Rule 497(c)
File Nos. 33-580004
and 811-7474
THE STATEMENT OF ADDITIONAL INFORMATION INCLUDES ADDITIONAL INFORMATION ABOUT
THE FUND.
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS IS AVAILABLE IN THE FUND'S
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS. IN THE FUND'S ANNUAL REPORT YOU
WILL FIND A DISCUSSION OF THE MARKET CONDITIONS AND INVESTMENT STRATEGIES THAT
SIGNIFICANTLY AFFECTED THE FUND'S PERFORMANCE SINCE ITS INCEPTION.
YOU CAN OBTAIN A FREE COPY OF THE FUND'S STATEMENT OF ADDITIONAL INFORMATION
AND/OR FREE COPIES OF THE FUND'S 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.
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YOU MAY CALL 1-800-BKB-1784 TO REQUEST OTHER INFORMATION ABOUT THE FUND OR TO
MAKE SHAREHOLDER INQUIRIES.
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 FUND (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 FUND ARE ALSO AVAILABLE ON THE
COMMISSION'S INTERNET SITE AT HTTP://WWW.SEC.GOV.
[LOGO OMITTED] BOSTON 1784 FUNDS
BOSTON 1784 FUNDSSM
P.O. BOX 8524
BOSTON, MA 02266-8524
1-800-BKB-1784
WWW.BOSTON1784FUNDS.COM
MF-0135
Prospectus
[LOGO OMITTED] BOSTON 1784 FUNDS
BOSTON 1784 CALIFORNIA
TAX-EXEMPT INCOME FUND
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.
April 1, 1999
<PAGE>
TABLE OF CONTENTS
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BOSTON 1784 CALIFORNIA TAX-EXEMPT INCOME FUND.................................1
SHAREHOLDER SERVICES..........................................................6
HOW TO REACH THE FUND...........................................6
TYPES OF ACCOUNTS...............................................6
HOW TO OPEN AN ACCOUNT..........................................6
HOW TO PURCHASE SHARES..........................................7
HOW TO SELL SHARES..............................................8
SHAREHOLDER SERVICES AND POLICIES..............................10
PRICING OF FUND SHARES.......................................................12
DISTRIBUTIONS................................................................12
TAX CONSIDERATIONS...........................................................13
MORE ABOUT BOSTON 1784 CALIFORNIA TAX-EXEMPT INCOME FUND ....................14
MANAGEMENT...................................................................16
DISTRIBUTION ARRANGEMENTS....................................................17
PROSPECTUS
<PAGE>
BOSTON 1784 CALIFORNIA TAX-EXEMPT INCOME FUND
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THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES BOSTON 1784 CALIFORNIA TAX-EXEMPT
INCOME FUND AND THE PRINCIPAL RISKS OF INVESTING IN THE FUND. FOR FURTHER
INFORMATION ON THE FUND, PLEASE READ THE SECTION ENTITLED MORE ABOUT THE BOSTON
1784 CALIFORNIA TAX-EXEMPT INCOME FUND.
[COMPASS ROSE GRAPHIC OMITTED] WHAT IS THE FUND'S GOAL?
The California Tax-Exempt Income Fund's goal is to provide investors with
current income exempt from both federal and California personal income tax,
consistent with preservation of capital.
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WHAT ARE MUNICIPAL SECURITIES?
MUNICIPAL SECURITIES are debt obligations of states, cities, towns, and other
political subdivisions, agencies or public authorities that pay interest that
is exempt from federal income tax. Municipal securities also include debt
obligations of other qualifying issuers such as Puerto Rico, Guam, the Virgin
Islands and Native American Tribes. Municipal securities are often issued to
raise money for public services and projects such as schools, hospitals and
public transportation systems. Some municipal securities (for example,
INDUSTRIAL DEVELOPMENT BONDS) may be backed by private companies and used to
provide financing for corporate facilities or other private projects. In most
states, municipal securities issued by entities within the state are also
exempt from that state's taxes. Municipal securities may be in the form of
BONDS, NOTES and COMMERCIAL PAPER, may have a fixed or floating rate of
interest, or be issued as ZERO COUPON BONDS.
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[CHESS PIECE GRAPHIC OMITTED] WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The California Tax-Exempt Income Fund invests primarily in municipal securities
that pay interest that is exempt from federal income tax and California personal
income tax. Issuers of these securities are generally located in California.
The Fund may also invest in limited amounts in municipal securities that are
exempt from federal income tax, but not exempt from California taxes, as well as
up to 20% of the Fund's assets in taxable debt securities such as U.S.
government obligations, corporate bonds, money market instruments and repurchase
agreements.
The Fund may, from time to time, invest as a hedging strategy in a limited
amount of futures contracts or options on futures contracts. The Fund may only
use futures contracts and options on futures contracts in an effort to offset
unfavorable changes in the value of securities held by the Fund for investment
purposes.
The Fund invests primarily in investment grade securities, and generally invests
in securities rated A or better. Certain securities held by the Fund may be
covered by municipal bond insurance. The average weighted maturity of the debt
securities held by the Fund is normally expected to be from 5 to 10 years.
The portfolio managers of the Fund evaluate the suitability of available
securities according to several factors based on research they conduct on an
on-going basis.
PROSPECTUS
1
<PAGE>
BOSTON 1784 CALIFORNIA TAX-EXEMPT INCOME FUND (CONTINUED)
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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.
- --------------------------------------------------------------------------------
[WARNING SIGN GRAPHIC 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. As with any non-money market mutual fund, the share price of
the Fund and the Fund's yield will change daily based on changes in interest
rates and other market conditions and factors. You may lose money if you invest
in the Fund. Please note that there are many other factors that could adversely
affect your investment, and that could prevent the Fund from achieving its
objectives, which are not described here. The principal risks of investing in
the Fund are:
[BULLET] INTEREST RATE RISK: In general, the prices of municipal securities
and other debt securities rise when interest rates fall and fall when
interest rates rise. Longer term obligations and zero coupon bonds are
usually more sensitive to interest rate changes than shorter term
obligations. Generally, the longer the average maturity of the bonds
in the Fund, the more the Fund's share price will fluctuate in response
to interest rate changes.
[BULLET] CREDIT RISK: Although the Fund invests primarily in investment grade
securities, these securities may have some credit risk. It is possible
that some of the issuers will not make payments on the municipal or
other debt securities held by the Fund or there could be defaults on
repurchase agreements held by the Fund. Or, an issuer may suffer
adverse changes in its 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. An adverse 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] MUNICIPAL MARKET RISK: There are special factors which may affect the
value of municipal securities and, as a result, the Fund's share price.
These factors include political or legislative changes, uncertainties
related to the tax status of the securities, or the rights of investors
in the securities.
[BULLET] PREPAYMENT RISK: The issuers of securities held by the 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.
PROSPECTUS
2
<PAGE>
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[BULLET] LACK OF DIVERSIFICATION: The Fund is not diversified, which means that
it may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers. As a result, the Fund may
be more susceptible to any single economic, political or regulatory
occurrence. The Fund is also particularly susceptible to events
affecting issuers in California. You should consider the greater risk
of investing in the Fund compared to more diversified mutual funds.
[BULLET] FUTURES AND OPTIONS ON FUTURES: If the Fund uses futures and options on
futures it would use them for hedging purposes only. However the
hedging strategy may not be successful if the portfolio manager is
unable to accurately predict movements in the prices of individual
securities held by the Fund or if the strategy does not correlate well
with the Fund's investments. The use of futures and options on futures,
which are commonly referred to as derivatives, may produce a loss for
the Fund, even when used only for hedging purposes.
[BULLET] WHEN-ISSUED SECURITIES: The Fund may enter into agreements to purchase
debt securities before the securities have been issued. The Fund takes
a risk that the market value of these securities will decline before
the securities are delivered to the Fund.
[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.
PROSPECTUS
3
<PAGE>
BOSTON 1784 CALIFORNIA TAX-EXEMPT INCOME FUND (CONTINUED)
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WHO MAY WANT TO INVEST?
- --------------------------------------------------------------------------------
THE FUND MAY BE APPROPRIATE FOR INVESTORS WHO ARE:
[BULLET] seeking current income that is exempt from federal income tax and
California personal income tax;
[BULLET] seeking a higher tax-equivalent yield than is available from
shorter-term tax-exempt securities or money market funds;
[BULLET] able to tolerate moderate risk and some fluctuation in share price.
The Fund is not an appropriate investment for tax-sheltered accounts such as
IRAs. The Fund alone does not provide a balanced investment plan.
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PROSPECTUS
4
<PAGE>
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[RACING FLAGS GRAPHIC OMITTED] HOW HAS THE FUND PERFORMED?
The Fund began operations during 1999 and does not have any
investment returns at the date of this Prospectus.
[CALCULATOR GRAPHIC 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 THE FUND.
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SHAREHOLDER FEES
(fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Purchases ................... None
Maximum Deferred Sales Charge (Load) ............................... None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ........ None
Redemption Fee ..................................................... None
Exchange Fee ....................................................... None
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ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets) as a % of average net assets
- --------------------------------------------------------------------------------
Management Fees ................................................. .74%
Distribution (12b-1) Fees ....................................... .25%
Other Expenses .................................................. .18%*
Total Annual Fund Operating Expenses ............................ 1.17%**
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*The Fund's "Other Expenses" are based on estimated amounts to be paid by the
Fund during the current fiscal year.
**The Adviser waives a portion of its management fees in order to keep the
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 the fee waiver,
the Fund's total annual operating expenses would be .80%.
- --------------------------------------------------------------------------------
EXAMPLE
- --------------------------------------------------------------------------------
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE 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:
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1 year ..................................... $ 119
3 years .................................... 372
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PROSPECTUS
5
<PAGE>
SHAREHOLDER SERVICES
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This section describes how to do business with the Fund and the services that
are available to shareholders.
HOW TO REACH THE FUND
BY TELEPHONE 1-800-BKB-1784
Call for account or Fund
information Monday
through Friday 8 a.m.
to 6 p.m. (Eastern time).
BY REGULAR MAIL Boston 1784 Funds
P.O. Box 8524
Boston, MA 02266-8524
BY OVERNIGHT Boston 1784 Funds
COURIER c/o Boston Financial Data Services
2 Heritage Drive
North Quincy, MA 02171
TYPES OF ACCOUNTS
If you are investing in the Fund for the first time, you will need to establish
an account. You may establish the following types of accounts by completing an
account application. To obtain an application, call 1-800-BKB-1784.
[BULLET] INDIVIDUAL OR JOINT OWNERSHIP. Individual accounts are owned by one
person. Joint accounts have two or more owners. The Fund will treat any
individual owner of a joint account as authorized to give instructions
on purchases, sales and exchanges of shares of the Fund without notice
to the other owners, except that for any transaction requiring a
signature guarantee, the signature guarantee of each account owner is
required.
[BULLET] GIFT OR TRANSFER TO MINOR (UGMA OR UTMA). A UGMA (Uniform Gifts to
Minors Act) or UTMA (Uniform Transfers to Minors Act) account is
maintained by a custodian for the benefit of a minor. To open a UGMA or
UTMA account, you must include the minor's social security number on
the application.
[BULLET] TRUST. A trust can open an account. The name of each trustee, the name
of the trust and the date of the trust agreement must be included on
the application.
[BULLET] CORPORATIONS, PARTNERSHIPS AND OTHER LEGAL ENTITIES. Corporations,
partnerships and other legal entities may also open an account. The
application and resolution form must be signed by a general partner of
the partnership or an authorized officer of the corporation or other
legal entity.
HOW TO OPEN AN ACCOUNT
Complete and sign an account application. Please be sure to provide your social
security or taxpayer identification number on the application. Make your check
payable to Boston 1784 Funds. Send all items to one of the following addresses:
BY REGULAR MAIL Boston 1784 Funds
P.O. Box 8524
Boston, MA 02266-8524
BY OVERNIGHT Boston 1784 Funds
COURIER c/o Boston Financial Data Services
2 Heritage Drive
North Quincy, MA 02171
PROSPECTUS
6
<PAGE>
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You may also purchase shares through certain financial institutions, including
BankBoston. These institutions may have their own procedures for buying and
selling shares, and may charge fees. Contact your financial institution for more
information.
HOW TO PURCHASE SHARES
Shares of the Fund are sold on a continuous basis and may be purchased from the
Distributor or a broker-dealer or financial institution that has an agreement
with the Distributor. Purchases may be made Monday through Friday, except on
certain holidays.
The Fund's share price, called net asset value per share, is calculated every
business day. The Fund's shares are sold without a sales charge. Shares are
purchased at net asset value the next time it is calculated after your
investment is received and accepted by the Distributor. For information on how
shares are priced, please see "Pricing of Fund Shares" below.
NEW PURCHASES. If you are new to the Fund, complete and sign an account
application and mail it along with your check. To establish the telephone
purchase option on your new account, complete the "Telephone Privilege
Authorization" section on the application and attach a check or savings
withdrawal slip from your bank account which you have "voided" by writing the
word "VOID" across the front.
If you wish to open an account by debiting your checking or savings account,
please attach a "voided" check or savings withdrawal slip, and complete the
"Electronic Transfer and Bank Wire" section of the application.
ADDITIONAL PURCHASES. If you already have money invested in the Fund, you can
invest additional money in the Fund in the following ways:
BY MAIL. Complete the remittance slip attached to the bottom of your
confirmation statement. Send your check and remittance slip or written
instructions to one of the addresses listed above under "How To Open
An Account."
BY TELEPHONE. This service allows you to purchase additional shares quickly
and conveniently through an electronic transfer of money. When you make an
additional purchase by telephone, the Fund will automatically deduct money
from your predesignated bank account for the desired amount. If you have not
established the telephone purchase option, call 1-800-BKB-1784 to request the
appropriate form.
BY WIRE. Purchases may also be made by wiring money from your bank account to
your Fund account. Each time you wish to send a wire, you must call
1-800-BKB-1784 to receive wiring instructions before you send money.
AUTOMATIC INVESTMENT PROGRAM. Automatic investing is an easy way to add to your
account on a regular basis. The Fund offers an automatic investment plan to help
you achieve your financial goals as simply and conveniently as possible. Please
note that minimum purchase amounts apply. Call 1-800-BKB-1784 for information.
PROSPECTUS
7
<PAGE>
SHAREHOLDER SERVICES (CONTINUED)
- --------------------------------------------------------------------------------
PAYING FOR SHARES. Please note the following:
[BULLET] Purchases may be made by check, wire transfer and electronic transfer.
[BULLET] All purchases must be made in U.S. dollars.
[BULLET] Checks must be drawn on U.S. banks and must be payable to Boston 1784
Funds. Checks that are not made payable directly to Boston 1784 Funds
("third party checks") are not accepted.
[BULLET] Cash and credit card checks are not accepted.
[BULLET] If a check does not clear your bank, the Fund reserves the right to
cancel the purchase.
[BULLET] If the Fund is unable to debit your predesignated bank account on the
day you purchase shares, they may make additional attempts or cancel
the purchase.
If your purchase is canceled, you will be responsible for any losses or fees
imposed by your bank and losses that may be incurred as a result of any decline
in the value of the canceled purchase. The Fund has the authority to redeem
shares in your account(s) to cover any losses due to changes in share price. The
Fund reserves the right to reject any specific purchase request.
MINIMUM INVESTMENTS. The following minimums apply unless they are waived by the
Distributor.
To open an account $1,000.00
To add to an account 250.00
Through automatic
investment plans 50.00
Minimum account balance 1,000.00
HOW TO SELL SHARES
Selling your shares in the Fund is called a "redemption" because the Fund buys
back its shares. On any business day, you may sell (redeem) all or a portion of
your shares. If your redemption request is over $100,000, you will need a
signature guarantee (see below). If the shares being sold were recently
purchased by check, telephone or through an automatic investment program, the
Fund 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 the Fund receives your redemption request in good order. You
may gain or lose money when you redeem your shares. Please note that a
redemption is treated as a sale for tax purposes, and could result in taxable
gain or loss in a non-tax-sheltered account.
BY MAIL. To redeem all or part of your shares by mail, please send your request
in writing to one of the addresses listed above under "How To Open An Account"
and include the following information:
[BULLET] the name of the Fund,
[BULLET] the account number(s),
[BULLET] the amount of money or number of shares being redeemed,
[BULLET] the name(s) on the account,
[BULLET] the signature of a registered account
owner, and
[BULLET] your daytime telephone number.
PROSPECTUS
8
<PAGE>
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Signature requirements vary based on the type of account you have:
[BULLET] INDIVIDUAL, JOINT TENANTS, TENANTS IN COMMON: Written instructions must
be signed by an individual shareholder, or in the case of joint
accounts, one of the shareholders (except where a signature guarantee
is required, in which case the signature guarantee of each account
owner is required), exactly as the name(s) appears on the account.
[BULLET] UGMA OR UTMA: Written instructions must be signed by the custodian as
it appears on the account.
[BULLET] SOLE PROPRIETOR, GENERAL PARTNER: Written instructions must be signed
by an authorized individual as it appears on the account.
[BULLET] CORPORATION, ASSOCIATION: Written instructions must be signed by the
person(s) authorized to act on the account. A resolution form,
authorizing the signer to act, must accompany the request if not on
file with the Fund.
[BULLET] TRUST: Written instructions must be signed by the trustee(s). If the
name of the current trustee(s) does not appear on the account, a
certified certificate of incumbency dated within 60 days must also be
submitted.
BY TELEPHONE. If you selected this option on your account application, you may
make redemptions from your account by calling 1-800-BKB-1784. The Fund requires
that requests for redemptions over $100,000 be in writing with signatures
guaranteed (see below). You may not close your account by telephone. If you
would like to establish this option on an existing account, please call
1-800-BKB-1784. See "Telephone transactions" below.
SYSTEMATIC WITHDRAWAL PLAN. Under this plan, you may redeem a specific dollar
amount from your account on a regular basis. For more information or to sign up
for this service, please call 1-800-BKB-1784.
PAYMENT OF REDEMPTION PROCEEDS. Payments may be made by check, wire transfer or
electronic transfer.
BY CHECK Redemption proceeds will be sent to the shareholder(s) on our
records at the address on our records within seven days after
receipt of a valid redemption request.
BY WIRE If you have selected this option on your application,
your redemption proceeds will be wired directly into your
designated bank account, normally on the next business day
after receipt of your redemption request is received. There
is no limitation on redemptions by wire. However, there is
a $12 fee for each wire and your bank may charge an
additional fee to receive the wire. If you would like to
establish this option on an existing account, please call
1-800-BKB-1784 to sign up for this service.
PROSPECTUS
9
<PAGE>
SHAREHOLDER SERVICES (CONTINUED)
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BY ELECTRONIC If you have established this option, your redemption proceeds will
TRANSFER be transferred electronically to your predesignated bank account.
To establish this option on an existing account, please call
1-800-BKB-1784 to request the appropriate form.
SIGNATURE GUARANTEES. In addition to the signature requirements described above,
a signature guarantee is required if:
[BULLET] You would like the check made payable to anyone other than the
shareholder(s) on our records.
[BULLET] You would like the check mailed to an address other than the address on
our records.
[BULLET] You would like the check mailed to an address on our records that has
changed in the past 30 days.
[BULLET] Your redemption request is over $100,000.
The Fund may also require signature guarantees for other redemptions. A
signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
SHAREHOLDER SERVICES AND POLICIES
EXCHANGES. On any business day, you may exchange all or a portion of your shares
in the Fund into any other fund in the Boston 1784 Funds family. To make
exchanges, please follow the procedures under "How To Sell Shares." Exchanges
are processed at the net asset value next calculated after an exchange request
in good order is received and approved. Please read the prospectus for the
Boston 1784 Fund into which you are exchanging. Each Boston 1784 Fund reserves
the right to reject any exchange request or to change or terminate the exchange
privilege at any time. An exchange is the sale of shares of one fund and
purchase of shares of another, and could result in taxable gain or loss in a
non-tax-sheltered account.
REDEMPTION PROCEEDS. The Fund's policy is to pay redemption proceeds in cash,
but the Fund reserves the right to change this policy and to pay in kind in
certain cases by delivering to you investment securities equal to the redemption
price. In these cases, you might have to pay brokerage costs when converting the
securities to cash. The right of any shareholder to receive redemption proceeds
may be suspended, or payment may be postponed, in certain circumstances. These
circumstances include any period the New York Stock Exchange is closed (other
than weekends or holidays) or trading on the Exchange is restricted, any period
when an emergency exists and any time the Securities and Exchange Commission
allows mutual funds to delay payments for the protection of investors.
TAXPAYER IDENTIFICATION NUMBER. On the account application or other appropriate
form, you will be asked to certify that your social security or taxpayer
identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you are subject to
backup withholding or you did not certify your taxpayer identification number,
the IRS requires the Fund to withhold 31% of any dividends and redemption or
exchange proceeds. The Fund reserves the right to reject any application that
does not include a certified social security or taxpayer identification number.
PROSPECTUS
10
<PAGE>
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SHARE OWNERSHIP. The Fund keeps a record of the ownership of their shares and
share certificates are not issued.
INVOLUNTARY REDEMPTIONS. If your account balance falls below the minimum
required investment as a result of selling or exchanging shares, you will be
given 60 days to re-establish the minimum balance. If you do not, your account
may be closed and the proceeds sent to you.
TELEPHONE TRANSACTIONS. You may buy, sell or exchange shares by telephone if you
selected this option on your account application or have completed the
appropriate form. The Fund and its agents will not be responsible for any losses
that may result from acting on wire or telephone instructions that it reasonably
believes to be genuine. The Fund and its agents will each follow reasonable
procedures to confirm that instructions received by telephone are genuine, which
may include taping telephone conversations. It may be difficult to reach the
Fund by telephone during periods of unusual market activity.
ADDRESS CHANGES. A change in address on your account must be made in writing and
be signed by all account owners. Include the name of the Fund, the account
numbers(s), the name(s) on the account and both the old and new addresses. Call
1-800-BKB-1784 if you need more information.
NAME/ACCOUNT OWNERSHIP CHANGES. To change the name on an account, the shares are
generally transferred to a new account. A signature guarantee must be provided
and, in some cases, certain legal documents may be required. For more
information, call 1-800-BKB-1784. If your shares are held by a financial
institution, contact that financial institution for ownership changes.
STATEMENTS AND REPORTS. The Fund will send you a confirmation statement after
every transaction that affects your account balance or registration. If you are
enrolled in an automatic investment program and invest on a monthly basis, you
will receive quarterly confirmations. Information about the tax status of income
dividends and capital gains distributions will be mailed to shareholders early
each year.
Financial reports for the Fund, which include a list of the Fund's portfolio
holdings, will be mailed twice each year to all shareholders.
PROSPECTUS
11
<PAGE>
PRICING OF FUND SHARES
- --------------------------------------------------------------------------------
The 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 Veterans' Day. The NAV
is the value of a single share of the Fund.
The Fund's 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.
DISTRIBUTIONS
- --------------------------------------------------------------------------------
Your dividend distributions are declared each day, starting the day after you
purchase your shares, although they are paid to your account on the first
business day of each month that you are a shareholder. You will not receive a
distribution for the day on which you sell shares.
You will receive distributions from the Fund in additional shares of the Fund
unless you choose to receive your distributions in cash. If you wish to change
the way in which you receive distributions, you should call 1-800-BKB-1784 for
instructions.
If you have elected to receive distributions in cash, and the
postal or other delivery service returns your check to the Fund as
undeliverable, you will not receive interest on amounts represented by the
uncashed checks.
PROSPECTUS
12
<PAGE>
TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
Your investment in the 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.
TAXES ON DISTRIBUTIONS
The Fund expects that most of its net income will be attributable to interest on
municipal obligations and, as a result, most of the Fund's distributions will be
"tax-exempt dividends" that are exempt from federal income tax. From time to
time, the Fund may invest in taxable securities and certain Fund distributions
may be subject to federal alternative minimum tax. It is possible that the Fund
may realize short-term or long-term capital gains and losses. As a result, the
Fund may designate some distributions as income or short-term capital gains
dividends, generally taxable to you as ordinary income, or capital gains
dividends, taxable to you as long-term capital gains, whether you take
distributions in cash or reinvest them in additional shares. You generally are
required to report all Fund distributions, including exempt-interest dividends,
on your federal income tax return.
If the Fund meets certain conditions, shareholders of the Fund will be able to
exclude from income, for California personal income tax purposes, dividends
received from the Fund. These dividends are derived from income (less related
expenses) from California municipal obligations held by the Fund that, if held
by an individual, would pay interest which is exempt from California taxation
("California exempt-interest securities"). Those conditions include a
requirement the Fund continue to qualify as a regulated investment company, a
requirement that at the close of each quarter of its taxable year, at least 50%
of the Fund's assets be invested in California exempt-interest securities, and a
requirement that these dividends must be designated as such by the Fund by
written notice to shareholders within 60 days after the close of the Fund's
fiscal year. Other distributions from the Fund to California residents will be
subject to California personal income tax, whether or not such dividends are
reinvested.
TAXES ON SALES OR EXCHANGES
If you sell your shares of the Fund, or exchange them for shares of another
Fund, you generally will be subject to tax on any taxable gain. Your taxable
gain is computed by subtracting your tax basis in the shares from the redemption
proceeds (in the case of a sale) or the value of the shares received (in the
case of an exchange). Because your tax basis depends on the original purchase
price and on the price at which any dividends may have been reinvested, you
should be sure to keep your account statements so that you or your tax preparer
will be able to determine whether a sale or exchange will result in a taxable
gain.
"BUYING A DIVIDEND"
If you buy shares in the Fund just prior to a capital gain distribution, you
will receive some of the purchase price back in the form of a taxable
distribution.
LOAN INTEREST. If you borrow money to purchase or hold shares of the Fund,
interest on your loan will not be deductible.
TAX WITHHOLDING. If you are not a U.S. citizen or resident, or if you are
subject to "backup withholding," the Fund may be required to withhold a portion
of your distributions and, in some cases, redemption proceeds, as a payment of
federal income tax.
PROSPECTUS
13
<PAGE>
MORE ABOUT BOSTON 1784 CALIFORNIA TAX-EXEMPT INCOME 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. In addition, the Fund's portfolio managers may decide, as a matter
of investment strategy, not to use the investments and investment techniques
described below and in the Statement of Additional Information at any particular
time.
The Fund invests primarily in municipal securities that pay interest that is
exempt from federal income tax and California personal income tax. The Fund may
invest in "general obligation" bonds, which are backed by the full faith, credit
and taxing power of the issuer, and in "revenue" bonds, which are payable only
from the revenues generated by a specific project or another specific revenue
source. The Fund may also invest in limited amounts in other mutual funds or
investment companies that invest primarily in municipal securities.
The Fund invests primarily in California municipal securities. California
municipal securities pay interest that is exempt from California's personal
income tax. Under normal circumstances, at least 80% of the Fund's net assets
are invested in municipal securities that pay interest exempt from federal
income tax, or in mutual funds or other investment companies that invest in
municipal securities that pay interest exempt from federal income tax. At
least 65% of the Fund's assets are invested in California municipal securities.
