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PROSPECTUS
LEHMAN BROTHERS INSTITUTIONAL FUNDS GROUP TRUST
One Exchange Place
Boston, Massachusetts 02109
For information call (800) 368-5556
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Lehman Brothers Institutional Funds Group Trust (the "Trust") is an
open-end, management investment company that currently offers a family of
diversified investment portfolios, seven of which are described in this
Prospectus (individually, a "Fund" and collectively, the "Funds"). This
Prospectus describes one class of shares ("Class A Shares") of the following
investment portfolios:
PRIME MONEY MARKET FUND
PRIME VALUE MONEY MARKET FUND
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
CASH MANAGEMENT FUND
TREASURY INSTRUMENTS MONEY MARKET FUND II
TAX-FREE MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
LEHMAN BROTHERS INC. ("Lehman Brothers" or the "Distributor")
sponsors each Fund and acts as Distributor of its shares. LEHMAN BROTHERS GLOBAL
ASSET MANAGEMENT INC. ("LBGAM" or the "Adviser") serves as each Fund's
Investment Adviser.
This Prospectus briefly sets forth certain information about the
Funds that investors should know before investing. Investors are advised to read
this Prospectus and retain it for future reference. Additional information about
the Funds, contained in a Statement of Additional Information dated May 30,
1995, as supplemented February 1, 1996, has been filed with the Securities and
Exchange Commission (the "SEC") and is available to investors without charge by
calling Lehman Brothers at 1-800-368-5556. The Statement of Additional
Information is incorporated in its entirety by reference into this Prospectus.
SHARES OF THE FUNDS INVOLVE CERTAIN INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. AN INVESTMENT IN A FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE FUNDS SEEK TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT THEY WILL
CONTINUE TO DO SO. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is May 30, 1995 as supplemented February 1, 1996.
<PAGE>
LEHMAN BROTHERS INSTITUTIONAL FUNDS GROUP TRUST
MAY 30, 1995
AS SUPPLEMENTED FEBRUARY 1, 1996
PROSPECTUS
TABLE OF CONTENTS
Page
Summary of Investment Objectives 3
Background and Expense Information 4
Financial Highlights 6
Investment Objectives and Policies 9
Portfolio Instruments and Practices 12
Investment Limitations 17
Purchase and Redemption of Shares 18
Dividends 21
Taxes 21
Management of the Funds 22
Performance and Yields 24
Description of Shares and Miscellaneous 25
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION
INCORPORATED HEREIN DESCRIBE THE INVESTMENT OBJECTIVES AND POLICIES, OPERATIONS,
CONTRACTS AND OTHER MATTERS RELATING TO THE FUNDS' CLASS A SHARES. INVESTORS
WISHING TO OBTAIN SIMILAR INFORMATION REGARDING THE TRUST'S OTHER CLASSES MAY
OBTAIN SEPARATE PROSPECTUSES DESCRIBING THEM BY CONTACTING LEHMAN BROTHERS AT
1-800-368-5556.
2
<PAGE>
SUMMARY OF INVESTMENT OBJECTIVES
The investment objectives of the Funds are summarized below. See
"Investment Objectives and Policies" beginning on page 9 for more detailed
information.
PRIME MONEY MARKET FUND seeks to provide current income and stability
of principal by investing in a broad range of short-term instruments, including
U.S. Government and U.S. bank and commercial obligations and repurchase
agreements relating to such obligations.
PRIME VALUE MONEY MARKET FUND seeks to provide current income and
stability of principal by investing in a portfolio consisting of a broad range
of short-term instruments, including U.S. Government and U.S. bank and
commercial obligations and repurchase agreements relating to such obligations.
Under normal market conditions, at least 25% of the Fund's total assets will be
invested in obligations of issuers in the banking industry and repurchase
agreements relating to such obligations.
GOVERNMENT OBLIGATIONS MONEY MARKET FUND seeks to provide current
income with liquidity and security of principal by investing in a portfolio
consisting of U.S. Treasury bills, notes and other obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements relating to such obligations.
CASH MANAGEMENT FUND seeks to provide current income with liquidity
and security of principal by investing in a portfolio consisting of U.S.
Treasury bills, notes and other obligations issued or guaranteed as to principal
and interest by the U.S. Government, its agencies or instrumentalities and
repurchase agreements relating to such obligations. The Fund is designed to
provide a convenient means for the late day investment of short-term assets held
by banks, trust companies, corporations, employee benefit plans and other
institutional investors.
TREASURY INSTRUMENTS MONEY MARKET FUND II seeks to provide current
income with liquidity and security of principal by investing in a portfolio
consisting of U.S. Treasury bills, notes and direct obligations of the U.S.
Treasury and repurchase agreements relating to direct Treasury obligations.
TAX-FREE MONEY MARKET FUND seeks to provide as high a level of
current income exempt from federal taxation as is consistent with relative
stability of principal by investing in a portfolio consisting of short-term
tax-exempt obligations issued by state and local governments and other
tax-exempt securities which are considered "First Tier Eligible Securities" as
defined in "Investment Objectives and Policies." The Fund will not purchase
securities the income from which may be a specific tax preference item for
purposes of federal individual and corporate alternative minimum tax.
MUNICIPAL MONEY MARKET FUND seeks to provide as high a level of
current income exempt from federal taxation as is consistent with relative
stability of principal by investing in a portfolio consisting of short-term
tax-exempt obligations issued by state and local governments and other
tax-exempt securities which are considered "Eligible Securities" as defined in
"Investment Objectives and Policies."
There is no assurance that the Funds will achieve their respective
investment objectives.
3
<PAGE>
BACKGROUND AND EXPENSE INFORMATION
Each Fund, with the exception of Cash Management Fund, currently
offers four classes of shares, only one of which, Class A Shares, is offered by
this Prospectus. Each class represents an equal, pro rata interest in a Fund.
Each Fund's other classes of shares have different service and/or distribution
fees and expenses from Class A Shares which would affect the performance of
those classes of shares. Investors may obtain information concerning the Funds'
other classes of shares by calling Lehman Brothers at 1-800-368-5556.
The purpose of the following table is to assist an investor in
understanding the various costs and estimated expenses that an investor in a
Fund would bear directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Management of the Funds" in this Prospectus and
the Statement of Additional Information.
EXPENSE SUMMARY
CLASS A SHARES
<TABLE>
<CAPTION>
GOVERNMENT
PRIME PRIME VALUE OBLIGATIONS CASH
MONEY MONEY MONEY MANAGEMENT
MARKET FUND MARKET FUND MARKET FUND FUND
----------- ----------- ----------- ----
<S> <C> <C> <C> <C>
ANNUAL OPERATING EXPENSES*
(as a percentage of average net assets)
Advisory Fees (net of applicable fee
waivers) .10% .10% .04% .00%
Rule 12b-1 fees None None None None
Other Expenses -- including
Administration Fees .08% .08% .14% .26%
--- --- --- ---
Total Fund Operating Expenses
(after fee waivers and/or expense
reimbursement) .18% .18% .18% .26%
=== === === ===
</TABLE>
<TABLE>
<CAPTION>
TREASURY
INSTRUMENT
MONEY TAX-FREE MUNICIPAL
MARKET FUND MONEY MONEY
II MARKET FUND MARKET FUND
-- ----------- -----------
<S> <C> <C> <C>
ANNUAL OPERATING EXPENSES*
(as a percentage of average net assets)
Advisory Fees (net of applicable fee
waivers) .10% .03% .06%
Rule 12b-1 fees None None None
Other Expenses -- including
Administration Fees .08% .15% .12%
--- --- ---
Total Fund Operating Expenses
(after fee waivers and/or expense
reimbursement) .18% .18% .18%
=== === ===
</TABLE>
* The Expense Summary above has been restated to reflect current expected fees
and the Adviser's and Administrator's voluntary fee waiver and expense
reimbursement arrangements currently in effect.
In order to maintain a competitive expense ratio, the Adviser and
Administrator have voluntarily agreed to waive fees and reimburse expenses to
the extent necessary to maintain an annualized expense ratio at a level no
greater than .18% of average daily net assets with respect to the Funds (.26%
with respect
4
<PAGE>
to the Cash Management Fund). The voluntary fee waiver and expense reimbursement
arrangements described above will not be changed unless shareholders are
provided at least 60 days' advance notice. The maximum annual contractual fees
payable to the Adviser and Administrator total .30% of average daily net assets
of the Funds. Absent fee waivers and expense reimbursements, the Total Fund
Operating Expenses of Class A Shares are expected to be as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF AVERAGE DAILY
NET ASSETS
----------
<S> <C>
Prime Money Market Fund .35%
Prime Value Money Market Fund .35%
Government Obligations Money Market Fund .44%
Cash Management Fund 1.94%
Treasury Instruments Money Market Fund II .35%
Tax-Free Money Market Fund .45%
Municipal Money Market Fund .42%
</TABLE>
- ----------
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end of each time
period with respect to the Class A Shares:
MONEY MARKET FUNDS
(OTHER THAN THE CASH MANAGEMENT FUND)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$2 $6 $10 $23
CASH MANAGEMENT FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$3 $8 $15 $33
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES AND
RATES OF RETURN, WHICH MAY BE GREATER OR LESS THAN THOSE SHOWN.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for the six months ended July 31,
1995 are derived from the Funds' unaudited Financial Statements dated July 31,
1995. All other data presented are derived from the Funds' Financial Statements
audited by Ernst & Young LLP, independent auditors, whose report thereon appears
in the Trust's Annual Report dated January 31, 1995. This information should be
read in conjunction with the financial statements, related notes and other
financial information incorporated by reference in the Statement of Additional
Information.
<TABLE>
<CAPTION>
PRIME MONEY MARKET FUND PRIME VALUE MONEY MARKET FUND
----------------------- -----------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR PERIOD ENDED YEAR PERIOD
7/31/95 ENDED ENDED 7/31/95 ENDED ENDED
(UNAUDITED) 1/31/95 1/31/94* (UNAUDITED) 1/31/95 1/31/94*
----------- ------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
Net investment income (1) 0.0300 0.0442 0.0310 0.0301 0.0442 0.0315
Dividends from net invest-
ment income (0.0300) (0.0442) (0.0310) (0.0301) (0.0442) (0.0315)
------- ------- ------- ------- ------- -------
Net asset value, end of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== =====
Total return (2) 3.05% 4.52% 3.14% 3.05% 4.51% 3.21%
==== ==== ==== ==== ==== ====
Ratios to average net
assets/supplemental data:
Net assets, end of period
(in 000's) $4,308,465 $1,538,802 $2,866,353 $3,460,284 $1,470,317 $3,981,184
Ratio of net investment
income to average net assets 6.05%(3) 4.30% 3.16%(3) 6.06%(3) 4.20% 3.23%(3)
Ratio of operating expenses
to average net assets (4) 0.18%(3) 0.12% 0.11%(3) 0.18%(3) .09% 0.07%(3)
</TABLE>
* The Class A Shares commenced operations on February 8, 1993.
(1) Net investment income per share before waiver of fees by the Investment
Adviser, Administrator, Custodian and/or Transfer Agent and/or expenses
reimbursed by the Investment Adviser and Administrator for the Class A
Shares was $0.0296 for the six months ended July 31, 1995, $0.0428 for the
year ended January 31, 1995 and $0.0289 for the period ended January 31,
1994 for the Prime Money Market Fund and $0.0297 for the six months ended
July 31, 1995, $0.0426 for the year ended January 31, 1995 and $0.0287 for
the period ended January 31, 1994 for the Prime Value Money Market Fund.
(2) Total return represents aggregate total return for the periods indicated.
(3) Annualized.
(4) Annualized expense ratios before waiver of fees by the Investment Adviser,
Administrator, Custodian and/or Transfer Agent and/or expenses reimbursed by
the Investment Adviser and Administrator for Class A Shares were 0.26% for
the six months ended July 31, 1995, 0.25% for the year ended January 31,
1995 and 0.33% for the period ended January 31, 1994 for the Prime Money
Market Fund and 0.26% for the six months ended July 31, 1995, 0.25% for the
year ended January 31, 1995 and 0.36% for the period ended January 31, 1994
for the Prime Value Money Market Fund.
6
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT OBLIGATIONS
MONEY MARKET FUND CASH MANAGEMENT FUND**
----------------- ----------------------
SIX SIX
MONTHS MONTHS
ENDED YEAR PERIOD ENDED YEAR PERIOD
7/31/95 ENDED ENDED 7/31/95 ENDED ENDED
(UNAUDITED) 1/31/95 1/31/94* (UNAUDITED) 1/31/95 1/31/94*
----------- ------- --------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
Net investment income (1) 0.0297 0.0435 0.0309 0.0297 0.0421 0.0304
Dividends from net investment
income (0.0297) (0.0435) (0.0309) (0.0297) (0.0421) (0.0304)
------- ------- ------- ------- ------- -------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== =====
Total return (2) 3.01% 4.45% 3.14% 3.01% 4.26% 3.09%
==== ==== ==== ==== ==== ====
Ratios to average net assets/
supplemental data:
Net assets, end of period
(in 000's) $84,939 $40,080 $121,532 $1,131 $4,740 $41,709
Ratio of net investment income
to average net assets 5.97%(3) 4.28% 3.18%(3) 5.86%(3) 3.52% 3.11%(3)
Ratio of operating expenses to
average net assets (4) 0.18%(3) 0.16% 0.03%(3) 0.26%(3) 0.17% 0.06%(3)
</TABLE>
* The Class A Shares commenced operations on February 8, 1993.
** Cash Management Fund was formerly named 100% Government Obligations Money
Market Fund.
(1) Net inv estment income per share before waiver of fees by the Investment
Adviser, Administrator, Custodian and/or Transfer Agent and/or expenses
reimbursed by the Investment Adviser and Administrator for the Class A
Shares was $0.0288 for the six months ended July 31, 1995, $0.0419 for the
year ended January 31, 1995 and $0.0261 for the period ended January 31,
1994 for the Government Obligations Money Market Fund and $0.0173 for the
six months ended July 31, 1995, $0.0350 for the year ended January 31, 1995
and $0.0220 for the period ended January 31, 1994 for the Cash Management
Fund.
(2) Total return represents aggregate total return for the periods indicated.
(3) Annualized.
(4) Annualized expense ratios before waiver of fees by the Investment Adviser,
Administrator, Custodian and/or Transfer Agent and/or expenses reimbursed by
the Investment Adviser and Administrator for Class A Shares were 0.36% for
the six months ended July 31, 1995, 0.31% for the year ended January 31,
1995 and 0.53% for the period ended January 31, 1994 for the Government
Obligations Money Market Fund and 2.70% for the six months ended July 31,
1995, 0.77% for the year ended January 31, 1995 and 0.92% for the period
ended January 31, 1994 for the Cash Management Fund.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
TREASURY INSTRUMENTS
MONEY MARKET FUND II
--------------------
SIX MONTHS
ENDED 7/31/95 YEAR ENDED PERIOD ENDED
(UNAUDITED) 1/31/95 1/31/94*
----------- ------- --------
<S> <C> <C> <C>
Net asset value, beginning of period $1.00 $1.00 $1.00
----- ----- -----
Net investment income (1) 0.0287 0.0424 0.0300
Dividends from net investment income (0.0287) (0.0424) (0.0300)
------- ------- -------
Net asset value, end of period $1.00 $1.00 $1.00
===== ===== =====
Total return (2) 2.90% 4.32% 3.04%
==== ==== ====
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $423,116 $368,796 $156,782
Ratio of net investment income to average net assets 5.79%(3) 4.38% 3.12%(3)
Ratio of operating expenses to average net assets (4) 0.18%(3) 0.12% 0.03%(3)
</TABLE>
* The Class A Shares commenced operations on February 8, 1993.
(1) Net investment income per share before waiver of fees by the Investment
Adviser, Administrator, Custodian and/or Transfer Agent and/or expenses
reimbursed by the Investment Adviser and Administrator for the Class A
Shares was $0.0282 for the six months ended July 31, 1995, $0.0407 for the
year ended January 31, 1995 and $0.0256 for the period ended January 31,
1994 for the Treasury Instruments Money Market Fund II.
(2) Total return represents aggregate total return for the periods indicated.
(3) Annualized.
(4) Annualized expense ratios before waiver of fees by the Investment Adviser,
Administrator, Custodian and/or Transfer Agent and/or expenses reimbursed by
the Investment Adviser and Administrator for Class A Shares were 0.27% for
the six months ended July 31, 1995, 0.27% for the year ended January 31,
1995 and 0.49% for the period ended January 31, 1994 for the Treasury
Instruments Money Market Fund II.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
TAX-FREE MONEY
MARKET FUND MUNICIPAL MONEY MARKET FUND
----------- ---------------------------
SIX SIX
MONTHS MONTHS
ENDED YEAR PERIOD ENDED YEAR PERIOD
7/31/95 ENDED ENDED 7/31/95 ENDED ENDED
(UNAUDITED) 1/31/95 1/31/94* (UNAUDITED) 1/31/95 1/31/94*
----------- ------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
Net investment income (1) 0.0194 0.0288 0.0228 0.0200 0.0300 0.0243
Dividends from net investment
income (0.0194) (0.0288) (0.0228) (0.0200) (0.0300) (0.0243)
------- ------- ------- ------- ------- -------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== =====
Total return (2) 1.97% 2.93% 2.30% 2.03% 3.04% 2.46%
==== ==== ==== ==== ==== ====
Ratios to average net assets/
supplemental data:
Net assets, end of period
(in 000's) $78,980 $60,351 $59,735 $228,306 $93,595 $350,975
Ratio of net investment income
to average net assets 3.91%(3) 2.99% 2.38%(3) 4.05%(3) 2.86% 2.53%(3)
Ratio of operating expenses to
average net assets (4) 0.18%(3) 0.16% 0.11%(3) 0.18%(3) 0.15% 0.13%(3)
</TABLE>
* The Class A Shares commenced operations on February 8, 1993.
(1) Net investment income per share before waiver of fees by the Investment
Adviser, Administrator, Custodian and/or Transfer Agent and/or expenses
reimbursed by the Investment Adviser and Administrator for the Class A
Shares was $0.0184 for the six months ended July 31, 1995, $0.0266 for the
year ended January 31, 1995 and $0.0093 for the period ended January 31,
1994 for the Tax-Free Money Market Fund and $0.0194 for the six months ended
July 31, 1995, $0.0283 for the year ended January 31, 1995 and $0.0201 for
the period ended January 31, 1994 for the Municipal Money Market Fund.
(2) Total return represents aggregate total return for the periods indicated.
(3) Annualized.
(4) Annualized expense ratios before waiver of fees by the Investment Adviser,
Administrator, Custodian and/or Transfer Agent and/or expenses reimbursed by
the Investment Adviser and Administrator for Class A Shares were 0.38% for
the six months ended July 31, 1995, 0.38% for the year ended January 31,
1995 and 1.52% for the period ended January 31, 1994 for the Tax-Free Money
Market Fund and 0.30% for the six months ended July 31, 1995, 0.31% for the
year ended January 31, 1995 and 0.51% for the period ended January 31, 1994
for the Municipal Money Market Fund.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general policies of each Fund are
described below. Specific investment techniques that may be employed by the
Funds are described in a separate section of this Prospectus. See "Portfolio
Instruments and Practices." Differences in objectives and policies among the
Funds, differences in the degree of acceptable risk and tax considerations are
some of the factors that can be expected to affect the investment return of each
Fund. Because of such factors, the performance results of the Funds may differ
even though more than one Fund may utilize the same security selections.
9
<PAGE>
Unless otherwise stated, the investment objectives and policies set
forth in this Prospectus are not fundamental and may be changed by the Board of
Trustees without shareholder approval. If there is a change in the investment
objective and policies of any Fund, shareholders should consider whether the
Fund remains an appropriate investment in light of their then-current financial
position and needs. The market value of certain fixed-rate obligations held by
the Funds will generally vary inversely with changes in market interest rates.
Thus, the market value of these obligations generally declines when interest
rates rise and generally rises when interest rates decline. The Funds are
subject to additional investment policies and restrictions described in the
Statement of Additional Information, some of which are fundamental and may not
be changed without shareholder approval.
The Funds seek to maintain a net asset value of $1.00 per share,
although there is no assurance that they will be able to do so on a continuing
basis. Each Fund operates as a diversified investment portfolio. Certain
securities held by the Funds may have remaining maturities in excess of stated
limitations discussed below if securities provide for adjustments in their
interest rates not less frequently than such time limitations. Each Fund
maintains a dollar-weighted average portfolio maturity of 90 days or less.
PRIME MONEY MARKET FUND AND PRIME VALUE MONEY MARKET FUND seek to
provide current income and stability of principal. In pursuing their investment
objectives, the Funds invest in a broad range of short-term instruments,
including U.S. Government and U.S. bank and commercial obligations and
repurchase agreements relating to such obligations. Prime Value Money Market
Fund may also invest in securities of foreign issuers. Each Fund invests only in
securities that are payable in U.S. dollars and that have (or, pursuant to
regulations adopted by the SEC will be deemed to have) remaining maturities of
thirteen months or less at the date of purchase by the Fund.
Both Funds invest in securities rated by the "Requisite NRSROs."
"Requisite NRSROs" means (a) any two nationally-recognized statistical rating
organizations ("NRSROs") that have issued a rating with respect to a security or
class of debt obligations of an issuer, or (b) one NRSRO, if only one NRSRO has
issued such a rating at the time that the Fund acquires the security. Currently,
there are six NRSROs: Standard & Poor's, a division of The McGraw-Hill Companies
("S&P"); Moody's Investors Service, Inc. ("Moody's"); Fitch Investors Services,
Inc.; Duff and Phelps, Inc.; IBCA Limited and its affiliate, IBCA, Inc. and
Thomson Bankwatch. A discussion of the ratings categories of the NRSROs is
contained in the Appendix to the Statement of Additional Information.
Prime Money Market Fund will limit its portfolio investments to
securities that the Board of Trustees determines present minimal credit risks
and which are "First Tier Eligible Securities" at the time of acquisition by the
Fund. The term First Tier Eligible Securities includes securities rated by the
Requisite NRSROs in the highest short-term rating categories, securities of
issuers that have received such rating with respect to other short-term debt
securities and comparable unrated securities.
Prime Value Money Market Fund will limit its portfolio investments to
securities that the Board of Trustees determines present minimal credit risks
and which are "Eligible Securities" at the time of acquisition by the Fund. The
term Eligible Securities includes securities rated by the Requisite NRSROs in
one of the two highest short-term rating categories, securities of issuers that
have received such rating with respect to other short-term debt securities and
comparable unrated securities.
Each Fund generally may not invest more than 5% of it total assets in
the securities of any one issuer, except for U.S. Government securities. In
addition, Prime Value Money Market Fund may not invest more than 5% of its total
assets in Eligible Securities that have not received the highest rating from the
Requisite NRSROs and comparable unrated securities ("Second Tier Securities")
and may not invest more than 1% of its total assets in the Second Tier
Securities of any one issuer. The Funds may invest more than 5% (but no more
than 25%) of the then-current value of the Fund's total assets in the securities
of a single issuer for a period of up to three business days, provided that (a)
the securities either are rated by the Requisite NRSROs in the highest
short-term rating category or are securities of issuers that have received such
rating with respect to other short-term debt securities or are comparable
unrated securities, and (b) the Fund does not make more than one such investment
at any one time.
10
<PAGE>
Each Fund may purchase obligations of issuers in the banking industry,
such as commercial paper, notes, certificates of deposit, bankers acceptances
and time deposits and U.S. dollar denominated instruments issued or supported by
the credit of U.S. (or foreign in the case of Prime Value Money Market Fund)
banks or savings institutions having total assets at the time of purchase in
excess of $1 billion. The Funds may also make interest-bearing savings deposits
in commercial and savings banks in amounts not in excess of 5% of their assets.
GOVERNMENT OBLIGATIONS MONEY MARKET FUND, CASH MANAGEMENT FUND AND
TREASURY INSTRUMENTS Money Market Fund II seek to provide income with liquidity
and security of principal. Each Fund invests only in securities that are payable
in U.S. dollars and that have (or, pursuant to regulations adopted by the SEC,
will be deemed to have) remaining maturities of thirteen months or less at the
date of purchase by the Fund (twelve months in the case of Government
Obligations Money Market Fund).
Government Obligations Money Market Fund and Cash Management Fund
invest in obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities (in addition to direct Treasury obligations) and repurchase
agreements relating to such obligations. Cash Management Fund is designed to
provide a convenient means for the late day investment of short-term assets held
by institutional investors and is not intended to be a long-term investment
vehicle.
Treasury Instruments Money Market Fund II invests solely in direct
obligations of the U.S. Treasury, such as Treasury bills and notes, and in
repurchase agreements relating to direct Treasury obligations. The Fund will not
purchase obligations of agencies or instrumentalities of the U.S. Government.
TAX-FREE MONEY MARKET FUND AND MUNICIPAL MONEY MARKET FUND seek to
provide investors with as high a level of current income exempt from federal
income tax as is consistent with relative stability of principal. In pursuing
their investment objectives, the Funds invest substantially all of their assets
in diversified portfolios of short-term tax-exempt obligations issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia, and their respective authorities, agencies, instrumentalities and
political subdivisions and tax-exempt derivative securities such as tender
option bonds, participations, beneficial interests in trusts and partnership
interests (collectively "Municipal Obligations"). Each Fund invests only in
securities that have (or, pursuant to regulations adopted by the SEC, will be
deemed to have) remaining maturities of thirteen months or less at the date of
purchase by the Fund. The Funds will not knowingly purchase securities the
interest on which is subject to federal income tax. Except during temporary
defensive periods, each Fund will invest substantially all, but in no event less
than 80%, of its net assets in Municipal Obligations. Tax-Free Money Market Fund
will not invest in securities the income from which may be a specific tax
preference item for purposes of federal individual and corporate alternative
minimum tax. The Funds also have the ability to enter into repurchase
agreements. Absent emergency or extraordinary circumstances, however, neither
Fund presently intends to engage in repurchase transactions, unless such
transactions would not generate taxable income to such Funds.
Both the Tax-Free Money Market Fund and Municipal Money Market Fund
purchase Municipal Obligations that present minimal credit risk as determined by
the Adviser pursuant to guidelines approved by the Board of Trustees. The
Municipal Money Market Fund invests in Eligible Securities while the Tax- Free
Money Market Fund invests in only First Tier Eligible Securities. The Funds may
hold uninvested cash reserves pending investment or during temporary defensive
periods, including when suitable tax-exempt obligations are unavailable. There
is no percentage limitation on the amount of assets which may be held
uninvested. Uninvested cash reserves will not earn income.
Although the Tax-Free Money Market Fund may invest more than 25% of its
net assets in (a) Municipal Obligations whose issuers are in the same state and
(b) Municipal Obligations the interest on which is paid solely from revenues of
similar projects, it does not presently intend to do so on a regular basis. To
the extent the Fund's assets are concentrated in Municipal Obligations that are
payable from the revenues of similar projects or are issued by issuers located
in the same state, the Fund will be subject to the peculiar risks presented by
the laws and economic conditions relating to such states, projects and bonds to
a greater extent than it would be if its assets were not so concentrated.
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<PAGE>
PORTFOLIO INSTRUMENTS AND PRACTICES
Investment strategies that are available to the Funds are set forth
below. Additional information concerning certain of these strategies and their
related risks is contained in the Statement of Additional Information.
U.S. GOVERNMENT OBLIGATIONS
Each Fund (other than Tax-Free Money Market Fund and Municipal Money
Market Fund) may purchase obligations issued or guaranteed by the U.S.
Government and (except in the case of Treasury Instruments Money Market Fund II)
U.S. Government agencies and instrumentalities. Securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities include U.S.
Treasury securities, which differ in interest rates, maturities and times of
issuance. Treasury bills have initial maturities of one year or less; Treasury
notes have initial maturities of one to ten years; and Treasury bonds generally
have initial maturities of greater than ten years. Some obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, for example,
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. While the
U.S. Government provides financial support to such U.S. Government-sponsored
agencies or instrumentalities, no assurance can be given that it will always do
so, since it is not so obligated by law. The Funds will invest in such
securities only when they are satisfied that the credit risk with respect to the
issuer is minimal.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities have historically involved little risk of loss of principal if
held to maturity. However, due to fluctuations in interest rates, the market
value of the securities may vary during the period an investor owns shares of a
Fund.
REPURCHASE AGREEMENTS
The Funds may agree to purchase securities from financial institutions
subject to the seller's agreement to repurchase them at an agreed upon time and
price within one year from the date of acquisition ("repurchase agreements").
The Funds will not invest more than 10% of the value of their net assets in
repurchase agreements with terms which exceed seven days. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price (including
accrued interest). Default by or bankruptcy of the seller would, however, expose
the Funds to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds for temporary purposes by entering into
reverse repurchase agreements in accordance with the investment restrictions
described below. Pursuant to such agreements, the Funds would sell portfolio
securities to financial institutions and agree to repurchase them at an agreed
upon date and price. The Funds would consider entering into reverse repurchase
agreements to avoid otherwise selling securities during unfavorable market
conditions. Reverse repurchase agreements involve the risk that the market value
of the securities sold by the Funds may decline below the price of the
securities the Funds are obligated to repurchase. The Funds may engage in
reverse repurchase agreements provided that the amount of the reverse repurchase
agreements and any other borrowings does not exceed one-third of the value of
the Fund's total assets (including the amount borrowed) less liabilities (other
than borrowings).
WHEN-ISSUED SECURITIES
The Funds (other than Tax-Free Money Market Fund and Municipal Money
Market Fund) may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and yield. The Funds will generally not
12
<PAGE>
pay for such securities or start earning interest on them until they are
received. Securities purchased on a when-issued basis are recorded as an asset
and are subject to changes in value based upon changes in the general level of
interest rates. The Funds expect that commitments to purchase when-issued
securities will not exceed 25% of the value of their total assets absent unusual
market conditions. The Funds do not intend to purchase when-issued securities
for speculative purposes but only in furtherance of their investment objectives.
ILLIQUID SECURITIES
Prime Money Market Fund, Prime Value Money Market Fund, Tax-Free Money
Market Fund and Municipal Money Market Fund will not knowingly invest more than
10% of the value of their total net assets in illiquid securities, including
time deposits and repurchase agreements having maturities longer than seven
days. Securities that have readily available market quotations are not deemed
illiquid for purposes of this limitation (irrespective of any legal or
contractual restrictions on resale). Each of the Funds may invest in commercial
obligations issued in reliance on the so-called "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended ("Section 4(2) paper"). Each of the Funds may also purchase securities
that are not registered under the Securities Act of 1933, as amended, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Section 4(2) paper is restricted as to
disposition under the federal securities laws, and generally is sold to
institutional investors such as the Funds who agree that they are purchasing the
paper for investment and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) paper is normally
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. Rule 144A securities generally must be
sold to other qualified institutional buyers. If a particular investment in
Section 4(2) paper or Rule 144A securities is not determined to be liquid, that
investment will be included within the percentage limitation on investment in
illiquid securities.
FOREIGN SECURITIES
Prime Value Money Market Fund may invest substantially in securities of
foreign issuers, including obligations of foreign banks or foreign branches of
U.S. banks, and debt securities of foreign issuers, where the Adviser deems the
instrument to present minimal credit risks. Investments in foreign banks or
foreign issuers present certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of currency
exchange blockages or other foreign governmental laws or restrictions and
reduced availability of public information. Foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements applicable to domestic issuers.
ZERO COUPON AND CAPITAL APPRECIATION BONDS
The Funds may invest in zero coupon and capital appreciation bonds,
which are debt securities issued or sold at a discount from their face value and
which do not entitle the holder to any periodic payment of interest prior to
maturity or a specified redemption date (or cash payment date). The amount of
the discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, the liquidity of the security and the
perceived credit quality of the issuer. These securities may also take the form
of debt securities that have been stripped of their unmatured interest coupons,
the coupons themselves or receipts or certificates representing interest in such
stripped debt obligations or coupons. Discounts with respect to stripped
tax-exempt securities or their coupons may be taxable. The market prices of
capital appreciation bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturity and credit quality.
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<PAGE>
U.S. TREASURY STRIPS
The Prime Money Market Fund, Prime Value Money Market Fund, Government
Obligations Money Market Fund, Cash Management Fund and Treasury Instruments
Money Market Fund II may invest in separately traded principal and interest
components of securities backed by the full faith and credit of the U.S.
Treasury. The principal and interest components of U.S. Treasury bonds with
remaining maturities of longer than ten years are eligible to be traded
independently under the Separate Trading of Registered Interest and Principal of
Securities ("STRIPS") program. Under the STRIPS program, the principal and
interest components are separately issued by the U.S. Treasury at the request of
depository financial institutions, which then trade the component parts
separately. Under the stripped bond rules of the Internal Revenue Code of 1986,
as amended (the "Code"), investments by the Funds in STRIPS will result in the
accrual of interest income on such investments in advance of the receipt of the
cash corresponding to such income. The interest component of STRIPS may be more
volatile than that of U.S. Treasury bills with comparable maturities. In
accordance with Rule 2a-7, the Funds' investments in STRIPS are limited to those
with maturity components not exceeding thirteen months.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities up to one-third of the value of
its total assets to U.S. and foreign broker/dealers, banks or other
institutional borrowers of securities that the Adviser has determined are
creditworthy under guidelines established by the Board of Trustees. The Funds
will receive collateral in the form of cash, letters of credit, or securities of
the U.S. Government or its agencies equal to at least 100% of the value of the
securities owned.
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which Prime Money
Market Fund, Prime Value Money Market Fund, Government Obligations Money Market
Fund, Cash Management Fund, Tax-Free Money Market Fund and Municipal Money
Market Fund may invest are not fixed and may fluctuate based upon changes in
market rates. A variable rate obligation has an interest rate which is adjusted
at predesignated periods. Interest on a floating rate obligation is adjusted
whenever there is a change in the market rate of interest on which the interest
rate payable is based. Tax-exempt variable or floating rate obligations
generally permit the holders of such obligations to demand payment of principal
from the issuer or a third party at stated intervals. Variable and floating rate
obligations are less effective than fixed rate instruments at locking in a
particular yield. Such obligations may fluctuate in value in response to
interest rate changes if there is a delay between changes in market interest
rates and the interest reset date for the obligation. The Funds will take demand
or reset features into consideration in determining the average portfolio
duration of the Fund and the effective maturity of individual securities. In
addition, the absence of an unconditional demand feature exercisable within
seven days will require a tax-exempt variable or floating rate obligation to be
treated as illiquid for purposes of a Fund's limitation on illiquid investments.
The failure of the issuer or a third party to honor its obligations under a
demand or put feature might also require a tax-exempt variable or floating rate
obligation to be treated as illiquid for purposes of a Fund's limitation on
illiquid investments.
TAX-EXEMPT COMMERCIAL PAPER
Tax-Free Money Market Fund and Municipal Money Market Fund may invest
in tax-exempt commercial paper. Issues of commercial paper typically represent
short-term, unsecured, negotiable promissory notes. These obligations are issued
by state and local governments and their agencies to finance working capital
needs of municipalities or to provide interim construction financing and are
paid from general or specific revenues of municipalities or are re-financed with
long-term debt. In some cases, tax-exempt commercial paper is backed by letters
of credit, lending agreements, note repurchase agreements or other credit
facility arrangements offered by banks or other institutions. The Funds will
invest only in tax-exempt commercial paper rated at least Prime-2 by Moody's or
A-2 by S&P.
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<PAGE>
MUNICIPAL OBLIGATIONS
Tax-Free Money Market Fund and Municipal Money Market Fund may invest
in the Municipal Obligations described below.
Municipal Obligations. Municipal Obligations include bonds, notes and
other instruments issued by or on behalf of states, territories and possessions
of the United States (including the District of Columbia) and their political
subdivisions, agencies or instrumentalities, the interest on which is, in the
opinion of bond counsel, exempt from regular federal income tax (i.e., excluded
from gross income for federal income tax purposes but not necessarily exempt
from the personal income taxes of any state or, with respect to the Municipal
Money Market Fund, from the federal alternative minimum tax). In addition,
Municipal Obligations include participation interests in such securities the
interest on which is, in the opinion of bond counsel for the issuers or counsel
selected by the Adviser, exempt from regular federal income tax. The definition
of Municipal Obligations includes other types of securities that currently exist
or may be developed in the future and that are, or will be, in the opinion of
counsel, as described above, exempt from regular federal income tax, provided
that investing in such securities is consistent with a Fund's investment
objective and policies.
The two principal classifications of Municipal Obligations which may be
held by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities, or in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds which
may be held by the Municipal Money Market Fund and which are not payable from
the unrestricted revenues of the issuer. While some private activity bonds are
general obligation securities, the vast majority are revenue securities.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Each of the Municipal Obligations described below may take the form of either
general obligation or revenue securities.
Municipal Obligations are often issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Obligations may be issued include refunding outstanding obligations, obtaining
funds for general operating and obtaining funds to lend to other public
institutions and facilities. Municipal Obligations also include industrial
development bonds or, with respect to the Municipal Money Market Fund, private
activity bonds, which are issued by or on behalf of public authorities to obtain
funds for privately-operated housing facilities, airport, mass transit or port
facilities, sewage disposal, solid waste disposal or hazardous waste treatment
or disposal facilities and certain local facilities for water supply, gas or
electricity. In addition, proceeds of certain industrial development bonds are
used for the construction, equipment, repair or improvement of privately
operated industrial or commercial facilities. The interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax.
Municipal Leases, Certificates of Participation and Other Participation
Interests. The Funds may invest in municipal leases and certificates of
participation in municipal leases. A municipal lease is an obligation in the
form of a lease or installment purchase which is issued by a state or local
government to acquire equipment and facilities. Income from such obligations is
generally exempt from state and local taxes in the state of issuance. Municipal
leases frequently involve special risks not normally associated with general
obligation or revenue bonds. Leases and installment purchase or conditional sale
contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject to
the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
15
<PAGE>
Although the obligation may be secured by the leased equipment or facilities,
the disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in an
unsatisfactory or delayed recoupment of the Fund's original investment.
Certificates of participation represent undivided interests in
municipal leases, installment purchase agreements or other instruments. The
certificates are typically issued by a trust or other entity which has received
an assignment of the payments to be made by the state or political subdivision
under such leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation
may be deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and certificates of
participation acquired by the Funds may be determined by the Adviser, pursuant
to guidelines adopted by the Board of Trustees, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including (a) the willingness of dealers to bid for the
security, (b) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers, (c) the frequency of trades or quotes
for the obligation, and (d) the nature of marketplace trades. In addition, the
Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance of the property
covered by the lease to the issuer and the likelihood that the marketability of
the obligation will be maintained throughout the time the obligation is held by
the Funds.
The Funds may also purchase participations in Municipal Obligations
held by a commercial bank or other financial institution. Such participations
provide the Funds with the right to a pro rata undivided interest in the
underlying Municipal Obligations. In addition, such participations generally
provide the Funds with the right to demand payment, on not more than seven days
notice, of all or any part of a Fund's participation interest in the underlying
Municipal Obligation, plus accrued interest. These demand features will be taken
into consideration in determining the effective maturity of such participations
and the average portfolio duration of the Funds. The Funds will only invest in
such participations if, in the opinion of bond counsel for the issuers or
counsel selected by the Adviser, the interest from such participations is exempt
from regular federal income tax.
Municipal Notes. Municipal Obligations purchased by the Funds may
include fixed-rate notes or variable- rate demand notes. Such notes may not be
rated by credit rating agencies, but unrated notes purchased by the Funds will
be determined by the Adviser to be of comparable quality at the time of purchase
to rated instruments purchasable by the Funds. Where necessary to determine that
a note is an Eligible Security or First Tier Eligible Security, the Funds will
require the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
While there may be no active secondary market with respect to a particular
variable rate demand note purchased by the Funds, the Funds may, upon notice
specified in the note, demand payment of the principal of the note at any time
or during specified periods not exceeding thirteen months, depending upon the
instrument involved, and may resell the note at any time to a third party. The
absence of such an active secondary market, however, could make it difficult for
the Funds to dispose of a variable rate demand note if the issuer were to
default on its payment obligation or during periods that the Funds are not
entitled to exercise their demand rights, and the Funds could, for this or other
reasons, suffer losses to the extent of the default.
Pre-Refunded Municipal Obligations. The Funds may invest in
pre-refunded Municipal Obligations. The principal of and interest on
pre-refunded Municipal Obligations are no longer paid from the original revenue
source for the Municipal Obligations. Instead, the source of such payments is
typically an escrow fund consisting of obligations issued or guaranteed by the
U.S. Government. The assets in the escrow fund are derived from the proceeds of
refunding bonds issued by the same issuer as the pre-refunded Municipal
Obligations, but usually on terms more favorable to the issuer. Issuers of
Municipal Obligations use this advance refunding technique to obtain more
favorable terms with respect to Municipal Obligations which are not yet subject
to call or redemption by the issuer. For example, advance refunding enables an
issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other
16
<PAGE>
governing instrument for the pre-refunded Municipal Obligations. However, except
for a change in the revenue source from which principal and interest payments
are made, the pre-refunded Municipal Obligations remain outstanding on their
original terms until they mature or are redeemed by the issuer. The effective
maturity of pre-refunded Municipal Obligations will be the redemption date if
the issuer has assumed an obligation or indicated its intention to redeem such
obligations on the redemption date. Pre-refunded Municipal Obligations are often
purchased at a price which represents a premium over their face value.
Tender Option Bonds. The Funds may purchase tender option bonds. A
tender option bond is a Municipal Obligation (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the Municipal Obligation's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at or near par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term
tax-exempt rate. The Adviser will consider on an ongoing basis the
creditworthiness of the issuer of the underlying Municipal Obligation, of any
custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other reasons. Additionally, the above description
of tender option bonds is meant only to provide an example of one possible
structure of such obligations, and the Funds may purchase tender option bonds
with different types of ownership, payment, credit and/or liquidity
arrangements.
INVESTMENT LIMITATIONS
The Funds' investment objectives and policies described above are not
fundamental and may be changed by the Board of Trustees without a vote of
shareholders. If there is a change in the investment objective of a Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. The Funds'
investment limitations described below may not be changed without the
affirmative vote of the holders of a majority of its outstanding shares. There
can be no assurance that the Funds will achieve their investment objectives. (A
complete list of the investment limitations that cannot be changed without a
vote of shareholders is contained in the Statement of Additional Information
under "Investment Objectives and Policies.")
