Rule 497(e) Statement of
File Nos. 33-58004 and 811-7474 Additional Information
October 2, 1995,
as amended
January 2, 1996,
as amended
February 1, 1996,
as amended
June 28, 1996
1784 FUNDS
1784 GROWTH AND INCOME FUND
1784 ASSET ALLOCATION FUND
1784 INTERNATIONAL EQUITY FUND
1784 GROWTH FUND
1784 U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
1784 SHORT-TERM INCOME FUND
1784 INCOME FUND
1784 TAX-EXEMPT MEDIUM-TERM INCOME FUND
1784 MASSACHUSETTS TAX-EXEMPT INCOME FUND
1784 RHODE ISLAND TAX-EXEMPT INCOME FUND
1784 CONNECTICUT TAX-EXEMPT INCOME FUND
1784 FLORIDA TAX-EXEMPT INCOME FUND
1784 TAX-FREE MONEY MARKET FUND
1784 U.S. TREASURY MONEY MARKET FUND
1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
This Statement of Additional Information is not a prospectus and is authorized
for distribution to prospective investors only if preceded or accompanied by a
current prospectus for one or more of the 1784 Growth and Income Fund, 1784
Asset Allocation Fund, 1784 International Equity Fund, 1784 Growth Fund, 1784
U.S. Government Medium-Term Income Fund, 1784 Short-Term Income Fund, 1784
Income Fund, 1784 Tax-Exempt Medium-Term Income Fund, 1784 Massachusetts
Tax-Exempt Income Fund, 1784 Rhode Island Tax-Exempt Income Fund, 1784
Connecticut Tax-Exempt Income Fund, 1784 Florida Tax-Exempt Income Fund, 1784
Tax-Free Money Market Fund, 1784 U.S. Treasury Money Market Fund and 1784
Institutional U.S. Treasury Money Market Fund (each, a "Fund" and collectively,
the "Funds"), each of which is a separate portfolio of 1784 Funds (the "Trust").
This Statement of Additional Information is intended to provide additional
information regarding the activities and operations of the Funds and should be
read in conjunction with the Trust's prospectuses dated October 2, 1995 or, for
Class C and Class D shares of the 1784 U.S. Treasury Money Market Fund, January
2, 1996 or, for the 1784 Growth Fund and the 1784 Florida Tax-Exempt Income
Fund, February 1, 1996, by which shares of the Funds are offered. Prospectuses
may be obtained without charge through the Distributor, SEI Financial Services
Company, 680 E. Swedesford Road, Wayne, PA 19087.
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TABLE OF CONTENTS
Page
The Trust 3
Investment Objectives and Policies 3
Description of Permitted Investments 4
Investment Limitations 38
The Advisers 41
The Administrator 43
The Distributor 43
Trustees and Officers of the Trust 44
Computation of Yield 46
Calculation of Total Return 48
Purchase and Redemption of Shares 48
Systematic Withdrawal Plan 48
Determination of Net Asset Value 49
Taxes 51
Fund Transactions; Trading Practices and Brokerage 55
Servicemarks 57
Description of Shares 57
Shareholder Liability 57
Limitation of Trustees' Liability 58
Financial Information 58
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THE TRUST
1784 FUNDS (the "Trust") is an open-end management investment company
established under Massachusetts law as a Massachusetts business trust under a
Declaration of Trust dated February 5, 1993. The Declaration of Trust permits
the Trust to offer separate portfolios ("funds") of shares of beneficial
interest ("shares") and different classes of shares of each fund. Each share of
each fund represents an equal proportionate interest in that fund. See
"Description of Shares." This Statement of Additional Information relates to the
following funds of the Trust:
1784 Growth and Income Fund, 1784 Asset Allocation Fund, 1784 International
Equity Fund and 1784 Growth Fund (each, an "Equity Fund" and collectively, the
"Equity Funds"),
1784 U.S. Government Medium-Term Income Fund, 1784 Short-Term Income Fund
and 1784 Income Fund (each, a "Fixed Income Fund" and collectively, the "Fixed
Income Funds"),
1784 Tax-Exempt Medium-Term Income Fund, 1784 Massachusetts Tax-Exempt Income
Fund, 1784 Rhode Island Tax-Exempt Income Fund, 1784 Connecticut Tax-Exempt
Income Fund and 1784 Florida Tax-Exempt Income Fund (each, together with the
1784 Tax-Free Money Market Fund, a "Tax-Exempt Fund" and collectively, the
"Tax-Exempt Funds"),
1784 Tax-Free Money Market Fund, 1784 U.S. Treasury Money Market Fund and 1784
Institutional U.S. Treasury Money Market Fund (each, a "Money Market Fund" and
collectively, the "Money Market Funds") (each of the Equity Funds, the Fixed
Income Funds, the Tax-Exempt Funds and the Money Market Funds, a "Fund" and
collectively, the "Funds").
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each of the 1784 GROWTH AND INCOME FUND and the 1784
INTERNATIONAL EQUITY FUND is long-term growth of capital with a secondary
objective of income. The investment objective of the 1784 ASSET ALLOCATION FUND
is to achieve a favorable total rate of return through current income and
capital appreciation consistent with preservation of capital, derived from
investing in fixed income and equity securities. The investment objective of the
1784 GROWTH FUND is capital appreciation. Dividend income, if any, is incidental
to the objective of the 1784 Growth Fund.
The investment objective of the 1784 U.S. GOVERNMENT MEDIUM-TERM INCOME FUND is
current income consistent with preservation of capital. The investment objective
of each of the 1784 SHORT-TERM INCOME FUND and the 1784 INCOME FUND is to
maximize current income. Preservation of capital is a secondary objective of
each of the Income and Short-Term Income Funds.
The investment objective of the 1784 TAX-EXEMPT MEDIUM-TERM INCOME FUND is
current income, exempt from federal income taxes, consistent with preservation
of capital. The investment objective of the 1784 MASSACHUSETTS TAX-EXEMPT INCOME
FUND is current income, exempt from both federal and Massachusetts personal
income taxes, consistent with the preservation of capital. The investment
objective of the 1784 CONNECTICUT TAX-EXEMPT INCOME FUND is current income
exempt from both federal and Connecticut personal income taxes. The investment
objective of the 1784 RHODE ISLAND TAX-EXEMPT INCOME FUND is current income
exempt from federal income tax, from Rhode Island personal income tax and from
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the Rhode Island business corporation tax. The investment objective of the 1784
FLORIDA TAX-EXEMPT INCOME FUND is to provide its shareholders with current
income exempt from federal income taxes through Fund shares which are exempt
from Florida intangible personal property taxes. Preservation of capital is a
secondary objective of each of the Connecticut, Rhode Island and Florida Funds.
As stated in the Trust's Prospectus for the Tax-Exempt Funds, each Tax-Exempt
Fund has a fundamental policy of investing at least 80% of its net assets under
normal market conditions in obligations issued by or on behalf of the states,
territories and possessions of the United States and the District of Columbia
and their respective political subdivisions, agencies and instrumentalities, the
interest on which, in the opinion of counsel for the issuer, is exempt from
federal income tax and not included as a preference item under the alternative
minimum tax (collectively, "Municipal Securities"). A Tax-Exempt Fund may comply
with this policy (or with any other policy of such Fund as to investing in
securities the interest on which is exempt from taxation in a particular state
or which are not subject to intangible personal property taxes of any state) by
investing in a partnership, trust, regulated investment company or other entity
which invests in such Municipal Securities, in which case the applicable Fund's
investment in such entity shall be deemed an investment in the underlying
Municipal Securities in the same proportion as such entity's investment in such
Municipal Securities bears to its net assets.
The investment objective of each of the 1784 U.S. TREASURY MONEY MARKET FUND and
the 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND is to preserve principal
value and maintain a high degree of liquidity while providing current income.
The investment objective of the 1784 TAX-FREE MONEY MARKET FUND is to preserve
principal value and maintain a high degree of liquidity while providing current
income exempt from federal income taxes.
There can be no assurance that any Fund will achieve its investment objective.
Each Fund's investment objective may be changed only with the consent of holders
of a majority of that Fund's outstanding shares. The investment policies of each
of the Funds are described in the prospectus by which shares of that Fund are
offered. Information in this Statement of Additional Information supplements and
is not intended to limit the information contained in the applicable prospectus
concerning the investment policies and permitted investments and investment
techniques of the Funds.
DESCRIPTION OF PERMITTED INVESTMENTS
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Fund (other than the 1784 Institutional U.S. Treasury Money Market Fund and
the 1784 U.S. Treasury Money Market Fund, which intend to invest only in U.S.
Treasury and other U.S. Government securities, repurchase agreements involving
such securities, and, in the case of the 1784 Institutional U.S. Treasury Money
Market Fund, to the extent permitted by the Investment Company Act of 1940 (the
"1940 Act"), securities of registered investment companies which invest solely
in the foregoing types of securities) may invest in variable amount master
demand notes which may or may not be backed by bank letters of credit. These
notes permit the investment of fluctuating amounts at varying market rates of
interest pursuant to direct arrangements between the Trust, as lender, on behalf
of a Fund and the borrower. Such notes provide that the interest rate on the
amount outstanding varies on a daily, weekly or monthly basis depending upon a
stated short-term interest rate index. Both the lender and the borrower have the
right to reduce the amount of outstanding indebtedness at any time. There is no
secondary market for the notes. It is not generally contemplated that such
instruments will be traded.
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GNMA SECURITIES
Each Fund may invest in securities issued by the Government National Mortgage
Association ("GNMA"), a wholly-owned U.S. Government corporation which
guarantees the timely payment of principal and interest. The market value and
interest yield of these instruments can vary due to market interest rate
fluctuations and early prepayments of underlying mortgages. These securities
represent ownership in a pool of federally insured mortgage loans. GNMA
certificates consist of underlying mortgages with a maximum maturity of 30
years. However, due to scheduled and unscheduled principal payments, GNMA
certificates have a shorter average maturity and, therefore, less principal
volatility than a comparable 30-year bond. Since prepayment rates vary widely,
it is not possible to predict accurately the average maturity of a particular
GNMA pool. The scheduled monthly interest and principal payments relating to
mortgages in the pool will be "passed through" to investors. GNMA securities
differ from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. As a result, there
will be monthly scheduled payments of principal and interest. In addition, there
may be unscheduled principal payments representing prepayments on the underlying
mortgages. Although GNMA certificates may offer yields higher than those
available from other types of U.S. Government securities, GNMA certificates may
be less effective than other types of securities as a means of "locking in"
attractive long-term rates because of the prepayment feature. For instance, when
interest rates decline, the value of a GNMA certificate likely will not rise as
much as comparable debt securities due to the prepayment feature. In addition,
these prepayments can cause the price of a GNMA certificate originally purchased
at a premium to decline in price to its par value, which may result in a loss.
MORTGAGE-BACKED SECURITIES
Each of the Equity Funds, the Fixed Income Funds and the Tax-Exempt Funds may
invest in mortgage-backed securities which are rated in one of the three top
categories by Standard and Poor's Ratings Group ("S&P"), Moody's Investors
Service, Inc. ("Moody's") or Fitch Investors Service, Inc. ("Fitch"), or, if not
rated by S&P, Moody's or Fitch, of comparable quality as determined by the
Adviser or Advisers (as defined below) to the Fund. Two principal types of
mortgage-backed securities are collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits ("REMICs"). CMOs are securities
collateralized by mortgages, mortgage pass-through certificates, mortgage
pay-through bonds (bonds representing an interest in a pool of mortgages where
the cash flow generated from the mortgage collateral pool is dedicated to bond
repayment), and mortgage-backed bonds (general obligations of the issuers
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of single family detached properties). Many CMOs are issued with
a number of classes or series which have different maturities and are retired in
sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-through certificates to be prepaid prior to
their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-through certificates issued or guaranteed by
U.S. Government agencies or instrumentalities, the CMOs themselves are not
generally guaranteed.
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REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
ASSET-BACKED SECURITIES
In addition to mortgage-backed securities, the Funds (other than the 1784
Institutional U.S. Treasury Money Market Fund and the 1784 U.S. Treasury Money
Market Fund) may invest in asset-backed securities including company
receivables, truck and auto loans, leases, and credit card receivables. These
issues may be traded over-the-counter and typically have a short to intermediate
maturity structure depending on the paydown characteristics of the underlying
financial assets which are passed through to the security holder.
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MORTGAGE "DOLLAR ROLL" TRANSACTIONS
As described in the prospectus by which shares of such Funds are offered, the
1784 Short-Term Income Fund and 1784 Income Fund may enter into mortgage "dollar
roll" transactions pursuant to which a Fund sells mortgage-backed securities for
delivery in the future and simultaneously contracts to repurchase substantially
similar securities on a specified future date. During the roll period, the Fund
foregoes principal and interest paid on the mortgage-backed securities. The Fund
is compensated for the lost interest by the difference between the current sales
price and the lower price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Fund may also be compensated by receipt of a commitment fee.
STRIPS
Each of the Funds may invest in Separately Traded Interest and Principal
Securities ("STRIPS"), which are component parts of U.S. Treasury Securities
traded through the Federal Reserve Book-Entry System. The Adviser or Advisers to
a Fund will purchase only those STRIPS that it determines or they determine are
liquid or, if illiquid, do not violate such Fund's investment policy concerning
investments in illiquid securities. Consistent with Rule 2a-7, Bank of Boston,
as the Adviser to the Money Market Funds, will purchase, for Money Market Funds,
only those STRIPS that have a remaining maturity of 397 days or less. No Money
Market Fund may invest more than 20% of its total assets in STRIPS. While there
is no limitation on the percentage of an Equity Fund's, Fixed Income Fund's or
Tax-Exempt Fund's assets that may be comprised of STRIPS, the Adviser or
Advisers to each Fund will monitor the level of such holdings to avoid the risk
of impairing shareholders' redemption rights.
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements collateralized by
securities in which that Fund may otherwise invest. Repurchase agreements are
agreements by which a Fund obtains a security and simultaneously commits to
return the security to the seller (a primary securities dealer recognized by the
Federal Reserve Bank of New York or a national member bank as defined in Section
3(d)(1) of the Federal Deposit Insurance Act, as amended) at an agreed upon
price (including principal and interest) on an agreed upon date within a number
of days (usually not more than seven) from the date of purchase. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or maturity of the underlying security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price, which obligation is in effect secured by the value of the underlying
security.
Repurchase agreements are considered to be loans by a Fund for purposes of its
investment limitations. The repurchase agreements entered into by the Funds will
provide that the underlying security at all times shall have a value at least
equal to 100% of the resale price stated in the agreement; the Adviser or
Advisers to each Fund will monitor compliance with this requirement. Under all
repurchase agreements entered into by any Fund, the Custodian or its agent must
take possession of the underlying collateral. However, if the seller under a
repurchase agreement defaults, the Fund investing in that repurchase agreement
could realize a loss on the sale of the underlying security to the extent that
the proceeds of the sale (including accrued interest) are less than the resale
price provided in the repurchase agreement (including interest). In addition,
even though the Bankruptcy Code provides protection for most repurchase
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agreements, if the seller should be involved in bankruptcy or insolvency
proceedings, a Fund may face delays and incur costs in selling the underlying
security or may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor of the seller and is required to return the underlying
security to the seller's estate as a voidable preference.
MONEY MARKET FUNDS
A money market fund is an investment company that limits its investments to high
quality money market instruments with a weighted average maturity of 90 days or
less. Certain Funds (as described in the prospectuses by which shares of such
Funds are offered) may invest in money market funds, but not more than 5% of its
assets in any one money market fund or more than 10% of its assets in other
investment companies, including money market funds. When a Fund invests in a
money market fund, a shareholder bears not only his or her proportionate share
of the Fund's expenses, but also indirectly his or her share of the expenses of
the money market fund, including management fees.
TAX-EXEMPT SECURITIES
MUNICIPAL NOTES AND BONDS
The 1784 Short-Term Income Fund, 1784 Income Fund and each of the Tax-Exempt
Funds may invest in municipal notes, which include but are not limited to
general obligation notes, tax anticipation notes (notes sold to finance working
capital needs of the issuer in anticipation of receiving taxes on a future
date), revenue anticipation notes (notes sold to provide needed cash prior to
receipt of expected non-tax revenues from a specific source), bond anticipation
notes, certificates of indebtedness, demand notes and construction loan notes. A
Fund's investment in any of the notes described above will be limited to those
obligations which are rated (i) MIG-2 or VMIG-2 or better at the time of
investment by Moody's, (ii) SP-2 or better at the time of investment by S&P, or
(iii) F-2 or better at the time of investment by Fitch, or which, if not rated
by Moody's, S&P or Fitch, are of at least comparable quality, as determined by
the Adviser to the Fund. Municipal bonds, in which these same Funds may invest,
must be rated BBB or better by S&P or Fitch or Baa or better by Moody's at the
time of investment or, if not rated by Moody's, S&P or Fitch, must be determined
by the Adviser to the Funds to have essentially the same characteristics and
quality as bonds having the above ratings. Bonds rated BBB by S&P or Fitch or
Baa by Moody's may have speculative characteristics. The Adviser to these Funds
may purchase industrial development and pollution control bonds for these Funds
if the interest paid thereon is exempt from federal income tax. These bonds are
issued by or on behalf of public authorities to raise money to finance various
privately-operated facilities for business and manufacturing, housing, sports,
and pollution control. These bonds may also be used to finance public facilities
such as airports, mass transit systems, ports, and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.
Municipal securities also include participations in municipal leases. These are
undivided interests in a portion of an obligation in the form of a lease or
installment purchase issued by a state or local government to acquire equipment
or facilities. Municipal leases frequently have special risks not normally
associated with general obligation bonds or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
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of debt. The debt-issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although the
obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. In light of these concerns, the Trust has
adopted and follows procedures for determining whether municipal lease
securities purchased by a Fund are liquid and for monitoring the liquidity of
municipal lease securities held in the Fund's portfolio. The procedures require
that a number of factors be used in evaluating the liquidity of a municipal
lease security, including the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers, the willingness of dealers to undertake to make a
market in the security, the nature of the marketplace in which the security
trades, the credit quality of the security, and other factors which the Adviser
to the Fund may deem relevant.
TAX-EXEMPT COMMERCIAL PAPER in which a Tax-Exempt Fund may invest will be
limited to investments in obligations which are rated at least A-2 by S&P,
Prime-2 by Moody's, or F-2 by Fitch, at the time of investment or which are of
comparable quality as determined by the Adviser to the Fund.
Each of the Tax-Exempt Funds may invest in FLOATING RATE NOTES. Investments in
such floating rate instruments will normally involve industrial development or
revenue (now known as "private activity") bonds which provide that the rate of
interest is set as a specific percentage of a designated base rate (such as the
prime rate) at a major commercial bank, and that a Fund can demand payment of
the obligation at all times or at stipulated dates on short notice (not to
exceed 30 days) at par plus accrued interest. For purposes of determining the
maturity of these obligations, the Fund may use the longer of (a) the period
required before the Fund is entitled to prepayment under such obligations or (b)
the period remaining until the next interest rate adjustment date. Such
obligations are frequently secured by letters of credit or other credit support
arrangements provided by banks. The quality of the underlying credit or of the
bank, as the case may be, must in the Fund Adviser's opinion be equivalent to
the long-term bond or commercial paper ratings on securities in which the Fund
may invest. The Adviser to the Fund will monitor the earning power, cash flow
and liquidity ratios of the issuers of floating rate instruments and the ability
of an issuer of a demand instrument to pay principal and interest on demand. The
Adviser to the Fund may also purchase other types of tax-exempt instruments for
these Funds as long as they are of a quality equivalent to the bonds or
commercial paper in which these Funds may invest.
