<PAGE> 1
THE GALAXY FUND
RETAIL A SHARES AND RETAIL B SHARES OF THE
EQUITY VALUE FUND, EQUITY GROWTH FUND,
EQUITY INCOME FUND, INTERNATIONAL EQUITY FUND,
SMALL COMPANY EQUITY FUND, ASSET ALLOCATION FUND,
SMALL CAP VALUE FUND AND GROWTH AND INCOME FUND
SUPPLEMENT DATED SEPTEMBER 4, 1997 TO
PROSPECTUS DATED FEBRUARY 28, 1997
INVESTMENT OBJECTIVES AND POLICIES
1. The last sentence in the second full paragraph under the
heading "International Equity Fund" on pages 16-17 of the Prospectus is amended
and restated to read as follows:
"Under normal market and economic conditions, no more than 20%
of the Fund's net assets will be invested in the aggregate in
the securities of issuers located in countries with emerging
economies or emerging securities markets."
2. The first sentence of the fourth paragraph under the
heading "Small Cap Value Fund" on page 18 of the Prospectus and the first
sentence of the fourth paragraph under the heading "Growth and Income Fund" on
pages 18-19 of the Prospectus are each amended and restated to read as follows:
"The Fund may invest up to 20% of its total assets in
securities of foreign issuers which are freely traded on United States
securities exchanges or in the over-the-counter market in the form of ADRs,
EDRs and GDRs."
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THE GALAXY FUND
TRUST SHARES OF THE
EQUITY VALUE FUND, EQUITY GROWTH FUND,
EQUITY INCOME FUND, INTERNATIONAL EQUITY FUND,
SMALL COMPANY EQUITY FUND, ASSET ALLOCATION FUND,
SMALL CAP VALUE FUND AND GROWTH AND INCOME FUND
SUPPLEMENT DATED SEPTEMBER 4, 1997 TO
PROSPECTUS DATED FEBRUARY 28, 1997
INVESTMENT OBJECTIVES AND POLICIES
1. The last sentence in the second full paragraph under the
heading "International Equity Fund" on pages 15-17 of the Prospectus is amended
and restated to read as follows:
"Under normal market and economic conditions, no more than 20%
of the Fund's net assets will be invested in the aggregate in
the securities of issuers located in countries with emerging
economies or emerging securities markets."
2. The first sentence of the fourth paragraph under the
heading "Small Cap Value Fund" on pages 18-19 of the Prospectus and the first
sentence of the fourth paragraph under the heading "Growth and Income Fund" on
pages 19-20 of the Prospectus are each amended and restated to read as follows:
"The Fund may invest up to 20% of its total assets in
securities of foreign issuers which are freely traded on United States
securities exchanges or in the over-the-counter market in the form of ADRs,
EDRs and GDRs."
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THE GALAXY FUND
TRUST SHARES OF THE
INTERNATIONAL EQUITY FUND
SUPPLEMENT DATED SEPTEMBER 4, 1997 TO
PROSPECTUS DATED FEBRUARY 28, 1997
INVESTMENT OBJECTIVE AND POLICIES
The last sentence in the second full paragraph under the
heading "In General" on pages 5-6 of the Prospectus is amended and restated to
read as follows:
"Under normal market and economic conditions, no more than 20%
of the Fund's net assets will be invested in the aggregate in
the securities of issuers located in countries with emerging
economies or emerging securities markets."
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THE GALAXY FUND
TRUST SHARES OF THE
GROWTH AND INCOME FUND
SUPPLEMENT DATED SEPTEMBER 4, 1997 TO
PROSPECTUS DATED FEBRUARY 28, 1997
INVESTMENT OBJECTIVE AND POLICIES
The first sentence of the fourth paragraph on page 5 of the
Prospectus is amended and restated to read as follows:
"The Fund may invest up to 20% of its total assets in
securities of foreign issuers which are freely traded on United States
securities exchanges or in the over-the-counter market in the form of American
Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") and Global
Depository Receipts ("GDRs")."
<PAGE> 5
THE GALAXY FUND
TRUST SHARES OF THE
SMALL CAP VALUE FUND
SUPPLEMENT DATED SEPTEMBER 4, 1997 TO
PROSPECTUS DATED FEBRUARY 28, 1997
INVESTMENT OBJECTIVE AND POLICIES
The first sentence of the fourth paragraph on page 5 of the
Prospectus is amended and restated to read as follows:
"The Fund may invest up to 20% of its total assets in
securities of foreign issuers which are freely traded on United States
securities exchanges or in the over-the-counter market in the form of American
Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") and Global
Depository Receipts ("GDRs")."
<PAGE> 6
THE GALAXY FUND
STATEMENT OF ADDITIONAL INFORMATION
Connecticut Municipal Money Market Fund
Massachusetts Municipal Money Market Fund
Growth and Income Fund
Small Cap Value Fund
February 28, 1997
(as revised September 4, 1997)
<PAGE> 7
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current Prospectuses (the "Prospectuses") for the
Connecticut Municipal Money Market, Massachusetts Municipal Money Market, Growth
and Income and Small Cap Value Funds of The Galaxy Fund ("Galaxy"), each dated
February 28, 1997, as they may from time to time be supplemented or revised.
This Statement of Additional Information is incorporated by reference in its
entirety into each such Prospectus. No investment in shares of the Funds should
be made without reading the Prospectuses. Copies of the Prospectuses may be
obtained by writing Galaxy c/o First Data Investor Services Group, Inc., 4400
Computer Drive, Westboro, Massachusetts 01581- 5108 or by calling Galaxy at
1-800-628-0414. Capitalized terms used herein but not otherwise defined have the
same meanings as in the Prospectuses.
<PAGE> 8
TABLE OF CONTENTS
Page
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THE GALAXY FUND............................................................. 1
INVESTMENT OBJECTIVES AND POLICIES.......................................... 1
Acceptable Investments - Money Market Funds ....................... 1
Types of Acceptable Investments - Money Market Funds............... 2
Types of Investments - Equity Funds................................ 2
Money Market Instruments........................................... 3
U.S. Government Obligations ....................................... 3
When-Issued and Delayed Delivery Transactions...................... 4
Stand-By Commitments............................................... 4
Munipreferred Securities........................................... 5
Variable Rate Demand Notes......................................... 5
Temporary Investments.............................................. 5
Restricted and Illiquid Securities................................. 5
Repurchase Agreements, Reverse Repurchase Agreements
and Lending of Portfolio Securities.............................. 7
Derivative Securities.............................................. 8
Portfolio Securities Generally..................................... 12
Portfolio Turnover................................................. 12
Special Considerations Relating to Connecticut
Municipal Securities............................................. 12
Additional Investment Limitations.................................. 14
NET ASSET VALUE - CONNECTICUT MUNICIPAL MONEY MARKET AND
MASSACHUSETTS MUNICIPAL MONEY MARKET FUNDS......................... 20
DIVIDENDS - MONEY MARKET FUNDS.............................................. 21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................. 21
DESCRIPTION OF SHARES....................................................... 23
ADDITIONAL INFORMATION CONCERNING TAXES..................................... 26
In General......................................................... 26
Connecticut Municipal Money Market and Massachusetts
Municipal Money Market Funds..................................... 28
Growth and Income and Small Cap Value Funds........................ 29
Taxation of Certain Financial Instruments.......................... 29
State Taxation .................................................... 32
Massachusetts State Income Tax .................................... 32
TRUSTEES AND OFFICERS....................................................... 32
Shareholder and Trustee Liability.................................. 37
ADVISORY, ADMINISTRATION, CUSTODIAN AND TRANSFER
AGENCY AGREEMENTS......................................................... 38
Custodian and Transfer Agent....................................... 41
PORTFOLIO TRANSACTIONS...................................................... 42
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Page
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SHAREHOLDER SERVICES PLAN.................................................. 44
DISTRIBUTION AND SERVICES PLAN............................................. 46
DISTRIBUTOR................................................................ 47
AUDITORS .................................................................. 49
COUNSEL .................................................................. 49
PERFORMANCE AND YIELD INFORMATION.......................................... 50
Yield Quotations -- Connecticut Municipal Money
Market and Massachusetts Municipal Money Market Funds........... 50
Tax-Equivalency Tables - Connecticut Municipal Money
Market and Massachusetts Municipal Money Market Funds........... 51
Yield and Performance of the Growth and
Income and Small Cap Value Funds................................ 53
MISCELLANEOUS.............................................................. 57
FINANCIAL STATEMENTS....................................................... 61
APPENDIX A................................................................. A-1
APPENDIX B................................................................. B-1
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<PAGE> 10
THE GALAXY FUND
The Galaxy Fund ("Galaxy") is an open-end management company currently
offering shares of beneficial interest in twenty-four investment portfolios.
This Statement of Additional Information provides additional investment
information with respect to the Connecticut Municipal Money Market Fund and
Massachusetts Municipal Money Market Fund (collectively, the "Money Market
Funds"), and with respect to the Growth and Income Fund and Small Cap Value Fund
(collectively, the "Equity Funds") (the Money Market Funds and Equity Funds are
referred to herein collectively as the "Funds"), and should be read in
conjunction with the current Prospectuses for the Funds.
The Connecticut Municipal Money Market, Massachusetts Municipal Money
Market, Growth and Income and Small Cap Value Funds commenced operations on
October 4, 1993, October 5, 1993, December 14, 1992 and December 14, 1992,
respectively, as separate investment portfolios (the "Predecessor Connecticut
Municipal Money Market Fund", "Predecessor Massachusetts Municipal Money Market
Fund", "Predecessor Growth and Income Fund" and "Predecessor Small Cap Value
Fund", respectively, and collectively, the "Predecessor Funds") of The Shawmut
Funds, which was organized as a Massachusetts business trust. On December 4,
1995, the Predecessor Funds were reorganized as new portfolios of Galaxy. Prior
to the reorganization, the Predecessor Funds offered and sold shares of
beneficial interest that were similar to Galaxy's Trust Shares and Retail A
Shares.
INVESTMENT OBJECTIVES AND POLICIES
ACCEPTABLE INVESTMENTS - MONEY MARKET FUNDS
The Connecticut Municipal Money Market Fund invests primarily in debt
obligations issued by or on behalf of Connecticut and of other states,
territories, and possessions of the United States, including the District of
Columbia, and any political subdivision or financing authority of any of these,
the income from which is, in the opinion of qualified legal counsel, exempt from
both federal regular income tax and Connecticut state income tax imposed upon
non-corporate taxpayers ("Connecticut Municipal Securities").
The Massachusetts Municipal Money Market Fund invests primarily in debt
obligations issued by or on behalf of the Commonwealth of Massachusetts and of
other states, territories, and possessions of the United States, including the
District of Columbia, and any political subdivision or financing authority of
any of these, the income from which is, in the opinion of qualified legal
counsel, exempt from both federal regular income tax and personal income taxes
imposed by the Commonwealth of Massachusetts
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<PAGE> 11
imposed upon non-corporate taxpayers ("Massachusetts Municipal Securities").
From time to time, such as when suitable Municipal Securities are not
available, the Money Market Funds may invest a portion of their respective
assets in cash. Any portion of a Money Market Fund's assets maintained in cash
will reduce the amount of assets in Municipal Securities and thereby reduce the
Money Market Fund's yield.
TYPES OF ACCEPTABLE INVESTMENTS - MONEY MARKET FUNDS
Examples of Municipal Securities are:
- municipal notes and commercial paper;
- general obligation serial bonds sold with differing maturity
dates;
- refunded municipal bonds; and
- all revenue bonds, including industrial development bonds.
TYPES OF INVESTMENTS - EQUITY FUNDS
The Growth and Income Fund invests principally in a
professionally-managed and diversified portfolio of common stocks of companies
with prospects for above average growth and dividends or of companies where
significant fundamental changes are taking place. The Growth and Income Fund
will seek to invest in equity securities of companies that are projected to show
earnings growth superior to the Standard & Poor's 500 Composite Stock Index.
Although the Growth and Income Fund may invest in other securities and in money
market instruments, it is the Growth and Income Fund's policy, under normal
market conditions, to invest at least 65% of its total assets in equity
securities. The securities in which the Growth and Income Fund may invest
include foreign securities, as described in the Prospectuses.
The Small Cap Value Fund invests primarily in a diversified portfolio
of equity securities of companies that have a market value capitalization of up
to $1 billion to achieve long-term capital appreciation and current income.
Under normal circumstances, the Small Cap Value Fund will invest at least 65% of
its total assets in equity securities of companies that have a market value
capitalization of up to $1 billion. In addition, the Small Cap Value Fund may
invest as described below, and as described in the Prospectuses.
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MONEY MARKET INSTRUMENTS
The Equity Funds may invest in the following money market instruments:
- instruments of domestic banks and savings and loans if they
have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is
insured in full by the Federal Deposit Insurance Corporation;
and
- prime commercial paper (rated A-1 by Standard & Poor's Ratings
Group, Prime-1 by Moody's Investors Service, Inc., or F-1 by
Fitch Investors Service, L.P.)
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. Government obligations in which the Equity Funds may
invest generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by U.S.
Government agencies or instrumentalities. These securities are backed by:
- the full faith and credit of the U.S. Treasury;
- the issuer's right to borrow an amount limited to a
specific line of credit from the U.S. Treasury;
- the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or
instrumentalities; or
- the credit of the agency or instrumentality issuing the
obligations.
Examples of U.S. Government agencies and instrumentalities that are
permissible investments and may not always receive financial support from the
U.S Government are:
- Federal Farm Credit Banks;
- Federal Home Loan Banks;
- Federal National Mortgage Association;
- Student Loan Marketing Association; and
- Federal Home Loan Mortgage Corporation.
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WHEN-ISSUED SECURITIES AND DELAYED SETTLEMENT TRANSACTIONS
When a Fund agrees to purchase securities on a "when-issued" or
"delayed settlement" basis, the Fund's custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. In the event of a decline in the value of the securities that the
custodian has set aside, the Fund may be required to place additional assets in
the separate account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. A Fund's net assets may fluctuate
to a greater degree if it sets aside portfolio securities to cover such purchase
commitments than if it sets aside cash.
When a Fund engages in when-issued or delayed settlement transactions,
it relies on the seller to consummate the trade. Failure of the seller to do so
may result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous for a security. For purposes of determining
the average weighted maturity of a Fund's portfolio, the maturity of when-issued
securities is calculated from the date of settlement of the purchase to the
maturity date.
STAND-BY COMMITMENTS
Under a "stand-by commitment," a dealer agrees to purchase from a Fund,
at the Fund's option, specified Municipal Securities at a specified price.
Stand-by commitments are exercisable by the Fund at any time before the maturity
of the underlying Municipal Security, and may be sold, transferred or assigned
by the Fund only with respect to the underlying instruments.
Although stand-by commitments are often available without the payment
of any direct or indirect consideration, if necessary or advisable, a Fund may
pay for a stand-by commitment either separately in cash or by paying a higher
price for Municipal Securities that are acquired subject to the commitment.
Where the Fund pays any consideration directly or indirectly for a stand-by
commitment, its cost will be reflected as unrealized depreciation for the period
during which the commitment is held by the Fund.
The Money Market Funds will enter into stand-by commitments only with
banks and broker/dealers that present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, a Fund's Investment
Adviser will review periodically the issuer's assets, liabilities, contingent
claims and other relevant financial information.
The Money Market Funds will acquire stand-by commitments solely to
facilitate liquidity and do not intend to exercise their rights thereunder for
trading purposes. Stand-by
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<PAGE> 14
commitments will be valued at zero in determining a Fund's net asset value.
MUNIPREFERRED SECURITIES
The Money Market Funds may purchase interests in Municipal Securities
that are offered in the form of a security representing a diversified portfolio
of investment grade bonds. These securities provide investors, such as the Money
Market Funds, with liquidity and income exempt from federal regular income tax
and some state income taxes.
VARIABLE RATE DEMAND NOTES
Variable interest rates generally reduce changes in the market value of
Municipal Securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less for variable rate Municipal Securities than for fixed
income obligations.
The terms of these variable rate demand instruments require payment of
principal and accrued interest from the issuer of the Municipal Securities, the
issuer of the participation interest or a guarantor of either issuer.
TEMPORARY INVESTMENTS
The Money Market Funds may also invest in high quality temporary
investments during times of unusual market conditions for defensive purposes.
From time to time, such as when suitable Municipal Securities are not
available, the Money Market Funds may invest a portion of their respective
assets in cash. Any portion of a Money Market Fund's assets maintained in cash
will reduce the amount of assets in Municipal Securities and thereby reduce the
Fund's yield.
RESTRICTED AND ILLIQUID SECURITIES
The Equity Funds may invest in commercial paper issued in reliance on
the exemption from registration afforded by Section 4(2) of the Securities Act
of 1933. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Equity Funds, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the purchaser
must be in an exempt transaction. Section 4(2) commercial paper is normally
resold to other institutional investors like the Equity Funds through or with
the assistance of the issuer or investment dealers who make a market
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<PAGE> 15
in Section 4(2) commercial paper, thus providing liquidity. The Equity Funds
believe that Section 4(2) commercial paper and possibly certain other restricted
securities that meet the criteria for liquidity established by Galaxy's Board of
Trustees are quite liquid. The Equity Funds intend, therefore, to treat the
restricted securities that meet the criteria for liquidity established by the
Board of Trustees, including Section 4(2) commercial paper (as determined by the
Equity Funds' Investment Adviser), as liquid and not subject to the investment
limitation applicable to illiquid securities. In addition, because Section 4(2)
commercial paper is liquid, the Equity Funds do not intend to subject such paper
to the limitation applicable to restricted securities.
