September 28, 1995
COLONIAL
MUNICIPAL
MONEY MARKET 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 risks including possible loss
of principal. Unlike savings accounts and certificates of deposit,
mutual funds are not insured or guaranteed by any financial
institution or government agency.
Please consult your full-service financial adviser to determine how
investing in this mutual fund may suit your unique needs, time horizon
and risk tolerance.
Colonial Municipal Money Market Fund (Fund), a diversified portfolio
of Colonial Trust IV (Trust), an open-end management investment
company, seeks maximum current income exempt from Federal income tax
by investing principally in a diversified portfolio of "short-term"
Municipal Securities.
Prior to its conversion to a master fund/feeder fund structure on
September 28, 1995, the Fund invested directly in individual
securities and was managed by the Administrator. Unlike a traditional
mutual fund which invests directly in individual securities, the Fund
currently seeks to achieve its objective by investing all of its
assets in SR&F Municipal Money Market Portfolio (Portfolio), a
municipal money market master fund which has the same investment
objective as the Fund. The Portfolio is a series of the SR&F Base
Trust, an open-end diversified management investment company which was
organized as a trust under the laws of The Commonwealth of
Massachusetts on August 23, 1993. Except for certain separate
expenses, 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.
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 September 28, 1995 Statement of
Additional
TM-01/223B-0895
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.
An investment in the Fund is not insured or guaranteed by the U.S.
Government. There can be no assurance that the $1.00 net asset value
per share will be maintained.
The Fund offers two classes of shares. Class A shares are offered at
net asset value; Class B shares are offered at net asset value and, in
addition, are subject to an annual distribution fee and a declining
contingent deferred sales charge on redemptions made within six years
after purchase. Class B shares automatically convert to Class A
shares after approximately eight years. See "How to buy shares".
Class B shares of the Fund are only for temporary investment while,
for example, considering investments in Class B shares of other
Colonial funds because, unlike shares of most money market funds,
investments in the Fund's Class B shares are subject to contingent
deferred sales charges, a distribution fee and a service fee.
Contents Page
Summary of expenses 2
The Fund's financial history 3
Two-tiered structure 5
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 managed are managed 8
How the Fund values its shares 9
Distributions and taxes 9
How to buy shares 9
How to sell shares 10
How to exchange shares 11
Telephone transactions 11
12b-1 plans 11
Organization and history 12
Appendix 13
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.
Shareholder Transaction Expenses (1)(2)
Class A Class B
Maximum Contingent Deferred
Sales Charge (as a % of offering
price)(3) 0.00% 5.00%(4)
(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) Because of the 0.75% distribution fee applicable
to Class B shares, long-term Class B shareholders
may pay more in aggregate sales charges than the
maximum sales charge permitted by the National
Association of Securities Dealers, Inc. However,
because the Fund's Class B shares automatically
convert to Class A shares after approximately 8
years, this is less likely for Class B shares
than for a class without a conversion feature.
Annual Operating Expenses (as a % of average net assets)
Class A Class B
Management fee 0.25% 0.25%
12b-1 fees 0.00 1.00
Other expenses (after expense
reimbursement and fee waiver) 0.50 0.50
Administration fee (after fee
waiver) 0.00% 0.00%
Total operating expenses 0.75%(5) 1.75%(5)
(5) The Administrator has voluntarily agreed to waive
or bear certain Fund expenses until further notice
to the Fund. Absent such agreement, the
"Administration fee" would have been 0.25% for each
Class, "Other expenses" would have been 0.61% for
each Class and "Total expenses" would have been
1.11% for Class A and 2.11% for Class B.
The preceding tables summarize your maximum transaction costs and
annual expenses for an investment in each Class of the Fund's shares.
Annual Operating Expenses include the expenses of the Portfolio as
well as the Fund. Annual Operating Expenses have been restated to
reflect current fees. See "How the Fund and the Portfolio are
managed" and "12b-1 plans" for more complete descriptions of the Funds
and the Portfolio's various costs and expenses."
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
Period: (6) (7)
1 year $ 8 $ 68 $ 18
3 years 24 86 56
5 years 42 116 96
10 years 93 181(8) 181(8)
(6) Assumes redemption.
(7) Assumes no redemption.
(8) Class B shares convert to Class A shares after
approximately 8 years; therefore, years 9 and 10 reflect
Class A share expenses.
Without voluntary fee reduction, the amounts would be $11, $35, $61
and $135 for Class A shares for 1, 3, 5 and 10 years, respectively;
$72, $97, $134 and $220 for Class B shares assuming redemptions for 1,
3, 5 and 10 years, respectively; and $22, $67, $114 and $220 for Class
B shares assuming no redemptions for 1, 3, 5 and 10 years,
respectively. The 10 year amounts for Class B shares convert to Class
A shares after approximately 8 years; therefore, years 9 and 10
reflect Class A expenses.
At the time they approved the conversion of the Fund to a master
fund/feeder fund structure, the Trust's Trustees could not determine
the potential for economies of scale as a result of the conversion
because the Portfolio had no operating history. For the same reason,
it cannot be determined with certainty whether the aggregate expenses
of the Fund and the Portfolio would be more or less than what the
Fund's expenses would be if the Fund invested directly in the
securities of the Portfolio. On the basis of available expense
amounts for the Stein Roe Municipal Money Market Fund (SteinRoe Fund)
as of its fiscal year ended June 30, 1994 (and utilizing the Fund's expenses
for its then fiscal year end of November 30, 1994), the effect of the
conversion could be a minor reduction in the ratio of gross expenses
to average net assets to 1.17% for Class A shares (from 1.19%) and
2.17% for Class B shares (from 2.19%). However, because the
Administrator plans to continue, until further notice, its policy
of limiting fees and reimbursing expenses, the Fund's actual expense
ratios will likely not be affected by the conversion.
THE FUND'S FINANCIAL HISTORY (a)
The following schedule of financial highlights for a share outstanding
throughout each period, has been audited by Price Waterhouse LLP, independent
accountants. Their unqualified report is included in the Fund's 1995 Annual
Report and is incorporated by reference into the Statement of Additional
Information.
<TABLE>
<CAPTION>
CLASS A
-------
Period ended Year Ended November 30
-------------- ----------------------
June 30, 1995(c) 1994 1993 1992 1991
------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value - Beginning of
period $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Income from investment
operations:
Net investment income(a) 0.018 0.020 0.017 0.024 0.042
_____ _____ _____ _____ _____
shareholders:
From net investment income (0.018) (0.020) (0.017) (0.024) (0.042)
------- ------- ------- ------- -------
Net asset value - End of period $1.00 $1.000 $1.000 $1.000 $1.000
----- ----- ----- ----- -----
Total return(d)(e) 1.80%(f) 2.00% 1.73% 2.44% 4.26%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Net assets at end of period (000) $24,675 $28,808 $18,618 $34,956 $28,355
Ratios to average net assets:
Expenses 0.75%(g) 0.60% 0.75% 0.75% 0.75%
Fees and expenses waived
or borne by the Administrator 0.36%(g) 0.59% 0.50% 0.61% 0.53%
Net investment income 3.05%(g) 2.05% 1.69% 2.42% 4.23%
_________________________________
(a) Prior to September 28, 1995, the Fund was managed by the Administrator and
invested directly in individual securities. On September 15, 1995,
shareholders of the Fund approved a conversion of the Fund to a master
fund/feeder fund structure at a special meeting of shareholders called for
that purpose. The financial history presented in this section for Class A
and Class B shares is that of the Fund. However, the investment
performance disclosed in the Statement of Additional Information and in
any sales or advertising materials for the Fund is that of the
SteinRoe Fund, adjusted to reflect applicable sales loads of the Fund.
The investment adviser of the SteinRoe Fund before its conversion to a
feeder fund of the Portfolio on September 28, 1995 was the Adviser.
Also, the investment objective, policies and restrictions of the
Portfolio are generally the same as those of the SteinRoe Fund prior
to September 28, 1995.
(b) Net of fees and
expenses waived or
borne by the
Administrator
which amounted to...... $0.002 $0.006 $0.005 $0.006 $0.005
(c) The Fund changed its fiscal year end from November 30 to June 30 on
June 16, 1995.
(d) Total return at net asset value assuming all distributions reinvested and
no contingent deferred sales charge.
(e) Had the Administrator not waived or reimbursed a portion of expenses total
return would have been reduced.
(f) Not annualized.
(g) Annualized.
(h) The Fund commenced investment operations on June 16, 1987.
</TABLE>
<TABLE>
<CAPTION>
Class A
-------
Year Ended November 30
----------------------
1990 1989 1988 1987(h)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value - Beginning of
period $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------
Income from investment
operations:
Net investment income(a) 0.055 0.059 0.050 0.022
_____ _____ _____ _____
shareholders:
From net investment income (0.055) (0.059) (0.050) (0.022)
------- ------- ------- -------
Net asset value - End of period $1.000 $1.000 $1.000 $1.000
----- ----- ----- -----
Total return(d)(e) 5.64% 6.11% 5.12% 2.19%(f)
Net assets at end of period (000) $37,158 $40,639 $53,758 $52,190
Ratios to average net assets:
Expenses 0.75% 0.66% 0.39% ----
Fees and expenses waived
or borne by the Administrator 0.38% 0.31% 0.49% 1.08%(g)
Net investment income 5.50% 5.96% 4.95% 5.37%(g)
_________________________________
(a) Prior to September 28, 1995, the Fund was managed by the Administrator and
invested directly in individual securities. On September 15, 1995,
shareholders of the Fund approved a conversion of the Fund to a master
fund/feeder fund structure at a special meeting of shareholders called for
that purpose. The financial history presented in this section for Class A
and Class B shares is that of the Fund. However, the investment
performance disclosed in the Statement of Additional Information and in
any sales or advertising materials for the Fund is that of the
SteinRoe Fund, adjusted to reflect applicable sales loads of the Fund.
The investment adviser of the SteinRoe Fund before its conversion to
a feeder fund of the Portfolio on September 28, 1995 was the Adviser.
Also, the investment objective, policies and restrictions of the Portfolio
are generally the same as those of the SteinRoe Fund prior to
September 28, 1995.
(b) Net of fees and
expenses waived or
borne by the
Administrator
which amounted to $0.004 $0.003 $0.050 $0.005
(c) The Fund changed its fiscal year end from November 30 to June 30 on
June 16, 1995.
(d) Total return at net asset value assuming all distributions reinvested and
no contingent deferred sales charge.
(e) Had the Administrator not waived or reimbursed a portion of expenses total
return would have been reduced.
(f) Not annualized.
(g) Annualized.
(h) The Fund commenced investment operations on June 16, 1987.
</TABLE>
THE FUND'S FINANCIAL HISTORY (continued)
<TABLE>
<CAPTION>
CLASS B
-------
Period ended Year Ended November 30
-------------- ----------------------
June 30, 1995(b) 1994 1993 1992(c)
------------------ ---- ---- -------
<S> <C> <C> <C> <C>
Net asset value - Beginning of
period $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------
Income from investment
operations:
Net investment income(a) 0.012 0.010 0.009 0.007
----- ----- ----- -----
Less distributions declared to
shareholders:
From net investment income (0.012) (0.010) (0.009) (0.007)
------- ------- ------- -------
Net asset value - End of period $1.000 $1.000 $1.000 $1.000
----- ----- ----- -----
Total return(d)(e) 1.20%(f) 1.01% 0.93% 0.68% (f)
Net assets at end of period (000) $3,111 $3,867 $908 $135
Ratios to average net assets:
Expenses 1.75%(g) 1.60% 1.75% 1.75% (g)
Fees and expenses waived
or borne by the Adviser 0.36%(g) 0.59% 0.50% 0.79% (g)
Net investment income 2.05%(g) 1.05% 0.69% 1.42% (g)
_________________________________
(a) Prior to September 28, 1995, the Fund was
managed by the Administrator and invested
directly in individual securities. On September
15, 1995, shareholders of the Fund approved a
conversion of the Fund to a master fund/feeder
fund structure at a special meeting of
shareholders called for that purpose. The
financial history presented in this section for
Class A and Class B shares is that of the Fund.
However, the investment performance disclosed in
the Statement of Additional Information and in
any sales or advertising materials for the Fund
is that of the SteinRoe Fund, adjusted to
reflect applicable sales loads of the Fund. The
investment adviser of the SteinRoe Fund before
its conversion to a feeder fund of the Portfolio
on September 28, 1995 was the Adviser. Also,
the investment objective, policies and
restrictions of the Portfolio are generally the
same as those of the SteinRoe Fund prior to
September 28, 1995.
(b) Net of fees and
expenses waived or
borne by the
Administrator
which amounted to $0.002 $0.006 $0.005 $0.003
(c) Class B shares were initially offered on
May 5, 1992. Per share amounts reflect activity from
that date.
(d) Total return at net asset value assuming all
distributions reinvested and no contingent
deferred sales charge.
(e) Had the Administrator not waived or reimbursed a
portion of expenses total return would have been
reduced.
(f) Not annualized.
(g) 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 Fund's and the Portfolio's investment objectives may be changed without
shareholder approval. Fund shareholders will be notified, however, at
least 30 days prior to any change in the Fund's or the Portfolio's
objective. Class B shareholders may incur a contingent deferred sales
charge if they redeem shares in response to a change in objective.
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
SteinRoe Fund is also an investor in the Portfolio. In the future, other
funds or institutional investors may also invest in the Portfolio. The
SteinRoe Fund currently has, and in the future other investors may have,
sufficient voting interests in the Portfolio to control matters relating to
the operation of the Portfolio. You may obtain additional information
about other investors in the Portfolio by writing or calling the
Administrator at 1-800-248-2828.
The SteinRoe Fund has invested, and other feeder funds or institutions may
invest, in the Portfolio on substantially the same terms and conditions as
the Fund. Each investor in the Portfolio will bear its proportionate share
of the Portfolio's expenses. However, other mutual fund investors in the
Portfolio will 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 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 as 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 of the Trust would
consider what action might be taken, including changes to the Fund's
investment objective or policies, 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.
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 maximum current income exempt from Federal income tax by
investing principally in a diversified portfolio of "short-term" Municipal
Securities.
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
and policies as the Fund. In pursuing its objective, the Portfolio
attempts to maintain relative stability of principal and liquidity. The
Portfolio invests principally in a diversified portfolio of short-term
Municipal Securities. "Short-term" means a remaining maturity of no more
than thirteen months (or a comparable period). See the Statement of
Additional Information for more information.
It is a fundamental policy that normally at least 80% of the Portfolio's
investments will produce income that is exempt from Federal income tax,
except for periods in which the Adviser believes require a temporary
defensive position for the protection of shareholders.
As a fundamental policy, the Portfolio invests in Municipal Securities
that, at the time of purchase, are: (i) variable rate demand securities
whose demand feature is rated within the two highest ratings assigned by
Moody's Investors Service, Inc. (Moody's), VMIG1 or VMIG2; (ii) notes rated
within the two highest short-term municipal ratings assigned by Moody's,
MIG1 or MIG2, or within the highest rating assigned by Standard & Poor's
Corporation (S&P), SP-1+; (iii) municipal commercial paper (short-term
promissory notes) rated Prime-1 by Moody's, or A-1 by S&P; (iv) municipal
bonds, including industrial development bonds, rated within the two highest
ratings assigned to municipal bonds by S&P, AAA or AA, or by Moody's, Aaa
or Aa; (v) securities not rated as described in (i) through (iv) but
determined by the Board of Trustees of the Portfolio to be at least equal
in quality to one or more of the foregoing ratings, although other types of
obligations of the same issuer might not be within the foregoing ratings;
(vi) securities backed by the full faith and credit of the U.S. Government;
or (vii) securities as to which the payment of principal and interest is
collateralized by securities issued or guaranteed by the U.S. Government or
by its agencies or instrumentalities (U.S. government securities) deposited
in an escrow for the benefit of holders of the securities. In accordance
with SEC Rule 2a-7 under the Investment Company Act of 1940, each security
in which the Portfolio invests will be U.S. dollar denominated and (i)
rated (or be issued by an issuer that is rated with respect to its short-
term debt) within the two highest rating categories for short-term debt by
at least two nationally recognized statistical rating organizations
(NRSROs) or, if rated by only one NRSRO, rated within the two highest
rating categories by that NRSRO, or, if unrated, determined by or under the
direction of the Board of Trustees of the Portfolio to be of comparable
quality, and (ii) determined by or under the direction of the Portfolio's
Board of Trustees to present minimal credit risks.