The Fund's average weighted maturity is expected to be from five to ten years
under normal circumstances.
The Fund also may invest in debt securities that pay interest that is not exempt
from federal or California taxes or is subject to the alternative minimum tax,
such as U.S. government obligations, corporate bonds, bank obligations, money
market instruments, commercial paper and repurchase agreements.
The Fund invests in investment grade securities, which means that they are
considered to have a medium to high probability of being paid. However, all of
these securities, and especially those in the lowest categories of investment
grade in which the Fund may invest, have credit risk. In adverse economic or
other circumstances, issuers of these lower graded securities are more likely to
have difficulty making principal and interest payments than issuers of higher
grade securities. For this reason, the Fund generally looks for securities rated
A or better. In addition, some of the bonds held in the Fund may be covered by
municipal bond insurance, in which case an insurer may make principal and
interest payments on the securities if the issuer fails to do so.
The Fund may, from time to time, invest as a hedging strategy in a limited
amount of futures contracts or options on futures contracts. The Fund may only
use futures contracts and options on futures contracts, commonly referred to as
derivatives, in an effort to offset unfavorable changes in the value of
securities held by the Fund for investment purposes.
Investors should note that during periods of unusual economic or market
conditions or for temporary defensive purposes or liquidity, the Fund may invest
without limit in cash and U.S. dollar-denominated high quality money market and
short-term instruments. These investments may result in a lower yield
PROSPECTUS
14
<PAGE>
- --------------------------------------------------------------------------------
than would be available from investments with a lower quality or longer term,
and more taxable income, and may prevent the Fund from achieving its investment
objective.
The Fund is actively managed, although the portfolio managers attempt to
minimize portfolio turnover. However, it is possible that the Fund's annual
portfolio turnover rate could exceed 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 Fund is non-diversified, which means that it may invest a relatively high
percentage of its assets in the obligations of a limited number of issuers. As a
result, the Fund may be more susceptible to any single economic, political or
regulatory occurrence. The Fund is particularly susceptible to events affecting
issuers in California.
When selecting securities for the Fund, the portfolio managers evaluate the
suitability of available bonds according to such factors as creditworthiness,
maturity, liquidity, interest rate, taxability and portfolio diversification.
The portfolio managers conduct research on potential and current securities
holdings in the Fund to determine whether the Fund should purchase or retain the
asset. This is a continuing process, the focus of which changes according to
market conditions, the availability of various permitted investments, and cash
flows both into and out of the Fund. The portfolio managers seek to diversify
the assets held in the Fund among various issuers and bond structures.
PORTFOLIO MANAGERS
DAVID H. THOMPSON, Director of Fund Management, has been the manager of the Fund
since the Fund began operations in April 1999. Mr. Thompson, who has more than
27 years of experience in investment management, research analysis and
securities trading, has been the Director of Fund Management at BankBoston since
1985.
GUY C. HOLBROOK, Fund Manager, has been a co-manager of the Fund since it began
operations in April 1999. Mr. Holbrook, who has ten years of investment
management experience, was a Research Analyst and Bond Trader at Scudder Kemper
Investments from 1992 to 1998.
PROSPECTUS
15
<PAGE>
MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
BankBoston is the investment adviser of the Fund and, subject to policies set by
the Trustees, makes investment decisions. BankBoston is the successor to a bank
chartered in 1784 and offers a wide range of banking and investment services to
customers throughout the world. BankBoston has been providing asset management
services since 1890. The Private Bank Division of BankBoston is the investment
management group within BankBoston that advises Boston 1784 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 Boston 1784 Funds
group, 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.
MANAGEMENT FEES
The Fund pays investment management fees equal to .74% percent of its average
net assets.
BankBoston may waive its investment management fees, if necessary, to limit the
total operating expenses of the Fund to a specified level. BankBoston also may
contribute to the Fund from time to time to help it maintain competitive expense
ratios. These arrangements are voluntary and may be terminated at any time.
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 Fund has no application systems of its own and is entirely dependent on its
service providers' systems and software. The Fund is working with its service
providers (including its investment adviser, administrator, transfer agent and
custodian) to identify and remedy any Year 2000 issues. However, the Fund 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 Fund.
The Fund could also be adversely affected if the issuers of securities held by
the Fund do not solve their Year 2000 problems, or if it costs them large
amounts of money to solve these problems.
PROSPECTUS
16
<PAGE>
DISTRIBUTION ARRANGEMENTS
- --------------------------------------------------------------------------------
The Fund does not charge any sales loads, deferred sales loads or other fees in
connection with the purchase of shares.
The Fund has adopted a plan under rule 12b-1. The plan allows the 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 Fund's Distributor currently
waives these fees on a voluntary basis. This fee waiver may be terminated in
whole or in part at any time.
PROSPECTUS
17
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
18
<PAGE>
Rule 497(c)
File Nos. 33-580004
and 811-7474
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.
================================================================================
YOU MAY ALSO CALL 1-800-BKB-1784 TO REQUEST OTHER INFORMATION ABOUT THE FUNDS OR
TO MAKE SHAREHOLDER INQUIRIES.
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.
[LOGO OMITTED]
BOSTON
1784
FUNDS
BOSTON 1784 FUNDS[SERVICE MARK]
P.O. BOX 8524
BOSTON, MA 02266-8524
1-800-BKB-1784
WWW.BOSTON1784FUNDS.COM
FILE NO. 811-7474 MF-0166
Prospectus
BOSTON 1784
MONEY MARKET FUNDS
[LOGO OMITTED]
BOSTON
1784
FUNDS
BOSTON 1784 TAX-FREE MONEY MARKET FUND
BOSTON 1784 CALIFORNIA 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
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.
April 1, 1999
<PAGE>
TABLE OF CONTENTS
================================================================================
BOSTON 1784 MONEY MARKET FUNDS.........................................1
SHAREHOLDER SERVICES...................................................9
HOW TO REACH THE FUNDS...................................9
TYPES OF ACCOUNTS........................................9
HOW TO OPEN AN ACCOUNT...................................9
HOW TO PURCHASE SHARES..................................10
HOW TO SELL SHARES......................................11
SHAREHOLDER SERVICES AND POLICIES.......................13
PRICING OF FUND SHARES................................................15
DISTRIBUTIONS.........................................................15
FEDERAL TAX CONSIDERATIONS............................................16
MORE ABOUT BOSTON 1784 MONEY MARKET FUNDS.............................17
MANAGEMENT............................................................20
DISTRIBUTION ARRANGEMENTS.............................................21
FINANCIAL HIGHLIGHTS..................................................22
PROSPECTUS
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS
================================================================================
TAX-FREE MONEY MARKET FUND INSTITUTIONAL U.S. TREASURY
MONEY MARKET FUND
CALIFORNIA TAX-FREE MONEY
MARKET FUND PRIME MONEY MARKET FUND
U.S. TREASURY MONEYMARKET FUND INSTITUTIONAL PRIME MONEY MARKET FUND
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH BOSTON 1784 MONEY MARKET 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 MONEY
MARKET FUNDS.
[COMPASS ROSE GRAPHIC OMITTED]
WHAT ARE THE FUNDS' GOALS?
TAX-FREE MONEY MARKET FUND
The Tax-Free Money Market 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 that is exempt from federal income tax.
CALIFORNIA TAX-FREE MONEY
MARKET FUND
The California Tax-Free Money Market 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 that is exempt from federal and California
personal income tax.
U.S. TREASURY MONEY MARKET FUND
INSTITUTIONAL U.S. TREASURY
MONEY MARKET FUND
PRIME MONEY MARKET FUND
INSTITUTIONAL PRIME
MONEY MARKET FUND
The Funds' goals are to preserve the principal value of a shareholder's
investment and to 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.
- --------------------------------------------------------------------------------
PROSPECTUS
1
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS (CONTINUED)
================================================================================
[CHESS PIECE GRAPHIC OMITTED]
WHAT ARE THE FUNDS' MAIN INVESTMENT STRATEGIES?
TAX-FREE MONEY MARKET FUND
The Tax-Free Money Market Fund invests primarily in short-term municipal
securities, which are debt securities issued by states, cities and towns and
other political or public entities or agencies. The interest paid on these debt
securities is free from federal income tax. The Fund may also enter into
repurchase agreements and invest in limited amounts in securities paying
interest that is not free from federal taxes.
CALIFORNIA TAX-FREE MONEY
MARKET FUND
The California Tax-Free Money Market Fund invests primarily in short-term
municipal securities that pay interest that is exempt from federal income tax
and California personal income tax. Issuers of these securities are generally
located in California.
The Fund may also enter into repurchase agreements and invest in limited amounts
in securities paying interest that is not free from federal or California income
tax.
U.S. TREASURY MONEY MARKET FUND
The U.S. Treasury Money Market 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.
INSTITUTIONAL U.S. TREASURY
MONEY MARKET FUND
The Institutional U.S. Treasury Money Market 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
PRIME MONEY MARKET FUND
The Prime Money Market Fund invests primarily in high quality short-term debt
obligations, including commercial paper, asset-backed commercial paper,
corporate bonds, U.S. government agency obligations, taxable municipal
securities and repurchase agreements.
INSTITUTIONAL PRIME MONEY MARKET FUND
The Institutional Prime Money Market Fund invests primarily in high quality
short-term debt obligations, including commercial paper, asset-backed commercial
paper, corporate bonds, U.S. government agency obligations, taxable municipal
securities and repurchase agreements.
PROSPECTUS
2
<PAGE>
================================================================================
[WARNING SIGN GRAPHIC OMITTED]
WHAT ARE THE MAIN RISKS OF INVESTING
IN BOSTON 1784 MONEY MARKET FUNDS?
The principal risks of investing in the Money Market Funds 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
that could adversely affect your investment, and that could prevent a 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 a Fund could cause the
value of your investment to decline.
[BULLET] Each Money Market 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] The California Tax-Free Money Market Fund is not diversified, which
means that it may invest a relatively high percentage of its assets
in the obligations of a limited number of issuers. As a result, the
Fund may be more susceptible to any single economic, political or
regulatory occurrence, especially events affecting issuers in
California.
[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.
[BULLET] Although the Funds seek to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the
Funds.
PROSPECTUS
3
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS (CONTINUED)
================================================================================
================================================================================
WHO MAY WANT TO INVEST?
================================================================================
TAX-FREE MONEY MARKET FUND
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR INVESTORS WHO:
[BULLET] are investing for a short period of time or as part of a savings plan;
[BULLET] are uncomfortable with an investment that will go up and down in value;
[BULLET] want to earn income exempt from federal taxes.
It is not an appropriate investment for tax-sheltered accounts such as IRAs.
CALIFORNIA TAX-FREE MONEY MARKET FUND
THIS MONEY MARKET FUND MAYBE APPROPRIATE FOR INVESTORS WHO:
[BULLET] are investing for a short period of time or as part of a savings plan;
[BULLET] are uncomfortable with an investment that will go up and down in value;
[BULLET] want to earn income that is exempt from federal and California personal
income tax.
It is not an appropriate investment for tax-sheltered accounts such as IRAs.
U.S. TREASURY MONEY MARKET FUND
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR INVESTORS WHO:
[BULLET] are investing for a short period of time or as part of a savings plan;
[BULLET] are uncomfortable with an investment that will go up and down in value;
[BULLET] want the added safety of U.S. government securities.
INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR INSTITUTIONAL INVESTORS WHO:
[BULLET] are investing for a short period of time;
[BULLET] want the added safety of U.S. government securities.
PRIME MONEY MARKET FUND
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR INVESTORS WHO:
[BULLET] are investing for a short period of time or as part of a savings plan;
[BULLET] are uncomfortable with an investment that will go up and down in value;
[BULLET] are looking for higher returns than are usually available from U.S.
Treasury money market funds.
INSTITUTIONAL PRIME MONEY MARKET FUND
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR INSTITUTIONAL INVESTORS WHO:
[BULLET] are investing for a short period of time;
[BULLET] are looking for higher returns than are usually available from U.S.
Treasury money market funds.
None of the Money Market Fundsalone provides a balanced investment plan.
PROSPECTUS
4
<PAGE>
================================================================================
[RACING FLAGS GRAPHIC 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.
- --------------------------------------------------------------------------------
TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR GRAPH OMITTED--PLOT POINTS AS FOLLOWS:]
1994 2.71%
1995 3.75%
1996 3.25%
1997 3.33%
1998 3.15%
================================================================================
HIGHEST AND LOWEST RETURN (Quarterly 1994-1998)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 0.96% June 30, 1995
Lowest 0.58% March 31, 1994
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (through December 31, 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF FUND
(SINCE 6/14/93)
Tax-Free Money 3.15% 3.24% 3.16%
Market Fund
IBC/Financial Data 2.92% 2.92% 2.82%*
Stockbroker
and General Purpose
Tax-Free Average
================================================================================
*(since 5/31/93)
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
The Fund began operations during 1999 and does not have any investment returns
at the date of this Prospectus.
- --------------------------------------------------------------------------------
U.S. TREASURY MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR GRAPH OMITTED--PLOT POINTS AS FOLLOWS:]
1994 3.72%
1995 5.43%
1996 4.82%
1997 4.96%
1998 4.86%
================================================================================
HIGHEST AND LOWEST RETURN (Quarterly 1994-1998)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 1.38% June 30, 1995
Lowest 0.64% March 31, 1994
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (through December 31, 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF FUND
(SINCE 6/7/93)
U.S. Treasury Money 4.86% 4.76% 4.54%
Market Fund
IBC/Financial Data 4.90% 4.70% 4.48%*
U.S. Government
& Agencies Average
================================================================================
*(since 5/31/93)
FOR UP-TO-DATE YIELD INFORMATION, PLEASE CALL 1-800-BKB-1784.
PROSPECTUS
5
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS (CONTINUED)
================================================================================
- --------------------------------------------------------------------------------
INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR GRAPH OMITTED--PLOT POINTS AS FOLLOWS:]
1994 4.04%
1995 5.69%
1996 5.14%
1997 5.30%
1998 5.20%
================================================================================
HIGHEST AND LOWEST RETURN (Quarterly 1994-1998)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 1.43% June 30, 1995
Lowest 0.76% March 31, 1994
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (through December 31, 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF FUND
(SINCE 6/14/93)
Institutional U.S. 5.20% 5.07% 4.87%
Treasury Money
Market Fund
IBC/Financial Data 5.10% 4.98% 4.76%*
Government-Only
Institutions
Only Average
================================================================================
*(since 5/30/93)
- --------------------------------------------------------------------------------
PRIME MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR GRAPH OMITTED--PLOT POINTS AS FOLLOWS:]
1992 3.48
1993 2.72%
1994 3.75%
1995 5.49%
1996 5.02%
1997 5.14%
1998 5.06
================================================================================
HIGHEST AND LOWEST RETURN (Quarterly 1992-1998)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 1.39% June 30, 1995
Lowest 0.66% March 31, 1994
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (through December 31, 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF FUND
(SINCE 6/6/91)
Prime Money 5.06% 4.89% 4.45%
Market Fund
IBC/Financial Data 4.96% 4.79% 4.34%*
First Tier Money
Market Average
================================================================================
*(since 5/31/91)
FOR UP-TO-DATE YIELD INFORMATION, PLEASE CALL 1-800-BKB-1784.
PROSPECTUS
6
<PAGE>
- --------------------------------------------------------------------------------
INSTITUTIONAL PRIME MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[BAR GRAPH OMITTED--PLOT POINT AS FOLLOWS:]
1998 5.40%
================================================================================
HIGHEST AND LOWEST RETURN (Quarterly 1998)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 1.35% September 30, 1998
Lowest 1.27% December 31, 1998
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (through December 31, 1998)
- --------------------------------------------------------------------------------
1 YEAR LIFE OF FUND
(SINCE 11/5/97)
Institutional Prime
Money Market Fund 5.40% 5.43%
IBC/Financial Data First Tier 5.33% 5.35%*
Institutionals-Only Average
================================================================================
*(since 10/31/97)
FOR UP-TO-DATE YIELD INFORMATION, PLEASE CALL 1-800-BKB-1784.
PROSPECTUS
7
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS (CONTINUED)
================================================================================
[CALCULATOR GRAPHIC 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 MONEY MARKET FUNDS
<TABLE>
<CAPTION>
==============================================================================================================================
SHAREHOLDER FEES (fees paid directly from your investment)
- ------------------------------------------------------------------------------------------------------------------------------
TAX-FREE CALIFORNIA U.S. TREASURY INSTITUTIONAL U.S. PRIME INSTITUTIONAL
MONEY TAX-FREE MONEY MONEY TREASURY MONEY MONEY PRIME MONEY
MARKET FUND MARKET FUND MARKET FUND MARKET FUND MARKET FUND MARKET FUND
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge (Load) None None None None None None
Imposed on Purchases
Maximum Deferred Sales Charge (Load) None None None None None None
Maximum Sales Charge (Load) None None None None None None
Imposed on Reinvested Dividends
Redemption Fee None None None None None None
Exchange Fee None None None None None None
==============================================================================================================================
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) as a % of average net assets
- ------------------------------------------------------------------------------------------------------------------------------
Management Fees .40% .40% .40% .20% .40% .20%
Distribution (12b-1) Fees None None None None None None
Other Expenses .13% .19%* .30% .13% .30% .22%
Total Annual Fund Operating Expenses .53% .59%** .70%** .33% .70%** .42%**
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
*The California Tax-Free Money Market Fund's "Other Expenses" are based on
estimated amounts to be paid by the Fund for the current fiscal year.
**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 a fee
waiver by the Funds' Adviser. The Adviser waives a portion of its management
fees in order to keep each Fund's total operating expenses at a specified
level. The Adviser may eliminate all or a part of the fee waiver at any time.
With the fee waiver, the Funds' actual total annual fund operating expenses
were, or would be in the case of the California Tax-Free Money Market Fund, as
follows:
U.S. TREASURY MONEY MARKET FUND .65% PRIME MONEY MARKET FUND .65%
INSTITUTIONAL PRIME MONEY MARKET .27% CALIFORNIA TAX-FREE MONEY MARKET FUND .56%
==============================================================================================================================
EXAMPLE
- ------------------------------------------------------------------------------------------------------------------------------
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN BOSTON
1784 MONEY MARKET 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:
</FN>
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
TAX-FREE CALIFORNIA U.S. TREASURY INSTITUTIONAL U.S. PRIME INSTITUTIONAL
MONEY TAX-FREE MONEY MONEY TREASURY MONEY MONEY PRIME MONEY
MARKET FUND MARKET FUND MARKET FUND MARKET FUND MARKET FUND MARKET FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year $ 54 $ 60 $ 72 $ 34 $ 72 $ 43
3 years 170 189 224 106 224 135
5 years 296 N/A 390 185 390 235
10 years 665 N/A 871 418 871 530
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROSPECTUS
8
<PAGE>
SHAREHOLDER SERVICES
================================================================================
This section describes how to do business with the Funds and the services that
are available to shareholders.
HOW TO REACH THE FUNDS
BY TELEPHONE 1-800-BKB-1784
Call for account or Fund information Monday
through Friday 8 a.m. to 6 p.m. (Eastern time).
BY REGULAR MAIL Boston 1784 Funds
P.O. Box 8524
Boston, MA 02266-8524
BY OVERNIGHT Boston 1784 Funds
COURIER c/o Boston Financial Data Services
2 Heritage Drive
North Quincy, MA 02171
TYPES OF ACCOUNTS
If you are investing in the Funds for the first time, you will need to establish
an account. You may establish the following types of accounts by completing an
account application. To obtain an application, call 1-800-BKB-1784.
[BULLET] INDIVIDUAL OR JOINT OWNERSHIP. Individual accounts are owned by one
person. Joint accounts have two or more owners. The Funds will treat
any individual owner of a joint account as authorized to give
instructions on purchases, sales and exchanges of shares of a Fund
without notice to the other owners, except that for any transaction
requiring a signature guarantee, the signature guarantee of each
account owner is required.
[BULLET] GIFT OR TRANSFER TO MINOR (UGMA OR UTMA). A UGMA (Uniform Gifts to
Minors Act) or UTMA (Uniform Transfers to Minors Act) account is
maintained by a custodian for the benefit of a minor. To open a UGMA
or UTMA account, you must include the minor's social security number
on the application.
[BULLET] TRUST. A trust can open an account. The name of each trustee, the
name of the trust and the date of the trust agreement must be
included on the application.
[BULLET] CORPORATIONS, PARTNERSHIPS AND OTHER LEGAL ENTITIES. Corporations,
partnerships and other legal entities may also open an account. The
application and resolution form must be signed by a general partner
of the partnership or an authorized officer of the corporation or
other legal entity.
[BULLET] RETIREMENT. If you are eligible, you may set up your account under a
tax-sheltered retirement plan, such as an Individual Retirement
Account. BankBoston offers a number of retirement plans through
which Fund shares may be purchased. Call 1-800-BKB-1784 for more
information.
HOW TO OPEN AN ACCOUNT
Complete and sign the appropriate account application. Please be sure to provide
your social security or taxpayer identification number on the application. Make
your check payable to Boston 1784 Funds. Send all items to one of the following
addresses:
BY REGULAR MAIL Boston 1784 Funds
P.O. Box 8524
Boston, MA 02266-8524
9
<PAGE>
SHAREHOLDER SERVICES (CONTINUED)
================================================================================
BY OVERNIGHT Boston 1784 Funds
COURIER c/o Boston Financial Data Services
2 Heritage Drive
North Quincy, MA 02171
You may also purchase shares through certain financial institutions, including
BankBoston. These institutions may have their own procedures for buying and
selling shares, and may charge fees. Contact your financial institution for more
information.
HOW TO PURCHASE SHARES
Shares of the Funds 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.
Each Fund's share price, called net asset value per share, is calculated every
business day. Each Fund's shares are sold without a sales charge. Shares are
purchased at net asset value the next time it is calculated after your
investment is received and accepted by the Distributor. For information on how
shares are priced, please see "Pricing of Fund Shares" below.
For the U.S. Treasury Money Market Fund, Institutional U.S. Treasury Money
Market Fund and Institutional Prime Money Market Fund, the Distributor must
receive payment by wire transfer or other immediately available Funds by the
close of business on the day your order is received and accepted. For the other
Money Market Funds, your investment is considered received when your check is
converted into immediately available funds. This normally happens within two
business days. On days when the financial markets close early, such as the day
after Thanksgiving and Christmas Eve, purchase orders for the U.S. Treasury
Money Market Fund, Institutional U.S. Treasury Money Market Fund and
Institutional Prime Money Market Fund must be received by 12 noon.
NEW PURCHASES. If you are new to the Funds, complete and sign an account
application and mail it along with your check. To establish the telephone
purchase option on your new account, complete the "Telephone Privilege
Authorization" section on the application and attach a check or savings
withdrawal slip from your bank account which you have "voided" by writing the
word "VOID" across the front.
If you wish to open an account by debiting your checking or savings account,
please attach a "voided" check or savings withdrawal slip, and complete the
"Electronic Transfer and Bank Wire" section of the application.
If you are investing through a tax-sheltered retirement plan for the first time,
you will need a special application. Retirement investing also involves its own
investment procedures. Call 1-800-BKB-1784 for more information.
ADDITIONAL PURCHASES. If you already have money invested in a Fund, you can
invest additional money in that Fund in the following ways:
BY MAIL. Complete the remittance slip attached to the bottom of your
confirmation statement. If your investment is in a retirement account, please
indicate whether the purchase is a rollover or a current or prior year
contribution. Send your check and remittance slip or written instructions to
one of the addresses listed above under "How To Open An Account."
BY TELEPHONE. This service allows you to purchase additional shares quickly
and conveniently through an electronic transfer of money. When you make an
additional purchase by telephone, the Funds will automatically deduct money
from your
PROSPECTUS
10
<PAGE>
predesignated bank account for the desired amount. If you have not
established the telephone purchase option, call 1-800-BKB-1784 to request the
appropriate form.
BY WIRE. Purchases may also be made by wiring money from your bank account to
your Boston 1784 Fund account. Each time you wish to send a wire, you must
call 1-800-BKB-1784 to receive wiring instructions before you send money.
AUTOMATIC INVESTMENT PROGRAM. Automatic investing is an easy way to add to your
account on a regular basis. Boston 1784 Funds offer an automatic investment plan
to help you achieve your financial goals as simply and conveniently as possible.
Please note that minimum purchase amounts apply. Call 1-800-BKB-1784 for
information.
PAYING FOR SHARES. Please note the following:
[BULLET] Purchases may be made by check, wire transfer and electronic
transfer.
[BULLET] All purchases must be made in U.S. dollars.
[BULLET] Checks must be drawn on U.S. banks and must be payable to Boston
1784 Funds. Checks that are not made payable directly to Boston 1784
Funds ("third party checks") are not accepted.
[BULLET] Cash and credit card checks are not accepted.
[BULLET] If a check does not clear your bank, the Funds reserve the right to
cancel the purchase.
[BULLET] If the Funds are unable to debit your predesignated bank account on
the day you purchase shares, they may make additional attempts or
cancel the purchase.
If your purchase is canceled, you will be responsible for any losses or fees
imposed by your bank and losses that may be incurred as a result of any decline
in the value of the canceled purchase. The Funds have the authority to redeem
shares in your account(s) to cover any losses due to changes in share price. The
Funds reserve the right to reject any specific purchase request.
MINIMUM INVESTMENTS. The following minimums apply unless they are waived
by the Distributor.
To open an account $1,000.00*
For tax-sheltered retirement plans 250.00
To add to an account 250.00**
Through automatic investment plans 50.00
Minimum account balance 1,000.00*
For tax-sheltered retirement plans 250.00
*$100,000 for the Institutional U.S. Treasury Money Market Fund and the
Institutional Prime Money Market Fund
**$5,000 for the Institutional U.S. Treasury Money Market Fund and the
Institutional Prime Money Market Fund
HOW TO SELL SHARES
Selling your shares in a Fund is called a "redemption" because the Fund buys
back its shares. On any business day, you may sell (redeem) all or a portion of
your shares. If your redemption request is over $100,000, you will need a
signature guarantee (see below). If the shares being sold were recently
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 the Funds receive your redemption request in good order. You
may gain or lose money when you redeem your shares. Please note that a
redemption is treated as a sale for tax
11
<PAGE>
SHAREHOLDER SERVICES (CONTINUED)
================================================================================
purposes and could result in a taxable gain or loss in a non-tax-sheltered
account.
BY MAIL. To redeem all or part of your shares by mail, please send your request
in writing to one of the addresses listed above under "How To Open An Account"
and include the following information:
[BULLET] the name of the Fund(s),
[BULLET] the account number(s),
[BULLET] the amount of money or number of shares being redeemed,
[BULLET] the name(s) on the account,
[BULLET] the signature of a registered account owner, and
[BULLET] your daytime telephone number.