The ability of the Board of Trustees to determine the liquidity of
certain restricted securities is permitted under a Securities and Exchange
Commission (the "SEC") Staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive,
safeharbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under the Rule. Galaxy, on behalf of the Equity Funds, believes that the Staff
of the SEC has left the question of determining the liquidity of all restricted
securities (eligible for resale under Rule 144A) for determination to the Board
of Trustees. The Board of Trustees considers the following criteria in
determining the liquidity of certain restricted securities:
- the frequency of trades and quotes for the security;
- the number of dealers willing to purchase or sell the security
and the number of other potential buyers;
- dealer undertakings to make a market in the security; and
- the nature of the security and the nature of the marketplace
trades.
Investing in Rule 144A securities could have the effect of increasing the level
of a Fund's illiquidity to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities. The Funds
expect that less than 5% of their respective net assets will be invested in Rule
144A securities during the current fiscal year.
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<PAGE> 16
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND LENDING OF PORTFOLIO
SECURITIES
Each Fund may enter into repurchase agreements, which are arrangements
in which banks, broker/dealers, and other recognized financial institutions sell
U.S. Government securities or other securities to the Funds and agree at the
time of sale to repurchase them at a mutually agreed upon time and price within
one year from the date of acquisition. A Fund requires its custodian to take
possession of the securities subject to a repurchase agreement and these
securities are marked to market daily. To the extent that the original seller
does not repurchase the securities from a Fund, the Fund could receive less than
the repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by a Fund might be delayed pending court action. The Funds believe
that, under the regular procedures normally in effect for custody of a Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or disposition
of such securities. The Funds will only enter into repurchase agreements with
banks and other recognized financial institutions, such as broker/dealers, which
are deemed by the Funds' Investment Adviser to be creditworthy pursuant to
guidelines established by the Board of Trustees.
The Equity Funds may also enter into reverse repurchase agreements.
These transactions are similar to borrowing cash. In a reverse repurchase
agreement, a Fund transfers possession of a portfolio instrument to another
person, such as a financial institution, broker, or dealer, in return for a
percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund
in a dollar amount sufficient to make payment for the obligations to be
purchased are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
The collateral received when the Equity Funds lend portfolio securities
must be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Funds. During
the time portfolio securities are on loan, the borrower pays a Fund any
dividends or
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<PAGE> 17
interest paid on such securities. Loans are subject to termination at the option
of the Funds or the borrower. The Funds may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.
DERIVATIVE SECURITIES
PUT AND CALL OPTIONS
An Equity Fund may purchase and sell put options on its portfolio
securities as described in the Prospectuses.
STOCK INDEX FUTURES AND OPTIONS
The Equity Funds may utilize stock index futures contracts and options
on stocks, stock indices, and stock index futures contracts for the purposes of
managing cash flows into and out of a Fund's portfolio and potentially reducing
transactional costs. The Funds may not use stock index futures contracts and
options for speculative purposes.
As a means of reducing fluctuations in the net asset value of shares of
the Equity Funds, the Funds may attempt to hedge all or a portion of their
respective portfolios through the purchase of listed put options on stocks,
stock indices and stock index futures contracts. These options will be used as a
form of forward pricing to protect portfolio securities against decreases in
value resulting from market factors, such as an anticipated increase in interest
rates. A purchased put option gives the Funds, in return for a premium, the
right to sell the underlying security to the writer (seller) at a specified
price during the term of the option. Put options on stock indices are similar to
put options on stocks except for the delivery requirements. Instead of giving
the Funds the right to make delivery of stock at a specified price, a put option
on a stock index gives the Funds, as holders, the right to receive an amount of
cash upon exercise of the option.
The Equity Funds may also write covered call options. As the writer of
a call option, the Funds have the obligation upon exercise of the option during
the option period to deliver the underlying security upon payment of the
exercise price.
An Equity Fund may only: (1) buy listed put options on stock indices
and stock index futures contracts; (2) buy listed put options on securities held
in its portfolio; and (3) sell listed call options either on securities held in
its portfolio or on securities which it has the right to obtain without payment
of further consideration (or has segregated cash in the amount of any such
additional consideration). A Fund will maintain its
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<PAGE> 18
positions in securities, option rights, and segregated cash subject to puts and
calls until the options are exercised, closed or expired. A Fund may also enter
into stock index futures contracts. A stock index futures contract is a
bilateral agreement which obligates the seller to deliver (and the purchaser to
take delivery of) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of trading
of the contract and the price at which the agreement is originally made. There
is no physical delivery of the stocks constituting the index, and no price is
paid upon entering into a futures contract.
In general, option contracts are closed out prior to their expiration.
An Equity Fund, when purchasing or selling a futures contract, will initially be
required to deposit in a segregated account in the broker's name with the Fund's
custodian an amount of cash or U.S. government securities approximately equal to
5% - 10% of the contract value. This amount is known as "initial margin", and it
is subject to change by the exchange or board of trade on which the contract is
traded. Subsequent payments to and from the broker are made on a daily basis as
the price of the index or the securities underlying the futures contract
fluctuates. These payments are known as "variation margins", and the fluctuation
in value of the long and short positions in the futures contract is a process
referred to as "marking to market". A Fund may decide to close its position on a
contract at any time prior to the contract's expiration. This is accomplished by
the Fund taking an opposite position at the then prevailing price, thereby
terminating its existing position in the contract. Because the initial margin
resembles a performance bond or good-faith deposit on the contract, it is
returned to the Fund upon the termination of the contract, assuming that all
contractual obligations have been satisfied. Therefore, the margin utilized in
futures contracts is readily distinguishable from the margin employed in
security transactions, since the margin employed in futures contracts does not
involve the borrowing of funds to finance the transaction.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS
An Equity Fund will not enter into futures contracts to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of its total assets. Further, an Equity
Fund will enter into stock index futures contracts only for bona fide hedging
purposes or such other purposes permitted under Part 4 of the regulations
promulgated by the Commodity Futures Trading Commission. Also, an Equity Fund
may not enter into stock index futures contracts and options to the extent that
the value of such contracts would exceed 20% of the Fund's total net assets and
may not purchase put options to the extent that more than 5% of the value of the
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<PAGE> 19
Fund's total assets would be invested in premiums on open put option positions.
INDEXED SECURITIES
The Equity Funds may invest in indexed securities whose value is linked
to foreign currencies, interest rates, commodities, indices or other financial
indicators. Most indexed securities are short- to intermediate-term fixed-income
securities whose values at maturity or interest rates rise or fall according to
the change in one or more specified underlying instruments. Indexed securities
may be positively or negatively indexed (i.e., their value may increase or
decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself.
SWAP AGREEMENTS
As one way of managing their exposure to different types of
investments, the Equity Funds may enter into interest rate swaps, currency
swaps, and other types of swap agreements such as caps, collars, and floors. In
a typical interest rate swap, one party agrees to make regular payments equal to
a floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. If a swap agreement provides for payments in different currencies, the
parties might agree to exchange notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer or an interest rate cap rate falls below
an agreed upon level. An interest rate collar combines elements of buying a cap
and selling a floor.
Swap agreements will tend to shift the Equity Funds' investment
exposure from one type of investment to another. For example, if an Equity Fund
agreed to exchange payments in dollars for payments in foreign currency, the
swap agreement would tend to decrease the Fund's exposure to U.S. interest rates
and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of an Equity Fund's investments and its share price and yield.
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Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
the Equity Funds' performance. Swap agreements are subject to risks related to
the counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Equity Funds may also suffer
losses if they are unable to terminate outstanding swap agreements or reduce
their exposure through offsetting transactions.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because the Equity Funds may buy and sell securities denominated in
currencies other than the U.S. dollar, and receive interest, dividends and sale
proceeds in currencies other than the U.S. dollar, the Funds may enter into
foreign currency exchange transactions to convert United States currency to
foreign currency and foreign currency to United States currency as well as
convert foreign currency to other foreign currencies. An Equity Fund either
enters into these transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or uses forward contracts to
purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by an
Equity Fund to purchase or sell a specific currency at a specified price and
future date, which may be any fixed number of days from the date of the
contract. Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has no
deposit requirement and is traded at a net price without commission. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of a Fund's portfolio securities or in foreign
exchange rates, or prevent loss if the prices of these securities should
decline.
The Equity Funds may enter into foreign currency hedging transactions
in an attempt to protect against changes in foreign currency exchange rates
between the trade and settlement dates of specific securities transactions or
changes in foreign currency exchange rates that would adversely affect a
portfolio position or an anticipated portfolio position. Since consideration of
the prospect for currency parities will be incorporated into a Fund's long-term
investment decisions, neither Equity Fund will routinely enter into foreign
currency hedging transactions with respect to portfolio security transactions;
however, it is important to have the flexibility to enter into foreign currency
hedging transactions when it is determined that the transactions
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<PAGE> 21
would be in the Fund's best interest. Although these transactions tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain that might be realized
should the value of the hedged currency increase. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible because the future value of these securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
PORTFOLIO SECURITIES GENERALLY
Subsequent to its purchase by a Fund an issue of securities may cease
to be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Trustees or the Funds' investment adviser,
Fleet Investment Advisors Inc. ("Fleet"), pursuant to guidelines established by
the Board, will promptly consider such an event in determining whether the Fund
involved should continue to hold the obligation. The Board of Trustees or Fleet
may continue to hold the obligation if retention is in accordance with the
interests of the particular Fund and applicable regulations of the Securities
and Exchange Commission.
PORTFOLIO TURNOVER
A Fund may sell a portfolio investment soon after its acquisition if
Fleet believes that such a disposition is consistent with the Fund's investment
objective. Portfolio investments may be sold for a variety of reasons, such as a
more favorable investment opportunity or other circumstances bearing on the
desirability of continuing to hold such investments. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses and
other transaction costs, which must be ultimately borne by the Fund's
shareholders.
SPECIAL CONSIDERATIONS RELATING TO CONNECTICUT MUNICIPAL SECURITIES
The ability of the issuers of Connecticut Municipal Securities to pay
the principal and interest on their obligations may be impacted by a variety of
factors relating to the economy of Connecticut and to the fiscal stability of
issuers of Connecticut Municipal Securities. The latter may include such matters
as the ability of issuers to raise sufficient tax and other revenues to meet
their needs, the availability of aid from other governmental bodies, and the
burdens that may be imposed on issuers by law or necessity. To the extent that
the Connecticut
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<PAGE> 22
Municipal Money Market Fund invests in obligations that are not general
obligations of their issuers, payments of principal and interest will depend on
all factors affecting the revenue sources from which payments thereon are to be
derived. The value of the obligations held by the Fund would be adversely
affected not only by any actual inability of their issuers to pay the principal
and interest thereon, but also by a public perception that such ability is in
doubt.
Investors should be aware that manufacturing has historically been
Connecticut's single most important economic activity. The State's manufacturing
industry is diversified, but from 1970 to 1995 manufacturing employment declined
35.5%. During this period, employment in other non-agricultural establishments
(including government) increased 69.7%, particularly in the service, trade, and
finance categories. In 1995, manufacturing accounted for only 17.9% of total
nonagricultural employment in Connecticut. Defense-related business plays an
important role in the Connecticut economy, and economic activity has been
affected by the volume of defense contracts awarded to Connecticut firms. On a
per capita basis, defense awards in Connecticut have traditionally been among
the highest in the nation, but reductions in defense spending have had a
substantial adverse impact on Connecticut's economy, and the State's largest
defense contractors have announced substantial labor force reductions to occur
over the next several years.
The average unemployment rate (seasonally adjusted) in Connecticut
increased from a low of 3.0% in 1988 to 7.5% in 1992 and, after a number of
important changes in the method of calculation, was reported to be 5.5% in 1995.
Pockets of more significant unemployment and poverty exist in some of
Connecticut's cities and towns, the economic conditions of which are causing
them severe financial problems, resulting in some cases in the reporting of
operating and accumulated deficits. Connecticut is in a recession the depth and
duration of which are uncertain.
The State recorded operating deficits in its General Fund for fiscal
1987-88, 1988-89, 1989-90, and 1990-91 of $115,600,000, $28,000,000,
$259,000,000, and $809,000,000, respectively. In the fall of 1991, the State
issued $965,712,000 of Economic Recovery Notes to help fund its accumulated
General Fund deficit. Largely as a result of the enactment in 1991 of a general
income tax on resident and non-resident individuals, trusts, and estates the
State's General Fund ended fiscal 1991- 92, 1992-93, 1993-94, 1994-95, and
1995-96 with operating surpluses of $110,000,000, $113,500,000, $19,700,000,
$80,500,000, and $250,000,000, respectively.
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<PAGE> 23
The General Fund is the main operating fund of the State. The three
major revenue sources for the General Fund are the personal income tax, the
sales and use taxes, and the corporation business tax, all of which are
sensitive to changes in the level of economic activity in the State. Since its
enactment, the personal income tax has superseded the other two as the largest
revenue source for the State's General Fund. Motor fuel taxes and other
transportation-related taxes are paid into a Special Transportation Fund while
all other tax revenues are carried in the General Fund.
The repair and maintenance of the State's highways and bridges will
require major expenditures in the near term. The State has adopted legislation
that provides for, among other things, the issuance of special tax obligation
bonds, the proceeds of which will be used to pay for improvements to the State's
transportation system. The bonds are payable solely from motor vehicle and other
transportation-related taxes and fees deposited in the Special Transportation
Fund. However, the amount of revenues is dependent on the occurrence of future
events, including a possible rise in fuel prices, and may thus differ materially
from projected amounts. The cost of this infrastructure program, to be met from
federal, State and local funds, is currently estimated at $11.2 billion. The
State expects to issue $4.2 billion of special tax obligation bonds over a
sixteen-year period commenced July 1, 1984 to finance a major portion of the
State's share of such costs.
The tax revenues of Connecticut municipalities are derived only from ad
valorem taxes on real and tangible personal property. Problems inherent with
these taxes impose practical limitations on the ability of Connecticut
municipalities to raise additional tax revenues. The U.S. Census Bureau reports
that, at the time of the 1990 census, Connecticut's capital city of Hartford was
the eighth poorest city in the nation based on the percentage of its residents
living in poverty; the same report indicates that four of Connecticut's largest
cities ranked among the 130 poorest cities in the nation by the same measure.
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in their
Prospectuses, the Funds are subject to the following investment limitations,
which may be changed with respect to a particular Fund only by a vote of the
holders of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous" in the Prospectuses):
1. No Fund may sell any securities short or purchase any
securities on margin, but each Fund may obtain such
short-term credits as may be necessary for clearance of
transactions, in the case of a Money Market Fund, or
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<PAGE> 24
the clearance of purchases and sales of portfolio securities,
in the cash of an Equity Fund. A deposit or payment by an
Equity Fund of initial or variation margin in connection with
futures contracts or related options transactions is not
considered the purchase of a security on margin.
2. No Fund may issue senior securities except that each
Fund may borrow money or engage in reverse repurchase
agreements in amounts up to one-third of the value of
its total assets, including the amounts borrowed; and
except to the extent that the Equity Funds may enter
into futures contracts. No Fund will borrow money or
engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the
portfolio by enabling a Fund to meet redemption
requests when the liquidation of portfolio securities
is deemed to be inconvenient or disadvantageous. No
Fund will purchase any securities while borrowings in
excess of 5% of its total assets are outstanding.
3. No Fund may mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases,
a Fund may only mortgage, pledge, or hypothecate assets
having a market value not exceeding 10% of the value of
total assets at the time of purchase. For purposes of
this limitation, the following will not be deemed to be
pledges of an Equity Fund's assets: (a) the deposit of
assets in escrow in connection with the writing of
covered put or call options and the purchase of
securities on a when-issued basis; and (b) collateral
arrangements with respect to: (i) the purchase and sale
of stock options (and options on stock indices) and
(ii) initial or variation margin for futures contracts.
Margin deposits from the purchase and sale of futures
contracts and related options are not deemed to be a
pledge.
4. No Fund may purchase or sell real estate or real estate
limited partnerships, although each Fund may invest in
securities of issuers whose business involves the purchase or
sale of real estate or in securities which are secured by real
estate or interests in real estate.
5. No Fund may purchase or sell commodities, commodity contracts,
or commodity futures contracts except to the extent that an
Equity Fund may engage in transactions involving financial
futures contracts or options on financial futures contracts.
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<PAGE> 25
6. No Fund may underwrite any issue of securities, except as a
Fund may be deemed to be an underwriter under the Securities
Act of 1933 in connection with the sale of securities in
accordance with its investment objective, policies and
limitations.
7. No Fund may lend any of its assets except that a Money
Market Fund may acquire publicly or non-publicly issued
Connecticut or Massachusetts Municipal Securities (as
defined in their Prospectuses) or temporary investments
or enter into repurchase agreements, in accordance with
their respective investment objectives, policies,
limitations and Galaxy's Declaration of Trust; and
except that an Equity Fund may lend portfolio
securities up to one-third the value of its total
assets. This limitation shall not prevent an Equity
Fund from purchasing or holding money market
instruments, repurchase agreements, obligations of the
U.S. Government, its agencies or instrumentalities,
variable rate demand notes, bonds debentures, notes,
certificates of indebtedness, or certain debt
instruments as permitted by its investment objective,
policies and limitations or Galaxy's Declaration of
Trust.