Municipal Securities. Municipal Securities are debt obligations issued by
or on behalf of the governments of states, territories or possessions of
the United States, the District of Columbia and their political
subdivisions, agencies and instrumentalities, the interest on which is
generally exempt from the regular Federal income tax.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. "General obligation" bonds are secured by
the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. "Revenue" bonds are usually payable
only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source. Industrial development bonds are usually
revenue bonds, the credit quality of which is normally directly related to
the credit standing of the industrial user involved. Municipal Securities
may bear either fixed or variable rates of interest. Variable rate
securities bear rates of interest that are adjusted periodically according
to formulae intended to minimize fluctuation in values of such instruments.
Within the principal classifications of Municipal Securities, there are
various types of instruments, including municipal bonds, municipal notes,
municipal leases, custodial receipts and participation certificates.
Municipal notes include tax, revenue and bond anticipation notes of short
maturity, generally less than three years, which are issued to obtain
temporary funds for various public purposes. Municipal lease securities,
and participation certificates therein, evidence certain types of interests
in lease or installment purchase contract obligations of a municipal
authority or other entity. Custodial receipts represent ownership in
future interest or principal payments (or both) on certain Municipal
Securities and are underwritten by securities dealers or banks. Some
Municipal Securities may not be backed by the faith, credit and taxing
power of the issuer and may be subject to "non-appropriation" clauses which
provide that the municipal authority is not obligated to make lease or
other contractual payments, unless specific annual appropriations are made
by the municipality. The Portfolio may invest more than 5% of its net
assets in municipal bonds and notes, but does not expect to invest more
than 5% of its net assets in the other Municipal Securities described in
this paragraph.
The Portfolio may also purchase Municipal Securities that are insured as to
the timely payment of interest and principal. Such insured Municipal
Securities may already be insured when purchased by the Portfolio or the
Portfolio may purchase insurance in order to turn an uninsured Municipal
Security into an insured Municipal Security.
Some Municipal Securities are backed by (i) the full faith and credit of
the U.S. government, (ii) agencies or instrumentalities of the U.S.
government, or (iii) U.S. government securities.
Except with respect to Municipal Securities with a demand feature acquired
by the Portfolio, if, after purchase by the Portfolio, an issue of
Municipal Securities ceases to meet the required rating standards, if any,
the Portfolio is not required to sell such security, but the Adviser would
consider such an event in deciding whether it should retain the security in
its portfolio.
In the case of Municipal Securities with a demand feature acquired by the
Portfolio, if the quality of such a security falls below the minimum level
applicable at the time of acquisition, the Portfolio must dispose of the
security, unless the Portfolio's Board of Trustees determines that it is in
the best interest of the Portfolio and its shareholders to retain the
security.
Other Investment Practices. The Portfolio may also engage to a limited
extent in the following investment practices, each of which may involve
certain special risks.
When-Issued and Delayed-Delivery Securities. The Portfolio's assets may
include securities purchased on a when-issued or delayed-delivery basis.
Although the payment and interest terms of these securities are established
at the time the purchaser enters into the commitment, the securities may be
delivered and paid for a month or more after the date of purchase, when
their value may have changed. The Portfolio makes such commitments only
with the intention of actually acquiring the securities, but may sell the
securities before settlement date if the Adviser deems it advisable for
investment reasons. Securities purchased in this manner involve a risk of
loss if the value of the security purchased declines before settlement
date.
Stand-By Commitments. To facilitate portfolio liquidity, the Portfolio
may obtain stand-by commitments when it purchases Municipal Securities. A
stand-by commitment gives the holder the right to sell the underlying
security to the seller at an agreed upon price on certain dates within a
specified period.
Participation Interests. The Portfolio may also purchase participation
interests or certificates of participation in all or part of specific
holdings of Municipal Securities, including municipal obligations. Some
participation interests, certificates of participation and municipal lease
obligations are illiquid and, as such, will be subject to the Portfolio's
10% limit on investments in illiquid securities.
Borrowing of Money. The Portfolio may borrow money up to 33 1/3% of its
total assets, determined at current value at the time of such borrowing,
from banks as a temporary measure for extraordinary or emergency purposes
but not to increase portfolio income. The Portfolio will not purchase
additional securities at a time when borrowings, less proceeds receivable
from sale of portfolio securities, exceed 5% of its total assets.
Risk Factors. All investments, including those in mutual funds, have
risks. No investment is suitable for all investors. Although the
Portfolio seeks to reduce risk by investing in a diversified portfolio,
this does not eliminate all risk. The risks inherent in the Portfolio
depend primarily upon the maturity and quality of the obligations in which
it invests as well as on market conditions. A decline in prevailing levels
of interest rates generally increases the value of the Portfolio's
securities, while an increase in rates usually reduces the value of those
securities. There can be no assurance that the Portfolio will achieve its
objective, nor can the Portfolio assure that payments of interest and
principal on portfolio securities will be made when due.
Generally, high-quality short-term obligations offer lower yields and less
fluctuation in value than long-term quality obligations. Consequently, the
Portfolio is designed for investors who seek little or no fluctuation in
portfolio value.
Although the Portfolio currently limits its investments in Municipal
Securities to those on which interest is exempt from the regular Federal
income tax, it may invest up to 100% of its total assets in Municipal
Securities the interest on which is subject to the Federal alternative
minimum tax.
The Portfolio may invest 25% or more of its assets in Municipal Securities
that are related in such a way that an economic, business, or political
development affecting one such security could also affect the other
securities. For example, Municipal Securities the interest upon which is
paid from revenues of similar-type projects, such as hospitals, utilities
or housing, would be so related. The Portfolio may invest 25% or more of
its assets in industrial development bonds (subject to the concentration
restrictions described in the Statement of Additional Information). It is
a fundamental policy that the assets of the Portfolio that are not invested
in Municipal Securities may be held in cash or invested in short-term
taxable investments.
Other. The Portfolio and, therefore, the Fund may not always achieve its
investment objective. The Fund's and the Portfolio's investment objectives
and non-fundamental policies may be changed without shareholder approval.
The Fund's and the Portfolio's fundamental policies listed in the Statement
of Additional Information cannot be changed without the approval of a
majority of the Fund's and the Portfolio's outstanding voting securities,
respectively. 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 advertisements and sales literature. 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 and the contingent deferred sales charge applicable to
the time period quoted on Class B shares. Other total returns differ from
average annual total return only in that they may relate to different time
periods, may represent aggregate rather than average annual total returns,
or may not reflect the contingent deferred sales charge.
Each Class's yield and tax-equivalent yield are calculated in accordance
with the Securities and Exchange Commission's formula for money market
funds. 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.
Unlike bank deposits or other investments which pay a fixed yield for a
stated period of time, each Class's yield changes in response to
fluctuations in interest rates and Fund expenses. Therefore, past Fund
performance does not predict future performance. Yields on other
investments may be calculated differently. When comparing investments,
investors should consider the quality and maturity of the portfolio
securities involved.
HOW THE FUND AND THE PORTFOLIO ARE MANAGED
The Trust'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). See "Management of the Fund" and "Management of the
Portfolio" in the Statement of Additional Information for information
concerning the Trustees and officers of the Trust and the Portfolio.
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.
For its management services, the Adviser receives from the Portfolio a
monthly fee at an annual rate of 0.25% of the Portfolio's average daily net
assets. The Adviser also provides pricing and bookkeeping services to the
Portfolio for a fee of $25,000 plus 0.0025% annually of average daily net
assets over $50 million. Stein Roe Services, Inc., a wholly-owned indirect
subsidiary of Liberty Mutual, serves as the transfer agent to the Portfolio
for a monthly fee of $500.
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 0.25% of the Fund's
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. Colonial Investment Services, Inc. (Distributor)
serves as the Fund's distributor. Colonial Investors Service Center, Inc.
(Transfer Agent) serves as the Fund's shareholder services and transfer
agent for a fee of 0.20% annually of average daily 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 of the Fund
and the Portfolio are valued as of the close of the New York Stock Exchange
(Exchange) (which generally is at 4:00 p.m. Eastern time, 3:00 p.m.
Chicago time) each day the Exchange is open. The net asset value of the
Portfolio will not be determined on days when the Exchange is closed
unless, in the judgment of the Portfolio's Board of Trustees, the net asset
value of the Portfolio should be determined on any such day, in which case
the determination will be made at 3:00 p.m., Chicago time. Portfolio
securities are valued using the "amortized cost" method (when such cost
approximates market value pursuant to procedures adopted by the Portfolio's
Trustees), which does not consider the effect of fluctuating interest rates
on the value of assets. The Fund's shares in the Portfolio are valued at
their net asset value. The Fund and the Portfolio intend to maintain a per
share net asset value of $1.00, but this cannot be assured.
DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code and to distribute to its shareholders virtually all
net income and any net realized gains at least annually.
The Fund generally declares distributions daily and pays them 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. If
an investment is made by federal funds wire, dividends start accruing on
the next business day. 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. If the Fund
makes taxable distributions, they will generally be taxable whether you
receive them in cash or in additional Fund shares; you must report them as
taxable income unless you are a tax-exempt institution. Each January,
information on the amount and nature of distributions for the prior year is
sent to shareholders.
HOW TO BUY SHARES
Shares are offered continuously. Orders received in good form prior to the
time shares are valued (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.
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. Certificates will not be issued for the Fund. 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. The
Distributor pays no commission on sales of Class A shares.
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 not
bearing a distribution or service 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 redemption occurs:
Years Contingent
Deferred
After Sales Charge
Purchase
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.
General. All contingent deferred sales charges are deducted from the
amount redeemed, not the amount remaining in the account, and are paid to
the Distributor. Shares issued upon distribution reinvestment and amounts
representing appreciation are not subject to a contingent deferred sales
charge. The contingent deferred sales charge is imposed on redemptions
which result in the account value falling below its Base Amount (the total
dollar value of purchase payments in the account, reduced by prior
redemptions on which a contingent deferred sales charge was paid and any
exempt redemptions). As all Fund shares are offered at net asset value, no
special purchase plans or methods are established for the Fund, except as
described in the preceding sentence respecting Class B redemptions
resulting in account value falling below its Base Amount. See the
Statement of Additional Information for more information, including "How to
Buy Shares" and "Investor Services."
Which Class is more beneficial to an investor depends on the amount and
intended length of the investment. Class B shares of the Fund are only for
temporary investment while considering investments in Class B shares of
other Colonial funds. Purchases of $250,000 or more must be for Class A
shares. Consult your financial service firm.
Financial service firms receive compensation only on sales of Class B
shares. The Distributor may pay additional compensation to financial
service firms which have made or may make significant sales of Class B
shares. 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 of the Fund may be sold on any day the Exchange is open, either
directly to the Fund or through your financial service firm. Sale proceeds
generally are sent within seven days (usually on the next business day
after your request is received in good form). However, for shares recently
purchased by check, the Fund will send proceeds as soon as the check has
cleared (which may take up to 15 days).
Selling Shares Directly To The Fund. Send a signed letter of instruction
or stock power form to the Transfer Agent, along with any certificates
which were issued prior to the Fund's conversion to a master fund/feeder
fund structure 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 of shares by corporations,
agents, fiduciaries, surviving joint owners and individual retirement
account holders. For details contact:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Selling Shares Through Financial Service Firms.
Financial service firms must receive requests prior to the time 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 and state
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
Exchanges at net asset value may be made among the same class of shares of
most Colonial funds. Shares will continue to age without regard to the
exchange for purposes of conversion and in 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.
Purchasers of $1 million or more of Class A shares of other Colonial funds
who exchange their shares for Class A shares of the Fund and redeem those
Fund shares within 18 months after the original investment are subject to a
1.00% contingent deferred sales charge.
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 in which the original
investment was made.
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisers are automatically eligible
to exchange Fund shares and redeem up to $50,000 of Fund shares by calling
1-800-422-3737 toll free any business day between 9:00 a.m. and the close
of trading of the New York Stock Exchange (normally 4:00 p.m. Eastern
time). Telephone redemption privileges for larger amounts may be elected
on the account application. 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. 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. All
telephone transactions are recorded. Shareholders and/or their financial
advisers are required to provide their name, address and account number.
Financial advisers are also required to provide their broker number.
Shareholders and/or their financial advisers wishing to redeem or exchange
shares by telephone may experience difficulty in reaching the Fund at its
toll-free telephone number during periods of drastic economic or market
changes. In that event, shareholders and/or their financial advisers
should follow the procedures for redemption or exchange by mail as
described above in "How to sell shares." The Administrator, the Transfer
Agent and the Fund reserve the right to change, modify, or terminate the
telephone redemption or exchange services at any time upon prior written
notice to shareholders. Shareholders and/or their financial advisers are
not obligated to transact by telephone.
12B-1 PLANS
Under the Class B 12b-1 Plan, the Fund pays the Distributor annual
distribution and service fees of 0.75% and 0.25%, respectively, of the
average net assets attributed to its Class B shares. Because the Class B
shares bear the additional 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. 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 Plan also authorizes other payments to the Distributor and its
affiliates (including the Administrator and the Adviser) which may be
construed to be indirect financing of Fund share sales.
ORGANIZATION AND HISTORY
The Fund is the successor to Colonial Tax-Exempt Money Market Trust, which
was organized in 1987 as a Massachusetts business trust. The Fund
represents the entire interest in a separate portfolio of the Trust. The
Trust is not required to hold annual shareholder meetings, but special
meetings may be called for certain purposes. 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.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration of Trust for the Trust (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 Trust's Trustees. The
Declaration provides for indemnification out of Fund property for all loss
and expense of any shareholder held personally liable for the obligations
of the Fund. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Fund would be unable to meet its obligations. The likelihood of such
circumstances is remote because it would be limited to circumstances in
which the disclaimer was inoperative and the Trust was unable to meet its
obligations.
The risk of a particular fund incurring financial loss on account of
unsatisfied liability of another fund of the Trust is also believed to be
remote, because it would be limited to claims to which the disclaimer did
not apply and to circumstances in which the other fund was unable to meet
its obligations.
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.
Provisional Ratings. The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment
of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however,
although addressing credit quality subsequent to completion of the project,
makes no comments on the likelihood of, or the risk of default upon failure
of, such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
Municipal Notes:
SP-1. Notes rated SP-1 have very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming
safety characteristics are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
interest.
Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue will be rated as a note).
Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be rated as a note).
Demand Feature of Variable Rate Demand Securities:
S&P assigns dual ratings to all long-term debt issues that have as part of
their provisions a demand feature. The first rating addresses the
likelihood of repayment of principal and interest as due, and the second
rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols are usually used to denote the put (demand)
option (for example, AAA/A-1+). Normally, demand notes receive note rating
symbols combined with commercial paper symbols (for example, SP-1+/A-1+).
Commercial Paper:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designations 1, 2, and 3 to indicate the relative degree to
safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
Corporate Bonds:
The description of the applicable rating symbols and their meanings is
substantially the same as its Municipal Bond ratings set forth above.
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.
Conditional Ratings. Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience,
(c) rentals which being when facilities are completed, or (d) payments to
which some other limiting conditions attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or
elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa 1, A 1, Baa 1, Ba 1, and B 1.
Municipal Notes:
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
Demand Feature of Variable Rate Demand Securities:
Moody's may assign a separate rating to the demand feature of a variable
rate demand security. Such a rating may include:
VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
VMIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
Commercial Paper:
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, Moody's, in
assigning ratings to such issuers, evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments, or other entities, but only as one factor in the total
rating assessment.
Corporate Bonds:
The description of the applicable rating symbols (Aaa, Aa, A) and their
meanings is identical to that of its Municipal Bond ratings as set forth
above, except for the numerical modifiers. Moody's applies numerical
modifiers 1, 2, and 3 in the Aa and A classifications of its corporate bond
rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and the modifier 3 indicates that the issuer ranks in the
lower end of its generic rating category.
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
Distributor
Colonial Investment Services, Inc.
One Financial Center
Boston, MA 02111-2621
Shareholder Services and Transfer Agent
Colonial Investors Service Center, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-345-6611
Fund Custodian
UMB, n.a.
928 Grand Avenue
Kansas City, MO 64106
Portfolio Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02101
Independent Accountants of Fund
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110-2624
Independent Auditors of Portfolio
Ernst & Young LLP
233 South Wacker Drive
Chicago, IL 60606
Legal Counsel of Fund
Ropes & Gray
One International Place
Boston, MA 02110-2624
Your financial service firm is:
Printed in U.S.A.
September 28, 1995
COLONIAL
MUNICIPAL MONEY MARKET FUND
PROSPECTUS
Colonial Municipal Money Market Fund seeks maximum current income
exempt from Federal income tax by investing principally in a
diversified portfolio of "short-term" Municipal Securities. The Fund
currently seeks to achieve its objective by investing all of its
assets in the SR&F Municipal Money Market Portfolio, a municipal money
market master fund which has the same investment objective as the
Fund.
For more detailed information about the Fund, call the Administrator
at 1-800-248-2828 for the September 28, 1995 Statement of Additional
Information.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR INSURED BY, ANY BANK OR GOVERNMENT AGENCY.
