March 13, 1995
COLONIAL GLOBAL UTILITIES FUND
PROSPECTUS
BEFORE YOU INVEST
Colonial Management Associates, Inc. (Administrator) 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 risk including possible loss
of principal. Unlike savings accounts and certificates of deposit,
mutual funds are not insured or guaranteed by any financial
institution or government agency.
Please consult your full-service financial adviser to determine how
investing in this mutual fund may suit your unique needs, time horizon
and risk tolerance.
Colonial Global Utilities Fund (Fund), a diversified portfolio of
Colonial Trust III (Trust), an open-end management investment company
seeks current income and long-term growth of capital and income.
The Fund is the successor by merger to the Liberty Financial Utilities
Fund. The merger occurred on March 24, 1995. All references to the
Fund as of a time prior to such date are to the Liberty Financial
Utilities Fund.
Unlike a traditional mutual fund which invests directly in individual
securities, the Fund seeks to achieve its objective by investing all
of its assets in the LFC Utilities Trust (Portfolio), an open-end
management investment company having the same objective as the Fund.
The Fund's investment experience will correspond directly to that of
the Portfolio. The Portfolio is managed by Stein Roe & Farnham
Incorporated (Adviser), successor to an investment advisory business
that was founded in 1932.
U-01/567A-0195
This Prospectus explains concisely what you should know before
investing in the Fund. Read it carefully and retain it for future
reference. More detailed information about the Fund is in the March
13, 1995 Statement of
Additional Information which has been filed with the Securities and
Exchange Commission and is obtainable free of charge by calling the
Administrator 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.
The Fund offers three classes of shares. Class A shares are offered
at net asset value plus a sales charge imposed at the time of
purchase; Class B shares are offered at net asset value plus a
distribution fee and a declining contingent deferred sales charge on
redemptions made within six years after purchase; and Class D shares
are offered at net asset value plus a small initial sales charge, a
contingent deferred sales charge on redemptions made within one year
after purchase and a continuing distribution fee. Class B shares
automatically convert to Class A shares after approximately eight
years. See "How to buy shares."
Contents Page
Summary of expenses 2
The Fund's financial history 3
Two-tiered structure 4
The Fund's investment objective 5
How the Fund pursues its objective
and certain risk factors 5
How the Fund measures its performance 8
How the Fund and the Portfolio are 8
managed
How the Fund values its shares 9
Distributions and taxes 9
How to buy shares 9
How to sell shares 11
How to exchange shares 12
Telephone transactions 12
12b-1 plans 12
Organization and history 13
Appendix 14
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 estimated annual expenses for an investment in each Class of the
Fund's shares. Annual Operating Expenses include the expenses of the
Portfolio. See "How the Fund and the Portfolio are Managed."
Shareholder Transaction Expenses (1)(2)
Class A Class B Class D
Maximum Initial Sales Charge
Imposed on a Purchase (as a %
of offering price) (3) 5.75% 0.00%(5) 1.00%(5)
Maximum Contingent Deferred
Sales Charge (as a % of offering 1.00%(4) 5.00% 1.00%
price) (3)
(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.
(3) Does not apply to reinvested
distributions.
(4) Only with respect to any portion
of purchases of $1 million to $5
million redeemed within
approximately 18 months after
purchase. See "How to buy
shares."
(5) Because of the 0.75% distribution
fee applicable to Class B and D
shares, long-term Class B and
Class D shareholders may pay more
in aggregate sales charges than
the maximum initial sales charge
permitted by the National
Association of Securities
Dealers, Inc. However, because
the Fund's Class B shares
automatically convert to Class A
shares after approximately eight
years, this is less likely for
Class B shares than for a class
without a conversion feature.
Annual Operating Expenses (as a % of net assets)
Class A Class B Class D
Management and administration
fees 0.55% 0.55% 0.55%
12b-1 fees 0.25 1.00 1.00
Other expenses 0.54 0.54 0.54
Total expenses 1.34% 2.09% 2.09%
Amounts in the table reflect the aggregate operating expenses incurred
by the Fund and the Portfolio during the fiscal year ended October 31,
1994, adjusted to reflect current fees of the Fund. See "How the Fund
and the Portfolio are Managed." The Trustees believe that the
potential for economies of scale that may be achieved by the Fund and
the Portfolio in the event additional Mutual Funds invest in the
Portfolio outweighs the slight increase (less than 0.01% of average
net assets per year at current asset levels) in the aggregate expenses
of the Fund and the Portfolio over what the Fund's expenses would be
if it invested directly in the securities held by the Portfolio.
Example
The following Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in each Class of shares of the Fund for
the periods specified, assuming a 5% annual return and, unless
otherwise noted, redemption at period end. The 5% return and expenses
used in this Example should not be considered indicative of actual or
expected Fund performance or expenses, both of which will vary:
Class A Class B Class D
Period (6) (7) (6) (7)
1 year $ 70 $ 71 $ 21 $ 41 $ 31
3 years 98 96 66 75 75
5 years 127 133 113 121 121
10 years 209 225 225 250 250
(6) Assumes redemption at period end.
(7) Assumes no redemption.
THE FUND'S FINANCIAL HISTORY
The following schedule of financial highlights for a Class A share
outstanding throughout each period through October 31, 1994, has been
audited by KPMG Peat Marwick LLP, independent auditors. Their
unqualified report is included in the 1994 Annual Report and is
incorporated by reference into the Statement of Additional
Information.
<TABLE>
<CAPTION>
Year ended October 31 Period August 23, 1991 through
1994 1993 1992 October 31, 1991
<S> <C> <C> <C>
Net asset value - Beginning of period............... $12.15 $10.43 $9.99 $10.00
Income from investment operations:
Net investment income(a)........................... 0.55 0.57 0.59 0.02
Net realized and unrealized gain (loss)
on investments..................................... (1.43) 1.79 0.46 (0.03)
Total from investment operations................. (0.88) 2.36 1.05 (0.01)
Less distributions declared to shareholders:
From net investment income......................... (0.50) (0.61) (0.61) ---
From net realized gains on investments............. (0.16) (0.03) (0.02) ---
Total distributions declared to shareholders..... (0.66) (0.64) (0.61) 0.00
Net asset value - End of period..................... 10.61 $12.15 $10.43 $9.99
Total return(b)..................................... (7.40)% 23.3% 10.8% (2.1)%(e)
Ratios to average net assets:
Expenses (a)...................................... 1.20% 1.13% 1.25%(c) 1.25%(c)(e)
Net investment income (a)......................... 4.90% 4.80% 5.81%(d) 5.75%(d)(e)
Net assets at end of period (in thousands).......... $260,450 $304,500 $118,997 $6,617
_________________________________
(a) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's
proportionate share of the income and expenses of LFC Utilities Trust.
(b) Total return based on net asset value with all distributions reinvested.
(c) If the Fund had paid all of its expenses excluding distribution fees waived and there had been no
reimbursement from the Adviser and the Administrator, as described in Note 3 of the Fund's 1994
Annual Report, these ratios would have been 1.61% and 9.81% for the periods ended October 31,
1992 and 1991, respectively.
(d) Computed giving effect to Adviser's and Administrator's expense limitation undertaking.
(e) Annualized.
</TABLE>
Further performance information is contained in the Fund's Annual
Report to shareholders, which is obtainable free of charge by calling
1-800-248-2828.
TWO-TIERED STRUCTURE
Unlike other mutual funds which invest directly in individual
securities, the Fund is an open-end management investment company that
seeks to achieve its investment objective by investing all of its
assets in the Portfolio, a separate registered investment company with
the same investment objective as the Fund and which invests directly
in portfolio securities. See "The Fund's Investment Objective," "How
the Fund Pursues its Objective and Certain Risk Factors" and "How the
Fund and the Portfolio are Managed" for information concerning the
Portfolio's and the Fund's investment objectives, policies, management
and expenses. The following describes certain of the effects and
risks of this structure.
The Fund's and the Portfolio's investment objectives may not be
changed without shareholder approval. Generally, matters submitted by
the Portfolio to its investors for a vote will be passed along by the
Fund to its shareholders, and the Fund will vote its entire interest
in the Portfolio in proportion to the votes actually received from
Fund shareholders. As of the date of this Prospectus, the Fund was
the only investor in the Portfolio, so that the outcome of any matter
submitted to the Portfolio's investors would be determined by the vote
of Fund shareholders. In the future, however, other funds or
institutional investors may invest in the Portfolio. Such other
investors could alone or collectively acquire sufficient voting
interests in the Portfolio to control matters relating to the
operation of the Portfolio. You may obtain information about whether
there are other investors in the Portfolio by writing or calling the
Administrator at 1-800-248-2828. Fund shareholders will be notified
at least 30 days prior to any change in the Fund's or the Portfolio's
objective.
Other funds or institutions would invest in the Portfolio on the same
terms and conditions as the Fund and would bear their proportionate
share of the Portfolio's expenses. However, such other mutual funds
would not be required to issue their shares at the same public
offering price as the Fund and may have direct expenses that are
higher or lower than those of the Fund. These differences may result
in such other funds generating investment returns higher or lower than
those of the Fund. Large scale redemptions by any such other
investors in the Portfolio could result in untimely liquidation of the
Portfolio's security holdings, loss of investment flexibility, and an
increase in the operating expenses of the Portfolio as a percentage of
its assets.
The Fund will continue to invest in the Portfolio so long as the
Trust's Board of Trustees determines it is in the best interest of
Fund shareholders to do so. In the event that the Portfolio's
investment objective or policies were changed so as to be inconsistent
with the Fund's investment objective or policies, the Board of
Trustees would consider what action might be taken, including changes
to the Fund's investment objective or policies, or withdrawal of the
Fund's assets from the Portfolio and investment of such assets in
another pooled investment entity or the retention of an investment
adviser to manage the Fund's investments. Certain of these actions
would require Fund shareholder approval. Further, because the same
individuals serve on the Boards of the Fund and the Portfolio, in the
event at the time any such action were to be taken other investors had
invested directly in the Portfolio, decisions as to the appropriate
actions to take might involve conflicts of interest. In such event,
the Trustees would adopt written policies to address any potential
conflicts. Withdrawal of the Fund's assets from the Portfolio could
result in a distribution by the Portfolio to the Fund of portfolio
securities in kind (as opposed to a cash distribution), and the Fund
could incur brokerage fees or other transaction costs and could
realize distributable taxable gains in converting such securities to
cash. Such a distribution in kind could also result in a less
diversified portfolio of investments for the Fund.
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks current income and long-term growth of capital and
income.
HOW THE FUND PURSUES ITS OBJECTIVE AND CERTAIN RISK FACTORS
As indicated above, the Fund seeks to achieve its objective by
investing all its assets in the Portfolio, which has the same
investment objective as the Fund. Following is a discussion of the
investment policies of the Portfolio.