The Funds may not:
1. Borrow money, except that a Fund may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) from banks, or subject
to specific authorization by the SEC, from funds advised by the Adviser or an
affiliate of the Adviser, and (ii) engage in reverse repurchase agreements;
provided that (i) and (ii) in combination do not exceed one-third of the value
of the Fund's total assets (including the amount borrowed) less liabilities
(other than borrowings). The Funds may not mortgage, pledge or hypothecate any
assets except in connection with such borrowings and reverse repurchase
agreements and then only in amounts not exceeding one-third of the value of the
particular Fund's total assets at the time of such borrowing (or, with respect
to the Cash Management Fund, in amounts not in excess of the lesser of the
dollar amounts borrowed or one-third of the value of the Fund's total assets at
the time of such borrowing). Additional investments will not be made by a Fund
when borrowings exceed 5% of the Fund's assets.
2. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, except that Prime Value Money Market Fund will invest 25%
or more of the value of its total assets in obligations of issuers in the
banking industry or in obligations, such as repurchase agreements, secured by
such obligations (unless the Fund is in a temporary defensive position);
provided that there is no limitation with respect to investments in U.S.
Government securities or, in the case of Prime Money Market Fund, in bank
instruments issued by domestic banks.
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<PAGE>
3. Make loans except that a Fund may (i) purchase or hold debt
obligations in accordance with its investment objective and policies, (ii) enter
into repurchase agreements for securities, (iii) lend portfolio securities and
(iv) with the exception of Government Obligations Money Market Fund, subject to
specific authorization by the SEC, lend money to other funds advised by the
Adviser or an affiliate of the Adviser.
Each Fund may, in the future, seek to achieve its investment objective
by investing all of its assets in a no-load, open-end management investment
company having the same investment objective and policies and substantially the
same investment restrictions as those applicable to the Fund. In such event,
each Fund's investment advisory agreement would be terminated. Such investment
would be made only if the Trust's Board of Trustees believes that the aggregate
per share expenses of each class of the Fund and such other investment company
will be less than or approximately equal to the expenses which each class of the
Fund would incur if the Fund 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.
PURCHASE AND REDEMPTION OF SHARES
To allow the Adviser to manage the Funds effectively, investors are
strongly urged to initiate all investments or redemptions of Fund shares as
early in the day as possible and to notify Lehman Brothers at least one day in
advance of transactions in excess of $5 million.
PURCHASE PROCEDURES
Shares of the Funds are sold at the net asset value per share of the
Fund next determined after receipt of a purchase order by Lehman Brothers, the
Distributor of the Fund's shares. Purchase orders for shares are accepted only
on days on which both the New York Stock Exchange and the Federal Reserve Bank
of Boston are open for business and must be transmitted to Lehman Brothers, by
telephone at 1-800-851-3134 or through Lehman Brothers ExpressNET, an automated
order entry system designed specifically for the Trust ("LEX"). Purchases of
shares will be effective and dividends will begin to accrue on the date of
purchase if purchase orders comply with the following schedule.
<TABLE>
<CAPTION>
ORDER MUST BE PAYMENT MUST BE
RECEIVED BY* RECEIVED BY*
------------ ------------
<S> <C> <C>
Prime Money Market Fund, 3:00 P.M. 4:00 P.M
Prime Value Money Market Fund,
Government Obligations Money Market Fund
and Treasury Instruments Money Market Fund II
Cash Management Fund** 5:00 P.M. 5:30 P.M.
Tax-Free Money Market Fund noon 4:00 P.M.
and Municipal Money Market Fund
</TABLE>
- ----------
* All times stated are Eastern time.
** In order to receive same day acceptance of purchases in Cash Management Fund
after 3:00 P.M., Eastern time, investors must telephone the Lehman Brothers
Client Service Center at 1-800-851-3134 before 5:00 P.M., Eastern time to
place the trade and obtain an order reference number for each trade. It is
necessary to obtain a new order reference number for each investment in Cash
Management Fund after 3:00 P.M., Eastern time.
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<PAGE>
Payment for Fund shares may be made only in federal funds immediately
available to Boston Safe Deposit and Trust Company ("Boston Safe"). Payment for
orders which are not received or accepted by Lehman Brothers will be returned
after prompt inquiry to the sending institution. A Fund may in its discretion
reject any order for shares. Any person entitled to receive compensation for
selling or servicing shares of the Funds may receive different compensation for
selling or servicing one Class of shares over another Class.
The minimum aggregate initial investment by an institution in the Funds
is $1 million (with not less than $25,000 invested in any one Fund); however,
broker-dealers and other institutional investors may set a higher minimum for
their customers. High net worth investors may purchase shares of the Funds. The
minimum aggregate initial investment by a high net worth investor in the Funds
is $5 million. To reach the minimum Trust-wide initial investment, purchases of
shares may be aggregated over a period of six months. There is no minimum
subsequent investment.
REDEMPTION PROCEDURES
Redemption orders must be transmitted to Lehman Brothers by telephone
at 1-800-851-3134 or through LEX on a day that both the New York Stock Exchange
and the Federal Reserve Bank of Boston are open for business.
Payment for redeemed shares will be made according to the following schedule.
<TABLE>
<CAPTION>
ORDER MUST BE
RECEIVED BY* PAYMENT MADE
------------ ------------
<S> <C> <C>
Prime Money Market Fund, 3:00 P.M. same business day
Prime Value Money Market Fund,
Government Obligations Money Market Fund,
Treasury Instruments Money Market Fund II
and Cash Management Fund
Tax-Free Money Market Fund noon same business day
and Municipal Money Market Fund
</TABLE>
- ----------
* All times stated are Eastern time.
Shares are redeemed at the net asset value per share next determined
after Lehman Brothers' receipt of the redemption order. While the Funds intend
to use their best efforts to maintain their net asset value per share at $1.00,
the proceeds paid to an investor upon redemption may be more or less than the
amount invested depending upon a share's net asset value at the time of
redemption.
The Funds reserve the right to wire redemption proceeds within seven
days after receiving the redemption order if, in the judgment of the Adviser, an
earlier payment could adversely affect the Funds. The Funds shall have the right
to redeem involuntarily shares in any account at their net asset value if the
value of the account is less than $10,000 ($5,000,000 in the case of a high net
worth investor) after 60 days' prior written notice to the investor. Any such
redemption shall be effected at the net asset value per share next determined
after the redemption order is entered. If during the 60-day period the investor
increases the value of its account to the required level, no such redemption
shall take place. In addition, the Funds may redeem shares involuntarily or
suspend the right of redemption as permitted under the Investment Company Act of
1940, as amended (the "1940 Act"), or under certain special circumstances
described in the Statement of Additional Information under "Additional Purchase
and Redemption Information."
The ability to give telephone instructions for the redemption (and
purchase or exchange) of shares is automatically established on an investor's
account. However, the Funds reserve the right to refuse a redemption order
transmitted by telephone if it is believed advisable to do so. Procedures for
redeeming Fund shares by telephone may be modified or terminated at any time by
the Funds or Lehman Brothers. In addition, neither the Funds, Lehman Brothers
nor First Data Investor Services Group, Inc. ("FDISG") will be responsible for
19
<PAGE>
the authenticity of telephone instructions for the purchase, redemption or
exchange of shares where the instructions are reasonably believed to be genuine.
Accordingly, the investor will bear the risk of loss. The Funds will attempt to
confirm that telephone instructions are genuine and will use such procedures as
are considered reasonable, including the recording of telephone instructions. To
the extent that the Funds fail to use reasonable procedures to verify the
genuineness of telephone instructions, the Funds or their service providers may
be liable for such instructions that prove to be fraudulent or unauthorized.
EXCHANGE PROCEDURES
The Exchange Privilege enables an investor to exchange shares of a Fund
without charge for shares of the same class of other Funds which have different
investment objectives that may be of interest to investors. To use the Exchange
Privilege, exchange instructions must be given to Lehman Brothers by telephone
or through LEX. See "Redemption Procedures." In exchanging shares, an investor
must meet the minimum initial investment requirement of the other Fund and the
shares involved must be legally available for sale in the state where the
investor resides. Before any exchange, the investor must also obtain and should
review a copy of the current prospectus of the Funds. Prospectuses may be
obtained from Lehman Brothers by calling 1-800-368-5556. Shares will be
exchanged at the net asset value next determined after receipt of an exchange
request in proper form. The exchange of shares of one Fund for shares of another
Fund is treated for federal income tax purposes as a sale of the shares given in
exchange by the investor and, therefore, an investor may realize a taxable gain
or loss. The Funds reserve the right to reject any exchange request in whole or
in part. The Exchange Privilege may be modified or terminated at any time upon
notice to investors.
VALUATION OF SHARES -- NET ASSET VALUE
Each Fund's net asset value per share for purposes of pricing purchase
and redemption orders is determined by the Fund's Administrator on each weekday,
with the exception of those holidays on which either the New York Stock Exchange
or the Federal Reserve Bank of Boston is closed, according to the following
schedule.
<TABLE>
<CAPTION>
NET ASSET VALUE
CALCULATED*
-----------
<S> <C>
Prime Money Market Fund, noon
Prime Value Money Market Fund,
Government Obligations Money Market Fund and 3:00 P.M.
Treasury Instruments Money Market Fund II 4:00 P.M.
Cash Management Fund noon
3:00 P.M.
5:00 P.M.
Tax-Free Money Market Fund
and Municipal Money Market Fund noon
4:00 P.M.
</TABLE>
- ----------
* All times stated are Eastern time.
Currently, one or both of the New York Stock Exchange and the Federal
Reserve Bank of Boston are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr.'s Birthday (observed), Presidents' Day
(Washington's Birthday), Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day (observed), Veterans Day, Thanksgiving Day and Christmas Day, and
on the
20
<PAGE>
preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively. The net asset value per share of Fund shares
is calculated separately for each class by adding the value of all securities
and other assets of the Fund, subtracting class-specific liabilities, and
dividing the result by the total number of the Fund's outstanding shares. In
computing net asset value, each Fund uses the amortized cost method of valuation
as described in the Statement of Additional Information under "Additional
Purchase and Redemption Information." A Fund's net asset value per share for
purposes of pricing purchase and redemption orders is determined independently
of the net asset values of the shares of each other Fund.
OTHER MATTERS
Fund shares are sold and redeemed without charge by the Funds.
Institutional investors purchasing or holding Fund shares for their customer
accounts may charge customers fees for cash management and other services
provided in connection with their accounts. A customer should, therefore,
consider the terms of its account with an institution before purchasing Fund
shares. An institution purchasing or redeeming Fund shares on behalf of its
customers is responsible for transmitting orders to Lehman Brothers in
accordance with its customer agreements.
DIVIDENDS
Investors of a Fund are entitled to dividends and distributions arising
only from the net investment income and capital gains, if any, earned on
investments held by that Fund. Each Fund's net investment income is declared
daily as a dividend to shares held of record at the close of business on the
date of declaration. Shares begin accruing dividends on the day the purchase
order for the shares is effective and continue to accrue dividends through the
day before such shares are redeemed. Dividends are paid monthly by wire transfer
within five business days after the end of the month or within five business
days after a redemption of all of an investor's shares of a particular class.
The Funds do not expect to realize net long-term capital gains.
Dividends are determined in the same manner and are paid in the same
amount for each Fund share, except that shares of each class bear all the
expenses associated with that specific class.
Institutional investors may elect to have their dividends reinvested in
additional full and fractional shares of the same class of shares with respect
to which such dividends are declared at the net asset value of such shares on
the payment date. Reinvested dividends receive the same tax treatment as
dividends paid in cash. Such election, or any revocation thereof, must be made
in writing to Lehman Brothers, 260 Franklin Street, 15th Floor, Boston,
Massachusetts 02110-9624, and will become effective after its receipt by Lehman
Brothers, with respect to dividends paid.
FDISG, as Transfer Agent, will send each investor or its authorized
representative an annual statement designating the amount of any dividends and
capital gains distributions, if any, made during each year and their federal tax
qualification.
TAXES
Each Fund qualified in its last taxable year and intends to qualify in
future years as a "regulated investment company" under the Code. A regulated
investment company is exempt from federal income tax on amounts distributed to
its investors.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
investors at least 90% of its investment company taxable income for such year.
In general, a Fund's investment company taxable income will be its taxable
income (including dividends and short-term capital gains, if any) subject to
certain adjustments and excluding the excess of any net long-term capital gains
for the taxable year over the net short-term capital loss, if any, for such
year. Each Fund intends to distribute substantially all of its investment
company taxable income each year. Such distributions will be taxable as ordinary
income to Fund investors who are not currently exempt from
21
<PAGE>
federal income taxes, whether such income is received in cash or reinvested in
additional shares. It is anticipated that none of a Fund's distributions will be
eligible for the dividends received deduction for corporations. The Funds do not
expect to realize long-term capital gains and, therefore, do not contemplate
payment of any "capital gain dividends" as described in the Code.
Dividends derived from exempt-interest income from Tax-Free Money
Market Fund and Municipal Money Market Fund may be treated by the Fund's
investors as items of interest excludable from their gross income under Section
103(a) of the Code, unless under the circumstances applicable to the particular
investor the exclusion would be disallowed.
Municipal Money Market Fund may hold without limit certain private
activity bonds issued after August 7, 1986. Investors must include, as an item
of tax preference, the portion of dividends paid by the Fund that is
attributable to interest on such bonds in determining liability (if any) for the
federal alternative minimum tax. Noncorporate taxpayers, depending on their
individual tax status, may be subject to alternative minimum tax at a blended
rate between 26% and 28%. Corporate taxpayers may be subject to (1) alternative
minimum tax at a rate of 20% of the excess of their alternative minimum taxable
income ("AMTI") over the exemption amount, and (2) the environmental tax.
Corporate investors must also take all exempt-interest dividends into account in
determining certain adjustments for federal alternative minimum and
environmental tax purposes. The environmental tax applicable to corporations is
imposed at the rate of .12% on the excess of the corporation's modified federal
alternative minimum taxable income over $2,000,000.
To the extent, if any, dividends paid to investors by Tax-Free Money
Market Fund or Municipal Money Market Fund are derived from taxable income or
from long-term or short-term capital gains, such dividends will not be exempt
from federal income tax, whether such dividends are paid in the form of cash or
additional shares, and may also be subject to state and local taxes.
In addition to federal taxes, an investor may be subject to state,
local or foreign taxes on payments received from a Fund. A state tax exemption
may be available in some states to the extent distributions of the Fund are
derived from interest on certain U.S. Government securities or on securities
issued by public authorities in the state. The Funds will provide investors
annually with information about federal income tax consequences of distributions
made each year. Investors should be aware of the application of their state and
local tax laws to investments in the Funds.
Investors will be advised at least annually as to the federal income tax status
of distributions made to them each year.
The foregoing discussion is only a brief summary of some of the
important federal tax considerations generally affecting a Fund and its
shareholders. No attempt is made to present a detailed explanation of the
federal, state or local income tax treatment of a Fund or its investors, and
this discussion is not intended as a substitute for careful tax planning.
Accordingly, potential investors in the Funds should consult their tax advisers
with specific reference to their own tax situation. See the Statement of
Additional Information for a further discussion of tax consequences of investing
in shares of the Funds.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction
of the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the persons or companies that furnish services
to the Funds, including agreements with its Distributor, Adviser, Administrator,
Transfer Agent and Custodian. The day-to-day operations of the Funds are
delegated to the Funds' Adviser and Administrator. The Statement of Additional
Information contains general background information regarding each Trustee and
executive officer of the Trust.
22
<PAGE>
DISTRIBUTOR
Lehman Brothers, located at 3 World Financial Center, New York, New
York 10285, is the Distributor of each Fund's shares. Lehman Brothers is a
wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). As of
November 30, 1995, FMR Corp. beneficially owned approximately 11.7%, Nippon Life
Insurance Company beneficially owned approximately 5.0% and Prudential Asset
Management beneficially owned approximately 5.0% of the outstanding voting
securities of Holdings. Lehman Brothers, a leading full-service investment firm,
meets the diverse financial needs of individuals, institutions and governments
around the world. Lehman Brothers has entered into a Distribution Agreement with
the Trust pursuant to which it has the responsibility for distributing shares of
the Funds.
The Trust has adopted a Plan of Distribution with respect to Class A
shares of the Funds pursuant to Rule 12b-1 under the 1940 Act. The Plan of
Distribution does not provide for the payment by the Funds of any Rule 12b-1
fees for distribution or shareholder services for Class A shares but provides
that Lehman Brothers may make payments to assist in the distribution of Class A
shares out of the other fees received by it or its affiliates from the Funds,
its past profits or any other sources available to it.
INVESTMENT ADVISER -- LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
LBGAM, located at 3 World Financial Center, New York, New York 10285,
serves as each Fund's Investment Adviser. LBGAM is a wholly-owned subsidiary of
Holdings. LBGAM, together with other Lehman Brothers investment advisory
affiliates, serves as investment adviser to investment companies and private
accounts and has assets under management of approximately $11 billion as of
December 31, 1995.
As Adviser to the Funds, LBGAM manages each Fund's portfolio in
accordance with its investment objective and policies, makes investment
decisions for the Funds, places orders to purchase and sell securities and
employs professional portfolio managers and securities analysts who provide
research services to the Funds. For its services LBGAM is entitled to receive a
monthly fee from each Fund at the annual rate of .20% of the value of the Fund's
average daily net assets.
ADMINISTRATOR AND TRANSFER AGENT -- FIRST DATA INVESTOR SERVICES GROUP, INC.
FDISG (formerly named The Shareholder Services Group, Inc.), located at
One Exchange Place, 53 State Street, Boston, Massachusetts 02109, serves as each
Fund's Administrator and Transfer Agent. FDISG is a wholly-owned subsidiary of
First Data Corporation. As Administrator, FDISG calculates the net asset value
of each Fund's shares and generally assists in all aspects of each Fund's
administration and operation. As compensation for FDISG's services as
Administrator, FDISG is entitled to receive from each Fund a monthly fee at the
annual rate of .10% of the value of the Fund's average daily net assets. FDISG
is also entitled to receive a fee from the Funds for its services as Transfer
Agent. FDISG pays Boston Safe, each Fund's Custodian, a portion of its monthly
administration fee for custody services rendered to the Funds.
On May 6, 1994, FDISG acquired the third party mutual fund
administration business of The Boston Company Advisors, Inc., an indirect,
wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). In connection
with the transaction, Mellon assigned to FDISG its agreement with Lehman
Brothers (then named Shearson Lehman Brothers Inc.) that Lehman Brothers and its
affiliates, consistent with their fiduciary duties and assuming certain service
quality standards are met, would recommend FDISG as the provider of
administration services to the Funds.
This duty to recommend expires on May 21, 2000.
CUSTODIAN -- BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe, a wholly-owned subsidiary of Mellon, located at One Boston
Place, Boston, Massachusetts 02108, serves as each Fund's Custodian. Under the
terms of the Stock Purchase Agreement dated September 14, 1992 between Mellon
and Lehman Brothers (then named Shearson Lehman Brothers Inc.), Lehman Brothers
agreed to recommend Boston Safe as Custodian of mutual funds affiliated with
Lehman Brothers until May 21, 2000 to the extent consistent with its fiduciary
duties and other applicable law.
23
<PAGE>
EXPENSES
Each Fund bears all its own expenses. A Fund's expenses include taxes,
interest, fees and salaries of the Trust's trustees and officers who are not
directors, officers or employees of the Fund's service contractors, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to investors, advisory
and administration fees, charges of the custodian, administrator, transfer agent
and dividend disbursing agent, certain insurance premiums, outside auditing and
legal expenses, costs of shareholder reports and shareholder meetings and any
extraordinary expenses. Each Fund also pays for brokerage fees and commissions
(if any) in connection with the purchase and sale of portfolio securities. In
order to maintain a competitive expense ratio, the Adviser and Administrator
have voluntarily agreed to waive fees and reimburse expenses to the extent
necessary to maintain an annualized expense ratio at a level no greater than
.18% of average daily net assets with respect to the Funds (.26% with respect to
the Cash Management Fund). This voluntary waiver and reimbursement arrangement
will not be changed unless investors are provided at least 60 days' advance
notice. In addition, these service providers have agreed to reimburse the Funds
to the extent required by applicable state law for certain expenses that are
described in the Statement of Additional Information. Any fees charged by
Service Organizations or other institutional investors to their customers in
connection with investments in Fund shares are not reflected in a Fund's
expenses.
PERFORMANCE AND YIELDS
From time to time, the "yields" and "effective yields" with respect to
all Funds, and "tax-equivalent yields" with respect to Tax-Free Money Market
Fund and Municipal Money Market Fund, may be quoted in advertisements or in
reports to shareholders. Yield quotations are computed separately for each class
of shares. The "yield" quoted in advertisements for a particular class of shares
refers to the income generated by an investment in such shares over a specified
period (such as a seven-day period) identified in the advertisement. This income
is then "annualized;" that is, the amount of income generated by the investment
during that period is assumed to be generated each such period over a 52-week or
one-year period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly but, when annualized, the income earned by an
investment in a particular class is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. The "tax-equivalent yield" demonstrates the
level of taxable yield necessary to produce an after-tax yield equivalent to a
Fund's tax-free yield for each class of shares. It is calculated by increasing
the yield (calculated as above) by the amount necessary to reflect the payment
of federal taxes at a stated rate. The "tax-equivalent yield" will always be
higher than the "yield."
A Fund's performance may be compared to those of other mutual funds
with similar objectives, to other relevant indices, or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, such data are reported in national
financial publications such as Morningstar, Inc., Barron's, IBC/Donoghue's Money
Fund Report(R), The Wall Street Journal and The New York Times; reports prepared
by Lipper Analytical Services, Inc.; and publications of a local or regional
nature.
A Fund's yield figures for a class of shares represent past
performance, will fluctuate and should not be considered as representative of
future results. The yield of any investment is generally a function of portfolio
quality and maturity, type of investment and operating expenses. Any fees
charged by institutional investors directly to their customers in connection
with investments in Fund shares are not reflected in a Fund's expenses or
yields; and, such fees, if charged, would reduce the actual return received by
customers on their investments. The methods used to compute a Fund's yields are
described in more detail in the Statement of Additional Information. Investors
may call 1-800-238-2560 to obtain current yield information.
24
<PAGE>
DESCRIPTION OF SHARES AND MISCELLANEOUS
The Trust is a Massachusetts business trust established on November 25,
1992. The Trust's Declaration of Trust authorizes the Board of Trustees to issue
an unlimited number of full and fractional shares of beneficial interest in the
Trust and to classify or reclassify any unissued shares into one or more
additional classes of shares. The Trust is an open-end management investment
company, which currently offers seven portfolios. The Trust has authorized the
issuance of seven classes of shares for Prime Value Money Market Fund,
Government Obligations Money Market Fund and Municipal Money Market Fund and
four classes of shares for Prime Money Market Fund, Cash Management Fund,
Treasury Instruments Money Market Fund II and Tax-Free Money Market Fund. The
issuance of separate classes of shares is intended to address the different
service needs of different types of investors. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any class of shares into one
or more sub-classes.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust will call a meeting of shareholders for the purpose of voting upon the
question of removal of a member of the Board of Trustees upon written request of
shareholders owning at least 10% of the outstanding shares of the Trust entitled
to vote.
Each Fund share represents an equal, proportionate interest in the
assets belonging to the Fund. Each share, which has a par value of $.001, has no
preemptive or conversion rights. When issued for payment as described in this
Prospectus, Fund shares will be fully paid and non-assessable.
Holders of the Fund's shares will vote in the aggregate and not by
class on all matters, except where otherwise required by law and except when the
Board of Trustees determines that the matter to be voted upon affects only the
shareholders of a particular class. Further, shareholders of the Funds 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 (see the
Statement of Additional Information under "Additional Description Concerning
Fund Shares" for examples where the 1940 Act requires voting by portfolio).
Shareholders of the Trust are entitled to one vote for each full share held
(irrespective of class or portfolio) and fractional votes for fractional shares
held. Voting rights are not cumulative; and, accordingly, the holders of more
than 50% of the aggregate shares of the Trust may elect all of the trustees.
For information concerning the redemption of Fund shares and possible
restrictions on their transferability, see "Purchase and Redemption of Shares."
25
<PAGE>
LEHMAN BROTHERS INSTITUTIONAL FUNDS
================================================================================
Client Service Center
(8:30 am to 5:00 pm, Eastern time): 800-851-3134
fax: 617-261-4330
or 617-261-4340
Dividend factors and yields: 800-238-2560
Administration/Sales/Marketing: 800-368-5556
To place a purchase or redemption order: 800-851-3134
To change account information: 800-851-3134
Additional Prospectuses: 800-368-5556
LEX Help Desk 800-566-5LEX
LEHMAN BROTHERS
================================================================================
LBP-202B6
================================================================================
PROSPECTUS
LEHMAN BROTHERS INSTITUTIONAL FUNDS GROUP TRUST
One Exchange Place
Boston, Massachusetts 02109
For information call (800) 368-5556
================================================================================
Lehman Brothers Institutional Funds Group Trust (the "Trust") is an
open-end, management investment company that currently offers a family of
diversified investment portfolios, six of which are described in this Prospectus
(individually, a "Fund" and collectively, the "Funds"). This Prospectus
describes one class of shares ("Class B Shares") of the following investment
portfolios:
PRIME MONEY MARKET FUND
PRIME VALUE MONEY MARKET FUND
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
TREASURY INSTRUMENTS MONEY MARKET FUND II
TAX-FREE MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
Class B Shares may not be purchased by individuals directly, but
institutional investors may purchase shares for accounts maintained by
individuals.
LEHMAN BROTHERS INC. ("Lehman Brothers" or the "Distributor") sponsors
each Fund and acts as Distributor of its shares. LEHMAN BROTHERS GLOBAL ASSET
MANAGEMENT INC. ("LBGAM" or the "Adviser") serves as each Fund's Investment
Adviser.
This Prospectus briefly sets forth certain information about the Funds
that investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Funds, contained in a Statement of Additional Information dated May 30, 1995, as
supplemented February 1, 1996, has been filed with the Securities and Exchange
Commission (the "SEC") and is available to investors without charge by calling
Lehman Brothers at 1-800-368-5556. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
SHARES OF THE FUNDS INVOLVE CERTAIN INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. AN INVESTMENT IN A FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE FUNDS SEEK TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT THEY WILL
CONTINUE TO DO SO. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY.
================================================================================
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
The date of this Prospectus is May 30, 1995 as supplemented February 1, 1996.
<PAGE>
LEHMAN BROTHERS INSTITUTIONAL FUNDS GROUP TRUST
MAY 30, 1995
AS SUPPLEMENTED FEBRUARY 1, 1996
PROSPECTUS
TABLE OF CONTENTS
Page
Summary of Investment Objectives 3
Background and Expense Information 4
Financial Highlights 6
Investment Objectives and Policies 8
Portfolio Instruments and Practices 10
Investment Limitations 16
Purchase and Redemption of Shares 17
Dividends 20
Taxes 20
Management of the Funds 21
Performance and Yields 23
Description of Shares and Miscellaneous 24
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION
INCORPORATED HEREIN DESCRIBE THE INVESTMENT OBJECTIVES AND POLICIES, OPERATIONS,
CONTRACTS AND OTHER MATTERS RELATING TO THE FUNDS' CLASS B SHARES. INVESTORS
WISHING TO OBTAIN SIMILAR INFORMATION REGARDING THE TRUST'S OTHER CLASSES MAY
OBTAIN SEPARATE PROSPECTUSES DESCRIBING THEM BY CONTACTING LEHMAN BROTHERS AT
1-800-368-5556.
2
<PAGE>
SUMMARY OF INVESTMENT OBJECTIVES
The investment objectives of the Funds are summarized below. See
"Investment Objectives and Policies" beginning on page 8 for more detailed
information.
PRIME MONEY MARKET FUND seeks to provide current income and stability
of principal by investing in a broad range of short-term instruments, including
U.S. Government and U.S. bank and commercial obligations and repurchase
agreements relating to such obligations.
PRIME VALUE MONEY MARKET FUND seeks to provide current income and
stability of principal by investing in a portfolio consisting of a broad range
of short-term instruments, including U.S. Government and U.S. bank and
commercial obligations and repurchase agreements relating to such obligations.
Under normal market conditions, at least 25% of the Fund's total assets will be
invested in obligations of issuers in the banking industry and repurchase
agreements relating to such obligations.
GOVERNMENT OBLIGATIONS MONEY MARKET FUND seeks to provide current
income with liquidity and security of principal by investing in a portfolio
consisting of U.S. Treasury bills, notes and other obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements relating to such obligations.
TREASURY INSTRUMENTS MONEY MARKET FUND II seeks to provide current
income with liquidity and security of principal by investing in a portfolio
consisting of U.S. Treasury bills, notes and direct obligations of the U.S.
Treasury and repurchase agreements relating to direct Treasury obligations.
TAX-FREE MONEY MARKET FUND seeks to provide as high a level of current
income exempt from federal taxation as is consistent with relative stability of
principal by investing in a portfolio consisting of short-term tax-exempt
obligations issued by state and local governments and other tax-exempt
securities which are considered "First Tier Eligible Securities" as defined in
"Investment Objectives and Policies." The Fund will not purchase securities the
income from which may be a specific tax preference item for purposes of federal
individual and corporate alternative minimum tax.
MUNICIPAL MONEY MARKET FUND seeks to provide as high a level of current
income exempt from federal taxation as is consistent with relative stability of
principal by investing in a portfolio consisting of short-term tax-exempt
obligations issued by state and local governments and other tax-exempt
securities which are considered "Eligible Securities" as defined in "Investment
Objectives and Policies."
There is no assurance that the Funds will achieve their respective
investment objectives.
3
<PAGE>
BACKGROUND AND EXPENSE INFORMATION
Each Fund currently offers four classes of shares, only one of which,
Class B Shares, is offered by this Prospectus. Each class represents an equal,
pro rata interest in a Fund. Each Fund's other classes of shares have different
service and/or distribution fees and expenses from Class B Shares which would
affect the performance of those classes of shares. Investors may obtain
information concerning the Funds' other classes by calling Lehman Brothers at
1-800-368-5556.
The purpose of the following table is to assist an investor in
understanding the various costs and estimated expenses that an investor in a
Fund would bear directly or indirectly. Certain institutions may also charge
their clients fees in connection with investments in Class B Shares, which fees
are not reflected in the table below. For more complete descriptions of the
various costs and expenses, see "Management of the Funds" in this Prospectus and
the Statement of Additional Information.
EXPENSE SUMMARY
CLASS B SHARES
<TABLE>
<CAPTION>
GOVERNMENT
PRIME PRIME VALUE OBLIGATIONS
MONEY MONEY MONEY
MARKET FUND MARKET FUND MARKET FUND
----------- ----------- -----------
<S> <C> <C> <C>
ANNUAL OPERATING EXPENSES*
(as a percentage of average net assets)
Advisory Fees (net of applicable fee waivers) .10% .10% .04%
Rule 12b-1 fees .25% .25% .25%
Other Expenses -- including Administration Fees .08% .08% .14%
--- --- ---
Total Fund Operating Expenses (after fee
waivers and/or expense reimbursement) .43% .43% .43%
=== === ===
</TABLE>
<TABLE>
<CAPTION>
TREASURY
INSTRUMENTS
MONEY TAX-FREE MUNICIPAL
MARKET FUND MONEY MONEY
II MARKET FUND MARKET FUND
-- ----------- -----------
<S> <C> <C> <C>
ANNUAL OPERATING EXPENSES*
(as a percentage of average net assets)
Advisory Fees (net of applicable fee waivers) .10% .03% .06%
Rule 12b-1 fees .25% .25% .25%
Other Expenses -- including Administration Fees .08% .15% .12%
--- --- ---
Total Fund Operating Expenses (after fee
waivers and/or expense reimbursement) .43% .43% .43%
=== === ===
</TABLE>
* The Expense Summary above has been restated to reflect current expected fees
and the Adviser's and Administrator's voluntary fee waiver and expense
reimbursement arrangements currently in effect.
In order to maintain a competitive expense ratio, the Adviser and
Administrator have voluntarily agreed to waive fees and reimburse expenses to
the extent necessary to maintain an annualized expense ratio at a level no
greater than .43% of average daily net assets (.18% excluding Rule 12b-1 fees)
with respect
4
to the Funds. The voluntary fee waiver and expense reimbursement arrangements
described above will not be changed unless shareholders are provided at least 60
days' advance notice. The maximum annual contractual fees payable to the Adviser
and Administrator total .30% of average daily net assets of the Funds. Absent
fee waivers and expense reimbursements, the Total Fund Operating Expenses of
Class B Shares are expected to be as follows:
PERCENTAGE OF AVERAGE DAILY
NET ASSETS
----------
Prime Money Market Fund .60%
Prime Value Money Market Fund .60%
Government Obligations Money Market Fund .69%
Treasury Instruments Money Market Fund II .60%
Tax-Free Money Market Fund .70%
Municipal Money Market Fund .67%
- ----------
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end of each time
period with respect to the Class B Shares:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$4 $14 $24 $54
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES AND
RATES OF RETURN, WHICH MAY BE GREATER OR LESS THAN THOSE SHOWN.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for the six months ended July 31,
1995 are derived from the Funds' unaudited Financial Statements dated July 31,
1995. All other data presented are derived from the Funds' Financial Statements
audited by Ernst & Young LLP, independent auditors, whose report thereon appears
in the Trust's Annual Report dated January 31, 1995. This information should be
read in conjunction with the financial statements, related notes and other
financial information incorporated by reference in the Statement of Additional
Information. As of July 31, 1995, Class B Shares of the Municipal Money Market
Fund had not been offered to the public. Accordingly, no financial information
is provided with respect to such shares. Financial information with respect to
Class A Shares of the Municipal Money Market Fund is included in that Class'
prospectus and the Trust's Semi-Annual Report dated July 31, 1995, which are
available upon request. Financial information with respect to Class C Shares of
the Municipal Money Market Fund is included in that Class' prospectus and the
Trust's Semi-Annual Report dated July 31, 1995, which are available upon
request.
<TABLE>
<CAPTION>
PRIME MONEY MARKET FUND PRIME VALUE MONEY MARKET FUND
----------------------- -----------------------------
SIX SIX
MONTHS MONTHS
ENDED YEAR PERIOD ENDED YEAR PERIOD
7/31/95 ENDED ENDED 7/31/95 ENDED ENDED
(UNAUDITED) 1/31/95 1/31/94* (UNAUDITED) 1/31/95 1/31/94*
----------- ------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
Net investment income (1) 0.0288 0.0417 0.0110 0.0289 0.0417 0.0125
Dividends from net investment
income (0.0288) (0.0417) (0.0110) (0.0289) (0.0417) (0.0125)
------- ------- ------- ------- ------- -------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== =====
Total return (2) 2.93% 4.21% 0.99% 2.93% 4.26% 1.26%
==== ==== ==== ==== ==== ====
Ratios to average net assets/
supplemental data:
Net assets, end of period
(in 000's) $316,304 $342,673 $350,666 $24,516 $21,739 $17,504
Ratio of net investment income
to average net assets 5.80%(3) 4.05% 2.91%(3) 5.81%(3) 3.95% 2.98%(3)
Ratio of operating expenses to
average net assets (4) 0.43%(3) 0.37% 0.36%(3) 0.43%(3) 0.34% 0.32%(3)
</TABLE>
* The Class B Shares commenced operations on September 2, 1993 with respect to
Prime Money Market Fund and September 1, 1993 with respect to Prime Value
Money Market Fund.
(1) Net investment income per share before waiver of fees by the Investment
Adviser, Administrator, Custodian and/or Transfer Agent and/or expenses
reimbursed by the Investment Adviser and Administrator for the Class B
Shares was $0.0284 for the six months ended July 31, 1995, $0.0403 for the
year ended January 31, 1995 and $0.0102 for the period ended January 31,
1994 for the Prime Money Market Fund and $0.0285 for the six months ended
July 31, 1995, $0.0398 for the year ended January 31, 1995 and $0.0113 for
the period ended January 31, 1994 for the Prime Value Money Market Fund.
(2) Total return represents aggregate total return for the periods indicated.
(3) Annualized.
(4) Annualized expense ratios before waiver of fees by the Investment Adviser,
Administrator, Custodian and/or Transfer Agent and/or expenses reimbursed by
the Investment Adviser and Administrator for Class B Shares were 0.51% for
the six months ended July 31, 1995, 0.50% for the year ended January 31,
1995 and 0.58% for the period ended January 31, 1994 for the Prime Money
Market Fund and 0.51% for the six months ended July 31, 1995, 0.50% for the
year ended January 31, 1995 and 0.61% for the period ended January 31, 1994
for the Prime Value Money Market Fund.
6
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT OBLIGATIONS TREASURY INSTRUMENTS
MONEY MARKET FUND MONEY MARKET FUND II
----------------------- --------------
SIX SIX
MONTHS MONTHS
ENDED YEAR PERIOD ENDED YEAR PERIOD
7/31/95 ENDED ENDED 7/31/95 ENDED ENDED
(UNAUDITED) 1/31/95 1/31/94* (UNAUDITED) 1/31/95 1/31/94*
----------- ------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
Net investment income (1) 0.0285 0.0410 0.0091 0.0275 0.0399 0.0198
Dividends from net investment
income (0.0285) (0.0410) (0.0091) (0.0275) (0.0399) (0.0198)
------- ------- ------- ------- ------- -------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== =====
Total return (2) 2.88% 4.19% 0.90% 2.77% 4.05% 2.00%
==== ==== ==== ==== ==== ====
Ratios to average net assets/
supplemental data:
Net assets, end of period
(in 000's) $13,288 $9,322 -- (5) $38,411 $27,242 $33,862
Ratio of net investment income
to average net assets 5.72%(3) 4.03% 2.93%(3) 5.54%(3) 4.13% 2.87%(3)
Ratio of operating expenses to
average net assets (4) 0.43%(3) 0.41% 0.28%(3) 0.43%(3) 0.37% 0.28%(3)
</TABLE>
* The Class B Shares commenced operations on August 16, 1993 with respect to
the Government Obligations Money Market Fund and May 24, 1993 with respect
to the Treasury Instruments Money Market Fund II.
(1) Net investment income per share before waiver of fees by the Investment
Adviser, Administrator, Custodian and/or Transfer Agent and/or expenses
reimbursed by the Investment Adviser and Administrator for the Class B
Shares was $0.0276 for the six months ended July 31, 1995, $0.0394 for the
year ended January 31, 1995 and $0.0075 for the period ended January 31,
1994 for the Government Obligations Money Market Fund and $0.0270 for the
six months ended July 31, 1995, $0.0384 for the year ended January 31, 1995
and $0.0166 for the period ended January 31, 1994 for the Treasury
Instruments Money Market Fund II.
(2) Total return represents aggregate total return for the periods indicated.
(3) Annualized.
(4) Annualized expense ratios before waiver of fees by the Investment Adviser,
Administrator, Custodian and/or Transfer Agent and/or expenses reimbursed by
the Investment Adviser and Administrator for Class B Shares were 0.61% for
the six months ended July 31, 1995, 0.56% for the year ended January 31,
1995 and 0.78% for the period ended January 31, 1994 for the Government
Obligations Money Market Fund and 0.52% for the six months ended July 31,
1995, 0.52% for the year ended January 31, 1995 and 0.74% for the period
ended January 31, 1994 for the Treasury Instruments Money Market Fund II.
(5) Total net assets for Class B Shares were $100 at January 31, 1994 for the
Government Obligations Money Market Fund.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET FUND
--------------------------
SIX MONTHS
ENDED
7/31/95 PERIODENDED
(UNAUDITED) 1/31/95*
----------- --------
<S> <C> <C>
Net asset value, beginning of period $1.00 $1.00
----- -----
Net investment income (1) 0.0182 0.0030
Dividends from net investment income (0.0182) (0.0030)
------- -------
Net asset value, end of period $1.00 $1.00
===== =====
Total return (2) 1.84% 0.30%
==== ====
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) -- (5) -- (5)
Ratio of net investment income to average net assets 3.66%(3) 2.74%(3)
Ratio of operating expenses to average net assets (4) 0.43%(3) 0.41%(3)
</TABLE>
* The Class B Shares commenced operations on December 30, 1994 with respect to
the Tax-Free Money Market Fund.
(1) Net investment income per share before waiver of fees by the Investment
Adviser, Administrator, Custodian and/or Transfer Agent and/or expenses
reimbursed by the Investment Adviser and Administrator for the Class B
Shares was $0.0172 for the six months ended July 31, 1995 and $0.0009 for
the period ended January 31, 1995, for the Tax-Free Money Market Fund.
(2) Total return represents aggregate total return for the periods indicated.
(3) Annualized.
(4) Annualized expense ratios before waiver of fees by the Investment Adviser,
Administrator, Custodian and/or Transfer Agent and/or expenses reimbursed by
the Investment Adviser and Administrator for Class B Shares were 0.63% for
the six months ended July 31, 1995 and 0.63% for the period ended January
31, 1995 for the Tax-Free Money Market Fund.
(5) Total net assets for Class B Shares were $100 at July 31, 1995 and January
31, 1995 for the Tax-Free Money Market Fund.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general policies of each Fund are
described below. Specific investment techniques that may be employed by the
Funds are described in a separate section of this Prospectus. See "Portfolio
Instruments and Practices." Differences in objectives and policies among the
Funds, differences in the degree of acceptable risk and tax considerations are
some of the factors that can be expected to affect the investment return of each
Fund. Because of such factors, the performance results of the Funds may differ
even though more than one Fund may utilize the same security selections.
Unless otherwise stated, the investment objectives and policies set
forth in this Prospectus are not fundamental and may be changed by the Board of
Trustees without shareholder approval. If there is a change in the investment
objective and policies of any Fund, shareholders should consider whether the
Fund remains an appropriate investment in light of their then-current financial
position and needs. The market value of certain fixed-rate obligations held by
the Funds will generally vary inversely with changes in market interest rates.
Thus, the market value of these obligations generally declines when interest
rates rise and generally rises when interest rates decline. The Funds are
subject to additional investment policies and restrictions described in the
Statement of Additional Information, some of which are fundamental and may not
be changed without shareholder approval.
8
The Funds seek to maintain a net asset value of $1.00 per share,
although there is no assurance that they will be able to do so on a continuing
basis. Each Fund operates as a diversified investment portfolio. Certain
securities held by the Funds may have remaining maturities in excess of stated
limitations discussed below if securities provide for adjustments in their
interest rates not less frequently than such time limitations. Each Fund
maintains a dollar-weighted average portfolio maturity of 90 days or less.
