Prospectus Rule 497(c)
File Nos. 33-58004
and 811-7474
Boston 1784 Funds(R)
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This Prospectus describes the Boston 1784 Large Cap Equity Fund, a
no-load mutual fund advised by BankBoston.
REMEMBER THAT SHARES OF THE FUND
(Degree) ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, BANKBOSTON OR ANY OF ITS AFFILIATES
(Degree) ARE NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY
(Degree) INVOLVE INVESTMENT RISKS, INCLUDING RISK TO PRINCIPAL
Please read this Prospectus before investing, and keep it on file for
future reference. It contains important information, including how the Fund
invests and services available to shareholders.
To learn more about the Fund and its investments, you can obtain a copy
of the Fund's most recent financial report and portfolio listing or a copy of
the Statement of Additional Information dated May 27, 1997, as supplemented
June 2, 1997. The Statement of Additional Information has been filed with the
Securities and Exchange Commission and is incorporated into this Prospectus by
reference. For a free copy of either document call 1-800-BKB-1784.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
June 2, 1997
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CONTENTS
Fund Summary...............................................................3
Expenses...................................................................3
Investment Information.....................................................4
Investment objectives and principal investment policies..............4
Additional investment policies.......................................4
Risk considerations..................................................5
Dividends and Distributions................................................7
Management.................................................................7
Shareholder Services.......................................................9
How to reach the Fund................................................9
Types of accounts....................................................9
How to open an account..............................................10
How to purchase shares..............................................10
How to sell shares..................................................12
Shareholder services and policies...................................13
Taxes.....................................................................15
General Information.......................................................15
Net asset value.....................................................15
Organization........................................................15
Voting and other rights.............................................16
Performance information.............................................16
Expenses............................................................17
Counsel and independent auditors....................................17
Appendix A - Permitted Investments and Investment Practices...............18
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FUND SUMMARY
This section summarizes the Fund's investment objectives and who may want
to invest. See the rest of this Prospectus for more information, including risk
considerations. As with any mutual fund, there can be no assurance that the
Fund will achieve its investment objectives. The Fund, by itself, is not
intended to be a complete investment program.
BOSTON 1784 LARGE CAP EQUITY FUND
Objectives: income and capital appreciation.
WHO MAY WANT TO INVEST
The Fund is designed for long-term investors who can tolerate changes in
the value of their investments. The Fund may be appropriate for those who seek
both income and growth from equity investments. While this Fund invests
primarily in U.S. securities, it may invest a portion of its assets in non-U.S.
securities. Non-U.S. securities involve risks in addition to those of U.S.
investments.
EXPENSES
These tables show shareholder transaction expenses and estimated annual
operating expenses for the Fund, and are intended to assist investors in
understanding the various costs and expenses that shareholders in the Fund will
bear, either directly or indirectly. For more information, see "Management" on
page 7 and "General Information - Expenses" on page 17.
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on None
purchases and reinvested dividends
Deferred sales charges imposed on None
redemptions
Redemption fee* None
Exchange fee None
*There is a $12 service fee if the Fund wires redemption proceeds to your bank
account.
ANNUAL OPERATING EXPENSES (after fee waivers and reimbursements)(1)
(expressed as a percentage of average net assets)
Total
Other Operating
Advisory Fee 12b-1 Fee(2)(3) Expenses(2) Expenses(2)
Large Cap Equity Fund .74% None .20% .94%
EXAMPLE(1)
A shareholder would pay the following expenses on a $1,000 investment,
assuming a 5% annual return, reinvestment of all dividends and redemption of
the shares after the number of years indicated:
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1 Year 3 Years
Large Cap Equity Fund $10 $30
(1)Because the Fund is newly organized, the information in the expense
table and the example is estimated for the current fiscal year and reflects
voluntary fee waivers and/or reimbursements. The assumption in the example of a
5% annual return is required by the Securities and Exchange Commission for all
mutual funds, and is not a prediction of the Fund's future performance. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF
THE FUND. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(2)Without fee waivers and reimbursements, 12b-1 fees would be 0.25%; and
other expenses and total operating expenses would be .76% and 1.75%.
(3)12b-1 fees are asset-based sales charges. Without waiver of this fee,
after a substantial period of time annual payment of the fee may total more
than the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT POLICIES
This section describes the Fund's investment objectives and principal
investment policies. Additional investment policies and risk considerations are
described in the next sections. The Fund's investment objectives are
fundamental, meaning that they cannot be changed without the approval of
shareholders of the Fund. Of course, there can be no assurance that the Fund
will achieve its investment objectives.
The investment objectives of the Boston 1784 Large Cap Equity Fund are
income and capital appreciation.
The Fund invests primarily in equity securities of U.S. and non-U.S.
issuers that have large market capitalizations. Under normal circumstances at
least 65% of the Fund's total assets is invested in these securities. Large
market capitalization companies are those with market capitalizations of $3
billion or more at the time of the Fund's investment. The average market
capitalization of companies whose securities are held by the Fund, on a
dollar-weighted basis, is expected to exceed $5 billion. Equity securities
include common and preferred stocks, securities convertible into common or
preferred stock, partnership interests, warrants and depositary receipts. The
Fund emphasizes securities of issuers that the Adviser believes pay high
dividends or offer high rates of return.
The Fund may also invest in non-convertible debt securities and money
market instruments. Under normal circumstances not more than 35% of the Fund's
total assets is invested in these securities.
ADDITIONAL INVESTMENT POLICIES
This section describes additional investment policies of the Fund. See
"Risk Considerations" for more information.
NON-U.S. SECURITIES. The Fund may invest not more than 20% of its assets
in non-U.S. securities, including American, European, Continental and Global
Depositary Receipts. These investments may include investments in securities of
issuers in developing countries. Investing in non-U.S. securities involves
risks in addition to those of investing in U.S. securities. These risks are
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heightened for investments in securities of issuers in developing countries.
See "Risk Considerations."
TEMPORARY INVESTMENTS. During periods of unusual economic or market
conditions or for temporary defensive purposes or liquidity, the Fund may
invest without limit in cash and in U.S. dollar-denominated high quality money
market and short-term instruments. These investments may result in a lower
yield than would be available from investments with a lower quality or longer
term.
OTHER PERMITTED INVESTMENTS. For more information regarding the Fund's
permitted investments and investment practices, see Appendix A. The Fund will
not necessarily invest or engage in each of the investments and investment
practices in Appendix A but reserves the right to do so.
OTHER INVESTMENT COMPANIES. The Fund may invest substantially all of its
assets in a mutual fund having the same investment objectives and policies as
the Fund. This structure is known as a master/feeder investment structure.
Shareholders will be given at least 30 days' notice before the Fund converts to
this structure.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains
a list of specific investment restrictions which govern the investment policies
of the Fund, including a limitation that the Fund may borrow money from banks
in an amount not to exceed 331/3% of the Fund's total assets for extraordinary
or emergency purposes (e.g., to meet redemption requests). Shareholder approval
is required to change the Fund's investment objectives. Generally, the Fund's
investment policies may be changed without shareholder approval. If a
percentage or rating restriction (other than a restriction as to borrowing) is
adhered to at the time an investment is made, a later change in percentage or
rating resulting from changes in the Fund's securities will not be a violation
of policy.
PORTFOLIO TURNOVER. Securities of the Fund will be sold whenever the
Adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The amount of brokerage commissions and realization of taxable
capital gains will tend to increase as the level of portfolio activity
increases. The annual turnover rate for the Fund is not expected to exceed
100%.
BROKERAGE TRANSACTIONS. The primary consideration in placing the Fund's
securities transactions with broker-dealers for execution is to obtain and
maintain the availability of execution at the most favorable prices and in the
most effective manner possible. The Fund may execute brokerage or other agency
transactions through the investment adviser or distributor of the Fund. The
adviser or distributor will be paid for these transactions.
RISK CONSIDERATIONS
The risks of investing in the Fund vary depending upon the nature of the
securities held, and the investment practices employed, on its behalf. Certain
of these risks are described in this section.
CHANGES IN NET ASSET VALUE. The Fund's net asset value will fluctuate
based on changes in the values of its underlying portfolio securities. This
means that an investor's shares may be worth more or less at redemption than at
the time of purchase. Equity securities fluctuate in response to general market
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and economic conditions and other factors, including actual and anticipated
earnings, changes in management, political developments and the potential for
takeovers and acquisitions. The value of debt securities generally goes down
when interest rates go up, and up when interest rates go down. Changes in
interest rates will generally cause larger changes in the prices of longer-term
securities than in the prices of shorter-term securities. Prices of debt
securities also fluctuate based on changes in the actual and perceived
creditworthiness of issuers. The prices of lower rated securities often
fluctuate more than those of higher rated securities.
CREDIT RISK OF DEBT SECURITIES. It is possible that some issuers will not
make payments on debt securities held by the Fund. Investors should be aware
that securities offering above-average yields may involve above-average risks.
Securities rated in the lowest categories of investment grade (that is, BBB or
Baa by Standard & Poor's or Moody's) and equivalent securities may have
speculative characteristics. In adverse economic or other circumstances,
issuers of these securities are more likely to have difficulty making principal
and interest payments than issuers of higher grade obligations.
NON-U.S. SECURITIES. Investments in non-U.S. securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S. and
non-U.S. issuers and markets are subject. These risks may include
expropriation, confiscatory taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets and political
or social instability. Enforcing legal rights may be difficult, costly and slow
in non-U.S. countries, and there may be special problems enforcing claims
against non-U.S. governments. In addition, non-U.S. companies may not be
subject to accounting standards or governmental supervision comparable to U.S.
companies, and there may be less public information about their operations.
Non-U.S. markets may be less liquid and more volatile than U.S. markets, and
may offer less protection to investors such as the Fund. Prices at which the
Fund may acquire securities may be affected by trading by persons with material
non-public information and by securities transactions by brokers in
anticipation of transactions by the Fund.
Because non-U.S. securities often trade in currencies other than the U.S.
dollar, changes in currency exchange rates will affect the Fund's net asset
value, the value of dividends and interest earned and gains and losses realized
on the sale of securities. In addition, some non-U.S. currency values may be
volatile and there is the possibility of governmental controls on currency
exchanges or governmental intervention in currency markets.
Equity securities traded in certain foreign countries may trade at
price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States. These multiples may not be
sustainable. Rapid increases in money supply in certain counties may result in
speculative investment in equity securities which may contribute to volatility
of trading markets.
The costs attributable to non-U.S. investing, such as the costs of
maintaining custody of securities in non-U.S. countries, frequently are higher
than those involved in U.S. investing. As a result, the operating expense ratio
of the Fund may be higher than that of investment companies investing
exclusively in U.S. securities.
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The Fund may invest in issuers located in developing countries, such as
the Philippines, Malaysia, Indonesia, Thailand, South Korea, India, Poland,
Hungary, Brazil, Peru and Russia. Developing countries are generally defined as
countries in the initial stages of their industrialization cycles with low per
capita income. All of the risks of investing in non-U.S. securities are
heightened by investing in developing countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of developed countries with more mature economies; the markets of
developing countries often have provided higher rates of return, and greater
risks, to investors.
INVESTMENT PRACTICES. Certain of the investment practices employed for
the Fund may entail certain risks. These risks are in addition to the risks
described above and are described in Appendix A.
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the Fund's net income from dividends and interest is
paid to its shareholders of record quarterly on or about the last day of MARCH,
JUNE, SEPTEMBER and DECEMBER.
The Fund's net realized short-term and long-term capital gains, if any,
will be distributed to the Fund's shareholders at least annually, in December.
The Fund may also make additional distributions to its shareholders to the
extent necessary to avoid the application of the 4% non-deductible excise tax
on certain undistributed income and net capital gains of mutual funds.
Distributions are paid in additional shares issued at net asset value
unless the shareholder elects to receive payment in cash.
MANAGEMENT
TRUSTEES AND OFFICERS. The Fund is supervised by the Board of Trustees of
Boston 1784 Funds. More information on the Trustees and Fund officers may be
found under "Management" in the Statement of Additional Information.
INVESTMENT ADVISER. BankBoston is the investment adviser of the Fund, and
subject to policies set by the Trustees, makes investment decisions. BankBoston
is the successor to a bank chartered in 1784 and offers a wide range of banking
and investment services to customers throughout the world. BankBoston has been
providing asset management services since 1890. The Private Bank Division of
BankBoston is the investment management group within BankBoston that advises
the Fund. As of December 31, 1996, the Private Bank was responsible for the
investment management of approximately $20 billion of individual,
institutional, endowment and corporate assets, including $6 billion in assets
of the funds in Boston 1784 Funds, in money market, equity, and fixed income
securities. The Private Bank has earned national recognition and respect as
investment managers. BankBoston is a wholly-owned subsidiary of BankBoston
Corporation; its legal name is BankBoston, N.A. and its address is 100 Federal
Street, Boston, Massachusetts 02110. Prior to April 24, 1997, BankBoston's
legal name was The First National Bank of Boston.
The following individual at BankBoston is responsible for the daily
management of the Fund: William W. Jennings, Senior Fund Manager, is manager of
the Fund as of its commencement of operations. Mr. Jennings, who has more than
20 years of experience in investment management, has been a Fund Manager and
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Investment Counsellor at BankBoston's affiliate, Rhode Island Hospital Trust
National Bank, since 1981. He has been managing equity funds for BankBoston and
its affiliates since 1987.
Advisory Fees. BankBoston is entitled to receive investment advisory
fees, which are accrued daily and payable monthly, of 0.74% of the Fund's
average daily net assets.
BankBoston has agreed to waive its investment advisory fees to the extent
necessary to limit the total operating expenses of the Fund to a specified
level. BankBoston also may contribute to the Fund from time to time to help it
maintain a competitive expense ratio. These arrangements are voluntary and may
be terminated at any time.
Banking Relationships. BankBoston and its affiliates may have banking
relationships with the issuers of securities purchased for the Fund. These
relationships may include outstanding loans to issuers which may be repaid in
whole or in part with the proceeds of securities purchased for the Fund.
BankBoston has informed the Fund that in making its investment decisions, it
does not obtain or use material inside information in the possession of any
division or department of BankBoston or any of its affiliates.
Bank Regulatory Matters. The Glass-Steagall Act prohibits certain
financial institutions, such as BankBoston, from underwriting securities of
open-end investment companies, such as the Fund. BankBoston believes that its
investment advisory services are not underwriting and are consistent with the
Glass-Steagall Act and other relevant federal and state laws. State laws on
this issue may differ from applicable federal law, and banks and financial
institutions may be required to register as dealers pursuant to state
securities laws. Changes in either federal or state statutes or regulations, or
in their interpretations, could prevent BankBoston from continuing to perform
these services. If that were to happen, the Fund would seek alternative means
for obtaining these services.
ADMINISTRATOR. SEI Fund Resources provides administrative and fund
accounting services to the Fund, including regulatory reporting, office
facilities and equipment and personnel. SEI also provides fund accounting
services and calculates the Fund's net asset value. For these services SEI
receives a fee, which is calculated daily and paid monthly, at an annual rate
of 0.085% of the first $5 billion of the combined average daily net assets of
the Fund and the other funds in Boston 1784 Funds, and 0.035% of combined
average daily net assets in excess of $5 billion. SEI has agreed to waive
portions of its fee from time to time. SEI may retain sub-administrators,
including BankBoston, whose fees would be paid by SEI.
SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT. BankBoston is the Fund's
shareholder servicing agent. Boston Financial Data Services, 2 Heritage Drive,
North Quincy, Massachusetts 02171, is the Fund's dividend disbursing agent.
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, is the transfer agent.
DISTRIBUTION ARRANGEMENTS. SEI Financial Services Company, 1 Freedom
Valley Road, Oaks, Pennsylvania 19456, is the distributor of shares of the
Fund. Under a Distribution Plan which has been adopted pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund may pay monthly fees at an
annual rate of up to 0.25% of the Fund's average daily net assets. These fees
<PAGE>
may be used by the Distributor to compensate itself for its services or for
advertising, marketing or other promotional activities. The Distribution Plan
and related Distribution Agreement obligate the Fund to pay fees to the
Distributor as compensation for its services, not as reimbursement for specific
expenses incurred. The Distributor has agreed to waive its fee. This waiver is
voluntary and may be terminated at any time.
From time to time the Distributor may provide incentive compensation to
its own employees and employees of banks (including BankBoston), broker-dealers
and investment counselors in connection with the sale of shares of the Fund.
Promotional incentives may be cash or other compensation, including
merchandise, airline vouchers, trips and vacation packages, will be offered
uniformly to all program participants and will be based upon the amount of
shares of the Fund sold by the participant.
CUSTODIAN. BankBoston is the Fund's custodian. Fund securities may be
held by a sub-custodian bank approved by the Trustees.
SHAREHOLDER SERVICES
This section describes how to do business with the Fund and shareholder
services that are available.
HOW TO REACH THE FUND
By telephone 1-800-BKB-1784
Call for account or Fund information Monday
through Friday 8:00 a.m. to 8 p.m. or Saturday and
Sunday 9:00 a.m. to 4:00 p.m. (Eastern time).
By regular mail Boston 1784 Funds
P.O. Box 8524
Boston, MA 02266-8524
By overnight courier Boston 1784 Funds
c/o Boston Financial Data Services
2 Heritage Drive
North Quincy, MA 02171
TYPES OF ACCOUNTS
If you are investing in the Fund for the first time, you will need to
establish an account. You may establish the following types of accounts by
completing the account application included with this Prospectus. If there is
no application accompanying this Prospectus, call 1-800-BKB-1784.
o INDIVIDUAL OR JOINT OWNERSHIP. Individual accounts are owned by one person.
Joint accounts have two or more owners.
o GIFT OR TRANSFER TO MINOR (UGMA OR UTMA). A UGMA (Uniform Gifts to Minors
Act) or UTMA (Uniform Transfers to Minors Act) account is a custodial
account managed for the benefit of a minor. To open a UGMA or UTMA account,
you must include the minor's social security number on the application.
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o TRUST. A trust can open an account. The name of each trustee, the name of
the trust and the date of the trust agreement must be included on the
application.
o CORPORATIONS, PARTNERSHIPS AND OTHER LEGAL ENTITIES. Corporations,
partnerships and other legal entities may also open an account. The
application must be signed by a general partner of the partnership or an
authorized officer of the corporation or other legal entity.
o RETIREMENT. If you are eligible, you may set up your account under a
tax-sheltered retirement plan, such as an Individual Retirement Account.
BankBoston offers a number of retirement plans through which Fund shares may
be purchased. Call 1-800-BKB-1784.