STANDBY COMMITMENTS
Funds investing in municipal securities may acquire such securities subject to a
"standby commitment." The Adviser or, if applicable, each of the Advisers, to
these Funds has the authority to purchase, for these Funds, securities at a
price which would result in a yield to maturity lower than that generally
offered by the seller at the time of purchase when they can simultaneously
acquire the right to sell the securities back to the seller, the issuer, or a
third party (the "writer") at an agreed-upon price at any time during a stated
period or on a certain date. Such a right is generally denoted as a "standby
commitment" or a "put." The purpose of engaging in transactions involving puts
is to maintain flexibility and liquidity to permit the Fund to meet redemptions
and remain as fully invested as possible in municipal securities. The Funds
reserve their right to engage in put transactions. The right to put the
securities depends on the writer's ability to pay for the securities at the time
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the put is exercised. Each Fund would limit its put transactions to institutions
which the Adviser or, if applicable, each Adviser, to such Fund believes present
minimum credit risks. Each Adviser would use its best efforts initially to
determine and to continue to monitor the financial strength of the sellers of
the options by evaluating their financial statements and such other information
as is available in the marketplace. It may, however, be difficult to monitor the
financial strength of the writers because adequate current financial information
may not be available. In the event that any writer is unable to honor a put for
financial reasons, the Fund would be a general creditor (i.e., on a parity with
all other unsecured creditors) of the writer. Furthermore, particular provisions
of the contract between the Fund and the writer may excuse the writer from
repurchasing the securities; for example, a change in the published rating of
the underlying municipal securities or any similar event that has an adverse
effect on the issuer's credit or a provision in the contract that the put will
not be exercised except in certain special cases, for example, to maintain fund
liquidity. The Fund could, however, at any time sell the underlying fund
security in the open market or wait until the fund security matures, at which
time it should realize the full par value of the security.
Municipal securities purchased subject to a put may be sold to third persons at
any time, even though the put is outstanding, but the put itself, unless it is
an integral part of the security as originally issued, may not be marketable or
otherwise assignable. Therefore, the put would have value only to the Fund. Sale
of the securities to third parties or lapse of time with the put unexercised may
terminate the right to put the securities. Prior to the expiration of any put
option, the Fund could seek to negotiate terms for the extension of such an
option. If such a renewal cannot be negotiated on terms satisfactory to the
Fund, the Fund could, of course, sell the security. The maturity of the
underlying security will generally be different from that of the put. There will
be no limit to the percentage of Fund securities that a Fund may purchase
subject to puts but the amount paid directly or indirectly for puts which are
not integral parts of a security as originally issued held in a Fund will not
exceed 1/2 of 1% of the value of the total assets of such Fund calculated
immediately after any such put is acquired.
For the purpose of determining the "maturity" of securities purchased subject to
an option to put, and for the purpose of determining the dollar-weighted average
maturity of a Fund including such securities, "maturity" will be considered to
be the first date on which the Fund has the right to demand payment from the
writer of the put although the final maturity of the security is later than such
date.
OPTIONS
Each of the Equity Funds, the 1784 Short-Term Income Fund and the 1784 Income
Fund may, for hedging purposes and in order to generate additional income, write
call options on a covered basis. Each of the Tax-Exempt Funds and the 1784 U.S.
Government Medium-Term Income Fund, may, for hedging purposes only, write call
options on a covered basis, and will not engage in option writing strategies for
speculative purposes.
A Fund may write covered call options from time to time on its assets as
determined by the Adviser or Advisers to such Fund to be appropriate in seeking
to achieve such Fund's investment objective, provided that the aggregate value
of such options may not exceed 10% of such Fund's net assets as of the time such
Fund enters into such options.
The purchaser of a call option has the right to buy, and the writer (in this
case a Fund) of a call option has the obligation to sell, an underlying security
at a specified exercise price during a specified option period. The advantage to
a Fund of writing covered calls is that the Fund receives a premium for writing
the call, which is additional income. However, if the security rises in value
and the call is exercised, the Fund may not participate fully in the market
appreciation of the security.
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During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction.
A closing purchase transaction is one in which a Fund, when obligated as a
writer of an option, terminates its obligation by purchasing an option of the
same series as the option previously written. A closing purchase transaction
cannot be effected with respect to an option once the Fund writing the option
has received an exercise notice for such option. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security or to enable a Fund to write another call option on the
underlying security with either a different exercise price or different
expiration date or both. The Fund may realize a net gain or loss from a closing
purchase transaction depending upon whether the net amount of the original
premium received on the call option is more or less than the cost of effecting
the closing purchase transaction. Any loss incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
sale of a different call option on the same underlying security. Such a loss may
also be wholly or partially offset by unrealized appreciation in the market
value of the underlying security. Conversely, a gain resulting from a closing
purchase transaction could be offset in whole or in part by a decline in the
market value of the underlying security.
If a call option expires unexercised, a Fund will realize a short-term capital
gain in the amount of the premium on the option, less the commission paid. Such
a gain, however, may be offset by depreciation in the market value of the
underlying security during the option period. If a call option is exercised, the
Fund will realize a gain or loss from the sale of the underlying security equal
to the difference between (a) the cost of the underlying security and (b) the
proceeds of the sale of the security, plus the amount of the premium on the
option, less the commission paid.
The market value of a call option generally reflects the market price of the
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security and the time remaining until the expiration date.
Each Fund will write call options only on a covered basis, which means that the
Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, the
Fund would be required to continue to hold a security which it might otherwise
wish to sell, or deliver a security it would want to hold. Options written by a
Fund will normally have expiration dates between one and nine months from the
date written. The exercise price of a call option may be below, equal to or
above the current market value of the underlying security at the time the option
is written.
A Fund may also purchase put and call options. Put options are purchased to
hedge against a decline in the value of securities held in the Fund's portfolio.
If such a decline occurs, the put options will permit the Fund to sell the
securities underlying such options at the exercise price, or to close out the
options at a profit. The premium paid for a put option plus any transaction
costs will reduce the benefit, if any, realized by the Fund upon exercise of the
option, and, unless the price of the underlying security rises or declines
sufficiently, the option may expire worthless to the Fund. In addition, in the
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event that the price of the security in connection with which an option was
purchased moves in a direction favorable to the Fund, the benefits realized by
the Fund as a result of such favorable movement will be reduced by the amount of
the premium paid for the option and related transaction costs.
OPTIONS ON STOCK INDICES
The Equity Funds may engage in options on stock indices. A stock index assigns
relative values to the common stocks included in the index, and the index
fluctuates with changes in the market values of the underlying common stocks.
The Funds will not engage in transactions in options on stock indices for
speculative purposes but only to protect appreciation attained, to offset
capital losses and to take advantage of the liquidity available in the option
markets. The aggregate premium paid on all options on stock indices will not
exceed 5% of a Fund's total assets.
Options on stock indices are similar to options on stocks but have different
delivery requirements. Stock options provide the right to take or make delivery
of the underlying stock at a specified price. A stock index option gives the
holder the right to receive a cash "exercise settlement amount" equal to (i) the
amount by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than (in the case of a call)
or less than (in the case of a put) the exercise price of the option. The amount
of cash received will be equal to such difference between the closing price of
the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
option premium received, to make delivery of this amount. Gain or loss to a Fund
on transactions in stock index options will depend on price movements in the
stock market generally (or in a particular industry or segment of the market)
rather than price movements of individual securities.
As with stock options, a Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange or it
may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the stock included
in the index. Some stock index options are based on a broad market index such as
the Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower market index such as the Standard & Poor's 100. Indices are also based
on an industry or market segment such as the AMEX Oil and Gas Index or the
Computer and Business Equipment Index. Options on stock indices are currently
traded on the following exchanges, among others: The Chicago Board Options
Exchange, New York Stock Exchange and American Stock Exchange.
A Fund's ability to hedge effectively all or a portion of its securities through
transactions in options on stock indices depends on the degree to which price
movements in the underlying index correlate with price movements in the
securities held by the Fund. Since the Fund will not duplicate all of the
components of an index, the correlation will not be exact. Consequently, the
Fund bears the risk that the prices of the securities being hedged will not move
in the same amount as the hedging instrument. It is also possible that there may
be a negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities which would result in a loss on
both such securities and the hedging instrument.
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Positions in stock index options may be closed out only on an exchange which
provides a secondary market. There can be no assurance that a liquid secondary
market will exist for any particular stock index option. Thus, it may not be
possible to close such an option. The inability to close options positions could
have an adverse impact on a Fund's ability to effectively hedge its securities.
The Fund will enter into an option position only if there appears to the Adviser
or the Advisers of such Fund, at the time of investment, to be a liquid
secondary market for such options.
FUTURES CONTRACTS
Subject to applicable laws, each of the Funds may enter into bond and interest
rate futures contracts subject to applicable laws. The Funds intend to use
futures contracts only for bona fide hedging purposes. Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specified security at a specified future time and at a specified
price. A "sale" of a futures contract entails a contractual obligation to
deliver the underlying securities called for by the contract, and a "purchase"
of a futures contract entails a contractual obligation to acquire such
securities, in each case in accordance with the terms of the contract. Futures
contracts must be executed through a futures commission merchant, or brokerage
firm, which is a member of an appropriate exchange designated as a "contract
market" by the Commodity Futures Trading Commission ("CFTC").
When a Fund purchases or sells a futures contract, the Trust must allocate
assets of that Fund as an initial deposit on the contract. The initial deposit
may be as low as approximately 5% of the value of the contract. The futures
contract is marked to market daily thereafter and the Fund may be required to
pay or entitled to receive additional "variation margin", based on decrease or
increase in the value of the futures contract.
Futures contracts call for the actual delivery or acquisition of securities, or
in the case of futures contracts based on indices, the making or acceptance of a
cash settlement at a specified future time; however, the contractual obligation
is usually fulfilled before the date specified in the contract by closing out
the futures contract position through the purchase or sale, on a commodities
exchange, of an identical futures contract. Positions in futures contracts may
be closed out only if a liquid secondary market for such contract is available,
and there can be no assurance that such a liquid secondary market will exist for
any particular futures contract.
The Funds will engage in transactions in futures contracts for hedging purposes
only. A Fund's ability to hedge effectively through transactions in futures
contracts depends on, among other factors, its Adviser's or Advisers', as
applicable, judgment as to the expected price movements in the securities
underlying the futures contracts. In addition, it is possible in some
circumstances that a Fund would have to sell securities from its portfolio to
meet "variation margin" requirements at a time when it may be disadvantageous to
do so.
OPTIONS ON FUTURES CONTRACTS
The Funds permitted to enter into futures contracts may also, subject to any
applicable laws, purchase and write options on those futures contracts for
hedging purposes only. The holder of a call option on a futures contract has the
right to purchase the futures contract, and the holder of a put option on a
futures contract has the right to sell the futures contract, in either case at a
fixed exercise price up to a stated expiration date or, in the case of certain
options, on a stated date. Options on futures contracts, like futures contracts,
are traded on contract markets.
<PAGE>
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the securities deliverable on exercise of the
futures contract. A Fund will receive an option premium when it writes the call,
and, if the price of the futures contract at expiration of the option is below
the option exercise price, the Fund will retain the full amount of this option
premium, which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. Similarly, the writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the securities deliverable upon exercise of the futures contract. If a
Fund writes an option on a futures contract and that option is exercised, the
Fund may incur a loss, which loss will be reduced by the amount of the option
premium received, less related transaction costs. A Fund's ability to hedge
effectively through transactions in options on futures contracts depends on,
among other factors, the degree of correlation between changes in the value of
securities held by the Fund and changes in the value of its futures positions.
This correlation cannot be expected to be exact, and the Fund bears a risk that
the value of the futures contract being hedged will not move in the same amount,
or even in the same direction, as the hedging instrument. Thus it may be
possible for a Fund to incur a loss on both the hedging instrument and the
futures contract being hedged.
The ability of a Fund to engage in options and futures strategies depends also
upon the availability of a liquid market for such instruments; there can be no
assurance that such a liquid market will exist for such instruments.
FOREIGN SECURITIES
Certain of the Funds, as stated in the prospectus by which shares of such Funds
are offered, may invest in certain obligations or securities of foreign issuers.
The 1784 International Equity Fund intends to invest a substantial portion of
its assets in securities and obligations of foreign issuers. Permissible
investments may consist of obligations of foreign branches of U.S. banks and of
foreign banks, including certificates of deposit and time deposits (including
Eurodollar time deposits).
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, the value of securities denominated in
foreign currencies and of dividends and interest paid with respect to such
securities, will fluctuate based on the relative strength of the U.S. dollar. In
addition, there is generally less publicly available information about foreign
companies, particularly those not subject to the disclosure and reporting
requirements of the U.S. securities laws. Foreign issuers are generally not
bound by uniform accounting, auditing and financial reporting requirements
comparable to those applicable to domestic issuers. Investments in foreign
securities also involve the risk of possible adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation, limitation
on the removal of funds or other assets of a Fund, political or financial
instability or diplomatic and other developments which would affect such
investments. Further, economies of particular countries or areas of the world
may differ favorably or unfavorably from the economy of the U.S.
It is anticipated that in most cases the best available market for foreign
securities would be on exchanges or in over-the-counter markets located outside
the U.S. Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those in the U.S., and securities of some foreign
issuers (particularly those located in developing countries) may be less liquid
and more volatile than securities of comparable U.S. companies. Foreign security
trading practices, including those involving securities settlement where a
<PAGE>
Fund's assets may be released prior to receipt of payment, may expose a Fund to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer. In addition, foreign brokerage commissions are generally higher
than commissions on securities traded in the U.S. and may be non-negotiable. In
general, there is less overall governmental supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the U.S.
The current policy of the 1784 International Equity Fund is not to invest more
than 10% of its assets in investment companies and investment trusts which
primarily hold foreign securities except that the Fund may invest all of its
investable assets in a Qualifying Portfolio (as defined below). Investments in
such entities may entail the risk that the market value of such investments may
be substantially less than their net asset value and that there would be
duplication of investment management and other fees and expenses.
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") and other forms of depositary receipts for
securities of foreign issuers provide an alternative method for a Fund to make
foreign investments. These securities are not denominated in the same currency
as the securities into which they may be converted. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and EDRs and
GDRs, in bearer form, are designed for use in European and global securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. EDRs and GDRs are European
and global receipts evidencing a similar arrangement.
A Fund may invest in foreign securities that impose restrictions on transfer
within the United States or to United States persons. Although securities
subject to such transfer restrictions may be marketable abroad, they may be less
liquid than foreign securities of the same class that are not subject to such
restrictions.
The Equity Funds, the 1784 Income Fund and the 1784 Short-Term Income Fund may
invest in securities issued by entities based in developing countries throughout
the world. All of the risks of investing in securities of foreign issuers
discussed above are heightened for securities of issuers in developing
countries. Such investments may also entail higher custodial fees and sales
commissions than domestic investments.
Foreign issuers of securities or obligations are often subject to accounting
treatment and engage in business practices different from those respecting
domestic issuers of similar securities or obligations. Foreign branches of U.S.
banks and foreign banks may be subject to less stringent reserve requirements
than those applicable to domestic branches of U.S. banks.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Since investments in foreign companies usually involve currencies of foreign
countries, the value of the assets of a Fund with investments in foreign
companies as measured in U.S. dollars may be affected favorably or unfavorably
by changes in foreign currency exchange rates and exchange control regulations.
Although such Fund's assets are valued daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. A Fund may conduct its foreign currency exchange transactions
on a spot basis or for settlement on a future date (i.e., a "forward foreign
currency" contract or "forward" contract). A Fund may convert currency on a spot
basis from time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a fee for
<PAGE>
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The Funds do not currently intend to speculate in
foreign currency exchange rates or forward contracts.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no fees or
commissions are charged at any stage for trades.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of foreign currency
involved in the underlying security transaction, a Fund will be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or sold and the date on which
payment is made or received.
When the Adviser or each of the Advisers to a Fund believes that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract to sell, for a fixed amount
of U.S. dollars, the amount of foreign currency approximating the value of some
or all of the Fund's securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved is not generally possible since the future value of such securities in
foreign currencies changes as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of a short-term hedging strategy is highly
uncertain. A Fund does not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's securities or other assets denominated in the applicable
currency. Under normal circumstances, consideration of the prospect for currency
parities is incorporated in the longer term investment decisions made with
regard to overall diversification strategies. However, each Adviser to such
Funds believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of such Funds will
be served.
A Fund generally does not enter into a forward contract with a term greater than
one year. At the maturity of a forward contract, the Fund either sells the
security and makes delivery of the foreign currency, or it retains the security
and terminates its contractual obligation to deliver the foreign currency by
purchasing an "offsetting" contract with the same currency trader obligating it
to purchase, on the same maturity date, the same amount of the foreign currency.
If a Fund retains the security and engages in an offsetting transaction, the
Fund incurs a gain or loss (as described below) to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline during the period between the
date the Fund enters into a forward contract for the sale of the foreign
currency and the date it enters into an offsetting contract for the purchase of
<PAGE>
foreign currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to sell exceeds the price of the currency it has agreed
to purchase. Should forward prices increase, the Fund will suffer a loss to the
extent that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
It is impossible to forecast with precision the market value of Fund securities
at the expiration of the contract. Accordingly, it may be necessary for the Fund
to purchase additional foreign currency for the Fund on the spot market (and
cause the Fund to bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the security if its
market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
The Funds' dealings in foreign currency contracts are limited to the
transactions described above. Of course, no Fund is required to enter into such
transactions with regard to the Fund's foreign currency-denominated securities
and will not do so unless deemed appropriate by the Adviser or Advisers to such
Fund. It should also be realized that this method of protecting the value of a
Fund's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, they also tend to limit any potential gain
which might result should the value of such currency increase.
WHEN-ISSUED SECURITIES
Each Fund may invest in securities on a when-issued basis, in which case
delivery and payment normally take place beyond conventional settlement time
after the date of commitment to purchase. The Funds will make commitments to
purchase obligations on a when-issued basis only with the intention of actually
acquiring the securities, but may sell them before the settlement date. The
when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case
there could be an unrealized loss at the time of delivery.
While awaiting delivery of securities purchased on a when-issued basis, a Fund
will establish a segregated account consisting of cash, short-term money market
instruments or high quality debt securities (for the 1784 Institutional U.S.
Treasury Money Market Fund and the 1784 U.S. Treasury Money Market Fund, cash
and U.S. Government securities) equal to the amount of the commitments to
purchase securities on such basis. If the value of these assets declines, the
Fund will place additional assets of the type described in the preceding
sentence in the account on a daily basis so that the value of the assets in the
account is equal to the amount of such commitments.
RESTRICTED SECURITIES
Restricted securities are securities that may not be sold to the public without
registration under the Securities Act of 1933 (the "1933 Act") absent an
exemption from registration. Certain of the permitted investments of the Funds
may be restricted securities, and the Adviser or Advisers to a Fund may invest
up to 20% of the total assets of a Fixed Income or Equity Fund in restricted
<PAGE>
securities provided it is determined by such Adviser or Advisers that at the
time of investment such securities are not illiquid (generally, an illiquid
security is one that cannot be disposed of within seven days in the ordinary
course of business at its full value), based on guidelines which are the
responsibility of and are periodically reviewed by the Board of Trustees. Under
these guidelines, the Adviser or Advisers to a Fund will consider the frequency
of trades and quotes for the security, the number of dealers in, and potential
purchasers for, the securities, dealer undertakings to make a market in the
security, and the nature of the security and of the marketplace trades. In
purchasing such restricted securities, the intention of the Adviser or Advisers
to a Fund is to rely upon the exemption from registration provided by Rule 144A
promulgated under the 1933 Act. Restricted securities not determined to be
liquid may be purchased subject to each Fund's limitation on all illiquid
securities (15% of net assets for each Equity, Fixed Income and Tax-Exempt Fund
(other than the 1784 Tax-Exempt Money Market Fund) and 10% for each Money Market
Fund).
SECURITIES LENDING
Each Fund may lend securities pursuant to agreements requiring that the loans be
continuously secured by cash, securities of the U.S. government or its agencies,
or any combination of cash and such securities, as collateral equal to 100% of
the market value at all times of the securities lent. Such loans will not be
made if, as a result, the aggregate amount of all outstanding securities loans
for the Fund exceed one-third of a Fund's total assets. A Fund will continue to
receive interest on the securities lent while simultaneously earning interest on
the investment of the cash collateral in U.S. government securities. However, a
Fund will normally pay lending fees to such broker-dealers and related expenses
from the interest earned on invested collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. However, loans are made only to borrowers deemed by the
Adviser or Advisers to a Fund to be of good standing and when, in the judgment
of the Adviser or Advisers to a Fund, the consideration which can be earned
currently from such securities loans justifies the attendant risk. Any loan may
be terminated by either party upon reasonable notice to the other party. A Fund
may use the Distributor or a broker/dealer affiliate of an Adviser as a broker
in these transactions.
OTHER INVESTMENTS
The Funds (other than the 1784 Institutional U.S. Treasury Money Market Fund and
the 1784 U.S. Treasury Money Market Fund, which intend to invest only in U.S.
