[THE FOLLOWING SUPPLEMENT RELATES TO THE PROSPECTUS OF THE COLONIAL FUND
WHICH OFFERS THE CLASS A AND CLASS B SHARES ONLY.]
THE COLONIAL FUND
Supplement to Prospectus
Dated February 28, 1995
Revised June 1, 1995
The following information is added after the first paragraph under
the caption The Fund's financial history:
(Unaudited)
Six months ended
April 30
1995(a)
Class A Class B
Net asset value - Beginning of
period......................... $8.060 $8.050
----- -----
Income from investment
operations:
Net investment income........... 0.209 0.152
Net realized and unrealized
gain (loss) on investments... 0.429 0.457
----- -----
Total from investment
operations.................. 0.638 0.609
----- -----
Less distributions declared to
shareholders:
From net investment income...... (0.107) (0.078)
From net realized gain
on investments.............. (0.501) (0.501)
----- -----
Total distributions declared to
shareholders............... (0.608) (0.579)
----- -----
Net asset value - End of period... $8.090 $8.080
===== =====
Total return(b)................... 8.83% (c) 8.42% (c)
===== =====
Ratios to average net assets:
Expenses...................... 1.15% (d) 1.90% (d)
Net investment income......... 2.65% (d) 1.90% (d)
Portfolio turnover................ 64% (d) 64% (d)
Net assets at end of period (000). $618,768 $296,885
_________________________________
(a) Per share data were calculated using average shares
outstanding during the period.
(b) Total return at net asset value assuming all distributions
reinvested and no initial or contingent deferred sales charge.
(c) Not annualized.
(d) Annualized.
A new paragraph is added as the third paragraph under the sub-
caption General, under the caption How to buy shares, as follows:
The Fund also offers Class Z shares, which are offered through a
separate Prospectus only to (i) certain institutions (including
certain insurance companies and banks investing for their own
account, trusts, endowment funds, foundations and investment
companies) and defined benefit retirement plans investing a
minimum of $5 million in the Fund and (ii) affiliates of the
Adviser and its affiliates. Class Z shares have no initial or
contingent deferred sales charge and no Rule 12b-1 fee.
Otherwise, Class Z expenses are the same as Classes A and B. The
only other Colonial funds which currently offer Class Z shares are
Colonial Newport Tiger Fund and Colonial Small Stock Fund. Class
Z shares may be exchanged at net asset value into the Class Z
shares of any other Colonial fund offering Class Z so long as the
investor is eligible to purchase the Class Z shares of that fund.
Class Z shares otherwise are exchangeable into the Class A shares
of any other Colonial fund at net asset value.
TF-36/122B-0795 July 28, 1995
[THE FOLLOWING PROSPECTUS RELATES ONLY TO THE CLASS Z SHARES OF THE COLONIAL
FUND. THE PROSPECTUS WHICH OFFERS THE CLASS A AND B SHARES IS BEING
SUPPLEMENTED AS REFERENCED ABOVE.]
July 28, 1995
THE COLONIAL FUND
CLASS Z SHARES
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.
The Colonial Fund (Fund), a diversified portfolio of Colonial Trust
III (Trust), an open-end management investment company, seeks
primarily income and capital growth and, secondarily, capital
preservation.
The Fund is managed by the Adviser, an investment adviser since 1931.
This Prospectus explains concisely what you should know before
investing in Class Z shares of the Fund.
[Colonial Logo]
Colonial Mutual Funds
One Financial Center
Boston, Massachusetts
02111-2621
617-426-3750
TF/123B-0795
Class Z shares may be purchased only by (i) certain institutions
(including certain insurance companies and banks investing for their
own account, trusts, endowment funds, foundations and investment
companies) and defined benefit retirement plans investing a minimum of
$5 million in the Fund and (ii) affiliates of the Adviser and its
affiliates.
Read this Prospectus carefully and retain it for future reference.
More detailed information about the Fund is in the February 28, 1995,
Revised July 28, 1995, 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 1-800-248-2828.
The Statement of Additional Information is incorporated by reference
in (which means it is considered to be a part of) this Prospectus.
Contents Page
Summary of expenses 2
The Fund's financial history 3
The Fund's investment objectives 5
How the Fund pursues its objectives 5
How the Fund measures its performance 6
How the Fund is managed 7
How the Fund values its shares 7
Distributions and taxes 7
How to buy shares 8
How to sell shares 8
How to exchange shares 9
Telephone transactions 9
Organization and history 10
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR INSURED BY, ANY BANK OR GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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 annual
expenses for an investment in Class Z shares of the Fund.
Shareholder Transaction Expenses (1)(2)
Maximum Initial Sales Charge Imposed on a Purchase
(as a % of offering price) 0.00%
Maximum Contingent Deferred Sales Charge
(as a % of offering price) 0.00%
(1)For accounts less than $1,000 an annual fee of $10 may be deducted. See
"How to sell shares."
(2)Redemption proceeds exceeding $5,000 sent via federal funds wire will be
subject to a $7.50 charge per transaction.
Annual Operating Expenses (as a % of net assets)
Management fee 0.55%
12b-1 fee 0.00
Other expenses 0.37
----
Total expenses 0.92%
====
Example
The following Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in the Class Z shares of the Fund for the
periods specified, assuming a 5% annual return with or without 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:
Period:
1 year $ 9
3 years $ 29
5 years $ 51
10 years $113
THE FUND'S FINANCIAL HISTORY
The following schedule of financial highlights for a share
outstanding throughout each period has been audited by Price Waterhouse LLP,
independent accountants. Their unqualified report is included in the Fund's
1994 Annual Report, and is incorporated by reference into the Statement of
Additional Information. The schedule has been restated to reflect the 3:1
split which occurred on December 10, 1993. The information presented is
for other classes of shares offered by the Fund. Prior to July 28, 1995,
no Class Z shares had been issued.
<TABLE>
<CAPTION>
CLASS A
-------
(Unaudited)
Six months ended
April 30 Year Ended October 31
-------- ---------------------
1995(a) 1994(a) 1993(b) 1992(b)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value - Beginning of
period $8.060 $8.410 $7.390 $7.050
------ ------ ------ ------
Income from investment
operations:
Net investment income 0.209 0.171 0.156 0.173
Net realized and unrealized
gain (loss) on investments 0.429 (0.116) 1.293 0.489
----- ------- ----- -----
Total from investment
operations 0.638 0.055 1.449 0.662
----- ----- ----- -----
Less distributions declared to
shareholders:
From net investment income (0.107) (0.160) (0.147) (0.185)
From net realized gain on investments (0.501) (0.245) (0.282) (0.137)
------- ------- ------- -------
Total distributions declared to
shareholders (0.608) (0.405) (0.429) (0.322)
------- ------- ------- -------
Net asset value - End of period $8.090 $8.060 $8.410 $7.390
===== ===== ===== =====
Total return(c) 8.83% 0.74% 20.21% 9.65%
==== ==== ===== ====
Ratios to average net assets:
Expenses 1.15% 1.14% 1.10% 1.09%
Net investment income 2.65% 2.07% 1.94% 2.52%
Portfolio turnover 64% 54% 14% 37%
Net assets at end of period (000) $618,768 $555,275 $520,706 $413,228
_________________________________
</TABLE>
<TABLE>
<CAPTION> CLASS A
-------
Year Ended October 31
---------------------
1991(b) 1990(b) 1989(b) 1988(b)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value - Beginning of
period $5.700 $6.850 $6.320 $5.530
------ ------ ------ ------
Income from investment
operations:
Net investment income 0.218 0.256 0.270 0.299
Net realized and unrealized
gain (loss) on investments 1.509 (0.979) 0.768 0.944
----- ------- ----- -----
Total from investment
operations 1.727 (0.723) 1.038 1.243
----- ------- ----- -----
Less distributions declared to
shareholders:
From net investment income (0.222) (0.276) (0.305) (0.263)
From net realized gain on investments (0.155) (0.151) (0.203) (0.190)
------- ------- ------- -------
Total distributions declared to
shareholders (0.377) (0.427) (0.508) (0.453)
------- ------- ------- -------
Net asset value - End of period $7.050 $5.700 $6.850 $6.320
====== ====== ====== ======
Total return(c) 31.23% (11.17)% 17.16% 23.60%
===== ======= ===== =====
Ratios to average net assets:
Expenses 1.06% 1.04% 0.97% 0.92%
Net investment income 3.35% 4.05% 4.34% 4.92%
Portfolio turnover 36% 41% 27% 27%
Net assets at end of period (000) $366,808 $285,265 $319,419 $258,178
_________________________________
</TABLE>
<TABLE>
<CAPTION>
CLASS A
-------
Year Ended October 31
---------------------
1987(b) 1986(b) 1985(b)
------- ------- -------
<S> <C> <C> <C>
Net asset value - Beginning of
period $6.450 $5.220 $4.640
------ ------ ------
Income from investment
operations:
Net investment income 0.216 0.283 0.313
Net realized and unrealized
gain (loss) on investments (0.387) 1.397 0.560
------- ----- -----
Total from investment
operations (0.171) 1.680 0.873
------- ----- -----
Less distributions declared to
shareholders:
From net investment income (0.310) (0.300) (0.300)
From net realized gain on investments (0.439) (0.150) 0.000
------- ------- -----
Total distributions declared to
shareholders (0.749) (0.450) (0.300)
------- ------- -------
Net asset value - End of period $5.530 $6.450 $5.220
====== ====== ======
Total return(c) (3.49)% 33.91% 19.44%
====== ===== =====
Ratios to average net assets:
Expenses 0.97% 1.06% 1.05%
Net investment income 3.99% 4.70% 6.32%
Portfolio turnover 47% 48% 69%
Net assets at end of period (000) $240,971 $168,399 $104,920
_________________________________
</TABLE>
(a) Per share data were calculated using average shares outstanding during
the period.