Colonial Mutual Funds
_________________________________________________________________
Please send your completed application to:
Colonial Mutual Funds
P.O. Box 1722
Boston, Massachusetts 02105-1722
New Account Application/Revision to Existing Account
To open a new account, complete sections 1, 2, 3, & 8.
To apply for special services for a new or existing account,
complete sections 4, 5, 6, 7, or 9 as appropriate.
___ Please check here if this is a revision.
1-----------Account Ownership--------------
Please choose one of the following.
__Individual: Print your name, Social Security #, U.S.
citizen status.
__Joint Tenant: Print all names, the Social Security # for
the first person, and his/her U.S. citizen status.
__Uniform Gift to Minors: Name of custodian and minor,
minor's Social Security #, minor's U.S. citizen status.
__Corporation, Association, Partnership: Include full name,
Taxpayer I.D. #.
__Trust: Name of trustee, trust title & date, and trust's
Taxpayer I.D. #.
______________________________________
Name of account owner
______________________________________
Name of joint account owner
______________________________________
Street address
______________________________________
Street address
______________________________________
City, State, and Zip
______________________________________
Daytime phone number
______________________________________
Social Security # or Taxpayer I.D. #
Are you a U.S. citizen? Yes___ No___
______________________________________
If no, country of permanent residence
______________________________________
Owner's date of birth
______________________________________
Account number (if existing account)
2 -----Colonial Fund(s) You Are Purchasing--------
Your investment will be made in Class A shares if no class
is indicated. Certificates are not available for Class B shares.
If no distribution option is selected,
distributions will be reinvested in additional Fund shares.
Please consult your financial adviser to determine which
class of shares best suits your needs.
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section
4B, inside
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section
4B, inside
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section
4B, inside
3---Your Signature & Taxpayer I.D. Number Certification----
Each person signing on behalf of an entity represents that
his/her actions are authorized.
I have received and read each appropriate Fund prospectus
and understand that its terms are incorporated by reference
into this application. I understand that this application
is subject to acceptance. I understand that certain
redemptions may be subject to a contingent deferred sales
charge. I certify, under penalties of perjury, that:
1. The Social Security # or Taxpayer I.D. # provided is
correct.
Cross out 2(a) or 2(b) if either is not true in your case.
2. I am not subject to 31% backup withholding because (a) I
have not been notified that I am subject to backup
withholding or (b) the Internal Revenue Service has notified
me that I am no longer subject to backup withholding.
It is agreed that the Fund, all Colonial companies and their
officers, directors, agents, and employees will not be
liable for any loss, liability, damage, or expense for
relying upon this application or any instruction believed
genuine.
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
4--------Ways to Withdraw from Your Fund-------
It may take up to 30 days to activate the following
features. Complete only the section(s) that apply to the
features you would like.
A. Systematic Withdrawal Plan (SWP)
You can receive monthly, quarterly, or semiannual checks
from your account in any amount you select, with certain
limitations. Your redemption checks can be sent to you at
the address of record for your account, to your bank
account, or to another person you choose. The value of the
shares in your account must be at least $5,000 and you must
reinvest all of your distributions. Checks will be processed
on the 10th calendar day of the month or the following
business day. Withdrawals in excess of 12% annually of your
current account value will not be accepted. Redemptions made
in addition to Plan payments may be subject to a contingent
deferred sales charge for Class B shares. Please
consult your financial or tax adviser before electing this
option.
Funds for Withdrawal:
______________________________________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________
or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _________________ (month).
______________________________________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________
or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _________________ (month).
______________________________________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________
or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _________________ (month).
Payment Instructions
Send the payment to (choose one):
__My address of record.
__My bank account via Colonial Cash Connection. Please
complete Section 4B and the Bank Information section below.
__The payee listed at right.
______________________________________________
Name of payee
______________________________________________
Address of payee
______________________________________________
City
______________________________________________
State Zip
______________________________________________
Payee's bank account number, if applicable
X_____________________________________________
Signature of account owner(s)
X_____________________________________________
Signature of account owner(s)
Signatures of all owners must be guaranteed. Provide the
name, address, payment amount, and frequency for other
payees (maximum of 5) on a separate sheet.
B. Direct Deposit via Colonial Cash Connection
You can arrange to have distributions from your Colonial
fund account(s) or Systematic Withdrawal Plan checks
automatically deposited directly into your bank checking
account. Distribution deposits will be made 2 days after the
Fund's payable date. Please complete Bank Information below
and attach a blank check marked "VOID."
Please deposit my:
__Dividend distributions only
__Dividend and capital gain distributions
__Systematic Withdrawal Plan payments
I understand that my bank must be a member of the Automated
Clearing House system.
C. Telephone Withdrawal Options
All telephone transaction calls are recorded. These options
are not available for retirement accounts.
1. Fast Cash
You are automatically eligible for this service. You or
your financial adviser can withdraw up to $50,000 from your
account and have it sent to your address on our records. For
your protection, this service is only available on accounts
that have not had an address change within
60 days of the redemption request.
2. Telephone Redemption
__I would like the Telephone Redemption privilege.
You may withdraw shares from your fund account by telephone
and send your money to your bank account. If you are adding
this service to an existing account, complete the Bank
Information section below and have all shareholder
signatures guaranteed.
Colonial's and the Fund's liability is limited when
following telephone instructions; a shareholder may suffer a
loss from an unauthorized transaction reasonably believed by
Colonial to have been authorized. Telephone redemptions
exceeding $5,000 will be sent via Federal Fund Wire, usually
on the next business day ($7.50 will be deducted).
Redemptions of $5,000 or less will be sent by check to your
designated bank.
Bank Information (For A, B, or C Above)
I authorize deposits to the following bank account:
____________________________________________________________
____
Bank name City Bank account number
____________________________________________________________
____
Bank street address State Zip Bank routing # (your bank
can provide this)
5-----Ways to Make Additional Investments--------
These services involve continuous investments regardless of
varying share prices. Please consider your ability to
continue purchases through periods of price fluctuations.
Dollar cost averaging does not assure a profit or protect
against loss in declining markets.
A. Automatic Dividend Diversification
Please diversify my portfolio by investing fund
distributions in another Colonial fund. These investments
will be made in the same share class and without sales
charges. I have carefully read the prospectus for the
fund(s) listed below.
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
B. Automated Dollar Cost Averaging
This program allows you to automatically have money from any
Colonial fund in which you have a balance of at least
$5,000 transferred into the same share class of up to four
other Colonial funds, on a monthly basis. The minimum amount
for each transfer is $100. Please complete the section
below.
____________________________________
Fund from which shares will be sold
$_________________________
Amount to redeem monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
C. Fundamatic
Fundamatic automatically transfers the specified amount from
your bank checking account to your Colonial fund account.
Your bank needs to be a member of the Automated Clearing
House system. Please attach a blank check marked "VOID."
Also, complete the section below and Fundamatic
Authorization (Section 6).
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
6 -------------Fundamatic Authorization--------------------
Authorization to honor checks drawn by Colonial Investors
Service Center. 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
Checkwriting Signature Card
(Class A Shares Only)
Colonial Mutual Funds
Signature Card for the Bank of Boston ("Bank").
- -----------------------------------------------
Name of Fund
- -----------------------------------------------
Fund account number
To request additional signature cards, please call Colonial at 1-800-248-2828.
Account Name:
You must sign below exactly as your account is registered.
X
- -----------------------------------------------
Signature
X
- -----------------------------------------------
Signature
By signing this card, you are subject to the conditions printed on the reverse
side. If adding this privilege to an existing account, your signatures must be
guaranteed.
Checkwriting Privilege
By electing the checkwriting privilege and signing the signature card, I
acknowledge that I am subject to the rules and regulations of the Bank of
Boston ("Bank") as currently existing and as they may be amended from time
to time. I designate the Bank as my representative to present checks drawn
on my Fund account to the Fund or its Agent and deposit the proceeds in this
checking account. I understand that the shares for which share certificates
have been issued or requested cannot be redeemed in this manner.
I understand that if my Fund account is registered in joint tenancy, that all
checks must include all signatures of all persons named on the account.
If the account is registered in joint tenancy, each person guarantees the
genuineness of all other parties' signatures.
Minimum and Maximum
I understand that checks may not be in amounts less than $500 nor more than
$100,000, and that the Fund reserves the right to change these limits in its
sole discretion. I agree that neither the Fund nor its Agent is responsible
for any loss, expense, or cost arising from these redemptions. Also, if I have
recently made additional investments, I understand that redemption proceeds
will not be available until the check used to purchase the investment
(including a certified or cashier's check) has been cleared by the bank on
which it is drawn, which could take up to 15 days or more.
D-256A-1094
COLONIAL MUNICIPAL MONEY MARKET FUND
Statement of Additional Information
September 28, 1995
This Statement of Additional Information (SAI) contains information
which may be useful to investors but which is not included in the
Prospectus of Colonial Municipal Money Market 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 September
28, 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.
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
Fund Charges and Expenses d
Investment Performance g
Custodian g
Independent Accountants g
Management of the Portfolio g
Other Information Concerning the Portfolio h
Part 2
Miscellaneous Investment Practices 1
Taxes 9
Management of the Colonial Funds 11
Determination of Net Asset Value 14
How to Buy Shares 15
Investor Services 19
Suspension of Redemptions 21
Shareholder Meetings 21
Performance Measures 22
Appendix I 23
Appendix II 26
TM-39/201B-0895
PART 1
COLONIAL MUNICIPAL MONEY MARKET FUND
Statement of Additional Information
September 28, 1995
DEFINITIONS
"Trust" Colonial Trust IV
"Fund" Colonial Municipal Money Market Fund
"Administrator" Colonial Management Associates, Inc., the
Fund's administrator and the investment
manager to each of the Colonial funds except
for the Fund, Colonial Global Utilities Fund,
a series of Colonial Trust III, and Colonial
Newport Tiger Fund, a series of Colonial Trust
VII
"CISI" Colonial Investment Services, Inc., the
distributor of the Fund and each of the open-
end mutual funds in the Colonial funds complex
"CISC" Colonial Investors Service Center, Inc.,
shareholder services and transfer agent to the
Fund and each of the open-end mutual funds in
the Colonial funds complex
"Portfolio" SR&F Municipal Money Market Portfolio
"Base Trust" SR&F Base Trust, a Massachusetts trust, of
which the Portfolio is a series
"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 includes additional information concerning the
Fund and the Portfolio, including a description of the Fund's and
the Portfolio's fundamental investment policies. 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
practices that may be utilized by the Portfolio:
Short-term Trading
Repurchase Agreements
Money Market Instruments
Forward Commitments
Participation Interests
Stand-by Commitments
Except as described below under "Fundamental Investment
Policies," the Fund's and the Portfolio's investment policies are
not fundamental, and the Fund's or the Portfolio'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 the Portfolio, or (2) 67% or
more of the shares present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by
proxy. The following fundamental investment policies cannot be
changed without such a vote.
Total assets and net assets are determined at current value for
purposes of compliance with investment restrictions and policies.
All percentage limitations will apply at the time of investment
and are not violated unless an excess or deficiency occurs as a
result of such investment. For the purpose of the Act's
diversification requirement, an issuer is the entity whose
revenues support the security.
As fundamental policies, neither the Fund nor the Portfolio
may:
1. Invest in a security if, with respect to 75% of the
Portfolio's assets, as a result of such investment, more
than 5% of its total assets (taken at market value at the
time of such investment) would be invested in the securities
of any one issuer (for this purpose, the issuer(s) of a
security being deemed to be only the entity or entities
whose assets or revenues are subject to the principal and
interest obligations of the security), except (1) in the
case of a guarantor of securities (including an issuer of a
letter of credit), the value of the guarantee (or letter of
credit) may be excluded from this computation if the
aggregate value of securities owned by the Fund or the
Portfolio and guaranteed by such guarantor (plus any other
investments of the Fund or the Portfolio in securities
issued by the guarantor) does not exceed 10% of the Fund's
or the Portfolio's total assets, (2) this restriction does
not apply to U.S. government securities or repurchase
agreements for such securities and (3) the Fund may invest
all or substantially all of its assets in another registered
investment company having the same investment objective and
substantially similar investment policies;
2. Purchase any securities on margin, except for use of short-
term credit necessary for clearance of purchases and sales
of portfolio securities (this restriction does not apply to
securities purchased on a when-issued or delayed-delivery
basis or to reverse repurchase agreements);
3. Make loans to other persons, except that the Fund or the
Portfolio may invest up to 100% of its assets in debt
obligations, including money market instruments;
4. Borrow, except that the Fund or the Portfolio may each
borrow up to 33 1/3% of its total assets, taken at current
value at the time of such borrowing, from banks as a
temporary measure for extraordinary or emergency purposes
but not to increase portfolio income (the total of reverse
repurchase agreements and such borrowings will not exceed 33
1/3% of either the Fund's or the Portfolio's respective
total assets and will not purchase additional securities at
a time when borrowings, less proceeds receivable from sales
of portfolio securities, exceed 5% of its total assets;
5. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by
the Fund or the Portfolio, except as may be necessary in
connection with borrowings permitted in (4) above;
6. Invest more than 25% of its total assets (taken at market
value at the time of each investment) in securities of non-
governmental issuers whose principal business activities are
in the same industry;
7. Purchase portfolio securities for the Fund or the Portfolio
from, or sell portfolio securities to, any of the officers,
directors or trustees of the Trust, the Base Trust or the
Portfolio's investment adviser;
8. Purchase or sell commodities or commodities contracts or
oil, gas or mineral programs;
9. Purchase any securities other than those described in the
Prospectus;
10. Issue any senior securities except to the extent permitted
under the Investment Company Act of 1940;
11. Purchase or sell real estate (other than Municipal
Securities or money market securities secured by real estate
or interests therein or such securities issued by companies
which invest in real estate or interests therein); and
12. Act as an underwriter of securities, except that the Fund or
the Portfolio may participate as part of a group in bidding,
or bid alone, for the purchase of Municipal Securities
directly from an issuer for the Fund's or the Portfolio's
own portfolio.
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed
without a shareholder vote, neither the Fund nor the Portfolio
may:
1. Own more than 10% of the outstanding voting securities of an
issuer, except that the Fund may invest all or substantially
all of its assets in another registered investment company
having the same investment objective and substantially similar
investment policies;
2. Invest in companies for the purpose of exercising control or
management, except that all or substantially all of the assets
of the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies;
3. Make investments in the securities of other investment
companies, except in connection with a merger, consolidation,
or reorganization, except that the Fund may invest all or
substantially all of its assets in another registered
investment company having the same investment objective and
substantially similar investment policies;
4. Invest in securities of issuers (other than issuers of Federal
agency obligations or of Municipal 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 regarding all such securities,
more than 5% of the Fund's or the Portfolio's total assets
(taken at market value at the time of such investment) would
be invested in such securities, except that the Fund may
invest all or substantially all of its assets in another
registered investment company having the same investment
objective and substantially similar investment policies;
5. Purchase or retain securities of an issuer if 5% of the
securities of such issuer are owned by those officers,
trustees or directors of the Fund, the Portfolio or the
Adviser, who each own individually more than 1/2 of 1% of such
securities;
6. Invest more than 10% of its net assets (taken at market value
at the time of each purchase) in illiquid securities,
including repurchase agreements maturing in more than seven
days;
7. Sell securities short unless (1) the Fund or the Portfolio
owns or has the right to obtain securities equivalent in kind
and amount to those sold short at no added cost or (2) the
securities sold are "when-issued" or "when-distributed"
securities which the Fund or the Portfolio expects to receive
in a recapitalization, reorganization or other exchange for
securities the Fund or the Portfolio contemporaneously owns or
has the right to obtain, and provided that the Fund or the
Portfolio may purchase stand-by commitments and securities
subject to a demand feature entitling the Portfolio to require
sellers of securities to the Fund or the Portfolio to
repurchase them upon demand by the Fund or the Portfolio;
8. Purchase shares of other open-end investment companies, except
in connection with a merger, consolidation, acquisition, or
reorganization; and
9. Invest more than 5% of its net assets (valued at time of
investment) in warrants, nor more than 2% of its net assets in
warrants which are not listed on the New York Stock Exchange
or American Stock Exchange.
FUND CHARGES AND EXPENSES
Aggregate Fund expenses include the Fund's proportionate share of
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 0.25% of the Portfolio's average daily net assets, (ii) a
pricing and bookkeeping fee of $25,000 plus 0.0025% annually of
average daily net assets over $50 million, (iii) a monthly
transfer agent fee of $500 and (iv) custody, legal and audit fees
and other miscellaneous expenses. The Fund's direct expenses
include (i) an administrative fee paid to the Administrator at
the annual rate of 0.25 % 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 by the Fund to the Administrator (a), CISI and
CISC (in thousands)
Period ended Year Ended November 30
June 30, 1994 1993 1992
1995(e)
Management fee $88 $131 $129 $144
Bookkeeping fee 16 27 27 27
Shareholder service and
transfer agent fee (b) 43 59 60 73(b)
Amount of above fees waived (63) (153) (129) (174)
12b-1 fees:
Service fee (Class B)(d) 4 4 1 (c)
Distribution fee (Class B)(d) 13 14 2 (c)
(a) Prior to September 28, 1995, the Administrator was the
Adviser of the Fund.