Treasury and other U.S. Government securities, repurchase agreements involving
such securities, and, in the case of the 1784 Institutional U.S. Treasury Money
Market Fund, to the extent permitted by the 1940 Act, securities of registered
investment companies which invest solely in the foregoing types of securities)
are not prohibited from investing in obligations of banks which are clients of
SEI Corporation ("SEI"). However, the purchase of shares of the Funds by such
banks or by their customers will not be a consideration in determining which
bank obligations the Funds will purchase.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN MASSACHUSETTS MUNICIPAL
SECURITIES
The following is a summary of certain information contained in official
statements of certain issuers of Massachusetts Municipal Securities published
prior to July, 1995. The summary does not purport to be a complete description
and is current as of the date of the corresponding official statement.
<PAGE>
1993 FISCAL YEAR. The budgeted operating funds of the Commonwealth ended fiscal
1993 with a surplus of revenues and other sources over expenditures and other
uses of $13.1 million and aggregate ending fund balances in the budgeted
operating funds of the Commonwealth of approximately $562.5 million. Budgeted
revenues and other sources for fiscal 1993 totaled approximately $14.710
billion, including tax revenues of $9.930 billion. Total revenues and other
sources increased by approximately 6.9% from fiscal 1992 to fiscal 1993, while
tax revenues increased by 4.7% for the same period. In July 1992, tax revenues
had been estimated to be approximately $9.685 billion for fiscal 1993. This
amount was subsequently revised during fiscal 1993 to $9.940 billion.
Commonwealth budgeted expenditures and other uses in fiscal 1993 totaled
approximately $14.696 billion, which is $1.280 billion or approximately 9.6%
higher than fiscal 1992 expenditures and other uses. Fiscal 1993 budgeted
expenditures were $23 million lower than the initial July 1992 estimates of
fiscal 1993 budgeted expenditures.
As of June 30, 1993, after payment of all Local Aid and retirement of short-term
debt, the Commonwealth showed a year-end cash position of approximately $622.2
million, as compared to a projected position of $485.1 million.
1994 FISCAL YEAR. The budgeted operating funds of the Commonwealth ended fiscal
1994 with a surplus of revenues and other sources over expenditures and other
uses of $26.8 million and aggregate ending fund balances in the budgeted
operating funds of the Commonwealth of approximately $589.3 million. Budgeted
revenues and other sources for fiscal 1994 totalled approximately $l5.550
billion, including tax revenues of $10.607 billion, $87 million below the
Department of Revenue's fiscal 1994 tax revenue estimate of $10.694 billion.
Total revenues and other sources increased by approximately 5.7% from fiscal
1993 to fiscal 1994 while tax revenues increased by 6.8% for the same period.
Commonwealth budgeted expenditures and other uses in fiscal 1994 totalled
$15.523 billion, which is $826.5 million or approximately 5.6% higher than
fiscal 1993 budgeted expenditures and other uses.
As of June 30, 1994, the Commonwealth showed a year-end cash position of
approximately $757 million, as compared to a projected position of $599 million.
In June, 1993, the Legislature adopted and the Governor signed into law
comprehensive education reform legislation. This legislation required an
increase in expenditures for education purposes above fiscal 1993 base spending
of $1.288 billion of approximately $175 million in fiscal 1994. The Executive
Office for Administration and Finance expects the annual increases in
expenditures above the fiscal 1993 base spending of $1.288 billion to be
approximately $396 million in fiscal 1995, $625 million in fiscal 1996 and $868
million in fiscal 1997. Additional annual increases are also expected in later
fiscal years. The fiscal 1995 budget as signed by the Governor includes $396
million in appropriations to satisfy this legislation.
1995 FISCAL YEAR. On July 10, 1994, the Governor signed into law the fiscal 1995
budget, which, together with authorizations contained in the final fiscal 1994
appropriations bill and expected supplemental appropriations relating to welfare
and certain other programs, as described below, currently provides for
approximately $16.482 billion in fiscal 1995 expenditures. The Governor
exercised his authority to veto and reduce individual line items and reduced
total expenditures by approximately $298.2 million and vetoed certain other law
changes contained in the fiscal 1995 budget.
<PAGE>
Included in the approximately $298.2 million of vetoes noted above, the Governor
vetoed approximately $296.9 million in appropriations for the Executive Office
of Human Services and the Department of Public Welfare, representing the
estimate, at that time, of four months of funding for the Commonwealth's public
assistance programs. On February 10, 1995, the Governor signed into law Chapter
5 of the Acts of 1995, which reforms the Commonwealth's program for Aid to
Families with Dependent Children ("AFDC"). The revised program is scheduled to
take effect on July 1, 1995, subject to federal approval of certain waivers. It
reduces AFDC benefits to able-bodied recipients by 2.75% while allowing them to
keep a larger portion of their earned wages, requires approximately 22,000
able-bodied parents with school-aged children to work or perform community
service for 20 hours per week, and requires approximately 16,000 recipients who
have children between the ages of two and six to participate in an education or
training program or perform community service. The plan also establishes a pilot
program for up to 2,000 participants that offers tax credits and wage subsidies
to employers who hire welfare recipients. Parents who find employment will be
provided with extended medical benefits and day care benefits for up to one
year. The plan mandates paternal identification, expands funding for anti-fraud
initiatives, and requires parents on AFDC to immunize their children. Parents
who are disabled, caring for a disabled child, have a child under the age of
two, or are teenagers living at home and attending high school, will continue to
receive cash assistance.
Since most provisions of the new law did not take effect until July 1, 1995, the
Executive Office for Administration and Finance projects that the reforms will
not materially affect fiscal 1995 public assistance spending. The fiscal 1995
expenditure estimate of $16.399 billion includes $247.8 million appropriated in
Chapter 5 to fund the Commonwealth's public assistance programs for the last
four months of fiscal 1995. The new law's impact on fiscal 1996 projected
spending for public assistance programs is currently being evaluated.
Budgeted revenues and other sources to be collected in fiscal 1995 are estimated
by the Executive Office for Administration and Finance to be approximately
$16.311 billion. This amount includes estimated fiscal 1995 tax revenues of
$11.151 billion, which is approximately $544 million higher than fiscal 1994 tax
revenues of $10.607 billion. In December, 1994, the Governor signed into law
legislation modifying the capital gains tax by phasing out the tax for assets
held longer than six years and increasing the no-tax status threshold for
personal income tax purposes. The capital gains tax change is not effective
until January 1, 1996 and, therefore, is not expected to affect fiscal 1995 tax
revenues and to have only a minor effect on fiscal 1996 tax revenues. The no-tax
status change is estimated to reduce fiscal 1995 tax revenues by approximately
$5.5 million and fiscal 1996 tax revenues by $13.3 million.
In recent months, the rate of growth in certain tax revenue categories,
including, in particular, the income tax, has slowed. Fiscal 1994 tax revenues
were approximately $87 million below the Department of Revenue's tax revenue
estimate of $10.694 billion. On April 13, 1995, as required by law, the
Secretary for Administration and Finance revised the fiscal 1995 tax revenue
estimate to $11.151 billion, a reduction of approximately $27.5 million from the
most recent official estimate of $11.179 billion. The reduction in fiscal 1995
revenues is expected to be offset by lower spending resulting from increased
reversions (including lower spending in public assistance programs) and, if
necessary utilization of part of the contingency currently included in the
estimated fiscal 1995 financial statement.
The fiscal 1995 budget is based on numerous spending and revenue estimates, the
achievement of which cannot be assured. The House initially overrode $296.9
million of the Governor's vetoes relating to certain welfare programs contained
in the fiscal 1995 budget as well as certain law changes which may have a
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financial impact on the Commonwealth. However, the Senate failed to override the
Governor's veto by the end of the calendar 1994 legislative session. The $16.399
billion of fiscal 1995 expenditures includes a reserve against certain
contingencies currently in the amount of $83.8 million. On October 7, 1994, the
Governor filed a supplemental appropriation recommendation aggregating
approximately $44.5 million; the Legislature failed to act on this
recommendation before the end of the calendar 1994 legislative session. On
January 25, 1995, the Governor filed fiscal 1995 supplemental appropriation
recommendations aggregating approximately $43.6 million.
On April 24, 1995, the Governor filed a fiscal 1995 supplemental appropriation
bill recommending approximately $16.7 million of expenditures related to
collective bargaining and certain other personnel costs. The legislature has not
yet acted upon this recommendation. On May 10, 1995, the House of
Representatives approved two supplemental appropriation bills for fiscal 1995,
which relate, in part, to prior supplemental appropriation recommendations. One
bill authorized fiscal 1995 expenditures of approximately $65 million, having a
net Commonwealth cost of approximately $27 million after factoring in revenue
reimbursements that would result form certain Medicaid expenditures authorized
by the legislation. The other bill authorizes fiscal 1995 expenditures of
approximately $9.1 million for certain Department of Social Services programs.
On May 17, 1995, the Senate Ways and Means Committee approved two supplemental
appropriation bills for fiscal 1995. One bill authorized fiscal 1995
expenditures of approximately $52.4 million (of which approximately $16.1
million would be continued to fiscal 1996), having a net Commonwealth cost of
approximately $50 million. The full Senate added approximately $59.5 million in
spending authorizations to this amount, having a net Commonwealth cost of
approximately $21.5 million after factoring in federal reimbursements for
certain Medicaid expenditures authorized by the bill. A second supplemental
appropriation bill authorizes approximately $9.2 million for Department of
Social Services programs. Both bills were approved by the Senate on May 25,
1995. Differences between the House and Senate versions of the two bills will be
reconciled by legislative conference committees. The net amounts for both the
House and Senate bills are included in the $83.8 million being reserved for
fiscal 1995 contingencies by the Executive Office for Administration and
Finance.
On November 8, 1994, the voters in the statewide general election approved an
initiative petition, which became law on December 8, 1994, that would slightly
increase the portion of gasoline tax revenue credited to the Highway Fund, one
of the Commonwealth's three major budgetary funds, prohibit the transfer of
money from the Highway Fund to other funds for non-highway purposes and exclude
the Highway Fund balance from the computation of the "consolidated net surplus"
for purposes of State finance laws. The initiative petition also provides that
no more than 15% of gasoline tax revenues may be used for mass transportation
purposes, such as expenditures related to the MBTA. The Executive Office of
Administration and Finance currently does not expect this law to have any
materially adverse impact on the fiscal 1995 budget or on other fiscal matters
generally. This law is not a constitutional amendment and is subject to
amendment or repeal by the Legislature, which may also, notwithstanding the
terms of the initiative petition, appropriate moneys from the Highway Fund in
such amounts and for such purposes as it determines, subject only to a
constitutional restriction that such moneys be used for motor vehicle, highway,
or mass transportation purposes.
CASH FLOW
The most recent cash flow projection prepared by the office of the State
Treasurer in May, 1995 estimates the fiscal 1995 year-end cash position to be
approximately $353 million. This projection is based on the fiscal 1995 budget
as originally signed by the Governor and supplemental appropriations enacted to
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date. The cash flow projection reflects actual results through April, 1995 and
revenue and spending estimates as of May, 1995. The expenditure forecast
anticipates use of the $83.8 million being reserved for contingencies by the
Executive Office for Administration and Finance. The projection forecasts a
year-end transfer of $65.4 million to the Stabilization Fund (the projected $353
million year-end balance does not include balances in the Stabilization Fund).
The projection also anticipates advance payments during fiscal 1995 of $95
million to the Department of Medical Assistance and the Department of
Transitional Assistance for fiscal 1996 activity. On November 22, 1994, the
Commonwealth issued $240 million of general obligation notes to fund payments to
the MBTA for its net cost of service. The notes matured on June 15, 1995 (rather
than later in fiscal 1996 as had been assumed in earlier cash flow projections).
The cash flow projection assumes the issuance of additional notes in June, 1995
to refinance such notes, which is consistent with current plans. (The original
cash flow projection for fiscal 1995 had assumed that such notes would be paid
from available funds and not refinanced.) The cash flow projection assumes that
the Commonwealth will issue no additional long-term general obligation bonds
during fiscal 1995 to finance capital projects beyond the $825 million issued to
date (prior cash flow projections had assumed that $1.05 billion of such bonds
would be issued) and that no short-term operating borrowings will take place
under the commercial paper program during the remainder of fiscal 1995. As of
June 8, 1995, no Commonwealth commercial paper is outstanding.
The May 26, 1995 cash flow projection also contains monthly forecasts through
the end of fiscal 1996 and estimates that the fiscal 1996 year-end cash position
will be $528.1 million. The fiscal 1996 forecast is based upon the Governor's
budget recommendations filed in January, 1995, including a $45 million
contingency reserve, adjusted for the consensus revenue estimate for fiscal 1996
agreed to by the Governor and the legislature in April, 1995. The fiscal 1996
cash flow projection anticipates no need for the Commonwealth to borrow for
operating needs under its commercial paper program if capital bond sales and a
transit note sale occur as scheduled (the projection calls for the issuance of
$1.06 billion of capital bonds and $240 million of transit notes during fiscal
1996).
The Commonwealth's practice is to use available cash for capital expenditures
pending the issuance of long term bonds and, in the event the amount of
long-term debt is reduced or its issuance delayed due to market conditions or
other circumstances, additional amounts of commercial paper may be outstanding
from time to time. The ending balance included in the cash flow forecast and the
estimated ending balance for the Commonwealth's operating budget will differ due
to timing differences and the effect of certain non-budget items. In addition,
events occurring subsequent to the preparation of this cash flow projection may
cause the actual cash flow of the Commonwealth to vary from the projected cash
flow.
1996 FISCAL YEAR. On January 25, 1995, the Governor submitted his fiscal 1996
budget recommendations to the Legislature. The proposal calls for budgeted
expenditures of approximately $16.737 billion. After adjusting for approximately
$147.9 million in higher education revenues and expenditures that the Governor's
budget recommendation proposes moving to an off-budget trust fund for fiscal
1996, as described below, the recommended fiscal 1996 spending level is
approximately $436 million. Proposed budgeted revenues for fiscal 1996 are
approximately $16.246 billion. The Governor's fiscal 1996 budget recommendation
proposes several reductions in personal and business taxes, including an
increase of $500 in the dependent allowance and a $500 increase in the exemption
for blind and elderly taxpayers, corporate tax credits for job training,
revisions to the definitions of research and development tax credits for
companies in the defense-industry, and a phasing out of the sales tax on bulk
purchases of telecommunications services. The Executive Office of Administration
and Finance estimates that these tax law changes would result in reduced tax
revenues of approximately $34.6 million in fiscal 1996.
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Under the Governor's fiscal 1996 budget recommendations, non-tax revenues are
estimated to total approximately $5.021 billion in fiscal 1996. Major changes in
projected non-tax revenues for fiscal 1996 include a decline in motor vehicle
license and registration fees of approximately $42 million, due mainly to
alternate year licensing patterns and the delayed impact of the change in 1991
to a five year driver's license renewal period; a decrease of approximately $17
million in abandoned property revenues, due to a one-time increase in abandoned
property collections in fiscal 1995 resulting from a change in the
Commonwealth's abandoned property laws; and a $40 million increase due to a
proposed initiative to provide incentives to State departments to optimize
non-tax revenues.
The Governor's budget proposal generally maintains current service levels for
most programs but also provides for increased funding to reflect various factors
including inflation, increased medical costs, increased pension costs and higher
debt services expenditures, as well as approximately $228 million recommended to
fully fund the education reform law passed in fiscal 1993. The proposal also
contains recommendations to increase spending in certain priority areas. The
Governor's budget proposal projects savings from reform of the State's welfare
system, higher health insurance contributions from State employees and other
administrative reductions. The recommendation also includes $45 million
allocated for a contingency reserve.
In connection with the fiscal 1996 budget recommendations, the Governor has also
recommended the establishment of an off-budget tuition retention trust fund for
higher education purposes. The revenues in and expenditures from such fund have
previously been counted as Commonwealth budgeted revenues and expenditures.
The Governor's fiscal 1996 budget recommendations will now be taken up by the
House Ways and Means Committee as the first step of legislative consideration of
the fiscal 1996 budget.
STATE TAXES. The major components of State taxes are the income tax, which
accounts for 53.6% of total projected tax revenues in fiscal 1994, the sales and
use tax, which accounts for 21.7%, and the business corporations tax, which
accounts for 7.4%. Other tax and excise sources account for the remaining 17.3%
of total tax revenues.
Income Tax. The Commonwealth assesses personal income taxes at flat rates,
according to classes of income, after specified deductions and exemptions. A
rate of 5.95% is applied to income from employment, professions, trades,
business, partnerships, rents, royalties, taxable pensions and annuities and
interest from Massachusetts banks. A rate of 12% is applied to other interest
(although interest on obligations of the United States and of the Commonwealth
and its political subdivisions is exempt) and dividends; and a rate ranging from
12% on capital gains from the sale of assets held for one year and less to 0% on
capital gains from the sale of certain assets held more than six years is
applied.
Under Chapter 151 of the Acts of 1990 up to 15% of State income tax revenue is
pledged to the payment of debt service on approximately $1.045 billion of
outstanding Fiscal Recovery Bonds issued pursuant to Chapter 151.
Partially as a result of income tax rate increases, State income tax revenues
increased from fiscal 1990 to $5.045 billion (excluding $298.3 million collected
pursuant to the 1989 tax legislation). These figures represent an increase of
approximately 13%. State income tax revenues in fiscal 1992 were $5.337 billion,
<PAGE>
which represents an increase from fiscal 1991 of approximately 5.8%. Income tax
revenues in fiscal 1993 were $5.375 billion, an increase of approximately 0.7%
from fiscal 1992. Income tax revenues for fiscal 1994 were approximately $5.690
billion, an increase of 5.9% from fiscal 1993. Income tax revenues for fiscal
1995 are currently expected to be approximately $6.028 billion, an increase of
5.9% from fiscal 1994. As a result of a slowing rate of growth in certain tax
revenue categories, including, in particular, the income tax, the Secretary of
Administration and Finance reduced the total fiscal 1995 tax revenue estimate by
$75 million in September, 1994. On January 25, 1995, based on tax revenue
collections through December 31, 1994, the Secretary for Administration and
Finance revised the fiscal 1995 tax revenue estimate to $11.179 billion, a
reduction of approximately $55 million from the September 1994 estimate.
Sales and Use Tax. The Commonwealth imposes a 5% sales tax on retail sales of
certain tangible properties (including retail sales of meals) transacted in the
Commonwealth and corresponding 5% use tax on the storage, use or other
consumption of like tangible properties brought into the Commonwealth. However,
food, clothing, prescribed medicine, materials and produce used in food
production, machinery, materials, tools and fuel used in certain industries, and
property subject to other excises (except for cigarettes) are exempt from sales
taxation. The sales and use tax is also applied to sales of electricity, gas and
steam for certain nonresidential use and to nonresidential and most residential
use of telecommunications services.
Annual sales and use tax revenues declined from $1.956 billion in fiscal 1990 to
$1.909 billion in fiscal 1991. Sales and use tax revenues increased to $1.979
billion in fiscal 1992 and to $2.124 billion in fiscal 1993 and to $2.302
billion in fiscal 1994. Sales and use tax are estimated to increase to $2.454
billion in fiscal 1995.
Business Corporations Tax. Business corporations doing business in the
Commonwealth, other than banks, trust companies, insurance companies, railroads,
public utilities and safe deposit companies, are subject to an excise that has a
property measure and an income measure. The value of Massachusetts tangible
property (not taxed locally) or net worth allocated to the Commonwealth is taxed
at $2.60 per $1,000 of value. The net income allocated to Massachusetts, which
is based on gross income for federal taxes, is taxed at 9.5%. The minimum tax is
$456. Both rates and the minimum tax include a 14% surtax. Annual revenues from
the business corporations tax have declined significantly in recent years, from
the high of $887.1 million in fiscal 1989 to $612.2 million in fiscal 1991.
Business corporation tax revenues were $643.8 million in fiscal 1992,
representing an increase of $31.5 million, or 5.1%, from fiscal 1991. For fiscal
1992, the excise tax on commercial and savings banks yielded $60.2 million,
representing an increase of approximately 25.2% over fiscal 1991. Due to the
settlement by the Department of Revenue of a case pending before the Appellate
Tax Board, the Commonwealth paid a taxpayer commercial bank $37.0 million, thus
reducing revenues from the commercial and savings bank excise tax in fiscal 1992
from $97.1 million to $60.2 million. For fiscal 1993, revenues from the business
corporations tax increased to $737.4 million, or approximately 14.5% above
fiscal 1992 and tax revenues from banks increased to $152.9 million or 154.4%
above fiscal 1992. Fiscal 1994 tax revenues from corporations and banks were
approximately $782.3 million and 199.9 million, respectively, or approximately
6.1% and 30.7% above the respective fiscal 1993 amounts. Fiscal 1995 tax
revenues from corporations and banks are estimated to be $851.0 million and
$225.0 million, respectively.
