Registration Numbers: 2-66976
811-3009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 28 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 28 [ X ]
COLONIAL TRUST II
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
(617) 426-3750
(Registrant's Telephone Number, Including Area Code)
Name and Address of Agent for Service: Copy to:
Arthur O. Stern, Esquire Peter MacDougall, Esquire
Colonial Management Associates, Inc. Ropes & Gray
One Financial Center One International Place
Boston, Massachusetts 02111 Boston, Massachusetts 02110
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ X ] on December 27, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on [date] pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
DECLARATION
The Registrant has registered an indefinite number of its shares of beneficial
interest under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940 and on or about October 29, 1996, the Registrant
filed the Rule 24f-2 Notice for the Registrant's most recent fiscal year ended
August 31, 1996.
<PAGE>
This Post-Effective Amendment relates solely to Colonial Government Money Market
Fund and Colonial U.S. Government Fund. No information relating to any other
series of the Registrant is amended or superseded hereby.
<PAGE>
COLONIAL TRUST II
Cross Reference Sheet (Colonial Government Money Market Fund)
Item Number of Form N-1A Prospectus Location or Caption
Part A
1. Cover page
2. Summary of expenses
3. The Fund's financial history
4. Organization and history; The Fund's
investment objective; How the Fund pursues
its objective and certain risk factors
5. Cover page; The Fund's investment
objective; How the Fund is managed;
Organization and history; Back cover
6. Organization and history; Distributions
and taxes; How to buy shares
7. Summary of expenses; How to buy shares;
How the Fund values its shares; 12b-1
plans; Back cover
8. How to sell shares; How to exchange
shares; Telephone transactions
9. Not applicable
December 27, 1996
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.
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 27, 1996 Statement of Additional
Information which has been filed with the Securities and Exchange Commission and
is obtainable free of charge by calling the Adviser at 1-800-426-3750. The
Statement of Additional Information is incorporated by reference in (which means
it is considered to be a part of) this Prospectus.
Contents Page
Summary of Expenses
The Fund's Financial History
The Fund's Investment Objective
How the Fund Pursues its Objective
and Certain Risk Factors
How the Fund Measures its Performance
How the Fund is Managed
How the Fund Values its Shares
Distributions and Taxes
How to Buy Shares
How to Sell Shares
How to Exchange Shares
Telephone Transactions
12b-1 Plans
Organization and History
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 and a declining contingent deferred sales
charge on redemptions made within six years after purchase; and Class D
shares are offered at net asset value plus a small initial sales charge and are
subject to 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."
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.
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 Sales Charges
(as a % of offering price) (3) 0.00% 0.00% 1.99%(4)
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 price)(3) 0.00% 5.00%(4) 0.99%(4)
(1) For accounts less than $1,000 an annual fee of $10 may be deducted. See "How
to Buy 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 8 years, this is less likely for Class B shares than for a
class without a conversion feature.
Annual Operating Expenses (as a % of average net assets)
Class A Class B Class D
Management fee(5) 0.30% 0.30% 0.30%
12b-1 fees 0.00 1.00 1.00
Other expenses 0.40 0.40 0.40
---- ---- ----
Total operating expenses 0.70% 1.70% 1.70%
==== ==== ====
(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
Period: (6) (7) (6) (7)
1 year $ 7 $67 $17 $37 $27
3 years 22 84 54 63 63(9)
5 years 39 112 92 101 101
10 years 87 174(8) 174(8) 209 209
(6) Assumes redemption at period end.
(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.
(9) Class D shares do not incur a contingent deferred sales charge on
redemptions made after one year.
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 1996 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
----------------------------------------------- ------------
1996 1995 1994 1993 1992(b)
<S> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.048 0.050 0.028 0.023 0.022
----- ----- ----- ----- -----
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.048) (0.050) (0.028) (0.023) (0.022)
----- ----- ----- ----- -----
Net asset value - End of period $1.000 $1.000 $1.000 $1.000 $1.000
===== ===== ===== ===== =====
Total return(c) 4.93% 5.14% (d) 2.85% (d) 2.28% (d) 2.18% (d)(e)
==== ==== ==== ==== ====
RATIOS TO AVERAGE NET ASSETS
Expenses 0.70% (f) 0.69% 0.73% 0.88% 1.00% (g)
Fees and expenses waived or
borne by the Adviser --- 0.04% 0.20% 0.20% 0.38% (g)
Net investment income 4.76% (f) 4.96% 3.01% 2.26% 3.23% (g)
Net assets at end of period (000) $115,063 $83,086 $97,115 $44,693 $47,885
__________________________
(a) Net of fees and expenses waived
or borne by the Adviser which
amounted to: --- --- $0.002 $0.002 $0.003
</TABLE>
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------
Year ended December 31
--------------------------------------------------------
1991 1990 1989 1988 1987 1986
<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) 0.053 0.074 0.082 0.065 0.057 0.059
----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.053) (0.074) (0.082) (0.065) (0.057) (0.059)
----- ----- ----- ----- ----- -----
Net asset value - End of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
===== ===== ===== ===== ===== =====
Total return(c) 5.38% (d) 7.64% (d) 8.50% (d) 6.66% (d) 5.83% (d) 5.98% (d)
==== ==== ==== ==== ==== ====
RATIOS TO AVERAGE NET ASSETS
Expenses 0.85% 0.77% 0.74% 0.67% 0.77% 1.01%
Fees and expenses waived or
borne by the Adviser 0.20% 0.13% --- --- --- 0.63%
Net investment income 5.32% 7.38% 8.20% 6.49% 5.82% 5.59%
Net assets at end of period (000) $56,198 $79,771 $75,301 $95,262 $104,649 $23,313
__________________________
(a) Net of fees and expenses waived
or borne by the Adviser which
amounted to: $0.002 $0.001 --- --- --- $0.007
(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) The benefits derived from custody credits and directed brokerage arrangements had no impact. Prior years'
ratios are net of benefits received, if any.
(g) Annualized.
</TABLE>
THE FUND'S FINANCIAL HISTORY (CONT'D)
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------
Period Ended
Year ended August 31 August 31
-----------------------------------------------------------------
1996 1995 1994 1993 1992(b)(c)
<S> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
===== ===== ===== ===== =====
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.038 0.040 0.018 0.013 0.004
----- ----- ----- ----- -----
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.038) (0.040) (0.018) (0.013) (0.004)
----- ----- ----- ----- -----
Net asset value - End of period $1.000 $1.000 $1.000 $1.000 $1.000
===== ===== ===== ===== =====
Total return(e) 3.86% 4.08% (g) 1.82% (g) 1.27% (g) 0.43% (g)(h)
==== ==== ==== ==== ====
RATIOS TO AVERAGE NET ASSETS
Expenses 1.70% (f) 1.69% 1.73% 1.88% 2.00% (i)
Fees and expenses waived or borne by the Adviser --- 0.04% 0.20% 0.20% 0.38% (i)
Net investment income 3.76% (f) 3.96% 2.01% 1.26% 2.23% (i)
Net assets at end of period (000) $76,539 $55,441 $54,535 $10,890 $14,096
_________________________________
(a) Net of fees and expenses waived or borne
by the Adviser which amounted to: --- --- $0.002 $0.002 $0.001
</TABLE>
<TABLE>
<CAPTION>
CLASS D
------------------------------------------
Year Ended Period ended
August 31 August 31
------------------------------------------
1996 1995 1994(d)
<S> <C> <C> <C>
Net asset value - Beginning of period $1.000 $1.000 $1.000
===== ===== =====
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.038 0.040 0.005
----- ----- -----
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment income (0.038) (0.040) (0.005)
----- ----- -----
Net asset value - End of period $1.000 $1.000 $1.000
===== ===== =====
Total return(e) 3.85% 4.07%(g) 0.45%(g)(h)
===== ===== =====
RATIOS TO AVERAGE NET ASSETS
Expenses 1.70% (f) 1.69% 1.73%(i)
Fees and expenses waived or borne by the Adviser --- 0.04% 0.20%(i)
Net investment income 3.76% (f) 3.96% 2.01%(i)
Net assets at end of period (000) $4,435 $625 $518
_________________________________
(a) Net of fees and expenses waived or borne
by the Adviser which amounted to: --- --- $0.002
(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) The benefits derived from custody credits and directed brokerage arrangements had no impact. Prior years' ratios are net
of benefits received, if any.
(g) Had the Adviser not waived or reimbursed a portion of expenses, total return
would have been reduced.
(h) Not annualized.
(i) Annualized.
</TABLE>
Further performance information is contained in the Fund's Annual Report to
shareholders, which is obtainable free of charge by calling 1-800-426-3750.
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 AND CERTAIN RISK FACTORS
The Fund seeks to achieve its objective by investing 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 investment policies may be
changed without shareholder approval. The Fund will notify investors in
connection with any material change in the Fund's investment objective. If there
is a change in the investment objective, shareholders should consider whether
the Fund remains an appropriate investment in light of their financial position
and needs. Shareholders may incur a contingent deferred sales charge if shares
are redeemed in response to a change in the investment objective. The Fund's
fundamental investment policies listed in the Statement of Additional
Information cannot be changed without the approval of a majority of the Fund's
outstanding voting securities. 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 the 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.
Colonial Investment Services, Inc. (Distributor), a subsidiary of the Adviser,
serves as the distributor for the Fund's shares. Colonial Investors Service
Center, Inc. (Transfer Agent), an affiliate of the Adviser, serves as the
shareholder services and transfer agent for the Fund. Each of the Adviser,
Distributor and the Transfer Agent is an indirect subsidiary of Liberty
Financial Companies, Inc. which in turn is an indirect subsidiary of Liberty
Mutual Insurance Company (Liberty Mutual). Liberty Mutual is considered to be
the controlling entity of the Adviser and its affiliates. Liberty Mutual is an
underwriter of workers' compensation insurance and a property and casualty
insurer in the U.S.
The Adviser furnishes the Fund with investment management, accounting and
administrative personnel and services, office space and other equipment and
services at the Adviser's expense. For these services, the Fund paid the Adviser
0.30% of the Fund's average daily net assets in fiscal year 1996.
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) (normally 4:00
p.m. Eastern time) 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 gain, at least annually.
The Fund generally declares distributions daily and pays them monthly.
Distributions are invested in additional shares of the same Class of the Fund at
net asset value unless the shareholder elects to receive cash. 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 of the Fund are offered continuously. Orders received in good form prior
to the time at which the Fund values its shares (or placed with a financial
service firm before such time and transmitted by the financial service firm
before the Fund processes that day's share transactions) will be processed based
on that day's closing net asset value.
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, and are subject to a 0.75% annual distribution fee and a
declining contingent deferred sales charge if redeemed within six years after
purchase. Class B shares automatically 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, and are subject to a 0.75% annual distribution fee and a
1.00% contingent deferred sales charge (0.99% of the offering price) 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. In addition, the ongoing
commission will only be paid after the proceeds of the purchase have been held
by the Fund for one year. 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 reduced or without initial or contingent
deferred sales charges. These programs are described in the Statement of
Additional Information under "Programs for Reducing or Eliminating Sales
Charges" and "How to Sell Shares."
Shareholder Services and Account Fees. A variety of shareholder services are
available. For more information about these services or your account, call
1-800-345-6611. Some services are described in the attached account application.
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. The Fund may also deduct annual maintenance and processing fees
(payable to the Transfer Agent) in connection with certain retirement plan
accounts. See "Special Purchase Programs/Investor Services" in the Statement of
Additional Information for more information.
HOW TO SELL SHARES
Shares of the Fund may be sold on any day the Exchange is open, either directly
to the Fund or through your financial service firm. Sale proceeds generally are
sent within seven days (usually on the next business day after your request is
received in good form). However, for shares recently purchased by check, the
Fund will send proceeds as soon as the check has cleared (which may take up to
15 days).
Selling Shares Directly To The Fund. Send a signed letter of instruction or
stock power form to the Transfer Agent. The sale price is the net asset value
(less any applicable contingent deferred sales charge) next calculated after the
Fund receives the request in proper form. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange or another eligible guarantor
institution. Stock power forms are available from financial service firms, the
Transfer Agent and many banks. Additional documentation is required for sales by
corporations, agents, fiduciaries, surviving joint owners and individual
retirement account holders. For details contact:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Selling Shares Through Financial Service Firms. Financial service firms must
receive requests prior to the time at which 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 Charge
0-1 5.00%
1-2 4.00
2-3 3.00
3-4 3.00
4-5 2.00
5-6 1.00
More than 6 0.00
Year one ends one year after the end of the month in which the purchase was
accepted and so on.
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.
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 1-800-426-3750 to receive a prospectus and an
exchange authorization form. Call 1-800-422-3737 to exchange shares by
telephone. An exchange is a taxable capital transaction. The exchange service
may be changed, suspended or eliminated on 60 days' written notice.
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, a contingent deferred sales charge will be assessed using
the schedule of the fund into which the original investment was made.
Class D Shares. Exchanges of Class D shares will not be subject to the
contingent deferred sales charge. However, if shares are redeemed within one
year after the original purchase, a 1.00% contingent deferred sales charge will
be assessed.
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisers are automatically eligible to
exchange Fund shares and redeem up to $50,000 of Fund shares by calling
1-800-422-3737 toll-free any business day between 9:00 a.m. and the time at
which the Fund values its shares. Telephone redemption privileges for larger
amounts may be elected on the account application. The Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine and may be liable for losses related to unauthorized
transactions in the event reasonable procedures are not employed. Such
procedures include restrictions on where proceeds of telephone redemptions may
be sent, limitations on the ability to redeem by telephone shortly after an
address change, recording of telephone lines and requirements that the redeeming
shareholder and/or financial adviser provide certain identifying information.
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 monthly a service fee at an
annual rate of 0.25% of the net assets and a distribution fee at an annual rate
of 0.75% of average daily net assets attributed to its Class B and Class D
shares. Because the Class B and Class D shares bear the additional fees, their
dividends will be lower than the dividends of Class A shares. Class B shares
automatically convert to Class A shares, approximately eight years after the
Class B shares were purchased. 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. Shareholders receive one vote for
each Fund share. Shares of the Trust vote together except when required by law
to vote separately by fund or by class. Shareholders owning in the aggregate ten
percent of Trust shares may call meetings to consider removal of Trustees. Under
certain circumstances, the Trust will provide information to assist shareholders
in calling such a meeting. See the Statement of Additional Information for
more information.
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 27, 1996
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 1-800-426-3750 for the
December 27, 1996 Statement of Additional Information.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED, ENDORSED OR
INSURED BY, ANY BANK OR GOVERNMENT AGENCY.
[COLONIAL FLAG LOGO]
Colonial Mutual Funds
_________________________________________________________________
Please send your completed application to:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, Massachusetts 02105-1722
New Account Application/Revision to Existing Account
To open a new account, complete sections 1, 2, 3, & 7.
To apply for special services for a new or existing account, complete sections
4, 5, 6, or 8 as appropriate.
___ Please check here if this is a revision.
1-----------Account Ownership--------------
Please choose one of the following.
__Individual: Print your name, Social Security #, U.S. citizen status.
__Joint Tenant: Print all names, the Social Security # for the first person,
and his/her U.S. citizen status.
__Uniform Gift to Minors: Names of custodian and minor, minor's Social Security
#, minor's U.S. citizen status.
__Corporation, Association, Partnership: Include full name, Taxpayer I.D. #.
__Trust: Name of trustee, trust title & date, and trust's Taxpayer I.D. #.
______________________________________
Name of account owner
______________________________________
Name of joint account owner
______________________________________
Street address
______________________________________
Street address
______________________________________
City, State, and Zip
______________________________________
Daytime phone number
______________________________________
Social Security # or Taxpayer I.D. #
Are you a U.S. citizen? ___Yes ___No
______________________________________
If no, country of permanent residence
______________________________________
Owner's date of birth
______________________________________
Account number (if existing account)
2 -----Colonial Fund(s) You Are Purchasing--------
Your investment will be made in Class A shares if no class is indicated.
Certificates are not available for Class B or D shares. If no distribution
option is selected, distributions will be reinvested in additional Fund
shares. Please consult your financial adviser to determine which class of
shares best suits your needs.
Fund Fund Fund
________________ ___________________ _____________________
$_______________ $__________________ $____________________
Amount Amount Amount
Class
___ A Shares ___ B Shares (less than $250,000) ___ C Shares (Adjustable Rate
U.S. Government Fund only)
___ D Shares (less than $500,000, available on certain funds; see prospectus)
Method of Payment
Choose one
___Check payable to the Fund
___Bank wired on ____/____/____
(Date) Wire/Trade confirmation #__________________
Ways to Receive Your Distributions
Choose one
___Reinvest dividends and capital gains
___Dividends and capital gains in cash
___Dividends in cash; reinvest capital gains
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection Complete Bank Information
in section 4B. I understand that my bank must be a member of the
Automated Clearing House (ACH).
Distributions of $10.00 or less will automatically be reinvested in additional
fund shares.
3---Your Signature & Taxpayer I.D. Number Certification----
Each person signing on behalf of an entity represents that his/her actions are
authorized.
I have received and read each appropriate Fund prospectus and understand that
its terms are incorporated by reference into this application. I understand
that this application is subject to acceptance. I understand that certain
redemptions may be subject to a contingent deferred sales charge. It is agreed
that the Fund, all Colonial Companies and their officers, directors, agents,
and employees will not be liable for any loss, liability, damage, or expense
for relying upon this application or any instruction believed genuine.
I certify, under penalties of perjury, that:
1. The Social Security # or Taxpayer I.D. # provided is correct.
You must cross out Item 2a, b or c below only if you have been notified by the
Internal Revenue Service (IRS) that you are currently subject to back-up
withholding because of under-reporting interest or dividends on you tax return.
2. I am not subject to back-up withholding because: (a) I am exempt from back-
up withholding, or (b) I have not been notified by the IRS that I am
subject to back-up withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified me that I am no longer
subject to back-up withholding.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholdings.
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
4--------Ways to Withdraw from Your Fund-------
It may take up to 30 days to activate the following features. Complete only
the section(s) that apply to the features you would like.
A. Systematic Withdrawal Plan (SWP)
You can receive monthly, quarterly, or semiannual checks from your account in
any amount you select, with certain limitations. Your redemption checks can
be sent to you at the address of record for your account, to your bank
account, or to another person you choose. The value of the shares in your
account must be at least $5,000 and you must reinvest all of your
distributions. Checks will be processed on the 10th calendar day of the month
or the following business day. If you receive your SWP payment via electronic
funds transfer (EFT), you may request it to be processed any day of the month.
Withdrawals in excess of 12% annually of your current account value will not be
accepted. Redemptions made in addition to SWP payments may be subject to a
contingent deferred sales charge for Class B or Class D shares. Please consult
your financial or tax adviser before electing this option.
Funds for Withdrawal:
___________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________
or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _____/_____ (day, if indicating EFT,month).
___________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________
or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _____/_____ (day,if indicating EFT,month).
Payment Instructions
Send the payment to (choose one):
__My address of record.
__My bank account via EFT. Please complete the Bank Information section below.
All EFT transactions will be made two business days after the processing date.
Your bank must be a member of the Automated Clearing House system.
__The payee listed at right. If more than one payee, provide the name,
address, payment amount, and frequency for other payees (maximum of 5) on
a separate sheet. If you are adding this service to an existing account,
please sign below and have your signature(s) guaranteed.
______________________________________________
Name of payee
______________________________________________
Address of payee
______________________________________________
City
______________________________________________
State Zip
______________________________________________
Payee's bank account number, if applicable
B. Telephone Withdrawal Options
All telephone transaction calls are recorded. These options are not available
for retirement accounts. Please sign below and have your signature(s)
guaranteed.
1. Fast Cash
You are automatically eligible for this service. You or your financial
adviser can withdraw up to $50,000 from your account and have it sent to your
address of record. For your protection, this service is only available on
accounts that have not had an address change within 30 days of the redemption
request.
2. Telephone Redemption
__I would like the Telephone Redemption privilege either by federal fund wire
or EFT. Telephone redemptions over $1,000 will be sent via federal fund wire,
usually on the next business day ($7.50 will be deducted). Redemptions of
$1,000 or less will be sent by check to your designated bank.
3. On-Demand EFT Redemption
__I would like the On-Demand EFT Redemption Privilege. Proceeds paid via EFT
will be credited to your bank account two business days after the process
date. You or your financial adviser may withdraw shares from your fund account
by telephone and send your money to your bank account. If you are adding this
service to an existing account, complete the Bank Information section below
and have all shareholder signatures guaranteed.
Colonial's and the Fund's liability is limited when following telephone
instructions; a shareholder may suffer a loss from an unauthorized transaction
reasonably believed by Colonial to have been authorized.
Bank Information (For Sections A and B Above)
I authorize deposits to the following bank account:
____________________________________________________________
Bank name City Bank account number
____________________________________________________________
Bank street address State Zip Bank routing # (your bank
can provide this)
X__________________________________
Signature of account owner(s)
X__________________________________
Signature of account owner(s) Place signature guarantee here.
5-----Ways to Make Additional Investments--------
These services involve continuous investments regardless of varying share
prices. Please consider your ability to continue purchases through periods of
price fluctuations. Dollar cost averaging does not assure a profit or protect
against loss in declining markets.
A. Automatic Dividend Diversification
Please diversify my portfolio by investing distributions from one fund into
another Colonial fund. These investments will be made in the same share class
and without sales charges. Accounts must be identically registered. I have
carefully read the prospectus for the fund(s) listed below.
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
B. Automated Dollar Cost Averaging
This program allows you to automatically have money from any Colonial fund in
which you have a balance of at least $5,000 exchanged into the same share
class of up to four other identically registered Colonial accounts, on a
monthly basis. The minimum amount for each exchange is $100. Please complete
the section below.
____________________________________
Fund from which shares will be sold
$_________________________
Amount to redeem monthly
1____________________________________
Fund to invest shares in
$_________________________
Amount to invest monthly
2____________________________________
Fund to invest shares in
$_________________________
Amount to invest monthly
C. Fundamatic/On-Demand EFT Purchase
Fundamatic automatically transfers the specified amount from your bank
checking account to your Colonial fund account by electronic funds transfer on
any specified day of the month. You will receive the applicable price two
business days after the receipt of your request. Your bank needs to be a
member of the Automated Clearing House System. Please attach a blank check
marked "VOID." Also, complete the section below.
1____________________________________
Fund name
_________________________________
Account number
$_____________________ _________________
Amount to transfer Month to start
2___________________________________
Fund name
________________________________
Account number
$_____________________ _________________
Amount to transfer Month to start
__On-Demand Purchase (will be automatically established if you choose
Fundamatic)
__Fundamatic Frequency
__Monthly or __Quarterly
Check one:
__EFT- Choose any day of the month_____________________
__Paper Draft-Choose either the:
__5th day of the month
__20th day of the month
Authorization to honor checks drawn by Colonial Investors Service Center,
Inc. Do Not Detach. Make sure all depositors on the bank account sign to
the far right. Please attach a blank check marked "VOID" here. See reverse
for bank instructions.
I authorize Colonial to draw on my bank account, by check or electronic funds
transfer, for an investment in a Colonial fund. Colonial and my bank are not
liable for any loss arising from delays or dishonored draws. If a draw is not
honored, I understand that notice may not be given and Colonial may reverse
the purchase and charge my account $15.
______________________________________
Bank name
______________________________________
Bank street address
______________________________________
Bank street address
______________________________________
City State Zip
______________________________________
Bank account number
______________________________________
Bank routing #
X_____________________________________
Depositor's Signature(s)
Exactly as appears on bank records
X_____________________________________
Depositor's Signature(s)
Exactly as appears on bank records
6------------Ways to Reduce Your Sales Charges------------
These services can help you reduce your sales charge while increasing your
share balance over the long term.
A. Right of Accumulation
If you, your spouse or your children own any other shares in other
Colonial funds, you may be eligible for a reduced sales charge. The combined
value of your accounts must be $50,000 or more. Class A shares of money market
funds are not eligible unless purchased by exchange from another Colonial fund.
The sales charge for your purchase will be based on the sum of the purchase(s)
added to the value of all shares in other Colonial funds at the previous
day's public offering price.
__Please link the accounts listed below for Right of Accumulation privileges,
so that this and future purchases will receive any discount for which they
are eligible.
_____________________________________
Name on account
_____________________________________
Account number
_____________________________________
Name on account
_____________________________________
Account number
B. Statement of Intent
If you agree in advance to invest at least $50,000 within 13 months, you'll
pay a lower sales charge on every dollar you invest. If you sign a Statement
of Intent within 90 days after you establish your account, you can receive a
retroactive discount on prior investments. The amount required to receive a
discount varies by fund; see the sales charge table in the "How to Buy Shares"
section of your fund prospectus.
__I want to reduce my sales charge.
I agree to invest $ _______________ over a 13-month period starting
______/______/ 19______ (not more than 90 days prior to this application). I
understand an additional sales charge must be paid if I do not complete this
Statement of Intent.
7-------------Financial Service Firm---------------------
To be completed by a Representative of your financial service firm.
This application is submitted in accordance with our selling agreement with
Colonial Investment Services, Inc. (CISI), the Fund's prospectus, and this
application. We will notify CISI, Inc., of any purchase made under a Statement
of Intent, Right of Accumulation, or Sponsored Arrangement. We guarantee the
signatures on this application and the legal capacity of the signers.
_____________________________________
Representative's name
_____________________________________
Representative's number
_____________________________________
Representative's phone number
_____________________________________
Account # for client at financial
service firm
_____________________________________
Branch office address
_____________________________________
City
_____________________________________
State Zip
_____________________________________
Branch office number
_____________________________________
Name of financial service firm
_____________________________________
Main office address
_____________________________________
Main office address
_____________________________________
City
_____________________________________
State Zip
X____________________________________
Authorized signature
8----------Request for a Combined Quarterly Statement Mailing-----------
Colonial can mail all of your quarterly statements in one envelope. This
option simplifies your record keeping and helps reduce fund expenses.
__I want to receive a combined quarterly mailing for all my accounts. Please
indicate accounts to be linked.______________________
Fundamatic (See Reverse Side)
Applications must be received before the start date for processing.
This program's deposit privilege can be revoked by Colonial without prior
notice if any check is not paid upon presentation. Colonial has no obligation
to notify the shareholder of non-payment of any draw. This program may be
discontinued by Colonial by written notice at least 30 business days prior
to the due date of any draw or by the shareholder at any time.
To the Bank Named on the Reverse Side:
Your depositor has authorized Colonial Investors Service Center, Inc. to
collect amounts due under an investment program from his/her personal checking
account. When you pay and charge the draws to the account of your depositor
executing the authorization payable to the order of Colonial Investors
Service Center, Inc., Colonial Investment Services, Inc., hereby indemnifies
and holds you harmless from any loss (including reasonable expenses) you may
suffer from honoring such draw, except any losses due to your payment of any
draw against insufficient funds.
SH-938B-0396
COLONIAL TRUST II
Cross Reference Sheet (Colonial U.S. Government Fund)
Item Number of Form N-1A Prospectus Location or Caption
Part A
1. Cover page
2. Summary of expenses
3. The Fund's financial history
4. Organization and history; The Fund's
investment objective; How the Fund pursues
its objective and certain risk factors
5. Cover page; How the Fund is managed;
Organization and history; The Fund's
investment objective; Back cover
6. Organization and history; Distributions
and taxes; How to buy shares
7. Summary of expenses; How to buy shares;
How the Fund values its shares; 12b-1
plans; Back cover
8. How to sell shares; How to exchange
shares; Telephone transactions
9. Not applicable
December 27, 1996
COLONIAL U.S.GOVERNMENT FUND
PROSPECTUS
BEFORE YOU INVEST
Colonial Management Associates, Inc. (Adviser) and your full-service financial
adviser want you to understand both the risks and benefits of mutual fund
investing.
While mutual funds offer significant opportunities and are professionally
managed, they also carry risks including possible loss of principal. Unlike
savings accounts and certificates of deposit, mutual funds are not insured or
guaranteed by any financial institution or government agency.
Please consult your full-service financial adviser to determine how investing in
this mutual fund may suit your unique needs, time horizon and risk tolerance.
Colonial U.S. Government Fund (Fund), a diversified portfolio of Colonial Trust
II (Trust), an open-end management investment company, seeks as high a level of
current income and total return as is consistent with prudent risk by investing
exclusively in 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 27, 1996 Statement of Additional
Information which has been filed with the Securities and Exchange Commission and
is obtainable free of charge by calling the Adviser at 1-800-426-3750. The
Statement of Additional Information is incorporated by reference in (which means
that it is considered to be a part of) this Prospectus.
UG--1296
The Fund offers three classes of shares. Class A shares are offered at net asset
value plus a sales charge imposed at the time of purchase; Class B shares are
offered at net asset value and, in addition, are subject to an annual
distribution fee and a declining contingent deferred sales charge on redemptions
made within six years after purchase; and Class D shares are offered at net
asset value plus a small initial sales charge, and are subject to an annual
distribution fee and a contingent deferred sales charge on redemptions made
within one year after purchase. Class B shares automatically convert to Class A
shares after approximately eight years. See "How to Buy Shares."
Contents Page
Summary of Expenses
The Fund's Financial History
The Fund's Investment Objective
How the Fund Pursues its Objective and Certain Risk Factors
How the Fund Measures its Performance
How the Fund is Managed
How the Fund Values its Shares
Distributions and Taxes
How to Buy Shares
How to Sell Shares
How to Exchange Shares
Telephone Transactions
12b-1 Plans
Organization and History
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED, ENDORSED OR
INSURED BY, ANY BANK OR GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in the Fund. The
following tables summarize your maximum transaction costs and 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)
<TABLE>
<CAPTION>
Class A Class B Class D
<S> <C> <C> <C>
Maximum Sales Charge (as a % of offering price)(3) 4.75% 5.00%(5) 1.99%(5)
Maximum Initial Sales Charge Imposed on a Purchase (as a % of offering price)(3) 4.75% 0.00%(5) 1.00%(5)
Maximum Contingent Deferred Sales Charge (as a % of offering price)(3) 1.00%(4) 5.00% 0.99%
</TABLE>
(1) For accounts less than $1,000 an annual fee of $10 may be deducted.
See "How to Buy Shares."
(2) Redemption proceeds exceeding $5,000 sent via federal funds wire will be
subject to a $7.50 charge per transaction.
(3) Does not apply to reinvested distributions.
(4) Only with respect to any portion of purchases of $1 million to $5 million
redeemed within approximately 18 months
after purchase. See "How to Buy Shares."
(5) Because of the 0.75% distribution fee applicable to Class B and 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 8 years, this is less likely for Class B shares than for a
class without a conversion feature.
Annual Operating Expenses (as a % of average net assets
Class A Class B Class D
Management fee 0.57% 0.57% 0.57%
12b-1 fees 0.25 1.00 1.00
Other expenses 0.29 0.29 0.29
----- ----- -----
Total operating expenses(6) 1.11 % 1.86 % 1.86%
===== ===== =====
(6) Total operating expenses, excluding brokerage, interest, taxes, 12b-1
distribution and service fees and extraordinary expenses, are until
further notice, voluntarily limited by the Adviser to 1.00% of the Fund's
average net assets.
