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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
- - Prospectus for Retail A Shares of the Funds and Retail B Shares of the
Tax-Exempt Bond Fund dated February 29, 2000
- - 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.
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TABLE OF CONTENTS
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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
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TABLE OF CONTENTS
(CONTINUED)
Page
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
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.............................................................................84
MISCELLANEOUS.....................................................................................85
FINANCIAL STATEMENTS..............................................................................92
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 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
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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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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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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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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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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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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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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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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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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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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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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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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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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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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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<PAGE>
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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<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:
<TABLE>
<CAPTION>
REALLOWANCE TO
DEALERS
-------
AS A % OF
OFFERING PRICE
AMOUNT OF TRANSACTION PER SHARE
- --------------------- ---------
<S> <C>
Less than $50,000 3.25
$50,000 but less than $100,000 3.00
$100,000 but less than $250,000 2.50
$250,000 but less than $500,000 2.00
$500,000 and over 0.00
</TABLE>
The appropriate reallowance to dealers will be paid by PDI to
broker-dealer organizations which have entered into agreements with PDI. The
reallowance to dealers may be changed from time to time.
Certain affiliates of Fleet may, at their own expense, provide
additional compensation to broker-dealer affiliates of Fleet and to unaffiliated
broker-dealers, whose customers purchase significant amounts of Retail A Shares
of the Funds. Such compensation will not represent an additional expense to the
Funds or their shareholders, since it will be paid from the assets of Fleet's
affiliates.
In certain situations or for certain individuals, the front-end sales
charge for Retail A Shares of the Funds may be waived either because of the
nature of the investor or the reduced sales effort required to attract such
investments. In order to receive the sales charge waiver, an investor must
explain the status of his or her investment at the time of purchase. In addition
to the sales charge waivers described in the 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:
- 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;
- purchases by current and retired members of Galaxy's Board of
Trustees and members of their immediate families;
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<PAGE>
- purchases by officers, directors, employees and retirees of
FleetBoston Financial Corporation and any of its affiliates
and members of their immediate families;
- purchases by officers, directors, employees and retirees of
PFPC Inc. and members of their immediate families;
- purchases by persons who are also plan participants in any
employee benefit plan which is the record or beneficial holder
of Trust Shares of the Funds or any of the other portfolios
offered by Galaxy;
- purchases by institutional investors, including but not
limited to bank trust departments and registered investment
advisers;
- purchases by clients of investment advisers or financial
planners who place trades for their own accounts if such
accounts are linked to the master accounts of such investment
advisers or financial planners on the books of the
broker-dealer through whom Retail A Shares are purchased;
- purchases by institutional clients of broker-dealers,
including retirement and deferred compensation plans and the
trusts used to fund these plans, which place trades through an
omnibus account maintained with Galaxy by the broker-dealer;
and
- purchases prior to July 1, 1999 by former deposit customers of
financial institutions (other than registered broker-dealers)
acquired by FleetBoston Financial Corporation in February
1998.
COMPUTATION OF OFFERING PRICE - RETAIL A SHARES
An illustration of the computation of the offering price per share of
Retail A Shares of the Funds, 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>
<TABLE>
<CAPTION>
New Jersey
Tax-Exempt Municipal
Bond Fund Bond Fund
--------- ---------
<S> <C> <C>
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
<CAPTION>
New York Connecticut
Municipal Municipal
Bond Fund Bond Fund
--------- ---------
<S> <C> <C>
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
<CAPTION>
Massachusetts Rhode Island
Municipal Municipal
Bond Fund Bond Fund
--------- ---------
<S> <C> <C>
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
</TABLE>
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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<PAGE>
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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<PAGE>
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:
<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
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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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
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<PAGE>
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.
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:
<TABLE>
<CAPTION>
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
<S> <C> <C>
Dwight E. Vicks, Jr. Chairman & Trustee President & Director, Vicks Lithograph &
Vicks Lithograph & Printing Corporation (book manufacturing
Printing Corporation and commercial printing); Director, Utica
Commercial Drive First Insurance Company; Trustee, Savings
P.O. Box 270 Bank of Utica; Director, Monitor Life
Yorkville, NY 13495 Insurance Company; Director, Commercial
Age 66 Travelers Mutual Insurance Company;
Trustee, The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
<S> <C> <C>
John T. O'Neill(1) President, Private Investor; Executive Vice President
28 Narragansett Bay Avenue Treasurer & and CFO, Hasbro, Inc. (toy and game
Warwick, RI 02889 Trustee 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.
