<PAGE>
[GRAPHIC]
GALAXY II INDEX FUNDS
GALAXY FUND II
PROSPECTUS
July 30, 1999
Galaxy II Large Company Index Fund
Galaxy II Small Company Index Fund
Galaxy II Utility Index Fund
Galaxy II U.S. Treasury Index Fund
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any shares of these Funds or determined if this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
[LOGO]
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
1 RISK/RETURN SUMMARY
1 Introduction
2 Galaxy II Large Company Index Fund
5 Galaxy II Small Company Index Fund
8 Galaxy II Utility Index Fund
11 Galaxy II U.S. Treasury Index Fund
14 Additional information about risk
15 FUND MANAGEMENT
16 HOW TO INVEST IN THE FUNDS
16 Buying, selling and exchanging shares
16 HOW TO BUY SHARES
17 HOW TO SELL SHARES
18 HOW TO EXCHANGE SHARES
18 OTHER TRANSACTION POLICIES
20 DIVIDENDS, DISTRIBUTIONS AND TAXES
21 GALAXY II INVESTOR PROGRAMS
21 Retirement plans
21 Other programs
22 HOW TO REACH GALAXY II
23 FINANCIAL HIGHLIGHTS
27 MISCELLANEOUS
</TABLE>
<PAGE>
RISK/RETURN SUMMARY
INTRODUCTION
THIS PROSPECTUS describes the Galaxy II Index Funds. The Funds use a
strategy called indexing, which seeks to provide investment results that match
the price and yield performance of particular sets of securities or market
segments.
On the following pages, you'll find important information about each of the
Galaxy II Index Funds, including:
- - the Fund's investment objective (sometimes called the Fund's goal) and the
main investment strategies used by the Fund's investment adviser in trying
to achieve that objective
- - the main risks associated with an investment in the Fund
- - the Fund's past performance measured on both a year-by-year and long-term
basis
- - the fees and expenses that you will pay as an investor in the Fund
WHICH FUND IS RIGHT FOR YOU?
Not all mutual funds are for everyone. Your investment goals and tolerance for
risk will determine which fund is right for you.
Index funds are generally suited for investors seeking to closely match the
investment performance of a particular market segment as represented by a
designated market index. Different indexes are comprised of securities that
carry varying levels of risk.
THE FUND'S INVESTMENT ADVISER
Fleet Investment Advisors Inc., which is referred to in this prospectus as THE
ADVISER, is the investment adviser for the Funds. The Adviser, an indirect
wholly-owned subsidiary of Fleet Financial Group, Inc., was established in 1984
and has its main office at 75 State Street, Boston, Massachusetts 02109. The
Adviser also provides investment management and advisory services to individual
and institutional clients and manages the Galaxy II Municipal Bond Fund. As of
December 31, 1998, the Adviser managed over $64 billion in assets.
- --------------------------------------------------------------------------------
AN INVESTMENT IN THE FUNDS ISN'T A FLEET BANK DEPOSIT AND IT ISN'T INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. YOU COULD LOSE MONEY BY INVESTING IN THE FUNDS.
[sidenote:]
THE INDEXING STRATEGY
The Funds are not actively managed. This means that the Adviser does not use
economic, financial and market analysis in selecting securities for the Funds.
Instead, the Adviser attempts to approximate the performance of each Fund's
target index by investing the Fund's assets in securities included in that
index. The Adviser relies on sophisticated computer models in managing the
Fund's investments. Because the indexing approach generally involves low
portfolio turnover, transaction and administration costs tend to be low
as well.
GALAXY II INDEX FUNDS 1
<PAGE>
GALAXY II LARGE COMPANY INDEX FUND
THE FUND'S INVESTMENT OBJECTIVE
The 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 Standard & Poor's 500 Composite Stock Price Index (S&P 500).
THE FUND'S MAIN INVESTMENT STRATEGIES
The Fund uses an indexing strategy through the use of sophisticated computer
models to approximate the investment performance of the S&P 500. The Fund
invests substantially all (at least 80%) of its total assets in the common
stocks of companies included in the S&P 500. Normally, the Fund holds all 500
stocks in the S&P 500, and in approximately the same percentage as each stock
is represented in the S&P 500.
The Fund will only purchase a security that is included in the S&P 500 at the
time of purchase. The Fund will normally only buy or sell securities to adjust
to changes in the composition of the S&P 500 or to accommodate cash flows into
and out of the Fund.
The Fund also invests in stock index futures contracts in order to track the S&P
500 when the purchase of individual securities may be less efficient.
THE MAIN RISKS OF INVESTING IN THE FUND
Changes in the U.S. or foreign economies can cause the value of stocks and other
investments held by the Fund to fall. Stock prices may decline over short or
extended periods. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
The value of your investment in the Fund will go up and down with the value of
the investments which the Fund holds. The Fund's investments may not perform as
well as other investments, even in times of rising markets.
In addition, the Fund also carries the following main risks:
- - INDEXING RISK - Your investment in the Fund will typically decline in value
when the S&P 500 declines. Since the Fund is designed to track the S&P 500,
the Fund cannot purchase other securities that may help offset declines in
the S&P 500. In addition, because the Fund may not always hold all stocks
included in the S&P 500 and may not always be fully invested, the Fund's
performance may fail to match the performance of the S&P 500, after taking
expenses into account.
- - STOCK INDEX FUTURES CONTRACTS - The Fund may not always be able to track
the performance of its index by entering into stock index futures
contracts, because the prices of stock index futures contracts may not
always match the movement of the index to which they relate. Also, a liquid
secondary market may not be available, which might prevent the Adviser from
closing out a futures contract when desired.
[Sidenote:]
S&P 500
The S&P 500 is an unmanaged index that tracks the performance of 500 widely held
common stocks listed on the New York Stock Exchange, the American Stock Exchange
and NASDAQ. The S&P 500 is heavily weighted with the stocks of large
companies.
MARKET CAPITALIZATION
A company's market capitalization is the price of a share of its stock,
multiplied by the number of shares held by investors. The average market
capitalization of the companies included in the S&P 500 as of March 31, 1999 was
approximately $21 billion.
STOCK INDEX FUTURES CONTRACTS
A stock index futures contract obligates a Fund, at the end of the contract, to
pay or receive an amount equal to the difference between the value of the stock
index on the date the contract was struck and its value at the end of the
contract, multiplied by the dollar amount of the contract. No physical delivery
of the underlying stocks in the index is made.
2 GALAXY II INDEX FUNDS
<PAGE>
GALAXY II LARGE COMPANY INDEX FUND
HOW THE FUND HAS PERFORMED
The bar chart and table below show how the Fund has performed in the past. Both
assume that all dividends and distributions are reinvested in the Fund. How the
Fund has performed in the past doesn't necessarily show how it will perform in
the future.
YEAR-BY-YEAR TOTAL RETURNS - CALENDAR YEARS
The bar chart shows how the performance of the Fund has varied from year to
year, thereby giving some indication of the risk of investing in the Fund.
[CHART]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
29.07% 7.09% 9.61% 0.96% 37.09% 22.54% 32.81% 28.06%
</TABLE>
The Fund's year-to-date return as of the quarter ended March 31, 1999 was 4.92%.
AVERAGE ANNUAL TOTAL RETURNS
The table shows the Fund's average annual total returns for the periods ended
December 31, 1998, as compared to the S&P 500.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Large Company Index Fund 28.06% 23.60% 20.66% (10/1/90)
- -------------------------------------------------------------------------------------------
S&P 500 28.60% 24.05% 21.37% (since 9/30/90)
- -------------------------------------------------------------------------------------------
</TABLE>
[Sidenote:]
BEST QUARTER
21.24% for the quarter ending December 31, 1998
WORST QUARTER
- -10.02% for the quarter ending September 30, 1998
GALAXY II INDEX FUNDS 3
<PAGE>
GALAXY II LARGE COMPANY INDEX FUND
FEES AND EXPENSES OF THE FUND
The following table shows the fees and expenses you may pay when you buy and
hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (FEES DEDUCTED FROM THE FUND'S ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12b-1) FEES EXPENSES EXPENSES
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Company Index Fund 0.10% None 0.37% 0.47%
- -------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
This example helps you compare the cost of investing in the Fund with the cost
of investing in other mutual funds. The example assumes:
- - you invest $10,000 for the periods shown
- - you reinvest all dividends and distributions in the Fund
- - you sell all your shares at the end of the periods shown
- - your investment has a 5% return each year
- - the Fund's operating expenses remain the same
Although your actual costs may be higher or lower depending on the amount you
invest and the Fund's actual rate of return, based on these assumptions your
costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Company Index Fund $48 $151 $263 $591
- -------------------------------------------------------------------------------------------------------
</TABLE>
4 GALAXY II INDEX FUNDS
<PAGE>
GALAXY II SMALL COMPANY INDEX FUND
THE FUND'S INVESTMENT OBJECTIVE
The 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 Standard
& Poor's SmallCap 600 Stock Price Index (S&P SmallCap 600).
THE FUND'S MAIN INVESTMENT STRATEGIES
The Fund uses an indexing strategy through the use of sophisticated computer
models to approximate the investment performance of the S&P SmallCap 600. The
Fund invests substantially all (at least 80%) of its total assets in the
common stocks of companies included in the S&P SmallCap 600. Normally, the Fund
holds all 600 stocks in the S&P SmallCap 600, in approximately the same
percentage as each stock represents in the S&P SmallCap 600. From time to time,
however, when deemed advisable by the Adviser, the Fund will not hold all of the
stocks in the S&P SmallCap 600 but instead will use a statistical technique
known as "portfolio optimization." When using portfolio optimization, the
Adviser will consider whether or not to include each stock in the Fund based on
that stock's contribution to the Fund's market capitalization, industry
representation and exposure to certain fundamentals (such as dividend yield,
price-earnings multiple and average growth rates) as compared to the S&P
SmallCap 600. When utilized, portfolio optimization is expected to provide an
effective method of substantially duplicating the dividend income and capital
gains of the S&P SmallCap 600.
The Fund will only purchase a security that is included in the S&P SmallCap 600
at the time of purchase. The Fund will normally only buy or sell securities to
adjust to changes in the composition of the S&P SmallCap 600 or to accommodate
cash flows into and out of the Fund.
The Fund also invests in stock index futures contracts in order to track the S&P
SmallCap 600 when the purchase of individual securities may be less efficient.
THE MAIN RISKS OF INVESTING IN THE FUND
Changes in the U.S. or foreign economies can cause the value of stocks and other
investments held by the Fund to fall. Stock prices may decline over short or
extended periods. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
The value of your investment in the Fund will go up and down with the value of
the investments which the Fund holds. The Fund's investments may not perform as
well as other investments, even in times of rising markets.
In addition, the Fund also carries the following main risks:
- - INDEXING RISK - Your investment in the Fund will typically decline in value
when the S&P SmallCap 600 declines. Since the Fund is designed to track the
S&P SmallCap 600, the Fund cannot purchase other securities that may help
offset declines in stocks represented in the S&P SmallCap 600. In addition,
because the Fund may not always hold all stocks included in the S&P
SmallCap 600, such as when the Adviser deems it advisable to utilize
portfolio optimization, and may not always be fully invested, the Fund's
performance may fail to match the performance of the S&P SmallCap 600,
after taking expenses into account.
- - SMALL COMPANIES RISK - Smaller companies tend to have limited resources,
product lines and market share. As a result, their share prices tend to
fluctuate more than those of larger companies. Their shares may also trade
less frequently and in limited volume, making them potentially less liquid.
The price of small company stocks might fall regardless of trends in the
broader market.
[sidenote:]
S&P SMALLCAP 600
The S&P SmallCap 600 is an unmanaged index that tracks the performance of 600
domestic companies traded on the New York Stock Exchange, the American Stock
Exchange and NASDAQ. The S&P SmallCap 600 is heavily weighted with the stocks of
small companies.
MARKET CAPITALIZATION
A company's market capitalization is the price of a share of its stock,
multiplied by the number of shares held by investors. The average market
capitalization of the companies included in the S&P SmallCap 600 as of March 31,
1999 was approximately $516 million.
STOCK INDEX FUTURES CONTRACTS
A stock index futures contract obligates a Fund, at the end of the contract, to
pay or receive an amount equal to the difference between the value of the stock
index on the date the contract was struck and its value at the end of the
contract, multiplied by the dollar amount of the contract. No physical delivery
of the underlying stocks in the index is made.
GALAXY II INDEX FUNDS 5
<PAGE>
GALAXY II SMALL COMPANY INDEX FUND
- - STOCK INDEX FUTURES CONTRACTS - The Fund may not always be able to track
the performance of its index by entering into stock index futures
contracts, because the prices of stock index futures contracts may not
always match the movement of the index to which they relate. Also, a liquid
secondary market may not be available, which might prevent the Adviser from
closing out a futures contract when desired.
..........................
HOW THE FUND HAS PERFORMED
The bar chart and table below show how the Fund has
performed in the past. Both assume that all dividends and distributions are
reinvested in the Fund. How the Fund has performed in the past doesn't
necessarily show how it will perform in the future.
YEAR-BY-YEAR TOTAL RETURNS - CALENDAR YEARS
The bar chart shows how the performance of the Fund has varied from year to
year, thereby giving some indication of the risk of investing in the Fund.
[CHART]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
45.53% 12.27% 11.35% -3.66% 33.11% 19.68% 23.56% -1.75%
</TABLE>
The Fund's year-to-date return as of the quarter ended March 31, 1999
was -8.97%.
AVERAGE ANNUAL TOTAL RETURNS
The table shows the Fund's average annual total returns for the periods ended
December 31, 1998, as compared to the S&P SmallCap 600.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Company Index Fund -1.75% 13.25% 17.03% (10/1/90)
- ------------------------------------------------------------------------------------------
S&P SmallCap 600 -1.31% 13.22% 18.63% (since 9/30/90)
- ------------------------------------------------------------------------------------------
</TABLE>
[Sidenote:]
BEST QUARTER
22.13% for the quarter ending March 31, 1991
WORST QUARTER
- -20.89% for the quarter ending September 30, 1998
6 GALAXY II INDEX FUNDS
<PAGE>
GALAXY II SMALL COMPANY INDEX FUND
FEES AND EXPENSES OF THE FUND
The following table shows the fees and expenses you may pay when you buy and
hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (FEES DEDUCTED FROM THE FUND'S ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12b-1) FEES EXPENSES EXPENSES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Company Index Fund 0.10% None 0.30% 0.40%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
This example helps you compare the cost of investing in the Fund with the cost
of investing in other mutual funds. The example assumes:
- - you invest $10,000 for the periods shown
- - you reinvest all dividends and distributions in the Fund
- - you sell all your shares at the end of the periods shown
- - your investment has a 5% return each year
- - the Fund's operating expenses remain the same
Although your actual costs may be higher or lower depending on the amount you
invest and the Fund's actual rate of return, based on these assumptions your
costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Company Index Fund $41 $128 $224 $505
- ---------------------------------------------------------------------------------------------------------
</TABLE>
GALAXY II INDEX FUNDS 7
<PAGE>
GALAXY II UTILITY INDEX FUND
THE FUND'S INVESTMENT OBJECTIVE
The 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 of companies in the utility industry, as represented by the Standard &
Poor's Utilities Composite Stock Price Index (S&P Utilities Index).
THE FUND'S MAIN INVESTMENT STRATEGIES
The Fund uses an indexing strategy through the use of sophisticated computer
models to approximate the investment performance of the S&P Utilities Index.
The Fund invests substantially all (at least 80%) of its total assets in the
common stocks of companies included in the S&P Utilities Index. Normally the
Fund holds every stock in the S&P Utilities Index, in approximately the same
percentage as each stock represents in the S&P Utilities Index.
The Fund will only purchase a security that is included in the S&P Utilities
Index at the time of purchase. The Fund will normally only buy or sell
securities to adjust to changes in the composition of the S&P Utilities Index or
to accommodate cash flows into and out of the Fund.
THE MAIN RISKS OF INVESTING IN THE FUND
Changes in the U.S. or foreign economies can cause the value of stocks and other
investments held by the Fund to fall. Stock prices may decline over short or
extended periods. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
The value of your investment in the Fund will go up and down with the value of
the investments which the Fund holds. The Fund's investments may not perform as
well as other investments, even in times of rising markets.
In addition, the Fund also carries the following main risks:
- - INDEXING RISK - Your investment in the Fund will typically decline in value
when the S&P Utilities Index declines. Since the Fund is designed to track
the S&P Utilities Index, the Fund cannot purchase other securities that may
help offset declines in stocks represented in the S&P Utilities Index. In
addition, because the Fund may not always hold all stocks included in the
S&P Utilities Index and may not always be fully invested, the Fund's
performance may fail to match the performance of the S&P Utilities Index.
- - INDUSTRY CONCENTRATION - The Fund concentrates its investments (i.e.,
invests 25% or more of its total assets) in the utility industry. As a
result, the Fund's investments may be subject to greater risk and market
fluctuation than a fund that holds securities representing a broad range
of industries.
- - INDUSTRY RISK - Because the Fund concentrates its investments in the
utility industry, it 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, may 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 or other operating costs,
increasing competition, and restriction to relatively mature markets.
- - LACK OF DIVERSIFICATION - The Fund is non-diversified, which means that it
can invest a large percentage of its assets in a small number of issuers.
As a result, a change in the value of any one investment held by the Fund
may affect the overall value of the Fund more than it would affect a
diversified fund which holds more investments.
[Sidenote:]
S&P UTILITIES INDEX
The S&P Utilities Index is an unmanaged index that tracks the performance of the
utility sector of the S&P 500. The weighting of stocks in the S&P Utilities
Index is based on each stock's relative market capitalization. The S&P Utilities
Index is currently made up of approximately 40 common stocks.
MARKET CAPITALIZATION
A company's market capitalization is the price of a share of its stock,
multiplied by the number of shares held by investors.
8 GALAXY II INDEX FUNDS
<PAGE>
GALAXY II UTILITY INDEX FUND
HOW THE FUND HAS PERFORMED
The bar chart and table below show how the Fund has performed in the past.
Both assume that all dividends and distributions are reinvested in the Fund.
How the Fund has performed in the past doesn't necessarily show how it will
perform in the future.
YEAR-BY-YEAR TOTAL RETURNS - CALENDAR YEARS
The bar chart shows how the performance of the Fund has varied from year to
year, thereby giving some indication of the risk of investing in the Fund.
[CHART]
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C>
- -8.64% 37.08% 3.47% 28.51% 14.77%
</TABLE>
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
- -9.35%.