Other Taxes. Other tax revenues of the Commonwealth are currently projected to
total $1.846 billion in fiscal 1995, a decrease of 0.01% over fiscal 1994. Other
<PAGE>
tax revenues are derived by the Commonwealth from motor fuels excise taxes,
cigarette and alcoholic beverage excise taxes, estate and deed excises and other
tax sources. The Commonwealth is authorized to issue special obligation highway
bonds secured by a pledge of all or a portion of the Highway Fund, including
revenues derived from all portion of the motor fuels excise tax. The
Commonwealth issued $103,770,000 of special obligation bonds on June 24, 1992
secured by a pledge of 2 cents of the 21 cent motor fuel excise tax imposes on
gasoline. The portion of the motor fuel excise tax currently pledged to the
special obligation bonds is estimated to be $168.7 million in fiscal 1995. The
Commonwealth expects to issue up to $300 million of additional special
obligation bonds in fiscal 1994 secured by an additional portion of the motor
fuels excise tax. Additional special obligation bonds may also be issued in the
future secured by all or additional portions of the motor fuels excise tax.
On November 3, 1992, legislation was enacted by voter initiative petition which
imposed, as of January 1, 1993, a new excise tax of 1.25 cents per cigarette (25
cents per pack of 20 cigarettes) and 25% of the wholesale price of smokeless
tobacco. Under the legislation, the revenues raised by this excise tax shall be
credited to a new Health Protection Fund and expended, subject to appropriation
by the Legislature, to pay for health programs and education relating to tobacco
use. Total revenues deposited in the Health Protection Fund in fiscal 1993 and
fiscal 1994 were $59.5 million and $116.3 million, respectively, and are
estimated to be $114.3 million in fiscal 1995.
In addition, in January 1993, the Legislature overrode the Governor's veto of a
100% increase in the deeds excise tax. The increased revenues from this excise
tax, estimated by the Executive Office for Administration and Finance to be
approximately $15.25 million for fiscal 1993, will be retained by county
governments and applied to certain county costs. The availability of these
revenues will reduce Commonwealth expenditures for county purposes by an equal
amount.
Estate Tax Revisions. The fiscal 1993 budget included legislation which
gradually phases down the current Massachusetts estate tax until it becomes a
"sponge tax" in 1997. The "sponge tax" is based on the maximum amount of the
credit for the State taxes allowed for federal estate tax purposes. The estate
tax is phased out by means of annual increases in the basic exemption from the
current $200,000 level. The exemption was increased to $300,000 for 1993,
$400,000 for 1994, $500,000 for 1995 and is increased to $600,000 for 1996. In
addition, the legislation includes a full marital deduction starting July 1,
1994. Currently, the marital deduction is limited to 50% of the Massachusetts
adjusted gross estate until June 30, 1995. The static fiscal impact of the phase
out of the estate tax was estimated to be $24.8 million in 1994 and is estimated
to be $72.5 million in fiscal 1995.
FEDERAL AND OTHER NON-TAX REVENUES. Revenues from the federal government are
received through reimbursements for the federal share of federally mandated
programs such as Medicaid and AFDC. The amount of federal reimbursements
received by the Commonwealth is determined by the amounts of State expenditures
for such programs. Federal reimbursements increased approximately 11.4% from
$1.542 billion in fiscal 1989 to $1.718 billion in fiscal 1990. In fiscal 1991,
federal reimbursements increased by 61.7% to $2.777 billion, owing mainly to the
$513.0 million reimbursement of uncompensated care payments. Federal
reimbursements in fiscal 1992 decreased by $383 million to approximately $2.394
billion, reflecting a decrease of $349 million in uncompensated care payments.
In fiscal 1993, federal reimbursements increased to $2.674 billion as a result
<PAGE>
of increased spending for certain entitlement programs. In fiscal 1994, federal
reimbursement increased to $2.915 billion. Federal reimbursements for fiscal
1995 are estimated to increase to $3.035 billion.
Departmental and other non-tax revenues are derived from licenses, registrations
and fees generated through cash transactions and reimbursement and assessments
for services. Annual revenues from these sources increased from $949.1 million
in fiscal 1989 to $1.025 billion in fiscal 1991, representing an annual average
increase of approximately 12.8%, decreased 1.5% to $1.187 billion in fiscal
1992, increased 11.8% in fiscal 1993 to $1.327 billion and decreased 10.5% to
$1.188 billion in fiscal 1994. Annual revenues from these sources are estimated
to increase to $1.250 billion in fiscal 1995. The decrease in 1994 was due to
several factors including: the change in fiscal 1993 to biennial car
registration at the Registry of Motor Vehicles; one-time receipt in fiscal 1993
of abandoned property revenues; and the one-time payment in fiscal 1993 to the
Commonwealth of $80 million from the Massachusetts Water Resources Authority.
These revenue declines were partially offset by an increase in higher education
tuition revenues due primarily to shifting higher education revenues and
expenditures from off-budget to on-budget accounts in fiscal 1994. The expected
increase in fiscal 1995 is due to various factors including primarily: the
biennial car registration mentioned above, which is expected to increase revenue
by approximately $20 million in fiscal 1995; certain abandoned property
initiatives that are expected to result in approximately $15 million of
additional revenues; additional Medicaid recoveries expected to amount to
approximately $24 million and increased child support collections in the amount
of approximately $11 million. The Governor's fiscal 1996 budget recommendation
projects departmental and other non-tax revenues of $1.099 billion, a decrease
of approximately $2 million after adjusting for approximately $147.9 million in
higher education revenue and spending that the recommendation proposes be moved
to an off-budget trust fund.
Interfund transfers and other sources from non-budgeted funds are estimated to
total $897.8 million in fiscal 1995, an increase of 5.1% compared to fiscal
1994. For the budgeted operating funds, interfund transfers include transfers of
profits from the State Lottery and Arts Lottery Funds and reimbursements for the
budgeted costs of the State Lottery Commission, which accounted for $568.6
million, $547.6 million, $558.0 million, $583.0 million in fiscal 1990 through
1994, respectively, and which are expected to account for $705.2 million in
fiscal 1995. The Governor's fiscal 1996 budget recommendation projects fiscal
1996 interfund transfers of approximately $930.4 million, an increase of 3.6% as
compared to fiscal 1995, which amounts include $729.4 million allocable to the
Lottery.
In fiscal 1991, special laws authorized transfers among the General, Highway and
Local Aid Funds to eliminate certain deficit fund balances. Transfers in respect
of such deficits were $234.8 million for fiscal 1991. Legislation included
within the fiscal 1993 budget prohibits, beginning with fiscal 1992, the
transfer of operating funds from the Highway Fund to the General Fund.
LIMITATIONS ON TAX REVENUES. In Massachusetts efforts to limit and reduce levels
of taxation have been under way for several years. Limits were established on
State tax revenues by legislation enacted on October 25, 1986 and by an
initiative petition approved by the voters on November 4, 1986. The two measures
are inconsistent in several respects.
Chapter 62F, which was added to the General Laws by initiative petition in
November 1986, establishes a State tax revenue growth limit for each fiscal year
equal to the average positive rate of growth in total wages and salaries in the
<PAGE>
Commonwealth, as reported by the federal government, during the three calendar
years immediately preceding the end of such fiscal year. Chapter 62F also
requires that allowable State revenues be reduced by the aggregate amount
received by local governmental units from any newly authorized or increased
local option taxes or excises. Any excess in State tax revenue collections for a
given fiscal year over the prescribed limit, as determined by the State Auditor,
is to be applied as a credit against the then current personal income tax
liability of all taxpayers in the Commonwealth in proportion to the personal
income tax liability of all taxpayers in the Commonwealth for the immediately
preceding tax year. Unlike Chapter 29B, as described below, the initiative
petition did not exclude principal and interest payments on Commonwealth debt
obligations from the scope of its tax limit. However, the preamble contained in
Chapter 62F provides that "although not specifically required by anything
contained in this chapter, it is assumed that from allowable State tax revenues
as defined herein the Commonwealth will give priority attention to the funding
of State financial assistance to local governmental units, obligations under the
State governmental pensions systems, and payment of principal and interest on
debt and other obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter 29B to the General
Laws, also established an allowable State revenue growth factor by reference to
total wages and salaries in the Commonwealth. However, rather than utilizing a
three-year average wage and salary growth rate, as used by Chapter 62F, Chapter
29B utilized an allowable State revenue growth factor equal to one-third of the
positive percentage gain in Massachusetts wages and salaries, as reported by the
federal government, during the three calendar years immediately preceding the
end of a given fiscal year. Additionally, unlike Chapter 62F, Chapter 29B allows
for an increase in maximum State tax revenues to fund an increase in local aid
and excludes from its definition of State tax revenues (i) income derived from
local option taxes and excises, and (ii) revenues needed to fund debt service
costs.
Tax revenues in fiscal 1990 through fiscal 1994 were lower than the limit set by
either Chapter 62F or Chapter 29B. The Executive Office for Administration and
Finance currently estimates that State tax revenues in fiscal 1995 and 1996 will
not reach the limit imposed by either of these
statutes.
In January 1992 the Governor announced his intention to seek an amendment to the
State constitution that would require any Commonwealth tax increase to receive
at least a two-thirds majority vote of each branch of the Legislature. No action
has yet been taken on this proposal.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN RHODE ISLAND
MUNICIPAL SECURITIES
The following is a summary of certain information contained in official
statements of certain issuers of Rhode Island Municipal Securities published
prior to July, 1995. The summary does not purport to be a complete description
and is current as of the date of the corresponding official statement.
Rhode Island Municipal Securities may fluctuate in value in response to a
variety of factors, including the economic strength of State and local
governments and the availability of federal funding.
Rhode Island has developed a modern, diversified economy providing employment
for over 470,000 residents in both goods and service industries. In 1993, goods
<PAGE>
producing industries generated $3.7 billion in earnings and accounted for 17% of
Rhode Island's total personal income. Service industries in the same year
generated $10.1 billion in earnings and accounted for 48 percent of the State's
personal income.
Total personal income in Rhode Island increased by 73.2% in nominal terms
between 1984 and 1994. In 1994, the Rhode Island economy generated $22.2 billion
in personal income. Rhode Island's per capita income of $22,251 is ranked 19th
among the 50 states and has grown faster than the national average.
In recent years, Rhode Island's employment mix has shifted with an increasing
proportion of employment in service producing sectors at the expense of goods
producing sectors. Between 1984 and 1994, employment in the goods producing
industries declined by 25.6% (135,000 to 100,500) while employment in service
producing industries grew by 18.5% (281,400 to 333,500).
In 1993, the manufacturing sector contributed $3.0 billion, or 13.9% of Rhode
Island's total personal income. Personal income derived from this sector
increased 28% between 1983 and 1993. Rhode Island is the jewelry capital of the
world, with over 35,000 employed in jewelry manufacturing, distribution and
related services. Hasbro, the world's second largest toy manufacturer, and
G-tech, the world's largest supplier of on-line lottery systems, are
headquartered in Rhode Island. Electronic products manufactured in the State
include connectors, circuit boards, uninterruptable computer power supplies, and
wire and cable assemblies. Metrology equipment, navigation equipment, medical
equipment and supplies, safety goggles, and protective breathing apparatus are
also manufactured in Rhode Island. Rhode Island's skilled crafts people produce
a wide variety of metal and plastic components which are used by manufacturers
throughout the world. Chemical manufacturers located in Rhode Island produce
products such as dyes, biomedical products and aerosol consumer products.
In 1993, the wholesale and retail trade sector contributed $2.0 billion, or 10%,
of Rhode Island's total personal income, and over 14.8% of the portion of
personal income derived from earnings. Employment in trade increased 7.3% from
88,600 in 1984 to 95,100 in 1994.
In 1992, the service sector contributed $4.0 billion, or 18.8% of Rhode Island's
total personal income, and over 28.9% of the portion of personal income derived
from earnings. Employment in Rhode Island's service industries increased 37.8%
from 99,200 in 1984, to 136,700 in 1994. Service is the largest division of the
State's economy with health services, business services and educational services
as the most important groups.
Business services, engineering, accounting and research are the fastest growing
sector of Rhode Island's economy, employing over 29,500 in 1994. Rhode Island
companies have developed extensive system engineering and research facilities to
support the Naval Undersea Warfare Center in Newport. Over 2,600 firms not only
provide business support services for Rhode Island's diversified economy, but
also export these services throughout the United States and the world.
Health services is the largest employment group in Rhode Island. There are 14
general hospitals and two voluntary psychiatric hospitals in Rhode Island. In
addition, there are 110 nursing and personal-care facilities in Rhode Island.
In 1993, the government sector contributed $2.3 billion, or 10.8% of Rhode
Island's total personal income, and over 16.6% of the portion of personal income
<PAGE>
derived from earnings. Government employment in Rhode Island has increased 7.7%
since 1984 from 57,400, to 61,800 in 1994.
The United States Navy maintains a significant presence in Newport, Rhode
Island, where its facilities include: the Naval Education and Training Center;
Naval War College; and the Naval Undersea Warfare Center. These facilities
employ over 7,543 military and civilian personnel, and have an average daily
enrollment of almost 2,022 students. The Naval Undersea Warfare Center, with its
major laboratories in Newport and Middletown, is a prime source of high
technology that provides the Navy with its tactical and strategic edge in combat
systems, surface ship sonar, and undersea ranges. In 1994, the Naval Undersea
Warfare Center employed 3,829 people. Many Rhode Island companies have developed
extensive system engineering and research facilities that provide support to the
center.
In 1994, military personnel, civilian Department of Defense personnel and
private industry defense related employment in Rhode Island was estimated at
15,887 having declined from a 1987 high of 26,934. Total defense contract awards
to Rhode Island firms have decreased from a high of $555 million in 1990, to
$410 million in 1994.
Beginning in 1989, Rhode Island, like other New England states, began to
experience a slowdown in its economy. The State's unemployment rate increased
from 4.1% in 1989 to 6.8% in 1990, to 8.6% in 1991, and again to 8.9% in 1992.
Personal income growth slowed from an annual rate of 9.0% in 1988 to 2.1 percent
in 1991. In constant dollars, personal income growth slowed from 4.5.% to -1.8%
for the same years.
The economic slowdown resulted in significant State budget constraints and
opportunities to review the overall fiscal situation. The recession that
engulfed the Rhode Island economy appears to have finally stabilized. After
three years of falling employment, the number of jobs in Rhode Island grew by
0.1% in 1993. Data Resources, Inc. (DRI) forecasters estimate Rhode Island job
growth at an annual rate of 1.4% annually from 1994 to 1998 with personal income
growth rates averaging 5.4%. Real personal income growth is forecast to average
2.2%.
The national recession has been longest and deepest in the New England states.
Since 1989, 9.6% of all of New England's non-agricultural jobs have been lost.
Rhode Island losses have paralleled those of the rest of the region.
Non-agricultural employment in Rhode Island fell by 8.9% between the 1989 peak
and the low point in 1992.
Rhode Island, Massachusetts, Connecticut and Maine rank among the top 12 states
in defense prime contract awards per capita. As a result, federal defense
cutbacks have affected this region disproportionately. The national recovery did
not affect all regions equally. New England is forecast to continue to lag due
to the restructuring of the defense industry and overbuilding in real estate
markets.
The DRI estimators forecast that the national economy is beginning to slow with
a "soft landing" rather than a recession. Consumer spending is slowing in
response to higher interest rates and rising debt burdens. Debt accumulation
appears to have risen to earlier peak levels; the rate of accumulation growth
does not appear sustainable.
The Rhode Island outlook is for continued recovery at a sluggish pace. Non-farm
employment has increased 1% annually over the past three years and is estimated
to remain at 1.2% annual growth through years 2000. Rhode Island expects to
continue to lose manufacturing jobs to foreign competitors, high regulatory
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costs, and the end of the Seawolf Program. Services will provide 80% of the new
jobs created through 2000, reflecting growth in business services, education,
health care, and tourism.
Population growth is expected to average 0.4% annually during the fiscal years
1995 through 2000. Population declined 0.2% annually during the past three years
as a result of a weak job market, motivating out-migration. The shrinking labor
force contributed to the reduction of three points off the unemployment rate
since the spring of 1992. The unemployment rate is forecast to grow from the
currently forecast 6.4% for 1995 to 6.8% in 1996.
The gross State product has rebounded from -3.8% change in 1991 to a high of
3.1% in 1994; however, that tracked the overall growth rate of the U.S. economy.
Growth rates are expected to drop to 1.7% in 1995 and further to 1.2% in 1996.
Personal income growth also peaked in 1994, at 5.4%. Growth drops to 5.3% in
1995 and 4.3% in 1996 before rebounding in 1997.
REVENUE ESTIMATES. Current revenue estimates are those adopted by the Revenue
Estimating Conference for fiscal 1995 and fiscal 1996 on May 10, 1995. They are
based on current law. Thus, they do not include the cigarette tax increase, the
retention of an additional one cent of the existing gas tax by the Department of
Transportation as recommended by the Governor, nor do they include extension of
the existing nursing home tax currently under discussion.
The Conference estimated revenues of $1.633 billion for fiscal 1995 and $l.565
billion for fiscal 1996. These represent 4.7% growth in fiscal 1995 and -3.5% in
fiscal 1996.
When adjusted for tax law changes, they represent -1.3% in fiscal 1995 and 2.1%
for fiscal 1996. Major changes include the nursing home tax, the hospital
license fee, and the public utilities gross earnings tax phase out for
manufacturing energy. The fiscal 1995 decrease is in disproportionate share
Medicaid receipts.
PERSONAL INCOME TAX. The personal income tax estimate for fiscal 1995 of $531.0
million is a downward revision of $37.0 million. The fiscal 1996 estimate of
$550.0 million is a downward revision of $47.0 million, reflecting fiscal 1995
change as well as reduction in estimated growth from 5.1% to 3.6% to reflect the
revised economic forecast.
Income tax returns to date have presented a mixed picture to estimators. Through
April, 1995 withholding receipts were 6.4% above the same period in fiscal 1994.
However, estimated payments and final payments were 13.7% and 5.6% below,
respectively. Refunds were 9.3% ahead. It appears possible that over withholding
may be occurring again -- it had been virtually eliminated in 1991 when the IRS
re-based the withholding tables.
INSURANCE COMPANY GROSS PREMIUMS TAX. The estimators lowered the estimates by
$6.0 million in fiscal 1995 and $8.0 million in fiscal 1996 based upon payments
to date and the March estimated filings. Companies are required to file 40% of
their tax year estimated liability in March and the remaining 60% in June. The
estimate of $35.0 million and $36.0 million reflects -6.9 percent and 2.9%
growth rates for fiscal 1995 and fiscal 1996, respectively.
SALES TAX. The estimates are $454.0 million for fiscal 1995 and $465.0 million
for fiscal 1996. These are downward revisions of: $1.0 million for fiscal 1995,
representing a drop in the growth rate from 8.4% to 8.2%; and $7.0 million in
fiscal 1996, representing a drop in the projected growth from 3.7% to 2.4%.
Review of monthly returns shows decreasing six-month average collections as
shown here:
<PAGE>
PERIOD MONTHLY AVERAGE
July - December $39.1
August - January 39.1
September - February 37.9
October - March 36.9
November - April 36.8
This suggests a slowdown on taxable purchases moving with the economic slowdown.
LOTTERY. The estimators revised the fiscal 1995 and fiscal
1996 estimates upward by $10.2 and $7.5 million,
respectively. The principal area of growth is in video
games.
OTHER. The estimators increased the disproportionate share component of
departmental sales and services by $12.7 million for fiscal 1995 and $5.7
million for fiscal 1996. This requires corresponding increases from DHS for
matching funds of $5.9 million and $2.6 million, respectively.
Personal income tax receipts showed healthy growth in fiscal 1994, probably as a
result of a large one-time filing equal to approximately two percent of the
growth. The fiscal 1995 drop would be 2% higher on that basis. The fiscal 1996
estimate reflects the estimators' concern for economic slowdown.
General business taxes show a drop in fiscal 1995 as a result of the change in
the health care provider assessment rate on mental retardation group homes in
September, 1994 as noted earlier. The drop in fiscal 1996 is the result of an
$8.1 million loss in the health care providers assessment on nursing homes that
expires September 30, 1995 under current law. The Assembly has discussed
extending the tax.
Sales and use taxes are estimated to increase 8.7% in fiscal 1995 and 2.1% in
fiscal 1996. The sales tax component is projected to grow 8.2% in fiscal 1995
and 2.4% in fiscal 1996. Fiscal 1995 showed dramatic growth of 16% in the first
six months (July-December) over the same period for the prior year, followed by
a gradual slowdown. The fiscal 1996 estimate assumes the slowdown will continue.