HOW TO OPEN AN ACCOUNT
Complete and sign the appropriate account application. Please be sure to
provide your social security or taxpayer identification number on the
application. Make your check payable to the Fund. Send all items to one of the
following addresses:
By regular mail Boston 1784 Funds
P.O. Box 8524
Boston, MA 02266-8524
By overnight courier Boston 1784 Funds
c/o Boston Financial Data Services
2 Heritage Drive
North Quincy, MA 02171
You may also purchase shares through certain financial institutions,
including BankBoston. These institutions may have their own procedures for
purchases and redemptions, and may charge fees. Contact your financial
institution for more information.
HOW TO PURCHASE SHARES
Shares of the Fund are sold on a continuous basis and may be purchased
from the Distributor or a broker-dealer or financial institution that has an
agreement with the Distributor. Purchases may be made Monday through Friday,
except on certain holidays.
The Fund's share price, called net asset value, is calculated every
business day. The Fund's shares are sold without a sales charge. Shares are
purchased at net asset value the next time it is calculated after your
investment is received and accepted by the Distributor. Net asset value is
normally calculated at 4 p.m. Eastern time.
New Purchases. If you are new to the Fund, complete and sign an account
application and mail it along with your check. To establish the telephone
purchase option on your new account, complete the "Telephone Purchase of
Shares" section on the application and attach a "voided" check or deposit slip
from your bank account.
If you are investing through a tax-sheltered retirement plan for the
first time, you will need a special application. Retirement investing also
involves its own investment procedures. Call 1-800-BKB-1784 for more
information.
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Additional Purchases. If you already have money invested in the Fund, you
can invest additional money in the Fund in the following ways:
By mail. Complete the remittance slip attached at the bottom of your
confirmation statement. If you are making a purchase into a retirement
account, please indicate whether the purchase is a rollover or a current
or prior year contribution. Send your check and remittance slip or
written instructions to one of the addresses listed previously.
By telephone. This service allows you to purchase additional shares
quickly and conveniently through an electronic transfer of money. When
you make an additional purchase by telephone, the Fund will automatically
debit your predesignated bank account for the desired amount. If you have
not established the telephone purchase option, call 1-800-BKB-1784 to
request the appropriate form.
By wire. Purchases may also be made by wiring money from your bank
account to your Fund account. Call 1-800-BKB-1784 to receive wiring
instructions.
Automatic investment programs. Automatic investing is an easy way to
add to your account systematically. The Fund offers automatic investment
plans to help you achieve your financial goals as simply and conveniently
as possible. Minimum purchase amounts apply. Call 1-800-BKB-1784 for
information.
Paying for shares. Please note the following:
o Purchases may be made by check, wire transfer and automated clearing
house transactions.
o All purchases must be made in U.S. dollars.
o Checks must be drawn on U.S. banks and must be payable to the Fund.
o Cash and credit card checks are not accepted.
o If a check does not clear your bank, the Fund reserves the right to
cancel the purchase.
o If the Fund is unable to debit your predesignated bank account on the
day of purchase, it may make additional attempts or cancel the
purchase.
If your purchase is canceled, you will be responsible for any losses or
fees imposed by your bank and losses that may be incurred as a result of any
decline in the value of the canceled purchase. The Fund has the authority to
redeem shares in your account(s) to cover any losses due to fluctuations in
share price. The Fund reserves the right to reject any specific purchase
request.
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Minimum investments. The following minimums apply, unless they are waived
by the Distributor.
To open an account $1,000.00
For tax-sheltered retirement plans 250.00
To add to an account 250.00
Through automatic
investment plans 50.00
Minimum account balance 1,000.00
For tax-sheltered retirement plans 250.00
HOW TO SELL SHARES
On any business day, you may redeem all or a portion of your shares. If
the shares being redeemed were purchased by check, telephone or through an
automatic investment program, the Fund may delay the mailing of your redemption
check for up to 5 days after purchase to allow the purchase to clear.
Your transaction will be processed at net asset value the next time it is
calculated after your redemption request in good order is received. A
redemption is treated as a sale for tax purposes, and could result in taxable
gain or loss in a non-tax-sheltered account.
By mail. To redeem all or part of your shares by mail, your request
should be sent in writing to one of the addresses listed on page 9 and must
include the following information:
o the name of the Fund,
o the account number(s),
o the amount of money or number of shares being redeemed,
o the name(s) on the account,
o the signature(s) of all registered account owners, and
o your daytime telephone number.
Signature requirements vary based on the type of account you have:
o Individual, Joint Tenants, Tenants in Common: Written instructions must
be signed by each shareholder, exactly as the names appear in the
account registration.
o UGMA or UTMA: Written instructions must be signed by the custodian in
his/her capacity as it appears in the account registration.
o Sole Proprietor, General Partner: Written instructions must be signed
by an authorized individual in his/her capacity as it appears in the
account registration.
o Corporation, Association: Written instructions must be signed by the
person(s) authorized to act on the account. In addition, a certified
copy of the corporate resolution, authorizing the signer to act, must
accompany the request.
o Trust: Written instructions must be signed by the trustee(s). If the
name of the current trustee(s) does not appear in the account
registration, a certificate of incumbency dated within 60 days must
also be submitted.
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o Retirement: Written instructions must be signed by the account owner.
Call 1-800-BKB-1784 for more information.
By telephone. If you selected this option on your account application,
you may make redemptions from your account by calling 1-800-BKB-1784 by 4:00
p.m. Eastern Time. The Fund at its option may require requests for redemptions
in excess of $25,000 to be in writing with signatures guaranteed. You may not
close your account by telephone.
Systematic Withdrawal Plan. Under this plan you may redeem a specific
dollar amount from your account on a regular basis. For more information or to
sign up for this service, please call 1-800-BKB-1784.
Payment of redemption proceeds. Payments may be made by check or wire
transfer.
By Check Redemption proceeds will be sent to the shareholder(s) of record at
the address of record within seven days after receipt of a valid
redemption request.
By Wire If you are authorized for the wire redemption service, your
redemption proceeds will be wired directly into your designated bank
account normally on the next business day after receipt of your
redemption request. There is no limitation on redemptions by wire;
however, there is a $12 fee for each wire and your bank may charge
an additional fee to receive the wire. If you would like to
establish this option on an existing account, please call
1-800-BKB-1784.
Signature guarantees. In addition to the signature requirements, a
signature guarantee is required in any of the following circumstances:
o You would like the check made payable to anyone other than the
shareholder(s) of record.
o You would like the check mailed to an address other than the address of
record.
At the Fund's discretion signature guarantees may also be required for
other redemptions. A signature guarantee assures that a signature is genuine
and protects shareholders from unauthorized account transfers. Banks, savings
and loan associations, trust companies, credit unions, broker-dealers and
member firms of a national securities exchange may guarantee signatures. Call
your financial institution to see if it has this capability.
SHAREHOLDER SERVICES AND POLICIES
Exchanges. On any business day you may exchange all or a portion of your
shares into any other available fund in Boston 1784 Funds. To make exchanges,
please follow the procedures for redemptions. Exchanges are processed at the
net asset value next calculated after an exchange request in good order is
received and approved. Please read the prospectus for the fund into which you
are exchanging. The Fund reserves the right to reject any exchange request or
to modify or terminate the exchange privilege at any time. An exchange is the
sale of shares of one fund and purchase of shares of another, and could result
in taxable gain or loss in a non-tax-sheltered account.
<PAGE>
Redemption proceeds. The Fund intends to pay redemption proceeds in cash,
but reserves the right to pay in kind by delivery of investment securities
equal to the redemption price. In these cases, you might incur brokerage costs
in converting the securities to cash. The right of any shareholder to receive
payment of redemption proceeds may be suspended, or payment may be postponed,
in certain circumstances. These circumstances include any period the New York
Stock Exchange is closed (other than weekends or holidays) or trading on the
Exchange is restricted, any period when an emergency exists and any time the
Securities and Exchange Commission permits mutual funds to postpone payments
for the protection of investors.
Taxpayer identification number. On the account application or other
appropriate form, you will be asked to certify that your social security or
taxpayer identification number is correct and that you are not subject to
backup withholding for failing to report income to the IRS. If you are subject
to the 31% backup withholding or you did not certify your taxpayer
identification, the IRS requires the Fund to withhold 31% of any dividends and
redemption or exchange proceeds.
Share certificates. Share certificates are not issued.
Involuntary redemptions. If your account balance falls below the minimum
required investment as a result of a redemption or exchange, you will be given
60 days to re-establish the minimum balance. If you do not, your account may be
closed and the proceeds sent to you.
Telephone transactions. You may initiate many transactions by telephone.
The Fund and its agents will not be responsible for any losses resulting from
acting upon wire or telephone instructions that they reasonably believe to be
genuine. The Fund and its agents will each employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. Such
procedures may include taping of telephone conversations. It may be difficult
to reach the Fund by telephone during periods of unusual market activity. If
you are unable to reach a representative by telephone, please consider sending
written instructions.
Address changes. To change the address on your account, call
1-800-BKB-1784 or send a written request signed by all account owners. Include
the name of your Fund, the account numbers(s), the name(s) on the account and
both the old and new addresses.
Registration changes. To change the name on an account, the shares are
generally transferred to a new account. In some cases, legal documentation may
be required. For more information, call 1-800-BKB-1784. If your shares are held
of record by a financial institution, contact that financial institution for
ownership changes.
Statements and reports. The Fund will send you a confirmation statement
after every transaction that affects your account balance or your account
registration. If you are enrolled in an automatic investment program and invest
on a monthly basis, you will receive quarterly confirmations. Information
regarding the tax status of income dividends and capital gains distributions
will be mailed to shareholders early each year.
Financial reports for the Fund, which include a list of the Fund's
portfolio holdings, will be mailed semiannually to all shareholders.
<PAGE>
TAXES
This discussion of taxes is for general information only. Investors should
consult their own tax advisers about their particular situations.
The Fund intends to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies so that it will not be liable for
any federal income or excise taxes. The Fund may pay withholding or other taxes
to foreign governments during the year, however, and these taxes will reduce
the Fund's dividends.
With certain exceptions, Fund dividends and capital gains distributions
are subject to federal income tax and may also be subject to state and local
taxes. Distributions from interest on U.S. government obligations may be exempt
from state and local taxes. Dividends and distributions are treated in the same
manner for federal tax purposes whether they are paid in cash or as additional
shares. Generally, distributions from the Fund's net investment income and
short-term capital gains will be taxed as ordinary income. A portion of the
Fund's distributions from net investment income may be eligible for the
dividends received deduction available to corporations. Distributions of
long-term net capital gains will be taxed as such regardless of how long the
shares of the Fund have been held.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares before the Fund makes a distribution may pay the
full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
Foreign shareholders may be subject to withholding taxes.
Early each year, the Fund will notify its shareholders of the amount and
tax status of distributions paid to shareholders for the preceding year.
Investors should consult their own tax advisers regarding the status of their
accounts under state and local laws.
GENERAL INFORMATION
NET ASSET VALUE. Net asset value per share of the Fund is calculated each
business day at the close of regular trading on the New York Stock Exchange,
normally 4 p.m.
All purchases, redemptions and exchanges will be processed at net asset
value the next time it is calculated after a request is received and approved
by the Distributor. In order to receive that day's price, an order must be
received by 4 p.m. Eastern time. Net asset value per share is calculated by
dividing the total value of the Fund's securities and other assets, less
liabilities, by the total number of shares outstanding. Securities are valued
at market value or, if a market quotation is not readily available, at their
fair value determined in good faith under procedures established by and under
the supervision of the Trustees.
ORGANIZATION. The Fund is a newly-organized series of Boston 1784 Funds.
Boston 1784 Funds is a Massachusetts business trust which was organized on
February 5, 1993; it also is an open-end management investment company
registered under the Investment Company Act of 1940. Prior to May 27, 1997,
<PAGE>
Boston 1784 Funds was known as 1784 Funds. Boston 1784 Funds currently has
eighteen active series.
The Fund is a diversified mutual fund. Under the 1940 Act, a diversified
mutual fund must manage at least 75% of its total assets so that no more than
5% of those assets are invested in any one company at the time of investment.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
VOTING AND OTHER RIGHTS. Boston 1784 Funds may issue an unlimited number
of shares, may create new series of shares and may divide shares in each series
into classes. Each share of each fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All shares of
each series of Boston 1784 Funds have equal voting rights except that, in
matters affecting only a particular fund or class, only shares of that
particular fund or class are entitled to vote.
Because Boston 1784 Funds is a Massachusetts business trust, the Fund is
not required to hold annual shareholder meetings. Shareholder approval will
usually be sought only for changes in certain investment restrictions and for
the election of Trustees under certain circumstances. Trustees may be removed
by shareholders under certain circumstances. Each share of the Fund is entitled
to participate equally in dividends and other distributions and the proceeds of
any liquidation of the Fund.
PERFORMANCE INFORMATION. Fund performance may be quoted in advertising,
shareholder reports and other communications in terms of yield, effective yield
and total rate of return. All performance information is historical and is not
intended to indicate future performance. Yields and total rates of return
fluctuate in response to market conditions and other factors, and the value of
the Fund's shares when redeemed may be more or less than their original cost.
The Fund may provide annualized "yield" and "effective yield" quotations.
The "yield" of the Fund refers to the income generated by an investment in the
Fund over a 30-day or one-month period (which period is stated in any such
advertisement or communication). This income is then annualized; that is, the
amount of income generated by the investment over that period is assumed to be
generated each month over a one-year period and is shown as a percentage of the
maximum public offering price on the last day of that period. The "effective
yield" is calculated similarly, but when annualized the income earned by the
investment during that 30-day or one-month period is assumed to be reinvested.
The effective yield is slightly higher than the yield because of the
compounding effect of this assumed reinvestment. A "yield" quotation, unlike a
total rate of return quotation, does not reflect changes in net asset value.
The Fund may provide period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the Fund over a stated period and reflects any change in net
asset value per share and is compounded to include the value of any shares
purchased with any dividends or capital gains declared during such period.
Period total rates of return may be "annualized." An "annualized" total rate of
return assumes that the period total rate of return is generated over a
one-year period.
<PAGE>
The Fund's performance may from time to time be compared to that of other
mutual funds tracked by mutual fund rating services, to that of broad groups of
comparable mutual funds or to that of unmanaged indices which may assume
investment of dividends but generally do not reflect deductions for
administrative and management costs. The Fund may advertise performance that
includes results from periods in which the Fund's assets were managed in a
non-registered predecessor vehicle.
Of course, any fees charged by a financial institution to a shareholder
will reduce that shareholder's net return on investment. See the Statement of
Additional Information for more information concerning the calculation of
performance for the Fund.
EXPENSES. In addition to amounts payable to its service providers and
under the Distribution Plan, the Fund is responsible for its own expenses,
including, among other things, the costs of securities transactions, the
compensation of Trustees that are not affiliated with BankBoston or the
Administrator, government fees, taxes, accounting and legal fees, expenses of
communicating with shareholders, interest expense and insurance premiums.
COUNSEL AND INDEPENDENT AUDITORS. Bingham, Dana & Gould LLP, Boston,
Massachusetts, is counsel for the Fund. Coopers & Lybrand L.L.P., Boston,
Massachusetts, serves as independent auditor for the Fund.
-------------------------------
The Statement of Additional Information dated May 27, 1997, as
supplemented June 2, 1997, contains more detailed information about the Fund,
including information relating to (i) investment policies and restrictions,
(ii) the Trustees, officers and investment adviser, (iii) securities
transactions, (iv) the Fund's shares, including rights and liabilities of
shareholders, (v) the method used to calculate performance information and (vi)
the determination of net asset value.
No person has been authorized to give any information or make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Fund or its distributor. This Prospectus does not
constitute an offering by the Fund or its distributor in any jurisdiction in
which such offering may not lawfully be made.
<PAGE>
APPENDIX A
PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
U.S. Treasury Obligations - U.S. Treasury obligations include bills, notes and
bonds issued by the U.S. Treasury and separately traded interest and principal
component parts of such obligations that are transferable through the Federal
book-entry system known as Separately Traded Registered Interest and Principal
Securities (STRIPS). STRIPS are sold as zero coupon securities. These
securities are usually structured with two classes that receive different
portions of the interest and principal payments from the underlying obligation.
The yield to maturity on the interest-only class is extremely sensitive to the
rate of principal payments on the underlying obligation. The market value of
the principal-only class generally is unusually volatile in response to changes
in interest rates. See "Zero Coupon Securities" for more information.
U.S. Government Agencies - Certain Federal agencies such as the Government
National Mortgage Association (GNMA) have been established as instrumentalities
of the U.S. government to supervise and finance certain types of activities.
Issues of these agencies, while not direct obligations of the U.S. government,
are either backed by the full faith and credit of the United States (e.g.,
GNMA) or supported by the issuing agencies' right to borrow from the Treasury.
The issues of other agencies are supported only by the credit of the
instrumentality (e.g., Federal National Mortgage Association).
Receipts - Receipts are interests in separately traded interest and principal
component parts of U.S. Treasury obligations that are issued by banks and
brokerage firms and are created by depositing U.S. Treasury obligations into a
special account at a custodian bank. The custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
or receipts. Receipts include Treasury Receipts (TRs), Treasury Investment
Growth Receipts (TIGRs) and Certificates of Accrual on Treasury Securities
(CATS). TRs, TIGRs, and CATS are sold as zero coupon securities.
Zero Coupon Securities - A zero coupon security pays no interest or principal
to its holder during its life. A zero coupon security is sold at a discount,
frequently substantial, and redeemed at face value at its maturity date. The
market prices of zero coupon securities are generally more volatile than the
market prices of securities of similar maturity that pay interest periodically,
and zero coupon securities are likely to react more to interest rate changes
than non-zero coupon securities with similar maturity and credit qualities.
Bank Obligations - Bank obligations include certificates of deposit, time
deposits (including Eurodollar time deposits) and bankers' acceptances and
other short-term debt obligations issued by domestic banks, foreign
subsidiaries or foreign branches of domestic banks, domestic and foreign
branches of foreign banks, domestic savings and loan associations and other
banking institutions. The Fund has established certain minimum credit quality
standards for bank obligations in which it invests.
Bankers' Acceptances - A banker's acceptance is a bill of exchange or time
draft drawn on and accepted by a commercial bank. It is used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange.
Maturities are generally six months or less.
Certificates of Deposit - A certificate of deposit is a negotiable
interest-bearing instrument with a specific maturity. Certificates of deposit
<PAGE>
are issued by banks and savings and loan institutions in exchange for the
deposit of funds and normally can be traded in the secondary market prior to
maturity.
Time Deposits - A time deposit is a non-negotiable receipt issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
Commercial Paper - Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations and other entities.
