Registration Nos: 2-41251
811-2214
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 44 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 26 [X]
COLONIAL TRUST I
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
617-426-3750
(Registrant's Telephone Number, including Area Code)
Name and Address of
Agent for Service Copy to
Michael H. Koonce Peter MacDougall, Esq.
Colonial Management Associates, Inc. Ropes & Gray
One Financial Center One International Place
Boston, MA 02111 Boston, MA 02110-2624
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b).
[X] on August 1, 1997 pursuant to paragraph (b).
[ ] 60 days after filing pursuant to paragraph (a)(1).
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
[ ] 75 days after filing pursuant to paragraph (a)(2).
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
The Registrant has registered an indefinite number of its shares of beneficial
interest under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940. On February 27, 1997, the Registrant filed a
Rule 24f-2 Notice in respect of its series whose fiscal years ended on
December 31, 1996.
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COLONIAL TRUST I
Cross Reference Sheet
---------------------
(Colonial Income Fund)
(Prospectus dated April 30, 1997; Revised August 1, 1997)
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Item Number of Form N-1A Prospectus Location or Caption
- ------------------------ ------------------------------
Part A
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1. Cover Page
2. Summary of Expenses
3. The Fund's Financial History
4. The Fund's Investment Objective;
Organization and History;
How the Fund Pursues Its Objective
and Certain Risk Factors
5. Cover Page;
How the Fund is Managed;
Organization and History;
Back Cover
6. Organization and History;
Distributions and Taxes;
How to Buy Shares
7. How to Buy Shares;
How the Fund Values Its Shares;
12b-1 Plans; Back Cover
8. How to Sell Shares;
How to Exchange Shares;
Telephone Transactions
9. Not Applicable
<PAGE>
<PAGE>
April 30, 1997; Revised August 1, 1997
COLONIAL INCOME
FUND
PROSPECTUS
BEFORE YOU INVEST
Colonial Management Associates, Inc. (Adviser) and your full-service financial
adviser want you to understand both the risks and benefits of mutual fund
investing.
While mutual funds offer significant opportunities and are professionally
managed, they also carry risks including possible loss of principal. Unlike
savings accounts and certificates of deposit, mutual funds are not insured or
guaranteed by any financial institution or government agency.
Please consult your full-service financial adviser to determine how investing in
this mutual fund may suit your unique needs, time horizon and risk tolerance.
Colonial Income Fund (Fund), a diversified portfolio of Colonial Trust I
(Trust), an open-end management investment company, seeks as high a level of
current income and total return, as is consistent with prudent risk, by
investing primarily in corporate debt securities.
The Fund is managed by the Adviser, an investment adviser since 1931.
This Prospectus explains concisely what you should know before investing in the
Fund. Read it carefully and retain it for future reference. More detailed
information about the Fund is in the April 30, 1997; Revised August 1, 1997
Statement of Additional Information, which has been filed with the Securities
and Exchange Commission and is obtainable free of charge by calling the Adviser
at 1-800-426-3750. The Statement of Additional Information is incorporated by
IF-01/940D-0897
reference in (which means it is considered to be a part of) this Prospectus.
The Fund offers three classes of shares. Class A shares are offered at net asset
value plus a sales charge imposed at the time of purchase; Class B shares are
offered at net asset value and are subject to an annual distribution fee and a
declining contingent deferred sales charge on redemptions made within six years
after purchase; and Class C shares are offered at net asset value and are
subject to an annual distribution fee and a contingent deferred sales charge on
redemptions made within one year after purchase. Class B shares automatically
convert to Class A shares after approximately eight years. See "How to Buy
Shares."
Contents Page
Summary of Expenses
The Fund's Financial History
The Fund's Investment Objective
How the Fund Pursues its Objective and
Certain Risk Factors
How the Fund Measures its Performance
How the Fund is Managed
How the Fund Values its Shares
Distributions and Taxes
How to Buy Shares
How to Sell Shares
How to Exchange Shares
Telephone Transactions
12b-1 Plan
Organization and History
Appendix
- ----------------------------- ------------------------------
NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
- ----------------------------- ------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE
<PAGE>
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in the Fund. The
following tables summarize your maximum transaction costs and your annual
expenses for an investment in each Class of the Fund's shares. See "How the Fund
is Managed" and "12b-1 Plan" for more complete descriptions of the Fund's
various costs and expenses.
Shareholder Transaction Expenses(1)(2)
Class A Class B Class C
Maximum Initial Sales Charge Imposed
on a Purchase (as a % of offering price)(3) 4.75% 0.00%(5) 0.00%(5)
Maximum Contingent Deferred Sales Charge
(as a % of offering price)(3) 1.00%(4) 5.00% 1.00%
(1) For accounts less than $1,000 an annual fee of $10 may be deducted. See
"How to Buy Shares."
(2) Redemption proceeds exceeding $1,000 sent via federal funds wire will be
subject to a $7.50 charge per transaction.
(3) Does not apply to reinvested distributions.
(4) Only with respect to any portion of purchases of $1 million to $5 million
redeemed within approximately 18 months after purchase. See "How to Buy
Shares."
(5) Because of the distribution fee applicable to Class B and Class C shares,
long-term Class B and Class C shareholders may pay more in aggregate sales
charges than the maximum initial sales charge permitted by the National
Association of Securities Dealers, Inc. However, because the Fund's Class
B shares automatically convert to Class A shares after approximately 8
years, this is less likely for Class B shares than for a class without a
conversion feature.
Annual Operating Expenses (as a % of average net assets)
Class A Class B Class C
Management fee 0.50% 0.50% 0.50%
12b-1 fees 0.25 1.00 0.85(6)
Other expenses 0.35 0.35 0.35
---- ---- ----
Total operating expenses 1.10% 1.85% 1.70%
(6) The Distributor has voluntarily agreed to waive a portion of the Class C
share Rule 12b-1 distribution fee so that it will not exceed 0.60%
annually. The Distributor may terminate the fee waiver at any time without
shareholder approval. See "12b-1 Plan." Absent such fee waiver, the "12b-1
fees" would have been 1.00% and the "Total operating expenses" would have
been 1.85%.
Example
The following Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in each Class of shares of the Fund for the
periods specified, assuming a 5% annual return and, unless otherwise noted,
redemption at period end. The 5% return and expenses used in this Example should
not be considered indicative of actual or expected Fund performance or expenses,
both of which will vary:
Class A Class B Class C
Period: (7) (8) (7) (8)
1 year $58 $69 $19 $27 $17
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3 years 81 88 58 54(10) 54(10)
5 years 105 120 100 92 92
10 years 175 197(9) 197(9) 201 201
If the Distributor had not agreed to waive a portion of the Class C share
distribution fee, amounts for Class C shares in the Example would be as follows:
$29, $58, $100 and $217 for 1, 3, 5 and 10 years respectively, assuming
redemption at period end; and $19, $58, $100 and $217 for 1, 3, 5 and 10 years
respectively, assuming no redemption.
(7) Assumes redemption at period end.
(8) Assumes no redemption.
(9) Class B shares automatically convert to Class A shares after approximately
8 years; therefore, years 9 and 10 reflect Class A share expenses.
(10) Class C shares do not incur a contingent deferred sales charge on
redemptions made after one year.
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THE FUND'S FINANCIAL HISTORY
The following financial highlights for a share outstanding throughout each
period have been audited by Price Waterhouse LLP, independent accountants. Their
unqualified report is included in the Fund's 1996 Annual Report and is
incorporated by reference into the Statement of Additional Information. No Class
C shares were outstanding during the periods shown.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
Year Ended December 31
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value-
Beginning of period $6.640 $5.950 $6.720 $6.460 $6.460
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.460 0.472 0.487 0.501 0.546
Net realized and unrealized
gain (loss) on investments (0.240) 0.698 (0.761) 0.261 0.001
------- ------ ------- ------ ------
Total from investment
operations 0.220 1.170 (0.274) 0.762 0.547
------ ------ ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.450) (0.480) (0.496) (0.502) (0.547)
From capital paid in -- -- -- -- --
------- ------ ------- ------ ------
Total distributions declared to
shareholders (0.450) (0.480) (0.496) (0.502) (0.547)
------- ------- ------- ------- -------
Net asset value - End of period $6.410 $6.640 $5.950 $6.720 $6.460
======= ======= ======= ======= =======
Total return (a) 3.59% 20.30% (4.09)% 12.05% 8.83%
===== ====== ======= ====== =====
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.10%(b) 1.09%(b) 1.11% 1.10% 1.24%
Net investment income 7.12%(b) 7.45%(b) 7.80% 7.45% 8.49%
Portfolio turnover 253% 85% 16% 46% 68%
Net assets at end of period (000) $129,681 $143,834 $129,560 $155,543 $149,309
<CAPTION>
CLASS A
----------------------------------------------------------------------
Year Ended December 31
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
Net asset value-
Beginning of period $5.970 $6.430 $6.610 $6.520 $7.220
------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.587 0.632 0.647 0.687 0.703
Net realized and unrealized
gain (loss) on investments 0.487 (0.477) (0.159) 0.081 (0.649)
------- ------- ------- ------- ------
Total from investment
operations 1.074 0.155 0.488 0.768 0.054
------- ------- ------- ------- ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.584) (0.615) (0.662) (0.678) (0.754)
From capital paid in -- -- (0.006) -- --
------- ------- ------- ------- ------
Total distributions declared to
shareholders (0.584) (0.615) (0.668) (0.678) (0.754)
------- ------- ------- ------- ------
Net asset value - End of period $6.460 $5.970 $6.430 $6.610 $6.520
======= ======= ======= ======= ======
Total return (a) 18.80% 2.65% 7.62% 12.45% 0.48%
======= ======= ======= ======= ======
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.25% 1.23% 1.15% 1.13% 1.15%
Net investment income 9.46% 10.30% 9.82% 10.37% 10.10%
Portfolio turnover 44% 29% 41% 19% 32%
Net assets at end of period (000) $146,905 $141,467 $162,163 $159,991 $164,636
(a) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(b) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
</TABLE>
5
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<TABLE>
<CAPTION>
CLASS B
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31
- ---------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992(a)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.640 $5.950 $6.720 $6.460 $6.390
------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.412 0.425 0.440 0.451 0.290
Net realized and unrealized
gain (loss) on investments (0.240) 0.698 (0.761) 0.261 0.088
------- ------ ------- ------ -----
Total from investment operations 0.172 1.123 (0.321) 0.712 0.378
------ ------ ------- ------ -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.402) (0.433) (0.449) (0.452) (0.308)
------- ------- ------- ------- -------
Net asset value - End of period $6.410 $6.640 $5.950 $6.720 $6.460
======= ======= ======= ======= ======
Total return (b) 2.82% 19.42% (4.82)% 11.23% 6..00%(c)
======= ======= ======= ======= ======
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.85%(d) 1.84%(d) 1.86% 1.85% 1.99%(e)
Net investment income 6.37%(d) 6.70%(d) 7.05% 6.70% 7.74%(e)
Portfolio turnover 253% 85% 16% 46% 68%
Net assets at end of period (000) $35,770 $38,203 $22,805 $19,787 $6,092
[BOX]
- ----------------------------------
(a) Class B shares were initially offered on May 15, 1992. Per share amounts
reflect activity from that date.
(b) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(c) Not annualized.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(e) Annualized.
</TABLE>
Further performance information is contained in the Fund's Annual Report to
shareholders, which is obtainable free of charge by calling 1-800-426-3750.
6
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THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks as high a level of current income and total return, as is
consistent with prudent risk, by investing primarily in corporate debt
securities.
HOW THE FUND PURSUES ITS OBJECTIVE AND CERTAIN RISK FACTORS
The Fund invests primarily in corporate and government debt securities and
preferred stocks, but intends to limit investments in preferred stocks to 10% of
its net assets. Some preferred stocks may be accompanied by rights to acquire
the issuer's common stock, but the Fund intends to dispose of any common stock
acquired through these rights. The type and the maturity of debt securities held
by the Fund will vary over time based on management's judgment of market and
economic conditions, fiscal and monetary policy and interest rate trends. The
Fund may invest up to 25% of its assets in securities issued or guaranteed by
foreign governments or foreign companies. The Fund will not invest more than 25%
of its total assets in a single industry.
Debt Securities. The Fund may invest in debt securities of any maturity that pay
fixed, floating or adjustable interest rates. The values of debt securities
generally fluctuate inversely with changes in interest rates. This is less
likely to be true for adjustable or floating rate securities, since interest
rate changes are more likely to be reflected in changes in the rates paid on the
securities. However, reductions in interest rates also may translate into lower
distributions paid by the Fund.
The Fund also may invest in debt securities (i) that do not pay interest but,
instead are issued at a significant discount to their maturity values (referred
to as zero coupon securities), (ii) that pay interest, at the issuer's option,
in additional securities instead of cash (referred to as pay-in-kind securities)
or (iii) pay interest at predetermined rates that increase over time (referred
to as step coupon bonds). Because zero coupon securities, pay-in-kind securities
and step coupon bonds may not pay interest but the Fund nevertheless must accrue
and distribute to investors the income deemed to be earned on a current basis,
the Fund may have to sell other investments to raise the cash needed to make
income distributions.
REMICs and CMOs. The Fund may invest in real estate mortgage investment conduits
(REMICs), collateralized mortgage obligations (CMOs) and other mortgage-backed
securities of investment grade or which are considered by the Adviser to be of
comparable quality. Certain of these securities may be issued by non-U.S.
government agencies, although the underlying mortgages will in all cases be
guaranteed by a U.S. government agency. The Fund may experience costs and delays
in liquidating the collateral if the non-U.S. government issuer defaults or
enters bankruptcy and may incur a loss. CMOs are obligations issued by
special-purpose trusts, secured by mortgages. REMICs are entities that own
mortgages and elect REMIC status under the Internal Revenue Code. Both CMOs and
REMICs issue one or more classes of securities of which one (the Residual) is in
the nature of equity. The Fund will not invest in the Residual class. The
principal of a REMIC, CMO or other mortgage-backed security may be prepaid if
the underlying mortgages are prepaid. Prepayment rates for mortgage-backed
securities tend to increase as rates decline (effectively shortening the
security's maturity) and decrease as interest rates rise (effectively
lengthening the security's maturity). Because of the prepayment feature, these
investments may not increase in value when interest rates fall. The Fund may be
able to invest prepaid principal only at lower yields. The prepayment of REMICs,
CMOs or other mortgage-backed securities purchased at a premium may result in
losses equal to the premium. The Fund may invest in "stripped" mortgage-backed
securities
7
<PAGE>
representing interests in, for example, only the principal or only the interest
on underlying mortgages. Interest-only strips involve the additional risk of
loss of the entire value of the investment if the underlying mortgages are
prepaid.
Lower Rated Debt Securities. Lower rated debt securities (commonly referred to
as junk bonds) are debt securities which are not considered to be investment
grade (that is, they are rated below BBB by Standard & Poor's Corporation (S&P)
or below Baa by Moody's Investors Service (Moody's), or are unrated but
considered by the Adviser to be of comparable credit quality). For a description
of S&P's and Moody's rating systems, see the Appendix to this Prospectus. Lower
rated bonds also are generally considered significantly more speculative and
likely to default than higher quality bonds. Because of the increased risk of
default, lower rated debt securities generally have higher interest rates than
higher quality securities. As a matter of policy, the Adviser will not invest
more than 25% of the Fund's total assets in lower rated debt securities.
The Fund may purchase bonds in the lowest rating categories (C for Moody's and D
for S&P) and comparable unrated securities. However, the Fund will only purchase
securities rated Ca or lower by Moody's or CC or lower by S&P if the Adviser
believes the quality of such securities is higher than indicated by the rating.
The values of lower rated securities are more likely to fluctuate directly,
rather than inversely, with changes in interest rates. This is because increases
in interest rates often are associated with an improving economy, which may
translate into an improved ability of the issuers to pay off their bonds
(lowering the risk of default). Relative to other debt securities, the values of
lower rated bonds tend to be more volatile because: (i) an economic downturn may
more significantly impact their potential for default, or (ii) the secondary
market for such securities may at times be less liquid or respond more adversely
to negative publicity or investor perceptions, making it more difficult to value
or dispose of the securities. The likelihood that these securities will help the
Fund achieve its investment objective is more dependent on the Adviser's own
credit analysis.
During the year ended December 31, 1996, 18.5% of the Fund's weighted average
total assets were invested in lower rated bonds. The portfolio composition
during 1996 does not necessarily reflect the current or future investments of
the Fund.
Foreign Investments. Investments in foreign securities have special risks
related to political, economic, and legal conditions outside of the U.S. As a
result, the prices of foreign securities may fluctuate substantially more than
the prices of securities of issuers based in the U.S. Special risks associated
with foreign securities include the possibility of unfavorable movements in
currency exchange rates, the existence of less liquid markets, the
unavailability of reliable information about issuers, the existence (or
potential imposition) of exchange control regulations (including currency
blockage), and political and economic instability, among others. In addition,
transactions in foreign securities may be more costly because of currency
conversion costs and higher brokerage and custodial costs. See "Foreign
Securities" and "Foreign Currency Transactions" in the Statement of Additional
Information for more information about foreign investments.
Emerging Markets. The Fund may invest in foreign securities issued or guaranteed
by companies or governments located in countries whose economies or securities
markets are not yet highly developed. Special risks associated with these
investments (in addition to those of foreign investments generally) may include,
among others, greater political uncertainties, an economy's dependence on
revenues from particular commodities or on international aid or development
assistance, extreme or volatile
8
<PAGE>
debt burdens or inflation rates, highly limited numbers of potential buyers for
such securities, heightened volatility of security prices, restrictions on
repatriation of capital invested abroad and delays and disruptions in securities
settlement procedures.
Foreign Currency Transactions. In connection with its investments in foreign
securities, the Fund may purchase and sell (i) foreign currencies on a spot or
forward basis, (ii) foreign currency futures contracts, and (iii) options on
foreign currencies and foreign currency futures. Such transactions may be
entered into (a) to lock in a particular foreign exchange rate pending
settlement of a purchase or sale of a foreign security or pending the receipt of
interest, principal or dividend payments on a foreign security held by the Fund,
or (b) to hedge against a decline in the value, in U.S. dollars or in another
currency, of a foreign currency in which securities held by the Fund are
denominated. The Fund will not attempt, nor would it be able, to eliminate all
foreign currency risk. Further, although hedging may lessen the risk of loss if
the hedged currency's value declines, it limits the potential gain from currency
value increases. See the Statement of Additional Information for information
relating to the Fund's obligations in entering into foreign currency
transactions.
Temporary/Defensive Instruments. Temporarily available cash may be invested in
certificates of deposit, bankers' acceptances, high quality commercial paper,
Treasury bills, repurchase agreements and U.S. government securities. Some or
all of the Fund's assets may be invested in such investments during periods of
unusual market conditions.
Under a repurchase agreement, the Fund buys a security from a bank or dealer,
which is obligated to buy it back at a fixed price and time. The security is
held in a separate account at the Fund's custodian and constitutes the Fund's
collateral for the bank's or dealer's repurchase obligation. Additional
collateral will be added so that the obligation will at all times be fully
collateralized. However, if the bank or dealer defaults or enters bankruptcy,
the Fund may experience costs and delays in liquidating the collateral, and may
experience a loss if it is unable to demonstrate its right to the collateral in
a bankruptcy proceeding. Not more than 10% of the Fund's net assets will be
invested in repurchase agreements maturing in more than 7 days or other illiquid
assets.
Interest Rate Futures and Options. For hedging purposes, the Fund may (1) buy or
sell interest rate futures (futures) and (2) buy and sell options on futures. A
future creates an obligation by the seller to deliver and the buyer to take
delivery of the type of instrument at the time and in the amount specified in
the contract. Although futures call for the delivery (or acceptance) of the
specified instrument, futures are usually closed out before the settlement date
through the purchase (or sale) of an offsetting contract. If the price of the
initial sale of the future exceeds (or is less than) the price of the offsetting
purchase, the Fund realizes a gain (or loss). The total market value of
securities to be delivered or acquired pursuant to such contracts will not
exceed 5% of the Fund's net assets.
"When-Issued" and "Delayed Delivery" Securities. The Fund may acquire securities
on a "when-issued" or "delayed delivery" basis by contracting to purchase
securities for a fixed price on a date beyond the customary settlement time with
no interest accruing until settlement. If made through a dealer, the contract is
dependent on the dealer' completing the sale. The dealer's failure could deprive
the Fund of an advantageous yield or price. These contracts involve the risk
that the value of the underlying security may change prior to settlement. The
Fund may realize short-term gains or losses if the contracts are sold.
Transactions in "when-issued" securities may be limited by certain Internal
Revenue Code requirements.
9
<PAGE>
Borrowing of Money. The Fund may borrow money from banks for temporary or
emergency purposes up to 10% of its net assets; however, the Fund will not
purchase additional portfolio securities while borrowings exceed 5% of net
assets.
Other. The Fund may not always achieve its investment objective. The Fund may
trade portfolio securities for short-term profits to take advantage of price
differentials. These trades involve transaction costs and are limited by certain
Internal Revenue Code requirements. High portfolio turnover may result in higher
transaction costs and higher levels of realized capital gains. The Fund's
investment objective and non-fundamental investment policies may be changed
without shareholder approval. The Fund's fundamental investment policies listed
in the Statement of Additional Information cannot be changed without the
approval of a majority of the Fund's outstanding voting securities. The Fund
will notify investors in connection with any material change in the Fund's
investment objective. If there is a change in the investment objective or
investment policies, shareholders should consider whether the Fund remains an
appropriate investment in light of their financial position and needs.
Shareholders may incur a contingent deferred sales charge if shares are redeemed
in response to a change in the investment objective or investment policies.
Additional information concerning certain of the securities and investment
techniques described above is contained in the Statement of Additional
Information.
HOW THE FUND MEASURES ITS PERFORMANCE
Performance may be quoted in sales literature and advertisements. Each Class's
average annual total returns are calculated in accordance with the Securities
and Exchange Commission's formula and assume the reinvestment of all
distributions, the maximum initial sales charge of 4.75% on Class A shares and
the contingent deferred sales charge applicable to the time period quoted on
Class B and Class C shares. Other total returns differ from average annual total
return only in that they may relate to different time periods, may represent
aggregate as opposed to average annual total returns, and may not reflect the
initial sales charge or contingent deferred sales charges.
Each Class's yield, which differs from total return because it does not consider
changes in net asset value, is calculated in accordance with the Securities and
Exchange Commission's formula. Each Class's distribution rate is calculated by
dividing the most recent month's distribution, annualized, by the maximum
offering price of that Class at the end of the month. Each Class's performance
may be compared to various indices. Quotations from various publications may be
included in sales literature and advertisements. See "Performance Measures" in
the Statement of Additional Information for more information. All performance
information is historical and does not predict future results.
HOW THE FUND IS MANAGED
The Trustees formulate the Fund's general policies and oversee the Fund's
affairs as conducted by the Adviser.
Colonial Investment Services, Inc. (Distributor), a subsidiary of the Adviser,
serves as the distributor for the Fund's shares. Colonial Investors Service
Center, Inc. (Transfer Agent), an affiliate of the Adviser, serves as the
shareholder services and transfer agent for the Fund. Each of the Adviser,
Distributor and Transfer Agent is an indirect subsidiary of Liberty Financial
Companies, Inc. which in turn is an indirect subsidiary of Liberty Mutual
Insurance Company (Liberty Mutual). Liberty Mutual is considered to be the
controlling entity of the Adviser and its
10
<PAGE>
affiliates. Liberty Mutual is an underwriter of workers' compensation insurance
and a property and casualty insurer in the U.S.
The Adviser furnishes the Fund with investment management, accounting and
administrative personnel and services, office space and other equipment and
services at the Adviser's expense. For these services, the Fund paid the Adviser
0.50% of the Fund's average daily net assets in fiscal year 1996.
Richard A. Stevens, Vice President of the Adviser, has managed or co-managed the
Fund since September, 1995. Prior to co-managing the Fund, Mr. Stevens was a
Senior Research Analyst for the Adviser. Prior to joining the Adviser in 1994,
Mr. Stevens was an Investment Analyst for Back Bay Advisors.
The Adviser also provides pricing and bookkeeping services to the Fund for a
monthly fee of $2,250 plus a percentage of the Fund's average net assets over
$50 million. The Transfer Agent provides transfer agency and shareholder
services to the Fund for a fee of 0.18% annually of average net assets plus
certain out-of-pocket expenses. Effective January 1, 1998, the transfer agency
and shareholder services fee will be reduced to 0.17% annually of average net
assets plus certain out-of-pocket expenses.
Each of the foregoing fees is subject to any reimbursement or fee waiver to
which the Adviser may agree.
The Adviser places all orders for the purchase and sale of portfolio securities.
In selecting broker-dealers, the Adviser may consider research and brokerage
services furnished by such broker-dealers to the Adviser and its affiliates and
may, in recognition of the research and brokerage services provided, pay the
selected broker-dealer a higher commission than would have been charged by
another broker-dealer not providing such services. Subject to seeking best
execution, the Adviser may consider sales of shares of the Fund (and of certain
other Colonial funds) in selecting broker-dealers for portfolio security
transactions.
HOW THE FUND VALUES ITS SHARES
Per share net asset value is calculated by dividing the total value of each
Class's net assets by its number of outstanding shares. Shares of the Fund are
valued as of the close of the New York Stock Exchange (Exchange) (normally 4:00
p.m. Eastern time) each day the Exchange is open. Portfolio securities for which
market quotations are readily available are valued at current market value.
Short-term investments maturing in 60 days or less are valued at amortized cost
when the Adviser determines, pursuant to procedures adopted by the Trustees,
that such cost approximates current market value. All other securities and
assets are valued at their fair value following procedures adopted by the
Trustees.
DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code and to distribute to shareholders net income monthly and
any net realized gain at least annually. The Fund generally declares
distributions daily. Distributions are invested in additional shares of the same
Class of the Fund at net asset value unless the shareholder elects to receive
cash. Regardless of the shareholder's election, distributions of $10 or less
will not be paid in cash to shareholders but will be invested in additional
shares of the same Class of the Fund at net asset value. To change your
election, call the Transfer Agent for information. Whether you receive taxable
distributions in cash or in additional fund shares, you must report them as
taxable income unless you are a tax-exempt institution. Each January,
information on the amount and nature of distributions for the prior year is sent
to shareholders.
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<PAGE>
The Fund has a significant capital loss carry forward and, until it is
exhausted, it is unlikely that capital gains distributions will be made. Any
capital gains will, however, be reflected in the net asset value.
HOW TO BUY SHARES
Shares of the Fund are offered continuously. Orders received in good form prior
to the time at which the Fund values its shares (or placed with a financial
service firm before such time and transmitted by the financial service firm
before the Fund processes that day's share transactions) will be processed based
on that day's closing net asset value, plus any applicable initial sales charge.
The minimum initial investment is $1,000; subsequent investments may be as small
as $50. The minimum initial investment for the Colonial Fundamatic program is
$50 and the minimum initial investment for a Colonial retirement account is $25.
Certificates will not be issued for Class B and Class C shares and there are
some limitations on the issuance of Class A share certificates. The Fund may
refuse any purchase order for its shares. See the Statement of Additional
Information for more information.
Class A Shares. Class A shares are offered at net asset value plus an initial
sales charge as follows:
Initial Sales Charge
---------------------------------
Retained
by
Financial
Service
as % of Firm
-------------------- as % of
Amount Offering Offering
Amount Purchased Invested Price Price
Less than $50,000 4.99% 4.75% 4.25%
$50,000 to less than
$100,000 4.71% 4.50% 4.00%
$100,000 to less than
$250,000 3.63% 3.50% 3.00%
$250,000 to less than
$500,000 2.56% 2.50% 2.00%
$500,000 to less than
$1,000,000 2.04% 2.00% 1.75%
$1,000,000 or more 0.00% 0.00% 0.00%
On purchases of $1 million or more, the Distributor pays the financial service
firm a cumulative commission as follows:
Amount Purchased Commission
First $3,000,000 1.00%
Next $2,000,000 0.50%
Over $5,000,000 0.25%(1)
(1) Paid over 12 months but only to the extent the shares remain outstanding.