The Portfolio normally invests at least 65% of its total assets in
U.S. and foreign equity and debt securities issued by public utility
companies (Utility Securities). Utility Securities include securities
issued by companies engaged in the manufacture, production,
generation, transmission, sale or distribution of electricity, natural
gas or other types of energy or water or other sanitary services, and
companies engaged in telecommunications, including telephone,
telegraph, satellite, microwave and other communications media (but
not companies primarily engaged in public broadcasting or cable
television). The Portfolio will invest primarily in securities of
large, established utility companies located in developed countries,
including the U.S. Generally, at least 20% of the Portfolio's total
assets will be invested in equity Utility Securities and at least 20%
in debt Utility Securities. Because the Portfolio concentrates its
investments in Utility Securities, an investment in the Fund may
entail more risk than an investment in a more diversified portfolio.
See "Utility Securities" below.
Equity securities generally include common and preferred stock,
warrants (rights) to purchase such stock, securities convertible into
such stock and sponsored and unsponsored American Depository Receipts
(receipts issued in the U.S. by banks or trust companies evidencing
ownership of underlying foreign securities). Debt securities
generally include securities of any maturity that pay fixed, floating
or adjustable interest rates, as well as zero coupon securities (debt
securities that do not pay interest but, instead, are issued at a
significant discount to their stated maturity values) and pay-in-kind
securities (debt securities that pay interest, at the issuer's option,
in additional securities instead of cash). The debt securities in
which the Portfolio invests will be rated at the time of investment at
least Baa by Moody's Investors Service, Inc. (Moody's) or BBB by
Standard & Poor's Corporation (S&P), or will be unrated securities
deemed by the Adviser to be of comparable quality to Baa by Moody's or
BBB by S&P or higher. Such securities will not necessarily be sold if
the rating is subsequently reduced unless any such down-grade would
cause the Portfolio to hold more than 5% of its total assets in debt
securities rated below investment grade. Equity and debt securities
may be purchased on a "when-issued" or forward basis. This means that
the Portfolio will enter into a contract to purchase the underlying
security for a fixed price on a date beyond the customary settlement
date. No interest accrues until settlement.
The Portfolio may invest without limit in foreign securities. The
Fund normally will invest in securities issued by companies located in
at least three countries including the U.S. Up to 35% of the
Portfolio's total assets may be invested in equity securities of any
type and investment grade debt securities that are not Utility
Securities.
Utility Securities. Because the Portfolio invests primarily in
Utility Securities, the Fund's shares may fluctuate in value more
widely than shares of a more diversified portfolio. The values of
Utility Securities are especially affected by changes in prevailing
interest rate levels (as interest rates increase, the values of
Utility Securities tend to decrease, and vice versa), as well as
general competitive and market forces in the utility industries,
changes in federal and state regulation, energy conservation efforts
and other environmental concerns and, particularly with respect to
nuclear facilities, shortened economic life and cost overruns.
Certain utilities, especially gas and telephone utilities, have in
recent years been affected by increased competition, which could
adversely affect the profitability of such utilities. Similarly, the
profitability of certain electric utilities may in the future be
adversely affected by increased competition resulting from partial
deregulation.
Debt Securities Generally. The values of debt securities also
generally fluctuate inversely with changes in interest rates. This is
less likely to be true for adjustable or floating rate securities,
since interest rate changes are more likely to be reflected in changes
in the rates paid on the securities. However, reductions in interest
rates may also translate into lower distributions paid by the Fund.
Additionally, because zero coupon and pay-in-kind securities do not
pay interest but the Portfolio nevertheless must accrue and distribute
the income deemed to be earned on a current basis, the Portfolio may
have to sell other investments to raise the cash needed to make income
distributions.
Debt securities rated BBB or Baa have speculative characteristics, and
changes in economic conditions or other circumstances are more likely
to lead to a weakened capacity of the issuers of such securities to
make principal and interest payments than would likely be the case
with investments in securities with higher credit ratings.
Foreign Investments. Investments in foreign securities (both debt and
equity) and American Depository Receipts have special risks related to
political, economic and legal conditions outside of the U.S. As a
result, the prices of such securities, and therefore of Fund shares,
may fluctuate substantially more than the prices of securities of
issuers based in the U.S. Special risks associated with foreign
securities include the possibility of unfavorable currency exchange
rates, difficulties in enforcing judgments abroad, the existence of
less liquid and less regulated foreign markets, the unavailability of
reliable information about issuers, the existence of different
accounting, auditing and financial standards in foreign countries, the
existence (or potential imposition) of exchange control regulations
(including currency blockage), restrictions on repatriation of capital
invested abroad, and political and economic instability, among others.
In addition, transactions in foreign securities may be more costly due
to currency conversion costs and higher brokerage and custodial costs.
See "Foreign Securities" and "Foreign Currency Transactions" in the
Statement of Additional Information for more information about foreign
investments.
Other Investment Practices. The Portfolio may also engage to a
limited extent in the following investment practices, which are
described more fully in the Statement of Additional Information.
Options, Forwards, Futures and Other Derivatives. Consistent with its
objective, the Portfolio may, without limit, purchase and write both
call options and put options on securities, indexes and foreign
currencies, enter into interest rate, index and foreign currency
futures contracts and options on such futures, and purchase other
types of exchange-traded investment contracts linked to individual
securities, indexes or other benchmarks. Such transactions will be
entered into to provide additional revenue, to hedge against changes
in security prices, interest rates or currency fluctuations, or as an
efficient means of adjusting its exposure to the market. Call and put
options will be written only if they are covered. The use of options,
forwards, futures and other derivative strategies for other than
hedging purposes may be considered speculative. Other than as
described below under "Leverage," the derivative securities purchased
by the Portfolio will not involve leverage.
The Portfolio will not attempt, nor would it be able, to eliminate all
foreign currency or interest rate risk. Further, although hedging may
lessen the risk of loss, it also limits the potential gain if the
hedged instrument's value increases. If an option expires
unexercised, the holder will lose any amount it paid to acquire the
option. Transactions in futures and options may not precisely achieve
the goals of hedging or gaining market exposure to the extent there is
an imperfect correlation between the price movements of the contracts
and of the underlying securities. In addition, if the Adviser's
prediction on currency exchange or interest rates or stock market
movements is inaccurate, the Portfolio may be worse off than if it had
not engaged in the transaction. See the Statement of Additional
Information for information relating to the Portfolio's obligations in
entering into such transactions.
Securities Lending. For the purpose of realizing additional income,
the Portfolio may lend its portfolio securities to broker-dealers or
institutional investors. Such loans will be limited to securities not
exceeding 30% in value of the Portfolio's total assets. Each such
loan will be continuously secured by collateral at least equal to the
value of the securities loaned. In the event of bankruptcy or other
default of the borrower, the Portfolio could experience both delays in
liquidating the loan collateral or recovering the loaned securities
and losses including (a) possible decline in the value of the
collateral or in the value of the securities loaned during the period
while the Portfolio seeks to enforce its rights thereto, (b) possible
subnormal levels of income and lack of access to income during this
period, and (c) expenses of enforcing its rights.
Leverage. The purchase of securities on a "when-issued" basis and the
purchase and sale of futures and forward contracts may present
additional risks associated with the use of leverage. Leverage may
magnify the effect on Fund shares of fluctuations in the values of the
securities underlying these transactions. In accordance with
Securities and Exchange Commission pronouncements, to reduce (but not
necessarily eliminate) leverage, the Portfolio will either "cover" its
obligations under such transactions by holding the currency or
instrument (or rights to acquire the currency or instrument) it is
obligated to deliver under such contracts, or deposit and maintain in
a segregated account with its custodian cash, high quality liquid debt
securities, or equity securities denominated in the particular foreign
currency, equal in value to the Portfolio's obligations under such
contracts.
Temporary/Defensive Investments. Temporarily available cash may be
invested in certificates of deposit, bankers' acceptances, high
quality commercial paper, Treasury bills and repurchase agreements.
Some or all of the Portfolio's assets also may be invested in such
investments or in investment grade U.S. or foreign debt securities,
Eurodollar certificates of deposit and obligations of savings
institutions during periods of unusual market conditions. Under a
repurchase agreement, the Fund buys a security from a bank or dealer,
which is obligated to buy it back at a fixed price and time. The
security is held in a separate account at the Fund's custodian, and
constitutes the Fund's collateral for the bank's or dealer's
repurchase obligation. Additional collateral may be added so that the
obligation will at all times be fully collateralized. However, if the
bank or dealer defaults or enters bankruptcy, the Fund may experience
costs and delays in liquidating the collateral, and may experience a
loss if it is unable to demonstrate its rights to the collateral in a
bankruptcy proceeding. Not more than 15% of the Fund's total assets
will be invested in repurchase agreements maturing in more than 7 days
and other illiquid securities.
Other. The Portfolio and, therefore, the Fund may not always achieve
its investment objective. The Fund's and the Portfolio's non-
fundamental policies may be changed without shareholder approval. The
Fund's and the Portfolio's investment objectives and fundamental
policies listed in the Statement of Additional Information cannot be
changed without the approval of a majority of the Fund's or the
Portfolio'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.
Each Class's average annual total returns are calculated in accordance
with the Securities and Exchange Commission's formula and assume the
reinvestment of all distributions, the maximum initial sales charge of
5.75% on Class A shares and 1.00% on Class D shares, and the
contingent deferred sales charge applicable to the time period quoted
on Class B and Class D shares. Other total returns differ from
average annual total return only in that they may relate to different
time periods, may represent aggregate as opposed to average annual
total returns and may not reflect the initial or contingent deferred
sales charges.
Each Class's yield, which differs from total return because it does
not consider changes in net asset value, is calculated in accordance
with the Securities and Exchange Commission's formula. Each Class's
distribution rate is calculated by dividing the most recent quarter's
distributions, annualized, by the maximum offering price of that Class
at the end of the quarter. Each Class's performance may be compared
to various indices. Quotations from various publications may be
included in sales literature and advertisements. See "Performance
Measures" in the Statement of Additional Information for more
information. All performance information is historical and does not
predict future results.
HOW THE FUND AND THE PORTFOLIO ARE MANAGED
The Fund's Trustees formulate the Fund's general policies and oversee
the Fund's affairs. The Fund has not retained the services of an
investment adviser because the Fund seeks to achieve its investment
objective by investing all of its investable assets in the Portfolio.
The Portfolio is managed by the Adviser. Subject to the supervision
of the Portfolio's Trustees, the Adviser makes the Portfolio's day-to-
day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments. The
Adviser is an indirect subsidiary of Liberty Financial Companies, Inc.
(Liberty Financial), which in turn is an indirect subsidiary of
Liberty Mutual Insurance Company (Liberty Mutual). The same
individuals serve as Trustees of the Fund and the Portfolio. See
"Management of the Fund" in the Statement of Additional Information
for information concerning the Trustees and officers of the Fund and
the Portfolio.
Robert A. Christensen, Senior Vice President of the Adviser, has been
the Portfolio's portfolio manager since its inception in August, 1991,
and has been associated with the Adviser since 1962. Ophelia
Barsketis, Senior Vice President of the Adviser, has co-managed the
Portfolio since September 1993. Ms. Barsketis has been associated
with the Adviser since 1983.