AVERAGE ANNUAL TOTAL RETURNS
The table shows the Fund's average annual total returns for the periods ended
December 31, 1998, as compared to the S&P Utilities Index.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Utility Index Fund 14.77% 13.83% 13.78% (1/5/93)
- -------------------------------------------------------------------------------------------------------
S&P Utilities Index 14.77% 13.90% 13.99% (since 12/31/92)
- -------------------------------------------------------------------------------------------------------
</TABLE>
[Sidenote:]
BEST QUARTER
15.97% for the quarter ending December 31, 1997
WORST QUARTER
- -7.76% for the quarter ending March 31, 1994
GALAXY II INDEX FUNDS 9
<PAGE>
GALAXY II UTILITY INDEX FUND
FEES AND EXPENSES OF THE FUND
The following table shows the fees and expenses you may pay when you buy and
hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (FEES DEDUCTED FROM THE FUND'S ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12b-1) FEES EXPENSES EXPENSES
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Utility Index Fund 0.10% None 0.30% 0.40%
- --------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
This example helps you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes:
- - you invest $10,000 for the periods shown
- - you reinvest all dividends and distributions in the Fund
- - you sell all your shares at the end of the periods shown
- - your investment has a 5% return each year
- - the Fund's operating expenses remain the same
Although your actual costs may be higher or lower depending on the amount you
invest and the Fund's actual rate of return, based on these assumptions your
costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Utility Index Fund $41 $128 $224 $505
- -------------------------------------------------------------------------------------------
</TABLE>
10 GALAXY II INDEX FUNDS
<PAGE>
GALAXY II U.S. TREASURY INDEX FUND
THE FUND'S INVESTMENT OBJECTIVE
The 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 component (U.S. Treasury
Index) of the Salomon Smith Barney Broad Investment-Grade Bond Index.
THE FUND'S MAIN INVESTMENT STRATEGIES
The Fund uses an indexing strategy through the use of sophisticated computer
models to approximate the investment performance of the U.S. Treasury Index.
The Fund invests substantially all (at least 80%) of its total assets in the
securities included in the U.S. Treasury Index.
The Fund will not hold all of the issues in the U.S. Treasury Index because
of the costs involved. Instead, the Adviser will consider whether or not to
include each security in the Fund based on that security's contribution to
the Fund's total market value, average coupon rate and average weighted
maturity of the Fund as compared to the U.S. Treasury Index.
The Fund will only purchase a security that is included in the U.S. Treasury
Index at the time of purchase. The Fund will normally only buy or sell
securities to adjust to changes in the composition of the U.S. Treasury
Index, or to accommodate cash flows into and out of the Fund.
THE MAIN RISKS OF INVESTING IN THE FUND
All mutual funds are affected by changes in the economy and swings in investment
markets. These can occur within or outside the U.S. or worldwide, and may affect
only particular companies or industries.
In addition, the Fund also carries the following main risks:
- - INDEXING RISK - Your investment in the Fund will typically decline in
value when the U.S. Treasury Index declines. Since the Fund is designed to
track the U.S. Treasury Index, the Fund cannot purchase other securities
that may help offset declines in debt securities represented in the U.S.
Treasury Index. In addition, because the Fund will not hold all issues
included in the U.S. Treasury Index and may not always be fully invested,
the Fund's performance may fail to match the performance of the U.S.
Treasury Index, after taking expenses into account.
- - INTEREST RATE RISK - The prices of debt securities generally tend to move
in the opposite direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are falling, the prices
of debt securities tend to rise. Generally, the longer the time until
maturity, the more sensitive the price of a debt security is to interest
rate changes. The Fund is subject to moderate levels of interest rate risk.
- - CREDIT RISK - Although U.S. Government securities, particularly U.S.
Treasury securities, have historically involved little credit risk, if an
issuer fails to pay interest or repay principal, the value of your
investment could decline.
[Sidenote:]
U.S. TREASURY INDEX
The U.S. Treasury Index is an unmanaged index comprised of all U.S. Treasury
notes and bonds with remaining maturities of at least one year and outstanding
principal of at least $25 million that are included in the Salomon Smith
Barney Investment-Grade Bond Index. Securities in the U.S. Treasury Index are
weighted by market value, that is, the price per bond or note multiplied by
the number of bonds or notes outstanding.
GALAXY II INDEX FUNDS 11
<PAGE>
GALAXY II U.S. TREASURY INDEX FUND
HOW THE FUND HAS PERFORMED
The bar chart and table below show how the Fund has performed in the past. Both
assume that all dividends and distributions are reinvested in the Fund. How the
Fund has performed in the past doesn't necessarily show how it will perform in
the future.
YEAR-BY-YEAR TOTAL RETURNS - CALENDAR YEARS
The bar chart shows how the performance of the Fund has varied from year to
year, thereby giving some indication of the risk of investing in the
Fund.
[CHART]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
6.77% 10.21% -3.68% 18.06% 2.21% 9.27% 9.76%
</TABLE>
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
- -1.73%.
AVERAGE ANNUAL TOTAL RETURNS
The table shows the Fund's average annual total returns for the periods ended
December 31, 1998, as compared to the U.S. Treasury Index.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Index Fund 9.76% 6.87% 8.24% (6/4/91)
- --------------------------------------------------------------------------------
U.S Treasury Index 10.00% 7.20% 8.60% (since 5/31/91)
- --------------------------------------------------------------------------------
</TABLE>
For current yield information, please call 1-877-BUY-GALAXY (1-877-289-4252).
[Sidenote:]
BEST QUARTER
6.15% for the quarter ending June 30, 1995
WORST QUARTER
- -2.93% for the quarter ending March 31, 1994
12 GALAXY II INDEX FUNDS
<PAGE>
GALAXY II U.S. TREASURY INDEX FUND
FEES AND EXPENSES OF THE FUND
The following table shows the fees and expenses you may pay when you buy and
hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (FEES DEDUCTED FROM THE FUND'S ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12b-1) FEES EXPENSES EXPENSES
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
0.10% None 0.31% 0.41%
- -------------------------------------------------------------------------------
</TABLE>
EXAMPLE
This example helps you compare the cost of investing in the Fund with the cost
of investing in other mutual funds. The example assumes:
- - you invest $10,000 for the periods shown
- - you reinvest all dividends and distributions in the Fund
- - you sell all your shares at the end of the periods shown
- - your investment has a 5% return each year
- - the Fund's operating expenses remain the same
Although your actual costs may be higher or lower depending on the amount you
invest and the Fund's actual rate of return, based on these assumptions your
costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
$42 $132 $230 $518
- -------------------------------------------------------------------------------
</TABLE>
GALAXY II INDEX FUNDS 13
<PAGE>
ADDITIONAL INFORMATION ABOUT RISK
The main risks associated with an investment in each of the Galaxy II Index
Funds have been described above. The following supplements that discussion.
OTHER TYPES OF INVESTMENTS
This prospectus describes each Fund's main investment strategies and the
particular types of securities in which each Fund principally invests. Each
Fund may hold temporary cash balances (normally not in excess of 2% of net
assets) to efficiently manage transactional expenses. The Funds may invest
these balances in instruments that are described in detail in the Statement
of Additional Information (SAI) which is referred to on the back cover of
this prospectus.
YEAR 2000 RISKS
As with other mutual funds, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by the Adviser and the Funds' other service providers
don't properly process and calculate date-related information and data from
and after January 1, 2000. This is commonly known as the "Year 2000" or "Y2K"
problem. The Adviser is taking steps to address the Y2K problem with respect
to the computer systems that it uses and to obtain assurances that comparable
steps are being taken by the Funds' other major service providers. At this
time, however, there can be no assurance that these steps will be sufficient
to avoid any adverse impact on the Funds. The Y2K problem could have a
negative impact on the issuers of securities in which the Funds invest, which
could hurt the Funds' investment returns.
14 GALAXY II INDEX FUNDS
<PAGE>
FUND MANAGEMENT
ADVISER
The Adviser, subject to the general supervision of Galaxy II's Board of
Trustees, manages each Fund in accordance with its investment objective and
policies, makes decisions with respect to and places orders for all purchases
and sales of portfolio securities, and maintains related records.
ALLOCATION OF ORDERS FOR PORTFOLIO SECURITIES
The Adviser may allocate orders for the purchase and sale of portfolio
securities to certain financial institutions, including those that are
affiliated with the Adviser or that have sold shares of the Funds, to the
extent permitted by law or by order of the Securities and Exchange
Commission. The Adviser will allocate orders to such institutions only if it
believes that the quality of the transaction and the commission are
comparable to what they would be with other qualified brokerage firms.
MANAGEMENT FEES
The management fees paid to the Adviser by the Funds during the last fiscal
year are set forth below.
<TABLE>
<CAPTION>
MANAGEMENT FEE
FUND AS A % OF AVERAGE NET ASSETS
- -------------------------------------------------------------------
<S> <C>
Large Company Index Fund 0.10%
- -------------------------------------------------------------------
Small Company Index Fund 0.10%
- -------------------------------------------------------------------
Utility Index Fund 0.10%
- -------------------------------------------------------------------
U.S. Treasury Index Fund 0.10%
- -------------------------------------------------------------------
</TABLE>
SUB-ACCOUNT SERVICES
Affiliates of the Adviser and certain other parties may receive fees from
Galaxy II's transfer agent for providing certain sub-accounting and
administrative services to participant sub-accounts with respect to shares of
the Funds held by defined contribution plans. The transfer agency fees
payable by the Funds have been increased by an amount equal to these fees, so
that the shareholders of the Funds indirectly bear these fees.
GALAXY II INDEX FUNDS 15
<PAGE>
HOW TO INVEST IN THE FUNDS
BUYING, SELLING AND EXCHANGING SHARES
You can buy and sell shares of the Funds on any day that the Funds are open
for business, which is any day that the New York Stock Exchange is open. The
New York Stock Exchange is generally open for trading every Monday through
Friday, except for national holidays.
The price at which you buy shares is the NAV next determined after your order
is accepted. The price at which you sell shares is the NAV next determined
after receipt of your order in proper form as described below. NAV is
determined on each day the New York Stock Exchange is open for trading at the
close of regular trading that day (usually 4:00 p.m. Eastern time). If market
prices are readily available for securities owned by the Funds, they're valued
at those prices. If market prices are not readily available for some
securities, they are valued at fair value under the supervision of Galaxy II's
Board of Trustees.
HOW TO BUY SHARES
You can buy shares through your financial institution or directly from Galaxy
II's distributor by calling 1-877-BUY-GALAXY (1-877-289-4252). A broker or
agent who places orders on your behalf may charge you a separate fee for
their services.
BUYING BY MAIL
Complete an account application and mail it, together with a check payable to
each Fund in which you want to invest, to:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
To make additional investments, send your check to the address above along
with one of the following:
- - the detachable form that's included with your Galaxy II statement or your
confirmation of a prior transaction
- - a letter stating the amount of your investment, the name of the Fund you
want to invest in, and your account number
If your check is returned because of insufficient funds, Galaxy II will
cancel your order.
BUYING BY WIRE
To make an initial or additional investment by wire, send U.S. funds through
the Federal Reserve System to Fleet National Bank as agent for Galaxy II's
distributor. You should wire money and registration instructions to:
Fleet National Bank
75 State Street
Boston, MA 02109
ABA #0110-0013-8, DDA #79673-5702
Ref: Galaxy Fund II (Account number)
(Account registration)
[sidenote:]
NET ASSET VALUE
The price you pay for your shares is based on the net asset value per share
(NAV). It's the value of a Fund's assets minus the value of the Fund's
liabilities divided by the number of shares held by investors.
[sidenote:]
MINIMUM INVESTMENT AMOUNTS
The minimum initial investment to open a Fund account is:
- - $2,500 for regular accounts
- - $500 for retirement plan accounts, such as IRA, SEP and Keogh Plan accounts
- - $100 for college savings accounts, including Education IRA accounts.
There is generally no minimum initial investment if you participate in the
Automatic Investment Program or in a salary reduction retirement plan such as
a SIMPLE IRA or 401(k). You generally can make additional investments for as
little as $100. See GALAXY II INVESTOR PROGRAMS below for information on
other minimums for initial and additional investments.
Usually, you must keep at least $250 in your account other than retirement
plan accounts. If your account falls below $250 because you sell or exchange
shares, Galaxy II may redeem your shares and close your account. Galaxy II
will give you 60 days' notice in writing before closing your account.
16 GALAXY II INDEX FUNDS
<PAGE>
Before making an initial investment by wire, you must complete an account
application and send it to Galaxy Fund II, P.O. Box 6520, Providence, RI
02940-6520. Your order will not be effected until the completed account
application is received by Galaxy II. Call Galaxy II's distributor at
1-877-BUY-GALAXY (1-877-289-4252) for an account application.
Your financial institution may charge you a fee for sending funds by wire.
CUSTOMERS OF FINANCIAL INSTITUTIONS
If you are a customer of a financial institution such as a bank, savings and
loan association or broker-dealer, including a financial institution
affiliated with the Adviser, you should place your order through your
financial institution. Your financial institution is responsible for sending
your order to Galaxy II's distributor and wiring the money to Galaxy II's
custodian. For details, please contact your financial institution.
HOW TO SELL SHARES
You can sell your shares in several ways: by mail, by telephone, by wire, or
through your financial institution.
SELLING BY MAIL
Send your request in writing to:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
You must include the following:
- - The name of the Fund
- - The number of shares or the dollar amount you want to sell
- - Your account number
- - Your Social Security number or tax identification number
- - The signatures of each registered owner of the account (the signatures must
match the names on the account registration)
Additional documents may be required for certain types of shareholders, such
as corporations, partnerships, executors, trustees, administrators or
guardians.
SELLING BY PHONE
You can sell shares by calling Galaxy II's distributor at 1-877-BUY-GALAXY
(1-877-289-4252), unless you tell Galaxy II on the account application or in
writing that you don't want this privilege. If you have difficulty getting
through to Galaxy II because of unusual market conditions, consider selling
your shares by mail or wire.
SELLING BY WIRE
Notify Galaxy II's distributor by phone or wire that you wish to sell shares
and have the sale proceeds wired to your account at any financial institution
in the U.S. To be eligible to use this privilege, you must complete the
appropriate section on the account application or notify Galaxy II in writing
(with a signature guarantee). Your sale proceeds must be more than $1,000.
[sidenote:]
SIGNATURE GUARANTEES
When selling your shares by mail or by phone, you must have your signature
guaranteed if:
- - you're selling shares worth more than $50,000
- - you want Galaxy II to send your money to an address other than the
address on your account, unless your assets are transferred to a
successor custodian
- - you want Galaxy II to send your money to the address on your account
that's changed within the last 30 days, or
- - you want Galaxy II to make the check payable to someone else
Your signature must be guaranteed by a bank that's a member of the FDIC, a
trust company, a member firm of a national securities exchange or any other
eligible institution. A notarized signature is not sufficient.
GALAXY II INDEX FUNDS 17
<PAGE>
The sale proceeds must be paid to the same bank and account you named on your
application or in your written instructions.
CUSTOMERS OF FINANCIAL INSTITUTIONS
Please contact your financial institution for information on how to sell your
shares. The financial institution is responsible for sending your order to
Galaxy II's distributor and for crediting your account with the proceeds.
Galaxy II doesn't charge a fee for wiring sales proceeds to your financial
institution, but your financial institution may charge you a fee.
HOW TO EXCHANGE SHARES
You may exchange shares of a Fund having a value of at least $100 for shares
of any other Galaxy II Fund or for shares of any other Fund that's managed by
the Adviser or any of its affiliates in which you have an existing account.
Unless you qualify for an exemption, you will have to pay a sales charge if
you exchange shares of the Fund for shares of another Fund that assesses a
sales charge on purchases.
TO EXCHANGE SHARES:
- - call Galaxy II's distributor or use the InvestConnect voice response line at
1-877-BUY-GALAXY (1-877-289-4252)
- - send your request in writing to:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
- - ask your financial institution
Galaxy II doesn't charge any fee for making exchanges but your financial
institution might do so. You are generally limited to three exchanges per
year. Galaxy II may change or cancel the exchange privilege with 60 days'
advance written notice to shareholders.
OTHER TRANSACTION POLICIES
If Galaxy II doesn't receive full payment for your order to buy shares within
three business days of the order date, Galaxy II won't accept your order.
Galaxy II will advise you if this happens and return any payment it may
eventually receive. You can only invest in shares of a Fund that are legally
available in your state.
Galaxy II may refuse any order to buy shares. Galaxy II doesn't issue a
certificate when you buy shares but it does keep a record of shares issued to
investors.
Galaxy II may refuse your order to sell or exchange shares by wire or
telephone if it believes it is advisable to do so. Galaxy II or its
distributor may change or cancel the procedures for selling or exchanging
shares by wire or telephone at any time without notice.
If you sell or exchange shares by telephone, you may be responsible for any
fraudulent telephone orders as long as Galaxy II has taken reasonable
precautions to verify your identity, such as requesting information about the
way in which your account is registered or about recent transactions in your
account.
Galaxy II normally pays you cash when you sell your shares, but it has the
right to deliver securities owned by a Fund instead of cash.
18 GALAXY II INDEX FUNDS
<PAGE>
When you sell these securities, you'll pay brokerage charges.
Sales proceeds are normally sent to you within three business days but Galaxy II
reserves the right to send sales proceeds within seven days if sending proceeds
earlier could adversely affect a Fund.
If any shares that you're selling are part of an investment you've paid for with
a personal check, Galaxy II will delay sending your sales proceeds until the
check clears, which can take up to 15 days from the purchase date.
Galaxy II reserves the right to vary or waive any minimum investment
requirement.
GALAXY II INDEX FUNDS 19
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Large Company Index Fund and Small Company Index Fund generally declare and
pay dividends from net investment income annually. The Utility Index Fund
generally declares and pays dividends from net investment income quarterly. The
U.S. Treasury Index Fund declares dividends from net investment income daily and
pays them monthly. Each Fund normally distributes net capital gains annually.
It's expected that the annual distributions for the U.S. Treasury Index Fund
will normally -- but not always -- consist primarily of ordinary income rather
than capital gains. Dividends and distributions are reinvested in additional
shares of the Funds, unless you indicate in the account application or in a
letter to Galaxy II that you want to have dividends and distributions paid in
cash.
FEDERAL TAXES
Each Fund contemplates declaring as dividends each year all or substantially all
of its taxable income, including its net capital gain (the excess of long-term
capital gain over short-term capital loss). Distributions attributable to the
net capital gain of a Fund will be taxable to you as long-term capital gain,
regardless of how long you have held your shares. Other Fund distributions will
generally be taxable as ordinary income. You will be subject to income tax on
Fund distributions regardless whether they are paid in cash or reinvested in
additional shares. You will be notified annually of the tax status of
distributions to you.
You should note that if you purchase shares just before a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that were received on
the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
STATE AND LOCAL TAXES
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however to the portions of each
Fund's distributions, if any, that are attributable to interest on Federal
securities or interest on securities of the particular state or localities
within the state.
MISCELLANEOUS
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. You should consult your tax
adviser for further information regarding federal, state, local and/or foreign
tax consequences relevant to your specific situation.