Signature requirements vary based on the type of account you have:
[BULLET] INDIVIDUAL, JOINT TENANTS, TENANTS IN COMMON: Written instructions
must be signed by an individual shareholder, or in the case of joint
accounts, one of the shareholders (except where a signature
guarantee is required, in which case the signature guarantee of each
account owner is required), exactly as the name(s) appears on the
account.
[BULLET] UGMA OR UTMA: Written instructions must be signed by the custodian
as it appears on the account.
[BULLET] SOLE PROPRIETOR, GENERAL PARTNER: Written instructions must be
signed by an authorized individual as it appears on the account.
[BULLET] CORPORATION, ASSOCIATION: Written instructions must be signed by the
person(s) authorized to act on the account. A resolution form,
authorizing the signer to act, must accompany the request, if not on
file with the Funds.
[BULLET] TRUST: Written instructions must be signed by the trustee(s). If the
name of the current trustee(s) does not appear on the account, a
certified certificate of incumbency dated within 60 days must also
be submitted.
[BULLET] RETIREMENT: Written instructions must be signed by the account
owner. Call 1-800-BKB-1784 for more information.
BY TELEPHONE. If you selected this option on your account application, you may
make redemptions from your account by calling 1-800-BKB-1784. The Funds require
that requests for redemptions over $100,000 be in writing with signatures
guaranteed (see below). You may not close your account by telephone. If you
would like to establish this option on an existing account, please call
1-800-BKB-1784. See "Telephone transactions" below.
SYSTEMATIC WITHDRAWAL PLAN. Under this plan, you may redeem a specific dollar
amount from your account on a regular basis. For more information or to sign up
for this service, please call 1-800-BKB-1784.
PAYMENT OF REDEMPTION PROCEEDS. Payments may be made by check, wire transfer or
electronic transfer.
BY CHECK Redemption proceeds will be sent to the shareholder(s) on
our records at the address on our records within seven days
after receipt of a valid redemption request.
BY WIRE If you have selected this option on your application, your
redemption proceeds will be wired directly into your designated
bank account, normally on the business day that your redemption
request is received. There is no limitation on redemptions by
wire.
PROSPECTUS
12
<PAGE>
However, there is a $12 fee for each wire and your bank may
charge an additional fee to receive the wire. If you would like
to establish this option on an existing account, please call
1-800-BKB-1784 to sign up for this service. Wire redemptions are
not available for retirement accounts.
BY ELECTRONIC If you have established this option, your redemption proceeds
TRANSFER will be transferred electronically to your predesignated bank
account. To establish this option on an existing account, please
call 1-800-BKB-1784 to request the appropriate form.
SIGNATURE GUARANTEES. In addition to the signature requirements described above,
a signature guarantee is required if:
[BULLET] You would like the check made payable to anyone other than the
shareholder(s) on our records.
[BULLET] You would like the check mailed to an address other than the address
on our records.
[BULLET] You would like the check mailed to an address on our records that
has changed in the past 30 days.
[BULLET] Your redemption request is over $100,000.
The Funds may also require signature guarantees for other redemptions. A
signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures.
Call your financial institution to determine if it has this capability.
SHAREHOLDER SERVICES AND POLICIES
EXCHANGES. On any business day, you may exchange all or a portion of your shares
into any other Fund in the Boston 1784 Funds family. To make exchanges, please
follow the procedures under "How To Sell Shares." Exchanges are processed at the
net asset value next calculated after an exchange request in good order is
received and approved. Please read the prospectus for the Fund into which you
are exchanging. The Funds reserve the right to reject any exchange request or to
change or terminate the exchange privilege at any time. An exchange is the sale
of shares of one Fund and purchase of shares of another, and could result in
taxable gain or loss in a non-tax-sheltered account.
REDEMPTION PROCEEDS. The Funds' policy is to pay redemption proceeds in cash,
but the Funds reserve the right to change this policy and to pay in kind in
certain cases by delivering to you investment securities equal to the redemption
price. In these cases, you might have to pay brokerage costs when converting the
securities to cash. The right of any shareholder to receive redemption proceeds
may be suspended, or payment may be postponed, in certain circumstances. These
circumstances include any period the New York Stock Exchange is closed (other
than weekends or holidays) or trading on the Exchange is restricted, any period
when an emergency exists and any time the Securities and Exchange Commission
allows mutual funds to delay payments for the protection of investors.
TAXPAYER IDENTIFICATION NUMBER. On the account application or other appropriate
form, you will be asked to certify that your social security or taxpayer
identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you are subject to
backup withholding or you did not certify your taxpayer identification number,
the IRS requires the Funds to
PROSPECTUS
13
<PAGE>
SHAREHOLDER SERVICES (CONTINUED)
================================================================================
withhold 31% of any dividends and redemption or exchange proceeds. The Funds
reserve the right to reject any application that does not include a certified
social security or taxpayer identification number.
SHARE OWNERSHIP. The Funds keep a record of the ownership of their shares and
share certificates are not issued.
INVOLUNTARY REDEMPTIONS. If your account balance falls below the minimum
required investment as a result of selling or exchanging shares, you will be
given 60 days to re-establish the minimum balance. If you do not, your account
may be closed and the proceeds sent to you.
TELEPHONE TRANSACTIONS. You may buy, sell or exchange shares by telephone if you
selected this option on your account application or have completed the
appropriate form. The Funds and their agents will not be responsible for any
losses that may result from acting on wire or telephone instructions that it
reasonably believes to be genuine. The Funds and their agents will each follow
reasonable procedures to confirm that instructions received by telephone are
genuine, which may include taping telephone conversations. It may be difficult
to reach the Funds by telephone during periods of unusual market activity.
ADDRESS CHANGES. A change in address on your account must be made in writing and
be signed by all account owners. Include the name of your Fund(s), the account
numbers(s), the name(s) on the account and both the old and new addresses. Call
1-800-BKB-1784 if you need more information.
NAME/ACCOUNT OWNERSHIP CHANGES. To change the name on an account, the shares are
generally transferred to a new account. A signature guarantee must be provided
and, in some cases, certain legal documents may be required. For more
information, call 1-800-BKB-1784. If your shares are held by a financial
institution, contact that financial institution for ownership changes.
STATEMENTS AND REPORTS. The Funds will send you a confirmation statement after
every transaction that affects your account balance or registration. If you are
enrolled in an automatic investment program and invest on a monthly basis, you
will receive quarterly confirmations. Information about the tax status of income
dividends and capital gains distributions will be mailed to shareholders early
each year.
Financial reports for the Funds, which include a list of the Funds' portfolio
holdings, will be mailed twice each year to all shareholders.
CHECKWRITING. Checkwriting privileges are available on the following Funds:
Boston 1784 Tax-Free Money Market Fund, Boston 1784 California Tax-Free Money
Market Fund, Boston 1784 U.S. Treasury Money Market Fund and Boston 1784 Prime
Money Market Fund. Checks may be written for a minimum of $250 each check. Call
1-800-BKB-1784 for more information.
Please note that you may not use a check to close your account.
PROSPECTUS
14
<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 Veterans' Day. The NAV
is the value of a single share of a Fund.
The U.S. Treasury Money Market Fund, Institutional U.S. Treasury Money Market
Fund and Institutional Prime Money Market Fund calculate NAV at 3:00 p.m.
Eastern time (12 noon on days when the financial markets close early). The
Tax-Free Money Market Fund, California Tax-Free Money Market Fund and Prime
Money Market Fund calculate NAV at 12 noon. In determining each Money Market
Fund's NAV, securities are valued at amortized cost, which is approximately
equal to market value.
DISTRIBUTIONS
================================================================================
As a Fund shareholder, you are entitled to your share of a Fund's net income and
gains on its investments. Each Fund passes substantially all of its earnings
along to its investors as distributions. When a Fund earns interest from money
market instruments 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.
Your distributions are declared each day, starting on the day you purchase your
shares. They are paid to your account on the first business day of each month
that you are a shareholder. You will not receive a distribution for the day on
which you sell shares.
You will receive distributions from a Fund in additional shares of that Fund
unless you choose to receive your distributions in cash. If you wish to change
the way in which you receive distributions, you should call 1-800-BKB-1784 for
instructions. If you have elected to receive distributions in cash, and the
postal or other delivery service returns your check to the Funds as
undeliverable, you will not receive interest on amounts represented by the
uncashed checks.
PROSPECTUS
15
<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.
TAXES ON DISTRIBUTIONS
You will generally have to pay federal income tax on all Fund distributions
except for certain dividend distributions from the Tax-Free Money Market Fund
and the California Tax-Free Money Market Fund. Your distributions will be taxed
in the same manner whether you receive the distributions in cash or additional
shares of the Fund. Distributions that are derived from net long-term capital
gains generally will be taxed as long-term capital gains. The rate of tax will
generally depend on how long the Fund held the securities on which it realized
the gains. All other distributions, including short-term capital gains,
generally will be taxed as ordinary income.
The Money Market Funds (other than the Tax-Free Money Market Fund and the
California Tax-Free Money Market Fund) expect that their distributions will
consist primarily of ordinary income.
TAXES ON DISTRIBUTIONS BY
THE TAX-FREE FUNDS
The Tax-Free Money Market Fund and the California Tax-Free Money Market Fund may
make distributions called "exempt-interest dividends" that are exempt from
federal income tax. Exempt-interest dividends will not necessarily be exempt
from state and local income taxes. These Funds may also make taxable
distributions (including all capital gains distributions). You generally are
required to report all Fund distributions, including exempt-interest dividends,
on your federal income tax return.
If the Fund meets certain conditions, shareholders of the California Tax-Free
Money Market Fund will be able to exclude from income, for California personal
income tax purposes, dividends received from the Fund which are derived from
income (less related expenses) from California municipal obligations held by the
Fund that, if held by an individual, would pay interest which is exempt from
California taxation ("California exempt-interest securities"). Those conditions
include a requirement the Fund continue to qualify as a regulated investment
company, a requirement that at the close of each quarter of its taxable year, at
least 50% of the Fund's assets be invested in California exempt-interest
securities, and a requirement that these dividends must be designated as such by
the Fund by written notice to shareholders within 60 days after the close of the
Fund's fiscal year. Other distributions from the Fund to California residents
will be subject to California personal income tax, whether or not such dividends
are reinvested.
TAXES ON SALES OR EXCHANGES
Generally, a sale of shares of a Fund or an exchange for shares of another Fund,
is a taxable event. However, because the Money Market Funds strive to maintain a
$1.00 share price, you generally should not be taxed on a sale or exchange.
LOAN INTEREST. If you borrow money to purchase or hold shares of the Tax-Free
Money Market Fund or the California Tax-Free Money Market Fund, interest on your
loan will not be deductible.
TAX WITHHOLDING. If you are not a U.S. citizen or resident, or if you are
subject to "backup withholding," the Funds may be required to withhold a portion
of your distributions and, in some cases, redemption proceeds as a payment of
federal income tax.
PROSPECTUS
16
<PAGE>
MORE ABOUT BOSTON 1784 MONEY MARKET FUNDS
================================================================================
Boston 1784 Funds currently offer six Money Market Funds:
[BULLET] BOSTON 1784 TAX-FREE MONEY MARKET FUND
[BULLET] BOSTON 1784 CALIFORNIA TAX-FREE MONEY MARKET FUND
[BULLET] BOSTON 1784 U.S. TREASURY MONEY MARKET FUND
[BULLET] BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
[BULLET] BOSTON 1784 PRIME MONEY MARKET FUND
[BULLET] BOSTON 1784 INSTITUTIONAL PRIME MONEY MARKET FUND
PRINCIPAL INVESTMENT STRATEGIES
The principal investment strategies of the Money Market 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. In addition, a Fund's portfolio managers
may decide, as a matter of investment strategy, not to use the investments and
investment techniques described below and in the Statement of Additional
Information at any particular time.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Each Money Market Fund has specific investment policies and procedures designed
to maintain a constant net asset value of $1.00 per share. Each Fund complies
with industry regulations that apply to money market funds. These regulations
require that each Fund's investments mature or be deemed to mature within 397
days from the date purchased and that the average maturity of each Fund's
investments (on a dollar-weighted basis) be 90 days or less. In addition, all of
the Funds' 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.
Each Money Market Fund may invest more than 25% of its assets in money market
instruments issued by banks, including foreign branches of U.S. banks and U.S.
branches of foreign banks, and in U.S. government obligations. The Tax-Free
Money Market Fund and the California Tax-Free Money Market Fund may also invest
more than 25% of its assets in tax-exempt securities issued by governments or
political subdivisions of governments.
TAX-FREE MONEY MARKET FUND
The TAX-FREE MONEY MARKET FUND invests primarily in short-term municipal money
market instruments that are issued by states, territories and possessions of the
United States (including the District of Columbia) and their political
subdivisions, agencies and instrumentalities. These securities pay interest that
is exempt from federal income tax, including the alternative minimum tax.
PROSPECTUS
17
<PAGE>
MORE ABOUT BOSTON 1784 FUNDS (CONTINUED)
================================================================================
The Fund attempts to generate a relatively high tax-exempt yield by investing in
municipal money market instruments that are issued in states that have little or
no income tax. The Fund invests in both "general obligation" securities, which
are backed by the full faith, credit and taxing power of the issuer, and in
"revenue" securities, which are payable only from revenues from a specific
project or another specific revenue source. Normally, at least 80% of the Fund's
net assets are invested in these municipal money market instruments.
The Fund may also invest in taxable money market instruments, particularly if
the after-tax return on those securities is greater than the return on municipal
money market instruments. Under normal circumstances, not more than 20% of the
Fund's assets are invested in taxable instruments.
CALIFORNIA TAX-FREE MONEY MARKET FUND
The CALIFORNIA TAX-FREE MONEY MARKET FUND invests primarily in short-term
municipal money market instruments that pay interest that is exempt from federal
income tax and California personal income tax. Issuers of these securities are
generally located in California.
The Fund invests in both "general obligation" securities, which are backed by
the full faith, credit and taxing power of the issuer, and in "revenue"
securities, which are payable only from revenues from a specific project or
another revenue source.
Normally at least 80% of the Fund's assets are invested in municipal money
market instruments that pay interest that is exempt from federal income tax.
The Fund may also invest in money market instruments that pay interest that is
not exempt from federal income tax, particularly if the after-tax return on
those securities is greater than the return on municipal money market
instruments. Under normal circumstances, 20% or less of the Fund's assets are
invested in instruments that pay interest that is not exempt from federal income
tax.
Normally at least 65% of the Fund's assets are invested in municipal money
market instruments that pay interest that is exempt from California personal
income tax. When acceptable municipal obligations of this type are not
available, the Fund may invest in municipal obligations that are not free from
California personal income taxes. This would cause the amount of the Fund's
income that is subject to California personal income tax to increase.
U.S. TREASURY MONEY MARKET FUND AND INSTITUTIONAL
U.S. TREASURY MONEY MARKET FUND
The U.S. TREASURY MONEY MARKET FUND and INSTITUTIONAL U.S. TREASURY MONEY MARKET
FUND invest 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 Funds'
assets are invested in these securities. The Funds invest the rest of their
assets in U.S. government obligations issued by agencies or instrumentalities,
including mortgage-backed securities.
When selecting securities for these Funds, 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.
PROSPECTUS
18
<PAGE>
ALTHOUGH THE FUNDS INVEST IN U.S. GOVERNMENT OBLIGATIONS, AN INVESTMENT IN THE
FUNDS IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
PRIME MONEY MARKET FUND AND INSTITUTIONAL PRIME MONEY MARKET FUND
The PRIME MONEY MARKET FUND and INSTITUTIONAL PRIME MONEY MARKET FUND invest
primarily in a variety of high quality money market instruments.
The portfolio managers employ a "top-down" approach when selecting securities
for these Funds, looking for value while adhering to the quality and other
restrictions on money market funds.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS OF
BOSTON 1784 MONEY MARKET FUNDS
DAVID H. THOMPSON, Director of Fund Management, has been the manager of the
Tax-Free Money Market Fund since 1998 and the co-manager of the California
Tax-Free Money Market Fund since it began operations in 1999. Mr. Thompson, who
has more than 27 years of experience in investment management, research analysis
and securities trading, has been Director of Fund Management at BankBoston since
1985.
GUY C. HOLBROOK, Fund Manager, has been co-manager of the Tax-Free Money Market
Fund since October 1998, and manager of the Boston 1784 California Tax-Free
Money Market Fund since it began operations in 1999. Mr. Holbrook, who has ten
years of investment management experience, was a Research Analyst and Bond
Trader at Scudder Kemper Investments from 1992 to 1998.
EMMETT M. WRIGHT, Senior Fund Manager, has been the manager of the U.S. Treasury
Money Market Fund and manager of the Institutional U.S. Treasury Money Market
Fund since they 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 U.S. Treasury Money
Market Fund and the Institutional U.S. Treasury Money Market Fund since January
1997. Ms. LeBoeuf, who has seven years experience in investment management, has
been with BankBoston since 1978.
MARY K. WERLER, Senior Fund Manager, and LISA W. LEBOEUF, Fund Manager, have
been co-managers of the Prime Money Market Fund since December 1996 and
co-managers of the Institutional Prime Money Market Fund since it began
operations in November 1997. 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. Ms. LeBoeuf's investment experience is described above.
PROSPECTUS
19
<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 Boston 1784 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.
MANAGEMENT FEES
The following chart shows the investment management fees paid by each Fund
during the last fiscal year. The California Tax-Free Money Market Fund began
operations during the current fiscal year and the fee shown for the Fund is the
fee currently in effect.
- --------------------------------------------------------------------------------
MANAGEMENT FEES PAID
(expressed as a percentage of average net assets)
- --------------------------------------------------------------------------------
Tax-Free Money Market Fund .40%
California Tax-Free Money Market Fund .40
U.S. Treasury Money Market Fund .35
Institutional U.S. Treasury Money Market Fund .20
Prime Money Market Fund .35
Institutional Prime Money Market Fund .05
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.
The Funds could also be adversely affected if the issuers of securities held by
the Funds do not solve their Year 2000 problems, or if it costs them large
amounts of money to solve these problems.
PROSPECTUS
20
<PAGE>
DISTRIBUTION ARRANGEMENTS
================================================================================
Boston 1784 Money Market Funds do not charge any sales loads, deferred sales
loads or other fees in connection with the purchase of shares and do not have a
Rule 12b-1 plan.
PROSPECTUS
21
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND A FUND'S
FINANCIAL PERFORMANCE FOR THE PAST 5 FISCAL 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. THE CALIFORNIA TAX-FREE MONEY MARKET FUND
BEGAN OPERATIONS IN 1999 AND HAS NO FINANCIAL PERFORMANCE AT THE DATE OF THIS
PROSPECTUS.
<TABLE>
<CAPTION>
NET NET NET
ASSET DISTRIBUTIONS ASSET ASSETS RATIO
VALUE NET FROM NET VALUE END OF EXPENSES
BEGINNING INVESTMENT INVESTMENT END TOTAL OF PERIOD TO AVERAGE
OF PERIOD INCOME INCOME OF PERIOD RETURN (000) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BOSTON 1784 TAX-FREE MONEY MARKET FUND
For the year ended May 31, 1998 $1.00 0.03 (0.03) $1.00 3.33% $1,007,724 0.53%
For the year ended May 31, 1997 $1.00 0.03 (0.03) $1.00 3.22% $ 845,612 0.54%
For the year ended May 31, 1996 $1.00 0.03 (0.03) $1.00 3.55% $ 549,628 0.54%
For the year ended May 31, 1995 $1.00 0.03 (0.03) $1.00 3.29% $ 539,412 0.50%
For the period ended May 31, 1994 (1) $1.00 0.02 (0.02) $1.00 2.31%* $ 407,448 0.27%
- ---------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 U.S. TREASURY MONEY MARKET FUND
For the year ended May 31, 1998 $1.00 0.05 (0.05) $1.00 5.02% $ 372,657 0.65%
For the year ended May 31, 1997 $1.00 0.05 (0.05) $1.00 4.86% $ 390,294 0.64%
For the year ended May 31, 1996 $1.00 0.05 (0.05) $1.00 5.16% $ 78,999 0.64%
For the year ended May 31, 1995 $1.00 0.05 (0.05) $1.00 4.81% $ 55,068 0.60%
For the period ended May 31, 1994 (2) $1.00 0.03 (0.03) $1.00 2.64%* $ 5,593 0.65%
- ---------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
For the year ended May 31, 1998 $1.00 0.05 (0.05) $1.00 5.36% $4,285,801 0.33%
For the year ended May 31, 1997 $1.00 0.05 (0.05) $1.00 5.16% $2,591,487 0.33%
For the year ended May 31, 1996 $1.00 0.05 (0.05) $1.00 5.45% $ 644,733 0.32%
For the year ended May 31, 1995 $1.00 0.05 (0.05) $1.00 5.05% $ 395,585 0.30%
For the period ended May 31, 1994 (3) $1.00 0.03 (0.03) $1.00 2.99%* $ 181,568 0.22%
- ---------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 PRIME MONEY MARKET FUND
For the year ended May 31, 1998 $1.00 0.05 (0.05) $1.00 5.16% $ 127,588 0.65%
For the period ended May 31, 1997 (4) $1.00 0.02 (0.02) $1.00 2.07%* $ 123,099 0.65%
For the year ended December 31, 1996 (5) $1.00 0.05 (0.05) $1.00 5.02% $ 93,229 0.66%
For the year ended December 31, 1995 $1.00 0.05 (0.05) $1.00 5.49% $ 156,532 0.62%
For the year ended December 31, 1994 $1.00 0.04 (0.04) $1.00 3.75% $ 136,923 0.65%
For the year ended December 31, 1993 $1.00 0.03 (0.03) $1.00 2.72% $ 168,909 0.59%
For the period ended December 31, 1992 (6) $1.00 0.02 (0.02) $1.00 2.13%* $ 242,935 0.59%
For the period ended April 30, 1992 (7) $1.00 0.03 (0.03) $1.00 3.55% $ 280,931 0.48%
- ---------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 INSTITUTIONAL PRIME MONEY MARKET FUND
For the period ended May 31, 1998 (8) $1.00 0.03 (0.03) $1.00 5.55% $ 302,338 0.27%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIO RATIO OF RATIO OF NET
OF NET EXPENSES TO INCOME TO
INCOME AVERAGE NET AVERAGE NET
TO AVERAGE ASSETS (EXCLUDING ASSETS (EXCLUDING
NET ASSETS WAIVERS) WAIVERS)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BOSTON 1784 TAX-FREE MONEY MARKET FUND
For the year ended May 31, 1998 3.28% 0.53% 3.28%
For the year ended May 31, 1997 3.17% 0.56% 3.15%
For the year ended May 31, 1996 3.49% 0.60% 3.43%
For the year ended May 31, 1995 3.28% 0.61% 3.17%
For the period ended May 31, 1994 (1) 2.39% 0.71% 1.95%
- ----------------------------------------------------------------------------------------------
BOSTON 1784 U.S. TREASURY MONEY MARKET FUND
For the year ended May 31, 1998 4.91% 0.70% 4.86%
For the year ended May 31, 1997 4.76% 0.72% 4.68%
For the year ended May 31, 1996 5.02% 0.75% 4.91%
For the year ended May 31, 1995 5.13% 0.92% 4.81%
For the period ended May 31, 1994 (2) 2.91% 6.42% (2.86)%
- ----------------------------------------------------------------------------------------------
BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
For the year ended May 31, 1998 5.24% 0.33% 5.24%
For the year ended May 31, 1997 5.05% 0.34% 5.04%
For the year ended May 31, 1996 5.29% 0.39% 5.22%
For the year ended May 31, 1995 5.12% 0.41% 5.01%
For the period ended May 31, 1994 (3) 3.16% 0.55% 2.83%
- ----------------------------------------------------------------------------------------------
BOSTON 1784 PRIME MONEY MARKET FUND
For the year ended May 31, 1998 5.05% 0.70% 5.00%
For the period ended May 31, 1997 (4) 4.98% 0.75% 4.88%
For the year ended December 31, 1996 (5) 4.85% 0.66% 4.85%
For the year ended December 31, 1995 5.40% 0.62% 5.40%
For the year ended December 31, 1994 3.64% 0.69% 3.60%
For the year ended December 31, 1993 2.68% 0.70% 2.57%
For the period ended December 31, 1992 (6 3.13% 0.64% 3.08%
For the period ended April 30, 1992 (7) 4.61% 0.63% 4.46%
- ----------------------------------------------------------------------------------------------
BOSTON 1784 INSTITUTIONAL PRIME MONEY MARKET FUND
For the period ended May 31, 1998 (8) 5.36% 0.42% 5.21%
- ----------------------------------------------------------------------------------------------
<FN>
* Returns are for the period indicated and have not been annualized.
(1) The Tax-Free Money Market Fund commenced operations on June 14, 1993. All ratios for the period have been annualized.
(2) The U.S. Treasury Money Market Fund commenced operations on June 7, 1993. All ratios for the period have been annualized.
(3) The Institutional U.S. Treasury Money Market Fund commenced operations on June 14, 1993. All ratios for the period have been
annualized.
(4) The Prime Money Market Fund changed its fiscal year from December 31 to May 31. Reflects operations for the period from
January 1, 1997 to May 31, 1997. All ratios for the period have been annualized.
(5) Until December 9, 1996, the Prime Money Market Fund was known as the BayFunds Money Market Portfolio and was a portfolio of
BayFunds, an open-end investment company registered under the Investment Company Act of 1940, as amended. Shares of the
BayFunds Money Market Portfolio were divided into two classes, known as Investment Shares and Trust Shares. The Prime Money
Market Fund has only a single class of outstanding shares. For periods prior to December 9, 1996, Ernst & Young LLP were the
auditors of the BayFunds Money Market Portfolio.
(6) The Prime Money Market Fund changed its fiscal year from April 30 to December 31. Reflects operations for the period from May
1, 1992 to December 31, 1992. All ratios for the period have been annualized.
(7) Reflects operations for the period from August 1, 1991 (date of initial public investment) to April 30, 1992. During the
period from May 16, 1991 (start of business) to August 1, 1991, net investment income aggregating to $0.01 per share ($1,101)
was distributed to Federated Administrative Services. All ratios for the period have been annualized.
(8) The Institutional Prime Money Market Fund commenced operations on November 5, 1997. All ratios for the period have been
annualized.
</FN>
</TABLE>
PROSPECTUS
22
<PAGE>
Rule 497(c)
File Nos. 33-580004
and 811-7474
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.
================================================================================
YOU MAY ALSO CALL 1-800-BKB-1784 TO REQUEST OTHER INFORMATION ABOUT THE FUNDS OR
TO MAKE SHAREHOLDER INQUIRIES.
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.
[LOGO OMITTED]
BOSTON
1784
FUNDS
BOSTON 1784 FUNDS[SERVICE MARK]
P.O. BOX 8524
BOSTON, MA 02266-8524
1-800-BKB-1784
WWW.BOSTON1784FUNDS.COM
FILE NO. 811-7474 MF-0166
Prospectus
BOSTON 1784
MONEY MARKET FUNDS
[LOGO OMITTED]
BOSTON 1784 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
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.