The Adviser places all orders for the purchase and sale of securities
for the Portfolio. In doing so, the Adviser seeks to obtain the best
combination of price and execution, which involves a number of
judgmental factors. When the Adviser believes that more than one
broker-dealer is capable of providing the best combination of price
and execution in a particular portfolio transaction, the Adviser often
selects a broker-dealer that furnishes it with research products or
services, and may consider sales of shares of the Fund as a factor in
the selection of the broker-dealer.
For its management services, the Adviser receives from the Portfolio a
monthly fee at an annual rate of 0.55% of the Portfolio's average
daily net assets up to $400 million and 0.50% of its average daily net
assets over that amount.
The Administrator provides the Fund with certain administrative
services and generally oversees the operation of the Fund. The Fund
pays the Administrator a monthly fee at the annual rate of 0.10% of
average daily net assets for these services. The Administrator also
provides pricing and bookkeeping services to the Fund for a monthly
fee at the annual rate of $18,000 plus 0.0233% annually of average
daily net assets over $50 million, and certain administrative and
accounting services to the Portfolio. Colonial Investment Services,
Inc. (Distributor), a subsidiary of the Administrator, serves as the
Fund's distributor. Colonial Investors Service Center, Inc.
(Transfer Agent), an affiliate of the Administrator, serves as the
Fund's shareholder services and transfer agent for a fee of 0.20%
annually of average net assets plus out-of-pocket expenses. The
Administrator, the Distributor and the Transfer Agent are all indirect
subsidiaries of Liberty Financial.
Each of the foregoing fees is subject to any fee waiver or expense
reimbursement to which the Adviser or the Administrator may agree.
See "Summary of Expenses" above.
HOW THE FUND VALUES ITS SHARES
Per share net asset value is calculated by dividing the total value of
each Class's net assets by its number of outstanding shares. Shares
are valued each day the New York Stock Exchange is open as of the
close of the Exchange (generally 4:00 p.m. Eastern time). 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 their fair value
following procedures adopted by the Trustees.
DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a "regulated investment company" under
the Internal Revenue Code and to distribute to shareholders virtually
all net income and any net realized gain, at least annually. The Fund
generally declares and pays income distributions monthly.
Distributions are invested in additional shares of the same Class of
the Fund at net asset value unless the shareholder elects to receive
cash. Regardless of the shareholder's election, distributions of $10
or less will not be paid in cash but will be invested in additional
shares of the same Class of the Fund at net asset value. 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
Shares are offered continuously. Orders received in good form prior
to the time at which the Fund values its shares (or placed with a
financial service firm before such time and transmitted by the
financial service firm before the Fund processes that day's share
transactions) will be processed based on that day's closing net asset
value, plus any applicable initial sales charge.
The minimum initial investment is $1,000; subsequent investments may
be as small as $50. The minimum initial investment for the Colonial
Fundamatic program is $50 and the minimum initial investment for a
Colonial retirement account is $25. Certificates will not be issued
for Class B or Class D shares and there are some limitations on the
issuance of Class A certificates. The Fund may refuse any purchase
order for its shares. See the Statement of Additional Information for
more information.
Class A Shares. Class A shares are offered at net asset value plus an
initial or a contingent deferred sales charge as follows:
Initial Sales Charge
Retained
by
Financial
Service
Firm
as % of as % of
Amount Offering Offering
Amount Purchased Invested Price Price
Less than $50,000 6.10% 5.75% 5.00%
$50,000 to less than 4.71% 4.50% 3.75%
$100,000
$100,000 to less than 3.63% 3.50% 2.75%
$250,000
$250,000 to less than
$500,000 2.56% 2.50% 2.00%
$500,000 to less 2.04% 2.00% 1.75%
than $1,000,000
$1,000,000 or more 0.00% 0.00% 0.00%
On purchases of $1 million or more, the Distributor pays the financial
service firm a cumulative commission as follows:
Amount Purchased Commission
First $3,000,000 1.00%
Next $2,000,000 0.50%
Over $5,000,000 0.25%(1)
(1) Paid over 12 months but only to the extent the
shares remain outstanding.
Purchases of $1 million to $5 million are subject to a 1.00%
contingent deferred sales charge payable to the Distributor on
redemptions within 18 months from the first day of the month following
the purchase. The contingent deferred sales charge does not apply to
the excess of any purchase over $5 million.
Class A shares bear a 0.25% annual service fee.
Class B Shares. Class B shares are offered at net asset value,
without an initial sales charge, subject to a 0.75% annual
distribution fee for approximately 8 years (at which time they convert
to Class A shares without a distribution fee), a 0.25% annual service
fee and a contingent deferred sales charge if redeemed within 6 years
after purchase. As shown below, the amount of the contingent deferred
sales charge depends on the number of years after purchase that the
redemption occurs:
Years Contingent Deferred
After Purchase Sales Charge
0-1 5.00%
1-2 4.00%
2-3 3.00%
3-4 3.00%
4-5 2.00%
5-6 1.00%
More than 6 0.00%
Year one ends one year after the end of the month in which the
purchase was accepted and so on. The Distributor pays financial
service firms a commission of 4.00% on Class B share purchases.
Class D Shares. Class D shares are offered at net asset value plus a
1.00% initial sales charge, and are subject to a 0.75% annual
distribution fee, a 0.25% annual service fee and a 1.00% contingent
deferred sales charge on redemptions made within one year from the
first day of the month after purchase.
The Distributor pays financial service firms an initial commission of
1.85% on purchases of Class D shares and an ongoing commission of
0.65% annually. Payment of the ongoing commission is conditioned on
receipt by the Distributor of the 0.75% distribution fee referred to
above. The commission may be reduced or eliminated if the
distribution fee paid by the Fund is reduced or eliminated for any
reason.
General. All contingent deferred sales charges are deducted from the
redemption, not the amount remaining in the account, and are paid to
the Distributor. Shares issued upon distribution reinvestment and
amounts representing appreciation are not subject to a contingent
deferred sales charge. The contingent deferred sales charge is
imposed on redemptions which result in the account value falling below
its Base Amount (the total dollar value of purchase payments
(including initial sales charges, if any,) in the account, reduced by
prior redemptions on which a contingent deferred sales charge was paid
and any exempt redemptions). See the Statement of Additional
Information for more information.
Which Class is more beneficial to an investor depends on the amount
and intended length of the investment. Large investments, qualifying
for a reduced Class A sales charge, avoid the distribution fee.
Investments in Class B shares have 100% of the purchase invested
immediately. Investors investing for a relatively short period of
time might consider Class D shares. Purchases of $250,000 or more
must be for Class A or Class D shares. Purchases of $500,000 or more
must be for Class A shares. Consult your financial service firm.
Financial service firms may receive different compensation rates for
selling different classes of shares. The Distributor may pay
additional compensation to financial service firms which have made or
may make significant sales. 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.
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.
HOW TO SELL SHARES
Shares may be sold on any day the New York Stock 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 only after the check has cleared (which may take up to 15
days).
Selling Shares Directly To The Fund. Send a signed letter of
instruction or stock power form to the Transfer Agent, along with any
certificates for shares to be sold. The sale price is the net asset
value (less any applicable contingent deferred sales charge) next
calculated after the Fund receives the request in proper form.
Signatures must be guaranteed by a bank, a member firm of a national
stock exchange or another eligible guarantor institution. Stock power
forms are available from financial service firms, 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 values
its shares to receive that day's price, are responsible for furnishing
all necessary documentation to the Transfer Agent and may charge for
this service.
General. The sale of shares is a taxable transaction for federal tax
purposes and may be subject to a contingent deferred sales charge.
The contingent deferred sales charge may be waived under certain
circumstances. See the Statement of Additional Information for more
information. Under unusual circumstances, the Fund may suspend
repurchases or postpone payment for up to seven days or longer, as
permitted by federal securities law. In June of any year, the Fund
may deduct $10 (payable to the Transfer Agent) from accounts valued at
less than $1,000 unless the account value has dropped below $1,000
solely as a result of share value depreciation. Shareholders will
receive 60 days' written notice to increase the account value before
the fee is deducted.
HOW TO EXCHANGE SHARES
Fund shares generally may be exchanged at net asset value for shares
of the same class of shares of most Colonial funds. Not all Colonial
funds offer all classes, so that you may not be able to exchange into
all of the other Colonial funds. Shares will continue to age without
regard to the exchange for purposes of conversion and determining the
contingent deferred sales charge, if any, upon redemption. Carefully
read the prospectus of the fund into which the exchange will go before
submitting the request. Call 1-800-248-2828 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.
Class A Shares. An exchange from a money market fund into a non-money
market fund will be at the applicable offering price next determined
(including sales charge), except for amounts on which an initial sales
charge was paid. Non-money market fund shares must be held for five
months before qualifying for exchange to a fund with a higher sales
charge, after which exchanges are made at the net asset value next
determined.
Class B Shares. Exchanges of Class B shares are not subject to the
contingent deferred sales charge. However, if shares are redeemed
within six years after the original purchase, a contingent deferred
sales charge will be assessed using the schedule of the fund into
which the original investment was made.
Class D Shares. Exchanges of Class D shares will not be subject to
the contingent deferred sales charge. However, if shares are redeemed
within one year after the original purchase, a 1.00% contingent
deferred sales charge will be assessed.
TELEPHONE TRANSACTIONS
All shareholders 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 Administrator, 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 Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are
genuine, and may be liable if reasonable procedures are not employed.
Shareholders will be required to provide their name, address and
account 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.
12B-1 PLANS
Under 12b-1 Plans, the Fund pays the Distributor an annual service fee
of 0.25% of the Fund's average net assets attributed to each Class of
shares. The Fund also pays the Distributor an annual distribution fee
of 0.75% of the average net assets attributed to its Class B and Class
D shares. Because the Class B and Class D shares bear the additional
distribution fees, their dividends will be lower than the dividends of
Class A shares. Class B shares automatically convert to Class A
shares, approximately eight years after the Class B shares were
purchased. Class D shares do not convert. The multiple class
structure could be terminated should certain Internal Revenue Service
rulings be rescinded. See the Statement of Additional Information for
more information. The Distributor uses the fees to defray the cost of
commissions and service fees paid to financial service firms which
have sold Fund shares, and to defray other expenses such as sales
literature, prospectus printing and distribution, shareholder
servicing costs and compensation to wholesalers. Should the fees
exceed the Distributor's expenses in any year, the Distributor would
realize a profit. The Plans also authorize other payments to the
Distributor and its affiliates (including the Administrator and the
Adviser) which may be construed to be indirect financing of sales of
Fund shares.
ORGANIZATION AND HISTORY
The Fund is the successor by merger to the Liberty Financial Utilities
Fund, which commenced operations in August 1991. The Fund was
organized in 1995 as a separate portfolio of the Trust, which is a
Massachusetts business trust established in 1986. The Trust is not
required to hold annual shareholder meetings, but special meetings may
be called for certain purposes. 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 for more
information.
