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THE GALAXY FUND
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 28, 2000
GALAXY MONEY MARKET FUND
GALAXY U.S. TREASURY FUND
GALAXY TAX-EXEMPT FUND
GALAXY SHORT-TERM BOND FUND
GALAXY INTERMEDIATE GOVERNMENT INCOME FUND
GALAXY HIGH QUALITY BOND FUND
GALAXY RHODE ISLAND MUNICIPAL BOND FUND
GALAXY ASSET ALLOCATION FUND
GALAXY GROWTH AND INCOME FUND
GALAXY INTERNATIONAL EQUITY FUND
BKB SHARES
This Statement of Additional Information is not a prospectus. It
relates to the prospectus dated February 28, 2000 for BKB Shares of the Funds
(the "Prospectus"). The Prospectus, as it may be supplemented or revised from
time to time, as well as the Funds' Annual Reports to Shareholders dated October
31, 1999 (the "Annual Reports"), may be obtained, without charge, by writing:
The Galaxy Fund
P.O. Box 6520
Providence, RI 02940-6520
or by calling 1-877-BUY-GALAXY (1-877-289-4252)
The financial statements included in the Annual Reports and the report
of Ernst & Young LLP, The Galaxy Fund's independent auditors, on the financial
statements for the fiscal year ended October 31, 1999 are incorporated by
reference into this Statement of Additional Information. The report of
PricewaterhouseCoopers LLP, The Galaxy Fund's former independent auditors, dated
December 23, 1998 on the financial statements included in the The Galaxy Fund's
Annual Reports to Shareholders with respect to the Funds for the fiscal year
ended October 31, 1998 is also incorporated by reference into this Statement of
Additional Information.
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TABLE OF CONTENTS
PAGE
GENERAL INFORMATION..........................................................1
DESCRIPTION OF GALAXY AND ITS SHARES.........................................1
INVESTMENT STRATEGIES, POLICIES AND RISKS....................................5
Money Market Fund...................................................5
U.S. Treasury Fund..................................................5
Tax-Exempt Fund.....................................................6
Short-Term Bond Fund................................................6
Intermediate Government Income Fund.................................7
High Quality Bond Fund..............................................8
Rhode Island Municipal Bond Fund....................................8
Asset Allocation Fund...............................................9
Growth and Income Fund..............................................9
International Equity Fund..........................................10
Special Risk Considerations........................................11
Foreign Securities.................................................11
European Currency Unification......................................11
General Risk Considerations........................................12
Other Investment Policies and Risk Considerations..................13
Ratings............................................................13
U.S. Government Obligations and Money Market Instruments...........14
Variable and Floating Rate Obligations.............................16
Municipal Securities...............................................17
Stand-by Commitments...............................................19
Private Activity Bonds.............................................20
Tender Option Bonds................................................21
Custodial Receipts and Certificates of Participation...............21
Repurchase and Reverse Repurchase Agreements.......................22
Securities Lending.................................................23
Investment Company Securities......................................23
REITs..............................................................24
Derivative Securities..............................................24
American, European and Global Depository Receipts..................34
Asset-Backed Securities............................................35
Mortgage-Backed Securities.........................................36
Mortgage Dollar Rolls..............................................36
Convertible Securities.............................................37
When-Issued, Forward Commitment and Delayed Settlement
Transactions.....................................................38
Stripped Obligations...............................................40
Guaranteed Investment Contracts....................................40
Bank Investment Contracts..........................................41
Portfolio Securities Generally.....................................41
Portfolio Turnover.................................................41
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INVESTMENT LIMITATIONS........................................................41
VALUATION OF PORTFOLIO SECURITIES.............................................55
Valuation of the Money Market, U.S. Treasury and Tax-Exempt
Funds..............................................................55
Valuation of the Short-Term Bond, Intermediate Government
Income, High Quality Bond and Rhode Island Municipal Bond Funds....56
Valuation of the Asset Allocation and Growth and Income Funds........56
Valuation of the International Equity Fund...........................57
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................57
Other Purchase Information - BKB Shares and Retail A Shares..........57
Applicable Sales Charge - Retail A Shares............................58
Computation of Offering Price - Retail A Shares......................59
Quantity Discounts...................................................62
Redemption of Retail A Shares and BKB Shares.........................64
INVESTOR PROGRAMS.............................................................65
Exchange Privilege--Retail A Shares and BKB Shares...................65
Retirement Plans.....................................................66
Automatic Investment Program and Systematic Withdrawal
Plan - Retail A Shares and BKB Shares..............................66
Payroll Deduction Program - Retail A Shares and BKB Shares...........67
College Investment Program - Retail A Shares and BKB Shares..........67
Direct Deposit Program - Retail A Shares and BKB Shares..............67
TAXES .....................................................................68
In General...........................................................68
State and Local......................................................69
Taxation of Certain Financial Instruments............................70
Miscellaneous........................................................71
TRUSTEES AND OFFICERS.........................................................71
Shareholder and Trustee Liability....................................75
INVESTMENT ADVISER AND SUB-ADVISER............................................75
Administrator........................................................78
CUSTODIAN AND TRANSFER AGENT..................................................80
EXPENSES .....................................................................81
PORTFOLIO TRANSACTIONS........................................................81
SHAREHOLDER SERVICES PLANS....................................................84
BKB Shares...........................................................84
Retail A Shares......................................................86
DISTRIBUTOR...................................................................88
AUDITORS .....................................................................88
COUNSEL .....................................................................89
PERFORMANCE AND YIELD INFORMATION.............................................89
Money Market, U.S. Treasury and Tax-Exempt Funds.....................89
Short-Term Bond, Intermediate Government Income, High Quality
Bond, Rhode Island Municipal Bond, Asset Allocation, Growth
and Income and International Equity Funds..........................90
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Tax-Equivalency Table - Rhode Island Municipal Bond Fund.............92
Performance Reporting................................................95
MISCELLANEOUS.................................................................96
FINANCIAL STATEMENTS........................................................ 103
APPENDIX A...................................................................A-1
APPENDIX B...................................................................B-1
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GENERAL INFORMATION
This Statement of Additional Information should be read in conjunction
with the current Prospectus. This Statement of Additional Information relates to
the Prospectus for BKB Shares of the ten Funds listed on the cover page. Each
Fund also offers one or more other share classes (i.e., Trust, Retail A, Retail
B, Prime A and Prime B Shares), which are described in separate statements of
additional information and related prospectuses. This Statement of Additional
Information is incorporated by reference in its entirety into the Prospectus. No
investment in BKB Shares of the Funds should be made without reading the
Prospectus.
BKB Shares will initially be issued in connection with the
reorganization of the Boston 1784 Funds into Galaxy (the "Reorganization").
Following the Reorganization, BKB Shares will be available for purchase only by
those shareholders who received BKB Shares in the Reorganization. BKB Shares of
a Fund will convert into Retail A Shares of the same Fund on the first
anniversary of the Reorganization provided that the Board of Trustees of Galaxy
has determined such conversion is in the best interests of the holders of BKB
Shares. Because of this conversion feature, some information is provided in this
Statement of Additional Information for Retail A Shares of the Funds.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, FLEETBOSTON FINANCIAL CORPORATION OR ANY OF ITS AFFILIATES,
FLEET INVESTMENT ADVISORS INC., OR ANY FLEET BANK. SHARES OF THE FUNDS ARE NOT
FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY
THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL VARY AS A RESULT OF MARKET CONDITIONS OR OTHER FACTORS SO THAT SHARES
OF THE FUNDS, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
ALTHOUGH THE MONEY MARKET, U.S. TREASURY AND TAX-EXEMPT FUNDS SEEK TO PRESERVE
THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE FUNDS. YOU ALSO COULD LOSE MONEY BY INVESTING IN ANY OF THE
OTHER FUNDS. AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
DESCRIPTION OF GALAXY AND ITS SHARES
The Galaxy Fund ("Galaxy") is an open-end management investment company
currently offering shares of beneficial interest in twenty-nine investment
portfolios: Money Market Fund, Government Fund, U.S. Treasury Fund, Tax-Exempt
Fund, Connecticut Municipal Money Market Fund, Massachusetts Municipal Money
Market Fund, Institutional Government Money Market Fund, Prime Reserves,
Government Reserves, Tax-Exempt Reserves, 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, Strategic Equity
Fund, Short-Term Bond Fund, Intermediate Government Income Fund, High Quality
Bond Fund, Corporate Bond Fund, Tax-Exempt Bond Fund, New Jersey Municipal Bond
Fund, New York Municipal Bond Fund, Connecticut Municipal Bond Fund,
Massachusetts Municipal Bond
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Fund and Rhode Island Municipal Bond Fund. Galaxy is also authorized to issue
shares of beneficial interest in two additional investment portfolios, the
MidCap Equity Fund and the New York Municipal Money Market Fund. As of the date
of this Statement of Additional Information, however, the MidCap Equity Fund and
the New York Municipal Money Market Fund have not commenced investment
operations.
The Growth and Income Fund commenced operations on December 14, 1992 as
a separate investment portfolio (the "Predecessor Growth and Income Fund") of
The Shawmut Funds, which was organized as a Massachusetts business trust. On
December 4, 1995, the Predecessor Growth and Income Fund was reorganized as a
new portfolio of Galaxy. Prior to the reorganization, the Predecessor Growth and
Income Fund offered and sold shares of beneficial interest that were similar to
Galaxy's Trust Shares and Retail A Shares.
Galaxy was organized as a Massachusetts business trust on March 31,
1986. Galaxy's Declaration of Trust authorizes the Board of Trustees to classify
or reclassify any unissued shares into one or more classes or series of shares
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 an
unlimited number of shares in each of the series in the Funds as follows: Class
A Shares (Retail A Shares), Class A -- Special Series 1 Shares (Trust Shares),
Class A -- Special Series 2 Shares (Retail B Shares) and Class A -- Special
Series 3 shares (BKB Shares), each series representing interests in the Money
Market Fund; Class D shares (Trust Shares), Class D - Special Series 1 shares
(Retail A Shares), Class D shares - Special Series 2 shares (Retail B Shares),
Class D shares - Special Series 3 shares (Prime A Shares), Class D shares -
Special Series 4 shares (Prime B Shares) and Class D - Special Series 5 shares
(BKB Shares), each series representing interests in the Intermediate Government
Income Fund; Class E Shares (Retail A Shares), Class E -- Special Series 1
Shares (Trust Shares) and Class E - Special Series 2 Shares (BKB Shares), each
series representing interests in the Tax-Exempt Fund; Class F Shares (Retail A
Shares), Class F -- Special Series 1 Shares (Trust Shares) and Class FF --
Special Series 2 Shares (BKB Shares), each series representing interests in the
U.S. Treasury Fund; Class G - Series 1 shares (Trust Shares), Class G - Series 2
shares (Retail A Shares), Class G - Series 3 shares (Retail B Shares), Class G -
Series 4 shares (Prime A Shares), Class G - Series 5 shares (Prime B Shares) and
Class G - Series 6 shares (BKB Shares), each series representing interests in
the International Equity Fund; Class J - Series 1 shares (Trust Shares), Class J
- - Series 2 shares (Retail A Shares), Class J - Series 3 shares (Retail B
Shares), Class J - Series 4 shares (Prime A Shares), Class J - Series 5 shares
(Prime B Shares) and Class J - Series 6 shares (BKB Shares), each series
representing interests in the High Quality Bond Fund; Class L - Series 1 shares
(Trust Shares), Class L - Series 2 shares (Retail A Shares), Class L - Series 3
shares (Retail B Shares), Class L - Series 4 shares (Prime A Shares), Class L -
Series 5 shares (Prime B Shares) and Class L - Series 6 shares (BKB Shares),
each series representing interests in the Short-Term Bond Fund; Class N - Series
1 shares (Trust Shares), Class N - Series 2 shares (Retail A Shares), Class N -
Series 3 shares (Retail B Shares), Class N Series 4 shares (Prime A Shares),
Class N - Series 5 shares (Prime B Shares) and Class N - Series 6 shares (BKB
Shares), each series representing interests in the Asset Allocation Fund; Class
R - Series 1 shares (Trust Shares) , Class R - Series 2 shares (Retail A Shares)
and Class R - Series 3 shares (BKB
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Shares), each series representing interests in the Rhode Island Municipal Bond
Fund; Class U - Series 1 shares (Trust Shares), Class U - Series 2 shares
(Retail A Shares), Class U - Series 3 shares (Retail B Shares), Class U - Series
4 shares (Prime A Shares), Class U - Series 5 shares (Prime B Shares) and Class
U - Series 6 shares (BKB Shares), each series representing interests in the
Growth and Income Fund. Each Fund, except the Rhode Island Municipal Bond Fund,
is classified as a diversified company under the Investment Company Act of 1940,
as amended (the "1940 Act"). The Rhode Island Municipal Bond Fund is classified
as a non-diversified company under the 1940 Act.
Each share of Galaxy (irrespective of series designation) has a par
value of $.001 per share, represents an equal proportionate interest in the
related investment portfolio with other shares of the same class (irrespective
of series designation), and is entitled to such dividends and distributions out
of the income earned on the assets belonging to such investment portfolio as are
declared in the discretion of Galaxy's Board of Trustees.
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 Prospectus, shares will be fully paid and
non-assessable. Each series of shares (i.e., BKB Shares, Retail A Shares, Retail
B Shares, Trust Shares, Prime A Shares and Prime B Shares) bear pro rata the
same expenses and are entitled equally to a Fund's dividends and distributions
except as follows. Each series will bear the expenses of any distribution and/or
shareholder servicing plans applicable to such series. For example, as described
below, holders of BKB Shares will bear the expenses of the Shareholder Services
Plan for BKB Shares and holders of Retail A Shares will bear the expenses of the
Shareholder Services Plan for Retail A Shares and Trust Shares (which is
currently applicable only to Retail A Shares). In addition, each series may
incur differing transfer agency fees and may have differing sales charges.
Standardized yield and total return quotations are computed separately for each
series of shares. The differences in expenses paid by the respective series will
affect their performance. See "Shareholder Services Plans" below.
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 each series of a Fund would be solely responsible for the Fund's
payments under any distribution and/or shareholder servicing plan applicable to
such series.
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 shares of a
particular series of a Fund will be entitled to vote on matters submitted to a
vote of shareholders pertaining to any distribution and/or shareholder servicing
plan for such series (e.g., only BKB Shares of a Fund will be entitled to vote
on matters submitted to a vote of shareholders pertaining to Galaxy's
Shareholder Services Plan for BKB Shares and only Retail A Shares of a Fund will
be entitled to vote on matters
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submitted to a vote of shareholders pertaining to Galaxy's Shareholder Services
Plan for Retail A 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 a
distribution plan or any change in an investment objective or a fundamental
investment policy would be effectively acted upon with respect to a Fund only if
approved by a majority of the outstanding shares 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 a
proportionate fractional vote for each fractional share held, and will vote in
the aggregate and not by class or series, except as otherwise expressly required
by law or when the Board of Trustees determines that the matter to be voted on
affects only the interests of shareholders of a particular class or series.
Voting rights are not cumulative and, accordingly, the holders of more than 50%
in the aggregate of Galaxy's outstanding shares may elect all of the trustees,
irrespective of the votes of other shareholders.
Galaxy is not required under Massachusetts law to hold annual
shareholder meetings and intends to do so only if required by the 1940 Act.
Shareholders have the right to remove Trustees. 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 which 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 which is equal to their net asset value and which 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
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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.
INVESTMENT STRATEGIES, POLICIES AND RISKS
Fleet Investment Advisors Inc. ("Fleet"), the Funds' investment
adviser, and, with respect to the International Equity Fund, Oechsle
International Advisors, LLC ("Oechsle"), the Fund's sub-adviser, will use their
best efforts to achieve each Fund's investment objective, although such
achievement cannot be assured. The investment objective of a Fund as described
in its Prospectus may not be changed without the approval of the holders of a
majority of its outstanding shares (as defined under "Miscellaneous"). Except as
noted below under "Investment Limitations," a Fund's investment policies may be
changed without shareholder approval. An investor should not consider an
investment in the Funds to be a complete investment program. The Money Market,
U.S. Treasury and Tax-Exempt Funds will maintain a dollar-weighted average
portfolio maturity of 90 days or less in an effort to maintain a stable net
asset value per share of $1.00. The following investment strategies, policies
and risks supplement those set forth in the Funds' Prospectus.
MONEY MARKET FUND
Money market instruments in which the Money Market Fund may invest
include debt obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia and their
authorities, agencies, instrumentalities and political subdivisions, the
interest on which, in the opinion of bond counsel or counsel to the issuer, is
exempt from federal income tax. These debt obligations are commonly referred to
as Municipal Securities. Municipal Securities may be advantageous for a taxable
portfolio such as the Fund when, as a result of prevailing economic, regulatory
or other circumstances, the yield of such securities on a pre-tax basis is
comparable to that of other debt securities the Fund can purchase. Dividends
paid by a taxable portfolio such as the Fund that come from interest on
Municipal Securities will be taxable to shareholders. The Fund may also invest
in Municipal Securities the interest on which is subject to federal income tax.
Instruments in which the Money Market Fund invests have remaining
maturities of 397 days or less (except for certain variable and floating rate
notes and securities underlying certain repurchase agreements). For more
information, including applicable quality requirements, see "Other Investment
Policies and Risk Considerations" below.
U.S. TREASURY FUND
Instruments in which the U.S. Treasury Fund invests may include, but
are not limited to, securities issued by the U.S. Treasury and by certain U.S.
Government agencies or instrumentalities such as the Federal Home Loan Banks and
Federal Farm Credit Banks. The
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Fund invests at least 65% of its total assets in direct U.S. Government
obligations. Shareholders residing in a particular state that has an income tax
law should determine through consultation with their own tax advisers whether
such interest income, when distributed by the Fund, will be considered by the
state to have retained exempt status and whether the Fund's capital gain and
other income, if any, when so distributed will be subject to the state's income
tax. See "Taxes."
Portfolio securities held by the Fund have remaining maturities of 397
days or less (with certain exceptions). The Fund may also invest in certain
variable and floating rate instruments. For more information, including
applicable quality requirements, see "Other Investment Policies and Risk
Considerations" below.
TAX-EXEMPT FUND
Municipal Securities in which the Tax-Exempt Fund invests present
minimal credit risk and meet the rating criteria described under "Other
Investment Policies and Risk Considerations - Quality Requirements" below.
Municipal Securities, as that term is used in this Statement of Additional
Information, are debt obligations issued by or on behalf of states, territories
and possessions of the United States, the District of Columbia, and their
authorities, agencies, instrumentalities and political subdivisions, the
interest on which, in the opinion of bond counsel or counsel to the issuer, is
exempt from federal income tax.
As a matter of fundamental policy that cannot be changed without the
requisite consent of the Fund's shareholders, the Fund will invest, except
during temporary defensive periods, at least 80% of its assets in Municipal
Securities. The Fund's investments in private activity bonds will not be treated
as investments in Municipal Securities for purposes of the 80% requirement
mentioned above and, under normal market conditions, will not exceed 20% of the
Fund's net assets when added together with any taxable investments held by the
Fund.
Although the Fund does not presently intend to do so on a regular
basis, it may invest more than 25% of its assets in Municipal Securities the
interest on which is paid solely from revenues of similar projects. To the
extent that the Fund's assets are concentrated in Municipal Securities payable
from revenues on similar projects, the Fund will be subject to the peculiar
risks presented by such projects to a greater extent than it would be if its
assets were not so invested.
SHORT-TERM BOND FUND
In addition to its principal investment strategies and policies as
described in the Prospectus, the Short-Term Bond Fund may also invest, from time
to time, in Municipal Securities. The purchase of Municipal Securities may be
advantageous when, as a result of prevailing economic, regulatory or other
circumstances, the performance of such securities, on a pre-tax basis, is
comparable to that of corporate or U.S. Government debt obligations. See "Other
Investment Policies and Risk Consideration - Municipal Securities" below. The
Fund may also enter into interest rate futures contracts to hedge against
changes in market values. See "Other Investment Policies and Risk Considerations
- - Derivative Securities" below. Any
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common stock received through the conversion of convertible debt obligations
will be sold in an orderly manner as soon as possible.
The obligations of foreign banks and obligations issued or guaranteed
by foreign governments or any of their political subdivisions or
instrumentalities in which the Fund may invest include debt obligations issued
by Canadian Provincial Governments, which are similar to U.S. Municipal
Securities except that the income derived therefrom is fully subject to U.S.
federal taxation. These instruments are denominated in either Canadian or U.S.
dollars and have an established over-the-counter market in the United States.
Also included are debt obligations of supranational entities, which include
international organizations designated or supported by governmental entities to
promote economic reconstruction or development and international banking
institutions and related government agencies. Examples of these include the
International Bank for Reconstruction and Development ("World Bank"), the Asian
Development Bank and the InterAmerican Development Bank. Obligations of
supranational entities may be supported by appropriated but unpaid commitments
of their member countries, and there is no assurance that these commitments will
be undertaken or met in the future. The Fund may not invest more than 35% of its
total assets in the securities of foreign issuers. The Fund may also invest in
dollar-denominated debt obligations of U.S. corporations issued outside the
United States.
The Fund may enter into forward currency contracts (agreements to
exchange one currency for another at a future date) to manage currency risks and
to facilitate transactions in foreign securities. Although forward currency
contracts can be used to protect the Fund from adverse rate changes, they
involve a risk of loss if Fleet fails to predict foreign currency values
correctly. See "Other Investment Policies and Risk Considerations - Derivative
Securities" below.
See "Other Investment Policies and Risk Considerations" below for
information regarding additional investment policies of the Short-Term Bond Fund
and Appendix A to this Statement of Additional Information for a description of
the rating categories of Standard & Poor's Ratings Group ("S&P") and Moody's
Investors Service, Inc. ("Moody's").
INTERMEDIATE GOVERNMENT INCOME FUND
In addition to its principal investment strategies and policies as
described in the Prospectus, the Intermediate Government Income Fund may also
invest, from time to time, in Municipal Securities. See "Other Investment
Policies and Risk Considerations - Municipal Securities" below. The Fund may
also enter into interest rate futures contracts to hedge against changes in
market values. See "Other Investment Policies and Risk Considerations -
Derivative Securities" below. In addition, the Fund may invest in obligations
issued by Canadian Provincial Governments and in debt obligations of
supranational entities. See "Short-Term Bond Fund" above. The Fund may also
invest in dollar-denominated high quality debt obligations of U.S. corporations
issued outside the United States. Any common stock received through the
conversion of convertible debt obligations will be sold in an orderly manner as
soon as possible.
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See "Other Investment Policies and Risk Considerations" below for
information regarding additional investment policies of the Intermediate
Government Income Fund and Appendix A to this Statement of Additional
Information for a description of the rating categories of S&P and Moody's.
HIGH QUALITY BOND FUND
In addition to its principal investment strategies and policies as
described in its Prospectus, the High Quality Bond Fund may also invest, from
time to time, in Municipal Securities. See "Other Investment Policies and Risk
Considerations - Municipal Securities" below. The Fund may enter into interest
rate futures contracts to hedge against changes in the market values of fixed
income instruments that the Fund holds or intends to purchase. See "Other
Investment Policies and Risk Considerations - Derivative Securities" below. The
Fund may also invest in obligations issued by Canadian Provincial Governments
and in debt obligations of supranational entities. See "Short-Term Bond Fund"
above. The Fund may also invest in dollar-denominated high quality debt
obligations of U.S. corporations issued outside the United States. Any common
stock received through the conversion of convertible debt obligations will be
sold in an orderly manner as soon as possible.
See "Other Investment Policies and Risk Considerations" below for
information regarding additional investment policies of the High Quality Bond
Fund and Appendix A to this Statement of Additional Information for a
description of the rating categories of S&P and Moody's.
RHODE ISLAND MUNICIPAL BOND FUND
As a matter of fundamental policy that cannot be changed without the
requisite consent of the Fund's shareholders, the Rhode Island Municipal Bond
Fund will invest, except during temporary defensive periods, at least 80% of its
total assets in Municipal Securities, primarily in Municipal Securities issued
by or on behalf of the State of Rhode Island, its political sub-divisions,
authorities, agencies, instrumentalities and corporations, and certain other
governmental issuers such as Puerto Rico, the interest on which, in the opinion
of bond counsel to the issuer, is exempt from federal and Rhode Island personal
income taxes ("Rhode Island Municipal Securities"). Dividends derived from
interest on Municipal Securities other than Rhode Island Municipal Securities
will generally be exempt from regular federal income tax but may be subject to
Rhode Island personal income tax. See "Taxes" below.
The Fund's ability to achieve its investment objective depends on the
ability of issuers of Rhode Island Municipal Securities to meet their continuing
obligations to pay principal and interest. Since the Fund invests primarily in
Rhode Island Municipal Securities, the value of the Fund's shares may be
especially affected by factors pertaining to the economy of Rhode Island and
other factors specifically affecting the ability of issuers of Rhode Island
Municipal Securities to meet their obligations. As a result, the value of the
Fund's shares may fluctuate more widely than the value of shares of a portfolio
investing in securities of issuers in a number of different states. The ability
of Rhode Island and its political subdivisions to meet their obligations will
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depend primarily on the availability of tax and other revenues to those
governments and on their fiscal conditions generally. The amount of tax and
other revenues available to governmental issuers of Rhode Island Municipal
Securities may be affected from time to time by economic, political and
demographic conditions within Rhode Island. In addition, constitutional or
statutory restrictions may limit a government's power to raise revenues or
increase taxes. The availability of federal, state and local aid to an issuer of
Rhode Island Municipal Securities may also affect that issuer's ability to meet
its obligations. Payments of principal and interest on limited obligation bonds
will depend on the economic condition of the facility or specific revenue source
from whose revenues the payments will be made, which in turn could be affected
by economic, political and demographic conditions in Rhode Island or a
particular locality. Any reduction in the actual or perceived ability of an
issuer of Rhode Island Municipal Securities to meet its obligations (including a
reduction in the rating of its outstanding securities) would likely affect
adversely the market value and marketability of its obligations and could affect
adversely the value of other Rhode Island Municipal Securities as well.
See "Special Considerations and Risks" and "Other Investment Policies
and Risk Considerations" below for information regarding additional investment
policies of the Rhode Island Municipal Bond Fund.
ASSET ALLOCATION FUND
The Asset Allocation Fund may invest up to 20% of its total assets in
foreign securities. Such foreign investments may be made directly, by purchasing
securities issued or guaranteed by foreign corporations, banks or governments
(or their political subdivisions or instrumentalities) or by supranational banks
or other organizations, or indirectly, by purchasing American Depository
Receipts ("ADRs") and European Depository Receipts ("EDRs"). Examples of
supranational banks include the International Bank for Reconstruction and
Development ("World Bank"), the Asian Development Bank and the InterAmerican
Development Bank. Obligations of supranational banks may be supported by
appropriated but unpaid commitments of their member countries and there is no
assurance that those commitments will be undertaken or met in the future. See
"Special Risk Considerations -- Foreign Securities" and "Other Investment
Policies and Risk Considerations -- American, European and Global Depository
Receipts" below. The Fund may also invest in dollar-denominated high quality
debt obligations of U.S. corporations issued outside the United States. The Fund
may purchase put options and call options and write covered call options,
purchase asset-backed securities and mortgage-backed securities and enter into
foreign currency exchange transactions.
See "Other Investment Policies and Risk Considerations" below for
information regarding additional investment policies of the Asset Allocation
Fund.
GROWTH AND INCOME FUND
Under normal market conditions, the Growth and Income Fund will invest
at least 65% of its total assets in common stocks, preferred stocks, common
stock warrants and securities convertible into common stock. The Fund may
purchase convertible securities, including
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convertible preferred stock, convertible bonds or debentures, units consisting
of "usable" bonds and warrants or a combination of the features of several of
these securities. See "Other Investment Policies and Risk Considerations --
Convertible Securities" below. The Fund may also buy and sell options and
futures contracts and utilize stock index futures contracts, options, swap
agreements, indexed securities, and options on futures contracts. See "Other
Investment Policies and Risk Considerations -- Derivative Securities" below.