April 1, 1999
<PAGE>
TABLE OF CONTENTS
================================================================================
BOSTON 1784 MONEY MARKET FUNDS.................................................1
SHAREHOLDER SERVICES...........................................................9
HOW TO REACH THE FUNDS...........................................9
TYPES OF ACCOUNTS................................................9
HOW TO OPEN AN ACCOUNT...........................................9
HOW TO PURCHASE SHARES..........................................10
HOW TO SELL SHARES..............................................11
SHAREHOLDER SERVICES AND POLICIES...............................13
PRICING OF FUND SHARES........................................................15
DISTRIBUTIONS.................................................................15
FEDERAL TAX CONSIDERATIONS....................................................16
MORE ABOUT BOSTON 1784 MONEY MARKET FUNDS.....................................17
MANAGEMENT....................................................................20
DISTRIBUTION ARRANGEMENTS.....................................................21
FINANCIAL HIGHLIGHTS..........................................................22
PROSPECTUS
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS
================================================================================
TAX-FREE MONEY MARKET FUND
U.S. TREASURY MONEYMARKET FUND
INSTITUTIONAL U.S. TREASURY
MONEY MARKET FUND
PRIME MONEY MARKET FUND
INSTITUTIONAL PRIME MONEY MARKET FUND
THIS RISK/RETURN SUMMARY BRIEFLY DESCRIBES EACH BOSTON 1784 MONEY MARKET 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 MONEY
MARKET FUNDS.
[COMPASS ROSE GRAPHIC OMITTED] WHAT ARE THE FUNDS' GOALS?
TAX-FREE MONEY MARKET FUND
The Tax-Free Money Market 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 that is exempt from federal income tax.
U.S. TREASURY MONEY MARKET FUND
INSTITUTIONAL U.S. TREASURY
MONEY MARKET FUND
PRIME MONEY MARKET FUND
INSTITUTIONAL PRIME
MONEY MARKET FUND
The Funds' goals are to preserve the principal value of a shareholder's
investment and to 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.
- --------------------------------------------------------------------------------
PROSPECTUS
1
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS (CONTINUED)
================================================================================
[CHESS PIECE GRAPHIC OMITTED] WHAT ARE THE FUNDS' MAIN INVESTEMENT STRATEGIES?
TAX-FREE MONEY MARKET FUND
The Tax-Free Money Market Fund invests primarily in short-term municipal
securities, which are debt securities issued by states, cities and towns and
other political or public entities or agencies. The interest paid on these debt
securities is free from federal income tax. The Fund may also enter into
repurchase agreements and invest in limited amounts in securities paying
interest that is not free from federal taxes.
U.S. TREASURY MONEY
MARKET FUND
The U.S. Treasury Money Market 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.
INSTITUTIONAL U.S. TREASURY
MONEY MARKET FUND
The Institutional U.S. Treasury Money Market 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.
PRIME MONEY MARKET FUND
The Prime Money Market Fund invests primarily in
high quality short-term debt obligations, including commercial paper,
asset-backed commercial paper, corporate bonds, U.S. government agency
obligations, taxable municipal securities and repurchase agreements.
INSTITUTIONAL PRIME
MONEY MARKET FUND
The Institutional Prime Money Market Fund
invests primarily in high quality short-term debt obligations, including
commercial paper, asset-backed commercial paper, corporate bonds, U.S.
government agency obligations, taxable municipal securities and repurchase
agreements.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
PROSPECTUS
2
<PAGE>
================================================================================
[WARNING SIGN GRAPHIC OMITTED] WHAT ARE THE MAIN RISKS OF INVESTING
IN BOSTON 1784 MONEY MARKET FUNDS?
The principal risks of investing in the Money Market Funds 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
that could adversely affect your investment, and that could prevent a 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 a Fund could cause the
value of your investment to decline.
[BULLET] Each Money Market 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 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.
[BULLET] Although the Funds seek to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the
Funds.
PROSPECTUS
3
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS (CONTINUED)
================================================================================
-----------------------
WHO MAY WANT TO INVEST?
-----------------------
Tax-Free Money Market Fund
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR INVESTORS WHO:
[BULLET] are investing for a short period of time or as part of a savings plan;
[BULLET] are uncomfortable with an investment that will go up and down in value;
[BULLET] want to earn income exempt from federal taxes.
It is not an appropriate investment for tax-sheltered accounts such as IRAs.
U.S. TREASURY MONEY MARKET FUND
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR INVESTORS WHO:
[BULLET] are investing for a short period of time or as part of a savings plan;
[BULLET] are uncomfortable with an investment that will go up and down in value;
[BULLET] want the added safety of U.S. government securities.
INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR INSTITUTIONAL INVESTORS WHO:
[BULLET] are investing for a short period of time;
[BULLET] want the added safety of U.S. government securities.
PRIME MONEY MARKET FUND
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR INVESTORS WHO:
[BULLET] are investing for a short period of time or as part of a savings plan;
[BULLET] are uncomfortable with an investment that will go up and down in value;
[BULLET] are looking for higher returns than are usually available from
U.S. Treasury money market funds.
INSTITUTIONAL PRIME MONEY MARKET FUND
THIS MONEY MARKET FUND MAY BE APPROPRIATE FOR INSTITUTIONAL INVESTORS WHO:
[BULLET] are investing for a short period of time;
[BULLET] are looking for higher returns than are usually available from
U.S. Treasury money market funds.
None of the Money Market Funds alone provides a balanced investment plan.
PROSPECTUS
4
<PAGE>
================================================================================
[RACING FLAGS GRAPHIC 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.
- --------------------------------------------------------------------------------
TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[Bar Chart Omitted] Plot points are as follows:
1994 2.71%
1995 3.75%
1996 3.25%
1997 3.33%
1998 3.15%
================================================================================
HIGHEST AND LOWEST RETURN (Quarterly 1994-1998)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 0.96% June 30, 1995
Lowest 0.58% March 31, 1994
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (through December 31, 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF FUND
(SINCE 6/14/93)
Tax-Free Money 3.15% 3.24% 3.16%
Market Fund
IBC/Financial Data 2.92% 2.92% 2.82%*
Stockbroker
and General Purpose
Tax-Free Average
================================================================================
*(since 5/31/93)
- --------------------------------------------------------------------------------
U.S. TREASURY MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[Bar Chart Omitted] Plot points are as follows:
1994 3.72%
1995 5.43%
1996 4.82%
1997 4.96%
1998 4.86%
================================================================================
HIGHEST AND LOWEST RETURN (Quarterly 1994-1998)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 1.38% June 30, 1995
Lowest 0.64% March 31, 1994
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (through December 31, 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF FUND
(SINCE 6/7/93)
U.S. Treasury Money 4.86% 4.76% 4.54%
Market Fund
IBC/Financial Data 4.90% 4.70% 4.48%*
U.S. Government
& Agencies Average
================================================================================
*(since 5/31/93)
FOR UP-TO-DATE YIELD INFORMATION, PLEASE CALL 1-800-BKB-1784.
PROSPECTUS
5
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS (CONTINUED)
================================================================================
- --------------------------------------------------------------------------------
INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[Bar Chart Omitted] Plot points are as follows:
1994 4.04%
1995 5.69%
1996 5.14%
1997 5.30%
1998 5.20%
================================================================================
HIGHEST AND LOWEST RETURN (Quarterly 1994-1998)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 1.43% June 30, 1995
Lowest 0.76% March 31, 1994
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (through December 31, 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF FUND
(SINCE 6/14/93)
Institutional U.S. 5.20% 5.07% 4.87%
Treasury Money
Market Fund
IBC/Financial Data 5.10% 4.98% 4.76%*
Government-Only
Institutional-
Only Average
================================================================================
*(since 5/30/93)
- --------------------------------------------------------------------------------
PRIME MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[Bar Chart Omitted] Plot points are as follows:
1992 3.48%
1993 2.72%
1994 3.75%
1995 5.49%
1996 5.02%
1997 5.14%
1998 5.06%
================================================================================
HIGHEST AND LOWEST RETURN (Quarterly 1992-1998)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 1.39% June 30, 1995
Lowest 0.66% March 31, 1994
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (through December 31, 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS LIFE OF FUND
(SINCE 6/6/91)
Prime Money 5.06% 4.89% 4.45%
Market Fund
IBC/Financial Data 4.96% 4.79% 4.34%*
First Tier Money
Market Average
================================================================================
*(since 5/31/91)
FOR UP-TO-DATE YIELD INFORMATION, PLEASE CALL 1-800-BKB-1784.
PROSPECTUS
6
<PAGE>
- --------------------------------------------------------------------------------
INSTITUTIONAL PRIME MONEY MARKET FUND
- --------------------------------------------------------------------------------
TOTAL RETURN
(per calendar year)
[Bar Chart Omitted] Plot points are as follows:
1998 5.40%
================================================================================
HIGHEST AND LOWEST RETURN (Quarterly 1998)
- --------------------------------------------------------------------------------
QUARTER ENDING
Highest 1.35% September 30, 1998
Lowest 1.27% December 31, 1998
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (through December 31, 1998)
- --------------------------------------------------------------------------------
1 YEAR LIFE OF FUND
(SINCE 11/5/97)
Institutional Prime 5.40% 5.43%
Money Market Fund
IBC/Financial Data First Tier 5.33% 5.35%*
Institutions Only Average
================================================================================
*(since 10/31/97)
FOR UP-TO-DATE YIELD INFORMATION, PLEASE CALL 1-800-BKB-1784.
PROSPECTUS
7
<PAGE>
BOSTON 1784 MONEY MARKET FUNDS (CONTINUED)
================================================================================
[CALCULATOR GRAPHIC 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 MONEY MARKET FUNDS
<TABLE>
<CAPTION>
===================================================================================================================
SHAREHOLDER FEES (fees paid directly from your investment)
- -------------------------------------------------------------------------------------------------------------------
TAX-FREE U.S. TREASURY INSTITUTIONAL U.S. PRIME INSTITUTIONAL
MONEY MONEY TREASURY MONEY MONEY PRIME MONEY
MARKET FUND MARKET FUND MARKET FUND MARKET FUND MARKET FUND
<S> <C> <C> <C> <C> <C>
Maximum Sales Charge (Load) None None None None None
Imposed on Purchases
Maximum Deferred Sales Charge (Load)None None None None None
Maximum Sales Charge (Load) None None None None None
Imposed on Reinvested Dividends
Redemption Fee None None None None None
Exchange Fee None None None None None
===================================================================================================================
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) as
a % of average net assets
- -------------------------------------------------------------------------------------------------------------------
Management Fees .40% 40% .20% .40% .20%
Distribution (12b-1) Fees None None None None None
Other Expenses .13% .30% .13% .30% .22%
Total Annual Fund Operating Expenses.53% .70%* .33% .70%* .42%*
*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 a fee waiver
by the Funds' Adviser. The Adviser waives a portion of its management fees in
order to keep each Fund's total operating expenses at a specified level. The
Adviser may eliminate all or a part of the fee waiver at any time. With the fee
waiver, the Funds' actual total annual fund operating expenses were as follows:
U.S. TREASURY MONEY MARKET FUND .65%
PRIME MONEY MARKET FUND .65%
INSTITUTIONAL PRIME MONEY MARKET .27%
</TABLE>
<TABLE>
<CAPTION>
===================================================================================================================
EXAMPLE
- -------------------------------------------------------------------------------------------------------------------
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN BOSTON
1784 MONEY MARKET 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:
- -------------------------------------------------------------------------------------------------------------------
TAX-FREE U.S. TREASURY INSTITUTIONAL U.S. PRIME INSTITUTIONAL
MONEY MONEY TREASURY MONEY MONEY PRIME MONEY
MARKET FUND MARKET FUND MARKET FUND MARKET FUND MARKET FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 year $ 54 $ 72 $ 34 $ 72 $ 43
3 years 170 224 106 224 135
5 years 296 390 185 390 235
10 years 665 871 418 871 530
- -------------------------------------------------------------------------------------------------------------------
PROSPECTUS
</TABLE>
8
<PAGE>
SHAREHOLDER SERVICES
================================================================================
This section describes how to do business with the Funds and the services that
are available to shareholders.
HOW TO REACH THE FUNDS
BY TELEPHONE 1-800-BKB-1784
Call for account or Fund
information Monday through Friday
8 a.m. to 6 p.m. (Eastern time).
BY REGULAR MAIL Boston 1784 Funds
P.O. Box 8524
Boston, MA 02266-8524
BY OVERNIGHT Boston 1784 Funds
COURIER c/o Boston Financial Data Services
2 Heritage Drive
North Quincy, MA 02171
TYPES OF ACCOUNTS
If you are investing in the Funds for the first time, you will need to establish
an account. You may establish the following types of accounts by completing an
account application. To obtain an application, call 1-800-BKB-1784.
[BULLET] INDIVIDUAL OR JOINT OWNERSHIP. Individual accounts are owned by one
person. Joint accounts have two or more owners. The Funds will treat
any individual owner of a joint account as authorized to give
instructions on purchases, sales and exchanges of shares of a Fund
without notice to the other owners, except that for any transaction
requiring a signature guarantee, the signature guarantee of each
account owner is required.
[BULLET] GIFT OR TRANSFER TO MINOR (UGMA OR UTMA). A UGMA (Uniform Gifts to
Minors Act) or UTMA (Uniform Transfers to Minors Act) account is
maintained by a custodian for the benefit of a minor. To open a UGMA
or UTMA account, you must include the minor's social security number
on the application.
[BULLET] TRUST. A trust can open an account. The name of each trustee, the name
of the trust and the date of the trust agreement must be included on
the application.
[BULLET] CORPORATIONS, PARTNERSHIPS AND OTHER LEGAL ENTITIES. Corporations,
partnerships and other legal entities may also open an account. The
application and resolution form must be signed by a general partner of
the partnership or an authorized officer of the corporation or other
legal entity.
[BULLET] RETIREMENT. If you are eligible, you may set up your account under a
tax-sheltered retirement plan, such as an Individual Retirement
Account. BankBoston offers a number of retirement plans through which
Fund shares may be purchased. Call 1-800-BKB-1784 for more information.
HOW TO OPEN AN ACCOUNT
Complete and sign the appropriate account application. Please be sure to provide
your social security or taxpayer identification number on the application. Make
your check payable to Boston 1784 Funds. Send all items to one of the following
addresses:
BY REGULAR MAIL Boston 1784 Funds
P.O. Box 8524
Boston, MA 02266-8524
PROSPECTUS
9
<PAGE>
SHAREHOLDER SERVICES (CONTINUED)
================================================================================
BY OVERNIGHT Boston 1784 Funds
COURIER c/o Boston Financial Data Services
2 Heritage Drive
North Quincy, MA 02171
You may also purchase shares through certain financial institutions, including
BankBoston. These institutions may have their own procedures for buying and
selling shares, and may charge fees. Contact your financial institution for more
information.
HOW TO PURCHASE SHARES
Shares of the Funds 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.
Each Fund's share price, called net asset value per share, is calculated every
business day. Each Fund's shares are sold without a sales charge. Shares are
purchased at net asset value the next time it is calculated after your
investment is received and accepted by the Distributor. For information on how
shares are priced, please see "Pricing of Fund Shares" below.
For the U.S. Treasury Money Market Fund, Institutional U.S. Treasury Money
Market Fund and Institutional Prime Money Market Fund, the Distributor must
receive payment by wire transfer or other immediately available Funds by the
close of business on the day your order is received and accepted. For the other
Money Market Funds, your investment is considered received when your check is
converted into immediately available funds. This normally happens within two
business days. On days when the financial markets close early, such as the day
after Thanksgiving and Christmas Eve, purchase orders for the U.S. Treasury
Money Market Fund, Institutional U.S. Treasury Money Market Fund and
Institutional Prime Money Market Fund must be received by 12 noon.
NEW PURCHASES. If you are new to the Funds, complete and sign an account
application and mail it along with your check. To establish the telephone
purchase option on your new account, complete the "Telephone Privilege
Authorization" section on the application and attach a check or savings
withdrawal slip from your bank account which you have "voided" by writing the
word "VOID" across the front.
If you wish to open an account by debiting your checking or savings account,
please attach a "voided" check or savings withdrawal slip, and complete the
"Electronic Transfer and Bank Wire" section of the application.
If you are investing through a tax-sheltered retirement plan for the first time,
you will need a special application. Retirement investing also involves its own
investment procedures. Call 1-800-BKB-1784 for more information.
ADDITIONAL PURCHASES. If you already have money invested in a Fund, you can
invest additional money in that Fund in the following ways:
BY MAIL. Complete the remittance slip attached to the bottom of your
confirmation statement. If your investment is in a retirement account, please
indicate whether the purchase is a rollover or a current or prior year
contribution. Send your check and remittance slip or written instructions to
one of the addresses listed above under "How To Open An Account."
BY TELEPHONE. This service allows you to purchase additional shares quickly
and conveniently through an electronic transfer of money. When you make an
additional purchase by telephone, the Funds will automatically deduct money
from your
PROSPECTUS
10
<PAGE>
================================================================================
predesignated bank account for the desired amount. If you have not
established the telephone purchase option, call 1-800-BKB-1784 to request the
appropriate form.
BY WIRE. Purchases may also be made by wiring money from your bank account to
your Boston 1784 Fund account. Each time you wish to send a wire, you must
call 1-800-BKB-1784 to receive wiring instructions before you send money.
AUTOMATIC INVESTMENT PROGRAM. Automatic investing is an easy way to add to your
account on a regular basis. Boston 1784 Funds offer an automatic investment plan
to help you achieve your financial goals as simply and conveniently as possible.
Please note that minimum purchase amounts apply. Call 1-800-BKB-1784 for
information.
PAYING FOR SHARES. Please note the following:
[BULLET] Purchases may be made by check, wire transfer and electronic
transfer.
[BULLET] All purchases must be made in U.S. dollars.
[BULLET] Checks must be drawn on U.S. banks and must be payable to Boston
1784 Funds. Checks that are not made payable directly to Boston 1784
Funds ("third party checks") are not accepted.
[BULLET] Cash and credit card checks are not accepted.
[BULLET] If a check does not clear your bank, the Funds reserve the right to
cancel the purchase. o If the Funds are unable to debit your
predesignated bank account on the day you purchase shares, they may
make additional attempts or cancel the purchase.
If your purchase is canceled, you will be responsible for any losses or fees
imposed by your bank and losses that may be incurred as a result of any decline
in the value of the canceled purchase. The Funds have the authority to redeem
shares in your account(s) to cover any losses due to changes in share price. The
Funds reserve the right to reject any specific purchase request.
MINIMUM INVESTMENTS. The following minimums
apply unless they are waived by the Distributor.
To open an account $1,000.00*
For tax-sheltered retirement plans 250.00
To add to an account 250.00**
Through automatic investment plans 50.00
Minimum account balance 1,000.00*
For tax-sheltered retirement plans 250.00
* $100,000 for the Institutional U.S.
Treasury Money Market Fund and the
Institutional Prime Money Market Fund
** $5,000 for the Institutional U.S.
Treasury Money Market Fund and the
Institutional Prime Money Market Fund
HOW TO SELL SHARES
Selling your shares in a Fund is called a "redemption" because the Fund buys
back its shares. On any business day, you may sell (redeem) all or a portion of
your shares. If your redemption request is over $100,000, you will need a
signature guarantee (see below). If the shares being sold were recently
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 the Funds receive your redemption request in good order. You
may gain or lose money when you redeem your shares. Please note that a
redemption is treated as a sale for tax
PROSPECTUS
11
<PAGE>
SHAREHOLDER SERVICES (CONTINUED)
================================================================================
purposes, and could result in taxable gain or loss in a non-tax-sheltered
account.
BY MAIL. To redeem all or part of your shares by mail, please send your request
in writing to one of the addresses listed above under "How To Open An Account"
and include the following information:
[BULLET] the name of the Fund(s),
[BULLET] the account number(s),
[BULLET] the amount of money or number of shares being redeemed,
[BULLET] the name(s) on the account,
[BULLET] the signature of a registered account owner, and
[BULLET] your daytime telephone number.
Signature requirements vary based on the type of account you have:
[BULLET] INDIVIDUAL, JOINT TENANTS, TENANTS IN COMMON: Written instructions
must be signed by an individual shareholder, or in the case of joint
accounts, one of the shareholders (except where a signature
guarantee is required, in which case the signature guarantee of each
account owner is required), exactly as the name(s) appears on the
account.
[BULLET] UGMA OR UTMA: Written instructions must be signed by the custodian
as it appears on the account.
[BULLET] SOLE PROPRIETOR, GENERAL PARTNER: Written instructions must be
signed by an authorized individual as it appears on the account.
[BULLET] CORPORATION, ASSOCIATION: Written instructions must be signed by the
person(s) authorized to act on the account. A resolution form,
authorizing the signer to act, must accompany the request, if not on
file with the Funds.
[BULLET] TRUST: Written instructions must be signed by the trustee(s). If the
name of the current trustee(s) does not appear on the account, a
certified certificate of incumbency dated within 60 days must also
be submitted.
[BULLET] RETIREMENT: Written instructions must be signed by the account
owner. Call 1-800-BKB-1784 for more information.
BY TELEPHONE. If you selected this option on your account application, you may
make redemptions from your account by calling 1-800-BKB-1784. The Funds require
that requests for redemptions over $100,000 be in writing with signatures
guaranteed (see below). You may not close your account by telephone. If you
would like to establish this option on an existing account, please call
1-800-BKB-1784. See "Telephone transactions" below.
SYSTEMATIC WITHDRAWAL PLAN. Under this plan, you may redeem a specific dollar
amount from your account on a regular basis. For more information or to sign up
for this service, please call 1-800-BKB-1784.
PAYMENT OF REDEMPTION PROCEEDS. Payments may be made by check, wire transfer or
electronic transfer.
BY CHECK Redemption proceeds will be sent to the shareholder(s) on our
records at the address on our records within seven days after
receipt of a valid redemption request.
BY WIRE If you have selected this option on your application, your
redemption proceeds will be wired directly into your designated
bank account, normally on the business day that your redemption
request is received. There is no limitation on redemptions by
wire.
PROSPECTUS
12
<PAGE>
================================================================================
However, there is a $12 fee for each wire and your bank may
charge an additional fee to receive the wire. If you would like
to establish this option on an existing account, please call
1-800-bkb-1784 to sign up for this service. Wire redemptions are
not available for retirement accounts.
BY ELECTRONIC If you have established this option, your redemption proceeds
TRANSFER will be transferred electronically to your predesignated bank
account. To establish this option on an existing account, please
call 1-800-BKB-1784 to request the appropriate form.
SIGNATURE GUARANTEES. In addition to the signature requirements described above,
a signature guarantee is required if:
[BULLET] You would like the check made payable to anyone other than the
shareholder(s) on our records.
[BULLET] You would like the check mailed to an address other than the address
on our records.
[BULLET] You would like the check mailed to an address on our records that
has changed in the past 30 days.
[BULLET] Your redemption request is over $100,000.
The Funds may also require signature guarantees for other redemptions. A
signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
SHAREHOLDER SERVICES AND POLICIES
EXCHANGES. On any business day, you may exchange all or a portion of your shares
into any other Fund in the Boston 1784 Funds family. To make exchanges, please
follow the procedures under "How To Sell Shares." Exchanges are processed at the
net asset value next calculated after an exchange request in good order is
received and approved. Please read the prospectus for the Fund into which you
are exchanging. The Funds reserve the right to reject any exchange request or to
change or terminate the exchange privilege at any time. An exchange is the sale
of shares of one Fund and purchase of shares of another, and could result in
taxable gain or loss in a non-tax-sheltered account.
REDEMPTION PROCEEDS. The Funds' policy is to pay redemption proceeds in cash,
but the Funds reserve the right to change this policy and to pay in kind in
certain cases by delivering to you investment securities equal to the redemption
price. In these cases, you might have to pay brokerage costs when converting the
securities to cash. The right of any shareholder to receive redemption proceeds
may be suspended, or payment may be postponed, in certain circumstances. These
circumstances include any period the New York Stock Exchange is closed (other
than weekends or holidays) or trading on the Exchange is restricted, any period
when an emergency exists and any time the Securities and Exchange Commission
allows mutual funds to delay payments for the protection of investors.
TAXPAYER IDENTIFICATION NUMBER. On the account application or other appropriate
form, you will be asked to certify that your social security or taxpayer
identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you are subject to
backup withholding or you did not certify your taxpayer identification number,
the IRS requires the Funds to
PROSPECTUS
13
<PAGE>
SHAREHOLDER SERVICES (CONTINUED)
================================================================================
withhold 31% of any dividends and redemption or exchange proceeds. The Funds
reserve the right to reject any application that does not include a certified
social security or taxpayer identification number.
SHARE OWNERSHIP. The Funds keep a record of the ownership of their shares and
share certificates are not issued.
INVOLUNTARY REDEMPTIONS. If your account balance falls below the minimum
required investment as a result of selling or exchanging shares, you will be
given 60 days to re-establish the minimum balance. If you do not, your account
may be closed and the proceeds sent to you.
TELEPHONE TRANSACTIONS. You may buy, sell or exchange shares by telephone if you
selected this option on your account application or have completed the
appropriate form. The Funds and their agents will not be responsible for any
losses that may result from acting on wire or telephone instructions that it
reasonably believes to be genuine. The Funds and their agents will each follow
reasonable procedures to confirm that instructions received by telephone are
genuine, which may include taping telephone conversations. It may be difficult
to reach the Funds by telephone during periods of unusual market activity.
ADDRESS CHANGES. A change in address on your account must be made in writing and
be signed by all account owners. Include the name of your Fund(s), the account
numbers(s), the name(s) on the account and both the old and new addresses. Call
1-800-BKB-1784 if you need more information.
NAME/ACCOUNT OWNERSHIP CHANGES. To change the name on an account, the shares are
generally transferred to a new account. A signature guarantee must be provided
and, in some cases, certain legal documents may be required. For more
information, call 1-800-BKB-1784. If your shares are held by a financial
institution, contact that financial institution for ownership changes.
STATEMENTS AND REPORTS. The Funds will send you a confirmation statement after
every transaction that affects your account balance or registration. If you are
enrolled in an automatic investment program and invest on a monthly basis, you
will receive quarterly confirmations. Information about the tax status of income
dividends and capital gains distributions will be mailed to shareholders early
each year.
Financial reports for the Funds, which include a list of the Funds' portfolio
holdings, will be mailed twice each year to all shareholders.
CHECKWRITING. Checkwriting privileges are available on the following Funds:
Boston 1784 Tax-Free Money Market Fund, Boston 1784 U.S. Treasury Money Market
Fund and Boston 1784 Prime Money Market Fund. Checks may be written for a
minimum of $250 each check. Call 1-800-BKB-1784 for more information.
Please note that you may not use a check to close your account.