Example
The following Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in each Class of shares of the Fund for the
periods specified, assuming a 5% annual return, and, unless otherwise noted,
redemption at period end. The 5% return and expenses used in this Example should
not be considered indicative of actual or expected Fund performance or expenses,
both of which will vary:
Class A Class B Class D
Period:
(7) (8) (7) (8)
1 year $ 58 $ 69 $ 19 $ 39 $ 29
3 years 81 88 58 68 68(10)
5 years 106 120 100 109 109
10 years 176 198(9) 198(9) 226 226
(7) Assumes redemption at period end.
(8) Assumes no redemption.
(9) Class B shares convert to Class A shares after approximately 8 years;
therefore, years 9 and 10 reflect Class A share expenses.
(10) Class D shares do not incur a contingent deferred sales charge
on redemptions made after one year.
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 1996 Annual
Report, and is incorporated by reference into the Statement of Additional
Information.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Year ended August 31
-------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Class A Class B Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.550 $6.550 $6.420 $6.420 $6.880 $6.880 $6.980 $6.980
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.390 0.341 0.447 0.399 0.415 0.365 0.541 0.490
Net realized and unrealized gain (loss) (0.161) (0.161) 0.100 0.100 (0.452) (0.452) (0.130) (0.130)
------- ------- ----- ----- ------- ------- ------- -------
Total from Investment Operations 0.229 0.180 0.547 0.499 (0.037) (0.087) 0.411 0.360
----- ----- ----- ----- ------- ------- ----- -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.391) (0.344) (0.417) (0.369) (0.400) (0.352) (0.511) (0.460)
In excess of net investment income (0.018) (0.016) --- --- --- --- --- ---
From capital paid in --- --- --- --- (0.023) (0.021 --- ---
Total Distributions Declared to Shareholders (0.409) (0.360) (0.417) (0.369) (0.423) (0.373) --- ---
Net asset value - End of period $6.370 $6.370 $6.550 $6.550 $6.420 $6.420 $6.880 $6.880
===== ===== ===== ===== ===== ===== ===== =====
Total return(a) 3.51% 2.74% 8.88% 8.07% (0.53)% (1.28)% 6.15% 5.36%
==== ==== ==== ==== ==== ==== ==== ====
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11%(b) 1.86%(b) 1.11% 1.86% 1.11% 1.86% 1.10% 1.85%
Net investment income 6.45%(b) 5.70(b) 7.51% 6.76% 8.14% 7.39% 7.85% 7.10%
Portfolio turnover 123% 123% 140% 140% 291% 291% 162% 162%
Net assets at end of period (in millions) $921 $572 $1,164 $701 $758 $836 $1,202 $978
</TABLE>
(a) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(b) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
THE FUND'S FINANCIAL HISTORY (CONT'D)
<TABLE>
<CAPTION>
Period ended
Year ended August 31 August 31
--------------------------------------------------------------------------
1992 1991 1990 1989 1988(h)
---- ---- ---- ---- -------
Class A Class B(b) Class A Class A Class A Class A
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $7.020 $6.950 $6.950 $7.130 $7.200 $7.140
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.614 0.122 0.699 0.711 0.702 0.639
Net realized and unrealized
gain (loss) (0.043) 0.029 0.069 (0.171) (0.074) 0.054
------- ----- ----- ------- ------- -----
Total from Investment Operations 0.571 0.151 0.768 0.540 0.628 0.693
----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.611) (0.121) (0.698) (0.720) (0.698) (0.633)
Total Distributions Declared to Shareholders (0.611)(c) (0.121)(c) (0.698) (0.720)(c) (0.698)(c) (0.633)
------- ------- ------- ------- ------- -------
Net asset value - End of period $6.980 $6.980 $7.020 $6.950 $7.130 $7.200
===== ===== ===== ===== ===== =====
Total return(d) 8.46% 2.19%(e) 11.54% 7.95%(g) 9.14%(g) 9.89%(g)(e)
==== ==== ===== ==== ==== ====
RATIOS TO AVERAGE NET ASSETS
Expenses 1.09% 1.84(f) 1.16% 1.25% 1.23% 0.56%(f)
Fees and expenses waived
or borne by the Adviser --- --- --- 0.15% 0.16% 1.05%(f)
Net investment income 8.55% 7.80%(f) 9.68% 10.09% 9.88% 9.85%(f)
Portfolio turnover 132% 132% 129% 82% 124% 49%(f)
Net assets at end of period (in millions) $1,102 $343 $444 $95 $57 $39
(a) Net of fees and expenses waived
or borne by the Adviser --- --- --- $0.010 $0.012 $0.068
- ---------------------------------------------------------
</TABLE>
(b) Class B shares were initially offered on June 8, 1992. Per share
amounts reflect activity from that date.
(c) Because of differences between book and tax basis accounting,
approximately $0.056 and $0.014 in 1992, $0.044 in 1990
and $0.036 in 1989 were a return of capital for federal income tax
purposes.
(d) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(e) Not annualized.
(f) Annualized.
(g) Had the Adviser not waived or reimbursed a portion of expenses total
return would have been reduced.
(h) The Fund commenced investment operations on October 13, 1987. Per share
amounts reflect activity from that date.
Further performance information is contained in the Fund's Annual Report to
shareholders, which is obtainable free of charge by calling 1-800-426-3750.
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks as high a level of current income and total return as is
consistent with prudent risk by investing primarily in U.S. government
securities.
HOW THE FUND PURSUES ITS OBJECTIVE AND CERTAIN RISK FACTORS
The Fund invests primarily in U.S. government securities. U.S. government
securities consist of (1) U.S. treasury obligations; (2) obligations issued or
guaranteed by U.S. government agencies and instrumentalities (Agencies) which
are supported by: (a) the full faith and credit of the U.S. government; (b) the
right of the issuer or guarantor to borrow an amount from a line of credit with
the U.S. treasury; (c) discretionary power of the U.S. government to purchase
obligations of the Agencies or (d) the credit of the Agencies; (3) real estate
mortgage investment conduits (REMICs), collateralized mortgage obligations
(CMOs) and other mortgage-backed securities issued or guaranteed by an Agency;
(4) "when-issued" commitments relating to the foregoing; and (5) repurchase
agreements collateralized by U.S. government securities. The Fund may invest in
U.S. government securities with fixed or variable interest rates and in zero
coupon securities.
Because the Fund invests primarily in debt securities, the value of an
investment in the Fund generally will fall as prevailing interest rates rise,
and will rise as prevailing interest rates fall. The Adviser attempts to control
the magnitude of such fluctuations by managing the Fund's duration. Duration
measures how quickly the principal and interest of a bond is expected to be paid
and is used by investment managers to predict how much a bond's value will
fluctuate given a change in interest rates. Generally, the shorter the duration,
the less such value would be expected to change given an interest rate change.
The Fund generally maintains an intermediate duration of less than 7.5 years.
Declines in interest rates may over time translate into lower income
distributions being paid by the Fund.
Mortage-Backed Securities. Mortgage-backed securities, including CMOs and
REMICs, evidence ownership in a pool of mortgage loans made by certain financial
institutions and insured or guaranteed by the U.S. government or its Agencies.
Principal on mortgage-backed securities may be prepaid if the underlying
mortgages are prepaid. Because of the prepayment feature these investments may
not increase in value as much as other debt securities when interest rates fall
and the Fund may be able to invest prepaid principal only at lower yields. The
prepayment of such securities purchased at a premium may result in losses equal
to the premium.
Variable Rate Securities; Zero Coupon Securities. Interest rates on variable
rate securities change periodically based on some index or interest rate change,
reducing, but not eliminating, the securities' volatility. The securities' value
may fluctuate from changes in market interest rates because the rate change may
lag the market or there may be limits on the rate change. Zero coupon securities
do not pay interest in cash on a current basis but rather are purchased at a
discount and increase in value as they approach maturity. Their market price may
change more dramatically because of changes in interest rates than similar
securities paying interest currently. The Fund may be required to distribute
interest currently and may have to sell securities to generate cash for
distributions.
When-Issued Securities. "When-issued" securities are contracts to purchase
securities for a fixed price on a date beyond the customary settlement time with
no interest accruing until settlement. If made through a dealer, the contract is
dependent on the dealer's consummation of the transaction. The dealer's failure
could deprive the Fund of advantageous yields. These contracts also involve the
risk that the value of the underlying security may change prior to settlement.
The Fund currently will not purchase these securities more than 120 days prior
to settlement. The Fund will segregate with its custodian cash or liquid
securities equal in value to the Fund's obligations under the contract.
Mortgage Dollar Rolls. The Fund may also engage in so-called "mortgage dollar
roll" transactions. 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. 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 exceed the return earned by the Fund from the
transaction.
Financial Futures; Options. The Fund may (1) buy or sell financial futures
contracts (futures) and (2) purchase and write call and put options on futures
and securities. Such transactions will be entered into for hedging purposes and
to adjust the Fund's duration. A future creates an obligation by the seller to
deliver and the buyer to take delivery of the type of instrument at the time and
in the amount specified in the contract. Although futures call for delivery (or
acceptance) of the specified instrument, futures are usually closed out before
the settlement date through the purchase (sale) of a comparable contract. If the
price of the initial sale of the future exceeds (or is less than) the price of
the offsetting purchase, the Fund realizes a gain (or loss). A call option
represents the right, but not the obligation, to buy, and a put option
represents the right, but not the obligation, to sell, a particular security or
futures contract at a specified price during a specified period of time.
Transactions in futures involve the risk of (1) imperfect correlation between
the price movement of the contracts and the underlying securities, (2) the
possible absence of a liquid secondary market at any point in time, and (3) if
the Adviser's prediction on interest rates is inaccurate, the Fund may be worse
off than if it had not hedged. With respect to options, if a purchased option
expires unexercised, the Fund will lose the price paid for the option.
Temporary/Defensive Investments. Temporarily available cash may be invested in
repurchase agreements. Some or all of the Fund's assets also may be invested in
such investments during periods of unusual market conditions. Under a repurchase
agreement, the Fund buys a security from a bank or dealer, which is obligated to
buy it back at a fixed price and time. The security is held in a separate
account at the Fund's custodian and constitutes the Fund's collateral for the
bank's or dealer's repurchase obligation. Additional collateral will be added so
that the obligation will at all times be fully collateralized. However, if the
bank or dealer defaults or enters bankruptcy, the Fund may experience costs and
delays in liquidating the collateral, and may experience a loss if it is unable
to demonstrate its rights 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.
Borrowing of Money. The Fund may 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.
The Fund may trade portfolio securities for short-term profits to take advantage
of price differentials. These trades are limited by certain Internal Revenue
Code requirements. High portfolio turnover may result in higher transaction
costs and higher levels of realized capital gains.
Other. The Fund may not always achieve its investment objective. The Fund's
investment objective and non-fundamental investment policies may be changed
without shareholder approval. The Fund will notify investors in connection with
any material change in the Fund's investment objective. If there is a change in
the investment objective, shareholders should consider whether the Fund remains
an appropriate investment in light of their financial position and needs.
Shareholders may incur a contingent deferred sales charge if shares are redeemed
in response to a change in the investment objective. The Fund's fundamental
investment policies listed in the Statement of Additional Information cannot be
changed without the approval of a majority of the Fund's outstanding voting
securities. Additional information concerning certain of the securities and
investment techniques described above is contained in the Statement of
Additional Information.
HOW THE FUND MEASURES ITS PERFORMANCE
Performance may be quoted in sales literature and advertisements. Each Class's
average annual total returns are calculated in accordance with the Securities
and Exchange Commission's formula and assume the reinvestment of all
distributions, the maximum initial sales charge of 4.75% on Class A shares, 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 the average annual total return only
in that they may relate to different time periods, may represent aggregate as
opposed to average annual total returns, and may not reflect the initial or
contingent deferred sales charges.
Each Class's yield, which differs from total return because it does not consider
changes in net asset value, is calculated in accordance with the Securities and
Exchange Commission's formula. Each Class's distribution rate is calculated by
dividing the most recent month's distributions by the maximum offering price of
that Class at the end of the month. Each Class's performance may be compared to
various indices. Quotations from various publications may be included in sales
literature and advertisements. See "Performance Measures" in the Statement of
Additional Information for more information. All performance information is
historical and does not predict future results.
HOW THE FUND IS MANAGED
The Trustees formulate the Fund's general policies and oversee the Fund's
affairs as conducted by the Adviser.
Colonial Investment Services, Inc. (Distributor), a subsidiary of the Adviser,
serves as the distributor for the Fund's shares. Colonial Investors Service
Center, Inc. (Transfer Agent), an affiliate of the Adviser, serves as the
shareholder services and transfer agent for the Fund. Each of the Adviser,
the Distributor and the Transfer Agent is an indirect subsidiary of Liberty
Financial Companies, Inc. which in turn is an indirect subsidiary of Liberty
Mutual Insurance Company (Liberty Mutual). Liberty Mutual is considered to
be the controlling entity of the Adviser and its affiliates. Liberty Mutual
is an underwriter of workers' compensation insurance and a property and
casualty insurer in the U.S.
The Adviser furnishes the Fund with investment management, accounting and
administrative personnel and services, office space and other equipment and
services at the Adviser's expense. For these services, the Fund paid the Adviser
0.57% of the Fund's average net assets in fiscal year 1996.
Leslie W. Finnemore, Vice President of the Adviser, has managed the Fund since
its inception and various other Colonial taxable income funds since 1987.
The Adviser also provides pricing and bookkeeping services to the Fund for a
monthly fee of $2,250 plus a percentage of the Fund's average net assets over
$50 million.
The Transfer Agent provides transfer agency and shareholder services to the
Fund for a fee of 0.18% annually of average net assets plus certain
out-of-pocket expenses.
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) (normally 4:00
p.m. Eastern time) each day the Exchange is open. Portfolio securities for which
market quotations are readily available are valued at current market value.
Short-term investments maturing in 60 days or less are valued at amortized cost
when it is determined, pursuant to procedures adopted by the Trustees, that such
cost approximates market value. All other securities and assets are valued at
their fair value following procedures adopted by the Trustees.
DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code and to distribute to shareholders virtually all net income
and any net realized gain, at least annually.
The Fund generally declares distributions daily and pays them monthly. At times
the distributions may exceed the actual returns for the year in which case a
portion of the distributions may be a "return of capital." This will reduce the
cost basis and be akin to a partial redemption of the investment (on which a
sales charge may have been paid). Distributions are invested in additional
shares of the same Class of the Fund at net asset value unless the shareholder
elects to receive cash. Regardless of the shareholder's election, distributions
of $10 or less will not be paid in cash to shareholders but will be invested in
additional shares of the same Class of the Fund at net asset value. To change
your election, call the Transfer Agent for information. Whether you receive
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. The Fund's distributions may, to the extent they consist of
interest from certain U.S. government securities, be exempt from certain state
and local income taxes. Annually, shareholders are informed of that portion of
the distribution which might qualify for the exemption.
HOW TO BUY SHARES
Shares of the Fund are offered continuously. Orders received in good form prior
to the time at which the Fund values its shares (or placed with a financial
services firm before such time and transmitted by the financial service firm
before the Fund processes that day's share transactions) will be processed based
on that day's closing net asset value, plus any applicable initial sales charge.
The minimum initial investment is $1,000; subsequent investments may be as small
as $50. The minimum initial investment for the Colonial Fundamatic program is
$50, and the minimum initial investment for a Colonial retirement account is
$25. Certificates will not be issued for Class B or Class D shares and there are
some limitations on the issuance of Class A share certificates. The Fund may
refuse any purchase order for its shares. See the Statement of Additional
Information for more information.
Class A Shares. Class A shares are offered at net asset value plus an initial
sales charge as follows:
Initial Sales Charge
----------------------------
Retained by
Financial
Service
Firm as
as % of % of
----------------
Amount Offering Offering
Amount Purchased Invested Price Price
Less than $50,000 4.99% 4.75% 4.25%
$50,000 to less than $100,000 4.71% 4.50% 4.00%
$100,000 to less than $250,000 3.00% 3.90% 3.50%
$250,000 to less than $500,000 2.00% 3.09% 2.50%
$500,000 to less than $1,000,000 2.04% 2.00% 1.75%
$1,000,000 or more 0.00% 0.00% 0.00%
On purchases of $1 million or more, the Distributor pays the financial service
firm a cumulative commission as follows:
Amount Purchased Commission
First $3,000,000 1.00%
Next $2,000,000 0.50%
Over $5,000,000 0.25% (1)
(1) Paid over 12 months but only to the extent the shares remain outstanding.
Purchases of $1 million to $5 million are subject to a 1.00% contingent deferred
sales charge payable to the Distributor on redemptions within 18 months from the
first day of the month following the purchase. The contingent deferred sales
charge does not apply to the excess of any purchase over $5 million.
Class B Shares. Class B shares are offered at net asset value, without an
initial sales charge, subject to a 0.75% annual distribution fee for
approximately eight years (at which time they automatically convert to Class A
shares not bearing a distribution fee) and a declining contingent deferred sales
charge if redeemed within six years after purchase. As shown below, the amount
of the contingent deferred sales charge depends on the number of years after
purchase that the redemption occurs:
Years Contingent Deferred
After Purchase Sales Charge
0-1 5.00%
1-2 4.00%
2-3 3.00%
3-4 3.00%
4-5 2.00%
5-6 1.00%
More than 6 0.00%
Year one ends one year after the end of the month in which the purchase was
accepted and so on. The Distributor pays financial service firms a commission
of 4.00% on Class B share purchases.
Class D Shares. Class D shares are offered at net asset value plus a 1.00%
initial sales charge, and are subject to a 0.75% annual distribution fee and a
1.00% contingent deferred sales charge (0.99% of the offering price) on
redemptions made within one year from the first day of the month after purchase.
The Distributor pays financial service firms an initial commission of 1.85% on
purchases of Class D shares and an ongoing commission of 0.65% annually. Payment
of the ongoing commission is conditioned on receipt by the Distributor of the
0.75% distribution fee referred to above. In addition, the ongoing commission
will only be paid after the proceeds of the purchase have been held by the Fund
for one year. The commission may be reduced or eliminated if the distribution
fee paid by the Fund is reduced or eliminated for any reason.
General. All contingent deferred sales charges are deducted from the amount
redeemed, not the amount remaining in the account, and are paid to the
Distributor. Shares issued upon distribution reinvestment and amounts
representing appreciation are not subject to a contingent deferred sales charge.
The contingent deferred sales charge is imposed on redemptions which result in
the account value falling below its Base Amount (the total dollar value of
purchase payments (including initial sales charges, if any) in the account,
reduced by prior redemptions on which a contingent deferred sales charge was
paid and any exempt redemptions). See the Statement of Additional Information
for more information.
Which Class is more beneficial to an investor depends on the amount and intended
length of the investment. Large investments, qualifying for a reduced Class A
sales charge, avoid the distribution fee. Investments in Class B shares have
100% of the purchase invested immediately. Investors investing for a relatively
short period of time might consider Class D shares. Purchases of $250,000 or
more must be for Class A or Class D shares. Purchases of $500,000 or more must
be for Class A shares. Consult your financial service firm.
Financial service firms may receive different compensation rates for selling
different classes of shares. The Distributor may pay additional compensation to
financial service firms which have made or may make significant sales. 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 reduced or without initial or contingent
deferred sales charges. These programs are described in the Statement of
Additional Information under "Programs for Reducing or Eliminating Sales
Charges" and "How to Sell Shares."
Shareholder Services and Account Fees. A variety of shareholder services are
available. For more information about these services or your account, call
1-800-345-6611. Some services are described in the attached account application.
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. The Fund may also deduct annual maintenance and processing fees
(payable to the Transfer Agent) in connection with certain retirement plan
accounts. See "Special Purchase Programs/Investor Services" in the Statement of
Additional Information for more information.
HOW TO SELL SHARES
Shares of the Fund may be sold on any day the Exchange is open, either directly
to the Fund or through your financial service firm. Sale proceeds generally are
sent within seven days (usually on the next business day after your request is
received in good form). However, for shares recently purchased by check, the
Fund will send proceeds as soon as the check has cleared (which may take up to
15 days).
Selling Shares Directly To The Fund. Send a signed letter of instruction or
stock power form to the Transfer Agent, along with any certificates for shares
to be sold. The sale price is the net asset value (less any applicable
contingent deferred sales charge) next calculated after the Fund receives the
request in proper form. Signatures must be guaranteed by a bank, a member firm
of a national stock exchange or another eligible guarantor institution. Stock
power forms are available from 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 at which the Fund values its shares to
receive that day's price, are responsible for furnishing all necessary
documentation to the Transfer Agent and may charge for this service.
General. The sale of shares is a taxable transaction for income tax purposes and
may be subject to a contingent deferred sales charge. The contingent deferred
sales charge may be waived under certain circumstances. See the Statement of
Additional Information for more information. Under unusual circumstances, the
Fund may suspend repurchases or postpone payment for up to seven days or longer,
as permitted by federal securities law.
HOW TO EXCHANGE SHARES
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 1-800-426-3750 to receive a prospectus and an
exchange authorization form. Call 1-800-422-3737 to exchange shares by
telephone. An exchange is a taxable capital transaction. The exchange service
may be changed, suspended or eliminated on 60 days' written notice.
Class A Shares. An exchange from a money market fund into a non-money market
fund will be at the applicable offering price next determined (including sales
charge), except for amounts on which an initial sales charge was paid. Non-money
market fund shares must be held for five months before qualifying for exchange
to a fund with a higher sales charge, after which exchanges are made at the net
asset value next determined.
Class B Shares. Exchanges of Class B shares are not subject to the contingent
deferred sales charges. However, if shares are redeemed within six years after
the original purchase, a contingent deferred sales charge will be assessed using
the schedule of any 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. The Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine and may be liable for losses related to unauthorized
transactions in the event reasonable procedures are not employed. Such
procedures include restrictions on where proceeds of telephone redemptions may
be sent, limitations on the ability to redeem by telephone shortly after an
address change, recording of telephone lines and requirements that the redeeming
shareholder and/or financial adviser provide certain identifying informaton. 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 monthly service fee at an
annual rate of 0.25% of the Fund's net assets attributed to each Class of
shares. The Fund also pays the Distributor monthly a distribution fee at an
annual rate of 0.75% of the average daily net assets attributed to its Class B
and Class D shares. Because the Class B and Class D shares bear the additional
distribution fee, their dividends will be lower than those of Class A shares.
Class B shares automatically convert to Class A shares, approximately eight
years after the Class B shares were purchased. The multiple class structure
could be terminated should certain Internal Revenue Service rulings be
rescinded. See the Statement of Additional Information for more information. The
Distributor uses the fees to defray the cost of commissions and service fees
paid to financial service firms which have sold Fund shares, and to defray other
expenses such as sales literature, prospectus printing and distribution,
shareholder servicing costs and compensation to wholesalers. Should the fees
exceed the Distributor's expenses in any year, the Distributor would realize a
profit. The 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. Shareholders receive one vote for
each 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.
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 27, 1996
COLONIAL U.S.
GOVERNMENT FUND
PROSPECTUS
Colonial U.S. Government Fund seeks as high a level of current income and total
return as is consistent with prudent risk by investing exclusively in U.S.
government securities.
For more detailed information about the Fund, call the Adviser at 1-800-426-3750
for the December 27, 1996 Statement of Additional Information.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED, ENDORSED OR
INSURED BY, ANY BANK OR GOVERNMENT AGENCY.
<PAGE>
COLONIAL TRUST II
Cross Reference Sheet (Colonial Government Money Market Fund)
Item Number of Form N-1A Statement of Additional Information
Location or Caption
Part B
10. Cover Page
11. Table of Contents
12. Not Applicable
13. Investment Objective and Policies; Fundamental
Investment Policies; Other Investment Policies;
Miscellaneous Investment Practices
14. Fund Charges and Expenses; Management of the
Colonial Funds
15. Fund Charges and Expenses
16. Fund Charges and Expenses; Management of the
Colonial Funds
17. Fund Charges and Expenses; Management of the
Colonial Funds
18. Shareholder Meetings; Shareholder Liability
19. How to Buy Shares; Determination of Net Asset
Value; Suspension of Redemptions; Special
Purchase Programs/Investor Services; Programs
for Reducing or Eliminating Sales Charge; How
to Sell Shares; How to Exchange Shares
20. Taxes
21. Fund Charges and Expenses; Management of the
Colonial Funds
22. Fund Charges and Expenses; Investment
Performance; Performance Measures
23. Independent Accountants
COLONIAL GOVERNMENT MONEY MARKET FUND
Statement of Additional Information
December 27, 1996
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 27, 1996. 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
Investment Objective and Policies
Fundamental Investment Policies
Other Investment Policies
Fund Charges and Expenses
Investment Performance
Custodian
Independent Accountants
Part 2
Miscellaneous Investment Practices
Taxes
Management of the Colonial Funds
Determination of Net Asset Value
How to Buy Shares
Special Purchase Programs/Investor Services
Programs for Reducing or Eliminating Sales Charges
How to Sell Shares
Distributions
How to Exchange Shares
Suspension of Redemptions
Shareholder Liability
Shareholder Meetings
Performance Measures
Appendix I
Appendix II
Part 1
COLONIAL GOVERNMENT MONEY MARKET FUND
Statement of Additional Information
December 27, 1996
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 (dollars in thousands)
Year ended August 31
------------------------------------
1996 1995 1994
---- ---- ----
Management fee $461 $467 $519
Bookkeeping fee 63 58 46
Shareholder service and transfer agent fee 375 336 250
12b-1 fees:
Distribution fee (Class B) 484 396 234
Distribution fee (Class D)(b) 17 4 1
Service Fee (Class B) 160 132 78
Service Fee (Class D)(b) 6 1 (a)
Amount of the above fees waived by the Adviser 0 (55) (207)
(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, 1996, 1995 and 1994.
Trustees Fees
For the fiscal year ended August 31, 1996 and the calendar year ended December
31, 1995, the Trustees received the following compensation for serving as
Trustees:
Aggregate Total Compensation From
Compensation Trust and Fund Complex
From Fund For The Paid to the Trustees For
Fiscal Year Ended The Calendar Year Ended
Trustee August 31, 1996 December 31, 1995 (c)
- ------- ---------------- -----------------------
Robert J. Birnbaum (d) $1,351 $71,250
Tom Bleasdale 1,474(e) 98,000(f)
Lora S. Collins 1,356 91,000
James E. Grinnell (d) 1,368 71,250
William D. Ireland, Jr. 1,681 113,000
Richard W. Lowry (d) 1,365 71,250
William E. Mayer 1,340 91,000
James L. Moody, Jr. 1,533(g) 94,500(h)
John J. Neuhauser 1,357 91,000
George L. Shinn 1,540 102,500
Robert L. Sullivan 1,500 101,000
Sinclair Weeks, Jr. 1,696 112,000
(c) At December 31, 1995, the Colonial Funds complex consisted of 33
open-end and 5 closed-end management investment company portfolios.
(d) Elected as Trustees of the Colonial Funds complex on April 21, 1995.
(e) Includes $723 payable in later years as deferred compensation.
(f) Includes $49,000 payable in later years as deferred compensation.
(g) Total compensation of $1,533 for the fiscal year ended August 31, 1996
will be payable in later years as deferred compensation.
(h) Total compensation of $94,500 for the calendar year ended December 31,
1995 will be payable in later years as deferred compensation.
The following table sets forth the amount of compensation paid to Messrs.
Birnbaum, Grinnell and Lowry in their capacities as Trustees or Directors of the
Liberty All-Star Equity Fund and Liberty All-Star Growth Fund, Inc. (formerly
known as The Charles Allmon Trust, Inc.) (together, Liberty Funds I) for service
during the calendar year ended December 31, 1995, and of Liberty Financial Trust
(now known as Colonial Trust VII) and LFC Utilities Trust (together, Liberty
Funds II) for the period January 1, 1995 through March 26, 1995 (i):
Total Compensation From Liberty Total Compensation From Liberty
Funds I For The Period January 1, Funds II For The Calendar Year
Trustee 1995 through March 26, 1995 Ended December 31, 1995 (j)
- ------- -------------------------------- -----------------------
Robert J. Birnbaum $2,900 $16,675
James E. Grinnell 2,900 22,900
Richard W. Lowry 2,900 26,250 (k)
(i) 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 reorganized into a new portfolio of Colonial Trust
III. Prior to their election as Trustees of the Colonial Funds, Messrs.
Birnbaum, Grinnell and Lowry served as Trustees of Liberty Funds II;
they continue to serve as Trustees or Directors of Liberty Funds I.
(j) At December 31, 1995, the Liberty Funds were advised by Liberty Asset
Management Company (LAMCO). LAMCO is an indirect wholly-owned
subsidiary of Liberty Financial Companies, Inc. (an intermediate parent
of the Adviser).
(k) Includes $3,500 paid to Mr. Lowry for service as Trustee of Liberty
Newport World Portfolio (formerly known as Liberty All-Star World
Portfolio) (Liberty Newport) during the calendar year ended December 31,
1995. At December 31, 1995, Liberty Newport was managed by Newport
Pacific Management, Inc. and Stein Roe & Farnham Incorporated, each an
affiliate of the Adviser.
Ownership of the Fund
At December 9, 1996, the officers and Trustees of the Trust as a group owned
approximately 5,555,603 Class A shares of the Fund, representing 4.95% of
the outstanding Class A shares of the Fund.
At December 9, 1996, the officers and Trustees of the Trust as a group owned
approximately 2,223,129 Class B shares of the Fund, representing 3.72% of the
outstanding Class B shares of the Fund.
At December 9, 1996, the officers and Trustees of the Trust as a group did not
own Class D shares of the Fund.
At November 30, 1996, First National Bank of Boston TTEE, Hiller Company, Inc.,
401K Retirement Plan, A/C Hank Muniz, 635 Mill Street, Marion, MA 02738 owned
11,242,021.270 Class A shares representing 10.01% of the total outstanding.
At November 30, 1996, Colonial Investment Services, Inc., c/o John Wallace, One
Financial Center, Boston, MA 02111 owned 19,632,686.350 Class A shares
representing 17.49% of the total outstanding.
At November 30, 1996, Colonial Management Associates, Inc., Attn: John
Wallace/Controller, 11th Floor, One Financial Center, Boston, MA 02111-2621
owned 3,914,309.420 Class D shares representing 76.23% of the total outstanding.
The largest single holding of each class of shares was by the Adviser.
At November 30, 1996 , there were 4,073 Class A, 5,830 Class B and 93 Class D
recordholders of the Fund.