(b) All per share amounts have been restated to reflect the 3-for-1 stock
split effective December 10, 1993.
(c) Total return at net asset value assuming all distributions reinvested
and no initial or contingent deferred sales charge.
(d) Not annualized.
(e) Annualized.
THE FUND'S FINANCIAL HISTORY (CONT'D)
<TABLE>
<CAPTION>
CLASS B
-------
(Unaudited)
Six months ended
April 30 Year ended October 31
-------- ---------------------
1995(a) 1994(a) 1993(b) 1992(b)(c)
------- ------ ------- ----------
<S> <C> <C> <C> <C>
Net asset value - Beginning of period $8.050 $8.400 $7.390 $7.440
------ ------ ------ ------
Net investment income 0.152 0.109 0.104 0.052
Net realized and unrealized
gain (loss) on investments 0.457 (0.111) 1.282 (0.044)
----- ------- ----- -------
Total from investment operations 0.609 (0.002) 1.386 0.008
----- ------- ----- -----
Less distributions declared to shareholders:
From net investment income (0.078) (0.103) (0.094) (0.058)
From net realized gains on investments (0.501) (0.245) (0.282) 0.000
------- ------- ------- -----
Total distributions declared to shareholders (0.579) (0.348) (0.376) (0.058)
------- ------- ------- -------
Net asset value - End of period $8.080 $8.050 $8.400 $7.390
===== ===== ===== =====
Total return(d) 8.42% (e) (0.04)% 19.38% (0.31)%(e)
----- ------ ----- ------
Ratios to average net assets
Expenses 1.90% (f) 1.89% 1.85% 1.84%(f)
Net investment income 1.90% (f) 1.32% 1.19% 1.77%(f)
Portfolio turnover 64% (f) 54% 14% 37%(f)
Net assets at end of period (000) $296,885 $264,122 $124,161 $15,582
_________________________________
</TABLE>
(a) Per share data were calculated using average shares outstanding during
the period.
(b) All per share amounts have been restated to reflect the 3-for-1 stock
split effective December 10, 1993.
(c) Class B shares were initially offered on May 5, 1992. Per share
amounts reflect activity from that date.
(d) Total return at net asset value assuming all distributions reinvested and
no initial or contingent deferred sales charge.
(e) Not annualized.
(f) Annualized.
Further performance information is contained in the Fund's Annual and
Semiannual Reports to shareholders, which are obtainable without charge
by calling 1-800-248-2828.
THE FUND'S INVESTMENT OBJECTIVES
The Fund seeks primarily income and capital growth and, secondarily,
capital preservation.
HOW THE FUND PURSUES ITS OBJECTIVES
The Fund may invest without limit in U.S. stock exchange or NASDAQ NMS
listed common stocks and foreign common stocks which, when purchased,
meet the following quantitative standards which in the Adviser's
judgment indicate above average financial soundness and high intrinsic
value relative to price. The issuer of any such common stock must
have net worth in excess of total debt, except for banking
institutions and electric utilities, whose net worth must exceed 35%
of total capitalization. In addition, each such common stock must
also meet one of the following criteria:
1. Earnings yield equals or exceeds the average yield to maturity of
the five most recently issued, actively traded long-term U.S.
government bonds; or
2. Dividend yield equals or exceeds 66% of the prevailing average
yield to maturity of the five most recently issued, actively traded
long-term U.S. government bonds; or
3. Per share going-concern value (as estimated by the Adviser) exceeds
book value and market value. No purchases will be made based on
this criterion if at the time more than 25% of the Fund's total
market value of common stocks was purchased on this criterion.
Up to 5% of the Fund's net assets may be invested in common stocks not
meeting any of the foregoing criteria at the time of purchase.
The Fund may also invest in debt securities, but currently intends to
limit those investments to U.S. government and agency obligations
(except for temporary or defensive investments). The market value of
debt securities will fluctuate with changing interest rates; this
could affect the value of Fund shares.
The portion of total assets invested in common stocks and debt
securities will vary based on the availability of common stocks
meeting the foregoing criteria and the Adviser's judgment of the
investment merit of common stocks relative to debt securities.
Foreign Investments. The Fund may invest without limit in common
stocks traded or issued by companies located outside of the U.S.
Foreign securities will subject the Fund to special considerations
related to political, economic and legal conditions outside of the
U.S. These considerations include the possibility of unfavorable
currency exchange rates, exchange control regulations (including
currency blockage), expropriation, nationalization, withholding taxes
on income and difficulties in enforcing judgments. Foreign securities
may be less liquid and more volatile than comparable U.S. securities.
Some foreign issuers are subject to less comprehensive accounting and
disclosure requirements than similar U.S. issuers.
The Fund may purchase foreign currencies on a spot or forward basis in
conjunction with its investments in foreign securities and to hedge
against fluctuations in foreign currencies. The precise matching of
foreign currency exchange transactions and portfolio securities will
not generally be possible since the future value of such securities in
foreign currencies will change as a consequence of market movements
which cannot be precisely forecast. Currency hedging does not
eliminate fluctuations in the underlying prices of securities, but
rather establishes a rate of exchange at some future point in time.
Although hedging may lessen the risk of loss due to a decline in the
value of the hedged currency, it tends to limit potential gain from
increases in currency values.
Transactions in foreign securities include currency conversion costs.
Brokerage and custodial costs may be higher for foreign securities
than for U.S. securities. See "Foreign Securities" and "Foreign
Currency Transactions" in the Statement of Additional Information for
more information about foreign investments.
Other Investment Practices. The Fund may engage in the following
investment practices, some of which are described in more detail in
the Statement of Additional Information.
The Fund may invest temporarily available cash in certificates of
deposit, bankers' acceptances, high quality commercial paper, Treasury
bills and repurchase agreements. Under a repurchase agreement, the
Fund buys a security, subject to the requirement to sell it back at a
fixed price and time, the proceeds of which are the Fund's cost plus
accrued interest. The transaction may be viewed as a loan by the
Fund, collateralized by the security. The Fund will enter into
repurchase agreements only with well capitalized banks and certain
broker-dealers meeting high credit standards. The agreements require
that at all times the issuer's obligations are at least 100%
collateralized by U.S. government securities maintained in a
segregated account of the Fund's custodian. The Fund may experience
costs and delays in liquidating the collateral if the issuer defaults
or enters bankruptcy and may incur a loss. Not more than 10% of the
Fund's total assets will be invested in repurchase agreements maturing
in more than 7 days and other illiquid assets.
In periods of unusual market conditions, when the Adviser considers it
appropriate, the Fund may invest all or any part of the Fund's assets
in cash, U.S. government securities, high quality commercial paper,
bankers' acceptances, repurchase agreements and certificates of
deposit.
The Statement of Additional Information describes other investment
techniques that the Fund may use, but currently has no intention in
the foreseeable future of using.
Other. The Fund may not always achieve its investment objectives. The
Fund's investment objectives and non-fundamental policies may be
changed without shareholder approval. The Fund will notify investors
at least 30 days prior to any material change in the Fund's investment
objectives. If there is a change in the investment objectives
shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial position and
needs. The Fund's fundamental policies listed in the Statement of
Additional Information cannot be changed without the approval of a
majority of the Fund's outstanding voting securities. 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.