Maturities on these issues vary from one to 270 days.
Money Market Funds - A money market fund is a mutual fund that limits its
investments to high quality money market instruments with a weighted average
maturity of 90 days or less. Consistent with applicable regulations the Fund
may not invest more than certain percentages of its assets in other mutual
funds. Investing in other mutual funds causes shareholders to bear not only
Fund expenses, but also expenses of the underlying mutual funds.
Variable and Floating Rate Instruments - Certain obligations may carry variable
or floating rates of interest and may involve a conditional or unconditional
demand feature permitting the holder to demand payment of principal at any time
or at specified intervals. These obligations may include variable amount master
demand notes. Such instruments bear interest at rates which are not fixed, but
which vary with changes in specified market rates or indices, such as a Federal
Reserve composite index. A demand instrument with a demand notice period
exceeding seven days may be considered illiquid if there is no secondary market
for such security. The interest rate on these securities may be reset daily,
weekly, quarterly, or some other reset period and may have a floor or ceiling
on interest rate charges. There is a risk that the current interest rate on
such obligations may not accurately reflect existing market interest rates.
Repurchase Agreements - A repurchase agreement is an agreement where a person
buys a security and simultaneously commits to sell the security to the seller
at an agreed upon price (including principal and interest) on an agreed upon
date within a number of days from the date of purchase. The Fund bears a risk
of loss in the event the other party defaults on its obligations and the Fund
is delayed or prevented from its right to dispose of the collateral securities
or if the Fund realizes a loss on the sale of the collateral securities.
Pursuant to an exemptive order from the SEC, the Fund and other funds in the
Boston 1784 Funds may enter into repurchase agreements on a pooled basis.
Reverse Repurchase Agreements - Reverse repurchase agreements involve the sale
of securities held by the Fund and the agreement by the Fund to repurchase the
securities at an agreed-upon price, date and interest payment. When the Fund
enters into reverse repurchase transactions, securities of a dollar amount
equal in value to the securities subject to the agreement will be maintained in
a segregated account with the Fund's custodian. The segregation of assets could
impair the Fund's ability to meet its current obligations or impede investment
management if a large portion of the Fund's assets are involved. Reverse
repurchase agreements are considered to be a form of borrowing.
Mortgage-Backed Securities - The Fund may purchase mortgage-backed securities
issued or guaranteed as to payment of principal and interest by the U.S.
government or one of its agencies and backed by the full faith and credit of
the U.S. government, including direct pass-through certificates of GNMA, as
<PAGE>
well as mortgage-backed securities for which principal and interest payments
are backed by the credit of particular agencies of the U.S. government.
Mortgage-backed securities are generally backed or collateralized by a pool or
mortgages. These securities are sometimes called collateralized mortgage
obligations or CMOs.
Even if the U.S. government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment because the underlying mortgages are refinanced to
take advantage of the lower rates. The prices of mortgage-backed securities may
not increase as much as prices of other debt obligations when interest rates
decline, and mortgage-backed securities may not be an effective means of
locking in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid. When interest rates go
up, mortgage-backed securities experience lower rates of prepayment. This has
the effect of lengthening the expected maturity of a mortgage-backed security.
As a result, prices of mortgage-backed securities may decrease more than prices
of other debt obligations when interest rates go up.
Forward Commitments or Purchases on a When-Issued Basis Forward commitments or
purchases of securities on a when-issued basis are transactions where the price
of the securities is fixed at the time of commitment and the delivery and
payment ordinarily takes place beyond customary settlement time. The interest
rate realized on these securities is fixed as of the purchase date and no
interest accrues to the buyer before settlement. The securities are subject to
market fluctuation due to changes in market interest rates; the securities are
also subject to fluctuation in value pending settlement based upon public
perception of the creditworthiness of the issuer of these securities. When the
Fund enters into forward commitments or purchases on a when-issued basis,
securities of a dollar amount equal in value to the securities subject to the
agreement will be maintained in a segregated account with the Fund's custodian.
The segregation of assets could impair the Fund's ability to meet its current
obligations or impede investment management if a large portion of the Fund's
assets are involved. The Fund may invest up to 25% of its assets in forward
commitments or commitments to purchase securities on a when-issued basis.
Securities Rated Baa or BBB - The Fund may purchase securities rated Baa by
Moody's or BBB by Standard & Poor's, which may have poor protection of payment
of principal and interest. See "Risk Considerations."
Asset-Backed Securities - The Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different
parties. Corporate asset-backed securities present certain risks. For instance,
in the case of credit card receivables, these securities may not have the
benefit of any security interest in the related collateral.
Loan Participations - Loan participations are interests in loans which are
administered by the lending bank or agent for a syndicate of lending banks, and
sold by the lending bank or syndicate member. The Fund may only purchase
interests in loan participations issued by a bank in the United States with
assets exceeding $1 billion and for which the underlying loan is issued by
borrowers in whose obligations the Fund may invest. Because the intermediary
<PAGE>
bank does not guarantee a loan participation in any way, a loan participation
is subject to the credit risk generally associated with the underlying
corporate borrower. In addition, in the event the underlying corporate borrower
defaults, the Fund may be subject to delays, expenses and risks that are
greater than those that would have been involved if the Fund had purchased a
direct obligation (such as commercial paper) of the borrower. Under the terms
of a loan participation the purchasing Fund may be regarded as a creditor of
the intermediary bank, so that the Fund may also be subject to the risk that
the issuing bank may become insolvent.
Guaranteed Investment Contracts (GIC) - A GIC is a contract between an
insurance company and, generally, an institutional investor that guarantees the
investor a specific interest rate for a specific period and the return of the
investor's principal. The Fund will not invest more than 20% of its total
assets in GICs.
Common and Preferred Stock - Common stocks are generally more volatile than
other securities. Preferred stocks share some of the characteristics of both
debt and equity investment and are generally preferred over common stocks with
respect to dividends and in liquidation.
Convertible Securities - Convertible securities have characteristics similar to
both fixed income and equity securities. Because of the conversion feature, the
market value of convertible securities tends to move together with the market
value of the underlying stock. The value of convertible securities is also
affected by prevailing interest rates, the credit quality of the issuer, and
many call provisions. Convertible securities include both debt obligations and
preferred stock.
American, European, Continental and Global Depositary Receipts - American
Depositary Receipts (ADRs) are securities, typically issued by a U.S. financial
institution, that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer. European Depositary Receipts (EDRs),
which are sometimes referred to as Continental Depositary Receipts (CDRs), and
Global Depositary Receipts (GDRs) are securities, typically issued by a
non-U.S. financial institution, that evidence ownership interests in a security
or a pool of securities issued by either a U.S. or foreign issuer. ADRs, EDRs,
CDRs and GDRs may be available for investment through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly by the
issuer of the security underlying the receipt and a depositary, whereas an
unsponsored facility may be established by a depositary without participation
by the issuer of the receipts' underlying security. Holders of an unsponsored
depositary receipt generally bear all the costs of the unsponsored facility and
the depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass voting rights through to the holders of the receipts in
respect of the deposited securities. Investment in securities of foreign
issuers (including ADRs, EDRs and CDRs) are subject to special risks. See "Risk
Considerations."
Foreign Currency Transactions - Currency exchange transactions may protect
against uncertainty in the level of future exchange rates. Currency exchange
transactions may be conducted either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, or through forward contracts to
purchase or sell currencies. A forward currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which must
be more than two days from the date of the contract, at a price set at the time
of the contract. Transaction hedging is the purchase or sale of forward
currency with respect to specific receivables or payables generally arising in
connection with the purchase or sales of particular portfolio securities.
<PAGE>
The Fund will use currency exchange transactions only for bona fide
hedging purposes and other non-speculative strategies.
Warrants - A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time. The Fund may
invest up to 5% of its net assets in warrants, except that this limitation does
not apply to warrants acquired in units or attached to securities. Included in
this limitation, 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.
Securities Lending - Consistent with applicable regulatory requirements and in
order to generate additional income, the Fund may lend securities to
broker-dealers and other institutional borrowers. Loans must be callable at any
time and continuously secured by collateral (cash or U.S. government
securities) in an amount not less than the market value, determined daily, of
the securities loaned. It is intended that the value of securities loaned by
the Fund would not exceed 331/3% of the Fund's total assets. In the event of
the bankruptcy of the other party to a securities loan, the Fund could
experience delays in recovering either the securities lent or cash. To the
extent that, in the meantime, the value of the securities lent has increased or
the value of the collateral has decreased, the Fund could experience a loss.
The voting rights of such securities may pass to the borrower; however, the
Fund will seek to call loans, to vote proxies, or otherwise to obtain rights to
vote or consent if a material event affecting the investment is to occur.
Restricted or Illiquid Securities - Securities that may not be sold freely to
the public absent registration or securities for which there is no readily
available market are referred to as restricted or illiquid securities,
respectively. The Fund may invest up to 15% of its net assets in illiquid
securities, including restricted securities that are illiquid. The absence of a
trading market can make it difficult to ascertain a market value for these
investments. Disposing of illiquid securities may involve time-consuming
negotiation and legal expense, and it may be difficult or impossible for the
Fund to sell them promptly at an acceptable price.
Rule 144A Securities - The Fund may purchase restricted securities that are not
registered for sale to the general public if it is determined that there is a
dealer or institutional market in the securities. In that case, the securities
will not be treated as illiquid for purposes of the Fund's investment
limitation described above. The Trustees will review these determinations.
These securities are known as "Rule 144A securities," because they are traded
under SEC Rule 144A among qualified institutional buyers. Institutional trading
in Rule 144A securities is relatively new and the liquidity of these
investments could be impaired if trading in Rule 144A securities does not
develop or if qualified institutional buyers become, for a time, uninterested
in purchasing Rule 144A securities.
Options - The Fund may engage in writing call options from time to time. Under
a call option, the purchaser of the option has the right to purchase, and the
writer (the Fund) the obligation to sell, the underlying security at the
exercise price during the option period. Options written on individual
securities are written solely as covered call options (such as options written
on securities owned by the Fund) and may be written for hedging purposes or in
order to generate additional income. Such options must be listed on a national
securities exchange. The Fund may write covered call options on its securities
<PAGE>
provided the aggregate value of such options does not exceed 10% of the Fund's
net assets.
There are risks associated with options transactions, including that the
success of a hedging strategy may depend on the ability of the Adviser to
predict movement in the prices of individual securities, market fluctuations
and movements in interest rates; there may be an imperfect correlation between
the movement in prices of securities held by the Fund and price movements of
related options; there may not be a liquid secondary market for options; and
while the Fund will receive a premium when it writes covered call options, it
may not participate fully in a rise in the market value of the underlying
security.
Futures and Options on Futures - 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. An option on a
futures contract gives the purchaser the right, in exchange for a premium, to
assume a position in a futures contract at a specified exercise price during
the term of the option. The Fund may enter into futures contracts and options
on futures contracts provided that the sum of the Fund's initial margin
deposits on open futures contracts plus the amount paid for premiums for
unexpired options on futures contracts does not exceed 5% of the market value
of the Fund's total assets and the outstanding obligations to purchase
securities under futures contracts do not exceed 20% of the Fund's total
assets. The Fund will enter into only those futures contacts which are traded
on recognized futures exchanges.
The Fund uses futures contracts and related options only for bona fide
hedging purposes, i.e., to offset unfavorable changes in the value of
securities otherwise held or expected to be acquired for investment purposes.
There are risks associated with these hedging activities. See "Options."
The Fund may purchase and sell interest rate futures contracts and options
on interest rate futures contracts, stock index futures contracts and options
on stock index futures contracts; and currency future contracts and options on
currency futures contracts.
Other Investment Companies - Subject to applicable statutory and regulatory
limitations, assets of the Fund may be invested in shares of other investment
companies and foreign investment trusts. The Fund may invest up to 5% of its
assets in closed-end investment companies which primarily hold securities of
non-U.S. issuers. The Fund's purchase of investment company securities may
result in the duplication of fees and expenses.
Currency Swaps - Currency swaps involve the exchange of rights to make or
receive payments in specified currencies. Currency swaps usually involve the
delivery of the entire principal value of one designated currency. Therefore,
the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations.
The use of currency swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values and currency exchange rates, the investment performance of the
Fund would be less favorable than it would have been if this investment
technique were not used.
Short Sales "Against the Box" - In a short sale, the Fund sells a borrowed
security and has a corresponding obligation to the lender to return the
<PAGE>
identical security. The Fund may engage in short sales only if at the time of
the short sale it owns or has the right to obtain at no additional cost, an
equal amount of the security being sold short. This investment technique is
known as a short sale "against the box." The Fund may make a short sale as a
hedge, when it believes that the value of a security owned by the Fund (or a
security convertible or exchangeable for such security) may decline, or when
the Fund wants to sell the security at an attractive current price but wishes
to defer recognition of gain or loss for tax purposes. Not more than 40% of the
Fund's total assets would be involved in short sales "against the box."
<PAGE>
Statement of Rule 497(c)
Additional Information File Nos. 33-58004
May 27, 1997, as supplemented and 811-7474
June 2, 1997
Boston 1784 Funds(R)
Money Market Funds:
Boston 1784 U.S. Treasury Money Market Fund
Boston 1784 Prime Money Market Fund
Boston 1784 Tax-Free Money Market Fund
Boston 1784 Institutional U.S. Treasury Money Market Fund
Bond Funds:
Boston 1784 U.S. Government Medium-Term Income Fund
Boston 1784 Short-Term Income Fund
Boston 1784 Income Fund
Tax-Exempt Funds:
Boston 1784 Tax-Exempt Medium-Term Income Fund
Boston 1784 Connecticut Tax-Exempt Income Fund
Boston 1784 Florida Tax-Exempt Income Fund
Boston 1784 Massachusetts Tax-Exempt Income Fund
Boston 1784 Rhode Island Tax-Exempt Income Fund
Stock Funds:
Boston 1784 Asset Allocation Fund
Boston 1784 Growth and Income Fund
Boston 1784 Growth Fund
Boston 1784 Large Cap Equity Fund
Boston 1784 Small Cap Equity Fund
Boston 1784 International Equity Fund
This Statement of Additional Information provides information regarding
the activities and operations of the no-load mutual funds listed above, and
should be read in conjunction with the Funds' Prospectuses dated May 27, 1997
and June 2, 1997. You may obtain a Prospectus without charge by calling
1-800-BKB-1784.
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.
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CONTENTS
Page
1. The Trust 3
2. Investment Objectives and Policies 4
3. Permitted Investments and Investment Practices 5
4. Investment Restrictions 19
5. Management 22
6. Fund Transactions; Trading Practices and Brokerage 30
7. Performance Information 32
8. Determination of Net Asset Value 38
9. Purchase and Redemption of Shares 40
10. Systematic Withdrawal Plan 40
11. Taxes 41
12. Servicemarks 45
13. Description of Shares 45
14. Trustee and Shareholder Liability 45
15. Financial Information 46
APPENDIX A -- CERTAIN INFORMATION CONCERNING CONNECTICUT, FLORIDA,
MASSACHUSETTS AND RHODE ISLAND
APPENDIX B -- DESCRIPTION OF SECURITIES RATINGS
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1. THE TRUST
BOSTON 1784 FUNDS(R) (the "Trust") is an open-end management investment
company established under Massachusetts law as a Massachusetts business trust
on February 5, 1993. Prior to May 27, 1997, Boston 1784 Funds was known as 1784
Funds. On that date the Trust and each Fund added "Boston" to their names.
Boston 1784 Funds currently has eighteen active series. The Trust's Declaration
of Trust permits the Trust to offer separate portfolios, or funds, of shares of
beneficial interest and different classes of shares of each fund. Each share in
a 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 (the "Funds"):
Money Market Funds:
Boston 1784 U.S. Treasury Money Market Fund
Boston 1784 Prime Money Market Fund
Boston 1784 Tax-Free Money Market Fund
Boston 1784 Institutional U.S. Treasury Money Market Fund
Bond Funds:
Boston 1784 U.S. Government Medium-Term Income Fund
Boston 1784 Short-Term Income Fund
Boston 1784 Income Fund
Tax-Exempt Funds:
Boston 1784 Tax-Exempt Medium-Term Income Fund
Boston 1784 Connecticut Tax-Exempt Income Fund
Boston 1784 Florida Tax-Exempt Income Fund
Boston 1784 Massachusetts Tax-Exempt Income Fund
Boston 1784 Rhode Island Tax-Exempt Income Fund
Stock Funds:
Boston 1784 Asset Allocation Fund
Boston 1784 Growth and Income Fund
Boston 1784 Growth Fund
Boston 1784 Large Cap Equity Fund
Boston 1784 Small Cap Equity Fund
Boston 1784 International Equity Fund
BankBoston, N.A. ("BankBoston") is the investment adviser of each Fund.
Kleinwort Benson Investment Management Americas, Inc. is the investment adviser
of the International Equity Fund with BankBoston (BankBoston and Kleinwort
Benson are each referred to as an "Adviser"). SEI Financial Services Company is
the distributor of shares of each Fund.
References in this Statement of Additional Information to the
Prospectuses are to the Funds' Prospectuses dated May 27, 1997 and June 2,
1997.
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As required by law, each of the Trust, BankBoston and the Trust's
administrator and distributor have adopted codes of ethics concerning certain
activities of officers, trustees or directors and employees. Copies of these
codes of ethics have been filed with the Securities and Exchange Commission.
2. INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Boston 1784 U.S. Treasury Money Market
Fund, Boston 1784 Institutional U.S. Treasury Money Market Fund and Boston 1784
Prime Money Market Fund is to preserve principal value and maintain a high
degree of liquidity while providing current income.
The investment objective of the Boston 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.
The investment objective of the Boston 1784 U.S. Government Medium-Term
Income Fund is current income consistent with preservation of capital.
The investment objective of the Boston 1784 Short-Term Income Fund and
Boston 1784 Income Fund is to maximize current income. Preservation of capital
is a secondary objective for each of these Funds.
The investment objective of the Boston 1784 Tax-Exempt Medium-Term Income
Fund is current income, exempt from federal income tax, consistent with
preservation of capital.
The investment objective of the Boston 1784 Connecticut Tax-Exempt Income
Fund is current income exempt from both federal and Connecticut personal income
tax. Preservation of capital is a secondary objective.
The investment objective of the Boston 1784 Florida Tax-Exempt Income
Fund is current income exempt from federal income tax through Fund shares which
are exempt from Florida intangible personal property tax. Preservation of
capital is a secondary objective.
The investment objective of the Boston 1784 Massachusetts Tax-Exempt
Income Fund is current income, exempt from both federal and Massachusetts
personal income tax, consistent with preservation of capital.
