December 29, 1995
COLONIAL GOVERNMENT MONEY MARKET FUND
PROSPECTUS
BEFORE YOU INVEST
Colonial Management Associates, Inc. (Adviser) and your full-service
financial adviser want you to understand both the risks and benefits
of mutual fund investing.
While mutual funds offer significant opportunities and are
professionally managed, they also carry risks including possible loss
of principal. Unlike savings accounts and certificates of deposit,
mutual funds are not insured or guaranteed by any financial
institution or government agency.
Please consult your full-service financial adviser to determine how
investing in this mutual fund may suit your unique needs, time horizon
and risk tolerance.
Contents Page
Summary of expenses 2
The Fund's financial history 3
The Fund's investment objective 5
How the Fund pursues its objective 5
How the Fund measures its performance 5
How the Fund is managed 6
How the Fund values its shares 6
Distributions and taxes 7
How to buy shares 7
How to sell shares 8
How to exchange shares 9
Telephone transactions 9
12b-1 plans 10
Organization and history 10
MM-01/467B-1195
Colonial Government Money Market Fund (Fund), a diversified portfolio
of Colonial Trust II (Trust), an open-end management investment
company, seeks current income, consistent with capital preservation
and liquidity, by investing exclusively in short-term U.S. government
securities.
The Fund is managed by the Adviser, an investment adviser since 1931.
This Prospectus explains concisely what you should know before
investing in the Fund. Read it carefully and retain it for future
reference. More detailed information about the Fund is in the
December 29, 1995 Statement of Additional Information which has been
filed with the Securities and Exchange Commission and is obtainable
free of charge by calling the Adviser at 1-800-248-2828. The
Statement of Additional Information is incorporated by reference in
(which means it is considered to be a part of) this Prospectus.
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 three 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, an annual
service fee, and a
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.
declining contingent deferred sales charge on redemptions made within
six years after purchase; and Class D shares are offered at net asset
value plus a small initial sales charge, a contingent deferred sales
charge on redemptions made within one year after purchase and
continuing service and distribution fees. Class B shares
automatically convert to Class A shares after approximately eight
years. See "How to buy shares."
Class B and Class D shares of the Fund are only for temporary
investment while, for example, considering investments in other
Colonial funds. Unlike shares of most money market funds, investments
in the Fund's Class B shares are subject to declining contingent
deferred sales charges, investments in Class D shares are subject to
initial sales charges and Class B and Class D shares are subject to
distribution and service fees.
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in the
Fund. The following tables summarize your maximum transaction costs
and your annual expenses for an investment in each Class of the Fund's
shares. See "How the Fund is managed" and "12b-1 plans" for more
complete descriptions of the Fund's various costs and expenses.
Shareholder Transaction Expenses(1)(2)
Class A Class B Class D
Maximum Initial Sales
Charge Imposed on a
Purchase (as a % of
offering price)(3) 0.00% 0.00%(4) 1.00%(4)
Maximum Contingent
Deferred Sales Charge
(as a % of offering 0.00% 5.00%(4) 1.00%(4)
price)(3)
(1) For accounts less than
$1,000 an annual fee of $10
may be deducted. See "How
to sell shares."
(2) Redemption proceeds
exceeding $5,000 sent via
federal funds wire will be
subject to a $7.50 charge
per transaction.
(3) Does not apply to reinvested
distributions.
(4) Because of the 0.75%
distribution fee applicable
to Class B and Class D
shares, long-term Class B
and Class D shareholders may
pay more in aggregate sales
charges than the maximum
initial sales charge
permitted by the National
Association of Securities
Dealers, Inc. However,
because the Fund's Class B
shares automatically convert
to Class A shares after
approximately eight years,
this is less likely for
Class B shares than for a
class without a conversion
feature.
Annual Operating Expenses (as a % of average net assets)
Class A Class B Class D
Management fee(5) 0.30% 0.30% 0.30%
12b-1 fees 0.00 1.00 1.00
Other expenses 0.39 0.39 0.39
---- ---- ----
Total operating expenses 0.69% 1.69% 1.69%
==== ==== ====
(5) Effective October 17, 1994, the
contractual management fee was
voluntarily reduced by the Adviser
from 0.50% to 0.30%.
Example
The following Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in each Class of shares of the Fund for
the periods specified, assuming a 5% annual return and, unless
otherwise noted, redemption at period end. The 5% return and expenses
used in this Example should not be considered indicative of actual or
expected Fund performance or expenses, both of which will vary:
Class A Class B Class D
(6) (7) (6) (7)
Period:
1 year $ 7 $67 $17 $37 $27
3 years 22 83 53 63 63
5 years 39 112 92 101 101
10 years 86 174(8) 174(8) 208 208
(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.
THE FUND'S FINANCIAL HISTORY
The following schedule of financial highlights for a share outstanding
throughout each period has been audited by Price Waterhouse LLP, independent
accountants. Their unqualified report is included in the Fund's 1995 Annual
Report and is incorporated by reference into the Statement of Additional
Information. The Fund adopted its current objective and policies effective
October 17, 1994. The data presented below prior to October 17, 1994 represents
operations under earlier objectives and policies.
<TABLE>
<CAPTION>
CLASS A
Year ended Period ended
August 31 August 31 Year ended December 31
1995 1994 1993 1992(b) 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value-Beginning of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
----- ----- ----- ----- ----- ---- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.050 0.028 0.023 0.022 0.053 0.074 0.082 0.065 0.057
----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.050) (0.028) (0.023) (0.022) (0.053) (0.074) (0.082) (0.065) (0.057)
----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value - End of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
===== ===== ===== ===== ===== ===== ===== ===== =====
Total return(c)(d) 5.14% 2.85% 2.28% 2.18%(e) 5.38% 7.64% 8.50% 6.66% 5.83%
==== ==== ==== ==== ==== ==== ==== ==== ====
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.69% 0.73% 0.88% 1.00%(f) 0.85% 0.77% 0.74% 0.67% 0.77%
Fees and expenses waived or
borne by the Adviser 0.04% 0.20% 0.20% 0.38%(f) 0.20% 0.13% --- --- ---
Net investment income 4.96% 3.01% 2.26% 3.23%(f) 5.32% 7.38% 8.20% 6.49% 5.82%
Net assets at end of period (000) $83,086 $97,115 $44,693 $47,885 $56,198 $79,771 $75,301 $95,262 $104,649
</TABLE>
<TABLE>
<CAPTION>
1986 1985
---- ----
<S> <C> <C>
Net asset value-Beginning of period $1.000 $1.000
----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.059 0.072
----- -----
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.059) (0.072)
----- -----
Net asset value - End of period $1.000 $1.000
===== =====
Total return (c)(d) 5.98% 7.39%
==== ====
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.01% 1.08%
Fees and expenses waived or borne
by the Adviser 0.63% 1.13%
Net investment income 5.59% 7.20%
Net assets at end of period (000) $23,313 $11,039
</TABLE>
_________________________________
(a) Net of fees and expenses waived or borne by the Adviser which
amounted to $0.000, $0.002, $0.002, $0.003, $0.002, $0.001, $0.000,
$0.000, $0.000, $0.007 and $0.011, respectively.
(b) The Fund changed its fiscal year end from December 31 to August 31 in
1992.
(c) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(d) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(e) Not annualized.
(f) Annualized.
THE FUND'S FINANCIAL HISTORY (CONT.)
<TABLE>
<CAPTION>
CLASS B CLASS D
Period ended Year ended Period ended
Year ended August August 31 August 31 August 31
1995 1994 1993 1992(b)(c) 1995 1994(d)
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.040 0.018 0.013 0.004 0.040 0.005
----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.040) (0.018) (0.013) (0.004) (0.040) (0.005)
----- ----- ----- ----- ----- -----
Net asset value - End of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
===== ===== ===== ===== ===== =====
Total return(e)(f) 4.08% 1.82% 1.27% 0.43%(g) 4.07% 0.45%(g)
==== ==== ==== ====
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.69% 1.73% 1.88% 2.00%(h) 1.69% 1.73%(h)
Fees and expenses waived or borne by the Adviser 0.04% 0.20% 0.20% 0.38%(h) 0.04% 0.20%(h)
Net investment income 3.96% 2.01% 1.26% 2.23%(h) 3.96% 2.01%(h)
Net assets at end of period (000) $55,441 $54,535 $10,890 $14,096 $625 $518
</TABLE>
_________________________________
(a) Net of fees and expenses waived or borne by the Adviser which
amounted to $0.000, $0.002, $0.002, $0.001, $0.000, and
$0.002, respectively.
(b) The Fund changed its fiscal year end from December 31 to
August 31 in 1992.
(c) Class B shares were initially offered on June 8, 1992. Per
share amounts reflect activity from that date.
(d) Class D shares were initially offered on July 1, 1994. Per
share amounts reflect activity from that date.
(e) Total return at net asset value assuming all distributions
reinvested and no initial sales charge or contingent deferred
sales charge.
(f) Had the Adviser not waived or reimbursed a portion of
expenses, total return would have been reduced.
(g) Not annualized.
(h) Annualized.
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.
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks current income, consistent with capital preservation
and liquidity, by investing exclusively in short-term U.S. government
securities.
HOW THE FUND PURSUES ITS OBJECTIVE
The Fund invests exclusively in short-term securities issued or
guaranteed by the U.S. government or its subdivisions, agencies,
authorities and instrumentalities, as well as repurchase agreements
collateralized by such securities. The Fund may purchase U.S.
government securities with floating or variable rates of interest that
are eligible, based on the Securities and Exchange Commission
requirements, for investment by money market funds. The Fund will not
purchase inverse floating rate instruments, so-called "range floaters"
(securities the interest rate on which is allowed to float only within
a certain range), structured notes, futures contracts or other
derivative securities. All the Fund's investments have remaining
maturities of 397 days or less (except securities subject to
repurchase agreements). The dollar weighted average maturity of the
Fund's investments will be 90 days or less. All securities purchased
will be determined by the Adviser, under procedures established by the
Trustees, to present minimal credit risk.
Under a repurchase agreement, the Fund buys a security from a bank or
dealer, which it is obligated to buy back at a fixed price and time.
The security is held in a separate account at the Fund's custodian and
constitutes the Fund's collateral for the bank's or dealer's
repurchase obligation. Additional collateral will be added so that
the obligation will at all times be fully collateralized. However, if
the bank or dealer defaults or enters into bankruptcy, the Fund may
experience costs and delays in liquidating collateral, and may
experience a loss if it is unable to demonstrate its right to the
collateral in a bankruptcy proceeding. Not more than 10% of the
Fund's net assets will be invested in repurchase agreements maturing
in more than 7 days and other illiquid assets.
The Fund intends to qualify as an eligible investment for federal
credit unions and national banks. The Fund's investments will be
strictly limited to investments and investment transactions that are
legal for federal credit unions under regulations adopted by the
National Credit Union Administration.
The Fund may borrow money, by issuing senior securities, from banks
for temporary or emergency purposes up to 10% of its net assets.
However, the Fund will not purchase additional portfolio securities
while borrowings exceed 5% of net assets.
Other. If the Fund disposes of securities prior to maturity, it may
realize a loss or gain. The Fund may not always achieve its
investment objective. The Fund's investment objective and non-
fundamental policies may be changed without shareholder approval. The
Fund will notify investors at least 30 days prior to any material
change in the Fund's investment objective. If there is a change in
the investment objective, shareholders should consider whether the
Fund remains an appropriate investment in light of their financial
position and needs. Shareholders may incur a contingent deferred
sales charge if shares are redeemed in response to a change in the
objective. The Fund's fundamental policies listed in the Statement of
Additional Information cannot be changed without the approval of a
majority of the Fund's outstanding voting securities. Additional
information concerning certain of the securities and investment
techniques described above is contained in the Statement of Additional
Information.
HOW THE FUND MEASURES ITS PERFORMANCE
Performance may be quoted in sales literature and advertisements.
Each Class's average annual total returns are calculated in accordance
with the Securities and Exchange Commission's formula and assume the
reinvestment of all distributions, the maximum initial sales charge of
1.00% on Class D shares and the contingent deferred sales charge
applicable to the time period quoted on Class B and Class D shares.
Other total returns differ from average annual total return only in
that they may relate to different time periods, may represent
aggregate as opposed to average annual total returns and may not
reflect the contingent deferred sales charge.
Each Class's yield is 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 for more 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.
All performance information is historical and does not reflect future
results.
HOW THE FUND IS MANAGED
The Trustees formulate the Fund's general policies and oversee the
Fund's affairs as conducted by the Adviser.
The Adviser is a subsidiary of The Colonial Group, Inc. Colonial
Investment Services, Inc. (Distributor) is a subsidiary of the
Adviser, and serves as the distributor for the Fund's shares.
Colonial Investors Service Center, Inc. (Transfer Agent), an affiliate
of the Adviser, serves as the shareholder services and transfer agent
for the Fund. The Colonial Group, Inc. is a direct subsidiary of
Liberty Financial Companies, Inc. which in turn is an indirect
subsidiary of Liberty Mutual Insurance Company (Liberty Mutual).
Liberty Mutual is considered to be the controlling entity of the
Adviser and its affiliates. Liberty Mutual is an underwriter of
worker's compensation insurance and a property and casualty insurer in
the U.S.
The Adviser furnishes the Fund with investment management, accounting
and administrative personnel and services, office space and other
equipment and services at the Adviser's expense for an annual fee of
0.30% of Fund average net assets.
The Adviser also provides pricing and bookkeeping services to the Fund
for a monthly fee of $2,250 plus a percentage of the Fund's average
net assets over $50 million. The Transfer Agent provides transfer
agency and shareholder services to the Fund for a fee of 0.20%
annually of average net assets plus certain out-of-pocket expenses.
Each of the foregoing fees is subject to any reimbursement or fee
waiver to which the Adviser may agree.
The Adviser places all orders for the purchase and sale of portfolio
securities. In selecting broker-dealers, the Adviser may consider
research and brokerage services furnished to it and its affiliates.
Subject to seeking best execution, the Adviser may consider sales of
shares of the Fund (and of certain other Colonial funds) in selecting
broker-dealers for portfolio security transactions.
HOW THE FUND VALUES ITS SHARES
Per share net asset value is calculated by dividing the total value of
each Class's net assets by its number of outstanding shares. Shares
of the Fund are valued as of the close of the New York Stock Exchange
(Exchange) each day the Exchange is open. Portfolio securities are
valued using the "amortized cost" method (when such value is
determined to represent market value in accordance with procedures
adopted by the Trustees), which does not consider the effect of
fluctuating interest rates on the value of assets. The Fund intends
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
them in cash. Regardless of the shareholder's election, distributions
of $10 or less will not be paid in cash to shareholders but will be
invested in additional shares of the same Class of the Fund at net
asset value. To change your election, call the Transfer Agent for
information.
Whether you receive distributions in cash or in additional Fund
shares, you must report them as taxable income unless you are a tax-
exempt institution. Each January information on the amount and nature
of distributions for the prior year is sent to shareholders.
