File Nos. 33-58004
811-7474
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ x]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 25 [ x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [ x]
Amendment No. 27 [ x]
(Check appropriate box or boxes)
BOSTON 1784 FUNDS*
(Exact Name of Registrant as Specified in Charter)
2 Oliver Street
Boston, Massachusetts 02109
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 342-5734
ROBERT A. NESHER
C/O SEI INVESTMENTS COMPANY
1 FREEDOM VALLEY DRIVE
OAKS, PENNSYLVANIA 19456
(Name and Address of Agent for Service)
Copies to:
JOHN M. BAKER, SENIOR COUNSEL ROGER P. JOSEPH, ESQ.
BANKBOSTON, N.A. BINGHAM DANA LLP
100 FEDERAL STREET, 01-19-02 150 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02110
It is proposed that this filing will become effective (check appropriate box)
[ x ] immediately upon filing pursuant to paragraph (b)
[ ] on ________ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on ________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on ________ pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
*This filing relates only to the modified prospectus for use by defined
contribution plans filed herewith, and does not effect the Prospectuses
previously filed.
<PAGE>
BOSTON 1784 FUNDS[SERVICE MARK]
FUNDS AVAILABLE THROUGH YOUR RETIREMENT PLAN
MONEY MARKET FUNDS
[BULLET] BOSTON 1784 INSTITUTIONAL U.S. TREASURY
MONEY MARKET FUND
BOND FUNDS
[BULLET] BOSTON 1784 SHORT-TERM INCOME FUND
[BULLET] BOSTON 1784 INCOME FUND
[BULLET] BOSTON 1784 U.S. GOVERNMENT MEDIUM-
TERM INCOME FUND
STOCK FUNDS
[BULLET] BOSTON 1784 ASSET ALLOCATION FUND
[BULLET] BOSTON 1784 GROWTH AND INCOME FUND
[BULLET] BOSTON 1784 GROWTH FUND
[BULLET] BOSTON 1784 INTERNATIONAL EQUITY FUND
Prospectus
[BOSTON 1784 FUNDS LOGO OMITTED]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION
NOR ANY STATE SECURITIES COMMISSION HAS APPROVED
OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
September 15, 1998
<PAGE>
TABLE OF CONTENTS
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BOSTON 1784 MONEY MARKET FUNDS................................................1
BOSTON 1784 BOND FUNDS........................................................4
BOSTON 1784 STOCK FUNDS......................................................10
INVESTING THROUGH YOUR RETIREMENT PLAN ......................................17
PRICING OF FUND SHARES.......................................................18
DISTRIBUTIONS................................................................18
FEDERAL TAX CONSIDERATIONS...................................................19
MORE ABOUT BOSTON 1784 FUNDS.................................................20
MONEY MARKET FUNDS.............................................20
BOND FUNDS.....................................................21
STOCK FUNDS....................................................22
MANAGEMENT...................................................................25
DISTRIBUTION ARRANGEMENTS....................................................26
FINANCIAL HIGHLIGHTS.........................................................27
PROSPECTUS
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS
================================================================================
INSTITUTIONAL U.S. TREASURY
MONEY MARKET FUND
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES BOSTON 1784 INSTITUTIONAL U.S.
TREASURY MONEY MARKET FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE FUND. FOR
FURTHER INFORMATION ON THIS FUND, PLEASE READ THE SECTION ENTITLED MORE ABOUT
BOSTON 1784 FUNDS.
[LOGO OF COMPASS OMITTED]
WHAT ARE THE FUND'S GOALS?
The Fund's goals are to preserve the principal value of a shareholder's
investment and maintain a high degree of liquidity while providing current
income.
- --------------------------------------------------------------------------------
WHAT IS A MONEY MARKET FUND?
A MONEY MARKET FUND is a type of mutual fund that tries to maintain a share
price of $1.00 while paying income to its shareholders. A stable share price
protects your investment from loss ("PRESERVATION OF PRINCIPAL"). If you need
to sell your shares at any time, you should receive your initial investment
plus any income that you have earned (thereby providing "LIQUIDITY").
However, a money market fund does not guarantee that you will receive your
money back.
A money market fund must follow strict rules as to the investment quality,
maturity, diversification and other features of the securities it purchases
and the average remaining maturity of the securities cannot be greater than
90 days. The remaining maturity of a security is the period of time until the
principal amount must be repaid.
- --------------------------------------------------------------------------------
[LOGO OF CHESS PIECE OMITTED]
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in short-term U.S. government obligations, including
Treasury securities, U.S. government agency securities and repurchase agreements
secured by U.S. government securities.
[LOGO OF FLAG MAN OMITTED]
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
The principal risks of investing in the Fund and the circumstances reasonably
likely, in the opinion of the Adviser, to adversely affect your investment are
described below. Please note that there are many other factors which could
adversely affect your investment, and that could prevent the Fund from achieving
its objectives, which are not described here. The principal risks are:
[BULLET] The rate of income will vary from day to day depending on
short-term interest rates.
[BULLET] It is possible that a major change in interest rates or a default
on a security or a repurchase agreement held by the Fund could
cause the value of your investment to decline.
[BULLET] The Fund may invest up to 5% of its total assets in zero coupon
securities called STRIPS, which are the separately traded
interest and principal component parts of U.S. Treasury
securities. The interest-only component is extremely sensitive to
the rate of principal payments on the underlying obligation. The
market value of the principal-only component generally is
unusually volatile in response to changes in interest rates.
[BULLET] An investment in the Fund is not a deposit of BankBoston and is
not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other governmental agency.
[BULLET] Although the Fund seeks to preserve the value of your investment
at $1.00 per share, it is possible to lose money by investing in
the Fund.
PROSPECTUS
1
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS (CONTINUED)
================================================================================
================================================================================
WHO MAY WANT TO INVEST?
================================================================================
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR RETIREMENT PLAN INVESTORS
WHO:
[BULLET] are investing for a short period of time;
[BULLET] want the added safety of U.S. government securities.
The Fund does not provide a balanced investment plan.
- --------------------------------------------------------------------------------
[LOGO OF FLAGS OMITTED]
HOW HAS THE FUND PERFORMED?
The chart and table below give an indication of the Fund's risks and
performance. The chart shows changes in the Fund's performance from year to
year. The table shows how the Fund's average annual returns for the periods
indicated compare to those of a broad measure of market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT THE FUND'S PERFORMANCE
IN PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW THE FUND WILL DO IN THE
FUTURE.
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INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR CHART OMITTED, PLOT POINTS FOLLOW:]
1994 4.04%
1995 5.69%
1996 5.14%
1997 5.30%
The total return for the six months ended June 30, 1998 was 2.62%.
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1994-1997)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 1.43% June 30, 1995
Lowest 0.76% March 31, 1994
- --------------------------------------------------------------------------------
Average Annual Total Returns
(through December 31, 1997)
- --------------------------------------------------------------------------------
1 YEAR LIFE OF FUND
(SINCE 6/14/93)
Institutional U.S. Treasury 5.30% 4.79%
Money Market Fund
IBC/Financial Data Government- 5.21% 5.08%*
Only Institutional-Only Average
- --------------------------------------------------------------------------------
*(since 5/30/93)
For up-to-date yield information, please call 1-800-BKB-1784.
PROSPECTUS
2
<PAGE>
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[GRAPHIC OF CALCULATOR OMITTED]
WHAT ARE THE FEES AND EXPENSES OF THE FUND?
THE TABLES BELOW DESCRIBE THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load) None
Imposed on Purchases
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) None
Imposed on Reinvested Dividends
Redemption Fee None
Exchange Fee None
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets) as a % of average net assets
- --------------------------------------------------------------------------------
Management Fees .20%
Distribution (12b-1) Fees None
Other Expenses .13%
Total Annual Fund Operating Expenses .33%
- --------------------------------------------------------------------------------
EXAMPLE
- --------------------------------------------------------------------------------
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN BOSTON
1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND TO THE COST OF INVESTING IN
OTHER MUTUAL FUNDS. THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE FUND FOR
THE TIME PERIODS INDICATED AND THEN SELL ALL OF YOUR SHARES AT THE END OF THOSE
PERIODS. THE EXAMPLE ALSO ASSUMES THAT YOUR INVESTMENT HAS A 5% RETURN EACH YEAR
AND THAT THE FUND'S OPERATING EXPENSES REMAIN THE SAME AS SHOWN IN THE TABLE
ABOVE. ALTHOUGH YOUR ACTUAL COSTS AND THE RETURN ON YOUR INVESTMENT MAY BE
HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COSTS WOULD BE:
- --------------------------------------------------------------------------------
1 year $ 34
3 years 106
5 years 185
10 years 418
- --------------------------------------------------------------------------------
PROSPECTUS
3
<PAGE>
BOSTON 1784 BOND FUNDS
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SHORT-TERM INCOME FUND
INCOME FUND
U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH BOSTON 1784 BOND FUND AND THE
PRINCIPAL RISKS OF INVESTING IN THE FUNDS. FOR FURTHER INFORMATION ON THESE
FUNDS, PLEASE READ THE SECTION ENTITLED MORE ABOUT BOSTON 1784 FUNDS.
[GRAPHIC OF COMPASS OMITTED]
WHAT ARE THE FUNDS' GOALS?
SHORT-TERM INCOME FUND
The Short-Term Income Fund's goal is to provide investors with maximum current
income, and, as a secondary goal, to preserve investors' capital.
INCOME FUND
The Income Fund's goal is to provide investors with maximum current income, and,
as a secondary goal, to preserve investors' capital.
U.S. GOVERNMENT MEDIUM-TERM
INCOME FUND
The U.S. Government Medium-Term Income Fund's goal is to provide investors with
current income consistent with preservation of capital.
- --------------------------------------------------------------------------------
WHAT IS A BOND?
A BOND, which is also called a DEBT SECURITY or DEBT OBLIGATION, is like a
loan. The issuer of the bond, which could be the U.S. government, a
corporation, or a city or state, borrows money from investors and agrees to
pay back the loan amount (the PRINCIPAL) on a certain date (the MATURITY
DATE). Usually, the issuer also agrees to pay interest on certain dates
during the period of the loan. Some bonds, such as ZERO COUPON BONDS, do not
pay interest, but instead pay back more at maturity than the original loan.
Most bonds pay a fixed rate of interest (or income), but some bonds' interest
rates may change based on market or other factors.
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- --------------------------------------------------------------------------------
WHAT DOES IT MEAN TO "PRESERVE CAPITAL"?
CAPITAL, also called PRINCIPAL, refers to the amount of money that you invest
in a fund. If you choose to have your dividends and other distributions
reinvested in additional shares of a fund, the amount of the distributions
will be added to your initial investment to increase the amount of your
capital. If the price of the fund's shares or net asset value (NAV) increases
because of increases in the value of the securities in the fund, your capital
will also increase. If, however, the value of the fund's investments go down
and the price of the fund's shares decreases, you will lose some of your
capital. A fund that seeks to preserve capital or principal tries to maintain
a stable share price so that you do not lose money.
- --------------------------------------------------------------------------------
[GRAPHIC OF CHESS PIECE OMITTED]
WHAT ARE THE FUNDS' MAIN INVESTMENT STRATEGIES?
SHORT-TERM INCOME FUND
The Short-Term Income Fund invests primarily in investment grade debt
securities, such as corporate bonds, notes, mortgage-backed and asset-backed
securities, taxable municipal securities and U.S. Treasury and government agency
obligations.
The Fund may invest in Yankee bonds, which are dollar-denominated bonds issued
in the U.S. by foreign borrowers. Yankee bonds may offer higher income than
bonds issued by U.S. borrowers. The Fund may also invest in bonds issued by
foreign issuers and payable in foreign currencies.
PROSPECTUS
4
<PAGE>
================================================================================
Under normal conditions, at least 65% of the securities will be rated A or
better by a rating agency, or be of comparable quality as determined by the
Adviser.
In order to limit fluctuations in share price, the Fund tries to maintain an
average weighted maturity of less than three years under normal circumstances.
- --------------------------------------------------------------------------------
WHAT ARE INVESTMENT GRADE SECURITIES?
INVESTMENT GRADE SECURITIES are securities that have been determined by a
rating agency to have a medium to high probability of being paid, although
there is always a risk of default. Investment grade securities are rated BBB,
A, AA OR AAA by Standard & Poor's Corporation or Baa, A, Aa or Aaa by Moody's
Investors Service.
- --------------------------------------------------------------------------------
INCOME FUND
The Income Fund invests primarily in investment grade debt securities, including
U.S. government obligations, corporate bonds and mortgage-backed and
asset-backed securities.
The Fund may invest in Yankee bonds, which are dollar-denominated bonds issued
in the U.S. by foreign borrowers. Yankee bonds may offer higher income than
bonds issued by U.S. borrowers. The Fund may also invest in bonds issued by
foreign issuers and payable in foreign currencies.
Under normal conditions, at least 65% of the securities will be rated A or
better by a rating agency, or be of comparable quality as determined by the
Adviser.
The Fund's average weighted maturity is normally expected to be between 7 and 30
years.
U.S. GOVERNMENT MEDIUM-TERM
INCOME FUND
The U.S. Government Medium-Term Income Fund invests primarily in short- to
intermediate-term U.S. Treasury and government agency securities and both
government agency and non-government agency mortgage-backed securities.
U.S. government obligations generally have less credit risk than other debt
obligations.
The Fund's average weighted maturity is normally expected to be from 3 to 10
years.
[GRAPHIC OF FLAG MAN OMITTED]
WHAT ARE THE MAIN RISKS OF INVESTING IN BOSTON 1784 BOND FUNDS?
The principal risks of investing in the Bond Funds and the circumstances
reasonably likely, in the opinion of the Adviser, to adversely affect your
investment are described below. As with any non-money market mutual fund, the
share price of each Fund and each Fund's yield will change daily because of
changes in interest rates and other market conditions and factors. You may lose
money if you invest in these Funds. Please note that there are many other
circumstances which could adversely affect your investment, and that could
prevent a Fund from achieving its objectives, which are not described here. The
principal risks of investing in the Bond Funds are:
[BULLET] INTEREST RATE RISK: In general, bond prices rise when interest rates
fall and fall when interest rates rise. Longer term bonds and zero
coupon bonds are generally more sensitive to interest rate changes
than shorter term bonds. Generally, the longer the average maturity of
the bonds in a Fund, the more the Fund's share price will fluctuate in
response to interest rate changes.
[BULLET] CREDIT RISK: It is possible that some of the issuers will not make
payments on debt securities held by a Fund, or there could be defaults
on repurchase agreements held by a Fund. Or, an issuer may suffer
adverse changes in financial condition that could lower the credit
quality of a security, leading to greater volatility in the price of
the security and in shares of a Fund. A change in the quality rating
of a bond can affect the bond's liquidity and make it more difficult
for the Fund to sell.
[BULLET] PREPAYMENT RISK: The issuers of securities held by a Fund may be able
to prepay principal due on the securities, particularly during periods
of declining interest rates. Securities subject to prepayment risk
generally offer less potential for gains when interest rates decline,
and may offer a greater potential for loss when interest rates rise.
In addition, rising interest rates may cause prepayments to occur at a
slower than expected rate, thereby effectively lengthening the
maturity of the security and making the security more sensitive to
interest rate changes. Prepayment risk is a major risk of
mortgage-backed securities.
[BULLET] SPECIAL RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES: The Fund
will receive payments on its mortgage-backed securities that are part
interest and part return of principal. These payments may vary based
on the
PROSPECTUS
5
<PAGE>
BOSTON 1784 BOND FUNDS (CONTINUED)
================================================================================
rate at which homeowners pay off their loans. When a homeowner makes a
prepayment, the Fund receives a larger portion of its principal investment
back, which means that there will be a decrease in monthly interest payments.
Some mortgage-backed securities may have structures that make their reaction
to interest rates and other factors difficult to predict, making their prices
very volatile.
[BULLET] FOREIGN SECURITIES: Investments in foreign securities may involve
risks in addition to those of U.S. investments, including increased
political and economic risk and exposure to currency fluctuations.
[BULLET] An investment in a Fund is not a deposit of BankBoston and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other governmental agency.
================================================================================
WHO MAY WANT TO INVEST?
================================================================================
SHORT-TERM INCOME FUND
THIS BOND FUND MAY BE APPROPRIATE FOR RETIREMENT PLAN
INVESTORS WHO ARE:
[BULLET] seeking income;
[BULLET] seeking a higher yield than a moneymarket fund or a bank savings
account;
[BULLET] seeking more price stability than a longer-term bond fund but are
able to tolerate some fluctuations in the value of their
investment.
INCOME FUND
THIS BOND FUND MAY BE APPROPRIATE FOR RETIREMENT PLAN
INVESTORS WHO ARE:
[BULLET] seeking a higher level of income than is available from shorter-
term securities;
[BULLET] able to tolerate the greater price fluctuations associated with
longer-term securities and higher levels of income.
U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
THIS BOND FUND MAY BE APPROPRIATE FOR RETIREMENT PLAN
INVESTORS WHO ARE:
[BULLET] seeking higher levels of income than is available from shorter-term
securities or money market funds;
[BULLET] seeking the added measure of protection against credit risk
provided by U.S. government securities;
[BULLET] able to tolerate the fluctuations in price associated with medium-
term securities.
None of the Bond Funds alone provides a balanced investment plan.
PROSPECTUS
6
<PAGE>
================================================================================
[GRAPHIC OF FLAGS OMITTED]
HOW HAVE THE FUNDS PERFORMED?
The charts and tables below give an indication of the Funds' risks and
performance. The charts show changes in the Funds' performance from year to
year. The tables show how the Funds' average annual returns for the periods
indicated compare to those of a broad measure of market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A FUND'S PERFORMANCE IN
PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A FUND WILL DO IN THE FUTURE.
- --------------------------------------------------------------------------------
SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR CHART OMITTED, PLOT POINTS TO FOLLOW:]
1995 11.36%
1996 4.25%
1997 6.30%
The total return for the six months ended June 30, 1998 was 3.01%.
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1997)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 3.31% June 30, 1995
Lowest -0.27% March 31, 1996
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1997)
- --------------------------------------------------------------------------------
1 YEAR LIFE OF FUND
(SINCE 7/1/94)
Short-Term Income Fund 6.30% 6.42%
Lehman Brothers Mutual Fund 7.12% 7.18%
1-5 Year Government/Corporate
Bond Index
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCOME FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR CHART OMITTED, PLOT POINTS TO FOLLOW:]
1995 17.98%
1996 2.60%
1997 7.85%
The total return for the six months ended June 30, 1998 was 3.14%.
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1997)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 6.34% June 30, 1995
Lowest -2.42% March 31, 1996
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1997)
- --------------------------------------------------------------------------------
1 YEAR LIFE OF FUND
(SINCE 7/1/94)
Income Fund 7.85% 7.94%
Lehman Brothers Aggregate 9.68% 9.16%
Bond Index
- --------------------------------------------------------------------------------
For up-to-date yield information, please call 1-800-BKB-1784.
PROSPECTUS
7
<PAGE>
BOSTON 1784 BOND FUNDS (CONTINUED)
================================================================================
- --------------------------------------------------------------------------------
U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR CHART OMITTED, PLOT POINTS TO FOLLOW:]
1994 -3.78%
1995 15.89%
1996 1.98%
1997 8.08%
The total return for the six months ended June 30, 1998 was 3.03%.
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1994-1997)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 5.51% June 30, 1995
Lowest -2.93% March 31, 1994
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1997)
- --------------------------------------------------------------------------------
1 YEAR LIFE OF FUND
(SINCE 6/7/93)
U.S. Government Medium-Term 8.08% 5.43%
Income Fund
Lehman Brothers Intermediate 7.72% 5.99%
U.S. Government Bond Index
- --------------------------------------------------------------------------------
For up-to-date yield information, please call 1-800-BKB-1784.
PROSPECTUS
8
<PAGE>
================================================================================
[GRAPHIC OF CALCULATOR OMITTED]
WHAT ARE THE FEES AND EXPENSES OF THE FUNDS?
THE TABLES BELOW DESCRIBE THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF BOSTON 1784 BOND FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment)
- ------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
SHORT-TERM INCOME MEDIUM-TERM
INCOME FUND FUND INCOME FUND
<S> <C> <C> <C>
Maximum Sales Charge (Load) None None None
Imposed on Purchases
Maximum Deferred Sales Charge (Load) None None None
Maximum Sales Charge (Load) None None None
Imposed on Reinvested Dividends
Redemption Fee None None None
Exchange Fee None None None
- ------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets) as a % of average net assets
- ------------------------------------------------------------------------------------------------------------------------
Management Fees .50% .74% .74%
Distribution (12b-1) Fees .25% .25% .25%
Other Expenses .14% .12% .13%
Total Annual Fund Operating Expenses .89%* 1.11%* 1.12%*
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Each of these Funds' actual total annual fund operating expenses for the most
recent fiscal year were less than the amount shown above because of fee waivers
by the Funds' Adviser and Distributor. The Adviser waives a portion of its
management fees in order to keep each Fund's total operating expenses at a
specified level and the Distributor waives its entire Distribution Fee. The
Adviser and the Distributor may eliminate all or a part of the fee waivers at
any time. With these fee waivers, the Funds' actual total annual operating
expenses were as follows:
SHORT-TERM INCOME FUND .64%
INCOME FUND .80%
U.S. GOVERNMENT MEDIUM-TERM INCOME FUND .80%
- --------------------------------------------------------------------------------
EXAMPLE
- --------------------------------------------------------------------------------
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN BOSTON
1784 BOND FUNDS TO THE COST OF INVESTING IN OTHER MUTUAL FUNDS. THE EXAMPLE
ASSUMES THAT YOU INVEST $10,000 IN A FUND FOR THE TIME PERIODS INDICATED AND
THEN SELL ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. THE EXAMPLE ALSO
ASSUMES THAT YOUR INVESTMENT HAS A 5% RETURN EACH YEAR AND THAT THE FUND'S
OPERATING EXPENSES REMAIN THE SAME AS SHOWN IN THE TABLE ABOVE. ALTHOUGH YOUR
ACTUAL COSTS AND THE RETURN ON YOUR INVESTMENT MAY BE HIGHER OR LOWER, BASED ON
THESE ASSUMPTIONS YOUR COSTS WOULD BE:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INCOME FUND U.S. GOVERNMENT
INCOME FUND MEDIUM-TERM INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 year $ 91 $ 113 $ 114
3 years 284 353 356
5 years 493 612 617
10 years 1,096 1,352 1,363
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROSPECTUS
9
<PAGE>
BOSTON 1784 STOCK FUNDS
================================================================================
ASSET ALLOCATION FUND
GROWTH AND INCOME FUND
GROWTH FUND
INTERNATIONAL EQUITY FUND
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH BOSTON 1784 STOCK FUND AND THE
PRINCIPAL RISKS OF INVESTING IN THE FUNDS. FOR FURTHER INFORMATION ON THESE
FUNDS, PLEASE READ THE SECTION ENTITLED MORE ABOUT BOSTON 1784 FUNDS.
[GRAPHIC OF COMPASS OMITTED]
WHAT ARE THE FUNDS' GOALS?
ASSET ALLOCATION FUND
The Asset Allocation Fund's goal is to provide investors with 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.
GROWTH AND INCOME FUND
The Growth and Income Fund's primary goal is to provide investors with long-term
growth of capital with a secondary goal of income.
GROWTH FUND
The Growth Fund's primary goal is to provide investors with capital
appreciation. Dividend income, if any, is incidental to this goal.
INTERNATIONAL EQUITY FUND
The International Equity Fund's goal is to provide investors
with long-term growth of capital. Dividend income, if any, is incidental to this
goal.
- --------------------------------------------------------------------------------
WHAT IS CAPITAL APPRECIATION?
A Fund that seeks CAPITAL APPRECIATION or GROWTH OF CAPITAL tries to increase
the value of your investment. CAPITAL, also called PRINCIPAL, refers to the
amount of money that you invest in a fund. If the price of the fund's shares
or net asset value (NAV) goes up due to an increase in the value of the
securities in the fund, your capital will also grow or appreciate. If,
however, the price of the fund's shares decreases due to a decline in the
value of securities in the fund, you will lose some of your capital. If you
choose to have your dividends and other distributions reinvested in
additional shares of a fund, the amount of the distributions will be added to
your initial investment and increase the amount of your capital.
- --------------------------------------------------------------------------------
[GRAPHIC OF CHESS PIECE OMITTED]
WHAT ARE THE FUNDS' MAIN INVESTMENT STRATEGIES?
ASSET ALLOCATION FUND
The Asset Allocation Fund invests in a carefully balanced mix of equity and debt
securities and money market instruments.
The Fund's equity securities include the stock of large U.S. companies, and from
time to time, mid-sized domestic companies and large, multi-national companies
based outside of the United States.
The Fund's debt securities include investment grade debt obligations such as
U.S. government securities, corporate bonds and mortgage-backed and asset-backed
securities.
The Fund's portfolio managers decide what percentage of the Fund's assets will
be invested in debt, equity and money market securities based on the managers'
judgment of various economic factors. The Fund expects that normally:
[BULLET] 30% to 70% of its assets will be invested in equity securities;
[BULLET] 30% to 60% of its assets will be invested in intermediate- and long-
term debt obligations;
[BULLET] up to 40% of its assets may be invested in short-term debt and money
market instruments.
GROWTH AND INCOME FUND
The Growth and Income Fund invests primarily in the common stock of established
U.S. and foreign companies where the Adviser believes there is opportunity for
growth.
When investing in U.S. companies, the Fund principally invests in companies with
a market capitalization of at least $1 billion, although the Fund also invests
in companies with smaller capitalizations. While the established companies in
which the Fund primarily invests are more likely than less established companies
to provide the Fund with dividend income, the principal focus in the selection
of securities for the Fund is growth potential, consistent with the Fund's
primary objective.
PROSPECTUS
10
<PAGE>
================================================================================
When investing in foreign companies, the Fund may also invest in smaller
companies and companies located in developing countries.
In addition to common stocks, the Fund may invest in other securities, including
convertible debt securities and preferred stock. The Fund may engage in foreign
currency hedging transactions in an attempt to minimize the effects of currency
fluctuations on the Fund.
- --------------------------------------------------------------------------------
WHAT IS CAPITALIZATION?
CAPITALIZATION or MARKET CAPITALIZATION is the total value of a company's
stock in the marketplace or on a stock exchange. For example, a company that
has issued one million shares that are currently selling for $50 per share
would have a capitalization of $50,000,000.
- --------------------------------------------------------------------------------
GROWTH FUND
The Growth Fund invests primarily in the common stock of U.S. and foreign
companies which the Adviser believes have above-average growth potential.
When investing in U.S. companies, the Fund principally invests in companies with
a market capitalization of at least $250 million, although the Fund also invests
in companies with smaller capitalizations. Companies with capitalizations of
less than $1 billion are generally considered to have small capitalizations.
When investing in foreign companies, the Fund may also invest in smaller
companies and in companies located in developing countries.
In addition to common stocks, the Fund may invest in other securities, including
convertible debt securities and preferred stock. The Fund may engage in foreign
currency hedging transactions in an attempt to minimize the effects of currency
fluctuations on the Fund.
INTERNATIONAL EQUITY FUND
The International Equity Fund invests primarily in stocks and other equity
interests issued by foreign companies. The Fund seeks to invest in a number of
countries with different economic characteristics and may invest in developing
countries. The Fund may also invest in other securities, including
non-convertible debt securities and money market instruments. The Fund may
engage in foreign currency hedging transactions in an attempt to minimize the
effects of currency fluctuations on the Fund.
[GRAPHIC OF FLAG MAN OMITTED]
WHAT ARE THE MAIN RISKS
OF INVESTING IN BOSTON 1784 STOCK FUNDS?
The principal risks of investing in the Stock Funds and the circumstances
reasonably likely, in the opinion of the Adviser, to adversely affect your
investment are described below. As with any non-money market mutual fund, the
share price of each Fund will change daily based on market conditions and other
factors. You may lose money if you invest in these Funds. Please note that there
are many other circumstances which could adversely affect your investment, and
that could prevent a Fund from achieving its objectives, which are not described
here. The principal risks of investing in the Stock Funds are:
[BULLET] MARKET RISK: This is the risk that the price of a security will rise
or fall due to changing economic, political or market conditions, or
due to a company's individual situation.
[BULLET] SMALLER COMPANIES: The securities of smaller companies may have more
risks than those of larger companies--they may be more susceptible to
market downturns and their prices may be more volatile.
[BULLET] FOREIGN SECURITIES: Investments in foreign 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 foreign issuers and markets are subject.
[BULLET] 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.
[BULLET] Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments. In addition, foreign 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.
PROSPECTUS
11
<PAGE>
BOSTON 1784 STOCK FUNDS (CONTINUED)
================================================================================
[BULLET] Foreign markets may be less liquid and more volatile than U.S.
markets, and may offer less protection to investors such as the Funds.
Equity securities traded in certain foreign countries may trade at
high price-earnings multiples that are unsustainable.
[BULLET] Since foreign securities often trade in currencies other than the U.S.
dollar, changes in currency exchange rates will affect a Fund's net
asset value, the value of dividends and interest earned, and gains and
losses realized on the sale of securities. An increase in the U.S.
dollar relative to these other currencies will adversely affect the
value of the Fund.
[BULLET] Each of the Stock Funds may invest in issuers located in developing
countries.
[BULLET] Developing countries are generally defined as countries in the initial
stages of their industrialization cycles with low per capita income.
[BULLET] All of the risks of investing in foreign securities are heightened by
investing in developing countries.
[BULLET] The markets of developing countries have been more volatile than the
markets of developed countries with more mature economies. These
markets often have provided higher rates of return, and greater risks,
to investors.
[BULLET] INTEREST RATE RISK: In general, the prices of debt securities rise
when interest rates fall and fall when interest rates rise. Longer
term obligations are usually more sensitive to interest rate changes.
[BULLET] CREDIT RISK: It is possible that some issuers will not make payments
on debt obligations held by a Fund. Or, an issuer may suffer adverse
changes in financial condition that could lower the credit quality of
a security, leading to greater volatility in the price of the security
and in shares of the Fund. A change in the quality rating of a bond
can also affect the bond's liquidity and make it more difficult for
the Fund to sell.
[BULLET] PREPAYMENT RISK: The issuers of securities held by a Fund may be able
to prepay principal due on the securities, particularly during periods
of declining interest rates. Securities subject to prepayment risk
generally offer less potential for gains when interest rates decline,
and may offer a greater potential for loss when interest rates rise.
In addition, rising interest rates may cause prepayments to occur at a
slower than expected rate, thereby effectively lengthening the
maturity of the security and making the security more sensitive to
interest rate changes. Prepayment risk is a major risk of
mortgage-backed securities.
[BULLET] SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES: Convertible
securities are subject to the market risk of stocks, while also
subject to interest rate risk and the credit risk of the issuers. Call
provisions may allow the issuer to repay the debt before it matures.
[BULLET] An investment in a Fund is not a deposit of BankBoston and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other governmental agency.
PROSPECTUS
12
<PAGE>
================================================================================
WHO MAY WANT TO INVEST?
================================================================================
ASSET ALLOCATION FUND
THE ASSET ALLOCATION FUND MAY BE APPROPRIATE FOR
LONG-TERM RETIREMENT PLAN INVESTORS WHO ARE:
[BULLET] seeking a balanced investment program;
[BULLET] seeking protection against inflation;
[BULLET] able to tolerate a substantial loss in the value of their
investment.
GROWTH AND INCOME FUND
THIS STOCK FUND MAY BE APPROPRIATE FOR LONG-TERM
RETIREMENT PLAN INVESTORS WHO ARE:
[BULLET] seeking high long-term growth;
[BULLET] able to tolerate a substantial loss in the value of their
investment.
GROWTH FUND
THIS STOCK FUND MAY BE APPROPRIATE FOR LONG-TERM
RETIREMENT PLAN INVESTORS WHO ARE:
[BULLET] seeking high long-term growth;
[BULLET] able to tolerate a substantial loss in the value of their
investment;
[BULLET] able to tolerate the additional risks of investing in smaller
companies;
[BULLET] not seeking income.
INTERNATIONAL EQUITY FUND
THIS STOCK FUND MAY BE APPROPRIATE FOR LONG-TERM
RETIREMENT PLAN INVESTORS WHO ARE:
[BULLET] seeking high long-term growth;
[BULLET] looking for exposure in the international markets and able to
tolerate the additional risks associated with these markets;
[BULLET] able to tolerate a substantial loss in the value of their
investments;
[BULLET] not seeking income.
None of the Stock Funds alone (except for the Asset
Allocation Fund) provides a balanced investment plan.
PROSPECTUS
13
<PAGE>
BOSTON 1784 STOCK FUNDS (CONTINUED)
================================================================================
[GRAPHIC OF FLAGS OMITTED]
HOW HAVE THE FUNDS PERFORMED?
The charts and tables below give an indication of the Funds' risks and
performance. The charts show changes in the Funds' performance from year to
year. The tables show how the Funds' average annual returns for the periods
indicated compare to those of a broad measure of market performance.
WHEN YOU CONSIDER THIS INFORMATION, PLEASE REMEMBER THAT A FUND'S PERFORMANCE IN
PAST YEARS IS NOT NECESSARILY AN INDICATION OF HOW A FUND WILL DO IN THE FUTURE.
- --------------------------------------------------------------------------------
ASSET ALLOCATION FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR CHART OMITTED, PLOT POINTS FOLLOW:]
1994 -0.65%
1995 29.55%
1996 10.48%
1997 20.74%
The total return for the six months ended June 30, 1998 was 9.40%.
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1994-1997)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 10.79% June 30, 1997
Lowest -3.33% March 31, 1994
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1997)
- --------------------------------------------------------------------------------
1 YEAR LIFE OF FUND
(SINCE 6/14/93)
Asset Allocation Fund 20.74% 13.07%
S&P 500 Composite Index 33.36% 21.39%*
Lehman Brothers 9.68% 6.86%
Aggregate Bond Index
- --------------------------------------------------------------------------------
*(since 6/11/93)
The table above compares the average annual return of the Fund, which holds a
mix of stocks, bonds and other debt securities, to an unmanaged stock index and
an unmanaged bond index for the periods indicated.
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR CHART OMITTED, PLOT POINTS FOLLOW:]
1994 -0.18%
1995 30.56%
1996 23.63%
1997 19.66%
The total return for the six months ended June 30, 1998 was 19.93%.
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1994-1997)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 13.03% June 30, 1997
Lowest -3.63% June 30, 1994
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1997)
- --------------------------------------------------------------------------------
1 YEAR LIFE OF FUND
(SINCE 6/7/93)
Growth and Income Fund 19.66% 17.34%
S&P 500 Composite Index 33.36% 21.14%*
- --------------------------------------------------------------------------------
*(since 6/4/93)
PROSPECTUS
14
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
GROWTH FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR CHART OMITTED, PLOT POINTS FOLLOW:]
1997 13.92%
The total return for the six months ended June 30, 1998 was 4.95%.
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1997)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 14.46% September 30, 1997
Lowest -7.07% December 31, 1997
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1997)
- --------------------------------------------------------------------------------
1 YEAR LIFE OF FUND
(SINCE 3/28/96)
Growth Fund 13.92% 17.98%
Russell 2000 Index 22.36% 19.32%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
Total Return
(per calendar year)
[BAR CHART OMITTED, PLOT POINTS FOLLOW:]
1995 13.34%
1996 13.68%
1997 -0.92%
The total return for the six months ended June 30, 1998 was 15.13%.
