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The Galaxy Fund
Statement of Additional Information
February 29, 2000
Galaxy Short-Term Bond Fund
Galaxy Intermediate Government Income Fund
Galaxy High Quality Bond Fund
Retail A Shares, Retail B Shares and
Trust Shares
Galaxy Corporate Bond Fund
Trust Shares
This Statement of Additional Information is not a prospectus. It relates
to the prospectuses for the Funds as listed below, as they may be supplemented
or revised from time to time (the "Prospectuses"). The Prospectuses, as well as
the Funds' Annual Report to Shareholders dated October 31, 1999 (the "Annual
Report"), 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)
Current Prospectuses
o Prospectus for Retail A Shares and Retail B Shares of the Short-Term Bond,
Intermediate Government Income and High Quality Bond Funds dated February
29, 2000
o Prospectus for Trust Shares of the Funds dated February 29, 2000
The financial statements included in the Annual Report and the report of
Ernst & Young LLP, The Galaxy Fund's independent auditors, on the financial
statements for 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 Galaxy Fund's
Annual Report to Shareholders with respect to the Fund 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
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GENERAL INFORMATION..........................................................1
DESCRIPTION OF GALAXY AND ITS SHARES.........................................1
INVESTMENT STRATEGIES, POLICIES AND RISKS....................................4
Short-Term Bond Fund...................................................4
Intermediate Government Income Fund....................................5
High Quality Bond Fund.................................................6
Corporate Bond Fund....................................................6
Special Risk Considerations............................................7
Foreign Securities.....................................................7
Ratings................................................................7
Other Investment Policies and Risk Considerations......................8
Variable and Floating Rate Obligations.................................8
U.S. Government Obligations and Money Market Instruments...............8
Municipal Securities..................................................10
Stand-by Commitments..................................................12
Repurchase and Reverse Repurchase Agreements..........................13
Securities Lending....................................................14
Investment Company Securities.........................................14
Derivative Securities.................................................14
When-Issued, Forward Commitment and Delayed Settlement Transactions...17
Asset-Backed Securities...............................................17
Mortgage-Backed Securities............................................18
Mortgage Dollar Rolls.................................................19
Stripped Obligations..................................................20
Guaranteed Investment Contracts.......................................20
Bank Investment Contracts.............................................21
Zero Coupon Bonds.....................................................21
Portfolio Turnover....................................................21
INVESTMENT LIMITATIONS......................................................22
VALUATION OF PORTFOLIO SECURITIES...........................................25
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................25
Purchases of Retail Shares and Trust Shares of the Corporate Bond
Fund ...............................................................25
General...............................................................25
Customers of Institutions.............................................26
Applicable Sales Charge -- Retail A Shares............................27
Computation of Offering Price - Retail A Shares.......................28
Quantity Discounts....................................................29
Applicable Sales Charge - Retail B Shares.............................32
Characteristics of Retail A Shares and Retail B Shares................33
Factors to Consider When Selecting Retail A Shares or Retail B Shares.34
Purchases of Trust Shares.............................................34
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Other Purchase Information............................................35
Redemption of Retail A Shares, Retail B Shares and Trust Shares.......35
INVESTOR PROGRAMS - RETAIL A SHARES AND RETAIL B SHARES.....................36
Exchange Privilege....................................................36
Retirement Plans......................................................37
Automatic Investment Program and Systematic Withdrawal Plan...........37
Payroll Deduction Program.............................................38
College Investment Program............................................38
Direct Deposit Program................................................38
TAXES ......................................................................39
Taxation of Certain Financial Instruments.............................39
TRUSTEES AND OFFICERS.......................................................39
Shareholder and Trustee Liability.....................................43
INVESTMENT ADVISER..........................................................44
ADMINISTRATOR...............................................................45
CUSTODIAN AND TRANSFER AGENT................................................47
EXPENSES....................................................................48
PORTFOLIO TRANSACTIONS......................................................48
SHAREHOLDER SERVICES PLAN...................................................49
DISTRIBUTION AND SERVICES PLAN..............................................51
DISTRIBUTOR.................................................................53
AUDITORS....................................................................55
COUNSEL.....................................................................55
PERFORMANCE AND YIELD INFORMATION...........................................55
Performance Reporting.................................................58
MISCELLANEOUS...............................................................60
FINANCIAL STATEMENTS........................................................67
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 a current Prospectus. This Statement of Additional Information relates to
the Prospectuses for Trust Shares of the four Funds listed on the cover page and
Retail A Shares and Retail B Shares of each of the Short-Term Bond, Intermediate
Government Income and High Quality Bond Funds. The Corporate Bond Fund is
authorized to offer Retail A Shares and Trust Shares but currently offers only
Trust Shares. The Short-Term Bond, Intermediate Government Income and High
Quality Bond Funds also offer Prime A Shares, Prime B Shares and BKB 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 Prospectuses. No investment in shares of the
Funds should be made without reading a Prospectus.
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.
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 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 had
not commenced investment operations.
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
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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 D shares (Trust Shares), Class D -
Special Series 1 shares (Retail A Shares), Class D - Special Series 2 shares
(Retail B Shares), Class D - Special Series 3 shares, (Prime A Shares), Class D
- - 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 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; and Class T - Series 1 shares (Trust Shares) and Class
T - Series 2 shares (Retail A Shares), each series representing interests in the
Corporate Bond Fund. Each Fund is classified as a diversified company under the
Investment Company Act of 1940, as amended (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 Prospectuses, shares will be fully paid and
non-assessable. Each series of shares in a Fund (i.e., Retail A Shares, Retail B
Shares, Trust Shares, Prime A Shares, Prime B Shares and BKB Shares) bear pro
rata the same expenses and are entitled equally to the 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 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) and holders of Retail B Shares
will bear the expenses of the Distribution and Services Plan for Retail B
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 Plan" and "Distribution and Services Plan" 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
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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 Retail A Shares and Trust 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 Retail A Shares and Trust Shares and only
Retail B Shares of a Fund will be entitled to vote on matters submitted to a
vote of shareholders pertaining to Galaxy's Distribution and Services Plan for
Retail B Shares). Further, shareholders of all of the Funds, as well as those of
any other investment portfolio now or hereafter offered by Galaxy, will vote
together in the aggregate and not separately on a Fund-by-Fund basis, except as
otherwise required by law or when permitted by the Board of Trustees. Rule 18f-2
under the 1940 Act provides that any matter required to be submitted to the
holders of the outstanding voting securities of an investment company such as
Galaxy shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each Fund affected by
the matter. A particular Fund is deemed to be affected by a matter unless it is
clear that the interests of each Fund in the matter are substantially identical
or that the matter does not affect any interest of the Fund. Under the Rule, the
approval of an investment advisory agreement or any change in 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.
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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 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,
will use its 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(es) 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 following investment strategies, policies and risks supplement
those set forth in the Funds' Prospectuses.
Short-Term Bond Fund
In addition to its principal investment strategies and policies as
described in its Prospectuses, 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 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
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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 currency forward 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 its Prospectuses, 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.
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 S&P's and Moody's rating categories.
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High Quality Bond Fund
In addition to its principal investment strategies and policies as
described in its Prospectuses, 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 S&P's and Moody's rating categories.
Corporate Bond Fund
In addition to its principal investment strategies and policies as
described in its Prospectus, the Corporate Bond Fund may also invest in
obligations issued or guaranteed by the U.S. or foreign governments, their
agencies or instrumentalities, or by supranational banks or other organizations.
Examples of supranational banks include the 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. The Fund may invest, from time to time, in municipal
securities. The purchase of municipal securities may be advantageous when, as a
result of their tax status or prevailing economic, regulatory or other
circumstances, the performance of such securities is expected to be comparable
to that of corporate or U.S. Government debt obligations. See "Other Investment
Policies and Risk Considerations - Municipal Securities" below. The Fund may
enter into interest rate futures contracts to hedge against changes in market
values. See "Other Investment Policies and Risk Considerations - Derivative
Securities" below. The Fund may also invest in "money market" instruments.
The value of convertible securities in which the Fund may invest
fluctuates in relation to changes in interest rates like bonds and, in addition,
fluctuates in relation to the underlying common stock. Any common stock received
through the conversion of convertible debt obligations will be sold in an
orderly manner as soon as possible.
The Fund may also invest in debt obligations of foreign issuers such as
foreign corporations and banks, as well as foreign governments and their
political subdivisions. Such investments may subject the Fund to special
investment risks. See "Special Risk Considerations - Foreign Securities" below.
The Fund will not invest more than 20% of its net assets in the
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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 currency forward contracts (agreements to exchange
one currency for another at a future date) to manage currency risks and to
facilitate transactions in foreign securities. Although currency forward
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 Fund and Appendix A
to this Statement of Additional Information for a description of S&P's and
Moody's rating categories.
Special Risk Considerations
Foreign Securities
Investments by the Short-Term Bond and Corporate Bond 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 principal and interest on foreign obligations.
Although the Short-Term Bond and Corporate Bond 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 the Funds'
shares may fluctuate with U.S. dollar exchange rates as well as with price
changes of the Funds' foreign 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 Funds make their foreign investments could reduce the
effect of increases and magnify the effect of decreases in the price of the
Funds' foreign 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'
foreign 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.
Ratings
If the rating of a security held by a Fund is downgraded below investment
grade, the Fund doesn't have to sell the security unless (i) the Adviser
determines under the circumstances the security is no longer an appropriate
investment for the Fund, or (ii) the security, together with
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any securities held by the Fund that are rated below investment grade, exceed 5%
of the Fund's net assets. The Funds' investments in obligations rated below the
four highest ratings assigned by S&P and Moody's have different risks than
investments in securities that are rated "investment grade." Risk of loss upon
default by the issuer is significantly greater because lower-rated securities
are generally unsecured and are often subordinated to other creditors of the
issuer, and because the issuers frequently have high levels of indebtedness and
are more sensitive to adverse economic conditions, such as recessions,
individual corporate developments and increasing interest rates than are
investment grade issuers. As a result, the market price of such securities may
be particularly volatile.
Other Investment Policies and Risk Considerations
Investment methods described in the Prospectuses 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.
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
Prospectuses and this Statement of Additional Information. If such an instrument
is not rated, Fleet must determine that such instrument is comparable to rated
instruments eligible for purchase by a Fund 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 an instrument will
usually be deemed to have a maturity equal to the longer of the period remaining
until the next regularly scheduled interest rate adjustment or the time the Fund
involved can receive payment of principal as specified in the instrument.
Instruments which are U.S. Government obligations and certain variable rate
instruments having a nominal maturity of 397 days or less when purchased by a
Fund, however, will be deemed to have a maturity equal to the period remaining
until the obligation's next interest rate adjustment.
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 money market instruments, including but not
limited to bank obligations, commercial paper and corporate bonds with
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
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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 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.
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. 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. Investments by the Funds in
non-negotiable time deposits are limited to no more than 5% of each Fund's total
assets at the time of purchase.
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 of 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 other foreign governmental restrictions which might adversely affect
the payment of principal and interest on such obligations. In addition, foreign
branches of U.S. banks and U.S. branches of foreign banks may be subject to less
stringent reserve requirements and to different
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accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks. Such investments may also subject
a Fund 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 believes that the credit risk
with respect to the instrument is minimal.
Commercial paper also may include variable and floating rate instruments
which are unsecured instruments that permit the indebtedness thereunder to vary.
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 there 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 that 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.
Commercial paper also 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. The Funds may also purchase Rule 144A
securities. See "Investment Limitations" below.
Municipal Securities
The Funds may 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 (the "Code"), yields on municipal
obligations 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 U.S. Government debt obligations as a result of prevailing
economic, regulatory or other circumstances.
Municipal securities acquired by the 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
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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 classifications 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. 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.
Each Fund's portfolio 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 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 nationally recognized
statistical rating organization ("NRSRO"), such as Moody's and S&P, described in
Appendix A to this Statement of Additional Information, represent such NRSRO's
opinion 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, 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.
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. 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
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<PAGE>
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its municipal 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, tax-exempt 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 for each 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. The principal and
interest on these obligations may be payable from the general revenues of the
users of such facilities.
Opinions relating to the validity of municipal securities and to the
exemption of interest thereon from regular 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.
Variable and Floating Rate Municipal Securities. Municipal securities
purchased by the Funds may include rated and unrated variable and floating rate
tax-exempt instruments. There may be no active secondary market with respect to
a particular variable or floating rate instrument. Nevertheless, the periodic
readjustments of their interest rates tend to assure that their value to a Fund
will approximate their par value. Illiquid variable and floating rate
instruments (instruments which are not payable upon seven days' notice and do
not have an active trading market) that are acquired by the Funds are subject to
the 10% (15% with respect to the Corporate Bond Fund) limit described in
Investment Limitation No. 3 under "Investment Limitations" below.
Stand-by Commitments
Each Fund may acquire "stand-by commitments" with respect to municipal
securities held by it. 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 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,
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a Fund may pay for a stand-by commitment either separately in cash or by paying
a higher price for municipal 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.
Stand-by commitments are exercisable by a Fund at any time before the
maturity of the underlying municipal security, and may be sold, transferred or
assigned by the Fund only with respect to the underlying instruments. 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.
Repurchase and Reverse Repurchase Agreements
Each 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. No Fund will enter into repurchase agreements with Fleet
or any of its 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 the 10% (15% with respect to the Corporate Bond Fund) limit
described in Investment Limitation No. 3 under "Investment Limitations" below.
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.
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 repurchase agreements 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 may also 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
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<PAGE>
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the repurchase price. A Fund 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.
Securities Lending
Each Fund 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 a Fund would be invested in high quality,
short-term money market instruments. Loans will generally be short-term, will be
made only to borrowers deemed by Fleet to be of good standing and only when, in
Fleet'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
The Funds 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. 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. Securities of other
investment companies will be acquired by the Funds 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 Funds, other investment portfolios of Galaxy, or any
other investment companies advised by Fleet.
Derivative Securities
The 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,
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<PAGE>
or indices, and include, but are not limited to, interest rate futures, certain
asset-backed and mortgage-backed securities, certain zero coupon bonds and
currency forward contracts.
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 to 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 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 will evaluate the risks presented by the derivative securities
purchased by the Funds, and will determine, in connection with its day-to-day
management of the Funds, how they will be used in furtherance of the Funds'
investment objectives. It is possible, however, that Fleet'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.
Interest Rate Futures Contracts. The Funds may enter into contracts (both
purchase and sales) which provide for the future delivery of fixed income
securities (commonly known as interest rate futures contracts). The Funds will
not engage in futures transactions for speculation, but only to hedge against
changes in the market values of securities which the Funds hold or intend 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 a Fund intends to purchase will require an
amount of cash and/or 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. Each Fund will limit its hedging transactions in futures contracts
so that, immediately after any such transaction, the aggregate initial margin
that is required to be posted by the 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 each 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 is 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,
a Fund may realize a loss on
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a futures transaction that is not offset by a favorable movement in the price of
securities which it holds or intends to purchase or a Fund may be unable to
close a futures position in the event of adverse price movements. Additional
information concerning futures transactions is contained in Appendix B to this
Statement of Additional Information.
Foreign Currency Exchange Transactions - Short-Term Bond and Corporate
Bond Funds. Because the Short-Term Bond and Corporate Bond Funds may buy and
sell securities denominated in currencies other than the U.S. dollar, and
receive interest, dividends and sale proceeds in currencies other than the U.S.
dollar, the Funds may enter into foreign currency exchange transactions to
convert U.S. currency to foreign currency and foreign currency to U.S. currency
as well as convert foreign currency 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.
A forward foreign currency exchange contract is an obligation by a Fund to
purchase or sell a specific currency at a specified price and future date, which
may be any fixed number of days from the date of the contract. Forward foreign
currency exchange contracts establish an exchange rate at a future date. These
contracts are transferable in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A forward
foreign currency exchange contract generally has no deposit requirement and is
traded at a net price without commission. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the prices of a
Fund's portfolio securities or in foreign exchange rates, or prevent loss if the
prices of these securities should decline.
The Short-Term Bond and Corporate Bond Funds may enter into foreign
currency hedging transactions in an attempt to protect against changes in
foreign currency exchange rates between the trade and settlement dates of
specific securities transactions or changes in foreign currency exchange rates
that would adversely affect a portfolio position or an anticipated portfolio
position. Since consideration of the prospect for currency parities will be
incorporated into a Fund's long-term investment decisions, neither Fund will
routinely enter into foreign currency hedging transactions with respect to
portfolio security transactions; however, it is important to have the
flexibility to enter into foreign currency hedging transactions when it is
determined that the transactions would be in a 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.
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When-Issued, Forward Commitment and Delayed Settlement Transactions
Each Fund may purchase eligible securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. Each Fund may
also purchase or sell 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 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
security 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.
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
forward commitments, when-issued purchases and delayed settlements 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.
Asset-Backed Securities
Each Fund 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
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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.
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
Each Fund 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
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interest and principal payments. Additional payments 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 the 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 that invests
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
Each Fund 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, the Fund would benefit to the extent of
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 each Fund. 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.
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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.
Stripped Obligations
To the extent consistent with its investment objective, each Fund 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, the 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
Each Fund, except the Corporate Bond Fund, may invest in guaranteed
investment contracts ("GICs") issued by U.S. 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
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<PAGE>
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 and substantial secondary market for the particular instrument and market
quotations are readily available.
Bank Investment Contracts
Each Fund 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% (15% with respect to the Corporate Bond Fund)
limitation on such investments, unless there is an active and substantial
secondary market for the particular instrument and market quotations are readily
available.
Zero Coupon Bonds
The Corporate Bond Fund may invest in zero coupon bonds. Zero coupon bonds
do not make interest payments; instead, they are sold at a deep discount from
their face value and are redeemed at face value when they mature. Because zero
coupon bonds do not pay current income, their prices can be very volatile when
interest rates change. In calculating its daily dividend, the Fund takes into
account as income a portion of the difference between a zero coupon bond's
purchase price and its face value.
A broker/dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), TRs (Treasury Receipts), and STRIPS
(Separate Trading of Registered Interest and Principal of Securities, are
examples of derivative zeros. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) can also be separated in this
fashion. Original issue zeros are zero coupon securities originally issued by
the U.S. Government, a U.S. Government agency or a corporation in zero coupon
form.
Portfolio Turnover
Each Fund may sell a portfolio investment soon after its acquisition if
Fleet believes that such a disposition is consistent with the Fund's investment
objective. Portfolio investments may be sold for a variety of reasons, such as a
more favorable investment opportunity or other circumstances bearing on the
desirability of continuing to hold such investments. A portfolio turnover rate
of 100% or more is considered high, although the rate of portfolio turnover will
not
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<PAGE>
be a limiting factor in making portfolio decisions. A high rate of portfolio
turnover may result in the realization of substantial capital gains and involves
correspondingly greater transaction costs.
INVESTMENT LIMITATIONS
In addition to each Fund's investment objective as stated in its
Prospectus(es), the following investment limitations are matters of fundamental
policy and may not be changed with respect to any Fund without the affirmative
vote of the holders of a majority of its outstanding shares (as defined under
"Miscellaneous").
No Fund may:
1. 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.
2. 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. None of the Short-Term Bond, Intermediate
Government Bond or High Quality Bond Funds will purchase
securities while borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are
outstanding.
3. Invest more than 10% (15% with respect to the Corporate Bond
Fund) 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.
4. 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
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<PAGE>
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.
5. 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.
6. 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.
7. 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.
8. 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 and
Corporate 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.
9. Invest in or sell put options, call options, straddles,
spreads, or any combination thereof.
10. Invest in companies for the purpose of exercising management
or control.
11. 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.
In addition to the above limitations:
12. The Funds, with the exception of the Short-Term Bond and
Corporate Bond Funds, may not purchase foreign securities,
except that the Intermediate Government Income and High
Quality Bond Funds may purchase certificates of deposit,
bankers' acceptances, or other similar obligations issued by
U.S. branches of foreign banks or foreign branches
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<PAGE>
of U.S. banks; and provided, however, that the Intermediate
Government Income and High Quality Bond Funds may also
purchase obligations of Canadian Provincial Governments in
accordance with each Fund's investment objective and policies.
In addition, the Funds may not purchase any securities which would cause
25% or 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 (a) there is
no limitation with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, (b) 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
(c) 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.)
With respect to Investment Limitation No. 2 above, (a) each 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, and (b)
mortgage dollar rolls entered into by a Fund that are not accounted for as
financings shall not constitute borrowings.
With respect to Investment Limitation No. 4 above, no Fund intends to
acquire more than 10% of the outstanding voting securities of any one issuer.
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. A Fund's investment 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 the 10% (15% with respect to the Corporate Bond Fund) limitation
on purchases of illiquid instruments described under Investment Limitation No. 3
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.
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.
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<PAGE>
VALUATION OF PORTFOLIO SECURITIES
The Funds' assets 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.
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.
This Statement of Additional Information provides additional purchase and
redemption information for Trust Shares of the Funds and Retail A Shares and
Retail B Shares of the Tax-Exempt Bond, Intermediate Government Income and High
Quality Bond Funds. Purchase and redemption information for Prime A Shares,
Prime B Shares and BKB Shares of the Short-Term Bond, Intermediate Government
Income and High Quality Bond Funds is provided in separate prospectuses and
statements of additional information.
Purchases of Retail Shares and Trust Shares of the Corporate Bond Fund
General
Investments in Retail A Shares of the Short-Term Bond, Intermediate
Government Income and High Quality Bond Funds are subject to a front-end sales
charge. Investments in Retail B Shares of such Funds are subject to a back-end
sales charge. This back-end sales charge declines over time and is known as a
"contingent deferred sales charge." Investors should read "Characteristics of
Retail A Shares and Retail B Shares" and "Factors to Consider When Selecting
Retail A Shares or Retail B Shares" below before deciding between the two.
PDI has established several procedures to enable different types of
investors to purchase Retail A Shares and Retail B Shares of the Short-Term
Bond, Intermediate Government Income
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<PAGE>
and High Quality Bond Funds (collectively, "Retail Shares"). These procedures
also apply to purchases of Trust Shares of the Corporate Bond Fund, in addition
to the purchase information described below under "Purchases of Trust Shares."
Retail Shares, as well as Trust Shares of the Corporate Bond Fund, may be
purchased by individuals or corporations who submit a purchase application to
Galaxy, purchasing directly either for their own accounts or for the accounts of
others. Retail Shares, as well as Trust Shares of the Corporate Bond Fund, may
also be purchased by FIS Securities, Inc., Fleet Securities, Inc., Fleet
Enterprises, Inc., FleetBoston Financial Corporation, its affiliates, their
correspondent banks and other qualified banks, savings and loan associations and
broker/dealers on behalf of their customers. Purchases may take place only on
days on which the New York Stock Exchange (the "Exchange") is open for business
("Business Days"). If an institution accepts a purchase order from a customer on
a non-Business Day, the order will not be executed until it is received and
accepted by PDI on a Business Day in accordance with PDI's procedures.
Galaxy has authorized certain brokers to accept purchase, exchange and
redemption orders on behalf of Galaxy with respect to Retail A Shares of the
Short-Term Bond, Intermediate Government Income and High Quality Bond Funds.
Such brokers are authorized to designate other intermediaries to accept
purchase, exchange and redemption orders on behalf of Galaxy. Galaxy will be
deemed to have received a purchase, exchange or redemption order when such an
authorized broker or designated intermediary accepts the order. Orders for
purchase, exchange or redemption of Retail A Shares of the Short-Term Bond,
Intermediate Government Income and High Quality Bond Funds accepted by any such
authorized broker or designated intermediary will be effected at the Funds'
respective net asset values per share next determined after acceptance of such
order and will not be subject to the front-end sales charge with respect to
Retail A Shares described in the applicable Prospectus and in this Statement of
Additional Information.
Customers of Institutions
Retail Shares, as well as Trust Shares of the Corporate Bond Funds
purchased by institutions on behalf of their customers will normally be held of
record by the institution and beneficial ownership of Retail Shares, as well as
Trust Shares of the Corporate Bond Fund , will be recorded by the institution
and reflected in the account statements provided to its customers. Galaxy's
transfer agent may establish an account of record for each customer of an
institution reflecting beneficial ownership of Retail Shares, as well as Trust
Shares of the Corporate Bond Fund. Depending on the terms of the arrangement
between a particular institution and Galaxy's transfer agent, confirmations of
purchases and redemptions of Retail Shares, as well as Trust Shares of the
Corporate Bond Fund, and pertinent account statements will either be sent by
Galaxy's transfer agent directly to a customer with a copy to the institution,
or will be furnished directly to the customer by the institution. Other
procedures for the purchase of Retail Shares, as well as Trust Shares of the
Corporate Bond Fund, established by institutions in connection with the
requirements of their customer accounts may apply. Customers wishing to purchase
Retail Shares, or Trust Shares of the Corporate Bond Fund through their
institution should contact such entity directly for appropriate purchase
instructions.
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<PAGE>
Applicable Sales Charge -- Retail A Shares
The public offering price for Retail A Shares of the Funds 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 applicable 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:
Reallowance to
Dealers
-------
As a % of
Offering Price
Amount of Transaction Per Share
- --------------------- ---------
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
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 applicable 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:
o 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;
o purchases by current and retired members of Galaxy's Board of
Trustees and members of their immediate families;
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<PAGE>
o purchases by officers, directors, employees and retirees of
FleetBoston Financial Corporation, and any of its affiliates and
members of their immediate families;
o purchases by officers, directors, employees and retirees of PFPC,
Inc. and members of their immediate families;
o 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;
o purchases by institutional investors, including but not limited to
bank trust departments and registered investment advisers;
o 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;
o 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
o 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, 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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<PAGE>
Intermediate
Short-Term Government
Bond Fund Income Fund
--------- -----------
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
High Quality
Bond Fund
---------
Net Assets $ 42,905,576
Outstanding Shares 4,187,138
Net Asset Value Per Share $ 10.25
Sales Charge (3.75% of the offering price) $ 0.40
Offering Price to Public $ 10.65
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
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<PAGE>
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
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
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<PAGE>
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:
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
- ------------- --------- --------- ---------
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
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
applicable 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.
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<PAGE>
Applicable Sales Charge - Retail B Shares
The public offering price for Retail B Shares of the Funds is the net
asset value of the Retail B Shares purchased. Although investors pay no
front-end sales charge on purchases of Retail B Shares, such Shares are subject
to a contingent deferred sales charge at the rates set forth below if they are
redeemed within six years of purchase. Securities dealers, brokers, financial
institutions and other industry professionals will receive commissions from PDI
in connection with sales of Retail B Shares. These commissions may be different
than the reallowances or placement fees paid to dealers in connection with sales
of Retail A Shares. 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 B Shares of a Fund. See "Applicable Sales Charge -- Retail A Shares." The
contingent deferred sales charge on Retail B Shares is based on the lesser of
the net asset value of the Shares on the redemption date or the original cost of
the Shares being redeemed. As a result, no sales charge is imposed on any
increase in the principal value of an investor's Retail B Shares. In addition, a
contingent deferred sales charge will not be assessed on Retail B Shares
purchased through reinvestment of dividends or capital gains distributions.
The proceeds from the contingent deferred sales charge that an investor
may pay upon redemption go to PDI, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Retail B Shares.
Exemptions from the Contingent Deferred Sales Charge. Certain types of
redemptions may also qualify for an exemption from the contingent deferred sales
charge. In addition to the sales charge exemptions described in the applicable
Prospectus, the contingent deferred sales charge with respect to Retail B Shares
is not assessed on: (i) redemptions in connection with required (or, in some
cases, discretionary) distributions to participants or beneficiaries of an
employee pension, profit-sharing or other trust or qualified retirement or Keogh
plan, individual retirement account or custodial account maintained pursuant to
Section 403(b)(7) of the Code; (ii) redemptions in connection with required (or,
in some cases, discretionary) distributions to participants in qualified
retirement or Keogh plans, individual retirement accounts or custodial accounts
maintained pursuant to Section 403(b)(7) of the Code due to death, disability or
the attainment of a specified age; (iii) redemptions effected pursuant to a
Fund's right to liquidate a shareholder's account if the aggregate net asset
value of Retail B Shares held in the account is less than the minimum account
size; (iv) redemptions in connection with the combination of a Fund with any
other investment company registered under the 1940 Act by merger, acquisition of
assets, or by any other transaction; (v) redemptions resulting from a tax-free
return of an excess contribution pursuant to Section 408(d)(4) or (5) of the
Code; or (vi) any redemption of Retail B Shares held by an investor, provided
the investor was the beneficial owner of shares of a Fund (or any of the other
portfolios offered by Galaxy or otherwise advised by Fleet or its affiliates)
before December 1, 1995. In addition to the foregoing exemptions, no contingent
deferred sales charge will be imposed on redemptions made pursuant to the
Systematic Withdrawal Plan, subject to the limitations set forth under "Investor
Programs - Retail A Shares and Retail B Shares - Automatic Investment Program
and Systematic Withdrawal Plan" below.
- 32 -
<PAGE>
Characteristics of Retail A Shares and Retail B Shares
The primary difference between Retail A Shares and Retail B Shares lies in
their sales charge structures and shareholder servicing/distribution expenses.
An investor should understand that the purpose and function of the sales charge
structures and shareholder servicing/distribution arrangements for both Retail A
Shares and Retail B Shares are the same.
Retail A Shares of the Funds are sold at their net asset value plus a
front-end sales charge of up to 3.75%. This front-end sales charge may be
reduced or waived in some cases. See the applicable Prospectus and "Applicable
Sales Charges -- Retail A Shares" and "Quantity Discounts" above. Retail A
Shares of a Fund are currently subject to ongoing shareholder servicing fees at
an annual rate of up to .15% of the Fund's average daily net assets attributable
to its Retail A Shares.
Retail B Shares of the Funds are sold at net asset value without an
initial sales charge. Normally, however, a deferred sales charge is paid if the
Shares are redeemed within six years of investment. See the applicable
Prospectus and "Applicable Sales Charges -- Retail B Shares" above. Retail B
Shares of a Fund are currently subject to ongoing shareholder servicing and
distribution fees at an annual rate of up to .80% of the Fund's average daily
net assets attributable to its Retail B Shares. These ongoing fees, which are
higher than those charged on Retail A Shares, will cause Retail B Shares to have
a higher expense ratio and pay lower dividends than Retail A Shares.
Six years after purchase, Retail B Shares of the Funds will convert
automatically to Retail A Shares of the Funds. The purpose of the conversion is
to relieve a holder of Retail B Shares of the higher ongoing expenses charged to
those shares, after enough time has passed to allow PDI to recover approximately
the amount it would have received if a front-end sales charge had been charged.
The conversion from Retail B Shares to Retail A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Retail A Shares as he or she had of Retail B Shares. The conversion
occurs six years after the beginning of the calendar month in which the Shares
are purchased. Upon conversion, the converted shares will be relieved of the
distribution and shareholder servicing fees borne by Retail B Shares, although
they will be subject to the shareholder servicing fees borne by Retail A Shares.
Retail B Shares acquired through a reinvestment of dividends or
distributions (as discussed under "Applicable Sales Charge -- Retail B Shares")
are also converted at the earlier of two dates -- six years after the beginning
of the calendar month in which the reinvestment occurred or the date of
conversion of the most recently purchased Retail B Shares that were not acquired
through reinvestment of dividends or distributions. For example, if an investor
makes a one-time purchase of Retail B Shares of a Fund, and subsequently
acquires additional Retail B Shares of such Fund only through reinvestment of
dividends and/or distributions, all of such investor's Retail B Shares in the
Fund, including those acquired through reinvestment, will convert to Retail A
Shares of such Fund on the same date.
- 33 -
<PAGE>
Factors to Consider When Selecting Retail A Shares or Retail B Shares
Before purchasing Retail A Shares or Retail B Shares of the Funds,
investors should consider whether, during the anticipated periods of their
investments in the particular Funds, the accumulated distribution and
shareholder servicing fees and potential contingent deferred sales charge on
Retail B Shares prior to conversion would be less than the initial sales charge
and accumulated shareholder servicing fees on Retail A Shares purchased at the
same time, and to what extent such differential would be offset by the higher
yield of Retail A Shares. In this regard, to the extent that the sales charge
for Retail A Shares is waived or reduced by one of the methods described above,
investments in Retail A Shares become more desirable. An investment of $250,000
or more in Retail B Shares would not be in most shareholders' best interest.
Shareholders should consult their financial advisers and/or brokers with respect
to the advisability of purchasing Retail B Shares in amounts exceeding $250,000.
Although Retail A Shares are subject to a shareholder servicing fee, they
are not subject to the higher distribution and shareholder servicing fee
applicable to Retail B Shares. For this reason, Retail A Shares can be expected
to pay correspondingly higher dividends per Share. However, because initial
sales charges are deducted at the time of purchase, purchasers of Retail A
Shares (that do not qualify for exemptions from or reductions in the initial
sales charge) would have less of their purchase price initially invested in
these Funds than purchasers of Retail B Shares in the Funds.
As described above, purchasers of Retail B Shares will have more of their
initial purchase price invested. Any positive investment return on this
additional invested amount would partially or wholly offset the expected higher
annual expenses borne by Retail B Shares. Because a Fund's future returns cannot
be predicted, there can be no assurance that this will be the case. Holders of
Retail B Shares would, however, own shares that are subject to a contingent
deferred sales charge of up to 5.00% upon redemption, depending upon the year of
redemption. Investors expecting to redeem during this six-year period should
compare the cost of the contingent deferred sales charge plus the aggregate
distribution and shareholder servicing fees on Retail B Shares to the cost of
the initial sales charge and shareholder servicing fees on the Retail A Shares.
Over time, the expense of the annual distribution and shareholder servicing fees
on the Retail B Shares may equal or exceed the initial sales charge and annual
shareholder servicing fee applicable to Retail A Shares. For example, if net
asset value remains constant, the aggregate distribution and shareholder
servicing fees with respect to Retail B Shares of a Fund would equal or exceed
the initial sales charge and aggregate shareholder servicing fees of Retail A
Shares approximately six years after the purchase. In order to reduce such fees
for investors that hold Retail B Shares for more than six years, Retail B Shares
will be automatically converted to Retail A Shares as described above at the end
of such six-year period.
Purchases of Trust Shares
Trust Shares of the Funds are sold to investors maintaining qualified
accounts at bank and trust institutions, including subsidiaries of FleetBoston
Financial Corporation, and to participants in employer-sponsored defined
contribution plans (such institutions and plans referred to herein
- 34 -
<PAGE>
collectively as "Institutions"). Trust Shares sold to such investors
("Customers") will be held of record by Institutions. Purchases of Trust Shares
will be effected only on days on which PDI, Galaxy's custodian and the
purchasing Institution are open for business ("Trust Business Days"). If an
Institution accepts a purchase order from its Customer on a non-Trust Business
Day, the order will not be executed until it is received and accepted by PDI on
a Trust Business Day in accordance with the foregoing procedures.
Other Purchase Information
On a Business Day or a Trust Business Day when the 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
or Trust Business Day.
Redemption of Retail A Shares, Retail B Shares and Trust 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 or Trust
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 or Trust Business Day.
Galaxy may require any information reasonably necessary to ensure that a
redemption has been duly authorized. Proceeds from the redemptions of Retail B
Shares of the Funds will be reduced by the amount of any applicable contingent
deferred sales charge. 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 Securities and Exchange Commission ("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.
- 35 -
<PAGE>
INVESTOR PROGRAMS - RETAIL A SHARES AND RETAIL B SHARES
The following information supplements the description in the applicable
Prospectus as to the various Investor Programs available to holders of Retail
Shares of the Funds.
Exchange Privilege
The minimum initial investment to establish an account in another Fund or
portfolio by exchange, except for the Institutional Government Money Market
Fund, is $2,500, unless (i) the Retail 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 the Automatic Investment Program
described below, in which event there is no minimum initial investment
requirement, or in the College Investment Program described below, in which
event the minimum initial investment is generally $100. The minimum initial
investment to establish an account by exchange in the Institutional Government
Money Market Fund is $2 million.
An exchange involves a redemption of all or a portion of the Retail Shares
of a Fund and the investment of the redemption proceeds in Retail Shares of
another Fund or portfolio offered by Galaxy or, with respect to Retail A Shares,
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 Retail 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 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.
- 36 -
<PAGE>
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 request, an investor should consult a tax or other financial
adviser to determine the tax consequences.
Retirement Plans
Retail Shares of the 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
The Automatic Investment Program permits an investor to purchase Retail
Shares of a Fund each month or each quarter. Provided an investor's financial
institution allows automatic withdrawals, Retail 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 Shares will be purchased, on a
monthly or quarterly basis, on any Business Day designated by an 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 Shares on a monthly, quarterly, semi-annual, or annual basis on any
Business Day designated by
- 37 -
<PAGE>
the investor. 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.
No contingent deferred sales charge will be assessed on redemptions of Retail B
Shares made through the Systematic Withdrawal Plan that do not exceed 12% of an
account's net asset value on an annualized basis. For example, monthly,
quarterly and semi-annual Systematic Withdrawal Plan redemptions of Retail B
Shares will not be subject to the contingent deferred sales charge if they do
not exceed 1%, 3% and 6%, respectively, of an account's net asset value on the
redemption date. Systematic Withdrawal Plan redemptions of Retail B Shares in
excess of this limit are still subject to the applicable contingent deferred
sales charge.
Payroll Deduction Program
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 an
investor's paycheck each pay period. Retail 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
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 PDI (call 1-877-BUY-GALAXY (1-877-289-4252)).
Direct Deposit Program
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.
- 38 -
<PAGE>
TAXES
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 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 currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Funds will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends or gross sale proceeds paid to
any shareholder who (i) has failed to provide a correct tax identification
number, (ii) is subject to backup withholding due to prior 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 that 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 a Fund on December 31
of such year if such dividends are actually paid during January of the following
year.
Taxation of Certain Financial Instruments
The tax principles applicable to certain financial instruments and futures
contracts and options that may be acquired by a Fund 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.
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
- 39 -
<PAGE>
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:
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
Dwight E. Vicks, Jr. Chairman & President & Director, Vicks
Vicks Lithograph & Trustee Lithograph & Printing
Printing Corporation Corporation (book
Commercial Drive manufacturing and commercial
P.O. Box 270 printing); Director, Utica
Yorkville, NY 13495 First Insurance Company;
Age 66 Trustee, Savings Bank of
Utica; Director, Monitor Life
Insurance Company; Director,
Commercial Travelers Mutual
Insurance Company; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
John T. O'Neill(1) President, Private Investor; Executive
28 Narragansett Bay Avenue Treasurer & Vice President and CFO,
Warwick, RI 02889 Trustee Hasbro, Inc. (toy and game
Age 55 manufacturer) until December
1999; Trustee, The Galaxy VIP
Fund; Trustee, Galaxy Fund II.
Louis DeThomasis Trustee President, Saint Mary's
Saint Mary's College College of Minnesota;
of Minnesota Director, Bright Day Travel,
Winona, MN 55987 Inc.; Trustee, Religious
Age 59 Communities Trust; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
Donald B. Miller Trustee Chairman, Horizon Media, Inc.
10725 Quail Covey Road (broadcast services);
Boynton Beach, FL 33436 Director/Trustee, Lexington
Age 74 Funds; Chairman, Executive
Committee, Compton
International, Inc.
(advertising agency);
Trustee, Keuka College;
Trustee, The Galaxy VIP Fund;
Trustee, Galaxy Fund II.
- 40 -
<PAGE>
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
James M. Seed Trustee Chairman and President, The
The Astra Ventures, Inc. Astra Projects, Incorporated
One Citizens Plaza (land development);
Providence, RI 02903 President, The Astra
Age 58 Ventures, Incorporated
(previously, Buffinton Box
Company - 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
2468 Ohio Street President and Director,
Bangor, ME 04401 Acadia Management Company
Age 68 (investment services);
Director, Essex County Gas
Company, until January 1994;
Director, Maine Mutual Fire
Insurance Co.; Member, Maine
Finance Authority; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
W. Bruce McConnel, III Secretary Partner of the law firm
One Logan Square Drinker Biddle & Reath LLP,
18th & Cherry Streets Philadelphia, Pennsylvania.
Philadelphia, PA 19103
Age 57
Jylanne Dunne Vice President Vice President, PFPC Inc.,
PFPC Inc. and Assistant 1990 to present.
4400 Computer Drive Treasurer
Westborough, MA 01581-5108
Age 40
- 41 -
<PAGE>
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
William Greilich Vice President Vice President, PFPC Inc.,
PFPC Inc. 1991-96; Vice President and
4400 Computer Drive Division Manager, PFPC Inc.,
Westborough, MA 01581-5108 1996-present.
Age 46
- ----------
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 the same 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"). 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.
- 42 -
<PAGE>
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 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.
================================================================================
Pension or
Retirement Total
Benefits Compensation
Accrued as from Galaxy and
Aggregate Part of Fund
Compensation from Fund Complex*Paid to
Name of Person/Position Galaxy Expenses Trustees
- --------------------------------------------------------------------------------
Bradford S. Wellman
Trustee $39,355 None $55,750
- --------------------------------------------------------------------------------
Dwight E. Vicks, Jr.
Chairman and Trustee $42,875 None $60,500
- --------------------------------------------------------------------------------
Donald B. Miller**
Trustee $40,042 None $56,500
- --------------------------------------------------------------------------------
Rev. Louis DeThomasis
Trustee $37,643 None $53,250
- --------------------------------------------------------------------------------
John T. O'Neill
President, Treasurer
and Trustee $41,813 None $59,000
- --------------------------------------------------------------------------------
James M. Seed**
Trustee $39,355 None $55,750
================================================================================
- ----------
* The "Fund Complex" consists of Galaxy, The Galaxy VIP Fund and Galaxy Fund
II, which comprised a total of 43 separate portfolios as of October 31,
1999.
** 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.
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
- 43 -
<PAGE>
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
Fleet serves as investment adviser to the Funds. In its Advisory
Agreement, Fleet has agreed to provide investment advisory services to the Funds
as described in the Prospectuses. Fleet has also agreed to pay all expenses
incurred by it in connection with its activities under the advisory agreement
other than the cost of securities (including brokerage commissions) purchased
for the Funds. See "Expenses" below.
For the services provided and expenses assumed with respect to the Funds,
Fleet is entitled to receive advisory fees, computed daily and paid monthly, at
an annual rate of .75% of the average daily net assets of each Fund. During the
last three fiscal years, Galaxy paid advisory fees (net of fee waivers and/or
expense reimbursements) to Fleet as set forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
---- ---- ----
Short-Term Bond ...................... $ 335,221 $ 390,913 $ 470,347
Intermediate Government Income ....... $1,674,194 $1,582,909 $1,535,166
High Quality Bond .................... $1,544,510 $1,294,758 $1,089,506
Corporate Bond ....................... $ 454,347 $ 489,512 $ 507,794
- 44 -
<PAGE>
During the last three fiscal years, Fleet waived advisory fees as follows:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
---- ---- ----
Short-Term Bond ...................... $121,931 $142,191 $171,035
Intermediate Government Income ....... $608,798 $575,603 $558,241
High Quality Bond .................... $561,640 $470,821 $396,183
Corporate Bond ....................... $165,517 $178,004 $184,653
During the last three fiscal years, Fleet reimbursed expenses as follows:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Short-Term Bond ......................... $ 0 $ 111 $ 2,300
Intermediate Government Income .......... $ 0 $ 0 $ 0
High Quality Bond ....................... $ 0 $ 0 $28,489
Corporate Bond .......................... $ 0 $ 0 $ 0
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.
ADMINISTRATOR
PFPC Inc. ("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
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<PAGE>
Funds and the other portfolios offered by Galaxy, computed daily and paid
monthly, at the following annual rates, effective September 10, 1998:
Combined Average Daily Net Assets Annual Rate
- --------------------------------- -----------
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%
Prior to September 10, 1998, Galaxy paid PFPC administration fees based on
the combined average daily net assets of the Funds and the other portfolios
offered by Galaxy at the following annual rates:
Combined Average Daily Net Assets Annual Rate
- --------------------------------- -----------
Up to $2.5 billion ...................................... 0.090%
From $2.5 to $5 billion ................................. 0.085%
Over $5 billion ......................................... 0.075%
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, PFPC received administration fees at the effective annual rate
of 0.08% of each Fund's average daily net assets. During the last three fiscal
years, PFPC received administration fees as set forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
---- ---- ----
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
Corporate Bond .................... $ 61,835 $ 71,640 $ 75,411
Under the Administration Agreement between Galaxy and PFPC (the
"Administration Agreement"), PFPC has agreed to maintain office facilities for
Galaxy, furnish Galaxy with statistical and research data, clerical, accounting,
and bookkeeping services, provide 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 approval of Galaxy's
Board of Trustees.
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<PAGE>
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 Short-Term Bond and Corporate Bond 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 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.
PFPC may enter into agreements with one or more entities, including
affiliates of Fleet, pursuant to which such entities agree to perform certain
sub-accounting and administrative functions ("Sub-Account Services") on a per
account basis with respect to Trust Shares of each Fund held by defined
contribution plans, including maintaining records reflecting separately with
respect to each plan participant's sub-account all purchases and redemptions of
Trust Shares and the dollar value of Trust Shares in each sub-account; crediting
to each participant's sub-account all dividends and distributions with respect
to that sub-account; and transmitting to each participant a periodic statement
regarding the sub-account as well as any proxy materials, reports
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<PAGE>
and other material Fund communications. Such entities are compensated by PFPC
for the Sub-Account Services and in connection therewith the transfer agency
fees payable by Trust Shares of the Funds to PFPC have been increased by an
amount equal to these fees. In substance, therefore, the holders of Trust Shares
of these Funds indirectly bear these fees.
Fleet Bank, an affiliate of Fleet, is paid a fee for Sub-Account Services
performed with respect to Trust Shares of the Funds held by defined contribution
plans. Pursuant to an agreement between Fleet Bank and PFPC, Fleet Bank will be
paid $21.00 per year for each defined contribution plan participant sub-account.
For the fiscal year ended October 31, 1999, Fleet Bank received $431,312 from
the Funds for Sub-Account Services. PFPC bears this expense directly, and
shareholders of Trust Shares of the Funds bear this expense indirectly through
fees paid to PFPC for transfer agency services.
EXPENSES
Fleet 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
Debt securities purchased or sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. In purchasing or selling securities for the Funds,
Fleet will seek to obtain the best net price and the most favorable execution of
orders. To the extent that the execution and price offered by more than one
broker/dealer are comparable, Fleet may effect transactions in portfolio
securities with broker/dealers who provide research, advice or other services
such as market investment literature.
Except as permitted by the SEC or applicable law, the Funds will not
acquire portfolio securities from, make savings deposits in, enter into
repurchase or reverse repurchase agreements
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<PAGE>
with, or sell securities to, Fleet, 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.
During the fiscal year ended October 31, 1999, 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; 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; the
Corporate Bond Fund held securities of Goldman Sachs Group with a value of
$247,650 and securities of Chase Manhattan with a value of $757,000; and 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. Associates Corp. of North
America, 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. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Fund, another
portfolio of Galaxy and/or another investment company or account, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which Fleet believes to be equitable to the Fund and such
other portfolio, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained or sold by such Fund. To the extent
permitted by law, Fleet may aggregate the securities to be sold or purchased for
a Fund with those to be sold or purchased for Galaxy's other Funds and
portfolios, or other investment companies or accounts in order to obtain best
execution.
SHAREHOLDER SERVICES PLAN
Galaxy has adopted a Shareholder Services Plan (the "Services 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 administrative and 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 Services Plan provides that Galaxy will pay fees for such services
at an annual rate of up to .30% 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
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<PAGE>
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 Services 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
Services Plan only with respect to Retail A Shares of the Short-Term Bond,
Intermediate Government Income and High Quality Bond Funds, and to limit the
payment under these servicing agreements for each Fund to an aggregate fee of
not more than .15% (on an annualized basis) 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 an institution ("Service
Organization") relating to the Services 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 (net of expense reimbursements) with respect to Retail A Shares as
shown in the table below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
---- ---- ----
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
(1) For the fiscal year ended October 31, 1999, Fleet and its affiliates
reimbursed fees of $6,771 with respect to the High Quality Bond Fund.
Galaxy's servicing agreements are governed by the Services Plan that has
been adopted by Galaxy's Board of Trustees in connection with the offering of
Retail A Shares of each Fund. Pursuant to the Services 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 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.
DISTRIBUTION AND SERVICES PLAN
Galaxy has adopted a Distribution and Services Plan pursuant to Rule 12b-1
under the 1940 Act (the "Rule") with respect to Retail B Shares of the
Short-Term Bond, Intermediate Government Income and High Quality Bond Funds (the
"12b-1 Plan"). Under the 12b-1 Plan, Galaxy may pay (a) PDI or another person
for expenses and activities intended to result in the sale of Retail B Shares,
including the payment of commissions to broker-dealers and other industry
professionals who sell Retail B Shares and the direct or indirect cost of
financing such payments, (b) institutions for shareholder liaison services,
which means personal services for holders of Retail B Shares and/or the
maintenance of shareholder accounts, such as responding to customer inquiries
and providing information on accounts, and (c) institutions for administrative
support services, which include but are not limited to (i) transfer agent and
sub-transfer agent services for beneficial owners of Retail B Shares; (ii)
aggregating and processing purchase and redemption orders; (iii) providing
beneficial owners with statements showing their positions in Retail B Shares;
(iv) processing dividend payments; (v) providing sub-accounting services for
Retail B Shares held beneficially; (vi) forwarding shareholder communications,
such as proxies, shareholder reports, dividend and tax notices, and updating
prospectuses to beneficial owners; and (vii) receiving, translating and
transmitting proxies executed by beneficial owners.
Under the 12b-1 Plan, payments by Galaxy (i) for distribution expenses may
not exceed the annualized rate of .65% of the average daily net assets
attributable to each such Fund's outstanding Retail B Shares, and (ii) to an
institution for shareholder liaison services and/or administrative support
services may not exceed the annual rates of .15% and .15%, respectively, of the
average daily net assets attributable to each such Fund's outstanding Retail B
Shares which are owned of record or beneficially by that institution's customers
for whom the institution is the dealer of record or shareholder of record or
with whom it has a servicing relationship. As of the date of this Statement of
Additional Information, Galaxy intends to limit each Fund's payments for
shareholder liaison and administrative support services under the 12b-1 Plan to
an aggregate fee of not more than .15% (on an annualized basis) of the average
daily net asset value of Retail B Shares owned of record or beneficially by
customers of institutions.
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<PAGE>
Payments for distribution expenses under the 12b-1 Plan are subject to the
Rule. The Rule defines distribution expenses to include the cost of "any
activity which is primarily intended to result in the sale of shares issued by"
Galaxy. The Rule provides, among other things, that an investment company may
bear such expenses only pursuant to a plan adopted in accordance with the Rule.
In accordance with the Rule, the 12b-1 Plan provides that a report of the
amounts expended under the 12b-1 Plan, and the purposes for which such
expenditures were incurred, will be made to the Board of Trustees for its review
at least quarterly. The 12b-1 Plan provides that it may not be amended to
increase materially the costs which Retail B Shares of a Fund may bear for
distribution pursuant to the 12b-1 Plan without shareholder approval, and that
any other type of material amendment must be approved by a majority of the Board
of Trustees, and by a majority of the trustees who are neither "interested
persons" (as defined in the 1940 Act) of Galaxy nor have any direct or indirect
financial interest in the operation of the 12b-1 Plan or in any related
agreements (the "12b-1 Trustees"), by vote cast in person at a meeting called
for the purpose of considering such amendments.
During the last three fiscal years, Retail B Shares of the Funds paid the
following distribution fees under the 12b-1 Plan:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
---- ---- ----
Short-Term Bond ...................... $ 5,699 $ 6,185 $ 3,443
Intermediate Government Income ....... $ 3,865 $ * $ *
High Quality Bond .................... $43,211 $22,171 $ 7,645
* Retail B Shares were not offered during the period.
During the last three fiscal years, Retail B Shares of the Funds paid the
following shareholder servicing fees (net of expense reimbursements) under the
12b-1 Plan:
For the Fiscal Year Ended October 31:
Fund 1999(1) 1998 1997
- ---- ------- ---- ----
Short-Term Bond ...................... $ 415 $1,427 $ 788
Intermediate Government Income ....... $ -- $ * $ *
High Quality Bond .................... $3,218 $5,116 $1,729
* Retail B Shares were not offered during the period.
(1) For the fiscal year ended October 31, 1999, Fleet and its affiliates
reimbursed shareholder servicing fees of $786 for the Short-Term Bond
Fund, $875 for the Intermediate Government Income Fund and $5,766 for the
High Quality Bond Fund.
All amounts paid under the 12b-1 Plan for these periods were attributable to
payments to broker-dealers.
Galaxy's Board of Trustees has concluded that there is a reasonable
likelihood that the 12b-1 Plan will benefit the Funds and holders of Retail B
Shares. The 12b-1 Plan is subject to annual reapproval by a majority of the
12b-1 Trustees and is terminable at any time with respect
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<PAGE>
to any Fund by a vote of a majority of the 12b-1 Trustees or by vote of the
holders of a majority of the Retail B Shares of the Fund involved. Any agreement
entered into pursuant to the 12b-1 Plan with a Service Organization is
terminable with respect to any Fund without penalty, at any time, by vote of a
majority of the 12b-1 Trustees, by vote of the holders of a majority of the
Retail B Shares of such Fund, by PDI or by the Service Organization. An
agreement will also terminate automatically in the event of its assignment.
As long as the 12b-1 Plan is in effect, the nomination of the trustees who
are not interested persons of Galaxy (as defined in the 1940 Act) must be
committed to the discretion of the 12b-1 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, Pennsylvania 19428-2961. Jane Haegele is the sole shareholder of
PDI.
Unless otherwise terminated, the Distribution Agreement between Galaxy and
PDI remains in effect until November 30, 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.
PDI is entitled to the payment of a front-end sales charge on the sale of
Retail A Shares of the Short-Term Bond, Intermediate Government Income and High
Quality Bond Funds as described in the applicable Prospectus and this Statement
of Additional Information.
Prior to December 1, 1999, First Data Distributors, Inc. ("FD
Distributors"), a wholly-owned subsidiary of PFPC, served as Galaxy's
distributor and was entitled to the payment of the front-end sales charges on
the sale of Retail A Shares of the Short-Term Bond, Intermediate Government
Income and High Quality Bond Funds. During the last three fiscal years, FD
Distributors received front-end sales charges in connection with Retail A Share
purchases as follows:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
Short-Term Bond ...................... $17,651 $32,006 $15,074
Intermediate Government Income ....... $56,921 $46,625 $28,979
High Quality Bond .................... $84,657 $95,494 $43,211
FD Distributors retained none of the amounts shown in the table above.
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<PAGE>
PDI is also entitled to the payment of contingent deferred sales charges
upon the redemption of Retail B Shares of the Funds. Prior to December 1, 1999,
FD Distributors was entitled to the payment of such contingent deferred sales
charges. During the last three fiscal years, FD Distributors received contingent
deferred sales charges in connection with Retail B Share redemptions as follows:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
Short-Term Bond ...................... $ 7,495 $ 2,849 $ 3,662
Intermediate Government Income ....... $ 2,953 * *
High Quality Bond .................... $47,278 $ 9,250 $ 5,970
- ----------
* Retail B Shares were not offered during the period.
FD Distributors retained none of the amounts shown in the table above.
The following table shows all sales charges, commissions and other
compensation received by FD Distributors directly or indirectly from the Funds
during the fiscal year ended October 31, 1999:
<TABLE>
<CAPTION>
Brokerage
Net Commissions in
Underwriting Compensation on Connection
Discounts and Redemption and with Fund Other
Fund Commissions(1) Repurchase(2) Transactions Compensation(3)
- ---- -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Short-Term
Bond ............. $ 25,146 $ 7,495 $ 0 $ 44,710
Intermediate
Government
Income ........... $ 59,874 $ 2,953 $ 0 $ 91,593
High Quality
Bond ............. $131,935 $ 47,278 $ 0 $111,490
Corporate Bond ..... N/A N/A $ 0 N/A
</TABLE>
- ----------
(1) Represents amounts received from front-end sales charges on Retail A
Shares and commissions received in connection with sales of Retail B
Shares.
(2) Represents amounts received from contingent deferred sales charges on
Retail B Shares. The basis on which such sales charges are paid is
described in the Prospectus relating to Retail B Shares. All such amounts
were paid to affiliates of Fleet.
(3) Represents payments made under the Shareholder Services Plan and
Distribution and Services Plan during the fiscal year ended October 31,
1999, which includes fees accrued in the fiscal year ended October 31,
1998 which were paid in 1999 (see "Shareholder Services Plan" and
"Distribution and Services Plan" above).
- 54 -
<PAGE>
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 Prospectuses and the
financial statements for the Funds contained in Galaxy's Annual Report to
Shareholders with respect to the Funds (the "Annual Report") 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 Prospectuses and the financial
statements for such years and periods contained in the Annual Report were
audited by PricewaterhouseCoopers LLP, Galaxy's former auditors.
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III, Secretary of
Galaxy, is a partner), One Logan Square, 18th & Cherry Streets, Philadelphia,
Pennsylvania 19103, are counsel to Galaxy and will pass upon certain legal
matters on its behalf.
PERFORMANCE AND YIELD INFORMATION
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:
YIELD = 2[(a-b)/cd+1)^6 - 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
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<PAGE>
d = maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on debt obligations held by a Fund is calculated by computing the yield
to maturity of each obligation based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by the Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be called
or, if none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market value of such debt obligations. Expenses accrued
for the period (variable "b" in the formula) include all recurring fees charged
by a Fund to all shareholder accounts 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).
Interest earned on tax-exempt obligations that are issued without original
issue discount and have a current market discount is calculated by using the
coupon rate of interest instead of the yield to maturity. In the case of
tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have discounts based on current market value that are
less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
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.
Based on the foregoing calculation, the standard yields for Retail A
Shares, Retail B Shares and Trust Shares (as applicable) of the Funds for the
30-day period ended October 31, 1999 were as set forth below:
- 56 -
<PAGE>
Fund Retail A Retail B Trust
- ---- -------- -------- -----
Short-Term Bond ...................... 4.96% 4.34% 5.31%
Intermediate Government Income ....... 5.38% 4.82% 5.76%
High Quality Bond .................... 5.41% 5.00% 5.76%
Corporate Bond ....................... * * 5.85%
- ----------
* The Corporate Bond Fund does not offer Retail A Shares or Retail B Shares.
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:
T = [(ERV/P)-1]^1/n
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. In addition, the Funds' Retail Shares average annual total
return and aggregate total return quotations will reflect the deduction of the
- 57 -
<PAGE>
maximum sales load charged in connection with purchases of Retail A Shares or
redemptions of Retail B Shares, as the case may be.
The aggregate total returns for Retail A Shares, Retail B Shares and Trust
Shares (as applicable) of the Funds from the date of initial public offering to
October 31, 1999 are set forth below:
Fund Retail A Retail B Trust
- ---- -------- -------- -----
Short-Term Bond ................. 41.64%(1) 13.35%(2) 48.88%(1)
Intermediate Government Income .. 100.46%(3) -6.47%(4) 110.38%(3)
High Quality Bond ............... 77.62%(5) 13.62%(2) 86.02%(5)
Corporate Bond .................. * * 38.96%(6)
- ----------
* The Corporate Bond Fund does not offer Retail A Shares or Retail B Shares.
(1) For the period from December 30, 1991 (initial public offering date)
through October 31, 1999.
(2) For the period from March 4, 1996 (initial public offering date) through
October 31, 1999.
(3) For the period from September 1, 1988 (initial public offering date)
through October 31, 1999.
(4) For the period November 1, 1998 (initial public offering date) through
October 31, 1999.
(5) For the period from December 14, 1990 (initial public offering date)
through October 31, 1999.
(6) For the period from December 12, 1994 (initial public offering date)
through October 31, 1999.