In determining the sales charge and commission applicable to a new purchase
under the above schedules, the amount of the current purchase is added to the
current value of shares previously purchased and still held. If a purchase
results in an account having a value from $1 million to $5 million, then the
shares purchased will be subject to a 1.00% contingent deferred sales charge,
payable to the Distributor, if redeemed within 18 months from the first day of
the month following the purchase. If the purchase results in an account having a
value in excess of $5 million, the contingent deferred sales charge will not
apply to the portion of the purchased shares comprising such excess amount.
Class B Shares. Class B shares are offered at net asset value, without an
initial sales charge, and are subject to a 0.75% annual distribution fee for
approximately eight years (at which time they automatically convert to Class A
shares not bearing a distribution fee) and a declining contingent deferred sales
charge if redeemed within six years after purchase. As shown below, the amount
of the contingent deferred sales charge depends on the number of years after
purchase that the redemption occurs:
Years Contingent Deferred
After Purchase Sales Charge
0-1 5.00%
1-2 4.00%
2-3 3.00%
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<PAGE>
3-4 3.00%
4-5 2.00%
5-6 1.00%
More than 6 0.00%
Year one ends one year after the end of the month in which the purchase was
accepted and so on.
The Distributor pays financial service firms a commission of 4.00% on Class B
share purchases.
Class C Shares. Class C shares are offered at net asset value and are subject to
a 0.75% annual distribution fee and a 1.00% contingent deferred sales charge on
redemptions made within one year after the end of the month in which the
purchase was accepted. The Distributor has voluntarily agreed to waive a portion
of the distribution fee so that it will not exceed 0.60% annually. This waiver
may be terminated by the Distributor at any time without shareholder approval.
The Distributor pays financial service firms an initial commission of 1.00% on
Class C share purchases and an ongoing commission of 0.55% annually commencing
after the shares purchased have been outstanding for one year. Payment of the
ongoing commission is conditioned on receipt by the Distributor of the 0.60%
annual distribution fee referred to above. The commission may be reduced or
eliminated if the distribution fee paid by the Fund is reduced or eliminated for
any reason.
General. All contingent deferred sales charges are deducted from the amount
redeemed, not the amount remaining in the account, and are paid to the
Distributor. Shares issued upon distribution reinvestment and amounts
representing appreciation are not subject to a contingent deferred sales charge.
The contingent deferred sales charge is imposed on redemptions which result in
the account value falling below its Base Amount (the total dollar value of
purchase payments in the account reduced by prior redemptions on which a
contingent deferred sales charge was paid and any exempt redemption). When a
redemption subject to a contingent deferred sales charge is made, generally
older shares will be redeemed first unless the shareholder instructs otherwise.
See the Statement of Additional Information for more information.
Which Class is more beneficial to an investor depends on the amount and intended
length of the investment. Large investments, qualifying for a reduced Class A
sales charge, avoid the distribution fee. Investments in Class B shares have
100% of the purchase invested immediately. Investors investing for a relatively
short period of time might consider Class C shares. Purchases of $250,000 or
more must be for Class A or Class C shares. Purchases of $1,000,000 or more must
be for Class A shares. Consult your financial service firm.
Financial service firms may receive different compensation rates for selling
different classes of shares. The Distributor may pay additional compensation to
financial service firms which have made or may make significant sales.
Special Purchase Programs. The Fund allows certain investors or groups of
investors to purchase shares with reduced or without initial or contingent
deferred sales charges. These programs are described in the Statement of
Additional Information under "Programs for Reducing or Eliminating Sales
Charges."
Shareholder Services and Account Fees. A variety of shareholder services are
available. For more information about these services or your account, call
1-800-345-6611. Some services are described in the attached account application.
A shareholder's manual explaining all available services will be provided upon
request.
In June of any year, the Fund may deduct $10 (payable to the Transfer Agent)
from accounts valued at less than $1,000 unless the account value has dropped
below $1,000 solely as a result of share value depreciation. Shareholders will
receive 60 days' written
13
<PAGE>
notice to increase the account value before the fee is deducted. The Fund may
also deduct annual maintenance and processing fees (payable to the Transfer
Agent) in connection with certain retirement plan accounts. See "Special
Purchase Programs/Investor Services" in the Statement of Additional Information
for more information.
HOW TO SELL SHARES
Shares of the Fund may be sold on any day the Exchange is open, either directly
to the Fund or through your financial service firm. Sale proceeds generally are
sent within seven days (usually on the next business day after your request is
received in good form). However, for shares recently purchased by check, the
Fund will send proceeds as soon as the check has cleared (which may take up to
15 days).
Selling Shares Directly To The Fund. Send a signed letter of instruction or
stock power form to the Transfer Agent, along with any certificates for shares
to be sold. The sale price is the net asset value (less any applicable
contingent deferred sales charge) next calculated after the Fund receives the
request in proper form. Signatures must be guaranteed by a bank, a member firm
of a national stock exchange or another eligible guarantor institution. Stock
power forms are available from your financial service firm, the Transfer Agent
and many banks. Additional documentation is required for sales by corporations,
agents, fiduciaries, surviving joint owners and individual retirement account
holders. For details contact:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Selling Shares Through Financial Service Firms. Financial service firms must
receive requests prior to the time at which the Fund values its shares to
receive that day's price, are responsible for furnishing all necessary
documentation to the Transfer Agent and may charge for this service.
General. The sale of shares is a taxable transaction for income tax purposes and
may be subject to a contingent deferred sales charge. The contingent deferred
sales charge may be waived under certain circumstances. See the Statement of
Additional Information for more information. Under unusual circumstances, the
Fund may suspend repurchases or postpone payment for up to seven days or longer,
as permitted by federal securities law.
HOW TO EXCHANGE SHARES
Except as described below with respect to money market funds, Fund shares may be
exchanged at net asset value among shares of the same class of most Colonial
funds. Shares will continue to age without regard to the exchange for purposes
of conversion and determining the contingent deferred sales charge, if any, upon
redemption. Carefully read the prospectus of the fund into which the exchange
will go before submitting the request. Call 1-800-426-3750 to receive a
prospectus and an exchange authorization form. Call 1-800-422-3737 to exchange
shares by telephone. An exchange is a taxable capital transaction. The exchange
service may be changed, suspended or eliminated on 60 days' written notice. The
Fund will terminate the exchange privilege as to a particular shareholder if the
Adviser determines, in its sole and absolute discretion, that the shareholder's
exchange activity is likely to adversely impact the Adviser's ability to manage
the Fund's investments in accordance with its investment objectives or otherwise
harm the Fund or its remaining shareholders.
Class A Shares. An exchange from a money market fund into a non-money market
fund will be at the applicable offering price next determined (including sales
charge), except for amounts on which an initial sales charge previously was
paid. Non-money market fund
14
<PAGE>
shares must be held for five months before qualifying for exchange to a fund
with a higher sales charge, after which, exchanges are made at the net asset
value next determined.
Class B Shares. Exchanges of Class B shares are not subject to the contingent
deferred sales charge. However, if shares are redeemed within six years after
the original purchase, a contingent deferred sales charge will be assessed using
the schedule of the fund into which the original investment was made.
Class C Shares. Exchanges of Class C shares are not subject to the contingent
deferred sales charge. However, if shares are redeemed within one year after the
original purchase, a 1.00% contingent deferred sales charge will be assessed.
Only one "roundtrip" exchange of the Fund's Class C shares may be made per three
month period, measured from the date of the initial purchase. For example, an
exchange from Fund A to Fund B and back to Fund A would be permitted only once
during each three month period.
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisers are automatically eligible to
exchange Fund shares and redeem up to $50,000 of Fund shares by calling
1-800-422-3737 toll-free any business day between 9:00 a.m. and the time at
which the Fund values its shares. Telephone redemption privileges for larger
amounts may be elected on the account application. The Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine and may be liable for losses related to unauthorized or
fraudulent transactions in the event reasonable procedures are not employed.
Such procedures include restrictions on where proceeds of telephone redemptions
may be sent, limitations on the ability to redeem by telephone shortly after an
address change, recording of telephone lines and requirements that the redeeming
shareholder and/or their financial adviser provide certain identifying
information. Shareholders and/or their financial advisers wishing to redeem or
exchange shares by telephone may experience difficulty in reaching the Fund at
its toll-free telephone number during periods of drastic economic or market
changes. In that event, shareholders and/or their financial advisers should
follow the procedures for redemption or exchange by mail as described above
under "How to Sell Shares." The Adviser, the Transfer Agent and the Fund reserve
the right to change, modify, or terminate the telephone redemption or exchange
services at any time upon prior written notice to shareholders. Shareholders
and/or their financial advisers are not obligated to transact by telephone.
12B-1 PLAN
Under a 12b-1 Plan, the Fund pays the Distributor monthly a service fee at the
annual rate of 0.25% of the Fund's net assets attributed to each Class of
shares. The 12b-1 Plan also requires the Fund to pay the Distributor monthly a
distribution fee at the annual rate of 0.75% of the average daily net assets
attributed to its Class B and Class C shares. The Distributor has voluntarily
agreed to waive a portion of the Class C share distribution fee so that it does
not exceed 0.60% annually. The Distributor may terminate this waiver at any time
without shareholder approval. Because the Class B and Class C shares bear the
additional distribution fee, their dividends will be lower than the dividends of
Class A shares. Class B shares automatically convert to Class A shares,
approximately eight years after the Class B shares were purchased. Class C
shares do not convert. The multiple class structure could be terminated should
certain Internal Revenue Service rulings be rescinded. See the Statement of
Additional Information for more information. The Distributor uses the fees to
defray the cost of commissions and service fees paid to financial service firms
which have sold Fund shares, and to defray other expenses such as sales
literature, prospectus printing and distribution, shareholder servicing costs
and compensation to wholesalers. Should the fees exceed the Distributor's
expenses in any
15
<PAGE>
year, the Distributor would realize a profit. The Plan also
authorizes other payments to the Distributor and its affiliates (including the
Adviser) which may be construed to be indirect financing of sales of Fund
shares.
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized in 1985. The Fund
represents the entire interest in a separate portfolio of the Trust.
The Trust is not required to hold annual shareholder meetings, but special
meetings may be called for certain purposes. Shareholders receive one vote for
each Fund share. Shares of the Trust vote together except when required by law
to vote separately by fund or by class. Shareholders owning in the aggregate ten
percent of Trust shares may call meetings to consider removal of Trustees. Under
certain circumstances, the Trust will provide information to assist shareholders
in calling such a meeting. See the Statement of Additional Information for more
information.
16
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
S&P
AAA bonds have the highest rating assigned by S&P. The obligor's capacity to
meet its financial commitment on the obligation is extremely strong.
AA bonds differ from the highest rated obligations only in small degree. The
obligor's capacity to meet its financial commitment on the obligation is very
strong.
A bonds are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB bonds exhibit 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.
BB, B, CCC and CC bonds are regarded as having significant speculative
characteristics. BB indicates the least degree of speculation and C the highest.
While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB bonds are less vulnerable to non-payment than other speculative issues.
However, they face major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B bonds are more vulnerable to nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC bonds are currently vulnerable to nonpayment, and are dependent upon
favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation.
CC bonds are currently highly vulnerable to nonpayment.
17
<PAGE>
C ratings may be used to cover a situation where a bankruptcy petition has been
filed or similar action has been taken, but payments on this obligation are
being continued.
D bonds are in payment default. The D rating category is used when payments on
an obligation are not made on the date due even if the applicable grace period
has not expired, unless S&P believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or minus(-): The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
r This symbol is attached to the rating of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
MOODY'S
Aaa bonds are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edge". Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While 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 are judged to be of high quality by all standards. Together with Aaa
bonds they comprise what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large as
in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A bonds possess many favorable investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa bonds are considered as medium grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba bonds are judged to have speculative elements; their future cannot be
considered as well secured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B bonds generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa bonds are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
18
<PAGE>
Ca bonds represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
C bonds are the lowest rated class of bonds and issues so rated can be regarded
as having extremely poor prospects of ever attaining any real investment
standing.
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<PAGE>
Investment Adviser
Colonial Management Associates, Inc.
One Financial Center
Boston, MA 02111-2621
Distributor
Colonial Investment Services, Inc.
One Financial Center
Boston, MA 02111-2621
Custodian
Boston Safe Deposit and Trust Company
One Boston Place
Boston, MA 02108-2624
Shareholder Services and Transfer Agent
Colonial Investors Service Center, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-345-6611
Independent Accountants
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110-2624
Legal Counsel
Ropes & Gray
One International Place
Boston, MA 02110-2624
April 30, 1997; Revised August 1, 1997
COLONIAL INCOME
FUND PROSPECTUS
Colonial Income Fund seeks as high a level of current income and total return,
as is consistent with prudent risk, by investing primarily in corporate debt
securities.
For more detailed information about the Fund, call the Adviser at 1-800-426-3750
for the April 30, 1997; Revised August 1, 1997 Statement of Additional
Information.
Your financial service firm is:
- ----------------------------- ------------------------------
NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
- ----------------------------- ------------------------------
Printed in U.S.A.
20
<PAGE>
[COLONIAL FLAG LOGO]
Colonial Mutual Funds
_________________________________________________________________
Please send your completed application to:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, Massachusetts 02105-1722
New Account Application/Revision to Existing Account
To open a new account, complete sections 1, 2, 3, & 7.
To apply for special services for a new or existing account, complete sections
4, 5, 6, or 8 as appropriate.
___ Please check here if this is a revision.
1-----------Account Ownership--------------
Please choose one of the following.
__Individual: Print your name, Social Security #, U.S. citizen status.
__Joint Tenant: Print all names, the Social Security # for the first person,
and his/her U.S. citizen status.
__Uniform Gift to Minors: Names of custodian and minor, minor's Social Security
#, minor's U.S. citizen status.
__Corporation, Association, Partnership: Include full name, Taxpayer I.D. #.
__Trust: Name of trustee, trust title & date, and trust's Taxpayer I.D. #.
______________________________________
Name of account owner
______________________________________
Name of joint account owner
______________________________________
Street address
______________________________________
Street address
______________________________________
City, State, and Zip
______________________________________
Daytime phone number
______________________________________
Social Security # or Taxpayer I.D. #
Are you a U.S. citizen? ___Yes ___No
______________________________________
If no, country of permanent residence
______________________________________
Owner's date of birth
______________________________________
Account number (if existing account)
2 -----Colonial Fund(s) You Are Purchasing--------
Your investment will be made in Class A shares if no class is indicated.
Certificates are not available for Class B or D shares. If no distribution
option is selected, distributions will be reinvested in additional Fund
shares. Please consult your financial adviser to determine which class of
shares best suits your needs.
Fund Fund Fund
________________ ___________________ _____________________
$_______________ $__________________ $____________________
Amount Amount Amount
Class
___ A Shares ___ B Shares (less than $250,000) ___ C Shares (Adjustable Rate
U.S. Government Fund only)
___ D Shares (less than $500,000, available on certain funds; see prospectus)
Method of Payment
Choose one
___Check payable to the Fund
___Bank wired on ____/____/____
(Date) Wire/Trade confirmation #__________________
Ways to Receive Your Distributions
Choose one
___Reinvest dividends and capital gains
___Dividends and capital gains in cash
___Dividends in cash; reinvest capital gains
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection Complete Bank Information
in section 4B. I understand that my bank must be a member of the
Automated Clearing House (ACH).
Distributions of $10.00 or less will automatically be reinvested in additional
fund shares.
3---Your Signature & Taxpayer I.D. Number Certification----
Each person signing on behalf of an entity represents that his/her actions are
authorized.
I have received and read each appropriate Fund prospectus and understand that
its terms are incorporated by reference into this application. I understand
that this application is subject to acceptance. I understand that certain
redemptions may be subject to a contingent deferred sales charge. It is agreed
that the Fund, all Colonial Companies and their officers, directors, agents,
and employees will not be liable for any loss, liability, damage, or expense
for relying upon this application or any instruction believed genuine.
I certify, under penalties of perjury, that:
1. The Social Security # or Taxpayer I.D. # provided is correct.
You must cross out Item 2a, b or c below only if you have been notified by the
Internal Revenue Service (IRS) that you are currently subject to back-up
withholding because of under-reporting interest or dividends on you tax return.
2. I am not subject to back-up withholding because: (a) I am exempt from back-
up withholding, or (b) I have not been notified by the IRS that I am
subject to back-up withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified me that I am no longer
subject to back-up withholding.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholdings.
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
4--------Ways to Withdraw from Your Fund-------
It may take up to 30 days to activate the following features. Complete only
the section(s) that apply to the features you would like.
A. Systematic Withdrawal Plan (SWP)
You can receive monthly, quarterly, or semiannual checks from your account in
any amount you select, with certain limitations. Your redemption checks can
be sent to you at the address of record for your account, to your bank
account, or to another person you choose. The value of the shares in your
account must be at least $5,000 and you must reinvest all of your
distributions. Checks will be processed on the 10th calendar day of the month
or the following business day. If you receive your SWP payment via electronic
funds transfer (EFT), you may request it to be processed any day of the month.
Withdrawals in excess of 12% annually of your current account value will not be
accepted. Redemptions made in addition to SWP payments may be subject to a
contingent deferred sales charge for Class B or Class D shares. Please consult
your financial or tax adviser before electing this option.
Funds for Withdrawal:
___________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________
or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _____/_____ (day, if indicating EFT,month).
___________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________
or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _____/_____ (day,if indicating EFT,month).
Payment Instructions
Send the payment to (choose one):
__My address of record.
__My bank account via EFT. Please complete the Bank Information section below.
All EFT transactions will be made two business days after the processing date.
Your bank must be a member of the Automated Clearing House system.
__The payee listed at right. If more than one payee, provide the name,
address, payment amount, and frequency for other payees (maximum of 5) on
a separate sheet. If you are adding this service to an existing account,
please sign below and have your signature(s) guaranteed.
______________________________________________
Name of payee
______________________________________________
Address of payee
______________________________________________
City
______________________________________________
State Zip
______________________________________________
Payee's bank account number, if applicable
B. Telephone Withdrawal Options
All telephone transaction calls are recorded. These options are not available
for retirement accounts. Please sign below and have your signature(s)
guaranteed.
1. Fast Cash
You are automatically eligible for this service. You or your financial
adviser can withdraw up to $50,000 from your account and have it sent to your
address of record. For your protection, this service is only available on
accounts that have not had an address change within 30 days of the redemption
request.
2. Telephone Redemption
__I would like the Telephone Redemption privilege either by federal fund wire
or EFT. Telephone redemptions over $1,000 will be sent via federal fund wire,
usually on the next business day ($7.50 will be deducted). Redemptions of
$1,000 or less will be sent by check to your designated bank.
3. On-Demand EFT Redemption
__I would like the On-Demand EFT Redemption Privilege. Proceeds paid via EFT
will be credited to your bank account two business days after the process
date. You or your financial adviser may withdraw shares from your fund account
by telephone and send your money to your bank account. If you are adding this
service to an existing account, complete the Bank Information section below
and have all shareholder signatures guaranteed.
Colonial's and the Fund's liability is limited when following telephone
instructions; a shareholder may suffer a loss from an unauthorized transaction
reasonably believed by Colonial to have been authorized.
Bank Information (For Sections A and B Above)
I authorize deposits to the following bank account:
____________________________________________________________
Bank name City Bank account number
____________________________________________________________
Bank street address State Zip Bank routing # (your bank
can provide this)
X__________________________________
Signature of account owner(s)
X__________________________________
Signature of account owner(s) Place signature guarantee here.
5-----Ways to Make Additional Investments--------
These services involve continuous investments regardless of varying share
prices. Please consider your ability to continue purchases through periods of
price fluctuations. Dollar cost averaging does not assure a profit or protect
against loss in declining markets.
A. Automatic Dividend Diversification
Please diversify my portfolio by investing distributions from one fund into
another Colonial fund. These investments will be made in the same share class
and without sales charges. Accounts must be identically registered. I have
carefully read the prospectus for the fund(s) listed below.
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
B. Automated Dollar Cost Averaging
This program allows you to automatically have money from any Colonial fund in
which you have a balance of at least $5,000 exchanged into the same share
class of up to four other identically registered Colonial accounts, on a
monthly basis. The minimum amount for each exchange is $100. Please complete
the section below.
____________________________________
Fund from which shares will be sold
$_________________________
Amount to redeem monthly
1____________________________________
Fund to invest shares in
$_________________________
Amount to invest monthly
2____________________________________
Fund to invest shares in
$_________________________
Amount to invest monthly
C. Fundamatic/On-Demand EFT Purchase
Fundamatic automatically transfers the specified amount from your bank
checking account to your Colonial fund account by electronic funds transfer on
any specified day of the month. You will receive the applicable price two
business days after the receipt of your request. Your bank needs to be a
member of the Automated Clearing House System. Please attach a blank check
marked "VOID." Also, complete the section below.
1____________________________________
Fund name
_________________________________
Account number
$_____________________ _________________
Amount to transfer Month to start
2___________________________________
Fund name
________________________________
Account number
$_____________________ _________________
Amount to transfer Month to start
__On-Demand Purchase (will be automatically established if you choose
Fundamatic)
__Fundamatic Frequency
__Monthly or __Quarterly
Check one:
__EFT- Choose any day of the month_____________________
__Paper Draft-Choose either the:
__5th day of the month
__20th day of the month
Authorization to honor checks drawn by Colonial Investors Service Center,
Inc. Do Not Detach. Make sure all depositors on the bank account sign to
the far right. Please attach a blank check marked "VOID" here. See reverse
for bank instructions.
I authorize Colonial to draw on my bank account, by check or electronic funds
transfer, for an investment in a Colonial fund. Colonial and my bank are not
liable for any loss arising from delays or dishonored draws. If a draw is not
honored, I understand that notice may not be given and Colonial may reverse
the purchase and charge my account $15.
______________________________________
Bank name
______________________________________
Bank street address
______________________________________
Bank street address
______________________________________
City State Zip
______________________________________
Bank account number
______________________________________
Bank routing #
X_____________________________________
Depositor's Signature(s)
Exactly as appears on bank records
X_____________________________________
Depositor's Signature(s)
Exactly as appears on bank records
6------------Ways to Reduce Your Sales Charges------------
These services can help you reduce your sales charge while increasing your
share balance over the long term.
A. Right of Accumulation
If you, your spouse or your children own any other shares in other
Colonial funds, you may be eligible for a reduced sales charge. The combined
value of your accounts must be $50,000 or more. Class A shares of money market
funds are not eligible unless purchased by exchange from another Colonial fund.
The sales charge for your purchase will be based on the sum of the purchase(s)
added to the value of all shares in other Colonial funds at the previous
day's public offering price.
__Please link the accounts listed below for Right of Accumulation privileges,
so that this and future purchases will receive any discount for which they
are eligible.
_____________________________________
Name on account
_____________________________________
Account number
_____________________________________
Name on account
_____________________________________
Account number
B. Statement of Intent
If you agree in advance to invest at least $50,000 within 13 months, you'll
pay a lower sales charge on every dollar you invest. If you sign a Statement
of Intent within 90 days after you establish your account, you can receive a
retroactive discount on prior investments. The amount required to receive a
discount varies by fund; see the sales charge table in the "How to Buy Shares"
section of your fund prospectus.
__I want to reduce my sales charge.
I agree to invest $ _______________ over a 13-month period starting
______/______/ 19______ (not more than 90 days prior to this application). I
understand an additional sales charge must be paid if I do not complete this
Statement of Intent.
7-------------Financial Service Firm---------------------
To be completed by a Representative of your financial service firm.
This application is submitted in accordance with our selling agreement with
Colonial Investment Services, Inc. (CISI), the Fund's prospectus, and this
application. We will notify CISI, Inc., of any purchase made under a Statement
of Intent, Right of Accumulation, or Sponsored Arrangement. We guarantee the
signatures on this application and the legal capacity of the signers.
_____________________________________
Representative's name
_____________________________________
Representative's number
_____________________________________
Representative's phone number
_____________________________________
Account # for client at financial
service firm
_____________________________________
Branch office address
_____________________________________
City
_____________________________________
State Zip
_____________________________________
Branch office number
_____________________________________
Name of financial service firm
_____________________________________
Main office address
_____________________________________
Main office address
_____________________________________
City
_____________________________________
State Zip
X____________________________________
Authorized signature
8----------Request for a Combined Quarterly Statement Mailing-----------
Colonial can mail all of your quarterly statements in one envelope. This
option simplifies your record keeping and helps reduce fund expenses.
__I want to receive a combined quarterly mailing for all my accounts. Please
indicate accounts to be linked.______________________
Fundamatic (See Reverse Side)
Applications must be received before the start date for processing.
This program's deposit privilege can be revoked by Colonial without prior
notice if any check is not paid upon presentation. Colonial has no obligation
to notify the shareholder of non-payment of any draw. This program may be
discontinued by Colonial by written notice at least 30 business days prior
to the due date of any draw or by the shareholder at any time.
To the Bank Named on the Reverse Side:
Your depositor has authorized Colonial Investors Service Center, Inc. to
collect amounts due under an investment program from his/her personal checking
account. When you pay and charge the draws to the account of your depositor
executing the authorization payable to the order of Colonial Investors
Service Center, Inc., Colonial Investment Services, Inc., hereby indemnifies
and holds you harmless from any loss (including reasonable expenses) you may
suffer from honoring such draw, except any losses due to your payment of any
draw against insufficient funds.
SH-938B-0396
<PAGE>
COLONIAL TRUST I
Cross Reference Sheet
---------------------
(Colonial Income Fund)
Item Number of Form N-1A Statement of Additional
- ------------------------ Information Location or Caption
-------------------------------
Part B
- ------
10. Cover Page
11. Table of Contents
12. Not Applicable
13. Investment Objective and Policies;
Fundamental Investment Policies;
Other Investment Policies;
Portfolio Turnover;
Miscellaneous Investment Practices
14. Fund Charges and Expenses; Management of the
Colonial Funds
15. Fund Charges and Expenses
16. Fund Charges and Expenses;
Management of the Colonial Funds
17. Fund Charges and Expenses;
Management of the Colonial Funds
18. Shareholder Meetings; Shareholder Liability
19. How to Buy Shares;
Determination of Net Asset Value;
Suspension of Redemptions;
Special Purchase Programs/Investor Services;
Programs for Reducing or Eliminating Sales
Charges; How to Sell Shares; How to Exchange
Shares
20. Taxes
21. Fund Charges and Expenses;
Management of the Colonial Funds
22. Fund Charges and Expenses;
Investment Performance;
Performance Measures
23. Independent Accountants
<PAGE>
COLONIAL INCOME FUND
Statement of Additional Information
April 30, 1997; Revised August 1, 1997
This Statement of Additional Information (SAI) contains information which may be
useful to investors but which is not included in the Prospectus of Colonial
Income Fund (Fund). This SAI is not a prospectus and is only authorized for
distribution when accompanied or preceded by the Prospectus of the Fund dated
April 30, 1997; Revised August 1, 1997. This SAI should be read together with
the Prospectus and the Fund's most recent annual report dated December 31, 1996.
Investors may obtain a free copy of the Prospectus from Colonial Investment
Services, Inc., One Financial Center, Boston, MA 02111-2621.
Part 1 of this SAI contains specific information about the Fund. Part 2 includes
information about the Colonial funds generally and additional information about
certain securities and investment techniques described in the Fund's Prospectus.