Average annual total returns are calculated in accordance with the
Securities and Exchange Commission's formula and assume the
reinvestment of all distributions. Other total returns differ from
average annual total return only in that they may relate to different
time periods and may represent aggregate as opposed to average annual
total returns.
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. Distribution rate is
calculated by dividing the most recent quarter's distributions,
annualized, by the net asset value at the end of the quarter.
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.
The Adviser is a subsidiary of The Colonial Group, Inc. Colonial
Investment Services, Inc. (Distributor) is a subsidiary of the Adviser
and serves as the distributor for the Fund's shares. The Colonial
Group, Inc. is the parent of Colonial Investors Service Center, Inc.
(Transfer Agent), which serves as the shareholder services and
transfer agent for the Fund. The Colonial Group, Inc. is a direct
subsidiary of Liberty Financial Companies, Inc. which is in turn an
indirect subsidiary of Liberty Mutual Insurance Company (Liberty
Mutual). Liberty Mutual is considered to be the controlling entity of
The Colonial Group, Inc. Liberty Mutual is an underwriter of worker's
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 0.55% of the Fund's average net assets for
fiscal year 1994.
Daniel Rie, Senior Vice President of the Adviser, has managed the Fund
since 1993 and has managed various other Colonial equity funds since
1986.
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 0.25%
annually of average net assets plus 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 to it and its affiliates.
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 net
asset value attributable to Class Z shares by the number of Class Z
shares outstanding. Shares are valued as of the close of the New York
Stock Exchange (Exchange) each day the Exchange is open. Portfolio
securities for which market quotations are readily available are
valued at market. Short-term investments maturing in 60 days or less
are valued at amortized cost when it is determined, pursuant to
procedures adopted by the Trustees, that such cost approximates market
value. All other securities and assets are valued at 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 virtually
all net income and any net realized gain at least annually.
The Fund generally declares and pays income distributions quarterly.
Distributions are invested in additional Class Z shares 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 Class Z shares at net
asset value. To change your election, call the Transfer Agent for
information.
Whether you receive distributions in cash or in additional Fund
shares, you must report them as taxable income unless you are a tax-
exempt institution. If you buy shares shortly before a distribution
is declared, the distribution will be taxable although it is in effect
a partial return of the amount invested. Each January, information on
the amount and nature of distributions for the prior year is sent to
shareholders.
HOW TO BUY SHARES
Class Z shares are offered continuously at net asset value without a
sales charge. 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 it before the Fund processes that
day's share transactions) will be processed based on that day's
closing net asset value. Certificates will not be issued for Class Z
shares. The Fund may refuse any purchase order for its shares. See
the Statement of Additional Information for more information.
Shareholder Services. 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.
Other Classes of Shares. In addition to Class Z shares, the Fund
offers two other classes of shares through a separate Prospectus.
Class A shares are offered at net asset value plus a maximum 5.75%
sales charge imposed at the time of purchase, and are subject to an
ongoing 0.25% annual Rule 12b-1 fee and a 1.00% contingent deferred
sales charge on certain redemptions made within 18 months after
purchase. Class B shares are offered at net asset value and are
subject to a 1.00% annual Rule 12b-1 fee and a contingent deferred
sales charge on redemptions made within six years after purchase. The
contingent deferred sales charge is 5.00% on redemptions made in year
one, and declines to 0 after six years. Class B shares convert to
Class A after approximately eight years. The maximum purchase amount
allowed for Class B shares is $250,000.
Other than the sales charges and Rule 12b-1 fees described above, the
fees and expenses relating to Classes A and B are the same as those
for Class Z shares.
Classes A and B are exchangeable into the same class of any other
Colonial fund offering such class. Class Z shares are exchangeable
into the Class Z shares of any other Colonial fund offering Class Z so
long as the investor is eligible to purchase the Class Z shares of
that fund. Class Z shares otherwise are exchangeable into the Class A
shares of the other Colonial funds.
Which Class is more beneficial to an investor depends on the amount
and intended length of the investment. In general, anyone eligible to
purchase Class Z shares should do so.
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. Initial or contingent deferred sales
charges may be reduced or eliminated for certain persons or
organizations purchasing Fund shares alone or in combination with
certain other Colonial funds. See the Statement of Additional
Information for more information.
HOW TO SELL SHARES
Shares 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 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. 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 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 the Transfer Agent and may charge for
this service.
General. The sale of shares is a taxable transaction for federal tax
purposes. 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. 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 solely as a
result of share value depreciation. Shareholders will receive 60
days' written notice to increase the account value before the fee is
deducted.
HOW TO EXCHANGE SHARES
The only other Colonial funds which currently offer Class Z shares are
the Colonial Newport Tiger Fund and Colonial Small Stock Fund. Class
Z shares may be exchanged at net asset value into the Class Z shares
of any other Colonial fund offering Class Z so long as the investor is
eligible to purchase the Class Z shares of that fund. Class Z shares
otherwise are exchangeable at net asset value into the Class A shares
of any other Colonial fund. If a Class Z shareholder exchanges into
another Colonial fund and then exchanges back to the Fund, the latter
exchange may be made into the Fund's Class Z shares only if the
shareholder continues to own Class Z shares at the time. If not, the
latter exchange will be made into Class A shares. Carefully read the
prospectus of the fund into which you are exchanging before submitting
the request. Call 1-800-248-2828 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.
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisers may redeem up to
$50,000 of Fund shares by telephone, and may elect telephone
redemption privileges for larger amounts on the account application.
All exchanges may be accomplished by telephone. See the Statement of
Additional Information for more information. The Adviser, the
Transfer Agent and the Fund will not be liable when following
telephone instructions reasonably believed to be genuine and a
shareholder may suffer a loss from unauthorized transactions. The
Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and may be liable if reasonable
procedures are not employed. Shareholders and/or their financial
advisers will be required to provide their name, address and account
number. Financial advisers will also be required to provide their
broker number. Proceeds and confirmations of telephone transactions
will be mailed or sent to the address of record. Telephone
redemptions are not available on accounts with an address change in
the preceding 60 days. All telephone transactions are recorded.
Shareholders are not obligated to transact by telephone.
ORGANIZATION AND HISTORY
The Fund was organized in 1986 as successor to a corporation organized
in 1904. It is a series of the Trust, which is a Massachusetts
business trust organized in 1986. 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 purposes such as electing Trustees or approving a
management contract. You receive one vote for each of your Fund
shares. 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.
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
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
Your financial service firm is:
Printed in U.S.A.
July 28, 1995
THE COLONIAL FUND
CLASS Z SHARES
Prospectus
The Colonial Fund seeks primarily income and capital growth and,
secondarily, capital preservation.
For more detailed information about the Fund call the Adviser at 1-800-
248-2828 for the February 28, 1995, Revised July 28, 1995, Statement
of Additional Information.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR INSURED BY, ANY BANK OR GOVERNMENT AGENCY.
Colonial Mutual Funds
_________________________________________________________________
Please send your completed application to:
Colonial Mutual Funds
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, & 8.
To apply for special services for a new or existing account,
complete sections 4, 5, 6, 7, or 9 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: Name 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 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 Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section
4B, inside
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section
4B, inside
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section
4B, inside
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. I certify, under penalties of perjury, that:
1. The Social Security # or Taxpayer I.D. # provided is
correct.
Cross out 2(a) or 2(b) if either is not true in your case.
2. I am not subject to 31% backup withholding because (a) I
have not been notified that I am subject to backup
withholding or (b) the Internal Revenue Service has notified
me that I am no longer subject to backup withholding.
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.
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. Withdrawals in excess of 12% annually of your
current account value will not be accepted. Redemptions made
in addition to Plan payments may be subject to a contingent
deferred sales charge for Class B 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 _________________ (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 _________________ (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 _________________ (month).
Payment Instructions
Send the payment to (choose one):
__My address of record.
__My bank account via Colonial Cash Connection. Please
complete Section 4B and the Bank Information section below.
__The payee listed at right.
______________________________________________
Name of payee
______________________________________________
Address of payee
______________________________________________
City
______________________________________________
State Zip
______________________________________________
Payee's bank account number, if applicable
X_____________________________________________
Signature of account owner(s)
X_____________________________________________
Signature of account owner(s)
Signatures of all owners must be guaranteed. Provide the
name, address, payment amount, and frequency for other
payees (maximum of 5) on a separate sheet.
