<PAGE> 1
GALAXY FUND II
LARGE COMPANY INDEX FUND
SMALL COMPANY INDEX FUND
UTILITY INDEX FUND
U.S. TREASURY INDEX FUND
PROSPECTUS
AUGUST 1, 1996
<PAGE> 2
GALAXY FUND II - THE INDEXED FUNDS
4400 COMPUTER DRIVE
P.O. BOX 5108
WESTBOROUGH, MASSACHUSETTS 01581-5108
For application and information regarding initial purchases and current
performance, call (800) 628-0414. For additional purchases, redemptions,
exchanges and other shareholder services, call (800) 628-0413.
GALAXY FUND II ("Galaxy II" or the "Trust") is a no-load, open-end investment
company which offers you five investment options. This Prospectus describes four
of these options (the "Funds"). The Funds use a strategy called indexing,
seeking to provide investment results that, before deduction of operating
expenses, match the price and yield performance of particular sets of securities
or market segments. The Funds and their market segments are:
The LARGE COMPANY INDEX FUND - U.S. publicly traded common stocks with large
stock market capitalizations, as represented by the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500").
The SMALL COMPANY INDEX FUND - U.S. publicly traded common stocks with smaller
stock market capitalizations, as represented by the Russell Special Small
Company(TM) Index (the "Small Company Index").
The UTILITY INDEX FUND - U.S. publicly traded common stocks of companies in the
utility industry, as represented by the Russell 1000(R) Utility Index (the
"Utility Index").
The U.S. TREASURY INDEX FUND - U.S. Treasury notes and bonds, as represented by
the U.S. Treasury component (the "U.S. Treasury Index") of the Salomon Brothers
Broad Investment-Grade Bond Index.
Shares of the Funds are offered without any sales charge or redemption fee. Each
Fund will incur management fees.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, FLEET FINANCIAL GROUP, INC. 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 THE POSSIBLE
LOSS OF PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely certain information about the Trust that
you should know before making an investment decision. You are encouraged to read
this Prospectus carefully and retain it for future reference. Additional
information about the Trust is contained in a Statement of Additional
Information bearing the same date and is available free of charge by calling
Galaxy II at (800) 628-0414 or by writing to Galaxy II, c/o First Data Investor
Services Group, Inc., 4400 Computer Drive, P.O. Box 5108, Westborough,
Massachusetts 01581. The Statement of Additional Information has been filed with
the Securities and Exchange Commission and, as amended from time to time, is
incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
August 1, 1996
<PAGE> 3
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS
OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE
FUNDS OR BY THEIR DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HIGHLIGHTS...................................................................................................... 3
EXPENSE SUMMARY................................................................................................. 5
FINANCIAL HIGHLIGHTS............................................................................................ 6
INVESTMENT OBJECTIVES AND POLICIES.............................................................................. 10
The Indexing Approach.................................................................................. 10
The Large Company Index Fund........................................................................... 11
The Small Company Index Fund........................................................................... 11
The Utility Index Fund................................................................................. 12
The U.S. Treasury Index Fund........................................................................... 12
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS.............................................................. 13
Temporary Cash Balances................................................................................ 13
Securities Lending..................................................................................... 13
Stock Index Futures Contracts.......................................................................... 14
INVESTMENT LIMITATIONS.......................................................................................... 14
INVESTMENT RISKS................................................................................................ 14
PRICING OF SHARES............................................................................................... 16
DIVIDENDS AND DISTRIBUTIONS..................................................................................... 16
TAXES ....................................................................................................... 17
MANAGEMENT OF THE FUNDS......................................................................................... 17
Investment Adviser..................................................................................... 17
Administrator.......................................................................................... 18
Distributor............................................................................................ 18
Custodian.............................................................................................. 18
HOW TO PURCHASE AND REDEEM SHARES............................................................................... 19
Distributor............................................................................................ 19
Purchase Procedures Customers of Institutions......................................................... 19
Purchase Procedures Direct Investors.................................................................. 19
Other Purchase Information............................................................................. 20
Redemption Procedures Customers of Institutions....................................................... 21
Redemption Procedures Direct Investors................................................................ 21
Other Redemption Information .......................................................................... 22
DESCRIPTION OF SHARES........................................................................................... 23
PERFORMANCE AND YIELD INFORMATION............................................................................... 23
INVESTOR PROGRAMS............................................................................................... 24
Exchange Privilege..................................................................................... 24
Retirement Plans....................................................................................... 25
Automatic Investment Program and Systematic Withdrawal Plan............................................ 26
Investing by Payroll Deduction by Regular IBM Employees ............................................... 26
LICENSE AGREEMENTS.............................................................................................. 26
MISCELLANEOUS................................................................................................... 27
</TABLE>
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<PAGE> 4
HIGHLIGHTS
Q: What is Galaxy Fund II?
A: The Trust is an open-end investment company (commonly known as a mutual
fund) that offers investors the opportunity to invest in different
investment portfolios, each having separate investment objectives and
policies. This Prospectus describes the Trust's Large Company Index,
Small Company Index, Utility Index and U.S. Treasury Index Funds. A
Prospectus for the Municipal Bond Fund may be obtained by calling (800)
628-0414.
Q: Who advises the Funds?
A: The Funds are managed by Fleet Investment Advisors Inc. (the
"Investment Adviser" or "Fleet"), an indirect wholly-owned subsidiary
of Fleet Financial Group, Inc. Fleet Financial Group, Inc. is a
financial services company with total assets as of June 30, 1996 of
approximately $87.7 billion. See "Management of the Funds--Investment
Adviser."
Q: What advantages do the Funds offer?
A: The Funds offer investors the opportunity to invest in a variety of
investment portfolios without having to become involved with the
detailed accounting and safekeeping procedures normally associated with
direct investments in securities.
Q: How does one buy and redeem shares?
A: The Funds are distributed by 440 Financial Distributors, Inc. Shares of
the Funds are sold to individuals or corporations, who submit a
purchase application to the Trust, purchasing either for their own
accounts or for the accounts of others ("Direct Investors"). Shares may
also be purchased by Fleet Brokerage Securities Corporation, Fleet
Securities, Inc., Fleet Financial Group, Inc., its affiliates, their
correspondent banks and other qualified banks, savings and loan
associations and broker/dealers ("Institutions") on behalf of their
customers ("Customers"). Share purchase and redemption information for
both Direct Investors and Customers is provided in this Prospectus
under "How to Purchase and Redeem Shares." The minimum initial
investment for Direct Investors and the minimum initial aggregate
investment for Institutions purchasing on behalf of their Customers is
$2,500. The minimum investment for subsequent purchases is $100. The
minimum investment requirement with respect to Individual Retirement
Accounts ("IRAs"), Simplified Employee Pension Plans ("SEPs"),
Multi-Employee Pension Plan accounts ("MERPs") and Keogh Plans is $500
($250 for spousal IRA accounts). There are no minimum investment
requirements for investors participating in the Automatic Investment
Program described below. Institutions may require Customers to maintain
certain minimum investments in Retail Shares. See "How to Purchase and
Redeem Shares--Other Purchase Information" below.
Q: When are dividends paid?
A: The net investment income of the Small Company Index and Large Company
Index Funds is declared and paid annually. The net investment income of
the Utility Index Fund is declared and paid quarterly. The net
investment income of the U.S. Treasury Index Fund is declared daily and
paid monthly. Net realized capital gains of the Funds are distributed
at least annually. See "Dividends and Distributions."
Q: What potential risks are presented by the Funds' investment practices?
-3-
<PAGE> 5
A: A Fund's ability to match its performance with an index may be affected
by, among other things, changes in the securities markets, the manner
in which the index is calculated and the timing of purchases and
redemptions of the Fund's shares. The Trust expects the investment of
each Fund to decline in value whenever the market, as represented by
the securities in the index, declines.
LARGE COMPANY INDEX FUND: The Fund should exhibit price
volatility similar to that of the S&P 500.
SMALL COMPANY INDEX FUND: Since it invests in smaller
companies, the Fund may have greater price volatility and less
liquidity than the Large Company Index Fund.
UTILITY INDEX FUND: Historically, utility stocks have been one
of the least volatile sectors of the U.S. stock market when measured by
statistics such as standard deviation of return. Consequently, the
Utility Index Fund may have less price volatility than either the Large
or Small Company Index Funds, although there can be no assurance of
this. The Utility Index Fund is subject to industry risk and market
risk. Industry risk is the possibility that a particular group of
related stocks in a particular industry will decline in price due to
industry-specific developments. The Fund will concentrate its
investments in the utility industry. As a result, the Fund's
investments may be subject to greater risk and market fluctuation than
a fund that has securities representing a broader range of investment
alternatives.
U.S. TREASURY INDEX FUND: While the "full faith and credit" of
the U.S. Government guarantees the stated interest rate and principal
at maturity of U.S. Treasury notes and bonds, the market value of these
securities will fluctuate due to changing interest rates. The U.S.
Treasury Index Fund is subject to moderate levels of interest rate
risk.
It is impossible to eliminate risk from investments in bonds and common
stocks. You should consider your investment in the Funds to be
long-term. The Funds are not designed to provide you with a means to
speculate on short-term movements in the stock market.
Q: What shareholder privileges are offered by the Funds?
A: Direct Investors and Customers of Institutions may, after appropriate
prior authorization, exchange shares of a Fund having a value of at
least $100 for shares of any of the other funds or portfolios offered
by the Trust or otherwise advised by Fleet Investment Advisors Inc. or
its affiliates in which the Direct Investor or Customer maintains an
existing account, provided that such other shares may legally be sold
in the state of the investor's residence. The Trust offers IRAs, SEPs,
and Keogh Plan accounts, which can be established by contacting the
Trust's Distributor (call (800) 628-0413). Shares of the Funds are
available for purchase in connection with MERPs accounts, and detailed
information concerning eligibility and other matters and the form of
application is available from Fleet Brokerage Securities Corporation
(call (800) 221-8210). The Trust also offers an Automatic Investment
Program, which allows a Direct Investor to purchase Fund shares each
month as well as other shareholder privileges. See "Investor Programs."
-4-
<PAGE> 6
EXPENSE SUMMARY
The following table illustrates expenses and fees that you would incur, either
directly or indirectly, as a shareholder of each Fund. The expenses and fees for
each Fund are for the fiscal year ended March 31, 1996. "Other Expenses" are
based on estimated amounts for the Funds' current fiscal year.
<TABLE>
<CAPTION>
LARGE SMALL U.S.
COMPANY COMPANY UTILITY TREASURY
INDEX INDEX INDEX INDEX
SHAREHOLDER TRANSACTION EXPENSES FUND FUND FUND FUND
- -------------------------------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases................................ None None None None
Sales Load Imposed on Reinvested Dividends..................... None None None None
Redemption Fees................................................ None None None None
Exchange Fees.................................................. None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE DAILY NET ASSETS)
Advisory and Administration Fees............................... 0.40% 0.40% 0.40% 0.40%
12b-1 Fees..................................................... None None None None
Other Expenses................................................. 0.00% 0.00% 0.00% 0.00%
Total Fund Operating Expenses.................................. 0.40% 0.40% 0.40% 0.40%
Account Maintenance Fee (per year per account
after waivers) $0.00* $0.00* $0.00* $0.00*
</TABLE>
- ---------------
* First Data Investor Services Group, Inc. (the "Sub-Administrator") has
agreed until further notice to waive receipt of the annual account
maintenance fee of $10.00 otherwise payable by shareholders of each
Fund to defray the costs of maintaining shareholder accounts. See
"Dividends and Distributions" for more information about this fee.
The Administrator is responsible for the payment of all of the expenses of the
Funds, other than certain limited expenses (such as brokerage fees and
commissions, interest on borrowings, taxes and such extraordinary, non-recurring
expenses as may arise). For a further description of the various costs and
expenses shown above, see "Management of the Funds."
EXAMPLE: You would pay the following expenses on a $1,000 investment in each
Fund over various time periods. It assumes that your investment grows 5% per
year and that you redeem your investment at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Large Company Index Fund............................................ $4 $13 $22 $49
Small Company Index Fund............................................ $4 $13 $22 $49
Utility Index Fund.................................................. $4 $13 $22 $49
U.S. Treasury Index Fund............................................ $4 $13 $22 $49
</TABLE>
These expense figures do not reflect the account maintenance fee for each Fund
of $10.00, for the one year period and an additional $20.00 in each of the
three, five, and ten year periods, that would otherwise be payable by
shareholders had not the Sub-Administrator agreed to waive until further notice
receipt of this fee.
THESE EXAMPLES ARE NOT REPRESENTATIONS OF PAST OR FUTURE EXPENSES OR
PERFORMANCE. ACTUAL EXPENSES MAY BE MORE OR LESS THAN SHOWN IN THESE EXAMPLES.
For example, certain shareholders who redeem by wire will incur a charge,
currently $5.00 per wire redemption. Also, each Fund's actual performance may be
better or worse than the 5% growth per year assumed in the examples.
-5-
<PAGE> 7
FINANCIAL HIGHLIGHTS
The following financial highlights for the fiscal years ended March 31,
1995 and March 31, 1996 have been audited by Coopers and Lybrand L.L.P.,
independent accountants, whose report is contained in the Trust's Annual Report
to Shareholders and is incorporated by reference in the Statement of Additional
Information. The Financial Highlights for the remaining periods were audited by
Price Waterhouse, L.L.P. Further information about the performance of the Funds
is also contained in the Funds' Annual Report to Shareholders which may be
obtained without charge by calling Galaxy II at (800) 628-0414.
LARGE COMPANY INDEX FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Period
Ended
Year Ended March 31, March 31,
----------------------------------------------------------- ---------
1996 1995 1994 1993 1992 1991(A)
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of period........... $ 15.76 $ 14.36 $ 14.59 $ 13.04 $ 12.10 $ 10.00
-------- -------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income(1).................... 0.38 0.37 0.36 0.34 0.31 0.15
Net realized and unrealized gain (loss) on
investments and futures.................. 4.57 1.73 (0.20) 1.55 0.95 2.10
-------- -------- -------- -------- -------- --------
Total from Investment Operations:.... 4.95 2.10 0.16 1.89 1.26 2.25
-------- -------- -------- -------- -------- --------
Less Dividends:
Dividends from net investment income........ (0.31) (0.37) (0.36) (0.34) (0.31) (0.15)
Distributions from net realized capital
gains .................................... (0.34) (0.33) (0.03) -- (0.01) --
-------- -------- -------- -------- -------- --------
Total Dividends:..................... (0.65) (0.70) (0.39) (0.34) (0.32) (0.15)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in net asset
value ..................................... 4.30 1.40 (0.23) 1.55 0.94 2.10
-------- -------- -------- -------- -------- --------
Net Asset Value, End of period................. $ 20.06 $ 15.76 $ 14.36 $ 14.59 $ 13.04 $ 12.10
======== ======== ======== ======== ======== ========
Total Return .................................. 31.80% 15.07% 1.02% 14.68% 10.43% 22.60%*
Ratios/Supplemental Data:
Net Assets, End of Period (000's).............. $240,689 $147,597 $143,828 $133,426 $ 87,118 $ 17,215
Ratios to average net assets:
Net investment income....................... 2.11% 2.48% 2.41% 2.57% 2.79% 3.45%+
Net Operating Expenses(1)................... 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%+
Portfolio Turnover Rate........................ 5% 7% 4% 0% 0% 0%
Average Commission Rate Paid(2)................ $ 0.0203 N/A N/A N/A N/A N/A
</TABLE>
- ----------
+ Annualized
* Not Annualized
(A) The Fund commenced operations on October 1, 1990.
(1) Net investment income per share and the net operating expense ratios
before reimbursement by the sub-administrator for the years ended March
31, 1996 and 1995 were $0.38 and 0.41% and $0.37 and 0.41%,
respectively.
(2) Required disclosure for the year ended 3/31/96.
-6-
<PAGE> 8
SMALL COMPANY INDEX FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Period
Ended
Year Ended March 31, March 31,
----------------------------------------------------------- ---------
1996 1995 1994 1993 1992 1991(A)
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of period........... $ 17.62 $ 17.49 $ 17.42 $ 15.39 $ 13.08 $ 10.00
-------- -------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income(1).................... 0.32 0.32 0.26 0.25 0.20 0.15
Net realized and unrealized gain (loss) on
investments and futures.................. 5.07 0.91 0.39 2.07 2.40 3.01
-------- -------- -------- -------- -------- --------
Total from Investment Operations:.... 5.39 1.23 0.65 2.32 2.60 3.16
-------- -------- -------- -------- -------- --------
Less Dividends:
Dividends from net investment income........ (0.38) (0.32) (0.25) (0.24) (0.22) (0.08)
Distributions from net realized capital gains. (0.33) (0.78) (0.33) (0.05) (0.07) --
-------- -------- -------- -------- -------- --------
Total Dividends:..................... (0.71) (1.10) (0.58) (0.29) (0.29) (0.08)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in net asset value..... 4.68 0.13 0.07 2.03 2.31 3.08
-------- -------- -------- -------- -------- --------
Net Asset Value, End of period................. $ 22.30 $ 17.62 $ 17.49 $ 17.42 $ 15.39 $ 13.08
======== ======== ======== ======== ======== ========
Total Return .................................. 30.85% 7.60% 3.64% 15.20% 20.04% 31.83%*
Ratios/Supplemental Data:
Net Assets, End of Period (000's).............. $291,724 $235,295 $255,347 $213,669 $116,290 $ 16,334
Ratios to average net assets:
Net investment income....................... 1.52% 1.72% 1.55% 1.80% 2.26% 2.98%+
Net Operating Expenses(1)................... 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%+
Portfolio Turnover Rate........................ 14% 10% 17% 5% 6% 1%
Average Commission Rate Paid(2)................ $ 0.0225 N/A N/A N/A N/A N/A
</TABLE>
- ----------
+ Annualized
* Not Annualized
(A) The Fund commenced operations on October 1, 1990.
(1) Net investment income per share and the net operating expense ratios
before reimbursement by the sub-administrator for the years ended March
31, 1996 and 1995 were $0.31 and 0.41% and $0.31 and 0.40%,
respectively.
(2) Required disclosure for the year ended 3/31/96.
-7-
<PAGE> 9
UTILITY INDEX FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Period
Ended
Year Ended March 31, March 31,
--------------------------------------- ---------
1996 1995 1994 1993(A)
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of period............ $ 9.88 $ 9.99 $ 10.93 $ 10.00
------- ------- ------- -------
Income from Investment Operations:
Net investment income(1)..................... 0.44 0.47 0.43 0.06
Net realized and unrealized gain (loss) on
investments............................... 2.15 (0.03) (0.93) 0.93
------- ------- ------- -------
Total from Investment Operations:..... 2.59 0.44 (0.50) 0.99
------- ------- ------- -------
Less Dividends:
Dividends from net investment income......... (0.44) (0.46) (0.43) (0.06)
Dividends from net realized capital gains.... -- (0.08) (0.01) --
Dividends in excess of net realized capital
gains. -- (0.01) -- --
------- ------- ------- -------
Total Dividends:...................... (0.44) (0.55) (0.44) (0.06)
------- ------- ------- -------
Net increase (decrease) in net asset value...... 2.15 (0.11) (0.94) 0.93
------- ------- ------- -------
Net Asset Value, End of period.................. $ 12.03 $ 9.88 $ 9.99 $ 10.93
======= ======= ======= =======
Total Return ................................... 26.61% 4.67% 4.83% 9.85%*
Ratios/Supplemental Data:
Net Assets, End of Period (000's)............... $56,383 $52,831 $68,445 $38,151
Ratios to average net assets:
Net investment income........................ 3.79% 4.62% 4.08% 4.66%+
Net Operating Expenses(1).................... 0.40% 0.40% 0.40% 0.40%+
Portfolio Turnover Rate......................... 12% 5% 19% 0%
Average Commission Rate Paid(2)................. $0.0230 N/A N/A N/A
</TABLE>
- ----------
+ Annualized
* Not Annualized
(A) The Fund commenced operations on January 5, 1993.
(1) Net investment income per share and the net operating expense ratios
before reimbursement by the sub-administrator for the years ended March
31, 1996 and 1995 were $0.44 and 0.41% and $0.47 and 0.41%,
respectively.
(2) Required disclosure for the year ended 3/31/96.
-8-
<PAGE> 10
U.S. TREASURY INDEX FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Period
Ended
Year Ended March 31, March 31,
-------------------------------------- ---------
1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of period............ $ 9.91 $ 10.38 $ 11.01 $ 10.39 $ 10.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income(1)..................... 0.66 0.65 0.58 0.63 0.51
Net realized and unrealized gain (loss)
on investments............................ 0.33 (0.29) (0.29) 0.75 0.38
-------- -------- -------- -------- --------
Total from Investment Operations...... 0.99 0.36 0.29 1.38 0.89
-------- -------- -------- -------- --------
Less Dividends:
Dividends from net investment income......... (0.65) (0.66) (0.58) (0.63) (0.50)
Dividends in excess of net investment
income.................................... (0.01) (0.01) -- -- --
Distributions from net realized capital
gains..................................... --- -- (0.34) (0.13) --
Dividends in excess of net realized
capital gains............................... --- (0.16) -- -- --
-------- -------- -------- -------- --------
Total Dividends:...................... (0.66) (0.83) (0.92) (0.76) (0.50)
-------- -------- -------- -------- --------
Net increase (decrease) in net
asset value.................................. 0.33) (0.47) (0.63) 0.62 0.39
-------- -------- -------- -------- --------
Net Asset Value, End of period.................. $ 10.24 $ 9.91 $ 10.38 $ 11.01 $ 10.39
======== ======== ======== ======== ========
Total Return ................................... 10.09% 3.81% 2.40% 13.69% 8.99%*
Ratios/Supplemental Data:
Net Assets, End of Period (000's)............... $124,944 $104,251 $138,225 $145,353 $102,830
Ratios to average net assets:
Net investment income........................ 6.35% 6.43% 5.21% 5.87% 6.40%+
Net Operating expenses(1).................... 0.40% 0.40% 0.40% 0.40% 0.40%+
Portfolio Turnover Rate......................... 35% 50% 75% 35% 57%
</TABLE>
- ----------
+ Annualized
* Not Annualized
(A) The Fund commenced operations on June 4, 1991.
(1) Net investment income per share and the net operating expense ratios
before reimbursement by the sub-administrator for the years ended March
31, 1996 and 1995 were $0.66 and 0.41% and $0.65 and 0.41%,
respectively.
-9-
<PAGE> 11
INVESTMENT OBJECTIVES AND POLICIES
The Trust offers you four indexed investment options:
The Large Company Index Fund seeks to provide investment results that,
before deduction of operating expenses, match the price and yield performance of
U.S. publicly traded common stocks with large stock market capitalizations, as
represented by the S&P 500.
The Small Company Index Fund seeks to provide investment results that,
before deduction of operating expenses, match the price and yield performance of
U.S. publicly traded common stocks with smaller stock market capitalizations, as
represented by the Small Company Index.
The Utility Index Fund seeks to provide investment results that, before
the deduction of operating expenses, match the price and yield performance of
U.S. publicly traded common stocks of companies engaged in the utility industry,
as represented by the Utility Index.
The U.S. Treasury Index Fund seeks to provide investment results that,
before deduction of operating expenses, match the price and yield performance of
U.S. Treasury notes and bonds, as represented by the U.S. Treasury Index.
The investment objective of a Fund may not be changed without the
approval of the holders of a "majority" of the outstanding voting shares of that
Fund. The term "majority" is defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). There can be no assurance that the investment
objective of any Fund will be achieved.
Risk considerations related to the Funds' investments are described
under "Other Investment Practices" and "Investment Risks."
THE INDEXING APPROACH
The Funds are not managed in a traditional sense, that is, by making
discretionary judgments based on analysis of economic, financial and market
conditions. Instead, the Funds seek to match the investment performance of their
respective market segments, as represented by their respective indexes, through
the use of sophisticated computer models to determine which stocks or bonds
should be purchased or sold, while keeping transaction and administrative costs
to a minimum. Each Fund will attempt to be fully invested in securities of its
respective index and will invest at least 80% of its net assets in those
securities. The Fund's investment adviser, Fleet Investment Advisors Inc.
("Fleet" or the "Investment Adviser"), generally selects securities for the
Funds on the basis of their weightings in the respective indexes. A Fund will
only purchase a security that is included in its respective index at the time of
such purchase. With respect to the remaining portion of its net assets, each
Fund has the ability to hold temporary cash balances and, if appropriate, in the
case of the Large Company Index Fund, the Small Company Index Fund and the
Utility Index Fund (the "Stock Funds") to use stock index futures contracts to
increase efficiency. Each Fund also may lend securities constituting up to
33 1/3% of its total assets.
While there can be no guarantee that each Fund's investment results
will precisely match the results of its corresponding index, the Investment
Adviser believes that, before deduction of operating expenses, there will be a
very high correlation between the returns generated by the Funds and their
respective indexes. Each Fund will attempt to achieve a correlation between the
performance of its portfolio and that of its respective index of at least 0.95
before deduction of operating expenses. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when a Fund's net asset value,
including the value of its dividend and capital gains distributions, increases
or decreases in exact proportion to changes in its respective index. Each Fund's
ability to correlate its performance with its respective index, however, may be
affected by, among other things, changes in securities markets, the manner in
which Standard & Poor's Corporation ("S&P"), Frank Russell Company ("Russell")
or Salomon Brothers Inc. ("Salomon") calculate their respective indexes, and the
timing of
-10-
<PAGE> 12
purchases and redemptions. The Investment Adviser monitors the correlation of
the performance of the Funds in relation to their indexes under the supervision
of the Board of Trustees. In the unlikely event that a high correlation is not
achieved, the Board of Trustees will take appropriate steps based on the reasons
for the lower than expected correlation.
The inclusion of a security in any of the Funds' indexes in no way
implies an opinion by S&P, Russell or Salomon as to its attractiveness as an
investment. S&P, Russell and Salomon are not sponsors of, or in any way
affiliated with, the Funds.
The Investment Adviser believes that the indexing approach should
involve less turnover, and thus lower brokerage costs, transfer taxes and
operating expenses, than in more traditionally managed funds, although there is
no assurance that this will be the case. Ordinarily, a Fund will buy or sell
securities only to reflect changes in an index (including mergers or changes in
the composition of an index) or to accommodate cash flows into and out of the
Fund. The costs and other expenses incurred in securities transactions, apart
from any difference between the investment results of a Fund and that of its
respective index, may cause the return of a Fund to be lower than the return of
its respective index. The Funds may invest in less than all of the securities
included in their respective indexes, which may result in a return that does not
match that of the indexes, after taking expenses into account.
THE LARGE COMPANY INDEX FUND
The S&P 500 is composed of approximately 500 common stocks, most of
which are listed on the New York Stock Exchange (the "NYSE"). S&P chooses the
stocks for the S&P 500 on a statistical basis. As of December 31, 1995 the
stocks in the S&P 500 have an average market capitalization of $6.7 billion and
account for approximately 69% of the total market value of all U.S. common
stocks. Normally, the Large Company Index Fund will hold all 500 stocks in the
S&P 500 and will hold each stock in approximately the same percentage as that
stock represents in the S&P 500. "Market capitalization" for a company is the
market price per share of stock multiplied by the number of shares outstanding.
The Investment Adviser believes that the S&P 500 is an appropriate benchmark for
the Fund because it is diversified, it is familiar to many investors and it is
widely accepted as a reference for common stock investments.
The common stock of Fleet Financial Corporation, the parent of the
Investment Adviser, is in the S&P 500. The Large Company Index Fund will invest
its assets in Fleet Financial Corporation stock approximately in proportion to
the percentage Fleet Financial Corporation stock represents in the S&P 500.
Purchases and sales of Fleet Financial Corporation stock, like all other stock
in the S&P 500, will be made solely in accordance with the directions generated
by the computer models utilized by the Investment Adviser to assist in
duplicating the performance of the S&P 500 and will not be made on the basis of
any fundamental or technical analysis of, or other similar specific information
concerning Fleet Financial Corporation. As of June 30, 1996, Fleet Financial
Corporation stock represented approximately 0.22% of the S&P 500.