HOW TO BUY SHARES
Shares are offered continuously. Orders received in good form prior
to the time at which the Fund values its shares (or placed with a
financial service firm before such time and transmitted by the
financial service firm before the Fund processes that day's share
transactions) will be processed based on that day's closing net asset
value.
The minimum initial investment is $1,000; subsequent investments may
be as small as $50. The minimum initial investment for the Colonial
Fundamatic program is $50, and the minimum initial investment for a
Colonial retirement account is $25. Certificates will not be issued.
The Fund may refuse any purchase order for its shares. See the
Statement of Additional Information for more information. Purchases
of $250,000 or more must be for Class A or Class D shares. Purchases
of $500,000 or more must be for Class A shares.
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, a 0.25% annual service fee and a declining
contingent deferred sales charge if redeemed within six years after
purchase. Class B shares convert to Class A shares after
approximately eight years which do not bear distribution or service
fees or a declining contingent deferred sales charge. The Distributor
pays financial service firms a commission of 4.00% on Class B share
purchases.
Class D Shares. Class D shares are offered at net asset value plus a
1.00% initial sales charge, subject to a 0.75% annual distribution
fee, a 0.25% annual service fee and a 1.00% contingent deferred sales
charge on redemptions made within one year from the first day of the
month after purchase.
The Distributor pays financial service firms an initial commission of
1.85% on purchases of Class D shares and an ongoing commission of
0.65% annually. Payment of the ongoing commission is conditioned on
receipt by the Distributor of the 0.75% annual distribution fee
referred to above. The commission may be reduced or eliminated if the
distribution fee paid by the Fund is reduced or eliminated for any
reason.
General. As shown above, financial service firms may receive
different compensation rates for selling different classes of shares.
The Distributor may pay additional compensation to financial service
firms which have made or may make significant sales. See the Statement
of Additional Information for more information.
Special Purchase Programs. The Fund allows certain investors or
groups of investors to purchase shares with a reduced or no initial or
contingent deferred sales charge. These programs are described in the
Statement of Additional Information under "Programs for Reducing or
Eliminating Sales Charges" and "How to Sell Shares."
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 business days (usually on the
next business day after your request is received in good form).
However, for shares recently purchased by check, the Fund will send
proceeds only after the check has cleared (which may take up to 15
days).
Selling Shares Directly To The Fund. Send a signed letter of
instruction or stock power form to the Transfer Agent. The sale price
that you receive is the net asset value (less any applicable
contingent deferred sales charge) next calculated after the Fund
receives the request in proper form. Signatures must be guaranteed by
a bank, a member firm of a national stock exchange or another eligible
guarantor institution. Stock power forms are available from financial
service firms, the Transfer Agent and many banks. Additional
documentation is required for sales by corporations, agents,
fiduciaries, surviving joint owners and individual retirement account
holders. For details contact:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Selling Shares Through Financial Service Firms. Financial service
firms must receive requests prior to the time the Fund values its
shares to receive that day's net asset value (less any applicable
contingent deferred sales charge), are responsible for furnishing all
necessary documentation to the Transfer Agent and may charge for this
service.
Contingent Deferred Sales Charges. As stated above, Class B and Class
D shares may be subject to a contingent deferred sales charge. As
shown below, the contingent deferred sales charge applicable to Class
B shares depends on the number of years after purchase that the
redemption occurs:
Years Contingent
After Deferred
Purchase Sales Charges
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.
Sales of Class D shares made within one year from the first day of the
month following the purchase will be subject to a 1.00% contingent
deferred sales charge.
General. The sale of shares is a taxable transaction for income tax
purposes and may be subject to a contingent deferred sales charge.
The contingent deferred sales charge may be waived under certain
circumstances. 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).
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. Not all Colonial funds offer Class D
shares. Shares will continue to age without regard to the exchange
for purposes of conversion and determining the contingent deferred
sales charge, if any, upon redemption. Carefully read the prospectus
of the fund into which the exchange will go before submitting the
request. Call 1-800-248-2828 to receive a prospectus and an exchange
authorization form. Call 1-800-422-3737 to exchange shares by
telephone. An exchange is a taxable capital transaction. The
exchange service may be changed, suspended or eliminated on 60 days'
written notice.
Class A Shares. An exchange from a money market fund into a non-money
market fund will be at the applicable offering price next determined
(including any 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 $1,000,000 or more of other Colonial funds' Class A
shares who exchange their shares for Class A shares of the Fund and
redeem those Fund shares within one year 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, the contingent deferred
sales charge will be assessed using the schedule of the fund into
which the original investment was made.
Class D Shares. Exchanges of Class D shares will not be subject to
the contingent deferred sales charge. However, if shares are redeemed
within one year after the original purchase, a 1.00% contingent
deferred sales charge will be assessed.
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisers are automatically
eligible to exchange Fund shares and redeem up to $50,000 of Fund
shares by calling 1-800-422-3737 toll-free any business day between
9:00 a.m. and the time at which the Fund values its shares. Telephone
redemption privileges for larger amounts may be elected on the account
application. 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 30 days. The Adviser, the Transfer Agent and the Fund
will not be liable when following telephone instructions reasonably
believed to be genuine, and a shareholder may suffer a loss from
unauthorized transactions. The 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 under
"How to sell shares." The Adviser, the Transfer Agent and the Fund
reserve the right to change, modify, or terminate the telephone
redemption or exchange services at any time upon prior written notice
to shareholders. Shareholders and/or their financial advisers are not
obligated to transact by telephone.
12B-1 PLANS
Under 12b-1 Plans, 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 and Class D shares. Because the
Class B and Class D shares bear these 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. Class D shares do not
convert. The multiple class structure could be terminated should
certain Internal Revenue Service rulings be rescinded. See the
Statement of Additional Information for more information. The
Distributor uses the fees to defray distribution expenses, including
the cost of commissions paid to financial service firms which have
sold Fund shares and expenses associated with providing certain
shareholder services. Should the fees exceed the Distributor's
expenses in any year, the Distributor would realize a profit. The
Plans also authorize other payments to the Distributor and its
affiliates (including the Adviser) which may be construed to be
indirect financing of sales of Fund shares.
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized in 1980. 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
an 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.
[THIS PAGE INTENTIONALLY LEFT BLANK.]
Investment Adviser
Colonial Management Associates, Inc.
One Financial Center
Boston, MA 02111-2621
Distributor
Colonial Investment Services, Inc.
One Financial Center
Boston, MA 02111-2621
Custodian
Boston Safe Deposit and Trust Company
One Boston Place
Boston, MA 02108-2624
Shareholder Services and Transfer Agent
Colonial Investors Service Center, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-345-6611
Independent Accountants
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110-2624
Legal Counsel
Ropes & Gray
One International Place
Boston, MA 02110-2624
Your financial service firm is:
Printed in U.S.A.
December 29, 1995
COLONIAL GOVERNMENT MONEY MARKET FUND
PROSPECTUS
Colonial Government Money Market Fund seeks current income, consistent
with capital preservation and liquidity, by investing exclusively in
short-term U.S. government securities.
For more detailed information about the Fund, call 1-800-248-2828 for
the December 29, 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 LOGO] Colonial Mutual Funds
One Financial Center
Boston, Massachusetts 02111-2621
617-426-3750
[COLONIAL FLAG LOGO]
Colonial Mutual Funds
_________________________________________________________________
Please send your completed application to:
Colonial Mutual Funds
P.O. Box 1722
Boston, Massachusetts 02105-1722
New Account Application/Revision to Existing Account
To open a new account, complete sections 1, 2, 3, & 8.
To apply for special services for a new or existing account, complete sections
4, 5, 6, 7, or 9 as appropriate.
___ Please check here if this is a revision.
1-----------Account Ownership--------------
Please choose one of the following.
__Individual: Print your name, Social Security #, U.S. citizen status.
__Joint Tenant: Print all names, the Social Security # for the first person,
and his/her U.S. citizen status.
__Uniform Gift to Minors: Name of custodian and minor, minor's Social Security
#, minor's U.S. citizen status.
__Corporation, Association, Partnership: Include full name, Taxpayer I.D. #.
__Trust: Name of trustee, trust title & date, and trust's Taxpayer I.D. #.
______________________________________
Name of account owner
______________________________________
Name of joint account owner
______________________________________
Street address
______________________________________
Street address
______________________________________
City, State, and Zip
______________________________________
Daytime phone number
______________________________________
Social Security # or Taxpayer I.D. #
Are you a U.S. citizen? Yes___ No___
______________________________________
If no, country of permanent residence
______________________________________
Owner's date of birth
______________________________________
Account number (if existing account)
2 -----Colonial Fund(s) You Are Purchasing--------
Your investment will be made in Class A shares if no class is indicated.
Certificates are not available for Class B or D shares. If no distribution
option is selected, distributions will be reinvested in additional Fund
shares. Please consult your financial adviser to determine which class of
shares best suits your needs.
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
___ D Shares (less than $500,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section 4B, inside
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
___ D Shares (less than $500,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section 4B, inside
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
___ D Shares (less than $500,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section 4B, inside
3---Your Signature & Taxpayer I.D. Number Certification----
Each person signing on behalf of an entity represents that his/her actions are
authorized.
I have received and read each appropriate Fund prospectus and understand that
its terms are incorporated by reference into this application. I understand
that this application is subject to acceptance. I understand that certain
redemptions may be subject to a contingent deferred sales charge. I certify,
under penalties of perjury, that:
1. The Social Security # or Taxpayer I.D. # provided is correct.
Cross out 2(a) or 2(b) if either is not true in your case.
2. I am not subject to 31% backup withholding because (a) I have not been
notified that I am subject to backup withholding or (b) the Internal
Revenue Service has notified me that I am no longer subject to backup
withholding.
It is agreed that the Fund, all Colonial companies and their officers,
directors, agents, and employees will not be liable for any loss, liability,
damage, or expense for relying upon this application or any instruction
believed genuine.
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
4--------Ways to Withdraw from Your Fund-------
It may take up to 30 days to activate the following features. Complete only
the section(s) that apply to the features you would like.
A. Systematic Withdrawal Plan (SWP)
You can receive monthly, quarterly, or semiannual checks from your account in
any amount you select, with certain limitations. Your redemption checks can
be sent to you at the address of record for your account, to your bank
account, or to another person you choose. The value of the shares in your
account must be at least $5,000 and you must reinvest all of your
distributions. Checks will be processed on the 10th calendar day of the month
or the following business day. Withdrawals in excess of 12% annually of your
current account value will not be accepted. Redemptions made in addition to
Plan payments may be subject to a contingent deferred sales charge for Class B
or Class D shares. Please consult your financial or tax adviser before
electing this option.
Funds for Withdrawal:
1______________________________________________
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).
2______________________________________________
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).
3______________________________________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________ or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _________________ (month).
Payment Instructions
Send the payment to (choose one):
__My address of record.
__My bank account via Colonial Cash Connection. Please complete Section 4B
and the Bank Information section below.
__The payee listed at right.
______________________________________________
Name of payee
______________________________________________
Address of payee
______________________________________________
City
______________________________________________
State Zip
______________________________________________
Payee's bank account number, if applicable
X_____________________________________________
Signature of account owner(s)
X_____________________________________________
Signature of account owner(s)
Signatures of all owners must be guaranteed. Provide the name, address,
payment amount, and frequency for other payees (maximum of 5) on a separate
sheet.
B. Direct Deposit via Colonial Cash Connection
You can arrange to have distributions from your Colonial fund account(s) or
Systematic Withdrawal Plan checks automatically deposited directly into your
bank checking account. Distribution deposits will be made 2 days after the
Fund's payable date. Please complete Bank Information below and attach a
blank check marked "VOID."
Please deposit my:
__Dividend distributions only
__Dividend and capital gain distributions
__Systematic Withdrawal Plan payments
I understand that my bank must be a member of the Automated Clearing House
system.
C. Telephone Withdrawal Options
All telephone transaction calls are recorded. These options are not available
for retirement accounts.
1. Fast Cash
You are automatically eligible for this service. You or your financial
adviser can withdraw up to $50,000 from your account and have it sent to your
address on our records. For your protection, this service is only available on
accounts that have not had an address change within 60 days of the redemption
request.
2. Telephone Redemption
__I would like the Telephone Redemption privilege. You may withdraw shares
from your fund account by telephone and send your money to your bank account.
If you are adding this service to an existing account, complete the Bank
Information section below and have all shareholder signatures guaranteed.
Colonial's and the Fund's liability is limited when following telephone
instructions; a shareholder may suffer a loss from an unauthorized transaction
reasonably believed by Colonial to have been authorized. Telephone redemptions
exceeding $5,000 will be sent via Federal Fund Wire, usually on the next
business day ($7.50 will be deducted). Redemptions of $5,000 or less will be
sent by check to your designated bank.
Bank Information (For A, B, or C Above)
I authorize deposits to the following bank account:
____________________________________________________________
Bank name City Bank account number
____________________________________________________________
Bank street address State Zip Bank routing # (your bank
can provide this)
5-----Ways to Make Additional Investments--------
These services involve continuous investments regardless of varying share
prices. Please consider your ability to continue purchases through periods of
price fluctuations. Dollar cost averaging does not assure a profit or protect
against loss in declining markets.
A. Automatic Dividend Diversification
Please diversify my portfolio by investing fund distributions in another
Colonial fund. These investments will be made in the same share class and
without sales charges. I have carefully read the prospectus for the fund(s)
listed below.
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
B. Automated Dollar Cost Averaging
This program allows you to automatically have money from any Colonial fund in
which you have a balance of at least $5,000 transferred into the same share
class of up to four other Colonial funds, on a monthly basis. The minimum
amount for each transfer is $100. Please complete the section below.
____________________________________
Fund from which shares will be sold
$_________________________
Amount to redeem monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
C. Fundamatic
Fundamatic automatically transfers the specified amount from your bank
checking account to your Colonial fund account. Your bank needs to be a
member of the Automated Clearing House system. Please attach a blank check
marked "VOID." Also, complete the section below and Fundamatic
Authorization (Section 6).
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
6 -------------Fundamatic Authorization--------------------
Authorization to honor checks drawn by Colonial Investors Service Center,
Inc. Do Not Detach. Make sure all depositors on the bank account sign to
the far right. Please attach a blank check marked "VOID" here. See reverse
for bank instructions.
I authorize Colonial to draw on my bank account, by check or electronic funds
transfer, for an investment in a Colonial fund. Colonial and my bank are not
liable for any loss arising from delays or dishonored draws. If a draw is not
honored, I understand that notice may not be given and Colonial may reverse
the purchase and charge my account $15.
______________________________________
Bank name
______________________________________
Bank street address
______________________________________
Bank street address
______________________________________
City State Zip
______________________________________
Bank account number
______________________________________
Bank routing #
X_____________________________________
Depositor's Signature(s)
Exactly as appears on bank records
X_____________________________________
Depositor's Signature(s)
Exactly as appears on bank records
7--Ways to Reduce Your Sales Charges for Class A Shares--
These services can help you reduce your sales charge while increasing your
share balance over the long term.