Departmental receipts show considerable annual variance, largely as a result of
the one-time hospital license fee (fiscal 1995) and large medicaid
disproportionate share payments (fiscal 1993 and fiscal 1994). The changing
federal medicaid restrictions on these sources are expected to have had run
their course by fiscal 1996.
Finally, lottery games continue to be a major source of revenue increase,
growing from $43.6 million in fiscal 1993, to $51.3 million in fiscal 1994, and
over $70.0 million in fiscal 1995 and fiscal 1996.
COMPARATIVE STATEMENTS OF REVENUES AND EXPENDITURES. The General Fund revenues
and expenditures for fiscal 1995 are predicated on the basis of revised revenue
estimates and revised expenditures as projected by the State Budget Office.
Revenues reflect the May Consensus estimates of the Revenue Estimating
Conference, adjusted by the Budget Office for the deficit resolution plan.
Fiscal 1995 revenues are currently estimated by the Budget Office to be
$1,669,633,205, an increase of $36,233,205 over the May conference and
$15,392,088 over the Governor's Budget. The $36.2 million variance is a result
<PAGE>
of an estimated decrease in the business corporations tax of $5.3 million due to
a liability resulting from a recent court decision and $41,523,400 of other
revenues estimated by the Budget Office. These revenues are from bond proceeds
earnings ($480,376), employee medical insurance recoveries ($1,305,132),
reversal of a medical assistance payable reserve ($12,420,002), prior year
adjustments ($1,319,225), prior year group life dividends ($775,265), recoveries
from the medical assistance program ($3.0 million), recoveries from the Solid
Waste Management Corporation ($5,854,523), excess bond proceeds recoveries
($3,508,877), prior year Public Building Authority recoveries ($960,000),
enhancements from restricted receipt conversions ($12.0 million) and a decrease
in revenues from Lottery advertising ($100,000).
The General Fund revenues and expenditures for fiscal 1996 are based on
expenditures contained in the proposed fiscal 1996 budget submitted by the
Governor in March, 1995. Revenues reflect the May consensus estimates of the
Revenue Estimating Conference. Fiscal 1996 revenues will change as a result of
budget negotiations. Revenue changes under discussion include a hospital
licensing fee of 4.92% of net revenues ($53.7 million), a 5 cent increase in the
cigarette tax ($4.9 million), a decrease of $410,000 due to the elimination of
the motor vehicle walk-in registration fee, a decrease in the gas tax due to
increased dedication to Transportation expenditures ($4.2 million), and a
decrease in sales and services tax due to lost revenues from out-of-State
prisoners ($2.2 million), all of which were proposed by the Governor in March.
These total $51.8 million. Also under discussion are the extension of the
nursing home tax ($8.1 million), additional gambling revenue through change to
the distribution at the Lincoln Dog Racing facility ($2.0 million), recovery of
prior year employee medical insurance ($2.7 million), additional medical
assistance program cost recoveries ($17.0 million), lottery advertising revenues
($1.0 million), and other sources ($2.0 million).
The Budget Office projects a closing surplus of $4.3 million in fiscal 1995
assuming the components contained in the deficit reduction plan are accepted.
The State must resolve a $42.5 million projected deficit in fiscal 1996. The
Governor is in the process of developing a budget deficit resolution plan for
fiscal 1996. In addition to the changes in revenues described above, expenditure
reduction plans for State agencies and departments are currently under review.
FREE SURPLUS. State law provides that all unexpended or unencumbered balances of
general revenue appropriations, whether regular or special, shall lapse to
General Fund surplus at the end of each fiscal year, provided, however, that
such balances may be reappropriated by the Governor in the ensuing fiscal year
for the same purpose for which the monies were originally appropriated by the
General Assembly. Free surplus is the amount available at the end of any fiscal
year for future appropriation by the General Assembly.
The Governor is in the process of developing a budget deficit resolution plan to
resolve the projected $42.5 million deficit in fiscal 1996. Expenditure
reduction plans for State agencies and departments are currently under review.
State statutes require every city and town to adopt a balanced budget for each
fiscal year. Local governments rely principally upon general real and tangible
personal property taxes and automobile excise taxes for provision of revenue.
The State is required to enact and maintain a balanced budget. In the event of a
budgetary imbalance, the available free surplus will be reduced and/or
additional resources (i.e. taxes, fines, fees, licenses, etc.) will be required
and/or certain of the expenditure controls will be put into effect.
A combination of these measures will be utilized by the State in order to
maintain a balanced budget.
<PAGE>
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN CONNECTICUT MUNICIPAL
SECURITIES
The following is a summary of certain information contained in official
statements of certain issuers of Connecticut Municipal Securities published
prior to October, 1995. The summary does not purport to be a complete
description and is current as of the date of the corresponding official
statement.
Connecticut Municipal Securities may fluctuate in value in response to a variety
of factors, including the economic strength of State and local governments and
the availability of federal funding.
Connecticut's economy is diverse, with manufacturing, services and trade
accounting for approximately 70% of total non-agricultural employment.
Manufacturing employment has been on a downward trend since 1984 while
non-manufacturing employment has risen significantly. Rapid relative growth in
the non-manufacturing sector as compared to the manufacturing sector is a trend
that is in evidence nationwide and reflects the increased importance of the
service industry. From 1970 to 1993, manufacturing employment in the State
declined 33.5%, while non-manufacturing employment rose 63.3%, particularly in
the service, trade and financial categories, resulting in a 27.6% increase in
total growth in non-agricultural establishment employment.
Defense-related business plays an important role in the Connecticut economy.
Economic activity has been affected by the volume of defense contracts awarded
to Connecticut firms. In the past 10 years, Connecticut has ranked from 6th to
12th among all states in total defense contract awards, receiving 2.5% of all
such contracts in 1993. On a per capita basis, defense awards to Connecticut
have traditionally been among the highest in the nation. However, in recent
years the federal government has reduced defense-related spending. This trend is
expected to continue.
The Connecticut General Assembly's annual appropriation acts have usually
authorized current expenditures consistent with the anticipated annual tax and
other revenue sources except in certain years since 1971 when borrowings were
authorized to fund deficits.
In the fiscal years ended June 30, 1985, 1986 and 1987, the operating surpluses
of the State's General Fund were $365.5, $250.1 and $365.2 million,
respectively. For the fiscal year ended June 30, 1988 the operating deficit was
$115,594,656. By statute, this amount was deemed to be appropriated from the
Budget Reserve Fund to fund the deficit.
After the effect of a variety of executive actions and legislative enactments in
the course of the fiscal year which significantly reduced the projected deficit,
the operating deficit for the fiscal year ended June 30, 1989 was $28,019,984.
This amount was also deemed to be appropriated from the Budget Reserve Fund to
fund the deficit.
For the fiscal year ended June 30, 1990, the General Fund's operating deficit
was $259,496,841. This was the net deficit after actions taken by the Governor
and the General Assembly which affected both revenues and expenditures. As
required by statute, the State Comptroller transferred the balance of the Budget
Reserve Fund, or $102,254,299, to the General Fund to partially fund the
operating deficit. This action brought the total deficit carried forward to
fiscal 1990-91 to $157,242,542.
For the fiscal year ended June 30, 1991, the operating deficit, after
miscellaneous surplus adjustments, was $808,468,983. Together with the deficit
<PAGE>
carried forward from fiscal 1989-90, the total deficit for the fiscal year
1990-91 was $965,711,525. This total deficit amount was funded by the issuance
of General Obligation Economic Recovery Notes.
The result of the fiscal year ended June 30, 1992 was a General Fund operating
surplus of $110,181,277. The surplus was used to retire $110,100,000 of Economic
Recovery Notes.
For the fiscal year ended June 30, 1993, there was a General Fund operating
surplus of $113,490,652. By statute, the unappropriated surplus in the General
Fund is deemed to be appropriated for debt service for the fiscal year ending
June 30, 1994.
For the fiscal year ended June 30, 1994, there was a General Fund operating
surplus of $19,654,737. By statute, the unappropriated surplus in the General
Fund is deemed to be appropriated for debt service for the fiscal year ending
June 30, 1995.
Per statute, the State's fiscal position is reported monthly by the Comptroller.
This report compares revenues already received and expenditures already made to
estimated revenues to be collected and estimated expenditures to be made during
the balance of the year.
The Comptroller's February 1, 1995 letter indicated a General Fund deficit of
$174.1 million. Subsequently, on February 15, 1995, the Governor released his
recommended budget for the upcoming biennium. As part of that recommendation,
the Governor included a plan to substantially reduce this deficit primarily
through legislative action to reinstate State taxes on hospital patient services
effective February 1, 1995, estimated to be $86.7 million from the gross
earnings tax and $45.0 million from the sales tax, and by legislative changes to
the tax levied in connection with underground fuel tanks estimated to produce
$13.5 million in revenues to the General Fund. Based on the assumption such
action would be taken, the Comptroller's monthly report of March 1, 1995,
reflects a deficit of $2.6 million. The General Assembly has not yet adopted the
Governor's plan and the Governor is currently exploring alternative actions
including potential legislative changes.
No assurance can be given that subsequent projections will not indicate changes
in the anticipated General Fund result.
The Governor's Recommended Biennial Budget for fiscal 1995-96 anticipates
General Fund expenditures of $8,489.7 million and General Fund revenues of
$8,495.3 million. After deducting $2.6 million for the anticipated carry-forward
deficit from fiscal 1994-95, the estimated surplus for fiscal 1995-96 is $3.0
million. For fiscal 1996-97, the Governor's Recommended Budget anticipates
General Fund expenditures of $8,617.2 million and General Fund revenue of
$8,629.9 million resulting in a projected surplus of $12.7 million. Per statute,
these surpluses will be deposited into the Budget Reserve Fund.
The Governor's Recommended Budget for the biennium remains within the limits
imposed by the statutory expenditure cap. For fiscal 1995-96 and for fiscal
1996-97, permitted growth in capped expenditures is 3.59% and 3.71%,
respectively. The Recommended Budget is $126.2 million below the expenditure cap
in fiscal 1995-96 and $246.6 million below the expenditure cap in fiscal
1996-97.
The Governor's Recommended Budget calls for a lower income tax rate of 3% to be
applied to a filer's first portion of taxable income with the remainder to be
taxed at the current rate of 4.5%. This change is retroactive to January 1, 1995
and for joint filers the new 3% rate will apply to the first $12,000 of taxable
income. By January 1, 1997, when the Governor's recommended changes are fully
implemented, for joint filers the new 3% rate will apply to the first $30,000 of
<PAGE>
taxable income. After full implementation fully 43% of Connecticut's taxpayers
will pay exclusively at the new 3% rate. In addition, the Governor is proposing
to phase down the Corporation Business Tax beginning January 1, 1997 from 10.5%
to 8% by January 1, 1999. These two changes, when combined with other
miscellaneous revenue modifications, are expected to result in a $218 million
revenue loss in fiscal 1995-96 and a $343 million revenue loss in fiscal
1996-97.
In order to achieve a balanced budget, the Governor, after a thorough review of
all State budget programs and functions, has recommended expenditure reductions
from estimated current services of approximately $1,020 million in fiscal
1995-96 and an additional $632 million in fiscal 1996-97. The Governor's budget
proposes significant changes to the welfare system aimed at promoting economic
self-sufficiency. These include permitting recipients to earn more before
eliminating their benefits, imposing an 18 month time limit for receipt of
benefits, and reducing the AFDC payment levels with no additional benefits for
additional children. In fiscal 1995-96 these changes will reduce AFDC
expenditures by $36 million from fiscal 1994-95 and General Assistance
expenditures by $27 million. Include in the Governor's budget is a restructuring
of the numerous categorical grants to municipalities. The Education Cost Sharing
grant, the State's largest, will be consolidated with other reduction related
grants. Overall, the Governor's budget pares back 95% of the projected increase
in education grants to towns. The Governor's budget also proposes to cut in
half, to $500 million, the amount of bonds annually authorized by the State to
rein in debt service costs.
The Governor's Recommended Budget also calls for the reissuance of a portion of
the fiscal 1995-96 Economic Recovery Fund payment and extending the payment over
three additional years. This change will decrease the fiscal 1995-96 payment
from $328.1 million to $91.9 million and increases the fiscal 1996-97 payment
form zero to $91.3 million, the fiscal 1997-98 payment from zero to $87.2
million and the fiscal 1998-99 payment from zero to $86.6 million. This revision
will result in a projected additional interest expense of $28.8 million over the
period.
The budget recommended by the Governor for fiscal year 1995-1996 anticipates
General Fund expenditures of $8,489,700,000 and General Fund revenues of
$8,495,300,000. For fiscal 1996-1997, the adopted budget anticipates General
Fund expenditures of $8,115,600,000 and General Fund revenues of $8,629,900,000.
No assurance can be given that subsequent projections will not indicate changes
in the anticipated General Fund result.
On November 3, 1992, Connecticut voters approved a constitutional amendment
which requires a balanced budget for each year and imposes a cap on the growth
of expenditures. The statutory spending cap limits the growth of expenditures to
either (1) the average of the annual increase in personal income in the State
for each of the preceding five years, or (2) the increase in the consumer price
index for urban consumers during the preceding twelve-month period, whichever is
greater. Expenditures for the payment of bonds, notes and other evidences of
indebtedness are excluded from the constitutional and statutory definitions of
general budget expenditures.
By statute, no bonds, notes or other evidences of indebtedness for borrowed
money payable from General Fund tax receipts of the State shall be authorized by
the General Assembly except as shall not cause the aggregate amount of (1) the
total amount of bonds, notes or other evidences of indebtedness payable from
General Fund tax receipts authorized by the General Assembly but which have not
been issued and (2) the total amount of such indebtedness (excluding short-term
and certain other indebtedness) which has been issued and remains outstanding,
to exceed 1.6 times the total estimated General Fund tax receipts of the State
for the fiscal year in which any such authorization will become effective. As a
<PAGE>
result, the State had a debt incurring margin as of March 1, 1995 of
$1,716,182,730.54.
Potentially, this law could limit the amount of Connecticut Municipal
Obligations available for purchase by the Fund.
Several tax changes were adopted during the 1993 legislative session, the net
effect of which is not yet clear. Among the most significant changes were the
changes to the Corporation Business Tax based on income. A four year gradual
rate reduction was adopted reducing the tax to 11.25% beginning January 1, 1995;
11% beginning January 1, 1996; 10.5% beginning January 1, 1997 and 10% beginning
January 1, 1998. Additionally, the Corporation Business Tax based on capital was
eliminated for regulated investment companies and real estate investment trusts.
To assist manufacturers, the Gross Receipts Tax on electricity to those
businesses will be phased out over the next four years. Further, to encourage
continuing research and development in Connecticut, a research and development
tax credit was provided for research and development expenses for income years
commencing on or after January 1, 1993.
Several Sales Tax exemptions were added which include, among others, amusements
and recreation, airport valet parking, certain tax preparation services and car
washes. The Personal Income Tax estimated and withholding payment schedule was
changed to conform to the federal timetable. A minimum tax was established so
that Connecticut personal income taxpayers who are subject to the federal
alternative minimum tax will now pay the higher of the State income tax or 23%
of their adjusted federal tentative minimum tax. The tax on cigarettes was
increased by 2 cents per pack effective July 1, 1993 and 3 cents per pack
effective July 1, 1994 and a two dollar excise tax on automobile tires was
enacted.
The State Department of Revenue Services has received claims for refund of the
Corporation Business Tax ("CBT") for the years 1986 through 1993 aggregating
more than $87,000,000, attributable to the inclusion in the income base of the
CBT of interest on federal obligations while excluding from the base interest on
certain State obligations. On March 8, 1995, the Connecticut General Assembly
enacted legislation taking by eminent domain the rights of holders relating to
exclusion of interest on any State obligation from the income base of the CBT,
effective for interest accrued on or after January 1, 1992. The State will pay
just compensation to holders for the rights taken. This legislative action is
intended to eliminate the basis for such refund claims for 1992 and later years,
aggregating approximately 70% of amounts claimed. The just compensation payable
to holders of State obligations is expected to aggregate substantially less than
the refunds claimed for 1992 and later years. Public Act Additional legislative
action authorizes the issuance of bonds in the amount of $48 million for the
payment of compensation, interest, administration and refunds.
The State of Connecticut, its officers and employees, are defendants in numerous
lawsuits. The Attorney General's Office has reviewed the status of pending
lawsuits and reports that an adverse decision in any of the cases listed in the
Litigation section of the Connecticut State Official Statement could materially
affect the State of Connecticut's financial position.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN FLORIDA MUNICIPAL
SECURITIES
The following is a summary of certain information contained in official
statements of certain issuers of Florida Municipal Securities published prior to
December 1995. The summary does not purport to be a complete description and is
current as of the date of the corresponding official statement.
Personal income in Florida has been growing the last several years and generally
has outperformed both the nation as a whole and the Southeast in particular.
From 1985 through 1994, Florida's per capita income rose an average of 5.2% per
<PAGE>
year, while the national per capita income increased an average of 5.1%. Real
personal income is estimated to increase 4.6% in 1995-96 and increase 3.8% in
1996-97 while real personal income per capita in Florida is projected to grow at
2.7% in 1995-96 and 1.9% in 1996-97.
Florida's population growth is one reason why its economy has typically
performed better than the nation as a whole. In 1980, Florida was ranked seventh
among the 50 states with a population of 9.7 million people. Florida has
continued to grow since then and as of April 1, 1994 ranks fourth with an
estimated population of 13.9 million. Since 1984, Florida's average annual rate
of population increase has been approximately 2.3% as compared to an
approximately 1.0% average annual increase for the nation as a whole.
Throughout the 1980s, the unemployment rate in Florida had, generally, tracked
below that of the nation. In recent years, however, as Florida's economic growth
has slowed from its previous highs, the unemployment rate has tracked above the
national average. Florida's unemployment rate is projected to be 5.6% in 1995
and 5.7% in 1996. The average rate of unemployment for Florida since 1985 is
6.3%, while the national average is 6.4%.
Until recently, Florida has had a dynamic construction industry, with single and
multi-family housing starts accounting for 8.5% of total U.S. housing starts in
1994, while Florida's population was 5.3% of the nation's total population. The
reason for such a dynamic construction industry was the rapid growth of
Florida's population. In Florida, single and multi-family housing starts in
1995-96 are projected to reach a combined level of nearly 113,200 units, while
increasing to 115,100 in 1996-97. Total construction expenditures are forecasted
to increase 4.0% in 1995-96 and increase by 5.3% in 1996-97.
Financial operations in Florida are maintained through the use of four funds
types -- the General Revenue Fund, Trust Funds, the Working Capital Fund and,
beginning in fiscal year 1995-96, the Budget Stabilization Fund. In fiscal year
1994-95, approximately 66% of total direct revenues to these Funds were derived
from Florida State taxes and fees. Federal funds and other special revenues
accounted for the remaining revenues. Major sources of tax revenues to the
General Revenue Fund are the sales and use tax, corporate income tax, intangible
personal property tax and alcoholic beverage tax, which amounted to 67%, 7%, 4%,
and 4%, respectively, of total General Revenue Fund receipts available. State
expenditures are categorized for budget and appropriation purposes by type of
fund and spending unit, which are further subdivided by line item. In fiscal
year 1994-95, expenditures from the General Revenue Fund for education, health
and welfare, and public safety amounted to approximately 49%, 32% and 11%,
respectively, of the total General Revenue Fund available.
For fiscal year 1995-96, the estimated General Revenue plus Working Capital and
Budget Stabilization funds available to Florida is $15,286.2 million, a 3.1%
increase over 1994-95. With combined General Revenue Fund, Working Capital Fund
and Budget Stabilization Fund appropriations at $14,808.2 million, unencumbered
reserves at the end of 1995-96 are estimated at $478.0 million. For fiscal year
1996-97, the estimated General Revenue plus Working Capital and Budget
Stabilization funds available total $15,922.0 million, a 4.2% increase over
fiscal year 1995-96.
The sales and use tax is the greatest single source of tax receipts in Florida.
For the fiscal year ended June 30, 1995, receipts from this source were $10,672
million, an increase of 6.0% from fiscal year 1993-94. The second largest source
of tax receipts is the motor fuel tax. The estimated collections from this
source during the fiscal year ended June 30, 1994 were $1,733.4 million, however
these revenues are almost entirely dedicated to trust funds for specific
purposes and are not included in the General Revenue Fund. Alcoholic beverage
<PAGE>
tax revenues totalled $437.3 million for the fiscal year ending June 30, 1995.