THE SMALL COMPANY INDEX FUND
Russell chooses stocks for the Small Company Index on the basis of
market capitalization. To create the Small Company Index, Russell selects, with
certain exceptions, the 3,000 companies with the largest market capitalizations
and eliminates from this list any company that is included in the S&P 500. Like
the S&P 500, the weighting of stocks in the Small Company Index is based on each
stock's relative total market capitalization. As of December 31, 1995, stocks in
the Small Company Index account for about 29% of the total market value of all
publicly traded U.S. common stocks. The average capitalization of stocks
included in the Small Company Index currently is approximately $.41 billion,
although the capitalization of some companies included in the Small Company
Index is significantly higher. Because this group of stocks does not overlap
with the S&P 500, the Investment Adviser believes that the Small Company Index
is an appropriate benchmark for the Small Company Index Fund, creating a
complement to the S&P 500-based Large Company Index Fund.
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<PAGE> 13
The Small Company Index Fund will not hold all of the issues in the
Small Company Index because of the costs involved and the illiquidity of many of
the securities. Instead, the Fund will use a statistical technique known as
"portfolio optimization." Through portfolio optimization, each stock is
considered for inclusion in the Fund based on its contribution to the market
capitalization, industry representation and fundamental exposures of the Fund
and their similarity to these financial characteristics in the Small Company
Index. These fundamental exposures include dividend yield, price-earnings
multiples and average growth rates.
The portfolio optimization program is expected to provide an effective
method of substantially duplicating the dividend income and capital gains
produced by the Small Company Index. Since the Fund does not hold every stock in
the Small Company Index, it is not expected to track the Small Company Index
with the same degree of accuracy that the Large Company Index Fund should track
the S&P 500, although the Fund will seek a correlation of at least 0.95, before
deduction of operating expenses. The Fund expects to own at least 750 of the
2,500 stocks in the Small Company Index. The Fund will not purchase stocks not
represented in the Small Company Index.
THE UTILITY INDEX FUND
Russell chooses stocks for the Utility Index on the basis of market
capitalization and industry participation. To create the Utility Index, Russell
chooses, with certain exceptions, the 1,000 companies with the largest market
capitalizations and further selects those companies from this list that engage
in the generation, transmission or distribution of electricity,
telecommunications, gas or water. As of December 31, 1995, the Utility Index
included 120 companies, reflecting the various segments of the utility industry
in the following percentages (on a market capitalization basis):
<TABLE>
<CAPTION>
% OF
SECTOR INDEX
- ------ -----
<S> <C>
Telephone/Telecommunications.................................... 52.51%
Electric........................................................ 32.06%
Gas and Water................................................... 5.11%
Communications/Long Distance/Cable.............................. 10.33%
</TABLE>
Like the S&P 500 and Small Company Index, the weighting of stocks in the Utility
Index is based on each stock's relative market capitalization. Normally, the
Utility Index Fund will hold every stock in the Utility Index and will hold each
stock in approximately the same percentage as that stock represents in the
Utility Index.
THE U.S. TREASURY INDEX FUND
The U.S. Treasury Index is composed of all U.S. Treasury notes and bonds with
remaining maturities of at least one year and outstanding principal of at least
$25 million. Securities in the index are weighted by market value, that is, the
price per bond or note multiplied by the number of bonds or notes outstanding.
Salomon updates the roster of securities represented in the index once each
month, adding new notes and bonds issued in the past month and removing those
notes and bonds that no longer meet the index's criteria. The following table
further describes the U.S. Treasury Index Fund as of December 31, 1995:
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<PAGE> 14
<TABLE>
<CAPTION>
U.S. TREASURY
INDEX FUND
-------------
<S> <C>
Number of Issues.......................................... 30
Total Market Value........................................ $126 million
Minimum Maturity.......................................... 1.6 year
Maximum Maturity.......................................... 28.9 years
Weighted Average Maturity................................. 8 years
Percent of Market Value with remaining
Maturity of:
1-3 years........................................ 34%
3-7 years........................................ 31%
7-10 years....................................... 13%
10-20 years...................................... 3%
Over 20 years.................................... 17%
Cash equivalent reserve................................... 2%
</TABLE>
Like the Small Company Index Fund, the U.S. Treasury Index Fund will
not hold all of the issues in its index because of the costs involved and the
illiquidity of many of the securities. Instead, each security will be considered
for inclusion in the Fund based on its contribution to the total market value,
average coupon rate and average weighted maturity of the Fund and its similarity
to these financial characteristics of the Fund's index.
The U.S. Treasury Index Fund is authorized to engage in the "Other
Investment Practices" (except the use of stock index futures contracts)
described below. Because the U.S. Treasury Index Fund expects to generate income
generally exempt from state and local income taxes, it will engage in such
investment practices only when deemed by the Investment Adviser to be in the
best interests of the Fund's shareholders. See "Taxes."
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS
TEMPORARY CASH BALANCES
Each Fund will hold very small temporary cash balances to efficiently
manage transactional expenses. These cash balances generally are expected, under
normal conditions, not to exceed 2% of its net assets at any time (excluding
amounts used as margin for futures transactions and collateral for securities
loans and repurchase agreements). The Funds may invest these temporary cash
balances in short-term securities of the U.S. Government or its agencies and
instrumentalities ("U.S. Government Securities"), high quality commercial paper
(rated A-1 or better by S&P or P-1 or better by Moody's Investors Service,
Inc.), and certificates of deposit and time deposits of banking institutions
having total assets in excess of $1 billion. The Funds may also hold these
investments in connection with "repurchase agreements" (which are not subject to
the 2% limitation above). In these agreements, a bank or non-bank dealer agrees
to "repurchase" the investment from the Fund at the Fund's cost plus a specified
interest rate within a specified time period, usually one to seven days.
Repurchase agreements involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the subject Fund's ability to dispose of the underlying securities.
SECURITIES LENDING
Each Fund may realize additional net investment income and help offset
some of its expenses by lending securities constituting up to 33 1/3% of its
total assets to qualified brokers, dealers and other financial organizations,
which percentage limitation is a fundamental policy of each Fund. These loans
will be collateralized by cash, letters of credit or U.S. Government Securities,
which are maintained at all times in an amount at least equal to the current
market value of the loaned securities, plus any dividends and interest accrued
thereon. The Fund involved continues to be entitled to the interest and
dividends payable on the loaned security and receives interest on the amount of
the loan. Any gain or
-13-
<PAGE> 15
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Fund. As with any loan, there
are risks of delay in recovery and in some cases even loss of rights in
collateral should the borrower of the securities fail financially or breach its
agreement with the Fund.
STOCK INDEX FUTURES CONTRACTS
The Stock Funds each may invest in stock index futures contracts that
are traded on a national exchange in order to hedge its positions or for other
permissible purposes. While there is some risk that the use of these instruments
may reduce the correlation between the performance of these Funds and the
indexes, the Investment Adviser believes that, under certain circumstances, the
cost savings associated with stock index futures contracts can be greater than
the risks involved. A Fund may not use stock index futures contracts as a
temporary defensive or stock-index arbitrage trading strategy. A Fund may not
enter into futures contracts other than for bona fide hedging purposes if the
aggregate initial margin deposits on its non-hedging futures contracts exceed 5%
of the Fund's net asset value, after taking into account unrealized profits and
unrealized losses on futures contracts it has entered into. When a Fund enters
into a long position in a stock index future, it must set aside with the Fund's
custodian an amount of cash or cash equivalents equal to the total market value
of the underlying futures contract, less amounts held in the Fund's commodity
brokerage account.
INVESTMENT LIMITATIONS
The Trust has adopted certain limitations on its investments, other
than investments in U.S. Government Securities. Some of these limitations are:
(1) With respect to 75% of its total assets, a Fund will not
invest more than 5% of its total assets in the securities of
any one issuer;
(2) A Fund will not invest more than 25% of its total assets in
issuers conducting their principal business activities in any
one industry, except that the Utility Index Fund will invest
in excess of 25% of its respective assets in the securities of
companies within the utility industry;
(3) A Fund will not purchase more than 10% of the voting
securities of any one issuer; and
(4) A Fund will not borrow money except for temporary or emergency
reasons. Total borrowings cannot exceed 33 1/3% of a Fund's
total assets and all borrowings must be repaid before a Fund
can purchase any securities. A Fund may not borrow for
leverage.
These investment restrictions, and certain of those contained in the
Trust's Statement of Additional Information, can be changed for a Fund only with
the approval of the holders of a majority of the outstanding shares of that
Fund.
INVESTMENT RISKS
A Fund's ability to match its performance with an index may be affected
by, among other things, changes in the securities markets, the manner in which
the index is calculated and the timing of purchases and redemptions of the
Fund's shares. The Trust expects the investments of each Fund to decline in
value whenever the market, as represented by the securities in its index,
declines.
The Large Company Index Fund should exhibit price volatility similar to
that of the S&P 500. The Small Company Index Fund, since it invests in smaller
companies, may have greater price volatility and less liquidity than the Large
Company Index Fund. Historically, utility stocks have been one of the least
volatile sectors of the U.S. stock market when measured by statistics such as
standard
-14-
<PAGE> 16
deviation of return. Consequently, the Utility Index Fund may have less price
volatility than either the Large or Small Company Index Funds, although there
can be no assurance of this.
It is impossible to eliminate risk from investments in common stocks.
The average annual total return of the U.S. stock market, as measured by
Ibbotson Associates, from 1926 to 1994 was 12.16%. Returns in individual
calendar years ranged from a low of -43.3% (in 1931) to a high of 53.9% (in
1933). You should consider your investment in the Stock Funds to be long-term.
These Funds are not designed to provide you with a means to speculate on
short-term movements in the stock market.
The Utility Index Fund is subject to industry risk. Industry risk is
the possibility that a particular group of related stocks, such as those stocks
in a particular industry, will decline in price due to industry-specific
developments. For the utility industry, these developments could include:
- changing regulations which could limit profits, dividends, or access
to new markets;
- unexpected increases in fuel, environmental compliance, safety, or
other operating costs, including high interest costs on borrowings needed for
capital improvement projects;
- increasing competition, particularly among providers of long-distance
telephone service and gas utilities, with the need to make large investments in
technology to meet this competition; and
- restriction to relatively mature markets, particularly among water
companies, which constrain potential for growth.
The Fund will concentrate its investments in the utility industry. As a
result, the Fund's investments may be subject to greater risk and market
fluctuation than a fund that has securities representing a broader range of
investment alternatives.
The Fund's policy of concentrating its investments in the utility
industry is a fundamental policy of the Fund and cannot be changed without
approval of a majority of the Fund's outstanding voting securities.
While the "full faith and credit" of the U.S. Government guarantees the
stated interest rate and principal at maturity of U.S. Treasury notes and bonds,
the market value of these securities will fluctuate due to changing interest
rates. In general, bond prices rise when interest rates fall, and bond prices
fall when interest rates rise. Longer-term bonds are typically affected more
dramatically than shorter-term bonds. The following table illustrates the
changes caused by a 2% change in interest rates on the market prices of
non-callable bonds with various maturities:
<TABLE>
<CAPTION>
2% INCREASE IN 2% DECREASE IN
MATURITY INTEREST RATES INTEREST RATES
- -------- -------------- --------------
<S> <C> <C>
1 year......................................................... -2% +2%
5 years........................................................ -8% +9%
10 years....................................................... -14% +17%
30 years....................................................... -25% +39%
</TABLE>
As of March 31, 1996, the weighted average maturity of the U.S.
Treasury Index Fund was 8.362 years. Thus, the U.S. Treasury Index Fund is
subject to moderate levels of interest rate risk.
-15-
<PAGE> 17
PRICING OF SHARES
On every day the New York Stock Exchange (the "NYSE") is open, the
Sub-Administrator calculates the net asset value per share for each Fund
separately, as of the close of regular trading on the NYSE. In calculating net
asset value, investments are valued based on their market values, but when
market quotations are not readily available, investments are valued based on
fair value as determined in good faith in accordance with procedures established
by the Board of Trustees. Bonds and other fixed income securities may be valued
on the basis of prices provided by a pricing service when such prices are
believed to reflect the market value of such securities. The prices provided by
a pricing service may be determined without regard to bid or last sale prices of
each security but take into account institutional size transactions in similar
groups of securities as well as any developments relating to specific
securities.
DIVIDENDS AND DISTRIBUTIONS
Each Fund intends to distribute substantially all of its net investment
income and its net realized capital gains to its shareholders each year.
Dividend declaration and payment frequencies are:
<TABLE>
<CAPTION>
NET INVESTMENT REALIZED
INCOME CAPITAL GAINS
-------------- -------------
<S> <C> <C>
Large Company Index Fund............................................ Annually Annually
Small Company Index Fund............................................ Annually Annually
Utility Index Fund.................................................. Quarterly Annually
U.S. Treasury Index Fund ........................................... Declaration-Daily Annually
Payment-Monthly
</TABLE>
Dividends and distributions may be made on a more frequent basis to
comply with the distribution requirements of the Internal Revenue Code of 1986,
as amended (the "Code").
You will receive all dividends and capital gains distributions as
additional shares of the Fund that paid the dividend or distribution at its then
current net asset value, unless you elect to receive cash. You may elect to
receive cash by so specifying on your account registration form or by notifying
the Sub-Administrator in writing. Shareholders electing to reinvest dividends in
the U.S. Treasury Index Fund will receive confirmation of their dividend on
regular, quarterly statements. As with all purchases and redemptions, you pay no
sales commissions or fees of any kind on shares acquired through reinvestment of
dividends and distributions.
The Sub-Administrator has agreed to waive until further notice receipt
of the $10.00 annual account maintenance fee otherwise automatically charged to
each Fund account at the time a dividend is credited to the account. The Board
of Trustees reserves the right to change the annual account maintenance fee.
-16-
<PAGE> 18
TAXES
Since each Fund intends to (a) qualify each year as a "regulated
investment company" within the meaning of the Code and (b) distribute to its
shareholders at least 90% of its "investment company taxable income," a Fund
itself will not be subject to Federal income tax to the extent that its net
investment income and its net realized capital gains are distributed to its
shareholders in accordance with the Code. As a regulated investment company,
each Fund will be subject to a 4% non-deductible excise tax if it fails to
currently distribute specified percentages of its ordinary taxable income and
capital gain net income (excess of capital gain over capital losses). Each Fund
expects to pay dividends and 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,
unless the Board of Trustees determines that it is not in the best interest of
the shareholders to do so.
Except as described in the following paragraph, dividends paid from
Fund income other than net capital gains will be taxable to you as ordinary
income. Distributions derived from net realized long-term capital gains will be
taxable to you as long-term capital gains, regardless of how long you have held
shares of a Fund. As a general rule, your gain or loss on a sale or redemption
of Fund shares will be a long-term capital gain or loss if you have held your
shares for more than one year and will be a short-term capital gain or loss if
you have held your shares for one year or less. If you hold shares for six
months or less and during that time receive a capital gain dividend on those
shares, any loss recognized on the sale or exchange of those shares will be
treated as a long-term capital loss to the extent of the capital gain dividend.
Many states do not tax dividends attributable to interest on U.S.
Treasury notes and bonds that are distributed by mutual funds which primarily
invest in such securities and which satisfy certain reporting and
diversification requirements. The U.S. Treasury Index Fund intends to be such a
fund and to satisfy such requirements and thus expects that its dividends
attributable to interest on its U.S. Treasury notes and bonds will, as a general
rule, be substantially free of state and local income tax.
However, all income from the Fund is subject to Federal taxes.
Statements as to the tax status of your dividends and distributions
will be mailed annually. The Trust will also send you, if applicable, various
written notices after the close of its tax year with respect to certain
dividends and distributions that were, or were deemed to be, received from a
Fund during that tax year. You should consult your tax adviser with regard to
your tax situation, including any state and local tax liabilities.
MANAGEMENT OF THE FUNDS
The Board of Trustees sets strategic and policy directions for the
Trust and oversees management. The Board selects and supervises the Investment
Adviser and the Trust's officers who are responsible for the day-to-day
management of the Trust's affairs.
INVESTMENT ADVISER
Fleet Investment Advisors Inc. (the "Investment Adviser"), with
principal offices at 45 East Avenue, Rochester, New York 14604, serves as
investment adviser to the Funds. The Investment Adviser also provides investment
management and advisory services to individual and institutional
-17-
<PAGE> 19
clients, and manages the investment portfolios of The Galaxy Fund and The Galaxy
VIP Fund. The Investment Adviser is an indirect wholly-owned subsidiary of Fleet
Financial Group, Inc., a registered bank holding company, that as of June 30,
1996, managed or advised approximately $46.7 billion in equity, fixed income and
short-term assets. The Investment Adviser is also an indirect wholly-owned
subsidiary of the Administrator. To fulfill its responsibilities, the Investment
Adviser employs the personnel, software and support systems needed to manage
indexed portfolios.
The Investment Adviser receives a fee from each Fund at the annual rate
of 0.10% of the average daily net assets of the Fund, which was the rate of the
Investment Adviser's compensation during the fiscal year ended March 31, 1996.
ADMINISTRATOR
Fleet National Bank (the "Administrator") provides the Trust with
office facilities and support personnel and generally assists in all aspects of
administration and operation of the Trust. The Administrator, with principal
offices at 50 Kennedy Plaza, Providence, Rhode Island 02903-2305, is an indirect
wholly-owned subsidiary of Fleet Financial Group, Inc. The Administrator pays
all of the expenses of the Funds, except the fees and expenses of those Trustees
who are not interested persons of the Trust, brokerage fees and commissions,
interest on borrowings, taxes and such extraordinary, nonrecurring expenses as
may arise, including litigation to which the Trust may be a party. The
Administrator receives a fee from each Fund at an annual rate of 0.30% of the
average daily net assets of the Fund. From time to time, the Administrator may
waive all or a portion of the administration fee payable to it by the Funds,
either voluntarily or pursuant to applicable statutory limitations.
The Administrator has entered into a sub-administration agreement with
First Data Investor Investor Services Group, Inc. ("FDISG") formerly known as
The Shareholder Services Group, Inc., d/b/a 440 Financial ("Sub-Administrator"),
4400 Computer Drive, P.O. Box 5108, Westborough, Massachusetts 01581, a
Massachusetts corporation and a wholly-owned subsidiary of First Data
Corporation, to provide administrative services to the Trust. The
Sub-Administrator also serves as shareholder servicing agent. The Administrator
bears the fees of the Sub-Administrator for serving in these capacities.
DISTRIBUTOR
440 Financial Distributors, Inc. (the "Distributor"), a Massachusetts
corporation and a wholly-owned subsidiary of FDISG, is responsible for the
marketing and distributing of the shares of each Fund. The Distributor is a
registered broker/dealer with principal offices located at 4400 Computer Drive,
P.O. Box 5108, Westborough, Massachusetts 01581. The Distributor does not
receive any compensation from Galaxy II or the Funds for its services.
CUSTODIAN
The Chase Manhattan Bank, N.A. (the "Custodian"), located at 1211
Avenue of the Americas, New York, New York 10036, a wholly-owned subsidiary of
The Chase Manhattan Corporation, serves as the custodian of the Funds' assets,
and FDISG serves as the Funds' transfer and dividend disbursing agent. Services
performed by both entities for the Funds are described in the
-18-
<PAGE> 20
Statement of Additional Information. Communications to FDISG should be directed
to FDISG at 4400 Computer Drive, P.O. Box 5108, Westborough, Massachusetts
01581.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
The Distributor has established several procedures to enable different
types of investors to purchase shares of the Funds. The shares may be purchased
by individuals or corporations who submit a purchase application to the Trust,
purchasing directly either for their own accounts or for the accounts of others
("Direct Investors"). Shares may also be purchased by Fleet Brokerage Securities
Corporation, Fleet Securities, Inc., Fleet Financial Group, Inc., its
affiliates, their correspondent banks and other qualified banks, savings and
loan associations and broker/dealers ("Institutions") on behalf of their
customers ("Customers"). Purchases by Direct Investors may take place only on
days on which the Distributor, the Custodian and the Administrator are 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 the Distributor on a Business Day in accordance with
the Distributor's procedures. Shares of the Funds will be issued to Direct
Investors only in exchange for monetary consideration as described below.
PURCHASE PROCEDURES - CUSTOMERS OF INSTITUTIONS
Purchase orders are placed by Customers of Institutions through their
Institution. The Institution is responsible for transmitting Customer purchase
orders to the Distributor and for wiring required funds in payment to the
Custodian on a timely basis. The Distributor is responsible for transmitting
such orders to the Sub-Administrator for execution. Shares purchased by
Institutions on behalf of their Customers will normally be held of record by the
Institution and beneficial ownership of the shares will be recorded by the
Institution and reflected in the account statements provided to their Customers.
The Sub-Administrator may establish an account of record for each Customer of an
Institution reflecting beneficial ownership of shares. Depending on the terms of
the arrangement between a particular Institution and the Sub-Administrator,
confirmations of share purchases and redemptions and pertinent account
statements will either be sent by the Sub-Administrator directly to a Customer
with a copy to the Institution, or will be furnished directly to the Customer by
the Institution. Other procedures for the purchase of shares established by
Institutions in connection with the requirements of their Customer accounts may
apply. Customers wishing to purchase shares through their Institution should
contact such entity directly for appropriate purchase instructions.
PURCHASE PROCEDURES - DIRECT INVESTORS
Purchases by Mail. Shares may be purchased by completing a purchase
application and mailing it, together with a check payable to each Fund in which
a Direct Investor wishes to invest, to:
Galaxy Fund II
4400 Computer Drive
P.O. Box 5108
Westborough, MA 01581
-19-
<PAGE> 21
All initial purchase orders placed by mail must be accompanied by a
purchase application. Applications may be obtained by calling the Distributor at
(800) 628-0414.
Subsequent investments in an existing account in any Fund may be made
at any time by sending a check for a minimum of $100 payable to the Fund in
which the additional investment is being made to the Trust at the address above
along with either (a) the detachable form that regularly accompanies
confirmation of a prior transaction, (b) a subsequent order form that may be
obtained from the Distributor, or (c) a letter stating the amount of the
investment, the name of the Fund and the account number in which the investment
is to be made. If a Direct Investor's check does not clear, the purchase will be
canceled.
OTHER PURCHASE INFORMATION
Purchases by Wire. Investors may also purchase shares by arranging to
transmit Federal funds by wire to Fleet Bank of Massachusetts, N.A. as agent for
FDISG. Prior to making any purchase by wire, an investor must telephone the
Distributor at (800) 628-0413 to place an order and for instructions.
Direct Investors making initial investments by wire must promptly
complete a purchase application and forward it to Galaxy Fund II, 4400 Computer
Drive, P.O. Box 5108, Westborough, Massachusetts 01581. Applications may be
obtained by calling the Distributor at (800) 628-0414.
Except as provided in "Investor Programs" below, the minimum initial
investment by a Direct Investor, or initial aggregate investment by an
Institution investing on behalf of its Customers, is $2,500. The minimum
investment for subsequent purchases is $100. The minimum investment requirement
with respect to IRAs, SEPs, MERPs and Keogh Plans (see below under "Retirement
Plans") is $500 ($250 for spousal IRA accounts). There are no minimum investment
requirements for investors participating in the Automatic Investment Program
described below. Customers may agree with a particular Institution to change the
minimum initial and minimum subsequent purchase requirements with respect to
their accounts.
The Trust or the Distributor each reserves the right to reject any
purchase order, in whole or in part, or to waive any minimum investment
requirement. The issuance of shares to Direct Investors and Institutions is
recorded on the books of the Trust and share certificates will not be issued.
Effective Time of Purchases. A purchase order for shares received and
accepted by the Distributor from an Institution or a Direct Investor on a
Business Day prior to the close of regular trading hours on the NYSE
(currently, 4:00 p.m. Eastern Time) will be executed at the net asset value per
share determined on that date, provided that the Custodian receives the
purchase price in Federal funds or other immediately available funds prior to
4:00 p.m. on the fifth Business Day following the receipt of such order. Such
order will be executed on the day on which the purchase price is received in
proper form. If funds are not received by such date and time, the order will
not be accepted and notice thereof will be given promptly to the Institution or
Direct Investor submitting the order. Payment for orders which are not received
or accepted will be returned.
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<PAGE> 22
REDEMPTION PROCEDURES - CUSTOMERS OF INSTITUTIONS
Customers of Institutions may redeem all or part of their shares in
accordance with procedures governing their accounts at Institutions. It is the
responsibility of the Institutions to transmit redemption orders to the
Distributor and credit their Customers' accounts with the redemption proceeds on
a timely basis. No charge for wiring redemption payments to Institutions is
imposed by the Trust, although Institutions may charge a Customer's account for
redemption services. Information relating to such redemption services and
charges, if any, is available from the Institutions.
Payments for redemption orders received by the Distributor on a
Business Day will normally be wired on the third Business Day to the
Institutions.
Direct Investors may redeem all or part of their shares in accordance
with any of the procedures described below.
REDEMPTION PROCEDURES - DIRECT INVESTORS
Redemption by Mail. Shares may be redeemed by a Direct Investor by
submitting a written request for redemption to:
Galaxy Fund II
4400 Computer Drive
P.O. Box 5108
Westborough, MA 01581
A written redemption request must (i) state the number of shares to be
redeemed, (ii) identify the shareholder account number and social security
number or tax identification number, and (iii) be signed by each registered
owner exactly as the shares are registered. A redemption request for an amount
in excess of $10,000, or for any amount if the proceeds are to be sent elsewhere
than the address of record, must be accompanied by signature guarantees. The
guarantor of a signature must be a bank that is a member of the FDIC, a trust
company, a member firm of a national securities exchange or any other eligible
guarantor institution. The Sub-Administrator will not accept guarantees from
notaries public. The Sub-Administrator may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees and guardians. A redemption request will not be deemed to be properly
received until the Sub-Administrator receives all required documents in proper
form. The Funds ordinarily will make payment for shares redeemed by mail within
five Business Days after proper receipt by the Sub-Administrator of the
redemption request. Questions with respect to the proper form for redemption
requests should be directed to the Sub-Administrator at (800) 628-0413.
Redemption by Telephone. Direct Investors may redeem shares by calling
(800) 628-0413 and instructing the Sub-Administrator to mail a check for
redemption proceeds of up to $10,000 to the address of record. A redemption
request for an amount in excess of $10,000 or for any amount if the proceeds are
to be sent elsewhere than the address of record, must be accompanied by
signature guarantees. (See "Redemption by Mail.")
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<PAGE> 23
Redemption by Wire. Direct Investors who have so indicated on the
application, or have subsequently arranged in writing to do so, may redeem
shares by instructing the Sub-Administrator by wire or telephone to wire the
redemption proceeds of $1,000 or more directly to a Direct Investor's account at
any commercial bank in the United States. The Sub-Administrator charges a $5.00
fee for each wire redemption and the fee is deducted from the redemption
proceeds. The redemption proceeds must be paid to the same bank and account as
designated on the application or in written instructions subsequently received
by the Sub-Administrator. To request redemption of shares by wire, Direct
Investors should call (800) 628-0413.
In order to arrange for redemption by wire after an account has been
opened or to change the bank or account designated to receive redemption
proceeds, a written request must be sent to the Trust at the address listed
above under "Redemption by Mail." Such requests must be signed by the investor
and accompanied by a signature guarantee (see "Redemption by Mail" above for
details regarding guarantees). Further documentation may be requested from
corporations, executors, administrators, trustees, or guardians. If, due to
temporary adverse conditions, investors are unable to effect telephone
transactions, investors are encouraged to follow the procedures for transactions
by wire or mail which are described above.
The Trust reserves the right to refuse a wire or telephone redemption
if it believes it is advisable to do so. Procedures for redeeming shares by wire
or telephone may be modified or terminated at any time. Neither the Trust nor
any of its service contractors will be liable for any loss, expense or cost for
acting upon any telephone instructions believed genuine unless it acts with
willful misfeasance, bad faith or gross negligence. Accordingly, investors will
bear the risk of loss. In attempting to confirm that telephone instructions are
genuine, the Trust will use such procedures as are considered reasonable,
including recording those instructions and requesting information as to account
registration (such as the name in which an account is registered, the account
number, recent transactions in the account, and the account holder's social
security number, address and/or bank). To the extent that the Trust fails to use
reasonable procedures as a basis for its belief, it and/or its service
contractors may be liable for instructions that prove to be fraudulent and
unauthorized.