A. Right of Accumulation
If you, your spouse or your children own Class A, B, or D shares in other
Colonial funds, you may be eligible for a reduced sales charge. The combined
value of your accounts must be $50,000 or more. Class A shares of money market
funds are not eligible unless purchased by exchange from another Colonial fund.
The sales charge for your purchase will be based on the sum of the purchase
added to the value of all shares in other Colonial funds at the previous
day's public offering price.
__Please link the accounts listed below for Right of Accumulation privileges,
so that this and future purchases will receive any discount for which they
are eligible.
_____________________________________
Name on account
_____________________________________
Account number
_____________________________________
Name on account
_____________________________________
Account number
B. Statement of Intent
If you agree in advance to invest at least $50,000 within 13 months, you'll
pay a lower sales charge on every dollar you invest. If you sign a Statement
of Intent within 90 days after you establish your account, you can receive a
retroactive discount on prior investments. The amount required to receive a
discount varies by fund; see the sales charge table in the "How to Buy Shares"
section of your fund prospectus.
__I want to reduce my sales charge.
I agree to invest $ _______________ over a 13-month period starting
______/______/ 19______ (not more than 90 days prior to this application). I
understand an additional sales charge must be paid if I do not complete this
Statement of Intent.
8-------------Financial Service Firm---------------------
To be completed by a Representative of your financial service firm.
This application is submitted in accordance with our selling agreement with
Colonial Investment Services, Inc. (CISI), the Fund's prospectus, and this
application. We will notify CISI of any purchase made under a Statement of
Intent, Right of Accumulation, or Sponsored Arrangement. We guarantee the
signatures on this application and the legal capacity of the signers.
_____________________________________
Representative's name
_____________________________________
Representative's number
_____________________________________
Representative's phone number
_____________________________________
Account # for client at financial
service firm
_____________________________________
Branch office address
_____________________________________
City
_____________________________________
State Zip
_____________________________________
Branch office number
_____________________________________
Name of financial service firm
_____________________________________
Main office address
_____________________________________
Main office address
_____________________________________
City
_____________________________________
State Zip
X____________________________________
Authorized signature
9--Request for a Combined Quarterly Statement Mailing--
Colonial can mail all of your quarterly statements in one envelope. This
option simplifies your record keeping and helps reduce fund expenses.
__I want to receive a combined quarterly mailing for all my accounts.
Fundamatic (See Reverse Side)
Applications must be received before the start date for processing.
This program's deposit privilege can be revoked by Colonial without prior
notice if any check is not paid upon presentation. Colonial has no obligation
to notify the shareholder of non-payment of any draw. This program may be
discontinued by Colonial by written notice at least 30 business days prior
to the due date of any draw or by the shareholder at any time.
To the Bank Named on the Reverse Side:
Your depositor has authorized Colonial Investors Service Center, Inc. to
collect amounts due under an investment program from his/her personal checking
account. When you pay and charge the draws to the account of your depositor
executing the authorization payable to the order of Colonial Investors
Service Center, Inc., Colonial Management Associates, Inc., hereby indemnifies
and holds you harmless from any loss (including reasonable expenses) you may
suffer from honoring such draw, except any losses due to your payment of any
draw against insufficient funds.
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 GOVERNMENT MONEY MARKET FUND
Statement of Additional Information
December 29, 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 Government 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 December
29, 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 b
Fund Charges and Expenses c
Investment Performance f
Custodian f
Independent Accountants f
Part 2
Miscellaneous Investment Practices 1
Taxes 11
Management of the Colonial Funds 13
Determination of Net Asset Value 17
How to Buy Shares 18
Special Purchase Programs/Investor Services 19
Programs for Reducing or Eliminating Sales 20
Charges
How to Sell Shares 22
Distributions 24
How to Exchange Shares 24
Suspension of Redemptions 25
Shareholder Meetings 25
Performance Measures 25
Appendix I 27
Appendix II 30
MM-16/513B-1295
Part 1
COLONIAL GOVERNMENT MONEY MARKET FUND
Statement of Additional Information
December 29, 1995
DEFINITIONS:
"Trust" Colonial Trust II
"Fund" Colonial Government Money Market Fund
"Adviser" Colonial Management Associates, Inc., the Fund's investment
adviser
"CISI" Colonial Investment Services, Inc., the Fund's distributor
"CISC" Colonial Investors Service Center, Inc., the Fund's
shareholder services and transfer agent
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes its investment objective and
policies. Part 1 of this SAI includes additional information
concerning, among other things, the fundamental investment
policies of the Fund. Part 2 contains additional information
about the following securities and investment techniques that
are described or referred to in the Prospectus:
Short-Term Trading
Repurchase Agreements
Except as described below under "Fundamental Investment
Policies," the Fund's investment policies are not fundamental,
and the Trustees may change the policies without shareholder
approval.
FUNDAMENTAL INVESTMENT POLICIES
The Investment Company Act of 1940 (Act) provides that a "vote of
a majority of the outstanding voting securities" means the
affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund, or (2) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares
are represented at the meeting in person or by proxy. The
following fundamental investment policies can not be changed
without such a vote.
The Fund may:
1. Issue senior securities only through borrowing money from banks
for temporary or emergency purposes up to 10% of its net assets;
however, the Fund will not purchase additional portfolio
securities while borrowings exceed 5% of net assets;
2. Not invest in real estate;
3. Invest up to 10% of its net assets in illiquid assets (i.e.,
assets which may not be sold in the ordinary course at
approximately the price at which they are valued by the Fund);
4. Purchase and sell futures contracts and related options so long
as the total initial margin and premiums on the contracts does
not exceed 5% of its total assets;
5. Underwrite securities issued by others only when disposing of
portfolio securities;
6. Make loans (i) through lending of securities not exceeding 30%
of total assets, (ii) through the purchase of debt instruments
or similar evidences of indebtedness typically sold privately to
financial institutions and (iii) through repurchase agreements;
and
7. Not concentrate more than 25% of its total assets in any one
industry (provided, however, that there is no limitation in
respect to investments in certificates of deposit and banker's
acceptances; finance companies as a group and utility companies
as a group are not considered a single industry) or with respect
to 75% of total assets purchase any security (other than
obligations of the U.S. government and cash items including
receivables) if as a result more than 5% of its total assets
would then be invested in securities of a single issuer or
purchase the voting securities of an issuer if, as a result of
such purchase, the Fund would own more than 10% of the
outstanding voting shares of such issuer.
As a matter of operating policy and not a fundamental policy, the
Fund will not purchase a security if, as a result, more than 5%
of its total assets would then be invested in securities of a
single issuer other than the U.S. government or its agencies,
without regard to the 75% of total assets criterion referred to
in policy 7 above.
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed
without a shareholder vote, the Fund may not:
1. Purchase securities on margin, but the Fund may receive short-
term credit to clear securities transactions and may make
initial or maintenance margin deposits in connection with
futures transactions;
2. Have a short securities position, unless the Fund owns, or
owns rights (exercisable without payment) to acquire, an
equal amount of such securities;
3. Own securities of any company if the Trust knows that
officers and Trustees of the Trust or officers and directors
of the Adviser who individually own more than 0.5% of such
securities together own more than 5% of such securities;
4. Invest in interests in oil, gas or other mineral exploration
or development programs, including leases;
5. Purchase any security resulting in the Fund having more than
5% of its total assets invested in securities of companies
(including predecessors) less than three years old;
6. Pledge more than 33% of its total assets;
7. Purchase any security if, as a result of such purchase, more
than 10% of its total assets would be invested in securities
which are restricted as to disposition; and
8. Invest in warrants if, immediately after giving effect to any
such investment, the Fund's aggregate investment in warrants,
valued at the lower of cost or market, would exceed 5% of the
value of the Fund's assets. Included within that amount, but
not to exceed 2% of the value of the Fund's net assets, may
be warrants which are not listed on the New York Stock
Exchange or the American Stock Exchange. Warrants acquired
by the Fund in units or attached to securities will be deemed
to be without value.
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.
FUND CHARGES AND EXPENSES
Under the Fund's management agreement, the Fund pays the Adviser
a monthly fee based on the average net assets of the Fund,
determined at the close of each business day during the month, at
the annual rate of 0.30%. Prior to October 17, 1994, the annual
rate was 0.50% of Fund average net assets which was voluntarily
reduced to 0.30%.
Recent Fees paid to the Adviser, CISI and CISC (in thousands)
Periods ended August 31
1995 1994 1993
Management fee $467 $519 $313
Bookkeeping fee 58 46 32
Shareholder service and transfer
agent fee 336 250 205
12b-1 fees:
Distribution fee (Class B) 396 234 100
Distribution fee (Class D)(b) 4 1 -
Service Fee (Class B) 132 78 33
Service Fee (Class D)(b) 1 (a) -
Amount of the above fees waived by
the Adviser (55) (207) (124)
(a) Rounds to less than one.
(b) Class D shares were initially offered on July 1, 1994.
Brokerage Commissions
The Fund did not pay any brokerage commissions during the fiscal
years ended August 31, 1995, 1994 and 1993.
Trustees Fees
For the fiscal year ended August 31, 1995, and the calendar year
ended December 31, 1994, the Trustees received the following
compensation for serving as Trustees:
Pension Total
or Compensation From
Aggregate Retirement Estimated Trust and Fund
Compensation Benefits Annual Complex Paid to
From Fund for Accrued Benefits the Trustees For
The Fiscal As Part Upon The Calendar Year
Year ended of Fund Retireme Ended December
Trustee August 31, 1995 Expense Retirement 31, 1994(d)
Robert J. Birnbaum(h) $ 682 $0 $0 $ 0
Tom Bleasdale 1621(c) 0 0 101,000 (e)
Lora S. Collins 1721 0 0 95,000
James E. Grinnell(h) 681 0 0 0
William D. Ireland, Jr. 1780 0 0 110,000
Richard W. Lowry(h) 681 0 0 0
William E. Mayer 1493 0 0 89,752
John A. McNeice, Jr. 0 0 0 0
James L. Moody, Jr. 1757(f) 0 0 109,000
John J. Neuhauser 1510 0 0 95,000
George L. Shinn 1883 0 0 112,000
Robert L. Sullivan 1658 0 0 104,561
Sinclair Weeks, Jr. 1849 0 0 116,000
(c) Includes $797 payable in later years as deferred compensation.
(d) At December 31, 1994, the Colonial Funds complex consisted of 31 open-end
and 5 closed-end management investment company portfolios.
(e) Includes $49,000 payable in later years as deferred compensation.
(f) Includes $1,145 payable in later years as deferred compensation.
The following table sets forth the amount of compensation paid to
Messrs. Birnbaum, Grinnell and Lowry in their capacities as
Trustees of the Liberty All-Star Equity Fund, The Charles Allmon
Trust, Inc., Liberty Financial Trust and LFC Utilities Trust
(Liberty Funds) for service during the calendar year ended
December 31, 1994:
Total
Compensation
Pension or Estimated From Liberty
Retirement Annual Funds for The
Benefits Accrued Benefits Calendar Year
As Part of Fund Upon Ended December
Trustee Expense Retirement 31, 1994(g)
Robert J. Birnbaum(h) $0 $0 $ 0
James E. Grinnell(h) 0 0 31,032
Richard W. Lowry(h) 0 0 31,282
(g) At December 31, 1994, Liberty Financial Trust and LFC Utilities
Trust were advised by Stein Roe & Farnham Incorporated (Stein
Roe) and Liberty All-Star Equity Fund and The Charles Allmon
Trust, Inc. were advised by Liberty Asset Management Company
(LAMCO). Stein Roe and LAMCO are indirect wholly-owned
subsidiaries of Liberty Financial Companies, Inc. (an
intermediate parent of the Adviser). On March 27, 1995, four
of the portfolios in the Liberty Financial Trust (now known as
Colonial Trust VII) were merged into existing Colonial funds
and a fifth was merged into a new portfolio of Colonial Trust
III.
(h) Elected as a trustee of the Colonial Funds complex on April 21,
1995.
Ownership of the Fund
At November 30, 1995, the officers and Trustees of the Trust as a
group owned approximately 368,630 Class A shares of the Fund,
representing 1.00% of the outstanding Class A shares of the Fund.
The largest single holding was by the Adviser.
No Class B shares were held by the Trustees and officers of the
Fund on November 30, 1995.
At November 30, 1995, the officers and Trustees of the Trust as
a group owned approximately 526,331 Class D shares of the Fund,
representing 80.51% of the outstanding Class D shares of the
Fund. The largest single holding was by the Adviser.
At November 30, 1995, Liberty Financial Companies, Attn: Michael
Santilli, 600 Atlantic Avenue, Boston, MA 02110 owned 7,896,294
Class A shares representing 13.74% of the total outstanding.
At November 30, 1995, John S. and Cheryl L. Edwards, Jt. Ten, 502
Ranger Drive, Tampa, FL 33615 owned 50,114 Class D shares
representing 7.64% of the total outstanding.
At November 30, 1995, there were 3,598 Class A, 4,030 Class B and
15 Class D recordholders of the Fund.
Sales Charges (for the fiscal year ended August 31, 1995) (in
thousands) were as follows:
Class B Shares Class D Shares
1995 1994 1993 1995
Aggregate contingent
deferred sales charges
(CDSC) on Fund
redemptions retained by $638 $306 $169 $(i)
CISI
(i) Rounds to less than one.
12b-1 Plans
The Fund offers three classes of shares - Class A, Class B and
Class D. The Fund may in the future offer other classes of
shares. The Trustees have approved 12b-1 Plans pursuant to Rule
12b-1 under the Act. Under the Plans, the Fund pays CISI a
service fee at an annual rate of 0.25% of average net assets and
a distribution fee at an annual rate of 0.75% of average net
assets attributed to Class B and D shares only. CISI may use the
entire amount of such fees to financial service firms (FSFs) for
certain services provided to shareholders, 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 and Class D Plans authorizes any other payments by the
Fund to CISI and its affiliates (including the Adviser) to the
extent that such payments might be construed to be indirect
financing of the distribution of Fund shares.
The Trustees believe the Plans could be a significant factor in
the growth and retention of Fund assets resulting in a more
advantageous expense ratio and increased investment flexibility
which could benefit Fund shareholders. The Plans will continue
in effect from year to year so long as continuance is
specifically approved at least annually by a vote of the
Trustees, including the Trustees who are not interested persons
of the Trust and have no direct or indirect financial interest in
the operation of the Plans or in any agreements related to the
Plans (Independent Trustees), cast in person at a meeting called
for the purpose of voting on the Plans. The Plans may not be
amended to increase the fee materially without approval by vote
of a majority of the outstanding voting securities of the
relevant class of shares and all material amendments of the Plans
must be approved by the Trustees in the manner provided in the
foregoing sentence. The Plans may be terminated at any time by
vote of a majority of the Independent Trustees or by vote of a
majority of the outstanding voting securities of the relevant
class of shares. The continuance of the Plans will only be
effective if the selection and nomination of the Trustees who are
non-interested Trustees is effected by such non-interested
Trustees.