TABLE OF CONTENTS
Part 1 Page
Definitions
Investment Objective and Policies
Fundamental Investment Policies
Other Investment Policies
Portfolio Turnover
Fund Charges and Expenses
Investment Performance
Custodian
Independent Accountants
Part 2
Miscellaneous Investment Practices
Taxes
Management of the Colonial Funds
Determination of Net Asset Value
How to Buy Shares
Special Purchase Programs/Investor Services
Programs for Reducing or Eliminating Sales Charges
How to Sell Shares
Distributions
How to Exchange Shares
Suspension of Redemptions
Shareholder Liability
Shareholder Meetings
Performance Measures
Appendix I
Appendix II
IF-16/941D-0897
a
<PAGE>
Part 1
COLONIAL INCOME FUND
Statement of Additional Information
April 30, 1997; Revised August 1, 1997
DEFINITIONS
"Trust" Colonial Trust I
"Fund" Colonial Income Fund
"Adviser" Colonial Management Associates, Inc., the Fund's investment adviser
"CISI" Colonial Investment Services, Inc., the Fund's distributor
"CISC" Colonial Investors Service Center, Inc., the Fund's shareholder
services and transfer agent
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes its investment objective and investment
policies. Part 1 of this SAI includes additional information concerning, among
other things, the investment restrictions of the Fund. Part 2 contains
additional information about the following securities and investment techniques
that are described or referred to in the Prospectus:
Lower Rated Debt Securities
Zero Coupon Securities
Step Coupon Bonds
Pay-In-Kind Securities
Forward Commitments (When Issued and Delayed Delivery Securities)
Repurchase Agreements
Futures Contracts and Related Options (interest rate futures and
related options only)
Foreign Securities
Foreign Currency Transactions
Except as indicated below under "Fundamental Investment Policies," the Fund's
investment policies are not fundamental, and the Trustees may change the
policies without shareholder approval.
FUNDAMENTAL INVESTMENT POLICIES
The Investment Company Act of 1940 (Act) provides that a "vote of a majority of
the outstanding voting securities" means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund, or (2) 67% or more of
the shares present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. The following fundamental
investment policies cannot be changed without such a vote.
Total assets and net assets are determined at current value for purposes of
compliance with investment restrictions and policies. All percentage limitations
will apply at the time of investment and are not violated unless an excess or
deficiency occurs as a result of such investment. For the purpose of the Act
diversification requirement, an issuer is the entity whose revenues support the
security.
The Fund may:
1. Issue senior securities only through borrowing money from banks for
temporary or emergency purposes up to 10% of its net assets; however, the
Fund will not purchase additional portfolio securities while borrowings
exceed 5% of net assets;
2. Only own real estate acquired as a result of owning securities and not
more than 5% of total assets;
3. Invest up to 10% of its net assets in illiquid assets;
4. Purchase and sell futures contracts and related options so long as the
total initial margin and premiums on contracts do not exceed 5% of its
total assets;
5. Underwrite securities issued by others only when disposing of portfolio
securities;
6. Make loans through lending of securities not exceeding 30% of total
assets, through the purchase of debt instruments or similar evidences of
indebtedness typically sold privately to financial institutions and
through repurchase agreements; and
7. Not concentrate more than 25% of its total assets in any one industry, or
with respect to 75% of total assets purchase any security (other than
obligations of the U.S. Government and cash items including receivables)
if as a result more than 5% of its total assets would then be invested in
securities of a single issuer, or purchase voting securities of an issuer
if, as a result of such purchase, the Fund would own more than 10% of the
outstanding voting shares of such issuer.
b
<PAGE>
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed without a
shareholder vote, the Fund may not:
1. Purchase securities on margin, but the Fund may receive short-term credit
to clear securities transactions and may make initial or maintenance
margin deposits in connection with futures transactions; and
2. Have a short securities position, unless the Fund owns, or owns rights
(exercisable without payment) to acquire, an equal amount of such
securities.
PORTFOLIO TURNOVER
Portfolio turnover for the last two fiscal years is included in the Prospectus
under "The Fund's Financial History." High portfolio turnover may cause the Fund
to realize capital gains which, if realized and distributed by the Fund, may be
taxable to shareholders as ordinary income. High portfolio turnover may result
in correspondingly greater brokerage commissions and other transaction costs,
which will be borne directly by the Fund.
FUND CHARGES AND EXPENSES
Under the Fund's management agreement, the Fund pays the Adviser a monthly fee
based on the average daily net assets of the Fund at the annual rate of 0.50%.
Recent Fees paid to the Adviser, CISI and CISC (for the fiscal years ended
December 31) (dollars in thousands)
1996 1995 1994
---- ---- ----
Management $852 $849 $814
Bookkeeping fee 69 69 67
Shareholder services and transfer
agent fee 385 384 377
12b-1 fees:
Service fee 425 426 406
Distribution fee (Class B) 271 223 161
Distribution fee (Class C) --- --- ---
---- ---- ----
Brokerage Commissions
The Fund did not pay brokerage commissions during the fiscal years ended
December 31, 1996, 1995 and 1994.
Trustees Fees
For the fiscal year ended December 31, 1996, and the calendar year ended
December 31, 1996, the Trustees received the following compensation for serving
as Trustees (a):
<TABLE>
<CAPTION>
Total Compensation
Aggregate From Trust And
Compensation Fund Complex Paid To The
From Fund For The Fiscal Year Trustees For The Calendar Year
Trustee Ended December 31, 1996 Ended December 31, 1996(b)
- ------- ----------------------- --------------------------
<S> <C> <C>
Robert J. Birnbaum $1,431 $ 92,000
Tom Bleasdale 1,643(c) 104,500(d)
Lora S. Collins 1,435 92,000
James E. Grinnell 1,449 93,000
William D. Ireland, Jr. 1,697 109,000
Richard W. Lowry 1,482 95,000
William E. Mayer 1,416 91,000
James L. Moody, Jr. 1,658(e) 106,500(f)
John J. Neuhauser 1,475 94,500
George L. Shinn 1,647 105,500
Robert L. Sullivan 1,585 102,000
Sinclair Weeks, Jr. 1,714 110,000
</TABLE>
(a) The Fund does not currently provide pension or retirement plan benefits to
the Trustees.
c
<PAGE>
(b) At December 31, 1996, the Colonial Funds complex consisted of 37 open-end
and 5 closed-end management investment company portfolios.
(c) Includes $812 payable in later years as deferred compensation.
(d) Includes $51,500 payable in later years as deferred compensation.
(e) Total compensation of $1,658 for the fiscal year ended December 31, 1996
will be payable in later years as deferred compensation.
(f) Total compensation of $106,500 for the calendar year ended December 31,
1996 will be payable in later years as deferred compensation.
The following table sets forth the amount of compensation paid to Messrs.
Birnbaum, Grinnell and Lowry in their capacities as Trustees or Directors of the
Liberty All-Star Equity Fund and of the Liberty All-Star Growth Fund, Inc.
(formerly known as The Charles Allmon Trust, Inc.) (together, Liberty Funds) for
service during the calendar year ended December 31, 1996:
Total Compensation
From Liberty Funds For The
Calendar Year Ended
Trustee December 31, 1996 (g)
Robert J. Birnbaum $25,000
James E. Grinnell 25,000
Richard W. Lowry 25,000
(g) At December 31, 1996, the Liberty Funds were advised by Liberty Asset
Management Company (LAMCO). LAMCO is an indirect wholly-owned subsidiary
of Liberty Financial Companies, Inc. (an intermediate parent of the
Adviser).
Ownership of the Fund
At June 30, 1997, the officers and Trustees of the Trust as a group beneficially
owned less than 1% of the outstanding shares of the Fund.
As of record on July 3, 1997, Merrill Lynch Pierce Fenner & Smith Inc., Attn:
Book Entry, Mutual Fund Operations, 4800 Deer Lake Dr., E 3rd Fl, Jacksonville,
FL 32216, owned 12.21% of the Fund's outstanding Class B Shares.
At June 30, 1997, there were 7,454 Class A and 2,632 Class B shareholders.
Sales Charges (for the fiscal years ended December 31) (dollars in thousands)
Class A Shares
1996 1995 1994
---- ---- ----
Aggregate initial sales charges on Fund
share sales $159 $204 $179
Initial sales charges retained by CISI 19 24 22
Class B Shares
1996 1995 1994
---- ---- ----
Aggregate contingent deferred sales charges
(CDSC) on Fund redemptions retained by CISI $142 $82 $60
12b-1 Plan, CDSC and Conversion of Shares
The Fund offers three classes of shares - Class A, Class B and Class C. The Fund
may in the future offer other classes of shares. The Trustees have approved a
12b-1 Plan (Plan) pursuant to Rule 12b-1 under the Act. Under the Plan, the Fund
pays CISI monthly a service fee at an annual rate of 0.25% of net assets
attributed to each Class of shares. The Fund also pays CISI monthly a
distribution fee at an annual rate of 0.75% of average daily net assets
attributed to Class B and Class C shares.
d
<PAGE>
The Distributor has voluntarily agreed to waive a portion of the Class C share
distribution fee so that it does not exceed 0.60% annually. CISI may use the
entire amount of such fees to defray the costs of commissions and service fees
paid to financial service firms (FSFs) and for certain other purposes. Since the
distribution and service fees are payable regardless of the amount of CISI's
expenses, CISI may realize a profit from the fees.
The Plan also authorizes any other payments by the Fund to CISI and its
affiliates (including the Adviser) to the extent that such payments might be
construed to be indirectly financing the distribution of Fund shares.
The Trustees believe the Plan could be a significant factor in the growth and
retention of Fund assets resulting in a more advantageous expense ratio and
increased investment flexibility which could benefit each class of Fund
shareholders. The Plan will continue in effect from year to year so long as
continuance is specifically approved at least annually by a vote of the
Trustees, including Trustees who are not interested persons of the Trust and
have no direct or indirect financial interest in the operation of the Plan or in
any agreements related to the Plan (Independent Trustees), cast in person at a
meeting called for the purpose of voting on the Plan. The Plan may not be
amended to increase materially the fee without approval by vote of a majority of
the outstanding voting securities of the relevant class of shares and all
material amendments of the Plan must be approved by the Trustees in the manner
provided in the foregoing sentence. The Plan may be terminated at any time by
vote of a majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the relevant class of shares. The continuance
of the Plan will only be effective if the selection and nomination of the
Trustees who are non-interested persons of the Trust is effected by such
disinterested Trustees.
Class A shares are offered at net asset value plus varying sales charges which
may include a CDSC. Class B shares are offered at net asset value and are
subject to a CDSC if redeemed within six years after purchase. Class C shares
are offered at net asset value and are subject to a 1.00% CDSC on redemptions
within one year after purchase. The CDSCs are described in the Prospectus.
No CDSC will be imposed on shares derived from reinvestment of distributions or
on amounts representing capital appreciation. In determining the applicability
and rate of any CDSC, it will be assumed that a redemption is made first of
shares representing capital appreciation, next of shares representing
reinvestment of distributions and finally of other shares held by the
shareholder for the longest period of time.
Eight years after the end of the month in which a Class B share is purchased,
such share and a pro rata portion of any shares issued on the reinvestment of
distributions will be automatically converted into Class A shares having an
equal value, which are not subject to the distribution fee.
Sales-related expenses (dollars in thousands) of CISI relating to the Fund for
the fiscal year ended December 31, 1996 were:
Class A Shares Class B Shares
Fees to FSFs $323 $302
Cost of sales material relating to the Fund
(including printing and mailing expenses) 12 12
Allocated travel, entertainment and other
promotional expenses (including advertising) 19 19
INVESTMENT PERFORMANCE
The Fund's Class A and Class B yields for the month ended December 31, 1996,
were 6.14% and 5.69%, respectively.
The Fund's average annual total returns at December 31, 1996, were:
Class A Shares
1 year 5 years 10 years
------ ------- --------
With sales charge of 4.75% (1.33)% 6.78% 7.49%
Without sales charge 3.59% 7.83% 8.01%
e
<PAGE>
Class B Shares
May 15, 1992
(commencement of investment operations)
1 year through December 31, 1996
------ -------------------------
With applicable CDSC (2.01)% (4.83% CDSC) 6.82% (2.00% CDSC)
Without CDSC 2.82% 7.16%
The Fund's Class A and Class B distribution rates at December 31, 1996, based on
the most recent month's distributions, annualized, and the maximum offering
price at the end of the month, were 6.60% and 6.16%, respectively.
See Part 2 of this SAI, "Performance Measures," for how calculations are made.
CUSTODIAN
Boston Safe Deposit and Trust Company is the Fund's custodian. The custodian is
responsible for safeguarding the Fund's cash and securities, receiving and
delivering securities and collecting the Fund's interest and dividends.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP are the Fund's independent accountants, providing audit and
tax return preparation services and assistance and consultation in connection
with the review of various Securities and Exchange Commission filings. The
financial statements incorporated by reference in this SAI have been so
incorporated, and the financial highlights included in the Prospectus have been
so included, in reliance upon the report of Price Waterhouse LLP given on the
authority of said firm as experts in accounting and auditing.
The financial statements and the Report of Independent Accountants appearing on
pages 6 through 25 of the December 31, 1996 Annual Report, are incorporated in
this SAI by reference.
f
STATEMENT OF ADDITIONAL INFORMATION
PART 2
The following information applies generally to most Colonial funds. "Colonial
funds" or "funds" include each series of Colonial Trust I, Colonial Trust II,
Colonial Trust III, Colonial Trust IV, Colonial Trust V, Colonial Trust VI and
Colonial Trust VII. In certain cases, the discussion applies to some but not all
of the Colonial funds, and you should refer to your Fund's Prospectus and to
Part 1 of this SAI to determine whether the matter is applicable to your Fund.
You will also be referred to Part 1 for certain data applicable to your Fund.
MISCELLANEOUS INVESTMENT PRACTICES
Part 1 of this Statement lists on page b which of the following investment
practices are available to your Fund. If an investment practice is not listed in
Part 1 of this SAI, it is not applicable to your Fund.
Short-Term Trading
In seeking the fund's investment objective, the Adviser will buy or sell
portfolio securities whenever it believes it is appropriate. The Adviser's
decision will not generally be influenced by how long the fund may have owned
the security. From time to time the fund will buy securities intending to seek
short-term trading profits. A change in the securities held by the fund is known
as "portfolio turnover" and generally involves some expense to the fund. These
expenses may include brokerage commissions or dealer mark-ups and other
transaction costs on both the sale of securities and the reinvestment of the
proceeds in other securities. If sales of portfolio securities cause the fund to
realize net short-term capital gains, such gains will be taxable as ordinary
income. As a result of the fund's investment policies, under certain market
conditions the fund's portfolio turnover rate may be higher than that of other
mutual funds. The fund's portfolio turnover rate for a fiscal year is the ratio
of the lesser of purchases or sales of portfolio securities to the monthly
average of the value of portfolio securities, excluding securities whose
maturities at acquisition were one year or less. The fund's portfolio turnover
rate is not a limiting factor when the Adviser considers a change in the fund's
portfolio.
Lower Rated Bonds
Lower rated bonds are those rated lower than Baa by Moody's, BBB by S&P, or
comparable debt unrated securities. Relative to debt securities of higher
quality:
1. an economic downturn or increased interest rates may have a more significant
effect on the yield, price and potential for default of lower rated bonds.
2. the secondary market for lower rated bonds may at times become less liquid
or respond to adverse publicity or investor perceptions, increasing the
difficulty in valuing or disposing of the bonds.
3. certain lower rated bonds do not pay interest in cash on a current basis.
However, the fund will accrue and distribute this interest on a current
basis, and may have to sell securities to generate cash for distributions.
4. the likelihood that lower rated bonds will help the fund achieve its
investment objective is more dependent on the Adviser's credit analysis.
5. lower rated bonds are less sensitive to interest rate changes, but are more
sensitive to adverse economic developments.
Small Companies
Smaller, less well established companies may offer greater opportunities for
capital appreciation than larger, better established companies, but may also
involve certain special risks related to limited product lines, markets, or
financial resources and dependence on a small management group. Their securities
may trade less frequently, in smaller volumes, and fluctuate more sharply in
value than securities of larger companies.
Foreign Securities
The fund may invest in securities traded in markets outside the United States.
Foreign investments can be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations. There may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing and financial
reporting
1
<PAGE>
standards comparable to those applicable to U.S. companies. Securities
of some foreign companies are less liquid or more volatile than securities of
U.S. companies, and foreign brokerage commissions and custodian fees may be
higher than in the United States. Investments in foreign securities can involve
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets
and imposition of withholding taxes on dividend or interest payments. Foreign
securities, like other assets of the fund, will be held by the fund's custodian
or by a subcustodian or depository. See also "Foreign Currency Transactions"
below.
The fund may invest in certain Passive Foreign Investment Companies (PFICs)
which may be subject to U.S. federal income tax on a portion of any "excess
distribution" or gain (PFIC tax) related to the investment. The PFIC tax is the
highest ordinary income rate, and it could be increased by an interest charge on
the deemed tax deferral.
The fund may possibly elect to include in its income its pro rata share of the
ordinary earnings and net capital gain of PFICs. This election requires certain
annual information from the PFICs which in many cases may be difficult to
obtain. An alternative election would permit the fund to recognize as income any
appreciation (but not depreciation) on its holdings of PFICs as of the end of
its fiscal year.
Zero Coupon Securities (Zeros)
The fund may invest in debt securities which do not pay interest, but instead
are issued at a deep discount from par. The value of the security increases over
time to reflect the interest accrued. The value of these securities may
fluctuate more than similar securities which are issued at par and pay interest
periodically. Although these securities pay no interest to holders prior to
maturity, interest on these securities is reported as income to the fund and
distributed to its shareholders. These distributions must be made from the
fund's cash assets or, if necessary, from the proceeds of sales of portfolio
securities. The fund will not be able to purchase additional income producing
securities with cash used to make such distributions and its current income
ultimately may be reduced as a result.
Step Coupon Bonds (Steps)
The fund may invest in debt securities which do not pay interest for a stated
period of time and then pay interest at a series of different rates for a series
of periods. In addition to the risks associated with the credit rating of the
issuers, these securities are subject to the volatility risk of zero coupon
bonds for the period when no interest is paid.
Tender Option Bonds
A tender option bond is a Municipal Security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the Municipal Security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate. The
Adviser will consider on an ongoing basis the creditworthiness of the issuer of
the underlying Municipal Securities, of any custodian, and of the third-party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying Municipal Securities and for other
reasons.
Pay-In-Kind (PIK) Securities
The fund may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are generally
high yield securities and in addition to the other risks associated with
investing in high yield securities are subject to the risks that the interest
payments which consist of additional securities are also subject to the risks of
high yield securities.
Money Market Instruments
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposits are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-term
needs. Participation Interests include the underlying securities and any related
guaranty, letter of credit, or collateralization arrangement which the fund
would be allowed to invest in directly.
Securities Loans
The fund may make secured loans of its portfolio securities amounting to not
more than the percentage of its total assets specified in Part 1 of this SAI,
thereby realizing additional income. The risks in lending portfolio securities,
as with other extensions of credit, consist
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of possible delay in recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. As a matter of policy,
securities loans are made to banks and broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or short-term
debt obligations at least equal at all times to the value of the securities on
loan. The borrower pays to the fund an amount equal to any dividends or interest
received on securities lent. The fund retains all or a portion of the interest
received on investment of the cash collateral or receives a fee from the
borrower. Although voting rights, or rights to consent, with respect to the
loaned securities pass to the borrower, the fund retains the right to call the
loans at any time on reasonable notice, and it will do so in order that the
securities may be voted by the fund if the holders of such securities are asked
to vote upon or consent to matters materially affecting the investment. The fund
may also call such loans in order to sell the securities involved.
Forward Commitments ("When-Issued" and "Delayed Delivery" Securities)
The fund may enter into contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments" and "when
issued securities") if the fund holds until the settlement date, in a segregated
account, cash or liquid securities in an amount sufficient to meet the purchase
price, or if the fund enters into offsetting contracts for the forward sale of
other securities it owns. Forward commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Where such purchases are made
through dealers, the fund relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the fund of an advantageous
yield or price. Although the fund will generally enter into forward commitments
with the intention of acquiring securities for its portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of a
commitment prior to settlement if the Adviser deems it appropriate to do so. The
fund may realize short-term profits or losses upon the sale of forward
commitments.
Mortgage Dollar Rolls
In a mortgage dollar roll, the fund sells a mortgage-backed security and
simultaneously enters into a commitment to purchase a similar security at a
later date. The fund either will be paid a fee by the counterparty upon entering
into the transaction or will be entitled to purchase the similar security at a
discount. As with any forward commitment, mortgage dollar rolls involve the risk
that the counterparty will fail to deliver the new security on the settlement
date, which may deprive the fund of obtaining a beneficial investment. In
addition, the security to be delivered in the future may turn out to be inferior
to the security sold upon entering into the transaction. Also, the transaction
costs may exceed the return earned by the fund from the transaction.
Repurchase Agreements
The fund may enter into repurchase agreements. A repurchase agreement is a
contract under which the fund acquires a security for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the fund to resell such security at a fixed time and price
(representing the fund's cost plus interest). It is the fund's present intention
to enter into repurchase agreements only with commercial banks and registered
broker-dealers and only with respect to obligations of the U.S. government or
its agencies or instrumentalities. Repurchase agreements may also be viewed as
loans made by the fund which are collateralized by the securities subject to
repurchase. The Adviser will monitor such transactions to determine that the
value of the underlying securities is at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, the fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the fund sells a security and agrees to
repurchase the same security at a mutually agreed upon date and price. A reverse
repurchase agreement may also be viewed as the borrowing of money by the fund
and, therefore, as a form of leverage. The fund will invest the proceeds of
borrowings under reverse repurchase agreements. In addition, the fund will enter
into a reverse repurchase agreement only when the interest income expected to be
earned from the investment of the proceeds is greater than the interest expense
of the transaction. The fund will not invest the proceeds of a reverse
repurchase agreement for a period which exceeds the duration of the reverse
repurchase agreement. The fund may not enter into reverse repurchase agreements
exceeding in the aggregate one-third of the market value of its total assets,
less liabilities other than the obligations created by reverse repurchase
agreements. Each fund will establish and maintain with its custodian a separate
account with a segregated portfolio of securities in an amount at least equal to
its purchase obligations under its reverse repurchase agreements. If interest
rates rise during the term of a reverse repurchase agreement, entering into the
reverse repurchase agreement may have a negative impact on a money market fund's
ability to maintain a net asset value of $1.00 per share.
Options on Securities
Writing covered options. The fund may write covered call options and covered put
options on securities held in its portfolio when, in the opinion of the Adviser,
such transactions are consistent with the fund's investment objective and
policies. Call options written by the fund give the purchaser the right to buy
the underlying securities from the fund at a stated exercise price; put options
give the purchaser the right to sell the underlying securities to the fund at a
stated price.
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The fund may write only covered options, which means that, so long as the fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The fund may
write combinations of covered puts and calls on the same underlying security.
The fund will receive a premium from writing a put or call option, which
increases the fund's return on the underlying security if the option expires
unexercised or is closed out at a profit. The amount of the premium reflects,
among other things, the relationship between the exercise price and the current
market value of the underlying security, the volatility of the underlying
security, the amount of time remaining until expiration, current interest rates,
and the effect of supply and demand in the options market and in the market for
the underlying security. By writing a call option, the fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option but continues to bear the risk
of a decline in the value of the underlying security. By writing a put option,
the fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an offsetting
option. The fund realizes a profit or loss from a closing transaction if the
cost of the transaction (option premium plus transaction costs) is less or more
than the premium received from writing the option. Because increases in the
market price of a call option generally reflect increases in the market price of
the security underlying the option, any loss resulting from a closing purchase
transaction may be offset in whole or in part by unrealized appreciation of the
underlying security.
If the fund writes a call option but does not own the underlying security, and
when it writes a put option, the fund may be required to deposit cash or
securities with its broker as "margin" or collateral for its obligation to buy
or sell the underlying security. As the value of the underlying security varies,
the fund may have to deposit additional margin with the broker. Margin
requirements are complex and are fixed by individual brokers, subject to minimum
requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
Purchasing put options. The fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such hedge protection is provided during the life of the put option since the
fund, as holder of the put option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. For a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs.
Purchasing call options. The fund may purchase call options to hedge against an
increase in the price of securities that the fund wants ultimately to buy. Such
hedge protection is provided during the life of the call option since the fund,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the fund might
have realized had it bought the underlying security at the time it purchased the
call option.
Over-the-Counter (OTC) options. The Staff of the Division of Investment
Management of the Securities and Exchange Commission has taken the position that
OTC options purchased by the fund and assets held to cover OTC options written
by the fund are illiquid securities. Although the Staff has indicated that it is
continuing to evaluate this issue, pending further developments, the fund
intends to enter into OTC options transactions only with primary dealers in U.S.
Government Securities and, in the case of OTC options written by the fund, only
pursuant to agreements that will assure that the fund will at all times have the
right to repurchase the option written by it from the dealer at a specified
formula price. The fund will treat the amount by which such formula price
exceeds the amount, if any, by which the option may be "in-the-money" as an
illiquid investment. It is the present policy of the fund not to enter into any
OTC option transaction if, as a result, more than 15% (10% in some cases, refer
to your fund's Prospectus) of the fund's net assets would be invested in (i)
illiquid investments (determined under the foregoing formula) relating to OTC
options written by the fund, (ii) OTC options purchased by the fund, (iii)
securities which are not readily marketable, and (iv) repurchase agreements
maturing in more than seven days.
Risk factors in options transactions. The successful use of the fund's options
strategies depends on the ability of the Adviser to forecast interest rate and
market movements correctly.
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When it purchases an option, the fund runs the risk that it will lose its entire
investment in the option in a relatively short period of time, unless the fund
exercises the option or enters into a closing sale transaction with respect to
the option during the life of the option. If the price of the underlying
security does not rise (in the case of a call) or fall (in the case of a put) to
an extent sufficient to cover the option premium and transaction costs, the fund
will lose part or all of its investment in the option. This contrasts with an
investment by the fund in the underlying securities, since the fund may continue
to hold its investment in those securities notwithstanding the lack of a change
in price of those securities.
The effective use of options also depends on the fund's ability to terminate
option positions at times when the Adviser deems it desirable to do so. Although
the fund will take an option position only if the Adviser believes there is a
liquid secondary market for the option, there is no assurance that the fund will
be able to effect closing transactions at any particular time or at an
acceptable price.
If a secondary trading market in options were to become unavailable, the fund
could no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A marketplace may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt normal market operations.
A marketplace may at times find it necessary to impose restrictions on
particular types of options transactions, which may limit the fund's ability to
realize its profits or limit its losses.
Disruptions in the markets for the securities underlying options purchased or
sold by the fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with losses if trading in the security reopens at a
substantially different price. In addition, the Options Clearing Corporation
(OCC) or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If a
prohibition on exercise remains in effect until an option owned by the fund has
expired, the fund could lose the entire value of its option.
Special risks are presented by internationally-traded options. Because of time
differences between the United States and various foreign countries, and because
different holidays are observed in different countries, foreign options markets
may be open for trading during hours or on days when U.S. markets are closed. As
a result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Futures Contracts and Related Options
Upon entering into futures contracts, in compliance with the Securities and
Exchange Commission's requirements, cash or liquid securities, equal in value to
the amount of the fund's obligation under the contract (less any applicable
margin deposits and any assets that constitute "cover" for such obligation),
will be segregated with the fund's custodian.
A futures contract sale creates an obligation by the seller to deliver the type
of instrument called for in the contract in a specified delivery month for a
stated price. A futures contract purchase creates an obligation by the purchaser
to take delivery of the type of instrument called for in the contract in a
specified delivery month at a stated price. The specific instruments delivered
or taken at settlement date are not determined until on or near that date. The
determination is made in accordance with the rules of the exchanges on which the
futures contract was made. Futures contracts are traded in the United States
only on commodity exchange or boards of trade -- known as "contract markets" --
approved for such trading by the Commodity Futures Trading Commission (CFTC),
and must be executed through a futures commission merchant or brokerage firm
which is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or acceptance
of commodities or securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Closing out a futures
contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument or commodity with
the same delivery date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid the difference
and realizes a gain. Conversely, if the price of the offsetting purchase exceeds
the price of the initial sale, the seller realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the purchaser's
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the purchaser realizes a gain, and if the purchase price exceeds
the offsetting sale price, the purchaser realizes a loss.