(b) Under a prior fee schedule.
(c) Rounds to less than one.
(d) Class B shares were initially offered on May 5, 1992.
(e) The Fund changed its fiscal year end from November 30 to
June 30 on June 16, 1995.
Brokerage Commissions
The Fund did not pay brokerage commissions during the period
ended June 30, 1995 and the fiscal years ended November 30, 1994
and 1993. (See footnote (e) above).
Trustees Fees
For the periods set forth below, the Trustees received the
following compensation for serving as Trustees:
Aggregate Total
Compensation Pension or Compensation
From Fund Retirement From Trust
For The Benefits Estimated and Fund Complex
Fiscal Year Accrued As Annual Paid to the
Ended Part of Benefits Trustees For The
November 30, Fund Upon Calendar Year Ended
Trustee 1994(f) Expenses Retirement December 31, 1994(g)
Robert J. Birnbaum(i) $ 0 $0 $0 $ 0
Tom Bleasdale 1,105(h) 0 0 101,000
Lora S. Collins 1,248 0 0 95,000
James E. Grinnell(i) 0 0 0 0
William D. Ireland, Jr. 1,189 0 0 110,000
Richard W. Lowry(i) 0 0 0 0
William E. Mayer 1,026 0 0 89,752
John A. McNeice, Jr. 0 0 0 0
James L. Moody, Jr. 1,123 0 0 109,000
John J. Neuhauser 1,112 0 0 95,000
George L. Shinn 1,095 0 0 112,000
Robert L. Sullivan 1,219 0 0 104,561
Sinclair Weeks, Jr. 1,223 0 0 116,000
(f) The Fund changed its fiscal year from November 30 to June 30
on June 16, 1995.
(g) At December 31, 1994, the Colonial funds complex consisted
of 31 open-end and 5 closed-end management investment
company portfolios.
(h) Included $573 payable as deferred compensation.
(i) Elected to the Colonial funds complex on April 21, 1995.
Ownership of the Fund
At September 14, 1995, John A. McNeice, Jr., President and a
Trustee of the Trust, beneficially owned 2,259,887.770 shares of
the Fund, representing 9.17% of the then outstanding shares. Mr.
McNeice was the only officer and/or Trustee of the Trust who
beneficially owned shares.
At September 14, 1995, the above and the following shareholders
owned more than 5% of the Fund's outstanding Class A and Class B
shares:
Class A
Sekura Limited Partnership 8.35%
c/o Michael A. Kane
1887 Newton St., N.W.
Washington, DC 20010
Class B
Alan Baker Co. 6.08%
160 Sylvester Road
South San Francisco, CA 94080-
6014
Audrey Golden-Lesser 5.30%
310 Madison Avenue-Suite 310
New York, NY 10017
Gilbert Farias 7.21%
411 Hobron #1512
Honolulu, HI 96815
Rocco T. and Marie Logiodice, 5.85%
Joint Tenants
5400 N. Francis Avenue
Oklahoma City, OK 73118
Randy P. and Nancy S. Shirley, 7.20%
Joint Tenants
Route 3, Box 226 C
Sherman, TX 75090-9587
At September 14, 1995, there were 794 Class A and 66 Class B
record holders of the Fund.
Sales Charges (in thousands)
Class B Shares
May 5, 1992
(commencement
of investment
Period operations)
ended Year ended through
June 30, November 30 November 30,
1995 1993 1994 1992
Aggregate
contingent deferred
sales charges
(CDSCs) on Fund
redemptions $21 $28 $10 $0
retained by CISI
12b-1 Plans, CDSCs and Conversion of Shares
The Fund offers two classes of shares - Class A and Class B. 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 Class B Plan, the Fund pays CISI a service
fee at an annual rate of 0.25% of average net assets attributed
to its Class B shares and a distribution fee at an annual rate of
0.75% of average net assets attributed to its Class B shares.
CISI may use the entire amount of such fees to defray the costs
of commissions and service fees paid to financial service firms
(FSFs) and for certain other purposes. Since the distribution
and service fees are payable regardless of the amount of CISI's
expenses, CISI may realize a profit from the fees. The Class A
Plan has no fee but like the Class B Plan authorizes any other
payments by the Fund to CISI and its affiliates (including the
Administrator and the Adviser) to the extent that such payments
might be construed to be indirect financing of the distribution
of Fund shares.
The Trustees of the Trust 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 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 of the Trust, including a majority of 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. Class B shares
are offered at net asset value subject to a CDSC if redeemed
within six years after purchase. The CDSC is 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 or service fee.
Sales-related expenses (for the period ended June 30, 1995) (in
thousands) of CISI relating to the Fund were as follows:
Class A Shares Class B Shares
Fees to FSF $0 $9
Cost of sales material
relating to the Fund
(including printing
and mailing expenses) $1 (j)
Allocated travel,
entertainment and other
promotional (including
advertising) $0 $0
(j) Rounds to less than
one.
INVESTMENT PERFORMANCE
The Portfolio did not commence investment operations until
September 28, 1995. The investment performance disclosed for the
Portfolio is that of SteinRoe Municipal Money Market Fund
(SteinRoe Fund), which has been advised by the Adviser since it
commenced investment operations on March 11, 1983, as a series of
the SteinRoe Municipal Trust. The Portfolio's investment
objective, policies and restrictions are generally the same as
those of the SteinRoe Fund which converted to a master
fund/feeder fund structure on September 28, 1995, and is now a
feeder fund in the Portfolio.
The Portfolio's yields for the seven days ended June 30, 1995
were:
Current Yield 3.52%
Effective Yield 3.58%
Tax-Equivalent Current Yield 5.84%
Tax-Equivalent Effective Yield 5.94%
The Portfolio's average annual return at June 30, 1995 was:
1 Year 5 Years 10 Years
Class A: 3.02% 2.97% 3.90%
Class B: (1.98)%* 2.61%* 3.90%
*Reflects payment of CDSCs which will apply to Class B
shareholders of the Fund.
See Part 2 of this SAI, "Performance Measures," for how
calculations are made.
CUSTODIAN
UMB, n.a. is the Fund's custodian. The custodian is responsible
for maintaining the Fund's open account.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP are the Fund's independent accountants
providing audit and tax return preparation services and
assistance and consultation in connection with the review of
various SEC filings. The financial statements of the Fund
incorporated by reference in this SAI have been so incorporated,
and the schedule of financial highlights included in the
Prospectus have been so included, in reliance upon the report of
Price Waterhouse LLP given on the authority of said firm as
experts in accounting and auditing.
MANAGEMENT OF THE PORTFOLIO
Trustees and Officers of the Portfolio
Gary A. Anetsberger(1), (Age 39), Senior Vice President, is Vice
President of the Adviser since January, 1991 (formerly Controller
and Associate of the Adviser from July, 1987 to December, 1991)
Timothy K. Armour(*)(1), (Age 46), President and Trustee, is
President of the Mutual Funds division of the Adviser and
Director of the Adviser since June, 1992 (formerly Senior Vice
President and Director of Marketing of Citibank Illinois from
February, 1989 to June, 1992)
Jilaine Hummel Bauer(1), (Age 40), Executive Vice President and
Secretary, is Senior Vice President since April, 1992 and
Assistant Secretary since May, 1990 of the Adviser (formerly Vice
President of the Adviser, January, 1988 to March, 1992)
Kenneth L. Block(1), (Age 75) Trustee, is Chairman Emeritus of A.
T. Kearney, Inc. (international management consultants) since
February, 1986
William W. Boyd(1), (Age 69) Trustee, is Chairman and Director of
Sterling Plumbing Group, Inc. (manufacturer of plumbing projects)
since 1992 (formerly Chairman, President and Chief Executive
Officer of Sterling Plumbing Group, Inc., over five years)
N. Bruce Callow(1), (Age 49) Executive Vice President, is
President of the Investment Counsel division of the Adviser,
since June, 1994 (formerly Senior Vice President of trust and
financial services for The Northern Trust, over five years)
Lindsay Cook(*) (1), (Age 43) Trustee, is Senior Vice President
of Liberty Financial (over five years), 600 Atlantic Avenue,
Boston, Massachusetts 02210
Philip D. Hausken(1), (Age 37) Vice President, is Corporate
Counsel for the Adviser since July, 1994 (formerly Assistant
Regional Director, Midwest Regional office of the Securities and
Exchange Commission, over five years)
Stephen P. Lautz(1), (Age 38) Vice President, is Vice President
of the Adviser since May, 1994 (formerly Associate of the
Adviser, since March, 1985)
Francis W. Morley(1), (Age 75) Trustee, is Chairman of Employer
Plan Administrators and Consultants Co. (designer, administrator,
and communicator of employee benefits plans), over five years
Charles R. Nelson(1), (Age 53) Trustee, is Van Voorhis Professor
of Political Economy of the University of Washington, Seattle,
Washington 98195 since January, 1995 and Professor, Department of
Economics, University of Washington, over five years
Nicolette D. Parrish(1), (Age 45) Vice President and Assistant
Secretary, is Associate of the Adviser, since 1978
Sharon R. Robertson(1), (Age 33) Controller, is Accounting
Manager for the Adviser's mutual funds division, since 1987
Janet B. Rysz(1), (Age 39) Assistant Secretary, is Assistant
Secretary of the Adviser, since January, 1988
Gordon R. Worley(1), (Age 75) Trustee, is Private Investor, since
June, 1983
Hans P. Ziegler(1), (Age 54) Executive Vice President, is Chief
Executive Officer of the Adviser since May, 1994 (formerly
President of the Investment Counsel division of the Adviser from
July, 1993 to June, 1994, and President and Chief Executive
Officer, Pitcairn Financial Management Group, from 1989 to 1993)
Margaret O. Zwick, Treasurer, is Compliance Manager of the
Adviser's Mutual Fund division since August, 1995 (former offices
held with Adviser: Compliance Accountant, January, 1995 to July,
1995; Section Manager, January, 1994 to January, 1995;
Supervisor, February, 1990 to December, 1993 and Fund Accountant,
July, 1988 to February, 1990)
(*) Trustee who is an "interested person" of the Portfolio and of
the Adviser, as defined in the Investment Company Act of 1940.
(1) The address of each Trustee and Officer is One South Wacker
Drive, Chicago, IL 60606, unless otherwise noted.
The Management Agreement
Under a Management Agreement, the Adviser has agreed to make day
to day investment decisions for the Portfolio, arrange for the
execution of portfolio transactions and generally manage the
Portfolio's investments. The Adviser has also agreed to perform
administrative services to the Portfolio, including without
limitation, providing all executive and other facilities required
to render investment management and administrative services. For
these services and facilities, the Portfolio pays a monthly fee
based on the average daily net assets of the Portfolio for such
month.
OTHER 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, policies and restrictions as
provided in the Fund's Prospectus and this Statement of
Additional Information. The Management Agreement provides for
the payment by the Portfolio to the Adviser of the management fee
described above under "Fund Charges and Expenses."
The Adviser is a wholly-owned subsidiary of Liberty Financial
Companies, Inc. (Liberty Financial), which in turn is a majority-
owned subsidiary of Liberty Mutual Equity Corporation, which in
turn is a wholly-owned subsidiary of Liberty Mutual Insurance
Company (Liberty Mutual). Liberty Mutual is an underwriter of
worker's compensation insurance and a property and casualty
insurer in the U.S. The address of Liberty Financial is 600
Atlantic Avenue, Boston, Massachusetts 02110. Liberty Mutual's
address is 175 Berkeley Street, Boston, Massachusetts 02117. The
Adviser's address is One South Wacker Drive, Chicago, Illinois
60606.
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 June 30, 1995, the Adviser managed over $22.4
billion in net assets: including over $4.9 billion in equities
and over $17.5 billion in fixed-income securities (including $2.3
billion in municipal securities). The $22.4 billion in managed
assets included over $5.5 billion held by open-end mutual funds
managed by the Adviser (approximately 21% of the mutual fund
assets were held by clients of the Adviser). The $5.5 billion
in mutual fund assets included over $550 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 June 30, 1995, the Adviser employed
approximately 17 research analysts and 34 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; Mr. Leibler is
President and Chief Executive Officer of Liberty Financial. 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,
600 Atlantic Avenue, 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. Portfolio securities are
purchased both in underwritings and in the over-the-counter
market. Included in the price paid to an underwriter of a
portfolio security is the spread between the price paid by the
underwriter to the issuer and the price paid by the purchaser.
Purchases and sales of portfolio securities in the over-the-
counter market usually are transacted with a broker or dealer on
a net basis, without any brokerage commission being paid by the
Portfolio, but do reflect the spread between the bid and asked
prices. The Adviser may also transact purchases of portfolio
securities directly with the issuers. 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 transaction charges and other 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 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 price in excess
of that which another broker or dealer may have charged for
effecting the same transaction or receive a price lower than that
which another broker-dealer may have paid. Evaluations of the
reasonableness of portfolio transactions, based on the foregoing
factors, are made on an ongoing basis by the Adviser's staff
while effecting portfolio transactions 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 of 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 price 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.
The Board of Trustees of the Base Trust has reviewed the legal
aspects and the practicability of attempting to recapture
underwriting discounts or selling concessions included in prices
paid by the Portfolio for purchases of Municipal Securities in
underwritten offerings. The Portfolio attempts to recapture
selling concessions on purchases during underwritten offerings;
however, the Adviser will not be able to negotiate discounts from
the fixed offering price for those issues for which there is a
strong demand, and will not allow the failure to obtain a
discount to prejudice its ability to purchase an issue. The
Trustees of the SR&F Base Trust periodically review efforts to
recapture concessions and whether it is in the best interests of
the Portfolio to continue to attempt to recapture underwriting
discounts or selling concessions.
Amortized Costs for Money Market Funds
In connection with the Portfolio's use of amortized cost and the
maintenance of its per share net asset value of $1.00, the Base
Trust has agreed, with respect to the Portfolio: (i) to seek to
maintain a dollar-weighted average portfolio maturity appropriate
to its objective of maintaining relative stability of principal
and not in excess of 90 days; (ii) not to purchase a portfolio
instrument with a remaining maturity of greater than thirteen
months (for this purpose, the Portfolio considers that an
instrument has a maturity of thirteen months or less if it is a
"short-term" obligation); and (iii) to limit its purchase of
portfolio instruments to those instruments that are denominated
in U.S. dollars which the Portfolio's Board of Trustees
determines present minimal credit risks and that are of eligible
quality as determined by any major rating service as defined
under SEC Rule 2a-7 or, in the case of any instrument that is not
rated, of comparable quality as determined by the Portfolio's
Board of Trustees.
The Portfolio has also agreed to establish procedures reasonably
designed to stabilize its price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures
include review of its portfolio holdings by the Portfolio's Board
of Trustees, at such intervals as the Portfolio deems
appropriate, to determine whether its net asset value calculated
by using available market quotations or market equivalents
deviates from $1.00 per share based on amortized cost.
Calculations are made to compare the value of its investments
value at amortized cost with market value. Market values are
obtained by using actual quotations provided by market makers,
estimates of market value, values from yield data obtained from
reputable sources for the instruments, values obtained from the
Adviser's matrix, or values obtained from an independent pricing
service. Any such service might value the Portfolio's
investments based on methods which include consideration of:
yields or prices of Municipal Securities of comparable quality,
coupon, maturity and type; indications as to values from dealers
and general market conditions. The service may also employ
electronic data processing techniques, a matrix system, or both
to determine valuations.
In connection with the Portfolio's use of the amortized cost
method of portfolio valuation to maintain its net asset value at
$1.00 per share, the Portfolio might incur or anticipate an
unusual expense, loss, depreciation, gain or appreciation that
would affect its net asset value per share or income for a
particular period. The extent of any deviation between the net
asset value based upon available market quotations or market
equivalents and $1.00 per share based on amortized cost will be
examined by the Portfolio's Board of Trustees as it deems
appropriate. If such deviation exceeds 1/2 of 1%, the
Portfolio's Board of Trustees will promptly consider what action,
if any, should be initiated. In the event the Portfolio's Board
of Trustees determines that a deviation exists that may result in
material dilution or other unfair results to investors or
existing shareholders, it will take such action as it considers
appropriate to eliminate or reduce to the extent reasonably
practicable such dilution or unfair results. Actions which the
Portfolio's Board of Trustees might take include: selling
portfolio instruments prior to maturity to realize capital gains
or losses or to shorten average portfolio maturity; increasing,
reducing, or suspending dividends or distributions from capital
or capital gains; or redeeming shares in kind. The Portfolio's
Board of Trustees might also establish a net asset value per
share by using market values, as a result of which the net asset
value might deviate form $1.00 per share.