PROSPECTUS
14
<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 Veterans' Day. The NAV
is the value of a single share of a Fund.
The U.S. Treasury Money Market Fund, Institutional U.S. Treasury Money Market
Fund and Institutional Prime Money Market Fund calculate NAV at 3:00 p.m.
Eastern time (12 noon on days when the financial markets close early). The
Tax-Free Money Market Fund and Prime Money Market Fund calculate NAV at 12 noon.
In determining each Money Market Fund's NAV, securities are valued at amortized
cost, which is approximately equal to market value.
DISTRIBUTIONS
================================================================================
As a Fund shareholder, you are entitled to your share of a Fund's net income and
gains on its investments. Each Fund passes substantially all of its earnings
along to its investors as distributions. When a Fund earns interest from money
market instruments 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.
Your distributions are declared each day, starting on the day you purchase your
shares. They are paid to your account on the first business day of each month
that you are a shareholder. You will not receive a distribution for the day on
which you sell shares.
You will receive distributions from a Fund in additional shares of that Fund
unless you choose to receive your distributions in cash. If you wish to change
the way in which you receive distributions, you should call 1-800-BKB-1784 for
instructions. If you have elected to receive distributions in cash, and the
postal or other delivery service returns your check to the Funds as
undeliverable, you will not receive interest on amounts represented by the
uncashed checks.
PROSPECTUS
15
<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.
TAXES ON DISTRIBUTIONS
You will generally have to pay federal income tax on all Fund distributions
except for certain dividend distributions from the Tax-Free Money Market Fund.
Your distributions will be taxed in the same manner whether you receive the
distributions in cash or additional shares of the Fund. Distributions that are
derived from net long-term capital gains generally will be taxed as long-term
capital gains. The rate of tax will generally depend on how long the Fund held
the securities on which it realized the gains. All other distributions,
including short-term capital gains, generally will be taxed as ordinary income.
The Money Market Funds (other than the Tax-Free Money Market Fund) expect that
their distributions will consist primarily of ordinary income.
TAXES ON DISTRIBUTIONS BY
THE TAX-FREE FUND
The Tax-Free Money Market Fund may make distributions called "exempt-interest
dividends" that are exempt from federal income tax. Exempt-interest dividends
will not necessarily be exempt from state and local income taxes. The Fund may
also make taxable distributions (including all capital gains distributions). You
generally are required to report all Fund distributions, including
exempt-interest dividends, on your federal income tax return.
TAXES ON SALES OR EXCHANGES
Generally, a sale of shares of a Fund or an exchange for shares of another Fund
is a taxable event. However, because the Money Market Funds strive to maintain a
$1.00 share price, you generally should not be taxed on a sale or exchange.
LOAN INTEREST. If you borrow money to purchase or hold shares of the Tax-Free
Money Market Fund, interest on your loan will not be deductible.
TAX WITHHOLDING. If you are not a U.S. citizen or resident, or if you are
subject to "backup withholding," the Funds may be required to withhold a portion
of your distributions and, in some cases, redemption proceeds as a payment of
federal income tax.
PROSPECTUS
16
<PAGE>
MORE ABOUT BOSTON 1784 MONEY MARKET FUNDS
================================================================================
Boston 1784 Funds currently offer five
Money Market Funds:
[BULLET] BOSTON 1784 TAX-FREE MONEY MARKET FUND
[BULLET] BOSTON 1784 U.S. TREASURY MONEY MARKET FUND
[BULLET] BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
[BULLET] BOSTON 1784 PRIME MONEY MARKET FUND
[BULLET] BOSTON 1784 INSTITUTIONAL PRIME MONEY MARKET FUND
PRINCIPAL INVESTMENT STRATEGIES
The principal investment strategies of the Money Market 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. In addition, a Fund's portfolio managers
may decide, as a matter of investment strategy, not to use the investments and
investment techniques described below and in the Statement of Additional
Information at any particular time.
----------------------------------------------------------------------------
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.
----------------------------------------------------------------------------
Each Money Market Fund has specific investment policies and procedures designed
to maintain a constant net asset value of $1.00 per share. Each Fund complies
with industry regulations that apply to money market funds. These regulations
require that each Fund's investments mature or be deemed to mature within 397
days from the date purchased and that the average maturity of each Fund's
investments (on a dollar-weighted basis) be 90 days or less. In addition, all of
the Funds' 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.
Each Money Market Fund may invest more than 25% of its assets in money market
instruments issued by banks, including foreign branches of U.S. banks and U.S.
branches of foreign banks, and in U.S. government obligations. The Tax-Free
Money Market Fund may also invest more than 25% of its assets in tax-exempt
securities issued by governments or political subdivisions of governments.
TAX-FREE MONEY MARKET FUND
The TAX-FREE MONEY MARKET FUND invests primarily in short-term municipal money
market instruments that are issued by states, territories and possessions of the
United States (including the District of Columbia) and their political
subdivisions, agencies and instrumentalities. These securities pay interest that
is exempt from federal income tax, including the alternative minimum tax.
PROSPECTUS
17
<PAGE>
MORE ABOUT BOSTON 1784 FUNDS (CONTINUED)
================================================================================
The Fund attempts to generate a relatively high tax-exempt yield by investing in
municipal money market instruments that are issued in states that have little or
no income tax. The Fund invests in both "general obligation" securities, which
are backed by the full faith, credit and taxing power of the issuer, and in
"revenue" securities, which are payable only from revenues from a specific
project or another specific revenue source. Normally, at least 80% of the Fund's
net assets are invested in these municipal money market instruments. The Fund
may also invest in taxable money market instruments, particularly if the
after-tax return on those securities is greater than the return on municipal
money market instruments. Under normal circumstances, not more than 20% of the
Fund's assets are invested in taxable instruments.
U.S. TREASURY MONEY MARKET FUND AND
INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
The U.S. TREASURY MONEY MARKET FUND and INSTITUTIONAL U.S. TREASURY MONEY MARKET
FUND invest 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 Funds'
assets are invested in these securities. The Funds invest the rest of their
assets in U.S. government obligations issued by agencies or instrumentalities,
including mortgage-backed securities.
When selecting securities for these Funds, 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 FUNDS INVEST IN U.S. GOVERNMENT OBLIGATIONS, AN INVESTMENT IN THE
FUNDS IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
PRIME MONEY MARKET FUND AND
INSTITUTIONAL PRIME MONEY
MARKET FUND
The PRIME MONEY MARKET FUND and INSTITUTIONAL PRIME MONEY MARKET FUND invest
primarily in a variety of high quality money market instruments.
The portfolio managers employ a "top-down" approach when selecting securities
for these Funds, looking for value while adhering to the quality and other
restrictions on money market funds.
-----------------------------------------------------------------------------
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.
-----------------------------------------------------------------------------
PROSPECTUS
18
<PAGE>
PORTFOLIO MANAGERS OF
BOSTON 1784 MONEY MARKET FUNDS
DAVID H. THOMPSON, Director of Fund Management, has been the manager of the
Tax-Free Money Market Fund since 1998. Mr. Thompson, who has more than 27 years
of experience in investment management, research analysis and securities
trading, has been Director of Fund Management at BankBoston since 1985.
GUY C. HOLBROOK, Fund Manager, has been co-manager of the Tax-Free Money Market
Fund since October 1998. Mr. Holbrook, who has ten years of investment
management experience, was a Research Analyst and Bond Trader at Scudder Kemper
Investments from 1992 to 1998.
EMMETT M. WRIGHT, Senior Fund Manager, has been the manager of the U.S. Treasury
Money Market Fund and manager of the Institutional U.S. Treasury Money Market
Fund since they 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 U.S. Treasury Money
Market Fund and the Institutional U.S. Treasury Money Market Fund since January
1997. Ms. LeBoeuf, who has seven years experience in investment management, has
been with BankBoston since 1978.
MARY K. WERLER, Senior Fund Manager, and LISA W. LEBOEUF, Fund Manager, have
been co-managers of the Prime Money Market Fund since December 1996 and
co-managers of the Institutional Prime Money Market Fund since it began
operations in November 1997. 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. Ms. LeBoeuf's investment experience is described above.
PROSPECTUS
19
<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 Boston 1784 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.
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)
- --------------------------------------------------------------------------------
Tax-Free Money Market Fund .40%
U.S. Treasury Money Market Fund .35
Institutional U.S. Treasury Money Market Fund .20
Prime Money Market Fund .35
Institutional Prime Money Market Fund .05
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.
The Funds could also be adversely affected if the issuers of securities held by
the Funds do not solve their Year 2000 problems, or if it costs them large
amounts of money to solve these problems.
PROSPECTUS
20
<PAGE>
DISTRIBUTION ARRANGEMENTS
================================================================================
Boston 1784 Money Market Funds do not charge any sales loads, deferred sales
loads or other fees in connection with the purchase of shares and do not have a
Rule 12b-1 plan.
PROSPECTUS
21
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND A FUND'S
FINANCIAL PERFORMANCE FOR THE PAST 5 FISCAL 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>
NET NET NET
ASSET DISTRIBUTIONS ASSET ASSETS RATIO
VALUE NET FROM NET VALUE END OF EXPENSES
BEGINNING INVESTMENT INVESTMENT END TOTAL OF PERIOD TO AVERAGE
OF PERIOD INCOME INCOME OF PERIOD RETURN (000) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BOSTON 1784 TAX-FREE MONEY MARKET FUND
For the year ended May 31, 1998 $1.00 0.03 (0.03) $1.00 3.33% $1,007,724 0.53%
For the year ended May 31, 1997 $1.00 0.03 (0.03) $1.00 3.22% $ 845,612 0.54%
For the year ended May 31, 1996 $1.00 0.03 (0.03) $1.00 3.55% $ 549,628 0.54%
For the year ended May 31, 1995 $1.00 0.03 (0.03) $1.00 3.29% $ 539,412 0.50%
For the period ended May 31, 1994 (1) $1.00 0.02 (0.02) $1.00 2.31%* $ 407,448 0.27%
- ---------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 U.S. TREASURY MONEY MARKET FUND
For the year ended May 31, 1998 $1.00 0.05 (0.05) $1.00 5.02% $ 372,657 0.65%
For the year ended May 31, 1997 $1.00 0.05 (0.05) $1.00 4.86% $ 390,294 0.64%
For the year ended May 31, 1996 $1.00 0.05 (0.05) $1.00 5.16% $ 78,999 0.64%
For the year ended May 31, 1995 $1.00 0.05 (0.05) $1.00 4.81% $ 55,068 0.60%
For the period ended May 31, 1994 (2) $1.00 0.03 (0.03) $1.00 2.64%* $ 5,593 0.65%
- ---------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
For the year ended May 31, 1998 $1.00 0.05 (0.05) $1.00 5.36% $4,285,801 0.33%
For the year ended May 31, 1997 $1.00 0.05 (0.05) $1.00 5.16% $2,591,487 0.33%
For the year ended May 31, 1996 $1.00 0.05 (0.05) $1.00 5.45% $ 644,733 0.32%
For the year ended May 31, 1995 $1.00 0.05 (0.05) $1.00 5.05% $ 395,585 0.30%
For the period ended May 31, 1994 (3) $1.00 0.03 (0.03) $1.00 2.99%* $ 181,568 0.22%
- ---------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 PRIME MONEY MARKET FUND
For the year ended May 31, 1998 $1.00 0.05 (0.05) $1.00 5.16% $ 127,588 0.65%
For the period ended May 31, 1997 (4) $1.00 0.02 (0.02) $1.00 2.07%* $ 123,099 0.65%
For the year ended December 31, 1996 (5) $1.00 0.05 (0.05) $1.00 5.02% $ 93,229 0.66%
For the year ended December 31, 1995 $1.00 0.05 (0.05) $1.00 5.49% $ 156,532 0.62%
For the year ended December 31, 1994 $1.00 0.04 (0.04) $1.00 3.75% $ 136,923 0.65%
For the year ended December 31, 1993 $1.00 0.03 (0.03) $1.00 2.72% $ 168,909 0.59%
For the period ended December 31, 1992 (6) $1.00 0.02 (0.02) $1.00 2.13%* $ 242,935 0.59%
For the period ended April 30, 1992 (7) $1.00 0.03 (0.03) $1.00 3.55% $ 280,931 0.48%
- ---------------------------------------------------------------------------------------------------------------------------------
BOSTON 1784 INSTITUTIONAL PRIME MONEY MARKET FUND
For the period ended May 31, 1998 (8) $1.00 0.03 (0.03) $1.00 5.55% $ 302,338 0.27%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIO RATIO OF RATIO OF NET
OF NET EXPENSES TO INCOME TO
INCOME AVERAGE NET AVERAGE NET
TO AVERAGE ASSETS (EXCLUDING ASSETS (EXCLUDING
NET ASSETS WAIVERS) WAIVERS)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BOSTON 1784 TAX-FREE MONEY MARKET FUND
For the year ended May 31, 1998 3.28% 0.53% 3.28%
For the year ended May 31, 1997 3.17% 0.56% 3.15%
For the year ended May 31, 1996 3.49% 0.60% 3.43%
For the year ended May 31, 1995 3.28% 0.61% 3.17%
For the period ended May 31, 1994 (1) 2.39% 0.71% 1.95%
- ----------------------------------------------------------------------------------------------
BOSTON 1784 U.S. TREASURY MONEY MARKET FUND
For the year ended May 31, 1998 4.91% 0.70% 4.86%
For the year ended May 31, 1997 4.76% 0.72% 4.68%
For the year ended May 31, 1996 5.02% 0.75% 4.91%
For the year ended May 31, 1995 5.13% 0.92% 4.81%
For the period ended May 31, 1994 (2) 2.91% 6.42% (2.86)%
- ----------------------------------------------------------------------------------------------
BOSTON 1784 INSTITUTIONAL U.S. TREASURY MONEY MARKET FUND
For the year ended May 31, 1998 5.24% 0.33% 5.24%
For the year ended May 31, 1997 5.05% 0.34% 5.04%
For the year ended May 31, 1996 5.29% 0.39% 5.22%
For the year ended May 31, 1995 5.12% 0.41% 5.01%
For the period ended May 31, 1994 (3) 3.16% 0.55% 2.83%
- ----------------------------------------------------------------------------------------------
BOSTON 1784 PRIME MONEY MARKET FUND
For the year ended May 31, 1998 5.05% 0.70% 5.00%
For the period ended May 31, 1997 (4) 4.98% 0.75% 4.88%
For the year ended December 31, 1996 (5) 4.85% 0.66% 4.85%
For the year ended December 31, 1995 5.40% 0.62% 5.40%
For the year ended December 31, 1994 3.64% 0.69% 3.60%
For the year ended December 31, 1993 2.68% 0.70% 2.57%
For the period ended December 31, 1992 (6 3.13% 0.64% 3.08%
For the period ended April 30, 1992 (7) 4.61% 0.63% 4.46%
- ----------------------------------------------------------------------------------------------
BOSTON 1784 INSTITUTIONAL PRIME MONEY MARKET FUND
For the period ended May 31, 1998 (8) 5.36% 0.42% 5.21%
- ----------------------------------------------------------------------------------------------
<FN>
* Returns are for the period indicated and have not been annualized.
(1) The Tax-Free Money Market Fund commenced operations on June 14, 1993. All ratios for the period have been annualized.
(2) The U.S. Treasury Money Market Fund commenced operations on June 7, 1993. All ratios for the period have been annualized.
(3) The Institutional U.S. Treasury Money Market Fund commenced operations on June 14, 1993. All ratios for the period have been
annualized.
(4) The Prime Money Market Fund changed its fiscal year from December 31 to May 31. Reflects operations for the period from
January 1, 1997 to May 31, 1997. All ratios for the period have been annualized.
(5) Until December 9, 1996, the Prime Money Market Fund was known as the BayFunds Money Market Portfolio and was a portfolio of
BayFunds, an open-end investment company registered under the Investment Company Act of 1940, as amended. Shares of the
BayFunds Money Market Portfolio were divided into two classes, known as Investment Shares and Trust Shares. The Prime Money
Market Fund has only a single class of outstanding shares. For periods prior to December 9, 1996, Ernst & Young LLP were the
auditors of the BayFunds Money Market Portfolio.
(6) The Prime Money Market Fund changed its fiscal year from April 30 to December 31. Reflects operations for the period from May
1, 1992 to December 31, 1992. All ratios for the period have been annualized.
(7) Reflects operations for the period from August 1, 1991 (date of initial public investment) to April 30, 1992. During the
period from May 16, 1991 (start of business) to August 1, 1991, net investment income aggregating to $0.01 per share ($1,101)
was distributed to Federated Administrative Services. All ratios for the period have been annualized.
(8) The Institutional Prime Money Market Fund commenced operations on November 5, 1997. All ratios for the period have been
annualized.
</FN>
</TABLE>
PROSPECTUS
22
<PAGE>
Rule 497(c)
File Nos. 33-580004
and 811-7474
Statement of
Additional Information
September 15, 1998, as
supplemented April 1, 1999
Boston 1784 Funds(SM)
Money Market Funds:
Boston 1784 Tax-Free Money Market Fund
Boston 1784 California 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 California Tax-Exempt 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 and
April 1, 1999. 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. Copies of the Funds' Annual Reports may be
obtained without charge by calling 1-800-BKB-1784.
This Statement of Additional Information is not a pro spectus and is
authorized for distribution to prospective investors only if preceded or
accompanied by a current prospectus.
<PAGE>
TABLE OF CONTENTS
Page
----
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 26
Compensation 29
4. Control Persons and Principal Holders of Securities 29
Principal Holders 29
5. Investment Advisory and Other Services 30
Investment Advisers 30
ServiceMarks 33
Distributor 33
Administrator 34
Dividend Disbursing Agent and Transfer Agent 35
Custodian 35
Counsel and Independent Accountant 35
6. Brokerage Allocation and Other Practices 36
Brokerage Transactions 36
Brokerage Selection 37
7. Description of Shares; Voting Rights and Liabilities 38
8. Purchase, Redemption and Pricing of Shares 39
Determination of Net Asset Value 39
Purchase and Redemption of Shares 41
Systematic Withdrawal Plan 41
Redemption in Kind 42
9. Taxes 42
Tax Status of the Funds 42
Taxation of Fund Distributions 43
Disposition of Shares 44
Additional Information for Shareholders
of the Tax-Exempt Funds 44
Additional Information Relating to Fund Investments 45
Additional Information Relating to Foreign Investments 45
Foreign Shareholders 46
Backup Withholding 46
10. Performance Information 46
Calculation of Yield 46
Calculation of Total Return 48
11. Financial Statements 54
Appendix A: Certain Information concerning California,
Connecticut, Florida, Massachusetts
and Rhode Island
Appendix B: Description of Securities Ratings
Appendix C: Taxable Equivalent Yields
<PAGE>
1. TRUST HISTORY
Boston 1784 Funds(SM) (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 nineteen active series. Each Fund (other
than the California Tax-Free Money Market Fund and 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 California 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 California Tax-Exempt 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
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International Equity Fund with BankBoston (BankBoston and Kleinwort are each
referred to as an "Adviser"). SEI Investments Distribution Co. is the
distributor of shares of each Fund.
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. Of course,
a Fund's portfolio managers may decide, as a matter of investment strategy, not
to use the investments and investment techniques described below at any
particular time. 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 California, Connecticut,
Florida, Massachusetts and Rhode Island. Each of the California, 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"
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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 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
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.
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Bank Obligations
Bank obligations include certificates of deposit, time deposits (including
Eurodollar time deposits), and bankers' acceptances and other short-term debt
obligations issued by domestic banks, foreign subsidiaries or foreign branches
of domestic banks, domestic and foreign branches of foreign banks, domestic
savings and loan associations, and other banking institutions. The Funds have
established certain minimum credit quality standards for bank obligations in
which they invest.
Bank obligations are susceptible to adverse events affecting the
banking industry. Banks are sensitive to changes in money market and general
economic conditions, as well as decisions by regulators that can affect their
profitability.
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.
Certificates 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
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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 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 an Adviser 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
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currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency. The precise matching of the forward
contract amounts and the value of the securities involved is not generally
possible since the future value of such securities in foreign currencies changes
as a consequence of market movements in the value of those securities between
the date the forward contract is entered into and the date it matures. The
projection of a short-term hedging strategy is highly uncertain. A Fund does not
enter into such forward contracts or maintain a net exposure to such contracts
where the consummation of the contracts would obligate the Fund to deliver an
amount of foreign currency in excess of the value of the Fund's securities or
other assets denominated in the applicable currency. Under normal circumstances,
consideration of the prospect for currency parities is incorporated in the
longer term investment decisions made with regard to overall diversification
strategies. However, each Adviser to such Funds believes that it is important to
have the flexibility to enter into such forward contracts when it determines
that the best interests of such Funds will be served.
A Fund generally does not enter into a forward contract with a term
greater than one year. At the maturity of a forward contract, the Fund either
sells the security and makes delivery of the foreign currency, or it retains the
security and terminates its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.
If a Fund retains the security and engages in an offsetting transaction,
the Fund incurs a gain or loss (as described below) to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline during the period between the
date the Fund enters into a forward contract for the sale of the foreign
currency and the date it enters into an offsetting contract for the purchase of
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 an Adviser 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
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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. 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
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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.
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 and liquid
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
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.
In a mortgage dollar roll, the Fund takes the risk that the market price of
the mortgage-backed security will drop below the future purchase price. To the
extent the Fund invests the proceeds from the sale of the mortgage-backed
security in other portfolio securities, the Fund is engaging in a form of
leverage which could have the effect of magnifying the Fund's gains or losses.
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 not issued by government issuers 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
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the cash flow generated from the mortgage collateral pool is dedicated to
bond repayment), and mortgage-backed bonds (general obligations of the issuers
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of single family detached properties). Many CMOs are issued with
a number of classes or series which have different maturities and are retired in
sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO 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, Tax-Exempt Funds and Bond Funds may write covered
call options from time to time on its assets as determined by the Adviser or
Advisers to such Fund to be appropriate in seeking to achieve such Fund's
investment objective, provided that the aggregate value of such options may not
exceed 10 percent of such Fund's net assets as of the time such Fund enters into
such options. The Stock Funds, Boston 1784 Short-Term Income Fund and Boston
1784 Income Fund may write covered call options, for hedging purposes and in
order to generate additional income. The Tax-Exempt Funds and Boston 1784 U.S.
Government Medium-Term Income Fund may write covered call options, for hedging
purposes only and will not engage in option writing strategies for speculative
purposes.
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
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deliver the underlying security against payment of the exercise price. This
obligation is terminated upon the expiration of the option period or at such
earlier time at which the writer effects a closing purchase transaction.
A closing purchase transaction is one in which a Fund, when obligated as a
writer of an option, terminates its obligation by purchasing an option of the
same series as the option previously written. A closing purchase transaction
cannot be effected with respect to an option once the Fund writing the option
has received an exercise notice for such option. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security or to enable a Fund to write another call option on the
underlying security with either a different exercise price or different
expiration date or both. The Fund may realize a net gain or loss from a closing
purchase transaction depending upon whether the net amount of the original
premium received on the call option is more or less than the cost of effecting
the closing purchase transaction. Any loss incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
sale of a different call option on the same underlying security. Such a loss may
also be wholly or partially offset by unrealized appreciation in the market
value of the underlying security. Conversely, a gain resulting from a closing
purchase transaction could be offset in whole or in part by a decline in the
market value of the underlying security.
If a call option expires unexercised, a Fund will realize a short-term
capital gain in the amount of the premium on the option, less the commission
paid. Such a gain, however, may be offset by depreciation in the market value of
the underlying security during the option period. If a call option is exercised,
the Fund will realize a gain or loss from the sale of the underlying security
equal to the difference between (a) the cost of the underlying security and (b)
the proceeds of the sale of the security, plus the amount of the premium on the
option, less the commission paid.
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
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movement will be reduced by the amount of the premium paid for the option
and related transaction costs.
Options on Futures Contracts
The Funds may, 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 of cash received will
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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 an Adviser 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 and principal payments for the benefit of the
registered owners of the certificates or receipts. Receipts include Treasury
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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 an Adviser to each Fund will monitor compliance with this
requirement. Under all repurchase agreements entered into by any Fund, the
underlying collateral must be held by the Fund's Custodian or sub-custodian.
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 an Adviser 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 an Adviser 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 an Adviser is to rely upon the
exemption from registration provided by Rule 144A promulgated under the 1933
Act. Restricted securities not determined to be liquid may be purchased subject
to each Fund's limitation on all illiquid securities (15 percent of net assets
for each Stock, Bond and Tax-Exempt Fund and 10 percent for each Money Market
Fund).
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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. In the event of the bankruptcy of the other party to a reverse
repurchase agreement, a Fund could experience delays in recovering the
securities sold. To the extent that, in the meantime, the value of the
securities sold has increased, the Fund could experience a loss.
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 or dividends 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 a rebate to the
borrowers 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 an Adviser to a Fund to be of good standing
and when, in the judgment of the Adviser, 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. When a
loan is terminated, the Fund must return the collateral received, and the
liquidation of any investments made with cash collateral may result in a loss to
the Fund. A Fund may use the Distributor or a broker/dealer affiliate of an
Adviser as a borrower or lending agent in these transactions.
Securities Rated Baa or BBB
Each of the Funds may purchase securities rated Baa by Moody's or BBB by
Standard & Poor's which may have poor protection of payment of principal and
interest.
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
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Federal Reserve Book-Entry System. The Adviser or an Adviser
to a Fund will purchase only those STRIPS that it determines or they determine
are liquid or, if illiquid, do not violate such Fund's investment policy
concerning investments in illiquid securities. Consistent with Rule 2a-7,
BankBoston, as the Adviser to the Money Market Funds, will purchase for Money
Market Funds only those STRIPS that have a remaining maturity of 397 days or
less. No Money Market Fund may invest more than 5 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 Tax-Free Money Market Fund, Boston 1784 California Tax-Free
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 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 AA or
better by S&P or Fitch IBCA (BBB or better for the Tax-Exempt Funds, Short Term
Income Fund and Income Fund) or Aa or better by Moody's (Baa or better for the
Tax-Exempt Funds, Short Term Income Fund and Income Fund) 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)
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have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt-issuance limitations are deemed to be inapplicable
because of the inclusion in many leases or contracts of "non-appropriation"
clauses that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated for
such purpose by the appropriate legislative body on a yearly or other periodic
basis. Although the obligations will be secured by the leased equipment or
facilities, the disposition of the property in the event of non-appropriation or
foreclosure might, in some cases, prove difficult. In light of these concerns,
the Trust has adopted and follows procedures for determining whether municipal
lease securities purchased by a Fund are liquid and for monitoring the liquidity
of municipal lease securities held in the Fund's portfolio. The procedures
require that a number of factors be used in evaluating the liquidity of a
municipal lease security, including the frequency of trades and quotes for the
security, the number of dealers willing to purchase or sell the security and the
number of other potential purchasers, the willingness of dealers to undertake to
make a market in the security, the nature of the marketplace in which the
security trades, the credit quality of the security, and other factors which the
Adviser to the Fund may deem relevant.