Sales Charges (for the fiscal year ended August 31, 1996) (dollars in thousands)
were as follows:
Class B Shares Class D Shares
------------------------ -------------------
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Aggregate contingent deferred
sales charges (CDSC) on Fund
redemptions retained by CISI $346 $638 $306 $1 $(l)
(l) 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 (Plans) pursuant to Rule 12b-1 under the Act. Under the Plans, the
Fund pays CISI monthly a service fee at an annual rate of 0.25% of the net
assets and a monthly distribution fee at an annual rate of 0.75% of average
daily net assets attributed to Class B and D shares only. CISI may use the
entire amount of such fees to defray the costs of commissions and service fees
paid 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, 1996)(dollars
in thousands) of CISI relating to the Fund were as follows:
Class A Class B Class D
------- ------- -------
Fees to FSFs $0 $1,020 $17
Cost of sales material relating to
the Fund (including printing
and mailing expenses) $1 $(m) $(m)
Allocated travel, entertainment
and other promotional expenses
(including advertising) $0 $0 $0
(m) 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, 1996 were:
Class A Shares Class B Shares Class D Shares
-------------- -------------- --------------
7-day Yield 4.620% 3.698% 3.722%
7-day Effective Yield 4.727% 3.766% 3.791%
The Fund's average annual total returns at August 31, 1996 were:
Class A Shares
--------------
1 year 5 years 10 years
------ ------- --------
4.93% 3.77% 5.30%
Class B Shares
--------------
June 8, 1992
(Class B shares initially offered)
1 Year through August 31, 1996
------- ------------------------
With applicable CDSC (1.14)%(5.00% CDSC) 2.26% (2.00% CDSC)
Without CDSC 3.86% 2.70%
Class D Shares
--------------
July 1, 1994
(Class D shares initially offered)
1 Year through August 31, 1996
------ ------------------------
With CDSC of 1.00% 1.82% 3.38% (n)
Without CDSC 3.85% 3.86%
(n) Does not include a CDSC.
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 Securities and Exchange Commission filings. The
financial statements incorporated by reference in this SAI have been so
incorporated, and the financial highlights included in the Prospectus 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 16 of the August 31, 1996 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. If an investment practice is not listed in
Part 1 of this SAI, it is not applicable to your Fund.
Short-Term Trading
In seeking the fund's investment objective, the Adviser will buy or sell
portfolio securities whenever it believes it is appropriate. The Adviser's
decision will not generally be influenced by how long the fund may have owned
the security. From time to time the fund will buy securities intending to seek
short-term trading profits. A change in the securities held by the fund is known
as "portfolio turnover" and generally involves some expense to the fund. These
expenses may include brokerage commissions or dealer mark-ups and other
transaction costs on both the sale of securities and the reinvestment of the
proceeds in other securities. If sales of portfolio securities cause the fund to
realize net short-term capital gains, such gains will be taxable as ordinary
income. As a result of the fund's investment policies, under certain market
conditions the fund's portfolio turnover rate may be higher than that of other
mutual funds. The fund's portfolio turnover rate for a fiscal year is the ratio
of the lesser of purchases or sales of portfolio securities to the monthly
average of the value of portfolio securities, excluding securities whose
maturities at acquisition were one year or less. The fund's portfolio turnover
rate is not a limiting factor when the Adviser considers a change in the fund's
portfolio.
Lower Rated Bonds
Lower rated bonds are those rated lower than Baa by Moody's, BBB by S&P, or
comparable 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 legislation limits and future legislation 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
The fund may invest in securities traded in markets outside the United States.
Foreign investments can be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations. There may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing and financial
reporting standards comparable to those applicable to U.S. companies. Securities
of some foreign companies are less liquid or more volatile than securities of
U.S. companies, and foreign brokerage commissions and custodian fees may be
higher than in the United States. Investments in foreign securities can involve
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets
and imposition of withholding taxes on dividend or interest payments. Foreign
securities, like other assets of the fund, will be held by the fund's custodian
or by a subcustodian or depository. See also "Foreign Currency Transactions"
below.
The fund may invest in certain Passive Foreign Investment Companies (PFICs)
which may be subject to U.S. federal income tax on a portion of any "excess
distribution" or gain (PFIC tax) related to the investment. The PFIC tax is the
highest ordinary income rate, and it could be increased by an interest charge on
the deemed tax deferral.
The fund may possibly elect to include in its income its pro rata share of the
ordinary earnings and net capital gain of PFICs. This election requires certain
annual information from the PFICs which in many cases may be difficult to
obtain. An alternative election would permit the fund to recognize as income any
appreciation (but not depreciation) on its holdings of PFICs as of the end of
its fiscal year.
Zero Coupon Securities (Zeros)
The fund may invest in debt securities which do not pay interest, but instead
are issued at a deep discount from par. The value of the security increases over
time to reflect the interest accrued. The value of these securities may
fluctuate more than similar securities which are issued at par and pay interest
periodically. Although these securities pay no interest to holders prior to
maturity, interest on these securities is reported as income to the fund and
distributed to its shareholders. These distributions must be made from the
fund's cash assets or, if necessary, from the proceeds of sales of portfolio
securities. The fund will not be able to purchase additional income producing
securities with cash used to make such distributions and its current income
ultimately may be reduced as a result.
Step Coupon Bonds (Steps)
The fund may invest in debt securities which do not pay interest for a stated
period of time and then pay interest at a series of different rates for a series
of periods. In addition to the risks associated with the credit rating of the
issuers, these securities are subject to the volatility risk of zero coupon
bonds for the period when no interest is paid.
Tender Option Bonds
A tender option bond is a Municipal Security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the Municipal Security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate. The
Adviser will consider on an ongoing basis the creditworthiness of the issuer of
the underlying Municipal Securities, of any custodian, and of the third-party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying Municipal Securities and for other
reasons.
Pay-In-Kind (PIK) Securities
The fund may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are generally
high yield securities and in addition to the other risks associated with
investing in high yield securities are subject to the risks that the interest
payments which consist of additional securities are also subject to the risks of
high yield securities.
Money Market Instruments
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposits are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-term
needs. Participation Interests include the underlying securities and any related
guaranty, letter of credit, or collateralization arrangement which the fund
would be allowed to invest in directly.
Securities Loans
The fund may make secured loans of its portfolio securities amounting to not
more than the percentage of its total assets specified in Part 1 of this SAI,
thereby realizing additional income. The risks in lending portfolio securities,
as with other extensions of credit, consist of possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. As a matter of policy, securities loans are made to banks and
broker-dealers pursuant to agreements requiring that loans be continuously
secured by collateral in cash or short-term debt obligations at least equal at
all times to the value of the securities on loan. The borrower pays to the fund
an amount equal to any dividends or interest received on securities lent. The
fund retains all or a portion of the interest received on investment of the cash
collateral or receives a fee from the borrower. Although voting rights, or
rights to consent, with respect to the loaned securities pass to the borrower,
the fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The fund may also call such loans in order
to sell the securities involved.
Forward Commitments
The fund may enter into contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments" and "when
issued securities") if the fund holds until the settlement date, in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the fund enters into offsetting contracts for the forward
sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date. Where such
purchases are made through dealers, the fund relies on the dealer to consummate
the sale. The dealer's failure to do so may result in the loss to the fund of an
advantageous yield or price. Although the fund will generally enter into forward
commitments with the intention of acquiring securities for its portfolio or for
delivery pursuant to options contracts it has entered into, the fund may dispose
of a commitment prior to settlement if the Adviser deems it appropriate to do
so. The fund may realize short-term profits or losses upon the sale of forward
commitments.
Mortgage Dollar Rolls
In a mortgage dollar roll, the fund sells a mortgage-backed security and
simultaneously enters into a commitment to purchase a similar security at a
later date. The fund either will be paid a fee by the counterparty upon entering
into the transaction or will be entitled to purchase the similar security at a
discount. As with any forward commitment, mortgage dollar rolls involve the risk
that the counterparty will fail to deliver the new security on the settlement
date, which may deprive the fund of obtaining a beneficial investment. In
addition, the security to be delivered in the future may turn out to be inferior
to the security sold upon entering into the transaction. Also, the transaction
costs may exceed the return earned by the fund from the transaction.
Repurchase Agreements
The fund may enter into repurchase agreements. A repurchase agreement is a
contract under which the fund acquires a security for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the fund to resell such security at a fixed time and price
(representing the fund's cost plus interest). It is the fund's present intention
to enter into repurchase agreements only with commercial banks and registered
broker-dealers and only with respect to obligations of the U.S. government or
its agencies or instrumentalities. Repurchase agreements may also be viewed as
loans made by the fund which are collateralized by the securities subject to
repurchase. The Adviser will monitor such transactions to determine that the
value of the underlying securities is at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, the fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the fund sells a security and agrees to
repurchase the same security at a mutually agreed upon date and price. A reverse
repurchase agreement may also be viewed as the borrowing of money by the fund
and, therefore, as a form of leverage. The fund will invest the proceeds of
borrowings under reverse repurchase agreements. In addition, the fund will enter
into a reverse repurchase agreement only when the interest income expected to be
earned from the investment of the proceeds is greater than the interest expense
of the transaction. The fund will not invest the proceeds of a reverse
repurchase agreement for a period which exceeds the duration of the reverse
repurchase agreement. The fund may not enter into reverse repurchase agreements
exceeding in the aggregate one-third of the market value of its total assets,
less liabilities other than the obligations created by reverse repurchase
agreements. Each fund will establish and maintain with its custodian a separate
account with a segregated portfolio of securities in an amount at least equal to
its purchase obligations under its reverse repurchase agreements. If interest
rates rise during the term of a reverse repurchase agreement, entering into the
reverse repurchase agreement may have a negative impact on a money market fund's
ability to maintain a net asset value of $1.00 per share.
Options on Securities
Writing covered options. The fund may write covered call options and covered put
options on securities held in its portfolio when, in the opinion of the Adviser,
such transactions are consistent with the fund's investment objective and
policies. Call options written by the fund give the purchaser the right to buy
the underlying securities from the fund at a stated exercise price; put options
give the purchaser the right to sell the underlying securities to the fund at a
stated price.
The fund may write only covered options, which means that, so long as the fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The fund may
write combinations of covered puts and calls on the same underlying security.
The fund will receive a premium from writing a put or call option, which
increases the fund's return on the underlying security if the option expires
unexercised or is closed out at a profit. The amount of the premium reflects,
among other things, the relationship between the exercise price and the current
market value of the underlying security, the volatility of the underlying
security, the amount of time remaining until expiration, current interest rates,
and the effect of supply and demand in the options market and in the market for
the underlying security. By writing a call option, the fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option but continues to bear the risk
of a decline in the value of the underlying security. By writing a put option,
the fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an offsetting
option. The fund realizes a profit or loss from a closing transaction if the
cost of the transaction (option premium plus transaction costs) is less or more
than the premium received from writing the option. Because increases in the
market price of a call option generally reflect increases in the market price of
the security underlying the option, any loss resulting from a closing purchase
transaction may be offset in whole or in part by unrealized appreciation of the
underlying security.
If the fund writes a call option but does not own the underlying security, and
when it writes a put option, the fund may be required to deposit cash or
securities with its broker as "margin" or collateral for its obligation to buy
or sell the underlying security. As the value of the underlying security varies,
the fund may have to deposit additional margin with the broker. Margin
requirements are complex and are fixed by individual brokers, subject to minimum
requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
Purchasing put options. The fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such hedge protection is provided during the life of the put option since the
fund, as holder of the put option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. For a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs.
Purchasing call options. The fund may purchase call options to hedge against an
increase in the price of securities that the fund wants ultimately to buy. Such
hedge protection is provided during the life of the call option since the fund,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the fund might
have realized had it bought the underlying security at the time it purchased the
call option.
Over-the-Counter (OTC) options. The Staff of the Division of Investment
Management of the Securities and Exchange Commission has taken the position that
OTC options purchased by the fund and assets held to cover OTC options written
by the fund are illiquid securities. Although the Staff has indicated that it is
continuing to evaluate this issue, pending further developments, the fund
intends to enter into OTC options transactions only with primary dealers in U.S.
Government Securities and, in the case of OTC options written by the fund, only
pursuant to agreements that will assure that the fund will at all times have the
right to repurchase the option written by it from the dealer at a specified
formula price. The fund will treat the amount by which such formula price
exceeds the amount, if any, by which the option may be "in-the-money" as an
illiquid investment. It is the present policy of the fund not to enter into any
OTC option transaction if, as a result, more than 15% (10% in some cases, refer
to your fund's Prospectus) of the fund's net assets would be invested in (i)
illiquid investments (determined under the foregoing formula) relating to OTC
options written by the fund, (ii) OTC options purchased by the fund, (iii)
securities which are not readily marketable, and (iv) repurchase agreements
maturing in more than seven days.
Risk factors in options transactions. The successful use of the fund's options
strategies depends on the ability of the Adviser to forecast interest rate and
market movements correctly.
When it purchases an option, the fund runs the risk that it will lose its entire
investment in the option in a relatively short period of time, unless the fund
exercises the option or enters into a closing sale transaction with respect to
the option during the life of the option. If the price of the underlying
security does not rise (in the case of a call) or fall (in the case of a put) to
an extent sufficient to cover the option premium and transaction costs, the fund
will lose part or all of its investment in the option. This contrasts with an
investment by the fund in the underlying securities, since the fund may continue
to hold its investment in those securities notwithstanding the lack of a change
in price of those securities.
The effective use of options also depends on the fund's ability to terminate
option positions at times when the Adviser deems it desirable to do so. Although
the fund will take an option position only if the Adviser believes there is a
liquid secondary market for the option, there is no assurance that the fund will
be able to effect closing transactions at any particular time or at an
acceptable price.
If a secondary trading market in options were to become unavailable, the fund
could no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A marketplace may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt normal market operations.
A marketplace may at times find it necessary to impose restrictions on
particular types of options transactions, which may limit the fund's ability to
realize its profits or limit its losses.
Disruptions in the markets for the securities underlying options purchased or
sold by the fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with losses if trading in the security reopens at a
substantially different price. In addition, the Options Clearing Corporation
(OCC) or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If a
prohibition on exercise remains in effect until an option owned by the fund has
expired, the fund could lose the entire value of its option.
Special risks are presented by internationally-traded options. Because of time
differences between the United States and various foreign countries, and because
different holidays are observed in different countries, foreign options markets
may be open for trading during hours or on days when U.S. markets are closed. As
a result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Futures Contracts and Related Options
Upon entering into futures contracts, in compliance with the Securities and
Exchange Commission's requirements, cash, cash equivalents or high-grade debt
securities, equal in value to the amount of the fund's obligation under the
contract (less any applicable margin deposits and any assets that constitute
"cover" for such obligation), will be segregated with the fund's custodian. For
example, if a fund investing primarily in foreign equity securities enters into
a contract denominated in a foreign currency, the fund will segregate cash, cash
equivalents or high-grade debt securities equal in value to the difference
between the fund's obligation under the contract and the aggregate value of all
readily marketable equity securities denominated in the applicable foreign
currency held by the fund.
A futures contract sale creates an obligation by the seller to deliver the type
of instrument called for in the contract in a specified delivery month for a
stated price. A futures contract purchase creates an obligation by the purchaser
to take delivery of the type of instrument called for in the contract in a
specified delivery month at a stated price. The specific instruments delivered
or taken at settlement date are not determined until on or near that date. The
determination is made in accordance with the rules of the exchanges on which the
futures contract was made. Futures contracts are traded in the United States
only on commodity exchange or boards of trade -- known as "contract markets" --
approved for such trading by the Commodity Futures Trading Commission (CFTC),
and must be executed through a futures commission merchant or brokerage firm
which is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or acceptance
of commodities or securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Closing out a futures
contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument or commodity with
the same delivery date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid the difference
and realizes a gain. Conversely, if the price of the offsetting purchase exceeds
the price of the initial sale, the seller realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the purchaser's
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the purchaser realizes a gain, and if the purchase price exceeds
the offsetting sale price, the purchaser realizes a loss.
Unlike when the fund purchases or sells a security, no price is paid or received
by the fund upon the purchase or sale of a futures contract, although the fund
is required to deposit with its custodian in a segregated account in the name of
the futures broker an amount of cash and/or U.S. Government Securities. This
amount is known as "initial margin". The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds by the fund to
finance the transactions. Rather, initial margin is in the nature of a
performance bond or good faith deposit on the contract that is returned to the
fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin", to and from the broker (or the
custodian) are made on a daily basis as the price of the underlying security or
commodity fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking to market."
The fund may elect to close some or all of its futures positions at any time
prior to their expiration. The purpose of making such a move would be to reduce
or eliminate the hedge position then currently held by the fund. The fund may
close its positions by taking opposite positions which will operate to terminate
the fund's position in the futures contracts. Final determinations of variation
margin are then made, additional cash is required to be paid by or released to
the fund, and the fund realizes a loss or a gain. Such closing transactions
involve additional commission costs.
Options on futures contracts. The fund will enter into written options on
futures contracts only when, in compliance with the SEC's requirements, cash or
equivalents equal in value to the commodity value (less any applicable margin
deposits) have been deposited in a segregated account of the fund's custodian.
The fund may purchase and write call and put options on futures contracts it may
buy or sell and enter into closing transactions with respect to such options to
terminate existing positions. The fund may use such options on futures contracts
in lieu of writing options directly on the underlying securities or purchasing
and selling the underlying futures contracts. Such options generally operate in
the same manner as options purchased or written directly on the underlying
investments.
As with options on securities, the holder or writer of an option may terminate
his position by selling or purchasing an offsetting option. There is no
guarantee that such closing transactions can be effected.
The fund will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements similar to those described above.
Risks of transactions in futures contracts and related options. Successful use
of futures contracts by the fund is subject to the Adviser`s ability to predict
correctly movements in the direction of interest rates and other factors
affecting securities markets.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on futures contracts involves less potential risk to the fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the fund when
the purchase or sale of a futures contract would not, such as when there is no
movement in the prices of the hedged investments. The writing of an option on a
futures contract involves risks similar to those risks relating to the sale of
futures contracts.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution, by exchanges, of special
procedures which may interfere with the timely execution of customer orders.
To reduce or eliminate a hedge position held by the fund, the fund may seek to
close out a position. The ability to establish and close out positions will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or continue to exist for a particular
futures contract. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain contracts or options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of contracts or options, or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of contracts or options (or a particular
class or series of contracts or options), in which event the secondary market on
that exchange (or in the class or series of contracts or options) would cease to
exist, although outstanding contracts or options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Use by tax-exempt funds of U.S. Treasury security futures contracts and options.
The funds investing in tax-exempt securities issued by a governmental entity may
purchase and sell futures contracts and related options on U.S. Treasury
securities when, in the opinion of the Adviser, price movements in Treasury
security futures and related options will correlate closely with price movements
in the tax-exempt securities which are the subject of the hedge. U.S. Treasury
securities futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right in return for the premium paid to assume
a position in a U.S. Treasury futures contract at the specified option exercise
price at any time during the period of the option.
In addition to the risks generally involved in using futures contracts, there is
also a risk that price movements in U.S. Treasury security futures contracts and
related options will not correlate closely with price movements in markets for
tax-exempt securities.
Index futures contracts. An index futures contract is a contract to buy or sell
units of an index at a specified future date at a price agreed upon when the
contract is made. Entering into a contract to buy units of an index is commonly
referred to as buying or purchasing a contract or holding a long position in the
index. Entering into a contract to sell units of an index is commonly referred
to as selling a contract or holding a short position. A unit is the current
value of the index. The fund may enter into stock index futures contracts, debt
index futures contracts, or other index futures contracts appropriate to its
objective(s). The fund may also purchase and sell options on index futures
contracts.
There are several risks in connection with the use by the fund of index futures
as a hedging device. One risk arises because of the imperfect correlation
between movements in the prices of the index futures and movements in the prices
of securities which are the subject of the hedge. The Adviser will attempt to
reduce this risk by selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the fund's portfolio securities sought to be hedged.
Successful use of index futures by the fund for hedging purposes is also subject
to the Adviser's ability to predict correctly movements in the direction of the
market. It is possible that, where the fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the fund's portfolio may
decline. If this occurs, the fund would lose money on the futures and also
experience a decline in the value in its portfolio securities. However, while
this could occur to a certain degree, the Adviser believes that over time the
value of the fund's portfolio will tend to move in the same direction as the
market indices which are intended to correlate to the price movements of the
portfolio securities sought to be hedged. It is also possible that, if the fund
has hedged against the possibility of a decline in the market adversely
affecting securities held in its portfolio and securities prices increase
instead, the fund will lose part or all of the benefit of the increased values
of those securities that it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the index futures and the securities of
the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures markets are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which would distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction.
Options on index futures. Options on index futures are similar to options on
securities except that options on index futures give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put), at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the index futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the index future. If an option is exercised on
the last trading day prior to the expiration date of the option, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
Options on indices. As an alternative to purchasing call and put options on
index futures, the fund may purchase call and put options on the underlying
indices themselves. Such options could be used in a manner identical to the use
of options on index futures.
Foreign Currency Transactions
The fund may engage in currency exchange transactions to protect against
uncertainty in the level of future currency exchange rates.
The fund may engage in both "transaction hedging" and "position hedging". When
it engages in transaction hedging, the fund enters into foreign currency
transactions with respect to specific receivables or payables of the fund
generally arising in connection with the purchase or sale of its portfolio
securities. The fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the fund attempts to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
The fund may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. The fund may also
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the fund may also purchase exchange-listed and
over-the-counter call and put options on foreign currency futures contracts and
on foreign currencies. Over-the-counter options are considered to be illiquid by
the SEC staff. A put option on a futures contract gives the fund the right to
assume a short position in the futures contract until expiration of the option.
A put option on currency gives the fund the right to sell a currency at an
exercise price until the expiration of the option. A call option on a futures
contract gives the fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
fund the right to purchase a currency at the exercise price until the expiration
of the option.
When it engages in position hedging, the fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or an increase in
the value of currency for securities which the fund expects to purchase, when
the fund holds cash or short-term investments). In connection with position
hedging, the fund may purchase put or call options on foreign currency and
foreign currency futures contracts and buy or sell forward contracts and foreign
currency futures contracts. The fund may also purchase or sell foreign currency
on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the fund is obligated to deliver and if a decision is made
to sell the security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the underlying
prices of the securities which the fund owns or intends to purchase or sell.
They simply establish a rate of exchange which one can achieve at some future
point in time. Additionally, although these techniques tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they tend to limit
any potential gain which might result from the increase in value of such
currency.
Currency forward and futures contracts. Upon entering into such contracts, in
compliance with the SEC's requirements, cash, cash equivalents or high-grade
debt securities, equal in value to the amount of the fund's obligation under the
contract (less any applicable margin deposits and any assets that constitute
"cover" for such obligation), will be segregated with the fund's custodian. For
example, if a fund investing primarily in foreign equity securities enters into
a contract denominated in a foreign currency, the fund will segregate cash, cash
equivalents or high-grade debt securities equal in value to the difference
between the fund's obligation under the contract and the aggregate value of all
readily marketable equity securities denominated in the applicable foreign
currency held by the fund.
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.
The fund will only purchase or write currency options when the Adviser believes
that a liquid secondary market exists for such options. There can be no
assurance that a liquid secondary market will exist for a particular option at
any specified time. Currency options are affected by all of those factors which
influence exchange rates and investments generally. To the extent that these
options are traded over the counter, they are considered to be illiquid by the
SEC staff.
The value of any currency, including the U.S. dollars, may be affected by
complex political and economic factors applicable to the issuing country. In
addition, the exchange rates of currencies (and therefore the values of currency
options) may be significantly affected, fixed, or supported directly or
indirectly by government actions. Government intervention may increase risks
involved in purchasing or selling currency options, since exchange rates may not
be free to fluctuate in respect to other market forces.
The value of a currency option reflects the value of an exchange rate, which in
turn reflects relative values of two currencies, the U.S. dollar and the foreign
currency in question. Because currency transactions occurring in the interbank
market involve substantially larger amounts than those that may be involved in
the exercise of currency options, investors may be disadvantaged by having to
deal in an odd lot market for the underlying currencies in connection with
options at prices that are less favorable than for round lots. Foreign
governmental restrictions or taxes could result in adverse changes in the cost
of acquiring or disposing of currencies.
There is no systematic reporting of last sale information for currencies and
there is no regulatory requirement that quotations available through dealers or
other market sources be firm or revised on a timely basis. Available quotation
information is generally representative of very large round-lot transactions in
the interbank market and thus may not reflect exchange rates for smaller odd-lot
transactions (less than $1 million) where rates may be less favorable. The
interbank market in currencies is a global, around-the-clock market. To the
extent that options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets.
Settlement procedures. Settlement procedures relating to the fund's investments
in foreign securities and to the fund's foreign currency exchange transactions
may be more complex than settlements with respect to investments in debt or
equity securities of U.S. issuers, and may involve certain risks not present in
the fund's domestic investments, including foreign currency risks and local
custom and usage. Foreign currency transactions may also involve the risk that
an entity involved in the settlement may not meet its obligations.
Foreign currency conversion. Although foreign exchange dealers do not charge a
fee for currency conversion, they do realize a profit based on the difference
(spread) between prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the fund at one rate,
while offering a lesser rate of exchange should the fund desire to resell that
currency to the dealer. Foreign currency transactions may also involve the risk
that an entity involved in the settlement may not meet its obligation.
Participation Interests
The fund may invest in municipal obligations either by purchasing them directly
or by purchasing certificates of accrual or similar instruments evidencing
direct ownership of interest payments or principal payments, or both, on
municipal obligations, provided that, in the opinion of counsel to the initial
seller of each such certificate or instrument, any discount accruing on such
certificate or instrument that is purchased at a yield not greater than the
coupon rate of interest on the related municipal obligations will be exempt from
federal income tax to the same extent as interest on such municipal obligations.
The fund may also invest in tax-exempt obligations by purchasing from banks
participation interests in all or part of specific holdings of municipal
obligations. Such participations may be backed in whole or part by an
irrevocable letter of credit or guarantee of the selling bank. The selling bank
may receive a fee from the fund in connection with the arrangement. The fund
will not purchase such participation interests unless it receives an opinion of
counsel or a ruling of the Internal Revenue Service that interest earned by it
on municipal obligations in which it holds such participation interests is
exempt from federal income tax.
The determinations concerning the liquidity and appropriate valuation of a
municipal lease obligation, as with any other municipal security are made based
on all relevant factors. These factors include among others: (1) the frequency
of trades and quotes for the obligation; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; and (4)
the nature of the marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers, and the mechanics of the
transfer.
Stand-by Commitments
When the fund purchases municipal obligations it may also acquire stand-by
commitments from banks and broker-dealers with respect to such municipal
obligations. A stand-by commitment is the equivalent of a put option acquired by
the fund with respect to a particular municipal obligation held in its
portfolio. A stand-by commitment is a security independent of the municipal
obligation to which it relates. The amount payable by a bank or dealer during
the time a stand-by commitment is exercisable, absent unusual circumstances
relating to a change in market value, would be substantially the same as the
value of the underlying municipal obligation. A stand-by commitment might not be
transferable by the fund, although it could sell the underlying municipal
obligation to a third party at any time.
The fund expects that stand-by commitments generally will be available without
the payment of direct or indirect consideration. However, if necessary and
advisable, the fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities.) The total amount paid in either manner for outstanding
stand-by commitments held in the fund portfolio will not exceed 10% of the value
of the fund's total assets calculated immediately after each stand-by commitment
is acquired. The fund will enter into stand-by commitments only with banks and
broker-dealers that, in the judgment of the Trust's Board of Trustees, present
minimal credit risks.
Inverse Floaters
Inverse floaters are derivative securities whose interest rates vary inversely
to changes in short-term interest rates and whose values fluctuate inversely to
changes in long-term interest rates. The value of certain inverse floaters will
fluctuate substantially more in response to a given change in long-term rates
than would a traditional debt security. These securities have investment
characteristics similar to leverage, in that interest rate changes have a
magnified effect on the value of inverse floaters.
Rule 144A Securities
The fund may purchase securities that have been privately placed but that are
eligible for purchase and sale under Rule 144A under the 1933 Act. That Rule
permits certain qualified institutional buyers, such as the fund, to trade in
privately placed securities that have not been registered for sale under the
1933 Act. The Adviser, under the supervision of the Board of Trustees, will
consider whether securities purchased under Rule 144A are illiquid and thus
subject to the fund's investment restriction on illiquid securities. A
determination of whether a Rule 144A security is liquid or not is a question of
fact. In making this determination, the Adviser will consider the trading
markets for the specific security, taking into account the unregistered nature
of a Rule 144A security. In addition, the Adviser could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential purchasers,
(3) dealer undertakings to make a market, and (4) nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the fund's holdings of
illiquid securities would be reviewed to determine what, if any, steps are
required to assure that the fund does not invest more than its investment
restriction on illiquid securities allows. Investing in Rule 144A securities
could have the effect of increasing the amount of the fund's assets invested in
illiquid securities if qualified institutional buyers are unwilling to purchase
such securities.
TAXES
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 alternative minimum tax (AMT).
Return of Capital Distributions. To the extent that a distribution is a return
of capital for federal tax purposes, it reduces the cost basis of the shares on
the record date and is similar to a partial return of the original investment
(on which a sales charge may have been paid). There is no recognition of a gain
or loss, however, unless the return of capital reduces the cost basis in the
shares to below zero.
Funds that invest in U.S. Government Securities. Many states grant tax-free
status to dividends paid to shareholders of mutual funds from interest income
earned by the fund from direct obligations of the U.S. government. Investments
in mortgage-backed securities (including GNMA, FNMA and FHLMC Securities) and
repurchase agreements collateralized by U.S. government securities do not
qualify as direct federal obligations in most states. Shareholders should
consult with their own tax advisers about the applicability of state and local
intangible property, income or other taxes to their fund shares and
distributions and redemption proceeds received from the fund.
Distributions from Tax-Exempt Funds. Each tax-exempt fund will have at least 50%
of its total assets invested in tax-exempt bonds at the end of each quarter so
that dividends from net interest income on tax-exempt bonds will be exempt from
Federal income tax when received by a shareholder. The tax-exempt portion of
dividends paid will be designated within 60 days after year-end based upon the
ratio of net tax-exempt income to total net investment income earned during the
year. That ratio may be substantially different from the ratio of net tax-exempt
income to total net investment income earned during any particular portion of
the year. Thus, a shareholder who holds shares for only a part of the year may
be allocated more or less tax-exempt dividends than would be the case if the
allocation were based on the ratio of net tax-exempt income to total net
investment income actually earned while a shareholder.
The Tax Reform Act of 1986 makes income from certain "private activity bonds"
issued after August 7, 1986, a tax preference item for the AMT at the maximum
rate of 28% for individuals and 20% for corporations. If the fund invests in
private activity bonds, shareholders may be subject to the AMT on that part of
the distributions derived from interest income on such bonds. Other provisions
of the Tax Reform Act affect the tax treatment of distributions for
corporations, casualty insurance companies and financial institutions; interest
on all tax-exempt bonds is included in corporate adjusted current earnings when
computing the AMT applicable to corporations. Seventy-five percent of the excess
of adjusted current earnings over the amount of income otherwise subject to the
AMT is included in a corporation's alternative minimum taxable income.