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURN
(Quarterly 1995-1997)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 12.12% June 30, 1997
Lowest -9.42% December 31, 1997
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(through December 31, 1997)
- --------------------------------------------------------------------------------
1 YEAR LIFE OF FUND
(SINCE 1/2/95)
International Equity Fund -0.92% 8.47%
Morgan Stanley MSCI EAFE Index 1.78% 6.28%*
- --------------------------------------------------------------------------------
*(since 12/31/94)
PROSPECTUS
15
<PAGE>
BOSTON 1784 STOCK FUNDS (CONTINUED)
================================================================================
[GRAPHIC OF CALCULATOR OMITTED]
WHAT ARE THE FEES AND EXPENSES OF THE FUNDS?
THE TABLES BELOW DESCRIBE THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF BOSTON 1784 STOCK FUNDS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment)
- -----------------------------------------------------------------------------------------------------------------------------
ASSET GROWTH AND GROWTH INTERNATIONAL
ALLOCATION FUND INCOME FUND FUND EQUITY FUND
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) None None None None
Imposed on Purchases
Maximum Deferred Sales Charge (Load) None None None None
Maximum Sales Charge (Load) None None None None
Imposed on Reinvested Dividends
Redemption Fee None None None None
Exchange Fee None None None None
- ------------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets) as a % of average net assets
- ------------------------------------------------------------------------------------------------------------------------------
Management Fees .74% .74% .74% 1.00%
Distribution (12b-1) Fees .25% .25% .25% .25%
Other Expenses .24% .16% .17% .24%
Total Annual Fund Operating Expenses 1.23%* 1.15%* 1.16%* 1.49%*
- ------------------------------------------------------------------------------------------------------------------------------
*Each of these Funds' actual total annual fund operating expenses for the most
recent fiscal year were less than the amount shown above because the Funds'
Distributor waives its entire Distribution Fee. The Distributor may eliminate
all or a part of the fee waiver at any time. With the fee waiver, the Funds'
actual total annual operating expenses were as follows:
ASSET ALLOCATION FUND .98%
GROWTH AND INCOME FUND .90%
GROWTH FUND .91%
INTERNATIONAL EQUITY FUND 1.24%
- ------------------------------------------------------------------------------------------------------------------------------
EXAMPLE
- ------------------------------------------------------------------------------------------------------------------------------
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN BOSTON
1784 STOCK FUNDS TO THE COST OF INVESTING IN OTHER MUTUAL FUNDS. THE EXAMPLE
ASSUMES THAT YOU INVEST $10,000 IN A FUND FOR THE TIME PERIODS INDICATED AND
THEN SELL ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. THE EXAMPLE ALSO
ASSUMES THAT YOUR INVESTMENT HAS A 5% RETURN EACH YEAR AND THAT THE FUND'S
OPERATING EXPENSES REMAIN THE SAME AS SHOWN IN THE TABLE ABOVE. ALTHOUGH YOUR
ACTUAL COSTS AND THE RETURN ON YOUR INVESTMENT MAY BE HIGHER OR LOWER, BASED ON
THESE ASSUMPTIONS YOUR COSTS WOULD BE:
- ------------------------------------------------------------------------------------------------------------------------------
ASSET GROWTH AND GROWTH INTERNATIONAL
ALLOCATION FUND INCOME FUND FUND EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------
1 year $ 125 $ 117 $ 118 $ 152
3 years 390 365 368 471
5 years 676 633 638 813
10 years 1,489 1,398 1,409 1,779
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROSPECTUS
16
<PAGE>
INVESTING THROUGH YOUR RETIREMENT PLAN
================================================================================
You may invest in Boston 1784 Funds through your employer-sponsored defined
contribution plan. These plans are designed to help you save for retirement. You
should contact your employer for information about the features and benefits of
your plan, or if you have questions about:
[BULLET] HOW TO INVEST IN A FUND
[BULLET] HOW TO CHANGE THE AMOUNT OF MONEY THAT YOU INVEST IN A FUND ON A
REGULAR BASIS
[BULLET] HOW TO WITHDRAW YOUR MONEY FROM A FUND AND INVEST IN OTHER INVESTMENT
OPTIONS
[BULLET] WHEN YOU WILL RECEIVE STATEMENTS OF YOUR ACCOUNT
[BULLET] HOW MUCH MONEY YOU MAY CONTRIBUTE TO YOUR PLAN
[BULLET] HOW TO INCREASE OR DECREASE THE AMOUNT OF MONEY THAT YOU ARE
CONTRIBUTING TO YOUR PLAN
[BULLET] HOW TO MAKE WITHDRAWALS FROM YOUR PLAN
[BULLET] HOW TO STOP MAKING CONTRIBUTIONS TO YOUR PLAN
[BULLET] WHAT HAPPENS TO YOUR INVESTMENTS IF YOU LEAVE YOUR CURRENT EMPLOYMENT
[BULLET] WHAT ACCESS YOU MAY HAVE TO THE MONEY YOU HAVE INVESTED IN THE PLAN IN
THE EVENT OF FINANCIAL HARDSHIPS OR EMERGENCIES
[BULLET] WHETHER YOU MAY BE ABLE TO TAKE OUT A LOAN FROM YOUR INVESTMENTS IN
THE PLAN
PROSPECTUS
17
<PAGE>
PRICING OF FUND SHARES
================================================================================
Each Fund's net asset value per share or NAV is calculated on each day the New
York Stock Exchange is open, except for Columbus Day and Veteran's Day. The NAV
is the value of a single share of a Fund.
BOND FUNDS AND STOCK FUNDS
Each of these Funds' NAV is calculated at the close of business of the New York
Stock Exchange, normally 4:00 p.m. Eastern time. The NAV is generally based on
the market value of the securities held in the Fund. If market values are not
available, the fair value of securities is determined using procedures that the
Board of Trustees has approved.
Foreign securities are valued based on quotations from the primary market in
which they are traded, and are converted from the local currency into U.S.
dollars using current exchange rates. Foreign securities may trade in their
primary markets on weekends or other days when the Fund does not price its
shares. Therefore, the NAV of Funds holding foreign securities may change on
days when shareholders will not be able to buy or sell their Fund shares.
MONEY MARKET FUNDS
The Institutional U.S. Treasury Money Market Fund calculates NAV at 3:00 p.m.
Eastern time (12 noon on days when the financial markets close early). In
determining the Fund's NAV, securities are valued at amortized cost, which is
approximately equal to market value.
DISTRIBUTIONS
================================================================================
When you invest in a Fund through a defined contribution plan, your share of a
Fund's net income and gains on its investments is added to your account. Each
Fund passes substantially all of its earnings along to its investors as
distributions. When a Fund earns dividends from stocks and interest from bonds
and other debt securities and distributes these earnings to shareholders, it is
called a DIVIDEND DISTRIBUTION. A Fund realizes capital gains when it sells
securities for a higher price than it paid. When these gains are distributed to
shareholders, it is called a CAPITAL GAIN DISTRIBUTION. Dividend distributions
may be made several times a year, while capital gain distributions are generally
made annually. Your distributions from a Fund will be automatically reinvested
in additional shares of the Fund and will be added to your account shortly after
your plan receives the distributions.
MONEY MARKET FUNDS
The Fund declares dividend distributions each day, and pays distributions
monthly. You will not receive a dividend for the day on which you sell shares.
BOND FUNDS
The Fund declares dividend distributions each day, and pays distributions
monthly.
STOCK FUNDS
The Asset Allocation Fund and Growth and Income Fund pay dividend distributions,
if any, quarterly, generally on the last day of March, June, September and
December.
The Growth Fund pays dividend distributions, if any, semi-annually, generally on
the last day of June and December.
The International Equity Fund pays dividend distributions, if any, annually,
generally on the last day of December.
PROSPECTUS
18
<PAGE>
FEDERAL TAX CONSIDERATIONS
================================================================================
Your investment in a Fund will have tax consequences that you should consider.
Some of the more common federal tax consequences are described here, but you
should consult your tax adviser about your own particular situation.
So long as your employer's plan remains exempt from federal income tax, you will
not have to pay federal income tax on Fund distributions or on any gain you
realize on the sale or exchange of Fund shares until you withdraw those amounts
from your plan. You will generally have to pay federal income taxes at ordinary
income tax rates on distributions the plan makes to you, including in some
circumstances a 10% penalty tax on distributions before age 59 1/2. You should
consult your plan's administrator for further information regarding the tax
status of your plan distributions.
PROSPECTUS
19
<PAGE>
MORE ABOUT BOSTON 1784 FUNDS
================================================================================
- --------------------------------------------------------------------------------
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
[BULLET] BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
PRINCIPAL INVESTMENT STRATEGIES
The principal investment strategies of the Fund are described below. These are
the strategies that, in the opinion of the Adviser, are most likely to be
important in trying to achieve the Fund's investment objective. Of course, there
can be no assurance that the Fund will achieve its investment objective. Please
note that the Fund may also use strategies and invest in securities that are not
described below but which are described in the Statement of Additional
Information.
- --------------------------------------------------------------------------------
WHAT ARE MONEY MARKET INSTRUMENTS?
A MONEY MARKET INSTRUMENT is a short-term IOU issued by banks or other U.S.
corporations, or the U.S. government or state or local governments. Money
market instruments have maturity dates of 13 months or less. Money market
instruments may include certificates of deposit, bankers' acceptances,
variable rate demand notes, fixed-term obligations, commercial paper,
asset-backed commercial paper and repurchase agreements.
- --------------------------------------------------------------------------------
The Fund has specific investment policies and procedures designed to maintain a
constant net asset value of $1.00 per share. The Fund complies with industry
regulations that apply to money market funds. These regulations require that the
Fund's investments mature or be deemed to mature within 397 days from the date
purchased and that the average maturity of the Fund's investments (on a
dollar-weighted basis) be 90 days or less. In addition, all of the Fund's
investments must be in U.S. dollar-denominated high quality securities which
have been determined by the Adviser to present minimal credit risks. Investments
in high quality, short-term securities such as money market instruments may, in
many circumstances, result in a lower yield than would be available from
investments in securities with a lower quality or a longer term.
The Fund invests primarily in money market instruments issued by the U.S.
Treasury, including bills, notes and bonds, and repurchase agreements secured by
U.S. Treasury securities. Under normal circumstances, at least 65% of the Fund's
assets are invested in these securities. The Fund invests the rest of its assets
in U.S. government obligations issued by agencies or instrumentalities,
including mortgage-backed securities.
When selecting securities for the Fund, the portfolio managers use a "top-down"
approach, looking first at general economic factors and market conditions, then
at individual securities. The portfolio managers look for value while adhering
to the credit and other restrictions on money market funds.
ALTHOUGH THE FUND INVESTS IN U.S. GOVERNMENT OBLIGATIONS, AN INVESTMENT IN THE
FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
- --------------------------------------------------------------------------------
WHAT ARE U.S. GOVERNMENT OBLIGATIONS?
U.S. GOVERNMENT OBLIGATIONS or securities are bonds or other debt obligations
issued by, or whose principal and interest are guaranteed by, the U.S.
government or one of its agencies or instrumentalities. U.S. Treasury
securities and some obligations of U.S. government agencies and
instrumentalities are supported by the "full faith and credit" of the United
States. Some U.S. government obligations are backed by the right of the
issuer to borrow from the U.S. Treasury, and others only by the credit of the
issuing agency or instrumentality. U.S. government obligations generally have
less credit risk than other debt obligations.
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS OF THE FUND
EMMETT M. WRIGHT, Senior Fund Manager, has been the manager of the Fund since it
began operations. Mr. Wright, who has more than six years of investment
management and research analysis experience, was an associate Fund Manager at
BankBoston from 1993 to 1994 and has been a Fund Manager at BankBoston since
1994.
LISA W. LEBOEUF, Fund Manager, has been a co-manager of the Fund since January
1997. Ms. LeBoeuf, who has seven years experience in investment management, has
been with BankBoston since 1978.
PROSPECTUS
20
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
BOND FUNDS
- --------------------------------------------------------------------------------
Boston 1784 Funds currently offer three Bond Funds:
[BULLET] BOSTON 1784 SHORT-TERM INCOME FUND
[BULLET] BOSTON 1784 INCOME FUND
[BULLET] BOSTON 1784 U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
PRINCIPAL INVESTMENT STRATEGIES
The principal investment strategies of the Bond Funds are described below. These
are the strategies that, in the opinion of the Adviser, are most likely to be
important in trying to achieve each Fund's investment objective. Of course,
there can be no assurance that any Fund will achieve its investment objective.
Please note that each Fund may also use strategies and invest in securities that
are not described below, but which are described in the Statement of Additional
Information.
Investors should note that during periods of unusual economic or market
conditions or for temporary defensive purposes or liquidity, each Fund may
invest without limit in cash and in U.S. dollar-denominated high quality money
market instruments and other short-term securities. These investments may result
in a lower yield than would be available from investments with a lower quality
or longer term and may prevent a Fund from achieving its investment objective.
Each Fund is actively managed, and the portfolio managers may trade securities
frequently, resulting, from time to time, in an annual portfolio turnover rate
of over 100%. Trading securities may produce capital gains, which are taxable to
shareholders when distributed. Active trading may also increase the amount of
mark-ups and fees that the Fund pays to broker-dealers when it buys and sells
securities. The "Financial Highlights" section of this prospectus shows each
Fund's historical portfolio turnover rate.
- --------------------------------------------------------------------------------
WHAT IS A "TOP-DOWN" APPROACH?
Managers of mutual funds use different styles when selecting securities to
purchase. When using a "TOP-DOWN" APPROACH, the portfolio manager looks first
at broad market factors, and on the basis of those market factors, chooses
certain sectors or industries within the overall market. The manager then
looks at individual companies within those sectors or industries.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHAT ARE MORTGAGE-BACKED SECURITIES?
Home mortgage loans are typically grouped together into "POOLS" by banks and
other lending institutions, and interests in these pools are then sold to
investors, allowing the bank or other lending institution to have more money
available to loan to home buyers. When homeowners make interest and principal
payments, these payments are passed on to the investors in the pool. Most of
these pools are guaranteed by U.S. government agencies or by government
sponsored private corporations--familiarly called "GINNIE MAES", "FANNIE
MAES" and "FREDDIE MACS".
- --------------------------------------------------------------------------------
SHORT-TERM INCOME FUND
AND INCOME FUND
The SHORT-TERM INCOME FUND and INCOME FUND invest primarily in debt securities,
such as U.S. government obligations, corporate bonds, notes, mortgage- and
asset-backed securities, and taxable municipal securities. Under normal
circumstances, at least 80% of each Fund's assets are invested in these
securities. Both Funds may invest up to 30% of their assets in securities of
foreign issuers, including Yankee bonds, which are dollar-denominated bonds
issued in the U.S. by foreign borrowers, and issuers in developing countries.
The SHORT-TERM INCOME FUND and INCOME FUND generally invest in investment grade
securities. Under normal circumstances, the Funds expect to invest at least 65%
of their assets in securities rated A or better by Standard & Poor's or Moody's
or of comparable quality as determined by the Adviser. The Funds' portfolios may
also include lower rated investment grade securities, securities which were
investment grade when purchased by a Fund but that have since been down-graded,
and securities that are not investment grade at the time of purchase but which
the portfolio managers believe will experience an increase in rating to
investment grade. The ratings are described in the Statement of Additional
Information. Higher quality securities tend to have lower yields than lower
quality securities.
When managing the SHORT-TERM INCOME FUND, the portfolio manager's emphasis is on
keeping fluctuations in the price of Fund shares at a minimum. For this reason,
the Fund's average weighted maturity is normally expected to be not more than
three years and the Fund generally maintains an average maturity of between 1.8
years and 2.3 years. Short-term debt securities tend to fluctuate less in price,
but also tend to have lower yields, than longer-term securities of comparable
quality. However, the Fund is not a money market fund and the price of its
shares will fluctuate.
PROSPECTUS
21
<PAGE>
MORE ABOUT BOSTON 1784 FUNDS (CONTINUED)
================================================================================
The portfolio managers of the SHORT-TERM INCOME FUND and INCOME FUND use a
"top-down" approach to select securities. They review economic outlook,
inflation expectation and interest rates to help identify sector weightings and
define maturity and duration selection before choosing individual securities.
The portfolio managers look at the diversification of the portfolios, and the
marketability and liquidity of the individual securities they select. Although
the Funds are actively managed, the portfolio managers attempt to manage the
Funds so as to minimize capital gains distributions.
The INCOME FUND'S average weighted maturity is expected to be from seven to
thirty years under normal circumstances. While longer-term securities tend to
have higher yields than short-term securities, their prices tend to fluctuate
more as a result of interest rate changes and other factors.
U.S. GOVERNMENT MEDIUM-TERM
INCOME FUND
The U.S. GOVERNMENT MEDIUM-TERM INCOME FUND invests primarily in U.S. government
obligations and repurchase agreements secured by U.S. government obligations.
Under normal circumstances, at least 65% of the Fund's assets are invested in
these securities.
The Fund invests in both U.S. Treasury obligations and obligations such as
mortgage-backed securities issued or guaranteed by the U.S. government or its
agencies. The Fund also invests in non-government agency mortgage-backed
securities. ALTHOUGH THE FUND INVESTS PRIMARILY IN U.S. GOVERNMENT OBLIGATIONS,
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
When selecting securities for the Fund, the portfolio managers use a "top-down"
economic analysis to determine economic outlook, and the direction in which
inflation and interest rates are expected to move, before selecting individual
securities for the Fund. The portfolio managers also analyze the yield curve
under multiple market conditions to help define maturity and duration selection.
The Fund's average weighted maturity is normally expected to be from three to
ten years.
PORTFOLIO MANAGERS OF BOSTON 1784 BOND FUNDS
MARY K. WERLER, Senior Fund Manager, has been the manager of the Short-Term
Income Fund since the Fund began operations in July 1994. Ms. Werler, who has
more than eleven years of investment management experience, has been a Fund
Manager at BankBoston since 1993. From 1987 to 1993, Ms. Werler was an Associate
Portfolio Manager with Keystone Investment Co.
EMMETT M. WRIGHT, Senior Fund Manager, has been the manager of the U.S.
Government Medium-Term Income Fund and a manager of the Income Fund since
September 1995. Mr. Wright, who has more than six years of investment management
and research analysis experience, was an Associate Fund Manager at BankBoston
from 1993 to 1994 and has been a Fund Manager at BankBoston since 1994.
- --------------------------------------------------------------------------------
STOCK FUNDS
- --------------------------------------------------------------------------------
Boston 1784 Funds currently offer four Stock Funds:
[BULLET] BOSTON 1784 ASSET ALLOCATION FUND
[BULLET] BOSTON 1784 GROWTH AND INCOME FUND
[BULLET] BOSTON 1784 GROWTH FUND
[BULLET] BOSTON 1784 INTERNATIONAL EQUITY FUND
PRINCIPAL INVESTMENT STRATEGIES
The principal investment strategies used by the Stock Funds are described below.
These are the strategies that, in the opinion of the Adviser, are most likely to
be important in trying to achieve each Fund's investment objective. Of course,
there can be no assurance that any Fund will achieve its investment objective.
Please note that each Fund may also use strategies and invest in securities that
are not described below but which are described in the Statement of Additional
Information.
Investors should note that during periods of unusual economic or market
conditions, or for temporary defensive purposes or liquidity, each 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 and
do not have the potential for capital appreciation that equity securities have,
and may prevent a Fund from achieving its investment objective.
PROSPECTUS
22
<PAGE>
================================================================================
Each of the Stock Funds is actively managed, although the portfolio managers
attempt to minimize portfolio turnover. However, from time to time a Fund's
annual portfolio turnover rate may exceed 100%. The sale of securities may
produce capital gains, which, when distributed, are taxable to shareholders.
Active trading may also increase the amount of commissions or mark-ups the Fund
pays to broker-dealers when the Fund buys and sells securities. The "Financial
Highlights" section of this prospectus shows each Fund's historical portfolio
turnover rate.
ASSET ALLOCATION FUND
The ASSET ALLOCATION FUND allocates its assets between equity securities, debt
securities and short-term or money market instruments. Normally, 30% to 70% of
the Fund's assets are invested in equity securities, 30% to 60% are invested in
intermediate- and long-term debt securities, and 0% to 40% are invested in
short-term debt securities or money market instruments. The portfolio managers
determine the mix of investments between equity and debt securities based on
current economic and market conditions and the underlying value of the
securities.
The equity portion of the Fund is primarily invested in the stocks of large U.S.
companies that the portfolio managers believe offer the prospect for
above-average earnings growth and are available at reasonable prices. From time
to time, the Fund may also invest in mid-sized U.S. companies and in large,
multi-national companies based outside of the U.S. The Fund's equity securities
include common stock, warrants to purchase common stock, debt securities
convertible into common stock, convertible and non-convertible preferred stock
and depositary receipts.
When selecting equity securities for the Fund, the portfolio managers place
particular emphasis on industry selection, seeking stocks in industries that are
outperforming the market, and may overweight the portfolio relative to the S&P
500 in these industries. The Fund may similarly be underweighted relative to the
S&P 500 in certain industries.
When selecting debt securities for the Fund, the portfolio managers use a
"top-down" approach, first performing a broad economic analysis, then
identifying sectors believed to outperform the market over a particular holding
period, and then selecting individual securities. The Fund's debt securities
include investment grade corporate debt securities and debt obligations issued
or guaranteed as to the payment of principal and interest by the U.S. government
or by foreign governments. The Fund also invests in mortgage-backed and
asset-backed securities rated A or better by Standard & Poor's or Moody's or of
comparable quality as determined by the Adviser.
The Fund will use short-term debt and money market instruments, including
short-term U.S. government and corporate obligations, commercial paper, bank
obligations and repurchase agreements, in varying degrees as a risk management
tool.
GROWTH AND INCOME FUND
AND GROWTH FUND
The GROWTH AND INCOME FUND and the GROWTH FUND invest primarily in common stock
(including depositary receipts) of U.S. and foreign issuers. Typically, it is
expected that 80-90% or more of the Funds' assets will be invested in these
securities, although the Funds may invest up to 35% of their assets in other
securities such as convertible and non-convertible debt securities, preferred
stock, warrants, and money market instruments.
The GROWTH AND INCOME FUND emphasizes the stock of U.S. companies with market
capitalizations of at least $1 billion. The portfolio managers may also select
stocks in smaller U.S. companies, and may invest up to 25% of the Fund's assets
in securities of foreign companies, including smaller companies and companies in
developing markets. The portfolio managers look for high quality growth
companies with strong potential for revenue and earnings increases.
The GROWTH FUND emphasizes securities of U.S. companies with a market
capitalization of at least $250 million that the portfolio managers believe have
above-average growth potential. The Fund also may invest in securities of
smaller, lesser-known companies and may invest up to 25% of its assets in
securities of foreign companies, including companies in developing countries.
While some of the Fund's investments may pay dividends, current income is not a
consideration when selecting investments.
The portfolio managers of the GROWTH AND INCOME FUND and GROWTH FUND use a
"bottom-up" approach when selecting securities for the Funds. They look for
companies that they believe are in dynamic high growth sectors of the world
economy, and that are thought to have dominant or strong competitive positions
within their sectors. They also look for companies thought to have quality
management and that are expected to have strong earnings growth potential. When
looking for companies with a higher growth rate than the general market, the
Funds may invest in securities with a higher price-earnings ratio than the
general market.
PROSPECTUS
23
<PAGE>
MORE ABOUT BOSTON 1784 FUNDS (CONTINUED)
================================================================================
- --------------------------------------------------------------------------------
WHAT IS A "BOTTOM-UP" APPROACH?
When portfolio managers use a "BOTTOM-UP" APPROACH, they look primarily at
individual companies against the context of broader market factors.
- --------------------------------------------------------------------------------
Both the GROWTH AND INCOME FUND and GROWTH FUND may engage in foreign currency
hedging transactions in an attempt to minimize the effects of currency
fluctuations on the Fund. The Funds' attempt to minimize the effects of currency
fluctuations through the use of hedging transactions may not be successful or
the hedging transactions may cause the Funds to be unable to take advantage of a
favorable change in the value of foreign currencies.
INTERNATIONAL EQUITY FUND
The INTERNATIONAL EQUITY FUND invests primarily in equity securities of foreign
issuers, including securities of issuers in developing countries.
The Fund's portfolio is diversified as to both country and industry exposure in
an attempt to limit the impact of an economic downturn in any particular country
or industry sector. The Fund emphasizes equity securities of issuers with market
capitalizations of at least $100 million that the portfolio managers believe are
financially sound, have a track record of growth in earnings and have
above-average growth potential.
The portfolio managers screen a large universe of securities as potential
investments and then identify companies with suitable market capitalization,
liquidity and balance sheet structure whose earnings growth rates have exceeded
national averages. The portfolio is then structured to reflect the relative
attractiveness of the economies of various countries, and to provide industry
diversification. While some of the Fund's investments may pay dividends, current
income is not a consideration when selecting investments.
The Fund may engage in foreign currency hedging transactions in an attempt to
minimize the effects of currency fluctuations on the Fund. The Fund's attempt to
minimize the effects of currency fluctuations through the use of hedging
transactions may not be successful or the hedging transactions may cause the
Fund to be unable to take advantage of a favorable change in the value of
foreign currencies. The Fund may also invest in convertible and non-convertible
bonds and other debt securities and money market instruments.
The costs of foreign investing, such as the costs of maintaining custody of
securities in foreign countries, frequently are higher than those involved in
U.S. investing. As a result, the operating expense ratios of the Fund may be
higher than those of investment companies investing only in U.S. securities.
PORTFOLIO MANAGERS OF THE
BOSTON 1784 STOCK FUNDS
EMMETT M. WRIGHT, Senior Fund Manager, and MICHAEL PELOSI, Senior Fund Manager,
have been co-managers of the Asset Allocation Fund since October 1997. Mr.
Wright, who has more than six years of investment management and research
analysis experience, was an Associate Fund Manager at BankBoston from 1993 to
1994 and has been a Fund Manager at BankBoston since 1994. Mr. Pelosi, who has
more than fifteen years experience in investment management, research analysis
and securities trading at BankBoston, has been a Portfolio Manager since 1988.
EUGENE D. TAKACH, Senior Fund Manager, and THEODORE E. OBER, Senior Fund
Manager, have been the co-managers of the Growth and Income Fund and the Growth
Fund since the Funds began operations. Mr. Takach, who has more than 30 years
experience in investment management, research analysis and securities trading,
has been a Portfolio Manager at BankBoston since 1971. Mr. Ober, who has more
than ten years experience in investment management and research analysis, has
been a Research Analyst, Fund Manager and Senior Fund Manager at BankBoston
since 1987.
KENTON J. IDE, Director of Investments for BankBoston's Private Bank, and JULIET
COHN, Senior Portfolio Manager at Kleinwort Benson Investment Management
Americas Inc., have been co-managers of the International Equity Fund since the
Fund began operations in January 1995. Mr. Ide, who has more than twenty years
experience in investment management and research analysis, has been with
BankBoston since early 1993. From 1983 to 1993, Mr. Ide was a Senior Vice
President with the Private Client Group of Boston Safe Deposit and Trust
Company. Ms. Cohn, who has more than fifteen years experience in investment
management, has been with Kleinwort since 1987.
PROSPECTUS
24
<PAGE>
MANAGEMENT
================================================================================
INVESTMENT ADVISER
BankBoston is the investment adviser of each 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 Funds. As of July
31, 1998, BankBoston's Private Bank was responsible for the investment
management of approximately $24 billion of individual, institutional, endowment
and corporate assets, including $8.9 billion in assets of the Funds, in money
market, equity, and fixed income securities. BankBoston's Private Bank has
earned national recognition and respect as an investment manager. BankBoston's
legal name is BankBoston, National Association and its address is 100 Federal
Street, Boston, Massachusetts 02110.
Kleinwort Benson Investment Management Americas Inc. ("Kleinwort") serves as
investment adviser to the International Equity Fund with BankBoston. Investment
decisions are joint. Kleinwort, 75 Wall Street, New York, New York 10005, is the
U.S.-registered investment management subsidiary of the London-based Kleinwort
Benson Group plc, a merchant banking group whose origins date back to 1792,
which in turn is an indirect wholly-owned subsidiary of Dresdner Bank AG. Since
it began operations in 1980, Kleinwort has managed investment accounts,
primarily for institutions in North America, comprised of equity, fixed income
and balanced portfolios. Kleinwort and its affiliates manage approximately $65
billion of assets.
MANAGEMENT FEES
The following chart shows the investment management fees paid by each Fund
during the last fiscal year.
- --------------------------------------------------------------------------------
MANAGEMENT FEES PAID
(expressed as a percentage of average net assets)
- --------------------------------------------------------------------------------
Institutional U.S. Treasury Money Market Fund .20%
Short-Term Income Fund .50
Income Fund .68
U.S. Government Medium-Term Income Fund .67
Asset Allocation Fund .74
Growth and Income Fund .74
Growth Fund .74
International Equity Fund 1.00
BankBoston waives its investment management fees, if necessary, to limit the
total operating expenses of a Fund to a specified level. BankBoston also may
contribute to the Funds from time to time to help them maintain competitive
expense ratios. These arrangements are voluntary and may be terminated at any
time. The fees without waivers are shown in the fee table in the Risk/Return
Summary.
YEAR 2000
The "Year 2000" issue stems from the use of a two-digit format to define the
year in certain date-sensitive application systems rather than the use of a
four-digit format. As a result, date-sensitive software programs could recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in major systems or process failures or the generation of erroneous data, which
would lead to disruptions in the Funds' business operations.
The Funds have no application systems of their own and are entirely dependent on
their service providers' systems and software. The Funds are working with their
service providers (including their investment advisers, administrator, transfer
agent and custodian) to identify and remedy any Year 2000 issues. However, the
Funds cannot guarantee that all Year 2000 issues will be identified and
remedied, and the failure to successfully identify and remedy all Year 2000
issues could result in an adverse impact on the Funds.
PROSPECTUS
25
<PAGE>
DISTRIBUTION ARRANGEMENTS
================================================================================
Boston 1784 Funds do not charge any sales loads, deferred sales loads or other
fees in connection with the purchase of shares.
Each Fund, other than the Institutional U.S. Treasury Money Market Fund, has
adopted a plan under rule 12b-1. The plan allows a Fund to use part of the
Fund's assets (up to .25% of its average daily net assets) for the sale and
distribution of its shares, including advertising, marketing and other
promotional activities. Because these fees are paid out of Fund assets, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges. The Funds' Distributor currently
waives these fees on a voluntary basis. This fee waiver may be terminated in
whole or in part at any time.
PROSPECTUS
26
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND A FUND'S
FINANCIAL PERFORMANCE FOR THE PAST 5 YEARS [OR, IF SHORTER, THE PERIOD OF THE
FUND'S OPERATIONS]. CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE
FUND SHARE. THE TOTAL RETURNS IN THE TABLE REPRESENT THE RATE THAT AN INVESTOR
WOULD HAVE EARNED [OR LOST] ON AN INVESTMENT IN EACH FUND (ASSUMING REINVESTMENT
OF ALL DISTRIBUTIONS). THIS INFORMATION HAS BEEN AUDITED BY
PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS, WHOSE REPORT, ALONG WITH
THE FUNDS' FINANCIAL STATEMENTS, ARE INCLUDED IN THE FUNDS' ANNUAL REPORTS,
WHICH ARE AVAILABLE UPON REQUEST.
<TABLE>
<CAPTION>
====================================================================================================================================
MONEY MARKET FUNDS
====================================================================================================================================
NET NET NET RATIO
ASSET DISTRIBUTIONS ASSET ASSETS RATIO OF NET
VALUE NET FROM NET VALUE END OF EXPENSES INCOME
BEGINNING INVESTMENT INVESTMENT END TOTAL OF PERIOD TO AVERAGE TO AVERAGE
OF PERIOD INCOME INCOME OF PERIOD RETURN (000) NET ASSETS NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
<S> > <C> <C> <C> <C> <C> <C> <C> <C>
For the year ended May 31, 1998 $1.00 0.05 (0.05) $1.00 5.36% $4,285,801 0.33% 5.24%
For the year ended May 31, 1997 $1.00 0.05 (0.05) $1.00 5.16% $2,591,487 0.33% 5.05%
For the year ended May 31, 1996 $1.00 0.05 (0.05) $1.00 5.45% $ 644,733 0.32% 5.29%
For the year ended May 31, 1995 $1.00 0.05 (0.05) $1.00 5.05% $ 395,585 0.30% 5.12%
For the period ended May 31, 1994 (1) $1.00 0.03 (0.03) $1.00 2.99%* $ 181,568 0.22% 3.16%
RATIO OF RATIO OF NET
EXPENSES TO INCOME TO
AVERAGE NET AVERAGE NET
ASSETS (EXCLUDING ASSETS (EXCLUDING
WAIVERS) WAIVERS)
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
For the year ended May 31, 1998 0.33% 5.24%
For the year ended May 31, 1997 0.34% 5.04%
For the year ended May 31, 1996 0.39% 5.22%
For the year ended May 31, 1995 0.41% 5.01%
For the period ended May 31, 1994 (1) 0.55% 2.83%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Returns are for the period indicated and have not been annualized.
(1) The Institutional U.S. Treasury Money Market Fund commenced operations on
June 14, 1993. All ratios for the period have been annualized.