20 GALAXY II INDEX FUNDS
<PAGE>
GALAXY II INVESTOR PROGRAMS
RETIREMENT PLANS
Shares of the Funds are available for purchase in connection with any of the
following retirement plans:
- - Individual Retirement Arrangements (IRAs), including Traditional, Roth,
Rollover and Education IRAs
- - Simplified Employee Pension Plans (SEPs)
- - Keogh money purchase and profit sharing plans
- - Salary reduction retirement plans set up by employers for their employees
which are qualified under section 401(k) and 403(b) of the Internal Revenue
Code
- - SIMPLE IRA plans which are qualified under Section 408(p) of the Internal
Revenue Code
For information about eligibility requirements and other matters concerning
these plans and to obtain an application, call Galaxy II's distributor at
1-877-BUY-GALAXY (1-877-289-4252).
OTHER PROGRAMS
It's also easy to buy or sell shares of the Funds by using one of the programs
described below. Just tell Galaxy II the amount and how frequently you want to
buy or sell shares and Galaxy II does the rest. For further information on any
of these programs, call Galaxy II's distributor at 1-877-BUY-GALAXY
(1-877-289-4252) or your financial institution.
AUTOMATIC INVESTMENT PROGRAM
You can make automatic investments from your bank account every month or every
quarter. You can choose to make your investment on any day of the month or
quarter. The minimum investment is $50 a month or $150 a quarter except for
Education IRAs, in which case the minimum investment is $40 a month or $125 a
quarter.
PAYROLL DEDUCTION PROGRAM
You can make regular investments from your paycheck. The minimum investment is
$25 per pay period. Send a completed Galaxy II Payroll Deduction Application to
your employer's payroll department. They'll arrange to have your investment
deducted from your paycheck.
COLLEGE INVESTMENT PROGRAM
The minimum for initial and additional investments through the College
Investment Program is $100 unless you participate in the Automatic Investment
Program, in which case the minimum for initial and additional investments is
$50. You can also save for college by opening an Education IRA account. The
minimum for initial and additional investments in an Education IRA is $100
unless you participate in the Automatic Investment Program, in which case the
minimum for initial and additional investments is $40.
DIRECT DEPOSIT PROGRAM
This program lets you deposit your social security payments in your Fund account
automatically. There's no minimum deposit. You can cancel the program by
notifying the Social Security Administration in writing.
SYSTEMATIC WITHDRAWAL PLAN
You can make regular withdrawals from your investment account every month, every
quarter, every six months or once a year. You need a minimum account balance of
$10,000 to participate in the plan.
You may cancel your participation in any of these programs, other than the
Direct Deposit Program, by writing to Galaxy II at:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
Please allow at least five days for the cancellation to be processed.
GALAXY II INDEX FUNDS 21
<PAGE>
HOW TO REACH GALAXY II
THROUGH YOUR FINANCIAL INSTITUTION
Your financial institution can help you buy, sell or exchange shares and can
answer questions about your account.
GALAXY II SHAREHOLDER SERVICES
Call Galaxy II's distributor at 1-877-BUY-GALAXY (1-877-289-4252), Monday
through Friday, 8 a.m. to 6 p.m. (Eastern time) for help from a Galaxy II
representative.
INVESTCONNECT
InvestConnect is Galaxy II's Shareholder Voice Response System. Call
1-877-BUY-GALAXY (1-877-289-4252) from any touch-tone phone for automated
access to account information and current Fund prices and performance, or to
place orders to sell or exchange shares. It's available 24 hours a day, seven
days a week.
If you live outside the United States, contact Galaxy II by calling
1-508-871-4121.
THE INTERNET
Please visit Galaxy II's website at: www.galaxyfunds.com
[Sidenote:]
Galaxy II also offers a TDD service for the hearing impaired. Just call
1-800-696-6515, 24 hours a day, seven days a week.
22 GALAXY II INDEX FUNDS
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables shown below will help you understand the
financial performance for the Funds' shares for the past five years. Certain
information reflects the financial performance of a single share of each Fund.
The total returns in the tables represent the rate that an investor would have
earned (or lost) on an investment in each Fund, assuming all dividends and
distributions were reinvested. The information for the fiscal year ended March
31, 1999 has been audited by Ernst & Young LLP, independent auditors, whose
report, along with the Funds' financial statements, are included in Galaxy II's
Annual Report and are incorporated by reference into the SAI. The Annual Report
and SAI are available free of charge upon request. The information for the
fiscal years ended March 31, 1998, 1997, 1996 and 1995 was audited by Galaxy
II's prior auditors, PricewaterhouseCoopers LLP.
GALAXY II LARGE COMPANY INDEX FUND
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING MARCH 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $31.92 $23.09 $20.06 $15.76 $14.36
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(1) 0.35 0.40 0.43 0.38 0.37
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Net realized and unrealized gain on investments
and futures contracts 5.38 10.23 3.41 4.57 1.73
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total from investment operations 5.73 10.63 3.84 4.95 2.10
LESS DIVIDENDS:
Dividends from net investment income (0.36) (0.44) (0.38) (0.31) (0.37)
- ------------------------------------------------------------------- --------- --------- --------- --------- ---------
Dividends from net realized capital gains (0.39) (1.36) (0.43) (0.34) (0.33)
- ------------------------------------------------------------------- --------- --------- --------- --------- ---------
Total dividends (0.75) (1.80) (0.81) (0.65) (0.70)
Net increase in net asset value 4.98 8.83 3.03 4.30 1.40
- ------------------------------------------------------------------- --------- --------- --------- --------- ---------
Net asset value, end of period $36.90 $31.92 $23.09 $20.06 $15.76
- ------------------------------------------------------------------- --------- --------- --------- --------- ---------
- ------------------------------------------------------------------- --------- --------- --------- --------- ---------
Total return 18.15% 47.29% 19.32% 31.80% 15.07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $828,899 $626,740 $421,652 $240,689 $147,597
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Net investment income including
reimbursement 1.11% 1.44% 2.19% 2.11% 2.48%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Operating expenses including
reimbursement 0.47% 0.40% 0.40% 0.40% 0.40%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Operating expenses excluding
reimbursement 0.47% 0.40% 0.40% 0.41% 0.41%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Portfolio turnover rate 3% 3% 11% 5% 7%
</TABLE>
(1) Net investment income per share before reimbursement of certain expenses
by the sub-administrator for the fiscal years ended March 31, 1999, 1998,
1997, 1996 and 1995 was $0.35, $0.40, $0.43, $0.38 and $0.37,
respectively.
GALAXY II INDEX FUNDS 23
<PAGE>
GALAXY II SMALL COMPANY INDEX FUND
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING MARCH 31,
-----------------------------------------------------
1999 1998(1) 1997 1996 1995
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $20.73 $22.64 $22.30 $17.62 $17.49
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) 0.10 0.27 0.38 0.32 0.32
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Net realized and unrealized gain (loss) on investments
and futures contracts (4.04) 7.64 1.76 5.07 0.91
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total from investment operations (3.94) 7.91 2.14 5.39 1.23
LESS DIVIDENDS:
Dividends from net investment income (0.09) (0.33) (0.34) (0.38) (0.32)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Dividends from net realized capital gains (1.48) (9.49) (1.46) (0.33) (0.78)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total dividends (1.57) (9.82) (1.80) (0.71) (1.10)
Net increase (decrease) in net asset value (5.51) (1.91) 0.34 4.68 0.13
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Net asset value, end of period $15.22 $20.73 $22.64 $22.30 $17.62
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total return (19.19)% 41.22% 9.60% 30.85% 7.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $259,903 $399,162 $309,474 $291,724 $235,295
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Net investment income including
reimbursement 0.56% 0.97% 1.59% 1.52% 1.72%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Operating expenses including
reimbursement 0.40% 0.40% 0.40% 0.40% 0.40%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Operating expenses excluding
reimbursement 0.40% 0.40% 0.40% 0.41% 0.40%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Portfolio turnover rate 22% 99% 8% 14% 10%
</TABLE>
(1) At a Special Meeting of Shareholders of the Small Company Index Fund held
on May 9, 1997, the shareholders approved a change in the target index
from the Russell Special Small Company Index to the Standard & Poor's
SmallCap 600 Stock Price Index.
(2) Net investment income per share before reimbursement of certain expenses
by the sub-administrator for the fiscal years ended March 31, 1999, 1998,
1997, 1996 and 1995 was $0.10, $0.27, $0.38, $0.31 and $0.31, respectively.
24 GALAXY II INDEX FUNDS
<PAGE>
GALAXY II UTILITY INDEX FUND
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING MARCH 31,
-----------------------------------------------------
1999 1998(1) 1997 1996 1995
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.18 $11.42 $12.03 $9.88 $9.99
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) 0.53 0.54 0.49 0.44 0.47
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Net realized and unrealized gain (loss)
on investments (0.71) 3.71 (0.09) 2.15 (0.03)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total from investment operations (0.18) 4.25 0.40 2.59 0.44
LESS DIVIDENDS:
Dividends from net investment income (0.51) (0.60) (0.46) (0.44) (0.46)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Dividends from net realized capital gains (0.14) (0.82) (0.55) - (0.08)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Dividends in excess of net realized capital gains - - - - (0.01)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Return of capital - (0.07) - - -
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total dividends (0.65) (1.49) (1.01) (0.44) (0.55)
Net increase (decrease) in net asset value (0.83) 2.76 (0.61) 2.15 (0.11)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Net asset value, end of period $13.35 $14.18 $11.42 $12.03 $9.88
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total return (1.53)% 39.07% 3.46% 26.61% 4.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $55,131 $55,864 $45,582 $56,383 $52,831
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Net investment income including
reimbursement 3.72% 4.24% 3.96% 3.79% 4.62%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Operating expenses including
reimbursement 0.40% 0.40% 0.40% 0.40% 0.40%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Operating expenses excluding
reimbursement 0.40% 0.40% 0.40% 0.41% 0.41%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Portfolio turnover rate 8% 72% 170% 12% 5%
</TABLE>
(1) At a Special Meeting of Shareholders of the Utility Index Fund held on
May 9, 1997, the shareholders approved a change in the target index from
the Russell 1000 Utility Index to the Standard & Poor's Utilities Composite
Stock Price Index.
(2) Net investment income per share before reimbursement of other expenses by
the sub-administrator for the fiscal years ended March 31, 1999, 1998,
1997, 1996 and 1995 was $0.53, $0.54, $0.49, $0.44 and $0.47, respectively.
GALAXY II INDEX FUNDS 25
<PAGE>
GALAXY II U.S. TREASURY INDEX FUND
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING MARCH 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.50 $9.99 $10.24 $9.91 $10.38
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(1) 0.61 0.63 0.64 0.66 0.65
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Net realized and unrealized gain (loss)
on investments 0.05 0.51 (0.25) 0.33 (0.29)
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.66 1.14 0.39 0.99 0.36
LESS DIVIDENDS:
Dividends from net investment income (0.62) (0.63) (0.64) (0.65) (0.66)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Dividends in excess of net investment income - - - (0.01) (0.01)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Dividends in excess of net realized capital gains - - - - (0.16)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total dividends (0.62) (0.63) (0.64) (0.66) (0.83)
Net increase (decrease) in net asset value 0.04 0.51 (0.25) 0.33 (0.47)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Net asset value, end of period $10.54 $10.50 $9.99 $10.24 $9.91
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total return 6.38% 11.72% 3.91% 10.09% 3.81%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $202,420 $118,368 $111,313 $124,944 $104,251
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Net investment income including
reimbursement 5.77% 6.12% 6.31% 6.35% 6.43%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Operating expenses including
reimbursement 0.41% 0.40% 0.40% 0.40% 0.40%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Operating expenses excluding
reimbursement 0.41% 0.40% 0.40% 0.41% 0.41%
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Portfolio turnover rate 70% 79% 39% 35% 50%
</TABLE>
(1) Net investment income per share before reimbursement of certain expenses
by the sub-administrator for the fiscal years ended March 31, 1999, 1998,
1997, 1996 and 1995 was $0.61, $0.63, $0.64, $0.66 and $0.65, respectively.
26 GALAXY II INDEX FUNDS
<PAGE>
MISCELLANEOUS
"Standard & Poor's," "S&P," "Standard & Poor's 500," "S&P 500," "500,"
"Standard & Poor's SmallCap 600 Index" and "S&P SmallCap 600 Index" are
service marks of The McGraw Hill Companies, Inc. and have been licensed to
the Adviser for use by Galaxy II.
The Large Company Index Fund, the Small Company Index Fund and the Utility
Index Fund are not sponsored, endorsed, sold or promoted by Standard & Poor's
("S&P"), a division of The McGraw Hill Companies, Inc. S&P makes no
representation or warranty, express or implied, to the shareholders of the
Large Company Index Fund, the Small Company Index Fund or the Utility Index
Fund or any member of the public regarding the advisability of investing in
securities generally or in the Large Company Index Fund, the Small Company
Index Fund or the Utility Index Fund particularly or the ability of the S&P
500, the S&P SmallCap 600 Index or the S&P Utilities Index to track general
stock market performance. S&P has no obligation to take the needs of Galaxy
II or the shareholders of the Large Company Index Fund, the Small Company
Index Fund or the Utility Index Fund into consideration in determining,
composing or calculating the S&P 500, the S&P SmallCap 600 Index and the S&P
Utilities 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, the Small Company Index Fund or the Utility Index Fund or the
timing of the issuance or sale of the shares of the Large Company Index Fund,
the Small Company Index Fund or the Utility Index Fund or in the
determination or calculation of the equation by which the shares of the Large
Company Index Fund, the Small Company Index Fund or the Utility 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, the Small Company Index Fund or the Utility Index Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500,
THE S&P SMALLCAP 600 INDEX OR THE S&P UTILITIES 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 GALAXY II, SHAREHOLDERS OF THE LARGE COMPANY INDEX
FUND, THE SMALL COMPANY INDEX FUND OR THE UTILITIES INDEX FUND OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500, THE S&P SMALLCAP 600 INDEX OR
THE S&P UTILITIES 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 Salomon Smith Barney Broad Investment-Grade Bond Index is a registered
trademark of Salomon Smith Barney.
The inclusion of a security in any of the Galaxy II Index Funds' indexes in
no way implies an opinion by S&P or Salomon Smith Barney Inc. as to its
attractiveness as an investment. S&P and Salomon Smith Barney Inc. are not
sponsors of, or in any way affiliated with, the Galaxy II Index Funds.
GALAXY II INDEX FUNDS 27
<PAGE>
WHERE TO FIND MORE INFORMATION
You'll find more information about the Funds in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
Galaxy II's annual and semi-annual reports contain more information about
each Fund and a discussion about the market conditions and investment
strategies that had a significant effect on each Fund's performance during
the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about the Funds and their policies. By
law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about
the Funds and make shareholder inquiries by calling Galaxy II at
1-877-BUY-GALAXY (1-877-289-4252) or writing to:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
If you buy your shares through a financial institution, you may contact your
institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public
Reference Section and ask them to mail you information about the Funds,
including the SAI. They'll charge you a fee for this service. You can also
visit the SEC Public Reference Room and copy the documents while you're
there. For information about the operation of the Public Reference Room, call
the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Funds are also available on the SEC's
website at http://www.sec.gov.
Galaxy II's Investment Company Act File No. is 811-06051.
PROTRIDX 18008 7/30/99 PKG-50
<PAGE>
[GRAPHIC]
GALAXY II MUNICIPAL BOND FUND
GALAXY FUND II
PROSPECTUS
July 30, 1999
Galaxy II Municipal Bond Fund
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of this Fund or determined if this prospectus
is accurate or complete. Anyone who tells you otherwise is committing a crime.
[LOGO]
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
1 RISK/RETURN SUMMARY
1 Introduction
2 Galaxy II Municipal Bond Fund
5 Additional information about risk
6 FUND MANAGEMENT
7 HOW TO INVEST IN THE FUND
7 Buying, selling and exchanging shares
7 HOW TO BUY SHARES
8 HOW TO SELL SHARES
8 HOW TO EXCHANGE SHARES
9 OTHER TRANSACTION POLICIES
10 DIVIDENDS, DISTRIBUTIONS AND TAXES
12 GALAXY II INVESTOR PROGRAMS
13 HOW TO REACH GALAXY II
14 FINANCIAL HIGHLIGHTS
</TABLE>
<PAGE>
RISK/RETURN SUMMARY
INTRODUCTION
THIS PROSPECTUS describes the Galaxy II Municipal Bond Fund. The Fund invests
primarily in municipal securities, which are debt obligations of state and local
governments and other political or public bodies or agencies. The interest paid
on municipal securities is generally exempt from federal income tax.
On the following pages, you'll find important information about the Galaxy II
Municipal Bond Fund, including:
- - the Fund's investment objective (sometimes called the Fund's goal) and the
main investment strategies used by the Fund's investment adviser in trying to
achieve that objective.
- - the main risks associated with an investment in the Fund
- - the Fund's past performance measured on both a year-by-year and long-term
basis.
- - the fees and expenses that you will pay as an investor in the Fund
IS THE FUND RIGHT FOR YOU?
The Fund is designed for investors who are looking for income that's free of
federal income tax and who can accept fluctuations in price and yield.
TAX-EXEMPT FUNDS ARE NOT APPROPRIATE INVESTMENTS FOR TAX-DEFERRED RETIREMENT
ACCOUNTS, SUCH AS IRAS, BECAUSE THEIR RETURNS BEFORE TAXES ARE GENERALLY LOWER
THAN THOSE OF TAXABLE FUNDS.
THE FUND'S INVESTMENT ADVISER
Fleet Investment Advisors Inc., which is referred to in this prospectus as THE
ADVISER, is the investment adviser for the Fund. The Adviser, an indirect
wholly-owned subsidiary of Fleet Financial Group, Inc., was established in 1984
and has its main office at 75 State Street, Boston, Massachusetts 02109. The
Adviser also provides investment management and advisory services to individual
and institutional clients and manages the other Galaxy II investment portfolios.
As of December 31, 1998, the Adviser managed over $64 billion in assets.
- --------------------------------------------------------------------------------
An investment in the Fund isn't a Fleet Bank deposit and it isn't insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money by investing in the Fund.
[Sidenote:]
TAX-EQUIVALENT YIELD
One way to understand the tax advantages of a tax-exempt fund is to compare its
after-tax return to that of a taxable investment. For example, suppose a taxable
fund pays a return of 10%. If you're in the 36% federal income tax bracket, the
fund's return after taxes is 6.4%. When a tax-exempt fund pays a return of 10%,
you don't pay tax. So if you're in the 36% tax bracket, that's the equivalent of
earning about 15.6% on a taxable fund. If you're in a low tax bracket, however,
it may not be helpful to invest in a tax-exempt fund if you can achieve a higher
after-tax return from a taxable investment.
GALAXY MUNICIPAL BOND FUND II 1
<PAGE>
GALAXY II MUNICIPAL BOND FUND
THE FUND'S INVESTMENT OBJECTIVE
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.
THE FUND'S MAIN INVESTMENT STRATEGIES
The Fund normally invests substantially all (at least 80%) of its net assets in
municipal securities that pay interest which is exempt from regular federal
income taxes, primarily bonds (normally, at least 65% of total assets).