Dividends derived from any investments other than tax-exempt bonds and any
distributions of short-term capital gains are taxable to shareholders as
ordinary income. Any distributions of net long-term gains will in general be
taxable to shareholders as long-term capital gains regardless of the length of
time fund shares are held.
Shareholders receiving social security and certain retirement benefits may be
taxed on a portion of those benefits as a result of receiving tax-exempt income,
including tax-exempt dividends from the fund.
Special Tax Rules Applicable to Tax-Exempt Funds. Income distributions to
shareholders who are substantial users or related persons of substantial users
of facilities financed by industrial revenue bonds may not be excludable from
their gross income if such income is derived from such bonds. Income derived
from the fund's investments other than tax-exempt instruments may give rise to
taxable income. The fund's shares must be held for more than six months in order
to avoid the disallowance of a capital loss on the sale of fund shares to the
extent of tax-exempt dividends paid during that period. A shareholder who
borrows money to purchase the fund's shares will not be able to deduct the
interest paid with respect to such borrowed money.
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 (in this section, and the following sections
entitled "Trustees and Officers," "The Management Agreement," "Administration
Agreement," "The Pricing and Bookkeeping Agreement," "Portfolio Transactions,"
"Investment decisions," and "Brokerage and research services," the "Adviser"
refers to Colonial Management Associates, Inc.) The Adviser is the investment
adviser to each of the Colonial funds (except for Colonial Municipal Money
Market Fund, Colonial Global Utilities Fund, Colonial Newport Tiger Fund,
Colonial Newport Tiger Cub Fund and Colonial Newport Japan Fund - see Part I of
each Fund's respective SAI for a description of the investment adviser). The
Adviser is a subsidiary of The Colonial Group, Inc. (TCG), One Financial Center,
Boston, MA 02111. TCG is a direct subsidiary of Liberty Financial Companies,
Inc. (Liberty Financial), which in turn is a direct subsidiary of LFC Holdings,
Inc., which in turn is a direct subsidiary of Liberty Mutual Equity Corporation,
which in turn is a wholly-owned subsidiary of Liberty Mutual Insurance Company
(Liberty Mutual). Liberty Mutual is an underwriter of workers' compensation
insurance and a property and casualty insurer in the U.S. Liberty Financial's
address is 600 Atlantic Avenue, Boston, MA 02210. Liberty Mutual's address is
175 Berkeley Street, Boston, MA 02117.
Trustees and Officers (this section applies to all of the Colonial funds)
<TABLE>
<CAPTION>
Name and Address Age Position with Principal Occupation During Past Five Years
- ---------------- --- -------------- -------------------------------------------
Fund
----
<S> <C> <C> <C>
Robert J. Birnbaum(1) (2) 69 Trustee Retired since 1994 (formerly Special Counsel, Dechert
313 Bedford Road Price & Rhoads from September, 1988 to December, 1993)
Ridgewood, NJ 07450
Tom Bleasdale 66 Trustee Retired since 1993 (formerly Chairman of the Board and
102 Clubhouse Drive #275 Chief Executive Officer, Shore Bank & Trust Company from
Naples, FL 34105 1992-1993), is a Director of The Empire Company since
June, 1995 (3)
Lora S. Collins 61 Trustee Attorney (formerly Attorney, Kramer, Levin, Naftalis,
1175 Hill Road Nessen, Kamin & Frankel from September, 1986 to November
Southold, NY 11971 1996) (3)
James E. Grinnell (1) (2) 67 Trustee Private Investor since November, 1988
22 Harbor Avenue
Marblehead, MA 01945
William D. Ireland, Jr. 72 Trustee Retired since 1990, is a Trustee of certain charitable
103 Springline Drive and non-charitable organizations since February, 1990 (3)
Vero Beach, FL 32963
Richard W. Lowry (1) (2) 60 Trustee Private Investor since August, 1987
10701 Charleston Drive
Vero Beach, FL 32963
William E. Mayer* 56 Trustee Dean, College of Business and Management, University of
College Park, MD 20742 Maryland since October, 1992 (formerly Dean, Simon
Graduate School of Business, University of Rochester from
October, 1991 to July, 1992) (3)
James L. Moody, Jr. 65 Trustee Chairman of the Board, Hannaford Bros., Co. since May,
P.O. Box 1000 1984 (formerly Chief Executive Officer, Hannaford Bros.
Portland, ME 04104 Co. from May, 1973 to May, 1992) (3)
John J. Neuhauser 53 Trustee Dean, Boston College School of Management since 1978 (3)
140 Commonwealth Avenue
Chestnut Hill, MA 02167
George L. Shinn 73 Trustee Financial Consultant since 1989 (formerly Chairman, Chief
The First Boston Corp. Executive Officer and Consultant, The First Boston
Tower Forty Nine Corporation from 1983 to July, 1991) (3)
12 East 49th Street
New York, NY 10017
Robert L. Sullivan 68 Trustee Self-employed Management Consultant since January, 1989
7121 Natelli Woods Lane (3)
Bethesda, MD 20817
Sinclair Weeks, Jr. 73 Trustee Chairman of the Board, Reed & Barton Corporation since
Bay Colony Corporate Ctr. 1987 (3)
Suite 4550
1000 Winter Street
Waltham, MA 02154
Harold W. Cogger 59 President President of Colonial funds since March, 1996 (formerly
(formerly Vice Vice President from July, 1993 to March, 1996); is
President) President since July, 1993, Chief Executive Officer
since March, 1995 and Director since
March, 1984 of the Adviser (formerly
Executive Vice President of the
Adviser from October, 1989 to
July, 1993); President since
October, 1994, Chief Executive Officer
since March, 1995 and Director since
October, 1981 of TCG; Executive Vice
President and Director, Liberty
Financial (3)
Timothy J. Jacoby 44 Treasurer and Treasurer and Chief Financial Officer of Colonial funds
Chief Financial since October, 1996, is Senior Vice President of the
Officer Adviser since September, 1996 (formerly Senior Vice
President, Fidelity Accounting and
Custody Services from September, 1993
to September, 1996 and Assistant
Treasurer to the Fidelity Group of
Funds from August, 1990 to September,
1993).
Peter L. Lydecker 42 Chief Accounting Chief Accounting Officer and Controller of Colonial
Officer and funds since June, 1993 (formerly Assistant Controller
Controller from March, 1985 to June, 1993); is Vice President of
(formerly the Adviser since June, 1993 (formerly Assistant Vice
Assistant President of the Adviser from August, 1988 to June,
Controller) 1993) (3)
Davey S. Scoon 49 Vice President Vice President of Colonial funds since June, 1993, is
Executive Vice President since July, 1993 and Director
since March, 1985 of the Adviser (formerly Senior Vice
President and Treasurer of the Adviser from March, 1985
to July, 1993); Executive Vice President and Chief
Operating Officer, TCG since March, 1995 (formerly Vice
President - Finance and Administration of TCG from
November, 1985 to March, 1995) (3)
Arthur O. Stern 56 Secretary Secretary of Colonial funds since 1985, is Director
since 1985, Executive Vice President since July, 1993,
General Counsel, Clerk and Secretary since March, 1985
of the Adviser; Executive Vice President, Legal since
March, 1995 and Clerk since March, 1985 of TCG
(formerly Executive Vice President, Compliance from
March, 1995 to March, 1996 and Vice President - Legal
of TCG from March, 1985 to March, 1995) (3)
</TABLE>
(1) Elected to the Colonial Funds complex on April 21, 1995.
(2) On April 3, 1995, and in connection with the merger of TCG with a
subsidiary of 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.
(3) Elected as a Trustee or officer of the LFC Utilities Trust, the master
fund in Colonial Global Utilities Fund, a series of Colonial Trust III
(LFC Portfolio) on March 27, 1995 in connection with the merger of TCG
with a subsidiary of Liberty Financial.
* Trustees who are "interested persons" (as defined in the Investment
Company Act of 1940) of the fund or the Adviser.
The address of the officers of each Colonial Fund is One Financial Center,
Boston, MA 02111.
The Trustees serve as trustees of all Colonial funds for which each Trustee will
receive an annual retainer of $45,000 and attendance fees of $7,500 for each
regular joint meeting and $1,000 for each special joint meeting. Committee
chairs receive an annual retainer of $5,000. Committee members receive an annual
retainer of $1,000 and $1,000 for each special meeting attended. Two-thirds of
the Trustee fees are allocated among the Colonial funds based on each fund's
relative net assets and one-third of the fees are divided equally among the
Colonial funds.
The Adviser and/or its affiliate, Colonial Advisory Services, Inc. (CASI), has
rendered investment advisory services to investment company, institutional and
other clients since 1931. The Adviser currently serves as investment adviser and
administrator for 33 open-end and 5 closed-end management investment company
portfolios, and is the administrator for 5 open-end management investment
company portfolios (collectively, Colonial funds). Trustees and officers of the
Trust, who are also officers of the Adviser or its affiliates, will benefit from
the advisory fees, sales commissions and agency fees paid or allowed by the
Trust. More than 30,000 financial advisers have recommended Colonial funds to
over 800,000 clients worldwide, representing more than $16.3. billion in assets.
The Agreement and Declaration of Trust (Declaration) of the Trust provides that
the Trust will indemnify its Trustees and officers against liabilities and
expenses incurred in connection with litigation in which they may be involved
because of their offices with the Trust but that such indemnification will not
relieve any officer or Trustee of any liability to the Trust or its shareholders
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties. The Trust, at its expense, provides liability
insurance for the benefit of its Trustees and officers.
The Management Agreement (this section does not apply to the Colonial Municipal
Money Market Fund, Colonial Global Utilities Fund, Colonial Newport Tiger Fund,
Colonial Newport Japan Fund or Colonial Newport Tiger Cub Fund) Under a
Management Agreement (Agreement), the Adviser has contracted to furnish each
fund with investment research and recommendations or fund management,
respectively, and accounting and administrative personnel and services, and with
office space, 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, Colonial Newport Tiger Fund,
Colonial Newport Japan Fund and Colonial Newport Tiger Cub Fund and their
respective Trusts).
Under an Administration Agreement with each Fund, the Adviser, in its capacity
as the Administrator to each Fund, has contracted to perform the following
administrative services:
(a) providing office space, equipment and clerical personnel;
(b) arranging, if desired by the respective Trust, for its Directors, officers
and employees to serve as Trustees, officers or agents of each Fund;
(c) preparing and, if applicable, filing all documents required for compliance
by each Fund with applicable laws and regulations;
(d) preparation of agendas and supporting documents for and minutes of meetings
of Trustees, committees of Trustees and shareholders;
(e) coordinating and overseeing the activities of each Fund's other third-party
service providers; and
(f) maintaining certain books and records of each Fund.
With respect to the Colonial Municipal Money Market Fund, the Administration
Agreement for this Fund provides for the following services in addition to the
services referenced above:
(g) monitoring compliance by the Fund with Rule 2a-7 under the Investment
Company Act of 1940 (the "1940 Act") and reporting to the Trustees from
time to time with respect thereto; and
(h) monitoring the investments and operations of the SR&F Municipal Money
Market Portfolio (Municipal Money Market Portfolio) in which Colonial
Municipal Money Market Fund is invested and the LFC Portfolio and reporting
to the Trustees from time to time with respect thereto.
The Administration Agreement has a one year term. The Adviser is paid a monthly
fee at the annual rate of average daily net assets set forth in Part 1 of this
Statement of Additional Information.
The Pricing and Bookkeeping Agreement
The Adviser provides pricing and bookkeeping services to each Colonial fund
pursuant to a Pricing and Bookkeeping Agreement. The Pricing and Bookkeeping
Agreement has a one-year term. The Adviser, in its capacity as the Administrator
to each of Colonial Municipal Money Market Fund and Colonial Global Utilities
Fund, is paid an annual fee of $18,000, plus 0.0233% of average daily net assets
in excess of $50 million. For each of the other Colonial funds (except for
Colonial Newport Tiger Fund, Colonial Newport Japan Fund and Colonial Newport
Tiger Cub Fund), the Adviser is paid monthly a fee of $2,250 by each fund, plus
a monthly percentage fee based on net assets of the fund equal to the following:
1/12 of 0.000% of the first $50 million;
1/12 of 0.035% of the next $950 million;
1/12 of 0.025% of the next $1 billion; 1/12
of 0.015% of the next $1 billion; and 1/12
of 0.001% on the excess over $3 billion
The Adviser provides pricing and bookkeeping services to Colonial Newport Tiger
Fund, Colonial Newport Japan Fund and Colonial Newport Tiger Cub Fund for an
annual fee of $27,000, plus 0.035% of Colonial Newport Tiger Fund's average
daily net assets over $50 million.
Stein Roe & Farnham Incorporated, the investment adviser of each of the
Municipal Money Market Portfolio and LFC Portfolio, provides pricing and
bookkeeping services to each Portfolio for a fee of $25,000 plus 0.0025%
annually of average daily net assets of each Portfolio over $50 million.
Portfolio Transactions
The following sections entitled "Investment decisions" and "Brokerage and
research services" do not apply to Colonial Municipal Money Market Fund, and
Colonial Global Utilities Fund. For each of these funds, see Part 1 of its
respective SAI. The Adviser of Colonial Newport Tiger Fund, Colonial Newport
Japan Fund and Colonial Newport Tiger Cub Fund follows the same procedures as
those set forth under "Brokerage and research services."
Investment decisions. The Adviser acts as investment adviser to each of the
Colonial funds (except for the Colonial Municipal Money Market Fund, Colonial
Global Utilities Fund, Colonial Newport Tiger Fund, Colonial Newport Japan Fund
and Colonial Newport Tiger Cub Fund, each of which is administered by the
Adviser. The Adviser's affiliate, CASI, advises other institutional, corporate,
fiduciary and individual clients for which CASI performs various services.
Various officers and Trustees of the Trust also serve as officers or Trustees of
other Colonial funds and the other corporate or fiduciary clients of the
Adviser. The Colonial funds and clients advised by the Adviser or the funds
administered by the Adviser sometimes invest in securities in which the Fund
also invests and sometimes engage in covered option writing programs and enter
into transactions utilizing stock index options and stock index and financial
futures and related options ("other instruments"). If the Fund, such other
Colonial funds and such other clients desire to buy or sell the same portfolio
securities, options or other instruments at about the same time, the purchases
and sales are normally made as nearly as practicable on a pro rata basis in
proportion to the amounts desired to be purchased or sold by each. Although in
some cases these practices could have a detrimental effect on the price or
volume of the securities, options or other instruments as far as the Fund is
concerned, in most cases it is believed that these practices should produce
better executions. It is the opinion of the Trustees that the desirability of
retaining the Adviser as investment adviser to the Colonial funds outweighs the
disadvantages, if any, which might result from these practices.
The portfolio managers of Colonial International Fund for Growth, a series of
Colonial Trust III, will use the trading facilities of Stein Roe & Farnham
Incorporated, an affiliate of the Adviser, to place all orders for the purchase
and sale of this fund's portfolio securities, futures contracts and foreign
currencies.
Brokerage and research services. Consistent with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., and subject to seeking
"best execution" (as defined below) and such other policies as the Trustees may
determine, the Adviser may 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 certain out-of-pocket expenses. See "Fund
Charges and Expenses" in Part 1 of this SAI for information on fees received by
CISC. The agreement continues indefinitely but may be terminated by 90 days'
notice by the Fund 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. Funds with portfolio securities which are primarily
listed on foreign exchanges may experience trading and changes in NAV on days on
which such Fund does not determine NAV due to differences in closing policies
among exchanges. This may significantly affect the NAV of the Fund's redeemable
securities on days when an investor cannot redeem such securities. The net asset
value of the Municipal Money Market Portfolio will not be determined on days
when the Exchange is closed unless, in the judgment of the Municipal Money
Market Portfolio's Board of Trustees, the net asset value of the Municipal Money
Market Portfolio should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time. Debt securities generally
are valued by a pricing service which determines valuations based upon market
transactions for normal, institutional-size trading units of similar securities.
However, in circumstances where such prices are not available or where the
Adviser deems it appropriate to do so, an over-the-counter or exchange bid
quotation is used. Securities listed on an exchange or on NASDAQ are valued at
the last sale price. Listed securities for which there were no sales during the
day and unlisted securities are valued at the last quoted bid price. Options are
valued at the last sale price or in the absence of a sale, the mean between the
last quoted bid and offering prices. Short-term obligations with a maturity of
60 days or less are valued at amortized cost pursuant to procedures adopted by
the Trustees. The values of foreign securities quoted in foreign currencies are
translated into U.S. dollars at the exchange rate for that day. Portfolio
positions for which there are no such valuations and other assets are valued at
fair value as determined in good faith under the direction of the Trust's
Trustees.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. Trading on certain foreign securities markets may not take place on
all business days in New York, and trading on some foreign securities markets
takes place on days which are not business days in New York and on which the
Fund's NAV is not calculated. The values of these securities used in determining
the NAV are computed as of such times. Also, because of the amount of time
required to collect and process trading information as to large numbers of
securities issues, the values of certain securities (such as convertible bonds,
U.S. government securities, and tax-exempt securities) are determined based on
market quotations collected earlier in the day at the latest practicable time
prior to the close of the Exchange. Occasionally, events affecting the value of
such securities may occur between such times and the close of the Exchange which
will not be reflected in the computation of each Colonial fund's NAV. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value following procedures
approved by the Trust's Trustees.
(The following two paragraphs are applicable only to Colonial Newport Tiger
Fund, Colonial Newport Japan Fund and Colonial Newport Tiger Cub Fund -
"Adviser" in these two paragraphs refers to each fund's Adviser which is Newport
Fund Management, Inc.)
Trading in securities on stock exchanges and over-the-counter markets in the Far
East is normally completed well before the close of the business day in New
York. Trading on Far Eastern securities markets may not take place on all
business days in New York, and trading on some Far Eastern securities markets
does take place on days which are not business days in New York and on which the
Fund's NAV is not calculated.
The calculation of the Fund's NAV accordingly may not take place
contemporaneously with the determination of the prices of the Fund's portfolio
securities used in such calculations. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the close
of the Exchange (when the Fund's NAV is calculated) will not be reflected in the
Fund's calculation of NAV unless the Adviser, acting under procedures
established by the Board of Trustees of the Trust, deems that the particular
event would materially affect the Fund's NAV, in which case an adjustment will
be made. Assets or liabilities initially expressed in terms of foreign
currencies are translated prior to the next determination of the NAV of the
Fund's shares into U.S. dollars at prevailing market rates.
Amortized Cost for Money Market Funds (this section currently applies only to
Colonial Government Money Market Fund, a series of Colonial Trust II - see
"Amortized Cost for Money Market Funds" under "Other Information Concerning the
Portfolio" in Part 1 of the SAI of Colonial Municipal Money Market Fund for
information relating to the Municipal Money Market Portfolio)
Money market funds generally value their portfolio securities at amortized cost
according to Rule 2a-7 under the 1940 Act.
Portfolio instruments are valued under the amortized cost method, whereby the
instrument is recorded at cost and thereafter amortized to maturity. This method
assures a constant NAV but may result in a yield different from that of the same
portfolio under the market value method. The Trust's Trustees have adopted
procedures intended to stabilize a money market fund's NAV per share at $1.00.
When a money market fund's market value deviates from the amortized cost of
$1.00, and results in a material dilution to existing shareholders, the Trust's
Trustees will take corrective action 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 at which shares are valued and transmits it to the Fund before the Fund
processes that day's transactions. If the FSF fails to transmit before the Fund
processes that day's transactions, the customer's entitlement to that day's
closing price must be settled between the customer and the FSF. If the FSF
receives the order after the time at which the Fund values its shares, the price
will be based on the NAV determined as of the close of the Exchange on the next
day it is open. If funds for the purchase of shares are sent directly to CISC,
they will be invested at the public offering price next determined after receipt
in good order. Payment for shares of the Fund must be in U.S. dollars; if made
by check, the check must be drawn on a U.S. bank.
The Fund receives the entire NAV of shares sold. For shares subject to an
initial sales charge, CISI's commission is the sales charge shown in the Fund's
Prospectus less any applicable FSF discount. The FSF discount is the same for
all FSFs, except that CISI retains the entire sales charge on any sales made to
a shareholder who does not specify a FSF on the Investment Account Application
("Application"). CISI generally retains 100% of any asset-based sales charge
(distribution fee) or contingent deferred sales charge. Such charges generally
reimburse CISI for any up-front and/or ongoing commissions paid to FSFs.
Checks presented for the purchase of shares of the Fund which are returned by
the purchaser's bank or checkwriting privilege checks for which there are
insufficient funds in a shareholder's account to cover redemption will subject
such purchaser or shareholder to a $15 service fee for each check returned.
Checks must be drawn on a U.S. bank and must be payable in U.S. dollars.
CISC acts as the shareholder's agent whenever it receives instructions to carry
out a transaction on the shareholder's account. Upon receipt of instructions
that shares are to be purchased for a shareholder's account, the designated FSF
will receive the applicable sales commission. Shareholders may change FSFs at
any time by written notice to CISC, provided the new FSF has a sales agreement
with CISI.
Shares credited to an account are transferable upon written instructions in good
order to CISC and may be redeemed as described under "How to Sell Shares" in the
Prospectus. Certificates will not be issued for Class A shares unless
specifically requested and no certificates will be issued for Class B, C, D, T
or Z shares. The Colonial money market funds will not issue certificates.
Shareholders may send any certificates which have been previously acquired to
CISC for deposit to their account.
SPECIAL PURCHASE PROGRAMS/INVESTOR SERVICES
The following special purchase programs/investor services may be changed or
eliminated at any time.
Fundamatic Program. As a convenience to investors, shares of most Colonial funds
may be purchased through the Colonial Fundamatic Program. Preauthorized monthly
bank drafts or electronic funds transfer for a fixed amount of at least $50 are
used to purchase a Colonial fund's shares at the public offering price next
determined after CISI receives the proceeds from the draft (normally the 5th or
the 20th of each month, or the next business day thereafter). If your Fundamatic
purchase is by electronic funds transfer, you may request the Fundamatic
purchase for any day. Further information and application forms are available
from FSFs or from CISI.
Automated Dollar Cost Averaging (Classes A, B and 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 exchanges made pursuant to the Automated Dollar Cost Averaging
program. Exchanges will continue so long as your Colonial fund balance is
sufficient to complete the transfers. Your normal rights and privileges as a
shareholder remain in full force and effect. Thus you can buy any fund, exchange
between the same Class of shares of funds by written instruction or by telephone
exchange if you have so elected and withdraw amounts from any fund, subject to
the imposition of any applicable CDSC.
Any additional payments or exchanges into your Colonial fund will extend the
time of the Automated Dollar Cost Averaging program.
An exchange is a capital sale transaction for federal income tax purposes.
You may terminate your program, change the amount of the exchange (subject to
the $100 minimum), or change your selection of funds, by telephone or in
writing; if in writing by mailing your instructions to Colonial Investors
Service Center, Inc. P.O. Box 1722, Boston, MA 02105-1722.
You should consult your FSF or investment adviser to determine whether or not
the Automated Dollar Cost Averaging program is appropriate for you.
CISI offers several plans by which an investor may obtain reduced initial or
contingent deferred sales charges . These plans may be altered or discontinued
at any time. See "Programs For Reducing or Eliminating Sales Charges" for more
information.
Tax-Sheltered Retirement Plans. CISI offers prototype tax-qualified plans,
including Individual Retirement Accounts (IRAs), and Pension and Profit-Sharing
Plans for individuals, corporations, employees and the self-employed. The
minimum initial Retirement Plan investment is $25. The First National Bank of
Boston is the Trustee of CISI prototype plans and charges a $10 annual fee.
Detailed information concerning these Retirement Plans and copies of the
Retirement Plans are available from CISI.
Participants in non-Colonial prototype Retirement Plans (other than IRAs) also
are charged a $10 annual fee unless the plan maintains an omnibus account with
CISC. Participants in Colonial prototype Plans (other than IRAs) who liquidate
the total value of their account will also be charged a $15 close-out processing
fee payable to CISC. The fee is in addition to any applicable CDSC. The fee will
not apply if the participant uses the proceeds to open a Colonial IRA Rollover
account in any fund, or if the Plan maintains an omnibus account.
Consultation with a competent financial and tax adviser regarding these Plans
and consideration of the suitability of fund shares as an investment under the
Employee Retirement Income Security Act of 1974 or otherwise is recommended.
Telephone Address Change Services. By calling CISC, shareholders or their FSF of
record may change an address on a recorded telephone line. Confirmations of
address change will be sent to both the old and the new addresses. Telephone
redemption privileges are suspended for 30 days after an address change is
effected.
Colonial Cash Connection. Dividends and any other distributions, including
Systematic Withdrawal Plan (SWP) payments, may be automatically deposited to a
shareholder's bank account via electronic funds transfer. Shareholders wishing
to avail themselves of this electronic transfer procedure should complete the
appropriate sections of the Application.
Automatic Dividend Diversification. The automatic dividend diversification
reinvestment program (ADD) generally allows shareholders to have all
distributions from a fund automatically invested in the same class of shares of
another Colonial fund. An ADD account must be in the same name as the
shareholder's existing open account with the particular fund. Call CISC for more
information at 1-800- 422-3737.
PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES
Right of Accumulation and Statement of Intent (Class A and Class T shares only)
(Class T shares can only be purchased by the shareholders of Colonial Newport
Tiger Fund who already own Class T shares). Reduced sales charges on Class A and
T shares can be effected by combining a current purchase with prior purchases of
Class A, B, C, 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 Share Certificates
Sponsored Arrangements Exchange Privilege
$50,000 Fast Cash Colonial Cash Connection
Right of Accumulation Automatic Dividend Diversification
Telephone Redemption Reduced Sales Charges for any "person"
Statement of Intent
*Exchanges may be made to other Colonial funds offering the Program.
Because of the unavailability of certain services, this Program may not be
suitable for all investors.
The FSF receives 3% of the investor's intended purchases under a Program at the
time of initial investment and 1% after the 24th monthly payment. CISI may
require the FSF to return all applicable commissions paid with respect to a
Program terminated within six months of inception, and thereafter to return
commissions in excess of the FSF discount applicable to shares actually
purchased.
Since the Asset Builder plan involves continuous investment regardless of the
fluctuating prices of funds shares, investors should consult their FSF to
determine whether it is appropriate. The Plan does not assure a profit nor
protect against loss in declining markets.
Reinstatement Privilege. An investor who has redeemed Class A, B, D or T shares
may, upon request, reinstate within one year a portion or all of the proceeds of
such sale in shares of the same Class of any Colonial fund at the NAV next
determined after CISC receives a written reinstatement request and payment. Any
CDSC paid at the time of the redemption will be credited to the shareholder upon
reinstatement. The period between the redemption and the reinstatement will not
be counted in aging the reinstated shares for purposes of calculating any CDSC
or conversion date. Investors who desire to exercise this privilege should
contact their FSF or CISC. Shareholders may exercise this Privilege an unlimited
number of times. Exercise of this privilege does not alter the Federal income
tax treatment of any capital gains realized on the prior sale of fund shares,
but to the extent any such shares were sold at a loss, some or all of the loss
may be disallowed for tax purposes. Consult your tax adviser.
Privileges of Colonial Employees or Financial Service Firms (in this section,
the "Adviser" refers to Colonial Management Associates, Inc. in its capacity as
the Adviser or Administrator to the Colonial Funds). Class A shares of certain
funds may be sold at NAV to the following individuals whether currently employed
or retired: Trustees of funds advised or administered by the Adviser; directors,
officers and employees of the Adviser, CISI and other companies affiliated with
the Adviser; registered representatives and employees of FSFs (including their
affiliates) that are parties to dealer agreements or other sales arrangements
with CISI; and such persons' families and their beneficial accounts.
Sponsored Arrangements. Class A and Class T shares (Class T shares can only be
purchased by the shareholders of Colonial Newport Tiger Fund who already own
Class T shares) of certain funds may be purchased at reduced or no sales charge
pursuant to sponsored arrangements, which include programs under which an
organization makes recommendations to, or permits group solicitation of, its
employees, members or participants in connection with the purchase of shares of
the fund on an individual basis. The amount of the sales charge reduction will
reflect the anticipated reduction in sales expense associated with sponsored
arrangements. The reduction in sales expense, and therefore the reduction in
sales charge, will vary depending on factors such as the size and stability of
the organization's group, the term of the organization's existence and certain
characteristics of the members of its group. The Colonial funds reserve the
right to revise the terms of or to suspend or discontinue sales pursuant to
sponsored plans at any time.
Class A and Class T shares (Class T shares can only be purchased by the
shareholders of Colonial Newport Tiger Fund who already own Class T shares) of
certain funds may also be purchased at reduced or no sales charge by clients of
dealers, brokers or registered investment advisers that have entered into
agreements with CISI pursuant to which the Colonial funds are included as
investment options in programs involving fee-based compensation arrangements,
and by participants in certain retirement plans.
Waiver of Contingent Deferred Sales Charges (CDSCs) (in this section, the
"Adviser" refers to Colonial Management Associates, Inc. in its capacity as the
Adviser or Administrator to the Colonial Funds) (Classes A, B, and 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 the Adviser, 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 FSF agrees to return all or an agreed upon
portion of the commission earned on the sale of the shares being redeemed.
HOW TO SELL SHARES
Shares may also be sold on any day the Exchange is open, either directly to the
Fund or through the shareholder's FSF. Sale proceeds generally are sent within
seven days (usually on the next business day after your request is received in
good form). However, for shares recently purchased by check, the Fund will send
proceeds only after the check has cleared (which may take up to 15 days).
To sell shares directly to the Fund, send a signed letter of instruction or
stock power form to CISC, along with any certificates for shares to be sold. The
sale price is the net asset value (less any applicable contingent deferred sales
charge) next calculated after the Fund receives the request in proper form.
Signatures must be guaranteed by a bank, a member firm of a national stock
exchange or another eligible guarantor institution. Stock power forms are
available from FSFs, CISC, and many banks. Additional documentation is required
for sales by corporations, agents, fiduciaries, surviving joint owners and
individual retirement account holders. Call CISC for more information
1-800-345-6611.
FSFs must receive requests before the time at which the Fund's shares are valued
to receive that day's price, are responsible for furnishing all necessary
documentation to CISC and may charge for this service.
Systematic Withdrawal Plan
If a shareholder's Account Balance is at least $5,000, the shareholder may
establish a SWP. A specified dollar amount or percentage of the then current net
asset value of the shareholder's investment in any Colonial fund designated by
the shareholder will be paid monthly, quarterly or semi-annually to a designated
payee. The amount or percentage the shareholder specifies generally may not, on
an annualized basis, exceed 12% of the value, as of the time the shareholder
makes the election of the shareholder's investment. Withdrawals from Class B and
Class 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 account.
A fund may terminate a shareholder's SWP if the shareholder's Account Balance
falls below $5,000 due to any transfer or liquidation of shares other than
pursuant to the SWP. SWP payments will be terminated on receiving satisfactory
evidence of the death or incapacity of a shareholder. Until this evidence is
received, CISC will not be liable for any payment made in accordance with the
provisions of a SWP.