The receipts of the corporate income tax for the fiscal year ended June 30, 1995
were $1,063.5 million, an increase of 1.5% from the previous fiscal year. Gross
receipt tax collections for fiscal year 1994-95 totalled $508.4 million, an
increase of 10.4% over the previous fiscal year. Documentary stamp tax
collections totalled $695.3 million during fiscal year 1994-95, decreasing 11.4%
from the previous fiscal year. The intangible personal property tax is a tax on
stocks, bonds, notes, governmental leaseholds, certain limited partnership
interests and other intangible personal property. Total collections from
intangible personal property taxes were $818.0 million during fiscal year
1994-95, a 2.1% decline from the previous fiscal year. Severance taxes totalled
$61.2 million during fiscal year 1994-95, up 1.1% from the previous fiscal year.
In November, 1986, Florida voters approved a constitutional amendment to allow
Florida to operate a lottery. Fiscal year 1994-95 produced ticket sales of $2.19
billion of which education received approximately $853.2 million.
Pursuant to a constitutional amendment which was ratified by the voters of
Florida on November 8, 1994, the rate of growth in State revenues in a given
fiscal year is limited to no more than the average annual growth rate in Florida
personal income over the previous five years. Revenues collected in excess of
the limitation are to be deposited into the Budget Stabilization Fund unless
two-thirds of the members of both houses of the Florida Legislature vote to
raise the limit. The revenue limit is determined by multiplying the average
annual growth rate in Florida personal income over the previous five year by the
maximum amount of revenue permitted under the cap for the previous year. For the
first year, which is fiscal year 1995-96, the limit is based on actual revenues
from fiscal year 1994-95. State revenues are defined as taxes, licenses, fees
and charges for services imposed by the Florida Legislature on individuals,
businesses or agencies outside of State government. The definition of State
revenues also includes the revenue from the sale of lottery tickets. Included
among the categories of State revenues which are exempt from the revenue
limitation, however, are funds used for debt service on State bonds and other
payments related to debt.
The Florida State Constitution does not permit a state or local personal income
tax. An amendment to the Florida State Constitution by the electors of Florida
is required to impose a personal income tax in Florida.
As of January 1, 1994, property valuations for homestead property are subject to
a growth cap. Growth in the assessed value of property qualifying for the
homestead exemption will be limited to 3% or the change in the Consumer Price
Index, whichever is less. If the property changes ownership or homestead status,
it is to be re-valued at full value on the next tax roll.
According to the Office of Comptroller, Department of Banking and Finance of the
State of Florida, as of February 15, 1995, Florida maintained a bond rating of
AA from Moody's, a bond rating of AA from S&P and a bond rating of AA from Fitch
on all of its general obligation bonds. Outstanding general obligation bonds at
June 30, 1994 totalled almost $6.1 billion and were issued to finance capital
outlay for educational projects of both local school districts, community
colleges and state universities, environmental protection and highway
construction.
<PAGE>
INVESTMENT LIMITATIONS
The following are fundamental policies of each of the Funds.
A Fund may not:
1. Purchase any securities which would cause more than 25% of the total
assets of the Fund to be invested in the securities of one or more
issuers conducting their principal business activities in the same
industry, provided that this limitation does not apply to investments
in obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities and repurchase agreements involving
such securities and, for certain Funds, to other investments as
described in the prospectuses by which shares of those Funds are
offered, and provided further that this limitation does not apply to
an investment of all of the investable assets of the 1784
International Equity Fund or the 1784 Growth Fund in a diversified,
open-end management investment company having the same investment
objective and policies and substantially the same investment
restrictions as those applicable to such Fund or an investment of all
of the investable assets of the 1784 Florida Tax-Exempt Income
Portfolio in an open-end management investment company having the same
investment objective and policies and substantially the same
investment restrictions as those applicable to the 1784 Florida
Tax-Exempt Income Fund (in each case, a "Qualifying Portfolio"). For
purposes of this limitation, (i) utility companies will be divided
according to their services; for example, gas, gas transmission,
electric and telephone will each be considered a separate industry;
(ii) financial service companies will be classified according to the
end users of their services; for example, automobile finance, bank
finance and diversified finance will each be considered a separate
industry; and (iii) supranational entities will be considered to be a
separate industry.
2. Make loans except that a Fund may (a) purchase or hold debt
instruments in accordance with its investment objective and policies;
(b) enter into repurchase agreements; and (c) engage in securities
lending as described in the prospectus by which shares of that Fund
are offered and in the Statement of Additional Information.
3. Acquire more than 10% of the voting securities of any one issuer
(except securities issued or guaranteed by the United States, its
agencies or instrumentalities and repurchase agreements involving such
securities) or invest more than 5% of the total assets of the Fund in
the securities of an issuer (except securities issued or guaranteed by
the United States, its agencies or instrumentalities and repurchase
agreements involving such securities); provided, that (a) the
foregoing limitation shall not apply to the 1784 Massachusetts
Tax-Exempt Income Fund, 1784 Connecticut Tax-Exempt Income Fund, 1784
Rhode Island Tax-Exempt Income Fund or the 1784 Florida Tax-Exempt
Income Fund, (b) the foregoing limitation shall not apply to 25% of
the total assets of each of the Equity Funds, the Fixed Income Funds,
the 1784 Tax-Exempt Medium-Term Income Fund or the 1784 Tax-Free Money
Market Fund and (c) the foregoing limitation does not apply to an
investment of all of the investable assets of the 1784 International
Equity Fund, the 1784 Growth Fund or the 1784 Florida Tax-Exempt
Income Fund in a Qualifying Portfolio.
4. Invest in companies for the purpose of exercising control.
5. Borrow, except that a Fund may borrow money from banks and may enter
into reverse repurchase agreements, in either case in an amount not to
<PAGE>
exceed 33-1/3% of that Fund's total assets and then only as a
temporary measure for extraordinary or emergency purposes (which may
include the need to meet Shareholder redemption requests). This
borrowing provision is included solely to facilitate the orderly sale
of fund securities to accommodate heavy redemption requests if they
should occur and is not for investment purposes. A Fund will not
purchase any securities for its portfolio at any time at which its
borrowings equal or exceed 5% of its total assets (taken at market
value), and any interest paid on such borrowings will reduce income.
6. In the case of the 1784 Growth and Income Fund, the 1784 Asset
Allocation Fund, the Money Market Funds, the 1784 U.S. Government
Medium-Term Income Fund, the 1784 Tax-Exempt Medium-Term Income Fund
and the 1784 Massachusetts Tax-Exempt Income Fund, pledge, mortgage or
hypothecate assets except to secure temporary borrowings permitted by
(5) above in aggregate amounts not to exceed 10% of total assets taken
at current value at the time of the incurrence of such loan, except as
permitted with respect to securities lending.
7. Purchase or sell real estate, including real estate limited
partnership interests, commodities and commodities contracts but
excluding interests in a pool of securities that are secured by
interests in real estate. However, subject to its permitted
investments, any Fund may invest in companies which invest in real
estate commodities or commodities contracts. Each of the Funds may
invest in futures contracts and options thereon to the extent
described in the prospectus by which shares of that Fund are offered
and elsewhere in this Statement of Additional Information.
8. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Trust may obtain short-term
credits as necessary for the clearance of security transactions.
9. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter under federal securities laws in selling a
security held by the Fund.
10. Purchase securities of other investment companies except as permitted
by the 1940 Act and the rules and regulations thereunder. Under these
rules and regulations, each of the Funds is prohibited from acquiring
the securities of other investment companies if, as a result of such
acquisition, (a) such Fund owns more than 3% of the total voting stock
of the company; (b) securities issued by any one investment company
represent more than 5% of the total assets of such Fund; or (c)
securities (other than treasury stock) issued by all investment
companies represent more than 10% of the total assets of such Fund,
provided, that with respect to the 1784 International Equity Fund, the
1784 Growth Fund and the 1784 Florida Tax-Exempt Income Fund, the
limitations do not apply to an investment of all of the investable
assets of such Fund in a Qualifying Portfolio. These investment
companies typically incur fees that are separate from those fees
incurred directly by a Fund. A Fund's purchase of such investment
company securities results in the layering of expenses, such that
Shareholders would indirectly bear a proportionate share of the
operating expenses of such investment companies, including advisory
fees.
It is the position of the Securities and Exchange Commission's Staff
that certain non-governmental issuers of CMOs and REMICs
constitute investment companies pursuant to the 1940 Act and
either (a) investments in such instruments are subject to the
<PAGE>
limitations set forth above or (b) the issuers of such instruments
have received orders from the Securities and Exchange Commission
exempting such instruments from the definition of investment company.
11. Issue senior securities (as defined in the 1940 Act) except in
connection with permitted borrowings as described above or as
permitted by rule, regulation or order of the Securities and Exchange
Commission.
12. Write or purchase puts, calls, or other options or combinations
thereof, except that each Fund may write covered call options with
respect to any or all of the securities it holds, subject to any
limitations described in the prospectus offering shares of that Fund
or elsewhere in this Statement of Additional Information and each Fund
may purchase and sell other options as described in the prospectus by
which shares of that Fund are offered.
NON-FUNDAMENTAL POLICIES
The following policies are not fundamental and may be changed by the Trust with
respect to any Fund without approval by the Shareholders of that Fund.
No Fund may invest in warrants except that (i) each of the Equity Funds may each
invest in warrants in an amount not exceeding 5% of the Fund's net assets as
valued at the lower of cost or market value; included in these amounts, but not
to exceed 2% of the Fund's net assets may be warrants not listed on the New York
Stock Exchange or American Stock Exchange; and (ii) the 1784 Short-Term Income
Fund and the 1784 Income Fund may each invest in warrants in an amount not
exceeding 2% of its net assets, this limitation does not apply to warrants
acquired in units or attached to securities. Such warrants may not be listed on
the New York Stock Exchange or American Stock Exchange.
No Fund may invest in illiquid securities in an amount exceeding, in the
aggregate, 15% of that Fund's net assets (10% for Money Market Funds), provided
that this limitation does not apply to an investment of all of the investable
assets of the 1784 International Equity Fund, the 1784 Growth Fund or the 1784
Florida Tax-Exempt Income Fund in a Qualifying Portfolio. An illiquid security
is a security which cannot be disposed of promptly (within seven days) and in
the usual course of business without a loss, and includes repurchase agreements
maturing in excess of seven days, time deposits with a withdrawal penalty,
non-negotiable instruments and instruments for which no market exists. The
foregoing limitation does not apply to restricted securities, including those
issued pursuant to Rule 144A under the 1933 Act, if it is determined by or under
procedures established by the Board of Trustees of the Trust that, based on
trading markets for the specific restricted security in question, such security
is not illiquid.
No Fund may purchase or retain securities of an issuer if, to the knowledge of
the Trust, an officer, trustee, partner or director of the Trust or any
investment adviser of the Trust owns beneficially more than 1/2 of 1% of the
shares or securities of such issuer and all such officers, trustees, partners
and directors owning more than 1/2 of 1% of such shares or securities together
own more than 5% of such shares or securities.
No Fund may invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
No Fund may purchase securities of any company which has (with predecessors) a
record of less than 3 years continuing operations if, as a result more than 5%
of total assets (taken at fair market value) of the Fund would be invested in
<PAGE>
such securities, except that the foregoing limitation shall not apply to (a)
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (b) municipal securities which are rated by at least one
nationally recognized bond rating service; or (c) an investment of all of the
investable assets of the 1784 International Equity Fund, the 1784 Growth Fund or
the 1784 Florida Tax-Exempt Income Fund in a Qualifying Portfolio.
The foregoing percentages will apply at the time of the purchase of a security
and shall not be considered violated unless an excess occurs or exists
immediately after and as a result of a purchase of such security.
THE ADVISERS
The Trust has entered into separate advisory agreements (each, an "Advisory
Agreement") with The First National Bank of Boston ("Bank of Boston") and, with
respect to the 1784 International Equity Fund, Kleinwort Benson Investment
Management Americas Inc. ("Kleinwort Benson"). The Advisory Agreement with Bank
of Boston for the Funds other than the 1784 International Equity Fund is dated
as of June 1, 1993 and the Advisory Agreement with Bank of Boston for the 1784
International Equity Fund is dated as of November 28, 1994. The Advisory
Agreement with Kleinwort Benson for the 1784 International Equity Fund is dated
as of October 27, 1995. Bank of Boston and Kleinwort Benson shall be referred to
in this Statement of Additional Information, collectively, as the "Advisers" and
each, individually, as an "Adviser." The prospectus by which shares of each Fund
are offered contains a description of the fees payable to the Advisers for
services rendered to that Fund under the applicable Advisory Agreements, and
contains a description of certain voluntary waivers of such fees.
For the fiscal years ended May 31, 1994 and 1995, the Trust paid the following
fees (after fee waivers) on behalf of the Funds to Bank of Boston under the
Advisory Agreements to which Bank of Boston is a party:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Bank of Boston Bank of Boston
Investment Investment
Fund Advisory Fees 1994 Advisory Fees 1995
- -----------------------------------------------------------------------------------------------
1784 Tax-Free Money Market Fund $ 0 $ 1,471,000
1784 U.S. Treasury Money Market Fund $ 0 $ 69,000
1784 Institutional U.S. Treasury Money Market Fund $ 0 $ 85,000
1784 U.S. Governmental Medium-Term Income Fund $ 0 $ 679,000
1784 Tax-Exempt Medium-Term Income Fund $ 0 $ 602,000
1784 Massachusetts Tax-Exempt Fund $ 0 $ 363,000
1784 Short-Term Income Fund N/A $ 86,000
1784 Income Fund N/A $ 521,000
1784 Connecticut Tax-Exempt Income Fund N/A $ 138,000
1784 Rhode Island Tax-Exempt Income Fund N/A $ 77,000
1784 Florida Tax-Exempt Income Fund N/A N/A
1784 Growth and Income Fund $ 12,000 $ 1,393,000
1784 Asset Allocation Fund $ 0 $ 23,000
1784 International Equity Fund N/A $ 0
1784 Growth Fund N/A N/A
- -----------------------------------------------------------------------------------------------
Total $ 12,000 $ 5,707,000
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The foregoing table does not reflect contributions to the Funds made by Bank of
Boston in order to assist the Funds in maintaining competitive expense ratios.
For the fiscal year ended May 31, 1995, the Trust paid $199,000 to Kleinwort
Benson under the Advisory Agreement to which Kleinwort Benson is a party with
respect to the 1784 International Equity Fund.
The continuance of each Advisory Agreement, after the first two years, must be
specifically approved at least annually (i) by the vote of the Trustees, and
(ii) by the vote of a majority of the Trustees who are neither parties to the
Advisory Agreement nor "interested persons" of any party thereto, cast in person
at a meeting called for the purpose of voting on such approval. Each Advisory
Agreement will terminate automatically in the event of its assignment, and is
terminable at any time without penalty by the Trustees of the Trust or, with
respect to any Fund, by a majority of the outstanding shares of that Fund, on
not less than 30 nor more than 60 days' written notice to the applicable
Adviser, or by the applicable Adviser on 90 days' written notice to the Trust.
Each Advisory Agreement provides that neither the Adviser nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution of
security transactions for the Trust or any Fund, except that the Adviser and its
personnel shall not be protected against any liability to the Trust, any Fund or
its Shareholders by reason of willful misfeasance, bad faith or gross negligence
on its or their part in the performance of its or their duties or from reckless
disregard of its or their obligations or duties thereunder.
THE ADMINISTRATOR
The Trust and SEI Financial Management Corporation (the "Administrator") are
parties to an administration agreement (the "Administration Agreement"). The
Administration Agreement provides that the Administrator shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of the Administrator in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder. The
Administration Agreement has an initial term of three years starting in May,
1993 and may be renewed for one additional two-year term unless either party
gives notice of non-renewal to the other party not less than 90 days prior to
the expiration of the initial term.
SEI Financial Management Corporation, a wholly owned subsidiary of SEI
Corporation ("SEI"), was organized as a Delaware corporation in 1969 and has its
principal business offices at 680 East Swedesford Road, Wayne, PA 19087. Alfred
P. West, Jr., Carmen V. Romeo, and Henry H. Greer constitute the Board of
Directors of the Administrator. Mr. West is the Chairman of the Board and Chief
Executive Officer of the Administrator. Mr. West serves as the Chairman of the
Board of Directors, and Chief Executive Officer of SEI. SEI and its subsidiaries
are leading providers of funds evaluation services, trust accounting systems,
and brokerage and information services to financial institutions, institutional
investors and money managers. The Administrator also serves as administrator to
the following other institutional mutual funds: SEI Daily Income Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust, SEI Index Funds, SEI International
Trust, SEI Institutional Managed Trust, Stepstone Funds, The Compass Capital
Group of Funds, FFB Lexicon Funds, The Advisors' Inner Circle Fund, The Pillar
Funds, CUFund, STI Classic Funds, CoreFunds, Inc., First American Funds, Inc.,
<PAGE>
First American Investment Funds, Inc., Rembrandt Funds(R), The Arbor Fund,
Marquissm Funds, Morgan Grenfell Investment Trust, The PBHG Funds, Inc.,
Inventor Funds, Inc., The Achievement Funds Trust, Insurance Investment Products
Trust, Bishop Street Funds, CrestFunds, Inc. and Conestoga Family of Funds.
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a wholly owned subsidiary of
SEI, and the Trust are parties to a distribution agreement ("Distribution
Agreement"), dated as of June 1, 1993 and amended and restated as of October 27,
1995. The Trust has adopted a distribution plan dated as of June 1, 1993 with
respect to each of the Equity Funds, the Fixed Income Funds and the Tax-Exempt
Funds (other than the 1784 Tax-Free Money Market Fund), a distribution plan
dated as of September 14, 1995 with respect to the Class C shares of the 1784
U.S. Treasury Money Market Fund, and a distribution plan dated as of September
14, 1995 with respect to the Class D shares of the 1784 U.S. Treasury Money
Market Fund, in each case pursuant to Rule 12b-1 under the 1940 Act
(collectively, the "Plans"). The Distributor will receive no compensation for
distribution of shares of the 1784 Tax-Free Money Market Fund or the 1784
Institutional U.S. Treasury Money Market Fund or for the distribution of the
Class A shares of the 1784 U.S. Treasury Money Market Fund.
The Distribution Agreement and the Plans provide that the Trust will pay the
Distributor a fee, calculated daily and paid monthly, at an annual rate of (i)
0.25% of the average daily net assets of each of the Equity Funds, the Fixed
Income Funds and the Tax-Exempt Funds (other than the 1784 Tax-Free Money Market
Fund), (ii) 0.25% of the average daily net assets of the Class C shares the 1784
U.S. Treasury Money Market Fund, and (iii) 0.75% of the average daily net assets
of the Class D shares 1784 U.S. Treasury Money Market Fund. The Distributor can
use these fees to compensate broker/dealers and service providers, including
each Adviser and its affiliates, which provide administrative and/or
distribution services to Shareholders of these Funds or holders of these shares
of the 1784 U.S. Treasury Money Market Fund, as applicable, or their customers
who beneficially own shares of these Funds or own these shares of the 1784 U.S.
Treasury Money Market Fund, as applicable.
The Distribution Agreement is renewable annually and may be terminated by the
Distributor, by the Trustees of the Trust who are not interested persons and
have no financial interest in the Plans or any related agreement ("Qualified
Trustees"), or, with respect to any particular Fund or Class of shares, by a
majority vote of the outstanding shares of such Fund or such Class of shares, as
applicable, for which the Distribution Agreement is in effect upon not more than
60 days' written notice by either party.
The Trust has adopted each of the Plans in accordance with the provisions of
Rule 12b-1 under the 1940 Act which regulates circumstances under which an
investment company may directly or indirectly bear expenses relating to the
distribution of its shares. Continuance of each of the Plans must be approved
annually by a majority of the Trustees of the Trust and by a majority of the
Qualified Trustees. Continuance of the Plan with respect to each of the Equity
Funds, the Fixed Income Funds and the Tax-Exempt Funds (other than the 1784
Tax-Free Money Market Fund) was approved by the Trustees on March 15, 1995. Each
of the Plans requires that quarterly written reports of amounts spent under such
Plan and of the purposes of such expenditures be furnished to and reviewed by
the Trustees. Expenditures may include (1) the cost of prospectuses, reports to
Shareholders, sales literature and other materials for potential investors; (2)
advertising; (3) expenses incurred in connection with the promotion and sale of
the Trust's shares including the Distributor's expenses for travel,
communication, and compensation and benefits for sales personnel; (4) any other
<PAGE>
expenses reasonably incurred in connection with the distribution and marketing
of the shares subject to approval of a majority of the Qualified Trustees. No
Plan may be amended to increase materially the amount which may be spent
thereunder without approval by a majority of the outstanding shares of the Funds
or the Class of shares which are subject to such Plan. All material amendments
of the Plans will require approval by a majority of the Trustees of the Trust
and of the Qualified Trustees.