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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Positions Principal Occupation
with The During Past 5 Years
Name and Address and Age Galaxy Fund and Other Affiliations
- ------------------------ ----------- ----------------------
<S> <C> <C>
Bradford S. Wellman(1) Trustee Private Investor; Vice President and
2468 Ohio Street Director, Acadia Management Company
Bangor, ME 04401 (investment services); Director, Essex
Age 68 County Gas Company, until January 1994;
Director, Maine Mutual Fire Insurance Co.;
Member, Maine Finance Authority; Trustee,
The Galaxy VIP Fund; Trustee,
Galaxy Fund II.
W. Bruce McConnel, III Secretary Partner of the law firm Drinker Biddle &
One Logan Square Reath LLP, Philadelphia, Pennsylvania.
18th & Cherry Streets
Philadelphia, PA 19103
Age 57
Jylanne Dunne Vice President and Vice President, PFPC Inc., 1990 to present.
PFPC Inc. Assistant Treasurer
4400 Computer Drive
Westborough, MA 01581-5108
Age 40
William Greilich Vice President PFPC Inc., 1991-96; Vice President and
PFPC Inc. Division Manager, PFPC Inc., 1996 to
4400 Computer Drive 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.
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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>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Total Compensation
Aggregate as Part from Galaxy and
Compensation From of Fund Fund Complex*Paid
Name of Person/position Galaxy Expenses to Trustees
- ---------------------- ------ -------- -----------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</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 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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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:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
- ----------------------
* 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:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
- ----------------------
* 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:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
- ----------------------
* 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.
-63-
<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:
<TABLE>
<CAPTION>
COMBINED AVERAGE DAILY NET ASSETS ANNUAL RATE
<S> <C> <C>
Up to $2.5 billion.......................... 0.090%
From $2.5 to $5 billion..................... 0.085%
From $5 to $12 billion...................... 0.075%
From $12 to $15 billion..................... 0.065%
From $15 to $18 billion..................... 0.060%
Over $18 billion............................ 0.0575%
</TABLE>
Prior to September 10, 1998, Galaxy paid PFPC administration fees based on
the combined average daily net assets of the Funds and all other portfolios
offered by Galaxy at the following annual rates:
<TABLE>
<CAPTION>
COMBINED AVERAGE DAILY NET ASSETS ANNUAL RATE
<S> <C> <C>
Up to $2.5 billion.......................... 0.090%
From $2.5 to $5 billion..................... 0.085%
Over $5 billion............................. 0.075%
</TABLE>
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:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
-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:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
- ----------------------
* 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
-65-
<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
-66-
<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:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
- ----------------------
* 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
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<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
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<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:
<TABLE>
<CAPTION>
SHAREHOLDER
FOR THE FISCAL YEAR ENDED OCTOBER 31: DISTRIBUTION FEES SERVICING FEES
- ------------------------------------- ----------------- --------------
<S> <C> <C>
1999....................................... $21,499 $4,520
1998....................................... $15,405 $3,555
1997....................................... $7,788 $1,784
</TABLE>
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
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<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:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
- ----------------------
* 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>
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>
Tax-Exempt $27,824 $14,680 $0 $58,963
Bond
New Jersey $13,008 NA $0 $1,071
Municipal
Bond
New York $64,555 NA $0 $67,227
Municipal
Bond
Connecticut $37,006 NA $0 $38,909
Municipal
Bond
Massachusetts $70,521 NA $0 $63,550
Municipal
Bond
Rhode Island $12,453 NA $0 $0
Municipal
Bond
</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
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<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:
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<PAGE>
(6)
YIELD = 2[((a-b)/cd+1) -1]
Where: a = dividends and interest earned by a Fund during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the
period, entitled to receive dividends; and
d = maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on debt obligations held by a Fund is calculated by computing the yield
to maturity of each obligation based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by the Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be 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.