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 Global Depository
Receipts ("GDRs"). Securities of a foreign issuer may present greater risks in
the form of nationalization, confiscation, domestic marketability, or other
national or international restrictions. As a matter of practice, the Fund will
not invest in the securities of foreign issuers if any such risk appears to
Fleet to be substantial. See "Special Risk Considerations -- Foreign Securities"
and "Other Investment Policies and Risk Considerations -- American, European and
Global Depository Receipts" below.
See "Other Investment Policies and Risk Considerations" below for
information regarding additional investment policies of the Growth and Income
Fund.
INTERNATIONAL EQUITY FUND
The International Equity Fund invests at least 75% of its total assets
in equity securities of foreign issuers. The Fund may invest in securities of
issuers located in a variety of different foreign regions and countries,
including, but not limited to, Australia, Austria, Belgium, Brazil, Canada,
Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan,
Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Portugal,
Singapore, Spain, Sweden, Switzerland, Thailand and the United Kingdom.
The Fund invests in common stock and may invest in other securities
with equity characteristics, consisting of trust or limited partnership
interests, preferred stock, rights and warrants. The Fund may also invest in
convertible securities, consisting of debt securities or preferred stock that
may be converted into common stock or that carry the right to purchase common
stock. See "Other Investment Policies and Risk Considerations -- Convertible
Securities" below. The Fund invests in securities listed on foreign or domestic
securities exchanges and securities traded in foreign or domestic
over-the-counter markets, and may invest in unlisted securities.
Securities issued in certain countries are currently accessible to the
Fund only through investment in other investment companies that are specifically
authorized to invest in such securities. The limitations on the Fund's
investment in other investment companies are described below under "Other
Investment Policies and Risk Considerations -- Investment Company Securities."
Subject to applicable securities regulations, the Fund may, for the
purpose of hedging its portfolio, purchase and write covered call options on
specific portfolio securities and may
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purchase and write put and call options on foreign stock indexes listed on
foreign and domestic stock exchanges. In addition, the Fund may invest up to
100% of its total assets in securities of foreign issuers in the form of ADRs,
EDRs or GDRs as described under "Other Investment Policies and Risk
Considerations -- American, European and Global Depository Receipts."
Furthermore, the Fund may purchase and sell securities on a when-issued basis.
See "Other Investment Policies and Risk Considerations" below regarding
additional investment policies of the International Equity Fund.
SPECIAL RISK CONSIDERATIONS
FOREIGN SECURITIES
Investments by the Short-Term Bond, Asset Allocation, Growth and Income
and International Equity Funds in foreign securities may involve higher costs
than investments in U.S. securities, including higher transaction costs, as well
as the imposition of additional taxes by foreign governments. In addition,
foreign investments may include additional risks associated with currency
exchange rates, less complete financial information about the issuers, less
market liquidity, and political instability. Future political and economic
developments, the possible imposition of withholding taxes on interest income,
the possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other governmental
restrictions, might adversely affect the payment of dividends or principal and
interest on foreign obligations.
Although these Funds may invest in securities denominated in foreign
currencies, the Funds value their securities and other assets in U.S. dollars.
As a result, the net asset value of a Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its foreign
investments could reduce the effect of increases and magnify the effect of
decreases in the price of the Fund's securities in their local markets.
Conversely, a decrease in the value of the U.S. dollar will have the opposite
effect of magnifying the effect of increases and reducing the effect of
decreases in the prices of the Funds' securities in their local markets. In
addition to favorable and unfavorable currency exchange rate developments, the
Funds are subject to the possible imposition of exchange control regulations or
freezes on convertibility of currency.
Certain of the risks associated with investments in foreign securities
are heightened with respect to investments in countries with emerging economies
or emerging securities markets. The risks of expropriation, nationalization and
social, political and economic instability are greater in those countries than
in more developed capital markets.
EUROPEAN CURRENCY UNIFICATION
Many European countries have adopted a single European currency, the
euro. On January 1, 1999, the euro became legal tender for all countries
participating in the Economic and
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Monetary Union ("EMU"). A new European Central Bank has been created to manage
the monetary policy of the new unified region. On the same date, the exchange
rates were irrevocably fixed between the EMU member countries. National
currencies will continue to circulate until they are replaced by euro coins and
bank notes by the middle of 2002.
This change is likely to significantly impact the European capital
markets in which the International Equity Fund invests and may result in the
Fund facing additional risks in pursuing its investment objective. These risks,
which include, but are not limited to, uncertainty as to the proper tax
treatment of the currency conversion, volatility of currency exchange rates as a
result of the conversion, uncertainty as to capital market reaction, conversion
costs that may affect issuer profitability and creditworthiness, and lack of
participation by some European countries, may increase the volatility of the
Fund's net asset value per share.
GENERAL RISK CONSIDERATIONS
Generally, the market value of fixed income securities, including
Municipal Securities, can be expected to vary inversely to changes in prevailing
interest rates. During periods of declining interest rates, the market value of
investment portfolios comprised primarily of fixed income securities, such as
the Short-Term Bond, Intermediate Government Income, High Quality Bond and Rhode
Island Municipal Bond Funds, will tend to increase, and during periods of rising
interest rates, the market value will tend to decrease. In addition, during
periods of declining interest rates, the yields of investment portfolios
comprised primarily of fixed income securities will tend to be higher than
prevailing market rates and, in periods of rising interest rates, yields will
tend to be somewhat lower. Fixed income securities with longer maturities, which
tend to produce higher yields, are subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities. Changes
in the financial strength of an issuer or changes in the ratings of any
particular security may also offset the value of these investments. Fluctuations
in the market value of fixed income securities subsequent to their acquisition
will not offset cash income from such securities but will be reflected in a
Fund's net asset value.
Although the Rhode Island Municipal Bond Fund does not presently intend
to do so on a regular basis, the Fund may invest more than 25% of its assets in
Municipal Securities the interest on which is paid solely from revenues on
similar projects if such investment is deemed necessary or appropriate by Fleet.
To the extent that the Fund's assets are concentrated in Municipal Securities
payable from revenues on similar projects, the Fund will be subject to the
particular risks presented by such projects to a greater extent than it would be
if its assets were not so concentrated.
The Rhode Island Municipal Bond Fund is classified as a non-diversified
investment company under the 1940 Act. Investment return on a non-diversified
portfolio typically is dependent upon the performance of a smaller number of
securities relative to the number held in a diversified portfolio. Consequently,
the change in value of any one security may affect the overall value of a
non-diversified portfolio more than it would a diversified portfolio, and
thereby subject the market-based net asset value per share of the
non-diversified portfolio to
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greater fluctuations. In addition, a non-diversified portfolio may be more
susceptible to economic, political and regulatory developments than a
diversified investment portfolio with similar objectives may be.
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
Investment methods described in the Prospectus and this Statement of
Additional Information are among those which one or more of the Funds have the
power to utilize. Some may be employed on a regular basis; others may not be
used at all. Accordingly, reference to any particular method or technique
carries no implication that it will be utilized or, if it is, that it will be
successful.
RATINGS
The Money Market, U.S. Treasury and Tax-Exempt Funds will purchase only
those instruments which meet the applicable quality requirements described
below. The Money Market Fund will not purchase a security (other than a U.S.
Government security) unless the security or the issuer with respect to
comparable securities (i) is rated by at least two nationally recognized
statistical rating organizations ("Rating Agencies") such as S&P, Moody's or
Fitch IBCA, Inc. ("Fitch IBCA") in the highest category for short-term debt
securities, (ii) is rated by the only Rating Agency that has issued a rating
with respect to such security or issuer in such Rating Agency's highest category
for short-term debt, or (iii) if not rated, the security is determined to be of
comparable quality. The Tax-Exempt Fund will not purchase a security (other than
a U.S. Government security) unless the security (i) is rated by at least two
such Rating Agencies in one of the two highest categories for short-term debt
securities, (ii) is rated by the only Rating Agency that has assigned a rating
with respect to such security in one of such Rating Agency's two highest
categories for short-term debt securities, or (iii) if not rated, the security
is determined to be of comparable quality. These rating categories are
determined without regard to sub-categories and gradations. The Funds will
follow applicable regulations in determining whether a security rated by more
than one Rating Agency can be treated as being in the highest short-term rating
categories. See "Investment Limitations" below.
All debt obligations, including convertible bonds, purchased by the
Asset Allocation Fund are rated investment grade by Moody's ("Aaa," "Aa," "A"
and "Baa") or S&P ("AAA," "AA," "A" and "BBB"), or, if not rated, are determined
to be of comparable quality by Fleet. Debt securities rated "Baa" by Moody's or
"BBB" by S&P are generally considered to be investment grade securities although
they have speculative characteristics and changes in economic conditions or
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case for higher rated debt obligations. See
Appendix A to this Statement of Additional Information for a description of
S&P's and Moody's rating categories.
The International Equity Fund may only purchase debt securities rated
"A" or higher by Moody's or S&P, or if unrated, determined by Fleet or Oechsle
to be of comparable quality. Issuers of commercial paper, bank obligations or
repurchase agreements in which the
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International Equity Fund invests must have, at the time of investment,
outstanding debt rated A or higher by Moody's or S&P, or, if they are not rated,
the instrument purchased must be determined to be of comparable quality.
The Growth and Income Fund may purchase convertible bonds rated "Ba" or
higher by Moody's or "BB" or higher by S&P or Fitch IBCA, at the time of
investment. See "Other Investment Policies and Risk Considerations --
Convertible Securities" below for a discussion of the risks of investing in
convertible bonds rated either "Ba" or "BB." Short-term money market instruments
purchased by the Growth and Income Fund must be rated in one of the top two
rating categories by a nationally recognized statistical rating agency, such as
Moody's, S&P or Fitch IBCA.
Determinations of comparable quality will be made in accordance with
procedures established by the Board of Trustees. Generally, if a security has
not been rated by a Rating Agency, Fleet will acquire the security if it
determines that the security is of comparable quality to securities that have
received the requisite ratings. Fleet also considers other relevant information
in its evaluation of unrated short-term securities.
Information on the requisite investment quality of debt obligations,
including Municipal Securities, eligible for purchase by the Short-Term Bond,
Intermediate Government Income, High Quality Bond and Rhode Island Municipal
Bond Funds is included in the Prospectus.
U.S. GOVERNMENT OBLIGATIONS AND MONEY MARKET INSTRUMENTS
Each Fund may, in accordance with its investment policies, invest from
time to time in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and in other money market instruments, including
but not limited to bank obligations, commercial paper and corporate bonds with
remaining maturities of 397 days or less.
Examples of the types of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (hereinafter, "U.S. Government
obligations") that may be held by the Funds include, without limitation, direct
obligations of the U.S. Treasury, and securities issued or guaranteed by the
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Resolution Trust Corporation and
Maritime Administration.
U.S. Treasury securities differ only in their interest rates,
maturities and time of issuance: Treasury Bills have initial maturities of one
year or less; Treasury Notes have initial maturities of one to ten years; and
Treasury Bonds generally have initial maturities of more than ten years.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as those of the Government National Mortgage Association, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Federal Home Loan Banks, are supported by the right
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of the issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Federal Home Loan Mortgage Corporation, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. Some of these
instruments may be variable or floating rate instruments.
Securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities have historically involved little risk of loss of
principal. However, due to fluctuations in interest rates, the market value of
such securities may vary during the period a shareholder owns shares of the
Funds.
The U.S. Treasury Fund will invest in those securities issued or
guaranteed as to principal and interest by the U.S. Government or by agencies
and instrumentalities thereof, the interest income from which, under current
law, generally will not be subject to state income tax by reason of federal law.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit and non-negotiable time deposits issued for a definite period of time
and earning a specified return by a U.S. bank which is a member of the Federal
Reserve System or is insured by the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the FDIC. With respect to each Fund other than the Growth and Income Fund,
bank obligations also include U.S. dollar-denominated obligations of foreign
branches of U.S. banks or of U.S. branches of foreign banks, all of the same
type as domestic bank obligations. Investments in bank obligations are limited
to the obligations of financial institutions having more than $1 billion in
total assets at the time of purchase. Time deposits with a maturity longer than
seven days or that do not provide for payment within seven days after notice
will be subject to each Fund's limitation on illiquid securities described below
under "Investment Limitations." Investments by each Fund in non-negotiable time
deposits are limited to no more than 5% of each Fund's total assets at the time
of purchase. For the purposes of each Fund's investment policies with respect to
bank obligations, the assets of a bank or savings institution will be deemed to
include the assets of its U.S. and foreign branches.
Domestic and foreign banks are subject to extensive but different
government regulation which may limit the amount and types of their loans and
the interest rates that may be charged. In addition, the profitability of the
banking industry is largely dependent upon the availability and cost of funds to
finance lending operations and the quality of underlying bank assets.
Investments in obligations of foreign branches of U.S. banks and U.S.
branches of foreign banks may subject a Fund to additional risks, including
future political and economic developments, the possible imposition of
withholding taxes on interest income, possible seizure or nationalization of
foreign deposits, the possible establishment of exchange controls, or the
adoption of foreign governmental restrictions which might adversely affect the
payment of principal and interest on such obligations. In addition, foreign
branches of U.S. banks and U.S.
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branches of foreign banks may be subject to less stringent reserve requirements
and to different accounting, auditing, reporting and recordkeeping standards
than those applicable to domestic branches of U.S. banks. Such investments may
also subject the Funds to investment risks similar to those accompanying direct
investments in foreign securities. See "Special Risk Considerations -- Foreign
Securities." The Funds will invest in the obligations of U.S. branches of
foreign banks or foreign branches of U.S. banks only when Fleet and/or Oechsle
believe that the credit risk with respect to the instrument is minimal.
Commercial paper may include securities issued by corporations without
registration under the Securities Act of 1933, as amended, (the "1933 Act") in
reliance on the so-called "private placement" exemption in Section 4(2)
("Section 4(2) Paper"). Section 4(2) Paper is restricted as to disposition under
the federal securities laws in that any resale must similarly be made in an
exempt transaction. Section 4(2) Paper is normally resold to other institutional
investors through or with the assistance of investment dealers who make a market
in Section 4(2) Paper, thus providing liquidity. For purposes of each Fund's 10%
limitation on purchases of illiquid instruments described below, Section 4(2)
Paper will not be considered illiquid if Fleet has determined, in accordance
with guidelines approved by the Board of Trustees, that an adequate trading
market exists for such securities. Each Fund except the U.S. Treasury Fund and
Rhode Island Municipal Bond Fund may also purchase Rule 144A securities. See
"Investment Limitations" below.
VARIABLE AND FLOATING RATE OBLIGATIONS
The Funds may purchase variable and floating rate instruments in
accordance with their investment objectives and policies as described in the
Prospectus and this Statement of Additional Information. Variable rate
instruments provide for periodic adjustments in the interest rate. Floating rate
instruments provide for automatic adjustment of the interest rate whenever some
other specified interest rate changes. Some variable and floating rate
obligations are direct lending arrangements between the purchaser and the issuer
and these may be no active secondary market. However, in the case of variable
and floating rate obligations with a demand feature, a Fund may demand payment
of principal and accrued interest at a time specified in the instrument or may
resell the instrument to a third party. In the event an issuer of a variable or
floating rate obligation defaulted on its payment obligation, a Fund might be
unable to dispose of the note because of the absence of a secondary market and
could, for this or other reasons, suffer a loss to the extent of the default.
Variable or floating rate instruments issued or guaranteed by the U.S.
Government or its agencies or instrumentalities are similar in form but may have
a more active secondary market. Substantial holdings of variable and floating
rate instruments could reduce portfolio liquidity.
If a variable or floating rate instrument is not rated, Fleet or
Oechsle must determine that such instrument is comparable to rated instruments
eligible for purchase by the Funds and will consider the earning power, cash
flows and other liquidity ratios of the issuers and guarantors of such
instruments and will continuously monitor their financial status in order to
meet payment on demand. In determining average weighted portfolio maturity of
each of these Funds, a variable or floating rate instrument issued or guaranteed
by the U.S. Government or an agency or
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instrumentality thereof will be deemed to have a maturity equal to the period
remaining until the obligation's next interest rate adjustment. Variable and
floating rate obligations with a demand feature will be deemed to have a
maturity equal to the longer of the period remaining to the next interest rate
adjustment or the demand notice period.
Long-term variable and floating rate obligations held by the Money
Market, U.S. Treasury and Tax-Exempt Funds may have maturities of more than 397
days, provided the Funds are entitled to payment of principal upon not more than
30 days' notice or at specified intervals not exceeding one year (upon not more
than 30 days' notice).
MUNICIPAL SECURITIES
Municipal Securities acquired by the Tax-Exempt, Short-Term Bond,
Intermediate Government Income, High Quality Bond and Rhode Island Municipal
Bond Funds include debt obligations issued by governmental entities to obtain
funds for various public purposes, including the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses, and the extension of loans to public institutions
and facilities. Private activity bonds that are issued by or on behalf of public
authorities to finance various privately operated facilities are "Municipal
Securities" if the interest paid thereon is exempt from regular federal income
tax and not treated as a specific tax preference item under the federal
alternative minimum tax.
The two principal categories of Municipal Securities which may be held
by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed.
The Funds' portfolios may also include "moral obligation" securities,
which are normally issued by special purpose public authorities. If the issuer
of moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund, the restoration of which
is a moral commitment, but not a legal obligation, of the state or municipality
which created the issuer. There is no limitation on the amount of moral
obligation securities that may be held by the Funds.
There are, of course, variations in the quality of Municipal
Securities, both within a particular category and between categories, and the
yields on Municipal Securities depend upon a variety of factors, including
general market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. The ratings of a Rating
Agency, such as Moody's and S&P, described in the Prospectus and in Appendix A
hereto, represent such Rating Agencies' opinions as to the quality of Municipal
Securities. It should be emphasized that these ratings are general and are not
absolute standards of quality. Municipal Securities with the same maturity,
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interest rate and rating may have different yields. Municipal Securities of the
same maturity and interest rate with different ratings may have the same yield.
Municipal Securities may include rated and unrated variable and
floating rate tax-exempt instruments, such as variable rate demand notes.
Variable rate demand notes are long-term Municipal Securities that have variable
or floating interest rates and provide a Fund with the right to tender the
security for repurchase at its stated principal amount plus accrued interest.
Such securities typically bear interest at a rate that is intended to cause the
securities to trade at par. The interest rate may float or be adjusted at
regular intervals (ranging from daily to annually), and is normally based on an
applicable interest index or another published interest rate or interest rate
index. Most variable rate demand notes allow a Fund to demand the repurchase of
the security on not more than seven days prior notice. Other notes only permit a
Fund to tender the security at the time of each interest rate adjustment or at
other fixed intervals. The Tax-Exempt Fund treats variable rate demand notes as
maturing on the later of the date of the next interest rate adjustment or the
date on which the Fund may next tender the security for repurchase. 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.
Municipal Securities purchased by these Funds in some cases may be
insured as to the timely payment of principal and interest. There is no
guarantee, however, that the insurer will meet its obligations in the event of a
default in payment by the issuer. In other cases, Municipal Securities may be
backed by letters of credit or guarantees issued by domestic or foreign banks or
other financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or guarantee with
respect to a Municipal Security held by a Fund, including a change in the credit
quality of any such bank or financial institution, could result in a loss to the
Fund and adversely affect the value of its shares. As described above letters of
credit and guarantees issued by foreign banks and financial institutions involve
certain risks in addition to those of similar instruments issued by domestic
banks and financial institutions.
The payment of principal and interest on most Municipal Securities
purchased by the Funds will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities and each multistate
agency of which a state is a member is a separate "issuer" as that term is used
in this Statement of Additional Information and the Prospectus. The
non-governmental user of facilities financed by private activity bonds is also
considered to be an "issuer." An issuer's obligations under its Municipal
Securities are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Code and laws, if any, which may be enacted by federal or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. The
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power or ability of an issuer to meet its obligations for the payment of
interest on and principal of its Municipal Securities may be materially
adversely affected by litigation or other conditions.
Among other instruments, the Funds may purchase short-term general
obligation notes, tax anticipation notes, bond anticipation notes, revenue
anticipation notes, commercial paper, construction loan notes and other forms of
short-term loans. Such instruments are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. In addition, the Funds may invest in long-term tax-exempt
instruments, such as municipal bonds and private activity bonds to the extent
consistent with the limitations set forth in the Prospectus.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Securities. For example, under the Tax Reform Act of 1986,
interest on certain private activity bonds must be included in an investor's
federal alternative minimum taxable income, and corporate investors must include
all tax-exempt interest in their federal alternative minimum taxable income.
Galaxy cannot, of course, predict what legislation may be proposed in the future
regarding the income tax status of interest on Municipal Securities, or which
proposals, if any, might be enacted. Such proposals, while pending or if
enacted, might materially and adversely affect the availability of Municipal
Securities for investment by the Tax-Exempt and Rhode Island Municipal Bond
Funds and the liquidity and value of their respective portfolios. In such an
event, the Funds would re-evaluate their investment objectives and policies and
consider possible changes in their structure or possible dissolution.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Funds nor
Fleet will review the proceedings relating to the issuance of Municipal
Securities or the bases for such opinions.
While the Tax-Exempt and Rhode Island Municipal Bond Funds will invest
primarily in Municipal Securities, each of the Short-Term Bond, Intermediate
Government Income and High Quality Bond Funds will invest in Municipal
Securities when such investments are deemed appropriate by Fleet in light of the
Funds' investment objectives. As a result of the favorable tax treatment
afforded such obligations under the Internal Revenue Code of 1986, as amended,
yields on Municipal Securities can generally be expected under normal market
conditions to be lower than yields on corporate and U.S. Government obligations,
although from time to time Municipal Securities have outperformed, on a total
return basis, comparable corporate and federal debt obligations as a result of
prevailing economic, regulatory or other circumstances.
STAND-BY COMMITMENTS
The Tax-Exempt, Short-Term Bond, Intermediate Government Income, High
Quality Bond and Rhode Island Municipal Bond Funds may acquire "stand-by
commitments" with respect to Municipal Securities held by them. Under a stand-by
commitment, a dealer agrees to purchase, at a Fund's option, specified Municipal
Securities at a specified price. The Funds will
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acquire stand-by commitments solely to facilitate portfolio liquidity and do not
intend to exercise their rights thereunder for trading purposes. The Funds
expect that stand-by commitments will generally be available without the payment
of any direct or indirect consideration. However, if necessary or advisable, a
Fund may pay for a stand-by commitment either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield otherwise available for the same
securities). Where a 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. Stand-by commitments
acquired by a Fund would be valued at zero in determining the Fund's net asset
value. The default or bankruptcy of a securities dealer giving such a commitment
would not affect the quality of the Municipal Securities purchased by a Fund.
However, without a stand-by commitment, these securities could be more difficult
to sell. A Fund will enter into stand-by commitments only with those dealers
whose credit Fleet believes to be of high quality.
Stand-by commitments are exercisable by the Funds 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
securities acquired subject to the commitment. Where a 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. A Fund 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, Fleet will review
periodically the issuer's assets, liabilities, contingent claims and other
relevant financial information.
PRIVATE ACTIVITY BONDS
The Tax-Exempt, Short-Term Bond, Intermediate Government Income, High
Quality Bond and Rhode Island Municipal Bond Funds may invest in "private
activity bonds," the interest on which, although exempt from regular federal
income tax, may constitute an item of tax preference for purposes of the federal
alternative minimum tax. Investments in such securities, however, will not be
treated as investments in Municipal Securities for purposes of the 80%
requirement mentioned above with respect to the Tax-Exempt and Rhode Island
Municipal Bond Funds and, under normal conditions, will not exceed 20% of each
such Fund's total assets when added together with any taxable investments held
by the Fund.
Private activity bonds are or have been issued to obtain funds to
provide, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities.
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The principal and interest on these obligations may be payable from the general
revenues of the users of such facilities.
Private activity bonds held by the Funds are in most cases revenue
securities and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of such private activity bonds is usually
directly related to the credit standing of the corporate user of the facility
involved.
TENDER OPTION BONDS
The Tax-Exempt Fund may purchase tender option bonds and similar
securities. A tender option bond generally has a long maturity and bears
interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates, and is coupled with an agreement by a third party, such as a
bank, broker-dealer or other financial institution, pursuant to which such
institution grants the security holders the option, usually upon not more than
seven days notice or at periodic intervals, to tender their securities to the
institution and receive the face value of the securities. In providing the
option, the financial institution receives a fee that reduces the fixed rate of
the underlying bond and results in a Fund effectively receiving a demand
obligation that bears interest at the prevailing short-term tax-exempt rate.
Fleet will monitor, on an ongoing basis, the creditworthiness of the issuer of
the tender option bond, the financial institution providing the option, and any
custodian holding the underlying long-term bond. The bankruptcy, receivership or
default of any of the parties to a tender option bond will adversely affect the
quality and marketability of the security.
CUSTODIAL RECEIPTS AND CERTIFICATES OF PARTICIPATION
Securities acquired by the Rhode Island Municipal Bond Fund may be in
the form of custodial receipts evidencing rights to receive a specific future
interest payment, principal payment or both on certain Municipal Securities.
Such obligations are held in custody by a bank on behalf of holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts," "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATS") and "Municipal Zero-Coupon Receipts." The Fund may also
purchase from time to time certificates of participation that, in the opinion of
counsel to the issuer, are exempt from federal income tax. A certificate of
participation gives the Fund an undivided interest in a pool of Municipal
Securities held by a bank. Certificates of participation may have fixed,
floating or variable rates of interest. If a certificate of participation is
unrated, Fleet will have determined that the instrument is of comparable quality
to those instruments in which the Fund may invest pursuant to guidelines
approved by Galaxy's Board of Trustees. For certain certificates of
participation, the Fund will have the right to demand payment, on not more than
30 days' notice, for all or any part of the Fund's participation interest, plus
accrued interest. As to these instruments, the Fund intends to exercise its
right to demand payment as needed to provide liquidity, to maintain or improve
the quality of its investment portfolio or upon a default (if permitted under
the terms of the instrument).
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REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Each Fund, except the U.S. Treasury Fund, may purchase portfolio
securities subject to the seller's agreement to repurchase them at a mutually
specified date and price ("repurchase agreements"). Repurchase agreements will
be entered into only with financial institutions such as banks and
broker/dealers which are deemed to be creditworthy by Fleet and/or Oechsle. No
Fund will enter into repurchase agreements with Fleet or Oechsle or any of their
affiliates. Unless a repurchase agreement has a remaining maturity of seven days
or less or may be terminated on demand upon notice of seven days or less, the
repurchase agreement will be considered an illiquid security and will be subject
to each Fund's 10% limit (15% with respect to the Growth and Income Fund) on
illiquid securities described below under "Investment Limitations."
The seller under a repurchase agreement will be required to maintain
the value of the securities which are subject to the agreement and held by a
Fund at not less than the agreed upon repurchase price. If the seller defaulted
on its repurchase obligation, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying securities
(including accrued interest) were less than the repurchase price (including
accrued interest) under the agreement. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such securities
by the Fund might be delayed pending court action. Income on repurchase
agreements is taxable. Investments by each of the Tax-Exempt Fund and Rhode
Island Municipal Bond Fund in repurchase agreements will be, under normal market
conditions, subject to a 20% overall limit on taxable obligations.
The repurchase price under a repurchase agreement generally equals the
price paid by a Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the securities underlying the
repurchase agreement). Securities subject to a repurchase agreement will be held
by a Fund's custodian or sub-custodian in a segregated account or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
Each Fund, except the U.S. Treasury and Tax-Exempt Funds may borrow
funds for temporary purposes by selling portfolio securities to financial
institutions such as banks and broker/dealers and agreeing to repurchase them at
a mutually specified date and price ("reverse repurchase agreements"). Reverse
repurchase agreements involve the risk that the market value of the securities
sold by a Fund may decline below the repurchase price. The Funds would pay
interest on amounts obtained pursuant to a reverse repurchase agreement.
Whenever a Fund enters into a reverse repurchase agreement, it will place in a
segregated custodial account liquid assets such as cash or liquid portfolio
securities equal to the repurchase price (including accrued interest). The Fund
will monitor the account to ensure such equivalent value is maintained. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
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SECURITIES LENDING
Each Fund, except the U.S. Treasury and Tax-Exempt Funds, may lend its
portfolio securities to financial institutions such as banks and broker/dealers
in accordance with the investment limitations described below. Such loans would
involve risks of delay in receiving additional collateral or in recovering the
securities loaned or even loss of rights in the collateral, should the borrower
of the securities fail financially. Any portfolio securities purchased with cash
collateral would also be subject to possible depreciation. A Fund that loans
portfolio securities would continue to accrue interest on the securities loaned
and would also earn income on the loans. Any cash collateral received by the
Funds would be invested in high quality, short-term "money market" instruments.