Tax-exempt commercial paper in which a Tax-Exempt Fund, Boston 1784
Tax-Free Money Market, Boston 1784 California Tax-Free Money Market 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 Tax-Free Money Market Fund,
Boston 1784 California Tax-Free Money Market Fund, 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
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an agreed-upon price at any time during a stated period or on a certain
date. Such a right is generally denoted as a "standby commitment" or a "put".
The purpose of engaging in transactions involving puts is to maintain
flexibility and liquidity to permit the Fund to meet redemptions and remain as
fully invested as possible in municipal securities. The Funds reserve their
right to engage in put transactions. The right to put the securities depends on
the writer's ability to pay for the securities at the time the put is exercised.
Each Fund would limit its put transactions to institutions which the Adviser 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
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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. 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
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involving such securities and, for each of the Money Market Funds, to
investments in obligations issued by domestic banks, foreign branches of
domestic banks and U.S. branches of foreign banks, to the extent that a
Fund may under the 1940 Act, reserve freedom of action to concentrate its
investments in such securities, and in the case of Boston 1784 Tax-Free
Money Market Fund and Boston 1784 California 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 California Tax-Free Money Market Fund, Boston 1784 Prime Money
Market Fund, Boston 1784 Institutional Prime Money Market Fund, Boston 1784
California Tax-Exempt Income 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 California 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 California
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 California Tax-Free Money Market Fund, Boston 1784 Prime
Money Market Fund, Boston 1784 Institutional Prime Money Market Fund,
Boston 1784 California Tax-Exempt Income 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.
-22-
<PAGE>
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 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, Boston 1784 Institutional Prime Money Market Fund and Boston 1784
California Tax-Free 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, subject to
certain exceptions, 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 the Boston 1784
California Tax-Free Money Market Fund, Boston 1784 Prime Money Market Fund,
Boston 1784 Institutional Prime Money Market Fund, Boston 1784 California
Tax-Exempt Income 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
-23-
<PAGE>
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.
The Funds have obtained an exemptive order from the Securities and Exchange
Commission which permits the Funds (other than the Money Market Funds) to
purchase shares of one or more affiliated investment companies that are
money market funds, subject to certain conditions contained in the
application for such exemptive order.
It is the position of the Securities and Exchange Commission's Staff that
certain non-governmental issuers of CMOs and REMICs constitute investment
companies pursuant to the 1940 Act and either (a) investments in such
instruments are subject to the limitations set forth above or (b) the
issuers of such instruments have received orders from the Securities and
Exchange Commission exempting such instruments from the definition of
investment company.
11. A Fund may not issue senior securities (as defined in the 1940 Act) except
in connection with permitted borrowings as described above or as permitted
by rule, regulation or order of the Securities and Exchange Commission.
12. A Fund may not write or purchase puts, calls, or other options or
combinations thereof, except that each Fund may write covered call options
with respect to any or all of the securities it holds, subject to any
limitations described in the Prospectuses or elsewhere in this Statement of
Additional Information and each Fund may purchase and sell other options as
described in the Prospectuses.
Non-Fundamental Policies
The following policies are not fundamental and may be changed with respect
to any Fund without approval by the shareholders of that Fund:
No Fund may invest in warrants, except that (i) each of the Stock Funds may
invest in warrants in an amount not exceeding 5 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 the Boston 1784 California Tax-Free Money Market Fund,
Boston 1784 Prime Money Market Fund, Boston 1784 Institutional Prime Money
Market Fund, Boston 1784 California Tax-Exempt Income 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.
-24-
<PAGE>
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.
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 the Boston 1784 California Tax-Free Money Market
Fund, Boston 1784 Prime Money Market Fund, Boston 1784 Institutional Prime Money
Market Fund, Boston 1784 California Tax-Exempt Income 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) for the fiscal years indicated. 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Portfolio Turnover Rates Portfolio Turnover Rates
Fund 1997 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Boston 1784 Short-Term Income Fund
128.11% 83.84%
Boston 1784 Income Fund 78.63% 79.09%
-25-
<PAGE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Portfolio Turnover Rates Portfolio Turnover Rates
Fund 1997 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
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 California Tax-Exempt
Income Fund N/A (1) N/A (1)
Boston 1784 Connecticut Tax-
Exempt Income Fund 4.28% 16.81%
Boston 1784 Florida Tax-Exempt
Income Fund (2) 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 (3) 22.88% 103.47%
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) The California Tax-Exempt Income Fund commenced operations in 1999.
(2) The Florida Tax-Exempt Income Fund commenced operations on June 30, 1997.
(3) 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.
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.
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.
-26-
<PAGE>
<TABLE>
<CAPTION>
Position(s)
Held with Principal Occupation(s)
Name, Address, and Age Trust During Past 5 Years
---------------------- ----------- ------------------------
<S> <C> <C>
DAVID H. CARTER Trustee Main Board Director, Touche Remnant & Co.
(date of birth March 21, 1933) (investment advisor), 1982-1988; Managing
Tochenham Farm, Wootton Bassett Director, Bearbull (UK) Ltd., London
Wiltshire SN47PB (investment advisor), 1988-January 1993.
England
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.
KATHRYN FLACKE MUNCIL Trustee Chief Financial Officer, Fort William
(date of birth November 30, 1958) Henry Corporation, since 1993;
c/o Fort William Henry Treasurer, Spaulding Investment Company
Corporation, 48 Canada Street, real estate development, nvestment and property
Lake George, New York 12845 imanagement), 1985-1993.
-27-
<PAGE>
<CAPTION>
Position(s)
Held with Principal Occupation(s)
Name, Address, and Age Trust During Past 5 Years
---------------------- ----------- ------------------------
<S> <C> <C>
*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, Officer compensated. Director and Executive Vice President
Oaks, Pennsylvania 19456 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, Administration, Graduate School of
Harvard University, Soldiers Field Road, Business Administration, Harvard
Boston, Massachusetts 02163 University (1988-present); formerly,
Trustee of BayFunds; formerly, Erwin H. Schell
Professor of Management, Sloan School of Management,
Massachusetts Institute of Technology; formerly,
Director, BayBank Systems, Inc.; Trustee, Marketing
Science Institute; Director, Reed and Barton, Inc.
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, Secretary since 1995. Associate, Dewey Ballantine
Oaks, 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.
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
-28-
<PAGE>
<CAPTION>
Position(s)
Held with Principal Occupation(s)
Name, Address, and Age Trust During Past 5 Years
---------------------- ----------- ------------------------
<S> <C> <C>
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.
JAMES R. FOGGO Vice President Vice President and Assistant Secretary of
(date of birth June 30, 1964) & Assistant the Administrator and the Distributor
Secretary since 1998. Associate, Paul Weiss,
Rifkind, Wharton & Garrison (law firm),
1998. Associate, Baker & McKenzie (law
firm), 1998-1995. Associate, Battle &
Fowler, LLP (law firm), 1993-1995.
Operations Manager, The Shareholder
Services Group, Inc., 1986-1990.
KATHY HELIG Vice President Treasurer of SEI since 1997; Vice
(date of birth December 21, 1958) & Assistant President of SEI since 1991; Director of
Secretary Taxes of SEI, 1987-1991. Tax Manager,
Arthur Anderson L.L.P. prior to 1987.
LYNDA J. STRIGEL Vice President Vice President and Assistant Secretary of
(date of birth October 30, 1948) & Assistant the Administrator and the Distributor
Secretary since 1998. Senior Asset Management
Counsel, Barnett Banks, Inc., 1997-1998.
Partner, Groom and Nordberg, Chartered,
1996-1997. Associate General Counsel,
Riggs Bank, N.A., 1991-1995.
LYDIA A. GARVALIS Vice President Vice President and Assistant Secretary of
(date of birth June 5, 1964) & Assistant the Administrator and the Distributor
Secretary since 1998. Assistant General Counsel and
Director of Arbitration, Philadelphia
Stock Exchange, 1989-1998.
</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.
-29-
<PAGE>
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual from the Trust and
Compensation from Accrued as Part of Benefits Upon the Funds Paid to
Name of Trustee the Trust 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.
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 December 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 December 31, 1998, Berkshire Realty Enterprise LP, One Beacon Street,
14th Floor, Boston, MA 02108-3107, owned of record 5.95% of the outstanding
shares of Boston 1784 Institutional Prime Money Market Fund.
As of December 31, 1998, Calton, Inc., 500 Craig Road, Manalapan, NJ 07726,
owned of record 7.43% of the outstanding shares of Boston 1784 Institutional
Prime Money Market Fund.
As of December 31, 1998, Corelink Financial Inc., 1855 Gateway Blvd. Suite
750, Concord, CA 94520-3290, owned of record 5.31% of the outstanding shares of
Boston 1784 Growth Fund.
As of December 31, 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 - 5.21%
Boston 1784 U.S. Treasury Money Market Fund - 19.58%
Boston 1784 Prime Money Market Fund - 12.57%
Boston 1784 Short-Term Income Fund - 5.88%
-30-
<PAGE>
Boston 1784 Massachusetts Tax-Exempt Income Fund - 16.76%
Boston 1784 Rhode Island Tax-Exempt Income Fund - 8.68%
Boston 1784 Asset Allocation Fund - 28.12%
Boston 1784 Growth and Income Fund - 10.58%
Boston 1784 Connecticut Tax-Exempt Income Fund - 8.69%
As of December 31, 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 - 82.73%
Boston 1784 Prime Money Market Fund - 10.99%
Boston 1784 Institutional U.S. Treasury Money Market Fund - 62.17%
Boston 1784 Institutional Prime Money Market Fund - 32.17%
Boston 1784 Tax-Exempt Medium-Term Income Fund - 88.60%
Boston 1784 Massachusetts Tax-Exempt Income Fund - 65.41%
Boston 1784 Rhode Island Tax-Exempt Income Fund - 80.54%
Boston 1784 Connecticut Tax-Exempt Income Fund - 77.02%
Boston 1784 Florida Tax-Exempt Income Fund - 96.47%
Boston 1784 U.S. Government Medium-Term Income Fund - 89.41%
Boston 1784 Short-Term Income Fund - 72.97%
Boston 1784 Income Fund - 85.02%
Boston 1784 Asset Allocation Fund - 34.18%
Boston 1784 Growth and Income Fund - 70.85%
Boston 1784 Growth Fund - 69.51%
Boston 1784 International Equity Fund - 89.94%
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"), the U.S.-registered
investment management subsidiary of the London-based Kleinwort 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 for Boston 1784
International Equity Fund is dated as of October 27, 1995. BankBoston and
Kleinwort 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).
-31-
<PAGE>
For the International Equity Fund, BankBoston and Kleinwort 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:
<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>
Boston 1784 Tax-Free Money Market Fund $1,996 $2,663 $3,896
Boston 1784 California Tax-Free
Money Market Fund N/A (1) N/A (1) N/A (1)
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) N/A (1) 227
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 California Tax-Exempt
Income Fund N/A (1) N/A (1) N/A (1)
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Boston 1784 California Tax-Free Money Market Fund, Boston 1784
Institutional Prime Money Market Fund, Boston 1784 California Tax-Exempt
Income Fund and Boston 1784 Florida Tax-Exempt Income Fund had no
operations during the periods indicated.
-32-
<PAGE>
(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.
For the fiscal year ended May 31, 1996, the Trust paid $1,222,419 to
Kleinwort under the Advisory Agreement to which Kleinwort is a party, with
respect to Boston 1784 International Equity Fund. For the fiscal years ended May
31, 1997 and 1998, respectively, the Trust paid $2,111,000 and $2,404,000 to
Kleinwort 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(SM)
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
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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 California 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. 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, 1999. 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.
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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.
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,
First American Funds, Inc., First American Investment Funds, Inc., The Arbor
Fund, 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.,
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HighMark Funds, Expedition Funds, Oak Associates Funds, the Armada Funds,
and the Nevis Fund, Inc.
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
Prior to September 30, 1998, BankBoston, N.A., acted as custodian of the
Funds' assets pursuant to a Custodian Agreement dated as of June 1, 1993 between
BankBoston, N.A. and the Trust. On September 30, 1998, BankBoston assigned its
rights and obligations under the Custodian Agreement to Investors Bank and Trust
Company. Investors Bank & Trust Company (the "Custodian"), Hancock Towers, 200
Clarendon Street, 16th Floor, Boston, Massachusetts 02116, acts as custodian of
the Funds' assets. 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, and who are appointed and supervised by the senior officers of
BankBoston or by senior officers of Kleinwort. 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.
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Subject to policies established by the Trustees, the Adviser to the Funds
(Kleinwort, in the case of the International Equity Fund) is responsible for
placing the orders to execute transactions for such Fund. In placing orders, it
is the policy of the Trust for each Adviser to seek to obtain the best net
results taking into account such factors as price (including the applicable
dealer spread), the size, type and difficulty of the transaction involved, the
firm's general execution and operational facilities, and the firm's risk in
positioning the securities involved. While each Adviser seeks reasonably
competitive spreads or commissions, the Trust will not necessarily be paying the
lowest spread or commission available.
The money market securities in which the Funds invest are traded primarily
in the over-the-counter market. Bonds and debentures are usually traded
over-the-counter, but may be traded on an exchange. Where possible, each Adviser
will deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Money market
securities are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of executing
transactions for the Funds will primarily consist of dealer spreads and
underwriting commissions.
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
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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 that Adviser in connection with its
investment decision-making process with respect to one or more portfolios under
its management and may not be used exclusively with respect to the fund or
account generating the brokerage. Not all brokerage and research services are
useful or of value in advising any particular Fund.
As provided in the Securities Exchange Act of 1934 (the "1934 Act"), higher
commissions may be paid to broker/dealers who provide brokerage and research
services than to broker/dealers who do not provide such services if such higher
commissions are deemed reasonable in relation to the value of the brokerage and
research services provided. Although transactions are directed to broker/dealers
who provide such brokerage and research services, the commissions paid to such
broker/dealers are not, in general, expected to be higher than commissions that
would be paid to broker/dealers not providing such services. Further, in
general, any such commissions are reasonable in relation to the value of the
brokerage and research services provided.
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, any Adviser or an affiliate of any
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
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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, any Adviser, or any such
affiliate of any Adviser by the Trust for such exchange transactions not exceed
"usual and customary" brokerage commissions. The rules define "usual and
customary" commissions to include amounts which are "reasonable and fair
compared to the commission, fee or other remuneration received or to be received
by other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time." In addition, an Adviser may direct commission business to one
or more designated broker/dealers in connection with such broker/dealer's
provision of services to the Trust or the Funds or payment of certain Trust
expenses, such as custody, pricing and professional fees. The Trustees,
including those who are not "interested persons" of the Trust, have adopted
procedures for evaluating the reasonableness of commissions paid to the
Distributor, the Adviser and affiliates of any Adviser 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 the same 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. 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 nineteen active series of shares, each of which is a Fund. Boston 1784 U.S.
Treasury Money Market Fund has three classes of shares authorized: Class A,
Class C and Class D. Class A shares are described in the prospectus for the
Boston 1784 U.S. Treasury Money Market Fund. 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
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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 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 is open, except for Columbus Day and
Veterans' Day ("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, Boston 1784 Tax-Free Money Market Fund and Boston
1784 California 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 New York Stock Exchange 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,
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
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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 Rule 2a-7 under the
1940 Act, provided that certain conditions are met. The regulations also require
the Trustees to establish procedures which are reasonably designed to stabilize
the net asset value per share at $1.00 for these Funds. Such procedures include
the determination of the extent of deviation, if any, of these Funds' current
net asset value per share calculated using available market quotations from
these Funds' amortized cost prices 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.
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. The Trust 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.
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On any business day, you may redeem all or a portion of your shares. Your
transaction will be processed at net asset value the next time it is calculated
after your redemption request in good order is received. If the shares being
redeemed were purchased by check, by 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. A
redemption is treated as a sale for tax purposes, and could result in taxable
gain or loss in a non-tax-sheltered account.
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.
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 ("Conn. 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
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<PAGE>
shares of another Fund. Any such plan may be terminated at any time by
either the shareholder or the applicable Fund.
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, the Tax-Free Money Market Fund and the California 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.
Distributions of net capital gains (the excess of net long-term capital
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<PAGE>
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, the Tax-Free Money Market Fund and
the California Tax-Free Money Market Fund. The portion of each Tax-Exempt
Fund's, the Tax-Free Money Market Fund's and the California 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 interest in any particular month. Shareholders are
required to report exempt-interest dividends received from the Fund on their
federal income tax returns.
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<PAGE>
Shareholders of the Tax-Exempt Funds, the Tax-Free Money Market Fund and
the California 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, the Tax-Free Money Market Fund and the California
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 or the
California 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, the Tax-Free Money Market Fund or the California 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.
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.
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<PAGE>
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 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.
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<PAGE>
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.
The foregoing is only a brief summary of some of the important tax
considerations generally affecting the taxation of shareholders that are subject
to personal income tax. Potential investors, including in particular, investors
who may be subject to other taxes, such as corporate franchise tax, corporate
income tax and taxes of other jurisdictions, should consult their own tax
advisers.
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). 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
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<PAGE>
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, the California 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 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
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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. The California
Tax-Free Income Fund is newly organized and had no operations at May 31, 1998.
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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
operations) to May 31, 1998 6.57% $1,371.53
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
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<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 U.S. Government Medium-Term
Income Fund
June 7, 1993 (commencement of
operations) to May 31, 1998 5.43% $1,301.59
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
operations) to May 31, 1998 7.72% $1,338.08
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
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<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 International Equity Fund
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 (other
than the California Tax-Exempt Income Fund) 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 (other
than the California Tax-Exempt Income Fund) 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. The California Tax-Free Money
Market Fund is newly organized and had no operations at May 31, 1998.
<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
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<PAGE>
<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 U.S. Treasury Money Market
Fund
June 7, 1993 (commencement of
operations) to May 31, 1998 4.51% $1,245.77
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 4.62% $1,253.15
Three years ended May 31, 1998 5.16% $1,163.02
One year ended May 31, 1998 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
</TABLE>
(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.
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 yield of Boston 1784 Tax-Free Money Market Fund for such period were
3.41% and 5.65%, respectively.
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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 California Tax-Free Money Market Fund and
the California Tax-Exempt Income Fund
Boston 1784 California Tax-Free Money Market Fund and Boston 1784
California Tax-Exempt Income Fund are newly organized and have not yet issued
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 ended December 31, 1993, December 31, 1994 and
December 31, 1995 are
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included in the Annual Reports to Shareholders of the Trust and are
incorporated by reference into this Statement of Additional Information and have
been 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.
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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.
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APPENDIX A
CERTAIN INFORMATION CONCERNING CALIFORNIA,
CONNECTICUT, FLORIDA, MASSACHUSETTS AND RHODE ISLAND
1. CALIFORNIA
Special Considerations Regarding Investments
in California Municipal Securities
The following is a summary of certain information contained in the Official
Statement of California dated October 1, 1998. The summary does not purport to
be a complete description and is current as of the date of the Official
Statement. The Funds are not responsible for the accuracy or timeliness of this
information.
For example, in November 1998 the nonpartisan state legislative analyst
estimated that, absent significant budgetary adjustments, California could end
the 1999-00 fiscal year with a substantial budget deficit due, in part, to a
slower than expected economic growth. California's ability to raise revenues and
reduce expenditures to the extent necessary to balance the budget for any year
depends upon numerous factors, including economic conditions in California and
the nation, the accuracy of California's revenue predictions, as well as the
impact of budgetary restrictions imposed by the voter-passed initiatives.
Recent Developments
In the Governor's Budget released on January 9, 1998, and the May Revision
to the 1998-99 Governor's Budget, released May 13, 1998, the Department of
Finance projected that the California economy will continue to show robust
growth through 1998, although at a slightly slower pace than in 1997. The
economic expansion has been marked by strong growth in high technology business
services (including computer software), construction, computers and electronic
components. The Asian economic crisis which began in late 1997 was expected to
have some dampening effects on California's economy, which was included in the
May Revision forecasts. However, during the summer of 1998, the soaring trade
deficit, continuing weakness in Asia, initial signs of economic weakness in
Canada and Latin America, which have been California's largest trading partners,
and the fall in stock prices worldwide all suggest that the May Revision
forecasts may be too optimistic, particularly for 1999. Other impacts of the
international situation may help California, such as the reduction in long-term
interest rates.
Moody's, Standard and Poor's and Fitch IBCA assigned their municipal bond
ratings of A1, A+ and AA-, respectively, to California's general obligation
bonds. Each such rating reflects only the views of the respective rating agency,
and an explanation of the significance of such rating may be obtained from such
rating agency. There is no assurance that such ratings will continue for any
given period of time or that they will not be revised or withdrawn entirely by
such rating agency if, in the judgment of such rating agency, circumstances so
warrant. A downward revision or withdrawal of any such rating may have an
adverse effect on the market price of California's general obligation bonds.
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Constitutional Limits on Spending and Taxes
State Appropriations Limit
California is subject to an annual appropriations limit imposed by Article
XIII B of the State Constitution (Appropriations Limit). The Appropriations
Limit does not restrict appropriations to pay debt service on voter-authorized
bonds.
Article XIII B prohibits California from spending "appropriations subject
to limitation" in excess of the Appropriations Limit. "Appropriations subject to
limitation," with respect to California, are authorizations to spend "proceeds
of taxes," which consist of tax revenues, and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent that
such proceeds exceed "the cost reasonably borne by that entity in providing the
regulation, product or service," but "proceeds of taxes" exclude most State
subventions to local governments, tax refunds and some benefit payments such as
unemployment insurance. No limit is imposed on appropriations of funds which are
not "proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriations of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
California's Appropriations Limit in each year is based on the limit for
the prior year, adjusted annually for changes in California per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government. The measurement of change in population is a blended average
of statewide overall population growth, and change in attendance at local school
and community college (K-14) districts. The Appropriations Limit is tested over
consecutive two-year periods. Any excess of the aggregate "proceeds of taxes"
received over such two-year period above the combined Appropriations Limits for
those two years is divided equally between transfers to K-14 districts and
refunds to taxpayers.
Proposition 98
On November 8, 1988, California voters approved Proposition 98, a combined
initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by Proposition
111, which was enacted on June 5, 1990), K-14 schools are guaranteed the greater
of (a) in general, a fixed percent of General Fund revenues (Test 1), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIII B by reference to California per
capita personal income) and enrollment (Test 2), or (c) a third test, which
would replace Test 2 in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one percent is less
than the percentage growth in California per capita personal income (Test 3).
Under Test 3, schools would receive the amount appropriated in the prior year
adjusted for changes in enrollment and per capita General
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Fund revenues, plus an additional small adjustment factor. If Test 3 is
used in any year, the difference between Test 3 and Test 2 would become a
"credit" to schools which would be the basis of payments in future years when
per capita General Fund revenue growth exceeds per capita personal income
growth. Legislation adopted prior to the end of the 1988-89 Fiscal Year,
implementing Proposition 98, determined the K-14 schools' funding guarantee
under Test 1 to be 40.3 percent of the General Fund tax revenues, based on
1986-87 appropriations. However, that percentage has been adjusted to
approximately 35 percent to account for a subsequent redirection of local
property taxes, since such redirection directly affects the share of General
Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,200 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
State and K-14 schools share in the repayment of prior years' emergency loans to
schools. Of the total $1.76 billion in loans, the State will repay $935 million
by forgiveness of the amount owed, while schools will repay $825 million. The
State's share of the repayment will be reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Proposition 98
guarantee, or from "below" the current base. Repayments are spread over the
eight-year period of 1994-95 through 2001-02 to mitigate any adverse fiscal
impact.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 and thereafter have resulted or will
result in retroactive increases in Proposition 98 appropriations from subsequent
fiscal years' budgets. Because of California's increasing revenues, per-pupil
funding at the K-12 level has increased by about 36 percent from the level in
place from 1991-92 through 1993-94, and is estimated at about $5,695 per ADA in
1998-99. A significant amount of the "extra" Proposition 98 monies in the last
few years have been allocated to special programs, most particularly an
initiative to allow each classroom from grades K-3 to have no more than 20
pupils by the end of the 1997-98 school year. There are also new initiatives
increasing instructoral time, for purchasing new instructional and library
materials, and expanding teacher preparation and support.
Sources of Tax Revenue
The following is a summary of California's major revenue sources.
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Personal Income Tax
The California personal income tax, which in 1997-98 contributed about 50
percent of General Fund revenues, is closely modeled after the federal income
tax law. It is imposed on net taxable income (gross income less exclusions and
deductions). The tax is progressive with rates ranging from 1 to 9.3 percent.
Personal, dependent, and other credits are allowed against the gross tax
liability. In addition, taxpayers may be subject to an alternative minimum tax
(AMT) which is much like the federal AMT.
The personal income tax is adjusted annually by the change in the consumer
price index to prevent taxpayers from being pushed into higher tax brackets
without a real increase in income.
Sales Tax
The sales tax is imposed upon retailers for the privilege of selling
tangible personal property in California. Sales tax accounted for about 32
percent of General Fund revenue in 1997-98. Most retail sales and leases are
subject to the tax. However, exemptions have been provided for certain
essentials such as food for home consumption, prescription drugs, gas delivered
through mains and electricity. Other exemptions provide relief for a variety of
sales ranging from custom computer software to aircraft.
Bank and Corporation Tax
Bank and corporation tax revenues, which comprised about 11 percent of
General Fund revenue in 1997-98, are derived from the following taxes:
1. The franchise tax and the corporate income tax are levied at a 8.84
percent rate on profits. The former is imposed on corporations for the privilege
of doing business in California, while the latter is imposed on corporations
that derive income from California sources but are not sufficiently present to
be classified as doing business in California
2. Banks and other financial corporations are subject to the franchise tax
plus an additional tax at the rate of 2.0 percent on their net income. This
additional tax is in lieu of personal property taxes and business license taxes.
3. The alternative minimum tax (AMT) is similar to that in federal law. In
general, the AMT is based on a higher level of net income computed by adding
back certain tax preferences. This tax is imposed at a rate of 6.65 percent.
4. Sub-Chapter S corporations are taxed at 1.5 percent of profits.
Insurance Tax
The majority of insurance written in California is subject to a 2.35
percent gross premium tax. For insurers, this premium tax takes the place of all
other State and local taxes except those on real property and motor vehicles.
Exceptions to the 2.35 percent rate are certain pension and profit- sharing
plans which are taxed at the lesser rate of 0.50 percent, surplus lines and
nonadmitted insurance at 3 percent and ocean marine insurers at 5 percent of
underwriting profits. Insurance taxes comprised approximately 2.3 percent of
General Fund revenues in 1997-98.
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In December, 1996, the California Earthquake Authority ("CEA") was
authorized to start selling homeowners' earthquake insurance. Earthquake
policies written through the CEA are exempt from the gross premiums tax.