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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
TAX- TAX-
FUND STANDARD EQUIVALENT STANDARD 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>
1/n
T = [(ERV/P)-1]
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the l, 5 or 10 year (or other)
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:
<TABLE>
<CAPTION>
FUND RETAIL A TRUST
- ---- -------- -----
<S> <C> <C>
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) --%*
</TABLE>
- ----------------------
* 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: 2000
Equivalent yields: Tax-exempt
<TABLE>
<CAPTION>
New Jersey &
Federal New Jersey Tax Equivalent Yields.**
$Taxable Income* State Federal Effective ---------------------------------------------------------------------------------
Single Rate Rate Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-20,000 1.40% 15.0% 16.19% 3.58% 4.18% 4.77% 5.37% 5.97% 6.56% 7.16% 7.76% 8.35% 8.95% 9.55%
20,001-26,250 1.75% 15.0% 16.49% 3.59% 4.19% 4.79% 5.39% 5.99% 6.59% 7.18% 7.78% 8.38% 8.98% 9.58%
26,251-35,000 1.75% 28.0% 29.26% 4.24% 4.95% 5.65% 6.36% 7.07% 7.77% 8.48% 9.19% 9.90% 10.60% 11.31%
35,001-40,000 3.50% 28.0% 30.52% 4.32% 5.04% 5.76% 6.48% 7.20% 7.92% 8.64% 9.36% 10.07% 10.79% 11.51%
40,001-63,550 5.525% 28.0% 31.98% 4.41% 5.15% 5.88% 6.62% 7.35% 8.09% 8.82% 9.56% 10.29% 11.03% 11.76%
63,551-75,000 5.525% 31.0% 34.81% 4.60% 5.37% 6.14% 6.90% 7.67% 8.44% 9.20% 9.97% 10.74% 11.50% 12.27%
75,001-132,600 6.37% 31.0% 35.40% 4.64% 5.42% 6.19% 6.97% 7.74% 8.51% 9.29% 10.06% 10.84% 11.61% 12.38%
132,601-288,350 6.37% 36.0% 40.08% 5.01% 5.84% 6.68% 7.51% 8.34% 9.18% 10.01% 10.85% 11.68% 12.52% 13.35%
Over 288,350 6.37% 39.6% 43.45% 5.31% 6.19% 7.07% 7.96% 8.84% 9.73% 10.61% 11.49% 12.38% 13.26% 14.15%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
New Jersey &
$Taxable Federal New Jersey Tax Equivalent Yields.**
Income* State Federal Effective ----------------------------------------------------------------------------------
Married Jointly Rate Rate Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-20,000 1.40% 15.0% 16.19% 3.58% 4.18% 4.77% 5.37% 5.97% 6.56% 7.16% 7.76% 8.35% 8.95% 9.55%
20,001-43,850 1.75% 15.0% 16.49% 3.59% 4.19% 4.79% 5.39% 5.99% 6.59% 7.18% 7.78% 8.38% 8.98% 9.58%
43,851-50,000 1.75% 28.0% 29.26% 4.24% 4.95% 5.65% 6.36% 7.07% 7.77% 8.48% 9.19% 9.90% 10.60% 11.31%
50,001-70,000 2.45% 28.0% 29.76% 4.27% 4.98% 5.69% 6.41% 7.12% 7.83% 8.54% 9.25% 9.97% 10.68% 11.39%
70,001-80,000 3.50% 28.0% 30.52% 4.32% 5.04% 5.76% 6.48% 7.20% 7.92% 8.64% 9.36% 10.07% 10.79% 11.51%
80,001-105,950 5.525% 28.0% 31.98% 4.41% 5.15% 5.88% 6.62% 7.35% 8.09% 8.82% 9.56% 10.29% 11.03% 11.76%
105,951-150,000 5.525% 31.0% 34.81% 4.60% 5.37% 6.14% 6.90% 7.67% 8.44% 9.20% 9.97% 10.74% 11.50% 12.27%
150,001-161,450 6.37% 31.0% 35.40% 4.64% 5.42% 6.19% 6.97% 7.74% 8.51% 9.29% 10.06% 10.84% 11.61% 12.38%
161,451-288,350 6.37% 36.0% 40.08% 5.01% 5.84% 6.68% 7.51% 8.34% 9.18% 10.01% 10.85% 11.68% 12.52% 13.35%
Over 288,350 6.37% 39.6% 43.45% 5.31% 6.19% 7.07% 7.96% 8.84% 9.73% 10.61% 11.49% 12.38% 13.26% 14.15%
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
<PAGE>
NEW YORK STATE AND CITY: 2000
Equivalent yields: Tax-exempt
<TABLE>
<CAPTION>
New York New York
State and State City
State Federal and Federal New York Tax Equivalent Yields:****