The investment objective of the Boston 1784 Rhode Island Tax-Exempt
Income Fund is current income exempt from federal income tax, from Rhode Island
personal income tax and the Rhode Island business corporation tax. Preservation
of capital is a secondary objective.
The investment objective of the Boston 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 Boston 1784 Growth and Income Fund is
long-term growth of capital with a secondary objective of income.
The investment objective of the Boston 1784 Growth Fund and Boston 1784
Small Cap Equity Fund is capital appreciation. Dividend income, if any, is
incidental to this objective for each of these Funds.
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The investment objective of the Boston 1784 Large Cap Equity Fund is
income and capital appreciation.
The investment objective of the Boston 1784 International Equity Fund is
long-term growth of capital. Dividend income, if any, is incidental to this
objective.
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 the holders of a majority of that Fund's outstanding shares.
The investment policies, permitted investments and investment techniques
of each of the Funds are described in the Prospectus by which shares of that
Fund are offered. The information herein supplements the information contained
in the Prospectus.
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.
Appendix A contains information concerning Connecticut, Florida,
Massachusetts and Rhode Island. Each of the Connecticut, Florida, Massachusetts
and Rhode Island Tax-Exempt Income Funds is particularly susceptible to events
affecting issuers in its state.
Appendix B describes the ratings assigned to securities by certain
securities rating organizations.
3. PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Fund (other than the Boston 1784 Institutional U.S. Treasury Money
Market Fund and the Boston 1784 U.S. Treasury Money Market Fund) 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 Funds (other than the Money Market Funds) may invest in
mortgage-backed securities which are rated in one of the three top categories
by Standard and Poor's Rating Services ("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 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.
<PAGE>
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, each of the Funds (other than
the Boston 1784 Institutional U.S. Treasury Money Market Fund and the Boston
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.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
The Boston 1784 Short-Term Income Fund and Boston 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 forgoes 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,
BankBoston, 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 any other 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.
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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 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.
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. Each of the Funds (other than the Boston 1784 U.S. Treasury Money
Market Fund) 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 Boston 1784 Short-Term Income Fund, Boston 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
<PAGE>
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
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.
<PAGE>
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 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 security in the open market or wait until the 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.
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OPTIONS
Each of the Stock Funds, the Boston 1784 Short-Term Income Fund and the
Boston 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 Boston 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.
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 at 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.
<PAGE>
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 or a call 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 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 Stock Funds may engage in transactions involving 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.
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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.
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. 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% or less 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
<PAGE>
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.
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 may also, subject to any applicable laws, purchase and write
options on 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.
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
As provided in the Prospectuses, each of the Funds may invest in certain
obligations or securities of foreign issuers. The Boston 1784 International
Equity Fund intends to invest a substantial portion of its assets in securities
and obligations of foreign issuers. Permissible investments include 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
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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 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 Boston 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.
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.
<PAGE>
The Stock Funds, Boston 1784 Income Fund and Boston 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 are heightened for securities of issuers in developing
countries. Such investments may also entail higher custodial fees and sales
commissions than domestic investments.
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 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
<PAGE>
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 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
<PAGE>
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 Boston 1784
Institutional U.S. Treasury Money Market Fund and Boston 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. Each Stock Fund and each Bond Fund may invest
up to 20% of its total assets in restricted securities provided it is
determined by the Adviser or Advisers to that Fund 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 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 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 Stock, Bond and Tax-Exempt 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, 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.
<PAGE>
OTHER INVESTMENTS
The Funds (other than the Boston 1784 Institutional U.S. Treasury Money
Market Fund and the Boston 1784 U.S. Treasury Money Market Fund) are not
prohibited from investing in obligations of banks which are clients of SEI
Investments Company ("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.
4. INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES
The following are fundamental policies of each of the Funds and may not
be changed with respect to any Fund without approval by holders of a majority
of the outstanding voting securities of that Fund, which as used in this
Statement of Additional Information means the vote of the lesser of (i) 67% or
more of the outstanding voting securities of the Fund present at a meeting at
which the holders of more than 50% of the outstanding voting securities of the
Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of the Fund. The term "voting securities" as used
in this paragraph has the same meaning as in the Investment Company Act of
1940, as amended (the "1940 Act").
1. A Fund may not 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. 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 each of the Money Market Funds, to investments in obligations issued
by domestic banks, foreign branches of domestic banks and U.S. branches of
foreign banks, to the extent that a Fund may under the 1940 Act, reserve
freedom of action to concentrate its investments in such securities, and
in the case of the Boston 1784 Tax-Free Money Market Fund, tax-exempt
securities issued by governments or political subdivisions of governments.
Each of the Money Market Funds has reserved its freedom of action to
concentrate its investments in government securities and bank instruments
described in the foregoing sentence. This limitation also does not apply
to an investment of all of the investable assets of each of the Boston
1784 Prime Money Market Fund, Boston 1784 International Equity Fund,
Boston 1784 Growth Fund, Boston 1784 Large Cap Equity Fund, Boston 1784
Small Cap Equity Fund and Boston 1784 Florida Tax-Exempt Income 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 (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; (iii) supranational entities will be considered to be a separate
industry; and (iv) loan participations are considered to be issued by both
the issuing bank and the underlying corporate borrower.
2. A Fund may not 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
<PAGE>
as described in the Prospectuses and in this Statement of Additional
Information.
3. A Fund may not 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 Boston 1784 Massachusetts Tax-Exempt Income Fund,
Boston 1784 Connecticut Tax-Exempt Income Fund, Boston 1784 Rhode Island
Tax-Exempt Income Fund or Boston 1784 Florida Tax-Exempt Income Fund; (b)
the foregoing limitation shall not apply to 25% of the total assets of
each of the Stock Funds, Bond Funds, Boston 1784 Tax-Exempt Medium-Term
Income Fund, Boston 1784 Tax-Free Money Market Fund or Boston 1784 Prime
Money Market Fund; and (c) the foregoing limitation does not apply to an
investment of all of the investable assets of the Boston 1784 Prime Money
Market Fund, Boston 1784 International Equity Fund, Boston 1784 Growth
Fund, Boston 1784 Large Cap Equity Fund, Boston 1784 Small Cap Equity Fund
or Boston 1784 Florida Tax-Exempt Income Fund in a Qualifying Portfolio.
4. A Fund may not invest in companies for the purpose of exercising control.
5. A Fund may not 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 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 Boston 1784 Asset Allocation Fund, Boston 1784 Growth
and Income Fund, Money Market Funds (other than the Boston 1784 Prime
Money Market Fund), Boston 1784 U.S. Government Medium-Term Income Fund,
Boston 1784 Tax-Exempt Medium-Term Income Fund and Boston 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. A Fund may not 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 Prospectuses and
elsewhere in this Statement of Additional Information.
<PAGE>
8. A Fund may not 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. A Fund may not 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. A Fund may not 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 Boston 1784 Prime Money Market Fund, Boston 1784
International Equity Fund, Boston 1784 Growth Fund, Boston 1784 Large Cap
Equity Fund, Boston 1784 Small Cap Equity Fund and Boston 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 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. A Fund may not 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. A Fund may not 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 Prospectuses or elsewhere in this Statement
of Additional Information and each Fund may purchase and sell other
options as described in the Prospectuses.
NON-FUNDAMENTAL POLICIES
The following policies are not fundamental and may be changed 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 Stock Funds
may 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 Boston 1784
<PAGE>
Short-Term Income Fund and Boston 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 Boston 1784 Prime Money Market Fund, Boston 1784 International
Equity Fund, Boston 1784 Growth Fund, Boston 1784 Large Cap Equity Fund, Boston
1784 Small Cap Equity Fund or Boston 1784 Florida Tax-Exempt Income Fund in a
Qualifying Portfolio. 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. No Fund may invest in 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 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 Boston 1784 Prime Money Market Fund, Boston
1784 International Equity Fund, Boston 1784 Growth Fund, Boston 1784 Large Cap
Equity Fund, Boston 1784 Small Cap Equity Fund or Boston 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.
5. MANAGEMENT
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. Their titles may have varied during the period. An
asterisk indicates a Trustee who may be deemed to be an "interested person" (as
defined in the 1940 Act) of the Trust.
DAVID H. CARTER - Trustee - 224 Polpis Road, Nantucket, Massachusetts 02554
(date of birth March 21, 1933). Main Board Director, Touche Remnant & Co.
(investment advisor), 1982-1988; Managing Director, Bearbull (UK) Ltd., London
(investment advisor), 1988-January 1993.
<PAGE>
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). The Industrial Bank
of Japan Professor of Finance and Director of Research, Harvard University
Graduate School of Business, since 1993; Thomas Henry Carroll-Ford Visiting
Professor of Business Administration, Harvard University Graduate School of
Business, 1991-1993; 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.
SARA L. JOHNSON - Trustee - 30 Eaton Court, Wellesley Hills, Massachusetts
(date of birth November 16, 1951). Chief Regional Economist (since 1995) and
principal (since 1992), Director of Regional Forecasting, Managing Economist
for Regional Information Group's Eastern Regions (1988-1991) and Senior
Economist, U.S. Economic Service (1983-1988), DRI/McGraw Hill; formerly,
Trustee of BayFunds.
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- 1 Freedom
Valley Road, Oaks, Pennsylvania 19456 (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.
ALVIN J. SILK - Trustee - Graduate School of Business Administration, Harvard
University, Soldiers Field Road, Boston, Massachusetts (date of birth December
31, 1935). Co-Chairman, Marketing Area and Lincoln Filene Professor of Business
Administration, Graduate School of Business Administration, Harvard University
(1988-present); formerly, Trustee of BayFunds; formerly, Erwin H. Schell
Professor of Management, Sloan School of Management, Massachusetts Institute of
Technology; formerly, Director, BayBank Systems, Inc.; Trustee, Marketing
Science Institute; Director, Reed and Barton, Inc.
MARC H. CAHN - Vice President and Assistant Secretary - 1 Freedom Valley Road,
Oaks, Pennsylvania 19456 (date of birth June 19, 1957). Vice President and
Assistant Secretary of SEI, the Administrator and the Distributor since May,
1996. Associate General Counsel, Barclays Bank plc (May 1995-May 1996). ERISA
counsel, First Fidelity Bancorporation (1994-1995). Associate, Morgan, Lewis &
Bockius (1989-1994).
TODD CIPPERMAN - Vice President and Assistant Secretary - 1 Freedom Valley
Road, Oaks, Pennsylvania 19456 (date of birth February 14, 1966). Vice
President and Assistant Secretary of SEI, the Administrator and the Distributor
since 1995. Associate, Dewey Ballantine (law firm)(1994-1995). Associate,
Winston & Strawn (law firm) (1991-1994).
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.
<PAGE>
DAVID G. LEE - Senior Vice President & Assistant Secretary - 1 Freedom Valley
Road, Oaks, Pennsylvania 19456 (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.
JOSEPH M. LYDON - Vice President, Assistant Secretary - 1 Freedom Valley Road,
Oaks, Pennsylvania 19456 (date of birth September 27, 1959). Director of
Business Administration of Fund Resources, SEI Investments Company since 1995.
Vice President of Dreman Value Management and President of Dreman Financial
Services, Inc. prior to 1995.
STEPHEN G. MEYER - Controller - 1 Freedom Valley Road, Oaks, Pennsylvania
19456. 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.
BARBARA A. NUGENT - Vice President and Assistant Secretary - 1 Freedom Valley
Road, Oaks, Pennsylvania 19456 (date of birth June 18, 1956). Vice President
and Secretary of SEI, the Administrator and Distributor since April 1996.
Associate, Drinker, Biddle & Reath (law firm) (1994-1996). Assistant Vice
President/Administration of Delaware Service Company, Inc. (1992-1993).
Assistant Vice President-Operations Delaware Service Company, Inc. (1988-1992).
SANDRA K. ORLOW - Vice President, Assistant Secretary - 1 Freedom Valley Road,
Oaks, Pennsylvania 19456 (date of birth October 18, 1953). Vice President and
Assistant Secretary of the Administrator and Distributor since 1983.
KEVIN P. ROBINS - Vice President & Assistant Secretary - 1 Freedom Valley Road,
Oaks, Pennsylvania 19456 (date of birth April 15, 1961). Senior Vice 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.
KATHRYN L. STANTON - Vice President, Assistant Secretary - 1 Freedom Valley
Road, Oaks, Pennsylvania 19456 (date of birth November 18, 1958). Vice
President and Assistant Secretary of SEI, the Administrator and the
Distributor, since 1994. Associate, Morgan, Lewis & Bockius (law firm)
1989-1994.
The following table sets forth certain information regarding the compensation
of the Trust's Trustees for the fiscal year ended May 31, 1996. The Officers of
the Trust receive no compensation from the Trust for serving in such capacity.
<PAGE>
<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 $29,000 $ 0 $ 0 $29,000
- --------------------------------------------------------------------------------------------
Tarrant Cutler 29,000 0 0 29,000
- --------------------------------------------------------------------------------------------
Kenneth A. Froot 29,000 0 0 29,000
- --------------------------------------------------------------------------------------------
Sara L. Johnson 0 0 0 0
- --------------------------------------------------------------------------------------------
Kathryn F. Muncil 29,000 0 0 29,000
- --------------------------------------------------------------------------------------------
Robert A. Nesher 0 0 0 0
- --------------------------------------------------------------------------------------------
Alvin J. Silk 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 Trustees of the Trust who
are employed by the Administrator is paid by the Administrator.
As of March 31, 1997, Photoelectron Corp., 5 Forbes Rd., Lexington, MA
02173, owned of record 14.96% of the outstanding shares of Boston 1784 Prime
Money Market Fund.
As of March 31, 1997, Corelink Financial Inc., 1855 Gateway Blvd., Suite
750, Concord, CA 94520, owned of record 8.43% of the outstanding shares of
Boston 1784 Growth Fund.
As of March 31, 1997, National Financial Services Corp., 200 Liberty
Street, New York, NY 10281, owned of record the following percentages of the
outstanding shares of the following Funds:
Boston 1784 U.S. Treasury Money Market Fund -- 14.01%
Boston 1784 Short-Term Income Fund -- 13.02%
Boston 1784 Massachusetts Tax-Exempt Income Fund -- 12.31%
Boston 1784 Rhode Island Tax-Exempt Income Fund -- 8.38%
Boston 1784 Asset Allocation Fund -- 27.70%
Boston 1784 Growth and Income Fund -- 9.14%
Boston 1784 Connecticut Tax-Exempt Income Fund -- 7.13%
As of March 31, 1997, BankBoston, N.A., 100 Federal Street, Boston,
Massachusetts 02110, and its affiliates, owned of record the following
percentages of the outstanding shares of the following Funds:
Boston 1784 Tax-Free Money Market Fund -- 84.57%
Boston 1784 Prime Money Market Fund -- 39.50%
Boston 1784 Institutional U.S. Treasury Money Market Fund -- 55.98%
Boston 1784 Tax-Exempt Medium-Term Income Fund - 91.61%
Boston 1784 Massachusetts Tax-Exempt Income Fund -- 68.22%
Boston 1784 Rhode Island Tax-Exempt Income Fund -- 85.39%
Boston 1784 Connecticut Tax-Exempt Income Fund -- 82.53%
<PAGE>
Boston 1784 U.S. Government Medium-Term Income Fund -- 86.11%
Boston 1784 Short-Term Income Fund -- 67.22%
Boston 1784 Income Fund -- 86.52%
Boston 1784 Asset Allocation Fund -- 31.98%
Boston 1784 Growth and Income Fund -- 75.23%
Boston 1784 Growth Fund -- 72.32%
Boston 1784 International Equity Fund -- 92.33%
The Trust believes that BankBoston possessed, on behalf of its underlying
accounts, voting or investment power with respect to a majority of such shares.
THE ADVISERS
The Trust has entered into separate advisory agreements (each, an
"Advisory Agreement") with BankBoston and, for the Boston 1784 International
Equity Fund, with Kleinwort Benson Investment Management Americas Inc.
("Kleinwort Benson"). The Advisory Agreement with BankBoston for the Funds
other than the Boston 1784 International Equity Fund is dated as of June 1,
1993 and the Advisory Agreement with BankBoston for the Boston 1784
International Equity Fund is dated as of November 28, 1994. The Advisory
Agreement with Kleinwort Benson for the Boston 1784 International Equity Fund
is dated as of October 27, 1995. BankBoston and Kleinwort Benson are referred
to in this Statement of Additional Information, collectively, as the "Advisers"
and each, individually, as an "Adviser." The Prospectuses contain a description
of the fees payable to the Advisers for services rendered to the Funds under
the applicable Advisory Agreements.
For the fiscal years ended May 31, 1994, 1995 and 1996, the Trust paid the
following fees (after fee waivers) on behalf of the Funds:
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
BankBoston BankBoston BankBoston
Investment Investment Investment
Fund Advisory Fees Advisory Fees Advisory Fees
1994 1995 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Boston 1784 Tax-Free Money Market Fund $ 0 $ 1,471,000 $1,996,000
Boston 1784 Prime Money Market Fund N/A (1) N/A (1) 6,700 (1)
Boston 1784 U.S. Treasury Money Market 0 69,000 276,000
Fund
Boston 1784 Institutional U.S. Treasury 0 85,000 651,000
Money Market Fund
Boston 1784 Tax-Exempt Medium-Term 0 602,000 1,116,000
Income Fund
Boston 1784 Massachusetts Tax-Exempt 0 363,000 548,000
Fund
Boston 1784 Rhode Island Tax-Exempt N/A 77,000 208,000
Income Fund
Boston 1784 Connecticut Tax-Exempt N/A 138,000 418,000
Income Fund
Boston 1784 Florida Tax-Exempt Income N/A N/A N/A
Fund
Boston 1784 U.S. Government Medium-Term 0 679,000 906,000
Income Fund
Boston 1784 Short-Term Income Fund N/A 86,000 348,000
Boston 1784 Income Fund N/A 521,000 1,257,000
Boston 1784 Asset Allocation Fund 0 23,000 90,000
Boston 1784 Growth and Income Fund 12,000 1,393,000 1,997,000
Boston 1784 Growth Fund N/A N/A 0
Boston 1784 International Equity Fund N/A 0 636,000
- ------------------------------------------------------------------------------------------
Total $12,000 $ 5,707,000 $10,453,700
- ------------------------------------------------------------------------------------------
</TABLE>
(1)The Prime Money Market Fund is the successor by merger of the BayFunds
Money Market Portfolio. The BayFunds Money Market Portfolio was a portfolio
of BayFunds, an open-end investment company registered under the Investment
Company Act of 1940, as amended, and merged into the Prime Money Market Fund
on December 9, 1996. Prior to the merger, BayBank, N.A. was the investment
adviser of the BayFunds Money Market Portfolio. The fiscal year of the Prime
Money Market Fund ends on December 31. For its fiscal years ended December
31, 1994, 1995 and 1996, respectively, the Fund paid investment advisory
fees of $732,016, $869,240 and $837,000 (of which $6,700 was paid to
BankBoston following the merger with the BayFunds Money Market Portfolio).