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below.
DAVID H. CARTER - Trustee - 224 Polpis Road, Nantucket, Massachusetts 02554
(date of birth March 21, 1933). Trustee, St. James Portfolios, since June, 1994;
Main Board Director, Touche Remnant & Co. (investment advisor), 1982-1988;
Managing Director, Bearbull (UK) Ltd., London (investment advisor), 1988-January
1993.
TARRANT CUTLER - Trustee - 5 Masconomo Street, Manchester, Massachusetts
01944 (date of birth June 12, 1926). Senior Executive Vice President,
Massachusetts Financial Services Company, retired in 1991.
KENNETH A. FROOT - Trustee - Harvard University Graduate School of Business,
Boston, Massachusetts 02163 (date of birth July 5, 1957). Thomas Henry
Carroll-Ford Visiting Professor of Business Administration, Harvard University
Graduate School of Business, since 1991; Associate Professor of Management with
Tenure, Sloan School of Management, Massachusetts Institute of Technology,
1991-May 1992; Ford International Development Chair, Sloan School, 1987-1990;
Research Associate, National Bureau of Economic Research, 1990-present.
KATHRYN F. MUNCIL - Trustee - c/o Fort William Henry Corporation, Canada Street,
Lake George, New York 12845 (date of birth November 30, 1958). Chief Financial
Officer, Fort William Henry Corporation, since 1993; Treasurer, Spaulding
Investment Company (property management) 1985-1993.
*ROBERT A. NESHER - Trustee, President & Chief Executive Officer- 680 East
Swedesford Road, Wayne, Pennsylvania 19087 (date of birth August 17, 1946).
Retired since 1994. Director and Executive Vice President of SEI 1986 to July,
1994. Director and Executive Vice President of the Administrator and Distributor
1981 to July, 1994.
CARMEN V. ROMEO - Treasurer, Assistant Secretary - 680 East Swedesford Road,
Wayne, Pennsylvania 19087 (date of birth December 30, 1943). Director, Executive
Vice President, Chief Financial Officer and Treasurer of SEI. Director and
Treasurer of the Administrator and Distributor since 1981.
ROGER P. JOSEPH - Secretary - 150 Federal Street, Boston, Massachusetts 02110
(date of birth October 3, 1951). Partner, Bingham, Dana & Gould LLP, counsel
to the Trust, since 1983.
DAVID G. LEE - Senior Vice President & Assistant Secretary - 680 East Swedesford
Road, Wayne, Pennsylvania 19087 (date of birth April 16, 1952). Senior Vice
President of the Administrator and the Distributor since 1993. Vice President of
the Administrator and the Distributor from 1991 to 1993. President of GW Sierra
Trust Funds before 1991.
KEVIN P. ROBINS - Vice President & Assistant Secretary - 680 East Swedesford
Road, Wayne, Pennsylvania 19087 (date of birth April 15, 1961). Senior Vice
<PAGE>
President of SEI, the Administrator and the Distributor since 1994. Vice
President of SEI, the Administrator and the Distributor from 1991 to 1994. Vice
President of SEI, the Administrator and the Distributor from 1992 to 1994.
Associate, Morgan, Lewis & Bockius (law firm) prior to 1992.
ROBERT CARROLL - Vice President & Assistant Secretary - 680 East Swedesford
Road, Wayne, Pennsylvania 19087 (date of birth February 26, 1960). Vice
President, Assistant Secretary of SEI, the Administrator and Distributor since
1994. United States Securities and Exchange Commission, Division of Investment
Management, from 1990 to 1994. Associate, McGuire, Woods, Brattle & Boothe (law
firm) before 1990.
SANDRA K. ORLOW - Vice President, Assistant Secretary - 680 East Swedesford
Road, Wayne, Pennsylvania 19087 (date of birth October 18, 1953). Vice President
and Assistant Secretary of the Administrator and Distributor since 1983.
STEPHEN G. MEYER- Controller - 680 East Swedesford Road, Wayne,
Pennsylvania 19087. Vice President and Controller, Chief Accounting Officer of
SEI since 1992 (date of birth July 12, 1965). Senior Associate, Coopers &
Lybrand L.L.P. from 1990 to 1992. Internal Audit, Vanguard Group of Investments
prior to 1990.
*Mr. Nesher is a Trustee who may be deemed to be an "interested" person of
the Trust as the term is defined in the 1940 Act.
The following table sets forth certain information regarding the compensation of
the Trust's Trustees for the fiscal year ended May 31, 1995. The Officers of the
Trust receive no compensation from the Trust for serving in such capacity.
<TABLE>
<CAPTION>
Compensation Table
- --------------------------------------------------------------------------------
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Accrued Annual Benefits from the Trust
Compensation as Part of Fund Upon and the Funds
Name of Trustee from the Trust Expenses Retirement Paid to Trustee
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David H. Carter $15,000 $ 0 $ 0 $15,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Tarrant Cutler $15,000 $ 0 $ 0 $15,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Kenneth A. Froot $15,000 $ 0 $ 0 $15,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Kathryn F. Muncil $15,000 $ 0 $ 0 $15,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Robert A. Nesher $0 $ 0 $ 0 $0
- --------------------------------------------------------------------------------
</TABLE>
The Trustees and officers of the Trust own, in the aggregate, less than 1% of
the outstanding shares of the Trust. The Trust pays the fees for unaffiliated
Trustees. Compensation of officers and affiliated Trustees of the Trust who are
employed by the Administrator is paid by the Administrator.
As of December 13, 1995, National Financial Services Corp., 200 Liberty Street,
New York, NY 10281, owned of record 20.90% of the outstanding Class A shares of
the 1784 U.S. Treasury Money Market Fund, 6.22% of the outstanding shares of the
1784 Massachusetts Tax-Exempt Income Fund, 5.10% of the outstanding shares of
the 1784 Asset Allocation Fund, and 9.72% of the outstanding shares of the 1784
Short-Term Income Fund.
<PAGE>
As of December 13, 1995, The First National Bank of Boston, 100 Federal Street,
Boston, Massachusetts 02110, and its affiliates, owned of record the following
percentages of the outstanding shares of the following Funds: 1784 Tax-Free
Money Market Fund - 84.10%; 1784 Institutional U.S. Treasury Money Market Fund -
44.97%; 1784 U.S. Government Medium-Term Income Fund - 85.06%; 1784 Tax-Exempt
Medium-Term Income Fund - 94.49%; 1784 Massachusetts Tax-Exempt Income Fund -
66.82%; 1784 Growth & Income Fund - 77.44%; 1784 Asset Allocation Fund - 28.83%;
1784 International Equity Fund - 97.62%; 1784 Short-Term Income Fund - 66.85%;
1784 Income Fund - 92.22%; 1784 Connecticut Tax-Exempt Income Fund - 85.74%; and
1784 Rhode Island Tax-Exempt Income Fund - 92.98%. The Trust believes that The
First National Bank of Boston possessed, on behalf of its underlying accounts,
voting or investment power with respect to a majority of such shares.
COMPUTATION OF YIELD
From time to time the Trust advertises the "current yield" and "effective yield"
(also referred to as "effective compound yield") of the Money Market Funds. Both
yield figures are based on historical earnings and are not intended to indicate
future performance. The "current yield" of a Fund refers to the income generated
by an investment in that Fund over a seven-day period (which period will be
stated in the advertisement). This income is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
The current yield of these Funds will be calculated daily based upon the seven
days ending on the date of calculation ("base period"). The yield is computed by
determining the net change (exclusive of capital changes) in the value of a
hypothetical pre-existing shareholder account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing such net change by the value
of the account at the beginning of the same period to obtain the base period
return and multiplying the result by (365/7). Realized and unrealized gains and
losses are not included in the calculation of the yield. The effective compound
yield of these Funds is determined by computing the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result, according to the following formula:
Effective Yield = (Base Period Return + 1) (365/7) - 1.
The current and the effective yields reflect the reinvestment of net income
earned daily on fund assets.
The yield of the Money Market Funds fluctuates, and the annualization of a
week's dividend is not a representation by the Trust as to what an investment in
a Fund will actually yield in the future. Actual yields will depend on such
variables as asset quality, average asset maturity, the type of instruments the
Fund invests in, changes in interest rates on money market instruments, changes
in the expenses of the Fund and other factors.
<PAGE>
Yields are one basis upon which investors may compare these Funds with other
money market funds; however, yields of other money market funds and other
investment vehicles may not be comparable because of the factors set forth above
and differences in the methods used in valuing fund instruments.
From time to time, the Trust may advertise a 30-day yield for each of the Equity
Funds and each of the Fixed Income Funds. These figures will be based on
historical earnings and are not intended to indicate future performance. The
yield of these Funds refers to the annualized net investment income per share
generated by an investment in the Funds over a specified 30-day period. The
yield is calculated by assuming that the income generated by the investment
during that 30-day period is generated over one year and is shown as a
percentage of the investment. In particular, yield will be calculated according
to the following formula:
Yield = 2 [((a-b)/cd + 1)6 - 1]
where a = dividends and interest earned during the period; b = expenses accrued
for the period (net of reimbursement); c = the current daily number of shares
outstanding during the period that were entitled to receive dividends; and d =
the maximum offering price per share on the last day of the period.
The Trust may also advertise a "tax-equivalent yield" for each of the Tax-Exempt
Funds. The "tax-equivalent yield" is calculated by determining the rate of
return that would have to be achieved on a fully taxable investment to produce
the after-tax equivalent of a Fund's yield, assuming certain tax brackets for a
Shareholder. Any tax-equivalent yield quotation of a Fund will be calculated by
adding (a) the portion of that Fund's current yield which is not tax-exempt and
(b) the result obtained by dividing the portion of the Fund's current yield
which is tax-exempt by the difference of one minus a stated income tax rate.
CALCULATION OF TOTAL RETURN
From time to time, the Trust may advertise total return for a Fund. The total
return of a Fund refers to the average compounded rate of return to a
hypothetical investment for designated time periods (including but not limited
to the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each
period. In particular, total return will be calculated according to the
following formula: P (1 + T)n = ERV, where P = a hypothetical initial payment of
$1,000; T = average annual total return; n = number of years; and ERV = ending
redeemable value (as of the end of the designated time period) of a hypothetical
$1,000 payment made at the beginning of the designated time period.
PURCHASE AND REDEMPTION OF SHARES
It is currently the Trust's policy to pay for the redemptions of shares of the
Funds in cash. The Trust retains the right, however, to alter this policy to
provide for redemptions in whole or in part by a distribution in kind of
securities held by the Funds in lieu of cash. Shareholders may incur brokerage
charges and tax liabilities on the sale of any such securities so received in
payment of redemptions.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
<PAGE>
emergency (as determined by the Securities and Exchange Commission by rule or
regulation) as a result of disposal or valuation of the Fund's securities is not
reasonably practicable, or for such other periods as the Securities and Exchange
Commission has by order permitted. The Trust also reserves the right to suspend
sales of shares of the Fund for any period during which any of the New York
Stock Exchange, an Adviser, the Administrator or the Custodian is not open for
business.
Purchase and redemption of shares of the 1784 U.S. Treasury Money Market
Fund by Connecticut municipalities and other Connecticut municipal corporations
and authorities pursuant to the provisions of Section 7-400 of the Connecticut
General Statutes, as from time-to-time amended ("Con. Gen. Stat. ss. 7-400"),
may be made only through the use of (i) a bank, savings bank or savings and loan
association incorporated under the laws of the State of Connecticut, or (ii) a
federally chartered bank, savings bank or savings and loan association having
its principal place of business in the State of Connecticut, or (iii) such other
agent as may be permitted by Conn. Gen. Stat. ss. 7-400.
SYSTEMATIC WITHDRAWAL PLAN
A Shareholder (other than a Shareholder of the 1784 Institutional U.S. Treasury
Money Market Fund and holders of Class C or Class D shares of the 1784 U.S.
Treasury Money Market Fund) may direct the shareholder servicing agent to send
him or her regular monthly, quarterly, semi-annual or annual payments, as
designated on the Account Application and based upon the value of his account.
Each payment under a Systematic Withdrawal Plan ("SWP") must be at least $100,
except in certain limited circumstances. Such payments are drawn from the
proceeds of the redemption of shares held in the Shareholder's account (which
would be a return of principal and, if reflecting a gain, would be taxable). To
the extent that redemptions for such periodic withdrawals exceed dividend income
reinvested in the account, such redemptions will reduce and may eventually
exhaust the number of shares in the Shareholder's account. All dividend and
capital gain distributions for an account with a SWP will be reinvested in
additional full and fractional shares of the applicable Fund at the net asset
value in effect at the close of business on the record date for such
distributions. To initiate a SWP, shares having an aggregate value of at least
$10,000 must be held on deposit by the shareholder servicing agent. The
Shareholder by written instruction to the shareholder servicing agent may
deposit into the account additional shares of the applicable Fund, change the
payee or change the dollar amount of each payment. The shareholder servicing
agent may charge the account for services rendered and expenses incurred beyond
those normally assumed by the applicable Fund with respect to the liquidation of
shares. No charge is currently assessed against the account, but one could be
instituted by the shareholder servicing agent on 60 days' notice in writing to
the Shareholder in the event that the applicable Fund ceases to assume the cost
of these services. Any Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another
Fund. Any such plan may be terminated at any time by either the Shareholder or
the applicable Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of each of the shares of each Fund (including shares of each
class of the 1784 U.S. Treasury Money Market Fund) is determined on each day on
which both the New York Stock Exchange and the Federal Reserve Bank of Boston
are open ("Business Days"). This determination is made once during each such
day, as of 12:00 noon Eastern Time ("ET") in respect of shares of the 1784 U.S.
Treasury Money Market Fund and the 1784 Tax-Free Money Market Fund, as of 3:00
<PAGE>
p.m. ET in respect of the 1784 Institutional U.S. Treasury Money Market Fund
(noon on a Half Day, as defined in the prospectus by which shares of such Fund
are offered), and as of 4:00 p.m. ET in respect of the 1784 Growth and Income
Fund, 1784 Asset Allocation Fund, 1784 International Equity Fund, 1784 Growth
Fund, 1784 U.S. Government Medium-Term Income Fund, 1784 Tax-Exempt Medium-Term
Income Fund, 1784 Massachusetts Tax-Exempt Income Fund, 1784 Connecticut
Tax-Exempt Income Fund, 1784 Rhode Island Tax-Exempt Income Fund, 1784 Florida
Tax-Exempt Income Fund, 1784 Short-Term Income Fund and 1784 Income Fund. The
Exchange is normally closed on the following national holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas. Net asset value per share of each Fund is
calculated by adding the value of securities and other assets of that Fund,
subtracting liabilities and dividing by the number of its outstanding shares.
Net asset value per share of each class of the 1784 U.S. Treasury Money Market
Fund is calculated by adding the value of securities and other assets
attributable to that class, subtracting liabilities attributable to that class
and dividing by the number of outstanding shares of that class.
Securities of the Money Market Funds will be valued by the amortized cost
method, which involves valuing a security at its cost on the date of purchase
and thereafter (absent unusual circumstances) assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuations
in general market rates of interest on the value of the instrument. While this
method provides certainty in valuation, it may result in periods during which a
security's value, as determined by this method, is higher or lower than the
price a Fund would receive if it sold the instrument. During periods of
declining interest rates, the daily yield of these Funds may tend to be higher
than a like computation made by a company with identical investments utilizing a
method of valuation based upon market prices and estimates of market prices for
all of its fund securities. Thus, if the use of amortized cost by a Fund
resulted in a lower aggregate fund value on a particular day, a prospective
investor in that Fund would be able to obtain a somewhat higher yield than would
result from investment in a company utilizing solely market values, and existing
investors in the Fund would experience a lower yield. The converse would apply
in a period of rising interest rates.
The use by the Money Market Funds of amortized cost and the maintenance by these
Funds of a net asset value at $1.00 are permitted by regulations promulgated by
Rule 2a-7 under the 1940 Act, provided that certain conditions are met. The
regulations also require the Trustees to establish procedures which are
reasonably designed to stabilize the net asset value per share at $1.00 for
these Funds. Such procedures include the determination of the extent of
deviation, if any, of these Funds' current net asset value per share calculated
using available market quotations from these Funds' amortized cost price per
share at such intervals as the Trustees deem appropriate and reasonable in light
of market conditions and periodic reviews of the amount of the deviation and the
methods used to calculate such deviation. In the event that such deviation
exceeds 1/2 of 1%, the Trustees are required to consider promptly what action,
if any, should be initiated, and, if the Trustees believe that the extent of any
deviation may result in material dilution or other unfair results to
Shareholders of these Funds, the Trustees are required to take such corrective
action as they deem appropriate to eliminate or reduce such dilution or unfair
results to the extent reasonably practicable. Such actions may include the sale
of fund instruments prior to maturity to realize capital gains or losses or to
shorten average fund maturity; withholding dividends; redeeming shares in kind;
or establishing a net asset value per share by using available market
quotations. In addition, if any of these Funds incurs a significant loss or
liability, the Trustees have the authority to reduce pro rata the number of
shares of that Fund in the account of each Shareholder of such Fund and to
offset each such Shareholder's pro rata portion of such loss or liability from
that Shareholder's accrued but unpaid dividends or from future dividends of the
<PAGE>
affected Fund while each other Fund must annually distribute at least 90% of its
investment company taxable income.
In valuing each of the Equity Funds', the Fixed Income Funds' and the Tax-Exempt
Funds' assets, short-term obligations are valued by the amortized cost method,
which involves valuing a security at its cost on the date of purchase and
thereafter (absent unusual circumstances) assuming a constant amortization to
maturity of any discount or premium regardless of the impact of fluctuations in
general market rates of interest on the value of the instrument. This
constitutes fair value as determined by the Board of Trustees of the Trust. A
security listed on an exchange will be valued at its last sale price on that
exchange using quotations on the exchange on which the security is traded most
extensively. Lacking any sales, the security will be valued at the mean between
the closing asking price and the closing bid price. Unlisted securities which
are quoted on the National Association of Securities Dealers' National Market
System, for which there have been sales of such securities, shall be valued at
the last sale price reported on such system. If there are no such sales, the
value shall be the high, or "inside" bid, which is the bid supplied by the NASD
on its NASDAQ Screen for such securities in the over-the-counter market. The
value of such securities quoted on the NASDAQ System, but not listed on the
National Market System, shall be valued at the high or "inside" bid. Unlisted
securities which are not quoted on the NASDAQ System and for which
over-the-counter market quotations are readily available will be valued at the
mean between the current bid and asked prices for such securities in the
over-the-counter market. Other unlisted securities (and listed securities
subject to restriction on sale) will be valued at their fair value as determined
in good faith by the Board of Trustees of the Trust although the actual
calculation may be done by others. Open futures contracts are valued at the most
recent settlement price, unless such price does not reflect the fair value of
the contract, in which case such positions will be valued by or under the
direction of the Board of Trustees of the Trust.
TAXES
TAX STATUS OF THE FUNDS
Each of the Funds is treated as a separate entity for federal income tax
purposes under subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). Each Fund has elected to be treated and intends to qualify each
year as a "regulated investment company" under Subchapter M by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions (as a percentage of
both the Fund's overall income and, in the case of the Tax-Exempt Funds, its
tax-exempt income), and the composition and holding period of the Fund's
portfolio assets. Because each Fund intends to distribute all of its net
investment income and net realized capital gains to shareholders in accordance
with the timing requirements imposed by the Code, it is not expected that the
Funds will be required to pay any federal income or excise taxes, although a
Fund's foreign-source income may be subject to foreign withholding taxes. If a
Fund should fail to qualify as a "regulated investment company" in any year, the
Fund would incur a regular corporate federal income tax upon its taxable income
and the Fund's distributions would generally be taxable as ordinary dividend
income to its shareholders.
Each of the Funds is organized as a series of a Massachusetts business trust and
is not subject to any Massachusetts income or excise taxes as long as it
qualifies as a regulated investment company under the Code.