The cost of administering SWPs for the benefit of shareholders who participate
in them is borne by the fund as an expense of all shareholders.
Shareholders whose positions are held in "street name" by certain FSFs may not
be able to participate in a SWP. If a shareholder's Fund shares are held in
"street name", the shareholder should consult his or her FSF to determine
whether he or she may participate in a SWP.
Telephone Redemptions. All Colonial fund shareholders and/or their financial
advisers (except for Colonial Newport Tiger Cub Fund and Colonial Newport Japan
Fund) are automatically eligible to redeem up to $50,000 of the fund's shares by
calling 1-800-422-3737 toll- free any business day between 9:00 a.m. and the
close of trading of the Exchange (normally 4:00 p.m. Eastern time). Transactions
received after 4:00 p.m. Eastern time will receive the next business day's
closing price. Telephone redemption privileges for larger amounts and for the
Colonial Newport Tiger Cub Fund and the Colonial Newport Japan Fund may be
elected on the Application. CISC will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. Telephone redemptions
are not available on accounts with an address change in the preceding 30 days
and proceeds and confirmations will only be mailed or sent to the address of
record unless the redemption proceeds are being sent to a pre-designated bank
account. Shareholders and/or their 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 (in this section, the "Adviser" refers to Colonial Management
Associates, Inc. in its capacity as the Adviser or Administrator of the Colonial
Funds) (Available only on the Class A 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; the shareholder will be charged a $15
service fee for each check returned. It is not possible to determine in advance
the total value of an open account because prior redemptions and possible
changes in net asset value may cause the value of an open account to change.
Accordingly, a check redemption should not be used to close an open account.
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. Class T and Z shares may be
exchanged for Class A shares of the other Colonial funds. The prospectus of each
Colonial fund describes its investment objective and policies, and shareholders
should obtain a prospectus and consider these objectives and policies carefully
before requesting an exchange. Shares of certain Colonial funds are not
available to residents of all states. Consult CISC before requesting an
exchange.
By calling CISC, shareholders or their FSF of record may exchange among accounts
with identical registrations, provided that the shares are held on deposit.
During periods of unusual market changes 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 and Class T shares for five months before
exchanging to certain funds having a higher maximum sales charge. Consult your
FSF or CISC. In all cases, the shares to be exchanged must be registered on the
records of the fund in the name of the shareholder desiring to exchange.
Shareholders of the other Colonial open-end funds generally may exchange their
shares at NAV for the same class of shares of the fund.
An exchange is a capital sale transaction for federal income tax purposes. The
exchange privilege may be revised, suspended or terminated at any time.
SUSPENSION OF REDEMPTIONS
A Colonial fund may not suspend shareholders' right of redemption or postpone
payment for more than seven days unless the Exchange is closed for other than
customary weekends or holidays, or if permitted by the rules of the SEC during
periods when trading on the Exchange is restricted or during any emergency which
makes it impracticable for the fund to dispose of its securities or to determine
fairly the value of its net assets, or during any other period permitted by
order of the SEC for protection of investors.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the fund
and the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the fund or the
Trust's Trustees. The Declaration provides for indemnification out of fund
property for all loss and expense of any shareholder held personally liable for
the obligations of the fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances (which are
considered remote) in which the fund would be unable to meet its obligations and
the disclaimer was inoperative.
The risk of a particular fund incurring financial loss on account of another
fund of the Trust is also believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the other fund was
unable to meet its obligations.
SHAREHOLDER MEETINGS
As described under the caption "Organization and History" in the Prospectus of
each Colonial fund, the fund will not hold annual shareholders' meetings. The
Trustees may fill any vacancies in the Board of Trustees except that the
Trustees may not fill a vacancy if, immediately after filling such vacancy, less
than two-thirds of the Trustees then in office would have been elected to such
office by the shareholders. In addition, at such times as less than a majority
of the Trustees then in office have been elected to such office by the
shareholders, the Trustees must call a meeting of shareholders. Trustees may be
removed from office by a written consent signed by a majority of the outstanding
shares of the Trust or by a vote of the holders of a majority of the outstanding
shares at a meeting duly called for the purpose, which meeting shall be held
upon written request of the holders of not less than 10% of the outstanding
shares of the Trust. Upon written request by the holders of 1% of the
outstanding shares of the Trust stating that such shareholders of the Trust, for
the purpose of obtaining the signatures necessary to demand a shareholders'
meeting to consider removal of a Trustee, request information regarding the
Trust's shareholders, the Trust will provide appropriate materials (at the
expense of the requesting shareholders). Except as otherwise disclosed in the
Prospectus and this SAI, the Trustees shall continue to hold office and may
appoint their successors.
At any shareholders' meetings that may be held, shareholders of all series would
vote together, irrespective of series, on the election of Trustees or the
selection of independent accountants, but each series would vote separately from
the others on other matters, such as changes in the investment policies of that
series or the approval of the management agreement for that series.
PERFORMANCE MEASURES
Total Return
Standardized average annual total return. Average annual total return is the
actual return on a $1,000 investment in a particular class of shares of the
fund, made at the beginning of a stated period, adjusted for the maximum sales
charge or applicable CDSC for the class of shares of the fund and assuming that
all distributions were reinvested at NAV, converted to an average annual return
assuming annual compounding.
Nonstandardized total return. Nonstandardized total returns 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 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). The fund's yield for any period may be more or less
than the amount actually distributed in respect of such period.
The fund may compare its performance to various unmanaged indices published by
such sources as listed in Appendix II.
The fund may also refer to quotations, graphs and electronically transmitted
data from sources believed by the Adviser to be reputable, and publications in
the press pertaining to a fund's performance or to the Adviser or its
affiliates, including comparisons with competitors and matters of national and
global economic and financial interest. Examples include Forbes, Business Week,
Money Magazine, The Wall Street Journal, The New York Times, The Boston Globe,
Barron's National Business & Financial Weekly, Financial Planning, Changing
Times, Reuters Information Services, Wiesenberger Mutual Funds Investment
Report, Lipper Analytical Services Corporation, Morningstar, Inc., Sylvia
Porter's Personal Finance Magazine, Money Market Directory, SEI Funds Evaluation
Services, FTA World Index and Disclosure Incorporated.
All data are based on past performance and do not predict future results.
<PAGE>
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 the Municipal Bond ratings set forth above.
<PAGE>
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 the Municipal Bond ratings as set forth above, except
for the numerical modifiers. Moody's applies numerical modifiers 1, 2, and 3 in
the Aa and A classifications of its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a midrange ranking; and the modifier 3
indicates that the issuer ranks in the lower end of its generic rating category.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX II
1995
SOURCE CATEGORY RETURN (%)
<S> <C> <C>
Donoghue Tax-Free Funds 3.39
Donoghue U.S. Treasury Funds 5.19
Dow Jones Industrials 36.95
Morgan Stanley Capital International EAFE Index 11.22
Morgan Stanley Capital International EAFE GDP Index 11.16
Libor Six-month Libor N/A
Lipper Adjustable Rate Mortgage 4.73
Lipper California Municipal Bond Funds 18.32
Lipper Connecticut Municipal Bond Funds 16.58
Lipper Closed End Bond Funds 20.83
Lipper Florida Municipal Bond Funds 17.84
Lipper General Bond Fund 20.83
Lipper General Municipal Bonds 16.84
Lipper General Short-Term Tax-Exempt Bonds 7.43
Lipper Global Funds 16.05
Lipper Growth Funds 30.79
Lipper Growth & Income Funds 30.82
Lipper High Current Yield Bond Funds 16.44
Lipper High Yield Municipal Bond Debt 15.98
Lipper Fixed Income Funds 15.19
Lipper Insured Municipal Bond Average 17.59
Lipper Intermediate Muni Bonds 12.89
Lipper Intermediate (5-10) U.S. Government Funds 15.75
Lipper Massachusetts Municipal Bond Funds 16.82
Lipper Michigan Municipal Bond Funds 16.89
Lipper Mid Cap Funds 32.04
Lipper Minnesota Municipal Bond Funds 15.39
Lipper U.S. Government Money Market Funds 5.26
Lipper Natural Resources 18.80
Lipper New York Municipal Bond Funds 16.73
Lipper North Carolina Municipal Bond Funds 17.51
Lipper Ohio Municipal Bond Funds 16.81
Lipper Small Company Growth Funds 31.55
Lipper U.S. Government Funds 17.34
Lipper Pacific Region Funds-Ex-Japan 1.95
Shearson Lehman Composite Government Index 18.33
Shearson Lehman Government/Corporate Index 19.25
Shearson Lehman Long-term Government Index 30.90
S&P 500 S&P 37.54
S&P Utility Index S&P 42.39
S&P Barra Growth 38.13
S&P Barra Value 37.00
S&P Midcap 400 28.56
First Boston High Yield Index 17.38
Swiss Bank 10 Year U.S. Government (Corporate Bond) 22.24
Swiss Bank 10 Year United Kingdom (Corporate Bond) 16.19
Swiss Bank 10 Year France (Corporate Bond) 26.72
Swiss Bank 10 Year Germany (Corporate Bond) 25.74
Swiss Bank 10 Year Japan (Corporate Bond) 17.83
Swiss Bank 10 Year Canada (Corporate Bond) 25.04
Swiss Bank 10 Year Australia (Corporate Bond) 19.42
Morgan Stanley Capital International 10 Year Hong Kong (Equity) 23.83
Morgan Stanley Capital International 10 Year Belgium (Equity) 20.67
Morgan Stanley Capital International 10 Year Austria (Equity) 10.85
Morgan Stanley Capital International 10 Year France (Equity) 15.30
Morgan Stanley Capital International 10 Year Netherlands (Equity) 19.33
Morgan Stanley Capital International 10 Year Japan (Equity) 12.82
Morgan Stanley Capital International 10 Year Switzerland (Equity) 17.06
Morgan Stanley Capital International 10 Year United Kingdom (Equity) 15.02
Morgan Stanley Capital International 10 Year Germany (Equity) 10.66
Morgan Stanley Capital International 10 Year Italy (Equity) 7.78
Morgan Stanley Capital International 10 Year Sweden (Equity) 19.43
Morgan Stanley Capital International 10 Year United States (Equity) 14.82
Morgan Stanley Capital International 10 Year Australia (Equity) 15.13
Morgan Stanley Capital International 10 Year Norway (Equity) 10.72
Morgan Stanley Capital International 10 Year Spain (Equity) 17.91
Morgan Stanley Capital International World GDP Index 18.14
Morgan Stanley Capital International Pacific Region Funds Ex-Japan 12.95
Inflation Consumer Price Index N/A
FHLB-San Francisco 11th District Cost-of-Funds Index N/A
Federal Reserve Six-Month Treasury Bill N/A
Federal Reserve One-Year Constant-Maturity Treasury Rate N/A
Federal Reserve Five-Year Constant-Maturity Treasury Rate N/A
Frank Russell & Co. Russell 2000 28.45
Frank Russell & Co. Russell 1000 Value 38.35
Frank Russell & Co. Russell 1000 Growth 37.19
Bloomberg NA NA
Credit Lyonnais NA NA
Statistical Abstract of the U.S. NA NA
World Economic Outlook NA NA
*in U.S. currency
</TABLE>
<PAGE>
INVESTMENT PORTFOLIO
AUGUST 31, 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
SHORT-TERM OBLIGATIONS - 98.3%
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES - 57.0%
- --------------------------------------------------------------------------------
ANNUALIZED
YIELD AT TIME
MATURITY OF PURCHASE PAR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Bank:
09/11/96 5.300% $ 5,000 $ 4,993
09/18/96 5.310% 7,000 6,982
10/07/96 5.250% 5,000 4,974
10/10/96 5.170% 2,465 2,451
11/05/96 5.340% 4,490 4,447
11/07/96 5.250% 5,000 4,951
11/13/96 5.220% 3,875 3,834
12/10/96 5.480% 5,000 4,924
---------
37,556
---------
Federal Home Loan Mortgage Corp.,
10/21/96 5.190% 5,000 4,964
---------
Federal National Mortgage Association:
09/12/96 5.120% 5,000 4,992
09/16/96 5.330% 5,000 4,989
09/18/96 5.140% 10,000 9,976
10/21/96 5.340% 5,000 4,963
11/19/96 5.380% 5,000 4,941
11/20/96 5.240% (a) 5,000 4,999
11/25/96 5.360% 5,000 4,937
11/27/96 5.210% 5,000 4,937
12/11/96 5.310% 5,000 4,995
01/15/97 5.240% 5,000 4,901
02/04/97 5.250% 5,000 4,886
02/27/97 5.300% 10,000 9,737
---------
69,253
---------
TOTAL U.S. GOVERNMENT AGENCIES (cost of $111,773) 111,773
---------
REPURCHASE AGREEMENTS - 41.3%
- --------------------------------------------------------------------------------
Repurchase agreement with Bank of America,
dated 8/30/96, due 9/03/96 at 5.240%, collateralized
by U.S. Treasury bills and notes with various
maturities to 1997, market value $40,838 (repurchase
proceeds $40,023) 40,000 40,000
</TABLE>
4
<PAGE>
Investment Portfolio/August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Repurchase agreement with Bankers Trust
Securities Corp., dated 8/30/96, due 9/03/96
at 5.240%, collaterized by U.S. Treasury notes
with various maturities to 2017, market value
$42,775 (repurchase proceeds $41,002) $40,978 $ 40,978
TOTAL REPURCHASE AGREEMENTS (cost of $80,978) 80,978
---------
TOTAL SHORT-TERM OBLIGATIONS
(cost of $192,751) (b) 192,751
---------
OTHER ASSETS & LIABILITIES, NET - 1.7 % 3,286
- --------------------------------------------------------------------------------
NET ASSETS - 100% $ 196,037
---------
</TABLE>
NOTES TO INVESTMENT PORTFOLIO:
- --------------------------------------------------------------------------------
(a) Interest rates on a variable rate security change periodically. The rate
listed is as of August 31, 1996.
(b) Cost for federal income tax purposes is the same.
See notes to financial statements.
5
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
AUGUST 31, 1996
<TABLE>
<S> <C> <C>
(in thousands except for per share amounts)
ASSETS
Investments at amortized cost $ 192,751
Receivable for:
Fund shares sold $ 4,173
Interest 92
Other 12 4,277
--------- ---------
Total Assets 197,028
LIABILITIES
Payable for:
Distributions 644
Fund shares repurchased 329
Accrued Deferred Trustees fees 5
Other 13
---------
Total Liabilities 991
---------
NET ASSETS $ 196,037
=========
Net asset value:
Class A ($115,063/115,031) $ 1.00
=========
Class B ($76,539/76,543) $ 1.00(a)
=========
Class D ($4,435/4,433) $ 1.00(a)
=========
Maximum offering price per share - Class D
($1.00/0.99) $ 1.01
=========
COMPOSITION OF NET ASSETS
Capital paid in $ 196,009
Undistributed net investment income 29
Accumulated net realized loss (1)
---------
$ 196,037
---------
</TABLE>
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See notes to financial statements.
6
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1996
<TABLE>
<S> <C> <C>
(in thousands)
INVESTMENT INCOME
Interest $ 8,415
EXPENSES
Management fee $ 461
Service fee - Class B 160
Service fee - Class D 6
Distribution fee - Class B 484
Distribution fee - Class D 17
Transfer agent 375
Bookkeeping fee 63
Trustee fee 23
Custodian fee 7
Audit fee 22
Legal fee 6
Registration fee 85
Reports to shareholders 7
Other 26 1,742
------ ---------
Net Investment Income $ 6,673
---------
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended
(in thousands) August 31
------------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
<S> <C> <C>
Operations:
Net investment income $ 6,673 $ 6,313
--------- ---------
Distributions:
From net investment income -- Class A (4,162) (4,177)
From net investment income -- Class B (2,436) (2,093)
From net investment income -- Class D (82) (22)
--------- ---------
(7) 21
--------- ---------
Fund Share Transactions:
Receipts for shares sold -- Class A 892,066 528,856
Value of distributions reinvested -- Class A 8,827 3,257
Cost of shares repurchased -- Class A (863,413) (546,152)
--------- ---------
31,980 (14,039)
--------- ---------
Receipts for shares sold -- Class B 264,792 113,063
Value of distributions reinvested -- Class B 1,845 1,596
Cost of shares repurchased -- Class B (245,533) (113,764)
--------- ---------
21,104 895
--------- ---------
Receipts for shares sold -- Class D 9,081 124
Value of distributions reinvested -- Class D 61 20
Cost of shares repurchased -- Class D (5,884) (37)
--------- ---------
3,808 107
--------- ---------
Net Increase (Decrease) from Fund Share
Transactions 56,892 (13,037)
--------- ---------
Total Increase (Decrease) 56,885 (13,016)
NET ASSETS
Beginning of period 139,152 152,168
--------- ---------
End of period (including undistributed
net investment income of $29 and $36,
respectively) $ 196,037 $ 139,152
--------- ---------
NUMBER OF FUND SHARES
Sold -- Class A 892,065 528,856
Issued for distributions reinvested -- Class A 8,327 3,257
Repurchased -- Class A (863,413) (546,152)
--------- ---------
31,979 (14,039)
--------- ---------
Sold -- Class B 264,792 113,063
Issued for distributions reinvested -- Class B 1,845 1,596
Repurchased -- Class B (245,533) (113,764)
--------- ---------
21,104 895
--------- ---------
Sold -- Class D 9,081 124
Issued for distributions reinvested -- Class D 61 21
Repurchased -- Class D (5,334) (38)
--------- ---------
3,808 107
--------- ---------
See notes to financial statements.
</TABLE>
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 1. ACCOUNTING POLICIES
ORGANIZATION: Colonial Government Money Market Fund (the Fund), a
series of Colonial Trust II, is a diversified portfolio of a
Massachusetts business trust, registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company.
The Fund's investment objective is to seek current income, consistent
with capital preservation and liquidity. The Fund may issue an
unlimited number of shares. The Fund offers three classes of shares:
Class A, Class B and Class D. Class B shares, which are identical to
Class A shares except for an annual service and distribution fee and a
contingent deferred sales charge, will convert to Class A shares when
they have been outstanding approximately eight years. Class D shares
are subject to a reduced front-end sales charge, a contingent deferred
sales charge on redemptions made within one year after purchase and a
continuing service and distribution fee.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. The following is a summary of significant
accounting policies that are consistently followed by the Fund in the
preparation of its financial statements.
SECURITY VALUATION AND TRANSACTIONS: The Fund values its portfolio
securities utilizing the amortized cost valuation method.
Security transactions are accounted for on the date the securities are
purchased, sold or mature.
Cost is determined and gains and losses are based upon the specific
identification method for both financial statement and federal income
tax purposes.
DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS: All
income, expenses (other than the Class B and Class D service and
distribution fees), realized and unrealized gains (losses) are
allocated to each class proportionately on a daily basis for purposes
of determining the net asset value of each class.
Class B and Class D per share data and ratios are calculated by
adjusting the expense and net investment income per share data and
ratios for the Fund for the entire period by the service and
distribution fees applicable to Class B and Class D shares only.
9
<PAGE>
Notes to Financial Statements/August 31, 1996
NOTE 1. ACCOUNTING POLICIES - CONT.
FEDERAL INCOME TAXES: Consistent with the Fund's policy to qualify as a
regulated investment company and to distribute all of its taxable
income, no federal income tax has been accrued.
DISTRIBUTIONS TO SHAREHOLDERS: The Fund declares and records
distributions daily and pays monthly.
OTHER: Interest income, including discount accretion and premium
amortization, is recorded daily on the accrual basis.
The Fund's custodian takes possession through the federal book-entry
system of securities collateralizing repurchase agreements. Collateral
is marked-to-market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund. The Fund may
experience costs and delays in liquidating the collateral if the issuer
defaults or enters bankruptcy.
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Adviser) is
the investment Adviser of the Fund and furnishes accounting and other
services and office facilities for a monthly fee equal to 0.30%
annually of the Fund's average net assets.
BOOKKEEPING FEE: The Adviser provides bookkeeping and pricing services
for $27,000 per year plus 0.035% of the Fund's average net assets over
$50 million.
TRANSFER AGENT: Colonial Investors Service Center, Inc. (the Transfer
Agent), an affiliate of the Adviser, provides shareholder services for
a monthly fee equal to 0.20% annually of the Fund's average net assets
and receives a reimbursement for certain out of pocket expenses.
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Colonial
Investment Services, Inc. (the Distributor), an affiliate of the
Adviser, is the Fund's principal underwriter. During the year ended
August 31, 1996, the Fund has been advised that the Distributor
received contingent deferred sales charges (CDSC) of $346,291 and $854
on Class B and Class D share redemptions, respectively.
The Fund has adopted a 12b-1 plan which requires it to pay the
Distributor a service fee equal to 0.25% annually of Class B and Class
D net assets as of the 20th of each month. The plan also requires the
payment of a distribution fee to the Distributor equal to 0.75%
annually of the average net assets attributable to Class B shares and
Class D shares.
The CDSC and the fees received from the 12b-1 plan are used principally
as repayment to the Distributor for amounts paid by the Distributor to
dealers who sold such shares.
10
<PAGE>
Notes to Financial Statements/August 31, 1996
EXPENSE LIMITS: The Adviser has agreed, until further notice, to waive
fees and bear certain Fund expenses to the extent that total expenses
(exclusive of service and distribution fees, brokerage commissions,
interest, taxes and extraordinary expenses, if any) exceed 1.00%
annually of the Fund's average net assets.
For the year ended August 31, 1996, the Fund's operating expenses did
not exceed the 1.00% expense limit.
OTHER: The Fund pays no compensation to its officers, all of whom are
employees of the Adviser.
The Fund's Trustees may participate in a deferred compensation plan
which may be terminated at any time. Obligations of the plan will be
paid solely out of the Fund's assets.
NOTE 3. PORTFOLIO INFORMATION
INVESTMENT ACTIVITY: During the year ended August 31, 1996, purchases
and sales (including maturities) of short-term obligations (excluding
repurchase agreements) were $339,851,552 and $316,414,000,
respectively, all of which were U.S. government securities.
NOTE 4. OTHER RELATED PARTY TRANSACTIONS
At August 31, 1996, Colonial Investment Services, Inc. owned greater
than 5% of the Fund's shares outstanding.
11
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
Year ended August 31
----------------------------------------------
1996
Class A Class B Class D
--------- --------- --------
<S> <C> <C> <C>
Net asset value -
Beginning of period $ 1.000 $ 1.000 $ 1.000
--------- --------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment
income (a) 0.048 0.038 0.038
--------- --------- --------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment
income (0.048) (0.038) (0.038)
--------- --------- --------
Net asset value -
End of period $ 1.000 $ 1.000 $ 1.000
--------- --------- --------
Total return (c) 4.93% 3.86% 3.85%
--------- --------- --------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.70%(f) 1.70%(f) 1.70%(f)
Fees and expenses waived
or borne by the Adviser -- -- --
Net investment
income 4.76%(f) 3.76%(f) 3.76%(f)
Net assets at end
of period (000) $ 115,063 $ 76,539 $ 4,435
</TABLE>
(a) Net of fees and expenses waived or borne by the Adviser which amounted to:
$ -- $ -- $ --
(b) Class D shares were initially offered on July 1, 1994. Per share amounts
reflect activity from that date.
(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) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(g) Annualized.
12
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
<TABLE>
<CAPTION>
Year ended August 31
------------------------------------------------------------------------------------------------------
1995 1994
Class A Class B Class D Class A Class B Class D(b)
--------------------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
0.050 0.040 0.040 0.028 0.018 0.005
(0.050) (0.040) (0.040) (0.028) (0.018) (0.005)
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
5.14%(d) 4.08%(d) 4.07%(d) 2.85%(d) 1.82%(d) 0.45%(d)(e)
0.69% 1.69% 1.69% 0.73% 1.73% 1.73%(g)
0.04% 0.04% 0.04% 0.20% 0.20% 0.20%(g)
4.96% 3.96% 3.96% 3.01% 2.01% 2.01%(g)
$83,086 $55,441 $ 625 $97,115 $54,535 $ 518
$ 0.000 $ 0.000 $ 0.000 $ 0.002 $ 0.002 $ 0.002
</TABLE>
13
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Selected data for a share of each class outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
Year ended Period ended
August 31 August 31
1993 1992 (b)
--------------------------- ---------------------------------
Class A Class B Class A Class B(c)
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000
INCOME FROM INVESTMENT OPERATIONS:
Net investment
income (a) 0.023 0.013 0.022 0.004
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net investment
income (0.023) (0.013) (0.022) (0.004)
Net asset value -
End of period $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total return (d) 2.28% 1.27% 2.18%(e)(f) 0.43%(e)(f)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.88% 1.88% 1.00%(g) 2.00%(g)
Fees and expenses waived
or borne by the Adviser 0.20% 0.20% 0.38%(g) 0.38%(g)
Net investment
income 2.26% 1.26% 3.23%(g) 2.23%(g)
Net assets at end
of period (000) $44,693 $10,890 $ 47,885 $14,096
</TABLE>
(a) Net of fees and expenses waived or borne by the Adviser which amounted to:
$0.002 $0.002 $0.003 $0.001
(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) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(e) Had the Adviser not waived or reimbursed a portion of expenses, total return
would have been reduced.
(f) Not annualized.
(g) Annualized.
14
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Year ended
December 31
-----------
1991
Class A
-------
$ 1.000
0.053
(0.053)
$ 1.000
5.38%(e)
0.85%
0.20%
5.32%
$56,198
$0.002
State Tax Information for the year ended August 31, 1996 (unaudited)
An average of 18% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
Approximately 23% of the Fund's distributions (18% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes, and bills.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
T0 THE TRUSTEES OF COLONIAL TRUST II AND THE SHAREHOLDERS OF
COLONIAL GOVERNMENT MONEY MARKET FUND
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Colonial Government Money Market Fund (a series of Colonial Trust II)
at August 31, 1996, the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These
financial statements and the financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which include
confirmation of portfolio positions at August 31, 1996 by
correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
October 11, 1996
COLONIAL TRUST II
Cross Reference Sheet (Colonial U.S. Government Fund)
Item Number of Form N-1A Statement of Additional Information
Location or Caption
Part B
10. Cover Page
11. Table of Contents
12. Not Applicable
13. Investment Objective and Policies; Fundamental
Investment Policies; Other Investment Policies;
Portfolio Turnover; Miscellaneous Investment
Practices
14. Fund Charges and Expenses; Management of the
Colonial Funds
15. Fund Charges and Expenses
16. Fund Charges and Expenses; Management of the
Colonial Funds
17. Fund Charges and Expenses; Management of the
Colonial Funds
18. Shareholder Meetings; Shareholder Liability
19. How to Buy Shares; Determination of Net Asset
Value; Suspension of Redemptions; Special
Purchase Programs/Investor Services; Programs
for Reducing or Eliminating Sales Charge; How
to Sell Shares; How to Exchange Shares
20. Taxes
21. Fund Charges and Expenses; Management of the
Colonial Funds
22. Fund Charges and Expenses; Investment
Performance; Performance Measures
23. Independent Accountants
COLONIAL U.S. GOVERNMENT FUND
Statement of Additional Information
December 27, 1996
This Statement of Additional Information (SAI) contains information which may be
useful to investors but which is not included in the Prospectus of Colonial U.S.
Government 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 27, 1996. 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
Investment Objective and Policies
Fundamental Investment Policies
Other Investment Policies
Portfolio Turnover
Fund Charges and Expenses
Investment Performance
Custodian
Independent Accountants
Part 2
Miscellaneous Investment Practices
Taxes
Management of the Colonial Funds
Determination of Net Asset Value
How to Buy Shares
Special Purchase Programs/Investor Services
Programs for Reducing or Eliminating Sales Charges
How to Sell Shares
Distributions
How to Exchange Shares
Shareholder Liability
Suspension of Redemptions
Shareholder Meetings
Performance Measures
Appendix I
Appendix II
UG--1296
<PAGE>
Part 1
COLONIAL U.S. GOVERNMENT FUND
Statement of Additional Information
December 27, 1996
DEFINITIONS
"Trust" Colonial Trust II
"Fund" Colonial U.S. Government Fund
"Adviser" Colonial Management Associates, Inc., the Fund's investment
adviser
"CISI" Colonial Investment Services, Inc., the Fund's distributor
"CISC" Colonial Investors Service Center, Inc., the Fund's shareholder
services and transfer agent
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes its investment objective and investment
policies. Part 1 of this SAI includes additional information concerning, among
other things, the 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
Forward Commitments
Zero Coupon Securities
Repurchase Agreements
Futures Contracts and Related Options
Mortgage Dollar Rolls
Except as indicated below under "Fundamental Investment Policies", the Fund's
investment policies are not fundamental, and the Trustees may change the
policies without shareholder approval.
FUNDAMENTAL INVESTMENT POLICIES
The Investment Company Act of 1940 (Act) provides that a "vote of a majority of
the outstanding voting securities" means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund, or (2) 67% or more of
the shares present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. The following fundamental
investment policies can not be changed without such a vote.
Total assets and net assets are determined at current value for purposes of
compliance with investment restrictions and policies. All percentage limitations
will apply at the time of investment and are not violated unless an excess or
deficiency occurs as a result of such investment. For the purpose of the Act
diversification requirement, an issuer is the entity whose revenues support the
security.
The Fund may:
1. Issue senior securities only through borrowing money from banks for
temporary or emergency purposes up to 10% of its net assets; however, the
Fund will not purchase additional portfolio securities while borrowings
exceed 5% of net assets;
2. Only own real estate acquired as the result of owning securities; and
not more than 5% of total assets; 3. Invest up to 10% of its net
assets in illiquid assets; 4. Purchase and sell futures contracts and
related options so long as the total initial margin and premiums on the
contracts do not exceed 5%of its total assets;
5. Underwrite securities issued by others only when disposing of portfolio
securities;
6. Make loans through lending of securities not exceeding 30% of total
assets, through the purchase of debt instruments or similar evidences of
indebtedness typically sold privately to financial institutions and
through repurchase agreements; and
7. Not concentrate more than 25% of its total assets in any one industry, or
with respect to 75% of total assets purchase any security (other than
obligations of the U.S. government and cash items including receivables)
if as a result more than 5% of its total assets would then be invested in
securities of a single issuer, or purchase 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.
<PAGE>
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed without a
shareholder vote, the Fund may not:
1. Purchase securities on margin, but it may receive short-term credit t
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 of issuers 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 net
assets. Included within that amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants which are not listed on the New
York Stock Exchange or the American Stock Exchange. Warrants acquired by
the Fund in units or attached to securities will be deemed to be without
value.
PORTFOLIO TURNOVER
Portfolio turnover for the last two fiscal years is included in the Prospectus
under "The Fund's Financial History." High portfolio turnover may cause the Fund
to realize capital gains which, if realized and distributed by the Fund, may be
taxable to shareholders as ordinary income. High portfolio turnover may result
in correspondingly greater brokerage commission and other transaction costs,
which will be borne directly by the Fund.