8. With respect to at least 50% of its total assets, a
Money Market Fund will invest no more than 5% of its
total assets in the securities of a single issuer and
no more than 25% of its total assets in the securities
of a single issuer at the close of each quarter of each
fiscal year. Under this limitation, each governmental
subdivision, including states, territories, possessions
of the United States, or their political subdivisions,
agencies, authorities, instrumentalities, or similar
entities will be considered a separate issuer if its
assets and revenues are separate from those of the
governmental body creating it and the security is
backed only by its own assets and revenues. Industrial
development bonds backed only by the assets and revenue
of a nongovernmental user are considered to be issued
solely by that user. If, in the case of an industrial
development bond or government-issued security, a
governmental or other entity guarantees the security,
such guarantee would be considered a separate security
issued by the guarantor, as well as the other issuer,
subject to limited exclusions allowed by the 1940 Act.
9. With respect to securities comprising 75% of the value of its
total assets, no Equity Fund will purchase securities issued
by any one issuer (other than cash, cash items, or securities
issued or guaranteed by the government of the United States or
its agencies or
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<PAGE> 26
instrumentalities and repurchase agreements collateralized by
such securities) if, as a result, more than 5% of the value of
its total assets would be invested in the securities of that
issuer. An Equity Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer.
10. No Money Market Fund may purchase securities, if, as a
result of such purchase, 25% or more of the value of
the Fund's total assets would be invested in any one
industry or in industrial development bonds or other
securities, the interest upon which is paid from
revenues of similar types of projects. However, a
Money Market Fund may invest as temporary investments
more than 25% of the value of its assets in cash or
cash items, securities issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities, or
instruments secured by these money market instruments
and repurchase agreements.
11. No Equity Fund will invest 25% of more of the value of
its total assets in any one industry (other than
securities issued by the U.S. Government, its agencies
or instrumentalities). However, an Equity Fund may
invest as temporary investments more than 25% of the
value of its assets in cash or cash items, securities
issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, or instruments secured
by these money market instruments, such as repurchase
agreements.
12. No Money Market Fund will invest more than 10% of its net
assets in securities subject to restrictions on resale under
the Securities Act of 1933.
The following limitations may be changed by Galaxy's Board of Trustees
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
13. Each Fund will limit its investments in other
investment companies to not more than 3% of the total
outstanding voting stock of any investment company;
will invest no more than 5% of its total assets in any
one investment company; and will invest no more than
10% of its total assets in investment companies in
general. However, these limitations are not applicable
if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of
assets.
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<PAGE> 27
The Money Market Funds will limit their respective investments
in the securities of other investment companies to those of
money market funds which are of comparable or better portfolio
quality and have investment objectives and policies similar to
their own. Rule 2a-7 under the 1940 Act requires that the
Money Market Funds limit their investments to instruments
that, in the opinion of the Trustees, present minimal credit
risk and that, if rated, meet minimum rating standards set
forth in Rule 2a-7 under the 1940 Act. If the instruments are
not rated, the Trustees must determine that they are of
comparable quality. Shares of investment companies purchased
by the Money Market Funds will meet these same criteria and
will have investment policies consistent with Rule 2a-7 of the
1940 Act.
The Equity Funds will purchase the securities of other
investment companies only in open market transactions
involving only customary broker's commissions. It should be
noted that investment companies incur certain expenses such as
management fees, and therefore any investment by an Equity
Fund in shares of another investment company would be subject
to such duplicate expenses.
14. No Fund may purchase or retain the securities of any issuer if
the officers and Trustees of Galaxy or Fleet, owning
individually more than 1/2 of 1% of the issuer's securities,
together own more than 5% of the issuer's securities.
15. No Fund may purchase or sell interests in oil, gas, or other
mineral exploration or development programs or leases; except
that the Equity Funds may purchase the securities of issuers
which invest in or sponsor such programs.
16. No Money Market Fund may purchase or sell puts, calls,
straddles, spreads, or any combination thereof, except that
each such Fund may purchase Municipal Securities accompanied
by agreements of sellers to repurchase them at the Fund's
option.
17. No Equity Fund may purchase put options on securities, unless
the securities are held in the Fund's portfolio and not more
than 5% of the value of the Fund's total assets would be
invested in premiums on open put option positions.
18. No Equity Fund may write call options on securities,
unless the securities are held in the Fund's portfolio
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<PAGE> 28
or unless the Fund is entitled to them in deliverable form
without further payment or after segregating cash in the
amount of any further payment. No Equity Fund may write call
options in excess of 5% of the value of its total assets.
19. No Equity Fund may invest more than 5% of the value of its
total assets in securities of issuers which have records of
less than three years of continuous operations, including the
operation of any predecessor.
20. No Money Market Fund may invest more than 5% of the value of
its total assets in industrial development bonds where the
payment of principal and interest are the responsibility of
companies (or guarantors, where applicable) with less than
three years of continuous operations, including the operation
of any predecessor.
21. No Money Market Fund may invest more than 10%, and no
Equity Fund will invest more than 15%, of the value of
its respective net assets in illiquid securities,
including repurchase agreements providing for
settlement in more than seven days after notice, non-
negotiable fixed time deposits with maturities over
seven days, and certain securities not determined by
the Board of Trustees to be liquid.
22. No Equity Fund may invest more than 10% of its total assets in
securities subject to restrictions on resale under the
Securities Act of 1933, except for commercial paper issued
under Section 4(2) of the Securities Act of 1933 and certain
other restricted securities which meet the criteria for
liquidity as established by the Board of Trustees.
23. No Equity Fund may invest in companies for the purpose
of exercising management or control.
24. No Equity Fund may invest more than 5% of its net assets in
warrants. No more than 2% of this 5% may be warrants which are
not listed on the New York Stock Exchange.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in violation of
such restriction.
For purposes of their respective policies and limitations, the Funds
consider certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings
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<PAGE> 29
and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items".
The Funds do not intend to borrow money in excess of 5% of the value of
their respective net assets or, with respect to the Money Market Funds only, to
invest more than 5% of their respective total assets in securities of foreign
issuers during the next twelve months.
NET ASSET VALUE - CONNECTICUT MUNICIPAL MONEY MARKET AND
MASSACHUSETTS MUNICIPAL MONEY MARKET FUNDS
Galaxy uses the amortized cost method of valuation to value shares of
the Money Market Funds. In order to use the amortized cost method, the Funds
comply with the various quality and maturity restrictions specified in Rule 2a-7
promulgated under the 1940 Act. Pursuant to this method, a security is valued at
its initial acquisition cost, as adjusted for amortization of premium or
accretion of discount, regardless of the impact of fluctuating interest rates on
the market value of the security. Where it is not appropriate to value a
security by the amortized cost method, the security will be valued either by
market quotations or by fair value as determined by or under the direction of
Galaxy's Board of Trustees. This method may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a Fund
would receive if it sold the security. The value of securities in each of these
Funds can be expected to vary inversely with changes in prevailing interest
rates. Thus, if interest rates have increased from the time a security was
purchased, such security, if sold, might be sold at a price less than its cost.
Similarly, if interest rates have declined from the time a security was
purchased, such security, if sold, might be sold at a price greater than its
purchase cost. In either instance, if the security is held to maturity, no gain
or loss will be realized.
The Money Market Funds invest only in instruments that meet the
applicable quality requirements of Rule 2a-7 and maintain a dollar-weighted
average portfolio maturity appropriate to their objective of maintaining a
stable net asset value per share, provided that neither of these Funds will
purchase any security deemed to have a remaining maturity (as defined in the
1940 Act) of more than thirteen months nor maintain a dollar-weighted average
portfolio maturity which exceeds 90 days. Galaxy's Board of Trustees has
established procedures reasonably designed, taking into account current market
conditions and each Fund's investment objective, to stabilize the net asset
value per share of each Money Market Fund for purposes of sales and redemptions
at $1.00. These procedures include review by the Board of Trustees, at such
intervals as it deems appropriate, to determine the extent, if any, to which the
net asset value per share of each Money Market Fund, calculated by using
available market
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<PAGE> 30
quotations, deviates from $1.00 per share. In the event such deviation exceeds
one-half of one percent, the Board of Trustees will promptly consider what
action, if any, should be initiated. If the Board of Trustees believes that the
extent of any deviation from a Money Market Fund's $1.00 amortized cost price
per share may result in material dilution or other unfair results to new or
existing investors, it has agreed to 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 average portfolio maturity; withholding or reducing
dividends; redeeming shares in kind; reducing the number of a Money Market
Fund's outstanding shares without monetary consideration; or utilizing a net
asset value per share determined by using available market quotations.
DIVIDENDS - MONEY MARKET FUNDS
As stated, Galaxy uses its best efforts to maintain the net asset value
per share of each Money Market Fund at $1.00. As a result of a significant
expense or realized or unrealized loss incurred by any of the Funds, it is
possible that a Fund's net asset value per share may fall below $1.00. Should
Galaxy incur or anticipate any unusual or unexpected significant expense or loss
which would affect disproportionately the income of a Fund for a particular
period, the Board of Trustees would at that time consider whether to adhere to
the present dividend policy with respect to these Funds or to revise it in order
to ameliorate to the extent possible the disproportionate effect of such expense
or loss on the income of the Fund experiencing such effect. Such expense or loss
may result in a shareholder's receiving no dividends for the period in which it
holds shares of a Fund and in its receiving upon redemption a price per share
lower than that which it paid.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are sold on a continuous basis by First Data
Distributors, Inc. ("FD Distributors"), and FD Distributors has agreed to use
appropriate efforts to solicit all purchase orders. As described in the
applicable Prospectuses, shares of the Money Market Funds, Retail A Shares of
the Equity Funds and Retail B Shares of the Growth and Income Fund are sold to
customers ("Customers") of FIS Securities, Inc., Fleet Brokerage Securities,
Inc., Fleet Securities, Inc., Fleet Enterprises, Inc., Fleet Financial Group,
Inc., its affiliates, their correspondent banks, and other qualified banks,
savings and loan associations and broker/dealers ("Institutions"). As described
in the applicable Prospectuses, shares of the Money Market Funds, Retail A
Shares of the Equity Funds and Retail B
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<PAGE> 31
Shares of the Growth and Income Fund may also be sold to individuals,
corporations or other entities, who submit a purchase application to Galaxy,
purchasing either for their own accounts or for the accounts of others ("Direct
Investors"). As described in the applicable Prospectuses, Trust Shares in the
Equity Funds are offered to investors maintaining qualified accounts at bank and
trust institutions, including institutions affiliated with Fleet Financial
Group, Inc., and to participants in employer-sponsored defined contribution
plans.
Retail A Shares of the Equity Funds are sold to Direct Investors and
Customers at the public offering price based on a Fund's net asset value plus a
front-end sales charge as described in the applicable Prospectus. Retail B
Shares of the Growth and Income Fund are sold to Direct Investors and Customers
at the net asset value next determined after a purchase order is received but
are subject to a contingent deferred sales charge which is payable on redemption
of such shares as described in the applicable Prospectus.
Retail A Shares of the Equity Funds are offered for sale with a maximum
front-end sales charge of 3.75%, with certain exceptions as described in the
applicable Prospectus. An illustration of the computation of the offering price
per share of the Equity Funds, using the value of each Fund's net assets and
number of outstanding Retail A Shares at the close of business on October 31,
1996, is as follows:
<TABLE>
<CAPTION>
Growth and Small Cap
Income Fund Value Fund
----------- ----------
<S> <C> <C>
Net Assets..................... $77,776,362 $34,402,292
Outstanding Shares 5,643,469 2,332,328
Net Asset Value Per
Share.......................... $ 13.78 $ 14.75
Sales Charge (3.75% of
the offering price) $ 0.54 $ 0.57
Offering to Public $ 14.32 $ 15.32
</TABLE>
If the Board of Trustees determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, Galaxy may
make payment wholly or partly in securities or other property. Such redemptions
will only be made in "readily marketable" securities. In such an event, a
shareholder would incur transaction costs in selling the securities or other
property.
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<PAGE> 32
Galaxy may suspend the right of redemption or postpone the date of
payment for Shares for more than seven days during any period when (a) trading
in the markets the Funds normally utilize is restricted, or an emergency, as
defined by the rules and regulations of the Securities and Exchange Commission
(the "SEC") exists making disposal of a Fund's investments or determination of
its net asset value not reasonably practicable; (b) the New York Stock Exchange
is closed (other than customary weekend and holiday closings); or (c) the SEC by
order has permitted such suspension.
Galaxy may require any information reasonably necessary to ensure that
a redemption has been duly authorized.
DESCRIPTION OF SHARES
Galaxy is a Massachusetts business trust. Galaxy's Declaration of Trust
authorizes the Board of Trustees to issue an unlimited number of shares and to
classify or reclassify any unissued shares into one or more additional classes
by setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption. Pursuant to
such authority, the Board of Trustees has authorized the issuance of twenty-four
classes of shares, each representing interests in one of twenty-four separate
investment portfolios: Money Market Fund, Government Fund, Tax-Exempt Fund, U.S.
Treasury Fund, Institutional Treasury Money Market Fund, Connecticut Municipal
Money Market Fund, Massachusetts Municipal Money Market Fund, Equity Value Fund,
Equity Growth Fund, Equity Income Fund, International Equity Fund, Small Company
Equity Fund, Asset Allocation Fund, Small Cap Value Fund, Growth and Income
Fund, Short-Term Bond Fund, Intermediate Government Income Fund, High Quality
Bond Fund, Corporate Bond Fund, Tax-Exempt Bond Fund, New York Municipal Bond
Fund, Connecticut Municipal Bond Fund, Massachusetts Municipal Bond Fund and
Rhode Island Municipal Bond Fund.
As stated in the applicable Prospectuses, two separate series of shares
(Retail A Shares and Trust Shares) of the Equity Funds (plus a third series of
shares, i.e. Retail B Shares, of the Growth and Income Fund) are offered under
separate Prospectuses to different categories of investors. Each Money Market
Fund offers only one series of shares.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Trustees may grant in its discretion. When issued for
payment as described in the Prospectuses, shares will be fully paid and
non-assessable. Except as noted below with respect to the Shareholder Services
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<PAGE> 33
Plan (which is currently applicable only to Retail A Shares of the Equity Funds
and to shares of the Connecticut Municipal Money Market and Massachusetts
Municipal Money Market Funds), the Distribution and Services Plan for Retail B
Shares of the Growth and Income Fund, and differing transfer agency fees, Trust
Shares, Retail A Shares and Retail B Shares bear pro rata the same expenses and
are entitled equally to a Fund's dividends and distributions. In the event of a
liquidation or dissolution of Galaxy or an individual Fund, shareholders of a
particular Fund would be entitled to receive the assets available for
distribution belonging to such Fund, and a proportionate distribution, based
upon the relative asset values of Galaxy's respective Funds, of any general
assets of Galaxy not belonging to any particular Fund, which are available for
distribution. Shareholders of a Fund are entitled to participate in the net
distributable assets of the particular Fund involved in liquidation, based on
the number of shares of the Fund that are held by each shareholder, except that
currently each Equity Fund's Retail A Shares (shares of the Connecticut
Municipal Money Market and Massachusetts Municipal Money Market Funds) would be
solely responsible for the Fund's payments to Service Organizations under the
Shareholder Services Plan and the Growth and Income Fund's Retail B Shares would
be solely responsible for the Fund's payments to FD Distributors and to Service
Organizations under the Distribution and Services Plan.
Holders of all outstanding shares of a particular Fund will vote
together in the aggregate and not by series on all matters, except that only
Retail A Shares and Trust Shares of a Fund (shares of the Money Market Funds)
will be entitled to vote on matters submitted to a vote of shareholders
pertaining to Galaxy's Shareholder Services Plan for Retail A and Trust Shares
and only Retail B Shares of the Growth and Income Fund will be entitled to vote
on matters submitted to a vote of shareholders pertaining to Galaxy's
Distribution and Services Plan for Retail B Shares. Further, shareholders of all
of the Funds, as well as those of any other investment portfolio now or
hereafter offered by Galaxy, will vote together in the aggregate and not
separately on a Fund-by-Fund basis, except as otherwise required by law or when
permitted by the Board of Trustees. Rule 18f-2 under the 1940 Act provides that
any matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as Galaxy shall not be deemed to have
been effectively acted upon unless approved by the holders of a majority of the
outstanding Shares of each Fund affected by the matter. A particular Fund is
deemed to be affected by a matter unless it is clear that the interests of each
Fund in the matter are substantially identical or that the matter does not
affect any interest of the Fund. Under the Rule, the approval of an investment
advisory agreement or any change in fundamental investment policy would be
effectively acted upon with respect to a Fund only if approved by a majority of
the outstanding Shares
-24-
<PAGE> 34
of such Fund (irrespective of series designation). However, the Rule also
provides that the ratification of the appointment of independent public
accountants, the approval of principal underwriting contracts, and the election
of trustees may be effectively acted upon by shareholders of Galaxy voting
without regard to class or series.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held. Voting rights are not cumulative
and, accordingly, the holders of more than 50% of the aggregate of Galaxy's
outstanding shares may elect all of the trustees, irrespective of the votes of
other shareholders.
Galaxy does not intend to hold annual shareholder meetings except as
may be required by the 1940 Act. Galaxy's Declaration of Trust provides that a
meeting of shareholders shall be called by the Board of Trustees upon a written
request of shareholders owning at least 10% of the outstanding Shares of Galaxy
entitled to vote.