Class A shares are offered at net asset value. Class B shares
are offered at net asset value subject to a CDSC if redeemed
within six years after purchase. Class D shares are offered at
net asset value plus 1.00% initial sales charge and are subject
to a 1.00% CDSC on redemptions within one year after purchase.
The CDSCs are described in the Prospectus.
No CDSC will be imposed on shares derived from reinvestment of
distributions or 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, which are not subject to the
service and distribution fees having an equal value.
Sales-related expenses (for the fiscal year ended August 31,
1995) (in thousands) of CISI relating to the Fund, were as
follows:
Class A Class B Class D
Fees to FSFs $(j) $3,799 $1
Cost of sales material relating to the Fund
(including printing and mailing expenses) $9 $4 $(j)
Allocated travel, entertainment and other
promotional (including advertising) $0 $0 $0
(j) Rounds to less than one.
INVESTMENT PERFORMANCE
The Fund's Class A, Class B and Class D share 7-day yields and 7-
day effective yields at August 31, 1995, were:
Class A Shares Class B Shares Class D Shares
7-day Yield 5.229% 4.189% 4.200%
7-day Effective Yield 5.366% 4.276% 4.288%
The Fund's average annual total returns at August 31, 1995, were:
Class A Shares
1 year 5 years 10 years
5.14% 4.07% 5.47%
Class B Shares
June 8, 1992
(Class B Shares
initially offered)
1 Year through August 31,
1995
With CDSC of 5.00% (0.92)% 1.45%
Without CDSC 4.08% 2.34%
Class D Shares
July 1, 1994
(Class D Shares
initially offered)
1 Year through August 31, 1995
With CDSC of 1.00% 2.04% 2.98%
Without CDSC 4.07% 3.87%
See Part 2 of this SAI, "Performance Measures," for how
calculations are made.
CUSTODIAN
Boston Safe Deposit and Trust Company is the Fund's custodian.
The custodian is responsible for safeguarding and controlling the
Fund's cash and securities, receiving and delivering securities
and collecting the Fund's interest and dividends.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP are the Fund's independent accountants
providing audit and tax return preparation services and
assistance and consultation in connection with the review of
various SEC filings. The financial statements incorporated by
reference in this SAI have been so incorporated, and the schedule
of financial highlights included in the Prospectus has been so
included, in reliance upon the report of Price Waterhouse LLP
given on the authority of said firm as experts in accounting and
auditing.
The financial statements and Report of Independent Accountants
appearing on pages 4 to 14 of the August 31, 1995 Annual Report
are incorporated in this SAI by reference.
STATEMENT OF ADDITIONAL INFORMATION
PART 2
The following information applies generally to most Colonial
funds. "Colonial funds" or "funds" include each series of
Colonial Trust I, Colonial Trust II, Colonial Trust III, Colonial
Trust IV, Colonial Trust V, Colonial Trust VI and Colonial Trust
VII. In certain cases, the discussion applies to some but not
all of the Colonial funds, and you should refer to your Fund's
Prospectus and to Part 1 of this SAI to determine whether the
matter is applicable to your Fund. You will also be referred to
Part 1 for certain data applicable to your Fund.
MISCELLANEOUS INVESTMENT PRACTICES
Part 1 of this Statement lists on page b which of the following
investment practices are available to your Fund.
Short-Term Trading
In seeking the fund's investment objective,the Adviser will buy
or sell portfolio securities whenever it believes it is
appropriate. The Adviser's decision will not generally be
influenced by how long the fund may have owned the security.
From time to time the fund will buy securities intending to seek
short-term trading profits. A change in the securities held by
the fund is known as "portfolio turnover" and generally involves
some expense to the fund. These expenses may include brokerage
commissions or dealer mark-ups and other transaction costs on
both the sale of securities and the reinvestment of the proceeds
in other securities. If sales of portfolio securities cause the
fund to realize net short-term capital gains, such gains will be
taxable as ordinary income. As a result of the fund's investment
policies, under certain market conditions the fund's portfolio
turnover rate may be higher than that of other mutual funds. 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
the Adviser considers a change in the fund's portfolio.
Lower Rated Bonds
Lower rated bonds are those rated lower than Baa by Moody's, BBB
by S&P, or comparable unrated securities. Relative to comparable
securities of higher quality:
1. the market price is likely to be more volatile because:
a. an economic downturn or increased interest rates may have
a more significant effect on the yield, price and
potential for default;
b. the secondary market may at times become less liquid or
respond to adverse publicity or investor perceptions,
increasing the difficulty in valuing or disposing of the
bonds;
c. existing or future legislation limits and may further
limit (i) investment by certain institutions or (ii) tax
deductibility of the interest by the issuer, which may
adversely affect value; and
d. certain lower rated bonds do not pay interest in cash on a
current basis. However, the fund will accrue and
distribute this interest on a current basis, and may have
to sell securities to generate cash for distributions.
2. the fund's achievement of its investment objective is more
dependent on the Adviser's credit
analysis.
3. lower rated bonds are less sensitive to interest rate
changes, but are more sensitive to adverse economic
developments.
Small Companies
Smaller, less well established companies may offer greater
opportunities for capital appreciation than larger, better
established companies, but may also involve certain special risks
related to limited product lines, markets, or financial resources
and dependence on a small management group. Their securities may
trade less frequently, in smaller volumes, and fluctuate more
sharply in value than securities of larger companies.
Foreign Securities
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 the fund, will be held by the
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 the fund to recognize as income any
appreciation (but not depreciation) on its holdings of PFICs as
of the end of its fiscal year.
Zero Coupon Securities (Zeros)
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 the fund and distributed to its
shareholders. These distributions must be made from the fund's
cash assets or, if necessary, from the proceeds of sales of
portfolio securities. 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 the 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 the 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, the fund retains the right to
call the loans at any time on reasonable notice, and it will do
so in order that the securities may be voted by the fund if the
holders of such securities are asked to vote upon or consent to
matters materially affecting the investment. 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 the fund
holds until the settlement date, in a segregated account, cash or
high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the fund enters into offsetting contracts
for the forward sale of other securities it owns. Forward
commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Where such
purchases are made through dealers, the fund relies on the dealer
to consummate the sale. The dealer's failure to do so may result
in the loss to the fund of an advantageous yield or price.
Although the fund will generally enter into forward commitments
with the intention of acquiring securities for its portfolio or
for delivery pursuant to options contracts it has entered into,
the fund may dispose of a commitment prior to settlement if the
Adviser deems it appropriate to do so. 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 the fund acquires a security
for a relatively short period (usually not more than one week)
subject to the obligation of the seller to repurchase and the
fund to resell such security at a fixed time and price
(representing the fund's cost plus interest). It is 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 the fund which are collateralized by the securities
subject to repurchase. The Adviser will monitor such
transactions to determine that the value of the underlying
securities is at least equal at all times to the total amount of
the repurchase obligation, including the interest factor. If the
seller defaults, the fund could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale
including accrued interest are less than the resale price
provided in the agreement including interest. In addition, if
the seller should be involved in bankruptcy or insolvency
proceedings, the fund may incur delay and costs in selling the
underlying security or may suffer a loss of principal and
interest if the fund is treated as an unsecured creditor and
required to return the underlying collateral to the seller's
estate.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the fund sells a security and
agrees to repurchase the same security at a mutually agreed upon
date and price. A reverse repurchase agreement may also be
viewed as the borrowing of money by the fund and, therefore, as a
form of leverage. A fund will invest the proceeds of borrowings
under reverse repurchase agreements. In addition, the fund will
enter into a reverse repurchase agreement only when the interest
income expected to be earned from the investment of the proceeds
is greater than the interest expense of the transaction. 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 the Adviser, such transactions are consistent
with the fund's investment objective and policies. Call options
written by the fund give the purchaser the right to buy the
underlying securities from the fund at a stated exercise price;
put options give the purchaser the right to sell the underlying
securities to the fund at a stated price.
A fund may write only covered options, which means that, so long
as the fund is obligated as the writer of a call option, it will
own the underlying securities subject to the option (or
comparable securities satisfying the cover requirements of
securities exchanges). In the case of put options, the fund will
hold cash and/or high-grade short-term debt obligations equal to
the price to be paid if the option is exercised. In addition,
the fund will be considered to have covered a put or call option
if and to the extent that it holds an option that offsets some or
all of the risk of the option it has written. 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 the fund's return on the underlying security if
the option expires unexercised or is closed out at a profit. The
amount of the premium reflects, among other things, the
relationship between the exercise price and the current market
value of the underlying security, the volatility of the
underlying security, the amount of time remaining until
expiration, current interest rates, and the effect of supply and
demand in the options market and in the market for the underlying
security. By writing a call option, the fund limits its
opportunity to profit from any increase in the market value of
the underlying security above the exercise price of the option
but continues to bear the risk of a decline in the value of the
underlying security. By writing a put option, the fund assumes
the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current
market value, resulting in a potential capital loss unless the
security subsequently appreciates in value.
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 the fund writes a call option but does not own the underlying
security, and when it writes a put option, the fund may be
required to deposit cash or securities with its broker as
"margin" or collateral for its obligation to buy or sell the
underlying security. As the value of the underlying security
varies, the fund may have to deposit additional margin with the
broker. Margin requirements are complex and are fixed by
individual brokers, subject to minimum requirements currently
imposed by the Federal Reserve Board and by stock exchanges and
other self-regulatory organizations.
Purchasing put options. 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 the fund, as holder of
the put option, is able to sell the underlying security at the
put exercise price regardless of any decline in the underlying
security's market price. For a put option to be profitable, the
market price of the underlying security must decline sufficiently
below the exercise price to cover the premium and transaction
costs. By using put options in this manner, the fund will reduce
any profit it might otherwise have realized from appreciation of
the underlying security by the premium paid for the put option
and by transaction costs.
Purchasing call options. A fund may purchase call options to
hedge against an increase in the price of securities that the
fund wants ultimately to buy. Such hedge protection is provided
during the life of the call option since the fund, as holder of
the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying
security's market price. In order for a call option to be
profitable, the market price of the underlying security must rise
sufficiently above the exercise price to cover the premium and
transaction costs. These costs will reduce any profit the fund
might have realized had it bought the underlying security at the
time it purchased the call option.
Over-the-Counter (OTC) options. The Staff of the Division of
Investment Management of the Securities and Exchange Commission
has taken the position that OTC options purchased by the fund and
assets held to cover OTC options written by the fund are illiquid
securities. Although the Staff has indicated that it is
continuing to evaluate this issue, pending further developments,
the fund intends to enter into OTC options transactions only with
primary dealers in U.S. Government Securities and, in the case of
OTC options written by the fund, only pursuant to agreements that
will assure that the fund will at all times have the right to
repurchase the option written by it from the dealer at a
specified formula price. 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 the fund not to enter into any OTC option
transaction if, as a result, more than 15% (10% in some cases,
refer to your fund's Prospectus) of the fund's net assets would
be invested in (i) illiquid investments (determined under the
foregoing formula) relating to OTC options written by the fund,
(ii) OTC options purchased by the fund, (iii) securities which
are not readily marketable, and (iv) repurchase agreements
maturing in more than seven days.
Risk factors in options transactions. The successful use of the
fund's options strategies depends on the ability of the Adviser
to forecast interest rate and market movements correctly.
When it purchases an option, the fund runs the risk that it will
lose its entire investment in the option in a relatively short
period of time, unless the fund exercises the option or enters
into a closing sale transaction with respect to the option during
the life of the option. If the price of the underlying security
does not rise (in the case of a call) or fall (in the case of a
put) to an extent sufficient to cover the option premium and
transaction costs, the fund will lose part or all of its
investment in the option. This contrasts with an investment by
the fund in the underlying securities, since the fund may
continue to hold its investment in those securities
notwithstanding the lack of a change in price of those
securities.
The effective use of options also depends on the fund's ability
to terminate option positions at times when the Adviser deems it
desirable to do so. Although the fund will take an option
position only if the Adviser believes there is a liquid secondary
market for the option, there is no assurance that the fund will
be able to effect closing transactions at any particular time or
at an acceptable price.
If a secondary trading market in options were to become
unavailable, the fund could no longer engage in closing
transactions. Lack of investor interest might adversely affect
the liquidity of the market for particular options or series of
options. A marketplace may discontinue trading of a particular
option or options generally. In addition, a market could become
temporarily unavailable if unusual events -- such as volume in
excess of trading or clearing capability -- were to interrupt
normal market operations.
A marketplace may at times find it necessary to impose
restrictions on particular types of options transactions, which
may limit the fund's ability to realize its profits or limit its
losses.
Disruptions in the markets for the securities underlying options
purchased or sold by the fund could result in losses on the
options. If trading is interrupted in an underlying security,
the trading of options on that security is normally halted as
well. As a result, the fund as purchaser or writer of an option
will be unable to close out its positions until options trading
resumes, and it may be faced with losses if trading in the
security reopens at a substantially different price. In
addition, the Options Clearing Corporation (OCC) or other options
markets may impose exercise restrictions. If a prohibition on
exercise is imposed at the time when trading in the option has
also been halted, the fund as purchaser or writer of an option
will be locked into its position until one of the two
restrictions has been lifted. If a prohibition on exercise
remains in effect until an option owned by the fund has expired,
the fund could lose the entire value of its option.
Special risks are presented by internationally-traded options.
Because of time differences between the United States and various
foreign countries, and because different holidays are observed in
different countries, foreign options markets may be open for
trading during hours or on days when U.S. markets are closed. As
a result, option premiums may not reflect the current prices of
the underlying interest in the United States.
Futures Contracts and Related Options
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 the fund investing primarily in foreign equity
securities, such equity securities), equal in value to the
commodity value (less any applicable margin deposits) have been
deposited in a segregated account of the fund's custodian.
A futures contract sale creates an obligation by the seller to
deliver the type of instrument called for in the contract in a
specified delivery month for a stated price. A futures contract
purchase creates an obligation by the purchaser to take delivery
of the type of instrument called for in the contract in a
specified delivery month at a stated price. The specific
instruments delivered or taken at settlement date are not
determined until on or near that date. The determination is made
in accordance with the rules of the exchanges on which the
futures contract was made. Futures contracts are traded in the
United States only on commodity exchange or boards of trade --
known as "contract markets" -- approved for such trading by the
Commodity Futures Trading Commission (CFTC), and must be executed
through a futures commission merchant or brokerage firm which is
a member of the relevant contract market.