The foregoing table does not reflect contributions to the Funds made by
BankBoston 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 Boston 1784 International Equity Fund. For the
fiscal year ended May 31, 1996, the Trust paid $1,222,419 to Kleinwort Benson
under the same Advisory Agreement.
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
<PAGE>
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 (1) for any error of judgment or mistake of law; (2)
for any loss arising out of any investment; or (3) 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 Fund Resources (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
that results 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 under the Administration
Agreement. The Administration Agreement expires by its terms November 22, 1998.
SEI Fund Resources is a Delaware business trust whose sole beneficiary is
SEI Financial Management Corporation. SEI Financial Management Corporation, a
wholly owned subsidiary of SEI Investments Company ("SEI"), was organized as a
Delaware corporation in 1969 and has its principal business offices at 1
Freedom Valley Road, Oaks, Pennsylvania 19456. 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 and its affiliates also serve
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
Advisors' Inner Circle Fund, The Pillar Funds, CUFund, STI Classic Funds,
CoreFunds, Inc., First American Funds, Inc., First American Investment Funds,
Inc., The Arbor Fund, Marquis Funds(R), Morgan Grenfell Investment Trust, The
PBHG Funds, Inc., The Achievement Funds Trust, Bishop Street Funds, CrestFunds,
Inc., STI Classic Variable Trust, Monitor Funds, FMB Funds, Inc., Turner Funds,
ARK Funds, SEI Asset Allocation Trust, SEI Institutional Investments Trust,
Profit Funds Investment Trust, Santa Barbara Group of Mutual Funds, Inc., First
American Strategy Funds, Inc., and HighMark Funds.
<PAGE>
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 Stock Funds, the Bond Funds and the
Tax-Exempt Funds and separate distribution plans dated as of September 14, 1995
with respect to Class C and Class D shares of the Boston 1784 U.S. Treasury
Money Market Fund. Each of these plans ("Plans") has been adopted pursuant to
Rule 12b-1 under the 1940 Act. The Distributor receives no compensation for
distribution of shares of the Boston 1784 Tax-Free Money Market Fund, Boston
1784 Prime Money Market Fund or Boston 1784 Institutional U.S. Treasury Money
Market Fund, or for the distribution of Class A Shares of the Boston 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 Stock Funds, the Bond
Funds and the Tax-Exempt Funds; (ii) 0.25% of the average daily net assets of
the Class C shares of the Boston 1784 U.S. Treasury Money Market Fund; and
(iii) 0.75% of the average daily net assets of the Class D shares of the Boston
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
holders of these shares or their customers who beneficially own these shares.
No fees have been paid to the Distributor under the Plans or the Distribution
Agreement since the Funds' inception.
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 Stock
Funds, the Bond Funds, and the Tax-Exempt Funds was approved by the Trustees in
March, 1997. Each of the Plans requires that quarterly written reports of money
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; and (4) any other 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 materially increase the
amount which may be spent under the Plan 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 require approval by a majority
of the Trustees of the Trust and of the Qualified Trustees.
<PAGE>
6. FUND TRANSACTIONS; TRADING PRACTICES AND BROKERAGE
FUND TRANSACTIONS
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
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 BankBoston, and who is appointed and
supervised by the senior officers of BankBoston, or in the case of the Boston
1784 International Equity Fund, by portfolio managers who are employees of
BankBoston or of Kleinwort Benson, and who are appointed and supervised by the
senior officers of BankBoston or by senior officers of Kleinwort Benson. 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 the Adviser's
judgment of their professional capability to provide the service. The primary
consideration is to have brokers or dealers execute transactions at the 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 the
Adviser's 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
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
<PAGE>
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing 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.
BankBoston may place a combined order for two or more Funds (or for a
Fund and another account under BankBoston's management) engaged in the purchase
or sale of the same security if, in BankBoston's judgment, 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 is generally beneficial.
Although it is recognized that 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 BankBoston 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 who 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, rules
promulgated by the Securities and Exchange Commission and 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
<PAGE>
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.
7. PERFORMANCE INFORMATION
CALCULATION 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
Stock and Bond 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
was entitled to receive dividends;
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 on a
hypothetical investment for designated time periods (including, but not limited
to, the period from which the Fund commenced operations through the specified
date), and assumes 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.
Set forth below is total rate of return information, assuming that
dividends and capital gains distributions, if any, were reinvested, for the
Tax-Exempt, Bond and Stock Funds for the periods indicated. The Large Cap
<PAGE>
Equity Fund, Small Cap Equity Fund and Florida Tax-Exempt Income Fund are newly
organized and had no operations at November 30, 1996.
REDEEMABLE VALUE OF A
HYPOTHETICAL $1,000
ANNUALIZED TOTAL INVESTMENT AT THE
FUND AND PERIOD RATE OF RETURN END OF THE PERIOD
BOSTON 1784 TAX-EXEMPT
MEDIUM-TERM INCOME
FUND
June 14, 1993
(commencement of
operations) to November 6.28% $1,235.02
30, 1996
One year ended November 5.48% $1,054.80
30, 1996
BOSTON 1784
MASSACHUSETTS TAX-
EXEMPT INCOME FUND
June 14, 1993
(commencement of
operations) to November 5.25% $1,194.03
30, 1996
One year ended November 4.76% $1,047.60
30, 1996
BOSTON 1784 RHODE
ISLAND TAX-EXEMPT
INCOME FUND
August 1, 1994
(commencement of
operations) to November
30, 1996 7.01% $1,171.34
One year ended November
30, 1996 5.58% $1,055.80
<PAGE>
BOSTON 1784 CONNECTICUT
TAX-EXEMPT INCOME
FUND
August 1, 1994
(commencement of
operations) to 7.40% $1,181.33
November 30, 1996
One year ended 5.03% $1,050.30
November 30, 1996
BOSTON 1784 U.S.
GOVERNMENT MEDIUM-
TERM INCOME FUND
June 7, 1993
(commencement of
operations) to November 5.10% $1,189.28
30, 1996
One year ended November 3.98% $1,039.80
30, 1996
BOSTON 1784 SHORT-TERM
INCOME FUND
July 1, 1994
(commencement of
operations) to November 6.79% $1,172.25
30, 1996
One year ended November 5.38% $1,053.80
30, 1996
BOSTON 1784 INCOME
FUND
July 1, 1994
(commencement of
operations) to November
30, 1996 8.70% $1,223.62
One year ended November
30, 1996 4.93% $1,049.30
<PAGE>
BOSTON 1784 ASSET
ALLOCATION FUND
June 14, 1993
(commencement of
operations) to November
30, 1996 12.10% $1,485.66
One year ended November
30, 1996 16.01% $1,160.10
BOSTON 1784 GROWTH AND
INCOME FUND
June 7, 1993
(commencement of
operations) to November
30, 1996 17.51% $1,754.71
One year ended November
30, 1996 25.41% $1,254.10
BOSTON 1784 GROWTH
FUND
March 28, 1996
(commencement of
operations) to November
30, 1996 28.02% $1,181.94
BOSTON 1784
INTERNATIONAL EQUITY
FUND
January 3, 1995
(commencement of
operations) to
November 30, 1996 13.99% $1,284.08
One year ended November
30, 1996 17.08% $1,170.80
The annualized yield of each of the Tax-Exempt, Bond and Stock Funds for
the 30-day period ended on November 30, 1996 was as follows: Boston 1784
Tax-Exempt Medium-Term Income Fund 4.71%; Boston 1784 Massachusetts Tax-Exempt
Income Fund 4.76%; Boston 1784 Rhode Island Tax-Exempt Income Fund 4.77%;
Boston 1784 Connecticut Tax-Exempt Income Fund 4.70%; Boston 1784 U.S.
Government Medium-Term Income Fund 5.92%; Boston 1784 Short-Term Income Fund
5.72%; Boston 1784 Income Fund 6.14%; Boston 1784 Asset Allocation Fund 2.47%;
Boston 1784 Growth and Income Fund .60%; and Boston 1784 Growth Fund 1.26%.
<PAGE>
The annualized tax-equivalent yield of each of the Tax-Exempt Funds for
the 30-day period ended on November 30, 1996 was as follows: Boston 1784
Tax-Exempt Medium-Term Income Fund 6.54%; Boston 1784 Massachusetts Tax-Exempt
Income Fund 6.61%; Boston 1784 Rhode Island Tax-Exempt Income Fund 6.63%; and
Boston 1784 Connecticut Tax-Exempt Income Fund 6.53%.
Set forth below is total rate of return information, assuming that
dividends and capital gains distributions, if any, were reinvested, for the
Money Market Funds for the periods indicated:
REDEEMABLE VALUE OF A
HYPOTHETICAL $1,000
ANNUALIZED TOTAL INVESTMENT AT THE
FUND AND PERIOD RATE OF RETURN END OF THE PERIOD
BOSTON 1784 TAX-FREE
MONEY MARKET FUND
June 14, 1993
(commencement of
operations) to November 3.10% $1,111.61
30, 1996
One year ended November 3.30% $1,033.00
30, 1996
BOSTON 1784 U.S.
TREASURY MONEY
MARKET FUND
June 7, 1993
(commencement of
operations) to November
30, 1996 4.31% $1,158.42
One year ended November
30, 1996 4.87% $1,048.70
BOSTON 1784 INSTITUTIONAL
U.S. TREASURY MONEY
MARKET FUND
June 30, 1993
(commencement of
operations) to November 4.64% $1,171.24
30, 1996
One year ended November 5.18% $1,051.80
30, 1996
<PAGE>
BOSTON 1784 PRIME
MONEY MARKET FUND
August 1, 1991 (date of
initial public investment) 4.22% $1,251.21
to December 31, 1996
For the year ended 5.02% $1,050.20
December 31, 1996
The annualized yield and tax-equivalent yield of the Boston 1784 Tax-Free
Money Market Fund for the seven-day period ended November 30, 1996 were 3.20%
and 4.68%, respectively, and the effective compound annualized yield of the
Boston 1784 Tax-Free Money Market Fund for such period was 3.37%.
The annualized yield of the Boston 1784 U.S. Treasury Money Market Fund
for the seven-day period ended November 30, 1996 was 4.75% and the effective
compound annualized yield of the Boston 1784 U.S. Treasury Money Market Fund
for such period was 4.87%.
The annualized yield of the Boston 1784 Institutional U.S. Treasury Money
Market Fund for the seven-day period ended November 30, 1996 was 5.03% and the
effective compound annualized yield of the Boston 1784 Institutional U.S.
Treasury Money Market Fund for such period was 5.16%.
The annualized yield of the Boston 1784 Prime Money Market Fund for the
seven-day period ended December 31, 1996 was 5.04% and the effective compound
annualized yield of the Boston 1784 Prime Money Market Fund for such period was
5.16%.
8. DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund (including shares of each
class of the Boston 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") with respect to shares of the
Boston 1784 Prime Money Market Fund, Boston 1784 U.S. Treasury Money Market
Fund and Boston 1784 Tax-Free Money Market Fund, as of 3:00 p.m. ET with
respect to the Boston 1784 Institutional U.S. Treasury Money Market Fund (noon
when the New York Stock Exchange closes early), and as of 4:00 p.m. ET with
respect to each other Fund. The New York Stock 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 Boston 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.
<PAGE>
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 affected Fund while each other Fund must
annually distribute at least 90% of its investment company taxable income.
In valuing each of the Stock, Bond and Tax-Exempt Funds' assets, bonds
and other fixed income securities are valued on the basis of valuations
furnished by a pricing service, use of which has been approved by the Board of
Trustees of the Trust. In making such valuations, the pricing service utilizes
both dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive
reliance upon quoted prices or exchange or over the counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. Valuations supplied by the pricing service are subject to review by
the Adviser and, if adjusted pursuant to review by the Adviser, by the Board.
An equity security listed on an exchange will be valued at its last sale price
<PAGE>
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. Securities
which are listed on the National Association of Securities Dealers' National
Market System, for which there have been sales, 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. Securities
quoted on the NASDAQ System, but not listed on the National Market System,
shall be valued at the high or "inside" bid. Unlisted equity 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 highest quoted current
bid price for such securities in the over-the-counter market. Securities for
which market quotations are not readily available, whether or not listed, will
be valued at their fair value as determined in good faith by the Board of
Trustees of the Trust, or pursuant to procedures adopted by the Board subject
to review by the Board of the resulting valuations. 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.
9. 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
emergency (as determined by the Securities and Exchange Commission by rule or
regulation) as a result of which disposal or valuation of a Fund's securities
is not reasonably practicable, or for such other periods as the Securities and
Exchange Commission has permitted by order. The Trust also reserves the right
to suspend sales of shares of any Fund for any period during which the New York
Stock Exchange, an Adviser, the Administrator or the Custodian is not open for
business.
Purchase and redemption of shares of the Boston 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, (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.
10. SYSTEMATIC WITHDRAWAL PLAN
A shareholder (other than a shareholder of the Boston 1784 Institutional
U.S. Treasury Money Market Fund and holders of Class C or Class D shares of the
Boston 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 or her 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
<PAGE>
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.
11. TAXES
TAX STATUS OF THE FUNDS
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.
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 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.
TAXATION OF FUND DISTRIBUTIONS
Distributions -- General. 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.
<PAGE>
Distributions of net capital gains (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. The Money Market
Funds are not expected to make any capital gain distributions.
Because the Funds, other than the Stock 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 Stock
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 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. Each
Fund 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 will
have the effect of reducing the per share net asset value of shares in the Fund
by the amount of the distribution. Thus, shareholders purchasing shares shortly
before the record date of any such distribution may pay the full price for the
shares and 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. Each Fund 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 advisers regarding the possible exclusion of such portion of their
dividends for state and local income tax purposes.
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. However, distributions of
tax-exempt interest earned from certain securities may 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
<PAGE>
receive from the Funds under rules corresponding to those set forth in the
preceding section. 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.
DISPOSITION OF SHARES
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 all the Funds, 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. Certain distributions of exempt-interest dividends may
also be a tax preference item for purposes of the federal individual and
corporate alternative minimum tax. All exempt-interest dividends may affect a
corporate shareholder's alternative minimum tax liability. 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
advisers 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 make an economic return of capital
taxable to shareholders. Any investment by a Fund in zero-coupon bonds, certain
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 (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%
<PAGE>
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.
ADDITIONAL INFORMATION RELATING TO FOREIGN INVESTMENTS
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 taxes. The Funds (other than the Boston
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 Boston 1784
International Equity Fund holds more than 50% of its assets in foreign stock
and securities at the close of its taxable year, it may elect to pass through
to its shareholders foreign income taxes paid. If it 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 their portion must be included in their gross income for federal income
tax purposes. Shareholders who itemize deductions would 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 a Fund does not qualify or elect to
pass through to the Fund's shareholders foreign income taxes paid by it, its
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. Occasionally, a Fund may invest in stock of foreign issuers deemed to be
"passive foreign investment 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 over-withheld 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.
<PAGE>
BACKUP WITHHOLDING
Each of the Funds is 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.
12. SERVICEMARKS
The servicemark BOSTON 1784 FUNDS(R) is a registered servicemark of, and
this servicemark and the "eagle" logo are used by permission of, BankBoston. In
the event that the Advisory Agreements with BankBoston are terminated, the
Trust has agreed to discontinue use of the servicemark and logo.
13. DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of each series and authorizes the division of shares of each series
into classes. Each share of each series represents an equal proportionate
interest in that series, except that due to varying expenses borne by different
classes distributions may be different for different classes. Shareholders of
each series are entitled, upon liquidation or dissolution, to a pro rata share
in the net assets of that series that are available for distribution to
shareholders, except to the extent of different expenses borne by different
classes as noted above. Shareholders have no preemptive rights. Currently, the
Trust has eighteen active series of shares, each of which is a Fund. The Boston
1784 U.S. Treasury Money Market Fund offers three classes of shares: Class A,
Class C and Class D. Class A shares are offered by this Prospectus, call
1-800-BKB-1784 for information on the other classes of this Fund. 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 or
more series. All consideration received by the Trust for shares of any series
and all assets in which such consideration is invested belong to that series
and are subject to the liabilities related thereto. Share certificates 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
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.
14. TRUSTEE AND SHAREHOLDER LIABILITY
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
<PAGE>
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.
SHAREHOLDER LIABILITY
The Trust is a Massachusetts business trust. Under Massachusetts law,
shareholders of such a trust could be held personally liable as partners for
the obligations of the trust. However, even if 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.
15. FINANCIAL INFORMATION
FOR THE PRIME MONEY MARKET FUND
The Statement of Net Assets at December 31, 1996, the Statement of
Operations for the period ended December 31, 1996, the Statement of Changes in
Net Assets for the periods ended December 31, 1995 and December 31, 1996, the
Financial Highlights for the periods ended April 31, 1992, December 31, 1992,
December 31, 1993, December 31, 1994, December 31, 1995 and December 31, 1996,
the Notes to the Financial Statements and the Report of Independent
Accountants, each of which is included in the Annual Report to Shareholders of
the Trust (Accession Number 0000935069-97-000021, 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 the Annual Report accompanies
this Statement of Additional Information.
FOR THE REMAINDER OF THE FUNDS
The Statement of Net Assets at November 30, 1996 (unaudited), the
Statements of Operations for the period ended November 30, 1996 (unaudited),
the Statements of Changes in Net Assets for the periods ended May 31, 1996 and
November 30, 1996 (unaudited), the Financial Highlights for the periods ended
May 31, 1994, May 31, 1995, May 31, 1996 and November 30, 1996, the Notes to
the Financial Statements and the Report of Independent Accountants, each of
which is included in the two Annual and two Semi-Annual Reports to Shareholders
of the Trust (Accession Numbers 0000935069-96-000096, 0000935069-96-000094, and
0000935069-97-000004), are incorporated by reference into this Statement of
Additional Information. The Annual Reports 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 and
Semi-Annual Reports accompanies this Statement of Additional Information.