No redemption by a Direct Investor in any Fund will be processed until
the Trust has received a completed application with respect to the Direct
Investor's account.
If any portion of the shares to be redeemed represents an investment
made by personal check, the Trust reserves the right to delay payment of
proceeds until the Sub-Administrator is reasonably satisfied that the check has
been collected, which could take up to 15 days from the purchase date. A Direct
Investor who anticipates the need for more immediate access to his or her
investment should purchase shares by Federal funds or bank wire or by certified
or cashier's check. Banks normally impose a charge in connection with the use of
bank wires, as well as certified checks, cashier's checks and Federal funds.
OTHER REDEMPTION INFORMATION
The Trust reserves the right to redeem accounts (other than retirement
plan accounts) involuntarily, upon 60 days' written notice, if the account's net
asset value falls below $250 as a result of redemptions. In addition, if an
investor has agreed with a particular Institution to maintain a minimum balance
in his or her account at the Institution with respect to Fund shares, and the
balance
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<PAGE> 24
in such account falls below that minimum, the Customer may be obliged by the
Institution to redeem all of his or her shares.
The Trust may require any information reasonably necessary to ensure
that a redemption has been duly authorized.
Redemption orders are effected at the net asset value per share next
determined after receipt and acceptance of the order by the Distributor. The
Trust reserves the right to wire redemption proceeds within seven days after
receiving the redemption order if, in its judgment, an earlier payment could
adversely affect a Fund.
DESCRIPTION OF SHARES
The Trust was organized on February 22, 1990 under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust." The Trust offers shares of beneficial interest,
par value $.001 per share. Five series of shares have been authorized for sale
to the public, four of whose shares constitute the interests of the Funds
described in this Prospectus. When matters are submitted for shareholder vote,
shareholders of each Fund will have one vote for each full share held and
proportionate, fractional votes for fractional shares held. Generally, shares of
the Trust 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.
Normally, no meetings of shareholders will be held for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Shareholders of record of no less than two-thirds of the outstanding
shares of the Trust may remove a Trustee through a declaration in writing or by
vote cast in person or by proxy at a meeting called for that purpose. A meeting
will be called for the purpose of voting on the removal of a Trustee at the
written request of holders of 10% of the Trust's outstanding shares.
Shareholders who satisfy certain criteria will be assisted by the Trust in
communicating with other shareholders in seeking the holding of the meeting.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the
performance and yields of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to stock or other relevant
bond indexes or to rankings prepared by independent services or other financial
or industry publications that monitor the performance of mutual funds. For
example, the performance of the Funds may be compared to data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds, the S&P 500, the Consumer Price Index,
the Dow Jones Industrial Average, a recognized unmanaged index of common stocks
of 30 industrial companies listed on the NYSE, the Small Company Index, the
Utility Index or the U.S. Treasury Index.
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<PAGE> 25
Performance and yield 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 and yields of the
Funds.
The standard yield is computed by dividing a Fund's average daily net
investment income per share during a 30-day (or one month) base period
identified in the advertisement by the net asset value per share on the last day
of the period, and annualizing the result on a semi-annual basis. The Funds may
also advertise their "effective yield" which is calculated similarly but, when
annualized, the income earned by an investment in a Fund is assumed to be
reinvested.
The Funds may also advertise their performance using "average annual
total return" 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.
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 assume
that dividends and capital gain distributions made by a Fund during the period
are reinvested in Fund shares.
Performance and yields of the Funds will fluctuate and any quotation of
performance or yield should not be considered as representative of future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in a Fund's shares with bank deposits, savings accounts
and similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance and yield are generally functions of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Direct Investors and Customers of Institutions may, after appropriate
prior authorization, exchange shares of a Fund having a value of at least $100
for shares of any of the other funds or portfolios offered by the Trust or
otherwise advised by Fleet Investment Advisors Inc. or its affiliates in which
the Direct Investor or Customer maintains an existing account, provided that
such other shares may legally be sold in the state of the investor's residence.
The minimum initial investment to establish a new account in another Fund by
exchange is $2,500, unless at the time of the exchange the Direct Investor or
Customer elects, with respect to the Fund into which the exchange is being made,
to participate in the Automatic Investment Program described below, in which
event there is no minimum initial investment requirement.
An exchange involves a redemption of all or a portion of the shares of
a Fund and the investment of the redemption proceeds in shares of another fund
or portfolio offered by the Trust or otherwise advised by the Investment Adviser
or its affiliates. The redemption will be made at the per share net asset value
next determined after the exchange request is received. The shares of the fund
to
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<PAGE> 26
be acquired will be purchased at the per share net asset value next determined
after acceptance of the exchange request.
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 the Trust's exchange privilege, Direct
Investors should call (800) 628-0413. Customers of Institutions should call
their Institution for such information. Customers exercising the exchange
privilege with the Municipal Bond Fund or another fund or portfolio offered by
the Trust or otherwise advised by the Investment Adviser should request and
review its prospectus prior to making an exchange (call (800) 628-0414 for a
prospectus). Telephone all exchanges to (800) 628-0413.
In order to prevent abuse of this privilege to the disadvantage of
other shareholders, the Trust reserves the right to terminate the exchange
privilege of any shareholder who requests more than three exchanges a year. The
Trust 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 expenses to the Trust which will result from
effecting additional exchange requests. The exchange privilege may be modified
or terminated at any time. At least 60 days' notice of any material modification
or termination will be given to shareholders except where notice is not required
under the regulations of the Securities and Exchange Commission.
The Trust does not charge any exchange fee. However, Institutions may
charge such fees with respect to either all exchange requests or with respect to
any request which exceeds the permissible number of free exchanges during a
particular period. Customers of Institutions should contact their Institution
for applicable information.
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, the Customer should consult a tax or other
financial adviser to determine the tax consequences.
RETIREMENT PLANS
Shares of the Funds are available for purchase in connection with the
following tax-deferred prototype retirement plans:
Individual Retirement Accounts ("IRAs") (including "rollovers" from
existing retirement plans), a retirement-savings vehicle for qualifying
individuals. The minimum initial investment for an IRA account is $500 ($250 for
a spousal account).
Simplified Employee Pension Plans ("SEPs"), a form of retirement plan
for sole proprietors, partnerships and corporations. The minimum initial
investment for a SEP account is $500.
Multi-Employee Pension Plans ("MERPs"), a retirement vehicle
established by employers for their employees which is qualified under Section
401(k) and 403(b) of the Internal Revenue Code.
The minimum initial investment for a MERP is $500.
Keogh Plan, a retirement vehicle for self-employed individuals. The
minimum initial investment for a Keogh Plan is $500.
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<PAGE> 27
Detailed information concerning eligibility and other matters related
to these plans and the form of application is available from the Distributor
(call (800) 628-0413) with respect to IRAs, SEPs and Keogh Plans and from Fleet
Brokerage Securities Corporation (call (800) 221-8210) with respect to MERPs.
AUTOMATIC INVESTMENT PROGRAM AND SYSTEMATIC WITHDRAWAL PLAN
The Automatic Investment Program permits a Direct Investor to purchase
Fund shares (minimum of $50 per transaction) each month. Provided the Direct
Investor's financial institution allows automatic withdrawals, Fund shares are
purchased by transferring funds from a Direct Investor's checking, bank money
market or NOW account designated by the investor. The account designated will be
debited in the specified amount, and Fund shares will be purchased, once a
month, on or about either the first or fifteenth day. Only an account maintained
at a domestic financial institution which is an Automated Clearing House member
may be so designated.
The Systematic Withdrawal Plan permits a Direct Investor to withdraw
Fund shares on a monthly, quarterly, semi-annual or annual basis, if the account
has a starting value of at least $10,000. Proceeds of the redemption will be
sent to the shareholder's address of record or financial institution on or about
the twenty-fifth day of each month. If withdrawals 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 the
Administrator (but not less than five days before a payment date). There is no
charge for this service.
INVESTING BY PAYROLL DEDUCTION BY REGULAR IBM EMPLOYEES
Until June 30, 1997, regular IBM employees may buy shares in the Fund
through payroll deduction. The minimum investment is $25 per account per pay
period. Deductions from any one employee may be invested in up to ten funds or
portfolios offered by the Trust or otherwise advised by the Investment Adviser
or its affiliates. IBM employees investing by payroll deduction in other funds
or portfolios offered by the Trust or otherwise advised by the Investment
Adviser or its affiliates should request and review the fund or portfolio's
prospectus prior to making an investment (call (800) 628-0414 for a prospectus).
Deductions will begin as soon as practicable following the submission of your
Galaxy II Payroll Deduction Authorization Form. You may change or stop payroll
deduction by submitting a new Galaxy II Payroll Deduction Authorization Form.
Payroll deduction investments will be reported on quarterly customer statements.
Closing your account by redeeming all of its shares will not automatically
cancel your payroll deduction investment.
The Funds may also offer their shares to employees of other companies
through payroll deduction.
LICENSE AGREEMENTS
"Standard & Poor's," "S&P," "S&P 500," "Standard and Poor's 500," and
"500" are service marks of Standard & Poor's Corporation and have been licensed
to the Trust.
The Large Company Index Fund is not sponsored, endorsed, sold or
promoted by Standard & Poor's ("S&P"). S&P makes no representation or warranty,
express or implied, to the shareholders of the Large Company Index Fund or any
member of the public regarding the advisability of
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<PAGE> 28
investing in securities generally or in the Large Company Index Fund
particularly or the ability of the S&P 500 Index to track general stock market
performance. S&P's only relationship to the Trust is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Trust or the Large Company
Index Fund. S&P has no obligation to take the needs of the Trust or the
shareholders of the Large Company Index Fund into consideration in determining,
composing or calculating the S&P 500 Index. S&P is not responsible for and has
not participated in the determination of the prices and amount of the shares of
the Large Company Index Fund or the timing of the issuance or sale of the shares
of the Large Company Index Fund or in the determination or calculation of the
equation by which the shares of the Large Company Index Fund are to be converted
into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the Large Company Index Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, SHAREHOLDERS OF THE LARGE
COMPANY INDEX FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
The Russell Special(TM) Small Company Index and the Russell 1000(R)
Utility Index are registered trademarks of the Frank Russell Company and are
being used under license. The Salomon Brothers Broad Investment-Grade Bond Index
is a registered trademark of Salomon Brothers Inc.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports describing the
Fund's investment operations and annual financial statements audited by
independent certified public accountants.
Inquiries regarding the Funds may be directed to Galaxy II at (800)
628-0414 (applications and information concerning initial purchases and current
performance) or (800) 628-0413 (additional purchases, redemptions, exchanges and
other shareholder services).
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<PAGE> 29
GALAXY FUND II - THE INDEXED FUNDS
STATEMENT OF ADDITIONAL INFORMATION
THE LARGE COMPANY INDEX FUND
THE SMALL COMPANY INDEX FUND
THE UTILITY INDEX FUND
THE U.S. TREASURY INDEX FUND
AUGUST 1, 1996
<PAGE> 30
This Statement of Additional Information is meant to be read
in conjunction with the Prospectus of Galaxy Fund II ("Galaxy II" or the
"Trust") dated August 1, 1996 relating to four indexed funds (the "Prospectus")
and is incorporated by reference in its entirety into the Prospectus. Because
this Statement of Additional Information is not itself a prospectus, no
investment in shares of the Trust should be made solely upon the information
contained herein. Copies of the Prospectus and of Galaxy II's Prospectus
relating to the Municipal Bond Fund may be obtained by calling 440 Financial
Distributors, Inc. (the "Distributor"), the Trust's distributor, at (800)
628-0414. Information regarding the status of shareholder accounts may be
obtained by calling First Data Investor Services Group, Inc. ("FDISG"), the
Trust's transfer agent, at (800) 628-0413.
<PAGE> 31
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVES........................................................ 1
INVESTMENT POLICIES AND RISK CONSIDERATIONS.................................. 2
The Indexing Approach...................................... 2
U.S. Government Securities................................. 2
Bank Obligations........................................... 3
Futures Contracts.......................................... 3
Lending of Portfolio Securities............................ 5
Repurchase Agreements...................................... 6
Investing in Utilities..................................... 7
Valuation of Portfolio Securities.......................... 7
INVESTMENT LIMITATIONS.............................................. 7
Portfolio Turnover......................................... 10
Portfolio Transactions..................................... 10
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................... 12
ADDITIONAL INFORMATION CONCERNING TAXES............................. 12
TRUSTEES AND OFFICERS............................................... 14
ADVISORY, ADMINISTRATION, CUSTODIAN, TRANSFER AGENT
AND DIVIDEND PAYING AGENT AGREEMENTS............................... 19
Investment Adviser and Administrator....................... 19
Authority to Act as Investment Adviser..................... 22
Custodian, Transfer Agent and Dividend Paying Agent........ 22
PERFORMANCE AND YIELD INFORMATION................................... 23
COUNSEL............................................................. 25
INDEPENDENT ACCOUNTANTS............................................. 25
GENERAL INFORMATION................................................. 26
FINANCIAL STATEMENTS................................................ 28
REPORT OF INDEPENDENT ACCOUNTANTS DATED
May 10, 1996.............................................................FS-34
<PAGE> 32
INVESTMENT OBJECTIVES
Galaxy II, which is a no-load, open-end, management investment
company, offers investors five investment options, four of which, the Large
Company Index Fund (the "Large Company Fund"), the Small Company Index Fund (the
"Small Company Fund"), the Utility Index Fund (the "Utility Fund"), and the U.S.
Treasury Index Fund (the "U.S. Treasury Fund", and together with the Large
Company Fund, the Small Company Fund and the Utility Fund, the "Funds"), are
described in this Statement of Additional Information. The investment objective
of the Large Company Fund is to provide investment results that, before
deduction of operating expenses, match the price and yield performance of U.S.
publicly traded common stocks with large stock market capitalizations, as
represented by the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500"). The investment objective of the Small Company Fund is to provide
investment results that, before deduction of operating expenses, match the price
and yield performance of U.S. publicly traded common stocks with smaller stock
market capitalizations, as represented by the Russell SpecialTM Small Company
Index (the "Small Company Index"). The investment objective of the Utility Fund
is to provide investment results that, before the deduction of operating
expenses, match the price and yield performance of U.S. publicly traded common
stocks of companies in the utility industry, as represented by the Russell
1000(R) Utility Index (the "Utility Index"). The investment objective of the
U.S. Treasury Fund is to provide investment results that, before deduction of
operating expenses, match the price and yield performance of U.S. Treasury notes
and bonds, as represented by the U.S. Treasury component (the "U.S. Treasury
Index") of the Salomon Brothers Broad Investment-Grade Bond Index.
A Prospectus and Statement of Additional Information
describing the fifth investment option available through Galaxy II, the
Municipal Bond Fund, can be obtained by calling Galaxy II at (800) 628-0414.
<PAGE> 33
INVESTMENT POLICIES AND RISK CONSIDERATIONS
The following policies supplement the descriptions of the
Funds' investment objectives and policies in the Prospectus.
THE INDEXING APPROACH
In using sophisticated computer models to select securities, a
Fund will only purchase a security that is included in its respective index at
the time of such purchase. A Fund may, however, temporarily continue to hold a
security that has been deleted from its respective index pending the rebalancing
of the Fund's portfolio. A list of securities included, as of the date of this
Statement of Additional Information, in each of the S&P 500, the Small Company
Index, the Utility Index, and the U.S. Treasury Index is available free of
charge by calling Galaxy II at (800) 628-0414, or by writing to Galaxy II, c/o
FDISG, 4400 Computer Drive, P.O. Box 5108, Westborough, Massachusetts 01581.
As noted in the Prospectus, the Small Company Fund and the
U.S. Treasury Fund will not hold all of the issues in their respective indexes
because of the costs involved and the illiquidity of many of the securities. The
Small Company Fund expects to own at least 750 of the 2500 securities in the
Small Company Index and will not purchase stocks not represented in the Small
Company Index. The U.S. Treasury Fund will hold a limited number of the notes
and bonds represented in the U.S. Treasury Index.
U.S. GOVERNMENT SECURITIES
As noted in the Prospectus, a Fund may invest in short-term
debt obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities ("U.S. Government Securities"). U.S. Government Securities in
which a Fund may invest include direct obligations of the U.S. Treasury and
obligations issued by U.S. government agencies and instrumentalities. Included
among direct obligations of the United States are Treasury Bills, Treasury Notes
and Treasury Bonds, which differ principally in terms of their maturities.
Included among the securities issued by those agencies and instrumentalities
are: securities that are supported by the full faith and credit of the United
States (such as Government National Mortgage Association certificates);
securities that are supported by the right of the issuer to borrow from the U.S.
Treasury (such as securities of Federal Home Loan Banks); and securities that
are supported by the credit of the instrumentality (such as Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation bonds).
2
<PAGE> 34
BANK OBLIGATIONS
Certificates of deposit and time deposits in which the Funds
may invest are generally limited to those instruments issued by U.S. and foreign
banks, savings and loan associations and other banking institutions having total
assets in excess of $1 billion. Certificates of deposit ("CDs") are short-term
negotiable obligations of commercial banks; and time deposits ("TDs") are
non-negotiable deposits maintained in banking institutions for specified periods
of time at stated interest rates. The Funds may invest in U.S.
dollar-denominated CDs and TDs, including instruments issued or supported by the
credit of U.S. or foreign banks or savings institutions having total assets at
the time of purchase in excess of $1 billion. The Funds will invest in an
obligation of a foreign bank or foreign branch of U.S. banks only if Fleet
Investment Advisors Inc. (the "Investment Adviser" or "Fleet") deems the
obligation to present minimal credit risks. Nevertheless, this kind of
obligation entails risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. The Funds will treat TDs maturing in more
than seven calendar days as illiquid securities.
FUTURES CONTRACTS
The Large Company Fund, the Small Company Fund, and the
Utility Fund (the "Stock Funds") may enter into stock index futures contracts
that are traded on a national exchange. A Stock Fund will enter into stock index
futures contracts only for bona-fide hedging purposes, or as otherwise permitted
by Commodity Futures Trading Commission ("CFTC") regulations. If permitted, a
Stock Fund may use stock index futures to maintain cash reserves while remaining
fully invested, to facilitate trading, to reduce transaction costs or to seek
higher investment returns when a stock index futures contract is priced more
attractively than the underlying index.
A stock index futures contract is an agreement between a
seller and a buyer to deliver and take delivery of, respectively, a commodity
which is represented by a multiple of a stock price index at a future specified
date. The delivery is a cash settlement of the difference between the original
transaction price and the final price of the index times the multiple at the
termination of the contract. No physical delivery of the underlying stocks in
the index is made. By entering into a stock index futures contract, a Stock Fund
is able to seek to protect its assets from fluctuations in value without
necessarily buying or selling the assets.
A Fund may not engage in futures activities for other than
bona fide hedging purposes if the aggregate initial margin
3
<PAGE> 35
deposits on its non-hedging futures contracts and premiums paid on its related
options exceed 5% of the fair market value of the Fund's total assets, after
taking into account unrealized profits and unrealized losses on futures
contracts it has entered into.
No consideration is paid or received by a Fund upon the
purchase or sale of a futures contract. Upon entering into a futures contract, a
Fund will be required to deposit in a segregated account with its custodian an
amount of cash or cash equivalents, such as U.S. Government Securities or
high-grade debt obligations, equal to approximately 1 to 10% of the contract
amount (this amount is subject to change by the exchange on which the contract
is traded and brokers may require a higher amount). This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Fund involved upon termination
of the futures contract, assuming all contractual obligations have been
satisfied. The broker will have access to amounts in the margin account if a
Fund fails to meet its contractual obligations. Subsequent payments, known as
"variation margin," to and from the broker, will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." At any time prior to the expiration of a
futures contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
Galaxy II will set aside with its custodian, or with a
designated subcustodian, cash or cash equivalents, at least equal to the
underlying commodity value of each long position the Fund assumes in commodity
futures contracts or will take other actions consistent with regulatory
requirements, to avoid leverage.
There are several risks in connection with investing in
futures contracts. For example, although the Funds intend to enter into futures
contracts only if there is an active market for such contracts, there is no
assurance that a liquid market will exist for the contracts at any particular
time. Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices could move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting a Fund
to substantial losses. In such event, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. In addition, there can be no assurance that there will be a
perfect correlation between movements in the price of stocks
4
<PAGE> 36
underlying a stock index futures contract and movements in the price of stocks
underlying a Fund's benchmark index. There is some risk, therefore, that the use
of stock index futures contracts may reduce the correlation between the
performance of a Stock Fund and its index.
Losses incurred in futures transactions and the costs of these
transactions will affect a Fund's performance. In addition, a Fund might have to
sell securities to meet daily variation margin requirements at a time when it
would be disadvantageous to do so. These sales of securities may, but will not
necessarily, be at increased prices.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities to brokers, dealers
and other financial organizations that meet capital and other credit
requirements or other criteria established by the Board of Trustees. These
loans, if and when made, may not exceed 33-1/3% of the Fund's total assets taken
at value. Loans of portfolio securities will be collateralized by cash, letters
of credit or U.S. Government Securities, which are maintained at all times in an
amount at least equal to the current market value of the loaned securities plus
any dividends and interest accrued thereon. From time to time, a Fund may return
a part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is unaffiliated with
the Fund and that is acting as a "placing agent", provided that the Board of
Trustees (1) determines that any amount paid to a placing agent is reasonable
and based solely upon services rendered and (2) considers the propriety of any
amount paid to a borrower.
A Fund will adhere to the following conditions whenever its
portfolio securities are loaned: (a) the Fund must receive cash or equivalent
securities from the borrower as collateral at least equal to 100% of the current
market value of the loaned securities plus any interest and dividends accrued
thereon; (b) the borrower must increase such collateral whenever the market
value of the securities plus any accrued interest or dividends rises above the
level of such collateral; (c) the Fund must be able to terminate the loan at any
time; (d) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (e) the Fund may pay only reasonable custodian fees in
connection with the loan; and (f) voting rights on the loaned securities may
pass to the borrower, provided, however, that if a material event adversely
affecting the investment occurs, the Board of Trustees must terminate the loan
and regain the right to vote the securities.
5
<PAGE> 37
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreement transactions with
respect to U.S. Government Securities. A Fund will enter into repurchase
agreements only with member banks of the Federal Reserve System having total
assets in excess of $5 billion or non-bank dealers that are listed on the
Federal Reserve Bank of New York's list of reporting dealers. Repurchase
agreements are contracts under which the buyer of a security simultaneously
commits to resell the security to the seller at an agreed-upon price and date.
Under the terms of a typical repurchase agreement, a Fund would acquire a U.S.
Government Security for a relatively short period (usually not more than seven
days) subject to an obligation of the seller to repurchase, and the Fund to
resell, the U.S. Government Security at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. Under each repurchase agreement, the selling institution
will be required to maintain the value of the securities subject to the
repurchase agreement at not less than 101% of the repurchase price.
Repurchase agreements involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the subject Fund's ability to dispose of the underlying
securities. In evaluating these potential risks, the Investment Adviser, acting
under the supervision of the Board of Trustees, and on an ongoing basis,
monitors (a) the value of the collateral underlying each repurchase agreement of
the Funds to determine whether the value is at least equal to the total amount
of the repurchase obligation, including interest, and (b) the creditworthiness
of the banks and dealers with which the Funds enter into repurchase agreements.
A Fund will not enter into repurchase agreements that would cause more than 5%
of its net assets to be invested in illiquid securities.
A joint trading account may be used by the Funds to enter into
repurchase agreements. Each Fund's decision to invest in the joint account will
be solely at its option; a Fund will not be required either to invest a minimum
amount or to maintain a minimum balance. The Board of Trustees will evaluate
annually the joint account arrangement and will continue participation only if
it determines that there is a reasonable likelihood that each participating Fund
and its shareholders would benefit from continued participation and that no
participant will be treated on a less advantageous basis than another
participant.
6
<PAGE> 38
INVESTING IN UTILITIES
The Utility Fund will concentrate its investments in the
utility industry. As a result, the Fund's investments may be subject to greater
risk and market fluctuation than a fund that had securities representing a
broader range of investment alternatives. The Fund's concentration policy means
that it will invest at least 25% of its total assets in utility companies, which
policy is a fundamental policy of the Fund and cannot be changed without
approval of a majority of the Fund's outstanding voting securities. The Fund
expects, however, to invest at least 80% of its total assets in utility
companies.
VALUATION OF PORTFOLIO SECURITIES
Portfolio securities which are listed on the New York Stock
Exchange or the American Stock Exchange are valued at the last quoted sales
price, or if no sales occurred, the closing bid price. Investments in U.S.
Government Securities (other than short-term securities) are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued on the basis of
amortized cost (which involves valuing an investment instrument at its cost and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument) unless Galaxy II's Board of Trustees has determined
that amortized cost does not approximate market value. Other securities for
which market quotations are readily available are valued as nearly as possible
in the manner described above. Securities may be valued by a pricing service
when such prices are believed to reflect the fair market value of such
securities. Other assets and securities for which market quotations are not
readily available are valued based on fair value as determined in good faith in
accordance with procedures established by the Board of Trustees.
INVESTMENT LIMITATIONS
Investment limitations numbered 1 through 13 as they affect a
particular Fund may not be changed without the approval by a vote of a majority
of the outstanding shares of that Fund. Investment limitations numbered 14
through 16 may be changed by a vote of the Board of Trustees at any time. A
majority vote by shareholders, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, is defined as the lesser of (a) 67% or more of the shares present at the
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (b) more than 50% of the outstanding
shares of the Fund.
7
<PAGE> 39
A Fund may not:
1. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that (a) this 5% limitation does not apply to
U.S. Government Securities and (b) up to 25% of the value of the Fund's total
assets may be invested without regard to this 5% limitation.
2. Borrow money or issue senior securities except that the
Fund may borrow from banks for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 33-1/3% of the value of the
Fund's total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any bank borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 33-1/3% of
the value of the Fund's total assets at the time of such borrowing. Whenever
borrowings are outstanding, a Fund will not make any additional investments
(including roll-overs). For purposes of this restriction, collateral
arrangements with respect to (a) the purchase and sale of options on stock
indexes and (b) initial and variation margin for futures contracts, will not be
deemed to be issuances of senior securities or to be pledges of a Fund's assets.
3. Purchase any securities that would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry, except that the Utility Fund will invest in excess of 25% of its
assets in the securities of companies within the utility industry, and provided
that there shall be no limit on the purchase of U.S. Government Securities.
4. Make loans, except that the Fund may purchase or hold debt
obligations, lend portfolio securities and enter into repurchase agreements, as
described herein and in the Prospectus.
5. Underwrite any issue of securities except to the extent
that the sale of portfolio securities in accordance with the Fund's investment
objective, policies and limitations may be deemed to be underwriting.
6. Purchase or sell real estate or real estate limited
partnership interests, or invest in oil, gas or mineral leases, or mineral
exploration or development programs, except that the Fund may invest in
securities secured by real estate, mortgages or interests therein and may
purchase securities issued by companies that invest or deal in any of the above.
7. Make short sales of securities or maintain a short
position.
8
<PAGE> 40
8. Purchase securities of other investment companies except as
they may be acquired in connection with a merger, consolidation, acquisition,
reorganization or offer of exchange and except as permitted under the Investment
Company Act of 1940, as amended (the "1940 Act"). Purchases made in connection
with this restriction may subject shareholders to duplicate fees and expenses.
9. Purchase more than 10% of the voting securities of any one
issuer, more than 10% of the securities of any class of any one issuer or more
than 10% of the outstanding debt securities of any one issuer; provided that
this limitation shall not apply to investments in U.S. Government Securities.
10. Purchase securities on margin, except that a Fund may
obtain any short-term credits necessary for the clearance of purchases and sales
of securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin by the Fund.