Loans will generally be short-term (except in the case of the Growth and Income
Fund which may loan its securities on a long-term or short-term basis or both),
will be made only to borrowers deemed by Fleet and/or Oechsle to be of good
standing and only when, in Fleet's and/or Oechsle's judgment, the income to be
earned from the loan justifies the attendant risks. The Funds currently intend
to limit the lending of their portfolio securities so that, at any given time,
securities loaned by a Fund represent not more than one-third of the value of
its total assets.
INVESTMENT COMPANY SECURITIES
With the exception of the Money Market and U.S. Treasury Funds, each
Fund may invest in securities issued by other investment companies which invest
in high quality, short-term debt securities and which determine their net asset
value per share based on the amortized cost or penny-rounding method, provided,
however, that the Tax-Exempt Fund may only invest in securities of other
investment companies which invest in high quality short-term Municipal
Securities and which determine their net asset value per share based on the
amortized cost or penny-rounding method. The International Equity Fund may also
purchase shares of investment companies investing primarily in foreign
securities, including so-called "country funds." Country funds have portfolios
consisting exclusively of securities of issuers located in one foreign country.
The Funds will invest in other investment companies primarily for the purpose of
investing their short-term cash which has not yet been invested in other
portfolio instruments. However, from time to time, on a temporary basis, the
Growth and Income Fund may invest exclusively in one other investment company
similar to the Fund.
Investments in other investment companies will cause a Fund (and,
indirectly, the Fund's shareholders) to bear proportionately the costs incurred
in connection with the investment companies' operations. Except as provided
above with respect to the Growth and Income Fund, securities of other investment
companies will be acquired by a Fund within the limits prescribed by the 1940
Act. Each Fund currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of other investment companies as a
group; (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund; and (d) not more than 10% of the
outstanding voting stock of any one closed-end investment company will be owned
in the aggregate by the
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Funds, other investment portfolios of Galaxy, or any other investment companies
advised by Fleet or Oechsle.
REITs
The Asset Allocation, Growth and Income and International Equity Funds
may invest up to 10% of their respective net assets in real estate investment
trusts ("REITs"). Equity REITs invest directly in real property while mortgage
REITs invest in mortgages on real property. REITs may be subject to certain
risks associated with the direct ownership of real estate, including declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, and variations in rental income. Generally, increases in
interest rates will decrease the value of high yielding securities and increase
the costs of obtaining financing, which could decrease the value of a REIT's
investments. In addition, equity REITs may be affected by changes in the value
of the underlying property owned by the REITs, while mortgage REITs may be
affected by the quality of credit extended. Equity and mortgage REITs are
dependent upon management skill, are not diversified and are subject to the
risks of financing projects. REITs are also subject to heavy cash flow
dependency, defaults by borrowers, self liquidation and the possibility of
failing to qualify for tax-free pass-through of income under the Internal
Revenue Code of 1986, as amended (the "Code"), and to maintain exemption from
the 1940 Act. REITs pay dividends to their shareholders based upon available
funds from operations. It is quite common for these dividends to exceed a REIT's
taxable earnings and profits resulting in the excess portion of such dividends
being designated as a return of capital. Each Fund intends to include the gross
dividends from any investments in REITs in its periodic distributions to its
shareholders and, accordingly, a portion of the Fund's distributions may also be
designated as a return of capital.
DERIVATIVE SECURITIES
Each Fund except the Money Market, U.S. Treasury and Tax-Exempt Funds
may from time to time, in accordance with their respective investment policies,
purchase certain "derivative" securities. Derivative securities are instruments
that derive their value from the performance of underlying assets, interest or
currency exchange rates, or indices, and include, but are not limited to,
municipal bond index and interest rate futures, put and call options, stock
index futures and options, indexed securities and swap agreements, foreign
currency exchange contracts and certain asset-backed and mortgage-backed
securities.
Derivative securities present, to varying degrees, market risk that the
performance of the underlying assets, interest or exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
security will decline more than the assets, rates or indices on which it is
based; liquidity risk that a Fund will be unable to sell a derivative security
when it wants because of lack of market depth or market disruption; pricing risk
that the value of a derivative security will not correlate exactly to the value
of the underlying assets, rates or indices on which it is based; and operations
risk that loss
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will occur as a result of inadequate systems and controls, human error or
otherwise. Some derivative securities are more complex than others, and for
those instruments that have been developed recently, data are lacking regarding
their actual performance over complete market cycles.
Fleet and/or Oechsle will evaluate the risks presented by the
derivative securities purchased by the Funds, and will determine, in connection
with their day-to-day management of the Funds, how such securities will be used
in furtherance of the Funds' investment objectives. It is possible, however,
that Fleet's and/or Oechsle's evaluations will prove to be inaccurate or
incomplete and, even when accurate and complete, it is possible that the Funds
will, because of the risks discussed above, incur loss as a result of their
investments in derivative securities. Further discussion of particular types of
derivative securities follows.
PUT AND CALL OPTIONS -- ASSET ALLOCATION FUND. The Asset Allocation
Fund may purchase put options and call options on securities and securities
indices. A put option gives the buyer the right to sell, and the writer the
obligation to buy, the underlying security at the stated exercise price at any
time prior to the expiration of the option. A call option gives the buyer the
right to buy the underlying security at the stated exercise price at any time
prior to the expiration of the option. Options involving securities indices
provide the holder with the right to make or receive a cash settlement upon
exercise of the option based on movements in the relevant index. Such options
must be listed on a national securities exchange and issued by the Options
Clearing Corporation. Such options may relate to particular securities or to
various stock indexes, except that a Fund may not write covered call options on
an index. A Fund may not purchase options unless immediately after any such
transaction the aggregate amount of premiums paid for put or call options does
not exceed 5% of its total assets. Purchasing options is a specialized
investment technique that may entail the risk of a complete loss of the amounts
paid as premiums to the writer of the option.
In order to close out put or call option positions, a Fund will be
required to enter into a "closing purchase transaction" -- the purchase of a put
or call option (depending upon the position being closed out) on the same
security with the same exercise price and expiration date as the option that it
previously wrote. When a portfolio security subject to a call option is sold, a
Fund will effect a closing purchase transaction to close out any existing call
option on that security. If a Fund is unable to effect a closing purchase
transaction, it will not be able to sell the underlying security until the
option expires or a Fund delivers the underlying security upon exercise.
In contrast to an option on a particular security, an option on an
index provides the holder with the right to make or receive a cash settlement
upon exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.
When a Fund purchases a put or call option, the premium paid by it is
recorded as an asset of the Fund. The amount of this asset will be subsequently
marked-to-market to reflect the current value of the option purchased. The
current value of the traded option is the last sale price
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or, in the absence of a sale, the average of the closing bid and asked prices.
If an option purchased by a Fund expires unexercised, the Fund realizes a loss
equal to the premium paid. If a Fund enters into a closing sale transaction on
an option purchased by it, the Fund will realize a gain if the premium received
by the Fund on the closing transaction is more than the premium paid to purchase
the option, or a loss if it is less.
There are several risks associated with transactions in options on
securities. For example, there are significant differences between the
securities and options markets which could result in an imperfect correlation
between the markets, causing a given transaction not to achieve its objectives.
In addition, a liquid secondary market for particular options, whether traded
over-the-counter or on a national securities exchange may be absent for reasons
which include the following: there may be insufficient trading interest in
certain options; restrictions may be imposed by an exchange on opening
transactions, closing transactions or both; trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; unusual or unforeseen circumstances may
interrupt normal operations on an exchange; the facilities of an exchange or the
Options Clearing Corporation may not at all times be adequate to handle current
trading volume; or one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. A Fund will likely be unable to
control losses by closing its position where a liquid secondary market does not
exist. Moreover, regardless of how much the market price of the underlying
security increases or decreases, the option buyer's risk is limited to the
amount of the original investment for the purchase of the option. However,
options may be more volatile than their underlying securities, and therefore, on
a percentage basis, an investment in options may be subject to greater
fluctuation than an investment in the underlying securities.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
COVERED CALL OPTIONS -- ASSET ALLOCATION AND INTERNATIONAL EQUITY
FUNDS. To further increase return on their portfolio securities, in accordance
with their respective investment objectives and policies, the Asset Allocation
and International Equity Funds may engage in writing covered call options
(options on securities owned by a Fund) and may enter into closing purchase
transactions with respect to such options. Such options must be listed on a
national securities exchange and issued by the Options Clearing Corporation. The
aggregate value of the securities subject to options written by the Funds may
not exceed 25% of the value of their respective net assets. By writing a covered
call option, a Fund forgoes the opportunity to profit from an increase in the
market price of the underlying security above the exercise price, except insofar
as the premium represents such a profit. A Fund will not be able to sell the
underlying security until the option expires or is exercised or the Fund effects
a closing purchase transaction by purchasing an option of the same series. Such
options will normally be written on underlying
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securities as to which Fleet and/or Oechsle does not anticipate significant
short-term capital appreciation.
The Funds may write listed covered call options. A listed call option
gives the purchaser of the option the right to buy from a clearing corporation,
and obligates the writer to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is consideration for undertaking the obligations under the option
contract. If an option expires unexercised, the writer realizes a gain in the
amount of the premium. Such a gain may be offset by a decline in the market
price of the underlying security during the option period.
A Fund may terminate its obligation to sell prior to the expiration
date of the option by executing a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (I.E., same
underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to permit the
writing of a new call option containing different terms on such underlying
security. The cost of such a liquidating purchase plus transaction costs may be
greater than the premium received upon the original option, in which event the
writer will have incurred a loss in the transaction. An option position may be
closed out only on an exchange that provides a secondary market for an option of
the same series. There is no assurance that a liquid secondary market on an
exchange will exist for any particular option. A covered option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying security until the option expires or the underlying security is
delivered upon exercise. The writer in such circumstances will be subject to the
risk of market decline of the underlying security during such period. A Fund
will write an option on a particular security only if Fleet and/or Oechsle
believes that a liquid secondary market will exist on an exchange for options of
the same series, which will permit the Fund to make a closing purchase
transaction in order to close out its position.
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by the Fund is included as a deferred
credit in the liability section of the Fund's statement of assets and
liabilities. The amount of the deferred credit will be subsequently
marked-to-market to reflect the current value of the option written. The current
value of the traded option is the last sale price or, in the absence of a sale
price, the average of the closing bid and asked prices. If an option expires on
the stipulated expiration date or if a Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold), and the
deferred credit related to such option will be eliminated. If an option is
exercised, the Fund may deliver the underlying security from its portfolio and
purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received,
and the Fund will realize a 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 treated as short-term capital losses.
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OPTIONS ON FOREIGN STOCK INDEXES -- INTERNATIONAL EQUITY FUND. The
International Equity Fund may, for the purpose of hedging its portfolio, subject
to applicable securities regulations purchase and write put and call options on
foreign stock indexes listed on foreign and domestic stock exchanges. A stock
index fluctuates with changes in the market values of the stocks included in the
index. Examples of foreign stock indexes are the Canadian Market Portfolio Index
(Montreal Stock Exchange), The Financial Times -- Stock Exchange 100 (London
Stock Exchange) and the Toronto Stock Exchange Composite 300 (Toronto Stock
Exchange).
Options on stock indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a stock
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by (b)
a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.
The effectiveness of purchasing or writing stock index options as a
hedging technique will depend upon the extent to which price movements in the
portion of the securities portfolio of the International Equity Fund correlate
with price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether the Fund realizes a gain or loss from the purchase
or writing of options on an index is dependent upon movements in the level of
stock prices in the stock market generally or, in the case of certain indexes,
in an industry or market segment, rather than movements in the price of a
particular stock. Accordingly, successful use by the Fund of options on stock
indexes will be subject to Fleet's and/or Oechsle's ability to predict correctly
movements in the direction of the stock market generally or of a particular
industry. This requires different skills and techniques than predicting changes
in the price of individual stocks. There can be no assurance that such judgment
will be accurate or that the use of these portfolio strategies will be
successful. The Fund will engage in stock index options transactions that are
determined to be consistent with its efforts to control risk.
When the Fund writes an option on a stock index, the Fund will
establish a segregated account with its custodian or with a foreign
sub-custodian in which the Fund will deposit cash or other liquid assets in an
amount equal to the market value of the option, and will maintain the account
while the option is open.
OPTIONS AND FUTURES CONTRACTS - GROWTH AND INCOME FUND. The Growth and
Income Fund may buy and sell options and futures contracts to manage its
exposure to changing interest rates, security prices and currency exchange
rates. The Fund may invest in options and futures
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based on any type of security, index, or currency, including options and futures
based on foreign exchanges (see "Options on Foreign Stock Indexes --
International Equity Fund" above) and options not traded on exchanges. Some
options and futures strategies, including selling futures, buying puts, and
writing calls, tend to hedge the Fund's investments against price fluctuations.
Other strategies, including buying futures, writing puts, and buying calls, tend
to increase market exposure. Options and futures may be combined with each other
or with forward contracts in order to adjust the risk and return characteristics
of the overall strategy.
Options and futures can be volatile investments, and involve certain
risks. If Fleet applies a hedge at an inappropriate time or judges market
conditions incorrectly, options and futures may lower the Fund's individual
return. The Fund could also experience losses if the prices of its options and
futures positions were poorly correlated with its other investments, or if it
could not close out its positions because of an illiquid secondary market.
The Fund will not hedge more than 20% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. The Fund will
not buy futures or write puts whose underlying value exceeds 20% of its total
assets, and will not buy calls with a value exceeding 5% of its total assets.
FUTURES CONTRACTS - SHORT-TERM BOND, INTERMEDIATE GOVERNMENT INCOME,
HIGH QUALITY BOND AND RHODE ISLAND MUNICIPAL BOND FUNDS. The Rhode Island
Municipal Bond Fund may purchase and sell municipal bond index futures contracts
as a hedge against changes in market conditions. A municipal bond index assigns
values daily to the municipal bonds included in the index based on the
independent assessment of dealer-to-dealer municipal bond brokers. A municipal
bond index futures contract represents a firm commitment by which two parties
agree to take or make delivery of an amount equal to a specified dollar amount
multiplied by the difference between the municipal bond index value on the last
trading date of the contract and the price at which the futures contract is
originally struck. No physical delivery of the underlying securities in the
index is made.
The Short-Term Bond, Intermediate Government Income, High Quality Bond
and Rhode Island Municipal Bond Funds may enter into contracts (both purchase
and sale) for the future delivery of fixed income securities commonly known as
interest rate futures contracts. Interest rate futures contracts are similar to
municipal bond index futures contracts except that, instead of a municipal bond
index, the "underlying commodity" is represented by various types of
fixed-income securities.
The Funds will not engage in futures transactions for speculation, but
only to hedge against changes in the market values of securities which a Fund
holds or intends to purchase. The Funds will engage in futures transactions only
to the extent permitted by the Commodity Futures Trading Commission ("CFTC") and
the Securities and Exchange Commission ("SEC"). The purchase of futures
instruments in connection with securities which the Funds intend to purchase
will require an amount of cash or other liquid assets, equal to the market value
of the outstanding futures contracts, to be deposited in a segregated account to
collateralize the position and thereby insure that the use of such futures is
unleveraged. The Funds will limit their hedging
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transactions in futures contracts so that, immediately after any such
transaction, the aggregate initial margin that is required to be posted by a
Fund under the rules of the exchange on which the futures contract is traded
does not exceed 5% of the Fund's total assets after taking into account any
unrealized profits and unrealized losses on the Fund's open contracts. In
addition, no more than one-third of a Fund's total assets may be covered by such
contracts.
Transactions in futures as a hedging device may subject the Funds to a
number of risks. Successful use of futures by the Funds are subject to the
ability of Fleet to predict correctly movements in the direction of the market.
In addition, there may be an imperfect correlation, or no correlation at all,
between movements in the price of futures contracts and movements in the price
of the instruments being hedged. There is no assurance that a liquid market will
exist for any particular futures contract at any particular time. Consequently,
the Funds may realize a loss on a futures transaction that is not offset by a
favorable movement in the price of securities which it holds or intends to
purchase or may be unable to close a futures position in the event of adverse
price movements. Any income from investments in futures contracts will be
taxable. Additional information concerning futures transactions, including
special rules regarding the taxation of such transactions, is contained in
Appendix B.
STOCK INDEX FUTURES, SWAP AGREEMENTS, INDEXED SECURITIES AND OPTIONS -
GROWTH AND INCOME FUND. The Growth and Income Fund may utilize stock index
futures contracts, options, swap agreements, indexed securities, and options on
futures contracts for the purposes of managing cash flows into and out of its
portfolio and potentially reducing transaction costs, subject to the limitation
that the value of these futures contracts, swap agreements, indexed securities,
and options will not exceed 20% of the Fund's total assets. The Fund will not
purchase options to the extent that more than 5% of the value of its total
assets would be invested in premiums on open put option positions. In addition,
the Fund does not intend to invest more than 5% of the market value of its total
assets in each of the following: futures contracts, swap agreements, and indexed
securities. When the Fund enters into a swap agreement, liquid assets of the
Fund equal to the value of the swap agreement will be segregated by the Fund.
The Fund may not use stock index futures contracts and options for speculative
purposes.
There are several risks accompanying the utilization of futures
contracts. Positions in futures contracts may be closed only on an exchange or
board of trade that furnishes a secondary market for such contracts. While the
Fund plans to utilize futures contracts only if there exists an active market
for such contracts, there is no guarantee that a liquid market will exist for
the contracts at a specified time. Furthermore, because by definition, futures
contracts look to projected price levels in the future and not to current levels
of valuation, market circumstances may result in there being a discrepancy
between the price of the stock index future and the movement in the
corresponding stock index. The absence of a perfect price correlation between
the futures contract and its underlying stock index could stem from investors
choosing to close futures contracts by offsetting transactions, rather than
satisfying additional margin requirements. This could result in a distortion of
the relationship between the index and the futures market. In addition, because
the futures market imposes less burdensome margin requirements than the
securities market, an increased amount of participation by speculators in the
futures market could result in price fluctuations.
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As a means of reducing fluctuations in the net asset value of shares of
the Fund, the Fund may attempt to hedge all or a portion of its portfolio
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 Fund, 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 Fund the right to make
delivery of stock at a specified price, a put option on a stock index gives the
Fund, as holder, the right to receive an amount of cash upon exercise of the
option.
The Fund may also write covered call options. As the writer of a call
option, the Fund has the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of the exercise
price.
The 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 have segregated cash in the amount of any such
additional consideration). The Fund will maintain its positions in securities,
option rights, and segregated cash subject to puts and calls until the options
are exercised, closed or expired. The 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.
The 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 liquid portfolio 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." The 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
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margin employed in futures contracts does not involve the borrowing of funds to
finance the transaction.
The Fund will not enter into futures contracts if, immediately
thereafter, the sum of its initial margin deposits on open contracts exceed 5%
of the market value of its total assets. Further, the 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, the 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 Fund's total assets would be
invested in premiums on open put option positions.
The Fund 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.
As one way of managing its exposure to different types of investments,
the Growth and Income Fund 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 of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate exceeds
an agreed upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest 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 Fund's investment exposure from
one type of investment to another. For example, if the 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 the 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 Fund's 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 Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce their exposure
through offsetting transactions.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Short-Term Bond,
Asset Allocation, Growth and Income and International Equity Funds may buy and
sell securities denominated in currencies other than the U.S. dollar, and may
receive interest, dividends and sale proceeds in currencies other than the U.S.
dollar, the Funds from time to time may enter into foreign currency exchange
transactions to convert the U.S. dollar to foreign currencies, to convert
foreign currencies to the U.S. dollar and to convert foreign currencies to other
foreign currencies. A 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.
Forward foreign currency exchange contracts are agreements to exchange one
currency for another -- for example, to exchange a certain amount of U.S.
dollars for a certain amount of Japanese yen -- at a future date, which may be
any fixed number of days from the date of the contract, and at a specified
price. Typically, the other party to a currency exchange contract will be a
commercial bank or other financial institution. 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.
Forward foreign currency exchange contracts also allow the Funds to
hedge the currency risk of portfolio securities denominated in a foreign
currency. This technique permits the assessment of the merits of a security to
be considered separately from the currency risk. By separating the asset and the
currency decision, it is possible to focus on the opportunities presented by the
security apart from the currency risk. Although forward foreign currency
exchange contracts are of short duration, generally between one and twelve
months, such contracts are rolled over in a manner consistent with a more
long-term currency decision. Because there is a risk of loss to a Fund if the
other party does not complete the transaction, forward foreign currency exchange
contracts will be entered into only with parties approved by Galaxy's Board of
Trustees.
A Fund may maintain "short" positions in forward foreign currency
exchange transactions, which would involve the Fund's agreeing to exchange
currency that it currently does not own for another currency -- for example, to
exchange an amount of Japanese yen that it does not own for a certain amount of
U.S. dollars -- at a future date and at a specified price in anticipation of a
decline in the value of the currency sold short relative to the currency that
the Fund has contracted to receive in the exchange. In order to ensure that the
short position is not used to achieve leverage with respect to the Fund's
investments, the Fund will establish with its custodian a segregated account
consisting of cash or other liquid assets equal in value to the fluctuating
market value of the currency as to which the short position is being maintained.
The
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value of the securities in the segregated account will be adjusted at least
daily to reflect changes in the market value of the short position.
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 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, the Funds will not 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 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.
AMERICAN, EUROPEAN AND GLOBAL DEPOSITORY RECEIPTS
The Short-Term Bond, Asset Allocation, Growth and Income and
International Equity Funds may invest in ADRs and EDRs. The Growth and Income
and International Equity Funds may also invest in GDRs. ADRs are receipts issued
in registered form by a U.S. bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. EDRs are receipts issued in
Europe typically by non-U.S. banks or trust companies and foreign branches of
U.S. banks that evidence ownership of foreign or U.S. securities. GDRs are
receipts structured similarly to EDRs and are marketed globally. ADRs may be
listed on a national securities exchange or may be traded in the
over-the-counter market. EDRs are designed for use in European exchange and
over-the-counter markets. GDRs are designed for trading in non-U.S. securities
markets. ADRs, EDRs and GDRs traded in the over-the-counter market which do not
have an active or substantial secondary market will be considered illiquid and
therefore will be subject to the Funds' respective limitations with respect to
such securities. If a Fund invests in an unsponsored ADR, EDR or GDR, there may
be less information available to the Fund concerning the issuer of the
securities underlying the unsponsored ADR, EDR or GDR than is available for an
issuer of securities underlying a sponsored ADR, EDR or GDR. ADR prices are
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denominated in U.S. dollars although the underlying securities are denominated
in a foreign currency. Investments in ADRs, EDRs and GDRs involve risks similar
to those accompanying direct investments in foreign securities. Certain of these
risks are described above under "Special Risk Considerations -- Foreign
Securities."
ASSET-BACKED SECURITIES
The Money Market, Short-Term Bond, Intermediate Government Income, High
Quality Bond, Rhode Island Municipal Bond and Asset Allocation Funds may
purchase asset-backed securities, which represent a participation in, or are
secured by and payable from, a stream of payments generated by particular
assets, most often a pool of assets similar to one another. Assets generating
such payments will consist of such instruments as motor vehicle installment
purchase obligations, credit card receivables and home equity loans. Payment of
principal and interest may be guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with entities issuing the securities. The estimated life of an asset-backed
security varies with the prepayment experience with respect to the underlying
debt instruments. The rate of such prepayments, and hence the life of the
asset-backed security, will be primarily a function of current market rates,
although other economic and demographic factors will be involved.
Asset-backed securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in an
underlying pool of assets, or as debt instruments, which are also known as
collateralized obligations, and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
decrease, yield to maturity.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. Like other fixed income securities, when interest rates rise, the
value of an asset-backed security generally will decline; however, when interest
rates decline, the value of an asset-backed security with prepayment features
may not increase as much as that of other fixed income securities.
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Asset-backed securities are subject to greater risk of default during
periods of economic downturn. Also, the secondary market for certain
asset-backed securities may not be as liquid as the market for other types of
securities, which could result in a Fund's experiencing difficulty in valuing or
liquidating such securities. For these reasons, under certain circumstances,
asset-backed securities may be considered illiquid securities.
MORTGAGE-BACKED SECURITIES
The Short-Term Bond, Intermediate Government Income, High Quality Bond,
Rhode Island Municipal Bond and Asset Allocation Funds may invest in
mortgage-backed securities (including collateralized mortgage obligations) that
represent pools of mortgage loans assembled for sale to investors by various
governmental agencies and government-related organizations, such as the
Government National Mortgage Association, the Federal National Mortgage
Association, and the Federal Home Loan Mortgage Corporation. Mortgage-backed
securities provide a monthly payment consisting of interest and principal
payments. Additional payment may be made out of unscheduled repayments of
principal resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs that may be incurred.
Prepayments of principal on mortgage-backed securities may tend to increase due
to refinancing of mortgages as interest rates decline. To the extent that a Fund
purchases mortgage-backed securities at a premium, mortgage foreclosures and
prepayments of principal by mortgagors (which may be made at any time without
penalty) may result in some loss of the Fund's principal investment to the
extent of the premium paid. The yield of a Fund, should it invest in
mortgage-backed securities, may be affected by reinvestment of prepayments at
higher or lower rates than the original investment.
Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers, and
special purpose entities. These private mortgage-backed securities may be
supported by U.S. Government mortgage-backed securities or some form of
non-government credit enhancement. Mortgage-backed securities have either fixed
or adjustable interest rates. The rate of return on mortgage-backed securities
may be affected by prepayments of principal on the underlying loans, which
generally increase as interest rates decline; as a result, when interest rates
decline, holders of these securities normally do not benefit from appreciation
in market value to the same extent as holders of other non-callable debt
securities. In addition, like other debt securities, the value of
mortgage-related securities, including government and government-related
mortgage pools, generally will fluctuate in response to market interest rates.
MORTGAGE DOLLAR ROLLS
The Short-Term Bond, Intermediate Government Income, High Quality Bond
and Asset Allocation Funds may enter into mortgage "dollar rolls" in which a
Fund sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future date not
exceeding 120 days. During the roll period, a Fund loses the right to receive
principal and interest paid on the securities sold. However, a Fund would
benefit to the extent of
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any difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Fund compared with what such performance would have been without the use of
mortgage dollar rolls. All cash proceeds will be invested in instruments that
are permissible investments for the Funds. The Funds will hold and maintain in a
segregated account until the settlement date cash or other liquid assets in an
amount equal to the forward purchase price.
For financial reporting and tax purposes, the Funds propose to treat
mortgage dollar rolls as two separate transactions; one involving the purchase
of a security and a separate transaction involving a sale. The Funds do not
currently intend to enter into mortgage dollar rolls that are accounted for as a
financing.
Mortgage dollar rolls involve certain risks. If the broker-dealer to
whom a Fund sells the security becomes insolvent, the Fund's right to purchase
or repurchase the mortgage-related securities may be restricted and the
instrument which the Fund is required to repurchase may be worth less than the
instrument which the Fund originally held. Successful use of mortgage dollar
rolls may depend upon Fleet's ability to predict correctly interest rates and
mortgage prepayments. For these reasons, there is no assurance that mortgage
dollar rolls can be successfully employed.
CONVERTIBLE SECURITIES
The Asset Allocation, Growth and Income and International Equity Funds
may from time to time, in accordance with their respective investment policies,
invest in convertible securities. Convertible securities are fixed income
securities which may be exchanged or converted into a predetermined number of
shares of the issuer's underlying common stock at the option of the holder
during a specified time period. Convertible securities may take the form of
convertible preferred stock, convertible bonds or debentures, units consisting
of "usable" bonds and warrants or a combination of the features of several of
these securities.