Galaxy's Declaration of Trust authorizes the Board of Trustees, without
shareholder approval (unless otherwise required by applicable law), to (a) sell
and convey the assets of a Fund to another management investment company for
consideration that may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding shares of the Fund involved to be
redeemed at a price that is equal to their net asset value and that may be paid
in cash or by distribution of the securities or other consideration received
from the sale and conveyance; (b) sell and convert a Fund's assets into money
and, in connection therewith, to cause all outstanding shares of the Fund
involved to be redeemed at their net asset value; or (c) combine the assets
belonging to a Fund with the assets belonging to another Fund of Galaxy and, in
connection therewith, to cause all outstanding shares of any Fund to be redeemed
at their net asset value or converted into Shares of another class of Galaxy's
shares at the net asset value. In the event that shares are redeemed in cash at
their net asset value, a shareholder may receive in payment for such shares, due
to changes in the market prices of the Fund's portfolio securities, an amount
that is more or less than the original investment. The exercise of such
authority by the Board of Trustees will be subject to the provisions of the 1940
Act, and the Board of Trustees will not take any action described in this
paragraph unless the proposed action has been disclosed in writing to the Fund's
shareholders at least 30 days prior thereto.
-25-
<PAGE> 35
ADDITIONAL INFORMATION CONCERNING TAXES
IN GENERAL
The following summarizes certain additional tax considerations
generally affecting the Funds of Galaxy and their shareholders that are not
described in the Funds' Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussion here and in the Prospectuses is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situation.
Each Fund of Galaxy is treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and each Fund intends to
qualify as a "regulated investment company" under the Code. By following this
policy, each Fund expects to eliminate or reduce to a nominal amount the federal
income taxes to which it may be subject. If for any taxable year a Fund does not
qualify for the special federal tax treatment afforded regulated investment
companies, all of the Fund's taxable income would be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In such
event, a Fund's distributions to shareholders (including amounts derived from
interest on Municipal Securities) would be taxable as ordinary income, to the
extent of the current and accumulated earnings and profits of the particular
Fund, and would be eligible for the dividends received deduction in the case of
corporate shareholders.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that each Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its tax-exempt interest income ,if any, net of
certain deductions for such year (the "Distribution Requirement"). In addition,
each Fund must satisfy certain requirements with respect to the source of its
income for a taxable year. At least 90% of the gross income of each Fund must be
derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the Fund's business of
investing in such stock, securities or currencies (the "Income Requirement").
The Treasury Department may by regulation exclude from qualifying income foreign
currency gains which are not directly related to a Fund's principal business of
investing in stock or securities, or options and futures with respect to stock
or securities. Any income derived by a Fund from a partnership or trust is
treated for this purpose as derived with respect to the Fund's business of
investing in stock, securities or currencies, only to the
-26-
<PAGE> 36
extent that such income is attributable to items of income which would have been
qualifying income if realized by the Fund in the same manner as by the
partnership or trust.
A Fund will not be treated for a taxable year as a regulated investment
company under the Code if 30% or more of the Fund's gross income for such year
is derived from gains realized on the sale or other disposition of the following
investments held for less than three months (the "Short-Short Gain Test"): (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Fund's principal business
of investing in stock and securities (and options and futures with respect to
stocks and securities). 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 that is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose. Although proposed legislation would repeal the
Short-Short Gain Test, it is unclear if or when such legislation would become
effective. With respect to covered call options, if the call is exercised by the
holder, the premium and the price received upon exercise constitute the proceeds
of sale, and the difference between the proceeds and the cost of the securities
subject to the call is capital gain or loss. Premiums from expired call options
written by a Fund and net gains from closing purchase transactions are treated
as short-term capital gains for Federal income tax purposes, and losses on
closing purchase transactions are short-term capital losses. With respect to
forward contracts, futures contracts, options on futures contracts, and other
financial instruments subject to the mark-to-market rules described below under
"Taxation of Certain Financial Instruments," the Internal Revenue Service (the
"Service") has ruled in private letter rulings issued to other registered
investment companies that a gain realized from such a contract, option or
financial instrument will be treated as being derived from a security held for
three months or more (regardless of the actual period for which the contract,
option or instrument is held) if the gain arises as a result of a constructive
sale under the mark-to-market rules, and will be treated as being derived from a
security held for less than three months only if the contract, option or
instrument is terminated (or transferred) during the taxable year (other than by
reason of the mark-to-market rules) and less than three months have elapsed
between the date the contract, option or instrument is acquired and the
termination date. Although a private letter ruling is binding on the Service
only with respect to the taxpayer receiving the
-27-
<PAGE> 37
ruling, it is anticipated that the Service would take the same position with
respect to the Funds. Increases and decreases in the value of a Fund's forward
contracts, futures contracts, options on futures contracts and other investments
that qualify as part of a "designated hedge," as defined in Section 851(g) of
the Code, may be netted for purposes of determining whether the Short-Short Gain
Test is met.
A Fund will designate any distribution of the excess of net long-term
capital gain over net short-term capital loss as a capital gain dividend in a
written notice mailed to shareholders within 60 days after the close of the
Fund's taxable year. Shareholders should note that, upon the sale or exchange of
Fund shares, if the shareholder has not held such shares for more than six
months, any loss on the sale or exchange of those shares will be treated as
long-term capital loss to the extent of the capital gain dividends received with
respect to the shares.
Ordinary income of individuals is taxable at a maximum marginal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains are
taxable at a maximum rate of 28%. For corporations, long-term capital gains and
ordinary income are both taxable at a maximum effective rate of 35%.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute 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.
The Funds will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or gross sale proceeds paid
to any shareholder who (i) has failed to provide a correct tax identification
number, (ii) is subject to withholding by the Internal Revenue Service for
failure to properly include on his or her return payments of taxable interest or
dividends, or (iii) has failed to certify to the Funds that he or she is not
subject to back up withholding when required to do so or that he or she is an
"exempt recipient."
CONNECTICUT MUNICIPAL MONEY MARKET AND MASSACHUSETTS MUNICIPAL MONEY MARKET
FUNDS
Shareholders are not required to pay the federal income tax on any
dividends received from the funds that represent net interest on tax-exempt
Municipal Securities.
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<PAGE> 38
In the case of a corporate shareholder, dividends of the Funds that
represent interest on Municipal Securities may be subject to the 20% corporate
alternative minimum tax. The corporate alternative minimum tax treats 75% of the
excess of a taxpayer's pre-tax 'adjusted current earning' over the taxpayer's
alternative minimum taxable income as a tax preference item. Since "earnings and
profits" generally includes the full amount of any Fund's dividend, and
alternative minimum taxable income does not include the portion of a Fund's
dividend attributable to municipal securities that are not private activity
bonds, 75% of the difference will be included in the calculation of the
corporation's alternative minimum tax.
Dividends of any of the Funds representing net interested income on
some temporary investments, and any realized net short-term gains are taxed as
ordinary income. Long-term capital gains distributions ar taxed as long-term
capital gains, regardless of the length of time the Fund shares have been held
the by the shareholder. These tax consequences apply whether dividend are
received in cash or as additional shares. Information on the tax status of
dividends and distributions is provided annually.
GROWTH AND INCOME AND SMALL CAP VALUE FUNDS
Shareholders are subject to federal income tax on dividends received as
cash or additional shares.
Capital gains experienced by the Funds could result in an increase in
dividends. Capital losses could result in a decrease in dividends.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of financial
instruments that may be held by the Funds. These rules may have a particular
impact on the amount of income or gain that the Funds must distribute to their
respective shareholders to comply with the Distribution Requirement, on the
income or gain qualifying under the Income Requirement and on their ability to
comply with the Short-Short Gain Test described above.
Generally, futures contracts and options on futures contracts held by
the Equity Funds and certain foreign currency contracts entered into by the
Equity Funds (as described above) (collectively, the "Instruments") at the close
of their taxable year are treated for federal income tax purposes as sold for
their fair market value on the last business day of such year, a process known
as "mark-to-market." Forty percent of any gain or loss resulting from such
constructive sales will be treated as short-term capital gain or loss, and 60%
of such gain or loss will be treated as long-term capital gain or loss without
regard to the period a Fund has held the Instruments ("the 40-60
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<PAGE> 39
rule"). The amount of any capital gain or loss actually realized by a Fund in a
subsequent sale or other disposition of those Instruments is adjusted to reflect
any capital gain or loss taken into account by the Fund in a prior year as a
result of the constructive sale of the Instruments. Losses with respect to
futures contracts to sell, related options and certain foreign currency
contracts, which are regarded as parts of a "mixed straddle" because their
values fluctuate inversely to the values of specific securities held by the
Funds, are subject to certain loss deferral rules, which limit the amount of
loss currently deductible on either part of the straddle to the amount thereof
that exceeds the unrecognized gain ,if any, with respect to the other part of
the straddle, and to certain wash sales regulations. Under short sales rules,
which also are applicable, the holding period of the securities forming part of
the straddle (if they have not been held for the long-term holding period) will
be deemed not to begin prior to termination of the straddle. With respect to
certain Instruments, deductions for interest and carrying charges may not be
allowed. Notwithstanding the rules described above, with respect to futures
contracts that are part of a "mixed straddle" to sell related options, and
certain foreign currency contracts that are properly identified as such, a Fund
may make an election which will exempt (in whole or in part) those identified
futures contracts, options and foreign currency contracts from the Rules of
Section 1256 of the Code including "the 40-60 rule" and "mark-to-market," but
gains and losses will be subject to such short sales, wash sales and loss
deferral rules and the requirement to capitalize interest and carrying charges.
Under Temporary Regulations, a Fund would be allowed (in lieu of the foregoing)
to elect either (1) to offset gains or losses from portions which are part of a
mixed straddle by separately identifying each mixed straddle to which such
treatment applies, or (2) to establish a mixed straddle account for which gains
and losses would be recognized and offset on a periodic basis during the taxable
year. Under either election, "the 40-60 rule" will apply to the net gain or loss
attributable to the Instruments, but in the case of a mixed straddle account
election, not more than 50% of any net gain may be treated as long-term, and no
more than 40% of any net loss may be treated as short-term.
A foreign currency contract must meet the following conditions in order
to be subject to the mark-to-market rules described above: (1) the contract must
require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts. As
of the date of this Statement of Additional
-30-
<PAGE> 40
Information, the Treasury Department has not issued any such regulations. Other
foreign currency contracts entered into by an Equity Fund may result in the
creation of one or more straddles for federal income tax purposes, in which case
certain loss deferral, short sales, and wash sales rules and the requirement to
capitalize interest and carrying charges may apply.
Some of the non-U.S. dollar denominated investments that an Equity Fund
may make, such as foreign securities, European Depository Receipts and foreign
currency contracts, may be subject to the provisions of Subpart J of the Code,
which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S dollar. The
types of transactions covered by these provisions include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option and
similar financial instrument. The disposition of a currency other than the U.S.
dollar by a U.S. taxpayer also is treated as a transaction subject to the
special currency rules. However, foreign currency-related regulated futures
contracts and non-equity options are generally not subject to the special
currency rules if they are or would be treated as sold for their fair market
value at year-end under the mark-to-market rules, unless an election is made to
have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. In accordance with Treasury regulations,
certain transactions that are part of a "Section 988 hedging transaction" (as
defined in the Code and Treasury regulations) may be integrated and treated as a
single transaction or otherwise treated consistently for purposes of the Code.
"Section 988 hedging transactions" are not subject to the mark-to-market or loss
deferral rules under the Code. Gain or loss attributable to the foreign currency
component of transactions engaged in by the Equity Funds, which is not subject
to the special currency rules (such as foreign equity investments other than
certain preferred stocks), is treated as capital gain or loss and is not
segregated from the gain or loss on the underlying transaction.
The Funds may be subject to U.S. Federal income tax on a portion of any
"excess distribution" or a gain from the
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<PAGE> 41
disposition of passive foreign investment companies even if it distributes the
income to its shareholders.
STATE TAXATION
Depending upon the extent of Galaxy's 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, each Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities that have income tax
laws, the treatment of a Fund and its shareholders under such laws may differ
from their treatment under Federal income tax laws. Under state or local law,
distributions of net investment income may be taxable to shareholders as
dividend income even though a substantial portion of such distributions may be
derived from interest on U.S. Government obligations which, if realized
directly, would be exempt from such income taxes. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
MASSACHUSETTS STATE INCOME TAX
Shareholders of the Massachusetts Municipal Money Market Fund subject
to Massachusetts personal income taxation will not be required to pay
Massachusetts personal income tax on that portion of their dividends which is
attributable to (and is properly designated as attributable to) interest earned
on Massachusetts tax-free municipal obligations, gain from the sale of certain
of such obligations, interest earned on obligations of the Untied States and
interest earned on obligations of United States territories or possessions to
the extent interest on such obligations is exempt from taxation by the state
pursuant to Federal law. Shareholders subject to Massachusetts income taxation
will be subject to Massachusetts personal income tax and Corporate shareholders
subject to the Massachusetts corporate excise tax will be subject to that tax on
all dividends from the Massachusetts Municipal Money Market Fund.
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<PAGE> 42
TRUSTEES AND OFFICERS
The trustees and executive officers of Galaxy, their addresses,
principal occupations during the past five years, and other affiliations are as
follows:
<TABLE>
<CAPTION>
Positions Principal Occupation
with The During Past 5 Years
Name and Address Galaxy Fund and Other Affiliations
- ---------------- ----------- ----------------------
<S> <C> <C>
Dwight E. Vicks, Jr. Chairman & President & Director,
Vicks Lithograph & Trustee Vicks Lithograph &
Printing Corporation Printing Corporation
Commercial Drive (book manufacturing and
P.O. Box 270 commercial printing);
Yorkville, NY 13495 Director, Utica Fire
Age 62 Insurance Company;
Trustee, Savings Bank of
Utica; Director, Monitor
Life Insurance Company;
Director, Commercial
Travelers Mutual
Insurance Company;
Trustee, The Galaxy VIP
Fund; Trustee, Galaxy
Fund II.
John T. O'Neill1 President, Executive Vice President
Hasbro, Inc. Treasurer & and CFO, Hasbro, Inc.
200 Narragansett Trustee (toy and game
Park Drive manufacturer), since
Pawtucket, RI 02862 1987; Trustee, The Galaxy
Age 52 VIP Fund; Trustee, Galaxy
Fund II; Managing
Partner, KPMG Peat
Marwick (accounting
firm), 1986.
</TABLE>
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<PAGE> 43
<TABLE>
<CAPTION>
Positions Principal Occupation
with The During Past 5 Years
Name and Address Galaxy Fund and Other Affiliations
- ---------------- ----------- ----------------------
<S> <C> <C>
Louis DeThomasis Trustee President, Saint Mary's
Saint Mary's College College of Minnesota;
of Minnesota Director, Bright Day
Winona, MN 55987 Travel, Inc.; Trustee,
Age 55 Religious Communities
Trust; Trustee, The
Galaxy VIP Fund; Trustee,
Galaxy Fund II.
Donald B. Miller Trustee Chairman, Horizon Media,
10725 Quail Covey Road Inc. (broadcast
Boynton Beach, FL 33436 services);
Age 70 Director/Trustee,
Lexington Funds;
President and CEO, Media
General Broadcast
Services, Inc. (1986 to
1989); Chairman,
Executive Committee,
Compton International,
Inc. (advertising
agency); Trustee, Keuka
College; Trustee, The
Galaxy VIP Fund; Trustee,
Galaxy Fund II.
James M. Seed Trustee Chairman and President,
The Astra Ventures, The Astra Projects,
Inc. Incorporated (land
One Citizens Plaza development); President,
Providence, RI 02903 The Astra Ventures,
Age 55 Incorporated (previously,
Buffinton Box Company
manufacturer of cardboard
boxes); Trustee, The
Galaxy VIP Fund; Trustee,
Galaxy Fund II;
Commissioner, Rhode
Island Investment
Commission.
Bradford S. Wellman(1) Trustee Private Investor;
2468 Ohio Street President, Ames &
Bangor, ME 04401 Wellman, from 1978 to
Age 65 1991; President, Pingree
Associates,
Inc.(timberland
management), from 1974
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
Positions Principal Occupation
with The During Past 5 Years
Name and Address Galaxy Fund and Other Affiliations
- ---------------- ----------- ----------------------
<S> <C> <C>
until 1990; Director,
Essex County Gas Company,
until January 1994;
Director, Maine Mutual
Fire Insurance Co.;
Member, Maine Finance
Authority; Trustee, The
Galaxy VIP Fund; Trustee,
Galaxy Fund II.
W. Bruce McConnel, III Secretary Partner of the law firm
Philadelphia National Drinker Biddle & Reath,
Bank Building Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107
Age 53
Jylanne Dunne Vice First Data Investor
First Data Services President Services Group, Inc.,
Group, Inc. and 1990 to present.
4400 Computer Drive Assistant
Westboro, MA 01581-5108 Treasurer
Age 37
</TABLE>
--------------------------
1. An interested person within the definition set forth in Section
2(a)(19) of the 1940 Act.