PRIME MONEY MARKET FUND AND PRIME VALUE MONEY MARKET FUND seek to
provide current income and stability of principal. In pursuing their investment
objectives, the Funds invest in a broad range of short-term instruments,
including U.S. Government and U.S. bank and commercial obligations and
repurchase agreements relating to such obligations. Prime Value Money Market
Fund may also invest in securities of foreign issuers. Each Fund invests only in
securities that are payable in U.S. dollars and that have (or, pursuant to
regulations adopted by the SEC will be deemed to have) remaining maturities of
thirteen months or less at the date of purchase by the Fund.
Both Funds invest in securities rated by the "Requisite NRSROs."
"Requisite NRSROs" means (a) any two nationally-recognized statistical rating
organizations ("NRSROs") that have issued a rating with respect to a security or
class of debt obligations of an issuer, or (b) one NRSRO, if only one NRSRO has
issued such a rating at the time that the Fund acquires the security. Currently,
there are six NRSROs: Standard & Poor's, a division of The McGraw-Hill Companies
("S&P"); Moody's Investors Service, Inc. ("Moody's"); Fitch Investors Services,
Inc.; Duff and Phelps, Inc.; IBCA Limited and its affiliate, IBCA, Inc. and
Thomson Bankwatch. A discussion of the ratings categories of the NRSROs is
contained in the Appendix to the Statement of Additional Information.
Prime Money Market Fund will limit its portfolio investments to
securities that the Board of Trustees determines present minimal credit risks
and which are "First Tier Eligible Securities" at the time of acquisition by the
Fund. The term First Tier Eligible Securities includes securities rated by the
Requisite NRSROs in the highest short-term rating categories, securities of
issuers that have received such rating with respect to other short-term debt
securities and comparable unrated securities.
Prime Value Money Market Fund will limit its portfolio investments to
securities that the Board of Trustees determines present minimal credit risks
and which are "Eligible Securities" at the time of acquisition by the Fund. The
term Eligible Securities includes securities rated by the Requisite NRSROs in
one of the two highest short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term debt securities and
comparable unrated securities.
Each Fund generally may not invest more than 5% of it total assets in
the securities of any one issuer, except for U.S. Government securities. In
addition, Prime Value Money Market Fund may not invest more than 5% of its total
assets in Eligible Securities that have not received the highest rating from the
Requisite NRSROs and comparable unrated securities ("Second Tier Securities")
and may not invest more than 1% of its total assets in the Second Tier
Securities of any one issuer. The Funds may invest more than 5% (but no more
than 25%) of the then-current value of the Fund's total assets in the securities
of a single issuer for a period of up to three business days, provided that (a)
the securities either are rated by the Requisite NRSROs in the highest
short-term rating category or are securities of issuers that have received such
rating with respect to other short-term debt securities or are comparable
unrated securities, and (b) the Fund does not make more than one such investment
at any one time.
Each Fund may purchase obligations of issuers in the banking industry,
such as commercial paper, notes, certificates of deposit, bankers acceptances
and time deposits and U.S. dollar denominated instruments issued or supported by
the credit of the U.S. (or foreign in the case of Prime Value Money Market Fund)
banks or savings institutions having total assets at the time of purchase in
excess of $1 billion. The Funds may also make interest-bearing savings deposits
in commercial and savings banks in amounts not in excess of 5% of their assets.
GOVERNMENT OBLIGATIONS MONEY MARKET FUND AND TREASURY INSTRUMENTS MONEY
MARKET FUND II seek to provide income with liquidity and security of principal.
Each Fund invests only in securities that are payable in U.S. dollars and that
have (or, pursuant to regulations adopted by the SEC, will be deemed to have)
remaining maturities of thirteen months or less at the date of purchase by the
Fund (twelve months in the case of Government Obligations Money Market Fund).
9
<PAGE>
Government Obligations Money Market Fund invests in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities (in
addition to direct Treasury obligations) and repurchase agreements relating to
such obligations.
Treasury Instruments Money Market Fund II invests solely in direct
obligations of the U.S. Treasury, such as Treasury bills and notes, and in
repurchase agreements relating to direct Treasury obligations. The Fund will
purchase obligations of agencies or instrumentalities of the U.S. Government.
TAX-FREE MONEY MARKET FUND AND MUNICIPAL MONEY MARKET FUND seek to
provide investors with as high a level of current income exempt from federal
income tax as is consistent with relative stability of principal. In pursuing
their investment objectives, the Funds invest substantially all of their assets
in diversified portfolios of short-term tax-exempt obligations issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia, and their respective authorities, agencies, instrumentalities and
political subdivisions and tax-exempt derivative securities such as tender
option bonds, participations, beneficial interests in trusts and partnership
interests (collectively "Municipal Obligations"). Each Fund invests only in
securities that have (or, pursuant to regulations adopted by the SEC, will be
deemed to have) remaining maturities of thirteen months or less at the date of
purchase by the Fund. The Funds will not knowingly purchase securities the
interest on which is subject to federal income tax. Except during temporary
defensive periods, each Fund will invest substantially all, but in no event less
than 80%, of its net assets in Municipal Obligations. Tax-Free Money Market Fund
will not invest in securities the income from which may be a specific tax
preference item for purposes of federal individual and corporate alternative
minimum tax. The Funds also have the ability to enter into repurchase
agreements. Absent emergency or extraordinary circumstances, however, neither
Fund presently intends to engage in repurchase transactions, unless such
transactions would not generate taxable income to such Funds.
Both the Tax-Free Money Market Fund and Municipal Money Market Fund
purchase Municipal Obligations that present minimal credit risk as determined by
the Adviser pursuant to guidelines approved by the Board of Trustees. The
Municipal Money Market Fund invests in Eligible Securities while the Tax-Free
Money Market Fund invests in only First Tier Eligible Securities. The Funds may
hold uninvested cash reserves pending investment or during temporary defensive
periods, including when suitable tax-exempt obligations are unavailable. There
is no percentage limitation on the amount of assets which may be held
uninvested. Uninvested cash reserves will not earn income.
Although the Tax-Free Money Market Fund may invest more than 25% of its
net assets in (a) Municipal Obligations whose issuers are in the same state and
(b) Municipal Obligations the interest on which is paid solely from revenues of
similar projects, it does not presently intend to do so on a regular basis. To
the extent the Fund's assets are concentrated in Municipal Obligations that are
payable from the revenues of similar projects or are issued by issuers located
in the same state, the Fund will be subject to the peculiar risks presented by
the laws and economic conditions relating to such states, projects and bonds to
a greater extent than it would be if its assets were not so concentrated.
PORTFOLIO INSTRUMENTS AND PRACTICES
Investment strategies that are available to the Funds are set forth
below. Additional information concerning certain of these strategies and their
related risks is contained in the Statement of Additional Information.
U.S. GOVERNMENT OBLIGATIONS
Each Fund (other than Tax-Free Money Market Fund and Municipal Money
Market Fund) may purchase obligations issued or guaranteed by the U.S.
Government and (except in the case of Treasury Instruments Money Market Fund II)
U.S. Government agencies and instrumentalities. Securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities include U.S.
Treasury securities,
10
<PAGE>
which differ in interest rates, maturities and times of issuance. Treasury bills
have initial maturities of one year or less; Treasury notes have initial
maturities of one to ten years; and Treasury bonds generally have initial
maturities of greater than ten years. Some obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, for example, Government National
Mortgage Association pass-through certificates, are supported by the full faith
and credit of the U.S. Treasury; others, such as those issued by the Federal
National Mortgage Association, by discretionary authority of the U.S. Government
to purchase certain obligations of the agency or instrumentality; and others,
such as those issued by the Student Loan Marketing Association, only by the
credit of the agency or instrumentality. These securities bear fixed, floating
or variable rates of interest. While the U.S. Government provides financial
support to such U.S. Government-sponsored agencies or instrumentalities, no
assurance can be given that it will always do so, since it is not so obligated
by law. The Funds will invest in such securities only when they are satisfied
that the credit risk with respect to the issuer is minimal.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities have historically involved little risk of loss of principal if
held to maturity. However, due to fluctuations in interest rates, the market
value of the securities may vary during the period an investor owns shares of a
Fund.
REPURCHASE AGREEMENTS
The Funds may agree to purchase securities from financial institutions
subject to the seller's agreement to repurchase them at an agreed upon time and
price within one year from the date of acquisition ("repurchase agreements").
The Funds will not invest more than 10% of the value of their net assets in
repurchase agreements with terms which exceed seven days. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price (including
accrued interest). Default by or bankruptcy of the seller would, however, expose
the Funds to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds for temporary purposes by entering into
reverse repurchase agreements in accordance with the investment restrictions
described below. Pursuant to such agreements, the Funds would sell portfolio
securities to financial institutions and agree to repurchase them at an agreed
upon date and price. The Funds would consider entering into reverse repurchase
agreements to avoid otherwise selling securities during unfavorable market
conditions. Reverse repurchase agreements involve the risk that the market value
of the securities sold by the Funds may decline below the price of the
securities the Funds are obligated to repurchase. The Funds may engage in
reverse repurchase agreements provided that the amount of the reverse repurchase
agreements and any other borrowings does not exceed one-third of the value of
the Fund's total assets (including the amount borrowed) less liabilities (other
than borrowings).
WHEN-ISSUED SECURITIES
The Funds (other than Tax-Free Money Market Fund and Municipal Money
Market Fund) may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and yield. The Funds will generally not pay for such
securities or start earning interest on them until they are received. Securities
purchased on a when-issued basis are recorded as an asset and are subject to
changes in value based upon changes in the general level of interest rates. The
Funds expect that commitments to purchase when-issued securities will not exceed
25% of the value of their total assets absent unusual market conditions. The
Funds do not intend to purchase when-issued securities for speculative purposes
but only in furtherance of their investment objectives.
ILLIQUID SECURITIES
Prime Money Market Fund, Prime Value Money Market Fund, Tax-Free Money
Market Fund and Municipal Money Market Fund will not knowingly invest more than
10% of the value of their total net assets in illiquid securities, including
time deposits and repurchase agreements having maturities longer than seven
11
<PAGE>
days. Securities that have readily available market quotations are not deemed
illiquid for purposes of this limitation (irrespective of any legal or
contractual restrictions on resale). Each of the Funds may invest in commercial
obligations issued in reliance on the so-called "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended ("Section 4(2) paper"). Each of the Funds may also purchase securities
that are not registered under the Securities Act of 1933, as amended, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Section 4(2) paper is restricted as to
disposition under the federal securities laws, and generally is sold to
institutional investors such as the Funds who agree that they are purchasing the
paper for investment and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) paper is normally
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. Rule 144A securities generally must be
sold to other qualified institutional buyers. If a particular investment in
Section 4(2) paper or Rule 144A securities is not determined to be liquid, that
investment will be included within the percentage limitation on investment in
illiquid securities.
FOREIGN SECURITIES
Prime Value Money Market Fund may invest substantially in securities of
foreign issuers, including obligations of foreign banks or foreign branches of
U.S. banks, and debt securities of foreign issuers, where the Adviser deems the
instrument to present minimal credit risks. Investments in foreign banks or
foreign issuers present certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of currency
exchange blockages or other foreign governmental laws or restrictions and
reduced availability of public information. Foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements applicable to domestic issuers.
ZERO COUPON AND CAPITAL APPRECIATION BONDS
The Funds may invest in zero coupon and capital appreciation bonds,
which are debt securities issued or sold at a discount from their face value and
which do not entitle the holder to any periodic payment of interest prior to
maturity or a specified redemption date (or cash payment date). The amount of
the discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, the liquidity of the security and the
perceived credit quality of the issuer. These securities may also take the form
of debt securities that have been stripped of their unmatured interest coupons,
the coupons themselves or receipts or certificates representing interest in such
stripped debt obligations or coupons. Discounts with respect to stripped
tax-exempt securities or their coupons may be taxable. The market prices of
capital appreciation bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturity and credit quality.
U.S. TREASURY STRIPS
The Prime Money Market Fund, Prime Value Money Market Fund, Government
Obligations Money Market Fund and Treasury Instruments Money Market Fund II may
invest in separately traded principal and interest components of securities
backed by the full faith and credit of the U.S. Treasury. The principal and
interest components of U.S. Treasury bonds with remaining maturities of longer
than ten years are eligible to be traded independently under the Separate
Trading of Registered Interest and Principal of Securities ("STRIPS") program.
Under the STRIPS program, the principal and interest components are separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts separately. Under the stripped bond rules
of the Internal Revenue Code of 1986, as amended (the "Code"), investments by
the Funds in STRIPS will result in the accrual of interest income on such
investments in advance of the receipt of the cash corresponding to such income.
The interest component of STRIPS may be more volatile than that of U.S. Treasury
bills with comparable maturities. In accordance with Rule 2a-7, the Funds'
investments in STRIPS are limited to those with maturity components not
exceeding thirteen months.
12
<PAGE>
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities up to one-third of the value of
its total assets to U.S. and foreign broker/dealers, banks or other
institutional borrowers of securities that the Adviser has determined are
creditworthy under guidelines established by the Board of Trustees. The Funds
will receive collateral in the form of cash, letters of credit, or securities of
the U.S. government or its agencies equal to at least 100% of the value of the
securities owned.
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which Prime Money
Market Fund, Prime Value Money Market Fund, Government Obligations Money Market
Fund, Tax-Free Money Market Fund and Municipal Money Market Fund may invest are
not fixed and may fluctuate based upon changes in market rates. A variable rate
obligation has an interest rate which is adjusted at predesignated periods.
Interest on a floating rate obligation is adjusted whenever there is a change in
the market rate of interest on which the interest rate payable is based.
Tax-exempt variable or floating rate obligations generally permit the holders of
such obligations to demand payment of principal from the issuer or a third party
at stated intervals. Variable and floating rate obligations are less effective
than fixed rate instruments at locking in a particular yield. Such obligations
may fluctuate in value in response to interest rate changes if there is a delay
between changes in market interest rates and the interest reset date for the
obligation. The Funds will take demand or reset features into consideration in
determining the average portfolio duration of the Fund and the effective
maturity of individual securities. In addition, the absence of an unconditional
demand feature exercisable within seven days will require a tax-exempt variable
or floating rate obligation to be treated as illiquid for purposes of a Fund's
limitation on illiquid investments. The failure of the issuer or a third party
to honor its obligations under a demand or put feature might also require a
tax-exempt variable or floating rate obligation to be treated as illiquid for
purposes of a Fund's limitation on illiquid investments.
TAX-EXEMPT COMMERCIAL PAPER
Tax-Free Money Market Fund and Municipal Money Market Fund may invest
in tax-exempt commercial paper. Issues of commercial paper typically represent
short-term, unsecured, negotiable promissory notes. These obligations are issued
by state and local governments and their agencies to finance working capital
needs of municipalities or to provide interim construction financing and are
paid from general or specific revenues of municipalities or are re-financed with
long-term debt. In some cases, tax-exempt commercial paper is backed by letters
of credit, lending agreements, note repurchase agreements or other credit
facility arrangements offered by banks or other institutions. The Funds will
invest only in tax-exempt commercial paper rated at least Prime-2 by Moody's or
A-2 by S&P.
MUNICIPAL OBLIGATIONS
Tax-Free Money Market Fund and Municipal Money Market Fund may invest
in the Municipal Obligations described below.
Municipal Obligations. Municipal Obligations include bonds, notes and
other instruments issued by or on behalf of states, territories and possessions
of the United States (including the District of Columbia) and their political
subdivisions, agencies or instrumentalities, the interest on which is, in the
opinion of bond counsel, exempt from regular federal income tax (i.e., excluded
from gross income for federal income tax purposes but not necessarily exempt
from the personal income taxes of any state or, with respect to the Municipal
Money Market Fund, from the federal alternative minimum tax). In addition,
Municipal Obligations include participation interests in such securities the
interest on which is, in the opinion of bond counsel for the issuers or counsel
selected by the Adviser, exempt from regular federal income tax. The definition
of Municipal Obligations includes other types of securities that currently exist
or may be developed in the future and that are, or will be, in the opinion of
counsel, as described above, exempt from regular federal income tax, provided
that investing in such securities is consistent with a Fund's investment
objective and policies.
13
<PAGE>
The two principal classifications of Municipal Obligations which may be
held by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities, or in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds which
may be held by the Municipal Money Market Fund and which are not payable from
the unrestricted revenues of the issuer. While some private activity bonds are
general obligation securities, the vast majority are revenue securities.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Each of the Municipal Obligations described below may take the form of either
general obligation or revenue securities.
Municipal Obligations are often issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Obligations may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses, and obtaining funds to lend to other
public institutions and facilities. Municipal Obligations also include
industrial development bonds or, with respect to the Municipal Money Market
Fund, private activity bonds, which are issued by or on behalf of public
authorities to obtain funds for privately-operated housing facilities, airport,
mass transit or port facilities, sewage disposal, solid waste disposal or
hazardous waste treatment or disposal facilities and certain local facilities
for water supply, gas or electricity. In addition, proceeds of certain
industrial development bonds are used for the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities. The
interest income from private activity bonds may subject certain investors to the
federal alternative minimum tax.
Municipal Leases, Certificates of Participation and Other Participation
Interests. The Funds may invest in municipal leases and certificates of
participation in municipal leases. A municipal lease is an obligation in the
form of a lease or installment purchase which is issued by a state or local
government to acquire equipment and facilities. Income from such obligations is
generally exempt from state and local taxes in the state of issuance. Municipal
leases frequently involve special risks not normally associated with general
obligation or revenue bonds. Leases and installment purchase or conditional sale
contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject to
the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligation may be secured by the leased equipment or facilities,
the disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in an
unsatisfactory or delayed recoupment of the Fund's original investment.
Certificates of participation represent undivided interests in
municipal leases, installment purchase agreements or other instruments. The
certificates are typically issued by a trust or other entity which has received
an assignment of the payments to be made by the state or political subdivision
under such leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation
may be deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and certificates of
participation acquired by the Funds may be determined by the Adviser, pursuant
to guidelines adopted by the Board of Trustees, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including (a) the willingness of dealers to bid for the
security, (b) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers, (c) the
14
<PAGE>
frequency of trades or quotes for the obligation, and (d) the nature of
marketplace trades. In addition, the Adviser will consider factors unique to
particular lease obligations and certificates of participation affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance of the property covered by the lease to the issuer and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by the Funds.
The Funds may also purchase participations in Municipal Obligations
held by a commercial bank or other financial institution. Such participations
provide the Funds with the right to a pro rata undivided interest in the
underlying Municipal Obligations. In addition, such participations generally
provide the Funds with the right to demand payment, on not more than seven days
notice, of all or any part of a Fund's participation interest in the underlying
Municipal Obligation, plus accrued interest. These demand features will be taken
into consideration in determining the effective maturity of such participations
and the average portfolio duration of the Funds. The Funds will only invest in
such participations if, in the opinion of bond counsel for the issuers or
counsel selected by the Adviser, the interest from such participations is exempt
from regular federal income tax.
Municipal Notes. Municipal Obligations purchased by the Funds may
include fixed-rate notes or variable-rate demand notes. Such notes may not be
rated by credit rating agencies, but unrated notes purchased by the Funds will
be determined by the Adviser to be of comparable quality at the time of purchase
to rated instruments purchasable by the Funds. Where necessary to determine that
a note is an Eligible Security or First Tier Eligible Security, the Funds will
require the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
While there may be no active secondary market with respect to a particular
variable rate demand note purchased by the Funds, the Funds may, upon notice
specified in the note, demand payment of the principal of the note at any time
or during specified periods not exceeding thirteen months, depending upon the
instrument involved, and may resell the note at any time to a third party. The
absence of such an active secondary market, however, could make it difficult for
the Funds to dispose of a variable rate demand note if the issuer were to
default on its payment obligation or during periods that the Funds are not
entitled to exercise their demand rights, and the Funds could, for this or other
reasons, suffer losses to the extent of the default.
Pre-Refunded Municipal Obligations. The Funds may invest in
pre-refunded Municipal Obligations. The principal of and interest on
pre-refunded Municipal Obligations are no longer paid from the original revenue
source for the Municipal Obligations. Instead, the source of such payments is
typically an escrow fund consisting of obligations issued or guaranteed by the
U.S. Government. The assets in the escrow fund are derived from the proceeds of
refunding bonds issued by the same issuer as the pre-refunded Municipal
Obligations, but usually on terms more favorable to the issuer. Issuers of
Municipal Obligations use this advance refunding technique to obtain more
favorable terms with respect to Municipal Obligations which are not yet subject
to call or redemption by the issuer. For example, advance refunding enables an
issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other
governing instrument for the pre-refunded Municipal Obligations. However, except
for a change in the revenue source from which principal and interest payments
are made, the pre-refunded Municipal Obligations remain outstanding on their
original terms until they mature or are redeemed by the issuer. The effective
maturity of pre-refunded Municipal Obligations will be the redemption date if
the issuer has assumed an obligation or indicated its intention to redeem such
obligations on the redemption date. Pre-refunded Municipal Obligations are often
purchased at a price which represents a premium over their face value.
Tender Option Bonds. The Funds may purchase tender option bonds. A
tender option bond is a Municipal Obligation (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the Municipal
15
<PAGE>
Obligation's fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at or near par on the date
of such determination. Thus, after payment of this fee, the security holder
effectively holds a demand obligation that bears interest at the prevailing
short-term tax-exempt rate. The Adviser will consider on an ongoing basis the
creditworthiness of the issuer of the underlying Municipal Obligation, of any
custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other reasons. Additionally, the above description
of tender option bonds is meant only to provide an example of one possible
structure of such obligations, and the Funds may purchase tender option bonds
with different types of ownership, payment, credit and/or liquidity
arrangements.
INVESTMENT LIMITATIONS
The Funds' investment objectives and policies described above are not
fundamental and may be changed by the Board of Trustees without a vote of
shareholders. If there is a change in the investment objective of a Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. The Funds'
investment limitations described below may not be changed without the
affirmative vote of the holders of a majority of its outstanding shares. There
can be no assurance that the Funds will achieve their investment objectives. (A
complete list of the investment limitations that cannot be changed without a
vote of shareholders is contained in the Statement of Additional Information
under "Investment Objectives and Policies.")
The Funds may not:
1. Borrow money, except that a Fund may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) from banks, or subject
to specific authorization by the SEC, from funds advised by the Adviser or an
affiliate of the Adviser, and (ii) engage in reverse repurchase agreements;
provided that (i) and (ii) in combination do not exceed one-third of the value
of the Fund's total assets (including the amount borrowed) less liabilities
(other than borrowings). The Funds may not mortgage, pledge or hypothecate any
assets except in connection with such borrowings and reverse repurchase
agreements and then only in amounts not exceeding one-third of the value of the
particular Fund's total assets at the time of such borrowing. Additional
investments will not be made by the Funds when borrowings exceed 5% of the
Fund's assets.
2. Purchase any securities which would cause 25% or more of the value
of its total assets at the time such purchase to be invested in the securities
of one of more issuers conducting their principal business activities in the
same industry, except that Prime Value Money Market Fund will invest 25% or more
of the value of its total assets in obligations of issuers in the banking
industry or in obligations, such as repurchase agreements, secured by such
obligations (unless the Fund is in a temporary defensive position); provided
that there is no limitation with respect to investments in U.S. Government
securities or, in the case of Prime Money Market Fund, in bank instruments
issued by domestic banks.
3. Make loans except that a Fund may (i) purchase or hold debt
obligations in accordance with its investment objective and policies, (ii) enter
into repurchase agreements for securities, (iii) lend portfolio securities and
(iv) with the exception of Government Obligations Money Market Fund, subject to
specific authorization by the SEC, lend money to other funds advised by the
Adviser or an affiliate of the Adviser.
Each Fund may, in the future, seek to achieve its investment objective
by investing all of its assets in a no-load, open-end management investment
company having the same investment objective and policies and substantially the
same investment restrictions as those applicable to the Fund. In such event,
each Fund's investment advisory agreement would be terminated. Such investment
would be made only if the Trust's Board of Trustees believes that the aggregate
per share expenses of each class of the Fund and such
16
<PAGE>
other investment company will be less than or approximately equal to the
expenses which each class of the Fund would incur if the Fund 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.
PURCHASE AND REDEMPTION OF SHARES
To allow the Adviser to manage the Funds effectively, investors are
strongly urged to initiate all investments or redemptions of Fund shares as
early in the day as possible and to notify Lehman Brothers at least one day in
advance of transactions in excess of $5 million.
PURCHASE PROCEDURES
Shares of the Funds are sold at the net asset value per share of the
Fund next determined after receipt of a purchase order by Lehman Brothers, the
Distributor of the Fund's shares. Purchase orders for shares are accepted only
on days on which both the New York Stock Exchange and the Federal Reserve Bank
of Boston are open for business and must be transmitted to Lehman Brothers, by
telephone at 1-800-851-3134 or through Lehman Brothers ExpressNET, an automated
order entry system designed specifically for the Trust ("LEX"). Purchases of
shares will be effective and dividends will begin to accrue on the date of
purchase if purchase orders comply with the following schedule.
<TABLE>
<CAPTION>
ORDER MUST PAYMENT MUST BE
RECEIVED BY* RECEIVED BY*
------------ ------------
<S> <C> <C>
Prime Money Market Fund, 3:00 P.M 4:00 P.M
Prime Value Money Market Fund,
Government Obligations Money Market Fund
and Treasury Instruments Money Market Fund II
Tax-Free Money Market Fund noon 4:00 P.M
and Municipal Money Market Fund.
</TABLE>
- ----------
* All times stated are Eastern time.
Payment for Fund shares may be made only in federal funds immediately
available to Boston Safe Deposit and Trust Company ("Boston Safe"). Payment for
orders which are not received or accepted by Lehman Brothers will be returned
after prompt inquiry to the sending institution. A Fund may in its discretion
reject any order for shares. Any person entitled to receive compensation for
selling or servicing shares of the Funds may receive different compensation for
selling or servicing one Class of shares over another Class.
The minimum aggregate initial investment by an institution in the Funds
is $1 million (with not less than $25,000 invested in any one Fund); however,
broker-dealers and other institutional investors may set a higher minimum for
their customers. To reach the minimum Trust-wide initial investment, purchases
of shares may be aggregated over a period of six months. There is no minimum
subsequent investment.
Conflicts of interest restrictions may apply to an institution's
receipt of compensation paid by the Funds on fiduciary funds that are invested
in Class B Shares. See also "Management of the Funds -- Service Organizations."
Institutions, including banks regulated by the Comptroller of the Currency 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 Class B Shares.
17
<PAGE>
REDEMPTION PROCEDURES
Redemption orders must be transmitted to Lehman Brothers by telephone
at 1-800-851-3134 or through LEX on a day that both the New York Stock Exchange
and the Federal Reserve Bank of Boston are open for business.
Payment for redeemed shares will be made according to the following schedule.
<TABLE>
<CAPTION>
ORDER MUST BE
RECEIVED BY* PAYMENT MADE
------------ ------------
<S> <C>
Prime Money Market Fund, 3:00 P.M. same business day
Prime Value Money Market Fund,
Government Obligations Money Market Fund,
Treasury Instruments Money Market Fund II
Tax-Free Money Market Fund noon same business day
and Municipal Money Market Fund
</TABLE>
- ----------
* All times stated are Eastern time.
Shares are redeemed at the net asset value per share next determined
after Lehman Brothers' receipt of the redemption order. While the Funds intend
to use their best efforts to maintain their net asset value per share at $1.00,
the proceeds paid to an investor upon redemption may be more or less than the
amount invested depending upon a share's net asset value at the time of
redemption.
The Funds reserve the right to wire redemption proceeds within seven
days after receiving the redemption order if, in the judgment of the Adviser, an
earlier payment could adversely affect the Funds. The Funds shall have the right
to redeem involuntarily shares in any account at their net asset value if the
value of the account is less than $10,000 after 60 days' prior written notice to
the investor. Any such redemption shall be effected at the net asset value per
share next determined after the redemption order is entered. If during the
60-day period the investor increases the value of its account to $10,000 or
more, no such redemption shall take place. In addition, the Funds may redeem
shares involuntarily or suspend the right of redemption as permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"), or under certain
special circumstances described in the Statement of Additional Information under
"Additional Purchase and Redemption Information."
The ability to give telephone instructions for the redemption (and
purchase or exchange) of shares is automatically established on an investor's
account. However, the Funds reserve the right to refuse a redemption order
transmitted by telephone if it is believed advisable to do so. Procedures for
redeeming Fund shares by telephone may be modified or terminated at any time by
the Funds or Lehman Brothers. In addition, neither the Funds, Lehman Brothers
nor First Data Investor Services Group, Inc. ("FDISG") will be responsible for
the authenticity of telephone instructions for the purchase, redemption or
exchange of shares where the instructions are reasonably believed to be genuine.
Accordingly, the investor will bear the risk of loss. The Funds will attempt to
confirm that telephone instructions are genuine and will use such procedures as
are considered reasonable, including the recording of telephone instructions. To
the extent that the Funds fail to use reasonable procedures to verify the
genuineness of telephone instructions, the Funds or their service providers may
be liable for such instructions that prove to be fraudulent or unauthorized.
EXCHANGE PROCEDURES
The Exchange Privilege enables an investor to exchange shares of a Fund
without charge for shares of the same class of other Funds which have different
investment objectives that may be of interest to investors. To use the Exchange
Privilege, exchange instructions must be given to Lehman Brothers by telephone
or through LEX. See "Redemption Procedures." In exchanging shares, an investor
must meet the minimum initial investment requirement of the other Fund and the
shares involved must be legally
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<PAGE>
available for sale in the state where the investor resides. Before any exchange,
the investor must also obtain and should review a copy of the current prospectus
of the Funds. Prospectuses may be obtained from Lehman Brothers by calling
1-800-368-5556. Shares will be exchanged at the net asset value next determined
after receipt of an exchange request in proper form. The exchange of shares of
one Fund for shares of another Fund is treated for federal income tax purposes
as a sale of the shares given in exchange by the investor and, therefore, an
investor may realize a taxable gain or loss. The Funds reserve the right to
reject any exchange request in whole or in part. The Exchange Privilege may be
modified or terminated at any time upon notice to investors.
VALUATION OF SHARES-NET ASSET VALUE
Each Fund's net asset value per share for purposes of pricing purchase
and redemption orders is determined by the Fund's Administrator on each weekday,
with the exception of those holidays on which either the New York Stock Exchange
or the Federal Reserve Bank of Boston is closed, according to the following
schedule.
NET ASSET VALUE
CALCULATED*
-----------
Prime Money Market Fund noon
Prime Value Money Market Fund,
Government Obligations Money Market Fund and 3:00 P.M.
Treasury Instruments Money Market Fund II 4:00 P.M.
Tax-Free Money Market Fund noon
and Municipal Money Market Fund
4:00 P.M.
- ----------
* All times stated are Eastern time.
Currently, one or both of the New York Stock Exchange and the Federal
Reserve Bank of Boston are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr.'s Birthday (observed), Presidents' Day
(Washington's Birthday), Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day (observed), Veterans Day, Thanksgiving Day and Christmas Day, and
on the preceding Friday or subsequent Monday when one of these holidays falls on
a Saturday or Sunday, respectively. The net asset value per share of Fund shares
is calculated separately for each class by adding the value of all securities
and other assets of the Fund, subtracting class-specific liabilities, and
dividing the result by the total number of the Fund's outstanding shares. In
computing net asset value, each Fund uses the amortized cost method of valuation
as described in the Statement of Additional Information under "Additional
Purchase and Redemption Information." A Fund's net asset value per share for
purposes of pricing purchase and redemption orders is determined independently
of the net asset values of the shares of each other Fund.
OTHER MATTERS
Fund shares are sold and redeemed without charge by the Funds.
Institutional investors purchasing or holding Fund shares for their customer
accounts may charge customers fees for cash management and other services
provided in connection with their accounts. A customer should, therefore,
consider the terms of its account with an institution before purchasing Fund
shares. An institution purchasing or redeeming Fund shares on behalf of its
customers is responsible for transmitting orders to Lehman Brothers in
accordance with its customer agreements.
19
<PAGE>
DIVIDENDS
Investors of a Fund are entitled to dividends and distributions arising
only from the net investment income and capital gains, if any, earned on
investments held by that Fund. Each Fund's net investment income is declared
daily as a dividend to shares held of record at the close of business on the
date of declaration. Shares begin accruing dividends on the day the purchase
order for the shares is effective and continue to accrue dividends through the
day before such shares are redeemed. Dividends are paid monthly by wire transfer
within five business days after the end of the month or within five business
days after a redemption of all of an investor's shares of a particular class.
The Funds do not expect to realize net long-term capital gains.
Dividends are determined in the same manner and are paid in the same
amount for each Fund share, except that shares of each class bear all the
expenses associated with that specific class.
Institutional investors may elect to have their dividends reinvested in
additional full and fractional shares of the same class of shares with respect
to which such dividends are declared at the net asset value of such shares on
the payment date. Reinvested dividends receive the same tax treatment as
dividends paid in cash. Such election, or any revocation thereof, must be made
in writing to Lehman Brothers, 260 Franklin Street, 15th Floor, Boston,
Massachusetts 02110-9624, and will become effective after its receipt by Lehman
Brothers, with respect to dividends paid.
FDISG, as Transfer Agent, will send each investor or its authorized
representative an annual statement designating the amount of any dividends and
capital gains distributions, if any, made during each year and their federal tax
qualification.
TAXES
Each Fund qualified in its last taxable year and intends to qualify in
future years as a "regulated investment company" under the Code. A regulated
investment company is exempt from federal income tax on amounts distributed to
its investors.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
investors at least 90% of its investment company taxable income for such year.
In general, a Fund's investment company taxable income will be its taxable
income (including dividends and short-term capital gains, if any) subject to
certain adjustments and excluding the excess of any net long-term capital gains
for the taxable year over the net short-term capital loss, if any, for such
year. Each Fund intends to distribute substantially all of its investment
company taxable income each year. Such distributions will be taxable as ordinary
income to Fund investors who are not currently exempt from federal income taxes,
whether such income is received in cash or reinvested in additional shares. It
is anticipated that none of a Fund's distributions will be eligible for the
dividends received deduction for corporations. The Funds do not expect to
realize long-term capital gains and, therefore, do not contemplate payment of
any "capital gain dividends" as described in the Code.
Dividends derived from exempt-interest income from Tax-Free Money
Market Fund and Municipal Money Market Fund may be treated by the Fund's
investors as items of interest excludable from their gross income under Section
103(a) of the Code, unless under the circumstances applicable to the particular
investor the exclusion would be disallowed.
Municipal Money Market Fund may hold without limit certain private
activity bonds issued after August 7, 1986. Investors must include, as an item
of tax preference, the portion of dividends paid by the Fund that is
attributable to interest on such bonds in determining liability (if any) for the
federal alternative minimum tax. Noncorporate taxpayers, depending on their
individual tax status, may be subject to alternative minimum tax at a blended
rate between 26% and 28%. Corporate taxpayers may be subject to (1) alternative
minimum tax at a rate of 20% of the excess of their alternative minimum taxable
income ("AMTI") over the exemption amount, and (2) the environmental tax.
Corporate investors must also take all
20
<PAGE>
exempt-interest dividends into account in determining certain adjustments for
federal alternative minimum and environmental tax purposes. The environmental
tax applicable to corporations is imposed at the rate of .12% on the excess of
the corporation's modified federal alternative minimum taxable income over
$2,000,000.
To the extent, if any, dividends paid to investors by Tax-Free Money
Market Fund or Municipal Money Market Fund are derived from taxable income or
from long-term or short-term capital gains, such dividends will not be exempt
from federal income tax, whether such dividends are paid in the form of cash or
additional shares, and may also be subject to state and local taxes.
In addition to federal taxes, an investor may be subject to state,
local or foreign taxes on payments received from a Fund. A state tax exemption
may be available in some states to the extent distributions of the Fund are
derived from interest on certain U.S. Government securities or on securities
issued by public authorities in the state. The Funds will provide investors
annually with information about federal income tax consequences of distributions
made each year. Investors should be aware of the application of their state and
local tax laws to investments in the Funds.
Investors will be advised at least annually as to the federal income
tax status of distributions made to them each year.
The foregoing discussion is only a brief summary of some of the
important federal tax considerations generally affecting a Fund and its
shareholders. No attempt is made to present a detailed explanation of the
federal, state or local income tax treatment of a Fund or its investors, and
this discussion is not intended as a substitute for careful tax planning.
Accordingly, potential investors in the Funds should consult their tax advisers
with specific reference to their own tax situation. See the Statement of
Additional Information for a further discussion of tax consequences of investing
in shares of the Funds.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction
of the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the persons or companies that furnish services
to the Funds, including agreements with its Distributor, Adviser, Administrator,
and Transfer Agent and Custodian. The day-to-day operations of the Funds are
delegated to the Funds' Adviser and Administrator. The Statement of Additional
Information contains general background information regarding each Trustee and
executive officer of the Trust.
DISTRIBUTOR
Lehman Brothers, located at 3 World Financial Center, New York, New
York 10285, is the Distributor of each Fund's shares. Lehman Brothers is a
wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). As of
November 30, 1995, FMR Corp. beneficially owned approximately 11.7%, Nippon Life
Insurance Company beneficially owned approximately 5.0% and Prudential Asset
Management beneficially owned approximately 5.0% of the outstanding voting
securities of Holdings. Lehman Brothers, a leading full-service investment firm,
meets the diverse financial needs of individuals, institutions and governments
around the world. Lehman Brothers has entered into a Distribution Agreement with
the Trust pursuant to which it has the responsibility for distributing shares of
the Funds.
INVESTMENT ADVISER -- LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
LBGAM, located at 3 World Financial Center, New York, New York 10285,
serves as each Fund's Investment Adviser. LBGAM is a wholly-owned subsidiary of
Holdings. LBGAM, together with other Lehman Brothers investment advisory
affiliates, serves as investment adviser to investment companies and private
accounts and has assets under management of approximately $11 billion as of
December 31, 1995.
21
<PAGE>
As Adviser to the Funds, LBGAM manages each Fund's portfolio in
accordance with its investment objective and policies, makes investment
decisions for the Funds, places orders to purchase and sell securities and
employs professional portfolio managers and securities analysts who provide
research services to the Funds. For its services LBGAM is entitled to receive a
monthly fee from each Fund at the annual rate of .20% of the value of the Fund's
average daily net assets.
ADMINISTRATOR AND TRANSFER AGENT -- FIRST DATA INVESTOR SERVICES GROUP, INC.
FDISG (formerly named The Shareholder Services Group, Inc.), located at
One Exchange Place, 53 State Street, Boston, Massachusetts 02109, serves as each
Fund's Administrator and Transfer Agent. FDISG is a wholly-owned subsidiary of
First Data Corporation. As Administrator, FDISG calculates the net asset value
of each Fund's shares and generally assists in all aspects of each Fund's
administration and operation. As compensation for FDISG's services as
Administrator, FDISG is entitled to receive from each Fund a monthly fee at the
annual rate of .10% of the value of the Fund's average daily net assets. FDISG
is also entitled to receive a fee from the Funds for its services as Transfer
Agent. FDISG pays Boston Safe, each Fund's Custodian, a portion of its monthly
administration fee for custody services rendered to the Funds.
On May 6, 1994, FDISG acquired the third party mutual fund
administration business of The Boston Company Advisors, Inc., an indirect,
wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). In connection
with the transaction, Mellon assigned to FDISG its agreement with Lehman
Brothers (then named Shearson Lehman Brothers Inc.) that Lehman Brothers and its
affiliates, consistent with their fiduciary duties and assuming certain service
quality standards are met, would recommend FDISG as the provider of
administration services to the Funds. This duty to recommend expires on May 21,
2000.
CUSTODIAN -- BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe, a wholly-owned subsidiary of Mellon, located at One Boston
Place, Boston, Massachusetts 02108, serves as each Fund's Custodian. Under the
terms of the Stock Purchase Agreement dated September 14, 1992 between Mellon
and Lehman Brothers (then named Shearson Lehman Brothers Inc.), Lehman Brothers
agreed to recommend Boston Safe as Custodian of mutual funds affiliated with
Lehman Brothers until May 21, 2000 to the extent consistent with its fiduciary
duties and other applicable law.
SERVICE ORGANIZATIONS
Under a Plan of Distribution (the "Plan") adopted pursuant to Rule
12b-1 under the 1940 Act, Class B Shares bear fees ("Rule 12b-1 fees") payable
by the Funds at the aggregate rate of up to .25% (on an annualized basis) of the
average daily net asset value of such shares to Lehman Brothers for providing
certain services to the Funds and holders of Class B Shares. Lehman Brothers may
retain all the payments made to it under the Plan or may enter into agreements
with and make payments of up to .25% to institutional investors such as banks,
savings and loan associations and other financial institutions ("Service
Organizations") for the provision of a portion of such services. These services,
which are described more fully in the Statement of Additional Information under
"Management of the Funds -- Service Organizations," include aggregating and
processing purchase and redemption requests from shareholders and placing net
purchase and redemption orders with Lehman Brothers; processing dividend
payments from the Funds on behalf of shareholders; providing information
periodically to shareholders showing their positions in shares; arranging for
bank wires; responding to shareholder inquiries relating to the services
provided by Lehman Brothers or the Service Organization and handling
correspondence; and acting as shareholder of record and nominee. The Plan also
allows Lehman Brothers to use its own resources to provide distribution services
and shareholder services. Under the terms of related agreements, Service
Organizations are required to provide to their shareholders a schedule of any
fees that they may charge shareholders in connection with their investments in
Class B Shares.
22
<PAGE>
EXPENSES
Each Fund bears all its own expenses. A Fund's expenses include taxes,
interest, fees and salaries of the Trust's trustees and officers who are not
directors, officers or employees of the Fund's service contractors, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to investors,
advisory, administration and distribution fees, charges of the custodian,
administrator, transfer agent and dividend disbursing agent, Service
Organization fees, certain insurance premiums, outside auditing and legal
expenses, costs of shareholder reports and shareholder meetings and any
extraordinary expenses. Each Fund also pays for brokerage fees and commissions
(if any) in connection with the purchase and sale of portfolio securities. In
order to maintain a competitive expense ratio, the Adviser and Administrator
have voluntarily agreed to waive fees and reimburse expenses to the extent
necessary to maintain an annualized expense ratio at a level no greater than
.43% of average daily net assets (.18% excluding Rule 12b-1 fees) with respect
to the Funds. This voluntary waiver and reimbursement arrangement will not be
changed unless investors are provided at least 60 days' advance notice. In
addition, these service providers have agreed to reimburse the Funds to the
extent required by applicable state law for certain expenses that are described
in the Statement of Additional Information. Any fees charged by Service
Organizations or other institutional investors to their customers in connection
with investments in Fund shares are not reflected in a Fund's expenses.