The average annual total returns for Retail A Shares, Retail B Shares and
Trust Shares (as applicable) of the Funds for the one-year, five-year and
ten-year periods (as applicable) are as set forth below:
<TABLE>
<CAPTION>
Retail A Retail B Trust
-------- -------- -----
One- Five- Ten- One- Five- Ten- One- Five- Ten-
Fund Year Year Year Year Year Year Year Year Year
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-Term Bond .... -1.38% 4.85% N/A -3.17% N/A N/A 2.67% 5.89% N/A
Intermediate
Government Income... -4.83% 5.45% 5.76% -6.47% N/A N/A -0.86% 6.56% 6.27%
High Quality Bond -6.34% 6.68% N/A -7.82% N/A N/A -2.52% 7.66% N/A
Corporate Bond ..... * * * * * -0.82% N/A N/A
</TABLE>
- ----------
* The Corporate Bond Fund does not offer Retail A Shares or Retail B Shares.
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.
- 58 -
<PAGE>
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. Performance data will be
calculated separately for Trust Shares, Retail A Shares, Retail B Shares, Prime
A Shares, Prime B Shares and BKB Shares of the Funds.
The standard yield is computed as described above. 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.
The Funds may also advertise their performance using "average annual total
return" figures over various periods of time. Such total return figures reflect
the average percentage change in the value of an investment in a Fund from the
beginning date of the measuring period to the end of the measuring period and
are calculated as described above. Average total return figures will be given
for the most recent one-, five- and ten-year periods (if applicable), and may be
given for other periods as well, such as from the commencement of a Fund's
operations, or on a year-by-year basis. Each Fund may also use "aggregate total
return" figures for various periods, representing the cumulative change in the
value of an investment in a Fund for the specified period. Both methods of
calculating total return reflect the maximum front-end sales load for Retail A
Shares of the Funds and the applicable contingent deferred sales charge for
Retail B Shares of the Funds and assume that dividends and capital gain
distributions made by a Fund during the period are reinvested in Fund shares.
The Funds may also advertise total return data without reflecting the
sales charges imposed on the purchase of Retail A Shares or the redemption of
Retail B Shares in accordance with the rules of the SEC. Quotations that do not
reflect the sales charges will be higher than quotations that do reflect the
sales charges.
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
- 59 -
<PAGE>
capital markets; investment strategies and techniques; investment products; and
tax, retirement and investment planning.
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
- 60 -
<PAGE>
Street, Rochester, NY 14638-0001 (13.16%); Gales & Co., Fleet Investment
Services, Mutual Funds Unit - NY/RO/T04A, 159 East Main Street, 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
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<PAGE>
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 (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
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<PAGE>
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, 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%);
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<PAGE>
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 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,
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<PAGE>
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%); 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
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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, 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
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<PAGE>
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%).
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 Report 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 Report 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 Report and is incorporated herein by
reference. The financial statements in such Annual Report 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 financial statements and
Financial Highlights included in the Annual Report for the Funds for prior
periods were audited by PricewaterhouseCoopers LLP, Galaxy's former independent
auditors. The report of PricewaterhouseCoopers LLP dated December 23, 1998 on
the Funds' financial statements included in the Funds' Annual Rrport 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
A-1
<PAGE>
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.
A-2
<PAGE>
"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
A-3
<PAGE>
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.
A-4
<PAGE>
"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
A-5
<PAGE>
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.
A-6
<PAGE>
"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.
A-7
<PAGE>
"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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<PAGE>
"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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<PAGE>
"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.
A-10
<PAGE>
APPENDIX B
As stated above, the 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 by a Fund
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase
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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 the adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
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.
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
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<PAGE>
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 the adviser believes that, because of an anticipated
fall in interest rates, the price will have risen to 105 (and the yield will
have dropped to about 9 1/2%) in four months. The Fund might enter into futures
contracts purchases of Treasury bonds for an equivalent price of 98. At the same
time, the Fund would assign a pool of investments in short-term securities that
are either maturing in four months or earmarked for sale in four months, for
purchase of the long-term bond at an assumed market price of 100. Assume these
short-term securities are yielding 15%. If the market price of the long-term
bond does indeed rise from 100 to 105, the equivalent futures market price for
Treasury bonds might also rise from 98 to 103. In that case, the 5 point
increase in the price that the Fund pays for the long-term bond would be offset
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. Margin Payments
Unlike purchases or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with Galaxy's custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the
B-3
<PAGE>
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying instruments
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as marking-to-the-market. For example, when a
particular Fund has purchased a futures contract and the price of the contract
has risen in response to a rise in the underlying instruments, that position
will have increased in value and the Fund will be entitled to receive from the
broker a variation margin payment equal to that increase in value. Conversely,
where the Fund has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Fund would be required to make a
variation margin payment to 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.
III. 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-4
<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 exchanges which limit the amount of fluctuation in a
futures contract price during a single
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<PAGE>
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-6
<PAGE>
The Galaxy Fund
Statement of Additional Information
February 29, 2000
Galaxy Tax-Exempt Bond Fund
Retail A Shares, Retail B Shares and
Trust Shares
Galaxy New Jersey Municipal Bond Fund
Galaxy New York Municipal Bond Fund
Galaxy Connecticut Municipal Bond Fund
Galaxy Massachusetts Municipal Bond Fund
Galaxy Rhode Island Municipal Bond Fund
Retail A Shares and Trust Shares
This Statement of Additional Information is not a prospectus. It relates
to the prospectuses for the Funds as listed below, as they may be supplemented
or revised from time to time (the "Prospectuses"). The Prospectuses, as well as
the Funds' Annual Report to Shareholders dated October 31, 1999 (the "Annual
Report"), 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)
Current Prospectuses
o Prospectus for Retail A Shares of the Funds and Retail B Shares of the
Tax-Exempt Bond Fund dated February 29, 2000
o Prospectus for Trust Shares of the Funds dated February 29, 2000
The financial statements included in the Annual Report 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 Report 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.
<PAGE>
TABLE OF CONTENTS
Page
GENERAL INFORMATION..........................................................1
DESCRIPTION OF GALAXY AND ITS SHARES.........................................1
INVESTMENT STRATEGIES, POLICIES AND RISKS....................................4
Tax-Exempt Bond Fund...................................................4
New Jersey Municipal Bond Fund.........................................5
New York Municipal Bond Fund...........................................5
Connecticut Municipal Bond Fund........................................5
Massachusetts Municipal Bond Fund......................................6
Rhode Island Municipal Bond Fund.......................................7
Special Considerations and Risks.......................................8
Investment Quality.....................................................8
General Risk Consideration.............................................8
Other Investment Policies and Risk Considerations......................9
Variable and Floating Rate Obligations.................................9
U.S. Government Obligations and Money Market Instruments..............10
Municipal Securities..................................................11
Stand-by Commitments..................................................13
Private Activity Bonds................................................13
Repurchase and Reverse Repurchase Agreements..........................14
Securities Lending....................................................15
Investment Company Securities.........................................15
Custodial Receipts and Certificates of Participation..................16
Derivative Securities.................................................16
When-Issued, Forward Commitment and Delayed Settlement Transactions...18
Asset-Backed Securities...............................................18
Mortgage-Backed Securities............................................19
Guaranteed Investment Contracts.......................................20
Bank Investment Contracts.............................................20
Special Considerations Relating to New Jersey Municipal Securities....21
Special Considerations Relating to New York Municipal Securities......24
Special Considerations Relating to Connecticut Municipal Securities...34
Portfolio Turnover....................................................37
INVESTMENT LIMITATIONS......................................................38
VALUATION OF PORTFOLIO SECURITIES...........................................40
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................40
Purchases Of Retail A Shares And Retail B Shares......................41
General...............................................................41
Customers of Institutions.............................................41
Applicable Sales Charge -- Retail A Shares............................42
Computation of Offering Price - Retail A Shares.......................43
Quantity Discounts....................................................44
Applicable Sales Charge - Retail B Shares.............................47
Characteristics of Retail A Shares and Retail B Shares................48
Factors to Consider When Selecting Retail A Shares or Retail B Shares.49
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TABLE OF CONTENTS
(continued)
Page
Purchases of Trust Shares.............................................50
Other Purchase Information............................................50
Redemption of Retail A Shares, Retail B Shares and Trust Shares.......50
INVESTOR PROGRAMS - RETAIL A SHARES AND RETAIL B SHARES.....................51
Exchange Privilege....................................................51
Automatic Investment Program and Systematic Withdrawal Plan...........52
Payroll Deduction Program.............................................52
College Investment Program............................................53
Direct Deposit Program................................................53
TAXES ......................................................................53
State and Local.......................................................54
Miscellaneous.........................................................57
TRUSTEES AND OFFICERS.......................................................57
Shareholder and Trustee Liability.....................................61
INVESTMENT ADVISER..........................................................62
ADMINISTRATOR...............................................................64
CUSTODIAN AND TRANSFER AGENT................................................65
EXPENSES....................................................................66
PORTFOLIO TRANSACTIONS......................................................66
SHAREHOLDER SERVICES PLAN...................................................67
DISTRIBUTION AND SERVICES PLAN..............................................69
DISTRIBUTOR.................................................................70
AUDITORS....................................................................72
COUNSEL.....................................................................73
PERFORMANCE AND YIELD INFORMATION...........................................73
Tax Equivalency Tables - New Jersey Municipal Bond and New York
Municipal Bond Funds..................................................77
Tax Equivalency Tables - Connecticut Municipal Bond, Massachusetts
Municipal Bond and Rhode Island Municipal Bond Funds..................80
Performance Reporting.......................................................83
MISCELLANEOUS...............................................................84
FINANCIAL STATEMENTS........................................................91
APPENDIX A.................................................................A-1
APPENDIX B.................................................................B-1
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<PAGE>
GENERAL INFORMATION
This Statement of Additional Information should be read in conjunction
with a current Prospectus. This Statement of Additional Information relates to
the Prospectuses for Trust Shares and Retail A Shares of the six Funds listed on
the cover page and Retail B Shares of the Tax-Exempt Bond Fund. The Tax-Exempt
Bond Fund also offers Prime A Shares and Prime B Shares, which are described in
a separate statement of additional information and related prospectus. The Rhode
Island Municipal Bond Fund also offers BKB Shares, which are described in a
separate prospectus and statement of additional information. As of the date of
this Statement of Additional Information, Trust Shares of the Rhode Island
Municipal Bond Fund were not being offered to investors. This Statement of
Additional Information is incorporated by reference in its entirety into the
Prospectuses. No investment in shares of the Funds should be made without
reading a Prospectus.
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.
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 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 had
not commenced investment operations.
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
<PAGE>
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 M - Series 1 shares (Trust Shares), Class M -
Series 2 shares (Retail A Shares), Class M - Series 3 shares (Retail B Shares),
Class M - Series 4 shares (Prime A Shares) and Class M - Series 5 shares (Prime
B Shares), each series representing interests in the Tax-Exempt Bond Fund; Class
O - Series 1 shares (Trust Shares) and Class O - Series 2 shares (Retail A
Shares), each series representing interests in the New York Municipal Bond Fund;
Class P - Series 1 shares (Trust Shares) and Class P - Series 2 shares (Retail A
Shares), each series representing interests in the Connecticut Municipal Bond
Fund; Class Q - Series 1 shares (Trust Shares) and Class Q - Series 2 shares
(Retail A Shares), each series representing interests in the Massachusetts
Municipal Bond Fund; Class R - Series 1 shares (Trust Shares), Class R - Series
2 shares (Retail A Shares) and Class R - Series 3 shares (BKB Shares), each
series representing interests in the Rhode Island Municipal Bond Fund; and Class
Y - Series 1 shares (Trust Shares) and Class Y - Series 2 shares (Retail A
Shares), each series representing interests in the New Jersey Municipal Bond
Fund. The Tax-Exempt Bond Fund is classified as a diversified company and the
New Jersey Municipal Bond, New York Municipal Bond, Connecticut Municipal Bond,
Massachusetts Municipal Bond and Rhode Island Municipal Bond Funds are
classified as non-diversified companies under the Investment Company Act of
1940, as amended (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 Prospectuses, shares will be fully paid and
non-assessable. Each series of shares in a Fund (i.e., Retail A Shares, Retail B
Shares, Trust Shares, Prime A Shares, Prime B Shares and BKB Shares) bear pro
rata the same expenses and are entitled equally to the 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 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) and holders of Retail B Shares
will bear the expenses of the Distribution and Services Plan for Retail B
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 Plan" and Distribution and Services Plan" 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
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<PAGE>
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 Retail A Shares and Trust 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 Retail A Shares and Trust Shares and only
Retail B Shares of a Fund will be entitled to vote on matters submitted to a
vote of shareholders pertaining to Galaxy's Distribution and Services Plan for
Retail B Shares). Further, shareholders of all of the Funds, as well as those of
any other investment portfolio now or hereafter offered by Galaxy, will vote
together in the aggregate and not separately on a Fund-by-Fund basis, except as
otherwise required by law or when permitted by the Board of Trustees. Rule 18f-2
under the 1940 Act provides that any matter required to be submitted to the
holders of the outstanding voting securities of an investment company such as
Galaxy shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each Fund affected by
the matter. A particular Fund is deemed to be affected by a matter unless it is
clear that the interests of each Fund in the matter are substantially identical
or that the matter does not affect any interest of the Fund. Under the Rule, the
approval of an investment advisory agreement or any change in 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
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<PAGE>
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 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,
will use its 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 Prospectuses may not be changed without the approval of the
holders of a majority of its outstanding shares (as defined under
"Miscellaneous"). Except as noted herein under "Tax-Exempt Bond Fund," "New
Jersey Municipal Bond Fund," "New York Municipal Bond Fund," "Connecticut
Municipal Bond Fund," "Massachusetts Municipal Bond Fund" and "Rhode Island
Municipal Bond Fund" and 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 following investment strategies, policies and risks supplement
those set forth in the Funds' Prospectuses.
Tax-Exempt Bond Fund
As a matter of fundamental policy that cannot be changed without the
requisite consent of the Tax-Exempt Bond Fund's shareholders, the Fund will
invest, except during temporary defensive periods, at least 80% of its total
assets in debt obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia and their respective
authorities, agencies, instrumentalities and political subdivisions, the
interest on which, in the opinion of bond counsel or counsel to the issuer, is
exempt from regular federal income tax ("Municipal Securities"), primarily bonds
(at least 65% under normal market conditions).
See "Special Considerations and Risks" and "Other Investment Policies and
Risk Considerations" below for information regarding additional investment
policies of the Tax-Exempt Bond Fund.
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<PAGE>
New Jersey Municipal Bond Fund
As a matter of fundamental policy that cannot be changed without the
requisite consent of the Fund's shareholders, the New Jersey Municipal Bond Fund
will invest, except during temporary defensive periods, at least 80% of its
total assets in Municipal Securities. The Fund expects that except during
temporary defensive periods or when, in Fleet's opinion, suitable obligations
are unavailable for investment, at least 65% of the Fund's total assets will be
invested in Municipal Securities issued by or on behalf of the State of New
Jersey, 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 New Jersey personal income taxes ("New Jersey Municipal
Securities"). See "Other Investment Policies and Risk Considerations - Special
Considerations Relating to New Jersey Municipal Securities" below for a
discussion of certain risks in investing in New Jersey Municipal Securities.
Dividends derived from interest on Municipal Securities other than New Jersey
Municipal Securities will generally be exempt from regular federal income tax
but may be subject to New Jersey personal income tax. See "Taxes" below.
See "Special Considerations and Risks" and "Other Investment Policies and
Risk Considerations" below for information regarding additional investment
policies of the New Jersey Municipal Bond Fund.
New York Municipal Bond Fund
As a matter of fundamental policy that cannot be changed without the
requisite consent of the Fund's shareholders, the New York 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 New York, 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, New York State and New
York City personal income taxes ("New York Municipal Securities"). See "Other
Investment Policies and Risk Considerations - Special Considerations Relating to
New York Municipal Securities" below for a discussion of certain risks in
investing in New York Municipal Securities. Dividends derived from interest on
Municipal Securities other than New York Municipal Securities will generally be
exempt from regular federal income tax but may be subject to New York State and
New York City personal income tax. See "Taxes" below.
See "Special Considerations and Risks" and "Other Investment Policies and
Risk Considerations" below for information regarding additional investment
policies of the New York Municipal Bond Fund.
Connecticut Municipal Bond Fund
As a matter of fundamental policy that cannot be changed without the
requisite consent of the Fund's shareholders, the Connecticut Municipal Bond
Fund will invest, except during
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<PAGE>
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 Connecticut, its political sub-divisions, or any public
instrumentality, state or local authority, district or similar public entity
created under the laws of Connecticut and certain other governmental issuers
such as Puerto Rico, the interest on which is, in the opinion of qualified legal
counsel, exempt from federal income tax and from Connecticut personal income tax
by virtue of federal law ("Connecticut Municipal Securities"). See "Other
Investment Policies and Risk Considerations - Special Considerations Relating to
Connecticut Municipal Securities" below, for a discussion of certain risks in
investing in Connecticut Municipal Securities. Dividends derived from interest
on Municipal Securities other than Connecticut Municipal Securities will
generally be exempt from regular federal income tax but may be subject to
Connecticut personal income tax. See "Taxes" below.
See "Special Considerations and Risks" and "Other Investment Policies and
Risk Considerations" below for information regarding additional investment
policies of the Connecticut Municipal Bond Fund.
Massachusetts Municipal Bond Fund
As a matter of fundamental policy that cannot be changed without the
requisite consent of the Fund's shareholders, the Massachusetts 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 Commonwealth of Massachusetts, 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
Massachusetts personal income taxes ("Massachusetts Municipal Securities").
Dividends derived from interest on Municipal Securities other than Massachusetts
Municipal Securities will generally be exempt from regular federal income tax
but may be subject to Massachusetts personal income tax. See "Taxes" below.
The Fund's ability to achieve its investment objective depends on the
ability of issuers of Massachusetts Municipal Securities to meet their
continuing obligations to pay principal and interest. Since the Fund invests
primarily in Massachusetts Municipal Securities, the value of the Fund's shares
may be especially affected by factors pertaining to the economy of Massachusetts
and other factors specifically affecting the ability of issuers of Massachusetts
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 Massachusetts and its political subdivisions to meet their obligations will
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 Massachusetts Municipal
Securities may be affected from time to time by economic, political and
demographic conditions within Massachusetts. 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
Massachusetts 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
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<PAGE>
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 Massachusetts or a particular locality. Any reduction in the
actual or perceived ability of an issuer of Massachusetts 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 values of other Massachusetts
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 Massachusetts Municipal Bond Fund.
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
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.
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<PAGE>
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.
Special Considerations and Risks
Investment Quality
Municipal Securities purchased by the Funds will consist primarily of
issues which are rated at the time of purchase within the four highest rating
categories assigned by Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's") or unrated instruments determined by Fleet
to be of comparable quality. Municipal Securities rated within the four highest
rating categories assigned by S&P ("AAA," "AA," "A" and "BBB") or Moody's
("Aaa," "Aa," "A" and "Baa") are considered to be investment grade. Municipal
Securities rated in the lowest of the four highest rating categories assigned by
S&P or Moody's are considered to have speculative characteristics, even though
they are of investment grade quality, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade Municipal
Securities. Such Municipal Securities will be purchased (and retained) only when
Fleet believes the issuers have an adequate capacity to pay interest and repay
principal. If the ratings of a particular Municipal Security purchased by a Fund
are subsequently downgraded below the four highest ratings categories assigned
by S&P or Moody's, such factor will be considered by Fleet in its evaluation of
the overall merits of that Municipal Security, but such ratings will not
necessarily result in an automatic sale of the Municipal Security unless the
Municipal Security, together with any other securities held by the Fund that are
rated below investment grade, exceed 5% of the Fund's net assets. Under normal
market and economic conditions, at least 65% of each Fund's total assets will be
invested in Municipal Securities rated in the three highest rating categories
assigned by S&P or Moody's. See Appendix A to this Statement of Additional
Information for a description of S&P's and Moody's rating categories.
General Risk Consideration
Generally, the market value of fixed income securities, such as Municipal
Securities, in the Funds 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 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.
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<PAGE>
Although no Fund presently intends to do so on a regular basis, each 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 a 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 New Jersey Municipal Bond, New York Municipal Bond, Connecticut
Municipal Bond, Massachusetts Municipal Bond and Rhode Island Municipal Bond
Funds are classified as non-diversified companies 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 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 Prospectuses 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.
Variable and Floating Rate Obligations
The Funds may purchase variable and floating rate instruments. If such an
instrument is not rated, Fleet must determine that such instrument is comparable
to rated instruments eligible for purchase by a Fund 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 an instrument will
usually be deemed to have a maturity equal to the longer of the period remaining
until the next regularly scheduled interest rate adjustment or the time the Fund
involved can receive payment of principal as specified in the instrument.
Instruments which are U.S. Government obligations and certain variable rate
instruments having a nominal maturity of 397 days or less when purchased by the
Fund involved, however, will be deemed to have a maturity equal to the period
remaining until the next interest rate adjustment.
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<PAGE>
U.S. Government Obligations and Money Market Instruments
The Funds may, in accordance with their investment policies, invest from
time to time in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and in 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 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.
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. 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. Investments by the Funds in
non-negotiable time deposits are limited to no more than 5% of each Fund's total
assets at the time of purchase.
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.
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<PAGE>
Investments in obligations of foreign branches of U.S. banks and of 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 other foreign governmental restrictions which might adversely affect
the payment of principal and interest on such obligations. In addition, foreign
branches of U.S. banks and U.S. 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. The Funds will invest in the obligations of U.S. branches of foreign
banks or foreign branches of U.S. banks only when Fleet believes that the credit
risk with respect to the instrument is minimal.
Commercial paper may include variable and floating rate instruments which
are unsecured instruments that permit the indebtedness thereunder to vary.
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 there 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 that 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.
Municipal Securities
Municipal Securities acquired by the 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 classifications 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.
Each Fund's portfolio 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
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restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
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 nationally recognized
statistical rating organization ("NRSRO"), such as Moody's and S&P, represent
such NRSRO's opinion 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, 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.
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. 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 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, tax-exempt 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 for each Fund. See "Private
Activity Bonds" below.
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 Funds and the liquidity and value of their
respective
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portfolios. In such an event, each Fund would re-evaluate its investment
objective and policies and consider possible changes in its 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.
Variable and Floating Rate Municipal Securities. Municipal Securities
purchased by the Funds may include rated and unrated variable and floating rate
tax-exempt instruments. There may be no active secondary market with respect to
a particular variable or floating rate instrument. Nevertheless, the periodic
readjustments of their interest rates tend to assure that their value to a Fund
will approximate their par value. Illiquid variable and floating rate
instruments (instruments which are not payable upon seven days' notice and do
not have an active trading market) that are acquired by the Funds are subject to
the 10% (15% with respect to the New Jersey Municipal Bond Fund) limit described
in Investment Limitation No. 3 under "Investment Limitations" below.
Stand-by Commitments
Each Fund may acquire "stand-by commitments" with respect to Municipal
Securities held by it. 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 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.
Stand-by commitments are exercisable by a Fund at any time before the
maturity of the underlying Municipal Security, and may be sold, transferred or
assigned by the Fund only with respect to the underlying instruments. 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
Each Fund 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
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investments in Municipal Securities for purposes of the 80% requirement
mentioned above and, under normal conditions, will not exceed 20% of a 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. 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.
Repurchase and Reverse Repurchase Agreements
Each 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 . No Fund will enter into repurchase agreements with Fleet
or any of its 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 the 10% (15% with respect to the New Jersey Municipal Bond
Fund) limit described in Investment Limitation No. 3 under "Investment
Limitations" below.
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.
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 repurchase agreements 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.
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Each Fund may also 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. A Fund 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.
Securities Lending
Each Fund 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 a Fund would be invested in high quality,
short-term money market instruments. Loans will generally be short-term, will be
made only to borrowers deemed by Fleet to be of good standing and only when, in
Fleet'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
The Funds 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 Bond 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. 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. 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 Fund, other
investment portfolios of Galaxy, or any other investment companies advised by
Fleet.
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Custodial Receipts and Certificates of Participation
Securities acquired by the Funds 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 Funds 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 a 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 Funds may invest pursuant to guidelines approved by Galaxy's Board of
Trustees. For certain certificates of participation, a 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,
each 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).
Derivative Securities
The 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 rates, or indices, and include, but are not limited
to, municipal bond index and interest rate futures and certain asset-backed and
mortgage-backed securities.
Derivative securities present, to varying degrees, market risk that the
performance of the underlying assets, interest 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 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 the Funds
will be unable to sell a derivative security when it wants to 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 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 will evaluate the risks presented by the derivative securities
purchased by the Funds, and will determine, in connection with its day-to-day
management of the Funds, how they will be used in furtherance of the Funds'
investment objectives. It is possible, however, that Fleet's evaluations will
prove to be inaccurate or incomplete and, even when accurate and complete, it is
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<PAGE>
possible that the Funds will, because of the risks discussed above, incur loss
as a result of their investments in derivative securities.
Futures Contracts. Each 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.
Each Fund may also enter into contracts 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 the Funds
hold or intend 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. Each Fund will limit its hedging transactions in futures contracts
so that, immediately after any such transaction, the aggregate initial margin
that is required to be posted by the 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 each 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 is 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,
a Fund 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 is contained in
Appendix B to this Statement of Additional Information.
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When-Issued, Forward Commitment and Delayed Settlement Transactions
Each Fund may purchase eligible securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. Each Fund may
also purchase or sell 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 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 security 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.
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
forward commitments, when-issued purchases and delayed settlements 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.
Asset-Backed Securities
Each Fund 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
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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. A Fund will
not invest more than 10% of its total assets in asset-backed securities.
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.
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
Each Fund 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 payments may be made
out of unscheduled
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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 the
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 that invests 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.
Guaranteed Investment Contracts
Each Fund may invest in guaranteed investment contracts ("GICs") issued by
U.S. 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%
(15% with respect to the New Jersey Municipal Bond Fund) limitation on such
investments, unless there is an active and substantial secondary market for the
particular instrument and market quotations are readily available.
Bank Investment Contracts
Each Fund 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% (15% with respect to the New Jersey Municipal Bond
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Fund) limitation on such investments, unless there is an active and substantial
secondary market for the particular instrument and market quotations are readily
available.
Special Considerations Relating to New Jersey Municipal Securities
The New Jersey Municipal Bond Fund's ability to achieve its investment
objective is dependent upon the ability of the issuers of New Jersey Municipal
Securities to meet their continuing obligations for the payment of principal and
interest. Since the Fund invests primarily in New Jersey Municipal Securities,
the value of the Fund's shares may be especially affected by factors pertaining
to the economy of New Jersey and other factors specifically affecting the
ability of issuers of New Jersey Municipal Securities to meet their obligations.
The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective
commercial agriculture, insurance, tourism, petroleum refining and
manufacturing, although New Jersey's manufacturing industry has experienced a
downward trend in the last few years. New Jersey is a major recipient of federal
assistance and, of all the states, is among the highest in the amount of federal
aid received. Therefore, a decrease in federal financial assistance may
adversely affect the financial condition of New Jersey and its political
subdivisions and instrumentalities. While New Jersey's economic base has become
more diversified over time and thus its economy appears to be less vulnerable
during recessionary periods, a recurrence of high levels of unemployment could
adversely affect New Jersey's overall economy and the ability of New Jersey and
its political subdivisions and instrumentalities to meet their financial
obligations. In addition, New Jersey maintains a balanced budget which restricts
total appropriation increases to only 5% annually with respect to any
municipality or county. This balanced budget plan may adversely affect a
particular municipality's or county's ability to repay its obligations.
The State of New Jersey and its political subdivisions, agencies and
public authorities are authorized to issue two general classes of indebtedness:
general obligation bonds and revenue bonds. Both classes of bonds may be
included in the Fund's portfolio. The repayment of principal and interest on
general obligation bonds is secured by the full faith and credit of the issuer,
backed by the issuer's taxing authority, without recourse to any special project
or source of revenue. Special obligation or revenue bonds may be repaid only
from revenues received in connection with the project for which the bonds are
issued, special excise taxes, or other special revenue sources and generally are
issued by entities without taxing power. Neither the State of New Jersey nor any
of its subdivisions is liable for the repayment of principal or interest on
revenue bonds except to the extent stated in the preceding sentences.
General obligation bonds of the State are repaid from revenues obtained
through the State's general taxing authority. An inability to increase taxes may
adversely affect the State's ability to authorize or repay debt.
Public authorities, private non-profit corporations, agencies and similar
entities of New Jersey ("Authorities") are established for a variety of
beneficial purposes, including economic development, housing and mortgage
financing, health care facilities and public transportation. The Authorities are
not operating entities of the State of New Jersey, but are separate legal
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entities that are managed independently. The State oversees the Authorities by
appointing the governing boards, designating management, and by significantly
influencing operations. The Authorities are not subject to New Jersey
constitutional restrictions on the incurrence of debt, applicable to the State
of New Jersey itself, and may issue special obligation or private activity bonds
in legislatively authorized amounts.
An absence or reduction of revenue will affect a bond-issuing Authority's
ability to repay debt on special obligation bonds and no assurance can be given
that sufficient revenues will be obtained to make such payments, although in
some instances repayment may be guaranteed or otherwise secured.
Various Authorities have issued bonds for the construction of health care
facilities, transportation facilities, office buildings and related facilities,
housing facilities, pollution control facilities, water and sewage facilities
and power and electric facilities. Each of these facilities may incur different
difficulties in meeting its debt repayment obligations. Hospital facilities, for
example, are subject to changes in Medicare and Medicaid reimbursement
regulations, attempts by Federal and state legislatures to limit the costs of
health care and management's ability to complete construction projects on a
timely basis as well as to maintain projected rates of occupancy and
utilization. At any given time, there are several proposals pending on a federal
and state level concerning health care which may further affect a hospital's
debt service obligation.
Housing facilities may be subject to increases in operating costs,
management's ability to maintain occupancy levels, rent restrictions and
availability of federal or state subsidies, while power and electric facilities
may be subject to increased costs resulting from environmental restrictions,
fluctuations in fuel costs, delays in licensing procedures and the general
regulatory framework in which these facilities operate. All of these entities
are constructed and operated under rigid regulatory guidelines.
Some entities which financed facilities with proceeds of private activity
bonds issued by the New Jersey Economic Development Authority, a major issuer of
special obligation bonds, have defaulted on their debt service obligations.
Because these special obligation bonds were repayable only from revenue received
from the specific projects which they funded, the New Jersey Economic
Development Authority was unable to repay the debt service to bondholders for
such facilities. Each issue of special obligation bonds, however, depends on its
own revenue for repayment, and thus these defaults should not affect the ability
of the New Jersey Economic Development Authority to repay obligations on other
bonds that it issues in the future.
The State has experienced a gradual economic recovery in the past five
years. While unemployment in manufacturing has declined, employment gains have
been recorded in business services, construction and retail sectors. Business
investment expenditures and consumer spending have also increased substantially
in the State as well as in the nation. To the extent that any adverse conditions
exist in the future which affect the obligor's ability to repay debt, the value
of the New Jersey Municipal Bond Fund may be immediately and substantially
affected.
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Certain litigation is pending against the State in which the State has a
potential for either a significant loss of revenue or a significant
unanticipated expenditure including as of August 1, 1999, suits relating to the
following matters: (i) a coalition of churches and church leaders in Hudson
County have filed suit asserting the State-owned Liberty State Park in Jersey
City violates environmental standards; (ii) representatives of the trucking
industry have filed a constitutional challenge to annual hazardous and solid
waste licensure renewal fees; (iii) several suits have been filed against the
State to compel the State to close the spending gap between poor urban school
districts and wealthy rural school districts; (iv) a group of insurance
companies has filed a constitutional challenge to the State's assessment of
monies pursuant to the Fair Automobile Insurance Reform Act of 1990; (v) a class
action consisting of prisoners with serious mental disorders has been filed
against officers of the Department of Corrections, alleging sex discrimination,
violation of the Americans with Disabilities Act of 1990, and constitutional
violations; (vi) a class action brought in federal court challenging the State's
method of determining the monthly needs of a spouse of an institutionalized
person under the Medicare Catastrophic Act is now being appealed to the U.S.
Supreme Court by the plaintiff; (vii) several suits have been filed against the
State in Federal court alleging that the State committed securities fraud and
environmental violations in the financing of a new Atlantic City highway and
tunnel; (viii) a class action filed against the State alleging the State's
breach of contract for not paying certain Medicare co-insurance and deductibles
has been appealed by the plaintiff; (ix) an action has been filed challenging
the State's issuance of bonds to fund the accrued liability in its pension funds
under the Pension Bond Financing Act of 1997; (x) several cases have been filed
by State hospitals with respect to Medicaid hospital reimbursement that
challenge the State's compliance with Federal regulations and the correctness of
reimbursement rates (this Chapter 11 case commenced when United Hospital closed
and demanded that the bankruptcy court take jurisdiction of and decide certain
Medicaid reimbursement matters pending in New Jersey administrative proceedings
or the New Jersey appellate courts); (xi) several plaintiffs have filed a
complaint seeking damages and injunctive relief on constitutional grounds on
behalf of individuals who did not obtain an increase in welfare benefits under
the "family cap" provisions of the State Work First New Jersey Act; (xii)
several cases have been filed by various hospitals alleging the $10 per adjusted
hospital admission charge is a "tax" as opposed to a "regulatory fee" and is in
violation of the State's constitution; and (xiii) the owner of a resource
recovery facility in South Camden who filed suit to have the County's solid
waste process halted to clarify bid specifications has filed a motion for leave
to appeal to the Supreme Court of New Jersey.
Although the New Jersey Municipal Bond Fund generally intends to invest
its assets primarily in New Jersey Municipal Securities rated within the four
highest rating categories assigned by S&P or Moody's, there can be no assurance
that such ratings will remain in effect until such obligations mature or are
redeemed or will not be revised downward or withdrawn. Such revisions or
withdrawals may have an adverse affect on the market price of such securities.
Although there can be no assurance that such conditions will continue, the
State's general obligation bonds are currently rated "AA+" by S&P and "Aa1" by
Moody's.
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Special Considerations Relating to New York Municipal Securities
Certain substantial issuers of New York Municipal Securities (including
issuers whose obligations may be acquired by the New York Municipal Bond Fund)
have experienced serious financial difficulties in recent years. These
difficulties have at times jeopardized the credit standing and impaired the
borrowing abilities of all New York issuers and have generally contributed to
higher interest costs for their borrowings and fewer markets for their
outstanding debt obligations. Strong demand for New York Municipal Securities
has also at times had the effect of permitting New York Municipal Securities to
be issued with yields relatively lower, and after issuance, to trade in the
market at prices relatively higher, than comparably rated Municipal Securities
issued by other jurisdictions. A recurrence of the financial difficulties
previously experienced by certain issuers of New York Municipal Securities could
result in defaults or declines in the market values of those issuers' existing
obligations and, possibly, in the obligations of other issuers of New York
Municipal Securities. Although as of the date of this Statement of Additional
Information, no issuers of New York Municipal Securities are in default with
respect to the payment of their Municipal Securities, the occurrence of any such
default could affect adversely the market values and marketability of all New
York Municipal Securities and, consequently, the net asset value of the Fund's
portfolio.
Some of the significant financial considerations relating to the New York
Municipal Bond Fund's investments in New York Municipal Securities are
summarized below. This summary information is not intended to be a complete
description and is principally derived from the Annual Information Statement of
the State of New York as supplemented and contained in official statements
relating to issues of New York Municipal Securities that were available prior to
the date of this Statement of Additional Information. The accuracy and
completeness of the information contained in those official statements have not
been independently verified.
State Economy. New York is one of the most populous states in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because New York City (the "City") is a regional employment center for a
multi-state region, State personal income measured on a residence basis
understates the relative importance of the State to the national economy and the
size of the base to which State taxation applies.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
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State Budget. The State Constitution requires the governor (the
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis State financial
plan, and an explanation of any changes from the previous State financial plan.
State law requires the Governor to propose a balanced budget each year. In
recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State's current fiscal year began on April 1, 1999 and
ends on March 31, 2000. On March 31, 1999, the State adopted the debt service
portion of the State budget for the 1999-2000 fiscal year; four months later, on
August 4, 1999, it enacted the remainder of the budget. The Governor approved
the budget as passed by the Legislature. Prior to passing the budget in its
entirety for the current fiscal year, the State enacted appropriations that
permitted the State to continue its operations.
In 1999-2000, General Fund disbursements, including transfers to support
capital projects, debt service and other funds, are estimated at $37.36 billion,
an increase of $868 million or 2.38 percent over 1998-99. Projected spending
under the 1999-2000 enacted budget is $215 million above the Governor's
Executive Budget recommendations, including 30-day amendments. This change is
the net result of spending actions that occurred during negotiations on the
Budget. The increase in General Fund spending is comprised of $1.1 billion in
legislative additions to the Executive Budget (primarily in education), offset
by various actions, including re-estimates of required spending based on
year-to-date results and the identification of certain other resources that
offset spending, such as $250 million from commencing the process of privatizing
the Medical Malpractice Insurance Association ("MMIA"), $250 million from the
retention of the Debt Reduction Reserve Fund within the General Fund and about
$100 million in excess fund balances. The MMIA was established in 1983 to
provide excess liability insurance to doctors and medical providers. Legislation
enacted with the 1999-2000 budget initiates the process of MMIA privatization
and transfers excess fund balances to the State.
The 1999-2000 enacted budget provides for $831 million in new funding for
public schools, the largest year-to-year increase in State history. The budget
also enacts several new tax cuts valued at $375 million when fully phased in by
2003-04. None of the $1.82 billion cash surplus from 1998-99 is assumed to
support spending in 1999-2000, but instead is reserved to help offset the costs
of previously enacted tax cuts that take effect after 1999-2000.
The 1999-2000 Financial Plan projects a closing balance of $2.85 billion
in the General Fund. The balance is comprised of the $1.82 billion surplus from
1998-99 that has been set aside to finance already-enacted tax cuts, $473
million in the Tax Stabilization Reserve Fund ("TSRF"), $250 million in the Debt
Reduction Reserve Fund ("DRRF"), $107 million in the Contingency Reserve Fund
("CRF"), and $200 million in the Community Projects Fund
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("CPF"), which finances legislative initiatives. The State expects to close
1999-2000 with cash balances in these funds at their highest level ever.
Preliminary analysis by the Division of Budget ("DOB") indicates that the
State will have a 2000-01 budget gap of approximately $1.9 billion, or about
$300 million above the 1999-2000 Executive Budget estimate (after adjusting for
the projected costs of collective bargaining). This estimate includes an
assumption for the projected costs of new collective bargaining agreements, $500
million in assumed operating efficiencies, as well as the planned application of
approximately $615 million of the $1.82 billion tax reduction reserve. The DOB
will formally update its projections of receipts and disbursements for future
years as part of the Governor's 2000-01 Executive Budget submission. The revised
expectations for these years will reflect the cumulative impact of tax
reductions and spending commitments enacted over the last several years as well
as new 2000-01 Executive Budget recommendations.
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions except those required to be accounted
for in another fund. It is the State's largest fund and received almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1999-2000 fiscal year, the General Fund (exclusive of transfers) is
expected to account for approximately 47.1 percent of all Governmental Funds
disbursements and 69.3 percent of total State Funds disbursements. General Fund
moneys are also transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types.
Total General Fund receipts and transfers in 1999-2000 are now projected
to be $39.31 billion, an increase of $2.57 billion from the $36.74 billion
recorded in 1998-99. This total includes $35.93 billion in tax receipts, $1.36
billion in miscellaneous receipts, and $2.02 billion in transfers from other
funds. The transfer of the $1.82 billion surplus recorded in 1998-99 to the
1999-2000 fiscal period has the effect of exaggerating the growth in State
receipts from year to year by depressing reported 1998-99 figures and inflating
1999-2000 projections.
Receipts from user taxes and fees are projected to total $7.35 billion, an
increase of $105 million from reported collections in the prior year. The sales
tax component of this category accounts for virtually all of the 1999-2000
growth. Growth in base sales tax yield, after adjusting for tax law and other
changes, is projected at 5.6 percent. Modest increases in motor fuel and auto
rental tax receipts over 1998-99 levels are also expected. However, receipts
from other user taxes and fees are estimated to decline by $177 million.
The yield of other excise taxes in this category, particularly the
cigarette and alcoholic beverage taxes, show long-term declining trends. General
Fund declines in 1999-2000 motor vehicle fee receipts, in contrast, reflect
statutory fee reductions and an increased amount of collections earmarked to the
Dedicated Highway and Bridge Trust Fund.
Significant statutory changes in this category during the 1999-2000
legislative session include: delaying until March 1, 2000 the implementation of
the exemption from State sales tax of clothing and footwear priced under $110;
providing week-long sales tax exemptions in September 1999 and January 2000 for
clothing and footwear priced under $500; enactment of a
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variety of small sales tax exemptions including certain equipment used in
providing telecommunications service for sale, property and services used in
theatrical productions, computer hardware used to design Internet web sites, and
building materials used in farming; a reduction in the beer tax rate; and an
expanded exemption from the alcoholic beverage tax for small brewers.
Following the pattern of the last two fiscal years, education programs
receive the largest share of new funding contained in the 1999-2000 Financial
Plan. School aid is expected to grow by $831 million or 8.58 percent over
1998-99 levels (on a State fiscal year basis). Outside of education, the largest
growth in spending is for State Operations ($207 million, including $100 million
reserved for possible collective bargaining costs); Debt Service ($183 million),
and mental hygiene programs, including funding for a cost of living increase for
care providers ($114 million). These increases were offset, in part, by spending
reductions or actions in health and social welfare ($280 million), and in
general State charges ($222 million).
Under the 1999-2000 enacted budget, General Fund spending on school aid is
projected at $10.52 billion on a State fiscal year basis, an increase of $831
million from the prior year. The budget provides additional funding for
operating aid, building aid, and several other targeted aid programs. It also
funds the balance of aid payable for the 1998-99 school year that is due
primarily in the first quarter of the 1999-2000 fiscal year. For all other
educational programs, disbursements are projected to grow by $78 million to
$2.99 billion.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan. These
forces may affect the State unpredictably from fiscal year to fiscal year and
are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. The projections assume
no changes in federal tax law, which could substantially alter the current
receipts forecast. In addition, these projections do not include funding for new
collective bargaining agreements after the current contracts expire. Actual
results, however, could differ materially and adversely from their projections,
and those projections may be changed materially and adversely from time to time.
Debt Limits and Outstanding Debt. There are a number of methods by which
the State of New York may incur debt. Under the State Constitution, the State
may not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval (i)
in anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes, and (ii) in
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anticipation of the receipt of proceeds from the sale of duly authorized but
unissued general obligation bonds, by issuing bond anticipation notes. The State
may also, pursuant to specific constitutional authorization, directly guarantee
certain obligations of the State of New York's authorities and public benefit
corporations ("Authorities"). Payments of debt service on New York State general
obligation and New York State-guaranteed bonds and notes are legally enforceable
obligations of the State of New York.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the LGAC to restructure the
way the State makes certain local aid payments.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. The State assumes that the 2000-01 Financial Plan will achieve $500
million in savings from initiatives by State agencies to deliver services more
efficiently, workforce management efforts, maximization of federal and
non-General Fund spending offsets, and other actions necessary to help bring
projected disbursements and receipts into balance. The projections do not assume
any gap-closing benefit from the potential settlement of State claims against
the tobacco industry.
Spending from Debt Service Funds are estimated at $3.64 billion in
1999-2000, up $370 million or 11.31 percent from 1998-99. Transportation
purposes, including debt service on bonds issued for State and local highway and
bridge programs financed through the New York State Thruway Authority and
supported by the Dedicated Highway and Bridge Trust Fund, account for $124
million of the year-to-year growth. Debt service for educational purposes,
including State and City University programs financed through the Dormitory
Authority, will increase by $80 million. The remaining growth is for a variety
of programs in mental health and corrections, and for general obligation
financings.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On March
5, 1999, S&P affirmed its A rating on the State's outstanding bonds.
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On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baal. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State.
On March 5, 1999, Moody's affirmed its A2 rating with a stable outlook to the
State's general obligations.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation. Certain litigation pending against New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) challenges to the
constitutionality of Public Health Law 2807-d, which imposes a gross receipts
tax from certain patient care services; (4) action seeking enforcement of
certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; (5) a challenge to the Governor's
application of his constitutional line item veto authority; and (6) a challenge
to the enactment of the Clean Water/Clean Air Bond Act of 1996.
Several actions challenging the constitutionality of legislation enacted
during the 1990 legislative session which changed actuarial funding methods for
determining state and local contributions to state employee retirement systems
have been decided against the State. As a result, the Comptroller developed a
plan to restore the State's retirement systems to prior funding levels. Such
funding is expected to exceed prior levels by $116 million in fiscal 1996-97,
$193 million in fiscal 1997-98, peaking at $241 million in fiscal 1998-99.
Beginning in fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than that required under the prior
funding method. As a result of the United States Supreme Court decision in the
case of State of Delaware v. State of New York, on January 21, 1994, the State
entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions were paid in 1998.
The legal proceedings noted above involve State finances, State programs
and miscellaneous cure rights, tort, real property and contract claims in which
the State is a defendant and the monetary damages sought are substantial,
generally in excess of $100 million. These proceedings could affect adversely
the financial condition of the State in the current fiscal year or thereafter.
Adverse developments in these proceedings, other proceedings for which there are
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unanticipated, unfavorable and material judgments, or the initiation of new
proceedings could affect the ability of the State to maintain a balanced
financial plan. An adverse decision in any of these proceedings could exceed the
amount of the reserve established in the State's financial plan for the payment
of judgments and, therefore, could affect the ability of the State to maintain a
balanced financial plan.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in part,
to the fiscal stability of its Authorities, which generally have responsibility
for financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, New York
State has provided financial assistance through appropriations, in some cases of
a recurring nature, to certain of the Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation indebtedness
or otherwise, for debt service. This operating assistance is expected to
continue to be required in future years. In addition, certain statutory
arrangements provide for State local assistance payments otherwise payable to
localities to be made under certain circumstances to certain Authorities. The
State has no obligation to provide additional assistance to localities whose
local assistance payments have been paid to Authorities under these
arrangements. However, in the event that such local assistance payments are so
diverted, the affected localities could seek additional State funds.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since 1995. As a
result of the structural imbalances in JDA's capital structure, and defaults in
its loan portfolio and loan guarantee program incurred between 1991 and 1996,
JDA would have experienced a debt service cash flow shortfall had it not
completed its recent refinancing. JDA anticipates that it will transact
additional refinancings in 1999, 2000 and 2003 to complete its long-term plan of
finance and further alleviate cash flow imbalances which are likely to occur in
future years. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
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New York City and Other Localities. The fiscal health of the State may
also be impacted by the fiscal health of its localities, particularly the City,
which has required and continues to require significant financial assistance
from the State. The City depends on State aid both to enable the City to balance
its budget and to meet its cash requirements. There can be no assurance that
there will not be reductions in State aid to the City from amounts currently
projected or that State budgets will be adopted by the April 1 statutory
deadline or that any such reductions or delays will not have adverse effects on
the City's cash flow or expenditures. In addition, the Federal budget
negotiation process could result in a reduction in or a delay in the receipt of
Federal grants which could have additional adverse effects on the City's cash
flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell
short-term notes to the public again until 1979. In 1975, S&P suspended its A
rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+ and
on November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998, S&P
assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with positive implications. On March 9, 1999, S&P
assigned its A- rating to Series 1999H of New York City general obligation bonds
and affirmed the A- rating on various previously issued New York City bonds.
Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Bal, in November 1983 to Baa, in December 1985 to Baal, in
May 1988 to A and again in February 1991 to Baal. On February 25, 1998, Moody's
upgraded approximately $28 billion of the City's general obligations from Baal
to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's general
obligations and stated that its outlook was stable.
On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion
outstanding general obligation bonds from A- to A.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the
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events of default in the resolutions authorizing MAC's long-term debt. The
occurrence of an event of default may result in the acceleration of the maturity
of all or a portion of MAC's debt. MAC bonds and notes constitute general
obligations of MAC and do not constitute an enforceable obligation or debt of
either the State or the City.
Since 1975, the City's financial condition has been subject to oversight
and review by the New York State Financial Control Board (the "Control Board")
and since 1978 the City's financial statements have been audited by independent
accounting firms. To be eligible for guarantees and assistance, the City is
required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the Financial
Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal years,
relating to the City, the Board of Education ("BOE") and City University of New
York ("CUNY") and reflected the City's expense and capital budgets for the 1998
fiscal year, which were adopted on June 6, 1997. The 1998-2001 Financial Plan
projected revenues and expenditures for the 1998 fiscal year balanced in
accordance with GAAP. The 1998-99 Financial Plan projected General Fund receipts
(including transfers from other funds) of $36.22 billion, an increase of $1.02
billion over the estimated 1997-1998 level. Recurring growth in the State
General Fund tax base was projected to be approximately six percent during
1998-99, after adjusting for tax law and administrative changes. This growth
rate is lower than the rates for 1996-97 or 1997-98, but roughly equivalent to
the rate for 1995-96.
Although the City has consistently maintained balanced budgets and is
projected to achieve balanced operating results for the current fiscal year,
there can be no assurance that the gap-closing actions proposed in the 1998-2001
Financial Plan can be successfully implemented or that the City will maintain a
balanced budget in future years without additional State aid, revenue increases
or expenditure reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.
The projections set forth in the 1998-2001 Financial Plan were based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the 1998-2001 Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation and
the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and
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mandate relief and the impact on City revenues and expenditures of Federal and
State welfare reform and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent upon the
City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $5.7
billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority was created
as part of the City's effort to assist in keeping the City's indebtedness within
the forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. Despite this additional financing mechanism, the
City currently projects that, if no further action is taken, it will reach its
debt limit in City fiscal year 1999-2000. Indebtedness subject to the
constitutional debt limit includes liability on capital contracts that are
expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Finance Authority to be
unconstitutional. If such legislation which is currently on appeal to the Court
of Appeals were voided, projected contracts for the City capital projects would
exceed the City's debt limit. Future developments concerning the City or
entities issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials have issued
reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. Although the City's 1998 fiscal year financial plan
projected $2.4 billion of seasonal financing, the City expected to undertake
only approximately $1.4 billion of seasonal financing. The City issued $2.4
billion of short-term obligations in fiscal year 1997. The delay in the adoption
of the State's budget in certain past fiscal years has required the City to
issue short-term notes in amounts exceeding those expected early in such fiscal
years.
Certain localities, in addition to the City, have experienced financial
problems and have requested and received additional New York State assistance
during the last several State fiscal years. The potential impact on the State of
any future requests by localities for additional assistance is not included in
the State's projections of its receipts and disbursements for the fiscal year.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of
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Troy from seeking federal bankruptcy protection while Troy MAC bonds are
outstanding. Troy MAC has issued bonds to effect a restructuring of the City of
Troy's obligations.
The 1998-99 budget included $29.4 million in unrestricted aid targeted to
57 municipalities across the State. Other assistance for municipalities with
special needs totals more than $25.6 million. Twelve upstate cities received
$24.2 million in one-time assistance from a cash flow acceleration of State aid.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
From time to time, Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities. If
the State, the City or any of the Authorities were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State could
be adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions and long-range
economic trends. Long-range potential problems of declining urban population,
increasing expenditures and other economic trends could adversely affect
localities and require increasing the State assistance in the future.
Year 2000 Compliance. In April 1999, the State Comptroller released an
audit on the State's Year 2000 compliance. The audit, which reviewed the State's
Y2K compliance activities through October 1998, found that the State had made
progress in achieving Y2K compliance, but needed to improve its activities in
several areas, including data interchanges and contingency planning. The Office
for Technology (OFT) will continue to monitor compliance progress for the States
mission-critical and high-priority systems and is reporting compliance progress
to the Governor's office on a quarterly basis. The 1999-2000 enacted budget
allocates $19 million for priority embedded systems and $20 million for
unanticipated expenses related to bringing technology into Y2K compliance.
Special Considerations Relating to Connecticut Municipal Securities
The following information is a brief summary of factors affecting the
economies and financial strengths of the State of Connecticut, its
municipalities and its political subdivisions and does not purport to be a
complete description of such factors. Other factors will affect issuers. The
summary is based primarily upon one or more publicly available offering
statements relating to debt offerings of the State of Connecticut that were
available prior to the date of this Statement of Additional Information. The
accuracy and completeness of the information contained in such offering
statements have not been independently verified.
The ability of the issuers of Connecticut Municipal Securities to pay the
principal and interest on their obligations may be impacted by a variety of
factors relating to the economy of
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Connecticut and to the fiscal stability of issuers of Connecticut Municipal
Securities. The latter may include such matters as the ability of issuers to
raise sufficient tax and other revenues to meet their needs, the availability of
aid from other governmental bodies, and the burdens that may be imposed on
issuers by law or necessity. To the extent that the Fund invests in obligations
that are not general obligations of their issuers, payments of principal and
interest will depend on all factors affecting the revenue sources from which
payments thereon are to be derived. The value of the obligations held by the
Fund would be adversely affected not only by any actual inability of their
issuers to pay the principal and interest thereon, but also by a public
perception that such ability is in doubt
Manufacturing has historically been of prime economic importance to
Connecticut (sometimes referred to as the "State"). The State's manufacturing
industry is diversified, with transportation equipment (primarily aircraft
engines, helicopters and submarines) the dominant industry, followed by
fabricated metals, non-electrical machinery, and electrical equipment. As a
result of a rise in employment in service-related industries and a decline in
manufacturing employment, however, manufacturing accounted for only 17.09% of
total non-agricultural employment in Connecticut in 1997. Defense-related
business represents a relatively high proportion of the manufacturing sector. On
a per capita basis, defense awards to Connecticut have traditionally been among
the highest in the nation, and reductions in defense spending have had a
substantially adverse impact on Connecticut's economy.
The average annual unemployment rate in Connecticut increased from a low
of 3.0% in 1988 to a high of 7.6% in 1992 and, after a number of important
changes in the method of calculation, was reported to be 5.8% in 1996. Average
per capita personal income of Connecticut residents increased in every year from
1989 to 1997, rising from $25,443 to $36,434. However, pockets of significant
unemployment and poverty exist in several Connecticut cities and towns.
For the four fiscal years ended June 30, 1991, the General Fund
experienced operating deficits but, for the eight fiscal years ended June 30,
1999, the General Fund recorded operating surpluses, based on Connecticut's
budgetary method of accounting. General Fund budgets adopted for the biennium
ending June 30, 2001, authorize expenditures of $10,581,600,000 for the
1999-2000 fiscal year and $11,085,200,000 for the 2000-2001 fiscal year and
projected surpluses of $64,400,000 and $4,800,000, respectively, for those
years. As of August 31, 1999, the Comptroller estimated expenditures of
$10,689,600,000 and a surplus of only $11,200,000 for the 1999-2000 fiscal year.
Connecticut's general obligation bonds are rated Aa3 by Moody's and AA by Fitch.
On October 8, 1998, S&P upgraded its ratings of Connecticut's general
obligations bonds from AA-to AA.
The State's primary method for financing capital projects is through the
sale of general obligation bonds. These bonds are backed by the full faith and
credit of the State. As of October 15, 1999, the State had authorized direct
general obligation bond indebtedness totaling $13,310,385,000, of which
$11,144,149,000 had been approved for issuance by the State Bond Commission and
$9,625,537,000 had been issued. As of October 15, 1999, net State direct general
obligation indebtedness outstanding was $6,890,968,000.
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In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The University was authorized to issue bonds totaling $962,000,000
by June 30, 2005, that are secured by a State debt service commitment to finance
the improvements, $359,475,000 of which were outstanding on October 15, 1999.
In addition, the State has limited or contingent liability on a
significant amount of other bonds. Such bonds have been issued by the following
quasi-public agencies: the Connecticut Housing Finance Authority, the
Connecticut Development Authority, the Connecticut Higher Education Supplemental
Loan Authority, the Connecticut Resources Recovery Authority and the Connecticut
Health and Educational Facilities Authority. Such bonds have been issued by the
cities of Bridgeport and West Haven and the Southeastern Connecticut Water
Authority. As of December 1, 1998, the amount of bonds outstanding on which the
State has limited or contingent liability totaled $4,154,900,000.
In 1984, the State established a program to plan, construct and improve
the State's transportation system (other than Bradley International Airport).
The total cost of the program through June 30, 2002, is currently estimated to
be $12.6 billion, to be met from federal, state, and local funds. The State
expects to finance most of its $5.1 billion share of such cost by issuing $4.6
billion of special tax obligation ("STO") bonds. The STO bonds are payable
solely from specific motor fuel taxes, motor vehicle receipts, and license,
permit and fee revenues pledged therefor and credited to the Special
Transportation Fund, which was established to budget and account for such
revenues.
The State, its officers and its employees are defendants in numerous
lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of the
following cases might have a significant impact on the State's financial
position: (i) an action on behalf of all persons with traumatic brain injury who
have been placed in certain State hospitals, and other persons with acquired
brain injury who are in the custody of the Department of Mental Health and
Addiction Services, claiming that their constitutional rights are violated by
placement in State hospitals alleged not to provide adequate treatment and
training, and seeking placement in community residential settings with
appropriate support services; (ii) litigation involving claims by Indian tribes
to portions of the State's land area; (iii) an action by certain students and
municipalities claiming that the State's formula for financing public education
violated the State's Constitution and seeking a declaratory judgment and
injunctive relief; (iv) an action for money damages for the death of a young
physician killed in an automobile accident allegedly as a result of negligence
of the State; and (v) actions by several hospitals claiming partial refunds of
taxes imposed on hospital gross earnings to the extent such taxes related to
tangible personal property transferred in the provision of services to patients.
As a result of litigation on behalf of black and Hispanic school children
in the City of Hartford seeking "integrated education" within the Greater
Hartford metropolitan area, on July 9, 1996, the State Supreme Court directed
the legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. The Superior Court ordered the State
to show cause as to whether there has been compliance with the Supreme
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<PAGE>
Court's ruling and concluded that the State had complied but that the plaintiffs
had not allowed the State sufficient time to take additional remedial steps.
Accordingly, the plaintiffs might be able to pursue their claim at a later date.
The fiscal impact of this matter might be significant but is not determinable at
this time.
The State's Department of Information Technology is reviewing the State's
Year 2000 exposure and developing plans for modification or replacement of
existing software that it believes will prevent significant operations problems.
There is a risk that the plan will not be completed on time, that planned
testing will not reveal all problems, or that systems of others on whom the
State relies will not be timely updated. If the necessary remediations are not
completed in a timely fashion, the Year 2000 problem may have a material impact
on the operations of the State.
General obligation bonds issued by municipalities are payable primarily
from ad valorem taxes on property located in the municipality. A municipality's
property tax base is subject to many factors outside the control of the
municipality, including the decline in Connecticut's manufacturing industry.
Certain Connecticut municipalities have experienced severe fiscal difficulties
and have reported operating and accumulated deficits. The most notable of these
is the City of Bridgeport, which filed a bankruptcy petition on June 7, 1991.
The State opposed the petition. The United States Bankruptcy Court for the
District of Connecticut held that Bridgeport had authority to file such a
petition but that its petition should be dismissed on the grounds that
Bridgeport was not insolvent when the petition was filed. State legislation
enacted in 1993 prohibits municipal bankruptcy filings without the prior written
consent of the Governor. Regional economic difficulties, reductions in revenues,
and increased expenses could lead to further fiscal problems for the State and
its political subdivisions, authorities, and agencies. Difficulties in payment
of debt service on borrowings could result in declines, possibly severe, in the
value of their outstanding obligations, increases in their future borrowing
costs, and impairment of their ability to pay debt service on their obligations.
In addition to general obligation bonds backed by the full faith and
credit of the municipality, certain municipal authorities finance projects by
issuing bonds that are not considered to be debts of the municipality. Such
bonds may be repaid only from revenues of the financed project, the revenues
from which may be insufficient to service the related debt obligations.
Portfolio Turnover
Each Fund may sell a portfolio investment soon after its acquisition if
Fleet believes that such a disposition is consistent with the Fund's investment
objective. Portfolio investments may be sold for a variety of reasons, such as a
more favorable investment opportunity or other circumstances bearing on the
desirability of continuing to hold such investments. A 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 may result in the realization of substantial capital gains and involves
correspondingly greater transaction costs.