FUND CHARGES AND EXPENSES
Under the Fund's management agreement, the Fund pays the Adviser a monthly fee
based on the average net assets of the Fund, determined at the close of each
business day during the month, at the following annual rates: 0.60% of the first
$1 billion, 0.55% of the next $500 million and 0.50% of any excess over $1.5
billion (subject to such reductions as the Adviser may agree to periodically).
<PAGE>
Recent Fees paid to the Adviser, CISI and CISC (dollars in thousands)
Years ended August 31
---------------------
1996 1995 1994
---- ---- ----
Management fee $9,755 $9,630 $11,116
Bookkeeping fee 536 525 587
Shareholder service and
transfer agent fee 3,657 3,588 3,969
12b-1 fees:
Service fee 4,245 4,117 4,814
Distribution fee (Class B only) 4,856 5,595 7,106
Brokerage Commissions
The Fund did not pay any brokerage commissions during the fiscal years ended
August 31, 1996, 1995 and 1994.
Trustees' Fees
For the fiscal year ended August 31, 1996 and the calendar year ended December
31, 1995, the Trustees received the following compensation for serving as
Trustees:
Aggregate Total Compensation From
Compensation Trust and Fund Complex
From Fund For The Paid to the Trustees For
Fiscal Year Ended The Calendar Year Ended
Trustee August 31, 1996 December 31, 1995 (a)
- ------- ---------------- ----------------------
Robert J. Birnbaum(b) $7,649 $ 71,250
Tom Bleasdale 8,345 (c) 98,000 (d)
Lora S. Collins 7,669 91,000
James E. Grinnell(b) 7,733 71,250
William D. Ireland, Jr. 9,533 113,000
Richard W. Lowry(b) 7,731 71,250
William E. Mayer 7,596 91,000
James L. Moody, Jr. 8,675 (e) 94,500 (f)
John J. Neuhauser 7,676 91,000
George L. Shinn 8,636 102,500
Robert L. Sullivan 8,517 101,000
Sinclair Weeks, Jr. 9,615 112,000
(a) At December 31, 1995 , the Colonial Funds complex consisted of 33 open-end
and 5 closed-end management investment company portfolios.
(b) Elected as a Trustee of the Colonial Funds complex on April 21, 1995.
(c) Includes $4,095 payable in later years as deferred compensation.
(d) Includes $49,000 payable in later years as deferred compensation.
(e) Includes $8,675 payable in later years as deferred compensation.
(f) Total compensation of $94,500 for the calendar year ended December 31,
1995, will be payable in later years as deferred compensation.
The following table sets forth the amount of compensation paid to Messrs.
Birnbaum, Grinnell and Lowry in their capacities as Trustees or Directors of the
Liberty All-Star Equity Fund and Liberty All-Star Growth Fund, Inc. (formerly
known as The Charles Allmon Trust, Inc.) (together, Liberty Funds I) for service
during the calendar year ended December 31, 1995, and of Liberty Financial Trust
(now known as Colonial Trust VII) and LFC Utilities Trust (together, Liberty
Funds II) for the period January 1, 1995 through March 26, 1995 (g):
Total Compensation Total Compensation
From Liberty Funds From Liberty Funds I
II For The Period For The Calendar Year
January 1, 1995 Ended December 31,
Trustee Through March 26, 1996 1995(h)
- ------- ---------------------- ----------------------
Robert J. Birnbaum $2,900 $ 16,675
James E. Grinnell 2,900 22,900
Richard W. Lowry 2,900 26,250(i)
(g) 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 reorganized into a new portfolio of Colonial Trust III.
Prior to their election as Trustees of the Colonial Funds, Messrs.
Birnbaum, Grinnell and Lowry served as Trustees of Liberty Funds II; they
continue to serve as Trustees or Directors of Liberty Funds I.
(h) At December 31, 1995, the Liberty Funds I were advised by Liberty Asset
Management Company (LAMCO). LAMCO is an indirect wholly-owned subsidiary of
Liberty Financial Companies, Inc. (an intermediate parent of the Adviser).
(i) Includes $3,500 paid to Mr. Lowry for service as Trustee of Liberty Newport
World Portfolio (formerly known as Liberty All-Star World Portfolio)
(Liberty Newport) during the calendar year ended December 31, 1995. At
December 31, 1995, Liberty Newport was managed by Newport Pacific
Management, Inc. (Newport Pacific) and Stein Roe and Farnham Incorporated,
each an affiliate of the Adviser.
Ownership of the Fund
At December 9, 1996, the officers and Trustees of the Trust as a group owned
less than 1% of the outstanding shares of the Fund.
At November 30, 1996, Merrill Lynch, Pierce, Fenner & Smith, Inc., FBO Mary
Belle Judd, 250 Vesey Street. World Financial Center, North Tower, New York, NY
10281 owned 6.85% of the Fund's outstanding Class B shares.
At November 30, 1996, there were 43,993 Class A and 25,014 Class B record
holders of the Fund.
Sales Charges (dollars in thousands)
Class A Shares
Years ended August 31
---------------------
1996 1995 1994
---- ---- ----
Aggregate initial sales charges
on Fund share sales $390 $476 $1,552
Initial sales charges retained by CISI 46 55 184
Class B Shares
Years ended August 31
---------------------
1996 1995 1994
---- ---- ----
Aggregate contingent deferred sales
charges (CDSC)on Fund redemptions
retained by CISI $2,453 $4,044 $3,774
12b-1 Plans, CDSCs and Conversion of Shares
The Fund offers three classes of shares - Class A, Class B and Class D. The Fund
may in the future offer other classes of shares. The Trustees have approved
12b-1 Plans (Plans) pursuant to Rule 12b-1 under the Act. Under the Plans, the
Fund pays CISI monthly a service fee at an annual rate of 0.25% of the net
assets attributed to each Class of shares. The Fund also pays CISI monthly
a distribution fee at an annual rate of 0.75% of the average daily net
assets attributed to Class B and Class D shares. CISI may use the entire amount
of such fees to defray the cost of commissions and service fees paid to
financial services firms (FSFs) and for certain other purposes. Since the
distribution and service fees are payable regardless of the amount of CISI's
expenses, CISI may realize a profit from the fees.
The Plans authorize any other payments by the Fund to CISI and its affiliates
(including the Adviser) to the extent that they might be construed to be
indirectly financing the distribution of Fund shares.
The Trustees believe the Plans could be a significant factor in the growth and
retention of Fund assets resulting in a more advantageous expense ratio and
increased investment flexibility which could benefit each class of Fund
shareholders. The Plans will continue in effect from year to year so long as
continuance is specifically approved at least annually by a vote of the
Trustees, including the Trustees who are not interested persons of the Trust and
have no direct or indirect financial interest in the operation of the Plans or
in any agreements related to the Plans (Independent Trustees), cast in person at
a meeting called for the purpose of voting on the Plans. The Plans may not be
amended to increase the fee materially without approval by vote of a majority of
the outstanding voting securities of the relevant class of shares and all
material amendments of the Plans must be approved by the Trustees in the manner
provided in the foregoing sentence. The Plans may be terminated at any time by
vote of a majority of the Independent Trustees or by vote of a majority of the
outstanding voting securities of the relevant class of shares. The continuance
of the Plans will only be effective if the selection and nomination of the
Trustees who are not interested persons is effected by such non-interested
Trustees.
Class A shares are offered at net asset value plus varying sales charges which
may include a CDSC. Class B shares are offered at net asset value subject to a
CDSC if redeemed within six years 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 distribution fee, having an equal value.
Sales-related expenses (for the fiscal year ended August 31, 1996) (dollars in
thousands) of CISI relating to the Fund, were as follows:
Class A Shares Class B Shares
-------------- --------------
Fees to FSF $ 2,592 $2,379
Cost of sales material relating to the Fund
(including printing and mailing expenses) 51 65
Allocated travel, entertainment and other
promotional expenses (including advertising) 55 63
INVESTMENT PERFORMANCE
The Fund's Class A and Class B yields for the month ended August 31, 1996 were
5.97% and 5.50%, respectively.
The Fund's average annual total returns at August 31, 1996 were:
Class A Shares
Since inception
1 year 5 years October 31, 1987
------ ------- ----------------
With sales charge of 4.75% (1.41)% 4.22% 6.67%
Without sales charge 3.51% 5.24% 7.25%
Class B Shares
Since inception
1 year June 8, 1992
------ ---------------
With applicable CDSC (2.12)% (4.86% CDSC) 3.60%
Without CDSC 2.74% (1.83% CDSC) 3.99%
The Fund's Class A and Class B distribution rates at August 31, 1996, which are
based on the most recent month's distributions and the maximum offering price at
the end of the month, were 6.12% and 5.67%, respectively.
See Part 2 of this SAI, "Performance Measures," for how calculations are made.
CUSTODIAN
Boston Safe Deposit and Trust Company is the Fund's custodian. The custodian is
responsible for safeguarding the Fund's cash and securities, receiving and
delivering securities and collecting the Fund's interest and dividends.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP are the Fund's independent accountants providing audit and
tax return preparation services and assistance and consultation in connection
with the review of various Securities and Exchange Commission filings.
The financial statements incorporated by reference in this SAI have
been so incorporated, and the financial highlights included in the Prospectus
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 6 to 20 of the August 31, 1996 Annual Report are incorporated in this SAI
by reference.
INVESTMENT PORTFOLIO
AUGUST 31, 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - 99.8% PAR VALUE
- --------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 81.7%
MATURITIES
COUPON FROM/TO
---------------- ----------------
Federal Home Loan Mortgage Corp.:
<S> <C> <C> <C>
7.500% 2016 $ 1,142 $ 1,142
8.000% 2003-2016 17,799 18,042
8.500% 2007-2017 4,456 4,592
8.750% 2005-2013 1,778 1,837
9.000% 2001-2022 7,433 7,736
9.250% 2008-2016 6,252 6,522
9.500% 2005-2016 2,368 2,536
9.750% 2016 129 137
10.000% 2019 2,951 3,202
10.250% 2009-2016 1,824 1,972
10.500% 2009-2021 3,183 3,471
11.250% 2005-2016 4,000 4,431
12.000% 2014 1 1
-------
55,621
-------
Federal National Mortgage Association,
6.240% 2000 25,000 24,500
-------
<CAPTION>
Federal National Mortgage Association:
<S> <C> <C> <C> <C>
6.000% 2008-2026 (a) 118,483 109,713
6.500% 2007-2026 (a) 377,859 359,971
7.000% 2007-2025 (a) 103,544 100,753
7.500% 2006-2009 3,273 3,276
8.000% 2008-2009 3,255 3,314
8.250% 2008 1,064 1,064
8.500% 2003-2021 9,478 9,746
9.000% 2002-2022 27,695 28,790
9.500% 2009-2021 2,776 2,963
10.000% 2001-2006 12,601 13,290
10.500% 2010-2016 5,327 5,817
11.000% 2015-2020 14,312 16,023
-------
654,720
-------
Government National Mortgage Association:
6.500% 2023-2026 (a) 26,151 24,259
7.000% 2022-2024 26,201 25,005
7.500% 2007-2009 16,174 16,235
8.000% 2004-2025 12,450 12,393
8.500% 2017-2026 7,969 8,069
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio/August 31, 1996
- -------------------------------------------------------------------------------
MATURITIES
COUPON FROM/TO
------------- ------------
<S> <C> <C> <C>
8.750% 2021-2022 $ 3,802 $ 4,004
8.850% 2018-2020 5,643 5,761
9.000% 2008-2025 33,757 35,156
9.250% 2016-2022 13,692 14,475
9.500% 2004-2025 160,970 173,274
10.000% 1998-2024 5,860 6,177
10.250% 2018 315 346
10.500% 2016-2020 13,860 15,359
10.625% 2010 96 107
10.750% 2024 2,426 2,478
11.000% 2009-2021 16,914 19,016
11.250% 2015 164 185
11.500% 2010-2021 24,039 27,344
11.750% 2013-2015 387 448
12.000% 2011-2019 24,048 27,844
12.250% 2013-2015 1,051 1,224
12.500% 2013-2015 15,971 18,632
12.750% 2010-2014 153 180
13.000% 2010-2015 5,389 6,367
13.500% 2010-2015 3,891 4,649
14.000% 2012-2014 165 199
14.500% 2012 60 73
15.000% 2011-2012 126 155
---------
449,414
---------
U.S. Small Business Administration:
7.600% 01/01/12 4,235 4,187
8.200% 10/01/11 4,013 4,083
8.250% 11/01/11 8,045 8,191
8.650% 11/01/14 5,710 5,896
8.850% 08/01/11 1,603 1,669
9.150% 07/01/11 3,694 3,883
9.450% 08/01/10 1,414 1,490
9.500% 04/01/10 2,695 2,862
9.650% 05/01/10 1,904 2,049
---------
34,310
---------
TOTAL GOVERNMENT AGENCIES (cost of $1,158,948) 1,218,565
---------
GOVERNMENT OBLIGATIONS (b) - 18.1%
U.S. Treasury bonds,
6.750% 08/15/26 13,000 12,411
---------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio/August 31, 1996
- --------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - CONT. PAR VALUE
- --------------------------------------------------------------------------
U.S. Treasury notes:
<S> <C> <C> <C>
6.500% 05/31/01 $29,000 $ 28,737
6.500% 08/15/05 14,846 14,412
6.625% 06/30/01 36,600 36,440
6.875% 05/15/06 158,082 157,243
7.000% 07/15/06 21,000 21,082
------------
257,914
------------
TOTAL GOVERNMENT OBLIGATIONS (cost of $334,195) 270,325
------------
TOTAL INVESTMENTS (cost of $1,493,143) 1,488,890
------------
<CAPTION>
SHORT-TERM OBLIGATIONS - 9.4%
-------------------------------------------------------------------------
<S> <C> <C>
Repurchase agreement with Bankers
Trust Securities Corp. dated 8/30/96,
due 9/03/96 at 5.240%, collateralized
by U.S. Treasury notes with various
maturities to 2017, market value $146,750.
(repurchase proceeds $140,670) 140,588 140,588
------------
OTHER ASSETS & LIABILITIES, NET - (9.2%) (136,964)
-------------------------------------------------------------------------
NET ASSETS - 100.0% $ 1,492,514
============
</TABLE>
NOTES TO INVESTMENT PORTFOLIO:
-------------------------------------------------------------------------
(a) These securities, or a portion thereof, have been purchased on a
delayed delivery basis whereby the terms that are fixed are the
purchase price, interest rate and the settlement date. The exact
quantity purchased may be slightly more or less than the amount shown.
(b) These securities, with a total market value of $270,325 and are being
used to collateralize the delayed delivery purchases indicated in note
(a) above.
(c) Cost for federal income tax purposes is $1,493,954.
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
AUGUST 31, 1996
(in thousands except for per share amounts and footnotes)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (cost $1,493,143) $ 1,488,890
Short-term obligations 140,588
-----------
1,629,478
Receivable for:
Investments sold $ 176,029
Interest 12,838
Fund shares sold 242
Other 337 189,446
---------- -----------
Total Assets 1,818,924
LIABILITIES
Payable for:
Investments purchased 315,400
Distributions 7,691
Fund shares repurchased 3,237
Accrued:
Transfer Agent Out of Pocket fees 32
Deferred Trustees fees 10
Other 40
----------
Total Liabilities 326,410
-----------
NET ASSETS $ 1,492,514
===========
Net asset value & redemption price
per share - Class A ($920,999/144,507) $ 6.37
===========
Maximum offering price per share -
Class A ($6.37/0.9525) $ 6.69 (a)
===========
Net asset value & offering price
per share - Class B ($571,515/89,671) $ 6.37 (b)
===========
COMPOSITION OF NET ASSETS
Capital paid in $ 1,633,556
Overdistributed net investment income (5,068)
Accumulated net realized loss (131,721)
Net unrealized depreciation (4,253)
-----------
$ 1,492,514
===========
</TABLE>
(a) On sales of $50,000 or more the offering price is reduced.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1996
<TABLE>
<S> <C> <C>
(in thousands)
INVESTMENT INCOME $ 124,751
Interest 3,988
---------
Dollar roll fee income 128,739
EXPENSES
Management fee $ 9,755
Distribution fee - Class B 4,856
Service fee 4,245
Transfer agent 3,657
Bookkeeping fee 536
Custodian fee 210
Registration fee 107
Trustees fee 93
Audit fee 75
Reports to shareholders 28
Legal fee 19
Other 123 23,704
-------- ---------
Net Investment Income 105,035
---------
NET REALIZED & UNREALIZED LOSS ON PORTFOLIO POSITIONS
Net realized loss (23,368)
Net unrealized depreciation during
the period (23,219)
--------
Net Loss (46,587)
---------
Net Increase in Net Assets From Operations $ 58,448
=========
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(in thousands) Year ended August 31
---------------------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
<S> <C> <C>
Operations:
Net investment income $ 105,035 $ 119,465
Net realized loss (23,368) (55,099)
Net unrealized appreciation (depreciation) (23,219) 74,212
----------- -----------
Net Increase from Operations 58,448 138,578
Distributions:
From net investment income - Class A (63,093) (59,237)
In excess of net investment income - Class A (2,852) --
From net investment income - Class B (34,034) (43,146)
In excess of net investment income - Class B (1,539) --
----------- -----------
(43,070) 36,195
----------- -----------
Fund Share Transactions:
Receipts for shares sold - Class A 112,816 23,802
Receipts for shares issued in the merger
with Liberty Financial U.S. Government
Securities Fund -- 657,855
Value of distributions reinvested - Class A 39,474 32,004
Cost of shares repurchased - Class A (368,789) (331,156)
----------- -----------
(216,499) 382,505
----------- -----------
Receipts for shares sold - Class B 28,322 24,592
Value of distributions reinvested - Class B 19,710 23,538
Cost of shares repurchased - Class B (161,195) (195,780)
----------- -----------
(113,163) (147,650)
----------- -----------
Net Increase (Decrease) from
Fund Share Transactions (329,662) 234,855
----------- -----------
Total Increase (Decrease) (372,732) 271,050
NET ASSETS
Beginning of period 1,865,246 1,594,196
----------- -----------
End of period (net of overdistributed
net investment income of $5,068 and
$658, respectively) $ 1,492,514 $ 1,865,246
=========== ===========
NUMBER OF FUND SHARES
Sold - Class A 17,280 3,736
Issued in the merger with Liberty Financial
U.S. Government Securities Fund -- 102,622
Issued for distributions reinvested - Class A 6,011 4,983
Repurchased - Class A (56,357) (51,715)
----------- -----------
(33,066) 59,626
----------- -----------
Sold - Class B 4,313 3,844
Issued for distributions reinvested - Class B 3,001 3,685
Repurchased - Class B (24,628) (30,739)
----------- -----------
(17,314) (23,210)
----------- -----------
</TABLE>
See notes to financial statements.
11
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Year ended August 31
-------------------------------
<S> <C> <C>
NET CHANGE IN CASH
Cash flows from operating activities:
Interest received $ 121,608
Dollar roll fee income received 4,529
Operating expenses paid (24,073)
-----------
Net cash provided by operating activities $ 102,064
Cash flows from investing activities:
Purchases of securities and short-term obligations (4,999,189)
Proceeds from sales of securities and short-term
obligations 5,329,718
-----------
Net cash provided by investing activities 330,529
---------
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES 432,593
Cash flows from financing activities:
Proceeds from shares sold 141,323
Cost of shares repurchased (529,904)
Cash dividends paid (44,012)
-----------
Net cash used by financing activities (432,593)
---------
Net change in cash $ 0
Cash - beginning of period 0
---------
Cash - end of period $ 0
=========
RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET CASH PROVIDED BY
OPERATING AND INVESTING ACTIVITIES:
Net increase in net
assets resulting from operations $ 58,448
Decrease in investments $ 802,989
Increase in interest and fees receivable (1,566)
Increase in receivable
from investments securities sold (126,206)
Decrease in payable for
investment securities purchased (300,703)
Decrease in other assets 17
Decrease in accrued expenses and liabilities (386)
-----------
Total 374,145
---------
Net cash provided by operating
and investing activities $ 432,593
=========
</TABLE>
See notes to financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 1. ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION: Colonial U.S. Government Fund (the Fund), a series of
Colonial Trust II, is a diversified portfolio of a Massachusetts
business trust registered under the Investment Company Act of 1940, as
amended, as an open-end, management investment company. The Fund's
investment objective is to seek as high a level of current income and
total return as is consistent with prudent risk. The Fund may issue an
unlimited number of shares. The Fund offers Class A shares sold with a
front-end sales charge and Class B shares which are subject to an annual
distribution fee and a contingent deferred sales charge. Class B shares
will convert to Class A shares when they have been outstanding
approximately eight years.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
SECURITY VALUATION AND TRANSACTIONS: Debt securities generally are
valued by a pricing service based upon market transactions for normal,
institutional-size trading units of similar securities. When management
deems it appropriate, an over-the-counter or exchange bid quotation is
used.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
Portfolio positions which cannot be valued as set forth above are valued
at fair value under procedures approved by the Trustees.
Security transactions are accounted for on the date the securities are
purchased, sold or mature.
Cost is determined and gains and losses are based upon the specific
identification method for both financial statement and federal income
tax purposes.
The Fund may enter into dollar roll transactions. A dollar roll
transaction involves a sale by the Fund of securities that it holds with
an agreement by the Fund to repurchase substantially similar securities
at an agreed upon price and date. During the period between the sale and
repurchase, the Fund will not be entitled to accrue interest and receive
principal payments on the securities sold. Dollar roll transactions
involve the risk that the market value of the securities sold by the
Fund may decline below the
13
<PAGE>
Notes to Financial Statements/August 31, 1996
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES - CONT.
- --------------------------------------------------------------------------------
repurchase price of those securities. In the event the buyer of
securities under a dollar roll transaction files for bankruptcy or
becomes insolvent, the Fund's use of proceeds of the transaction may be
restricted pending a determination by or with respect to the other
party.
The Fund may trade securities on other than normal settlement terms.
This may increase the risk if the other party to the transaction fails
to deliver and causes the Fund to subsequently invest at less
advantageous prices.
The Fund maintains U.S. government securities or other liquid high grade
debt obligations as collateral with respect to dollar roll transactions
and securities traded on other than normal settlement terms.
DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS: All
income, expenses (other than the Class B distribution fee), realized and
unrealized gains (losses), are allocated to each class proportionately
on a daily basis for purposes of determining the net asset value of each
class.
Class B per share data and ratios are calculated by adjusting the
expense and net investment income per share data and ratios for the Fund
for the entire period by the annualized distribution fee applicable to
Class B shares only.
FEDERAL INCOME TAXES: Consistent with the Fund's policy to qualify as a
regulated investment company and to distribute all of its taxable
income, no federal income tax has been accrued.
STATEMENT OF CASH FLOWS: Information on financial transactions which
have been settled through the receipt or disbursement of cash is
presented in the Statement of Cash Flows. The cash amount shown in the
Statement of Cash Flows is the amount included in other assets in the
Fund's Statement of Assets and Liabilities and represents cash on hand
at its custodian bank account and does not include any short-term
investments as of August 31, 1996.
INTEREST INCOME, FEE INCOME, DEBT DISCOUNT AND PREMIUM: Interest income
is recorded on the accrual basis. Fee income attributable to mortgage
dollar roll transactions is recorded on the accrual basis over the term
of the transaction. Original issue discount is accreted to interest
income over the life of a security with a corresponding increase in the
cost basis; premium and market discount are not amortized or accreted.
DISTRIBUTIONS TO SHAREHOLDERS: The Fund declares and records
distributions daily and pays monthly.
The amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
14
<PAGE>
Notes to Financial Statements/August 31, 1996
- --------------------------------------------------------------------------------
primarily due to differing treatments for mortgage backed securities for book
and tax purposes and expired capital loss carryforwards. Permanent book and tax
basis differences will result in reclassifications to capital accounts.
OTHER: The Fund's custodian takes possession through the federal book-entry
system of securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying assets
remains sufficient to protect the Fund. The Fund may experience costs and delays
in liquidating the collateral if the issuer defaults or enters bankruptcy.
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES
- --------------------------------------------------------------------------------
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Adviser) is the
investment Adviser of the Fund and furnishes accounting and other services and
office facilities for a monthly fee based on the Fund's average net assets as
follows:
<TABLE>
<CAPTION>
Average Net Assets Annual Fee Rate
------------------ ---------------
<S> <C>
First $1 billion........ 0.60%
Next $500 million....... 0.55%
Over $1.5 billion....... 0.50%
</TABLE>
BOOKKEEPING FEE: The Adviser provides bookkeeping and pricing services for
$27,000 per year plus a percentage of the Fund's average net assets as follows:
<TABLE>
<CAPTION>
Average Net Assets Annual Fee Rate
------------------- ---------------
<S> <C>
First $50 million....... No charge
Next $950 million....... 0.035%
Next $1 billion......... 0.025%
Next $1 billion......... 0.015%
</TABLE>
TRANSFER AGENT: Colonial Investors Service Center, Inc. (the Transfer Agent), an
affiliate of the Adviser, provides shareholder services for a monthly fee equal
to 0.18% annually of the Fund's average net assets and receives a reimbursement
for certain out of pocket expenses.
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Colonial Investment
Services, Inc. (the Distributor), an affiliate of the Adviser, is the Fund's
principal underwriter. For the year ended August 31, 1996,
15
<PAGE>
Notes to Financial Statements/August 31, 1996
- --------------------------------------------------------------------------------
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES - CONT.
- --------------------------------------------------------------------------------
the Fund has been advised that the Distributor retained net underwriting
discounts of $45,903 on sales of the Fund's Class A shares and received
contingent deferred sales charges (CDSC) of $2,452,811 on Class B share
redemptions.
The Fund has adopted a 12b-1 plan which requires the payment of a service fee to
the Distributor equal to 0.25% annually of the Fund's net assets as of the 20th
of each month. The plan also requires the payment of a distribution fee to the
Distributor equal to 0.75% annually of the average net assets attributable to
Class B shares only.
The CDSC and the fees received from the 12b-1 plan are used principally as
repayment to the Distributor for amounts paid by the Distributor to dealers who
sold such shares.
OTHER: The Fund pays no compensation to its officers, all of whom are employees
of the Adviser.
The Fund's Trustees may participate in a deferred compensation plan which may be
terminated at any time. Obligations of the plan will be paid solely out of the
Fund's assets.
NOTE 3. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITY: For the year ended August 31, 1996, purchases and sales of
investments, other than short-term obligations and mortgage dollar roll
transactions, were $1,748,144,803 and $2,212,383,882, respectively.
Unrealized appreciation (depreciation) at August 31, 1996, based on cost of
investments for federal income tax purposes was:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 15,818,633
Gross unrealized depreciation (20,882,538)
------------
Net unrealized depreciation $ (5,063,905)
============
</TABLE>
Information regarding dollar roll transactions that are other than normal
settlement are as follows:
<TABLE>
<S> <C>
Maximum amount outstanding during the period $406,163,125
Average amount outstanding during the period $206,935,073
Amount outstanding at August 31, 1996 $ 16,723,125
</TABLE>
The average amount outstanding during the period was calculated by summing
borrowings at the end of each day and dividing the sum by the number of days in
the period ended August 31, 1996.
16
<PAGE>
Notes to Financial Statements/August 31, 1996
- --------------------------------------------------------------------------------
CAPITAL LOSS CARRYFORWARDS: At August 31, 1996, capital loss carry-forwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
<TABLE>
<CAPTION>
Year of Capital loss
expiration carryforward
------------------- -------------
<S> <C>
1997............... $ 2,528,000
1998............... 706,000
1999............... 2,970,000
2000............... 5,878,000
2001............... 29,729,000
2002............... 7,249,000
2003............... 67,291,000
2004............... 32,546,000
-------------
$ 148,897,000
=============
</TABLE>
Of the loss carryforwards expiring in 1997, 1998, 1999, 2000, 2001, and 2002,
$25,000, $130,000, and $1,184,000, none, none, and none, respectively, were
acquired in the merger with VIP Federal Securities Fund and $2,439,000, none,
$938,000, $5,252,000, $25,355,000 and $4,423,000, respectively, were acquired in
the merger with Liberty Financial U.S. Government Securities Fund. Their
availability may be limited in a given year.
Expired capital loss carryforwards, if any, are recorded as a reduction of
capital paid in.
To the extent loss carryforwards are used to offset any future realized gains,
it is unlikely that such gains would be distributed since they may be taxable to
shareholders as ordinary income.
NOTE 4. MERGER INFORMATION
- --------------------------------------------------------------------------------
On March 24, 1995, Liberty Financial U.S. Government Securities Fund (LFUSGSF)
was merged into the Fund by a non-taxable exchange of 102,621,829 shares of the
Fund (valued at $657,854,682) for the 74,665,826 of LFUSGSF shares then
outstanding. The assets of LFUSGSF acquired included unrealized depreciation of
$10,937,427. The aggregate net assets of the Fund and LFUSGSF immediately after
the merger were $2,014,746,627.
17
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year ended August 31
-----------------------------------------------------
1996 1995
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 6.550 $ 6.550 $ 6.420 $ 6.420
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.390 0.341 0.447 0.399
Net realized and
unrealized gain (loss) (0.161) (0.161) 0.100 0.100
------- ------- ------- -------
Total from Investment
Operations 0.229 0.180 0.547 0.499
------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.391) (0.344) (0.417) (0.369)
In excess of
net investment income (0.018) (0.016) -- --
From capital paid in -- -- -- --
------- ------- ------- -------
Total Distributions
Declared to Shareholders (0.409) (0.360) (0.417) (0.369)
------- ------- ------- -------
Net asset value -
End of period $ 6.370 $ 6.370 $ 6.550 $ 6.550
======= ======= ======= =======
Total return(c) 3.51 % 2.74 % 8.88 % 8.07 %
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11 %(e) 1.86 %(e) 1.11 % 1.86 %
Net investment income 6.45 %(e) 5.70 %(e) 7.51 % 6.76 %
Portfolio turnover 123 % 123 % 140 % 140 %
Net assets at end
of period (in millions) $ 921 $ 572 $ 1,164 $ 701
</TABLE>
(a) Class B shares were initially offered on June 8, 1992. Per share amounts
reflect activity from that date.
(b) Because of differences between book and tax basis accounting,
approximately $0.056 and $0.014, respectively, were a return of capital
for federal income tax purposes.
(c) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(d) Not annualized.
(e) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(f) Annualized.