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Unlike when the fund purchases or sells a security, no price is paid or received
by the fund upon the purchase or sale of a futures contract, although the fund
is required to deposit with its custodian in a segregated account in the name of
the futures broker an amount of cash and/or U.S. Government Securities. This
amount is known as "initial margin". The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds by the fund to
finance the transactions. Rather, initial margin is in the nature of a
performance bond or good faith deposit on the contract that is returned to the
fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin", to and from the broker (or the
custodian) are made on a daily basis as the price of the underlying security or
commodity fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking to market."
The fund may elect to close some or all of its futures positions at any time
prior to their expiration. The purpose of making such a move would be to reduce
or eliminate the hedge position then currently held by the fund. The fund may
close its positions by taking opposite positions which will operate to terminate
the fund's position in the futures contracts. Final determinations of variation
margin are then made, additional cash is required to be paid by or released to
the fund, and the fund realizes a loss or a gain. Such closing transactions
involve additional commission costs.
Options on futures contracts. The fund will enter into written options on
futures contracts only when, in compliance with the SEC's requirements, cash or
liquid securities equal in value to the commodity value (less any applicable
margin deposits) have been deposited in a segregated account of the fund's
custodian. The fund may purchase and write call and put options on futures
contracts it may buy or sell and enter into closing transactions with respect to
such options to terminate existing positions. The fund may use such options on
futures contracts in lieu of writing options directly on the underlying
securities or purchasing and selling the underlying futures contracts. Such
options generally operate in the same manner as options purchased or written
directly on the underlying investments.
As with options on securities, the holder or writer of an option may terminate
his position by selling or purchasing an offsetting option. There is no
guarantee that such closing transactions can be effected.
The fund will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements similar to those described above.
Risks of transactions in futures contracts and related options. Successful use
of futures contracts by the fund is subject to the Adviser`s ability to predict
correctly movements in the direction of interest rates and other factors
affecting securities markets.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on futures contracts involves less potential risk to the fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the fund when
the purchase or sale of a futures contract would not, such as when there is no
movement in the prices of the hedged investments. The writing of an option on a
futures contract involves risks similar to those risks relating to the sale of
futures contracts.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution, by exchanges, of special
procedures which may interfere with the timely execution of customer orders.
To reduce or eliminate a hedge position held by the fund, the fund may seek to
close out a position. The ability to establish and close out positions will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or continue to exist for a particular
futures contract. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain contracts or options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of contracts or options, or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of contracts or options (or a particular
class or series of contracts or options), in which event the secondary market on
that exchange (or in the class or series of contracts or options) would cease to
exist, although outstanding contracts or options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Use by tax-exempt funds of U.S. Treasury security futures contracts and options.
The funds investing in tax-exempt securities issued by a governmental entity may
purchase and sell futures contracts and related options on U.S. Treasury
securities when, in the
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opinion of the Adviser, price movements in Treasury security futures and related
options will correlate closely with price movements in the tax-exempt securities
which are the subject of the hedge. U.S. Treasury securities futures contracts
require the seller to deliver, or the purchaser to take delivery of, the type of
U.S. Treasury security called for in the contract at a specified date and price.
Options on U.S. Treasury security futures contracts give the purchaser the right
in return for the premium paid to assume a position in a U.S. Treasury futures
contract at the specified option exercise price at any time during the period
of the option.
In addition to the risks generally involved in using futures contracts, there is
also a risk that price movements in U.S. Treasury security futures contracts and
related options will not correlate closely with price movements in markets for
tax-exempt securities.
Index futures contracts. An index futures contract is a contract to buy or sell
units of an index at a specified future date at a price agreed upon when the
contract is made. Entering into a contract to buy units of an index is commonly
referred to as buying or purchasing a contract or holding a long position in the
index. Entering into a contract to sell units of an index is commonly referred
to as selling a contract or holding a short position. A unit is the current
value of the index. The fund may enter into stock index futures contracts, debt
index futures contracts, or other index futures contracts appropriate to its
objective(s). The fund may also purchase and sell options on index futures
contracts.
There are several risks in connection with the use by the fund of index futures
as a hedging device. One risk arises because of the imperfect correlation
between movements in the prices of the index futures and movements in the prices
of securities which are the subject of the hedge. The Adviser will attempt to
reduce this risk by selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the fund's portfolio securities sought to be hedged.
Successful use of index futures by the fund for hedging purposes is also subject
to the Adviser's ability to predict correctly movements in the direction of the
market. It is possible that, where the fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the fund's portfolio may
decline. If this occurs, the fund would lose money on the futures and also
experience a decline in the value in its portfolio securities. However, while
this could occur to a certain degree, the Adviser believes that over time the
value of the fund's portfolio will tend to move in the same direction as the
market indices which are intended to correlate to the price movements of the
portfolio securities sought to be hedged. It is also possible that, if the fund
has hedged against the possibility of a decline in the market adversely
affecting securities held in its portfolio and securities prices increase
instead, the fund will lose part or all of the benefit of the increased values
of those securities that it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the index futures and the securities of
the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures markets are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which would distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction.
Options on index futures. Options on index futures are similar to options on
securities except that options on index futures give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put), at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the index futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the index future. If an option is exercised on
the last trading day prior to the expiration date of the option, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
Options on indices. As an alternative to purchasing call and put options on
index futures, the fund may purchase call and put options on the underlying
indices themselves. Such options could be used in a manner identical to the use
of options on index futures.
Foreign Currency Transactions
The fund may engage in currency exchange transactions to protect against
uncertainty in the level of future currency exchange rates.
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The fund may engage in both "transaction hedging" and "position hedging". When
it engages in transaction hedging, the fund enters into foreign currency
transactions with respect to specific receivables or payables of the fund
generally arising in connection with the purchase or sale of its portfolio
securities. The fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the fund attempts to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
The fund may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. The fund may also
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the fund may also purchase exchange-listed and
over-the-counter call and put options on foreign currency futures contracts and
on foreign currencies. Over-the-counter options are considered to be illiquid by
the SEC staff. A put option on a futures contract gives the fund the right to
assume a short position in the futures contract until expiration of the option.
A put option on currency gives the fund the right to sell a currency at an
exercise price until the expiration of the option. A call option on a futures
contract gives the fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
fund the right to purchase a currency at the exercise price until the expiration
of the option.
When it engages in position hedging, the fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or an increase in
the value of currency for securities which the fund expects to purchase, when
the fund holds cash or short-term investments). In connection with position
hedging, the fund may purchase put or call options on foreign currency and
foreign currency futures contracts and buy or sell forward contracts and foreign
currency futures contracts. The fund may also purchase or sell foreign currency
on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the fund is obligated to deliver and if a decision is made
to sell the security or securities 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 portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the underlying
prices of the securities which the fund owns or intends to purchase or sell.
They simply establish a rate of exchange which one can achieve at some future
point in time. Additionally, although these techniques tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they tend to limit
any potential gain which might result from the increase in value of such
currency.
Currency forward and futures contracts. Upon entering into such contracts, in
compliance with the SEC's requirements, cash or liquid securities, equal in
value to the amount of the fund's obligation under the contract (less any
applicable margin deposits and any assets that constitute "cover" for such
obligation), will be segregated with the fund's custodian.
A forward currency 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 as agreed by the parties, at a price set at the time of
the contract. In the case of a cancelable contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades. A currency futures contract is a standardized contract for
the future delivery of a specified amount of a foreign currency at a future date
at a price set at the time of the contract. Currency futures contracts traded in
the United States are designed and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
8
<PAGE>
Forward currency contracts differ from currency futures contracts in certain
respects. For example, the maturity date of a forward contract may be any fixed
number of days from the date of the contract agreed upon by the parties, rather
than a predetermined date in a given month. Forward contracts may be in any
amounts agreed upon by the parties rather than predetermined amounts. Also,
forward contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires no margin or
other deposit.
At the maturity of a forward or futures contract, the fund may either accept or
make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract. Closing transactions with respect to futures contracts are effected on
a commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
Positions in currency futures contracts may be closed out only on an exchange or
board of trade which provides a secondary market in such contracts. Although the
fund intends to purchase or sell currency futures contracts only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a secondary market on an exchange or board of trade will exist
for any particular contract or at any particular time. In such event, it may not
be possible to close a futures position and, in the event of adverse price
movements, the fund would continue to be required to make daily cash payments of
variation margin.
Currency options. In general, options on currencies operate similarly to options
on securities and are subject to many similar risks. Currency options are traded
primarily in the over-the-counter market, although options on currencies have
recently been listed on several exchanges. Options are traded not only on the
currencies of individual nations, but also on the European Currency Unit
("ECU"). The ECU is composed of amounts of a number of currencies, and is the
official medium of exchange of the European Economic Community's European
Monetary System.
The fund will only purchase or write currency options when the Adviser believes
that a liquid secondary market exists for such options. There can be no
assurance that a liquid secondary market will exist for a particular option at
any specified time. Currency options are affected by all of those factors which
influence exchange rates and investments generally. To the extent that these
options are traded over the counter, they are considered to be illiquid by the
SEC staff.
The value of any currency, including the U.S. dollars, may be affected by
complex political and economic factors applicable to the issuing country. In
addition, the exchange rates of currencies (and therefore the values of currency
options) may be significantly affected, fixed, or supported directly or
indirectly by government actions. Government intervention may increase risks
involved in purchasing or selling currency options, since exchange rates may not
be free to fluctuate in respect to other market forces.
The value of a currency option reflects the value of an exchange rate, which in
turn reflects relative values of two currencies, the U.S. dollar and the foreign
currency in question. Because currency transactions occurring in the interbank
market involve substantially larger amounts than those that may be involved in
the exercise of currency options, investors may be disadvantaged by having to
deal in an odd lot market for the underlying currencies in connection with
options at prices that are less favorable than for round lots. Foreign
governmental restrictions or taxes could result in adverse changes in the cost
of acquiring or disposing of currencies.
There is no systematic reporting of last sale information for currencies and
there is no regulatory requirement that quotations available through dealers or
other market sources be firm or revised on a timely basis. Available quotation
information is generally representative of very large round-lot transactions in
the interbank market and thus may not reflect exchange rates for smaller odd-lot
transactions (less than $1 million) where rates may be less favorable. The
interbank market in currencies is a global, around-the-clock market. To the
extent that options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets.
Settlement procedures. Settlement procedures relating to the fund's investments
in foreign securities and to the fund's foreign currency exchange transactions
may be more complex than settlements with respect to investments in debt or
equity securities of U.S. issuers, and may involve certain risks not present in
the fund's domestic investments, including foreign currency risks and local
custom and usage. Foreign currency transactions may also involve the risk that
an entity involved in the settlement may not meet its obligations.
Foreign currency conversion. Although foreign exchange dealers do not charge a
fee for currency conversion, they do realize a profit based on the difference
(spread) between 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. Foreign currency transactions may also involve the risk
that an entity involved in the settlement may not meet its obligation.
9
<PAGE>
Municipal Lease Obligations
Although a municipal lease obligation does not constitute a general obligation
of the municipality for which the municipality's taxing power is pledged, a
municipal lease obligation is ordinarily backed by the municipality's covenant
to budget for, appropriate and make the payments due under the municipal lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. In addition, the tax treatment of such
obligations in the event of non-appropriation is unclear.
Determinations concerning the liquidity and appropriate valuation of a municipal
lease obligation, as with any other municipal security, are made based on all
relevant factors. These factors include, among others: (1) the frequency of
trades and quotes for the obligation; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; and (4)
the nature of the marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers, and the mechanics of the
transfer.
Participation Interests
The fund may invest in municipal obligations either by purchasing them directly
or by purchasing certificates of accrual or similar instruments evidencing
direct ownership of interest payments or principal payments, or both, on
municipal obligations, provided that, in the opinion of counsel to the initial
seller of each such certificate or instrument, any discount accruing on such
certificate or instrument that is purchased at a yield not greater than the
coupon rate of interest on the related municipal obligations will be exempt from
federal income tax to the same extent as interest on such municipal obligations.
The fund may also invest in tax-exempt obligations by purchasing from banks
participation interests in all or part of specific holdings of municipal
obligations. Such participations may be backed in whole or part by an
irrevocable letter of credit or guarantee of the selling bank. The selling bank
may receive a fee from the fund in connection with the arrangement. The fund
will not purchase such participation interests unless it receives an opinion of
counsel or a ruling of the Internal Revenue Service that interest earned by it
on municipal obligations in which it holds such participation interests is
exempt from federal income tax.
Stand-by Commitments
When the fund purchases municipal obligations it may also acquire stand-by
commitments from banks and broker-dealers with respect to such municipal
obligations. A stand-by commitment is the equivalent of a put option acquired by
the fund with respect to a particular municipal obligation held in its
portfolio. A stand-by commitment is a security independent of the municipal
obligation to which it relates. The amount payable by a bank or dealer during
the time a stand-by commitment is exercisable, absent unusual circumstances
relating to a change in market value, would be substantially the same as the
value of the underlying municipal obligation. A stand-by commitment might not be
transferable by the fund, although it could sell the underlying municipal
obligation to a third party at any time.
The fund expects that stand-by commitments generally will be available without
the payment of direct or indirect consideration. However, if necessary and
advisable, the fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities.) The total amount paid in either manner for outstanding
stand-by commitments held in the fund portfolio will not exceed 10% of the value
of the fund's total assets calculated immediately after each stand-by commitment
is acquired. The fund will enter into stand-by commitments only with banks and
broker-dealers that, in the judgment of the Trust's Board of Trustees, present
minimal credit risks.
Inverse Floaters
Inverse floaters are derivative securities whose interest rates vary inversely
to changes in short-term interest rates and whose values fluctuate inversely to
changes in long-term interest rates. The value of certain inverse floaters will
fluctuate substantially more in response to a given change in long-term rates
than would a traditional debt security. These securities have investment
characteristics similar to leverage, in that interest rate changes have a
magnified effect on the value of inverse floaters.
Rule 144A Securities
The fund may purchase securities that have been privately placed but that are
eligible for purchase and sale under Rule 144A under the Securities Act of 1933
(1933 Act). That Rule permits certain qualified institutional buyers, such as
the fund, to trade in privately placed securities that have not been registered
for sale under the 1933 Act. The Adviser, under the supervision of the Board of
Trustees, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to the fund's investment restriction on illiquid
<PAGE>
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, the Adviser will consider the
trading markets for the specific security, taking into account the unregistered
nature of a Rule 144A security. In addition, the Adviser could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential purchasers,
(3) dealer undertakings to make a market, and (4) nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions, it is
determined by the Adviser that a Rule 144A security is no longer liquid, the
fund's holdings of illiquid securities would be reviewed to determine what, if
any, steps are required to assure that the fund does not invest more than its
investment restriction on illiquid securities allows. Investing in Rule 144A
securities could have the effect of increasing the amount of the fund's assets
invested in illiquid securities if qualified institutional buyers are unwilling
to purchase such securities.
TAXES
In this section, all discussions of taxation
at the shareholder level relate to federal taxes only. Consult your tax adviser
for state and local tax considerations and for information about special tax
considerations that may apply to shareholders that are not natural persons.
Alternative Minimum Tax. Distributions derived from interest which is exempt
from regular federal income tax may subject corporate shareholders to or
increase their liability under the corporate alternative minimum tax (AMT).
A portion of such distributions may constitute a tax preference item for
individual shareholders and may subject them to or increase their liability
under the AMT.
Dividends Received Deductions. Distributions will qualify for the corporate
dividends received deduction only to the extent that dividends earned by the
fund qualify. Any such dividends are, however, includable in adjusted current
earnings for purposes of computing corporate AMT.
Return of Capital Distributions. To the extent that a distribution is a return
of capital for federal tax purposes, it reduces the cost basis of the shares on
the record date and is similar to a partial return of the original investment
(on which a sales charge may have been paid). There is no recognition of a gain
or loss, however, unless the return of capital reduces the cost basis in the
shares to below zero.
Funds that invest in U.S. Government Securities. Many states grant tax-free
status to dividends paid to shareholders of mutual funds from interest income
earned by the fund from direct obligations of the U.S. government. Investments
in mortgage-backed securities (including GNMA, FNMA and FHLMC Securities) and
repurchase agreements collateralized by U.S. government securities do not
qualify as direct federal obligations in most states. Shareholders should
consult with their own tax advisers about the applicability of state and local
intangible property, income or other taxes to their fund shares and
distributions and redemption proceeds received from the fund.
Distributions from Tax-Exempt Funds. Each tax-exempt fund will have at least 50%
of its total assets invested in tax-exempt bonds at the end of each quarter so
that dividends from net interest income on tax-exempt bonds will be exempt from
Federal income tax when received by a shareholder. The tax-exempt portion of
dividends paid will be designated within 60 days after year-end based upon the
ratio of net tax-exempt income to total net investment income earned during the
year. That ratio may be substantially different from the ratio of net tax-exempt
income to total net investment income earned during any particular portion of
the year. Thus, a shareholder who holds shares for only a part of the year may
be allocated more or less tax-exempt dividends than would be the case if the
allocation were based on the ratio of net tax-exempt income to total net
investment income actually earned while a shareholder.
The Tax Reform Act of 1986 makes income from certain "private activity bonds"
issued after August 7, 1986, a tax preference item for the AMT at the maximum
rate of 28% for individuals and 20% for corporations. If the fund invests in
private activity bonds, shareholders may be subject to the AMT on that part of
the distributions derived from interest income on such bonds. Other provisions
of the Tax Reform Act affect the tax treatment of distributions for
corporations, casualty insurance companies and financial institutions; interest
on all tax-exempt bonds is included in corporate adjusted current earnings when
computing the AMT applicable to corporations. Seventy-five percent of the excess
of adjusted current earnings over the amount of income otherwise subject to the
AMT is included in a corporation's alternative minimum taxable income.
Dividends derived from any investments other than tax-exempt bonds and any
distributions of short-term capital gains are taxable to shareholders as
ordinary income. Any distributions of net long-term gains will in general be
taxable to shareholders as long-term capital gains regardless of the length of
time fund shares are held.
The Revenue Reconciliation Act of 1993 requires that any market discount
recognized on a tax-exempt bond is taxable as ordinary income. This rule
applies only for disposals of bonds purchased after April 30, 1993. A market
discount bond is a bond acquired in the secondary market at a price below its
redemption value. Under prior law, the treatment of market discount as
ordinary income did not apply to tax-exempt obligations. Instead, realized
market discount on tax-exempt obligations was treated as capital gain. Under
the new law, gain on the disposition of a tax-exempt obligation or any other
market discount bond that is acquired for a price less than its principal amount
will be treated as ordinary income (instead of capital gain) to the extent of
accured market discount. This rule is effective only for bonds purchased after
April 30, 1993.
Shareholders receiving social security and certain retirement benefits may be
taxed on a portion of those benefits as a result of receiving tax-exempt income,
including tax-exempt dividends from the fund.
Special Tax Rules Applicable to Tax-Exempt Funds. Income distributions to
shareholders who are substantial users or related persons of substantial users
of facilities financed by industrial revenue bonds may not be excludable from
their gross income if such income is derived from such bonds. Income derived
from the fund's investments other than tax-exempt instruments may give rise to
taxable income. The fund's shares must be held for more than six months in order
to avoid the disallowance of a capital loss on the sale of fund shares to the
extent of tax-exempt dividends paid during that period. A shareholder who
borrows money to purchase the fund's shares will not be able to deduct the
interest paid with respect to such borrowed money.
11
<PAGE>
Sales of Shares. In general, any gain or loss realized upon a taxable
disposition of shares by a shareholder 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 assuming such shares are held as a capital
asset. However, any loss realized upon a taxable disposition of shares held for
six months or less will be treated as long-term, rather than short-term, capital
loss to the extent of any long-term capital gain distributions received by the
shareholder with respect to those shares. All or a portion of any loss realized
upon a taxable disposition of shares will be disallowed if other shares are
purchased within 30 days before or after the disposition. In such a case, the
basis of the newly purchased shares will be adjusted to reflect the disallowed
loss.
Backup Withholding. Certain distributions and redemptions may be subject to a
31% backup withholding unless a taxpayer identification number and certification
that the shareholder is not subject to the withholding is provided to the fund.
This number and form may be provided by either a Form W-9 or the accompanying
application. In certain instances, CISC may be notified by the Internal Revenue
Service that a shareholder is subject to backup withholding.
Excise Tax. To the extent that the Fund does not annually distribute
substantially all taxable income and realized gains, it is subject to an excise
tax. The Adviser intends to avoid this tax except when the cost of processing
the distribution is greater than the tax.
Tax Accounting Principles. To qualify as a "regulated investment company," the
fund must (a) derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of securities or foreign currencies or other income (including but
not limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities or currencies; (b)
derive less than 30% of its gross income from the sale or other disposition of
certain assets held less than three months; (c) diversify its holdings so that,
at the close of each quarter of its taxable year, (i) at least 50% of the value
of its total assets consists of cash, cash items, U.S. Government securities,
and other securities limited generally with respect to any one issuer to not
more than 5% of the total assets of the fund and not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any issuer (other than U.S.
Government securities).
Futures Contracts. Accounting for futures contracts will be in accordance with
generally accepted accounting principles. The amount of any realized gain or
loss on the closing out of a futures contract will result in a capital gain or
loss for tax purposes. In addition, certain futures contracts held by the fund
(so-called "Section 1256 contracts") will be required to be "marked-to-market"
(deemed sold) for federal income tax purposes at the end of each fiscal year.
Sixty percent of any net gain or loss recognized on such deemed sales or on
actual sales will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss.
However, if a futures contract is part of a "mixed straddle" (i.e., a straddle
comprised in part of Section 1256 contracts), a fund may be able to make an
election which will affect the character arising from such contracts as
long-term or short-term and the timing of the recognition of such gains or
losses. In any event, the straddle provisions described below will be applicable
to such mixed straddles.
Special Tax Rules Applicable to "Straddles". The straddle provisions of the Code
may affect the taxation of the fund's options and futures transactions and
transactions in securities to which they relate. A "straddle" is made up of two
or more offsetting positions in "personal property," including debt securities,
related options and futures, equity securities, related index futures and, in
certain circumstances, options relating to equity securities, and foreign
currencies and related options and futures.
The straddle rules may operate to defer losses realized or deemed realized on
the disposition of a position in a straddle, may suspend or terminate the fund's
holding period in such positions, and may convert short-term losses to long-term
losses in certain circumstances.
Foreign Currency-Denominated Securities and Related Hedging Transactions. The
fund's transactions in foreign currency-denominated debt securities, certain
foreign currency options, futures contracts and forward contracts may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
If more than 50% of the fund's total assets at the end of its fiscal year are
invested in securities of foreign corporate issuers, the fund may make an
election permitting its shareholders to take a deduction or credit for federal
tax purposes for their portion of certain foreign taxes paid by the fund. The
Adviser will consider the value of the benefit to a typical shareholder, the
cost to the fund of compliance with the election, and incidental costs to
shareholders in deciding whether to make the election. A shareholder's ability
to claim such a foreign tax credit will be subject to certain limitations
imposed by the Code, as a result of which a shareholder may not get a full
credit for the amount of foreign taxes so paid by the fund. Shareholders who do
not itemize on their federal income tax returns may claim a credit (but no
deduction) for such foreign taxes.
Certain securities are considered to be Passive Foreign Investment Companies
(PFICS) under the Code, and the fund is liable for any PFIC-related taxes.
12
<PAGE>
MANAGEMENT OF THE COLONIAL FUNDS (in this section, and the following sections
entitled "Trustees and Officers," "The Management Agreement," "Administration
Agreement," "The Pricing and Bookkeeping Agreement," "Portfolio Transactions,"
"Investment decisions," and "Brokerage and research services," the "Adviser"
refers to Colonial Management Associates, Inc.)
The Adviser is the investment adviser to each of the Colonial funds (except for
Colonial Municipal Money Market Fund, Colonial Global Utilities Fund, Colonial
Newport Tiger Fund, Colonial Newport Tiger Cub Fund, Colonial Newport Japan Fund
and Newport Greater China Fund - see Part I of each Fund's respective SAI for a
description of the investment adviser). The Adviser is a subsidiary of The
Colonial Group, Inc. (TCG), One Financial Center, Boston, MA 02111. TCG is a
direct subsidiary of Liberty Financial Companies, Inc. (Liberty Financial),
which in turn is a direct subsidiary of LFC Holdings, Inc., which in turn is a
direct subsidiary of Liberty Mutual Equity Corporation, which in turn is a
wholly-owned subsidiary of Liberty Mutual Insurance Company (Liberty Mutual).
Liberty Mutual is an underwriter of workers' compensation insurance and a
property and casualty insurer in the U.S. Liberty Financial's address is 600
Atlantic Avenue, Boston, MA 02210. Liberty Mutual's address is 175 Berkeley
Street, Boston, MA 02117.
Trustees and Officers (this section applies to all of the Colonial funds)
<TABLE>
<CAPTION>
Name and Address Age Position with Principal Occupation
Fund
<S> <C> <C> <C>
Robert J. Birnbaum 69 Trustee Retired (formerly Special Counsel, Dechert Price & Rhoads
313 Bedford Road from September, 1988 to December, 1993).
Ridgewood, NJ 07450
Tom Bleasdale 66 Trustee Retired (formerly Chairman of the Board and Chief
102 Clubhouse Drive #275 Executive Officer, Shore Bank & Trust Company from
Naples, FL 34105 1992-1993), is a Director of The Empire Company since
June, 1995.
Lora S. Collins 61 Trustee Attorney (formerly Attorney, Kramer, Levin, Naftalis,
1175 Hill Road Nessen, Kamin & Frankel from September, 1986 to
Southold, NY 11971 November, 1996).
James E. Grinnell 67 Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
William D. Ireland, Jr. 73 Trustee Retired, is a Trustee of certain charitable and
103 Springline Drive non-charitable organizations since February, 1990.
Vero Beach, FL 32963
Richard W. Lowry 61 Trustee Private Investor since August, 1987.
10701 Charleston Drive
Vero Beach, FL 32963
William E. Mayer* 56 Trustee Partner, Development Capital, LLC (formerly Dean, College
500 Park Avenue, 5th Floor of Business and Management, University of Maryland from
New York, NY 10022 October, 1992 to November, 1996, Dean, Simon Graduate
School of Business, University of Rochester from October, 1991 to
July, 1992).
James L. Moody, Jr. 65 Trustee Chairman of the Board and Director, Hannaford Bros. Co.
P.O. Box 1000 since May, 1984 (formerly Chief Executive Officer,
Portland, ME 04104 Hannaford Bros. Co. from May, 1973 to May, 1992).
John J. Neuhauser 53 Trustee Dean, Boston College School of Management since 1978.
140 Commonwealth Avenue
Chestnut Hill, MA 02167
George L. Shinn 74 Trustee Financial Consultant since 1989.
Credit Suisse First Boston
Corp.
13
<PAGE>
Eleven Madison Avenue, 25th
Floor
New York, NY 10010-3629
Robert L. Sullivan 69 Trustee Retired Partner, Peat Marwick Main & Co.
7121 Natelli Woods Lane
Bethesda, MD 20817
Sinclair Weeks, Jr. 73 Trustee Chairman of the Board, Reed & Barton Corporation since
Bay Colony Corporate Ctr. 1987.
Suite 4550
1000 Winter Street
Waltham, MA 02154
Harold W. Cogger 61 President President of Colonial funds since March, 1996 (formerly
(formerly Vice Vice President from July, 1993 to March, 1996); is
President) Director, since March, 1984 and Chairman of the Board
since March, 1996 of the Adviser (formerly President
from July, 1993 to December, 1996, Chief Executive
Officer from March, 1995 to December, 1996 and Executive
Vice President from October, 1989 to July, 1993); Director since
October, 1991 and Chairman of the Board since March, 1996 of TCG
(formerly President from October, 1994 to December, 1996 and Chief
Executive Officer from March, 1995 to December, 1996); Executive
Vice President and Director since March, 1995, Liberty Financial;
Director since November, 1996 of Stein Roe & Farnham Incorporated.