$Taxable Income* City State City Federal Effective Effective --------------------------------------------
Single Rate*** Rate Combined Rate Rate Rate*** 3.0% 3.5% 4.0% 4.5% 5.0%
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 8,000 3.021% 4% 7.021% 15% 18.40% 20.9679% 3.80% 4.43% 5.06% 5.69% 6.33%
8,001 - 11,000 3.021% 4.5% 7.521% 15% 18.825% 21.3929% 3.82% 4.45% 5.09% 5.72% 6.36%
11,001 - 12,000 3.021% 5.25% 8.271% 15% 19.4625% 22.0304% 3.85% 4.49% 5.13% 5.77% 6.41%
12,001 - 13,000 3.665% 5.25% 8.915% 15% 19.4625% 22.5778% 3.87% 4.52% 5.17% 5.81% 6.46%
13,001 - 20,000 3.665% 5.9% 9.565% 15% 20.015% 23.1303% 3.90% 4.55% 5.20% 5.85% 6.50%
20,001 - 25,000 3.665% 6.85% 10.515% 15% 20.8225% 23.9378% 3.94% 4.60% 5.26% 5.92% 6.57%
25,001 - 26,250 3.722% 6.85% 10.572% 15% 20.8225% 23.9863% 3.95% 4.60% 5.26% 5.92% 7.76%
26,251 - 50,000 3.722% 6.85% 10.572% 28% 32.9320% 35.6119% 4.66% 5.44% 6.21% 6.99% 7.77%
50,001 - 63,550 3.779% 6.85% 10.629% 28% 32.9320% 35.6530% 4.66% 5.44% 6.22% 6.99% 7.77%
63,551 - 132,600 3.779% 6.85% 10.629% 31% 35.7265% 38.3341% 4.86% 5.68% 6.49% 7.30% 8.11%
132,601 - 288,350 3.779% 6.85% 10.629% 36% 40.3840% 42.8026% 5.24% 6.12% 6.99% 7.87% 8.74%
Over 288,350 3.779% 6.85% 10.629% 39.6% 43.7374% 46.0200% 5.56% 6.48% 7.41% 8.34% 9.26%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
New York Tax Equivalent Yields:****
$Taxable Income* -----------------------------------------------------------------
Single 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0 - 8,000 6.96% 7.59% 8.22% 8.86% 9.49% 10.12%
8,001 - 11,000 7.00% 7.63% 8.27% 8.91% 9.54% 10.18%
11,001 - 12,000 7.05% 7.70% 8.34% 8.98% 9.62% 10.26%
12,001 - 13,000 7.10% 7.75% 8.40% 9.04% 9.69% 10.33%
13,001 - 20,000 7.15% 7.81% 8.46% 9.11% 9.76% 10.41%
20,001 - 25,000 7.23% 7.89% 8.55% 9.20% 9.86% 10.52%
25,001 - 26,250 7.24% 7.89% 8.55% 9.21% 9.87% 10.52%
26,251 - 50,000 8.54% 9.32% 10.10% 10.87% 11.65% 12.42%
50,001 - 63,550 8.55% 9.32% 10.10% 10.88% 11.66% 12.43%
63,551 - 132,600 8.92% 9.73% 10.54% 11.35% 12.16% 12.97%
132,601 - 288,350 9.62% 10.49% 11.36% 12.24% 13.11% 13.99%
Over 288,350 10.19% 11.12% 12.04% 12.97% 13.89% 14.82%
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
New York New York
State and State City
State Federal and Federal New York Tax Equivalent Yields:****
$Taxable Income* City State City Federal Effective Effective ----------------------------------------------
Single Rate*** Rate Combined Rate Date Rate*** 3.0% 3.5% 4.0% 4.5% 5.0%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 16,000 3.021% 4% 7.021% 15% 18.40% 20.9679% 3.80% 4.43% 5.06% 5.69% 6.33%
16,001 - 21,600 3.021% 4.5% 7.521% 15% 18.8250% 21.3929% 3.82% 4.45% 5.09% 5.72% 6.36%
21,601 - 22,000 3.665% 4.5% 8.165% 15% 18.8250% 21.9403% 3.84% 4.48% 5.12% 5.76% 6.41%
22,001 - 26,000 3.665% 5.25% 8.915% 15% 19.4625% 22.5778% 3.87% 4.52% 5.17% 5.81% 6.46%
26,001 - 40,000 3.665% 5.9% 9.565% 15% 20.0150% 23.1303% 3.90% 4.55% 5.20% 5.85% 6.50%
40,001 - 43,850 3.665% 6.85% 10.515% 15% 20.8225% 23.9378% 3.94% 4.60% 5.26% 5.92% 6.57%
43,851 - 45,000 3.665% 6.85% 10.515% 28% 32.9320% 35.5709% 4.66% 5.43% 6.21% 6.98% 7.76%
45,001 - 105,950 3.722% 6.85% 10.572% 28% 32.9320% 35.6119% 4.66% 5.44% 6.21% 6.99% 7.77%
105,951 - 161,450 3.779% 6.85% 10.629% 31% 35.7265% 38.3341% 4.86% 5.68% 6.49% 7.30% 8.11%
161,451 - 288,350 3.779% 6.85% 10.629% 36% 40.3840% 42.8026% 5.24% 6.12% 6.99% 7.87% 8.74%