Municipal securities purchased by the Fund may include general obligation
securities, revenue securities and private activity bonds. The interest on
private activity bonds may be subject to the federal alternative minimum tax
(AMT). Investments in private activity bonds subject to the AMT will normally
not exceed 20% of the Fund's net assets and will not be treated as investments
in municipal securities for purposes of the 80% requirement stated above.
Nearly all of the Fund's investments will be of investment grade quality.
Investment grade securities have one of the top four ratings assigned by
Standard & Poor's Ratings Group (S&P), Moody's Investors Service, Inc.
(Moody's), or another nationally recognized statistical rating organization
(NRSRO), or are unrated securities determined by the Adviser to be of comparable
quality. Under normal market conditions, the Fund will invest at least 65% of
its total assets in securities that have one of the top three ratings assigned
by S&P or Moody's or another NRSRO, or in unrated securities determined by the
Adviser to be of comparable quality. Occasionally, the rating of a security held
by the Fund may be downgraded to below investment grade. If that happens, the
Fund doesn't have to sell the security unless the Adviser determines that, under
the circumstances, the security is no longer an appropriate investment for the
Fund.
Under normal market conditions, the Fund expects to maintain a weighted
average maturity of between 7 and 12 years. There is no limit on the maturity
of any individual security in the Fund.
The Fund will sell a portfolio security when, as a result of changes in the
economy or the performance of the security or other circumstances, the Adviser
believes that holding the security is no longer consistent with the Fund's
investment objective.
THE MAIN RISKS OF INVESTING IN THE FUND
All mutual funds are affected by changes in the economy and swings in investment
markets.
In addition, the Fund also carries the following main risks:
- - INTEREST RATE RISK - The prices of debt securities, including municipal
securities, tend to move in the opposite direction to interest rates. When
rates are rising, the prices of debt securities tend to fall. When rates are
falling, the prices of debt securities tend to rise. Generally, the longer
the time until maturity, the more sensitive the price of a debt security is
to interest rate changes.
- - CREDIT RISK - The value of debt securities, including municipal securities,
also depends on the ability of issuers to make principal and interest
payments. If an issuer can't meet its payment obligations or if its credit
rating is lowered, the value of its debt securities will fall. Debt securities
which have the lowest of the top four ratings assigned by S&P, Moody's or
another NRSRO have speculative characteristics. Changes in the economy are
more likely to affect the ability of issuers of these securities to make
payments of principal and interest than is the case with higher-rated
securities. The ability of a state or local government issuer to make
payments can be affected by many factors, including economic conditions, the
flow of tax
[Sidenote:]
MUNICIPAL SECURITIES
State and local governments issue municipal securities to raise money to finance
public works, to repay outstanding obligations, to raise funds for general
operating expenses and to make loans to other public institutions. Some
municipal securities, known as private activity bonds, are backed by private
entities and are used to finance various non-public projects. Municipal
securities, which can be issued as bonds, notes or commercial paper, usually
have fixed interest rates, although some have interest rates that change from
time to time.
[Sidenote:]
TYPES OF MUNICIPAL SECURITIES
GENERAL OBLIGATION securities are secured by the issuer's full faith, credit and
taxing power. REVENUE OBLIGATION securities are usually payable only from
revenues derived from specific facilities or revenue sources. PRIVATE ACTIVITY
BONDS are usually revenue obligations since they are typically payable by the
private user of the facilities financed by the bonds.
2 GALAXY MUNICIPAL BOND FUND II
<PAGE>
GALAXY II MUNICIPAL BOND FUND
revenues and
changes in the level of federal, state or local aid. Some municipal obligations
are payable only from limited revenue sources or by private entities.
- - PREPAYMENT/EXTENSION RISK - Changes in interest rates may cause certain
municipal securities held by the Fund to be paid off much sooner or later
than expected, which could adversely affect the Fund's value. In the event
that a security is paid off sooner than expected because of a decline in
interest rates, the fund may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in lower-yielding
securities. In the event of a later than expected payment because of a rise
in interest rates, the value of the obligation will decrease and the
portfolio may suffer from the inability to invest in higher-yielding
securities.
- - SELECTION OF INVESTMENTS - The Adviser evaluates the risks and rewards
presented by all securities purchased by the Fund and how they advance the
Fund's investment objective. It's possible, however, that these evaluations
will prove to be inaccurate.
..........................
HOW THE FUND HAS PERFORMED
The bar chart and the table below show how the Fund has performed in the past.
Both assume that all dividends and distributions are reinvested in the Fund. How
the Fund has performed in the past doesn't necessarily show how it will perform
in the future.
YEAR-BY-YEAR TOTAL RETURNS - CALENDAR YEARS
The bar chart shows how the performance of the Fund has varied from year to
year, thereby giving some indication of the risk of investing in the Fund.
[CHART]
<TABLE>
<S> <C>
1994 -5.59%
1995 14.63%
1996 3.56%
1997 7.23%
1998 5.46%
</TABLE>
[Sidenote:]
WEIGHTED AVERAGE MATURITY
Weighted average maturity gives you the average time until all debt securities
in the Fund come due or MATURE. It is calculated by averaging the time to
maturity of all debt securities held by the Fund with each maturity "weighted"
according to the percentage of assets it represents.
[Sidenote:]
BEST QUARTER
6.09% for the quarter ending March 31, 1995
WORST QUARTER
- -4.89% for the quarter ending March 31, 1994
The Fund's year-to-date return as of the quarter ended March 31, 1999 was 0.66%.
GALAXY MUNICIPAL BOND FUND II 3
<PAGE>
GALAXY II MUNICIPAL BOND FUND
AVERAGE ANNUAL TOTAL RETURNS
The table shows the Fund's average annual total returns for the periods ended
December 31, 1998, as compared to a broad-based market index.
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Municipal Bond Fund 5.46% 4.86% 5.72% (4/15/93)
- --------------------------------------------------------------------------------
Lehman Brothers Quality
Intermediate Bond Index 6.00% 5.60% 6.05% (since 3/31/93)
- --------------------------------------------------------------------------------
</TABLE>
For current yield information, please call 1-877-BUY-GALAXY (1-877-289-4252).
FEES AND EXPENSES OF THE FUND
The following table shows the fees and expenses you may pay when you buy and
hold shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (FEES DEDUCTED FROM THE FUND'S ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
FEES (12b-1) FEES EXPENSES EXPENSES
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bond Fund 0.25% None 0.35% 0.60%
- ----------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
This example helps you compare the cost of investing in the Fund with the cost
of investing in other mutual funds. The example assumes:
- - you invest $10,000 for the periods shown
- - you reinvest all dividends and distributions in the Fund
- - you sell all your shares at the end of the periods shown
- - your investment has a 5% return each year
- - the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower depending on the amount you
invest and the Fund's actual rate of return, based on these assumptions your
costs would be:
<TABLE>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bond Fund $61 $192 $335 $750
- -------------------------------------------------------------------------------------------
</TABLE>
[Sidenote:]
The Lehman Brothers Quality Intermediate Bond Index is an unmanaged index that
tracks the performance of investment grade, tax-exempt municipal bonds with
remaining maturities between two and twelve years and rated in one of the top
three rating categories.
[Sidenote:]
PORTFOLIO MANAGER
The Adviser's Tax-Exempt Investment Policy Committee is responsible for the
day-to-day management of the Fund's investment portfolio.
4 GALAXY MUNICIPAL BOND FUND II
<PAGE>
ADDITIONAL INFORMATION ABOUT RISK
The main risks associated with an investment in the Galaxy II Municipal Bond
Fund have been described above. The following supplements that discussion.
TEMPORARY DEFENSIVE POSITIONS
The Fund may temporarily hold up to 20% of its net assets in investments that
are not part of its main investment strategy to try to avoid losses during
unfavorable market conditions. These investments may include short-term
municipal securities, such as short-term municipal notes and tax-exempt
commercial paper, and taxable money market securities, such as U.S. Government
obligations, bank certificates of deposit and bankers' acceptances, and
repurchase agreements collateralized by these securities. This strategy could
prevent the Fund from achieving its investment objective.
OTHER TYPES OF INVESTMENTS
This prospectus describes the Fund's main investment strategies and the
particular types of securities in which the Fund mainly invests. The Fund may,
from time to time, pursue other investment strategies and make other types of
investments in support of its overall investment goal. These supplemental
investment strategies - and the risks involved - are described in detail in the
Statement of Additional Information (SAI), which is referred to on the back
cover of this prospectus.
YEAR 2000 RISKS
As with other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Adviser and the Fund's other service providers don't properly
process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000" or "Y2K" problem.
The Adviser is taking steps to address the Y2K problem with respect to the
computer systems that it uses and to obtain assurances that comparable steps
are being taken by the Fund's other major service providers. At this time,
however, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Fund. The Y2K problem could have a negative impact on
the issuers of securities in which the Fund invests, which could hurt the
Fund's investment returns.
GALAXY MUNICIPAL BOND FUND II 5
<PAGE>
FUND MANAGEMENT
ADVISER
The Adviser, subject to the general supervision of Galaxy II's Board of
Trustees, manages the Fund in accordance with its investment objective and
policies, makes decisions with respect to and places orders for all purchases
and sales of portfolio securities, and maintains related records.
ALLOCATION OF ORDERS FOR PORTFOLIO SECURITIES
The Adviser may allocate orders for the purchase and sale of portfolio
securities to certain financial institutions, including those that are
affiliated with the Adviser or that have sold shares of the Fund, to the extent
permitted by law or by order of the Securities and Exchange Commission. The
Adviser will allocate orders to such institutions only if it believes that the
quality of the transaction and the commission are comparable to what they would
be with other qualified brokerage firms.
MANAGEMENT FEES
The Fund paid the Adviser management fees equal to 0.25% of the Fund's
average net assets during the last fiscal year.
6 GALAXY MUNICIPAL BOND FUND II
<PAGE>
HOW TO INVEST IN THE FUND
BUYING, SELLING AND EXCHANGING SHARES
You can buy and sell shares of the Fund on any day that the Fund is open for
business, which is any day that the New York Stock Exchange is open. The New
York Stock Exchange is generally open for trading every Monday through Friday,
except for national holidays.
The price at which you buy shares is the NAV next determined after your order
is accepted. The price at which you sell shares is the NAV next determined
after receipt of your order in proper form as described below. NAV is
determined on each day the New York Stock Exchange is open for trading at the
close of regular trading that day (usually 4:00 p.m. Eastern time). If market
prices are readily available for securities owned by the Fund, they're valued
at those prices. If market prices are not readily available for some
securities, they are valued at fair value under the supervision of Galaxy
II's Board of Trustees.
HOW TO BUY SHARES
You can buy shares through your financial institution or directly from Galaxy
II's distributor by calling 1-877-BUY-GALAXY (1-877-289-4252). A broker or agent
who places orders on your behalf may charge you a separate fee for their
services.
BUYING BY MAIL
Complete an account application and mail it, together with a check payable to
the Fund, to:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
To make additional investments, send your check to the address above
along with one of the following:
- - the detachable form that's included with your Galaxy II statement or your
confirmation of a prior transaction
- - a letter stating the amount of your investment, the name of the Fund and your
account number
If your check is returned because of insufficient funds, Galaxy II will
cancel your order.
BUYING BY WIRE
To make an initial or additional investment by wire, send U.S. funds through
the Federal Reserve System to Fleet National Bank as agent for Galaxy II's
distributor. You should wire money and registration instructions to:
Fleet National Bank
75 State Street
Boston, MA 02109
ABA #0110-0013-8, DDA #79673-5702
Ref: Galaxy Fund II (Account number)
(Account registration)
[Sidenote:]
NET ASSET VALUE
The price you pay for your shares is based on the net asset value per share
(NAV). It's the value of the Fund's assets minus the value of the Fund's
liabilities divided by the number of shares held by investors.
[Sidenote:]
MINIMUM INVESTMENT AMOUNTS
The minimum initial investment to open a Fund account is:
- - $2,500 for regular accounts
- - $100 for college savings accounts
There is generally no minimum initial investment if you participate in the
Automatic Investment Program. You generally can make additional investments for
as little as $100. See GALAXY II INVESTOR PROGRAMS below for information on
other minimums for initial and additional investments.
Usually, you must keep at least $250 in your account. If your account falls
below $250 because you sell or exchange shares, Galaxy II may redeem your
shares and close your account. Galaxy II will give you 60 days' notice in
writing before closing your account.
GALAXY MUNICIPAL BOND FUND II 7
<PAGE>
Before making an initial investment by wire, you must complete an
account application and send it to Galaxy Fund II, P.O. Box 6520, Providence, RI
02940-6520. Your order will not be effected until the completed account
application is received by Galaxy II. Call Galaxy II's distributor at
1-877-BUY-GALAXY (1-877-289-4252) for an account application.
Your financial institution may charge you a fee for sending funds by wire.
CUSTOMERS OF FINANCIAL INSTITUTIONS
If you are a customer of a financial institution such as a bank, savings and
loan association or broker-dealer, including a financial institution
affiliated with the Adviser, you should place your order through your
financial institution. Your financial institution is responsible for sending
your order to Galaxy II's distributor and wiring the money to Galaxy II's
custodian. For details, please contact your financial institution.
HOW TO SELL SHARES
You can sell your shares in several ways: by mail, by telephone, by wire, or
through your financial institution.
SELLING BY MAIL
Send your request in writing to:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
You must include the following:
- - The name of the Fund
- - The number of shares or the dollar amount you want to sell
- - Your account number
- - Your Social Security number or tax identification number
- - The signatures of each registered owner of the account (the signatures must
match the names on the account registration)
Additional documents may be required for certain types of shareholders, such as
corporations, partnerships, executors, trustees, administrators or guardians.
SELLING BY PHONE
You can sell shares by calling Galaxy II's distributor at 1-877-BUY-GALAXY
(1-877-289-4252), unless you tell Galaxy II on the account application or in
writing that you don't want this privilege. If you have difficulty getting
through to Galaxy II because of unusual market conditions, consider selling
your shares by mail or wire.
SELLING BY WIRE
Notify Galaxy II's distributor by phone or wire that you wish to sell shares and
have the sale proceeds wired to your account at any financial institution in the
U.S. To be eligible to use this privilege, you must complete the appropriate
section on the account application or notify Galaxy II in writing (with a
signature guarantee). Your sale proceeds must be more than $1,000.
The sale proceeds must be paid to the same bank and account you named on your
application or in your written instructions.
CUSTOMERS OF FINANCIAL INSTITUTIONS
Please contact your financial institution for information on how to sell your
shares. The financial institution is responsible for sending your order to
Galaxy II's distributor and for crediting your account with the proceeds.
[Sidenote:]
SIGNATURE GUARANTEES
When selling your shares by mail or by phone, you must have your signature
guaranteed if:
- - you're selling shares worth more than $50,000
- - you want Galaxy II to send your money to an address other than the address on
your account, unless your assets are transferred to a successor custodian
- - you want Galaxy II to send your money to the address on your account that's
changed within the last 30 days, or
- - you want Galaxy II to make the check payable to someone else
Your signature must be guaranteed by a bank that's a member of the FDIC, a trust
company, a member firm of a national securities exchange or any other eligible
institution. A notarized signature is not sufficient.
8 GALAXY MUNICIPAL BOND FUND II
<PAGE>
Galaxy II doesn't charge a fee for wiring sales proceeds to your financial
institution, but your financial institution may charge you a fee.
HOW TO EXCHANGE SHARES
You may exchange shares of the Fund having a value of at least $100 for
shares of any other Galaxy II Fund or for shares of any other Fund that's
managed by the Adviser or any of its affiliates in which you have an existing
account. You will have to pay a sales charge if you exchange shares of the
Fund for shares of another Fund that assesses a sales charge on purchases,
unless you qualify for an exemption.
TO EXCHANGE SHARES:
- - call Galaxy II's distributor or use the InvestConnect voice response line at
1-877-BUY-GALAXY (1-877-289-4252)
- - send your request in writing to:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
- - ask your financial institution
Galaxy II doesn't charge any fee for making exchanges but your financial
institution might do so. You are generally limited to three exchanges per year.
Galaxy II may change or cancel the exchange privilege with 60 days' advance
written notice to shareholders.
OTHER TRANSACTION POLICIES
If Galaxy II doesn't receive full payment for your order to buy shares within
three business days of the order date, Galaxy II won't accept your order. Galaxy
II will advise you if this happens and return any payment it may eventually
receive. You can only invest in shares of the Fund that are legally available
in your state.
Galaxy II may refuse any order to buy shares. Galaxy II doesn't issue a
certificate when you buy shares but it does keep a record of shares issued to
investors.
Galaxy II may refuse your order to sell or exchange shares by wire or
telephone if it believes it is advisable to do so. Galaxy II or its
distributor may change or cancel the procedures for selling or exchanging
shares by wire or telephone at any time without notice.
If you sell or exchange shares by telephone, you may be responsible for any
fraudulent telephone orders as long as Galaxy II has taken reasonable
precautions to verify your identity, such as requesting information about the
way in which your account is registered or about recent transactions in your
account.
Galaxy II normally pays you cash when you sell your shares, but it has the
right to deliver securities owned by the Fund instead of cash. When you sell
these securities, you'll pay brokerage charges.
Sales proceeds are normally sent to you within three business days but Galaxy
II reserves the right to send sales proceeds within seven days if sending
proceeds earlier could adversely affect the Fund.
If any shares that you're selling are part of an investment you've paid for
with a personal check, Galaxy II will delay sending your sales proceeds until
the check clears, which can take up to 15 days from the purchase date.
Galaxy II reserves the right to vary or waive any minimum investment
requirement.
GALAXY MUNICIPAL BOND FUND II 9
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund generally declares dividends from net investment income daily and pays
them monthly. It normally distributes net capital gains annually. It's expected
that the Fund's annual distributions will be mainly income dividends. Dividends
and distributions are reinvested in additional shares of the Fund unless you
indicate in the account application or in a letter to Galaxy II that you want
to have dividends and distributions paid in cash.
FEDERAL TAXES
It is expected that the Fund will distribute dividends derived from interest
earned on exempt securities, and these "exempt-interest dividends" will be
exempt income for shareholders for federal income tax purposes. However,
distributions, if any, derived from net capital gains of the Fund will
generally be taxable to you as long-term capital gains, and distributions, if
any, derived from short-term capital gains or taxable interest income will be
taxable to you as ordinary income. It is expected that the Fund may pay such
taxable distributions from time to time. You will be notified annually of the
tax status of distributions to you.
You should note that if you purchase shares just prior to a taxable
distribution, the purchase price will reflect the amount of the upcoming
distribution, but you will be taxed on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of capital. This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that were received on
the shares. If you receive an exempt-interest dividend with respect to any share
and the share is held by you for six months or less, any loss on the sale or
exchange of the share will be disallowed to the extent of such exempt-interest
dividend amount.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of the Fund generally will not be deductible for federal income tax purposes.
You should note that a portion of the exempt-interest dividends paid by the Fund
may constitute an item of tax preference for purposes of determining federal
alternative minimum tax liability. Exempt-interest dividends will also be
considered along with other adjusted gross income in determining whether any
Social Security or railroad retirement payments received by you are subject to
federal income taxes.