B. Direct Deposit via Colonial Cash Connection
You can arrange to have distributions from your Colonial
fund account(s) or Systematic Withdrawal Plan checks
automatically deposited directly into your bank checking
account. Distribution deposits will be made 2 days after the
Fund's payable date. Please complete Bank Information below
and attach a blank check marked "VOID."
Please deposit my:
__Dividend distributions only
__Dividend and capital gain distributions
__Systematic Withdrawal Plan payments
I understand that my bank must be a member of the Automated
Clearing House system.
C. Telephone Withdrawal Options
All telephone transaction calls are recorded. These options
are not available for retirement accounts.
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 on our records. For
your protection, this service is only available on accounts
that have not had an address change within
60 days of the redemption request.
2. Telephone Redemption
__I would like the Telephone Redemption privilege.
You 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. Telephone redemptions
exceeding $5,000 will be sent via Federal Fund Wire, usually
on the next business day ($7.50 will be deducted).
Redemptions of $5,000 or less will be sent by check to your
designated bank.
Bank Information (For A, B, or C 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)
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 fund
distributions in another Colonial fund. These investments
will be made in the same share class and without sales
charges. 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)
____________________________
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 transferred into the same share class of up to four
other Colonial funds, on a monthly basis. The minimum amount
for each transfer is $100. Please complete the section
below.
____________________________________
Fund from which shares will be sold
$_________________________
Amount to redeem monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
C. Fundamatic
Fundamatic automatically transfers the specified amount from
your bank checking account to your Colonial fund account.
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 and Fundamatic
Authorization (Section 6).
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
6 -------------Fundamatic Authorization--------------------
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
7--Ways to Reduce Your Sales Charges for Class A Shares--
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 Class A, B or D
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 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.
8-------------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
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
9--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.
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 Management Associates, 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.
THE COLONIAL FUND
Statement of Additional Information
February 28, 1995, Revised July 28, 1995
This Statement of Additional Information (SAI) contains information which
may be useful to investors but which is not included in the Prospectus of
The Colonial Fund (Fund). This SAI is not a prospectus and is authorized
for distribution only when accompanied or preceded by the Prospectuses of
the Fund dated February 28, 1995, Revised June 1, 1995 (Class A and B) or
July 28, 1995 (Class Z). The SAI should be read together with the
Prospectus. 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 b
Investment Objectives and Policies b
Fundamental Investment Policies b
Other Investment Policies b
Portfolio Turnover c
Fund Charges and Expenses c
Investment Performance f
Custodian f
Independent Accountants f
Part 2
Miscellaneous Investment Practices 1
Taxes 9
Management of the Funds 11
Determination of Net Asset Value 14
How to Buy Shares 14
Investor Services 18
Suspension of Redemptions 20
Shareholder Liability 20
Performance Measures 21
Appendix I 21
Appendix II 23
TF-16/124B-0795
Part 1
THE COLONIAL FUND
Statement of Additional Information
February 28, 1995, Revised July 28, 1995
DEFINITIONS
"Trust" Colonial Trust III
"Fund" The Colonial Fund
"Colonial" 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 investor services and transfer agent
INVESTMENT OBJECTIVES AND POLICIES
The Fund's Prospectus describes its investment objectives and
investment policies. Part 1 includes additional information
concerning, among other things, the fundamental investment
policies of the Fund. Part 2 of this SAI contains additional
information about the following securities and investment
techniques that are described or referred to in the Prospectus.
Short-Term Trading
Foreign Securities
Written Options (calls on common stock, puts and calls on
foreign currencies)
Foreign Currency Transactions
Securities Loans
Repurchase Agreements
Except as described under "Fundamental Investment Policies", the
investment policies described 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, it will not purchase additional portfolio
securities while borrowings exceed 5% of net assets;
2.Only own real estate acquired as the 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 the 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 the voting securities of an issuer
if, as a result of such purchases, the Fund would own more
than 10% of the outstanding voting shares of such issuer.
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 it may receive short-term
credit to clear securities transactions and may make initial
or maintenance margin deposits in connection with futures
transactions;
2. Have a short securities position, unless the Fund owns, or
owns rights (exercisable without payment) to acquire, an equal
amount of such securities;
3. Own voting securities of any company if the Fund knows that
officers and Trustees of the Trust or officers and directors
of Colonial who individually own more than 0.5% of such
securities together own more than 5% of such securities;
4. Invest in interests in oil, gas or other mineral exploration
or development programs, including leases;
5. Purchase any security resulting in the Fund having more than
5% of its total assets invested in securities of companies
(including predecessors) less than three years old;
6. Pledge more than 33% of its total assets;
7. Purchase any security if, as a result of such purchase, more
than 10% of its total assets would then be invested in
securities which are restricted as to disposition;
8. Purchase or sell real estate (including limited partnership
interests) although it may purchase and sell (a) securities
which are secured by real estate and (b) securities of
companies which invest or deal in real estate; provided,
however, that nothing in this restriction shall limit the
Fund's ability to acquire or take possession of or sell real
estate which it has obtained as a result of enforcement of its
rights and remedies in connection with securities it otherwise
is permitted to acquire; and
9. Invest in warrants if, immediately after giving effect to any
such investment, the Fund's aggregate investment in warrants,
valued at the lower of cost or market, would exceed 5% of the
value of the Fund's net assets. Included within that amount,
but not to exceed 2% of the value of the Fund's net assets,
may be warrants which are not listed on the New York Stock
Exchange or the American Stock Exchange. Warrants acquired by
the Fund in units or attached to securities will be deemed to
be without value.
PORTFOLIO TURNOVER
Period ended
April 30, 1995 (unaudited) 1994 1993
64% (annualized) 54% 14%
FUND CHARGES AND EXPENSES
Under the Fund's management agreement, the Fund pays Colonial a
monthly fee at the annual rate of 0.55% of average daily net
assets.
Recent Fees paid to Colonial, CISI and CISC (in thousands)
Period ended
April 30 Year Ended October 31
1995 (unaudited) 1994 1993 1992
Management fee $2,280 $4,102 $2,957 $2,178
Bookkeeping fee 150 270 198 148
Shareholder service
and transfer
agent fee 1,224 2,143 1,556 1,111(a)
12b-1 fees:
Service fee 957 1,661 963 583
Distribution
fee (Class B) 1,016 1,528 470 24
Brokerage Commissions (in thousands)
1995 1994 1993 1992
Total commissions $ 742 $ 1,080 $ 329 $ 387
Directed transactions(b)$18,404 $ 66,091 $68,445 $108,312
Commissions on directed
transactions $ 28 $ 90 $ 101 $ 168
(a) Under a prior fee schedule.
(b) See "Management of the Funds-Portfolio Transactions-Brokerage
and Research Services" in Part 2 of this SAI.
Trustees Fees
For the calendar year ended December 31, 1994, the Trustees
received the following compensation for serving as Trustees:
Pension or
Retirement Estimated Total
Benefits Annual Compensation
Aggregate Accrued As Benefits From Fund
Compensation Part of Fund Upon and Fund
Trustee From Fund Expense Retirement Complex(c)
Tom Bleasdale $4,384(d) ----- ----- $101,000(e)
Lora S. Collins $4,123 ----- ----- $ 95,000
William D.
Ireland, Jr. $4,767 ----- ----- $110,000
William E. Mayer $3,901 ----- ----- $ 89,752
John A. McNeice, Jr. ----- ----- ----- -----
James L. Moody, Jr. $4,761 ----- ----- $109,000
John J. Neuhauser $4,121 ----- ----- $ 95,000
George L. Shinn $4,870 ----- ----- $112,000
Robert L. Sullivan $4,556 ----- ----- $104,561
Sinclair Weeks, Jr. $5,045 ----- ----- $116,000
(c) At 12/31/94, the Colonial Fund Complex consisted of 31 open-
end and 5 closed-end management investment company portfolios.
(d) Includes $2,110 payable in later years as deferred compensation.
(e) Includes $49,000 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 of the Liberty All-Star Equity Fund, The Charles Allmon
Trust, Inc., Liberty Financial Trust and LFC Utilities Trust
(together, Liberty Funds) for service during the calendar year
ended December 31, 1994:
Total
Pension or Estimated Compensation
Retirement Annual From Liberty
Benefits Benefits Funds for
Accrued As Upon the calendar
Part of Retire- year ended
Trustee Fund Expense ment 12/31/94 (d)
Robert J. $0 $0 $ 0
Birnbaum(e)
James E. 0 0 31,032
Grinnell(e)
Richard W. 0 0 31,282
Lowry(e)
(d) At 12/31/94 the Liberty Funds consisted of 5 open-end and 2
closed-end management investment company portfolios, each of
which was advised by Stein Roe & Farnham Incorporated, an
indirect wholly-owned subsidiary of Liberty Financial
Companies, Inc. (an intermediate parent of Colonial). On
March 27, 1995, four of the portfolios in the Liberty
Financial Trust (now known as Colonial Trust VII) were
merged into existing Colonial funds and a fifth was merged
into a new portfolio of Colonial Trust III.