Timothy J. Jacoby 44 Treasurer and Treasurer and Chief Financial Officer of Colonial funds
Chief Financial since October, 1996, is Senior Vice President of the
Officer Adviser since September, 1996 (formerly Senior Vice
President, Fidelity Accounting and Custody Services
from September, 1993 to September, 1996 and Assistant
Treasurer to the Fidelity Group of Funds from August,
1990 to September, 1993).
Peter L. Lydecker 43 Chief Accounting Chief Accounting Officer and Controller of Colonial
Officer and funds since June, 1993 (formerly Assistant Controller
Controller from March, 1985 to June, 1993); is Vice President of
(formerly the Adviser since June, 1993 (formerly Assistant Vice
Assistant President of the Adviser from August, 1988 to June,
Controller) 1993).
Davey S. Scoon 50 Vice President Vice President of Colonial funds since June, 1993, is
Executive Vice President since July, 1993 and Director
since March, 1985 of the Adviser (formerly Senior Vice
President and Treasurer of the Adviser from March, 1985
to July, 1993); Executive Vice President and Chief
Operating Officer, TCG since March, 1995 (formerly Vice
President - Finance and Administration of TCG from
November, 1985 to March, 1995).
14
<PAGE>
Arthur O. Stern 58 Secretary Secretary of Colonial funds since 1985, is Director
since 1985, Executive Vice President since July, 1993,
General Counsel, Clerk and Secretary since March, 1985
of the Adviser; Executive Vice President, Legal since
March, 1995 and Clerk since March, 1985 of TCG
(formerly Executive Vice President, Compliance from
March, 1995 to March, 1996 and Vice President - Legal
of TCG from March, 1985 to March, 1995).
</TABLE>
* A Trustee who is an "interested person" (as defined in the Investment
Company Act of 1940) of the fund or the Adviser.
The address of the officers of each Colonial Fund is One Financial Center,
Boston, MA 02111.
The Trustees serve as trustees of all Colonial funds for which each Trustee will
receive an annual retainer of $45,000 and attendance fees of $7,500 for each
regular joint meeting and $1,000 for each special joint meeting. Committee
chairs receive an annual retainer of $5,000. Committee members receive an annual
retainer of $1,000 and $1,000 for each special meeting attended. Two-thirds of
the Trustee fees are allocated among the Colonial funds based on each fund's
relative net assets and one-third of the fees are divided equally among the
Colonial funds.
The Adviser and/or its affiliate, Colonial Advisory Services, Inc. (CASI), has
rendered investment advisory services to investment company, institutional and
other clients since 1931. The Adviser currently serves as investment adviser and
administrator for 38 open-end and 5 closed-end management investment company
portfolios, and is the administrator for 5 open-end management investment
company portfolios (collectively, Colonial funds). Trustees and officers of the
Trust, who are also officers of the Adviser or its affiliates, will benefit from
the advisory fees, sales commissions and agency fees paid or allowed by the
Trust. More than 30,000 financial advisers have recommended Colonial funds to
over 800,000 clients worldwide, representing more than $16.3 billion in assets.
The Agreement and Declaration of Trust (Declaration) of the Trust provides that
the Trust will indemnify its Trustees and officers against liabilities and
expenses incurred in connection with litigation in which they may be involved
because of their offices with the Trust but that such indemnification will not
relieve any officer or Trustee of any liability to the Trust or its shareholders
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties. The Trust, at its expense, provides liability
insurance for the benefit of its Trustees and officers.
The Management Agreement (this section does not apply to the Colonial Municipal
Money Market Fund, Colonial Global Utilities Fund, Colonial Newport Tiger Fund,
Colonial Newport Japan Fund, Colonial Newport Tiger Cub Fund or Newport Greater
China Fund)
Under a Management Agreement (Agreement), the Adviser has contracted to furnish
each fund with investment research and recommendations or fund management,
respectively, and accounting and administrative personnel and services, and with
office space,
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equipment and other facilities. For these services and facilities, each Colonial
fund pays a monthly fee based on the average of the daily closing value of the
total net assets of each fund for such month. Under the Agreement, any liability
of the Adviser to the Trust, fund and/or its shareholders is limited to
situations involving the Adviser's own willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties.
The Agreement may be terminated with respect to the fund at any time on 60 days'
written notice by the Adviser or by the Trustees of the Trust or by a vote of a
majority of the outstanding voting securities of the fund. The Agreement will
automatically terminate upon any assignment thereof and shall continue in effect
from year to year only so long as such continuance is approved at least annually
(i) by the Trustees of the Trust or by a vote of a majority of the outstanding
voting securities of the fund and (ii) by vote of a majority of the Trustees who
are not interested persons (as such term is defined in the 1940 Act) of the
Adviser or the Trust, cast in person at a meeting called for the purpose of
voting on such approval.
The Adviser pays all salaries of officers of the Trust. The Trust pays all
expenses not assumed by the Adviser including, but not limited to, auditing,
legal, custodial, investor servicing and shareholder reporting expenses. The
Trust pays the cost of printing and mailing any Prospectuses sent to
shareholders. CISI pays the cost of printing and distributing all other
Prospectuses.
Administration Agreement (this section applies only to the Colonial Municipal
Money Market Fund, Colonial Global Utilities Fund, Colonial Newport Tiger Fund,
Colonial Newport Japan Fund, Colonial Newport Tiger Cub Fund and Newport Greater
China Fund and their respective Trusts).
Under an Administration Agreement with each Fund, the Adviser, in its capacity
as the Administrator to each Fund, has contracted to perform the following
administrative services:
(a) providing office space, equipment and clerical personnel;
(b) arranging, if desired by the respective Trust, for its
Directors, officers and employees to serve as Trustees,
officers or agents of each Fund;
(c) preparing and, if applicable, filing all documents
required for compliance by each Fund with applicable laws
and regulations;
(d) preparation of agendas and supporting documents for and
minutes of meetings of Trustees, committees of Trustees
and shareholders;
(e) coordinating and overseeing the activities of each Fund's
other third-party service providers; and
(f) maintaining certain books and records of each Fund.
With respect to the Colonial Municipal Money Market Fund, the Administration
Agreement for this Fund provides for the following services in addition to the
services referenced above:
(g) monitoring compliance by the Fund with Rule 2a-7 under the
Investment Company Act of 1940 (the "1940 Act") and
reporting to the Trustees from time to time with respect
thereto; and
(h) monitoring the investments and operations of the SR&F
Municipal Money Market Portfolio (Municipal Money Market
Portfolio) in which Colonial Municipal Money Market Fund
is invested
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and the LFC Utilities Trust (LFC Portfolio) in which
Colonial Global Utilities Fund is invested and reporting
to the Trustees from time to time with respect thereto.
The Adviser is paid a monthly fee at the annual rate of average daily net assets
set forth in Part 1 of this Statement of Additional Information.
The Pricing and Bookkeeping Agreement
The Adviser provides pricing and bookkeeping services to each Colonial fund
pursuant to a Pricing and Bookkeeping Agreement. The Adviser, in its capacity as
the Administrator to each of Colonial Municipal Money Market Fund and Colonial
Global Utilities Fund, is paid an annual fee of $18,000, plus 0.0233% of average
daily net assets in excess of $50 million. For each of the other Colonial funds
(except for Colonial Newport Tiger Fund, Colonial Newport Japan Fund, Colonial
Newport Tiger Cub Fund and Newport Greater China Fund), the Adviser is paid
monthly a fee of $2,250 by each fund, plus a monthly percentage fee based on net
assets of the fund equal to the following:
1/12 of 0.000% of the first $50 million;
1/12 of 0.035% of the next $950 million;
1/12 of 0.025% of the next $1 billion;
1/12 of 0.015% of the next $1 billion; and
1/12 of 0.001% on the excess over $3 billion
The Adviser provides pricing and bookkeeping services to Colonial Newport Tiger
Fund, Colonial Newport Japan Fund, Colonial Newport Tiger Cub Fund and Newport
Greater China Fund for an annual fee of $27,000, plus 0.035% of each Fund's
average daily net assets over $50 million.
Stein Roe & Farnham Incorporated, the investment adviser of each of the
Municipal Money Market Portfolio and LFC Portfolio, provides pricing and
bookkeeping services to each Portfolio for a fee of $25,000 plus 0.0025%
annually of average daily net assets of each Portfolio over $50 million.
Portfolio Transactions
The following sections entitled "Investment decisions" and "Brokerage and
research services" do not apply to Colonial Municipal Money Market Fund, and
Colonial Global Utilities Fund. For each of these funds, see Part 1 of its
respective SAI. The Adviser of Colonial Newport Tiger Fund, Colonial Newport
Japan Fund, Colonial Newport Tiger Cub Fund and Newport Greater China Fund
follows the same procedures as those set forth under "Brokerage and research
services."
Investment decisions. The Adviser acts as investment adviser to each of the
Colonial funds (except for the Colonial Municipal Money Market Fund, Colonial
Global Utilities Fund, Colonial Newport Tiger Fund, Colonial Newport Japan Fund,
Colonial Newport Tiger Cub Fund and Newport Greater China Fund, each of which is
administered by the Adviser. The Adviser's affiliate, CASI, advises other
institutional, corporate, fiduciary and individual clients for which CASI
performs various services. Various officers and Trustees of the Trust also serve
as officers or Trustees of other Colonial funds and the other corporate or
fiduciary clients of the Adviser. The Colonial funds and clients advised by the
Adviser or the funds administered by the Adviser sometimes invest in securities
in which the Fund also invests and sometimes engage in covered option writing
programs and enter into transactions utilizing stock index options and stock
index and financial futures and related options ("other instruments"). If the
Fund, such other Colonial funds and such other clients desire to buy or sell the
same portfolio securities, options or other instruments at about the same time,
the purchases and sales are normally made as nearly as practicable on a pro rata
basis in proportion to the amounts desired to be purchased or sold by each.
Although in some cases these practices could have a detrimental effect on the
price or volume of the securities, options or other instruments as far as the
Fund is concerned, in most cases it is believed that these practices should
produce better executions. It is the opinion of the Trustees that the
desirability of retaining the Adviser as investment adviser to the Colonial
funds outweighs the disadvantages, if any, which might result from these
practices.
The portfolio managers of Colonial International Fund for Growth, a series of
Colonial Trust III, will use the trading facilities of Stein Roe & Farnham
Incorporated, an affiliate of the Adviser, to place all orders for the purchase
and sale of this fund's portfolio securities, futures contracts and foreign
currencies.
Brokerage and research services. Consistent with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., and subject to seeking
"best execution" (as defined below) and such other policies as the Trustees may
determine, the Adviser may
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consider sales of shares of the Colonial funds as a
factor in the selection of broker-dealers to execute securities transactions for
a Colonial fund.
The Adviser places the transactions of the Colonial funds with broker-dealers
selected by the Adviser and, if applicable, negotiates commissions.
Broker-dealers may receive brokerage commissions on portfolio transactions,
including the purchase and writing of options, the effecting of closing purchase
and sale transactions, and the purchase and sale of underlying securities upon
the exercise of options and the purchase or sale of other instruments. The
Colonial funds from time to time also execute portfolio transactions with such
broker-dealers acting as principals. The Colonial funds do not intend to deal
exclusively with any particular broker-dealer or group of broker-dealers.
It is the Adviser's policy generally to seek best execution, which is to place
the Colonial funds' transactions where the Colonial funds can obtain the most
favorable combination of price and execution services in particular transactions
or provided on a continuing basis by a broker-dealer, and to deal directly with
a principal market maker in connection with over-the-counter transactions,
except when it is believed that best execution is obtainable elsewhere. In
evaluating the execution services of, including the overall reasonableness of
brokerage commissions paid to, a broker-dealer, consideration is given to, among
other things, the firm's general execution and operational capabilities, and to
its reliability, integrity and financial condition.
Securities transactions of the Colonial funds may be executed by broker-dealers
who also provide research services (as defined below) to the Adviser and the
Colonial funds. The Adviser may use all, some or none of such research services
in providing investment advisory services to each of its investment company and
other clients, including the fund. To the extent that such services are used by
the Adviser, they tend to reduce the Adviser's expenses. In the Adviser's
opinion, it is impossible to assign an exact dollar value for such services.
The Trustees have authorized the Adviser to cause the Colonial funds to pay a
broker-dealer which provides brokerage and research services to the Adviser an
amount of commission for effecting a securities transaction, including the sale
of an option or a closing purchase transaction, for the Colonial funds in excess
of the amount of commission which another broker-dealer would have charged for
effecting that transaction. As provided in Section 28(e) of the Securities
Exchange Act of 1934, "brokerage and research services" include advice 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 issues, industries,
securities, economic factors and trends and portfolio strategy and performance
of accounts; and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement). The Adviser must
determine in good faith that such greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of that particular transaction or the Adviser's
overall responsibilities to the Colonial funds and all its other clients.
The Trustees have authorized the Adviser to utilize the services of a clearing
agent with respect to all call options written by Colonial funds that write
options and to pay such clearing agent commissions of a fixed amount per share
(currently 1.25 cents) on the sale of the underlying security upon the exercise
of an option written by a fund.
Principal Underwriter
CISI is the principal underwriter of the Trust's shares. CISI has no obligation
to buy the Colonial funds' shares, and purchases the Colonial funds' shares only
upon receipt of orders from authorized FSFs or investors.
Investor Servicing and Transfer Agent
CISC is the Trust's investor servicing agent (transfer, plan and dividend
disbursing agent), for which it receives fees which are paid monthly by the
Trust. The fee paid to CISC is based on the average daily net assets of each
Colonial fund plus reimbursement for certain out-of-pocket expenses. See "Fund
Charges and Expenses" in Part 1 of this SAI for information on fees received by
CISC. The agreement continues indefinitely but may be terminated by 90 days'
notice by the Fund to CISC or generally by 6 months' notice by CISC to the Fund.
The agreement limits the liability of CISC to the Fund for loss or damage
incurred by the Fund to situations involving a failure of CISC to use reasonable
care or to act in good faith in performing its duties under the agreement. It
also provides that the Fund will indemnify CISC against, among other things,
loss or damage incurred by CISC on account of any claim, demand, action or suit
made on or against CISC not resulting from CISC's bad faith or negligence and
arising out of, or in connection with, its duties under the agreement.
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DETERMINATION OF NET ASSET VALUE
Each Colonial fund determines net asset value (NAV) per share for each Class as
of the close of the New York Stock Exchange (Exchange) (generally 4:00 p.m.
Eastern time, 3:00 p.m. Chicago time) each day the Exchange is open. Currently,
the Exchange is closed Saturdays, Sundays and the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Thanksgiving and Christmas. Funds with portfolio securities which are primarily
listed on foreign exchanges may experience trading and changes in NAV on days on
which such Fund does not determine NAV due to differences in closing policies
among exchanges. This may significantly affect the NAV of the Fund's redeemable
securities on days when an investor cannot redeem such securities. The net asset
value of the Municipal Money Market Portfolio will not be determined on days
when the Exchange is closed unless, in the judgment of the Municipal Money
Market Portfolio's Board of Trustees, the net asset value of the Municipal Money
Market Portfolio should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time. Debt securities generally
are valued by a pricing service which determines valuations based upon market
transactions for normal, institutional-size trading units of similar securities.
However, in circumstances where such prices are not available or where the
Adviser deems it appropriate to do so, an over-the-counter or exchange bid
quotation is used. Securities listed on an exchange or on NASDAQ are valued at
the last sale price. Listed securities for which there were no sales during the
day and unlisted securities are valued at the last quoted bid price. Options are
valued at the last sale price or in the absence of a sale, the mean between the
last quoted bid and offering prices. Short-term obligations with a maturity of
60 days or less are valued at amortized cost pursuant to procedures adopted by
the Trustees. The values of foreign securities quoted in foreign currencies are
translated into U.S. dollars at the exchange rate for that day. Portfolio
positions for which there are no such valuations and other assets are valued at
fair value as determined by the Adviser in good faith under the direction of the
Trust's Trustees.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. Trading on certain foreign securities markets may not take place on
all business days in New York, and trading on some foreign securities markets
takes place on days which are not business days in New York and on which the
Fund's NAV is not calculated. The values of these securities used in determining
the NAV are computed as of such times. Also, because of the amount of time
required to collect and process trading information as to large numbers of
securities issues, the values of certain securities (such as convertible bonds,
U.S. government securities, and tax-exempt securities) are determined based on
market quotations collected earlier in the day at the latest practicable time
prior to the close of the Exchange. Occasionally, events affecting the value of
such securities may occur between such times and the close of the Exchange which
will not be reflected in the computation of each Colonial fund's NAV. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value following procedures
approved by the Trust's Trustees.
(The following two paragraphs are applicable only to Colonial Newport Tiger
Fund, Colonial Newport Japan Fund, Colonial Newport Tiger Cub Fund and Newport
Greater China Fund - "Adviser" in these two paragraphs refers to each fund's
Adviser, Newport Fund Management, Inc.)
Trading in securities on stock exchanges and over-the-counter markets in the Far
East is normally completed well before the close of the business day in New
York. Trading on Far Eastern securities markets may not take place on all
business days in New York, and trading on some Far Eastern securities markets
does take place on days which are not business days in New York and on which the
Fund's NAV is not calculated.
The calculation of the Fund's NAV accordingly may not take place
contemporaneously with the determination of the prices of the Fund's portfolio
securities used in such calculations. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the close
of the Exchange (when the Fund's NAV is calculated) will not be reflected in the
Fund's calculation of NAV unless the Adviser, acting under procedures
established by the Board of Trustees of the Trust, deems that the particular
event would materially affect the Fund's NAV, in which case an adjustment will
be made. Assets or liabilities initially expressed in terms of foreign
currencies are translated prior to the next determination of the NAV of the
Fund's shares into U.S. dollars at prevailing market rates.
Amortized Cost for Money Market Funds (this section currently applies only to
Colonial Government Money Market Fund, a series of Colonial Trust II - see
"Amortized Cost for Money Market Funds" under "Other Information Concerning the
Portfolio" in Part 1 of the SAI of Colonial Municipal Money Market Fund for
information relating to the Municipal Money Market Portfolio)
Money market funds generally value their portfolio securities at amortized cost
according to Rule 2a-7 under the 1940 Act.
Portfolio instruments are valued under the amortized cost method, whereby the
instrument is recorded at cost and thereafter amortized to maturity. This method
assures a constant NAV but may result in a yield different from that of the same
portfolio under the market value method. The Trust's Trustees have adopted
procedures intended to stabilize a money market fund's NAV per share at $1.00.
When a money market fund's market value deviates from the amortized cost of
$1.00, and results in a material dilution to existing shareholders, the Trust's
Trustees will take corrective action that may include: realizing gains or
losses; shortening the portfolio's maturity; withholding distributions;
redeeming shares in kind; or converting to the market value method (in which
case the NAV per share
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may differ from $1.00). All investments will be determined pursuant to
procedures approved by the Trust's Trustees to present minimal credit risk.
See the Statement of Assets and Liabilities in the shareholder report of the
Colonial Government Money Market Fund for a specimen price sheet showing the
computation of maximum offering price per share of Class A shares.
HOW TO BUY SHARES
The Prospectus contains a general description of how investors may buy shares of
the Fund and tables of charges. This SAI contains additional information which
may be of interest to investors.
The Fund will accept unconditional orders for shares to be executed at the
public offering price based on the NAV per share next determined after the order
is placed in good order. The public offering price is the NAV plus the
applicable sales charge, if any. In the case of orders for purchase of shares
placed through FSFs, the public offering price will be determined on the day the
order is placed in good order, but only if the FSF receives the order prior to
the time at which shares are valued and transmits it to the Fund before the Fund
processes that day's transactions. If the FSF fails to transmit before the Fund
processes that day's transactions, the customer's entitlement to that day's
closing price must be settled between the customer and the FSF. If the FSF
receives the order after the time at which the Fund values its shares, the price
will be based on the NAV determined as of the close of the Exchange on the next
day it is open. If funds for the purchase of shares are sent directly to CISC,
they will be invested at the public offering price next determined after receipt
in good order. Payment for shares of the Fund must be in U.S. dollars; if made
by check, the check must be drawn on a U.S. bank.
The Fund receives the entire NAV of shares sold. For shares subject to an
initial sales charge, CISI's commission is the sales charge shown in the Fund's
Prospectus less any applicable FSF discount. The FSF discount is the same for
all FSFs, except that CISI retains the entire sales charge on any sales made to
a shareholder who does not specify a FSF on the Investment Account Application
("Application"). CISI generally retains 100% of any asset-based sales charge
(distribution fee) or contingent deferred sales charge. Such charges generally
reimburse CISI for any up-front and/or ongoing commissions paid to FSFs.
Checks presented for the purchase of shares of the Fund which are returned by
the purchaser's bank or checkwriting privilege checks for which there are
insufficient funds in a shareholder's account to cover redemption will subject
such purchaser or shareholder to a $15 service fee for each check returned.
Checks must be drawn on a U.S. bank and must be payable in U.S. dollars.
CISC acts as the shareholder's agent whenever it receives instructions to carry
out a transaction on the shareholder's account. Upon receipt of instructions
that shares are to be purchased for a shareholder's account, the designated FSF
will receive the applicable sales commission. Shareholders may change FSFs at
any time by written notice to CISC, provided the new FSF has a sales agreement
with CISI.
Shares credited to an account are transferable upon written instructions in good
order to CISC and may be redeemed as described under "How to Sell Shares" in the
Prospectus. Certificates will not be issued for Class A shares unless
specifically requested and no certificates will be issued for Class B, C, T
or Z shares. The Colonial money market funds will not issue certificates.
Shareholders may send any certificates which have been previously acquired to
CISC for deposit to their account.
SPECIAL PURCHASE PROGRAMS/INVESTOR SERVICES
The following special purchase programs/investor services may be changed or
eliminated at any time.
Fundamatic Program. As a convenience to investors, shares of most Colonial funds
may be purchased through the Colonial Fundamatic Program. Preauthorized monthly
bank drafts or electronic funds transfer for a fixed amount of at least $50 are
used to purchase a Colonial fund's shares at the public offering price next
determined after CISI receives the proceeds from the draft (normally the 5th or
the 20th of each month, or the next business day thereafter). If your Fundamatic
purchase is by electronic funds transfer, you may request the Fundamatic
purchase for any day. Further information and application forms are available
from FSFs or from CISI.
Automated Dollar Cost Averaging (Classes A, B and C). Colonial's Automated
Dollar Cost Averaging program allows you to exchange $100 or more on a monthly
basis from any Colonial fund in which you have a current balance of at least
$5,000 into the same class of shares of up to four other Colonial funds.
Complete the Automated Dollar Cost Averaging section of the Application. The
designated amount will be exchanged on the third Tuesday of each month. There is
no charge for exchanges made pursuant to the Automated Dollar Cost Averaging
program. Exchanges will continue so long as your Colonial fund balance is
sufficient to complete the transfers. Your normal rights and privileges as a
shareholder remain in full force and effect. Thus you can buy any fund, exchange
between the same Class of shares of funds by written instruction or by telephone
exchange if you have so elected and withdraw amounts from any fund, subject to
the imposition of any applicable CDSC.
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Any additional payments or exchanges into your Colonial fund will extend the
time of the Automated Dollar Cost Averaging program.
An exchange is a capital sale transaction for federal income tax purposes.
You may terminate your program, change the amount of the exchange (subject to
the $100 minimum), or change your selection of funds, by telephone or in
writing; if in writing by mailing your instructions to Colonial Investors
Service Center, Inc. P.O. Box 1722, Boston, MA 02105-1722.
You should consult your FSF or investment adviser to determine whether or not
the Automated Dollar Cost Averaging program is appropriate for you.
CISI offers several plans by which an investor may obtain reduced initial or
contingent deferred sales charges . These plans may be altered or discontinued
at any time. See "Programs For Reducing or Eliminating Sales Charges" for more
information.
Tax-Sheltered Retirement Plans. CISI offers prototype tax-qualified plans,
including Individual Retirement Accounts (IRAs), and Pension and Profit-Sharing
Plans for individuals, corporations, employees and the self-employed. The
minimum initial Retirement Plan investment is $25. The First National Bank of
Boston is the Trustee of CISI prototype plans and charges a $10 annual fee.
Detailed information concerning these Retirement Plans and copies of the
Retirement Plans are available from CISI.
Participants in non-Colonial prototype Retirement Plans (other than IRAs) also
are charged a $10 annual fee unless the plan maintains an omnibus account with
CISC. Participants in Colonial prototype Plans (other than IRAs) who liquidate
the total value of their account will also be charged a $15 close-out processing
fee payable to CISC. The fee is in addition to any applicable CDSC. The fee will
not apply if the participant uses the proceeds to open a Colonial IRA Rollover
account in any fund, or if the Plan maintains an omnibus account.
Consultation with a competent financial and tax adviser regarding these Plans
and consideration of the suitability of fund shares as an investment under the
Employee Retirement Income Security Act of 1974 or otherwise is recommended.
Telephone Address Change Services. By calling CISC, shareholders or their FSF of
record may change an address on a recorded telephone line. Confirmations of
address change will be sent to both the old and the new addresses. Telephone
redemption privileges are suspended for 30 days after an address change is
effected.
Colonial Cash Connection. Dividends and any other distributions, including
Systematic Withdrawal Plan (SWP) payments, may be automatically deposited to a
shareholder's bank account via electronic funds transfer. Shareholders wishing
to avail themselves of this electronic transfer procedure should complete the
appropriate sections of the Application.
Automatic Dividend Diversification. The automatic dividend diversification
reinvestment program (ADD) generally allows shareholders to have all
distributions from a fund automatically invested in the same class of shares of
another Colonial fund. An ADD account must be in the same name as the
shareholder's existing open account with the particular fund. Call CISC for more
information at 1-800- 422-3737.
PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES
Right of Accumulation and Statement of Intent (Class A and Class T shares only)
(Class T shares can only be purchased by the shareholders of Colonial Newport
Tiger Fund who already own Class T shares). Reduced sales charges on Class A and
T shares can be effected by combining a current purchase with prior purchases of
Class A, B, C, T and Z shares of the Colonial funds. The applicable sales
charge is based on the combined total of:
1. the current purchase; and
2. the value at the public offering price at the close of business on
the previous day of all Colonial funds' Class A shares held by the
shareholder (except shares of any Colonial money market fund, unless
such shares were acquired by exchange from Class A shares of another
Colonial fund other than a money market fund and Class B, C, T
and Z shares).
CISI must be promptly notified of each purchase which entitles a shareholder to
a reduced sales charge. Such reduced sales charge will be applied upon
confirmation of the shareholder's holdings by CISC. A Colonial fund may
terminate or amend this Right of Accumulation.
Any person may qualify for reduced sales charges on purchases of Class A and T
shares made within a thirteen-month period pursuant to a Statement of Intent
("Statement"). A shareholder may include, as an accumulation credit toward the
completion of such Statement,
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the value of all Class A, B, C, T and Z shares held by the shareholder on the
date of the Statement in Colonial funds (except shares of any Colonial money
market fund, unless such shares were acquired by exchange from Class A shares of
another non-money market Colonial fund). The value is determined at the public
offering price on the date of the Statement. Purchases made through reinvestment
of distributions do not count toward satisfaction of the Statement.
During the term of a Statement, CISC will hold shares in escrow to secure
payment of the higher sales charge applicable to Class A or T shares actually
purchased. Dividends and capital gains will be paid on all escrowed shares and
these shares will be released when the amount indicated has been purchased. A
Statement does not obligate the investor to buy or a fund to sell the amount of
the Statement.