10 GALAXY MUNICIPAL BOND FUND II
<PAGE>
STATE AND LOCAL TAXES
Dividends paid by the Fund that are attributable to interest earned by the Fund
may be taxable to shareholders under state or local law. Some states allow
shareholders to exclude from state income tax that portion of the Fund's
tax-exempt interest 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.
MISCELLANEOUS
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. You should consult your tax
adviser for further information regarding federal, state, local and/or foreign
tax consequences relevant to your specific situation.
GALAXY MUNICIPAL BOND FUND II 11
<PAGE>
GALAXY II INVESTOR PROGRAMS
It's also easy to buy or sell shares of the Fund by using one of the programs
described below. Just tell Galaxy II the amount and how frequently you want to
buy or sell shares and Galaxy II does the rest. For further information on any
of these programs, call Galaxy II's distributor at 1-877-BUY-GALAXY
(1-877-289-4252) or your financial institution.
AUTOMATIC INVESTMENT PROGRAM
You can make automatic investments from your bank account every month or every
quarter. You can choose to make your investment on any day of the month or
quarter. The minimum investment is $50 a month or $150 a quarter.
PAYROLL DEDUCTION PROGRAM
You can make regular investments from your paycheck. The minimum investment is
$25 per pay period. Send a completed Galaxy II Payroll Deduction Application to
your employer's payroll department. They'll arrange to have your investment
deducted from your paycheck.
COLLEGE INVESTMENT PROGRAM
The minimum for initial and additional investments through the College
Investment Program is $100 unless you participate in the Automatic Investment
Program, in which case the minimum for initial and additional investments is
$50.
DIRECT DEPOSIT PROGRAM
This program lets you deposit your social security payments in your Fund
account automatically. There's no minimum deposit. You can cancel the
program by notifying the Social Security Administration in writing.
SYSTEMATIC WITHDRAWAL PLAN
You can make regular withdrawals from your investment account every month, every
quarter, every six months or once a year. You need a minimum account balance of
$10,000 to participate in the plan.
You may cancel your participation in any of these programs, other than the
Direct Deposit Program, by writing to Galaxy II at:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
Please allow at least five days for the cancellation to be processed.
12 GALAXY MUNICIPAL BOND FUND II
<PAGE>
HOW TO REACH GALAXY II
THROUGH YOUR FINANCIAL INSTITUTION
Your financial institution can help you buy, sell or exchange shares and can
answer questions about your account.
GALAXY II SHAREHOLDER SERVICES
Call Galaxy II's distributor at 1-877-BUY-GALAXY (1-877-289-4252), Monday
through Friday, 8 a.m. to 6 p.m. (Eastern time) for help from a Galaxy II
representative.
INVESTCONNECT
InvestConnect is Galaxy II's Shareholder Voice Response System. Call
1-877-BUY-GALAXY (1-877-289-4252) from any touch-tone phone for automated
access to account information and current Fund prices and performance, or
to place orders to sell or exchange shares. It's available 24 hours a day,
seven days a week.
If you live outside the United States, you can contact Galaxy II by
calling 1-508-871-4121.
THE INTERNET
Please visit Galaxy II's website at: www.galaxyfunds.com
[Sidenote:]
Galaxy II also offers a TDD service for the hearing impaired. Just call
1-800-696-6515, 24-hours a day, seven days a week.
GALAXY MUNICIPAL BOND FUND II 13
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table shown below will help you understand the Fund's
financial performance for the past five years. Certain information reflects the
financial performance for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund, assuming all dividends and distributions were reinvested. The information
for the fiscal year ended March 31, 1999 has been audited by Ernst & Young LLP,
independent auditors, whose report, along with the Fund's financial statements,
are included in Galaxy II's Annual Report and are incorporated by reference into
the SAI. The Annual Report and SAI are available free of charge upon request.
The information for the fiscal years ended March 31, 1998, 1997, 1996 and 1995
was audited by Galaxy II's former auditors, PricewaterhouseCoopers LLP.
GALAXY II MUNICIPAL BOND FUND
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING MARCH 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.51 $10.15 $10.20 $9.94 $9.89
- --------------------------------------------------------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(1) 0.46 0.47 0.47 0.46 0.46
- --------------------------------------------------------- -------- -------- -------- -------- --------
Net realized and unrealized gain (loss)
on investments 0.08 0.36 (0.05) 0.26 0.05
- --------------------------------------------------------- -------- -------- -------- -------- --------
Total from investment operations 0.54 0.83 0.42 0.72 0.51
LESS DIVIDENDS:
Dividends from net investment income (0.46) (0.47) (0.47) (0.46) (0.46)
------------------------------------------------------ -------- -------- -------- -------- --------
Dividends from net realized capital gains - - - - -
- --------------------------------------------------------- -------- -------- -------- -------- --------
Total dividends (0.46) (0.47) (0.47) (0.46) (0.46)
Net increase (decrease) in net
asset value 0.08 0.36 (0.05) 0.26 0.05
- --------------------------------------------------------- -------- -------- -------- -------- --------
Net asset value, end of period $10.59 $10.51 $10.15 $10.20 $9.94
- --------------------------------------------------------- -------- -------- -------- -------- --------
- --------------------------------------------------------- -------- -------- -------- -------- --------
Total return 5.20% 8.29% 4.15% 7.36% 5.34%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $21,607 $18,147 $19,921 $22,478 $24,560
- ---------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Net investment income including
reimbursement 4.31% 4.49% 4.57% 4.54% 4.72%
- --------------------------------------------------------
Operating expenses including
reimbursement 0.60% 0.60% 0.60% 0.60% 0.60%
- --------------------------------------------------------
Operating expenses excluding
reimbursement 0.60% 0.60% 0.60% 0.61% 0.63%
- --------------------------------------------------------
Portfolio turnover rate 43% 28% 7% 2% 47%
</TABLE>
(1) Net investment income per share before reimbursement of certain expenses by
the sub-administrator for the years ended March 31, 1999, 1998, 1997, 1996
and 1995 was $0.46, $0.47, $0.47, 0.46 and $0.46, respectively.
14 GALAXY MUNICIPAL BOND FUND II
<PAGE>
WHERE TO FIND MORE INFORMATION
You'll find more information about the Fund in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
Galaxy II's annual and semi-annual reports contain more information about the
Fund and a discussion about the market conditions and investment strategies that
had a significant effect on the Fund's performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about the Fund and its policies. By law,
it's incorporated by reference into (considered to be part of) this prospectus.
You can get a free copy of these documents, request other information about the
Fund and make shareholder inquiries by calling Galaxy II at 1-877-BUY-GALAXY
(1-877-289-4252) or by writing to:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
If you buy your shares through a financial institution, you may contact your
institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Fund, including the SAI.
They'll charge you a fee for this service. You can also visit the SEC Public
Reference Room and copy the documents while you're there. For information about
the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Fund are also available
on the SEC's website at http://www.sec.gov.
Galaxy II's Investment Company Act File No. is 811-06051.
PROTRMBND 18033 7/30/99 PKG-50
<PAGE>
GALAXY FUND II
STATEMENT OF ADDITIONAL INFORMATION
JULY 30, 1999
GALAXY II LARGE COMPANY INDEX FUND
GALAXY II SMALL COMPANY INDEX FUND
GALAXY II UTILITY INDEX FUND
GALAXY II U.S. TREASURY INDEX FUND
GALAXY II MUNICIPAL BOND FUND
This Statement of Additional Information is not a prospectus. The
prospectuses for the Funds as listed below, as they may be supplemented or
revised from time to time (the "Prospectuses"), as well as the Funds' Annual
Report to Shareholders dated March 31, 1999 (the "Annual Report"), may be
obtained, without charge, by writing:
Galaxy Fund II
P.O. Box 6520
Providence, RI 02940-6520
or by calling 1-877-BUY-GALAXY (1-877-289-4252)
CURRENT PROSPECTUSES
- - Prospectus for the Galaxy II Large Company Index, Galaxy II Small Company
Index, Galaxy II Utility Index and Galaxy II U.S. Treasury Index Funds (the
"Index Funds") dated July 30, 1999.
- - Prospectus for the Galaxy II Municipal Bond Fund dated July 30, 1999.
The financial statements included in the Annual Report and the report of
Ernst & Young LLP, Galaxy Fund II's independent auditors, on the financial
statements for the fiscal year ended March 31, 1999 are incorporated by
reference into this Statement of Additional Information. The report of
PricewaterhouseCoopers LLP, Galaxy II's former independent auditors, dated
May 8, 1998 on the financial statements included in the Funds' Annual Report
to Shareholders for the fiscal year ended March 31, 1998 is also incorporated
by reference into this Statement of Additional Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
GENERAL INFORMATION....................................................................1
DESCRIPTION OF GALAXY II AND ITS SHARES................................................1
INVESTMENT STRATEGIES, POLICIES AND RISKS..............................................3
The Indexing Approach - Large Company Index, Small Company Index,
Utility Index, and U.S. Treasury Index Funds..................................3
Large Company Index Fund......................................................4
Small Company Index Fund......................................................5
Utility Index Fund............................................................5
U.S. Treasury Index Fund......................................................5
Municipal Bond Fund...........................................................6
Special Risk Considerations...................................................8
Industry Concentration Risk - Utility Index Fund..............................8
Other Investment Policies and Risk Considerations.............................9
Temporary Cash Balances......................................................10
U.S. Government Securities...................................................10
Bank Obligations.............................................................10
U.S. Treasury Rolls - Index Funds............................................11
Securities of Other Investment Companies - Municipal Bond Fund...............11
Futures Contracts - Stock Funds and Municipal Bond Fund......................11
Options On Futures Contracts - Municipal Bond Fund...........................14
Lending of Portfolio Securities..............................................14
Repurchase Agreements........................................................15
Municipal Securities - Municipal Bond Fund...................................16
When-Issued and Delayed-Delivery Securities - Municipal Bond Fund............17
Ratings as Investment Criteria - Municipal Bond Fund.........................18
Portfolio Turnover...........................................................18
INVESTMENT LIMITATIONS................................................................19
VALUATION OF PORTFOLIO SECURITIES.....................................................22
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................................22
General......................................................................23
Customers of Institutions....................................................23
Other Purchase Information...................................................24
Redemption of Fund Shares....................................................24
INVESTOR PROGRAMS.....................................................................24
Exchange Privilege............................................................24
Retirement Plans..............................................................25
Automatic Investment Program..................................................26
Systematic Withdrawal Plan....................................................26
Payroll Deduction Program.....................................................27
College Investment Program....................................................27
Direct Deposit Program........................................................27
TAXES.................................................................................27
State and Local...............................................................28
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Taxation of Certain Financial Instruments.....................................29
TRUSTEES AND OFFICERS.................................................................29
Shareholder and Trustee Liability.............................................32
INVESTMENT ADVISER....................................................................33
Authority to Act as Investment Adviser.......................................34
ADMINISTRATOR AND SUB-ADMINISTRATOR...................................................35
CUSTODIAN AND TRANSFER AGENT..........................................................36
PORTFOLIO TRANSACTIONS................................................................37
DISTRIBUTOR...........................................................................39
AUDITORS..............................................................................39
COUNSEL...............................................................................40
PERFORMANCE AND YIELD INFORMATION.....................................................40
MISCELLANEOUS.........................................................................42
FINANCIAL STATEMENTS..................................................................43
APPENDIX A............................................................................A-
</TABLE>
-ii-
<PAGE>
GENERAL INFORMATION
This Statement of Additional Information should be read in conjunction
with a current Prospectus. This Statement of Additional Information relates to
the Prospectuses for shares of the Funds listed on the cover page. This
Statement of Additional Information is incorporated by reference in its entirety
into the Prospectuses. No investment in shares of the Funds should be made
without reading a Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, 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 POSSIBLE LOSS OF
THE PRINCIPAL AMOUNT INVESTED.
DESCRIPTION OF GALAXY II AND ITS SHARES
Galaxy Fund II ("Galaxy II") is a no-load, open-end management
investment company currently offering shares of beneficial interest in five
investment portfolios: Large Company Index Fund, Small Company Index Fund,
Utility Index Fund, U.S. Treasury Index Fund and Municipal Bond Fund.
Galaxy II was organized as a Massachusetts business trust on February
22, 1990. Galaxy II's Declaration of Trust authorizes the Board of Trustees to
create and establish series of shares by setting the preference, conversion or
other rights, voting powers, restrictions, limitations as to dividends, and
qualifications or terms and conditions of, or right to require redemption of any
unissued shares. Pursuant to such authority, the Board of Trustees has
authorized the issuance of an unlimited number of shares in each of the Funds.
Each Fund other than the Utility Index Fund, which is classified as a
non-diversified investment company, is classified as a diversified investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
Each share of Galaxy II (irrespective of series designation) has a par
value of $.001 per share, represents an equal proportionate interest in the
related investment portfolio and is entitled to such dividends and distributions
out of the income earned on the assets belonging to such investment portfolio as
are declared in the discretion of Galaxy II's Board of Trustees.
Shareholders have no preemptive or other right to subscribe to any
additional shares and only such conversion or exchange rights as the Board of
Trustees may grant in its discretion. When issued for payment as described in
the Prospectuses, shares will be fully paid and non-assessable. Each series of
shares bears pro rata the same expenses and is entitled equally to a Fund's
dividends and distributions.
<PAGE>
In the event of a liquidation or dissolution of Galaxy II or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund, including any
assets of Galaxy II allocated by the Trustees to such Fund that are otherwise
not readily identifiable as belonging to such Fund. Shareholders of a Fund are
entitled to participate in the net distributable assets of the particular Fund
involved in liquidation, based on the number of shares of the Fund that are held
by each shareholder.
Shareholders have the power to vote, subject to provisions of the
Declaration of Trust, (i) for the election of Trustees, (ii) with respect to any
investment advisory or management contract, (iii) with respect to amendment of
the Declaration of Trust, (iv) to the same extent as a Massachusetts business
corporation concerning whether a legal action should be brought or maintained
derivatively on behalf of Galaxy II or shareholders, provided that a shareholder
of a particular Fund is not entitled to bring a derivative or class action on
behalf of any other Fund, and (v) with respect to other matters as are required
or authorized by law, the Declaration of Trust, Galaxy II's bylaws, Galaxy II's
state or federal registration, or as the Trustees consider desirable.
Shareholders will vote separately on a Fund-by-Fund basis and not together in
the aggregate, except when required by the 1940 Act, shares will be voted in the
aggregate, or when the Board of Trustees has determined that the matter affects
the interests of one or more Funds, then only the shareholders of such Fund(s)
will be entitled to vote on such matter. Rule 18f-2 under the 1940 Act provides
that any matter required to be submitted to the holders of the outstanding
voting securities of an investment company such as Galaxy II shall not be deemed
to have been effectively acted upon unless approved by the holders of a majority
of the outstanding shares of each Fund affected by the matter. A particular Fund
is deemed to be affected by a matter unless it is clear that the interests of
each Fund in the matter are substantially identical or that the matter does not
affect any interest of the Fund. Under the Rule, the approval of an investment
advisory agreement or any change in an investment objective or a fundamental
investment policy would be effectively acted upon with respect to a Fund only if
approved by a majority of the outstanding shares of such Fund (irrespective of
series designation). However, the Rule also provides that the ratification of
the appointment of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of Galaxy II voting without regard to series.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Voting rights are
not cumulative in the election of Trustees and, accordingly, the holders of more
than 50% in the aggregate of Galaxy II's outstanding shares may elect all of the
trustees, irrespective of the votes of other shareholders.
Galaxy II is not required under Massachusetts law to hold annual
shareholder meetings and intends to do so only if required by the 1940 Act. Any
Trustee may be removed by the holders of two-thirds of the outstanding voting
shares through a declaration in writing or by a vote cast in person or by proxy
at a special meeting called for that purpose. Galaxy II's Declaration of Trust
provides that a meeting of shareholders for the purpose of voting on the
question of removal of any Trustee(s) shall be called by the Board of Trustees
upon a written request of shareholders owning at least 10% of the outstanding
shares of Galaxy II.
-2-
<PAGE>
Galaxy II's Declaration of Trust authorizes the Board of Trustees,
subject to majority shareholder vote of each series affected by the matter, or,
if applicable, to a majority shareholder vote of Galaxy II (unless otherwise
required by applicable law), to (a) merge or consolidate with any other
corporation, association, trust or other organization; (b) sell and convey the
assets of Galaxy II or any individual series to another trust, partnership,
association or corporation organized under the laws of any state which is a
diversified open-end management investment company as defined in the 1940 Act,
for adequate consideration which shall include the assumption of all outstanding
obligations, taxes and other liabilities, accrued or contingent, of Galaxy II or
any individual series, and which may include shares of beneficial interest or
stock of such trust, partnership, association or corporation; or (c) at any time
sell and convert into money all of the assets of Galaxy II or any individual
series. In connection with (b) and (c) above, after making provision for the
payment of all liabilities, the Board of Trustees will distribute the remaining
proceeds of assets ratably among the holders of the shares of Galaxy II or any
individual series then outstanding. In the event that shares are redeemed in
cash at their net asset value, a shareholder may receive in payment for such
shares, due to changes in the market prices of the Fund's portfolio securities,
an amount that is more or less than the original investment.
INVESTMENT STRATEGIES, POLICIES AND RISKS
Fleet Investment Advisors Inc. ("Fleet"), the Funds' investment
adviser, will use its best efforts to achieve each Fund's investment objective,
although such achievement cannot be assured. The investment objective of a Fund
as described in its Prospectus may not be changed without the approval of the
holders of a majority of its outstanding shares (as defined under
"Miscellaneous"). Except as noted below under "Investment Limitations," a Fund's
investment policies may be changed without shareholder approval. An investor
should not consider an investment in the Funds to be a complete investment
program. The following investment strategies, policies and risks supplement
those set forth in the Funds' Prospectuses.
THE INDEXING APPROACH - LARGE COMPANY INDEX, SMALL COMPANY INDEX, UTILITY
INDEX, AND U.S. TREASURY INDEX FUNDS
The Index 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 Index 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. In using sophisticated
computer models to select securities, an Index Fund will only purchase a
security that is included in its respective index at the time of such purchase.
An Index 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 Standard & Poor's 500 Composite Stock
Price Index ("S&P 500"), the Standard & Poor's SmallCap 600 Stock Price Index
("S&P SmallCap Index"), the Standard & Poor's Utilities
-3-
<PAGE>
Composite Stock Price Index ("S&P Utilities Index"), and the U.S. Treasury
component ("U.S. Treasury Index") of the Salomon Smith Barney Broad
Investment-Grade Bond Index is available free of charge by calling Galaxy II at
1-877-BUY-GALAXY (1-877-289-4252), or by writing to Galaxy II, c/o First Data
Investor Services Group, Inc., 4400 Computer Drive, P.O. Box 5108, Westborough,
Massachusetts 01581.