</FN>
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
BOND FUNDS
====================================================================================================================================
NET REALIZED AND NET NET
ASSET UNREALIZED DISTRIBUTIONS DISTRIBUTIONS ASSET ASSETS
VALUE NET GAINS OR FROM NET FROM VALUE END OF
BEGINNING INVESTMENT (LOSSES) ON INVESTMENT CAPITAL END OF TOTAL PERIOD
OF PERIOD INCOME INVESTMENTS INCOME GAINS PERIOD RETURN (000)
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 SHORT-TERM INCOME FUND
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended May 31, 1998 $ 9.98 0.57 0.11 (0.57) -- $10.09 6.98% $197,256
For the year ended May 31, 1997 $ 9.93 0.58 0.05 (0.58) -- $ 9.98 6.47% $194,033
For the year ended May 31, 1996 $10.09 0.60 (0.12) (0.60) (0.04 $ 9.93 4.87% $ 86,383
For the period ended May 31, 1995 (1) $10.00 0.56 0.09 (0.56) -- $10.09 6.74%* $ 52,581
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 INCOME FUND
For the year ended May 31, 1998 $ 9.99 0.61 0.26 (0.61) -- $10.25 8.88% $392,556
For the year ended May 31, 1997 $ 9.90 0.63 0.17 (0.63) (0.08) $ 9.99 8.32% $334,778
For the year ended May 31, 1996 $10.39 0.65 (0.37) (0.65) (0.12) $ 9.90 2.64% $235,022
For the period ended May 31, 1995 (1) $10.00 0.62 0.39 (0.62) -- $10.39 10.69%* $196,515
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
For the year ended May 31, 1998 $ 9.37 0.55 0.23 (0.55) -- $ 9.60 8.56% $252,719
For the year ended May 31, 1997 $ 9.31 0.59 0.06 (0.59) -- $ 9.37 7.16% $209,141
For the year ended May 31, 1996 $ 9.57 0.61 (0.26) (0.61) -- $ 9.31 3.65% $167,494
For the year ended May 31, 1995 $ 9.36 0.58 0.21 (0.58) -- $ 9.57 8.79% $130,081
For the period ended May 31, 1994 (2) $10.00 0.59 (0.64) (0.59) -- $ 9.36 (0.65)%* $ 92,387
RATIO OF RATIO OF RATIO OF RATIO OF NET
EXPENSES NET EXPENSES TO INCOME TO
TO AVERAGE INCOME AVERAGE NET ASSETS AVERAGE NET PORTFOLIO
NET TO AVERAGE (EXCLUDING ASSETS (EXCLUDING TURNOVER
ASSETS NET ASSETS WAIVERS) WAIVERS) RATE
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 SHORT-TERM INCOME FUND
<S> <C> <C> <C> <C> <C>
For the year ended May 31, 1998 0.64% 5.67% 0.89% 5.42% 83.84%
For the year ended May 31, 1997 0.65% 5.78% 0.93% 5.50% 128.11%
For the year ended May 31, 1996 0.63% 5.87% 1.06% 5.44% 95.06%
For the period ended May 31, 1995 (1) 0.48% 6.31% 1.27% 5.52% 84.54%
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 INCOME FUND
For the year ended May 31, 1998 0.80% 5.91% 1.11% 5.60% 79.09%
For the year ended May 31, 1997 0.80% 6.31% 1.15% 5.96% 78.63%
For the year ended May 31, 1996 0.80% 6.17% 1.20% 5.77% 100.51%
For the period ended May 31, 1995 (1) 0.55% 7.01% 1.23% 6.33% 80.53%
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
For the year ended May 31, 1998 0.80% 5.80% 1.12% 5.48% 73.65%
For the year ended May 31, 1997 0.79% 6.30% 1.16% 5.93% 98.22%
For the year ended May 31, 1996 0.80% 6.23% 1.24% 5.79% 158.66%
For the year ended May 31, 1995 0.80% 6.24% 1.27% 5.77% 142.14%
For the period ended May 31, 1994 (2) 0.31% 6.08% 1.35% 5.04% 144.77%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Returns are for the period indicated and have not been annualized.
(1) The Short-Term Income and Income Funds commenced operations on July 1, 1994. All ratios for the period have been
annualized.
(2) The U.S. Government Medium-Term Income Fund commenced operations on June 7, 1993. All ratios for the period have
been annualized.
</FN>
</TABLE>
PROSPECTUS
27
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
====================================================================================================================================
STOCK FUNDS
====================================================================================================================================
NET REALIZED AND NET NET
ASSET NET UNREALIZED DISTRIBUTIONS DISTRIBUTIONS ASSET ASSETS
VALUE INVESTMENT GAINS OR FROM NET FROM VALUE END OF
BEGINNING INCOME (LOSSES) ON INVESTMENT CAPITAL END OF TOTAL PERIOD
OF PERIOD (LOSS) INVESTMENTS INCOME GAINS PERIOD RETURN (000)
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 ASSET ALLOCATION FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the year ended May 31, 1998 $13.40 0.37 2.30 (0.38) (0.53) $15.16 20.51% $ 50,283
For the year ended May 31, 1997 $12.31 0.34 1.44 (0.33) (0.36) $13.40 14.89% $ 35,522
For the year ended May 31, 1996 $10.99 0.31 1.61 (0.31) (0.29) $12.31 17.83% $ 16,831
For the period ended May 31, 1995 $ 9.84 0.28 1.15 (0.27) (0.01) $10.99 14.84% $ 8,622
For the period ended May 31, 1994 (1) $10.00 0.19 (0.20) (0.15) (0.00) $ 9.84 (0.15)%* $ 6,928
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 GROWTH AND INCOME FUND
For the year ended May 31, 1998 $17.54 0.07 4.55 (0.09) (0.35) $21.72 26.71% $553,997
For the year ended May 31, 1997 $15.23 0.12 2.63 (0.11) (0.33) $17.54 18.33% $457,952
For the year ended May 31, 1996 $12.16 0.10 3.08 (0.11) (0.00) $15.23 26.32% $303,463
For the period ended May 31, 1995 $10.57 0.11 1.67 (0.10) (0.09) $12.16 17.09% $229,200
For the period ended May 31, 1994 (2) $10.00 0.12 0.56 (0.11) (0.00) $10.57 6.80%* $121,717
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 GROWTH FUND
For the year ended May 31, 1998 $12.20 (0.05) 1.59 -- (0.81) $12.93 12.64% $257,550
For the year ended May 31, 1997 $11.27 0.02 0.96 (0.05) (0.00 $12.20 8.77% $261,487
For the year ended May 31, 1996 (3) $10.00 0.02 1.25 (0.00) (0.00) $11.27 12.70%* $ 46,026
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 INTERNATIONAL EQUITY FUND
For the year ended May 31, 1998 $13.20 (0.02) 0.80 (0.15) (0.14) $13.69 6.19% $469,819
For the year ended May 31, 1997 $12.05 0.07 1.23 (0.09) (0.06) $13.20 10.93% $503,048
For the year ended May 31, 1996 $10.41 0.11 1.85 (0.27) (0.05) $12.05 19.08% $362,460
For the period ended May 31, 1995 (4) $10.00 0.06 0.35 (0.00) (0.00) $10.41 4.73%* $148,439
RATIO OF RATIO OF RATIO OF RATIO OF NET
EXPENSES NET EXPENSES TO INCOME TO
TO AVERAGE INCOME AVERAGE NET ASSETS AVERAGE NET PORTFOLIO
NET TO AVERAGE (EXCLUDING ASSETS (EXCLUDING TURNOVER
ASSETS NET ASSETS WAIVERS) WAIVERS) RATE
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 ASSET ALLOCATION FUND
<S> <C> <C> <C> <C> <C>
For the year ended May 31, 1998 0.98% 2.66% 1.23% 2.41% 47.83%
For the year ended May 31, 1997 1.07% 2.87% 1.37% 2.57% 23.60%
For the year ended May 31, 1996 1.25% 2.86% 1.90% 2.21% 39.56%
For the period ended May 31, 1995 1.25% 2.88% 2.51% 1.62% 67.23%
For the period ended May 31, 1994 (1) 1.25% 2.62% 3.61% 0.26% 28.19%
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 GROWTH AND INCOME FUND
For the year ended May 31, 1998 0.90% 0.36% 1.15% 0.11% 39.03%
For the year ended May 31, 1997 0.92% 0.77% 1.19% 0.50% 15.35%
For the year ended May 31, 1996 0.94% 0.78% 1.24% 0.48% 39.50%
For the period ended May 31, 1995 0.94% 1.05% 1.23% 0.76% 38.94%
For the period ended May 31, 1994 (2) 0.35% 1.23% 1.36% 0.22% 31.55%
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 GROWTH FUND
For the year ended May 31, 1998 0.91% (0.35%) 1.16% (0.60%) 48.60%
For the year ended May 31, 1997 0.77% 0.17% 1.15% (0.21%) 57.46%
For the year ended May 31, 1996 (3) 0.20% 1.75% 1.73% 0.22% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 INTERNATIONAL EQUITY FUND
For the year ended May 31, 1998 1.24% 0.04% 1.49% (0.21%) 103.47%
For the year ended May 31, 1997 1.27% 0.41% 1.52% 0.16% 22.88%
For the year ended May 31, 1996 1.13% 0.76% 1.61% 0.28% 15.55%
For the period ended May 31, 1995 (4) 0.89% 2.06% 1.70% 1.25% 11.03%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Returns are for the period indicated and have not been annualized.
(1) The Asset Allocation Fund commenced operations on June 14, 1993. All ratios
for the period have been annualized.
(2) The Growth and Income Fund commenced operations on June 7, 1993. All ratios
for the period have been annualized.
(3) The Growth Fund commenced operations on March 28, 1996. All ratios for the
period have been annualized.
(4) The International Equity Fund commenced operations on January 3, 1995. All
ratios for the period have been annualized.
</FN>
</TABLE>
PROSPECTUS
28
<PAGE>
THE STATEMENT OF ADDITIONAL INFORMATION INCLUDES ADDITIONAL INFORMATION ABOUT
THE FUNDS.
ADDITIONAL INFORMATION ABOUT THE FUNDS' INVESTMENTS IS AVAILABLE IN THE FUNDS'
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS. IN THE FUNDS' ANNUAL REPORT, YOU
WILL FIND A DISCUSSION OF THE MARKET CONDITIONS AND INVESTMENT STRATEGIES THAT
SIGNIFICANTLY AFFECTED THE FUNDS' PERFORMANCE DURING THE LAST FISCAL YEAR.
YOU CAN OBTAIN A FREE COPY OF THE FUNDS' STATEMENT OF ADDITIONAL INFORMATION
AND/OR FREE COPIES OF THE FUNDS' MOST RECENT ANNUAL OR SEMI-ANNUAL REPORT BY
CALLING 1-800-BKB-1784. THE MATERIAL YOU REQUEST WILL BE SENT BY FIRST-CLASS
MAIL, OR OTHER MEANS DESIGNED TO ENSURE EQUALLY PROMPT DELIVERY, WITHIN THREE
BUSINESS DAYS OF RECEIPT OF THE REQUEST.
THE STATEMENT OF ADDITIONAL INFORMATION HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION AND IS INCORPORATED INTO THIS PROSPECTUS BY REFERENCE.
INFORMATION ABOUT THE FUNDS (INCLUDING THE STATEMENT OF ADDITIONAL INFORMATION)
CAN BE REVIEWED AND COPIED AT THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. INFORMATION ON THE OPERATION OF THE PUBLIC
REFERENCE ROOM MAY BE OBTAINED BY CALLING THE COMMISSION AT 1-800-SEC-0330.
COPIES OF THIS INFORMATION MAY BE OBTAINED, UPON PAYMENT OF A DUPLICATING FEE,
BY WRITING THE PUBLIC REFERENCE SECTION OF THE COMMISSION, WASHINGTON, D.C.
20549-6009.
REPORTS AND OTHER INFORMATION ABOUT THE FUNDS ARE ALSO AVAILABLE ON THE
COMMISSION'S INTERNET SITE AT HTTP://WWW.SEC.GOV.
THIS PROSPECTUS IS INTENDED FOR USE BY RETIREMENT PLAN INVESTORS.
[BOSTON 1784 FUNDS OMITTED]
BOSTON 1784 FUNDS
P.O. BOX 8524
BOSTON, MA 02266-8524
1-800-BKB-1784
WWW.BOSTON1784FUNDS.COM
FILE NO. 811-7474 MF-0170
<PAGE>
Statement of
Additional Information
September 15, 1998
BOSTON 1784 FUNDS[SERVICE MARK]
MONEY MARKET FUNDS:
Boston 1784 Tax-Free Money Market Fund
Boston 1784 U.S. Treasury Money Market Fund
Boston 1784 Institutional U.S. Treasury Money Market Fund
Boston 1784 Prime Money Market Fund
Boston 1784 Institutional Prime Money Market Fund
BOND FUNDS:
Boston 1784 Short-Term Income Fund
Boston 1784 Income Fund
Boston 1784 U.S. Government Medium-Term 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 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 September 15,
1998. You may obtain a Prospectus without charge by calling 1-800-BKB-1784.
Certain financial information which is included in the Annual Reports
to Shareholders of Boston 1784 Funds is incorporated by reference into this
Statement of Additional Information.
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.
<PAGE>
-2-
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
1. Trust History 2
2. Description of the Trust and its Investments and Risks 2
Classification 2
Investment Strategies and Risks 3
Fund Policies 21
Temporary Defensive Position 25
Portfolio Turnover 25
3. Management 26
Trustees 26
Management Information 27
Compensation 29
4. Control Persons and Principal Holders of Securities 30
Principal Holders 30
5. Investment Advisory and Other Services 31
Investment Advisers 31
Distributor 33
Administrator 34
Dividend Disbursing Agent and Transfer Agent 35
Custodian 36
Counsel and Independent Accountant 36
6. Brokerage Allocation and Other Practices 36
Brokerage Transactions 36
Brokerage Selection 37
7. Description of Shares; Voting Rights and Liabilities 39
8. Purchase, Redemption and Pricing of Shares 40
Determination of Net Asset Value 40
Purchase and Redemption of Shares 41
Systematic Withdrawal Plan 42
Redemption in Kind 43
9. Taxes 43
Tax Status of the Funds 43
Taxation of Fund Distributions 44
Disposition of Shares 45
Additional Information for Shareholders of the Tax-Exempt Funds 45
Additional Information Relating to Fund Investments 45
Additional Information Relating to Foreign Investments 46
Foreign Shareholders 47
Backup Withholding 47
10. Performance Information 47
Calculation of Yield 47
Calculation of Total Return 49
11. Financial Statements 55
Appendix A: Certain Information concerning Connecticut, Florida, Massachusetts and
Rhode Island
Appendix B: Description of Securities Ratings
Appendix C: Taxable Equivalent Yields
</TABLE>
<PAGE>
-2-
1. TRUST HISTORY
BOSTON 1784 FUNDS[SERVICE MARK] (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.
2. DESCRIPTION OF THE TRUST AND ITS INVESTMENTS AND RISKS
CLASSIFICATION
The 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. Boston 1784 Funds currently has seventeen active series.
Each Fund (other than the state Tax-Exempt Funds) is a diversified mutual fund.
This Statement of Additional Information relates to the following funds
of the Trust (the "Funds"):
MONEY MARKET FUNDS:
Boston 1784 Tax-Free Money Market Fund
Boston 1784 U.S. Treasury Money Market Fund
Boston 1784 Institutional U.S. Treasury Money Market Fund
Boston 1784 Prime Money Market Fund
Boston 1784 Institutional Prime Money Market Fund
BOND FUNDS:
Boston 1784 Short-Term Income Fund
Boston 1784 Income Fund
Boston 1784 U.S. Government Medium-Term 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 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 Investments Distribution Co.
is the distributor of shares of each Fund.
<PAGE>
-3-
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.
INVESTMENT STRATEGIES AND RISKS
The principal investment policies and strategies of each of the Funds
are described in the Prospectus by which shares of that Fund are offered. The
permitted investments and investment techniques described below, in alphabetical
order, supplements the information contained in the Prospectus.
Each Tax-Exempt Fund has a fundamental policy of investing at least 80
percent 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.
Appendix C describes the yield investors need to achieve from a taxable
investment to equal the yield from a tax-exempt investment. The taxable
equivalent yields tables do not predict the yield of any Fund.
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS
Each of the Funds may invest in 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"), 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 and CDRs 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 receipt's underlying security.
Holdings of an unsponsored depositary receipt generally bear all the costs of
the unsponsored facility
<PAGE>
-4-
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 to the deposited securities.
ASSET-BACKED SECURITIES
In addition to mortgage-backed securities, each of the Funds (other
than Boston 1784 Institutional U.S. Treasury Money Market Fund and 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.
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. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (E.G., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
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
<PAGE>
-5-
loan associations, and other banking institutions. The Funds have established
certain minimum credit quality standards for bank obligations in which they
invest.
The Funds (other than Boston 1784 Institutional U.S. Treasury Money
Market Fund and 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.
BANKERS' ACCEPTANCES
Each of the Funds may invest in 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
Each of the Funds may invest in certificates of deposit. A certificate
of deposit is a negotiable interest-bearing instrument with a specific maturity.
Cerificates of deposit 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.
COMMERCIAL PAPER
Each of the Funds may invest in 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.
COMMON AND PREFERRED STOCK
Each of the Funds may invest in 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 investments and are
generally preferred over common stocks with respect to dividends and in
liquidation.
CONVERTIBLE SECURITIES
Each of the Funds may invest in 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 any call provisions. Convertible
securities include both debt obligations and preferred stock.
CURRENCY SWAPS
Each of the Funds may engage in 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
<PAGE>
-6-
and risks different from those associated with ordinary portfolio securities
transactions. If the Adviser or Advisers to a Fund are incorrect in their
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.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Each of the Funds may engage in 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 assets denominated in the applicable
currency. Under
<PAGE>
-7-
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.
FOREIGN SECURITIES
Each of the Funds (other than Boston 1784 Institutional U.S. Treasury
Money Market Fund and Boston 1784 U.S. Treasury Money Market Fund) may invest in
certain obligations or securities of foreign issuers. 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.
<PAGE>
-8-
banks and of foreign banks, including certificates of deposit and time deposits
(including Eurodollar time deposits).
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, the value of securities
denominated in foreign currencies and of dividends and interest paid with
respect to such securities, will fluctuate based on the relative strength of the
U.S. dollar. In addition, there is generally less publicly available information
about foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign issuers are
generally not bound by uniform accounting, auditing and financial reporting
requirements comparable to those applicable to domestic issuers. Investments in
foreign securities also involve the risk of possible adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, limitation on the removal of funds or other assets of a Fund,
political or financial instability or diplomatic and other developments which
would affect such investments. Further, economies of particular countries or
areas of the world may differ favorably or unfavorably from the economy of the
U.S.
It is anticipated that in most cases the best available market for
foreign securities would be on exchanges or in over-the-counter markets located
outside the U.S. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the U.S., and
securities of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
U.S. companies. Foreign security trading practices, including those involving
securities settlement where a 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 Boston 1784 International Equity Fund is not to
invest more than 10 percent 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 diversified, open-end management investment
company having the same investment objective and policies and substantially the
same investment restrictions as those applicable to the Fund (a "Qualifying
Portfolio"). 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.
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>
-9-
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.
FORWARD COMMITMENTS OR PURCHASES ON A WHEN-ISSUED BASIS
Each Fund may invest up to 25 percent of its assets in forward
commitments or commitments to purchase securities 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 the
commitment and delivery and payment normally take place beyond conventional
settlement time after the date of commitment to purchase. The Funds will make
commitments to purchase obligations on a when-issued basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date. The when-issued securities are subject to market fluctuation,
and no interest accrues on the security to the purchaser during this period. The
payment obligation and the interest rate that will be received on the securities
are each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case,
there could be an unrealized loss at the time of delivery.
While awaiting delivery of securities purchased on a when-issued basis,
a Fund will establish a segregated account consisting of cash, short-term money
market instruments or high quality debt securities (for 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.
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 percent 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.
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Futures contracts call for the actual delivery or acquisition of
securities, or in the case of futures contracts based on indices, the making or
acceptance of a cash settlement at a specified future time; however, the
contractual obligation is usually fulfilled before the date specified in the
contract by closing out the futures contract position through the purchase or
sale, on a commodities exchange, of an identical futures contract. Positions in
futures contracts may be closed out only if a liquid secondary market for such
contract is available, and there can be no assurance that such a liquid
secondary market will exist for any particular futures contract.
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.
GUARANTEED INVESTMENT CONTRACTS (GIC)
A GIC is a contract between an insurance company and, generally, an
institutional investor that guarantees the investor a specified interest rate
for a specific period and the return of the investor's principal. Each of the
Funds may invest in GICs, but no Fund will invest more than 20% of its total
assets in GICs.
LOAN PARTICIPATIONS
Each of the Funds may invest in 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 Funds 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 Funds
may invest. Because the intermediary 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, a 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.
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 Boston 1784 U.S.
Treasury Money Market Fund, Boston 1784 Institutional U.S. Treasury Money Market
Fund and Boston 1784 Institutional Prime Money Market Fund) may invest in money
market funds, but not more than 5 percent of its assets in any one money market
fund or more than 10 percent 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.
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MORTGAGE "DOLLAR ROLL" TRANSACTIONS
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.
MORTGAGE-BACKED SECURITIES
Each of the Funds may invest in mortgage-backed securities, which are
securities representing interests in pools of mortgage loans. Interests in pools
of mortgage-related securities differ from other forms of debt securities which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. The market value and interest yield of these instruments
can vary due to market interest rate fluctuations and early prepayments of
underlying mortgages.
The principal governmental issuers or guarantors of mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith and
credit of the United States Government while obligations of FNMA and FHLMC are
supported by the respective agency only.
Each of the Funds (other than the Money Market Funds) may also 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 IBCA, Inc. ("Fitch IBCA"), or, if not rated by S&P, Moody's
or Fitch IBCA, 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"). 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.
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.
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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 obligations 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.
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.
OPTIONS
Each of the Stock Funds, Boston 1784 Short-Term Income Fund and 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
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. The aggregate value of such options
may not exceed 10 percent 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.
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A closing purchase transaction is one in which a Fund, when obligated
as a writer of an option, terminates its obligation by purchasing an option of
the same series as the option previously written. A closing purchase transaction
cannot be effected with respect to an option once the Fund writing the option
has received an exercise notice for such option. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security or to enable a Fund to write another call option on the
underlying security with either a different exercise price or different
expiration date or both. The Fund may realize a net gain or loss from a closing
purchase transaction depending upon whether the net amount of the original
premium received on the call option is more or less than the cost of effecting
the closing purchase transaction. Any loss incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
sale of a different call option on the same underlying security. Such a loss may
also be wholly or partially offset by unrealized appreciation in the market
value of the underlying security. Conversely, a gain resulting from a closing
purchase transaction could be offset in whole or in part by a decline in the
market value of the underlying security.
If a call option expires unexercised, a Fund will realize a short-term
capital gain in the amount of the premium on the option, less the commission
paid. Such a gain, however, may be offset by depreciation in the market value of
the underlying security during the option period. If a call option is exercised,
the Fund will realize a gain or loss from the sale of the underlying security
equal to the difference between (a) the cost of the underlying security and (b)
the proceeds of the sale of the security, plus the amount of the premium on the
option, less the commission paid.
The market value of a call option generally reflects the market price
of the underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
Each of the Stock Funds, Tax-Exempt Funds and Bond Funds 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.
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OPTIONS ON FUTURES CONTRACTS
Each of 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.
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 percent 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
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of cash received will be equal to such difference between the closing
price of the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
option premium received, to make delivery of this amount. Gain or loss to a Fund
on transactions in stock index options will depend on price movements in the
stock market generally (or in a particular industry or segment of the market)
rather than price movements of individual securities.
As with stock options, a Fund may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the
stock included in the index. Some stock index options are based on a broad
market index such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index, or a narrower market index such as the Standard & Poor's 100.
Indices are also based on an industry or market segment such as the AMEX Oil and
Gas Index or the Computer and Business Equipment Index. Options on stock indices
are currently traded on the following exchanges, among others: The Chicago Board
Options Exchange, New York Stock Exchange and American Stock Exchange.
A Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices depends on the
degree to which price movements in the underlying index correlate with price
movements in the securities held by the Fund. Since the Fund will not duplicate
all of the components of an index, the correlation will not be exact.
Consequently, the Fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both such securities and the hedging instrument.
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.
OTHER INVESTMENT COMPANIES
Subject to applicable statutory and regulatory limitations, assets of
each Fund may be invested in shares of other investment companies and foreign
investment trusts. Each Fund may invest up to 5% of its assets in closed-end
investment companies that primarily hold securities of non-U.S. issuers. A
Fund's purchase of investment company securities may result in the duplication
of fees and expenses.
RECEIPTS
Each of the Funds may invest in 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
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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.
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. Pursuant to an exemptive order from the Securities and Exchange
Commission, the Funds' may enter into repurchase agreements on a pooled basis.
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 percent 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.
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. Boston 1784 Prime Money Market Fund, Boston 1784
Institutional Prime Money Market Fund, each Stock Fund and each Bond Fund may
invest up to 20 percent 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
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may be purchased subject to each Fund's limitation on all illiquid securities
(15 percent of net assets for each Stock, Bond and Tax-Exempt Fund and 10
percent for each Money Market Fund).
A 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.
REVERSE REPURCHASE AGREEMENTS
Each of the Funds may enter into reverse repurchase agreements. Reverse
repurchase agreements involve the sale of securities held by a Fund and the
agreement by the Fund to repurchase the securities at an agreed-upon price, date
and interest payment. When a 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.
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.
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
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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 percent 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.
The interest-only component is extremely sensitive to the rate of principal
payments on the underlying obligation. The market value of the principal-only
component generally is unusually volatile in response to changes in interest
rates.
TAX-EXEMPT SECURITIES
MUNICIPAL NOTES AND BONDS
Boston 1784 Prime Money Market Fund, Boston 1784 Institutional Prime
Money Market Fund, 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
IBCA, or which, if not rated by Moody's, S&P or Fitch IBCA, 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 IBCA or Baa or better by Moody's at the time of investment or, if not
rated by Moody's, S&P or Fitch IBCA, 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 IBCA or Baa by Moody's may
have speculative characteristics. The Adviser to these Funds may purchase
industrial development and pollution control bonds for these Funds if the
interest paid thereon is exempt from federal income tax. These bonds are issued
by or on behalf of public authorities to raise money to finance various
privately-operated facilities for business and manufacturing, housing, sports,
and pollution control. These bonds may also be used to finance public facilities
such as airports, mass transit systems, ports, and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.
Municipal securities also include participations in municipal leases.
These are undivided interests in a portion of an obligation in the form of a
lease or installment purchase issued by a state or local government to acquire
equipment or facilities. Municipal leases frequently have special risks not
normally associated with general obligation bonds or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed to be inapplicable
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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, Boston 1784
Prime Money Market Fund and Boston 1784 Institutional Prime Money Market 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 IBCA, 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, Boston 1784 Prime Money Market Fund and
Boston 1784 Institutional Prime Money Market Fund may invest in FLOATING RATE
NOTES. Investments in such floating rate instruments will normally involve
industrial development or revenue (now known as "private activity") bonds which
provide that the rate of interest is set as a specific percentage of a
designated base rate (such as the prime rate) at a major commercial bank, and
that a Fund can demand payment of the obligation at all times or at stipulated
dates on short notice (not to exceed 30 days) at par plus accrued interest. For
purposes of determining the maturity of these obligations, the Fund may use the
longer of (a) the period required before the Fund is entitled to prepayment
under such obligations or (b) the period remaining until the next interest rate
adjustment date. Such obligations are frequently secured by letters of credit or
other credit support arrangements provided by banks. The quality of the
underlying credit or of the bank, as the case may be, must in the Fund Adviser's
opinion be equivalent to the long-term bond or commercial paper ratings on
securities in which the Fund may invest. The Adviser to the Fund will monitor
the earning power, cash flow and liquidity ratios of the issuers of floating
rate instruments and the ability of an issuer of a demand instrument to pay
principal and interest on demand. The Adviser to the Fund may also purchase
other types of tax-exempt instruments for these Funds as long as they are of a
quality equivalent to the bonds or commercial paper in which these Funds may
invest.
STANDBY COMMITMENTS
Funds investing in municipal securities may acquire such securities
subject to a "standby commitment". The Adviser 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
<PAGE>
-20-
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 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 percent 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.
TIME DEPOSITS
Each of the Funds may invest in 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.
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Fund (other than Boston 1784 Institutional U.S. Treasury Money
Market Fund and 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.
<PAGE>
-21-
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.
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. Each of the Stock Funds may
invest up to 5% of its net assets in warrants. 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. The Short-Term Income Fund and
Income Fund may each invest in warrants in an amount not exceeding 2% of its net
assets, except that 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.
ZERO COUPON SECURITIES
Each of the Funds may invest in 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.
FUND POLICIES
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 percent or more
of the outstanding voting securities of the Fund present at a meeting at which
the holders of more than 50 percent of the outstanding voting securities of the
Fund are present or represented by proxy, or (ii) more than 50 percent 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
percent 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
<PAGE>
-22-
may under the 1940 Act, reserve freedom of action to concentrate its
investments in such securities, and in the case of 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 Boston 1784 Prime Money Market
Fund, Boston 1784 Institutional Prime Money Market Fund, Boston 1784
Florida Tax-Exempt Income Fund, Boston 1784 Growth Fund, and Boston
1784 International Equity 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 as described in the Prospectuses and in this
Statement of Additional Information.
3. A Fund may not acquire more than 10 percent 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 percent 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 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 percent 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, Boston 1784 Prime Money
Market Fund or Boston 1784 Institutional Prime Money Market Fund; and
(c) the foregoing limitation does not apply to an investment of all of
the investable assets of Boston 1784 Prime Money Market Fund, Boston
1784 Institutional Prime Money Market Fund, Boston 1784 Florida
Tax-Exempt Income Fund, Boston 1784 Growth Fund, or Boston 1784
International Equity 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 percent 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
<PAGE>
-23-
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 percent
of its total assets (taken at market value), and any interest paid on
such borrowings will reduce income.
6. In the case of Boston 1784 Asset Allocation Fund, Boston 1784 Growth
and Income Fund, Money Market Funds (other than Boston 1784 Prime Money
Market Fund and Boston 1784 Institutional 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, such a Fund may not pledge, mortgage or
hypothecate assets except to secure temporary borrowings permitted by
(5) above in aggregate amounts not to exceed 10 percent 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.
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 percent of the
total voting stock of the company; (b) securities issued by any one
investment company represent more than 5 percent of the total assets of
such Fund; or (c) securities (other than treasury stock) issued by all
investment companies represent more than 10 percent of the total assets
of such Fund, provided, that with respect to Boston 1784 Prime Money
Market Fund, Boston 1784 Institutional Prime Money Market Fund, Boston
1784 Florida Tax-Exempt Income Fund, Boston 1784 Growth Fund, and
Boston 1784 International Equity 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.
<PAGE>
-24-
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 elsewhere in this
Statement of Additional Information.
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 percent 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 percent of the Fund's net assets, may be warrants
not listed on the New York Stock Exchange or American Stock Exchange; and (ii)
Boston 1784 Short-Term Income Fund and Boston 1784 Income Fund may each invest
in warrants in an amount not exceeding 2 percent 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 percent of that Fund's net assets (10 percent for Money Market
Funds), provided that this limitation does not apply to an investment of all of
the investable assets of Boston 1784 Prime Money Market Fund, Boston 1784
Institutional Prime Money Market Fund, Boston 1784 Florida Tax-Exempt Income
Fund, Boston 1784 Growth Fund, or Boston 1784 International Equity 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 percent
of the shares or securities of such issuer and all such officers, trustees,
partners and directors owning more than 1/2 of 1 percent of such shares or
securities together own more than 5 percent 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.
<PAGE>
-25-
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 percent 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 Boston 1784 Prime Money Market Fund, Boston 1784
Institutional Prime Money Market Fund, Boston 1784 Florida Tax-Exempt Income
Fund, Boston 1784 Growth Fund, or Boston 1784 International Equity 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.
TEMPORARY DEFENSIVE POSITION
During periods of unusual economic or market conditions or for
temporary defensive purposes or liquidity, each 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.
PORTFOLIO TURNOVER
Set forth below are the portfolio turnover rates for each of the Funds
(with the exception of the money market funds). A rate of 100% indicates that
the equivalent of all of the Fund's assets have been sold and reinvested in a
year. The amount of brokerage commissions will tend to increase as the level of
portfolio activity increases. High portfolio turnover may result in the
realization of substantial net capital gains or losses. To the extent net short
term capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes.
<PAGE>
-26-
<TABLE>
<CAPTION>
- ---------------------------------------------- ------------------------------ -----------------------------
Portfolio Turnover Rates 1997 Portfolio Turnover Rates
Fund 1998
- ---------------------------------------------- ------------------------------ -----------------------------
<S> <C> <C>
Boston 1784 Short-Term Income Fund
128.11% 83.84%
Boston 1784 Income Fund 78.63% 79.09%
Boston 1784 U.S. Government
Medium-Term Income Fund 98.22% 73.65%
Boston 1784 Tax-Exempt Medium
Term Income Fund
33.24% 34.06%
Boston 1784 Connecticut Tax
Exempt Income Fund 4.28% 16.81%
Boston 1784 Florida Tax-Exempt
Income Fund (1) 2.90% 21.35%
Boston 1784 Massachusetts Tax
Exempt Fund 9.47% 6.45%
Boston 1784 Rhode Island Tax
Exempt Income Fund 8.18% 13.79%
Boston 1784 Asset Allocation Fund 23.60% 47.83%
Boston 1784 Growth and Income
Fund 15.35% 39.03%
Boston 1784 Growth Fund 57.46% 48.60%
Boston 1784 International Equity
Fund (2) 22.88% 103.47%
- ---------------------------------------------- ------------------------------ -----------------------------
<FN>
(1) The Florida Tax-Exempt Income Fund commenced operations on June 30, 1997.
(2) The turnover rate for International Equity Fund increased significantly
during the Fund's last fiscal year due primarily to a change in approach in the
management of the emerging markets sector of the Fund's portfolio and the
collapse of certain Asian economies during the period.
</FN>
</TABLE>
3. MANAGEMENT
TRUSTEES
The management and affairs of the Trust are supervised by the Trustees
under the laws of the Commonwealth of Massachusetts. Subject to the provisions
of the Declaration of Trust, the business of the Trust shall be managed by the
Trustees, and they shall have all powers necessary or convenient to carry out
that responsibility.
<PAGE>
-27-
MANAGEMENT INFORMATION
The Trustees and executive officers of the Trust and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. An asterisk indicates a Trustee who may be
deemed to be an "interested person" (as defined in the 1940 Act) of the Trust.
<TABLE>
<CAPTION>
- ------------------------------------------- ------------------ --------------------------------------------
<S> <C> <C>
Position(s) Held
with Trust Principal Occupation(s) During Past 5 Years
Name, Address, and Age
- ------------------------------------------- ------------------ --------------------------------------------
- ------------------------------------------- ------------------ --------------------------------------------
DAVID H. CARTER Trustee Main Board Director, Touche Remnant & Co.
(date of birth March 21, 1933) (investment advisor), 1982-1988; Managing
224 Polpis Road, Nantucket, Massachusetts Director, Bearbull (UK) Ltd., London
02554 (investment advisor), 1988-January 1993.
- ------------------------------------------- ------------------ --------------------------------------------
TARRANT CUTLER Trustee Senior Executive Vice President,
(date of birth June 12, 1926) Massachusetts Financial Services Company,
5 Masconomo Street retired in 1991.
Manchester, Massachusetts 01944
- ------------------------------------------- ------------------ --------------------------------------------
KENNETH A. FROOT Trustee The Industrial Bank of Japan Professor of
(date of birth July 5, 1957) Finance and Director of Research, Harvard
Harvard University Graduate School of University Graduate School of Business,
Business, Boston, Massachusetts 02163 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 Chief Regional Economist (since 1995) and
(date of birth November 16, 1951) principal (since 1992), Director of
30 Eaton Court, Wellesley Hills, Regional Forecasting, Managing Economist
Massachusetts 02181 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.
- ------------------------------------------- ------------------ --------------------------------------------
</TABLE>
<PAGE>
-28-
<TABLE>
<CAPTION>
- ------------------------------------------- ------------------ --------------------------------------------
<S> <C> <C>
KATHRYN FLACKE MUNCIL Trustee Chief Financial Officer, Fort William
(date of birth November 30, 1958) Henry Corporation, since 1993; Treasurer,
c/o Fort William Henry Spaulding Investment Company (real estate
Corporation, 48 Canada development, investment and property
Street, Lake George, management), 1985-1993.