18
<PAGE>
FINANCIAL HIGHLIGHTS - CONTINUED
<TABLE>
<CAPTION>
Year ended August 31
----------------------------------------------------------------------------------
1994 1993 1992
Class A Class B Class A Class B Class A Class B (a)
------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 6.880 $ 6.880 $ 6.980 $ 6.980 $ 7.020 $ 6.950
------- ------- ------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.415 0.365 0.541 0.490 0.614 0.122
Net realized and
unrealized gain (loss) (0.452) (0.452) (0.130) (0.130) (0.043) 0.029
------- ------- ------- -------- ------- -------
Total from Investment
Operations (0.037) (0.087) 0.411 0.360 0.571 0.151
------- ------- ------- -------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.400) (0.352) (0.511) (0.460) (0.611) (0.121)
In excess of
net investment income
From capital paid in (0.023) (0.021) -- -- -- --
------- ------- ------- -------- ------- -------
Total Distributions
Declared to Shareholders (0.423) (0.373) (0.511) (0.460) (0.611) (b) (0.121) (b)
------- ------- ------- -------- ------- -------
Net asset value -
End of period $ 6.420 $ 6.420 $ 6.880 $ 6.880 $ 6.980 $ 6.980
======= ======= ======== ======== ======= =======
Total return(c) (0.53)% (1.28)% 6.15 % 5.36 % 8.46 % 2.19 %(d)
======= ======= ======== ======== ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11 % 1.86 % 1.10 % 1.85 % 1.09 % 1.84 %(f)
Net investment income 8.14 % 7.39 % 7.85 % 7.10 % 8.55 % 7.80 %(f)
Portfolio turnover 291 % 291 % 162 % 162 % 132 % 132 %
Net assets at end
of period (in millions) $ 758 $ 836 $ 1,202 $ 978 $ 1,102 $ 343
</TABLE>
- --------------------------------------------------------------------------------
State Tax Information for the Year Ended August 31, 1996 (unaudited) An average
of 22% of the Fund's investments as of the end of each quarter were in direct
obligations of the U.S. Treasury.
Approximately 24% of the Fund's distributions (19% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
- --------------------------------------------------------------------------------
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF COLONIAL TRUST II AND THE SHAREHOLDERS OF
COLONIAL U.S. GOVERNMENT FUND
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations, of cash
flows, and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of Colonial U.S. Government
Fund (a series of Colonial Trust II) at August 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements and the financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of portfolio positions
at August 31, 1996 by correspondence with the custodian and brokers, and the
application of alternative auditing procedures when confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
October 11, 1996
Part C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A
Summary of Expenses
The Fund's Financial History
Included in Part B
Colonial Government Money Market Fund (CGMMF)
Investment Portfolio, August 31, 1996 Statement of Assets and
Liabilities, August 31, 1996 Statement of Operations, Year
Ended August 31, 1996 Statement of Changes in Net Assets,
Years Ended August 31, 1996
and 1995
Notes to Financial Statements, August 31, 1996
Financial Highlights
Report of Independent Accountants
Colonial U.S. Government Fund (CUSGF)
Investment Portfolio, August 31, 1996 Statement of Assets and
Liabilities, August 31, 1996 Statement of Operations, Year
Ended August 31, 1996 Statement of Changes in Net Assets,
Years Ended August 31, 1996
and 1995
Statement of Cash Flows, Year Ended August 31, 1996
Notes to Financial Statements, August 31, 1996
Financial Highlights
Report of Independent Accountants
(b) Exhibits:
1. Amendment No. 5 to the Agreement and
Declaration of Trust
2. By-Laws, as amended (e)
3. Not Applicable
4. Form of Specimen Share Certificate (e)
5.(i) Form of Management Agreement (CGMMF)(d)
5.(ii)(a) Form of Management Agreement (CUSGF)(d)
5.(ii)(b) Amendment No. 1 to Management Agreement
(CUSGF)(d)
6.(i) Form of Distributor's Contract
(incorporated herein by reference to
Exhibit 6.(a) to Post-Effective Amendment
No. 10 to the Registration Statement of
Colonial Trust VI, Registration Nos.
33-45117 and 811-6529 filed with the
Commission on September 27, 1996)
6.(ii) Form of Selling Agreement (incorporated
herein by reference to Exhibit 6.(b) to
Post-Effective Amendment No. 10 to the
Registration Statement of Colonial
Trust VI, Registration Nos. 33-45117 and
811-6529, filed with the Commission
on September 27, 1996)
6.(iii) Investment Account Application (incorporated
by reference from Prospectus)
6.(iv) Form of Bank and Bank Affiliated Selling
Agreement (incorporated herein by reference
to Exhibit 6.(c) to Post Effective
Amendment No. 10 to the Registration
Statement of Colonial Trust VI, Registration
Nos. 33-45117 and 811-6529, filed
with the Commission on September 27, 1996)
6.(v) Form of Asset Retention Agreement
(incorporated herein by reference to Exhibit
6.(d) to Post-Effective Amendment No. 10
to the Registration Statement of Colonial
Trust VI, Registration Nos. 33-45117 and
811-6529, filed with the Commission on
September 27, 1996)
7. Not Applicable
8. Form of Custody Agreement with Boston
Safe Deposit and Trust Company
(incorporated herein by reference to Exhibit
8.(a) to Post-Effective Amendment No. 10 to
the Registration Statement of Colonial
Trust VI, Registration Nos. 33-45117 and
811-6529, filed with the Commission on
September 27, 1996)
9.(i) Form of Pricing and Bookkeeping Agreement
with Colonial Management Associates,
Inc. (incorporated herein by reference to
Exhibit 9.(b) to Post-Effective
Amendment No. 10 to the Registration
Statement of Colonial Trust VI,
Registration Nos. 33-45117 and 811-6529,
filed with the Commission on September 27,
1996)
9.(ii) Amended and Restated Shareholders'
Servicing and Transfer Agent Agreement as
amended with Colonial Management Associates,
Inc. and Colonial Investors Service
Center, Inc. (incorporated herein by
reference to Exhibit 9.(a) to
Post-Effective Amendment No. 10 to the
Registration Statement of Colonial
Trust VI, Registration Nos. 33-45117 and
811-6529, filed with the Commission
on September 27, 1996)
9.(iii) Credit Agreement (incorporated by reference
to Exhibit 9.(f) of Post-Effective
Amendment No. 19 to the Registration
Statement of Colonial Trust V,
Registration Nos. 33-12109 and 811-5030,
filed with the Commission on May 20,
1996)
10. Opinion and Consent of Counsel (CGMMF)(a)
10.(i) Opinion and Consent of Counsel
(incorporated herein by reference to
Exhibit 10 to Pre-Effective Amendment No. 1
to the Registration Statement of Colonial
U.S. Government Trust, Registration Nos.
33-16255 and 811-5268, filed with the
Commission on September 28, 1987) (CUSGF)
11. Consent of Independent Accountants
12. Not Applicable
13. Not Applicable
13.(i) Investment letter of Colonial Management
Associates, Inc. (incorporated herein by
reference to Exhibit 13 to Pre-Effective
Amendment No. 1 to the Registration
Statement of Colonial U.S. Government Trust,
Registration Nos. 33-16255 and 811-5268,
filed with the Commission on September 28,
1987) (CUSGF)
14.(i) Form of Colonial Mutual Funds Money Purchase
Pension and Profit Sharing Plan Document
and Trust Agreement (incorporated herein by
reference to Exhibit 14(a) to Post-Effective
Amendment No. 5 to the Registration
Statement of Colonial Trust VI, Registration
Nos. 33-45117 and 811-6529, filed with the
Commission on October 11, 1994)
14.(ii) Form of Colonial Mutual Funds Money
Purchase Pension and Profit Sharing Plan
Establishment Booklet (incorporated herein
by reference to Exhibit 14(b) to
Post-Effective Amendment No. 5 to the
Registration Statement of Colonial Trust VI,
Registration Nos. 33-45117 and 811-6529,
filed with the Commission on October 11,
1994)
14.(iii) Form of Colonial Mutual Funds Individual
Retirement Account and Application
(incorporated herein by reference to Exhibit
14(c) to Post-Effective Amendment No. 5 to
the Registration Statement of Colonial
Trust VI, Registration Nos. 33-45117 and
811-6529, filed with the Commission on
October 11, 1994)
14.(iv) Form of Colonial Mutual Funds Simplified
Employee Plan and Salary Reduction
Simplified Employee Pension Plan
(incorporated herein by reference to Exhibit
14(d) to Post-Effective Amendment No. 5 to
the Registration Statement of Colonial Trust
VI, Registration Nos.33-45117 and 811-6529,
filed with the Commission on October 11,
1994)
14.(v) Form of Colonial Mutual Funds 401(k) Plan
Document, Trust Agreement and IRS Opinion
Letter (incorporated by reference to Exhibit
14.(v) of Post-Effective Amendment No. 27
to the Registration Statement of Colonial
Trust II, Registration Nos. 2-66976 and
811-3009, filed with the Commission on
November 18, 1996)
14.(vi) Form of Colonial Mutual Funds 401(k)
Plan Establishment Booklet and Employee
Communications Kit (incorporated by
reference to Exhibit 14.(vi) of Post-
Effective Amendment No. 27 to the
Registration Statement of Colonial
Trust II, Registration Nos. 2-66976 and
811-3009, filed with the Commission on
November 18, 1996)
14.(vii) Form of Colonial Mutual Funds 401(k)
Employee Reports Booklet (incorporated
herein by reference to Exhibit 14(g) to
Post-Effective Amendment No. 5 to the
Registration Statement of Colonial Trust VI,
Registration Nos. 33-45117 and 811-6529,
filed with the Commission on October 11,
1994)
15. Form of proposed Distribution Plan adopted
pursuant to Section 12b-1 of the
Investment Company Act of 1940, incorporated
by reference to the Distributor's
Contract filed as Exhibit 6(i)(b) hereto
16.(i) Calculation of Performance Information
(CGMMF)
16.(ii) Calculation of Yield (CGMMF)
16.(iii) Calculation of Performance Information
(CUSGF)
16.(iv) Calculation of Yield (CUSGF)
17.(i) Financial Data Schedule (Class A)(CGMMF)
17.(ii) Financial Data Schedule (Class B)(CGMMF)
17.(iii) Financial Data Schedule (Class D)(CGMMF)
17.(iv) Financial Data Schedule (Class A)(CUSGF)
17.(v) Financial Data Schedule (Class B)(CUSGF)
18. Power of Attorney for: Tom Bleasdale, Lora
S. Collins, William D. Ireland, Jr.,
William E. Mayer, James L. Moody, Jr.,
John J. Neuhauser, George L. Shinn,
Robert L. Sullivan and Sinclair Weeks, Jr.
(incorporated herein by reference to
Exhibit 16 to Post-Effective Amendment No.
38 to the Registration Statement of Colonial
Trust IV, Registration Nos. 2-62492 and
811-2865, filed with the Commission on
March 11, 1994)
18.(i) Power of Attorney for: Robert J. Birnbaum,
James E. Grinnell and Richard W. Lowry
(incorporated herein by reference to Exhibit
18(a) to Post-Effective Amendment No. 18 to
the Registration Statement of Colonial
Trust V, Registration Nos. 33-12109 and
811-5030, filed with the Commission on
May 22, 1995)
18.(ii) Plan pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940 (incorporated
herein by reference to Exhibit No. 9(c) to
Post-Effective Amendment No. 10 to the
Registration Statement of Colonial Trust VI,
Registration Statement Nos. 33-45117 &
811-6529, filed with the Commission on
September 27, 1996)
- -------------------------------------
Not all footnotes will be applicable to this filing.
(a) Incorporated by reference from Pre-Effective Amendment No. 3 filed on
December 5, 1980.
(b) Incorporated by reference from Post-Effective Amendment No. 14 filed on
December 17, 1991.
(c) Incorporated by reference from Post-Effective Amendment No. 19 filed on
February 19, 1993.
(d) Incorporated by reference from Post-Effective Amendment No. 24 filed on
December 11, 1995.
(e) Incorporated by reference from Post-Effective Amendment No. 25 filed on
March 20, 1996.
(f) Incorporated by reference from Post-Effective Amendment No. 26 filed on
October 28, 1996
Item 25.Persons Controlled by or under Common Group Control with Registrant
Not applicable (CGMMF, CUSGF)
Item 26. Number of Holders of Securities
(1) (2)
Title of Class Number of Record Holders at 11/30/96
Shares of Beneficial Interest 4,073 Class A recordholders (CGMMF)
5,830 Class B recordholders (CGMMF)
93 Class D recordholders (CGMMF)
43,993 Class A recordholders (CUSGF)
25,014 Class B recordholders (CUSGF)
Item 27. Indemnification
See Article VIII of Amendment No. 5 to the Agreement and
Declaration of Trust filed as Exhibit 1 hereto.
Item 28. Business and Other Connections of Investment Adviser
The following sets forth business and other connections of each
director and officer of Colonial Management Associates, Inc.:
(see next page)
ITEM 28.
- --------
Registrant's investment adviser, Colonial Management Associates, Inc., is
registered as an investment adviser under the Investment Advisers Act of 1940
(1940 Act). Colonial Advisory Services, Inc. (CASI), an affiliate of Colonial
Management Associates, Inc., is also registered as an investment adviser under
the 1940 Act. As of the end of its fiscal year, December 31, 1995, CASI had
one institutional, corporate or other account under management or supervision,
the market value of which was approximately $31.4 million. As of the end of
its fiscal year, December 31, 1995, Colonial Management Associates, Inc. was
the investment adviser and/or administrator to 38 mutual funds in the Colonial
Group of Funds, the market value of which investment companies was
approximately $16,439.3 million. Colonial Investment Services, Inc., a
subsidiary of Colonial Management Associates, Inc., is the principal
underwriter and the national distributor of all of the funds in the Colonial
Group of Funds, including the Registrant.
The following sets forth the business and other connections of each
director and officer of Colonial Management Associates, Inc.:
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 11/30/96. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
Andersen, Peter V.P.
Archer, Joseph A. V.P.
Berliant, Allan V.P.
Bertocci, Bruno V.P. Stein Roe Global Capital Mngmt. Principal
Boatman, Bonny E. Dir.; Colonial Advisory Services, Inc. Exec. V.P.
Sr.V.P.;
IPC Mbr.
Campbell, Kimberly V.P.
Carnabucci,
Dominick V.P.
Carroll, Sheila A. Sr.V.P.;
Dir.
Citrone, Frank V.P.
Cogger, Harold W. Dir.;Pres.; The Colonial Group, Inc. Dir.; Pres.;
Chairman; CEO; Chrm.
CEO;IPC Mbr. Colonial Trusts I through VII Pres.
Exe. Cmte. Colonial High Income
Municipal Trust Pres.
Colonial InterMarket Income
Trust I Pres.
Colonial Intermediate High
Income Fund Pres.
Colonial Investment Grade
Municipal Trust Pres.
Colonial Municipal Income
Trust Pres.
Liberty Financial Exec V.P.;
Companies, Inc. Dir.
Colonial Advisory Services, Dir. Chrm.,
Inc.
Colonial Investors Service
Center, Inc. Dir.
Collins, Anne V.P.
Conlin, Nancy V.P.; Colonial Investors Service
Asst. Center, Inc. Asst. Clerk
Sec.; The Colonial Group, Inc. Asst. Clerk
Asst Colonial Advisory Services,
Clerk and Inc. Asst. Clerk
Counsel Colonial Investment Services,
Inc. Asst. Clerk
Colonial Trusts I through VII Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Cordes, Susan V.P.
Daniszewski, V.P. Colonial Investment Services,
Joseph J. Inc. V.P.
DiSilva, Linda V.P. Colonial Advisory Services, Compliance
IPC Mbr. Inc. Officer
Ericson, Carl C. Dir; Sr. Colonial Intermediate High
V.P. Income Fund V.P.
IPC Mbr. Colonial Advisory Services,
Inc. Exec. V.P.
Evans, C. Frazier Dir.; Colonial Investment Services,
Sr.V.P. Inc. Sr. V.P.
Feingold, Andrea S. V.P. Colonial Intermediate High
Income Fund V.P.
Colonial Advisory Services,
Inc. Sr. V.P.
Feloney, Joseph L. V.P. Colonial Investment Services,
Inc. A.V.P.
Finnemore, V.P. Colonial Advisory Services,
Leslie W. Inc. Sr. V.P.
Franklin, Sr. V.P.
Fred J.
Gerokoulis, V.P. Colonial Investment Services,
Stephen A. Inc. Sr. V.P.
Gibson, Stephen E. Dir.; The Colonial Group, Inc. Exec. V.P.
Exec. V.P.
Harasimowicz, V.P. Colonial Investment Services,
Stephen Inc. V.P.
Harris, David V.P. Stein Roe Global Capital Mngmt Principal
Hartford, Brian V.P.
Haynie, James P. V.P. Colonial Advisory Services,
Inc. Sr. V.P.
Jacoby, Timothy J. Sr. V.P. Colonial Trusts I through VII Treasr.,CFO
Colonial High Income
Municipal Trust Treasr.,CFO
Colonial InterMarket Income
Trust I Treasr.,CFO
Colonial Intermediate High
Income Fund Treasr.,CFO
Colonial Investment Grade
Municipal Trust Treasr.,CFO
Colonial Municipal Income
Trust Treasr.,CFO
Johnson, Gordon V.P.
Kimball, Erik V.P.
Koonce, Michael H. V.P.; Colonial Trusts I through VII Asst. Sec.
Asst. Colonial High Income
Sec.; Municipal Trust Asst. Sec.
Asst. Colonial InterMarket Income
Clerk & Trust I Asst. Sec.
Counsel Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Colonial Investment Services,
Inc. Asst. Clerk
Colonial Investors Service
Center, Inc. Asst. Clerk
The Colonial Group, Inc. Asst. Clerk
Colonial Advisory Services,
Inc. Asst. Clerk
Lennon, John E. V.P. Colonial Advisory Services,
Inc. V.P.
Lenzi, Sharon V.P.
Loring, William C. V.P.
Lydecker, Peter L. V.P.; Colonial Trusts I through VII Controller
Asst. Colonial High Income
Treasurer Municipal Trust Controller
Colonial InterMarket Income
Trust I Controller
Colonial Intermediate High
Income Fund Controller
Colonial Investment Grade
Municipal Trust Controller
Colonial Municipal Income
Trust Controller
MacKinnon, Dir.;
Donald S. Sr.V.P.
McGregor, Dir.; Colonial Investment Services, Pres.; CEO;
Jeffrey L. Sr.V.P. Inc. Dir.
Newman, Maureen V.P.
O'Neill, Charles A. Sr.V.P.; Colonial Investment Services,
Dir. Inc. Exec. V.P.
Peters, Helen F. Dir.; Colonial Advisory Services, Dir. Pres.,
Sr.V.P.; Inc. CEO
IPC Mbr.
Peterson, Ann T. V.P. Colonial Advisory Services,
Inc. V.P.
Rao, Gita V.P.
Reading, John V.P.
Rega, Michael V.P.
Rie, Daniel Sr.V.P.; Colonial Advisory Services,
IPC Mbr.; Inc. Exec. V.P.
Dir.
Scoon, Davey S. Dir.; Colonial Advisory Services,
Exe.V.P.; Inc. Dir.
IPC Mbr.; Colonial High Income
Exec. Comm. Municipal Trust V.P.
Mbr. Colonial InterMarket Income
Trust I V.P.
Colonial Intermediate High
Income Fund V.P.
Colonial Investment Grade
Municipal Trust V.P.
Colonial Municipal Income
Trust V.P.
Colonial Trusts I through VII V.P.
Colonial Investors Service Dir; Pres.
Center, Inc.
The Colonial Group, Inc. COO; Ex. V.P.
Colonial Investment Services,
Inc. Director
Seibel, Sandra L. V.P.
Shore, Janet V.P.
Stern, Arthur O. Exe.V.P.; Colonial Advisory Services,
Dir.; Inc. Clerk, Dir.
Sec.; Colonial High Income
Clrk. & Municipal Trust Secretary
Gnrl. Colonial InterMarket Income
Counsel; Trust I Secretary
IPC Mbr. Colonial Intermediate High
Income Fund Secretary
Colonial Investment Grade
Municipal Trust Secretary
Colonial Municipal Income
Trust Secretary
Colonial Trusts I through VII Secretary
Colonial Investors Service
Center, Inc. Clerk
The Colonial Group, Inc. Exec. V.P.;
Clerk; General
Counsel
Colonial Investment Services, Dir., Chrmn.
Inc. Counsel; Clrk.
Stevens, Richard V.P. Colonial Advisory Services,
Inc. V.P.
Waas, Robert S. V.P.
Wallace, John V.P.- Corp. Colonial Advisory Services,
Finance and Inc. Controller
Controller
Welsh, Stephen Treasurer The Colonial Group, Inc. Controller, Chf.
Acctng. Officer,
Asst. Treasurer
Colonial Investment Services,
Inc. Treasurer
Colonial Advisory Service,
Inc. Treasurer
Colonial Investors Service
Center, Inc. Controller
Wiley, Peter V.P.
- ------------------------------------------------
*The Principal address of all of the officers and directors of the investment
adviser is One Financial Center, Boston, MA 02111.
Item 29 Principal Underwriter
- ------- ---------------------
(a) Colonial Investment Services, Inc. a subsidiary of Colonial
Management Associates, Inc., Registrant's principal
underwriter, also acts in the same capacity to
Colonial Trust I, Colonial Trust III, Colonial
Trust IV, Colonial Trust V, Colonial Trust VI and Colonial Trust
VII; and sponsor for Colony Growth Plans (public offering of which
were discontinued June 14, 1971).
(b) The table below lists each director or officer of the principal
underwriter named in the answer to Item 21.
(1) (2) (3)
Name and Principal Position and Offices Positions and
Business Address* with Principal Offices with
Underwriter Registrant
- ------------------ ------------------- --------------
Babbitt, Debra V.P. None
Ballou, Rich Regional V.P. None
Balzano, Christine R. V.P. None
Bartsokas, David Regional V.P. None
Cairns, David Regional V.P. None
Chrzanowski, Regional V.P. None
Daniel
Clapp, Elizabeth A. V.P. None
Crossfield, Andrew Regional V.P. None
Daniszewski, V.P. None
Joseph J.
Davey, Cynthia Sr. V.P. None
Desilets, Marian V.P. None
Donovan, John Regional V.P. None
Eckelman, Bryan Sr. V.P. None
Emerson, Kim P. Regional V.P. None
Erickson, Cynthia G. V.P. None
Evans, C. Frazier Sr. V.P. None
Feldman, David Regional V.P. None
Gerokoulis, Sr. V.P. None
Stephen A.
Goldberg, Matthew Regional V.P. None
Harasimowicz, V.P. None
Stephen
Hodgkins, Joseph Regional V.P. None
Karagiannis, Sr. V.P. None
Marilyn
Kavolius, Mark Regional V.P. None
Kelley, Terry M. Regional V.P. None
Kelson, David W. Sr. V.P. None
Lloyd, Judith H. Sr. V.P. None
McGregor, Jeffrey L. Director, CEO, None
President
Meriwether, Jan V.P.
Moberly, Ann R. Sr. V.P. None
Murphy, Robert F. Sr. V.P. None
O'Neill, Charles A. Exec. V.P. None
Palmer, Laura V.P. None
Reed, Christopher B. Regional V.P. None
Scoon, Davey Director V.P.
Scott, Michael W. Sr. V.P. None
Sorrells, Sr. V.P. None
Elizabeth
Spanos, Gregory J. Sr. V.P. None
Stern, Arthur O. Clerk and Secretary
Counsel, Dir.,
Chairman
VanEtten, Keith H. V.P. None
Villanova, Paul Regional V.P. None
Wallace, John V.P. None
Welsh, Stephen Treasurer Asst. Treasurer
Wess, Valerie Regional V.P. None
- --------------------------
* The address for each individual is One Financial Center, Boston, MA
02111.
Item 30. Location of Accounts and Records
Registrant's accounts and records required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder are in the physical possession of the following:
Registrant
Rule 31a-1 (b) (4)
Rule 31a-2 (a) (1)
Colonial Management Associates, Inc.
One Financial Center, Boston, Massachusetts 02111
Rule 31a-1 (b) (1), (2), (3), (5), (6), (7), (8), (9), (10), (11),
(12)
Rule 31a-1 (d), (f)
Rule 31a-2 (a) (1), (2), (c), (e)
Colonial Investment Services, Inc.
One Financial Center, Boston, Massachusetts 02111
Rule 31a-1 (d)
Rule 31a-2 (c)
Boston Safe Deposit and Trust Company
One Boston Place, Boston, Massachusetts 02108
Rule 31a-1 (b), (2), (3)
Rule 31a-2 (a) (2)
Colonial Investors Service Center, Inc.
Post Office Box 1722, Boston, Massachusetts 02105-1722
Rule 31a-1 (b) (2)
Rule 31a-2 (a) (2)
Item 31. Management Services
See Item 5, Part A and Item 16, Part B
Item 32. Undertakings
(i) The Registrant undertakes to call a meeting of shareholders
for the purpose of voting upon the question of the removal
of a Trustee or Trustees when requested in writing to do so
by the holders of at least 10% of any series' outstanding
shares and in connection with such meeting to comply with
the provisions of Section 16(c) of the Investment Company
Act of 1940 relating to shareholder communications.
(ii) The Registrant undertakes to furnish free of charge to each
person to whom a prospectus is delivered, a copy of the
applicable series' annual report to shareholders containing
the information required of Item 5A of Form N-1A.
<PAGE>
NOTICE
A copy of the Agreement and Declaration of Trust, as amended, of Colonial
Trust II is on file with the Secretary of The Commonwealth of Massachusetts and
notice is hereby given that the instrument has been executed on behalf of the
Trust by an officer of the Trust as an officer and by the Trust's Trustees as
trustees and not individually and the obligations of or arising out of this
instrument are not binding upon any of the Trustees, officers, or shareholders
individually but are binding only upon the assets and property of the Trust.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 28 to its Registration Statement under the Securities Act of 1933
and the Post-Effective Amendment No. 28 under the Investment Company Act of
1940, to be signed in this City of Boston, and The Commonwealth of Massachusetts
on this 13th day of December, 1996.
COLONIAL TRUST II
By: /s/ HAROLD W. COGGER
----------------
Harold W. Cogger
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment has been signed below by the following persons in their capacities and
on the date indicated.
SIGNATURES TITLE DATE
/s/ HAROLD W. COGGER President December 13, 1996
- --------------------- (chief executive officer)
Harold W. Cogger
/s/ TIMOTHY J. JACOBY Treasurer and Chief December 13, 1996
- ---------------------- Financial Officer
Timothy J. Jacoby (principal financial officer)
/s/ PETER L. LYDECKER Controller and Chief December 13, 1996
- ---------------------- Accounting Officer
Peter L. Lydecker (principal accounting officer)
<PAGE>
/s/ ROBERT J. BIRNBAUM* Trustee
Robert J. Birnbaum
/s/ TOM BLEASDALE* Trustee
Tom Bleasdale
/s/ LORA S. COLLINS* Trustee
Lora S. Collins
/s/ JAMES E. GRINNELL* Trustee
James E. Grinnell
/s/ WILLIAM D. IRELAND, JR.* Trustee
William D. Ireland, Jr.
/s/ RICHARD W. LOWRY* Trustee
Richard W. Lowry
/s/ JAMES L. MOODY, JR.* Trustee
James L. Moody, Jr. *Michael H. Koonce
Attorney-in-fact
December 13, 1996
/s/ WILLIAM E. MAYER* Trustee
William E. Mayer
/s/ JOHN J. NEUHAUSER* Trustee
John J. Neuhauser
/s/ GEORGE L. SHINN* Trustee
George L. Shinn
/s/ ROBERT L. SULLIVAN* Trustee
Robert L. Sullivan
/s/ SINCLAIR WEEKS, JR. * Trustee
Sinclair Weeks, Jr.
<PAGE>
EXHIBITS
1. Amendment No. 5 to the Agreement and Declaration of Trust
11. Consent of Independent Accountants
16.(i) Calculation of Performance Information (CGMMF)
16.(ii) Calculation of Yield (CGMMF)
16.(iii) Calculation of Performance Information (CUSGF)
16.(iv) Calculation of Yield (CUSGF)
17.(i) Financial Data Schedule (Class A) (CGMMF)
17.(ii) Financial Data Schedule (Class B) (CGMMF)
17.(iii) Financial Data Schedule (Class D) (CGMMF)
17.(iv) Financial Data Schedule (Class A) (CUSGF)
17.(v) Financial Data Schedule (Class B) (CUSGF)
AMENDMENT NO. 5 TO THE
AGREEMENT AND DECLARATION OF TRUST
OF COLONIAL TRUST II
AGREEMENT AND DECLARATION OF TRUST made at Boston,
Massachusetts, this 15th day of November, 1991 by the Trustees
hereunder, and by the holders of shares of beneficial interest to
be issued hereunder as hereinafter provided.
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business
of an investment company; and
WHEREAS, the Trustees have agreed to manage all property
coming into their hands as trustees of a Massachusetts business
trust in accordance with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will
hold all cash, securities and other assets, which they may from
time to time acquire in any manner as Trustees hereunder, IN
TRUST to manage and dispose of the same upon the following terms
and conditions for the pro rata benefit of the holders from time
to time of Shares in this Trust as hereinafter set forth.
ARTICLE I
NAME AND DEFINITIONS
Name
Section 1. This Trust shall be known as Colonial Trust
II and the Trustees shall conduct the business of the Trust under
that name or any other name as they may from time to time
determine.
Definitions
Section 2. Whenever used herein, unless otherwise
required by the context or specifically provided:
(a) The "Trust" refers to the Massachusetts business
trust established by this Agreement and Declaration of Trust, as
amended from time to time;
(b) "Trustees" refers to the Trustees of the Trust
named herein or elected in accordance with Article IV;
(c) "Shares" means the equal proportionate
transferable units of interest into which the beneficial interest
in the Trust shall be divided from time to time or, if more than
one series of Shares is authorized by the Trustees, the equal
proportionate units into which each series of Shares shall be
divided from time to time or, if more than one class of Shares of
any series is authorized by the Trustees, the equal proportionate
units into which each class of such series of Shares shall be
divided from time to time;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company
Act of 1940 and the Rules and Regulations thereunder, all as
amended from time to time;
(f) The terms "Affiliated Person," "Assignment,"
"Commission," "Interested Person," "Principal Underwriter" and
"Majority Shareholder Vote" (the 67% or 50% requirement of the
third sentence of Section 2(a)(42) of the 1940 Act, whichever may
be applicable) shall have the meanings given them in the 1940
Act;
(g) "Declaration of Trust" shall mean this Agreement
and Declaration of Trust as amended or restated from time to
time; and
(h) "By-Laws" shall mean the By-Laws of the Trust as
amended from time to time.
ARTICLE II
PURPOSE
The purpose of the Trust is to provide investors a managed
investment primarily in securities, commodities and debt
instruments.
ARTICLE III
SHARES
Division of Beneficial Interest
Section 1. The Shares of the Trust shall be issued in
one or more series as the Trustees may, without Shareholder
approval, authorize. The Trustees may, without Shareholder
approval, divide the Shares of any series into two or more
classes, Shares of each such class having such preferences or
special or relative rights or privileges (including conversion
rights, if any) as the Trustees may determine and as are not
inconsistent with any provision of this Declaration of Trust.