While there can be no guarantee that each Index Fund's investment
results will precisely match the results of its corresponding index, Fleet
believes that, before deduction of operating expenses, there will be a very high
correlation between the returns generated by the Index Funds and their
respective indexes. Each Index 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 an Index 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 Index 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 ("S&P") or Salomon
Smith Barney calculate their respective indexes, and the timing of purchases and
redemptions. Fleet monitors the correlation of the performance of the Index
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.
Fleet 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, an Index 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 Index Fund. The costs
and other expenses incurred in securities transactions, apart from any
difference between the investment results of an Index Fund and that of its
respective index, may cause the return of an Index Fund to be lower than the
return of its respective index. The Index 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.
LARGE COMPANY INDEX FUND
The S&P 500 is composed of 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, 1998, the stocks
in the S&P 500 had an average market capitalization of approximately $19.86
billion and accounted for approximately 77.64% of the total market value of
all U.S. common stocks. Fleet 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.
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SMALL COMPANY INDEX FUND
The S&P SmallCap 600 Index is comprised of 600 U.S. common stocks with
small market capitalizations. Like the S&P 500, the weighting of stocks in the
S&P SmallCap 600 Index is based on each stock's relative total market
capitalization. As of December 31, 1998, stocks in the S&P SmallCap 600 Index
accounted for about 2.65% of the total market value of all publicly traded U.S.
common stocks. The average capitalization of stocks included in the S&P SmallCap
600 Index as of December 31, 1998 was approximately $565.5 million, although the
capitalization of some companies included in the S&P SmallCap 600 Index is
significantly higher.
When utilized, the portfolio optimization program is expected to
provide an effective method of substantially duplicating the dividend income and
capital gains produced by the S&P SmallCap 600 Index. Since the Fund does not
hold every stock in the S&P SmallCap 600 Index when utilizing portfolio
optimization, it is not expected to track the S&P SmallCap 600 Index with the
same degree of accuracy as when it holds all 600 stocks in the Index, although
the Fund will seek a correlation of at least 0.95, before deduction of operating
expenses.
UTILITY INDEX FUND
The S&P Utilities Index is an index of U.S. common stocks designed to
measure the performance of the utility sector of the S&P 500. The weighting of
stocks in the S&P Utilities Index is based on each stock's relative market
capitalization. As of December 31, 1998, the S&P Utilities Index included 40
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>
Electric........................................... 76.8%
Gas and Water...................................... 23.2%
</TABLE>
The weighting of stocks in the S&P Utilities Index is based on each
stock's relative market capitalization.
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. SalomonSmithBarney updates the roster of securities represented in
the U.S. Treasury Index monthly, 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, 1998:
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U.S. TREASURY
INDEX FUND
Number of Issues.............................................. 29
Total Market Value............................................ $187,071,935
Minimum Maturity.............................................. 1 Year
Maximum Maturity.............................................. 28 Years
Weighted Average Maturity..................................... 9.1 Years
Percent of Market Value with remaining Maturity of:
1-3 years............................................ 24.4%
3-7 years............................................ 34.6%
7-10 years........................................... 10.4%
10-20 years.......................................... 9.9%
Over 20 years........................................ 19.6%
Cash equivalent reserve....................................... 1.1%
The U.S. Treasury Index Fund will not hold all of the issues in its
index because of the costs involved. 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 other types of
securities listed under the heading "Other Investment Policies and Risk
Considerations" (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 Fleet to be in the best interests of the Fund's
shareholders. See "Taxes."
MUNICIPAL BOND FUND
Municipal securities in which the Municipal Bond Fund invests 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.
In no case will the Fund purchase municipal securities rated below BBB
by Standard & Poor's Ratings Group ("S&P") or Baa by Moody's Investors Service,
Inc. ("Moody's") or the equivalent by 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 securities: (i) short-term municipal notes rated MIG-1 or MIG-2 by
Moody's or SP-1+ or SP-1 by S&P; (ii) tax-exempt commercial paper rated P-1 by
Moody's or A-1+ by S&P; (iii) municipal bonds with an effective maturity of
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one year or less which are rated A or higher by Moody's or S&P; (iv) unrated
short-term obligations from an issuer whose outstanding long-term obligations
are rated A or higher by Moody's or S&P; and (v) 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 tax-exempt
funds. Investments in tax-exempt funds 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.
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 during temporary
defensive periods, 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 total 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.
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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.
SPECIAL RISK CONSIDERATIONS
INDEXING RISKS
The Index Funds' ability to match their 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. Galaxy II expects the investments of each
Index 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 deviation of return. Consequently, the Utility Index Fund may have less
price volatility than either the Large Company Index 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 Large Company Index, Small
Company Index, and Utilities Index Funds (the "Stock Funds") to be long-term.
The Stock Funds are not designed to provide you with a means to speculate on
short-term movements in the stock market.
INDUSTRY CONCENTRATION RISK - UTILITY INDEX FUND
The Utility Index 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 in excess of 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.
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INTEREST RATE RISK
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:
2% INCREASE IN 2% DECREASE IN
MATURITY INTEREST RATES INTEREST RATES
1 year............................... -2% +2%
5 years.............................. -8% +9%
10 years............................. -14% +17%
30 years............................. -25% +39%
As of March 31, 1999, the weighted average maturity of the U.S.
Treasury Index Fund was 9.0 years. Thus, the U.S. Treasury Index Fund is subject
to moderate levels of interest rate risk.
As the Municipal Bond 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.
MARKET RISK AND CALL RISK - MUNICIPAL BOND FUND
The Municipal Bond Fund is subject to market risk and call risk.
Market risk is the possibility that market prices of bonds will decline
without regard to fluctuations in prevailing interest rates.
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.
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
Investment methods described in the Prospectuses and this Statement of
Additional Information are among those which one or more of the Funds have the
power to utilize. Some may be employed on a regular basis; others may not be
used at all. Accordingly, reference to any particular method or technique
carries no implication that it will be utilized or, if it is, that it will be
successful.
-9-
<PAGE>
TEMPORARY CASH BALANCES
Each of the Index Funds 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 each Index Fund's net
assets at any time (excluding amounts used as margin and segregated assets with
respect to futures transactions and collateral for securities loans and
repurchase agreements). The Index 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), certificates of
deposit and time deposits of banking institutions having total assets in excess
of $1 billion, and repurchase agreements collateralized by U.S. Government
securities. The Index Funds may also hold these investments in connection with
"U.S. Treasury rolls," which are not subject to the 2% limitation above.
See "U.S. Treasury Rolls-Index Funds" below.
U.S. GOVERNMENT SECURITIES
As noted in the Prospectuses, each 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 U.S. Government 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).
BANK OBLIGATIONS
Certificates of deposit ("CDs") in which each 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. The Index Funds may also invest in time deposits ("TDs"),
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. CDs are short-term negotiable obligations of commercial
banks. TDs are non-negotiable deposits maintained in banking institutions for
specified periods of time at stated interest rates. CDs and TDs in which a Fund
may invest will be U.S. dollar-denominated and may include 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. A Fund will invest
in an obligation of a foreign bank or a foreign branch of a U.S. bank only if
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
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in political, regulatory and economic systems and conditions. The Index Funds
will treat TDs maturing in more than seven calendar days as illiquid securities.
U.S. TREASURY ROLLS - INDEX FUNDS
The Index Funds may hold certain investments in connection with U.S.
Treasury rolls. See "Temporary Cash Balances" above. In U.S. Treasury rolls, an
Index Fund sells outstanding U.S. Treasury securities and buys back on a delayed
settlement basis the same U.S. Treasury securities. During the period prior to
the delayed settlement date, the assets from the sale of the U.S. Treasury
securities are invested in certain cash equivalent instruments. U.S. Treasury
rolls entail the risk that an Index Fund could suffer an opportunity loss if the
counterparty to the roll failed to perform its obligations on the settlement
date, and if market conditions changed adversely. Each Index Fund intends,
however, to enter into U.S. Treasury rolls only with U.S. Government securities
dealers recognized by the Federal Reserve Bank or with member banks of the
Federal Reserve System. For financial reporting and tax purposes, the Index
Funds propose to treat U.S. Treasury rolls as two separate transactions, one
involving the purchase of a security and a separate transaction involving a
sale. The Index Funds do not currently intend to enter into U.S. Treasury rolls
that are accounted for as a financing.
SECURITIES OF OTHER INVESTMENT COMPANIES - MUNICIPAL BOND FUND
The Municipal Bond 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 - STOCK FUNDS AND MUNICIPAL BOND FUND
The Stock Funds may enter into stock index futures contracts that are
traded on a national exchange. The Municipal Bond Fund may enter into interest
rate futures contracts and municipal bond index futures contracts. A Stock Fund
will enter into stock index futures contracts and the Municipal Bond Fund will
enter into interest rate futures contracts and municipal bond 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
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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.
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 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
Municipal Bond 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.
A Stock Fund may not engage in futures activities for other than bona
fide hedging purposes if the aggregate initial margin 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. The Municipal Bond 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.
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 or an eligible
futures commission merchant an amount of cash or liquid securities 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 liquid securities at least equal to the underlying
commodity value of each long position the Fund
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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 Municipal
Bond Fund is subject to the ability of Fleet to predict correctly movements in
the direction of interest notes. Such predictions involve skills and techniques
which may be different from those involved in the management of a municipal bond
portfolio. In addition, although each of the Stock Funds and the Municipal Bond
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 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.
Further, with respect to the Stock Funds, there can be no assurance
that there will be a perfect correlation between movements in the price of
stocks underlying a stock index futures contract and movements in the price of
stocks underlying the stock Fund's target 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.
With respect to the Municipal Bond Fund, 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 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.
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OPTIONS ON FUTURES CONTRACTS - MUNICIPAL BOND FUND
The Municipal Bond 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.
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.
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 Fleet, 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 Municipal Bond Fund's portfolio securities.
LENDING OF PORTFOLIO SECURITIES
The Index Funds may lend portfolio securities to brokers, dealers and
other financial organizations that meet capital and other credit requirements or
other criteria established by Galaxy II's Board of Trustees. These loans, if and
when made, may not exceed 33 1/3% of each Index 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, an Index 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 such Index 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.
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Each Index Fund will adhere to the following conditions whenever its
portfolio securities are loaned: (a) the Index 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 Index Fund must be
able to terminate the loan at any time; (d) the Index 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 Index 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.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreement transactions pending
investment of proceeds or for other temporary purposes. A Fund will enter into
repurchase agreements only with (a) banks that are the issuers of instruments
acceptable for purchase by the Fund or that are on the "approved list"
maintained by Fleet, or (b) primary non-bank dealers of U.S. Government
Securities that are listed on the Federal Reserve Bank of New York's list of
reporting dealers and that meet certain other criteria. 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 (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 (including accrued
interest).
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, Fleet, 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. The Index Funds
will not enter into repurchase agreements that would cause more than 5% of its
net assets to be invested in illiquid securities. The Municipal Bond Fund will
not enter into repurchase agreements that would cause more than 15% 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
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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.
MUNICIPAL SECURITIES - MUNICIPAL BOND FUND
The term "municipal securities" as used in the Prospectus relating to
the Municipal Bond Fund 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 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 Municipal Bond Fund may invest up to 20% of its assets in AMT
bonds.
Municipal securities may be issued to finance lifecare 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 healthcare delivery and competition from
alternative healthcare 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.
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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 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.
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 Fleet 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 Fleet can predict
whether additional legislation adversely affecting the municipal securities
market will be enacted in the future. Galaxy II will monitor legislative
developments and consider whether changes in the investment objective or
policies of the Fund need to be made in response to those developments.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES - MUNICIPAL BOND FUND
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
Municipal Bond Fund consisting of cash or liquid securities
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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
Municipal Bond 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.
RATINGS AS INVESTMENT CRITERIA - MUNICIPAL BOND FUND
The ratings of NRSROs such as S&P or 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 Fleet as initial criteria for the selection of
portfolio securities on behalf of the Municipal Bond Fund, Fleet will also rely
upon its own analysis to evaluate potential investments.
Subsequent to its purchase by the Municipal Bond 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, Fleet 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.
PORTFOLIO TURNOVER
Galaxy II cannot accurately predict the Funds' respective portfolio
turnover rates. 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.
High portfolio turnover rates (100% or greater) can result in corresponding
increases in brokerage commissions and other transaction costs, which must be
ultimately borne by a Fund's shareholders. A 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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INVESTMENT LIMITATIONS
In addition to each Fund's investment objective as stated in its
Prospectus, the following investment limitations are matters of fundamental
policy and may not be changed with respect to any Fund without the affirmative
vote of the holders of a majority of its outstanding shares (as defined under
"Miscellaneous").
Each Fund may not:
1. 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.
2. 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.
3. Make short sales of securities or maintain a short position.
4. 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.
5. Invest in commodities, except that the Stock Funds may invest in stock
index futures and the Municipal Bond Fund may invest in futures contracts and
options, as described herein and in the Prospectuses.
6. Invest in companies for the purpose of exercising control or management.
Each Index Fund may not:
7. Except for the Utility Index Fund, 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.
8. 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
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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.
9. 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 Index 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.
10. 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.
11. 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.
12. Except for the Utility Index Fund, 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.
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.
The Municipal Bond Fund may not:
14. Under normal market conditions, invest less than 80% of its net assets
in municipal securities.
15. 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
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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.
16. 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.
17. 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.
18. Make loans, except that the Fund may purchase or hold debt obligations
and enter into repurchase agreements, as described herein and in the Prospectus.
19. 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.
20. 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.
21. 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.
22. 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 companies within the same industry, are
grouped together as an "industry."
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23. Except with respect to investment limitation numbers 8 and 16, if a
percentage limitation is satisfied at the time of investment, a later increase
in such percentage resulting from a change in the value of a Fund's portfolio
securities generally will not constitute a violation of the limitation. If the
value of a Fund's holdings of illiquid securities at any time exceeds the
percentage limitation applicable at the time of acquisition due to subsequent
fluctuations in value or other reasons, the Board of Trustees will consider what
actions, if any, are appropriate to maintain adequate liquidity. With respect to
borrowings, if a Fund's asset coverage at any time falls below that required by
the 1940 Act, the Fund will reduce the amount of its borrowings in the manner
required by the 1940 Act to the extent necessary to satisfy the asset coverage
requirement.
VALUATION OF PORTFOLIO SECURITIES
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 Galaxy II's Board of Trustees.
Debt securities of U.S. issuers held by the Municipal Bond Fund (other
than U.S. Government Securities and short-term investments), including municipal
securities, are valued by First Data Investor Services Group, Inc. ("Investor
Services Group"), the Fund's sub-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 Fleet under the
general supervision and responsibility of Galaxy II's Board of Trustees.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Fund are sold on a continuous basis by Galaxy's
distributor, First Data Distributors, Inc. ("FD Distributors"), a wholly-owned
subsidiary of First Data Investor Services
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Group, Inc. FD Distributors is a registered broker/dealer with principal
offices located at 4400 Computer Drive, Westborough, Massachusetts 01581. FD
Distributors has agreed to use appropriate efforts to solicit all purchase
orders.
GENERAL
FD Distributors has established several procedures to enable
different types of investors to purchase shares of the Funds. Shares may be
purchased by individuals or corporations who submit a purchase application to
Galaxy II, purchasing directly either for their own accounts or for the
accounts of others. Shares may also be purchased by FIS Securities, Inc.,
Fleet Securities, Inc., Fleet Enterprises, Inc., Fleet Financial Group, Inc.,
its affiliates, their correspondent banks and other qualified banks, savings
and loan associations and broker/dealers on behalf of their customers.
Purchases may take place on any day that the Funds are open for business,
which is any day that the New York Stock Exchange is open. 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 FD Distributors on
a Business Day in accordance with FD Distributors' procedures.
Galaxy II has authorized certain brokers to accept purchase, exchange
and redemption orders on behalf of Galaxy II with respect to shares of the
Funds. Such brokers are authorized to designate other intermediaries to accept
purchase, exchange and redemption orders on behalf of Galaxy II. Galaxy II will
be deemed to have received a purchase, exchange or redemption order when such an
authorized broker or designated intermediary accepts the order. Orders for the
purchase, exchange or redemption of shares of the Funds accepted by any such
authorized broker or designated intermediary will be effected at the Funds'
respective net asset values per share next determined after acceptance of such
order.
CUSTOMERS OF INSTITUTIONS
Shares purchased by institutions on behalf of their customers will
normally be held of record by the institution and beneficial ownership of shares
will be recorded by the institution and reflected in the account statements
provided to its customers. Galaxy II's transfer agent 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 Galaxy II's transfer agent, confirmations of share purchases and
redemptions and pertinent account statements will either be sent by Galaxy II's
transfer agent directly to a customer with a copy to the institution, or will be
furnished directly to the customer by the institution. Other procedures for the
purchase of shares established by institutions in connection with the
requirements of their customer accounts may apply. Customers wishing to purchase
shares through their institution should contact such entity directly for
appropriate purchase instructions.
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OTHER PURCHASE INFORMATION
On a Business Day when the New York Stock Exchange (the "Exchange")
closes early due to a partial holiday or otherwise, Galaxy II will advance the
time at which purchase orders must be received in order to be processed on that
Business Day.
REDEMPTION OF FUND SHARES
Redemption orders are effected at the net asset value per share next
determined after receipt of the order by FD Distributors. On a Business Day when
the Exchange closes early due to a partial holiday or otherwise, Galaxy II will
advance the time at which redemption orders must be received in order to be
processed on that Business Day. Galaxy II may require any information reasonably
necessary to ensure that a redemption has been duly authorized. Galaxy II
reserves the right to transmit redemption proceeds within seven days after
receiving the redemption order if, in its judgment, an earlier payment could
adversely affect a Fund.
If the Board of Trustees determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, Galaxy II
may make payment wholly or partly in securities or other property. Such
redemptions will only be made in "readily marketable" securities. In such an
event, a shareholder would incur transaction costs in selling the securities or
other property. However, Galaxy II has filed an election with the Securities and
Exchange Commission ("SEC") to pay in cash all redemptions requested by a
shareholder of record limited in amount during any 90-day period to the lesser
of $250,000 or 1% of the net assets of a Fund at the beginning of such period.
Such commitment cannot be revoked without the prior approval of the SEC.
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 utilize is restricted, or an emergency, as
defined by the rules and regulations of the SEC exists making disposal of a
Fund's investments or determination of its net asset value not reasonably
practicable; (b) the NYSE is closed (other than customary weekend and holiday
closings); or (c) the SEC by order has permitted such suspension.
INVESTOR PROGRAMS
The following information supplements the description in the applicable
Prospectus as to the various investment programs available to holders of Shares
of the Funds.
EXCHANGE PRIVILEGE
Investors 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 Galaxy II or otherwise advised by Fleet or its
affiliates in which the investor maintains an 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 by exchange in another Fund
offered by Galaxy II is
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$2,500, unless at the time of the exchange the investor elects, with respect to
the Fund into which the exchange is being made, to participate in the Automatic
Investment Program described below, in which event there is no minimum initial
investment requirement, or in the College Investment Program described below, in
which event the minimum initial investment is generally $100.