New York 12845
- ------------------------------------------- ------------------ --------------------------------------------
*ROBERT A. NESHER President & Mr. Nesher currently performs various
(date of birth August 17, 1946) Chief Executive services on behalf of SEI for which he is
1 Freedom Valley Drive, Oaks, Officer compensated. Director and Executive Vice
Pennsylvania 19456 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 Co-Chairman, Marketing Area and Lincoln
(date of birth December 31, 1935) Filene Professor of Business
Graduate School of Business Administration, Graduate School of
Administration, Harvard University, Business Administration, Harvard
Soldiers Field Road, Boston, University (1988-present); formerly,
Massachusetts 02163 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.
- ------------------------------------------- ------------------ --------------------------------------------
TODD CIPPERMAN Vice President & Vice President and Assistant Secretary of
(date of birth February 14, 1966) Assistant SEI, the Administrator and the Distributor
1 Freedom Valley Drive, Oaks, Secretary since 1995. Associate, Dewey Ballantine
Pennsylvania 19456 (law firm)(1994-1995). Associate, Winston
& Strawn (law firm) (1991-1994).
- ------------------------------------------- ------------------ --------------------------------------------
ROGER P. JOSEPH Secretary Partner, Bingham Dana LLP, counsel to the
(date of birth October 3, 1951) Trust, since 1983.
150 Federal Street, Boston,
Massachusetts 02110
- ------------------------------------------- ------------------ --------------------------------------------
STEPHEN G. MEYER Controller Vice President and Controller, Chief
(date of birth July 12, 1965) Accounting Officer of SEI since 1992 (date
1 Freedom Valley Drive, Oaks, of birth July 12, 1965). Senior
Pennsylvania 19456 Associate, Coopers & Lybrand L.L.P. from
1990 to 1992. Internal Audit, Vanguard
Group of Investments prior to 1990.
- ------------------------------------------- ------------------ --------------------------------------------
</TABLE>
<PAGE>
-29-
<TABLE>
<CAPTION>
- ------------------------------------------- ------------------ --------------------------------------------
<S> <C> <C>
JOSEPH O'DONNELL Vice President & Vice President of the Administrator and
(date of birth November 13, 1954) Assistant the Distributor since 1998. Vice
1 Freedom Valley Drive, Oaks, Secretary President and General Counsel of FPS
Pennsylvania 19456 Services Inc. from 1995-1998. Secretary,
Staff Counsel and Compliance
Administrator, ProvidentMutual Family of
Funds, 1989-1993.
- ------------------------------------------- ------------------ --------------------------------------------
SANDRA K. ORLOW Vice President & Vice President and Assistant Secretary of
(date of birth October 18, 1953) Assistant the Administrator and Distributor since
1 Freedom Valley Drive, Oaks, Secretary 1983.
Pennsylvania 19456
- ------------------------------------------- ------------------ --------------------------------------------
KEVIN P. ROBINS Vice President & Senior Vice President of SEI, the
(date of birth April 15, 1961) Assistant Administrator and the Distributor, since
1 Freedom Valley Drive, Oaks, Secretary 1994. Vice President of SEI, the
Pennsylvania 19456 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 & Vice President and Assistant Secretary of
(date of birth November 18, 1958) Assistant SEI, the Administrator and the
1 Freedom Valley Drive, Oaks, Secretary Distributor, since 1994. Associate,
Pennsylvania 19456 Morgan, Lewis & Bockius (law firm)
1989-1994.
- ------------------------------------------- ------------------ --------------------------------------------
</TABLE>
COMPENSATION
The following table sets forth certain information regarding the
compensation of the Trust's Trustees for the fiscal year ended May 31, 1998.
<TABLE>
<CAPTION>
- -------------------------- -------------------- ---------------------- --------------------- ---------------------
Aggregate Pension or Total Compensation
Compensation from Retirement Benefits Estimated Annual from the Trust and
Name of Trustee the Trust Accrued as Part of Benefits Upon the Funds Paid to
Fund Expenses Retirement 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 29,000 0 0 29,000
Kathryn F. Muncil 29,000 0 0 29,000
Robert A. Nesher 0 0 0 0
Alvin J. Silk 29,000 0 0 29,000
</TABLE>
The Officers of the Trust receive no compensation from the Trust for
serving in such capacity. Compensation of officers and Trustees of the Trust who
are employed by the Administrator is paid by the Administrator.
<PAGE>
-30-
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers as described below under "Trustee and Shareholder
Liability--Limitation of Trustees' Liability".
4. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
PRINCIPAL HOLDERS
As of July 31, 1998, all Trustees and officers of the Trust as a group
owned less than 1 percent of each Fund's outstanding shares. The Trust pays the
fees for unaffiliated Trustees.
As of August 7, 1998, Back Bay Partners V LP, One Financial Center 44th
Floor, Boston, MA 02111-2621, owned of record 6.96% of the outstanding shares of
Boston 1784 Institutional Prime Money Market Fund.
As of August 7, 1998, Interep National Radio Sales, Inc. 2090 Palm
Beach Lake Blvd., West Palm Beach, FL 33409, owned of record 7.36% of the
outstanding shares of Boston 1784 Institutional Prime Money Market Fund.
As of August 7, 1998, Corelink Financial Inc., 1855 Gateway Blvd. Suite
750, Concord, CA 94520-3290, owned of record 5.63% of the outstanding shares of
Boston 1784 Growth Fund.
As of August 7, 1998, National Financial Services Corp., P.O. Box 3908
Church Street Station, New York, NY 10008-3908, owned of record the following
percentages of the outstanding shares of the following Funds:
Boston 1784 Tax-Free Money Market Fund - 5.50%
Boston 1784 U.S. Treasury Money Market Fund - 19.68%
Boston 1784 Prime Money Market Fund - 14.29%
Boston 1784 Short-Term Income Fund - 5.99%
Boston 1784 Massachusetts Tax-Exempt Income Fund -- 15.53%
Boston 1784 Rhode Island Tax-Exempt Income Fund - 9.51%
Boston 1784 Asset Allocation Fund - 29.03%
Boston 1784 Growth and Income Fund -- 10.78%
Boston 1784 Connecticut Tax-Exempt Income Fund - 8.57%
As of August 7, 1998, 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 -- 83.80%
Boston 1784 Prime Money Market Fund - 16.29%
Boston 1784 Institutional U.S. Treasury Money Market Fund - 60.27%
Boston 1784 Institutional Prime Money Market Fund - 24.59%
Boston 1784 Tax-Exempt Medium-Term Income Fund - 94.11%
Boston 1784 Massachusetts Tax-Exempt Income Fund - 67.58%
Boston 1784 Rhode Island Tax-Exempt Income Fund - 79.64%
Boston 1784 Connecticut Tax-Exempt Income Fund - 79.04%
Boston 1784 Florida Tax-Exempt Income Fund -- 96.36%
Boston 1784 U.S. Government Medium-Term Income Fund - 89.25%
<PAGE>
-31-
Boston 1784 Short-Term Income Fund -- 73.85%
Boston 1784 Income Fund -- 86.56%
Boston 1784 Asset Allocation Fund -- 37.55%
Boston 1784 Growth and Income Fund -- 71.76%
Boston 1784 Growth Fund -- 72.52%
Boston 1784 International Equity Fund -- 90.2%
5. INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISERS
The Trust has entered into separate advisory agreements (each, an
"Advisory Agreement") with BankBoston, a wholly-owned subsidiary of BankBoston
Corporation, and, for Boston 1784 International Equity Fund, with Kleinwort
Benson Investment Management Americas Inc. ("Kleinwort Benson"), the
U.S.-registered investment management subsidiary of the London-based Kleinwort
Benson Group plc, a merchant banking group, which in turn is a subsidiary of
Dresdner Bank A.G.
The Advisory Agreement with BankBoston for the Funds other than Boston
1784 International Equity Fund is dated as of June 1, 1993 and the Advisory
Agreement with BankBoston for Boston 1784 International Equity Fund is dated as
of November 28, 1994. The Advisory Agreement with Kleinwort Benson for 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."
BankBoston is entitled to receive investment advisory fees, which are
accrued daily and payable monthly, of .40% of each Money Market Fund's average
daily net assets (.20% for the Institutional U.S. Treasury Money Market Fund and
the Institutional Prime Money Market Fund), .74% of each Bond and Each
Tax-Exempt Fund's average daily net assets (.50% for the Short-Term Income Fund)
and .74% of each Stock Fund's average daily net assets (other than the
International Equity Fund).
For the International Equity Fund, BankBoston and Kleinwort Benson each
are entitled to receive an investment advisory fee of .50% of the Fund's average
net assets, for a total of 1.00% of the Fund's average daily net assets. This
fee is higher than the fee paid by most investment companies in general.
BankBoston has agreed to waive its investment advisory fees to the
extent necessary to limit the total operating expenses of each Fund to a
specified level. BankBoston also may contribute to the Funds from time to time
to help them maintain competitive expense ratios. These arrangements are
voluntary and may be terminated at any time.
For the fiscal years ended May 31, 1996, 1997 and 1998, the Trust paid
the following fees (after fee waivers) on behalf of the Funds:
<PAGE>
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<TABLE>
<CAPTION>
- --------------------------------------------- ---------------------- --------------------- ---------------------
BankBoston BankBoston BankBoston
Investment Investment Investment
Fund Advisory Fees Advisory Fees Advisory Fees
1996 1997 1998
(thousands) (thousands) (thousands)
- --------------------------------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Boston 1784 Tax-Free Money Market Fund $1,996 $2,663 $3,896
Boston 1784 U.S. Treasury Money Market
Fund 276 879 1,485
Boston 1784 Institutional U.S. Treasury
Money Market Fund 651 3,052 6,468
Boston 1784 Institutional Prime Money
Market Fund N/A (1) 227 N/A (1)
Boston 1784 Prime Money Market Fund 7 (2) 142 (3) 488
Boston 1784 Short-Term Income Fund 348 708 960
Boston 1784 Income Fund 1,257 1,829 2,721
Boston 1784 U.S. Government Medium
Term Income Fund 906 1,199 1,730
Boston 1784 Tax-Exempt Medium-Term
Income Fund 1,116 1,387 2,075
Boston 1784 Connecticut Tax-Exempt
Income Fund 418 573 869
Boston 1784 Florida Tax-Exempt Income
Fund N/A (1) N/A (1) 327
Boston 1784 Massachusetts Tax-Exempt
Fund 548 768 1,316
Boston 1784 Rhode Island Tax-Exempt
Income Fund 208 280 478
Boston 1784 Asset Allocation Fund 90 177 318
Boston 1784 Growth and Income Fund 1,997 2,650 3,785
Boston 1784 Growth Fund 0 1,050 2,110
Boston 1784 International Equity Fund 636 2,111 2,404
- --------------------------------------------- ---------------------- --------------------- ---------------------
Total $10,454 $19,468 31,657
- --------------------------------------------- ---------------------- --------------------- ---------------------
<FN>
(1) The Boston 1784 Institutional Prime Money Market Fund and Boston 1784
Florida Tax-Exempt Income Fund are newly organized and had no operations during
the periods indicated.
(2) The Prime Money Market Fund is the successor through a reorganization with
the BayFunds Money Market Portfolio. The BayFunds Money Market Portfolio was a
portfolio of BayFunds, an open-end investment company registered under the 1940
Act and reorganized with the Prime Money Market Fund on December 9, 1996. Prior
to the reorganization, BayBank, N.A. was the investment adviser of the BayFunds
Money Market Portfolio. For its fiscal year ended December 31, 1996, the Fund
paid investment advisory fees of $837,000 (of which $6,700 was paid to
BankBoston following the reorganization with the BayFunds Money Market
Portfolio).
(3) The Prime Money Market Fund changed its fiscal year from December 31 to May
31. The investment advisory fee of $142,000 reflects payments made by the Fund
for the period from January 1, 1997 to May 31, 1997.
The foregoing table does not reflect contributions to the Funds made by
BankBoston in order to assist the Funds in maintaining competitive expense
ratios.
</FN>
</TABLE>
For the fiscal year ended May 31, 1996, the Trust paid $1,222,419 to
Kleinwort Benson under the Advisory Agreement to which Kleinwort Benson is a
party, with respect to Boston 1784 International Equity Fund. For the fiscal
years ended May 31,
<PAGE>
-33-
1997 and 1998, respectively, the Trust paid $2,111,000 and $2,404,000 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 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.
SERVICEMARKS
The servicemark BOSTON 1784 FUNDS[SERVICE MARK] 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.
DISTRIBUTOR
SEI Investments Distribution Co. (formerly known as 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
Distributor has its principal business offices at 1 Freedom Valley Drive, Oaks,
Pennsylvania 19456.
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 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
Boston 1784 Tax-Free Money Market Fund, Boston 1784 Prime Money Market Fund,
Boston 1784 Institutional Prime Money Market Fund or Boston 1784 Institutional
U.S. Treasury Money Market Fund, or for the distribution of Class A Shares of
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 Boston 1784 U.S. Treasury Money Market Fund; and (iii)
0.75% of the average daily net assets of the Class D shares of Boston 1784 U.S.
Treasury Money Market Fund.
<PAGE>
-34-
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, 1998. 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.
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 funds. 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 predicated upon the
amount of shares of the Funds sold by the participant.
ADMINISTRATOR
The Trust and SEI Investments Mutual Funds Services (formerly known as
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 continues until November 22, 1998 and indefinitely
thereafter unless terminated.
<PAGE>
-35-
Under the Agreement, the Administrator provides administrative and fund
accounting services to the Funds, including regulatory reporting, office
facilities, and equipment and personnel. The Administrator receives a fee for
these services, which is calculated daily and paid monthly, at an annual rate of
.085% of the first $5 billion of the Funds' combined average daily net assets
and .045% of combined average daily net assets in excess of $5 billion. SEI has
agreed to waive portions of its fee from time to time. The Administrator may
retain sub-administrators, including BankBoston, whose fees would be paid by the
Administrator.
For the fiscal year ended May 31, 1996, the Trust paid $2,440,000 to
the Administrator under the Administration Agreement. For the fiscal years ended
May 31, 1997 and 1998, respectively, the Trust paid $3,912,000 and $5,426,000 to
the Administrator under the existing Administration Agreement.
SEI Investments Mutual Funds Services (formerly known as SEI Fund
Resources) is a Delaware business trust whose sole beneficiary is SEI
Investments Management Corporation (formerly known as SEI Financial Management
Corporation). SEI Investments 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 Drive, 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 mutual funds:
SEI Daily Income Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, SEI Index
Funds, SEI Institutional International Trust, SEI Institutional Managed Trust,
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., PBHG Insurance Series Fund, Inc., PBHG Advisor Funds, Inc.,
The Achievement Funds Trust, Bishop Street Funds, CrestFunds, Inc., STI Classic
Variable Trust, Monitor Funds, TIP Funds, TIP Institutional Funds, ARK Funds,
SEI Asset Allocation Trust, SEI Institutional Investments Trust, First American
Strategy Funds, Inc., HighMark Funds, Expedition Funds, Oak Associates Funds,
The Nevis Funds, Inc. and the Armada Funds.
DIVIDEND DISBURSING AGENT AND TRANSFER AGENT
Boston Financial Data Services, 2 Heritage Drive, North Quincy,
Massachusetts 02171 is the Funds' dividend disbursing agent. State Street Bank
and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, is the
transfer agent.
CUSTODIAN
Pursuant to a Custodian Agreement, BankBoston, 150 Federal Street,
Boston, Massachusetts 02110, acts as custodian of the Funds assets (the
"Custodian"). The Board of Trustees have approved an assignment of the Custodian
Agreement to Investors Bank & Trust Company, Hancock Towers, 200 Clarendon
Street, 16th Floor,
<PAGE>
-36-
Boston, Massachusetts 02116, which is expected to take effect on or about
September 30, 1998. The Custodian's responsibilities include holding and
administering the Funds' cash and securities, handling the receipt and delivery
of securities, furnishing a statement of all transactions and entries for the
account of each Fund, and furnishing the Funds with such other reports covering
securities held by it or under its control as may be agreed upon from time to
time. The Custodian and its agents (including foreign sub-custodians) may make
arrangements with Depository Trust Company and other foreign or domestic
depositories or clearing agencies, including the Federal Reserve Bank and any
foreign depository or clearing agency, whereby certain securities may be
deposited for the purpose of allowing transactions to be made by bookkeeping
entry without physical delivery of such securities, subject to such restrictions
as may be agreed upon by the Custodian and the Funds. Fund securities may be
held by a sub-custodian bank approved by the Trustees. The Custodian does not
determine the investment policies of the Funds or decide which securities the
Funds will buy or sell. For its services, the Custodian will receive such
compensation as may from time to time be agreed upon by it and the Trust.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Bingham Dana LLP, 150 Federal Street, Boston Massachusetts 02110, is
counsel for each Fund. PricewaterhouseCoopers LLP, 2400 Eleven Penn Center,
Philadelphia, Pennsylvania 19103, serves as independent auditor for each Fund
providing audit and accounting services including: (i) examination of the annual
financial statements, (ii) assistance and consultation with respect to the
preparation of filings with the Securities and Exchange Commission, and (iii)
preparation of annual income tax returns.
6. BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE TRANSACTIONS
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 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.
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
<PAGE>
-37-
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.
For the fiscal years ended May 31, 1996, 1997 and 1998, the Trust paid
the following aggregate amount of brokerage commissions on behalf of the Funds:
<TABLE>
<CAPTION>
- --------------------------------------------- -------------------- ------------------- --------------------
Brokerage Brokerage Brokerage
Fund Commissions 1996 Commissions 1997 Commissions 1998
- --------------------------------------------- -------------------- ------------------- --------------------
- --------------------------------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C>
Boston 1784 Asset Allocation Fund $ 12,818.55 $ 17,370.50 $ 17,061.84
- --------------------------------------------- -------------------- ------------------- --------------------
Boston 1784 Growth and Income Fund 165,071.38 152,899.49 344,969.84
- --------------------------------------------- -------------------- ------------------- --------------------
Boston 1784 Growth Fund 12,951.00 163,410.76 227,975.43
- --------------------------------------------- -------------------- ------------------- --------------------
Boston 1784 International Equity Fund 659,011.71 823,922.21 1,969,530.48
- --------------------------------------------- -------------------- ------------------- --------------------
Total $849,852.64 $1,157,602.96 $ 2,559,537.59
- --------------------------------------------- -------------------- ------------------- --------------------
</TABLE>
BROKERAGE SELECTION
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
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.
<PAGE>
-38-
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
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
<PAGE>
-39-
reasonableness of commissions paid to the Distributor and will review these
procedures periodically.
7. DESCRIPTION OF SHARES; VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trust to offer separate
portfolios, or funds, of shares of beneficial interest (with no par value). 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, with each other share of that class. 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 right or other right to receive, purchase or
subscribe for any additional shares or other securities issued by the Trust.
Currently, the Trust has seventeen active series of shares, each of which is a
Fund. Boston 1784 U.S. Treasury Money Market Fund offers three classes of
shares: Class A, Class C and Class D. Class A shares are described in a
prospectus. Class C and D shares have been authorized but are not currently
being offered. 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.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust may maintain
appropriate insurance (e.g., fidelity bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents covering possible tort and other liabilities.
Thus, 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.
The Declaration of Trust provides that the Trustees shall not be
responsible or liable in any event for any neglect or wrongdoing of any officer,
agent, employee, investment adviser or administrator, principal underwriter or
custodian, nor shall any Trustee be responsible for the act or omission of any
other Trustee, and no Trustee shall be liable to the Trust or any Shareholder.
The Declaration of Trust also provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with actual or threatened litigation in which they may be
<PAGE>
-40-
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.
8. PURCHASE, REDEMPTION AND PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund (including shares of
each class of 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 Boston
1784 Prime Money Market Fund and Boston 1784 Tax-Free Money Market Fund, as of
3:00 p.m. ET with respect to the Boston 1784 U.S. Treasury Money Market Fund,
Boston 1784 Institutional U.S. Treasury Money Market Fund and Boston 1784
Institutional Prime 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 Fund
is normally closed on the following national holidays: New Year's Day, Martin
Luther King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veteran's 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 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.
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
<PAGE>
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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 services may
employ methodologies that utilize actual market transactions, broker-dealer
supplied valuations or other electronic data processing techniques. Equity
securities listed on a domestic securities exchange for which quotations are
readily available, including securities traded over the counter, are valued, by
a pricing service, at the last quoted sale price on the principal exchange on
which they are traded on the valuation date, or, if there is no such reported
sale on the valuation date, at the most recent quoted bid price. Equity
securities which are primarily traded on a foreign exchange are generally
valued, by a pricing service, at the preceding closing value on the exchange.
Securities for which market quotations are not readily available are 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.
PURCHASE AND REDEMPTION OF 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. Shares are purchased at net asset value the next
time it is calculated after your investment is received and accepted by the
Distributor.
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 Funds may delay the mailing of your redemption
check for up to 10 business 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.
<PAGE>
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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 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.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder (other than a shareholder of Boston 1784 Institutional
U.S. Treasury Money Market Fund or Boston 1784 Institutional Prime Money Market
Fund and holders of Class C or Class D shares of 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 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.
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REDEMPTION IN KIND
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, subject to the Rule
18f-1 notice described below, 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 filed a Notification of Election pursuant to Rule 18f-1 under
the Investment Company Act of 1940 with the Securities and Exchange Commission
which commits the Boston 1784 Massachusetts Tax-Exempt Income Fund, Boston 1784
Connecticut Tax-Exempt Income Fund, Boston 1784 Rhode Island Tax-Exempt Income
Fund and Boston 1784 Tax-Exempt Medium-Term Income Fund to pay in cash all
requests for redemptions by any shareholder of record, limited in amount with
respect to each shareholder during any 90-day period to the lesser of: (i)
$250,000, or (ii) one percent of the net asset value of the Fund at the
beginning of such period.
9. TAXES
TAX STATUS OF THE FUNDS
Each of the Funds is organized as a series of a Massachusetts business
trust and 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 and the
Tax-Free Money Market Funds, its tax-exempt income), and the composition 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.
No Fund will be subject to any Massachusetts income or excise taxes as
long as it qualifies as a separate regulated investment company under the Code.
TAXATION OF FUND DISTRIBUTIONS
DISTRIBUTIONS -- GENERAL. Shareholders of Funds other than the
Tax-Exempt Funds and the Tax-Free Money Market Fund 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>
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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 for federal
income tax purposes without regard to the length of time the shareholders have
held their shares. Such capital gains will generally be taxable to shareholders
as if the shareholders had directly realized gains from the same sources from
which they were realized by the Fund. 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 distributions 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 corporate
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.
Distributions of net capital gains and net short-term capital gains
from any Bond Fund or Tax-Exempt Fund, and any distributions from a Stock Fund,
will reduce the distributing Fund's net asset value per share. Shareholders who
buy shares just before the record date for any such distribution may pay the
full price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
Distributions of a Fund that are derived from interest on obligations
of the U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. 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, INCLUDING THE TAX-FREE MONEY
MARKET FUND. The portion of each Tax-Exempt Fund's and the Tax-Free Money Market
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
<PAGE>
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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 and the Tax-Free Money Market Fund
will have to pay federal income taxes and may be subject to state or local
income taxes on the non exempt-interest dividends (including dividends from
earnings from taxable securities and repurchase transactions) and capital gain
distributions they receive from the Funds 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; a
long-term capital gain realized by an individual, estate, or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
In the case of the Tax-Exempt Funds and the Tax-Free Money Market Fund, 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 (or of the Tax-Free Money Market Fund) will not be
deductible for federal income tax purposes. Exempt-interest dividends are taken
into account in calculating the amount of social security and railroad
retirement benefits that may be subject to federal income tax. Entities or
persons who are "substantial users" (or persons related to "substantial users")
of facilities financed by private activity bonds should consult their tax
advisers before purchasing shares of a Tax-Exempt Fund or the Tax-Free Money
Market 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.
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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, forward contracts,
short sales "against the box," swaps and related transactions 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% 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, 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
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 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 the 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. Any Fund making such an
investment also may elect to mark to market its investments in "passive
<PAGE>
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foreign investment companies" on the last day of each taxable year, which may
cause the Fund to recognize ordinary income prior to the receipt of cash
payments with respect to those investments. In order to distribute that income
and avoid a tax on the Fund, such a Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold.
FOREIGN SHAREHOLDERS
Taxable dividends and certain other payments to persons who are not
citizens or residents of the United States or U.S. entities ("Non-U.S. Persons")
are generally subject to U.S. tax withholding at a rate of 30%, although the 30%
rate may be reduced to the extent provided by an applicable tax treaty. The
Funds intend to withhold tax payments at the rate of 30% (or the lower treaty
rate) on taxable dividends and other payments to Non-U.S. Persons that are
subject to such withholding. Any amounts overwithheld may be recovered by such
persons by filing a claim for refund with the U.S. Internal Revenue Service
within the time period appropriate to such claims. Distributions received from
the Funds by Non-U.S. Persons also may be subject to tax under the laws of their
own jurisdictions.
BACKUP WITHHOLDING
Each of the Funds is required in certain circumstances to apply backup
withholding at the rate of 31% on taxable dividends and (except in the case of
the Money Market Funds) redemption proceeds paid to any shareholder (including a
Non-U.S. Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however be applied to payments that have been subject to
30% withholding.
10. 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).
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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.
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 average daily number of shares outstanding during the period
that were 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 the Tax-Free
Money Market Fund and each of the Tax-Exempt Funds. The tax-equivalent yield is
determined by calculating 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. The tax-equivalent yield
quotation of a Fund will
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be calculated by dividing that portion of the Fund's yield that is tax-exempt by
1 minus a stated income tax rate and adding the quotient to that portion, if
any, of the Fund's yield that is not tax-exempt. The tax-equivalent effective
yield is determined by dividing that portion of the Fund's effective yield that
is tax-exempt by 1 minus a stated income tax rate and adding the quotient to
that portion, if any, of the Fund's effective yield that is not tax-exempt.
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.
Total returns calculated for the Florida Tax-Exempt Income Fund for any
period which includes periods prior to the commencement of the Fund's operations
reflect the performance of a common trust fund managed by BankBoston that
contributed all of its assets to the Fund at the Fund's commencement of
operations. The performance of the common trust fund was calculated in
accordance with recommended standards of the Association for Investment
Management and Research. The common trust fund had investment objectives,
policies and practices materially equivalent to those of the Florida Tax-Exempt
Income Fund. All total return percentages for periods prior to the commencement
of operations of the Florida Tax-Exempt Income Fund reflect historical rates of
return of the common trust fund for those periods adjusted to assume that all
current Fund charges, expenses and fees were then deducted. The common trust
fund was neither registered under the 1940 Act (and therefore was not subject to
certain investment restrictions imposed by the 1940 Act) nor subject to the
requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, as to the nature of gross income, the amount of distributions and the
composition and holding period of portfolio assets. If the common trust fund had
been registered under the 1940 Act, its investment performance might have been
adversely affected. The prior performance of the common trust fund represents
historical performance for similarly managed accounts and is not indicative of
the corresponding Fund's future performance.
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.
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<TABLE>
<CAPTION>
REDEEMABLE VALUE OF A
HYPOTHETICAL $1,000
ANNUALIZED TOTAL INVESTMENT AT THE
FUND AND PERIOD RATE OF RETURN END OF THE PERIOD
--------------- ---------------- ---------------------
<S> <C> <C>
BOSTON 1784 TAX-EXEMPT MEDIUM-TERM
INCOME FUND
June 14, 1993 (commencement of 6.57% $1,371.53
operations) to May 31, 1998
One year ended May 31, 1998 9.24% $1,092.42
BOSTON 1784 CONNECTICUT TAX-EXEMPT
INCOME FUND
August 1, 1994 (commencement of
operations) to May 31, 1998 7.34% $1,311.50
One year ended May 31, 1998 9.29% $1,092.87
BOSTON 1784 FLORIDA TAX-EXEMPT INCOME
FUND (1)
January 1, 1991 (date of initial public
investment in the common trust fund) to
May 31, 1998 6.92% $1,642.67
Five years ended May 31, 1998 5.57% $1,311.37
Three years ended May 31, 1998 6.31% $1,201.36
One year ended May 31, 1998 8.52% $1,085.17
BOSTON 1784 MASSACHUSETTS TAX-EXEMPT
INCOME FUND
June 14, 1993 (commencement of
operations) to May 31, 1998 5.78% $1,321.79
One year ended May 31, 1998 8.91% $1,089.15
BOSTON 1784 RHODE ISLAND TAX-EXEMPT
INCOME FUND
August 1, 1994 (commencement of
operations) to May 31, 1998 6.93% $1,292.57
One year ended May 31, 1998 8.28% $1,082.83
</TABLE>
<PAGE>
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<TABLE>
<CAPTION>
<S> <C> <C>
BOSTON 1784 U.S. GOVERNMENT MEDIUM-TERM
INCOME FUND
June 7, 1993 (commencement of 5.43% $1,301.59
operations) to May 31, 1998
One year ended May 31, 1998 8.56% $1,085.58
BOSTON 1784 SHORT-TERM INCOME FUND
July 1, 1994 (commencement of
operations) to May 31, 1998 6.37% $1,273.73
One year ended May 31, 1998
6.98% $1,069.84
BOSTON 1784 INCOME FUND
July 1, 1994 (commencement of 7.72% $1,338.08
operations) to May 31, 1998
One year ended May 31, 1998 8.88% $1,088.76
BOSTON 1784 ASSET ALLOCATION FUND
June 14, 1993 (commencement of
operations) to May 31, 1998 13.45% $1,870.67
One year ended May 31, 1998
20.51% $1,205.08
BOSTON 1784 GROWTH AND INCOME FUND
June 7, 1993 (commencement of
operations) to May 31, 1998 18.90% $2,368.49
One year ended May 31, 1998
26.71% $1,267.07
BOSTON 1784 GROWTH FUND
March 28, 1996 (commencement of
operations) to May 31, 1998 15.99% $1,380.81
One year ended May 31, 1998
12.64% $1,126.38
</TABLE>
<PAGE>
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<TABLE>
<CAPTION>
BOSTON 1784 INTERNATIONAL EQUITY FUND
<S> <C> <C>
January 3, 1995 (commencement of
operations) to May 31, 1998 11.75% $1,460.23
One year ended May 31, 1998
6.19% $1,061.94
</TABLE>
(1) Without giving effect to fee waivers and reimbursements currently in effect
the annualized total rate of return for Boston 1784 Florida Tax-Exempt Income
Fund for the one, three and five year periods ended May 31, 1998 and for the
period from January 1, 1991 (date of initial public investment in common trust
fund) to May 31, 1998, would have been 8.52%, 6.31%, 5.57% and 6.92%,
respectively.
The annualized yield of each of the Tax-Exempt, Bond and Stock Funds
for the 30-day period ended on May 31, 1998 was as follows: Boston 1784
Short-Term Income Fund 5.44%; Boston 1784 Income Fund 5.56%; Boston 1784 U.S.
Government Medium-Term Income Fund 5.41%; Boston 1784 Tax-Exempt Medium-Term
Income Fund 4.30%; Boston 1784 Connecticut Tax-Exempt Income Fund 4.16%; Boston
1784 Massachusetts Tax-Exempt Income Fund 4.19%; Boston 1784 Rhode Island
Tax-Exempt Income Fund 4.23%; Boston 1784 Asset Allocation Fund 2.38%; Boston
1784 Growth and Income Fund 0.17%; and Boston 1784 Growth Fund -0.38%.
The annualized tax-equivalent yield of each of the Tax-Exempt Funds for
the 30-day period ended on May 31, 1998 was as follows: Boston 1784 Tax-Exempt
Medium-Term Income Fund 7.12%; Boston 1784 Connecticut Tax-Exempt Income Fund
7.21%, Boston 1784 Massachusetts Tax-Exempt Income Fund 7.88%; and Boston 1784
Rhode Island Tax-Exempt Income Fund 7.86%.
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.
<TABLE>
<CAPTION>
REDEEMABLE VALUE OF A
HYPOTHETICAL $1,000
ANNUALIZED TOTAL INVESTMENT AT THE
FUND AND PERIOD RATE OF RETURN END OF THE PERIOD
--------------- ---------------- ---------------------
<S> <C> <C>
BOSTON 1784 TAX-FREE MONEY MARKET FUND
June 14, 1993 (commencement of
operations) to May 31, 1998 3.16% $1,167.19
One year ended May 31, 1998
3.33% $1,033.35
</TABLE>
<PAGE>
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<TABLE>
<CAPTION>
<S> <C> <C>
BOSTON 1784 U.S. TREASURY MONEY
MARKET FUND
June 7, 1993 (commencement of 4.51% $1,245.77
operations) to May 31, 1998
One year ended May 31, 1998 5.02% $1,050.23
BOSTON 1784 INSTITUTIONAL U.S.
TREASURY MONEY MARKET FUND
June 30, 1993 (commencement of
operations) to May 31, 1998 4.84% $1,264.14
One year ended May 31, 1998
5.36% $1,053.63
BOSTON 1784 PRIME MONEY MARKET FUND
(1)
August 1, 1991 (date of initial
public investment) to May 31, 1998
4.40% $1,351.33
Five years ended May 31, 1998
Three years ended May 31, 1998 4.62% $1,253.15
One year ended May 31, 1998
5.16% $1,163.02
5.16% $1,051.65
BOSTON 1784 INSTITUTIONAL PRIME MONEY
MARKET FUND
November 5, 1997 (date of initial
public investment) to May 31, 1998
5.55% $1,031.08
<FN>
(1) The Prime Money Market Fund is the successor through a reorganization with
the BayFunds Money Market Portfolio. The BayFunds Money Market Portfolio was a
portfolio of BayFunds, an open-end investment company registered under the 1940
Act and reorganized with the Prime Money Market Fund on December 9, 1996.
</FN>
</TABLE>
The annualized yield and tax-equivalent yield of Boston 1784 Tax-Free
Money Market Fund for the seven-day period ended May 31, 1998 were 3.36% and
5.56%, respectively, and the effective compound annualized yield and
tax-equivalent effective
<PAGE>
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yield of Boston 1784 Tax-Free Money Market Fund for such period were 3.41% and
5.65%, respectively.
The annualized yield of Boston 1784 U.S. Treasury Money Market Fund for
the seven-day period ended May 31, 1998 was 4.92% and the effective compound
annualized yield of Boston 1784 U.S. Treasury Money Market Fund for such period
was 5.04%.
The annualized yield of Boston 1784 Institutional U.S. Treasury Money
Market Fund for the seven-day period ended May 31, 1998 was 5.24% and the
effective compound annualized yield of Boston 1784 Institutional U.S.
Treasury Money Market Fund for such period was 5.37%.
The annualized yield of Boston 1784 Prime Money Market Fund for the
seven-day period ended May 31, 1998 was 5.03% and the effective compound
annualized yield of Boston 1784 Prime Money Market Fund for such period was
5.16%.
The annualized yield of Boston 1784 Institutional Prime Money Market
Fund for the seven-day period ended May 31, 1998 was 5.35% and the effective
compound annualized yield of Boston 1784 Institutional Prime Money Market Fund
for such period was 5.49%.
A Fund's performance may from time to time be compared to that of other
mutual funds tracked by mutual fund rating services, broad groups of comparable
mutual funds or unmanaged indices, which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs. In
reports and other communications to shareholders or in advertising and sales
literature, the Funds may also present statistics on current and historical
rates of Money Market Deposits Accounts and Statement Savings prepared by
outside services such as Bank Rate Monitor, Inc. The Funds may also show the
historical performance of other investment vehicles or groups of other mutual
funds, and compare this performance to the historical performance of the Funds,
and may compare tax equivalent yields to taxable yields. Any given "performance"
or performance comparison should not be considered as representative of any
performance in the future. In addition, there may be differences between the
Funds and the various indexes and reporting services which may be quoted by the
Funds.