11. Invest in commodities, except that the Stock Funds may
invest in stock index futures as described in this Statement of Additional
Information and in the Prospectus.
12. Invest in companies for the purpose of exercising
control or management.
13. Invest more than 5% of the value of the Fund's net assets
in securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities.
14. Purchase any security if as a result the Fund would then
have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.
15. Purchase or retain securities of any company if, to the
knowledge of Galaxy II, any of Galaxy II's officers or Trustees or any officer
or director of Galaxy II's investment adviser individually owns more than 1/2 of
1% of the outstanding securities of such company and together they own
beneficially more than 5% of the securities.
16. Purchase warrants.
Galaxy II may make commitments more restrictive than the
restrictions listed above with respect to a Fund so as to
9
<PAGE> 41
permit the sale of shares of the Fund in certain states. Should Galaxy II
determine that any such commitment is no longer in the best interest of the Fund
involved and its shareholders, Galaxy II will revoke the commitment by
terminating the sale of shares of the Fund in the state involved or may
otherwise modify its commitment based on a change in the involved state's
restrictions. If a percentage restriction (other than that contained in
Investment Limitation 2) is adhered to at the time of an investment, a later
increase or decrease in the percentage of assets resulting from a change in the
values of portfolio securities or in the amount of the relevant Fund's assets
will not constitute a violation of such restriction.
PORTFOLIO TURNOVER
Galaxy II cannot accurately predict the Funds' respective
portfolio turnover rates. For the fiscal years ended March 31, 1996 and 1995,
respectively, the portfolio turnover rates were as follows: the Large Company
Fund, 5% and 7%; the Small Company Fund, 14% and 10%; the U.S. Treasury Fund,
35% and 50%; and the Utility Fund, 12% and 5%. Portfolio turnover rate is
calculated by dividing the lesser of a Fund's annual sales or purchases of
portfolio securities by the monthly average value of securities in the Fund
during the year, excluding any portfolio security, the maturity of which at the
time of acquisition was one year or less. Higher portfolio turnover rates can
result in corresponding increases in brokerage commissions. A Fund will not
consider its turnover rate a limiting factor in making investment decisions
consistent with its investment objective and policies.
PORTFOLIO TRANSACTIONS
The Investment Adviser will select specific portfolio
investments and effect transactions for the Funds. The Investment Adviser seeks
to obtain the best net price and the most favorable execution of orders. The
Investment Adviser may, in its discretion, effect transactions in portfolio
securities with dealers who provide research advice or other services to the
Funds or the Investment Adviser. The Investment Adviser is authorized to pay a
broker or dealer who provides such brokerage and research services a commission
for executing a portfolio transaction for any Fund which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction if the Investment Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Investment Adviser's overall responsibilities to
the particular Fund and to the Trust. Such brokerage and research services might
consist of reports and statistics relating to specific companies or industries,
general summaries
10
<PAGE> 42
of groups of stocks or bonds and their comparative earnings and yields, or broad
overviews of the stock, bond and government securities markets and the economy.
The fees under the investment advisory agreement between Galaxy II and the
Investment Adviser are not reduced by reason of receiving such brokerage and
research services. The Board of Trustees will periodically review the
commissions paid by the Funds to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Funds.
Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. There is
generally no stated commission in the case of securities traded in U.S.
over-the-counter markets, but the prices of those securities include undisclosed
commissions or mark-ups. The cost of securities purchased from underwriters
includes an underwriting commission or concession, and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down. U.S. Government Securities are generally purchased from underwriters
or dealers, although certain newly issued U.S. Government Securities may be
purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality. No brokerage commissions are typically paid on purchases and
sales of U.S. Government Securities.
During the fiscal years ended March 31, 1994, March 31, 1995
and March 31, 1996, the Large Company Fund paid $8,002, $22,022 and $22,538,
respectively, in commissions to broker-dealers for execution of portfolio
transactions and, for the same periods, the Small Company Fund paid $113,705,
$132,261 and $95,120, respectively, in commissions. For the fiscal years ended
March 31, 1994, March 31, 1995 and March 31, 1996 the Utility Fund paid $55,415,
$20,912 and $16,044, respectively, in commissions to broker-dealers. During the
fiscal years ended March 31, 1995 and March 31, 1996, the U.S. Treasury Index
Fund paid $237 and $0, respectively, in commissions to broker-dealers for
execution of portfolio transactions. These Funds follow an index strategy and,
therefore, any variation in turnover rate would be related to an increase or
decrease in assets of a Fund resulting in the necessity of such Fund buying or
selling securities.
The Trust is required to identify any securities of its
"regular brokers or dealers" that the Trust has acquired during its most recent
fiscal year. At March 31, 1996, (a) the Large Company Fund held common stock of
Merrill Lynch and Co., Inc. in the amount of $494,627 and in Salomon, Inc. in
the amount of $192,338; and (b) the Small Company Fund held common stock of Bear
Stearns Cos. in the amount of $954,385.
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<PAGE> 43
Since Galaxy II does not market shares of the Funds through
intermediary brokers or dealers, it is not Galaxy II's practice to allocate
brokerage or principal business on the basis of sales of its shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are sold on a continuous basis by the
Distributor, and the Distributor has agreed to use appropriate efforts to
solicit all purchase orders. As described in the Prospectus, shares of the Funds
are sold to customers ("Customers") of Fleet Brokerage Securities Corporation,
Fleet Securities, Inc., Fleet Financial Group, Inc. ("Fleet Group"), its
affiliates, their correspondent banks, and other qualified banks, savings and
loan associations and broker/dealers ("Institutions"). As described in the
Prospectus, Shares may also be sold to individuals or corporations, who submit a
purchase application to Galaxy II, purchasing either for their own accounts or
for the accounts of others ("Direct Investors").
Galaxy II 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 utilized is restricted, or an
emergency, as defined by the rules and regulations of the Securities and
Exchange Commission (the "SEC"), exists making disposal of the Fund's
investments or determination of its net asset value not reasonably practicable;
(b) the New York Stock Exchange is closed (other than customary weekend and
holiday closings); or (c) the SEC has by order permitted such suspension.
ADDITIONAL INFORMATION CONCERNING TAXES
Each Fund has qualified each year in the past and each Fund
intends to qualify each year in the future as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Provided that
a Fund (a) qualifies as a regulated investment company and (b) distributes to
its shareholders at least 90% of its "investment company taxable income" (that
is, its income minus its "net capital gains" and after taking into account
certain required adjustments), the Fund generally will not be subject to Federal
income tax to the extent its net investment income (that is, its income other
than its net realized capital gains) and its net realized long-term and
short-term capital gains are distributed to its shareholders in accordance with
the Code. Because of the Code's requirements for qualification as a regulated
investment company, each Fund may be restricted in the utilization of certain of
the investment techniques described above and in the Prospectus.
12
<PAGE> 44
As noted in the Prospectus, each Fund expects to pay dividends
and to make distributions as necessary to avoid the application of the 4%
non-deductible excise tax measured with respect to certain undistributed amounts
of ordinary income and capital gain. A Fund may also, in order to avoid the 4%
excise tax, declare one or more dividends in October, November or December of
any calendar year, payable to shareholders of record on a specified date in such
a month. If a Fund declares such dividends, then each such shareholder will be
treated as receiving such dividends and the Fund will be treated as having paid
the dividends on December 31 of that year provided that the Fund pays such
dividends to such shareholders during January of the following calendar year. As
a general rule, dividends paid by a Fund will qualify for the dividends-received
deduction for corporate shareholders if such Fund dividends are attributable to
dividends received by the Fund from U.S. corporations and certain holding period
requirements are met.
As described above and in the Prospectus, the Stock Funds are
authorized to buy and sell exchange-traded stock index futures contracts. Each
Fund's transactions, if any, in futures contracts will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses recognized by the Fund (i.e., may affect whether gains or
losses are ordinary or capital), accelerate recognition of income to the Fund
and defer Fund losses. These rules could therefore affect the character, amount
and timing of distributions to shareholders. These provisions also (1) will
require each Fund to mark-to-market certain types of its positions (i.e., treat
them as if they were closed out) and (2) may cause that Fund to recognize income
without receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. Each Fund will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it acquires any futures contract or hedged investment so that, to
the extent possible, (1) neither the Fund nor its shareholders will be treated
as receiving a materially greater amount of capital gains or distributions than
actually realized or received, (2) the Fund will be able to use substantially
all of its losses for the fiscal years in which the losses actually occur and
(3) the Fund will continue to qualify as a regulated investment company.
Net realized long-term capital gains will be distributed as
described in the Prospectus. Such distributions ("capital gain dividends") will
be taxable to a shareholder as long-term capital gains, regardless of how long a
shareholder has held Fund shares. However, if a shareholder receives a capital
gain dividend with respect to any share and if such share is held by the
shareholder for six months or less, then any loss on the
13
<PAGE> 45
sale or redemption of such share will be treated as a long-term capital loss to
the extent of the capital gain dividend.
A shareholder of a Fund receiving dividends or distributions
in the form of additional shares will be treated for Federal income tax purposes
as receiving a distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or distributions receives and will have a
cost basis in the shares equal to that amount.
Investors considering buying shares of a Fund on or just prior
to the record date for a taxable dividend or capital gain distribution should be
aware that the amount of the forthcoming dividend or distribution payment,
although, in effect, a return of capital will be a taxable dividend or
distribution payment.
If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to backup withholding, then the
shareholder may be subject to a 31% "backup withholding tax" with respect to (a)
dividends and distributions and (b) the proceeds of any sales or redemptions of
a Fund's shares. An individual's taxpayer identification number is his or her
social security number. Corporate shareholders and certain other shareholders
specified in the Code generally are exempt from backup withholding. The 31%
"backup withholding tax" is not an additional tax and may be credited against a
taxpayer's regular Federal income tax liability. Dividends and distributions
also may be subject to state and local taxes depending on each shareholder's
particular situation.
The foregoing is only a summary of certain tax considerations
generally affecting the Funds and their shareholders, and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult their tax
advisers with respect to the particular tax consequences to them of an
investment in a Fund.
TRUSTEES AND OFFICERS
The trustees and executive officers of Galaxy II, their
addresses, their principal occupations during the past five years, ages and
other affiliations are set forth below. The executive officers of Galaxy II are
employees of organizations that provide services to the Funds. Each trustee who
is an "interested person" of Galaxy II, as defined in the 1940 Act, is indicated
by an asterisk. Each other trustee has no relationship with the Investment
Adviser or the Former Adviser (as hereafter defined).
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<PAGE> 46
Positions Held with Galaxy II and
Principal Occupation(s) During
Name and Address Past 5 Years
- ---------------- ---------------------------------
Dwight E. Vicks, Jr. Trustee and Chairman of the Board
Vicks Lithograph &
Printing Corporation President & Director, Vicks
Commercial Drive Lithograph & Printing
P.O. Box 270 Corporation (book manufacturing
Yorkville, NY 13495 and commercial printing); Director,
Age 63 Utica First Insurance Company;
Trustee, Savings Bank of
Utica; Director, Monitor
Life Insurance Company;
Director, Commercial
Travelers Mutual Insurance
Company; Chairman of the
Board, The Galaxy Fund and
The Galaxy VIP Fund.
*John T. O'Neill Trustee, President and Treasurer
Hasbro, Inc.
200 Narragansett Executive Vice President and CFO,
Park Drive Hasbro, Inc. (toy and game
Pawtucket, RI 02862 manufacturer), since 1987; Trustee,
Age 55 President and Treasurer, The Galaxy
Fund and The Galaxy VIP
Fund; Managing Partner,
KPMG Peat Marwick
(accounting firm), 1986.
Louis DeThomasis Trustee
Saint Mary's College
of Minnesota President, Saint Mary's College of
Winona, MN 55987 Minnesota; Director, Bright Day
Age 55 Travel, Inc.; Trustee, Religious
Communities Trust; Trustee, The
Galaxy Fund and The Galaxy VIP
Fund.
Donald B. Miller Trustee
10725 Quail Covey Road
Boynton Beach, FL 33436 Chairman, Horizon Media, Inc.
Age 70 (broadcast services); Director/
Trustee, Lexington Funds; Director,
Maguire Group of Connecticut, Inc.
(consulting engineers); Trustee,
Keuka College; Trustee, The Galaxy
Fund and The Galaxy VIP Fund.
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<PAGE> 47
James M. Seed Trustee
The Astra Ventures, Inc.
One Citizens Plaza Chairman and President, The Astra
Providence, RI 02903 Projects, Incorporated (land
Age 55 development); President, The Astra
Ventures, Incorporated
(previously, Buffinton Box
Company - manufacturer of
cardboard boxes); Trustee,
The Galaxy Fund and The
Galaxy VIP Fund;
Commissioner, Rhode Island
Investment Commission.
*Bradford S. Wellman Trustee
2468 Ohio Street
Bangor, ME 04401 Private Investor; President, Ames &
Age 65 Wellman, from 1978 to 1991;
President, Pingree
Associates, Inc., from 1974
until 1990; Director, Essex
County Gas Company, until
January 1994; Director,
Maine Mutual Fire Insurance
Co.; Member, Maine Finance
Authority; Trustee, The
Galaxy Fund and The Galaxy
VIP Fund.
W. Bruce McConnel, III Secretary
Drinker Biddle & Reath
Philadelphia National Partner of the law firm Drinker
Bank Building Biddle & Reath, Philadelphia,
1345 Chestnut St. Pennsylvania.
Philadelphia, PA 19107
Age 53
Neil Forrest Vice President and Assistant
First Data Investor Treasurer
Services Group, Inc.
4400 Computer Drive Vice President, Investment
P.O. Box 5108 Marketing and Strategic Planning
Westborough, MA 01581 Manufacturers and Traders Trust Co.
Age 36 1990-1992; First Data Investor
Services Group, Inc. 1992-present.
The following chart provides certain information about Galaxy
II trustee fees for the year ended March 31, 1996:
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<PAGE> 48
<TABLE>
<CAPTION>
TOTAL
COMPENSA-
PENSION OR TION FROM
RETIREMENT COMPANY
BENEFITS AND FUND
AGGREGATE ACCRUED COMPLEX*
NAME OF COMPENSATION AS PART OF PAID TO
PERSON FROM THE COMPANY FUND EXPENSES TRUSTEES
- ------ ---------------- ------------- --------
<S> <C> <C> <C>
Bradford S. Wellman $5,000 None $29,750
Dwight E. Vicks, Jr. $5,000 None $36,100
Donald B. Miller $5,000 None $32,000
Louis DeThomasis $5,000 None $32,000
John T. O'Neill $5,000 None $34,625
James M. Seed $5,000 None $32,000
</TABLE>
* The "Fund Complex" consists of The Galaxy Fund, The Galaxy VIP Fund and
Galaxy Fund II.
Each trustee receives an annual fee of $5,000 for his services as a
trustee of Galaxy II plus an additional $750 for each in-person Galaxy II Board
meeting and $500 for each telephone Galaxy II Board meeting attended and is
reimbursed for expenses incurred in attending meetings. Beginning March 1,
1996, each trustee is also entitled to participate in the Galaxy Fund II
Deferred Compensation Plans (the "Plan"). The Plan, which is substantially
identical, provide that a trustee may defer all or a portion of the
compensation earned from Galaxy II to a deferred compensation account. Monies
in the deferred compensation account will be invested according to the
investment options selected by the trustee. No employee of First Data receives
any compensation from Galaxy II 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 II.
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<PAGE> 49
As of June 1, 1996, the aforementioned Trustees and officers
of Galaxy II as a group owned no shares of the Large Company Fund, the Small
Company Fund, the U.S. Treasury Fund, the Utility Fund or the Municipal Bond
Fund.
ADVISORY, ADMINISTRATION, CUSTODIAN, TRANSFER AGENT
AND DIVIDEND PAYING AGENT AGREEMENTS
INVESTMENT ADVISER AND ADMINISTRATOR
Fleet, an indirect subsidiary of Fleet Financial Group, Inc.,
serves as the investment adviser to the Funds. Fleet's principal offices are
located at 45 East Avenue, Rochester, New York 14604.
Pursuant to its investment advisory agreement with Galaxy II,
Fleet, subject to the general supervision of Galaxy II's Board of Trustees and
in accordance with each Fund's investment policies, manages each Fund, makes
decisions with respect to and places orders for all purchases and sales of its
portfolio securities and maintains related records. The fees paid to the
Investment Adviser under the Advisory Agreement are described in the Prospectus.
Prior to July 1, 1994, IBM Credit Management Corporation, a wholly-owned
subsidiary IBM Credit Corporation, served as the investment adviser to the Trust
(the "Former Adviser") for the same fees as those charged by Fleet Investment
Advisors Inc. For the fiscal year ended March 31, 1994 and for the period ended
June 30, 1994, the Former Adviser earned $143,524 and $35,830, respectively, as
adviser to the Large Company Fund, and for the period July 1, 1994 through March
31, 1995 and for the year ended March 31, 1996, Fleet earned $106,047 and
$194,615, respectively, as adviser to the Large Company Fund. For the fiscal
year ended March 31, 1994, and for the period ended June 30, 1994, the Former
Adviser earned $243,272 and $62,824, respectively, as adviser to the Small
Company Fund and for the period July 1, 1994 through March 31, 1995 and for the
year ended March 31, 1996, Fleet earned $178,169 and $264,753, respectively, as
adviser to the Small Company Fund. For the fiscal year ended March 31, 1994 and
for the period ended June 30, 1994, the Former Adviser earned $72,948 and
$16,429, respectively, as adviser to the Utility Fund, and for the period July
1, 1994 through March 31, 1995 and for the year ended March 31, 1996, Fleet
earned $43,024 and $55,279, respectively, as adviser to the Utility Fund. For
the fiscal years ended March 31, 1994 and for the period ended June 30, 1994,
the Former Adviser earned $149,615 and $32,672, respectively, as adviser to the
U.S. Treasury Fund and for the period July 1, 1994 through March 31, 1995 and
for the year ended March 31, 1996 Fleet earned $83,856 and $117,603,
respectively, as adviser to the U.S. Treasury Fund.
18
<PAGE> 50
Pursuant to its administration agreement with Galaxy II (the
"Administration Agreement"), Fleet National Bank (the "Administrator") generally
assists in certain aspects of the administration and operation of the Funds. The
Administrator has agreed to maintain office facilities for Galaxy II, furnish
Galaxy II with statistical and research data, clerical, accounting, and
bookkeeping services, certain other services such as internal auditing services
required by Galaxy II, and compute the net asset value and net income of the
Funds. In addition, the Administrator 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 II's operations.
Pursuant to the Administration Agreement, the Administrator may delegate to
another organization the performance of some or all of these services, in which
case the Administrator will be responsible for all compensation payable to such
organization and will remain liable for losses or failures resulting from the
actions or omissions of such agent. The Administrator has entered into a
Sub-Administration Agreement with First Data Investor Services Group, Inc.
("FDISG"), pursuant to which the Sub-Administrator has agreed to provide the
Trust with the services which the Trust is entitled to receive under the
Administration Agreement with the Administrator.
For the fiscal years ended March 31, 1994 and for the period
through June 30, 1994, the Former Adviser earned $430,573 and $107,490,
respectively, as administrator of the Large Company Fund and the Administrator
earned $311,540 and $581,697 for the period July 1, 1994 through March 31, 1995
and for the year ended March 31, 1996, respectively. For the fiscal year ended
March 31, 1994 and for the period through June 30, 1994, the Former Adviser
earned $729,817 and $188,472, respectively, as administrator of the Small
Company Fund and the Administrator earned $527,906 and $787,499 for the period
July 1, 1994 through March 31, 1995 and for the year ended March 31, 1996,
respectively. For the fiscal year ended March 31, 1994, and the period through
June 30, 1994, the Former Adviser earned $218,845 and $49,314, respectively, as
administrator of the Utility Fund and the Administrator earned $122,471 and
$164,968 for the period July 1, 1994 through March 31, 1995 and for the year
ended March 31, 1996, respectively. For the fiscal year ended March 31, 1994 and
for the period through June 30, 1994, the Former Adviser earned $448,845 and
$98,600, respectively, as administrator of the U.S. Treasury Fund and the
Administrator earned $244,968 and $352,810 for the period July 1, 1994 through
March 31, 1995 and for the year ended March 31, 1996, respectively.
The Administrator pays the salaries of all officers and
employees who are employed by both it and Galaxy II, and
19
<PAGE> 51
maintains office facilities for Galaxy II. The Investment Adviser and the
Administrator bear all expenses in connection with their respective duties under
the Advisory and Administration Agreements and the Administrator bears all of
Galaxy II's expenses with the following exceptions: brokerage fees and
commissions; fees and expenses of Trustees who are not officers, directors or
employees of the Investment Adviser, the Administrator, the Distributor or any
of their affiliates; taxes; interest; and any extraordinary non-recurring
expenses, including litigation to which Galaxy II may be a party. The fees paid
to the Administrator under the Administration Agreement are described in the
Prospectus.
The Advisory and Administration Agreements provide that,
absent willful misfeasance, bad faith, gross negligence or reckless disregard of
duty (or, in the case of the Investment Adviser, a breach of fiduciary duty with
respect to the receipt of compensation for services), neither the Investment
Adviser, nor the Administrator, as the case may be, shall be liable to Galaxy II
for any error of judgment or mistake of law or for any loss sustained by Galaxy
II. The Advisory and Administration Agreements are terminable without penalty by
Galaxy II on sixty days' written notice when authorized by vote of a majority of
its Board of Trustees, or by the Investment Adviser or Administrator, as the
case may be, on sixty days' written notice. In addition, the Advisory Agreement
is terminable without penalty by Galaxy II on sixty days' written notice when
authorized by a majority vote of its outstanding voting shares and will
automatically terminate in the event of its "assignment" as defined in the 1940
Act.
Each of the Advisory and Administration Agreements provides
that the agreement remains in effect until June 30 of each year, unless earlier
terminated, as long as such continuance is annually approved by a vote of
trustees who are not parties to the contract or "interested persons", as defined
by the 1940 Act, of any such party cast in person at a meeting specially called
for the purpose of voting on the continuance of the Advisory Agreement.
The Investment Adviser and the Administrator have agreed that
if in any fiscal year the aggregate expenses of a Fund (as defined under the
securities regulations of any state having jurisdiction over the Fund) exceed
the expense limitation of such state, the Investment Adviser and the
Administrator will reduce its advisory and administration fee, respectively,
payable by that Fund or reimburse the Fund to the extent required by state law.
A fee reduction, if any, will be accrued on a daily basis. The most restrictive
annual expense limitation applicable to a Fund is 2.5% of the first $30 million
of the average net assets of the Fund, 2% of the next $70 million of the average
net assets of the Fund and 1.5% of any remaining average net assets of the Fund.
20
<PAGE> 52
AUTHORITY TO ACT AS INVESTMENT ADVISER
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956, as amended, or any bank
or non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities such as shares of
the Funds, but do not prohibit such a bank holding company or its affiliates or
banks generally from acting as investment adviser, administrator, transfer agent
or custodian to such an investment company or from purchasing shares of such a
company as agent for and upon the order of customers. The Investment Adviser,
Administrator, the Funds' custodian and certain financial institutions which
have agreed to provide shareholder support services that are banks or bank
affiliates are subject to such banking laws and regulations. Should legislative,
judicial or administrative action prohibit or restrict the activities of such
companies in connection with their services to the Funds, Galaxy II might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is anticipated, however, that any
resulting change in the Funds' method of operation would not affect their net
asset value per share or result in financial losses to any shareholder. State
securities laws on this issue may differ from Federal law and banks and
financial institutions may be required to register as dealers pursuant to state
law.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT
The Chase Manhattan Bank, N.A. (the "Custodian") serves as
custodian to the Funds pursuant to a Custody Agreement. Under its custody
agreement, the Custodian 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; and (v) respond to
correspondence from security brokers and others relating to its duties.
First Data Investor Services Group, Inc. ("FDSIG") serves as
Galaxy II's transfer agent and dividend disbursing agent pursuant to a Transfer
Agency Agreement ("Transfer Agency Agreement"). Under the Transfer Agency
Agreement, FDISG has agreed to: (i) issue and redeem shares of each Fund; (ii)
transmit all communications by each Fund to its shareholders of record,
including reports to shareholders, dividend and distribution notice and proxy
materials for meetings of shareholders; (iii) respond to correspondence by
security brokers
21
<PAGE> 53
and others relating to its duties; and (iv) maintain shareholder accounts.
PERFORMANCE AND YIELD INFORMATION
From time to time, a Fund may quote its performance, as based
upon its total return, its yield in the case of the Utility Fund or the U.S.
Treasury Fund, or its tax-equivalent yield in the case of the U.S. Treasury
Fund, in advertisements or in reports and other communications to shareholders.
For the Large Company Fund and the Small Company Fund, the total returns for the
twelve-month period ending March 31, 1996 were 31.80% and 30.88%, respectively.
The average annual total returns for the Large Company Fund and the Small
Company Fund for the period beginning October 1, 1990 (commencement of
operations) and ending March 31, 1996 were 17.07% and 19.47%, respectively. For
the U.S. Treasury Fund, the total return for the twelve-month period ending
March 31, 1996 was 10.1%. The average annual total return for the U.S. Treasury
Fund for the period beginning June 4, 1991 (commencement of operations) through
March 31, 1996 was 8.1%. For the Utility Fund, the total return for the
twelve-month period ending March 31, 1996 was 26.60%. The average annual total
return for the Utility Fund for the period beginning January 5, 1993
(commencement of operations) through March 31, 1996 was 9.87%. These total
return figures have been adjusted by 1.05%, 1.06%, 0.97% and 0.97% for the
twelve-month period ended March 31, 1996, and by 0.86%, 0.79%, 0.92% and 0.64%
for the life of the Fund, for the Large Company Fund, the Small Company Fund,
the U.S. Treasury Fund and the Utility Fund, respectively, to reflect, based
upon a hypothetical $1,000 initial investment, the imposition of $10.00 annual
account maintenance fees. The Administrator has agreed to waive until further
notice receipt of the $10.00 annual account maintenance fees. Aggregate total
return may be shown by means of schedules, charts or graphs, and may indicate
subtotals of the various components of total return (that is, change in value of
initial investment, income dividends and capital gains distributions). A Fund's
"average annual total return" figures described in the Prospectus are computed
according to a formula prescribed by the SEC. The formula can be expressed as
follows:
P(1+T)(n)=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a period, at the end
of a 1-, 5- or 10-year period (or fractional
22
<PAGE> 54
portion thereof), assuming reinvestment of all
dividends and distributions.
Yield is calculated by annualizing the net investment income
generated by the U.S. Treasury Fund over a specified thirty-day period according
to the following formula:
a-b
YIELD = 2[( ___________________ +1)(6)-1]
cd
For purposes of this formula: "a" is dividends and interest earned during the
period; "b" is expenses accrued for the period (net of reimbursements); "c" is
the average daily number of shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per share
on the last day of the period.
The yield for the 30-day period ended March 31, 1996 for the
U.S. Treasury Fund was 5.83%.
Tax-equivalent yield is calculated over a specified thirty-day
period by dividing that portion of the Fund's yield which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of the Fund that is not tax-exempt.
A Fund's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of a Fund's performance for any specified period in the future.
In addition, because the performance will fluctuate, it may not provide a basis
for comparing an investment in a Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Fund's performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
Comparative performance information may be used from time to
time in advertising the shares of a Fund, including data from Lipper Analytical
Services, Inc., Ibbotson Associates, Morningstar, Inc., the S&P 500, the Russell
3000 Index, the Small Company Index, the Dow Jones Industrial Average, the BIG
Index, the U.S. Treasury Index, the Utility Index and other industry
publications.
Galaxy II may compare the performance of the Large Company
Fund and the Small Company Fund to certain U.S. diversified equity mutual funds,
as calculated by
23
<PAGE> 55
Morningstar, Inc. or another industry service and with that of the S&P 500 and
the Small Company Index, respectively. The performance of the Utility Fund may
be compared to certain utility funds, as calculated by Morningstar, Inc. or
another industry service and with that of the Utility Index. In addition, the
Trust may compare the performance of the U.S. Treasury Fund to certain U.S.
fixed income mutual funds, as calculated by Morningstar, Inc. or another
industry service and with that of the U.S. Treasury Index.