Convertible bonds and convertible preferred stocks generally retain the
investment characteristics of fixed income securities until they have been
converted but also react to movements in the underlying equity securities. The
holder is entitled to receive the fixed income of a bond or the dividend
preference of a preferred stock until the holder elects to exercise the
conversion privilege. Usable bonds are corporate bonds that can be used in whole
or in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants, which
are options to buy the common stock, they function as convertible bonds, except
that the warrants generally will expire before the bond's maturity. Convertible
securities are senior to equity securities and therefore have a claim to the
assets of the issuer prior to the holders of common stock in the case of
liquidation. However, convertible securities are generally subordinated to
similar non-convertible securities of the same
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issuer. The interest income and dividends from convertible bonds and preferred
stocks provide a stable stream of income with generally higher yields than
common stocks, but lower than non-convertible securities of similar quality. A
Fund will exchange or convert the convertible securities held in its portfolio
into shares of the underlying common stock in instances in which, in Fleet's
and/or Oechsle's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, a Fund will hold or trade the convertible securities. In selecting
convertible securities for a Fund, Fleet evaluates the investment
characteristics of the convertible security as a fixed income instrument, and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, Fleet and/or Oechsle considers numerous factors, including
the economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
The Growth and Income Fund may invest in convertible bonds rated "BB"
or higher by S&P or Fitch IBCA, or "Ba" or higher by Moody's at the time of
investment. Securities rated "BB" by S&P or Fitch IBCA or "Ba" by Moody's
provide questionable protection of principal and interest in that such
securities either have speculative characteristics or are predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. Debt obligations that are not
rated, or not determined to be, investment grade are high-yield, high-risk
bonds, typically subject to greater market fluctuations, and securities in the
lowest rating category may be in danger of loss of income and principal due to
an issuer's default. To a greater extent than investment grade bonds, the value
of lower-rated bonds tends to reflect short-term corporate, economic, and market
developments, as well as investor perceptions of the issuer's credit quality. In
addition, lower-rated bonds may be more difficult to dispose of or to value than
higher-rated, lower-yielding bonds. Fleet will attempt to reduce the risks
described above through diversification of the Fund's portfolio and by credit
analysis of each issuer, as well as by monitoring broad economic trends and
corporate and legislative developments. If a convertible bond is rated below
"BB" or "Ba" after the Fund has purchased it, the Fund is not required to
eliminate the convertible bond from its portfolio, but will consider appropriate
action. The investment characteristics of each convertible security vary widely,
which allows convertible securities to be employed for different investment
objectives. The Fund does not intend to invest in such lower-rated bonds during
the current fiscal year. A description of the rating categories of S&P, Moody's
and Fitch IBCA is contained in Appendix A to this Statement of Additional
Information.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED SETTLEMENT TRANSACTIONS
Each Fund except the Asset Allocation Fund may purchase eligible
securities on a "when-issued" basis. The Short-Term Bond, Intermediate
Government Income, High Quality Bond and Rhode Island Municipal Bond Funds may
purchase or sell securities on a "forward commitment" basis. Each Fund except
the Asset Allocation and International Equity Funds may also purchase eligible
securities on a "delayed settlement" basis. When-issued and forward commitment
transactions, which involve a commitment by a Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months
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later), permit the Fund to lock in a price or yield on a security it owns or
intends to purchase, regardless of future changes in interest rates. Delayed
settlement describes settlement of a securities transaction in the secondary
market which will occur sometime in the future. When-issued, forward commitment
and delayed settlement transactions involve the risk, however, that the yield or
price obtained in a transaction may be less favorable than the yield or price
available in the market when the securities delivery takes place. It is expected
that forward commitments, when-issued purchases and delayed settlements will not
exceed 25% of the value of a Fund's total assets absent unusual market
conditions. In the event a Fund's forward commitments, when-issued purchases and
delayed settlements ever exceeded 25% of the value of its total assets, the
Fund's liquidity and the ability of Fleet to manage the Fund might be adversely
affected. The Funds do not intend to engage in when-issued purchases, forward
commitments and delayed settlements for speculative purposes, but only in
furtherance of their investment objectives.
A Fund may dispose of a commitment prior to settlement if Fleet or
Oechsle, as the case may be, deems it appropriate to do so. In addition, a Fund
may enter into transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Funds may realize short-term profits or
losses upon the sale of such commitments.
When a Fund agrees to purchase securities on a when-issued, forward
commitment 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. Because a Fund sets aside liquid assets
to satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be adversely affected in the event its
commitment to purchase forward commitments, commitments to purchase when-issued
securities or commitments to purchase securities on a delayed settlement basis
exceeded 25% of the value of its assets.
When a Fund engages in when-issued, forward commitment 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.
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STRIPPED OBLIGATIONS
To the extent consistent with its investment objective, the Short-Term
Bond, Intermediate Government Income and High Quality Bond Funds may purchase
U.S. Treasury receipts and other "stripped" securities that evidence ownership
in either the future interest payments or the future principal payments on U.S.
Government and other obligations. These participations, which may be issued by
the U.S. Government or by private issuers, such as banks and other institutions,
are issued at their "face value," and may include stripped mortgage-backed
securities ("SMBS"), which are derivative multi-class mortgage securities.
Stripped securities, particularly SMBS, may exhibit greater price volatility
than ordinary debt securities because of the manner in which their principal and
interest are returned to investors.
SMBS are usually structured with two or more classes that receive
different proportions of the interest and principal distributions from a pool of
mortgage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class will receive all of the principal.
However, in some instances, one class will receive some of the interest and most
of the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities. The market value of the class consisting
entirely of principal payments generally is extremely volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest are generally higher than prevailing market yields on other
mortgage-backed obligations because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped. SMBS which are not issued by the U.S. Government (or a U.S. Government
agency or instrumentality) are considered illiquid by the Funds. Obligations
issued by the U.S. Government may be considered liquid under guidelines
established by Galaxy's Board of Trustees if they can be disposed of promptly in
the ordinary course of business at a value reasonably close to that used in the
calculation of net asset value per share.
GUARANTEED INVESTMENT CONTRACTS
The Money Market, Short-Term Bond, Intermediate Government Income, High
Quality Bond and Rhode Island Municipal Bond Funds may invest in guaranteed
investment contracts ("GICs") issued by United States and Canadian insurance
companies. Pursuant to GICs, a Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
to the Fund payments at negotiated, floating or fixed interest rates. A GIC is a
general obligation of the issuing insurance company and not a separate account.
The purchase price paid for a GIC becomes part of the general assets of the
insurance company, and the contract is paid from the company's general assets.
The Funds will only purchase GICs that are issued or guaranteed by insurance
companies that at the time of purchase are rated at least AA by S&P or receive a
similar high quality rating from a nationally recognized service which provides
ratings of insurance companies. GICs are considered illiquid securities and will
be subject to the Funds' 10% limitation on such investments, unless there is an
active
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and substantial secondary market for the particular instrument and market
quotations are readily available.
BANK INVESTMENT CONTRACTS
The Short-Term Bond, Intermediate Government Income, High Quality Bond
and Rhode Island Municipal Bond Funds may invest in bank investment contracts
("BICs") issued by banks that meet the quality and asset size requirements for
banks described above under "U.S. Government Obligations and Money Market
Instruments." Pursuant to BICs, cash contributions are made to a deposit account
at the bank in exchange for payments at negotiated, floating or fixed interest
rates. A BIC is a general obligation of the issuing bank. BICs are considered
illiquid securities and will be subject to the Funds' 10% limitation on such
investments, unless there is an active and substantial secondary market for the
particular instrument and market quotations are readily available.
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 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 determine that it is appropriate for the Fund to 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 ("SEC").
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment soon after its acquisition if
Fleet and/or Oechsle 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 portfolio
turnover rate of 100% or more is considered high, although the rate of portfolio
turnover will not be a limiting factor in making portfolio decisions. A high
rate of portfolio turnover involves correspondingly greater brokerage commission
expenses and other transaction costs, which must be ultimately borne by a Fund's
shareholders. High portfolio turnover may result in the realization of
substantial net capital gains; distributions derived from such gains will be
treated as ordinary income for federal income tax purposes.
INVESTMENT LIMITATIONS
In addition to each Fund's investment objective as stated in the
Prospectus, the following investment limitations are matters of fundamental
policy and may not be changed with respect to a particular Fund without the
affirmative vote of the holders of a majority of its outstanding shares (as
defined under "Miscellaneous").
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Each of the Money Market, U.S. Treasury and Tax-Exempt Funds may not:
1. Make loans, except that (i) each Fund may purchase or
hold debt instruments in accordance with its
investment objective and policies, (ii) each Fund,
except the U.S. Treasury Fund, may enter into
repurchase agreements with respect to portfolio
securities, and (iii) the Money Market Fund may lend
portfolio securities against collateral consisting of
cash or securities that are consistent with the
Fund's permitted investments, where the value of the
collateral is equal at all times to at least 100% of
the value of the securities loaned.
2. Purchase foreign securities, except that the Money
Market Fund may purchase certificates of deposit,
bankers' acceptances, or other similar obligations
issued by U.S. branches of foreign banks or foreign
branches of U.S. banks.
3. Purchase securities on margin (except such short-term
credits as may be necessary for the clearance of
purchases), make short sales of securities, or
maintain a short position.
4. Act as an underwriter within the meaning of the
Securities Act of 1933; except insofar as a Fund
might be deemed to be an underwriter upon disposition
of restricted portfolio securities; and except to the
extent that the purchase of securities directly from
the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be
deemed to be underwriting.
5. Purchase or sell real estate; except that the Money
Market and U.S. Treasury Funds may purchase
securities that are secured by real estate, and the
Money Market Fund may purchase securities of issuers
which deal in real estate or interests therein; and
except that the Tax-Exempt Fund may invest in
Municipal Securities secured by real estate or
interests therein; however the Funds will not
purchase or sell interests in real estate limited
partnerships.
6. Purchase or sell commodities or commodity contracts
or invest in oil, gas or other mineral exploration or
development programs or mineral leases.
7. Invest in or sell put options, call options,
straddles, spreads, or any combination thereof.
8. Invest in companies for the purpose of exercising
management or control.
9. Purchase securities of other investment companies
except in connection with a merger, consolidation,
reorganization or acquisition of assets;
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provided, however, that the Tax-Exempt Fund may
acquire such securities in accordance with the 1940
Act.
10. Purchase securities of any one issuer if immediately
after such purchase more than 5% of the value of its
total assets would be invested in the securities of
such issuer (the "5% limitation"), except that up to
25% of the value of its total assets may be invested
without regard to the 5% limitation; notwithstanding
the foregoing restriction, each Fund may invest
without regard to the 5% limitation in U.S.
Government obligations and as otherwise permitted in
accordance with Rule 2a-7 under the 1940 Act or any
successor rule.
With respect to Investment Limitation No. 10 above, (a) a security is
considered to be issued by the governmental entity or entities whose assets and
revenues back the security or, with respect to a private activity bond that is
backed only by the assets and revenues of a non-governmental user, such
non-governmental user; (b) in certain circumstances, the guarantor of a
guaranteed security may also be considered to be an issuer in connection with
such guarantee; (c) securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (including securities backed by the full faith and
credit of the United States) are deemed to be U.S. Government obligations; and
(d) no Fund intends to acquire more than 10% of the outstanding voting
securities of any one issuer.
Each of the Money Market and U.S. Treasury Funds may not:
11. Borrow money or issue senior securities, except that
each Fund may borrow from domestic banks for
temporary purposes and then in amounts not in excess
of 10% of the value of a Fund's total assets at the
time of such borrowing (provided that the Money
Market Fund may borrow pursuant to reverse repurchase
agreements in accordance with its investment policies
and in amounts not in excess of 10% of the value of
its total assets at the time of such borrowing); or
mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not
in excess of the lesser of the dollar amounts
borrowed or 10% of the value of a Fund's total assets
at the time of such borrowing. A Fund will not
purchase securities while borrowings (including
reverse repurchase agreements with respect to the
Money Market Fund) in excess of 5% of its total
assets are outstanding.
12. Invest more than 10% of the value of its total assets
in illiquid securities, including, with respect to
the Money Market and U.S. Treasury Funds, repurchase
agreements with remaining maturities in excess of
seven days, time deposits with maturities in excess
of seven days, restricted securities, non-negotiable
time deposits and other securities which are not
readily marketable.
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<PAGE>
With respect to Investment Limitation No. 11 above, the Money Market
Fund intends to limit any borrowings, including reverse repurchase agreements,
to not more than 10% of the value of its total assets at the time of such
borrowing.
With respect to Investment Limitation No. 12 above, each Fund intends
to limit investments in illiquid securities to not more than 10% of the value of
its net assets.
The Money Market Fund may not:
13. Purchase any securities other than "money-market"
instruments, some of which may be subject to
repurchase agreements, but the Fund may make
interest-bearing savings deposits not in excess of 5%
of the value of its total assets at the time of
deposit and may make time deposits.
The Tax-Exempt Fund may not:
14. Borrow money or issue senior securities, except that
the Fund may borrow from banks for temporary
purposes, and then in amounts not in excess of 10% of
the value of its total assets at the time of such
borrowing; or mortgage, pledge, or hypothecate any
assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the
dollar amounts borrowed or 10% of the value of its
total assets at the time of such borrowing. The Fund
will not purchase any portfolio securities while
borrowings in excess of 5% of its total assets are
outstanding.
15. Knowingly invest more than 10% of the value of its
total assets in illiquid securities, including
repurchase agreements with remaining maturities in
excess of seven days and other securities which are
not readily marketable.
16. Purchase any securities that would cause 25% or more
of the value of its total assets at the time of
purchase to be invested in the securities of one or
more issuers conducting their principal business
activities in the same industry; provided, however,
that there is no limitation with respect to
securities issued or guaranteed by the United States,
any state, territory or possession of the U.S.
Government, the District of Columbia, or any of their
authorities, agencies, instrumentalities, or
political subdivisions.
17. Invest in industrial revenue bonds where the payment
of principal and interest are the responsibility of a
company (including its predecessors) with less than
three years of continuous operation.
With respect to Investment Limitation No. 15, The Tax Exempt Fund
intends to limit investments in illiquid securities to not more than 10% of the
value of its net assets.
The Short-Term Bond, Intermediate Government Income and High Quality
Bond Funds may not:
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18. Make loans, except that (i) each Fund may purchase or
hold debt instruments in accordance with its
investment objective and policies, and may enter into
repurchase agreements with respect to portfolio
securities, and (ii) each Fund may lend portfolio
securities against collateral consisting of cash or
securities which are consistent with the Fund's
permitted investments, where the value of the
collateral is equal at all times to at least 100% of
the value of the securities loaned.
19. Borrow money or issue senior securities, except that
each Fund may borrow from domestic banks for
temporary purposes and then in amounts not in excess
of 10% of the value of its total assets at the time
of such borrowing (provided that each Fund may borrow
pursuant to reverse repurchase agreements in
accordance with its investment policies and in
amounts not in excess of 10% of the value of its
total assets at the time of such borrowing); or
mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not
in excess of the lesser of the dollar amounts
borrowed or 10% of the value of its total assets at
the time of such borrowing. No Fund will purchase
securities while borrowings (including reverse
repurchase agreements) in excess of 5% of its total
assets are outstanding.
20. Invest more than 10% of the value of its net assets
in illiquid securities, including repurchase
agreements with remaining maturities in excess of
seven days, time deposits with maturities in excess
of seven days, restricted securities, non-negotiable
time deposits and other securities which are not
readily marketable.
21. Purchase securities of any one issuer, other than
obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, if
immediately after such purchase more than 5% of the
value of its total assets would be invested in such
issuer, except that up to 25% of the value of its
total assets may be invested without regard to this
limitation.
22. Purchase securities on margin (except such short-term
credits as may be necessary for the clearance of
purchases), make short sales of securities, or
maintain a short position.
23. Act as an underwriter within the meaning of the
Securities Act of 1933; except insofar as a Fund
might be deemed to be an underwriter upon disposition
of restricted portfolio securities; and except to the
extent that the purchase of securities directly from
the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be
deemed to be underwriting.
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<PAGE>
24. Purchase or sell real estate; except that each Fund
may purchase securities that are secured by real
estate and may purchase securities of issuers which
deal in real estate or interests therein; however,
the Funds will not purchase or sell interests in real
estate limited partnerships.
25. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration
or development programs or mineral leases; provided
however, that each Fund may enter into interest rate
futures contracts to the extent permitted under the
Commodity Exchange Act and the 1940 Act; and further
provided that the Short-Term Bond Fund may enter into
forward currency contracts and foreign currency
futures contracts and related options to the extent
permitted by their respective investment objectives
and policies.
26. Invest in or sell put options, call options,
straddles, spreads, or any combination thereof.
27. Invest in companies for the purpose of exercising
management or control.
28. Purchase securities of other investment companies
except in connection with a merger, consolidation,
reorganization, or acquisition of assets; provided,
however, that each Fund may acquire such securities
in accordance with the 1940 Act.
With respect to Investment Limitation No. 19 above, (a) each of the
Short-Term Bond, Intermediate Government Income and High Quality Bond Funds
intends to limit any borrowings (including reverse repurchase agreements) to not
more than 10% of the value of its total assets at the time of such borrowing,
and (b) mortgage dollar rolls entered into by one of these Funds that are not
accounted for as financings shall not constitute borrowings.
With respect to Investment Limitation No. 21 above, neither the
Short-Term Bond Fund, Intermediate Government Income Fund nor High Quality Bond
Fund intends to acquire more than 10% of the outstanding voting securities of
any one issuer.
In addition to the above limitations:
29. The Funds, with the exception of the Short-Term Bond
Fund, may not purchase foreign securities, except
that the Funds may purchase certificates of deposit,
bankers' acceptances, or other similar obligations
issued by U.S. branches of foreign banks or foreign
branches of U.S. banks; and provided, however, that
the Funds may also purchase obligations of Canadian
Provincial Governments in accordance with each Fund's
investment objective and policies.
The Rhode Island Municipal Bond Fund may not:
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30. Make loans, except that (i) the Fund may purchase or
hold debt instruments in accordance with its
investment objective and policies, and may enter into
repurchase agreements with respect to portfolio
securities, and (ii) the Fund may lend portfolio
securities against collateral consisting of cash or
securities which are consistent with its permitted
investments, where the value of the collateral is
equal at all times to at least 100% of the value of
the securities loaned.
31. Borrow money or issue senior securities, except that
the Fund may borrow from domestic banks for temporary
purposes and then in amounts not in excess of 10% of
the value of its total assets at the time of such
borrowing (provided that the Fund may borrow pursuant
to reverse repurchase agreements in accordance with
its investment policies and in amounts not in excess
of 10% of the value of its total assets at the time
of such borrowing); or mortgage, pledge, or
hypothecate any assets except in connection with any
such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed or 10% of the
value of its total assets at the time of such
borrowing. The Fund will not purchase securities
while borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are
outstanding.
32. Invest more than 10% of the value of its net assets
in illiquid securities, including repurchase
agreements with remaining maturities in excess of
seven days, time deposits with maturities in excess
of seven days, restricted securities, non-negotiable
time deposits and other securities which are not
readily marketable.
33. Purchase any securities which would cause 25% or more
of the value of the Fund's total assets at the time
of purchase to be invested in the securities of one
or more issuers conducting their principal business
activities in the same industry; provided, however,
that there is no limitation with respect to
securities issued or guaranteed by the U.S.
Government, any state, territory or possession of the
U. S. Government, the District of Columbia, or any of
their authorities, agencies, instrumentalities or
political subdivisions.
34. Purchase securities on margin (except such short-term
credits as may be necessary for the clearance of
purchases), make short sales of securities, or
maintain a short position.
35. Act as an underwriter within the meaning of the
Securities Act of 1933; except insofar as the Fund
might be deemed to be an underwriter upon disposition
of restricted portfolio securities; and except to the
extent that the purchase of securities directly from
the issuer thereof in accordance
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with the Fund's investment objective, policies and
limitations may be deemed to be underwriting.
36. Purchase or sell real estate; except that the Fund
may invest in Municipal Securities secured by real
estate or interests therein; however, the Fund will
not purchase or sell interests in real estate limited
partnerships.
37. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration
or development programs or mineral leases; provided
however, that the Fund may enter into municipal bond
index futures contracts and interest rate futures
contracts to the extent permitted under the Commodity
Exchange Act and the 1940 Act.
38. Invest in or sell put options, call options,
straddles, spreads, or any combination thereof.
39. Invest in companies for the purpose of exercising
management or control.
40. Purchase securities of other investment companies
except in connection with a merger, consolidation,
reorganization, or acquisition of assets; provided,
however, that the Fund may acquire such securities in
accordance with the 1940 Act.
41. Invest in industrial revenue bonds where the payment
of principal and interest are the responsibility of a
company (including its predecessors) with less than
three years of continuous operation.
42. Purchase foreign securities, except that the Fund may
purchase certificates of deposit, bankers'
acceptances, or other similar obligations issued by
U.S. branches of foreign banks or foreign branches of
U.S. banks.
43. Purchase securities of any one issuer, other than
obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, if
immediately after such purchase more than 5% of the
value of its total assets would be invested in the
securities of such issuer, except that up to 50% of
the value of its total assets may be invested without
regard to this 5% limitation, provided that no more
than 25% of the value of the Fund's total assets are
invested in the securities of any one issuer.
With respect to Investment Limitation No. 31 above, the Rhode Island
Municipal Bond intends to limit any borrowings (including reverse repurchase
agreements) to not more than 10% of the value of its total assets at the time of
such borrowing.
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With respect to Investment Limitation No. 43 above, the Rhode Island
Municipal Bond Fund does not intend to acquire 10% or more of the outstanding
voting securities of any one issuer.
The Asset Allocation and International Equity Funds may not:
44. Make loans, except that (i) each Fund may purchase or
hold debt instruments in accordance with its
investment objective and policies, and may enter into
repurchase agreements with respect to portfolio
securities, and (ii) each Fund may lend portfolio
securities against collateral consisting of cash or
securities which are consistent with its permitted
investments, where the value of the collateral is
equal at all times to at least 100% of the value of
the securities loaned.
45. Borrow money or issue senior securities, except that
each Fund may borrow from domestic banks for
temporary purposes and then in amounts not in excess
of 33% of the value of its total assets at the time
of such borrowing (provided that the Funds may borrow
pursuant to reverse repurchase agreements in
accordance with their investment policies and in
amounts not in excess of 33% of the value of their
respective total assets at the time of such
borrowing); or mortgage, pledge, or hypothecate any
assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the
dollar amounts borrowed or 33% of the value of a
Fund's total assets at the time of such borrowing. No
Fund will purchase securities while borrowings
(including reverse repurchase agreements) in excess
of 5% of its total assets are outstanding.
46. Invest more than 10% of the value of its net assets
in illiquid securities, including repurchase
agreements with remaining maturities in excess of
seven days, time deposits with maturities in excess
of seven days, securities which are restricted as to
transfer in their principal market (with respect to
the International Equity Fund), non-negotiable time
deposits and other securities which are not readily
marketable.
47. Purchase securities of any one issuer, other than
obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, if
immediately after such purchase more than 5% of the
value of a Fund's total assets would be invested in
such issuer, except that up to 25% of the value of
its total assets may be invested without regard to
this limitation.
48. Purchase securities on margin (except such short-term
credits as may be necessary for the clearance of
purchases), make short sales of securities, or
maintain a short position.
49. Act as an underwriter within the meaning of the
Securities Act of 1933; except insofar as a Fund
might be deemed to be an underwriter upon
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disposition of restricted portfolio securities; and
except to the extent that the purchase of securities
directly from the issuer thereof in accordance with
the Fund's investment objective, policies and
limitations may be deemed to be underwriting.
50. Purchase or sell real estate; except that each Fund
may purchase securities that are secured by real
estate, and the Funds may purchase securities of
issuers which deal in real estate or interests
therein; however, the Funds will not purchase or sell
interests in real estate limited partnerships.
51. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration
or development programs or mineral leases; provided
however, that the Funds may enter into forward
currency contracts and foreign currency futures
contracts and related options to the extent permitted
by their respective investment objectives and
policies.
52. Invest in or sell put options, call options,
straddles, spreads, or any combination thereof;
provided, however, that each Fund may write covered
call options with respect to its portfolio securities
that are traded on a national securities exchange,
and may enter into closing purchase transactions with
respect to such options if, at the time of the
writing of such options, the aggregate value of the
securities subject to the options written by the Fund
does not exceed 25% of the value of its total assets;
and further provided that (i) the Funds may purchase
put and call options to the extent permitted by their
investment objectives and policies.
53. Invest in companies for the purpose of exercising
management or control.
54. Purchase securities of other investment companies
except in connection with a merger, consolidation,
reorganization, or acquisition of assets; provided,
however, that the Funds may acquire such securities
in accordance with the 1940 Act.
With respect to Investment Limitation No. 45 above, (a) each of the
Asset Allocation and International Equity Funds intends to limit any borrowings
(including reverse repurchase agreements) to not more than 33% of the value of
its total assets at the time of such borrowing, and (b) mortgage dollar rolls
entered into by the Asset Allocation Fund that are not accounted for as
financings shall not constitute borrowings.
With respect to Investment Limitation No. 47 above, each of the Asset
Allocation and International Equity Funds does not intend to acquire more than
10% of the outstanding voting securities of any one issuer.
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The Growth and Income Fund may not:
55. Borrow money directly or through reverse repurchase
agreements (arrangements in which the Fund sells a
portfolio instrument for a percentage of its cash
value with an arrangement to buy it back on a set
date) or pledge securities except, under certain
circumstances, such Fund may borrow up to one-third
of the value of its total assets and pledge up to 10%
of the value of its total assets to secure such
borrowings.
56. With respect to 75% of the value of its total assets,
invest more than 5% in securities of any one issuer,
other than cash, cash items, or securities issued or
guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase
agreements collateralized by such securities, or
acquire more than 10% of the outstanding voting
securities of any one issuer.
57. Sell any securities short or purchase any securities
on margin, but the Fund may obtain such short-term
credits as may be necessary for the clearance of
purchases and sales of portfolio securities. A
deposit or payment by the 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.
58. Issue senior securities except that the 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 Fund may enter into
futures contracts. The Fund will not 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 the Fund to
meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of its
total assets are outstanding.
59. Mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, the Fund
may only mortgage, pledge, or hypothecate assets
having a market value not exceeding 10% of the value
of its total assets at the time of purchase. For
purposes of this limitation, the following will not
be deemed to be pledges of the 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.
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60. Purchase or sell real estate or real estate limited
partnerships, although the 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.
61. Purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that
the Fund may engage in transactions involving
financial futures contracts or options on financial
futures contracts.
62. Underwrite any issue of securities, except as the
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.
63. Lend any of its assets except that the Fund may lend
portfolio securities up to one-third the value of its
total assets. This limitation shall not prevent the
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.
64. 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, the 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.
The following investment policies with respect to the Growth and Income
Fund may be changed by Galaxy's Board of Trustees without shareholder approval.
Shareholders will be notified before any material change in these limitations
become effective:
65. The Fund may not invest more than 15% of its net
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 securities which
meet the criteria for liquidity as established by the
Board of Trustees).
66. The 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
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<PAGE>
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.
The Fund 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 the Fund in shares of
another investment company would be subject to such
duplicate expenses.
67. The Fund may not 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.
68. The Fund may not purchase or sell interests in oil,
gas, or mineral exploration or development programs
or leases; except that the Fund may purchase the
securities of issuers which invest in or sponsor such
programs.
69. The Fund may not 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.
70. The Fund may not write call options on securities,
unless the securities are held in the Fund's
portfolio 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. The Fund may not write call options in
excess of 5% of the value of its total assets.
71. The Fund may not 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.
72. The Fund may not invest in companies for the purpose
of exercising management or control.
73. The Fund may not 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.
In addition to the foregoing limitations, (a) the Money Market, U.S.
Treasury, Short-Term Bond, Intermediate Government Income, High Quality Bond,
Asset Allocation, Growth & Income and International Equity Funds may not
purchase securities that would cause 25% or
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<PAGE>
more of the value of a Fund's total assets at the time of purchase to be
invested in the securities of one or more issuers conducting their principal
business activities in the same industry; provided, however, that (i) there is
no limitation with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or, with respect to the Money
Market Fund, by domestic banks or by U.S. branches of foreign banks that are
subject to the same regulation as domestic banks; (ii) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(iii) utilities will be classified according to their services (for example,
gas, gas transmission, electric and gas, electric and telephone each will be
considered a separate industry.