APPENDIX
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 which
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 which 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.
Investment Adviser
Stein Roe & Farnham Incorporated
One South Wacker Drive
Chicago, IL 60606
Administrator
Colonial Management Associates, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-345-6611
Distributor
Colonial Investment Services, Inc.
One Financial Center
Boston, MA 02111-2621
Custodian
State Street Bank and Trust Company
225 Franklin Street
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.
March 13, 1995
COLONIAL GLOBAL UTILITIES FUND
PROSPECTUS
Colonial Global Utilities Fund seeks current income and long-term
growth of capital and income.
For more detailed information about the Fund, call the Administrator
at 1-800-248-2828 for the March 13, 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 or
D shares. If no distribution option is selected,
distributions will be reinvested in additional Fund shares.
Please consult your financial adviser to determine which
class of shares best suits your needs.
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
___ D Shares (less than $500,000)
$______________________________________________
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)
___ D Shares (less than $500,000)
$______________________________________________
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)
___ D Shares (less than $500,000)
$______________________________________________
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 or Class D shares. Please
consult your financial or tax adviser before electing this
option.
Funds for Withdrawal:
______________________________________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________
or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _________________ (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. 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 (CIS), the
Fund's prospectus, and this application. We will notify CIS
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 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, 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.
D-461L-594
COLONIAL GLOBAL UTILITIES FUND
Statement of Additional Information
March 13, 1995
This Statement of Additional Information (SAI) contains
information which may be useful to investors but which is not
included in the Prospectus of Colonial Global Utilities Fund
(Fund). This SAI is not a prospectus and is authorized for
distribution only when accompanied or preceded by the Prospectus
of the Fund dated March 13, 1995. This 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.
The Fund is the successor by merger to the Liberty Financial
Utilities Fund. The merger occurred on March 24, 1995. All
references to the Fund as of a time prior to such date shall be
deemed to refer to the Liberty Financial Utilities Fund.
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 Objective and Policies b
Fundamental Investment Policies b
Other Investment Policies c
Portfolio Turnover d
Fund Charges and Expenses d
Investment Performance f
Custodian g
Independent Accountants g
Certain Information Concerning the Portfolio g
Part 2
Miscellaneous Investment Practices 1
Taxes 10
Management of the Fund 12
Determination of Net Asset Value 16
How to Buy Shares 16
Investor Services 20
Suspension of Redemptions 23
Shareholder Liability 23
Performance Measures 23
Appendix I 25
Appendix II 26
GU-16/568A-0195
COLONIAL GLOBAL UTILITIES FUND
Statement of Additional Information
March 13, 1995
DEFINITIONS
"Fund" Colonial Global Utilities Fund
"Trust" Colonial Trust III
"Administrator" Colonial Management Associates, Inc., the Fund's
administrator
"CISI" Colonial Investment Services, Inc., the Fund's
distributor
"CISC" Colonial Investors Service Center, Inc., the Fund's
shareholder services and transfer agent
"Portfolio" LFC Utilities Trust
"Adviser" Stein Roe & Farnham Incorporated, the Portfolio's
investment adviser
INVESTMENT OBJECTIVE AND POLICIES
As described in the Fund's Prospectus, the Fund currently seeks
to achieve its objective by investing all its assets in the
Portfolio. Part 1 contains additional information concerning the
Fund and the Portfolio, including a description of the Fund's and
the Portfolio's fundamental investment practices. Except where
otherwise indicated, references to the "Fund" in connection with
descriptions of investment policies and practices shall include
the Portfolio. Part 2 of this SAI contains additional
information about the following securities and investment
techniques:
Foreign Securities
Money Market Instruments
Forward Commitments
Repurchase Agreements
Futures Contracts and Related Options
Foreign Currency Transactions
Securities Lending
Zero Coupon Securities
Pay-in-Kind Securities
Options on Securities
Except as described below under "Fundamental Investment
Policies," the Fund's and the Portfolio's investment policies are
not fundamental, and the Fund's 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 can not 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's
diversification requirement, an issuer is the entity whose
revenues support the security.
As fundamental policies, neither the Fund nor the Portfolio may:
1. Issue senior securities (as defined in the Act and the
rules thereunder) or borrow money, except that as a
temporary measure for extraordinary or emergency purposes
each of the Fund and the Portfolio may borrow from banks
in aggregate amounts at any one time outstanding not
exceeding 33 1/3% of the total assets (including the
amount borrowed) of the Fund or Portfolio, respectively,
valued at market; and neither the Fund nor the Portfolio
may purchase any securities at any time when borrowings
exceed 5% of the total assets of the Fund or the
Portfolio, respectively (taken at market value); and
except that the Fund and the Portfolio may enter into
options and futures transactions;
2. Purchase any security on margin, except that the Fund or
the Portfolio may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of
securities (this restriction does not apply to securities
purchased on a when-issued basis or to margin deposits in
connection with futures and options transactions);
3. Underwrite securities issued by other persons, except
insofar as the Fund or the Portfolio may technically be
deemed an underwriter under the Securities Act of 1933 in
selling a security and except that the Fund may invest all
or substantially all of its assets in another registered
investment company having substantially the same
investment objective as the Fund;
4. Make loans to other persons except (a) through the lending
of securities held by the Fund or the Portfolio, but not
in excess of 30% of the total assets of the Fund or the
Portfolio, respectively, or (b) through the purchase of
debt securities in accordance with the respective
investment policies of the Fund and the Portfolio;
5. Purchase the securities of any one issuer (except
securities issued or guaranteed by the U.S. Government and
its agencies or instrumentality's, as to which there are
no percentage limits or restrictions) if immediately after
and as a result of such purchase (a) more than 5% of the
value of its assets would be invested in that issuer, or
(b) the Fund or the Portfolio would hold more than 10% of
the outstanding voting securities of that issuer and
except that the Fund may invest all or substantially all
of its assets in another registered investment company
having substantially the same investment objective as the
Fund;
6. Purchase or sell real estate or interests in real estate
limited partnerships (other than securities secured by
real estate or interests therein), interests in oil, gas
or mineral leases, commodities or commodity contracts in
the ordinary course of business (the Fund and the
Portfolio each reserves the freedom of action to hold and
to sell real estate acquired as a result of the ownership
of securities and to enter into futures and options
transactions in accordance with its investment policies);
or
7. Invest more than 25% of its total assets in the securities
of issuers whose principal business activities are in the
same industry (excluding obligations of the U.S.
Government and repurchase agreements collateralized by
obligations of the U.S. Government), except that the Fund
and the Portfolio may invest without limit (but may not
invest less than 25% of its total assets) in the
securities of companies in the public utilities industry
and except that the Fund may invest all or substantially
all of its assets in another registered investment company
having substantially the same investment objective as the
Fund.
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed
without a shareholder vote, neither the Fund nor the Portfolio
may:
1. Invest in illiquid securities, including repurchase
agreements maturing in more than seven days but excluding
securities which may be resold pursuant to Rule 144A under
the Securities Act of 1933, if, as a result thereof, more
than 15% of the net assets (taken at market value at the
time of each investment of the Fund or the Portfolio, as
the case may be) would be invested in such securities and
except that the Fund may invest all or substantially all
of its assets in another registered investment company
having substantially the same investment objective as the
Fund;
2. Invest in companies for the purpose of exercising control
or management except that the Fund may invest all or
substantially all its assets in another registered
investment company having substantially the same
investment restrictions as the Fund;
3. Invest in the voting securities of a public utility
company if, as a result, it would own 5% or more of the
outstanding voting securities of more than one public
utility company;
4. Make investments in the securities of other investment
companies except that the Fund may invest all or
substantially all its assets in another registered
investment company having substantially the same
investment restrictions as the Fund;
5. Invest in securities of issuers (other than U.S.
Government Securities) having a record of less than three
years of continuous operation (for this purpose, the
period of operation of any issuer shall include the period
of operation of any predecessor or unconditional guarantor
of such issuer) if more than 5% of the total assets (taken
at market value at the time of each investment) of the
Fund or the Portfolio, as the case may be, would be
invested in such securities except that the Fund may
invest all or substantially all its assets in another
registered investment company having substantially the
same investment restrictions as the Fund;
6. Make short sales of securities or maintain a short
position except in connection with futures and options
transactions;
7. Mortgage, pledge, hypothecate or in any manner transfer,
as security for indebtedness, any securities owned by the
Fund or the Portfolio except (a) as may be necessary in
connection with borrowings mentioned in (1) above, and (b)
they may enter into futures and options transactions;
8. Invest more than 5% of its net assets (valued at the time
of purchase) in warrants, nor more than 2% of its net
assets in warrants that are not listed on the New York or
American Stock Exchange or a recognized foreign exchange;
9. Invest more than 5% of its total assets in puts, calls,
straddles, spreads, or any combination thereof (except
that the Fund or the Portfolio may enter into transactions
in options, futures and options on futures);
10. Write secured puts if the aggregate value of the
obligations underlying such puts would exceed 50% of its
net assets;
11. Purchase or hold securities of an issuer if 5% of the
securities of such issuer are owned by those officers,
trustees or directors of the Fund or the Portfolio or the
investment adviser of the Portfolio, who each own more
than 1/2 of 1% of the securities of the issuer; or
12. Invest more than 10% of its total assets in securities
(debt or equity) which the Fund or the Portfolio would be
restricted from selling without registration under the
Securities Act of 1933, excluding securities which are
eligible for resale pursuant to Rule 144A thereunder, or
more than 5% of its total assets in equity securities
which are not readily marketable except in either case,
the Fund may invest all or substantially all its assets in
another registered investment company having substantially
the same investment restrictions as the Fund; .
PORTFOLIO TURNOVER
1994 1993
34% 41%
Portfolio turnover is the lesser of the aggregate purchases or
sales of securities other than short-term divided by the average
assets for the period. The Portfolio turnover indicated above is
for the Liberty Financial Utilities Fund for the fiscal years
ended October 31.
FUND CHARGES AND EXPENSES
Aggregate Fund expenses include the expenses of the Portfolio,
which are borne indirectly by the Fund, and the Fund's direct
expenses. The Portfolio's expenses include (i) a management fee
paid to the Adviser at an annual rate of 0.55% of average daily
net assets up to $400 million and 0.50% of average daily net
assets thereafter, (ii) an annual $7,500 accounting services fee
paid to the Administrator, and (iii) custody, legal and audit
fees and other miscellaneous expenses. The Fund's expenses
include (i) an administrative fee paid to the Administrator at
the annual rate of 0.10% of average daily net assets, (ii) a
transfer agency and shareholder services fee paid to CISC at the
annual rate of 0.20% of average daily net assets plus CISC's out-
of-pocket expenses, (iii) the Rule 12b-1 fees paid to CISI
described below, (iv) a pricing and bookkeeping fee paid to the
Administrator in the amount of $18,000 per year plus 0.0233% of
average daily net assets in excess of $50 million and (v)
custody, legal and audit fees and other miscellaneous expenses.