<PAGE>
APPENDIX A
CERTAIN INFORMATION CONCERNING CONNECTICUT, FLORIDA,
MASSACHUSETTS AND RHODE ISLAND
1. CONNECTICUT
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN
CONNECTICUT MUNICIPAL SECURITIES
The following is a summary of certain information contained in the Annual
Information Statement of the State of Connecticut dated October 2, 1995,
modified February 7, 1996 and the Information Supplement of the State of
Connecticut dated April 18, 1996. The summary does not purport to be a complete
description and is current as of the date of the corresponding information
statement. The Funds are not responsible for the accuracy or timeliness of this
information.
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.
ECONOMIC OVERVIEW
Connecticut's economy is diverse. Manufacturing employment has been on a
downward trend since the mid-1980s, while non-manufacturing employment has
risen significantly. Manufacturing is diversified, with transportation
equipment (primarily aircraft engines, helicopters and submarines) the dominant
industry. Connecticut is a leading producer of aircraft engines, along with
related components, and submarines. The largest employers in these industries
are United Technologies Corporation, including its Pratt and Whitney Aircraft
Division, with headquarters in East Hartford, and General Dynamics
Corporation's Electric Boat Division in Groton. The State is also a leading
producer of military and civilian helicopters.
Over the past ten years, Connecticut's manufacturing employment peaked in
1985 at over 408,000 workers. Since that year, employment in manufacturing has
been on a downward trend, declining 30.1% or a loss of 122,850 jobs by 1994
from 1985 levels. A number of factors, such as the overvalued dollar of the
mid-1980s, heightened foreign competition, a sharp decrease in defense
spending, and improved productivity played a significant role in affecting the
overall level of manufacturing employment. In Connecticut, the rate of job loss
in the manufacturing sector provided a decline of 3.0% or 8,940 jobs from 1993
to 1994.
Over the past several decades the non-manufacturing sector of the State's
economy has risen in economic importance, from just over 50% of total State
employment in 1950 to approximately 81.5% by 1994. This trend has decreased the
State's dependence on manufacturing jobs. The State's non-manufacturing sector
expended by 1.7% in 1994 as compared to 1993, and 1.4% in 1993 as compared to
1992, following three years of decline starting in 1990. During the 1990's,
Connecticut's growth in non-manufacturing employment has lagged that of the New
England region and the nation as a whole.
The non-manufacturing sector is comprised of industries that typically
provide a service. The four major industries in terms of employment are: trade;
finance, insurance and real estate; business and personal services; and
<PAGE>
government, which collectively comprise over 90% of employment in the
non-manufacturing sector.
After enjoying an extraordinary boom during the mid-1980s, Connecticut,
as well as the rest of the Northeast, experienced an economic slow down before
the onset of the national recession in the latter half of 1990. Reflecting the
downturn, the unemployment rate in the State rose from a low of 3% in 1988 to
just above the national average of 7.4% during 1992. Since 1992, the
unemployment rate has declined annually to a rate of 5.6% for 1994.
FISCAL CONDITION IN RECENT YEARS
The State finances most of its operation through its General Fund. The
major components of General Fund revenues are state taxes, including the
personal income tax, the sales and use tax and the corporation business tax.
Miscellaneous fees, receipts, transfers and unrestricted federal grants account
for most of the other General Fund revenue. A cumulative budgetary-bases
deficit in the General Fund as of June 30, 1991 in the amount of $965,711,525
was funded by the issuance of General Obligation Economic Recovery Notes. For
the fiscal years ended June 30, 1992, 1993 and 1994, the operating surpluses of
the General Fund were $110.2, $113.5 and $19.7 million, respectively. For the
fiscal year ended June 30, 1995, the operating surplus was $80.5 million, which
was transferred to the budget reserve fund.
GENERAL FUND BUDGETS 1995-1996 AND 1996-1997
The adopted budget for fiscal year 1995-96 anticipates General Fund
revenues of $8,837.0 million and General Fund expenditures of $8.836.8 million,
resulting in a projected surplus of $0.2 million. For fiscal 1996-97, the
adopted budget anticipates General Fund revenues of $9,158.0 million and
General Fund expenditures of $9,157.8 million, resulting in a projected surplus
of $0.2 million. Per statute, these surpluses, if unappropriated, will be
transferred into a budget reserve fund unless otherwise directed by law. When
the amount in the budget reserve fund in any fiscal year exceeds 5% of the net
General Fund appropriations, surpluses are deemed appropriated to the State
Employees' Retirement Fund in an amount not to exceed 5% of the unfunded
liability of that system. Any excess surplus remaining is to be used for the
purpose of retiring outstanding indebtedness above the State's normal
retirement schedule.
The adopted budget reflects implementation of significant tax changes
aimed at increasing overall disposable income and encouraging economic
expansion of the State. A phase down in the personal income tax rate was
enacted, pursuant to which the tax rate on the first $4,500 of taxable income
for joint filers is dropped 33% from 4.5% to 3% for the income year commencing
January 1, 1996. For income years commencing on or after January 1, 1997, the
application of the 3% rate is further expanded to the first $9000 of taxable
income for joint filers. In addition, a new personal income tax credit, limited
to no more than $100 per filer, has been added with the income years commencing
on or after January 1, 1996. To improve the business climate in the State and
stimulate long term growth, legislation was also enacted which will reduce
Connecticut's corporate tax rate from its current rate of 11.25% to 7.5% by
January 1, 2000.
The General Fund Adopted Budget anticipates that approximately $241
million of the original $965.7 million in Economic Recovery Notes issued to
fund the cumulative deficit of fiscal 1990-91, will be retired in fiscal years
1996-97 through 1998-99, rather than in fiscal 1995-96. Of the original $965.7
million issued, $725 million will be retired on schedule, and the Economic
<PAGE>
Recovery Notes will be paid in full by the expiration of the current Governor's
term.
The adopted budget also reflects significant reductions in expenditures
from current service levels. Some of the changes, which are expected to result
in significant long-term savings to the State, include restructuring the
General Assistance program to limit benefits, reform of the Aid to Families
with Dependent Children program to place time limits on benefits, reduction of
long-term case costs by creating a system of capitated rates, merging of mental
health and substance abuse services, consolidating the State's mental health
hospitals and moving the State toward a 40-hour work week for State employees.
The adopted budget reflects the commitment of the State to improving the way in
which government delivers services, reducing the tax burden and encouraging
economic growth in the State.
The Connecticut General Statutes require the Comptroller to report the
State's fiscal position monthly. This required 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 April 1, 1996, letter indicated a projected General
Fund deficit of $22.3 million for fiscal 1996-97. The Governor has reduced
allotments on selected appropriated accounts and has actively encouraged State
agency heads to curtail expenditures. The current year deficit is primarily a
result of Medicaid expenditures which are anticipated to be higher than
appropriations, the cost of negotiated settlement in the Connecticut Hospital
Association v. O'Neill lawsuit and additional expenditures required in the
Department of Children and Families to comply with a 1991 consent decree in the
Juan F. v. O'Neill lawsuit. (See "Litigation Section below.) No assurances can
be given that subsequent projections will not indicate changes in the 1995-96
General Fund result. To the extent there is a deficit at the end of the fiscal
year, it may be funded by a transfer from the $80.5 million Budget Reserve
Fund.
The Governor is required by statue to submit a status report to the
General Assembly on the biennial budget enacted in the previous year. The
status report shall include any recommendation for adjustments and revisions of
the enacted budget. The General Assembly convened on February 7, 1996 to
consider the Governor's proposed Midterm Budget Adjustments and was scheduled
to adjourn on May 8, 1996.
The Governor's proposed Midterm Budget Adjustments for fiscal year
1996-97 anticipates General Fund expenditures of $9,086.3 million, General Fund
revenues of $9,087.0 million, and an estimated General fund surplus for fiscal
year 1996-97 of $0.7 million. These adjustments would result in a fiscal year
1996-97 budget that remains within the limits imposed by the constitutional and
statutory expenditure cap. For fiscal year 1996-97, permitted growth in capped
expenditures is 3.43%. The proposed Midterm Budget Adjustments would result in
a fiscal year 1996-97 budget that is $123.6 million below the expenditure cap.
The Governor's adjustments for fiscal year 1996-97 anticipate an increase
in General Fund revenues of $151.2 million and a decrease in General Fund
expenditures of $31.0 million, as a result of the Connecticut Lottery
Privatization Implementation Plan. At present, Connecticut has agreements with
insurance companies under which the State Lottery Fund purchases annuities
under group contracts which provide payments corresponding to the State's
obligation for payments to State Lottery prize winners. The State, however,
remains contingently liable for the payment of prizes due to Lottery prize
winners. As of June 30, 1995, the State is obligated to Lottery prize winners
<PAGE>
in the amount of $956 million. The privatization of the lottery is subject to
legislative approval.
The Midterm Budget Adjustments proposed by the Governor, in addition to
those adjustments which would result from the privatization of the State
lottery, anticipate a net reduction in expenditures totaling $40.5 million and
a net decrease in revenues totaling $18.1 million. The expenditure adjustments
and some of the revenue adjustments are subject to legislative approval.
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 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.
LITIGATION
The State of Connecticut, its officers and employees, are defendants in
numerous lawsuits. The ultimate disposition of and final consequences of these
lawsuits are not determinable at present. The Attorney General's Office has
reviewed the status of pending lawsuits and reports that in its opinion such
pending litigation will not be determined in the end so as to result,
individually or in the aggregate, in a final judgment against the State which
would adversely affect its financial position, except that in the cases
described below the fiscal impact of an adverse decision might be significant
but is not determinable at this time.
The cases described in this section generally do no include any
individual case where the fiscal impact of an adverse judgment is expected to
be less than $15 million, but adverse judgments in a number of such cases
could, in the aggregate and in certain circumstances, have a significant
impact.
THE CONNECTICUT HOSPITAL ASSOCIATION V. O'NEILL is an action brought in
1990 in Federal District Court. The plaintiffs include thirty-three of
Connecticut's general hospitals. The plaintiffs claim that the State Department
of Income Maintenance violated federal law and the United States Constitution
by adopting and implementing a reimbursement methodology that consistently
underpays the hospitals for providing inpatient services to Medicaid patients.
The plaintiffs seek relief declaring the State's Medicaid inpatient hospital
methodology invalid and enjoining the State form continuing to utilize such
<PAGE>
methodology. The plaintiffs also seek an order requiring the State to reimburse
the plaintiff hospitals at higher rates for inpatient hospital services
provided to Medicaid patients. On March 30, 1994, the District Court ordered
the State to begin reimbursing hospitals for Medicaid inpatient costs at rates
computed by using the Medicare reasonable cost methodology. Since the court
stated that it has not made any determination as to whether the State system
substantively complies with the Federal Boren Amendment, the hospitals were
ordered to post a bond to cover any repayment obligation of the hospitals if
the court later determines, after trial, that the system complies with federal
law, since reimbursement at the Medicare reasonable cost rate may be greater
than what is required under the Boren Amendment. The State appealed the
decision. On January 30, 1995, the Second Circuit Court reversed the March 30,
1994 order of the District Court, vacated the preliminary injunction against
the State, and remanded the matter to the District Court for further proceeding
consistent with the Court's decision. The State is now using the reimbursement
methodology challenged in this action and seeking the recovery of payments
inappropriately made to the hospitals while the injunction was in effect.
The parties in THE CONNECTICUT HOSPITAL ASSOCIATION V. O'NEILL have
reached a settlement agreement which has been approved by the Connecticut
General Assembly pursuant to Connecticut General Statutes ss.3-125a. The
settlement results in the continued use of the current reimbursement
methodology for up to three years with no further challenges to it by the
plaintiffs during that time regarding payments on behalf of Medicaid recipients
who are not enrolled in managed care; and simultaneous transactions in which
the first inpatient reimbursements made to hospitals by the State after
approval of the agreement are reduced in the aggregate by $32,668,675.43 and
increased in the aggregate by $41,211,526.87. The United States Department of
Health and Human Services will participate in the reimbursement transactions
set forth above at the fifty percent (50%) matching rate.
CONNECTICUT CRIMINAL DEFENSE LAWYERS ASSOCIATION V. FORST is an action
brought in 1989 in Federal District Court alleging a pervasive campaign by the
State and various State Police officials of illegal electronic surveillance,
wiretapping and bugging for a number of years at Connecticut State Police
facilities. The plaintiffs seek compensatory damages, punitive damages, and
other damages, costs and attorneys fees. The plaintiffs also seek temporary and
permanent injunctive relief. In November 1991, the court issued an order which
will allow the plaintiffs to represent a class of all persons who participated
in wire or oral communications to, from, or within State Police facilities
between January 1, 1974, and November 9, 1989, and whose communications were
intercepted, recorded and/or used by the defendants in violation of the law.
This class includes (1) a sub-class of the Connecticut State Police Union, (2)
current and former Connecticut State Police officers who are not defendants in
this or any consolidated case, and (3) other persons who, acting on behalf of
the State Police, participated in oral or wire communications to, from or
within State Police facilities between such dates.
SHEFF V. O'NEILL is a Superior Court action brought in 1989 on behalf of
black and Hispanic school children in the Hartford school district. The
plaintiffs seek a declaratory judgment that the public schools in the greater
Hartford metropolitan area are segregated de facto by race and ethnicity and
are inherently unequal to their detriment. They also seek injunctive relief
against state officials to provide them with an "integrated education." In
April 1995, the Superior Court entered judgment for the State. The plaintiffs'
appeal to the State Supreme Court is pending.
In 1979, the Connecticut Supreme Court determined in HORTON V. MESKILL,
172 Conn. 615 (1979), that the method of financing elementary and secondary
public schools in Connecticut violated the State Constitution because the
<PAGE>
statutory scheme delegated the State's responsibility for education to towns
whose taxable property per pupil varies so greatly as to prevent equal access
to education. The General Assembly enacted legislation in 1979 which sought to
achieve equalization of educational financing. The system was further refined
by the General Assembly during subsequent sessions. In 1985, the State Supreme
Court held that the 1979 legislation was constitutional and that the Superior
Court applied an improper standard to test the constitutionality of the
post-1979 amendments to the State's educational financial plan. It remanded the
case to the Superior Court for further proceedings on the post-1979 amendments.
195 Conn. 24 (1985). The case, as remanded in 1985, is still awaiting trial.
Additional legislative changes have been made to the system for financing
public schools since 1985, but there has been no challenge to such changes.
THE CONNECTICUT TRAUMATIC BRAIN INJURY ASSOCIATION, INC. V. HOGAN is a
Federal District Court civil rights action brought in 1990 on behalf of all
persons with retardation or traumatic brain injury who have been, or may be,
placed in Norwich, Fairfield Hills or Connecticut Valley Hospitals. The
plaintiffs claim that the treatment and training they need is unavailable in
state hospitals for the mentally ill and that placement in those hospitals
violates their constitutional rights. The plaintiffs seek relief which would
require that the plaintiff-class members be transferred to community
residential settings with appropriate support services.
Since 1977, several suits have been filed in the Federal District Court
and the Connecticut Superior Court on behalf of alleged INDIAN TRIBES in
various parts of the State, claiming monetary recovery and ownership to land in
issue. The land involved is located generally in rural and residential areas. A
suit was brought in 1992, however, involving land within the City of
Bridgeport. The same plaintiff group in that suit also subsequently sued
concerning land in Trumbull and Southbury and has threatened to sue regarding
additional land in other towns in the State.
WASHINGTON V. MEACHUM is a class action brought in 1994 in Superior Court
by prison inmates who seek damages and other relief. The plaintiffs claim that
the monitoring and recording of their telephone calls from the State's
correctional institutions violates the Connecticut Wiretapping and
Eavesdropping statutes and the federal and State constitutions. In March 1995,
the court entered a judgment which is substantially in the State's favor and
denies any monetary damages to the plaintiffs except for attorney fees. The
plaintiffs have appealed to the Appellate Court and the State has
cross-appealed on those issues decided against it. The appeal has been
transferred to the Supreme Court.
The Commissioner of the Department of Revenue Services received claims
for tax refunds from various companies which paid corporation business taxes on
interest earned on United States Treasury bonds and notes. The claims
challenged the State's right to include interest on United States Treasury
bonds and notes in the calculation of the corporation business tax when
interest on certain State bonds was excluded. In March 1995, the Connecticut
General Assembly enacted legislation taking, by eminent domain, the rights of
holders to exclude the interest on such State bonds from the income base on
which the corporation business tax is calculated, effective for interest
accrued on and after January 1, 1992. The State will provide compensation to
the holders of the affected bonds. The legislation was intended to eliminate
the basis for the tax refund claims noted above for 1992 and later years.
Several cases have been filed in 1995 against the COMMISSIONER OF THE
DEPARTMENT OF REVENUE SERVICES claiming refunds on the basis described above.
Adverse decisions in these cases could cause the State to pay up to $97 million
in refunds.
<PAGE>
Certain of the plaintiffs who filed cases in 1995 against the
COMMISSIONER OF THE DEPARTMENT OF REVENUE SERVICES seeking refunds of
corporation business taxes have now claimed that the eminent domain legislation
enacted by the Connecticut General Assembly in March 1995 is unconstitutional
and does not eliminate the basis for any tax refund claims for 1992 and later
years. It is not possible to estimate, with any degree of precision, the
potential amount of tax refunds and tax revenue losses in future years which
could result if these additional claims were to prevail, but, in recent years,
the amount of tax revenue in question is estimated to be approximately $100
million each fiscal year.
CONNECTICUT HOSPITAL ASSOCIATION V. POGUE was an action brought in 1994
in Federal District Court, challenging 1994 legislation that was successor
legislation to the uncompensated care pool statutes challenged in the earlier
case of NEW ENGLAND HEALTH CARE EMPLOYEES UNION DISTRICT 1199, SEIU AFL-CIO V.
MT. SINAI HOSPITAL. That legislation provided a mechanism to spread the cost of
uncompensated care provided by hospitals by compensating hospitals that bear a
disproportionate share of such costs and to generate federal Medicaid program
reimbursements. An adverse decision could have adversely impacted the State's
receipt of federal reimbursements. In September 1995, the United States Second
Circuit Court of Appeals upheld the State's position in these cases, based on
the recent decision of the United States Supreme Court in New York Conference
of Blue Cross & Blue Shield Plans v. Travelers Insurance Company, and remanded
the cases to the District Court for entry of judgment in favor of the State.
2. FLORIDA
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN
FLORIDA MUNICIPAL SECURITIES
The following is a summary of certain information contained in the
Official Statement Relating to $300,000,000 State of Florida Department of
Environmental Protection Preservation 2000 Revenue Bonds, Series 1996A, dated
April 10, 1996. The summary does not purport to be a complete description and
is current as of the date of the official statement. The Funds are not
responsible for the accuracy or timeliness of this information.