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<PAGE>
INVESTMENT LIMITATIONS
In addition to each Fund's investment objective as stated in its
Prospectuses and the fundamental policies noted above, the following investment
limitations are also matters of fundamental policy and may not be changed with
respect to any Fund without the affirmative vote of the holders of a majority of
its outstanding shares (as defined under "Miscellaneous").
No Fund may:
1. 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.
2. 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.
3. Invest more than 10% (15% with respect to the New Jersey Municipal
Bond Fund) 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.
4. Purchase any securities which would cause 25% or 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
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.
5. 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.
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<PAGE>
6. 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.
7. Purchase or sell real estate; except that each 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.
8. 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
municipal bond index futures contracts and interest rate futures
contracts to the extent permitted under the Commodity Exchange Act
and the 1940 Act.
9. Invest in or sell put options, call options, straddles, spreads, or
any combination thereof.
10. Invest in companies for the purpose of exercising management or
control.
11. 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.
12. 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.
13. 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.
In addition, the Tax-Exempt Bond Fund may not:
14. 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 25% of the value of its total
assets may be invested without regard to this limitation.
In addition, the New Jersey Municipal Bond, New York Municipal Bond,
Connecticut Municipal Bond, Massachusetts Municipal Bond and Rhode Island
Municipal Bond Funds may not:
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15. 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 a Fund's total
assets may be invested without regard to this 5% limitation,
provided that no more than 25% of the value of a Fund's total assets
are invested in the securities of any one issuer.
With respect to Investment Limitation No. 2 above, each 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.
Except as stated otherwise, if 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.
VALUATION OF PORTFOLIO SECURITIES
The Funds' assets 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.
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.
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This Statement of Additional Information provides additional purchase and
redemption information for Trust Shares and Retail A Shares of each Fund and
Retail B Shares of the Tax-Exempt Bond Fund. Purchase and redemption information
for Prime A Shares and Prime B Shares of the Tax-Exempt Bond Fund and BKB Shares
of the Rhode Island Municipal Bond Fund are described in separate prospectuses
and statements of additional information.
Purchases of Retail A Shares and Retail B Shares
General
Investments in Retail A Shares of the Funds are subject to a front-end
sales charge. Investments in Retail B Shares of the Tax-Exempt Bond Fund are
subject to a back-end sales charge. This back-end sales charge declines over
time and is known as a "contingent deferred sales charge."
Investors should read "Characteristics of Retail A Shares and Retail B
Shares" and "Factors to Consider When Selecting Retail A Shares or Retail B
Shares" below before deciding between the two with respect to the Tax-Exempt
Bond Fund.
PDI has established several procedures to enable different types of
investors to purchase Retail A Shares of the Funds and Retail B Shares of the
Tax-Exempt Bond Fund (collectively, "Retail Shares"). Retail Shares may be
purchased by individuals or corporations who submit a purchase application to
Galaxy, purchasing directly either for their own accounts or for the accounts of
others. Retail Shares may also be purchased by FIS Securities, Inc., Fleet
Securities, Inc., Fleet Enterprises, Inc., FleetBoston Financial Corporation,
its affiliates, their correspondent banks and other qualified banks, savings and
loan associations and broker/dealers on behalf of their customers. Purchases may
take place only on days on which the New York Stock Exchange (the "Exchange") is
open for business ("Business Days"). If an institution accepts a purchase order
from a customer on a non-Business Day, the order will not be executed until it
is received and accepted by PDI on a Business Day in accordance with PDI's
procedures.
Customers of Institutions
Retail Shares purchased by institutions on behalf of their customers will
normally be held of record by the institution and beneficial ownership of Retail
Shares will be recorded by the institution and reflected in the account
statements provided to its customers. Galaxy's transfer agent may establish an
account of record for each customer of an institution reflecting beneficial
ownership of Retail Shares. Depending on the terms of the arrangement between a
particular institution and Galaxy's transfer agent, confirmations of Retail
Share purchases and redemptions and pertinent account statements will either be
sent by Galaxy's transfer agent directly to a customer with a copy to the
institution, or will be furnished directly to the customer by the institution.
Other procedures for the purchase of Retail Shares established by institutions
in connection with the requirements of their customer accounts may apply.
Customers wishing to purchase Retail Shares through their institution should
contact such entity directly for appropriate purchase instructions.
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Applicable Sales Charge -- Retail A Shares
The public offering price for Retail A Shares of the Funds 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 applicable 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:
Reallowance to
Dealers
-------
As a % of
Offering Price
Amount of Transaction Per Share
- --------------------- ---------
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
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 applicable 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:
o 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;
o purchases by current and retired members of Galaxy's Board of
Trustees and members of their immediate families;
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o purchases by officers, directors, employees and retirees of
FleetBoston Financial Corporation and any of its affiliates and
members of their immediate families;
o purchases by officers, directors, employees and retirees of PFPC
Inc. and members of their immediate families;
o 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;
o purchases by institutional investors, including but not limited to
bank trust departments and registered investment advisers;
o 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;
o 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
o 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, 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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New Jersey
Tax-Exempt Municipal
Bond Fund Bond Fund
--------- ---------
Net Assets .................................... $25,704,197 $1,301,526
Outstanding Shares ............................ 2,487,639 136,115
Net Asset Value Per Share ..................... $ 10.33 $ 9.56
Sales Charge (3.75% of
the offering price) ........................... $ 0.40 $ 0.37
Offering Price to Public ...................... $ 10.73 $ 9.93
New York Connecticut
Municipal Municipal
Bond Fund Bond Fund
--------- ---------
Net Assets .............................. $ 41,343,124 $ 26,714,579
Outstanding Shares ...................... 3,910,140 2,647,709
Net Asset Value Per Share ............... $ 10.57 $ 10.09
Sales Charge (3.75% of
the offering price) ..................... $ 0.41 $ 0.39
Offering Price to Public ................ $ 10.98 $ 10.48
Massachusetts Rhode Island
Municipal Municipal
Bond Fund Bond Fund
--------- ---------
Net Assets .............................. $ 39,696,320 $ 19,833,264
Outstanding Shares ...................... 4,066,820 1,914,494
Net Asset Value Per Share ............... $ 9.76 $ 10.36
Sales Charge (3.75% of
the offering price) ..................... $ 0.38 $ 0.40
Offering Price to Public ................ $ 10.14 $ 10.76
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.
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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
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.
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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 "wash sale" rules of the Internal
Revenue Code of 1986, as amended (the "Code").
Group Sales. Members of qualified groups may purchase Retail A Shares of
the Funds at the following group sales rates:
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
- ------------- --------- --------- ---------
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
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
applicable 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
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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.
Applicable Sales Charge - Retail B Shares
The public offering price for Retail B Shares of the Tax-Exempt Bond Fund
is the net asset value of the Retail B Shares purchased. Although investors pay
no front-end sales charge on purchases of Retail B Shares, such Shares are
subject to a contingent deferred sales charge at the rates set forth below if
they are redeemed within six years of purchase. Securities dealers, brokers,
financial institutions and other industry professionals will receive commissions
from PDI in connection with sales of Retail B Shares. These commissions may be
different than the reallowances or placement fees paid to dealers in connection
with sales of Retail A Shares. 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 B Shares of the Fund. See "Applicable Sales Charge -- Retail A
Shares." The contingent deferred sales charge on Retail B Shares is based on the
lesser of the net asset value of the Shares on the redemption date or the
original cost of the Shares being redeemed. As a result, no sales charge is
imposed on any increase in the principal value of an investor's Retail B Shares.
In addition, a contingent deferred sales charge will not be assessed on Retail B
Shares purchased through reinvestment of dividends or capital gains
distributions.
The proceeds from the contingent deferred sales charge that an investor
may pay upon redemption go to PDI, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Retail B Shares.
Exemptions from the Contingent Deferred Sales Charge. Certain types of
redemptions may also qualify for an exemption from the contingent deferred sales
charge. In addition to the sales charge exemptions described in the applicable
Prospectus, the contingent deferred sales charge with respect to Retail B Shares
is not assessed on: (i) redemptions in connection with required (or, in some
cases, discretionary) distributions to participants or beneficiaries of an
employee pension, profit-sharing or other trust or qualified retirement or Keogh
plan, individual retirement account or custodial account maintained pursuant to
Section 403(b)(7) of the Code; (ii) redemptions in connection with required (or,
in some cases, discretionary) distributions to participants in qualified
retirement or Keogh plans, individual retirement accounts or custodial accounts
maintained pursuant to Section 403(b)(7) of the Code due to death, disability or
the attainment of a specified age; (iii) redemptions effected pursuant to the
Fund's right to liquidate a shareholder's account if the aggregate net asset
value of Retail B Shares held in the account is less than the minimum account
size; (iv) redemptions in connection with the combination of the Fund with any
other investment company registered under the 1940 Act by merger, acquisition of
assets, or by any other transaction; (v) redemptions resulting from a tax-free
return of an excess contribution pursuant to Section 408(d)(4) or (5) of the
Code; or (vi) any redemption of Retail B Shares held by investors, provided the
investor was the beneficial owner of shares of the Fund (or any of the other
portfolios offered by Galaxy or otherwise advised by Fleet or its
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affiliates) before December 1, 1995. In addition to the foregoing exemptions, no
contingent deferred sales charge will be imposed on redemptions made pursuant to
the Systematic Withdrawal Plan, subject to the limitations set forth under
"Investor Programs -- Retail A Shares and Retail B Shares -- Automatic
Investment Program and Systematic Withdrawal Plan" below.
Characteristics of Retail A Shares and Retail B Shares
The primary difference between Retail A Shares and Retail B Shares lies in
their sales charge structures and shareholder servicing/distribution expenses.
An investor should understand that the purpose and function of the sales charge
structures and shareholder servicing/distribution arrangements for both Retail A
Shares and Retail B Shares are the same.
Retail A Shares of the Funds are sold at their net asset value plus a
front-end sales charge of up to 3.75%. This front-end sales charge may be
reduced or waived in some cases. See the applicable Prospectus and "Applicable
Sales Charges -- Retail A Shares" and "Quantity Discounts" above. Retail A
Shares of a Fund are currently subject to ongoing shareholder servicing fees at
an annual rate of up to .15% of the Fund's average daily net assets attributable
to its Retail A Shares.
Retail B Shares of the Tax-Exempt Bond Fund are sold at net asset value
without an initial sales charge. Normally, however, a deferred sales charge is
paid if the Shares are redeemed within six years of investment. See the
applicable Prospectus and "Applicable Sales Charges -- Retail B Shares" above.
Retail B Shares of the Fund are currently subject to ongoing shareholder
servicing and distribution fees at an annual rate of up to .80% of the Fund's
average daily net assets attributable to its Retail B Shares. These ongoing
fees, which are higher than those charged on Retail A Shares, will cause Retail
B Shares to have a higher expense ratio and pay lower dividends than Retail A
Shares.
Six years after purchase, Retail B Shares of the Fund will convert
automatically to Retail A Shares of the Fund. The purpose of the conversion is
to relieve a holder of Retail B Shares of the higher ongoing expenses charged to
those shares, after enough time has passed to allow PDI to recover approximately
the amount it would have received if a front-end sales charge had been charged.
The conversion from Retail B Shares to Retail A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Retail A Shares as he or she had of Retail B Shares. The conversion
occurs six years after the beginning of the calendar month in which the Shares
are purchased. Upon conversion, the converted shares will be relieved of the
distribution and shareholder servicing fees borne by Retail B Shares, although
they will be subject to the shareholder servicing fees borne by Retail A Shares.
Retail B Shares acquired through a reinvestment of dividends or
distributions (as discussed under "Applicable Sales Charge -- Retail B Shares")
are also converted at the earlier of two dates -- six years after the beginning
of the calendar month in which the reinvestment occurred or the date of
conversion of the most recently purchased Retail B Shares that were not acquired
through reinvestment of dividends or distributions. For example, if an investor
makes a one-time purchase of Retail B Shares of the Fund, and subsequently
acquires additional Retail B Shares of the Fund only through reinvestment of
dividends and/or distributions, all of such
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investor's Retail B Shares in the Fund, including those acquired through
reinvestment, will convert to Retail A Shares of the Fund on the same date.
Factors to Consider When Selecting Retail A Shares or Retail B Shares
Investors deciding whether to purchase Retail A Shares or Retail B Shares
of the Tax-Exempt Bond Fund should consider whether, during the anticipated
periods of their investments in the Fund, the accumulated distribution and
shareholder servicing fees and potential contingent deferred sales charge on
Retail B Shares prior to conversion would be less than the initial sales charge
and accumulated shareholder servicing fees on Retail A Shares purchased at the
same time, and to what extent such differential would be offset by the higher
yield of Retail A Shares. In this regard, to the extent that the sales charge
for Retail A Shares is waived or reduced by one of the methods described above,
investments in Retail A Shares become more desirable. An investment of $250,000
or more in Retail B Shares would not be in most shareholders' best interest.
Shareholders should consult their financial advisers and/or brokers with respect
to the advisability of purchasing Retail B Shares in amounts exceeding $250,000.
Although Retail A Shares are subject to a shareholder servicing fee, they
are not subject to the higher distribution and shareholder servicing fee
applicable to Retail B Shares. For this reason, Retail A Shares can be expected
to pay correspondingly higher dividends per Share. However, because initial
sales charges are deducted at the time of purchase, purchasers of Retail A
Shares (that do not qualify for exemptions from or reductions in the initial
sales charge) would have less of their purchase price initially invested in the
Fund than purchasers of Retail B Shares in the Fund.
As described above, purchasers of Retail B Shares will have more of their
initial purchase price invested. Any positive investment return on this
additional invested amount would partially or wholly offset the expected higher
annual expenses borne by Retail B Shares. Because the Fund's future returns
cannot be predicted, there can be no assurance that this will be the case.
Holders of Retail B Shares would, however, own shares that are subject to a
contingent deferred sales charge of up to 5.00% upon redemption, depending upon
the year of redemption. Investors expecting to redeem during this six-year
period should compare the cost of the contingent deferred sales charge plus the
aggregate distribution and shareholder servicing fees on Retail B Shares to the
cost of the initial sales charge and shareholder servicing fees on the Retail A
Shares. Over time, the expense of the annual distribution and shareholder
servicing fees on the Retail B Shares may equal or exceed the initial sales
charge and annual shareholder servicing fee applicable to Retail A Shares. For
example, if net asset value remains constant, the aggregate distribution and
shareholder servicing fees with respect to Retail B Shares of a Fund would equal
or exceed the initial sales charge and aggregate shareholder servicing fees of
Retail A Shares approximately six years after the purchase. In order to reduce
such fees for investors that hold Retail B Shares for more than six years,
Retail B Shares will be automatically converted to Retail A Shares as described
above at the end of such six-year period.
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<PAGE>
Purchases of Trust Shares
Trust Shares are sold to investors maintaining qualified accounts at bank
and trust institutions, including subsidiaries of FleetBoston Financial
Corporation, and to participants in employer-sponsored defined contribution
plans (such institutions and plans referred to herein collectively as
"Institutions"). Trust Shares sold to such investors ("Customers") will be held
of record by Institutions. Purchases of Trust Shares will be effected only on
days on which PDI, Galaxy's custodian and the purchasing Institution are open
for business ("Trust Business Days"). If an Institution accepts a purchase order
from its Customer on a non-Trust Business Day, the order will not be executed
until it is received and accepted by PDI on a Trust Business Day in accordance
with the foregoing procedures.
Other Purchase Information
On a Business Day or a Trust Business Day when the 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
or Trust Business Day.
Redemption of Retail A Shares, Retail B Shares
and Trust 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 or Trust
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 or Trust Business Day.
Galaxy may require any information reasonably necessary to ensure that a
redemption has been duly authorized. Proceeds from the redemptions of Retail B
Shares of the Tax-Exempt Bond Fund will be reduced by the amount of any
applicable contingent deferred sales charge. 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
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<PAGE>
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.
INVESTOR PROGRAMS - RETAIL A SHARES AND RETAIL B SHARES
The following information supplements the description in the applicable
Prospectus as to the various Investor Programs available to holders of Retail
Shares of the Funds.
Exchange Privilege
The minimum initial investment to establish an account in another Fund or
portfolio by exchange, except for the Institutional Government Money Market
Fund, is $2,500, unless (i) the Retail 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 the Automatic Investment Program
described below, in which event there is no minimum initial investment
requirement, or in the College Investment Program described below, in which
event the minimum initial investment is generally $100. The minimum initial
investment to establish an account by exchange in the Institutional Government
Money Market Fund is $2 million.
An exchange involves a redemption of all or a portion of the Retail Shares
of a Fund and the investment of the redemption proceeds in Retail Shares of
another Fund or portfolio offered by Galaxy or, with respect to Retail A Shares,
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 Retail 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 at 1-877-BUY-GALAXY (1-877-289-4252). Customers of institutions
should call their institution for such information. Customers 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
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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 request, an investor should consult a tax or other financial
adviser to determine the tax consequences.
Automatic Investment Program and Systematic Withdrawal Plan
The Automatic Investment Program permits an investor to purchase Retail
Shares of a Fund each month or each quarter. Provided an investor's financial
institution allows automatic withdrawals, Retail 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 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 Shares on a monthly, quarterly, semi-annual, or annual basis on any
Business 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.
No contingent deferred sales charge will be assessed on redemptions of Retail B
Shares of the Tax-Exempt Bond Fund made through the Systematic Withdrawal Plan
that do not exceed 12% of an account's net asset value on an annualized basis.
For example, monthly, quarterly and semi-annual Systematic Withdrawal Plan
redemptions of Retail B Shares will not be subject to the contingent deferred
sales charge if they do not exceed 1%, 3% and 6%, respectively, of an account's
net asset value on the redemption date. Systematic Withdrawal Plan redemptions
of Retail B Shares in excess of this limit are still subject to the applicable
contingent deferred sales charge.
Payroll Deduction Program
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
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employer's payroll department, which will arrange for the specified amount to be
debited from the investor's paycheck each pay period. Retail 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
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 PDI (call 1-877-BUY-GALAXY (1-877-289-4252)).
Direct Deposit Program
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.
TAXES
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 invest all, or substantially all, of its assets in debt obligations the
interest on which is exempt for federal income tax purposes, so that the 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. For a Fund to pay tax-exempt dividends for any taxable year, at least
50% of the aggregate value of the Fund's assets at the close of each quarter of
the Fund's taxable year must consist of exempt-interest obligations.
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
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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 a Fund on December 31
of such year if such dividends are actually paid during January of the following
year.
An investment in a Fund is not intended to constitute a balanced
investment program. Shares of the Funds 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 ultimately taxable to
the beneficiaries when distributed. In addition, the Funds 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.
State and Local
Exempt-interest dividends and other distributions paid by the Funds 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.
It is anticipated that substantially all dividends paid by the New Jersey
Municipal Bond Fund will not be subject to New Jersey personal income tax. In
accordance with the provisions of New Jersey law as currently in effect,
distributions paid by a "qualified investment fund" will not be subject to the
New Jersey personal income tax to the extent that the distributions are
attributable to income received as interest or gain from New Jersey Municipal
Securities (as defined above), or as interest or gain from direct U.S.
Government obligations. Distributions by a "qualified investment fund" that are
attributable to most other sources will be subject to the New Jersey personal
income tax. Shares of the Fund are not subject to property taxation by New
Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations. For
all corporations subject to the New Jersey Corporation Business Tax, dividends
and distributions
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from a "qualified investment fund" are included in the net income tax base for
purposes of computing the Corporation Business Tax. Furthermore, any gain upon
the redemption or sale of shares by a corporate shareholder is also included in
the net income tax base for purposes of computing the Corporation Business Tax.
With respect to the New York Municipal Bond Fund, exempt-interest
dividends (as defined for federal income tax purposes), derived from interest on
New York Municipal Securities (as defined above) will be exempt from New York
State and New York City personal income taxes (but not corporate franchise
taxes), provided the interest on such obligations is and continues to be exempt
from applicable federal, New York State and New York City income taxes. To the
extent that investors are subject to state and local taxes outside of New York
State and New York City, dividends by the Fund may be taxable income for
purposes thereof. Dividends and distributions derived from income (including
capital gains on all New York Municipal Securities) other than interest on New
York Municipal Securities described above are not exempt from New York State and
New York City taxes. Interest or indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund is not deductible for
federal, New York State or New York City personal income tax purposes.
Dividends paid by the Connecticut Municipal Bond Fund that qualify as
exempt-interest dividends for federal income tax purposes are not subject to the
Connecticut personal income tax imposed on resident and non-resident
individuals, trusts and estates to the extent that they are derived from
Connecticut Municipal Securities (as defined above). Other Fund dividends and
distributions, whether received in cash or additional shares, are subject to
this tax, except that, in the case of shareholders who hold their shares of the
Fund as capital assets, distributions treated as capital gain dividends for
federal income tax purposes are not subject to the tax to the extent that they
are derived from obligations issued by or on behalf of the State of Connecticut,
its political subdivisions, or public instrumentalities, state or local
authorities, districts or similar public entities created under Connecticut law.
Dividends and distributions paid by the Fund that constitute items of tax
preference for purposes of the federal alternative minimum tax, other than any
derived from Connecticut Municipal Securities, could cause liability for the net
Connecticut minimum tax applicable to investors subject to the Connecticut
personal income tax who are required to pay the federal alternative minimum tax.
Dividends paid by the Fund, including those that qualify as exempt-interest
dividends for federal income tax purposes, are taxable for purposes of the
Connecticut Corporation Business Tax; however, 70% (100% if the investor owns at
least 20% of the total voting power and value of the Fund's shares) of amounts
that are treated as dividends and not as exempt-interest dividends or capital
gain dividends for federal income tax purposes are deductible for purposes of
this tax, but no deduction is allowed for expenses related thereto. Shares of
the Fund are not subject to property taxation by Connecticut or its political
subdivisions.
Distributions by the Massachusetts Municipal Bond Fund to its shareholders
are exempt from Massachusetts personal income taxation to the extent they are
derived from (and designated by the Fund as being derived from) (i) interest on
Massachusetts Municipal Securities (as defined above), (ii) capital gains
realized by the Fund from the sale of certain Massachusetts Municipal
Securities, or (iii) interest on U.S. Government obligations exempt from state
income taxation. 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
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<PAGE>
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. In 1994, the
Massachusetts personal income tax statute was modified to provide for graduated
rates of tax (with some exceptions) on gains from the sale or exchange of
capital assets held for more than one year based on the length of time the asset
has been held since January 1, 1995. The Massachusetts Department of Revenue has
released proposed regulations providing that the holding period of the mutual
fund (rather than that of its shareholders) will be determinative for purposes
of applying the revised statute to shareholders that receive capital gain
distributions (other than exempt capital gain distributions, as discussed
above), so long as the mutual fund separately designates the amount of such
distributions attributable to each of six classes of gains from the sale or
exchange of capital assets held for more than one year in a notice provided to
shareholders and the Commissioner of Revenue on or before March 1 of the
calendar year after the calendar year of such distributions. In the absence of
such notice, the holding period of the assets giving rise to such gain is deemed
to be more than one but not more than two years. Shareholders should consult
their tax advisers with respect to the Massachusetts tax treatment of capital
gain distributions from the Fund.
Distributions by the Massachusetts Municipal Bond Fund to corporate
shareholders, including exempt-interest dividends, may be subject to
Massachusetts corporate excise tax. Fund shares are not, however, subject to
property taxation by Massachusetts or its political subdivisions.
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 (as defined above) 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.
Depending upon the extent of Galaxy's activities in states and localities
in which its offices are maintained, in which its agents or independent
contractors are located, or in which it is otherwise deemed to be conducting
business, each Fund may be subject to the tax laws of such states or localities.
In addition, in those states and localities that have income tax laws, the
treatment of a Fund and its shareholders under such laws may differ from their
treatment under federal income tax laws. Under state or local law, distributions
of net investment income may be
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<PAGE>
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 tax principles applicable to certain financial investments and
futures contracts and options that may be acquired by a Fund 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.
Miscellaneous
Shareholders will be advised annually as to the federal income tax
consequences and, with respect to shareholders of the New Jersey Municipal Bond,
New York Municipal Bond, Connecticut Municipal Bond, Massachusetts Municipal
Bond and Rhode Island Municipal Bond Funds, the New Jersey personal income tax,
New York State and New York City personal income tax, Connecticut personal
income tax, Massachusetts personal income tax and Rhode Island personal income
tax consequences, respectively, 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:
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
Dwight E. Vicks, Jr. Chairman & President & Director, Vicks
Vicks Lithograph & Trustee Lithograph & Printing
Printing Corporation Corporation (book
Commercial Drive manufacturing and commercial
P.O. Box 270 printing); Director, Utica
Yorkville, NY 13495 First Insurance Company;
Age 66 Trustee, Savings Bank of
Utica; Director, Monitor Life
Insurance Company; Director,
Commercial Travelers Mutual
Insurance Company; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
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<PAGE>
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
John T. O'Neill(1) President, Private Investor; Executive
28 Narragansett Bay Avenue Treasurer & Vice President and CFO,
Warwick, RI 02889 Trustee Hasbro, Inc. (toy and game
Age 55 manufacturer) until December
1999; Trustee, The Galaxy VIP
Fund; Trustee, Galaxy Fund II.
Louis DeThomasis Trustee President, Saint Mary's
Saint Mary's College College of Minnesota;
of Minnesota Director, Bright Day Travel,
Winona, MN 55987 Inc.; Trustee, Religious
Age 59 Communities Trust; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
Donald B. Miller Trustee Chairman, Horizon Media, Inc.
10725 Quail Covey Road (broadcast services);
Boynton Beach, FL 33436 Director/Trustee, Lexington
Age 74 Funds; Chairman, Executive
Committee, Compton
International, Inc.
(advertising agency);
Trustee, Keuka College;
Trustee, The Galaxy VIP Fund;
Trustee, Galaxy Fund II.
James M. Seed Trustee Chairman and President, The
The Astra Ventures, Inc. Astra Projects, Incorporated
One Citizens Plaza (land development);
Providence, RI 02903 President, The Astra
Age 58 Ventures, Incorporated
(previously, Buffinton Box
Company - manufacturer of
cardboard boxes);
Commissioner, Rhode Island
Investment Commission;
Trustee, The Galaxy VIP Fund;
Trustee, Galaxy Fund II.
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<PAGE>
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
Bradford S. Wellman(1) Trustee Private Investor; Vice
2468 Ohio Street President and Director,
Bangor, ME 04401 Acadia Management Company
Age 68 (investment services);
Director, Essex County Gas
Company, until January 1994;
Director, Maine Mutual Fire
Insurance Co.; Member, Maine
Finance Authority; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
W. Bruce McConnel, III Secretary Partner of the law firm
One Logan Square Drinker Biddle & Reath LLP,
18th & Cherry Streets Philadelphia, Pennsylvania.
Philadelphia, PA 19103
Age 57
Jylanne Dunne Vice President Vice President, PFPC Inc.,
PFPC Inc. and Assistant 1990 to present.
4400 Computer Drive Treasurer
Westborough, MA 01581-5108
Age 40
William Greilich Vice President PFPC Inc., 1991-96; Vice
PFPC Inc. President and Division
4400 Computer Drive Manager, PFPC Inc., 1996 to
Westborough, MA 01581-5108 present.
Age 46
- ----------
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.
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<PAGE>
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 the same 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"). 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 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.
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<PAGE>
================================================================================
Pension or
Retirement Total
Benefits Compensation
Accrued as from Galaxy and
Aggregate Part of Fund
Compensation from Fund Complex*Paid to
Name of Person/Position Galaxy Expenses Trustees
- --------------------------------------------------------------------------------
Bradford S. Wellman
Trustee $39,355 None $55,750
- --------------------------------------------------------------------------------
Dwight E. Vicks, Jr.
Chairman and Trustee $42,875 None $60,500
- --------------------------------------------------------------------------------
Donald B. Miller**
Trustee $40,042 None $56,500
- --------------------------------------------------------------------------------
Rev. Louis DeThomasis
Trustee $37,643 None $53,250
- --------------------------------------------------------------------------------
John T. O'Neill
President, Treasurer
and Trustee $41,813 None $59,000
- --------------------------------------------------------------------------------
James M. Seed**
Trustee $39,355 None $55,750
================================================================================
- -------------
* The "Fund Complex" consists of Galaxy, The Galaxy VIP Fund and Galaxy Fund
II, which comprised a total of 43 separate portfolios as of October 31,
1999.
** 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.
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 for 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
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<PAGE>
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
Fleet serves as investment adviser to the Funds. In its Advisory
Agreement, Fleet has agreed to provide investment advisory services to the Funds
as described in the Prospectuses. Fleet has also agreed to pay all expenses
incurred by it in connection with its activities under the advisory agreement
other than the cost of securities (including brokerage commissions) purchased
for the Funds. See "Expenses" below.
For the services provided and expenses assumed with respect to the Funds,
Fleet is entitled to receive advisory fees, computed daily and paid monthly, at
the annual rate of 0.75% of the average daily net assets of each Fund. Fleet is
currently waiving a portion of the advisory fees payable to it by the Funds so
that it is entitled to receive advisory fees at the annual rate of 0.55% of each
Fund's average daily net assets, but Fleet may in its discretion 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:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Tax-Exempt Bond ....................... $930,448 $864,035 $789,598
New Jersey Municipal Bond ............. $ 22,716 $ 7,348(1) *
New York Municipal Bond ............... $462,934 $406,853 $351,041
Connecticut Municipal Bond ............ $149,353 $118,625 $ 74,799
Massachusetts Municipal Bond .......... $254,202 $184,536 $102,040
Rhode Island Municipal Bond ........... $ 76,212 $ 60,214 $ 37,641
- ----------
* Not in operation during the period.
(1) For the period from April 3, 1998 (commencement of operations) through
October 31, 1998.
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<PAGE>
During the last three fiscal years, Fleet waived advisory fees as set
forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Tax-Exempt Bond ....................... $338,345 $318,713 $287,127
New Jersey Municipal Bond ............. $ 45,431 $ 20,153(1) *
New York Municipal Bond ............... $168,340 $148,595 $127,651
Connecticut Municipal Bond ............ $170,690 $160,488 $149,599
Massachusetts Municipal Bond .......... $290,517 $246,101 $204,080
Rhode Island Municipal Bond ........... $ 86,559 $ 80,524 $ 75,284
- ----------
* Not in operation during the period.
(1) For the period from April 3, 1998 (commencement of operations) through
October 31, 1998.
During the last three fiscal years, Fleet reimbursed expenses as follows:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Tax-Exempt Bond ....................... $ 0 $12,427 $73,334
New Jersey Municipal Bond ............. $ 65 $ 2,729(1) *
New York Municipal Bond ............... $ 381 $ 1,784 $48,842
Connecticut Municipal Bond ............ $ 0 $ 0 $ 0
Massachusetts Municipal Bond .......... $ 0 $ 0 $ 0
Rhode Island Municipal Bond ........... $ 0 $ 0 $ 538
- ----------
* Not in operation during the period.
(1) For the period from April 3, 1998 (commencement of operations) through
October 31, 1998.
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.
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<PAGE>
ADMINISTRATOR
PFPC Inc. ("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, computed daily and paid monthly, at the following
rates, effective September 10, 1998:
Combined Average Daily Net Assets Annual Rate
- --------------------------------- -----------
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%
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:
Combined Average Daily Net Assets Annual Rate
- --------------------------------- -----------
Up to $2.5 billion ................................................ 0.090%
From $2.5 to $5 billion ........................................... 0.085%
Over $5 billion ................................................... 0.075%
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 fee payable to it by the Funds. For the fiscal year ended October
31, 1999 PFPC received administration fees at the effective annual rate of 0.08%
of each Fund's average daily net assets.
During the last three fiscal years, PFPC received administration fees (net
of fee waivers) as set forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
Tax-Exempt Bond ........................ $127,246 $127,627 $117,223
New Jersey Municipal Bond .............. $ 0 $ --(1) *
New York Municipal Bond ................ $ 63,326 $ 9,775 $ 26,292
Connecticut Municipal Bond ............. $ 32,081 $ 29,946 $ 0
Massachusetts Municipal Bond ........... $ 54,619 $ 46,188 $ 2,406
Rhode Island Municipal Bond ............ $ 16,327 $ 15,172 $ 12,293
- 64 -
<PAGE>
- ----------
* Not in operation during the period.
(1) For the period from April 3, 1998 (commencement of operations) through
October 31, 1998.
During the last three fiscal years, PFPC waived administration fees as set
forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Tax-Exempt Bond ........................ $ 0 $ 0 $ 0
New Jersey Municipal Bond .............. $ 6,887 $ 3,235(1) *
New York Municipal Bond ................ $ 0 $50,001 $25,827
Connecticut Municipal Bond ............. $ 0 $ 0 $39,755
Massachusetts Municipal Bond ........... $ 0 $ 0 $30,919
Rhode Island Municipal Bond ............ $ 0 $ 0 $ 0
- ----------
* Not in operation during the period.
(1) For the period from April 3, 1998 (commencement of operations) through
October 31, 1998.
Under the Administration Agreement between Galaxy and PFPC (the
"Administration Agreement"), PFPC has agreed to maintain office facilities for
Galaxy, furnish Galaxy with statistical and research data, clerical, accounting,
and bookkeeping services, provide 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.
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
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<PAGE>
reasonable care with respect to the safekeeping of the Funds' assets. 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 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
Debt securities purchased or sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. In purchasing or selling securities for the Funds,
Fleet will seek to obtain the best net price and the most favorable execution of
orders. To the extent that the execution and price offered by more than one
broker/dealer are comparable, Fleet may effect transactions in portfolio
securities with broker/dealers who provide research, advice or other services
such as market investment literature.
Except as permitted by the SEC or applicable law, the Funds will not
acquire portfolio securities from, make savings deposits in, enter into
repurchase or reverse repurchase agreements
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<PAGE>
with, or sell securities to, Fleet, 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.
During the fiscal year ended October 31, 1999, the Funds did not own any
securities of its regular brokers or dealers.
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. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Fund, another
portfolio of Galaxy, and/or another investment company or account, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which Fleet believes to be equitable to the Fund and such
other portfolio, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained or sold by such Fund. To the extent
permitted by law, Fleet may aggregate the securities to be sold or purchased for
a Fund with those to be sold or purchased for Galaxy's other Funds and
portfolios, or other investment companies or accounts in order to obtain best
execution.
SHAREHOLDER SERVICES PLAN
Galaxy has adopted a Shareholder Services Plan (the"Services 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 administrative and 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 Services Plan provides that Galaxy will pay fees for such services
at an annual rate of up to .30% 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 Services 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
Services Plan only with respect to Retail A Shares of each Fund, and to limit
the payment under these servicing agreements for each Fund to an aggregate fee
of not more than .15% (on an annualized basis) of the average daily net asset
value of the Retail A Shares of the Fund beneficially owned by customers of
institutions. Galaxy
- 67 -
<PAGE>
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 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 an institution ("Service
Organization") relating to the Services Plan requires that, with respect to
those Funds which declare dividends on a daily basis, the Service Organization
agrees 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:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Tax-Exempt Bond ........................ $33,072 $38,181 $37,652
New Jersey Municipal Bond .............. $ 960 $ 386(1) *
New York Municipal Bond ................ $66,562 $64,145 $56,596
Connecticut Municipal Bond ............. $39,136 $37,207 $32,160
Massachusetts Municipal Bond ........... $63,058 $58,742 $40,842
Rhode Island Municipal Bond ............ $ 0 $ 0 $ 0
- ----------
* Not in operation during the period.
(1) For the period from April 3, 1998 (commencement of operations) through
October 31, 1998.
Galaxy's servicing agreements are governed by the Services Plan that has
been adopted by Galaxy's Board of Trustees in connection with the offering of
Retail A Shares of each Fund. Pursuant to the Services Plan, the Board of
Trustees reviews, at least quarterly, a written report of the amounts paid under
the servicing agreements and the purposes for which the expenditures were made.
In addition, the arrangements with Service Organizations must be approved
annually by a majority of Galaxy's trustees, including a majority of the
trustees who are not "interested persons" of Galaxy as defined in the 1940 Act
and who have no direct or indirect financial interest in such arrangements (the
"Disinterested Trustees").
The Board of Trustees has approved Galaxy's arrangements with Service
Organizations based on information provided by Galaxy's service contractors that
there is a reasonable likelihood that the arrangements will benefit the Funds
and their shareholders by affording Galaxy greater flexibility in connection
with the efficient servicing of the accounts of the beneficial owners of Retail
A Shares of the 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
- 68 -
<PAGE>
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.
DISTRIBUTION AND SERVICES PLAN
Galaxy has adopted a Distribution and Services Plan pursuant to Rule 12b-1
under the 1940 Act (the "Rule") with respect to Retail B Shares of the
Tax-Exempt Bond Fund (the "12b-1 Plan"). Under the 12b-1 Plan, Galaxy may pay
(a) PDI or another person for expenses and activities intended to result in the
sale of Retail B Shares, including the payment of commissions to broker-dealers
and other industry professionals who sell Retail B Shares and the direct or
indirect cost of financing such payments, (b) institutions for shareholder
liaison services, which means personal services for holders of Retail B Shares
and/or the maintenance of shareholder accounts, such as responding to customer
inquiries and providing information on accounts, and (c) institutions for
administrative support services, which include but are not limited to (i)
transfer agent and sub-transfer agent services for beneficial owners of Retail B
Shares; (ii) aggregating and processing purchase and redemption orders; (iii)
providing beneficial owners with statements showing their positions in Retail B
Shares; (iv) processing dividend payments; (v) providing sub-accounting services
for Retail B Shares held beneficially; (vi) forwarding shareholder
communications, such as proxies, shareholder reports, dividend and tax notices,
and updating prospectuses to beneficial owners; and (vii) receiving, translating
and transmitting proxies executed by beneficial owners.
Under the 12b-1 Plan for Retail B Shares, payments by Galaxy (i) for
distribution expenses may not exceed the annualized rate of .65% of the average
daily net assets attributable to the Fund's outstanding Retail B Shares, and
(ii) to an institution for shareholder liaison services and/or administrative
support services may not exceed the annual rates of .15% and .15%, respectively,
of the average daily net assets attributable to the Fund's outstanding Retail B
Shares which are owned of record or beneficially by that institution's customers
for whom the institution is the dealer of record or shareholder of record or
with whom it has a servicing relationship. As of the date of this Statement of
Additional Information, Galaxy intends to limit the Fund's payments for
shareholder liaison and administrative support services under the 12b-1 Plan to
an aggregate fee of not more than .15% (on an annualized basis) of the average
daily net asset value of Retail B Shares owned of record or beneficially by
customers of institutions.
Payments for distribution expenses under the 12b-1 Plan are subject to the
Rule. The Rule defines distribution expenses to include the cost of "any
activity which is primarily intended to result in the sale of shares issued by"
Galaxy. The Rule provides, among other things, that an investment company may
bear such expenses only pursuant to a plan adopted in accordance with the Rule.
In accordance with the Rule, the 12b-1 Plan provides that a report of the
amounts expended under the 12b-1 Plan, and the purposes for which such
expenditures were incurred, will be made to the Board of Trustees for its review
at least quarterly. The 12b-1 Plan provides that it may not be amended to
increase materially the costs which Retail B Shares of a Fund may bear for
distribution pursuant to the 12b-1 Plan without shareholder approval, and that
any other type of material amendment must be approved by a majority of the Board
of Trustees, and by a majority of the trustees who are neither "interested
persons" (as defined in the 1940 Act) of
- 69 -
<PAGE>
Galaxy nor have any direct or indirect financial interest in the operation of
the 12b-1 Plan or in any related agreements (the "12b-1 Trustees"), by vote cast
in person at a meeting called for the purpose of considering such amendments.
During the last three fiscal years, Retail B Shares of the Tax-Exempt Bond
Fund bore the following distribution fees and shareholder servicing fees under
the 12b-1 Plan:
Shareholder
Distribution Servicing
For the Fiscal Year Ended October 31: Fees Fees
- ------------------------------------- ---- ----
1999 ......................................... $21,499 $ 4,520
1998 ......................................... $15,405 $ 3,555
1997 ......................................... $ 7,788 $ 1,784
During these periods, all amounts paid under the 12b-1 Plan were attributable to
payments to broker-dealers.
Galaxy's Board of Trustees has concluded that there is a reasonable
likelihood that the 12b-1 Plan will benefit the Fund and holders of Retail B
Shares. The 12b-1 Plan is subject to annual reapproval by a majority of the
12b-1 Trustees and is terminable at any time with respect to the Fund by a vote
of a majority of such Trustees or by vote of the holders of a majority of the
Retail B Shares of the Fund. Any agreement entered into pursuant to the 12b-1
Plan with an institution ("Service Organization") is terminable with respect to
the Fund without penalty, at any time, by vote of a majority of the 12b-1
Trustees, by vote of the holders of a majority of the Retail B Shares of the
Fund, by PDI or by the Service Organization. An agreement will also terminate
automatically in the event of its assignment.
As long as the 12b-1 Plan is in effect, the nomination of the trustees who
are not interested persons of Galaxy (as defined in the 1940 Act) must be
committed to the discretion of the 12b-1 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, Pennsylvania 19428-2961. Jane Haegele is the sole shareholder of
PDI.
Unless otherwise terminated, the Distribution Agreement between Galaxy and
PDI remains in effect until November 30, 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.
PDI is entitled to the payment of a front-end sales charge on the sale of
Retail A Shares of the Funds as described in the applicable Prospectus and this
Statement of Additional
- 70 -
<PAGE>
Information. Prior to December 1, 1999, First Data Distributors, Inc. ("FD
Distributors"), a wholly-owned subsidiary of PFPC, served as Galaxy's
distributor and was entitled to the payment of the front-end sales charge on
Retail A Shares of the Funds. During the last three fiscal years, FD
Distributors received front-end sales charges in connection with Retail A Share
purchases as follows:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Tax-Exempt Bond ...................... $ 13,144 $ 18,288 $ 19,403
New Jersey Municipal Bond ............ $ 13,008 $ 4,020(1) *
New York Municipal Bond .............. $ 64,555 $ 71,005 $ 49,295
Connecticut Municipal Bond ........... $ 37,006 $ 54,683 $ 46,322
Massachusetts Municipal Bond ......... $ 70,521 $175,611 $140,492
Rhode Island Municipal Bond .......... $ 12,453 $ 38,348 $ 22,941
- ----------
* Not in operation during the period.
(1) For the period from April 3, 1998 (commencement of operations) through
October 31, 1998.
FD Distributors retained none of the amounts shown in the table above.
PDI is also entitled to the payment of contingent deferred sales charges
upon the redemption of Retail B Shares of the Tax-Exempt Bond Fund. Prior to
December 1, 1999, FD Distributors was entitled to the payment of such contingent
deferred sales charges. For the fiscal years ended October 31, 1999, October 31,
1998 and October 31, 1997, FD Distributors received contingent deferred sales
charges in connection with Retail B Share redemptions of the Tax-Exempt Bond
Fund in the amounts of $14,680, $7,124 and $5,353, respectively. FD Distributors
retained none of these amounts.
- 71 -
<PAGE>
The following table shows all sales charges, commissions and other
compensation received by FD Distributors directly or indirectly from the Funds
during the fiscal year ended October 31, 1999:
<TABLE>
<CAPTION>
Brokerage
Net Underwriting Compensation on Commissions in
Discounts and Redemption and Connection with Other
Fund Commissions(1) Repurchase(2) Fund Transactions Compensation(3)
---- -------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Tax-Exempt
Bond $27,824 $14,680 $0 $58,963
New Jersey
Municipal
Bond $13,008 NA $0 $ 1,071
New York
Municipal
Bond $64,555 NA $0 $67,227
Connecticut
Municipal
Bond $37,006 NA $0 $38,909
Massachusetts
Municipal
Bond $70,521 NA $0 $63,550
Rhode Island
Municipal
Bond $12,453 NA $0 $ 0
</TABLE>
- ----------
(1) Represents amounts received from front-end sales charges on Retail A
Shares and commissions received in connection with sales of Retail B
Shares.
(2) Represents amounts received from contingent deferred sales charges on
Retail B Shares. The basis on which such sales charges are paid is
described in the Prospectus relating to Retail B Shares. All such amounts
were paid to affiliates of Fleet.
(3) Represents payments made under the Shareholder Services Plan and
Distribution and Services Plan during the fiscal year ended October 31,
1999, which includes fees accrued in the fiscal year ended October 31,
1998 which were paid in 1999 (see "Shareholder Services Plan" and
"Distribution and Services Plan" above).
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 Prospectuses and the
financial statements for the Funds contained in
- 72 -
<PAGE>
Galaxy's Annual Report to Shareholders with respect to the Funds (the "Annual
Report") 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 Prospectuses
and the financial statements for such years and periods contained in the Annual
Report were audited by PricewaterhouseCoopers LLP, Galaxy's former auditors.
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III, Secretary of
Galaxy, is a partner), One Logan Square, 18th & Cherry Streets, Philadelphia,
Pennsylvania 19103, are counsel to Galaxy, will pass upon certain legal matters
on its behalf, and has reviewed the portion of this Statement of Additional
Information and the Prospectuses with respect to the New Jersey Municipal Bond
Fund concerning New Jersey taxes and the description of special considerations
relating to New Jersey Municipal Securities. The law firm of Willkie Farr &
Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022,
serves as special New York counsel to Galaxy and has reviewed the portion of
this Statement of Additional Information and the Prospectuses with respect to
the New York Municipal Bond Fund concerning New York taxes and the description
of special considerations relating to New York Municipal Securities. The law
firm of Day, Berry & Howard LLP, Cityplace, Hartford, Connecticut 06103-3499
serves as special Connecticut counsel to Galaxy and has reviewed the portion of
this Statement of Additional Information and the Prospectuses with respect to
the Connecticut Municipal Bond Fund concerning Connecticut taxes and the
description of special considerations relating to Connecticut Municipal
Securities. The law firm of Ropes & Gray, One International Place, Boston,
Massachusetts 02110-2624 serves as special Massachusetts counsel and special
Rhode Island counsel to Galaxy and has reviewed the portion of this Statement of
Additional Information and the Prospectuses with respect to the Massachusetts
Municipal Bond Fund concerning Massachusetts taxes and the description of
special considerations relating to Massachusetts Municipal Securities and the
portion of 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 Considerations relating to Rhode Island Municipal
Securities.
PERFORMANCE AND YIELD INFORMATION
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:
- 73 -
<PAGE>
YIELD = 2[((a-b)/cd+1)6-1]
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 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).
Interest earned on tax-exempt obligations that are issued without original
issue discount and have a current market discount is calculated by using the
coupon rate of interest instead of the yield to maturity. In the case of
tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have discounts based on current market value that are
less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
- 74 -
<PAGE>
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.
The "tax-equivalent" yield of the New Jersey Municipal Bond, New York
Municipal Bond, Connecticut Municipal Bond, Massachusetts Municipal Bond and
Rhode Island Municipal Bond Funds is computed by: (a) dividing the portion of
each 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. The
"tax-equivalent" yield of the Tax-Exempt Bond Fund is computed by (a) dividing
the portion of the yield (calculated as above) that is exempt from federal
income tax by one minus a stated federal income tax rate and (b) adding that
figure to that portion, if any, of the yield that is not exempt from federal
income tax.
Based on the foregoing calculations, the standard yields and
tax-equivalent yields (assuming a 36% federal tax rate) for Retail A Shares and
Trust Shares of the Funds for the 30-day period ended October 31, 1999 were as
set forth below:
<TABLE>
<CAPTION>
Retail A Trust
-------- -----
Fund Standard Tax-Equivalent Standard Tax-Equivalent
- ---- -------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Tax-Exempt Bond.................... 4.35% 6.79% 4.67% 7.29%
New Jersey Municipal Bond.......... 4.06% 6.77% 4.12% 6.87%
New York Municipal Bond............ 4.23% 7.09% 4.59% 7.17%
Connecticut Municipal Bond......... 4.15% 6.79% 4.45% 7.28%
Massachusetts Municipal Bond....... 4.32% 7.17% 4.63% 7.69%
Rhode Island Municipal Bond........ 4.54% 7.59% * *
</TABLE>
- ----------
* The Rhode Island Municipal Bond Fund does not offer Trust Shares.
Based on the foregoing calculations, (i) the standard yield for Retail B
Shares of the Tax-Exempt Bond Fund for the 30-day period ended October 31, 1999
was 3.79%, and (ii) the tax-equivalent yield (assuming a 36% federal tax rate)
for Retail B Shares of the Tax-Exempt Bond Fund for the 30-day period ended
October 31, 1999 was 5.92%.
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:
- 75 -
<PAGE>
T = [(ERV/P)-1]^1/n
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)
period 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)-1]
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. In addition, the Funds' Retail Shares average annual return
and aggregate total return quotations will reflect the deduction of the maximum
sales load charged in connection with purchases of Retail A Shares or
redemptions of Retail B Shares, as the case may be.
The aggregate total returns for Retail A Shares and Trust Shares of the
Funds from the date of initial public offering through October 31, 1999 are set
forth below:
Fund Retail A Trust
- ---- -------- -----
Tax-Exempt Bond .................................. 48.17%(1) 54.50%(1)
New Jersey Municipal Bond ........................ (2.82)%(2) 1.28%(2)
New York Municipal Bond .......................... 44.62%(3) 51.75%(3)
Connecticut Municipal Bond ....................... 28.80%(4) 35.26%(4)
Massachusetts Municipal Bond ..................... 26.47%(5) 32.57%(5)
Rhode Island Municipal Bond ...................... 26.83%(6) --%*
- ----------
* The Rhode Island Municipal Bond Fund does not offer Trust Shares.
(1) For the period from December 30, 1991 (initial public offering date)
through October 31, 1999.
(2) For the period from April 3, 1998 (initial public offering date) through
October 31, 1999.
(3) For the period from December 31, 1991 (initial public offering date)
through October 31, 1999.
- 76 -
<PAGE>
(4) For the period from March 16, 1993 (initial public offering date) through
October 31, 1999.
(5) For the period from March 12, 1993 (initial public offering date) through
October 31, 1999.
(6) For the period from December 20, 1994 (initial public offering date)
through October 31, 1999.
The aggregate total return for Retail B Shares of the Tax-Exempt Bond Fund
from March 4, 1996 (initial public offering date) through October 31, 1999 was
8.89%.
The average annual total returns for Retail A Shares and Trust Shares (as
applicable) of the Funds for the one-year and five-year periods (as applicable)
ended October 31, 1999 are as set forth below:
<TABLE>
<CAPTION>
Retail A Trust
-------- -----
Fund One-Year Five-Year One-Year Five-Year
- ---- -------- --------- -------- ---------
<S> <C> <C> <C> <C>
Tax-Exempt Bond ................... (7.07)% 5.01% (3.25)% 6.06%
New Jersey Municipal Bond ......... (6.87)% --%* (3.06)% --%*
New York Municipal Bond ........... (7.36)% 5.06% (3.54)% 6.09%
Connecticut Municipal Bond ........ (6.50)% 5.39% (2.68)% 6.43%
Massachusetts Municipal Bond ...... (6.97)% 5.09% (3.17)% 6.10%
Rhode Island Municipal Bond ....... (6.42)% --%* --%** --%**
</TABLE>
- ----------
* Not offered during the full period.
** The Rhode Island Municipal Bond Fund does not offer Trust Shares.
The average annual total return for Retail B Shares of the Tax-Exempt Bond
Fund for the one-year period ended October 31, 1999 was (8.64)%.
Tax Equivalency Tables - New Jersey Municipal Bond and New York Municipal Bond
Funds
The New Jersey Municipal Bond and New York Municipal Bond Funds may use
tax-equivalency tables in advertising and sales literature. These tables are
intended to demonstrate the advantages of investing in tax free investments such
as the Funds. The tax exempt yields used here are hypothetical and no assurance
can be made that a Fund will obtain any particular yield. A Fund's yield
fluctuates as market conditions change.
The tax brackets and related yield calculations are based on the expected
2000 Federal and state marginal tax rates. The combined Federal and state rate
reflects an assumed deduction of the state tax liability. In fact, however,
certain limitations on this deductibility may apply. Also, the tables do not
reflect the phase out of personal exemptions and itemized deductions which will
apply to certain higher income taxpayers.
Investors are urged to consult their tax advisors as to these matters.
- 77 -
<PAGE>
New Jersey 1999
Equivalent yields: Tax-exempt
<TABLE>
<CAPTION>
New Jersey New Jersey Tax Equivalent Yields:**
$ Taxable Income* State Federal & Federal ----------------------------------------------------------------------
Single Rate Rate Effective Rate 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-20,000 1.40% 15.0% 16.19% 1.79% 2.39% 2.98% 3.58% 4.18% 4.77% 5.37% 5.97% 6.56% 7.16%
20,001-25,750 1.75% 15.0% 16.49% 1.80% 2.39% 2.99% 3.59% 4.19% 4.79% 5.39% 5.99% 6.59% 7.18%
25,751-35,000 1.75% 28.0% 29.26% 2.12% 2.83% 3.53% 4.24% 4.95% 5.65% 6.36% 7.07% 7.77% 8.48%
35,001-40,000 3.50% 28.0% 30.52% 2.16% 2.88% 3.60% 4.32% 5.04% 5.76% 6.48% 7.20% 7.92% 8.64%
40,001-62,450 5.525% 28.0% 31.98% 2.21% 2.94% 3.68% 4.41% 5.15% 5.88% 6.62% 7.35% 8.09% 8.82%
62,451-75,000 5.525% 31.0% 34.81% 2.30% 3.07% 3.84% 4.60% 5.37% 6.14% 6.90% 7.67% 8.44% 9.20%
75,001-130,250 6.37% 31.0% 35.40% 2.32% 3.10% 3.87% 4.64% 5.42% 6.19% 6.97% 7.74% 8.51% 9.29%
130,251-283,150 6.37% 36.0% 40.08% 2.50% 3.34% 4.17% 5.01% 5.84% 6.68% 7.51% 8.34% 9.18% 10.01%
Over 283,150 6.37% 39.6% 43.45% 2.65% 3.54% 4.42% 5.30% 6.19% 7.07% 7.96% 8.84% 9.73% 10.61%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
New Jersey New Jersey Tax Equivalent Yields:**
$ Taxable Income State Federal & Federal --------------------------------------------------------------------------
Married Filing Jointly Rate Rate Effective Rate 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-20,000 1.40% 15.0% 16.19% 1.79% 2.39% 2.98% 3.58% 4.18% 4.77% 5.37% 5.97% 6.56% 7.16%
20,001-43,050 1.75% 15.0% 16.49% 1.80% 2.39% 2.99% 3.59% 4.19% 4.79% 5.39% 5.99% 6.59% 7.18%
43,051-50,000 1.75% 28.0% 29.26% 2.12% 2.83% 3.53% 4.24% 4.95% 5.65% 6.36% 7.07% 7.77% 8.48%
50,001-70,000 2.45% 28.0% 29.76% 2.14% 2.85% 3.56% 4.27% 4.98% 5.70% 6.41% 7.12% 7.83% 8.54%
70,001-80,000 3.50% 28.0% 30.52% 2.16% 2.88% 3.60% 4.32% 5.04% 5.76% 6.48% 7.20% 7.92% 8.64%
80,001-104,050 5.525% 28.0% 31.98% 2.21% 2.94% 3.68% 4.41% 5.15% 5.88% 6.62% 7.35% 8.09% 8.82%
104,051-150,000 5.525% 31.0% 34.81% 2.30% 3.07% 3.84% 4.60% 5.37% 6.14% 6.90% 7.67% 8.44% 9.20%
150,001-158,550 6.37% 31.0% 35.40% 2.32% 3.10% 3.87% 4.64% 5.42% 6.19% 6.97% 7.74% 8.51% 9.29%
158,551-283,150 6.37% 36.0% 40.08% 2.50% 3.34% 4.17% 5.01% 5.84% 6.68% 7.51% 8.34% 9.18% 10.01%
Over 283,150 6.37% 39.6% 43.45% 2.65% 3.54% 4.42% 5.30% 6.19% 7.07% 7.96% 8.84% 9.73% 10.61%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income for New Jersey tax purposes is the
same as defined in the Internal Revenue Code. In fact, however, New Jersey
taxable income may differ due to differences in exemptions, itemized
deductions and other items.
** Each entry represents the taxable yield that is the equivalent to the
specified Federal and New Jersey tax-exempt yield for a New Jersey
taxpayer in the specified income bracket.
- 78 -
<PAGE>
NEW YORK STATE AND CITY: 1999
Equivalent yields: Tax-exempt
<TABLE>
<CAPTION>
Taxable Income* State New York State New York State
- ----------------- State City Federal and Federal City and Federal
Single City rate*** rate Combined rate Effective Date Effective Rate**
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0 - 8,000 3.05% 4% 7.04950% 15% 18.40% 20.99%
8,001 - 11,000 3.05% 4.5% 7.54950% 15% 18.83% 21.42%
11,001 - 12,000 3.05% 5.25% 8.29950% 15% 19.46% 22.05%
12,001 - 13,000 3.71% 5.25% 8.96355% 15% 19.46% 22.62%
13,001 - 20,000 3.71% 5.9% 9.61355% 15% 20.02% 23.17%
20,001 - 25,000 3.71% 6.85% 10.56355% 15% 20.82% 23.98%
25,001 - 25,750 3.77% 6.85% 10.62055% 15% 20.82% 24.03%
25,751 - 50,000 3.77% 6.85% 10.62055% 28% 32.93% 35.65%
50,001 - 61,450 3.83% 6.85% 10.62055% 28% 32.93% 35.69%
61,451 - 130,250 3.83% 6.85% 10.67755% 31% 35.73% 38.37%
130,251 - 283,150 3.83% 6.85% 10.67755% 36% 40.38% 42.83%
over 283,150 3.83% 6.85% 10.67755% 39.6% 43.74% 46.05%
- -----------------------------------------------------------------------------------------------
<CAPTION>
Taxable Income* New York Tax Equivalent Yields:****
- ----------------- -------------------------------------------------------------------------
Single 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 5.0% 5.5% 6.0%
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 8,000 1.90% 2.53% 3.16% 3.80% 4.43% 5.06% 6.33% 6.96% 7.59%
8,001 - 11,000 1.91% 2.55% 3.18% 3.82% 4.45% 5.09% 6.36% 7.00% 7.64%
11,001 - 12,000 1.92% 2.57% 3.21% 3.85% 4.49% 5.13% 6.41% 7.06% 7.70%
12,001 - 13,000 1.94% 2.58% 3.23% 3.88% 4.52% 5.17% 6.46% 7.11% 7.75%
13,001 - 20,000 1.95% 2.60% 3.25% 3.90% 4.56% 5.21% 6.51% 7.16% 7.81%
20,001 - 25,000 1.97% 2.63% 3.29% 3.95% 4.60% 5.26% 6.58% 7.23% 7.89%
25,001 - 25,750 1.97% 2.63% 3.29% 3.95% 4.61% 5.27% 6.58% 7.24% 7.90%
25,751 - 50,000 2.33% 3.11% 3.88% 4.66% 5.44% 6.22% 7.77% 8.55% 9.32%
50,001 - 61,450 2.33% 3.11% 3.89% 4.66% 5.44% 6.22% 7.77% 8.55% 9.33%
61,451 - 130,250 2.43% 3.25% 4.06% 4.87% 5.68% 6.49% 8.11% 8.92% 9.74%
130,251 - 283,150 2.62% 3.50% 4.37% 5.25% 6.12% 7.00% 8.75% 9.62% 10.50%
over 283,150 2.78% 3.71% 4.63% 5.55% 6.49% 7.41% 9.27% 10.19% 11.12%
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Taxable Income* State New York State New York State
- ---------------- State City Federal and Federal City and Federal
Joint City rate*** rate Combined rate Effective Date Effective Rate**
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0 - 16,000 3.05% 4% 7.04950% 15% 18.40% 20.99%
16,001 - 21,600 3.05% 4.5% 7.54950% 15% 18.83% 21.42%
21,601 - 22,000 3.71% 4.5% 8.21355% 15% 18.83% 21.88%
22,001 - 26,000 3.71% 5.25% 8.96355% 15% 19.46% 22.62%
26,001 - 40,000 3.71% 5.9% 9.61355% 15% 20.02% 23.17%
40,001 - 43,050 3.71% 6.85% 10.56355% 15% 20.82% 23.98%
43,051 - 45,000 3.71% 6.85% 10.56355% 28% 32.93% 35.61%
45,001 - 90,000 3.77% 6.85% 10.62055% 28% 32.93% 35.65%
90,001 - 104,050 3.83% 6.85% 10.67755% 28% 32.93% 35.69%
104,051 - 158,550 3.83% 6.85% 10.67755% 31% 35.73% 38.37%
158,551 - 283,150 3.83% 6.85% 10.67755% 36% 40.38% 42.83%
over 283,150 3.83% 6.85% 10.67755% 39.6% 43.74% 46.05%
- --------------------------------------------------------------------------------------------
<CAPTION>
Taxable Income* New York Tax Equivalent Yields:****
- ---------------- -------------------------------------------------------------------------
Joint 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 5.0% 5.5% 6.0%
- --------------------------------------------------------------------------------------------
0 - 16,000 1.90% 2.53% 3.16% 3.80% 4.43% 5.06% 6.33% 6.96% 7.59%
16,001 - 21,600 1.91% 2.55% 3.18% 3.82% 4.45% 5.09% 6.36% 7.00% 7.64%
21,601 - 22,000 1.92% 2.56% 3.20% 3.85% 4.49% 5.13% 6.41% 7.05% 7.69%
22,001 - 26,000 1.94% 2.59% 3.23% 3.88% 4.52% 5.17% 6.46% 7.11% 7.75%
26,001 - 40,000 1.95% 2.60% 3.25% 3.90% 4.56% 5.21% 6.51% 7.16% 7.81%
40,001 - 43,050 1.97% 2.63% 3.29% 3.95% 4.60% 5.26% 6.58% 7.23% 7.89%
43,051 - 45,000 2.33% 3.11% 3.88% 4.66% 5.44% 6.21% 7.76% 8.54% 9.32%
45,001 - 90,000 2.33% 3.11% 3.88% 4.66% 5.44% 6.22% 7.77% 8.55% 9.32%
90,001 - 104,050 2.33% 3.11% 3.89% 4.66% 5.44% 6.22% 7.77% 8.55% 9.33%
104,051 - 158,550 2.43% 3.25% 4.06% 4.87% 5.68% 6.49% 8.11% 8.92% 9.74%
158,551 - 283,150 2.62% 3.50% 4.37% 5.25% 6.12% 7.00% 8.75% 9.62% 10.50%
over 283,150 2.78% 3.71% 4.63% 5.56% 6.49% 7.41% 9.27% 10.19% 11.12%
- --------------------------------------------------------------------------------------------
</TABLE>
* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income as defined in the Internal Revenue
Code is the same as under the New York State or City Personal Income Tax
law; however, New York state or city taxable income may differ due to
differences in exemptions, itemized deductions, and other items.