Other Taxes
Other General Fund major taxes and license revenues include: Estate,
Inheritance and Gift Taxes, Cigarette Taxes, Alcoholic Beverage Taxes, Horse
Racing Revenues and trailer coach license fees. These other sources totaled
approximately 2.4 percent of General Fund revenues in the 1997-98 Fiscal Year.
Special Fund Revenues
The California Constitution, codes and statutes specify the uses of certain
revenue. Such receipts are accounted for in various Special Funds. In general,
Special Fund revenues comprise three categories of income:
1. Receipts from tax levies which are allocated to specified functions,
such as motor vehicle taxes and fees and certain taxes on tobacco products.
2. Charges for special services to specific functions, including such items
as business and professional license fees.
3. Rental royalties and other receipts designated for particular purposes
(e.g., oil and gas royalties).
Motor vehicle related taxes and fees accounted for about 59 percent of all
Special Fund revenue in 1996-97. Principal sources of this income are motor
vehicle fuel taxes, registration and weight fees and vehicle license fees.
During the 1997-98 Fiscal Year, $8.3 billion was derived from the ownership or
operation of motor vehicles. About $4.5 billion of this revenue was returned to
local governments. The remainder was available for various State programs
related to transportation and services to vehicle owners. These amounts include
the additional fees and taxes derived from the passage of Proposition 111 in
June 1990.
Chapter 322, Statutes of 1998, reduced vehicle license fees by 25 percent
beginning January 1, 1999. In addition, this percentage reduction could be
increased in annual stages up to a maximum of 67.5 percent in 2003 depending on
whether future General Fund revenues reach specified target levels. Vehicle
license fees, over and above the costs of collection and refunds authorized by
law, are constitutionally defined local revenues. A continuous appropriation
from the General Fund will replace the vehicle license fee revenue that local
governments would otherwise lose due to the fee reductions. If in any year the
Legislature fails to appropriate enough funds to fully offset the
then-applicable vehicle license fee reduction, the fee may be increased to
assure that local governments are not disadvantaged. Therefore, the amount of
revenue going to local governments will remain the same as under prior law.
On November 8, 1988, voters approved Proposition 99, which imposed, as of
January 1, 1989, an additional 25 cents per pack excise tax on cigarettes, and a
new, equivalent excise tax on other tobacco products. The initiative requires
that funds from this tax be allocated to anti-tobacco education and research and
indigent health services, and
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environmental and recreation programs. Legislation enacted in 1993 added an
additional 2 cents per pack excise tax for the purpose of funding breast cancer
research.
Prior Fiscal Years' Financial Results
1995-96, 1996-97 and 1997-98 Fiscal Years
California's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. California's cash
position also improved, and external deficit borrowing has occurred over the end
of these three fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97 and $2.2 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget reserve,
the Special Fund for Economic Uncertainties (SFEU) totaled $639.8 million as of
June 30, 1997 and $1.782 billion at June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large increase in
funding for K-14 education under Proposition 98, reflecting strong revenues
which exceeded initial budgeted amounts. Part of the nearly $1.75 billion in
increased spending was allocated to prior fiscal years. Funds were provided to
fully pay for the cost-of-living-increase component of Proposition 98, and to
extend the class size reduction and reading initiatives.
2. The Budget Act reflected payment of $1.228 billion to satisfy a court
judgment in a lawsuit regarding payments to the State pension fund, and brought
funding of the State's pension contribution back to the quarterly basis which
existed prior to the deferral actions which were invalidated by the courts.
3. Funding from the General Fund for the University of California and
California State University was increased by about 6 percent ($121 million and
$107 million, respectively), and there was no increase in student fees.
4. Because of the effect of the pension payment, most other State programs
were continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs were contained, continuing generally the grant
levels from prior years, as part of the initial implementation of the CalWORKs
program.
6. Unlike prior years, this Budget Act did not depend on uncertain federal
budget actions. About $300 million in federal funds, already included in the
federal fiscal year 1997 and 1998 budgets, was included in the Budget Act, to
offset incarceration costs for illegal aliens.
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7. The Budget Act contained no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving approximately $500
million.
Current State Budget
The discussion below of the 1998-99 Fiscal Year budget is based on
estimates and projections of revenues and expenditures for the current fiscal
year and must not be construed as statements of fact. These estimates and
projections are based upon various assumptions which may be affected by numerous
factors, including future economic conditions in the State and the nation, and
there can be no assurance that the estimates will be achieved.
1998-99 Fiscal Year Budget
Background
When the Governor released his proposed 1998-99 Fiscal Year Budget on
January 9, 1998, he projected General Fund revenues for the 1998-99 Fiscal Year
of $55.4 billion, and proposed expenditures in the same amount. By the time the
Governor released the May Revision to the 1998-99 Budget (the "May Revision") on
May 14, 1998, the Administration projected that revenues for the 1997-98 and
1998-99 Fiscal Years combined would be more than $4.2 billion higher than was
projected in January. The Governor proposed that most of this increased revenue
be dedicated to fund a 75% cut in the Vehicle License Fee (VLF).
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and
the Governor signed it on August 21, 1998. Some 33 companion bills necessary to
implement the budget were also signed. In signing the Budget Bill, the Governor
used his line-item veto power to reduce expenditures by $1.360 billion from the
General Fund, and $160 million from Special Funds. Of this total, the Governor
indicated that about $250 million of vetoed funds were "set aside" to fund
programs for education. Vetoed items included education funds, salary increases
and many individual resources and capital projects.
The 1998-99 Budget Act is based on projected General Fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from the revised 1997-98 figures.
Special Fund revenues were estimated at $14.3 billion. The revenue projections
were based on the May Revision. Economic problems overseas since that time may
affect the May Revision projections.
After giving effect to the Governor's vetoes, the Budget Act provides
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion from
bond funds. The Budget Act projects a balance in the SFEU at June 30, 1999 (but
without including the "set aside" veto amount) of $1.255 billion, a little more
than 2% of General Fund revenues. The Budget Act assumes California will carry
out its normal intra-year cash flow borrowing in the amount of $1.7 billion of
revenue anticipation notes, which are expected to be issued by early October.
The most significant feature of the 1998-99 budget was agreement on a total
of $1.4 billion of tax cuts. The central element is a bill which provides for a
phased-in reduction of the VLF. Since the VLF is currently transferred to cities
and counties, the bill provides for the General Fund to replace the lost
revenues. Starting on January 1, 1999, the VLF will be
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reduced by 25%, at a cost to the General Fund of approximately $500 million
in the 1998-99 Fiscal Year and about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget includes both temporary
and permanent increases in the personal income tax dependent credit ($612
million General Fund cost in 1998-99, but less in future years), a nonrefundable
renters tax credit ($133 million), and various targeted business tax credits
($106 million). About half of the business tax credits will only become
effective if Proposition 7, an initiative measure which involves various tax
credits, is rejected by the voters on the November 3, 1998 ballot.
Other significant elements of the 1998-99 Budget Acts are as follows:
1. Proposition 98 funding for K-12 schools is increased by $1.7 billion in
General Fund moneys over revised 1997-98 levels, about $300 million higher than
the minimum Proposition 98 guaranty. An additional $600 million was appropriated
to "settle up" prior years' Proposition 98 entitlements, and was primarily
devoted to one-time uses such as block grants, deferred maintenance, and
computer and laboratory equipment. Of the 1998-99 funds, major new programs
include money for instructional and library materials, deferred maintenance,
support for increasing the school year to 180 days and reduction of class sizes
in Grade 9. The Governor held $250 million of educational funds which were
vetoed as set-aside for enactment of additional reforms. Overall, per-pupil
spending for K-12 schools under Proposition 98 is increased to $5,695, more than
one-third higher than the level in the last recession year of 1993-94. The
Budget also includes $250 million as repayment of prior years' loans to schools,
as part of the settlement of the CTA v. Gould lawsuit.
2. Funding for higher education increased substantially above the level
called for in the Governor's four-year compact. General Fund support was
increased by $340 million (15.6%) for the University of California and $267
million (14.1%) for the California State University system. In addition,
Community Colleges received a $300 million (6.6%) increase under Proposition 98.
3. The Budget includes increased funding for health, welfare and social
services programs. A 4.9% grant increase was included in the basic welfare
grants, the first increase in those grants in 9 years. Future increases will
depend on sufficient General Fund revenue to trigger the phased cuts in VLF
described above.
4. Funding for the judiciary and criminal justice programs increased by
about 11% over 1997-98, primarily to reflect increased State support for local
trial courts and rising prison population.
5. Various other highlights of the Budget included new funding for
resources projects, dedication of $376 million of General Fund moneys for
capital outlay projects, funding of a 3% State employee salary increase, funding
of 2,000 new Department of Transportation positions to accelerate transportation
construction projects, and funding of the Infrastructure and Economic
Development Bank ($50 million).
6. The State of California received approximately $167 million of federal
reimbursements to offset costs related to the incarceration of undocumented
alien felons for federal fiscal year 1997. California anticipates receiving
approximately $195 million in federal reimbursements for federal fiscal year
1998.
After the Budget Act was signed, and prior to the close of the Legislative
session on August 31, 1998, the Legislature passed a variety of fiscal bills.
The Governor had until
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September 30, 1998 to sign or veto these bills. The bills with the most
significant fiscal impact which the Governor signed include $235 million for
certain water system improvements in Southern California, $243 million for
California's share of the purchase of environmentally sensitive forest lands,
and $175 million for state prisons. The Governor also signed bills totaling $223
million for education programs which were part of the Governor's $250 million
veto "set aside." In addition, he signed a bill passed by the Legislature
reducing by $577 million California's obligation to contribute to the State
Teachers' Retirement System. On a net basis, most of these costs had already
been assumed in the 1998-99 Budget Act, and will not, in themselves, have a
material effect on the projected SFEU balance at June 30, 1999.
Year 2000
California's reliance on information technology in every aspect of its
operations has made Year 2000-related (Y2K) information technology (IT) issues a
high priority for California. The Department of Information Technology (DOIT),
an independent office reporting directly to the Governor, is responsible for
ensuring the State's information technology processes are fully functional
before the year 2000. The DOIT has created a Year 2000 Task Force and a
California 2000 Office to establish statewide policy requirements; to gather,
coordinate, and share information; and to monitor statewide progress.
In late August 1998, the State Auditor (BSA) released a report on "Year
2000 Computer Problems." The BSA surveyed 39 State departments and compared
their status to the March 31, 1998 DOIT quarterly report. The BSA Report also
noted concern that departments were not making adequate plans to test remediated
systems, were not focusing sufficiently on problems associated with data
interface with other governmental and private bodies, and were not far enough
along in developing "business continuation plans" to ensure continued operations
after January 1, 2000 in the event of IT problems. The DOIT responded in some
detail to the BSA Report, generally agreeing with its identification of issue
areas, and stating that it was following up on all areas with the departments.
Although the DOIT reports that State departments are making substantial
progress overall toward the goal of Y2K compliance, the task is very large and
will likely encounter unexpected difficulties. California cannot predict whether
all mission critical systems will be ready and tested by late 1999 or what
impact failure of any particular IT system(s) or of outside interfaces with
State IT systems might have.
The State Treasurer's Office and the State Controller's Office report
that they are both on schedule to complete their Y2K remediation projects by
December 31, 1998, allowing full testing during 1999. These systems include debt
service payments on State debt and the State fiscal and accounting system.
Litigation
California is a party to numerous legal proceedings, many of which normally
occur in governmental operations. Following are some of the more significant
lawsuits against California:
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
beginning in Fiscal Year 1992-93. On January 11, 1995, the Sacramento County
Superior Court entered a judgment finding that the legislation
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unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides, for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation found to be unconstitutional, and to transfer to PERS the
contributions that were unpaid to date. On February 19, 1997, the State Court of
Appeal affirmed the decision of the Superior Court, and the Supreme Court
subsequently refused to hear the case, making the Court of Appeals' ruling
final. On July 30, 1997, the Controller transferred $1.228 billion from the
General Fund to PERS in repayment of the principal amount determined to have
been improperly deferred. Subsequent State payments to PERS will be made on a
quarterly basis. On July 7, 1998, pursuant to Chapter 94, Statutes of 1998,
California paid PERS $332.7 million for the accrued interest on the judgment and
interest on the unpaid accrued interest amount.
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al.
v. Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a state budget. On July 21, 1998, the trial
court issued a preliminary injunction prohibiting the State Controller from
paying moneys from the State Treasury for fiscal year 1998-99, with certain
limited exceptions, in the absence of a state budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments pursuant to any continuing appropriation.
On July 22 and 27, 1998, various employee unions which had intervened in
the case appealed the trial court's preliminary injunction and asked the Court
of Appeal to stay the preliminary injunction. On July 28, 1998, the Court of
Appeal granted the unions' requests and stayed the preliminary injunction
pending the Court of Appeal's decision on the merits of the appeal. On August 5,
1998, the Court of Appeal denied the plaintiffs' request to reconsider the stay.
Also on July 22, 1998, the State Controller asked the California Supreme Court
to immediately stay the trial court's preliminary injunction and to overrule the
order granting the preliminary injunction on the merits. On July 29, 1998, the
Supreme Court transferred the State Controller's request to the Court of Appeal.
The matters are now pending before the Court of Appeal.
In Jordan v. Department of Motor Vehicles, plaintiff challenged the
validity and constitutionality of the state's smog impact fee and requested a
refund of the fee. In October 1997, the trial court ruled in favor of plaintiff
and, in addition, ordered the State to provide refunds to all persons who paid
the smog impact fee from three years before the filing of the lawsuit in 1995 to
the present. Plaintiff asserts that the total amount required to be refunded
will exceed $350 million. The State has appealed.
California is a defendant in several related cases, mainly California
Ambulance Association v. Shalala et al., in which the plaintiffs are seeking
action to compel the Department of Health Services to pay Part B ambulance and
physician services copayments under the Medicare and Medicaid Acts. Should the
plaintiffs prevail, the liability for retroactive payments is estimated to be
$490 million, and the liability for future payments can be in excess of $130
million annually. The General Fund and the federal government will share the
liability equally. A judgment was entered for the plaintiffs. The Ninth Circuit
Court of Appeals, however, reversed the trial court's decision. Plaintiffs filed
a petition for certiorari at the United States Supreme Court, which California
opposed. The petition is currently pending at the Supreme Court.
California is a defendant in Ceridian Corporation v. Franchise Tax
Board, a suit which challenges the validity of two sections of the California
Tax laws. The first relates to
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deduction from corporate taxes for dividends received from insurance
companies to the extent the insurance companies have California activities. The
second relates to corporate deduction of dividends to the extent the earnings of
the dividend paying corporation have already been included in the measure of
their California tax. If both sections of the California Tax law are
invalidated, and all dividends become deductible, then the General Fund can
become liable for approximately $200-$250 million annually. A judgment was
entered in August 1998. The State will appeal.
California is a defendant in the case of Kurt Hathaway, et al. v. Wilson,
et al., where the plaintiffs are challenging the legality of various budget
action transfers and appropriations from particular special funds for years
ended June 30, 1995, and June 30, 1996. The plaintiffs allege that the transfers
and appropriations are contrary to the substantive law establishing the funds
and providing for interest accruals to the fund, violate the single subject
requirement of the State Constitution, and is an invalid "special law".
Plaintiffs seek to have monies totaling approximately $335 million returned to
the special funds. The plaintiffs and the State reached a settlement which
resolved all the issues presented in the case. Pursuant to the settlement,
judgment was entered in August 1998, requiring the State to return $19,427,000
from the General Fund to one special fund.
California is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to State-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates ("Commission")). The Board of
Control decided in favor of local school districts' claims for reimbursement for
special education programs for handicapped students. The case was then brought
to the trial court by the State and later remanded to the Commission for
redetermination. The Commission has since expanded the claim to include
supplemental claims filed by seven other educational institutions; the issuance
of a final consolidated decision is anticipated sometime in late 1998. To date,
the Legislature has not appropriated funds. The liability to the State, if all
potentially eligible school districts pursue timely claims, has been estimated
by the Department of Finance at more than $1 billion.
California is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J.B. Stringfellow, Jr. et al., the State is seeking recovery for
the past costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts. Because the State is the present
owner of the site, the State may be found liable. Present estimates of the
cleanup range from $300 million to $800 million.
California is a defendant in a coordinated action involving 3,000
plaintiffs seeking recovery for damages caused by the Yuba River flood of
February 1986. The trial court has found liability in inverse condemnation and
awarded damages of $500,000 to a sample of plaintiffs. The State's potential
liability to the remaining plaintiffs ranges from $800 million to $1.5 billion.
An appeal has been filed.
California is a defendant in California State Employees Association v.
Wilson, where the petitioners are challenging several budget appropriations in
the 1994 and 1995 Budget Acts. The appropriations mandate the transfer of funds
from the State Highway Account, within the special revenue funds, to the General
Fund to reimburse the General Fund for debt service costs on two rail bond
measures. The petitioners contend that the transfers violate the bond acts
themselves and are requesting the monies be returned. The loss to the State's
General Fund could be up to $227 million.
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In a similar case, Professional Engineers in California Government v.
Wilson, the petitioners are challenging several appropriations in the 1993,
1994, and 1995 Budget Acts. The appropriations mandate the transfer of
approximately $262 million from the State Highway Account, within the special
revenue funds, and $113 million from the Motor Vehicle Account, within the
special revenue funds, to the General Fund and appropriate approximately $6
million from the State Highway Account to fund a highway- grade crossing program
administered by the Public Utilities Commission. Petitioners contend that the
transfers violate several constitutional provisions and request that the monies
be returned to the State Highway Account and Motor Vehicle Account.
California is a defendant in Just Say No To Tobacco Dough Campaign v. State
of California, where the petitioners challenge the appropriation of
approximately $166 million of Proposition 99 funds in the Cigarette and Tobacco
Products Surtax Fund for years ended June 30, 1990, through June 30, 1995 for
programs which were allegedly not health education or tobacco-related disease
research. If the State loses, the General Fund and funds from other sources
would be used to reimburse the Cigarette and Tobacco Products Surtax for
approximately $166 million.
California is a defendant in two related cases, Beno vs. Sullivan ("Beno")
and Welch vs. Anderson ("Welch"), concerning reductions in Aid to Families with
Dependent Children ("AFDC") grant payments. In the Beno case, plaintiffs seek to
invalidate AFDC grant reductions and in the Welch case, plaintiffs contend that
AFDC grant reductions are not authorized by state law. The Beno case concerns
the total grant reductions while the Welch case concerns the period of time the
State did not have a waiver for those reductions. The State's potential
liability for retroactive AFDC grant reductions is estimated at $831 million if
the plaintiffs are awarded the full amount in both cases.
The University of California and the special purpose authorities, which are
discretely presented component units, are contingently liable in connection with
claims and contracts, including those currently in litigation, arising in the
normal course of their activities. The outcome of such matters are not expected
to have a material effect on the financial statements.
2. 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 4, 1998, as
modified December 15, 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.
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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 1988 at over 372,230 workers. Since that year, employment in
manufacturing has been on a downward trend, declining 25.8 percent or a loss of
96,030 jobs by 1997 from 1988 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. However, in
1997, total manufacturing jobs in Connecticut registered a gain of 1,400 jobs or
0.5% over 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 1997. This trend has
decreased the State's dependence on manufacturing. The State's non-manufacturing
sector expanded by 2.4 percent in 1997 as compared to 2.0 percent in 1996 and
1.9 percent in 1995. This trend, which began in 1993, reversed 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:
services, retail and wholesale trade, state and local government, as well as
finance, insurance and real estate ("FIRE"), 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 which occurred at the beginning of the 1990s.
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.
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General Fund Budgets 1997-98, and 1998-99
Per Section 3-115 of the Connecticut General Statutes and Article IV,
Section 24 of the State Constitution, the State's official budgetary basis
fiscal position for the fiscal year ended June 30, 1998 is reported by the
Comptroller. This report indicates 1997-98 fiscal year General Fund expenditures
of $9,829.3 million, General Fund revenues of $10,142.2 million and a surplus of
$312.9 million, (excluding Restricted Federal and Other Grants).
Per Section 4-30a of the Connecticut General Statutes, any unappropriated
surplus, up to five percent of General Fund expenditures, shall be deposited
into the Budget Reserve Fund. After the transfer of $161.7 million which is
required to meet the five percent of General Fund expenditures, the balance of
$151.2 million will be used pursuant to Article XXVIII of the Amendments to the
Constitution of Connecticut to reduce bonded indebtedness.
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 $170.7 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 $172.2 million from the enacted budget plan.
Per Section 4-30a of the Connecticut General Statutes, any unappropriated
surplus, up to five percent of General Fund expenditures, shall be deposited
into the Budget Reserve Fund. After transferring the amount which is required to
meet the five percent of General Fund expenditures, the balance will be used
pursuant to Article XXVIII of the Amendments to the Constitution of Connecticut
to reduce bonded indebtedness.
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
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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 $350 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. Legislation enacted in 1998
provided for rebates from $50 to $150 to certain taxpayers filing income tax
returns for the taxable year commencing January 1, 1997, and who have paid
property tax which first came due and was paid in such income year.
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, any dissolved corporation that continues to conduct
business, any electric distribution company 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. Section 12-214, as amended, provides for
certain financial services companies to be exempt from this tax. For income
years commencing on or after January 1, 1999, this exemption extends to domestic
insurance companies. 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 had been levied at the
rate of 10.5 percent until January 1, 1998 when it was decreased 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
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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 a flat $250. Corporations must compute
their tax under all three methods and pay the tax under the highest computation.
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, taxes on admissions, dues
and cabarets 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 1998 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.
Year 2000 Readiness
Connecticut's Current State of Readiness
The State has coordinated a review of its Year 2000 exposures through its
Department of Information Technology ("DOIT"). To date, DOIT has assessed
approximately 1360 computer systems (of the State's approximately 15000 systems)
of which 770 have been categorized as mission critical. As of October 31, 1998,
63% of the programs in mission critical systems requiring remediation had been
converted, and 27% of the testing cycles required to validate compliance in
mission critical systems had been completed. A target date of March 31, 1999 has
been established for completion of remediation and testing activities for
mission critical systems, however, some agency project plans anticipate
completion dates in the second and third quarters.
The State Legislature approved $15.0 million in bonding in 1997-98 for
equipment and related costs of the Year 2000 issue. An additional $80 million
was appropriated to DOIT as part of the 1998-1999 Midterm Budget Adjustments.
The State presently believes that, with modifications to existing software
and converting to new software, the Year 2000 problem will not pose significant
operations problems for the State's computer systems as so modified or
converted. While the State expects its Year 2000 plan to be completed on a
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timely basis, there is a risk that the plan will not be completed on time and
that there may not be enough time to adequately test all computer systems for
Year 2000 problems. There is a related risk that testing does not satisfactorily
reveal all Year 2000 software or hardware problems. Also, there can be no
assurance that the systems of other companies on which the State's systems or
service commitments may rely will be completed in a timely fashion. If the
necessary remediations are not completed in a timely fashion, the Year 2000
problem may have a material impact on the operations of the State.
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 it is the opinion of
the Attorney General that such pending litigation will not be determined 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, as well as 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 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.
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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. The Court in 1998 expanded the class of
plaintiffs to include persons who are or have been in the custody of the
Department of Mental Health and Addiction Services at any time during the
pendency of the case without reference to a particular facility.
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 and fund 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. There may be additional suits filed by other alleged Indian Tribes
claiming ownership of land located in the State of Connecticut but to which the
State is not a party. One such claim involves the alleged Schaghticoke Indian
Tribe claiming privately and town held lands in the Town of Kent.
3. FLORIDA
Special Considerations Regarding Investments in
Florida Municipal Securities
The following is a summary of certain information contained in the Official
Statement Relating to $226,375,000 State of Florida State Board of Education,
Public Education Capital Outlay Refunding Bonds, 1998 Series D, dated December
15, 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.
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National and State Economic Outlook
The national economic forecast indicates slower growth during the next two
fiscal years. Real GDP is expected to increase 2.6 percent in 1998-99 and 2.2
percent in 1999-00. Real business investment is anticipated to expand 4.6
percent in 1988-99 and 2.6 percent next year, while real consumption should
increase 4.0 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. On the monetary side, the Federal Reserve is
expected to undertake a series of interest rate cuts to avoid financial turmoil
and recession in the U.S. Inflation, as measured by the Consumer Price Index, is
expected to remain under control, averaging 2.0 percent in 1998-99 and 2.6
percent in 1999-00. The federal budget deficit is forecasted to be $64.7 billion
this year and $69.4 billion next year.
In other areas of the U.S. economy, construction activity will begin to
soften in 1998-99 and continue to decrease slightly in 1998-99. Housing starts
should reach 1.6 million units this year and 1.5 million next year. The stock
market, as measured by the S&P Index, is expected to increase slightly in
1998-99 and in 1999-00. Total employment will expand 1.1 percent in 1998-99 and
4.6 percent the next year. The unemployment rate is expected to average 4.5
percent this year and 4.6 percent next year.
While the Florida economy will also slow, it is expected to continue
outperforming the U.S. Total non-farm employment is expected to increase 3.4
percent in 1998-99 and 2.9 percent in 1999-00, reaching almost 7.0 million.
Trade and services account for more than half of all nonfarm jobs. Service jobs
are forecasted to grow 5.5% in 1998-99, and 4.4% in 1999-00. Trade jobs will
grow 2.8% the first year and 2.8% the next year.
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 144,000 units in 1998-99 and 143,000 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 46,500 starts in
1998-99, and 46,300 starts in 1999-00. Single family starts are forecasted to be
97,600 in 1998-99, and 38,300 starts in 1999-00. Single family starts are
forecasted to be 88,100 in 1998-99, and 96,700 the next year. Total construction
expenditures will increase 8.6 percent and 2.5 percent during the two years.
Tourist arrivals are forecasted to increase 2.0 percent in 1998-99 and 1.7
percent the following year. Air tourists will increase 3.2 percent and 3.9
percent, while auto tourists will increase 0.6 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 4.9 percent
in 1998-99 and 3.5 percent in 1999-00. During this time, real personal income
per capita will grow at 3.1 percent in 1998-99 and 1.8 percent in 1999-00.
Florida Financial Outlook
For fiscal year 1998-99, the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $19,463,7 million, a 5.1 percent
increase over 1997-98. The $17,692.4 million in Estimated Revenues represent a
4.4 percent increase over the analogous figure in 1997-98. With combined General
Revenue, Working Capital Fund, and Budget Stabilization Fund appropriations at
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$18,185.0 million, including a $100.9 million transfer to the Budget
Stabilization Fund, unencumbered reserves at the end of 1998-99 are estimated at
$1,379.6 million.
For fiscal year 1999-00, the estimated General Revenues plus Working
Capital and Budget Stabilization funds available total $19,923.7 million, a 2.4
percent increase over 1998-99. The $18,386.1 million in Estimated Revenues
represent a 3.9 percent increase over the analogous figure in 1998-99.
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
Stabilization 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 and 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 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.