The following chart shows the performance of the benchmark
indexes for the past ten calendar years.
<TABLE>
<CAPTION>
SMALL U.S.
COMPANY TREASURY UTILITY
YEAR S&P500 INDEX INDEX INDEX
<S> <C> <C> <C> <C>
1995 37.58% 33.01% 37.96% 37.58%
1994 1.3 -2.7 -3.4 -8.3
1993 10.0 13.2 10.7 14.2
1992 7.6 14.1 7.2 12.1
1991 30.5 6.6 15.3 21.0
1990 -3.1 -11.2 8.6 -8.2
1989 31.7 24.4 14.4 46.4
1988 16.6 20.9 7.1 20.1
1987 5.1 -5.4 1.9 -3.0
1986 18.6 13.2 15.7 26.7
Average 15.59% 10.61% 11.55% 15.86%
</TABLE>
The quoted performance of the benchmark indexes shown above is not intended to
indicate the future performance of a Fund. The Manager believes that the
investment results of each Fund will approximate the return of its respective
index, before taking expenses incurred by the Fund into account.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of
Galaxy II, is a partner), Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107, is counsel to Galaxy II and will pass
upon certain legal matters on its behalf.
INDEPENDENT ACCOUNTANTS
The financial highlights for the respective Funds included in
its Prospectus and the financial statements for all
24
<PAGE> 56
Funds of Galaxy II attached to this Statement of Additional Information for the
respective fiscal periods ended March 31 of each calendar year (with the
exception of the fiscal years ended March 31, 1995 and March 31, 1996) have been
audited by the Trust's former independent accountant, Price Waterhouse, LLP, 300
Atlantic Street, Stamford, Connecticut 06904, for the periods included in their
report thereon which appears therein. Coopers & Lybrand L.L.P., independent
certified public accountants, with offices at One Post Office Square, Boston,
Massachusetts 02109, currently serves as independent accountant to Galaxy II and
has audited the financial highlights for the respective Funds included in the
Prospectus and the financial statements for all Funds included in the Statement
of Additional Information for the fiscal years ended March 31, 1995 and 1996.
GENERAL INFORMATION
The Trust is organized as an unincorporated business trust
under the laws of the Commonwealth of Massachusetts pursuant to a Declaration of
Trust dated February 22, 1990 (the "Trust Agreement"). Under the Trust
Agreement, the Board of Trustees has authority to create an unlimited number of
shares of beneficial interest with a par value of $.001 per share.
In the interest of economy and convenience, certificates
representing shares in Galaxy II are not physically issued. Fleet National Bank
maintains a record of each shareholder's ownership of Galaxy II shares. Shares
do not have cumulative voting rights, which means that holders of more than 50%
of the shares voting for the election of Trustees can elect all Trustees. Shares
are transferable, but have no preemptive, conversion or subscription rights.
Shareholders generally vote by Fund, except with respect to the election of
Trustees and the selection of independent accountants. Trustees were elected and
investment advisory agreements with the Former Adviser with respect to the Large
Company Fund, the Small Company Fund and the U.S. Treasury Fund were submitted
for approval at the first meeting of shareholders on October 28, 1991. At a
shareholders meeting held on June 15, 1994, Trustees were elected and the
Advisory Agreement was approved with respect to each of the Funds. There will
normally be no meetings of shareholders for the purpose of electing Trustees
unless and until such time as less than a majority of Trustees holding office
have been elected by shareholders, at which time Trustees then in office will
call a shareholders' meeting for the election of Trustees. Under the 1940 Act,
shareholders of record of no less than two-thirds of the outstanding shares of
Galaxy II may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. Under the Trust
Agreement, Trustees are required to call a meeting of shareholders for the
purpose of voting upon the question of removal of any such
25
<PAGE> 57
Trustee when requested in writing to do so by the shareholders of record of not
less than 10% of Galaxy II's outstanding shares.
Massachusetts law provides that shareholders could, under
certain circumstances, be held personally liable for the obligations of the
Trust. The Trust Agreement disclaims shareholder liability for acts or
obligations of Galaxy II, however, and requires that notice of the disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Trust Agreement provides for indemnification from
Galaxy II's property for all losses and expenses of any shareholder held
personally liable for the obligations of Galaxy II. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which Galaxy II would be unable to meet its
obligations, a possibility that Galaxy II's management believes is remote. Upon
payment of any liability incurred by Galaxy II, the shareholder paying the
liability will be entitled to reimbursement from the general assets of Galaxy
II. Trustees intend to conduct the operations of Galaxy II in such a way so as
to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of Galaxy II.
As of July 18, 1996, the name, address and percentage
ownership of the persons that owned of record 5% or more of the Large Company
Fund's outstanding shares were as follows: Norstar Trust Company, Gales & Co.,
Funds Control, Attn: Julie Hogestyn, One East Avenue, Rochester, New York 14638,
17.64%; Olsen & Co., Attn: Corporate Actions OF-0503, One Federal Street,
Boston, Massachusetts 02110-2003, 10.25%. As of July 18, 1996, the name, address
and percentage ownership of the person that owned of record 5% or more of the
U.S. Treasury Index Fund's outstanding shares were as follows: Norstar Trust
Company, Gales & Co., Funds Control, Attn: Julie Hogestyn, One East Avenue,
Rochester, New York 14638, 9.52%. No person owned of record 5% or more of the
outstanding shares of the Small Company Fund or the Utility Fund.
26
<PAGE> 58
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year
ended March 31, 1996 with respect to the Large Company Fund, the Small Company
Fund, the U.S. Treasury Fund, the Utility Fund and the Municipal Bond Fund are
attached.
<PAGE> 59
GALAXY FUND II
THE MUNICIPAL BOND FUND
PROSPECTUS
AUGUST 1, 1996
<PAGE> 60
GALAXY FUND II - THE MUNICIPAL BOND FUND
4400 COMPUTER DRIVE
P.O. BOX 5108
WESTBOROUGH, MASSACHUSETTS 01581-5108
FOR AN APPLICATION AND INFORMATION
REGARDING INITIAL PURCHASES AND CURRENT
PERFORMANCE CALL (800) 628-0414. FOR ADDITIONAL
PURCHASES, REDEMPTIONS, EXCHANGES AND OTHER
SHAREHOLDER SERVICES, CALL (800) 628-0413.
The MUNICIPAL BOND FUND (the "Fund") seeks to provide investors with
the highest level of income exempt from regular Federal income tax consistent
with prudent investment management and preservation of capital. In seeking its
objective, the Fund will normally invest substantially all of its assets in a
diversified portfolio of municipal securities. Under normal market conditions,
at least 95% of the Fund's municipal securities will be rated A or higher by
major credit agencies. The Fund is a series of shares of Galaxy Fund II ("Galaxy
II" or the "Trust"), a no-load, open-end, investment company. Currently, there
are four other series of shares (together, the "Funds") offered to the public by
the Trust.
Shares of the Fund are offered without any sales charge or redemption
fee, although the Fund will incur management fees.
SHARES OF THE FUND ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, FLEET FINANCIAL GROUP, INC. OR ANY OF ITS AFFILIATES, FLEET
INVESTMENT ADVISORS INC., OR ANY FLEET BANK. SHARES OF THE FUND 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 FUND, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely certain information about the Fund
that you should know before making an investment decision. You are encouraged to
read this Prospectus carefully and retain it for future reference. Additional
information about the Fund is contained in a Statement of Additional Information
bearing the same date and is available free of charge by calling Galaxy II at
(800) 628-0414 or by writing to Galaxy II c/o First Data Investor Services
Group, Inc. The Statement of Additional Information has been filed with the
Securities and Exchange Commission and, as amended from time to time, is
incorporated by reference into this Prospectus.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
August 1, 1996
<PAGE> 61
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN
ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE
MADE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
HIGHLIGHTS............................................................................................. 3
EXPENSE SUMMARY........................................................................................ 6
FINANCIAL HIGHLIGHTS................................................................................... 7
INVESTMENT OBJECTIVE AND POLICIES...................................................................... 8
Risk Considerations........................................................................... 8
Investment Policies........................................................................... 8
INVESTMENT LIMITATIONS................................................................................. 9
INVESTMENT RISKS....................................................................................... 10
WHO SHOULD INVEST...................................................................................... 11
COMPARING TAX-EXEMPT AND TAXABLE YIELDS................................................................ 11
PRICING OF SHARES...................................................................................... 13
HOW TO PURCHASE AND REDEEM SHARES...................................................................... 13
Purchase Procedures - Customers of Institutions............................................... 13
Purchase Procedures - Direct Investors........................................................ 14
Other Purchase Information.................................................................... 14
Redemption Procedures - Customers of Institutions............................................. 15
Redemption Procedures - Direct Investors...................................................... 15
Other Redemption Information.................................................................. 16
DIVIDENDS, DISTRIBUTIONS AND TAXES..................................................................... 17
State and Local Taxes......................................................................... 18
MANAGEMENT OF THE FUND................................................................................. 18
Investment Adviser............................................................................ 18
Administrator................................................................................. 19
Distributor................................................................................... 19
Custodian..................................................................................... 19
DESCRIPTION OF SHARES.................................................................................. 19
INVESTOR PROGRAMS...................................................................................... 20
Exchange Privilege............................................................................ 20
Retirement Plans.............................................................................. 21
Automatic Investment Program.................................................................. 21
Systematic Withdrawal Plan.................................................................... 22
Investing by Payroll Deduction by Regular IBM Employees....................................... 22
PERFORMANCE AND YIELD INFORMATION...................................................................... 22
MISCELLANEOUS.......................................................................................... 23
</TABLE>
-2-
<PAGE> 62
HIGHLIGHTS
Q: What is Galaxy Fund II?
A: The Trust is an open-end investment company (commonly known as a mutual
fund) that offers investors the opportunity to invest in different
investment portfolios, each having separate investment objectives and
policies. This Prospectus describes the Trust's Municipal Bond Fund
(the "Fund"). A Prospectus for the Large Company Index, Small Company
Index, Utility Index and U.S. Treasury Index Funds may be obtained by
calling (800) 628-0414.
Q: Who advises the Fund?
A: The Fund is managed by Fleet Investment Advisors Inc. (the "Investment
Adviser" or "Fleet"), an indirect, wholly-owned subsidiary of Fleet
Financial Group, Inc. Fleet Financial Group, Inc. is a financial
services company with total assets as of June 30, 1996 of approximately
$87.7 billion. See "Management of the Funds--Investment Adviser."
Q: What advantages does the Fund offer?
A: The Fund offers investors the opportunity to invest in an investment
portfolio without having to become involved with the detailed
accounting and safekeeping procedures normally associated with direct
investments in securities.
Q: How does one buy and redeem shares?
A: The Fund is distributed by 440 Financial Distributors, Inc. Shares of
the Fund are sold to individuals or corporations, who submit a purchase
application to the Trust, purchasing either for their own accounts or
for the accounts of others ("Direct Investors"). Shares may also be
purchased by Fleet Brokerage Securities Corporation, Fleet Securities,
Inc., Fleet Financial Group, Inc., its affiliates, their correspondent
banks and other qualified banks, savings and loan associations and
broker/dealers ("Institutions") on behalf of their customers
("Customers"). Share purchase and redemption information for both
Direct Investors and Customers is provided in this Prospectus under
"How to Purchase and Redeem Shares." The minimum initial investment for
Direct Investors and the minimum initial aggregate investment for
Institutions purchasing on behalf of their Customers is $2,500. The
minimum investment for subsequent purchases is $100. The minimum
investment requirement with respect to Individual Retirement Accounts
("IRAs"), Simplified Employee Pension Plans ("SEPs"), Multi-Employee
Pension Plan accounts ("MERPs") and Keogh Plans is $500 ($250 for
spousal IRA accounts). There are no minimum investment requirements for
investors participating in the Automatic Investment Program described
below. Institutions may require Customers to maintain certain minimum
investments in Retail Shares. See "How to Purchase and Redeem
Shares--Purchase of Shares" below.
Q: When are dividends paid?
-3-
<PAGE> 63
A: The net investment income of the Municipal Bond Fund is declared daily
and paid monthly. Net realized capital gains of the Fund are
distributed at least annually. See "Dividends and Distributions."
Q: What potential risks are presented by the Fund's investment practices?
A: The Fund may use municipal bond index futures contracts, interest rate
futures contracts and options thereon to a limited extent. Futures
contracts and options pose some risks, primarily: (i) there may be
imperfect correlation between the change in market value of the
securities held by the Fund and the prices of the futures contracts and
options; and (ii) the possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a futures
contract prior to its maturity date. The risk of imperfect correlation
is minimized by investing only in those contracts whose price
fluctuations are expected to resemble those of the Fund's underlying
securities. The illiquidity risk will be minimized by entering into
such transactions on a national exchange with an active and liquid
secondary market.
Interest rate risk is the potential for fluctuations in bond prices due
to changing interest rates. In general, bond prices rise when interest
rates fall, and bond prices fall when interest rates rise. Longer-term
bonds are affected more dramatically than shorter-term bonds. As the
Fund expects to maintain an average dollar-weighted maturity of 7 to 12
years, it is subject to a moderate amount of interest rate risk.
Credit risk is the possibility that a bond issuer will fail to make
timely payments of interest or principal to the Fund. The credit risk
of a Fund depends on the credit quality of its underlying securities.
As the Fund expects to maintain high credit quality (at least 95% of
the Fund's municipal securities must be rated A or higher by Moody's,
S&P or another nationally recognized statistical rating organization),
the Fund's credit risk is expected to be low.
Call risk is the possibility that, during periods of falling interest
rates, a municipal security with a high stated interest rate will be
prepaid, or "called," prior to its expected maturity date. As a result,
the Fund will be required to invest the unanticipated proceeds at lower
interest rates, and the Fund's income may decline. As the Fund may
invest in some callable securities, it may be exposed to call risk.
Manager risk is the possibility that the Fund's investment adviser will
fail to execute the Fund's investment strategy effectively. If this
happens, the Fund may fail to meet its stated objective.
Q: What shareholder privileges are offered by the Fund?
A: Direct Investors and Customers of Institutions may, after appropriate
prior authorization, exchange shares of the Fund having a value of at
least $100 for shares of any of the other funds or portfolios offered
by the Trust or otherwise advised by Fleet Investment Advisors Inc. or
its affiliates in which the Direct Investor or Customer maintains an
existing account, provided that such other shares may legally be sold
in the state of the investor's residence. The Trust offers IRAs, SEPs
and Keogh Plan accounts, which can be established by contacting the
Trust's Distributor (call (800) 628-0413). Shares of the Fund are
available for purchase in connection with MERPs accounts, and detailed
information concerning eligibility
-4-
<PAGE> 64
and other matters and the form of application is available from Fleet
Brokerage Securities Corporation (call (800) 221-8210). The Trust also
offers an Automatic Investment Program, which allows a Direct Investor
to purchase Fund shares each month as well as other shareholder
privileges. See "Investor Programs."
-5-
<PAGE> 65
EXPENSE SUMMARY
The following table illustrates expenses and fees that you would incur, either
directly or indirectly, as a shareholder of the Fund. The expenses and fees for
the Fund are for the fiscal year ended March 31, 1996. "Other Expenses" are
based on estimated amounts for the Fund's current fiscal year.
<TABLE>
<CAPTION>
MUNICIPAL
BOND FUND
---------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases................................................................ None
Sales Load Imposed on Reinvested Dividends..................................................... None
Redemption Fee................................................................................. None
Exchange Fee................................................................................... None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory and Administration Fees............................................................... 0.60%
12b-1 Fee...................................................................................... None
Other Expenses................................................................................. 0.00%
Total Fund Operating Expenses.................................................................. 0.60%
</TABLE>
Fleet National Bank (the "Administrator") is responsible for the payment of all
of the expenses of the Fund, other than certain limited expenses (such as
brokerage fees and commissions, interest on borrowings, taxes and such
extraordinary, non-recurring expenses as may arise). For a further description
of the various costs and expenses shown above, see "Management of the Fund."
The following example shows what you would pay on a $1,000 investment in the
Fund over various time periods. It assumes that your investment grows 5% per
year and that you redeem your investment at the end of each time period.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Municipal Bond Fund............................................... $6 $19 $33 $73
</TABLE>
THIS EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE.
ACTUAL EXPENSES MAY BE MORE OR LESS THAN SHOWN IN THE EXAMPLE. For example,
certain shareholders who redeem by wire will incur a charge, currently $5.00 per
wire redemption. Also, the Fund's actual performance may be better or worse than
the 5% growth per year assumed in the example.
-6-
<PAGE> 66
FINANCIAL HIGHLIGHTS
The following Financial Highlights for the fiscal years ended March 31, 1995 and
March 31, 1996 have been audited by Coopers and Lybrand L.L.P., independent
accountants, whose report is contained in the Trust's Annual Report to
Shareholders and is incorporated by reference in the Statement of Additional
Information. The Financial Highlights for the period ended March 31, 1994 have
been audited by Price Waterhouse, L.L.P. Further information about the
performance of the Fund is also contained in the Fund's Annual Report to
Shareholders which may be obtained without charge by calling Galaxy II at (800)
628-0414.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
March 31, 1996 March 31, 1995 March 31, 1994(A)
-------------- -------------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of period $ 9.94 $ 9.89 $ 10.00
---------- ---------- ----------
Income from Investment Operations:
Net investment income(1) 0.46 0.46 0.43
Net realized and unrealized gain (loss)
on investments 0.26 0.05 (0.11)
---------- ---------- ----------
Total from Investment Operations 0.72 0.51 0.32
---------- ---------- ----------
Less Dividends:
Dividends from net investment income (0.46) (0.46) (0.43)
Distributions from net realized capital gains -- -- --
---------- ---------- ----------
Total Dividends: (0.46) (0.46) (0.43)
---------- ---------- ----------
Net increase (decrease) in net asset
value 0.26 0.05 (0.11)
---------- ---------- ----------
Net Asset Value, End of period $ 10.20 $ 9.94 $ 9.89
========== ========== ==========
Total Return 7.36% 5.34% 3.10%*
Ratios/Supplemental Data:
Net Assets, End of Period (000's) $ 22,478 $ 24,560 $ 33,352
Ratios to average net assets:
Net investment income 4.54% 4.72% 4.35%+
Net Operating Expenses(1) 0.60% 0.60% 0.60%+
Portfolio Turnover Rate 2% 47% 56%
</TABLE>
- -------------------------
+ Annualized
* Not Annualized
(A) The Fund commenced operations on April 15, 1993.
(1) Net investment income per share and the net operating expense ratios
before reimbursement by the sub-administrator for the years ended March
31, 1996 and 1995 were $0.46 and 0.61% and $0.46 and 0.63%, respectively.
-7-
<PAGE> 67
INVESTMENT OBJECTIVE AND POLICIES
The Municipal Bond Fund seeks to provide investors with the highest
level of income exempt from regular Federal income tax consistent with prudent
investment management and preservation of capital.
The investment objective of the Fund may not be changed without the
approval of the holders of a "majority" of the outstanding voting shares of the
Fund. The term "majority" is defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). There can be no assurance that the investment
objective of the Fund will be achieved.
RISK CONSIDERATIONS
Risk considerations related to the Fund's investments are described
under "Investment Policies" and "Investment Risks."
INVESTMENT POLICIES
The Fund will normally invest substantially all--but not less than
80%--of its net assets in municipal securities. Municipal securities are debt
obligations issued by state and local governments and regional governmental
authorities, which provide interest income that is exempt from regular Federal
income taxes. These may include municipal leases which may take the form of a
lease or an installment purchase issued by state and local governments to
acquire equipment and facilities. Normally, the Fund will invest at least 65% of
its total assets in municipal securities that are issued as municipal bonds.
Under normal market conditions, at least 95% of the municipal
securities held by the Fund must be rated at least A or its equivalent by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("S&P") or another nationally recognized statistical rating organization
("NRSRO"). In no case will the Fund purchase municipal securities rated below
investment grade BBB by S&P or Baa by Moody's or the equivalent from another
NRSRO.
Pending investment of proceeds or for other temporary purposes, the
Fund may invest up to 20% of its net assets in the following short-term
municipal obligations:
- - Short-term municipal notes rated MIG-1 or MIG-2 by Moody's or SP-1+ or
SP-1 by S&P;
- - Tax-exempt commercial paper rated P-1 by Moody's or A-1+ by S&P;
- - Municipal bonds with an effective maturity of one year or less which
are rated A or higher by Moody's or S&P;
- - Unrated short-term obligations from an issuer whose outstanding
long-term obligations are rated A or higher by Moody's or S&P; and
- - Tax-exempt funds, including tax-exempt money market funds, subject to
the requirements of applicable law. In no case will the Fund invest
more than 10% of its net assets in such investments. These investments
will result in shareholders paying duplicate or multiple fees, as such
funds incur expenses similar to those of the Fund. The Fund will only
invest in other funds when it believes the yields on such funds are
beneficial even including multiple fees.
Under normal market conditions, the Fund expects to maintain a
dollar-weighted average maturity between 7 and 12 years. There is no limit on
the maturity of any individual security in the Fund.
-8-
<PAGE> 68
The Fund may purchase municipal securities on a "when-issued" basis.
In buying such securities, the Fund commits to buy securities at a certain price
even though the securities may not be delivered for up to 45 days. The Fund pays
for the securities and begins earning interest when the securities are actually
delivered. Consequently, it is possible that the market price of the securities
at the time of delivery may be higher or lower than the purchase price.
The Fund is authorized to invest up to 20% of its net assets in "AMT"
bonds. AMT bonds are tax-exempt "private activity" bonds issued after August 7,
1986 whose proceeds are directed at least in part to a private, for-profit
organization. While the income from AMT bonds is exempt from regular Federal
income tax, it is a tax preference item for purposes of the "alternative minimum
tax." The alternative minimum tax is a special tax that applies to a limited
number of taxpayers who have certain adjustments or tax preference items.
Although the Fund does not expect to do so, except in unusual
circumstances, it may invest up to 20% of its net assets in the following
taxable money market securities: obligations of the U.S. Government and its
agencies or instrumentalities; bank certificates of deposit and bankers'
acceptances; and repurchase agreements collateralized by these securities.
The Fund may use municipal bond index futures contracts, interest rate
futures contracts and options thereon to a limited extent. Specifically, the
Fund may enter into futures contracts and options thereon provided that initial
margin and premiums required to establish such positions that are not bona fide
hedging positions (as defined by the Commodity Futures Trading Commission) will
not exceed 5% of its net asset value, after taking into account unrealized
profits and losses on any such contracts it has entered into. In addition, the
Fund may enter into futures contracts and options transactions only to the
extent that obligations under such contracts or transactions represent not more
than 20% of the Fund's assets.
The Fund may use these instruments for several reasons: to maintain
cash reserves while remaining effectively fully invested, to facilitate trading,
to reduce transaction costs, to seek higher investment returns when a futures
contract is priced more attractively than the underlying municipal securities,
or to hedge against changes in the value of the portfolio securities due to
anticipated changes in interest rates and market conditions and where the
transactions are economically appropriate to the reduction of risks inherent in
the management of the Fund. The Fund will not use futures contracts or options
transactions to leverage its assets.
Futures contracts and options pose some risks, primarily: (i) there
may be imperfect correlation between the change in market value of the
securities held by the Fund and the prices of the futures contracts and options;
and (ii) the possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract prior to its maturity
date. The risk of imperfect correlation is minimized by investing only in those
contracts whose price fluctuations are expected to resemble those of the Fund's
underlying securities. The illiquidity risk will be minimized by entering into
such transactions on a national exchange with an active and liquid secondary
market.
INVESTMENT LIMITATIONS
The Fund has adopted certain limitations on its investment practices, including
the following:
-9-
<PAGE> 69
(1) The Fund will normally not invest less than 80% of its net assets in
securities other than municipal securities; however, the Fund may
invest up to 20% of its net assets in certain short-term taxable
securities and in municipal bond index futures contracts, interest rate
futures contracts and options thereon;
(2) The Fund will not borrow money except for temporary or emergency
purposes and then not in excess of 33-1/3% of total assets; the Fund
will repay all borrowings before making additional investments;
(3) With respect to 75% of its total assets, the Fund will not invest more
than 5% of its assets in securities of one issuer (except the U.S.
Government, its agencies and instrumentalities); for purposes of this
limitation, the issuer will be identified based on a determination of
the source of assets and revenues committed to meeting interest and
principal payments of each security;
(4) The Fund will not purchase any securities which would cause more than
25% of the value of the Fund's net assets at the time of such purchase
to be invested in the securities of one or more issuers conducting
their principal activities in the same state; and
(5) The Fund will not pledge, mortgage or hypothecate more than 33-1/3% of
its assets.
These investment restrictions, and certain of those contained in the
Fund's Statement of Additional Information, can be changed only with the
approval of the holders of a majority of the outstanding shares of the Fund.
INVESTMENT RISKS
Interest rate risk is the potential for fluctuations in bond prices
due to changing interest rates. In general, bond prices rise when interest rates
fall, and bond prices fall when interest rates rise. Longer-term bonds are
affected more dramatically than shorter-term bonds. The following table
illustrates the changes caused by a 2% change in interest rates on the market
prices of non-callable bonds with various maturities:
<TABLE>
<CAPTION>
2% INCREASE IN 2% DECREASE IN
MATURITY INTEREST RATES INTEREST RATES
- -------- -------------- --------------
<S> <C> <C>
1 year........................................... -2% +2%
5 years.......................................... -8% +9%
10 years......................................... -14% +17%
30 years......................................... -25% +39%
</TABLE>
As the Fund expects to maintain an average dollar-weighted maturity of
7 to 12 years, it is subject to a moderate amount of interest rate risk.
Credit risk is the possibility that a bond issuer will fail to make
timely payments of interest or principal to the Fund. The credit risk of a Fund
depends on the credit quality of its underlying securities. As the Fund expects
to maintain high credit quality (at least 95% of the Fund's municipal securities
must be rated A or higher by Moody's, S&P or another nationally recognized
statistical rating organization), the Fund's credit risk is expected to be low.
-10-
<PAGE> 70
Call risk is the possibility that, during periods of falling interest
rates, a municipal security with a high stated interest rate will be prepaid, or
"called," prior to its expected maturity date. As a result, the Fund will be
required to invest the unanticipated proceeds at lower interest rates, and the
Fund's income may decline. As the Fund may invest in some callable securities,
it may be exposed to call risk.
Manager risk is the possibility that the Fund's investment adviser will
fail to execute the Fund's investment strategy effectively. If this happens, the
Fund may fail to meet its stated objective.
WHO SHOULD INVEST
The Fund is intended for investors seeking income that is exempt from
regular Federal income taxes. As a rule, tax-free income is attractive to
investors in high Federal income tax brackets. Investors in lower Federal income
tax brackets may find a taxable income investment more suitable to their needs
since the after-tax yield of the taxable investment may be greater than the
tax-exempt yield offered by an investment such as the Fund.
You can determine whether tax-exempt or taxable income is more
attractive in your particular case by calculating the "tax equivalent yield" of
the Fund and comparing it with the yield from a comparable taxable mutual fund
investment. See "Comparing Tax-Exempt and Taxable Yields" below.
Because the Fund invests in municipal bonds of all durations, the price
per share of the Fund will fluctuate, particularly due to interest rate risk.
The Fund is intended for investors willing to accept share price fluctuations in
return for potentially higher and more constant yields. These share price
fluctuations may cause the share price at the time of an investor's redemption
to be more or less than the purchase price, thus affecting the investor's total
return from an investment in the Fund.
The Fund intends to invest virtually all of its assets in debt
obligations. As such, capital growth is not an objective of the Fund, though
some incidental capital gains or losses may be realized in the course of the
Fund's operations. The Fund is intended for investors willing to forego capital
growth in return for potentially more constant yields. Of course, there may be
other fixed-income investments, particularly longer-term investments, which
offer a higher yield than the Fund.