Effective November 1, 1996, each trustee receives an annual aggregate
fee of $29,000 for his services as a trustee of Galaxy, The Galaxy VIP Fund
("Galaxy VIP") and Galaxy Fund II ("Galaxy") (collectively, the "Trusts"), plus
an additional $2,250 for each in-person Galaxy Board meeting attended and $1,500
for each inperson Galaxy VIP or Galaxy II Board meeting attended not held
concurrently with an in-person Galaxy meeting, and is reimbursed for expenses
incurred in attending all meetings. Each trustee also receives $500 for each
telephone Board meeting in which the trustee participates, $1,000 for each
in-person Board committee meeting attended and $500 for each telephone Board
committee meeting in which the trustee participates. The Chairman of the Boards
of the Trusts is entitled to an additional annual aggregate fee in the amount of
$4,000, and the President and Treasurer of the Trusts is entitled to an
additional annual aggregate fee of $2,500 for their services in these respective
capacities. The foregoing trustees' and officers' fees are allocated among the
portfolios of the Trusts based on their relative net assets.
For the fiscal year ended October 31, 1996, each trustee was authorized
to receive an annual aggregate fee of $18,000 for his
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<PAGE> 45
services as a trustee of Galaxy and Galaxy VIP plus a separate annual fee of
$5,000 for his services as a trustee of Galaxy II, in addition to meeting fees
of $1,500 for each in-person Galaxy Board meeting attended, $1,500 for each
in-person Galaxy VIP Board meeting attended not held concurrently with a Galaxy
Board meeting, and $750 for each Galaxy II Board meeting attended, and
reimbursement for expenses incurred in attending meetings. Annual fees to the
Chairman of the Boards and the President and Treasurer of the Trusts were the
same as the current fees as were the fees for telephone and Board committee
meetings.
Beginning March 1, 1996, each trustee is also entitled to participate
in The Galaxy Fund, The Galaxy VIP Fund and Galaxy Fund II Deferred Compensation
Plans (the "Original Plans"). Effective January 1, 1997, the Original Plans were
merged into The Galaxy Fund/The Galaxy VIP Fund/Galaxy Fund II Deferred
Compensation Plan (together with the Original Plans, the "Plan"). Under the
Plan, a trustee may elect to have his deferred fees treated as if they had been
invested by the Trusts in the shares of one or more portfolios in the Trusts, or
other types of investment options, and the amount paid to the trustees under the
Plan will be determined based upon the performance of such investments. Deferral
of trustees' fees will have no effect on a portfolio's assets, liabilities, and
net income per share, and will not obligate the Trusts to retain the services of
any trustee or obligate a portfolio to any level of compensation to the trustee.
The Trusts may invest in underlying securities without shareholder approval.
No employee of First Data Investor Services Group, Inc., ("FDISG")
receives any compensation from Galaxy for acting as an officer. No person who is
an officer, director or employee of Fleet, or any of its affiliates, or of the
Sub-Adviser, serves as a trustee, officer or employee of Galaxy. The trustees
and officers of Galaxy own less than 1% of its outstanding shares.
The following chart provides certain information about the fees
received by Galaxy's trustees for the fiscal year ended October 31, 1996:
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from Galaxy
Aggregate Part of and Fund
Name of Compensation Fund Complex*Paid
Person/Position from Galaxy Expenses to Trustees
--------------- ----------- -------- -----------
<S> <C> <C> <C>
Bradford S. Wellman $ 26,702 None $ 35,000
Trustee
Dwight E. Vicks, Jr. $ 29,124 None $ 37,450
Chairman and Trustee
</TABLE>
-36-
<PAGE> 46
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as from Galaxy
Aggregate Part of and Fund
Name of Compensation Fund Complex*Paid
Person/Position from Galaxy Expenses to Trustees
--------------- ----------- -------- -----------
<S> <C> <C> <C>
Donald B. Miller** $ 26,776 None $ 31,000
Trustee
Rev. Louis DeThomasis $ 25,713 None $ 34,000
Trustee
John T. O'Neill $ 26,702 None $ 34,250
President, Treasurer
and Trustee
James M. Seed** $ 25,713 None $ 34,000
Trustee
</TABLE>
- --------------------
* The "Fund Complex" consists of Galaxy, The Galaxy VIP Fund
and Galaxy Fund II.
** Deferred compensation (including interest) in the amounts of
$ 10,976 and $ 17,967 accrued during Galaxy's fiscal year
ended October 31, 1996 for Messrs. Miller and Seed,
respectively.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, Galaxy's Declaration of Trust provides that shareholders
shall not be subject to any personal liability for the acts or obligations of
Galaxy, and that every note, bond, contract, order or other undertaking made by
Galaxy 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 any shareholder held personally
liable solely by reason of his or her being or having been a shareholder and not
because of his or her acts or omissions outside such capacity or some other
reason. The Declaration of Trust also provides that Galaxy shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of Galaxy, and shall satisfy any judgment thereon. Thus, the risk of
shareholder liability is limited to circumstances in which Galaxy itself would
be unable to meet its obligations.
The Declaration of Trust states further that no trustee, officer or
agent of Galaxy shall be personally liable for or on account of any contract,
debt, 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 Galaxy; nor shall any trustee be personally liable to any person for
any action or failure to act except by reason of his
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<PAGE> 47
own bad faith, willful misfeasance, gross negligence or reckless disregard of
his duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or Galaxy 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 Board of Trustees
shall indemnify representatives and employees of Galaxy to the same extent to
which they themselves are entitled to indemnification.
ADVISORY, ADMINISTRATION, CUSTODIAN AND
TRANSFER AGENCY AGREEMENTS
Fleet serves as investment adviser to the Funds. In its advisory
agreement, Fleet has agreed to provide investment advisory services to the Funds
as described in the Prospectuses. Fleet has also agreed to pay all expenses
incurred by it in connection with its activities under the advisory agreement
other than the cost of securities (including brokerage commissions) purchased
for the Funds. See "Expenses" in the Prospectuses.
For the period from December 4, 1995 to October 31, 1996, Fleet
received advisory fees of $386,073, $154,616, $1,143,059 and $1,790,255 with
respect to the Connecticut Municipal Money Market Fund, Massachusetts Municipal
Money Market Fund, Small Cap Value Fund and Growth and Income Fund,
respectively, and reimbursed expenses of $93,862, $90,548, $63,394 and $99,656
with respect to the Connecticut Municipal Money Market Fund, Massachusetts
Municipal Money Market Fund, Small Cap Value Fund and Growth and Income Fund,
respectively.
For the period from November 1, 1995 to December 3, 1995, Shawmut Bank,
N.A. ("Shawmut"), the investment adviser for the Predecessor Funds, earned the
following advisory fees: $43,242, $17,003, $128,152 and $207,833 with respect to
the Predecessor Connecticut Municipal Money Market Fund, Predecessor
Massachusetts Municipal Money Market Fund, Predecessor Small Cap Value Fund and
Predecessor Growth and Income Fund, respectively.
For the fiscal year ended October 31, 1995, Shawmut earned the
following advisory fees: Predecessor Connecticut Municipal Money Market Fund,
$544,556, of which $177,977 was voluntarily waived and $35,932 was reimbursed in
expenses; Predecessor Massachusetts Municipal Money Market Fund, $168,602, of
which $108,318 was voluntarily waived and $46,320 was reimbursed in
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expenses; Predecessor Growth and Income Fund, $2,067,505, of which $365,382 was
voluntarily waived; and Predecessor Small Cap Value Fund, $1,304,952, of which
$304,915 was voluntarily waived.
For the fiscal year ended October 31, 1994, Shawmut earned the
following advisory fees: Predecessor Connecticut Municipal Money Market Fund,
$305,260, of which $50,074 was voluntarily waived; Predecessor Massachusetts
Municipal Money Market Fund, $136,636 of which $21,600 was voluntarily waived;
Predecessor Growth and Income Fund, $1,720,866, of which $354,887 was
voluntarily waived; and Predecessor Small Cap Value Fund, $1,180,502, of which
$302,952 was voluntarily waived.
In addition, Shawmut reimbursed other operating expenses for the fiscal
year ended October 31, 1994, for the following Predecessor Funds: Predecessor
Connecticut Municipal Money Market Fund, $222,800 and Predecessor Massachusetts
Municipal Money Market Fund, $149,809, respectively.
The advisory agreement provides that Fleet shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Funds in
connection with the performance of its duties under the advisory agreement,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Fleet in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder. Unless sooner terminated, the advisory agreement will
continue in effect with respect to a particular Fund until August 10, 1997, and
thereafter from year to year as long as such continuance is approved at least
annually (i) by the vote of a majority of trustees who are not parties to such
advisory agreement or interested persons (as defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval; and (ii) by Galaxy's Board of Trustees, or by a vote of a majority of
the outstanding shares of such Fund. The term "majority of the outstanding
shares of such Fund" means, with respect to approval of an advisory agreement,
the vote of the lesser of (i) 67% or more of the shares of the Fund present at a
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund. The advisory agreement may be terminated by Galaxy or by
Fleet on sixty days' written notice, and will terminate immediately in the event
of its assignment.
Fleet Bank, an affiliate of Fleet, is paid a fee for sub-account and
administrative services performed with respect to Trust Shares of the Equity
Funds held by defined contribution plans. Pursuant to an agreement between Fleet
Bank and FDISG, Fleet will be paid $21.00 per year for each defined contribution
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plan participant sub-account. As of October 31, 1996, there were approximately
80,883 defined contribution plan participant subaccounts invested in Trust
Shares of the Equity Funds; thus it is expected that Fleet Bank will receive
annually $1,412,651 for sub-account services. FDISG bears this expense directly,
and shareholders of Trust Shares of the Equity Funds bear this expense
indirectly through fees paid to FDISG for transfer agency services.
FDISG serves as Galaxy's administrator. Under the administration
agreement, FDISG has agreed to maintain office facilities for Galaxy, furnish
Galaxy with statistical and research data, clerical, accounting, and bookkeeping
services, certain other services such as internal auditing services required by
Galaxy, and compute the net asset value and net income of the Funds. FDISG
prepares the Funds' annual and semi-annual reports to the Securities and
Exchange Commission, Federal and state tax returns, and filings with state
securities commissions, arranges for and bears the cost of processing share
purchase and redemption orders, maintains the Funds' financial accounts and
records and generally assists in all aspects of Galaxy's operations.
Prior to March 31, 1995, Galaxy's administrator and transfer agent was
440 Financial Group of Worcester, Inc., a wholly-owned subsidiary of State
Mutual Life Assurance Company of America. On March 31, 1995, FDISG, a
wholly-owned subsidiary of First Data Corporation, acquired all of the assets of
440 Financial Group of Worcester, Inc.
For the period December 4, 1995 through October 31, 1996, FDISG
received administration fees of $81,178, $32,643, $129,102 and $203,187 with
respect to the Connecticut Municipal Money Market Fund, Massachusetts Municipal
Money Market Fund, Small Cap Value Fund and Growth and Income Fund,
respectively.
For the period from November 1, 1995 to December 3, 1995, Federated
Administrative Services ("Federated"), a subsidiary of Federated Investors,
served as administrator of the Predecessor Funds and earned the following
administrative fees: Predecessor Connecticut Municipal Money Market Fund,
$12,973, none of which was waived; Predecessor Massachusetts Municipal Money
Market Fund, $5,101, none of which was waived; Predecessor Small Cap Value Fund,
$19,223, none of which was waived; and Predecessor Growth and Income Fund,
$31,175, none of which was waived.
For the fiscal year ended October 31, 1995, Federated earned the
following administrative fees: Predecessor Connecticut Municipal Money Market
Fund, $109,347, none of which was voluntarily waived; Predecessor Massachusetts
Municipal Money Market Fund, $50,000, none of which was voluntarily waived;
Predecessor Small Cap Value Fund, $131,149, none of which was
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voluntarily waived; and Predecessor Growth and Income Fund, $207,280, none of
which was voluntarily waived.
For the fiscal year ended October 31, 1994, Federated earned the
following administrative fees: Predecessor Connecticut Municipal Money Market
Fund, $77,039, of which $3,405 was voluntarily waived; Predecessor Massachusetts
Municipal Money Market Fund, $50,000, none of which was voluntarily waived;
Predecessor Growth and Income Fund, $184,829, none of which was voluntarily
waived; and Predecessor Small Cap Value Fund, $126,698, none of which was
voluntarily waived.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank ("Chase Manhattan") serves as custodian to the
Funds pursuant to a Global Custody Agreement. Under its custody agreement, Chase
Manhattan has agreed to: (i) maintain a separate account or accounts in the name
of each Fund; (ii) hold and disburse portfolio securities on account of each
Fund; (iii) collect and make disbursements of money on behalf of each Fund; (iv)
collect and receive all income and other payments and distributions on account
of each Fund's portfolio securities; (v) respond to correspondence from security
brokers and others relating to its duties; and (vi) make periodic reports to the
Board of Trustees concerning the Funds' operations. Chase Manhattan is
authorized to select one or more banks or trust companies to serve as
sub-custodian for the Funds, provided that Chase Manhattan shall remain
responsible for the performance of all of its duties under the custodian
agreement and shall be liable to the Funds for any loss which shall occur as a
result of the failure of a sub-custodian to exercise reasonable care with
respect to the safekeeping of the Funds' assets. In addition, Chase Manhattan
may employ sub-custodians for the Equity Funds upon prior approval by the Board
of Trustees in accordance with the regulations of the SEC, for the purpose of
providing custodial services for the foreign assets of those Funds held outside
the United States. The assets of the Funds are held under bank custodianship in
compliance with the 1940 Act.
Shawmut Bank, N.A. ("Shawmut") served as custodian to the Predecessor
Funds and was entitled to receive a fee based upon a sliding scale ranging from
a minimum of .011% to a maximum of .02% as percentage of net Fund assets, plus
certain transaction costs.
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<PAGE> 51
For the fiscal year ended October 31, 1995, Shawmut earned the
following custody fees: Predecessor Connecticut Municipal Money Market Fund,
$21,791, all of which was voluntarily waived; Predecessor Massachusetts
Municipal Money Market Fund, $12,000, all of which was voluntarily waived;
Predecessor Growth and Income Fund, $41,361, all of which was voluntarily
waived; and Predecessor Small Cap Value Fund, $26,112, all of which was
voluntarily waived.
For the fiscal year ended October 31, 1994, Shawmut earned the
following custody fees: Predecessor Connecticut Municipal Money Market Fund,
$12,215, all of which was voluntarily waived; Predecessor Massachusetts
Municipal Money Market Fund, $12,000, all of which was voluntarily waived;
Predecessor Growth and Income Fund, $34,400, all of which was voluntarily
waived; and Predecessor Small Cap Value Fund, $23,598, all of which was
voluntarily waived.
FDISG also serves as Galaxy's transfer agent and dividend disbursing
agent pursuant to a Transfer Agency Agreement ("Transfer Agency Agreement").
Under the Transfer Agency Agreement, FDISG has agreed to: (i) issue and redeem
shares of each Fund; (ii) transmit all communications by each Fund to its
shareholders of record, including reports to shareholders, dividend and
distribution notices and proxy materials for meetings of shareholders; (iii)
respond to correspondence by security brokers and others relating to its duties;
(iv) maintain shareholder accounts; and (v) make periodic reports to the Board
of Trustees concerning Galaxy's operations.
PORTFOLIO TRANSACTIONS
Debt securities purchased or sold by the Money Market Funds are
generally traded in the over-the-counter market on a net basis (i.e., without
commission) through dealers, or otherwise involve transactions directly with the
issuer of an instrument. The cost of securities purchased from underwriters
includes an underwriting commission or concession, and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down.
Transactions in equity securities on U.S. stock exchanges for the
Equity Funds involve the payment of negotiated brokerage commissions. On U.S.
stock exchanges on which commissions are negotiated, the cost of transactions
may vary among different brokers. 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
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commissions. With respect to over-the-counter transactions, Fleet will normally
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 or as described below.
For the period December 4, 1995 through October 31, 1996, the Growth
and Income and Small Cap Value Funds paid $398,181 and $118,396, respectively,
in brokerage commissions on brokerage transactions. For the fiscal years ended
October 31, 1995 and 1994, the Predecessor Growth and Income and Predecessor
Small Cap Value Funds paid $250,125 and $384,037 and $58,543, $89,793,
respectively, in brokerage commissions on brokerage transactions.
The Equity Funds may engage in short-term trading to achieve their
investment objectives. Portfolio turnover may vary greatly from year to year as
well as within a particular year. The Money Market Funds do not intend to seek
profits from short-term trading. Their annual portfolio turnover will be
relatively high, but since brokerage commissions are normally not paid on money
market instruments, it should not have a material effect on the net income of
either of these Funds.
In purchasing or selling securities for the Funds, Fleet will seek to
obtain the best net price and the most favorable execution of orders. To the
extent that the execution and price offered by more than one broker/dealer are
comparable, Fleet may effect transactions in portfolio securities with
broker/dealers who provide research, advice or other services such as market
investment literature.
Except as permitted by the SEC or applicable law, the Funds will not
acquire portfolio securities from, make savings deposits in, enter into
repurchase or reverse repurchase agreements with, or sell securities to, Fleet,
FDISG, or their affiliates, and will not give preference to affiliates and
correspondent banks of Fleet with respect to such transactions.