** For federal tax purposes, these combined rates reflect the applicable
marginal rates for 1998, including indexing for inflation. These rates
include the effect of deducting state and city taxes on your Federal
return. For New York purposes, these combined rates reflect the expected
New York State and New York City tax and surcharge rates for 1998.
*** The New York city rate is comprised of the tax base rate, city surcharge,
and the additional city surcharge for 1998.
**** These represent New York State, City, and Federal Equivalent Yields.
- 79 -
<PAGE>
Tax-Equivalency Tables - Connecticut Municipal Bond, Massachusetts Municipal
Bond, and Rhode Island Municipal Bond Funds
The Connecticut Municipal Bond, Massachusetts Municipal Bond and Rhode
Island Municipal Bond Funds also may use tax-equivalency tables in advertising
and sales literature. The interest earned by the Municipal Securities in the
Funds' respective portfolios generally remains free from federal regular income
tax, and from the regular personal income tax imposed by Connecticut,
Massachusetts and Rhode Island, respectively. Some portion of the Funds' 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 Connecticut Municipal Bond, Massachusetts Municipal
Bond and Rhode Island Municipal Bond Funds.
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.
Connecticut Note: The charts below do not address taxable equivalent
yields applicable to married taxpayers filing separate returns or heads of
households.
Investors are urged to consult their own tax advisors as to these matters.
- 80 -
<PAGE>
TAXABLE YIELD EQUIVALENT FOR 1999
STATE OF CONNECTICUT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Federal Tax Bracket: 15.00% 28.00% 31.00% 36.00% 39.60%
Combined Federal and State: 19.50% 32.50% 35.50% 40.50% 44.10%
Joint Return: $1-43,050 $43,051-104,050 $104,051-158,550 $158,551-283,150 Over $283,151
Single Return: $1-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 Over $283,151
Tax-Exempt Yield:
</TABLE>
Taxable Yield Equivalent
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1.50% 1.86% 2.22% 2.33% 2.52% 2.68%
2.00% 2.48% 2.96% 3.10% 3.36% 3.58%
2.50% 3.11% 3.70% 3.88% 4.20% 4.47%
3.00% 3.73% 4.44% 4.65% 5.04% 5.37%
3.50% 4.35% 5.19% 5.43% 5.88% 6.26%
4.00% 4.97% 5.93% 6.20% 6.72% 7.16%
4.50% 5.59% 6.67% 6.98% 7.56% 8.05%
5.00% 6.21% 7.41% 7.75% 8.40% 8.94%
5.50% 6.83% 8.15% 8.53% 9.24% 9.84%
6.00% 7.45% 8.89% 9.30% 10.08% 10.73%
</TABLE>
TAXABLE YIELD EQUIVALENT FOR 1999
COMMONWEALTH OF MASSACHUSETTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Federal Tax Bracket: 15.00% 28.00% 31.00% 36.00% 39.60%
Combined Federal and State: 20.95% 33.95% 36.95% 41.95% 45.55%
Joint Return: $1-43,050 $43,051-104,050 $104,051-158,550 $158,551-283,150 Over $283,151
Single Return: $1-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 Over $283,151
Tax-Exempt Yield:
</TABLE>
Taxable Yield Equivalent
<TABLE>
<S> <C> <C> <C> <C> <C>
1.50% 1.90% 2.27% 2.38% 2.58% 2.75%
2.00% 2.53% 3.03% 3.17% 3.45% 3.67%
2.50% 3.16% 3.79% 3.97% 4.31% 4.59%
3.00% 3.80% 4.54% 4.76% 5.17% 5.51%
3.50% 4.43% 5.30% 5.55% 6.03% 6.43%
4.00% 5.06% 6.06% 6.34% 6.89% 7.35%
4.50% 5.69% 6.81% 7.14% 7.75% 8.26%
5.00% 6.33% 7.57% 7.93% 8.61% 9.18%
5.50% 6.96% 8.33% 8.72% 9.47% 10.10%
6.00% 7.59% 9.08% 9.52% 10.34% 11.02%
</TABLE>
- 81 -
<PAGE>
TAXABLE YIELD EQUIVALENT FOR 1999
STATE OF RHODE ISLAND
<TABLE>
<S> <C> <C> <C> <C> <C>
Federal Tax Bracket: 15.00% 28.00% 31.00% 36.00% 39.60%
Combined Federal and State: 18.98% 35.42% 39.22% 45.54% 50.09%
Joint Return: $0-43,050 $43,051-104,050 $104,051-158,550 $158,551-283,150 Over $283,151
Single Return: $0-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 Over $283,151
Tax-Exempt Yield:
</TABLE>
Taxable Yield Equivalent
<TABLE>
<S> <C> <C> <C> <C> <C>
1.50% 1.85% 2.32% 2.47% 2.75% 3.01%
2.00% 2.47% 3.10% 3.29% 3.67% 4.01%
2.50% 3.09% 3.87% 4.11% 4.59% 5.01%
3.00% 3.70% 4.65% 4.94% 5.51% 6.01%
3.50% 4.32% 5.42% 5.76% 6.43% 7.01%
4.00% 4.94% 6.19% 6.58% 7.34% 8.01%
4.50% 5.55% 6.97% 7.40% 8.26% 9.02%
5.00% 6.17% 7.74% 8.23% 9.18% 10.02%
5.50% 6.79% 8.52% 9.05% 10.10% 11.02%
6.00% 7.41% 9.29% 9.87% 11.02% 12.02%
</TABLE>
- 82 -
<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 bond
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.
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. Performance data will be
calculated separately for Trust Shares, Retail A Shares, Retail B Shares, Prime
A Shares, Prime B Shares and BKB Shares of the Funds.
The standard yield is computed as described above. Each Fund may also
advertise its "effective yield" which is calculated similarly but, when
annualized, the income earned by an investment in a Fund is assumed to be
reinvested. Each Fund may also quote its "tax equivalent yield" which
demonstrates the level of taxable yield necessary to produce an after-tax
equivalent yield to the Fund's tax-free yield. It is calculated as described
above. A Fund's tax-equivalent yield will always be higher than its yield.
The Funds may also advertise their performance using "average annual total
return" figures over various periods of time. Such total return figures reflect
the average percentage change in the value of an investment in a Fund from the
beginning date of the measuring period to the end of the measuring period and
are calculated as described above. Average total return figures will be given
for the most recent one-, five- and ten-year periods (if applicable), and may be
given for other periods as well, such as from the commencement of a Fund's
operations, or on a year-by-year basis. Each Fund may also use "aggregate total
return" figures for various periods, representing the cumulative change in the
value of an investment in a Fund for the specified period. Both methods of
calculating total return reflect the maximum front-end sales load charged by the
Funds for Retail A Shares and the applicable contingent deferred sales charge
for Retail B Shares of the Tax-Exempt Bond Fund and assume that dividends and
capital gains distributions made by a Fund during the period are reinvested in
Fund shares.
The Funds may also advertise total return data without reflecting the
sales charges imposed on the purchase of Retail A Shares or the redemption of
Retail B Shares in accordance with the rules of the SEC. Quotations that do not
reflect the sales charges will be higher than quotations that do reflect the
sales charges.
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
- 83 -
<PAGE>
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.
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 --
- 84 -
<PAGE>
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, 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
- 85 -
<PAGE>
(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 (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
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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, 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-
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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 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
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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%); 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
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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, 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
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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%).
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 Report 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 Report 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 Report and is incorporated herein by
reference. The financial statements in such Annual Report 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 financial statements and
Financial Highlights included in the Annual Report for the Funds for prior
periods were audited by PricewaterhouseCoopers LLP, Galaxy's former independent
auditors. The report of PricewaterhouseCoopers LLP dated December 23, 1998 on
the Funds' financial statements included in the Funds' Annual Report 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 ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the 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 S&P 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:
A-1
<PAGE>
"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 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.
A-2
<PAGE>
"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 BankWatch:
"TBW-1" - This designation represents Thomson 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 BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
A-3
<PAGE>
"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.
"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
A-4
<PAGE>
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 S&P 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 than the best bonds because margins of
protection may not be as large as in "Aaa" securities or
A-5
<PAGE>
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" are of 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.
A-6
<PAGE>
"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.
A-7
<PAGE>
"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. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved and "D"
represents the lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch
IBCA ratings from and including "AA" to "B" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long term debt and
preferred stock which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the 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.
"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 BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
A-8
<PAGE>
"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 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 very
strong characteristics 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:
"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, with
margins of protection that 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.
A-9
<PAGE>
"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.
A-10
<PAGE>
APPENDIX B
As stated above, the 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 by a Fund
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase
B-1
<PAGE>
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.
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
B-2
<PAGE>
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 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
B-3
<PAGE>
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 Funds will sell index futures contracts in order to offset a decrease
in market value of their respective portfolio securities that might otherwise
result from a market decline. A 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, a Fund will
purchase index futures contracts in anticipation of purchases of securities. In
a substantial majority of these transactions, a 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 a 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.
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
B-4
<PAGE>
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.
Cash Market Futures Market
----------- --------------
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
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 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
B-5
<PAGE>
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 exchanges which limit the amount of fluctuation in a
futures contract price during a single
B-7
<PAGE>
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
<PAGE>
The Galaxy Fund
Statement of Additional Information
February 29, 2000
Galaxy Asset Allocation Fund
Galaxy Equity Income Fund
Galaxy Growth and Income Fund
Galaxy Strategic Equity Fund
Galaxy Equity Value Fund
Galaxy Equity Growth Fund
Galaxy International Equity Fund
Galaxy Small Cap Value Fund
Galaxy Small Company Equity Fund
Retail A Shares, Retail B Shares and
Trust Shares
This Statement of Additional Information is not a prospectus. It
relates to the prospectuses for the Funds as listed below, as they may be
supplemented or revised from time to time (the "Prospectuses"). The Prospectuses
as well as the Funds' Annual Report to Shareholders dated October 31, 1999 (the
"Annual Report"), 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)
Current Prospectuses
o Prospectus for Retail A Shares and Retail B Shares of the Funds dated
February 29, 2000
o Prospectus for Trust Shares of the Funds dated February 29, 2000
o The financial statements included in the Annual Report 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 Galaxy Fund's Annual Report 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.
<PAGE>
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION............................................................1
DESCRIPTION OF GALAXY AND ITS SHARES...........................................1
INVESTMENT STRATEGIES, POLICIES AND RISKS......................................4
Asset Allocation Fund.................................................5
Equity Income Fund....................................................5
Growth and Income Fund................................................6
Strategic Equity Fund.................................................6
Equity Value Fund.....................................................6
Equity Growth Fund....................................................7
International Equity Fund.............................................7
Small Cap Value Fund..................................................8
Small Company Equity Fund.............................................9
Special Risk Considerations...........................................9
Foreign Securities....................................................9
European Currency Unification........................................10
Other Investment Policies and Risk Considerations....................10
Ratings..............................................................10
U.S. Government Obligations and Money Market Instruments.............11
Variable and Floating Rate Obligations...............................13
Repurchase and Reverse Repurchase Agreements.........................13
Securities Lending...................................................14
Investment Company Securities........................................15
REITs................................................................15
Derivative Securities................................................16
American, European and Global Depository Receipts....................25
Asset-Backed Securities -- Asset Allocation Fund.....................25
Mortgage-Backed Securities -- Asset Allocation Fund..................26
Mortgage Dollar Rolls -- Asset Allocation Fund.......................27
Convertible Securities...............................................28
When-Issued and Delayed Settlement Transactions - Growth and
Income, Strategic Equity, International Equity and
Small Cap Value Funds...............................................29
Restricted and Illiquid Securities...................................30
Portfolio Turnover...................................................30
INVESTMENT LIMITATIONS........................................................31
VALUATION OF PORTFOLIO SECURITIES.............................................37
Valuation of the Asset Allocation, Equity Income, Growth and
Income, Strategic Equity, Equity Value, Equity
Growth, Small Cap Value and Small Company Equity Funds..............37
Valuation of the International Equity Fund...........................38
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................38
Purchases of Retail A Shares and Retail B Shares.....................39
General .............................................................39
- i-
<PAGE>
Customers of Institutions............................................39
Applicable Sales Charge - Retail A Shares............................40
Computation of Offering Price - Retail A Shares......................41
Quantity Discounts...................................................43
Applicable Sales Charge - Retail B Shares............................46
Characteristics of Retail A Shares and Retail B Shares...............47
Factors to Consider When Selecting Retail A Shares or
Retail B Shares.....................................................48
Purchases of Trust Shares............................................48
Redemption of Retail A Shares, Retail B Shares and Trust Shares......49
INVESTOR PROGRAMS-RETAIL A SHARES AND RETAIL B SHARES.........................50
Exchange Privilege...................................................50
Retirement Plans.....................................................51
Automatic Investment Program and Systematic Withdrawal Plan..........51
Payroll Deduction Program............................................52
College Investment Program...........................................52
Direct Deposit Program...............................................52
TAXES.........................................................................53
Taxation of Certain Financial Instruments and Investments............53
TRUSTEES AND OFFICERS.........................................................54
Shareholder and Trustee Liability....................................57
INVESTMENT ADVISER AND SUB-ADVISER............................................58
ADMINISTRATOR.................................................................61
CUSTODIAN AND TRANSFER AGENT..................................................63
EXPENSES .....................................................................64
PORTFOLIO TRANSACTIONS........................................................64
SHAREHOLDER SERVICES PLAN.....................................................67
DISTRIBUTION AND SERVICES PLAN................................................69
DISTRIBUTOR...................................................................71
AUDITORS .....................................................................74
COUNSEL ......................................................................74
PERFORMANCE AND YIELD INFORMATION.............................................74
Performance Reporting................................................78
MISCELLANEOUS.................................................................79
FINANCIAL STATEMENTS..........................................................87
APPENDIX A...................................................................A-1
APPENDIX B...................................................................B-1
- ii -
<PAGE>
GENERAL INFORMATION
This Statement of Additional Information should be read in conjunction
with a current Prospectus. This Statement of Additional Information relates to
the Prospectuses for Trust Shares, Retail A Shares and Retail B Shares of the
nine Funds listed on the cover page. Each Fund also offers Prime A Shares and
Prime B Shares, which are described in a separate statement of additional
information and related prospectus. The Asset Allocation, Growth and Income and
International Equity Funds also offer BKB Shares, which are described in a
separate statement of additional information and related prospectus. This
Statement of Additional Information is incorporated by reference in its entirety
into the Prospectuses. No investment in shares of the Funds should be made
without reading a Prospectus.
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.
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 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 had
not commenced investment operations.
The Growth and Income Fund and Small Cap Value Fund commenced operations
on December 14, 1992 as separate investment portfolios (the "Predecessor Growth
and Income Fund" and "Predecessor Small Cap Value Fund," respectively, and
collectively, the "Predecessor
<PAGE>
Funds") of The Shawmut Funds, which was organized as a Massachusetts business
trust. On December 4, 1995, the Predecessor Funds were reorganized as new
portfolios of Galaxy. Prior to the reorganization, the Predecessor Funds offered
and sold shares of beneficial interest that were similar to Galaxy's Trust
Shares and Retail A Shares.
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
C shares (Trust Shares), Class C - Special Series 1 shares (Retail A Shares),
Class C - Special Series 2 shares (Retail B Shares), Class C - Special Series 3
shares (Prime A Shares) and Class C - Special Series 4 shares (Prime B Shares),
each series representing interests in the Equity Value 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 H - Series 1 shares (Trust Shares), Class H - Series 2 shares (Retail A
Shares), Class H - Series 3 shares (Retail B Shares), Class H - Series 4 shares
(Prime A Shares) and Class H - Series 5 shares (Prime B Shares), each series
representing interests in the Equity Growth Fund; Class I - Series 1 shares
(Trust Shares), Class I- Series 2 shares (Retail A Shares), Class I - Series 3
shares (Retail B Shares), Class I - Series 4 shares (Prime A Shares) and Class I
- - Series 5 shares (Prime B Shares), each series representing interests in the
Equity Income Fund; Class K - Series 1 shares (Trust Shares), Class K - Series 2
shares (Retail A Shares), Class K - Series 3 shares (Retail B Shares), Class K -
Series 4 shares (Prime A Shares) and Class K - Series 5 shares (Prime B Shares),
each series representing interests in the Small Company Equity 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 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; Class X - Series 1 shares (Trust Shares), Class X -
Series 2 shares (Retail A Shares), Class X - Series 3 shares (Retail B Shares),
Class X - Series 4 shares (Prime A Shares) and Class X - Series 5 shares (Prime
B Shares), each series representing interests in the Small Cap Value Fund; and
Class AA - Series 1 shares (Trust Shares), Class AA - Series 2 shares (Retail A
Shares), Class AA - Series 3 shares (Retail B Shares), Class AA - Series 4
shares (Prime A Shares) and Class AA - Series 5 shares (Prime B Shares), each
series representing interests in the Strategic Equity Fund. Each Fund is
classified as a diversified company under the Investment Company Act of 1940, as
amended (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
- 2 -
<PAGE>
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 Prospectuses, shares will be fully paid and
non-assessable. Each series of shares in a Fund (i.e., Retail A Shares, Retail B
Shares, Trust Shares, Prime A Shares, Prime B Shares and BKB Shares) bear pro
rata the same expenses and are entitled equally to the 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 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) and holders of Retail B Shares
will bear the expenses of the Distribution and Services Plan for Retail B
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 Plan" and "Distribution and Services Plan" 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 Retail A Shares and Trust 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 Retail A and Trust Shares and only Retail
B Shares of a Fund will be entitled to vote on matters submitted to a vote of
shareholders pertaining to Galaxy's Distribution and Services Plan for Retail B
Shares). Further, shareholders of all of the Funds, as well as those of any
other investment portfolio now or hereafter offered by Galaxy, will vote
together in the aggregate and not separately on a Fund-by-Fund basis, except as
otherwise required by law or when permitted by the Board of Trustees. Rule 18f-2
under the 1940 Act provides that any matter required to be submitted to the
holders of the outstanding voting securities of an investment company such as
Galaxy shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each Fund affected by
the matter. A particular Fund is deemed to be affected by a matter unless it is
clear that the interests of each Fund in the matter are substantially identical
or that the matter
- 3 -
<PAGE>
does not affect any interest of the Fund. Under the Rule, the approval of an
investment advisory agreement 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 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
- 4 -
<PAGE>
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 Prospectuses 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 following investment strategies, policies and risks
supplement those set forth in the Funds' Prospectuses.
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.
Equity Income Fund
In addition to common stocks, the Equity Income Fund may also invest in
securities convertible into common stock that offer income potential. See "Other
Investment Policies and Risk Considerations - Convertible Securities" below. The
Fund may invest up to 20% of its total assets in foreign securities, either
directly or indirectly through the purchase of ADRs and EDRs. In addition, the
Fund may invest in securities issued by foreign branches of U.S. banks and
foreign banks. See "Special Risk Considerations -- Foreign Securities" and
"Other Investment Policies and Risk Considerations -- American, European and
Global Depository Receipts" below. The Fund may also purchase put options and
call options and write covered call options. 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 Equity Income Fund.
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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 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.
Strategic Equity Fund
Under normal market and economic conditions, the Strategic Equity Fund
will invest at least 65% of its total assets in equity securities, including
common stocks, preferred stocks, securities convertible into common stock,
rights and warrants. The Fund may invest up to 20% of its total assets in
foreign securities, either directly or indirectly through ADRs, EDRs and GDRs.
See "Special Risk Considerations -- Foreign Securities" and "Other Investment
Policies and Risk Considerations -- American, European and Global Depository
Receipts" 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.
See "Other Investment Policies and Risk Considerations" below for
information regarding additional investment policies of the Strategic Equity
Fund.
Equity Value Fund
Under normal market and economic conditions, the Equity Value Fund invests
at least 75% of its total assets in common stock, preferred stock (including
convertible preferred stock) and debt securities convertible into common stock
that Fleet believes to be undervalued. Debt securities convertible into common
stock are purchased primarily during periods of relative
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market instability and are acquired principally for income with the potential
for appreciation being a secondary consideration. See "Other Investment Policies
and Risk Considerations -Convertible Securities" below.
The Fund may also invest up to 20% of its total assets in foreign
securities, either directly or indirectly through ADRs and EDRs. In addition,
the Fund may invest in securities issued by foreign branches of U.S. banks and
foreign banks. See "Special Risk Considerations -- Foreign Securities" and
"Other Investment Policies and Risk Considerations -- American, European and
Global Depository Receipts" below. The Fund may also write covered call options.
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 Equity Value Fund.
Equity Growth Fund
Convertible securities purchased by the Equity Growth Fund may include
both debt securities and preferred stock. By investing in convertible
securities, the Fund will seek the opportunity, through the conversion feature,
to participate in the capital appreciation of the common stock into which the
securities are convertible. See "Other Investment Policies and Risk
Considerations -- Convertible Securities" below. The Fund may also invest in
common stock warrants.
The Fund may invest up to 20% of its total assets in foreign securities,
either directly or indirectly through the purchase of ADRs and EDRs. In
addition, the Fund may invest in securities issued by foreign branches of U.S.
banks and foreign banks. See "Special Risk Considerations -- Foreign Securities"
and "Other Investment Policies and Risk Considerations -- American, European and
Global Depository Receipts" below. The Fund may also purchase put options and
call options and write covered call options. 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 Equity Growth 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
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<PAGE>
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 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.
Small Cap Value Fund
In addition to common stocks, the Small Cap Value Fund may purchase
convertible securities, including 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 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 a foreign issuer 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 Small Cap Value
Fund.
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<PAGE>
Small Company Equity Fund
In addition to common stocks, the Small Company Equity Fund may invest in
preferred stock, securities convertible into common stock, rights and warrants.
Under normal market and economic conditions, at least 65% of the Fund's total
assets will be invested in the equity securities of companies that have market
capitalizations of $1.5 billion or less. The Fund may invest up to 20% of its
total assets in foreign securities, either directly or indirectly through ADRs
and EDRs. See "Special Risk Considerations -- Foreign Securities" and "Other
Investment Policies and Risk Considerations -- American, European and Global
Depository Receipts" below.
The Fund may purchase put options and call options and write covered call
options as a hedge against changes resulting from market conditions and in the
value of the securities held in the Fund or which it intends to purchase and
where the transactions are economically appropriate for the reduction of risks
inherent in the ongoing management of the Fund. 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 Small Company Equity
Fund.
Special Risk Considerations
Foreign Securities
Investments 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 each of the Funds may invest in securities denominated in foreign
currencies, each Fund values its 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 a Fund makes its investments could
reduce the effect of increases and magnify the effect of decreases in the price
of a 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 a Fund's
securities in their local markets. In addition to favorable and unfavorable
currency
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<PAGE>
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 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.
Other Investment Policies and Risk Considerations
Investment methods described in the Prospectuses 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
All debt obligations, including convertible bonds, purchased by the Asset
Allocation, Equity Income, Strategic Equity, Equity Value, Equity Growth and
Small Company Equity Funds are rated investment grade by Moody's Investors
Service, Inc. ("Moody's") ("Aaa," "Aa," "A" and "Baa") or Standard & Poor's
Ratings Group ("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.
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<PAGE>
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 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 and Small Cap Value Funds may purchase convertible
bonds rated "Ba" or higher by Moody's or "BB" or higher by S&P or Fitch IBCA,
Inc. ("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 and Small Cap Value
Funds 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.
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 or Oechsle, as the case may
be, 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"). However, each Fund will sell promptly any security that is not rated
investment grade by either S&P or Moody's if such securities exceed 5% of the
Fund's net assets.
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
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<PAGE>
U.S. Treasury; others, such as those of the Federal Home Loan Banks, are
supported by the right 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.
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 and
Small Cap Value Funds, 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 limited to 10% (15% with respect to the Strategic
Equity Fund, Growth and Income Fund and Small Cap Value Fund) of a Fund's net
assets. Investments by the Funds in non-negotiable time deposits are limited to
no more than 5% of each Fund's total assets at the time of purchase.
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. 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 a Fund 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 variable and floating rate instruments which
are unsecured instruments that permit the indebtedness thereunder to vary.
Variable rate instruments
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<PAGE>
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 there 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 that 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.
The Funds 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
Prospectuses and this Statement of Additional Information. If such an 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 an instrument will
usually be deemed to have a maturity equal to the longer of the period remaining
until the next regularly scheduled interest rate adjustment or the time the Fund
involved can receive payment of principal as specified in the instrument.
Instruments which are U.S. Government obligations and certain variable rate
instruments having a nominal maturity of 397 days or less when purchased by the
Fund involved, however, will be deemed to have a maturity equal to the period
remaining until the next interest rate adjustment.
Repurchase and Reverse Repurchase Agreements
Each 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 the 10% limit (15% with
respect to the Strategic Equity Fund) described below in Investment Limitation
No. 3 under "Investment Limitations" with respect to the Asset Allocation,
Equity Income, Strategic Equity, Equity Value, Equity Growth, International
Equity and Small Company Equity Funds, and to the 15% limit described below in
Investment Limitation No. 23 under "Investment Limitations" with respect to the
Growth and Income and Small Cap Value Funds.
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<PAGE>
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.
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 may also 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.
Securities Lending
Each Fund 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 and Small Cap Value
Funds which may loan their 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.
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<PAGE>
Investment Company Securities
The Asset Allocation, Equity Income, Equity Value, Equity Growth,
International Equity and Small Company Equity Funds 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. 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 primarily of securities of issuers located in one foreign country.
The Growth and Income, Strategic Equity and Small Cap Value Funds may 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,
Strategic Equity and Small Cap Value Funds may invest exclusively in one other
investment company similar to the respective Funds. 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, Strategic Equity and Small Cap Value Funds, 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 Fund, other investment portfolios of Galaxy, or
any other investment companies advised by Fleet or Oechsle.
REITs
Each Fund may invest up to 10% of its 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
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<PAGE>
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
The 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, 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 to 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 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.
Put and Call Options -- Asset Allocation, Equity Income, Equity Growth and
Small Company Equity Funds. The Asset Allocation, Equity Income, Equity Growth
and Small Company Equity Funds 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.
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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 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
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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, Equity Income, Equity Value,
Equity Growth, International Equity and Small Company Equity Funds. To further
increase return on their portfolio securities, in accordance with their
respective investment objectives and policies, the Asset Allocation, Equity
Income, Equity Value, Equity Growth, International Equity and Small Company
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 Asset Allocation, Equity Income,
Equity Value, Equity Growth, International Equity and Small Company Equity 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 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
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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.
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.
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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, Strategic Equity and
Small Cap Value Funds. The Growth and Income, Strategic Equity and Small Cap
Value Funds may buy and sell options and futures contracts to manage their
exposure to changing interest rates, security prices and currency exchange
rates. The Funds may invest in options and futures 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 a
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 a Fund's individual
return. A 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 Funds will not hedge more than 20% of their respective total assets by
selling futures, buying puts, and writing calls under normal conditions. The
Funds will not buy futures or write puts whose underlying value exceeds 20% of
their respective total assets, and will not buy calls with a value exceeding 5%
of their respective total assets.
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Stock Index Futures, Swap Agreements, Indexed Securities and Options -
Growth and Income, Strategic Equity and Small Cap Value Funds. The Growth and
Income, Strategic Equity and Small Cap Value Funds 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 their
respective portfolios 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 Funds' respective total
assets. The Funds will not purchase options to the extent that more than 5% of
the value of their respective total assets would be invested in premiums on open
put option positions. In addition, the Funds do not intend to invest more than
5% of the market value of their respective total assets in each of the
following: futures contracts, swap agreements, and indexed securities. When a
Fund enters into a swap agreement, liquid assets of the Fund equal to the value
of the swap agreement will be segregated by that Fund. The Funds 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 Funds plan
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.
As a means of reducing fluctuations in the net asset value of shares of
the Funds, the Funds may attempt to hedge all or a portion of their respective
portfolios through the purchase of listed put options on stocks, stock indices
and stock index futures contracts. These options will be used as a form of
forward pricing to protect portfolio securities against decreases in value
resulting from market factors, such as an anticipated increase in interest
rates. A purchased put option gives a 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 a 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 Funds may also write covered call options. As the writer of a call
option, a Fund has the obligation upon exercise of the option during the option
period to deliver the underlying security upon payment of the exercise price.
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<PAGE>
The Funds may only: (1) buy listed put options on stock indices and stock
index futures contracts; (2) buy listed put options on securities held in their
respective portfolios; and (3) sell listed call options either on securities
held in their respective portfolios or on securities which they have the right
to obtain without payment of further consideration (or have segregated cash in
the amount of any such additional consideration). A 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. A Fund may also enter
into stock index futures contracts. A stock index futures contract is a
bilateral agreement which obligates the seller to deliver (and the purchaser to
take delivery of) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of trading
of the contract and the price at which the agreement is originally made. There
is no physical delivery of the stocks constituting the index, and no price is
paid upon entering into a futures contract.
In general, option contracts are closed out prior to their expiration. A
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." A Fund may decide to close its position on a
contract at any time prior to the contract's expiration. This is accomplished by
the Fund taking an opposite position at the then prevailing price, thereby
terminating its existing position in the contract. Because the initial margin
resembles a performance bond or good-faith deposit on the contract, it is
returned to the Fund upon the termination of the contract, assuming that all
contractual obligations have been satisfied. Therefore, the margin utilized in
futures contracts is readily distinguishable from the margin employed in
security transactions, since the margin employed in futures contracts does not
involve the borrowing of funds to finance the transaction.
None of the Growth and Income, Strategic Equity or Small Cap Value Funds
will 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, a 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, a
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 Growth and Income, Strategic Equity and Small Cap Value Funds may
invest in indexed securities whose value is linked to foreign currencies,
interest rates, commodities, indices or other financial indicators. Most indexed
securities are short- to intermediate-term fixed income securities whose values
at maturity or interest rates rise or fall according to the
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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 their exposure to different types of investments,
the Growth and Income, Strategic Equity and Small Cap Value Funds may enter into
interest rate swaps, currency swaps, and other types of swap agreements such as
caps, collars, and floors. In a typical interest rate swap, one party agrees to
make regular payments equal to a floating interest rate times a "notional
principal amount," in return for payments equal to a fixed rate times the same
amount, for a specified period of time. If a swap agreement provides for
payments in different currencies, the parties might agree to exchange notional
principal amount as well. Swaps may also depend on other prices or rates, such
as the value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer 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 a Fund's investment exposure from one
type of investment to another. For example, if a 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 a Fund's
investments and its share price and yield.
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 Funds' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Funds may also suffer losses
if they are unable to terminate outstanding swap agreements or reduce their
exposure through offsetting transactions.
Foreign Currency Exchange Transactions. Because each Fund 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
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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.
Forward foreign currency exchange contracts also allow a Fund 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 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
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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
Each Fund may invest in ADRs and EDRs. The Growth and Income, Strategic
Equity, International Equity and Small Cap Value 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
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 -- Asset Allocation Fund
The Asset Allocation Fund 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.
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<PAGE>
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.
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 -- Asset Allocation Fund
The Asset Allocation Fund 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 the Fund purchases mortgage-backed securities
at a premium, mortgage foreclosures and prepayments of principal by mortgagors
(which may be
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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 the 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 -- Asset Allocation Fund
The Asset Allocation Fund may enter into mortgage "dollar rolls" in which
the 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, the Fund loses the right to receive
principal and interest paid on the securities sold. However, the Fund would
benefit to the extent of 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 the 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 Fund. The Fund 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 Fund proposes to treat
mortgage dollar rolls as two separate transactions; one involving the purchase
of a security and a separate transaction involving a sale. The Fund does 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
the 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
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prepayments. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
Convertible Securities
The 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 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
and/or Oechsle 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 and Small Cap Value Funds 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
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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 each 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 a 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 Funds do 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 and Delayed Settlement Transactions - Growth and Income, Strategic
Equity, International Equity and Small Cap Value Funds
The Growth and Income, Strategic Equity, International Equity and Small
Cap Value Funds may purchase eligible securities on a "when-issued" basis. The
Growth and Income, Strategic Equity and Small Cap Value Funds may also purchase
eligible securities on a "delayed settlement" basis. When-issued 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 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 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.
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 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.
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<PAGE>
When a Fund engages in when-issued or delayed settlement transactions, it
relies on the seller to consummate the trade. Failure of the seller to do so may
result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous for a security. For purposes of determining
the average weighted maturity of a Fund's portfolio, the maturity of when-issued
securities is calculated from the date of settlement of the purchase to the
maturity date.
Restricted and Illiquid Securities
Each Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended (the "1933 Act"). Section 4(2) commercial paper is restricted
as to disposition under federal securities law and is generally sold to
institutional investors, such as the Funds, who agree that they are purchasing
the paper for investment purposes and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors like the
Funds through or with the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus providing liquidity. The
Funds believe that Section 4(2) commercial paper and possibly certain other
restricted securities that meet the criteria for liquidity established by
Galaxy's Board of Trustees are quite liquid. The Funds intend, therefore, to
treat the restricted securities that meet the criteria for liquidity established
by the Board of Trustees, including Section 4(2) commercial paper (as determined
by Fleet), as liquid and not subject to the investment limitation applicable to
illiquid securities. In addition, because Section 4(2) commercial paper is
liquid, the Funds do not intend to subject such paper to the limitation
applicable to restricted 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. A Fund's investment 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 10% limitation (15% with respect to the Growth and
Income, Small Cap Value and Strategic Equity Funds) on purchases of illiquid
instruments described under "Investment Limitations" below, Rule 144A securities
will not be considered to be illiquid if Fleet and/or Oechsle has determined, in
accordance with guidelines established by the Board of Trustees, that an
adequate trading market exists for such securities.
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
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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.
INVESTMENT LIMITATIONS
In addition to each Fund's investment objective as stated in its
Prospectuses, 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").
The Asset Allocation, Equity Income, Strategic Equity, Equity Value,
Equity Growth, International Equity and Small Company Equity 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, 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.
2. 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%, with respect to the Equity Value Fund,
or 33%, with respect to the Asset Allocation, Equity Income,
Strategic Equity, Equity Growth, International Equity and Small
Company Equity Funds, 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 10%, with respect to the
Equity Value Fund, or 33%, with respect to the Asset Allocation,
Equity Income, Strategic Equity, Equity Growth, International Equity
and Small Company Equity Funds, 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 10%, with respect to the Equity Value Fund, or 33%, with
respect to the Equity Growth, Equity Income, International Equity,
Small Company Equity, Asset Allocation and Strategic Equity Funds,
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.
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<PAGE>
3. Invest more than 10% (15% with respect to the Strategic Equity Fund)
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 (with respect to the Equity Value Fund),
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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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 (i) the Asset Allocation,
Equity Income, Equity Value, Equity Growth, International Equity and
Small Company Equity 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, and (ii) the Strategic Equity Fund may engage in
transactions involving financial futures contracts or options on
financial futures contracts.
9. Invest in or sell put options, call options, straddles, spreads, or
any combination thereof; provided, however, that each of the Asset
Allocation, Equity Income, Equity Value, Equity Growth,
International Equity and Small Company Equity Funds may write
covered call options with respect to its portfolio securities that
are traded on a national securities exchange,
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<PAGE>
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 Asset Allocation, Equity Income,
Equity Growth, International Equity and Small Company Equity Funds
may purchase put and call options to the extent permitted by their
investment objectives and policies, and (ii) the Strategic Equity
Fund may buy and sell options, including without limit buying or
writing puts and calls, based on any type of security, index or
currency, including options on foreign exchanges and options not
traded on exchanges.
10. Invest in companies for the purpose of exercising management or
control.
11. 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; and further
provided, that the Strategic Equity Fund may from time to time, on a
temporary basis, invest exclusively in one other investment company
similar to the Fund.
The Growth and Income and Small Cap Value Funds may not:
12. 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 Funds may borrow up to one-third of the value of their
respective total assets and pledge up to 10% of the value of their
respective total assets to secure such borrowings.
13. With respect to 75% of the value of their respective 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.
14. Sell any securities short or purchase any securities on margin, but
each 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 a 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.
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15. Issue senior securities except that each Fund may borrow money or
engage in reverse repurchase agreements in amounts up to one-third
of the value of its total assets, including the amounts borrowed;
and except to the extent that the Funds may enter into futures
contracts. No Fund will borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling a Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. No Fund will purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
16. Mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. In those cases, a Fund may only mortgage,
pledge, or hypothecate assets having a market value not exceeding
10% of the value of its total assets at the time of purchase. For
purposes of this limitation, the following will not be deemed to be
pledges of a 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.
17. Purchase or sell real estate or real estate limited partnerships,
although each Fund may invest in securities of issuers whose
business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in real
estate.
18. Purchase or sell commodities, commodity contracts, or commodity
futures contracts except to the extent that a Fund may engage in
transactions involving financial futures contracts or options on
financial futures contracts.
19. Underwrite any issue of securities, except as a Fund may be deemed
to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment
objective, policies and limitations.
20. Lend any of its assets except that a Fund may lend portfolio
securities up to one-third the value of its total assets. This
limitation shall not prevent a 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
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<PAGE>
investment objective, policies and limitations or Galaxy's
Declaration of Trust.
21. With respect to securities comprising 75% of the value of its total
assets, purchase securities issued by any one issuer (other than
cash, cash items, or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities
and repurchase agreements collateralized by such securities) if, as
a result, more than 5% of the value of its total assets would be
invested in the securities of that issuer. A Fund will not acquire
more than 10% of the outstanding voting securities of any one
issuer.
22. 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, a 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
and Small Cap Value Funds 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:
23. The Funds may not invest more than 15% of their respective 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).
24. Each Fund will limit its investments in other investment companies
to not more than 3% of the total outstanding voting stock of any
investment company; will invest no more than 5% of its total assets
in any one investment company; and will invest no more than 10% of
its total assets in investment companies in general. However, these
limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization or acquisition of assets.
The Funds will purchase the securities of other investment companies
only in open market transactions involving only customary broker's
commissions. It should be noted that investment companies incur
certain expenses such as management fees, and therefore any
investment by a Fund in shares of another investment company would
be subject to such duplicate expenses.
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25. Neither Fund may purchase or retain the securities of any issuer if
the officers and Trustees of Galaxy or Fleet, owning individually
more than 1/2 of 1% of the issuer's securities, together own more
than 5% of the issuer's securities.
26. Neither Fund may purchase or sell interests in oil, gas, or mineral
exploration or development programs or leases; except that the Funds
may purchase the securities of issuers which invest in or sponsor
such programs.
27. Neither Fund may purchase put options on securities, unless the
securities are held in the Fund's portfolio and not more than 5% of
the value of the Fund's total assets would be invested in premiums
on open put option positions.
28. Neither Fund may 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. Neither
Fund may write call options in excess of 5% of the value of its
total assets.
29. Neither Fund may invest more than 5% of the value of its total
assets in securities of issuers which have records of less than
three years of continuous operations, including the operation of any
predecessor.
30. Neither Fund will invest more than 15% of the value of its
respective net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days after
notice, non-negotiable fixed time deposits with maturities over
seven days, and certain securities not determined by the Board of
Trustees to be liquid.
31. Neither Fund may invest in companies for the purpose of exercising
management or control.
32. Neither Fund may invest more than 5% of its net assets in warrants.
No more than 2% of this 5% may be warrants which are not listed on
the New York Stock Exchange.
In addition, the Funds may not purchase any securities which would cause
25% or 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 (a) there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, (b) 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
(c) utilities will be classified according to their
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services. (For example, gas, gas transmission, electric and gas, electric and
telephone each will be considered a separate industry.)
With respect to Investment Limitation No. 2 above, (a) the Equity Value
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 and each of the Asset Allocation, Equity Income, Strategic Equity,
Equity Growth, International Equity and Small Company 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. 4 above, each of the Asset
Allocation, Equity Income, Strategic Equity, Equity Value, Equity Growth,
International Equity and Small Company Equity Funds does not intend to acquire
more than 10% of the outstanding voting securities of any one issuer.
The Growth and Income and Small Cap Value Funds intend 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. Each
such 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, if 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.
VALUATION OF PORTFOLIO SECURITIES
Valuation of the Asset Allocation, Equity Income, Growth and Income, Strategic
Equity, Equity Value, Equity Growth, Small Cap Value and Small Company Equity
Funds
In determining market value, the assets in the Asset Allocation, Equity
Income, Growth and Income, Strategic Equity, Equity Value, Equity Growth, Small
Cap Value and Small Company Equity Funds which are traded on a recognized stock
exchange are valued at the last
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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.
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 Fall Corporate Center, 6th
Floor, West Conshohocken, Pennsylvania 19428. PDI has agreed to use appropriate
efforts to solicit all purchase orders.
- 38 -
<PAGE>
This Statement of Additional Information provides additional purchase and
redemption information for Trust Shares, Retail A Shares and Retail B Shares of
the Funds. Purchase and redemption information for A Prime Shares and B Prime
Shares of the Funds and BKB Shares of the Asset Allocation, Growth and Income
and International Equity Funds is provided in separate prospectuses and
statements of additional information.
Purchases of Retail A Shares and Retail B Shares
General
Investments in Retail A Shares of the Funds are subject to a front-end
sales charge. Investments in Retail B Shares of the Funds are subject to a
back-end sales charge. This back-end sales charge declines over time and is
known as a "contingent deferred sales charge."
Investors should read "Characteristics of Retail A Shares and Retail B
Shares" and "Factors to Consider When Selecting Retail A Shares or Retail B
Shares" below before deciding between the two.
PDI has established several procedures to enable different types of
investors to purchase Retail A Shares and Retail B Shares (collectively, "Retail
Shares") of the Funds. Retail Shares may be purchased by individuals or
corporations who submit a purchase application to Galaxy, purchasing directly
either for their own accounts or for the accounts of others. Retail Shares may
also be purchased by FIS Securities, Inc., Fleet Securities, Inc., Fleet
Enterprises, Inc., FleetBoston Financial Corporation, its affiliates, their
correspondent banks and other qualified banks, savings and loan associations and
broker/dealers on behalf of their customers. Purchases may take place only on
days on which the New York Stock Exchange (the "Exchange") is open for business
("Business Days"). If an institution accepts a purchase order from a customer on
a non-Business Day, the order will not be executed until it is received and
accepted by PDI on a Business Day in accordance with PDI's procedures.
Galaxy has authorized certain brokers to accept purchase, exchange and
redemption orders on behalf of Galaxy with respect to Retail A Shares of the
Funds. Such brokers are authorized to designate other intermediaries to accept
purchase, exchange and redemption orders on behalf of Galaxy. Galaxy will be
deemed to have received a purchase, exchange or redemption order when such an
authorized broker or designated intermediary accepts the order. Orders for the
purchase, exchange or redemption of Retail A Shares of the Funds accepted by any
such authorized broker or designated intermediary will be effected at the Funds'
respective net asset values per share next determined after acceptance of such
order and will not be subject to the front-end sales charge with respect to
Retail A Shares described in the applicable Prospectus and in this Statement of
Additional Information.
Customers of Institutions
Retail Shares purchased by institutions on behalf of their customers will
normally be held of record by the institution and beneficial ownership of Retail
Shares will be recorded by the
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<PAGE>
institution and reflected in the account statements provided to its customers.
Galaxy's transfer agent may establish an account of record for each customer of
an institution reflecting beneficial ownership of Retail Shares. Depending on
the terms of the arrangement between a particular institution and Galaxy's
transfer agent, confirmations of Retail Share purchases and redemptions and
pertinent account statements will either be sent by Galaxy's transfer agent
directly to a customer with a copy to the institution, or will be furnished
directly to the customer by the institution. Other procedures for the purchase
of Retail Shares established by institutions in connection with the requirements
of their customer accounts may apply. Customers wishing to purchase Retail
Shares through their institution should contact such entity directly for
appropriate purchase instructions.
Applicable Sales Charge - Retail A Shares
The public offering price for Retail A Shares of the Funds 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 applicable 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:
Reallowance to
Dealers
-------
As a % of
Offering Price
Amount of Transaction Per Share
- --------------------- ---------
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
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
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<PAGE>
the sales charge waivers described in the applicable 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:
o 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;
o purchases by current and retired members of Galaxy's Board of
Trustees and members of their immediate families;
o purchases by officers, directors, employees and retirees of
FleetBoston Financial Corporation and any of its affiliates and
members of their immediate families;
o purchases by officers, directors, employees and retirees of PFPC
Inc. and members of their immediate families;
o 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;
o purchases by institutional investors, including but not limited to
bank trust departments and registered investment advisers;
o 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;
o 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
o 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, 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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<PAGE>
Asset Allocation Equity Income
Fund Fund
---------------- ---------------
Net Assets ....................... $ 389,077,216 $ 213,040,891
Outstanding Shares ............... 21,935,139 10,925,405
Net Asset Value Per Share ........ $ 17.74 $ 19.50
Sales Charge (3.75% of
the offering price) .............. $ 0.69 $ 0.76
Offering Price to Public ......... $ 18.43 $ 20.26
Growth and Strategic
Income Fund Equity Fund
----------- -----------
Net Assets ....................... $ 232,110,404 $ 8,228,538
Outstanding Shares ............... 14,524,500 832,168
Net Asset Value Per Share ........ $ 15.98 $ 9.89
Sales Charge (3.75% of
the offering price) .............. $ 0.62 $ 0.39
Offering Price to Public ......... $ 16.60 $ 10.28
Equity Equity
Value Fund Growth Fund
---------- -----------
Net Assets ....................... $ 258,331,914 $ 443,639,472
Outstanding Shares ............... 14,133,678 15,304,980
Net Asset Value Per Share ........ $ 18.28 $ 28.99
Sales Charge (3.75% of
the offering price) .............. $ 0.71 $ 1.13
Offering Price to Public ......... $ 18.99 $ 30.12
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<PAGE>
International Small Cap
Equity Fund Value Fund
----------- ----------
Net Assets ....................... $ 89,326,639 $ 80,869,956
Outstanding Shares ............... 4,282,082 6,228,694
Net Asset Value Per Share ........ $ 20.86 $ 12.98
Sales Charge (3.75% of
the offering price) .............. $ 0.81 $ 0.51
Offering Price to Public ......... $ 21.67 $ 13.49
Small Company
Equity Fund
-----------
Net Assets ......................................... $ 87,920,586
Outstanding Shares ................................. 5,613,672
Net Asset Value Per Share .......................... $ 15.66
Sales Charge (3.75% of
the offering price) ................................ $ 0.61
Offering Price to Public ........................... $ 16.27
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
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<PAGE>
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
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
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<PAGE>
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>
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
applicable 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.
- 45 -
<PAGE>
Applicable Sales Charge - Retail B Shares
The public offering price for Retail B Shares of the Funds is the net
asset value of the Retail B Shares purchased. Although investors pay no
front-end sales charge on purchases of Retail B Shares, such Shares are subject
to a contingent deferred sales charge at the rates set forth below if they are
redeemed within six years of purchase. Securities dealers, brokers, financial
institutions and other industry professionals will receive commissions from PDI
in connection with sales of Retail B Shares. These commissions may be different
than the reallowances or placement fees paid to dealers in connection with sales
of Retail A Shares. 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 B Shares of a Fund. See "Applicable Sales Charge -- Retail A Shares." The
contingent deferred sales charge on Retail B Shares is based on the lesser of
the net asset value of the Shares on the redemption date or the original cost of
the Shares being redeemed. As a result, no sales charge is imposed on any
increase in the principal value of an investor's Retail B Shares. In addition, a
contingent deferred sales charge will not be assessed on Retail B Shares
purchased through reinvestment of dividends or capital gains distributions.
The proceeds from the contingent deferred sales charge that an investor
may pay upon redemption go to PDI, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Retail B Shares.
Exemptions from the Contingent Deferred Sales Charge. Certain types of
redemptions may also qualify for an exemption from the contingent deferred sales
charge. In addition to the sales charge exemptions described in the applicable
Prospectus, the contingent deferred sales charge with respect to Retail B Shares
is not assessed on: (i) redemptions in connection with required (or, in some
cases, discretionary) distributions to participants or beneficiaries of an
employee pension, profit-sharing or other trust or qualified retirement or Keogh
plan, individual retirement account or custodial account maintained pursuant to
Section 403(b)(7) of the Code; (ii) redemptions in connection with required (or,
in some cases, discretionary) distributions to participants in qualified
retirement or Keogh plans, individual retirement accounts or custodial accounts
maintained pursuant to Section 403(b)(7) of the Code due to death, disability or
the attainment of a specified age; (iii) redemptions effected pursuant to a
Fund's right to liquidate a shareholder's account if the aggregate net asset
value of Retail B Shares held in the account is less than the minimum account
size; (iv) redemptions in connection with the combination of a Fund with any
other investment company registered under the 1940 Act by merger, acquisition of
assets, or by any other transaction; (v) redemptions resulting from a tax-free
return of an excess contribution pursuant to Section 408(d)(4) or (5) of the
Code; or (vi) any redemption of Retail B Shares held by an investor, provided
the investor was the beneficial owner of shares of a Fund (or any of the other
portfolios offered by Galaxy or otherwise advised by Fleet or its affiliates)
before December 1, 1995. In addition to the foregoing exemptions, no contingent
deferred sales charge will be imposed on redemptions made pursuant to the
Systematic Withdrawal Plan, subject to the limitations set forth under "Investor
Programs - Retail A Shares and Retail B Shares -- Automatic Investment Program
and Systematic Withdrawal Plan" below.
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<PAGE>
Characteristics of Retail A Shares and Retail B Shares
The primary difference between Retail A Shares and Retail B Shares lies in
their sales charge structures and shareholder servicing/distribution expenses.
An investor should understand that the purpose and function of the sales charge
structures and shareholder servicing/distribution arrangements for both Retail A
Shares and Retail B Shares are the same.
Retail A Shares of the Funds are sold at their net asset value plus a
front-end sales charge of up to 3.75%. This front-end sales charge may be
reduced or waived in some cases. See the applicable Prospectus and "Applicable
Sales Charges -- Retail A Shares" and "Quantity Discounts" above. Retail A
Shares of a Fund are currently subject to ongoing shareholder servicing fees at
an annual rate of up to .30% of the Fund's average daily net assets attributable
to its Retail A Shares.
Retail B Shares of the Funds are sold at net asset value without an
initial sales charge. Normally, however, a deferred sales charge is paid if the
Shares are redeemed within six years of investment. See the applicable
Prospectus and "Applicable Sales Charges - Retail B Shares" above. Retail B
Shares of a Fund are currently subject to ongoing shareholder servicing and
distribution fees at an annual rate of up to .95% of the Fund's average daily
net assets attributable to its Retail B Shares. These ongoing fees, which are
higher than those charged on Retail A Shares, will cause Retail B Shares to have
a higher expense ratio and pay lower dividends than Retail A Shares.
Six years after purchase, Retail B Shares of the Funds will convert
automatically to Retail A Shares of the Funds. The purpose of the conversion is
to relieve a holder of Retail B Shares of the higher ongoing expenses charged to
those shares, after enough time has passed to allow PDI to recover approximately
the amount it would have received if a front-end sales charge had been charged.
The conversion from Retail B Shares to Retail A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Retail A Shares as he or she had of Retail B Shares. The conversion
occurs six years after the beginning of the calendar month in which the Shares
are purchased. Upon conversion, the converted shares will be relieved of the
distribution and shareholder servicing fees borne by Retail B Shares, although
they will be subject to the shareholder servicing fees borne by Retail A Shares.
Retail B Shares acquired through a reinvestment of dividends or
distributions (as discussed under "Applicable Sales Charge - Retail B Shares")
are also converted at the earlier of two dates - six years after the beginning
of the calendar month in which the reinvestment occurred or the date of
conversion of the most recently purchased Retail B Shares that were not acquired
through reinvestment of dividends or distributions. For example, if an investor
makes a one-time purchase of Retail B Shares of a Fund, and subsequently
acquires additional Retail B Shares of such Fund only through reinvestment of
dividends and/or distributions, all of such investor's Retail B Shares in the
Fund, including those acquired through reinvestment, will convert to Retail A
Shares of such Fund on the same date.
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<PAGE>
Factors to Consider When Selecting Retail A Shares or Retail B Shares
Before purchasing Retail A Shares or Retail B Shares of the Funds,
investors should consider whether, during the anticipated periods of their
investments in the particular Funds, the accumulated distribution and
shareholder servicing fees and potential contingent deferred sales charge on
Retail B Shares prior to conversion would be less than the initial sales charge
and accumulated shareholder servicing fees on Retail A Shares purchased at the
same time, and to what extent such differential would be offset by the higher
yield of Retail A Shares. In this regard, to the extent that the sales charge
for Retail A Shares is waived or reduced by one of the methods described above,
investments in Retail A Shares become more desirable. An investment of $250,000
or more in Retail B Shares would not be in most shareholders' best interest.
Shareholders should consult their financial advisers and/or brokers with respect
to the advisability of purchasing Retail B Shares in amounts exceeding $250,000.
Although Retail A Shares are subject to a shareholder servicing fee, they
are not subject to the higher distribution and shareholder servicing fee
applicable to Retail B Shares. For this reason, Retail A Shares can be expected
to pay correspondingly higher dividends per Share. However, because initial
sales charges are deducted at the time of purchase, purchasers of Retail A
Shares (that do not qualify for exemptions from or reductions in the initial
sales charge) would have less of their purchase price initially invested in
these Funds than purchasers of Retail B Shares in the Funds.
As described above, purchasers of Retail B Shares will have more of their
initial purchase price invested. Any positive investment return on this
additional invested amount would partially or wholly offset the expected higher
annual expenses borne by Retail B Shares. Because a Fund's future returns cannot
be predicted, there can be no assurance that this will be the case. Holders of
Retail B Shares would, however, own shares that are subject to a contingent
deferred sales charge of up to 5.00% upon redemption, depending upon the year of
redemption. Investors expecting to redeem during this six-year period should
compare the cost of the contingent deferred sales charge plus the aggregate
distribution and shareholder servicing fees on Retail B Shares to the cost of
the initial sales charge and shareholder servicing fees on the Retail A Shares.
Over time, the expense of the annual distribution and shareholder servicing fees
on the Retail B Shares may equal or exceed the initial sales charge and annual
shareholder servicing fee applicable to Retail A Shares. For example, if net
asset value remains constant, the aggregate distribution and shareholder
servicing fees with respect to Retail B Shares of a Fund would equal or exceed
the initial sales charge and aggregate shareholder servicing fees of Retail A
Shares approximately six years after the purchase. In order to reduce such fees
for investors that hold Retail B Shares for more than six years, Retail B Shares
will be automatically converted to Retail A Shares as described above at the end
of such six-year period.
Purchases of Trust Shares
Trust Shares are sold to investors maintaining qualified accounts at bank
and trust institutions, including subsidiaries of FleetBoston Financial
Corporation, and to participants in employer-sponsored defined contribution
plans (such institutions and plans are referred to herein
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<PAGE>
collectively as "Institutions"). Trust Shares sold to such investors
("Customers") will be held of record by Institutions. Purchases of Trust Shares
will be effected only on days on which PDI, Galaxy's custodian and the
purchasing Institution are open for business ("Trust Business Days"). If an
Institution accepts a purchase order from its Customer on a non-Trust Business
Day, the order will not be executed until it is received and accepted by PDI on
a Trust Business Day in accordance with the foregoing procedures.
Trust Shares of the International Equity Fund may also be sold to clients,
members and employees of Oechsle.
Other Purchase Information
On a Business Day or a Trust Business Day when the 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
or Trust Business Day.
Redemption of Retail A Shares, Retail B Shares
and Trust 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 or Trust
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 or Trust Business Day.
Galaxy may require any information reasonably necessary to ensure that a
redemption has been duly authorized. Proceeds from the redemptions of Retail B
Shares of the Funds will be reduced by the amount of any applicable contingent
deferred sales charge. 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-RETAIL A SHARES AND RETAIL B SHARES
The following information supplements the description in the applicable
Prospectus as to the various Investor Programs available to holders of Retail
Shares of the Funds.
Exchange Privilege
The minimum initial investment to establish an account in another Fund or
portfolio by exchange, except for the Institutional Government Money Market
Fund, is $2,500, unless (i) the Retail 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 the Automatic Investment Program
described below, in which event there is no minimum initial investment
requirement, or in the College Investment Program described below, in which
event the minimum initial investment is generally $100. The minimum initial
investment to establish an account by exchange in the Institutional Government
Money Market Fund is $2 million.
An exchange involves a redemption of all or a portion of the Retail Shares
of a Fund and the investment of the redemption proceeds in Retail Shares of
another Fund or portfolio offered by Galaxy or, with respect to Retail A Shares,
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 Retail 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 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.
- 50 -
<PAGE>
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 request, an investor should consult a tax or other financial
adviser to determine the tax consequences.
Retirement Plans
Retail Shares of the 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
The Automatic Investment Program permits an investor to purchase Retail
Shares of a Fund each month or each quarter. Provided an investor's financial
institution allows automatic withdrawals, Retail 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 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 Shares on a monthly, quarterly, semi-annual, or annual basis on any
Business Day designated by
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<PAGE>
the investor. 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.
No contingent deferred sales charge will be assessed on redemptions of Retail B
Shares made through the Systematic Withdrawal Plan that do not exceed 12% of an
account's net asset value on an annualized basis. For example, monthly,
quarterly and semi-annual Systematic Withdrawal Plan redemptions of Retail B
Shares will not be subject to the contingent deferred sales charge if they do
not exceed 1%, 3% and 6%, respectively, of an account's net asset value on the
redemption date. Systematic Withdrawal Plan redemptions of Retail B Shares in
excess of this limit are still subject to the applicable contingent deferred
sales charge.
Payroll Deduction Program
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 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
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
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
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 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 currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Funds will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends or gross sale proceeds paid to
any shareholder who (i) has failed to provide a correct tax identification
number, (ii) is subject to backup withholding due to prior 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 that 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 a Fund on December 31
of such year if such dividends are actually paid during January of the following
year.