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 Galaxy II or otherwise advised by Fleet or its
affiliates. The redemption will be made at the per share net asset value next
determined after the exchange request is received. The shares of the fund or
portfolio to be acquired will be purchased at the per share net asset value next
determined after acceptance of the exchange request plus any applicable sales
charge.
Investors may find the exchange privilege useful if their investment
objectives or market outlook should change after they invest in any of the
Funds. For further information regarding Galaxy II's exchange privilege,
investors should call 1-877-BUY-GALAXY (1-877-289-4252). Customers of
institutions should call their institution for such information. Investors
exercising the exchange privilege into other portfolios should request and
review these portfolios' prospectus(es) prior to making an exchange. Telephone
1-877-BUY-GALAXY (1-877-289-4252) for a prospectus and/or to make an exchange.
In order to prevent abuse of this privilege to the disadvantage of
other shareholders, Galaxy II reserves the right to terminate the exchange
privilege of any shareholder who requests more than three exchanges a year.
Galaxy II will determine whether to do so based on a consideration of both the
number of exchanges that any particular shareholder or group of shareholders has
requested and the time period over which their exchange requests have been made,
together with the level of expense to Galaxy II which will result from effecting
additional exchange requests. The exchange privilege may be modified or
terminated at any time. At least 60 days' notice of any material modification or
termination will be given to shareholders except where notice is not required
under the regulations of the SEC.
For federal income tax purposes, an exchange of shares is a taxable
event and, accordingly, a capital gain or loss may be realized by an investor.
Before making an exchange request, an investor should consult a tax or other
financial adviser to determine the tax consequences.
RETIREMENT PLANS
Shares of the Funds (except for the Municipal Bond Fund) are available
for purchase in connection with the following tax-deferred prototype retirement
plans:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAs") (including traditional, Roth
and Education IRAs and "rollovers" from existing retirement plans), a
retirement-savings vehicle for qualifying individuals. The minimum initial
investment for an IRA account is $500 (including a spousal account).
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SIMPLIFIED EMPLOYEE PENSION PLANS ("SEPs"), a form of retirement plan
for sole proprietors, partnerships and corporations. The minimum initial
investment for a SEP account is $500.
MULTI-EMPLOYEE RETIREMENT PLANS ("MERPs"), a retirement vehicle
established by employers for their employees which is qualified under Section
401(k) and 403(b) of the Code. The minimum initial investment for a MERP is
$500.
KEOGH PLAN, a retirement vehicle for self-employed individuals. The
minimum initial investment for a Keogh Plan is $500.
Investors purchasing shares of a Fund pursuant to a retirement plan are
not subject to the minimum investment provisions described in the applicable
Prospectus. Detailed information concerning eligibility and other matters
related to these plans and the form of application is available from FD
Distributors (call 1-877-BUY-GALAXY (1-877-289-4252)) with respect to IRAs, SEPs
and Keogh Plans and from Fleet Brokerage Securities, Inc. (call 1-800-221-8210)
with respect to MERPs.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits an investor to purchase Fund
shares each month or each quarter. Provided an investor's financial institution
allows automatic withdrawals, Fund shares are purchased by transferring funds
from the 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 on a monthly or quarterly basis on any Business
Day designated by the investor. If the designated day follows a weekend or
holiday, the purchase will be made on the Business Day closest to the designated
day. Only an account maintained at a domestic financial institution which is an
Automated Clearing House ("ACH") member may be so designated.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan permits an investor to automatically
redeem Fund shares on a monthly, quarterly, semi-annual or annual basis on any
Business Day designated by the investor, if the account has a starting value of
at least $10,000. If the designated day falls on a weekend or holiday, the
redemption will be made on the Business Day closest to the designated day.
Proceeds of the redemption will be sent to the shareholder's address of record
or financial institution within three Business Days of the redemption. If
redemptions exceed purchases and dividends, the number of shares in the account
will be reduced. Investors may terminate the Systematic Withdrawal Plan at any
time upon written notice to Investor Services Group (but not less than five days
before a payment date). There is no charge for this service.
-26-
<PAGE>
PAYROLL DEDUCTION PROGRAM
To be eligible for the Payroll Deduction Program, the payroll
department of an investor's employer must have the capability to forward
transactions directly through the ACH, or indirectly through a third party
payroll processing company that has access to the ACH. An investor must complete
and submit a Galaxy II Payroll Deduction Application to his or her employer's
payroll department, which will arrange for the specified amount to be debited
from the investor's paycheck each pay period. Shares of the applicable Fund(s)
will be purchased within three days after the debit occurred. If the designated
day falls on a weekend or non-Business Day, the purchase will be made on the
Business Day closest to the designated day. An investor should allow between two
to four weeks for the Payroll Deduction Program to be established after
submitting an application to the employer's payroll department.
COLLEGE INVESTMENT PROGRAM
Galaxy II reserves the right to redeem accounts participating in the
College Program involuntarily, upon 60 days' written notice, if the account's
net asset value falls below the applicable minimum initial investment as a
result of redemptions. Investors participating in the College Investment Program
will receive consolidated monthly statements of their accounts. Detailed
information concerning College Investment Program accounts and applications may
be obtained from FD Distributors (call 1-877-BUY-GALAXY (1-877-289-4252)).
DIRECT DEPOSIT PROGRAM
Death or legal incapacity will terminate an investor's participation in
the Direct Deposit Program. An investor may elect at any time to terminate his
or her participation by notifying in writing the Social Security Administration.
Further, Galaxy II may terminate an investor's participation upon 30 days'
notice to the investor.
TAXES
Each Fund qualified during its last taxable year and intends to
continue to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended, (the "Code"). The Municipal Bond Fund
intends to invest all, or substantially all, of its assets in debt obligations
the interest on which is exempt for federal income tax purposes, so that the
Fund itself generally will be relieved of federal income and excise taxes. Each
Index Fund intends to distribute its income to shareholders each year, so that
each Index Fund itself generally will be relieved of federal income and excise
taxes. If a Fund were to fail to qualify as a regulated investment company: (1)
the Fund would be taxed on its taxable income at regular corporate rates without
any deduction for distributions to shareholders; and (2) shareholders would be
taxed as if they received ordinary dividends, although corporate shareholders
could be eligible for the dividends received deduction. For a Fund to pay
tax-exempt dividends for any taxable year, at least 50% of the aggregate value
of the Fund's assets at the close of each quarter of the Fund's taxable year
must consist of exempt-interest obligations.
-27-
<PAGE>
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
The Funds will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or gross sale proceeds paid
to any shareholder who (i) has failed to provide a correct tax identification
number, (ii) is subject to withholding due to prior failure to properly include
on his or her return payments of taxable interest or dividends, or (iii) has
failed to certify to the Funds that he or she is not subject to back up
withholding when required to do so or that he or she is an "exempt recipient."
Dividends declared in October, November or December of any year which
are payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year if such dividends are actually paid during January of the following
year.
Shares of the Municipal Bond Fund would not be suitable for tax-exempt
institutions or for retirement plans qualified under Section 401 of the Code,
H.R. 10 plans and individual retirement accounts because such plans and accounts
are generally tax-exempt and, therefore, the shareholder would not gain any
additional benefit from the Fund's dividends being tax-exempt. In addition, the
Fund may not be an appropriate investment for entities which are "substantial
users" of facilities financed by "private activity bonds" or "related persons"
thereof. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who (i) regularly uses a part of such facilities in
his or her trade or business and whose gross revenues derived with respect to
the facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, (ii) occupies more than 5% of
the usable area of such facilities or (iii) are persons for whom such facilities
or a part thereof were specifically constructed, reconstructed or acquired.
"Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
STATE AND LOCAL
Exempt-interest dividends and other distributions paid by the Municipal
Bond Fund may be taxable to shareholders under state or local law as dividend
income, even though all or a portion of such distributions may be derived from
interest on tax-exempt obligations which, if realized directly, would be exempt
from such income taxes.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
The tax principles applicable to certain financial instruments and
futures contracts and options that may be acquired by a Fund are complex and, in
some cases, uncertain. Such
-28-
<PAGE>
investments may cause a Fund to recognize taxable income prior to the receipt of
cash, thereby requiring the Fund to liquidate other positions, or to borrow
money, so as to make sufficient distributions to shareholders to avoid
corporate-level tax. Moreover, some or all of the taxable income recognized may
be ordinary income or short-term capital gain, so that the distributions may be
taxable to shareholders as ordinary income.
TRUSTEES AND OFFICERS
The business and affairs of the Funds are managed under the direction
of Galaxy II's Board of Trustees in accordance with the laws of the Commonwealth
of Massachusetts and Galaxy II's Declaration of Trust. The Trustees and
executive officers of Galaxy II, their addresses, ages, principal occupations
during the past five years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Positions with Pncipal Occupation(s) During
Name and Address and Age Galaxy Fund II Past 5 Years and Other Affiliations
- ------------------------ -------------- -----------------------------------
<S> <C> <C>
Dwight E. Vicks, Jr. Chairman and President & Director, Vicks Lithograph &
Vicks Lithograph & Printing Corporation Trustee Printing Corporation (book manufacturing and
Commercial Drive commercial printing); Director, Utica First
P.O. Box 270 Insurance Company; Trustee, Savings Bank of
Yorkville, NY 13495 Utica; Director, Monitor Life Insurance
Age 66 Company; Director, Commercial Travelers
Mutual Insurance Company; Trustee, The
Galaxy Fund; Trustee, The Galaxy VIP Fund.
John T. O'Neill* President, Executive Vice President and Chief Financial
Hasbro, Inc. Treasurer and Officer, Hasbro, Inc. (toy and game
1011 Newport Avenue Trustee manufacturer); Trustee, The Galaxy Fund;
Pawtucket, RI 02862 Trustee, The Galaxy VIP Fund.
Age 54
Louis DeThomasis Trustee President, Saint Mary's College of
Saint Mary's College of Minnesota Minnesota; Director, Bright Day Travel,
Winona, MN 55987 Inc.; Trustee, Religious Communities Trust;
Age 58 Trustee, The Galaxy Fund; Trustee, The
Galaxy VIP Fund.
-29-
<PAGE>
<CAPTION>
Positions with Pncipal Occupation(s) During
Name and Address and Age Galaxy Fund II Past 5 Years and Other Affiliations
- ------------------------ -------------- -----------------------------------
<S> <C> <C>
Donald B. Miller Trustee Chairman, Horizon Media, Inc. (broadcast
10725 Quail Covey Road services); Director/Trustee, Lexington
Boynton Beach, FL 33436 Funds; Chairman of the Board, Executive
Age 73 Committee, Compton International, Inc.
(advertising agency); Trustee, Keuka
College; Trustee, The Galaxy Fund; Trustee,
The Galaxy VIP Fund.
James M. Seed Trustee Chairman and President, The Astra Projects,
The Astra Ventures, Inc. Incorporated (land development); President,
One Citizens Plaza The Astra Ventures, Incorporated (previously
Providence, RI 02903 Buffinton Box Company - manufacturer of
Age 58 cardboard boxes); Commissioner, Rhode Island
Investment Commission; Trustee, The Galaxy
Fund; Trustee, The Galaxy VIP Fund.
Bradford S. Wellman* Trustee Private Investor; Vice President and
2468 Ohio Street Director, Acadia Management Company
Bangor, ME 04401 (investment services); Director, Essex
Age 67 County Gas Company, until January 1994;
Director, Maine Mutual Fire Insurance Co.;
Member, Maine Finance Authority; Trustee,
The Galaxy Fund; Trustee, The Galaxy VIP
Fund.
W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle &
Philadelphia National Bank Building Reath LLP, Philadelphia, Pennsylvania.
1345 Chestnut Street
Philadelphia, PA 19107
Age 56
-30-
<PAGE>
<CAPTION>
Positions with Pncipal Occupation(s) During
Name and Address and Age Galaxy Fund II Past 5 Years and Other Affiliations
- ------------------------ -------------- -----------------------------------
<S> <C> <C>
Jylanne Dunne Vice President Vice President, First Data Investor Services
First Data Investor Services Group, Inc. and Assistant Group, Inc., 1990 to present.
4400 Computer Drive Treasurer
Westborough, MA 01581-5108
Age 40
William Greilich Vice President Vice President, First Data Investor Services
First Data Investor Services Group, Inc., 1991-96; Vice President and
Group, Inc. Division Manager, First Data Investor
4400 Computer Drive Services Group, Inc., 1996-present.
Westborough, MA 01581-5108
Age 45
</TABLE>
* May be deemed to be an "interested person" within the definition set
forth in Section 2(a)(19) of the 1940 Act.
Effective May 28, 1999, each Trustee receives an annual aggregate
fee of $45,000 for his services as a Trustee of Galaxy II, The Galaxy Fund
("Galaxy") and The Galaxy VIP Fund ("Galaxy VIP") (collectively, the
"Trusts"), plus an additional $3,250 for each in-person Galaxy Board meeting
attended and $1,500 for each in-person Galaxy VIP or Galaxy II Board meeting
attended not held concurrently with an in-person Galaxy Board meeting, and is
reimbursed for expenses incurred in attending all meetings. Each Trustee also
receives $750 for each telephone Board meeting in which the Trustee
participates, $1,000 for each in-person Board committee meeting attended and
$500 for each telephone Board committee meeting in which the Trustee
participates. The Chairman of the Boards of the Trusts is entitled to an
additional annual aggregate fee in the amount of $4,000, and the President
and Treasurer of the Trusts is entitled to an additional annual aggregate fee
of $2,500, for their services in these respective capacities. The foregoing
Trustees' and officers' fees are allocated among the portfolios of the Trusts
based on their relative net assets. Prior to May 28, 1999, each Trustee was
entitled to receive an annual aggregate fee of $40,000 for his services as a
Trustee of the Trusts plus an additional $2,250 for each in-person Galaxy
Board meeting attended, with all other meeting fees being the same as those
currently in effect.
Beginning March 1, 1996, each Trustee became entitled to participate in
The Galaxy Fund, The Galaxy VIP Fund and Galaxy Fund II Deferred Compensation
Plans (the "Original Plans"). Effective January 1, 1997, the Original Plans were
merged into The Galaxy Fund/The Galaxy VIP Fund/Galaxy Fund II Deferred
Compensation Plan (together with the Original Plans, the "Plan"). Under the
Plan, a Trustee may elect to have his deferred fees treated as if they had been
invested by the Trusts in the shares of one or more portfolios in the Trusts, or
other types of investment options, and the amount paid to the Trustees under the
Plan will be determined based upon the performance of such investments. Deferral
of Trustees' fees will have no effect on a portfolio's assets, liabilities, and
net income per share, and will not obligate the Trusts to retain the services of
any Trustee or obligate a portfolio to any level of compensation to the Trustee.
The Trusts may invest in underlying securities without shareholder approval.
-31-
<PAGE>
No employee of Investor Services Group 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.
As of the date of this Statement of Additional Information, the
Trustees and officers of Galaxy II owned less than 1% of its outstanding shares.
The following chart provides certain information about the Trustee fees
for the fiscal year ended March 31, 1999:
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSA-
RETIREMENT TION FROM
BENEFITS FUND
AGGREGATE ACCRUED COMPLEX*
NAME OF COMPENSATION AS PART OF PAID TO
PERSON/POSITION FROM GALAXY II GALAXY II EXPENSES TRUSTEES
- --------------- -------------- ------------------ --------
<S> <C> <C> <C>
Bradford S. Wellman $ 4,368 None $ 54,250
Trustee
Dwight E. Vicks, Jr. $ 4,824 None $ 59,000
Chairman and Trustee
Donald B. Miller** $ 4,494 None $ 55,000
Trustee
Louis DeThomasis $ 4,184 None $ 54,250
Trustee
John T. O'Neill $ 4,701 None $ 57,500
President, Treasurer
and Trustee
James M. Seed** $ 4,371 None $ 54,250
Trustee
</TABLE>
* The "Fund Complex" consists of Galaxy II, The Galaxy Fund and The
Galaxy VIP Fund, which comprise a total of 43 separate portfolios.
** Deferred compensation (including interest) in the amounts of $4,651 and
$7,071 accrued during Galaxy II's fiscal year ended March 31, 1999 for
Messrs. Miller and Seed, respectively.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of Galaxy II. However, Galaxy II's Declaration of Trust provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of Galaxy II, and that every note, bond, contract, order or other
undertaking made by Galaxy II shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out
-32-
<PAGE>
of Galaxy II's property of any shareholder held personally liable solely by
reason of his or her being or having been a shareholder and not because of
his or her acts or omissions outside such capacity or some other reason.
Thus, the risk of shareholder liability is limited to circumstances in which
Galaxy II itself would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer or
agent of Galaxy II shall be personally liable for or on account of any contract,
debt, claim, damage, judgment or decree arising out of or connected with the
administration or preservation of the Galaxy II estate or the conduct of any
business of Galaxy II; nor shall any trustee be personally liable to any person
for any action or failure to act except by reason of his own bad faith, willful
misfeasance, gross negligence or reckless disregard of his duties as Trustee.
The Declaration of Trust also provides that all persons having any claim against
the Trustees or Galaxy II shall look solely to Galaxy II's property for payment.
With the exceptions stated, the Declaration of Trust provides that a
Trustee is entitled to be indemnified against all liabilities and expenses
reasonably incurred by him in connection with the defense or disposition of any
proceeding in which he may be involved or with which he may be threatened by
reason of his being or having been a Trustee, and that the Board of Trustees
shall indemnify representatives and employees of Galaxy II to the same extent to
which they themselves are entitled to indemnification.
INVESTMENT ADVISER
Fleet, with principal offices at 75 State Street, Boston, Massachusetts
02109, serves as investment adviser to the Funds. In its advisory agreement,
Fleet has agreed to provide investment advisory services to the Funds as
described in the Prospectuses. Fleet has also agreed to pay all expenses
incurred by it in connection with its activities under the advisory agreement
other than the cost of securities (including brokerage commissions) purchased
for the Funds. See "Expenses" below.
For the services provided and expenses assumed with respect to the
Funds, Fleet is entitled to receive advisory fees, computed daily and paid
monthly, at an annual rate of 0.10% of the average daily net assets of each
Index Fund and 0.25% of the average daily net assets of the Municipal Bond
Fund. During the last three fiscal years, Galaxy II paid advisory fees to
Fleet as set forth below:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MARCH 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Large Company Index.......$691,409 $523,353 $324,858
Small Company Index.......$320,032 $365,498 $311,685
Utility Index.............$ 56,600 $ 48,970 $ 51,447
U.S. Treasury Index.......$158,811 $113,719 $116,944
Municipal Bond............$ 46,712 $ 48,421 $ 51,631
</TABLE>
-33-
<PAGE>
The advisory agreement provides that Fleet shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Funds in
connection with the performance of its duties under the advisory agreement,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Fleet in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder. Unless sooner terminated, the advisory agreement will
continue in effect with respect to a particular Fund from year to year as long
as such continuance is approved at least annually (i) by the vote of a majority
of Trustees who are not parties to such advisory agreement or interested persons
(as defined in the 1940 Act) of any such party, cast in person at a meeting
called for the purpose of voting on such approval; and (ii) by Galaxy II's Board
of Trustees, or by a vote of a majority of the outstanding shares of such Fund.