If a shareholder exceeds the amount of the Statement and reaches an amount which
would qualify for a further quantity discount, a retroactive price adjustment
will be made at the time of expiration of the Statement. The resulting
difference in offering price will purchase additional shares for the
shareholder's account at the applicable offering price. As a part of this
adjustment, the FSF shall return to CISI the excess commission previously paid
during the thirteen-month period.
If the amount of the Statement is not purchased, the shareholder shall remit to
CISI an amount equal to the difference between the sales charge paid and the
sales charge that should have been paid. If the shareholder fails within twenty
days after a written request to pay such difference in sales charge, CISC will
redeem that number of escrowed Class A shares to equal such difference. The
additional amount of FSF discount from the applicable offering price shall be
remitted to the shareholder's FSF of record.
Additional information about and the terms of Statements of Intent are available
from your FSF, or from CISC at 1-800-345-6611.
Colonial Asset Builder Investment Program (this section currently applies only
to the Class A shares of Colonial Growth Shares Fund and The Colonial Fund, each
a series of Colonial Trust III). A reduced sales charge applies to a purchase of
certain Colonial funds' Class A shares under a Statement of Intent for the
Colonial Asset Builder Investment Program. The Program offer may be withdrawn at
any time without notice. A completed Program may serve as the initial investment
for a new Program, subject to the maximum of $4,000 in initial investments per
investor. Shareholders in this program are subject to a 5% sales charge. CISC
will escrow shares to secure payment of the additional sales charge on amounts
invested if the Program is not completed. Escrowed shares are credited with
distributions and will be released when the Program has ended. Shareholders are
subject to a 1% fee on the amount invested if they do not complete the Program.
Prior to completion of the Program, only scheduled Program investments may be
made in a Colonial fund in which an investor has a Program account. The
following services are not available to Program accounts until a Program has
ended:
Systematic Withdrawal Plan Share Certificates
Sponsored Arrangements Exchange Privilege
$50,000 Fast Cash Colonial Cash Connection
Right of Accumulation Automatic Dividend Diversification
Telephone Redemption Reduced Sales Charges for any "person"
Statement of Intent
*Exchanges may be made to other Colonial funds offering the Program.
Because of the unavailability of certain services, this Program may not be
suitable for all investors.
The FSF receives 3% of the investor's intended purchases under a Program at the
time of initial investment and 1% after the 24th monthly payment. CISI may
require the FSF to return all applicable commissions paid with respect to a
Program terminated within six months of inception, and thereafter to return
commissions in excess of the FSF discount applicable to shares actually
purchased.
Since the Asset Builder plan involves continuous investment regardless of the
fluctuating prices of funds shares, investors should consult their FSF to
determine whether it is appropriate. The Plan does not assure a profit nor
protect against loss in declining markets.
Reinstatement Privilege. An investor who has redeemed Class A, B,C or T shares
may, upon request, reinstate within one year a portion or all of the proceeds of
such sale in shares of the same Class of any Colonial fund at the NAV next
determined after CISC receives a written reinstatement request and payment. Any
CDSC paid at the time of the redemption will be credited to the shareholder upon
reinstatement. The period between the redemption and the reinstatement will not
be counted in aging the reinstated shares for
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purposes of calculating any CDSC or conversion date. Investors who desire to
exercise this privilege should contact their FSF or CISC. Shareholders may
exercise this Privilege an unlimited number of times. Exercise of this privilege
does not alter the Federal income tax treatment of any capital gains realized on
the prior sale of fund shares, but to the extent any such shares were sold at a
loss, some or all of the loss may be disallowed for tax purposes. Consult your
tax adviser.
Privileges of Colonial Employees or Financial Service Firms (in this section,
the "Adviser" refers to Colonial Management Associates, Inc. in its capacity as
the Adviser or Administrator to the Colonial Funds). Class A shares of certain
funds may be sold at NAV to the following individuals whether currently employed
or retired: Trustees of funds advised or administered by the Adviser; directors,
officers and employees of the Adviser, CISI and other companies affiliated with
the Adviser; registered representatives and employees of FSFs (including their
affiliates) that are parties to dealer agreements or other sales arrangements
with CISI; and such persons' families and their beneficial accounts.
Sponsored Arrangements. Class A and Class T shares (Class T shares can only be
purchased by the shareholders of Colonial Newport Tiger Fund who already own
Class T shares) of certain funds may be purchased at reduced or no sales charge
pursuant to sponsored arrangements, which include programs under which an
organization makes recommendations to, or permits group solicitation of, its
employees, members or participants in connection with the purchase of shares of
the fund on an individual basis. The amount of the sales charge reduction will
reflect the anticipated reduction in sales expense associated with sponsored
arrangements. The reduction in sales expense, and therefore the reduction in
sales charge, will vary depending on factors such as the size and stability of
the organization's group, the term of the organization's existence and certain
characteristics of the members of its group. The Colonial funds reserve the
right to revise the terms of or to suspend or discontinue sales pursuant to
sponsored plans at any time.
Class A and Class T shares (Class T shares can only be purchased by the
shareholders of Colonial Newport Tiger Fund who already own Class T shares) of
certain funds may also be purchased at reduced or no sales charge by clients of
dealers, brokers or registered investment advisers that have entered into
agreements with CISI pursuant to which the Colonial funds are included as
investment options in programs involving fee-based compensation arrangements,
and by participants in certain retirement plans.
Waiver of Contingent Deferred Sales Charges (CDSCs) (in this section, the
"Adviser" refers to Colonial Management Associates, Inc. in its capacity as the
Adviser or Administrator to the Colonial Funds) (Classes A, B, and C) CDSCs may
be waived on redemptions in the following situations with the proper
documentation:
1. Death. CDSCs may be waived on redemptions within one year following
the death of (i) the sole shareholder on an individual
account, (ii) a joint tenant where the surviving joint tenant is
the deceased's spouse, or (iii) the beneficiary of a Uniform Gifts
to Minors Act (UGMA), Uniform Transfers to Minors Act (UTMA) or
other custodial account. If, upon the occurrence of one of the
foregoing, the account is transferred to an account registered in
the name of the deceased's estate, the CDSC will be waived on any
redemption from the estate account occurring within one year after
the death. If the Class B shares are not redeemed within one year
of the death, they will remain subject to the applicable CDSC, when
redeemed from the transferee's account. If the account is
transferred to a new registration and then a redemption is
requested, the applicable CDSC will be charged.
2. Systematic Withdrawal Plan (SWP). CDSCs may be waived on
redemptions occurring pursuant to a monthly, quarterly or
semi-annual SWP established with CISC, to the extent the
redemptions do not exceed, on an annual basis, 12% of the account's
value, so long as at the time of the first SWP redemption the
account had had distributions reinvested for a period at least
equal to the period of the SWP (e.g., if it is a quarterly SWP,
distributions must have been reinvested at least for the three
month period prior to the first SWP redemption); otherwise CDSCs
will be charged on SWP redemptions until this requirement is met;
this requirement does not apply if the SWP is set up at the time
the account is established, and distributions are being reinvested.
See below under "Investor Services - Systematic Withdrawal Plan."
3. Disability. CDSCs may be waived on redemptions occurring within one
year after the sole shareholder on an individual account or a joint
tenant on a spousal joint tenant account becomes disabled (as
defined in Section 72(m)(7) of the Internal Revenue Code). To be
eligible for such waiver, (i) the disability must arise after the
purchase of shares and (ii) the disabled shareholder must have been
under age 65 at the time of the initial determination of
disability. If the account is transferred to a new registration and
then a redemption is requested, the applicable CDSC will be
charged.
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4. Death of a trustee. CDSCs may be waived on redemptions occurring
upon dissolution of a revocable living or grantor trust following
the death of the sole trustee where (i) the grantor of the trust is
the sole trustee and the sole life beneficiary, (ii) death occurs
following the purchase and (iii) the trust document provides for
dissolution of the trust upon the trustee's death. If the account
is transferred to a new registration (including that of a successor
trustee), the applicable CDSC will be charged upon any subsequent
redemption.
5. Returns of excess contributions. CDSCs may be waived on redemptions
required to return excess contributions made to retirement plans or
individual retirement accounts, so long as the FSF agrees to return
the applicable portion of any commission paid by Colonial.
6. Qualified Retirement Plans. CDSCs may be waived on redemptions
required to make distributions from qualified retirement plans
following (i) normal retirement (as stated in the Plan document) or
(ii) separation from service. CDSCs also will be waived on SWP
redemptions made to make required minimum distributions from
qualified retirement plans that have invested in Colonial funds for
at least two years.
The CDSC also may be waived where the FSF agrees to return all or an agreed upon
portion of the commission earned on the sale of the shares being redeemed.
HOW TO SELL SHARES
Shares may also be sold on any day the Exchange is open, either directly to the
Fund or through the shareholder's FSF. Sale proceeds generally are sent within
seven days (usually on the next business day after your request is received in
good form). However, for shares recently purchased by check, the Fund will send
proceeds only after the check has cleared (which may take up to 15 days).
To sell shares directly to the Fund, send a signed letter of instruction or
stock power form to CISC, along with any certificates for shares to be sold. The
sale price is the net asset value (less any applicable contingent deferred sales
charge) next calculated after the Fund receives the request in proper form.
Signatures must be guaranteed by a bank, a member firm of a national stock
exchange or another eligible guarantor institution. Stock power forms are
available from FSFs, CISC, and many banks. Additional documentation is required
for sales by corporations, agents, fiduciaries, surviving joint owners and
individual retirement account holders. Call CISC for more information
1-800-345-6611.
FSFs must receive requests before the time at which the Fund's shares are valued
to receive that day's price, are responsible for furnishing all necessary
documentation to CISC and may charge for this service.
Systematic Withdrawal Plan
If a shareholder's account balance is at least $5,000, the shareholder may
establish a SWP. A specified dollar amount or percentage of the then current net
asset value of the shareholder's investment in any Colonial fund designated by
the shareholder will be paid monthly, quarterly or semi-annually to a designated
payee. The amount or percentage the shareholder specifies generally may not, on
an annualized basis, exceed 12% of the value, as of the time the shareholder
makes the election, of the shareholder's investment. Withdrawals from Class B
and Class C shares of the fund under a SWP will be treated as redemptions of
shares purchased through the reinvestment of fund distributions, or, to the
extent such shares in the shareholder's account are insufficient to cover Plan
payments, as redemptions from the earliest purchased shares of such fund in the
shareholder's account. No CDSCs apply to a redemption pursuant to a SWP of 12%
or less, even if, after giving effect to the redemption, the shareholder's
account balance is less than the shareholder's base amount. Qualified plan
participants who are required by Internal Revenue Service regulation to withdraw
more than 12%, on an annual basis, of the value of their Class B and Class C
share account may do so but will be subject to a CDSC ranging from 1% to 5% of
the amount withdrawn. If a shareholder wishes to participate in a SWP, the
shareholder must elect to have all of the shareholder's income dividends and
other fund distributions payable in shares of the fund rather than in cash.
A shareholder or a shareholder's FSF of record may establish a SWP account by
telephone on a recorded line. However, SWP checks will be payable only to the
shareholder and sent to the address of record. SWPs from retirement accounts
cannot be established by telephone.
A shareholder may not establish a SWP if the shareholder holds shares in
certificate form. Purchasing additional shares (other than through dividend and
distribution reinvestment) while receiving SWP payments is ordinarily
disadvantageous because of duplicative sales charges. For this reason, a
shareholder may not maintain a plan for the accumulation of shares of the fund
(other than through the reinvestment of dividends) and a SWP at the same time.
SWP payments are made through share redemptions, which may result in a gain or
loss for tax purposes, may involve the use of principal and may eventually use
up all of the shares in a shareholder's account.
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A fund may terminate a shareholder's SWP if the shareholder's account balance
falls below $5,000 due to any transfer or liquidation of shares other than
pursuant to the SWP. SWP payments will be terminated on receiving satisfactory
evidence of the death or incapacity of a shareholder. Until this evidence is
received, CISC will not be liable for any payment made in accordance with the
provisions of a SWP.
The cost of administering SWPs for the benefit of shareholders who participate
in them is borne by the fund as an expense of all shareholders.
Shareholders whose positions are held in "street name" by certain FSFs may not
be able to participate in a SWP. If a shareholder's Fund shares are held in
"street name", the shareholder should consult his or her FSF to determine
whether he or she may participate in a SWP.
Telephone Redemptions. All Colonial fund shareholders and/or their FSFs (except
for Colonial Newport Tiger Cub Fund, Colonial Newport Japan Fund and Newport
Greater China Fund) are automatically eligible to redeem up to $50,000 of the
fund's shares by calling 1-800-422-3737 toll- free any business day between 9:00
a.m. and the close of trading of the Exchange (normally 4:00 p.m. Eastern time).
Transactions received after 4:00 p.m. Eastern time will receive the next
business day's closing price. Telephone redemption privileges for larger amounts
and for the Colonial Newport Tiger Cub Fund and the Colonial Newport Japan Fund
may be elected on the Application. CISC will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. Telephone
redemptions are not available on accounts with an address change in the
preceding 30 days and proceeds and confirmations will only be mailed or sent to
the address of record unless the redemption proceeds are being sent to a
pre-designated bank account. Shareholders and/or their FSFs will be required to
provide their name, address and account number. FSFs will also be required to
provide their broker number. All telephone transactions are recorded. A loss to
a shareholder may result from an unauthorized transaction reasonably believed to
have been authorized. No shareholder is obligated to execute the telephone
authorization form or to use the telephone to execute transactions.
Checkwriting (in this section, the "Adviser" refers to Colonial Management
Associates, Inc. in its capacity as the Adviser or Administrator of the Colonial
Funds) (Available only on the Class A shares of certain Colonial
funds) Shares may be redeemed by check if a shareholder has previously completed
an Application and Signature Card. CISC will provide checks to be drawn on The
First National Bank of Boston (the "Bank"). These checks may be made payable to
the order of any person in the amount of not less than $500 nor more than
$100,000. The shareholder will continue to earn dividends on shares until a
check is presented to the Bank for payment. At such time a sufficient number of
full and fractional shares will be redeemed at the next determined net asset
value to cover the amount of the check. Certificate shares may not be redeemed
in this manner.
Shareholders utilizing checkwriting drafts will be subject to the Bank's rules
governing checking accounts. There is currently no charge to the shareholder for
the use of checks. The shareholder should make sure that there are sufficient
shares in his or her open account to cover the amount of any check drawn since
the net asset value of shares will fluctuate. If insufficient shares are in the
shareholder's open account, the check will be returned marked "insufficient
funds" and no shares will be redeemed; the shareholder will be charged a $15
service fee for each check returned. It is not possible to determine in advance
the total value of an open account because prior redemptions and possible
changes in net asset value may cause the value of an open account to change.
Accordingly, a check redemption should not be used to close an open account. In
addition, a check redemption, like any other redemption, may give rise to
taxable capital gains.
Non Cash Redemptions. For redemptions of any single shareholder within any
90-day period exceeding the lesser of $250,000 or 1% of a Colonial fund's net
asset value, a Colonial fund may make the payment or a portion of the payment
with portfolio securities held by that Colonial fund instead of cash, in which
case the redeeming shareholder may incur brokerage and other costs in selling
the securities received.
DISTRIBUTIONS
Distributions are invested in additional shares of the same Class of the fund at
net asset value unless the shareholder elects to receive cash. Regardless of the
shareholder's election, distributions of $10 or less will not be paid in cash,
but will be invested in additional shares of the same Class of the Fund at net
asset value. Undelivered distribution checks returned by the post office will be
reinvested in your account.
Shareholders may reinvest all or a portion of a recent cash distribution without
a sales charge. A shareholder request must be received within 30 calendar days
of the distribution. A shareholder may exercise this privilege only once. No
charge is currently made for reinvestment.
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Shares of most funds that pay daily dividends will normally earn dividends
starting with the date the fund receives payment for the shares and will
continue through the day before the shares are redeemed, transferred or
exchanged. The daily dividends for Colonial Municipal Money Market Fund will be
earned starting with the day after that fund receives payments for the shares.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for the same class of shares of the other
continuously offered Colonial funds (with certain exceptions) on the basis of
the NAVs per share at the time of exchange. Class T and Z shares may be
exchanged for Class A shares of the other Colonial funds. The prospectus of each
Colonial fund describes its investment objective and policies, and shareholders
should obtain a prospectus and consider these objectives and policies carefully
before requesting an exchange. Shares of certain Colonial funds are not
available to residents of all states. Consult CISC before requesting an
exchange.
By calling CISC, shareholders or their FSF of record may exchange among accounts
with identical registrations, provided that the shares are held on deposit.
During periods of unusual market changes or shareholder activity, shareholders
may experience delays in contacting CISC by telephone to exercise the telephone
exchange privilege. Because an exchange involves a redemption and reinvestment
in another Colonial fund, completion of an exchange may be delayed under unusual
circumstances, such as if the fund suspends repurchases or postpones payment for
the fund shares being exchanged in accordance with federal securities law. CISC
will also make exchanges upon receipt of a written exchange request and, share
certificates, if any. If the shareholder is a corporation, partnership, agent,
or surviving joint owner, CISC will require customary additional documentation.
Prospectuses of the other Colonial funds are available from the Colonial
Literature Department by calling 1-800-426-3750.
A loss to a shareholder may result from an unauthorized transaction reasonably
believed to have been authorized. No shareholder is obligated to use the
telephone to execute transactions.
You need to hold your Class A and Class T shares for five months before
exchanging to certain funds having a higher maximum sales charge. Consult your
FSF or CISC. In all cases, the shares to be exchanged must be registered on the
records of the fund in the name of the shareholder desiring to exchange.
Shareholders of the other Colonial open-end funds generally may exchange their
shares at NAV for the same class of shares of the fund.
An exchange is a capital sale transaction for federal income tax purposes. The
exchange privilege may be revised, suspended or terminated at any time.
SUSPENSION OF REDEMPTIONS
A Colonial fund may not suspend shareholders' right of redemption or postpone
payment for more than seven days unless the Exchange is closed for other than
customary weekends or holidays, or if permitted by the rules of the SEC during
periods when trading on the Exchange is restricted or during any emergency which
makes it impracticable for the fund to dispose of its securities or to determine
fairly the value of its net assets, or during any other period permitted by
order of the SEC for the protection of investors.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the fund
and the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the fund or the
Trust's Trustees. The Declaration provides for indemnification out of fund
property for all loss and expense of any shareholder held personally liable for
the obligations of the fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances (which are
considered remote) in which the fund would be unable to meet its obligations and
the disclaimer was inoperative.
The risk of a particular fund incurring financial loss on account of another
fund of the Trust is also believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the other fund was
unable to meet its obligations.
SHAREHOLDER MEETINGS
As described under the caption "Organization and History" in the Prospectus of
each Colonial fund, the fund will not hold annual shareholders' meetings. The
Trustees may fill any vacancies in the Board of Trustees except that the
Trustees may not fill a vacancy if, immediately after filling such vacancy, less
than two-thirds of the Trustees then in office would have been elected to such
office by the shareholders. In addition, at such times as less than a majority
of the Trustees then in office have been elected to such office by the
shareholders, the Trustees must call a meeting of shareholders. Trustees may be
removed from office by a written consent signed by a majority of the outstanding
shares of the Trust or by a vote of the holders of a majority of the outstanding
shares at a meeting duly called for the purpose, which meeting shall be held
upon written request of the holders of not less than 10% of the outstanding
shares of the Trust. Upon written request by the holders of 1% of the
outstanding shares of the Trust stating that such shareholders of the Trust, for
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the purpose of obtaining the signatures necessary to demand a shareholders'
meeting to consider removal of a Trustee, request information regarding the
Trust's shareholders, the Trust will provide appropriate materials (at the
expense of the requesting shareholders). Except as otherwise disclosed in the
Prospectus and this SAI, the Trustees shall continue to hold office and may
appoint their successors.
At any shareholders' meetings that may be held, shareholders of all series would
vote together, irrespective of series, on the election of Trustees or the
selection of independent accountants, but each series would vote separately from
the others on other matters, such as changes in the investment policies of that
series or the approval of the management agreement for that series.
PERFORMANCE MEASURES
Total Return
Standardized average annual total return. Average annual total return is the
actual return on a $1,000 investment in a particular class of shares of the
fund, made at the beginning of a stated period, adjusted for the maximum sales
charge or applicable CDSC for the class of shares of the fund and assuming that
all distributions were reinvested at NAV, converted to an average annual return
assuming annual compounding.
Nonstandardized total return. Nonstandardized total returns may differ from
standardized average annual total returns in that they may relate to
nonstandardized periods, represent aggregate rather than average annual total
returns or may not reflect the sales charge or CDSC.
Yield
Money market. A money market fund's yield and effective yield is computed in
accordance with the SEC's formula for money market fund yields.
Non money market. The yield for each class of shares of a fund is determined by
(i) calculating the income (as defined by the SEC for purposes of advertising
yield) during the base period and subtracting actual expenses for the period
(net of any reimbursements), and (ii) dividing the result by the product of the
average daily number of shares of the fund that were entitled to dividends
during the period and the maximum offering price of the fund on the last day of
the period, (iii) then annualizing the result assuming semi-annual compounding.
Tax-equivalent yield is calculated by taking that portion of the yield which is
exempt from income tax and determining the equivalent taxable yield which would
produce the same after-tax yield for any given federal and state tax rate, and
adding to that the portion of the yield which is fully taxable. Adjusted yield
is calculated in the same manner as yield except that expenses voluntarily borne
or waived by Colonial have been added back to actual expenses.
Distribution rate. The distribution rate for each class of shares of a fund is
calculated by annualizing the most current period's distributions and dividing
by the maximum offering price on the last day of the period. Generally, the
fund's distribution rate reflects total amounts actually paid to shareholders,
while yield reflects the current earning power of the fund's portfolio
securities (net of the fund's expenses). The fund's yield for any period may be
more or less than the amount actually distributed in respect of such period.
The fund may compare its performance to various unmanaged indices published by
such sources as are listed in Appendix II.
The fund may also refer to quotations, graphs and electronically transmitted
data from sources believed by the Adviser to be reputable, and publications in
the press pertaining to a fund's performance or to the Adviser or its
affiliates, including comparisons with competitors and matters of national and
global economic and financial interest. Examples include Forbes, Business Week,
Money Magazine, The Wall Street Journal, The New York Times, The Boston Globe,
Barron's National Business & Financial Weekly, Financial Planning, Changing
Times, Reuters Information Services, Wiesenberger Mutual Funds Investment
Report, Lipper Analytical Services Corporation, Morningstar, Inc., Sylvia
Porter's Personal Finance Magazine, Money Market Directory, SEI Funds Evaluation
Services, FTA World Index and Disclosure Incorporated.
All data are based on past performance and do not predict future results.
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APPENDIX I
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S CORPORATION (S&P)
AAA bonds have the highest rating assigned by S&P.Capacity to pay interest and
repay principal is extremely strong.
AA bonds have a very strong capacity to pay interest and repay principal, and
they differ from AAA only in small degree.
A bonds have a strong capacity to pay interest and repay principal, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB bonds are regarded as having an adequate capacity to pay interest and repay
principal. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal than for bonds in the A
category.
BB, B, CCC, CC and C bonds are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and pay principal
in accordance with the terms of the obligation. BB indicates the lowest degree
of speculation and C the highest degree. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or large exposures to adverse conditions.
BB bonds have less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B bonds have a greater vulnerability to default but currently has the capacity
to meet interest payments and principal repayments. Adverse business, financial,
or economic conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC bonds have a currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, the bonds are not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC rating typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating C rating typically is applied to debt
subordinated to senior debt which assigned an actual or implied CCC- debt
rating. The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI rating is reserved for income bonds on which no interest is being paid.
D bonds are in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus(+) or minus(-) ratings from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Provisional Ratings. The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, although addressing credit
quality subsequent to completion of the project, makes no comments on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
Municipal Notes:
SP-1. Notes rated SP-1 have very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and interest.
Notes due in three years or less normally receive a note rating. Notes maturing
beyond three years normally receive a bond rating, although the following
criteria are used in making that assessment:
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue will be rated as a note).
Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be rated as a note).
Demand Feature of Variable Rate Demand Securities:
S&P assigns dual ratings to all long-term debt issues that have as part of their
provisions a demand feature. 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 are
usually used to denote the put (demand) option (for example, AAA/A-1+).
Normally, demand notes receive note rating symbols combined with commercial
paper symbols (for example, SP-1+/A-1+).
Commercial Paper:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
Corporate Bonds:
The description of the applicable rating symbols and their meanings is
substantially the same as the Municipal Bond ratings set forth above.
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MOODY'S INVESTORS SERVICES, INC. (MOODY'S)
Aaa bonds are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edge". Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair a fundamentally
strong position of such issues.
Aa bonds are judged to be of high quality by all standards. Together with Aaa
bonds they comprise what are generally known as high-grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large 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.
Those bonds in the Aa through B groups that Moody's believes possess the
strongest investment attributes are designated by the symbol Aa1, A1 and Baa1.
A bonds possess many favorable investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa bonds are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact, have speculative
characteristics as well.
Ba bonds are judged to have speculative elements: their future cannot be
considered as well secured. Often, the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B bonds generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa bonds are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca bonds represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
C bonds are the lowest rated class of bonds and issues so rated can be regarded
as having extremely poor prospects of ever attaining any real investment
standing.
Conditional Ratings. Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
conditions attach. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1, and B 1.
Municipal Notes:
MIG 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. This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security elements are
accounted for, but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Demand Feature of Variable Rate Demand Securities:
Moody's may assign a separate rating to the demand feature of a variable rate
demand security. Such a rating may include:
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.
VMIG 2. This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
29
<PAGE>
VMIG 3. This designation denotes favorable quality. All security elements are
accounted for, but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Commercial Paper:
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.
Corporate Bonds:
The description of the applicable rating symbols (Aaa, Aa, A) and their meanings
is identical to that of the Municipal Bond ratings as set forth above, except
for the numerical modifiers. Moody's applies numerical modifiers 1, 2, and 3 in
the Aa and A classifications of its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a midrange ranking; and the modifier 3
indicates that the issuer ranks in the lower end of its generic rating category.
FITCH INVESTORS SERVICES
Investment Grade Bond Ratings
AAA bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and/or
dividends and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated `AAA'. Because bonds rated in the
`AAA' and `AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated `F-1+'.
A bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than debt securities with higher ratings.
BBB bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest or dividends and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
securities and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
securities with higher ratings.
Conditional
A conditional rating is premised on the successful completion of a project or
the occurrence of a specific event.
Speculative-Grade Bond Ratings
BB bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified, which could assist the
obligor in satisfying its debt service requirements.
B bonds are considered highly speculative. While securities in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC bonds have certain identifiable characteristics that, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C bonds are in imminent default in payment of interest or principal.
30
<PAGE>
DDD, DD, and D bonds are in default on interest and/or principal payments. Such
securities are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. `DDD'
represents the highest potential for recovery on these securities, and `D'
represents the lowest potential for recovery.
DUFF & PHELPS CREDIT RATING CO.
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA - High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+, A, A - Protection factors are average but adequate. However, risk factors
are more available and greater in periods of economic stress.