Although futures contracts by their terms call for actual
delivery or acceptance of commodities or securities, the
contracts usually are closed out before the settlement date
without the making or taking of delivery. Closing out a futures
contract sale is effected by purchasing a futures contract for
the same aggregate amount of the specific type of financial
instrument or commodity with the same delivery date. If the
price of the initial sale of the futures contract exceeds the
price of the offsetting purchase, the seller is paid the
difference and realizes a gain. Conversely, if the price of the
offsetting purchase exceeds the price of the initial sale, the
seller realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the purchaser's entering into a
futures contract sale. If the offsetting sale price exceeds the
purchase price, the purchaser realizes a gain, and if the
purchase price exceeds the offsetting sale price, the purchaser
realizes a loss.
Unlike when the fund purchases or sells a security, no price is
paid or received by the fund upon the purchase or sale of a
futures contract, although the fund is required to deposit with
its custodian in a segregated account in the name of the futures
broker an amount of cash and/or U.S. Government Securities. This
amount is known as "initial margin". The nature of initial
margin in futures transactions is different from that of margin
in security transactions in that futures contract margin does not
involve the borrowing of funds by the fund to finance the
transactions. Rather, initial margin is in the nature of a
performance bond or good faith deposit on the contract that is
returned to the fund upon termination of the futures contract,
assuming all contractual obligations have been satisfied.
Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin", to and from the
broker (or the custodian) are made on a daily basis as the price
of the underlying security or commodity fluctuates, making the
long and short positions in the futures contract more or less
valuable, a process known as "marking to market."
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 the fund. A fund may close its positions by
taking opposite positions which will operate to terminate the
fund's position in the futures contracts. Final determinations
of variation margin are then made, additional cash is required to
be paid by or released to the fund, and the fund realizes a loss
or a gain. Such closing transactions involve additional
commission costs.
Options on futures contracts. 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 the 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 the fund is subject to the
Adviser `s ability to predict correctly movements in the
direction of interest rates and other factors affecting
securities markets.
Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves
less potential risk to the fund because the maximum amount at
risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of
a call or put option on a futures contract would result in a loss
to the fund when the purchase or sale of a futures contract would
not, such as when there is no movement in the prices of the
hedged investments. The writing of an option on a futures
contract involves risks similar to those risks relating to the
sale of futures contracts.
There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render
certain market clearing facilities inadequate, and thereby result
in the institution, by exchanges, of special procedures which may
interfere with the timely execution of customer orders.
To reduce or eliminate a hedge position held by the fund, the
fund may seek to close out a position. The ability to establish
and close out positions will be subject to the development and
maintenance of a liquid secondary market. It is not certain that
this market will develop or continue to exist for a particular
futures contract. Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options;
(ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options,
or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or a clearing corporation may not
at all times be adequate to handle current trading volume; or
(vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the
trading of contracts or options (or a particular class or series
of contracts or options), in which event the secondary market on
that exchange (or in the class or series of contracts or options)
would cease to exist, although outstanding contracts or options
on the exchange that had been issued by a clearing corporation as
a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Use by tax-exempt funds of U.S. Treasury security futures
contracts and options. A fund investing in tax-exempt securities
issued by a governmental entity may purchase and sell futures
contracts and related options on U.S. Treasury securities when,
in the opinion of the Adviser, price movements in Treasury
security futures and related options will correlate closely with
price movements in the tax-exempt securities which are the
subject of the hedge. U.S. Treasury securities futures contracts
require the seller to deliver, or the purchaser to take delivery
of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security
futures contracts give the purchaser the right in return for the
premium paid to assume a position in a U.S. Treasury futures
contract at the specified option exercise price at any time
during the period of the option.
In addition to the risks generally involved in using futures
contracts, there is also a risk that price movements in U.S.
Treasury security futures contracts and related options will not
correlate closely with price movements in markets for tax-exempt
securities.
Index futures contracts. An index futures contract is a contract
to buy or sell units of an index at a specified future date at a
price agreed upon when the contract is made. Entering into a
contract to buy units of an index is commonly referred to as
buying or purchasing a contract or holding a long position in the
index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short
position. A unit is the current value of the index. 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 the fund of
index futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the prices of the
index futures and movements in the prices of securities which are
the subject of the hedge. The Adviser will attempt to reduce
this risk by selling, to the extent possible, futures on indices
the movements of which will, in its judgment, have a significant
correlation with movements in the prices of the fund's portfolio
securities sought to be hedged.
Successful use of the index futures by the fund for hedging
purposes is also subject to the Adviser's ability to predict
correctly movements in the direction of the market. It is
possible that, where the fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the
futures are written may advance and the value of securities held
in the fund's portfolio may decline. If this occurs, the fund
would lose money on the futures and also experience a decline in
the value in its portfolio securities. However, while this could
occur to a certain degree, the Adviser believes that over time
the value of the fund's portfolio will tend to move in the same
direction as the market indices which are intended to correlate
to the price movements of the portfolio securities sought to be
hedged. It is also possible that, if the fund has hedged against
the possibility of a decline in the market adversely affecting
securities held in its portfolio and securities prices increase
instead, the fund will lose part or all of the benefit of the
increased valued of those securities that it has hedged because
it will have offsetting losses in its futures positions. In
addition, in such situations, if the fund has insufficient cash,
it may have to sell securities to meet daily variation margin
requirements.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the
index futures and the securities of the portfolio being hedged,
the prices of index futures may not correlate perfectly with
movements in the underlying index due to certain market
distortions. First, all participants in the futures markets are
subject to margin deposit and maintenance requirements. Rather
than meeting additional margin deposit requirements, investors
may close futures contracts through offsetting transactions which
would distort the normal relationship between the index and
futures markets. Second, margin requirements in the futures
market are less onerous than margin requirements in the
securities market, and as a result the futures market may attract
more speculators than the securities market. Increased
participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price
distortions in the futures market and also because of the
imperfect correlation between movements in the index and
movements in the prices of index futures, even a correct forecast
of general market trends by the Adviser may still not result in a
successful hedging transaction.
Options on index futures. Options on index futures are similar
to options on securities except that options on index futures
give the purchaser the right, in return for the premium paid, to
assume a position in an index futures contract (a long position
if the option is a call and a short position if the option is a
put), at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the
futures position by the writer of the option to the holder of the
option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the
amount by which the market price of the index futures contract,
at exercise, exceeds (in the case of a call) or is less than (in
the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior
to the expiration date of the option, the settlement will be made
entirely in cash equal to the difference between the exercise
price of the option and the closing level of the index on which
the future is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
Options on indices. As an alternative to purchasing call and put
options on index futures, the fund may purchase call and put
options on the underlying indices themselves. Such options could
be used in a manner identical to the use of options on index
futures.
Foreign Currency Transactions
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, the fund
enters into foreign currency transactions with respect to
specific receivables or payables of the fund generally arising in
connection with the purchase or sale of its portfolio securities.
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
the fund attempts to protect itself against a possible loss
resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, or
on which the dividend or interest payment is declared, and the
date on which such payments are made or received.
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 the fund may also purchase
exchange-listed and over-the-counter call and put options on
foreign currency futures contracts and on foreign currencies.
Over-the-counter options are considered to be illiquid by the SEC
staff. A put option on a futures contract gives the fund the
right to assume a short position in the futures contract until
expiration of the option. A put option on currency gives the
fund the right to sell a currency at an exercise price until the
expiration of the option. A call option on a futures contract
gives the fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on
currency gives the fund the right to purchase a currency at the
exercise price until the expiration of the option.
When it engages in position hedging, the fund enters into foreign
currency exchange transactions to protect against a decline in
the values of the foreign currencies in which its portfolio
securities are denominated (or an increase in the value of
currency for securities which the fund expects to purchase, when
the fund holds cash or short-term investments). In connection
with position hedging, the fund may purchase put or call options
on foreign currency and foreign currency futures contracts and
buy or sell forward contracts and foreign currency futures
contracts. 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 the
fund to purchase additional foreign currency on the spot market
(and bear the expense of such purchase) if the market value of
the security or securities being hedged is less than the amount
of foreign currency the fund is obligated to deliver and if a
decision is made to sell the security or securities and make
delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security or securities if
the market value of such security or securities exceeds the
amount of foreign currency the fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in
the underlying prices of the securities which the fund owns or
intends to purchase or sell. They simply establish a rate of
exchange which one can achieve at some future point in time.
Additionally, although these techniques tend to minimize the risk
of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the
increase in value of such currency.
Currency forward and futures contracts. 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 the fund's custodian. A forward
currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number
of days from the date of the contract as agreed by the parties,
at a price set at the time of the contract. In the case of a
cancelable contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and
their customers. A contract generally has no deposit
requirement, and no commissions are charged at any stage for
trades. A currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign
currency at a future date at a price set at the time of the
contract. Currency futures contracts traded in the United States
are designed and traded on exchanges regulated by the CFTC, such
as the New York Mercantile Exchange.
Forward currency contracts differ from currency futures contracts
in certain respects. For example, the maturity date of a forward
contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined
date in a given month. Forward contracts may be in any amounts
agreed upon by the parties rather than predetermined amounts.
Also, forward contracts are traded directly between currency
traders so that no intermediary is required. A forward contract
generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the fund may
either accept or make delivery of the currency specified in the
contract, or at or prior to maturity enter into a closing
transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts
are usually effected with the currency trader who is a party to
the original forward contract. Closing transactions with respect
to futures contracts are effected on a commodities exchange; a
clearing corporation associated with the exchange assumes
responsibility for closing out such contracts.
Positions in currency futures contracts may be closed out only on
an exchange or board of trade which provides a secondary market
in such contracts. Although the fund intends to purchase or sell
currency futures contracts only on exchanges or boards of trade
where there appears to be an active secondary market, there is no
assurance that a secondary market on an exchange or board of
trade will exist for any particular contract or at any particular
time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the fund
would continue to be required to make daily cash payments of
variation margin.
Currency options. In general, options on currencies operate
similarly to options on securities and are subject to many
similar risks. Currency options are traded primarily in the over-
the-counter market, although options on currencies have recently
been listed on several exchanges. Options are traded not only on
the currencies of individual nations, but also on the European
Currency Unit ("ECU"). The ECU is composed of amounts of a
number of currencies, and is the official medium of exchange of
the European Economic Community's European Monetary System.
A fund will only purchase or write currency options when the
Adviser believes that a liquid secondary market exists for such
options. There can be no assurance that a liquid secondary
market will exist for a particular option at any specified time.
Currency options are affected by all of those factors which
influence exchange rates and investments generally. To the
extent that these options are traded over the counter, they are
considered to be illiquid by the SEC staff.
The value of any currency, including the U.S. dollars, may be
affected by complex political and economic factors applicable to
the issuing country. In addition, the exchange rates of
currencies (and therefore the values of currency options) may be
significantly affected, fixed, or supported directly or
indirectly by government actions. Government intervention may
increase risks involved in purchasing or selling currency
options, since exchange rates may not be free to fluctuate in
respect to other market forces.
The value of a currency option reflects the value of an exchange
rate, which in turn reflects relative values of two currencies,
the U.S. dollar and the foreign currency in question. Because
currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in
the exercise of currency options, investors may be disadvantaged
by having to deal in an odd lot market for the underlying
currencies in connection with options at prices that are less
favorable than for round lots. Foreign governmental restrictions
or taxes could result in adverse changes in the cost of acquiring
or disposing of currencies.
There is no systematic reporting of last sale information for
currencies and there is no regulatory requirement that quotations
available through dealers or other market sources be firm or
revised on a timely basis. Available quotation information is
generally representative of very large round-lot transactions in
the interbank market and thus may not reflect exchange rates for
smaller odd-lot transactions (less than $1 million) where rates
may be less favorable. The interbank market in currencies is a
global, around-the-clock market. To the extent that options
markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in
the options markets.
Settlement procedures. Settlement procedures relating to the
fund's investments in foreign securities and to the fund's
foreign currency exchange transactions may be more complex than
settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not
present in the fund's domestic investments, including foreign
currency risks and local custom and usage. Foreign currency
transactions may also involve the risk that an entity involved in
the settlement may not meet its obligations.
Foreign currency conversion. Although foreign exchange dealers
do not charge a fee for currency conversion, they do realize a
profit based on the difference (spread) between prices at which
they are buying and selling various currencies. Thus, a dealer
may offer to sell a foreign currency to the fund at one rate,
while offering a lesser rate of exchange should the fund desire
to resell that currency to the dealer. Foreign currency
transactions may also involve the risk that an entity involved in
the settlement may not meet its obligation.
Participation Interests
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 the
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 the fund purchases municipal obligations it may also acquire
stand-by commitments from banks and broker-dealers with respect
to such municipal obligations. A stand-by commitment is the
equivalent of a put option acquired by the fund with respect to a
particular municipal obligation held in its portfolio. A stand-
by commitment is a security independent of the municipal
obligation to which it relates. The amount payable by a bank or
dealer during the time a stand-by commitment is exercisable,
absent unusual circumstances relating to a change in market
value, would be substantially the same as the value of the
underlying municipal obligation. A stand-by commitment might not
be transferable by the fund, although it could sell the
underlying municipal obligation to a third party at any time.
A fund expects that stand-by commitments generally will be
available without the payment of direct or indirect
consideration. However, if necessary and advisable, the fund may
pay for stand-by commitments either separately in cash or by
paying a higher price for portfolio securities which are acquired
subject to such a commitment (thus reducing the yield to maturity
otherwise available for the same securities.) The total amount
paid in either manner for outstanding stand-by commitments held
in a fund portfolio will not exceed 10% of the value of the
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.
Mortgage Dollar Rolls
In a mortgage dollar roll, the fund sells a mortgage-backed
security and simultaneously enters into a commitment to purchase
a similar security at a later date. The fund either will be paid
a fee by the counterparty upon entering into the transaction or
will be entitled to purchase the similar security at a discount.
As with any forward commitment, mortgage dollar rolls involve the
risk that the counterparty will fail to deliver the new security
on the settlement date, which may deprive the fund of obtaining a
beneficial investment. In addition, the security to be delivered
in the future may turn out to be inferior to the security sold
upon entering into the transaction. Finally, the transaction
costs may not exceed the return earned by the fund from the
transaction.
TAXES
All discussions of taxation at the shareholder level relate to
federal taxes only. Consult your tax adviser for state and local
tax considerations and for information about special tax
considerations that may apply to shareholders that are not
natural persons.
Dividends Received Deductions. Distributions will qualify for
the corporate dividends received deduction only to the extent
that dividends earned by the fund qualify. Any such dividends
are, however, includable in adjusted current earnings for
purposes of computing corporate AMT.
Return of Capital Distributions. To the extent that a
distribution is a return of capital for federal and state tax
purposes, it reduces the cost basis of the shares on the record
date and is similar to a partial return of the original
investment (on which a sales charge may have been paid). There
is no recognition of a gain or loss, however, unless the return
of capital reduces the cost basis in the shares to below zero.
Funds that invest in U.S. Government Securities. Many states
grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by the fund from direct
obligations of the U.S. government. Investments in mortgage-
backed securities (including GNMA, FNMA and FHLMC Securities) and
repurchase agreements collateralized by U.S. government
securities do not qualify as direct federal obligations in most
states. Shareholders should consult with their own tax advisers
about the applicability of state and local intangible property,
income or other taxes to their fund shares and distributions and
redemption proceeds received from the fund.