(e) Elected a trustee of the Colonial Funds Complex on April 21,
1995.
None of Messrs. Birnbaum, Grinnell or Lowry received any
compensation from any of the Colonial funds for the calendar
year.
Ownership of the Fund
At June 30, 1995, the officers and Trustees of the Trust as a
group beneficially owned approximately 784,751 Class A shares
representing 1.03% of the then outstanding shares. Messrs. Scoon
and Stern, who are officers of the Trust, held 605,744 Class A
shares, representing 0.79% of the then outstanding shares. This
holding consisted entirely of shares held by them as co-Trustees
of The Colonial Group, Inc. Profit-Sharing Plan with respect to
which they share investment and voting power. No shareholder
owned of record 5% or more of the Class A shares of the Fund as
of June 30, 1995.
At June 30, 1995, the officers and Trustees of the Trust as a
group beneficially owned less than 1% of the Class B shares.
At June 30, 1995, Merrill Lynch, Pierce, Fenner & Smith, 4800
Deer Lake Drive, Jacksonville, FL 32216 owned of record 2,240,038
Class B shares representing 5.99% of the then outstanding shares.
At June 30, 1995 there were 44,190 Class A and 27,519 Class B
shareholders of record of the Fund.
Sales Charges (in thousands)
Class A Shares
(unaudited)
Period ended
April 30 Years ended October 31
1995 1994 1993 1992
Aggregate charges on
Fund share sales $515 $2,500 $2,382 $1,564
Sales charges
retained by CISI $ 86 $ 255 $ 378 $ 260
Class B Shares
(unaudited) May 5, 1992
Period ended (Class B shares
April 30 initially offered)
1995 1994 1993 through October 31, 1992
Aggregate contingent
deferred sales
charges (CDSC)
on Fund redemptions
retained by CISI $493 $513 $66 $15
12b-1 Plans, CDSCs and Conversion of Shares
The Fund offers three classes of shares - Class A, Class B and
Class Z. The Fund may in the future offer other classes of
shares. The Trustees have approved 12b-1 plans (Plans) pursuant
to Rule 12b-1 under the Act. Under the Plans, the Fund pays CISI
an annual service fee of 0.15% of the Fund's average net assets
attributable to Class A shares outstanding prior to April 1, 1989
and 0.25% of the Fund's average net assets attributable to shares
of Classes A and B issued thereafter. The Fund also pays CISI a
distribution fee not to exceed 0.75% of average net assets
attributable to its Class B shares. 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 Plans authorize any other payments by the Fund to CISI and
its affiliates (including Colonial) to the extent that such
payments might be construed to be indirectly financing the
distribution of Fund shares.
The Trustees believe the Plans could be a significant factor in
the growth and retention of the Fund's assets resulting in more
advantageous expense ratios and increased investment flexibility
which could benefit each class of Fund shareholders. The Plans
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 the Trustees who are not interested persons
of the Fund and have no direct or indirect financial interest in
the operation of the Plans or in any agreements related to the
Plans (Independent Trustees), cast in person at a meeting called
for the purpose of voting on the Plans. The Plans may not be
amended to increase the fee materially without approval by vote
of a majority of the outstanding voting securities of the
relevant class of shares and all material amendments of the Plans
must be approved by the Trustees in the manner provided in the
foregoing sentence. The Plans may be terminated at any time by
vote of a majority of the Independent Trustees or by vote of a
majority of the outstanding voting securities of the relevant
class of shares. The continuance of the Plans will only be
effective if the selection and nomination of the Trustees who are
non-interested Trustees is effected by such non-interested
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 subject to a CDSC if redeemed within six years of
purchase. The CDSCs are described in the Prospectus. Class Z
shares are offered at net asset value and are not subject to a
CDSC.
No CDSC will be imposed on distributions or on amounts which
represent an increase in the value of the shareholder account
resulting from 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 were as
follows:
(unaudited)
Period ended Year ended
April 30, 1995 October 31, 1994
Class A Class B Class A Class B
Fees to FSFs $595 $1,057 $1,121 $5,043
Cost of sales
material relating
to the Fund 50 77 189 353
Allocated travel,
entertainment and
other promotional 105 155 290 542
INVESTMENT PERFORMANCE
The Fund's Class A and Class B yields for the months ended
October 31, 1994 and April 30, 1995 were 2.54% and 1.94% (October
31, 1994) and 2.41% and 1.81% (April 30, 1995), respectively.
The Fund's Class A average annual total returns at April 30, 1995
were as follows:
November 1, 1994
through April 30, 1995 1 year 5 years 10 years
With sales charge
of 5.75% 2.57% 3.74% 10.17% 12.43%
Without sales charge 8.83% 10.07% 11.48% 13.10%
The Fund's Class B total returns at April 30, 1995 were as
follows:
May 5, 1992
November 1, 1994 (Class B shares initially offered)
through April 30, 1995 1 year through October 31, 1994
With CDSC of 5.00% 3.42% 4.14% 8.03%
Without CDSC 8.42% 9.14% 8.89%
The Fund's Class A and Class B distribution rates at October 31,
1994 and April 30, 1995, based on the previous calendar quarter's
distributions, annualized, and the maximum offering price at the
end of each period, were 2.10% and 1.51% (October 31, 1994) and
2.38% and 1.83% (April 30, 1995), 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 SEC filings. The financial statements incorporated by
reference in this SAI 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 Report of Independent Accountants
appearing on pages 3 through 13 of the October 31, 1994 Annual
Report, and the financial statements appearing on pages 6 through
24 of the April 30, 1995 Semiannual Report (unaudited), are
incorporated in this SAI by reference.
STATEMENT OF ADDITIONAL INFORMATION
PART 2
The following information applies generally to your Fund and to the
other Colonial funds. In certain cases the discussion applies to
some but not all of the 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.
Short-Term Trading
In seeking the Fund's objective, Colonial will buy or sell portfolio
securities whenever Colonial believes it appropriate. Colonial'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. 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
Colonial 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 unrated securities. Relative to comparable
securities of higher quality:
1. the market price is likely to be more volatile because:
a. an economic downturn or increased interest rates may have a
more significant effect on the yield, price and potential for
default;
b. the secondary market may at times become less liquid or
respond to adverse publicity or investor perceptions,
increasing the difficulty in valuing or disposing of the
bonds;
c. existing or future legislation limits and may further limit
(i) investment by certain institutions or (ii) tax
deductibility of the interest by the issuer, which may
adversely affect value; and
d. 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.
2. the Fund's achievement of its investment objective is more
dependent on Colonial's credit analysis.
3. 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
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 accreted. 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.
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 that are securities are also subject
to the risks of high yield securities.
Money Market Instruments
Government obligations are issued by the U.S. or foreign government,
its 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 funds deposited 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 are
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 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
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 high-grade debt
obligations 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 Colonial deems it
appropriate to do so. The Fund may realize short-term profits or
losses upon the sale of forward commitments.
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. Colonial
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, a 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, a 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. A Fund will not invest the
proceeds of a reverse repurchase agreement for a period which exceeds
the duration of the reverse repurchase agreement. A 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 Colonial, such transactions are consistent with the Fund's
investment objectives 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.
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 Colonial to
forecast interest rate and market movements correctly.
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 Colonial deems it desirable
to do so. Although the Fund will take an option position only if
Colonial 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 the 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
The Fund will enter into futures contracts only when, in compliance
with the SEC's requirements, cash or cash equivalents, (or, in the
case of a fund investing primarily in foreign equity securities, such
equity 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.
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.
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 equivalents 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
Colonial'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. A Fund 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 opinion of
Colonial, 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. Colonial 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 the index futures by the Fund for hedging purposes
is also subject to Colonial'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, Colonial
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 valued 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 Colonial 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.
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. The Fund will enter into
such contracts only when, in compliance with the SEC's requirements,
cash or equivalents equal in value to the commodity value (less any
applicable margin deposits) have been deposited in a segregated
account of 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 changed 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.
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 Colonial
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.
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 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.