Galaxy is required to identify any securities of its "regular brokers
or dealers" that the Funds have acquired during Galaxy's most recent fiscal
year. At October 31, 1996, (i) the Growth and Income Fund held 40,000 shares of
common stock of J.P. Morgan & Co., Inc. (value $3,455,000) and entered into a
repurchase transaction with Chase Securities, Inc. in the amount of $21,980,581
to be repurchased on November 1, 1996 at $21,983,909; and (ii) the Small Cap
Value Fund held 106,700 shares of SEI Corp. (value $2,160,675) and entered into
a repurchase transaction with Chase Securities, Inc. in the amount of
$13,959,202 to be repurchased on November 1, 1996 at $13,961,315. Chase
Manhattan Bank, J.P. Morgan and SEI Financial
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are considered "regular brokers or dealers" of Galaxy. Chase Manhattan Bank,
J.P. Morgan & Co., Inc. and SEI Corp. are the parents of Chase Securities, Inc.,
J.P. Morgan and SEI Financial, respectively.
Investment decisions for each Fund are made independently from those
for the other Funds and for any other investment companies and accounts advised
or managed by Fleet. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund, another portfolio of Galaxy,
and/or another investment company or account, the transaction will be averaged
as to price, and available investments allocated as to amount, in a manner which
Fleet believes to be equitable to the Fund and such other portfolio, investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or sold by such Fund. To the extent permitted by law, Fleet may aggregate the
securities to be sold or purchased for a Fund with those to be sold or purchased
for its other portfolios, or other investment companies or accounts in order to
obtain best execution.
SHAREHOLDER SERVICES PLAN
As stated in the Prospectuses for the Funds, Galaxy may enter into
agreements ("Servicing Agreements") pursuant to its Shareholder Services Plan
("Services Plan") with Institutions and other organizations (including Fleet
Bank and its affiliates) (collectively, "Service Organizations") pursuant to
which Service Organizations will be compensated by Galaxy for providing certain
administrative and support services to Customers who are the beneficial owners
of Retail A Shares and Trust Shares of the Equity Funds and shares of the Money
Market Funds. As of October 31, 1996, Galaxy had entered into Servicing
Agreements only with Fleet Bank and affiliates.
Each Servicing Agreement between Galaxy and a Service Organization
relating to the Services Plan described above requires that, with respect to
those Funds which declare dividends on a daily basis, the Service Organization
agree to waive a portion of the servicing fee payable to it under the Services
Plan to the extent necessary to ensure that the fees required to be accrued with
respect to the Retail A Shares of such Funds (shares of the Money Market Funds)
on any day do not exceed the income to be accrued to such shares on that day.
For the period December 4, 1995 through October 31, 1996, payments to
Service Organizations totaled $104,877 with respect to shares of the Connecticut
Municipal Money Market Fund, $38,441 with respect to shares of the Massachusetts
Municipal Money Market Fund, $154,838 with respect to Retail A Shares of
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<PAGE> 54
the Growth and Income Fund, and $79,503 with respect to Retail A Shares of the
Small Cap Value Fund.
Galaxy's Servicing Agreements are governed by the Services Plan that
has been adopted by Galaxy's Board of Trustees in connection with the offering
of Retail A Shares of the Equity Funds and shares of the Money Market Funds.
Pursuant to the Plan, the Board of Trustees reviews, at least quarterly, a
written report of the amounts paid under the Servicing Agreements and the
purposes for which the expenditures were made. In addition, the arrangements
with Service Organizations must be approved annually by a majority of Galaxy's
trustees, including a majority of the trustees who are not "interested persons"
of Galaxy as defined in the 1940 Act and who have no direct or indirect
financial interest in such arrangements (the "Disinterested Trustees").
The Board of Trustees has approved Galaxy's arrangements with Service
Organizations based on information provided by Galaxy's service contractors that
there is a reasonable likelihood that the arrangements will benefit the Funds
and their shareholders by affording Galaxy greater flexibility in connection
with the efficient servicing of the accounts of the beneficial owners of Retail
A Shares of the Equity Funds and shares of the Money Market Funds. Any material
amendment to Galaxy's arrangements with Service Organizations must be approved
by a majority of Galaxy's Board of Trustees (including a majority of the
Disinterested Trustees). So long as Galaxy's arrangements with Service
Organizations are in effect, the selection and nomination of the members of
Galaxy's Board of Trustees who are not "interested persons" (as defined in the
1940 Act) of Galaxy will be committed to the discretion of such Disinterested
Trustees.
Investment Shares of the Predecessor Funds were subject to a Plan
adopted pursuant to Rule 12b-1 under the 1940 Act (the "Shawmut Plan"). The
Shawmut Plan permitted the payment of fees to administrators (including
broker/dealers and depository institutions such as commercial banks and savings
and loan associations) for distribution and administrative services. The Shawmut
Plan was designed to stimulate administrators to provide distribution and
administrative support services to the Predecessor Funds and their shareholders.
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<PAGE> 55
For the fiscal years ended October 31, 1994 and October 31, 1995, the
Predecessor Connecticut Municipal Money Market Fund paid $217,698 and $377,953,
respectively, in 12b-1 fees, of which $108,849 and $188,976, respectively, was
voluntarily waived. During the same periods, the Predecessor Massachusetts
Municipal Money Market Fund did not accrue 12b-1 fees. For the fiscal years
ended October 31, 1994 and October 31, 1995, the Predecessor Growth and Income
and Predecessor Small Cap Value Funds paid $96,587 and $166,932 and $89,974 and
$111,535, respectively, in 12b-1 fees, of which $48,234 and $83,466 and $44,987
and $55,768, respectively, was voluntarily waived.
DISTRIBUTION AND SERVICES PLAN
Galaxy has adopted a Distribution and Services Plan (the "12b-1 Plan")
pursuant to Rule 12b-1 under the 1940 Act with respect to Retail B Shares of the
Growth and Income Fund. The 12b-1 Plan is described in the applicable
Prospectus.
Under the 12b-1 Plan,, payments by Galaxy (i) for distribution expenses
may not exceed .65% (annualized) of the average daily net assets attributable to
such Fund's outstanding Retail B Shares, (ii) to an Institution for shareholder
liaison services and/or administrative support services may not exceed .25%
(annualized) and .25% (annualized), respectively, of the average daily net
assets attributable to such Fund's outstanding Retail B Shares which are owned
of record or beneficially by that Institution's Customers for whom the
Institution is the dealer of record or shareholder of record or with whom it has
a servicing relationship. As of the date of this Statement of Additional
Information, Galaxy intends to limit the Growth and Income Fund's payments for
shareholder liaison and administrative support services under the 12b-1 Plan to
an aggregate fee of not more than .30% (on an annualized basis) of the average
daily net asset value of Retail B Shares owned of record or beneficially by
Customers of Institutions.
Payments for distribution expenses under the 12b-1 Plan are subject to
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule defines distribution
expenses to include the cost of "any activity which is primarily intended to
result in the sale of Galaxy shares." The Rule provides, among other things,
that an investment company may bear such expenses only pursuant to a plan
adopted in accordance with the Rule. In accordance with the Rule, the 12b-1 Plan
provides that a report of the amounts expended under the 12b-1 Plan, and the
purposes for which such expenditures were incurred, will be made to the Board of
Trustees for its review at least quarterly. The 12b-1 Plan provides that
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it may not be amended to increase materially the costs which Retail B Shares of
the Growth and Income Fund may bear for distribution pursuant to the 12b-1 Plan
without shareholder approval, and that any other type of material amendment must
be approved by a majority of the Board of Trustees, and by a majority of the
trustees who are neither "interested persons" (as defined in the 1940 Act) of
Galaxy nor have any direct or indirect financial interest in the operation of
the 12b-1 Plan or in any related agreements, by vote cast in person at a meeting
called for the purpose of considering such amendments (the "Disinterested
Trustees").
For the period from March 4, 1996 (date of initial public offering of
Retail B Shares) through October 31, 1996, Retail B Shares of the Growth and
Income Fund bore $7,070 in distribution fees and $3,263 in shareholder servicing
fees. For the fiscal year ended October 31, 1996, all amounts paid under the
12b-1 Plan were attributable to payments to broker-dealers.
Galaxy's Board of Trustees has concluded that there is a reasonable
likelihood that the 12b-1 Plan will benefit the Growth and Income Fund and
holders of Retail B Shares. The 12b-1 Plan is subject to annual reapproval by a
majority of the Disinterested Trustees and is terminable at any time with
respect to the Growth and Income Fund by a vote of a majority of such Trustees
or by vote of the holders of a majority of the Retail B Shares of the Fund. Any
agreement entered into pursuant to the 12b-1 Plan with a Service Organization is
terminable with respect to the Fund without penalty, at any time, by vote of a
majority of the Disinterested Trustees, by vote of the holders of a majority of
the Retail B Shares of the Fund, by FD Distributors or by the Service
Organization. An agreement will also terminate automatically in the event of its
assignment.
As long as the 12b-1 Plan is in effect, the nomination of the trustees
who are not interested persons of Galaxy (as defined in the 1940 Act) must be
committed to the discretion of such Disinterested Trustees.
DISTRIBUTOR
First Data Distributors, Inc., a wholly-owned subsidiary of FDISG,
serves as Galaxy's Distributor. On March 31, 1995, 440 Financial acquired all of
the issued and outstanding stock of FD Distributors. Prior to that time, FD
Distributors was a wholly-owned subsidiary of 440 Financial Group of Worcester,
Inc. and an indirect subsidiary of State Mutual Life Assurance Company of
America.
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Unless otherwise terminated, the Distribution Agreement among Galaxy
and FD Distributors and its parent First Data, remains in effect until May 31,
1997, and thereafter will continue from year to year upon annual approval by
Galaxy's Board of Trustees, or by the vote of a majority of the outstanding
shares of Galaxy and by the vote of a majority of the Board of Trustees of
Galaxy who are not parties to the Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval. The Agreement will terminate in the event of its assignment, as
defined in the 1940 Act.
FD Distributors is entitled to the payment of a front-end sales charge
on the sale of Retail A Shares of the Equity Funds as described in the
applicable Prospectus. For the period December 4, 1995 through October 31, 1996,
FD Distributors received front-end sales charges in connection with Retail A
Share purchases as follows: Growth and Income Fund -- $279,670 ; and Small Cap
Value Fund -- $34,022.
FD Distributors is also entitled to the payment of contingent deferred
sales charges upon the redemption of Retail B Shares of the Growth and Income
Fund. For the period from March 4, 1996 (date of the initial public offering of
Retail B Shares) through October 31, 1996, FD Distributors received $2,815 in
contingent deferred sales charges in connection with redemptions of Retail B
Shares of the Growth and Income Fund. All such amounts were paid over to
affiliates of Fleet.
The following table shows all sales charges, commissions and other
compensation received by FD Distributors directly or indirectly from the Funds
during the fiscal year ended October 31, 1996:
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<TABLE>
<CAPTION>
Brokerage
Net Compensation Commissions
Underwriting on Redemption in Connection
Discounts and and with Fund Other
Fund Commissions(1) Repurchase(2) Transactions Compensation(3)
---- -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Connecticut N/A N/A N/A $ 83,549
Municipal Money
Market
Massachusetts N/A N/A N/A $ 34,586
Municipal Money
Market
Growth and Income $228,000.31 $2,814.97 $4,484.90 $173,942
Small Cap Value $ 32,876.87 N/A $1,144.96 $ 86,194
</TABLE>
- ----------------------
(1) Represents amounts received from front-end sales charges on Retail A
Shares and commissions received in connection with sales of Retail B
Shares.
(2) Represents amounts received from contingent deferred sales charges on
Retail B Shares. The basis on which such sales charges are paid is
described in the Prospectus relating to Retail B Shares. All such
amounts were paid to affiliates of Fleet.
(3) Represents payments made under the Shareholder Services Plan and
Distribution and Services Plan that have been adopted by Galaxy (see
"Shareholder Services Plan" and "Distribution and Services Plan"
above).
AUDITORS
Coopers & Lybrand L.L.P., independent certified public accountants,
with offices at One Post Office Square, Boston, Massachusetts 02109, serve as
auditors to Galaxy. The financial highlights for the Funds for the fiscal year
ended October 31,1996 including in their Prospectuses and the financial
statements for the fiscal year ended October 31, 1996 contained in Galaxy's
Annual Report to Shareholders and incorporated by reference into the Statement
of Additional Information have been audited by Coopers & Lybrand L.L.P. for the
period included in their report which appears therein.
COUNSEL
Drinker Biddle & Reath (of which W. Bruce McConnel, III, Secretary of
Galaxy, is a partner), 1345 Chestnut Street, Suite 1100, Broad and Chestnut
Streets, Philadelphia, Pennsylvania 19107, are counsel to Galaxy and will pass
upon certain legal matters on its behalf. The law firm of Day, Berry & Howard,
Cityplace, Hartford, Connecticut 06103-3499, serves as special
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Connecticut counsel to Galaxy and has reviewed the portion of this Statement of
Additional Information and the Prospectuses with respect to the Connecticut
Municipal Money Market Fund concerning Connecticut taxes and the description of
special considerations relating to Connecticut Municipal Securities. The law
firm of Ropes & Gray, One International Place, Boston, Massachusetts 02110-2624,
serves as special Massachusetts counsel to Galaxy and has reviewed the portion
of the Prospectuses with respect to the Massachusetts Municipal Money Market
Fund concerning Massachusetts taxes and the description of special
considerations relating to Massachusetts Municipal Securities.
PERFORMANCE AND YIELD INFORMATION
YIELD QUOTATIONS -- CONNECTICUT MUNICIPAL MONEY MARKET AND
MASSACHUSETTS MUNICIPAL MONEY MARKET FUNDS
The standardized, annualized seven-day yields for the Connecticut
Municipal Money Market and Massachusetts Municipal Money Market Funds are
computed by: (1) determining the net change, exclusive of capital changes, in
the value of a hypothetical pre-existing account in a Fund having a balance of
one share at the beginning of a seven-day period, for which the yield is to be
quoted, (2) dividing the net change in account value by the value of the account
at the beginning of the base period to obtain the base period return, and (3)
analyzing the results (i.e., multiplying the base period return by (365/7)). The
net change in the value of the account in each Fund includes the value of
additional shares purchased with dividends from the original share and dividends
declared on both the original share and any such additional shares, and all fees
that are charged by a Fund to all shareholder accounts in proportion to the
length of the base period, other than non-recurring account and sales charges.
For any account fees that vary with the size of the account, the amount of fees
charged is computed with respect to the Fund's mean (or median) account size.
The capital changes to be excluded from the calculation of the net change in
account value are realized gains and losses from the sale of securities and
unrealized appreciation and depreciation. The effective compound yield quotation
for each Fund is computed by adding 1 to the unannualized base period return
(calculated as described above), raising the sum to a power equal to 365 divided
by 7, and subtracting 1 from the result.
The current yield for the Connecticut Municipal Money Market and
Massachusetts Municipal Money Market Funds may be obtained by calling FD
Distributors at the telephone numbers provided on the cover page of the
applicable Prospectus. For the seven-day period ended October 31, 1996, the
annualized and effective yields of the Connecticut Municipal Money Market Fund
were 2.84% and 2.88%, respectively. For the seven-day period ended
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October 31, 1996, the annualized and effective yields of the Massachusetts
Municipal Money Market Fund was were 2.83% and 2.87%, respectively.
In addition, the Connecticut Municipal Money Market and Massachusetts
Municipal Money Market Funds may calculate a "tax equivalent yield." The tax
equivalent yield for a Fund is computed by dividing that portion of the Fund's
yield which is tax-exempt by one minus a stated income tax rate and adding the
product to that portion, if any, of the Fund's computed yield that is not
tax-exempt. Tax equivalent yields of the Connecticut Municipal Money Market and
Massachusetts Municipal Money Market Funds assume a 32.50% and 40.00% respective
combined Federal and state tax rate and indicate what each Fund would have had
to earn to equal its actual yield, assuming that income earned by the Fund is
100% tax-exempt. The tax-equivalent yields for the Connecticut Municipal Money
Market Fund and Massachusetts Municipal Money Market Fund, for the seven-day
period ended October 31, 1996 were 4.21% and 4.72%, respectively.
TAX-EQUIVALENCY TABLES - CONNECTICUT MUNICIPAL MONEY MARKET AND
MASSACHUSETTS MUNICIPAL MONEY MARKET FUNDS
The Connecticut Municipal Money Market and Massachusetts Municipal
Money Market Funds may use tax-equivalency tables in advertising and sales
literature. The interest earned by the municipal securities in the Funds'
respective portfolios generally remain free from Federal regular income tax, and
from the regular personal income tax imposed by Connecticut and Massachusetts.1
As the tables below indicate, "tax-free" investments are attractive choices for
investors, particularly in times of narrow spreads between "tax-free" and
taxable yields.
Note: The maximum margina(l) tax rate for each bracket was used in
calculating the taxable yield equivalent for each chart. Furthermore, additional
state and local taxes paid on comparable taxable investments were not used to
increase Federal deductions.
The charts below are for illustrative purposes only and use tax
brackets that went into effect beginning January 1, 1994. These are not
indicators of past or future performance of the Connecticut Municipal Money
Market and Massachusetts Municipal Money Market Funds.
- --------
(1) Some portion of either Fund's income may be subject to the federal
alternative minimum tax and state and local regular or alternative
minimum taxes.