Taxation of Certain Financial Instruments and Investments
The tax principles applicable to transactions in financial instruments and
futures contacts and options that may be engaged in by a Fund, and investments
in passive foreign investment companies ("PFICs"), are complex and, in some
cases, uncertain. Such transactions and 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.
In addition, in the case of any shares of a PFIC in which a Fund invests,
the Fund may be liable for corporate-level tax on any ultimate gain or
distributions on the shares if the Fund fails to make an election to recognize
income annually during the period of its ownership of the shares.
- 53 -
<PAGE>
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 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'Neill1 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 1999; Trustee,
Age 55 The Galaxy VIP Fund; Trustee, Galaxy Fund
II.
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.
</TABLE>
- 54 -
<PAGE>
<TABLE>
<CAPTION>
Positions Principal Occupation
with The During Past 5 Years
Name and Address Galaxy Fund and Other Affiliations
- ---------------- ----------- ----------------------
<S> <C> <C>
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. Wellman1 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.
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
</TABLE>
- 55 -
<PAGE>
<TABLE>
<CAPTION>
Positions Principal Occupation
with The During Past 5 Years
Name and Address Galaxy Fund and Other Affiliations
- ---------------- ----------- ----------------------
<S> <C> <C>
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 to 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 the same 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"). 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
- 56 -
<PAGE>
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 comprised a total of 43 separate portfolios as of October 31,
1999.
** 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.
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
- 57 -
<PAGE>
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 Prospectuses. Fleet has also agreed to pay all expenses
incurred by it in connection with its activities under the advisory agreement
other than the cost of securities (including brokerage commissions) purchased
for the Funds. See "Expenses" below.
For the services provided and expenses assumed with respect to the Funds,
Fleet is entitled to receive advisory fees, computed daily and paid monthly, at
the annual rate of 0.75% of the average daily net assets of each Fund other than
the International Equity Fund. For the services provided and the expenses
assumed with respect to the International Equity Fund, Fleet is entitled to
receive advisory fees, computed daily and paid monthly, at the annual rate of
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.
- 58 -
<PAGE>
During the last three fiscal years, Galaxy paid advisory fees (net of fee
waivers and/or expense reimbursements) to Fleet as set forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation.............. $5,338,301 $3,743,922 $2,313,863
Equity Income................. $2,608,376 $2,457,188 $1,947,792
Growth and Income............. $4,577,393 $3,701,722 $2,361,898
Strategic Equity(1)........... $455,936 $70,206(1) *
Equity Value.................. $4,468,558 $3,782,620 $2,860,410
Equity Growth................. $10,553,344 $8,345,236 $6,555,045
International Equity(2)....... $3,119,675 $2,480,868 $1,844,037
Small Cap Value............... $2,487,806 $2,042,588 $1,370,449
Small Company Equity.......... $2,481,560 $3,166,852 $2,610,431
- ----------
* Not in operation during the period.
(1) For the fiscal year ended October 31, 1999 and the period from March 4,
1998 (commencement of operations) through October 31, 1998, Fleet waived
advisory fees of $165,794 and $26,590, respectively, with respect to the
Strategic Equity Fund.
(2) 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:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation ............ $ 0 $ 0 $ 19,254
Equity Income ............... $ 0 $ 0 $ 38,298
Growth and Income ........... $ 0 $150,727 $306,295
Strategic Equity ............ $ 0 $ 2,915(1) *
Equity Value ................ $ 0 $ 0 $ 26,294
Equity Growth ............... $ 0 $ 0 $ 27,033
International Equity ........ $ 0 $ 0 $ 18,362
Small Cap Value ............. $ 0 $115,022 $103,101
Small Company Equity ........ $ 0 $ 27,376 $118,118
- --------
* Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
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
- 59 -
<PAGE>
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, 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 the Sub-Advisory
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 0.40% of the first $50 million of the
International Equity Fund's average daily net assets, plus 0.35% 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
- 60 -
<PAGE>
of $1,728,153, $1,355,508 and $979,810, respectively, with respect to the
International Equity Fund.
Administrator
PFPC Inc. ("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, computed daily and paid monthly, at the following
annual rates, effective September 10, 1998:
Combined Average Daily Net Assets Annual Rate
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%
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:
Combined Average Daily Net Assets Annual Rate
Up to $2.5 billion ...................................... 0.090%
From $2.5 to $5 billion ................................. 0.085%
Over $5 billion ......................................... 0.075%
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, each Fund 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:
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<PAGE>
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation ......... $ 533,921 $ 401,495 $ 253,881
Equity Income ............ $ 259,413 $ 263,640 $ 216,835
Growth and Income ........ $ 456,860 $ 413,204 $ 290,324
Strategic Equity ......... $ 62,309 $ 10,624(1) *
Equity Value ............. $ 446,506 $ 405,740 $ 314,236
Equity Growth ............ $1,055,020 $ 895,213 $ 716,320
International Equity ..... $ 365,677 $ 305,871 $ 222,620
Small Cap Value .......... $ 248,680 $ 231,440 $ 160,350
Small Company Equity ..... $ 248,980 $ 342,901 $ 222,620
- ----------
* Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
During the last three fiscal years, PFPC waived administration fees as set
forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation .................. $0 $0 $0
Equity Income ..................... $0 $0 $0
Growth and Income ................. $0 $0 $0
Strategic Equity .................. $0 $0(1) *
Equity Value ...................... $0 $0 $0
Equity Growth ..................... $0 $0 $0
International Equity .............. $0 $0 $0
Small Cap Value ................... $0 $0 $0
Small Company Equity .............. $0 $0 $0
- ----------
* Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
Under the Administration Agreement between Galaxy and PFPC (the
"Administration Agreement"), PFPC has agreed to maintain office facilities for
Galaxy, furnish Galaxy with statistical and research data, clerical, accounting,
and bookkeeping services, provide 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
- 62 -
<PAGE>
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 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 the 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.
PFPC may enter into agreements with one or more entities, including
affiliates of Fleet, pursuant to which such entities agree to perform certain
sub-accounting and administrative functions ("Sub-Account Services") on a per
account basis with respect to Trust Shares of each Fund held by defined
contribution plans, including maintaining records reflecting separately with
respect to each plan participant's sub-account all purchases and redemptions of
Trust Shares and the dollar value of Trust Shares in each sub-account; crediting
to each participant's sub-account all dividends and distributions with respect
to that sub-account; and transmitting to each
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<PAGE>
participant a periodic statement regarding the sub-account as well as any proxy
materials, reports and other material Fund communications. Such entities are
compensated by PFPC for the Sub-Account Services and in connection therewith the
transfer agency fees payable by Trust Shares of the Funds to PFPC have been
increased by an amount equal to these fees. In substance, therefore, the holders
of Trust Shares of these Funds indirectly bear these fees.
Fleet Bank, an affiliate of Fleet, is paid a fee for Sub-Account Services
performed with respect to Trust Shares of the Funds held by defined contribution
plans. Pursuant to an agreement between Fleet Bank and PFPC, Fleet Bank is paid
$21.00 per year for each defined contribution plan participant account. For the
fiscal year ended October 31, 1999, Fleet Bank received $3,035,184 for
Sub-Account Services. PFPC bears this expense directly, and shareholders of
Trust Shares of the Funds bear this expense indirectly through fees paid to PFPC
for transfer agency services.
EXPENSES
Fleet 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
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 Agreement
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<PAGE>
between Galaxy and Fleet and the Sub-Advisory Agreement between 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 Funds paid soft dollar
commissions as shown below:
Fund Commissions
- ---- -----------
Asset Allocation .................................... $ 159,620
Equity Income ....................................... $ 250,780
Growth and Income ................................... $ 283,931
Strategic Equity .................................... $ 186,517
Equity Value ........................................ $ 998,817
Equity Growth ....................................... $1,014,330
International Equity ................................ $ 27,519
Small Cap Value ..................................... $ 365,870
Small Company Equity ................................ $ 655,243
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 Funds paid brokerage commissions as shown in the table below:
For the Fiscal Year Ended October 31:
Fund 1998 1998 1997
- ---- ---- ---- ----
Asset Allocation ......... $ 164,971 $ 225,758 $ 155,296
Equity Income ............ $ 260,679 $ 304,645 $ 201,407
Growth and Income ........ $ 305,533 $ 511,307 $ 851,919
Strategic Equity ......... $ 213,205 $ 118,965(1) *
Equity Value ............. $1,055,494 $ 965,718 $ 934,709
Equity Growth ............ $1,267,684 $1,128,464 $7,006,331
International Equity ..... $1,047,761 $ 841,389 $ 851,919
Small Cap Value .......... $ 390,632 $ 223,853 $ 173,335
Small Company Equity ..... $ 731,699 $ 579,137 $ 354,910
- ----------
- 65 -
<PAGE>
* Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
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 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 fiscal year ended October 31, 1999.
For the Fiscal Year Ended October 31, 1999
<TABLE>
<CAPTION>
% of
% of Aggregate 1998
Aggregate Aggregate Commission Aggregate
Fund Amount Commissions Transactions Amount
<S> <C> <C> <C> <C>
Asset Allocation ........... $141,443 85.74% 88.69% $130,968
Equity Income .............. $232,329 89.12% 91.74% $108,651
Growth and Income .......... $129,843 42.50% 47.05% $118,050
Strategic Equity ........... $ 11,375 5.34% 5.73% $ 26,480
Equity Value ............... $860,618 81.54% 82.31% $298,078
Equity Growth .............. $157,771 12.45% 13.29% $ 56,784
Small Cap Value ............ $ 14,000 3.58% 3.39% --
Small Company Equity ....... $ 7,380 1.01% 1.30% --
</TABLE>
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. 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 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; (2) the Equity Income Fund was
party to a repurchase agreement with Chase Manhattan Bank with a value of
$36,620,000; (3) 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
- 66 -
<PAGE>
Manhattan Bank with a value of $43,135,000; (4) the Strategic Equity Fund was
party to a repurchase agreement with Chase Manhattan Bank with a value of
$7,414,000; (5) the Equity Value Fund held common stock of Chase Manhattan Corp.
with a value of $11,268,638, common stock of Merrill Lynch & Co. with a value of
$8,878,350, and was party to a repurchase agreement with Chase Manhattan Bank
with a value of $15,451,002; (6) the Equity Growth Fund held common stock of
Chase Manhattan Corp. with a value of $30,581,250, and was party to a repurchase
agreement with Chase Manhattan Bank with a value of $88,038,000; (7) the
International Equity Fund was party to a repurchase agreement with Chase
Manhattan Bank with a value of $28,704,000; (8) the Small Cap Value Fund was
party to a repurchase agreement with Chase Manhattan Bank with a value of
$29,099,000.
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 PLAN
Galaxy has adopted a Shareholder Services Plan (the "Services 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 administrative and 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 Services Plan provides that Galaxy will pay fees for such services
at an annual rate of 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.
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<PAGE>
Although the Services 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
Services Plan only with respect to Retail A Shares of each Fund, and to limit
the payment under these servicing agreements for each Fund to an aggregate fee
of not more than .30% (on an annualized basis) 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 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 an institution ("Service
Organization") relating to the Services Plan requires that, with respect to
those Funds which declare dividends on a daily basis, the Service Organization
agrees 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 (net of expense reimbursements) with respect to Retail A Shares as
shown in the table below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation ............ $1,052,992 $ 763,611 $ 412,384
Equity Income ............... $ 623,725 $ 599,940 $ 434,674
Growth and Income(2) ........ $ 426,269 $ 472,627 $ 324,069
Strategic Equity(2) ......... $ 3,344 $ 4,356(1) *
Equity Value ................ $ 759,127 $ 667,247 $ 440,920
Equity Growth ............... $1,093,512 $ 841,650 $ 558,695
International Equity ........ $ 204,149 $ 191,712 $ 102,465
Small Cap Value(2) .......... $ 3 $ 250,077 $ 130,739
Small Company Equity(2) ..... $ 214,192 $ 343,948 $ 287,068
- ----------
* Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
(2) Expense reimbursements for fiscal year ended October 31, 1999 were
$252,526, $15,006 $242,064 and $12,586, respectively, for the Growth and
Income, Strategic Equity, Small Cap Value and Small Company Equity Funds.
Galaxy's servicing agreements are governed by the Services Plan that has
been adopted by Galaxy's Board of Trustees in connection with the offering of
Retail A Shares of each Fund. Pursuant to the Services Plan, the Board of
Trustees reviews, at least quarterly, a written report
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<PAGE>
of the amounts paid under the servicing agreements and the purposes for which
the expenditures were made. In addition, the arrangements with Service
Organizations must be approved annually by a majority of Galaxy's trustees,
including a majority of the trustees who are not "interested persons" of Galaxy
as defined in the 1940 Act and who have no direct or indirect financial interest
in such arrangements (the "Disinterested Trustees").
The Board of Trustees has approved Galaxy's arrangements with Service
Organizations based on information provided by Galaxy's service contractors that
there is a reasonable likelihood that the arrangements will benefit the Funds
and their shareholders by affording Galaxy greater flexibility in connection
with the efficient servicing of the accounts of the beneficial owners of Retail
A Shares of the 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.
DISTRIBUTION AND SERVICES PLAN
Galaxy has adopted a Distribution and Services Plan pursuant to Rule 12b-1
under the 1940 Act (the "Rule") with respect to Retail B Shares of the Funds
(the "12b-1 Plan"). Under the 12b-1 Plan, Galaxy may pay (a) PDI or another
person for expenses and activities intended to result in the sale of Retail B
Shares, including the payment of commissions to broker-dealers and other
industry professionals who sell Retail B Shares and the direct or indirect cost
of financing such payments, (b) institutions for shareholder liaison services,
which means personal services for holders of Retail B Shares and/or the
maintenance of shareholder accounts, such as responding to customer inquiries
and providing information on accounts, and (c) institutions for administrative
support services, which include but are not limited to (i) transfer agent and
sub-transfer agent services for beneficial owners of Retail B Shares; (ii)
aggregating and processing purchase and redemption orders; (iii) providing
beneficial owners with statements showing their positions in Retail B Shares;
(iv) processing dividend payments; (v) providing sub-accounting services for
Retail B Shares held beneficially; (vi) forwarding shareholder communications,
such as proxies, shareholder reports, dividend and tax notices, and updating
prospectuses to beneficial owners; and (vii) receiving, translating and
transmitting proxies executed by beneficial owners.
Under the 12b-1 Plan, payments by Galaxy (i) for distribution expenses may
not exceed the annualized rate of .65% of the average daily net assets
attributable to each such Fund's outstanding Retail B Shares, and (ii) to an
institution for shareholder liaison services and/or administrative support
services may not exceed the annual rates of .25% and .25%, respectively, of the
average daily net assets attributable to each such Fund's outstanding Retail B
Shares which are owned of record or beneficially by that institution's customers
for whom the institution is the dealer of record or shareholder of record or
with whom it has a servicing relationship. As of the date of this Statement of
Additional Information, Galaxy intends to limit each Fund's payments for
shareholder liaison and administrative support services under the 12b-1 Plan to
an aggregate
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<PAGE>
fee of not more than .30% (on an annualized basis) of the average daily net
asset value of Retail B Shares owned of record or beneficially by customers of
institutions.
Payments for distribution expenses under the 12b-1 Plan are subject to the
Rule. The Rule defines distribution expenses to include the cost of "any
activity which is primarily intended to result in the sale of shares issued by"
Galaxy. The Rule provides, among other things, that an investment company may
bear such expenses only pursuant to a plan adopted in accordance with the Rule.
In accordance with the Rule, the 12b-1 Plan provides that a report of the
amounts expended under the 12b-1 Plan, and the purposes for which such
expenditures were incurred, will be made to the Board of Trustees for its review
at least quarterly. The 12b-1 Plan provides that it may not be amended to
increase materially the costs which Retail B Shares of a Fund may bear for
distribution pursuant to the 12b-1 Plan without shareholder approval, and that
any other type of material amendment must be approved by a majority of the Board
of Trustees, and by a majority of the trustees who are neither "interested
persons" (as defined in the 1940 Act) of Galaxy nor have any direct or indirect
financial interest in the operation of the 12b-1 Plan or in any related
agreements (the "12b-1 Trustees"), by vote cast in person at a meeting called
for the purpose of considering such amendments.
During the last three fiscal years, Retail B Shares of the Funds bore the
following distribution fees under the 12b-1 Plan:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation ............ $499,231 $292,256 $ 99,219
Equity Income ............... $ 9,488 * *
Growth and Income ........... $400,239 $306,933 $122,300
Strategic Equity ............ $ 6,114 $ 1,300(1) **
Equity Value ................ $190,927 $132,464 $ 50,897
Equity Growth ............... $346,626 $184,524 $ 75,906
International Equity ........ $ 6,058 * *
Small Cap Value ............. $ 4,653 * *
Small Company Equity ........ $ 80,055 $ 97,785 $ 55,371
- ----------
* The Equity Income, International Equity and Small Cap Value Funds did not
offer Retail B Shares until November 1, 1998.
** Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
During the last three the fiscal years, Retail B Shares of the Funds bore
the following shareholder servicing fees (net of expense reimbursements) under
the 12b-1 Plan:
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<PAGE>
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation ............ $206,080 $134,888 $ 44,293
Equity Income(2) ............ $ 986 * *
Growth and Income(2) ........ $166,236 $124,879 $ 54,046
Strategic Equity(2) ......... $ 0 $ 600(1) **
Equity Value(2) ............. $ 80,680 $ 61,137 $ 21,199
Equity Growth(2) ............ $130,774 $ 85,165 $ 34,034
International Equity(2) ..... $ 20 * *
Small Cap Value(2) .......... $ 0 * *
Small Company Equity(2) ..... $ 12,679 $ 45,132 $ 23,556
- ----------
* The Equity Income, International Equity and Small Cap Value Funds did not
offer Retail B Shares until November 1, 1998.
** Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
(2) Expense reimbursements for the fiscal year ended October 31, 1999 were
$3,274, $493, $2,803, $2,445, $17,717, $1,764, $1,980 and $20,434,
respectively, for the Equity Income, Growth and Income, Strategic Equity,
Equity Value, Equity Growth, International Equity, Small Cap Value and
Small Company Equity Funds.
All amounts paid under the 12b-1 Plan for these periods were attributable to
payments to broker-dealers.
Galaxy's Board of Trustees has concluded that there is a reasonable
likelihood that the 12b-1 Plan will benefit the Funds and holders of Retail B
Shares. The 12b-1 Plan is subject to annual reapproval by a majority of the
12b-1 Trustees and is terminable at any time with respect to any Fund by a vote
of a majority of the 12b-1 Trustees or by vote of the holders of a majority of
the Retail B Shares of the Fund involved. Any agreement entered into pursuant to
the 12b-1 Plan with an institution ("Service Organization") is terminable with
respect to any Fund without penalty, at any time, by vote of a majority of the
12b-1 Trustees, by vote of the holders of a majority of the Retail B Shares of
such Fund, by PDI or by the Service Organization. An agreement will also
terminate automatically in the event of its assignment.
As long as the 12b-1 Plan is in effect, the nomination of the trustees who
are not interested persons of Galaxy (as defined in the 1940 Act) must be
committed to the discretion of the 12b-1 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, Pennsylvania 19428-2961. Jane Haegele is the sales shareholder of
PDI.
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<PAGE>
Unless otherwise terminated, the Distribution Agreement between Galaxy and
PDI remains in effect until November 30, 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.
PDI is entitled to the payment of a front-end sales charge on the sale of
Retail A Shares of the Funds as described in the applicable Prospectus and this
Statement of Additional Information. Prior to December 1, 1999, First Data
Distributors, Inc. ("FD Distributors") a wholly-owned subsidiary of PFPC, served
as Galaxy's distributor, and was entitled to the payment of the front-end sales
charge on the sale of Retail A Shares of the Funds. During the last three fiscal
years, FD Distributors received front-end sales charges in connection with
Retail A Share purchases as follows:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation ......... $1,053,290 $1,208,453 $1,010,359
Equity Income ............ $ 135,022 $ 312,155 $ 592,347
Growth and Income ........ $ 299,146 $ 681,018 $ 988,216
Strategic Equity ......... $ 48,858 $ 21,677(1) *
Equity Value ............. $ 253,743 $ 364,586 $ 451,771
Equity Growth ............ $ 780,524 $ 548,901 $ 491,165
International Equity ..... $ 77,780 $ 126,093 $ 320,935
Small Cap Value .......... $ 101,995 $ 398,478 $ 300,152
Small Company Equity ..... $ 35,664 $ 103,755 $ 343,614
- ----------
* Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
FD Distributors retained none of the amounts shown in the table above.
PDI is also entitled to the payment of contingent deferred sales charges
upon the redemption of Retail B Shares of the Funds. During the last three
fiscal years, FD Distributors, as distributor for the Funds, was entitled to the
payment of the contingent deferred sales charges upon the redemption of Retail B
Shares and received contingent deferred sales charges in connection with Retail
B Share redemptions as follows:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation ............ $299,927 $142,492 $ 57,559
Equity Income ............... $ 3,829 * *
Growth and Income ........... $189,894 $107,798 $ 49,278
Strategic Equity ............ $ 5,711 $ 112(1) **
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<PAGE>
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Equity Value ................ $ 79,351 $ 44,300 $ 21,384
Equity Growth ............... $161,048 $ 65,766 $ 28,379
International Equity ........ $ 1,355 * *
Small Cap Value ............. $ 2,464 * *
Small Company Equity ........ $ 52,313 $ 38,792 $ 34,481
- ----------
* The Equity Income, International Equity and Small Cap Value Funds did not
offer Retail B Shares until November 1, 1998.
** Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
FD Distributors retained none of the amounts shown in the table above.
The following table shows all sales charges, commissions and other
compensation received by FD Distributors directly or indirectly from the Funds
during the fiscal year ended October 31, 1999:
<TABLE>
<CAPTION>
Net Underwriting Compensation on Brokerage Commissions
Discounts and Redemption and in Connection with
Fund Commissions(1) Repurchase(2) Fund Transactions Other Compensation(3)
- ---- -------------- ------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Asset
Allocation $1,353,217 $ 299,927 $ 0 $1,714,888
Equity Income $ 138,851 $ 3,829 $ 0 $ 629,052
Growth and Income $ 489,040 $ 189,894 $ 0 $1,004,724
Strategic Equity $ 54,569 $ 5,711 $ 0 $ 12,700
Equity Value $ 333,094 $ 79,351 $ 0 $1,016,732
Equity Growth $ 941,572 $ 161,048 $ 0 $1,511,710
International
Equity $ 79,135 $ 1,355 $ 0 $ 205,291
Small Cap Value $ 104,459 $ 2,464 $ 0 $ 11,566
Small Company
Equity $ 87,977 $ 52,313 $ 0 $ 299,314
</TABLE>
- ----------
(1) Represents amounts received from front-end sales charges on Retail A
Shares and commissions received in connection with sales of Retail B
Shares.
(2) Represents amounts received from contingent deferred sales charges on
Retail B Shares. The basis on which such sales charges are paid is
described in the Prospectus relating to Retail B Shares. All such amounts
were paid to affiliates of Fleet.
(3) Represents payments made under the Shareholder Services Plan and
Distribution and Services Plan during the fiscal year ended October 31,
1999, which includes fees accrued in the fiscal year ended October 31,
1998, which were paid in 1997 (see "Shareholder Services Plan" and
"Distribution and Services Plan" above).
- 73 -
<PAGE>
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 Prospectuses and the
financial statements for the Funds contained in Galaxy's Annual Report to
Shareholders with respect to the Funds ("Annual Report") 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 Prospectuses and the financial
statements for such years and periods contained in the Annual Report were
audited by PricewaterhouseCoopers LLP, Galaxy's former auditors.
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.
PERFORMANCE AND YIELD INFORMATION
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:
YIELD = 2[(a-b)/cd +1 )6 - 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.
- 74 -
<PAGE>
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on debt obligations held by a Fund is calculated by computing the yield
to maturity of each obligation based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by the Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be called
or, if none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market value of such debt obligations. Expenses accrued
for the period (variable "b" in the formula) include all recurring fees charged
by a Fund to all shareholder accounts 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.
Based on the foregoing calculation, the standard yields for Retail A
Shares, Retail B Shares and Trust Shares of the Funds for the 30-day period
ended October 31, 1999 were as set forth below:
Fund Retail A Retail B Trust
- ---- -------- -------- -----
Asset Allocation ........................ 2.46% 1.91% 2.56%
Equity Income ........................... 1.03% 0.48% 1.46%
Growth and Income ....................... 0.60% -0.12% 0.82%
Strategic Equity ........................ 0.70% 0.07% 1.08%
Equity Value ............................ -0.12% -0.79% 0.20%
Equity Growth ........................... -0.21% -0.77% 0.16%
International Equity .................... -0.02% -0.47% 0.45%
Small Cap Value ......................... 1.52% 0.79% 1.90%
Small Company Equity .................... -1.30% -1.98% -0.96%
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
- 75 -
<PAGE>
during specified periods that equates the initial amount invested to the ending
redeemable value of such investment according to the following formula:
T = [(ERV/P) - 1]1/n
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. In addition, the Funds' Retail Shares average annual total
return and aggregate total return quotations will reflect the deduction of the
maximum sales load charged in connection with purchases of Retail A Shares or
redemptions of Retail B Shares, as the case may be.
- 76 -
<PAGE>
The aggregate total returns for Retail A Shares, Retail B Shares and Trust
Shares (as applicable) of the Funds from the date of initial public offering to
October 31, 1999 are set forth below:
Fund Retail A(1) Retail B Trust
- ---- ----------- -------- -----
Asset Allocation ..................... 135.81%(2) 56.18%(3) 147.36%(2)
Equity Income ........................ 219.88%(4) 4.44%* 240.10%(4)
Growth and Income .................... 166.41%(5) 69.12%(3) 181.80%(6)
Strategic Equity(7) .................. -4.36% -6.27% 0.19%
Equity Value ......................... 334.86%(8) 71.69%(3) 360.74%(8)
Equity Growth ........................ 318.97%(4) 101.75%(3) 344.74%(4)
International Equity ................. 139.49%(2) 23.41%* 156.23%(2)
Small Cap Value ...................... 120.26%(5) 0.04%* 133.25%(6)
Small Company Equity ................. 100.07%(2) 12.49%(3) 113.20%(2)
- ----------
* For the period from November 1, 1998 (initial public offering date)
through October 31, 1999.
(1) On September 7, 1995, Retail Shares of the Funds were redesignated "Retail
A Shares."
(2) For the period from December 30, 1991 (initial public offering date)
through October 31, 1999.
(3) For the period from March 4, 1996 (initial public offering date) through
October 31, 1999.
(4) For the period from December 14, 1990 (initial public offering date)
through October 31, 1999.
(5) For the period from February 12, 1993 through October 31, 1999. The
Predecessor Growth and Income Fund and Predecessor Small Cap Value Fund
began offering Investment Shares, which were similar to Retail A Shares,
on February 13, 1993.
(6) For the period from December 14, 1992 (initial public offering date)
through October 31, 1999. The Predecessor Growth and Income Fund and
Predecessor Small Cap Value Fund commenced operations on December 14,
1992, and initially offered Trust Shares, which were similar to Galaxy
Trust Shares.
(7) For the period from March 4, 1998 (initial public offering date) through
October 31, 1999.
(8) For the period from September 1, 1988 (initial public offering date)
through October 31, 1999.
The average annual total returns for Retail A Shares, Retail B Shares and
Trust Shares of the Funds for the one-year, five-year and ten-year periods (as
applicable) ended October 31, 1999 are as set forth below:
<TABLE>
<CAPTION>
Retail A Retail B Trust
Fund One-Year Five-Year Ten-Year One-Year Five-Year Ten-Year One-Year Five-Year Ten-Year
- ---- -------- --------- -------- -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Allocation ... 5.42% 15.79% * 3.76% * * 9.63% 16.89% *
Equity Income ...... 5.99% 16.97% * 4.44% ** ** 10.60% 18.40% *
Growth and Income .. 10.26% 17.59% * 8.72% * * 14.85% 18.80% *
Strategic Equity ... -0.58% * * -2.50% * * 3.64% * *
Equity Value ....... 10.35% 18.16% 13.85% 8.81% * * 15.04% 19.52% 14.51%
Equity Growth ...... 22.79% 22.71% * 21.63% * * 28.07% 24.17% *
International Equity 24.22% 12.50% * 23.41% ** ** 29.71% 14.02% *
Small Cap Value .... 1.70% 14.09% * 0.04% ** ** 6.02% 15.35% *
Small Company Equity 10.59% 10.04% * 9.34% * * 15.54% 11.43% *
</TABLE>
- ----------
* Not offered during the full period.
- 77 -
<PAGE>
** The Equity Income, International Equity and Small Cap Value Funds did not
offer Retail B Shares until November 1, 1998.
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 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 and the performance of the Small Company Equity
Fund and Small Cap Value Fund may be compared to the NASDAQ Composite Index, an
unmanaged index of over-the-counter stock prices.
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. Performance data will be
calculated separately for Trust Shares, Retail A Shares, Retail B Shares, Prime
A Shares, Prime B Shares and BKB Shares of the Funds.
The standard yield is computed as described above. 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.
The Funds may also advertise their performance using "average annual total
return" figures over various periods of time. Such total return figures reflect
the average percentage change in the value of an investment in a Fund from the
beginning date of the measuring period to the end of the measuring period and
are calculated as described above. Average total return figures will be given
for the most recent one-, five- and ten-year periods (if applicable), and may be
given for other periods as well, such as from the commencement of a Fund's
operations, or on a year-by-year basis. Each Fund may also use "aggregate total
return" figures for various periods, representing the cumulative change in the
value of an investment in a Fund for the specified period. Both methods of
calculating total return reflect the maximum front-end sales load for Retail A
Shares of the Funds and the applicable contingent deferred sales charge for
Retail B Shares of the Funds and assume that dividends and capital gain
distributions made by a Fund during the period are reinvested in Fund shares.
The Funds may also advertise total return data without reflecting the
sales charges imposed on the purchase of Retail A Shares or the redemption of
Retail B Shares in accordance
- 78 -
<PAGE>
with the rules of the SEC. Quotations that do not reflect the sales charges will
be higher than quotations that do reflect the sales charges.
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.
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
- 79 -
<PAGE>
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, 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
- 80 -
<PAGE>
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 (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 -
- 81 -
<PAGE>
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, 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
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<PAGE>
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 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.
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<PAGE>
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%); 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%);
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<PAGE>
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, 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 --
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<PAGE>
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%).
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.
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<PAGE>
FINANCIAL STATEMENTS
Galaxy's Annual Report 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 Report 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 Report and is incorporated herein by
reference. The financial statements in such Annual Report have been incorporated
herein by reference in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing. The financial statements and
Financial Highlights included in the Annual Report for the Funds for prior
periods were audited by PricewaterhouseCoopers LLP, Galaxy's former independent
auditors. The report of PricewaterhouseCoopers LLP dated December 23, 1998 on
the Funds' financial statements included in the Funds' Annual Report to the
Shareholders for the fiscal year ended October 31, 1998, is also incorporated
herein by reference.
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<PAGE>
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
A-1
<PAGE>
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.
A-2
<PAGE>
"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
A-3
<PAGE>
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.
A-4
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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
A-5
<PAGE>
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.
A-7
<PAGE>
"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.
A-8
<PAGE>
"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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<PAGE>
"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.
A-10
<PAGE>
APPENDIX B
As stated above, the Growth and Income, Strategic Equity and Small Cap
Value Funds may enter into futures transactions for hedging purposes. The
following is a description of such transactions.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Funds may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Funds presently could accomplish a similar result to that which they
hope to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Funds, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate futures
contract sale would create an obligation by a Fund, as seller, to deliver the
specific type of financial instrument called for in the contract at a specific
future time for a specified price. A futures contract purchase would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
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. 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 liquid portfolio securities, known
as initial margin, based on the value of the contract. The nature of
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<PAGE>
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when a particular Fund has
purchased a futures contract and the price of the contract has risen in response
to a rise in the underlying instruments, that position will have increased in
value and the Fund will be entitled to receive from the broker a variation
margin payment equal to that increase in value. Conversely, where the Fund has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Fund would be required to make a variation margin payment
to 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.
III. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by the
Growth and Income, Strategic Equity and Small Cap Value 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
B-4
<PAGE>
value of instruments held in the Fund may decline. If this occurred, the Fund
would lose money on the futures and also experience a decline in value in its
portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern 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 liquid portfolio securities, 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.
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<PAGE>
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the 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-6
<PAGE>
The Galaxy Fund
Statement of Additional Information
February 29, 2000
<TABLE>
<S> <C>
Galaxy Money Market Fund Retail A Shares, Retail B Shares and
Trust Shares
Galaxy Government Fund Retail A Shares and Trust Shares
Galaxy U.S. Treasury Fund
Galaxy Tax-Exempt Fund
Galaxy Connecticut Municipal Money Market Fund Retail A Shares and Prime Shares
Galaxy Massachusetts Municipal Money Market Fund
Galaxy New York Municipal Money Market Fund
Galaxy Institutional Government Money Market Shares
Fund
</TABLE>
This Statement of Additional Information is not a prospectus. It relates
to the prospectuses for the Funds as listed below, as they may be supplemented
or revised from time to time (the "Prospectuses"). The Prospectuses, 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)
Current Prospectuses
o Prospectus for Retail A Shares and Retail B Shares of the Money Market
Fund and Retail A Shares of the Government, U.S. Treasury, Tax-Exempt,
Connecticut Municipal Money Market, Massachusetts Municipal Money Market
and New York Municipal Money Market Funds dated February 29, 2000
o Prospectus for Trust Shares of the Money Market, Government, U.S. Treasury
and Tax-Exempt Funds and Shares of the Institutional Government Money
Market Fund dated February 29, 2000
o Prospectus for Prime Shares of the Connecticut Municipal Money Market,
Massachusetts Municipal Money Market and New York Municipal Money Market
Funds dated February 29, 2000
The financial statement 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 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.
<PAGE>
TABLE OF CONTENTS
Page
GENERAL INFORMATION..........................................................1
DESCRIPTION OF GALAXY AND ITS SHARES.........................................1
INVESTMENT STRATEGIES, POLICIES AND RISKS....................................4
Money Market Fund......................................................4
Government Fund........................................................5
U.S. Treasury Fund.....................................................5
Tax-Exempt Fund........................................................5
Institutional Government Money Market Fund.............................6
Connecticut Municipal Money Market Fund................................6
Massachusetts Municipal Money Market Fund..............................7
New York Municipal Money Market Fund...................................7
Other Investment Policies and Risk Considerations......................7
Quality Requirements...................................................8
U.S. Government Obligations............................................8
Money Market Instruments...............................................9
Municipal Securities..................................................10
Stand-By Commitments..................................................13
Tender Option Bonds...................................................14
Variable and Floating Rate Instruments................................14
Repurchase and Reverse Repurchase Agreements..........................15
When-Issued and Delayed Settlement Transactions.......................16
Securities Lending -- Money Market....................................17
Guaranteed Investment Contracts -- Money Market Fund..................17
Asset-Backed Securities -- Money Market Fund..........................18
Investment Company Securities -- Tax-Exempt Money Market Funds and
Institutional Government Money Market Fund......................18
Non-Diversification - Connecticut Municipal Money Market,
Massachusetts Municipal Money Market and New York Municipal
Money Market Funds .............................................19
Connecticut Investment Risks..........................................20
Massachusetts Investment Risks........................................23
New York Investment Risks.............................................23
Portfolio Securities Generally........................................34
INVESTMENT LIMITATIONS......................................................35
NET ASSET VALUE.............................................................42
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................43
Purchases of Retail Shares and Prime Shares...........................43
Applicable Sales Charges - Retail B Shares............................45
Purchases of Shares of the Institutional Government Money Market Fund.46
Purchases of Trust Shares - Money Market, Government, U.S. Treasury
and Tax-Exempt Funds............................................47
INVESTOR PROGRAMS...........................................................48
Exchange Privilege - Retail Shares and Shares of the Institutional
Government Money Market Fund....................................48
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TABLE OF CONTENTS
(continued)
Page
Retirement Plans - Retail Shares......................................49
Automatic Investment Program and Systematic Withdrawal Plan - Retail
Shares 50
College Investment Program - Retail Shares............................50
Checkwriting - Retail Shares..........................................50
Direct Deposit Program - Retail Shares................................51
TAXES ......................................................................51
State and Local.......................................................52
Miscellaneous.........................................................54
TRUSTEES AND OFFICERS.......................................................54
Shareholder and Trustee Liability.....................................58
INVESTMENT ADVISER..........................................................59
ADMINISTRATOR...............................................................61
CUSTODIAN AND TRANSFER AGENT................................................63
EXPENSES....................................................................64
PORTFOLIO TRANSACTIONS......................................................64
SHAREHOLDER SERVICES PLAN -- RETAIL A SHARES................................65
DISTRIBUTION AND SERVICES PLANS.............................................67
Retail B Share Plan...................................................67
Prime Share Plan......................................................68
Retail B Share Plan and Prime Share Plan..............................69
DISTRIBUTOR.................................................................70
AUDITORS....................................................................71
COUNSEL.....................................................................72
PERFORMANCE AND YIELD INFORMATION...........................................72
Tax-Equivalency Tables - Connecticut Municipal Money Market,
Massachusetts Municipal Money Market and New York Municipal
Money Market Funds .............................................74
Performance Reporting.................................................78
MISCELLANEOUS...............................................................79
FINANCIAL STATEMENTS........................................................86
APPENDIX A.................................................................A-1
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<PAGE>
GENERAL INFORMATION
This Statement of Additional Information should be read in conjunction
with a current Prospectus. This Statement of Additional Information relates to
the Prospectuses described on the cover page. The Money Market, Government and
Tax-Exempt Funds also offer BKB Shares, which are described in a separate
Statement of Additional Information and related prospectus. This Statement of
Additional Information is incorporated by reference in its entirety into the
Prospectuses. No investment in shares of the Funds should be made without
reading a Prospectus.
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. Although the 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.
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 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 had
not commenced investment operations.
Prior to the date of this Statement of Additional Information, the
Connecticut Municipal Money Market, Massachusetts Municipal Money Market and New
York Municipal Money Market Funds had not offered Prime 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
<PAGE>
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 B Shares (Retail A
Shares), Class B -- Special Series 1 Shares (Trust Shares) and Class B --
Special Series 2 Shares (BKB Shares), each series representing interests in the
Government 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) and Class F -- Special Series 1 Shares (Trust Shares), each series
representing interests in the U.S. Treasury Fund; Class S Shares representing
interests in the Institutional Government Money Market Fund; Class V Shares
(Retail A Shares) and Class V -- Special Series 1 Shares (Prime Shares),
representing interests in the Connecticut Municipal Money Market Fund; Class W
Shares (Retail A Shares) and Class W -- Special Series 1 Shares (Prime Shares),
representing interests in the Massachusetts Municipal Money Market Fund; and
Class EE -- Series 1 Shares (Retail A Shares) and Class EE -- Series 2 Shares
(Prime Shares), each series representing interests in the New York Municipal
Money Market Fund. Each Fund (other than the Connecticut Municipal Money Market,
Massachusetts Municipal Money Market and New York Municipal Money Market Funds)
is classified as a diversified company under the Investment Company Act of 1940,
as amended (the "1940 Act"). The Connecticut Municipal Money Market,
Massachusetts Municipal Money Market and New York Municipal Money Market Funds
are classified as non-diversified investment companies 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 Prospectuses, shares will be fully paid and
non-assessable. Each series of shares in a Fund (i.e., Retail A Shares, Retail B
Shares, Trust Shares, Prime Shares and BKB Shares) bear pro rata the same
expenses and are entitled equally to the 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 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), holders of Retail B Shares will bear the
expenses of the Distribution and Services Plan for Retail B Shares, and holders
of Prime Shares will bear the expenses of the Distribution and Services Plan for
Prime 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 Plan" and "Distribution and Services Plans" below.
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<PAGE>
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 Retail A Shares and Trust 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 Retail A Shares and Trust Shares, only
Retail B Shares of the Money Market Fund will be entitled to vote on matters
pertaining to Galaxy's Distribution and Services Plan for Retail B Shares, and
only Prime Shares of a Fund will be entitled to vote on matters submitted to a
vote of shareholders pertaining to Galaxy's Distribution and Services Plan for
Prime Shares). Further, shareholders of all of the Funds, as well as those of
any other investment portfolio now or hereafter offered by Galaxy, will vote
together in the aggregate and not separately on a Fund-by-Fund basis, except as
otherwise required by law or when permitted by the Board of Trustees. Rule 18f-2
under the 1940 Act provides that any matter required to be submitted to the
holders of the outstanding voting securities of an investment company such as
Galaxy shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each Fund affected by
the matter. A particular Fund is deemed to be affected by a matter unless it is
clear that the interests of each Fund in the matter are substantially identical
or that the matter does not affect any interest of the Fund. Under the Rule, the
approval of an investment advisory agreement or any change in 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.
- 3 -
<PAGE>
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 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 Fund's investment adviser,
will use its 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(es), may not be changed without the approval of the
holders of a majority of its outstanding shares (as defined under
"Miscellaneous"). Except as noted herein under "Tax-Exempt Fund," "Connecticut
Municipal Money Market Fund," "Massachusetts Municipal Money Market Fund," and
"New York Municipal Money Market Fund" and 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. Each Fund 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 value of the Funds' portfolio securities will generally
vary inversely with changes in prevailing interest rates. The following
investment strategies, policies and risks supplement those set forth in the
Funds' Prospectuses.
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
- 4 -
<PAGE>
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.
Government Fund
Instruments in which the Government Fund invests have remaining maturities
of 397 days or less (except for certain variable and floating rate notes and
securities underlying certain repurchase agreements). 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 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,
- 5 -
<PAGE>
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.
Institutional Government Money Market Fund
Instruments in which the Institutional Government 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). See "Other Investment Policies and Risk Considerations" below.
Connecticut Municipal Money Market Fund
The Connecticut Municipal Money Market Fund attempts to achieve its
objective by investing in a portfolio of debt obligations issued by or on behalf
of the State of Connecticut, its political subdivisions, or public
instrumentalities, state or local authorities, districts or similar public
entities created under Connecticut law, and obligations of territories and
possessions of the United States and any political sub-division or financing
authority of any of these, the interest income from which is, in the opinion of
qualified legal counsel, exempt from both federal regular income tax and the
Connecticut state income tax on individuals, trusts and estates ("Connecticut
Municipal Securities") with remaining maturities of 397 days or less at the time
of purchase (with certain exceptions). Examples of Connecticut Municipal
Securities include, but are not limited to, municipal commercial paper and other
short-term notes; variable rate demand notes; municipal bonds (including bonds
having remaining maturities of less than 397 days without demand features); and
tender option bonds. See "Other Investment Policies and Risk Considerations"
below. As a matter of fundamental policy that cannot be changed without
shareholder approval, the Fund invests its assets so that at least 80% of its
annual interest income is exempt from federal regular income tax or at least 80%
of the total value of its assets is invested in obligations the interest income
from which is exempt from federal regular income tax.
- 6 -
<PAGE>
Massachusetts Municipal Money Market Fund
The Massachusetts Municipal Money Market Fund attempts to achieve its
objective by investing in a portfolio of debt obligations issued by or on behalf
of the Commonwealth of Massachusetts and its political subdivisions and
financing authorities, and obligations of other states, territories and
possessions of the United States, including the District of Columbia, and any
political subdivision or financing authority of any of these, the interest
income from which is, in the opinion of qualified legal counsel, exempt from
federal regular income tax and the income taxes imposed by the Commonwealth of
Massachusetts upon non-corporate taxpayers ("Massachusetts Municipal
Securities") with remaining maturities of 397 days or less at the time of
purchase (with certain exceptions). Examples of Massachusetts Municipal
Securities include, but are not limited to, municipal commercial paper and other
short-term notes; variable rate demand notes; municipal bonds (including bonds
having remaining maturities of less than 397 days without demand features); and
tender option bonds. See "Other Investment Policies and Risk Considerations"
below. As a matter of fundamental policy that cannot be changed without
shareholder approval, the Fund invests its assets so that at least 80% of its
annual interest income is exempt from federal regular income tax or at least 80%
of the total value of its assets are invested in obligations the interest income
from which is exempt from federal regular income tax.
New York Municipal Money Market Fund
The New York Municipal Money Market Fund attempts to achieve its objective
by investing in a portfolio of debt obligations issued by or on behalf of the
State of New York, its political subdivisions, or public instrumentalities,
state or local authorities, and obligations of other states, territories and
possessions of the United States, including the District of Columbia, and any
political subdivision or financial authority of any of these, the interest
income from which is, in the opinion of qualified legal counsel, exempt from
regular federal income tax, and New York State and New York City personal income
taxes ("New York Municipal Securities") with remaining maturities of 397 days or
less at the time of purchase (with certain exceptions). Examples of New York
Municipal Securities include, but are not limited to, municipal commercial paper
and other short-term notes; variable rate demand notes; municipal bonds
(including bonds having remaining maturities of less than 397 days without
demand features); and tender option bonds. See "Other Investment Policies and
Risk Considerations" below. As a matter of fundamental policy that cannot be
changed without shareholder approval, the Fund invests its assets so that at
least 80% of its annual interest income is exempt from federal regular income
tax or at least 80% of the total value of its assets is invested in obligations
the interest income from which is exempt from federal regular income tax.
Other Investment Policies and Risk Considerations
Investment methods described in the Prospectuses 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
- 7 -
<PAGE>
particular method or technique carries no implication that it will be utilized
or, if it is, that it will be successful.
Quality Requirements
Each Fund 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, in
certain cases, the guarantor) or the issuer (or guarantor provider) with respect
to comparable securities (i) is rated by at least two nationally recognized
statistical rating organizations ("Rating Agencies") (such as Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Service, Inc. ("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, Connecticut Municipal Money Market
Fund, Massachusetts Municipal Money Market Fund and New York Municipal Money
Market Fund (collectively, the "Tax-Exempt Money Market Funds") 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 or, with respect to the Tax-Exempt Money Market Funds one of the two
highest, short-term rating categories. See "Investment Limitations" below.
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. For example, with respect to the Connecticut
Municipal Money Market, Massachusetts Municipal Money Market and New York
Municipal Money Market Funds, Fleet will generally treat Connecticut Municipal
Securities, Massachusetts Municipal Securities or New York Municipal Securities,
as the case may be, as eligible portfolio securities if the issuer has received
long-term bond ratings within the three highest rating categories assigned by a
Rating Agency with respect to other bond issues. Fleet also considers other
relevant information in its evaluation of unrated short-term securities.
U.S. Government Obligations
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
- 8 -
<PAGE>
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 10 years. Obligations of
certain agencies and instrumentalities of the U.S. Government, such as 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 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 U.S. Government obligations may be issued as 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 or
instrumentalities thereof, the interest income from which, under current law,
generally will not be subject to state income tax by reason of federal law.
Money Market Instruments
Money market instruments include but are not limited to bank obligations,
commercial paper and corporate bonds with remaining maturities of 397 days or
less.
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 that 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 that is insured
by the FDIC. 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. Investments in non-negotiable time
deposits are limited to no more than 5% of the Money Market Fund's total assets
at the time of purchase. For the purposes of the Money Market Fund's
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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 regulations 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 of U.S.
branches of foreign banks may subject a Fund to additional investment 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 other foreign governmental restrictions which might adversely affect
the payment of principal and interest on such obligations. In addition, foreign
branches of U.S. banks and U.S. 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. Investments in the obligations of U.S. branches of foreign banks or
foreign branches of U.S. banks will be made only when Fleet believes 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. The Money Market Fund and each Tax-Exempt
Money Market Fund may also purchase Rule 144A securities. See "Investment
Limitations" below.
Municipal Securities
Municipal Securities are generally issued to finance public works, such as
airports, bridges, highways, housing, health-related entities,
transportation-related projects, educational programs, water and pollution
control and sewer works. They are also issued to repay outstanding obligations,
to raise funds for general operating expenses and to make loans to other public
institutions and for other facilities. Municipal Securities include private
activity bonds issued by or on behalf of public authorities to provide financing
aid to acquire sites or construct and equip facilities for privately or publicly
owned corporations. The availability of this financing encourages these
corporations to locate within the sponsoring communities and thereby increases
local employment.
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The two principal classifications of Municipal Securities that may be held
by the Money Market Fund and Tax-Exempt Money Market 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. Private activity
bonds are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
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.
Municipal Securities may include variable rate demand notes, which 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 Money
Market Fund and Tax-Exempt Money Market Funds treat variable rate demand notes
as maturing on the later of the date of the next interest rate adjustment or the
date on which a 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 the Money Market Fund and Tax-Exempt
Money Market 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
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of its shares. As described above under "Money Market Instruments," 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.
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, S&P and Fitch IBCA described in Appendix A hereto, represent such
Rating Agency's opinion 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, 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.
The payment of principal and interest on most securities purchased by the
Money Market Fund and Tax-Exempt Money Market 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 Funds' Prospectuses. 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 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 Money Market Fund and Tax-Exempt Money Market
Funds may purchase short-term general obligation notes, tax anticipation notes,
bond anticipation notes, revenue anticipation notes, tax-exempt commercial
paper, construction loan notes and other forms of short-term loans. Such
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 Prospectuses for the Funds including applicable maturity
restrictions.
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
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bonds for such purposes in order to encourage corporations to locate within
their communities. The principal and interest on these obligations may be
payable from the general revenues of the users of such facilities.
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 Money Market Funds and the liquidity
and value of their respective portfolios. In such an event, a Fund would
re-evaluate its investment objective and policies and consider possible changes
in its 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
Tax-Exempt Money Market Funds nor Fleet will review the proceedings relating to
the issuance of Municipal Securities or the bases for such opinions.
Munipreferred Securities. The Connecticut Municipal Money Market,
Massachusetts Municipal Money Market and New York Municipal Money Market Funds
may purchase interests in Municipal Securities that are offered in the form of a
security representing a diversified portfolio of investment grade bonds. These
securities provide investors, such as the Funds, with liquidity and income
exempt from federal regular income tax and some state income taxes.
Stand-By Commitments
The Money Market Fund and each Tax-Exempt Money Market Fund may acquire
"stand-by commitments" with respect to Municipal Securities held by it. Under a
stand-by commitment, a dealer agrees to purchase from a Fund, at the Fund's
option, specified Municipal Securities at a specified price. Each Fund will
acquire stand-by commitments solely to facilitate portfolio liquidity and does
not intend to exercise its rights thereunder for trading purposes. 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 a Fund at any time before the
maturity of the underlying Municipal Security, and may be sold, transferred or
assigned by the Fund only with respect to the underlying instruments. Although
stand-by commitments are often available
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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.
Tender Option Bonds
The Money Market Fund and the Tax-Exempt Money Market Funds 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.
Variable and Floating Rate Instruments
Securities purchased by the Funds may include variable and floating rate
instruments. 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 there 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.
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If a variable or floating rate instrument is not rated, Fleet 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 an instrument will
usually be deemed to have a maturity equal to the longer of the period remaining
until the next regularly scheduled interest rate adjustment or the time the Fund
involved can receive payment of principal as specified in the instrument.
Instruments which are U.S. Government obligations and certain variable rate
instruments having a nominal maturity of 397 days or less when purchased by the
Fund involved, however, will be deemed to have a maturity equal to the period
remaining until the next interest rate adjustment.
Long-term variable and floating rate obligations held by the 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).
Variable and floating rate obligations with a demand feature held by the
Funds 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.
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
only be entered into with financial institutions such as banks and
broker/dealers that are deemed to be creditworthy by Fleet. No Fund will enter
into repurchase agreements with Fleet or any of its 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%
limitation on investments in illiquid securities described under "Investment
Limitations" below.
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 a Fund
might be delayed pending court action. Income on repurchase agreements is
taxable. Investments by a Tax-Exempt Money Market Fund in repurchase agreements
will be, under normal market conditions, subject to a 20% overall limit on
taxable obligations.
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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 agreements). Securities subject to repurchase agreements 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.
The Money Market and Government Funds may also 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"). A reverse repurchase agreement
involves the risk that the market value of the securities sold by a Fund may
decline below the repurchase price. A Fund would pay interest on amounts
obtained pursuant to a reverse repurchase agreement.
Whenever a Fund enters into a reverse repurchase agreement, the Fund will
place in a segregated custodial account liquid assets such as cash or liquid
securities equal to the repurchase price (including accrued interest). The Fund
will monitor the account to ensure such equivalent values are maintained.
Reverse repurchase agreements are considered to be borrowings by a Fund under
the 1940 Act.
When-Issued and Delayed Settlement Transactions
Each Fund may purchase securities on a "when-issued" or "delayed
settlement" basis. When-issued transactions, which involve a commitment by a
Fund to purchase particular securities with payment and delivery taking place at
a future date (perhaps one or two months later) permit the Fund to lock in a
price or yield on a security it intends to purchase, regardless of future
changes in interest rates. Delayed settlement describes settlement of a
securities transaction in the secondary market sometime in the future.
When-issued 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, absent unusual market conditions, commitments by a Fund to
purchase securities on a when-issued or delayed settlement basis will not exceed
25% of the value of its total assets. These transactions will not be entered
into for speculative purposes, but only in furtherance of a Fund's investment
objective.
When a Fund agrees to purchase securities on a "when-issued" or "delayed
settlement" basis, the Fund's custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account. In the
event of a decline in the value of the securities that the custodian has set
aside, the Fund may be required to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitment. A Fund's net assets may fluctuate to a greater
degree if it sets aside portfolio securities to cover such purchase commitments
than if it sets aside cash. Because the Fund sets aside liquid assets to satisfy
its purchase commitments in the manner described, its liquidity and
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ability to manage its portfolio might be affected in the event its commitments
to purchase securities on a when-issued or delayed settlement basis exceeded 25%
of the value of its assets.
When a Fund engages in when-issued or delayed settlement transactions, it
relies on the seller to consummate the trade. Failure of the seller to do so may
result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous for a security. For purposes of determining
the average weighted maturity of a Fund's portfolio, the maturity of securities
purchased on a when-issued or delayed settlement basis is calculated from the
date of settlement of the purchase to the maturity date.
Securities Lending -- Money Market
The Money Market and Government Funds may lend their portfolio securities
to financial institutions such as banks and broker/dealers in accordance with
their investment limitations. 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. Loans will generally be short-term, and
will be made only to borrowers deemed by Fleet to be of good standing and only
when, in Fleet'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.
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 Government Fund in connection with such loans would
be invested in short-term obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; cash collateral received by the
Money Market Fund would be invested in high quality, short-term money market
instruments.
Guaranteed Investment Contracts -- Money Market Fund
The Money Market Fund may invest in guaranteed investment contracts
("GICs") issued by U.S. insurance companies. Pursuant to such contracts, the
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 Fund will only
purchase GICs that are issued or guaranteed by insurance companies that at the
time of purchase are rated in accordance with the applicable quality
requirements described above under "Quality Requirements." GICs are considered
illiquid securities and will be subject to the Fund's 10% limitation on illiquid
investments, unless there is an active and substantial secondary market for the
particular instrument and market quotations are readily available.
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Asset-Backed Securities -- Money Market Fund
The Money Market Fund 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, such as motor vehicle receivables and credit card receivables. The Fund
will only purchase asset-backed securities that meet the applicable quality
requirements described above under "Quality Requirements."
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.
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 the Fund's experiencing difficulty in valuing
or liquidating such securities. For these reasons, under certain circumstances,
asset-backed securities may be considered illiquid securities.
Investment Company Securities -- Tax-Exempt Money Market Funds and Institutional
Government Money Market Fund
The Tax-Exempt Money Market Funds may invest in securities issued by other
investment companies limited, with respect to the Tax-Exempt Fund, to open-end
investment companies that invest in high quality, short-term Municipal
Securities that meet the applicable
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quality requirements described above under "Quality Requirements" and that
determine their net asset value per share based on the amortized cost or
penny-rounding method. Such securities may be acquired by a Fund within the
limits prescribed by the 1940 Act. Except as otherwise permitted under the 1940
Act, each Fund currently intends to limit its investments in other investment
companies 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
investment companies as a group; and (c) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the Fund. A Fund
will invest in other investment companies primarily for the purpose of investing
its short-term cash which has not as yet been invested in other portfolio
instruments. However, from time to time, on a temporary basis, the Connecticut
Municipal Money Market Fund, Massachusetts Municipal Money Market Fund and New
York Municipal Money Market Fund may invest exclusively in one other investment
company managed similarly to the particular Fund.
The Institutional Government Money Market Fund may invest up to 5% of its
total assets in securities issued by other open-end investment companies that
invest in the types of obligations in which the Fund may invest and that
determine their net asset value per share based on the amortized cost or
penny-rounding method.
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.
Non-Diversification - Connecticut Municipal Money Market, Massachusetts
Municipal Money Market and New York Municipal Money Market Funds
The Connecticut Municipal Money Market, Massachusetts Municipal Money
Market and New York Municipal Money Market Funds are non-diversified investment
portfolios. As such, there is no limit on the percentage of assets which can be
invested in any single issuer. An investment in one of these Funds, therefore,
entails greater risk than would exist in a diversified investment portfolio
because the higher percentage of investments among fewer issuers may result in
greater fluctuation in the total market value of the Fund's portfolio. Any
economic, political, or regulatory developments affecting the value of the
securities in a Fund's portfolio will have a greater impact on the total value
of the portfolio than would be the case if the portfolio was diversified among
more issuers. The Connecticut Municipal Money Market, Massachusetts Municipal
Money Market and New York Municipal Money Market Funds intend to comply with
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). This
undertaking requires that at the end of each quarter of a Fund's taxable year,
with regard to at least 50% of its total assets, no more than 5% of its total
assets are invested in the securities of a single issuer; beyond that, no more
than 25% of its total assets are invested in the securities of a single issuer.
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Connecticut Investment Risks
The following information is a brief summary of factors affecting the
economies and financial strengths of the State of Connecticut, its
municipalities and its political subdivisions and does not purport to be a
complete description of such factors. Other factors will affect issuers. The
summary is based primarily upon one or more publicly available offering
statements relating to debt offerings of the State of Connecticut that were
available prior to the date of this Statement of Additional Information. The
accuracy and completeness of the information contained in such offering
statements have not been independently verified.
The ability of the issuers of Connecticut Municipal Securities to pay the
principal and interest on their obligations may be impacted by a variety of
factors relating to the economy of Connecticut and to the fiscal stability of
issuers of Connecticut Municipal Securities. The latter may include such matters
as the ability of issuers to raise sufficient tax and other revenues to meet
their needs, the availability of aid from other governmental bodies, and the
burdens that may be imposed on issuers by law or necessity. To the extent that
the Connecticut Municipal Money Market Fund invests in obligations that are not
general obligations of their issuers, payments of principal and interest will
depend on all factors affecting the revenue sources from which payments thereon
are to be derived. The value of the obligations held by the Fund would be
adversely affected not only by any actual inability of their issuers to pay the
principal and interest thereon, but also by a public perception that such
ability is in doubt.
Manufacturing has historically been of prime economic importance to
Connecticut (sometimes referred to as the "State"). The State's manufacturing
industry is diversified, with transportation equipment (primarily aircraft
engines, helicopters and submarines) the dominant industry, followed by
fabricated metals, non-electrical machinery, and electrical equipment. As a
result of a rise in employment in service-related industries and a decline in
manufacturing employment, however, manufacturing accounted for only 17.09% of
total non-agricultural employment in Connecticut in 1997. Defense-related
business represents a relatively high proportion of the manufacturing sector. On
a per capita basis, defense awards to Connecticut have traditionally been among
the highest in the nation, and reductions in defense spending have had a
substantial adverse impact on Connecticut's economy.
The average annual unemployment rate in Connecticut increased from a low
of 3.0% in 1988 to a high of 7.6% in 1992 and, after a number of important
changes in the method of calculation, was reported to be 5.8% in 1996. Average
per capita personal income of Connecticut residents increased in every year from
1989 to 1997, rising from $25,443 to $36,434. However, pockets of significant
unemployment and poverty exist in several Connecticut cities and towns.