11. FINANCIAL STATEMENTS
FOR THE PRIME MONEY MARKET FUND
The Statement of Net Assets at May 31, 1998, the Statements of
Operations for the period ended May 31, 1998, the Statements of Changes in Net
Assets for the periods ended May 31, 1997 and May 31, 1998, the Financial
Highlights for the periods ended December 31, 1996, May 31, 1997 and May 31,
1998, the Notes to the Financial Statements and the Report of Independent
Accountants, each of which is included in the Annual Reports to Shareholders of
the Trust (Accession Numbers 0000935069-98-000115 and 0000935069-98-000114), are
incorporated by reference into this Statement of Additional Information and have
been so incorporated in reliance upon the report of PricewaterhouseCoopers LLP,
independent accountants, as experts in accounting and auditing. The Financial
Highlights for the periods
<PAGE>
-55-
ended December 31, 1993, December 31, 1994 and December 31, 1995 are included in
the Annual Reports to Shareholders of the Trust and are incorporated by
reference into this Statement of Additional Information and havebeen so
incorporated in reliance upon the report of Ernst & Young, LLP, independent
auditors, given upon the authority of said firm 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 May 31, 1998, the Statements of
Operations for the period ended May 31, 1998, the Statements of Changes in Net
Assets for the periods ended May 31, 1997 and May 31, 1998, the Financial
Highlights for the periods ended May 31, 1995, May 31, 1996, May 31, 1997 and
May 31, 1998, the Notes to the Financial Statements and the Report of
Independent Accountants, each of which is included in the Annual Reports to
Shareholders of the Trust (Accession Numbers 0000935069-98-000115 and
0000935069-98-000114), are incorporated by reference into this Statement of
Additional Information. The Annual Report has been so incorporated in reliance
upon the report of PricewaterhouseCoopers LLP, independent accountants, as
experts in accounting and auditing. A copy of the Annual Report accompanies this
Statement of Additional Information.
<PAGE>
-56-
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
Preliminary Official Statement of Connecticut dated December 1, 1997, as
modified January 14, 1998. 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
recovered most of its losses from its peak in the late 1980s. Manufacturing is
diversified, with transportation equipment (primarily aircraft engines,
helicopters, and submarines) the dominant industry. Connecticut is a leading
producer of aircraft engines and parts, submarines, and helicopters. The largest
employers in these industries are United Technologies Corporation, including its
Pratt and Whitney Aircraft Division, with headquarters in East Hartford, and
Sikorsky Aircraft Division in Stratford, as well as General Dynamics
Corporation's Electric Boat Division in Groton.
During the past ten years, Connecticut's manufacturing employment was
at its highest in 1987 at over 384,000 workers. Since that year, employment in
manufacturing has been on a downward trend, declining 28.3 percent or a loss of
108,760 jobs by 1996 from 1987 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 declined 1.3 percent or 3,660
jobs from 1995 to 1996.
Over the past several decades the non-manufacturing sector of the
State's economy has risen in economic importance, from just over 50 percent of
total State employment in 1950 to approximately 83 percent by 1996. This trend
has decreased the State's dependence on manufacturing. The State's
non-manufacturing sector expanded by 2.0 percent in 1996 as compared to 1.9
percent in 1995, 1.7 percent in 1994, and 1.4 percent in 1993, 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,
<PAGE>
-57-
insurance and real estate; business and personal services; and government, which
collectively comprise about 90 percent 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 slowdown 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 percent in
1988 to just above the national average of 7.5 percent during 1992.
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-basis 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. In fiscal year
1996-97 an appropriation was made to pay when due the remaining debt service due
on the Economic Recovery Notes. The final payment is due in fiscal year 1998-99.
GENERAL FUND BUDGETS 1997-98, AND 1998-99
Pursuant to Section 4-71 of the General Statutes, the Governor
submitted his proposed budget to the legislature on February 13, 1997. In
accordance with Section 4-71, the budget document included a proposed General
Fund budget for fiscal year 1997-98 and fiscal year 1998-99. Special Act 97-21,
adopted by the legislature June 3, 1997 and signed by the Governor June 6, 1997,
as amended, made General Fund appropriations and set forth estimated revenues
for each of the 1997-98 and 1998-99 fiscal years, and constitutes the adopted
budget.
The adopted budget for fiscal 1997-98 anticipates General Fund revenues
of $9,342.4 million and General Fund expenditures of $9,342.2 million. For
fiscal 1998-99, the adopted budget anticipates General Fund Revenues of $9,496.0
million and General Fund expenditures of $9,495.9 million. The adopted budget is
within the expenditure limits proscribed by the Constitution of the State of
Coonecticut, $213.1 million below the cap in fiscal 1997-98 and $325.1 million
below the cap in fiscal 1998-99.
1997-1998 OPERATIONS
Per Section 3-115 of the Connecticut General Statutes, the State's
fiscal position is reported monthly by the Comptroller. This report compares
revenues already received and the expenditures already made to estimated
expenditures to be made during the balance of the fiscal year. This report
projects an operating surplus of $178.9 million, as a result of an increase in
estimated revenues that more than offset the increase in estimated expenditures.
Estimated revenues have been revised upward by $372.9 million from the enacted
budget plan, including the loss due to the elimination of certain taxes proposed
by the Governor for the 1997-99 Midterm Budget Adjustments totaling $4.2
million. Estimated expenditures have been revised upward by $194.1 million
(including miscellaneous adjustments). In addition, as part of the Midterm
Budget Adjustments, the Governor is proposing to set aside the first $125
million of the estimated year-ending surplus for a taxpayer rebate program. Any
unappropriated
<PAGE>
-58-
surplus amounts in excess of $125 million would be deposited in the Budget
Reserve Fund pursuant to section 4-30a of the Connecticut General Statutes.
PROPOSED MIDTERM BUDGET ADJUSTMENTS
Per Section 4071 of the Connecticut General Statutes, the Governor is
required to submit a status report to the General Assembly on the biennial
budget enacted in the previous year. The status report shall include any
recommendations for adjustments and revisions to the enacted budget.
On February 4, 1998, the Governor submitted to the General Assembly a
status report including detailed projections of expenditures and revenues and
proposed Midterm Budget Adjustments for the 1997-98 and 1998-99 fiscal years.
Some of the proposals require action by the General Assembly. Per Article XXVIII
of the Amendments to the Constitution of Connecticut, the General Assembly must
enact a budget in which the authorized general budget expenditures do not exceed
the estimated amount of revenue for such fiscal year. The General Assembly
convened on February 4, 1998 to consider the Governor's proposed Midterm Budget
Adjustments and is scheduled to adjourn on May 6, 1998.
The Governor's proposed Midterm Budget Adjustments for fiscal year
1997-98 anticipate General Fund expenditures of $9,536.4 million, General Fund
revenues of $9,715.3 million and an estimated General Fund surplus for fiscal
1997-98 of $178.9 million. The Governor's proposed Midterm Budget Adjustments
for fiscal year 1998-99 anticipate General Fund expenditures of $9,901.0
million, General Fund revenues of $9,901.6 million and an estimated General Fund
surplus for fiscal 1998-99 of $0.6 million.
Pursuant to Article XXVIII of the Amendments to the Constitution of the
State of Connecticut and Section 2-33a of the Connecticut General Statutes, the
Governor's proposed Midterm Budget adjustments would result in a fiscal 1997-98
budget that remains within the limits imposed by the expenditure cap. For fiscal
1998-99, permitted growth in capped expenditures is projected at 4.86 percent.
The proposed Midterm Budget Adjustments would result in a fiscal 1998-99 budget
that is $69.3 million below the expenditure cap.
For fiscal 1997-98, the following revenue modifications are included in
the Governor's proposed Midterm Budget Adjustments: 1) a reduction of $2.8
million due to the repeal of the Corporation Business Tax on private water
companies, effective January 1, 1998; and 2) a reduction of $1.4 million due to
the repeal of the HMO tax on Medicaid, the Healthcare for Uninsured Kids and
Youth (HUSKY) Program, and General Assistance managed care providers, effective
April 1, 1998. In addition, the Governor proposes to set aside the first $125
million of the estimated fiscal 1997-98 surplus for a taxpayer rebate program.
On the expenditure side, the Governor is recommending elimination of the
deficits in the Nautilus Committee Loan Fund ($2 million), the Education
Excellence Trust Fund ($2.5 million), and the Public Works Service Fund ($2.5
million). Also, expenditures for Medicaid and Temporary Family Assistance have
increased over the original budget amounts.
For fiscal 1998-99, the revenues reflect a revised revenue projection
and proposed tax changes in the Midterm Budget Adjustments, including 1) a $75
million personal income tax reduction through an increase in the portion of the
taxable income subject to the lower 3 percent rate; and 2) an $8.5 million tax
reduction for the roll-out of
<PAGE>
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the corporation and HMO tax changes cited above. Under the personal income tax,
effective for income years commencing on or after January 1, 1998, the taxable
income amounts subject to the 3 percent rate are increased to $9,000 for Single
filers, $18,000 for Joint filers, and $14,500 for Head of Household filers.
Commencing on and after January 1, 1999, the taxable income amounts subject to
the 3 percent rate are further expanded to $13,500 for Single Governor's Midterm
Budget Adjustments there is proposed a total increase of $405.1 million from the
originally enacted budget, with the most significant adjustments proposed in the
areas of Medicaid, Temporary Family Assistance, and Employment Retirement
Contributions. Medicaid adjustments amount to a total increase of $206.0
million. Of that amount, $84.7 million is in the area of nursing facilities, and
is due to a combination of an increase in the rates paid to the facilities,
annualization of Fiscal Year 1998 expenditures, and the Governor's decision to
suspend current efforts on the state's 1115 Waiver, and another $51.3 million is
due to increases in pharmacy costs and utilization. Temporary Family Assistance
has been increased $46.5 million primarily because the caseload has not declined
as quickly as anticipated in the originally adopted budget. Finally, Employee
Retirement Contributions were adjusted downward to reflect final certification
for Fiscal Year 1999 contributions. In addition to the General Fund proposed
budget adjustments for 1998-99, the Governor is also proposing bonding increases
of $119.5 million for upgrading core financial and data processing systems due
to the Year 2000 problem, $100 million for the local school construction program
and $25 million for Urban Act investment.
COMPONENTS OF REVENUE
PERSONAL INCOME TAX
Beginning with the income year commencing on or after January 1, 1991,
the State imposed a personal income tax on the income of residents of the State
(including resident trusts and estates), part-year residents and certain
non-residents who have taxable income derived from or connected with sources
within Connecticut. For tax years commencing on or after January 1, 1992, the
tax imposed is at the rate of 4.5 percent on Connecticut taxable income.
Depending on federal income tax filing status and Connecticut adjusted gross
income, personal exemptions ranging from $12,000 to $24,000 are available to
taxpayers. In addition, tax credits ranging from 1 percent to 75 percent of a
taxpayer's Connecticut tax liability are also available depending upon federal
income tax filing status and Connecticut adjusted gross income. Such exemptions
and tax credits are phased out at certain higher income levels. Neither the
personal exemption nor the tax credit described above is available to a trust or
an estate. Legislation enacted in 1995 effected a graduated rate structure
beginning in tax year 1996. Under this revised structure, the top rate remains
at 4.5 percent with a rate of 3 percent on the first $4,500 of taxable income
for joint filers and the first $2,250 for single filers. For tax year 1997, the
3 percent rate is expanded to the first $9,000 of taxable income for joint
filers and the first $4,500 for single filers. Legislation enacted during the
1997 session expands the amount of taxable income subject to the lower 3 percent
rate. By tax year 1999, the first $20,000 of taxable income for a joint filer
and the first $10,000 of taxable income for a single filer will be taxed at the
3 percent rate. In addition, the maximum $100 income tax credit for property
taxes paid will be expanded to a maximum of $285 per filer. Taxpayers also are
subject to the Connecticut minimum tax based on their liability, if any, for
payment of the federal alternative minimum tax.
<PAGE>
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SALES AND USE TAX
The Sales Tax is imposed, subject to certain limitations, on the gross
receipts from certain transactions within the State of persons engaged in
business in the State, including (a) sales at retail of tangible personal
property, (b) the rendering of certain services, (c) the leasing or rental of
tangible personal property, (d) the producing, fabricating, processing,
printing, or imprinting of tangible personal property to special order or with
materials furnished by the consumer, (e) the furnishing, preparing or serving of
food, meals, or drinks, and (f) the transfer of occupancy of hotel or lodging
house rooms for a period not exceeding thirty consecutive calendar days. The Use
Tax is imposed on the consideration paid for certain services or purchases or
rentals of tangible personal property used within the State pursuant to a
transaction not subject to the Sales Tax. A separate rate of 12 percent is
charged on the occupancy of hotel rooms. Effective October 1, 1991, the tax rate
for the Sales and Use Taxes was reduced from eight percent to six percent.
Various exemptions from the Sales and Use Taxes are provided, based on the
nature, use or price of the property or services involved or the identity of the
purchaser. Tax returns and accompanying payments with respect to revenues from
these taxes are generally due monthly on or before the last day of the month
next succeeding the taxable month.
CORPORATION BUSINESS TAX
The Corporation Business Tax is imposed on any corporation, joint stock
company or association or fiduciary of any of the foregoing which carries on or
has the right to carry on business within the State or owns or leases property
or maintains an office within the State or is a general partner in a partnership
or a limited partner in a limited partnership, except an investment partnership,
that does business, owns or leases property or maintains an office within the
State. The Corporation Business Tax provides for three methods of computation.
The taxpayer's liability is the greatest amount computed under any of the three
methods.
The first method of computation is a tax measured by the net income of
a taxpayer (the "Income-Base Tax"). Net income, except as applied to insurance
companies means federal gross income with limited variations less certain
deductions, most of which correspond to the deductions allowed under the
Internal Revenue Code of 1986, as amended from time to time. In the case of life
insurance companies subject to the Corporation Business Tax, net income means
life insurance company taxable income, as determined for federal income tax
purposes, with certain adjustments. The Income-Base Tax is levied at the rate of
10.75 percent until January 1, 1998 when it will decrease to 9.5 percent.
Legislation enacted in 1993 and subsequent years instituted a phase down in the
corporation tax rate so that by the income year commencing on or after January
1, 2000 the corporate rate will be 7.5 percent. The second method of computing
the Corporation Business Tax, from which the domestic insurance companies are
exempted, is an alternative tax on capital. This alternative tax is determined
either as a specific maximum dollar amount or at a flat rate on a defined base,
usually related in whole or in part to its capital stock and balance sheet
surplus, profit and deficit. The third method of computing the Corporation
Business Tax is the minimum tax which is $250. Corporations must compute their
tax under all three methods and pay the tax under the highest computation.
<PAGE>
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OTHER TAXES
Other tax revenues are derived from the inheritance taxes, taxes on
gross receipts of hospitals and public service corporations, taxes on net direct
premiums of insurance companies, taxes on oil companies, cigarette and alcoholic
beverage excise taxes, real estate conveyance taxes and other miscellaneous tax
sources.
FEDERAL GRANTS
Federal grants in aid are normally conditioned to some degree,
depending upon the particular program being funded, on resources provided by the
State. More than 99 percent of unrestricted federal grant revenue is expenditure
driven. The largest federal grants in fiscal 1997 were made for the purposes of
providing medical assistance payments to the indigent and Aid to Families with
Dependent Children. The State also receives certain restricted federal grants
which are not reflected in annual appropriations but which nonetheless are
accounted for in the General Fund. In addition, the State receives certain
federal grants which are not accounted for in the General Fund but are allocated
to the Transportation Fund, various Capital Project Funds and other funds.
OTHER NON-TAX REVENUES
Other non-tax revenues are derived from special revenue transfers;
Indian gaming payments; licenses, permits and fees; sales of commodities and
services; rents, fines and escheats; investment income; and other miscellaneous
revenue sources.
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 presently determinable. 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 materially 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 not 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.
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, as well
as other damages and costs and attorneys' fees, and 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 a
sub-class of the Connecticut State Police Union, current and former
<PAGE>
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Connecticut State Police officers who are not defendants in this or any
consolidated case, and other persons acting on behalf of the State Police who
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 sought 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 sought injunctive relief
against state officials to provide them with an "integrated education". On April
12, 1995, the Superior Court entered judgment for the State. On July 9, 1996,
the State Supreme Court reversed the Superior Court judgment and remanded the
case with direction to render a declaratory judgment in favor of the plaintiffs.
The Court directed the legislature to develop appropriate measures to remedy the
racial and ethnic segregation in the Hartford public schools. The Supreme Court
also directed the Superior Court to retain jurisdiction of this matter. The 1997
General Assembly enacted P.A. 97-290, An Act Enhancing Educational Choices and
Opportunities in response to the Supreme Court decision. In response to a motion
filed by the plaintiffs, the Superior Court recently ordered the State to show
cause as to whether there has been compliance with the Supreme Court's ruling.
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 classmembers be transferred to community residential
settings with appropriate support services. This case has been settled as to all
persons with mental retardation by their eventual discharge from Norwich and
Fairfield Hills Hospital. The case is still proceeding as to those persons with
traumatic brain injury and the class of plaintiffs has been expanded to include
persons with acquired brain injury who are in the custody of the Department of
Mental Health and Addiction Services.
JOHNSON V. ROWLAND is a Superior Court action brought in 1998 in the
name of several public school students and the Connecticut municipalities in
which the students reside, seeking declaratory judgment that the State's current
system of financing public education through local property taxes and State
payments to municipalities determined under a Statutory Education Cost Sharing
("ECS") formula violates the Connecticut Constitution. Additionally, the suit
seeks various injunctive orders requiring the State to, among other things,
cease implementation of the present system, modify the ECS formula at the level
contemplated in the original 1988 public act which established the ECS.
Several suits have been filed since 1977 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 as well as ownership to land in
issue. Some of these suits have been settled or dismissed. The plaintiff group
in the remaining suits is the alleged Golden Hill Paugussett Tribe and the lands
involved are generally located in Bridgeport, Trumbull, Orange, Shelton and
Seymour.
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2. FLORIDA
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN
FLORIDA MUNICIPAL SECURITIES
The following is a summary of certain information contained in the
Preliminary Official Statement Relating to $300,000,000 State of Florida
Department of Environmental Protection Preservation 2000 Revenue Bonds, Series
1998B dated April 1, 1998. The summary does not purport to be a complete
description and is current as of the date of the statement. The Funds are not
responsible for the accuracy or timeliness of this information.
NATIONAL AND STATE ECONOMIC OUTLOOK
The national economic forecast indicates strong growth this year and
slower next. Real GDP is expected to increase 3.2 percent in 1997-98 and 1.9
percent in 1998-99. Real investment is anticipated to expand 7.2 percent this
year and 2.1 percent next year, while real consumption should increase 3.5
percent this year and 2.6 percent next year. Underlying the official national
economic forecast are key assumptions regarding fiscal policy, monetary policy,
and prices. By late 1998, the Federal Reserve will reverse course and lower
interest rates because of a slowing economy. Inflation, as measured by the
Consumer Price Index, is expected to remain under control, averaging 2.1 percent
in 1997-98 and 2.4 percent in 1998-99. The federal budget deficit is forecasted
to be $28.7 billion this year and $57.6 billion next year.
In other areas of the U.S. economy, construction activity in 1997-98
will remain near last year's level and drop slightly in 1998-99. Housing starts
should reach 1.46 million units this year and 1.42 million next year. The stock
market, as measured by the S&P Index, is expected to increase for 1997-98 and
decrease slightly in 1998-99. Total employment will expand 2.2 percent in
1997-98 and 1.3 percent in 1998-99. The unemployment rate is expected to average
4.7 percent this year and 5.0 percent next year.
The Florida economy is forecasted to grow in a similar pattern, but
will continue to outperform the U.S. as a whole. Total non-farm employment is
expected to increase 3.9 percent in 1997-98 and 2.6 percent in 1998-99. In
1998-99, non-farm employment is expected to increase 3.9 percent in 1997-98 and
2.6 percent in 1998-99. In 1998-99, non-farm employment in the state will reach
an average of 6.7 million jobs. Trade and services account for more than half of
nonfarm employment. Services employment will grow by 4.8 percent in 1997-98, and
4.1 percent in 1998-99. Trade employment will grow 3.7 percent this year and 2.3
percent next year. Florida's unemployment rate is expected to be 4.6 percent in
1997-98 and 4.8 percent in 1998-99.
An important element of Florida's economic outlook is the construction
sector. Florida's single and multi-family private housing starts are projected
to reach a combined total of 127,400 units in 1998-99 and 125,800 units the
following year. Multi-family starts have been slow to recover from the early
90's recession, but they are showing strength with an expected 39,300 starts in
1998-99, and 38,300 starts in 1999-00. Single family starts in 1998-99, and
38,300 starts in 1999-00. Single family starts are forecasted to be 88,100 in
1998-99, and 87,500 the next year. Total construction expenditures will increase
0.8 percent and 1.8 percent during the two years.
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Tourist arrivals are forecasted to increase 2.6 percent in 1998-99 and
1.7 percent the following year. Air tourists will increase 4.1 percent and 3.9
percent, while auto tourists will increase 0.8 percent and -1.0 percent, during
this time. By the end of 1998-99, 49.7 million domestic and international
tourists are expected to visit the State. In 1999-00 tourist visits should reach
50.6 million.
Real personal income in Florida is forecasted to increase 5.2 percent
in 1997-98 and 3.7 percent in 1998-99. During this time, real personal income
per capita is projected to grow at 3.2 percent in 1997-98 and 1.8 percent in
1998-99. Overall, the Florida economy appears to be growing in line with, but
stronger than, the US economy, and is expected to experience strong growth
during 1997-98 and a mild slowdown during 1998-99.
FLORIDA FINANCIAL OUTLOOK
For fiscal year 1997-98, the estimated General Revenue plus Working
Capital and Budget Stabilization funds available total $18,469.8 million, a 10.3
percent increase over 1996-97. The $16,877.6 million in Estimated Revenues
represent a 7.2 percent increase over the analogous figure in 1996-97. With
combined General Revenue, Working Capital Fund, and Budget Stabilization Fund
appropriations at $17,114.0 million, unencumbered reserves at the end of 1997-98
are estimated at $1,355.8 million.
For fiscal year 1998-99, the estimated General Revenues plus Working
Capital and Budget Stabilization funds available total $19,185.4 million, a 3.9
percent increase over 1997-98. The $17,627.0 million in Estimated Revenues
represent a 4.4 percent increase over the analogous figure in 1997-98.
REVENUES AND EXPENDITURES
Financial operations of the State of Florida covering all receipts and
expenditures are maintained through the use of four fund types: the General
Revenue Fund, Trust Funds, the Working Capital Fund, and the Budget Fund.
In fiscal year 1996-97, an estimated 67 percent of total direct
revenues to these funds were derived from 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, beverage tax, and estate tax which
amounted to 68 percent, 8 percent, 4 percent, 3 percent, respectively, of total
General Revenue funds available.
State expenditures are categorized for budget and appropriation
purposes by the type of fund and spending unit, which are further subdivided by
line item. In fiscal year 1996-97, appropriations from the General Revenue Fund
for education, health and welfare, and public safety amounted to approximately
53 percent, 26 percent, and 14 percent, respectively, of total General Revenue
funds available.
SALES AND USE TAX
The largest single source of tax receipts in Florida is the sales and
use tax. The sales tax is 6 percent of the sales price of tangible personal
property sold at retail in the State. The use tax is also 6 percent of the cost
price of tangible personal property when the same is not sold but is used, or
stored for use in the State. The use tax also applies
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to the use in the State of tangible personal property purchased outside Florida
which would have been subject to the sales tax if purchased from a Florida
dealer.
All receipts of the sales and use tax, with the exception of the tax on
gasoline and special fuels, are credited to either the General Revenue Fund, the
Solid Waste Management Trust Fund, or counties and cities. For the State fiscal
year which ended June 30, 1997, total receipts from this source were $12,089
million, an increase of 5.5 percent from the prior fiscal year.
MOTOR FUEL TAX
The second largest source of State tax receipts, including those
distributed to local governments, is the tax on motor fuels. Preliminary data
show collections from this source in State fiscal year ending June 30, 1997 were
$2,012 million. However, these revenues are almost entirely dedicated trust
funds for specific purposes and are not included in the State General Revenue
Fund.
ALCOHOLIC BEVERAGE TAX
Florida's alcoholic beverage tax is an excise tax on beer, wine, and
liquor. The tax is one of the State's major tax sources, with revenues totaling
$447.2 million in State fiscal year ending June 30, 1997. Two percent of
collections are deposited into the Alcoholic Beverage and Tobacco Trust Fund,
while the remainder of revenues are deposited into the General Revenue Fund.
The 1990 Legislature established a surcharge on alcoholic beverages.
This charge is levied on alcoholic beverages sold for consumption on premises.
The surcharge is ten cents per ounce of liquor, ten cents per four ounces of
wine, and four cents per twelve ounces of beer. In fiscal year 1996-97, a total
of $106.6 million was collected. Of these collections, the Children and
Adolescent Substance Abuse Trust Fund receives 9.8 percent, while the remainder
is deposited to the credit of the General Revenue Fund.
CORPORATE INCOME TAX
Pursuant to an amendment to Article VII, Section 5, of the State
Constitution, the Legislature of the State of Florida adopted, effective January
1, 1972, the "Florida Income Tax Code" imposing a tax upon the net income of
corporations, organizations, associations, and other artificial entities for the
privilege of conducting business, deriving income, or existing within the State.
This tax does not apply to natural persons who engage in a trade or business or
profession under their own or any fictitious name, whether individually as
proprietorships or in partnerships with others, estates of decedents or
incompetents, or testamentary trusts.
All receipts of the corporate income tax are credited to the General
Revenue Fund. For the fiscal year which ended June 30, 1997, receipts from this
source were $1,362.3 million, an increase of 17.2 percent from fiscal year
1995-96.
DOCUMENTARY STAMP TAX
Deeds and other documents relating to realty are taxed at 70 cents per
$100 of consideration, while Corporate shares, bonds, certificates of
indebtedness, promissory notes, wage assignments, and retail charge accounts are
taxed at 35 cents per $100 of face value, or actual value if issued without face
value. Documentary stamp collections
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totaled $844.2 million during fiscal year 1996-97, posting a 8.9 percent
increase from the previous fiscal year.
GROSS RECEIPTS TAX
The tax rate is 2.5 percent of the gross receipts of providers of
electric, natural gas, and telecommunications services.
All gross receipts utilities tax collections are credited to the Public
Education Capital Outlay and Debt Service Trust Fund. In fiscal year 1996-97,
gross receipts utilities tax collections totaled $575.7 million, an increase of
6.0 percent over the previous fiscal year.
INTANGIBLE PERSONAL PROPERTY TAX
This tax is levied on two distinct bases. First, stocks, bonds,
including bonds secured by liens on Florida realty, notes, governmental lease
holds, interests in limited partnerships registered with the Securities and
Exchange Commission, and other miscellaneous intangible personal property not
secured by liens on Florida realty are taxed annually at a rate of 2 mills.
Second, there is a non-recurring 2 mill tax on mortgages and other obligations
secured by liens on Florida realty, notes, governmental lease holds, interests
in limited partnerships registered with the Securities and Exchange Commission,
and other miscellaneous intangible personal property not secured by liens on
Florida realty are taxed annually at a rate of 2 mills. Second, there is a
non-recurring 2 mill tax on mortgages and other obligations secured by liens on
Florida realty.
The Department of Revenue uses part of the proceeds for administrative
costs. Of the remaining tax proceeds, 33.5 percent is distributed to the County
Revenue Sharing Trust Fund and 66.5 percent is distributed to the General
Revenue Fund.
In fiscal year 1996-97 total intangible personal property tax
collections were $952.4 million, a 6.3 percent increase from the prior year.
ESTATE TAX
An estate tax is imposed on the estate for the privilege of
transferring property at death. The tax on estates of resident decedents is
equal to the amount allowable as a credit against federal estate tax for state
death taxes paid, less any amount paid to other states. Thus, the Florida estate
tax on resident decedents will not increase the total tax liability of the
estate. The tax on estates of nonresident decedents is equal to the amount
allowable as a credit against federal estate tax for state death taxes paid
multiplied by the ratio of the value of the property taxable in Florida over the
value of the entire gross estate.
All receipts of the estate tax are credited to the General Revenue
Fund. For the fiscal year which ended June 30, 1997, receipts from this source
were $546.9 million, an increase of 30 percent from fiscal year 1995-96.
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LOTTERY
In November 1986 the voters of the State of Florida approved a
constitutional amendment which allows State operated lotteries. Section 15,
Article X of the Florida Constitution provides for State lotteries, with the
proceeds being dedicated exclusively to education. The 1987 Legislature passed
Chapter 24, Florida Statutes, creating the Department of the Lottery to operate
the State Lottery and setting forth the allocation of the revenues. Of the
revenues generated by the Lottery, 50 percent is to be returned to the public as
prizes; at least 38 percent is to be deposited in the Educational Enhancement
Trust Fund (for public education); and no more than 12 percent can be spent on
the administrative cost of operating the lottery.
Fiscal year 1996-97 produced gross revenues of $2.09 billion of which
education received approximately $792.3 million.
LITIGATION
Due to its size and broad range of activities, the State is involved in
numerous routine legal actions. The departments involved believe that the
results of such litigation pending or anticipated will not materially affect the
State of Florida's financial position.
COASTAL PETROLEUM V. STATE OF FLORIDA, CASE NO. 90-3195, 2ND JUDICIAL
CIRCUIT. This is an inverse condemnation case claiming that the action of the
Trustees and Legislature constitute a taking of Coastal's leases for which
compensation is due. The Circuit judge granted the State's motion for summary
judgment, finding that as a matter of law, the State had not deprived Coastal of
any royalty rights. Coastal appealed to the First District Court of Appeals, but
the case was remanded to Circuit Court for trial. On August 6, 1996, final
judgment was made in favor of the State. Coastal has filed for a review by the
Florida Supreme Court. The State is awaiting a decision by the Court.
FLORIDA DEPARTMENT OF TRANSPORTATION V. 745 PROPERTY INVESTMENTS, CSX
TRANSPORTATION, INC. AND CONTINENTAL EQUITIES, CASE NO. 94-17739 CA 27, DADE
COUNTY CIRCUIT COURT. This case involves the Florida Department of
Transportation (FDOT) and CSX Transportation, Inc. FDOT has filed an action
against the adjoining property owners seeking a declaratory judgment from the
Dade County Circuit Court that the Department is not the owner of the property
that is subject to a claim by the U.S. Environmental Protection Agency (EPA).
The case was dismissed and FDOT's appeal of the order of dismissal is pending in
the Third District Court of Appeal.
The EPA is seeking clean-up costs, pursuant to the Comprehensive
Environmental Response Compensation and Liability Act, regarding property which
the EPA alleges is owned by the FDOT (and formerly owned by CSX Transportation,
Inc.). The EPA has agreed to await the outcome of the Department's declaratory
action before proceeding further. If the Department is unsuccessful in its
actions, the possible clean-up costs could exceed $25 million.
JENKINS V. FLORIDA DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES,
CASE NO. 79-102-CIV-J-16, UNITED STATES DISTRICT COURT. This is a class action
suit on behalf of clients of residential placement for the developmentally
disabled seeking refunds for services where children were entitled to free
education under the Education for Handicapped Act. The district court held that
the State could not charge maintenance
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fees for children between the ages of 5 and 17 based on the Education for
Handicapped Act. All appeals have been exhausted. The State's potential cost of
refunding these charges could exceed $42 million. However, attorneys are in the
process of negotiating a settlement amount.
NATHAN M. HAMEROFF, M.D. ET AL. V. AGENCY FOR HEALTH CARE
ADMINISTRATION, ET AL., CASE NO. 95-5936, LEON COUNTY CIRCUIT COURT. The
plaintiffs challenge the constitutionality of the Public Medical Assistance
Trust Fund (PMATF) annual assessment on net operating revenue of free-standing
out-patient facilities offering sophisticated radiology services. A trial has
not been scheduled. If the State is unsuccessful in its actions, the potential
refund liability could amount to approximately $70 million.
WALDEN V. DEPARTMENT OF CORRECTIONS, CASE NO. 95-40357-WS (USDC N.D.
FLA.). This action is brought by one captain and one lieutenant in the
Department of Corrections seeking declaratory judgment that they (and
potentially 700 similarly situated others) are not exempt employees under the
Fair Labor Standards Act (FLSA) and, therefore, are entitled to overtime
compensation at a rate of not less than one and one-half times their regular
rate of pay for overtime hours worked since April 1, 1992, forward and including
liquidated damages. The U.S. District Court for the Northern District of Florida
entered an order dismissing the case for lack of jurisdiction on June 24, 1996.
Plaintiffs filed a lawsuit against the Department (Case No. 96-3955) in July
1996 at the State level (Circuit Court, Second Judicial Circuit), making the
same allegations at that level which plaintiffs previously made before the U.S.
District Court for the Northern District of Florida. On December 20, 1996, that
Court determined that it has jurisdiction over the FLSA claim. On December 10,
1997 the Court entered final summary judgment. The Plaintiffs were not awarded
overtime pay at time and one-half nor liquidated damages; however, they were
awarded attorneys fees and costs.
BARNETT BANK V. DEPARTMENT OF REVENUE, CASE NO. 97-02375, 4TH JUDICIAL
CIRCUIT, involves the issue of whether Florida's refund statute for dealer
repossessions authorizes the Department to grant a refund to a financial
institution as the assignee of numerous security agreements governing the sale
of automobiles and other property sold by dealers. The question turns on whether
the Legislature intended the statute only to provide a refund or credit to the
dealer who actually sold the tangible personal property and collected and
remitted the tax or intended that right to be assignable. Several banks have
applied for refunds; the potential refund to financial institutions exceeds
$30,000,000.
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 May 5, 1998.
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.
The ability of the Commonwealth to meet its obligations will be
affected by future social, environmental and economic conditions, among other
things, as well as by questions of
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legislative policy and the financial conditions of the Commonwealth. Many of
these conditions are not within the control of the Commonwealth.
1998 FISCAL YEAR
The budget for fiscal year 1998 was enacted by the Legislature on June
30, 1997 and approved by Governor Weld on July 10, 1997. (Appropriations
covering the first two weeks of the fiscal year were enacted and approved on
June 30, 1997.) The budget was based on a consensus tax revenue forecast of
$12.85 billion, as agreed by both houses of the Legislature in March. The
Executive Office for Administration and Finance revised the fiscal 1998 tax
forecast to $13.06 billion on July 30, 1997 and, after a review of first quarter
fiscal 1998 tax receipts, to $13.20 billion on October 15, 1997. (The fiscal
1998 budget amended the state finance law to change the required date for tax
revenue estimates from September 25 to October 15.) The fiscal 1998 tax revenue
estimates were revised again on January 16, 1998 to reflect an increase of $100
million in tax revenues. Tax law changes effective in fiscal 1998 have (i)
increased anticipated revenues by $19.0 million from miscellaneous fees to be
collected as a result of the convention center legislation approved on November
17, 1997, (ii) reduced tax revenues by an estimated $25.0 million as a result of
the exemption of military pensions from state income tax, effective January 1,
1998, which was approved by Acting Governor Celluci on November 6, 1997, and
(iii) reduced tax revenues by an estimated $140 million as a result of a change
in the sales tax payment schedule. After taking into account such tax law
changes, the January 16, 1998 estimate was $13.154 billion. On May 5, 1998, the
tax revenue estimate was further revised upward to $13.3 billion. The current
tax revenue estimate does not reflect the fiscal 1998 impact of Acting Governor
Celluci's proposed reduction of the tax rate on Part B personal income ($196
million).