Recent Fees paid to the Adviser, Liberty Investment Services,
Inc. (Liberty Services) (a), Liberty Securities Corporation
(Liberty Securities) (b) and State Street Bank and Trust Company
(c) (dollars in thousands)
1994 1993 1992
Management fee $1,603 $1,061 $233
Administration fee 292 193 0
Bookkeeping fee (Accounting) 62 62 57
Shareholders services and 776 541 223
transfer agent fee
12b-1 Fees 0 0
Distribution fee (d) 0 0 0
Service fee 471 0 0
Investor Accounting fee 8 19 23
(a) Liberty Services was the Fund's Administrator prior to March 24, 1995.
(b) Liberty Securities Corporation was the Fund's distributor prior to
March 24, 1995.
(c) State Street Bank and Trust Company was the Fund's transfer agent prior
to March 24, 1995.
(d) Prior to March 1, 1994, no distribution fees had been paid pursuant to
the 12b-1 Plan.
Brokerage Commissions (in thousands)
1994 1993 1992
Total commissions $ 228 $ 218 $ 132
Directed transactions (e) 20,440 24,881 5,677
Commissions on directed
transactions 52 51 13
(e) See "Management of the Funds-Portfolio Transactions-
Brokerage and research services" in Part 2 of this SAI.
Trustees Fees
Prior to March 24, 1995, the Fund was a series of the Liberty
Financial Trust. The following table sets forth the amount of
compensation paid to the Trustees of the Fund by the Fund and the
Liberty Financial Trust Complex during the calendar year ended
December 31, 1994:
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Compensation
Compensa- Accrued As Benefits From Fund
tion From Part of Upon and
Trustee Fund Fund Expense Retirement Fund Complex (f)
Richard R. $ 0 $0 $0 $ 0
Christensen
James E. 2,298 0 0 31,032
Grinnell
Harold Krensky 1,526 0 0 18,382
Richard W. 2,298 0 0 31,282
Lowry
Richard I. 0 0 0 0
Roberts
(f) The Liberty Financial Trust Complex consists of 5 open-end
management investment company portfolios.
Effective March 24, 1995, the Fund became a series of Colonial
Trust III, which is part of the Colonial Fund Complex. The
following table sets forth the amount of compensation paid to the
Trustees of the Colonial Funds during the calendar year ended
December 31, 1994:
Total Compensation
from
Colonial Fund
Trustee Complex(g)
Tom Bleasdale $101,000
Lora S. Collins 95,000
William D. Ireland, Jr. 110,000
William E. Mayer 89,752
John A. McNeice, Jr. 0
James L. Moody, Jr. 109,000
John J. Neuhauser 95,000
George L. Shinn 112,000
Robert L. Sullivan 104,561
Sinclair Weeks, 116,000
Jr.
(g) The Colonial Fund Complex consists of 31 open-end and 5
closed-end investment company portfolios.
Ownership of the Fund
At January 31, 1995, the officers and Trustees of the Trust as a
group owned less than 1% of the outstanding shares of the Fund.
At January 31, 1995, there were 26,908 record holders of the Fund.
Sales Charges (for the fiscal year ended October 31) (in thousands)
1994 1993 1992
Aggregate initial sales
charges on Fund share sales $1,566 $6,210 $4,866
12b-1 Plans, CDSCs and Conversion of Shares
The Fund offers three classes of shares - Class A, Class B and
Class D. The Fund may in the future offer other classes of
shares. The Trustees have approved 12b-1 Plans pursuant to Rule
12b-1 under the Act. Under the Plans, the Fund pays CISI a
service fee at an annual rate of 0.25% of average net assets
attributed to each class of shares and a distribution fee at an
annual rate of 0.75% of average net assets attributed to Class B
and Class D 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 the Administrator) 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 Fund assets resulting in a more
advantageous expense ratio 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 Trust 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 contingent deferred sales charge
(CDSC). Class B shares are offered at net asset value subject to
a CDSC if redeemed within six years after purchase. Class D
shares are offered at net asset value plus a 1.00% initial sales
charge and subject to a 1.00% CDSC on redemption's within one
year after purchase. The CDSCs are described in the Prospectus.
No CDSC will be imposed on shares derived from reinvestment of
distributions or on amounts representing capital appreciation.
In determining the applicability and rate of any CDSC, it will be
assumed that a redemption is made first of shares representing
capital appreciation, next of shares representing reinvestment of
distributions and finally of other shares held by the shareholder
for the longest period of time.
Eight years after the end of the month in which a Class B share
is purchased, such share and a pro rata portion of any shares
issued on the reinvestment of distributions will be automatically
converted into Class A shares having an equal value which are not
subject to the distribution fee.
INVESTMENT PERFORMANCE
The Fund's average annual total returns at October 31, 1994 were:
Period August 23, 1991
1 year through October 31, 1994
With sales charge of 4.50% (h) (11.56)% 6.36%
Without sales charge (7.41)% 7.98%
(h) The sales charge prior to March 24, 1995 was 4.50%. As of
March 24, 1995, the sales charge will be 5.75%.
The Fund's distribution rate at October 31, 1994, which is based
on the latest quarter's distributions, annualized, by the maximum
offering price at the end of the quarter was 4.64%.
CUSTODIAN
State Street Bank 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. KPMG Peat Marwick LLP were the Fund's
independent auditors prior to March 24, 1995.
The financial statements and Report of Independent Accountants
appearing on pages 16 through 23 and 28 through 36 of the October
31, 1994 Annual Report, are incorporated into the SAI by
reference.
CERTAIN INFORMATION CONCERNING THE PORTFOLIO
Portfolio's Investment Adviser
Under its Management Agreement with the Portfolio, the Adviser
provides the Portfolio with discretionary investment services.
Specifically, the Adviser is responsible for supervising and
directing the investments of the Portfolio in accordance with the
Portfolio's investment objective, program, and restrictions as
provided in the Fund's prospectus and this Statement of
Additional Information. The Adviser is also responsible for
effecting all security transactions on behalf of the Portfolio,
including the allocation of principal business and portfolio
brokerage and the negotiation of commissions (See "Portfolio
Transactions"). the Management Agreement provides for the
payment to the Adviser of the fee described above under "Fund
Charges and Expenses."
The Adviser is an indirect wholly-owned subsidiary of Liberty
Financial Companies, Inc., which in turn is an indirect
subsidiary of Liberty Mutual Insurance Company.
The Adviser is the successor to an investment advisory business
that was founded in 1932. The Adviser acts as investment adviser
to wealthy individuals, trustees, pension and profit sharing
plans, charitable organizations and other institutional
investors. As of December 31, 1994, the Adviser managed over
$22.8 billion in net assets: over $5.4 billion in equities and
over $17.4 billion in fixed-income securities (including $2.3
billion in municipal securities). The $22.8 billion in managed
assets included over $6.4 billion held by open-end mutual funds
managed by the Adviser (approximately 25% of the mutual fund
assets were held by clients of the Adviser). These mutual funds
were owned by over 149,000 shareholders. The $6.4 billion in
mutual fund assets included over $504 million in over 33,000 IRA
accounts. In managing those assets, the Adviser utilizes a
proprietary computer-based information system that maintains and
regularly updates information for approximately 6,500 companies.
The Adviser also monitors over 1,400 issues via a proprietary
credit analysis system. At January 31, 1995, the Adviser
employed approximately 20 research analysts and 42 account
managers. The average investment-related experience of these
individuals is 19 years.
The directors of the Adviser are Gary L. Countryman, Kenneth R.
Leibler, Timothy K. Armour, N. Bruce Callow and Hans P. Ziegler.
Mr. Countryman is Chairman of Liberty Mutual Insurance Company;
Mr. Leibler is President and Chief Operating Officer of Liberty
Financial Companies; Mr. Armour is President of the Adviser's
Mutual Funds division; Mr. Callow is President of the Adviser's
Investment Counsel division; and Mr. Ziegler is Chief Executive
Officer of the Adviser. The business address of Mr. Countryman
is 175 Berkeley Street, Boston, MA 02117; that of Mr. Leibler is
Federal Reserve Plaza , Boston, Massachusetts 02210; that of
Messrs. Armour, Callow and Ziegler is One South Wacker Drive,
Chicago, Illinois 60606.
Under the Management Agreement, the Adviser is not liable for any
error of judgment or mistake of law or for any loss suffered by
the Portfolio or the Fund in connection with the matters to which
such Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of
its duties or from reckless disregard of its obligations and
duties under the Agreement.
Portfolio Transactions
The Adviser places the orders for the purchase and sale of the
Portfolio's portfolio securities and options and futures
contracts.
The Adviser's overriding objective in effecting portfolio
transactions is to seek to obtain the best combination of price
and execution. The best net price, giving effect to brokerage
commissions, if any, and other transaction costs, normally is an
important factor in this decision, but a number of other
judgmental factors may also enter into the decision. These
include: the Adviser's knowledge of negotiated commission rates
currently available and other current transaction costs; the
nature of the security being traded; the size of the transaction;
the desired timing of the trade; the activity existing and
expected in the market for the particular security;
confidentiality; the execution, clearance and settlement
capabilities of the broker or dealer selected and others which
are considered; the Adviser's knowledge of the financial
stability of the broker or dealer selected and such other brokers
or dealers; and the Adviser's knowledge of actual or apparent
operational problems of any broker or dealer. Recognizing the
value of these factors, the Portfolio may pay a brokerage
commission in excess of that which another broker or dealer may
have charged for effecting the same transaction. Evaluations of
the reasonableness of brokerage commissions, based on the
foregoing factors, are made on an ongoing basis by the Adviser's
staff while effecting portfolio transactions. The general level
of brokerage commissions paid is reviewed by the Adviser, and
reports are made annually to the Board of Trustees of the
Portfolio.
With respect to issues of securities involving brokerage
commissions, when more than one broker or dealer is believed to
be capable of providing the best combination of price and
execution with respect to a particular portfolio transaction for
the Portfolio, the Adviser often selects a broker or dealer that
has furnished it with research products or services such as
research reports, subscriptions to financial publications and
research compilations, compilations of securities prices,
earnings, dividends, and similar data, and computer data bases,
quotation equipment and services, research-oriented computer
software and services, and services of economic and other
consultants. Selection of brokers or dealers is not made
pursuant to an agreement or understanding with any of the brokers
or dealers; however, the Adviser uses an internal allocation
procedure to identify those brokers or dealers who provide it
with research products or services and the amount of research
products or services they provide, and endeavors to direct
sufficient commissions generated by its clients' accounts in the
aggregate, including the Portfolio, to such brokers or dealers to
ensure the continued receipt of research products or services
that the Adviser feels are useful. In certain instances, the
Adviser receives from brokers and dealers products or services
which are used both as investment research and for
administrative, marketing, or other non-research purposes. In
such instances, the Adviser makes a good faith effort to
determine the relative proportions of such products or services
which may be considered as investment research. The portion of
the costs of such products or services attributable to research
usage may be defrayed by the Adviser (without prior agreement or
understanding, as noted above) through brokerage commissions
generated by transactions by clients (including the Portfolio),
while the portions of the costs attributable to non-research
usage of such products or services is paid by the Adviser in
cash. No person acting on behalf of the Portfolio is authorized,
in recognition of the value of research products or services, to
pay a commission in excess of that which another broker or dealer
might have charged for effecting the same transaction. Research
products or services furnished by brokers and dealers may be used
in servicing any or all of the clients of the Adviser and not all
such research products or services are used in connection with
the management of the Portfolio.