Distributions from Tax-Exempt Funds. Each tax-exempt fund will
have at least 50% of its total assets invested in tax-exempt
bonds at the end of each quarter so that dividends from net
interest income on tax-exempt bonds will be exempt from Federal
income tax when received by a shareholder. The tax-exempt
portion of dividends paid will be designated within 60 days after
year-end based upon the ratio of net tax-exempt income to total
net investment income earned during the year. That ratio may be
substantially different than the ratio of net tax-exempt income
to total net investment income earned during any particular
portion of the year. Thus, a shareholder who holds shares for
only a part of the year may be allocated more or less tax-exempt
dividends than would be the case if the allocation were based on
the ratio of net tax-exempt income to total net investment income
actually earned while a shareholder.
The Tax Reform Act of 1986 makes income from certain "private
activity bonds" issued after August 7, 1986, a tax preference
item for the alternative minimum tax (AMT) at the maximum rate of
28% for individuals and 20% for corporations. If the fund
invests in private activity bonds, shareholders may be subject to
the AMT on that part of the distributions derived from interest
income on such bonds. Other provisions of the Tax Reform Act
affect the tax treatment of distributions for corporations,
casualty insurance companies and financial institutions; interest
on all tax-exempt bonds is included in corporate adjusted current
earnings when computing the AMT applicable to corporations.
Seventy-five percent of the excess of adjusted current earnings
over the amount of income otherwise subject to the AMT is
included in 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 a 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 a fund's investments other than tax-exempt instruments may
give rise to taxable income. A fund's shares must be held for
more than six months in order to avoid the disallowance of a
capital loss on the sale of fund shares to the extent of tax-
exempt dividends paid during that period. A shareholder that
borrows money to purchase a fund's 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. The Adviser, intends to avoid
this tax except when the cost of processing the distribution is
greater than the tax.
Tax Accounting Principles. To qualify as a "regulated investment
company," the fund must (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of
securities or foreign currencies or other income (including but
not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such
securities or currencies; (b) derive less than 30% of its gross
income from the sale or other disposition of certain assets held
less than three months; (c) diversify its holdings so that, at
the close of each quarter of its taxable year, (i) at least 50%
of the value of its total assets consists of cash, cash items,
U.S. Government securities, and other securities limited
generally with respect to any one issuer to not more than 5% of
the total assets of the fund and not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities
of any issuer (other than U.S. Government securities).
Futures Contracts. Accounting for futures contracts will be in
accordance with generally accepted accounting principles. The
amount of any realized gain or loss on the closing out of a
futures contract will result in a capital gain or loss for tax
purposes. In addition, certain futures contracts held by the
fund (so-called "Section 1256 contracts") will be required to be
"marked-to-market" (deemed sold) for federal income tax purposes
at the end of each fiscal year. Sixty percent of any net gain or
loss recognized on such deemed sales or on actual sales will be
treated as long-term capital gain or loss, and the remainder will
be treated as short-term capital gain or loss.
However, if a futures contract is part of a "mixed straddle"
(i.e., a straddle comprised in part of Section 1256 contracts), a
fund may be able to make an election which will affect the
character arising from such contracts as long-term or short-term
and the timing of the recognition of such gains or losses. In
any event, the straddle provisions described below will be
applicable to such mixed straddles.
Special Tax Rules Applicable to "Straddles". The straddle
provisions of the Code may affect the taxation of the fund's
options and futures transactions and transactions in securities
to which they relate. A "straddle" is made up of two or more
offsetting positions in "personal property," including debt
securities, related options and futures, equity securities,
related index futures and, in certain circumstances, options
relating to equity securities, and foreign currencies and related
options and futures.
The straddle rules may operate to defer losses realized or deemed
realized on the disposition of a position in a straddle, may
suspend or terminate the fund's holding period in such positions,
and may convert short-term losses to long-term losses in certain
circumstances.
Foreign Currency-Denominated Securities and Related Hedging
Transactions. The fund's transactions in foreign currency-
denominated debt securities, certain foreign currency options,
futures contracts and forward contracts may give rise to ordinary
income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
If more than 50% of the fund's total assets at the end of its
fiscal year are invested in securities of foreign corporate
issuers, the fund may make an election permitting its
shareholders to take a deduction or credit for federal tax
purposes for their portion of certain foreign taxes paid by the
fund. The Adviser, will consider the value of the benefit to a
typical shareholder, the cost to the fund of compliance with the
election, and incidental costs to shareholders in deciding
whether to make the election. A shareholder's ability to claim
such a foreign tax credit will be subject to certain limitations
imposed by the Code, as a result of which a shareholder may not
get a full credit for the amount of foreign taxes so paid by the
fund. Shareholders who do not itemize on their federal income
tax returns may claim a credit (but no deduction) for such
foreign taxes.
Certain securities are considered to be Passive Foreign
Investment Companies (PFICS) under the Code, and the fund is
liable for any PFIC-related taxes.
MANAGEMENT OF THE COLONIAL FUNDS
Colonial Management Associates, Inc. (CMA) is the investment
adviser to each of the Colonial funds (except for Colonial
Municipal Money Market Fund, Colonial Global Utilities Fund and
Colonial Newport Tiger Fund). (See Part I of this SAI for a
description of the Adviser to these funds) CMA 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 direct subsidiary
of LFC Holdings, Inc., which in turn is a direct subsidiary
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 (1), is a Trustee of LFC Utilites Trust in which
Colonial Global Utilities Fund is invested (LFC Portfolio) since
November, 1994, 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 (2), is a Trustee of certain 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 (2), 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 (1), is a Private Investor since November, 1988, is a
Trustee of the LFC Portfolio since August, 1991 (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 (2), 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 (1), is a Trustee of the LFC Portfolio since August,
1991, 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, Vero Beach, FL 32963
William E. Mayer (Age 55), Trustee of all Colonial funds since
February, 1994 (2), 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; formerly Chairman and Chief
Executive Officer, C.S. First Boston Merchant Bank from January,
1990 to January, 1991; and formerly President and Chief Executive
Officer, The First Boston Corporation from September, 1988 to
January, 1990), College Park, MD 20742
John A. McNeice, Jr. (3)(Age 63), Trustee and President of all
Colonial funds since February, 1975 (2), is Chairman of the Board
and Director, TCG since November, 1984 ,and of CMA since
November, 1983, Director, Liberty Financial since March, 1995
(formerly Chief Executive Officer, CMA and TCG from November,
1983 to March, 1995)
James L. Moody, Jr. (Age 63), Trustee of all Colonial funds since
May, 1986 (2), 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 (2), 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 (2), 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 (2), 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 (2), 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, CMA (formerly Executive Vice
President, CMA from October, 1989 to July, 1993); President since
October, 1994, Chief Executive Officer since March, 1995 and
Director since October, 1981, 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, CMA since June, 1993 (formerly Assistant Vice
President, CMA 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, CMA (formerly Senior Vice President and Treasurer
from March, 1985 to July, 1993, CMA); 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, CMA;
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, CMA; 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)
(1) On April 3, 1995, and in connection with the merger of The
Colonial Group, Inc. into Liberty Financial which occurred on
March 27, 1995, Liberty Financial Trust (LFT) changed its
name to Colonial Trust VII. Prior to the merger, each of
Messrs. Birnbaum, Grinnell, and Lowry was a Trustee of LFT.
Mr. Birnbaum has been a Trustee of LFT since November, 1994.
Each of Messrs. Grinnell and Lowry has been a Trustee of LFT
since August, 1991. Each of Messrs. Grinnell and Lowry
continue to serve as Trustees under the new name, Colonial
Trust VII, along with each of the other Colonial Trustees
named above. The Colonial Trustees were elected as Trustees
of Colonial Trust VII effective April 3, 1995.
(2) Elected as a Trustee of the LFC Portfolio on March 27, 1995.
(3) Trustees who are "interested persons" (as defined in the 1940
Act) of the fund or CMA.
The address of the officers of each Colonial Fund is One
Financial Center, Boston, MA 02111.
The Trustees serve as trustees of all Colonial funds for which
each Trustee (except Mr. McNeice) will receive an annual retainer
of $45,000 and attendance fees of $7,500 for each regular joint
meeting and $1,000 for each special joint meeting. Committee
chairs receive an annual retainer of $5,000. Committee members
receive an annual retainer of $1,000 and $1,000 for each special
meeting attended. Two-thirds of the Trustee fees are allocated
among the Colonial funds based on the fund's relative net assets
and one-third of the fees are divided equally among the Colonial
funds.
CMA and/or its affiliate, Colonial Advisory Services, Inc.
(CASI), has rendered investment advisory services to investment
company, institutional and other clients since 1931. CMA
currently serves as investment adviser and administrator 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 CMA
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-See Part I of this SAI)
Under a Management Agreement (Agreement), the Adviser has
contracted to furnish each fund with investment research and
recommendations or fund management, respectively, and accounting,
and administrative personnel and services, and with office space,
equipment and other facilities. For these services and
facilities, each Colonial fund pays a monthly fee based on the
average of the daily closing value of the total net assets of
each fund for such month.
The Adviser's compensation under the Agreement is subject to
reduction in any fiscal year to the extent that the total
expenses of each 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 Colonial
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 the Adviser to the fund and
its shareholders is limited to situations involving the Adviser's
own willful misfeasance, bad faith, gross negligence or reckless
disregard of duties.
The Agreement may be terminated with respect to the fund at any
time on 60 days' written notice by the Adviser or by the Trustees
of the Trust or by a vote of a majority of the outstanding voting
securities of the fund. The Agreement will automatically
terminate upon any assignment thereof and shall continue in
effect from year to year only so long as such continuance is
approved at least annually (i) by the Trustees of the Trust or by
a vote of a majority of the outstanding voting securities of the
fund and (ii) by vote of a majority of the Trustees who are not
interested persons (as such term is defined in the 1940 Act) of
the Adviser or the Trust, cast in person at a meeting called for
the purpose of voting on such approval.
The Adviser pays all salaries of officers of the Trust. The
Trust pays all expenses not assumed by the Adviser including, but
not limited to, auditing, legal, custodial, investor servicing
and shareholder reporting expenses. The Trust pays the cost of
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 the Adviser 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 the Adviser.
Administration Agreement (this section applies only to the
Colonial Municipal Money Market Fund, Colonial Global Utilities
Fund and Colonial Newport Tiger Fund and their respective Trusts)
Under an Administration Agreement with each Fund, CMA, in its
capacity as the Administrator to each Fund, has contracted to
perform the following administrative services:
(a) providing office space, equipment and clerical
personnel;
(b) arranging, if desired by the respective Trust, for its
Directors,
officers and employees to serve as Trustees, officers or
agents of each Fund;
(c) preparing and, if applicable, filing all documents
required for compliance by each Fund with
applicable laws and regulations;
(d) preparation of agendas and supporting documents for and
minutes of meetings of Trustees,
committees of Trustees and shareholders;
(e) monitoring compliance by the Fund (only applicable to
Colonial Municipal Money Market 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 SR&F
Municipal Money Market Portfolio
(Municipal Money Market Portfolio) in which Colonial
Municipal Money Market Fund is invested
and the LFC Portfolio and reporting to the Trustees
from time to time with respect thereto;
(g) coordinating and overseeing the activities of each
Fund's other third-party service providers;
and
(h) maintaining certain books and records of each Fund.
The Pricing and Bookkeeping Agreement
CMA provides pricing and bookkeeping services to each Colonial
fund pursuant to a Pricing and Bookkeeping Agreement. The
Pricing and Bookkeeping Agreement has a one-year term. CMA, in
its capacity as the Administrator to each of Colonial Municipal
Money Market Fund and Colonial Global Utilities Fund, is paid an
annual fee of $18,000, plus 0.0233% of average daily net assets
in excess of $50 million. For each of the other Colonial funds
(except for Colonial Newport Tiger Fund), CMA 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
CMA 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 each of the Municipal Money Market Portfolio and
LFC Portfolio provides pricing and bookkeeping services to each
Portfolio for a fee of $25,000 plus 0.0025% annually of average
daily net assets of each Portfolio over $50 million.
Portfolio Transactions
The following sections entitled "Investment decisions" and
Brokerage and research services" do not apply to Colonial
Municipal Money Market Fund, Colonial U.S. Fund for Growth,
Colonial Newport Tiger Fund or Colonial Global Utilities Fund.
For each of Colonial Municipal Money Market Fund, Colonial U.S.
Fund for Growth and Colonial Global Utilities Fund, see Part 1
of each fund's respective SAI.
Investment decisions. The Adviser acts as investment adviser to
each of the Colonial funds (except for the Colonial Municipal
Money Market Fund, Colonial Global Utilities Fund and Colonial
Newport Tiger Fund, each of which is administered by the Adviser,
and Colonial U.S. Fund for Growth for which investment decisions
have been delegated by the Adviser to State Street Bank and Trust
Company, the fund's sub-adviser) (as defined under Management of
the Fund herein).The Adviser's affiliate, CASI, advises other
institutional, corporate, fiduciary and individual clients for
which CASI performs various services. Various officers and
Trustees of the Trust also serve as officers or Trustees of other
Colonial funds and the other corporate or fiduciary clients of
the Adviser. The Colonial funds and clients advised by the
Adviser or the funds administered by the Adviser sometimes invest
in securities in which the Fund also invests and sometimes engage
in covered option writing programs and enter into transactions
utilizing stock index options and stock index and financial
futures and related options ("other instruments"). If the Fund,
such other Colonial funds and such other clients desire to buy or
sell the same portfolio securities, options or other instruments
at about the same time, the purchases and sales are normally made
as nearly as practicable on a pro rata basis in proportion to the
amounts desired to be purchased or sold by each. Although in
some cases these practices could have a detrimental effect on the
price or volume of the securities, options or other instruments
as far as the Fund is concerned, in most cases it is believed
that these practices should produce better executions. It is the
opinion of the Trustees that the desirability of retaining the
Adviser as investment adviser to the Colonial funds outweighs the
disadvantages, if any, which might result from these practices.
The portfolio managers of Colonial International Fund for Growth
will use the trading facilities of Stein Roe and Farnham
Incorporated, an affiliate of the Adviser, to place all orders
for the purchase and sale of this fund's portfolio securities,
futures contracts and foreign currencies.
Brokerage and research services. Consistent with the Rules of
Fair Practice of the National Association of Securities Dealers,
Inc., and subject to seeking "best execution" (as defined below)
and such other policies as the Trustees may determine, the
Adviser may consider sales of shares of the Colonial funds as a
factor in the selection of broker-dealers to execute securities
transactions for a Colonial fund.