COMPARING TAX-EXEMPT AND TAXABLE YIELDS
Before choosing a tax-exempt investment such as the Fund, you should
determine if you would be better off with taxable or tax-exempt income in your
particular marginal tax bracket. To compare taxable and tax-free income, you
should calculate the "tax equivalent yield" for the Fund and compare it with the
yield of a taxable investment with similar credit and maturity standards.
The tax equivalent yield for the Fund is based upon the Fund's
tax-exempt yield and your marginal tax bracket. The formula is:
Fund's Tax-Exempt Yield = Your Tax
------------------------------
100% - Your Marginal Tax Bracket Equivalent Yield
For example, if you are in the 28% tax bracket and can earn a
tax-exempt yield of 4.0%, the tax equivalent yield would be 5.56%, as shown
here:
-11-
<PAGE> 71
4.0% = 4.0% = 5.56%
--------- -----
100% - 28% 72%
In this example you would invest in the 4.0% tax-exempt investment if
your taxable alternative yielded less than 5.56%. You would invest in the
taxable investment if you expected its yield to be greater than 5.56% (assuming,
of course, similar credit and maturity standards).
The following table shows tax equivalent yields for various tax
brackets and tax-exempt yields. There can be no guarantee that the Fund will
achieve any specific yield. Also, though the Fund's objective is to seek
tax-exempt income, it is possible from time to time for some small portion of
the Fund's income to be taxable. Also, a portion of the Fund's income may be
subject to the alternative minimum tax.
<TABLE>
<CAPTION>
TAX EQUIVALENT RATES BASED ON
FEDERAL TAX-EXEMPT YIELD OF:
MARGINAL INCOME -------------------------------------------------------------
TAX BRACKET 2% 3% 4% 5% 6% 7% 8%
------------- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C>
15% 2.4% 3.5% 4.7% 5.9% 7.1% 8.2% 9.4%
28% 2.8 4.2 5.6 6.9 8.3 9.7 11.1
31% 2.9 4.3 5.8 7.2 8.7 10.1 11.6
36% 3.1 4.7 6.2 7.8 9.4 10.9 12.5
</TABLE>
-12-
<PAGE> 72
PRICING OF SHARES
On every day the New York Stock Exchange (the "NYSE") is open, First
Data Investor Services Group, Inc. (the "Sub-Administrator") calculates the net
asset value per share for the Fund as of the close of regular trading on the
NYSE. In calculating net asset value, investments are valued based on their
market values, but when market quotations are not readily available, investments
are valued based on fair value as determined in good faith in accordance with
procedures established by the Board of Trustees. Bonds and other fixed income
securities may be valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the market value of such securities.
The prices provided by a pricing service may be determined without regard to bid
or last sale prices of each security but take into account institutional size
transactions in similar groups of securities as well as any developments
relating to specific securities.
HOW TO PURCHASE AND REDEEM SHARES
The Distributor has established several procedures to enable different
types of investors to purchase shares of the Fund. The shares may be purchased
by individuals or corporations who submit a purchase application to the Trust,
purchasing directly either for their own accounts or for the accounts of others
("Direct Investors"). Shares may also be purchased by Fleet Brokerage Securities
Corporation, Fleet Securities, Inc., Fleet Financial Group, Inc., its
affiliates, their correspondent banks and other qualified banks, savings and
loan associations and broker/dealers ("Institutions") on behalf of their
customers ("Customers"). Purchases by Direct Investors may take place only on
days on which the Distributor, the Custodian and the Administrator are 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 the Distributor on a Business Day in accordance with
the Distributor's procedures. Shares of the Fund will be issued to Direct
Investors only in exchange for monetary consideration as described below.
PURCHASE PROCEDURES - CUSTOMERS OF INSTITUTIONS
Purchase orders are placed by Customers of Institutions through their
Institution. The Institution is responsible for transmitting Customer purchase
orders to the Distributor and for wiring required funds in payment to the
Custodian on a timely basis. The Distributor is responsible for transmitting
such orders to the Sub-Administrator for execution. Shares purchased by
Institutions on behalf of their Customers will normally be held of record by the
Institution and beneficial ownership of the shares will be recorded by the
Institution and reflected in the account statements provided to their Customers.
The Sub-Administrator may establish an account of record for each Customer of an
Institution reflecting beneficial ownership of shares. Depending on the terms of
the arrangement between a particular Institution and the Sub-Administrator,
confirmations of share purchases and redemptions and pertinent account
statements will either be sent by the Sub-Administrator directly to a Customer
with a copy to the Institution, or will be furnished directly to the Customer by
the Institution. Other procedures for the purchase of shares established by
Institutions in connection with the requirements of their Customer accounts may
apply. Customers wishing to purchase shares through their Institution should
contact such entity directly for appropriate purchase instructions.
-13-
<PAGE> 73
PURCHASE PROCEDURES - DIRECT INVESTORS
Purchases by Mail. Shares may be purchased by completing a purchase
application and mailing it, together with a check payable to the Fund to:
Galaxy Fund II
4400 Computer Drive
P.O. Box 5108
Westborough, MA 01581
All purchase orders placed by mail must be accompanied by a purchase
application. Applications may be obtained by calling the Distributor at (800)
628-0414.
Subsequent investments in an existing account in the Fund may be made
at any time by sending a check for a minimum of $100 payable to the Fund in
which the additional investment is being made to the Trust at the address above
along with either (a) the detachable form that regularly accompanies
confirmation of a prior transaction, (b) a subsequent order form that may be
obtained from the Distributor, or (c) a letter stating the amount of the
investment, the name of the Fund and the account number in which the investment
is to be made. If a Direct Investor's check does not clear, the purchase will be
canceled.
OTHER PURCHASE INFORMATION
Purchases by Wire. Investors may also purchase shares by arranging to
transmit Federal funds by wire to Fleet Bank of Massachusetts, N.A. as agent for
First Data Investor Services Group, Inc. Prior to making any purchase by wire,
an investor must telephone the Distributor at (800) 628-0413 to place an order
and for instructions.
Direct Investors making initial investments by wire must promptly
complete a purchase application and forward it to Galaxy Fund II, 4400 Computer
Drive, P.O. Box 5108, Westborough, Massachusetts 01581. Applications may be
obtained by calling the Distributor at (800) 628-0414.
Except as provided in "Investor Programs" below, the minimum initial
investment by a Direct Investor, or initial aggregate investment by an
Institution investing on behalf of its Customers, is $2,500. The minimum
investment for subsequent purchases is $100. The minimum investment requirement
with respect to IRAs, SEPs, MERPs and Keogh Plans (see below under "Retirement
Plans") is $500 ($250 for spousal IRA accounts). There are no minimum investment
requirements for investors participating in the Automatic Investment Program
described below. Customers may agree with a particular Institution to change the
minimum initial and minimum subsequent purchase requirements with respect to
their accounts.
The Trust or the Distributor each reserves the right to reject any
purchase order, in whole or in part, or to waive any minimum investment
requirement. The issuance of shares to Direct Investors and Institutions is
recorded on the books of the Trust and share certificates will not be issued.
Effective Time of Purchases. A purchase order for shares received and
accepted by the Distributor from an Institution or a Direct Investor on a
Business Day prior to the close of regular trading hours on the NYSE (currently
4:00 p.m. Eastern Time) will be executed at the net asset value per share
determined on that date, provided that the Custodian receives the purchase
price in Federal funds or other immediately available funds prior to 4:00 p.m.
on the fifth Business Day following the receipt of such order. Such order will
be executed on the day on which the purchase price is received in proper form.
-14-
<PAGE> 74
If funds are not received by such date and time, the order will not be accepted
and notice thereof will be given promptly to the Institution or Direct
Investor submitting the order. Payment for orders which are not received or
accepted will be returned. 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 the Distributor on a Business Day in accordance with
the above procedures.
REDEMPTION PROCEDURES - CUSTOMERS OF INSTITUTIONS
Customers of Institutions may redeem all or part of their shares in
accordance with procedures governing their accounts at Institutions. It is the
responsibility of the Institutions to transmit redemption orders to the
Distributor and credit their Customers' accounts with the redemption proceeds on
a timely basis. No charge for wiring redemption payments to Institutions is
imposed by the Trust, although Institutions may charge a Customer's account for
redemption services. Information relating to such redemption services and
charges, if any, is available from the Institutions.
Payments for redemption orders received by the Distributor on a
Business Day will normally be wired on the third Business Day to the
Institutions.
Direct Investors may redeem all or part of their shares in accordance
with any of the procedures described below.
REDEMPTION PROCEDURES - DIRECT INVESTORS
Redemption by Mail. Shares may be redeemed by a Direct Investor by
submitting a written request for redemption to:
Galaxy Fund II
4400 Computer Drive
P.O. Box 5108
Westborough, MA 01581
A written redemption request must (i) state the number of shares to be
redeemed, (ii) identify the shareholder account number and social security
number or tax identification number, and (iii) be signed by each registered
owner exactly as the shares are registered. A redemption request for an amount
in excess of $10,000, or for any amount if the proceeds are to be sent elsewhere
than the address of record, must be accompanied by signature guarantees. The
guarantor of a signature must be a bank that is a member of the FDIC, a trust
company, a member firm of a national securities exchange or any other eligible
guarantor institution. The Sub-Administrator will not accept guarantees from
notaries public. The Sub-Administrator may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees and guardians. A redemption request will not be deemed to be properly
received until the Sub-Administrator receives all required documents in proper
form. The Fund ordinarily will make payment for shares redeemed by mail within
five Business Days after proper receipt by the Sub-Administrator of the
redemption request. Questions with respect to the proper form for redemption
requests should be directed to the Sub-Administrator at (800) 628-0413.
Redemption by Telephone. Direct Investors may redeem shares by calling
(800) 628-0413 and instructing the Sub-Administrator to mail a check for
redemption proceeds of up to $10,000 to the address of
-15-
<PAGE> 75
record. A redemption request for an amount in excess of $10,000 or for any
amount if the proceeds are to be sent elsewhere than the address of record, must
be accompanied by signature guarantees. (See "Redemption by Mail.")
Redemption by Wire. Direct Investors who have so indicated on the
application, or have subsequently arranged in writing to do so, may redeem
shares by instructing the Sub-Administrator by wire or telephone to wire the
redemption proceeds of $1,000 or more directly to a Direct Investor's account at
any commercial bank in the United States. The Sub-Administrator charges a $5.00
fee for each wire redemption and the fee is deducted from the redemption
proceeds. The redemption proceeds must be paid to the same bank and account as
designated on the application or in written instructions subsequently received
by the Sub-Administrator. To request redemption of shares by wire, Direct
Investors should call (800) 628-0413.
In order to arrange for redemption by wire after an account has been
opened or to change the bank or account designated to receive redemption
proceeds, a written request must be sent to the Trust at the address listed
above under "Redemption by Mail." Such requests must be signed by the investor
and accompanied by a signature guarantee (see "Redemption by Mail" above for
details regarding signature guarantees). Further documentation may be requested
from corporations, executors, administrators, trustees, or guardians. If, due to
temporary adverse conditions, investors are unable to effect telephone
transactions, investors are encouraged to follow the procedures for transactions
by wire or mail which are described above.
The Trust reserves the right to refuse a wire or telephone redemption
if it believes it is advisable to do so. Procedures for redeeming shares by wire
or telephone may be modified or terminated at any time. Neither the Trust nor
any of its service contractors will be liable for any loss, expense or cost for
acting upon any telephone instructions believed genuine unless it acts with
willful misfeasance, bad faith or gross negligence. Accordingly, investors will
bear the risk of loss. In attempting to confirm that telephone instructions are
genuine, the Trust will use such procedures as are considered reasonable,
including recording those instructions and requesting information as to account
registration (such as the name in which an account is registered, the account
number, recent transactions in the account, and the account holder's social
security number, address and/or bank). To the extent that the Trust fails to use
reasonable procedures as a basis for its belief, it and/or its service
contractors may be liable for instructions that prove to be fraudulent and
unauthorized.
No redemption by a Direct Investor in any Fund will be processed until
the Trust has received a completed application with respect to the Direct
Investor's account. If any portion of the shares to be redeemed represents an
investment made by personal check, the Trust reserves the right to delay payment
of proceeds until the Administrator is reasonably satisfied that the check has
been collected, which could take up to 15 days from the purchase date. A Direct
Investor who anticipates the need for more immediate access to his or her
investment should purchase shares by Federal funds or bank wire or by certified
or cashier's check. Banks normally impose a charge in connection with the use of
bank wires, as well as certified checks, cashier's checks and Federal funds.
OTHER REDEMPTION INFORMATION
The Trust reserves the right to redeem accounts (other than retirement
plan accounts) involuntarily, upon 60 days' written notice, if the account's net
asset value falls below $250 as a result of redemptions. In addition, if an
investor has agreed with a particular Institution to maintain a minimum balance
in his or her account at the Institution with respect to Fund shares, and the
balance in such account falls below that minimum, the Customer may be obliged by
the Institution to redeem all of his or her shares.
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The Trust may require any information reasonably necessary to ensure
that a redemption has been duly authorized.
Redemption orders are effected at the net asset value per share next
determined after receipt and acceptance of the order by the Distributor. The
Trust reserves the right to wire redemption proceeds within seven days after
receiving the redemption order if, in its judgment, an earlier payment could
adversely affect a Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends consisting of virtually all ordinary income of the Fund will
be declared daily and will be payable to shareholders of record at the close of
the previous business day. Such dividends will be paid monthly. Capital gains
distributions, if any, will be made annually. Dividends and distributions may be
made on a more frequent basis to comply with the distribution requirements of
the Internal Revenue Code of 1986, as amended (the "Code").
You will receive all dividends and capital gains distributions as
additional shares of the Fund at their then current net asset value, unless you
elect to receive cash. You may elect to receive cash by so specifying on your
account registration form or by notifying the Sub-Administrator in writing.
Shareholders electing to reinvest dividends in the Fund will receive
confirmation of their dividends on regular, quarterly statements. As with all
purchases and redemptions, you pay no sales commissions or fees of any kind on
shares acquired through reinvestment of dividends and distributions.
Since the Fund intends to (a) qualify each year as a "regulated
investment company" within the meaning of the Code and (b) distribute to its
shareholders at least 90% of its net tax-exempt interest income and 90% of its
"investment company taxable income," if any, the Fund will not be subject to
Federal income tax to the extent that its net investment income and its net
realized capital gains are distributed to its shareholders in accordance with
the Code. As a regulated investment company, the Fund will be subject to a 4%
non-deductible excise tax if it fails to currently distribute an amount equal to
specified percentages of its ordinary taxable income and capital gain net income
(excess of capital gain over capital losses). The Fund expects to pay dividends
and to make distributions or deemed distributions as are necessary to avoid the
application of this tax, unless the Board of Trustees determines that it is not
in the best interest of the shareholders to do so.
The Fund intends to invest a sufficient portion of its assets in
municipal securities so that it will qualify to pay "exempt-interest dividends"
to shareholders. Such exempt-interest dividends distributed to shareholders
generally are excluded from a shareholder's gross income for Federal income tax
purposes. A portion of the Fund's dividends, while exempt from the regular
Federal income tax, may be a tax preference item for purposes of the Federal
alternative minimum tax.
Distributions paid by the Fund from long-term capital gains, whether
received in cash or reinvested in additional shares, are taxable, regardless of
the length of time you have owned shares in the Fund. Also, any short-term
capital gains or any taxable interest income will be distributed as a taxable
ordinary dividend distribution. The Fund expects distributions of capital gains,
whether long-term or short-term, and taxable interest income to be negligible in
comparison to exempt-interest dividends.
Although dividend income from the Fund is expected to be exempt from
regular Federal income taxes, a sale or other disposition of the Fund's shares
is a taxable event, and may result in a capital gain or
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loss. This gain or loss may be realized by any redemption of the Fund's shares,
including an exchange of shares between the Fund and another of the Funds
offered by the Trust. In addition, any capital loss realized from municipal
securities held for six months or less is disallowed to the extent of tax-exempt
income received. In other words, if you held shares in the Fund for six months
or less, and sold those shares (or a portion of those shares) at a loss, the
capital loss you report is reduced by the tax-exempt dividends paid on these
shares.
STATE AND LOCAL TAXES
Tax-exempt dividends and capital gains distributions from the Fund and
any capital gains or losses realized from the redemption of shares may be
subject to state and local taxes. However, some states allow shareholders to
exclude from state income tax that portion of the Fund's tax-exempt income that
is attributable to municipal securities issued within the shareholder's own
state. To assist shareholders of these states, the Fund will provide a breakdown
of its tax-exempt interest income on a state-by-state basis at year-end.
The tax discussion set forth above is included for general information
purposes only. Prospective investors should consult their own tax advisers
concerning the tax consequences of an investment in the Fund.
Statements as to the tax status of your dividends and distributions
will be mailed annually. The Trust will also send you, if applicable, various
written notices after the close of its tax year with respect to certain
dividends and distributions that were, or were deemed to be, received from the
Fund during that tax year.
MANAGEMENT OF THE FUND
The Board of Trustees sets strategic and policy directions for the
Trust and oversees management. The Board selects and supervises the Investment
Adviser and Galaxy II's officers who are responsible for the day-to-day
management of its affairs.
INVESTMENT ADVISER
Fleet Investment Advisors Inc. (the "Investment Adviser"), with
principal offices at 45 East Avenue, Rochester, New York 14604, serves as
investment adviser to the Fund. The Investment Adviser also provides investment
management and advisory services to individual and institutional clients, and
manages the investment portfolios of The Galaxy Fund and The Galaxy VIP Fund.
The Investment Adviser is an indirect, wholly-owned subsidiary of Fleet
Financial Group, Inc., a registered bank holding company, that as of June 30,
1996, managed or advised approximately $46.7 billion. The Investment Adviser is
also an indirect, wholly-owned subsidiary of the Administrator. To fulfill its
responsibilities, the Investment Adviser employs the personnel, software and
support systems needed to manage the Fund.
For its services as investment adviser, the Investment Adviser receives
a fee from the Fund at the annual rate of .25% of the average daily net assets
of the Fund, which was the rate of the Investment Adviser's compensation during
the fiscal year ended March 31, 1996.
Mary McGoldrick of Fleet Investment Advisors Inc. is primarily
responsible for the day-to-day management of the Fund. She assumed this
responsibility on June 30, 1994, when Fleet Investment Advisors Inc. became the
Fund's new investment adviser. Ms. McGoldrick has worked for the Investment
Adviser
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since February 1990, serving as a portfolio manager for personal clients, a
common trust fund and the Galaxy Tax-Exempt Bond Fund, a portfolio of The Galaxy
Fund. Prior to working for the Investment Adviser, Ms. McGoldrick was a member
of the Trust Department of Fleet National Bank.
ADMINISTRATOR
Fleet National Bank ("Administrator") provides the Trust with office
facilities and support personnel and generally assists in all aspects of
administration and operation of the Trust. The Administrator, with principal
offices at 50 Kennedy Plaza, Providence, Rhode Island 02903-2305, is a
wholly-owned subsidiary of Fleet Financial Group, Inc. The Administrator pays
all of the expenses of the Fund, except the fees and expenses of those Trustees
who are not interested persons of the Trust, brokerage fees and commissions,
interest on borrowings, taxes and such extraordinary, non-recurring expenses as
may arise, including litigation to which the Trust may be a party. For its
services as administrator, the Administrator receives a fee from the Fund at an
annual rate of .35% of the average daily net assets of the Fund. From time to
time, the Administrator may waive all or a portion of the administration fee
payable to it by the Fund, either voluntarily or pursuant to applicable
statutory limitations.
The Administrator has entered into a sub-administration agreement with
First Data Investor Services Group, Inc. (the "Sub-Administrator" or "FDISG"),
4400 Computer Drive, P.O. Box 5108, Westborough, Massachusetts 01581, a
wholly-owned subsidiary of First Data Corporation to provide administrative
services to the Trust. The Sub-Administrator also serves as shareholder
servicing agent. The Administrator bears the fees of the Sub-Administrator for
serving in these capacities.
DISTRIBUTOR
440 Financial Distributors, Inc. (the "Distributor"), a wholly-owned
subsidiary of FDISG, is responsible for the marketing and distributing of the
shares of the Fund. The Distributor is a registered broker-dealer with principal
offices located at 4400 Computer Drive, P.O. Box 5108, Westborough,
Massachusetts 01581. The Distributor does not receive any compensation from
Galaxy II or the Fund for its services.
CUSTODIAN
The Chase Manhattan Bank, N.A. (the "Custodian"), located at 1 Chase
Manhattan Plaza, New York, New York 10081, a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as the custodian of the Fund's assets, and
FDISG serves as the Fund's transfer and dividend disbursing agent. Services
performed by both entities for the Fund are described in the Statement of
Additional Information. Communications to FDISG should be directed to FDISG at
4400 Computer Drive, P.O. Box 5108, Westborough, Massachusetts 01581.
DESCRIPTION OF SHARES
The Fund is a series of shares of the Trust. The Trust was organized on
February 22, 1990 under the laws of the Commonwealth of Massachusetts and is a
business entity commonly known as a "Massachusetts business trust." The Trust
offers shares of beneficial interest, par value $.001 per share. Currently, five
series of shares have been authorized for sale to the public (together, the
"Funds") one of whose shares constitutes the interest of the Fund described in
this Prospectus. When matters are submitted for shareholder vote, shareholders
of each Fund will have one vote for each full share held and proportionate,
fractional votes
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for fractional shares held. Generally, shares of the Trust 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.
Normally, no meetings of shareholders will be held for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Shareholders of record of no less than two-thirds of the outstanding
shares of the Trust may remove a Trustee through a declaration in writing or by
vote cast in person or by proxy at a meeting called for that purpose. A meeting
will be called for the purpose of voting on the removal of a Trustee at the
written request of holders of 10% of the Trust's outstanding shares.
Shareholders who satisfy certain criteria will be assisted by the Trust in
communicating with other shareholders in seeking the holding of the meeting.
INVESTOR PROGRAMS
EXCHANGE PRIVILEGE
Direct Investors and Customers of Institutions may, after appropriate
prior authorization, exchange shares of the Fund having a value of at least $100
for shares of any of the other funds or portfolios offered by the Trust or
otherwise advised by Fleet Investment Advisors Inc. or its affiliates in which
the Direct Investor or Customer maintains an existing account, provided that
such other shares may legally be sold in the state of the investor's residence.
The minimum initial investment to establish a new account in another fund or
portfolio offered by the Trust or otherwise advised by Fleet Investment Advisors
Inc. or its affiliates by exchange is $2,500, unless at the time of the exchange
the Direct Investor or Customer elects, with respect to the Fund into which the
exchange is being made, to participate in the Automatic Investment Program
described below, in which event there is no minimum initial investment
requirement.
An exchange involves a redemption of all or a portion of the shares of
a Fund and the investment of the redemption proceeds in shares of another fund
or portfolio offered by the Trust or otherwise advised by the Investment Adviser
or its affiliates. The redemption will be made at the per share net asset value
next determined after the exchange request is received. The shares of the fund
to be acquired will be purchased at the per share net asset value next
determined after acceptance of the exchange request.
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 the Trust's exchange privilege, Direct
Investors should call (800) 628-0413. Customers of Institutions should call
their Institution for such information. Customers exercising the exchange
privilege with the Large Company Index Fund, Small Company Index Fund, the U.S.
Treasury Index Fund and the Utility Index Fund should request and review a
prospectus for these Funds prior to making an exchange (call (800) 628-0414 for
a prospectus). Telephone all exchanges to (800) 628-0413.
In order to prevent abuse of this privilege to the disadvantage of
other shareholders, the Trust reserves the right to terminate the exchange
privilege of any shareholder who requests more than three exchanges a year. The
Trust 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 expenses to the Trust which will result from
effecting additional exchange requests. The exchange privilege may be modified
or terminated at
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any time. At least 60 days' notice of any material modification or termination
will be given to shareholders except where notice is not required under the
regulations of the Securities and Exchange Commission.
The Trust does not charge any exchange fee. However, Institutions may
charge such fees with respect to either all exchange requests or with respect to
any request which exceeds the permissible number of free exchanges during a
particular period. Customers of Institutions should contact their Institution
for applicable information.
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, the Customer should consult a tax or other
financial adviser to determine the tax consequences.
RETIREMENT PLANS
Shares of the Funds are available for purchase in connection with the
following tax-deferred prototype retirement plans:
Individual Retirement Accounts ("IRAs") (including "rollovers" from
existing retirement plans), a retirement-savings vehicle for qualifying
individuals. The minimum initial investment for an IRA account is $500 ($250 for
a spousal account).
Simplified Employee Pension Plans ("SEPs"), a form of retirement plan
for sole proprietors, partnerships and corporations. The minimum initial
investment for a SEP account is $500.
Multi-Employee Pension Plans ("MERPs"), a retirement vehicle
established by employers for their employees which is qualified under Section
401(k) and 403(b) of the Internal Revenue Code. The minimum initial investment
for a MERP is $500.
Keogh Plan, a retirement vehicle for self-employed individuals. The
minimum initial investment for a Keogh Plan is $500.
Detailed information concerning eligibility and other matters related
to these plans and the form of application is available from the Distributor
(call (800) 628-0413) with respect to IRAs, SEPs and Keogh Plans and from Fleet
Brokerage Securities Corporation (call (800) 221-8210) with respect to MERPs.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits a Direct Investor to purchase
Fund shares (minimum of $50 per transaction) each month. Provided the Direct
Investor's financial institution allows automatic withdrawals, Fund shares are
purchased by transferring funds from a Direct Investor's checking, bank money
market or NOW account designated by the investor. The account designated will be
debited in the specified amount, and Fund shares will be purchased, once a
month, on or about either the first or fifteenth day. Only an account maintained
at a domestic financial institution which is an Automated Clearing House member
may be so designated.
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<PAGE> 81
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan permits a Direct Investor to withdraw
Fund shares on a monthly, quarterly, semi-annual or annual basis, if the account
has a starting value of at least $10,000. Proceeds of the redemption will be
sent to the shareholder's address of record or financial institution on or about
the twenty-fifth day of each month. If withdrawals 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 the
Sub-Administrator (but not less than five days before a payment date). There is
no charge for this service.
INVESTING BY PAYROLL DEDUCTION BY REGULAR IBM EMPLOYEES
Until June 30, 1997, regular IBM employees may buy shares in the Fund
through payroll deduction. The minimum investment is $25 per account per pay
period. Deductions from any one employee may be invested in up to ten funds or
portfolios offered by the Trust or otherwise advised by the Investment Adviser
or its affiliates. IBM employees investing by payroll deduction in other funds
or portfolios offered by the Trust or otherwise advised by the Investment
Adviser or its affiliates should request and review the fund or portfolio's
prospectus prior to making an investment (call (800) 628-0414 for a prospectus).
Deductions will begin as soon as practicable following the submission of your
Galaxy II Payroll Deduction Authorization Form. You may change or stop your
payroll deduction by submitting a new Galaxy II Payroll Deduction Authorization
Form. Payroll deduction investments will be reported on quarterly customer
statements. Closing your account by redeeming all of its shares will not
automatically cancel your payroll deduction investment.
The Fund may also offer its shares to employees of other companies
through payroll deduction.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the
performance and yields of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to stock or other relevant
bond indexes 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 Fund may be compared to data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds.
Performance and yield 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 and yields of the
Fund.
The standard yield is computed by dividing the Fund's average daily net
investment income per share during a 30-day (or one month) base period
identified in the advertisement by the net asset value per share on the last day
of the period, and annualizing the result on a semi-annual basis. The Fund may
also advertise its "effective yield" which is calculated similarly but, when
annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The 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 by increasing
the Fund's yield (calculated as above) by the amount necessary to reflect the
payment of income taxes at stated tax rates. The tax-equivalent yield will
always be higher than the Fund's yield.
The Fund may also advertise its performance using "average annual total
return" over various periods of time. Such total return figures reflect the
average percentage change in the value of an investment in the
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Fund from the beginning date of the measuring period to the end of the measuring
period. 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 the Fund's operations, or on a
year-by-year basis. The Fund may also use "aggregate total return" figures for
various periods, representing the cumulative change in the value of an
investment in the Fund for the specified period. Both methods of calculating
total return assume that dividend and capital gain distributions made by the
Fund during the period are reinvested in Fund shares.