As stated above, the Adviser's overriding objective in effecting
portfolio transactions for the Portfolio is to seek to obtain the
best combination of price and execution. However, consistent
with the provisions of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., the Adviser may, in
selecting broker dealers to effect portfolio transactions for the
Portfolio, and where more than one broker dealer is believed
capable of providing the best combination of price and execution
with respect to a particular transaction, select a broker dealer
in recognition of its sales of shares of the Fund. The Adviser
maintains an internal procedure to identify broker dealers which
have sold shares of the Fund and the amount of such shares sold
by them. None of the Fund, the Portfolio or the Adviser has
entered into any agreement with, or made any commitment to, any
broker dealer which would bind the Adviser or the Portfolio to
compensate any broker dealer, directly or indirectly, for sales
of shares of the Fund. The Adviser does not cause the Portfolio
to pay brokerage commissions higher than those obtainable from
other broker dealers in recognition of such sales.With respect to
the Portfolio's purchases and sales of portfolio securities
transacted with a broker or dealer on a net basis,
the Adviser may also consider the part, if any, played by the
broker or dealer in bringing the security involved to the
Adviser's attention, including investment research related to the
security and provided to the Portfolio.
The Portfolio has arranged for its custodian to act as a
soliciting dealer to accept any fees available to the custodian
as a soliciting dealer in connection with any tender offer for
the Portfolio's portfolio securities held by the Portfolio. The
custodian will credit any such fees received against its
custodial fees. In addition, the Board of Trustees has reviewed
the legal developments pertaining to and the practicability of
attempting to recapture underwriting discounts or selling
concessions when portfolio securities are purchased in
underwritten offerings. However, the Board has been advised by
counsel that recapture by a mutual fund currently is not
permitted under the Rules of Fair Practice of the National
Association of Securities Dealers.
Custodian
State Street Bank and Trust Company (Bank) is the custodian for
the securities and cash of the Portfolio, but it does not
participate in the investment decisions of the Portfolio. The
Portfolio has authorized the Bank to deposit certain portfolio
securities in central depository systems as allowed by federal
law. The Bank's main office is at 225 Franklin Street, Boston,
Massachusetts 02107.
Portfolio securities purchased by the Portfolio in the U.S. are
maintained in the custody of the bank or of other domestic banks
or depositories. Portfolio securities purchased outside of the
U.S. are maintained in the custody of foreign banks and trust
companies that are members of the Bank's Global Custody Network
or foreign depositories used by such foreign banks and trust
companies. Each of the domestic and foreign custodial
institutions holding portfolio securities has been approved by
the Board of Trustees of the Portfolio in accordance with
regulations under the Investment Company Act of 1940.
The Portfolio may invest in obligations (including repurchase
agreements) of the Bank and may purchase or sell securities from
or to the Bank.
Independent Accountants
The independent auditor for the Portfolio is KPMG Peat Marwick
LLP, One Boston Place, Boston, Massachusetts 02108. KPMG Peat
Marwick LLP audits and reports on the annual financial statement
of the Portfolio, reviews certain regulatory reports of the
Portfolio and their Federal income tax returns, and performs such
accounting, auditing, tax and advisory services as the Portfolio
may engage them to do so.
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.
American Depository Receipts
The Fund may purchase American Depository Receipts (ADRs) if in
the opinion of the Adviser trading conditions make them more
attractive than direct investment in the underlying securities.
ADRs are receipts typically issued in the U.S. by a bank or trust
company evidencing ownership of an underlying foreign security.
The Fund may invest in ADRs which are structured by a U.S. bank
without the sponsorship of the underlying foreign issuer. In
addition to the risks of foreign investment applicable to the
underlying securities, such unsponsored ADRs may also be subject
to the risks that the foreign issuer may not be obligated to
cooperate with the U.S. bank, may not provide financial and other
information to the bank or the investor, or that such information
in the U.S. market may not be current.
Short-Term Trading
In seeking the Fund's objective, the Adviser will buy or sell
portfolio securities whenever the Adviser believes it
appropriate. The Adviser's decision will not generally be
influenced by how long the Fund may have owned the security.
From time to time the Fund will buy securities intending to seek
short-term trading profits. A change in the securities held by
the Fund is known as "portfolio turnover" and generally involves
some expense to the Fund. These expenses may include brokerage
commissions or dealer mark-ups and other transaction costs on
both the sale of securities and the reinvestment of the proceeds
in other securities. If sales of portfolio securities cause the
Fund to realize net short-term capital gains, such gains will be
taxable as ordinary income. As a result of the Fund's investment
policies, under certain market conditions the Fund's portfolio
turnover rate may be higher than that of other mutual funds.
Portfolio turnover rate for a fiscal year is the ratio of the
lesser of purchases or sales of portfolio securities to the
monthly average of the value of portfolio securities, excluding
securities whose maturities at acquisition were one year or less.
The Fund's portfolio turnover rate is not a limiting factor when
the Adviser considers a change in the Fund's portfolio.
Lower Rated Bonds
Lower rated bonds are those rated lower than Baa by Moody's, BBB
by S&P, or comparable 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. recent 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;
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 the Adviser'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
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.
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 the
Adviser 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. The Adviser will monitor such
transactions to determine that the value of the underlying
securities is at least equal at all times to the total amount of
the repurchase obligation, including the interest factor. If the
seller defaults, the Fund could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale
including accrued interest are less than the resale price
provided in the agreement including interest. In addition, if
the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may incur delay and costs in selling the
underlying security or may suffer a loss of principal and
interest if the Fund is treated as an unsecured creditor and
required to return the underlying collateral to the seller's
estate.
Reverse Repurchase Agreements
In a reverse repurchase agreement, 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, is 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.
Securities Lending
Any loans of portfolio securities by a Fund will be secured
continuously by cash or equivalent collateral or by a letter of
credit in favor of the Fund at least equal at all times to 100%
of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will
pay the Fund any income accruing thereon. Loans will be subject
to termination by the Fund in the normal settlement time,
generally five business days after notice, or by the borrower on
one day's notice. Borrowed securities must be returned when the
loan is terminated. Any gain or loss in the market price of the
borrowed securities which occurs during the term of the loan
inures to a Fund and its respective shareholders. A Fund may pay
reasonable finders' and custodial fees in connection with a loan.
In addition, the Fund will consider all facts and circumstances
including the creditworthiness of the borrowing financial
institution, and a Fund will not make any loans in excess of one
year.
Synthetic Variable Rate instruments
Certain funds may invest in certain synthetic variable rate
instruments as described in the Prospectus. In the case of some
types of instruments credit enhancement is not provided, and if
certain events, which may include (a) default in the payment of
principal or interest on the underlying bond, (b) downgrading of
the bond below investment grade or (c) a loss of the bond's tax
exempt status, occur, then (i) the put will terminate, (ii) the
risk to a Fund will be that of holding a long-term bond, and
(iii) in the case of a money market fund, the disposition of the
bond may be required which could be at a loss.
Options on Securities
Writing covered options. The Fund may write covered call options
and covered put options on securities held in its portfolio when,
in the opinion of the Adviser, such transactions are consistent
with the Fund's investment 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% of the Fund's net
assets would be invested in (i) illiquid investments (determined
under the foregoing formula) relating to OTC options written by
the Fund, (ii) OTC options purchased by the Fund, (iii)
securities which are not readily marketable, and (iv) repurchase
agreements maturing in more than seven days.
Risk factors in options transactions. The successful use of the
Fund's options strategies depends on the ability of the Adviser
to forecast interest rate and market movements correctly.
When it purchases an option, the Fund runs the risk that it will
lose its entire investment in the option in a relatively short
period of time, unless the Fund exercises the option or enters
into a closing sale transaction with respect to the option during
the life of the option. If the price of the underlying security
does not rise (in the case of a call) or fall (in the case of a
put) to an extent sufficient to cover the option premium and
transaction costs, the Fund will lose part or all of its
investment in the option. This contrasts with an investment by
the Fund in the underlying securities, since the Fund may
continue to hold its investment in those securities
notwithstanding the lack of a change in price of those
securities.
The effective use of options also depends on the Fund's ability
to terminate option positions at times when the Adviser deems it
desirable to do so. Although the Fund will take an option
position only if the Adviser believes there is a liquid secondary
market for the option, there is no assurance that the Fund will
be able to effect closing transactions at any particular time or
at an acceptable price.
If a secondary trading market in options were to become
unavailable, the Fund could no longer engage in closing
transactions. Lack of investor interest might adversely affect
the liquidity of the market for particular options or series of
options. A marketplace may discontinue trading of a particular
option or options generally. In addition, a market could become
temporarily unavailable if unusual events -- such as volume in
excess of trading or clearing capability -- were to interrupt
normal market operations.
A marketplace may at times find it necessary to impose
restrictions on particular types of options transactions, which
may limit the Fund's ability to realize its profits or limit its
losses.
Disruptions in the markets for the securities underlying options
purchased or sold by the Fund could result in losses on the
options. If trading is interrupted in an underlying security,
the trading of options on that security is normally halted as
well. As a result, the Fund as purchaser or writer of an option
will be unable to close out its positions until options trading
resumes, and it may be faced with losses if trading in the
security reopens at a substantially different price. In
addition, the Options Clearing Corporation (OCC) or other options
markets may impose exercise restrictions. If a prohibition on
exercise is imposed at the time when trading in the option has
also been halted, the Fund as purchaser or writer of an option
will be locked into its position until one of the two
restrictions has been lifted. If a prohibition on exercise
remains in effect until an option owned by the Fund has expired,
the Fund could lose the entire value of its option.
Special risks are presented by internationally-traded options.
Because of time differences between the United States and 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 the
Adviser's ability to predict correctly movements in the direction
of interest rates and other factors affecting securities markets.
Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves
less potential risk to the Fund because the maximum amount at
risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of
a call or put option on a futures contract would result in a loss
to the Fund when the purchase or sale of a futures contract would
not, such as when there is no movement in the prices of the
hedged investments. The writing of an option on a futures
contract involves risks similar to those risks relating to the
sale of futures contracts.
There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render
certain market clearing facilities inadequate, and thereby result
in the institution, by exchanges, of special procedures which may
interfere with the timely execution of customer orders.