<PAGE>
TAX STATUS OF THE SHAREHOLDERS
Distributions by Funds Other Than the Tax-Exempt Funds. Shareholders of Funds
other than the Tax-Exempt Funds will have to pay federal income taxes and may be
subject to state or local income taxes on the dividends and capital gain
distributions they receive from those Funds. Dividends from ordinary income and
any distributions from net short-term capital gains are taxable to shareholders
as ordinary income for federal income tax purposes, whether paid in cash or in
additional shares. Distributions of net capital gains (i.e., the excess of net
long-term capital gains over net short-term capital losses), whether paid in
cash or in additional shares, are taxable to shareholders as long-term capital
gains without regard to the length of time the shareholders have held their
shares.
Distributions by the Tax-Exempt Funds. The portion of each Tax-Exempt Fund's
distributions of net investment income that is attributable to interest from
tax-exempt securities will be designated by that Fund as an "exempt-interest
dividend" under the Code and will generally be exempt from federal income tax in
the hands of shareholders so long as at least 50% of the total value of the
Fund's assets consists of tax-exempt securities at the close of each quarter of
the Fund's taxable year. Distributions of tax-exempt interest earned from
certain securities may, however, be treated as an item of tax preference for
shareholders under the federal alternative minimum tax, and all exempt-interest
dividends may increase a corporate shareholder's alternative minimum tax. The
percentage of income designated as tax-exempt will be applied uniformly to all
distributions by the Fund of net investment income made during each fiscal year
of the Fund and may differ from the percentage of distributions consisting of
tax-exempt interest in any particular month. Shareholders are required to report
exempt-interest dividends received from the Fund on their federal income tax
returns.
Shareholders of the Tax-Exempt Funds will have to pay federal income taxes and
may be subject to state or local income taxes on the non exempt-interest
dividends (including dividends from earnings from taxable securities and
repurchase transactions) and capital gain distributions they receive from the
Funds. That portion of net investment income distributions not designated as
tax-exempt and any distributions from net short-term capital gains are taxable
to shareholders as ordinary income for federal income tax purposes, whether the
distributions are paid in cash or in additional shares. Distributions of net
capital gains, whether paid in cash or in additional shares, are taxable to
shareholders as long-term capital gains without regard to the length of time the
shareholders have held their shares.
The exemption of exempt-interest dividends for federal income tax purposes does
not necessarily result in exemption under the tax laws of any state or local
taxing authority. For a discussion of the state and local tax consequences of an
exempt-interest dividend from any Fund investing in state or local obligations,
see that Fund's prospectus.
Distributions -- General. The Money Market Funds are not expected to make any
capital gain distributions. Because the Funds other than the Equity Funds do not
expect to earn any dividend income, it is expected that none of their dividends
will qualify for the dividends received deduction for corporations. A portion of
the Equity Funds' ordinary income dividends (but none of their capital gain
distributions) is normally eligible for the dividends received deduction for
corporations if the recipient otherwise qualifies for that deduction with
respect to its holding of Fund shares. Availability of the deduction for
particular shareholders is subject to certain limitations, and deducted amounts
<PAGE>
may be subject to the alternative minimum tax or result in certain basis
adjustments. Any Fund dividend that is declared in October, November, or
December of a calendar year, that is payable to shareholders of record in such a
month, and that is paid the following January will be treated as if received by
the shareholders on December 31 of the year in which the dividend is declared.
The Trust will notify shareholders regarding the federal tax status of
distributions after the end of each calendar year.
Except in the case of the Money Market Funds, any Fund distribution (or, in the
case of the Fixed Income Funds and the Tax-Exempt Funds, any Fund distribution
of net capital gains or net short-term capital gains) will have the effect of
reducing the per share net asset value of shares in the Fund by the amount of
the distribution. Shareholders purchasing shares shortly before the record date
of any such distribution may thus pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
Distributions of a Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Trust intends to advise shareholders of
the extent, if any, to which their respective distributions consist of such
interest. Shareholders are urged to consult their tax advisors regarding the
possible exclusion of such portion of their dividends for state and local income
tax purposes.
DISPOSITION OF SHARES IN THE FUNDS
In general, any gain or loss realized upon a taxable disposition of shares of a
Fund by a Shareholder that holds such shares as a capital asset will be treated
as long-term capital gain or loss if the shares have been held for more than
twelve months and otherwise as short-term capital gain or loss. In the case of
the Tax-Exempt Funds, any loss realized upon a disposition of shares in a Fund
held for six months or less will be disallowed to the extent of any
exempt-interest dividends received with respect to those shares. In the case of
any Fund, any loss realized upon the disposition of shares in the Fund held for
six months or less will (if not disallowed as described in the preceding
sentence) be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales.
ADDITIONAL INFORMATION FOR SHAREHOLDERS OF THE TAX-EXEMPT FUNDS
Interest on indebtedness incurred by Shareholders to purchase or carry shares of
a Tax-Exempt Fund will not be deductible for federal income tax purposes.
Exempt-interest dividends are taken into account in calculating the amount of
social security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by certain private activity bonds
should consult their tax advisors before purchasing shares of a Tax-Exempt Fund.
ADDITIONAL INFORMATION RELATING TO FUND INVESTMENTS
Except in the case of the Money Market Funds, the Funds' current dividend and
accounting policies will affect the amount, timing, and character of
distributions to Shareholders, and may, under certain circumstances, make an
economic return of capital taxable to Shareholders. Any investment by a Fund in
zero coupon bonds, deferred interest bonds, payment-in-kind bonds, certain
<PAGE>
stripped securities including STRIPS, and certain securities purchased at a
market discount will cause the Fund to recognize income prior to the receipt of
cash payments with respect to those securities. In order to distribute this
income and avoid a tax on the Fund, a Fund may be required to liquidate
portfolio securities that it might otherwise have continued to hold, potentially
resulting in additional taxable gain or loss to the Fund.
An investment by a Fund in residual interests of a CMO that has elected to be
treated as a REMIC can create complex tax problems, especially if the Fund has
state or local governments or other tax-exempt organizations as shareholders.
Fund transactions in options, futures contracts, and forward contracts will be
subject to special tax rules that may affect the amount, timing, and character
of Fund income and distributions to shareholders. For example, certain positions
held by a Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by a Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Funds will limit their activities in options, futures contracts,
forward contracts, and swaps and related transactions to the extent necessary to
meet the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to a Fund's foreign investments.
Investment income received by a Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source; the Funds (other than
the 1784 International Equity Fund) do not expect to be able to pass through to
shareholders foreign tax credits or deductions with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Funds to a reduced rate of tax or an exemption
from tax on such income; the Funds intend to qualify for treaty reduced rates
where available. It is not possible, however, to determine a Fund's effective
rate of foreign tax in advance since the amount of the Fund's assets to be
invested within various countries is not known. If the 1784 International Equity
Fund holds more than 50% of its assets in foreign stock and securities at the
close of its taxable year, the Fund may elect to "pass through" to the Fund's
Shareholders foreign income taxes paid. If the Fund so elects, Shareholders will
be required to treat their pro rata portion of the foreign income taxes paid by
the Fund as part of the amounts distributed to them by the Fund and thus
includable in their gross income for federal income tax purposes. Shareholders
who itemize deductions would then be allowed to claim a deduction or credit (but
not both) on their federal income tax returns for such amounts, subject to
certain limitations. Shareholders who do not itemize deductions would (subject
to such limitations) be able to claim a credit but not a deduction. No deduction
will be permitted to individuals in computing their alternative minimum tax
liability. If the Fund does not qualify or elect to "pass through" to the Fund's
Shareholders foreign income taxes paid by it, Shareholders will not be able to
claim any deduction or credit for any part of the foreign taxes paid by the
Fund.
Foreign exchange gains and losses realized by a Fund will generally be treated
as ordinary income and losses. Use of foreign currencies for non-hedging
purposes may be limited in order to avoid a tax on the applicable Fund. While it
is not intended for the Funds generally to do so, a Fund may from time to time
invest in stock of foreign issuers deemed to be "passive foreign investment
<PAGE>
companies" for U.S. tax purposes; any Fund making such an investment may be
liable for U.S. income taxes on certain distributions and realized capital gains
from stock of such issuers.
FOREIGN SHAREHOLDERS
Taxable dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%, although the 30%
rate may be reduced to the extent provided by an applicable tax treaty. The
Funds intend to withhold tax payments at the rate of 30% (or the lower treaty
rate) on taxable dividends and other payments to Non-U.S. Persons that are
subject to such withholding. Any amounts overwithheld may be recovered by such
persons by filing a claim for refund with the U.S. Internal Revenue Service
within the time period appropriate to such claims. Distributions received from
the Funds by Non-U.S. Persons also may be subject to tax under the laws of their
own jurisdiction.
BACKUP WITHHOLDING
Each of the Funds is also required in certain circumstances to apply backup
withholding at the rate of 31% on taxable dividends and redemption proceeds paid
to any shareholder (including a Non-U.S. Person) who does not furnish to the
Fund certain information and certifications or who is otherwise subject to
backup withholding. Backup withholding will not, however, be applied to payments
that have been subject to 30% (or lower treaty rate) withholding.
FUND TRANSACTIONS; TRADING PRACTICES AND BROKERAGE
FUND TRANSACTIONS
None of the Advisers has any obligation to deal with any dealer or group of
dealers in the execution of transactions in Fund securities. Subject to policies
established by the Trustees, each Adviser to a Fund is responsible for placing
the orders to execute transactions for such Fund. In placing orders, it is the
policy of the Trust for each Adviser to seek to obtain the best net results
taking into account such factors as price (including the applicable dealer
spread), the size, type and difficulty of the transaction involved, the firm's
general execution and operational facilities, and the firm's risk in positioning
the securities involved. While each Adviser generally seeks reasonably
competitive spreads or commissions, the Trust will not necessarily be paying the
lowest spread or commission available.
The money market securities in which the Funds invest are traded primarily in
the over-the-counter market. Bonds and debentures are usually traded
over-the-counter, but may be traded on an exchange. Where possible, each Adviser
will deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Money market
securities are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of executing
transactions for the Funds will primarily consist of dealer spreads and
underwriting commissions.
TRADING PRACTICES AND BROKERAGE
Specific decisions to purchase or sell securities for a Fund are made by a
portfolio manager who is an employee of Bank of Boston, as Adviser to such Fund
and who is appointed and supervised by the senior officers of Bank of Boston, or
<PAGE>
in the case of the 1784 International Equity Fund, by portfolio managers who are
employees of Bank of Boston or of Kleinwort Benson and who are appointed and
supervised by the senior officers of Bank of Boston or by senior officers of
Kleinwort Benson. Changes in a Fund's investments are reviewed by the Board of
Trustees of the Trust. A portfolio manager may serve other clients of either of
the Advisers or of an affiliate of either of the Advisers in a similar capacity.
Each Adviser selects brokers or dealers to execute transactions for the purchase
or sale of securities for the Funds on the basis of its judgment of their
professional capability to provide the service. The primary consideration is to
have brokers or dealers execute transactions at best price and execution. Best
price and execution refers to many factors, including the price paid or received
for a security, the commission charged, the promptness and reliability of
execution, the confidentiality and placement accorded the order and other
factors affecting the overall benefit obtained by the account on the
transaction. Each Adviser's determination of what are reasonably competitive
rates is based upon the professional knowledge of its portfolio managers as to
rates paid and charged for similar transactions throughout the securities
industry. In some instances, a Fund pays a minimal share transaction cost when
the transaction presents no difficulty. Some trades are made on a net basis
where a Fund either buys securities directly from the dealer or sells them to
the dealer. In these instances, there is no direct commission charged but there
is a spread (the difference between the buy and sell price) which is the
equivalent of a commission.
Each Adviser may allocate, out of all commission business generated by all of
the funds and accounts under its management, brokerage business to brokers or
dealers who provide brokerage and research services. These research services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing of analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends; assisting in
determining portfolio strategy; providing computer software used in security
analyses; and providing fund performance evaluation and technical market
analyses. Such services are used by each Adviser in connection with its
investment decision-making process with respect to one or more portfolios under
its management and may not be used exclusively with respect to the fund or
account generating the brokerage. Not all brokerage and research services are
useful or of value in advising any particular Fund.
As provided in the Securities Exchange Act of 1934 (the "1934 Act"), higher
commissions may be paid to broker/dealers who provide brokerage and research
services than to broker/dealers who do not provide such services if such higher
commissions are deemed reasonable in relation to the value of the brokerage and
research services provided. Although transactions are directed to broker/dealers
who provide such brokerage and research services, the commissions paid to such
broker/dealers are not, in general, expected to be higher than commissions that
would be paid to broker/dealers not providing such services; further, in
general, any such commissions are reasonable in relation to the value of the
brokerage and research services provided. Unless otherwise directed by the
Trust, a commission higher than one charged elsewhere will not be paid to a
broker/dealer solely because it provided research services to an Adviser. In
addition, fund transactions which generate commissions or their equivalent are
directed to broker/dealers who provide daily fund pricing services to the Funds.
Subject to best price and execution, commissions used for pricing may or may not
be generated by the Funds receiving the pricing service.
Bank of Boston may place a combined order for two or more Funds (or for a Fund
and another account under the Bank of Boston's management) engaged in the
purchase or sale of the same security if, in the Bank of Boston's judgment,
<PAGE>
joint execution is in the best interest of each participant and will result in
best price and execution. Transactions involving commingled orders are allocated
in a manner deemed equitable to each Fund or account. It is believed that the
ability of the Funds to participate in volume transactions will generally be
beneficial to them. Although it is recognized that, in some cases, the joint
execution of orders could adversely affect the price or volume of the security
that a particular Fund may obtain, it is the opinion of the Bank of Boston and
the Board of Trustees of the Trust that the advantages of combined orders
outweigh the possible disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, an
Adviser may place orders for a Fund with broker/dealers which have agreed to
defray certain Trust expenses such as custodian fees, and may, at the request of
the Distributor, give consideration to sales of shares of the Trust as a factor
in the selection of brokers and dealers to execute Fund transactions.
It is expected that an Adviser may execute brokerage or other agency
transactions through the Distributor or such Adviser or an affiliate of such
Adviser, for a commission in conformity with the 1940 Act, the 1934 Act and
rules promulgated by the Securities and Exchange Commission such policies as the
Board of Trustees of the Trust may determine. Under these provisions, the
Distributor or such Adviser or an affiliate of such Adviser is permitted to
receive and retain compensation for effecting transactions for a Fund on an
exchange if a written contract is in effect between the Distributor and the
Trust expressly permitting the Distributor or such Adviser or an affiliate of
such Adviser to receive and retain such compensation. These rules further
require that commissions paid to the Distributor, such Adviser or any such
affiliate by the Trust for such exchange transactions not exceed "usual and
customary" brokerage commissions. The rules define "usual and customary"
commissions to include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time." In addition, an Adviser may direct commission business to one or more
designated broker/dealers in connection with such broker/dealer's provision of
services to the Trust or the Funds or payment of certain Trust expenses, such as
custody, pricing and professional fees. The Trustees, including those who are
not "interested persons" of the Trust, have adopted procedures for evaluating
the reasonableness of commissions paid to the Distributor and will review these
procedures periodically.
SERVICEMARKS
The servicemark 1784 FUNDS and the "eagle" logo are used by permission of Bank
of Boston, and in the event that the Advisory Agreements with Bank of Boston are
terminated, the Trust has agreed to discontinue use of the servicemark and logo.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of series, each of which represents an equal proportionate interest in
that series. Shareholders of each series are entitled upon liquidation or
dissolution to a pro rata share in the net assets of that series available for
distribution to shareholders. Shareholders have no preemptive rights. Currently,
the Trust has fifteen series of shares, each of which is a Fund. The 1784 U.S.
Treasury Money Market Fund offers three classes of shares: Class A, Class C and
Class D. The Declaration of Trust provides that the Trustees of the Trust may
create additional series of shares, and may create additional classes of any one
<PAGE>
or more series. All consideration received by the Trust for shares of any
additional series and all assets in which such consideration is invested would
belong to that series and would be subject to the liabilities related thereto.
Share certificates representing shares will not be issued.
Shares of each series of the Trust are entitled to vote separately to approve
advisory agreements or changes in investment policies, but shares of all series
of the Trust vote together in the election or selection of Trustees, principal
underwriters and accountants.
The Declaration of Trust may be amended as authorized by vote of Shareholders of
the Trust. Matters not affecting all series or classes of shares shall be voted
on only by the shares of the series or classes affected. Shares of the Trust may
be voted in person or by proxy, and any action taken by Shareholders may be
taken without a meeting by written consent of a majority of Shareholders
entitled to vote on the matter.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust could, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. Even if, however, the Trust were held to be a partnership, the
possibility of the Shareholders' incurring financial loss for that reason
appears remote because the Trust's Declaration of Trust contains an express
disclaimer of Shareholder liability for obligations of the Trust and requires
that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by or on behalf of the Trust or the
Trustees, and because the Declaration of Trust provides for indemnification out
of the Trust property for any Shareholder held personally liable for the
obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that the Trustees shall not be responsible or
liable in any event for any neglect or wrongdoing of any officer, agent,
employee, investment adviser or administrator, principal underwriter or
custodian, nor shall any Trustee be responsible for the act or omission of any
other Trustee, and no Trustee shall be liable to the Trust or any Shareholder.
The Declaration of Trust also provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with actual or threatened litigation in which they may be involved because of
their offices with the Trust unless it is determined, in the manner provided in
the Declaration of Trust, that they have not acted in good faith in the
reasonable belief that their actions were in the best interests of the Trust.
However, nothing in the Declaration of Trust shall protect or indemnify a
Trustee against any liability for his or her willful misfeasance, bad faith,
gross negligence or reckless disregard of his or her duties.
FINANCIAL INFORMATION
The Statements of Net Assets at May 31, 1995, the Statements of Operations for
the period ended May 31, 1995, the Statements of Changes in Net Assets for the
period ended May 31, 1995, the Financial Highlights for the period ended May 31,
1995, the Notes to the Financial Statements and the Report of Independent
Accountants, each of which is included in the two Annual Reports to Shareholders
of the Trust (Accession Number 0000929638-95-000094), are incorporated by
reference into this Statement of Additional Information and have been so
incorporated in reliance upon the report of Coopers & Lybrand L.L.P.,
independent accountants, as experts in accounting and auditing. A copy of each
of the Annual Reports accompanies this Statement of Additional Information.
<PAGE>
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INVESTMENT ADVISERS 1784 FUNDS
<S> <C>
The First National Bank of Boston 1784 GROWTH AND INCOME FUND
100 Federal Street 1784 ASSET ALLOCATION FUND
Boston, MA 02110 1784 INTERNATIONAL EQUITY FUND
1784 GROWTH FUND
1784 U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
Kleinwort Benson Investment 1784 SHORT-TERM INCOME FUND
Management Americas Inc. 1784 INCOME FUND
200 Park Avenue 1784 TAX-EXEMPT MEDIUM-TERM INCOME FUND
New York, New York 10166 1784 MASSACHUSETTS TAX-EXEMPT INCOME FUND
1784 RHODE ISLAND TAX-EXEMPT INCOME FUND
1784 CONNECTICUT TAX-EXEMPT INCOME FUND
DISTRIBUTOR 1784 FLORIDA TAX-EXEMPT INCOME FUND
1784 TAX-FREE MONEY MARKET FUND
SEI Financial Services Company 1784 U.S. TREASURY MONEY MARKET FUND
680 East Swedesford Road 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
Wayne, PA 19087-1658
ADMINISTRATOR
SEI Financial Management Corporation
680 East Swedesford Road
Wayne, PA 19087-1658
LEGAL COUNSEL
Bingham, Dana & Gould LLP
150 Federal Street
Boston, MA 02110
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109 STATEMENT OF ADDITIONAL INFORMATION
CUSTODIAN
The First National Bank of Boston OCTOBER 2,1995,
100 Federal Street AS AMENDED JANUARY 2, 1996,
Boston, MA 02110 AS AMENDED FEBRUARY 1, 1996,
AS AMENDED JUNE 28, 1996
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The 1784 Funds:
-are not insured by the FDIC or any other governmental agency;
-are not guaranteed by The First National Bank of Boston or any
of its affiliates;
-are not deposits or obligations of The First National Bank of Boston or any of
its affiliates;
-involve investment risks, including possible loss of principal.
The First National Bank of Boston serves as investment adviser,
custodian and fund accountant for the 1784 Funds. The 1784 Funds
are distributed by SEI Financial Services Company, a party independent
of The First National Bank of Boston or any of its affiliates. Financial
Service Counselors are registered representatives of an independent
broker-dealer or of 1784 Investor Services, Inc., an affiliate of
The First National Bank of Boston.
1784 FUNDS
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