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.
Independent Auditors
The independent auditors for the Portfolio are Ernst & Young LLP,
233 South Wacker Drive, Chicago, IL 60606. Ernst & Young LLP
audit and report on the annual financial statements of the
Portfolio, review certain regulatory reports and the Portfolio's
Federal income tax returns, and perform such other professional
accounting, auditing, tax and advisory services as the Portfolio
may engage them to do so.
Cross-Indemnification Agreement
The Trust, on behalf of the Fund, and the Base Trust, on behalf
of the Portfolio, have entered into a cross-indemnification
agreement relating to liability in connection with the
information relating to the Base Trust and the Portfolio
contained in the Trust's Registration Statement of which this SAI
is a part.
STATEMENT OF ADDITIONAL INFORMATION
PART 2
The following information applies generally to Colonial funds. In certain
cases the discussion applies to some but not all of the Colonial funds, and
you should refer to your Fund's Prospectus and to Part 1 of this SAI to
determine whether the matter is applicable to your Fund. You will also be
referred to Part 1 for certain data applicable to your Fund.
MISCELLANEOUS INVESTMENT PRACTICES
Part 1 of this Statement lists on page b which of the following investment
practices are available to your Fund.
Short-Term Trading
In seeking a fund's investment objective, Colonial (or if different, your
fund's adviser) will buy or sell portfolio securities whenever it believes
it is appropriate. Colonial's (or if different, your fund's adviser's)
decision will not generally be influenced by how long a fund may have owned
the security. From time to time a fund will buy securities intending to
seek short-term trading profits. A change in the securities held by a fund
is known as "portfolio turnover" and generally involves some expense to a
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 a fund to realize net short-term capital gains, such gains
will be taxable as ordinary income. As a result of a fund's investment
policies, under certain market conditions a fund's portfolio turnover rate
may be higher than that of other mutual funds. A fund's portfolio turnover
rate for a fiscal year is the ratio of the lesser of purchases or sales of
portfolio securities to the monthly average of the value of portfolio
securities, excluding securities whose maturities at acquisition were one
year or less. A fund's portfolio turnover rate is not a limiting factor
when Colonial (or if different, your fund's adviser) considers a change in
a fund's portfolio.
Lower Rated Bonds
Lower rated bonds are those rated lower than Baa by Moody's, BBB by S&P, or
comparable unrated securities. Relative to comparable securities of higher
quality:
1. the market price is likely to be more volatile because:
a. an economic downturn or increased interest rates may have a
more significant effect on the yield, price and potential for
default;
b. the secondary market may at times become less liquid or
respond to adverse publicity or investor perceptions,
increasing the difficulty in valuing or disposing of the
bonds;
c. existing or future legislation limits and may further limit
(i) investment by certain institutions or (ii) tax
deductibility of the interest by the issuer, which may
adversely affect value; and
d. certain lower rated bonds do not pay interest in cash on a
current basis. However, a fund will accrue and distribute
this interest on a current basis, and may have to sell
securities to generate cash for distributions.
2. a fund's achievement of its investment objective is more
dependent on Colonial's (or if different, your fund's adviser)
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
A 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 a fund, will be held by a fund's custodian or by a
subcustodian or depository. See also "Foreign Currency Transactions"
below.
A 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.
A 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 a fund to
recognize as income any appreciation (but not depreciation) on its holdings
of PFICs as of the end of its fiscal year.
Zero Coupon Securities (Zeros)
A 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 a fund and distributed to its shareholders. These distributions
must be made from a fund's cash assets or, if necessary, from the proceeds
of sales of portfolio securities. A 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)
A 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
A fund may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are
generally high yield securities and in addition to the other risks
associated with investing in high yield securities are subject to the risks
that the interest payments which consist of additional securities are also
subject to the risks of high yield securities.
Money Market Instruments
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations
are issued by supranational entities and are generally designed to promote
economic improvements. Certificates of deposits are issued against
deposits in a commercial bank with a defined return and maturity. Banker's
acceptances are used to finance the import, export or storage of goods and
are "accepted" when guaranteed at maturity by a bank. Commercial paper 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 a fund would be allowed to
invest in directly.
Securities Loans
A fund may make secured loans of its portfolio securities amounting to not
more than the percentage of its total assets specified in Part 1 of this
SAI, thereby realizing additional income. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay
in recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. As a matter of policy, securities
loans are made to banks and broker-dealers pursuant to agreements requiring
that loans be continuously secured by collateral in cash or short-term debt
obligations at least equal at all times to the value of the securities on
loan. The borrower pays to a fund an amount equal to any dividends or
interest received on securities lent. A fund retains all or a portion of
the interest received on investment of the cash collateral or receives a
fee from the borrower. Although voting rights, or rights to consent, with
respect to the loaned securities pass to the borrower, a fund retains the
right to call the loans at any time on reasonable notice, and it will do so
in order that the securities may be voted by a fund if the holders of such
securities are asked to vote upon or consent to matters materially
affecting the investment. A fund may also call such loans in order to sell
the securities involved.
Forward Commitments
A 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 a 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 a 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, a fund
relies on the dealer to consummate the sale. The dealer's failure to do so
may result in the loss to a fund of an advantageous yield or price.
Although a 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, a fund may dispose of a
commitment prior to settlement if Colonial (or if different, your fund's
adviser) deems it appropriate to do so. A fund may realize short-term
profits or losses upon the sale of forward commitments.
Repurchase Agreements
A fund may enter into repurchase agreements. A repurchase agreement is a
contract under which a 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 a fund to resell such security at a fixed time and
price (representing a fund's cost plus interest). It is a 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 a fund which are
collateralized by the securities subject to repurchase. Colonial (or if
different, your fund's 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, a 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, a fund may incur delay and costs in
selling the underlying security or may suffer a loss of principal and
interest if a 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 a fund and, therefore, as a form of leverage. A fund will invest the
proceeds of borrowings under reverse repurchase agreements. In addition, a
fund will enter into a reverse repurchase agreement only when the interest
income expected to be earned from the investment of the proceeds is greater
than the interest expense of the transaction. A fund will not invest the
proceeds of a reverse repurchase agreement for a period which exceeds the
duration of the reverse repurchase agreement. A fund may not enter into
reverse repurchase agreements exceeding in the aggregate one-third of the
market value of its total assets, less liabilities other than the
obligations created by reverse repurchase agreements. Each fund will
establish and maintain with its custodian a separate account with a
segregated portfolio of securities in an amount at least equal to its
purchase obligations under its reverse repurchase agreements. If interest
rates rise during the term of a reverse repurchase agreement, entering into
the reverse repurchase agreement may have a negative impact on a money
market fund's ability to maintain a net asset value of $1.00 per share.
Options on Securities
Writing covered options. A fund may write covered call options and covered
put options on securities held in its portfolio when, in the opinion of
Colonial (or if different, your fund's adviser), such transactions are
consistent with a fund's investment objective and policies. Call options
written by a fund give the purchaser the right to buy the underlying
securities from a fund at a stated exercise price; put options give the
purchaser the right to sell the underlying securities to a fund at a stated
price.
A fund may write only covered options, which means that, so long as a 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, a
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, a 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. A fund may write combinations of covered puts and calls on
the same underlying security.
A fund will receive a premium from writing a put or call option, which
increases a 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, a 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, a 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.
A 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. A 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 a fund writes a call option but does not own the underlying security,
and when it writes a put option, a 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, a 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. A 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 a 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, a 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. A fund may purchase call options to hedge against
an increase in the price of securities that a fund wants ultimately to buy.
Such hedge protection is provided during the life of the call option since
a 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 a 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 a fund and assets held to cover OTC options
written by a fund are illiquid securities. Although the Staff has
indicated that it is continuing to evaluate this issue, pending further
developments, a 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 a fund, only pursuant to agreements that will assure
that a fund will at all times have the right to repurchase the option
written by it from the dealer at a specified formula price. A 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 a fund not to enter into any OTC option transaction
if, as a result, more than 15% (10% in some cases, refer to your fund's
Prospectus) of a fund's net assets would be invested in (i) illiquid
investments (determined under the foregoing formula) relating to OTC
options written by a fund, (ii) OTC options purchased by a 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 a fund's
options strategies depends on the ability of Colonial (or if different,
your fund's adviser) to forecast interest rate and market movements
correctly.
When it purchases an option, a fund runs the risk that it will lose its
entire investment in the option in a relatively short period of time,
unless a 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, a fund will lose part or all of its
investment in the option. This contrasts with an investment by a fund in
the underlying securities, since a 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 a fund's ability to terminate
option positions at times when Colonial (or if different, your fund's
adviser) deems it desirable to do so. Although a fund will take an option
position only if Colonial (or if different, your fund's adviser) believes
there is a liquid secondary market for the option, there is no assurance
that a 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, a 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 a fund's ability
to realize its profits or limit its losses.
Disruptions in the markets for the securities underlying options purchased
or sold by a 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, a 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, a 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 a fund has expired, a fund could lose the
entire value of its option.
Special risks are presented by internationally-traded options. Because of
time differences between the United States and various foreign countries,
and because different holidays are observed in different countries, foreign
options markets may be open for trading during hours or on days when U.S.
markets are closed. As a result, option premiums may not reflect the
current prices of the underlying interest in the United States.
Futures Contracts and Related Options
A 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 a 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 a fund purchases or sells a security, no price is paid or
received by a fund upon the purchase or sale of a futures contract,
although a 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 a 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 a 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."
A 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 a fund. A
fund may close its positions by taking opposite positions which will
operate to terminate a 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 a fund, and a fund realizes a loss or
a gain. Such closing transactions involve additional commission costs.
Options on futures contracts. A 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
a fund's custodian. A 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. A 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.
A 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 a fund is subject to Colonial's (or if
different, your fund's 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 a 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 a 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 a fund, a fund may seek to
close out a position. The ability to establish and close out positions
will be subject to the development and maintenance of a liquid secondary
market. It is not certain that this market will develop or continue to
exist for a particular futures contract. Reasons for the absence of a
liquid secondary market on an exchange include the following: (i) there
may be insufficient trading interest in certain contracts or options; (ii)
restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
contracts or options, or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of contracts or options (or a particular
class or series of contracts or options), in which event the secondary
market on that exchange (or in the class or series of contracts or options)
would cease to exist, although outstanding contracts or options on the
exchange that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms.
Use by tax-exempt funds of U.S. Treasury security futures contracts and
options. A fund investing in tax-exempt securities issued by a
governmental entity may purchase and sell futures contracts and related
options on U.S. Treasury securities when, in the opinion of Colonial (or if
different, your fund's 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. A 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 a fund of index
futures as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the index futures and
movements in the prices of securities which are the subject of the hedge.
Colonial (or if different, your fund's 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 a fund's portfolio securities sought to be
hedged.
Successful use of the index futures by a fund for hedging purposes is also
subject to Colonial's (or if different, your fund's adviser's ability to
predict correctly movements in the direction of the market. It is possible
that, where a 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 a fund's portfolio may decline.
If this occurs, a fund would lose money on the futures and also experience
a decline in the value in its portfolio securities. However, while this
could occur to a certain degree, Colonial (or if different, your fund's
adviser) believes that over time the value of a 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 a fund has hedged against the
possibility of a decline in the market adversely affecting securities held
in its portfolio and securities prices increase instead, a 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 a fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the
securities of the portfolio being hedged, the prices of index futures may
not correlate perfectly with movements in the underlying index due to
certain market distortions. First, all participants in the futures markets
are subject to margin deposit and maintenance requirements. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions which would distort the normal
relationship between the index and futures markets. Second, margin
requirements in the futures market are less onerous than margin
requirements in the securities market, and as a result the futures market
may attract more speculators than the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between
movements in the index and movements in the prices of index futures, even a
correct forecast of general market trends by Colonial (or if different,
your fund's 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, a 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
A fund may engage in currency exchange transactions to protect against
uncertainty in the level of future currency exchange rates.
A fund may engage in both "transaction hedging" and "position hedging".
When it engages in transaction hedging, a fund enters into foreign currency
transactions with respect to specific receivables or payables of a fund
generally arising in connection with the purchase or sale of its portfolio
securities. A 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 a 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.
A 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. A 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 a 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 a fund the right to assume a short position in the futures
contract until expiration of the option. A put option on currency gives a
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 a fund the right
to assume a long position in the futures contract until the expiration of
the option. A call option on currency gives a fund the right to purchase a
currency at the exercise price until the expiration of the option.
When it engages in position hedging, a 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 a fund expects to
purchase, when a fund holds cash or short-term investments). In connection
with position hedging, a 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. A 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 a 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 a 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 a fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a 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. A fund will enter into such
contracts only when, in compliance with the SEC's requirements, cash or
equivalents equal in value to the commodity value (less any applicable
margin deposits) have been deposited in a segregated account of a fund's
custodian. A forward currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number
of days from the date of the contract as agreed by the parties, at a price
set at the time of the contract. In the case of a cancelable contract, the
holder has the unilateral right to cancel the contract at maturity by
paying a specified fee. The contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial
banks) and their customers. A contract generally has no deposit
requirement, and no commissions are charged at any stage for trades. A
currency futures contract is a standardized contract for the future
delivery of a specified amount of a foreign currency at a future date at a
price set at the time of the contract. Currency futures contracts traded
in the United States are designed and traded on exchanges regulated by the
CFTC, such as the New York Mercantile Exchange.
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, a 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 a 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, a 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.
A fund will only purchase or write currency options when Colonial (or if
different, your fund's 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 a fund's
investments in foreign securities and to a 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 a 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
a fund at one rate, while offering a lesser rate of exchange should a 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
A 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. A 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 a
fund in connection with the arrangement. A 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 a 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 a 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 a fund, although it could sell the
underlying municipal obligation to a third party at any time.
A fund expects that stand-by commitments generally will be available
without the payment of direct or indirect consideration. However, if
necessary and advisable, a 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 a fund's total assets
calculated immediately after each stand-by commitment is acquired. A fund
will enter into stand-by commitments only with banks and broker-dealers
that, in the judgment of the Trust's Board of Trustees, present minimal
credit risks.
Inverse Floaters
Inverse floaters are derivative securities whose interest rates vary
inversely to changes in short-term interest rates and whose values
fluctuate inversely to changes in long-term interest rates. The value of
certain inverse floaters will fluctuate substantially more in response to a
given change in long-term rates than would a traditional debt security.
These securities have investment characteristics similar to leverage, in
that interest rate changes have a magnified effect on the value of inverse
floaters.
TAXES
All discussions of taxation at the shareholder level relate to federal
taxes only. Consult your tax adviser for state and local tax
considerations and for information about special tax considerations that
may apply to shareholders that are not natural persons.
Dividends Received Deductions. Distributions will qualify for the
corporate dividends received deduction only to the extent that dividends
earned by a fund qualify. Any such dividends are, however, includable in
adjusted current earnings for purposes of computing corporate AMT.
Return of Capital Distributions. To the extent that a distribution is a
return of capital for federal tax purposes, it reduces the cost basis of
the shares on the record date and is similar to a partial return of the
original investment (on which a sales charge may have been paid). There is
no recognition of a gain or loss, however, unless the return of capital
reduces the cost basis in the shares to below zero.
Funds that invest in U.S. Government Securities. Many states grant tax-
free status to dividends paid to shareholders of mutual funds from interest
income earned by a fund from direct obligations of the U.S. government.
Investments in mortgage-backed securities (including GNMA, FNMA and FHLMC
Securities) and repurchase agreements collateralized by U.S. government
securities do not qualify as direct federal obligations in most states.
Shareholders should consult with their own tax advisers about the
applicability of state and local intangible property, income or other taxes
to their fund shares and distributions and redemption proceeds received
from a 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 a fund invests in private activity bonds,
shareholders may be subject to the AMT on that part of the distributions
derived from interest income on such bonds. Other provisions of the Tax
Reform Act affect the tax treatment of distributions for corporations,
casualty insurance companies and financial institutions; interest on all
tax-exempt bonds is included in corporate adjusted current earnings when
computing the AMT applicable to corporations. Seventy-five percent of the
excess of adjusted current earnings over the amount of income otherwise
subject to the AMT is included in a corporation's alternative minimum
taxable income.
Dividends derived from any investments other than tax-exempt bonds and any
distributions of short-term capital gains are taxable to shareholders as
ordinary income. Any distributions of net long-term gains will in general
be taxable to shareholders as long-term capital gains regardless of the
length of time fund shares are held.