over 288,350 3.779% 6.85% 10.629% 39.6% 43.7374% 46.0200% 5.56% 6.48% 7.41% 8.34% 9.26%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
New York Tax Equivalent Yields:****
$Taxable Income* ---------------------------------------------------------
Single 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0 - 16,000 6.96% 7.59% 8.22% 8.86% 9.49% 10.12%
16,001 - 21,600 7.00% 7.63% 8.27% 8.91% 9.54% 10.18%
21,601 - 22,000 7.05% 7.69% 8.33% 8.97% 9.61% 10.25%
22,001 - 26,000 7.10% 7.75% 8.40% 9.04% 9.69% 10.33%
26,001 - 40,000 7.15% 7.81% 8.46% 9.11% 9.76% 10.41%
40,001 - 43,850 7.23% 7.89% 8.55% 9.20% 9.86% 10.52%
43,851 - 45,000 8.54% 9.31% 10.09% 10.86% 11.64% 12.42%
45,001 - 105,950 8.54% 9.32% 10.10% 10.87% 11.65% 12.42%
105,951 - 161,450 8.92% 9.73% 10.54% 11.35% 12.16% 12.97%
161,451 - 288,350 9.62% 10.49% 11.36% 12.24% 13.11% 13.99%
over 288,350 10.19% 11.12% 12.04% 12.97% 13.89% 14.82%
- ----------------------------------------------------------------------------------
</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 2000, 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 New
York State and New York City tax and surcharge rates for 2000.
*** The New York City rate is comprised of the tax base rate and city
surcharge for 2000.
**** 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 also may use tax-equivalency tables in advertising and
sales literature. The interest earned by the Municipal Securities in the Fund's
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>
CONNECTICUT: 2000
Equivalency yields: Tax-Exempt
<TABLE>
<CAPTION>
Combined Connecticut Tax-Equivalent Yields**
$Taxable Income* State Federal Effective ---------------------------------------------------------------------------------------
Single Rate Rate Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-26,250 3.96% 15% 18.37% 3.68% 4.29% 4.90% 5.51% 6.13% 6.74% 7.35% 7.96% 8.58% 9.19% 9.80%
26,251-63,550 4.50% 28% 31.24% 4.36% 5.09% 5.82% 6.54% 7.27% 8.00% 8.73% 9.45% 10.18% 10.91% 11.63%
63,551-132,600 4.50% 31% 34.11% 4.55% 5.31% 6.07% 6.83% 7.59% 8.35% 9.11% 9.86% 10.62% 11.38% 12.14%
132,601-288,350 4.50% 36% 38.88% 4.91% 5.73% 6.54% 7.36% 8.18% 9.00% 9.82% 10.63% 11.45% 12.27% 13.09%
Over 288,350 4.50% 39.6% 42.32% 5.20% 6.07% 6.93% 7.80% 8.67% 9.54% 10.40% 11.27% 12.14% 13.00% 13.87%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
$Taxable Income* Combined Connecticut Tax-Equivalent Yields**
Married Filing State Federal Effective --------------------------------------------------------------------------------------
Jointly Rate Rate Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-43,850 3.825% 15% 18.25% 3.67% 4.28% 4.89% 5.50% 6.12% 6.73% 7.34% 7.95% 8.56% 9.17% 9.79%
43,851-105,950 4.50% 28% 31.24% 4.36% 5.09% 5.82% 6.54% 7.27% 8.00% 8.73% 9.45% 10.18% 10.91% 11.63%
105,951-161,450 4.50% 31% 34.11% 4.55% 5.31% 6.07% 6.83% 7.59% 8.35% 9.11% 9.86% 10.62% 11.38% 12.14%
161,451-288,350 4.50% 36% 38.88% 4.91% 5.73% 6.54% 7.36% 8.18% 9.00% 9.82% 10.63% 11.45% 12.27% 13.09%
Over 288,350 4.50% 39.6% 42.32% 5.20% 6.07% 6.93% 7.80% 8.67% 9.54% 10.40% 11.27% 12.14% 13.00% 13.87%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income for Connecticut tax purposes is the
same as defined in the Internal Revenue Code. In fact, however, Connecticut
taxable income may differ due to differences in exemptions, itemized
deductions or other items.