The term "majority of the outstanding shares of such Fund" means, with respect
to approval of an advisory agreement, the vote of the lesser of (i) 67% or more
of the shares of the Fund present at a meeting, if the holders of more than 50%
of the outstanding shares of the Fund are present or represented by proxy, or
(ii) more than 50% of the outstanding shares of the Fund. The advisory agreement
may be terminated by Galaxy II or by Fleet on sixty days' written notice, and
will terminate immediately in the event of its assignment.
Fleet is authorized to allocate purchase and sale orders for portfolio
securities to certain financial institutions, including, to the extent permitted
by law or order of the SEC, financial institutions that are affiliated with
Fleet or that have sold shares of the Funds, if Fleet believes that the quality
of the transaction and the commission are comparable to what they would be with
other qualified brokerage firms.
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. Fleet, the
administrator, the custodian and institutions which agree 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 a Fund's net asset value per share or
result in financial loss to any shareholder.
-34-
<PAGE>
ADMINISTRATOR AND SUB-ADMINISTRATOR
Pursuant to its administration agreement with Galaxy II (the
"Administration Agreement"), Fleet National Bank ("FNB") generally assists in
certain aspects of the administration and operation of the Funds. FNB 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, FNB 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, FNB may delegate to
another organization the performance of some or all of these services, in which
case FNB 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. FNB has entered into a Sub-Administration Agreement
with Investor Services Group, pursuant to which Investor Services Group has
agreed to provide Galaxy II with the services which Galaxy II is entitled to
receive under the Administration Agreement with FNB. For the services provided
to the Funds, FNB is entitled to receive administration fees at the annual rates
of 0.30% of the average daily net assets of each of the Index Funds and 0.35% of
the average daily net assets of the Municipal Bond Fund.
During the last three fiscal years, FNB received administration fees as
set forth below:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MARCH 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Large Company Index..........$2,074,227 $1,570,060 $974,572
Small Company Index..........$ 960,095 $1,096,493 $935,055
Utility Index................$ 169,800 $ 146,908 $154,341
U.S. Treasury Index..........$ 476,434 $ 341,158 $350,831
Municipal Bond...............$ 65,396 $ 67,789 $ 72,282
</TABLE>
During the last three fiscal years, Investor Services Group
reimbursed expenses as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MARCH 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Large Company Index..........$14,963 $11,230 $13,688
Small Company Index..........$ 6,910 $ 8,223 $13,134
Utility Index................$ 1,224 $ 1,106 $ 2,168
U.S. Treasury Index..........$ 3,441 $ 2,568 $ 4,928
Municipal Bond...............$ 404 $ 428 $ 870
</TABLE>
FNB 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
-35-
<PAGE>
commissions; fees and expenses of Trustees who are not officers, directors or
employees of Fleet, FNB, FD Distributors or any of their affiliates; taxes;
interest; sub-account fees payable with respect to shares of the Funds held by
defined contribution plans; and any extraordinary non-recurring expenses,
including litigation to which Galaxy II may be a party.
The Administration Agreement provides that, absent willful misfeasance,
bad faith, gross negligence or reckless disregard of duty, FNB shall not be
liable to Galaxy II for any error of judgment or mistake of law or for any loss
sustained by Galaxy II. The Administration Agreement is 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 FNB on sixty days' written notice.
The Administration Agreement 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 agreement.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank ("Chase Manhattan"), located at One Chase
Manhattan Plaza, New York, New York 10081, a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as the custodian of the Funds pursuant to a
Mutual Fund Custody Agreement (the "Custody Agreement").
Under the Custody Agreement, Chase Manhattan has agreed to: (i)
maintain a separate account or accounts in the name of each Fund; (ii) hold and
disburse portfolio securities on account of each Fund; (iii) collect and make
disbursements of money on behalf of each Fund; (iv) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
securities; and (v) respond to correspondence from security brokers and others
relating to its duties.
Investor Services Group, a wholly-owned subsidiary of First Data
Corporation, serves as the Funds' transfer and dividend disbursing agent
pursuant to a Transfer Agency and Services Agreement (the "Transfer Agency
Agreement"). Communications to Investor Services Group should be directed to
Investor Services Group at P.O. Box 5108, 4400 Computer Drive, Westborough,
Massachusetts 01581. Under the Transfer Agency Agreement, Investor Services
Group has agreed to: (i) issue and redeem shares of each Fund; (ii) transmit all
communications by each Fund to its shareholders of record, including reports to
shareholders, dividend and distribution notices and proxy materials for meetings
of shareholders; (iii) respond to correspondence by security brokers and others
relating to its duties; and (iv) maintain shareholder accounts.
-36-
<PAGE>
Galaxy II and Investor Services Group may enter into agreements with
one or more entities, including FNB and other affiliates of Fleet, pursuant to
which such entities agree to perform certain sub-account and administrative
functions ("Sub-Account Services") on a per account basis with respect to shares
of the Index Funds held by defined contribution plans, including maintaining
records reflecting separately with respect to each plan participant's
sub-account all purchases and redemptions of Index Fund shares and the dollar
value of shares in each sub-account; crediting to each participant's sub-account
all dividends and distributions with respect to that sub-account; and
transmitting to each participant a periodic statement regarding the sub-account
as well as any proxy materials, reports and other material Index Fund
communications. Such entities are compensated by Investor Services Group for the
Sub-Account Services and in connection therewith the transfer agency fees
payable by the Index Funds to Investor Services Group have been increased by an
amount equal to these fees. In substance, therefore, the shareholders of the
Index Funds indirectly bear these fees.
Fleet Bank and Columbia Trust Company, affiliates of Fleet, are paid
fees for Sub-Account Services performed with respect to shares of the Index
Funds held by defined contribution plans. Pursuant to agreements with Galaxy
II and Investor Services Group, Fleet Bank and Columbia Trust Company are
entitled to payment of $21.00 per year for each defined contribution plan
participant sub-account. For the fiscal year ended March 31, 1999, Fleet Bank
and Columbia Trust Company received $491,449 and $800, respectively, for
Sub-Account Services.
PORTFOLIO TRANSACTIONS
Fleet will select specific portfolio investments and effect
transactions for the Funds. Fleet seeks to obtain the best net price and the
most favorable execution of orders. Fleet may, in its discretion, effect
transactions in portfolio securities with dealers who provide research advice or
other services to the Funds or Fleet. Fleet is authorized to pay a broker or
dealer who provides such brokerage and research services a commission for
executing a portfolio transaction for any Fund which is in excess of the amount
of commission another broker or dealer would have charged for effecting that
transaction if Fleet determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or Fleet's overall responsibilities to the particular Fund and to
Galaxy II. 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 Fleet are
not reduced by reason of receiving such brokerage and research services. The
Board of Trustees will periodically review the commissions paid by the Funds to
determine if the commissions paid over representative periods of time were
reasonable in relation to the benefits inuring to the Funds. During the fiscal
year ended March 31, 1999, the total amount of soft dollar commissions paid by
the Large Company Index Fund, Small Company Index Fund and Utility Index Fund
were $58,512.14, $133,940.12 and $10,757.08, respectively.
-37-
<PAGE>
Municipal securities and U.S. Government Securities are generally
purchased from underwriters or dealers, although certain newly issued municipal
securities and U.S. Government Securities may be purchased directly from the
issuing agency or instrumentality. No brokerage commissions are typically paid
on purchases and sales of municipal securities or U.S. Government Securities.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. There is generally no
stated commission in the case of securities traded in U.S. over-the-counter
markets, but the prices of those securities include undisclosed commissions or
mark-ups. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down. U.S.
Government Securities are generally purchased from underwriters or dealers,
although certain newly issued U.S. Government Securities may be purchased
directly from the U.S. Treasury or from the issuing agency or instrumentality.
No brokerage commissions are typically paid on purchases and sales of U.S.
Government Securities.
During the fiscal years ended March 31, 1997, March 31, 1998 and March
31, 1999, the Funds paid the following commissions to broker-dealers for
execution of portfolio transactions:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MARCH 31:
FUND 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Large Company Index.......$ 77,910 $ 84,998 $118,621
Small Company Index.......$169,035 $652,975 $105,820
Utility Index.............$ 12,125 $106,486 $296,342
U.S. Treasury Index.......$ 0 $ 0 $ 0
Municipal Bond............$ 0 $ 0 $ 0
</TABLE>
The differences in the level of brokerage commissions paid by certain
of the Index Funds during the last three fiscal years are attributable to two
events. First, during the fiscal year ended March 31, 1997, Fleet adopted a
more active trading approach, which involves negotiating price, timing and
commissions, and reduced its reliance on electronic trading networks. A more
active trading approach tends to improve the overall quality of execution,
although it results in higher commission rates. Second, during the fiscal
year ended March 31, 1998, the shareholders of the Small Company Index Fund
approved a change in the benchmark index of the Fund. The change increased
the brokerage commissions paid by the Fund during that year, as Fleet
adjusted the composition of the Fund to match its new index.
Investment decisions for each Fund are made independently from those
for the other Funds and portfolios of Galaxy II and for any other investment
companies and accounts advised or managed by Fleet. When a purchase or sale of
the same security is made at substantially the same time on behalf of a Fund,
another portfolio of Galaxy II, and/or another investment company or account,
the transaction will be averaged as to price, and available investments
allocated as to amount, in a manner which Fleet believes to be equitable to the
Fund and such other portfolio, investment company or account. In some instances,
this investment procedure may adversely affect the price paid or received by a
Fund or the size of the position obtained or sold by such Fund. To the extent
permitted by law, Fleet may aggregate the securities to be sold or purchased for
a Fund with those to be sold or purchased for Galaxy II's other Funds and
portfolios, or other investment companies or accounts in order to obtain best
execution.
-38-
<PAGE>
DISTRIBUTOR
FD Distributors, a wholly-owned subsidiary of Investor Services Group,
serves as Galaxy II's distributor. On March 31, 1995, Investor Services Group
acquired all of the issued and outstanding stock of FD Distributors. Prior to
that time, FD Distributors was a wholly-owned subsidiary of 440 Financial Group
of Worcester, Inc. and an indirect subsidiary of State Mutual Life Assurance
Company of America.
Unless otherwise terminated, the Distribution Agreement between Galaxy
II and FD Distributors remains in effect until May 31 of each year, and will
continue from year to year upon annual approval by Galaxy II's Board of
Trustees, or by the vote of a majority of the outstanding shares of Galaxy II
and by the vote of a majority of the Board of Trustees of Galaxy II who are not
parties to the Agreement or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such approval. The Agreement
will terminate in the event of its assignment, as defined in the 1940 Act. FD
Distributors does not receive any compensation from Galaxy II or any of the
Funds for its services under the Distribution Agreement.
AUDITORS
Ernst & Young LLP, independent auditors, with offices at 200
Clarendon Street, Boston, Massachusetts 02116-5072, serve as auditors to
Galaxy II. The financial highlights for the Funds included in the
Prospectuses and the financial statements for the Funds contained in Galaxy
II's Annual Report to Shareholders and incorporated by reference into this
Statement of Additional Information for the fiscal year ended March 31, 1999
have been audited by Ernst & Young LLP. The financial highlights for the
Funds included in the Prospectuses for the fiscal years ended March 31, 1998,
1997, 1996 and 1995 have been audited by PricewaterhouseCoopers LLP, Galaxy
II's former auditors.
-39-
<PAGE>
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III, Secretary
of Galaxy II, is a partner), 1345 Chestnut Street, Suite 1100, Philadelphia,
Pennsylvania 19107, are counsel to Galaxy II and will pass upon certain legal
matters on its behalf.
PERFORMANCE AND YIELD INFORMATION
From time to time, a Fund may quote its performance, as based upon its
total return, or its tax-equivalent yield in the case of the U.S. Treasury Index
Fund and Municipal Bond Fund, in advertisements or in reports and other
communications to shareholders.
The average annual total returns for shares of the Funds for the
one-year and five-year periods and since the inception of the Funds are set
forth below:
<TABLE>
<CAPTION>
SINCE
FUND ONE-YEAR FIVE-YEAR INCEPTION
- ---- -------- --------- ---------
<S> <C> <C> <C>
Large Company Index........... 28.06% 23.60% 20.66%(1)
Small Company Index........... (1.75)% 13.25% 17.03%(1)
Utility Index................. 14.77% 13.83% 13.78%(2)
U.S. Treasury Index........... 9.76% 6.87% 8.24%(3)
Municipal Bond................ 5.46% 4.86% 5.72%(4)
</TABLE>
(1) The Large Company and Small Company Index Funds commenced operations
on October 1, 1990.
(2) The Utility Index Fund commenced operations on January 5, 1993.
(3) The U.S. Treasury Index Fund commenced operations on June 4, 1991.
(4) The Municipal Bond Fund commenced operations on April 15, 1993.
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 Prospectuses are computed according to a formula prescribed by the SEC.
The formula can be expressed as follows:
n
P(1+T) =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
portion thereof), assuming reinvestment of all
dividends and distributions.
Yield is calculated by annualizing the net investment income generated
by the U.S. Treasury Index Fund and Municipal Bond Fund over a specified
thirty-day period according to the following formula:
-40-
<PAGE>
6
YIELD = 2[(a-b+1) -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 U.S. Treasury Index Fund's yield for the 30-day period ended March
31, 1999 was 4.65%. The Municipal Bond Fund's yield for the 30-day period ended
March 31, 1999 was 3.54%.
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 Municipal Bond Fund's tax-equivalent yield for the 30-day period
ended March 31, 1999 was 4.92% for a federal marginal income tax ("FMIT")
bracket of 28%, 5.13% for a FMIT bracket of 31%, 5.53% for a FMIT bracket of 36%
and 5.86% for a FMIT bracket of 39.6%.
PERFORMANCE REPORTING
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 Dow Jones Industrial
Average, the BIG Index, the S&P 500, the S&P SmallCap 600 Index, the S&P
Utilities Index, the U.S. Treasury Index or similar independent services that
monitor the performance of mutual funds or other industry publications.
Galaxy II may compare the performance of the Large Company Index Fund
and the Small Company Index Fund to certain U.S. diversified equity mutual
funds, as calculated by Morningstar, Inc. or another industry service and with
that of the S&P 500 and the S&P SmallCap 600 Index, respectively. The
performance of the Utility Index Fund may be compared to certain utility funds,
as calculated by Morningstar, Inc. or another industry service and with that of
the S&P Utilities Index. In addition, Galaxy II may compare the performance of
the U.S. Treasury Index 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.
-41-
<PAGE>
COMPARING TAX-EXEMPT AND TAXABLE YIELDS - MUNICIPAL BOND FUND
Before choosing a tax-exempt investment such as the Municipal Bond
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-exempt 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-Equivalent Yield
--------------------------------
100% - Your Marginal Tax Bracket
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:
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, although 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>
FEDERAL MARGINAL TAX-EQUIVALENT RATES BASED ON TAX-EXEMPT YIELD OF:
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%
39.6% 3.3% 5.0% 6.6% 8.3% 9.9% 11.6% 13.2%
</TABLE>
MISCELLANEOUS
As used in this Statement of Additional Information, "assets belonging
to" a particular Fund or series of a Fund means the consideration received by
Galaxy II upon the issuance of shares in that particular Fund or series of the
Fund, together with all income, earnings, profits, and proceeds derived from the
investment thereof, including any proceeds from the sale of such
-42-
<PAGE>
investments, any funds or payments derived from any reinvestment of such
proceeds and a portion of any general assets of Galaxy II not belonging to a
particular series or Fund. In determining the net asset value of a particular
series of a Fund, assets belonging to the particular series of the Fund are
charged with the direct liabilities in respect of that series and with a share
of the general liabilities of Galaxy II, which are allocated in proportion to
the relative asset values of the respective series and Funds at the time of
allocation. Subject to the provisions of Galaxy II's Declaration of Trust,
determinations by the Board of Trustees as to the direct and allocable
liabilities, and the allocable portion of any general assets with respect to a
particular series or Fund, are conclusive.
Shareholders will receive unaudited semi-annual reports describing the
Funds' investment operations and annual financial statements audited by
independent certified public accountants.
A "vote of the holders of a majority of the outstanding shares" of a
particular Fund or a particular series of shares in a Fund means, with respect
to the approval of an investment advisory agreement, a distribution plan or a
change in an investment objective or fundamental investment policy, the
affirmative vote of the holders of the lesser of (a) more than 50% of the
outstanding shares of such Fund or such series of shares, or (b) 67% or more of
the shares of such Fund or such series of shares present at a meeting if more
than 50% of the outstanding shares of such Fund or such series of shares are
represented at the meeting in person or by proxy.
As of May 17, 1999, the name, address and percentage ownership of
the persons who owned of record or were known by Galaxy II to own
beneficially 5% or more of the outstanding shares of any portfolio of Galaxy
II were as follows: Large Company Index Fund - Gales & Co., Fleet Investment
Services, Mutual Funds Unit - NY/RO/TO4A, 159 East Main Street, Rochester, NY
14638 (of record, 35.38%); Gales & Co., Fleet Savings Plus, c/o Norstar Trust
Company, Gales & Co., 159 East Main Street, Rochester, NY 14638
(beneficially, 14.63%); U.S. Treasury Index Fund - Gales & Co., Fleet
Investment Services, Mutual Funds Unit - NY/RO/TO4A, 159 East Main Street,
Rochester, NY 14638 (of record, 11.52%). No person owned of record or was
known by Galaxy II to own beneficially 5% or more of the outstanding shares
of the Small Company Index Fund, the Utility Index Fund or the Municipal Bond
Fund.
FINANCIAL STATEMENTS
Galaxy II's Annual Report to Shareholders with respect to the Funds
for the fiscal year ended March 31, 1999 has been filed with the SEC. The
financial statements in such Annual Report (the "Financial Statements") are
incorporated by reference into this Statement of Additional Information. The
Financial Statements and Financial Highlights included in the Annual Report
for the Funds for the fiscal year ended March 31, 1999 have been audited by
Galaxy II's independent auditors, Ernst & Young LLP, whose report thereon
also appears in such Annual Report and is incorporated herein by reference.
The Financial Statements in such Annual Report have been incorporated herein
by reference in reliance upon the report given upon the authority of such
firm as experts in accounting and auditing. The Financial Statements and
Financial Highlights included in the Annual Report for the Funds for prior
periods were audited by PricewaterhouseCoopers LLP, Galaxy II's former
independent auditors. The report of PricewaterhouseCoopers LLP dated May 8,
1998 on the Funds' financial statements included in the Funds' Annual Report
to Shareholders for the fiscal year ended March 31, 1998 is also incorporated
herein by reference.
-43-
<PAGE>
APPENDIX A
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 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.
A-1
<PAGE>
"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") 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.
A-2
<PAGE>
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
Municipal Bond 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"
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.
A-3
<PAGE>
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. "SG"
denotes speculative quality and lack of margins of protection.
A-4