The Growth and Income Fund intends to invest in restricted securities.
Restricted securities are any securities in which a Fund may otherwise invest
pursuant to its investment objective and policies, but which are subject to
restriction on resale under federal securities law. The Fund will limit its
investments in illiquid securities, including certain restricted securities not
determined by the Board of Trustees to be liquid, non-negotiable fixed time
deposits with maturities over seven days, over-the-counter options, and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of its net assets.
Except as stated otherwise, a percentage limitation is satisfied at the
time of investment, a later increase in such percentage resulting from a change
in the value of a Fund's portfolio securities generally will not constitute a
violation of the limitation. If the value of a Fund's holdings of illiquid
securities at any time exceeds the percentage limitation applicable at the time
of acquisition due to subsequent fluctuations in value or other reasons, the
Board of Trustees will consider what actions, if any, are appropriate to
maintain adequate liquidity. With respect to borrowings, if a Fund's asset
coverage at any time falls below that required by the 1940 Act, the Fund will
reduce the amount of its borrowings in the manner required by the 1940 Act to
the extent necessary to satisfy the asset coverage requirement.
Each of the Money Market, U.S. Treasury and Tax-Exempt Funds may follow
non-fundamental operating policies that are more restrictive than its
fundamental investment limitations as set forth in the Prospectus and this
Statement of Additional Information, in order to comply with applicable laws and
regulations, including the provisions of and regulations under the 1940 Act. In
particular, each Fund will comply with the various requirements of Rule 2a-7
under the 1940 Act which regulates money market funds. In accordance with Rule
2a-7, the Money Market Fund is subject to the 5% limitation contained in
Investment Limitation No. 10 above as to all of its assets; however in
accordance with such Rule, the Money Market Fund will be able to invest more
than 5% (but no more than 25%) of its total assets in the securities of a single
issuer for a period of up to three business days after the purchase thereof,
provided that the Fund may not hold more than one such investment at any one
time. Adherence by a Fund to the diversification requirements of Rule 2a-7 is
deemed to constitute adherence to the diversification requirements of Investment
Limitation No. 10 above. Each of the Money Market, U.S. Treasury and Tax-Exempt
Funds will determine the effective maturity of its respective investments, as
well as its ability to consider a security as having received the requisite
short-term ratings by Rating Agencies, according to Rule 2a-7. A Fund may change
these operating policies to reflect changes in the laws and regulations without
the approval of its shareholders.
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<PAGE>
Each Fund except the U.S. Treasury Fund and Rhode Island Municipal Bond
Fund may purchase Rule 144A securities Rule 144A under the 1933 Act allows for a
broader institutional trading market for securities otherwise subject to
restrictions on resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the 1933 Act for resales of
certain securities to qualified institutional buyers. Investment by a Fund in
Rule 144A securities could have the effect of increasing the level of
illiquidity of the Fund during any period that qualified institutional buyers
were no longer interested in purchasing these securities. For purposes of each
Fund's limitation on purchases of illiquid securities described above, Rule 144A
securities will not be considered to be illiquid if Fleet has determined, in
accordance with guidelines established by the Board of Trustees, that an
adequate trading market exists for such securities.
VALUATION OF PORTFOLIO SECURITIES
VALUATION OF THE MONEY MARKET, U.S. TREASURY AND TAX-EXEMPT FUNDS
Galaxy uses the amortized cost method of valuation to value shares of
the Money Market, U.S. Treasury and Tax-Exempt 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 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 none of the Funds will purchase any security deemed to
have a remaining maturity (as defined in the 1940 Act) of more than 397 days 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 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 Fund, calculated by using
available market quotations, deviates from $1.00 per share. In the event such
deviation exceeds one-half
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<PAGE>
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 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 Fund's outstanding shares without
monetary consideration; or utilizing a net asset value per share determined by
using available market quotations.
VALUATION OF THE SHORT-TERM BOND, INTERMEDIATE GOVERNMENT INCOME, HIGH QUALITY
BOND AND RHODE ISLAND MUNICIPAL BOND FUNDS
The assets of the Short-Term Bond, Intermediate Government Income, High
Quality Bond and Rhode Island Municipal Bond Funds are valued for purposes of
pricing sales and redemptions by an independent pricing service ("Service")
approved by Galaxy's Board of Trustees. When, in the judgment of the Service,
quoted bid prices for portfolio securities are readily available and are
representative of the bid side of the market, these investments are valued at
the mean between quoted bid prices (as obtained by the Service from dealers in
such securities) and asked prices (as calculated by the Service based upon its
evaluation of the market for such securities). Other investments are carried at
fair value as determined by the Service, based on methods which include
consideration of yields or prices of bonds of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. The Service may also employ electronic data processing techniques
and matrix systems to determine value. Short-term securities are valued at
amortized cost, which approximates market value. The amortized cost method
involves valuing a security at its cost on the date of purchase and thereafter
assuming a constant amortization to maturity of the difference between the
principal amount due at maturity and cost.
VALUATION OF THE ASSET ALLOCATION AND GROWTH AND INCOME FUNDS
In determining market value, the assets in the Asset Allocation and
Growth and Income Funds which are traded on a recognized stock exchange are
valued at the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities quoted on the NASD National Market System are also
valued at the last sale price. Other securities traded on over-the-counter
markets are valued on the basis of their closing over-the-counter bid prices.
Securities for which there were no transactions are valued at the average of the
most recent bid and asked prices. Investments in debt securities with remaining
maturities of 60 days or less are valued based upon the amortized cost method.
Restricted securities, securities for which market quotations are not readily
available, and other assets are valued at fair value by Fleet under the
supervision of Galaxy's Board of Trustees. An option is generally valued at the
last sale price or, in the absence of a last sale price, the last offer price.
See "Valuation of International Equity Fund" below for a description of the
valuation of certain foreign securities held by these Funds.
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<PAGE>
VALUATION OF THE INTERNATIONAL EQUITY FUND
In determining market value, the International Equity Fund's portfolio
securities which are primarily traded on a domestic exchange are valued at the
last sale price on that exchange or, if there is no recent sale, at the last
current bid quotation. Portfolio securities which are primarily traded on
foreign securities exchanges are generally valued at the preceding closing
values of such securities on their respective exchanges, except when an
occurrence subsequent to the time a value was so established is likely to have
changed such value, then the fair value of those securities may be determined
through consideration of other factors by or under the direction of Galaxy's
Board of Trustees. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the primary
market for such security. Investments in debt securities having a remaining
maturity of 60 days or less are valued based upon the amortized cost method. All
other securities are valued at the last current bid quotation if market
quotations are available, or at fair value as determined in accordance with
policies established in good faith by the Board of Trustees. For valuation
purposes, quotations of foreign securities in foreign currency are converted to
U.S. dollars equivalent at the prevailing market rate on the day of valuation.
An option is generally valued at the last sale price or, in the absence of a
last sale price, the last offer price.
Certain of the securities acquired by the International Equity Fund may
be traded on foreign exchanges or over-the-counter markets on days on which the
Fund's net asset value is not calculated. In such cases, the net asset value of
the Fund's shares may be significantly affected on days when investors can
neither purchase nor redeem shares of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Fund are sold on a continuous basis by Galaxy's
distributor, Provident Distributors, Inc. ("PDI"). PDI is a registered
broker/dealer with its principal offices at Four Falls Corporate Center, 6th
Floor, West Conshohocken, Pennsylvania 19428. PDI has agreed to use appropriate
efforts to solicit all purchase orders.
BKB Shares will initially be issued in connection with the
Reorganization. Following the Reorganization, BKB Shares will be available for
purchase only by those shareholders who received BKB Shares in the
Reorganization. BKB Shares of a Fund will convert to Retail A Shares of the same
Fund on the first anniversary of the Reorganization, provided that the Board of
Trustees of Galaxy has determined that such conversion is in the best interests
of holders of BKB Shares.
OTHER PURCHASE INFORMATION - BKB SHARES AND RETAIL A SHARES
On a business day (i.e. a day when the New York Stock Exchange (the
"Exchange") is open for trading) when the Stock Exchange closes early due to a
partial holiday or otherwise, Galaxy will advance the time at which purchase
orders must be received in order to be processed on that business day.
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<PAGE>
APPLICABLE SALES CHARGE - RETAIL A SHARES
The public offering price for Retail A Shares of the Funds (other than
Retail A Shares of the Money Market, U.S. Treasury and Tax-Exempt Funds which
are sold without a sales charge) is the sum of the net asset value of the Retail
A Shares purchased plus any applicable front-end sales charge as described in
the Prospectus. A deferred sales charge of up to 1.00% is assessed on certain
redemptions of Retail A Shares that are purchased with no initial sales charge
as part of an investment of $500,000 or more. A portion of the front-end sales
charge may be reallowed to broker-dealers as follows:
<TABLE>
<CAPTION>
REALLOWANCE TO
DEALERS
-------
AS A % OF
OFFERING PRICE
AMOUNT OF TRANSACTION PER SHARE
- --------------------- --------------
<S> <C>
Less than $50,000 3.25
$50,000 but less than $100,000 3.00
$100,000 but less than $250,000 2.50
$250,000 but less than $500,000 2.00
$500,000 and over 0.00
</TABLE>
The appropriate reallowance to dealers will be paid by PDI to
broker-dealer organizations which have entered into agreements with PDI. The
reallowance to dealers may be changed from time to time.
Certain affiliates of Fleet may, at their own expense, provide
additional compensation to broker-dealer affiliates of Fleet and to unaffiliated
broker-dealers whose customers purchase significant amounts of Retail A Shares
of the Funds. Such compensation will not represent an additional expense to the
Funds or their shareholders, since it will be paid from the assets of Fleet's
affiliates.
In certain situations or for certain individuals, the front-end sales
charge for Retail A Shares of the Funds may be waived either because of the
nature of the investor or the reduced sales effort required to attract such
investments. In order to receive the sales charge waiver, an investor must
explain the status of his or her investment at the time of purchase. In addition
to the sales charge waivers described in the Prospectus, no sales charge is
assessed on purchases of Retail A Shares of the Funds by the following
categories of investors or in the following types of transactions:
- purchases by directors, officers and employees of
broker-dealers having agreements with PDI pertaining to the
sale of Retail A Shares to the extent permitted by such
organizations;
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<PAGE>
- purchases by current and retired members of Galaxy's Board of
Trustees and members of their immediate families;
- purchases by officers, directors, employees and retirees of
FleetBoston Financial Corporation and any of its affiliates
and members of their immediate families;
- purchases by officers, directors, employees and retirees of
PFPC Inc. and members of their immediate families;
- purchases by persons who are also plan participants in any
employee benefit plan which is the record or beneficial holder
of Trust Shares of the Funds or any of the other portfolios
offered by Galaxy;
- purchases by institutional investors, including but not
limited to bank trust departments and registered investment
advisers;
- purchases by clients of investment advisers or financial
planners who place trades for their own accounts if such
accounts are linked to the master accounts of such investment
advisers or financial planners on the books of the
broker-dealer through whom Retail A Shares are purchased;
- purchases by institutional clients of broker-dealers,
including retirement and deferred compensation plans and the
trusts used to fund these plans, which place trades through an
omnibus account maintained with Galaxy by the broker-dealer;
and
- purchases prior to July 1, 1999 by former deposit customers of
financial institutions (other than registered broker-dealers)
acquired by FleetBoston Financial Corporation in February
1998.
COMPUTATION OF OFFERING PRICE - RETAIL A SHARES
An illustration of the computation of the offering price per share of
Retail A Shares of the Funds (other than the Money Market, U.S. Treasury and
Tax-Exempt Funds), using the value of each Fund's net assets attributable to
such Shares and the number of outstanding Retail A Shares of each Fund at the
close of business on October 31, 1999 and the maximum front-end sales charge of
3.75%, is as follows:
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<TABLE>
<CAPTION>
Short Term Intermediate Government
Bond Fund Income Fund
---------- -----------------------
<S> <C> <C>
Net Assets........................................... $24,652,827 $56,453,630
Outstanding Shares................................... 2,499,555 5,728,355
Net Asset Value Per Share............................ $9.86 $9.86
Sales Charge (3.75% of
the offering price).................................. $0.38 $0.38
Offering Price to Public............................. $10.24 $10.24
</TABLE>
<TABLE>
<CAPTION>
High Quality Rhode Island Municipal
Bond Fund Bond Fund
--------- ---------
<S> <C> <C>
Net Assets........................................... $42,905,576 $19,833,264
Outstanding Shares................................... 4,187,138 1,914,494
Net Asset Value Per Share............................ $10.25 $10.36
Sales Charge (3.75% of
the offering price).................................. $0.40 $0.40
Offering Price to Public............................. $10.65 $10.76
</TABLE>
<TABLE>
<CAPTION>
Asset Allocation
Fund
----
<S> <C>
Net Assets........................................... $389,077,216
Outstanding Shares................................... 21,935,139
Net Asset Value Per Share............................ $17.74
Sales Charge (3.75% of
the offering price).................................. $0.69
Offering Price to Public............................. $18.43
</TABLE>
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<TABLE>
<CAPTION>
Growth and
Income Fund
-----------
<S> <C>
Net Assets........................................... $232,110,404
Outstanding Shares................................... 14,524,500
Net Asset Value Per Share............................ $15.98
Sales Charge (3.75% of
the offering price).................................. $0.62
Offering Price to Public............................. $16.60
</TABLE>
<TABLE>
<CAPTION>
International
Equity Fund
-------------
<S> <C>
Net Assets........................................... $89,326,639
Outstanding Shares................................... 4,282,082
Net Asset Value Per Share............................ $20.86
Sales Charge (3.75% of
the offering price).................................. $0.81
Offering Price to Public............................. $21.67
</TABLE>
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QUANTITY DISCOUNTS
Investors may be entitled to reduced sales charges through Rights of
Accumulation, a Letter of Intent or a combination of investments, as described
below, even if the investor does not wish to make an investment of a size that
would normally qualify for a quantity discount.
In order to obtain quantity discount benefits, an investor must notify
PDI at the time of purchase that he or she would like to take advantage of any
of the discount plans described below. Upon such notification, the investor will
receive the lowest applicable sales charge. Quantity discounts may be modified
or terminated at any time and are subject to confirmation of an investor's
holdings through a check of appropriate records. For more information about
quantity discounts, please contact PDI or your financial institution.
RIGHTS OF ACCUMULATION. A reduced sales charge applies to any purchase
of Retail A Shares of any portfolio of Galaxy that is sold with a sales charge
("Eligible Fund") where an investor's then current aggregate investment in
Retail A Shares is $50,000 or more. "Aggregate investment" means the total of:
(a) the dollar amount of the then current purchase of shares of an Eligible
Fund; and (b) the value (based on current net asset value) of previously
purchased and beneficially owned shares of any Eligible Fund on which a sales
charge has been paid. If, for example, an investor beneficially owns shares of
one or more Eligible Funds with an aggregate current value of $49,000 on which a
sales charge has been paid and subsequently purchases shares of an Eligible Fund
having a current value of $1,000, the sales charge applicable to the subsequent
purchase would be reduced to 3.50% of the offering price. Similarly, with
respect to each subsequent investment, all shares of Eligible Funds that are
beneficially owned by the investor at the time of investment may be combined to
determine the applicable sales charge.
LETTER OF INTENT. By completing the Letter of Intent included as part
of the Account Application, an investor becomes eligible for the reduced sales
charge applicable to the total number of Eligible Fund Retail A Shares purchased
in a 13-month period pursuant to the terms and under the conditions set forth
below and in the Letter of Intent. To compute the applicable sales charge, the
offering price of Retail A Shares of an Eligible Fund on which a sales charge
has been paid and that are beneficially owned by an investor on the date of
submission of the Letter of Intent may be used as a credit toward completion of
the Letter of Intent. However, the reduced sales charge will be applied only to
new purchases.
PFPC Inc. ("PFPC"), Galaxy's administrator, will hold in escrow Retail
A Shares equal to 5% of the amount indicated in the Letter of Intent for payment
of a higher sales charge if an investor does not purchase the full amount
indicated in the Letter of Intent. The escrow will be released when the investor
fulfills the terms of the Letter of Intent by purchasing the specified amount.
If purchases qualify for a further sales charge reduction, the sales charge will
be adjusted to reflect the investor's total purchases. If total purchases are
less than the amount specified, the investor will be requested to remit an
amount equal to the difference between the sales charge actually paid and the
sales charge applicable to the total purchases. If such remittance is not
received within 20 days, PFPC, as attorney-in-fact pursuant to the terms of the
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<PAGE>
Letter of Intent and at PDI's direction, will redeem an appropriate number of
Retail A Shares held in escrow to realize the difference. Signing a Letter of
Intent does not bind an investor to purchase the full amount indicated at the
sales charge in effect at the time of signing, but an investor must complete the
intended purchase in accordance with the terms of the Letter of Intent to obtain
the reduced sales charge. To apply, an investor must indicate his or her
intention to do so under a Letter of Intent at the time of purchase.
QUALIFICATION FOR DISCOUNTS. For purposes of applying the Rights of
Accumulation and Letter of Intent privileges described above, the scale of sales
charges applies to the combined purchases made by any individual and/or spouse
purchasing securities for his, her or their own account or for the account of
any minor children, or the aggregate investments of a trustee or custodian of
any qualified pension or profit-sharing plan established (or the aggregate
investment of a trustee or other fiduciary) for the benefit of the persons
listed above.
REINSTATEMENT PRIVILEGE. Investors may reinvest all or any portion of
their redemption proceeds in Retail A Shares of the Funds or in Retail A Shares
of another portfolio of Galaxy within 90 days of the redemption trade date
without paying a sales load. Retail A Shares so reinvested will be purchased at
a price equal to the net asset value next determined after Galaxy's transfer
agent receives a reinstatement request and payment in proper form.
Investors wishing to exercise this Privilege must submit a written
reinstatement request to PFPC as transfer agent stating that the investor is
eligible to use the Privilege. The reinstatement request and payment must be
received within 90 days of the trade date of the redemption. Currently, there
are no restrictions on the number of times an investor may use this Privilege.
Generally, exercising the Reinstatement Privilege will not affect the
character of any gain or loss realized on redemptions for federal income tax
purposes. However, if a redemption results in a loss, the reinstatement may
result in the loss being disallowed under the Code's "wash sale" rules.
GROUP SALES. Members of qualified groups may purchase Retail A Shares
of the Funds at the following group sales rates:
<TABLE>
<CAPTION>
REALLOWANCE
TOTAL SALES CHARGE TO DEALERS
------------------------------------- ----------
AS A % OF AS A % OF AS A % OF
NUMBER OF QUALIFIED OFFERING PRICE NET ASSET VALUE OFFERING PRICE
GROUP MEMBERS PER SHARE PER SHARE PER SHARE
- --------------------- --------- --------- ---------
<S> <C> <C> <C>
50,000 but less than 250,000.................... 3.00 3.09 3.00
250,000 but less than 500,000................... 2.75 2.83 2.75
500,000 but less than 750,000................... 2.50 2.56 2.50
750,000 and over................................ 2.00 2.04 2.00
</TABLE>
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<PAGE>
To be eligible for the discount, a group must meet the requirements set
forth below and be approved in advance as a qualified group by PDI. To receive
the group sales charge rate, group members must purchase Retail A Shares
directly from PDI in accordance with any of the procedures described in the
Prospectus. Group members must also ensure that their qualified group
affiliation is identified on the purchase application.
A qualified group is a group that (i) has at least 50,000 members, (ii)
was not formed for the purpose of buying Fund shares at a reduced sales charge,
(iii) within one year of the initial member purchase, has at least 1% of its
members invested in the Funds or any of the other investment portfolios offered
by Galaxy, (iv) agrees to include Galaxy sales material in publications and
mailings to members at a reduced cost or no cost, and (v) meets certain other
uniform criteria. PDI may request periodic certification of group and member
eligibility. PDI reserves the right to determine whether a group qualifies for a
quantity discount and to suspend this offer at any time.
REDEMPTION OF RETAIL A SHARES AND BKB SHARES
Redemption orders are effected at the net asset value per share next
determined after receipt of the order by PDI. On a business day when the
Exchange closes early due to a partial holiday or otherwise, Galaxy will advance
the time at which redemption orders must be received in order to be processed on
that business day. Galaxy may require any information reasonably necessary to
ensure that a redemption has been duly authorized. Galaxy reserves the right to
transmit redemption proceeds within seven days after receiving the redemption
order if, in its judgment, an earlier payment could adversely affect a Fund.
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 SEC exists making disposal of a
Fund's investments or determination of its net asset value not reasonably
practicable; (b) the Exchange is closed (other than customary weekend and
holiday closings); or (c) the SEC by order has permitted such suspension.
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. However, Galaxy has filed an election with the SEC to pay in cash all
redemptions requested by a shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a Fund at the
beginning of such period. Such commitment cannot be revoked without the prior
approval of the SEC.
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<PAGE>
INVESTOR PROGRAMS
The following information supplements the description in the Prospectus
as to various Investor Programs available to holders of Retail A Shares and BKB
Shares.
EXCHANGE PRIVILEGE -- RETAIL A SHARES AND BKB SHARES
The minimum initial investment to establish an account in another Fund
or portfolio by exchange is $2,500, unless (i) the Retail A Shares or BKB Shares
being redeemed were purchased through a registered representative who is a Fleet
Bank employee, in which event there is no minimum investment requirement, or
(ii) at the time of the exchange the investor elects, with respect to the Fund
or portfolio into which the exchange is being made, to participate in Galaxy's
Automatic Investment Program, in which event there is no minimum initial
investment requirement, or in Galaxy's College Investment Program, in which
event the minimum initial investment is generally $100.
An exchange involves a redemption of all or a portion of the Retail A
Shares or BKB Shares of a Fund and the investment of the redemption proceeds in
Retail A Shares or BKB Shares of another Fund or, in the case of Retail A
Shares, another portfolio offered by Galaxy or otherwise advised by Fleet or its
affiliates. The redemption will be made at the per share net asset value next
determined after the exchange request is received. The shares of a Fund or
portfolio to be acquired will be purchased at the per share net asset value next
determined after acceptance of the exchange request, plus any applicable sales
charge.
Investors may find the exchange privilege useful if their investment
objectives or market outlook should change after they invest in any of the
Funds. For further information regarding Galaxy's exchange privilege, investors
should call PFPC, Galaxy's transfer agent, at 1-877-BUY-GALAXY (1-877-289-4252).
Customers of institutions should call their institution for such information.
Investors exercising the exchange privilege into other portfolios should request
and review these portfolios' prospectuses prior to making an exchange. Telephone
1-877-BUY-GALAXY (1-877-289-4252) for a prospectus or to make an exchange.
In order to prevent abuse of this privilege to the disadvantage of
other shareholders, Galaxy reserves the right to terminate the exchange
privilege of any shareholder who requests more than three exchanges a year.
Galaxy will determine whether to do so based on a consideration of both the
number of exchanges that any particular shareholder or group of shareholders has
requested and the time period over which their exchange requests have been made,
together with the level of expense to Galaxy which will result from effecting
additional exchange requests. The exchange privilege may be modified or
terminated at any time. At least 60 days' notice of any material modification or
termination will be given to shareholders except where notice is not required
under the regulations of the SEC.
For federal income tax purposes, an exchange of shares is a taxable
event and, accordingly, a capital gain or loss may be realized by an investor.
Before making an exchange
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<PAGE>
request, an investor should consult a tax or other financial adviser to
determine the tax consequences.
RETIREMENT PLANS
Retail A Shares and BKB Shares of each Fund (except for the Tax-Exempt
and Rhode Island Municipal Bond Funds) are available for purchase in connection
with the following tax-deferred prototype retirement plans:
INDIVIDUAL RETIREMENT ARRANGEMENTS ("IRAS") (including traditional,
Roth and Education IRAs and "roll-overs" from existing retirement plans), a
retirement-savings vehicle for qualifying individuals. The minimum initial
investment for an IRA account is $500 (including a spousal account).
SIMPLIFIED EMPLOYEE PENSION PLANS ("SEPS"), a form of retirement plan
for sole proprietors, partnerships and corporations. The minimum initial
investment for a SEP account is $500.
MULTI-EMPLOYEE RETIREMENT PLANS ("MERPS"), a retirement vehicle
established by employers for their employees which is qualified under Section
401(k) and 403(b) of the Code. The minimum initial investment for a MERP is
$500.
KEOGH PLANS, a retirement vehicle for self-employed individuals. The
minimum initial investment for a Keogh Plan is $500.
Detailed information concerning eligibility and other matters related
to these plans and the form of application is available from PFPC (call
1-877-BUY-GALAXY (1-877-289-4252)) with respect to IRAs, SEPs and Keogh Plans
and from Fleet Securities, Inc. (call 1-800-221-8210) with respect to MERPs.
AUTOMATIC INVESTMENT PROGRAM AND SYSTEMATIC WITHDRAWAL PLAN -- RETAIL A SHARES
AND BKB SHARES
The Automatic Investment Program permits an investor to purchase Retail
A Shares or BKB Shares of a Fund each month or each quarter. Provided an
investor's financial institution allows automatic withdrawals, shares are
purchased by transferring funds from the investor's checking, bank money market,
NOW or savings account designated by the investor. The account designated will
be debited in the specified amount, and Retail A Shares or BKB shares will be
purchased, on a monthly or quarterly basis, on any Business Day designated by
the investor. If the designated day falls on a weekend or holiday, the purchase
will be made on the Business Day closest to the designated day. Only an account
maintained at a domestic financial institution which is an Automated Clearing
House ("ACH") member may be so designated.
The Systematic Withdrawal Plan permits an investor to automatically
redeem Retail A Shares or BKB Shares on a monthly, quarterly, semi-annual, or
annual basis on any Business
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<PAGE>
Day designated by an investor, if the account has a starting value of at least
$10,000. If the designated day falls on a weekend or holiday, the redemption
will be made on the Business Day closest to the designated day. Proceeds of the
redemption will be sent to the shareholder's address of record or financial
institution within three Business Days of the redemption. If redemptions exceed
purchases and dividends, the number of shares in the account will be reduced.
Investors may terminate the Systematic Withdrawal Plan at any time upon written
notice to PFPC, Galaxy's transfer agent (but not less than five days before a
payment date). There is no charge for this service. Purchases of additional
Retail A Shares concurrently with withdrawals are ordinarily not advantageous
because of the sales charge involved in the additional purchases.
PAYROLL DEDUCTION PROGRAM -- RETAIL A SHARES AND BKB SHARES
To be eligible for the Payroll Deduction Program, the payroll
department of an investor's employer must have the capability to forward
transactions directly through the ACH, or indirectly through a third party
payroll processing company that has access to the ACH. An investor must complete
and submit a Galaxy Payroll Deduction Application to his or her employer's
payroll department, which will arrange for the specified amount to be debited
from the investor's paycheck each pay period. Retail A Shares or BKB Shares of
Galaxy will be purchased within three days after the debit occurred. If the
designated day falls on a weekend or non-Business Day, the purchase will be made
on the Business Day closest to the designated day. An investor should allow
between two to four weeks for the Payroll Deduction Program to be established
after submitting an application to the employer's payroll department.
COLLEGE INVESTMENT PROGRAM -- RETAIL A SHARES AND BKB SHARES
Galaxy reserves the right to redeem accounts participating in the
College Investment Program involuntarily, upon 60 days' written notice, if the
account's net asset value falls below the applicable minimum initial investment
as a result of redemptions. Investors participating in the College Investment
Program will receive consolidated monthly statements of their accounts. Detailed
information concerning College Investment Program accounts and applications may
be obtained from PFPC (call 1-877-BUY-GALAXY (1-877-289-4252)).
DIRECT DEPOSIT PROGRAM -- RETAIL A SHARES AND BKB SHARES
Death or legal incapacity will terminate an investor's participation in
the Direct Deposit Program. An investor may elect at any time to terminate his
or her participation by notifying in writing the Social Security Administration.
Further, Galaxy may terminate an investor's participation upon 30 days' notice
to the investor.