Preliminary results indicate that year-to-date tax collections through
April 1998 total approximately $11.068 billion, approximately $602.2 million, or
5.8%, higher than collections in the corresponding period in fiscal 1997.
The fiscal 1998 budget provides for total appropriations of
approximately $18.4 billion, a 2.8% increase over fiscal 1997 expenditures.
Governor Weld vetoed or reduced appropriations totaling $3.3 million. The budget
incorporates tax cuts valued by the Department of Revenue at $61 million and
provides for an accelerated pension funding schedule. Supplemental
appropriations have been approved for fiscal 1998 in the amount of approximately
$210.4 million, including the transfer of approximately $34.8 million to the
Massachusetts Water Pollution Abatement Trust for state revolving fund programs.
In addition, on November 26, 1997, Acting Governor Celluci approved legislation
transferring off-budget the $206.3 million Department of Medical Assistance
reserve to indemnify certain medical facilities against losses that might result
from providing uncompensated care. On January 30, 1998, Acting Governor Celluci
filed two bills recommending supplemental appropriations for fiscal 1998
totaling $211.8 million. The bills incorporated most of the supplemental
appropriations recommended in bills filed by the Administration on October 6,
1997 and October 17, 1997 which were not enacted by the Legislature. The first
bill totaled $44.6 million in proposed spending to provide for certain
unanticipated obligations of the Commonwealth. The second bill recommended
$167.1 million in proposed spending to provide for one-time expenditures,
matching grants and capital initiatives, including $50 million for the
construction and repair of local roads and bridges, $20 million for the
development of a new human resource compensation management system and $10
million in additional funding for the upgrade of the Commonwealth's information
technology systems in preparation for the year 2000 conversion. On April 29,
1998, Acting Governor Celluci approved a
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supplemental appropriations bill for $116.4 million, of which $56.3 million is
for expenditures contained in the bills filed by the Acting Governor on January
30, 1998. The bill includes $21.1 million for snow and ice costs at the
Massachusetts Highway Department, $15.4 million for child care services relating
to welfare reform and $11 million at the Department of Social Services for
residential group care and adoption. Projected total fiscal 1998 expenditures
are approximately $18.930 billion.
CASH FLOW. The most recent cash flow projections for fiscal 1998 and
fiscal 1999 were released by the State Treasurer and the Secretary of
Administration and Finance on March 25, 1998. The forecast for fiscal 1998 is
based on the fiscal 1998 budget signed by Governor Weld on July 10, 1997, and
includes the value of all fiscal 1998 supplemental budgets enacted by the
Legislature. The fiscal 1999 forecast is based on the proposed fiscal 1999
budget submitted by the Acting Governor on January 27, 1998. Both projections
are based on revenue and spending estimates prepared by the Executive Office for
Administration and Finance and incorporate actual results through January 1998
and monthly projections through June 1999.
Fiscal 1998 is projected to end with a cash balance of $477.9 million,
without regard to any fiscal 1998 activity that may occur after June 30, 1998.
Such balance does not include the balance in the Stabilization Fund ($799.0
million at June 30, 1997) or interest earnings thereon expected during fiscal
1998; it does reflect the required Stabilization Fund transfer related to the
fiscal 1997 of $234.0 million during fiscal 1998. The cash flow statement notes
that general obligation bonds were issued for capital projects in August 1997 in
the amount of $250 million and in January 1998 in the amount of $250 million and
projects that an additional $428 million of general obligation bonds will be
issued for such purposes during the remainder of the fiscal year. The statement
also notes that $105 million of special obligation bonds were issued in October
1997.
The cash flow statement notes that the Massachusetts Turnpike Authority
and the Massachusetts Port Authority are required to make payments to the
Commonwealth in connection with the Central Authority Artery/Ted Williams Tunnel
project and forecasts that the Commonwealth will receive $430 million in the
aggregate during fiscal 1998 from such authorities or from the issuance of
Commonwealth notes in anticipation of payments from such authorities. (The
statement also notes that the Commonwealth has the statutory authority to issue
bonds to pay such notes.) The statement further forecasts, in connection with
the Central Artery/Ted Williams Tunnel project, that the Commonwealth will issue
$350 million of notes in anticipation of future federal highway grants, noting
that federal funding for such purposes has been extended on an interim basis
through March 31, 1998, and that successor federal funding legislation is
expected to be enacted by late 1998.
Fiscal 1999 is projected to end with a cash balance of $167.7 million.
The cash flow statement projects that an aggregate of $1 billion of general
obligation bonds will be issued for capital projects in fiscal 1999, and that
the Commonwealth will issue $465 million of notes in anticipation of future
federal highway grants in fiscal 1999.
Neither the issuance of transit notes nor commercial paper for
operating purposes is forecast for fiscal 1998 or fiscal 1999.
The ending balances projected for fiscal 1998 and fiscal 1999 are
likely to differ from the ending balances for the Commonwealth's budgeted
operating funds for those years because of timing differences and the effect of
non-budget items.
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1999 FISCAL YEAR
On January 27, 1998, Acting Governor Celluci filed his fiscal 1999
budget recommendations with the House of Representatives. The proposal calls for
budgeted expenditures of approximately $19.06 billion, or total fiscal 1999
spending of $19.49 billion after adjusting for shifts to and from off-budget
accounts. The proposed fiscal 1999 spending level represents a $559 million, or
3.0 percent, increase over projected total fiscal 1998 expenditures of $18.930
billion. Budgeted revenues for fiscal 1999 are projected to be $18.961 billion,
or $19.291 billion after adjusting for shifts to and from off-budget accounts.
This represents a $53.0 million, or 0.3 percent, increase over the $18.908
billion forecast for fiscal 1998. (The $18.908 billion revenue estimate for
fiscal 1998 reflects the addition of $100 million in tax revenue incorporated
into the forecast by the Secretary of Administration and Finance on January 16,
1998 and the addition of $146 million in tax revenue incorporated into the
forecast by the Secretary of Administration and Finance on May 5, 1998.) The
Governor's proposal projects a fiscal 1999 ending balance in the budgeted funds
of $906.3 million, including a Stabilization Fund balance of $878.1 million.
The Governor's budget recommendation is based on a tax revenue estimate
of $13.665 billion, a $365.0 million, or 2.7 percent, increase over fiscal 1998
projected tax revenues of $13.300 billion. The projection incorporates $244.8
million in income tax cuts proposed by the Governor, including a reduction of
the Part B ("earned income") tax rate from 5.95 percent to 5 percent over three
years ($205.8 million), a reduction of the Part A ("unearned income"; i.e.,
interest from non-Massachusetts banks, dividends, and short-term capital gains)
tax rate from 12 percent to 5 percent over five years ($30 million), credits and
exemptions to encourage saving for children's higher education ($3 million), an
exemption from capital gains taxes on the sale of a house ($2 million) and an
exemption for providing care to an elderly relative ($4 million). The
recommendation also proposes moving $92.5 million in tax revenue in the
Children's and Seniors Health Protection Fund off-budget.
The proposed budget assumes non-tax revenues of $5.297 billion, or
$5.624 billion when adjusted for the shifts to and from off-budget accounts, and
represents an increase of $15.4 million from fiscal 1998. Of the three classes
of non-tax revenue, federal reimbursements, including those for Medicaid, and
block grants for Temporary Assistance to Needy Families and Child Care programs
most affect the Commonwealth's budgetary considerations. These payments are
projected to total $3.216 billion in fiscal 1999, or $3.426 billion after the
impact of shifts to and from off-budget accounts is removed. This level of
federal payments represents an increase of $41.0 million, or 1.2 percent, from
fiscal 1998, the result primarily of changes in federal reimbursement for
Medicaid programs. Fiscal 1999 departmental revenues of $1.130 billion, or
$1.158 billion after adjusting for shifts to and from off-budget accounts,
represent a decrease of approximately $127 million from fiscal 1998 projections,
due primarily to the implementation of free, lifetime driver licensing and
vehicle registration and a decrease of $29.3 million from fiscal 1998 in the
revenue generated by the revenue optimization program. Consolidated transfers,
the third category of non-tax revenue, consists primarily of state lottery
profits which are distributed to cities and towns. Consolidated transfers are
projected to increase by $1.8 million from fiscal 1998 levels. Lottery profits
are expected to remain constant in fiscal 1999.
The Governor's budget proposal generally provides for maintaining
current levels of service for most state programs but recommends increased
spending for certain
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priority areas, including a $357 million increase in funding for the Department
of Education, $309.7 million in additional local aid to cities and towns, $69
million for Medicaid program inflation and $34 million in additional local aid
funded by the State Lottery.
The Governor's fiscal 1999 budget recommendations call for
appropriations of $945.3 million for pension funding, $85.2 million less than
the amount appropriated for fiscal 1998 and $113.9 million less than the amount
called for in the most recently adopted funding schedule. The recommended amount
reflects the elimination in 1997 of the Commonwealth's responsibility for
funding cost-of-living adjustments incurred by local pension systems and assumes
the adoption of a revised funding schedule in the spring of 1998. The proposed
budget also includes a $20 million reserve to meet the Commonwealth's obligation
to reduce the unfunded pension liabilities attributable to former employees of
Franklin, Hampden, Middlesex and Worcester counties and certain incremental
benefit costs associated with legislation enacted in 1996; any expenditures from
the reserve are contingent upon the adoption of a new funding schedule.
Under the Governor's proposed fiscal 1999 budget, the Commonwealth is
expected to spend approximately $936.6 million on public assistance programs.
Under the federal welfare reform law, Massachusetts will receive $459.4 million
from the Temporary Assistance for Needy Families (TANF) federal block grant. Of
this total, the Commonwealth is expected to spend $321.6 million on Transitional
Aid for Families with Dependent Children (TAFDC)-related programs and to
transfer $91.9 million to the Child Care Fund and $45.9 million to the Social
Services Program Fund. In addition, the Commonwealth expects to receive $77.3
million from the Child Care Development Fund block grant and $51.8 million from
the Social Services block grant.
Acting Governor Celluci's fiscal 1999 budget also recommends spending
of $3.688 billion by the Department of Medical Assistance, the Commonwealth's
Medicaid agency. This level of spending represents a decrease of $119.2 million,
or 3.1 percent, from fiscal 1998, due in part to the Governor's proposal to move
the Children's and Seniors' Health Care Assistance Fund off-budget to a trust
fund. Spending in support of the expansion in the population eligible for health
care assistance therefore is not reflected in the fiscal 1999 budget
recommendation. The proposed fiscal 1999 expansion in Medicaid coverage conforms
to the terms of the Commonwealth's federal waiver and was authorized by
legislation passed in July 1996 and July 1997.
On April 27, 1998, the House Committee on Ways and Means released its
proposed budget for fiscal 1999. Debate in the full House of Representatives
began on May 4, 1998. The House Committee's budget provides for total spending
of $19.592 billion and assumes total revenues of $19.446 billion. The House
Committee's budget is based on the consensus tax revenue estimate of $14.4
billion, less approximately $534 million from tax cuts proposed in such budget.
The Committee's budget includes the income tax provisions approved by the House
of Representatives on March 12, 1998. It would raise the statutory ceiling on
amounts in the Stabilization Fund from 5% to 7.5% of budgeted revenues and other
financial resources pertaining to budgeted funds. The committee's budget would
add $18 million in appropriations for building maintenance and $21 million in
appropriations for debt service related to the "forward funding" of the
Massachusetts Bay Transportation Authority. The committee's budget would also
appropriate approximately $965.3 million for the Commonwealth's pension
liabilities.
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The Senate Committee on Ways and Means has also been considering the
Governor's budget recommendations and is expected to release its version of the
budget after House floor action on the budget has been completed.
LOCAL GOVERNMENT
Below the level of state government are 12 county governments
responsible for various functions, principally the operation of houses of
correction and registries of deeds. There are 14 counties in Massachusetts, but
county government has been abolished in two of them and is scheduled to
terminate in two others. Under legislation enacted in 1996, Franklin County
government terminated on July 1, 1997 in favor of a regional council of
governments. Legislation approved by Governor Weld on July 11, 1997 abolished
Middlesex County government on that date and provided for the abolition of
county government in Hampden and Worcester Counties on July 1, 1998 (or sooner,
if such county defaults on a bond or note). Under the 1997 legislation,
virtually all functions, duties and responsibilities of the affected counties
are transferred to the Commonwealth. As of the date of abolition of an affected
county's government, all valid liabilities and debts of such county which are in
force immediately before such date become obligations of the Commonwealth, and
all assets and revenues of such county become assets and revenues of the
Commonwealth. The Secretary of Administration and Finance is directed to
establish an amortization schedule to recover the Commonwealth's costs from the
cities and towns within each such country over a period not to exceed 25 years.
Governor Weld vetoed provisions in the legislation that would have placed
responsibility for county retirees on cities and towns rather than the
Commonwealth, filed legislation providing for state assumption of such pension
costs. On July 15, 1997, the House of Representatives overrode Governor Weld's
veto of such provisions, but the Senate has not acted on the Governor's veto
message. Governor Weld also vetoed provisions that would have created county
charter commissions in certain counties, indicating that he favored legislation
setting a date certain for the abolition of all county government and a
mechanism by which cities and towns that wish to do so may establish alternative
regional entities. The legislation approved by Governor Weld in July 1997
established a task force on the valuation of county assets and liabilities that
was charged with compiling an inventory and providing for the valuation of all
property of all counties in the Commonwealth for the purposes of considering the
abolition of county government and the transfer of its functions, assets and
liabilities to the Commonwealth. The eleven-member task force, consisting of
eight members of the Legislature, the Secretary of Administration and Finance,
the Inspector General and the State Auditor, had a report filing deadline of
February 1, 1998; the task force has convened and has begun planning for the
valuation. On July 17, 1997, Governor Weld filed legislation that would abolish
all county governments by July 1, 1999 and that would require the state
employees' retirement system to absorb the pension costs associated with county
retirees. The legislation is being considered by the Legislature's Committee on
Counties.
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 1997, approximately 70.8 percent of the Commonwealth's annual budgeted
revenues were derived from state taxes. In addition, the federal government
provided approximately
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16.6 percent of such revenues, with the remaining 12.6 percent provided from
departmental revenues and transfers from non-budgeted funds.
The major components of State taxes are the income tax, which accounted
for approximately 55.8 percent of total tax revenues in fiscal 1997, the sales
and use tax, which accounted for approximately 22.4 percent, and the business
corporations tax, which accounted for approximately 7.5 percent. Other tax and
excise sources accounted for the remaining 14.3 percent of total fiscal 1997 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 percent is applied to income from employment,
professions, trades, businesses, rents, royalties, taxable pensions and
annuities and interest from Massachusetts banks; a rate of 12 percent 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 percent on capital gains from the
sale of assets held for one year and less to 0 percent on capital gains from the
sale of certain assets held more than six years.
In December 1994, the Governor approved legislation modifying the
capital gains tax by phasing out the tax for assets held longer than six years
and increasing the no-tax status threshold for personal income tax purposes. The
capital gains tax charge did not become effective until January 1, 1996.
Accordingly, it is estimated by the Executive Office for Administration and
Finance to have had only a minor effect on fiscal 1996 tax revenues and to have
approximately $41.0 million. The no-tax status change is estimated to have
reduced fiscal 1995 tax revenues by approximately $13.3 million. It is expected
to decrease fiscal 1998 tax revenues by $13.0.
As part of the fiscal 1997 budget the Legislature established a tax
deduction for the amount by which tuition payments to two- or four-year
colleges, net of financial aid, exceed 25 percent of the taxpayer's adjusted
gross income. The Department of Revenue estimates that this deduction resulted
in no revenue reduction in fiscal 1997 and will result in an approximately $14
million reduction on an annualized basis thereafter.
The fiscal 1998 budget contained three tax cuts with an aggregate
fiscal 1998 cost estimated by the Department of Revenue to be $60.9 million--an
increase in the child dependent deduction from $600 to $1,200 for children up to
age 12 ($15.3 million), a tax credit of up to $6,000 over four years for septic
tank improvements ($17 million) and an earned income tax credit amounting to 10
percent of the federal credit ($28.6 million).
On November 6, 1997, Acting Governor Cellucci approved legislation
exempting military pensions from the state income tax, effective January 1,
1998. The Department of Revenue estimates that this exemption will result in a
fiscal 1998 revenue reduction of $25.0 million and an approximately $18 million
reduction on an annualized basis thereafter.
As part of Acting Governor Celluci's fiscal 1999 budget
recommendations, he proposed a reduction in the tax rate on "Part B" personal
income (so-called "earned" income) from the current level of 5.95% to 5% over
three calendar years. The rate would be reduced to 5.6% effective January 1,
1999, 5.3% effective January 1, 2000 and 5% effective January 1, 2001. The
Executive Office for Administration and Finance estimates that the static
revenue impact of these changes would be a reduction in
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personal income tax collections of approximately $206 million in fiscal 1999,
$616 million in fiscal 2000, $1.035 billion in fiscal 2001 and $1.292 billion in
fiscal 2002, at which time the rate reduction would be fully implemented. The
Acting Governor also proposed a reduction in the tax rate on "Part A" personal
income (so-called "unearned" income) from 12 % to 5% over five years. The
Executive Office for Administration and Finance estimates that the static
revenue impact of these changes would be a reduction in personal income tax
collections of approximately $30 million in fiscal 1999, $101 million in fiscal
2000, $173 million in fiscal 2001, $249 million in fiscal 2002, $327 million in
fiscal 2003 and $372 million in fiscal 2004, at which time the rate reduction
would be fully implemented. On March 12, 1998 the House of Representatives
approved legislation that would reduce the rate on Part A and Part B income, and
raise the rate on capital gains income, to 5.7%, as well as raising the age of
the children's exemption to age 18 and raising the amount of the exemption from
$1200 to $2400. Such provisions were also included in the proposed fiscal 1999
budget released on April 27, 1998 by the House Committee on Ways and Means.
Two initiative petitions that would reduce income tax rates were
certified by the Attorney General on September 3, 1997 and filed with the State
Secretary in November 1997, to be placed before the 1998 session of the
Legislature. One petition set the rate for Part B personal income at 5.6% for
the tax year 1999, 5.3% for tax year 2000 and 5% for tax year 2001 and
thereafter, unless the Legislature set a lower rate for any of those years. The
other petition would change the income tax rate on interest and dividend income
(currently 12%) to whatever rate applies to Part B income, starting in tax year
2000. On January 2, 1998, opponents of the first of these two petitions
(relating to Part B personal income taxes) filed an objection with the state
Ballot Law Commission, challenging the validity of the petition signatures. The
Commission ruled in the opponents' favor on January 23, 1998, holding that the
petition did not contain a sufficient number of certified signatures. Following
that decision, petition opponents and proponents both filed suit in Superior
Court seeking, respectively, to disqualify additional signatures so as to
prevent the petition from appearing on the ballot, and to add signatures, so as
to allow the petition to appear on the ballot. On May 5, 1998, the Superior
Court ruled that the petitioners had not obtained sufficient signatures to place
the petition on the ballot. Under the state constitution, if the Legislature
does not enact the petition relating to the tax on personal interest and
dividend income by May 6, 1998, the sponsors may have the petition placed on the
1998 general election ballot by collecting an additional 10,821 signatures.
SALES AND USE TAX. The Commonwealth imposes a 5 percent sales tax on
retail sales of certain tangible properties (including retail sales of meals)
transacted in the Commonwealth and a corresponding 5 percent 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.
On October 20, 1997, Acting Governor Cellucci announced that the
Department of Revenue will issue regulations changing the payment for
approximately 15,000 sales, meals and room occupancy taxpayers over $25,000 in
tax per year. While these new regulations will not affect the amount of tax
owed, the Department of Revenue estimates that the Commonwealth will realize a
reduction in fiscal 1998 revenues of $120 million
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to $160 million, which has been incorporated into the January 16, 1998 revenue
estimates. This reduction will be a one-time event.
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 net income for federal taxes, is taxed at 9.5 percent. The minimum
tax is $456. Both rates and the minimum tax include a 14 percent surtax. The
reduction in fiscal 1996 tax revenues from business corporations compared to
fiscal 1995 was due primarily to an estimated $49 million reduction resulting
from the application of the "single sales factor" apportionment formula,
described below. The fiscal 1997 tax revenue collections reflected an additional
$44 million reduction for the full-year impact of the "single sales"
apportionment formula and a $10 million reduction due to the impact of
legislation enacted in August 1996, which, effective January 1, 1997, changed
the computation of the sales factor for certain mutual fund companies.
On November 28, 1995 the Governor approved legislation establishing a
"single sales factor" apportionment formula for the business corporations tax.
The new formula, when fully 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 prior formula that took other factors, such as
payroll and property into account. The new formula was made effective as of
January 1, 1996 to certain federal defense contractors and phased in over five
years for manufacturing firms generally. The Department of Revenue estimated
that the revision reduced revenues by $44 million in fiscal 1996 and by $90
million in fiscal 1997. If the new formula were fully effective for all covered
businesses, the Department estimates that the annual revenue reduction would be
$100 million to $150 million.
On August 8, 1996, the Governor approved legislation making two changes
in the apportionment formula for the business corporations tax payable by
certain mutual fund service corporations. Effective January 1, 1997, the
legislation changed the computation of the sales factor; instead of sourcing
sales from the state where the seller bears the cost of performing the services
relating to the sale, the corporations will source sales to the state of
domicile of the ultimate consumer of the service. Effective July 1, 1997, the
legislation changed the prior three-factor formula to a single sales factor
formula, just as the November 1995 legislation had done for certain federal
defense contractors and, over time, for manufacturing firms. Under the new law,
affected corporations are required to increase their numbers of employees by 5
percent per year for five years, subject to exceptions for adverse economic
conditions affecting the stock market or the amount of assets under their
management. The Department of Revenue estimates that the changes resulted in a
revenue reduction of approximately $10 million in fiscal 1997 and will result in
revenue reductions of $39 million to $53 million on an annualized basis
thereafter, starting in fiscal 1998. These estimates do not take into account
any increased economic activity stimulated by the tax cuts.
On August 9, 1996, the Governor signed legislation providing a tax
credit to shippers that pay federal harbor maintenance taxes on cargo passing
through Massachusetts ports. The Department of Revenue estimates that there was
no impact on revenues in fiscal 1997 as a result of this tax credit and the
annualized revenue loss will be approximately $3 million to $4 million,
beginning in fiscal 1998.
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BANK TAX. Commercial and savings banks are subject to an excise tax of
12.54 percent. On July 27, 1995, the Governor approved legislation that will
reduce the rate over several years to 10.5 percent, the same effective rate
charged to other corporations. The Department of Revenue estimates that the tax
cut, 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.
INSURANCE TAXES. Life insurance companies are subject to a 2% tax on
gross premiums; domestic companies also pay a 14% tax on net investment income.
Property and casualty insurance companies are subject to a 2% tax on gross
premiums, plus a 14% surcharge for an effective tax rate of 2.28%; domestic
companies also pay a 1% tax rate on gross investment income. On April 30, 1998,
the House of Representatives approved legislation that would over five years
eliminate the 14% surcharge for property and casualty insurers and the tax on
investment income for both types of domestic insurers. The House Committee on
Ways and Means has estimated the fully phased-in aggregate annual value of the
tax reductions to be approximately $50 million.
OTHER TAXES. 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.
On July 24, 1996, the Legislature overrode the Governor's veto of
legislation imposing a 25(cent)-per-pack tax increase on cigarettes, as well as
a 25 percent increase in the tax on smokeless tobacco and a 15 percent tax on
cigars and smoking tobacco, all effective October 1, 1996. The Department of
Revenue estimates that these changes resulted in approximately $74 million in
additional tax revenue for fiscal 1997 and will result in $80 million to $90
million in additional revenue in fiscal 1998. The Department estimates that by
fiscal 2000, when demand for cigarettes will have fully adjusted to the higher
tobacco product prices expected to result from the increased tax, additional
revenues will range from $73 million to $83 million.
In 1992, legislation was enacted by the voters which increased the
tobacco excise tax by 1.25(cent) per cigarette (25(cent) per pack of 20
cigarettes) and 25 percent of the wholesale price of smokeless tobacco,
effective January 1, 1993. Under the legislation, the revenues raised by this
excise tax were to be credited to the Health Protection Fund and expended,
subject to appropriation by the Legislature, to pay for health programs and
education relating to tobacco use. Total revenues deposited in the Health
Protection Fund in fiscal 1993 and fiscal 1994 were $59.5 million and $116.4
million and have been $114 million on an annualized basis since fiscal 1995.
The Commonwealth is authorized to issue special obligation highway
bonds secured by a pledge of all or a portion of the Highway Fund, including
revenues derived from all or a portion of the motor fuels excise tax. The
portion of the motor fuel tax currently pledged to special obligation bonds is
estimated to be approximately $177 million in fiscal 1998. Additional special
obligation bonds may be issued in the future secured by all or additional
portions of the motor fuels excise tax.
On November 17, 1997, the legislature overrode Acting Governor
Cellucci's veto to enact legislation the Commonwealth to issue special
obligation convention center bonds secured by a pledge of certain taxes related
to tourism and conventions, including
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a 2.75 percent convention center financing fee imposed by the legislation on
hotel room occupancy in four Massachusetts cities.
ESTATE TAX REVISIONS. The fiscal 1993 budget included legislation which
gradually phased down the current Massachusetts estate tax until it became a
"sponge tax" in 1997. The "sponge tax" is based on the maximum amount of the
credit for the State taxes allowed for federal estate tax purposes. The estate
was phased out by means of annual increases in the basic exemption from the
original $200,000 level. The exemption was increased to $300,000 for 1993,
$400,000 for 1994, $500,000 for 1995 and $600,000 for 1996. In addition, the
legislation included a full marital deduction starting July 1, 1994. The marital
deduction was limited to 50 percent of the Massachusetts adjusted gross estate
until June 30, 1995. The statistic fiscal impact of the phase-out of the estate
tax is estimated to have been approximately $25 million in fiscal 1994,
approximately $73 million in fiscal 1995, approximately $112 million in fiscal
1996 and approximately $139 million in fiscal 1997 and is projected to be
approximately $253 million in fiscal 1998.
FEDERAL AND OTHER NON-TAX REVENUES
Federal revenue is collected through reimbursements for the federal
share of entitlement programs such as Medicaid and, beginning in federal fiscal
year 1997, through block grants for programs such as Transitional Assistance to
Needy Families ("TANF"), formerly Aid to Families with Dependent Children
("AFDC"). The amount of federal revenue to be received is determined by state
expenditures for these programs. The Commonwealth receives reimbursement for
approximately 50 percent of its spending for Medicaid programs. Block grant
funding for TANF is received quarterly and its contingent upon a maintenance of
effort spending level determined annually by the federal government.
Departmental and other non-tax revenues are derived from licenses,
registrations and reimbursements and assessments for services. In fiscal 1996, a
revenue maximization pilot project undertaken by the Comptroller and the
Executive office for Administration and Finance yielded almost $39.9 million in
additional federal reimbursement revenues, net of agency and vendor incentive
payments, at the Department of Mental Health, Department of Mental Retardation,
Department of Social Services and Division of Medical Assistance. In fiscal
1997, $41.3 million in additional non-tax revenues resulted in net revenues of
$39.1 million deposited into the General Fund. In fiscal 1998, an estimated
$46.7 million in additional non-tax revenues is expected to result in $37.1
million of net revenues for the General Fund.
The Commonwealth began in fiscal 1997 to phase in a one-time (rather
than annual) passenger vehicle registration fee of $30 and a reduction in the
passenger vehicle operating license renewal fee from the rate of $30 to $2,
effective May 1, 2001. The Executive Office for Administration and Finance
estimates that these changes had no effect on fiscal 1997 revenues and will
reduce fiscal 1998 revenues by $15.0 million. When all drivers become eligible
for free registration renewals in fiscal 1999, revenues are projected to decline
by approximately $55 million. Revenue reductions due to lifetime licenses will
not begin until fiscal 2001, when they will total approximately $5 million. In
fiscal 2002, when all drivers become eligible for free license renewals, the
revenue reduction is estimated to be approximately $31 million. (The
Commonwealth is still maintaining the requirement that all parking tickets,
moving violation citations, excise taxes and insurance premiums be paid before
license and registration renewals are processed, in order to ensure that cities
and towns do not lose revenue from the
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change to lifetime licenses and registration.) In May 1997, the Legislature
enacted legislation that would restore registration, license and permit fees
credited to the Highway Fund to the rates in effect on January 1, 1996 if
federal aid to the Central Artery/Ted Williams Tunnel project falls below $550
million in any fiscal year during the next six years. Governor Weld vetoed this
provision. Under the state constitution, his veto can be overridden by a
two-thirds vote of each house of the Legislature; neither house has acted on the
veto.
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 $600.2
million, $667.3 million, $709.5 million, $727.5 million and $770.2 million in
fiscal 1993 through 1997, respectively and which are expected to account for
$780.6 million in fiscal 1998.
In 1994, the voters in the statewide general election approved an
initiative petition, effective December 8, 1994, that would slightly increase
the portion of gasoline tax revenue credited to the Highway Fund, one of the
Commonwealth's three major budgeted finds, prohibit the transfer of money from
the Highway Fund to other funds for non-highway purposes and exclude the Highway
Fund balance from the computation of the "consolidated net surplus" for purposes
of state finance laws. The initiative petition also provided that no more than
15 percent of gasoline tax revenues could be used for mass transportation
purposes, such as expenditures related to the Massachusetts Bay Transportation
Authority. This law is not a constitutional amendment and is subject to
amendment or repeal by the Legislature, which may also, notwithstanding the
terms of the initiative petition, appropriate moneys from the Highway Fund in
such amounts and for such purposes as it determines, subject only to a
constitutional restriction that such moneys be used for motor vehicle, highway,
or mass transportation purposes. The Legislature has twice postponed the
effective date of the provision that would exclude the Highway Fund balance from
the computation of the "consolidated net surplus". The most recent postponement
changed the effective date of the provision to July 1, 1998.
On August 9, 1996, the Governor approved legislation, authorizing the
State Lottery Commission to participate with other states in a
multi-jurisdictional lottery. Beginning September, 1996, the Commission joined
with the states of Illinois, Georgia, Maryland, Michigan and Virginia in a
multi-state game that is estimated to generate an additional $30 million per
year in net lottery revenues.
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 tax 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
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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 establishes 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 utilizes 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. Accordingly, the amount of revenues
permitted by Chapter 62F will always be less than the amount of revenues
permitted by Chapter 29B. Because the provisions of Chapter 29B are essentially
superceded by those of Chapter 62F, Acting Governor Celluci has proposed, as
part of his fiscal 1999 budget recommendations, that the tax revenue limitations
provisions of Chapter 29B be repealed. The House Committee on Ways and Means
included such recommendation in its proposed fiscal 1999 budget released on
April 27, 1998.
Tax revenues in fiscal 1993 through fiscal 1997 were lower than the
limit set by either Chapter 62F or Chapter 29B, and the Executive Office for
Administration and Finance currently estimates that State tax revenues in fiscal
1998 will not reach the limit imposed by either of these statutes.
LITIGATION
There are pending in state and federal courts within the Commonwealth
and in the Supreme Court of the United States various suits in which the
Commonwealth is a party. In the opinion of the Attorney General, no litigation
is pending or, to his knowledge, threatened which is likely to result, either
individually or in the aggregate, in final judgments against the Commonwealth
that would affect materially its financial condition.
COMMONWEALTH PROGRAMS AND SERVICES. From time to time actions are
brought against the Commonwealth by the recipients of governmental services,
particularly recipients of human services benefits, seeking expanded levels of
services and benefits and by the providers of such services challenging the
Commonwealth's reimbursement rates and methodologies. To the extent that such
actions result in judgments requiring the Commonwealth to provide expanded
services or benefits or pay increased rates, additional operating and capital
expenditures might be needed to implement such judgments. In June 1993, in an
action challenging the Commonwealth's funding of public primary and secondary
education systems on both federal and state constitutional grounds, WEBBY V.
DUKAKIS (now known as MCDUFFY V. ROBERTSON, Supreme Judicial
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Court for Suffolk County No. 90-128), the Supreme Judicial Court ruled that the
Massachusetts Constitution imposes an enforceable duty on the Commonwealth to
provide adequate public education for all children in the Commonwealth and that
the Commonwealth was not at that time fulfilling this constitutional duty.
However, the court also ruled that the Legislature and the Governor were to
determine the necessary response to satisfy the Commonwealth's constitutional
duty, although a single justice of the court could retain jurisdiction to
determine whether, within a reasonable time, appropriate legislative action had
been taken. Comprehensive education reform legislation was approved by the
Legislature and the Governor later in June 1993. On May 10, 1995, the plaintiffs
filed a motion for further relief, arguing that the 1993 legislation did not
provide sufficiently for public education and that its timetable was too slow.
It cannot be determined at this time what further action, if any, the plaintiffs
in McDuffy may take or whether the court will order any further relief.
Challenges by residents of five state schools for the retarded in RICCI
V. MURPHY (U.S. District Court C.A. No. 72-469-T) resulted in a consent decree
in the 1970's which required the Commonwealth to upgrade and rehabilitate the
facilities in question and to provide services and community placements in
western Massachusetts. The District Court issued orders in October 1986 leading
to termination of active judicial supervision. On May 25, 1993, the District
Court entered a final order vacating and replacing all consent decrees and court
orders. In their place, the final order requires lifelong provisions for
individualized services to class members and contains requirements regarding
staffing, maintenance of effort (including funding) and other matters.
In HODGE V. GALLANT (Suffolk Superior Court No. 93-0290G), plaintiffs
allege that the Division of Medical Assistance has unlawfully denied personal
care attendant services to certain disabled Medicaid recipients. The Superior
Court denied plaintiffs' motions for the preliminary injunction and class
certification. If plaintiffs were to prevail on their claims and the
Commonwealth were required to provide all of the services sought by plaintiffs
to all similarly situated persons, a substantial increase in the annual cost of
the Commonwealth of these services might eventually be required. The Division of
Medical Assistance estimates this increase to be as much as $200 million per
year. In September 1995, the parties argued cross motions for summary judgment,
which are now under advisement.
In BEAULIEU V. BELMONT (U.S. District Court No. 95-12382GAO), the
plaintiffs are former residents of the Fernald School, a facility of the
Department of Mental Retardation. They allege that in the 1950's they were fed
radioactive isotopes without their informed consent. They claim violations of
their civil rights, battery, invasion of privacy, loss of consortium and
misrepresentation. The amount of potential liability is estimated to be $25
million.
ENVIRONMENTAL MATTERS. The Commonwealth is engaged in various lawsuits
concerning environmental and related laws, including an action brought by the
U.S. Environmental Protection Agency alleging violations of the Clean Water Act
and seeking to enforce the clean-up of Boston Harbor. UNITED STATES V.