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<PAGE> 61
TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF CONNECTICUT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Federal Tax Bracket:
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
Combined Federal and State:
19.50% 32.50% 35.50% 40.50% 44.10%
- --------------------------------------------------------------------------------------------------------------
Join
Return: $1-38,000 $38,001-91,850 $91,851-140,000 $140,001-250,000 Over $250,000
Single
Return: $1-22,750 $22,751-55,100 $55,101-115,000 $115,001-250,000 Over $250,000
- --------------------------------------------------------------------------------------------------------------
Tax-Exempt
Yield:
Taxable Yield Equivalent
- --------------------------------------------------------------------------------------------------------------
1.50% 1.86% 2.22% 2.33% 2.52% 2.68%
2.00% 2.48% 2.96% 3.10% 3.36% 3.58%
2.50% 3.11% 3.70% 3.88% 4.20% 4.47%
3.00% 3.73% 4.44% 4.65% 5.04% 5.37%
3.50% 4.35% 5.19% 5.43% 5.88% 6.26%
4.00% 4.97% 5.93% 6.20% 6.72% 7.16%
4.50% 5.59% 6.67% 6.98% 7.56% 8.05%
5.00% 6.21% 7.41% 7.75% 8.40% 8.94%
5.50% 6.83% 8.15% 8.53% 9.24% 9.84%
6.00% 7.45% 8.89% 9.30% 10.08% 10.73%
</TABLE>
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<PAGE> 62
TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF MASSACHUSETTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Federal Tax Bracket:
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
Combined Federal and State:
27.00% 40.00% 43.00% 48.00% 51.60%
- --------------------------------------------------------------------------------------------------------------
Joint
Return: $1-38,000 $38,001-91,850 $91,851-140,000 $140,001-250,000 Over $250,000
Single
Return: $1-22,750 $22,751-55,100 $55,101-115,000 $115,001-250,000 Over $250,000
- --------------------------------------------------------------------------------------------------------------
Tax-Exempt
Yield:
Taxable Yield Equivalent
- --------------------------------------------------------------------------------------------------------------
1.50% 2.05% 2.50% 2.63% 2.88% 3.10%
2.00% 2.74% 3.33% 3.51% 3.85% 4.13%
2.50% 3.42% 4.17% 4.39% 4.81% 5.17%
3.00% 4.11% 5.00% 5.26% 5.77% 6.20%
3.50% 4.79% 5.83% 6.14% 6.73% 7.23%
4.00% 5.48% 6.67% 7.02% 7.69% 8.26%
4.50% 6.16% 7.50% 7.89% 8.65% 9.30%
5.00% 6.85% 8.33% 8.77% 9.62% 10.33%
5.50% 7.53% 9.17% 9.65% 10.58% 11.36%
6.00% 8.22% 10.00% 10.53% 11.54% 12.40%
</TABLE>
YIELD AND PERFORMANCE OF THE GROWTH AND INCOME AND SMALL CAP VALUE FUNDS
The Growth and Income and Small Cap Value Funds' 30-day (or one month)
standard yields described in their Prospectuses are calculated separately for
each series of shares in each Fund in accordance with the method prescribed by
the SEC for mutual funds:
a - b
YIELD = 2[( - - - - +1 )6 - 1]
cd
Where: a = dividends and interest earned by a
Fund during the period;
b = expenses accrued for the period
(net of reimbursements);
c = average daily number of shares
outstanding during the period,
entitled to receive dividends; and
-53-
<PAGE> 63
d = maximum offering price per share on
the last day of the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on debt obligations held by a Fund is calculated by computing the yield
to maturity of each obligation based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by the Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be called
or, if none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market value of such debt obligations. Expenses accrued
for the period (variable "b" in the formula) include all recurring fees charged
by a Fund to all shareholder accounts and to the particular series of shares in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the offering
price per share (variable "d" in the formula). The Funds' maximum offering price
per Retail A Share for purposes of the formula will include the maximum sales
load imposed by the Funds -- currently 3.75% of the per share offering price.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the case
of tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have discounts based on current market value that are
less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
-54-
<PAGE> 64
With respect to mortgage or other receivables-backed obligations that
are expected to be subject to monthly payments of principal and interest
("pay-downs"), (i) gain or loss attributable to actual monthly pay downs are
accounted for as an increase or decrease to interest income during the period,
and (ii) each Fund may elect either (a) to amortize the discount and premium on
the remaining security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if any, if the weighted average date is not available or
(b) not to amortize discount or premium on the remaining security.
Each Fund that advertises its "average annual total return" computes
such return separately for each series of shares by determining the average
annual compounded rate of return during specified periods that equates the
initial amount invested to the ending redeemable value of such investment
according to the following formula:
ERV l/n
T = [(-----) - 1]
P
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
l, 5 or 10 year (or other) periods at the
end of the applicable period (or a
fractional portion thereof);
P = hypothetical initial payment of $1,000 less
any applicable sales charge; and
n = period covered by the computation, expressed
in years.
Each Fund that advertises its "aggregate total return" computes such
returns separately for each series of shares by determining the aggregate
compounded rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - l]
P
The calculations are made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date
-55-
<PAGE> 65
(reflecting any sales load charged upon such reinvestment), (2) all recurring
fees charged to all shareholder accounts are included, and (3) for any account
fees that vary with the size of the account, a mean (or median) account size in
the Fund during the periods is reflected. The ending redeemable value (variable
"ERV" in the formula) is determined by assuming complete redemption of the
hypothetical investment after deduction of all nonrecurring charges at the end
of the measuring period. In addition, the Equity Funds' Retail Shares average
annual total return and aggregate total return quotations will reflect the
deduction of the maximum sales load charged in connection with the purchase of
Retail Shares.
For the period ended October 31, 1996, the 30-day yields for Retail A
Shares of the Growth and Income and Small Cap Value Funds were 1.48% and
(0.14)%, respectively, and the 30-day yields for Trust Shares of the Growth and
Income Fund and Small Cap Value Fund were 1.77% and 0.10%, respectively.
The average annual total returns for the one-year period ended October
31, 1996 and for the period from February 12, 1993 (date of initial public
offering) to October 31, 1996 were 15.75% and 13.98%, respectively, for Retail A
Shares of the Growth and Income Fund and 20.13% and 14.60%, respectively, for
Retail A Shares of the Small Cap Value Fund. The average annual total returns
for the one-year period ended October 31, 1996 and for the period from December
14, 1992 (date of initial public offering) to October 31, 1996 were 20.77% and
14.81%, respectively, for Trust Shares of the Growth and Income Fund, and
25.22% and 15.31%, respectively, for Trust Shares of the Small
Cap Value Fund.
The aggregate total returns for Retail A Shares of the Growth and
Income Fund and Small Cap Value Fund for the period from February 12, 1993 (date
of initial public offering) to October 31, 1996 were 62.61% and 65.93%,
respectively. The aggregate total returns for Trust Shares of the Growth and
Income Fund and Small Cap Value Fund for the period December 14, 1992 (date of
initial public offering) to October 31, 1996 were 70.85% and 73.78%,
respectively.
For the period ended October 31, 1996, the 30-day yield for Retail B
Shares of the Growth and Income Fund was 0.92%. The average annual total return
for the period from March 4, 1996 (date of initial public offering) to October
31, 1996 was 1.83% for Retail B Shares of the Growth and Income Fund.
As stated in the Funds' Prospectuses, the Funds may also calculate
total return quotations without deducting the maximum sales charge imposed on
purchases of Retail Shares. The effect of not deducting the sales charge will be
to increase the total return reflected.
-56-
<PAGE> 66
MISCELLANEOUS
As used in the Prospectuses, "assets belonging to a Fund" or "assets
belonging to a particular series of a Fund" means the consideration received by
Galaxy upon the issuance of shares in that particular Fund or that particular
series of the Fund, 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 Galaxy not belonging to a
particular series or Fund. In determining the net asset value of a particular
Fund or series of a Fund, assets belonging to the particular Fund or series of
the Fund are charged with the direct liabilities in respect of that Fund or
series and with a share of the general liabilities of Galaxy, which are
allocated in proportion to the relative asset values of the respective series
and Funds at the time of allocation. Subject to the provisions of Galaxy's
Declaration of Trust, determinations by the Board of Trustees as to the direct
and allocable liabilities, and the allocable portion of any general assets with
respect to a particular series or Fund, are conclusive.
As of February 3, 1997, the name, address and share ownership of the
entities or persons that held of record more than 5% of the outstanding Trust
Shares of each of Galaxy's investment portfolios (including shares of the
Institutional Treasury Money Market Fund) were as follows: Money Market Fund - -
Fleet New York, Fleet Investment Services, 159 East Main Street, NY/RO/TO3C,
Rochester, New York 14863 (98.53%); Government Money Market Fund -- Fleet New
York, Fleet Investment Services, 159 East Main Street, NY/RO/TO3C, Rochester,
New York 14638 (97.86%); U.S. Treasury Money Market Fund -- Fleet New York,
Fleet Investment Services, 159 East Main Street, NY/RO/TO3C, Rochester, New York
14638 (95.32%); Tax-Exempt Money Market Fund -- Fleet New York, Fleet Investment
Services, 159 East Main Street, NY/RO/TO3C, Rochester, New York 14638 (99.50%);
Institutional Treasury Money Market Fund -- Security-Connecticut Life Insurance
Co., Attn: Investment Department, 20 Security Drive, Avon, Connecticut 06001
(7.76%); Fleet New York, Fleet Investment Services, 159 East Main Street;
NY/RO/TO3C, Rochester, New York 14638 (89.62%); Equity Value Fund -- Norstar
Trust Company, Gales & Co., Funds Control, Account 00000003294, Attn: Julie
Hogestyn, One East Avenue, Rochester, New York 14638 (21.28%); Norstar Trust
Company, Gales & Co., Funds Control, Account 00000000064, Attn: Julie Hogestyn,
One East Avenue, Rochester, New York 14638 (74.15%); Equity Growth Fund --
Norstar Trust Company, Gales & Co., Funds Control, Account 00000030718, Attn:
Julie Hogestyn, One East Avenue, Rochester, New York 14638 (14.58%); Norstar
Trust Company, Gales & Co., Funds Control, Account 00000010017, Attn: Julie
Hogestyn, One East Avenue,
-57-
<PAGE> 67
Rochester, New York 14638 (20.03%); Norstar Trust Company, Gales & Co., Funds
Control, Account 00000000082, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (64.76%); Equity Income Fund -- Norstar Trust Company, Gales &
Co., Funds Control, Account 00000000037, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (13.49%); Norstar Trust Company, Gales & Co., Funds
Control, Account 00000003748, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (30.99%); Norstar Trust Company, Gales & Co., Funds Control,
Account 00000015701, Attn: Julie Hogestyn, One East Avenue, Rochester, New York
14638 (54.90%); International Equity Fund -- Norstar Trust Company, Gales & Co.,
Funds Control, Account 00000004088, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (10.96%); Norstar Trust Company, Gales & Co., Funds
Control, Account 00000000876, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (37.98%); Norstar Trust Company, Gales & Co., Funds Control,
Account 00000000073, Attn: Julie Hogestyn, One East Avenue, Rochester, New York
14638 (47.78%); Growth and Income Fund -- Norstar Trust Company, Gales & Co.,
Funds Control, Account 05000503793, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (38.98%); Norstar Trust Company, Gales & Co., Funds
Control, Account 05000603873, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (59.43%); Asset Allocation Fund -- Norstar Trust Company, Gales &
Co., Funds Control, Account 00000006709, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (9.63%); Norstar Trust Company, Gales & Co., Funds
Control, Account 00000002598, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (14.30%); Norstar Trust Company, Gales & Co., Funds Control,
Account 00000000073, Attn: Julie Hogestyn, One East Avenue, Rochester, New York
14638 (76.07%); Small Company Equity Fund -- Norstar Trust Company, Gales & Co.,
Funds Control, Account 00000006102, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (5.24%); Norstar Trust Company, Gales & Co., Funds
Control, Account 00000001492, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (24.42%); Norstar Trust Company, Gales & Co., Funds Control,
Account 00000000046, Attn: Julie Hogestyn, One East Avenue, Rochester, New York
14638 (67.93%); Small Cap Value Fund -- Norstar Trust Company, Gales & Co.,
Funds Control, Account 05000503917, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (11.77%); Norstar Trust Company, Gales & Co., Funds
Control, Account 05000503999, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (85.30%); Short-Term Bond Fund -- Norstar Trust Company, Gales &
Co., Funds Control, Account 00000000064, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (40.18%); Norstar Trust Company, Gales & Co., Funds
Control, Account 00000001090, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (13.75%); Norstar Trust Company, Gales & Co., Funds Control,
Account 00000008627, Attn: Julie Hogestyn, One East Avenue, Rochester, New York
14638 (46.28%); Intermediate Government Income Fund -- Norstar Trust Company,
Gales & Co., Funds Control, Account 00000007183, Attn: Julie Hogestyn, One East
Avenue, Rochester, New York 14638 (26.86%); Norstar Trust Company, Gales & Co.,
Funds Control, Account 00000000037, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (28.78%); Norstar Trust Company, Gales & Co., Funds
Control, Account 00000038408, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (43.37%); High Quality Bond Fund -- Norstar Trust Company, Gales
& Co., Funds Control, Account 00000006095, Attn: Julie Hogestyn, One East
Avenue, Rochester, New York 14638 (11.50%); Norstar Trust Company, Gales & Co.,
Funds Control, Account
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<PAGE> 68
00000001465, Attn: Julie Hogestyn, One East Avenue, Rochester, New York 14638
(24.50%); Norstar Trust Company, Gales & Co., Funds Control, Account
00000000037, Attn: Julie Hogestyn, One East Avenue, Rochester, New York 14638
(62.89%); Corporate Bond Fund --Norstar Trust Company, Gales & Co., Funds
Control, Account 00000000046, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (41.10%); Norstar Trust Company, Gales & Co., Funds Control,
Account 00000006102, Attn: Julie Hogestyn, One East Avenue, Rochester, New York
14638 (48.20%); Tax-Exempt Bond Fund -- Norstar Trust Company, Gales & Co.,
Funds Control, Account 00000000670, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (22.04%); Norstar Trust Company, Gales & Co., Funds
Control, Account 00000000028, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (33.58%); Norstar Trust Company, Gales & Co., Funds Control,
Account 00000005899, Attn: Julie Hogestyn, One East Avenue, Rochester, New York
14638 (43.92%); New York Municipal Bond Fund -- Norstar Trust Company, Gales &
Co., Funds Control, Account 00000005292, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (9.95%); Norstar Trust Company, Gales & Co., Funds
Control, Account 00000000019, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York 14638 (12.52%); Norstar Trust Company, Gales & Co., Funds Control,
Account 00000001107, Attn: Julie Hogestyn, One East Avenue, Rochester, New York
14638 (76.77%); Connecticut Municipal Bond Fund -- Norstar Trust Company, Gales
& Co., Funds Control, Account 00000000037, Attn: Julie Hogestyn, One East
Avenue, Rochester, New York 14638 (41.88%); Norstar Trust Company, Gales & Co.,
Funds Control, Account 00000000019, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638 (52.89%); and Massachusetts Municipal Bond Fund --
Norstar Trust Company, Gales & Co., Funds Control, Account 00000000073, Attn:
Julie Hogestyn, One East Avenue, Rochester, New York 14638 (32.81%); Norstar
Trust Company, Gales & Co., Funds Control, Account 00000000019, Attn: Julie
Hogestyn, One East Avenue, Rochester, New York 14638 (67.19%).
As of February 3, 1997, the name, address and share ownership of the
entities or persons that held of record more than 5% of the outstanding Retail A
Shares of each of Galaxy's investment portfolios (including shares of the
Connecticut Municipal Money Market and Massachusetts Municipal Money Market
Funds) were as follows: Tax-Exempt Money Market Fund -- Hope H. Van Beuren, East
Main RR 25 Enterprise Center, Middletown, Rhode Island 02842 (13.14%);
Massachusetts Municipal Money Market Fund -- Joel Alvord, DBA Chestnut
Associates, 20 Rowes Wharf, Unit 710, Boston, Massachusetts 02110 (13.20%);
Fleet New York, Fleet Investment Services, 159 East Main Street, NY/RO/TO3C,
Rochester, New York 14638 (35.27%); Connecticut Municipal Money Market Fund --
Fleet New York, Fleet Investment Services, 159 East Main Street, NY/RO/TO3C,
Rochester, New York 14638 (29.95%); Massachusetts Municipal Bond Fund -- Leonard
M. Caruso, 225 Lynn Fella Parkway, Sangus, Massachusetts 09106-3119 (5.14%); and
Rhode Island Municipal Bond Fund -- James R. McCulloch c/o Microfibre,
-59-
<PAGE> 69
P.O. Box 1208, Pawtucket, Rhode Island 02860 (7.21%); Norstar Trust Company,
Galles & Co.; Funds Control, Attn: Julie Hogestyn, One East Avenue, Rochester,
New York (46.39%).
As of February 3 , 1997, the name, address and share ownership of the
entities or persons that held of record more than 5% of the outstanding Retail B
Shares of each of Galaxy's investment portfolio were as follows: High Quality
Bond Fund -- Michael J. Sangiacomo, 4 Hubbard Road, Hartford, Connecticut 06114
(6.13%); Colonial Marble Co., Inc., Stephen B. Fichera, 25 Garvey Street, P.O.