For the four fiscal years ended June 30, 1991, the General Fund
experienced operating deficits but, for the eight fiscal years ended June 30,
1999, the General Fund recorded operating surpluses, based on Connecticut's
budgetary method of accounting. General Fund budgets adopted for the biennium
ending June 30, 2001, authorize expenditures of $10,581,600,000 for the
1999-2000 fiscal year and $11,085,200,000 for the 2000-2001 fiscal year and
project
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surpluses of $64,400,000 and $4,800,000, respectively, for those years. As of
August 31, 1999, the Comptroller estimated expenditures of $10,689,600,000 and a
surplus of only $11,200,000 for the 1999-2000 fiscal year. Connecticut's general
obligation bonds are rated Aa3 by Moody's and AA by Fitch. On October 8, 1998,
S&P upgraded its ratings of Connecticut's general obligations bonds from AA- to
AA.
The State's primary method for financing capital projects is through the
sale of general obligation bonds. These bonds are backed by the full faith and
credit of the State. As of October 15, 1999, the State had authorized direct
general obligation bond indebtedness totaling $13,310,385,000 of which
$11,144,149,000 had been approved for issuance by the State Bond Commission and
$9,625,537,000 had been issued. As of October 15, 1999 net State direct general
obligation indebtedness outstanding was $6,890,968,000.
In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The University was authorized to issue bonds totaling $962,000,000
by June 30, 2005, that are secured by a State debt service commitment to finance
the improvements, $359,475,000 of which were outstanding on October 15, 1999.
In addition, the State has limited or contingent liability on a
significant amount of other bonds. Such bonds have been issued by the following
quasi-public agencies: the Connecticut Housing Finance Authority, the
Connecticut Development Authority, the Connecticut Higher Education Supplemental
Loan Authority, the Connecticut Resources Recovery Authority and the Connecticut
Health and Educational Facilities Authority. Such bonds have also been issued by
the cities of Bridgeport and West Haven and the Southeastern Connecticut Water
Authority. As of December 1, 1998, the amount of bonds outstanding on which the
State has limited or contingent liability totaled $4,154,900,000.
In 1984, the State established a program to plan, construct and improve
the State's transportation system (other than Bradley International Airport).
The total cost of the program through June 30, 2002, is currently estimated to
be $12.6 billion, to be met from federal, state, and local funds. The State
expects to finance most of its $5.1 billion share of such cost by issuing $4.6
billion of special tax obligation ("STO") bonds. The STO bonds are payable
solely from specified motor fuel taxes, motor vehicle receipts, and license,
permit and fee revenues pledged therefor and credited to the Special
Transportation Fund, which was established to budget and account for such
revenues.
The State, its officers and its employees are defendants in numerous
lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of the
following cases might have a significant impact on the State's financial
position: (i) an action on behalf of all persons with traumatic brain injury who
have been placed in certain State hospitals, and other persons with acquired
brain injury who are in the custody of the Department of Mental Health and
Addiction Services, claiming that their constitutional rights are violated by
placement in State hospitals alleged not to provide adequate treatment and
training, and seeking placement in community residential settings with
appropriate
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support services; (ii) litigation involving claims by Indian tribes to portions
of the State's land area; (iii) an action by certain students and municipalities
claiming that the State's formula for financing public education violates the
State's Constitution and seeking a declaratory judgment and injunctive relief;
(iv) an action for money damages for the death of a young physician killed in an
automobile accident allegedly as a result of negligence of the State; and (v)
actions by several hospitals claiming partial refunds of taxes imposed on
hospital gross earnings to the extent such taxes related to tangible personal
property transferred in the provision of services to patients.
As a result of litigation on behalf of black and Hispanic school children
in the City of Hartford seeking "integrated education" within the Greater
Hartford metropolitan area, on July 9, 1996, the State Supreme Court directed
the legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. The Superior Court ordered the State
to show cause as to whether there has been compliance with the Supreme Court's
ruling and concluded that the State had complied but that the plaintiffs had not
allowed the State sufficient time to take additional remedial steps.
Accordingly, the plaintiffs might be able to pursue their claim at a later date.
The fiscal impact of this matter might be significant but is not determinable at
this time.
The State's Department of Information Technology is reviewing the State's
Year 2000 exposure and developing plans for modification or replacement of
existing software that it believes will prevent significant operations problems.
There is a risk that the plan will not be completed on time, that planned
testing will not reveal all problems, or that systems of others on whom the
State relies will not be timely updated. If the necessary remediations are not
completed in a timely fashion, the Year 2000 problem may have a material impact
on the operations of the State.
General obligation bonds issued by municipalities are payable primarily
from ad valorem taxes on property located in the municipality. A municipality's
property tax base is subject to many factors outside the control of the
municipality, including the decline in Connecticut's manufacturing industry.
Certain Connecticut municipalities have experienced severe fiscal difficulties
and have reported operating and accumulated deficits. The most notable of these
is the City of Bridgeport, which filed a bankruptcy petition on June 7, 1991.
The State opposed the petition. The United States Bankruptcy Court for the
District of Connecticut held that Bridgeport had authority to file such a
petition but that its petition should be dismissed on the grounds that
Bridgeport was not insolvent when the petition was filed. State legislation
enacted in 1993 prohibits municipal bankruptcy filings without the prior written
consent of the Governor. Regional economic difficulties, reductions in revenues,
and increased expenses could lead to further fiscal problems for the State and
its political subdivisions, authorities, and agencies. Difficulties in payment
of debt service on borrowings could result in declines, possibly severe, in the
value of their outstanding obligations, increases in their future borrowing
costs, and impairment of their ability to pay debt service on their obligations.
In addition to general obligation bonds backed by the full faith and
credit of the municipality, certain municipal authorities finance projects by
issuing bonds that are not
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considered to be debts of the municipality. Such bonds may be repaid only from
revenues of the financed project, the revenues from which may be insufficient to
service the related debt obligations.
Massachusetts Investment Risks
The Massachusetts Municipal Money Market Fund's ability to achieve its
investment objective depends on the ability of issuers of Massachusetts
Municipal Securities to meet their continuing obligations to pay principal and
interest. Since the Fund invests primarily in Massachusetts Municipal
Securities, the value of the Fund's shares may be especially affected by factors
pertaining to the economy of Massachusetts and other factors specifically
affecting the ability of issuers of Massachusetts 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 Massachusetts and its
political subdivisions to meet their obligations will 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 Massachusetts Municipal Securities may be affected from
time to time by economic, political and demographic conditions within
Massachusetts. 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 Massachusetts 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 Massachusetts or a particular locality. Any
reduction in the actual or perceived ability of an issuer of Massachusetts
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 values
of other Massachusetts Municipal Securities as well.
New York Investment Risks
Certain substantial issuers of New York Municipal Securities (including
issuers whose obligations may be acquired by the Fund) have, at times,
experienced serious financial difficulties in recent years. These difficulties
have at times jeopardized the credit standing and impaired the borrowing
abilities of all New York issuers and have generally contributed to higher
interest costs for their borrowings and fewer markets for their outstanding debt
obligations. A recurrence of the financial difficulties previously experienced
by certain issuers of New York Municipal Securities could result in defaults or
declines in the market values of those issuers' existing obligations and,
possibly, in the obligations of other issuers of New York Municipal Securities.
Although as of the date of this Statement of Additional Information, no issuers
of New York Municipal Securities are in default with respect to the payment of
their Municipal Securities, the occurrence of any such default could affect
adversely the market values and marketability of all New York Municipal
Securities and, consequently, the net asset value of the Fund's portfolio.
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Some of the significant financial considerations relating to the New York
Municipal Money Market Fund's investments in New York Municipal Securities are
summarized below. This summary information is not intended to be a complete
description and is principally derived from the Annual Information Statement of
the State of New York as supplemented and contained in official statements
relating to issues of New York Municipal Securities that were available prior to
the date of this Statement of Additional Information. The accuracy and
completeness of the information contained in those official statements have not
been independently verified.
State Economy. New York is one of the most populous states in the
nation and has a relatively high level of personal wealth. The State's economy
is diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because New York City (the "City") is a regional employment center for a
multi-state region, State personal income measured on a residence basis
understates the relative importance of the State to the national economy and the
size of the base to which State taxation applies.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.
State law requires the Governor to propose a balanced budget each
year. In recent years, the State has closed projected budget gaps of $5.0
billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than
$1 billion (1998-99). The State's current fiscal year began on April 1, 1999 and
ends on March 31, 2000. On March 31, 1999, the State adopted the debt service
portion of the State budget for the 1999-2000 fiscal year; four months later, on
August 4, 1999, it enacted the remainder of the budget. The Governor approved
the budget as
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passed by the Legislature. Prior to passing the budget in its entirety for the
current fiscal year, the State enacted appropriations that permitted the State
to continue its operations.
In 1999-2000, General Fund disbursements, including transfers to
support capital projects, debt service and other funds, are estimated at $37.36
billion, an increase of $868 million or 2.38 percent over 1998-99. Projected
spending under the 1999-2000 enacted budget is $215 million above the Governor's
Executive Budget recommendations, including 30-day amendments. This change is
the net result of spending actions that occurred during negotiations on the
Budget. The increase in General Fund spending is comprised of $1.1 billion in
legislative additions to the Executive Budget (primarily in education), offset
by various actions, including re-estimates of required spending based on
year-to-date results and the identification of certain other resources that
offset spending, such as $250 million from commencing the process of privatizing
the Medical Malpractice Insurance Association (MMIA), $250 million from the
retention of the Debt Reduction Reserve Fund within the General Fund and about
$100 million in excess fund balances. The ("MMIA"), was established in 1983 to
provide excess liability insurance to doctors and medical providers. Legislation
enacted with the 1999-2000 budget initiates the process of MMIA privatization
and transfers excess fund balances to the State.
The 1999-2000 enacted budget provides for $831 million in new
funding for public schools, the largest year-to-year increase in State history.
The budget also enacts several new tax cuts valued at $375 million when fully
phased in by 2003-04. None of the $1.82 billion cash surplus from 1998-99 is
assumed to support spending in 1999-2000, but instead is reserved to help offset
the costs of previously enacted tax cuts that take effect after 1999-2000.
The 1999-2000 Financial Plan projects a closing balance of $2.85
billion in the General Fund. The balance is comprised of the $1.82 billion
surplus from 1998-99 that has been set aside to finance already-enacted tax
cuts, $473 million in the Tax Stabilization Reserve Fund ("TSRF"), $250 million
in the Debt Reduction Reserve Fund ("DRRF"), $107 million in the Contingency
Reserve Fund ("CRF"), and $200 million in the Community Projects Fund ("CPF"),
which finances legislative initiatives. The State expects to close 1999-2000
with cash balances in these funds at their highest level ever.
Preliminary analysis by the Division of Budget ("DOB") indicates
that the State will have a 2000-01 budget gap of approximately $1.9 billion, or
about $300 million above the 1999-2000 Executive Budget estimate (after
adjusting for the projected costs of collective bargaining). This estimate
includes an assumption for the projected costs of new collective bargaining
agreements, $500 million in assumed operating efficiencies, as well as the
planned application of approximately $615 million of the $1.82 billion tax
reduction reserve. In recent years, the State has closed projected budget gaps
which DOB estimates at $5.0 billion (1995-96), $3.9 billion (1996-97), $2.3
billion (1997-98), and less than $1 billion (1998-99). The DOB will formally
update its projections of receipts and disbursements for future years as part of
the Governor's 2000-01 Executive Budget submission. The revised expectations for
these years will reflect the cumulative impact of tax reductions and spending
commitments enacted over the last several years as well as new 2000-01 Executive
Budget recommendations.
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The General Fund is the principal operating fund of the State and is
used to account for all financial transactions except those required to be
accounted for in another fund. It is the State's largest fund and received
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1999-2000 fiscal year, the General Fund (exclusive of transfers)
is expected to account for approximately 47.1 percent of all Governmental Funds
disbursements and 69.3 percent of total State Funds disbursements. General Fund
moneys are also transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types.
Total General Fund receipts and transfers in 1999-2000 are now
projected to be $39.31 billion, an increase of $2.57 billion from the $36.74
billion recorded in 1998-99. This total includes $35.93 billion in tax receipts,
$1.36 billion in miscellaneous receipts, and $2.02 billion in transfers from
other funds. The transfer of the $1.82 billion surplus recorded in 1998-99 to
the 1999-2000 fiscal period has the effect of exaggerating the growth in State
receipts from year to year by depressing reported 1998-99 figures and inflating
1999-2000 projections.
Receipts from user taxes and fees are projected to total $7.35
billion, an increase of $105 million from reported collections in the prior
year. The sales tax component of this category accounts for virtually all of the
1999-2000 growth. Growth in base sales tax yield, after adjusting for tax law
and other changes, is projected at 5.6 percent. Modest increases in motor fuel
and auto rental tax receipts over 1998-99 levels are also expected. However,
receipts from other user taxes and fees are estimated to decline by $177
million.
The yield of other excise taxes in this category, particularly the
cigarette and alcoholic beverage taxes, show long-term declining trends. General
Fund declines in 1999-2000 motor vehicle fee receipts, in contrast, reflect
statutory fee reductions and an increased amount of collections earmarked to the
Dedicated Highway and Bridge Trust Fund.
Significant statutory changes in this category during the 1999-2000
legislative session include: delaying until March 1, 2000 the implementation of
the exemption from State sales tax of clothing and footwear priced under $110;
providing week-long sales tax exemptions in September 1999 and January 2000 for
clothing and footwear priced under $500; enactment of a variety of small sales
tax exemptions including certain equipment used in providing telecommunications
service for sale, property and services used in theatrical productions, computer
hardware used to design Internet web sites, and building materials used in
farming; a reduction in the beer tax rate; and an expanded exemption from the
alcoholic beverage tax for small brewers.
Following the pattern of the last two fiscal years, education
programs receive the largest share of new funding contained in the 1999-2000
Financial Plan. School aid is expected to grow by $831 million or 8.58 percent
over 1998-99 levels (on a State fiscal year basis). Outside of education, the
largest growth in spending is for State Operations ($207 million, including $100
million reserved for possible collective bargaining costs); Debt Service ($183
million), and mental hygiene programs, including funding for a cost of living
increase for care
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providers ($114 million). These increases were offset, in part, by spending
reductions or actions in health and social welfare ($280 million), and in
general State charges ($222 million).
Under the 1999-2000 enacted budget, General Fund spending on school
aid is projected at $10.52 billion on a State fiscal year basis, an increase of
$831 million from the prior year. The budget provides additional funding for
operating aid, building aid, and several other targeted aid programs. It also
funds the balance of aid payable for the 1998-99 school year that is due
primarily in the first quarter of the 1999-2000 fiscal year. For all other
educational programs, disbursements are projected to grow by $78 million to
$2.99 billion.
Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and organizations that are
not subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. The projections assume
no changes in federal tax law, which could substantially alter the current
receipts forecast. In addition, these projections do not include funding for new
collective bargaining agreements after the current contracts expire. Actual
results, however, could differ materially and adversely from their projections,
and those projections may be changed materially and adversely from time to time.
Debt Limits and Outstanding Debt. There are a number of methods by
which the State of New York may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to
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finance the construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the LGAC to restructure the
way the State makes certain local aid payments.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. The State assumes that the 2000-01 Financial Plan will achieve $500
million in savings from initiatives by State agencies to deliver services more
efficiently, workforce management efforts, maximization of federal and
non-General Fund spending offsets, and other actions necessary to help bring
projected disbursements and receipts into balance. The projections do not assume
any gap-closing benefit from the potential settlement of State claims against
the tobacco industry.
Spending from Debt Service Funds are estimated at $3.64 billion in
1999-2000, up $370 million or 11.31 percent from 1998-99. Transportation
purposes, including debt service on bonds issued for State and local highway and
bridge programs financed through the New York State Thruway Authority and
supported by the Dedicated Highway and Bridge Trust Fund, account for $124
million of the year-to-year growth. Debt service for educational purposes,
including State and City University programs financed through the Dormitory
Authority, will increase by $80 million. The remaining growth is for a variety
of programs in mental health and corrections, and for general obligation
financings.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On March
5, 1999, S&P affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baal. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State.
On March 5, 1999, Moody's affirmed its A2 rating with a stable outlook to the
State's general obligations.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
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Litigation. Certain litigation pending against New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) challenges to the
constitutionality of Public Health Law 2807-d, which imposes a gross receipts
tax from certain patient care services; (4) action seeking enforcement of
certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; (5) a challenge to the Governor's
application of his constitutional line item veto authority; and (6) a challenge
to the enactment of the Clean Water/Clean Air Bond Act of 1996.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision in
the case of State of Delaware v. State of New York, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions were paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the current fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan.
Although other litigation is pending against New York State, except
as described herein, no current litigation involves New York State's authority,
as a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New
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York State's power or ability, as a matter of law, to impose or collect
significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in
part, to the fiscal stability of its Authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit markets
could be impaired, and the market price of its outstanding debt may be
materially and adversely affected, if any of the Authorities were to default on
their respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since 1995. As a
result of the structural imbalances in JDA's capital structure, and defaults in
its loan portfolio and loan guarantee program incurred between 1991 and 1996,
JDA would have experienced a debt service cash flow shortfall had it not
completed its recent refinancing. JDA anticipates that it will transact
additional refinancings in 1999, 2000 and 2003 to complete its long-term plan of
finance and further alleviate cash flow imbalances which are likely to occur in
future years. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
New York City and Other Localities. The fiscal health of the State
may also be impacted by the fiscal health of its localities, particularly the
City, which has required and continues to require significant financial
assistance from the State. The City depends on State aid both to enable the City
to balance its budget and to meet its cash requirements. There can be no
assurance that there will not be reductions in State aid to the City from
amounts currently projected or that State budgets will be adopted by the April 1
statutory deadline or that any such reductions or delays will not have adverse
effects on the City's cash flow or expenditures. In
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addition, the Federal budget negotiation process could result in a reduction in
or a delay in the receipt of Federal grants which could have additional adverse
effects on the City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell
short-term notes to the public again until 1979. In 1975, S&P suspended its A
rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+
and on November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998,
S&P assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with positive implications. On March 9, 1999, S&P
assigned its A- rating to Series 1999H of New York City general obligation bonds
and affirmed the A- rating on various previously issued New York City bonds.
Moody's ratings of City bonds were revised in November 1981 from B
(in effect since 1977) to Bal, in November 1983 to Baa, in December 1985 to
Baal, in May 1988 to A and again in February 1991 to Baal. On February 25, 1998,
Moody's upgraded approximately $28 billion of the City's general obligations
from Baal to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's
general obligations and stated that its outlook was stable.
On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion
outstanding general obligation bonds from A- to A.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do not
constitute an enforceable obligation or debt of either the State or the City.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's
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financial statements have been audited by independent accounting firms. To be
eligible for guarantees and assistance, the City is required during a "control
period" to submit annually for Control Board approval, and when a control period
is not in effect for Control Board review, a financial plan for the next four
fiscal years covering the City and certain agencies showing balanced budgets
determined in accordance with GAAP. New York State also established the Office
of the State Deputy Comptroller for New York City ("OSDC") to assist the Control
Board in exercising its powers and responsibilities. On June 30, 1986, the City
satisfied the statutory requirements for termination of the control period. This
means that the Control Board's powers of approval are suspended, but the Board
continues to have oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the
Financial Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal
years, relating to the City, the Board of Education ("BOE") and City University
of New York ("CUNY") and reflected the City's expense and capital budgets for
the 1998 fiscal year, which were adopted on June 6, 1997. The 1998-2001
Financial Plan projected revenues and expenditures for the 1998 fiscal year
balanced in accordance with GAAP. The 1998-99 Financial Plan projected General
Fund receipts (including transfers from other funds) of $36.22 billion, an
increase of $1.02 billion over the estimated 1997-1998 level. Recurring growth
in the State General Fund tax base was projected to be approximately six percent
during 1998-99, after adjusting for tax law and administrative changes. This
growth rate is lower than the rates for 1996-97 or 1997-98, but roughly
equivalent to the rate for 1995-96.
Although the City has consistently maintained balanced budgets and
is projected to achieve balanced operating results for the current fiscal year,
there can be no assurance that the gap-closing actions proposed in the 1998-2001
Financial Plan can be successfully implemented or that the City will maintain a
balanced budget in future years without additional State aid, revenue increases
or expenditure reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.
The projections set forth in the 1998-2001 Financial Plan were based
on various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the 1998-2001 Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation and
the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent
upon the City's ability to market its securities successfully. The City's
financing program for fiscal years 1998 through 2001 contemplates the issuance
of $5.7
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billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was created
as part of the City's effort to assist in keeping the City's indebtedness within
the forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. Despite this additional financing mechanism, the
City currently projects that, if no further action is taken, it will reach its
debt limit in City fiscal year 1999-2000. Indebtedness subject to the
constitutional debt limit includes liability on capital contracts that are
expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Transitional Finance
Authority to be unconstitutional. If such legislation which is currently on
appeal to the Court of Appeals were voided, projected contracts for the City
capital projects would exceed the City's debt limit. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussion of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. Although the City's 1998 fiscal year financial plan
projected $2.4 billion of seasonal financing, the City expected to undertake
only approximately $1.4 billion of seasonal financing. The City issued $2.4
billion of short-term obligations in fiscal year 1997. The delay in the adoption
of the State's budget in certain past fiscal years has required the City to
issue short-term notes in amounts exceeding those expected early in such fiscal
years.
Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York State
assistance during the last several State fiscal years. The potential impact on
the State of any future requests by localities for additional assistance is not
included in the State's projections of its receipts and disbursements for the
fiscal year.
Beginning in 1990, the City of Troy experienced a series of
budgetary deficits that resulted in the establishment of a Supervisory Board for
the City of Troy in 1994. The Supervisory Board's powers were increased in 1995,
when Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
The 1998-99 budget included $29.4 million in unrestricted aid
targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals
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more than $25.6 million. Twelve upstate cities received $24.2 million in
one-time assistance from a cash flow acceleration of State aid.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. State law requires the Comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
From time to time, federal expenditure reductions could reduce, or
in some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing the State assistance in
the future.
Year 2000 Compliance. In April 1999, the State Comptroller released
an audit on the State's Year 2000 compliance. The audit, which reviewed the
State's Y2K compliance activities through October 1998, found that the State had
made progress in achieving Y2K compliance, but needed to improve its activities
in several areas, including data interchanges and contingency planning.
The Office for Technology (OFT) will continue to monitor compliance
progress for the States mission-critical and high-priority systems and is
reporting compliance progress to the Governor's office on a quarterly basis. The
1999-2000 enacted budget allocates $19 million for priority embedded systems and
$20 million for unanticipated expenses related to bringing technology into Y2K
compliance.
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
Fund and applicable regulations of the Securities and Exchange Commission
("SEC").
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<PAGE>
INVESTMENT LIMITATIONS
In addition to each Fund's investment objective as stated in its
Prospectus(es), the following investment limitations are matters of fundamental
policy and may not be changed with respect to a Fund without the affirmative
vote of the holders of a majority of its outstanding shares (as defined under
"Miscellaneous").
Each of the Money Market, Government, U.S. Treasury, Tax-Exempt and
Institutional Government Money Market 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 and Government Funds each 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 each taxable Fund 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.
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9. Purchase securities of other investment companies except in
connection with a merger, consolidation, reorganization or
acquisition of assets; provided, however, that the Tax-Exempt and
Institutional Government Money Market Funds may acquire such
securities in accordance with the 1940 Act; and provided, further,
that the Institutional Government Money Market Fund may only invest
up to 5% of its total assets in shares of other investment companies
which are registered under the 1940 Act and which invest only in
securities that the Fund could acquire directly.
Each of the Money Market, Government, U.S. Treasury and Institutional
Government Money Market Funds may not:
10. 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 and
Government Funds may borrow pursuant to reverse repurchase
agreements in accordance with their investment policies and in
amounts not in excess of 10% 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 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 and Government Funds) in excess of 5% of its total assets are
outstanding.
11. Invest more than 10% of the value of its total assets in illiquid
securities, including, with respect to the Money Market, Government
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.
With respect to Investment Limitation No. 10 above, each of the Money
Market and Government 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.
With respect to Investment Limitation No. 11 above, each of the Money
Market, Government, U.S. Treasury and Institutional Government Money Market
Funds intends to limit investments in illiquid securities to not more than 10%
of the value of its net assets.
Each of the Money Market, Government, U.S. Treasury and Tax-Exempt Funds
may not:
12. 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
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<PAGE>
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. 12 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; and (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.
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 Government Fund may not:
14. Purchase securities other than obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, some of
which may be subject to repurchase agreements.
The Tax-Exempt Fund may not:
15. 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.
16. 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.
17. 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;
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<PAGE>
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.
18. 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. 16 above, the Tax-Exempt Fund
intends to limit investments in illiquid securities to not more than 10% of the
value of its net assets.
The Institutional Government Money Market Fund may not:
19. Invest in obligations having remaining maturities in excess of 397
days, except that certain variable and floating rate instruments may
bear longer maturities (provided certain provisions are met).
The Connecticut Municipal Money Market, Massachusetts Municipal Money
Market and New York Municipal Money Market Funds may not:
20. Borrow money directly or pledge securities except, under certain
circumstances, each 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.
21. Sell any securities short or purchase any securities on margin, but
each Fund may obtain such short-term credits as may be necessary for
clearance of transactions.
22. Issue senior securities except that each Fund may borrow money or
engage in reverse repurchase agreements in amounts up to one-third
of the value of its total assets, including the amounts borrowed. No
Fund will borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary,
or emergency measure to facilitate management of the portfolio by
enabling a Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or
disadvantageous. No Fund will purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
23. Mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. In those cases, a Fund may only mortgage,
pledge, or hypothecate assets having a market value not exceeding
10% of the value of its total assets at the time of purchase.
24. Purchase or sell real estate or real estate limited partnerships,
although each Fund may invest in securities of issuers whose
business involves the purchase or sale of
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real estate or in securities which are secured by real estate or
interests in real estate.
25. Purchase or sell commodities, commodity contracts, or commodity
futures contracts.
26. Underwrite any issue of securities, except as a Fund may be deemed
to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment
objective, policies and limitations.
27. Lend any of its assets except that a Fund may acquire publicly or
non-publicly issued Connecticut, Massachusetts or New York Municipal
Securities or temporary investments or enter into repurchase
agreements, in accordance with their respective investment
objectives, policies, limitations and Galaxy's Declaration of Trust.
28. With respect to at least 50% of its total assets, invest more than
5% of its total assets in the securities of a single issuer and more
than 25% of its total assets in the securities of a single issuer at
the close of each quarter of each fiscal year. Under this
limitation, each governmental subdivision, including states,
territories and possessions of the United States, or their political
subdivisions, agencies, authorities, instrumentalities, or similar
entities will be considered a separate issuer if its assets and
revenues are separate from those of the governmental body creating
it and the security is backed only by its own assets and revenues.
Industrial development bonds backed only by the assets and revenue
of a non-governmental user are considered to be issued solely by
that user. If, in the case of an industrial development bond or
government-issued security, a governmental or other entity
guarantees the security, such guarantee would be considered a
separate security issued by the guarantor, as well as the other
issuer, subject to limited exclusions allowed by the 1940 Act.
29. Purchase securities, if, as a result of such purchase, 25% or more
of the value of the Fund's total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of
projects. However, a Fund may invest as temporary investments more
than 25% of the value of its assets in cash or cash items,
securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, or instruments secured by these money market
instruments and repurchase agreements.
30. Invest more than 10% of its net assets in securities subject to
restrictions on resale under the Securities Act of 1933.
The following investment limitations with respect to the Connecticut
Municipal Money Market, Massachusetts Municipal Money Market and New York
Municipal Money Market
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Funds may be changed by Galaxy's Board of Trustees without shareholder approval
(shareholders will be notified before any material change in this limitation
becomes effective):
31. No Fund will invest more than 5% of its total assets in industrial
development bonds or other Municipal Securities when the payment of
principal and interest is the responsibility of companies (or
guarantors, where applicable) with less than three years of
continuous operations, including the operation of any predecessor.
32. Each Fund will limit its investments in other investment companies
to not more than 3% of the total outstanding voting stock of any
investment company; will invest no more than 5% of its total assets
in any one investment company; and will invest no more than 10% of
its total assets in investment companies in general. However, these
limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization or acquisition of assets. The
Funds will limit their respective investments in the securities of
other investment companies to those of money market funds which are
of comparable or better portfolio quality and have investment
objectives and policies similar to their own. Rule 2a-7 under the
1940 Act requires that the Funds limit their investments to
instruments that, in the opinion of the Board of Trustees, present
minimal credit risk and that, if rated, meet minimum rating
standards set forth in Rule 2a-7 under the 1940 Act. If the
instruments are not rated, the Trustees must determine that they are
of comparable quality. Shares of investment companies purchased by
the Funds will meet these same criteria and will have investment
policies consistent with Rule 2a-7 of the 1940 Act.
33. No Fund may purchase or retain the securities of any issuer if the
officers and Trustees of Galaxy or Fleet, owning individually more
than 1/2 of 1% of the issuer's securities, together own more than 5%
of the issuer's securities.
34. No Fund may purchase or sell interests in oil, gas, or other mineral
exploration or development programs or leases.
35. No Fund may purchase or sell puts, calls, straddles, spreads, or any
combination thereof, except that each such Fund may purchase
Municipal Securities accompanied by agreements of sellers to
repurchase them at the Fund's option.
36. No Fund may invest more than 5% of the value of its total assets in
industrial development bonds where the payment of principal and
interest are the responsibility of companies (or guarantors, where
applicable) with less than three years of continuous operations,
including the operation of any predecessor.
37. No Fund may invest more than 10% of the value of its respective net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice,
non-negotiable fixed time deposits with maturities over seven days,
and certain securities not determined by the Board of Trustees to be
liquid.
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The Connecticut Municipal Money Market, Massachusetts Municipal Money
Market and New York Municipal Money Funds may purchase restricted securities,
which are any securities in which a Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to restrictions on
resale under federal securities laws. Certain restricted securities may be
considered liquid pursuant to guidelines established by the Board of Trustees.
To the extent restricted securities are deemed illiquid, each such Fund will
limit its purchase, together with other securities considered to be illiquid, to
10% of its net assets.
In addition to the foregoing limitations, (a) the Money Market, Government
and U.S. Treasury Funds may not purchase securities that would cause 25% or 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) with respect to the Money
Market Fund, 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) with respect to the Money
Market Fund, 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); (b) the Connecticut Municipal Money
Market, Massachusetts Municipal Money Market and New York Municipal Money Market
Funds may not purchase securities that would cause 25% or 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 there is no limitation with respect to
obligations 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; and (c) the
Institutional Government Money Market Fund may not purchase 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 obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
Except as stated otherwise, if 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 Fund may follow non-fundamental operating policies that are more
restrictive than its fundamental investment limitations, as set forth in the
Prospectuses and this Statement of
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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. 12 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. 13 above. Each
Fund 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.
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 the Money Market Fund or any Tax-Exempt Money Market 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 10% 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.
The Connecticut Municipal Money Market, Massachusetts Municipal Money
Market and New York Municipal Money Market Funds do not intend to borrow money
in excess of 5% of the value of their respective assets or to invest more than
5% of their respective total assets in securities of foreign issuers during the
next twelve months.
NET ASSET VALUE
Galaxy uses the amortized cost method of valuation to value shares of the
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
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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 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.
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.
Purchases of Retail Shares and Prime Shares
Investments in Retail A Shares of the Money Market, Government, U.S.
Treasury, Tax-Exempt, Connecticut Municipal Money Market, Massachusetts
Municipal Money Market and New York Municipal Money Market Funds ("Retail A
Shares") (collectively, Retail A Shares and Retail B Shares of the Money Market
Fund may be referred to as "Retail Shares"), and Prime Shares of the Connecticut
Municipal Money Market, Massachusetts Municipal Money Market and New York
Municipal Money Market Funds ("Prime Shares") are not subject to any sales
charge. Investments in Retail B Shares of the Money Market Fund are subject to a
back-end sales charge. This back-end sales charge declines over time and is
known as a "contingent deferred sales charge." See "Applicable Sales Charge --
Retail B Shares" below. Retail B
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Shares of the Money Market Fund have higher operating expenses than Retail A
Shares of the Fund and may not be appropriate for investors that do not plan to
exchange into Retail B Shares of certain of Galaxy's non-money market
portfolios.
PDI has established procedures to enable different types of investors to
purchase Retail Shares and Prime Shares. Retail Shares may be purchased by FIS
Securities, Inc., Fleet Securities, Inc., Fleet Enterprises, Inc., FleetBoston
Financial Corporation, its affiliates, their correspondent banks and other
qualified banks, saving and loan associations and broker/dealers on behalf of
their customers. Retail Shares may also be purchased by individuals,
corporations or other entities, who submit a purchase application to Galaxy,
purchasing directly for their own accounts or for the accounts of others.
Purchases of Retail Shares may take place only on days on which the New York
Stock Exchange (the "Exchange") is open for business ("Business Days"). If an
institution accepts a purchase order from a customer on a non-Business Day, the
order will not be executed until it is received and accepted by PDI on a
Business Day in accordance with PDI's procedures.
Retail Shares purchased by institutions on behalf of their customers will
normally be held of record by the institution and beneficial ownership of Retail
Shares will be recorded by the institution and reflected in the account
statements provided to its customers. Galaxy's transfer agent may establish an
account of record for each customer of an institution reflecting beneficial
ownership of Retail Shares. Depending on the terms of the arrangement between a
particular institution and Galaxy's transfer agent, confirmations of Retail
Share purchases and redemptions and pertinent account statements will either be
sent by Galaxy's transfer agent directly to a customer with a copy to the
institution, or will be furnished directly to the customer by the institution.
Other procedures for the purchase of Retail Shares established by institutions
in connection with the requirements of their customer accounts may apply.
Customers wishing to purchase Retail Shares through their institution should
contact such entity directly for appropriate purchase instructions.
Purchase orders for Prime Shares are placed by investors through selected
broker/dealers. The broker/dealer is responsible for transmitting its customers'
purchase orders to PDI and for wiring required funds in payment to Galaxy's
custodian on a timely basis. PDI is responsible for transmitting such orders to
Galaxy's transfer agent for execution. Prime Shares purchased by a broker/dealer
on behalf of its customers will normally be held of record by the broker/dealer
and reflected in the account statements provided to its customers. Depending on
the terms of the arrangement between a particular broker/dealer and Galaxy's
transfer agent, confirmations of Prime Share purchases and redemptions and
pertinent account statements will either be sent by Galaxy's transfer agent
directly to a shareholder with a copy to the broker/dealer, or will be furnished
directly to the shareholder by the broker/dealer. Other procedures for the
purchase of Prime Shares established by broker/dealers may apply. Purchases of
Prime Shares will be effected only on Business Days.
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Applicable Sales Charges - Retail B Shares
The public offering price for Retail B Shares of the Money Market Fund is
the net asset value of the Retail B Shares purchased. Although investors pay no
front-end sales charge on purchases of Retail B Shares, such Shares are subject
to a contingent deferred sales charge at the rates set forth below if they are
redeemed within six years of purchase. Securities dealers, brokers, financial
institutions and other industry professionals will receive commissions from PDI
in connection with sales of Retail B Shares. These commissions may be different
than the reallowances or placement fees paid to dealers in connection with sales
of Retail A Shares of Galaxy's non-money market portfolios. Certain affiliates
of Fleet may, at their own expense, provide additional compensation to Fleet
Enterprises, Inc., a broker-dealer affiliate of Fleet, whose customers purchase
significant amounts of Retail B Shares of the Fund. Such compensation will not
represent an additional expense to the Fund or its shareholders, since it will
be paid from the assets of Fleet's affiliates. The contingent deferred sales
charge on Retail B Shares is based on the lesser of the offering price or the
net asset value of the Shares on the redemption date. As a result, no sales
charge is imposed on any increase in the principal value of an investor's Retail
B Shares. In addition, a contingent deferred sales charge will not be assessed
on Retail B Shares purchased through reinvestment of dividends or capital gains
distributions.
The proceeds from the contingent deferred sales charge that an investor
may pay upon redemption go to PDI, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Retail B Shares.
Exemptions from the Contingent Deferred Sales Charge. Certain types of
redemptions may also qualify for an exemption from the contingent deferred sales
charge. In addition to the sales charge exemptions described in the applicable
Prospectus, the contingent deferred sales charge with respect to Retail B Shares
is not assessed on: (i) redemptions in connection with required (or, in some
cases, discretionary) distributions to participants or beneficiaries of an
employee pension, profit-sharing or other trust or qualified retirement or Keogh
plan, individual retirement account or custodial account maintained pursuant to
Section 403(b)(7) of the Code; (ii) redemptions in connection with required (or,
in some cases, discretionary) distributions to participants in qualified
retirement or Keogh plans, individual retirement accounts or custodial accounts
maintained pursuant to Section 403(b)(7) of the Code due to death, disability or
the attainment of a specified age; (iii) redemptions effected pursuant to the
Money Market Fund's right to liquidate a shareholder's account if the aggregate
net asset value of Retail B Shares held in the account is less than the minimum
account size; (iv) redemptions in connection with the combination of the Money
Market Fund with any other investment company registered under the 1940 Act by
merger, acquisition of assets, or by any other transaction; (v) redemptions
resulting from a tax-free return of an excess contribution pursuant to Section
408(d)(4) or (5) of the Code; or (vi) any redemption of Retail B Shares held by
an investor, provided the investor was the beneficial owner of shares of the
Money Market Fund (or any of the other portfolios offered by Galaxy or otherwise
advised by Fleet or its affiliates) before December 1, 1995. In addition to the
foregoing exemptions, no contingent deferred sales charge will be imposed on
redemptions made pursuant to the Systematic Withdrawal Plan, subject to the
limitations set forth under
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"Investor Programs - Retail Shares - Automatic Investment Program and Systematic
Withdrawal Plan" below.
Six years after purchase, Retail B Shares of the Money Market Fund will
convert automatically to Retail A Shares of the Fund. The purpose of the
conversion is to relieve a holder of Retail B Shares of the higher ongoing
expenses charged to those Shares. The conversion from Retail B Shares to Retail
A Shares takes place at net asset value, as a result of which an investor
receives dollar-for-dollar the same value of Retail A Shares as he or she had of
Retail B Shares. The conversion occurs six years after the beginning of the
calendar month in which the Retail B Shares are purchased. Upon conversion, an
investor would hold Retail A Shares subject to the operating expenses for Retail
A Shares.
Retail B Shares of the Money Market Fund acquired through a reinvestment
of dividends or distributions are also converted at the earlier of two dates --
six years after the beginning of the calendar month in which the reinvestment
occurred or the date of conversion of the most recently purchased Retail B
Shares that were not acquired through reinvestment of dividends or
distributions. For example, if an investor makes a one-time purchase of Retail B
Shares of the Fund, and subsequently acquires additional Retail B Shares of the
Fund only through reinvestment of dividends and/or distributions, all of such
investor's Retail B Shares in the Fund, including those acquired through
reinvestment, will convert to Retail A Shares of the Fund on the same date.
Purchases of Shares of the Institutional Government Money Market Fund
Investments in Shares of the Institutional Government Money Market Fund
(referred to in the Prospectus for the Fund as Trust Shares) are not subject to
any sales charge. Shares of the Institutional Government Money Market Fund may
be purchased by FIS Securities, Inc., Fleet Securities, Inc., Fleet Enterprises,
Inc., FleetBoston Financial Corporation, its affiliates, their correspondent
banks and other qualified banks, saving and loan associations and broker/dealers
on behalf of their customers. Purchases of Shares may take place only on
Business Days. If an institution accepts a purchase order from a customer on a
non-Business Day, the order will not be executed until it is received and
accepted by PDI on a Business Day in accordance with PDI's procedures.
Shares of the Institutional Government Money Market Fund purchased by
institutions on behalf of their customers will normally be held of record by the
institution and beneficial ownership of such Shares will be recorded by the
institution and reflected in the account statements provided to its customers.
Depending on the terms of the arrangement between a particular institution and
Galaxy's transfer agent, confirmations of Share purchases and redemptions and
pertinent account statements will either be sent by Galaxy's transfer agent
directly to a customer with a copy to the institution, or will be furnished
directly to the customer by the institution. Other procedures for the purchase
of Shares established by institutions in connection with the requirements of
their customer accounts may apply. Customers wishing to
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purchase Shares through their institution should contact such entity directly
for appropriate purchase instructions.
Purchases of Trust Shares - Money Market,
Government, U.S. Treasury and Tax-Exempt Funds
Trust Shares of the Money Market, Government, U.S. Treasury and Tax-Exempt
Funds are sold to investors maintaining qualified accounts at bank and trust
institutions, including subsidiaries of FleetBoston Financial Corporation and,
with respect to each Fund other than the Tax-Exempt Fund, to participants in
employer-sponsored defined contribution plans (such institutions and plans are
referred to herein collectively as "Institutions"). Trust Shares sold to such
investors ("Customers") will be held of record by Institutions. Purchases of
Trust Shares will be effected only on days on which PDI, Galaxy's custodian and
the purchasing Institution are open for business ("Trust Business Days"). If an
Institution accepts a purchase order from its Customer on a non-Trust Business
Day, the order will not be executed until it is received and accepted by PDI on
a Trust Business Day in accordance with the foregoing procedures.
Other Purchase Information
On a Business Day or a Trust Business Day when the 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
or Trust Business Day.
Redemptions
Redemption orders are effected at the net asset value per share next
determined after receipt of the order by PDI, except that proceeds from the
redemption of Retail B Shares of the Money Market Fund will be reduced by the
amount of any applicable contingent deferred sales charge. On a Business Day or
Trust 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 or Trust Business Day.
Galaxy may require any information reasonably necessary to ensure that a
redemption has been duly authorized. When redeeming Retail Shares in the Money
Market Fund, investors should indicate whether they are redeeming Retail A
Shares or Retail B Shares of the Fund. If an investor owns both Retail A Shares
and Retail B Shares of the Money Market Fund, the Retail A Shares will be
redeemed first unless the investor indicates otherwise. 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.
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
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cash all redemptions requested by any 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.
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.
INVESTOR PROGRAMS
The following information supplements the description in the applicable
Prospectuses as to various Investor Programs available to holders of Retail
Shares and Shares of the Institutional Government Money Market Fund.
Exchange Privilege - Retail Shares and Shares of the Institutional Government
Money Market Fund
The minimum initial investment to establish a new account in another
eligible fund by exchange, except for the Institutional Government Money Market
Fund, is $2,500, unless, with respect to Retail Shares, (i) the Retail 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
into which the exchange is being made, to participate in the Automatic
Investment Program described below, in which event there is no minimum initial
investment requirement, or in the College Investment Program described below, in
which event the minimum initial investment is generally $100. The minimum
initial investment to establish an account by exchange in the Institutional
Government Money Market Fund is $2 million.
An exchange involves a redemption of all or a portion of Retail Shares or
Shares and the investment of the redemption proceeds in shares of another Fund
or portfolio offered by Galaxy or, with respect to Retail A Shares, 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 net asset
value per share 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 Inc. ("PFPC"), Galaxy's administrator, 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
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should request and review the prospectuses for these portfolios 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 request, an investor should consult a tax or other financial
adviser to determine the tax consequences.
Retirement Plans - Retail Shares
Retail Shares of the Funds, other than the Tax-Exempt Money Market Funds,
are available for purchase in connection with the following tax-deferred
prototype retirement plans:
Individual Retirement Arrangementts ("IRAs") (including traditional, Roth
and Education IRAs and "rollovers" 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 Sections
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, service fees and other
matters related to these plans, and the form of application, is available from
PDI (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.
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Automatic Investment Program and Systematic Withdrawal Plan - Retail Shares
The Automatic Investment Program permits an investor to purchase Retail
Shares of a Fund each month or each quarter. Provided an investor's financial
institution allows automatic withdrawals, Retail 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 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 Shares on a monthly, quarterly, semi-annual, or annual basis on any
Business Day designated by the investor. 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 Galaxy's transfer agent (but
not less than five days before a payment date). No contingent deferred sales
charge will be assessed on redemptions of Retail B Shares of the Money Market
Fund made through the Systematic Withdrawal Plan that do not exceed 12% of an
account's net asset value on an annualized basis. For example, monthly,
quarterly and semi-annual Systematic Withdrawal Plan redemptions of Retail B
Shares will not be subject to the contingent deferred sales charge if they do
not exceed 1%, 3% and 6%, respectively, of an account's net asset value on the
redemption date. Systematic Withdrawal Plan redemptions of Retail B Shares in
excess of this limit are still subject to the applicable contingent deferred
sales charge.
College Investment Program - Retail 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 PDI (call 1-877-BUY-GALAXY (1-877-289-4252)).
Checkwriting - Retail Shares
Checkwriting is available for investors in Retail Shares. A charge for use
of the checkwriting privilege may be imposed by Galaxy. There is no limit to the
number of checks an investor may write per month in an amount per check of $250
or more. To obtain checks, an investor must complete the signature card that
accompanies the account application. To establish this checkwriting service
after opening an account in a Fund, investors must contact PDI by
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telephone (1-877-BUY-GALAXY (1-877-289-4252)) or mail to obtain a signature
card. A signature guarantee may be required. An investor will receive the daily
dividends declared on the Retail Shares to be redeemed up to the day that a
check is presented to Galaxy's custodian for payment. Upon 30 days' written
notice to investors, the checkwriting privilege may be modified or terminated.
An account in a Fund may not be closed by writing a check.
Direct Deposit Program - Retail 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.
TAXES
Each of the Money Market, Government, Institutional Government Money
Market, U.S. Treasury, Tax-Exempt, Connecticut Municipal Money Market and
Massachusetts Municipal Money Market Funds qualified during its last taxable
year and intends to continue to qualify, and the New York Municipal Money Market
Fund intends 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 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."
The Tax-Exempt Money Market Funds. It is the policy of each Tax-Exempt
Money Market 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
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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 a Tax-Exempt Money Market Fund is not intended to
constitute a balanced investment program. Shares of the Funds 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
ultimately taxable to the beneficiaries when distributed. In addition, the Funds
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 Funds 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 Sections 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
Money Market Funds 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.
Dividends paid by the Connecticut Municipal Money Market Fund that qualify
as exempt-interest dividends for federal income tax purposes will not be subject
to the Connecticut personal income tax imposed on resident and nonresident
individuals, trusts and estates to the extent that they are derived from
Connecticut Municipal Securities (as defined above). Other Fund dividends and
distributions, whether received in cash or additional shares, are subject to
this tax, except that, in the case of shareholders who hold their shares as
capital assets,
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distributions treated as capital gain dividends for federal income tax purposes
are not subject to the tax to the extent that they are derived from obligations
issued by or on behalf of the State of Connecticut, its political subdivisions,
or public instrumentalities, state or local authorities, districts or similar
public entities created under Connecticut law. Dividends and distributions paid
by the Fund that constitute items of tax preference for purposes of the federal
alternative minimum tax, other than any derived from Connecticut Municipal
Securities, could cause liability for the net Connecticut minimum tax applicable
to investors subject to the Connecticut personal income tax who are required to
pay the federal alternative minimum tax. Dividends paid by the Connecticut
Municipal Money Market Fund, including those that qualify as exempt-interest
dividends for federal income tax purposes, are taxable for purposes of the
Connecticut Corporation Business Tax; however, 70% (100% if the investor owns at
least 20% of the total voting power and value of the Fund's shares) of amounts
that are treated as dividends and not as exempt-interest dividends or capital
gain dividends for federal income tax purposes are deductible for purposes of
this tax, but no deduction is allowed for expenses related thereto. Shares of
the Fund are not subject to property taxation by Connecticut or its political
subdivisions.
Distributions by the Massachusetts Municipal Money Market Fund to its
shareholders are exempt from Massachusetts personal income taxation to the
extent they are derived from (and designated by the Fund as being derived from)
(i) interest on Massachusetts Municipal Securities (as defined above), or (ii)
capital gains realized by the Fund from the sale of certain Massachusetts
Municipal Securities. 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. Distributions by the Fund to corporate
shareholders, including exempt-interest dividends, may be subject to
Massachusetts's corporate excise tax.
With respect to the New York Municipal Money Market Fund, exempt-interest
dividends (as defined for federal income tax purposes), derived from interest on
New York Municipal Securities (as defined above) will be exempt from New York
State and New York City personal income taxes (but not corporate franchise
taxes), provided the interest on such obligations is and continues to be exempt
from applicable federal, New York State and New York City income taxes. To the
extent that investors are subject to state and local taxes outside of New York
State and New York City, dividends by the Fund may be taxable income for
purposes thereof. Dividends and distributions derived from income (including
capital gains on all New York Municipal Securities) other than interest on New
York Municipal Securities described above are not exempt from New York State and
New York City taxes. Interest or indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund is not deductible for
federal, New York State or New York City personal income tax purposes.
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
- 53 -
<PAGE>
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 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.
Miscellaneous
Shareholders will be advised at least annually as to the federal income
tax consequences of distributions made each year. Shareholders of the
Connecticut Municipal Money Market, Massachusetts Municipal Money Market and New
York Municipal Money Market Funds will also be advised as to the Connecticut
personal income tax, Massachusetts personal income tax and New York personal
income tax consequences, respectively, 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:
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<PAGE>
Positions Principal Occupation
with The During Past 5 Years
Name and Address Galaxy Fund and Other Affiliations
- ---------------- ----------- ----------------------
Dwight E. Vicks, Jr. Chairman & President & Director, Vicks
Vicks Lithograph & Trustee Lithograph & Printing
Printing Corporation Corporation (book
Commercial Drive manufacturing and commercial
P.O. Box 270 printing); Director, Utica
Yorkville, NY 13495 Fire Insurance Company;
Age 66 Trustee, Savings Bank of
Utica; Director, Monitor Life
Insurance Company; Director,
Commercial Travelers Mutual
Insurance Company; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
John T. O'Neill(1) President, Private Investor; Executive
28 Narragansett Bay Avenue Treasurer & Vice President and CFO,
Warwick, RI 02889 Trustee Hasbro, Inc. (toy and game
Age 55 manufacturer) until December
1999; Trustee, The Galaxy VIP
Fund; Trustee, Galaxy Fund II.
Louis DeThomasis Trustee President, Saint Mary's
Saint Mary's College College of Minnesota;
of Minnesota Director, Bright Day Travel,
Winona, MN 55987 Inc.; Trustee, Religious
Age 59 Communities Trust; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
Donald B. Miller Trustee Chairman, Horizon Media, Inc.
10725 Quail Covey Road (broadcast services);
Boynton Beach, FL 33436 Director/Trustee, Lexington
Age 74 Funds; Chairman, Executive
Committee, Compton
International, Inc.
(advertising agency);
Trustee, Keuka College;
Trustee, The Galaxy VIP Fund;
Trustee, Galaxy Fund II.
- 55 -
<PAGE>
Positions Principal Occupation
with The During Past 5 Years
Name and Address Galaxy Fund and Other Affiliations
- ---------------- ----------- ----------------------
James M. Seed Trustee Chairman and President, The
The Astra Ventures, Inc. Astra Projects, Incorporated
One Citizens Plaza (land development);
Providence, RI 02903 President, The Astra
Age 58 Ventures, Incorporated
(previously, Buffinton Box
Company - 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
2468 Ohio Street President and Director,
Bangor, ME 04401 Acadia Management Company
Age 68 (investment services);
Director, Essex County Gas
Company, until January 1994;
Director, Maine Mutual Fire
Insurance Co.; Member, Maine
Finance Authority; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
W. Bruce McConnel, III Secretary Partner of the law firm
One Logan Square Drinker Biddle & Reath LLP,
18th and Cherry Streets Philadelphia, Pennsylvania.
Philadelphia, PA 19103
Age 57
Jylanne Dunne Vice President Vice President, PFPC Inc.,
PFPC Inc. and Assistant 1990 to present.
4400 Computer Drive Treasurer
Westborough, MA 01581-5108
Age 40
- 56 -
<PAGE>
Positions Principal Occupation
with The During Past 5 Years
Name and Address Galaxy Fund and Other Affiliations
- ---------------- ----------- ----------------------
William Greilich Vice President Vice President, PFPC Inc.,
PFPC Inc. 1991-96; Vice President and
4400 Computer Drive Division Manager, PFPC Inc.,
Westborough, MA 01581-5108 1996 to present.
Age 46
- ----------
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 the same 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"). 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.
- 57 -
<PAGE>
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 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.
===============================================================================
Pension or
Retirement
Benefits Total
Accrued as Compensation
Aggregate Part of from Galaxy and
Compensation from Fund Fund Complex
Name of Person/Position Galaxy Expenses Paid to Trustees
- -------------------------------------------------------------------------------
Bradford S. Wellman $39,355 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
===============================================================================
* The "Fund Complex" consists of Galaxy, The Galaxy VIP Fund and Galaxy Fund
II, which comprised a total of 43 separate portfolios at the end of the
fiscal year.
** 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.
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
- 58 -
<PAGE>
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
Fleet serves as investment adviser to the Funds. In its Advisory
Agreement, Fleet has agreed to provide investment advisory services to the Funds
as described in the Prospectuses. Fleet has also agreed to pay all expenses
incurred by it in connection with its activities under the advisory agreement
other than the cost of securities (including brokerage commissions) purchased
for the Funds. See "Expenses" 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:
o with respect to the Money Market, Government and Tax-Exempt Funds, .40% of
the average daily net assets of each Fund;
o with respect to the U.S. Treasury, Connecticut Municipal Money Market,
Massachusetts Municipal Money Market and New York Municipal Money Market
Funds, .40% of the first $750,000,000 of average daily net assets of each
Fund plus .35% of the average daily net assets of each Fund in excess of
$750,000,000; and
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<PAGE>
o with respect to the Institutional Government Money Market Fund, .20% of
the average daily net assets of the Fund.
Fleet has advised Galaxy that, with respect to the Money Market,
Government and Tax-Exempt Funds, it intends to waive advisory fees payable to it
by each 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.
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(1) 1998 1997
- ---- ------- ---- ----
<S> <C> <C> <C>
Money Market ........................ $13,842,448 $11,668,106 $ 9,458,596
Government .......................... $ 4,000,037 $ 4,200,651 $ 4,214,959
U. S. Treasury ...................... $ 4,011,663 $ 3,727,152 $ 3,439,391
Tax-Exempt .......................... $ 2,320,683 $ 1,514,545 $ 1,275,727
Institutional Government Money Market $ 126,310 $ 128,172 $ 350,902
Connecticut Municipal Money Market .. $ 856,115 $ 567,175 $ 497,713
Massachusetts Municipal Money Market $ 810,887 $ 361,928 $ 251,050
</TABLE>
- ----------
(1) As of October 31, 1999, the New York Municipal Money Market Fund had not
yet commenced operations.
During the last three fiscal years, Fleet waived advisory fees as set
forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Money Market ........................ $1,548,921 $1,238,301 $ 922,657
Government .......................... $ 142,862 $ 171,522 $ 173,566
U. S. Treasury ...................... $ 0 $ 0 $ 0
Tax-Exempt .......................... $ 0 $ 0 $ 0
Institutional Government Money Market $ 224,797 $ 151,744 $ 350,901
Connecticut Municipal Money Market .. $ 0 $ 0 $ 0
Massachusetts Municipal Money Market $ 0 $ 0 $ 0
- 60 -
<PAGE>
During the last three fiscal years, Fleet reimbursed expenses as follows:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Money Market ............................ $ 0 $ 0 $ 17
Government .............................. $ 0 $ 0 $ 542
U. S. Treasury .......................... $ 0 $ 0 $25,108
Tax-Exempt .............................. $ 2,099 $ 0 $15,751
Institutional Government Money Market ... $98,487 $23,572 $18,206
Connecticut Municipal Money Market ...... $ 0 $54,320 $62,664
Massachusetts Municipal Money Market .... $ 0 $58,991 $54,862
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.
ADMINISTRATOR
PFPC Inc. ("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, computed daily and paid monthly, at the following
annual rates effective September 10, 1998:
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<PAGE>
Combined Average Daily Net Assets Annual Rate
- --------------------------------- -----------
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%
Prior to September 10, 1998, Galaxy paid PFPC administration fees based on
the combined average daily net assets of the Funds and the other portfolios
offered by Galaxy at the following annual rates:
Combined Average Daily Net Assets Annual Rate
- --------------------------------- -----------
Up to $2.5 billion ................................................. 0.090%
From $2.5 to $5 billion ............................................ 0.085%
Over $5 billion .................................................... 0.075%
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 fee payable to it by the Funds. For the fiscal year ended October
31, 1999, (i) the Money Market, Government, Tax-Exempt, U.S. Treasury,
Connecticut Municipal Money Market and Massachusetts Municipal Money Market
Funds paid PFPC administration fees at the effective annual rate of 0.08% of
each Fund's average daily net assets, and (ii) the Institutional Government
Money Market Fund paid PFPC administration fees (after fee waivers) at the
effective annual rate of 0.05% of the Fund's average daily net assets. As of
October 31,1999, the New York Municipal Money Market Fund had not yet commenced
operations.
During the last three fiscal years, PFPC received administration fees (net
of fee waivers) as set forth below:
For the Fiscal Year Ended October 31:
Fund 1999(2) 1998 1997
- ---- ------- ---- ----
Money Market ............................ $2,885,072 $2,596,354 $2,118,433
Government .............................. $ 778,896 $ 879,555 $ 895,995
U. S. Treasury .......................... $ 779,542 $ 770,823 $ 720,691
Tax-Exempt .............................. $ 435,865 $ 304,716 $ 263,643
Institutional Government Money Market(1) $ 112,398 $ 74,925 $ 173,799
Connecticut Municipal Money Market ...... $ 160,459 $ 124,998 $ 101,578
Massachusetts Municipal Money Market .... $ 151,558 $ 84,643 $ 51,212
(1) For the fiscal years ended October 31, 1999, October 31, 1998 and October
31, 1997, PFPC waived administration fees of $89,919, $61,161 and $142,012
respectively, with respect to the Institutional Government Money Market
Fund.
(2) As of October 31, 1999, the New York Municipal Money Market Fund had not
commenced operations.
- 62 -
<PAGE>
Under the Administration Agreement between Galaxy and PFPC (the
"Administration Agreement"), PFPC has agreed to maintain office facilities for
Galaxy, furnish Galaxy with statistical and research data, clerical, accounting,
and bookkeeping services, provide 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.
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. 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.
PFPC may enter into agreements with one or more entities, including
affiliates of Fleet, pursuant to which such entities agree to perform certain
sub-account and administrative functions ("Sub-Account Services") on a per
account basis with respect to Trust Shares of the Money
- 63 -
<PAGE>
Market, Government and U.S. Treasury Funds held by defined contribution plans,
including maintaining records reflecting separately with respect to each plan
participant's sub-account all purchases and redemptions of Trust Shares and the
dollar value of Trust Shares in each sub-account; crediting to each
participant's sub-account all dividends and distributions with respect to that
sub-account; and transmitting to each participant a periodic statement regarding
the sub-account as well as any proxy materials, reports and other material Fund
communications. Such entities are compensated by PFPC for the Sub-Account
Services and in connection therewith the transfer agency fees payable by Trust
Shares of the Money Market, Government and U.S. Treasury Funds to PFPC have been
increased by an amount equal to these fees. In substance, therefore, the holders
of Trust Shares of these Funds indirectly bear these fees.
Fleet Bank, an affiliate of Fleet, is paid a fee for Sub-Account Services
performed with respect to Trust Shares of the Money Market, Government and U.S.
Treasury Funds held by defined contribution plans. Pursuant to an agreement
between Fleet Bank and PFPC, Fleet Bank is paid $21.00 per year for each defined
contribution plan participant account. For the fiscal year ended October 31,
1999, Fleet Bank received $281,096 for Sub-Account Services. PFPC bears this
expense directly, and shareholders of Trust Shares of these Funds bear this
expense indirectly through fees paid to PFPC for transfer agency services.
EXPENSES
Fleet 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
Debt securities purchased or sold by the Funds are generally traded in the
over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
Transactions in 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
- 64 -
<PAGE>
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.
The 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.
In purchasing or selling securities for the Funds, Fleet will seek to
obtain the best net price and the most favorable execution of orders. To the
extent that the execution and price offered by more than one broker/dealer are
comparable, Fleet may effect transactions in portfolio securities with
broker/dealers who provide research, advice or other services such as market
investment literature.