PERFORMANCE AND YIELDS
From time to time, the "yields" and "effective yields" with respect to
all Funds, and "tax-equivalent yields" with respect to Municipal Money Market
Fund and Tax-Free Money Market Fund, may be quoted in advertisements or in
reports to shareholders. Yield quotations are computed separately for each class
of shares. The "yield" quoted in advertisements for a particular class of shares
refers to the income generated by an investment in such shares over a specified
period (such as a seven-day period) identified in the advertisement. This income
is then "annualized;" that is, the amount of income generated by the investment
during that period is assumed to be generated each such period over a 52-week or
one-year period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly but, when annualized, the income earned by an
investment in a particular class is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. The "tax-equivalent yield" demonstrates the
level of taxable yield necessary to produce an after-tax yield equivalent to a
Fund's tax-free yield for each class of shares. It is calculated by increasing
the yield (calculated as above) by the amount necessary to reflect the payment
of federal taxes at a stated rate. The "tax-equivalent yield" will always be
higher than the "yield."
A Fund's performance may be compared to those of other mutual funds
with similar objectives, to other relevant indices, or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, such data are reported in national
financial publications such as Morningstar, Inc., Barron's, IBC/Donoghue's Money
Fund Report(, The Wall Street Journal and The New York Times; reports prepared
by Lipper Analytical Services, Inc; and publications of a local or regional
nature.
A Fund's yield figures for a class of shares represent past
performance, will fluctuate and should not be considered as representative of
future results. The yield of any investment is generally a function of portfolio
quality and maturity, type of investment and operating expenses. Any fees
charged by Service Organizations or other institutional investors directly to
their customers in connection with investments in Fund shares are not reflected
in a Fund's expenses or yields; and, such fees, if charged, would reduce the
actual return received by customers on their investments. The methods used to
compute a Fund's yields are described in more detail in the Statement of
Additional Information. Investors may call 1-800-238-2560 to obtain current
yield information.
23
<PAGE>
DESCRIPTION OF SHARES AND MISCELLANEOUS
The Trust is a Massachusetts business trust established on November 25,
1992. The Trust's Declaration of Trust authorizes the Board of Trustees to issue
an unlimited number of full and fractional shares of beneficial interest in the
Trust and to classify or reclassify any unissued shares into one or more
additional classes of shares. The Trust is an open-end management investment
company, which currently offers ten portfolios. The Trust has authorized the
issuance of seven classes of shares for Prime Value Money Market Fund,
Government Obligations Money Market Fund and Municipal Money Market Fund and
four classes of shares for Prime Money Market Fund, Cash Management Fund,
Treasury Instruments Money Market Fund II and Tax-Free Money Market Fund. The
issuance of separate classes of shares is intended to address the different
service needs of different types of investors. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any class of shares into one
or more sub-classes.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust will call a meeting of shareholders for the purpose of voting upon the
question of removal of a member of the Board of Trustees upon written request of
shareholders owning at least 10% of the outstanding shares of the Trust entitled
to vote.
Each Fund share represents an equal, proportionate interest in the
assets belonging to the Fund. Each share, which has a par value of $.001, has no
preemptive or conversion rights. When issued for payment as described in this
Prospectus, Fund shares will be fully paid and non-assessable.
Holders of the Fund's shares will vote in the aggregate and not by
class on all matters, except where otherwise required by law and except when the
Board of Trustees determines that the matter to be voted upon affects only the
shareholders of a particular class. Further, shareholders of the Funds 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 (see the
Statement of Additional Information under "Additional Description Concerning
Fund Shares" for examples where the 1940 Act requires voting by portfolio).
Shareholders of the Trust are entitled to one vote for each full share held
(irrespective of class or portfolio) and fractional votes for fractional shares
held. Voting rights are not cumulative; and, accordingly, the holders of more
than 50% of the aggregate shares of the Trust may elect all of the trustees.
For information concerning the redemption of Fund shares and possible
restrictions on their transferability, see "Purchase and Redemption of Shares."
24
<PAGE>
LEHMAN BROTHERS INSTITUTIONAL FUNDS
================================================================================
Client Service Center
(8:30 am to 5:00 pm, Eastern time): 800-851-3134
fax: 617-261-4330
or 617-261-4340
Dividend factors and yields: 800-238-2560
Administration/Sales/Marketing: 800-368-5556
To place a purchase or redemption order: 800-851-3134
To change account information: 800-851-3134
Additional Prospectuses: 800-368-5556
Information on Service Agreements: 800-851-3134
LEX Help Desk 800-566-5LEX
LEHMAN BROTHERS
================================================================================
LBP-201B6
================================================================================
PROSPECTUS
LEHMAN BROTHERS INSTITUTIONAL FUNDS GROUP TRUST
One Exchange Place
Boston, Massachusetts 02109
For information call (800) 368-5556
================================================================================
Lehman Brothers Institutional Funds Group Trust (the "Trust") is an
open-end, management investment company that currently offers a family of
diversified investment portfolios, six of which are described in this Prospectus
(individually, a "Fund" and collectively, the "Funds"). This Prospectus
describes one class of shares ("Class C Shares") of the following investment
portfolios:
PRIME MONEY MARKET FUND
PRIME VALUE MONEY MARKET FUND
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
TREASURY INSTRUMENTS MONEY MARKET FUND II
TAX-FREE MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
Class C Shares may not be purchased by individuals directly, but
institutional investors may purchase shares for accounts maintained by
individuals.
LEHMAN BROTHERS INC. ("Lehman Brothers" or the "Distributor") sponsors
each Fund and acts as Distributor of its shares. LEHMAN BROTHERS GLOBAL ASSET
MANAGEMENT INC. ("LBGAM" or the "Adviser") serves as each Fund's Investment
Adviser.
This Prospectus briefly sets forth certain information about the Funds
that investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Funds, contained in a Statement of Additional Information dated May 30, 1995, as
supplemented February 1, 1996, has been filed with the Securities and Exchange
Commission (the "SEC") and is available to investors without charge by calling
Lehman Brothers at 1-800-368-5556. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
SHARES OF THE FUNDS INVOLVE CERTAIN INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. AN INVESTMENT IN A FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE FUNDS SEEK TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT THEY WILL
CONTINUE TO DO SO. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY.
================================================================================
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
The date of this Prospectus is May 30, 1995 as supplemented February 1, 1996.
<PAGE>
LEHMAN BROTHERS INSTITUTIONAL FUNDS GROUP TRUST
MAY 30, 1995
AS SUPPLEMENTED FEBRUARY 1, 1996
PROSPECTUS
TABLE OF CONTENTS
Page
Summary of Investment Objectives 3
Background and Expense Information 4
Financial Highlights 6
Investment Objectives and Policies 7
Portfolio Instruments and Practices 9
Investment Limitations 14
Purchase and Redemption of Shares 15
Dividends 18
Taxes 18
Management of the Funds 19
Performance and Yields 21
Description of Shares and Miscellaneous 22
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION
INCORPORATED HEREIN DESCRIBE THE INVESTMENT OBJECTIVES AND POLICIES, OPERATIONS,
CONTRACTS AND OTHER MATTERS RELATING TO THE FUNDS' CLASS C SHARES. INVESTORS
WISHING TO OBTAIN SIMILAR INFORMATION REGARDING THE TRUST'S OTHER CLASSES MAY
OBTAIN SEPARATE PROSPECTUSES DESCRIBING THEM BY CONTACTING LEHMAN BROTHERS AT
1-800-368-5556.
2
<PAGE>
SUMMARY OF INVESTMENT OBJECTIVES
The investment objectives of the Funds are summarized below. See
"Investment Objectives and Policies" beginning on page 7 for more detailed
information.
PRIME MONEY MARKET FUND seeks to provide current income and stability
of principal by investing in a broad range of short-term instruments, including
U.S. Government and U.S. bank and commercial obligations and repurchase
agreements relating to such obligations.
PRIME VALUE MONEY MARKET FUND seeks to provide current income and
stability of principal by investing in a portfolio consisting of a broad range
of short-term instruments, including U.S. Government and U.S. bank and
commercial obligations and repurchase agreements relating to such obligations.
Under normal market conditions, at least 25% of the Fund's total assets will be
invested in obligations of issuers in the banking industry and repurchase
agreements relating to such obligations.
GOVERNMENT OBLIGATIONS MONEY MARKET FUND seeks to provide current
income with liquidity and security of principal by investing in a portfolio
consisting of U.S. Treasury bills, notes and other obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements relating to such obligations.
TREASURY INSTRUMENTS MONEY MARKET FUND II seeks to provide current
income with liquidity and security of principal by investing in a portfolio
consisting of U.S. Treasury bills, notes and direct obligations of the U.S.
Treasury and repurchase agreements relating to direct Treasury obligations.
TAX-FREE MONEY MARKET FUND seeks to provide as high a level of current
income exempt from federal taxation as is consistent with relative stability of
principal by investing in a portfolio consisting of short-term tax-exempt
obligations issued by state and local governments and other tax-exempt
securities which are considered "First Tier Eligible Securities" as defined in
"Investment Objectives and Policies." The Fund will not purchase securities the
income from which may be a specific tax preference item for purposes of federal
individual and corporate alternative minimum tax.
MUNICIPAL MONEY MARKET FUND seeks to provide as high a level of current
income exempt from federal taxation as is consistent with relative stability of
principal by investing in a portfolio consisting of short-term tax-exempt
obligations issued by state and local governments and other tax-exempt
securities which are considered "Eligible Securities" as defined in "Investment
Objectives and Policies."
There is no assurance that the Funds will achieve their respective
investment objectives.
3
<PAGE>
BACKGROUND AND EXPENSE INFORMATION
Each Fund currently offers four classes of shares, only one of which,
Class C Shares, is offered by this Prospectus. Each class represents an equal,
pro rata interest in a Fund. Each Fund's other classes of shares have different
service and/or distribution fees and expenses from Class C Shares which would
affect the performance of those classes of shares. Investors may obtain
information concerning the Funds' other classes of shares by calling Lehman
Brothers at 1-800-368-5556.
The purpose of the following table is to assist an investor in
understanding the various costs and estimated expenses that an investor in a
Fund would bear directly or indirectly. Certain institutions may also charge
their clients fees in connection with investments in Class C Shares, which fees
are not reflected in the table below. For more complete descriptions of the
various costs and expenses, see "Management of the Funds" in this Prospectus and
the Statement of Additional Information.
EXPENSE SUMMARY
CLASS C SHARES
<TABLE>
<CAPTION>
GOVERNMENT
PRIME PRIME VALUE OBLIGATIONS
MONEY MONEY MONEY
MARKET FUND MARKET FUND MARKET FUND
----------- ----------- -----------
<S> <C> <C> <C>
ANNUAL OPERATING EXPENSES*
(as a percentage of average net assets)
Advisory Fees (net of applicable fee waivers) .10% .10% .04%
Rule 12b-1 fees .35% .35% .35%
Other Expenses -- including Administration
Fees .08% .08% .14%
--- --- ---
Total Fund Operating Expenses (after fee
waivers and/or expense reimbursement) .53% .53% .53%
=== === ===
</TABLE>
<TABLE>
<CAPTION>
TREASURY
INSTRUMENTS
MONEY TAX-FREE MUNICIPAL
MARKET FUND MONEY MONEY
II MARKET FUND MARKET FUND
-- ----------- -----------
<S> <C> <C> <C>
ANNUAL OPERATING EXPENSES*
(as a percentage of average net assets)
Advisory Fees (net of applicable fee waivers) .10% .03% .06%
Rule 12b-1 fees .35% .35% .35%
Other Expenses -- including Administration
Fees .08% .15% .12%
--- --- ---
Total Fund Operating Expenses (after fee
waivers and/or expense reimbursement) .53% .53% .53%
=== === ===
</TABLE>
* The Expense Summary above has been restated to reflect current expected fees
and the Adviser's and Administrator's voluntary fee waiver and expense
reimbursement arrangements currently in effect.
In order to maintain a competitive expense ratio, the Adviser and
Administrator have voluntarily agreed to waive fees and reimburse expenses to
the extent necessary to maintain an annualized expense ratio at a level no
greater than .53% of average daily net assets (.18% excluding Rule 12b-1 fees)
with respect
4
<PAGE>
to the Funds. The voluntary fee waiver and expense reimbursement arrangements
described above will not be changed unless shareholders are provided at least 60
days' advance notice. The maximum annual contractual fees payable to the Adviser
and Administrator total .30% of average daily net assets of the Funds. Absent
fee waivers and expense reimbursements, the Total Fund Operating Expenses of
Class C Shares are expected to be as follows:
PERCENTAGE OF AVERAGE DAILY
NET ASSETS
----------
Prime Money Market Fund .70%
Prime Value Money Market Fund .70%
Government Obligations Money Market Fund .79%
Treasury Instruments Money Market Fund II .70%
Tax-Free Money Market Fund .80%
Municipal Money Market Fund .77%
- ----------
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end of each time
period with respect to the Class C Shares:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$5 $17 $30 $66
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES AND
RATES OF RETURN, WHICH MAY BE GREATER OR LESS THAN THOSE SHOWN.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for the six months ended July 31,
1995 are derived from the Funds' unaudited Financial Statements dated July 31,
1995. All other data presented are derived from the Funds' Financial Statements
audited by Ernst & Young LLP, independent auditors, whose report thereon appears
in the Trust's Annual Report dated January 31, 1995. This information should be
read in conjunction with the financial statements, related notes and other
financial information incorporated by reference in the Statement of Additional
Information. As of July 31, 1995, Class C Shares of the Funds, other than Prime
Money Market Fund, Government Obligations Money Market Fund, and Municipal Money
Market Fund, have not been offered to the public. Accordingly, no financial
information is provided with respect to such shares. Financial information with
respect to Class A Shares of such Funds is included in that Class' prospectus
and the Trust's Annual Report dated January 31, 1995 and Semi-Annual Report
dated July 31, 1995, which are available on request. Financial information with
respect to Class B Shares of such Funds except Municipal Money Market Fund is
included in that Class' prospectus and the Trust's Annual Report dated January
31, 1995 and Semi-Annual Report dated July 31, 1995, which are available upon
request.
<TABLE>
<CAPTION>
GOVERNMENT
OBLIGATIONS MUNICIPAL
MONEY MONEY
MARKET MARKET
PRIME MONEY MARKET FUND FUND FUND
----------------------- ---- ----
SIX
MONTHS PERIOD PERIOD
ENDED YEAR PERIOD ENDED ENDED
7/31/95* ENDED ENDED 7/31/95* 7/31/95*
(UNAUDITED) 1/31/95 1/31/94* (UNAUDITED) (UNAUDITED)
----------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Net investment income (1) 0.0283 0.0407 0.0001 0.0162 0.0093
Dividends from net investment income (0.0283) (0.0407) (0.0001) (0.0162) (0.0093)
------- ------- ------- ------- -------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== =====
Total return (2) 2.86% 4.14% -- (5) 1.43% 0.93%
==== ==== == ==== ====
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $13,480 $7,245 -- (6) $609 $2,234
Ratio of net investment income to average
net assets 5.70%(3) 3.95% 2.81%(3) 5.62%(3) 3.70%(3)
Ratio of operating expenses to average
net assets (4) 0.53%(3) 0.47% 0.46%(3) 0.53%(3) 0.53%(3)
</TABLE>
* The Class C Shares commenced operations on December 27, 1993 for Prime Money
Market Fund, April 18, 1995 for Government Obligations Money Market Fund and
April 14, 1995 for Municipal Money Market Fund.
(1) Net investment income per share before waiver of fees by the Investment
Adviser, Administrator, Custodian and/or Transfer Agent and/or expenses
reimbursed by the Investment Adviser and Administrator for the Class C
Shares was $0.0279 for the six months ended July 31, 1995, $0.0393 for the
year ended January 31, 1995 and $0.0001 for the period ended January 31,
1994 for the Prime Money Market Fund; $0.0153 for the period ended July 31,
1995 for the Government Obligations Money Market Fund; and $0.0087 for the
period ended July 31, 1995 for the Municipal Money Market Fund.
(2) Total return represents aggregate total return for the periods indicated.
(3) Annualized.
(4) Annualized expense ratios before waiver of fees by the Investment Adviser,
Administrator, Custodian and/or Transfer Agent and/or expenses reimbursed by
the Investment Adviser and Administrator for Class C Shares were 0.61% for
the six months ended July 31, 1995, 0.60% for the year ended January 31,
1995 and 0.68% for the period ended January 31, 1994 for the Prime Money
Market Fund; 0.71% for the period ended July 31, 1995 for the Government
Obligations Money Market Fund; and 0.65% for the period ended July 31, 1995
for the Municipal Money Market Fund.
(5) All Class C Shares of the Prime Money Market Fund offered to the public on
December 27, 1993 were redeemed on December 28, 1993; therefore, total
return deemed not to be meaningful.
(6) Total net assets for Class C Shares of the Prime Money Market Fund were $100
at January 31, 1994.
6
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general policies of each Fund are
described below. Specific investment techniques that may be employed by the
Funds are described in a separate section of this Prospectus. See "Portfolio
Instruments and Practices." Differences in objectives and policies among the
Funds, differences in the degree of acceptable risk and tax considerations are
some of the factors that can be expected to affect the investment return of each
Fund. Because of such factors, the performance results of the Funds may differ
even though more than one Fund may utilize the same security selections.
Unless otherwise stated, the investment objectives and policies set
forth in this Prospectus are not fundamental and may be changed by the Board of
Trustees without shareholder approval. If there is a change in the investment
objective and policies of any Fund, shareholders should consider whether the
Fund remains an appropriate investment in light of their then-current financial
position and needs. The market value of certain fixed-rate obligations held by
the Funds will generally vary inversely with changes in market interest rates.
Thus, the market value of these obligations generally declines when interest
rates rise and generally rises when interest rates decline. The Funds are
subject to additional investment policies and restrictions described in the
Statement of Additional Information, some of which are fundamental and may not
be changed without shareholder approval.
The Funds seek to maintain a net asset value of $1.00 per share,
although there is no assurance that they will be able to do so on a continuing
basis. Each Fund operates as a diversified investment portfolio. Certain
securities held by the Funds may have remaining maturities in excess of stated
limitations discussed below if securities provide for adjustments in their
interest rates not less frequently than such time limitations. Each Fund
maintains a dollar-weighted average portfolio maturity of 90 days or less.
PRIME MONEY MARKET FUND AND PRIME VALUE MONEY MARKET FUND seek to
provide current income and stability of principal. In pursuing their investment
objectives, the Funds invest in a broad range of short-term instruments,
including U.S. Government and U.S. bank and commercial obligations and
repurchase agreements relating to such obligations. Prime Value Money Market
Fund may also invest in securities of foreign issuers. Each Fund invests only in
securities that are payable in U.S. dollars and that have (or, pursuant to
regulations adopted by the SEC will be deemed to have) remaining maturities of
thirteen months or less at the date of purchase by the Fund.
Both Funds invest in securities rated by the "Requisite NRSROs."
"Requisite NRSROs" means (a) any two nationally-recognized statistical rating
organizations ("NRSROs") that have issued a rating with respect to a security or
class of debt obligations of an issuer, or (b) one NRSRO, if only one NRSRO has
issued such a rating at the time that the Fund acquires the security. Currently,
there are six NRSROs: Standard & Poor's, a division of The McGraw-Hill Companies
("S&P"); Moody's Investors Service, Inc. ("Moody's"); Fitch Investors Services,
Inc.; Duff and Phelps, Inc.; IBCA Limited and its affiliate, IBCA, Inc. and
Thomson Bankwatch. A discussion of the ratings categories of the NRSROs is
contained in the Appendix to the Statement of Additional Information.
Prime Money Market Fund will limit its portfolio investments to
securities that the Board of Trustees determines present minimal credit risks
and which are "First Tier Eligible Securities" at the time of acquisition by the
Fund. The term First Tier Eligible Securities includes securities rated by the
Requisite NRSROs in the highest short-term rating categories, securities of
issuers that have received such rating with respect to other short-term debt
securities and comparable unrated securities.
Prime Value Money Market Fund will limit its portfolio investments to
securities that the Board of Trustees determines present minimal credit risks
and which are "Eligible Securities" at the time of acquisition by the Fund. The
term Eligible Securities includes securities rated by the Requisite NRSROs in
one of the two highest short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term debt securities and
comparable unrated securities.
Each Fund generally may not invest more than 5% of it total assets in
the securities of any one issuer, except for U.S. Government securities. In
addition, Prime Value Money Market Fund may not invest more than 5% of its total
assets in Eligible Securities that have not received the highest rating from the
Requisite
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NRSROs and comparable unrated securities ("Second Tier Securities") and may not
invest more than 1% of its total assets in the Second Tier Securities of any one
issuer. The Funds may invest more than 5% (but no more than 25%) of the
then-current value of the Fund's total assets in the securities of a single
issuer for a period of up to three business days, provided that (a) the
securities either are rated by the Requisite NRSROs in the highest short-term
rating category or are securities of issuers that have received such rating with
respect to other short-term debt securities or are comparable unrated
securities, and (b) the Fund does not make more than one such investment at any
one time.
Each Fund may purchase obligations of issuers in the banking industry,
such as commercial paper, notes, certificates of deposit, bankers acceptances
and time deposits and U.S. dollar denominated instruments issued or supported by
the credit of the U.S. (or foreign in the case of Prime Value Money Market Fund)
banks or savings institutions having total assets at the time of purchase in
excess of $1 billion. The Funds may also make interest-bearing savings deposits
in commercial and savings banks in amounts not in excess of 5% of their assets.
GOVERNMENT OBLIGATIONS MONEY MARKET FUND AND TREASURY INSTRUMENTS MONEY
MARKET FUND II seek to provide income with liquidity and security of principal.
Each Fund invests only in securities that are payable in U.S. dollars and that
have (or, pursuant to regulations adopted by the SEC, will be deemed to have)
remaining maturities of thirteen months or less at the date of purchase by the
Fund (twelve months in the case of Government Obligations Money Market Fund).
Government Obligations Money Market Fund invests in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities (in
addition to direct Treasury obligations) and repurchase agreements relating to
such obligations.
Treasury Instruments Money Market Fund II invests solely in direct
obligations of the U.S. Treasury, such as Treasury bills and notes, and in
repurchase agreements relating to direct Treasury obligations. The Fund will
purchase obligations of agencies or instrumentalities of the U.S. Government.
TAX-FREE MONEY MARKET FUND AND MUNICIPAL MONEY MARKET FUND seek to
provide investors with as high a level of current income exempt from federal
income tax as is consistent with relative stability of principal. In pursuing
their investment objectives, the Funds invest substantially all of their assets
in diversified portfolios of short-term tax-exempt obligations issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia, and their respective authorities, agencies, instrumentalities and
political subdivisions and tax-exempt derivative securities such as tender
option bonds, participations, beneficial interests in trusts and partnership
interests (collectively "Municipal Obligations"). Each Fund invests only in
securities that have (or, pursuant to regulations adopted by the SEC, will be
deemed to have) remaining maturities of thirteen months or less at the date of
purchase by the Fund. The Funds will not knowingly purchase securities the
interest on which is subject to federal income tax. Except during temporary
defensive periods, each Fund will invest substantially all, but in no event less
than 80%, of its net assets in Municipal Obligations. Tax-Free Money Market Fund
will not invest in securities the income from which may be a specific tax
preference item for purposes of federal individual and corporate alternative
minimum tax. The Funds also have the ability to enter into repurchase
agreements. Absent emergency of extraordinary circumstances, however, neither
Fund presently intends to engage in repurchase transactions, unless such
transactions would not generate taxable income to such Funds.
Both the Tax-Free Money Market Fund and Municipal Money Market Fund
purchase Municipal Obligations that present minimal credit risk as determined by
the Adviser pursuant to guidelines approved by the Board of Trustees. The
Municipal Money Market Fund invests in Eligible Securities while the Tax- Free
Money Market Fund invests in only First Tier Eligible Securities. The Funds may
hold uninvested cash reserves pending investment or during temporary defensive
periods, including when suitable tax-exempt obligations are unavailable. There
is no percentage limitation on the amount of assets which may be held
uninvested. Uninvested cash reserves will not earn income.
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Although the Tax-Free Money Market Fund may invest more than 25% of its
net assets in (a) Municipal Obligations whose issuers are in the same state and
(b) Municipal Obligations the interest on which is paid solely from revenues of
similar projects, it does not presently intend to do so on a regular basis. To
the extent the Fund's assets are concentrated in Municipal Obligations that are
payable from the revenues of similar projects or are issued by issuers located
in the same state, the Fund will be subject to the peculiar risks presented by
the laws and economic conditions relating to such states, projects and bonds to
a greater extent than it would be if its assets were not so concentrated.
PORTFOLIO INSTRUMENTS AND PRACTICES
Investment strategies that are available to the Funds are set forth
below. Additional information concerning certain of these strategies and their
related risks is contained in the Statement of Additional Information.
U.S. GOVERNMENT OBLIGATIONS
Each Fund (other than Municipal Money Market Fund and Tax-Free Money
Market Fund) may purchase obligations issued or guaranteed by the U.S.
Government and (except in the case of Treasury Instruments Money Market Fund II)
U.S. Government agencies and instrumentalities. Securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities include U.S.
Treasury securities, which differ in interest rates, maturities and times of
issuance. Treasury bills have initial maturities of one year or less; Treasury
notes have initial maturities of one to ten years; and Treasury bonds generally
have initial maturities of greater than ten years. Some obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, for example,
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. While the
U.S. Government provides financial support to such U.S. Government-sponsored
agencies or instrumentalities, no assurance can be given that it will always do
so, since it is not so obligated by law. The Funds will invest in such
securities only when they are satisfied that the credit risk with respect to the
issuer is minimal.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities have historically involved little risk of loss of principal if
held to maturity. However, due to fluctuations in interest rates, the market
value of the securities may vary during the period an investor owns shares of a
Fund.
REPURCHASE AGREEMENTS
The Funds may agree to purchase securities from financial institutions
subject to the seller's agreement to repurchase them at an agreed upon time and
price within one year from the date of acquisition ("repurchase agreements").
The Funds will not invest more than 10% of the value of their net assets in
repurchase agreements with terms which exceed seven days. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price (including
accrued interest). Default by or bankruptcy of the seller would, however, expose
the Funds to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds for temporary purposes by entering into
reverse repurchase agreements in accordance with the investment restrictions
described below. Pursuant to such agreements, the Funds would sell portfolio
securities to financial institutions and agree to repurchase them at an agreed
upon date and price. The Funds would consider entering into reverse repurchase
agreements to avoid otherwise selling securities during unfavorable market
conditions. Reverse repurchase agreements involve the risk
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that the market value of the securities sold by the Funds may decline below the
price of the securities the Funds are obligated to repurchase. The Funds may
engage in reverse repurchase agreements provided that the amount of the reverse
repurchase agreements and any other borrowings does not exceed one-third of the
value of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings).
WHEN-ISSUED SECURITIES
The Funds (other than Tax-Free Money Market Fund and Municipal Money
Market Fund) may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and yield. The Funds will generally not pay for such
securities or start earning interest on them until they are received. Securities
purchased on a when-issued basis are recorded as an asset and are subject to
changes in value based upon changes in the general level of interest rates. The
Funds expect that commitments to purchase when-issued securities will not exceed
25% of the value of their total assets absent unusual market conditions. The
Funds do not intend to purchase when-issued securities for speculative purposes
but only in furtherance of their investment objectives.
ILLIQUID SECURITIES
Prime Money Market Fund, Prime Value Money Market Fund, Tax-Free Money
Market Fund and Municipal Money Market Fund will not knowingly invest more than
10% of the value of their total net assets in illiquid securities, including
time deposits and repurchase agreements having maturities longer than seven
days. Securities that have readily available market quotations are not deemed
illiquid for purposes of this limitation (irrespective of any legal or
contractual restrictions on resale). Each of the Funds may invest in commercial
obligations issued in reliance on the so-called "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended ("Section 4(2) paper"). Each of the Funds may also purchase securities
that are not registered under the Securities Act of 1933, as amended, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Section 4(2) paper is restricted as to
disposition under the federal securities laws, and generally is sold to
institutional investors such as the Funds who agree that they are purchasing the
paper for investment and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) paper is normally
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. Rule 144A securities generally must be
sold to other qualified institutional buyers. If a particular investment in
Section 4(2) paper or Rule 144A securities is not determined to be liquid, that
investment will be included within the percentage limitation on investment in
illiquid securities.
FOREIGN SECURITIES
Prime Value Money Market Fund may invest substantially in securities of
foreign issuers, including obligations of foreign banks or foreign branches of
U.S. banks, and debt securities of foreign issuers, where the Adviser deems the
instrument to present minimal credit risks. Investments in foreign banks or
foreign issuers present certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of currency
exchange blockages or other foreign governmental laws or restrictions and
reduced availability of public information. Foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements applicable to domestic issuers.
ZERO COUPON AND CAPITAL APPRECIATION BONDS
The Funds may invest in zero coupon and capital appreciation bonds,
which are debt securities issued or sold at a discount from their face value and
which do not entitle the holder to any periodic payment of interest prior to
maturity or a specified redemption date (or cash payment date). The amount of
the discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, the liquidity of the security and the
perceived credit quality of the issuer. These securities may also take the
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form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interest in such stripped debt obligations or coupons. Discounts with respect to
stripped tax-exempt securities or their coupons may be taxable. The market
prices of capital appreciation bonds generally are more volatile than the market
prices of interest-bearing securities and are likely to respond to a greater
degree to changes in interest rates than interest-bearing securities having
similar maturity and credit quality.
U.S. TREASURY STRIPS
The Prime Money Market Fund, Prime Value Money Market Fund, Government
Obligations Money Market Fund and Treasury Instruments Money Market Fund II may
invest in separately traded principal and interest components of securities
backed by the full faith and credit of the U.S. Treasury. The principal and
interest components of U.S. Treasury bonds with remaining maturities of longer
than ten years are eligible to be traded independently under the Separate
Trading of Registered Interest and Principal of Securities ("STRIPS") program.
Under the STRIPS program, the principal and interest components are separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts separately. Under the stripped bond rules
of the Internal Revenue Code of 1986, as amended (the "Code"), investments by
the Funds in STRIPS will result in the accrual of interest income on such
investments in advance of the receipt of the cash corresponding to such income.
The interest component of STRIPS may be more volatile than that of U.S. Treasury
bills with comparable maturities. In accordance with Rule 2a-7, the Funds'
investments in STRIPS are limited to those with maturity components not
exceeding thirteen months.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities up to one-third of the value of
its total assets to U.S. and foreign broker/dealers, banks or other
institutional borrowers of securities that the Adviser has determined are credit
worthy under guidelines established by the Board of Trustees. The Funds will
receive collateral in the form of cash, letters of credit, or securities of the
U.S. Government or its agencies equal to at least 100% of the value of the
securities owned.
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which Prime Money
Market Fund, Prime Value Money Market Fund, Government Obligations Money Market
Fund, Tax-Free Money Market Fund and Municipal Money Market Fund may invest are
not fixed and may fluctuate based upon changes in market rates. A variable rate
obligation has an interest rate which is adjusted at predesignated periods.
Interest on a floating rate obligation is adjusted whenever there is a change in
the market rate of interest on which the interest rate payable is based.
Tax-exempt variable or floating rate obligations generally permit the holders of
such obligations to demand payment of principal from the issuer or a third party
at stated intervals. Variable and floating rate obligations are less effective
than fixed rate instruments at locking in a particular yield. Such obligations
may fluctuate in value in response to interest rate changes if there is a delay
between changes in market interest rates and the interest reset date for the
obligation. The Funds will take demand or reset features into consideration in
determining the average portfolio duration of the Fund and the effective
maturity of individual securities. In addition, the absence of an unconditional
demand feature exercisable within seven days will require a tax-exempt variable
or floating rate obligation to be treated as illiquid for purposes of a Fund's
limitation on illiquid investments. The failure of the issuer or a third party
to honor its obligations under a demand or put feature might require a
tax-exempt variable or floating rate obligation to be treated as illiquid for
purposes of a Fund's limitation on illiquid investments.
TAX-EXEMPT COMMERCIAL PAPER
Tax-Free Money Market Fund and Municipal Money Market Fund may invest
in tax-exempt commercial paper. Issues of commercial paper typically represent
short-term, unsecured, negotiable promissory notes. These obligations are issued
by state and local governments and their agencies to finance
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working capital needs of municipalities or to provide interim construction
financing and are paid from general or specific revenues of municipalities or
are re-financed with long-term debt. In some cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility arrangements offered by banks or other institutions.
The Funds will invest only in tax-exempt commercial paper rated at least Prime-2
by Moody's or A-2 by S&P.
MUNICIPAL OBLIGATIONS
Tax-Free Money Market Fund and Municipal Money Market Fund may invest
in the Municipal Obligations described below.
Municipal Obligations. Municipal Obligations include bonds, notes and
other instruments issued by or on behalf of states, territories and possessions
of the United States (including the District of Columbia) and their political
subdivisions, agencies or instrumentalities, the interest on which is, in the
opinion of bond counsel, exempt from regular federal income tax (i.e., excluded
from gross income for federal income tax purposes but not necessarily exempt
from the personal income taxes of any state or, with respect to the Municipal
Money Market Fund, from the federal alternative minimum tax). In addition,
Municipal Obligations include participation interests in such securities the
interest on which is, in the opinion of bond counsel for the issuers or counsel
selected by the Adviser, exempt from regular federal income tax. The definition
of Municipal Obligations includes other types of securities that currently exist
or may be developed in the future and that are, or will be, in the opinion of
counsel, as described above, exempt from regular federal income tax, provided
that investing in such securities is consistent with a Fund's investment
objective and policies.
The two principal classifications of Municipal Obligations which may be
held by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities, or in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds which
may be held by the Municipal Money Market Fund and which are not payable from
the unrestricted revenues of the issuer. While some private activity bonds are
general obligation securities, the vast majority are revenue securities.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Each of the Municipal Obligations described below may take the form of either
general obligation or revenue securities.
Municipal Obligations are often issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Obligations may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses, and obtaining funds to lend to other
public institutions and facilities. Municipal Obligations also include
industrial development bonds, or with respect to the Municipal Money Market
Fund, private activity bonds, which are issued by or on behalf of public
authorities to obtain funds for privately-operated housing facilities, airport,
mass transit or port facilities, sewage disposal, solid waste disposal or
hazardous waste treatment or disposal facilities and certain local facilities
for water supply, gas or electricity. In addition, proceeds of certain
industrial development bonds are used for the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities. The
interest income from private activity bonds may subject certain investors to the
federal alternative minimum tax.
Municipal Leases, Certificates of Participation and Other Participation
Interests. The Funds may invest in municipal leases and certificates of
participation in municipal leases. A municipal lease is an obligation in the
form of a lease or installment purchase which is issued by a state or local
government to acquire equipment and facilities. Income from such obligations is
generally exempt from state and local taxes in the state of issuance. Municipal
leases frequently involve special risks not normally associated with general
obligation or revenue bonds. Leases and installment purchase or conditional sale
contracts (which
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normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt issuance limitations are deemed
to be inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that relieve the governmental issuer of any
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. In addition, such leases or contracts may be subject to
the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligation may be secured by the leased equipment or facilities,
the disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in an
unsatisfactory or delayed recoupment of the Fund's original investment.
Certificates of participation represent undivided interests in
municipal leases, installment purchase agreements or other instruments. The
certificates are typically issued by a trust or other entity which has received
an assignment of the payments to be made by the state or political subdivision
under such leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation
may be deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and certificates of
participation acquired by the Funds may be determined by the Adviser, pursuant
to guidelines adopted by the Board of Trustees, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including (a) the willingness of dealers to bid for the
security, (b) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers, (c) the frequency of trades or quotes
for the obligation, and (d) the nature of marketplace trades. In addition, the
Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance of the property
covered by the lease to the issuer and the likelihood that the marketability of
the obligation will be maintained throughout the time the obligation is held by
the Funds.
The Funds may also purchase participations in Municipal Obligations
held by a commercial bank or other financial institution. Such participations
provide the Funds with the right to a pro rata undivided interest in the
underlying Municipal Obligations. In addition, such participations generally
provide the Funds with the right to demand payment, on not more than seven days
notice, of all or any part of a Fund's participation interest in the underlying
Municipal Obligation, plus accrued interest. These demand features will be taken
into consideration in determining the effective maturity of such participations
and the average portfolio duration of the Funds. The Funds will only invest in
such participations if, in the opinion of bond counsel for the issuers or
counsel selected by the Adviser, the interest from such participations is exempt
from regular federal income tax.
Municipal Notes. Municipal Obligations purchased by the Funds may
include fixed-rate notes or variable-rate demand notes. Such notes may not be
rated by credit rating agencies, but unrated notes purchased by the Funds will
be determined by the Adviser to be of comparable quality at the time of purchase
to rated instruments purchasable by the Funds. Where necessary to determine that
a note is an Eligible Security or First Tier Eligible Security, the Funds will
require the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
While there may be no active secondary market with respect to a particular
variable rate demand note purchased by the Funds, the Funds may, upon notice
specified in the note, demand payment of the principal of the note at any time
or during specified periods not exceeding thirteen months, depending upon the
instrument involved, and may resell the note at any time to a third party. The
absence of such an active secondary market, however, could make it difficult for
the Funds to dispose of a variable rate demand note if the issuer were to
default on its payment obligation or during periods that the Funds are not
entitled to exercise their demand rights, and the Funds could, for this or other
reasons, suffer losses to the extent of the default.
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Pre-Refunded Municipal Obligations. The Funds may invest in
pre-refunded Municipal Obligations. The principal of and interest on
pre-refunded Municipal Obligations are no longer paid from the original revenue
source for the Municipal Obligations. Instead, the source of such payments is
typically an escrow fund consisting of obligations issued or guaranteed by the
U.S. Government. The assets in the escrow fund are derived from the proceeds of
refunding bonds issued by the same issuer as the pre-refunded Municipal
Obligations, but usually on terms more favorable to the issuer. Issuers of
Municipal Obligations use this advance refunding technique to obtain more
favorable terms with respect to Municipal Obligations which are not yet subject
to call or redemption by the issuer. For example, advance refunding enables an
issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other
governing instrument for the pre-refunded Municipal Obligations. However, except
for a change in the revenue source from which principal and interest payments
are made, the pre-refunded Municipal Obligations remain outstanding on their
original terms until they mature or are redeemed by the issuer. The effective
maturity of pre-refunded Municipal Obligations will be the redemption date if
the issuer has assumed an obligation or indicated its intention to redeem such
obligations on the redemption date. Pre-refunded Municipal Obligations are often
purchased at a price which represents a premium over their face value.
Tender Option Bonds. The Funds may purchase tender option bonds. A
tender option bond is a Municipal Obligation (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the Municipal Obligation's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at or near par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term
tax-exempt rate. The Adviser will consider on an ongoing basis the
creditworthiness of the issuer of the underlying Municipal Obligation, of any
custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other reasons. Additionally, the above description
of tender option bonds is meant only to provide an example of one possible
structure of such obligations, and the Funds may purchase tender option bonds
with different types of ownership, payment, credit and/or liquidity
arrangements.
INVESTMENT LIMITATIONS
The Funds' investment objectives and policies described above are not
fundamental and may be changed by the Board of Trustees without a vote of
shareholders. If there is a change in the investment objective of a Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. The Funds'
investment limitations described below may not be changed without the
affirmative vote of the holders of a majority of its outstanding shares. There
can be no assurance that the Funds will achieve their investment objectives. (A
complete list of the investment limitations that cannot be changed without a
vote of shareholders is contained in the Statement of Additional Information
under "Investment Objectives and Policies.")
The Funds may not:
1. Borrow money, except that a Fund may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) from banks, or subject
to specific authorization by the SEC, from funds advised by the Adviser or an
affiliate of the Adviser, and (ii) engage in reverse repurchase agreements;
provided that (i) and (ii) in combination do not exceed one-third of the value
of the Fund's total assets (including the amount borrowed) less liabilities
(other than borrowings). The Funds may not mortgage,
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pledge or hypothecate any assets except in connection with such borrowings and
reverse repurchase agreements and then only in amounts not exceeding one-third
of the value of the particular Fund's total assets at the time of such
borrowing. Additional investments will not be made by a Fund when borrowings
exceed 5% of the Fund's assets.
2. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, except that Prime Value Money Market Fund will invest 25%
or more of the value of its total assets in obligations of issuers in the
banking industry or in obligations, such as repurchase agreements, secured by
such obligations (unless the Fund is in a temporary defensive position);
provided that there is no limitation with respect to investments in U.S.
Government securities or, in the case of Prime Money Market Fund, in bank
instruments issued by domestic banks.
3. Make loans except that a Fund may (i) purchase or hold debt
obligations in accordance with its investment objective and policies, (ii) enter
into repurchase agreements for securities, (iii) lend portfolio securities and
(iv) with the exception of Government Obligations Money Market Fund, subject to
specific authorization by the SEC, lend money to other funds advised by the
Adviser or an affiliate of the Adviser.
Each Fund may, in the future, seek to achieve its investment objective
by investing all of its assets in a no-load, open-end management investment
company having the same investment objective and policies and substantially the
same investment restrictions as those applicable to the Fund. In such event,
each Fund's investment advisory agreement would be terminated. Such investment
would be made only if the Trust's Board of Trustees believes that the aggregate
per share expenses of each class of the Fund and such other investment company
will be less than or approximately equal to the expenses which each class of the
Fund would incur if the Fund 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.
PURCHASE AND REDEMPTION OF SHARES
To allow the Adviser to manage the Funds effectively, investors are
strongly urged to initiate all investments or redemptions of Fund shares as
early in the day as possible and to notify Lehman Brothers at least one day in
advance of transactions in excess of $5 million.
PURCHASE PROCEDURES
Shares of the Funds are sold at the net asset value per share of the
Fund next determined after receipt of a purchase order by Lehman Brothers, the
Distributor of the Fund's shares. Purchase orders for shares are accepted only
on days on which both the New York Stock Exchange and the Federal Reserve Bank
of Boston are open for business and must be transmitted to Lehman Brothers, by
telephone at 1-800-851-3134 or through Lehman Brothers ExpressNET, an automated
order entry system designed specifically for the Trust ("LEX"). Purchases of
shares will be effective and dividends will begin to accrue on the date of
purchase if purchase orders comply with the following schedule.