Performance and yields of the Fund will fluctuate and any quotation of
performance or yield should not be considered as representative of future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in the Fund's shares with bank deposits, savings accounts
and similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance and yield are generally functions of kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports describing the
Fund's investment operations and annual financial statements audited by
independent certified public accountants.
Inquiries regarding the Fund may be directed to Galaxy II at (800)
628-0414 (applications and information concerning initial purchases and current
performance) or (800) 628-0413 (additional purchases, redemptions, exchanges and
other shareholder services).
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GALAXY FUND II
STATEMENT OF ADDITIONAL INFORMATION
MUNICIPAL BOND FUND
AUGUST 1, 1996
<PAGE> 84
This Statement of Additional Information is meant to be read
in conjunction with the Prospectus of Galaxy Fund II ("Galaxy II" or the
"Trust") dated August 1, 1996, relating to the Municipal Bond Fund (the "Fund"),
and is incorporated by reference in its entirety into that Prospectus (the
"Prospectus"). Because this Statement of Additional Information is not itself a
prospectus, no investment in shares of the Fund should be made solely upon the
information contained herein. Copies of the Prospectus relating to the Fund may
be obtained by calling 440 Financial Distributors, Inc. (the "Distributor"), the
Trust's distributor, at (800) 628-0414. Information regarding the status of
shareholder accounts may be obtained by calling First Data Investor Services
Group, Inc. ("FDISG"), the Trust's transfer agent, at (800) 628-0413.
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<PAGE> 85
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE................................................................................... 4
INVESTMENT POLICIES AND RISK CONSIDERATIONS............................................................ 4
U.S. Government Securities.................................................................... 4
Bank Obligations.............................................................................. 5
Securities Of Other Investment Companies...................................................... 5
Futures Contracts............................................................................. 5
Options on Futures Contracts.................................................................. 7
Repurchase Agreements......................................................................... 8
Municipal Securities.......................................................................... 9
Valuation of Portfolio Securities............................................................. 12
Ratings as Investment Criteria................................................................ 13
INVESTMENT LIMITATIONS................................................................................. 14
PORTFOLIO TURNOVER..................................................................................... 17
PORTFOLIO TRANSACTIONS................................................................................. 17
ADDITIONAL INFORMATION CONCERNING TAXES................................................................ 18
TRUSTEES AND OFFICERS.................................................................................. 22
ADVISORY, ADMINISTRATION, CUSTODIAN, TRANSFER AGENCY
AND DIVIDEND PAYING AGENT AGREEMENTS.............................................................. 25
Investment Adviser and Administrator.......................................................... 25
Authority to Act as Investment Adviser........................................................ 27
Custodian, Transfer Agent and Dividend Paying Agent........................................... 27
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................................................... 28
PERFORMANCE AND YIELD INFORMATION...................................................................... 28
COUNSEL................................................................................................ 30
INDEPENDENT ACCOUNTANTS................................................................................ 30
GENERAL INFORMATION.................................................................................... 31
FINANCIAL STATEMENTS .................................................................................. FS-1
REPORT OF INDEPENDENT ACCOUNTANTS DATED
May 10, 1996...................................................................................... FS-34
APPENDIX............................................................................................... A-1
</TABLE>
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<PAGE> 86
INVESTMENT OBJECTIVE
The Fund seeks to provide investors the highest level of
income exempt from regular Federal income tax as is consistent with prudent
investment management and preservation of capital. Under normal market
conditions, the Fund will invest substantially all of its total assets in a
diversified portfolio of municipal securities. Under normal market conditions,
at least 95% of the Fund's municipal securities will be rated at least A or the
equivalent by major credit agencies. The Fund is a series of shares of Galaxy
II, a no-load, open-end investment company. Currently, there are four other
series of shares offered to the public by Galaxy II.
A Prospectus and Statement of Additional Information
describing the four other investment options currently available to the public
through Galaxy II, the Large Company Index Fund, the Small Company Index Fund,
the U.S. Treasury Index Fund and the Utility Index Fund (collectively with the
Fund, the "Funds"), can be obtained by calling Galaxy II at (800) 628-0414.
INVESTMENT POLICIES AND RISK CONSIDERATIONS
The following policies supplement the descriptions of the
Fund's investment objective and policies in the Prospectus.
U.S. GOVERNMENT SECURITIES
As noted in the Prospectus, the Fund may invest in short-term
debt obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Securities"). U.S. Government Securities in
which the Fund may invest include direct obligations of the U.S. Treasury and
obligations issued by U.S. Government agencies and instrumentalities. Included
among direct obligations of the United States are Treasury Bills, Treasury Notes
and Treasury Bonds, which differ principally in terms of their maturities.
Included among the securities issued by those agencies and instrumentalities
are: securities that are supported by the full faith and credit of the United
States (such as Government National Mortgage Association certificates);
securities that are supported by the right of the issuer to borrow from the U.S.
Treasury (such as securities of Federal Home Loan Banks); and securities that
are supported by the credit of the instrumentality (such as Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation bonds).
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<PAGE> 87
BANK OBLIGATIONS
Certificates of deposit in which the Fund may invest are
generally limited to those instruments issued by U.S. and foreign banks, savings
and loan associations and other banking institutions having total assets in
excess of $1 billion. Certificates of deposit ("CDs") are short-term negotiable
obligations of commercial banks. The Fund may invest in U.S. dollar-denominated
CDs, including instruments issued or supported by the credit of U.S. or foreign
banks or savings institutions having total assets at the time of purchase in
excess of $1 billion. The Fund will invest in an obligation of a foreign bank or
foreign branch of U.S. banks only if Fleet Investment Advisors Inc. (the
"Investment Adviser" or "Fleet") deems the obligation to present minimal credit
risks. Nevertheless, this kind of obligation entails risks that are different
from those of investments in domestic obligations of U.S. banks due to
differences in political, regulatory and economic systems and conditions.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in securities of other investment
companies to the extent permitted under the Investment Company Act of 1940, as
amended (the "1940 Act"). Presently, under the 1940 Act, the Fund may hold
securities of another investment company in amounts which (a) do not exceed 3%
of the total outstanding voting stock of such company, (b) do not exceed 5% of
the value of the Fund's total assets and (c) when added to all other investment
company securities held by the Fund, do not exceed 10% of the value of the
Fund's total assets. Purchases of securities of other investment companies may
subject shareholders to duplicate fees and expenses.
FUTURES CONTRACTS
The Fund may enter into interest rate futures contracts and
municipal bond index futures contracts. The Fund will enter into such futures
contracts only for "bona fide hedging" purposes, or as otherwise permitted by
Commodity Futures Trading Commission ("CFTC") regulations. The Fund may not
engage in futures activities if the aggregate initial margin deposits on its
existing futures contracts and the premiums paid for unexpired options required
to establish positions other than those considered to be "bona fide hedging" by
the CFTC would exceed 5% of the Fund's net asset value, after taking into
account unrealized profits and unrealized losses on futures contracts it has
entered into.
An interest rate futures contract is a standardized
contract for the future delivery of a specified security (such as
a U.S. Treasury bond or U.S. Treasury note) or its equivalent at
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<PAGE> 88
a future date at a price set at the time of the contract. A municipal bond index
futures contract is an agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to the difference between the value of
the index at the close of the last trading day of the contract and the price at
which the index contract was originally written. No physical delivery of the
underlying securities is made. By entering into an interest rate or municipal
bond index futures contract, the Fund is able to seek to protect its assets from
fluctuations in interest rates on tax-exempt securities without actually buying
or selling the long-term municipal securities.
No consideration is paid or received by the Fund upon the
purchase or sale of a futures contract. Upon entering into a futures contract,
the Fund will be required to deposit in a segregated account with its custodian
an amount of cash or cash equivalents, such as U.S. Government Securities or
high-grade debt obligations, equal to approximately 1 to 10% of the contract
amount (this amount is subject to change by the exchange on which the contract
is traded and brokers may require a higher amount). This amount is known as
"initial margin" and 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. The
broker will have access to amounts in the margin account if the Fund fails to
meet its contractual obligations. Subsequent payments, known as "variation
margin," to and from the broker, will be made daily as the price of the index or
securities underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." At any time prior to the expiration of a futures contract,
the Fund may elect to close the position by taking an opposite position, which
will operate to terminate the Fund's existing position in the contract.
Galaxy II will set aside with its custodian, or with a
designated sub-custodian, cash or cash equivalents, at least equal to the
underlying commodity value of each long position the Fund assumes in commodity
futures contracts or will take other actions consistent with regulatory
requirements to avoid leverage.
There are several risks in connection with investing in
futures contracts. Successful use of such futures contracts by the Fund is
subject to the ability of the Investment Adviser to predict correctly movements
in the direction of interest rates. Such predictions involve skills and
techniques which may be different from those involved in the management of a
municipal bond portfolio. In addition, although the Fund intends to enter into
futures contracts only if there is an active market for such contracts, there is
no assurance that a liquid market will exist for the contracts at any particular
time. Most futures exchanges
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limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit. It is
possible that futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting the Fund to substantial losses.
In such event, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
Further, there can be no assurance that there will be a perfect correlation
between movements in the price of the security or index underlying the futures
contract and movements in the price of the municipal securities which are the
subject of the hedge. The degree of imperfection of correlation depends upon
various circumstances, such as variations in speculative market demand for
futures contracts and municipal securities and technical influences in futures
trading, and differences between the municipal securities being hedged and the
municipal securities underlying the futures contracts, in such respects as
interest rate levels, maturities and creditworthiness of issuers. A decision of
whether, when and how to hedge involves the exercise of skill and judgment and
even a well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected trends in interest rates.
Losses incurred in futures transactions and the costs of these
transactions will affect the Fund's performance. In addition, the Fund might
have to sell securities to meet daily variation margin requirements at a time
when it would be disadvantageous to do so. These sales of securities may, but
will not necessarily, be at increased prices.
The ability of the Fund to trade in futures contracts and
options on futures contracts may be materially limited by the requirements of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable to a
regulated investment company. See "Additional Information Concerning Taxes"
below.
OPTIONS ON FUTURES CONTRACTS
The Fund may purchase put and call options on interest rate
and municipal bond index futures contracts which are traded on a United States
exchange as a hedge against changes in interest rates, and may enter into
closing transactions with respect to such options to terminate existing
positions. The Fund would sell put and call options on futures contracts only as
part of closing sale transactions to terminate its options positions. There is
no guarantee that such closing transactions can be effected.
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Options on futures contracts, as contrasted with the direct
investment in such contracts, gives the purchaser the right, in return for the
premium paid, to assume a position in futures contracts at a specified exercise
price at any time prior to the expiration date of the options. Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of sale, there are
no daily cash payments to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that change
would be reflected in the net asset value of the Fund.
Galaxy II will set aside with its custodian, or with a
designated sub-custodian, cash or cash equivalents, at least equal to the
underlying commodity value of each long position the Fund assumes in options on
futures contracts or will take other actions consistent with regulatory
requirements, to avoid leverage.
There are several risks relating to options on futures
contracts. The ability to establish and close out positions on such options will
be subject to the existence of a liquid market. In addition, the Fund's purchase
of put or call options will be based upon predictions as to anticipated interest
rate trends by the Investment Adviser, which could prove to be inaccurate. Even
if these expectations are correct there may be an imperfect correlation between
the change in the value of the options and of the Fund's portfolio securities.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreement transactions
pending investment of proceeds or for other temporary purposes ("Temporary
Investments"). The Fund will enter into repurchase agreements only with member
banks of the Federal Reserve System having total assets in excess of $5 billion
or non-bank dealers that are listed on the Federal Reserve Bank of New York's
list of reporting dealers. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the seller
at an agreed-upon price and date. Under the terms of a typical repurchase
agreement, the Fund would acquire a Temporary Investment for a relatively short
period (usually not more than seven days) subject to an obligation of the seller
to repurchase,
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and the Fund to resell, the Temporary Investment at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. Under each repurchase agreement,
the selling institution will be required to maintain the value of the securities
subject to the repurchase agreement at not less than 101% of the repurchase
price.
Repurchase agreements involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. In
evaluating these potential risks, the Investment Adviser, acting under the
supervision of the Board of Trustees, and on an ongoing basis, monitors (a) the
value of the collateral underlying each repurchase agreement of the Fund to
determine whether the value is at least equal to the total amount of the
repurchase obligation, including interest, and (b) the creditworthiness of the
banks and dealers with which the Fund enters into repurchase agreements. The
Fund will not enter into repurchase agreements that would cause more than 5% of
its net assets to be invested in illiquid securities.
A joint trading account may be used by the Fund to enter into
repurchase agreements. The Fund's decision to invest in the joint account will
be solely at its option; the Fund will not be required either to invest a
minimum amount or to maintain a minimum balance. The Board of Trustees will
evaluate annually the joint account arrangement and will continue participation
only if it determines that there is a reasonable likelihood that the Fund and
its shareholders would benefit from continued participation and that no
participant will be treated on a less advantageous basis than another
participant.
MUNICIPAL SECURITIES
The term "municipal securities" as used in the Prospectus and
this Statement of Additional Information means debt obligations issued by, or on
behalf of, states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities or multi-state agencies or authorities, the interest from
which debt obligations is, in the opinion of bond counsel to the issuer,
excluded from gross income for regular Federal income tax purposes. Municipal
securities generally are understood to include debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities, refunding of outstanding obligations, payment of general
operating expenses and extensions of loans to public institutions and
facilities. Private activity bonds that are issued by or on behalf of public
authorities to finance privately
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operated facilities are considered to be municipal securities if the interest
paid on them qualifies as excluded from gross income (but not necessarily from
alternative minimum taxable income) for Federal income tax purposes in the
opinion of bond counsel to the issuer ("AMT bonds"). The Fund may invest up to
20% of its assets in AMT bonds.
Municipal securities may be issued to finance life care
facilities, which are an alternative form of long-term housing for the elderly
that offer residents the independence of a condominium life-style and, if
needed, the comprehensive care of nursing home services. Bonds to finance these
facilities have been issued by various state industrial development authorities.
Because the bonds are secured only by the revenues of each facility and not by
state or local government tax payments, they are subject to a wide variety of
risks, including a drop in occupancy levels, the difficulty of maintaining
adequate financial reserves to secure estimated actuarial liabilities, the
possibility of regulatory cost restrictions applied to health care delivery and
competition from alternative health care or conventional housing facilities.
Municipal leases are municipal securities that may take the
form of a lease or an installment purchase contract issued by state and local
governmental authorities to obtain funds to acquire a wide variety of equipment
and facilities such as fire and sanitation vehicles, computer equipment and
other capital assets. These obligations have evolved to make it possible for
state and local government authorities to acquire property and equipment without
meeting constitutional and statutory requirements for the issuance of debt.
Thus, municipal leases have special risks not normally associated with municipal
securities. These obligations frequently contain "non-appropriation" clauses
that provide that the governmental issuer of the obligation has no obligation to
make future payments under the lease or contract unless money is appropriated
for those purposes by the legislative body on a yearly or other periodic basis.
In addition to the non-appropriation risk, municipal leases represent a type of
financing that has not yet developed the depth of marketability associated with
other municipal securities. Moreover, although municipal leases will be secured
by the leased equipment, the disposition of the equipment in the event of
foreclosure might prove to be difficult. The Fund does not intend to invest more
than 5% of its net assets in municipal leases.
The yields on municipal securities are dependent on a variety
of factors, including general economic and monetary conditions, money market
factors, conditions of the municipal securities market, the size of a particular
offering, maturity of the obligation, and rating of the issue.
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Municipal securities may also be 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 Congress 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. There
is also the possibility that as a result of litigation or other conditions the
power or ability of any one or more issuers to pay, when due, the principal of
and interest on its or their municipal securities may be materially affected.
The Fund will not invest more than 25% of its total assets in
municipal securities whose issuers conduct their principal activities in the
same state. The Fund may invest without limitation in municipal securities that
are repayable out of revenue streams generated from economically related
projects or facilities. Investments in these obligations could involve an
increased risk to the Fund should any of the related projects or facilities
experience financial difficulties. In addition, there could be economic,
business or political developments or changes which might affect all municipal
securities of a similar type. However, the Fund believes that the most important
consideration affecting risk is the quality of particular issues of municipal
securities rather than factors affecting all, or broad classes of, municipal
securities.
Tax legislation in recent years has included several
provisions that may affect the supply of, and the demand for, municipal
securities, as well as the tax-exempt nature of interest paid on those
obligations. Neither Galaxy II nor the Investment Adviser can predict with
certainty the effect of recent tax law changes upon the municipal securities
market, including the availability of instruments for investment by the Fund. In
addition, neither Galaxy II nor the Investment Adviser can predict whether
additional legislation adversely affecting the municipal security market will be
enacted in the future. Galaxy II will monitor legislative developments and
consider whether changes in the objective or policies of the Fund need to be
made in response to those developments.
When-Issued and Delayed-Delivery Securities. Municipal
securities are subject to changes in value based upon the public's perception of
the creditworthiness of the issuers and changes, real or anticipated, in the
level of interest rates. In general, municipal securities tend to appreciate
when interest rates decline and depreciate when interest rates rise. Purchasing
municipal securities on a when-issued or delayed-delivery basis, therefore, can
involve the risk that the yields available in the market when the delivery takes
place actually may be higher than those obtained in the transaction itself. To
account for this risk, a separate account of the Fund
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consisting of cash or liquid debt securities equal to the amount of the
when-issued or delayed-delivery commitments will be established at the Fund's
custodian bank. For the purpose of determining the adequacy of the securities in
the account, the deposited securities will be valued at market or fair value. If
the market or fair value of such securities declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of such commitments by the Fund. Upon the
settlement date of the when-issued or delayed-delivery securities, the Fund will
meet its obligations from the then-available cash flow, sale of securities held
in the separate account, sale of other securities or although it would not
normally expect to do so, from the sale of the securities themselves (which may
have a greater or lesser value than the Fund's payment obligations). Sales of
securities to meet such obligations may involve the realization of capital
gains, which are not exempt from federal income taxes.
VALUATION OF PORTFOLIO SECURITIES
Debt securities of U.S. issuers (other than U.S. Government
Securities and short-term investments), including municipal securities, are
valued by Fleet National Bank (the "Administrator") after consultation with a
pricing service. When, in the judgment of the pricing service, quoted bid prices
for investments of the Fund are readily available and are representative of the
bid side of the market, these investments are valued at the mean between the
quoted bid prices and asked prices. Investments of the Fund that are not
regularly quoted are carried at fair value as determined by the Board of
Trustees, which may rely on the assistance of the pricing service. The
procedures of the pricing service are reviewed periodically by the Investment
Adviser under the general supervision and responsibility of the Board of
Trustees of Galaxy II.
Portfolio securities which are listed on the New York Stock
Exchange or the American Stock Exchange are valued at the last quoted sales
price, or if no sales occurred, the closing bid price. Investments in U.S.
Government Securities (other than short-term investments) are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued on the basis of
amortized cost (which involves valuing an investment instrument at its cost and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument) unless Galaxy II's Board of Trustees has determined
that amortized cost does not approximate market value. Other securities for
which market quotations are readily available are valued as nearly as possible
in the manner described above. Securities may be valued by a pricing service
when such prices are believed to reflect the fair market value of
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such securities. Other assets and securities for which market quotations are not
readily available are valued based on fair value as determined in good faith in
accordance with procedures established by the Board of Trustees.
RATINGS AS INVESTMENT CRITERIA
The ratings of nationally recognized statistical rating
organizations ("NRSROs") such as Standard & Poor's Ratings Group ("S&P") or
Moody's Investors Service, Inc. ("Moody's") represent the opinions of those
organizations as to the quality of securities that they rate. Although these
ratings, which are relative and subjective and are not absolute standards of
quality, will be used by the Investment Adviser as initial criteria for the
selection of portfolio securities on behalf of the Fund, the Investment Adviser
will also rely upon its own analysis to evaluate potential investments.
Subsequent to its purchase by the Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Fund. Although a change in rating may not necessarily
require the sale of the securities by the Fund, the Investment Adviser will
consider the event in its determination of whether the Fund should continue to
hold the securities. In the event of a default by the issuer of the security,
the Fund will dispose of the security as soon as practicable, unless Galaxy II's
Board of Trustees determines that disposal of the security would not be in the
best interests of the Fund. To the extent that a NRSRO's ratings change as a
result of a change in the NRSRO or its rating system, the Fund will attempt to
use comparable ratings as standards for its investments in accordance with its
investment objective and policies.
INVESTMENT LIMITATIONS
Investment limitations numbered 1 through 15 may not be
changed without the approval by a vote of a majority of the outstanding shares
of the Fund. Investment limitations numbered 16 through 18 may be changed by a
vote of the Board of Trustees at any time. A majority vote by shareholders is
defined, with respect to the approval of an investment advisory agreement, a
distribution plan or a change in a fundamental investment policy as the lesser
of (a) 67% or more of the shares present at the meeting, if the holders of more
than 50% of the outstanding shares of the Fund are present or represented by
proxy, or (b) more than 50% of the outstanding shares of the Fund.
The Fund may not:
1. Under normal market conditions invest less than 80% of its
net assets in municipal securities.
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2. With respect to 75% of its total assets, purchase the
securities of any issuer if as a result more than 5% of the value of the Fund's
total assets would be invested in the securities of such issuer, except that
this 5% limitation does not apply to U.S. Government Securities. For purposes of
this limitation, the issuer will be identified based on a determination of the
source of assets and revenues committed to meeting interest and principal
payments of each security. The Fund will regard each state and each of its
political subdivisions, agencies and instrumentalities and each multi-state
agency, as separate issuers for purposes of this restriction. If private
companies are responsible for payment of principal and interest, the Fund will
regard each such company as a separate issuer for purposes of this restriction.
All securities of a foreign government and its agencies will be treated as a
single issuer for purposes of this restriction.
3. Borrow money or issue senior securities except that the
Fund may borrow from banks for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 33-1/3% of the value of the
Fund's total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any bank borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 33-1/3% of
the value of the Fund's total assets at the time of such borrowing. The Fund
will repay all borrowings before making additional investments. For purposes of
this restriction, collateral arrangements with respect to (a) the purchase and
sale of options on futures contracts and (b) initial and variation margin for
futures contracts, will not be deemed to be issuances of senior securities or to
be pledges of the Fund's assets.
4. Purchase any securities that would cause 25% or more of the
value of the Fund's net assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
state.
5. Make loans, except that the Fund may purchase or hold debt
obligations and enter into repurchase agreements, as described herein and in the
Prospectus.
6. Underwrite any issue of securities except to the extent
that the sale of portfolio securities in accordance with the Fund's investment
objective, policies and limitations may be deemed to be underwriting.
7. Purchase or sell real estate or real estate limited
partnership interests, or invest in oil, gas or mineral leases, or mineral
exploration or development programs, except that the Fund may invest in
securities secured by real estate mortgages or
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interests therein and may purchase securities issued by companies that invest or
deal in any of the above.
8. Make short sales of securities or maintain a short
position.
9. Purchase securities of other investment companies except as
they may be acquired in connection with a merger, consolidation, acquisition,
reorganization or offer of exchange and except as permitted under the 1940 Act.
10. With respect to 75% of its total assets, purchase more
than 10% of the voting securities of any one issuer, more than 10% of the
securities of any class of any one issuer or more than 10% of the outstanding
debt securities of any one issuer; provided that this limitation shall not apply
to investments in U.S. Government Securities. The Fund will regard each state
and each of its political subdivisions, agencies and instrumentalities and each
multi-state agency, as separate issuers for purposes of this restriction. If
private companies are responsible for payment of principal and interest, the
Fund will regard each such company as a separate issuer for purposes of this
restriction. All securities of a foreign government and its agencies will be
treated as a single issuer for purposes of this restriction.
11. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and sales
of securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin by the Fund.
12. Invest in commodities, except that the Fund may invest in
futures contracts and options thereon as described herein and in the Prospectus.
13. Invest in companies for the purpose of exercising control
or management.
14. Invest more than 15% of the value of the Fund's net assets
in securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations.
15. Invest more than 25% of its assets in the securities of
issuers in any single industry; provided that there shall be no limitation on
the purchase of municipal securities and U.S. Government Securities. For the
purposes of this restriction, private activity bonds, where the payment of
principal and interest is the ultimate responsibility of
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companies within the same industry, are grouped together as an "industry."
16. Purchase any security if as a result the Fund would then
have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years, except that in the case of industrial revenue bonds purchased by
the Fund, this restriction will apply to the entity supplying the revenues from
which the issue is to be paid.
17. Purchase or retain securities of any company if, to the
knowledge of Galaxy II, any of Galaxy II's officers or Trustees or any officer
or director of Galaxy II's investment adviser individually owns more than 1/2 of
1% of the outstanding securities of such company and together they own
beneficially more than 5% of the securities.
18. Purchase warrants.
Galaxy II may make commitments more restrictive than the
restrictions listed above with respect to the Fund so as to permit the sale of
shares of the Fund in certain states. Should Galaxy II determine that any such
commitment is no longer in the best interest of the Fund and its shareholders,
Galaxy II will revoke the commitment by terminating the sale of shares of the
Fund in the state involved or may otherwise modify its commitment based on a
change in the involved state's restrictions. If a percentage restriction (other
than that contained in investment limitation 3) is adhered to at the time of an
investment, a later increase or decrease in the percentage of assets resulting
from a change in the values of portfolio securities or in the amount of the
Fund's assets will not constitute a violation of such restriction.
PORTFOLIO TURNOVER
Galaxy II cannot accurately predict the Fund's portfolio
turnover rate. However, the annual turnover rate of the Fund generally is
expected to be less than 100%. For the fiscal years ended March 31, 1995 and
March 31, 1996, the Fund's portfolio turnover rate was 47% and 2%, respectively.
Portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities by the monthly average value
of securities in the Fund during the year, excluding any portfolio security, the
maturity of which at the time of acquisition was one year or less. Higher
portfolio turnover rates can result in corresponding increases in brokerage
commissions. The Fund will not consider its turnover rate a limiting factor in
making investment decisions consistent with its investment objective and
policies.
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PORTFOLIO TRANSACTIONS
The Investment Adviser will select specific portfolio
investments and effect transactions for the Fund. The Investment Adviser seeks
to obtain the best net price and the most favorable execution of orders. The
Investment Adviser may, in its discretion, effect transactions in portfolio
securities with dealers who provide research advice or other services to the
Fund or the Investment Adviser. The Investment Adviser is authorized to pay a
broker or dealer who provides such brokerage and research services a commission
for executing a portfolio transaction for the Fund which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction if the Investment Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Investment Adviser's overall responsibilities to
the Fund and to the Trust. Such brokerage and research services might consist of
reports and statistics relating to specific companies or industries, general
summaries of groups of stocks or bonds and their comparative earnings and
yields, or broad overviews of the stock, bond and government securities markets
and the economy. The fees under the investment advisory agreement between Galaxy
II and the Investment Adviser are not reduced by reason of receiving such
brokerage and research services. The Board of Trustees will periodically review
the commissions paid by the Fund to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Fund.
Municipal securities and U.S. Government Securities are
generally purchased from underwriters or dealers, although certain newly issued
municipal securities and U.S. Government Securities may be purchased directly
from the issuing agency or instrumentality. No brokerage commissions are
typically paid on purchases and sales of municipal securities or U.S. Government
Securities.
Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. There is generally no stated commission in the
case of securities traded in U.S. over-the-counter markets, but the prices of
those securities include undisclosed commissions or mark-ups. The cost of
securities purchased from underwriters includes an underwriting commission or
concession, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down.
Since Galaxy II does not market shares of the Fund through
intermediary brokers or dealers, it is not Galaxy II's
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practice to allocate brokerage or principal business on the basis
of sales of its shares.