Shareholders receiving social security and certain retirement benefits may
be taxed on a portion of those benefits as a result of receiving tax-exempt
income, including tax-exempt dividends from the Fund.
Special Tax Rules Applicable to Tax-Exempt Funds. Income distributions to
shareholders who are substantial users or related persons of substantial
users of facilities financed by industrial revenue bonds may not be
excludable from their gross income if such income is derived from such
bonds. Income derived from Fund investments other than tax-exempt
instruments may give rise to taxable income. Fund shares must be held for
more than six months in order to avoid the disallowance of a capital loss
on the sale of Fund shares to the extent of tax-exempt dividends paid
during that period. A shareholder that borrows money to purchase Fund
shares will not be able to deduct the interest paid with respect to such
borrowed money.
Sales of Shares. In general, any gain or loss realized upon a taxable
disposition of shares by a shareholder will be treated as long-term capital
gain or loss if the shares have been held for more than twelve months, and
otherwise as short-term capital gain or loss assuming such shares are held
as a capital asset. However, any loss realized upon a taxable disposition
of shares held for six months or less will be treated as long-term, rather
than short-term, capital loss to the extent of any long-term capital gain
distributions received by the shareholder with respect to those shares.
All or a portion of any loss realized upon a taxable disposition of shares
will be disallowed if other shares are purchased within 30 days before or
after the disposition. In such a case, the basis of the newly purchased
shares will be adjusted to reflect the disallowed loss.
Backup Withholding. Certain distributions and redemptions may be subject
to a 31% backup withholding unless a taxpayer identification number and
certification that the shareholder is not subject to the withholding is
provided to the Fund. This number and form may be provided by either a
Form W-9 or the accompanying application. In certain instances, CISC may
be notified by the Internal Revenue Service that a shareholder is subject
to backup withholding.
Excise Tax. To the extent that the Fund does not annually distribute
substantially all taxable income and realized gains, it is subject to an
excise tax. Colonial (or if different, your fund's 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, a 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 a
fund. Colonial (or if different, your fund's adviser), will consider the
value of the benefit to a typical shareholder, the cost to a fund of
compliance with the election, and incidental costs to shareholders in
deciding whether to make the election. A shareholder's ability to claim
such a foreign tax credit will be subject to certain limitations imposed by
the Code, as a result of which a shareholder may not get a full credit for
the amount of foreign taxes so paid by a 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 a fund is liable for any PFIC-related
taxes.
MANAGEMENT OF THE COLONIAL FUNDS
Colonial, in its capacity as the investment adviser to each of the Colonial
funds (except for Colonial Municipal Money Market Fund, Colonial Global
Utilities Fund, a series of Colonial Trust III and Colonial Newport Tiger
Fund, a series of Colonial Trust VII), is a subsidiary of The Colonial
Group, Inc. (TCG), One Financial Center, Boston, MA 02111. TCG is a
subsidiary of Liberty Financial Companies, Inc. (Liberty Financial), which
in turn is a majority owned subsidiary of Liberty Mutual Equity
Corporation, which in turn is a wholly-owned subsidiary of Liberty Mutual
Insurance Company (Liberty Mutual). Liberty Mutual is an underwriter of
worker's compensation insurance and a property and casualty insurer in the
U.S. Liberty Financial's address is 600 Atlantic Avenue, Boston, MA 02210.
Liberty Mutual's address is 175 Berkeley Street, Boston, MA 02117.
Trustees and Officers (this section applies to all of the Colonial funds)
Robert J. Birnbaum(Age 68), Trustee of all Colonial funds since April,
1995, is a Trustee of certain charitable and non-charitable organizations
since December, 1993 (formerly Special Counsel, Dechert Price & Rhoads from
September, 1988 to December, 1993; President and Chief Operating Officer,
New York Stock Exchange, Inc. from May, 1985 to June, 1988), 313 Bedford
Road, Ridgewood, NJ 07450
Tom Bleasdale (Age 65), Trustee of all Colonial funds since November, 1987,
is a Trustee of certain charitable and non-charitable organizations since
1993 (formerly Chairman of the Board and Chief Executive Officer, Shore
Bank & Trust Company from 1992-1993), 1508 Ferncroft Tower, Danvers, MA
01923
Lora S. Collins (Age 59), Trustee of all Colonial funds since August, 1980,
is an Attorney with Kramer, Levin, Naftalis, Nessen, Kamin & Frankel since
September, 1986, 919 Third Avenue, New York, NY 10022
James E. Grinnell(Age 66), Trustee of all Colonial funds since April, 1995,
is a Private Investor since November, 1988 (formerly Senior Vice President-
Operations, The Rockport Company from May, 1986 to November, 1988), 22
Harbor Avenue, Marblehead, MA 01945
William D. Ireland, Jr. (Age 71), Trustee of all Colonial funds since
November, 1969, is a Trustee of certain charitable and non-charitable
organizations since February, 1990 (formerly Chairman of the Board, Bank of
New England, - Worcester from August, 1987 to February, 1990), 103
Springline Drive, Vero Beach, FL 32963
Richard W. Lowry(Age 59), Trustee of all Colonial funds since April, 1995,
is a Private Investor since August, 1987 (formerly Chairman and Chief
Executive Officer, U.S. Plywood Corporation from 1985 to August, 1987),
10701 Charleston Drive, VeroBeach, FL 32963
William E. Mayer (Age 55), Trustee of all Colonial funds since February,
1994, is Dean, College of Business and Management, University of Maryland
since October, 1992 (formerly Dean, Simon Graduate School of Business,
University of Rochester from October, 1991 to July, 1992; Chairman and
Chief Executive Officer, C.S. First Boston Merchant Bank from January, 1990
to January, 1991; and President and Chief Executive Officer, The First
Boston Corporation from September, 1988 to January, 1990), College Park, MD
20742
John A. McNeice, Jr.(*)(Age 63), Trustee and President of all Colonial
funds since February, 1975, is Chairman of the Board and Director, TCG
since November, 1984 and Colonial since November, 1983, Director, Liberty
Financial since March, 1995 (formerly Chief Executive Officer, Colonial
and TCG from November, 1983 to March, 1995)
James L. Moody, Jr. (Age 63), Trustee of all Colonial funds since May,
1986, is Chairman of the Board, Hannaford Bros., Co. since May, 1984
(formerly Chief Executive Officer, Hannaford Bros. Co. from May, 1984 to
May, 1992), P.O. Box 1000, Portland, ME 04104
John J. Neuhauser (Age 51), Trustee of all Colonial funds since January,
1984, is Dean, Boston College School of Management since 1978, 140
Commonwealth Avenue, Chestnut Hill, MA 02167
George L. Shinn (Age 72), Trustee of all Colonial funds since May, 1984, is
a Financial Consultant since 1989 (formerly Chairman, Chief Executive
Officer and Consultant, The First Boston Corporation from 1983 to July,
1991), The First Boston Corporation, Tower Forty Nine, 12 East 49th
Street, New York, NY 10017
Robert L. Sullivan (Age 67), Trustee of all Colonial funds since September,
1987, is a self-employed Management Consultant since January, 1989
(formerly Management Consultant, Saatchi and Saatchi Consulting Ltd. from
December, 1987 to January, 1989 and formerly Principal and International
Practice Director, Management Consulting, Peat Marwick Main & Co. over five
years), 7121 Natelli Woods Lane, Bethesda, MD 20817
Sinclair Weeks, Jr. (Age 72), Trustee of all Colonial funds since October,
1968, is Chairman of the Board, Reed & Barton Corporation since 1987, Bay
Colony Corporate Center, Suite 4550, 1000 Winter Street, Waltham, MA 02154
Harold W. Cogger (Age 59), Vice President since July, 1993, is President
since July, 1993, Chief Executive Officer since March, 1995 and Director
since March, 1984, Colonial (formerly Executive Vice President; Colonial
from October, 1989 to July, 1993); President since October, 1994, Chief
Executive Officer since March, 1995 and Director, TCG; Executive Vice
President and Director, Liberty Financial since March, 1995
Peter L. Lydecker (Age 41), Controller since June, 1993 (formerly Assistant
Controller from March, 1985 to June, 1993), is Vice President, Colonial
since June, 1993 (formerly Assistant Vice President, Colonial from August,
1988 to June, 1993)
Davey S. Scoon (Age 48), Vice President since June, 1993, is Executive Vice
President since July, 1993 and Director since March, 1985, Colonial
(formerly Senior Vice President and Treasurer from March, 1985 to July,
1993, Colonial); Executive Vice President and Chief Operating Officer, TCG
since March, 1995 (formerly Vice President - Finance and Administration,
TCG from November, 1985 to March, 1995)
Richard A. Silver (Age 48), Treasurer and Chief Financial Officer since
July, 1993 (formerly Controller from July, 1980 to June, 1993), is Senior
Vice President and Director since April, 1988, Treasurer and Chief
Financial Officer since July, 1993, Colonial; Treasurer and Chief Financial
Officer, TCG since July, 1993 (formerly Assistant Treasurer, TCG from
January, 1985 to July, 1993)
Arthur O. Stern (Age 56),Secretary since 1985, is Director since 1985,
Executive Vice President since July, 1993, General Counsel, Clerk and
Secretary since March, 1985, Colonial; Executive Vice President, Legal and
Compliance since March, 1995 and Clerk since March, 1985, TCG (formerly
Vice President - Legal, TCG from March, 1985 to March, 1995)
* Trustees who are "interested persons" (as defined in the
1940 Act) of a fund or Colonial.
The address of the officers of the funds is One Financial Center, Boston,
MA 02111.
The Trustees serve as trustees of all Colonial funds for which each Trustee
(except Mr. McNeice) will receive an annual retainer of $45,000 and
attendance fees of $7,500 for each regular joint meeting and $1,000 for
each special joint meeting. Committee chairs receive an annual retainer of
$5,000. Committee members receive an annual retainer of $1,000 and $1,000
for each special meeting attended. Two-thirds of the Trustee fees are
allocated among the Colonial funds based on a funds' relative net assets
and one-third of the fees are divided equally among the Colonial funds.
Colonial or its affiliate, Colonial Advisory Services, Inc. (CASI), has
rendered investment advisory services to investment company, institutional
and other clients since 1931. Colonial currently serves as investment
adviser for 30 open-end and 5 closed-end management investment company
portfolios and is the administrator for 3 open-end management investment
company portfolios(collectively, Colonial funds). Trustees and officers of
the Trust who are also officers of Colonial or its affiliates will benefit
from the advisory fees, sales commissions and agency fees paid or allowed
by the Trust. More than 30,000 financial advisers have recommended
Colonial funds to over 800,000 clients worldwide, representing more than
$15.5 billion in assets.
The Agreement and Declaration of Trust (Declaration) of the Trust provides
that the Trust will indemnify its Trustees and officers against liabilities
and expenses incurred in connection with litigation in which they may be
involved because of their offices with the Trust but that such
indemnification will not relieve any officer or Trustee of any liability to
the Trust or its shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of his or her duties. The Trust, at
its expense, provides liability insurance for the benefit of its Trustees
and officers.
The Management Agreement (this section does not apply to the Colonial
Municipal Money Market Fund, Colonial Global Utilities Fund or Colonial
Newport Tiger Fund)
Under a Management Agreement (Agreement), Colonial has contracted to
furnish a fund with investment research and recommendations or fund
management, respectively, and accounting, and administrative personnel and
services, and with office space, equipment and other facilities. For these
services and facilities, a fund pays a monthly fee based on the average of
the daily closing value of the total net assets of a fund for such month.
Colonial's compensation under the Agreement is subject to reduction in any
fiscal year to the extent that the total expenses of a 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 a fund is 2.5% of the first $30 million of
the Trust's average net assets for such year, 2% of the next $70 million
and 1.5% of any excess over $100 million.
Under the Agreement, any liability of Colonial to a fund and its
shareholders is limited to situations involving Colonial's own willful
misfeasance, bad faith, gross negligence or reckless disregard of duties.
The Agreement may be terminated with respect to a fund at any time on 60
days' written notice by Colonial or by the Trustees of the Trust or by a
vote of a majority of the outstanding voting securities of a fund. The
Agreement will automatically terminate upon any assignment thereof and
shall continue in effect from year to year only so long as such continuance
is approved at least annually (i) by the Trustees of the Trust or by a vote
of a majority of the outstanding voting securities of a fund and (ii) by
vote of a majority of the Trustees who are not interested persons (as such
term is defined in the 1940 Act) of Colonial or the Trust, cast in person
at a meeting called for the purpose of voting on such approval.
Colonial pays all salaries of officers of the Trust. The Trust pays all
expenses not assumed by Colonial including, but not limited to, auditing,
legal, custodial, investor servicing and shareholder reporting expenses.
The Trust pays the cost of typesetting for its Prospectuses and the cost of
printing and mailing any Prospectuses sent to shareholders. CISI pays the
cost of printing and distributing all other Prospectuses.
The Agreement provides that Colonial shall not be subject to any liability
to the Trust or to any shareholder of the Trust for any act or omission in
the course of or connected with rendering services to the Trust in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties on the part of Colonial.
Administration Agreement (this section applies only to the Colonial
Municipal Money Market Fund, Colonial Global Utilities Fund and Colonial
Newport Tiger Fund)
Under an Administration Agreement, Colonial, in its capacity as the
Administrator of the Colonial Municipal Money Market Fund, Colonial Global
Utilities Fund and Colonial Newport Tiger Fund, has contracted to perform
the following administrative services:
(a) providing office space, equipment and clerical personnel;
(b) arranging, if desired by the Trust, for its Directors, officers
and employees to serve as Trustees, officers or agents of the Fund;
(c) preparing and, if applicable, filing all documents required for
compliance by the Fund with applicable laws and regulations;
(d) preparation of agendas and supporting documents for and minutes
of meetings of Trustees, committees of Trustees and shareholders;
(e) monitoring compliance by the Fund with Rule 2a-7 under the
Investment Company Act of 1940 (the "1940 Act")
and reporting to the Trustees from time to time with respect thereto;
(f) monitoring the investments and operations of the Portfolio and
reporting to the Trustees from time to time with respect thereto;
(g) coordinating and overseeing the activities of the Fund's other
third-party service providers; and
(h) maintaining certain books and records of the Fund.
The Pricing and Bookkeeping Agreement
Colonial provides pricing and bookkeeping services to the Fund pursuant to
a Pricing and Bookkeeping Agreement. The Pricing and Bookkeeping Agreement
has a one-year term. Colonial, in its capacity as the Administrator of
each of the Fund and the Colonial Global Utilities Fund, is paid an annual
fee of $18,000, plus 0.0233% of average daily net assets in excess of $50
million. For each of the other Colonial funds (except for Colonial Newport
Tiger Fund ), Colonial is paid monthly a fee of $2,250 by each fund, plus a
monthly percentage fee based on net assets of the Fund equal to the
following:
1/12 of 0.000% of the first $50 million;
1/12 of 0.035% of the next $950 million;
1/12 of 0.025% of the next $1 billion;
1/12 of 0.015% of the next $1 billion; and
1/12 of 0.001% on the excess over $3 billion
Colonial provides pricing and bookkeeping services to Colonial Newport
Tiger Fund for an annual fee of $27,000, plus 0.035% of Colonial Newport
Tiger Fund's average net assets over $50 million.
The Adviser of the Portfolio provides pricing and bookkeeping services to
the Portfolio for a fee of $25,000 plus 0.0025% annually of average daily
net assets of the Portfolio over $50 million.
Portfolio Transactions
The following sections entitled "Investment Decisions" and Brokerage and
research services" do not apply to the Colonial Municipal Money Market Fund
or Colonial Global Utilities Fund. For the Colonial Municipal Money Market
Fund, see ""Portfolio Transactions" under "Other Information Concerning the
Portfolio" in Part 1 of the SAI for information relating to the Portfolio.
For Colonial Global Utilities Fund, see Part I of its SAI.
Investment decisions. Colonial acts as investment adviser to each of the
Colonial funds (except for the Colonial Municipal Money Market Fund,
Colonial Global Utilities Fund and Colonial Newport Tiger Fund) (as defined
under Management of the Fund herein) and its affiliate, CASI, advises other
institutional, corporate, fiduciary and individual clients for which CASI
performs various services. Various officers and Trustees of the Trust also
serve as officers or Trustees of other Colonial funds and the other
corporate or fiduciary clients of Colonial. The other funds and clients
advised by Colonial sometimes invest in securities in which the Fund also
invests and sometimes engage in covered option writing programs and enter
into transactions utilizing stock index options and stock index and
financial futures and related options ("other instruments"). If the Fund,
such other funds and such other clients desire to buy or sell the same
portfolio securities, options or other instruments at about the same time,
the purchases and sales are normally made as nearly as practicable on a pro
rata basis in proportion to the amounts desired to be purchased or sold by
each. Although in some cases these practices could have a detrimental
effect on the price or volume of the securities, options or other
instruments as far as the Fund is concerned, in most cases it is believed
that these practices should produce better executions. It is the opinion
of the Trustees that the desirability of retaining Colonial as investment
adviser to a fund outweighs the disadvantages, if any, which might result
from these practices.