TAXES
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.
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 than 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 alternative minimum tax (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 the 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.
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 Fund
investments other than tax-exempt instruments may give rise to
taxable income. Fund 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 that borrows money to purchase Fund shares will not be
able to deduct the interest paid with respect to such borrowed money.
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. Colonial 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 a 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. Colonial 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 the
shareholder 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.
MANAGEMENT OF THE FUNDS
Colonial is a subsidiary of The Colonial Group, Inc. (TCG), One
Financial Center, Boston, MA 02111. TCG is a subsidiary of Liberty
Financial Companies, Inc. (Liberty Financial), which in turn is an
indirect subsidiary of Liberty Mutual Insurance Company (Liberty
Mutual). Liberty Mutual is an underwriter of worker's 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
Robert J. Birnbaum(1)(Age 67), Trustee, is a Trustee (formerly
Special Counsel, Dechert Price & Rhoads; President and Chief
Operating Officer, New York Stock Exchange, Inc.), 313 Bedford Road,
Ridgewood, NJ 07450
Tom Bleasdale (Age 64), Trustee, is a Trustee (formerly Chairman of
the Board and Chief Executive Officer, Shore Bank & Trust Company),
1508 Ferncroft Tower, Danvers, MA 01923
Lora S. Collins (Age 59), Trustee, is an Attorney with Kramer, Levin,
Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New York, NY
10022
James E. Grinnell(1)(Age 65), Trustee, is a Private Investor
(formerly Senior Vice President-Operations, The Rockport Company), 22
Harbor Avenue, Marblehead, MA 01945
William D. Ireland, Jr. (Age 71), Trustee, is a Trustee (formerly
Chairman of the Board, Bank of New England - Worcester), 103
Springline Drive, Vero Beach, FL 32963
Richard W. Lowry(1)(Age 58), Trustee, is a Private Investor (formerly
Chairman and Chief Executive Officer, U.S. Plywood Corporation),
10701 Charleston Drive, Vero Beach, FL 32963
William E. Mayer (Age 54), Trustee, is Dean, College of Business and
Management, University of Maryland (formerly Dean, Simon Graduate
School of Business, University of Rochester; Chairman and Chief
Executive Officer, C.S. First Boston Merchant Bank; and President and
Chief Executive Officer, The First Boston Corporation), College Park,
MD 20742
John A. McNeice, Jr.(2)(Age 62), Trustee and President, is Chairman
of the Board and Director, TCG and Colonial, Director, Liberty
Financial (formerly Chief Executive Officer, Colonial and TCG)
James L. Moody, Jr. (Age 63), Trustee, is Chairman of the Board,
Hannaford Bros., Co. (formerly Chief Executive Officer, Hannaford
Bros. Co.), P.O. Box 1000, Portland, ME 04104
John J. Neuhauser (Age 51), Trustee, is Dean, Boston College School
of Management, 140 Commonwealth Avenue, Chestnut Hill, MA 02167
George L. Shinn (Age 72), Trustee, is a Financial Consultant
(formerly Chairman, Chief Executive Officer and Consultant, The First
Boston Corporation), The First Boston Corporation, Tower Forty Nine,
12 East 49th Street, New York, NY 10017
Robert L. Sullivan (Age 67), Trustee, is a Management Consultant
(formerly Management Consultant, Saatchi and Saatchi Consulting Ltd.
and Principal and International Practice Director, Management
Consulting, Peat Marwick main & Co.), 7121 Natelli Woods Lane,
Bethesda, MD 20817
Sinclair Weeks, Jr. (Age 71), Trustee, is Chairman of the Board, Reed
& Barton Corporation, Bay Colony Corporate Center, Suite 4550, 1000
Winter Street, Waltham, MA 02154
Harold W. Cogger (Age 59), Vice President, is President, Chief
Executive Officer and Director, Colonial (formerly Executive Vice
President; Colonial); President, Chief Executive Officer and
Director, TCG; Executive Vice President and Director, Liberty
Financial
Peter L. Lydecker (Age 41), Controller (formerly Assistant
Controller), is Vice President, Colonial (formerly Assistant Vice
President, Colonial)
Davey S. Scoon (Age 48), Vice President, is Executive Vice President
and Director, Colonial (formerly Senior Vice President and Treasurer,
Colonial); Executive Vice President and Chief Operating Officer, TCG,
(formerly Vice President - Finance and Administration, TCG)
Richard A. Silver (Age 48), Treasurer and Chief Financial Officer
(formerly Controller), is Senior Vice President, Director, Treasurer
and Chief Financial Officer, Colonial; Treasurer and Chief Financial
Officer, TCG (formerly Assistant Treasurer, TCG)
Arthur O. Stern (Age 56),Secretary, is Director, Executive Vice
President, General Counsel, Clerk and Secretary, Colonial; Executive
Vice President, Legal and Compliance and Clerk, TCG (formerly Vice
President - Legal, TCG)
(1) Elected to the Colonial Funds Complex on April 21, 1995.
(2) Trustees who are "interested persons" (as defined in the
1940 Act) of the Fund or Colonial.
The Trustees serve as trustees of all Colonial funds for which each
Trustee (except Mr. McNeice) 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 the Funds' relative net assets and one-third of the fees are
divided equally among the Colonial funds.
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.
Colonial or its affiliate, Colonial Advisory Services, Inc. (CASI),
has rendered investment advisory services to investment company,
institutional and other clients since 1931. Colonial currently
serves as investment adviser for 33 open-end and 5 closed-end
management investment company portfolios (collectively, Colonial
funds). Trustees and officers of the Trust who are also officers of
Colonial 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 $15.5 billion in
assets.
The Management Agreement
Under a Management Agreement (Agreement), Colonial has contracted to
furnish the Fund with investment research and recommendations or fund
management, respectively, and accounting, and administrative
personnel and services, and with office space, equipment and other
facilities, at Colonial's expense. For these services and
facilities, the Fund pays a monthly fee based on the average of the
daily closing value of the total net assets of the Fund for such
month.
Colonial's compensation under the Agreement is subject to reduction
in any fiscal year to the extent that the total expenses of the Fund
for such year (subject to applicable exclusions) exceed the most
restrictive applicable expense limitation prescribed by any state
statute or regulatory authority in which the Trust's shares are
qualified for sale. The most restrictive expense limitation
applicable to the Fund is 2.5% of the first $30 million of the
Trust's average net assets for such year, 2% of the next $70 million
and 1.5% of any excess over $100 million.
Under the Agreement, any liability of Colonial to the Fund and its
shareholders is limited to situations involving Colonial's own
willful misfeasance, bad faith, gross negligence or reckless
disregard of duties.
The Agreement may be terminated with respect to the Fund at any time
on 60 days' written notice by Colonial 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 Colonial or the Trust, cast in person
at a meeting called for the purpose of voting on such approval.
Colonial pays all salaries of officers of the Trust. The Trust pays
all expenses not assumed by Colonial including, but not limited to,
auditing, legal, custodial, investor servicing and shareholder
reporting expenses. The Trust pays the cost of typesetting for its
Prospectuses and the cost of printing and mailing any Prospectuses
sent to shareholders. CISI pays the cost of printing and
distributing all other Prospectuses.
The Agreement provides that Colonial shall not be subject to any
liability to the Trust or to any shareholder of the Trust for any act
or omission in the course of or connected with rendering services to
the Trust in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties on the part of
Colonial.
The Pricing and Bookkeeping Agreement
Colonial provides pricing and bookkeeping services to the Fund
pursuant to a Pricing and Bookkeeping Agreement. The Pricing and
Bookkeeping Agreement has a one-year term. Colonial 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
Portfolio Transactions
Investment decisions. Colonial also acts as investment adviser to
the other Colonial funds (as defined under Management of the Fund
herein) and its 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 Colonial. The other Funds and
clients advised by Colonial 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 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
Colonial as investment adviser to the Fund outweighs the
disadvantages, if any, which might result from these practices.
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, Colonial may consider sales
of shares of the Fund and of the other Colonial funds as a factor in
the selection of broker-dealers to execute securities transactions
for the Fund.
Colonial places the transactions of the Fund with broker-dealers
selected by Colonial 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 Fund from time to
time also executes portfolio transactions with such broker-dealers
acting as principals. The Fund does not intend to deal exclusively
with any particular broker-dealer or group of broker-dealers.
Except as described below in connection with commissions paid to a
clearing agent on sales of securities, it is the Fund's and
Colonial's policy always to seek best execution, which is to place
the Fund's transactions where the Fund 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.