ADDITIONAL INFORMATION CONCERNING TAXES
As described above and in the Prospectus, the Fund is designed
to provide shareholders with current income which is excluded from gross income
for regular Federal income tax purposes. The Fund is not intended to constitute
a balanced investment program and is not designed for investors seeking capital
gains or maximum tax-exempt income irrespective of fluctuations in principal.
Investment in the Fund would not be suitable for tax-exempt institutions,
qualified retirement plans (including those that cover self-employed
individuals) and individual retirement accounts since such investors would not
gain any additional tax benefit from the receipt of tax-exempt income.
The Fund intends to qualify each year as a "regulated
investment company" under the Code. Provided that the Fund (a) is a regulated
investment company and (b) distributes to its shareholders (i) at least 90% of
its "investment company taxable income" (that is, its income minus its "net
capital gains" and after taking into account certain required adjustments) and
(ii) at least 90% of its tax-exempt interest income (reduced by certain
expenses), the Fund generally will not be subject to Federal income tax to the
extent its net investment income (that is, its income other than its net
realized capital gains) and its net realized long-term and short-term capital
gains are distributed to its shareholders in accordance with the Code. The
Fund's net investment income for dividend purposes consists of (i) interest
accrued and discount earned on the Fund's assets, (ii) less amortization of
market premium on such assets, accrued expenses directly attributable to the
Fund, and the general expenses (e.g., legal, accounting and trustees' fees) of
the Trust prorated to the Fund on the basis of its relative net assets. The
amortization of market discount on the Fund's assets is not included in the
calculation of net income, unless the Fund elects to include accrued market
discount currently.
Although the Fund expects to be relieved of all or
substantially all Federal, state and local income and franchise taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, that portion of the
Fund's income which is treated as earned in any such state or locality could be
subject to state and local tax. Any such taxes paid by the Fund would reduce the
amount of income and gains available for distribution to shareholders.
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As noted in the Prospectus, the Fund expects to pay dividends
and to make distributions as necessary to avoid the application of the 4%
non-deductible excise tax measured with respect to certain undistributed amounts
of taxable ordinary income and capital gain. The Fund may also, in order to
avoid the 4% excise tax, declare one or more dividends in October, November or
December of any calendar year, payable to shareholders of record on a specified
date in such a month. If the Fund declares such dividends, then each such
shareholder will be treated as receiving such dividends and the Fund will be
treated as having paid such dividends on December 31 of that year provided that
the Fund pays such dividends to such shareholders during January of the
following calendar year. As a general rule, dividends paid by the Fund will
qualify for the dividends-received deduction for corporate shareholders only to
the extent the Fund's dividends are attributable to dividends received by the
Fund from U.S. corporations.
As described above and in the Prospectus, the Fund is
authorized to invest in futures contracts and options on futures contracts.
Galaxy II anticipates that this investment activity will not prevent the Fund
from qualifying as a regulated investment company. As a general rule, this
investment activity will increase or decrease the amount of long-term and
short-term capital gains or losses realized by the Fund involved, and,
accordingly, will affect the amount of capital gains distributed to the Fund's
shareholders.
For Federal income tax purposes, gain or loss on the futures
contracts described above (collectively referred to herein as "section 1256
contracts") is taxed pursuant to a special "mark-to-market system." Under the
mark-to-market system, the Fund may be treated as realizing a greater or lesser
amount of gains or losses than actually realized. As a general rule, gain or
loss on section 1256 contracts is treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss and, accordingly, the mark-to-market
system generally will affect the amount and timing of capital gains or losses
that may be taxable to the Fund and the amount of distribution taxable to a
shareholder. Moreover, if the Fund invests in both section 1256 contracts and
offsetting positions in such contracts, then the Fund might not be able to
receive the benefit of certain realized losses for an indeterminate period of
time. The Fund expects that its activities with respect to section 1256
contracts and offsetting positions in such contracts (a) will not cause it or
its shareholders to be treated as receiving a materially greater amount of
capital gains or distributions than actually realized or received and (b) will
permit it to use substantially all of its losses for the fiscal years in which
such losses actually occur.
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<PAGE> 102
In order for the Fund to pay exempt-interest dividends for any
taxable year, at the close of each taxable quarter, at least 50% of the
aggregate value of the Fund's portfolio must consist of exempt-interest
obligations. Within 60 days after the close of the taxable year of the Fund, the
Trust will notify the Fund's shareholders of the portion of the dividends paid
that constitutes an exempt-interest dividend with respect to that taxable year.
The percentage of total dividends paid by the Fund with respect to any taxable
year that qualifies as federal exempt-interest dividends will be the same for
all shareholders receiving dividends from the Fund for that year.
A portion of the interest on indebtedness incurred by a
shareholder to purchase or carry shares of the Fund, equal to the percentage of
the total non-capital gain dividends distributed during the shareholder's
taxable year that are exempt-interest dividends, is not deductible for Federal
income tax purposes. If a shareholder of the Fund holds shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. In addition, the Code may require a shareholder, if he or she receives
exempt-interest dividends, to treat as Federal taxable income a portion of
certain otherwise non-taxable social security and railroad retirement benefit
payments. Furthermore, that portion of any exempt-interest dividend paid by the
Fund which represents income derived from "private activity bonds" held by the
Fund may not retain its tax-exempt status in the hands of a shareholder who is a
"substantial user" of a facility financed by such bonds, or a "related person"
thereof.
While exempt-interest dividends are exempt from regular
Federal income tax, they may be subject to alternative minimum tax (currently
imposed at the rate of 26%-28% on non-corporate taxpayers and at the rate of 20%
in the case of corporate taxpayers), in two circumstances. First,
exempt-interest dividends derived from private activity bonds issued after
August 7, 1986 generally will constitute an item of tax preference for both
corporate and non-corporate taxpayers. Second, exempt-interest dividends derived
from all bonds, regardless of the date of issue, must be taken into account by
corporate taxpayers in determining certain adjustments for alternative minimum
and environmental tax purposes. Receipt of exempt-interest dividends may result
in collateral Federal income tax consequences to certain other taxpayers,
including subchapter S corporate shareholders, financial institutions, property
and casualty insurance companies, and foreign corporations engaged in trade or
business in the United States. Prospective investors should consult their own
tax advisers as to such consequences.
Net realized long-term capital gains will be distributed as
described in the Prospectus. Such distributions
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<PAGE> 103
("capital gain dividends") will be taxable to a shareholder as long-term capital
gains, regardless of how long a shareholder has held Fund shares. However, if a
shareholder receives a capital gain dividend with respect to any share and if
such share is held by the shareholder for six months or less, then any loss on
the sale or redemption of such share will be treated as a long-term capital loss
to the extent of the capital gain dividend.
Investors considering buying shares of the Fund on or just
prior to the record date for a taxable dividend or capital gain distribution
should be aware that the amount of the forthcoming dividend or distribution
payment, although in effect a return of capital, will be a taxable dividend or
distribution payment.
If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to backup withholding, then the
shareholder may be subject to a 31% "backup withholding tax" with respect to (a)
dividends and distributions and (b) the proceeds of any sales or redemptions of
the Fund's shares. An individual's taxpayer identification number is his or her
social security number. The 31% "backup withholding tax" is not an additional
tax and may be credited against a taxpayer's regular Federal income tax
liability.
The foregoing is only a summary of certain tax considerations
generally affecting the Fund and its shareholders, and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult their tax
advisers with specific reference to their own tax situations, including their
state and local tax liabilities.
TRUSTEES AND OFFICERS
The trustees and executive officers of Galaxy II, their
addresses, ages and their principal occupations during the past five years and
other affiliations are set forth below. The executive officers of Galaxy II are
employees of organizations that provide services to the Fund. Each trustee who
is an "interested person" of the Trust, as defined in the 1940 Act, is indicated
by an asterisk. Each other trustee has no relationship with the Investment
Adviser or the Former Adviser (as hereinafter defined).
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<PAGE> 104
<TABLE>
<CAPTION>
Positions Held with Galaxy II and
Principal Occupation(s) During
Name, Address and Age Past 5 Years
- --------------------- ------------
<S> <C>
Dwight E. Vicks, Jr. Trustee and Chairman of the Board
Vicks Lithograph &
Printing Corporation President & Director,
Commercial Drive Vicks Lithograph &
P.O. Box 270 Printing Corporation
Yorkville, NY 13495 (book manufacturing and commercial
Age 63 printing); Director, Utica First
Insurance Company; Trustee,
Savings Bank of Utica;
Director, Monitor Life
Insurance Company;
Director, Commercial
Travelers Mutual Insurance
Company; Chairman of the
Board, The Galaxy Fund and
The Galaxy VIP Fund.
*John T. O'Neill Trustee, President and Treasurer
Hasbro, Inc.
200 Narragansett Executive Vice President and CFO,
Park Drive Hasbro, Inc.(toy and game
Pawtucket, RI 02862 manufacturer), since 1987; Trustee,
Age 55 President and Treasurer, The Galaxy
Fund and the Galaxy VIP
Fund; Managing Partner,
KPMG Peat Marwick
(accounting firm), 1986.
Louis DeThomasis Trustee
Saint Mary's College
of Minnesota President, Saint Mary's College of
Winona, MN 55987 Minnesota; Director, Bright Day
Age 55 Travel, Inc.; Trustee, Religious
Communities Trust; Trustee, The
Galaxy Fund and The Galaxy VIP
Fund.
Donald B. Miller Trustee
10725 Quail Covey Road
Boynton Beach, FL 33436 Chairman, Horizon Media, Inc.
Age 70 (broadcast services); Director/
Trustee, Lexington Funds; Director,
Maguire Group of Connecticut, Inc.
(consulting engineers); Trustee,
Keuka College; Trustee, The Galaxy
Fund and The Galaxy VIP Fund.
</TABLE>
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<PAGE> 105
<TABLE>
<CAPTION>
Positions Held with Galaxy II and
Principal Occupation(s) During
Name, Address and Age Past 5 Years
- --------------------- ------------
<S> <C>
James M. Seed Trustee
The Astra Ventures, Inc.
One Citizens Plaza Chairman and President, The Astra
Providence, RI 02903 Projects, Incorporated (land
Age 55 development); President, The Astra
Ventures, Incorporated
(previously, Buffinton Box
Company - manufacturer of
cardboard boxes); Trustee,
The Galaxy Fund and The
Galaxy VIP Fund;
Commissioner, Rhode Island
Investment Commission.
*Bradford S. Wellman Trustee
2468 Ohio Street
Bangor, ME 04401 Private Investor; President, Ames &
Age 65 Wellman, from 1978 to 1991;
President, Pingree
Associates, Inc., from 1974
until 1990; Director, Essex
County Gas Company, until
January 1994; Director,
Maine Mutual Fire Insurance
Co.; Member, Maine Finance
Authority; Trustee, The
Galaxy Fund and The Galaxy
VIP Fund.
W. Bruce McConnel, III Secretary
Drinker Biddle & Reath
Philadelphia National Partner of the law firm Drinker
Bank Building Biddle & Reath, Philadelphia,
1345 Chestnut St. Pennsylvania.
Philadelphia, PA 19107
Age 53
Neil Forrest Vice President and Assistant
First Data Investor Treasurer
Services Group, Inc.
4400 Computer Drive Vice President, Investment
P.O. Box 5108 Marketing and Strategic Planning,
Westborough, MA 01581 Manufacturers and Traders Trust Co.
Age 36 1990-1992; First Data Investor
Services Group, Inc. 1992-present.
</TABLE>
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<PAGE> 106
The following chart provides certain information about the
trustee fees for the year ended March 31, 1996:
<TABLE>
<CAPTION>
TOTAL
COMPENSA-
PENSION OR TION FROM
RETIREMENT COMPANY
BENEFITS AND FUND
AGGREGATE ACCRUED COMPLEX*
NAME OF COMPENSATION AS PART OF PAID TO
PERSON FROM THE COMPANY FUND EXPENSES TRUSTEES
- ------ ---------------- ------------- --------
<S> <C> <C> <C>
Bradford S. Wellman $5,000 None $29,750
Dwight E. Vicks, Jr. $5,000 None $36,100
Donald B. Miller $5,000 None $32,000
Louis DeThomasis $5,000 None $32,000
John T. O'Neill $5,000 None $34,625
James M. Seed $5,000 None $32,000
</TABLE>
* The "Fund Complex" consists of The Galaxy Fund, The Galaxy VIP and
Galaxy Fund II.
Each trustee receives an annual fee of $5,000 for his services as a
trustee of Galaxy II plus an additional $750 for each in-person Galaxy II Board
meeting and $500 for each telephone Galaxy II Board meeting attended and is
reimbursed for expenses incurred in attending meetings. Beginning March 1,
1996, each trustee is also entitled to participate in the Galaxy II Deferred
Compensation Plan (the "Plan"). The Plan provides that a trustee may defer all
or a portion of the compensation earned from Galaxy II to a deferred
compensation account. Monies in the deferred compensation account will be
invested according to the investment options selected by the trustee. No
employee of First Data receives any compensation from Galaxy II 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 II.
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<PAGE> 107
As of June 1, 1996, the aforementioned trustees and officers
of Galaxy II as a group owned no shares of the Large Company Fund, the Small
Company Fund, the U.S. Treasury Fund, the Utility Fund or the Municipal Bond
Fund.
ADVISORY, ADMINISTRATION, CUSTODIAN, TRANSFER AGENCY
AND DIVIDEND PAYING AGENT AGREEMENTS
INVESTMENT ADVISER AND ADMINISTRATOR
Fleet, an indirect subsidiary of Fleet Financial Group, Inc.,
serves as the investment adviser to the Fund. Fleet's principal offices are
located at 45 East Avenue, Rochester, New York 14604.
Pursuant to its investment advisory agreement with Galaxy II,
Fleet, subject to the general supervision of Galaxy II's Board of Trustees and
in accordance with the Fund's investment policies, manages the Fund, makes
decisions with respect to and places orders for all purchases and sales of its
portfolio securities and maintains related records. The fees paid to the
Investment Adviser under the Advisory Agreement are described in the Prospectus.
For the period April 1, 1994 through June 30, 1994, IBM Credit
Investment Management Corporation, the Former Adviser, earned $20,007 and Fleet
earned $50,719 for the period July 1, 1994 through March 31, 1995 and $59,097
for the year ended March 31, 1996.
Pursuant to an administration agreement with the Trust (the
"Administration Agreement"), the Administrator, subject to the supervision of
the Board of Trustees, generally assists in certain aspects of the
administration and operation of the Fund. Under the Administration Agreement,
the Administrator has agreed to maintain office facilities for Galaxy II,
furnish Galaxy II with statistical and research data, clerical, accounting, and
bookkeeping services, certain other services such as internal auditing services
required by Galaxy II, and compute the net asset value and net income of the
Fund. In addition, the Administrator prepares the Fund's 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 Fund's financial accounts and
records, and generally assists in all aspects of Galaxy II's operations.
Pursuant to the Administration Agreement, the Administrator may delegate to
another organization the performance of some or all of these services, in which
case the Administrator will be responsible for all compensation payable to such
organization and will remain liable for losses or failures resulting from the
actions or omissions of such agent. The Administrator has entered into a
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<PAGE> 108
Sub-Administration Agreement with First Data Investor Services Group. Inc. (the
"Sub-Administrator" or "FDISG"), pursuant to which the Sub-Administrator has
agreed to provide the Trust with the services which the Trust is entitled to
receive under the Administration Agreement with the Administrator.
For the period April 1, 1994 through June 30, 1994, the Former
Adviser earned $28,197 as administrator of the Fund and the Administrator earned
$64,406 for the period July 1, 1994 through March 31, 1995 and $82,017 for the
year ended March 31, 1996 for the Fund.
The Administrator pays the salaries of all officers and
employees who are employed by both it and Galaxy II. The Administrator bears all
expenses in connection with its duties under the Administration Agreement and
bears all of Galaxy II's expenses with the following exceptions: brokerage fees
and commissions; fees and expenses of Trustees who are not officers, directors
or employees of the Investment Adviser, the Administrator, the Distributor or
any of their affiliates; taxes; interest; and any extraordinary non-recurring
expenses, including litigation to which Galaxy II may be a party. The fees paid
to the Administrator under the Administration Agreement are described in the
Prospectus.
The Advisory and Administration Agreements provide that,
absent willful misfeasance, bad faith, gross negligence or reckless disregard of
duty (or, in the case of the Investment Adviser, a breach of fiduciary duty with
respect to the receipt of compensation for services), neither the Investment
Adviser nor the Administrator shall be liable to the Trust for any error of
judgment or mistake of law or for any loss sustained by the Trust. The Advisory
and Administration Agreements are terminable without penalty by Galaxy II on
sixty days' written notice when authorized by vote of a majority of its Board of
Trustees or by the Investment Adviser or Administrator, as the case may be, on
sixty days' written notice. In addition, the Advisory Agreement is terminable
without penalty by Galaxy II on sixty days' written notice when authorized by a
majority vote of its outstanding voting shares and will automatically terminate
in the event of its "assignment" as defined in the 1940 Act.
Each of the Advisory and Administration Agreements provide
that the agreement remains in effect until June 30 of each year, unless earlier
terminated, as long as such continuance is annually approved by a vote of
trustees who are not parties to the contract or "interested persons", as defined
by the 1940 Act, of any such party cast in person at a meeting specially called
for the purpose of voting on the continuance of the agreement.
The Investment Adviser and the Administrator have agreed that
if in any fiscal year the aggregate expenses of the
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<PAGE> 109
Fund (as defined under the securities regulations of any state having
jurisdiction over the Fund) exceed the expense limitation of such state, the
Investment Adviser and the Administrator will reduce their fees or reimburse the
Fund to the extent required by state law. A fee reduction, if any, will be
accrued on a daily basis. The most restrictive annual expense limitation
applicable to the Fund is 2.5% of the first $30 million of the average net
assets of the Fund, 2% of the next $70 million of the average net assets of the
Fund and 1.5% of any remaining average net assets of the Fund.
AUTHORITY TO ACT AS INVESTMENT ADVISER
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956, as amended, or any bank
or non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities such as shares of
the Fund, but do not prohibit such a bank holding company or its affiliates or
banks generally from acting as investment adviser, administrator, transfer agent
or custodian to such an investment company or from purchasing shares of such a
company as agent for and upon the order of customers. The Investment Adviser,
the Administrator, the Fund's custodian and institutions which have agreed to
provide shareholder support services that are banks or bank affiliates are
subject to such banking laws and regulations. Should legislative, judicial or
administrative action prohibit or restrict the activities of such companies in
connection with their services to the Fund, Galaxy II might be required to alter
materially or discontinue its arrangements with such companies and change its
method of operation. It is anticipated, however, that any resulting change in
the Fund's method of operation would not affect its net asset value per share or
result in financial losses to any shareholder. State securities laws on this
issue may differ from Federal law and banks and financial institutions may be
required to register as dealers pursuant to state law.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT
The Chase Manhattan Bank, N.A. (the "Custodian") serves as
custodian to the Fund pursuant to a Global Custody Agreement. Under its custody
agreement, the Custodian has agreed to: (i) maintain a separate account or
accounts in the name of the Fund; (ii) hold and disburse portfolio securities on
account of the Fund; (iii) collect and make disbursements of money on behalf of
the Fund; (iv) collect and receive all income and other payments and
distributions on account of the Fund's portfolio securities; and (v) respond to
correspondence from security brokers and others relating to its duties.
-27-
<PAGE> 110
FDISG serves as the Trust's transfer agent and dividend
disbursing agent pursuant to a Transfer Agency Agreement ("Transfer Agency
Agreement"). Under the Transfer Agency Agreement, the Transfer Agent 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 notice and proxy materials for meetings of
shareholders; (iii) respond to correspondence by security brokers and others
relating to its duties; and (iv) maintain shareholder accounts.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are sold on a continuous basis by the
Distributor, and the Distributor has agreed to use appropriate efforts to
solicit all purchase orders. As described in the Prospectus, shares of the Fund
are sold to customers ("Customers") of Fleet Brokerage Securities Corporation,
Fleet Securities, Inc., Fleet Financial Group, Inc. ("Fleet Group"), its
affiliates, their correspondent banks, and other qualified banks, savings and
loan associations and broker/dealers ("Institutions"). As described in the
Prospectus, Shares may also be sold to individuals or corporations, who submit a
purchase application to Galaxy II, purchasing either for their now accounts or
for the accounts of others ("Direct Investors").
Galaxy II 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 Fund normally utilizes 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 or its net asset value not
reasonably practicable; (b) the New York Stock Exchange is closed (other than
customary weekend and holiday closings); or (c) the SEC has by order permitted
such suspension.
PERFORMANCE AND YIELD INFORMATION
From time to time, the Fund may quote its performance, as
based upon its total return, its yield or its tax-equivalent yield, in
advertisements or in reports and other communications to shareholders. Aggregate
total return may be shown by means of schedules, charts or graphs, and may
indicate subtotals of the various components of the total return (that is,
change in value of the initial investment, income dividends and capital gains
distributions). The Fund's "average annual total return" figures described in
the Prospectus are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P(1+T)(n) = ERV
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<PAGE> 111
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a period, at the end
of a 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
The total return for the Fund for the fiscal year ended March
31, 1996 was 7.36%.
Yield is calculated by annualizing the net investment income
generated by the Fund over a specified thirty-day period according to the
following formula:
a-b
YIELD = 2[( -------------- +1)(6) - 1]
cd
For purposes of this formula: "a" is dividends and interest earned during the
period; "b" is expenses accrued for the period (net of reimbursements); "c" is
the average daily number of shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per share
on the last day of the period.
The yield for the 30-day period ended March 31, 1996 for the
Fund was 4.42%.
Tax-equivalent yield is calculated over a specified thirty-day
period by dividing that portion of the Fund's yield which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of the Fund that is not tax-exempt.
The tax-equivalent yield for the 30-day period ended March 31,
1996 for the Fund was 6.14% for a Federal marginal income tax ("FMIT") bracket
of 28%, 6.41% for a FMIT bracket of 31%, 6.91% for a FMIT bracket of 36% and
7.32% for a FMIT bracket of 39.6%.
The Fund's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because the performance will fluctuate, it may not
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<PAGE> 112
provide a basis for comparing an investment in the Fund with certain bank
deposits or other investments that pay a fixed yield for a stated period of
time. Investors comparing the Fund's performance with that of other mutual funds
should give consideration to the quality and maturity of the respective
investment companies' portfolio securities.
Comparative performance information may be used from time to
time in advertising the shares of the Fund, including data from Lipper
Analytical Services, Inc., Morningstar, Inc., or similar independent services
that monitor the performance of
mutual funds, or other industry publications.
The following table shows the approximate average yields of
AAA rated, general obligation municipal securities as of October 21, 1995:
<TABLE>
<CAPTION>
Years to Maturity
-----------------
1 5 7 10 20 30
- - - -- -- --
<S> <C> <C> <C> <C> <C> <C>
Yield......... 3.66% 4.23% 4.43% 4.73% 5.49% 5.59%
</TABLE>
Source: Bloomberg Financial Markets
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE ABOVE
CHART IS NOT INTENDED TO REFLECT THE PERFORMANCE OF THE FUND.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of
the Trust, is a partner), Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107, are counsel to Galaxy II and will pass
upon certain legal matters on its behalf.
INDEPENDENT ACCOUNTANTS
The financial highlights for the Fund included in the
Prospectus and the financial statements for all Funds of Galaxy II attached to
this Statement of Additional Information for the respective fiscal periods ended
March 31 of each calendar year (with the exception for the fiscal years ended
March 31, 1995 and March 31, 1996) have been audited by the Trust's former
independent accountant, Price Waterhouse LLP, 300 Atlantic Street, Stamford,
Connecticut 06904, for the periods included in their report thereon which
appears therein. Coopers & Lybrand L.L.P., independent certified public
accountants, with offices at One Post Office Square, Boston, Massachusetts
02109, currently serve as auditors to Galaxy II and have audited the financial
highlights for the respective Fund included in the Prospectus and
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<PAGE> 113
the financial statements for all Funds in the Statement of Additional
Information for the fiscal years ended March 31, 1995 and March 31, 1996.
GENERAL INFORMATION
Galaxy II is organized as an unincorporated business trust
under the laws of the Commonwealth of Massachusetts pursuant to a Declaration of
Trust dated February 22, 1990 (the "Trust Agreement"). Under the Trust
Agreement, the Board of Trustees has authority to create an unlimited number of
shares of beneficial interest with a par value of $.001 per share.
In the interest of economy and convenience, certificates
representing shares in Galaxy II are not physically issued. The Distributor
maintains a record of each shareholder's ownership of Galaxy II shares. Shares
do not have cumulative voting rights, which means that holders of more than 50%
of the shares voting for the election of Trustees can elect all Trustees. Shares
are transferable, but have no preemptive, conversion or subscription rights.
Shareholders generally vote by series of Galaxy II, except with respect to the
election of Trustees and the selection of independent accountants. Trustees were
elected and the Fund's investment advisory agreement was approved by
shareholders at a meeting of shareholders on June 15, 1994. There will normally
be no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Under the 1940 Act,
shareholders of record of no less than two-thirds of the outstanding shares of
Galaxy II may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. Under the Trust
Agreement, the Trustees are required to call a meeting of shareholders for the
purpose of voting upon the question of removal of any such Trustee when
requested in writing to do so by the shareholders of record of not less than 10%
of Galaxy II's outstanding shares.
Massachusetts law provides that shareholders could, under
certain circumstances, be held personally liable for the obligations of Galaxy
II. The Trust Agreement disclaims shareholder liability for acts or obligations
of Galaxy II, however, and requires that notice of the disclaimer be given in
each agreement, obligation or instrument entered into or executed by Galaxy II
or a Trustee. The Trust Agreement provides for indemnification from Galaxy II's
property for all losses and expenses of any shareholder held personally liable
for the obligations of Galaxy II. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to circumstances
in which Galaxy II would be unable to
-31-
<PAGE> 114
meet its obligations, a possibility that Galaxy II's management believes is
remote. Upon payment of any liability incurred by Galaxy II, the shareholder
paying the liability will be entitled to reimbursement from the general assets
of Galaxy II. The Trustees intend to conduct the operations of Galaxy II in such
a way so as to avoid, as far as possible, ultimate liability of the shareholders
for liabilities of Galaxy II.
As of July 18, 1996, the name, address and percentage
ownership of the person who owned of record 5% or more of the Fund's outstanding
shares were as follows: Barbara S. Easton & Marvin L. Easton, JT ROS, 231
Charity Court, Naples, Florida 33962-5012, 9.76%.
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<PAGE> 115
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year
ended March 31, 1996 with respect to the Large Company Index Fund, the Small
Company Index Fund, the Utility Fund Index, the U.S. Treasury Index Fund, and
the Municipal Bond Fund are attached.
FS-1
<PAGE> 116
APPENDIX
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
DESCRIPTION OF S&P MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay
A-1
<PAGE> 117
interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments 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. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments 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 rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS
Municipal notes with maturities of three years or less are usually
given note ratings (designated "SP-1", "SP-2" or "SP-3")
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to distinguish more clearly the credit quality of notes as compared to bonds.
Notes rated SP-1 have a very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are given the designation of "SP-1+". Notes rated SP-2 have satisfactory
capacity to pay principal and interest. Notes rated SP-3 exhibit speculative
capacity to pay principal and interest.
DESCRIPTION OF MOODY'S MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Moody's for municipal
long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
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 risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
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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 operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds,
indicates that the rating is provisional pending delivery of the
bonds. The rating may be revised prior to delivery if changes
occur in the legal documents or the underlying credit quality of
the bonds.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and for variable rate
demand obligations are designated Variable Moody's Investment Grade ("VMIG").
This distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation "MIG-1"/"VMIG-1" are the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated and broad-based access to the market for
refinancing. Loans bearing the designation "MIG-2"/"VMIG-2" are of high quality,
with margins of protection ample although not as large as in the preceding
group. Loans bearing the designation "MIG-3"/"VMIG-3" are of favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the higher grades. Liquidity and cash flow protection may be narrow and market
access for refinancing, in particular, is likely to be less well established.
Loans bearing the designation "MIG-4"/"VMIG-4" are of adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
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