BBB+, BBB, BBB - Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB - Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B - Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC - Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD - Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
31
<PAGE>
<TABLE>
<CAPTION>
APPENDIX II
1996
SOURCE CATEGORY RETURN (%)
<S> <C> <C>
Donoghue Tax-Free Funds 4.95
Donoghue U.S. Treasury Funds 4.71
Dow Jones & Company Industrial Index 28.91
Morgan Stanley Capital International EAFE Index 6.05
Morgan Stanley Capital International EAFE GDP Index 7.63
Libor Six-month Libor N/A
Lipper Short U.S. Government Funds 4.36
Lipper California Municipal Bond Funds 3.65
Lipper Connecticut Municipal Bond Funds 3.48
Lipper Closed End Bond Funds 8.13
Lipper Florida Municipal Bond Funds 3.00
Lipper General Bond Fund 6.16
Lipper General Municipal Bonds 3.30
Lipper Global Funds 16.51
Lipper Growth Funds 19.24
Lipper Growth & Income Funds 20.78
Lipper High Current Yield Bond Funds 13.67
Lipper High Yield Municipal Bond Debt 4.17
Lipper Fixed Income Funds 10.24
Lipper Insured Municipal Bond Average 2.83
Lipper Intermediate Muni Bonds 3.70
Lipper Intermediate (5-10) U.S. Government Funds 2.68
Lipper Massachusetts Municipal Bond Funds 3.39
Lipper Michigan Municipal Bond Funds 3.17
Lipper Mid Cap Funds 18.10
Lipper Minnesota Municipal Bond Funds 3.11
Lipper U.S. Government Money Market Funds 4.75
Lipper New York Municipal Bond Funds 3.15
Lipper North Carolina Municipal Bond Funds 2.78
Lipper Ohio Municipal Bond Funds 3.35
Lipper Small Company Growth Funds 20.20
Lipper U.S. Government Funds 1.72
Lipper Pacific Region Funds-Ex-Japan 11.11
Lipper Pacific Region (4.45)
Lipper International Funds 11.78
Lipper Balanced Funds 13.76
Lipper Tax-Exempt Money Market 2.93
Shearson Lehman Composite Government Index 2.77
Shearson Lehman Government/Corporate Index 2.90
Shearson Lehman Long-term Government Index (0.84)
S&P S&P 500 Index 22.95
S&P Utility Index 3.12
S&P Barra Growth 23.98
S&P Barra Value 21.99
S&P Midcap 400 19.20
First Boston High Yield Index 12.40
Swiss Bank 10 Year U.S. Government (Corporate Bond) 0.30
Swiss Bank 10 Year United Kingdom (Corporate Bond) 19.10
Swiss Bank 10 Year France (Corporate Bond) 7.80
Swiss Bank 10 Year Germany (Corporate Bond) 1.00
Swiss Bank 10 Year Japan (Corporate Bond) (3.40)
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C>
Swiss Bank 10 Year Canada (Corporate Bond) 10.5
Swiss Bank 10 Year Australia (Corporate Bond) 20.6
Morgan Stanley Capital International 10 Year Hong Kong (Equity) 21.87
Morgan Stanley Capital International 10 Year Belgium (Equity) 15.16
<CAPTION>
SOURCE CATEGORY RETURN (%)
<S> <C> <C>
Morgan Stanley Capital International 10 Year Austria (Equity) 7.65
Morgan Stanley Capital International 10 Year France (Equity) 10.35
Morgan Stanley Capital International 10 Year Netherlands (Equity) 16.90
Morgan Stanley Capital International 10 Year Japan (Equity) 3.39
Morgan Stanley Capital International 10 Year Switzerland (Equity) 13.14
Morgan Stanley Capital International 10 Year United Kingdom (Equity) 15.06
Morgan Stanley Capital International 10 Year Germany (Equity) 8.16
Morgan Stanley Capital International 10 Year Italy (Equity) 0.53
Morgan Stanley Capital International 10 Year Sweden (Equity) 16.42
Morgan Stanley Capital International 10 Year United States (Equity) 14.39
Morgan Stanley Capital International 10 Year Australia (Equity) 11.44
Morgan Stanley Capital International 10 Year Norway (Equity) 13.23
Morgan Stanley Capital International 10 Year Spain (Equity) 11.55
Morgan Stanley Capital International World GDP Index 11.50
-----
Morgan Stanley Capital International Pacific Region Funds Ex-Japan 20.54
Bureau of Labor Statistics Consumer Price Index (Inflation) 3.32
FHLB-San Francisco 11th District Cost-of-Funds Index N/A
Federal Reserve Six-Month Treasury Bill N/A
Federal Reserve One-Year Constant-Maturity Treasury Rate N/A
Federal Reserve Five-Year Constant-Maturity Treasury Rate N/A
Frank Russell & Co. Russell 2000 16.50
Frank Russell & Co. Russell 1000 Value 21.64
Frank Russell & Co. Russell 1000 Growth 11.26
Bloomberg NA NA
Credit Lyonnais NA NA
Statistical Abstract of the U.S. NA NA
World Economic Outlook NA NA
</TABLE>
*in U.S. currency
33
<PAGE>
Part C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A
Summary of Expenses
The Fund's Financial History
Incorporated by reference into Part B are the financial statements
contained in the Annual Report for Colonial Income Fund, dated December 31, 1996
(which was previously filed electronically pursuant to Section 30(b)(2) of the
Investment Company Act of 1940):
Fund Accession Number
---- ----------------
Colonial Income Fund (CIF) 0000021847-97-000048
The Financial Statements contained in the Annual Report are as follows:
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
Independent Auditors' Report
(b) Exhibits (each exhibit is applicable to all series of the Trust
unless otherwise referenced)
1. Amendment No. 3 to the Agreement and Declaration of Trust
(b)
2. Amended By-Laws dated 2/16/96 (a)
3. Not applicable
4. Form of Specimen of Share Certificate - filed as Exhibit 4
in Part C, Item 24(b) of Post-Effective Amendment No. 45
to the Registration Statement on Form N-1A of Colonial
Trust IV (File Nos. 2-62492 and 811-2865) and is hereby
incorporated by reference and made a part of this
Registration Statement
5. Management Agreement between Colonial Trust I, with
respect to CIF and Colonial Management Associates, Inc.
(a)
6.(a) Distributor's Contract with Colonial Investment
Services, Inc.
<PAGE>
(b) Form of Selling Agreement with Colonial Investment
Services, Inc. - filed as Exhibit 6(a) in Part C, Item
24(b) of Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A of Colonial Trust VI
(File Nos. 33-45117 and 811-6529) and is hereby
incorporated by reference and made a part of this
Registration Statement
(c) Form of Bank and Bank Affiliated Selling Agreement - filed
as Exhibit 6(c) in Part C, Item 24(b) of Post-Effective
Amendment No. 10 to the Registration Statement on Form
N-1A of Colonial Trust VI (File Nos. 33-45117 and
811-6529) and is hereby incorporated by reference and made
a part of this Registration Statement
(d) Form of Asset Retention Agreement - filed as Exhibit 6(d)
in Part C, Item 24(b) of Post-Effective Amendment No. 10
to the Registration Statement on Form N-1A of Colonial
Trust VI (File Nos. 33-45117 and 811-6529) and is hereby
incorporated by reference and made a part of this
Registration Statement
7. Not applicable
8.(a) Custody Agreement with Boston Safe Deposit and Trust
Company - filed as Exhibit 8 in Part C, Item 24(b) of
Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A of Colonial Trust VI (File Nos.
33-45117 and 811-6529) and is hereby incorporated by
reference and made a part of this Registration Statement
(b) Amendment to Custody Agreement with Boston Safe Deposit
and Trust Company filed as Exhibit 8(a) in Part C, Item
24(b) of Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A of Colonial Trust VI
(File Nos. 33-45117 and 811-6529) and is hereby
incorporated by reference and made a part of this
Registration Statement
(c) Form of Customer, Safekeeping and Procedural Agreements
(b)
9.(a) Pricing and Bookkeeping Agreement - filed as Exhibit
9(b) in Part C, Item 24(b) of Post-Effective Amendment No.
10 to the Registration Statement on Form N-1A of Colonial
Trust VI (File Nos. 33-45117 and 811-6529) and is hereby
incorporated by reference and made a part of this
Registration Statement
(b) Amendment to Appendix I of Pricing and Bookkeeping
Agreement - filed as Exhibit 9(i)(a) in Part C, Item 24(b)
of Post-Effective Amendment No. 29 to the Registration
Statement on Form N-1A of Colonial Trust
<PAGE>
II (File Nos. 2-66976 and 811-3009) and is incorporated by
reference and made a part of this Registration Statement
(c) Amended and Restated Shareholders' Servicing and Transfer
Agent Agreement as amended - filed as Exhibit No. 9(a) in
Part C, Item 24(b) of Post-Effective Amendment No. 10 to
the Registration Statement on Form N-1A of Colonial Trust
VI, (File Nos. 33-45117 & 811-6529) and is hereby
incorporated by reference and made a part of this
Registration Statement
(d) Amendment No. 9 to Schedule A of Amended and Restated
Shareholders' Servicing and Transfer Agent Agreement as
amended with Colonial Investors Service Center, Inc. -
filed as Exhibit 9(ii)(a) in Part C, Item 24(b) of
Post-Effective Amendment No. 29 to the Registration
Statement on Form N-1A of Colonial Trust III (File Nos.
2-66976 & 811-3009) and is hereby incorporated by
reference and made a part of this Registration Statement
(e) Amendment No. 14 to Appendix I of Amended and Restated
Shareholders' Servicing and Transfer Agent Agreement as
amended - filed as Exhibit 9(a)(ii) in Part C, Item 24(b)
of Post-Effective Amendment No. 97 to the Registration
Statement on Form N-1A of Colonial Trust III (File Nos.
2-15184 & 811-881) and is hereby incorporated by reference
and made a part of this Registration Statement
(f) Investment Account Application (incorporated herein by
reference to the Prospectus of each series of Colonial
Trust I)
10. Opinion and Consent of Counsel (b)
11. Consent of Independent Accountants
12. Not applicable
13. Not applicable
14.(a) Form of Colonial Group of Mutual Funds Money Purchase
Pension and Profit Sharing Plan Document and Trust
Agreement - filed as Exhibit 14(a) in Part C, Item 24(b)
of Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A of Colonial Trust VI (File Nos.
33-45117 & 811-6529) and is hereby incorporated by
reference and made a part of this Registration Statement
(b) Form of Colonial Group of Mutual Funds Money Purchase
Pension and Profit Sharing Establishment Book - filed as
Exhibit 14(b) in Part C, Item 24(b) of Post-Effective
Amendment No. 5 to the Registration
<PAGE>
Statement on Form N-1A of Colonial Trust VI (File Nos.
33-45117 & 811-6529) and is hereby incorporated by
reference and made a part of this Registration Statement
(c) Form of Colonial Group Funds Individual Retirement Account
and Application - filed as Exhibit 14(c) in Part C, Item
24(b) of Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A of Colonial Trust VI
(File Nos. 33-45117 & 811-6529) and is hereby incorporated
by reference and made a part of this Registration
Statement
(d) Form of Colonial Mutual Funds Simplified Employee Plan and
Salary Reduction Simplified Employee Plan - filed as
Exhibit 14(d) in Part C, Item 24(b) of Post-Effective
Amendment No. 5 to the Registration Statement on Form N-1A
of Colonial Trust VI (File Nos. 33-45117 & 811-6529) and
is hereby incorporated by reference and made a part of
this Registration Statement
(e) Form of Colonial Mutual Funds 401(k) Plan Document and
Trust Agreement - filed as Exhibit 14.(v) in Part C, Item
24(b) of Post-Effective Amendment No. 27 to the
Registration Statement on Form N-1A of Colonial Trust II
(File Nos. 2-66976 & 811-3009) and is hereby incorporated
by reference and made a part of this Registration
Statement
(f) Form of Colonial Mutual Funds 401(k) Plan Establishment
Booklet - filed as Exhibit 14.(vi) in Part C, Item 24(b)
of Post-Effective Amendment No. 27 to the Registration
Statement on Form N-1A of Colonial Trust II (File Nos.
2-66976 & 811-3009) and is hereby incorporated by
reference and made a part of this Registration Statement
(g) Form of Colonial Mutual Funds 401(k) Employee Reports
Booklet - filed as Exhibit 14(g) in Part C, Item 24(b) of
Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A of Colonial Trust VI (File Nos.
33-45117 & 811-6529) and is hereby incorporated by
reference and made a part of this Registration Statement
15. Distribution Plan adopted pursuant to Section 12b-1 of the
Investment Company Act of 1940, incorporated by reference
to the Distributor's Contract filed as Exhibit 6(a) hereto
16.(a) Calculation of Performance Information (a)
(b) Calculation of Yield (a)
17.(a) Financial Data Schedule (Class A)
<PAGE>
(b) Financial Data Schedule (Class B)
18.(a) Power of Attorney for: Robert J. Birnbaum, Tom Bleasdale,
Lora S. Collins, James E. Grinnell, William D. Ireland,
Jr., Richard W. Lowry, William E. Mayer, James L. Moody,
Jr., John J. Neuhauser, George L. Shinn, Robert L.
Sullivan and Sinclair Weeks, Jr. - filed as Exhibit 18(a)
in Part C, Item 24(b) of Post-Effective Amendment No. 97
to the Registration Statement on Form N-1A of Colonial
Trust III (File Nos. 2-15184 and 811-881) and is hereby
incorporated by reference and made a part of this
Registration Statement
18.(b) Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940
(a) Incorporated by reference to Post-Effective Amendment No.
40 filed with the Commission via EDGAR on April 15, 1996.
(b) Incorporated by reference to Post-Effective Amendment No.
42 filed with the Commission via EDGAR on April 22, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant
None
Item 26. Number of Holders of Securities
(1) (2)
Title of Class Number of Record Holders as of
June 30, 1997
Shares of beneficial
interest 7,454 Class A recordholders (CIF)
2,632 Class B recordholders (CIF)
Item 27. Indemnification
See Article VIII of Amendment No. 3 to the Agreement and
Declaration of Trust filed as Exhibit 1 hereto.
Item 28. Business and Other Connections of Investment Adviser
The following sets forth business and other connections of
each director and officer of Colonial Management Associates,
Inc. (see next page):
<PAGE>
ITEM 28.
- --------
Registrant's investment adviser/administrator, Colonial Management
Associates, Inc. ("Colonial"), is registered as an investment adviser under
the Investment Advisers Act of 1940 (1940 Act). Colonial Advisory Services,
Inc. (CASI), an affiliate of Colonial, is also registered as an investment
adviser under the 1940 Act. As of the end of its fiscal year, December
31, 1996, CASI had one institutional, corporate or other account under
management or supervision, the market value of which was approximately $42.0
million. As of the end of its fiscal year, December 31, 1996, Colonial
was the investment adviser, sub-adviser and/or administrator to 49 Colonial
mutual funds (including funds sub-advised by Colonial, the market value of which
investment companies was approximately $17,165.0 million. Colonial Investment
Services, Inc., a subsidiary of Colonial Management Associates, Inc., is the
principal underwriter and the national distributor of all of the funds in the
Colonial Mutual Funds complex, including the Registrant.
The following sets forth the business and other connections of each
director and officer of Colonial Management Associates, Inc.:
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 07/01/97. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
Allard, Laurie V.P.
Andersen, Peter V.P.
Archer, Joseph A. V.P.
Babbitt, Debra V.P. Colonial Investment Services, Inc. V.P.,
Comp. Off.
Berliant, Allan V.P.
Bertocci, Bruno V.P. Stein Roe Global Capital Mngmt. Principal
Boatman, Bonny E. Dir.; Colonial Advisory Services, Inc. Exec. V.P.
Sr.V.P.;
IPC Mbr.
Bunten, Walter V.P.
Campbell, Kimberly V.P.
Carnabucci,
Dominick V.P.
Carroll, Sheila A. Sr.V.P.;
Dir.
Citrone, Frank V.P.
Cogger, Harold W. Dir.; The Colonial Group, Inc. Dir.;
Chairman; Chrm.
IPC Mbr.; Colonial Trusts I through VII Pres.
Exe. Cmte. Colonial High Income
Mbr. Municipal Trust Pres.
Colonial InterMarket Income
Trust I Pres.
Colonial Intermediate High
Income Fund Pres.
Colonial Investment Grade
Municipal Trust Pres.
Colonial Municipal Income
Trust Pres.
LFC Utilities Trust Pres.
Liberty Financial Exec V.P.;
Companies, Inc. Dir.
Stein Roe & Farnham Dir.
Incorporated
Conlin, Nancy V.P.; Colonial Investors Service
Asst. Center, Inc. Asst. Clerk
Sec.; The Colonial Group, Inc. Asst. Clerk
Asst Colonial Advisory Services,
Clerk and Inc. Asst. Clerk
Counsel Colonial Investment Services,
Inc. Asst. Clerk
Colonial Trusts I through VII Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
LFC Utilities Trust Asst. Sec.
Daniszewski, V.P. Colonial Investment Services,
Joseph J. Inc. V.P.
Desilets, Marian V.P.
DiSilva, Linda V.P. Colonial Advisory Services, Compliance
IPC Mbr. Inc. Officer
Ericson, Carl C. Dir; Sr. Colonial Intermediate High
V.P. Income Fund V.P.
IPC Mbr. Colonial Advisory Services,
Inc. Exec. V.P.
Evans, C. Frazier Dir.; Colonial Investment Services,
Sr.V.P. Inc. Sr. V.P.
Feingold, Andrea S. V.P. Colonial Intermediate High
Income Fund V.P.
Colonial Advisory Services,
Inc. Sr. V.P.
Feloney, Joseph L. V.P. Colonial Investment Services,
Inc. A.V.P.
Finnemore, V.P. Colonial Advisory Services,
Leslie W. Inc. Sr. V.P.
Franklin, Sr. V.P.
Fred J.
Gauger, Richard V.P.
Gerokoulis, V.P. Colonial Investment Services,
Stephen A. Inc. Sr. V.P.
Gibson, Stephen E. Dir.; Pres.; The Colonial Group, Inc. Dir.;
CEO; Exec. Pres.; CEO;
Cmte. Mbr. Exec. Cmte.
Mbr.
Colonial Investment Services, Dir.; Chm.
Inc.
Colonial Advisory Services, Dir.; Chm.
Inc.
Colonial Investors Service Dir.; Chm.
Center, Inc.
Harasimowicz, V.P. Colonial Investment Services,
Stephen Inc. V.P.
Harris, David V.P. Stein Roe Global Capital Mngmt Principal
Hartford, Brian V.P.
Haynie, James P. V.P. Colonial Advisory Services,
Inc. Sr. V.P.
Hill, William V.P.
Iudice, Jr. Philip V.P. The Colonial Group, Inc. Controller,
Controller Chief Acctg.
Officer
Colonial Investment Services, CFO
Inc. Treasurer
Colonial Advisory Services,
Inc. Controller
Jacoby, Timothy J. Sr. V.P. Colonial Trusts I through VII Treasr.,CFO
Colonial High Income
Municipal Trust Treasr.,CFO
Colonial InterMarket Income
Trust I Treasr.,CFO
Colonial Intermediate High
Income Fund Treasr.,CFO
Colonial Investment Grade
Municipal Trust Treasr.,CFO
Colonial Municipal Income
Trust Treasr.,CFO
LFC Utilities Trust Treasr.,CFO
Johnson, Gordon V.P.
Knudsen, Gail V.P.
Koonce, Michael H. V.P.; Colonial Trusts I through VII Asst. Sec.
Asst. Colonial High Income
Sec.; Municipal Trust Asst. Sec.
Asst. Colonial InterMarket Income
Clerk & Trust I Asst. Sec.
Counsel Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
LFC Utilities Trust Asst. Sec.
Colonial Investment Services,
Inc. Asst. Clerk
Colonial Investors Service
Center, Inc. Asst. Clerk
The Colonial Group, Inc. Asst. Clerk
Colonial Advisory Services,
Inc. Asst. Clerk
Lennon, John E. V.P. Colonial Advisory Services,
Inc. V.P.
Lenzi, Sharon V.P.
Lessard, Kristen V.P.
Loring, William C. V.P.
Lydecker, Peter L. V.P.; Colonial Trusts I through VII Controller;CAO
Asst. Colonial High Income
Treasurer Municipal Trust Controller;CAO
Colonial InterMarket Income
Trust I Controller;CAO
Colonial Intermediate High
Income Fund Controller;CAO
Colonial Investment Grade
Municipal Trust Controller;CAO
Colonial Municipal Income
Trust Controller;CAO
LFC Utilities Trust Controller;CAO
MacKinnon, Dir.;
Donald S. Sr.V.P.
Newman, Maureen V.P.
Ostrander, Laura V.P.
Peters, Helen F. Dir.; Colonial Advisory Services, Dir. Pres.,
Sr.V.P.; Inc. CEO
IPC Mbr.
Peterson, Ann T. V.P. Colonial Advisory Services,
Inc. V.P.
Rao, Gita V.P.
Reading, John V.P.; Colonial Investors Service
Asst. Center, Inc. Asst. Clerk
Sec.; The Colonial Group, Inc. Asst. Clerk
Asst Colonial Advisory Services,
Clerk and Inc. Asst. Clerk
Counsel Colonial Investment Services,
Inc. Asst. Clerk
Colonial Trusts I through VII Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
LFC Utilities Trust Asst. Sec.V.P.
Colonial Trusts I through VII Asst. Sec.
Rega, Michael V.P.
Rie, Daniel Sr.V.P.; Colonial Advisory Services,
IPC Mbr.; Inc. Exec. V.P.
Dir.
Scoon, Davey S. Dir.; Colonial Advisory Services,
Exe.V.P.; Inc. Dir.
IPC Mbr.; Colonial High Income
Exec. Comm. Municipal Trust V.P.
Mbr. Colonial InterMarket Income
Trust I V.P.
Colonial Intermediate High
Income Fund V.P.
Colonial Investment Grade
Municipal Trust V.P.
Colonial Municipal Income
Trust V.P.
Colonial Trusts I through VII V.P.
LFC Utilities Trust V.P.
Colonial Investors Service Dir; Pres.
Center, Inc.
The Colonial Group, Inc. COO; Ex. V.P.
Colonial Investment Services,
Inc. Director
Seibel, Sandra L. V.P.
Spanos, Gregory Sr. V.P.
Stern, Arthur O. Exe.V.P.; Colonial Advisory Services,
Dir.; Inc. Clerk, Dir.
Sec.; Colonial High Income
Clrk. & Municipal Trust Secretary
Gnrl. Colonial InterMarket Income
Counsel; Trust I Secretary
IPC Mbr. Colonial Intermediate High
Income Fund Secretary
Colonial Investment Grade
Municipal Trust Secretary
Colonial Municipal Income
Trust Secretary
Colonial Trusts I through VII Secretary
LFC Utilities Trust Secretary
Colonial Investors Service
Center, Inc. Clerk
The Colonial Group, Inc. Exec. V.P.;
Clerk; General
Counsel
Colonial Investment Services, Dir., Chrmn.
Inc. Counsel; Clrk.
Stevens, Richard V.P. Colonial Advisory Services,
Inc. V.P.
Stoeckle, Mark V.P.
Wallace, John V.P.
Welsh, Stephen Treasurer The Colonial Group, Inc. Treasurer
Colonial Advisory Service,
Inc. Treasurer
Colonial Investors Service Treasurer
Center, Inc. Controller
Young, Deborah V.P. Colonial Investment Services
Inc. V.P.
- ------------------------------------------------
*The Principal address of all of the officers and directors of the investment
adviser is One Financial Center, Boston, MA 02111.
<PAGE>
Item 29 Principal Underwriter
- ------- ---------------------
(a) Colonial Investment Services, Inc. a subsidiary of Colonial
Management Associates, Inc., Registrant's principal
underwriter, also acts in the same capacity to Colonial Trust I,
Colonial Trust II, Colonial Trust III, Colonial Trust IV,
Colonial Trust V, Colonial Trust VI, Colonial Trust VII;
and sponsor for Colony Growth Plans (public offering of which
were discontinued June 14, 1971).
(b) The table below lists each director or officer of the principal
underwriter named in the answer to Item 21.
(1) (2) (3)
Name and Principal Position and Offices Positions and
Business Address* with Principal Offices with
Underwriter Registrant
- ------------------ ------------------- --------------
Anderson, Judith V.P. None
Babbitt, Debra V.P. and None
Comp. Officer
Ballou, Rich Regional V.P. None
Balzano, Christine R. V.P. None
Bartlett, John Sr. V.P. None
Brown, Beth V.P. None
Burtman, Tracy V.P. None
Carroll, Greg Regional V.P. None
Chrzanowski, Regional V.P. None
Daniel
Clapp, Elizabeth A. V.P. None
Crossfield, Andrew Regional V.P. None
Daniszewski, V.P. None
Joseph J.
Davey, Cynthia Regional Sr. V.P. None
Desilets, Marian V.P. None
DiMaio, Steve V.P. None
Donovan, John Regional V.P. None
Downey, Christopher V.P. None
Eckelman, Bryan Sr. V.P. None
Emerson, Kim P. Regional V.P. None
Erickson, Cynthia G. Sr. V.P. None
Evans, C. Frazier Sr. V.P. None
Feldman, David Sr. V.P. None
Fifield, Robert Regional V.P. None
Gerokoulis, Sr. V.P. None
Stephen A.
Gibson, Stephen E. Director; Chairman None
of the Board
Goldberg, Matthew Regional V.P. None
Harasimowicz, V.P. None
Stephen
Harrington, Tom Sr. Regional V.P. None
Hodgkins, Joseph Sr. Regional V.P. None
Iudice, Jr., Philip Treasurer and CFO None
Karagiannis, Sr. V.P. None
Marilyn
Kelley, Terry M. Regional V.P. None
Kelson, David W. Sr. V.P. None
Menchin, Catherine V.P. None
Moberly, Ann R. Regional Sr. V.P. None
Morner, Patrick V.P. None
Nerney, Andrew Regional V.P. None
Nolin, Kevin V.P. None
O'Shea, Kevin Sr. V.P. None
Predmore, Tracy Regional V.P. None
Reed, Christopher B. Sr. Regional V.P. None
Scarlott, Rebecca V.P. None
Schulman, David Regional V.P. None
Scoon, Davey Director V.P.
Scott, Michael W. Sr. V.P. None
Spanos, Gregory J. Sr. V.P. None
Stern, Arthur O. Clerk and Secretary
Counsel, Dir.
Studer, Eric Regional V.P. None
Sutton, R. Andrew Regional V.P. None
VanEtten, Keith H. V.P. None
Villanova, Paul Regional V.P. None
Wallace, John V.P. None
Welsh, Stephen Treasurer Asst. Treasurer
Wess, Valerie Regional V.P. None
Young, Deborah V.P. None
- --------------------------
* The address for each individual is One Financial Center, Boston, MA
02111.
<PAGE>
Item 30. Location of Accounts and Records
Persons maintaining physical possession of accounts, books and
other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the Rules thereunder
include Registrant's Secretary; Registrant's investment adviser
and/or administrator, Colonial Management Associates, Inc.;
Registrant's principal underwriter, Colonial Investment
Services, Inc.; Registrant's transfer and dividend disbursing
agent, Colonial Investors Service Center, Inc.; and the
Registrant's custodian, Boston Safe Deposit and Trust Company.
The custodian's address is One Boston Place, Boston, MA
02108-2624.
Item 31. Management Services
See Item 5, Part A and Item 16, Part B
Item 32. Undertakings
(a) Not applicable
(b) The Registrant hereby undertakes to promptly call a meeting
of shareholders for the purpose of voting upon the question
of removal of any trustee or trustees when requested in
writing to do so by the record holders of not less than 10
per cent of the Registrant's outstanding shares and to
assist its shareholders in communicating with other
shareholders in accordance with the requirements of Section
16(c) of the Investment Company Act of 1940.
(c) The Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered a copy of the Registrant's
series' latest annual report to shareholders upon request
and without charge.
<PAGE>
******************
NOTICE
A copy of the Agreement and Declaration of Trust, as amended, of Colonial Trust
I is on file with the Secretary of State of the Commonwealth of Massachusetts
and notice is hereby given that the instrument has been executed on behalf of
the Trust by an officer of the Trust as an officer and by its Trustees as
trustees and not individually and the obligations of or arising out of this
instrument are not binding upon any of the Trustees, officers or shareholders
individually but are binding only upon the assets and property of the Trust.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of the Registration Statement pursuant to Rule
485(b) and has duly caused this Post-Effective Amendment No. 44 to its
Registration Statement under the Securities Act of 1933 and the Post-Effective
Amendment No. 26 under the Investment Company Act of 1940, to be signed in this
City of Boston, and The Commonwealth of Massachusetts on this 24th day of
July, 1997.