<TABLE>
<CAPTION>
ORDER MUST BE PAYMENT MUST BE
RECEIVED BY* RECEIVED BY*
------------ ------------
<S> <C> <C>
Prime Money Market Fund, 3:00 P.M 4:00 P.M
Prime Value Money Market Fund,
Government Obligations Money Market Fund
and Treasury Instruments Money Market Fund
Tax-Free Money Market Fund noon 4:00 P.M
and Municipal Money Market Fund.
</TABLE>
- ----------
* All times stated are Eastern time.
15
<PAGE>
Payment for Fund shares may be made only in federal funds immediately
available to Boston Safe Deposit and Trust Company ("Boston Safe"). (Payment for
orders which are not received or accepted by Lehman Brothers will be returned
after prompt inquiry to the sending institution.) A Fund may in its discretion
reject any order for shares. Any person entitled to receive compensation for
selling or servicing shares of the Funds may receive different compensation for
selling or servicing one Class of shares over another Class.
The minimum aggregate initial investment by an institution in the Funds
is $1 million (with not less than $25,000 invested in any one Fund); however,
broker-dealers and other institutional investors may set a higher minimum for
their customers. To reach the minimum Trust-wide initial investment, purchases
of shares may be aggregated over a period of six months. There is no minimum
subsequent investment.
Conflicts of interest restrictions may apply to an institution's
receipt of compensation paid by the Funds on fiduciary funds that are invested
in Class C Shares. See also "Management of the Funds -- Service Organizations."
Institutions, including banks regulated by the Comptroller of the Currency 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 Class C Shares.
REDEMPTION PROCEDURES
Redemption orders must be transmitted to Lehman Brothers by telephone
at 1-800-851-3134 or through LEX on a day that both the New York Stock Exchange
and the Federal Reserve Bank of Boston are open for business.
Payment for redeemed shares will be made according to the following schedule.
<TABLE>
<CAPTION>
ORDER MUST BE
RECEIVED BY* PAYMENT MADE
------------ ------------
<S> <C>
Prime Money Market Fund, 3:00 P.M. same business day
Prime Value Money Market Fund,
Government Obligations Money Market Fund,
Treasury Instruments Money Market Fund II
Tax-Free Money Market Fund noon same business day
and Municipal Money Market Fund
</TABLE>
- ----------
* All times stated are Eastern time.
Shares are redeemed at the net asset value per share next determined
after Lehman Brothers' receipt of the redemption order. While the Funds intend
to use their best efforts to maintain their net asset value per share at $1.00,
the proceeds paid to an investor upon redemption may be more or less than the
amount invested depending upon a share's net asset value at the time of
redemption.
The Funds reserve the right to wire redemption proceeds within seven
days after receiving the redemption order if, in the judgment of the Adviser, an
earlier payment could adversely affect the Funds. The Funds shall have the right
to redeem involuntarily shares in any account at their net asset value if the
value of the account is less than $10,000 after 60 days' prior written notice to
the investor. Any such redemption shall be effected at the net asset value per
share next determined after the redemption order is entered. If during the
60-day period the investor increases the value of its account to $10,000 or
more, no such redemption shall take place. In addition, the Funds may redeem
shares involuntarily or suspend the right of redemption as permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"), or under certain
special circumstances described in the Statement of Additional Information under
"Additional Purchase and Redemption Information."
16
<PAGE>
The ability to give telephone instructions for the redemption (and
purchase or exchange) of shares is automatically established on an investor's
account. However, the Funds reserve the right to refuse a redemption order
transmitted by telephone if it is believed advisable to do so. Procedures for
redeeming Fund shares by telephone may be modified or terminated at any time by
the Funds or Lehman Brothers. In addition, neither the Funds, Lehman Brothers
nor First Data Investor Services Group, Inc. ("FDISG") will be responsible for
the authenticity of telephone instructions for the purchase, redemption or
exchange of shares where the instructions are reasonably believed to be genuine.
Accordingly, the investor will bear the risk of loss. The Funds will attempt to
confirm that telephone instructions are genuine and will use such procedures as
are considered reasonable, including the recording of telephone instructions. To
the extent that the Funds fail to use reasonable procedures to verify the
genuineness of telephone instructions, the Funds or their service providers may
be liable for such instructions that prove to be fraudulent or unauthorized.
EXCHANGE PROCEDURES
The Exchange Privilege enables an investor to exchange shares of a Fund
without charge for shares of the same class of other Funds which have different
investment objectives that may be of interest to investors. To use the Exchange
Privilege, exchange instructions must be given to Lehman Brothers by telephone
or through LEX. See "Redemption Procedures." In exchanging shares, an investor
must meet the minimum initial investment requirement of the other Fund and the
shares involved must be legally available for sale in the state where the
investor resides. Before any exchange, the investor must also obtain and should
review a copy of the current prospectus of the Funds. Prospectuses may be
obtained from Lehman Brothers by calling 1-800-368-5556. Shares will be
exchanged at the net asset value next determined after receipt of an exchange
request in proper form. The exchange of shares of one Fund for shares of another
Fund is treated for federal income tax purposes as a sale of the shares given in
exchange by the investor and, therefore, an investor may realize a taxable gain
or loss. The Funds reserve the right to reject any exchange request in whole or
in part. The Exchange Privilege may be modified or terminated at any time upon
notice to investors.
VALUATION OF SHARES -- NET ASSET VALUE
Each Fund's net asset value per share for purposes of pricing purchase
and redemption orders is determined by the Fund's Administrator on each weekday,
with the exception of those holidays on which either the New York Stock Exchange
or the Federal Reserve Bank of Boston is closed, according to the following
schedule.
NET ASSET VALUE
CALCULATED*
-----------
Prime Money Market Fund noon
Prime Value Money Market Fund,
Government Obligations Money Market Fund and 3:00 P.M.
Treasury Instruments Money Market Fund II
4:00 P.M.
Tax-Free Money Market Fund noon
and Municipal Money Market Fund
4:00 P.M.
- ----------
* All times stated are Eastern time.
Currently, one or both of the New York Stock Exchange and the Federal
Reserve Bank of Boston are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr.'s Birthday (observed), Presidents' Day
(Washington's Birthday), Good Friday, Memorial Day, Independence Day,
17
<PAGE>
Labor Day, Columbus Day (observed), Veterans Day, Thanksgiving Day and Christmas
Day, and on the preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. The net asset value per share of
Fund shares is calculated separately for each class by adding the value of all
securities and other assets of the Fund, subtracting class specific liabilities,
and dividing the result by the total number of the Fund's outstanding shares. In
computing net asset value, each Fund uses the amortized cost method of valuation
as described in the Statement of Additional Information under "Additional
Purchase and Redemption Information." A Fund's net asset value per share for
purposes of pricing purchase and redemption orders is determined independently
of the net asset values of the shares of each other Fund.
OTHER MATTERS
Fund shares are sold and redeemed without charge by the Funds.
Institutional investors purchasing or holding Fund shares for their customer
accounts may charge customers fees for cash management and other services
provided in connection with their accounts. A customer should, therefore,
consider the terms of its account with an institution before purchasing Fund
shares. An institution purchasing or redeeming Fund shares on behalf of its
customers is responsible for transmitting orders to Lehman Brothers in
accordance with its customer agreements.
DIVIDENDS
Investors of a Fund are entitled to dividends and distributions arising
only from the net investment income and capital gains, if any, earned on
investments held by that Fund. Each Fund's net investment income is declared
daily as a dividend to shares held of record at the close of business on the
date of declaration. Shares begin accruing dividends on the day the purchase
order for the shares is effective and continue to accrue dividends through the
day before such shares are redeemed. Dividends are paid monthly by wire transfer
within five business days after the end of the month or within five business
days after a redemption of all of an investor's shares of a particular class.
The Funds do not expect to realize net long-term capital gains.
Dividends are determined in the same manner and are paid in the same
amount for each Fund share, except that shares of each class bear all the
expenses associated with that specific class.
Institutional investors may elect to have their dividends reinvested in
additional full and fractional shares of the same class of shares with respect
to which such dividends are declared at the net asset value of such shares on
the payment date. Reinvested dividends receive the same tax treatment as
dividends paid in cash. Such election, or any revocation thereof, must be made
in writing to Lehman Brothers, 260 Franklin Street, 15th Floor, Boston,
Massachusetts 02110-9624, and will become effective after its receipt by Lehman
Brothers, with respect to dividends paid.
FDISG, as Transfer Agent, will send each investor or its authorized
representative an annual statement designating the amount of any dividends and
capital gains distributions, if any, made during each year and their federal tax
qualification.
TAXES
Each Fund qualified in its last taxable year and intends to qualify in
future years as a "regulated investment company" under the Code. A regulated
investment company is exempt from federal income tax on amounts distributed to
its investors.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
investors at least 90% of its investment company taxable income for such year.
In general, a Fund's investment company taxable income will be its taxable
income (including dividends and short-term capital gains, if any) subject to
certain adjustments and excluding the excess of any net long-term capital gains
for the taxable year over the net short-term capital loss, if any, for such
year.
18
<PAGE>
Each Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions will be taxable as ordinary income
to Fund investors who are not currently exempt from federal income taxes,
whether such income is received in cash or reinvested in additional shares. It
is anticipated that none of a Fund's distributions will be eligible for the
dividends received deduction for corporations. The Funds do not expect to
realize long-term capital gains and, therefore, do not contemplate payment of
any "capital gain dividends" as described in the Code.
Dividends derived from exempt-interest income from Tax-Free Money
Market Fund and Municipal Money Market Fund may be treated by the Fund's
investors as items of interest excludable from their gross income under Section
103(a) of the Code, unless under the circumstances applicable to the particular
investor the exclusion would be disallowed.
Municipal Money Market Fund may hold without limit certain private
activity bonds issued after August 7, 1986. Investors must include, as an item
of tax preference, the portion of dividends paid by the Fund that is
attributable to interest on such bonds in determining liability (if any) for the
federal alternative minimum tax. Noncorporate taxpayers, depending on their
individual tax status, may be subject to alternative minimum tax at a blended
rate between 26% and 28%. Corporate taxpayers may be subject to (1) alternative
minimum tax at a rate of 20% of the excess of their alternative minimum taxable
income ("AMTI") over the exemption amount, and (2) the environmental tax.
Corporate investors must also take all exempt-interest dividends into account in
determining certain adjustments for federal alternative minimum and
environmental tax purposes. The environmental tax applicable to corporations is
imposed at the rate of .12% on the excess of the corporation's modified federal
alternative minimum taxable income over $2,000,000. Investors receiving Social
Security benefits should note that all exempt-interest dividends will be taken
into account in determining the taxability of such benefits.
To the extent, if any, dividends paid to investors by Tax-Free Money
Market Fund or Municipal Money Market Fund are derived from taxable income or
from long-term or short-term capital gains, such dividends will not be exempt
from federal income tax, whether such dividends are paid in the form of cash or
additional shares, and may also be subject to state and local taxes.
In addition to federal taxes, an investor may be subject to state,
local or foreign taxes on payments received from a Fund. A state tax exemption
may be available in some states to the extent distributions of the Fund are
derived from interest on certain U.S. Government securities or on securities
issued by public authorities in the state. The Funds will provide investors
annually with information about federal income tax consequences of distributions
made each year. Investors should be aware of the application of their state and
local tax laws to investments in the Funds.
Investors will be advised at least annually as to the federal income
tax status of distributions made to them each year.
The foregoing discussion is only a brief summary of some of the
important federal tax considerations generally affecting a Fund and its
shareholders. No attempt is made to present a detailed explanation of the
federal, state or local income tax treatment of a Fund or its investors, and
this discussion is not intended as a substitute for careful tax planning.
Accordingly, potential investors in the Funds should consult their tax advisers
with specific reference to their own tax situation. See the Statement of
Additional Information for a further discussion of tax consequences of investing
in shares of the Funds.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction
of the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the persons or companies that furnish services
to the Funds, including agreements with its Distributor, Adviser, Administrator,
Transfer Agent and Custodian. The day-to-day operations of the Funds are
delegated to the Funds' Adviser and Administrator. The Statement of Additional
Information contains general background information regarding each Trustee and
executive officer of the Trust.
19
<PAGE>
DISTRIBUTOR
Lehman Brothers, located at 3 World Financial Center, New York, New
York 10285, is the Distributor of each Fund's shares. Lehman Brothers is a
wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). As of
November 30, 1995, FMR Corp. beneficially owned approximately 11.7%, Nippon Life
Insurance Company beneficially owned approximately 5.0% and Prudential Asset
Management beneficially owned approximately 5.0% of the outstanding voting
securities of Holdings. Lehman Brothers, a leading full-service investment firm,
meets the diverse financial needs of individuals, institutions and governments
around the world. Lehman Brothers has entered into a Distribution Agreement with
the Trust pursuant to which it has the responsibility for distributing shares of
the Funds.
INVESTMENT ADVISER -- LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
LBGAM, located at 3 World Financial Center, New York, New York 10285,
serves as each Fund's Investment Adviser. LBGAM is a wholly-owned subsidiary of
Holdings. LBGAM, together with other Lehman Brothers investment advisory
affiliates, serves as investment adviser to investment companies and private
accounts and has assets under management of approximately $11 billion as of
December 31, 1995.
As Adviser to the Funds, LBGAM manages each Fund's portfolio in
accordance with its investment objective and policies, makes investment
decisions for the Funds, places orders to purchase and sell securities and
employs professional portfolio managers and securities analysts who provide
research services to the Funds. For its services LBGAM is entitled to receive a
monthly fee from each Fund at the annual rate of .20% of the value of the Fund's
average daily net assets.
ADMINISTRATOR AND TRANSFER AGENT -- FIRST DATA INVESTOR SERVICES GROUP, INC.
FDISG (formerly named The Shareholder Services Group, Inc.), located at
One Exchange Place, 53 State Street, Boston, Massachusetts 02109, serves as each
Fund's Administrator and Transfer Agent. FDISG is a wholly-owned subsidiary of
First Data Corporation. As Administrator, FDISG calculates the net asset value
of each Fund's shares and generally assists in all aspects of each Fund's
administration and operation. As compensation for FDISG's services as
Administrator, FDISG is entitled to receive from each Fund a monthly fee at the
annual rate of .10% of the value of the Fund's average daily net assets. FDISG
is also entitled to receive a fee from the Funds for its services as Transfer
Agent. FDISG pays Boston Safe, each Fund's Custodian, a portion of its monthly
administration fee for custody services rendered to the Funds.
On May 6, 1994, FDISG acquired the third party mutual fund
administration business of The Boston Company Advisors, Inc., an indirect,
wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). In connection
with the transaction, Mellon assigned to FDISG its agreement with Lehman
Brothers (then named Shearson Lehman Brothers Inc.) that Lehman Brothers and its
affiliates, consistent with their fiduciary duties and assuming certain service
quality standards are met, would recommend FDISG as the provider of
administration services to the Funds. This duty to recommend expires on May 21,
2000.
CUSTODIAN -- BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe, a wholly-owned subsidiary of Mellon, located at One Boston
Place, Boston, Massachusetts 02108, serves as each Fund's Custodian. Under the
terms of the Stock Purchase Agreement dated September 14, 1992 between Mellon
and Lehman Brothers (then named Shearson Lehman Brothers Inc.), Lehman Brothers
agreed to recommend Boston Safe as Custodian of mutual funds affiliated with
Lehman Brothers until May 21, 2000 to the extent consistent with its fiduciary
duties and other applicable law.
SERVICE ORGANIZATIONS
Under a Plan of Distribution (the "Plan") adopted pursuant to Rule
12b-1 under the 1940 Act, Class C Shares bear fees ("Rule 12b-1 fees") payable
by the Funds at the aggregate rate of up to .35% (on an annualized basis) of the
average daily net asset value of such shares to Lehman Brothers for providing
20
<PAGE>
certain services to the Funds and holders of Class C Shares. Lehman Brothers may
retain all the payments made to it under the Plan or may enter into agreements
with and make payments of up to .35% to institutional investors such as banks,
savings and loan associations and other financial institutions ("Service
Organizations") for the provision of a portion of such services. These services,
which are described more fully in the Statement of Additional Information under
"Management of the Funds -- Service Organizations," include aggregating and
processing purchase and redemption requests from shareholders and placing net
purchase and redemption orders with Lehman Brothers; processing dividend
payments from the Funds on behalf of shareholders; providing information
periodically to shareholders showing their positions in shares; arranging for
bank wires; responding to shareholder inquiries relating to the services
provided by Lehman Brothers or the Service Organization and handling
correspondence; and acting as shareholder of record and nominee. The Plan also
allows Lehman Brothers to use its own resources to provide distribution services
and shareholder services. Under the terms of related agreements, Service
Organizations are required to provide to their shareholders a schedule of any
fees that they may charge shareholders in connection with their investments in
Class C Shares.
EXPENSES
Each Fund bears all its own expenses. A Fund's expenses include taxes,
interest, fees and salaries of the Trust's trustees and officers who are not
directors, officers or employees of the Fund's service contractors, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to investors,
advisory, administration and distribution fees, charges of the custodian,
administrator, transfer agent and dividend disbursing agent, Service
Organization fees, certain insurance premiums, outside auditing and legal
expenses, costs of shareholder reports and shareholder meetings and any
extraordinary expenses. Each Fund also pays for brokerage fees and commissions
(if any) in connection with the purchase and sale of portfolio securities. In
order to maintain a competitive expense ratio, the Adviser and Administrator
have voluntarily agreed to waive fees and reimburse expenses to the extent
necessary to maintain an annualized expense ratio at a level no greater than
.53% of average daily net assets (.18% excluding Rule 12b-1 fees) with respect
to the Funds. This voluntary waiver and reimbursement arrangement will not be
changed unless investors are provided at least 60 days' advance notice. In
addition, these service providers have agreed to reimburse the Funds to the
extent required by applicable state law for certain expenses that are described
in the Statement of Additional Information. Any fees charged by Service
Organizations or other institutional investors to their customers in connection
with investments in Fund shares are not reflected in a Fund's expenses.
PERFORMANCE AND YIELDS
From time to time, the "yields" and "effective yields" with respect to
all Funds and "tax-equivalent yields" with respect to Tax-Free Money Market Fund
and Municipal Money Market Fund, may be quoted in advertisements or in reports
to shareholders. Yield quotations are computed separately for each class of
shares. The "yield" quoted in advertisements for a particular class of shares
refers to the income generated by an investment in such shares over a specified
period (such as a seven-day period) identified in the advertisement. This income
is then "annualized;" that is, the amount of income generated by the investment
during that period is assumed to be generated each such period over a 52-week or
one-year period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly but, when annualized, the income earned by an
investment in a particular class is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. The "tax-equivalent yield" demonstrates the
level of taxable yield necessary to produce an after-tax yield equivalent to a
Fund's tax-free yield for each class of shares. It is calculated by increasing
the yield (calculated as above) by the amount necessary to reflect the payment
of federal taxes at a stated rate. The "tax-equivalent yield" will always be
higher than the "yield."
A Fund's performance may be compared to those of other mutual funds
with similar objectives, to other relevant indices, or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, such data are reported in national
financial
21
<PAGE>
publications such as Morningstar, Inc., Barron's, IBC/Donoghue's Money Fund
Report(, The Wall Street Journal and The New York Times; reports prepared by
Lipper Analytical Services, Inc.; and publications of a local or regional
nature.
A Fund's yield figures for a class of shares represent past
performance, will fluctuate and should not be considered as representative of
future results. The yield of any investment is generally a function of portfolio
quality and maturity, type of investment and operating expenses. Any fees
charged by Service Organizations or other institutional investors directly to
their customers in connection with investments in Fund shares are not reflected
in a Fund's expenses or yields; and, such fees, if charged, would reduce the
actual return received by customers on their investments. The methods used to
compute a Fund's yields are described in more detail in the Statement of
Additional Information. Investors may call 1-800-238-2560 to obtain current
yield information.
DESCRIPTION OF SHARES AND MISCELLANEOUS
The Trust is a Massachusetts business trust established on November 25,
1992. The Trust's Declaration of Trust authorizes the Board of Trustees to issue
an unlimited number of full and fractional shares of beneficial interest in the
Trust and to classify or reclassify any unissued shares into one or more
additional classes of shares. The Trust is an open-end management investment
company, which currently offers ten portfolios. The Trust has authorized the
issuance of seven classes of shares for Prime Value Money Market Fund,
Government Obligations Money Market Fund and Municipal Money Market Fund and
four classes of shares for Prime Money Market Fund, Cash Management Fund,
Treasury Instruments Money Market Fund II and Tax-Free Money Market Fund. The
issuance of separate classes of shares is intended to address the different
service needs of different types of investors. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any class of shares into one
or more sub-classes.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust will call a meeting of shareholders for the purpose of voting upon the
question of removal of a member of the Board of Trustees upon written request of
shareholders owning at least 10% of the outstanding shares of the Trust entitled
to vote.
Each Fund share represents an equal, proportionate interest in the
assets belonging to the Fund. Each share, which has a par value of $.001, has no
preemptive or conversion rights. When issued for payment as described in this
Prospectus, Fund shares will be fully paid and non-assessable.
Holders of the Fund's shares will vote in the aggregate and not by
class on all matters, except where otherwise required by law and except when the
Board of Trustees determines that the matter to be voted upon affects only the
shareholders of a particular class. Further, shareholders of the Funds 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 (see the
Statement of Additional Information under "Additional Description Concerning
Fund Shares" for examples where the 1940 Act requires voting by portfolio).
Shareholders of the Trust are entitled to one vote for each full share held
(irrespective of class or portfolio) and fractional votes for fractional shares
held. Voting rights are not cumulative; and, accordingly, the holders of more
than 50% of the aggregate shares of the Trust may elect all of the trustees.
For information concerning the redemption of Fund shares and possible
restrictions on their transferability, see "Purchase and Redemption of Shares."
22
<PAGE>
LEHMAN BROTHERS INSTITUTIONAL FUNDS
================================================================================
Client Service Center
(8:30 am to 5:00 pm, Eastern time): 800-851-3134
fax: 617-261-4330
or 617-261-4340
Dividend factors and yields: 800-238-2560
Administration/Sales/Marketing: 800-368-5556
To place a purchase or redemption order: 800-851-3134
To change account information: 800-851-3134
Additional Prospectuses: 800-368-5556
Information on Service Agreements: 800-851-3134
LEX Help Desk 800-566-5LEX
LEHMAN BROTHERS
================================================================================
LBP-200B6
- --------------------------------------------------------------------------------
PROSPECTUS
LEHMAN BROTHERS INSTITUTIONAL FUNDS GROUP TRUST
One Exchange Place
Boston, Massachusetts 02109
For information call (800) 368-5556
- --------------------------------------------------------------------------------
Lehman Brothers Institutional Funds Group Trust (the "Trust") is an
open-end, management investment company that currently offers a family of
diversified investment portfolios, six of which are described in this Prospectus
(individually, a "Fund" and collectively, the "Funds"). This Prospectus
describes one class of shares ("Class E Shares") of the following investment
portfolios:
PRIME MONEY MARKET FUND
PRIME VALUE MONEY MARKET FUND
GOVERNMENT OBLIGATIONS MONEY MARKET FUND
TREASURY INSTRUMENTS MONEY MARKET FUND II
TAX-FREE MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
Class E Shares may not be purchased by individuals directly, but
institutional investors may purchase shares for accounts maintained by
individuals.
LEHMAN BROTHERS INC. ("Lehman Brothers" or the "Distributor") sponsors
each Fund and acts as Distributor of its shares. LEHMAN BROTHERS GLOBAL ASSET
MANAGEMENT INC. ("LBGAM" or the "Adviser") serves as each Fund's Investment
Adviser.
This Prospectus briefly sets forth certain information about the Funds
that investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Funds, contained in a Statement of Additional Information dated May 30, 1995, as
supplemented February 1, 1996, has been filed with the Securities and Exchange
Commission (the "SEC") and is available to investors without charge by calling
Lehman Brothers at 1-800-368-5556. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
SHARES OF THE FUNDS INVOLVE CERTAIN INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. AN INVESTMENT IN A FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE FUNDS SEEK TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT THEY WILL
CONTINUE TO DO SO. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
The date of this Prospectus is May 30, 1995 as supplemented February 1, 1996.
<PAGE>
LEHMAN BROTHERS INSTITUTIONAL FUNDS GROUP TRUST
MAY 30, 1995
AS SUPPLEMENTED FEBRUARY 1, 1996
PROSPECTUS
TABLE OF CONTENTS
Page
Summary of Investment Objectives 3
Background and Expense Information 4
Financial Highlights 6
Investment Objectives and Policies 6
Portfolio Instruments and Practices 9
Investment Limitations 14
Purchase and Redemption of Shares 15
Dividends 18
Taxes 18
Management of the Funds 19
Performance and Yields 21
Description of Shares and Miscellaneous 21
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION
INCORPORATED HEREIN DESCRIBE THE INVESTMENT OBJECTIVES AND POLICIES, OPERATIONS,
CONTRACTS AND OTHER MATTERS RELATING TO THE FUNDS' CLASS E SHARES. INVESTORS
WISHING TO OBTAIN SIMILAR INFORMATION REGARDING THE TRUST'S OTHER CLASSES MAY
OBTAIN SEPARATE PROSPECTUSES DESCRIBING THEM BY CONTACTING LEHMAN BROTHERS AT
1-800-368-5556.
2
<PAGE>
SUMMARY OF INVESTMENT OBJECTIVES
The investment objectives of the Funds are summarized below. See
"Investment Objectives and Policies" beginning on page 6 for more detailed
information.
PRIME MONEY MARKET FUND seeks to provide current income and stability
of principal by investing in a broad range of short-term instruments, including
U.S. Government and U.S. bank and commercial obligations and repurchase
agreements relating to such obligations.
PRIME VALUE MONEY MARKET FUND seeks to provide current income and
stability of principal by investing in a portfolio consisting of a broad range
of short-term instruments, including U.S. Government and U.S. bank and
commercial obligations and repurchase agreements relating to such obligations.
Under normal market conditions, at least 25% of the Fund's total assets will be
invested in obligations of issuers in the banking industry and repurchase
agreements relating to such obligations.
GOVERNMENT OBLIGATIONS MONEY MARKET FUND seeks to provide current
income with liquidity and security of principal by investing in a portfolio
consisting of U.S. Treasury bills, notes and other obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements relating to such obligations.
TREASURY INSTRUMENTS MONEY MARKET FUND II seeks to provide current
income with liquidity and security of principal by investing in a portfolio
consisting of U.S. Treasury bills, notes and direct obligations of the U.S.
Treasury and repurchase agreements relating to direct Treasury obligations.
TAX-FREE MONEY MARKET FUND seeks to provide as high a level of current
income exempt from federal taxation as is consistent with relative stability of
principal by investing in a portfolio consisting of short-term tax-exempt
obligations issued by state and local governments and other tax-exempt
securities which are considered "First Tier Eligible Securities" as defined in
"Investment Objectives and Policies." The Fund will not purchase securities the
income from which may be a specific tax preference item for purposes of federal
individual and corporate alternative minimum tax.
MUNICIPAL MONEY MARKET FUND seeks to provide as high a level of current
income exempt from federal taxation as is consistent with relative stability of
principal by investing in a portfolio consisting of short-term tax-exempt
obligations issued by state and local governments and other tax-exempt
securities which are considered "Eligible Securities" as defined in "Investment
Objectives and Policies."
There is no assurance that the Funds will achieve their respective
investment objectives.
3
<PAGE>
BACKGROUND AND EXPENSE INFORMATION
Each Fund currently offers four classes of shares, only one of which,
Class E Shares, is offered by this Prospectus. Each class represents an equal,
pro rata interest in a Fund. Each Fund's other classes of shares have different
service and/or distribution fees and expenses from Class E Shares which would
affect the performance of those classes of shares. Investors may obtain
information concerning the Funds' other classes of shares by calling Lehman
Brothers at 1-800-568-5556.
The purpose of the following table is to assist an investor in
understanding the various costs and estimated expenses that an investor in a
Fund would bear directly or indirectly. Certain institutions may also charge
their clients fees in connection with investments in Class E Shares, which fees
are not reflected in the table below. For more complete descriptions of the
various costs and expenses, see "Management of the Funds" in this Prospectus and
the Statement of Additional Information.
EXPENSE SUMMARY
CLASS E SHARES
<TABLE>
<CAPTION>
PRIME VALUE OBLIGATIONS
PRIME MONEY MONEY MARKET MONEY MARKET
MARKET FUND FUND FUND
<S> <C> <C> <C>
ANNUAL OPERATING EXPENSES*
(as a percentage of average net assets)
Advisory Fees (net of applicable fee waivers) .10% .10% .04%
Rule 12b-1 fees .15% .15% .15%
Other Expenses - including Administration Fees .08% .08% .14%
---- ---- ----
Total Fund Operating Expenses
(after fee waivers and/or expense reimbursement) .33% .33% .33%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
TREASURY
INSTRUMENTS
MONEY MARKET TAX-FREE MONEY MUNICIPAL MONEY
FUND MARKET FUND MARKET FUND
II
<S> <C> <C> <C>
ANNUAL OPERATING EXPENSES*
(as a percentage of average net assets)
Advisory Fees (net of applicable fee waivers) .10% .03% .06%
Rule 12b-1 fees .15% .15% .15%
Other Expenses - including Administration Fees .08% .15% .12%
---- ---- ----
Total Fund Operating Expenses
(after fee waivers and/or expense reimbursement) .33% .33% .33%
==== ==== ====
</TABLE>
*The Expense Summary above has been restated to reflect current expected fees
and the Adviser's and Administrator's voluntary fee waiver and expense
reimbursement arrangements currently in effect.
In order to maintain a competitive expense ratio, the Adviser and
Administrator have voluntarily agreed to waive fees and reimburse expenses to
the extent necessary to maintain an annualized expense ratio at a level no
greater than .33% of average daily net assets (.18% excluding Rule 12b-1 fees)
with respect to the Funds. The voluntary fee waiver and expense reimbursement
arrangements described above will not be changed unless shareholders are
provided at least 60 days' advance notice. The maximum annual contractual fees
payable to the Adviser and Administrator total .30% of average daily net assets
of the Funds. Absent fee waivers and expense reimbursements, the Total Fund
Operating Expenses of Class E Shares are expected to be as follows:
4
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF AVERAGE DAILY
NET ASSETS
<S> <C>
Prime Money Market Fund .50%
Prime Value Money Market Fund .50%
Government Obligations Money Market Fund .59%
Treasury Instruments Money Market Fund II .50%
Tax-Free Money Market Fund .60%
Municipal Money Market Fund .57%
</TABLE>
- -------------------
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end of each time
period with respect to the Class E Shares:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$3 $11 $19 $42
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES AND
RATES OF RETURN, WHICH MAY BE GREATER OR LESS THAN THOSE SHOWN.
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for the six months ended July 31,
1995 are derived from the Funds' unaudited Financial Statements dated July 31,
1995. All other data presented are derived from the Funds' Financial Statements
audited by Ernst & Young LLP, independent auditors, whose report thereon appears
in the Trust's Annual Report dated January 31, 1995. This information should be
read in conjunction with the financial statements, related notes and other
financial information incorporated by reference in the Statement of Additional
Information. As of July 31, 1995, Class E Shares of the Funds, other than Prime
Money Market Fund, had not been offered to the public. Accordingly, no financial
information is provided with respect to such shares. Financial information with
respect to Class A Shares of such Funds, Class B Shares of such Funds except
Municipal Money Market Fund and Class C shares of such Funds except Prime Value
Money Market Fund, Treasury Instruments Money Market Fund II and Tax-Free Money
Market Fund is included in each Class' prospectus and the Trust's Annual Report
dated January 31, 1995 and the Semi-Annual Report dated July 31, 1995, which are
available upon request.
<TABLE>
<CAPTION>
PRIME MONEY MARKET FUND
SIX MONTHS
ENDED
7/31/95 PERIOD ENDED
(UNAUDITED) 1/31/95*
<S> <C> <C>
Net asset value, beginning of period $1.00 $1.00
----- -----
Net investment income (1) 0.0293 0.0165
Dividends from net investment income (0.0293) (0.0165)
-------- --------
Net asset value, end of period $1.00 $1.00
===== =====
Total return (2) 2.98% 1.66%
===== =====
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $4,572 $8,318
Ratio of net investment income to average net assets 5.90% (3) 4.15%(3)
Ratio of operating expenses to average net assets (4) 0.33% (3) 0.27%(3)
</TABLE>
* The Class E Shares commenced operations on October 6, 1994.
(1) Net investment income per share before waiver of fees by the Investment
Adviser, Administrator, Custodian and/or Transfer Agent and/or expenses
reimbursed by the Investment Adviser and Administrator for the Class E
Shares was $0.0289 for the period ended July 31, 1995 and $0.0160 for
the period ended January 31, 1995.
(2) Total return represents aggregate total return for the period indicated.
(3) Annualized.
(4) Annualized expense ratio before waiver of fees by the Investment
Adviser, Administrator, Custodian and/or Transfer Agent and/or expenses
reimbursed by the Investment Adviser and Administrator for Class E
Shares was 0.41% for the period ended July 31, 1995 and 0.39% for the
period ended January 31, 1995.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general policies of each Fund are
described below. Specific investment techniques that may be employed by the
Funds are described in a separate section of this Prospectus. See "Portfolio
Instruments and Practices." Differences in objectives and policies among the
Funds, differences in the degree of acceptable risk and tax considerations are
some of the factors that can be expected to affect the investment return of each
Fund. Because of such factors, the performance results of the Funds may differ
even though more than one Fund may utilize the same security selections.
Unless otherwise stated, the investment objectives and policies set
forth in this Prospectus are not fundamental and may be changed by the Board of
Trustees without shareholder approval. If there is a change in
6
<PAGE>
the investment objective and policies of any Fund, shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current financial position and needs. The market value of certain
fixed-rate obligations held by the Funds will generally vary inversely with
changes in market interest rates. Thus, the market value of these obligations
generally declines when interest rates rise and generally rises when interest
rates decline. The Funds are subject to additional investment policies and
restrictions described in the Statement of Additional Information, some of which
are fundamental and may not be changed without shareholder approval.
The Funds seek to maintain a net asset value of $1.00 per share,
although there is no assurance that they will be able to do so on a continuing
basis. Each Fund operates as a diversified investment portfolio. Certain
securities held by the Funds may have remaining maturities in excess of stated
limitations discussed below if securities provide for adjustments in their
interest rates not less frequently than such time limitations. Each Fund
maintains a dollar-weighted average portfolio maturity of 90 days or less.
PRIME MONEY MARKET FUND AND PRIME VALUE MONEY MARKET FUND seek to
provide current income and stability of principal. In pursuing their investment
objectives, the Funds invest in a broad range of short-term instruments,
including U.S. Government and U.S. bank and commercial obligations and
repurchase agreements relating to such obligations. Prime Value Money Market
Fund may also invest in securities of foreign issuers. Each Fund invests only in
securities that are payable in U.S. dollars and that have (or, pursuant to
regulations adopted by the SEC will be deemed to have) remaining maturities of
thirteen months or less at the date of purchase by the Fund.
Both Funds invest in securities rated by the "Requisite NRSROs."
"Requisite NRSROs" means (a) any two nationally-recognized statistical rating
organizations ("NRSROs") that have issued a rating with respect to a security or
class of debt obligations of an issuer, or (b) one NRSRO, if only one NRSRO has
issued such a rating at the time that the Fund acquires the security. Currently,
there are six NRSROs: Standard & Poor's, a division of The McGraw-Hill Companies
("S&P"); Moody's Investors Service, Inc. ("Moody's"); Fitch Investors Services,
Inc.; Duff and Phelps, Inc.; IBCA Limited and its affiliate, IBCA, Inc. and
Thomson Bankwatch. A discussion of the ratings categories of the NRSROs is
contained in the Appendix to the Statement of Additional Information.
Prime Money Market Fund will limit its portfolio investments to
securities that the Board of Trustees determines present minimal credit risks
and which are "First Tier Eligible Securities" at the time of acquisition by the
Fund. The term First Tier Eligible Securities includes securities rated by the
Requisite NRSROs in the highest short-term rating categories, securities of
issuers that have received such rating with respect to other short-term debt
securities and comparable unrated securities.
Prime Value Money Market Fund will limit its portfolio investments to
securities that the Board of Trustees determines present minimal credit risks
and which are "Eligible Securities" at the time of acquisition by the Fund. The
term Eligible Securities includes securities rated by the Requisite NRSROs in
one of the two highest short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term debt securities and
comparable unrated securities.
Each Fund generally may not invest more than 5% of its total assets in
the securities of any one issuer, except for U.S. Government securities. In
addition, Prime Value Money Market Fund may not invest more than 5% of its total
assets in Eligible Securities that have not received the highest rating from the
Requisite NRSROs and comparable unrated securities ("Second Tier Securities")
and may not invest more than 1% of its total assets in the Second Tier
Securities of any one issuer. The Funds may invest more than 5% (but no more
than 25%) of the then-current value of the Fund's total assets in the securities
of a single issuer for a period of up to three business days, provided that (a)
the securities either are rated by the Requisite NRSROs in the highest
short-term rating category or are securities of issuers that have received such
rating with respect to other short-term debt securities or are comparable
unrated securities, and (b) the Fund does not make more than one such investment
at any one time.
Each Fund may purchase obligations of issuers in the banking industry,
such as commercial paper, notes, certificates of deposit, bankers acceptances
and time deposits and U.S. dollar denominated instruments issued or supported by
the credit of U.S. (or foreign in the case of Prime Value Money Market Fund)
banks or savings institutions having total assets at the time of purchase in
excess of $1 billion. The Funds may also make interest-bearing savings deposits
in commercial and savings banks in amounts not in excess of 5% of their assets.
7
<PAGE>
GOVERNMENT OBLIGATIONS MONEY MARKET FUND AND TREASURY INSTRUMENTS MONEY
MARKET FUND II seek to provide income with liquidity and security of principal.
Each Fund invests only in securities that are payable in U.S. dollars and that
have (or, pursuant to regulations adopted by the SEC, will be deemed to have)
remaining maturities of thirteen months or less at the date of purchase by the
Fund (twelve months in the case of Government Obligations Money Market Fund).
Government Obligations Money Market Fund invests in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities (in
addition to direct Treasury obligations) and repurchase agreements relating to
such obligations.
Treasury Instruments Money Market Fund II invests solely in direct
obligations of the U.S. Treasury, such as Treasury bills and notes, and in
repurchase agreements relating to direct Treasury obligations. The Fund will not
purchase obligations of agencies or instrumentalities of the U.S. Government.
TAX-FREE MONEY MARKET FUND AND MUNICIPAL MONEY MARKET FUND seek to
provide investors with as high a level of current income exempt from federal
income tax as is consistent with relative stability of principal. In pursuing
their investment objectives, the Funds invest substantially all of their assets
in diversified portfolios of short-term tax-exempt obligations issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia, and their respective authorities, agencies, instrumentalities and
political subdivisions and tax-exempt derivative securities such as tender
option bonds, participations, beneficial interests in trusts and partnership
interests (collectively "Municipal Obligations"). Each Fund invests only in
securities that have (or, pursuant to regulations adopted by the SEC, will be
deemed to have) remaining maturities of thirteen months or less at the date of
purchase by the Fund. The Funds will not knowingly purchase securities the
interest on which is subject to federal income tax. Except during temporary
defensive periods, each Fund will invest substantially all, but in no event less
than 80%, of its net assets in Municipal Obligations. Tax-Free Money Market Fund
will not invest its assets in securities the income from which may be a specific
tax preference item for purposes of federal individual and corporate alternative
minimum tax. The Funds also have the ability to enter into repurchase
agreements. Absent emergency or extraordinary circumstances, however, neither
Fund presently intends to engage in repurchase transactions, unless such
transactions would not generate taxable income to such Funds.
Both the Tax-Free Money Market Fund and Municipal Money Market Fund
purchase Municipal Obligations that present minimal credit risk as determined by
the Adviser pursuant to guidelines approved by the Board of Trustees. The
Municipal Money Market Fund invests in Eligible Securities while the Tax-Free
Money Market Fund invests in only First Tier Eligible Securities. The Funds may
hold uninvested cash reserves pending investment or during temporary defensive
periods, including when suitable tax-exempt obligations are unavailable. There
is no percentage limitation on the amount of assets which may be held
uninvested. Uninvested cash reserves will not earn income.
Although the Tax-Free Money Market Fund may invest more than 25% of its
net assets in (a) Municipal Obligations whose issuers are in the same state and
(b) Municipal Obligations the interest on which is paid solely from revenues of
similar projects, it does not presently intend to do so on a regular basis. To
the extent the Fund's assets are concentrated in Municipal Obligations that are
payable from the revenues of similar projects or are issued by issuers located
in the same state, the Fund will be subject to the peculiar risks presented by
the laws and economic conditions relating to such states, projects and bonds to
a greater extent than it would be if its assets were not so concentrated.
8
<PAGE>
PORTFOLIO INSTRUMENTS AND PRACTICES
Investment strategies that are available to the Funds are set forth
below. Additional information concerning certain of these strategies and their
related risks is contained in the Statement of Additional Information.
U.S. GOVERNMENT OBLIGATIONS
Each Fund (other than Tax-Free Money Market Fund and Municipal Money
Market Fund) may purchase obligations issued or guaranteed by the U.S.
Government and (except in the case of Treasury Instruments Money Market Fund II)
U.S. Government agencies and instrumentalities. Securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities include U.S.
Treasury securities, which differ in interest rates, maturities and times of
issuance. Treasury bills have initial maturities of one year or less; Treasury
notes have initial maturities of one to ten years; and Treasury bonds generally
have initial maturities of greater than ten years. Some obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, for example,
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. While the
U.S. Government provides financial support to such U.S. Government-sponsored
agencies or instrumentalities, no assurance can be given that it will always do
so, since it is not so obligated by law. The Funds will invest in such
securities only when they are satisfied that the credit risk with respect to the
issuer is minimal.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities have historically involved little risk of loss of principal if
held to maturity. However, due to fluctuations in interest rates, the market
value of the securities may vary during the period an investor owns shares of a
Fund.
REPURCHASE AGREEMENTS
The Funds may agree to purchase securities from financial institutions
subject to the seller's agreement to repurchase them at an agreed upon time and
price within one year from the date of acquisition ("repurchase agreements").
The Funds will not invest more than 10% of the value of their net assets in
repurchase agreements with terms which exceed seven days. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price (including
accrued interest). Default by or bankruptcy of the seller would, however, expose
the Funds to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds for temporary purposes by entering into
reverse repurchase agreements in accordance with the investment restrictions
described below. Pursuant to such agreements, the Funds would sell portfolio
securities to financial institutions and agree to repurchase them at an agreed
upon date and price. The Funds would consider entering into reverse repurchase
agreements to avoid otherwise selling securities during unfavorable market
conditions. Reverse repurchase agreements involve the risk that the market value
of the securities sold by the Funds may decline below the price of the
securities the Funds are obligated to repurchase. The Funds may engage in
reverse repurchase agreements provided that the amount of the reverse repurchase
agreements and any other borrowings does not exceed one-third of the value of
the Fund's total assets (including the amount borrowed) less liabilities (other
than borrowings).