Subject to such practice of always seeking best execution, securities
transactions of the Fund may be executed by broker-dealers who also
provide research services (as defined below) to Colonial, the Fund
and the other Colonial funds. Colonial 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 Colonial, they tend to
reduce Colonial's expenses. In Colonial's opinion, it is impossible
to assign an exact dollar value for such services.
Subject to such policies as the Trustees may determine, Colonial may
cause the Fund to pay a broker-dealer which provides brokerage and
research services to Colonial an amount of commission for effecting a
securities transaction, including the sale of an option or a closing
purchase transaction, for the Fund 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).
Colonial 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 Colonial's overall responsibilities to
the Fund and all its other clients.
The Trustees have authorized Colonial to utilize the services of a
clearing agent with respect to all call options written by 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. The
Trustees may further authorize Colonial to depart from the present
policy of always seeking best execution and to pay higher brokerage
commissions from time to time for other brokerage and research
services as described above in the future if developments in the
securities markets indicate that such would be in the interests of
the shareholders of the Fund.
Principal Underwriter
CISI is the principal underwriter of the Trust's shares. CISI has no
obligation to buy the Fund's shares, and purchases the Fund's
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. 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.
DETERMINATION OF NET ASSET VALUE
The Fund determines net asset value (NAV) per share for each Class as
of the close of the New York Stock Exchange 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. 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 Colonial 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 in good faith under the direction of the 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. 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 the 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 Trustees.
Amortized Cost for Money Market Funds
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 than that of the same portfolio under the market
value method. The Trustees have adopted procedures intended to
stabilize the Fund's NAV per share at $1.00. When the Fund's market
value deviates from the amortized cost of $1.00, and results in a
material dilution to existing shareholders, the Trustees will take
corrective action to: realize gains or losses; shorten the
portfolio's maturity; withhold distributions; redeem shares in kind;
or convert to the market value method (in which case the NAV per
share may differ from $1.00). All investments will be determined
pursuant to procedures approved by the Trustees to present minimal
credit risk.
See the Statement of Assets and Liabilities of the 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 before
4:00 p.m. Eastern time 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 4:00 p.m.
Eastern time, 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.
As a convenience to investors, shares of most Colonial funds may be
purchased through the Colonial Fundamatic Check Program.
Preauthorized monthly bank drafts or electronic funds transfer for a
fixed amount (at least $50) are used to purchase Fund 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, except for Class Z and T which
will be the 15th of the month). Further information and application
forms are available from FSFs or from CISI.
Class A Shares
Most Funds continuously offer Class A shares. The Fund receives the
entire NAV of shares sold. CISI's commission is the sales charge
shown in the 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 an FSF on the investment account application and retains the
entire contingent deferred sales charge (CDSC).
CISI offers several plans by which an investor may obtain reduced
sales charges on purchases of a Fund's Class A shares. These plans
may be altered or discontinued at any time.
Right of Accumulation and Statement of Intent (Class A and T Shares
only)
Reduced sales charges on Class A and T shares can be effected by
combining a current purchase with prior purchases of Class A, B, D, 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 fund 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 any Class C shares) and Class B,
D, 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. The 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 (exclusive of reinvested distributions of all
Colonial funds) made within a thirteen-month period pursuant to a
Statement of Intent ("Statement"). A shareholder may include, as an
accumulation credit towards the completion of such Statement, the
value of all Class A, B, D, T and Z shares held by the shareholder in
Colonial funds (except money market fund, unless acquired by exchange
from another non-money market Colonial fund). The value is
determined at the public offering price on the date 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 or T 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.
Classes B, C, D, T and Z Shares
For those Funds offering Class B, C, D, T and Z shares, the
Prospectus contains a general description of how investors may buy
Class B shares of the Fund and a description of the CDSC. This SAI
contains additional information which may be of interest to
investors.
With respect to all classes, the Fund receives the entire NAV of
shares sold. The FSF commission is the same for all FSFs selling the
same classes of shares; CISI retains the entire CDSC.
Waiver of Contingent Deferred Sales Charges (CDSCs) (Classes A, B, D
and T)
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.
2. Systematic Withdrawal Plan (SWP). CDSCs may be waived on
redemptions occurring pursuant to a monthly, quarterly or semi-
annual SWP established with Colonial, 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).
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.
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 current
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.
Fundamatic Check Program
As a convenience to investors, shares of most Colonial funds may be
purchased through the Colonial Fundamatic Check Program.
Preauthorized monthly bank drafts or electronic funds transfer for a
fixed amount of at least $50 are used to purchase Fund 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, except for Class T and Z which
will be on the 15th of each month). Further information and
application forms are available from FSFs or from CISI.
Automated Dollar Cost Averaging (Classes A, B and D)
Colonial's Automated Dollar Cost Averaging Program allows you to
exchange 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 agreeing to a monthly
exchange of $100 or more to the same class of shares of the Colonial
fund you designate on your written application. The designated
amount will be exchanged on the third Tuesday of each month. There
is no charge for the 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 Funds, 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.
Any additional payments or exchanges into your Fund will extend the
time of the Automated Dollar Cost Averaging program.
An exchange is a taxable capital transaction for federal 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 it to Colonial
Investors Service Center, 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.
Colonial Asset Builder Investment Program (Class A of The Colonial
Fund and Colonial Growth Shares Fund only)
A reduced sales charge applies to a purchase of certain Colonial
fund's 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. 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. 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 Telephone Redemption Statement of Intent
Plan
Sponsored Arrangements Colonial Cash Connection Share Certificates
$50,000 Fast Cash Reduced Sales Charges
Automatic Dividend Diversification
Right of Accumulation for any "person" Exchange Privilege*
*Exchanges may be made to other Colonial funds offering the Program.
Because of the unavailability of certain services, the 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 Fund shares, investors should
consult their FSF to determine whether it is appropriate. The Plan
does not assure a profit nor protects against loss in declining
markets.
Tax-Sheltered Retirement Plans
Certain Colonial funds offer prototype tax-qualified plans, including
Individual Retirement Accounts, and Pension and Profit-Sharing Plans
for individuals, corporations, employees and the self-employed. The
minimum initial Retirement Plan investment in any of the Funds is
$25. The First National Bank of Boston is the Trustee and charges a
$10 annual fee. Detailed information concerning these retirement
plans and copies of the Retirement Plans are available from CISI.
Other Plans (Classes A and T only)
Shares of certain funds may be sold at NAV to current and retired:
Trustees of funds advised by Colonial; directors, officers and
employees of Colonial, CISI and other companies affiliated with
Colonial; 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.
Class A and 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 organizations group,
the term of the organization's existence and certain characteristics
of the members of its group. The Funds reserve the right to revise
the terms of or to suspend or discontinue sales pursuant to sponsored
plans at any time.
Classes A and 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.
Class A shares of certain funds may also be purchased at reduced or
no sales charge by investors moving from another mutual fund complex
and by participants in certain retirement plans. In lieu of the
commissions described in the Prospectus, Colonial will pay the FSF a
finder's fee of 0.25% of the applicable account value during the
first twelve months in connection with such purchases.
Consultation with a competent financial and tax advisor 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.
INVESTOR SERVICES
Your Open Account
The following information provides more detail concerning the
operation of a Colonial Open Account (an account with book entry
shares only). For further information or assistance, investors
should consult CISC.
The Open Account permits a shareholder to 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.
The $10 fee on small accounts is paid to CISC.
If a shareholder changes his or her address and does not notify the
Fund, the Fund will reinvest all future distributions regardless of
the option chosen.
The Open Account also provides a way to accumulate shares of the
Fund. 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 , D, T or Z shares. Money
market funds will not issue certificates. A shareholder may send any
certificates which have been previously acquired to CISC for deposit
to their account.
Shares of 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.
Undelivered distribution checks returned by the post office may be
invested in your account.
Reinvestment Privilege
An investor who has redeemed Class A, B, or D shares may, upon
request, reinvest 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 reinvestment request
and payment. Any CDSC paid at the time of the redemption will be
credited to the shareholder upon reinvestment. The period between
the redemption and the reinvestment will not be counted in aging the
reinvested shares for 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.
Exchange Privilege
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. The prospectus of each 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 and
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.
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 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.
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. The
$50,000 Fast Cash privilege is suspended for 60 days after an address
change is effected.
Plans Available To Shareholders
The Plans described below are offered by most Colonial funds, are
voluntary and may be terminated at any time without the imposition by
the Fund or CISC of any penalty.