Box 187, Everett, Massachusetts 02149 (6.88%); Helen M. Boylan, 21 Putnam Lane,
Danvers, Massachusetts 01923 (7.23%); Thomas R. Spaltabak, 950 Rice Road, Elma,
New York 14059-9583 (10.50%); Short-Term Bond Fund -- Leonard J. Mercer, 21
Portsmouth Road, Amesbury, Massachusetts 01913 (5.87%); Natale Costa and Mary
Castle JTWROS, 11 Maple Avenue, Hopkinton, Massachusetts 01748 (9.09%); Chelsea
Police Relief Association, John R. Phillips, Treasurer and Michael McCona,
Clerk, 19 Park Street, Chelsea, Massachusetts 02150 (9.44%); Michael J.
Sangiacomo, 4 Hubbard Road, Hartford, Connecticut 06114 (10.37%); Colonial
Marble Co., Inc., Stephen B. Fichera, 25 Garvey Street, P.O. Box 187, Everett,
Massachusetts 02149 (20.69%); and Tax- Exempt Bond Fund -- Betsy Royal, 51 Hoyt
Street, New Canann, Connecticut 06840-5618 (5.48%); Edward A. Pitts, P.O. Box
119, 152 Maih Street, Broad Brook, Connecticut 06016 (5.58%); William R. Droll
and William F. Droll JTWROS, 16 Manning Drive, Lowell, Massachusetts 01851-3930
(5.64%); Louis Dicola and Ester Dicola JTWROS, 4 April Court, Providence, Rhode
Island 02908-2111 (8.78%); David Fendler and Sylvia Fendler JTWROS, 72
Brinkenhoff Avenue, Stamford, Connecticut 06905 (9.57%); Leonard F. Szadtowski
and Francis Willy JTWROS, 162 Friendship Street, Bolivar, New York 14715
(9.61%); Jeannette E. Seiter, 121 Schuyler Street, Boonville, New York 13309
(9.96%); Katrina A. Seiter, 121 Schuyler Street, Boonville, New York 13309
(11.06%).
As of February 3, 1997, the name, address and share ownership of the
entities or persons that held beneficially more than 5% of the outstanding Trust
Shares of each of Galaxy's investment portfolios (including shares of the
Institutional Treasury Money Market Fund) were as follows: U.S. Treasury Money
Market Fund -- Loring Walcott Sweep Account, Loring Walcott & Coolidge, Attn:
Richard Ferrari, 230 Congress Street, Boston, Massachusetts 02110 (15.19%);
Institutional Treasury Money Market Fund -- Charon Industries Inc. IM, c/o
Robert J. McDermott, 370 Old Country Road, Garden City, New York 11530 (5.85%);
Equity Value Fund -- Fleet Savings Plus Plan, Fleet Financial Group, Inc., 50
Kennedy Plaza, Providence, Rhode Island 02903 (12.36%); Equity Growth Fund --
Fleet Savings Plus Plan, Fleet Financial Group, Inc., 50 Kennedy Plaza,
Providence, Rhode Island 02903 (22.12%); International Equity Fund -- Fleet
Savings Plus Plan, Fleet Financial Group, Inc., 50 Kennedy Plaza, Providence,
Rhode Island 02903 (9.73%); FFG Retirement & Pension Equity, Fleet
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<PAGE> 70
Financial Group, Inc., 50 Kennedy Plaza, Providence, Rhode Island 02903
(19.23%); Growth and Income Fund -- Fleet Savings Plus Plan, Fleet Financial
Group, Inc., 50 Kennedy Plaza, Providence, Rhode Island 02903 (40.32%); Asset
Allocation Fund -- Fleet Financial Group, Inc., 50 Kennedy Plaza, Providence,
Rhode Island 02903 (25.91%); Small Company Equity Fund -- Fleet Savings Plus
Plan, Fleet Financial Group, Inc., 50 Kennedy Plaza, Providence, Rhode Island
02903 (40.41%); Small Cap Value Fund -- Fleet Bank N.A., Rogers Corp, Attn:
James DeLucin, Fleet Bank CT, 157 Church Street, P.O. Box 1909, New Haven,
Connecticut 06509 (6.92%); FFG Employee Retirement Miscellaneous Assets, Fleet
Financial Group, Inc., 50 Kennedy Plaza, Providence, Rhode Island 02903
(31.25%); Intermediate Government Income Fund -- NUSCO Retiree Health VEBA
Trust, P.O. Box 270, Hartford, Connecticut 06141 (5.69%); High Quality Bond Fund
- -- Fleet Savings Plus Plan, Fleet Financial Group, Inc., 50 Kennedy Plaza,
Providence, Rhode Island 02903 (25.76%); Corporate Bond Fund -- Cole Hersee
Pension, C/o Fleet Financial Group, Inc., One East Avenue, Rochester, New York
11530 (5.62%); BNE Unified Retirement Trust, Attn: Ben Branch, Trustee, 21
Merchants Road, Boston, Massachusetts 02109 (21.29%); Tax-Exempt Bond Fund --
Nusco Retiree Health, P.O. Box 270, Hartford, Connecticut 06141 (31.59%);
Connecticut Municipal Bond Fund -- Robert A. Simons, c/o Fleet Financial Group,
Inc., One East Avenue, Rochester, New York 11530 (5.81%); Ruthan Wein, 18
Timberlane Drive, Farmington, Connecticut 06032 (6.35%); Florence M. Roberts,
336 Drummond Road, Orange, Connecticut 06477 (7.55%); and Massachusetts
Municipal Bond Fund -- Philip H. Tobey, c/o Fleet Financial Group, Inc., One
East Avenue, Rochester, New York 11530 (5.33%); Margaret U. Davis, 8 Kilsyth
Terrace #21, Brighton, Massachusetts 02146 (5.53%); Alice Gardner, c/o Fleet
Financial Group, Inc., One East Avenue, Rochester, New York 11530 (5.53%).
FINANCIAL STATEMENTS
Galaxy's Annual Reports to Shareholders with respect to the Funds for
the fiscal year ended October 31, 1996 has been filed with the Securities and
Exchange Commission. The financial statements in such Annual Reports (the
"Financial Statements") are incorporated into this Statement of Additional
Information by reference. The Financial Statements included in the Annual
Reports for the Funds for the fiscal year ended October 31, 1996 have been
audited by Galaxy's independent accountants, Coopers & Lybrand L.L.P., whose
reports thereon also appear in such Annual Reports and is incorporated herein by
reference. The Financial Statements in such Annual Reports have been
incorporated herein by reference in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
-61-
<PAGE> 71
The Shawmut Funds' Annual Report to Shareholders with respect to the
Predecessor Funds for the fiscal year ended October 31, 1995 has been filed with
the Securities and Exchange Commission. The financial statements in such Annual
Report (the "Shawmut Financial Statements") are incorporated into this Statement
of Additional Information. The Shawmut Financial Statements included in the
Annual Report for the Predecessor Funds for the fiscal year ended October 31,
1995 have been audited by Price Waterhouse LLP, independent accountants for the
Predecessor Funds, whose report thereon also appears in such Annual Report and
is incorporated herein by reference. The Shawmut Financial Statements in such
Annual Report have been incorporated herein by reference in reliance upon the
report of said firm of independent accountants given upon their authority as
experts in accounting and auditing.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
The following is a description of the securities ratings of Duff &
Phelps Credit Rating Co. ("D&P"), Fitch Investors Service, L.P. ("Fitch"),
Standard & Poor's Ratings Group, ("S&P"), Moody's Investors Service, Inc.
("Moody's"), IBCA Limited and IBCA Inc. ("IBCA") and Thomson BankWatch
("Thomson").
Corporate and Tax-Exempt Bond Ratings
The five highest ratings of D&P for tax-exempt and corporate
fixed-income securities are AAA, AA, A, BBB and BB. Securities rated AAA are of
the highest credit quality. The risk factors are considered to be negligible,
being only slightly more than for risk-free U.S. Treasury debt. Securities rated
AA are of high credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions. Securities
that are rated "A" have protection factors that are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress. Securities that are rated "BBB" have below average protection factors
but are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles. Securities that are rated
BB are considered to be below investment grade but are deemed likely to meet
obligations when due. The AA, A, BBB and BB ratings may be modified by an
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
The five highest ratings of Fitch for tax-exempt and corporate bonds
are AAA, AA, A, BBB and BB. Plus (+) and minus (-) signs are used with a rating
symbol to indicate the relative position of a credit within the rating category.
AAA bonds are considered to be investment grade and of the highest credit
quality. The obligor is judged to have an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. AA bonds are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. 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 are 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 are
considered to be investment grade and of satisfactory credit quality. The
obligor's ability to pay interest and repay principal is
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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 bonds are considered to be speculative investments and
represent the likelihood of timely payment of principal and interest in
accordance with the terms of obligation for issues not in default.
The five highest ratings of S&P for tax-exempt and corporate bonds are
AAA, AA, A, BBB and BB. Bonds rated AAA bear the highest rating assigned by S&P
to a debt obligation and the AAA rating indicates in its opinion an extremely
strong capacity to pay interest and repay principal. Bonds rated AA by S&P are
judged by it to have a very strong capacity to pay interest and repay principal,
and they differ from AAA issues only in small degree. Bonds rated A are
considered to have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds of a higher rated category.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas such bonds 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 for higher rated categories. Bonds rated BB have less
near-term vulnerability to default than other speculative issues. However, such
bonds face major ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lend to inadequate capacity to meet
timely interest and principal payments. The AA, A, BBB and BB ratings may be
modified by an addition of a plus (+) or minus (-) sign to show relative
standing within these major rating categories.
The five highest ratings of Moody's for tax-exempt and corporate bonds
are Aaa, Aa, A, Baa and Ba. Tax-exempt and corporate bonds rated Aaa are judged
to be of the "best quality." The rating of Aa is assigned to bonds which are of
"high quality by all standards." Aa bonds are rated lower than Aaa bonds because
margins of protection may not be as large or fluctuations of protective elements
may be of greater amplitude or there may be other elements which make the
long-term risks appear somewhat larger. Bonds that are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present that suggest a susceptibility to impairment
sometime in the future. Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
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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. Bonds rated Ba provide questionable protection of
interest and principal and indicate some speculative elements. Moody's may
modify a rating of Aa, A, Baa or Ba by adding numerical modifiers of 1, 2 or 3
to show relative standing within these categories. The foregoing ratings are
sometimes presented in parentheses preceded with a "con" indicating the bonds
are rated conditionally. Such parenthetical rating denotes the probable credit
stature upon completion of construction or elimination of the basis of the
condition.
The five highest ratings of IBCA for tax-exempt and corporate bonds are
AAA, AA, A, BBB and BB. 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 banking subsidiaries. Obligations rated AAA by
IBCA have 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. Obligations for which there is a very low expectation of
investment risk are rated AA. Obligations rated A have a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although changes in business, economic or financial conditions may lead
to increased investment risk. Obligations rated BBB currently have a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in higher categories. Obligations rated BB represent a low
degree of speculation and indicate a possibility of investment risk developing.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote relative
status within a major rating category.
Corporate and Tax-Exempt Commercial Paper Ratings
The highest rating of D&P for commercial paper is Duff 1. D&P employs
three designations, Duff 1 plus, Duff 1 and Duff 1 minus, within the highest
rating category. Duff 1 plus indicates highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is judged to be "outstanding, and safety is just
below risk-free U.S. Treasury short-term obligations." Duff 1 indicates very
high certainty of timely payment. Liquidity factors are excellent and supported
by good fundamental protection factors. Risk factors are considered to be minor.
Duff 1 minus indicates high certainty of timely payment.
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Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small. Duff 2 indicates 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. Duff 3 indicates satisfactory liquidity
and other protection factors qualify such issues as to investment grade. Risk
factors are larger and subject to more variation. Nevertheless, timely payment
is expected. Duff 4 indicates speculative investment characteristics.
Fitch's short-term ratings apply to tax-exempt and corporate debt
obligations that are payable on demand or have original maturities of up to
three years. The four highest ratings of Fitch for short-term securities are
F-1+, F-1, F-2 and F-3. 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. F-3 securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade. 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.
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debt considered short-term in the relevant
market. Issues assigned A-1 ratings, in S&P's opinion, indicate that the degree
of safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics will be denoted with a plus (+)
designation. Issues rated A-2 by S&P indicate that capacity for timely payment
on these issues is satisfactory. However, the relative degree of safety is not
as high as for issues designated A-1. Issues rated A-3 have an adequate capacity
for timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes and circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only a speculative capacity
for timely payment.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Issuers rated Prime-1 (or related supporting
institutions) in the opinion of
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Moody's "have a superior capacity for repayment of short-term promissory
obligations." Principal repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity. Issuers rated Prime-2 (or related
supporting institutions) have a strong capacity for repayment of short-term
promissory obligations. This capacity will normally be evidenced by many of the
characteristics of Prime-1 rated issues, 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 alternate liquidity is maintained. Issuers rated
Prime-3 (or related supporting institutions) have an acceptable capacity for
repayment of short-term promissory obligations. Issuers rated Not Prime do not
fall within any of the Prime rating categories.
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 banking subsidiaries. The designation A1 by IBCA indicates that
the obligation is supported by the highest capacity for timely repayment.
Obligations rated A2 are supported by a good capacity for timely repayment.
Obligations rated A3 are supported by a satisfactory capacity for timely
repayment. Obligations are rated B if there is an uncertainty as to the capacity
to ensure timely repayment.
Thomson commercial paper ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of debt having a maturity of one
year or less, which is issued by a bank holding company or an entity within the
holding company structure. The designation TBW-1 represents the highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis. The designation TBW-2 represents the
second highest rating category and 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. The designation TBW-3
represents the lowest investment grade category and indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, the capacity to service principal and interest
in a timely fashion is considered adequate.
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Tax-Exempt Note Ratings
A S&P rating reflects the liquidity concerns and market access risks
unique to notes due in three years or less. Notes rated SP-1 are issued by
issuers that exhibit very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are given a plus (+) designation. Notes rated SP-2 are issued by issuers that
exhibit satisfactory capacity to pay principal and interest. Notes rated SP-3
are issued by issuers that exhibit speculative capacity to pay principal and
interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated MIG and variable rate demand obligations are designated
VMIG. Such ratings recognize the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG-1 or VMIG-1 are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing. Loans bearing the designation MIG-2 or VMIG-2 are of high quality,
with margins of protection ample although not so large as with loans rated MIG-1
or VMIG-1. Loans bearing the designation MIG-3 or VMIG-3 are of favorable
quality with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
Loans bearing the designation MIG-4 or VMIG-4 are of adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
Fitch uses its short-term ratings described above under "Corporate and
Tax-Exempt Commercial Paper Ratings" for tax-exempt notes.
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APPENDIX B
As stated in the applicable Prospectuses, the Growth and Income Equity
and Small Cap Value Funds may enter into futures transactions for hedging
purposes. The following is a description of such transactions.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Funds may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Funds presently could accomplish a similar result to that which
they hope to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest rates
are expected to increase, or conversely, selling short-term bonds and investing
in long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Funds, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
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Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by a Fund's entering
into a futures contract purchase for the same aggregate amount of the specific
type of financial instrument and the same delivery date. If the price of the
sale exceeds the price of the offsetting purchase, the Fund immediately is paid
the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Fund pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by a Fund
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Funds would
deal only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Funds may trade in any interest rate futures
contracts for which there exists a public market, including, without limitation,
the foregoing instruments.
Example of Futures Contract Sale. The Funds would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security held by a particular
Fund tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury bonds"). The adviser wishes to fix the current
market value of this portfolio security until some point in the future. Assume
the portfolio security has a market value of 100, and the adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
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In that case, the five point loss in the market value of the portfolio
security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The adviser could be wrong in its forecast of interest rates, and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Example of Futures Contract Purchase. A Fund would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g., shorter
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9 1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the 5
point increase in the price that the Fund pays for the long-term bond would be
offset
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by the 5 point gain realized by closing out the futures contract purchase.
The adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for
long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase. In each transaction, expenses would also be incurred.
II. Margin Payments
Unlike purchases or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with Galaxy's custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to
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the broker. At any time prior to expiration of the futures contract, the adviser
may elect to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or gain.
III. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by the
Equity Funds as hedging devices. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments that are the subject of the hedge. The price of the
futures may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, a Fund would be in a better position than if it had not hedged at
all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Funds involved will experience either a loss or gain on the futures, which
will not be completely offset by movements in the price of the instruments which
are the subject of the hedge. To compensate for the imperfect correlation of
movements in the price of instruments being hedged and movements in the price of
futures contracts, a Fund may buy or sell futures contracts in a greater dollar
amount than the dollar amount of instruments being hedged if the volatility over
a particular time period of the prices of such instruments has been greater than
the volatility over such time period of the futures, or if otherwise deemed to
be appropriate by the investment adviser. Conversely, a Fund may buy or sell
fewer futures contracts if the volatility over a particular time period of the
prices of the instruments being hedged is less than the volatility over such
time period of the futures contract being used, or if otherwise deemed to be
appropriate by Fleet. It is also possible that, where a Fund had sold futures to
hedge its portfolio against a decline in the market, the market may advance and
the value of instruments held in the Fund may decline. If this occurred, the
Fund would lose money on the futures and also experience a decline in value in
its portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern
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as to possible further market decline or for other reasons, the Fund will
realize a loss on the futures contract that is not offset by a reduction in the
price of the instruments that were to be purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with Galaxy's custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions that could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Equity
Funds intend to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures
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contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Equity Funds is also subject to the
adviser's ability to predict correctly movements in the direction of the market.
For example, if a particular Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Funds
may have to sell securities at a time when it may be disadvantageous to do so.
B-7