Except as permitted by the SEC or applicable law, the Funds will not
acquire portfolio securities from, make savings deposits in, enter into
repurchase or reverse repurchase agreements with, or sell securities to, Fleet,
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.
During the fiscal year ended October 31, 1999, the 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 with a value of $99,778,194.
Associates Corp. of North America and J.P. Morgan 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. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Fund, another
portfolio of Galaxy and/or another investment company or account, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which Fleet believes to be equitable to the Fund and such
other portfolio, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained or sold by such Fund. To the extent
permitted by law, Fleet may aggregate the securities to be sold or purchased for
a Fund with those to be sold or purchased for Galaxy's other Funds and
portfolios, or other investment companies or accounts in order to obtain best
execution.
SHAREHOLDER SERVICES PLAN -- RETAIL A SHARES
Galaxy has adopted a Shareholder Services Plan with respect to Retail A
Shares of each Fund that offers Retail A Shares pursuant to which Galaxy intends
to enter into servicing agreements with institutions (including Fleet Bank and
its affiliates). Pursuant to these servicing agreements, institutions render
certain administrative and support services to customers who are
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<PAGE>
the beneficial owners of Retail A Shares in consideration for payment of up to
.25% (on an annualized basis) of the average daily net asset value of Retail A
Shares of a Fund beneficially owned by such customers. Services under the
Shareholder Services Plan may include: aggregating and processing purchase and
redemption requests and placing net purchase and redemption orders with PDI;
processing dividend payments from a Fund; providing customers with information
as to their positions in Retail A Shares; providing sub-accounting with respect
to Retail A Shares or the information necessary for sub-accounting; and
providing periodic mailings to customers. Such services are intended to
supplement the services provided by PFPC as administrator and transfer agent.
Although the Shareholder Services Plan has been approved with respect to
Retail A Shares of the Funds and Trust Shares of the Money Market, Government,
U.S. Treasury and Tax-Exempt Funds, as of the date of this Statement of
Additional Information, Galaxy intends to enter into servicing agreements under
the Shareholder Services Plan only with respect to Retail A Shares of each Fund,
and to limit the payment under these servicing agreements for each Fund to no
more than .10% (on an annualized basis) 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 an institution relating to the
Shareholder Services Plan requires that, with respect to those Funds which
declare dividends on a daily basis, the institution agree to waive a portion of
the servicing fee payable to it under the Shareholder 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 institutions
(net of expense reimbursements) with respect to Retail A Shares of the Money
Market, Government, U.S. Treasury, Tax-Exempt, Connecticut Municipal Money
Market and Massachusetts Municipal Money Market Funds as shown in the table
below:
For the Fiscal Year Ended October 31:
Fund 1999(2) 1998 1997
- ---- ------- ---- ----
Money Market ............................ $2,222,784 $2,057,474 $1,430,359
Government .............................. $ 360,723 $ 364,278 $ 346,517
U. S. Treasury .......................... $ 590,338 $ 569,986 $ 507,400
Tax-Exempt .............................. $ 169,840 $ 163,842 $ 133,048
Connecticut Municipal Money Market(1) ... $ 137,245 $ 155,374 $ 111,361
Massachusetts Municipal Money Market(1) . $ 133,010 $ 105,230 $ 58,905
- 66 -
<PAGE>
- ----------
(1) For the fiscal year ended October 31, 1999, Fleet and affiliates
reimbursed shareholder servicing fees of $76,784 for the Connecticut
Municipal Money Market Fund, and $69,574 for the Massachusetts Municipal
Money Market Fund.
(2) As of October 31, 1999, the New York Municipal Money Market Fund had not
yet commenced operations.
Galaxy's Servicing Agreements are governed by the Shareholder Services
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 Shareholder Services
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 institutions must be
approved annually by a majority of Galaxy's trustees, including a majority of
the trustees who are not "interested persons" of Galaxy as defined in the 1940
Act and who have no direct or indirect financial interest in such arrangements
(the "Disinterested Trustees").
The Board of Trustees has approved Galaxy's arrangements with institutions
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 institutions
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
institutions 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.
DISTRIBUTION AND SERVICES PLANS
Retail B Share Plan
Galaxy has adopted a Distribution and Services Plan pursuant to Rule 12b-1
under the 1940 Act (the "Rule") with respect to Retail B Shares of the Money
Market Fund (the "Retail B Share Plan"). Under the Retail B Share Plan, Galaxy
may pay (a) PDI or another person for expenses and activities intended to result
in the sale of Retail B Shares, including the payment of commissions to
broker-dealers and other industry professionals who sell Retail B Shares and the
direct or indirect cost of financing such payments, (b) institutions for
shareholder liaison services, which means personal services for holders of
Retail B Shares and/or the maintenance of shareholder accounts, such as
responding to customer inquiries and providing information on accounts, and (c)
institutions for administrative support services, which include but are not
limited to (i) transfer agent and sub-transfer agent services for beneficial
owners of Retail B Shares; (ii) aggregating and processing purchase and
redemption orders; (iii) providing beneficial owners with statements showing
their positions in Retail B Shares; (iv) processing dividend payments; (v)
providing sub-accounting services for Retail B Shares held beneficially; (vi)
forwarding shareholder communications, such as proxies, shareholder reports,
dividend and tax
- 67 -
<PAGE>
notices, and updating prospectuses to beneficial owners; and (vii) receiving,
translating and transmitting proxies executed by beneficial owners.
Under the Retail B Share Plan, payments by Galaxy (i) for distribution
expenses may not exceed the annualized rate of .65% of the average daily net
assets attributable to the Money Market Fund's outstanding Retail B Shares, and
(ii) to an institution for shareholder liaison services and/or administrative
support services may not exceed the annual rates of .25% and .25%, respectively,
of the average daily net assets attributable to the Money Market Fund's
outstanding Retail B Shares which are owned of record or beneficially by that
institution's customers for whom the institution is the dealer of record or
shareholder of record or with whom it has a servicing relationship. As of the
date of this Statement of Additional Information, Galaxy intends to limit the
Money Market Fund's payments for shareholder liaison and administrative support
services under the Retail B Share Plan to an aggregate fee of not more than .10%
(on an annualized basis) of the average daily net asset value of Retail B Shares
owned of record or beneficially by customers of institutions.
During the last three fiscal years, Retail B Shares of the Money Market
Fund paid distribution fees and shareholder servicing fees (net of expense
reimbursements) under the Retail B Share Plan as set forth in the table below:
Distribution Shareholder
For the Fiscal Year Ended October 31: Fees Services Fees
- ------------------------------------- ---- -------------
1999(2)....................... $14,506 $ 3.00
1998 ......................... $ 4,377 $ 674
1997(1)....................... $ 1,869 $ 288
- ----------
(1) For the period March 6, 1997 (date of initial public offering) through
October 31, 1997.
(2) For the fiscal year ended October 31, 1999, Fleet and affiliates
reimbursed shareholder servicing fees of $1,817.
During this period, all amounts paid under the Retail B Share Plan were
attributable to payments to broker-dealers.
Prime Share Plan
Galaxy has also adopted a Distribution and Services Plan pursuant to the
Rule with respect to Prime Shares of the Connecticut Municipal Money Market,
Massachusetts Municipal Money Market and New York Municipal Money Market Funds
(the "Prime Share Plan"). Under the Prime Share Plan, Galaxy may pay (i) PDI or
another person for distribution services provided and expenses assumed, and (ii)
broker-dealers, financial institutions or other organizations for shareholder
administrative support services provided to holders of Prime Shares of the
Funds. Payments to PDI are to compensate it for distribution assistance and
expenses assumed and activities primarily intended to result in the sale of
Prime Shares, including compensating dealers and other sales personnel, direct
advertising and marketing expenses and expenses incurred in connection with
preparing printing, mailing and distributing
- 68 -
<PAGE>
or publishing advertisements and sales literature, for printing and mailing
prospectuses and statements of additional information (except those used for
regulatory purposes or for distribution to existing shareholders), and costs
associated with implementing and operating the Prime Share Plan.
The servicing agreements adopted under the Prime Share Plan require the
organizations receiving such compensation to perform certain services, including
providing administrative services with respect to the beneficial owners of Prime
Shares of the Funds, such as establishing and maintaining accounts and records
for their customers who invest in such shares, assisting customers in processing
purchase, exchange and redemption requests and/or in changing dividend options
and account descriptions, developing, maintaining and supporting systems
necessary to support cash management services, such as sweep arrangements, and
responding to customer inquiries concerning their investments.
Under the Prime Share Plan, payments by Galaxy (i) for distribution
expenses may not exceed .75% (annualized) of the average daily net assets
attributable to each Fund's Prime Shares, and (ii) to a broker-dealer, financial
institution, or other organizations for shareholder administrative support
services may not exceed .25% (annualized) of the average daily net assets
attributable to each Fund's outstanding Prime Shares which are owned of record
or beneficially by that organization's customers for whom the organization is
the dealer of record or shareholder of record or with whom it has a servicing
relationship. As of the date of this Statement of Additional Information, Galaxy
intends to limit the payments under the Prime Share Plan to an aggregate fee of
not more than .45% (on an annualized basis) of the average daily net assets of
each Fund's Prime Shares. In addition, Fleet may make payments for distribution
assistance and for shareholder administrative support services from its own
resources, which may include the advisory fee paid by each Fund.
Retail B Share Plan and Prime Share Plan
Payments for distribution expenses under the Retail B Share Plan and Prime
Share Plan (together the "12b-1 Plans") are subject to the Rule. The Rule
defines distribution expenses to include the cost of "any activity which is
primarily intended to result in the sale of shares issued by" Galaxy. The Rule
provides, among other things, that an investment company may bear such expenses
only pursuant to a plan adopted in accordance with the Rule. In accordance with
the Rule, the 12b-1 Plans provide that reports of the amounts expended under the
12b-1 Plans, and the purposes for which such expenditures were incurred, will be
made to the Board of Trustees for its review at least quarterly. Each 12b-1 Plan
provides that it may not be amended to increase materially the costs which
Retail B Shares of the Money Market Fund or Prime Shares of the Connecticut
Municipal Money Market, Massachusetts Municipal Money Market and New York
Municipal Money Market Funds, as the case may be, may bear for distribution
pursuant to the 12b-1 Plan without shareholder approval, and that any other type
of material amendment must be approved by a majority of the Board of Trustees,
and by a majority of the trustees who are neither "interested persons" (as
defined in the 1940 Act) of Galaxy nor have any direct or indirect financial
interest in the operation of the 12b-1 Plan or in any related agreements (the
"12b-1
- 69 -
<PAGE>
Trustees"), by vote cast in person at a meeting called for the purpose of
considering such amendments.
Galaxy's Board of Trustees has concluded that there is a reasonable
likelihood that the Retail B Share Plan will benefit the Money Market Fund and
the holders of its Retail B Shares and that the Prime Share Plan will benefit
the Connecticut Municipal Money Market, Massachusetts Municipal Money Market and
New York Municipal Money Market Funds and the holders of their Prime Shares. The
12b-1 Plans are subject to annual reapproval by a majority of the 12b-1 Trustees
and are terminable at any time with respect to the Funds by a vote of a majority
of the 12b-1 Trustees or by vote of the holders of a majority of Retail B Shares
with respect to the Retail B Share Plan, or by vote of the holders of a majority
of Prime Shares with respect to the Prime Share Plan. Agreements entered into
pursuant to the 12b-1 Plans with a broker-dealer, financial institution, or
other organization are terminable with respect to the Funds without penalty, at
any time, by vote of a majority of the 12b-1 Trustees, by vote of the holders of
a majority of the Retail B Shares with respect to the Retail B Share Plan, or by
vote of the holders of a majority of Prime Shares with respect to the Prime
Share Plan, by PDI, or by the broker-dealer, financial institution, or other
organization. An agreement will also terminate automatically in the event of its
assignment.
As long as the 12b-1 Plans are in effect, the nomination of the trustees
who are not interested persons of Galaxy (as defined in the 1940 Act) must be
committed to the discretion of the 12b-1 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, Pennsylvania 19428-2961. Jane Haegele is the sole shareholder of
PDI.
Unless otherwise terminated, the Distribution Agreement between Galaxy and
PDI remains in effect until November 30, 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.
PDI is entitled to the payment of contingent deferred sales charges upon
the redemption of Retail B Shares of the Money Market Fund. Prior to December 1,
1999, First Data Distributors, Inc. ("FD Distributors"), a wholly-owned
subsidiary of PFPC, served as Galaxy's distributor and was entitled to the
payment of the contingent deferred sales charges upon the redemption of Retail B
Shares of the Money Market Fund. For the fiscal years ended October 31, 1999 and
October 31, 1998, and for the period March 6, 1997 (date of initial public
offering) through October 31, 1997, FD Distributors received contingent deferred
sales charges
- 70 -
<PAGE>
of $26,785, $12,243 and $655, respectively, in connection with Retail B Share
redemptions in the Money Market Fund.
The following table shows all sales charges, commissions and other
compensation received by FD Distributors directly or indirectly from the Funds
during the fiscal year ended October 31, 1999*:
Brokerage
Net Compensation Commissions in
Underwriting on Redemption Connection
Discounts and and with Fund Other
Fund Commissions(1) Repurchase(2) Transactions Compensation(3)
---- -------------- ------------- ------------ ---------------
Money Market $26,785 $26,785 $0 $2,209,203
Government N/A N/A $0 $360,807
Tax-Exempt N/A N/A $0 $168,955
U.S. Treasury N/A N/A $0 $586,765
Institutional N/A N/A $0 N/A
Government
Money Market
Connecticut N/A N/A $0 $207,104
Municipal
Money
Market
Massachusetts N/A N/A $0 $193,473
Municipal
Money
Market
- ----------
* The New York Municipal Money Market Fund was not in operation and the
Connecticut Municipal Money Market and Massachusetts Municipal Money
Market Funds did not offer Prime Shares during the fiscal year ended
October 31, 1999.
(1) Represents amounts received from commissions received in connection with
sales of Retail B Shares.
(2) Represents amounts received from contingent deferred sales charges on
Retail B Shares. The basis on which such sales charges are paid is
described in the Prospectus relating to Retail B Shares.
(3) Represents payments made under the Shareholder Services Plan and
Distribution and Services Plan for Retail B Shares during the fiscal year
ended October 31, 1999, which includes fees accrued in the fiscal year
ended October 31, 1998, which were paid in 1999 (see "Shareholder Services
Plan - Retail A Shares" and "Distribution and Services Plans - Retail B
Share Plan" above).
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
- 71 -
<PAGE>
Funds included in their Prospectuses and the financial statements for the Funds
contained in Galaxy's Annual Report 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
Prospectuses and the financial statements for such years and periods contained
in the Annual Reports were audited by PricewaterhouseCoopers LLP, Galaxy's
former auditors.
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 19103-6996, are counsel to Galaxy and will pass upon certain legal
matters on its behalf. The law firm of Day, Berry & Howard LLP, CityPlace,
Hartford, Connecticut 06103-3499, serves as special Connecticut counsel to
Galaxy and has reviewed the portion of this Statement of Additional Information
and the Prospectuses with respect to the Connecticut Municipal Money Market Fund
concerning Connecticut taxes and the description of special considerations
relating to Connecticut Municipal Securities. The law firm of Ropes & Gray, One
International Place, Boston, Massachusetts 02110-2624, serves as special
Massachusetts counsel to Galaxy and has reviewed the portion of this Statement
of Additional Information and the Prospectuses with respect to the Massachusetts
Municipal Money Market Fund concerning Massachusetts taxes and the description
of special considerations relating to Massachusetts Municipal Securities. The
law firm of Willkie Farr and Gallagher, One Citicorp Center, 153 East 53rd
Street, New York, New York 10022, serves as special New York counsel to Galaxy
and has reviewed the portion of this Statement of Additional Information and the
Prospectuses with respect to the New York Municipal Money Market Fund concerning
New York taxes and the description of special considerations relating to New
York Municipal Securities.
PERFORMANCE AND YIELD INFORMATION
The standardized annualized seven-day yields for the 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
- 72 -
<PAGE>
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, Connecticut Municipal Money Market,
Massachusetts Municipal Money Market and New York Municipal Money Market Funds
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 31%. Tax equivalent yields of the
Connecticut Municipal Money Market, Massachusetts Municipal Money Market and New
York Municipal Money Market Funds assume 42.30%, 43.20% and 43.80% combined
federal and state tax rates, respectively, and indicate what each Fund would
have had to earn to equal its actual yield, assuming that income earned by a
Fund is 100% tax-exempt.
The current yields for the Funds may be obtained by calling PDI at
1-877-BUY-GALAXY (1-877-289-4252).
For the seven-day period ended October 31, 1999, the annualized yields and
effective yields for Retail A Shares of the Money Market, Government, U.S.
Treasury, Tax-Exempt, Connecticut Municipal Money Market and Massachusetts
Municipal Money Market Funds, and the tax-equivalent yield for Retail A Shares
of the Tax-Exempt Fund, Connecticut Municipal Money Market and Massachusetts
Municipal Money Market Funds, were as set forth below:
<TABLE>
<CAPTION>
Annualized Effective Tax-Equivalent
Fund Yield Yield Yield
- ---- ----- ----- -----
<S> <C> <C>
Money Market ............................... 4.80% 4.92% *
Government ................................. 4.75% 4.86% *
U. S. Treasury ............................. 4.28% 4.37% *
Tax-Exempt ................................. 2.76% 2.80% 4.00%
Connecticut Municipal Money Market ......... 2.71% 2.74% 4.70%
Massachusetts Municipal Money Market ....... 2.73% 2.77% 4.81%
</TABLE>
- ----------
* Not applicable
As of October 31, 1999, the New York Municipal Money Market Fund had not
yet commenced operations.
- 73 -
<PAGE>
For the seven-day period ended October 31, 1999, the annualized yields and
effective yields for Trust Shares of the Money Market, Government, U.S. Treasury
and Tax-Exempt Funds, and the tax-equivalent yield for Trust Shares of the
Tax-Exempt Fund were as set forth below:
Annualized Effective Tax-Equivalent
Fund Yield Yield Yield
- ---- ----- ----- -----
Money Market 4.96% 5.08% *
Government 4.88% 5.00% *
U. S. Treasury 4.43% 4.52% *
Tax-Exempt 2.90% 2.94% 4.20%
- ----------
* Not applicable
For the seven-day period ended October 31, 1999, the annualized yield and
effective yield for Retail B Shares of the Money Market Fund were 3.95% and
4.03%, respectively.
For the seven day period ended October 31, 1999, the annualized yield and
effective yield for Shares of the Institutional Government Money Market Fund
were 5.17% and 5.30%, respectively.
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. Based on the foregoing calculation and assuming, for purposes of
illustration, state income tax rates of 3%, 7% and 11%, the state flow through
yields for the seven-day period ended October 31, 1999 for Retail A Shares and
Trust Shares of the U.S. Treasury Fund were as set forth below:
Series 3% 7% 11%
- ------ -- -- ---
Retail A Shares 4.41% 4.60% 4.81%
Trust Shares 4.57% 4.76% 4.98%
Prime Shares of the Connecticut Municipal Money Market, Massachusetts
Municipal Money Market and New York Municipal Money Market Funds were not
offered prior to the date of this Statement of Additional Information.
Tax-Equivalency Tables - Connecticut Municipal Money Market, Massachusetts
Municipal Money Market and New York Municipal Money Market Funds
The Connecticut Municipal Money Market, Massachusetts Municipal Money
Market and New York Municipal Money Market Funds may use tax-equivalency tables
in advertising and
- 74 -
<PAGE>
sales literature. The interest earned by the Municipal Securities in the Funds'
respective portfolios generally remains free from federal regular income tax,
and from the regular personal income tax imposed by Connecticut, Massachusetts
and New York. Some portion of either 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 Connecticut Municipal Money Market, Massachusetts
Municipal Money Market and New York Municipal Money Market Funds.
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.
Connecticut Note: The charts below do not address taxable equivalent
yields applicable to married taxpayers filing separate returns or heads of
households.
Investors are urged to consult their own tax advisors as to these matters.
TAXABLE YIELD EQUIVALENT FOR 1999
STATE OF CONNECTICUT
<TABLE>
<S> <C> <C> <C> <C> <C>
Federal Tax Bracket: 15.00% 28.00% 31.00% 36.00% 39.60%
Combined Federal and State: 19.50% 32.50% 35.50% 40.50% 44.10%
Joint Return: $1-43,050 $43,051-104,050 $104,051-158,550 $158,551-283,150 Over $283,150
Single Return: $1-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 Over $283,150
Tax-Exempt Yield:
</TABLE>
Taxable Yield Equivalent
<TABLE>
<S> <C> <C> <C> <C> <C>
1.50% 1.86% 2.22% 2.33% 2.52% 2.68%
2.00% 2.48% 2.96% 3.10% 3.36% 3.58%
2.50% 3.11% 3.70% 3.88% 4.20% 4.47%
3.00% 3.73% 4.44% 4.65% 5.04% 5.37%
3.50% 4.35% 5.19% 5.43% 5.88% 6.26%
4.00% 4.97% 5.93% 6.20% 6.72% 7.16%
4.50% 5.59% 6.67% 6.98% 7.56% 8.05%
5.00% 6.21% 7.41% 7.75% 8.40% 8.94%
5.50% 6.83% 8.15% 8.53% 9.24% 9.84%
6.00% 7.45% 8.89% 9.30% 10.08% 10.73%
</TABLE>
- 75 -
<PAGE>
TAXABLE YIELD EQUIVALENT FOR 1999
STATE OF MASSACHUSETTS
<TABLE>
<S> <C> <C> <C> <C> <C>
Federal Tax Bracket: 15.00% 28.00% 31.00% 36.00% 39.60%
Combined Federal and State: 20.95% 33.95% 36.95% 41.95% 45.55%
Joint Return: $1-43,050 $43,051-104,050 $104,051-158,550 $158,551-283,150 Over $283,150
Single Return: $1-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 Over $283,150
Tax-Exempt Yield:
</TABLE>
Taxable Yield Equivalent
<TABLE>
<S> <C> <C> <C> <C> <C>
1.50% 1.90% 2.27% 2.38% 2.58% 2.75%
2.00% 2.53% 3.03% 3.17% 3.45% 3.67%
2.50% 3.16% 3.79% 3.97% 4.31% 4.59%
3.00% 3.80% 4.54% 4.76% 5.17% 5.51%
3.50% 4.43% 5.30% 5.55% 6.03% 6.43%
4.00% 5.06% 6.06% 6.34% 6.89% 7.35%
4.50% 5.69% 6.81% 7.14% 7.75% 8.26%
5.00% 6.33% 7.57% 7.93% 8.61% 9.18%
5.50% 6.96% 8.33% 8.72% 9.47% 10.10%
6.00% 7.59% 9.08% 9.52% 10.34% 11.02%
</TABLE>
- 76 -
<PAGE>
NEW YORK STATE AND CITY: 1999
Equivalent yields: Tax-exempt
<TABLE>
<CAPTION>
Taxable Income* State New York State New York State
- ---------------- State City Federal and Federal City and Federal
Single City rate*** rate Combined rate Effective Date Effective Rate**
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0 - 8,000 3.05% 4% 7.04950% 15% 18.40% 20.99%
8,001 - 11,000 3.05% 4.5% 7.54950% 15% 18.83% 21.42%
11,001 - 12,000 3.05% 5.25% 8.29950% 15% 19.46% 22.05%
12,001 - 13,000 3.71% 5.25% 8.96355% 15% 19.46% 22.62%
13,001 - 20,000 3.71% 5.9% 9.61355% 15% 20.02% 23.17%
20,001 - 25,000 3.71% 6.85% 10.56355% 15% 20.82% 23.98%
25,001 - 25,750 3.77% 6.85% 10.62055% 15% 20.82% 24.03%
25,751 - 50,000 3.77% 6.85% 10.62055% 28% 32.93% 35.65%
50,001 - 61,450 3.83% 6.85% 10.62055% 28% 32.93% 35.69%
61,451 - 130,250 3.83% 6.85% 10.67755% 31% 35.73% 38.37%
130,251 - 283,150 3.83% 6.85% 10.67755% 36% 40.38% 42.83%
over 283,150 3.83% 6.85% 10.67755% 39.6% 43.74% 46.05%
- ------------------------------------------------------------------------------------------------
<CAPTION>
Taxable Income* New York Tax Equivalent Yields:****
- ---------------- -------------------------------------------------------------------------
Single 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 8,000 1.90% 2.53% 3.16% 3.80% 4.43% 5.06% 6.33% 6.96% 7.59%
8,001 - 11,000 1.91% 2.55% 3.18% 3.82% 4.45% 5.09% 6.36% 7.00% 7.64%
11,001 - 12,000 1.92% 2.57% 3.21% 3.85% 4.49% 5.13% 6.41% 7.06% 7.70%
12,001 - 13,000 1.94% 2.58% 3.23% 3.88% 4.52% 5.17% 6.46% 7.11% 7.75%
13,001 - 20,000 1.95% 2.60% 3.25% 3.90% 4.56% 5.21% 6.51% 7.16% 7.81%
20,001 - 25,000 1.97% 2.63% 3.29% 3.95% 4.60% 5.26% 6.58% 7.23% 7.89%
25,001 - 25,750 1.97% 2.63% 3.29% 3.95% 4.61% 5.27% 6.58% 7.24% 7.90%
25,751 - 50,000 2.33% 3.11% 3.88% 4.66% 5.44% 6.22% 7.77% 8.55% 9.32%
50,001 - 61,450 2.33% 3.11% 3.89% 4.66% 5.44% 6.22% 7.77% 8.55% 9.33%
61,451 - 130,250 2.43% 3.25% 4.06% 4.87% 5.68% 6.49% 8.11% 8.92% 9.74%
130,251 - 283,150 2.62% 3.50% 4.37% 5.25% 6.12% 7.00% 8.75% 9.62% 10.50%
over 283,150 2.78% 3.71% 4.63% 5.55% 6.49% 7.41% 9.27% 10.19% 11.12%
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Taxable Income* State New York State New York State
- ---------------- State City Federal and Federal City and Federal
Joint City rate*** rate Combined rate Effective Date Effective Rate**
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0 - 16,000 3.05% 4% 7.04950% 15% 18.40% 20.99%
16,001 - 21,600 3.05% 4.5% 7.54950% 15% 18.83% 21.42%
21,601 - 22,000 3.71% 4.5% 8.21355% 15% 18.83% 21.88%
22,001 - 26,000 3.71% 5.25% 8.96355% 15% 19.46% 22.62%
26,001 - 40,000 3.71% 5.9% 9.61355% 15% 20.02% 23.17%
40,001 - 43,050 3.71% 6.85% 10.56355% 15% 20.82% 23.98%
43,051 - 45,000 3.71% 6.85% 10.56355% 28% 32.93% 35.61%
45,001 - 90,000 3.77% 6.85% 10.62055% 28% 32.93% 35.65%
90,001 - 104,050 3.83% 6.85% 10.67755% 28% 32.93% 35.69%
104,051 - 158,550 3.83% 6.85% 10.67755% 31% 35.73% 38.37%
158,551 - 283,150 3.83% 6.85% 10.67755% 36% 40.38% 42.83%
over 283,150 3.83% 6.85% 10.67755% 39.6% 43.74% 46.05%
- ----------------------------------------------------------------------------------------------
<CAPTION>
Taxable Income* New York Tax Equivalent Yields:****
--------------- --------------------------------------------------------------------------
Joint 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 5.0% 5.5% 6.0%
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 16,000 1.90% 2.53% 3.16% 3.80% 4.43% 5.06% 6.33% 6.96% 7.59%
16,001 - 21,600 1.91% 2.55% 3.18% 3.82% 4.45% 5.09% 6.36% 7.00% 7.64%
21,601 - 22,000 1.92% 2.56% 3.20% 3.85% 4.49% 5.13% 6.41% 7.05% 7.69%
22,001 - 26,000 1.94% 2.59% 3.23% 3.88% 4.52% 5.17% 6.46% 7.11% 7.75%
26,001 - 40,000 1.95% 2.60% 3.25% 3.90% 4.56% 5.21% 6.51% 7.16% 7.81%
40,001 - 43,050 1.97% 2.63% 3.29% 3.95% 4.60% 5.26% 6.58% 7.23% 7.89%
43,051 - 45,000 2.33% 3.11% 3.88% 4.66% 5.44% 6.21% 7.76% 8.54% 9.32%
45,001 - 90,000 2.33% 3.11% 3.88% 4.66% 5.44% 6.22% 7.77% 8.55% 9.32%
90,001 - 104,050 2.33% 3.11% 3.89% 4.66% 5.44% 6.22% 7.77% 8.55% 9.33%
104,051 - 158,550 2.43% 3.25% 4.06% 4.87% 5.68% 6.49% 8.11% 8.92% 9.74%
158,551 - 283,150 2.62% 3.50% 4.37% 5.25% 6.12% 7.00% 8.75% 9.62% 10.50%
over 283,150 2.78% 3.71% 4.63% 5.56% 6.49% 7.41% 9.27% 10.19% 11.12%
- ---------------------------------------------------------------------------------------------
</TABLE>
* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income as defined in the Internal Revenue
Code is the same as under the New York State or City Personal Income Tax
law; however, New York state or city taxable income may differ due to
differences in exemptions, itemized deductions, and other items.
** For federal tax purposes, these combined rates reflect the applicable
marginal rates for 1998, including indexing for inflation. These rates
include the effect of deducting state and city taxes on your Federal
return. For New York purposes, these combined rates reflect the expected
New York State and New York City tax and surcharge rates for 1998.
*** The New York city rate is comprised of the tax base rate, city surcharge,
and the additional city surcharge for 1998.
**** These represent New York State, City, and Federal Equivalent Yields.
- 77 -
<PAGE>
Performance Reporting
From time to time, in advertisements or in reports to shareholders, the
yields of the Funds, as a measure of their performance, may be quoted and
compared to those of other mutual funds with similar investment objectives and
to other relevant indexes or to rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, such data is reported in national financial publications
such as Donoghue's Money Fund Report(R), a widely recognized independent
publication that monitors the performance of mutual funds. Also, the Funds'
yield data may be 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 in publications of a local or regional nature. The
performance of the Money Market, Government, U.S. Treasury and Institutional
Government Money Market 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. Yield data will be calculated separately for
Trust Shares, Retail A Shares, Retail B Shares and BKB Shares of the Money
Market, Government, U.S. Treasury and Tax-Exempt Funds and for Retail A Shares
and Prime Shares of the Connecticut Municipal Money Market, Massachusetts
Municipal Money Market and New York Municipal Money Market Funds.
The yield of a Fund refers to the income generated over a seven-day period
identified in the advertisement and is calculated as described above. Each Fund
may also advertise its "effective yield" which is calculated as described above.
The "effective yield" will be slightly higher because of the compounding effect
of the assumed reinvestment. Also, each Tax-Exempt Money Market Fund may from
time to time advertise a "tax-equivalent yield" to demonstrate the level of
taxable yield necessary to produce an after-tax yield equivalent to that
achieved by the Fund. The "tax-equivalent yield" is computed as described above.
The U.S. Treasury Fund may also advertise a "state flow through yield," as
discussed above.
The Funds' yields will fluctuate and any quotation of yield should not be
considered as representative of the future performance of the Funds. Since
yields fluctuate, yield data cannot necessarily be used to compare an investment
in a Fund's shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Shareholders should remember that performance is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses, and market conditions. Any
fees charged directly by institutions to accounts of customers that have
invested in shares of a Fund will not be included in calculations of yield.
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.
- 78 -
<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,
- 79 -
<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 (20.25%); Gales &
Co., Fleet Investment Services, Mutual Funds Unit - NY/RO/T04A, 159 East
- 80 -
<PAGE>
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, 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
- 81 -
<PAGE>
(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 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-
- 82 -
<PAGE>
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%); 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,
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<PAGE>
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, 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
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<PAGE>
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%).
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
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<PAGE>
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 have 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 reports
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 reports given upon the
authority of such firm as experts in accounting and auditing. The financial
statements and Financial Highlights included in the Annual Reports for the Funds
for prior periods were audited by PricewaterhouseCoopers LLP, Galaxy's former
independent auditors. 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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<PAGE>
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
A-1
<PAGE>
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.
A-2
<PAGE>
"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
A-3
<PAGE>
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.
A-4
<PAGE>
"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
A-5
<PAGE>
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.
A-6
<PAGE>
"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.
A-7
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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.
A-8
<PAGE>
"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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<PAGE>
"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.
A-10
<PAGE>
The Galaxy Fund
Statement of Additional Information
February 29, 2000
Galaxy Asset Allocation Fund Galaxy Short-Term Bond Fund
Galaxy Equity Income Fund Galaxy Intermediate Government Income Fund
Galaxy Growth and Income Fund Galaxy High Quality Bond Fund
Galaxy Strategic Equity Fund Galaxy Tax-Exempt Bond Fund
Galaxy Equity Value Fund
Galaxy Equity Growth Fund
Galaxy International Equity Fund
Galaxy Small Cap Value Fund
Galaxy Small Company Equity Fund
Prime A Shares and Prime B Shares
This Statement of Additional Information is not a prospectus. It relates
to the prospectuses dated February 29, 2000 for Prime A Shares and Prime B
Shares of the Funds (the "Prospectuses"). The Prospectuses, as they 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.
<PAGE>
TABLE OF CONTENTS
Page
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GENERAL INFORMATION..........................................................1
DESCRIPTION OF GALAXY AND ITS SHARES.........................................1
INVESTMENT STRATEGIES, POLICIES AND RISKS....................................5
Asset Allocation Fund..................................................5
Equity Income Fund.....................................................6
Growth and Income Fund.................................................6
Strategic Equity Fund..................................................7
Equity Value Fund......................................................7
Equity Growth Fund.....................................................7
International Equity Fund..............................................8
Small Cap Value Fund...................................................9
Small Company Equity Fund..............................................9
Short-Term Bond Fund..................................................10
Intermediate Government Income Fund...................................11
High Quality Bond Fund................................................11
Tax-Exempt Bond Fund..................................................11
Special Risk Considerations...........................................12
Foreign Securities....................................................12
European Currency Unification.........................................12
General Risk Considerations...........................................13
Other Investment Policies and Risk Considerations.....................13
Ratings...............................................................14
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................................................19
Repurchase and Reverse Repurchase Agreements..........................20
Securities Lending....................................................21
Investment Company Securities.........................................21
Custodial Receipts and Certificates of Participation..................22
REITs ................................................................22
Derivative Securities.................................................23
American, European and Global Depository Receipts.....................33
Asset-Backed Securities...............................................34
Mortgage-Backed Securities............................................35
Mortgage Dollar Rolls.................................................35
Convertible Securities................................................36
When-Issued, Forward Commitment and Delayed Settlement Transactions...37
Stripped Obligations..................................................38
Guaranteed Investment Contracts.......................................39
Bank Investment Contracts.............................................39
Restricted and Illiquid Securities....................................40
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Page
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Portfolio Turnover....................................................40
INVESTMENT LIMITATIONS......................................................41
VALUATION OF PORTFOLIO SECURITIES...........................................51
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................53
Purchases of Prime A Shares and Prime B Shares........................53
General...............................................................53
Applicable Sales Charge -- Prime A Shares.............................54
Computation of Offering Price - Prime A Shares........................55
Quantity Discounts....................................................57
Applicable Sales Charge - Prime B Shares..............................59
Characteristics of Prime A Shares and Prime B Shares..................60
Factors to Consider When Selecting Prime A Shares or Prime B Shares...61
Redemption of Prime A Shares and Prime B Shares.......................62
EXCHANGE PRIVILEGE..........................................................63
TAXES ......................................................................64
In General............................................................64
State and Local.......................................................65
Taxation of Certain Financial Instruments.............................65
TRUSTEES AND OFFICERS.......................................................66
Shareholder and Trustee Liability.....................................69
INVESTMENT ADVISER AND SUB-ADVISER..........................................70
Administrator.........................................................73
CUSTODIAN AND TRANSFER AGENT................................................75
EXPENSES....................................................................76
PORTFOLIO TRANSACTIONS......................................................77
DISTRIBUTION PLANS..........................................................80
Prime A Shares Plan...................................................80
Prime B Shares Plan...................................................81
Both Distribution Plans...............................................83
DISTRIBUTOR.................................................................84
AUDITORS....................................................................86
COUNSEL.....................................................................87
PERFORMANCE AND YIELD INFORMATION...........................................87
Performance Reporting.................................................90
MISCELLANEOUS...............................................................92
FINANCIAL STATEMENTS.......................................................100
APPENDIX A.................................................................A-1
APPENDIX B.................................................................B-1
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<PAGE>
GENERAL INFORMATION
This Statement of Additional Information should be read in conjunction
with a current Prospectus. This Statement of Additional Information relates to
the Prospectuses for Prime A Shares and Prime B Shares of the thirteen Funds
listed on the cover page. Each Fund also offers Retail A, Retail B and Trust
Shares, which are described in separate statements of additional information and
related prospectuses. The Asset Allocation, Growth and Income, International
Equity, Short-Term Bond, Intermediate Government Income and High Quality Bond
Funds also offer BKB Shares, which are described in a separate statement of
additional information and related prospectus. This Statement of Additional
Information is incorporated by reference in its entirety into the Prospectuses.
No investment in shares of the Funds should be made without reading a
Prospectus.
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.
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 Fund and Rhode Island Municipal Bond Fund. Galaxy
is also authorized to issue shares of beneficial interest in an additional
investment portfolio, 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 had
not commenced investment operations.
The Growth and Income Fund and Small Cap Value Fund commenced operations
on December 14, 1992 as separate investment portfolios (the "Predecessor Growth
and Income
<PAGE>
Fund" and "Predecessor Small Cap Value Fund," respectively, and collectively,
the "Predecessor Funds") of The Shawmut Funds, which was organized as a
Massachusetts business trust. On December 4, 1995, the Predecessor Funds were
reorganized as new portfolios of Galaxy. Prior to the reorganization, the
Predecessor Funds offered and sold shares of beneficial interest that were
similar to Galaxy's Trust Shares and Retail A Shares.
As of the date of the Annual Reports, the Equity Income, Strategic Equity,
Equity Value, Small Company Equity, Short-Term Bond, Intermediate Government
Income and Tax-Exempt Bond Funds had not offered Prime A Shares and Prime B
Shares to investors.
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
C shares (Trust Shares), Class C - Special Series 1 shares (Retail A Shares),
Class C - Special Series 2 shares (Retail B Shares), Class C - Special Series 3
shares (Prime A Shares) and Class C - Special Series 4 shares (Prime B Shares),
each series representing interests in the Equity Value Fund; Class D shares
(Trust Shares), Class D - Special Series 1 shares (Retail A Shares), Class D -
Special Series 2 shares (Retail B Shares), Class D - Special Series 3 shares
(Prime A Shares), Class D - 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 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), Class G - Series 6 shares (BKB Shares), each series
representing interests in the International Equity Fund; Class H - Series 1
shares (Trust Shares), Class H - Series 2 shares (Retail A Shares), Class H -
Series 3 shares (Retail B Shares), Class H - Series 4 shares (Prime A Shares)
and Class H - Series 5 shares (Prime B Shares), each series representing
interests in the Equity Growth Fund; Class I - Series 1 shares (Trust Shares),
Class I - Series 2 shares (Retail A Shares), Class I - Series 3 shares (Retail B
Shares), Class I - Series 4 shares (Prime A Shares) and Class I - Series 5
shares (Prime B Shares), each series representing interests in the Equity Income
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 K - Series 1 shares (Trust Shares), Class K - Series 2
shares (Retail A Shares), Class K - Series 3 shares (Retail B Shares), Class K -
Series 4 shares (Prime A Shares) and Class K - Series 5 shares (Prime B Shares),
each series representing interests in the Small Company Equity 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 M - Series 1 shares (Trust Shares), Class M - Series 2 shares
(Retail A Shares), Class M - Series 3 shares (Retail B shares), Class M - Series
4 shares (Prime A Shares) and Class M - Series 5 shares
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<PAGE>
(Prime B Shares), each series representing interests in the Tax-Exempt 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 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; Class X - Series 1 shares (Trust
Shares), Class X - Series 2 shares (Retail A Shares), Class X - Series 3 shares
(Retail B Shares), Class X - Series 4 shares (Prime A Shares) and Class X -
Series 5 shares (Prime B Shares), each series representing interests in the
Small Cap Value Fund; and Class AA - Series 1 shares (Trust Shares), Class AA -
Series 2 shares (Retail A Shares), Class AA - Series 3 shares (Retail B Shares),
Class AA - Series 4 shares (Prime A Shares) and Class AA - Series 5 shares
(Prime B Shares), each series representing interests in the Strategic Equity
Fund. Each Fund is classified as a diversified company under the Investment
Company Act of 1940, as amended (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 Prospectuses, shares will be fully paid and
non-assessable. Each series of shares in a Fund (i.e., Retail A Shares, Retail B
Shares, Trust Shares, Prime A Shares, Prime B Shares and BKB 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 Prime A Shares will bear the expenses of
the Distribution Plan for Prime A Shares and holders of Prime B Shares will bear
the expenses of the Distribution and Services Plan for Prime B 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 "Distribution Plan"
and "Distribution and Services Plan" 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
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<PAGE>
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 Prime A Shares of a Fund will be entitled to
vote on matters submitted to a vote of shareholders pertaining to Galaxy's
Distribution Plan for Prime A and only Prime B Shares of a Fund will be entitled
to vote on matters submitted to a vote of shareholders pertaining to Galaxy's
Distribution and Services Plan for Prime B Shares). Further, shareholders of all
of the Funds, as well as those of any other investment portfolio now or
hereafter offered by Galaxy, will vote together in the aggregate and not
separately on a Fund-by-Fund basis, except as otherwise required by law or when
permitted by the Board of Trustees. Rule 18f-2 under the 1940 Act provides that
any matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as Galaxy shall not be deemed to have
been effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each Fund affected by the matter. A particular Fund is
deemed to be affected by a matter unless it is clear that the interests of each
Fund in the matter are substantially identical or that the matter does not
affect any interest of the Fund. Under the Rule, the approval of an investment
advisory agreement or any change in 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
-4-
<PAGE>
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 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 following investment
strategies, policies and risks supplement those set forth in the Funds'
Prospectuses.
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.
-5-
<PAGE>
See "Other Investment Policies and Risk Considerations" below for
information regarding additional investment policies of the Asset Allocation
Fund.
Equity Income Fund
In addition to common stocks, the Equity Income Fund may also invest in
securities convertible into common stock that offer income potential. See "Other
Investment Policies and Risk Considerations - Convertible Securities" below. The
Fund may invest up to 20% of its total assets in foreign securities, either
directly or indirectly through the purchase of ADRs and EDRs. In addition, the
Fund may invest in securities issued by foreign branches of U.S. banks and
foreign banks. See "Special Risk Considerations -- Foreign Securities" and
"Other Investment Policies and Risk Considerations -- American, European and
Global Depository Receipts" below. The Fund may also purchase put options and
call options and write covered call options. 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 Equity Income 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 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.
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<PAGE>
Strategic Equity Fund
Under normal market and economic conditions, the Strategic Equity Fund
will invest at least 65% of its total assets in equity securities, including
common stocks, preferred stocks, securities convertible into common stock,
rights and warrants. The Fund may invest up to 20% of its total assets in
foreign securities, either directly or indirectly through ADRs, EDRs and GDRs.
See "Special Risk Considerations -- Foreign Securities" and "Other Investment
Policies and Risk Considerations -- American, European and Global Depository
Receipts" 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.
See "Other Investment Policies and Risk Considerations" below for
information regarding additional investment policies of the Strategic Equity
Fund.
Equity Value Fund
Under normal market and economic conditions, the Equity Value Fund invests
at least 75% of its total assets in common stock, preferred stock (including
convertible preferred stock) and debt securities convertible into common stock
that Fleet believes to be undervalued. Debt securities convertible into common
stock are purchased primarily during periods of relative market instability and
are acquired principally for income with the potential for appreciation being a
secondary consideration. See "Other Investment Policies and Risk Considerations
- -Convertible Securities" below.
The Fund may also invest up to 20% of its total assets in foreign
securities, either directly or indirectly through ADRs and EDRs. In addition,
the Fund may invest in securities issued by foreign branches of U.S. banks and
foreign banks. See "Special Risk Considerations -- Foreign Securities" and
"Other Investment Policies and Risk Considerations -- American, European and
Global Depository Receipts" below. The Fund may also write covered call options.
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 Equity Value Fund.
Equity Growth Fund
Convertible securities purchased by the Equity Growth Fund may include
both debt securities and preferred stock. By investing in convertible
securities, the Fund will seek the opportunity, through the conversion feature,
to participate in the capital appreciation of the common stock into which the
securities are convertible. See "Other Investment Policies and Risk
Considerations -- Convertible Securities" below. The Fund may also invest in
common stock warrants.
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<PAGE>
The Fund may invest up to 20% of its total assets in foreign securities,
either directly or indirectly through the purchase of ADRs and EDRs. In
addition, the Fund may invest in securities issued by foreign branches of U.S.
banks and foreign banks. See "Special Risk Considerations -- Foreign Securities"
and "Other Investment Policies and Risk Considerations -- American, European and
Global Depository Receipts" below. The Fund may also purchase put options and
call options and write covered call options. 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 Equity Growth 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 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.
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<PAGE>
Small Cap Value Fund
In addition to common stocks, the Small Cap Value Fund may purchase
convertible securities, including 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 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 a foreign issuer 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 Small Cap Value
Fund.
Small Company Equity Fund
In addition to common stocks, the Small Company Equity Fund may invest in
preferred stock, securities convertible into common stock, rights and warrants.
Under normal market and economic conditions, at least 65% of the Fund's total
assets will be invested in the equity securities of companies that have market
capitalizations of $1.5 billion or less. The Fund may invest up to 20% of its
total assets in foreign securities, either directly or indirectly through ADRs
and EDRs. See "Special Risk Considerations -- Foreign Securities" and "Other
Investment Policies and Risk Considerations -- American, European and Global
Depository Receipts" below.
The Fund may purchase put options and call options and write covered call
options as a hedge against changes resulting from market conditions and in the
value of the securities held in the Fund or which it intends to purchase and
where the transactions are economically appropriate for the reduction of risks
inherent in the ongoing management of the Fund. 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 Small Company Equity
Fund.
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<PAGE>
Short-Term Bond Fund
In addition to its principal investment strategies and policies as
described in its Prospectus, the Short-Term Bond Fund may also invest, from time
to time, in debt obligations issued by or on behalf of states, territories and
possessions of the United States, the District of Columbia and their respective
authorities, agencies, instrumentalities and political subdivisions, the
interest on which, in the opinion of bond counsel or counsel to the issuer, is
exempt from regular federal income tax ("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 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 currency forward contracts (agreements to exchange
one currency for another at a future date) to manage currency risks and to
facilitate transactions in foreign securities. Although currency forward
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").
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<PAGE>
Intermediate Government Income Fund
In addition to its principal investment strategies and policies as
described in its 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.
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 S&P's and Moody's rating categories.
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 S&P's and Moody's rating categories.
Tax-Exempt Bond Fund
As a matter of fundamental policy that cannot be changed without the
requisite consent of the Tax-Exempt Bond Fund's shareholders, the Fund will
invest, except during temporary defensive periods, at least 80% of its total
assets in municipal securities, primarily bonds (at least 65% under normal
market conditions).
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<PAGE>
See "Special Considerations and Risks" and Other Investment Policies and
Risk Considerations" below for information regarding additional investment
policies of the Tax-Exempt Bond Fund.
Special Risk Considerations
Foreign Securities
Investments by the Asset Allocation, Equity Income, Growth and Income,
Strategic Equity, Equity Value, Equity Growth, International Equity, Small Cap
Value and Small Company Equity Funds (the "Equity Funds") and Short-Term Bond
Fund 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 the Equity Funds and Short-Term Bond Fund 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 Equity Funds and Short-Term Bond Fund 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 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
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<PAGE>
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
Tax-Exempt Bond Funds (the "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 Tax-Exempt Bond 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 on similar projects if such
investment is deemed necessary or appropriate by Fleet. To the extent that the
Tax-Exempt Bond 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.
Other Investment Policies and Risk Considerations
Investment methods described in the Prospectuses 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.
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<PAGE>
Ratings
All debt obligations, including convertible bonds, purchased by the Asset
Allocation, Equity Income, Strategic Equity, Equity Value, Equity Growth and
Small Company Equity Funds are rated investment grade by Moody's Investors
Service, Inc. ("Moody's") ("Aaa," "Aa," "A" and "Baa") or Standard & Poor's
Ratings Group ("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 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 and Small Cap Value Funds may purchase convertible
bonds rated "Ba" or higher by Moody's or "BB" or higher by S&P or Fitch IBCA,
Inc. ("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 and Small Cap Value
Funds 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.
Information on the requisite investment quality of debt obligations,
including municipal securities, eligible for purchase by the Bond Funds is
included in the Prospectus for those Funds.
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 or Oechsle, as the case may
be, 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"). However, each Fund will sell promptly any security that is not rated
investment grade by either S&P or Moody's if such securities exceed 5% of the
Fund's net assets.
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.
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<PAGE>
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 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.
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 and
Small Cap Value Funds, 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 limited to 10% (15% with respect to the Strategic
Equity Fund, Growth and Income Fund and Small Cap Value Fund) of a Fund's net
assets. Investments by the Funds in non-negotiable time deposits are limited to
no more than 5% of each Fund's total assets at the time of purchase.
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.
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<PAGE>
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. 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 Equity Funds and Tax-Exempt Bond
Fund 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 variable and floating rate instruments which
are unsecured instruments that permit the indebtedness thereunder to vary.
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 there 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 that 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. The Equity Funds and Short-Term Bond, Intermediate Government Income
and High Quality Bond Funds may also purchase Rule 144A securities. See
"Restricted and Illiquid Securities" 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
Prospectuses and this Statement of Additional Information. If such an 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, an instrument will
usually be deemed to have a maturity equal to the longer of the period remaining
until the next regularly scheduled interest rate adjustment or the time the Fund
involved can recover payment of principal as specified in the instrument.
Instruments which are U.S. Government obligations and certain variable rate
instruments having a nominal maturity of 397 days or less when purchased
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<PAGE>
by the Fund involved, however, will be deemed to have a maturity equal to the
period remaining until the next interest rate adjustment.
Municipal Securities
Municipal securities acquired by the 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 classifications of municipal securities which may be
held by the Bond 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. 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.
Each Bond Fund's portfolio 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 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 nationally recognized
statistical rating organization, such as Moody's and S&P, described in Appendix
A to this Statement of Additional Information, represent such organization's
opinion 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, 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.
The payment of principal and interest on most municipal securities
purchased by the Bond 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
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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 Bond Funds' 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 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 Bond 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 Bond 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 for each Bond Fund.
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 Bond Fund and the liquidity and
value of its portfolio. In such an event, the Tax-Exempt Bond Fund would
re-evaluate its investment objective and policies and consider possible changes
in its 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 Bond
Funds nor Fleet will review the proceedings relating to the issuance of
municipal securities or the bases for such opinions.
While the Tax-Exempt Bond Fund will invest primarily in municipal
securities, each of the Short-Term Bond, Intermediate Government Income and High
Quality Bond Funds may also 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
U.S. Government debt obligations as a result of prevailing economic, regulatory
or other circumstances.
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Variable and Floating Rate Municipal Securities. Municipal securities
purchased by the Bond Funds may include rated and unrated variable and floating
rate tax-exempt instruments. There may be no active secondary market with
respect to a particular variable on floating rate instrument. Nevertheless, the
periodic readjustments of their interest rates tend to assure that their value
to a Fund will approximate their par value. Illiquid variable and floating rate
instruments (instruments which are payable upon seven days' notice and do not
have an active trading market) that are acquired by the Funds are subject to
each Fund's 10% limit on illiquid instruments described under "Investment
Limitations" below.
Stand-by Commitments
Each Bond Fund may acquire "stand-by commitments" with respect to
municipal securities held by it. Under a stand-by commitment, a dealer agrees to
purchase, at a Fund's option, specified municipal securities at a specified
price. The Bond Funds will acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. The Bond 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.
Stand-by commitments are exercisable by a Bond Fund at any time before the
maturity of the underlying municipal security, and may be sold, transferred or
assigned by the Fund only with respect to the underlying instruments. 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
Each Bond Fund 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 Tax-Exempt Bond Fund's 80% requirement
mentioned above and, under normal conditions, will not exceed 20% of the 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
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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. 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 Bond 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.
Repurchase and Reverse Repurchase Agreements
Each 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, Strategic Equity and Small Cap Value
Funds) 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.
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 may also 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
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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.
Securities Lending
Each Fund 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 and Small Cap Value Funds which may
loan their 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
The Asset Allocation, Equity Income, Equity Value, Equity Growth,
International Equity and Small Company Equity Funds and Bond Funds 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 Bond 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 primarily of
securities of issuers located in one foreign country. The Growth and Income,
Strategic Equity and Small Cap Value Funds may 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, Strategic Equity and Small
Cap Value Funds may invest exclusively in one other investment company similar
to the respective Funds. 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, Strategic Equity and
Small Cap Value Funds, securities of other investment companies will be acquired
by a Fund within the
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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 Fund, other investment portfolios
of Galaxy, or any other investment companies advised by Fleet or Oechsle.
Custodial Receipts and Certificates of Participation
Securities acquired by the Tax-Exempt 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 Tax-Exempt Bond 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).
REITs
The Equity Funds may invest up to 10% of their 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
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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
Equity 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
The 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 to 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 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.
Put and Call Options -- Asset Allocation, Equity Income, Equity Growth and
Small Company Equity Funds. The Asset Allocation, Equity Income, Equity Growth
and Small Company Equity Funds 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
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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 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
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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, Equity Income, Equity Value,
Equity Growth, International Equity and Small Company Equity Funds. To further
increase return on their portfolio securities, in accordance with their
respective investment objectives and policies, the Asset Allocation, Equity
Income, Equity Value, Equity Growth, International Equity and Small Company
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 Asset Allocation, Equity Income,
Equity Value, Equity Growth, International Equity and Small Company Equity 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 securities as to
which Fleet and/or Oechsle does not anticipate significant short-term capital
appreciation.
The Asset Allocation, Equity Income, Equity Value, Equity Growth and Small
Company Equity 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
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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.
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
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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, Strategic Equity and
Small Cap Value Funds. The Growth and Income, Strategic Equity and Small Cap
Value Funds may buy and sell options and futures contracts to manage their
exposure to changing interest rates, security prices and currency exchange
rates. The Funds may invest in options and futures 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 a
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 a Fund's individual
return. A 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.
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The Funds will not hedge more than 20% of their respective total assets by
selling futures, buying puts, and writing calls under normal conditions. The
Funds will not buy futures or write puts whose underlying value exceeds 20% of
their respective total assets, and will not buy calls with a value exceeding 5%
of their respective total assets.
Futures Contracts - Bond Funds. The Tax-Exempt 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.
Each Bond Fund 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 Bond Funds will not engage in futures transactions for speculation,
but only to hedge against changes in the market values of securities which the
Fund hold 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 Bond Funds will limit their hedging
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 Bond 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 Bond 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.
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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, Strategic Equity and Small Cap Value Funds. The Growth and
Income, Strategic Equity and Small Cap Value Funds 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 their
respective portfolios 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 Funds' respective total
assets. The Funds will not purchase options to the extent that more than 5% of
the value of their respective total assets would be invested in premiums on open
put option positions. In addition, the Funds do not intend to invest more than
5% of the market value of their respective total assets in each of the
following: futures contracts, swap agreements, and indexed securities. When a
Fund enters into a swap agreement, liquid assets of the Fund equal to the value
of the swap agreement will be segregated by that Fund. The Funds 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 Funds plan
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.
As a means of reducing fluctuations in the net asset value of shares of
the Funds, the Funds may attempt to hedge all or a portion of their respective
portfolios through the purchase of listed put options on stocks, stock indices
and stock index futures contracts. These options will be used as a form of
forward pricing to protect portfolio securities against decreases in value
resulting from market factors, such as an anticipated increase in interest
rates. A purchased put option gives a 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 a 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.
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The Funds may also write covered call options. As the writer of a call
option, a 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 Funds may only: (1) buy listed put options on stock indices and stock
index futures contracts; (2) buy listed put options on securities held in their
respective portfolios; and (3) sell listed call options either on securities
held in their respective portfolios or on securities which they have the right
to obtain without payment of further consideration (or have segregated cash in
the amount of any such additional consideration). A 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. A Fund may also enter
into stock index futures contracts. A stock index futures contract is a
bilateral agreement which obligates the seller to deliver (and the purchaser to
take delivery of) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of trading
of the contract and the price at which the agreement is originally made. There
is no physical delivery of the stocks constituting the index, and no price is
paid upon entering into a futures contract.
In general, option contracts are closed out prior to their expiration. A
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." A Fund may decide to close its position on a
contract at any time prior to the contract's expiration. This is accomplished by
the Fund taking an opposite position at the then prevailing price, thereby
terminating its existing position in the contract. Because the initial margin
resembles a performance bond or good-faith deposit on the contract, it is
returned to the Fund upon the termination of the contract, assuming that all
contractual obligations have been satisfied. Therefore, the margin utilized in
futures contracts is readily distinguishable from the margin employed in
security transactions, since the margin employed in futures contracts does not
involve the borrowing of funds to finance the transaction.
None of the Growth and Income, Strategic Equity or Small Cap Value Funds
will 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, a 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, a
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.
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The Growth and Income, Strategic Equity and Small Cap Value Funds may
invest in indexed securities whose value is linked to foreign currencies,
interest rates, commodities, indices or other financial indicators. Most indexed
securities are short- to intermediate-term fixed income securities whose values
at maturity or interest rates rise or fall according to the change in one or
more specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their value may increase or decrease if the underlying
instrument appreciates), and may have return characteristics similar to direct
investments in the underlying instrument or to one or more options on the
underlying instrument. Indexed securities may be more volatile than the
underlying instrument itself.
As one way of managing their exposure to different types of investments,
the Growth and Income, Strategic Equity and Small Cap Value Funds may enter into
interest rate swaps, currency swaps, and other types of swap agreements such as
caps, collars, and floors. In a typical interest rate swap, one party agrees to
make regular payments equal to a floating interest rate times a "notional
principal amount," in return for payments equal to a fixed rate times the same
amount, for a specified period of time. If a swap agreement provides for
payments in different currencies, the parties might agree to exchange notional
principal amount as well. Swaps may also depend on other prices or rates, such
as the value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer 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 a Fund's investment exposure from one
type of investment to another. For example, if a 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 a Fund's
investments and its share price and yield.
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 Funds' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Funds may also suffer losses
if they are unable to terminate outstanding swap agreements or reduce their
exposure through offsetting transactions.
Foreign Currency Exchange Transactions. Because the Equity Funds and
Short-Term Bond Fund may buy and sell securities denominated in currencies other
than the U.S. dollar, and
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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 Equity Funds
and Short-Term Bond Fund 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 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
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eliminate fluctuations in the prices of a Fund's portfolio securities or in
foreign exchange rates, or prevent loss if the prices of these securities should
decline.
The Equity Funds and Short-Term Bond Fund 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
Each Equity Fund and the Short-Term Bond Fund may invest in ADRs and EDRs.
The Growth and Income, Strategic Equity, International Equity and Small Cap
Value 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 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."
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Asset-Backed Securities
The Bond Funds and Asset Allocation Fund 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. The Tax-Exempt Bond Fund will not invest
more than 10% of its total assets in asset-backed securities.
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.
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.
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Mortgage-Backed Securities
The Bond Funds and Asset Allocation Fund 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 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
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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 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 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
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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 and/or Oechsle 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 and Small Cap Value Funds 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 each Equity 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 a 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 Funds do 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
The Growth and Income, Strategic Equity, International Equity and Small
Cap Value Funds and Bond Funds may purchase eligible securities on a
"when-issued" basis. The Bond Funds may purchase or sell securities on a
"forward commitment" basis. The Growth and Income, Strategic Equity and Small
Cap Value Funds and Bond 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 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
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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
forward commitments, when-issued purchases or delayed settlements 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.