** Each entry represents the taxable yield that is the equivalent to the
specified Federal and Connecticut tax-exempt yield for a Connecticut tax
payer in the specified income bracket.
-81-
<PAGE>
MASSACHUSETTS: 2000
Equivalent Yields: Tax-Exempt
<TABLE>
<CAPTION>
Combined Massachusetts Tax-Equivalent Yields**
$Taxable Income State Federal Effective ------------------------------------------------------------------------------------
Single* Rate Rate Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-26,250 5.85% 15.0% 19.97% 3.75% 4.37% 5.00% 5.62% 6.25% 6.87% 7.50% 8.12% 8.75% 9.37% 10.00%
26,251-63,550 5.85% 28.0% 32.21% 4.43% 5.16% 5.90% 6.64% 7.38% 8.11% 8.85% 9.59% 10.33% 11.06% 11.80%
63,551-132,600 5.85% 31.0% 35.04% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.24% 10.01% 10.78% 11.55% 12.32%
132,601-288,350 5.85% 36.0% 39.74% 4.98% 5.81% 6.64% 7.47% 8.30% 9.13% 9.96% 10.79% 11.62% 12.45% 13.28%
Over 288,350 5.85% 39.6% 43.13% 5.28% 6.15% 7.03% 7.91% 8.79% 9.67% 10.55% 11.43% 12.31% 13.19% 14.07%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
$Taxable Income* Combined Massachusetts Tax-Equivalent Yields**
Married Filing State Federal Effective ------------------------------------------------------------------------------------
Jointly Rate Rate Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-43,850 5.85% 15.0% 19.97% 3.75% 4.37% 5.00% 5.62% 6.25% 6.87% 7.50% 8.12% 8.75% 9.37% 10.00%
43,851-105,950 5.85% 28.0% 32.21% 4.43% 5.16% 5.90% 6.64% 7.38% 8.11% 8.85% 9.59% 10.33% 11.06% 11.80%
105,951-161,450 5.85% 31.0% 35.04% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.24% 10.01% 10.78% 11.55% 12.32%
161,451-288,350 5.85% 36.0% 39.74% 4.98% 5.81% 6.64% 7.47% 8.30% 9.13% 9.96% 10.79% 11.62% 12.45% 13.28%
Over 288,350 5.85% 39.6% 43.13% 5.28% 6.15% 7.03% 7.91% 8.79% 9.67% 10.55% 11.43% 12.31% 13.19% 14.07%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income for Massachusetts tax purposes is
the same as defined in the Internal Revenue Code. In fact, however,
Massachusetts taxable income may differ due to differences in exemptions,
itemized deductions or other items.
** Each entry represents the taxable yield that is the equivalent to the
specified Federal and Massachusetts tax-exempt yield for a Massachusetts
tax payer in the specified income bracket.