The Adviser places the transactions of the Colonial funds with
broker-dealers selected by the Adviser and, if applicable,
negotiates commissions. Broker-dealers may receive brokerage
commissions on portfolio transactions, including the purchase and
writing of options, the effecting of closing purchase and sale
transactions, and the purchase and sale of underlying securities
upon the exercise of options and the purchase or sale of other
instruments. The Colonial funds from time to time also execute
portfolio transactions with such broker-dealers acting as
principals. The Colonial funds do not intend to deal exclusively
with any particular broker-dealer or group of broker-dealers.
Except as described below in connection with commissions paid to
a clearing agent on sales of securities, it is the Adviser's
policy always to seek best execution, which is to place the
Colonial funds' transactions where the Colonial funds can obtain
the most favorable combination of price and execution services in
particular transactions or provided on a continuing basis by a
broker-dealer, and to deal directly with a principal market maker
in connection with over-the-counter transactions, except when it
is believed that best execution is obtainable elsewhere. In
evaluating the execution services of, including the overall
reasonableness of brokerage commissions paid to, a broker-dealer,
consideration is given to, among other things, the firm's general
execution and operational capabilities, and to its reliability,
integrity and financial condition.
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 the Adviser and the Colonial funds. The Adviser may
use all, some or none of such research services in providing
investment advisory services to each of its investment company
and other clients, including the fund. To the extent that such
services are used by the Adviser, they tend to reduce the
Adviser's expenses. In the Adviser's opinion, it is impossible
to assign an exact dollar value for such services.
Subject to such policies as the Trustees may determine, the
Adviser may cause the Colonial funds to pay a broker-dealer which
provides brokerage and research services to the Adviser an amount
of commission for effecting a securities transaction, including
the sale of an option or a closing purchase transaction, for the
Colonial funds in excess of the amount of commission which
another broker-dealer would have charged for effecting that
transaction. As provided in Section 28(e) of the Securities
Exchange Act of 1934, "brokerage and research services" include
advice as to the value of securities, the advisability of
investing in, purchasing or selling securities and the
availability of securities or purchasers or sellers of
securities; furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends and portfolio
strategy and performance of accounts; and effecting securities
transactions and performing functions incidental thereto (such as
clearance and settlement). The Adviser must determine in good
faith that such greater commission is reasonable in relation to
the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of that particular
transaction or the Adviser's overall responsibilities to the
Colonial funds and all its other clients.
The Trustees have authorized the Adviser to utilize the services
of a clearing agent with respect to all call options written by
Colonial funds that write options and to pay such clearing agent
commissions of a fixed amount per share (currently 1.25 cents) on
the sale of the underlying security upon the exercise of an
option written by a fund. The Trustees may further authorize the
Adviser 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 each Colonial fund plus reimbursement
for out-of-pocket expenses. See "Fund Charges and Expenses" in
Part 1 of this SAI for information on fees received by CISC. The
agreement continues indefinitely but may be terminated by 90
days' notice by the Fund 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
Each Colonial fund determines net asset value (NAV) per share for
each Class as of the close of the New York Stock Exchange
(Exchange)(generally 4:00 p.m. Eastern time, 3:00 p.m. Chicago
time) each day the Exchange is open. Currently, the Exchange is
closed Saturdays, Sundays and the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of
July, Labor Day, Thanksgiving and Christmas. The net asset value
of the Municipal Money Market Portfolio will not be determined on
days when the Exchange is closed unless, in the judgment of the
Municipal Money Market Portfolio's Board of Trustees, the net
asset value of the Municipal Money Market Portfolio should be
determined on any such day, in which case the determination will
be made at 3:00 p.m., Chicago time. Debt securities generally
are valued by a pricing service which determines valuations based
upon market transactions for normal, institutional-size trading
units of similar securities. However, in circumstances where
such prices are not available or where the Adviser deems it
appropriate to do so, an over-the-counter or exchange bid
quotation is used. Securities listed on an exchange or on NASDAQ
are valued at the last sale price. Listed securities for which
there were no sales during the day and unlisted securities are
valued at the last quoted bid price. Options are valued at the
last sale price or in the absence of a sale, the mean between the
last quoted bid and offering prices. Short-term obligations with
a maturity of 60 days or less are valued at amortized cost
pursuant to procedures adopted by the Trustees. The values of
foreign securities quoted in foreign currencies are translated
into U.S. dollars at the exchange rate for that day. Portfolio
positions for which there are no such valuations and other assets
are valued at fair value as determined 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 each
Colonial fund's NAV. If events materially affecting the value of
such securities occur during such period, then these securities
will be valued at their fair value following procedures approved
by the Trust's Trustees.
Amortized Cost for Money Market Funds (this section currently
applies only to Colonial Government Money Market Fund, a series
of Colonial Trust II- see "Amortized Cost for Money Market Funds"
under "Other Information Concerning the Portfolio" in Part 1 of
the SAI of Colonial Municipal Money Market Fund for information
relating to the Municipal Money Market Portfolio)
Money market funds generally value their portfolio securities at
amortized cost according to Rule 2a-7 under the 1940 Act.
Portfolio instruments are valued under the amortized cost method,
whereby the instrument is recorded at cost and thereafter
amortized to maturity. This method assures a constant NAV but
may result in a yield different than that of the same portfolio
under the market value method. The Trust'sTrustees have adopted
procedures intended to stabilize a money market fund's NAV per
share at $1.00. When a money market fund's market value deviates
from the amortized cost of $1.00, and results in a material
dilution to existing shareholders, the Trust's Trustees will take
corrective action 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 in the Shareholder
Report of the Colonial Government Money Market Fund for a
specimen price sheet showing the computation of maximum offering
price per share of Class A shares.
HOW TO BUY SHARES
The Prospectus contains a general description of how investors
may buy shares of the Fund and tables of charges. This SAI
contains additional information which may be of interest to
investors.
The Fund will accept unconditional orders for shares to be
executed at the public offering price based on the NAV per share
next determined after the order is placed in good order. The
public offering price is the NAV plus the applicable sales
charge, if any. In the case of orders for purchase of shares
placed through FSFs, the public offering price will be determined
on the day the order is placed in good order, but only if the FSF
receives the order prior to the time 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 the Fund
values its shares, the price will be based on the NAV determined
as of the close of the Exchange on the next day it is open. If
funds for the purchase of shares are sent directly to CISC, they
will be invested at the public offering price next determined
after receipt in good order. Payment for shares of the Fund must
be in U.S. dollars; if made by check, the check must be drawn on
a U.S. bank.
The Fund receives the entire NAV of shares sold. For shares
subject to an initial sales charge, CISI's commission is the
sales charge shown in the Fund's Prospectus less any applicable
FSF discount. The FSF discount is the same for all FSFs, except
that CISI retains the entire sales charge on any sales made to a
shareholder who does not specify an FSF on the Investment Account
Application ("Application"). CISI generally retains 100% of any
asset-based sales charge (distribution fee) or contingent
deferred sales charge. Such charges generally reimburse CISI for
an up-front and/or ongoing commission paid to FSFs.
Checks presented for the purchase of shares of the Fund which are
returned by the purchaser's bank, or checkwriting privilege
checks for which there are insufficient funds in a shareholder's
account to cover redemption, will subject such purchaser or
shareholder to a $15 service fee for each check returned. Checks
must be drawn on a U.S. bank and must be payable in U.S. dollars.
CISC acts as the shareholder's agent whenever it receives
instructions to carry out a transaction on the shareholder's
account. Upon receipt of instructions that shares are to be
purchased for a shareholder's account, the designated FSF will
receive the applicable sales commission. Shareholders may change
FSFs at any time by written notice to CISC, provided the new FSF
has a sales agreement with CISI.
Shares credited to an account are transferable upon written
instructions in good order to CISC and may be redeemed as
described under "How to sell shares" in the Prospectus.
Certificates will not be issued for Class A shares unless
specifically requested and no certificates will be issued for
Class B, C, D, T or Z shares. The Colonial 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.
SPECIAL PURCHASE PROGRAMS/INVESTOR SERVICES
The following special purchase programs/investor services may be
changed or eliminated at any time.
Fundamatic Program. As a convenience to investors, shares of
most Colonial funds may be purchased through the Colonial
Fundamatic Program. Preauthorized monthly bank drafts or
electronic funds transfer for a fixed amount of at least $50 are
used to purchase a Colonial fund's shares at the public offering
price next determined after CISI receives the proceeds from the
draft (normally the 5th or the 20th of each month, or the next
business day thereafter). If your Fundamatic purchase is by
electronic funds transfer, you may request the Fundamatic
purchase for any day. Further information and application forms
are available from FSFs or from CISI.
Automated Dollar Cost Averaging (Classes A, B and D). Colonial's
Automated Dollar Cost Averaging program allows you to exchange
$100 or more on a monthly basis from any Colonial fund in which
you have a current balance of at least $5,000 into the same class
of shares of up to four other Colonial funds. Complete the
Automated Dollar Cost Averaging section of the Application. The
designated amount will be exchanged on the third Tuesday of each
month. There is no charge for 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 Colonial fund will
extend the time of the Automated Dollar Cost Averaging program.
An exchange is a capital sale transaction for federal income tax
purposes.You may terminate your program, change the amount of the
exchange (subject to the $100 minimum), or change your selection
of funds, by telephone or in writing; if in writing by mailing 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.
CISI offers several plans by which an investor may obtain reduced
initial or contingent deferred sales charges. These plans may be
altered or discontinued at any time.
Tax-Sheltered Retirement Plans. CISI offers 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.
Consultation with a competent financial and tax adviser regarding
these Plans and consideration of the suitability of fund shares
as an investment under the Employee Retirement Income Security
Act of 1974 or otherwise is recommended.
Telephone Address Change Services. By calling CISC, shareholders
or their FSF of record may change an address on a recorded
telephone line. Confirmations of address change will be sent to
both the old and the new addresses. The Telephone redemption
privileges are suspended for 30 days after an address change is
effected.
Colonial cash connection. Dividends and any other distributions,
including Systematic Withdrawal Plan (SWP) payments, may be
automatically deposited to a shareholder's bank account via
electronic funds transfer. Shareholders wishing to avail
themselves of this electronic transfer procedure should complete
the appropriate sections of the Application.
Automatic dividend diversification. The automatic dividend
diversification reinvestment program (ADD) generally allows
shareholders to have all distributions from a fund automatically
invested in the same class of shares of another Colonial fund.
An ADD account must be in the same name as the shareholder's
existing Open Account with the particular fund. Call CISC for
more information at 1-800- 422-3737.
PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES
Right of Accumulation and Statement of Intent (Class A and Class
T shares only) (Class T shares can only be purchased by the
shareholders of Colonial Newport Tiger Fund who already own Class
T shares). Reduced sales charges on Class A and T shares can be
effected by combining a current purchase with prior purchases of
Class A, B, C, D, T and Z shares of the Colonial funds. The
applicable sales charge is based on the combined total of:
1. the current purchase; and
2. the value at the public offering price at the close of
business on the previous day of all Colonial funds' Class A
shares held by the shareholder (except shares of any Colonial
money market fund, unless such shares were acquired by
exchange from Class A shares of another Colonial fund other
than a money market fund and Class B, C, D, T and Z shares).
CISI must be promptly notified of each purchase which entitles a
shareholder to a reduced sales charge. Such reduced sales charge
will be applied upon confirmation of the shareholder's holdings
by CISC. A Colonial fund may terminate or amend this Right of
Accumulation.
Any person may qualify for reduced sales charges on purchases of
Class A and T shares made within a thirteen-month period
pursuant to a Statement of Intent ("Statement"). A shareholder
may include, as an accumulation credit toward the completion of
such Statement, the value of all Class A, B, C D, T and Z shares
held by the shareholder on the date of the Statement in Colonial
funds (except shares of any Colonial money market fund, unless
such shares were acquired by exchange from Class A shares of
another non-money market Colonial fund). The value is
determined at the public offering price on the date of the
Statement. Purchases made through reinvestment of distributions
do not count toward satisfaction of the Statement.
During the term of a Statement, CISC will hold shares in escrow
to secure payment of the higher sales charge applicable to Class
A or T shares actually purchased. Dividends and capital gains
will be paid on all escrowed shares and these shares will be
released when the amount indicated has been purchased. A
Statement does not obligate the investor to buy or a fund to sell
the amount of the Statement.
If a shareholder exceeds the amount of the Statement and reaches
an amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made at the time of
expiration of the Statement. The resulting difference in offering
price will purchase additional shares for the shareholder's
account at the applicable offering price. As a part of this
adjustment, the FSF shall return to CISI the excess commission
previously paid during the thirteen-month period.
If the amount of the Statement is not purchased, the shareholder
shall remit to CISI an amount equal to the difference between the
sales charge paid and the sales charge that should have been
paid. If the shareholder fails within twenty days after a
written request to pay such difference in sales charge, CISC will
redeem that number of escrowed Class A shares to equal such
difference. The additional amount of FSF discount from the
applicable offering price shall be remitted to the shareholder's
FSF of record.
Additional information about and the terms of Statements of
Intent are available from your FSF, or from CISC at
1-800-345-6611.
Colonial Asset Builder Investment Program (this section currently
applies only to the Class A shares of Colonial Growth Shares Fund
and The Colonial Fund, each a series of Colonial Trust III). A
reduced sales charge applies to a purchase of certain Colonial
funds' Class A shares under a statement of intent for the
Colonial Asset Builder Investment Program. The Program offer may
be withdrawn at any time without notice. A completed Program may
serve as the initial investment for a new Program, subject to the
maximum of $4,000 in initial investments per investor.
Shareholders in this program are subject to a 5% sales charge.
CISC will escrow shares to secure payment of the additional sales
charge on amounts invested if the Program is not completed.
Escrowed shares are credited with distributions and will be
released when the Program has ended. Shareholders are subject to
a 1% fee on the amount invested if they do not complete the
Program. Prior to completion of the Program, only scheduled
Program investments may be made in a Colonial fund in which an
investor has a Program account. The following services are not
available to Program accounts until a Program has ended:
Systematic Withdrawal Plan Telephone Redemption Statement of Intent
Sponsored Arrangements Colonial Cash Connection Share Certificates
$50,000 Fast Cash Reduced Sales Charges Automatic Dividend
Right of Accumulation for any "person" Diversification
Exchange Privilege
*Exchanges may be made to other Colonial funds offering the
Program.
Because of the unavailability of certain services, this Program
may not be suitable for all investors.
The FSF receives 3% of the investor's intended purchases under a
Program at the time of initial investment and 1% after the 24th
monthly payment. CISI may require the FSF to return all
applicable commissions paid with respect to a Program terminated
within six months of inception, and thereafter to return
commissions in excess of the FSF discount applicable to shares
actually purchased.
Since the Asset Builder plan involves continuous investment
regardless of the fluctuating prices of funds shares, investors
should consult their FSF to determine whether it is appropriate.
The Plan does not assure a profit nor protect against loss in
declining markets.
Reinstatement Privilege. An investor who has redeemed Class A,
B, 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.
Privileges of Colonial Employees or Financial Service Firms.