Checkwriting (Available only on the Class A and C shares of certain
Funds)
Shares may be redeemed by check if a shareholder completed an
Investment Account Application and Signature Card. Colonial 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. 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.
Systematic Withdrawal Plan
If a shareholder's Account Balance is at least $5,000, the
shareholder may establish a Systematic Withdrawal Plan (SWP). A
specified dollar amount or percentage of the then current net asset
value of the shareholder's investment in any Fund will be paid
monthly or quarterly 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 D shares of a 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. Generally, no CDSCs apply to a redemption pursuant to a
SWP, 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 Code regulation to withdraw more than 12%, on an annual
basis, of the value of their Class B and Class D share account may do
so but will be subject to a CDSC ranging from 1.00% 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 a 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 Open
Account.
The Funds 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 Funds 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.
Colonial cash connection. Dividends and any other distributions,
including 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 Investment
Account 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 the other Colonial funds. 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.
Telephone Redemptions. Shareholders and/or their financial advisers
may select telephonic redemptions on their account application. A
redemption of up to $50,000 may be sent to a shareholder's address
without preauthorization, by calling 1-800-422-3737 between 9:00 a.m.
and 4:00 p.m. (NY time) on business days. 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 60 days and proceeds
and confirmations will be mailed or sent to the address of record.
Shareholders and/or their financial advisers will be required to
provide their name, address and account number. Financial advisers
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.
Non cash Redemptions. For redemptions of any single shareholder
within any 90-day period exceeding the lesser of $250,000 or 1% of
the Fund's net asset value, the Fund may make the payment or a
portion of the payment with portfolio securities held by the Fund
instead of cash, in which case the redeeming shareholder may incur
brokerage and other costs in selling the securities received.
SUSPENSION OF REDEMPTIONS
The Fund may not suspend shareholders' right of redemption or
postpone payment for more than seven days unless the New York Stock
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 protection of investors.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the
Fund. However, the Declaration disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Fund or the 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 in which the Fund would be unable to meet its
obligations. The likelihood of such circumstances is remote.
As described under the caption "Organization and history" in the
Prospectus, 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 the
purpose of obtaining the signatures necessary to demand a
shareholder's 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 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 investment advisory 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 a 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 differ
from standardized average annual total returns only in that they may
relate to nonstandardized periods, represent aggregate rather than
average annual total returns or in that the sales charge or CDSC is
not deducted.
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 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 entitled to dividends for 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 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, a Fund's distribution rate reflects total amounts actually
paid to shareholders, while yield reflects the current earning power
of a Fund's portfolio securities (net of a Fund's expenses). A
Fund's yield for any period may be more or less than the amount
actually distributed in respect of such period.
A Fund may compare its performance to various unmanaged indices
published by such sources as listed in Appendix II.
A Fund may also refer to quotations, graphs and electronically
transmitted data from sources believed by Colonial to be reputable,
and publications in the press pertaining to a Fund's performance or
to Colonial 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 is based on past performance and does not predict future
results.
APPENDIX I
DESCRIPTION OF BOND RATINGS
S&P
AAA The highest rating assigned by S&P indicates an extremely strong
capacity to repay principal and interest.
AA bonds also qualify as high quality. Capacity to repay principal and pay
interest is very strong, and in the majority of instances, they differ from
AAA only in small degree.
A bonds have a strong capacity to repay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB bonds are regarded as having an adequate capacity to repay principal
and interest. Whereas they normally exhibit protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to repay principal and interest than for bonds in the A
category.
BB, B, CCC, and CC bonds are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and principal in
accordance with the terms of the obligation. BB indicates the lowest
degree of speculation and CC the highest degree. While likely to have some
quality and protection characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C ratings are reserved for income bonds on which no interest is being paid.
D bonds are in default, and payment of interest and/or principal is in
arrears.
Plus(+) or minus (-) are modifiers relative to the standing within the
major rating categories.
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 protective elements
may be of greater amplitude or there may be other elements present which
make the long-term risk 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 of the 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, 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 these bonds.
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. They may be in default or there may be
present elements of danger with respect to principal or interest.
Ca bonds are speculative in a high degree, often in default or having other
marked shortcomings.
C bonds are the lowest rated class of bonds and can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
APPENDIX II
1994
SOURCE CATEGORY RETURN
(%)
Donoghue Tax-Free Funds 2.25
Donoghue U.S. Treasury Funds 3.34
Dow Jones Industrials 5.03
Morgan Stanley Capital 8.06
International EAFE Index
Morgan Stanley Capital 8.21
International EAFE GDP Index
Libor Six-month Libor 6.9375
Lipper Adjustable Rate Mortgage -2.20
Lipper California Municipal Bond -7.52
Funds
Lipper Connecticut Municipal Bond -7.04
Funds
Lipper Closed End Bond Funds -6.86
Lipper Florida Municipal Bond Funds -7.76
Lipper General Bond Fund -5.98
Lipper General Municipal Bonds -6.53
Lipper General Short-Term Tax-Exempt -0.28
Bonds
Lipper Global Flexible Portfolio -3.03
Funds
Lipper Growth Funds -2.15
Lipper Growth & Income Funds -0.94
Lipper High Current Yield Bond Funds -3.83
Lipper High Yield Municipal BondDebt -4.99
Lipper Fixed Income Funds -3.62
Lipper Insured Municipal Bond -6.47
Average
Lipper Intermediate Muni Bonds -3.53
Lipper Intermediate (5-10) U.S. -3.72
Government Funds
Lipper Massachusetts Municipal Bond -6.35
Funds
Lipper Michigan Municipal Bond Funds -5.89
Lipper Mid Cap Funds -2.05
Lipper Minnesota Municipal Bond -5.87
Funds
Lipper U.S. Government Money Market 3.58
Funds
Lipper Natural Resources -4.20
Lipper New York Municipal Bond Funds -7.54
Lipper North Carolina Municipal Bond -7.48
Funds
Lipper Ohio Municipal Bond Funds -6.08
Lipper Small Company Growth Funds -0.73
Lipper Specialty/Miscellaneous Funds -2.29
Lipper U.S. Government Funds -4.63
Shearson Lehman Composite -3.37
Government Index
Shearson Lehman -3.51
Government/Corporate Index
Shearson Lehman Long-term -7.73
Government Index
S&P 500 S&P 1.32
S&P Utility Index S&P -7.94
Bond Buyer Bond Buyer Price Index -18.10
First Boston High Yield Index -0.97
Swiss Bank 10 Year U.S. Government -6.39
(Corporate Bond)
Swiss Bank 10 Year United Kingdom -5.29
(Corporate Bond)
Swiss Bank 10 Year France (Corporate -1.37
Bond)
Swiss Bank 10 Year Germany (Corporate 4.09
Bond)
Swiss Bank 10 Year Japan (Corporate 7.95
Bond)
Swiss Bank 10 Year Canada (Corporate -14.10
Bond)
Swiss Bank 10 Year Australia (Corporate 0.52
Bond)
Morgan Stanley Capital 10 Year Hong Kong (Equity) -28.90
International
Morgan Stanley Capital 10 Year Belgium (Equity) 9.43
International
Morgan Stanley Capital 10 Year Spain (Equity) -3.93
International
SOURCE CATEGORY RETURN
(%)
Morgan Stanley Capital 10 Year Austria (Equity) -6.05
International
Morgan Stanley Capital 10 Year France (Equity) -4.70
International
Morgan Stanley Capital 10 Year Netherlands (Equity) 12.66
International
Morgan Stanley Capital 10 Year Japan (Equity) 21.62
International
Morgan Stanley Capital 10 Year Switzerland (Equity) 4.18
International
Morgan Stanley Capital 10 Year United Kingdom -1.63
International (Equity)
Morgan Stanley Capital 10 Year Germany (Equity) 5.11
International
Morgan Stanley Capital 10 Year Italy (Equity) 12.13
International
Morgan Stanley Capital 10 Year Sweden (Equity) 18.80
International
Morgan Stanley Capital 10 Year United States 2.00
International (Equity)
Morgan Stanley Capital 10 Year Australia (Equity) 6.48
International
Morgan Stanley Capital 10 Year Norway (Equity) 24.07
International
Inflation Consumer Price Index 2.67
FHLB-San Francisco 11th District Cost-of-Funds 4.367
Index
Federal Reserve Six-Month Treasury Bill 6.49
Federal Reserve One-Year Constant-Maturity 7.14
Treasury Rate
Federal Reserve Five-Year Constant-Maturity 7.78
Treasury Rate
*in U.S. currency