9
<PAGE>
WHEN-ISSUED SECURITIES
The Funds (other than Tax-Free Money Market Fund and Municipal Money
Market Fund) may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and yield. The Funds will generally not pay for such
securities or start earning interest on them until they are received. Securities
purchased on a when-issued basis are recorded as an asset and are subject to
changes in value based upon changes in the general level of interest rates. The
Funds expect that commitments to purchase when-issued securities will not exceed
25% of the value of their total assets absent unusual market conditions. The
Funds do not intend to purchase when-issued securities for speculative purposes
but only in furtherance of their investment objectives.
ILLIQUID SECURITIES
Prime Money Market Fund, Prime Value Money Market Fund, Tax-Free Money
Market Fund and Municipal Money Market Fund will not knowingly invest more than
10% of the value of their total net assets in illiquid securities, including
time deposits and repurchase agreements having maturities longer than seven
days. Securities that have readily available market quotations are not deemed
illiquid for purposes of this limitation (irrespective of any legal or
contractual restrictions on resale). Each of the Funds may invest in commercial
obligations issued in reliance on the so-called "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended ("Section 4(2) paper"). Each of the Funds may also purchase securities
that are not registered under the Securities Act of 1933, as amended, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Section 4(2) paper is restricted as to
disposition under the federal securities laws, and generally is sold to
institutional investors such as the Funds who agree that they are purchasing the
paper for investment and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) paper is normally
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. Rule 144A securities generally must be
sold to other qualified institutional buyers. If a particular investment in
Section 4(2) paper or Rule 144A securities is not determined to be liquid, that
investment will be included within the percentage limitation on investment in
illiquid securities.
FOREIGN SECURITIES
Prime Value Money Market Fund may invest substantially in securities of
foreign issuers, including obligations of foreign banks or foreign branches of
U.S. banks, and debt securities of foreign issuers, where the Adviser deems the
instrument to present minimal credit risks. Investments in foreign banks or
foreign issuers present certain risks, including those resulting from
fluctuations in currency exchange rates, revaluation of currencies, future
political and economic developments and the possible imposition of currency
exchange blockages or other foreign governmental laws or restrictions and
reduced availability of public information. Foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements applicable to domestic issuers.
ZERO COUPON AND CAPITAL APPRECIATION BONDS
The Funds may invest in zero coupon and capital appreciation bonds,
which are debt securities issued or sold at a discount from their face value and
which do not entitle the holder to any periodic payment of interest prior to
maturity or a specified redemption date (or cash payment date). The amount of
the discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, the liquidity of the security and the
perceived credit quality of the issuer. These securities may also take the form
of debt securities that have been stripped of their unmatured interest coupons,
the coupons themselves or receipts or certificates representing interest in such
stripped debt obligations or coupons. Discounts with respect to stripped
tax-exempt securities or their coupons may be taxable. The market prices of
capital appreciation bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturity and credit quality.
10
<PAGE>
U.S. TREASURY STRIPS
The Prime Money Market Fund, Prime Value Money Market Fund, Government
Obligations Money Market Fund and Treasury Instruments Money Market Fund II may
invest in separately traded principal and interest components of securities
backed by the full faith and credit of the U.S. Treasury. The principal and
interest components of U.S. Treasury bonds with remaining maturities of longer
than ten years are eligible to be traded independently under the Separate
Trading of Registered Interest and Principal of Securities ("STRIPS") program.
Under the STRIPS program, the principal and interest components are separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts separately. Under the stripped bond rules
of the Internal Revenue Code of 1986, as amended (the "Code"), investments by
the Funds in STRIPS will result in the accrual of interest income on such
investments in advance of the receipt of the cash corresponding to such income.
The interest component of STRIPS may be more volatile than that of U.S. Treasury
bills with comparable maturities. In accordance with Rule 2a-7, the Funds'
investment in STRIPS are limited to those with maturity components not exceeding
thirteen months.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities up to one-third of the value of
its total assets to broker/dealers, banks or other institutional borrowers of
securities that the Adviser has determined are creditworthy under guidelines
established by the Board of Trustees. The Funds will receive collateral in the
form of cash, letters of credit, or securities of the U.S. Government or its
agencies equal to at least 100% of the value of the securities owned.
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which Prime Money
Market Fund, Prime Value Money Market Fund, Government Obligations Money Market
Fund, Tax-Free Money Market Fund and Municipal Money Market Fund may invest are
not fixed and may fluctuate based upon changes in market rates. A variable rate
obligation has an interest rate which is adjusted at predesignated periods.
Interest on a floating rate obligation is adjusted whenever there is a change in
the market rate of interest on which the interest rate payable is based.
Tax-exempt variable or floating rate obligations generally permit the holders of
such obligations to demand payment of principal from the issuer or a third party
at stated intervals. Variable and floating rate obligations are less effective
than fixed rate instruments at locking in a particular yield. Such obligations
may fluctuate in value in response to interest rate changes if there is a delay
between changes in market interest rates and the interest reset date for the
obligation. The Funds will take demand or reset features into consideration in
determining the average portfolio duration of the Fund and the effective
maturity of individual securities. In addition, the absence of an unconditional
demand feature exercisable within seven days will require a tax-exempt variable
or floating rate obligation to be treated as illiquid for purposes of a Fund's
limitation on illiquid investments. The failure of the issuer or a third party
to honor its obligations under a demand or put feature might also require a
tax-exempt variable or floating rate obligation to be treated as illiquid for
purposes of a Fund's limitation on illiquid investments.
TAX-EXEMPT COMMERCIAL PAPER
Tax-Free Money Market Fund and Municipal Money Market Fund may invest
in tax-exempt commercial paper. Issues of commercial paper typically represent
short-term, unsecured, negotiable promissory notes. These obligations are issued
by state and local governments and their agencies to finance working capital
needs of municipalities or to provide interim construction financing and are
paid from general or specific revenues of municipalities or are re-financed with
long-term debt. In some cases, tax-exempt commercial paper is backed by letters
of credit, lending agreements, note repurchase agreements or other credit
facility arrangements offered by banks or other institutions. The Funds will
invest only in tax-exempt commercial paper rated at least Prime-2 by Moody's or
A-2 by S&P.
11
<PAGE>
MUNICIPAL OBLIGATIONS
Tax-Free Money Market Fund and Municipal Money Market Fund may invest
in the Municipal Obligations described below.
Municipal Obligations. Municipal Obligations include bonds, notes and
other instruments issued by or on behalf of states, territories and possessions
of the United States (including the District of Columbia) and their political
subdivisions, agencies or instrumentalities, the interest on which is, in the
opinion of bond counsel, exempt from regular federal income tax (i.e., excluded
from gross income for federal income tax purposes but not necessarily exempt
from the personal income taxes of any state or, with respect to the Municipal
Money Market Fund, from the federal alternative minimum tax). In addition,
Municipal Obligations include participation interests in such securities the
interest on which is, in the opinion of bond counsel for the issuers or counsel
selected by the Adviser, exempt from regular federal income tax. The definition
of Municipal Obligations includes other types of securities that currently exist
or may be developed in the future and that are, or will be, in the opinion of
counsel, as described above, exempt from regular federal income tax, provided
that investing in such securities is consistent with a Fund's investment
objective and policies.
The two principal classifications of Municipal Obligations which may be
held by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities, or in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds which
may be held by the Municipal Money Market Fund and which are not payable from
the unrestricted revenues of the issuer. While some private activity bonds are
general obligation securities, the vast majority are revenue securities.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Each of the Municipal Obligations described below may take the form of either
general obligation or revenue securities.
Municipal Obligations are often issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Obligations may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses, and obtaining funds to lend to other
public institutions and facilities. Municipal Obligations also include
industrial development bonds, or with respect to the Municipal Money Market
Fund, private activity bonds, which are issued by or on behalf of public
authorities to obtain funds for privately-operated housing facilities, airport,
mass transit or port facilities, sewage disposal, solid waste disposal or
hazardous waste treatment or disposal facilities and certain local facilities
for water supply, gas or electricity. In addition, proceeds of certain
industrial development bonds are used for the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities. The
interest income from private activity bonds may subject certain investors to the
federal alternative minimum tax.
Municipal Leases, Certificates of Participation and Other Participation
Interests. The Funds may invest in municipal leases and certificates of
participation in municipal leases. A municipal lease is an obligation in the
form of a lease or installment purchase which is issued by a state or local
government to acquire equipment and facilities. Income from such obligations is
generally exempt from state and local taxes in the state of issuance. Municipal
leases frequently involve special risks not normally associated with general
obligation or revenue bonds. Leases and installment purchase or conditional sale
contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject to
the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligation may be secured by the leased equipment or facilities,
the disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in an
unsatisfactory or delayed recoupment of the Fund's original investment.
12
<PAGE>
Certificates of participation represent undivided interests in
municipal leases, installment purchase agreements or other instruments. The
certificates are typically issued by a trust or other entity which has received
an assignment of the payments to be made by the state or political subdivision
under such leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation
may be deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and certificates of
participation acquired by the Funds may be determined by the Adviser, pursuant
to guidelines adopted by the Board of Trustees, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including (a) the willingness of dealers to bid for the
security, (b) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers, (c) the frequency of trades or quotes
for the obligation, and (d) the nature of marketplace trades. In addition, the
Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance of the property
covered by the lease to the issuer and the likelihood that the marketability of
the obligation will be maintained throughout the time the obligation is held by
the Funds.
The Funds may also purchase participations in Municipal Obligations
held by a commercial bank or other financial institution. Such participations
provide the Funds with the right to a pro rata undivided interest in the
underlying Municipal Obligations. In addition, such participations generally
provide the Funds with the right to demand payment, on not more than seven days
notice, of all or any part of a Fund's participation interest in the underlying
Municipal Obligation, plus accrued interest. These demand features will be taken
into consideration in determining the effective maturity of such participations
and the average portfolio duration of the Funds. The Funds will only invest in
such participations if, in the opinion of bond counsel for the issuers or
counsel selected by the Adviser, the interest from such participations is exempt
from regular federal income tax.
Municipal Notes. Municipal Obligations purchased by the Funds may
include fixed-rate notes or variable-rate demand notes. Such notes may not be
rated by credit rating agencies, but unrated notes purchased by the Funds will
be determined by the Adviser to be of comparable quality at the time of purchase
to rated instruments purchasable by the Funds. Where necessary to determine that
a note is an Eligible Security or First Tier Eligible Security, the Funds will
require the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
While there may be no active secondary market with respect to a particular
variable rate demand note purchased by the Funds, the Funds may, upon notice
specified in the note, demand payment of the principal of the note at any time
or during specified periods not exceeding thirteen months, depending upon the
instrument involved, and may resell the note at any time to a third party. The
absence of such an active secondary market, however, could make it difficult for
the Funds to dispose of a variable rate demand note if the issuer were to
default on its payment obligation or during periods that the Funds are not
entitled to exercise their demand rights, and the Funds could, for this or other
reasons, suffer losses to the extent of the default.
Pre-Refunded Municipal Obligations. The Funds may invest in
pre-refunded Municipal Obligations. The principal of and interest on
pre-refunded Municipal Obligations are no longer paid from the original revenue
source for the Municipal Obligations. Instead, the source of such payments is
typically an escrow fund consisting of obligations issued or guaranteed by the
U.S. Government. The assets in the escrow fund are derived from the proceeds of
refunding bonds issued by the same issuer as the pre-refunded Municipal
Obligations, but usually on terms more favorable to the issuer. Issuers of
Municipal Obligations use this advance refunding technique to obtain more
favorable terms with respect to Municipal Obligations which are not yet subject
to call or redemption by the issuer. For example, advance refunding enables an
issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other
governing instrument for the pre-refunded Municipal Obligations. However, except
for a change in the revenue source from which principal and interest payments
are made, the pre-refunded Municipal Obligations remain outstanding on their
original terms until they mature or are redeemed by the issuer. The effective
maturity of pre-refunded Municipal Obligations will be the redemption date if
the issuer has assumed an obligation or indicated its intention
13
<PAGE>
to redeem such obligations on the redemption date. Pre-refunded Municipal
Obligations are often purchased at a price which represents a premium over their
face value.
Tender Option Bonds. The Funds may purchase tender option bonds. A
tender option bond is a Municipal Obligation (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the Municipal Obligation's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at or near par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term
tax-exempt rate. The Adviser will consider on an ongoing basis the
creditworthiness of the issuer of the underlying Municipal Obligation, of any
custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other reasons. Additionally, the above description
of tender option bonds is meant only to provide an example of one possible
structure of such obligations, and the Funds may purchase tender option bonds
with different types of ownership, payment, credit and/or liquidity
arrangements.
INVESTMENT LIMITATIONS
The Funds' investment objectives and policies described above are not
fundamental and may be changed by the Board of Trustees without a vote of
shareholders. If there is a change in the investment objective of a Fund,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs. The Funds'
investment limitations described below may not be changed without the
affirmative vote of the holders of a majority of its outstanding shares. There
can be no assurance that the Funds will achieve their investment objectives. (A
complete list of the investment limitations that cannot be changed without a
vote of shareholders is contained in the Statement of Additional Information
under "Investment Objectives and Policies.")
The Funds may not:
1. Borrow money, except that a Fund may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) from banks, or subject
to specific authorization by the SEC, from funds advised by the Adviser or an
affiliate of the Adviser, and (ii) engage in reverse repurchase agreements;
provided that (i) and (ii) in combination do not exceed one-third of the value
of the Fund's total assets (including the amount borrowed) less liabilities
(other than borrowings). The Funds may not mortgage, pledge or hypothecate any
assets except in connection with such borrowings and reverse repurchase
agreements and then only in amounts not exceeding one-third of the value of the
particular Fund's total assets at the time of such borrowing. Additional
investments will not be made by a Fund when borrowings exceed 5% of the Fund's
assets.
2. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, except that Prime Value Money Market Fund will invest 25%
or more of the value of its total assets in obligations of issuers in the
banking industry or in obligations, such as repurchase agreements, secured by
such obligations (unless the Fund is in a temporary defensive position);
provided that there is no limitation with respect to investments in U.S.
Government securities or, in the case of Prime Money Market Fund, in bank
instruments issued by domestic banks.
3. Make loans except that a Fund may (i) purchase or hold debt
obligations in accordance with its investment objective and policies, (ii) enter
into repurchase agreements for securities, (iii) lend portfolio securities, and
(iv) with the exception of Government Obligations Money Market Fund, subject to
specific authorization by the SEC, lend money to other funds advised by the
Adviser or an affiliate of the Adviser.
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<PAGE>
Each Fund may, in the future, seek to achieve its investment objective
by investing all of its assets in a no-load, open-end management investment
company having the same investment objective and policies and substantially the
same investment restrictions as those applicable to the Fund. In such event,
each Fund's investment advisory agreement would be terminated. Such investment
would be made only if the Trust's Board of Trustees believes that the aggregate
per share expenses of each class of the Fund and such other investment company
will be less than or approximately equal to the expenses which each class of the
Fund would incur if the Fund 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.
PURCHASE AND REDEMPTION OF SHARES
To allow the Adviser to manage the Funds effectively, investors are
strongly urged to initiate all investments or redemptions of Fund shares as
early in the day as possible and to notify Lehman Brothers at least one day in
advance of transactions in excess of $5 million.
PURCHASE PROCEDURES
Shares of the Funds are sold at the net asset value per share of the
Fund next determined after receipt of a purchase order by Lehman Brothers, the
Distributor of the Fund's shares. Purchase orders for shares are accepted only
on days on which both the New York Stock Exchange and the Federal Reserve Bank
of Boston are open for business and must be transmitted to Lehman Brothers, by
telephone at 1-800-851-3134 or through Lehman Brothers ExpressNET, an automated
order entry system designed specifically for the Trust ("LEX"). Orders for the
purchase of shares must be made according to the following schedule. Purchases
of shares will be effective and dividends will begin to accrue on the date of
purchase if purchase orders comply with the following schedule.
<TABLE>
<CAPTION>
ORDER MUST BE PAYMENT MUST BE
RECEIVED BY* RECEIVED BY*
<S> <C> <C>
Prime Money Market Fund, 3:00 P.M. 4:00 P.M.
Prime Value Money Market Fund,
Government Obligations Money Market
Fund and
Treasury Instruments Money Market
Fund II
Tax-Free Money Market Fund and noon 4:00 P.M.
Municipal Money Market Fund
</TABLE>
* All times stated are Eastern time.
Payment for Fund shares may be made only in federal funds immediately
available to Boston Safe Deposit and Trust Company ("Boston Safe"). Payment for
orders which are not received or accepted by Lehman Brothers will be returned
after prompt inquiry to the sending institution. A Fund may in its discretion
reject any order for shares. Any person entitled to receive compensation for
selling or servicing shares of the Funds may receive different compensation for
selling or servicing one Class of shares over another Class.
The minimum aggregate initial investment by an institution in the Funds
is $1 million (with not less than $25,000 invested in any one Fund); however,
broker-dealers and other institutional investors may set a higher minimum for
their customers. To reach the minimum Trust-wide initial investment, purchases
of shares may be aggregated over a period of six months. There is no minimum
subsequent investment.
Conflicts of interest restrictions may apply to an institution's
receipt of compensation paid by the Funds on fiduciary funds that are invested
in Class E Shares. See also "Management of the Funds - Service Organizations."
Institutions, including banks regulated by the Comptroller of the Currency 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 Class E Shares.
15
<PAGE>
REDEMPTION PROCEDURES
Redemption orders must be transmitted to Lehman Brothers by telephone
at 1-800-851-3134 or through LEX on a day that both the New York Stock Exchange
and the Federal Reserve Bank of Boston are open for business. Payment for
redeemed shares will be made according to the following schedule.
<TABLE>
<CAPTION>
ORDER MUST BE
RECEIVED BY* PAYMENT MADE
<S> <C> <C>
Prime Money Market Fund, 3:00 P.M. same business day
Prime Value Money Market Fund,
Government Obligations Money Market
Fund and Treasury Instruments Money Market
Fund II
Tax-Free Money Market Fund and noon same business day
Municipal Money Market Fund
</TABLE>
*All times stated are Eastern time.
Shares are redeemed at the net asset value per share next determined
after Lehman Brothers' receipt of the redemption order. While the Funds intend
to use their best efforts to maintain their net asset value per share at $1.00,
the proceeds paid to an investor upon redemption may be more or less than the
amount invested depending upon a share's net asset value at the time of
redemption.
The Funds reserve the right to wire redemption proceeds within seven
days after receiving the redemption order if, in the judgment of the Adviser, an
earlier payment could adversely affect the Funds. The Funds shall have the right
to redeem involuntarily shares in any account at their net asset value if the
value of the account is less than $10,000 after 60 days' prior written notice to
the investor. Any such redemption shall be effected at the net asset value per
share next determined after the redemption order is entered. If during the
60-day period the investor increases the value of its account to $10,000 or
more, no such redemption shall take place. In addition, the Funds may redeem
shares involuntarily or suspend the right of redemption as permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"), or under certain
special circumstances described in the Statement of Additional Information under
"Additional Purchase and Redemption Information."
The ability to give telephone instructions for the redemption (and
purchase or exchange) of shares is automatically established on an investor's
account. However, the Funds reserve the right to refuse a redemption order
transmitted by telephone if it is believed advisable to do so. Procedures for
redeeming Fund shares by telephone may be modified or terminated at any time by
the Funds or Lehman Brothers. In addition, neither the Funds, Lehman Brothers
nor FDISG will be responsible for the authenticity of telephone instructions for
the purchase, redemption or exchange of shares where the instructions are
reasonably believed to be genuine. Accordingly, the investor will bear the risk
of loss. The Funds will attempt to confirm that telephone instructions are
genuine and will use such procedures as are considered reasonable, including the
recording of telephone instructions. To the extent that the Funds fail to use
reasonable procedures to verify the genuineness of telephone instructions, the
Funds or their service providers may be liable for such instructions that prove
to be fraudulent or unauthorized.
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<PAGE>
EXCHANGE PROCEDURES
The Exchange Privilege enables an investor to exchange shares of a Fund
without charge for shares of the same class of other Funds which have different
investment objectives that may be of interest to investors. To use the Exchange
Privilege, exchange instructions must be given to Lehman Brothers by telephone
or through LEX. See "Redemption Procedures." In exchanging shares, an investor
must meet the minimum initial investment requirement of the other Fund and the
shares involved must be legally available for sale in the state where the
investor resides. Before any exchange, the investor must also obtain and should
review a copy of the current prospectus of the Funds. Prospectuses may be
obtained from Lehman Brothers by calling 1-800-368-5556. Shares will be
exchanged at the net asset value next determined after receipt of an exchange
request in proper form. The exchange of shares of one Fund for shares of another
Fund is treated for federal income tax purposes as a sale of the shares given in
exchange by the investor and, therefore, an investor may realize a taxable gain
or loss. The Funds reserve the right to reject any exchange request in whole or
in part. The Exchange Privilege may be modified or terminated at any time upon
notice to investors.
VALUATION OF SHARES-NET ASSET VALUE
Each Fund's net asset value per share for purposes of pricing purchase
and redemption orders is determined by the Fund's Administrator on each weekday,
with the exception of those holidays on which either the New York Stock Exchange
or the Federal Reserve Bank of Boston is closed, according to the following
schedule.
<TABLE>
<CAPTION>
NET ASSET VALUE
CALCULATED*
<S> <C>
Prime Money Market Fund, noon
Prime Value Money Market Fund,
Government Obligations Money Market Fund 3:00 P.M.
and Treasury Instruments Money Market Fund II
4:00 P.M.
Tax-Free Money Market Fund and Municipal noon
Money Market Fund
4:00 P.M.
</TABLE>
*All times stated are Eastern time.
Currently, one or both of the New York Stock Exchange and the Federal
Reserve Bank of Boston are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr.'s Birthday (observed), Presidents' Day
(Washington's Birthday), Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day (observed), Veterans Day, Thanksgiving Day and Christmas Day, and
on the preceding Friday or subsequent Monday when one of these holidays falls on
a Saturday or Sunday, respectively. The net asset value per share of Fund shares
is calculated separately for each class by adding the value of all securities
and other assets of the Fund, subtracting class specific liabilities, and
dividing the result by the total number of the Fund's outstanding shares. In
computing net asset value, each Fund uses the amortized cost method of valuation
as described in the Statement of Additional Information under "Additional
Purchase and Redemption Information." A Fund's net asset value per share for
purposes of pricing purchase and redemption orders is determined independently
of the net asset values of the shares of each other Fund.
OTHER MATTERS
Fund shares are sold and redeemed without charge by the Funds.
Institutional investors purchasing or holding Fund shares for their customer
accounts may charge customers fees for cash management and other services
provided in connection with their accounts. A customer should, therefore,
consider the terms of its account with an institution before purchasing Fund
shares. An institution purchasing or redeeming Fund shares on behalf of its
customers is responsible for transmitting orders to Lehman Brothers in
accordance with its customer agreements.
17
<PAGE>
DIVIDENDS
Investors of a Fund are entitled to dividends and distributions arising
only from the net investment income and capital gains, if any, earned on
investments held by that Fund. Each Fund's net investment income is declared
daily as a dividend to shares held of record at the close of business on the
date of declaration. Shares begin accruing dividends on the day the purchase
order for the shares is effective and continue to accrue dividends through the
day before such shares are redeemed. Dividends are paid monthly by wire transfer
within five business days after the end of the month or within five business
days after a redemption of all of an investor's shares of a particular class.
The Funds do not expect to realize net long-term capital gains.
Dividends are determined in the same manner and are paid in the same
amount for each Fund share, except that shares of each class bear all the
expenses associated with that specific class.
Institutional investors may elect to have their dividends reinvested in
additional full and fractional shares of the same class of shares with respect
to which such dividends are declared at the net asset value of such shares on
the payment date. Reinvested dividends receive the same tax treatment as
dividends paid in cash. Such election, or any revocation thereof, must be made
in writing to Lehman Brothers, 260 Franklin Street, 15th Floor, Boston,
Massachusetts 02110-9624, and will become effective after its receipt by Lehman
Brothers, with respect to dividends paid.
FDISG, as Transfer Agent, will send each investor or its authorized
representative an annual statement designating the amount of any dividends and
capital gains distributions, if any, made during each year and their federal tax
qualification.
TAXES
Each Fund qualified in its last taxable year and intends to qualify in
future years as a "regulated investment company" under the Code. A regulated
investment company is exempt from federal income tax on amounts distributed to
its investors.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
investors at least 90% of its investment company taxable income for such year.
In general, a Fund's investment company taxable income will be its taxable
income (including dividends and short-term capital gains, if any) subject to
certain adjustments and excluding the excess of any net long-term capital gains
for the taxable year over the net short-term capital loss, if any, for such
year. Each Fund intends to distribute substantially all of its investment
company taxable income each year. Such distributions will be taxable as ordinary
income to Fund investors who are not currently exempt from federal income taxes,
whether such income is received in cash or reinvested in additional shares. It
is anticipated that none of a Fund's distributions will be eligible for the
dividends received deduction for corporations. The Funds do not expect to
realize long-term capital gains and, therefore, do not contemplate payment of
any "capital gain dividends" as described in the Code.
Dividends derived from exempt-interest income from Tax-Free Money
Market Fund and Municipal Money Market Fund may be treated by the Fund's
investors as items of interest excludable from their gross income under Section
103(a) of the Code, unless under the circumstances applicable to the particular
investor the exclusion would be disallowed.
Municipal Money Market Fund may hold without limit certain private
activity bonds issued after August 7, 1986. Investors must include, as an item
of tax preference, the portion of dividends paid by the Fund that is
attributable to interest on such bonds in determining liability (if any) for the
federal alternative minimum tax. Noncorporate taxpayers, depending on their
individual tax status, may be subject to alternative minimum tax at a blended
rate between 26% and 28%. Corporate taxpayers may be subject to (1) alternative
minimum tax at a rate of 20% of the excess of their alternative minimum taxable
income ("AMTI") over the exemption amount, and (2) the environmental tax.
Corporate investors must also take all exempt-interest dividends into account in
determining certain adjustments for federal alternative minimum and
environmental tax purposes. The
18
<PAGE>
determining adjustments for federal alternative minimum and environmental tax
purposes environmental tax applicable to corporations is imposed at the rate of
.12% on the excess of the corporation's modified federal alternative minimum
taxable income over $2,000,000.
To the extent, if any, dividends paid to investors by Tax-Free Money
Market Fund or Municipal Money Market Fund are derived from taxable income or
from long-term or short-term capital gains, such dividends will not be exempt
from federal income tax, whether such dividends are paid in the form of cash or
additional shares, and may also be subject to state and local taxes.
In addition to federal taxes, an investor may be subject to state,
local or foreign taxes on payments received from a Fund. A state tax exemption
may be available in some states to the extent distributions of the Fund are
derived from interest on certain U.S. Government securities or on securities
issued by public authorities in the state. The Funds will provide investors
annually with information about federal income tax consequences of distributions
made each year. Investors should be aware of the application of their state and
local tax laws to investments in the Funds.
Investors will be advised at least annually as to the federal income
tax status of distributions made to them each year.
The foregoing discussion is only a brief summary of some of the
important federal tax considerations generally affecting a Fund and its
shareholders. No attempt is made to present a detailed explanation of the
federal, state or local income tax treatment of a Fund or its investors, and
this discussion is not intended as a substitute for careful tax planning.
Accordingly, potential investors in the Funds should consult their tax advisers
with specific reference to their own tax situation. See the Statement of
Additional Information for a further discussion of tax consequences of investing
in shares of the Funds.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds are managed under the direction
of the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the persons or companies that furnish services
to the Funds, including agreements with its Distributor, Adviser, Administrator,
Transfer Agent and Custodian. The day-to-day operations of the Funds are
delegated to the Funds' Adviser and Administrator. The Statement of Additional
Information contains general background information regarding each Trustee and
executive officer of the Trust.
DISTRIBUTOR
Lehman Brothers, located at 3 World Financial Center, New York, New
York 10285, is the Distributor of each Fund's shares. Lehman Brothers is a
wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). As of
November 30, 1995, FMR Corp. beneficially owned approximately 11.7%, Nippon Life
Insurance Company beneficially owned approximately 5.0% and Prudential Asset
Management beneficially owned approximately 5.0% of the outstanding voting
securities of Holdings. Lehman Brothers, a leading full-service investment firm,
meets the diverse financial needs of individuals, institutions and governments
around the world. Lehman Brothers has entered into a Distribution Agreement with
the Trust pursuant to which it has the responsibility for distributing shares of
the Funds.
INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
LBGAM, located at 3 World Financial Center, New York, New York 10285,
serves as each Fund's Investment Adviser. LBGAM is a wholly-owned subsidiary of
Holdings. LBGAM, together with other Lehman Brothers investment advisory
affiliates, serves as investment adviser to investment companies and private
accounts and has assets under management of approximately $11 billion as of
December 31, 1995.
As Adviser to the Funds, LBGAM manages each Fund's portfolio in
accordance with its investment objective and policies, makes investment
decisions for the Funds, places orders to purchase and sell securities and
employs professional portfolio managers and securities analysts who provide
research services to the Funds. For its
19
<PAGE>
services LBGAM is entitled to receive a monthly fee from each Fund at the annual
rate of .20% of the value of the Fund's average daily net assets.
ADMINISTRATOR AND TRANSFER AGENT - FIRST DATA INVESTOR SERVICES GROUP, INC.
FDISG (formerly named The Shareholder Services Group, Inc.), located at
One Exchange Place, 53 State Street, Boston, Massachusetts 02109, serves as each
Fund's Administrator and Transfer Agent. FDISG is a wholly-owned subsidiary of
First Data Corporation. As Administrator, FDISG calculates the net asset value
of each Fund's shares and generally assists in all aspects of each Fund's
administration and operation. As compensation for FDISG's services as
Administrator, FDISG is entitled to receive from each Fund a monthly fee at the
annual rate of .10% of the value of the Fund's average daily net assets. FDISG
is also entitled to receive a fee from the Funds for its services as Transfer
Agent. FDISG pays Boston Safe, each Fund's Custodian, a portion of its monthly
administration fee for custody services rendered to the Funds.
On May 6, 1994, FDISG acquired the third party mutual fund
administration business of The Boston Company Advisors, Inc., an indirect,
wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). In connection
with the transaction, Mellon assigned to FDISG its agreement with Lehman
Brothers (then named Shearson Lehman Brothers Inc.) that Lehman Brothers and its
affiliates, consistent with their fiduciary duties and assuming certain service
quality standards are met, would recommend FDISG as the provider of
administration services to the Funds. This duty to recommend expires on May 21,
2000.
CUSTODIAN - BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe, a wholly-owned subsidiary of Mellon, located at One Boston
Place, Boston, Massachusetts 02108, serves as each Fund's Custodian. Under the
terms of the Stock Purchase Agreement dated September 14, 1992 between Mellon
and Lehman Brothers (then named Shearson Lehman Brothers Inc.), Lehman Brothers
agreed to recommend Boston Safe as Custodian of mutual funds affiliated with
Lehman Brothers until May 21, 2000 to the extent consistent with its fiduciary
duties and other applicable law.
SERVICE ORGANIZATIONS
Under a Plan of Distribution (the "Plan") adopted pursuant to Rule
12b-1 under the 1940 Act, Class E Shares bear fees ("Rule 12b-1 fees") payable
by the Funds at the aggregate rate of up to .15% (on an annualized basis) of the
average daily net asset value of such shares to Lehman Brothers for providing
certain services to the Funds and holders of Class E Shares. Lehman Brothers may
retain all the payments made to it under the Plan or may enter into agreements
with and make payments of up to .15% to institutional investors such as banks,
savings and loan associations and other financial institutions ("Service
Organizations") for the provision of a portion of such services. These services,
which are described more fully in the Statement of Additional Information under
"Management of the Funds -- Service Organizations," include aggregating and
processing purchase and redemption requests from shareholders and placing net
purchase and redemption orders with Lehman Brothers; processing dividend
payments from the Funds on behalf of shareholders; providing information
periodically to shareholders showing their positions in shares; arranging for
bank wires; responding to shareholder inquiries relating to the services
provided by Lehman Brothers or the Service Organization and handling
correspondence; and acting as shareholder of record and nominee. The Plan also
allows Lehman Brothers to use its own resources to provide distribution services
and shareholder services. Under the terms of related agreements, Service
Organizations are required to provide to their shareholders a schedule of any
fees that they may charge shareholders in connection with their investments in
Class E Shares.
EXPENSES
Each Fund bears all its own expenses. A Fund's expenses include taxes,
interest, fees and salaries of the Trust's trustees and officers who are not
directors, officers or employees of the Fund's service contractors, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to investors,
advisory, administration and distribution fees, charges of the custodian,
administrator, transfer agent and dividend disbursing agent, Service
Organization fees, certain insurance premiums, outside
20
<PAGE>
auditing and legal expenses, costs of shareholder reports and shareholder
meetings and any extraordinary expenses. Each Fund also pays for brokerage fees
and commissions (if any) in connection with the purchase and sale of portfolio
securities. In order to maintain a competitive expense ratio, the Adviser and
Administrator have voluntarily agreed to waive fees and reimburse expenses to
the extent necessary to maintain an annualized expense ratio at a level no
greater than .33% of average daily net assets (.18% excluding Rule 12b-1 fees)
with respect to the Funds. This voluntary waiver and reimbursement arrangement
will not be changed unless investors are provided at least 60 days' advance
notice. In addition, these service providers have agreed to reimburse the Funds
to the extent required by applicable state law for certain expenses that are
described in the Statement of Additional Information. Any fees charged by
Service Organizations or other institutional investors to their customers in
connection with investments in Fund shares are not reflected in a Fund's
expenses.
PERFORMANCE AND YIELDS
From time to time, the "yields" and "effective yields" with respect to
all Funds and "tax-equivalent yields" with respect to Tax-Free Money Market Fund
and Municipal Money Market Fund shares may be quoted in advertisements or in
reports to shareholders. Yield quotations are computed separately for each class
of shares. The "yield" quoted in advertisements for a particular class of shares
refers to the income generated by an investment in such shares over a specified
period (such as a seven-day period) identified in the advertisement. This income
is then "annualized;" that is, the amount of income generated by the investment
during that period is assumed to be generated each such period over a 52-week or
one-year period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly but, when annualized, the income earned by an
investment in a particular class is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. The "tax-equivalent yield" demonstrates the
level of taxable yield necessary to produce an after-tax yield equivalent to a
Fund's tax-free yield for each class of shares. It is calculated by increasing
the yield (calculated as above) by the amount necessary to reflect the payment
of federal taxes at a stated rate. The "tax-equivalent yield" will always be
higher than the "yield."
A Fund's performance may be compared to those of other mutual funds
with similar objectives, to other relevant indices, or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, such data are reported in national
financial publications such as Morningstar, Inc., Barron's, IBC/Donoghue's Money
Fund Report(R), The Wall Street Journal and The New York Times; reports prepared
by Lipper Analytical Services, Inc; and publications of a local or regional
nature.
A Fund's yield figures for a class of shares represent past
performance, will fluctuate and should not be considered as representative of
future results. The yield of any investment is generally a function of portfolio
quality and maturity, type of investment and operating expenses. Any fees
charged by Service Organizations or other institutional investors directly to
their customers in connection with investments in Fund shares are not reflected
in a Fund's expenses or yields; and, such fees, if charged, would reduce the
actual return received by customers on their investments. The methods used to
compute a Fund's yields are described in more detail in the Statement of
Additional Information. Investors may call 1-800-238-2560 to obtain current
yield information.
DESCRIPTION OF SHARES AND MISCELLANEOUS
The Trust is a Massachusetts business trust established on November 25,
1992. The Trust's Declaration of Trust authorizes the Board of Trustees to issue
an unlimited number of full and fractional shares of beneficial interest in the
Trust and to classify or reclassify any unissued shares into one or more
additional classes of shares. The Trust is an open-end management investment
company, which currently offers seven portfolios. The Trust has authorized the
issuance of seven classes of shares for Prime Value Money Market Fund,
Government Obligations Money Market Fund and Municipal Money Market Fund and
four classes of shares for Prime Money Market Fund, Cash Management Fund,
Treasury Instruments Money Market Fund II, and Tax-Free Money Market Fund. The
issuance of separate classes of shares is intended to address the different
service needs of different types of investors. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any class of shares into one
or more sub-classes.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust will call a meeting of shareholders for the purpose of voting upon the
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question of removal of a member of the Board of Trustees upon written request of
shareholders owning at least 10% of the outstanding shares of the Trust entitled
to vote.
Each Fund share represents an equal, proportionate interest in the
assets belonging to the Fund. Each share, which has a par value of $.001, has no
preemptive or conversion rights. When issued for payment as described in this
Prospectus, Fund shares will be fully paid and non-assessable.
Holders of the Fund's shares will vote in the aggregate and not by
class on all matters, except where otherwise required by law and except when the
Board of Trustees determines that the matter to be voted upon affects only the
shareholders of a particular class. Further, shareholders of the Funds 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 (see the
Statement of Additional Information under "Additional Description Concerning
Fund Shares" for examples where the 1940 Act requires voting by portfolio).
Shareholders of the Trust are entitled to one vote for each full share held
(irrespective of class or portfolio) and fractional votes for fractional shares
held. Voting rights are not cumulative; and, accordingly, the holders of more
than 50% of the aggregate shares of the Trust may elect all of the trustees.
For information concerning the redemption of Fund shares and possible
restrictions on their transferability, see "Purchase and Redemption of Shares."
22
<PAGE>
LEHMAN BROTHERS INSTITUTIONAL FUNDS
Client Service Center 800-851-3134
(8:30 am to 5:00 p.m. Eastern time): fax: 617-261-4330
or 617-261-4340
Dividend factors and yields: 800-238-2560
Administration/Sales/Marketing: 800-368-5556
To place a purchase or redemption order: 800-851-3134
To change account information: 800-851-3134
Additional Prospectuses: 800-368-5556
Information on Service Agreements: 800-851-3134
LEX Help Desk 800-5565LEX
LEHMAN BROTHERS
LBP-203B6
<PAGE>
Prime Money Market Fund
Prime Value Money Market Fund
Investment Portfolios Offered By
Lehman Brothers Institutional Funds Group Trust
Statement of Additional Information
May 30, 1995
as Supplemented February 1, 1996 and February 16, 1996
This Statement of Additional Information is meant to be read
in conjunction with the Prospectuses for the Prime Money Market
Fund and Prime Value Money Market Fund portfolios dated May 30,
1995, as supplemented on February 1, 1996 and February 16, 1996,
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 Prime Money
Market Fund or Prime Value Money Market Fund portfolios should be
made solely upon the information contained herein. Copies of a
Prospectus for Prime Money Market Fund or Prime Value Money Market
Fund shares 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
Additional Purchase and Redemption
Information
7
Management of the Funds
9
Additional Information Concerning Taxes
17
Dividends
18
Additional Yield Information
18
Additional Description Concerning Shares
20
Counsel
20
Independent Auditors
20
Financial Statements
21
Miscellaneous
21
Appendix
A-1
THE TRUST
Lehman Brothers Institutional Funds Group Trust (the "Trust")
is an open-end management investment company. The Trust currently
includes a family of portfolios, two of which are Prime Money
Market Fund and Prime Value Money Market Fund (individually, a
"Fund"; collectively, the "Funds").
Although the Funds have the same Investment Adviser, Lehman
Brothers Global Asset Management, Inc. (the "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, Prime Value Money Market Fund
invests in obligations of foreign branches of U.S. banks and
foreign banks and corporate issuers while Prime Money Market Fund
does not).
THIS STATEMENT OF ADDITIONAL INFORMATION AND THE FUNDS'
PROSPECTUSES RELATE PRIMARILY TO THE FUNDS AND DESCRIBE ONLY THE
INVESTMENT OBJECTIVES AND POLICIES, OPERATIONS, CONTRACTS AND OTHER
MATTERS RELATING TO EACH FUND. INVESTORS WISHING TO OBTAIN SIMILAR
INFORMATION REGARDING THE TRUST'S OTHER PORTFOLIOS MAY OBTAIN
INFORMATION 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 current income and stability of
principal by investing in a portfolio of money market instruments.
The following policies supplement the description of each Fund's
investment objective and policies in the Prospectuses.
The Funds are managed to provide stability of capital while
achieving competitive yields. The 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, the Adviser is responsible for, makes decisions with
respect to and places orders for all purchases and sales of
portfolio securities for a Fund. The Adviser purchases portfolio
securities for the Funds either directly from the issuer or from
dealers who specialize in money market instruments. Such purchases
are usually without brokerage commissions. In making portfolio
investments, the Adviser 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,
the Adviser may, in its discretion, effect transactions in
portfolio securities with dealers who provide the Trust with
research advice or other services.
The Adviser may seek to obtain an undertaking from issuers of
commercial paper or dealers selling commercial paper to consider
the repurchase of such securities from a Fund prior to their
maturity at their original cost plus interest (interest may
sometimes be adjusted to reflect the actual maturity of the
securities) if the Adviser believes that a Fund's anticipated need
for liquidity makes such action desirable. Certain dealers (but not
issuers) have charged and may in the future charge a higher price
for commercial paper where they undertake to repurchase prior to
maturity. The payment of a higher price in order to obtain such an
undertaking reduces the yield which might otherwise be received by
a Fund on the commercial paper. The Trust's Board of Trustees has
authorized the Adviser to pay a higher price for commercial paper
where it secures such an undertaking if the Adviser believes that
the prepayment privilege is desirable to assure a Fund's liquidity
and such an undertaking cannot otherwise be obtained.
Investment decisions for each Fund are made independently from
those for another of the Trust's portfolios or other investment
company portfolios or accounts advised by the Adviser. Such other
portfolios may also invest in the same securities as the Funds.
When purchases or sales of the same security are made at
substantially the same time on behalf of such other portfolios,
transactions are averaged as to price, and available investments
allocated as to amount, in a manner which the Adviser believes to
be equitable to each portfolio, including the Funds. In some
instances, this investment procedure may adversely affect the price
paid or received by a Fund or the size of the position obtainable
for a Fund. To the extent permitted by law, the Adviser may
aggregate the securities to be sold or purchased for a Fund with
those to be sold or purchased for such other portfolios in order to
obtain best execution.