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<PAGE>
TAXES
IN GENERAL
Each Fund qualified during its last taxable year and intends to
continue to qualify as a regulated investment company under Subchapter M of the
Code and to distribute out its income to shareholders each year, so that each
Fund itself generally will be relieved of federal income and excise taxes. If a
Fund were to fail to so qualify: (1) the Fund would be taxed on its taxable
income at regular corporate rates without any deduction for distributions to
shareholders; and (2) shareholders would be taxed as if they received ordinary
dividends, although corporate shareholders could be eligible for the dividends
received deduction.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to distribute with respect to each calendar year at least
98% of their ordinary taxable income and capital gain net income (excess of
capital gains over capital losses) for the one year period ending October 31 of
such calendar year. 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."
Dividends declared in October, November or December of any year which
are payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by the Bond and Equity
Funds on December 31 of such year if such dividends are actually paid during
January of the following year.
It is the policy of each of the Tax-Exempt Fund and Rhode Island
Municipal Bond Fund to pay dividends with respect to each taxable year equal to
at least the sum of 90% of its net exempt-interest income and 90% of its
investment company taxable income, if any. Dividends derived from
exempt-interest income ("exempt-interest dividends") may be treated by a Fund's
shareholders as items of interest excludable from their gross income under
Section 103(a) of the Code, unless under the circumstances applicable to a
particular shareholder, exclusion would be disallowed.
An investment in any one Fund is not intended to constitute a balanced
investment program. Shares of the Tax-Exempt Fund and Rhode Island Municipal
Bond Fund would not be suitable for tax-exempt institutions and may not be
suitable for retirement plans qualified under Section 401 of the Code, H.R. 10
plans and individual retirement accounts because such plans and accounts are
generally tax-exempt and, therefore, not only would the shareholder not gain any
additional benefit from the Funds' dividends being tax-exempt, but such
dividends would be
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<PAGE>
ultimately taxable to the beneficiaries when distributed. In addition, the
Tax-Exempt Fund and Rhode Island Municipal Bond Fund may not be an appropriate
investment for entities which are "substantial users" of facilities financed by
"private activity bonds" or "related persons" thereof. "Substantial user" is
defined under U.S. Treasury Regulations to include a non-exempt person who (i)
regularly uses a part of such facilities in his or her trade or business and
whose gross revenues derived with respect to the facilities financed by the
issuance of bonds are more than 5% of the total revenues derived by all users of
such facilities, (ii) occupies more than 5% of the usable area of such
facilities or (iii) are persons for whom such facilities or a part thereof were
specifically constructed, reconstructed or acquired. "Related persons" include
certain related natural persons, affiliated corporations, a partnership and its
partners and an S corporation and its shareholders.
In order for the Tax-Exempt Fund and Rhode Island Municipal Bond Fund
to pay exempt-interest dividends for any taxable year, at the close of each
taxable quarter, at least 50% of the aggregate value of a Fund's portfolio must
consist of exempt-interest obligations. Within 60 days after the close of its
taxable year, each Fund will notify its shareholders of the portion of the
dividends paid by the Fund which constitutes exempt-interest dividends with
respect to such taxable year. However, the aggregate amount of dividends so
designated by a Fund cannot exceed the excess of the amount of interest exempt
from tax under Section 103 of the Code received by the Fund over any amounts
disallowed as deductions under Section 265 and 171(a)(2) of the Code. The
percentage of total dividends paid by a Fund with respect to any taxable year
that qualifies as federal exempt-interest dividends will be the same for all
shareholders receiving dividends from the Fund for such year.
STATE AND LOCAL
Exempt-interest dividends and other distributions paid by the
Tax-Exempt Fund and Rhode Island Municipal Bond Fund may be taxable to
shareholders under state or local law as dividend income, even though all or a
portion of such distributions may be derived from interest on tax-exempt
obligations which, if realized directly, would be exempt from such income taxes.
The U.S. Treasury Fund is structured to provide shareholders, to the
extent permissible by federal and state law, with income that is exempt or
excluded from taxation at the state and local level. Many states, by statute,
judicial decision or administrative action, have taken the position that
dividends of a regulated investment company, such as the Fund, that are
attributable to interest on direct U.S. Treasury obligations or obligations of
certain U.S. Government agencies, are the functional equivalent of interest from
such obligations and are, therefore, exempt from state and local income taxes.
Shareholders should consult their own tax advisers about the status of
distributions from the Fund in their own state.
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
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<PAGE>
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.
The Rhode Island Municipal Bond Fund has received a ruling from the
Rhode Island Division of Taxation to the effect that distributions by it to its
shareholders are exempt from Rhode Island personal income taxation and the Rhode
Island business corporation tax to the extent they are derived from (and
designated by the Fund as being derived from) interest earned on Rhode Island
Municipal Securities or obligations of the United States. Distributions from the
Fund's other net investment income and short-term capital gains will be taxable
as ordinary income. Distributions from the Fund's net long-term capital gains
will be taxable as long-term capital gains regardless of how long the
shareholder has owned Fund shares. The tax treatment of distributions is the
same whether distributions are paid in cash or in additional shares of the Fund.
The Rhode Island Municipal Bond Fund will be subject to the Rhode
Island business corporation tax on its "gross income" apportioned to the State
of Rhode Island. For this purpose, gross income does not include interest income
earned by the Fund on Rhode Island Municipal Securities and obligations of the
United States, capital gains realized by the Fund on the sale of certain Rhode
Island Municipal Securities, and 50 percent of the Fund's other net capital
gains.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
The tax principles applicable to certain financial instruments and
futures contracts and options that may be acquired by the Funds are complex and,
in some cases, uncertain. Such investments may cause a Fund to recognize taxable
income prior to the receipt of cash, thereby requiring the Fund to liquidate
other positions, or to borrow money, so as to make sufficient distributions to
shareholders to avoid corporate-level tax. Moreover, some or all of the taxable
income recognized may be ordinary income or short-term capital gain, so that the
distributions may be taxable to shareholders as ordinary income.
Generally, futures contracts and options on futures contracts held by
the 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 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. With respect to certain
Instruments, deductions for interest and carrying charges may not be allowed.
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<PAGE>
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.
MISCELLANEOUS
Shareholders will be advised annually as to the federal income tax
consequences and, with respect to shareholders of the Rhode Island Municipal
Bond Fund, Rhode Island personal income tax consequences of distributions made
each year.
TRUSTEES AND OFFICERS
The business and affairs of the Funds are managed under the direction
of Galaxy's Board of Trustees in accordance with the laws of the Commonwealth of
Massachusetts and the Trust's Declaration of Trust. 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 and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
<S> <C> <C>
Dwight E. Vicks, Jr. Chairman & Trustee President & Director, Vicks Lithograph &
Vicks Lithograph & Printing Corporation (book manufacturing
Printing Corporation and commercial printing); Director, Utica
Commercial Drive First Insurance Company; Trustee, Savings
P.O. Box 270 Bank of Utica; Director, Monitor Life
Yorkville, NY 13495 Insurance Company; Director, Commercial
Age 66 Travelers Mutual Insurance Company;
Trustee, The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
John T. O'Neill(1) President, Treasurer Private Investor; Executive Vice President
28 Narragansett Bay Avenue & Trustee and CFO, Hasbro, Inc. (toy and game
Warwick, RI 02889 manufacturer) until December 31, 1999;
Age 55 Trustee, The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
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<PAGE>
<CAPTION>
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
<S> <C> <C>
Louis DeThomasis Trustee President, Saint Mary's College of
Saint Mary's College Minnesota; Director, Bright Day Travel,
of Minnesota Inc.; Trustee, Religious Communities Trust;
Winona, MN 55987 Trustee, The Galaxy VIP Fund; Trustee,
Age 59 Galaxy Fund II.
Donald B. Miller Trustee Chairman, Horizon Media, Inc. (broadcast
10725 Quail Covey Road services); Director/Trustee, Lexington
Boynton Beach, FL 33436 Funds; Chairman, Executive Committee,
Age 74 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 Projects,
The Astra Ventures, Inc. Incorporated (land development); President,
One Citizens Plaza The Astra Ventures, Incorporated
Providence, RI 02903 (previously, Buffinton Box Company -
Age 58 manufacturer of cardboard boxes);
Commissioner, Rhode Island Investment
Commission; Trustee, The Galaxy VIP Fund;
Trustee, Galaxy Fund II.
Bradford S. Wellman(1) Trustee Private Investor; Vice President and
2468 Ohio Street Director, Acadia Management Company
Bangor, ME 04401 (investment services); Director, Essex
Age 68 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.
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<PAGE>
<CAPTION>
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
<S> <C> <C>
W. Bruce McConnel, III Secretary Partner of the law firm Drinker Biddle &
One Logan Square Reath LLP, Philadelphia, Pennsylvania.
18th and Cherry Streets
Philadelphia, PA 19103
Age 57
Jylanne Dunne Vice President and Vice President, PFPC Inc., 1990 to present.
PFPC Inc. Assistant Treasurer
4400 Computer Drive
Westborough, MA 01581-5108
Age 40
William Greilich Vice President Vice President, PFPC Inc., 1991-96; Vice
PFPC Inc. President and Division Manager, PFPC Inc.,
4400 Computer Drive 1996-present.
Westborough, MA 01581-5108
Age 46
</TABLE>
- --------------------------------
1. May be deemed to be an "interested person" within the definition set
forth in Section 2(a)(19) of the 1940 Act.
Effective May 28, 1999, each trustee receives an annual aggregate fee
of $45,000 for his services as a trustee of Galaxy, The Galaxy VIP Fund ("Galaxy
VIP") and Galaxy Fund II ("Galaxy II") (collectively, the "Trusts"), plus an
additional $3,500 for each in-person Galaxy Board meeting attended and $1,500
for each in-person 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 $750 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. Prior to May 28,
1999, each Trustee was entitled to receive an annual aggregate fee of $40,000
for his services as a Trustee of the Trusts, plus an additional $2,500 for each
in-person Galaxy Board meeting attended, with all other fees being as those
currently in effect.
Effective March 1, 1996, each trustee became entitled to participate in
The Galaxy Fund, The Galaxy VIP Fund and Galaxy Fund II Deferred Compensation
Plans (the "Original Plans").
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<PAGE>
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 PFPC receives any compensation from Galaxy for acting as
an officer. No person who is an officer, director or employee of Fleet or
Oechsle, or any of its affiliates, 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 in the most recently completed fiscal year.
<TABLE>
<CAPTION>
============================================================================================================
Pension or
Retirement Total Compensation
Benefits Accrued from Galaxy and Fund
Aggregate Compensation as Part of Fund Complex *Paid TO
Name of Person/position From Galaxy Expenses Trustees
----------------------- ----------- -------- --------
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bradford S. Wellman $39,395 None $55,750
Trustee
- ------------------------------------------------------------------------------------------------------------
Dwight E. Vicks, Jr. $42,875 None $60,500
Chairman and Trustee
- ------------------------------------------------------------------------------------------------------------
Donald B. Miller** $40,042 None $56,500
Trustee
- ------------------------------------------------------------------------------------------------------------
Rev. Louis DeThomasis $37,643 None $53,250
Trustee
- ------------------------------------------------------------------------------------------------------------
John T. O'Neill $41,813 None $59,000
President, Treasurer
and Trustee
- ------------------------------------------------------------------------------------------------------------
James M. Seed** $39,355 None $55,750
Trustee
============================================================================================================
</TABLE>
- ---------------------------------
* The "Fund Complex" consists of Galaxy, The Galaxy VIP Fund and Galaxy
Fund II, which comprise a total of 43 separate portfolios.
** Deferred compensation (including interest) in the amounts of $43,939
and $65,944 accrued during Galaxy's fiscal year ended October 31, 1999
for Messrs. Miller and Seed, respectively.
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<PAGE>
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 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.
INVESTMENT ADVISER AND SUB-ADVISER
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 Prospectus. 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" below.
For the services provided and expenses assumed, Fleet is entitled to
receive advisory fees, computed daily and paid monthly, at the following annual
rates (i) with respect to the Money Market Fund and Tax-Exempt Fund, 0.40% of
the average daily net assets of each Fund; (ii) with respect to the U.S.
Treasury Fund, 0.40% of the first $750,000,000 of the Fund's average daily
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net assets plus 0.35% of the average daily net assets of the Fund in excess of
$750,000,000; (iii) with respect to the Short-Term Bond, Intermediate Government
Income, High Quality Bond, Rhode Island Municipal Bond, Asset Allocation, Growth
and Income Funds, 0.75% of each Fund's average daily net assets; and (iv) with
respect to the International Equity Fund, 1.15% of the first $50 million of the
Fund's average daily net assets, plus 0.95% of the next $50 million of such
assets, plus 0.85% of net assets in excess of $100 million.
Fleet is currently waiving a portion of the advisory fees payable by
the Money Market Fund and Tax-Exempt Fund in an amount equal to 0.05% of the
average daily net assets of each Fund to the extent that a Fund's net assets
exceed $750,000,000.
Fleet is currently waiving a portion of the advisory fees payable to it
by the Short-Term Bond, Intermediate Government Income, High Quality Bond and
Rhode Island Municipal Bond Funds so that it is entitled to receive advisory
fees at the annual rate of 0.55% of such Bond Fund's average daily net assets.
Fleet may revise or discontinue this waiver at any time.
During the last three fiscal years, Galaxy paid advisory fees (net of
fee waivers and/or expense reimbursements) to Fleet as set forth below:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Money Market(1)................................................ $13,842,448 $11,668,106 $9,458,596
U.S. Treasury.................................................. $4,011,663 $3,727,152 $3,439,391
Tax-Exempt..................................................... $2,320,683 $1,514,545 $1,275,727
Short-Term Bond(2)............................................. $335,221 $ 390,913 $ 470,347
Intermediate Government Income(3).............................. $1,674,194 $1,582,909 $1,535,166
High Quality Bond(4)........................................... $1,544,510 $1,294,758 $1,089,506
Rhode Island Municipal Bond(5)................................. $162,771 $ 60,214 $ 37,641
Asset Allocation............................................... $5,338,301 $3,743,922 $2,313,863
Growth and Income.............................................. $4,577,393 $3,701,722 $2,361,898
International Equity(6)........................................ $3,119,675 $2,480,868 $1,844,037
- ---------------
</TABLE>
(1) For the fiscal years ended October 31, 1999, October 31, 1998, and
October 31, 1997, Fleet waived advisory fees of $1,548,921, $1,238,301
and $922,657, respectively, with respect to the Money Market Fund.
(2) For the fiscal years ended October 31, 1999, October 31, 1998, and
October 31, 1997, Fleet waived advisory fees of $121,931, $142,191 and
$171,035, respectively, with respect to the Short-Term Bond Fund.
(3) For the fiscal years ended October 31, 1999, October 31, 1998 and
October 31, 1997, Fleet waived advisory fees of $608,798, $575,603 and
$558,241, respectively, with respect to the Intermediate Government
Income Fund.
(4) For the fiscal years ended October 31, 1999, October 31, 1998 and
October 31, 1997, Fleet waived advisory fees of $561,640, $470,821 and
$396,183, respectively, with respect to the High Quality Bond Fund.
(5) For the fiscal years ended October 31, 1999, October 31, 1998 and
October 31, 1997, Fleet waived advisory fees of $86,559, $80,524 and
$75,284 respectively, with respect to the Rhode Island Municipal Bond
Fund.
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<PAGE>
(6) For the fiscal years ended October 31, 1999, October 31, 1998, and
October 31, 1997, Fleet waived advisory fees of $1,216,531, $950,363
and $682,009, respectively, with respect to the International Equity
Fund.
During the last three fiscal years, Fleet reimbursed expenses as
follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Money Market....................................... $0 $ 0 $ 17
U.S. Treasury...................................... $0 $ 0 $ 25,108
Tax-Exempt......................................... $2,099 $ 0 $ 15,751
Short-Term Bond Fund............................... $0 $ 111 $ 2,300
Intermediate Government Income Fund................ $0 $ 0 $ 0
High Quality Bond Fund............................. $0 $ 0 $ 28,489
Rhode Island Municipal Bond Fund................... $0 $ 0 $ 538
Asset Allocation................................... $0 $ 0 $ 19,254
Growth and Income.................................. $0 $150,727 $306,295
International Equity............................... $0 $ 0 $ 18,362
- ---------------
</TABLE>
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 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.
The advisory agreement between Galaxy and Fleet with respect to the
International Equity Fund provides that Fleet will provide a continuous
investment program for the Fund, including research and management with respect
to all securities and investments and cash equivalents in the Fund. In addition,
the advisory agreement authorizes Fleet to engage a sub-adviser to assist it in
the performance of its services. Pursuant to such authorization, Fleet has
appointed Oechsle, a Delaware limited liability company with principal offices
at One International Place, Boston, Massachusetts 02210, as the sub-adviser to
the International Equity Fund. The member manager of Oechsle is Oechsle Group,
LLC. FleetBoston Financial Corporation owns approximately a 35% non-voting
interest in Oechsle. As of December 31,
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<PAGE>
1999, Oechsle had discretionary management authority over approximately $19.1
billion in assets.
Under its sub-advisory agreement with Fleet, Oechsle determines which
securities and other investments will be purchased, retained or sold for the
Fund; places orders for the Fund; manages the Fund's overall cash position; and
provides Fleet with foreign broker research and a quarterly review of
international economic and investment developments. Fleet, among other things,
assists and consults with Oechsle in connection with the Fund's continuous
investment program; approves lists of foreign countries recommended by Oechsle
for investment; reviews the investment policies and restrictions of the Fund and
recommends appropriate changes to the Board of Trustees; and provides the Board
of Trustees and Oechsle with information concerning relevant economic and
political developments. Oechsle will provide services under this agreement in
accordance with the Fund's investment objectives, policies and restrictions.
Unless sooner terminated by Fleet or the Board of Trustees upon sixty days'
written notice or by Oechsle upon ninety days' written notice, the sub-advisory
agreement will continue in effect from year to year as long as such continuance
is approved at least annually as described above.
For the services provided and the expenses assumed pursuant to the
sub-advisory agreement, Fleet pays a fee to Oechsle, computed daily and paid
quarterly, at the annual rate of .40% of the first $50 million of the
International Equity Fund's average daily net assets, plus .35% of average daily
net assets in excess of $50 million.
For the fiscal years ended October 31, 1999, October 31, 1998 and
October 31, 1997; Oechsle and /or its predecessor, Oechsle International
Advisors, L.P., received sub-advisory fees of $1,728,153, $1,355,508 and
$979,810, respectively, with respect to the International Equity Fund.
Fleet and Oechsle are authorized to allocate purchase and sale orders
for portfolio securities to certain financial institutions, including, to the
extent permitted by law or order of the SEC, financial institutions that are
affiliated with Fleet or Oechsle or that have sold shares of the Funds, if Fleet
or Oechsle, as the case may be, believes that the quality of the transaction and
the commission are comparable to what they would be with other qualified
brokerage firms.
ADMINISTRATOR
PFPC (formerly known as First Data Investor Services Group, Inc.),
located at 4400 Computer Drive, Westborough, Massachusetts 01581-5108, serves as
the Funds' administrator. PFPC is an indirect majority-owned subsidiary of PNC
Bank Corp.
PFPC generally assists the Funds in their administration and operation.
PFPC also serves as administrator to the other portfolios of Galaxy. For the
services provided to the Funds, PFPC is entitled to receive administration fees
based on the combined average daily net assets of the Funds and the other
portfolios offered by Galaxy with an October 31 fiscal year end, computed daily
and paid monthly, at the following annual rates, effective September 10, 1998:
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<PAGE>
<TABLE>
<CAPTION>
COMBINED AVERAGE DAILY NET ASSETS ANNUAL RATE
--------------------------------- -----------
<S> <C>
Up to $2.5 billion.......................... 0.090%
From $2.5 to $5 billion..................... 0.085%
From $5 to $12 billion...................... 0.075%
From $12 to $15 billion..................... 0.065%
From $15 to $18 billion..................... 0.060%
Over $18 billion............................ 0.0575%
</TABLE>
Prior to September 10, 1998, Galaxy paid PFPC administration fees based
on the combined average daily net assets of the Funds and all other portfolios
offered by Galaxy at the following annual rates:
<TABLE>
<CAPTION>
COMBINED AVERAGE DAILY NET ASSETS ANNUAL RATE
--------------------------------- -----------
<S> <C>
Up to $2.5 billion.......................... 0.090%
From $2.5 to $5 billion..................... 0.085%
Over $5 billion............................. 0.075%
</TABLE>
In addition, PFPC also receives a separate annual fee from each Galaxy portfolio
for certain fund accounting services.
From time to time, PFPC may waive voluntarily all or a portion of the
administration fees payable to it by the Funds. For the fiscal year ended
October 31, 1999, the Funds paid PFPC administration fees at the effective
annual rate of 0.08% of such Fund's average daily net assets.
During the last three fiscal years, PFPC received administration fees
(net of fee waivers) as set forth below:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Money Market....................................................... $2,885,072 $2,596,354 $2,118,433
U.S. Treasury...................................................... $779,542 $ 770,823 $ 720,691
Tax-Exempt......................................................... $435,865 $ 304,716 $ 263,643
Short-Term Bond.................................................... $45,886 $ 57,228 $ 69,851
Intermediate Government Income..................................... $229,022 $ 231,595 $ 227,963
High Quality Bond.................................................. $211,269 $ 189,406 $ 161,732
Rhode Island Municipal Bond........................................ $16,327 $ 15,172 $ 12,293
Asset Allocation................................................... $533,921 $ 401,495 $ 253,881
Growth and Income.................................................. $456,860 $ 413,204 $ 290,324
International Equity............................................... $365,677 $ 305,871 $ 222,620
</TABLE>
During the last three fiscal years, PFPC waived administration fees as
set forth below:
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<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Money Market........................................................ $0 $0 $0
U.S. Treasury....................................................... $0 $0 $0
Tax-Exempt.......................................................... $0 $0 $0
Short-Term Bond..................................................... $0 $0 $0
Intermediate Government Income...................................... $0 $0 $0
High Quality Bond................................................... $0 $0 $0
Rhode Island Municipal Bond......................................... $0 $0 $0
Asset Allocation.................................................... $0 $0 $0
Growth and Income................................................... $0 $0 $0
International Equity................................................ $0 $0 $0
</TABLE>
Under the administration agreement between Galaxy and PFPC (the
"Administration Agreement"), Investor Services Group 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. PFPC prepares the Funds' annual and semi-annual
reports to the SEC, 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. Unless
otherwise terminated, the Administration Agreement will remain in effect until
May 31, 2001 and thereafter will continue from year to year upon annual approval
of Galaxy's Board of Trustees.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank ("Chase Manhattan"), located at One Chase
Manhattan Plaza, New York, New York 10081, a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as the custodian of the Funds' assets
pursuant to a Global Custody Agreement. Chase Manhattan may employ
sub-custodians for the Funds for the purpose of providing custodial services for
the Funds' foreign assets held outside the United States.
Under the Global 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
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<PAGE>
Manhattan also serves as Galaxy's "foreign custody manager" (as that term is
defined in Rule 17f-5 under the 1940 Act) and in such capacity employs
sub-custodians for the Funds for the purpose of providing custodial services for
the foreign assets of those Funds held outside the U.S. The assets of the Funds
are held under bank custodianship in compliance with the 1940 Act.
PFPC serves as the Funds' transfer and dividend disbursing agent
pursuant to a Transfer Agency and Services Agreement (the "Transfer Agency
Agreement"). Communications to PFPC should be directed to PFPC at P.O. Box 5108,
4400 Computer Drive, Westborough, Massachusetts 01581. Under the Transfer Agency
Agreement, PFPC 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.
EXPENSES
Fleet, Oechsle and PFPC bear all expenses in connection with the
performance of their services for the Funds, except that Galaxy bears the
expenses incurred in the Funds' operations including: taxes; interest; fees
(including fees paid to its trustees and officers who are not affiliated with
PFPC); SEC fees; state securities fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory, administration, shareholder servicing, Rule 12b-1
distribution (if applicable), fund accounting and custody fees; charges of the
transfer agent and dividend disbursing agent; certain insurance premiums;
outside auditing and legal expenses; costs of independent pricing services;
costs of shareholder reports and meetings; and any extraordinary expenses. The
Funds also pay for brokerage fees and commissions in connection with the
purchase of portfolio securities.
PORTFOLIO TRANSACTIONS
Fleet or Oechsle will select specific portfolio investments and effect
transactions for the Funds. Fleet seeks to obtain the best net price and the
most favorable execution of orders. Fleet or Oechsle may, in its discretion,
effect transactions in portfolio securities with dealers who provide research
advice or other services to the Funds, Fleet or Oechsle. Fleet or Oechsle is
authorized to pay a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for any Fund which
is in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if Fleet or Oechsle determines in good
faith that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or Fleet or Oechsle's overall
responsibilities to the particular Fund and to Galaxy. Such brokerage and
research services might consist of reports and statistics relating to specific
companies or industries, general summaries of groups of stocks or bonds and
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<PAGE>
their comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy. The fees under the investment
advisory agreements between Galaxy and Fleet and Fleet and Oechsle are not
reduced by reason of receiving such brokerage and research services. The Board
of Trustees will periodically review the commissions paid by the Funds to
determine if the commissions paid over representative periods of time were
reasonable in relation to the benefits inuring to the Funds.
During the fiscal year ended October 31, 1999, the following Funds paid
soft dollar commissions as shown below:
<TABLE>
<CAPTION>
FUND COMMISSIONS
<S> <C>
Asset Allocation..................$154,620
Growth and Income.................$283,921
International Equity..............$27,519
</TABLE>
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. There is generally no
stated commission in the case of securities traded in U.S. over-the-counter
markets, but the prices of those securities include undisclosed commissions or
mark-ups. 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. U.S.
Government Securities are generally purchased from underwriters or dealers,
although certain newly issued U.S. Government Securities may be purchased
directly from the U.S. Treasury or from the issuing agency or instrumentality.
No brokerage commissions are typically paid on purchases and sales of U.S.
Government Securities.
The following Funds paid brokerage commissions as shown in the table
below:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Asset Allocation.................................................. $164,971 $225,758 $155,296
Growth and Income................................................. $305,533 $511,307 $851,919
International Equity............................................. $1,047,761 $841,389 $851,919
</TABLE>
During the period February 1, 1998 through October 31, 1998 and the
fiscal year ended October 31, 1999, certain Funds effected a portion of their
portfolio transactions through Quick & Reilly Institutional Trading ("Quick &
Reilly"), a division of Fleet Securities, Inc., which is an affiliate of Fleet.
The table below discloses (1) the aggregate amount of commissions paid to Quick
& Reilly by the Funds during the period ended October 31, 1998 and the fiscal
year ended October 31, 1999, (2) the percentage of each Fund's aggregate
brokerage commissions for the period ended October 31, 1998 and the fiscal year
ended October 31, 1999 that was paid to Quick & Reilly, and (3) the percentage
of each Fund's aggregate dollar amount of transactions that involved payment of
commissions that was effected through Quick & Reilly during the period ended
October 31, 1998 and the fiscal year ended October 31, 1999.
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<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998:
% OF AGGREGATE
% OF AGGREGATE COMMISSION
FUND AGGREGATE AMOUNT COMMISSIONS TRANSACTIONS
- ---- ---------------- ----------- ------------
<S> <C> <C> <C>
Asset Allocation................................................ $130,968 72.93% 78.11%
Growth and Income............................................... $118,050 32.53% 32.56%
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999:
% OF AGGREGATE
% OF AGGREGATE COMMISSION
FUND AGGREGATE AMOUNT COMMISSIONS TRANSACTIONS
- ---- ---------------- ------------ ------------
<S> <C> <C> <C>
Asset Allocation................................................ $141,443 85.74% 88.69%
Growth and Income............................................... $129,843 42.50% 47.05%
</TABLE>
Transactions in the over-the-counter market are generally principal
transactions with dealers and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to over-the-counter
transactions, 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.
Debt securities purchased or sold by the Money Market, U.S. Treasury,
Tax-Exempt, Short-Term Bond, Intermediate Government Income, High Quality Bond
and Rhode Island Municipal Bond Funds are generally traded in 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 and underwriting commission or
concession, and the prices at which securities are purchased from and sold to
dealers include a dealers' mark-up or mark-down.