Brokerage and research services. Consistent with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., and
subject to seeking "best execution" (as defined below) and such other
policies as the Trustees may determine, Colonial may consider sales of
shares of a fund and of the other Colonial funds as a factor in the
selection of broker-dealers to execute securities transactions for a fund.
Colonial places the transactions of the funds with broker-dealers selected
by Colonial and, if applicable, negotiates commissions. Broker-dealers may
receive brokerage commissions on portfolio transactions, including the
purchase and writing of options, the effecting of closing purchase and sale
transactions, and the purchase and sale of underlying securities upon the
exercise of options and the purchase or sale of other instruments. The
Colonial funds from time to time also execute portfolio transactions with
such broker-dealers acting as principals. The Colonial fund 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 Colonial's policy always to seek best
execution, which is to place the Colonial fund's transactions where the
Colonial funds can obtain the most favorable combination of price and
execution services in particular transactions or provided on a continuing
basis by a broker-dealer, and to deal directly with a principal market
maker in connection with over-the-counter transactions, except when it is
believed that best execution is obtainable elsewhere. In evaluating the
execution services of, including the overall reasonableness of brokerage
commissions paid to, a broker-dealer, consideration is given to, among
other things, the firm's general execution and operational capabilities,
and to its reliability, integrity and financial condition.
Subject to such practice of always seeking best execution, securities
transactions of the Colonial funds may be executed by broker-dealers who
also provide research services (as defined below) to Colonial, the Fund and
the other Colonial funds. Colonial may use all, some or none of such
research services in providing investment advisory services to each of its
investment company and other clients, including a fund. To the extent that
such services are used by Colonial, they tend to reduce Colonial's
expenses. In Colonial's opinion, it is impossible to assign an exact
dollar value for such services.
Subject to such policies as the Trustees may determine, Colonial may cause
the Colonial funds to pay a broker-dealer which provides brokerage and
research services to Colonial an amount of commission for effecting a
securities transaction, including the sale of an option or a closing
purchase transaction, for the Colonial funds in excess of the amount of
commission which another broker-dealer would have charged for effecting
that transaction. As provided in Section 28(e) of the Securities Exchange
Act of 1934, "brokerage and research services" include advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities and the availability of securities or purchasers or
sellers of securities; furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends and portfolio strategy
and performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement).
Colonial must determine in good faith that such greater commission is
reasonable in relation to the value of the brokerage and research services
provided by the executing broker-dealer viewed in terms of that particular
transaction or Colonial's overall responsibilities to the Colonial funds
and all its other clients.
The Trustees have authorized Colonial to utilize the services of a clearing
agent with respect to all call options written by Colonial Funds that write
options and to pay such clearing agent commissions of a fixed amount per
share (currently 1.25 cents) on the sale of the underlying security upon
the exercise of an option written by a Fund. The Trustees may further
authorize Colonial to depart from the present policy of always seeking best
execution and to pay higher brokerage commissions from time to time for
other brokerage and research services as described above in the future if
developments in the securities markets indicate that such would be in the
interests of the shareholders of the Colonial funds.
Principal Underwriter
CISI is the principal underwriter of the Trust's shares. CISI has no
obligation to buy the Colonial funds' shares, and purchases the Colonial
funds' shares, only upon receipt of orders from authorized FSFs or
investors.
Investor Servicing and Transfer Agent
CISC is the Trust's investor servicing agent (transfer, plan and dividend
disbursing agent), for which it receives fees which are paid monthly by the
Trust. The fee paid to CISC is based on the average daily net assets of
the Fund and each Colonial fund. See "Fund Charges and Expenses" in Part 1
of this SAI for information on fees received by CISC. The agreement
continues indefinitely but may be terminated by 90 days' notice by the Fund
or Colonial funds to CISC or generally by 6 months' notice by CISC to the
Fund or Colonial funds. The agreement limits the liability of CISC to the
Fund or Colonial funds for loss or damage incurred by the Fund or Colonial
funds 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 or Colonial funds 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 or Colonial funds determine net asset value (NAV) per share for
each Class as of the close of the New York Stock Exchange (, generally 4:00
p.m. Eastern time, 3:00 p.m. Chicago time) each day the Exchange is open.
Currently, the Exchange is closed Saturdays, Sundays and the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, the
Fourth of July, Labor Day, Thanksgiving and Christmas. The net asset value
of the Portfolio (in which the Colonial Municipal Money Market Fund is
invested) will not be determined on days when the Exchange is closed
unless, in the judgment of the Portfolio's Board of Trustees, the net asset
value of the Portfolio should be determined on any such day, in which case
the determination will be made at 3:00 p.m., Chicago time. Debt securities
generally are valued by a pricing service which determines valuations based
upon market transactions for normal, institutional-size trading units of
similar securities. However, in circumstances where such prices are not
available or where Colonial (or if different, your fund's adviser) deems it
appropriate to do so, an over-the-counter or exchange bid quotation is
used. Securities listed on an exchange or on NASDAQ are valued at the last
sale price. Listed securities for which there were no sales during the day
and unlisted securities are valued at the last quoted bid price. Options
are valued at the last sale price or in the absence of a sale, the mean
between the last quoted bid and offering prices. Short-term obligations
with a maturity of 60 days or less are valued at amortized cost pursuant to
procedures adopted by the Trustees. The values of foreign securities
quoted in foreign currencies are translated into U.S. dollars at the
exchange rate for that day. Portfolio positions for which there are no
such valuations and other assets are valued at fair value as determined in
good faith under the direction of the Trust's Trustees.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. 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 Trust's Trustees.
Amortized Cost for Money Market Funds (this section does not apply to
Colonial Municipal Money Market Fund - see "Amortized Cost for Money Market
Funds" under "Other Information Concerning the Portfolio" in Part 1 of the
SAI for information relating to the Portfolio of the Colonial Municipal
Money Market Fund)
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 Trust's
Trustees have adopted procedures intended to stabilize a fund's NAV per
share at $1.00. When a fund's market value deviates from the amortized
cost of $1.00, and results in a material dilution to existing shareholders,
the Trust's Trustees will take corrective action 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 Trust's 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 prior to the time shares are valued and transmits it to the Fund
before the Fund processes that day's transactions. If the FSF fails to
transmit before the Fund processes that day's transactions, the customer's
entitlement to that day's closing price must be settled between the
customer and the FSF. If the FSF receives the order after the time shares
are valued, 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).
Further information and application forms are available from FSFs or from
CISI.
Class A Shares
Most Funds continuously offer Class A shares. A fund receives the entire
NAV of shares sold. CISI's commission is the sales charge shown in the
Prospectus less any applicable FSF discount. The FSF discount is the same
for all FSFs, except that CISI retains the entire sales charge on any sales
made to a shareholder who does not specify an FSF on the investment account
application and retains the entire contingent deferred sales charge (CDSC).
CISI offers several plans by which an investor may obtain reduced sales
charges on purchases of a fund's Class A shares. These plans may be
altered or discontinued at any time.
Right of Accumulation and Statement of Intent (Class A Shares only)
Reduced sales charges on Class A shares can be effected by combining a
current purchase with prior purchases of Class A, B or D 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
and D 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
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 and D
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 shares actually
purchased. Dividends and capital gains will be paid on all escrowed shares
and these shares will be released when the amount indicated has been
purchased. A Statement does not obligate the investor to buy or a Fund to
sell the amount of the Statement.
If a shareholder exceeds the amount of the Statement and reaches an amount
which would qualify for a further quantity discount, a retroactive price
adjustment will be made at the time of expiration of the Statement. The
resulting difference in offering price will purchase additional shares for
the shareholder's account at the applicable offering price. As a part of
this adjustment, the FSF shall return to CISI the excess commission
previously paid during the thirteen-month period.
If the amount of the Statement is not purchased, the shareholder shall
remit to CISI an amount equal to the difference between the sales charge
paid and the sales charge that should have been paid. If the shareholder
fails within twenty days after a written request to pay such difference in
sales charge, CISC will redeem that number of escrowed Class A shares to
equal such difference. The additional amount of FSF discount from the
applicable offering price shall be remitted to the shareholder's FSF of
record.
Additional information about and the terms of Statements of Intent are
available from your FSF, or from CISC at 1-800- 345-6611.
Class B Shares
For those funds offering Class B shares, the Prospectus contains a general
description of how investors may buy Class B shares of a the fund and a
description of the CDSC. This SAI contains additional information which
may be of interest to investors.
Most funds continuously offer Class B shares. A fund receives the entire
NAV of shares sold. The FSF commission is the same for all FSFs; CISI
retains the entire CDSC.
Colonial's money market funds' Class B shares are subject to higher charges
than those normally associated with money market funds, and checkwriting
privileges are not offered.
Class C Shares
For those funds offering Class C shares, the Prospectus contains a general
description of how investors may buy Class C shares of the fund. This SAI
contains additional information which may be of interest to investors.
Class C shares are offered continuously. A fund receives the entire NAV of
shares sold.
Class D Shares
For those funds offering Class D Shares, the Prospectus contains a general
description of how investors may buy Class D shares of the fund and a
description of the CDSC. This SAI contains additional information which
may be of interest to investors.
A fund receives the entire NAV of shares sold. The FSF commission is the
same for all FSFs; CISI retains the entire CDSC.
Waiver of Contingent Deferred Sales Charges (CDSCs) (Classes A, B 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. If the account
is transferred to a new registration and then a redemption is
requested, the applicable CDSC will be charged.
2. Systematic Withdrawal Plan (SWP). CDSCs may be waived on
redemptions occurring pursuant to a monthly, quarterly or semi-
annual SWP established with Colonial, to the extent the
redemptions do not exceed, on an annual basis, 12% of the
account's value, so long as at the time of the first SWP
redemption the account had had distributions reinvested for a
period at least equal to the period of the SWP (e.g., if it is
a quarterly SWP, distributions must have been reinvested at
least for the three month period prior to the first SWP
redemption; otherwise CDSCs will be charged on SWP redemptions
until this requirement is met; this requirement does not apply
if the SWP is set-up at the time the account is established,
and distributions are being reinvested).
3. Disability. CDSCs may be waived on redemptions occurring
within one year after the sole shareholder on an individual
account or a joint tenant on a spousal joint tenant account
becomes disabled (as defined in Section 72(m)(7) of the
Internal Revenue Code). To be eligible for such waiver, (i)
the disability must arise after the purchase of shares and
(ii) the disabled shareholder must have been under age 65 at
the time of the initial determination of disability. If the
account is transferred to a new registration and then a
redemption is requested, the applicable CDSC will be charged.
4. Death of a trustee. CDSCs may be waived on redemptions
occurring upon dissolution of a revocable living or grantor
trust following the death of the sole trustee where (i) the
grantor of the trust is the sole trustee and the current
beneficiary, (ii) death occurs following the purchase and
(iii) the trust document provides for dissolution of the trust
upon the trustee's death. If the account is transferred to a
new registration (including that of a successor trustee), the
applicable CDSC will be charged upon any subsequent
redemption.
5. Returns of excess contributions. CDSCs may be waived on
redemptions required to return excess contributions made to
retirement plans or individual retirement accounts, so long as
the FSF agrees to return the applicable portion of any
commission paid by Colonial.
6. Qualified Retirement Plans. CDSCs may be waived on
redemptions required to make distributions from qualified
retirement plans following (i) normal retirement (as stated in
the Plan document) or (ii) separation from service. CDSCs
also will be waived on SWP redemptions made to make required
minimum distributions from qualified retirement plans that
have invested in Colonial funds for at least two years.
Fundamatic Check Program
As a convenience to investors, shares of most Colonial funds may be
purchased through the Colonial Fundamatic Check Program. Preauthorized
monthly bank drafts or electronic funds transfer for a fixed amount of at
least $50 are used to purchase Fund shares at the public offering price
next determined after CISI receives the proceeds from the draft (normally
the 5th or the 20th of each month, or the next business day thereafter).
Further information and application forms are available from FSFs or from
CISI.
Automated Dollar Cost Averaging (Classes A, B and D)
Colonial's Automated Dollar Cost Averaging Program allows you to exchange
on a monthly basis from any Colonial fund in which you have a current
balance of at least $5,000 into the same class of shares of up to four
other Colonial funds. Complete the Automated Dollar Cost Averaging section
of the application agreeing to a monthly exchange of $100 or more to the
same class of shares of the Colonial fund you designate on your written
application. The designated amount will be exchanged on the third Tuesday
of each month. There is no charge for the exchanges made pursuant to the
Automated Dollar Cost Averaging program. Exchanges will continue so long
as your Colonial fund balance is sufficient to complete the transfers.
Your normal rights and privileges as a shareholder remain in full force and
effect. Thus you can: buy any funds, exchange between the same Class of
shares of funds by written instruction or by telephone exchange if you have
so elected and withdraw amounts from any fund, subject to the imposition of
any applicable CDSC.
Any additional payments or exchanges into your fund will extend the time of
the Automated Dollar Cost Averaging program.
An exchange is a taxable capital transaction for federal tax purposes.
You may terminate your program, change the amount of the exchange (subject
to the $100 minimum), or change your selection of funds, by telephone or in
writing; if in writing by mailing it to Colonial Investors Service Center,
Inc. P.O. Box 1722, Boston, MA 02105-1722.
You should consult your FSF or investment adviser to determine whether or
not the Automated Dollar Cost Averaging program is appropriate for you.
Colonial Asset Builder Investment Program (this section currently applies
only to Colonial Growth Shares Fund and The Colonial Fund, each a series of
Colonial Trust III) (Class A only)
A reduced sales charge applies to a purchase of certain Colonial funds'
Class A shares under a statement of intent for the Colonial Asset Builder
Investment Program. The Program offer may be withdrawn at any time without
notice. A completed Program may serve as the initial investment for a new
Program, subject to the maximum of $4,000 in initial investments per
investor. CISC will escrow shares to secure payment of the additional
sales charge on amounts invested if the Program is not completed. Escrowed
shares are credited with distributions and will be released when the
Program has ended. Prior to completion of the Program, only scheduled
Program investments may be made in a Colonial fund in which an investor has
a Program account. The following services are not available to Program
accounts until a Program has ended:
Systematic Withdrawal Telephone Redemption Statement of Intent
Plan
Sponsored Arrangements Colonial Cash Connection Share Certificates
$50,000 Fast Cash Reduced Sales Charges Automatic Dividend
Diversification
Right of Accumulation for any "person" Exchange Privilege
*Exchanges may be made to other Colonial funds offering the Program.
Because of the unavailability of certain services, the Program may not be
suitable for all investors.
The FSF receives 3% of the investor's intended purchases under a Program at
the time of initial investment and 1% after the 24th monthly payment. CISI
may require the FSF to return all applicable commissions paid with respect
to a Program terminated within six months of inception, and thereafter to
return commissions in excess of the FSF discount applicable to shares
actually purchased.
Since the Asset Builder plan involves continuous investment regardless of
the fluctuating prices of funds shares, investors should consult their FSF
to determine whether it is appropriate. The Plan does not assure a profit
nor protects against loss in declining markets.
Tax-Sheltered Retirement Plans (Classes A, B and D)
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 these 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 only)
Shares of certain funds may be sold at NAV to the following current and
retired individuals: Trustees of funds advised or administrated by
Colonial; directors, officers and employees of Colonial, CISI and other
companies affiliated with Colonial; registered representatives and
employees of FSFs (including their affiliates) that are parties to dealer
agreements or other sales arrangements with CISI; and such persons'
families and their beneficial accounts.
Class A 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 a 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 Colonial funds reserve the right to revise the terms of
or to suspend or discontinue sales pursuant to sponsored plans at any time.
Class A shares of certain funds may also be purchased at reduced or no
sales charge by clients of dealers, brokers or registered investment
advisers that have entered into agreements with CISI pursuant to which the
Colonial funds are included as investment options in programs involving fee-
based compensation arrangements. Class A shares of certain funds may also
be purchased at reduced or no sales charge by investors moving from another
mutual fund complex and by participants in certain retirement plans. In
lieu of the commissions described in the Prospectus, Colonial will pay the
FSF a finder's fee of 0.25% of the applicable account value during the
first twelve months in connection with such purchases.
Consultation with a competent financial and tax adviser regarding these
Plans and consideration of the suitability of fund shares as an investment
under the Employee Retirement Income Security Act of 1974 or otherwise is
recommended.