The Funds will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in,
or enter into repurchase agreements with Lehman Brothers or the
Adviser 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, with respect to such
transactions, securities, deposits and agreements, the Funds will
not give preference to Service Organizations with which a Fund
enters into agreements. (See the Prospectuses, "Management of the
Fund - Service Organizations").
The Funds may seek profits through short-term trading. Each
Fund's annual portfolio turnover will be relatively high, but
brokerage commissions are normally not paid on money market
instruments and 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 Portfolio Instruments
With respect to the variable rate notes and variable rate
demand notes described in the Prospectuses, the Adviser will
consider the earning power, cash flows and other liquidity ratios
of the issuers of such notes and will continuously monitor their
financial ability to meet payment obligations when due.
The repurchase price under the repurchase agreements described
in the Funds' Prospectuses generally equals the price paid by a
Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). The collateral underlying
each repurchase agreement entered into by the Funds will consist
entirely of direct obligations of the U.S. government and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. Securities subject to repurchase agreements will
be held by the Trust's Custodian, sub-custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by the Funds under the 1940 Act.
As stated in the Funds' Prospectuses, a Fund may purchase
securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When 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 a 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 a Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous. Neither Fund intends to
purchase when-issued securities for speculative purposes but only
in furtherance of its investment objective. Each Fund reserves the
right to sell these securities before the settlement date if it is
deemed advisable.
Examples of the types of U.S. Government obligations that may
be held by a Fund include, in addition to U.S. Treasury Bills, the
obligations of the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, Federal Financing Bank,
General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Federal Land Banks, Federal Farm Credit Banks,
Maritime Administration, Resolution Trust Corporation, Tennessee
Valley Authority, U.S. Postal Service and Washington D.C. Armory
Board.
For purposes of Prime Value Money Market Fund's investment
policies with respect to obligations of issuers in the banking
industry, the assets of a bank or savings institution will be
deemed to include the assets of its domestic and foreign branches.
Prime Value Money Market Fund's investments in the obligations of
foreign branches of U.S. banks and of foreign banks and other
foreign issuers may subject Prime Value Money Market Fund to
investment risks that are different in some respects from those of
investment in obligations of U.S. domestic issuers. Such risks
include future political and economic developments, the possible
seizure or nationalization of foreign deposits, the possible
establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment
of principal and interest on such obligations. In addition, foreign
branches of U.S. banks and foreign banks may be subject to less
stringent reserve requirements and foreign issuers generally are
subject to different accounting, auditing, reporting and record
keeping standards than those applicable to U.S. issuers. Prime
Value Money Market Fund will acquire securities issued by foreign
branches of U.S. banks or foreign issuers only when the Adviser
believes that the risks associated with such instruments are
minimal.
Among the bank obligations in which the Funds may invest are
notes issued by banks. These notes, which are exempt from
registration under federal securities laws, are not deposits of the
banks and are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Holders of notes rank on a par
with other unsecured and unsubordinated creditors of the banks.
Notes may be sold at par or sold on a discount basis and may bear
fixed or floating rates of interest.
Each Fund may invest in asset-backed and receivable-backed
securities. Several types of asset-backed and receivable-backed
securities have been offered to investors, including interests in
pools of credit card receivables and motor vehicle retail
installment sales contracts and security interests in the vehicles
securing the contracts. Payments of principal and interest on these
securities are passed through to certificate holders. In addition,
asset-backed securities often carry credit protection in the form
of extra collateral, subordinate certificates, cash reserve
accounts and other enhancements. An investor's return on these
securities may be affected by early prepayment of principal on the
underlying receivables or sales contracts. Any asset-backed or
receivable-backed securities held by the Funds must comply with the
portfolio maturity and quality requirements contained in Rule 2a-7
under the 1940 Act. Each Fund will monitor the performance of these
investments and will not acquire any such securities unless rated
in the highest rating category by at least two nationally
recognized statistical rating organizations ("NRSROs").
As stated in the Funds' Prospectuses, each Fund may invest in
obligations issued by state and local governmental entities.
Municipal securities are issued by various public 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 issued by or on behalf of public
authorities to finance various privately operated facilities are
considered to be municipal securities and may be purchased by a
Fund. Dividends paid by a Fund that are derived from interest on
such municipal securities would be taxable to that Fund's investors
for federal income tax purposes.
The SEC has adopted Rule 144A under the Securities Act of
1933, as amended (the "1933 Act"), that allows for a broader
institutional trading market for securities otherwise subject to
restrictions on resale to the general public. Rule 144A establishes
a "safe harbor" from the registration requirements of the 1933 Act
for resales of certain securities to qualified institutional
buyers. The Adviser anticipates that the market for certain
restricted securities such as institutional commercial paper 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, Inc.
The Adviser will monitor the liquidity of restricted and other
illiquid securities under the supervision of the Board of Trustees.
In reaching liquidity decisions with respect to Rule 144A
securities, the Adviser will consider, inter alia, the following
factors: (1) the unregistered nature of a Rule 144A security;
(2) the frequency of trades and quotes for a Rule 144A security;
(3) the number of dealers wishing to purchase or sell the Rule 144A
security and the number of other potential purchasers; (4) dealer
undertakings to make a market in the Rule 144A security; (5) the
trading markets for the Rule 144A security; and (6) the nature of
the Rule 144A security and the nature of the marketplace trades
(e.g., the time needed to dispose of the Rule 144A security, the
method of soliciting offers and the mechanics of the transfer).
The Appendix to this Statement of Additional Information
contains a description of the relevant rating symbols used by
NRSROs for commercial obligations that may be purchased by each
Fund.
The Funds may invest in mortgage backed securities issued by
U.S. Government agencies or instrumentalities consisting of
mortgage pass-through securities or collateralized mortgage
obligations ("CMOs"). Mortgage pass-through securities in which
the Funds may invest represent a partial ownership interest in a
pool of residential mortgage loans and are issued or guaranteed by
the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through
securities (collateral collectively referred to as "Mortgage
Assets"). CMOs in which the Funds may invest are issued by GNMA,
FNMA and FHLMC. In a CMO, a series of bonds or certificates are
usually issued in multiple classes. Each class of CMOs, often
referred to as a "tranche," is issued at a specific fixed or
floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets
may cause the CMOs to be retired substantially earlier than their
stated maturities or final distribution dates, resulting in a loss
of all or part of the premium if any has been paid. Interest is
paid or accrues on all classes of the CMOs on a monthly, quarterly
or semiannual basis. The Funds expect that mortgage backed
securities will only be purchased in connection with repurchase
transactions.
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 securities of any one 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 total assets may be invested without regard to such 5%
limitation and provided that there is no limitation with respect to
investments in U.S. Government securities.
2. Borrow money, except that the Fund may (i) borrow money for
temporary or emergency purposes (not for leveraging or investment)
from banks or, subject to specific authorization by the SEC, from
funds advised by the Adviser or an affiliate of the Adviser, and
(ii) engage in reverse repurchase agreements, provided that (i) and
(ii) in combination do not exceed one-third of the value of the
particular Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings). A Fund may not mortgage,
pledge or hypothecate its assets except in connection with such
borrowings and reverse repurchase agreements and then only in
amounts not exceeding one-third of the value of the particular
Fund's total assets. Additional investments will not be made when
borrowings exceed 5% of the Fund's assets.
3. Purchase any securities which would cause 25% or more of the
value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, except that
Prime Value Money Market Fund will invest 25% or more of the value
of its total assets in obligations of issuers in the banking
industry or in obligations, such as repurchase agreements, secured
by such obligations (unless the Fund is in a temporary defensive
position); provided that there is no limitation with respect to
investments in U.S. Government securities or, in the case of Prime
Money Market Fund, in bank instruments issued by domestic banks.
4. Make loans, except that a Fund may (i) purchase or hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements for securities,
(iii) lend portfolio securities and (iv) subject to specific
authorization by the SEC, lend money to other funds advised by the
Adviser or an affiliate of the Adviser.
5. Act as an underwriter of securities, except insofar as the
Fund may be deemed an underwriter under applicable securities laws
in selling portfolio securities.
6. 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.
7. Purchase or sell commodities contracts, or invest in oil, gas
or mineral exploration or development programs or in mineral
leases.
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 15% (or such lesser amount as set by state securities
laws) 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 order to permit the sale of Fund shares in certain states,
the Funds may make commitments more restrictive than the investment
policies and limitations above. Should a Fund determine that any
such commitments are no longer in its best interests, it will
revoke the commitment by terminating sales of its shares in the
state involved. Further, with respect to the above-stated third
limitation, each Fund will consider wholly owned finance companies
to be in the industries of their parents, if their activities are
primarily related to financing the activities of their parents, and
will divide utility companies according to their services; for
example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
In General
Information on how to purchase and redeem each Fund's shares
is included in the Prospectuses. The issuance of 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 Prime Money Market Fund and Prime
Value 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, Class C or Class E
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, Class C or
Class E 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 ("NYSE") is closed, other
than customary weekend and holiday closings, or during which
trading on the NYSE 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. Investors 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 Fund's 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 separately
for each class by dividing the total value of the assets belonging
to a Fund attributable to a class, less the value of any class-
specific liabilities charged to such Fund, by the total number of
that Fund's shares of that class outstanding. "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 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 Fund.
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 such 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 Prospectuses, 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 the portfolio
security for purposes of determining net asset value normally does
not change in response to fluctuating interest rates. While the
amortized cost method seems to provide 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 thirteen months (397 days) (with
certain exceptions). The Trust's Board of Trustees has also
established procedures, pursuant to rules promulgated by the SEC,
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, it will take such steps as it 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
Position with the
Trust
Principal Occupations During
Past 5
Years and Other Affiliations
JAMES A. CARBONE (1)
3 World Financial
Center
New York, NY 10285
Age: 43
Co-Chairman of the
Board and Trustee
Managing Director, Lehman
Brothers.
ANDREW GORDON (1)
3 World Financial
Center
New York, NY 10285
Age: 42
Co-Chairman of the
Board, Trustee and
President
Managing Director, Lehman
Brothers.
CHARLES BARBER (2)(3)
66 Glenwood Drive
Greenwich, CT 06830
Age: 78
Trustee
Consultant; formerly
Chairman of the Board,
ASARCO Incorporated.
BURT N.
DORSETT (2)(3)
201 East 62nd Street
New York, NY 10022
Age: 65
Trustee
Managing Partner, Dorsett
McCabe Capital Management,
Inc., an investment
counseling 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
Age: 50
Trustee
Partner with the law firm of
Hepburn Willcox Hamilton &
Putnam.
S. DONALD
WILEY (2)(3)
USX Tower
Pittsburgh, PA 15219
Age: 69
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.
JOHN M. WINTERS
3 World Financial
Center
New York, NY 10285
Age: 46
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.
NICHOLAS RABIECKI,
III
3 World Financial
Center
New York, NY 10285
Age: 39
Vice President and
Investment Officer
Vice President and Senior
Portfolio Manager, Lehman
Brothers Global Asset
Management, Inc.; formerly
Senior Fixed-Income
Portfolio Manager with Chase
Private Banking.
MICHAEL C. KARDOK
One Exchange Place
Boston, MA 02109
Age: 36
Treasurer
Vice President, First Data
Investor Services Group,
Inc.; prior to May 1994,
Vice President, The Boston
Company Advisors, Inc.
PATRICIA L. BICKIMER
One Exchange Place
Boston, MA 02109
Age: 42
Secretary
Vice President and Associate
General Counsel, First Data
Investor 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.
Messrs. Carbone, Gordon and Dorsett serve as Trustees or
Directors of other investment companies for which Lehman Brothers,
the Adviser or one of their affiliates serve as distributor or
investment adviser.
No employee of Lehman Brothers, the Adviser or First Data
Investor Services Group, Inc. ("FDISG") (formerly named The
Shareholder Services Group, Inc.), the Trust's Administrator and
Transfer Agent, 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, the
Adviser or FDISG 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 year ended January 31, 1996, such fees and
expenses totaled $54,392.75 for the Prime Money Market Fund and
$43,139.39 for the Prime Value Money Market Fund and $109,883.32 in
the aggregate for the Trust. As of January 31, 1996, Trustees and
Officers of the Trust as a group beneficially owned less than 1% of
the outstanding shares of each of the Funds.
By virtue of the responsibilities assumed by Lehman Brothers,
the Adviser, FDISG and their affiliates under their respective
agreements with the Trust, the Trust itself requires no employees
in addition to its officers.
The following table sets forth certain information regarding
the compensation of the Trust's Trustees during the fiscal year
ended January 31, 1996. No executive officer or person affiliated
with the Trust received compensation from the Trust during the
fiscal year ended January 31, 1996 in excess of $60,000.
COMPENSATION TABLE
Name of
Person and
Position
Aggregate
Compensati
on
from the
Trust
Pension or
Retirement
Benefits
Accrued as
Part of Trust
Expenses
Estimated
Annual
Benefits
Upon
Retirement
Total
Compensation
From the
Trust
and Fund
Complex
Paid to
Trustees*
James A.
Carbone,
Co-Chairman
of the Board
and Trustee
$0
$0
N/A
$0 (2)
Andrew
Gordon,
Co-Chairman
of the Board,
Trustee and
President
$0
$0
N/A
$0 (2)
Charles
Barber,
Trustee
$25,000
$0
N/A
$25,000 (1)
Burt N.
Dorsett,
Trustee
$25,000
$0
N/A
$52,500(2)
Edward J.
Kaier,
Trustee
$25,000
$0
N/A
$25,000 (1)
S. Donald
Wiley,
Trustee
$25,000
$0
N/A
$25,000 (1)
_____________
* Represents the total compensation paid to such persons by all
investment companies (including the Trust) from which such person
received compensation during the fiscal year ended January 31, 1996
that are considered part of the same "fund complex" as the Trust
because they have common or affiliated investment advisers. The
parenthetical number represents the number of such investment
companies, including the Trust.
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"). As of December 31, 1995, FMR Corp.
beneficially owned approximately 11.7%, Nippon Life Insurance
Company beneficially owned approximately 5.0% and Prudential Asset
Management beneficially owned approximately 5.0% of the outstanding
voting securities 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 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
Lehman Brothers Global Asset Management, Inc. serves as the
Adviser to each of the Funds. The Adviser, located at 3 World
Financial Center, New York, New York 10285, is a wholly-owned
subsidiary of Holdings. The investment advisory agreements provide
that the Adviser is responsible for all investment activities of
the Funds, including executing portfolio strategy, effecting Fund
purchase and sale transactions and employing professional portfolio
managers and security analysts who provide research for the Funds.
Investment personnel of the Adviser may invest in securities
for their own account pursuant to a code of ethics that establishes
procedures for personal investing and restricts certain
transactions.
The Investment Advisory Agreement with respect to each of the
Funds was most recently approved by the Trust's Board of Trustees,
including a majority of the Trust's "non-interested" Trustees, on
December 5, 1995 and by shareholders on January 31, 1996. The
Investment Advisory Agreements commenced on February 1, 1996 and
will continue until February 1, 1998 unless terminated or amended
prior to that date according to its terms. The Investment Advisory
Agreements will continue initially for a two-year period and
automatically for successive annual periods thereafter 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).
Effective February 1, 1996, as compensation for the Adviser's
services rendered to the Fund, the Adviser is entitled to a fee,
computed daily and paid monthly, at the annual rate of .20% of the
average daily net assets of the Fund. Prior to February 1, 1996,
the Adviser was 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 fiscal period ended January 31, 1994 and for the
fiscal years ended January 31, 1995 and 1996, the Adviser was
entitled to receive advisory fees in the following amounts: the
Prime Money Market Fund, $1,165,899, $2,386,734 and $4,452,828,
respectively, and the Prime Value Money Market Fund, $1,106,003,
$1,858,719, and $2,885,656, respectively. Waivers by the Adviser
of advisory fees and reimbursement of expenses to maintain the
Funds' operating expenses ratios at certain levels amounted to:
the Prime Money Market Fund, $1,165,899 and $0, respectively, for
the fiscal period ended January 31, 1994, $1,171,734 and $0,
respectively, for the fiscal year ended January 31, 1995 and $0.00
and $0.00, respectively, for the fiscal year ended January 31,
1996; and the Prime Value Money Market Fund, $1,106,003 and
$757,799, respectively for the fiscal period ended January 31,
1994, $1,388,554 and $0, respectively, for the fiscal year ended
January 31, 1995 and $0.00 and $0.00, respectively, for the fiscal
year ended January 31, 1996. In order to maintain competitive
expense ratios during 1996 and thereafter, the 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
the Prospectuses.
Principal Holders
On February 16, 1996, the principal holders of Class A Shares
of Prime Money Market Fund were as follows: Harris Trust and
Savings Bank, 200 West Monroe Street, Chicago, IL 60606, 10.99%
shares held of record; and Wells Fargo Institutional Trust Co., 45
Fremont Street, San Francisco, CA 94101, 5.27% shares held of
record. Principal holders of Class B Shares of Prime Money Market
Fund as of February 16, 1996 were as follows: Harris Trust and
Savings Bank, 200 West Monroe Street, Chicago, IL 60606, 56.20%
shares held of record; and Hare & Co., One Wall Street, New York,
New York 10286, 42.47% shares held of record. Principal holders
of Class C Shares of Prime Money Market Fund as of February 16,
1996 were as follows: FNB Nominee Bank, 614 Philadelphia Street,
Indiana, PA 15701, 86.02% shares held of record; and Gordon's Inc.
401K Retirement Plan, P.O. Box 291, Jackson, MS 39205; 7.06%
shares held of record. The principal holder of Class E Shares as
of February 16, 1996 was Heart Special Trust Account, 120 Wall
Street, New York, New York 10043, with 99.99% shares held of
record.
Principal holders of Class A Shares of Prime Value Money
Market Fund as of February 16, 1996 were as follows: NationsBank of
Texas, NA, 1401 Elm Street, 11th Floor, Dallas, TX 75202-2911,
8.11% shares held of record; Northern Trust Cash Investment, 801
South Canal Street, Chicago, IL 60607, 6.95% shares held of
record; Mellon Bank Securities Lending, 3 Mellon Bank Center,
Pittsburgh, PA 15259, 5.60% shares held of record; and Thermo
Electron Corporation, 81 Wyman Street, Waltham, MA 02254, 5.11%
shares held of record. The principal holder of Class B Shares of
Prime Value Money Market Fund was Hare & Co., One Wall Street, New
York, New York 10286, 95.76% shares held of record.
As of February 16, 1996, there were no investors in Class C or
Class E Shares of Prime Value Money Market Fund 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
FDISG, 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, FDISG has agreed to provide the following services:
(i) assist generally in supervising a Fund's operations, providing
and supervising the operation of an automated data processing
system to process purchase and redemption orders, providing
information concerning a Fund to its shareholders of record,
handling investor problems, supervising the services of employees
and monitoring the arrangements pertaining to the Funds' agreements
with Service Organizations; (ii) prepare reports to a Fund's
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. FDISG 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. FDISG
pays Boston Safe Deposit and Trust Company ("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,
FDISG acquired TBCA's third party mutual fund administration
business from Mellon, and each Fund's administration agreement with
TBCA was assigned to FDISG. For the fiscal period ended January
31, 1994 and the fiscal years ended January 31, 1995 and 1996, the
Administrator was entitled to receive administration fees in the
following amounts: the Prime Money Market Fund - $1,165,899,
$2,386,734, and $4,452,828 respectively, and the Prime Value Money
Market Fund - $1,106,003, $1,858,719, and $2,885,656 respectively.
Waivers by the Administrator of administration fees and
reimbursement of expenses to maintain the Funds' operating expense
ratios at certain levels amounted to: the Prime Money Market Fund
- - $1,165,899 and $115,300, respectively, for the fiscal period
ended January 31, 1994; $1,815,227 and $0, respectively, for the
fiscal year ended January 31, 1995; and $3,282,922 and $0.00 for
the fiscal year ended January 31, 1996; and the Prime Value Money
Market Fund - $1,106,003 and $192,939, respectively, for the fiscal
period ended January 31, 1994; $1,414,970 and $0, respectively, for
the fiscal period ended January 31, 1995; and $2,127,361 and $0.00
for the fiscal year ended January 31, 1996. In order to maintain
competitive expense ratios during 1996 and thereafter, the 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, FDISG maintains the
shareholder account records for the Trust, handles certain
communications between investors and the Trust, 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, FDISG receives a monthly fee based
on average net assets and is reimbursed for out-of-pocket expenses.
Custodian
Boston Safe, 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 FDISG 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, Class C or Class E shares. The Fund will enter into an
agreement with each Service Organization whose customers
("Customers") are the beneficial owners of Class B, Class C or
Class E shares that requires the Service Organization to provide
certain services to Customers in consideration of such Fund's
payment of .25%, .35% or .15% respectively, of the average daily
net asset value of the respective Class beneficially owned by the
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) sub-
accounting with respect to shares beneficially owned by Customers
or the information necessary for sub-accounting; and (c)
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. Holders of Class E Shares of a
Fund will receive the services set forth in (i) and (v), above. A
Service Organization, at its option, may also provide to its
Customers of Class E shares services including those services set
forth in (ii), (iii), (iv), (vi), (vii) and (viii) above and the
optional services set forth in (a), (b) and (c) above.
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 under Rule 12b-1 of the 1940 Act.
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 fiscal year ended January 31, 1996, the following
service fees were paid by Prime Money Market Fund: Class B shares,
$966,300.60, Class C shares, $37,692.74, and Class E shares,
$16,750.28. For the fiscal year ended January 31, 1995, the
following service fees were paid by the Prime Money Market Fund:
Class B shares, $726,035, Class C shares, $60,810, and Class E
shares, $5,834. For the period February 8, 1993 (commencement of
operations) to January 31, 1994, the following service fees were
paid by the Prime Money Market Fund: Class B shares, $127,731 and
Class C shares, $161. For the fiscal year ended January 31, 1996,
the following service fees were paid by Prime Value Money Market
Fund: Class B shares, $72,844.42, Class C shares, $0.00, and Class
E shares, $0.00. For the fiscal year ended January 31, 1995, the
following service fees were paid by the Prime Value Money Market
Fund: Class B shares, $40,846; no service fees were paid with
respect to Class C or Class E shares. For the period February 8,
1993 (commencement of operations) to January 31, 1994, the
following service fees were paid by the Prime Value Money Market
Fund: Class B shares, $21,438; no service fees were paid with
respect to Class C shares. Class E shares were not offered by the
Funds during the fiscal period ended January 31, 1994.
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 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. The Adviser and
FDISG 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, it will
reimburse that Fund for any excess to the extent required by such
regulations in the same proportion that each of their fees bears to
the Fund's aggregate fees for investment advice and administrative
services. Unless otherwise required by law, such reimbursement
would be accrued and paid on the same basis that the advisory and
administration fees are accrued and paid by that Fund. To each
Fund's knowledge, of the expense limitations in effect on the date
of this Statement of Additional Information, none is more
restrictive than two and one-half percent (2.5%) of the first
$30 million of a Fund's average net assets, two percent (2%) of the
next $70 million of the average net assets and one and one-half
percent (1.5%) of the remaining average 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 Prospectuses 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 under the Code 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 tests and derive less than 30% of its gross
income for the year from the sale or other disposition of
securities and certain other investments held for less than three
months. Interest (including original issue plus accrued market
discount) received by a Fund at maturity or disposition of a
security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such
security within the meaning of the 30% requirement. However, any
income in excess of such interest will be treated as gross income
from the sale or other disposition of securities for this purpose.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail currently to distribute an amount
equal to specified percentages of their ordinary taxable income and
capital gain net income (excess of capital gains over capital
losses). Each Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital
gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
If for any taxable year a Fund does not qualify for tax
treatment as a regulated investment company, all of that Fund's
taxable income will be subject to tax at regular corporate rates
without any deduction for distributions to Fund investors. In such
event, dividend distributions to investors would be taxable as
ordinary income to the extent of that Fund's earnings and profits,
and would be eligible for the dividends received deduction in the
case of corporate shareholders.
Each Fund will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or 31% of gross
proceeds realized upon sale paid to its 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 tax, depending upon the extent of
its activities in states and localities in which its offices are
maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting
business, a Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have
income tax laws, the treatment of the Fund and its investors under
such laws may differ from the treatment under federal income tax
laws. Investors are advised to consult their tax advisers
concerning the application of state and local taxes.
DIVIDENDS
Each Fund's net investment income for dividend purposes
consists of (i) interest accrued and original issue discount earned
on that Fund's assets, (ii) plus the amortization of market
discount and minus the amortization of market premium on such
assets, (iii) less 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. Any realized short-term capital gains may
also be distributed as dividends to Fund investors. In addition, a
Fund's Class B, Class C and Class E 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."
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" and "effective yields" are calculated separately
for each class of shares of each Fund and in accordance with the
formulas prescribed by the SEC. The seven-day yield for each class
of shares in a Fund is calculated by determining the net change in
the value of a hypothetical preexisting account in a Fund having a
balance of one share 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 shareholder accounts in
proportion to the length of the base period and the Fund's average
account size, but does not include gains and losses or unrealized
appreciation and depreciation. In addition, the effective
annualized yield may be computed on a compounded basis (calculated
as described above) with respect to each class of a Fund's shares
by adding 1 to the base period return, raising the sum to a power
equal to 365/7, and subtracting 1 from the result. Similarly, based
on the calculations described above, 30-day (or one-month) yields
and effective yields may also be calculated.
Based on the fiscal year ended January 31, 1996, the yields
and effective yields for each of the Funds were as follows:
7-day
Yield
7-day
Effecti
ve
Yield
Prime Money Market Fund
Class A Shares
5.57%
5.71%
Class B Shares
5.32%
5.45%
Class C Shares
5.22%
5.35%
Class E Shares
5.42%
5.56%
Class A Shares*
5.50%
5.64%
Class B Shares*
5.25%
5.38%
Class C Shares*
5.15%
5.27%
Class E Shares*
5.35%
5.48%
Prime Value Money Market Fund
Class A Shares
5.59%
5.74%
Class B Shares
5.34%
5.47%
Class C Shares
5.24%
5.37%
Class E Shares
5.44%
5.58%
Class A Shares*
5.51%
5.65%
Class B Shares*
5.26%
5.39%
Class C Shares*
5.16%
5.28%
Class E Shares*
5.36%
5.49%
*estimated yield without fee waivers and/or expense reimbursements.
Class B, Class C and Class E Shares bear the expenses of fees
paid to Service Organizations. As a result, at any given time, the
net yield of Class B, Class C and Class E Shares could be up to
.25%, .35% and .15% lower than the net yield of Class A Shares,
respectively.
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.
The Funds' yields will fluctuate, and any quotation of yield
should not be considered as representative of the future
performance of the Funds. Since yields fluctuate, yield data cannot
necessarily be used to compare an investment in a Fund's shares
with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed
yield for a stated period of time. Investors 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 FUND 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 in the Trust will vote in the aggregate and not by class on
all matters, except where otherwise required by law and except that
only a Fund's Class B, Class C and Class E 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 each 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 auditors, 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, 153 East 53rd Street, New York, New
York 10022, serves as counsel to the Trust and will pass upon the
legality of the shares offered hereby. Willkie Farr & Gallagher
also serves as counsel to Lehman Brothers.
INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, serve as independent
auditors to each Fund and render an opinion on each 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 year ended January
31, 1995 and its Semi-Annual Report for the six months ended July
31, 1995 are incorporated into this Statement of Additional
Information by reference in their 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 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 of 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 RATINGS
Commercial Paper Ratings
Standard & Poor's, a division of The McGraw-Hill Companies
("Standard & Poor's") commercial paper rating is a current assessment
of the likelihood of timely payment of debt considered short-term in
the relevant market. 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 short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an
original maturity not exceeding one year. 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 ability for repayment of senior
short-term debt 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 ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many
of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative
liquidity is maintained.
The two highest rating categories of Duff & Phelps for
investment grade commercial paper are "D-1" and "D-2." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the
highest rating category. The following summarizes the two highest
rating categories used by Duff & Phelps for commercial paper:
"D-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.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
"D-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 generally 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 some of the 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 short-term ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity
of one year or less. 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. Where issues possess a particularly strong credit
feature a rating of "A1+" is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's
for 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 the highest rated
issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for debt in this category than in
higher-rated categories.
"BB," "B," "CCC," "CC," and "C" - Debt that possesses one of
these ratings is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay
principal. "BB" indicates the least degree of speculation and "CCC"
the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is also used upon
the filing of a bankruptcy petition if debt service payments are
jeopardized.
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 ratings used by Moody's for
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.
"A" - Bonds possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and
principal ("Ba" indicates some speculative elements; "B" indicates a
general lack of characteristics of desirable investment; "Caa"
represents a poor standing; "Ca" represents obligations which are
speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Municipal 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.
Moody's applies numerical modifiers 1, 2 and 3 in generic
classification of "Aa" in its corporate bond rating system. The
modifier 1 indicates that the company 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 company ranks at the
lower end of its generic rating category.
Those municipal bonds in the "Aa" to "B" groups which Moody's
believes posses the strongest investment attributes are designated by
the symbols "Aa1," "A1," "Baa1," "Ba1," and "B1."
The following summarizes the ratings used by Duff & Phelps for
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.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in
periods of economic stress.
"BBB" - Debt possesses below average Protection factors but such
protection factors are still considered sufficient for prudent
investment. Considerable variability in risk is present during
economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although
below investment grade, debt rated "BB" is deemed likely to meet
obligations when due. Debt rated "B" possesses the risk that
obligations will not be met when due. Debt rated "CCC" is well below
investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend averages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing
within these major rating categories.
The following summarizes the ratings used by Fitch for 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+."
"A" - Bonds considered to be investment grade and of high credit
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.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest
and repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have an adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -Bonds that
possess one of these ratings are considered by Fitch to be
speculative investments. The ratings "BB" to "C" represent Fitch's
assessment of the likelihood of timely payment of principal and
interest in accordance with the terms of obligation for bond issues
not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment that bonds should be valued on the basis of the ultimate
recovery value in liquidation or reorganization of the obligor.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing
within these major rating categories.
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.
"A" - This designation indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations
with higher ratings.
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.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business economic or
financial conditions may lead to increased investment risk.
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 factors 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 strong
capacity to pay principal and interest. Those issues determined to
possess a very strong capacity to pay are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG").
Such ratings recognize the differences between short-term credit risk
and long-term risk. A short-term rating may also be assigned on an
issue having a demand feature. Such ratings will be designated as
"VMIG." The following summarizes the two highest ratings used by
Moody's Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There
is strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality.
Margins of protection are 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.
Government Obligations Money Market Fund
Cash Management Fund
Treasury Instruments Money Market Fund II
Investment Portfolios Offered By
Lehman Brothers Institutional Funds Group Trust
Statement of Additional Information
May 30, 1995
as Supplemented February 1,1996 and February 16, 1996
This Statement of Additional Information is meant to be read in
conjunction with the Prospectuses for Government Obligations Money
Market Fund, Cash Management Fund and Treasury Instruments Money
Market Fund II, each dated May 30, 1995, as supplemented on February
1, 1996 and February 16, 1996, and is incorporated by reference in
its entirety into those Prospectuses. Because this Statement of
Additional Information is not itself a prospectus, no investment in
shares of Government Obligations Money Market Fund, Cash Management
Fund or Treasury Instruments Money Market Fund II should be made
solely upon the information contained herein. Copies of the
Prospectuses for Government Obligations Money Market Fund, Cash
Management Fund and Treasury Instruments Money Market Fund II 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
Additional Purchase and Redemption Information 6
Management of the Funds 8
Additional Information Concerning Taxes 16
Dividends 17
Additional Yield Information 17
Additional Description Concerning Shares 19
Counsel 20
Independent Auditors 20
Financial Statements 20
Miscellaneous 20
THE TRUST
Lehman Brothers Institutional Funds Group Trust (the "Trust") is
an open-end management investment company. The Trust currently
includes a family of portfolios, three of which are Government
Obligations Money Market, Cash Management Fund and Treasury
Instruments Money Market Fund II (individually, a "Fund";
collectively, the "Funds").
The securities held by Government Obligations Money Market Fund
consist of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and repurchase agreements relating
to such obligations. Securities held by Cash Management Fund consist
of U.S. Treasury bills, notes and obligations issued or guaranteed as
to principal and interest by the U.S. Government, its agencies or
instrumentalities and repurchase agreements relating to such
obligations. Securities held by Treasury Instruments Money Market
Fund II are limited to U.S. Treasury bills, notes and other direct
obligations of the U.S. Treasury and repurchase agreements relating
to direct Treasury obligations. Although all three Funds have the
same Investment Adviser, Lehman Brothers Global Asset Management,
Inc. (the "Adviser"), and have comparable investment objectives,
their yields normally will differ due to their differing cash flows
and differences in the specific portfolio securities held.
THIS STATEMENT OF ADDITIONAL INFORMATION AND THE FUNDS'
PROSPECTUSES RELATE PRIMARILY TO THE FUNDS AND DESCRIBE ONLY THE
INVESTMENT OBJECTIVE 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
INFORMATION 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 the Funds is current income with liquidity and security of
principal. The following policies supplement the description in the
Prospectuses of the investment objectives and policies of the Funds.
The Funds are managed to provide stability of capital while
achieving competitive yields. The 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,
the 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, the Adviser 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, the Adviser
may, in its discretion, effect transactions in portfolio securities
with dealers who provide the Trust with research advice or other
services. Although the Funds will not seek profits through short-term
trading, the Adviser may, on behalf of the Funds, dispose of any
portfolio security prior to its maturity if it believes such
disposition is advisable.
Investment decisions for the Funds are made independently from
those for other investment company portfolios advised by the Adviser.
Such other investment company 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
investment company portfolios, transactions are averaged as to price,
and available investments allocated as to amount, in a manner which
the Adviser 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, the
Adviser may aggregate the securities to be sold or purchased for the
Funds with those to be sold or purchased for such other investment
company 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 the Adviser
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, with respect to such
transactions, securities, deposits and agreements, the Funds will not
give preference to Service Organizations with which a Fund enters
into agreements. (See the Prospectuses, "Management of the Fund-
Service Organizations").
The Funds may seek profits through short-term trading. The
Funds' annual portfolio turnover rates will be relatively high, but
brokerage commissions are normally not paid on money market
instruments and the Funds' portfolio turnover is not expected to have
a material effect on the net incomes of the Funds. The portfolio
turnover rate for each of the Funds is expected to be zero for
regulatory reporting purposes.
Additional Information on Investment Practices
The repurchase price under the repurchase agreements described
in the Funds' Prospectuses generally equals the price paid by a Fund
plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the securities underlying
the repurchase agreement). Securities subject to repurchase
agreements will be held by the Funds' Custodian, sub-custodian or in
the Federal Reserve/Treasury book-entry system. Repurchase agreements
are considered to be loans by the Funds under the 1940 Act.
Whenever the Funds enter into reverse repurchase agreements as
described in their Prospectuses, they will place in a segregated
custodian account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently
monitor the account to ensure such equivalent value is maintained.
Reverse repurchase agreements are considered to be borrowings by the
Funds under the 1940 Act.
As stated in the Funds' Prospectuses, the Funds may purchase
securities 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, its 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 such 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 the Funds will set aside cash or liquid assets to satisfy
their respective purchase commitments in the manner described, such a
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. The Funds do
not intend to purchase when-issued securities for speculative
purposes but only in furtherance of their investment objectives. The
Funds reserve the right to sell the securities before the settlement
date if it is deemed advisable.
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 a Fund incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
Each Fund has the ability to lend securities from its portfolio
to brokers, dealers and other financial organizations. There is no
investment restriction on the amount of securities that may be
loaned. A Fund may not lend its portfolio securities to Lehman
Brothers or its affiliates without specific authorization from the
SEC. Loans of portfolio securities by a Fund will be collateralized
by cash, letters of credit or securities issued or guaranteed by the
U.S. Government or its agencies which will be maintained at all times
in an amount equal to at least 100% of the current market value of
the loaned securities (and will be marked to market daily). From time
to time, a Fund may return a part of the interest earned from the
investment of collateral received for securities loaned to the
borrower and/or a third party, which is unaffiliated with the Fund or
with Lehman Brothers, and which is acting as a "finder." With respect
to loans by the Funds of their portfolio securities, the Funds would
continue to accrue interest on loaned securities and would also earn
income on loans. Any cash collateral received by the Funds in
connection with such loans would be invested in short-term U.S.
Government obligations.
The Funds may invest in mortgage backed securities issued by
U.S. Government agencies or instrumentalities consisting of mortgage
pass-through securities or collateralized mortgage obligations
("CMOs"). Mortgage pass-through securities in which the Funds may
invest represent a partial ownership interest in a pool of
residential mortgage loans and are issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities
(collateral collectively referred to as "Mortgage Assets"). CMOs in
which the Funds may invest are issued by GNMA, FNMA and FHLMC. In a
CMO, a series of bonds or certificates are usually issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is
issued at a specific fixed or floating coupon rate and has a stated
maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially
earlier than their stated maturities or final distribution dates,
resulting in a loss of all or part of the premium if any has been
paid. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semiannual basis. The Funds expect that
mortgage backed securities will only be purchased in connection with
repurchase transactions.
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 the outstanding shares" of the respective Fund (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 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 that the Fund may (i) borrow money for
temporary or emergency purposes (not for leveraging or investment)
from banks or, subject to specific authorization by the SEC, from
funds advised by the Adviser or an affiliate of the Adviser, and (ii)
engage in reverse repurchaase agreements, provided that (i) and (ii)
in combination do not exceed one-third of the value of the particular
Fund's total assets (including the amount borrowed) less liabilities
(other than borrowings). A Fund may not mortgage, pledge or
hypothecate its assets except in connection with such borrowings and
reverse repurchase agreements and then only in amounts not exceeding
one-third of the value of the particular Fund's total assets.
Additional investments will not be made when borrowings exceed 5% of
the Fund's assets.
3. Make loans except that a Fund may (i) purchase or hold debt
obligations in accordance with its investment objective and policies,
(ii) may enter into repurchase agreements for securities, (iii) may
lend portfolio securities and (iv) subject to specific authorization
by the SEC, lend money to other funds advised by the Adviser or an
affiliate of the Adviser.
4. Act as an underwriter, 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
except that the Fund may invest in securities secured by 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 15% (or such lesser amount as set by state securities laws)
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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
In General
Information on how to purchase and redeem a Fund's shares,
including the timing of placing a purchase and redemption order, is
included in its Prospectus. The issuance of shares is recorded on the
books of the Funds, 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 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 the Funds on fiduciary funds that are
invested in a Fund's Class B, Class C or Class E 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, should consult their legal advisers before investing
fiduciary funds in a Fund's Class B, Class C or Class E shares.
Under the 1940 Act, the Funds may suspend the right of
redemption or postpone the date of payment upon redemption for any
period during which the New York Stock Exchange ("NYSE") is closed,
other than customary weekend and holiday closings, or during which
trading on the NYSE is restricted, or during which (as determined by
the SEC by rule or regulation) an emergency exists as a result of
which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The
Funds may also suspend or postpone the recordation of the transfer of
their shares upon the occurrence of any of the foregoing conditions.)
In addition, the Funds may redeem shares involuntarily in
certain other instances if the Board of Trustees determines that
failure to redeem may have material adverse consequences to a Fund's
investors in general. Each Fund is obligated to redeem shares solely
in cash up to $250,000 or 1% of the Fund's net asset value, whichever
is less, for any one 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, the
Fund may make payment wholly or partly in readily marketable
securities or other property, valued in the same way as the Fund
determines net asset value. 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. Investors 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 and 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 separately
for each class by dividing the total value of the assets belonging to
a Fund attributable to a class, less the value of any class-specific
liabilities charged to such Fund, by the total number of that Fund's
shares of such class outstanding. "Assets belonging to" a Fund
consist of the consideration received upon the issuance of 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 Fund.
Assets belonging to a particular Fund are charged with the direct
liabilities of that Fund and with a share of the general liabilities
of the Trust allocated in proportion to the relative net assets of
such Fund and the Trust's other portfolios. Determinations made in
good faith and in accordance with generally accepted accounting
principles by the Board of Trustees as to the allocations of any
assets or liabilities with respect to a Fund are conclusive.
As stated in the Funds' Prospectuses, in computing the net asset
value of shares of the Funds for purposes of sales and redemptions,
the Funds use the amortized cost method of valuation. Under this
method, the Funds value each of their portfolio securities at cost on
the date of purchase and thereafter assume 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 for the Funds' securities which are higher or lower than
the market value of such securities.
In connection with their use of amortized cost valuation, each
of the Funds 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 thirteen months
(with certain exceptions) (12 months in the case of Government
Obligations Money Market Fund). In determining the average weighted
portfolio maturity of each Fund, a variable rate obligation that is
issued or guaranteed by the U.S. Government, or an agency or
instrumentality thereof, is deemed to have a maturity equal to the
period remaining until the obligation's next interest rate
adjustment. The Trust's Board of Trustees has also established
procedures, pursuant to rules promulgated by the SEC, that are
intended to stabilize the net asset value per share of each Fund 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 each 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% with respect
to a Fund, the Board will promptly consider what action, if any,
should be initiated. If the Board believes that the amount of any
deviation from the $1.00 amortized cost price per share of a Fund may
result in material dilution or other unfair results to investors or
existing investors, it will take such steps as it 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; shortening
the Fund's average portfolio maturity; withholding or reducing
dividends; redeeming shares in kind; 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
Position with the
Trust
Principal Occupations
During Past 5
Years and Other
Affiliations
JAMES A. CARBONE (1)
3 World Financial
Center
New York, NY 10285
Age: 43
Co-Chairman of the
Board and Trustee
Director, Lehman Brothers
Global Asset Management
K.K.; Managing Director,
Lehman Brothers Inc.;
formerly Branch Manager,
Lehman Brothers Japan Inc.;
formerly Chairman, Lehman
Brothers Asia Holdings
Limited; and formerly
Manager -- Debt Syndicate,
Origination & Corporate
Bonds, Lehman Brothers Inc.
ANDREW GORDON (1)
3 World Financial
Center
New York, NY 10285
Age: 42
Co-Chairman of the
Board, Trustee and
President
Managing Director, Lehman
Brothers.
CHARLES F. BARBER
(2)(3)
66 Glenwood Drive
Greenwich, CT 06830
Age: 78
Trustee
Consultant; formerly
Chairman of the Board,
ASARCO Incorporated.
BURT N. DORSETT (2)(3)
201 East 62nd Street
New York, NY 10022
Age: 65
Trustee
Managing Partner, Dorsett
McCabe Capital Management,
Inc., an investment
counseling 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
Age: 50
Trustee
Partner with the law firm
of Hepburn Willcox Hamilton
& Putnam.