Class A shares of certain funds may be sold at NAV to the
following current and retired individuals: Trustees of funds
advised or administered by CMA; directors, officers and employees
of CMA, CISI and other companies affiliated with CMAl; registered
representatives and employees of FSFs (including their
affiliates) that are parties to dealer agreements or other sales
arrangements with CISI; and such persons' families and their
beneficial accounts.
Sponsored Arrangements. Class A and Class T shares (Class T
shares can only be purchased by the shareholders of Colonial
Newport Tiger Fund who already own Class T shares) of certain
funds may be purchased at reduced or no sales charge pursuant to
sponsored arrangements, which include programs under which an
organization makes recommendations to, or permits group
solicitation of, its employees, members or participants in
connection with the purchase of shares of the fund on an
individual basis. The amount of the sales charge reduction will
reflect the anticipated reduction in sales expense associated
with sponsored arrangements. The reduction in sales expense, and
therefore the reduction in sales charge will vary depending on
factors such as the size and stability of the 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 and Class T shares (Class T shares can only be purchased
by the shareholders of Colonial Newport Tiger Fund who already
own Class T shares) of certain funds may also be purchased at
reduced or no sales charge by clients of dealers, brokers or
registered investment advisers that have entered into agreements
with CISI pursuant to which the Colonial funds are included as
investment options in programs involving fee-based compensation
arrangements.
Net Asset Value Exchange Privilege. Class A shares of certain
funds may also be purchased at reduced or no sales charge by
investors moving from another mutual fund complex or a
discretionary account and by participants in certain retirement
plans. In lieu of the commissions described in the Prospectus,
CMAl will pay the FSF a quarterly service fee which is the
service fee established for each applicable Colonial fund.
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 CMA , to the extent the redemptions
do not exceed, on an annual basis, 12% of the account's value,
so long as at the time of the first SWP redemption the account
had had distributions reinvested for a period at least equal to
the period of the SWP (e.g., if it is a quarterly SWP,
distributions must have been reinvested at least for the three
month period prior to the first SWP redemption; otherwise CDSCs
will be charged on SWP redemptions until this requirement is
met; this requirement does not apply if the SWP is set-up at the
time the account is established, and distributions are being
reinvested). See below under "Investors Services" - Systematic
Withdrawal Plan.
3. Disability. CDSCs may be waived on redemptions occurring within
one year after the sole shareholder on an individual account or
a joint tenant on a spousal joint tenant account becomes
disabled (as defined in Section 72(m)(7) of the Internal Revenue
Code). To be eligible for such waiver, (i) the disability must
arise after the purchase of shares and (ii) the disabled
shareholder must have been under age 65 at the time of the
initial determination of disability. If the account is
transferred to a new registration and then a redemption is
requested, the applicable CDSC will be charged.
4. Death of a trustee. CDSCs may be waived on redemptions
occurring upon dissolution of a revocable living or grantor
trust following the death of the sole trustee where (i) the
grantor of the trust is the sole trustee and the sole life
beneficiary, (ii) death occurs following the purchase and (iii)
the trust document provides for dissolution of the trust upon
the trustee's death. If the account is transferred to a new
registration (including that of a successor trustee), the
applicable CDSC will be charged upon any subsequent redemption.
5. Returns of excess contributions. CDSCs may be waived on
redemptions required to return excess contributions made to
retirement plans or individual retirement accounts, so long as
the FSF agrees to return the applicable portion of any
commission paid by Colonial.
6. Qualified Retirement Plans. CDSCs may be waived on redemptions
required to make distributions from qualified retirement plans
following (i) normal retirement (as stated in the Plan document)
or (ii) separation from service. CDSCs also will be waived on
SWP redemptions made to make required minimum distributions from
qualified retirement plans that have invested in Colonial funds
for at least two years.
The CDSC also may be waived where the financial service firm
agrees to return all or an agreed upon portion of the commission
earned on the sale of the shares being redeemed.
HOW TO SELL SHARES
Shares may also be sold on any day the Exchange is open, either
directly to the Fund or through your financial service firm.
Sale proceeds generally are sent within seven days (usually on
the next business day after your request is received in good
form). However, for shares recently purchased by check, the Fund
will send proceeds only after the check has cleared (which may
take up to 15 days).
To sell shares directly to the Fund, send a signed letter of
instruction or stock power form to CISC, along with any
certificates for shares to be sold. The sale price is the net
asset value (less any applicable contingent deferred sales
charge) next calculated after the Fund receives the request in
proper form. Signatures must be guaranteed by a bank, a member
firm of a national stock exchange or another eligible guarantor
institution. Stock power forms are available from financial
service firms, CISC, and many banks. Additional documentation is
required for sales by corporations, agents, fiduciaries,
surviving joint owners and individual retirement account holders.
Call CISC for more information 1-800-345-6611.
Financial service firms must receive requests before the time at
which the Fund's shares are valued to receive that day's price,
are responsible for furnishing all necessary documentation to
CISC and may charge for this service.
Systematic Withdrawal Plan
If a shareholder's Account Balance is at least $5,000, the
shareholder may establish a SWP. A specified dollar amount or
percentage of the then current net asset value of the
shareholder's investment in any Colonial fund designated by the
shareholder will be paid monthly, quarterly or semi-annually to a
designated payee. The amount or percentage the shareholder
specifies generally may not, on an annualized basis, exceed 12%
of the value, as of the time the shareholder makes the election
of the shareholder's investment. Withdrawals from Class B and
Class D shares of the fund under a SWP will be treated as
redemptions of shares purchased through the reinvestment of fund
distributions, or, to the extent such shares in the shareholder's
account are insufficient to cover Plan payments, as redemptions
from the earliest purchased shares of such fund in the
shareholder's account. No CDSCs apply to a redemption pursuant to
a SWP of 12% or less, even if, after giving effect to the
redemption, the shareholder's Account Balance is less than the
shareholder's base amount. Qualified plan participants who are
required by Internal Revenue 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% to 5% of the amount withdrawn. If a shareholder
wishes to participate in a SWP, the shareholder must elect to
have all of the shareholder's income dividends and other fund
distributions payable in shares of the fund rather than in cash.
A shareholder or a shareholder's FSF of record may establish a
SWP account by telephone on a recorded line. However, SWP checks
will be payable only to the shareholder and sent to the address
of record. SWPs from retirement accounts cannot be established
by telephone.
A shareholder may not establish a SWP if the shareholder holds
shares in certificate form. Purchasing additional shares (other
than through dividend and distribution reinvestment) while
receiving SWP payments is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may
not maintain a plan for the accumulation of shares of the fund
(other than through the reinvestment of dividends) and a SWP at
the same time.
SWP payments are made through share redemptions, which may result
in a gain or loss for tax purposes, may involve the use of
principal and may eventually use up all of the shares in a
shareholder's open account.
A Colonial fund may terminate a shareholder's SWP if the
shareholder's Account Balance falls below $5,000 due to any
transfer or liquidation of shares other than pursuant to the SWP.
SWP payments will be terminated on receiving satisfactory
evidence of the death or incapacity of a shareholder. Until this
evidence is received, CISC will not be liable for any payment
made in accordance with the provisions of a SWP.
The cost of administering SWPs for the benefit of shareholders
who participate in them is borne by the fund as an expense of all
shareholders.
Shareholders whose positions are held in "street name" by certain
FSFs may not be able to participate in a SWP. If a shareholder's
Fund shares are held in "street name", the shareholder should
consult his or her FSF to determine whether he or she may
participate in a SWP.
Telephone Redemptions. All shareholders and/or their financial
advisers are automatically eligible to redeem up to $50,000 of
the fund's shares by calling 1-800-422-3737 toll free any
business day between 9:00 a.m. and the close of trading of the
Exchange (normally 4:00 p.m. Eastern time). Telephone redemption
privileges for larger amounts may be elected on the Application.
CISC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Telephone
redemptions are not available on accounts with an address change
in the preceding 30 days and proceeds and confirmations will only
be mailed or sent to the address of record. 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.
Checkwriting (Available only on the Class A and Class C shares of
certain Colonial funds)
Shares may be redeemed by check if a shareholder completed an
Application and Signature Card. The Adviser 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.
Non cash Redemptions. For redemptions of any single shareholder
within any 90-day period exceeding the lesser of $250,000 or 1%
of a Colonial fund's net asset value, a Colonial fund may make
the payment or a portion of the payment with portfolio securities
held by that Colonial fund instead of cash, in which case the
redeeming shareholder may incur brokerage and other costs in
selling the securities received.
DISTRIBUTIONS
Distributions are invested in additional shares of the same Class
of the fund at net asset value unless the shareholder elects to
receive cash. Regardless of the shareholder's election,
distributions of $10 or less will not be paid in cash, but will
be invested in additional shares of the same Class of the Fund at
net asset value. Undelivered distribution checks returned by the
post office will be invested in your account.
Shareholders may reinvest all or a portion of a recent cash
distribution without a sales charge. A shareholder request must
be received within 30 calendar days of the distribution. A
shareholder may exercise this privilege only once. No charge is
currently made for reinvestment.
Shares of most funds that pay daily dividends will normally earn
dividends starting with the date the fund receives payment for
the shares and will continue through the day before the shares
are redeemed, transferred or exchanged. The daily dividends for
Colonial Municipal Money Market Fund will be earned starting with
the day after that fund receives payments for the shares.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for the same class of shares
of the other continuously offered Colonial funds (with certain
exceptions) on the basis of the NAVs per share at the time of
exchange. The prospectus of each Colonial fund describes its
investment objective and policies, and shareholders should obtain
a prospectus and consider these objectives and policies carefully
before requesting an exchange. Shares of certain Colonial funds
are not available to residents of all states. Consult CISC
before requesting an exchange.
By calling CISC, shareholders or their FSF of record may exchange
among accounts with identical registrations, provided that the
shares are held on deposit. During periods of unusual market
changes 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.
SUSPENSION OF REDEMPTIONS
A Colonial fund may not suspend shareholders' right of redemption
or postpone payment for more than seven days unless the Exchange
is closed for other than customary weekends or holidays, or if
permitted by the rules of the SEC during periods when trading on
the Exchange is restricted or during any emergency which makes it
impracticable for the fund to dispose of its securities or to
determine fairly the value of its net assets, or during any other
period permitted by order of the SEC for protection of investors.
SHAREHOLDER MEETINGS
As described under the caption "Organization and history" in the
Prospectus of each Colonial fund, the fund will not hold annual
shareholders' meetings. The Trustees may fill any vacancies in
the Board of Trustees except that the Trustees may not fill a
vacancy if, immediately after filling such vacancy, less than two-
thirds of the Trustees then in office would have been elected to
such office by the shareholders. In addition, at such times as
less than a majority of the Trustees then in office have been
elected to such office by the shareholders, the Trustees must
call a meeting of shareholders. Trustees may be removed from
office by a written consent signed by a majority of the
outstanding shares of the Trust or by a vote of the holders of a
majority of the outstanding shares at a meeting duly called for
the purpose, which meeting shall be held upon written request of
the holders of not less than 10% of the outstanding shares of the
Trust. Upon written request by the holders of 1% of the
outstanding shares of the Trust stating that such shareholders of
the Trust, for 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 of independent accountants,
but each series would vote separately from the others on other
matters, such as changes in the investment policies of that
series or the approval of the management agreement for that
series.
PERFORMANCE MEASURES
Total Return
Standardized average annual total return. Average annual total
return is the actual return on a $1,000 investment in a
particular class of shares of 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, the fund's distribution rate
reflects total amounts actually paid to shareholders, while yield
reflects the current earning power of the fund's portfolio
securities (net of the fund's expenses). 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 the Adviser to be
reputable, and publications in the press pertaining to a fund's
performance or to the Adviser or its affiliates , including
comparisons with competitors and matters of national and global
economic and financial interest. Examples include Forbes,
Business Week, MONEY Magazine, The Wall Street Journal, The New
York Times, The Boston Globe, Barron's National Business &
Financial Weekly, Financial Planning, Changing Times, Reuters
Information Services, Wiesenberger Mutual Funds Investment
Report, Lipper Analytical Services Corporation, Morningstar,
Inc., Sylvia Porter's Personal Finance Magazine, Money Market
Directory, SEI Funds Evaluation Services, FTA World Index and
Disclosure Incorporated.
All data 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 begin when facilities are completed, or (d) payments to
which some other limiting conditions attach. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination of
basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa 1, A 1, Baa 1, Ba 1, and B 1.
Municipal Notes:
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
Demand Feature of Variable Rate Demand Securities:
Moody's may assign a separate rating to the demand feature of a variable
rate demand security. Such a rating may include:
VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
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 8.06
EAFE Index
Morgan Stanley Capital International 8.21
EAFE GDP Index
Libor Six-month Libor 6.9375
Lipper Adjustable Rate Mortgage -2.20
Lipper California Municipal Bond Funds -7.52
Lipper Connecticut Municipal Bond Funds -7.04
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- -0.28
Exempt Bonds
Lipper Global Flexible Portfolio Funds -3.03
Lipper Growth Funds -2.15
Lipper Growth & Income Funds -0.94
Lipper High Current Yield Bond Funds -3.83
Lipper High Yield Municipal Bond Debt -4.99
Lipper Fixed Income Funds -3.62
Lipper Insured Municipal Bond Average -6.47
Lipper Intermediate Muni Bonds -3.53
Lipper Intermediate (5-10) U.S. -3.72
Government Funds
Lipper Massachusetts Municipal -6.35
Bond Funds
Lipper Michigan Municipal Bond Funds -5.89
Lipper Mid Cap Funds -2.05
Lipper Minnesota Municipal Bond Funds -5.87
Lipper U.S. Government Money 3.58
Market Funds
Lipper Natural Resources -4.20
Lipper New York Municipal Bond Funds -7.54
Lipper North Carolina Municipal -7.48
Bond 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 -3.37
Index
Shearson Lehman Government/Corporate -3.51
Index
Shearson Lehman Long-term Government -7.73
Index
S&P 500 S&P 1.32
S&P Utility Index S&P -7.94
Bond Buyer Bond Buyer Price Index -18.10
First Boston High Yield Index -0.97
Swiss Bank 10 Year U.S. Government -6.39
(Corporate Bond)
Swiss Bank 10 Year United Kingdom -5.29
(Corporate Bond)
Swiss Bank 10 Year France (Corporate Bond) -1.37
Swiss Bank 10 Year Germany (Corporate Bond) 4.09
Swiss Bank 10 Year Japan (Corporate Bond) 7.95
Swiss Bank 10 Year Canada (Corporate Bond)-14.10
Swiss Bank 10 Year Australia 0.52
(Corporate 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
Federal Reserve One-Year Constant-Maturity 7.14
Treasury Rate
Federal Reserve Five-Year Constant-Maturity 7.78
Treasury Rate
Bloomberg NA NA
Credit Lyonnais NA NA
Lipper Pacific Region Funds -12.07
Statistical Abstract of the U.S. NA NA
World Economic Outlook NA NA
*in U.S. currency