COLONIAL TRUST I
By: HAROLD W. COGGER
----------------
Harold W. Cogger, President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment has been signed below by the following persons in their capacities and
on the date indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
HAROLD W. COGGER President (chief July 24, 1997
- ---------------------- executive officer)
Harold W. Cogger
TIMOTHY J. JACOBY Treasurer and July 24, 1997
- ----------------------- Chief Financial Officer
Timothy J. Jacoby (principal financial
officer)
PETER L. LYDECKER Controller and July 24, 1997
- ----------------------- Chief Accounting Officer
Peter L. Lydecker (principal accounting
officer)
<PAGE>
/s/ ROBERT J. BIRNBAUM* Trustee
- ----------------------
Robert J. Birnbaum
/s/ TOM BLEASDALE* Trustee
- ----------------------
Tom Bleasdale
/s/ LORA S. COLLINS* Trustee
- ----------------------
Lora S. Collins
/s/ JAMES E. GRINNELL* Trustee
- ----------------------
James E. Grinnell
/s/ WILLIAM D. IRELAND, JR.* Trustee */s/ NANCY L. CONLIN
- ---------------------- ---------------------
William D. Ireland, Jr. Nancy L. Conlin
Attorney-in-fact
For each Trustee
July 24, 1997
/s/ RICHARD W. LOWRY* Trustee
- ----------------------
Richard W. Lowry
/s/ WILLIAM E. MAYER* Trustee
- ----------------------
William E. Mayer
/s/ JAMES L. MOODY, JR. * Trustee
- ----------------------
James L. Moody, Jr.
/s/ JOHN J. NEUHAUSER* Trustee
- ----------------------
John J. Neuhauser
/s/ GEORGE L. SHINN* Trustee
- ----------------------
George L. Shinn
/s/ ROBERT L. SULLIVAN* Trustee
- ----------------------
Robert L. Sullivan
/s/ SINCLAIR WEEKS, JR. * Trustee
- ----------------------
Sinclair Weeks, Jr.
<PAGE>
Exhibit Index
Exhibit
- -------
6.(a) Distributor's Contract
11. Consent of Independent Accountants
17.(a) Financial Data Schedule (Class A)
17.(b) Financial Data Schedule (Class B)
18.(b) Amended Plan pursuant to Rule 18f-3(d)
DISTRIBUTOR'S CONTRACT
Each Massachusetts Business Trust (Trust) designated in Appendix 2 from
time to time, acting severally, and Colonial Investment Services, Inc. (CISI), a
Massachusetts corporation, agree effective July 1, 1997:
1. APPOINTMENT OF CISI. The Trust may offer an unlimited number of
separate investment series (Funds), each of which may have multiple classes of
shares (Shares). The Trust appoints CISI as the principal underwriter and
exclusive distributor of Shares of Funds designated in Appendix 2. The Contract
will apply to each Fund as set forth on Appendix 2 as it may be amended from
time to time with the latest effective date and signed.
2. SALE OF SHARES. CISI, acting as principal for its own account and not
as agent for the Trust, shall have the exclusive right to purchase Shares and
shall sell Shares in accordance with a Fund's prospectus on a "best efforts"
basis. CISI shall purchase Shares at a price equal to the net asset value only
as needed to fill orders. CISI will receive all sales charges. CISI will notify
the Trust at the end of each business day of the Shares of each Fund to be
purchased. The Trust may at any time refuse to sell Shares hereunder and may
issue Shares directly to shareholders as a stock split or dividend.
3. REDEMPTION OF SHARES. The Trust will redeem in accordance with a
Fund's prospectus all Shares tendered by CISI pursuant to shareholder
redemption requests. CISI will notify the Trust at the end of each business
day of the Shares of each Fund tendered.
4. COMPLIANCE. CISI will comply with applicable provisions of the
prospectus of a Fund and with applicable laws and rules relating to the sale of
Shares and indemnifies the Trust for any damage or expense from unlawful acts by
CISI and persons acting under its direction or authority.
5. EXPENSES. The Trust will pay all expenses associated with:
a. the registration and qualification of Shares for sale;
b. shareholder meetings and proxy solicitation;
c. Share certificates;
d. communications to shareholders; and
e. taxes payable upon the issuance of Shares to CISI.
CISI will pay all expenses associated with advertising and sales literature
including those of printing and distributing prospectuses and shareholder
reports, proxy materials and other shareholder communications used as sales
literature.
6. 12b-1 PLAN. Except as indicated in Appendix 1 which may be revised from
time to time, dated and signed, this Section 6 constitutes each Fund's
distribution plan (Plan) adopted pursuant to Rule 12b-1 (Rule) under the
Investment Company Act of 1940 (Act).
A. The Fund* shall pay CISI monthly a service fee at the annual
rate of 0.25% of the net assets of its Class A, B and C Shares on the
20th of each month and a distribution fee at the annual rate of 0.75%
of the average daily net assets of its Class B and C Shares. Each of
the Funds identified on Appendix 1 as having a Class E share 12b-1 Plan
shall pay CISI monthly a service fee at the annual rate of 0.25% of the
net assets of its Class E Shares on the 20th of each month and a
distribution fee at the annual rate of 0.10% of the average daily net
assets of its Class E Shares. Each of the Funds identified on Appendix
1 as having a Class F share 12b-1 Plan shall pay CISI monthly a service
fee at the annual rate of 0.25% of the net assets of its Class F Shares
on the 20th of each month and a distribution fee at the annual rate of
0.75% of the average daily net assets of its Class F Shares. Each of
the Funds identified on Appendix 1 as having a Class G share 12b-1 Plan
shall pay CISI monthly a service fee at the annual rate of 0.25% of the
net assets of its Class G Shares on the 20th of each month and a
distribution fee at the annual rate of 0.10% of the average daily net
assets of its Class G Shares outstanding less than five years from the
date of purchase and 0.25% of the average daily net assets of its Class
G Shares outstanding for five years or more. Each of the Funds
identified on Appendix 1 as having a Class H share 12b-1 Plan shall pay
CISI monthly a service fee at the annual rate of 0.25% of the net
assets of its Class H Shares on the 20th of each month and a
distribution fee at the annual rate of 0.75% of the average daily net
assets of its Class H Shares. CISI may use the service and distribution
fees received from the Fund as reimbursement for commissions and
service fees paid to financial service firms which sold Fund Shares and
to defray other CISI distribution and shareholder servicing expenses,
including its expenses set forth in Paragraph 5. CISI shall provide to
the Trust's Trustees, and the Trustees shall review, at least
quarterly, reports setting forth all Plan expenditures, and the
purposes for those expenditures. Amounts payable under this paragraph
are subject to any limitations on such amounts prescribed by applicable
laws or rules.
B. Payments by the Trust to CISI and its affiliates (including
Colonial Management Associates, Inc.) other than any prescribed by
Section 6A which may be indirect financing of distribution costs are
authorized by this Plan.
C. The Plan shall continue in effect with respect to a Class of
Shares only so long as specifically approved for that Class at least
annually as provided in the Rule. The Plan may not be amended to
increase materially the service fee or distribution fee with respect to
a Class of Shares without such shareholder approval as is required by
the Rule and any applicable orders of the Securities and Exchange
Commission, and all material amendments of the Plan must be approved in
the manner described in the Rule. The Plan may be terminated with
respect to a Class of Shares at any time as provided in the Rule
without payment of any penalty. The continuance of the Plan shall be
effective only if the selection and nomination of the Trust's Trustees
who are not interested persons (as defined under the Act) of the Trust
is effected by such non-interested Trustees as required by the Rule.
7. CONTINUATION, AMENDMENT OR TERMINATION. This Contract (a) supersedes
and replaces any contract or agreement relating to the subject matter hereof in
effect prior to the date hereof, (b) shall continue in effect only so long as
specifically approved at least annually by the Trustees or shareholders of the
Trust and (c) may be amended at any time by written agreement of the parties,
each in accordance with the Act. This Contract (a) shall terminate immediately
upon the effective date of any later dated agreement relating to the subject
matter hereof, and (b) may be terminated upon 60 days notice without penalty by
a vote of the Trustees or by CMAI or otherwise in accordance with the Act and
will terminate immediately in the event of assignment (as defined under the
Act). Upon termination the obligations of the parties under this Contract shall
cease except for unfulfilled obligations and liabilities arising prior to
termination. All notices shall be in writing and delivered to the office of the
other party.
8. AGREEMENT AND DECLARATION OF TRUST. A copy of the document establishing
the Trust is filed with the Secretary of The Commonwealth of Massachusetts. This
Contract is executed by officers not as individuals and is not binding upon any
of the Trustees, officers or shareholders of the Trust individually but only
upon the assets of the Fund.
Agreed:
EACH TRUST DESIGNATED IN APPENDIX 2 COLONIAL INVESTMENT SERVICES, INC.
By: By:
Arthur O. Stern, Marilyn Karagiannis,
Secretary For Each Trust Senior Vice President
<PAGE>
APPENDIX 1
THE FOLLOWING IS APPLICABLE TO THE DESIGNATED FUND'S 12b-1 PLAN:
1. For Colonial Government Money Market Fund and Colonial Municipal Money
Market Fund, the first sentence of Section 6A is replaced with: "The
Fund shall pay CISI monthly a service fee at an annual rate of 0.25%
of the net assets of its Class B and C Shares on the 20th of each
month and a distribution fee at an annual rate of 0.75% of the average
daily net assets of its Class B and C Shares."
2. For Colonial California Tax-Exempt Fund, Colonial Connecticut
Tax-Exempt Fund, Colonial Florida Tax-Exempt Fund, Colonial
Massachusetts Tax-Exempt Fund, Colonial Michigan Tax-Exempt Fund,
Colonial Minnesota Tax-Exempt Fund, Colonial New York Tax-Exempt Fund,
Colonial North Carolina Tax-Exempt Fund and Colonial Ohio Tax-Exempt
Fund the first sentence of Section 6A is replaced with: "The Fund
shall pay CISI monthly (i) a service fee at the annual rate of (A)
0.10% of the net assets attributable to its Class A and Class B Shares
outstanding as of the 20th day of each month which were issued prior
to December 1, 1994, and (B) 0.25% of the net assets attributable to
its Class A, B and C Shares outstanding as of the 20th day of each
month which were issued on or after December 1, 1994, and (ii) a
distribution fee at an annual rate of 0.75% of the average daily net
assets of its Class B and C Shares."
3. For The Colonial Fund and Colonial Growth Shares Fund, the first
sentence of Section 6A is replaced with: "The Fund shall pay CISI
monthly a service fee at an annual rate of 0.15% of the net assets on
the 20th of each month of its Class A and B Shares outstanding which
were issued prior to April 1, 1989, and 0.25% of the net assets on the
20th of each month of its Class A, B and C Shares issued thereafter,
and a distribution fee at an annual rate of 0.75% of the average daily
net assets of its Class B and C Shares.
4. For Colonial Strategic Income Fund, the first sentence of Section 6A
is replaced with: "The Fund shall pay CISI monthly a service fee at an
annual rate of 0.15% of the net assets on the 20th of each month of
its Class A and B Shares outstanding which were issued prior to
January 1, 1993, and 0.25% of the net assets on the 20th of each month
of its Class A, B and C Shares issued thereafter, and a distribution
fee at an annual rate of 0.75% of the average daily net assets of its
Class B and C Shares."
5. For Colonial Short Duration U.S. Government Fund and Colonial
Intermediate Tax-Exempt Fund, the first sentence of Section 6A is
replaced with: "The Fund shall pay CISI monthly a service fee at an
annual rate of 0.20% of the net assets on the 20th of each month of
its Class A, B and C Shares and a distribution fee at an annual rate
of 0.65% of the average daily net assets of its Class B and C Shares."
6. For Colonial Strategic Balanced Fund, the following sentence is added
as the second sentence of Section 6A: " The Fund shall also pay CISI
an annual distribution fee not exceeding 0.30% of the average net
assets attributed to its Class A Shares."
7. Colonial Newport Tiger Fund does not offer a 12b-1 plan for Class T
and Class Z Shares.
8. Colonial Small Stock Fund, The Colonial Fund, Colonial Newport Tiger
Cub Fund and Colonial Newport Japan Fund do not offer a 12b-1 plan for
Class Z Shares.
9. The Funds with Class E, Class F, Class G and Class H share 12b-1 Plans
are as follows: Colonial Tax-Managed Growth Fund
Dated: July 1, 1997
By:
Arthur O. Stern, Secretary For Each Trust
By:
Marilyn Karagiannis, Senior Vice President
Colonial Investment Services, Inc.
<PAGE>
APPENDIX 2
Trust Series
Colonial Trust I
Colonial High Yield Securities Fund
Colonial Income Fund
Colonial Strategic Income Fund
Colonial Tax-Managed Growth Fund
Colonial Trust II
Colonial Government Money Market Fund
Colonial U.S. Government Fund
Colonial Short Duration U.S. Government Fund
Colonial Newport Tiger Cub Fund
Colonial Newport Japan Fund
Newport Greater China Fund
Colonial Trust III
Colonial Select Value Fund
The Colonial Fund
Colonial Federal Securities Fund
Colonial Global Equity Fund
Colonial International Horizons Fund
Colonial International Fund for Growth
Colonial Strategic Balanced Fund
Colonial Global Utilities Fund
Colonial Trust IV
Colonial High Yield Municipal Fund
Colonial Intermediate Tax-Exempt Fund
Colonial Tax-Exempt Fund
Colonial Tax-Exempt Insured Fund
Colonial Municipal Money Market Fund
Colonial Utilities Fund
Colonial Trust V
Colonial Massachusetts Tax-Exempt Fund
Colonial Connecticut Tax-Exempt Fund
Colonial California Tax-Exempt Fund
Colonial Michigan Tax-Exempt Fund
Colonial Minnesota Tax-Exempt Fund
Colonial New York Tax-Exempt Fund
Colonial North Carolina Tax-Exempt Fund
Colonial Ohio Tax-Exempt Fund
Colonial Florida Tax-Exempt Fund
Colonial Trust VI
Colonial U.S. Stock Fund
Colonial Small Cap Value Fund
Colonial Aggressive Growth Fund
Colonial Equity Income Fund
Colonial International Equity Fund
Colonial Trust VII
Colonial Newport Tiger Fund
By:
Arthur O. Stern, Secretary For Each Trust
By:
Marilyn Karagiannis, Senior Vice President
Colonial Investment Services, Inc.
Dated: July 1, 1997
S:\FUNDS\GENERAL\CONTRACT\DISTCON2.DOC
- --------
* Except as indicated in Appendix 1.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Statement of Additional Information constituting part of
this Post-Effective Amendment No. 44 to the registration
statement on Form N-1A (the "Registration Statement") of our
report dated February 10, 1997, relating to the financial
statements and financial highlights appearing in the
December 31, 1996 Annual Report to Shareholders of Colonial
Income Fund, a series of Colonial Trust I, which are also
incorporated by reference into the Registration Statement.
We also consent to the references to us under the headings
"The Fund's Financial History" in the Prospectus and
"Independent Accountants" in the Statement of Additional
Information.
Price Waterhouse LLP
Boston, Massachusetts
July 24, 1997
COLONIAL TRUST I-VII
Plan pursuant to Rule 18f-3(d) under the Investment Company Act of 1940
Effective April 22, 1996(1)
Amended July 1, 1997
Each series ("Fund") of Colonial Trusts I-VII (the "Trusts") may from time to
time issue one or more of the following classes of shares: Class A shares, Class
B shares, Class C shares, Class E shares, Class F shares, Class shares, Class H
shares, Class T shares and Class Z shares. Each class is subject to such
investment minimums and other conditions of eligibility as set forth in the
Funds' prospectuses as from time to time in effect. The differences in expenses
among these classes of shares, and the conversion and exchange features of
each class of shares, are set forth below in this Plan, which is subject to
change, to the extent permitted by law and by the Declaration of Trust and
By-laws of each Trust, by action of the Board of Trustees of each Trust.
Class A shares
Class A shares are offered at net asset value ("NAV") plus the initial sales
charges described in the Funds' prospectuses as from time to time in effect.
Initial sales charges may not exceed 6.50%, and may be reduced or waived as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act") and as described in the Funds' prospectuses from time to time in effect.
Purchases of $1 million to $5 million of Class A shares that are redeemed within
18 months from purchase are subject to a contingent deferred sales charge
("CDSC") of 1% of either the purchase price or the NAV of the shares redeemed,
whichever is less. Class A shares are not otherwise subject to a CDSC. The CDSC
may be reduced or waived as permitted by Rule 6c-10 under the 1940 Act and as
described in the Funds' prospectuses as from time to time in effect.
Class A shares pay service fees pursuant to plans adopted pursuant to Rule 12b-1
under the 1940 Act ("12b-1 Plans") as described in the Funds' prospectuses in
effect from time to time. Such fees may not exceed 0.25% per annum of the
average daily net assets attributable to such class. Class A shares generally do
not pay distribution fees, except that Colonial Strategic Balanced Fund pays a
distribution fee of 0.30% per annum of average daily net assets attributable to
its Class A shares.
Class A shares of any Fund may be exchanged, at the holder's option, for Class A
shares of another Fund without the payment of a sales charge, except that if
shares of any other non-money market fund are exchanged within five months after
purchase for shares of a Fund with a higher sales charge, then the difference in
sales charges must be paid on the exchange.
Class B shares
Class B shares are offered at NAV, without an initial sales charge. Class B
shares that are redeemed within the period of time after purchase (not more than
6 years) specified in each Fund's prospectus as from time to time in effect are
subject to a CDSC of up to 5% of either the purchase price or the NAV of the
shares redeemed, whichever is less; such percentage may be lower for certain
Funds and declines the longer the shares are held, all as described in the
Funds' prospectuses as from time to time in effect. Class B shares purchased
with reinvested distributions are not subject to a CDSC. The CDSC is subject to
reduction or waiver in certain circumstances, as permitted by Rule 6c-10 under
the 1940 Act and as described in the Funds' prospectuses as from time to time in
effect.
Class B shares pay distribution and service fees pursuant to 12b-1 Plans as
described in the Funds' prospectuses in effect from time to time. Such fees may
be in amounts up to but may not exceed, respectively, 0.75% and 0.25% per annum
of the average daily net assets attributable to such class.
Class B shares automatically convert to Class A shares of the same Fund eight
years after purchase, except that Class B shares purchased through the
reinvestment of dividends and other distributions on Class B shares convert
proportionally to the amount of Class B shares otherwise being converted.
Class B shares of any Fund may be exchanged, at the holder's option, for Class B
shares of another Fund, without the payment of a CDSC. The holding period for
determining the CDSC and the conversion to Class A shares will include the
holding period of the shares exchanged. If the Class B shares received in the
exchange are subsequently redeemed, the amount of the CDSC, if any, will be
determined by the schedule of the Fund in which the original investment was
made.
Class C shares
Class C shares are offered at NAV without an initial sales charge or CDSC. Class
C shares that are redeemed within one year from purchase may be subject to a
CDSC of 1% of either the purchase price or the NAV of the shares redeemed,
whichever is less. Class C shares purchased with reinvested dividends or capital
gain distributions are not subject to a CDSC. The CDSC may be reduced or waived
in certain circumstances as permitted by Rule 6c-10 under the 1940 Act and as
described in the Funds' prospectuses as from time to time in effect. Class C
shares pay distribution and service fees pursuant to 12b-1 Plans, as described
in the Funds' prospectuses in effect from time to time. Such fees may be in
amounts up to but may not exceed, respectively, 0.75% and 0.25% per annum of the
average daily net assets attributable to such class.
Class C shares of any Fund may be exchanged for Class C shares of any other Fund
that offers Class C shares. The holding period for determining whether a CDSC
will be charged will include the holding period of the shares exchanged. Only
one exchange of any Fund's Class C shares may be made in any three month period.
For this purpose, an exchange into any Fund and a prior or subsequent exchange
out of the Fund constitutes "one exchange."
Class E shares (applicable to Colonial Tax-Managed Growth Fund)
Class E shares are offered at NAV plus the initial sales charges described in
the Fund's prospectus as from time to time in effect. Initial sales charges may
not exceed 5.00%, and may be reduced or waived as permitted by Rule 22d-1 under
the 1940 Act and as described in the Fund's prospectus from time to time in
effect.
Purchases of $1 million to $5 million of Class E shares that are redeemed within
18 months from purchase are subject to the same CDSC on the same basis as Class
A shares. Class E shares are not otherwise subject to a CDSC. The CDSC may be
reduced or waived as permitted by Rule 6c-10 under the 1940 Act and as described
in the Fund's prospectus as from time to time in effect.
Class E shares pay distribution and service fees pursuant to 12b-1 Plans, as
described in the Fund's prospectus in effect from time to time. Such fees may be
in amounts up to but may not exceed, respectively, 0.10% and 0.25% per annum of
the average daily net assets attributable to such class.
Class E shares may not be exchanged for shares of any other Fund.
Class F shares (applicable to Colonial Tax-Managed Growth Fund)
Class F shares are offered at NAV without an initial sales charge and subject to
the same declining CDSC, distribution and service fees as Class B shares. Class
F shares automatically convert to Class E shares eight years after purchase,
except that Class F shares purchased through the reinvestment of dividends and
other distributions on Class F shares convert proportionally to the amount of
Class E shares being converted.
Class F shares may not be exchanged for shares of any other Fund.
Class G shares (applicable to Colonial Tax-Managed Growth Fund)
Class G shares are offered at NAV plus the initial sales charges described in
the Fund's prospectus as from time to time in effect. Initial sales charges may
not exceed 4.50%, and may be reduced or waived as permitted by Rule 22d-1 under
the 1940 Act and as described in the Fund's prospectus from time to time in
effect.
Purchases of $1 million to $5 million of Class G shares that are redeemed within
18 months from purchase are subject to the same CDSC on the same basis as Class
A shares. Class G shares are not otherwise subject to a CDSC. The CDSC may be
reduced or waived as permitted by Rule 6c-10 under the 1940 Act and as described
in the Fund's prospectus as from time to time in effect.
Class G shares may not be exchanged for shares of any other Fund.
Class H shares (applicable to Colonial Tax-Managed Growth Fund)
Class H shares are offered at NAV without an initial sales charge and subject to
the same declining CDSC, distribution and service fees as Class B shares. Class
H shares automatically convert to Class G shares eight years after purchase,
except that Class H shares purchased through the reinvestment of dividends and
other distributions on Class H shares convert proportionally to the amount of
Class G shares being converted.
Class H shares pay distribution and service fees pursuant to 12b-1 Plans, as
described in the Fund's prospectus in effect from time to time. Such fees may be
in amounts up to but may not exceed, respectively, 0.25% and 0.25% per annum of
the average daily net assets attributable to such class.
Class H shares may not be exchanged for shares of any other Fund.
Class T shares
Class T shares are offered at NAV plus the initial sales charges described in
the Funds' prospectuses as from time to time in effect. The sales charge may not
exceed 6.50%, and may be reduced or waived as permitted by Rule 22d-1 under the
1940 Act and as described in the Funds' prospectuses from time to time in
effect.
Purchases of $1 million or more of Class T shares that are redeemed within 18
months from purchase are subject to a CDSC of 1% of either the purchase price or
the NAV of the shares redeemed, whichever is less. Class T shares are not
otherwise subject to a CDSC. The CDSC may be reduced or waived as permitted by
Rule 6c-10 under the 1940 Act and as described in the Funds' prospectuses as
from time to time in effect.
Class T shares do not pay fees pursuant to a 12b-1 Plan. Class T shares of a
Fund may only be exchanged for Class A shares of another Fund.
Class Z shares
Class Z shares are offered at NAV, without an initial sales charge or CDSC.
Class Z shares do not pay fees under a 12b-1 Plan. Class Z shares of a Fund may
only be exchanged for Class A shares of another Fund.
- --------
(1)Colonial Trusts I-VII (the "Trusts") have been offering multiple classes of
shares, prior to the effectiveness of this Plan, pursuant to an exemptive order
of the Securities and Exchange Commission. This Plan is intended to permit the
Trusts to offer multiple classes of shares pursuant to Rule 18f-3 under the
Investment Company Act of 1940, without any change in the arrangements and
expense allocations that have been approved by the Board of Trustees of each
Trust under such order of exemption.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF COLONIAL INCOME FUND, CLASS A YEAR END DEC-31-1996 AND IS
QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH FINANCIAL STATEMENTS OF COLONIAL
INCOME FUND, CLASS A YEAR END DEC-31-1996
</LEGEND>
<CIK> 0000021832
<NAME> COLONIAL TRUST I
<SERIES>
<NUMBER> 2
<NAME> COLONIAL INCOME FUND, CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 159154
<INVESTMENTS-AT-VALUE> 162298
<RECEIVABLES> 3283
<ASSETS-OTHER> 19
<OTHER-ITEMS-ASSETS> 36
<TOTAL-ASSETS> 165636
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 185
<TOTAL-LIABILITIES> 185
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 180671
<SHARES-COMMON-STOCK> 20219
<SHARES-COMMON-PRIOR> 21671
<ACCUMULATED-NII-CURRENT> 322
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 18711
<ACCUM-APPREC-OR-DEPREC> 3169
<NET-ASSETS> 165451
<DIVIDEND-INCOME> 261
<INTEREST-INCOME> 13732
<OTHER-INCOME> 0
<EXPENSES-NET> 2142
<NET-INVESTMENT-INCOME> 11851
<REALIZED-GAINS-CURRENT> 717
<APPREC-INCREASE-CURRENT> (7114)
<NET-CHANGE-FROM-OPS> 5454
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9496
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1428
<NUMBER-OF-SHARES-REDEEMED> (3647)
<SHARES-REINVESTED> 767
<NET-CHANGE-IN-ASSETS> (16586)
<ACCUMULATED-NII-PRIOR> 56
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (19283)
<GROSS-ADVISORY-FEES> 852
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2142
<AVERAGE-NET-ASSETS> 170273
<PER-SHARE-NAV-BEGIN> 6.640
<PER-SHARE-NII> 0.460
<PER-SHARE-GAIN-APPREC> (0.240)
<PER-SHARE-DIVIDEND> (0.450)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.41
<EXPENSE-RATIO> 1.1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF COLONIAL INCOME FUND, CLASS B YEAR END DEC-31-1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OF COLONIAL
INCOME FUND, CLASS B YEAR END DEC-31-1996
</LEGEND>
<CIK> 0000021832
<NAME> COLONIAL TRUST I
<SERIES>
<NUMBER> 2
<NAME> COLONIAL INCOME FUND, CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 159154
<INVESTMENTS-AT-VALUE> 162298
<RECEIVABLES> 3283
<ASSETS-OTHER> 19
<OTHER-ITEMS-ASSETS> 36
<TOTAL-ASSETS> 165636
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 185
<TOTAL-LIABILITIES> 185
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 180671
<SHARES-COMMON-STOCK> 5577
<SHARES-COMMON-PRIOR> 5756
<ACCUMULATED-NII-CURRENT> 322
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 18711
<ACCUM-APPREC-OR-DEPREC> 3169
<NET-ASSETS> 165451
<DIVIDEND-INCOME> 261
<INTEREST-INCOME> 13732
<OTHER-INCOME> 0
<EXPENSES-NET> 2142
<NET-INVESTMENT-INCOME> 11851
<REALIZED-GAINS-CURRENT> 717
<APPREC-INCREASE-CURRENT> (7114)
<NET-CHANGE-FROM-OPS> 5454
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2285
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1907
<NUMBER-OF-SHARES-REDEEMED> (2281)
<SHARES-REINVESTED> 197
<NET-CHANGE-IN-ASSETS> (16586)
<ACCUMULATED-NII-PRIOR> 56
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (19283)
<GROSS-ADVISORY-FEES> 852
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2142
<AVERAGE-NET-ASSETS> 170273
<PER-SHARE-NAV-BEGIN> 6.640
<PER-SHARE-NII> 0.412
<PER-SHARE-GAIN-APPREC> (0.240)
<PER-SHARE-DIVIDEND> (0.402)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 6.410
<EXPENSE-RATIO> 1.850
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