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 5.1% per year, while the national per capita income increased an average of
5.0%. Real personal income is estimated to increase 4.7% in 1995-96 and
increase 3.8% in 1996-97 while real personal income per capita in Florida is
projected to grow at 2.9% 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. Since 1985, the United States has
had an average population increase of about 1.0% annually, while Florida's
average annual rate of increase is around 2.3%. Florida has been and continues
to be the fastest growing of the 11 largest states.
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. The average rate of unemployment for
Florida since 1986 is 6.2%, while the national average is also 6.2%.
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Florida's dependency on the highly cyclical construction and
construction-related manufacturing sectors has declined. This is expected to
continue as Florida's economy continues to diversify. Florida, nevertheless,
has a dynamic construction industry, with single and multi-family housing
starts accounting for approximately 8.5% of total U.S. housing starts in 1995,
while the State's population is 5.4% of the nation's population. Total housing
starts were 115,500 in 1995.
A driving force behind Florida's construction industry is of course its
rapid growth in population. While annual growth in the State's population is
projected to slow somewhat, it is still expected to grow close to 230,000 new
residents per year throughout the 1990's.
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 1994-95, 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 are $15,311.3
million, a 3.3% 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 $503.1
million. For fiscal year 1996-97, the estimated General Revenue plus Working
Capital and Budget Stabilization funds available total $15,997.6 million, a
4.5% 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 tax revenues totaled $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
totaled $508.4 million, an increase of 10.4% over the previous fiscal year.
Documentary stamp tax collections totaled $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 totaled $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.
<PAGE>
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.
3. MASSACHUSETTS
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS
IN MASSACHUSETTS MUNICIPAL SECURITIES
The following is a summary of certain information contained in the
Information Statement of the Commonwealth of Massachusetts dated February
16,1996 and the Commonwealth's Information Statement Supplement dated June 5,
1996. The summary does not purport to be a complete description and is current
as of the date of the corresponding information statement. The Funds are not
responsible for the accuracy or timeliness of this information.
Massachusetts Municipal Securities may fluctuate in value in response to
a variety of factors, including the economic strength of Massachusetts.
FISCAL YEARS 1991 THROUGH 1997
1991 Fiscal Year. Budgeted expenditures for fiscal 1991 were
approximately $13.659 billion. Budgeted revenues and other sources for fiscal
1991 were $13.634 billion. The fiscal 1991 operating loss equaled approximately
$21.2 million. Application of the adjusted fiscal 1990 fund balance of $258.3
million resulted in a final fiscal 1991 budgetary surplus of $237.1 million.
Upon taking office in January, 1991, the new Governor undertook a
comprehensive review of the Commonwealth's budget. Based on projected spending
of $14.105 billion, it was then estimated that $850.0 million in budget
balancing measures would be needed prior to the close of fiscal 1991. To
<PAGE>
address the projected deficit, a number of legislative measures were enacted,
including a state employee furlough program, and the Governor took certain
other administrative actions not requiring legislative approval. It is
estimated that spending reductions achieved through savings initiatives and the
withholding of allotments totaled $484.3 million for fiscal 1991.
1992 Fiscal Year. Budgeted revenues and other sources for fiscal 1992
were $13.728 billion, including tax revenues of $9.484 billion. Budgeted
revenues and other sources increased by approximately 0.7% from fiscal 1991 to
fiscal 1992, while tax revenues increased by 5.4% for the same period.
Budgeted expenditures were approximately $13.420 billion in fiscal 1992,
which was $238.7 million, or 1.7%, lower than fiscal 1991 budgeted
expenditures. Final fiscal 1992 budgeted expenditures were approximately $300
million higher than the initial July, 1991 estimates of budgeted expenditures.
Overall, the budgeted operating funds ended fiscal 1992 with an excess of
revenues and other sources over expenditures and other uses of $312.3 million
and with positive fund balances of $549.4 million. Total fiscal 1992 spending
authority continued into fiscal 1993 amounted to $231.0 million.
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.
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.
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 totaled 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 totaled
$15.523 billion, which is $826.5 million or approximately 5.6% higher than
fiscal 1993 budgeted expenditures and other uses.
In June, 1993, the Legislature adopted and the Governor signed into law
comprehensive education reform legislation, requiring substantial annual
increases in state appropriations for education purposes above fiscal 1993 base
expenditures of approximately $1.288 billion.
<PAGE>
1995 Fiscal Year. Fiscal 1995 tax revenue collections totaled $11.163
billion, approximately $12 million above the Department of Revenue's revised
fiscal year 1995 tax revenue estimate of $11.151 billion, and approximately
$556 million or 5.2% above fiscal year 1994 tax revenues of $10.607 billion.
Budgeted revenues and other sources, including non-tax revenues, collected in
fiscal 1995 totaled $16.387 billion, approximately $837 million or 5.4% above
fiscal year 1994 budgeted revenues of $15.550 billion. Budgeted expenditures
and other uses of funds in fiscal 1995 were approximately $16.251 billion,
approximately $728 million or 4.7% above fiscal 1994 budgeted expenditures and
uses of $15.523 billion. The Commonwealth ended fiscal 1995 with an operating
gain of $137 million and an ending fund balance of $726 million.
The final fiscal 1995 supplemental budget modified, with respect to the
fiscal 1995 year-end surplus, the provisions of state law governing deposits to
the Stabilization Fund. As calculated by the Comptroller, the amount of surplus
funds (the sum of the undesignated fund balances at year-end that are to be
credited to three principle operating funds) for fiscal year 1995 was
approximately $94.9 million, of which $55.9 million was available to be carried
forward as a beginning balance for fiscal year 1996. Of the balance,
approximately $27.9 million was deposited in the Stabilization Fund, and
approximately $11.1 million was deposited in the Cost Relief Fund.
1996 Fiscal Year. Through April, 1996, fiscal 1996 tax revenue
collections totaled approximately $9.426 billion, approximately $534.5 million,
or 6.0%, greater than tax revenue collections for the same period in fiscal
1995. In May, 1996, the Executive Office for Administration and Finance revised
its fiscal 1996 tax revenue estimate upward to $11.684 billion, an increase of
approximately $80 million from the earlier estimate, based upon tax revenue
collections through April, 1996.
Preliminary figures through May, 1996 indicate that fiscal 1996 tax
revenue collections totaled approximately $10.604 billion, 7.9% greater than
tax revenue collections for the same period in fiscal 1995. The preliminary May
figures suggest total fiscal 1996 tax revenue collections of $11.850 billion to
$11.950 billion, which represents an increase of approximately $166 million to
$266 million above the current official estimate of $11.684 billion.
Current fiscal 1996 projected spending is approximately $16.963 billion,
including approximately $153.2 million reserved for contingencies. Assuming
fiscal 1996 tax revenue collections of $11.900 billion (the midpoint of the
range mentioned in the preceding paragraph), fiscal 1996 revenues are projected
to total approximately $17.065 billion.
1997 Fiscal Year. On April 13, 1996, the House of Representatives adopted
a fiscal 1997 budget that provides for total expenditures of approximately
$17.615 billion, as compared to the Governor's fiscal 1997 budget
recommendation of $17.360 billion when adjusted for funds moved off and on
budget (the Governor's budget provides for $16.739 billion in expenditures
without such adjustments). On May 16, 1996, the Senate Ways and Means Committee
released its proposed budget for fiscal 1997, which recommended fiscal 1997
spending of approximately $17.421 billion. The full Senate adopted its budget
on May 22, 1996, which authorized fiscal 1997 spending of approximately $17.426
billion. The Executive Office for Administration and Finance is currently
analyzing the impact of floor amendments made to the Senate Ways and Means
budget by the Senate. Each legislative budget is based upon the fiscal 1997
consensus tax revenue estimate of $12.177 billion, agreed to in April, 1996. A
legislative conference committee will develop a compromise budget for
consideration by the House and Senate, which upon enactment by both houses will
be presented to the Governor.
<PAGE>
Cash Flows. The most recent quarterly cash flow projections prepared by
the office of the State Treasurer are dated March 6, 1996, and estimate the
fiscal 1996 year-end cash position to be approximately $411.6 million. The
projection is based on the original fiscal 1996 budget signed by the Governor
and supplemental appropriations to the date of the projection, and includes a
$145 million contingency reserve.
The Commonwealth currently has no outstanding commercial paper. The
current cash flow projection anticipates no need of the Commonwealth to borrow
for operating needs under its commercial paper program during the remainder of
fiscal year 1996.
The March 6, 1996, cash flow projection also contains monthly forecasts
through the end of fiscal 1997 and estimates that the fiscal 1997 year-end cash
position will be $451.1 million. The fiscal 1997 cash flow projection
anticipates that the Commonwealth will need to borrow under its commercial
paper program in October, 1996, December, 1996 and March, 1997 for its
operating needs due to the local aid payments that are made on a quarterly
basis.
The ending balances included in the cash flow forecast for fiscal 1996
and fiscal 1997 and the estimated ending balance for the Commonwealth's
operating budget for those years are likely to differ due to timing differences
and the effect of certain non-budget items.
Recent Default. In late 1996, Middlesex County, Massachusetts defaulted
on a bond issuance. The Commonwealth refused to pay the county's obligations.
It is not possible to predict the effects of this default on other issuers of
Massachusetts Municipal Obligations.
COMMONWEALTH REVENUES
In order to fund its programs and services, the Commonwealth collects a
variety of taxes and receives revenues from other non-tax sources, including
the federal government and various fees, fines, court revenues, assessments,
reimbursements, interest earnings and transfers from its non-budgeted funds. In
fiscal 1995, approximately 68.1% of the Commonwealth's annual budgeted revenues
were derived from state taxes. In addition, the federal government provided
approximately 18.1% of such revenues, with the remaining 13.8% provided from
departmental revenues and transfers from non-budgeted funds.
The major components of State taxes are the income tax, which accounted
for 55% of total projected tax revenues in fiscal 1995, the sales and use tax,
which accounted for approximately 22%, and the business corporations tax, which
accounted for approximately 8%. Other tax and excise sources accounted for the
remaining 15% of total fiscal 1995 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, businesses, 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, as of January 1,
1996, 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.
<PAGE>
The Governor filed legislation on January 23, 1996 that would reduce the
personal income tax rate on earned income from 5.95% to 5.45% over two calendar
years. The bill would reduce the rate to 5.70% for calendar 1997, followed by a
reduction to 5.45% in calendar year 1998. The Executive Office for
Administration and Finance estimates that this cut in the personal income tax
rate would reduce base tax revenues by approximately $133 million in fiscal
1997, an additional $265 million in fiscal 1998 and a further $132 million in
fiscal 1999, at which time the proposed tax reduction would be fully
implemented.
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 $619.0
million of outstanding Fiscal Recovery Bonds issued pursuant to Chapter 151.
Partially as a result of income tax rate increases, state income tax
revenues increased by 5.8% from fiscal 1991 to fiscal 1992. Compared to the
prior fiscal year, state income tax revenues increased by 0.7% in fiscal 1993,
5.9% in fiscal 1994 and 5.0% in fiscal 1995 and are projected to increase by
6.4% in fiscal 1996.
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 a 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.
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. Compared to the prior fiscal year, business corporation
tax revenues increased by 5.1% in fiscal 1992, 14.5% in fiscal 1993, 6.1% in
fiscal 1994 and 16.4% in fiscal 1995. Fiscal 1996 tax revenues from business
corporations are projected to be 2.3% lower than fiscal 1995, taking into
account an expected $49 million reduction in the business corporations tax
resulting from the implementation of legislation establishing a "single sales
factor" apportionment formula for the business corporations tax. The new
formula, when implemented, will calculate a firm's taxable income as its net
income times the percentage of its total sales that are in Massachusetts, as
opposed to the current formula that takes other factors, such as payroll and
property, into account.
Bank Tax. Commercial and savings banks are subject to an excise tax of
12.54%. On July 27, 1995 the Governor approved legislation that will reduce the
rate over several years to 10.5%, the same effective rate charged to other
corporations. The Department of Revenue estimates that the deduction, when
fully implemented in fiscal year 1999, will result in an annual $32.3 million
revenue loss, including the effect of provisions in the proposed legislation
that would apply the tax to out-of-state banks and other financial institutions
that are not currently taxed and that would lead to an estimated $18 million
annual gain.
<PAGE>
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,
tax revenues from banks increased to $152.9 million, or 154.5% above fiscal
1992. Fiscal 1994 tax revenues from banks were approximately $199.9 million, or
approximately 30.7% above fiscal 1993. Fiscal 1995 tax revenues from banks were
$206 million, or approximately 3.0% above fiscal 1994. Fiscal 1996 tax revenues
from banks are estimated to be approximately $209 million, or 1.4% higher than
fiscal 1995.
Other Taxes. Other tax revenue of the Commonwealth is projected to total
$1.567 billion in fiscal 1996, a decrease of 1.5% from fiscal 1995. Other 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.
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.
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. In fiscal 1991, federal
reimbursements increased by 61.6% 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 of
increased spending for certain entitlement programs. In fiscal 1994, federal
reimbursement increased to $2.901 billion from fiscal 1993 reimbursements of
$2.674 billion and increased further to $2.970 billion in fiscal 1995. Federal
reimbursements for fiscal 1996 are estimated to remain approximately level with
fiscal 1995 at $2.969 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 decreased 1.5%
to $1.187 billion in fiscal 1992, increased 11.8% in fiscal 1993 to $1.327
billion decreased 10.5% to $1.188 billion in fiscal 1994, increased 7.2% to
$1.273 billion in fiscal 1995 and are projected to decrease 7.4% to $1.179
billion in fiscal 1996.
Interfund transfers and other sources from non-budgeted funds are
estimated to total $1.010 billion in fiscal 1996, an increase of 3.0% compared
to fiscal 1993. 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 $547.6 million, $558.0 million, $600.2 million, $667.3 million
and $709.5 million in fiscal 1991 through 1995, respectively, and which are
expected to account for $728.9 million in fiscal 1996.
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.
<PAGE>
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.
On September 29, 1995, the Governor signed a tribal-state compact between
the Wampanoag Tribe of Gay Head and the Commonwealth which establishes the
relationship between the tribe and the Commonwealth with respect to the
operation of a casino in the city of New Bedford. The compact is subject to
approval by the Legislature and by the United States Secretary of the Interior.
The Governor also filed companion legislation that would authorize the
licensing of up to 700 slot machines at each of the four race tracks now
licensed in the state, as well as a casino in Hampden County. On November 9,
1995, the United States Secretary of the Interior announced that he would not
approve the tribal-state compact between the Wampanoag Tribe of Gay Head and
the Commonwealth until after the Legislature had approved it. Legislative
action on the compact has not yet occurred.
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 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.
<PAGE>
Tax revenues in fiscal 1991 through fiscal 1995 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 1996 will not reach the limit imposed by either of these statutes.
4. RHODE ISLAND
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN
RHODE ISLAND MUNICIPAL SECURITIES
The following is a summary of certain information contained in the
Information Statement of the State of Rhode Island and Providence Plantations
dated March 22, 1996. The summary does not purport to be a complete description
and is current as of the date of the information statement. The Funds are not
responsible for the accuracy or timeliness of this information.
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.
OVERVIEW OF THE ECONOMY
POPULATION CHARACTERISTICS
Rhode Island experienced modest population increases between 1980 and
1990. The 1990 United States census count for Rhode Island was 1,005,000, or
5.9% more than the 949,000 counted in 1980. While the Rhode Island population
did not change significantly between 1989 and 1993, it decreased by 0.3%
between 1993 and 1994. Bureau of the Census estimates from 1994 show the Rhode
Island population to be 997,000. In contrast, the total United States
population increased by approximately 9.8% between 1980 and 1990, 3.6% between
1990 and 1993, and 1.0% between 1993 and 1994.
PERSONAL INCOME, CONSUMER PRICES AND POVERTY
Per capita personal income levels in Rhode Island have been consistent
with those in the United States since 1970. In addition, Rhode Island has
maintained a poverty rate well below the national average. In 1994, 10.3% of
the Rhode Island population was below the poverty line, while 14.5% of the
population of the United States fell below the poverty line.
EMPLOYMENT
Total employment levels in Rhode Island grew at a rate of 1.2% in 1993
and 0.9% in 1994. The only employment sector that did not grow in 1993 and 1994
was the manufacturing sector, which has experienced declining employment levels
since 1985. The sector employing the greatest number of people in Rhode Island
continues to be the service sector, which contributed approximately 31.5% of
total non-agricultural employment in 1994.
ECONOMIC BASE AND PERFORMANCE
Rhode Island has a diversified economic base which includes traditional
manufacturing, high technology and service industries. A substantial portion of
products generated by these and other sectors is exported. Like most other
<PAGE>
historically industrial states, Rhode Island has seen a shift in employment
from labor-intensive manufacturing industries to technology and service-based
industries.
HUMAN RESOURCES
Skilled human capital is the foundation of economic strength in Rhode
Island. It provides the basis for a technologically dynamic and industrially
diverse regional economy. The Rhode Island population is well-educated with
27.6% of its residents over the age of 25 having received at least an
Associate's degree. In addition, per pupil spending on public elementary and
secondary education in Rhode Island has been significantly higher than the
national average since 1980. For the 1994-95 academic year Rhode Island spent
25% more per pupil than the national average.
FUTURE ECONOMIC GROWTH
Data Resources, Inc. ("DRI") and the New England Economic Project ("NEEP")
provided the following forecasts of Rhode Island's economic outlook to the
State's Revenue Estimating Conference.
PERSONAL INCOME
DRI forecasts that personal income in Rhode Island will expand at an
average annual rate of 4.4% from 1994 through 1999, in comparison to their
forecast of a 5.0% expansion of personal income in the United States overall.
NEEP forecasts that personal income in Rhode Island will expand at an average
annual rate of 5.4%, in comparison to their forecast of a 6.0% expansion of
personal income in the United States overall. Both DRI and NEEP predict Rhode
Island's growth rate will be 0.6% less than the comparable United States growth
rate for the same period.
EMPLOYMENT
Annual average employment growth is expected to fall in the range of 0.6
to 0.9% during the 1994 through 1999 forecast horizon. In the near term, DRI
forecasts that employment growth will pick up momentum based upon falling
interest rates and a boost in construction jobs. The NEEP forecast, however,
assumes that growth will continue through calendar year 1996 and then
decelerate sharply by 1997. Over the five year period, Rhode Island is expected
to gain approximately 17,000 jobs and to be up 35,000 jobs from the prior 1991
fourth quarter trough of 415,002.
Manufacturing employment is anticipated to continue the secular decline
which began in 1984. Contributing factors will be foreign competition, high
regulatory costs and reductions in defense spending.