Each Fund may engage in short-term trading to achieve its investment
objective. Portfolio turnover may vary greatly from year to year as well as
within a particular year. The Money Market, U.S. Treasury and Tax-Exempt 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 any of these Funds. 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, Oechsle, PFPC, 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, 1999 : (1) the
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<PAGE>
Money Market Fund held securities issued by Associates Corp. of North America in
the aggregate value of $149,676,111, and securities issued by J.P. Morgan & Co.
with a value of $99,778,194; (2) the Short Term Bond Fund held securities of
Associates Corp. of North America with a value of $975 and securities of Chase
Manhattan with a value of $6,805,000; (3) the Intermediate Government Income
Fund held securities of Chase Manhattan Auto Owner Trust with a value of
$2,884,205 and of Chase Manhattan with a value of $387,000; (4) the High Quality
Bond Fund held securities of Associates Corp. of North America with an aggregate
value of $4,030,000, of Goldman Sachs Group with a value of $1,109,663, of Chase
Manhattan Auto Owner Trust with a value of $2,211,224 and of Chase Manhattan
with a value of $4,220,000; (5) the Asset Allocation Fund held common stock of
Chase Manhattan Corp. with a value of $7,426,875 and a senior note of Associates
Corp. of North America with a value of $3,254,062; (6) the Growth and Income
Fund held common stock of Chase Manhattan Corp. with a value of $8,388,000,
common stock of J.P. Morgan & Co., Inc. with a value of $7,067,250, and was
party to a repurchase agreement with Chase Manhattan Bank with a value of
$43,135,000; and (7) the International Equity Fund was party to a repurchase
agreement with Chase Manhattan Bank with a value of $28,704,000. Associates
Corp. of North America, J.P. Morgan, & Co., Chase Manhattan and the Goldman
Sachs Group are considered to be "regular brokers or dealers" of Galaxy.
Investment decisions for each Fund are made independently from those
for the other Funds and portfolios of Galaxy and for any other investment
companies and accounts advised or managed by Fleet or Oechsle. 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 or Oechsle 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 or Oechsle may aggregate the securities to
be sold or purchased for a Fund with those to be sold or purchased for Galaxy's
other Funds and portfolios, or other investment companies or accounts in order
to obtain best execution.
SHAREHOLDER SERVICES PLANS
BKB SHARES
Galaxy has adopted a Shareholder Services Plan (the "BKB Plan")
pursuant to which it intends to enter into servicing agreements with
institutions (including Fleet Bank and its affiliates). Pursuant to these
servicing agreements, institutions render certain shareholder liason and/or
administrative support services to customers who are the beneficial owners of
BKB Shares. Such services are provided to customers who are the beneficial
owners of BKB Shares and are intended to supplement the services provided by
PFPC as administrator and transfer agent to the shareholders of record of BKB
Shares. The BKB Plan provides that Galaxy will pay fees for such services at the
following annual rates: (i) with respect to the Money Market, U.S.
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Treasury and Tax-Exempt Funds, up to .25% of the average daily net asset value
of BKB Shares owned by customers, (ii) with respect to the Short-Term Bond,
Intermediate Government Income, High Quality Bond and Rhode Island Municipal
Bond Funds, up to .30% of the average daily net asset value of BKB Shares owned
by customers, and (iii) with respect to the Asset Allocation, Growth and Income
and International Equity Funds, up to .50% of the average daily net asset value
of BKB Shares owned beneficially by customers. Institutions may receive up to
one-half of this fee for providing one or more of the following services to such
customers: aggregating and processing purchase and redemption requests and
placing net purchase and redemption orders with PDI; processing dividend
payments from a Fund; providing sub-accounting with respect to BKB Shares or the
information necessary for sub-accounting; and providing periodic mailings to
customers. Institutions may also receive up to one-half of this fee for
providing one or more of these additional services to such customers: providing
customers with information as to their positions in BKB Shares; responding to
customer inquiries; and providing a service to invest the assets of customers in
BKB Shares.
Galaxy intends to limit the payment under any servicing agreements for
each Fund to an aggregate annual fee of not more than: (i) with respect to the
Money Market, U.S. Treasury and Tax-Exempt Funds, .10% of the average daily net
asset value of the BKB Shares of each Fund beneficially owned by customers of
institutions, (ii) with respect to the Short-Term Bond, Intermediate Government
Income, High Quality Bond and Rhode Island Municipal Bond Funds, .15% of the
average daily net asset value of the BKB Shares of each Fund beneficially owned
by customers of institutions, and (iii) with respect to the Asset Allocation,
Growth and Income and International Equity Funds, .30% of the average daily net
asset value of the BKB Shares of the Fund beneficially owned by customers of
institutions. Galaxy understands that institutions may charge fees to their
customers who are the beneficial owners of BKB Shares in connection with their
accounts with such institutions. Any such fees would be in addition to any
amounts which may be received by an institution under the BKB Plan. Under the
terms of each servicing agreement entered into with Galaxy, institutions are
required to provide to their customers a schedule of any fees that they may
charge in connection with customer investments in BKB Shares.
Each Servicing Agreement between Galaxy and a Service Organization
relating to the BKB Plan 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 BKB Plan to the extent
necessary to ensure that the fees required to be accrued with respect to the BKB
Shares of such Funds on any day do not exceed the income to be accrued to such
BKB Shares on that day.
Galaxy's Servicing Agreements are governed by the BKB Plan that has
been adopted by Galaxy's Board of Trustees in connection with the offering of
BKB Shares of each Fund. Pursuant to the BKB 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
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<PAGE>
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 BKB
Shares of the 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.
RETAIL A SHARES
Galaxy has adopted a separate Shareholder Services Plan (the "Retail A
Plan") pursuant to which it intends to enter into servicing agreements with
institutions (including Fleet Bank and its affiliates). Pursuant to these
servicing agreements, institutions render certain shareholder liason and/or
administrative support services to customers who are the beneficial owners of
Retail A Shares. Such services are provided to customers who are the beneficial
owners of Retail A Shares and are intended to supplement the services provided
by PFPC as administrator and transfer agent to the shareholders of record of the
Retail A Shares. The Plan provides that Galaxy will pay fees for such services
at the following annual rates: (i) with respect to the Money Market, U.S.
Treasury and Tax-Exempt Funds, up to .25% of the average daily net asset value
of BKB Shares owned by customers, (ii) with respect to the Short-Term Bond,
Intermediate Government Income, High Quality Bond and Rhode Island Municipal
Bond Funds, up to .30% of the average daily net asset value of BKB Shares owned
by customers, and (iii) with respect to the Asset Allocation, Growth and Income
and International Equity Funds, up to .50% of the average daily net asset value
of Retail A Shares owned beneficially by customers. Institutions may receive up
to one-half of this fee for providing one or more of the following services to
such customers: aggregating and processing purchase and redemption requests and
placing net purchase and redemption orders with PDI; processing dividend
payments from a Fund; providing sub-accounting with respect to Retail A Shares
or the information necessary for sub-accounting; and providing periodic mailings
to customers. Institutions may also receive up to one-half of this fee for
providing one or more of these additional services to such customers: providing
customers with information as to their positions in Retail A Shares; responding
to customer inquiries; and providing a service to invest the assets of customers
in Retail A Shares.
Although the Retail A Plan has been approved with respect to both
Retail A Shares and Trust Shares of the Funds, as of the date of this Statement
of Additional Information, Galaxy has entered into servicing agreements under
the Retail A Plan only with respect to Retail A Shares of the Funds and limiting
payments under these servicing agreements for each Fund to an annual aggregate
fee of not more than (i) with respect to the Money Market, U.S. Treasury and
Tax-Exempt Funds, .10% of the average daily net asset value of the Retail A
Shares of each Fund
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beneficially owned by customers of institutions, (ii) with respect to the
Short-Term Bond, Intermediate Government Income, High Quality Bond and Rhode
Island Municipal Bond Funds, .15% of the average daily net asset value of BKB
Shares beneficially owned by customers of institutions, and (iii) with respect
to the Asset Allocation, Growth and Income and International Equity Fund, .30%
of the average daily net asset value of the Retail A Shares of the Fund
beneficially owned by customers of institutions. Galaxy understands that
institutions may charge fees to their customers who are the beneficial owners of
Retail A Shares in connection with their accounts with such institutions. Any
such fees would be in addition to any amounts which may be received by an
institution under the Shareholder Services Plan. Under the terms of each
servicing agreement entered into with Galaxy, institutions are required to
provide to their customers a schedule of any fees that they may charge in
connection with customer investments in Retail A Shares. As of October 31, 1999,
Galaxy had entered into Servicing Agreements only with Fleet Bank and
affiliates.
Each Servicing Agreement between Galaxy and a Service Organization
relating to the Retail A Plan 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 on any day do not exceed the income to be accrued
to such Retail A Shares on that day.
During the last three fiscal years, Galaxy made payments to Service
Organizations with respect to Retail A Shares as shown in the table below:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Money Market...................................................... $2,222,784 $2,057,474 $1,430,359
U.S. Treasury..................................................... $590,338 $ 569,986 $ 507,400
Tax-Exempt........................................................ $169,840 $ 163,842 $ 133,048
Short-Term Bond................................................... $37,626 $ 41,334 $ 43,131
Intermediate Government Income.................................... $87,475 $ 97,753 $ 102,805
High Quality Bond(1).............................................. $59,319 $ 52,525 $ 35,749
Rhode Island Municipal Bond....................................... $0 $0 $0
Asset Allocation.................................................. $1,052,492 $ 763,611 $ 412,384
Growth and Income(1).............................................. $426,269 $ 472,627 $ 324,069
International Equity.............................................. $204,149 $ 191,712 $ 102,465
</TABLE>
(1) Expense reimbursements for the year ended October 31, 1999, were
$6,771 for High Quality Bond Fund and $252,526 for Growth and Income
Fund.
Galaxy's Servicing Agreements are governed by the Retail A Plan that
has been adopted by Galaxy's Board of Trustees in connection with the offering
of Retail A Shares of each Fund. Pursuant to the Retail A 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
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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 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 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.
DISTRIBUTOR
PDI serves as Galaxy's distributor. PDI is a registered broker-dealer
with principal offices located at Four Falls Corporate Center, 6th Floor, West
Conshohocken, PA 19428-2961. Jane Haegele is the sole shareholder of PDI.
Unless otherwise terminated, the Distribution Agreement between Galaxy
and PDI remains in effect until December 1, 2000, 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.
AUDITORS
Ernst & Young LLP, independent auditors, with offices at 200 Clarendon
Street, Boston, Massachusetts 02110, serve as auditors for Galaxy. The financial
highlights for the respective Funds included in their Prospectus and the
financial statements for the Funds contained in Galaxy's Annual Reports to
Shareholders with respect to the Funds (the "Annual Reports") and incorporated
by reference into this Statement of Additional Information for the fiscal year
ended October 31, 1999 have been audited by Ernst & Young LLP. For the
respective fiscal years and periods prior to October 31, 1999, the financial
highlights for the Funds included in the Prospectus and the financial statements
for such years and periods contained in the Annual Reports were audited by
PricewaterhouseCoopers LLP, Galaxy's former auditors.
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<PAGE>
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III,
Secretary of Galaxy, is a partner), One Logan Square, 18th and Cherry Streets,
Philadelphia, Pennsylvania 19103, are counsel to Galaxy and will pass upon
certain legal matters on its behalf. The law firm of Ropes & Gray, One
International Place, Boston, Massachusetts 02110-2624 serves as special Rhode
Island Counsel to Galaxy and has reviewed this Statement of Additional
Information and the Prospectus with respect to the Rhode Island Municipal Bond
Fund concerning Rhode Island taxes and the description of special consideration
relating to Rhode Island Municipal Securities.
PERFORMANCE AND YIELD INFORMATION
MONEY MARKET, U.S. TREASURY AND TAX-EXEMPT FUNDS
The standardized annualized seven-day yields for the Money Market, U.S.
Treasury and Tax-Exempt Funds are computed by: (1) determining the net change,
exclusive of capital changes and income other than investment income, 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)
annualizing 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.
In addition, the Tax-Exempt Fund may calculate a "tax equivalent
yield." The tax equivalent yield is computed by dividing that portion of a
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 assume the payment of federal income taxes
at a rate of 36%.
The current yields for the Funds may be obtained by calling PFPC at
1-877-BUY-GALAXY (1-877-289-4252).
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<PAGE>
The U.S. Treasury Fund may calculate a "state flow through yield,"
which shows the level of taxable yield needed to produce an after-tax yield
equivalent to a particular state's tax-exempt yield achieved by the Fund. The
state flow through yield refers to that portion of income that is derived from
interest income on direct obligations of the U.S. Government, its agencies or
instrumentalities and which qualifies for exemption from state taxes. The yield
calculation assumes that 100% of the interest income is exempt from state
personal income tax. A state flow through yield is computed by dividing that
portion of the Fund's yield which is tax-exempt by one minus a stated income tax
rate.
SHORT-TERM BOND, INTERMEDIATE GOVERNMENT INCOME, HIGH QUALITY BOND, RHODE ISLAND
MUNICIPAL BOND, ASSET ALLOCATION, GROWTH AND INCOME AND INTERNATIONAL EQUITY
FUNDS
Investment returns and principal values will vary with market
conditions so that an investor's shares, when redeemed, may be worth more or
less than their original cost. Past performance is no guarantee of future
results. Unless otherwise indicated, total return figures include changes in
share price, deduction of any applicable sales charge, and reinvestment of
dividends and capital gains distributions, if any.
The Funds' 30-day (or one month) standard yields are calculated
separately for each series of shares in each Fund in accordance with the method
prescribed by the SEC for mutual funds:
6
YIELD = 2[(a-b)/cd +1) - 1]
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
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
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<PAGE>
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 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).
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 may also advertise its "effective yield" which is calculated
similarly but when annualized, the income earned by an investment in the Fund is
assumed to be reinvested.
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 the then-remaining portion of the original issue discount (market premium),
the yield to maturity is based on the market value.
The "tax-equivalent" yield of the Rhode Island Municipal Bond Fund is
computed by (a) dividing the portion of the Fund's yield (calculated as above)
that is exempt from both federal and state income taxes by one minus a stated
combined federal and state income tax rate; (b) dividing the portion of the
Fund's yield (calculated as above) that is exempt from federal income tax only
by one minus a stated federal income tax rate; and (c) adding the figures
resulting from (a) and (b) above to that portion if any, of the yield that is
not exempt from federal income tax.
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<PAGE>
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:
1/n
T = [(ERV/P) - 1]
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; 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:
Aggregate Total Return = [(ERV/P) - l]
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, (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.
TAX-EQUIVALENCY TABLE - RHODE ISLAND MUNICIPAL BOND FUND
The Rhode Island Municipal Bond Fund may use tax-equivalency tables in
advertising and sales literature. The interest earned by the Municipal
Securities in the respective portfolios generally remains free from federal
regular income tax, and from the regular personal income tax imposed by Rhode
Island. Some portion of the Fund's income may, however, be subject to the
federal alternative minimum tax and state and local regular or alternative
minimum taxes. As the tables below indicate, "tax-free" investments may be
attractive choices for investors, particularly in times of narrow spreads
between "tax-free" and taxable yields.
The charts below are for illustrative purposes only and use tax
brackets that were in effect beginning January 1, 1999. These are not indicators
of past or future performance of the Rhode Island Municipal Bond Fund.
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<PAGE>
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent for each chart. Moreover, the charts do
not reflect the possible effect of all items relating to the effective marginal
tax rate, such as alternative minimum tax, personal exemptions, tax credits, the
phase-out of exemptions or credits, itemized deductions (including the federal
deduction for state taxes paid) or the possible partial disallowance of
deductions.
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<PAGE>
RHODE ISLAND: 2000
Equivalent yields: Tax-Exempt
<TABLE>
<CAPTION>
Combined
$Taxable Income State Federal Effective
Single* Rate Rate Rate
- -------------------- -------- -------- -------------
<S> <C> <C> <C>
$0-26,250 3.90% 15.0% 18.32%
26,251-63,550 7.28% 28.0% 33.24%
63,551-132,600 8.06% 31.0% 36.56%
132,601-288,350 9.36% 36.0% 41.99%
Over 288,350 10.30% 39.6% 45.82%
- -------------------- -------- -------- -------------
<CAPTION>
Rhode Island Tax-Equivalent Yields**
$Taxable Income -------- ------- --------- ------- --------- -------- --------- -------- ------- --------- ---------
Single* 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
- -------------------- -------- ------- --------- ------- --------- -------- --------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-26,250 3.67% 4.29% 4.90% 5.51% 6.12% 6.73% 7.35% 7.96% 8.57% 9.18% 9.79%
26,251-63,550 4.49% 5.24% 5.99% 6.74% 7.49% 8.24% 8.99% 9.74% 10.49% 11.23% 11.98%
63,551-132,600 4.73% 5.52% 6.31% 7.09% 7.88% 8.67% 9.46% 10.25% 11.03% 11.82% 12.61%
132,601-288,350 5.17% 6.03% 6.90% 7.76% 8.62% 9.48% 10.34% 11.20% 12.07% 12.93% 13.79%
Over 288,350 5.54% 6.46% 7.38% 8.31% 9.23% 10.15% 11.07% 12.00% 12.92% 13.84% 14.77%
- -------------------- -------- ------- --------- ------- --------- -------- --------- -------- ------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
$Taxable Income* Combined
Married Filing State Federal Effective
Jointly Rate Rate Rates
- -------------------- -------- -------- -------------
<S> <C> <C> <C>
$0-43,850 3.90% 15.0% 18.32%
43,851-105,950 7.28% 28.0% 33.24%
105,951-161,450 8.06% 31.0% 36.56%
161,451-288,350 9.36% 36.0% 41.99%
Over 288,350 10.30% 39.6% 45.82%
- -------------------- -------- -------- -------------
<CAPTION>
$Taxable Income* Rhode Island Tax-Equivalent Yields**
Married Filing -------- ------- --------- ------- --------- -------- --------- -------- ------- --------- ---------
Jointly 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
- -------------------- -------- ------- --------- ------- --------- -------- --------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-43,850 3.67% 4.29% 4.90% 5.51% 6.12% 6.73% 7.35% 7.96% 8.57% 9.18% 9.79%
43,851-105,950 4.49% 5.24% 5.99% 6.74% 7.49% 8.24% 8.99% 9.74% 10.49% 11.23% 11.98%
105,951-161,450 4.73% 5.52% 6.31% 7.09% 7.88% 8.67% 9.46% 10.25% 11.03% 11.82% 12.61%
161,451-288,350 5.17% 6.03% 6.90% 7.76% 8.62% 9.48% 10.34% 11.20% 12.07% 12.93% 13.79%
Over 288,350 5.54% 6.46% 7.38% 8.31% 9.23% 10.15% 11.07% 12.00% 12.92% 13.84% 14.77%
- -------------------- -------- ------- --------- ------- --------- -------- --------- -------- ------- --------- ---------
</TABLE>
* This amount represents taxable income as defined in the Internal
Revenue Code. It is assumed that taxable income for Rhode Island tax
purposes is the same as defined in the Internal Revenue Code. In fact,
however, Rhode Island taxable income may differ due to differences in
exemptions, itemized deductions or other items.
** Each entry represents the taxable yield that is the equivalent to the
specified Federal and Rhode Island tax-exempt yield for a Rhode Island
tax payer in the specified income bracket.
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<PAGE>
PERFORMANCE REPORTING
From time to time, in advertisements or in reports to shareholders, the
performance of the Funds may be quoted and compared to that of other mutual
funds with similar investment objectives and to stock or other relevant indices
or to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Funds may be compared to data prepared by Lipper Analytical
Services, Inc., a widely recognized independent service which monitors the
performance of mutual funds. The performance of the Asset Allocation, Growth and
Income and International Equity Funds may also be compared to data prepared by
the S&P 500 Index, an unmanaged index of groups of common stocks, the Consumer
Price Index, or the Dow Jones Industrial Average, a recognized unmanaged index
of common stocks of 30 industrial companies listed on the New York Stock
Exchange. In addition, the performance of the International Equity Fund may be
compared to the Morgan Stanley Capital International Index or the FT World
Actuaries Index.
Performance data as reported in national financial publications
including, but not limited to, MONEY MAGAZINE, FORBES, BARRON'S, THE WALL STREET
JOURNAL and THE NEW YORK TIMES, or publications of a local or regional nature
may also be used in comparing the performance of the Funds. The Money Market,
U.S. Treasury and Tax-Exempt Funds may also be compared to the average yields
reported by the BANK RATE MONITOR for money market deposit accounts offered by
the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas.
Performance data will be calculated separately for each class of shares
of the Funds.
The performance of the Funds will fluctuate and any quotation of
performance should not be considered as representative of the future performance
of the Funds. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in a Fund's shares with bank deposits, savings accounts
and similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance data are generally functions of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any additional fees charged by institutions with respect to
accounts of customers that have invested in shares of a Fund will not be
included in performance calculations.
The portfolio managers of the Funds and other investment professionals
may from time to time discuss in advertising, sales literature or other
material, including periodic publications, various topics of interest to
shareholders and prospective investors. The topics may include but are not
limited to the advantages and disadvantages of investing in tax-deferred and
taxable investments; Fund performance and how such performance may compare to
various market indices; shareholder profiles and hypothetical investor
scenarios; the economy; the financial and capital markets; investment strategies
and techniques; investment products; and tax, retirement and investment
planning.
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<PAGE>
MISCELLANEOUS
As used in this Statement of Additional Information, "assets belonging
to" a particular Fund or series of a Fund means the consideration received by
Galaxy upon the issuance of shares in that particular Fund or 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 series of a Fund,
assets belonging to the particular series of the Fund are charged with the
direct liabilities in respect of that 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.
Shareholders will receive unaudited semi-annual reports describing the
Funds' investment operations and annual financial statements audited by
independent certified public accountants.
A "vote of the holders of a majority of the outstanding shares" of a
particular Fund or a particular series of shares in a Fund means, with respect
to the approval of an investment advisory agreement, a distribution plan or a
change in an investment objective or fundamental investment policy, the
affirmative vote of the holders of the lesser of (a) more than 50% of the
outstanding shares of such Fund or such series of shares, or (b) 67% or more of
the shares of such Fund or such series of shares present at a meeting if more
than 50% of the outstanding shares of such Fund or such series of shares are
represented at the meeting in person or by proxy.
As of February 9, 2000, 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 Government Money Market Fund) were as follows: Money Market Fund
- -- Fleet New York, Fleet Investment Services, 159 East Main Street, NY/RO/T03C,
Rochester, NY 14638-0001 (99.71%); Tax-Exempt Money Market Fund -- Fleet New
York, Fleet Investment Services, 159 East Main Street, NY/RO/T03C, Rochester, NY
14638-0001 (99.83%); Government Money Market Fund -- Fleet New York, Fleet
Investment Services, 159 East Main Street, NY/RO/T03C, Rochester, NY 14638-0001
(98.18%); U.S. Treasury Money Market Fund -- Fleet New York, Fleet Investment
Services, 159 East Main Street, NY/RO/T03C, Rochester, NY 14638-0001 (94.67%);
Institutional Treasury Money Market Fund -- Fleet New York, Fleet Investment
Services, 159 East Main Street, NY/RO/T03C, Rochester, NY 14638-0001 (90.51%);
Luitpold Pharmaceuticals Inc., Kirk Sobecki, CFO, ATTN: Harold Noviello, One
Luitpold Drive, Shirley, NY 11967 (6.28%); Equity Value Fund -- Gales & Co.,
Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street,
Rochester, NY 14638-0001 (78.09%); Gales & Co., Fleet Investment Services,
Mutual Funds Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001
(13.16%); Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street,
Street,
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<PAGE>
Rochester, NY 14638-0001 (7.11%); Equity Growth Fund -- Gales & Co., Fleet
Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street,
Rochester, NY 14638-0001 (69.29%); Gales & Co., Fleet Investment Services,
Mutual Funds Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001
(16.18%); Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (14.06%); Equity
Income Fund -- Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (13.69%); Gales &
Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main
Street, Rochester, NY 14638-0001 (32.37%); Gales & Co., Fleet Investment
Services, Mutual Funds Unit -NY/RO/T04A, 159 East Main Street, Rochester, NY
14638-0001 (52.62%); International Equity Fund -- Gales & Co., Fleet
Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street,
Rochester, NY 14638-0001 (43.05%); Gales & Co., Fleet Investment Services,
Mutual Funds Unit -NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001
(37.80%); Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (13.94%); Growth &
Income Fund -- Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (76.51%); Gales &
Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main
Street, Rochester, NY 14638-0001 (19.76%); Asset Allocation Fund -- Gales &
Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main
Street, Rochester, NY 14638-0001 (93.31%); Gales & Co., Fleet Investment
Services, Mutual Funds Unit --NY/RO/T04A, 159 East Main Street, Rochester, NY
14638-0001 (5.97%); Small Company Equity Fund -- Gales & Co., Fleet
Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street,
Rochester, NY 14638-0001 (63.45%); Gales & Co., Fleet Investment Services,
Mutual Funds Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY
14638-0001 (26.75%); Gales & Co., Fleet Investment Services, Mutual Funds
Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (7.32%);
Small Cap Value Fund -- Gales & Co., Fleet Investment Services, Mutual Funds
Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (31.82%);
Gales & Co., Fleet Investment Services, Mutual Funds Unit -NY/RO/T04A, 159
East Main Street, Rochester, NY 14638-0001 (17.96%); Gales & Co., Fleet
Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street,
Rochester, NY 14638-0001 (48.81%); Strategic Equity Fund -- Gales & Co.,
Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main
Street, Rochester, NY 14638-0001 (97.52%); Intermediate Government Income
Fund -- Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (25.67%); Gales &
Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main
Street, Rochester, NY 14638-0001 (33.94%); Gales & Co., Fleet Investment
Services, Mutual Funds Unit -NY/RO/T04A, 159 East Main Street, Rochester, NY
14638-0001 (38.13%); High Quality Bond Fund -- Gales & Co., Fleet Investment
Services, Mutual Funds Unit -NY/RO/T04A, 159 East Main Street, Rochester, NY
14638-0001 (60.55%); Gales & Co., Fleet Investment Services, Mutual Funds
Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (26.00%);
Gales & Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159
East Main Street, Rochester, NY 14638-0001 (12.74%); Short-Term Bond Fund --
Gales & Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159
East Main Street, Rochester, NY 14638-0001 (46.26%); Gales & Co., Fleet
Investment Services, Mutual Funds Unit -NY/RO/T04A, 159 East Main Street,
Rochester, NY 14638-0001
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(20.25%); Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (31.27%); Tax-Exempt
Bond Fund -- Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (37.18%); Gales &
Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main
Street, Rochester, NY 14638-0001 (26.37%); Gales & Co., Fleet Investment
Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY
14638-0001 (32.39%); Connecticut Municipal Bond Fund -- Gales & Co., Fleet
Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street,
Rochester, NY 14638-0001 (71.43%); Gales Co., Fleet Investment Services, Mutual
Funds Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (23.98%)
Massachusetts Municipal Bond Fund -- Gales & Co., Fleet Investment Services,
Mutual Funds Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001
(44.64%); Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (45.38%); Bob & Co.,
c/o Bank of Boston, Attn: Mutual Fund Dept. 45-02-06, P.O. Box 1809, Boston, MA
02105-1809 (8.09%); Corporate Bond Fund - Gales & Co., Fleet Investment
Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY
14638-0001 (42.58%); Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (33.79%); Gales &
Co., Fleet Investment Services, Mutual Funds Unit - Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (15.43%); New York
Municipal Bond Fund -- Gales & Co., Fleet Investment Services, Mutual Funds Unit
- - NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (7.24%); Gales &
Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main
Street, Rochester, NY 14638-0001 (67.05%); Gales & Co., Fleet Investment
Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY
14638-0001 (12.44%); Bob & Co., c/o Bank of Boston, ATTN: Mutual Fund Dept.
45-02-06, P.O. Box 1809, Boston, MA 02105-1809 (13.20%); New Jersey Municipal
Bond Fund -- Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (51.12%); Gales &
Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main
Street, Rochester, NY 14638-0001 (34.02%); Bob & Co., c/o Bank of Boston, ATTN:
Mutual Fund Dept. 45-02-06, P.O. Box 1805, Boston, MA 02105-1809 (14.56%).