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<PAGE>
RHODE ISLAND: 2000
Equivalent yields: Tax-Exempt
<TABLE>
<CAPTION>
Combined Rhode Island Tax-Equivalent Yields**
$Taxable Income State Federal Effective --------------------------------------------------------------------------------------
Single* Rate Rate Rate 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-26,250 3.90% 15.0% 18.32% 3.67% 4.29% 4.90% 5.51% 6.12% 6.73% 7.35% 7.96% 8.57% 9.18% 9.79%
26,251-63,550 7.28% 28.0% 33.24% 4.49% 5.24% 5.99% 6.74% 7.49% 8.24% 8.99% 9.74% 10.49% 11.23% 11.98%
63,551-132,600 8.06% 31.0% 36.56% 4.73% 5.52% 6.31% 7.09% 7.88% 8.67% 9.46% 10.25% 11.03% 11.82% 12.61%
132,601-288,350 9.36% 36.0% 41.99% 5.17% 6.03% 6.90% 7.76% 8.62% 9.48% 10.34% 11.20% 12.07% 12.93% 13.79%
Over 288,350 10.30% 39.6% 45.82% 5.54% 6.46% 7.38% 8.31% 9.23% 10.15% 11.07% 12.00% 12.92% 13.84% 14.77%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
$Taxable Income* Combined Rhode Island Tax-Equivalent Yields**
Married Filing State Federal Effective --------------------------------------------------------------------------------------
Jointly Rate Rate Rates 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-43,850 3.90% 15.0% 18.32% 3.67% 4.29% 4.90% 5.51% 6.12% 6.73% 7.35% 7.96% 8.57% 9.18% 9.79%
43,851-105,950 7.28% 28.0% 33.24% 4.49% 5.24% 5.99% 6.74% 7.49% 8.24% 8.99% 9.74% 10.49% 11.23% 11.98%
105,951-161,450 8.06% 31.0% 36.56% 4.73% 5.52% 6.31% 7.09% 7.88% 8.67% 9.46% 10.25% 11.03% 11.82% 12.61%
161,451-288,350 9.36% 36.0% 41.99% 5.17% 6.03% 6.90% 7.76% 8.62% 9.48% 10.34% 11.20% 12.07% 12.93% 13.79%
Over 288,350 10.30% 39.6% 45.82% 5.54% 6.46% 7.38% 8.31% 9.23% 10.15% 11.07% 12.00% 12.92% 13.84% 14.77%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income for Rhode Island tax purposes is
the same as defined in the Internal Revenue Code. In fact, however, Rhode
Island taxable income may differ due to differences in exemptions, itemized
deductions or other items.
** Each entry represents the taxable yield that is the equivalent to the
specified Federal and Rhode Island tax-exempt yield for a Rhode Island tax
payer in the specified income bracket.
-83-
<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
-84-
<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 --
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<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
-86-
<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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<PAGE>
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-
-88-
<PAGE>
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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<PAGE>
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:
"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 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 obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
A-4
<PAGE>
"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 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
A-5
<PAGE>
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.
"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
A-6
<PAGE>
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.
"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.
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<PAGE>
"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.
"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.
A-8
<PAGE>
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.
"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-9
<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 the purchase of long-term bonds
in light of the availability of advantageous interim investments,
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<PAGE>
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 municipal bond brokers daily. The 40 prices then
are averaged and multiplied by a coefficient.
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<PAGE>
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 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.
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<PAGE>
On March 23, the bonds in the portfolio have the following values:
<TABLE>
<S> <C>
Ohio HFA 81-28
NYS Power 98-26
San Diego, CA IDB 98-11
Muscatine, IA Elec 99-24
Mass Health & Ed 97-18
</TABLE>
The bond prices have fallen, and the portfolio has sustained a loss of
$130,312. This would have been the loss incurred without hedging. However, the
Municipal Bond Index also has fallen, and its value stands at 83-27. Suppose now
the portfolio manager closes out his or her futures position by buying back 50
municipal bond index futures contracts at this price.
The following table provides a summary of transactions and the results
of the hedge.
<TABLE>
<CAPTION>
Cash Market Futures Market
----------- --------------
<S> <C> <C>
February 2 $5,003,750 long posi- Sell 50 Municipal Bond
tion in municipal futures contracts at
bonds 86-09
March 23 $4,873,438 long posi- Buy 50 Municipal Bond
tion in municipal futures contracts at
bonds 83-27
--------------------- ----------------------
$130,312 Loss $121,875 Gain
</TABLE>
While the gain in the futures market did not entirely offset the loss
in the cash market, the $8,437 loss is significantly lower than the loss which
would have been incurred without hedging.
The numbers reflected in this appendix do not take into account the
effect of brokerage fees or taxes.
III. MARGIN PAYMENTS
Unlike purchases or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with Galaxy's custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial 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
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<PAGE>
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 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.
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<PAGE>
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 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.
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<PAGE>
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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