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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 tax collections 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
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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.
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.
Year 2000
The Governor's Office of Planning and Budgeting, the Senate and the House
of Representatives created a Year 2000 Task Force in 1997 to provide direction
to State agencies for addressing potential year 2000 date change problems. The
Year 2000 Task Force, which meets monthly, is comprised of representatives of
the Governor's Office of Planning and Budgeting, the Department of Management
Services and the Department of Banking and Finance. The Task Force also includes
ex-officio representatives from the Senate and the House of Representatives.
The Year 2000 Task Force has established a monthly progress reporting
system to monitor remediation in all State agencies, with a special emphasis on
top priority systems and agencies where the impact of potential difficulties is
the highest, based on the number of citizens affected, projected failure date,
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if any, and cost to renovate. The top priority systems include systems relating
to sales taxes, central accounting, intangibles taxes and payroll. At the end of
October 1998, agency progress reports showed that Florida had completed 85% of
the total agency work estimated to be required to remediate year 2000 date
calculations in State-developed or contracted systems and that the top priority
systems had 80% of the required work completed. The State has allocated $81
million for the remediation of state agency computer systems. The State expects
to complete the remediation of all state agency computer systems by June 1999. A
statewide reserve fund has been established to address unanticipated remediation
or testing issues.
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 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
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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.
4. 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, as
supplemented August 21, 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 legislative policy and the financial conditions of the
Commonwealth. Many of these conditions are not within the control of the
Commonwealth.
1998 Fiscal Year
Preliminary results indicate that tax collections for fiscal 1998 totaled
approximately $14.026 billion, an increase of $1.161 billion, or 9.0%, over
fiscal 1997, and approximately $326 million higher than the final estimate for
the year made by the Executive Office for Administration and Finance. On May 5,
1998 the estimate for the year was raised from $13.154 billion to $13.3 billion,
and on June 10, 1998 it was raised to $13.7 billion. Projected total fiscal 1998
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expenditures are $18.887 billion, including approximately $123 million in
anticipated additional fiscal 1998 supplemental appropriations. Among the
anticipated appropriations are $46.1 million for Medicaid (see "Medicaid") and
$8 million for environmental remediation of certain underground storage tanks in
the Commonwealth. If such remediation efforts are not underway by December 23,
1998, the Commonwealth may be liable for substantial penalties imposed by the
federal Environmental Protection Agency.
The Legislature has enacted several bills providing for disposition of the
fiscal 1998 surplus, but it has not completed action on final fiscal 1998
appropriations. The final fiscal 1998 supplemental appropriation bill or bills
are expected to authorize certain additional post-fiscal 1998 spending to be
charged to fiscal 1998. Acting Governor Cellucci has also filed a bill calling
for a one-time tax cut of $287.5 million to be charged to fiscal 1998.
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
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.
Fiscal 1998 Year-end Surplus
Legislation approved by Acting Governor Cellucci on July 21, 1998 increased
the ceiling effective June 30, 1998, on the amount that can be maintained in the
Stabilization Fund from 5% to 7.5% of budgeted revenues. Based on current
estimates of fiscal 1998 results, this change increased the statutory ceiling
from approximately $984.8 million to approximately $1.477 billion. The current
projected fiscal 1998 ending balance in the Stabilization Fund is $972.2
million, assuming enactment of additional tax cuts aggregating $287.5 million as
proposed by the Acting Governor (see below).
In July, 1998 the Legislature also enacted several bills specifically
providing for disposition of the fiscal 1998 surplus:
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The fiscal 1999 budget approved by the Acting Governor on July 30, 1998
contains a Provision calling for the Comptroller to transfer $162.5 million, as
of June 30, 1998, from the General Fund to a newly established Tax Exemption
Escrow Trust Fund. By June 30, 1999 the Comptroller is to transfer $162.5
million plus interest from the new fund back to the General Fund. The effect of
this provision is to charge to fiscal 1998 the approximate cost allocable to
fiscal 1998 of the retroactive income tax reductions approved by the Acting
Governor on July 21, 1998.
On August 5, 1998, Acting Governor Cellucci approved legislation
establishing a new Brownfields Revitalization Fund as of June 30, 1998 and
providing for the transfer of $45 million to that fund, to be used through the
2001 fiscal year to fund a $15 million access to capital program to be
administered by the Massachusetts Office of Business Development and a $30
million Brownfields Redevelopment Fund to be administered by the Massachusetts
Development Finance Agency. The legislation also contains an additional $12
million in fiscal 1998 appropriations, which are made available through fiscal
2001, to fund Brownfields-related costs of the Attorney General and the
Department of Environmental Protection.
On August 10, 1998 Acting Governor Cellucci approved legislation
establishing a Teacher Quality Endowment Fund and transferring $60 million from
the General Fund into the new fund as of June 30, 1998. Earnings from the
investment of moneys credited to the new fund are to be used by the state
Commissioner of Education to pay signing bonuses to incoming teachers and salary
bonuses to existing teachers under a new master teacher corps program. The
corpus of the fund is to be left intact. The legislation also provided for the
transfer from the General Fund, as of June 30, 1998, of $200 million to the Tax
Reduction Fund (to be applied to a temporary increase in the personal exemptions
applicable to 1998 income taxes) and $150 million to the Stabilization Fund (in
addition to any other transfer required by state finance law). In addition, the
legislation authorized approximately $62.9 million in additional revenues from
the state lottery to be distributed to cities and towns on account of fiscal
1998.
Also on August 10, 1998 Acting Governor Cellucci gave his partial approval
to legislation providing for a variety of capital appropriations to be charged
to fiscal 1998. The bill enacted by the Legislature called for the transfer, as
of June 30, 1998, of approximately $272.4 million from the General Fund and
approximately $106.9 million from the Highway Fund to a Capital Improvement and
Investment Trust Fund to finance various specified capital expenditures through
fiscal 2000. Acting Governor Cellucci vetoed many of the proposed capital
expenditures, reducing the amount of the General Fund transfer to approximately
$96.2 million and the amount of the Highway Fund transfer to $93 million. The
Governor filed legislation on the same day calling for an additional $287.5
million to be transferred to the Tax Reduction Fund. That bill has been referred
to the House Committee on Ways and Means. Under existing law, the effect of the
vetoes is to increase the amount of the fiscal 1998 surplus that will be
credited to the Stabilization Fund and the Capital Projects Fund.
On August 12, 1998, Acting Governor Cellucci approved a fiscal 1998
supplemental appropriations bill providing for approximately $70.9 million in
fiscal 1998 appropriations to be made available in fiscal 1999 to fund various
collective bargaining agreements.
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
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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.
The cash flow statement for fiscal years 1998 and 1999 which was due on May
25, 1998 has not been released.
1999 Fiscal Year
The House of Representatives approved its version of the fiscal 1999 budget
on May 7, 1998, and the Senate approved its version on June 3, 1998. After
passage of two interim, partial budgets to provide for expenditures during the
first 30 days of the fiscal year, the legislative conference committee appointed
to reconcile the two versions of the fiscal 1999 budget released its report on
July 20, 1998, and the budget was enacted by the Legislature on the same day.
Acting Governor Cellucci approved it on July 30, 1998. The Governor vetoed or
reduced appropriations totaling approximately $100.9 million. On July 31, 1998
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the Legislature overrode several of those vetoes, restoring approxiinately$63.1
million of appropriations. After accounting for the value of vetoes and
subsequent overrides, the budget provides for total appropriations of
approximately $19.5 billion.
The fiscal 1999 appropriation for pension funding is approximately $965.3
million. This amount is consistent with the amount requested by the Acting
Governor, but is approximately $93.9 million less than the amount required by
the most recently approved pension funding schedule. The smaller appropriation
is based on the assumption that a revised funding schedule will require reduced
funding because of the 1997 change in law eliminating Commonwealth
responsibility for funding cost-of-living adjustments incurred by local pension
systems. A revised funding, schedule has not yet been submitted to the
Legislature.
The fiscal 1999 budget is based on a consensus tax revenue forecast of
$14.4 billion, as agreed by both houses of the Legislature in May. The tax cuts
incorporated into the budget, valued by the Department of Revenue at $990
million in fiscal 1999, had the effect of reducing the consensus forecast to
$13.41 billion. Tax collections in July, 1998 totaled $895.5 million, an
increase of $96.4 million, or 12.1%, over July, 1997. On August 19,1998 the
Executive Office for Administration and Finance raised the fiscal 1999 tax
estimate by $200 million to $13.61 billion. This estimate does not reflect the
Acting Governor's recommendation of an additional $287.5 million tax reduction
pursuant to legislation he filed on AugustI0, 1998.
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
three 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). Legislation approved by acting Governor
Cellucci in August, 1998 provided for the abolition of Hampshire, Essex and
Berkshire counties of January 1, 1999, July 1, 1999 and July 1, 2000,
respectively. 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
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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.
Administration Finance is to conduct an audit of all remaining county
assets and liabilities and report to the Legislature by February 1, 1999. The
Secretary is also to analyze, in consultation with the Public Employee
Retirement Administration Commission, the potential cost to the Commonwealth of
transferring current and retired county employees to the state retirement system
and report to the Legislature by December 31, 1998. Acting Governor Cellucci
vetoed provisions in the legislation that would have placed responsibility for
county retirees on the remaining municipalities making up the county retirement
system.
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 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 and, as of January 1, 1999, 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.
On July 21, 1998, Acting Governor Cellucci approved legislation that phased
in a doubling of the personal exemptions applicable to the "Part B" ("earned")
income tax, effective January 1, 1998, with an estimated fiscal 1999 cost of
$600 million (which includes costs for January 1, 1998 to June 30, 1998) and an
estimated fully annualized cost of $492 million. In addition, the legislation
conformed state tax law to federal law with respect to Roth and educational
IRS's, deferred compensation, capital gains on the sale of a personal residence,
travel and entertainment deductions and the definition of short-term capital
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gains. The estimated aggregate fiscal 1999 cost of these additional changes is
less than $5 million, and the estimated aggregate annualized cost, excluding the
Roth IRA, is also less than $5 million. The full impact of the Roth IRA change
will only be felt as those now contributing to Roth IRA's withdraw their
investments, over a period starting more than 20 years from now. The amount of
tax cut due to the Roth IRA change depends on many factors, including the
amounts invested, rates of return earned on those investments and the period
over which the earnings are withdrawn. No definite estimate is currently
available for events so far into the future.
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 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
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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.
On July 1, 1998, the proponents of the initiative petition to change the
rate on Part B income to the same rate applicable to Part A income filed
sufficient additional signatures to place the proposal on the November, 1998
ballot. In light of the subsequent enactment of the legislation described above,
the petition would have no effect on the Part B income tax rate unless the Part
A rate were to be changed from its current level of 5.95%.
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 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,
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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.
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
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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.
On August 10, 1998, Acting Governor Cellucci approved legislation that will
reduce insurance company taxes over five years in essentially the manner
provided in the legislation approved by the House of Representatives on April
30, 1998, though the enacted legislation, unlike the House bill, does not
eliminate the 14% surcharge on the gross premium income of property and casualty
insurers. The estimated fiscal 1999 cost of these changes is $5 million, and the
estimated fully phased-in aggregate annual value of these tax reductions is $48
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
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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 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 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
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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 permit 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 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
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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.
Year 2000
In June 1997, the Executive Office for Administration and Finance
established a Year 2000 Program Management Office within its Information
Technology Division. The purpose of the office is to ensure accurate monitoring
of the Commonwealth's progress in achieving "year 2000 compliance", i.e.,
remediating or replacing and redeploying affected systems, as well as to
identify risk areas and risk mitigation activities and serve as a resource for
all state agencies and departments. The program management office has asked
agencies to identify "mission critical" and "essential" systems. Mission
critical systems are those which directly affect the health, safety or
livelihood of citizens, which directly affect state revenues or whose loss would
severely jeopardize agency delivery of services. Essential systems are those
whose loss would cause a disruption of some agency services but would not
prevent the agency from delivering primary services. The most recent report
issued by the program management office on July 22, 1998 for the April-June 1998
quarter indicates that the office is currently monitoring year 2000 compliance
efforts for 169 state agencies, including independent agencies and
constitutional offices. The office assigns a quarterly status code - green (low
risk), yellow (medium risk) or red (significantly high risk) - to agencies based
on information collected from telephone and personal interviews. The criteria
for the status codes becomes increasingly more stringent each quarter; the
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status codes for the most recent quarter are based on the likelihood for
achieving year 2000 compliance with respect to mission critical systems by
January 31, 1999 and with respect to essential systems by May 31, 1999. Of the
169 state agencies rated for the April-June 1998 quarter, 101 were rated green,
27 were rated yellow and 32 were rated red. Those agencies have identified 261
mission critical systems and 192 essential systems; 173, or 66%, of the mission
critical systems and 115, or 60%, of the essential systems are not yet
compliant. The report notes that approximately 20% of the agencies had regressed
on their compliance efforts, adding to the number of high-risk systems. There
are still agencies that do not have effective compliance projects in place. Few
agencies have begun to address the need for contingency planning. The report
also notes that year 2000 exposure for "embedded systems", particularly devices
used for control systems is high. This exposure affects only a few agencies, but
the impact of failures would be significant, e.g., switches and signals for the
MBTA, a variety of systems at Logan Airport for the Port Authority, toll
collection and ticket systems for the Turnpike Authority, water and sewer
management and treatment systems for the Massachusetts Water Resources Authority
and traffic signals for the Massachusetts Highway Department.
Legislation approved by the Acting Governor on August 10, 1998 appropriates
$20.4 million for expenditure by the Information Technology Division to achieve
year 2000 compliance for the six Executive Offices and other departments which
report directly to the Governor. This amount, together with previously
appropriated amounts and expenditures at the departmental level from existing
funds, is anticipated to be sufficient to meet most of the remediation efforts
for such Executive Offices and departments. The Secretary of Administration and
Finance is to report quarterly to the Legislature on the progress being made to
address the year 2000 compliance efforts, and to assess the sufficiency of
funding levels.
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 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
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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. The parties have stipulated to the dismissal of the case.
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 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.
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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 remaining group of plaintiffs has
been settled. The Legislature appropriated approximately $8 million to implement
the terms of the resulting judgment.
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 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
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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 has paid approximately $17 million to date in abatements in accordance
with the judgment. To date, the total amount for abatements requested, including
those that have been paid, and that are in the process of being evaluated, is
$35 million.
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. The plaintiff has
appealed the Superior Court's judgment.
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 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. The two
cases have been consolidated for discovery. Total potential liability to the
Commonwealth in these cases is approximately $35 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
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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 and the
Supreme Judicial Court has ordered direct appellate review of the case.
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. Judgment was entered on April 22, 1998 which requires the
Commonwealth to pay $16 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) and Shea v. Commonwealth (Norfolk Superior Court No. 97-1070-B) are
eminent domain cases 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.
Pursuant to a verdict on the Trilling Way parcel in P&P Realty Co., Inc. v.
Department of Public Works (Suffolk Superior Court No. 92-2081), the
Commonwealth will pay $6 million. The Commonwealth's total potential liability
is $22 million.
5. 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 September 28, 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.
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
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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 is increasingly
creating higher paying jobs. This is further evidenced by the shift 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.
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
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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) domestic water usage; (f) gasoline and other
motor fuels otherwise specifically taxed; (g) sales of tangible property and
public utility services when the property or service becomes a component part of
a manufactured product for resale, or when the property or service is consumed
directly in the process of manufacturing or processing products for resale and
such consumption occurs within one year from the date such property is first
used in such production; (h) tools, dies and molds and machinery and equipment
(including replacement parts thereof) used directly and exclusively in an
industrial plant in the actual manufacture, conversion or processing of tangible
personal property to be sold; (i) sales of air and water pollution control
equipment for installation pursuant to an order by the State Director of
Environmental Management; and (j) sales of boats or vessels.
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
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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 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.
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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 tax on
natural gas was lowered one percent per year for the next three years, and was
fully eliminated on July 1, 1996. 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.
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
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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 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.
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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.
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.
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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 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.
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<PAGE>
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, and other legislation which changes the distribution of
the hotel tax receipts. The Consensus Revenue Estimating Conference is required
by legislation to convene at least twice annually to forecast generally revenues
for the current year and the budget year, based upon current law and collection
trends, as well as the economic forecast.
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), 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
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<PAGE>
$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.
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.
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<PAGE>
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 $767.6 million of bonds
outstanding and $276,347,926 of authorized but unissued direct debt. In July
1998, the State issued an additional $65,720,000 of bonds, resulting in a
balance of authorized but unissued debt of $209,910,479.
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 and the Narragansett Bay
Water Quality Management District Commission. As of June 30, 1997, these
entities had bonds outstanding of $22,657,000 and $1,514,000 of authorized but
unissued debt.
Year 2000
The State has taken steps to ensure that internal and mechanical Year 2000
issues, which may arise from State operations, will not materially affect the
State's credit-worthiness and ability to make timely payments of debt service.
The approach of the State has been to raise the awareness of technical and
managerial staff and to provide the assistance necessary to mitigate the risk to
the performance of the State's business.
The State has coordinated the efforts to remediate and mitigate the impact
of the Year 2000 computer issue through the office of the Chief Information
Officer. The "Year 2000 Program Office", which was created in December 1996,
performs this coordination.
The Fiscal Year 1998 budget contained $500,000 for Year 2000 compliance.
Approximately half of the funding was extended to departments to repair and
replace critical non-compliant software systems inventoried and assessed by
departments as overseen by the Program Office.
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<PAGE>
The General Assembly enacted the Governor's requested budget for fiscal
year 1999 of $2.5 million for "Year 2000" technology problems. This budget will
be used to address infrastructure issues and external compliance. Contingency
plans will be necessary for critical operations where compliance cannot be
assured. The year 2000 Program Office will accept requests for emergency
financial assistance in any of these areas, provided that the need, agency
commitment and feasibility of the project have been demonstrated. Requests for
additional appropriations may be required as a result of these requests.
The State cannot guarantee that systems of other companies on which
State government systems rely, or that a failure to convert by another company,
or a conversion that is incompatible with the State's systems, would not have a
material adverse effect on the State. Furthermore, the failure of certain
entities beyond the control of the State, such as the federal government or
other sources of revenue, to address the Year 2000 issue could have a material
adverse impact on the operations or finances of the State.
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 $11,700,000 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
subsequently obtained a Writ of Mandamus from the Superior Court against the
State requiring immediate payment of the judgment. The State has appealed the
issuance of that Writ to the Rhode Island Supreme Court. The State also 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. If the State is forced to
pay one half the judgement, it is the State's position that the City of
Providence is obligated to reimburse the State that amount.
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.
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<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS(1)
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.
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.
- --------
(1) As described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may, from
time to time, revise such ratings, they undertake no obligation to do so.
<PAGE>
Description of Standard & Poor's Rating Services
Four Highest Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is still strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Plus (+) or minus (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Description of Fitch 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.
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.
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<PAGE>
"+" 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.
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+").
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<PAGE>
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.
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.
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<PAGE>
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.
-5-
<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 January 5, 1999.
- --------------------------------------------------------------------------------
FEDERAL
Equivalent yields: Tax-exempt versus taxable securities
<TABLE>
<CAPTION>
1998
Federal
Taxable Income 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>
$0-25,350 $0-42,350 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%` 7.65% 8.24% 8.82% 9.41%
25,351-61,400 42,351-102,300 28.00% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11%
61,401-128,100 102,301-155,950 31.00% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59%
128,101-278,450 155,951-278,450 36.00% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94% 11.72% 12.50%
over 278,450 over 39.60% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 11.59% 12.42% 13.25%
278,450
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</TABLE>
CALIFORNIA
Equivalent yields: Tax-exempt versus taxable securities
<TABLE>
<CAPTION>
Taxable Income* 1998 A California Tax-Exempt Income Fund
1998 Combined Yield of:
Federal California
State Margin and Federal
- -------------------------- ----- -------- -------- -------- -------
Single Joint Rate Rate Tax 4.0% 5.0% 6.0% 7.0% 8.0%
Bracket**
- -------------- ----------- ------ ------- ------------- ----- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-5,131 $0-10,262 1.00% 15.00% 15.85% 4.75% 5.94% 7.13% 8.32% 9.51%
5,132-12,161 10,263-24,322 2.00% 15.00% 16.70% 4.80% 6.00% 7.20% 8.40% 9.60%
12,162-19,193 24,323-38,386 4.00% 15.00% 18.40% 4.90% 6.13% 7.35% 8.58% 9.80%
19,194-25,350 38,387-42,350 6.00% 15.00% 20.10% 5.01% 6.26% 7.51% 8.76% 10.01%
25,351-26,644 42,351-53,288 6.00% 28.00% 32.32% 5.91% 7.39% 8.87% 10.34% 11.82%
26,645-33,673 53,289-67,346 8.00% 28.00% 33.76% 6.04% 7.55% 9.06% 10.57% 12.08%
33,674-61,400 67,347-102,300 9.30% 28.00% 34.70% 6.13% 7.66% 9.19% 10.72% 12.25%
61,401-128,100 102,301-155,950 9.30% 31.00% 37.42% 6.39% 7.99% 9.59% 11.19% 12.78%
128,101-278,450 155,951-278,450 9.30% 36.00% 41.95% 6.89% 8.61% 10.34% 12.06% 13.78%
over 278,450 over 9.30% 39.60% 45.22% 7.30% 9.13% 10.95% 12.78% 14.60%
278,450
</TABLE>
* 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 California Personal Income Tax law, however,
California 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 1998, including indexing for inflation. These rates
include the effect of deducting state taxes on your Federal return.
-2
<PAGE>
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<TABLE>
<CAPTION>
CONNECTICUT
Equivalent yields: Tax-exempt versus taxable securities
1997
Combined
Taxable Income* Connecticut A Connecticut Tax-Exempt Income
and Fund Yield of:
------------------------- State Federal Federal ------ ----- ------- ------- --------
Single Joint Rate** Rate TaxBracket***4.0% 5.0% 6.0% 7.0% 8.0%
-------------- ---------- ------ ------- ----------- ------ ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-7,500 $0-15,000 3.00%*15.00% 17.55% 4.85% 6.06% 7.28% 8.49% 9.70%
7,501-25,350 15,001-42,350 4.50% 15.00% 18.83% 4.93% 6.16% 7.39% 8.62% 9.86%
25,351-61,400 42,351-102,300 4.50% 28.00% 31.24% 5.82% 7.27% 8.73% 10.18% 11.63%
61,401-128,100 102,301-155,950 4.50% 31.00% 34.11% 6.07% 7.59% 9.11% 10.62% 12.14%
128,101-278,450 155,951-278,450 4.50% 36.00% 38.88% 6.54% 8.18% 9.82% 11.45% 13.09%
over 278,450 over 4.50% 39.60% 42.32% 6.93% 8.67% 10.40% 12.14% 13.87%
278,450
</TABLE>
* 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.
*** Per changes of 1997 Regular Session and the trailing Special Sessions of
the Connecticut General Assembly. **** For federal tax purposes, these
combined rates reflect the applicable marginal rates for 1998, including
indexing for inflation. These rates include the effect of deducting state
taxes on your Federal return.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLORIDA
Equivalent yields: Tax-exempt versus taxable securities
1998
Combined
Taxable Income* Florida A Tax-Exempt Income Fund Yield of:
and
Federal
- -------------------------- -------- -------- -------- ------- -------- -------- -------
Single Joint Tax 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
Bracket**
- -------------- ----------- ----------- -------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-25,350 $0-42,350 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%` 7.65% 8.24%
25,351-61,400 42,351-102,300 28.00% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72%
61,401-128,100 102,301-155,950 31.00% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14%
128,101-278,450 155,951-278,450 36.00% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94%
over 278,450 over 39.60% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 11.59%
278,450
</TABLE>
* 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 1998, including indexing for inflation. These rates
include the effect of deducting state taxes on your federal return.
-2
<PAGE>
<TABLE>
<CAPTION>
MASSACHUSETTS
Equivalent yields: Tax-exempt versus taxable securities
1998
Combined
Taxable Income* Massachusetts A Massachusetts Tax-Exempt Income Fund
and Yield of:
Federal
- --------------------------
State Federal Tax ----- -------- -------- -------- -------
Single Joint Rate Rate Bracket** 4.0% 5.0% 6.0% 7.0% 8.0%
- -------------- ----------- -------- ------- ------------- ----- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-25,350 $0-42,350 12.00% 15.00% 25.20% 5.35% 6.68% 8.02% 9.36% 10.70%
24,351-61,400 42,351-102,300 12.00% 28.00% 36.64% 6.31% 7.89% 9.47% 11.05% 12.63%
61,401-128,100 102,301-155,950 12.00% 31.00% 39.28% 6.59% 8.23% 9.88% 11.53% 13.18%
128,101-278,450 155,951-278,450 12.00% 36.00% 43.68% 7.10% 8.88% 10.65% 12.43% 14.20%
over 278,450 over 12.00% 39.60% 46.85% 7.53% 9.41% 11.29% 13.17% 15.05%
278,450
</TABLE>
* 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 1998, including indexing for inflation. These rates
include the effect of deducting state taxes on your Federal return.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RHODE ISLAND
Equivalent yields: Tax-exempt versus taxable securities
1998
Combined
Taxable Income* Rhode A Rhode Island Tax-Exempt Income
Island Fund Yield of:
and
Federal
- --------------------------
State Federal ------ ------ ------- ------- ------
Single Joint Rate Rate Tax 4.0% 5.0% 6.0% 7.0% 8.0%
Bracket**
- -------------- ----------- ----- ------- ---------- ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-25,350 $0-42,350 4.94% 15.00% 19.05% 4.94% 6.18%7.41% 8.56% 9.88%
25,351-61,400 42,351-102,300 6.21% 28.00% 35.56% 6.21% 7.76%9.31% 10.86% 12.41%
61,401-128,100 102,301-155,950 6.60% 31.00% 39.37% 6.60% 8.25%9.90% 11.55% 13.19%
128,101-278,450 155,951-278,450 7.37% 36.00% 45.72% 7.37% 9.21%11.05% 12.90% 14.74%
over 278,450 over 8.05% 39.60% 50.29% 8.05% 10.06%12.07% 14.08% 16.09%
278,450
</TABLE>
* 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 1998, including indexing for inflation. These rates
include the effect of deducting state taxes on your Federal return.
-3-
<PAGE>
Boston 1784 FUNDS(SM)
Boston 1784 Tax-Free Money Market Fund
Boston 1784 California 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 California Tax-Exempt 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, as supplemented April 1, 1999
- ----------------------------------------------------
Boston 1784 Funds(SM):
o are not insured by the FDIC or any other governmental agency;
o are not guaranteed by BankBoston, N.A. or any
of its affiliates;
o are not deposits or obligations of BankBoston, N.A. or any of
its affiliates; and
o involve investment risks, including possible loss of principal.
BankBoston, N.A. serves as investment adviser and shareholder servicing agent
for Boston 1784 Funds. Investors Bank and Trust Company serves as
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.