As of February 9, 2000, 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: U.S. Treasury Money Market Fund -- U. S. Clearing, A
Division of Fleet Securities Inc., 26 Broadway, New York, NY 10004 (10.38%);
Massachusetts Municipal Money Market Fund -- Fleet New York, Fleet Investment
Services, 159 East Main Street, NY/RO/T03C, Rochester, NY 14638-0001 (59.39%);
Connecticut Municipal Money Market Fund -- Fleet New York, Fleet Investment
Services, 159 East Main Street, NY/RO/T03C, Rochester, NY 14638-0001 (50.11%);
International Equity Fund -- Charles Schwab & Co., Inc., Special Custody
Account, Attn: Mutual Funds, 101 Montgomery Street, San Francisco, CA 94104-4122
(5.98%); Tax-Exempt Bond Fund -- Danny Schulman, 9 Corn Mill Ct., Upper Saddle
River, NJ 07458-1232 (8.20%); Connecticut Municipal Bond Fund -- Marle Luida
Carcangiu, Juan Rosai Ulma CT, 36 Beach Ave., Milford, CT 06460 (5.77%);
Massachusetts Municipal Bond Fund -- Al Lodice, 63 Winter St., Lexington,
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MA 02420-1209 (6.08%); Rhode Island Municipal Bond Fund -- Gales & Co., Fleet
Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street,
Rochester, NY 14638-0001 (35.52%); James R. McCulloch, c/o Microfibre, P.O. Box
1208, Pawtucket, RI 02862-1208 (7.51%); Bob & Co., c/o Bank of Boston, Attn:
Mutual Fund Dept. 45-02-06, P.O. Box 1809, Boston, MA 02105-1809 (20.01%); New
York Municipal Bond Fund -- Marilyn J. Brantley, 5954 Van Allen Road, Belfast,
NY 14711-8750 (10.85%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#978-61025-18, Lipco Action Electric J.V., Anthony Spina-President, 19-55
37th Street, Astoria, NY 11105-1118 (6.65%); New Jersey Municipal Bond Fund --
Serena W. Peng, 70 Chelsea, Watchung, NJ 07060-6424 (79.60%); William Minnaard,
50 Rock Road Unit A6, Hawthorne, NJ 07506-1570 (6.25%).
As of February 9, 2000, 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 portfolios were as follows: Money Market
Fund -- Ralph V. Luciano & Claire E. Luciano JTWROS, 8651 Ethans Glen Terrace,
Jacksonville, FL 32256-9072 (5.20%); Steven R. Schwartz, 2393 Lake Elmo Ave. N,
Lake Elmo, MN 55042-8407 (5.89%); Wylie O'Brien, 69 Edgewood Ave., Haverhill, MA
01832-2909 (5.36%); Strategic Equity Fund -- Betsey Tan, 7 Donovan's Lane,
Natick, MA 01760-3615 (7.18%); Intermediate Government Income Fund -- Adriana
Vita, 345 Park Ave., New York, NY 10154 (7.71%); Short-Term Bond Fund -- Chelsea
Police Relief Assoc., John R. Phillips, Treas. & Michael McCona, Clerk, 180
Crescent Avenue, Chelsea, MA 02150-3017 (15.08%); Josua Colon Cust, Hazel Colon
UGMA CT, 400 Lasalle Street, New Britan, CT 06051-1316 (8.41%); Elizabeth Mugar,
10 Chestnut St., Apt. 1808, Springfield, MA 01103-1709 (8.04%); Tax-Exempt Bond
Fund -- David Fendler, Sylvia Fendler JTWROS, 72 Brinkerhoff Ave., Stamford, CT
06905-3203 (7.93%); Frances E. Stady, P.O. Box 433, 3176 Main St., Yorkshire, NY
14173-0433 (6.19%); U.S. Clearing Corp., FBO#978-02869-11, Carol Guy & Ali E.
Guy, 14 Thomas St., Scarsdale, NY 10583-1031 (5.20%).
As of February 9, 2000, the name, address and share ownership of the
entities or persons that held of record or beneficially more than 5% of the
outstanding Prime A Shares of each of Galaxy's investment portfolios were as
follows: Equity Growth Fund -- U.S. Clearing, A Division of Fleet Securities,
Inc., FBO#104-32732-16, Hilda Brandt, 3900 North Charles Street, Baltimore, MD
21218-1724 (49.88%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#114-697238-17, Sara Mallow, 6415 NW 24th Street, Boca Raton, FL 33439-4320
(26.03%); U.S. Clearing, A Division of Fleet Securities Inc., FBO#120-97689-18,
Yook Y. Doo, 46-34 Robinson St., Flushing, NY 11355-3445 (8.66%); U.S. Clearing,
A Division of Fleet Securities Inc., FBO#021-90471-15, Mabel L. Bowman, 35634
Meyers Ct., Fremont, CA 94536-2540 (6.86%); U.S. Clearing, A Division of Fleet
Securities Inc., FBO#143-27206-11, Mary V. Mastroianni & Pasqual Mastroianni JT
Ten, 1811 Randolph Road, Schenectady, NY 12308-2021 (5.33%); International
Equity Fund -- U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#125-98055-11, Albert F. Twanmo, 6508 81st Street, Cabin John, MD 20818-1203
(80.62%); U.S. Clearing, A Division of Fleet Securities Inc., FBO#136-99157-13,
Jon-Paul Dadaian, Roth IRA Account, 178 Clarken Drive, West Orange, NJ
07052-3441 (14.83%); Growth and Income Fund -- U.S. Clearing, A Division of
Fleet Securities Inc., FBO#160-27022-17, Linda Shaw, Trustee for the Linda J.
Shaw Trust, 920 Meadows Road, Geneva, IL 60134-3052 (35.29%); U.S. Clearing, A
Division of Fleet Securities Inc., FBO#113-27816-16, Pamela
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M. Fain, 68 Oak Ridge Drive, Bethany, CT 06524-3118 (28.59%); U.S. Clearing, A
Division of Fleet Securities Inc., FBO#175-97327-10, Margaret Ann Gillenwater,
2525 E. Prince Road #23, Tucson, AZ 85716-1146 (23.86%); U.S. Clearing, A
Division of Fleet Securities Inc., FBO#103-80060-19, Saint Clare School
Endowment Fund, Attn: Fr. O'Shea, Andrew J. Houvouras &/or Bruce Blatman, 821
Prosperity Farms Road, No. Palm Beach, FL 33406-4299 (6.20%); Asset Allocation
Fund -- U.S. Clearing, A Division of Fleet Securities Inc., FBO#147-97697-11,
Ray Wayne Prince, 11010 Stephens Road, Berlin Heights, OH 44814-9673 (22.65%);
U.S. Clearing, A Division of Fleet Securities Inc., FBO#170-29789-15, Nicholas
G. Roselli & Nicholas A. Roselli JT WROS, 315 Southampton Road, Westfield, MA
01085-1360 (7.45%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#175-97327-10, Margaret Ann Gillenwater, 2525 E. Prince Road #23, Tucson, AZ
85716-1146 (14.58%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#114-97238-17, Sara Mallow, IRA Account, 6415 NW 24th Street, Boca Raton, FL
33434-4320 (22.83%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#166-98586-13, Pamela Ann Radamaker, 1001 Trainway Blvd. NE, Albuquerque, NM
87112-6280 (13.12%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#194-97099-17, James Kenneth Winter, IRA Rollover Account, 28 South Fork
Cove, Senatobia, MS 38668-6329 (5.26%); Small Cap Value Fund -- U.S. Clearing, A
Division of Fleet Securities Inc., FBO#104-32732-16, Hilda Brandt, 3900 North
Charles Street, Baltimore, MD 21218-1724 (28.64%); U.S. Clearing, A Division of
Fleet Securities Inc., FBO#150-98301-11, N. Clifford Nelson Jr., 58 Middlebury
Road, Orchard Park, NY 14127-3581 (18.05%); U.S. Clearing, A Division of Fleet
Securities Inc., FBO#102-60254-19, Frederick W. Geissinger, 601 NW 2nd Street,
Evansville, IN 47708-1013 (17.92%); U.S. Clearing, A Division of Fleet
Securities Inc., FBO#103-97564-14, Thomas X. McKenna, 170 Turtle Creek Drive,
Tequesta, FL 33469-1547 (12.05%); U.S. Clearing, A Division of Fleet Securities
Inc., FBO#103-31296-18, Edward U. Roddy III, 109 Angler Avenue, Palm Beach, FL
33480-3101 (8.82%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#165-26664-29, Special Risk Underwriters, P.O. Box 54699, Phoenix, AZ
85078-4699 (5.66%); High Quality Bond Fund -- U.S. Clearing, A Division of Fleet
Securities Inc., FBO#103-30971-12, Doris G. Schack, FBO-Doris G. Schack Living
Trust, 9161 East Evans, Scottsdale, AZ 85260-7575 (71.89%); U.S. Clearing, A
Division of Fleet Securities Inc., FBO#013-02964-11, Jane L. Grayhurst, 770
Boylston St., Apt. 10-G, Boston, MA 02199-7709 (15.64%); U.S. Clearing, A
Division of Fleet Securities Inc., FBO#132-90090-11, Virginia Holmes, 303 Bella
Vista Drive, Ithaca, NY 14850-5774 (12.21%).
As of February 9, 2000, the name, address and share ownership of the
entities or persons that held of record or beneficially more than 5% of the
outstanding Prime B Shares of each of Galaxy's investment portfolios were as
follows: Equity Growth Fund -- U.S. Clearing, A Division of Fleet Securities
Inc., FBO#111-98315-17, Thomas J. Bernfeld, 185 West End Avenue, Apt. 21D, New
York, NY 10023-5548 (19.75%); U.S. Clearing, A Division of Fleet Securities
Inc., FBO#166-31108-13, Frank Catanho, Trustee of the Frank Catanho 1996 Trust
dated 10/22/96, 24297 Mission Blvd., Hayward, CA 94544-1020 (12.76%); U.S.
Clearing, A Division of Fleet Securities Inc., FBO#183-97247-11, W.P. Fleming,
66500 E. 253rd, Grove, OK 74344-6163 (5.87%); U.S. Clearing, A Division of Fleet
Securities Inc., FBO#024-90318-16, Lynn C. Sherrie, IRA Rollover, P.O. Box 316,
Wilson, NY 14172-0316 (12.39%); U.S. Clearing, A Division of Fleet Securities
Inc., FBO#221-00085-18, Walter M. Swiecicki & Cathleen Swiecicki JTWROS, 119 Old
Beekman Road, Monmouth Junction, NJ 08852-3114 (10.69%);
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International Equity Fund -- U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#102-59241-17, Church & Friary of St. Francis of Assisi, c/o Fr. Ronald P.
Stark, OFM, 165 West 31st St., New York, NY 10001-3405 (80.25%); Growth and
Income Fund -- U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#147-97497-13, Martin Allen Sante, 8858 Moanalua Way, Diamondhead, MS
39525-3760 (28.95%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#103-31744-16, Irwin Luftig & Elaine Luftig, 6119 Bear Creek Ct., Lake Worth,
FL 33467-6812 (19.09%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#147-29019-15, Walter W. Quan, 2617 Skyline Drive, Lorain, OH 44053-2243
(15.84%); U.S. Clearing, A Division of Fleet Securities Inc., FBO#014-90365-19,
Peter Burr Bickford, 65 A. Lazell Street, Hingham, MA 02043-4403 (7.92%); U.S.
Clearing, A Division of Fleet Securities Inc., FBO#108-000116-10, Michael
Kennedy & Carleen Kennedy JTWROS, 12 Walton Avenue, Locust Valley, NY 11560-1227
(5.83%); U.S. Clearing Corp., FBO#148-28677-18, Linda M. Berke & Michael E.
Berke JTTEN, 30941 Westwood Rd., Farmington Hills, MI 48331-1466 (16.24%); Asset
Allocation Fund -- U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#138-97818-14, Carol Y. Foster, 524 Marie Avenue, Blountstown, FL 32424-1218
(9.84%); U.S. Clearing, A Division of Fleet Securities Inc., FBO#102-92974-11,
Ann E. Herzog, 74 Tacoma Street, Staten Island, NY 10304-4222 (9.39%); U.S.
Clearing, A Division of Fleet Securities Inc., FBO#166-98559-16, Ann P. Sargent,
422 Los Encinos Avenue, San Jose, CA 95134-1336 (6.26%); U.S. Clearing, A
Division of Fleet Securities Inc., FBO#166-97970-19, Alicia E. Schober, 10139
Ridgeway Drive, Cupertino, CA 95014-2658 (6.07%); U.S. Clearing, A Division of
Fleet Securities Inc., FBO#194-14889-16, Paul R. Thornton & Karin Z. Thornton,
JTTEN, 1207 Oak Glen Lane, Sugarland, TX 77479-6175 (5.58%); U.S. Clearing, A
Division of Fleet Securities Inc., FBO#147-29049-19, Randall Prince, Rt. 1, Box
865, Turtletown, TN 37391-9700 (5.93%); Small Cap Value Fund -- U.S. Clearing, A
Division of Fleet Securities Inc., FBO#147-97574-19, Ray William Mominey, 1340
San Cristobal Villa, Punta Gorda, FL 33983-6618 (16.77%); U.S. Clearing, A
Division of Fleet Securities Inc., FBO#111-98315-17, Thomas J. Bernfield, 185
West End Avenue, Apt. 21D, New York, NY 10023-5548 (10.68%); U.S. Clearing, A
Division of Fleet Securities Inc., FBO#107-30623-15, Andrejs Zvejnieks, 2337
Christopher Walk, Atlanta, GA 30327-1110 (7.24%); U.S. Clearing, A Division of
Fleet Securities Inc., FBO#180-98472-11, Rufus O. Eddins, Jr., IRA Rollover, 360
Dominion Circle, Knoxville, TN 37922-2750 (5.63%); U.S. Clearing, A Division of
Fleet Securities Inc., FBO#221-97250-13, Michael A. Veschi, 106 Exmoor Court,
Leesburg, VA 20176-2049 (5.41%); High Quality Bond Fund -- U.S. Clearing, A
Division of Fleet Securities Inc., FBO#200-70099-19, Neil C. Feldman, 41 Windham
Way, Englishtown, NJ 07726-8216 (27.85%); U.S. Clearing, A Division of Fleet
Securities Inc., FBO#119-97697-10, Ira Zornberg, 4219 Nautilus Avenue, Brooklyn,
NY 11224-1019 (11.23%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#013-03576-19, Louise Brown & Sandra Fontaine JTTEN, 172 High Street,
Woonsocket, RI 02895-4311 (5.00%); U.S. Clearing, A Division of Fleet Securities
Inc., FBO# 147-24459-13, Jay Robert Klein, 26800 Amhearst Circle #209,
Cleveland, OH 44122-7572 (11.06%); U.S. Clearing, A Division of Fleet Securities
Inc., FBO#102-93287-11, Marjorie Dion, 301 Raimond Street, Yephank, NY
11980-9725 (8.02%); U.S. Clearing, A Division of Fleet Securities Inc.,
FBO#102-68909-11, Marjorie Dion, 301 Raimond Street, Yephank, NY 11980-9725
(10.57%); U.S. Clearing, A Division of Fleet Securities Inc., FBO#157-98031-13,
Patricia Fusco, 112 E. Chapel Avenue, Cherry Hill, NJ 08034-1204 (7.17%); U.S.
Clearing, A Division of Fleet Securities Inc., FBO#238-97175-19,
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Marie Gottfried, Rollover IRA Account, 10208 Andover Coach Circle H-2, Lake
Worth, FL 33467-8158 (5.31%).
As of February 9, 2000, 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 were as follows: Money Market
Fund -- Stable Asset Fund, c/o Norstar Trust Co./Gales & Co., 159 East Main
Street, Rochester, NY 14638 (12.36%); Silverstream Software Inc., c/o Norstar
Trust Co./Gales & Co., 159 East Main Street, Rochester, NY 14638 (5.13%); U.S.
Treasury Money Market Fund -- Loring Walcott Client Sweep Account, c/o Norstar
Trust Co./Gales & Co., 159 East Main Street, Rochester, NY 14638 (21.63%);
Equity Value Fund -- Fleet Savings Plus- Equity Value, c/o Norstar Trust
Co./Gales & Co., 159 East Main Street, Rochester, NY 14638 (25.00%); Equity
Growth Fund -- Fleet Savings - Equity Growth, c/o Norstar Trust Co./Gales & Co.,
159 East Main Street, Rochester, NY 14638 (23.00%); Nusco Retiree Health VEBA
Trust, c/o Norstar Trust Co./Gales & Co., 159 East Main Street, Rochester, NY
14638 (6.91%); International Equity Fund -- FFG International Equity Fund, c/o
Norstar Trust Co./Gales & Co., 159 East Main Street, Rochester, NY 14638
(12.24%); Fleet Savings Plus - Intl. Equity, c/o Norstar Trust Co./Gales & Co.,
159 East Main Street, Rochester, NY 14638 (10.45%); Intermediate Government
Income Fund -- Nusco Retiree Health VEBA Trust, c/o Norstar Trust Co./Gales &
Co., 159 East Main Street, Rochester, NY 14638 (6.45%); Strategic Equity Fund --
FFG Retirement & Pension VDG, c/o Fleet Financial Group, 159 East Main Street,
Rochester, NY 14638 (93.85%); High Quality Bond Fund -- Fleet Savings Plus Plan
- - HQ Bond, c/o Norstar Trust Co./Gales & Co., 159 East Main Street, Rochester,
NY 14638 (18.49%); Short-Term Bond Fund -- Witicox & Gibbs Retirement Plan, c/o
Norstar Trust Co./Gales & Co., 159 East Main Street, Rochester, NY 14638
(5.14%); Asset Allocation Fund -- Fleet Savings Plus - Asset Allocation, c/o
Norstar Trust Co./Gales & Co., 159 East Main Street, Rochester, NY 14638
(26.66%); Small Company Equity Fund -- Fleet Savings Plus - Small Company, c/o
Norstar Trust Co./Gales & Co., 159 East Main Street, Rochester, NY 14638
(32.64%); Tax-Exempt Bond Fund -- Nusco Retiree Health VEBA Trust, c/o Norstar
Trust Co./ Gales & Co., 159 East Main Street, Rochester, NY 14638 (35.99%);
Corporate Bond Fund -- Cole Hersee Pension Plan, c/o Norstar Trust Co./Gales &
Co., 159 East Main Street, Rochester, NY 14638 (7.92%); Growth and Income Fund
- -- Fleet Savings Plus - Growth Income, c/o Norstar Trust Co./Gales & Co., 159
East Main Street, Rochester, NY 14638 (43.28%); Crompton & Knowles IARP, c/o
Norstar Trust Co./Gales & Co., 159 East Main Street, Rochester, NY 14638
(9.55%); Small Cap Value Fund -- FFG Emp. Ret. Misc. Assets SNC, c/o Norstar
Trust Co./Gales & Co., 159 East Main Street, Rochester, NY 14638 (25.80%);
Institutional Government Fund -- Duncanson & Holt Inc., c/o Norstar Trust
Co./Gales & Co., 159 East Main Street, Rochester, NY 14638 (5.42%); New Jersey
Municipal Bond Fund -- Perillo Tours, c/o Norstar Trust Co./Gales & Co., 159
East Main Street, Rochester, NY 14638 (22.20%); Royal Chambord IMA, c/o Norstar
Trust Co./Gales & Co., 159 East Main Street, Rochester, NY 14638 (11.10%); McKee
Wendell A. Martial Trust, c/o Norstar Trust Co./Gales & Co., 159 East Main
Street, Rochester, NY 14638 (11.02%); Varco Inc. IMA, c/o Norstar Trust
Co./Gales & Co., 159 East Main Street, Rochester, NY 14638 (5.55%); Terry, Julia
Lee Inv. Adv., c/o Norstar Trust Co./Gales & Co., 159 East Main Street,
Rochester, NY 14638 (5.22%); Tieman Diane V IA, c/o Norstar Trust Co./Gales &
Co., 159 East Main Street, Rochester, NY 14638 (5.04%).
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As of February 9, 2000, the name, address and share ownership of the
entities or persons that held of record or beneficially more than 5% of the
outstanding shares of Galaxy's Prime Reserves, Government Reserves, Tax-Exempt
Reserves, Large Company Index, U.S. Treasury Index and Municipal Index Funds
were as follows: Prime Reserves -- U.S. Clearing, 26 Broadway, New York, NY
10004 (100%); Government Reserves -- U.S. Clearing, 26 Broadway, New York, NY
10004 (100%); Tax-Exempt Reserves -- U.S. Clearing, 26 Broadway, New York, NY
(100%); Large Company Index -- Gales & Co., Fleet Investment Services, Mutual
Funds Unit - NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001
(37.42%); Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (5.17%); U.S.
Treasury Index -- Gales & Co., Fleet Investment Services, Mutual Funds Unit -
NY/RO/T04A, 159 East Main Street, Rochester, NY 14638-0001 (8.29%); Gales & Co.,
Fleet Investment Services, Rochester, NY 14638-0001 (15.35%); Municipal Index --
Gales & Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East
Main Street, Rochester, NY 14638-0001 (8.96%); Bob & Co., c/o Bank of Boston,
Attn: Mutual Funds Dept. 45-02-06, P.O. Box 1809, Boston, MA 02105-1809
(18.08%); U.S. Clearing Corp., FBO#979-11223-11, Steven Starker, 7 Flagler
Drive, Rye, NY 10580-1951 (5.18%).
As of February 9, 2000, the following Galaxy investment portfolios had
no single person or entity own beneficially more than 5% of the portfolios'
outstanding Trust Shares: Equity Income Fund, New York Municipal Bond Fund,
Connecticut Municipal Bond Fund, Massachusetts Municipal Bond Fund, Rhode Island
Municipal Bond Fund, Massachusetts Municipal Money Market Fund, Connecticut
Municipal Money Market Fund, Government Money Fund and the Tax-Exempt Money
Market Fund.
FINANCIAL STATEMENTS
Galaxy's Annual Reports to Shareholders with respect to the Funds for
the fiscal year ended October 31, 1999 has been filed with the SEC. The
financial statements contained in such Annual Reports are incorporated by
reference into this Statement of Additional Information. The financial
statements and financial highlights for the Funds for the fiscal year ended
October 31, 1999 have been audited by Galaxy's independent auditors, Ernst &
Young LLP, whose report thereon also appears 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 report
given upon the authority of such firm as experts in accounting and auditing. The
report of PricewaterhouseCoopers LLP dated December 23, 1998 on the Funds'
financial statements included in the Funds' Annual Reports to the Shareholders
for the fiscal year ended October 31, 1998, is also incorporated herein by
reference.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
opinion of credit worthiness of an obligor with respect to financial obligations
having an original maturity of no more than 365 days. The following summarizes
the rating categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be
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evidenced by many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.
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"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial
BankWatch's highest category and indicates a very high likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial
BankWatch's second-highest category and indicates that while the degree of
safety regarding timely repayment of
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principal and interest is strong, the relative degree of safety is not as high
as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
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"B" - An obligation rated "B" is more vulnerable to nonpayment
than obligations rated "BB," but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable
to nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This symbol is attached to the ratings of instruments
with significant noncredit risks. It highlights risks to principal or volatility
of expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower
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than the best bonds because margins of protection may not be as large as in
"Aaa" securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risk
appear somewhat larger than the "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa." The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered to be of high credit quality.
Protection factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
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"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of credit risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of credit risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
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"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC," "CC", and "C" - Bonds have high default risk. Default
is a real possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C" ratings
signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated "DDD" have the highest prospect for
resumption of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
"D" have a poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
Thomson Financial BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and broker-dealers.
The following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
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"BBB" - This designation represents the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned
by Thomson Financial BankWatch to non-investment grade long-term debt. Such
issues are regarded as having speculative characteristics regarding the
likelihood of timely repayment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's note rating reflects the liquidity
concerns and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
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"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality.
Margins of protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes 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.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated above, the Short-Term Bond, Intermediate Government Income,
High Quality Bond, Rhode Island Municipal Bond and Growth and Income 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.
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
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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"). Fleet 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 Fleet 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.
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.
Fleet 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.
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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. Fleet 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 Fleet 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
by the 5 point gain realized by closing out the futures contract purchase.
Fleet 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. MUNICIPAL BOND INDEX FUTURES CONTRACTS
A municipal bond index assigns relative values to the bonds included in
the index and the index fluctuates with changes in the market values of the
bonds so included. The Chicago Board of Trade has designed a futures contract
based on the Bond Buyer Municipal Bond Index. This Index is composed of 40 term
revenue and general obligation bonds, and its composition is
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updated regularly as new bonds meeting the criteria of the Index are issued and
existing bonds mature. The Index is intended to provide an accurate indicator of
trends and changes in the municipal bond market. Each bond in the Index is
independently priced by six dealer-to-dealer municipal bond brokers daily. The
40 prices then are averaged and multiplied by a coefficient. The coefficient is
used to maintain the continuity of the Index when its composition changes. The
Chicago Board of Trade, on which futures contracts based on this Index are
traded, as well as other U.S. commodities exchanges, are regulated by the
Commodity Futures Trading Commission. Transactions on such exchange are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract.
The Rhode Island Municipal Bond Fund will sell index futures contracts
in order to offset a decrease in market value of its portfolio securities that
might otherwise result from a market decline. The Fund may do so either to hedge
the value of its portfolio as a whole, or to protect against declines occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Fund will purchase index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, the
Fund will purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a corresponding
purchase of securities.
Closing out a futures contract sale prior to the settlement date may be
effected by the Fund's entering into a futures contract purchase for the same
aggregate amount of the index involved and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund 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's 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.
EXAMPLE OF A MUNICIPAL BOND INDEX FUTURES CONTRACT
Consider a portfolio manager holding $1 million par value of each of
the following municipal bonds on February 2 in a particular year.
<TABLE>
<CAPTION>
Current Price
(points and
Maturity thirty-seconds
Issue Coupon Issue Date Date of a Point)
- ------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Ohio HFA 9 3/8 5/05/83 5/1/13 94-2
NYS Power 9 3/4 5/24/83 1/1/17 102-0
San Diego, CA IDR 10 6/07/83 6/1/18 100-14
Muscatine, IA Elec 10 5/8 8/24/83 1/1/08 103-16
Mass Health & Ed 10 9/23/83 7/1/16 100-12
</TABLE>
The current value of the portfolio is $5,003,750.
B-4
<PAGE>
To hedge against a decline in the value of the portfolio, resulting
from a rise in interest rates, the portfolio manager can use the municipal bond
index futures contract. The current value of the Municipal Bond Index is 86-09.
Suppose the portfolio manager takes a position in the futures market opposite to
his or her cash market position by selling 50 municipal bond index futures
contracts (each contract represents $100,000 in principal value) at this price.
On March 23, the bonds in the portfolio have the following values:
Ohio HFA 81-28
NYS Power 98-26
San Diego, CA IDB 98-11
Muscatine, IA Elec 99-24
Mass Health & Ed 97-18
The bond prices have fallen, and the portfolio has sustained a loss of
$130,312. This would have been the loss incurred without hedging. However, the
Municipal Bond Index also has fallen, and its value stands at 83-27. Suppose now
the portfolio manager closes out his or her futures position by buying back 50
municipal bond index futures contracts at this price.
The following table provides a summary of transactions and the results
of the hedge.
<TABLE>
<CAPTION>
CASH MARKET FUTURES MARKET
<S> <C> <C>
February 2 $5,003,750 long posi- Sell 50 Municipal Bond
tion in municipal futures contracts at
bonds 86-09
March 23 $4,873,438 long posi- Buy 50 Municipal Bond
tion in municipal futures contracts at
Bonds 83-27
-------------------- ----------------------
$130,312 Loss $121,875 Gain
</TABLE>
While the gain in the futures market did not entirely offset the loss
in the cash market, the $8,437 loss is significantly lower than the loss which
would have been incurred without hedging.
The numbers reflected in this appendix do not take into account the
effect of brokerage fees or taxes.
III. 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
B-5
<PAGE>
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 futures 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 the broker.
At any time prior to expiration of the futures contract, Fleet 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.
IV. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by the
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.
B-6
<PAGE>
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 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 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
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
B-7
<PAGE>
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 Funds is also subject to Fleet'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-8