INVESTOR SERVICES
Your Open Account
The following information provides more detail concerning the operation of
a Colonial Open Account (an account with book entry shares only). For
further information or assistance, investors should consult CISC.
The Open Account permits a shareholder to reinvest all or a portion of a
recent cash distribution without a sales charge. A shareholder request
must be received within 30 calendar days of the distribution. A
shareholder may exercise this privilege only once. No charge is currently
made for reinvestment.
The $10 fee on small accounts is paid to CISC.
If a shareholder changes his or her address and does not notify the Fund,
the Fund will reinvest all future distributions regardless of the option
chosen.
The Open Account also provides a way to accumulate shares of the Fund.
Checks presented for the purchase of shares of the Fund which are returned
by the purchaser's bank, or checkwriting privilege checks for which there
are insufficient funds in a shareholder's account to cover redemption, will
subject such purchaser or shareholder to a $15 service fee for each check
returned. Checks must be drawn on a U.S. bank and must be payable in U.S.
dollars.
CISC acts as the shareholder's agent whenever it receives instructions to
carry out a transaction on the shareholder's account. Upon receipt of
instructions that shares are to be purchased for a shareholder's account,
the designated FSF will receive the applicable sales commission.
Shareholders may change FSFs at any time by written notice to CISC,
provided the new FSF has a sales agreement with CISI.
Shares credited to an account are transferable upon written instructions in
good order to CISC and may be redeemed as described under "How to sell
shares" in the Prospectus. Certificates will not be issued for Class A
shares unless specifically requested and no certificates will be issued for
Class B, C or D shares. Money market funds will not issue certificates. A
shareholder may send any certificates which have been previously acquired
to CISC for deposit to their account.
Shares of funds that pay daily dividends will normally earn dividends
starting with the date the Fund receives payment for the shares and will
continue through the day before the shares are redeemed, transferred or
exchanged.
Undelivered distribution checks returned by the post office will be
invested in your account.
Reinstatement Privilege
An investor who has redeemed Class A, B, or D shares may, upon request,
reinstate within one year a portion or all of the proceeds of such sale in
shares of the same Class of any Colonial fund at the NAV next determined
after CISC receives a written reinstatement request and payment. Any CDSC
paid at the time of the redemption will be credited to the shareholder upon
reinstatement. The period between the redemption and the reinstatement
will not be counted in aging the reinstated shares for purposes of
calculating any CDSC or conversion date. Investors who desire to exercise
this Privilege should contact their FSF or CISC. Shareholders may exercise
this Privilege an unlimited number of times. Exercise of this Privilege
does not alter the Federal income tax treatment of any capital gains
realized on the prior sale of Fund shares, but to the extent any such
shares were sold at a loss, some or all of the loss may be disallowed for
tax purposes. Consult your tax adviser.
Exchange Privilege
Shares of the Fund may be exchanged for the same class of shares of the
other continuously offered Colonial funds (with certain exceptions) on the
basis of the NAVs per share at the time of exchange. The prospectus of
each fund describes its investment objective and policies, and shareholders
should obtain a prospectus and consider these objectives and policies
carefully before requesting an exchange. Shares of certain Colonial funds
are not available to residents of all states. Consult CISC before
requesting an exchange.
By calling CISC, shareholders or their FSF of record may exchange among
accounts with identical registrations, provided that the shares are held on
deposit. During periods of unusual market changes and shareholder
activity, shareholders may experience delays in contacting CISC by
telephone to exercise the Telephone Exchange Privilege. Because an
exchange involves a redemption and reinvestment in another Colonial fund,
completion of an exchange may be delayed under unusual circumstances, such
as if the fund suspends repurchases or postpones payment for the fund
shares being exchanged in accordance with federal securities law. CISC
will also make exchanges upon receipt of a written exchange request and,
share certificates, if any. If the shareholder is a corporation,
partnership, agent, or surviving joint owner, CISC will require customary
additional documentation. Prospectuses of the other Colonial funds are
available from the Colonial Literature Department by calling 1-800-248-
2828.
A loss to a shareholder may result from an unauthorized transaction
reasonably believed to have been authorized. No shareholder is obligated
to use the telephone to execute transactions.
You need to hold your Class A shares for five months before exchanging to
certain funds having a higher maximum sales charge. Consult your FSF or
CISC. In all cases, the shares to be exchanged must be registered on the
records of the Fund in the name of the shareholder desiring to exchange.
Shareholders of the other Colonial open-end funds generally may exchange
their shares at NAV for the same class of shares of the Fund.
An exchange is a capital sale transaction for federal income tax purposes.
The Exchange Privilege may be revised, suspended or terminated at any time.
Telephone Address Change Services
By calling CISC, shareholders or their FSF of record may change an address
on a recorded telephone line. Confirmations of address change will be sent
to both the old and the new addresses. The $50,000 Fast Cash privilege is
suspended for 60 days after an address change is effected.
Plans Available To Shareholders
The Plans described below are offered by most Colonial funds, are voluntary
and may be terminated at any time without the imposition by the Fund or
CISC of any penalty.
Checkwriting (Available only on the Class A and C shares of certain Funds)
Shares may be redeemed by check if a shareholder completed an Investment
Account Application and Signature Card. Colonial will provide checks to be
drawn on The First National Bank of Boston (the "Bank"). These checks may
be made payable to the order of any person in the amount of not less than
$500 nor more than $100,000. The shareholder will continue to earn
dividends on shares until a check is presented to the Bank for payment. At
such time a sufficient number of full and fractional shares will be
redeemed at the next determined net asset value to cover the amount of the
check. Certificate shares may not be redeemed in this manner.
Shareholders utilizing checkwriting drafts will be subject to the Bank's
rules governing checking accounts. There is currently no charge to the
shareholder for the use of checks. The shareholder should make sure that
there are sufficient shares in his or her Open Account to cover the amount
of any check drawn since the net asset value of shares will fluctuate. If
insufficient shares are in the shareholder's Open Account, the check will
be returned marked "insufficient funds" and no shares will be redeemed. It
is not possible to determine in advance the total value of an Open Account
because prior redemptions and possible changes in net asset value may cause
the value of an Open Account to change. Accordingly, a check redemption
should not be used to close an Open Account.
Systematic Withdrawal Plan
If a shareholder's Account Balance is at least $5,000, the shareholder may
establish a Systematic Withdrawal Plan (SWP). A specified dollar amount or
percentage of the then current net asset value of the shareholder's
investment in any Colonial fund designated by the shareholder 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. No CDSCs apply to a redemption pursuant to a SWP of
12% or less, even if, after giving effect to the redemption, the
shareholder's account balance is less than the shareholder's base amount.
Qualified plan participants who are required by Internal Revenue Code
regulation to withdraw more than 12%, on an annual basis, of the value of
their Class B and Class D share account may do so but will be subject to a
CDSC ranging from 1.00% to 5% of the amount withdrawn. If a shareholder
wishes to participate in a SWP, the shareholder must elect to have all of
the shareholder's income dividends and other Fund distributions payable in
shares of the Fund rather than in cash.
A shareholder or a shareholder's FSF of record may establish a SWP account
by telephone on a recorded line. However, SWP checks will be payable only
to the shareholder and sent to the address of record. SWPs from retirement
accounts cannot be established by telephone.
A shareholder may not establish a SWP if the shareholder holds shares in
certificate form. Purchasing additional shares (other than through
dividend and distribution reinvestment) while receiving SWP payments is
ordinarily disadvantageous because of duplicative sales charges. For this
reason, a shareholder may not maintain a plan for the accumulation of
shares of a Fund (other than through the reinvestment of dividends) and a
SWP at the same time.
SWP payments are made through share redemptions, which may result in a gain
or loss for tax purposes, may involve the use of principal and may
eventually use up all of the shares in a shareholder's open account.
The Funds may terminate a shareholder's SWP if the shareholder's Account
Balance falls below $5,000 due to any transfer or liquidation of shares
other than pursuant to the SWP. SWP payments will be terminated on
receiving satisfactory evidence of the death or incapacity of a
shareholder. Until this evidence is received, CISC will not be liable for
any payment made in accordance with the provisions of a SWP.
The cost of administering SWPs for the benefit of shareholders who
participate in them is borne by the Funds as an expense of all
shareholders.
Shareholders whose positions are held in "street name" by certain FSFs may
not be able to participate in a SWP. If a shareholder's Fund shares are
held in "street name", the shareholder should consult his or her FSF to
determine whether he or she may participate in a SWP.
Colonial cash connection. Dividends and any other distributions, including
SWP payments, may be automatically deposited to a shareholder's bank
account via electronic funds transfer. Shareholders wishing to avail
themselves of this electronic transfer procedure should complete the
appropriate sections of the Investment Account Application.
Automatic dividend diversification. The automatic dividend diversification
reinvestment program (ADD) generally allows shareholders to have all
distributions from a Fund automatically invested in the same class of
shares of the other Colonial funds. An ADD account must be in the same
name as the shareholder's existing Open Account with the particular fund.
Call CISC for more information at 1-800- 422-3737.
Telephone Redemptions. All shareholders and/or their financial advisers
are automatically eligible to redeem up to $50,000 of a fund's shares by
calling 1-800-422-3737 toll free any business day between 9:00 a.m. and
the close of trading of the New York Stock Exchange (normally 4:00 p.m.
Eastern time). Telephone redemption privileges for larger amounts may be
elected on the account application. CISC will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine.
Telephone redemptions are not available on accounts with an address change
in the preceding 60 days and proceeds and confirmations will only be mailed
or sent to the address of record. Shareholders and/or their financial
advisers will be required to provide their name, address and account
number. Financial advisers will also be required to provide their broker
number. All telephone transactions are recorded. A loss to a shareholder
may result from an unauthorized transaction reasonably believed to have
been authorized. No shareholder is obligated to execute the telephone
authorization form or to use the telephone to execute transactions.
Non cash Redemptions. For redemptions of any single shareholder within any
90-day period exceeding the lesser of $250,000 or 1% of the Fund's net
asset value, the Fund may make the payment or a portion of the payment with
portfolio securities held by the Fund instead of cash, in which case the
redeeming shareholder may incur brokerage and other costs in selling the
securities received.
SUSPENSION OF REDEMPTIONS
The Fund may not suspend shareholders' right of redemption or postpone
payment for more than seven days unless the New York Stock Exchange is
closed for other than customary weekends or holidays, or if permitted by
the rules of the SEC during periods when trading on the Exchange is
restricted or during any emergency which makes it impracticable for the
Fund to dispose of its securities or to determine fairly the value of its
net assets, or during any other period permitted by order of the SEC for
protection of investors.
SHAREHOLDER MEETINGS
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 a Colonial 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 (or if different, your fund's
Adviser) to be reputable, and publications in the press pertaining to a
fund's performance or to Colonial or its affiliates (or if different, your
fund's Adviser), including comparisons with competitors and matters of
national and global economic and financial interest. Examples include
Forbes, Business Week, MONEY Magazine, The Wall Street Journal, The New
York Times, The Boston Globe, Barron's National Business & Financial
Weekly, Financial Planning, Changing Times, Reuters Information Services,
Wiesenberger Mutual Funds Investment Report, Lipper Analytical Services
Corporation, Morningstar, Inc., Sylvia Porter's Personal Finance Magazine,
Money Market Directory, SEI Funds Evaluation Services, FTA World Index and
Disclosure Incorporated.
All data is based on past performance and does not predict future results.
APPENDIX I
DESCRIPTION OF BOND RATINGS
S&P
AAA The highest rating assigned by S&P indicates an extremely strong
capacity to repay principal and interest.
AA bonds also qualify as high quality. Capacity to repay principal and pay
interest is very strong, and in the majority of instances, they differ from
AAA only in small degree.
A bonds have a strong capacity to repay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB bonds are regarded as having an adequate capacity to repay principal
and interest. Whereas they normally exhibit protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to repay principal and interest than for bonds in the A
category.
BB, B, CCC, and CC bonds are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and principal in
accordance with the terms of the obligation. BB indicates the lowest
degree of speculation and CC the highest degree. While likely to have some
quality and protection characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C ratings are reserved for income bonds on which no interest is being paid.
D bonds are in default, and payment of interest and/or principal is in
arrears.
Plus(+) or minus (-) are modifiers relative to the standing within the
major rating categories.
Provisional Ratings. The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment
of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however,
although addressing credit quality subsequent to completion of the project,
makes no comments on the likelihood of, or the risk of default upon failure
of, such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
Municipal Notes:
SP-1. Notes rated SP-1 have very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming
safety characteristics are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
interest.
Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue will be rated as a note).
Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be rated as a note).
Demand Feature of Variable Rate Demand Securities:
S&P assigns dual ratings to all long-term debt issues that have as part of
their provisions a demand feature. The first rating addresses the
likelihood of repayment of principal and interest as due, and the second
rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols are usually used to denote the put (demand)
option (for example, AAA/A-1+). Normally, demand notes receive note rating
symbols combined with commercial paper symbols (for example, SP-1+/A-1+).
Commercial Paper:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designations 1, 2, and 3 to indicate the relative degree to
safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
Corporate Bonds:
The description of the applicable rating symbols and their meanings is
substantially the same as its Municipal Bond ratings set forth above.
MOODY'S
Aaa bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While various protective elements are
likely to change, such changes as can be visualized are most unlikely to
impair a fundamentally strong position of such issues.
Aa bonds are judged to be of high quality by all standards. Together with
Aaa bonds they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protective elements
may be of greater amplitude or there may be other elements present which
make the long-term risk appear somewhat larger than in Aaa securities.
Those bonds in the Aa through B groups that Moody's believes possess the
strongest investment attributes are designated by the symbol Aa1, A1 and
Baa1.
A bonds possess many of the favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa bonds are considered as medium grade, neither highly protected nor
poorly secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact, have speculative
characteristics as well.
Ba bonds are judged to have speculative elements: their future cannot be
considered as well secured. Often, the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes these bonds.
B bonds generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be small.
Caa bonds are of poor standing. They may be in default or there may be
present elements of danger with respect to principal or interest.
Ca bonds are speculative in a high degree, often in default or having other
marked shortcomings.
C bonds are the lowest rated class of bonds and can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
Conditional Ratings. Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience,
(c) rentals which being when facilities are completed, or (d) payments to
which some other limiting conditions attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or
elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa 1, A 1, Baa 1, Ba 1, and B 1.
Municipal Notes:
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
Demand Feature of Variable Rate Demand Securities:
Moody's may assign a separate rating to the demand feature of a variable
rate demand security. Such a rating may include:
VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
VMIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
Commercial Paper:
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, Moody's, in
assigning ratings to such issuers, evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments, or other entities, but only as one factor in the total
rating assessment.
Corporate Bonds:
The description of the applicable rating symbols (Aaa, Aa, A) and their
meanings is identical to that of its Municipal Bond ratings as set forth
above, except for the numerical modifiers. Moody's applies numerical
modifiers 1, 2, and 3 in the Aa and A classifications of its corporate bond
rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and the modifier 3 indicates that the issuer ranks in the
lower end of its generic rating category.
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
International EAFE Index 8.06
Morgan Stanley Capital
International EAFE GDP Index 8.21
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.
Government Funds -3.72
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
Government Index -3.37
Shearson Lehman
Government/Corporate Index -3.51
Shearson Lehman Long-term
Government Index -7.73
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
(Corporate Bond) -6.39
Swiss Bank 10 Year United Kingdom
(Corporate Bond) -5.29
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
International 10 Year Hong Kong (Equity) -28.90
Morgan Stanley Capital
International 10 Year Belgium (Equity) 9.43
Morgan Stanley Capital
International 10 Year Spain (Equity) -3.93
SOURCE CATEGORY RETURN
(%)
Morgan Stanley Capital
International 10 Year Austria (Equity) -6.05
Morgan Stanley Capital
International 10 Year France (Equity) -4.70
Morgan Stanley Capital
International 10 Year Netherlands (Equity) 12.66
Morgan Stanley Capital
International 10 Year Japan (Equity) 21.62
Morgan Stanley Capital
International 10 Year Switzerland (Equity) 4.18
Morgan Stanley Capital
International 10 Year United Kingdom -1.63
(Equity)
Morgan Stanley Capital
International 10 Year Germany (Equity) 5.11
Morgan Stanley Capital
International 10 Year Italy (Equity) 12.13
Morgan Stanley Capital
International 10 Year Sweden (Equity) 18.80
Morgan Stanley Capital
International 10 Year United States 2.00
(Equity)
Morgan Stanley Capital
International 10 Year Australia (Equity) 6.48
Morgan Stanley Capital
International 10 Year Norway (Equity) 24.07
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
One-Year Constant-Maturity
Federal Reserve Treasury Rate 7.14
Five-Year Constant-Maturity
Federal Reserve Treasury Rate 7.78
*in U.S. currency