METROPOLITAN DISTRICT COMMISSION (U.S. District Court C.A. No. 85-0489-MA). See
also CONSERVATION LAW FOUNDATION V. METROPOLITAN DISTRICT COMMISSION (U.S.
District Court C.A. No. 83-1614-MA). The Massachusetts Water Resources Authority
(MWRA), successor in liability to the Metropolitan District Commission (MDC),
has assumed primary responsibility for developing and implementing a
court-approved plan and timetable for the construction of the treatment
facilities necessary to achieve compliance with the federal requirements. During
fiscal 1997, the MWRA completed the mining of the 9.5-mile
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outfall tunnel, completed the draft combined sewer outflow (CSO) plan and began
design of several CSO projects, completed construction of the first battery of
secondary treatment and began construction of the third and final battery of
secondary treatment. The MWRA currently projects that the total cost of
construction of the waste water facilities required under the court's order, not
including CSO costs, will be approximately $3.142 billion in current dollars,
with approximately $601 million to be spent after June 30, 1997. With CSO costs,
the MWRA anticipates spending approximately $901 million after that date. Under
the Clean Water Act, the Commonwealth may be liable for any cost of complying
with any judgment in these or any other Clean Water Act cases to the extent the
MWRA or a municipality is prevented by state law from raising revenues necessary
to comply with such a judgment.
On February 12, 1998, the U.S. Department of Justice filed a complaint
in federal district court seeking to compel the MWRA to build a water filtration
plant for the metropolitan Boston water supply and, together with the MDC, to
take certain watershed protection measures. The MWRA is gathering data to
determine whether a water filtration plant is necessary and anticipates
completing its inquiry by the fall of 1998. The federal district court has
issued a scheduling order under which it will decide in January 1999 whether the
Safe Water Drinking Act compels the MWRA to build a filtration system or whether
the MWRA can demonstrate that its data entitles it to avoid building such a
system. It is too early to predict what remedy the court will order if it
decides adversely to the MWRA.
TAXES AND OTHER REVENUES. In MASSACHUSETTS WHOLESALERS OF MALT
BEVERAGES V. COMMONWEALTH (Suffolk Superior Court No. 90-1523), associations of
bottlers challenged the 1990 amendments to the bottle bill which escheat
abandoned deposits to the Commonwealth. Plaintiffs claimed a taking; the
Commonwealth argued a legitimate regulation of abandoned amounts. In March 1993,
the Supreme Judicial Court upheld the amendments except for the initial funding
requirement, which the Court held severable. In August 1994, the Superior Court
ruled that the Commonwealth is liable for certain amounts (plus interest) as a
result of the Supreme Judicial Court's decision. The actual amount will be
determined in further proceedings. In February 1996, the Commonwealth settled
all remaining issues with one group of plaintiffs, the Massachusetts Soft Drink
Association. Payments to that group will total approximately $7 million. The
Legislature appropriated the funds necessary for these payments in its final
supplemental budget for fiscal 1996. Litigation with the other group of
plaintiffs, the Massachusetts Wholesalers of Malt Beverages, is still pending.
The remaining potential liability is approximately $50 million.
In THE FIRST NATIONAL BANK OF BOSTON V. COMMISSIONER OF REVENUE
(Appellate Tax Board No. F232249), the First National Bank of Boston challenges
the constitutionality of the former version of the Commonwealth's bank excise
tax. In 1992, several pre-1992 petitions filed by the bank, which raised the
same issues, were settled prior to a board decision. The bank has now filed
claims with respect to 1993 and 1994. The bank claims that the tax violated the
Commerce Clause of the United States Constitution by including its worldwide
income without appointment. The Department of Revenue estimates that the amount
of abatement, including interest, sought by the First National Bank of Boston,
could total $128 million.
In STATE STREET BANK AND TRUST COMPANY V. COMMISSIONER OF REVENUE
(Appellate Tax Board Nos. F215497, F232152, F233019 and F233948), State Street
Bank and Trust Company has raised the same claims as the First National Bank of
Boston, outlined above. State Street Bank also claims that it is entitled to
alternative apportionment
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under the bank excise tax. The Department of Revenue estimates that the amount
of abatement, including interest, sought by State Street Bank and Trust Company,
could total $158 million. On February 19, 1998 the case was settled for $8.7
million.
In addition, there are several tax cases pending which could result in
significant refunds if taxpayers prevail. It is the policy of the Attorney
General and the Commissioner of Revenue to defend such actions vigorously on
behalf of the Commonwealth, and the descriptions that follow are not intended to
imply that the Commissioner has conceded any liability whatsoever.
On March 22, 1995, the Supreme Judicial Court issued its opinion in
PERINI CORPORATION V. COMMISSIONER OF REVENUE (Supreme Judicial Court No. 6657).
The court held that certain deductions from the net worth measure of the
Massachusetts corporate excise tax violate the Commerce Clause of the United
States Constitution. The court remanded the case for entry of a declaration and
further proceedings, if necessary, to determine other appropriate remedies. On
October 2, 1995, the United State Supreme Court denied the Commonwealth's
petition for a writ of certiorari. The Supreme Judicial Court, on April 30,
1996, entered a partial final judgment implementing its decision for tax years
ending prior to January 1, 1995. The Department of Revenue estimates that tax
revenues in the amount of $40 million to $55 million may be abated as a result
of the partial final judgment. On May 13, 1996, the Court entered an order for
judgment and memorandum concerning relief for tax years ending on or after
January 1, 1996. A final judgment was entered on June 6, 1996. The Department of
Revenue is estimating the fiscal impact of that ruling; to date it has paid
approximately $15 million in abatements in accordance with the judgment.
Approximately $75 million in taxes and interest in the aggregate are at
issue in several other cases pending before the Appellate Tax Board or on appeal
to the Appeals Court of the Supreme Judicial Court.
EMINENT DOMAIN. In SPAULDING REHABILITATION HOSPITAL CORPORATION V.
MASSACHUSETTS HIGHWAY DEPARTMENT (Suffolk Superior Court. No. 95-4360C), the
Spaulding Rehabilitation Hospital filed an action to enforce an agreement to
acquire its property by eminent domain, in connection with the Ted Williams
Tunnel/Central Artery project. On March 13, 1998, the Superior Court entered
judgment for the Commonwealth dismissing the complaint.
Both COMMONWEALTH OF MASSACHUSETTS V. RUGGLES CENTER JOINT VENTURE
(Suffolk Superior Court No. 47-1764-A and RUGGLES CENTER, LLC V. BEACON
CONSTRUCTION CORPORATION (Suffolk Court No. 96-0637-E) involve an indoor air
quality dispute regarding the former headquarters of the Registry of Motor
Vehicles at Ruggles Center in Boston. In 1997, the Commonwealth commenced suit
against the former building owners, Ruggles Center Joint Venture (RCJV), as well
as the general contractor, the architect, the mechanical engineer and the
manufacturer of the fireproofing, to recover losses associated with the indoor
air quality (IAQ) problems, including the costs of relocating the agency and
workers' compensation payments paid to employees. RCJV has filed a counterclaim
against the Commonwealth alleging breach of lease, breach of the covenant of
good faith and fair dealing and negligence. RCJV claims that it fulfilled all of
its obligations under the lease and its amendment and that the Commonwealth
wrongfully terminated these agreements, and that the Commonwealth's negligence,
or that of its contractors, caused the IAQ problems. RCJV seeks to recover the
costs associated with its efforts to remedy the IAQ problems, additional rent
payments under the lease, and the value of RCJV's equity in the project had the
lease not been
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terminated. In the second and related case, the building owner has sued the
general contractor to recover on the performance bond. Many second, third and
fourth parties have been impleaded. The Registry of Motor Vehicles and the
Division of Capital Planning and Operations have been named as fourth-party
defendants by the manufacturer of the fireproofing. United States Mineral
Products Co., Inc., which has asserted a claim for indemnification. Potential
liability to the Commonwealth in each case is approximately $25 million.
DIBIASE V. COMMISSIONER OF INSURANCE (Suffolk Superior Court No.
96-4241-A) is a putative class action suit in which the plaintiffs seek to
invalidate most of Chapter 178A of the Massachusetts General Laws, which is the
savings bank life insurance statute. The suit alleges that the statute's
conversion of the former savings bank life insurance system established by
former Chapter 178 of the Massachusetts General Laws deprived policyholders
under the old system of more than $60 million in "surplus" and $11 million in
former General Insurance Guaranty Fund, the proceeds of both of which assertedly
belonged to them. The defendants have moved to dismiss on statute of limitations
grounds, and the plaintiffs have cross-moved for partial summary judgment on a
claim of alleged procedural due process violations. On October 16, 1997, the
Court dismissed the case on statute-of-limitations grounds. The plaintiff has
appealed.
BOSTON WHARF CO. V. COMMONWEALTH OF MASSACHUSETTS (Suffolk Superior
Court No. 96-0028) is an eminent domain case concerning a parcel on A Street in
South Boston which is being used for a tunnel in the Central Artery/Ted Williams
Tunnel project. The plaintiff's are claiming $32 million.
MASSACHUSETTS PORT AUTHORITY, BIRD ISLAND LTD. PARTNERSHIP AND HILTON
HOTELS V. COMMONWEALTH OF MASSACHUSETTS (Suffolk Superior Court Nos. 96-4803-C,
94-6966, 94-2830-E, 94-2831-F, 94-5745-B, 94-5744-A and 96-6789-E) are eminent
domain cases concerning a land acquisition in East Boston for the Central
Artery/Ted Williams Tunnel project. The Commonwealth faces a potential liability
of approximately $35.7 million.
THOMAS RICH V. COMMONWEALTH OF MASSACHUSETTS (Norfolk Superior Court
No. 94-2319) is an eminent domain case concerning property in the city of
Quincy. The Commonwealth faces a potential liability of $30 million. The cost of
remediation of contaminated soil will also be an issue.
P&P REALTY CO., INC. V. DEPARTMENT OF PUBLIC WORKS (Suffolk Superior
Court No. 92-2081) is an eminent domain case concerning two parcels at Summer
Street and Trilling Way in South Boston. The Commonwealth's potential liability
is $22 million.
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 July 3, 1998. 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.
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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.
ECONOMIC FORECAST
The Revenue Estimating Conference incorporates a range of economic
forecasts and economic information in making revenue estimates. During its May
1998 meeting, forecasts were presented by Data Resources, Inc. (DRI), Regional
Financial Associates (RFA), and The New England Economic Project (NEEP). Current
employment and labor force trends were also presented by the Department of Labor
and Training.
RFA, DRI, and NEEP all forecast that economic growth will continue
throughout fiscal year 1999, albeit at a more moderate pace.
EMPLOYMENT
There was some disparity among the economists with respect to the
employment forecast. In fiscal year 1998, growth was anticipated in the range of
1.6 percent to 1.9 percent, and fiscal year 1999, growth is expected to fall in
the range of 1.0 percent to 1.4 percent. The disparity may be partially
explained by problems in data sampling.
Benchmark revisions for fiscal year 1997 resulted in annual employment
growth of 1.7 percent, versus the preliminary figure 1.0 percent. RFA revised
its 1998 nonfarm employment growth from 0.6 percent in November, to 1.9 percent
in May.
PERSONAL INCOME
Personal income growth rates vary from 4.8 percent to 5.1 percent in
fiscal year 1998, and 4.1 percent to 5.5 percent in fiscal year 1999. Personal
income tax receipts have increased dramatically due to continued strength in
financial markets.
WAGE AND SALARY INCOME
A fairly wide range of forecasts was present in wage and salary growth
estimates, from 5.2 percent to 6.1 percent in fiscal year 1998, and 4.7 percent
to 6.4 percent in fiscal year 1999. This disparity also contributes to the
differential in estimated personal income growth. The more optimistic outlook
may reflect the theory that high wage earners are realizing greater salary
gains, as well as larger and more frequent bonuses. The dramatic rise in wage
and salary income since 1996 further indicates that Rhode Island away from
low-paying manufacturing employment toward higher paying services employment.
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.
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MAJOR SOURCES OF STATE REVENUE
TAX REVENUES. Approximately 67.6 percent of all taxes and departmental
receipts in fiscal year 1997 were derived from the Rhode Island personal income
tax and the sales and use tax. They constituted 60.8 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).
A resident's Rhode Island taxable income is equal to his or her federal
income, subject to specified modifications. A non-resident's Rhode Island income
is equal to such non-resident's income less deductions (including such
taxpayer's share of the income and deductions of any partnership, trust, estate,
electing small business corporations, or domestic international sales
corporation), subject to specified modifications which are included in computing
his or her federal adjusted gross income and are derived from or connected with
any property located or deemed to be located in the State and any income
producing activity or occupation carried on in the State. Although the law
provides for certain adjustments to be made to federal taxable income to arrive
at the Rhode Island income of residents and non-residents, the Rhode Island
personal income tax essentially "piggy-backs" federal income tax law and thus is
affected by any modifications to the federal tax base. The fiscal year 1997
Appropriations Act, however, provided that new federal credits enacted after
January 1, 1996 shall not be allowed as a deduction when computing the state
tax. Current law allows the Tax Administrator to modify income tax rates as
necessary when the Assembly is not in session to adjust for federal tax law
changes to ensure maintenance of the revenue base upon which appropriations are
made. The fiscal year 1998 Appropriations Act reduced the personal income tax
rate from 27.5 percent of federal liability to 27.0 percent, effective January
1, 1998, and from 27.0 percent to 26.5 percent effective January 1, 1999. It
also increased the Investment Tax Credit from 4.0 percent to 10.0 percent, and
increased the Research and Development Tax Credit from 5.0 percent to 22.5
percent effective January 1, 1998. The Rhode Island personal income tax
accounted for approximately 34.3 percent of the State's fiscal year 1997 general
revenues.
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) 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
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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.
The fiscal year 1991 Reissuance of Appropriations Act, Article 4,
provided that the sales tax rate would remain at 7.0 percent for the period
commencing July 1, 1990. In addition, subject to annual appropriation by the
General Assembly, the Rhode Island Depositors Economic Protection Corporation
Act dedicated one-half cent of the total levy per dollar to "...be utilized to
pay the debt service of the corporation and otherwise effectuate the purposes of
the corporation" effective July 1, 1991. Legislation enacted by the 1992
Assembly increased the dedication under the Rhode Island Depositors Economic
Protection Corporation Act from one-half to six-tenths of one cent, exclusive of
any receipts resulting from any expansion of the coverage in sale and use taxes
through legislation enacted subsequent to February 1, 1992.
The sales and use tax accounted for approximately 26.5 percent of the
State's fiscal year 1997 general revenues.
BUSINESS CORPORATION TAX. The business corporation 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. In addition, Chapter
27 of the Rhode Island Public Laws of 1990 requires that two installments of the
Business Corporation Tax shall be paid in advance, based upon the estimated tax
declared for taxable years ending December 31, 1990 or thereafter. 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. In addition, the minimum business or franchise tax was raised from $100
to $250. Two reductions to the business corporation tax were enacted as part of
the fiscal year 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. The fiscal year 1998 Appropriation Act modified taxes due under the
Business Corporations Tax by providing for enhanced credits. Specifically, the
budget provided for an increase in the Investment Tax Credit from 4.0 percent to
10.0 percent for machinery and equipment expenditures and increased the Research
and Development Tax Credit for qualified research expenses from 5.0 percent to
22.5 percent, both effective January 1, 1998.
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. Such corporate
security dealers, investment companies, investment trusts and personal holding
companies are allowed to deduct from net
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income 50.0 percent of the excess of capital gains over capital losses realized
during the taxable year when computing the tax.
HEALTH CARE PROVIDER ASSESSMENT. The 1992 Legislature enacted a health
care provider assessment on residential facilities for the mentally retarded in
the fiscal year 1992 Supplemental Budget Bill. This was a medicaid provider
specific tax levy of 25.0 percent on gross revenues on community residences for
the mentally retarded. That assessment fell within the guidelines of the federal
legislation enacted in November of 1991 concerning medicaid provider specific
taxes. In mid-September 1994, the levy dropped to 6.0 percent because of new
federal limitations on reimbursements for this tax.
The Legislature also enacted a 2.75 percent tax on gross revenues for
nursing homes and a 1.50 percent tax on gross revenues from free-standing
medicaid facilities not associated with hospitals as part of the fiscal year
1993 budget. This tax was scheduled to end September 30, 1995; however, the
fiscal year 1996 Appropriations Act extended the tax on nursing facilities to
September 30, 1997 and raised the rate to 3.75 percent effective October 1,
1995. The fiscal year 1998 Budget provided for elimination of the previously
enacted sunset date and made the tax permanent.
TAXES ON PUBLIC SERVICE CORPORATIONS. A tax ranging from 1.25 percent
to 8.0 percent of gross earnings is assessed annually against any corporation
enumerated in Title 44, Chapter 13 of the General Laws, incorporated under the
laws of the State or doing business in Rhode Island. In the case of corporations
whose principal business is manufacturing, selling or distributing currents of
electricity, the rate of tax imposed is 4.0 percent. For those corporations
manufacturing, selling or distributing illuminating or heating gas, the rate of
tax imposed is 3.0 percent of gross earnings. Corporations providing
telecommunications services were assessed at the rate of 6.0 percent, until July
1, 1997, at which time the rate was reduced to 5.0 percent. However, 100.0
percent of the amounts paid by a corporation to another corporation for
connecting fees, switching charges and carrier access charges are excluded from
the gross earnings of the paying company. The minimum tax payable is $100. The
tangible personal property within the State of telegraph, cable, and telephone
corporations used exclusively for the corporate business, is exempt from
taxation, subject to certain exceptions.
Article 14 of the fiscal year 1995 Appropriations Act prescribed a
phase out of the portion of the public service corporations tax imposed on
energy used in manufacturing effective July 1, 1994. The tax on electricity was
lowered one percent for four years, and was fully eliminated on July 1, 1997.
The article contained provisions to ensure that the tax savings would be passed
on directly to manufacturers.
TAX ON INSURANCE COMPANIES. Each insurance company transacting business
in Rhode Island must file a return each year on or before March 1 and pay a tax
of 2.0 percent of its gross premiums. These are premiums on insurance contracts
written during the preceding calendar year on Rhode Island businesses. The same
tax applies to an out-of-state insurance company, but the tax cannot be less
than that which would be levied by the State or foreign country on a similar
Rhode Island insurance company or its agent doing business to the same extent
there. Effective December 31, 1989, premiums from marine insurance issued in
Rhode Island became exempt from the tax on gross premiums. The fiscal year 1998
Appropriations Act provided for an increase in the investment tax credit for
insurance companies from 4.0 percent to 10.0 percent for machinery and equipment
expenditures effective January 1, 1998.
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Insurance and surety companies are exempt from the business corporation
tax and annual franchise tax, but they are subject to provisions concerning any
estimated taxes which may be due. Through the provisions of Article 33 of the
fiscal year 1990 Appropriations Act, surplus line brokers were included under
the statutes relative to estimated taxes.
TAX ON BANKING INSTITUTIONS-EXCISE TAX. For the privilege of existing
as a banking institution during any part of the year, each State bank, trust
company, or loan and investment company in the State must annually pay an excise
tax measured by (1) 9.0 percent of its net income of the preceding year, or (2)
$2.50 per $10,000 or a fraction thereof of its authorized capital stock as of
the last day of the preceding calendar year. The tax payable is the higher of
the two. A national bank within the State must only pay the excise tax measured
by option (1) above. The minimum tax payable is $100. Mutual savings banks and
building and loan associations are subject to tax, effective January 1, 1998.
The fiscal year 1998 Appropriations Act provided for an increase in the
investment tax credit for banking institutions from 4.0 percent to 10.0 percent
for machinery and equipment expenditures effective January 1, 1998.
TAX ON BANKING INSTITUTIONS-INTEREST BEARING DEPOSITS. Chapter 410 of
the Public Laws of 1986 established current tax rates on banking institutions.
For institutions with over $150 million in deposits, the rate was .0695(cent) on
each one hundred dollars ($100) of deposits. For institutions with $150 million
or less in deposits, the rate was .0625(cent) on each one hundred dollars
($100). Under Article 29 of the fiscal year 1993 Appropriations Act, the tax
rates applied to credit unions were set equal to those levied on other banking
institutions and the tax is applied to average daily deposits held for the full
calendar year for all types of banking institutions. Article 34 of the fiscal
year 1996 Appropriations Act reduces the rates on banking institutions with over
$150 million in deposits to .0348 cents on each one hundred dollars of deposits
and .0313 cents on each one hundred dollars of deposits for those institutions
with less than $150 million in deposits for the calendar year. The rate was set
to zero beginning January 1, 1998 and thereafter. The deposits base includes all
but that percentage equivalent to total assets as are invested in obligations of
the United States and excludes those deposits of a branch or office located
outside the State of Rhode Island or those of an international banking facility
of any banking institution. The fiscal year 1996 Appropriations Act eliminated
certain exclusions relative to the tax on credit unions effective January 1,
1996, but did not make changes relative to the rate of tax.
Chapter 15 of the 1992 Rhode Island Public Laws changed the timing of
the estimated payments. The legislation placed the bank deposit tax on the same
calendar basis as the other business taxes.
ESTATE TAX. For decedents who died before January 1, 1986, a tax was
assessed on each decedent's estate at rates ranging from 2.0 percent to 9.0
percent of the net estate depending on its value. The exemption for all estates
is $25,000, and the marital deduction is $175,000. An orphan's deduction is
allowed similar to the deduction allowed under federal law.
Current law, established under the provisions of the 1991
Appropriations Act, provides for the phasing out of the estate tax, with the
minimum tax set equal to the maximum credit allowable under federal estate tax
law. Rates are equal to 40 percent of the tax otherwise payable for estates of
decedents whose deaths occurred on or after June 1, 1990 and prior to January 1,
1992. For decedents whose deaths occurred on or after January 1, 1992, the
estate tax equaled the maximum credit allowable under
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federal estate tax law, providing for the full implementation of the phase out.
The time period for filing a return was reduced from ten to nine months under
this legislation.
CIGARETTE TAX. Article 17 of the 1990 Appropriations Act established
rates equal to 18.5 mills per cigarette (37 cents per package of 20) effective
on June 29, 1989. The fiscal year 1994 Budget increased the rate from 18.5 mills
per cigarette to 22.0 mills per cigarette (from 37 cents to 44 cents per package
of 20 cigarettes) and to 56 cents per pack, effective July 1, 1994. The fiscal
year 1996 Appropriations Act increased the tax by five cents to 61 cents per
pack effective July 1, 1995. Article 12 of the fiscal year 1998 Appropriations
Act raised the tax by 10 cents to 71 cents per pack effective July 1, 1997.
GASOLINE TAX. The tax is due and is not refundable on the sale of all
fuels used or suitable for operating internal combustion engines other than fuel
used: (a) for commercial fishing and other marine purposes other than operating
pleasure craft; (b) in engines, tractors, or motor vehicles not registered for
use or used on public highways by lumbermen, water well drillers and farmers;
(c) for the operation of airplanes; (d) by manufacturers who use diesel engine
fuel for the manufacture of power and who use fuels other than gasoline and
diesel engine fuel as industrial raw material; and (e) for municipalities and
sewer commissions using fuel in the operation of vehicles not registered for use
on public highways.
Chapter 6 of the 1991 Rhode Island Public Laws modified the gasoline
tax floor from 18 cents per gallon to 23 cents per gallon, effective upon
passage. In addition, the minimum tax under the gasoline excise component was
changed from two to three cents per gallon for a total gasoline tax floor of 26
cents per gallon upon passage of the Act.
The fiscal year 1993 Budget increased the dedicated portion of gas tax
receipts to the Highway Reconstruction and Repair account from five cents to
seven cents and from zero to three cents to the Rhode Island Public Transit
Authority (RIPTA). The 1994 Appropriations Act raised the gasoline tax of 28
cents per gallon, an increase of 2 cents. One cent continues to be deposited as
general revenue through June 30, 1998, and the remaining 27 cents were deposited
in the Intermodal Surface Transportation Fund (ISTF). ISTF funds were
distributed to RIPTA (3 cents), Elderly and Handicapped Transportation (1 cent),
and the General Revenue Fund (10 cents), with the remainder used to finance the
Department of Transportation (13 cents). The fiscal year 1996 Appropriations Act
decreased the portion of the tax deposited in General Revenue by one cent (to 9
cents), and reallocated that portion to the Department of Transportation. The
fiscal year 1998 Appropriations Act again modified the distribution of ISTF
receipts. The share of the gasoline tax transferred to the general fund
decreased by 2 cents (to 7 cents), thereby increasing the Department of
Transportation share by 2 cents (to 16 cents). The fiscal year 1999
Appropriations Act requires that the full 28 cents of the gas tax be deposited
in the ISTF, and again modified the distribution. Beginning in fiscal year 1999,
the tax is allocated as follows: Department of Elderly Affairs (1 cent), RIPTA
(5 cents), Department of Transportation (17.5 cents), and Transfer to General
Fund (4.5 cents). In fiscal year 2000 and each year thereafter, the portion
allocated for transfer to the general fund will decrease by one cent and will be
dedicated to the Department of Transportation until the entire gas tax is
dedicated to transportation purposes.
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
registration of motor vehicles and the operation of pari-mutuel betting.
<PAGE>
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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, which was intended to be a one year fee that yielded
$77.3 million in fiscal year 1995. The fiscal year 1996 Appropriations Act
extended the fee one year but at a lower rate generating $37.5 million. The
fiscal year 1997 Appropriations Act extended the fee for an additional year at
the same rate of 2.2 percent, yielding $37.5 million. The fiscal year 1998
Appropriations Act also extended the fee for an additional year and imposed a
rate of 2.0 percent, which yielded $37.4 million. The fiscal year 1999
Appropriations Act again extends the fee for one year, at the current rate of
2.0 percent of gross patient receipts.
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 year 1997, the State received a total of
$90.1 million in restricted receipts excluding transfers into the General Fund.
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. Of the
total restricted receipts received in fiscal year 1997, the most significant
revenues reflected the dedication of sales tax revenues to the Depositors
Economic Protection Corporation (DEPCO) totaling $45.9 million in cash receipts.
The fiscal year 1998 Appropriations Act provided for the transfer of $15.0
million of DEPCO restricted receipts to general revenue. In fiscal year 1999,
and thereafter, all monies dedicated to DEPCO will be utilized to accelerate the
defeasance of DEPCO debt.
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. The monies in the fund are allocated for:
(1) establishing a prize fund from which payments of the prize are disbursed to
holders of winning lottery tickets, the total of which prize payments equals, as
nearly as practicable, 45 percent of the total revenue accruing from the sale of
lottery tickets; (2) payment of expenses incurred by the Commission in the
operation of State lotteries; and (3) payment to the State's General Fund of all
revenues remaining in the State Lottery Fund, provided that the amount to be
transferred into the General Fund must equal not less than 30 percent of the
total revenue received and accrued from the sale of lottery tickets plus any
other income earned from the lottery. The fiscal year 1996 Appropriations Act
increased the percentage of video lottery terminal receipts which are
transferred to the General Fund and increased the payout to keno game players,
which has increased lottery income. Lottery transfers to the general fund
totaled $100.0 million in fiscal year 1997.
The second largest single component of Other Sources is the gas tax
transfer from the Intermodal Surface Transportation Fund. Gasoline tax
recipients not dedicated for use by transportation agencies become available to
the general fund. This amounted to $37.7 million in fiscal year 1997.
The Unclaimed Property Transfer reflects funds which have escheated to
the State. They include unclaimed items such as bank deposits, funds held by
life insurance companies, deposits and refunds held by utilities, dividends and
property held by courts and public agencies. The escheated funds are deposited
by the General Treasurer in the
<PAGE>
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general fund, with deductions made for administrative costs. Unclaimed property
transfers totaled $5.0 million in fiscal year 1997.
Other Miscellaneous Sources in fiscal year 1997 totaled $40.8 million.
This includes $15.8 million from DEPCO, $5.5 million from the Underground
Storage Tank Fund, $4.5 million of interest earnings, and $5.0 million of health
insurance settlements. In fiscal year 1998 and fiscal year 1999, $34.8 million
and $20.7 million are estimated.
FEDERAL RECEIPTS. In fiscal year 1997, the State collected receipts of
$922.4 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 Temporary
Assistance to Needy Families (TANF). The federal participatory rates for Title
XIX are recalculated annually, and the major determinant in the rate calculation
is the relative wealth of the State. The federal match rate is 53.4 percent as
of October 1, 1997. Effective in fiscal year 1997, TANF funds are block grants;
state eligibility is conditional on maintenance of effort expenditure floors.
REVENUE ESTIMATES
Revenue estimates are predicated upon the May Revenue Estimating
conference, as well as changes to general revenues reflected in the fiscal year
1998 budget plan adopted by the Legislature on April 2, 1998 and the fiscal year
1999 Appropriations Act. This is a revision of 3.4 percent to the November
estimate. The estimate includes adjustments adopted by the Revenue Estimating
Conference and changes included in the fiscal year 1998 budget plan adopted by
the Legislature for 1998.
FISCAL YEAR 1998 REVENUE ESTIMATE
The fiscal year 1998 estimate was revised upward by $64.3 million over
the estimate adopted by the November Revenue Estimating Conference. This is a
revision of 3.4 percent to the November estimate. The estimate includes
adjustments adopted by the Revenue Estimating Conference and changes included in
the fiscal year 1998 budget plan adopted by the Legislature for 1998.
The largest revision was $43.9 million in personal income taxes over
the enacted estimate. The revisions to the enacted estimate were: $22.2 million
increase in estimated payments, $16.9 million increase in final payments, $6.8
million increase in refunds, and a $11.4 million increase in withholding
payments. The Conference adopted estimated payments of $163.7 million, growth of
24.9 percent over fiscal year 1997, reflecting market activity. The 28.5 percent
increase in final payments appears to also reflect that activity. Refunds are
estimated to be 5.8 percent greater than fiscal year 1997. Withholding growth is
estimated at 6.9 percent.
Total general business taxes estimates were $5.4 million less than the
November estimate. Gains in corporate income tax ($1.1 million), Franchise Taxes
($0.4 million), Taxes on insurance companies ($8.6 million), and bank deposits
taxes ($0.2 million),
<PAGE>
-93-
partially offset reductions in Public Utilities Gross Earnings Taxes ($2.6
million), Taxes on Financial Institutions ($12.6 million and the Health Care
Provider Tax ($0.5 million).
Estimated sales tax revenues of $527.0 million reflects 7.7 percent
growth over fiscal year 1997 receipts. The estimate is $11.0 million over the
November estimate. Other major changes in the Sales and Use Tax category include
increases in Motor Vehicle Taxes ($1.8 million) and Cigarettes ($0.8 million).
Other adjustments include: an increase of $0.8 million in inheritance
taxes; an upward revision of $6.8 million for departmental earnings; and a $4.0
million decrease to lottery revenues. The lottery estimate change includes a
$2.8 million decrease to the video lottery terminal estimate, a decrease of $1.8
million to the enacted estimate for games, and a $0.6 million increase to the
KENO estimate.
The Legislature's revised budget plan resulted in an adjustment of
negative $0.9 million to fiscal year 1998 departmental revenues.
FISCAL YEAR 1999 REVENUE ESTIMATE
The largest source of fiscal year 1999 general revenue is the personal
income tax, with estimated receipts of $731.1 million composing 37.1 percent of
the total. While collections in this component have been reduced significantly
by 1997 tax law changes, growth of 1.5 percent is still anticipated. Adjusted
for these changes, fiscal year 1999 growth equals 4.3 percent.
Sales Tax collections are expected to total $548.0 million in fiscal
year 1999. The fiscal year 1999 estimate anticipates 4.0 percent annual growth,
and composes 27.8 percent of total general revenues.
Other sources of "Sales and Use" taxes are expected to vary slightly in
the budget year. Since the Appropriations Act dedicates the full gas tax to
ISTF, the motor fuel tax will realize a loss of $4.5 million, but the gas tax
transfer in "Other Sources" will increase by the same amount subject to other
changes in ISTF allocation. Cigarette Tax collections are expected to realize a
loss of $1.1 million, or negative 1.7 percent, for an annual total of $65.0
million. Motor Vehicle and Alcohol Tax collections are expected to remain at
fiscal year 1998 levels.
The General Business Taxes, which represent 10.5 percent of total
collections, are expected to increase slightly in fiscal year 1999. The Business
Corporations Tax is expected to decline by approximately 2.0 percent as a result
of tax cuts and other adjustments, for a total of $65.6 million in revenues. The
Franchise and Bank Deposits Taxes are expected to remain flat in fiscal year
1999, while the Public Utilities Gross Earnings Tax revenues are expected to
decrease by 1.6 percent, with total collections of $60.0 million. The Financial
Institutions account should rebound in fiscal year 1999, with total revenues
reaching $7.0 million. The Health Care Provider Assessment is expected to
increase by 3.4 percent to $24.0 million, keeping in line with forecast
inflation.
Inheritance and Gift Taxes are expected to decline by $3.0 million,
(negative 16.7 percent) in fiscal year 1999. The anticipated loss is
attributable to the Taxpayer Relief Act provisions which will alter the taxable
estate criteria beginning January 1, 1998, and which will likely have the
greatest incremental effect in fiscal year 1999, due to tax return filing
requirements.
<PAGE>
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The Hospital Licensing Fee enacted by the 1997 General Assembly expires
on June 30, 1998. The fiscal year 1999 Appropriations Act extends the fee, and
includes $37.4 million in fiscal year 1999 General Revenues.
A reduction in "Other Sources" is explained by a smaller portion of the
Gas Tax being transferred to General Revenue, as well as significant reductions
in "Other Miscellaneous Revenues". The fiscal year 1999 Appropriations Act
allocated the full gas tax to the ISTF with 5 cents dedicated to RIPTA, 1 cent
to Elderly Affairs, 17.5 cents to transportation, and the remaining 4.5 cents to
the General Fund.
The fiscal year 1999 Appropriations Act also transfers $4.0 million
from the Resource Recovery Fund to General Revenue.
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, or to appropriate monies
to pay rental obligations under State long-term leases, such as the State's
lease agreements with the Convention Center Authority and the Resource Recovery
Corporation, are not subject to this limitation.
DIRECT DEBT. Direct debt is authorized by the voters as general
obligation bonds and notes. As of June 30, 1998, the State had $770.7 million of
bonds outstanding and $276,347,926 of authorized but unissued direct debt.
GUARANTEED DEBT. Guaranteed debt of the State includes bonds and notes
issued by, or on behalf of certain agencies, commissions, and authorities
created by the General Assembly and charged with enterprise undertakings, for
the payment of which debt the full faith and credit of the State are pledged in
the event that the revenues of such entities may at any time be insufficient.
These include the Blackstone Valley District Commission, the Rhode Island
Turnpike and Bridge Authority, and the Narragansett Bay Water Quality Management
District Commission. As of June 30, 1997, these entities had bonds outstanding
of $54,973,749 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.
<PAGE>
-95-
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.
LITIGATION
The State, its officers and employees are defendants in numerous
lawsuits. With respect to any such litigation, State officials are of the
opinion that the lawsuits are not likely to result either individually or in the
aggregate in final judgments against the State which would materially affect its
financial position. However, the following case should be noted. In Case No.