Stripped Obligations
To the extent consistent with its investment objective, each of 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.
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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
Each Bond Fund may invest in guaranteed investment contracts ("GICs")
issued by U.S. 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 and substantial
secondary market for the particular instrument and market quotations are readily
available.
Bank Investment Contracts
Each Bond Fund 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.
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Restricted and Illiquid Securities
Each Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended (the "1933 Act"). Section 4(2) commercial paper is restricted
as to disposition under federal securities law and is generally sold to
institutional investors, such as the Funds, who agree that they are purchasing
the paper for investment purposes and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors like the
Funds through or with the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus providing liquidity. The
Funds believe that Section 4(2) commercial paper and possibly certain other
restricted securities that meet the criteria for liquidity established by
Galaxy's Board of Trustees are quite liquid. The Funds intend, therefore, to
treat the restricted securities that meet the criteria for liquidity established
by the Board of Trustees, including Section 4(2) commercial paper (as determined
by Fleet and/or Oechsle), as liquid and not subject to the investment limitation
applicable to illiquid securities. In addition, because Section 4(2) commercial
paper is liquid, the Funds do not intend to subject such paper to the limitation
applicable to restricted 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. A Fund's investment 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 10% limitation (15% with respect to the Growth and
Income, Small Cap Value and Strategic Equity Funds) on purchases of illiquid
instruments described under "Investment Limitations" below, Rule 144A securities
will not be considered to be illiquid if Fleet and/or Oechsle has determined, in
accordance with guidelines established by the Board of Trustees, that an
adequate trading market exists for such securities.
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.
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INVESTMENT LIMITATIONS
In addition to each Fund's investment objective as stated in its
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").
The Asset Allocation, Equity Income, Strategic Equity, Equity Value,
Equity Growth, International Equity and Small Company Equity 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, 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.
2. 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%, with respect to the Equity
Value Fund, or 33%, with respect to the Asset Allocation,
Equity Income, Strategic Equity, Equity Growth, International
Equity and Small Company Equity Funds, 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 10%, with respect to the Equity Value Fund, or
33%, with respect to the Asset Allocation, Equity Income,
Strategic Equity, Equity Growth, International Equity and
Small Company Equity Funds, 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 10%, with respect to the
Equity Value Fund, or 33%, with respect to the Equity Growth,
Equity Income, International Equity, Small Company Equity,
Asset Allocation and Strategic Equity Funds, 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.
3. Invest more than 10% (15% with respect to the Strategic Equity
Fund) 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 (with respect to the
Equity Value Fund), securities which are restricted as to
transfer in their principal market (with respect to the
International Equity
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Fund), non-negotiable time deposits and other securities which
are not readily marketable.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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 (i) the
Asset Allocation, Equity Income, Equity Value, Equity Growth,
International Equity and Small Company Equity 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, and (ii) the
Strategic Equity Fund may engage in transactions involving
financial futures contracts or options on financial futures
contracts.
9. Invest in or sell put options, call options, straddles,
spreads, or any combination thereof; provided, however, that
each of the Asset Allocation, Equity Income, Equity Value,
Equity Growth, International Equity and Small Company Equity
Funds 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
Asset Allocation, Equity Income, Equity Growth, International
Equity and Small Company Equity Funds may purchase put and
call options to the extent
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permitted by their investment objectives and policies, and
(ii) the Strategic Equity Fund may buy and sell options,
including without limit buying or writing puts and calls,
based on any type of security, index or currency, including
options on foreign exchanges and options not traded on
exchanges.
10. Invest in companies for the purpose of exercising management
or control.
11. 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; and
further provided, that the Strategic Equity Fund may from time
to time, on a temporary basis, invest exclusively in one other
investment company similar to the Fund.
The Growth and Income and Small Cap Value Funds may not:
12. 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 Funds may borrow up to one-third
of the value of their respective total assets and pledge up to
10% of the value of their respective total assets to secure
such borrowings.
13. With respect to 75% of the value of their respective 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.
14. Sell any securities short or purchase any securities on
margin, but each 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 a 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.
15. Issue senior securities except that each Fund may borrow money
or engage in reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the
amounts borrowed; and except to the extent that the Funds may
enter into futures contracts. No Fund will borrow money or
engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by
enabling a Fund to meet
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redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. No
Fund will purchase any securities while borrowings in excess
of 5% of its total assets are outstanding.
16. Mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. In those cases, a Fund may only
mortgage, pledge, or hypothecate assets having a market value
not exceeding 10% of the value of its total assets at the time
of purchase. For purposes of this limitation, the following
will not be deemed to be pledges of a 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.
17. Purchase or sell real estate or real estate limited
partnerships, although each Fund may invest in securities of
issuers whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or
interests in real estate.
18. Purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that a Fund
may engage in transactions involving financial futures
contracts or options on financial futures contracts.
19. Underwrite any issue of securities, except as a Fund may be
deemed to be an underwriter under the Securities Act of 1933
in connection with the sale of securities in accordance with
its investment objective, policies and limitations.
20. Lend any of its assets except that a Fund may lend portfolio
securities up to one-third the value of its total assets. This
limitation shall not prevent a 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.
21. With respect to securities comprising 75% of the value of its
total assets, purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or
guaranteed by the government of the United States or its
agencies or instrumentalities and repurchase agreements
collateralized by such securities) if, as a result, more than
5% of the value
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of its total assets would be invested in the securities of
that issuer. A Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer.
22. 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, a 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
and Small Cap Value Funds 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:
23. The Funds may not invest more than 15% of their respective 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).
24. Each Fund will limit its investments in other investment
companies to not more than 3% of the total outstanding voting
stock of any investment company; will invest no more than 5%
of its total assets in any one investment company; and will
invest no more than 10% of its total assets in investment
companies in general. However, these limitations are not
applicable if the securities are acquired in a merger,
consolidation, reorganization or acquisition of assets.
The Funds will purchase the securities of other investment
companies only in open market transactions involving only
customary broker's commissions. It should be noted that
investment companies incur certain expenses such as management
fees, and therefore any investment by a Fund in shares of
another investment company would be subject to such duplicate
expenses.
25. Neither Fund may purchase or retain the securities of any
issuer if the officers and Trustees of Galaxy or Fleet, owning
individually more than 1/2 of 1% of the issuer's securities,
together own more than 5% of the issuer's securities.
26. Neither Fund may purchase or sell interests in oil, gas, or
mineral exploration or development programs or leases; except
that the Funds may purchase the securities of issuers which
invest in or sponsor such programs.
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27. Neither Fund may purchase put options on securities, unless
the securities are held in the Fund's portfolio and not more
than 5% of the value of the Fund's total assets would be
invested in premiums on open put option positions.
28. Neither Fund may 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. Neither Fund may write call options in excess of 5%
of the value of its total assets.
29. Neither Fund may invest more than 5% of the value of its total
assets in securities of issuers which have records of less
than three years of continuous operations, including the
operation of any predecessor.
30. Neither Fund will invest more than 15% of the value of its
respective net assets in illiquid securities, including
repurchase agreements providing for settlement in more than
seven days after notice, non-negotiable fixed time deposits
with maturities over seven days, and certain securities not
determined by the Board of Trustees to be liquid.
31. Neither Fund may invest in companies for the purpose of
exercising management or control.
32. Neither Fund may invest more than 5% of its net assets in
warrants. No more than 2% of this 5% may be warrants which are
not listed on the New York Stock Exchange.
The Short-Term Bond, Intermediate Government Income and High Quality Bond
Funds may not:
33. 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.
34. 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
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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.
35. 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.
36. 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.
37. 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.
38. 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.
39. 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.
40. 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.
41. Invest in or sell put options, call options, straddles,
spreads, or any combination thereof.
42. Invest in companies for the purpose of exercising management
or control.
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43. 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.
In addition to the above limitations with respect to the Short-Term Bond,
Intermediate Government Income and High Quality Bond Funds:
44. The Funds, with the exception of the Short-Term Bond Fund, may
not purchase foreign securities, except that the Intermediate
Government Income and High Quality Bond 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 Intermediate Government Income and High Quality Bond Funds
may also purchase obligations of Canadian Provincial
Governments in accordance with each Fund's investment
objective and policies.
The Tax-Exempt Bond Fund may not:
45. 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.
46. 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.
47. 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.
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48. 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.
49. 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.
50. 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 with
the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
51. 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.
52. 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.
53. Invest in or sell put options, call options, straddles,
spreads, or any combination thereof.
54. Invest in companies for the purpose of exercising management
or control.
55. 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.
56. 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.
57. 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.
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58. 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 25% of the
value of its total assets may be invested without regard to
this limitation.
In addition, to the foregoing investment limitations, the Equity Funds and
Short-Term Bond, Intermediate Government Income and High Quality Bond Funds may
not purchase any securities which would cause 25% or 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 (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, (b) 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 (c) 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.)
With respect to Investment Limitation No. 2 above, (a) the Equity Value
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 and each of the Asset Allocation, Equity Income, Strategic Equity,
Equity Growth, International Equity and Small Company 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. 4 above, each of the Asset
Allocation, Equity Income, Strategic Equity, Equity Value, Equity Growth,
International Equity and Small Company Equity Funds does not intend to acquire
more than 10% of the outstanding voting securities of any one issuer.
The Growth and Income and Small Cap Value Funds intend 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. Each
such 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.
With respect to Investment Limitation No. 34 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
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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. 36 above, each of the Short-Term
Bond, Intermediate Government Income and High Quality Bond Funds does not intend
to acquire more than 10% of the outstanding voting securities of any one issuer.
With respect to Investment Limitation No. 46 above, the Tax-Exempt Bond
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.
Except as stated otherwise, if 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.
VALUATION OF PORTFOLIO SECURITIES
Valuation of the Asset Allocation, Equity Income, Growth and Income,
Strategic Equity, Equity Value, Equity Growth, Small Cap Value and Small Company
Equity Funds
In determining market value, the assets in the Asset Allocation, Equity
Income, Growth and Income, Strategic Equity, Equity Value, Equity Growth, Small
Cap Value and Small Company Equity 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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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.
Valuation of the Bond Funds
The assets of the 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.
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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 principal offices located at Four Falls Corporate Center,
West Conshohocken, Pennsylvania 19428. PDI has agreed to use appropriate efforts
to solicit all purchase orders.
This Statement of Additional Information provides additional purchase and
redemption information for Prime A Shares and Prime B Shares of the Funds.
Purchase and redemption information for Retail A Shares, Retail B Shares and
Trust Shares of the Funds and BKB Shares of the Asset Allocation, Growth and
Income, International Equity, Short-Term Bond, Intermediate Government Income
and High Quality Bond Funds are provided in separate statements of additional
information and related prospectuses.
Purchases of Prime A Shares and Prime B Shares
General
Investments in Prime A Shares of the Funds are subject to a front-end
sales charge. Investments in Prime B Shares of the Funds are subject to a
back-end sales charge. This back-end sales charge declines over time and is
known as a "contingent deferred sales charge."
Investors should read "Characteristics of Prime A Shares and Prime B
Shares" and "Factors to Consider When Selecting Prime A Shares or Prime B
Shares" below before deciding between the two.
Purchase orders for Prime A Shares and Prime B Shares are placed by
investors through selected broker/dealers. The broker/dealer is responsible for
transmitting its customers' purchase orders to PDI and wiring required funds in
payment to Galaxy's custodian on a timely basis. PDI is responsible for
transmitting such orders to Galaxy's transfer agent for execution. Shares
purchased by a broker/dealer on behalf of its customers will normally be held of
record by the broker/dealer and reflected in the account statements provided to
its customers. Depending on the terms of the arrangement between a particular
broker/dealer and Galaxy's transfer agent, confirmations of Prime A Share and/or
Prime B Share purchases and redemptions and pertinent account statements will be
sent by Galaxy's transfer agent directly to a shareholder with a copy to the
broker/dealer, or will be furnished directly to the shareholder by the
broker/dealer. Other procedures for the purchase of Prime A Shares and/or Prime
B Shares established by broker/dealers may apply. Purchases of Prime A Shares
and Prime B Shares will be effected only on days on which the New York Stock
Exchange is open for business ("business day"). On a business day when the New
York 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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Applicable Sales Charge -- Prime A Shares
The public offering price for Prime A Shares of the Funds is the sum of
the net asset value of the Prime A Shares purchased plus any applicable
front-end sales charge as described in the applicable Prospectus. A deferred
sales charge of up to 1.00% is assessed on certain redemptions of Prime A Shares
that are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. A portion of the front-end sales charge may be reallowed to
broker-dealers as follows:
Reallowance to Dealers
----------------------
As a % of As a % of
Offering Price Offering Price
Amount of Transaction Per Share - Per Share -
- --------------------- Equity Funds Bond Funds
------------ ----------
Less than $50,000 5.00% 4.25%
$50,000 but less than $100,000 4.00% 4.00%
$100,000 but less than $250,000 3.00% 3.00%
$250,000 but less than $500,000 2.00% 2.00%
$500,000 but less than $1,000,000 1.75% 1.75%
$1,000,000 and over 0.00% 0.00%
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.
In certain situations or for certain individuals, the front-end sales
charge for Prime 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's
broker/dealer must explain the status of the investor's investment at the time
of purchase. In addition to the sales charge waivers described in the applicable
Prospectus, no sales charge is assessed on purchases of Prime A Shares of the
Funds by the following categories of investors or in the following types of
transactions:
o purchases by directors, officers and employees of
broker-dealers having agreements with PDI pertaining to the
sale of Prime A Shares to the extent permitted by such
organizations;
o purchases by current and retired members of Galaxy's Board of
Trustees and members of their immediate families;
o purchases by officers, directors, employees and retirees of
FleetBoston Financial Corporation and any of its affiliates
and members of their immediate families; and
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o purchases by officers, directors, employees and retirees of
PFPC Inc. and members of their immediate families.
Computation of Offering Price - Prime A Shares
An illustration of the computation of the offering price per share of
Prime A Shares of the Funds, using the value of each Fund's net assets
attributable to such Shares and the number of outstanding Prime A Shares of each
Fund at the close of business on October 31, 1999 and the maximum front-end
sales charge of 5.50% for the Equity Funds and 4.75% for the Bond Funds, are set
forth below. Prime A Shares of the Equity Income, Strategic Equity, Equity
Value, Small Company Equity, Short-Term Bond, Intermediate Government Income and
Tax-Exempt Bond Funds were not offered during the period ended October 31, 1999
and the information presented below is based on the projected value of each
Fund's net assets and the projected number of Prime A Shares of each Fund on the
date such Shares are first offered for sale to public investors.
Asset Allocation Equity Income
Fund Fund
---- ----
Net Assets ........................... $ 237,778 $ 10.00
Outstanding Shares ................... 13,412 1
Net Asset Value Per Share ............ $ 17.73 $ 10.00
Sales Charge (5.50% of
the offering price) .................. $ 1.03 $ 0.58
Offering Price to Public ............. $ 18.76 $ 10.58
Growth and Strategic
Income Fund Equity Fund
----------- -----------
Net Assets ........................... $ 150,276 $ 10.00
Outstanding Shares ................... 9,392 1
Net Asset Value Per Share ............ $ 16.00 $ 10.00
Sales Charge (5.50% of
the offering price) .................. $ 0.93 $ 0.58
Offering Price to Public ............. $ 16.93 $ 10.58
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Equity Equity
Value Fund Growth Fund
---------- -----------
Net Assets ........................... $ 10.00 $ 106,593
Outstanding Shares ................... 1 3,682
Net Asset Value Per Share ............ $ 10.00 $ 28.95
Sales Charge (5.50% of
the offering price) .................. $ 0.58 $ 1.68
Offering Price to Public ............. $ 10.58 $ 30.63
International Small Cap
Equity Fund Value Fund
----------- ----------
Net Assets ........................... $ 12,255 $ 174,521
Outstanding Shares ................... 584 13,387
Net Asset Value Per Share ............ $ 20.98 $ 13.04
Sales Charge (5.50% of
the offering price) .................. $ 1.22 $ 0.76
Offering Price to Public ............. $ 22.20 $ 13.80
Small Company
Equity Fund
Net Assets ........................... $ 10.00
Outstanding Shares ................... 1
Net Asset Value Per Share ............ $ 10.00
Sales Charge (5.50% of
the offering price) .................. $ 0.58
Offering Price to Public ............. $ 10.58
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Short Term Intermediate Government
Bond Fund Income Fund
--------- -----------
Net Assets ........................... $ 10.00 $ 10.00
Outstanding Shares ................... 1 1
Net Asset Value Per Share ............ $ 10.00 $ 10.00
Sales Charge (4.75% of
the offering price) .................. $ 0.50 $ 0.50
Offering Price to Public ............. $ 10.50 $ 10.50
High Quality Tax-Exempt
Bond Fund Bond Fund
--------- ---------
Net Assets ........................... $ 16,084 $ 10.00
Outstanding Shares ................... 1,569 1
Net Asset Value Per Share ............ $ 10.25 $ 10.00
Sales Charge (4.75% of
the offering price) .................. $ 0.51 $ 0.50
Offering Price to Public ............. $ 10.76 $ 10.50
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's broker/dealer
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 your broker/dealer.
Rights of Accumulation. A reduced sales charge applies to any purchase of
Prime A Shares of any portfolio of Galaxy that is sold with a sales charge
("Eligible Fund") where an
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investor's then current aggregate investment in Prime 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 4.50% 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 Prime 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 Prime 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 Prime 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
Letter of Intent and at PDI's direction, will redeem an appropriate number of
Prime 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, through his or her broker/dealer, 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 Prime A Shares of the Funds or in Prime A Shares of
another portfolio of Galaxy
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that offers Prime A Shares within 90 days of the redemption trade date without
paying a sales load. Prime 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 from the investor's
broker/dealer on behalf of its client.
Broker/dealers wishing to exercise this Privilege on behalf of their
customers must submit a written reinstatement request to PFPC as transfer agent
stating that the customer 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.
Applicable Sales Charge - Prime B Shares
The public offering price for Prime B Shares of the Funds is the net asset
value of the Prime B Shares purchased. Although investors pay no front-end sales
charge on purchases of Prime B Shares, such Shares are subject to a contingent
deferred sales charge at the rates set forth below if they are redeemed within
six years of purchase. Broker/dealers who have entered into agreements with PDI
will receive commissions from PDI in connection with sales of Prime B Shares.
These commissions may be different than the reallowances or placement fees paid
to broker/dealers in connection with sales of Prime A Shares. The contingent
deferred sales charge on Prime B Shares is based on the lesser of the net asset
value of the Shares on the redemption date or the original cost of the Shares
being redeemed. As a result, no sales charge is imposed on any increase in the
principal value of an investor's Prime B Shares. In addition, a contingent
deferred sales charge will not be assessed on Prime B Shares purchased through
reinvestment of dividends or capital gains distributions.
When an investor redeems his or her Prime B Shares, the redemption request
is processed to minimize the amount of the contingent deferred sales charge that
will be charged. Prime B Shares are redeemed first from those shares that are
not subject to a contingent deferred sales charge (i.e., Prime B Shares that
were acquired through reinvestment of dividends or distributions or that qualify
for other deferred sales charge exemptions) and after that from the Prime B
Shares that have been held the longest.
The proceeds from the contingent deferred sales charge that an investor
may pay upon redemption go to PDI, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Prime B Shares.
Exemptions from the Contingent Deferred Sales Charge. Certain types of
redemptions may also qualify for an exemption from the contingent deferred sales
charge. To receive exemptions (i), (iv) or (viii) listed below, an investor's
broker/dealer must explain the status of
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the investor's redemption at the time Prime B Shares are redeemed. In addition
to the sales charge exemptions described in the applicable Prospectus, the
contingent deferred sales charge with respect to Prime B Shares is not assessed
on: (i) exchanges described under "Investor Programs - Exchange Privilege"
below; (ii) redemptions in connection with required (or, in some cases,
discretionary) distributions to participants or beneficiaries of an employee
pension, profit-sharing or other trust or qualified retirement or Keogh plan,
individual retirement account or custodial account maintained pursuant to
Section 403(b)(7) of the Code; (iii) redemptions in connection with required
(or, in some cases, discretionary) distributions to participants in qualified
retirement or Keogh plans, individual retirement accounts or custodial accounts
maintained pursuant to Section 403(b)(7) of the Code due to death, disability or
the attainment of a specified age; (iv) redemptions effected pursuant to a
Fund's right to liquidate a shareholder's account if the aggregate net asset
value of Prime B Shares held in the account is less than the minimum account
size; (v) redemptions in connection with the combination of a Fund with any
other investment company registered under the 1940 Act by merger, acquisition of
assets, or by any other transaction; (vi) redemptions in connection with the
death or disability of a shareholder; (vii) redemptions resulting from a
tax-free return of an excess contribution pursuant to Section 408(d)(4) or (5)
of the Code; or (viii) any redemption of Prime B Shares held by an investor,
provided the investor was the beneficial owner of shares of a Fund (or any of
the other portfolios offered by Galaxy or otherwise advised by Fleet or its
affiliates) before December 1, 1995.
Characteristics of Prime A Shares and Prime B Shares
The primary difference between Prime A Shares and Prime B Shares lies in
their sales charge structures and shareholder servicing/distribution expenses.
An investor should understand that the purpose and function of the sales charge
structures and shareholder servicing/distribution arrangements for both Prime A
Shares and Prime B Shares are the same.
Prime A Shares of the Funds are sold at their net asset value plus a
front-end sales charge of up to 5.50% with respect to the Equity Funds and up to
4.75% with respect to the Bond Funds. This front-end sales charge may be reduced
or waived in some cases. See the applicable Prospectus and "Applicable Sales
Charges -- Prime A Shares" and "Quantity Discounts" above. Prime A Shares of a
Fund are currently subject to ongoing distribution fees at an annual rate of up
to 0.25% of the Fund's average daily net assets attributable to its Prime A
Shares.
Prime B Shares of the Funds are sold at net asset value without an initial
sales charge. Normally, however, a deferred sales charge is paid if the Shares
are redeemed within six years of investment. See the applicable Prospectus and
"Applicable Sales Charges - Prime B Shares" above. Prime B Shares of a Fund are
currently subject to ongoing shareholder servicing and distribution fees at an
annual rate of up to 1.00% of the Fund's average daily net assets attributable
to its Prime B Shares. These ongoing fees, which are higher than those charged
on Prime A Shares, will cause Prime B Shares to have a higher expense ratio and
pay lower dividends than Prime A Shares.
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Eight years after purchase, Prime B Shares of the Funds will convert
automatically to Prime A Shares of the Funds. The purpose of the conversion is
to relieve a holder of Prime B Shares of the higher ongoing expenses charged to
those shares, after enough time has passed to allow PDI to recover approximately
the amount it would have received if a front-end sales charge had been charged.
The conversion from Prime B Shares to Prime A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Prime A Shares as he or she had of Prime B Shares. The conversion
occurs eight years after the beginning of the calendar month in which the Prime
B Shares are purchased. Upon conversion, the converted shares will be relieved
of the distribution and shareholder servicing fees borne by Prime B Shares,
although they will be subject to the distribution fees borne by Prime A Shares.
Prime B Shares acquired through a reinvestment of dividends or
distributions (as discussed under "Applicable Sales Charge - Prime B Shares")
are also converted at the earlier of two dates - eight years after the beginning
of the calendar month in which the reinvestment occurred or the date of
conversion of the most recently purchased Prime B Shares that were not acquired
through reinvestment of dividends or distributions. For example, if an investor
makes a one-time purchase of Prime B Shares of a Fund, and subsequently acquires
additional Prime B Shares of such Fund only through reinvestment of dividends
and/or distributions, all of such investor's Prime B Shares in the Fund,
including those acquired through reinvestment, will convert to Prime A Shares of
such Fund on the same date.
Factors to Consider When Selecting Prime A Shares or Prime B Shares
Before purchasing Prime A Shares or Prime B Shares of the Funds, investors
should consider whether, during the anticipated periods of their investments in
the particular Funds, the accumulated distribution and shareholder servicing
fees and potential contingent deferred sales charge on Prime B Shares prior to
conversion would be less than the initial sales charge and accumulated
distribution fees on Prime A Shares purchased at the same time, and to what
extent such differential would be offset by the higher yield of Prime A Shares.
In this regard, to the extent that the sales charge for Prime A Shares is waived
or reduced by one of the methods described above, investments in Prime A Shares
become more desirable. An investment of $250,000 or more in Prime B Shares would
not be in most shareholders' best interest. Shareholders should consult their
broker-dealers or other financial advisers with respect to the advisability of
purchasing Prime B Shares in amounts exceeding $250,000.
Although Prime A Shares are subject to distribution fees, they are not
subject to the higher distribution and shareholder servicing fee applicable to
Prime B Shares. For this reason, Prime A Shares can be expected to pay
correspondingly higher dividends per Share. However, because initial sales
charges are deducted at the time of purchase, purchasers of Prime A Shares (that
do not qualify for exemptions from or reductions in the initial sales charge)
would have less of their purchase price initially invested in these Funds than
purchasers of Prime B Shares in the Funds.
As described above, purchasers of Prime B Shares will have more of their
initial purchase price invested. Any positive investment return on this
additional invested amount would
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partially or wholly offset the expected higher annual expenses borne by Prime B
Shares. Because a Fund's future returns cannot be predicted, there can be no
assurance that this will be the case. Holders of Prime B Shares would, however,
own shares that are subject to a contingent deferred sales charge of up to 5.00%
upon redemption, depending upon the year of redemption. Investors expecting to
redeem during this eight-year period should compare the cost of the contingent
deferred sales charge plus the aggregate annual distribution and shareholder
servicing fees on Prime B Shares to the cost of the initial sales charge and
distribution fees on Prime A Shares. Over time, the expense of the annual
distribution and shareholder servicing fees on the Prime B Shares may equal or
exceed the initial sales charge and annual distribution fees applicable to Prime
A Shares. For example, if net asset value remains constant, the aggregate
distribution and shareholder servicing fees with respect to Prime B Shares of a
Fund would equal or exceed the initial sales charge and aggregate distribution
fees of Prime A Shares approximately eight years after the purchase. In order to
reduce such fees for investors that hold Prime B Shares for more than eight
years, Prime B Shares will be automatically converted to Prime A Shares as
described above at the end of such eight-year period.
Redemption of Prime A Shares and Prime B 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 New
York Stock 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 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.
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 any 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.
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.
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EXCHANGE PRIVILEGE
A shareholder may, after appropriate prior authorization, exchange through
his or her broker/dealer Prime A Shares of a Fund having a value of at least
$100 for Prime A Shares of any of the other Funds, provided that such other
Prime A Shares may be sold legally in the state of the shareholder's residence.
A shareholder may exchange through his or her broker/dealer Prime B Shares of a
Fund for Prime B Shares of any of the other Funds, provided that such other
Prime B Shares may be sold legally in the state of the shareholder's residence.
No additional sales charge will be incurred when exchanging Prime A Shares
of a Fund for Prime A Shares of another Fund. Prime B Shares may be exchanged
without the payment of any contingent deferred sales charge at the time the
exchange is made. In determining the holding period for calculating the
contingent deferred sales charge payable on redemptions of Prime B Shares, the
holding period of the Prime B Shares originally held will be added to the
holding period of the Prime B Shares acquired through exchange. Galaxy does not
charge an exchange fee. The minimum initial investment to establish an account
in another Fund or portfolio by exchange is $2,500.
An exchange involves a redemption of all or a portion of the Prime A or
Prime B Shares of a Fund and the investment of the redemption proceeds in Prime
A or Prime B Shares of another Fund. The redemption will be made at the per
share net asset value next determined after the exchange request is received.
The Prime A or Prime B Shares of a Fund 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 contact their broker/dealers.
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 request, an investor should consult a tax or other financial
adviser to determine the tax consequences.
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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.
For the Tax-Exempt Bond Fund to pay tax-exempt dividends for any taxable year,
at least 50% of the aggregate value of the Fund's assets at the close of each
quarter of the Fund's taxable year must consist of exempt-interest obligations.
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 a Fund on December 31
of such year if such dividends are actually paid during January of the following
year.
An investment in any one Fund is not intended to constitute a balanced
investment program. Shares of the Tax-Exempt 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 Fund's
dividends being tax-exempt, but such dividends would be ultimately taxable to
the beneficiaries when distributed. In addition, the Tax-Exempt 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
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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.
State and Local
Exempt-interest dividends and other distributions paid by the Tax-Exempt
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.
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, the Tax-Exempt Bond 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 the Tax-Exempt Bond Fund and its shareholders under such
laws may differ from their treatment under federal income tax laws. Under state
or local law, distributions of net investment income may be taxable to
shareholders as dividend income even though a substantial portion of such
distributions may be derived from interest on U.S. Government obligations which,
if realized directly, would be exempt from such income taxes. Shareholders are
advised to consult their tax advisers concerning the application of state and
local taxes.
Taxation of Certain Financial Instruments
The tax principles applicable to transactions in certain financial
instruments and futures contracts and options that may be engaged in by the
Funds, and investments in passive foreign investment companies ("PFICs"), are
complex and, in some cases, uncertain. Such transactions and 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.
In addition, in the case of any shares of a PFIC in which a Fund invests,
the Fund may be liable for corporate-level tax on any ultimate gain or
distributions on the shares if the Fund fails to make an election to recognize
income annually during the period of its ownership of the shares.
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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:
Positions Principal Occupation
with The During Past 5 Years
Name and Address Galaxy Fund and Other Affiliations
- ---------------- ----------- ----------------------
Dwight E. Vicks, Jr. Chairman & President & Director, Vicks
Vicks Lithograph & Trustee Lithograph & Printing
Printing Corporation Corporation (book
Commercial Drive manufacturing and commercial
P.O. Box 270 printing); Director, Utica
Yorkville, NY 13495 Fire Insurance Company;
Age 66 Trustee, Savings Bank of
Utica; Director, Monitor Life
Insurance Company; Director,
Commercial Travelers Mutual
Insurance Company; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
John T. O'Neill(1) President, Private Investor; Executive
28 Narragansett Bay Avenue Treasurer & Vice President and Chief
Warwick, RI 02889 Trustee Financial Officer, Hasbro,
Age 55 Inc. (toy and game
manufacturer) until December
1999; Trustee, The Galaxy VIP
Fund; Trustee, Galaxy Fund II.
Louis DeThomasis Trustee President, Saint Mary's
Saint Mary's College College of Minnesota;
of Minnesota Director, Bright Day Travel,
Winona, MN 55987 Inc.; Trustee, Religious
Age 59 Communities Trust; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
Donald B. Miller Trustee Chairman, Horizon Media, Inc.
10725 Quail Covey Road (broadcast services);
Boynton Beach, FL 33436 Director/Trustee, Lexington
Age 74 Funds; Chairman, Executive
Committee, Compton
International, Inc.
(advertising agency);
Trustee, Keuka College;
Trustee, The Galaxy VIP Fund;
Trustee, Galaxy Fund II.
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Positions Principal Occupation
with The During Past 5 Years
Name and Address Galaxy Fund and Other Affiliations
- ---------------- ----------- ----------------------
James M. Seed Trustee Chairman and President, The
The Astra Ventures, Inc. Astra Projects, Incorporated
One Citizens Plaza (land development);
Providence, RI 02903 President, The Astra
Age 58 Ventures, Incorporated
(previously, Buffinton Box
Company - 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
2468 Ohio Street President and Director,
Bangor, ME 04401 Acadia Management Company
Age 68 (investment services);
Director, Essex County Gas
Company, until January 1994;
Director, Maine Mutual Fire
Insurance Co.; Member, Maine
Finance Authority; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
W. Bruce McConnel, III Secretary Partner of the law firm
One Logan Square Drinker Biddle & Reath LLP,
18th & Cherry Streets Philadelphia, Pennsylvania.
Philadelphia, PA 19103-6996
Age 57
Jylanne Dunne Vice President Vice President, PFPC Inc.,
PFPC Inc. and Assistant 1990 to present.
4400 Computer Drive Treasurer
Westborough, MA 01581-5108
Age 40
William Greilich Vice President Vice President, PFPC Inc.,
PFPC Inc. 1991-96; Vice President and
4400 Computer Drive Division Manager, PFPC Inc.,
Westborough, MA 01581-5108 1996 to present.
Age 46
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- --------------------------
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 $3,250 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, (i) each trustee received an annual aggregate fee of $40,000 for his
services as a trustee of the Trusts, plus an additional $2,250 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 Board meeting, and (ii) the President and Treasurer of the Trusts
received the same fees as they are currently paid for their services in these
capacities.
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"). 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 during the fiscal year ended October 31, 1999.
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================================================================================
Pension or
Retirement
Benefits Total
Accrued as Compensation
Aggregate Part of from Galaxy and
Compensation from Fund Fund Complex
Name of Person/Position Galaxy Expenses Paid to Trustees
- --------------------------------------------------------------------------------
Bradford S. Wellman $39,355 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
================================================================================
- -----------
* The "Fund Complex" consists of Galaxy, The Galaxy VIP Fund and Galaxy Fund
II, which comprised a total of 43 separate portfolios as of October 31,
1999.
** 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.
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
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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 Prospectuses. Fleet has also agreed to pay all expenses
incurred by it in connection with its activities under the Advisory Agreement
other than the cost of securities (including brokerage commissions) purchased
for the Funds. See "Expenses" below.
For the services provided and expenses assumed with respect to the Funds,
Fleet is entitled to receive advisory fees, computed daily and paid monthly, at
the annual rate of 0.75% of the average daily net assets of each Fund other than
the International Equity Fund. For the services provided and the expenses
assumed with respect to the International Equity Fund, Fleet is entitled to
receive advisory fees, computed daily and paid monthly, at the annual rate of
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 to it by the Bond Funds so that it is entitled to receive advisory fees
at the annual rate of 0.55% of each Bond Fund's average daily net assets.
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During the fiscal years ended October 31, 1999, October 31, 1998 and
October 31, 1997, Galaxy paid advisory fees (net of fee waivers and/or expense
reimbursements) to Fleet as set forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation......................... $5,338,301 $3,743,922 $2,313,863
Equity Income............................ $2,608,376 $2,457,188 $1,947,792
Growth and Income........................ $4,577,393 $3,701,722 $2,361,898
Strategic Equity(1)...................... $455,936 $70,206 *
Equity Value............................. $4,468,558 $3,782,620 $2,860,410
Equity Growth............................ $10,553,344 $8,345,236 $6,555,045
International Equity(2).................. $3,119,675 $2,480,868 $1,844,037
Small Cap Value.......................... $2,487,806 $2,042,588 $1,370,449
Small Company Equity..................... $2,481,560 $3,166,852 $2,610,431
Short-Term Bond(3) ...................... $335,221 $390,913 $470,347
Intermediate Government Income(4) ....... $1,674,194 $1,582,909 $1,535,166
High Quality Bond(5) .................... $1,544,510 $1,294,758 $1,089,506
Tax-Exempt Bond(6) ...................... $930,448 $864,035 $789,598
- ---------------
* Not in operation during the period.
(1) For the fiscal year ended October 31, 1999 and the period from March 4,
1998 (commencement of operations) through October 31, 1999, Fleet waived
advisory fees of $165,794 and $26,590, respectively with respect to the
Strategic Equity Fund.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) For the fiscal years ended October 31, 1999, October 31, 1998 and October
31, 1997, Fleet waived advisory fees of $338,345, $318,713, and $287,127,
respectively, with respect to the Tax-Exempt Bond Fund.
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During the fiscal years ended October 31, 1999, October 31, 1998 and
October 31, 1997, Fleet reimbursed expenses as follows:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation.................... $0 $0 $19,254
Equity Income....................... $0 $0 $38,298
Growth and Income................... $0 $150,727 $306,295
Strategic Equity.................... $0 $2,915(1) *
Equity Value........................ $0 $0 $26,294
Equity Growth....................... $0 $0 $27,033
International Equity................ $0 $0 $18,362
Small Cap Value..................... $0 $115,022 $103,101
Small Company Equity................ $0 $27,376 $118,118
Short-Term Bond Fund................ $0 $111 $2,300
Intermediate Government Income Fund. $0 $0 $0
High Quality Bond Fund.............. $0 $0 $28,489
Tax-Exempt Bond Fund................ $0 $12,427 $73,334
- ---------------
* Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
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
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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, 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 the Sub-Advisory
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 0.40% of the first $50 million of the
International Equity Fund's average daily net assets, plus .035% 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 Inc. ("PFPC") (formerly known as First Data Investor Services Group,
Inc.), located at 4400 Computer Drive, Westboro, 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
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is entitled to receive administration fees based on the combined average daily
net assets of the Funds and the other portfolios offered by Galaxy, computed
daily and paid monthly, at the following annual rates, effective September 10,
1998:
Combined Average Daily Net Assets Annual Rate
--------------------------------- -----------
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%
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:
Combined Average Daily Net Assets Annual Rate
--------------------------------- -----------
Up to $2.5 billion............... 0.090%
From $2.5 to $5 billion.......... 0.085%
Over $5 billion.................. 0.075%
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, each Fund paid PFPC administration fees at the effective
annual rate of 0.08% of such Fund's average daily net assets. During the fiscal
years ended October 31, 1999, October 31, 1998 and October 31, 1997, PFPC
received administration fees (net of fee waivers) as set forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation............................. $533,921 $401,495 $253,881
Equity Income................................ $259,413 $263,640 $216,835
Growth and Income............................ $456,860 $413,204 $290,324
Strategic Equity............................. $62,309 $10,624(1) *
Equity Value................................. $446,506 $405,740 $314,236
Equity Growth................................ $1,055,020 $895,213 $716,320
International Equity......................... $365,677 $305,871 $222,620
Small Cap Value.............................. $248,680 $231,440 $160,350
Small Company Equity......................... $248,980 $342,901 $222,620
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
Tax-Exempt Bond.............................. $127,246 $127,627 $117,223
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- ---------------------
* Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
During the fiscal years ended October 31, 1999, October 31, 1998 and
October 31, 1997, PFPC waived administration fees as set forth below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation................................ $0 $0 $0
Equity Income................................... $0 $0 $0
Growth and Income............................... $0 $0 $0
Strategic Equity................................ $0 $0(1) *
Equity Value.................................... $0 $0 $0
Equity Growth................................... $0 $0 $0
International Equity............................ $0 $0 $0
Small Cap Value................................. $0 $0 $0
Small Company Equity............................ $0 $0 $0
Short-Term Bond................................. $0 $0 $0
Intermediate Government Income.................. $0 $0 $0
High Quality Bond............................... $0 $0 $0
Tax-Exempt Bond................................. $0 $0 $0
- ---------------------
* Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
Under the Administration Agreement between Galaxy and PFPC (the
"Administration Agreement"), PFPC has agreed to maintain office facilities for
Galaxy, furnish Galaxy with statistical and research data, clerical, accounting,
and bookkeeping services, provide 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
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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 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 the Funds held outside the United States. 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 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.
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PORTFOLIO TRANSACTIONS
Fleet or Oechsle will select specific portfolio investments and effect
transactions for the Equity 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
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 Agreement between Galaxy and Fleet and the Sub-Advisory Agreement
between 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 Equity Funds
paid soft dollar commissions as shown below:
Fund Commissions
---- -----------
Asset Allocation.............. $159,620
Equity Income................. $250,780
Growth and Income............. $283,931
Strategic Equity.............. $186,517
Equity Value.................. $998,817
Equity Growth................. $1,014,330
International Equity.......... $27,519
Small Cap Value............... $365,870
Small Company Equity.......... $655,243
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
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agency or instrumentality. No brokerage commissions are typically paid on
purchases and sales of U.S. Government securities.
For the fiscal years ended October 31, 1999, October 31, 1998 and October
31, 1997, the following Funds paid brokerage commissions as shown in the table
below:
For the Fiscal Year Ended October 31:
Fund 1999 1998 1997
- ---- ---- ---- ----
Asset Allocation............................. $164,971 $225,758 $155,296
Equity Income................................ $260,679 $304,645 $201,407
Growth and Income............................ $305,533 $511,307 $851,919
Strategic Equity............................. $213,205 $118,965(1) *
Equity Value................................. $1,055,494 $965,718 $934,709
Equity Growth................................ $1,267,684 $1,128,464 $7,006,331
International Equity......................... $1,047,761 $841,389 $851,919
Small Cap Value.............................. $390,632 $223,853 $173,335
Small Company Equity......................... $731,699 $579,137 $354,910
- -----------------
* Not in operation during the period.
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
During the period February 1, 1998 through October 31, 1998 and the fiscal
year ended October 31, 1999, certain Equity 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.
Year Ended October 31, 1999
-----------------------------------
% of
% of Aggregate
Aggregate Aggregate Commission
Fund Amount Commissions Transactions
- ---- ------ ------------------------
Asset Allocation........................... $141,443 85.74% 88.69%
Equity Income.............................. $232,329 89.12% 91.74%
Growth and Income.......................... $129,843 42.50% 47.05%
Strategic Equity........................... $11,375 5.34% 5.73%
Equity Value............................... $860,618 81.54% 82.31%
Equity Growth.............................. $157,771 12.45% 13.29%
Small Cap Value............................ $14,000 3.58% 3.39%
Small Company Equity....................... $7,380 1.01% 1.30%
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Year Ended October 31, 1998
------------------------------------
% of
% of Aggregate
Aggregate Aggregate Commission
Fund Amount Commissions Transactions
- ---- ------ ----------- ------------
Asset Allocation.......................... $130,968 72.93% 78.11%
Equity Income............................. $108,651 40.75% 45.43%
Growth and Income......................... $118,050 32.53% 32.56%
Strategic Equity(1)....................... $26,480 22.26% 27.40%
Equity Value.............................. $298,078 38.48% 43.86%
Equity Growth............................. $56,784 5.76% 8.21%
- ---------------
(1) For the period from March 4, 1998 (commencement of operations) through
October 31, 1998.
Debt securities purchased or sold by the 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.
The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. 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 the fiscal year ended October 31,
1999. At October 31, 1999, (1) 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; (2) the Equity Income Fund
was party to a repurchase agreement with Chase Manhattan Bank with a value of
$36,620,000; (3) 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; (4) the Strategic Equity Fund was
party to a repurchase agreement with Chase Manhattan Bank with a value of
$7,414,000; (5) the Equity Value Fund held common stock of Chase Manhattan Corp.
with a value of $11,262,638, common stock of Merrill Lynch & Co. with a value of
$8,878,350, and was party to a repurchase agreement with Chase Manhattan Bank
with a value of $15,451,000; (6) the Equity Growth Fund held common stock of
Chase Manhattan Corp. with a value of $30,581,250, and was party to a repurchase
agreement with Chase Manhattan Bank with a value of $88,038,000; (7) the
International Equity Fund was party to a repurchase agreement with Chase
Manhattan Bank with a value of $28,704,000; (8) the
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Small Cap Value Fund was party to a repurchase agreement with Chase Manhattan
Bank with a value of $29,099,000.
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.
DISTRIBUTION PLANS
Prime A Shares Plan
Galaxy has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act (the "Rule") with respect to Prime A Shares of the Funds (the "Prime A
Shares Plan"). Under the Prime A Shares Plan, Galaxy may pay PDI or another
person for expenses and activities intended to result in the sale of Prime A
Shares, including the payment of commissions to broker-dealers and other
industry professionals who sell Prime A Shares and the direct or indirect cost
of financing such payments.
Under the Prime A Shares Plan, payments by Galaxy for distribution
expenses may not exceed the annualized rate of 0.30% of the average daily net
assets attributable to each Fund's outstanding Prime A Shares. As of the date of
this Prospectus, Galaxy intends to limit the Funds' payments for distribution
expenses to not more than 0.25% (on an annualized basis) of the average daily
net asset value of each Fund's outstanding Prime A Shares.
During the fiscal year ended October 31, 1999, Prime A Shares of the Funds
paid the following distribution fees under the Prime A Shares Plan:
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For the Fiscal Year Ended
Fund October 31, 1999
- ---- ----------------
Asset Allocation............................. $438
Equity Income................................ *
Growth and Income............................ $264
Strategic Equity............................. *
Equity Value................................. *
Equity Growth................................ $184
International Equity......................... N/A
Small Cap Value.............................. $357
Small Company Equity......................... *
Short-Term Bond.............................. *
Intermediate Government Income............... *
High Quality Bond............................ $63
Tax-Exempt Bond.............................. *
- ---------------------
* Prime A Shares were not offered during the period.
All amounts paid under the Prime A Shares Plan were paid to broker-dealers.
Prime B Shares Plan
Galaxy has adopted a Distribution and Services Plan pursuant to the Rule
with respect to Prime B Shares of the Funds (the "Prime B Shares Plan"). Under
the Prime B Shares Plan, Galaxy may pay (a) PDI or another person for expenses
and activities intended to result in the sale of Prime B Shares, including the
payment of commissions to broker-dealers and other industry professionals who
sell Prime B Shares and the direct or indirect cost of financing such payments,
(b) institutions for shareholder liaison services, which means personal services
for holders of Prime B Shares and/or the maintenance of shareholder accounts,
such as responding to customer inquiries and providing information on accounts,
and (c) institutions for administrative support services, which include but are
not limited to (i) transfer agent and sub-transfer agent services for beneficial
owners of Prime B Shares; (ii) aggregating and processing purchase and
redemption orders; (iii) providing beneficial owners with statements showing
their positions in Prime B Shares; (iv) processing dividend payments; (v)
providing sub-accounting services for Prime B Shares held beneficially; (vi)
forwarding shareholder communications, such as proxies, shareholder reports,
dividend and tax notices, and updating prospectuses to beneficial owners; and
(vii) receiving, translating and transmitting proxies executed by beneficial
owners.
Under the Prime B Shares Plan, payments by Galaxy (i) for distribution
expenses may not exceed the annualized rate of 0.75% of the average daily net
assets attributable to each such Fund's outstanding Prime B Shares, and (ii) to
a broker/dealer for shareholder liaison services and/or administrative support
services may not exceed the annual rates of 0.25% and 0.25%, respectively, of
the average daily net assets attributable to each such Fund's outstanding Prime
B Shares which are owned of record or beneficially by that broker/dealer's
customers for whom the
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broker/dealer is the dealer of record or shareholder of record or with whom it
has a servicing relationship. As of the date of this Statement of Additional
Information, Galaxy intends to limit each Fund's payments for shareholder
liaison and administrative support services under the Prime B Shares Plan to an
aggregate fee of not more than 0.25% (on an annualized basis) of the average
daily net asset value of Prime B Shares owned of record or beneficially by
customers of broker/dealers.
During the fiscal year ended October 31, 1999, Prime B Shares of the Funds
paid the following distribution fees under the Prime B Shares Plan:
For the Fiscal Year Ended
Fund October 31, 1999
- ---- ----------------
Asset Allocation................................ $754
Equity Income................................... *-
Growth and Income............................... $137
Strategic Equity................................ *
Equity Value.................................... *
Equity Growth................................... $268
International Equity............................ $537
Small Cap Value................................. $349
Small Company Equity............................ *
Short-Term Bond................................. *
Intermediate Government Income.................. *
High Quality Bond............................... $543
Tax-Exempt Bond................................. *
- ------------------------------
* Prime B Shares were not offered during the period.
During the fiscal year ended October 31, 1999, Prime B Shares of the Funds paid
the following shareholder servicing fees under the Prime B Shares Plan:
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For the Fiscal Year Ended
Fund October 31, 1999
- ---- ----------------
Asset Allocation................................ $2,263
Equity Income................................... *
Growth and Income............................... $412
Strategic Equity................................ *
Equity Value.................................... *
Equity Growth................................... $806
International Equity............................ $1,640
Small Cap Value................................. $1,046
Small Company Equity............................ *
Short-Term Bond................................. *
Intermediate Government Income.................. *
High Quality Bond............................... $1,629
Tax-Exempt Bond................................. *
- --------------------
* Prime B Shares were not offered during the period.
All amounts paid under the Prime B Shares Plan were paid to broker-dealers.
Both Distribution Plans
Payments for distribution expenses under the Prime A Shares Plan and Prime
B Shares Plan (the "12b-1 Plans") are subject to the Rule. The Rule defines
distribution expenses to include the cost of "any activity which is primarily
intended to result in the sale of shares issued by" Galaxy. The Rule provides,
among other things, that an investment company may bear such expenses only
pursuant to a plan adopted in accordance with the Rule. In accordance with the
Rule, the 12b-1 Plans provide that a report of the amounts expended under the
12b-1 Plans, and the purposes for which such expenditures were incurred, will be
made to the Board of Trustees for its review at least quarterly. The 12b-1 Plans
provide that it may not be amended to increase materially the costs which Prime
A Shares or Prime B Shares of a Fund may bear for distribution pursuant to the
12b-1 Plan without shareholder approval, and that any other type of material
amendment must be approved by a majority of the Board of Trustees, and by a
majority of the trustees who are neither "interested persons" (as defined in the
1940 Act) of Galaxy nor have any direct or indirect financial interest in the
operation of the 12b-1 Plans or in any related agreements (the "12b-1
Trustees"), by vote cast in person at a meeting called for the purpose of
considering such amendments.
Galaxy's Board of Trustees has concluded that there is a reasonable
likelihood that the 12b-1 Plans will benefit the Funds and holders of the Prime
A Shares and Prime B Shares. The 12b-1 Plans are subject to annual reapproval by
a majority of the 12b-1 Trustees and are terminable at any time with respect to
any Fund by a vote of a majority of the 12b-1 Trustees or by vote of the holders
of a majority of the Prime A Shares and Prime B Shares of the Fund involved. Any
agreement entered into pursuant to the 12b-1 Plans with a broker-dealer is
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terminable with respect to any Fund without penalty, at any time, by vote of a
majority of the 12b-1 Trustees, by vote of the holders of a majority of the
Prime B Shares of such Fund, by PDI or by the broker-dealer. An agreement will
also terminate automatically in the event of its assignment.
As long as the 12b-1 Plans are in effect, the nomination of the trustees
who are not interested persons of Galaxy (as defined in the 1940 Act) must be
committed to the discretion of the 12b-1 Trustees.
DISTRIBUTOR
PDI serves as Galaxy's distributor. PDI is a registered broker/dealer with
principal offices located at Four Falls Corporate Center, West Conshohocken,
Pennsylvania 19428-2961. Jane Haegele is the sole shareholder of PDI.
Unless otherwise terminated, the Distribution Agreement between Galaxy and
PDI remains in effect until November 30, 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.
PDI is entitled to the payment of a front-end sales charge on the sale of
Prime A Shares of the Funds as described in the Prospectuses and this Statement
of Additional Information.
Prior to December 1, 1999, First Data Distributors, Inc. ("FD
Distributors"), a wholly-owned subsidiary of PFPC, served as Galaxy's
distributor and was entitled to the payment of front-end sales charges on the
sale of Prime A Shares of the Funds. During the fiscal year ended October 31,
1999, FD Distributors received front-end sales charges in connection with sales
of Prime A Shares as follows:
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For the Fiscal Year Ended
Fund October 31, 1999
- ---- ----------------
Asset Allocation............................. $16,496
Equity Income................................... *
Growth and Income............................... $7,455
Strategic Equity................................ *
Equity Value.................................... *
Equity Growth................................... $5,074
International Equity............................ $552
Small Cap Value................................. $9,851
Small Company Equity............................ *
Short-Term Bond................................. *
Intermediate Government Income.................. *
High Quality Bond............................... $2,608
Tax-Exempt Bond................................. *
- ------------------
* Prime A Shares were not offered during the period.
FD Distributors retained none of the amounts shown in the above table.
PDI is also entitled to the payment of contingent deferred sales charges
upon the redemption of Prime B Shares of the Fund as described in the
Prospectuses and this Statement of Additional Information.
Prior to December 1, 1999, FD Distributors was entitled to payment of such
contingent deferred sales charges. During the fiscal year ended October 31,
1999, FD Distributors received contingent deferred sales charges in connection
with Prime B Share redemptions as follows:
For the Fiscal Year Ended
Fund October 31, 1999
- ---- ----------------
Asset Allocation................................ $21,170
Equity Income................................... *
Growth and Income............................... $5,551
Strategic Equity................................ *
Equity Value.................................... *
Equity Growth................................... $8,866
International Equity............................ $16,620
Small Cap Value................................. $8,032
Small Company Equity............................ *
Short-Term Bond................................. *
Intermediate Government Income.................. *
High Quality Bond............................... $11,302
Tax-Exempt Bond................................. *
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- ----------------
* Prime B Shares were not offered during the period.
FD Distributors retained none of the amounts shown in the aboved table.
The following table shows all sales charges, commissions and other
compensation received by FD Distributors directly or indirectly from the Funds
with respect to their Prime A Shares and Prime B Shares during the fiscal year
ended October 31, 1999:
Brokerage
Net Compensation Commissions in
Underwriting on Redemption Connection
Discounts and and with Fund Other
Fund* Commissions(1) Repurchase(2) Transactions Compensation(3)
- ----- -------------- ------------- ------------ ---------------
Asset Allocation $37,665 $21,170 $0 $2,596
Growth and
Income $13,006 $5,551 $0 $524
Equity Growth $13,940 $8,866 $0 $656
International
Equity $17,172 $16,620 $0 $1,531
Small Cap Value $17,884 $8,032 $0 $1,321
High Quality
Bond $13,910 $11,302 $0 $1,765
- ------------------
* A Prime Shares and B Prime Shares of this Equity Income, Strategic Equity,
Equity Value, Small Company Equity, Short-Term Bond, Intermediate
Government Income and Tax-Exempt Bond Funds were not offered during the
period.
(1) Represents amounts received from front-end sales charges on Prime A Shares
and commissions received in connection with sales of Prime B Shares.
(2) Represents amounts received from contingent deferred sales charges on
Prime B Shares Plan. The basis on which such sales charges are paid is
described in the Prospectus relating to Prime B Shares. All such amounts
were paid to affiliates of Fleet.
(3) Represents payments made under the Prime A Shares Plan and Prime B Shares
during the fiscal year ended October 31, 1999 (see "Distribution Plans"
above).
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 the Prospectuses 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 years and periods prior to the fiscal year ended October 31, 1999,
the financial highlights for the Funds
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included in the Prospectuses and the financial statements for such years and
periods contained in the Annual Reports were audited by PricewaterhouseCoopers
LLP, Galaxy's former auditors.
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.
PERFORMANCE AND YIELD INFORMATION
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:
YIELD = 2[(a-b)/cd +1 )6 - 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
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call provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market value of such debt
obligations. Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts 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.
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.
Based on the foregoing calculations, the standardized yield for Prime A
Shares and Prime B Shares of the Funds for the 30-day period ended October 31,
1999 were as set forth below.
Fund Prime A Prime B
- ---- ------- -------
Asset Allocation................................ 2.37% 1.82%
Equity Income................................... N/A N/A
Growth and Income............................... 0.66% -0.04%
Strategic Equity............................... N/A N/A
Equity Value ................................... N/A N/A
Equity Growth................................... -0.05% -0.72%
International Equity............................ 0.24% -0.45%
Small Cap Value................................. 1.66% 0.91%
Small Company Equity............................ N/A N/A
Short-Term Bond................................. N/A N/A
Intermediate Government Income.................. N/A N/A
High Quality Bond............................... 5.66% 4.89%
Tax-Exempt Bond................................. N/A N/A
The "tax-equivalent" yield of the Tax-Exempt Bond Fund is computed by (a)
dividing the portion of the Fund's yield (calculated as above) that is exempt
from federal income tax by one
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minus a stated federal income tax rate and (b) adding that figure to that
portion, if any, of the yield that is not exempt from federal income tax. The
Tax-Exempt Bond Fund did not offer Prime A Shares and Prime B Shares during the
30-day period ended October 31, 1999.
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:
T = [(ERV/P) - 1](1/n)
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. In addition, the Funds' average annual total return and
aggregate total return quotations will reflect the deduction of the maximum
sales load charged in connection with purchases of Prime A Shares or redemptions
of Prime B Shares, as the case may be.
The aggregate total returns for Prime A Shares and Prime B Shares of the
Funds from November 1, 1998 (date of initial public offering) to October 31,
1999 are set forth below:
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Fund Prime A Prime B
- ---- ------- -------
Asset Allocation............................... 3.66% 3.91%
Equity Income.................................. N/A N/A
Growth and Income.............................. 8.47% 8.98%
Strategic Equity.............................. N/A N/A
Equity Value .................................. N/A N/A
Equity Growth.................................. 20.28% 21.79%
International Equity........................... 22.60% 23.74%
Small Cap Value................................ -0.02% 0.18%
Small Company Equity........................... N/A N/A
Short-Term Bond................................ N/A N/A
Intermediate Government Income................. N/A N/A
High Quality Bond.............................. -7.31% -8.03%
Tax-Exempt Bond................................ N/A N/A
As stated in the Prospectus, the Funds may also calculate total return
quotations without deducting the maximum sales charge imposed on purchases of
Prime A Shares or redemptions of Prime B Shares. The effect of not deducting the
sales charge will be to increase the total return reflected.
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 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 and the performance of the Small Company Equity
Fund and Small Cap Value Fund may be compared to the NASDAQ Composite Index, an
unmanaged index of over-the-counter stock prices.
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. Performance data will be
calculated separately for Trust Shares, Retail A Shares, Retail B Shares, Prime
A Shares, Prime B Shares and BKB Shares of the Funds.
The standard yield is computed as described above. 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. The Tax-Exempt Bond Fund may also quote
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its "tax equivalent yield" which demonstrates the level of taxable yield
necessary to produce an after-tax equivalent yield to the Fund's tax-free yield.
It is calculated as described above. The Fund's tax-equivalent yield will always
be higher than its yield.
The Funds may also advertise their performance using "average annual total
return" figures over various periods of time. Such total return figures reflect
the average percentage change in the value of an investment in a Fund from the
beginning date of the measuring period to the end of the measuring period and
are calculated as described above. Average total return figures will be given
for the most recent one-, five- and ten-year periods (if applicable), and may be
given for other periods as well, such as from the commencement of a Fund's
operations, or on a year-by-year basis. Each Fund may also use "aggregate total
return" figures for various periods, representing the cumulative change in the
value of an investment in a Fund for the specified period. Both methods of
calculating total return reflect the maximum front-end sales load for Prime A
Shares of the Funds and the applicable contingent deferred sales charge for
Prime B Shares of the Funds and assume that dividends and capital gain
distributions made by a Fund during the period are reinvested in Fund shares.
The Funds may also advertise total return data without reflecting the
sales charges imposed on the purchase of Prime A Shares or the redemption of
Prime B Shares in accordance with the rules of the SEC. Quotations that do not
reflect the sales charges will be higher than quotations that do reflect the
sales charges.
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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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.
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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, 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,
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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 (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,
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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, 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%).
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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 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 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
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<PAGE>
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%); 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
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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, 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./
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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%).
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.
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FINANCIAL STATEMENTS
Galaxy's Annual Reports to Shareholders with respect to the Funds for the
fiscal year ended October 31, 1999 have been filed with the SEC. The financial
statements 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 reports
thereon also appear in such Annual Reports and are incorporated herein by
reference. The financial statements in such Annual Reports have been
incorporated herein by reference in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing. The financial
statements and Financial Highlights included in the Annual Report for the Funds
for prior periods were audited by PricewaterhouseCoopers LLP, Galaxy's former
independent auditors. The report of PricewaterhouseCoopers LLP dated December
23, 1998 on the Funds' financial statements included in the Funds' Annual Report
to the Shareholders for the fiscal year ended October 31, 1998, is also
incorporated herein by reference.
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<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current opinion of
the creditworthiness 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:
A-1
<PAGE>
"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 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.
A-2
<PAGE>
"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 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 best 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 Financial 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
A-3
<PAGE>
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 Financial 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 Financial 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.
A-4
<PAGE>
"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 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 than the best bonds because margins of
protection may not be as large as in "Aaa" securities or
A-5
<PAGE>
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 change 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 denote 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 factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's 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 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, certain of the 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 by a Fund
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase
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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.
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
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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 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
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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 Tax-Exempt 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 the 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.
Current Price
(points and
Maturity thirty-seconds
Issue Coupon Issue Date Date of a point)
- ------------------------------------------------ --------------------------
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
The current value of the portfolio is $5,003,750.
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
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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.
Cash Market Futures Market
----------- --------------
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
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 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
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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.
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
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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 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
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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.
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