S. DONALD WILEY (2)(3)
USX Tower
Pittsburgh, PA 15219
Age: 69
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.
JOHN M. WINTERS
3 World Financial
Center
New York, NY 10285
Age: 46
Vice President and
Investment Officer
Senior Vice President and
Senior Money Market
Manager, Lehman Brothers
Global Asset Management,
Inc.; formerly Product
Manager with Lehman
Brothers Capital Markets
Group.
NICHOLAS RABIECKI, III
3 World Financial
Center
New York, NY 10285
Age: 39
Vice President and
Investment Officer
Vice President and Senior
Portfolio Manager, Lehman
Brothers Global Asset
Management, Inc.; formerly
Senior Fixed-Income
Portfolio Manager with
Chase Private Banking.
MICHAEL C. KARDOK
One Exchange Place
Boston, MA 02109
Age: 36
Treasurer
Vice President, First Data
Investor Services Group,
Inc.; prior to May 1994,
Vice President, The Boston
Company Advisors, Inc.
PATRICIA L. BICKIMER
One Exchange Place
Boston, MA 02109
Age: 42
Secretary
Vice President and
Associate General Counsel,
First Data Investor
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.
Messrs. Carbone, Gordon and Dorsett serve as trustees or
directors of other investment companies for which Lehman Brothers,
the Adviser or one of their affiliates serve as distributor and
investment adviser.
No employee of Lehman Brothers, the Adviser or First Data
Investor Services Group, Inc. ("FDISG") (formerly named The
Shareholder Services Group, Inc.), the Trust's Administrator and
Transfer Agent, 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, the
Adviser or FDISG 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 ended January 31, 1996, such fees and
expenses totaled $1,208.36 for the Government Obligations Money
Market Fund, $106.04 for the Cash Management Fund and $7,219.33 for
the Treasury Instruments Money Market Fund II and $109883.32 for the
Trust in the aggregate. As of December 21, 1995, Trustee 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,
the Adviser, FDISG and their affiliates under their respective
agreements with the Trust, the Trust itself requires no employees in
addition to its Officers.
The following table sets forth certain information regarding the
compensation of the Trust's Trustees during the fiscal year ended
January 31, 1996. No executive officer or person affiliated with the
Trust received compensation from the Trust during the fiscal year
ended January 31, 1996 in excess of $60,000.
COMPENSATION TABLE
Name of
Person and
Position
Aggregate
Compensation
from the
Trust
Pension or
Retirement
Benefits Accrued
as Part of Trust
Expenses
Estimated
Annual
Benefits
Upon
Retirement
Total
Compensation
From the
Trust and
Fund Complex
Paid to
Trustees*
James A.
Carbone,
Co-Chairman
of the Board
and Trustee
$0
$0
N/A
$0 (2)
Andrew
Gordon
Co-Chairman
of the
Board,
Trustee and
President
$0
$0
N/A
$0 (2)
Charles
Barber,
Trustee
$25,000
$0
N/A
$25,000(1)
Burt N.
Dorsett,
Trustee
$25,000
$0
N/A
$52,500(2)
Edward J.
Kaier,
Trustee
$25,000
$0
N/A
$25,000(1)
S. Donald
Wiley,
Trustee
$25,000
$0
N/A
$25,000(1)
__________________________________
* Represents the total compensation paid to such persons by all
investment companies (including the Trust) from which such person
received compensation during the fiscal year ended January 31, 1996
that are considered part of the same "fund complex" as the Trust
because they have common or affiliated investment advisers. The
parenthetical number represents the number of such investment
companies, including the Trust.
Distributor
Lehman Brothers acts as the Distributor of each Funds' 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"). As of December 31, 1995, FMR Corp. beneficially
owned approximately 11.7%, Nippon Life Insurance Company beneficially
owned approximately 5.0% and Prudential Asset Management beneficially
owned approximately 5.0% of the outstanding voting securities 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 the
Funds (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
the Funds to Lehman Brothers 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
Lehman Brothers Global Asset Management, Inc. serves as the
Investment Adviser to each of the Funds. The Adviser, located at 3
World Financial Center, New York, New York 10285, is a wholly-owned
subsidiary of Holdings. The investment advisory agreements provide
that the Adviser is responsible for all investment activities of the
Funds, including executing portfolio strategy, effecting Fund
purchase and sale transactions and employing professional portfolio
managers and security analysts who provide research for the Funds.
Investment personnel of the Adviser may invest in securities for
their own account pursuant to a code of ethics that establishes
procedures for personal investing and restricts certain transactions.
The Investment Advisory Agreement with respect to each of the
Funds was most recently approved by the Trust's Board of Trustees,
including a majority of the Trust's "non-interested" Trustees, on
December 5, 1995 and by shareholders on January 31, 1996. The
Investment Advisory Agreements commenced on February 1, 1996 and will
continue until February 1, 1998 unless terminated or amended prior to
that date according to its terms. The Investment Advisory Agreements
will continue initially for a two-year period and automatically for
successive annual periods thereafter 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).
Effective February 1, 1996, as compensation for the Adviser's
services rendered to the Funds, the Adviser is entitled to a fee,
computed daily and paid monthly, at the annual rate of .20% of the
average daily net assets of the Fund. Prior to February 1, 1996, the
Adviser was entitled to a fee, computed daily and paid monthly, at
the annual rate of .10% of the average net assets of the Fund. For
the fiscal period ended January 31, 1994 and the fiscal years ended
January 31, 1995 and 1996, the Adviser was entitled to receive
advisory fees in the following amounts: the Government Obligations
Money Market Fund, $72,100, $86,255 and $87,393, respectively, the
Cash Management Fund, $27,323, $11,931 and $2,930, respectively, and
the Treasury Instruments Money Market Fund II, $96,737, $357,350
$408,361, respectively. Waivers by the Adviser of advisory fees and
reimbursement of expenses to maintain the Funds' operating expense
ratios at certain levels amounted to: the Government Obligations
Money Market Fund, $72,100 and $163,039, respectively, for the fiscal
period ended January 31, 1994, $48,079 and $0, respectively, for the
fiscal year ended January 31, 1995 and $33,786 and $0.00,
respectively, for the fiscal year ended January 31, 1996; the Cash
Management Fund, $27,323 and $130,650, respectively, for the fiscal
year ended January 31, 1994, $11,931 and $45,500, respectively, for
the fiscal year ended January 31, 1995, and $2,930 and $37,849,
respectively, for the fiscal year ended January 31, 1996; and the
Treasury Instruments Money Market Fund II, $96,737 and $173,335,
respectively for the fiscal period ended January 31, 1994, $231,451
and $0, respectively, for the fiscal year ended January 31, 1995 and
$29,150 and $0.00, respectively, for the fiscal year ended January
31, 1996. In order to maintain competitive expense ratios during
1996 and thereafter, the 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
On February 16, 1996, the principal holders of Class A Shares of
Government Obligations Money Market Fund were as follows: Bank of
Boston, 150 Royal Street, Canton, MA 02021, 36.46% shares held of
record; Oster & Co., P.O. Box 1338, Victoria, TX 77902, 15.46% shares
held of record; Old Kent Bank and Trust Company, Investment
Management Division, Second Floor Monroe Building, 111 Lyon N.W.,
Grand Rapids, MI 49503, 13.40% shares held of record; FMCO FBO Cash
Management, One Financial Plaza, Holland, MI 49423, 7.90% shares
held of record; and Hardware Wholesalers, Inc., 6502 Nelson Road,
Fort Wayne, IN 46803, 6.63% shares held of record. The principal
holder of Class B Shares of Government Obligations Money Market Fund
as of February 16, 1996 was Hare & Co., One Wall Street, New York, NY
10286, with 98.80% shares held of record. The principal holder of
Class C Shares of Government Obligations Money Market Fund as of
February 16, 1996 was FNB Nominee Company, 614 Philadelphia Street,
Indiana, PA 15701, with 99.99% shares held of record.
As of February 16, 1996, there were no investors in Class E
Shares of Government Obligations Money Market Fund and all
outstanding shares were held by Lehman Brothers.
Principal holders of Class A Shares of Treasury Instruments
Money Market Fund II as of February 16, 1996, were as follows: Health
Care Service Corporation, 233 N. Michigan Avenue, 10th Floor,
Chicago, IL 60601, 27.51% shares held of record; BSDT as Escrow Agent
for APEX Property and Track Exchange, Inc., 1606Y, One Cabot Road,
Medford, MA 02155, 13.83% shares held of record; State
Street/Securities Lending/Reinvested Earnings, 2 International Place,
Boston, MA 02110, 10.26% shares held of record; Hybridon, Inc, 155
Fortune Boulevard, Milford, MA 01757, 10.05% shares held of record;
LBF as Pledge for Stratton Partners, 225 W. Washington Street,
Chicago, IL 60606, 7.42% shares held of record; and Boston & Co., 3
Mellon Bank Center, Pittsburgh, PA 15259, 6.04% shares held of
record. The principal holders of Class B shares of Treasury
Instruments Money Market Fund II as of February 16, 1996 were as
follows: HCA/Federal Settlement Escrow Account, 77 Water Street, New
York, New York 10005, 74.51% shares held of record; and Harris Trust
Co. of NY as agent for Unimed Pharmaceuticals, Inc., 77 Water Street,
New York, NY 10005, 8.11% shares held of record. The principal
holder of Class C Shares of Treasury Instruments Money Market Fund II
as of February 16, 1996 was Perusahaan Petambangan Minyak Dan Gas
Bumi Negara ( Pertamina), 350 Park Avenue, New York, NY 10022-6022,
with 99.99% shares held of record.
As of February 16, 1996, there were no investors in the Class E
Shares of Treasury Instruments Money Market Fund II and all
outstanding shares were held by Lehman Brothers.
As of February 16, 1996, there were no investors in the Class A,
Class B, or Class C Shares of Cash Management Fund 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
FDISG, 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, FDISG has agreed to provide the following services:
(i) assist generally in supervising the Funds' operations, providing
and supervising the operation of an automated data processing system
to process purchase and redemption orders, providing information
concerning the Funds to their shareholders of record, handling
investor problems, supervising the services of employees and
monitoring the arrangements pertaining to the Funds' 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 the
Funds' shares for sale under state securities laws. FDISG 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. FDISG pays Boston Safe Deposit and Trust
Company ("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"), an indirect, wholly-owned subsidiary of Mellon Bank
Corporation ("Mellon"), served as Administrator of the Funds. On May
6, 1994, FDISG acquired TBCA's third party mutual fund administration
business from Mellon, and each Fund's administration agreement with
TBCA was assigned to FDISG. For the fiscal period ended January 31,
1994 and the fiscal years ended January 31, 1995 and 1996 the
Administrator was entitled to receive administration fees in the
following amounts: the Government Obligations Money Market Fund,
$72,100, $86,255 and $87,393, respectively, the Cash Management Fund,
$27,323, $11,931 and $2,930, respectively, and the Treasury
Instruments Money Market Fund II, $96,737, $357,350 and 408,361,
respectively. Waivers by the Administrator of administration fees
and reimbursement of expenses to maintain the Funds' operating
expense ratios at certain levels amounted to: the Government
Obligations Money Market Fund, $72,100 and $19,087, respectively for
the fiscal period ended January 31, 1994, $64,842 and $0,
respectively, for the fiscal year ended January 31, 1995, and $64,487
and $0.00 for the fiscal year ended January 31, 1996; the Cash
Management Fund, $27,323 and $9,381, respectively for the fiscal
period ended January 31, 1994, $9,110 and $0, respectively, for the
fiscal year ended January 31, 1995, and $2,164 and $0.00 for the
fiscal year ended January 31, 1996; and the Treasury Instruments
Money Market Fund II, $96,737 and $42,443, respectively for the
fiscal period ended January 31, 1994, $269,369 and $0, respectively,
for the fiscal year ended January 31, 1995 and $301,631 and $0.00 for
the fiscal year ended January 31, 1996. In order to maintain
competitive expense ratios during 1996 and thereafter, the Adviser
and Administrator have agreed to waive fees or 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, FDISG maintains the
investor account records for the Trust, handles certain
communications between investors and the Trust, 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, FDISG receives a monthly fee based on average net
assets and is reimbursed for out-of-pocket expenses.
Custodian
Boston Safe, a wholly-owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, 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 FDISG 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,
Class C or Class E shares. The Funds will enter into an agreement
with each Service Organization whose customers ("Customers") are the
beneficial owners of Class B, Class C or Class E shares that requires
the Service Organization to provide certain services to Customers in
consideration of the Funds' payment of .25%, .35%, or .15%,
respectively, of the average daily net asset value of the respective
Class beneficially owned by the 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 the Funds on behalf of
Customers; (iii) providing information periodically to Customers
showing their positions in 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 the Funds (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 check writing 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 a 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. Holders of Class E shares
of a Fund will receive the services set forth in (i) and (v) above.
A Service Organization, and at its option, may also provide to its
Customers of Class E shares services including: those services set
forth in (ii), (iii), (iv), (vi), (vii) and (viii) above and the
optional services set forth in (a), (b) and (c) above.
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 under Rule 12b-1 of the 1940 Act.
Under this Plan, the Board of Trustees reviews, at least quarterly, a
written report of the amounts expended under the Fund's agreements
with Service Organizations and the purposes for which the
expenditures were made. In addition, the Funds' 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 the Funds' arrangements with
Service Organizations based on information provided by the Funds'
service contractors that there is a reasonable likelihood that the
arrangements will benefit the Funds and their investors by affording
the Funds greater flexibility in connection with the servicing of the
accounts of the beneficial owners of their shares in an efficient
manner. Any material amendment to the Funds' 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 the Funds' 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 fiscal year ended January 31, 1996, the following
service fees were paid by Government Obligations Money Market Fund:
Class B shares, $25,777.60, Class C shares, $3,066.65, and Class E
shares, $0.00. For the fiscal year ended January 31, 1995, the
following service fees were paid by Government Obligations Money
Market Fund: Class B shares, $19,702; no service fees were paid with
respect to Class C or Class E shares. For the period February 8,
1993 (commencement of operations) to January 31, 1994, Government
Obligations Money Market Fund paid $771 in service fees with respect
to its Class B Shares; no service fees were paid with respect to
Class C shares. For the fiscal year ended January 31, 1996, the
following service fees were paid by Cash Management Fund: Class B
shares, $25.62, Class C shares, $0.00, and Class E shares, $0.00.
For the fiscal year ended January 31, 1995, the following service
fees were paid by Cash Management Fund: Class B Shares, $26; Class C
Shares, $2; no service fees were paid with respect to Class E shares.
For the period February 8, 1993 (commencement of operations) to
January 31, 1994, Cash Management Fund did not pay any service fees.
For the fiscal year ended January 31, 1996, the following service
fees were paid by Treasury Instruments Money Market Fund II: Class B
shares, $80,741.32, Class C shares, $34,595.40, and Class E shares,
$0.00. For the fiscal year ended January 31, 1995, the following
service fees were paid by Treasury Instruments Money Market Fund II:
Class B Shares, $83,224; no service fees were paid with respect to
Class C or Class E shares. For the period February 8, 1993
(commencement of operations) to January 31, 1994, Treasury
Instruments Money Market Fund II paid $35,867 in service fees with
respect to its Class B Shares; no service fees were paid with respect
to Class C Shares. Class E Shares were not offered by the Funds
during the fiscal period ended January 31, 1994.
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, 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. The Adviser and FDISG 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 the particular Fund are registered or
qualified for sale to the public, they will reimburse such Fund for
any excess to the extent required by such regulations in the same
proportion that each of their fees bears to the Fund's aggregate fees
for investment advice and administrative services. Unless otherwise
required by law, such reimbursement would be accrued and paid on the
same basis that the advisory and administration fees are accrued and
paid by such Fund. To the Funds' 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 net assets, two
percent (2%) of the next $70 million of the average net assets and
one and one-half percent (1 1/2%) of the remaining average net
assets.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting each Fund and its investors that are not
described in each Fund's Prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the Funds or their
investors or possible legislative changes, and the discussion here
and in each Fund's 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 of the Trust 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, each Fund
must satisfy the distribution requirement described in its
Prospectus, derive at least 90% of its gross income for the year from
certain qualifying sources, comply with certain diversification tests
and derive less than 30% of its gross income from the sale or other
disposition of securities and certain other investments held for less
than three months. Interest (including original issue discount and
accrued market discount) received by a Fund upon 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 this 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.
A 4% nondeductible excise tax is imposed on regulated investment
companies that fail to distribute currently an amount equal to
specified percentages of their ordinary taxable income and capital
gain net income (excess of capital gains over capital losses). Each
Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and any capital gain net income 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 its taxable
income will be subject to federal income tax at regular corporate
rates without any deduction for distributions to Fund investors. In
such event, dividend distributions would be taxable as ordinary
income to the Fund's investors to the extent of its current and
accumulated earnings and profits, and would be eligible for the
dividends received deduction in the case of corporate shareholders.
Each Fund will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or 31% of gross
proceeds realized upon sale paid to any investor who has failed to
provide a correct tax identification number in the manner required,
or who is subject to withholding by the Internal Revenue Service for
failure to properly include on his return payments of taxable
interest or dividends, or who has failed to certify to the Fund that
he is not subject to backup withholding when required to do so or
that he is an "exempt recipient."
Depending upon the extent of the Funds' activities in states and
localities in which their offices are maintained, in which their
agents or independent contractors are located or in which they are
otherwise deemed to be conducting business, the Funds may be subject
to the tax laws of such states or localities. In addition, in those
states and localities which have income tax laws, the treatment of
the Funds and their investors under such laws may differ from their
treatment under federal income tax laws. Investors are advised to
consult their tax advisers concerning the application of state and
local taxes.
The foregoing discussion is based on federal tax laws and
regulations which are in effect on the date of this Statement of
Additional Information; such laws and regulations may be changed by
legislative or administrative action.
DIVIDENDS
Net income of each of the Funds for dividend purposes consists
of (i) interest accrued and original issue discount earned on the
Fund's assets, (ii) plus the amortization of market discount and
minus the amortization of market premium on such assets, (iii) less
accrued expenses directly attributable to the Fund and the general
expenses (e.g., legal, accounting and trustees' fees) of the Trust
prorated to the Fund on the basis of its relative net assets. In
addition, Class B, Class C and Class E 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." With respect to the Cash Management Fund dividends
may be based on estimates of net interest income for the Fund.
Actual income may differ from estimates and differences, if any, will
be included in the calculation of subsequent dividends.
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 either
of these portfolios, it is possible that the portfolio's net asset
value per share may fall below $1.00.
ADDITIONAL YIELD INFORMATION
The "yields" and "effective yields" are calculated separately
for each class of shares of each Fund and in accordance with the
formulas prescribed by the SEC. The seven-day yield for each class of
shares is calculated by determining the net change in the value of a
hypothetical pre-existing account in the particular 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, an effective annualized yield quotation may be computed
on a compounded basis with respect to each class of its shares by
adding 1 to the base period return for the class involved (calculated
as described above), raising that sum to a power equal to 365/7, and
subtracting 1 from the result.
Similarly, based on the calculations described above, the Funds'
30-day (or one-month) yields and effective yields may also be
calculated. Such yields refer to the average daily income generated
over a 30-day (or one-month) period, as appropriate.
Based on the period ended January 31, 1996, the yields and
effective yields for each of the Funds were as follows:
7-day
Yield
7-day
Effectiv
e
Yield
Government Obligations Money Market
Fund
Class A Shares
5.46
5.60%
Class B Shares
5.21
5.34%
Class C Shares
5.11
5.23%
Class E Shares
5.31
5.44%
Class A Shares*
5.28%
5.41%
Class B Shares*
5.03
5.15%
Class C Shares*
4.93%
5.04%
Class E Shares*
5.13%
5.25%
Cash Management Fund
Class A Shares
5.51%
5.65%
Class A Shares*
4.01%
4.08%
Treasury Instruments Money Market Fund
II
Class A Shares
5.39%
5.53%
Class B Shares
5.14%
5.26%
Class C Shares
5.04%
5.16%
Class E Shares
5.24%
5.37%
Class A Shares*
5.27&
5.40%
Class B Shares*
5.02%
5.14%
Class C Shares*
4.92%
5.03%
Class E Shares*
5.12%
5.24%
**estimated yield without fee waivers and/or expense reimbursements
Class B, Class C and Class E Shares bear the expenses of fees
paid to Service Organizations. As a result, at any given time, the
net yield of Class B, Class C and Class E Shares could be up to .25%,
.35%, and .15% lower than the net yield of Class A Shares,
respectively.
From time to time, in advertisements or in reports to investors,
the performance of the Funds 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
yields of the Funds may be compared to the 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.
The Funds' yields will fluctuate and any quotation of yield
should not be considered as representative of the future performance
of the Funds. Since yields fluctuate, yield data cannot necessarily
be used to compare an investment in the Funds' 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. Investors 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 net of waivers
and expense reimbursements and market conditions. Any fees charged by
Service Organizations or other institutional investors with respect
to customer accounts in investing in shares of the Funds will not be
included in calculations of yield; such fees, if charged, would
reduce the actual yield from that quoted.
ADDITIONAL DESCRIPTION CONCERNING FUND 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 Prospectuses for the Funds, holders of each
Fund's shares, will vote in the aggregate and not by class on all
matters, except where otherwise required by law and except that for
each Fund only that Fund's Class B, Class C and Class E shares will
be entitled to vote on matters submitted to a vote of shareholders
pertaining to the 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 auditors, 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.
On August 22, 1994, the Cash Management Fund changed its name
from the 100% Government Money Market Fund to the Cash Management
Fund.
COUNSEL
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd
Street, New York, New York 10022, serves as counsel to the Trust and
will pass upon the legality of the shares offered hereby. Willkie
Farr & Gallagher also serves as counsel to Lehman Brothers.
INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, serve as independent
auditors to the Fund and render an opinion on each 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, 1995 and its Semi-Annual Report for the six-months ended July 31,
1995 are incorporated into this Statement of Additional Information
by reference in their entirety.
MISCELLANEOUS
Shareholder Vote
As used in this Statement of Additional Information and the
Prospectuses for the Funds, a "majority of the outstanding shares" of
a Fund or of any other portfolio means the lesser of (1) 67% of the
shares of such Fund (irrespective of class) or of the portfolio
represented at a meeting at which the holders of more than 50% of the
outstanding shares of such Fund or portfolio are present in person or
by proxy or (2) more than 50% of the outstanding shares of such 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 of the Funds 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 of a Fund of any shareholder of the Fund held personally
liable solely by reason of his being or having been a shareholder and
not because of his 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 its investment 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, Officer or agent 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 his own bad
faith, willful misfeasance, gross negligence in the performance of
his duties or by reason of reckless disregard of his 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 by him in connection
with the defense or disposition of any proceeding in which he may be
involved or with which he may be threatened by reason of his 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 person would not be entitled to indemnification had he been a
Trustee.
Municipal Money Market Fund
Tax-Free Money Market Fund
Investment Portfolios Offered By
Lehman Brothers Institutional Funds Group Trust
Statement of Additional Information
May 30, 1995
as Supplemented February 1, 1996 and February 16, 1996
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 30, 1995,
as supplemented on February 1, 1996 and February 16, 1996, 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
9
Management of the Funds
11
Additional Information Concerning Taxes
19
Dividends
21
Additional Yield Information
21
Additional Description Concerning Shares
23
Counsel
23
Independent Auditors
23
Financial Statements
24
Miscellaneous
24
Appendix
A-1
THE TRUST
Lehman Brothers Institutional Funds Group Trust (the "Trust") is
an 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, Lehman
Brothers Global Asset Management, Inc. (the "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, the Tax-Free Money Market Fund invests only
in First Tier Eligible Securities whereas the Municipal Money Market
Fund may invest in Eligible Securities that are not First Tier).
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
INFORMATION 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 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,
the 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, the Adviser 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, the Adviser
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 the Adviser. 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 the Adviser 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, the Adviser 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 the Adviser
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, participation's, 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 Prospectuses, "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 the Adviser, in its sole discretion, believes such
practice to be in a Fund's interest.
The Funds may seek profits through short-term trading. Each
Fund's annual portfolio turnover will be relatively high, but
brokerage commissions are normally not paid on money market
instruments and the Funds' portfolio turnover is not expected to have
a material effect on the net incomes of the Funds. 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, the Adviser 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, the
Adviser 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 the Adviser 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 connection 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
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.
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 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.
The Adviser will monitor on an ongoing basis the liquidity of
restricted securities under the supervision of the Board of Trustees.
In reaching liquidity decisions with respect to Rule 144A securities,
the 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 that the Fund may (i) borrow money for
temporary or emergency purposes (not for leveraging or investment)
from banks or, subject to specific authorization by the SEC, from
funds advised by the Adviser or an affiliate of the Adviser, and (ii)
engage in reverse repurchase agreements, provided that (i) and (ii)
in combination do not exceed one-third of the value of the particular
Fund's total assets (including the amount borrowed) less liabilities
(other than borrowings). A Fund may not mortgage, pledge or
hypothecate its assets except in connection with such borrowings and
reverse repurchase agreements and then only in amounts not exceeding
one-third of the value of the particular Fund's total assets.
Additional investments will not be made when borrowings exceed 5% of
the Fund's assets.
3. Make loans, except that a Fund may (i) purchase or hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements for securities, (iii) lend
portfolio securities and (iv) subject to specific authorization by
the SEC, lend money to other funds advised by the Adviser or an
affiliate of the Adviser.
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 15% (or such lesser amount as set by state securities
laws) 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
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
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 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 or Class E 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, Class C or Class E
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 ("NYSE") is closed, other than
customary weekend and holiday closings, or during which trading on
the NYSE 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 separately
for each class by dividing the total value of the assets belonging to
such Fund attributable to a class, less the value of any class-
specific liabilities charged to such Fund, by the total number of
that Fund's shares of that class outstanding. "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
Fund. 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
Position with the
Trust
Principal Occupations During
Past 5
Years and Other Affiliations
JAMES A. CARBONE (1)
3 World Financial
Center
New York, NY 10285
Age: 43
Co-Chairman of the
Board and Trustee
Director, Lehman Brothers
Global Asset Management
K.K.; Managing Director,
Lehman Brothers Inc.;
formerly Branch Manager,
Lehman Brothers Japan Inc.;
formerly Chairman, Lehman
Brothers Asia Holdings
Limited; and formerly
Manager -- Debt Syndicate,
Origination & Corporate
Bonds, Lehman Brothers Inc.
ANDREW GORDON (1)
3 World Financial
Center
New York, NY 10285
Age: 42
Co-Chairman of the
Board, Trustee and
President
Managing Director, Lehman
Brothers.
CHARLES F.
BARBER (2)(3)
66 Glenwood Drive
Greenwich, CT 06830
Age: 78
Trustee
Consultant; formerly
Chairman of the Board,
ASARCO Incorporated.
BURT N.
DORSETT (2)(3)
201 East 62nd Street
New York, NY 10022
Age: 65
Trustee
Managing Partner, Dorsett
McCabe Capital Management,
Inc., an investment
counseling 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
Age: 50
Trustee
Partner with the law firm of
Hepburn Willcox Hamilton &
Putnam.
S. DONALD
WILEY (2)(3)
USX Tower
Pittsburgh, PA 15219
Age: 69
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.
JOHN M. WINTERS
3 World Financial
Center
New York, NY 10285
Age: 46
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.
NICHOLAS RABIECKI,
III
3 World Financial
Center
New York, NY 10285
Age: 39
Vice President and
Investment Officer
Vice President and Senior
Portfolio Manager, Lehman
Brothers Global Asset
Management, Inc.; formerly
Senior Fixed Income
Portfolio Manager with Chase
Private Banking.
MICHAEL C. KARDOK
One Exchange Place
Boston, MA 02109
Age: 36
Treasurer
Vice President, First Data
Investor Services Group,
Inc.; prior to May 1994,
Vice President, The Boston
Company Advisors, Inc.
PATRICIA L. BICKIMER
One Exchange Place
Boston, MA 02109
Age: 42
Secretary
Vice President and Associate
General Counsel, First Data
Investor 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.
Messrs. Carbone, Gordon and Dorsett serve as Trustees or
Directors of other investment companies for which Lehman Brothers,
the Adviser or one of their affiliates serve as distributor and
investment adviser.
No employee of Lehman Brothers, the Adviser or First Data
Investor Services Group, Inc. ("FDISG") (formerly named The
Shareholder Services Group, Inc.), the Trust's Administrator and
Transfer Agent, 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, the
Adviser or FDISG 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 year ended January 31, 1996, such fees and
expenses totaled $2,589.89 for the Municipal Money Market Fund and
$1,227.56 for the Tax-Free Money Market Fund and $109,883.32 for the
Trust in the aggregate. As of January 31, 1996, 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,
the Adviser, FDISG and their affiliates under their respective
agreements with the Trust, the Trust itself requires no employees in
addition to its Officers.
The following table sets forth certain information regarding the
compensation of the Trust's Trustees during the fiscal year ended
January 31, 1996. No executive officer or person affiliated with the
Trust received compensation from the Trust during the fiscal year
ended January 31, 1996 in excess of $60,000.
COMPENSATION TABLE
Name of
Person and
Position
Aggregate
Compensation
from the
Trust
Pension or
Retirement
Benefits Accrued
as Part of Trust
Expenses
Estimated
Annual
Benefits
Upon
Retirement
Total
Compensation
From the
Trust and
Fund Complex
Paid to
Trustees*
James A.
Carbone,
Co-Chairman
of the Board
and Trustee
$0
$0
N/A
$0 (2)
Andrew
Gordon,
Co-Chairman
of the Board,
Trustee and
President
$0
$0
N/A
$0 (2)
Charles
Barber,
Trustee
$25,000
$0
N/A
$25,000(1)
Burt N.
Dorsett,
Trustee
$25,000
$0
N/A
$52,500(2)
Edward J.
Kaier,
Trustee
$25,000
$0
N/A
$25,000(1)
S. Donald
Wiley,
Trustee
$25,000
$0
N/A
$25,000(1)
__________________________________
* Represents the total compensation paid to such persons by all
investment companies (including the Trust) from which such person
received compensation during the fiscal year ended January 31, 1996
that are considered part of the same "fund complex" as the Trust
because they have common or affiliated investment advisers. The
parenthetical number represents the number of such investment
companies, including the Trust.
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"). As of December 31, 1995, FMR Corp. beneficially
owned approximately 11.7%, Nippon Life Insurance Company beneficially
owned approximately 5.0% and Prudential Asset Management beneficially
owned approximately 5.0% of the outstanding voting securities 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 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
Lehman Brothers Global Asset Management, Inc. serves as the
Investment Adviser to each of the Funds. The Adviser, located at 3
World Financial Center, New York, New York 10285, is a wholly-owned
subsidiary of Holdings. The investment advisory agreements provide
that the Adviser 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.
Investment personnel of the Adviser may invest in securities for
their own account pursuant to a code of ethics that establishes
procedures for personal investing and restricts certain transactions.
The Investment Advisory Agreement with respect to each of the
Funds was most recently approved by the Trust's Board of Trustees,
including a majority of the Trust's "non-interested" Trustees, on
December 5, 1995 and by shareholders on January 31, 1996. The
Investment Advisory Agreements commenced on February 1, 1996 and will
continue until February 1, 1998 unless terminated or amended prior to
that date according to its terms. The Investment Advisory Agreements
will continue initially for a two-year period and automatically for
successive annual periods thereafter 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).
Effective February 1, 1996, as compensation for the Adviser's
services rendered to the Fund, the Adviser is entitled to a fee,
computed daily and paid monthly, at the annual rate of .20% of the
average daily net assets of the Fund. Prior to February 1, 1996, the
Adviser was entitled to a fee, computed daily and paid monthly, at
the annual rate of .10% of the average net assets of the Fund. For
the fiscal period ended January 31, 1994 and the fiscal years ended
January 31, 1995 and 1996, the Adviser was entitled to receive
advisory fees in the following amounts: the Municipal Money Market
Fund, $103,318, $223,512 and $172,515, respectively, and the Tax-Free
Money Market Fund, $15,640, $59,392 and $76,037, respectively.
Waivers by the Adviser 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, for the fiscal period ended January 31, 1994, $150,715
and $0, respectively, for the fiscal year ended January 31, 1995 and
$44,039 and $0.00, respectively, for the fiscal year ended January
31, 1996; and the Tax-Free Money Market Fund $15,640 and $139,234,
respectively for the fiscal period ended January 31, 1994, $59,392
and $9,042, respectively, for the fiscal year ended January 31, 1995
and $48,697 and $0.00, respectively, for the fiscal year ended
January 31, 1996. In order to maintain competitive expense ratios
during 1996 and thereafter, the 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
On February 16, 1996, the principal holders of Class A Shares of
Municipal Money Market Fund were as follows: Society Asset
Management, Inc., 127 Public Square, 19th Floor, Cleveland, OH 44114,
14.07% shares held of record; Synopsys Inc., 700 East Middlefield
Road, Mountain View, CA 94043, 12.70% shares held of record; Publix
Supermarket, P.O. Box 407, Lakeland, FL 33802, 11.22% shares held of
record; Oracle Corporation, 500 Oracle Parkway, Box 659506, Redwood
Shore, CA 94065, 9.95% shares held of record; Deposit Guaranty
National Bank, Trust Division, P.O. Box 23100, Jackson, MS 39225-
3100, 9.20% shares held of record; and The Gap, Inc., 900 Cherry
Avenue, San Bruno, CA 94066, 5.23% shares held of record. The
principal holder of Class C Shares of Municipal Money Market Fund as
of February 16, 1996 was FNB Nominee Company, 614 Philadelphia
Street, Indiana, PA 15701, with 99.99% shares held of record.
As of February 16, 1996, there were no investors in Class B or
Class E Shares of Municipal Money Market Fund and all outstanding
shares were held by Lehman Brothers.
Principal holders of Class A Shares of Tax-Free Money Market
Fund as of February 16, 1996 were as follows: Trulin & Co., P.O. Box
1412, Rochester, NY 14603, 19.80% shares held of record; Brooklyn
Union Gas 1996 Series Project Fund, 1 Metrotech Center, Brooklyn, NY
11201, 13.36% shares held of record; Bank of Boston, 150 Royal
Street, Canton, MA 02021, 9.70% shares held of record; Edrayco, c/o
First National Bank of Gainsville, P.O. Box 937, Gainsville, GA
30503, 7.98% shares held of record; Douglas S. Schatz, c/o Lehman
Brothers, 1009 Lochland Court, Fort Collins, CO 80524-9644, 6.79%
shares held of record; Trust Company of Knoxville, P.O. Box 789,
Knoxville, TN 37901-0789, 6.19% shares held of record; and Commerce
Company, P.O. Box 17089, Fort Worth, TX 76102, 5.16% shares held of
record.
As of February 16, 1996, there were no investors in Class B,
Class C, or Class E Shares of Tax-Free Money Market Fund 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
FDISG, 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, FDISG 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. FDISG 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. FDISG pays Boston Safe Deposit and Trust
Company ("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,
FDISG acquired TBCA's third party mutual fund administration business
from Mellon, and each Fund's administration agreement with TBCA was
assigned to FDISG. For the fiscal period ended January 31, 1994 and
the fiscal years ended January 31, 1995 and 1996, the Administrator
was entitled to receive administration fees in the following amounts:
the Municipal Money Market Fund, $103,318, $223,512 and $172,515,
respectively, and the Tax-Free Money Market Fund, $15,640, $59,392
and $76,037, respectively. 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, for
the fiscal period ended January 31, 1994, $171,438 and $0,
respectively, for the fiscal year ended January 31, 1995, and
$127,184 and $0.00, respectively, for the fiscal year ended January
31, 1996; and the Tax-Free Money Market Fund, $15,640 and $10,485,
respectively, for the fiscal period ended January 31, 1994, $44,947
and $0, respectively, for the fiscal year ended January 31, 1995, and
$56,170 and $0.00, respectively, for the fiscal year ended January
31, 1996. In order to maintain competitive expense ratios during
1996 and thereafter, the 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, FDISG maintains the
investor account records for the Trust, handles certain
communications between investors and the Trust, 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, FDISG receives a monthly fee based on average net
assets and is reimbursed for out-of-pocket expenses.
Custodian
Boston Safe, 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 FDISG 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,
Class C or Class E shares. The Fund will enter into an agreement
with each Service Organization whose customers ("Customers") are the
beneficial owners of Class B, Class C or Class E shares and that
requires the Service Organization to provide certain services to
Customers in consideration of such Fund's payment of .25%, .35 or
.15%, 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. Holders of Class E
shares of a Fund will receive the services set forth in (i) and (v),
above. A Service Organization, at its option, may also provide to
its Customers of Class E shares servicing including those services
set forth in (ii), (iii), (iv), (vi), (vii) and (viii) above and the
optional services set forth in (a), (b) and (c), above.
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 fiscal year ended January 31, 1996, the following
service fees were paid by Tax-Free Money Market Fund: Class B
shares, $0.00, Class C shares, $5,328.63, and Class E shares, $0.00.
For the fiscal year ended January 31, 1995, the Tax-Free Money Market
Fund paid $29 in service fees with respect to its Class B shares; no
service fees were paid by the Fund with respect to Class C or Class E
shares. For the fiscal year ended January 31, 1996, the following
service fees were paid by Municipal Money Market Fund: Class B
shares, $14.40, Class C shares, $0.00, and Class E shares, $0.00.
For the fiscal year ended January 31, 1995, the Municipal Money
Market Fund did not pay any service fees. For the fiscal period
ended 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 Administrator, 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. The
Adviser and FDISG 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 net assets, two percent (2%) of the next $70 million
of the average annual net and one and one-half percent (1 1/2%) of
the remaining average 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,
Class C and Class E 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 and
in accordance with the formulas prescribed by the SEC. 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, 1996, 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
Municipal Money Market Fund
Class A Shares
3.51%
3.57%
5.09%
Class B Shares
3.26%
3.31%
4.72%
Class C Shares
3.16%
3.21%
4.58%
Class E Shares
3.36%
3.41%
4.87%
Class A Shares*
3.40%
3.45%
4.93%
Class B Shares*
3.15%
3.20%
4.57%
Class C Shares*
3.05%
3.09%
4.42%
Class E Shares*
3.25%
3.30%
4.71%
Tax-Free Money Market Fund
Class A Shares
3.54%
3.60%
5.13%
Class B Shares
3.29%
3.34%
4.77%
Class C Shares
3.19%
3.24%
4.62%
Class E Shares
3.39%
3.44%
4.91%
Class A Shares*
3.41%
3.46%
4.94%
Class B Shares*
3.16%
3.21%
4.58%
Class C Shares*
3.06%
3.10%
4.43%
Class E Shares*
3.26%
3.31%
4.72%
*estimated yield without fee waivers and/or expense reimbursements
Note: Tax-equivalent yields assume a maximum Federal Tax Rate of 31%.
Class B, Class C and Class E Shares bear the expenses of fees
paid to Service Organizations. As a result, at any given time, the
net yield of Class B, Class C and Class E Shares could be up to .25%,
.35% and .15% lower than the net yield of Class A Shares,
respectively.
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, Class C and Class E 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 to the Trust and will pass upon the
legality of the shares offered hereby. Willkie Farr & Gallagher also
serves as counsel to Lehman Brothers.
INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, serve as auditors to
each Fund and render an opinion on each 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 year ended January 31,
1995 and its Semi-Annual Report for the six-months ended July 31,
1995 are incorporated into this Statement of Additional Information
by reference in their 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 of 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
Standard & Poor's, a division of The McGraw-Hill Companies
("Standard & Poor's) commercial paper rating is a current assessment
of the likelihood of timely payment of debt considered short-term in
the relevant market. 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 short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an
original maturity not exceeding one year. 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 ability for repayment of senior
short-term debt 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 ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many
of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative
liquidity is maintained.
The two highest rating categories of Duff & Phelps for
investment grade commercial paper are "D-1" and "D-2." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the
highest rating category. The following summarizes the two highest
rating categories used by Duff & Phelps for commercial paper:
"D-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.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
"D-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 generally 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 some of the 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 short-term ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity
of one year or less. 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. Where issues possess a particularly strong credit
feature a rating of "A1+" is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
Municipal Long-Term Debt Ratings
The following summarizes the 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 the highest rated
issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for debt in this category than in
higher-rated categories.
"BB," "B," "CCC," "CC," and "C" - Debt that possesses one of
these ratings is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay
principal. "BB" indicates the least degree of speculation and "CCC"
the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is also used upon
the filing of a bankruptcy petition if debt service payments are
jeopardized.
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 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.
"A" - Bonds possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and
principal ("Ba" indicates some speculative elements; "B" indicates a
general lack of characteristics of desirable investment; "Caa"
represents a poor standing; "Ca" represents obligations which are
speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Municipal 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.
Moody's applies numerical modifiers 1, 2 and 3 in generic
classification of "Aa" in its corporate bond rating system. The
modifier 1 indicates that the company 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 company ranks at the
lower end of its generic rating category.
Those municipal bonds in the "Aa" to "B" groups which Moody's
believes posses the strongest investment attributes are designated by
the symbols "Aa1," "A1," "Baa1," "Ba1," and "B1."
The following summarizes the 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.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in
periods of economic stress.
"BBB" - Debt possesses below average Protection factors but such
protection factors are still considered sufficient for prudent
investment. Considerable variability in risk is present during
economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although
below investment grade, debt rated "BB" is deemed likely to meet
obligations when due. Debt rated "B" possesses the risk that
obligations will not be met when due. Debt rated "CCC" is well below
investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing
within these major rating categories.
The following summarizes the 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+."
"A" - Bonds considered to be investment grade and of high credit
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.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest
and repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have an adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -Bonds that
possess one of these ratings are considered by Fitch to be
speculative investments. The ratings "BB" to "C" represent Fitch's
assessment of the likelihood of timely payment of principal and
interest in accordance with the terms of obligation for bond issues
not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment that bonds should be valued on the basis of the ultimate
recovery value in liquidation or reorganization of the obligor.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing
within these major rating categories.
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.
"A" - This designation indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations
with higher ratings.
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.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business economic or
financial conditions may lead to increased investment risk.
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 factors 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 strong
capacity to pay principal and interest. Those issues determined to
possess a very strong capacity to pay are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG").
Such ratings recognize the differences between short-term credit risk
and long-term risk. A short-term rating may also be assigned on an
issue having a demand feature. Such ratings will be designated as
"VMIG." The following summarizes the two highest ratings used by
Moody's Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There
is strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality.
Margins of protection are 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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