To reduce or eliminate a hedge position held by the Fund, the
Fund may seek to close out a position. The ability to establish
and close out positions will be subject to the development and
maintenance of a liquid secondary market. It is not certain that
this market will develop or continue to exist for a particular
futures contract. Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options;
(ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options,
or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or a clearing corporation may not
at all times be adequate to handle current trading volume; or
(vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the
trading of contracts or options (or a particular class or series
of contracts or options), in which event the secondary market on
that exchange (or in the class or series of contracts or options)
would cease to exist, although outstanding contracts or options
on the exchange that had been issued by a clearing corporation as
a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Use by tax-exempt funds of U.S. Treasury security futures
contracts and options. 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 the Adviser, price movements in Treasury
security futures and related options will correlate closely with
price movements in the tax-exempt securities which are the
subject of the hedge. U.S. Treasury securities futures contracts
require the seller to deliver, or the purchaser to take delivery
of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security
futures contracts give the purchaser the right in return for the
premium paid to assume a position in a U.S. Treasury futures
contract at the specified option exercise price at any time
during the period of the option.
In addition to the risks generally involved in using futures
contracts, there is also a risk that price movements in U.S.
Treasury security futures contracts and related options will not
correlate closely with price movements in markets for tax-exempt
securities.
Index futures contracts. An index futures contract is a contract
to buy or sell units of an index at a specified future date at a
price agreed upon when the contract is made. Entering into a
contract to buy units of an index is commonly referred to as
buying or purchasing a contract or holding a long position in the
index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short
position. A unit is the current value of the index. The Fund
may enter into stock index futures contracts, debt index futures
contracts, or other index futures contracts appropriate to its
objective(s). The Fund may also purchase and sell options on
index futures contracts.
There are several risks in connection with the use by the Fund of
index futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the prices of the
index futures and movements in the prices of securities which are
the subject of the hedge. The Adviser will attempt to reduce
this risk by selling, to the extent possible, futures on indices
the movements of which will, in its judgment, have a significant
correlation with movements in the prices of the Fund's portfolio
securities sought to be hedged.
Successful use of the index futures by the Fund for hedging
purposes is also subject to the Adviser's ability to predict
correctly movements in the direction of the market. It is
possible that, where the Fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the
futures are written may advance and the value of securities held
in the Fund's portfolio may decline. If this occurs, the Fund
would lose money on the futures and also experience a decline in
the value in its portfolio securities. However, while this could
occur to a certain degree, the Adviser believes that over time
the value of the Fund's portfolio will tend to move in the same
direction as the market indices which are intended to correlate
to the price movements of the portfolio securities sought to be
hedged. It is also possible that, if the Fund has hedged against
the possibility of a decline in the market adversely affecting
securities held in its portfolio and securities prices increase
instead, the Fund will lose part or all of the benefit of the
increased 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 the Adviser may still not result in a
successful hedging transaction.
Options on index futures. Options on index futures are similar
to options on securities except that options on index futures
give the purchaser the right, in return for the premium paid, to
assume a position in an index futures contract (a long position
if the option is a call and a short position if the option is a
put), at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the
futures position by the writer of the option to the holder of the
option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the
amount by which the market price of the index futures contract,
at exercise, exceeds (in the case of a call) or is less than (in
the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior
to the expiration date of the option, the settlement will be made
entirely in cash equal to the difference between the exercise
price of the option and the closing level of the index on which
the future is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
Options on indices. As an alternative to purchasing call and put
options on index futures, the Fund may purchase call and put
options on the underlying indices themselves. Such options could
be used in a manner identical to the use of options on index
futures.
Foreign Currency Transactions. The Fund may engage in currency
exchange transactions to protect against uncertainty in the level
of future currency exchange rates.
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
underlying 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 the
Adviser believes that a liquid secondary market exists for such
options. There can be no assurance that a liquid secondary
market will exist for a particular option at any specified time.
Currency options are affected by all of those factors which
influence exchange rates and investments generally. To the
extent that these options are traded over the counter, they are
considered to be illiquid by the SEC staff.
The value of any currency, including the U.S. dollars, may be
affected by complex political and economic factors applicable to
the issuing country. In addition, the exchange rates of
currencies (and therefore the values of currency options) may be
significantly affected, fixed, or supported directly or
indirectly by government actions. Government intervention may
increase risks involved in purchasing or selling currency
options, since exchange rates may not be free to fluctuate in
respect to other market forces.
The value of a currency option reflects the value of an exchange
rate, which in turn reflects relative values of two currencies,
the U.S. dollar and the foreign currency in question. Because
currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in
the exercise of currency options, investors may be disadvantaged
by having to deal in an odd lot market for the underlying
currencies in connection with options at prices that are less
favorable than for round lots. Foreign governmental restrictions
or taxes could result in adverse changes in the cost of acquiring
or disposing of currencies.
There is no systematic reporting of last sale information for
currencies and there is no regulatory requirement that quotations
available through dealers or other market sources be firm or
revised on a timely basis. Available quotation information is
generally representative of very large round-lot transactions in
the interbank market and thus may not reflect exchange rates for
smaller odd-lot transactions (less than $1 million) where rates
may be less favorable. The interbank market in currencies is a
global, around-the-clock market. To the extent that options
markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in
the options markets.
Settlement procedures. Settlement procedures relating to the
Fund's investments in foreign securities and to the Fund's
foreign currency exchange transactions may be more complex than
settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not
present in the Fund's domestic investments, including foreign
currency risks and local custom and usage. Foreign currency
transactions may also involve the risk that an entity involved in
the settlement may not meet its obligations.
Foreign currency conversion. Although foreign exchange dealers
do not charge a fee for currency conversion, they do realize a
profit based on the difference (spread) between prices at which
they are buying and selling various currencies. Thus, a dealer
may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire
to resell that currency to the dealer. Foreign currency
transactions may also involve the risk that an entity involved in
the settlement may not meet its obligation.
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 the effects of 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 Deduction. 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. If distributions are
taken in additional shares, they will have no impact since the
capital returned is reinvested and the cost basis of the
investment is unchanged.
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)
collateralized by U.S. government securities do not qualify as
direct federal obligations in most states and investments in
repurchase agreements do not qualify as direct federal
obligations in any 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 a
preference item and added to the AMT income, potentially creating
an AMT liability.
Dividends derived from net income on 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. The tax is imposed only where the sum of the
recipient's adjusted gross income, tax-exempt interest and
dividend income and one-half the social security benefits exceeds
a base amount ($25,000 for single individuals and $32,000 for
individuals filing a joint return). The tax is imposed on the
lesser of one-half of the social security benefits or on one-half
of the excess over the base amount.
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.
Backup Withholding. Certain distributions and redemptions may be
subject to a 31% backup withholding unless a taxpayer
identification number and certification that the shareholder is
not subject to the withholding is provided to the Fund. This
number and form may be provided by either a Form W-9 or the
accompanying application. In certain instances CISC may be
notified by the Internal Revenue Service that a shareholder is
subject to backup withholding.
Excise Tax. To the extent that the Fund does not annually
distribute substantially all taxable income and realized gains,
it is subject to an excise tax. The Adviser intends to avoid
this tax except when the cost of processing the distribution is
greater than the tax.
Tax Accounting Principles. To qualify as a "regulated investment
company," the Fund must (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of
securities or foreign currencies or other income (including but
not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such
securities or currencies; (b) derive less than 30% of its gross
income from the sale or other disposition of certain assets held
less than three months; (c) diversify its holdings so that, at
the close of each quarter of its taxable year, (i) at least 50%
of the value of its total assets consists of cash, cash items,
U.S. Government securities, and other securities limited
generally with respect to any one issuer to not more than 5% of
the total assets of the Fund and not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities
of any issuer (other than U.S. Government securities).
Futures Contracts. Accounting for futures contracts will be in
accordance with generally accepted accounting principles. The
amount of any realized gain or loss on the closing out of a
futures contract will result in a capital gain or loss for tax
purposes. In addition, certain futures contracts held by the
Fund (so-called "Section 1256 contracts") will be required to be
"marked-to-market" (deemed sold) for federal income tax purposes
at the end of each fiscal year. Sixty percent of any net gain or
loss recognized on such deemed sales or on actual sales will be
treated as long-term capital gain or loss, and the remainder will
be treated as short-term capital gain or loss.
However, if a futures contract is part of a "mixed straddle"
(i.e., a straddle comprised in part of Section 1256 contracts), a
Fund may be able to make an election which will affect the
character arising from such contracts as long-term or short-term
and the timing of the recognition of such gains or losses. In
any event, the straddle provisions described below will be
applicable to such mixed straddles.
Special Tax Rules Applicable to "Straddles". The straddle
provisions of the Code may affect the taxation of the Fund's
options and futures transactions and transactions in securities
to which they relate. A "straddle" is made up of two or more
offsetting positions in "personal property," including debt
securities, related options and futures, equity securities,
related index futures and, in certain circumstances, options
relating to equity securities, and foreign currencies and related
options and futures.
The straddle rules may operate to defer losses realized or deemed
realized on the disposition of a position in a straddle, may
suspend or terminate the Fund's holding period in such positions,
and may convert short-term losses to long-term losses in certain
circumstances.
Foreign Currency-Denominated Securities and Related Hedging
Transactions. The Fund's transactions in foreign currency-
denominated debt securities, certain foreign currency options,
futures contracts and forward contracts may give rise to ordinary
income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
If more than 50% of 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 FUND
The Adviser is an indirect 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. Colonial is a subsidiary of The Colonial Group, Inc.
(TCG), One Financial Center, Boston, MA 02111. TCG also is a
subsidiary of Liberty Financial.
The Adviser is the successor to an investment advisory business
that was founded in 1932. The Adviser's address is One South
Wacker Drive, Chicago, IL 60606.
Trustees and Officers of the Fund and the Portfolio:
Robert J. Birnbaum, Trustee, is a Trustee (formerly Special
Counsel, Dechert Price & Rhoads), 313 Bedford Road, Ridgewood, NJ
07405
Tom Bleasdale, Trustee, is a Trustee (formerly Chairman of the
Board and Chief Executive Officer, Shore Bank & Trust Company),
1508 Ferncroft Tower, Danvers, MA 01923
Robert A. Christensen, Vice President, is Senior Vice President
of Adviser.
Richard R. Christensen, Senior Vice President, is President,
Liberty Investment Services, Inc., 80 Exeter Street, Exeter, NH
03833.
Lora S. Collins, Trustee, is an Attorney with Kramer, Levin,
Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New York, NY
10022
John L. Davenport, Secretary, is Vice President and Associate
General Counsel, Liberty Financial Companies, Inc., Federal
Reserve Plaza, 600 Atlantic Avenue, Boston, MA 02210.
Ernest E. Dunbar, Vice President and Treasurer, is Senior Vice
President, Liberty Investment Services, Inc., Federal Reserve
Plaza, 600 Atlantic Avenue, Boston, MA 02210.