97-329-Appeal Capital Properties, Inc. ("CPI") v. State of Rhode Island, the
Rhode Island Supreme Court issued an order on April 17, 1998 affirming a
judgment in favor of CPI against the State for $6,100,949 plus interest and
costs. With interest, the judgment totals in excess of $11,200,000 with interest
accruing in an amount in excess of $3,500 per day.
The judgment arises out of a condemnation of land of CPI by the State
in 1987. The State contends there are contractual obligations among the State,
CPI and the City of Providence, Rhode Island which relieve the State of the
obligation to pay the judgment in the case. The State's position is that the
City of Providence and the State agreed to bear equally any judgment entered in
favor of CPI, and that CPI moreover agreed it would forego enforcement of any
judgment against the State in exchange for the State's conveyance to CPI of land
designated as "Parcel 9." Parcel 9 has been previously conveyed by the State to
CPI. Accordingly, it is the position of the State that the applicable
contractual provisions preclude enforcement of the judgment against the State.
The appeal was remanded by the Rhode Island Supreme Court to the Superior Court
without prejudice to any party seeking to enforce any contractual obligations
that may be implicated by enforcement of the judgment against the State. CPI is
currently seeking a Writ of Mandamus against the State requiring immediate
payment of the judgment. The State has also recently brought a suit against CPI
and the City of Providence seeking a court order acknowledging that the State
has already paid one-half the judgment to CPI and that the other half is the
responsibility of the City.
The State intends to oppose vigorously any enforcement of the judgment.
There are, however, no assurances the State will prevail. If the State fails
to prevail, resources of the State will have to be identified to satisfy this
judgment. No monies are currently budgeted to pay the judgment.
<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 IBCA, Inc. ("Fitch IBCA") 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.
- ----------------------
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>
-2-
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.
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 IBCA, INC.'S
FOUR HIGHEST INTERNATIONAL LONG-TERM CREDIT RATINGS
When assigning ratings, Fitch IBCA considers the historical and
prospective financial condition, quality of management, and the operating
performance of the issuer and of any guarantor, any special features of a
specific issue or guarantee, the issue's relationship to other obligations of
the issuer, as well as developments in the economic and political environment
that might affect the issuer's financial strength and credit quality.
Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as 'AAA/F1+'. The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in the case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
<PAGE>
-3-
BBB Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the 'AAA' long-term
category.
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.
<PAGE>
-4-
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+").
DESCRIPTION OF FITCH IBCA, INC.'S
TWO HIGHEST INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
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.
<PAGE>
-5-
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>
APPENDIX C
TAXABLE EQUIVALENT YIELDS
- --------------------------------------------------------------------------------
These tables show the yield investors need to achieve from a taxable investment
to equal the yield from a tax-exempt investment. These tables do not predict the
yield of any Fund. They are accurate as of August 20, 1998.
- --------------------------------------------------------------------------------
FEDERAL
Equivalent yields: Tax-exempt versus taxable securities
<TABLE>
<CAPTION>
1997
Taxable Income Federal
- ---------------------------- Marginal
Single Joint Rate 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- ------------ ------------ ------- -------- -------- -------- ------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-24,000 $0-40,100 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%` 7.65% 8.24% 8.82% 9.41%
24,001-58,150 40,101-96,900 28.00% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11%
58,151-121,300 96,901-147,700 31.00% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59%
121,301-263,750 147,701-263,750 36.00% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94% 11.72% 12.50%
over 263,750 over 263,750 39.60% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 11.59% 12.42% 13.25%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
CONNECTICUT
Equivalent yields: Tax-exempt versus taxable securities
<TABLE>
<CAPTION>
1997
Combined
Taxable Income* Connecticut A Connecticut Tax-Exempt Income Fund Yield of:
- ------------------------------- State Federal and Federal ----------------------------------------------------------------
Single Joint Rate** Rate TaxBracket*** 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- --------------- --------------- ------ ------- ----------- ----- ------ ------ ----- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-6,250 $0-12,500 3.00% 15.00% 17.55% 4.85% 5.46% 6.06% 6.67% 7.28% 7.88% 8.49% 9.10% 9.70%
6,251-24,650 12,501-41,200 4.50% 15.00% 18.83% 4.93% 5.54% 6.16% 6.78% 7.39% 8.01% 8.62% 9.24% 9.86%
24,651-59,750 41,201-99,600 4.50% 28.00% 31.24% 5.82% 6.54% 7.27% 8.00% 8.73% 9.45% 10.18% 10.91% 11.63%
59,751-124,650 99,601-151,750 4.50% 31.00% 34.11% 6.07% 6.83% 7.59% 8.35% 9.11% 9.86% 10.62% 11.38% 12.14%
124,651-271,050 151,751-271,050 4.50% 36.00% 38.88% 6.54% 7.36% 8.18% 9.00% 9.82% 10.63% 11.45% 12.27% 13.09%
over 271,050 over 271,050 4.50% 39.60% 42.32% 6.93% 7.80% 8.67% 9.54%10.40% 11.27% 12.14% 13.00% 13.87%
<FN>
* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income as defined in the Internal Revenue
Code is the same as under the Connecticut Personal Income Tax law, however,
Connecticut taxable income may differ due to differences in exemptions,
itemized deductions and other items.
** The Connecticut credits have not been included in the calculation of the
state rates. A credit between 1% and 75% is automatically allowed for
single taxpayers with a CT adjusted gross income ranging from $12,000 to
$52,500. A credit between 1% and 75% is automatically allowed for married
filing joint taxpayers with CT adjusted gross income ranging from $24,000
to $100,500.
*** For federal tax purposes, these combined rates reflect the applicable
marginal rates for 1997, including indexing for inflation. These rates
include the effect of deducting state taxes on your Federal return.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
-2-
FLORIDA
Equivalent yields: Tax-exempt versus taxable securities
<TABLE>
<CAPTION>
1997
Combined
Taxable Income* Florida A Tax-Exempt Income Fund Yield of:
- ------------------------------- and Federal ------------------------------------------------------------
Single Joint Tax Bracket** 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
- --------------- --------------- ------------- -------- -------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-24,000 $0-40,100 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%` 7.65% 8.24%
24,001-58,150 40,101-96,900 28.00% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72%
58,151-121,300 96,901-147,700 31.00% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14%
121,301-263,750 147,701-263,750 36.00% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94%
over 263,750 over 263,750 39.60% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 11.59%
<FN>
* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income as defined in the Internal Revenue
Code is the same as under the Florida Personal Income Tax law; however,
Florida taxable income may differ due to differences in exemptions,
itemized deductions and other items.
** For federal tax purposes these combined rates reflect the applicable
marginal rates for 1997, including indexing for inflation. These rates
include the effect of deducting state taxes on your federal return.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
MASSACHUSETTS
Equivalent yields: Tax-exempt versus taxable securities
<TABLE>
<CAPTION>
1997
Combined A Massachusetts Tax-Exempt
Taxable Income* Massachusetts Income Fund Yield of:
- ------------------------------- State Federal and Federal ----------------------------------------
Single Joint Rate Rate Tax Bracket** 4.0% 5.0% 6.0% 7.0% 8.0%
- --------------- --------------- ------- -------- ------------- ------ -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-24,000 $0-40,100 12.00% 15.00% 25.20% 5.35% 6.68% 8.02% 9.36% 10.70%
24,001-58,150 40,101-96,900 12.00% 28.00% 36.64% 6.31% 7.89% 9.47% 11.05% 12.63%
58,151-121,300 96,901-147,700 12.00% 31.00% 39.28% 6.59% 8.23% 9.88% 11.53% 13.18%
121,301-263,750 147,701-263,750 12.00% 36.00% 43.68% 7.10% 8.88% 10.65% 12.43% 14.20%
over 263,750 over 263,750 12.00% 39.60% 46.85% 7.53% 9.41% 11.29% 13.17% 15.05%
<FN>
* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income as defined in the Internal Revenue
Code is the same as under the Massachusetts Personal Income Tax law,
however, Massachusetts taxable income may vary due to differences in
exemptions, itemized deductions and other items.
** For federal tax purposes these combined rates reflect the applicable
marginal rates for 1997, including indexing for inflation. These rates
include the effect of deducting state taxes on your Federal return.
</FN>
</TABLE>
<PAGE>
-3-
- --------------------------------------------------------------------------------
RHODE ISLAND
Equivalent yields: Tax-exempt versus taxable securities
<TABLE>
<CAPTION>
1997
Combined
Rhode
Island
and
Taxable Income* Federal A Rhode Island Tax-Exempt Income Fund Yield of:
- ------------------------------- State Federal Tax ----------------------------------------------------------------------
Single Joint Rate Rate Bracket** 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- --------------- --------------- ------ ------ ---------- ------ ------ ------ ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-24,000 $0-40,100 4.13% 15.00% 18.51% 4.91% 5.52% 6.14% 6.75% 7.36% 7.98% 8.59% 9.20% 9.82%
24,001-58,150 40,101-96,900 7.70% 28.00% 33.54% 6.02% 6.77% 7.52% 8.28% 9.03% 9.78% 10.53% 11.29% 12.04%
58,151-121,300 96,901-147,700 8.53% 31.00% 36.88% 6.34% 7.13% 7.92% 8.71% 9.51% 10.30% 11.09% 11.88% 12.67%
121,301-263,750 147,701-263,750 9.90% 36.00% 42.34% 6.94% 7.80% 8.67% 9.54% 10.41% 11.27% 12.14% 13.01% 13.87%
over 263,750 over 263,750 10.89% 39.60% 46.18% 7.43% 8.36% 9.29% 10.22% 11.15% 12.08% 13.01% 13.93% 14.86%
<FN>
* This amount represents taxable income as defined in the Internal Revenue
Code. It is assumed that taxable income defined in the Internal Revenue
Code is the same as under the Rhode Island Personal Income Tax law,
however, Rhode Island taxable income may differ due to differences in
exemptions, itemized deductions, and other items.
** For federal tax purposes, these combined rates reflect the applicable
marginal rates for 1997, including indexing for inflation. These rates
include the effect of deducting state taxes on your Federal return.
</FN>
</TABLE>
<PAGE>
BOSTON 1784 FUNDS[SERVICE MARK]
BOSTON 1784 TAX-FREE MONEY MARKET FUND
BOSTON 1784 U.S. TREASURY MONEY MARKET FUND
BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
BOSTON 1784 PRIME MONEY MARKET FUND
BOSTON 1784 INSTITUTIONAL PRIME MONEY MARKET FUND
BOSTON 1784 SHORT-TERM INCOME FUND
BOSTON 1784 INCOME FUND
BOSTON 1784 U.S. GOVERNMENT MEDIUM-TERM INCOME FUND
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
BOSTON 1784 ASSET ALLOCATION FUND
BOSTON 1784 GROWTH AND INCOME FUND
BOSTON 1784 GROWTH FUND
BOSTON 1784 INTERNATIONAL EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
September 15, 1998
- ----------------------------------------------------
Boston 1784 Funds[SERVICE MARK]:
[Bullet] are not insured by the FDIC or any other governmental agency;
[Bullet] are not guaranteed by BankBoston, N.A. or any of its affiliates;
[Bullet] are not deposits or obligations of BankBoston, N.A. or any of its
affiliates; and
[Bullet] involve investment risks, including possible loss of principal.
BankBoston, N.A. serves as investment adviser, shareholder servicing agent and
custodian for Boston 1784 Funds. Boston 1784 Funds are distributed by SEI
Investments Distribution Co., a party independent of BankBoston, N.A. and any of
its affiliates. Financial Services Counselors are registered representatives of
BankBoston Investor Services, Inc., (member NASD/SIPC) a wholly-owned subsidiary
of BankBoston, N.A.
<PAGE>
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS
(1)(a) Declaration of Trust of the Registrant.(1)
(1)(b) Certificate of Amendment to Agreement and Declaration of
Trust.(11)
(2) By-Laws of the Registrant.(2)
(4)(a) Investment Advisory Agreement between the Registrant and
BankBoston, N.A.(3)(6)
(4)(b) Form of Investment Advisory Agreement between the
Registrant and BankBoston, N.A. with Schedule reflecting
advisory fees to be paid by the Registrant on behalf
of Boston 1784 Prime Money Market Fund.(8)
(4)(c) Investment Advisory Agreement between the Registrant and
BankBoston, N.A. with respect to Boston 1784
International Equity Fund.(5)
(4)(d) Investment Advisory Agreement between the Registrant and
Kleinwort Benson Investment Management Americas Inc. with
respect to Boston 1784 International Equity Fund.(5)
(4)(e) Form of Investment Advisory Agreement between the
Registrant and BankBoston, N.A. with Schedule reflecting
advisory fees to be paid by the Registrant on behalf of
Boston 1784 Small Cap Equity Fund.(9)
(4)(f) Form of Investment Advisory Agreement between the
Registrant and BankBoston, N.A. with Schedule reflecting
advisory fees to be paid by the Registrant on behalf of
Boston 1784 Large Cap Equity Fund.(10)
(5) Amended and Restated Distribution Agreement between the
Registrant and SEI Financial Services Company.(6)
(7)(a) Custodian Agreement.(3)
(7)(b) Custodian Agreement Amendment.(13)
(8)(a) Administration Agreement between the Registrant and SEI
Financial Management Corporation.(3)
(8)(b) Transfer Agency and Service Agreement between the
Registrant and State Street Bank and Trust Company.(7)
(8)(c) Fund Accounting Agreement between the Registrant and
BankBoston, N.A.(3)
(10)(a) Consent of PricewaterhouseCoopers LLP
<PAGE>
(10)(b) Consent of Ernst & Young LLP.
(13)(a) Amended and Restated Distribution Plan of the
Registrant.(6)
(13)(b) Distribution Plan (Class C Shares of Boston 1784 U.S.
Treasury Money Market Fund) of the Registrant.(6)
(13)(c) Distribution Plan (Class D Shares of Boston 1784 U.S.
Treasury Money Market Fund) of the Registrant.(6)
(14) Financial Data Schedule.
(19)(a) Code of Ethics of the Registrant.(8)
(19)(b) Code of Ethics of BankBoston, N.A. (12)
(25)(a) Powers of Attorney of Trustees of Registrant.(4)
(25)(b) Powers of Attorney of Trustees of Registrant.(11)
- -------------------------------
(1) Incorporated by reference to Registrant's Statement on
Form N1-A filed with the SEC on February 8, 1993.
(2) Incorporated by reference to Registrant's Pre-Effective
Amendment No. 2 filed with the SEC on May 18, 1993.
(3) Incorporated by reference to Registrant's Post-Effective
Amendment No. 2 filed with the SEC on January 31, 1994.
(4) Incorporated by reference to Registrant's Pre-Effective
Amendment No. 2 filed with the SEC on May 18, 1993 (on
signature page).
(5) Incorporated by reference to Registrant's Post-Effective
Amendment No. 5 filed with the SEC on September 28, 1994.
(6) Incorporated by reference to Registrant's Post-Effective
Amendment No. 8 filed with the SEC on November 1, 1995.
(7) Incorporated by reference to Registrant's Post-Effective
Amendment No. 9 filed with the SEC on December 15, 1995.
(8) Incorporated by reference to Registrant's Post-Effective
Amendment No. 10 filed with the SEC on July 17, 1996.
(9) Incorporated by reference to Registrant's Post-Effective
Amendment No. 13 filed with the SEC on November 15, 1996.
(10) Incorporated by reference to Registrant's Post-Effective
Amendment No. 14 filed with the SEC on March 17, 1997.
(11) Incorporated by reference to Registrant's Post-Effective
Amendment No. 16 filed with the SEC on August 1, 1997.
(12) Incorporated by reference to Registrant's Post-Effective
Amendment No. 22 filed with the SEC on June 22, 1998.
(13) Incorporated by reference to Registrant's Post-Effective
Amendment No. 25 filed with the SEC on August 25, 1998.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
<PAGE>
ITEM 25. INDEMNIFICATION
Reference is hereby made to Article VIII of the Agreement and
Declaration of Trust, filed as an Exhibit to Registrant's Statement on
Form N-1A with the Securities and Exchange Commission on February 8,
1993. The Trust participates in a group liability policy under which
the Trust and its trustees, officers and affiliated persons are insured
against certain liabilities. The Trust and its officers and employees
are also insured under the fidelity bond required by Rule 17g-1 under
the Investment Company Act of 1940, as amended.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
BankBoston, N.A. ("BankBoston") and its affiliates offer a
wide variety of banking and other financial services to customers
throughout New England, the United States and internationally. As of
June 30, 1998, BankBoston had aggregate gross interest and non-interest
income of $1.12 billion year to date, net income of $242 million and
assets of approximately $70.5 billion, including customer deposits of
$45.2 billion. BankBoston's principal place of business is 100 Federal
Street, Boston, Massachusetts 02110.
Other business, profession, vocation, or employment of a
substantial nature in which each director or principal officer of
BankBoston is or has been, at any time during the last two fiscal
years, engaged for his or her own account or in the capacity of
director, officer, employee, partner or trustee are as follows (each
Director of BankBoston is also a director of BankBoston Corporation):
Name and Position Connection with and
with Investment Adviser Name of Other Company
- ----------------------- ---------------------
Wayne A. Budd, Group President, Bell Atlantic, 185 Franklin
Director Street, Boston, MA 02107, since 1996. Senior
Partner, Goodwin, Procter & Hoar, from 1993
to 1996, United States Attorney, District of
Massachusetts from 1989 to 1992; Associate
Attorney General of the United States from
1992 to 1993.
William F. Connell, Chairman and Chief Executive Officer of Connell
Director Limited Partnership, One International Place,
Boston, MA 02109, since 1987. Director of
Harcourt General, Inc. and LCI International, Inc.
Gary L. Countryman, Chairman and Chief Executive Officer of Liberty
Director Mutual Insurance Company, 175 Berkeley Street,
Boston, MA 02117. Chairman of Liberty
Mutual Insurance Company since 1991;
Director of Boston Edison Company, The
Neiman-Marcus Group, Inc.,
Alliance of American Insurers,
and Harcourt General, Inc.
<PAGE>
William M. Crozier, Jr., Chairman Emeritus, BankBoston Corporation, 100
Chairman Emeritus Federal Street, Boston, MA 02110, Chairman of the
BankBoston Corporation Board and Chief Executive Officer of BayBanks from
1974 to July, 1996.
Alice F. Emerson, Senior Fellow, The Andrew W. Mellon Foundation,
Director 140 East 62nd Street, New York, NY 10021, since
1991. President Emerita of Wheaton College;
President of Wheaton College from 1975 to 1991;
Director of Eastman Kodak Company, Champion
International Corporation and AES Corporation.
Charles K. Gifford, Chairman and Chief Executive Officer of BankBoston
Chief Executive Officer of Corporation and of BankBoston since July 1995;
BankBoston Corporation, President of BankBoston and BankBoston Corporation
100 Federal Street, since 1989; Director of Massachusetts Mutual Life
Boston, MA 02110 Insurance Company and Boston Edison Company.
Thomas J. May, Chairman, President and Chief Executive Officer of
Director Boston Edison Company, 800 Boylston Street,
Boston, MA 02199, since July, 1994.
President and Chief Operating Officer of Boston
Edison Company from 1993 to July, 1994; Director
of Liberty Mutual Life Insurance Company and
RCN Corporation.
Donald F. McHenry, University Research Professor of Diplomacy and
Director International Relations, Georgetown University,
School of Foreign Service, Washington, D.C. 20057,
since 1981. President of the IRC Group, 1320 19th
Street, N.W., Suite 410, Washington, D.C. 20036,
since 1983; Director of American Telephone and
Telegraph Company, Coca-Cola Company,
International Paper Company, and
SmithKline Beecham, plc.
Henrique de Campos Meirelles, President and Chief Operating Officer,
President and Chief BankBoston, N.A., 100 Federal Street,
Operating Officer Boston, MA 02110; Director of Best Foods, Inc.
BankBoston, and MasterCard International.
100 Federal Street,
Boston, MA 02110
<PAGE>
Paul C. O'Brien, President of The O'Brien Group, Inc., Two
Director International Place, Boston, MA 02110 since 1995.
President and Chief Executive Officer of New
England Telephone and Telegraph Company from 1988
to 1993 and Chairman of the Board from 1993 to
December 1994. Chairman of the Board of ViewTech,
Inc. since January 1997, Director of Cambridge
NeuroScience, Inc, First Pacific Networks Inc.,
Shiva Corporation, The Registry, Inc., and
ViewTech, Inc.
Thomas R. Piper, Lawrence E. Fouraker Professor of Business
Director Administration, Harvard University Graduate School
of Business Administration, Morgan Hall -
469 Soldier's Field Road, Boston, MA 02163
Fran S. Rodgers, Chief Executive Officer of WFD, Inc. (Formerly
Director Work/Family Directions) 930 Commonwealth Avenue,
Boston, MA 02215; Founder and Chief Executive
Officer of Work/Family Directions since 1983;
Trustee of Barnard College of Columbia University,
and Trustee of the Foundation of the National
Academy of Human Resources.
John W. Rowe, Chairman, President and Chief Executive Officer of
Director Unicom Corp., 25 Research Drive, Westborough,
MA 01582, since 1998; President and Chief
Executive Officer of New England Electric System
from 1989 to February 1998. Director of New
England Electric System and UNUM Corporation.
Glenn P. Strehle, Vice President for Finance and Treasurer,
Director Massachusetts Institute of Technology, Building 4
- Room 110, 77 Massachusetts Avenue,
Cambridge, MA 02139, since 1975 Vice President
since 1986 and Vice President for Finance
and Treasurer since 1994; Director of BayBanks
from 1979 to July, 1996. Director, Liberty Mutual
Insurance Company and Property Capital Trust.
William C. Van Faasen, President and Chief Executive Officer of Blue
Director Cross and Blue Shield of Massachusetts, Inc.,
100 Summer Street, Boston, Massachusetts 02110.
Executive Vice President and Chief Operating
Officer of Blue Cross and Blue Shield of
Massachusetts, Inc. from 1990 to 1992 and
President and Chief Executive Officer of
Blue Cross andBlue Shield of Massachusetts, Inc.
since 1992.
<PAGE>
Thomas B. Wheeler, Chairman and Chief Executive Officer of
Director Massachusetts Mutual Life Insurance Company,
1295 State Street, Springfield, MA 01111.
President of Massachusetts Mutual Life Insurance
Company from 1987 to March, 1996 and Chief
Executive Officer since 1988 and Chairman since
March, 1996; Director of Massachusetts Mutual Life
Insurance Company and Textron Inc.
Alfred M. Zeien, Chairman of the Board and Chief Executive Officer
Director of The Gillette Company, Prudential Tower
Building, Boston, MA 02199, since 1991. Director
of Polaroid Corporation, Raytheon Company and
Massachusetts Mutual Life Insurance Company.
Kleinwort Benson Investment Management Americas Inc.
("Kleinwort") is the U.S. registered investment management subsidiary
of the London based Kleinwort Benson Group plc, a holding company for a
merchant banking group whose origins date back to 1792, which in turn
is an indirect wholly-owned subsidiary of Dresdner Bank A.G. Kleinwort
has offices in New York, London, Hong Kong and Tokyo. As of May 31,
1998, Kleinwort had approximately $795 million of assets under
management. Kleinwort's principal place of business is 75 Wall Street,
New York, New York 10005.
Other business, profession, vocation, or employment of a
substantial nature in which each director or principal officer of
Kleinwort is or has been, at any time during the last two fiscal
years, engaged for his or her own account or in the capacity of
director, officer, employee, partner or trustee are as follows:
Name and Position Connection with and
with Investment Adviser Name of Other Company
- ----------------------- ---------------------
Gerhard Eberstadt, Member of the Board of Managing Directors,
Chairman Dresdner Bank AG ("Dresdner")
Michael J. Apatoff, President and Member of the Board of
Director and Chief Executive Managers, Dresdner RCM Global Investors LLC
Officer ("Dresdner RCM")
Eamonn F. Dolan, Principal, Dresdner RCM
Director
George N. Fugelsang, President, Chief Executive Officer and Member
Director of the Board of Managers, Dresdner Kleinwort
Benson North America LLC
Joachim Madler, Member of the Board of Managing Directors,
Director Dresdner Bank
William L. Price, Chief Investment Officer and Member of the
Director Board of Managers, Dresdner RCM
<PAGE>
Jeffrey S. Rudsten, Principal and Member of the Board of
Director Managers, Dresdner RCM
Kenneth B. Weeman, Jr., Chief Operating Officer and Member of the
Director Board of Managers, Dresdner RCM
ITEM 27. PRINCIPAL UNDERWRITERS
(a) The Registrant's distributor, SEI Investments Distribution Co. (the
"Distributor"), acts as distributor for SEI Daily Income Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust, SEI Index Funds, SEI
Institutional Managed Trust, SEI International 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, Boston 1784 Funds(R), Marquis
Funds(R), Morgan Grenfell Investment Trust, The PBHG Funds, Inc., The
Achievement Funds Trust, Bishop Street Funds, CrestFunds, Inc., STI
Classic Variable Trust, ARK Funds, Monitor Funds, FMB Funds, Inc., SEI
Asset Allocation Trust, TIP Funds, SEI Institutional Investments Trust,
First American Strategy Funds, Inc., Highmark Funds, Armada Funds,
Expedition Funds, and Oak Associate Funds pursuant to distribution
agreements dated July 15, 1982, November 29, 1982, December 3, 1982,
July 10, 1985, January 22, 1987, August 30, 1988, January 30, 1991,
November 14, 1991, February 28, 1992, May 1, 1992, May 29, 1992,
October 30, 1992, November 1, 1992, November 1, 1992, January 28, 1993,
June 1, 1993, August 17, 1993, January 3, 1994, July 16, 1993, December
27, 1994, January 27, 1995, March 1, 1995, August 18, 1995, November 1,
1995, January 11, 1996, March 1, 1996, April 1, 1996, April 28, 1996,
June 14, 1996, October 1, 1996, February 18, 1997, March 8, 1997, June
9, 1997, and February 27, 1998 respectively.
The Distributor provides numerous financial services to
investment managers, pension plan sponsors, and bank trust departments.
These services include fund evaluation, performance measurement, and
consulting services ("Funds Evaluation") and automated execution,
clearing and settlement of securities transactions ("MarketLink").
(b) The following are the directors and officers of the Distributor.
Unless otherwise noted, the business address of each director or
officer is 1 Freedom Valley Drive, Oaks, Pennsylvania 19456.
<PAGE>
Position and Positions and
Name Offices with Underwriter Offices with Trust
---- ------------------------ ------------------
Alfred P. West, Jr. Director, Chairman and Chief --
Executive Officer
Henry H. Greer Director, President & Chief --
Operating Officer
Carmen V. Romeo Director, Executive Vice --
President
Gilbert L. Beebower Executive Vice President --
Richard B. Lieb Executive Vice President --
Dennis J. McGonigle Executive Vice President --
Leo J. Dolan, Jr. Senior Vice President --
Carl A. Guarino Senior Vice President --
Larry Hutchison Senior Vice President --
Jack May Senior Vice President
A. Keith McDowell Senior Vice President --
Hartland J. McKeown Senior Vice President --
Barbara J. Moore Senior Vice President --
Patrick K. Walsh Senior Vice President --
Kevin P. Robins Senior Vice President, General Vice President &
Counsel & Secretary Assistant Secretary
Kathryn L. Stanton Vice President & Assistant Vice President &
Secretary Assistant Secretary
Robert Crudup Vice President & Managing --
Director
Victor Galef Vice President & Managing --
Director
Kim Kirk Vice President & Managing --
Director
Carolyn McLaurin Vice President & Managing --
Director
<PAGE>
John Krzeminski Vice President & Managing --
Director
Donald Pepin Vice President & Managing --
Director
Mark Samuels Vice President & Managing --
Director
Wayne M. Withrow Vice President & Managing --
Director
Mick Duncan Vice President & Team Leader --
Cynthia M. Parrish Vice President & Assistant --
Secretary
Sandra K. Orlow Vice President Vice President &
Assistant Secretary
Robert Aller Vice President --
Marc H. Cahn Vice President & Assistant Vice President &
Secretary Assistant Secretary
Gordon W. Carpenter Vice President --
Todd Cipperman Vice President & Assistant Vice President &
Secretary Assistant Secretary
Barbara Doyne Vice President --
Jeff Drennen Vice President --
Kathy Heilig Vice President & Treasurer --
Michael Kantor Vice President --
Samuel King Vice President --
Jack May Senior Vice President --
W. Kelso Morrill Vice President --
Joanne Nelson Vice President --
Larry Pokora Vice President --
Kim Rainey Vice President --
Steve Smith Vice President --
Daniel Spaventa Vice President --
<PAGE>
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Books or other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940, and the rules promulgated thereunder, are
maintained as follows:
BankBoston, N.A. (investment adviser)
100 Federal Street
Boston, Massachusetts 02110
and
150 Royall Street,
Canton, Massachusetts 02021
Kleinwort Benson Investment Management Americas Inc. (investment adviser)
75 Wall Street
New York, New York 10005
and
10 Fenchurch Street
London, England EC3M 3HB
SEI Investments Mutual Fund Services (administrator and fund accountant)
1 Freedom Valley Drive
Oaks, Pennsylvania 19456
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
NOTICE
A copy of the Agreement and Declaration of Trust for the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts and notice
is hereby given that this Registration Statement has been executed on behalf of
the Trust by an officer of the Trust as an officer and by its Trustees as
trustees and not individually and the obligations of or arising out of this
Registration Statement are not binding upon any of the Trustees, officers, or
Shareholders individually but are binding only upon the assets and property of
the Trust.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Registrant certifies that it meets all of the requirements for
effectiveness of this registration statement under Rule 485(b) under the
Securities Act and has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Oaks,
Commonwealth of Pennsylvania on the 15th day of September, 1998.
BOSTON 1784 FUNDS[registered mark]
By: /s/ Robert A. Nesher
Robert A. Nesher
President
Pursuant to the requirements of the Securities Act, this registration statement
has been signed below by the following persons in the capacities and on the
date(s) indicated.
/s/ Robert A. Nesher Trustee, President & Chief September 15, 1998
- -------------------
Robert A. Nesher Executive Officer
/s/ Stephen G. Meyer Controller September 15, 1998
- --------------------
Stephen G. Meyer
* Trustee September 15, 1998
- ---------------
David H. Carter
* Trustee September 15, 1998
- ---------------
Tarrant Cutler
* Trustee September 15, 1998
- ----------------
Kenneth A. Froot
* Trustee September 15, 1998
- ---------------
Sara L. Johnson
* Trustee September 15, 1998
- -----------------
Kathryn F. Muncil
* Trustee September 15, 1998
- -------------
Alvin J. Silk
*By: /s/ Robert A. Nesher
- -------------------------
Robert A. Nesher
Executed by Robert A. Nesher, Attorney-in-fact on behalf of those indicated,
pursuant to Powers of Attorney previously filed.
<PAGE>
EXHIBIT INDEX
Exhibit Name
------- ----
(10)(a) Consent of PricewaterhouseCoopers LLP
(10)(b) Consent of Ernst & Young LLP
(14) Financial Data Schedule
Exhibit (7)(b)
CUSTODIAN AGREEMENT AMENDMENT
-----------------------------
THIS AMENDMENT made as of this 18th day of March, 1998, to the Custodian
Agreement, dated as of June 1, 1993, between 1784 Funds, a Massachusetts
business trust now known as Boston 1784 Funds, and The First National Bank of
Boston, a national banking association now known as BankBoston, National
Association.
IN CONSIDERATION of the mutual promises contained herein and for other good
and valuable consideration, the parties hereto hereby agree to amend Section
4(B) of the Custodian Agreement to provide as follows:
B. The Custodian may, at its sole discretion, advance cash or Securities of
the Custodian as a temporary measure for extraordinary or emergency purposes,
for payment or delivery on behalf of a series of the Fund (the "Series") to a
third party (an "Advance"), and in the event of an Advance, property held by the
Custodian on behalf of the Series with a fair market value equal to 130% of the
amount of such Advance (the "Collateral") shall serve as security for the
Series' obligation to repay such Advance until such time as such Advance is
repaid. In the case where an Advance is extended for the purchase of Securities
which constitute "margin stock" under Regulation U of the Board of Governors of
the Federal Reserve System and where the Custodian reasonably determines that
Regulation U applies, such additional Securities of the Series, as shall be
necessary for the Custodian, in the Custodian's reasonable determination, to
be in compliance with such Regulation U also shall constitute security for the
Series' obligation to repay such Advance and shall be deemed "Collateral"
hereunder. Notwithstanding the foregoing, in no event shall the value of the
Collateral for all Advances to a Series exceed 10% of the current value of the
total assets of such Series at the time of the incurrence of the last such
Advance. The Fund on behalf of the Series hereby grants the Custodian a security
interest in the Collateral to secure such Advance to the Series and agrees to
repay such Advance promptly without demand from the Custodian (and in any event,
as soon as reasonably practicable following any demand by the Custodian),
unless otherwise agreed by both parties. If repayment of any Advance is not
made in accordance with the terms hereof, the Custodian shall have the rights
and remedies of a secured party under the Massachusetts Uniform Commercial
Code (the "Code") including the right to sell any of the Collateral on any
securities market, or at public or private sale in a commercially reasonable
manner, which the Fund agrees may be without notice to the Fund or prior
tender, demand or call upon the Fund. Subject to the Code and to the
Investment Company Act of 1940, the Custodian may purchase all or any part of
the Collateral free from any redemption right, but the Fund on behalf of the
Series will remain liable for any deficiency, including reasonable brokerage
fee commissions. The parties acknowledge and agree that the Custodian is the
Fund's "securities intermediary" as that term is defined in Section 8-102(a)(14)
of the Code and that all securities constituting any part of the Collateral
shall be in the "possession" and under the "control" of the Custodian as that
term is defined in Section 8-106(e) of the Code.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the
Custodian Agreement to be executed by their respect officers thereunto duly
authorized as of the date first written above.
BOSTON 1784 FUNDS
By: /s/Robert A. Nesher
-------------------
Name: Robert A. Nesher
Title: President
BANKBOSTON, NATIONAL
ASSOCIATION
By: /s/Herbert N. Alleyne
---------------------
Name: Herbert N. Alleyne
Title: Senior Manager
Exhibit 10(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 25 to the Registration Statement under the Securities Act of 1933 and Post-
Effective Amendment No. 27 to the Registration Statement under the Securities
Act of 1940 on Form N-1A and (File Nos. 33-58004 and 811-7474, respectively) of
our report dated July 11, 1997 on our audit of the financial statements and
financial highlights of Boston 1784 Funds, which report is included in the
Annual Report to Shareholders for the year ended May 31, 1997 and for the
respective periods then ended. We also consent to the reference to our Firm
under the headings "Financial Highlights" in the Prospectus and under the
headings "Independent Accountants" and "Financial Statements" in the Statement
of Additional Information.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
September 15, 1998
Exhibit 10(b)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Highlights"
and to the use of our report dated February 9, 1996, with respect to the
financial statements and financial highlights of Boston 1784 Prime Money
Market Fund incorporated by reference in the Form N-1A Filing and related
Prospectus and Statement of Additional Information of Boston 1784 Funds.
/S/ SIGNATURE
Pittsburgh, Pennsylvania
September 15, 1998
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</TABLE>