Services employment will continue to serve as the primary engine of
growth, and will equal approximately one-third of the employment base by 1999.
Health care cost containment measures will constrain growth in the health
services component, while expansion is anticipated in higher education,
tourism, computer software, engineering and other business services.
Wholesale and retail trade employment is also expected to be a
significant contributor to overall jobs growth, but will not gain appreciably
as a percentage of overall employment.
<PAGE>
GENERAL FUND REVENUES AND EXPENDITURES
The State draws nearly all of its revenue from a series of non-property
related taxes and excises, principally the personal income tax and general
retail sales and use tax, from federal assistance payments and grants-in-aid,
and from earnings and receipts from certain State-operated programs and
facilities. The State additionally derives revenue from a variety of special
purpose fees and charges which must be used for specific purposes as required
by State law.
MAJOR SOURCES OF STATE REVENUE
Tax Revenues. Approximately 65.6 percent of all taxes and departmental
receipts in fiscal 1995 were derived from the Rhode Island personal income tax
and the sales and use tax. They constituted 59.0 percent of all general
revenues.
Personal Income Tax. State law provides for a personal income tax on
residents and non-residents (including estates and trusts) equal to a
percentage of the federal income tax liability attributable to the taxpayer's
Rhode Island income. Effective with the passage of Chapter 6 of the 1991 Rhode
Island Public Laws, the State rate became 27.5 percent of the taxpayer's
federal income tax liability for the period January 1, 1991 and thereafter.
However, Article 30 of the 1993 Appropriations Act provided for a second tier
rate of 32.0 percent on the amount of a taxpayer's federal tax liability which
is in excess of fifteen thousand dollars. This provision remained in effect
through tax year 1993, although the Tax Administrator, using his authority to
adjust rates (as described below), modified the second tier rates in October
1993. This was done to offset the effects of changes in federal tax law
contained in the Omnibus Budget Reconciliation Act of 1993 (H.R. 2264).
The Rhode Island personal income tax accounts for approximately 32% of
the State's fiscal 1995 general revenues.
For tax year 1996 and thereafter, the Governor proposes to decouple the
state's income tax from federal tax liability. The change would allow for the
application of state tax rates, ranging from 4.125 percent to 10.89 percent, to
be applied to a taxpayer's federal taxable income. The measure is expected to
be revenue neutral for tax year 1996 and to generate an additional $1.7 million
in receipts during fiscal 1997. The Tax Administrator's current authority to
adjust the state income tax rate in response to federal tax law changes would
also be repealed.
Business Corporation Tax. The business tax is imposed on corporations
deriving income from sources within the State or engaging in activities for the
purpose of profit or gain. Article 20 of the 1990 Budget as amended set a rate
of 9.0 percent effective July 1, 1989. Passage of the fiscal year 1991
Reissuance of Appropriations Act provided for a surtax of 11.0 percent on the
amount otherwise due for corporations whose taxable year ends on or after March
31, 1991 and before January 1, 1993.
The Corporation tax was amended in 1993 to change the carry-back,
carry-forward provisions from 3 years back, 15 years forward to five years
forward. Two reductions to the business corporation tax were enacted as part of
the fiscal 1994 Budget; the first repealed the 11.0 percent surtax for
corporations whose taxable years begin on or after January 1, 1994 (an
extension to January 1, 1997 was enacted in 1993), and the second doubled the
investment tax credit from two to four percent for investments made beginning
January 1, 1994.
<PAGE>
Corporations dealing in securities on their own behalf, whose gross
receipts from such activities amount to at least 90.0 percent of their total
gross receipts, have been exempt from the net worth computation but are
required to pay the 9.0 percent income tax. Regulated investment companies and
real estate investment trusts and personal holding companies pay a tax at the
rate of 10(cent) per $100 of gross income or $100, whichever is greater.
Beginning with the 1997 tax year, the Governor proposes to modify the
business corporations tax computation for manufacturing firms. Apportionment
factors would be modified to allow for greater weight on the sales factor.
Greater weight would be assigned in each successive year, culminating in a 100
percent weight for tax year 2000 and thereafter. The estimated fiscal impact
would be a loss of $2.0 million in fiscal 1997.
Sales and Use Tax. The State assesses a tax on all retail sales, subject
to certain exceptions, and on hotel and other public accommodation rentals, as
well as upon the storage, use or other consumption of tangible personal
property in the State. The sales and use tax is imposed upon the retailer at
the rate of 7.0 percent of the gross receipts from taxable sales. Included as
major exemptions from the tax are: (a) food (excluding food sold by
restaurants, drive-ins or other eating places) for human consumption off the
premises of the retailer; (b) clothing; (c) medicines sold on prescription; (d)
fuel used in the heating of homes and residential premises; (e) domestic water
usage; (f) gasoline and other motor fuels otherwise specifically taxed; (g)
sales of tangible property and public utility services when the property or
service becomes a component part of a manufactured product for resale, or when
the property or service is consumed directly in the process of manufacturing or
processing products for resale and such consumption occurs within one year from
the date such property is first used in such production; (h) tools, dies and
molds and machinery and equipment (including replacement parts thereof) used
directly and exclusively in an industrial plant in the actual manufacture,
conversion or processing of tangible personal property to be sold; (i) sales of
air and water pollution control equipment for installation pursuant to an order
by the State Director of Environmental Management; and (j) sales of boats or
vessels to nonresidents for use outside the State.
Other taxes. In addition to the above described taxes, the State imposes
various fees, taxes and excises for the registration of domestic and foreign
corporations, the sale of liquor and other alcoholic beverages, the sale of
cigarettes, the sale of gasoline, the registration of motor vehicles and the
operation of pari-mutuel betting.
Departmental Revenues. The largest category of departmental earnings is
the group defined as licenses and fees, due largely to the assessment of the
hospital licensing fee. There was a one year hospital licensing fee, which
yielded $77.3 million in fiscal 1995. The fiscal 1996 Appropriations Act
extends the fee one year but at a lower rate generating $37.5 million. For
fiscal 1997, the Governor proposes to extend the fee for an additional year and
to change the levy from 2.2 percent of gross receipts to 4.4 percent. The
second largest category of revenue is sales and services, which includes
disproportionate share revenues. Other departmental revenues include various
miscellaneous receipts such as investment earnings on General Fund balances.
Restricted Receipts. In fiscal 1995, the State received a total of $135.7
million in restricted receipts excluding transfers into the General Fund, based
upon audited statements. These reflect various specialized fees and charges,
interest on certain funds and accounts maintained by the State and private
contributions and grants to certain State programs. Such receipts are
restricted under State law to offset State expenditures for the program under
which such receipts are derived.
<PAGE>
Other Sources. The largest component of Other Sources is the transfer
from the State Lottery. The State Lottery Fund was created in 1974 for the
receipt and disbursement of revenues of the State Lottery Commission from sales
of lottery tickets and license fees.
In fiscal 1995, Lottery transfers totaled $71.8 million.
The second largest single component of Other Sources is the gas tax
transfer from the Intermodal Surface Transportation Fund. Gasoline tax receipts
not dedicated for use by transportation agencies became available to the
general fund. This amounted to $41.0 million on fiscal 1995.
Other Miscellaneous Sources in fiscal 1995 totaled $56.2 million based
upon audited statements. It included $12.6 million as the result of conversions
of restricted receipts to general revenues.
Federal Receipts. In fiscal 1995, the State collected receipts of $787.3
million from the federal government, representing grants-in-aid and
reimbursements to the State for expenditures for various health, welfare and
educational programs and distribution of various restricted or categorical
grants-in-aid.
Federal grants-in-aid reimbursements are normally conditioned to some
degree, depending on the particular program being funded, on matching resources
by the State ranging from a 50 percent matching expenditure to in-kind
contributions. The largest categories of federal grants and reimbursements are
made for medical assistance payments for the indigent (Title XIX) and Aid to
Families with Dependent Children (AFDC). The federal participatory rate for
these two programs are recalculated annually, and the major determinant in the
rate calculation is the relative wealth of the State. The federal match rate
changed from 53.87 percent to 55.49 percent effective October 1, 1994. The
federal match rate is 53.84 percent as of October 1, 1995.
REVENUE ESTIMATES
The Governor's recommended fiscal 1997 budget includes revised general
revenues of $1.737 billion for fiscal year 1996 and $1.737 billion for fiscal
1995. This represents a 3.8 percent growth for fiscal 1996 and a .1 percent
reduction for fiscal 1997.
The estimates of general revenues are based on the December 1995 Revenue
Estimating Conference and changes recommended by the Governor. The Revenue
Estimating Conference is required by law to meet at least three times a year to
forecast revenue estimates and review current revenue collections under current
law. The Conference members are the Budget Officer, the House Fiscal Advisor,
and the Senate Fiscal Advisor.
The estimators have revised the fiscal 1996 estimate down by $36.3
million or 2.1 percent over the estimates upon which the fiscal year 1996
budget was originally enacted. Approximately $26.1 million of the reduction
occurred in tax estimates, $12.5 in departmental receipts and a gain of $2.3
has been reflected in the other sources component.
Recommended General Revenues for fiscal 1996 are estimated to display a
3.8 percent increase or growth of $64.0 million over fiscal 1995. Approximately
two-thirds or $44.0 million of this growth is anticipated to occur in other
sources, with the Lottery contributing $20.2 million and other miscellaneous
receipts to another $25.9 million over the prior year. Taxes and departmental
<PAGE>
receipts will contribute the remaining increase at $20.0 million, rising by 1.3
percent over fiscal 1995.
The fiscal 1997 revenue estimate of $1.735 billion represents a .1
percent decline over fiscal 1996. Adjusted for tax and fee law changes, overall
growth is 1.9 percent.
Personal Income Tax. The largest single source of general revenues is the
personal income tax which reflects 31.8% of total general revenues in fiscal
1997. The fiscal 1997 estimate of $552.5 million is based upon additional
revenues of $2.6 million. Approximately $1.7 million of this gain is
anticipated to result from the governor's proposal to decouple the personal
income tax from federal tax liability, effective for tax years 1996 and
thereafter. In addition, $0.9 million is anticipated to be realized through
consolidations of tax collection activities.
General Business Taxes. The general business taxes are estimated to total
$213.9 million, or 12.3% of total general revenues in fiscal 1997. There is a
2.6% decrease over fiscal 1995, largely as a result of the Governor's proposal
to modify apportionment factors for manufacturing firms under the corporations
tax ($2.0 million), previously enacted legislation relative to the utilities
tax ($3.8 million) and the phase out of the bank deposits tax ($3.8 million).
Adjusted for these factors, the estimate would contain 1.3% growth.
Sales and Use Taxes. Sales and use taxes of $578.2 million in fiscal 1997
will constitute 33.3% of general revenues in that year, slightly more than the
income tax. Sales and use taxes include the sales tax itself ($469.8 million in
fiscal 1997), cigarette taxes ($54.0 million in fiscal 1997), motor vehicle
registration fees ($39.9 million in fiscal 1997), alcohol taxes ($8.6 million
in fiscal 1997), and the general use motor fuel tax ($5.9 million in fiscal
year 1997). All sales and use taxes are projected to grow 3.7% in fiscal year
1996, with the sales tax itself growing 2.0%.
Departmental Receipts. Departmental receipts of $208.7 million for fiscal
1997, 12.0% of the total, include licenses and fees whose use is unrestricted,
fines and penalties, departmental sales of services, and interest earnings. The
estimated 18.6% increase from fiscal year 1996 results primarily from the
Governor's proposal to continue the hospital license fee at a new rate.
Adjusted growth is 1.3%.
Lottery. The largest remaining source of general revenues is lottery
proceeds, estimated at $96.0 million for fiscal 1997, a 4.3% gain of $4.0
million over fiscal 1996. The lottery contributes 5.5% of the total revenue
estimate for fiscal 1997.
EXPENDITURES
Expenditures from general revenue totaled $1.640 billion in fiscal 1995.
The recommended expenditures from general revenue in the Governor's budget are
$1.707 billion for fiscal year 1996 and $1.700 billion for fiscal year 1997.
Any unspent general revenues lapse to the Free Surplus fund at the end of the
fiscal year.
State law mandates the maintenance of a balanced budget. In the event of
a budgetary imbalance, the available Free Surplus will be reduced and/or
additional resources (for example, taxes, fines, fees, licenses, etc.) will be
utilized and/or certain expenditure controls will be put into effect. For
fiscal 1996, the available Free Surplus balance is estimated to be $437,380.
For fiscal 1997, the available Free Surplus balance is estimated to be
$433,718.
<PAGE>
INDEBTEDNESS
Under the State Constitution, the General Assembly has no power to incur
State debts in excess of $50,000 without the consent of the people, except in
the case of war, insurrection or invasion, or to pledge the faith of the State
to the payment of obligations of others without such consent. By judicial
interpretation, the limitation stated above has been judged to include all
debts of the State for which its full faith and credit are pledged, including
general obligation bonds and notes; bonds and notes guaranteed by the State;
and debts or loans insured by agencies of the State, such as the
Industrial-Recreational Building Authority. However, non-binding agreements of
the State to appropriate monies in aid of obligations of a State agency, such
as the provisions of law governing the capital reserve funds of the Port
Authority and Economic Development Corporation, now known as the Rhode Island
Economic Development Corporation, Housing and Mortgage Finance Corporation and
Solid Waste Management Corporation, or to appropriate monies to pay rental
obligations under State long-term leases, such as the State's lease agreement
with the Convention Center Authority, are not subject to this limitation.
Direct Debt. Direct debt is authorized by the voters as general
obligation bonds and notes. As of March 1, 1996, Rhode Island has $693,233,306
of bonds outstanding and $215,903,691 of authorized but unissued direct debt.
Guaranteed Debt. Guaranteed debt consists of bonds and notes issued by
agencies, commissions, and authorities (for example, the Blackstone Valley
District Commission, the Rhode Island Turnpike and Bridge Authority, and the
Narragansett Bay Water Quality Management District Commission) created by the
General Assembly of Rhode Island. The full faith and credit of Rhode Island
backs guaranteed debt. As of November 1, 1995, these instrumentalities had
bonds outstanding of $57,013,290 and $1,514,000 of authorized but unissued
debt.
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 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>
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS1/
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Rating Services ("S&P"), and Fitch Investors Service, Inc. ("Fitch")
represent their opinions as to the quality of various debt securities, and are
not absolute standards of quality. Debt securities with the same maturity,
coupon and rating may have different yields, while debt securities of the same
maturity and coupon with different ratings may have the same yield. The ratings
below are as described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may, from time to
time, revise such ratings, they undertake no obligation to do so.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
FOUR HIGHEST BOND RATINGS
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower then the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investments attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA Bonds which are rated Baa are considered as medium grade obligations,
since they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
greater length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Note: Those bonds in the Aa, A and Baa categories which Moody's believes
possess the strongest credit attributes are designated by the symbols Aa1, A1
and Baa1.
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1/As described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may, from time to
time, revise such ratings, they undertake no obligation to do so.
<PAGE>
DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
FOUR HIGHEST BOND RATINGS
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is still strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Plus (+) or minus (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF FITCH INVESTORS SERVICES, INC.'S
FOUR HIGHEST BOND RATINGS
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environmental that might affect the
issuer's future financial strength and credit quality.
AAA Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however,
are more likely to have an adverse impact on these bonds, and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in AAA category.
<PAGE>
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES
Moody's ratings for state and municipal short-term obligations are
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, such as long-term secular trends, may be less important over the short
run.
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note.
Source of payment -- the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
RATINGS OF TAX-EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all debt issues that have a put or demand
feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for
example, "AAA/A-1+"). With short-term demand debt, note rating symbols are used
with the commercial paper rating symbols (for example, "SP-1+/A-1+").
<PAGE>
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S
THREE HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in timely
manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as
for issues assigned F-1+ and F-1 ratings.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually short-term senior debt obligations having an original maturity
not in excess of one year.
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics: (1)
leading market positions in well-established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structure with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
TWO HIGHEST COMMERCIAL PAPER RATINGS
A S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligations is still strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
<PAGE>
DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S
THREE HIGHEST COMMERCIAL PAPER RATINGS
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurances for timely payment, but the margin of safety is not as great as
for issues assigned F-1+ and F-1 ratings.
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT ADVISERS BOSTON 1784 FUNDS(R)
<S> <C>
BankBoston, N.A. BOSTON 1784 U.S. TREASURY MONEY MARKET FUND
100 Federal Street BOSTON 1784 PRIME MONEY MARKET FUND
Boston, MA 02110 BOSTON 1784 TAX-FREE MONEY MARKET FUND
BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
BOSTON 1784 U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
Kleinwort Benson Investment BOSTON 1784 SHORT-TERM INCOME FUND
Management Americas Inc. BOSTON 1784 INCOME FUND
200 Park Avenue BOSTON 1784 TAX-EXEMPT MEDIUM-TERM INCOME FUND
New York, New York 10166 BOSTON 1784 CONNECTICUT TAX-EXEMPT INCOME FUND
BOSTON 1784 FLORIDA TAX-EXEMPT INCOME FUND
BOSTON 1784 MASSACHUSETTS TAX-EXEMPT INCOME FUND
DISTRIBUTOR BOSTON 1784 RHODE ISLAND TAX-EXEMPT INCOME FUND
BOSTON 1784 ASSET ALLOCATION FUND
SEI Financial Services Company BOSTON 1784 GROWTH AND INCOME FUND
1 Freedom Valley Road BOSTON 1784 GROWTH FUND
Oaks, Pennsylvania 19456 BOSTON 1784 LARGE CAP EQUITY FUND
BOSTON 1784 SMALL CAP EQUITY FUND
BOSTON 1784 INTERNATIONAL EQUITY FUND
</TABLE>
ADMINISTRATOR
SEI Fund Resources
1 Freedom Valley Road
Oaks, Pennsylvania 19456
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
BankBoston, N.A. MAY 27, 1997, AS SUPPLEMENTED
100 Federal Street JUNE 2, 1997
Boston, MA 02110
- ----------------------------------------------------
The Boston 1784 Funds(R):
oare not insured by the FDIC or any other governmental agency;
oare not guaranteed by BankBoston, N.A. or any
of its affiliates;
oare not deposits or obligations of BankBoston, N.A. or any of
its affiliates; and
oinvolve investment risks, including possible loss of principal.
BankBoston, N.A. serves as investment adviser and
custodian for the Boston 1784 Funds. The Boston 1784 Funds are distributed
by SEI Financial Services Company, a party independent
of BankBoston, N.A. and any of its affiliates. Financial
Service Counselors are registered representatives of an independent
broker-dealer or of BankBoston Investor Services, Inc., an affiliate of
BankBoston, N.A.