James E. Grinnell, Trustee, is a Private Investor, 22 Harbor
Avenue, Marblehead, MA 01945
William D. Ireland, Jr., Trustee, is a Trustee (formerly Chairman
of the Board, Bank of New England, Worcester), 103 Springline
Drive, Vero Beach, FL 32963
Richard W. Lowry, Trustee, is a Private Investor, 10701
Charleston Drive, Vero Beach, FL 32963
Willliam E. Mayer, 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.*, Trustee and President, is Chairman of the
Board, Chief Executive Officer and Director, Colonial; is
Chairman of the Board and Director, TCG; Director, Liberty
Financial.
James L. Moody, Jr., 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, Trustee, is Dean, Boston College School of
Management, 140 Commonwealth Avenue, Chestnut Hill, MA 02167
Richard I. Roberts, President. Retired effective January 1,
1994. (formerly President, Chief Executive Officer and
Director, Liberty Asset Management Company).
George L. Shinn, 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, Trustee, is a Management Consultant, 7121
Natelli Woods Lane, Bethesda, MD 20817
Sinclair Weeks, Jr., Trustee, is Chairman of the Board, Reed &
Barton Corporation, Bay Colony Corporate Center, Suite 4550, 1000
Winter Street, Waltham, MA 02154
Harold W. Cogger, Vice President, is President and Director,
Colonial (formerly Executive Vice President); is President, Chief
Executive Officer and Director, TCG; is Executive Vice President
and Director, Liberty Financial.
Peter L. Lydecker, Controller (formerly Assistant Controller), is
Vice President, Colonial (formerly Assistant Vice President,
Colonial).
Davey S. Scoon, Vice President, is Executive Vice President and
Director, Colonial (formerly Senior Vice President and Treasurer,
Colonial); is Executive Vice President and Chief Operating
Officer, TCG (formerly Vice President-Finance and Administration
and Treasurer).
Richard A. Silver, Treasurer and Chief Financial Officer
(formerly Controller), is Senior Vice President, Director,
Treasurer and Chief Financial Officer, Colonial; Treasurer and
Chief Financial Officer, The Colonial Group, Inc.
Thomas J. Simpson, Controller, is Vice President, Liberty
Investment Services, Inc., Federal Reserve Plaza, 600 Atlantic
Avenue, Boston, MA 02210.
Arthur O. Stern, Secretary, is Director, Executive Vice
President, General Counsel, Clerk and Secretary, Colonial
(formerly Senior Vice President, Colonial); is Executive Vice
President-Legal and Compliance, TCG (formerly Vice President -
Legal and Clerk, TCG).
*Trustees who are "interested persons" (as defined in the 1940
Act) of the Fund, the Adviser or Colonial.
The Trustees serve as trustees to 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 wholly-owned subsidiary, 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 31
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
or who are stockholders of Liberty Financial will benefit from
the advisory fees, administration 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 $14 billion in
assets.
The Management Contract
Under a Management Contract (Contract), the Adviser has
contracted to furnish the Fund with investment research and fund
management, respectively, at the Adviser's expense. For these
services, 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.
The Adviser's compensation under the Contract 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 Contract, any liability of the Adviser to the Fund and
its shareholders is limited to situations involving the Adviser's
own willful misfeasance, bad faith, gross negligence or reckless
disregard of duties.
The Contract may be terminated with respect to the Fund at any
time on 60 days' written notice by the Adviser or by the Trustees
of the Trust or by a vote of a majority of the outstanding voting
securities of the Fund. The Contract will automatically
terminate upon any assignment thereof and shall continue in
effect from year to year only so long as such continuance is
approved at least annually (i) by the Trustees of the Trust or by
a vote of a majority of the outstanding voting securities of the
Fund and (ii) by vote of a majority of the Trustees who are not
interested persons (as such term is defined in the 1940 Act) of
the Adviser or the Trust, cast in person at a meeting called for
the purpose of voting on such approval.
Certain Expenses
Colonial or the Adviser pays all salaries of officers of the
Trust and the Portfolio. The Trust and the Portfolio pay their
respective expenses not assumed by the Adviser or 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 Administration Agreement (applies only to Colonial Global
Utilities Fund and Colonial Newport Tiger Fund)
Colonial provides the following adminstrative services to the
Fund pursuant to an Administration Agreement:
(a) provide office space, equipment and clerical
personnel;
(b) arrange, if desired by the Trust, for its Directors,
officers and employees to serve as Trustees, officers
or agents of the Fund;
(c) prepare and, if applicable, file all documents
required for compliance by the Fund with applicable
laws and regulations;
(d) prepare agendas and supporting documents for and
minutes of meetings of Trustees, committees of
Trustees and shareholders;
(e) monitor the investments and operations of the Fund and
report to the Trustees from time to time with respect
thereto;
(f) coordinate and oversee the activities of the Fund's
other third-party service providers; and
(g) maintain certain books and records of the Fund.
The Administration Agreement has a one year term. Colonial is
paid monthly a fee at the annual rate of average daily net assets
set forth in Part 1 of this Statement of Additional Information.
The Pricing and Bookkeeping Agreement (this section does not
apply to Colonial Newport Tiger Fund or Colonial Global Utilities
Fund))
Colonial provides pricing and bookkeeping services to the Funds
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 0.0233% of the
next $950 million;
1/12 of 0.017% of the
next $1 billion;
1/12 of 0.005% of the
next $1 billion; and
1/12 of 0.001% on the
excess over $3 billion
Portfolio Transactions (this section does not apply to Colonial
Global Utilities Fund)
Investment decisions. The Adviser acts as investment adviser to
certain other funds and accounts. The other funds and accounts
advised by the Adviser sometimes invest in securities in which
the Fund also invests and sometimes engage in covered option
writing programs and enter into transactions utilizing stock
index options and stock index and financial futures and related
options (other instruments). If the Fund and such other funds
and accounts desire to buy or sell the same portfolio securities,
options or other instruments at about the same time, the
purchases and sales are normally made as nearly as practicable on
a pro rata basis in proportion to the amounts desired to be
purchased or sold by each. Although in some cases these
practices could have a detrimental effect on the price or volume
of the securities, options or other instruments as far as the
Fund is concerned, in most cases it is believed that these
practices should produce better executions. It is the opinion of
the Trustees that the desirability of retaining the Adviser as
investment adviser to the 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, the
Adviser 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.
The Adviser places the transactions of the Fund with broker-
dealers selected by the Adviser and, if applicable, negotiates
commissions. Broker-dealers may receive brokerage commissions on
portfolio transactions, including the purchase and writing of
options, the effecting of closing purchase and sale transactions,
and the purchase and sale of underlying securities upon the
exercise of options and the purchase or sale of other
instruments. The Fund from time to time also executes portfolio
transactions with such broker-dealers acting as principal. 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 the
Adviser'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
the Adviser, the Fund and the other funds and accounts managed by
the Adviser. The Adviser may use all, some or none of such
research services in providing investment advisory services to
each of its investment company and other clients, including the
Fund. To the extent that such services are used by the Adviser,
they tend to reduce the Adviser's expenses. In the Adviser's
opinion, it is impossible to assign an exact dollar value for
such services.
Subject to such policies as the Trustees may determine, the
Adviser may cause the Fund to pay a broker-dealer which provides
brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction, including the
sale of an option or a closing purchase transaction, for the 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).
The Adviser must determine in good faith that such greater
commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-
dealer viewed in terms of that particular transaction or the
Adviser's overall responsibilities to the Fund and all its other
clients.
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 the fund. 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 (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 the Adviser deems it
appropriate to do so, an over-the-counter or exchange bid
quotation is used. Securities listed on an exchange or on NASDAQ
are valued at the last sale price. Listed securities for which
there were no sales during the day and unlisted securities are
valued at the last quoted bid price. Options are valued at the
last sale price or in the absence of a sale, the mean between the
last quoted bid and offering prices. Short-term obligations with
a maturity of 60 days or less are valued at amortized cost
pursuant to procedures adopted by the Trustees. The values of
foreign securities quoted in foreign currencies are translated
into U.S. dollars at the exchange rate as of the close of the
Exchange. 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. Trading on certain foreign
securities markets may not take place on all business days in New
York, and trading on some foreign securities markets takes place
on days which are not business days in New York and on which the
Fund's NAV is not calculated.The values of these securities used
in determining the NAV are computed as of such times. Also,
because of the amount of time required to collect and process
trading information as to large numbers of securities issues, the
values of certain securities (such as convertible bonds, U.S.
government securities, and tax-exempt securities) are determined
based on market quotations collected earlier in the day at the
latest practicable time prior to the close of the Exchange.
Occasionally, events affecting the value of such securities may
occur between such times and the close of the Exchange which will
not be reflected in the computation of 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 the time of pricing the Fund's
portfolio securities and transmits it to the Fund before the Fund
processes that day's transactions. If the FSF fails to transmit
before the Fund processes that day's transactions, the customer's
entitlement to that day's closing price must be settled between
the customer and the FSF. If the FSF receives the order after
the Fund has priced its securities, 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 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 Fund 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.
Class 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 such shares and any initial or contingent deferred sales
charges (CDSC) that may apply. 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, T and D)
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 (Classes A, B, C, D, T and Z)
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, C, D, T and Z)
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 up to four other
Colonial funds. Except for Classes T and Z, exchanges are made
into the same class of shares of such other 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 into other 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 [and T] only)
(applicable only to The Colonial Fund and Colonial Growth Shares
Fund) A reduced sales charge applies to a purchase of certain
Colonial fund's Class A or T 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 Telephone Statement of
Withdrawal Plan Redemption Intent
Sponsored Colonial Cash Share Certificates
Arrangements Connection
$50,000 Fast Reduced Sales Automatic Dividend
Cash Charges Diversification
Right of for any Exchange
Accumulation "person" 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 protect against loss in
declining markets.
Tax-Sheltered Retirement Plans (Classes A, B, D, T and Z)
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 (Class A, T and Z only)
Shares of certain funds may be sold at NAV to current and
retired: Trustees of funds advised or administrated by Colonial;
current and retired directors, officers and employees, and
private advisory clients 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.
Classes A, T and Z 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, T and Z 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 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 charges 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 the shareholder's 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, or D shares. 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, D, T or Z shares may
reinvest (within 90 days) 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 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 their Reinvestment Privilege an unlimited number of
times. Exercise of this Privilege does not alter the federal
income tax treatment. The sale of Fund shares constitutes a
capital transaction for federal 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. Class T and Z shares may be exchanged for Class A
shares of the other Colonial funds. 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 and T shares for five months before
exchanging to certain funds having a higher maximum sales charge.
Consult your FSF or CISC. In all cases, the shares to be
exchanged must be registered on the records of the Fund in the
name of the shareholder desiring to exchange.
Shareholders of the other Colonial open-end Funds generally may
exchange their shares at NAV for the same class of shares of the
Fund.
An exchange is a capital sale transaction for federal income tax
purposes. The Exchange Privilege may be revised, suspended or
terminated at any time.
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
(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. Certificated 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 5.00% 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 her or his FSF to determine whether she or he 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 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. The Fund 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 will be required to provide
their name, address and account 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. All non-standardized performance measures will be
accompanied by standardized performance.
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 which 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
which 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