Each series shall be preferred over all other series in respect
of the assets allocated to that series. The beneficial interest
in each series shall at all times be divided into Shares, without
par value, each of which shall, except as the Trustees may
otherwise authorize in the case of any series that is divided
into two or more classes, represent an equal proportionate
interest in the series with each other Share of the same series,
none having priority or preference over another. The number of
Shares authorized shall be unlimited, and the Shares so
authorized may be represented in part by fractional shares. The
Trustees may from time to time divide or combine the Shares of
any series or class into a greater or lesser number without
thereby changing the proportionate beneficial interests in the
series or class.
Ownership of Shares
Section 2. The ownership of Shares shall be recorded on
the books of the Trust or its transfer or similar agent. No
certificates certifying the ownership of Shares shall be issued
except as the Trustees may otherwise determine from time to time.
The Trustees may make such rules as they consider appropriate for
the issuance of Share certificates, the transfer of Shares and
similar matters. The record books of the Trust as kept by the
Trust or any transfer or similar agent of the Trust, as the case
may be, shall be conclusive as to who are the Shareholders of
each series and class and as to the number of Shares of each
series and class held from time to time by each Shareholder.
Investments in the Trust; Assets of the Series
Section 3. The Trustees shall accept investments in the
Trust from such persons and on such terms and, subject to any
requirements of law, for such consideration, which may consist of
cash or tangible or intangible property or a combination thereof,
as they from time to time authorize.
All consideration received by the Trust for the issue or
sale of Shares of each series, together with all income,
earnings, profits and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation thereof, and any
funds or payments derived from any reinvestment of such proceeds
in whatever form the same may be, shall irrevocably belong to the
series of Shares with respect to which the same were received by
the Trust for all purposes, subject only to the rights of
creditors, and shall be so handled upon the books of account of
the Trust and are herein referred to as "assets of" such series.
No Preemptive Rights
Section 4. Shareholders shall have no preemptive or
other right to receive, purchase or subscribe for any additional
Shares or other securities issued by the Trust.
Status of Shares and Limitation of Personal Liability
Section 5. Shares shall be deemed to be personal
property giving only the rights provided in this instrument.
Every Shareholder by virtue of having become a Shareholder shall
be held to have expressly assented and agreed to the terms hereof
and to have become a party hereto. The death of a Shareholder
during the continuance of the Trust shall not operate to
terminate the same nor entitle the representative of any deceased
Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but only to the
rights of said decedent under this Trust. Ownership of Shares
shall not entitle the Shareholder to any title in or to the whole
or any part of the Trust property or right to call for a
partition or division of the same or for an accounting, nor shall
the ownership of Shares constitute the Shareholders partners.
Neither the Trust nor the Trustees, nor any officer, employee or
agent of the Trust, shall have any power to bind personally any
Shareholder, nor except as specifically provided herein to call
upon any Shareholder for the payment of any sum of money or
assessment whatsoever other than such as the Shareholder may at
any time personally agree to pay.
ARTICLE IV
THE TRUSTEES
Election
Section 1. The number of Trustees shall be fixed by the
Trustees, except that, subsequent to any sale of Shares pursuant
to a public offering, there shall be not less than three
Trustees. Any vacancies occurring in the Board of Trustees may
be filled by the Trustees if, immediately after filling any such
vacancy, at least two-thirds of the Trustees then holding office
shall have been elected to such office by the Shareholders. In
the event that at any time less than a majority of the Trustees
then holding office were elected to such office by the
Shareholders, the Trustees shall call a meeting of Shareholders
for the purpose of electing Trustees. Each Trustee elected by
the Shareholders or by the Trustees shall serve until the next
meeting of Shareholders called for the purpose of electing
Trustees and until the election and qualification of his or her
successor, or until he or she sooner dies, resigns or is removed.
The initial Trustees, each of whom shall serve until the first
meeting of Shareholders at which Trustees are elected and until
his or her successor is elected and qualified, or until he or she
sooner dies, resigns or is removed, shall be John A. McNeice, Jr.
and such other persons as the Trustee or Trustees then in office
shall, prior to any sale of Shares pursuant to a public offering,
appoint. By vote of a majority of the Trustees then in office,
the Trustees may remove a Trustee with or without cause. At any
meeting called for the purpose, a Trustee may be removed, with or
without cause, by vote of the holders of two-thirds of the
outstanding Shares.
Effect of Death, Resignation, etc. of a Trustee
Section 2. The death, declination, resignation,
retirement, removal or incapacity of the Trustees, or any one of
them, shall not operate to annul the Trust or to revoke any
existing agency created pursuant to the terms of this Declaration
of Trust.
Powers
Section 3. Subject to the provisions of this Declaration
of Trust, the business of the Trust shall be managed by the
Trustees, and they shall have all powers necessary or convenient
to carry out that responsibility. Without limiting the
foregoing, the Trustees may adopt By-Laws not inconsistent with
this Declaration of Trust providing for the conduct of the
business of the Trust and may amend and repeal them to the extent
that such By-Laws do not reserve that right to the Shareholders;
they may fill vacancies in their number, including vacancies
resulting from increases in their number, and may elect and
remove such officers and appoint and terminate such agents as
they consider appropriate; they may appoint from their own
number, and terminate, any one or more committees consisting of
two or more Trustees, including an executive committee which may,
when the Trustees are not in session, exercise some or all of the
power and authority of the Trustees as the Trustees may
determine; they may appoint an advisory board, the members of
which shall not be Trustees and need not be Shareholders; they
may employ one or more custodians of the assets of the Trust and
may authorize such custodians to employ subcustodians and to
deposit all or any part of such assets in a system or systems for
the central handling of securities, retain a transfer agent or a
Shareholder services agent, or both, provide for the distribution
of Shares by the Trust, through one or more principal
underwriters or otherwise, set record dates for the determination
of Shareholders with respect to various matters, and in general
delegate such authority as they consider desirable to any officer
of the Trust, to any committee of the Trustees and to any agent
or employee of the Trust or to any such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have
power and authority:
(a) To invest and reinvest cash, and to hold cash
uninvested;
(b) To sell, exchange, lend, pledge, mortgage,
hypothecate, write options on and lease any or all of the assets
of the Trust;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property;
and to execute and deliver proxies or powers of attorney to such
person or persons as the Trustees shall deem proper, granting to
such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper;
(d) To exercise powers and rights of subscription or
otherwise which in any manner arise out of ownership of
securities;
(e) To hold any security or property in a form not
indicating any trust, whether in bearer, unregistered or other
negotiable form, or in the name of the Trustees or of the Trust
or in the name of a custodian, subcustodian or other depository
or a nominee or nominees or otherwise;
(f) Subject to the provisions of Article III, Section
3, to allocate assets, liabilities and expenses of the Trust to a
particular series of Shares or to apportion the same among two or
more series, provided that any liabilities or expenses incurred
by a particular series of Shares shall be payable solely out of
the assets of that series; and to the extent necessary or
appropriate to give effect to the preferences and special or
relative rights and privileges of any classes of Shares, to
allocate assets, liabilities, income and expenses of a series to
a particular class of Shares of that series or to apportion the
same among two or more classes of Shares of that series;
(g) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or
issuer, any security of which is or was held in the Trust; to
consent to any contract, lease, mortgage, purchase or sale of
property by such corporation or issuer, and to pay calls or
subscriptions with respect to any security held in the Trust;
(h) To join with other security holders in acting
through a committee, depositary, voting trustee or otherwise, and
in that connection to deposit any security with, or transfer any
security to, any such committee, depositary or trustee, and to
delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such
portion of the expenses and compensation of such committee,
depositary or trustee as the Trustees shall deem proper;
(i) To compromise, arbitrate or otherwise adjust
claims in favor of or against the Trust on any matter in
controversy, including but not limited to claims for taxes;
(j) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(k) To borrow funds;
(l) To endorse or guarantee the payment of any notes
or other obligations of any person; to make contracts of guaranty
or suretyship, or otherwise assume liability for payment thereof;
and to mortgage and pledge the Trust property or any part thereof
to secure any of or all of such obligations;
(m) To purchase and pay for entirely out of Trust
property such insurance as they may deem necessary or appropriate
for the conduct of the business, including, without limitation,
insurance policies insuring the assets of the Trust and payment
of distributions and principal on its portfolio investments, and
insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, investment advisers or managers, principal
underwriters or independent contractors of the Trust individually
against all claims and liabilities of every nature arising by
reason of holding, being or having held any such office or
position, or by reason of any action alleged to have been taken
or omitted by any such person as Shareholder, Trustee, officer,
employee, agent, investment adviser or manager, principal
underwriter or independent contractor, including any action taken
or omitted that may be determined to constitute negligence,
whether or not the Trust would have the power to indemnify such
person against such liability; and
(n) To pay pensions for faithful service, as deemed
appropriate by the Trustees, and to adopt, establish and carry
out pension, profit-sharing, share bonus, share purchase,
savings, thrift and other retirement, incentive and benefit
plans, trusts and provisions, including the purchasing of life
insurance and annuity contracts as a means of providing such
retirement and other benefits, for any or all of the Trustees,
officers, employees and agents of the Trust.
The Trustees shall not in any way be bound or limited by any
present or future law or custom in regard to investments by
Trustees. Except as otherwise provided herein or from time to
time in the By-Laws, any action to be taken by the Trustees may
be taken by a majority of the Trustees present at a meeting of
the Trustees (a quorum being present), within or without
Massachusetts, including any meeting held by means of a
conference telephone or other communications equipment by means
of which all persons participating in the meeting can hear each
other at the same time, and participation by such means shall
constitute presence in person at a meeting, or by written
consents of a majority of the Trustees then in office.
Payment of Expenses by Trust
Section 4. The Trustees are authorized to pay or to
cause to be paid out of the principal or income of the Trust, or
partly out of principal and partly out of income, as they deem
fair, all expenses, fees, charges, taxes and liabilities incurred
or arising in connection with the Trust, or in connection with
the management thereof, including, but not limited to, the
Trustees' compensation and such expenses and charges for the
services of the Trust's officers, employees, investment adviser
or manager, principal underwriter, auditor, counsel, custodian,
transfer agent, Shareholder services agent and such other agents
or independent contractors, and such other expenses and charges,
as the Trustees may deem necessary or proper to incur, provided,
however, that all expenses, fees, charges, taxes and liabilities
incurred or arising in connection with a particular series of
Shares, as determined by the Trustees, shall be payable solely
out of the assets of that series.
Ownership of Assets of the Trust
Section 5. Title to all of the assets of each series of
Shares and of the Trust shall at all times be considered as
vested in the Trustees.
Advisory, Management and Distribution
Section 6. Subject to a favorable Majority Shareholder
Vote, the Trustees may, at any time and from time to time,
contract for exclusive or nonexclusive advisory and/or management
services with Colonial Management Associates, Inc., a
Massachusetts corporation, or any other corporation, trust,
association or other organization (the "Adviser"), every such
contract to comply with such requirements and restrictions as may
be set forth in the By-Laws; and any such contract may contain
such other terms interpretive of or in addition to said
requirements and restrictions as the Trustees may determine,
including, without limitation, authority to determine from time
to time what investments shall be purchased, held, sold or
exchanged and what portion, if any, of the assets of the Trust
shall be held uninvested, and to make changes in the Trust's
investments. The Trustees may also, at any time and from time to
time, contract with the Adviser or any other corporation, trust,
association or other organization, appointing it exclusive or
nonexclusive distributor or principal underwriter for the Shares,
every such contract to comply with such requirements and
restrictions as may be set forth in the By-Laws; and any such
contract may contain such other terms interpretive of or in
addition to said requirements and restrictions as the Trustees
may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of
the Trust is a shareholder, director, officer, partner, trustee,
employee, manager, adviser, principal underwriter or distributor
or agent of or for any corporation, trust, association or other
organization, or of or for any parent or affiliate of any
organization, with which an advisory or management contract, or
principal underwriter's or distributor's contract, or transfer,
shareholder services or other agency contract may have been or
may hereafter be made, or that any organization, or any parent or
affiliate thereof, is a Shareholder or has an interest in the
Trust, or that
(ii) any corporation, trust, association or other
organization with which an advisory or management contract or
principal underwriter's or distributor's contract, or transfer,
Shareholder services or other agency contract may have been or
may hereafter be made also has an advisory or management
contract, or principal underwriter's or distributor's contract,
or transfer, shareholder services or other agency contract with
one or more other corporations, trusts, associations or other
organizations, or has other business or interests
shall not affect the validity of any such contract or disqualify
any Shareholder, Trustee or officer of the Trust from voting upon
or executing the same or create any liability or accountability
to the Trust or its Shareholders.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Voting Powers
Section 1. The Shareholders shall have power to vote
only (i) for the election of Trustees as provided in Article IV,
Section 1, (ii) with respect to any Adviser as provided in
Article IV, Section 6, (iii) with respect to any termination of
this Trust to the extent and as provided in Article IX, Section
4, (iv) with respect to any amendment of this Declaration of
Trust to the extent and as provided in Article IX, Section 7, (v)
to the same extent as the stockholders of a Massachusetts
business corporation as to whether or not a court action,
proceeding or claim should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the
Shareholders, and (vi) with respect to such additional matters
relating to the Trust as may be required by law, this Declaration
of Trust, the By-Laws or any registration of the Trust with the
Securities and Exchange Commission (or any successor agency) or
any state, or as the Trustees may consider necessary or
desirable. Each whole Share shall be entitled to one vote as to
any matter on which it is entitled to vote and each fractional
Share shall be entitled to a proportionate fractional vote.
Notwithstanding any other provision of this Declaration of Trust,
on any matter submitted to a vote of Shareholders, all Shares of
the Trust then entitled to vote shall be voted in the aggregate
as a single class without regard to series or class; except (1)
when required by the 1940 Act or when the Trustees shall have
determined that the matter affects one or more series or classes
materially differently, Shares shall be voted by individual
series or class; and (2) when the Trustees have determined that
the matter affects only the interests of one or more series or
classes, then only Shareholders of such series or classes shall
be entitled to vote thereon. There shall be no cumulative voting
in the election of Trustees. Shares may be voted in person or by
proxy. A proxy with respect to Shares held in the name of two or
more persons shall be valid if executed by any one of them unless
at or prior to exercise of the proxy the Trust receives a
specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to its
exercise and the burden of proving invalidity shall rest on the
challenger. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required by
law, this Declaration of Trust or the By-Laws to be taken by
Shareholders.
Voting Power and Meetings
Section 2. Meetings of Shareholders of the Trust or of
any series or class may be called by the Trustees or such other
person or persons as may be specified in the By-Laws and held
from time to time for the purpose of taking action upon any
matter requiring the vote or the authority of the Shareholders of
the Trust or any series or class as herein provided or upon any
other matter deemed by the Trustees to be necessary or desirable.
Meetings of Shareholders of the Trust or of any series or class
shall be called by the Trustees or such other person or persons
as may be specified in the By-Laws upon written application. The
Shareholders shall be entitled to at least seven days' written
notice of any meeting of the Shareholders.
Quorum and Required Vote
Section 3. Thirty percent (30%) of the Shares entitled
to vote shall be a quorum for the transaction of business at a
Shareholders' meeting, except that where any provision of law or
of this Declaration of Trust permits or requires that holders of
any series or class shall vote as a series or class, then thirty
percent (30%) of the aggregate number of Shares of that series or
class entitled to vote shall be necessary to constitute a quorum
for the transaction of business by that series or class. Any
lesser number, however, shall be sufficient for adjournments.
Any adjourned session or sessions may be held within a reasonable
time after the date set for the original meeting without the
necessity of further notice. Except when a larger vote is
required by any provision of this Declaration of Trust or the By-
Laws, a majority of the Shares voted shall decide any questions
and a plurality shall elect a Trustee, provided that where any
provision of law or of this Declaration of Trust permits or
requires that the holders of any series or class shall vote as a
series or class, then a majority of the Shares of that series or
class voted on the matter (or a plurality with respect to the
election of a Trustee) shall decide that matter insofar as that
series or class is concerned.
Action by Written Consent
Section 4. Any action taken by Shareholders may be taken
without a meeting if a majority of Shareholders entitled to vote
on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or
the By-Laws) consent to the action in writing and such written
consents are filed with the records of the meetings of
Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
Additional Provisions
Section 5. The By-Laws may include further provisions
for Shareholders' votes and meetings and related matters.
ARTICLE VI
DISTRIBUTIONS, REDEMPTIONS AND REPURCHASES,
AND DETERMINATION OF NET ASSET VALUE
Distributions
Section 1. The Trustees may, but need not, each year
distribute to the Shareholders of each series or class such
income and gains, accrued or realized, as the Trustees may
determine, after providing for actual and accrued expenses and
liabilities (including such reserves as the Trustees may
establish) determined in accordance with good accounting
practices. The Trustees shall have full discretion to determine
which items shall be treated as income and which items as capital
and their determination shall be binding upon the Shareholders.
Distributions of each year's income of each series, if any be
made, may be made in one or more payments, which shall be in
Shares, in cash or otherwise and on a date or dates and as of a
record date or dates determined by the Trustees. At any time and
from time to time in their discretion, the Trustees may
distribute to the Shareholders of any one or more series or
classes as of a record date or dates determined by the Trustees,
in Shares, in cash or otherwise, all or part of any gains
realized on the sale or disposition of property of the series or
otherwise, or all or part of any other principal of the Trust
attributable to the series. In the case of any series not
divided into two or more classes of Shares, each distribution
pursuant to this Section 1 shall be made ratably according to the
number of Shares of the series held by the several Shareholders
on the applicable record date thereof, provided that no
distribution need be made on Shares purchased pursuant to orders
received, or for which payment is made, after such time or times
as the Trustees may determine. In the case of any series divided
into two or more classes, each distribution pursuant to this
Section 1 may be made in whole or in such parts as the Trustees
may determine to the Shareholders of any one or more classes, and
the distribution to the Shareholders of any class shall be made
ratably according to the number of Shares of the class (but need
not be made ratably according to the number of Shares of the
series, considered without regard to class) held by the several
Shareholders on the record date thereof, provided that no
distribution need be made on Shares purchased pursuant to orders
received, or for which payment is made, after such time or times
as the Trustees may determine. Any such distribution paid in
Shares will be paid at the net asset value thereof as determined
in accordance with Section 7 of this Article VI.
Redemptions and Repurchases
Section 2. Any holder of Shares of the Trust may by
presentation of a written request, together with his or her
certificates, if any, for such Shares, in proper form for
transfer, at the office of the Trust or at a principal office of
a transfer agent appointed by the Trust, redeem his or her Shares
for the net asset value thereof determined and computed in
accordance with the provisions of this Section 2 and the
provisions of Section 7 of this Article VI.
Upon receipt by the Trust or its transfer agent of such
written request for redemption of Shares, such Shares shall be
redeemed at the net asset value per share of the appropriate
series next determined after such Shares are tendered in proper
order for transfer to the Trust or determined as of such other
time fixed by the Trustees as may be permitted or required by the
1940 Act, provided that no such tender shall be required in the
case of Shares for which a certificate or certificates have not
been issued, and in such case such Shares shall be redeemed at
the net asset value per share of the appropriate series next
determined after such request has been received or determined at
such other time fixed by the Trustees as may be permitted or
required by the 1940 Act.
The obligation of the Trust to redeem its Shares of each
series or class as set forth above in this Section 2 shall be
subject to the condition that during any time of emergency, as
hereinafter defined, such obligation may be suspended by the
Trust by or under authority of the Trustees for such period or
periods during such time of emergency as shall be determined by
or under authority of the Trustees. If there is such a
suspension, any Shareholder may withdraw any demand for
redemption and any tender of Shares which has been received by
the Trust during any such period and any tender of Shares, the
applicable net asset value of which would but for such suspension
be calculated as of a time during such period. Upon such
withdrawal, the Trust shall return to the Shareholder the
certificates therefor, if any. For the purposes of any such
suspension, "time of emergency" shall mean, either with respect
to all Shares or any series of Shares, any period during which:
(a) the New York Stock Exchange is closed other than
for customary weekend and holiday closings; or
(b) the Trustees or authorized officers of the Trust
shall have determined, in compliance with any applicable rules
and regulations of the Securities and Exchange Commission, either
that trading on the New York Stock Exchange is restricted, or
that an emergency exists as a result of which (i) disposal by the
Trust of securities owned by it is not reasonably practicable or
(ii) it is not reasonably practicable for the Trust fairly to
determine the current value of its net assets; or
(c) the suspension or postponement of such obligations
is permitted by order of the Securities and Exchange Commission.
The Trust may also purchase, repurchase or redeem
Shares in accordance with such other methods, upon such other
terms and subject to such other conditions as the Trustees may
from time to time authorize at a price not exceeding the net
asset value of such Shares in effect when the purchase or
repurchase or any contract to purchase or repurchase is made.
Payment in Kind
Section 3. Subject to any generally applicable
limitation imposed by the Trustees, any payment on redemption of
Shares may, if authorized by the Trustees, be made wholly or
partly in kind, instead of in cash. Such payment in kind shall
be made by distributing securities or other property
constituting, in the opinion of the Trustees, a fair
representation of the various types of securities and other
property then held by the series of Shares being redeemed (but
not necessarily involving a portion of each of the series'
holdings) and taken at their value used in determining the net
asset value of the Shares in respect of which payment is made.
Redemptions at the Option of the Trust
Section 4. The Trust shall have the right at its option
and at any time to redeem Shares of any Shareholder at the net
asset value thereof as determined in accordance with Section 7 of
Article VI of this Declaration of Trust: (i) if at such time
such Shareholder owns fewer Shares than, or Shares having an
aggregate net asset value of less than, an amount determined from
time to time by the Trustees; or (ii) to the extent that such
Shareholder owns Shares of a particular series of Shares equal to
or in excess of a percentage of the outstanding Shares of that
series (determined without regard to class) determined from time
to time by the Trustees; or (iii) to the extent that such
Shareholder owns Shares of the Trust representing a percentage
equal to or in excess of such percentage of the aggregate number
of outstanding Shares of the Trust or the aggregate net asset
value of the Trust determined from time to time by the Trustees.
Dividends, Distributions, Redemptions and Repurchases
Section 5. No dividend or distribution (including,
without limitation, any distribution paid upon termination of the
Trust or of any series) with respect to, nor any redemption or
repurchase of, the Shares of any series (or of any class) shall
be effected by the Trust other than from the assets of such
series (or of the series of which such class is a part).
Additional Provisions Relating to Redemptions and Repurchases
Section 6. The completion of redemption of Shares shall
constitute a full discharge of the Trust and the Trustees with
respect to such shares, and the Trustees may require that any
certificate or certificates issued by the Trust to evidence the
ownership of such Shares shall be surrendered to the Trustees for
cancellation or notation.
Determination of Net Asset Value
Section 7. The term "net asset value" of the Shares of
each series or class shall mean: (i) the value of all the assets
of such series or class; (ii) less the total liabilities of such
series or class; (iii) divided by the number of Shares of such
series or class outstanding, in each case at the time of each
determination. The "number of Shares of such series or class
outstanding" for the purposes of such computation shall be
exclusive of any Shares of such series or class to be redeemed
and not then redeemed as to which the redemption price has been
determined, but shall include Shares of such series or class
presented for repurchase and not then repurchased and Shares of
such series or class to be redeemed and not then redeemed as to
which the redemption price has not been determined and Shares of
such series or class the sale of which has been confirmed. Any
fractions involved in the computation of net asset value per
share shall be adjusted to the nearer cent unless the Trustees
shall determine to adjust such fractions to a fraction of a cent.
The Trustees, or any officer or officers or agent of this
Trust designated for the purpose by the Trustees, shall determine
the net asset value of the Shares of each series or class, and
the Trustees shall fix the times as of which the net asset value
of the Shares of each series or class shall be determined and
shall fix the periods during which any such net asset value shall
be effective as to sales, redemptions and repurchases of, and
other transactions in, the Shares of such series or class, except
as such times and periods for any such transaction may be fixed
by other provisions of this Declaration of Trust or by the By-
Laws.
In valuing the portfolio investments of any series or class
for determination of net asset value per share of such series or
class, securities for which market quotations are readily
available shall be valued at prices which, in the opinion of the
Trustees, or any officer or officers or agent of the Trust
designated for the purpose by the Trustees, most nearly represent
the market value of such securities, which may, but need not, be
the most recent bid price obtained from one or more of the market
makers for such securities; other securities and assets shall be
valued at fair value as determined by or pursuant to the
direction of the Trustees. Notwithstanding the foregoing, short-
term debt obligations, commercial paper and repurchase agreements
may be, but need not be, valued on the basis of quoted yields for
securities of comparable maturity, quality and type, or on the
basis of amortized cost. In determination of net asset value of
any series or class, dividends receivable and accounts receivable
for investments sold and for Shares sold shall be stated at the
amounts to be received therefor; and income receivable accrued
daily on bonds and notes owned shall be stated at the amount to
be received. Any other assets shall be stated at fair value as
determined by the Trustees or such officer, officers or agent
pursuant to the Trustees' authority, except that no value shall
be assigned to good will, furniture, lists, reports, statistics
or other noncurrent assets other than real estate. Liabilities
of any series or class for accounts payable for investments
purchased and for Shares tendered for redemption and not then
redeemed as to which the redemption price has been determined
shall be stated at the amounts payable therefor. In determining
the net asset value of any series or class, the person or persons
making such determination on behalf of the Trust may include in
liabilities such reserves, estimated accrued expenses and
contingencies as such person or persons may in its, his or their
best judgment deem fair and reasonable under the circumstances.
Any income dividends and gains distributions payable by the Trust
shall be deducted as of such time or times on the record date
therefor as the Trustees shall determine.
The manner of determining the net assets of any series or
class or of determining the net asset value of the Shares of any
series or class may from time to time be altered as necessary or
desirable in the judgment of the Trustees to conform to any other
method prescribed or permitted by any applicable law or
regulation.
Determinations under this Section 7 made in good faith and
in accordance with the provisions of the 1940 Act shall be
binding on all parties concerned.
ARTICLE VII
COMPENSATION AND LIMITATION OF LIABILITY OF TRUSTEES
Compensation
Section 1. The Trustees as such shall be entitled to
reasonable compensation from the Trust; they may fix the amount
of their compensation. Nothing herein shall in any way prevent
the employment of any Trustee for advisory, management, legal,
accounting, investment banking or other services and payment for
the same by the Trust.
Limitation of Liability
Section 2. The Trustees shall not be responsible or
liable in any event for any neglect or wrongdoing of any officer,
agent, employee, adviser or principal underwriter of the Trust,
nor shall any Trustee be responsible for the act or omission of
any other Trustee, but nothing herein contained shall protect any
Trustee against any liability to which he or she should otherwise
be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Every note, bond, contract, instrument, certificate, Share
or undertaking and every other act or thing whatsoever executed
or done by or on behalf of the Trust or the Trustees or any of
them in connection with the Trust shall be conclusively deemed to
have been executed or done only in or with respect to their or
his or her capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII
INDEMNIFICATION
Trustees, Officers, etc.
Section 1. The Trust shall indemnify each of its
Trustees and officers (including persons who serve at the Trust's
request as directors, officers or trustees of another
organization in which the Trust has any interest as a
shareholder, creditor or otherwise) (hereinafter referred to as a
"Covered Person") against all liabilities and expenses, including
but not limited to amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and counsel fees reasonably
incurred by any Covered Person in connection with the defense or
disposition of any action, suit or other proceeding, whether
civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have
been involved as a party or otherwise or with which such person
may be or may have been threatened, while in office or
thereafter, by reason of being or having been such a Trustee or
officer, except that no Covered Person shall be indemnified
against any liability to the Trust or its Shareholders to which
such Covered Person would otherwise be subject by reason of
wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered
Person's office. Expenses, including counsel fees so incurred by
any such Covered Person (but excluding amounts paid in
satisfaction of judgments, in compromise or as fines or
penalties), may be paid from time to time by the Trust in advance
of the final disposition of any such action, suit or proceeding
upon receipt of any undertaking by or on behalf of such Covered
Person to repay amounts so paid to the Trust if it is ultimately
determined that indemnification of such expenses is not
authorized under this Article, provided that (a) such Covered
Person shall provide security for his undertaking, (b) the Trust
shall be insured against losses arising by reason of such Covered
Person's failure to fulfill his undertaking or (c) a majority of
the Trustees who are disinterested persons and who are not
Interested Persons (provided that a majority of such Trustees
then in office act on the matter), or independent legal counsel
in a written opinion, shall determine, based on a review of
readily available facts (but not a full trial-type inquiry), that
there is reason to believe such Covered Person ultimately will be
entitled to indemnification.
Compromise Payment
Section 2. As to any matter disposed of (whether by a
compromise payment, pursuant to a consent decree or otherwise)
without an adjudication in a decision on the merits by a court,
or by any other body before which the proceeding was brought,
that such Covered Person is liable to the Trust or its
Shareholders by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office, indemnification shall be
provided if (a) approved as in the best interest of the Trust,
after notice that it involves such indemnification, by at least a
majority of the Trustees who are disinterested persons and are
not Interested Persons (provided that a majority of such Trustees
then in office act on the matter), upon a determination, based
upon a review of readily available facts (but not a full trial-
type inquiry), that such Covered Person is not liable to the
Trust or its Shareholders by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office, or (b)
there has been obtained an opinion in writing of independent
legal counsel, based upon a review of readily available facts
(but not a full trial-type inquiry) to the effect that such
indemnification would not protect such Covered Person against any
liability to the Trust to which such Covered Person would
otherwise be subject by reason of wilful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of his office. Any approval pursuant to this Section
shall not prevent the recovery from any Covered Person of any
amount paid to such Covered Person in accordance with this
Section as indemnification if such Covered Person is subsequently
adjudicated by a court of competent jurisdiction to have been
liable to the Trust or its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of such Covered Person's
office.
Indemnification Not Exclusive
Section 3. The right of indemnification hereby provided
shall not be exclusive of or affect any other rights to which any
such Covered Person may be entitled. As used in this Article
VIII, the term "Covered Person" shall include such person's
heirs, executors and administrators, and a "disinterested person"
is a person against whom none of the actions, suits or other
proceedings in question or another action, suit or other
proceeding on the same or similar grounds is then or has been
pending. Nothing contained in this article shall affect any
rights to indemnification to which personnel of the Trust, other
than Trustees and officers, and other persons may be entitled by
contract or otherwise under law, nor the power of the Trust to
purchase and maintain liability insurance on behalf of such
persons.
Shareholders
Section 4. In case any Shareholder or former Shareholder
shall be held to be personally liable solely by reason of his or
her being or having been a Shareholder and not because of his or
her acts or omissions or for some other reason, the Shareholder
or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or, in the case of
a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and
indemnified against all loss and expense arising from such
liability, but only out of the assets of the particular series of
shares of which he or she is or was a Shareholder.
ARTICLE IX
MISCELLANEOUS
Trustees, Shareholders, etc. Not Personally Liable; Notice
Section 1. All persons extending credit to, contracting
with or having any claim against the Trust or a particular series
of Shares shall look only to the assets of the Trust or the
assets of that particular series of Shares for payment under such
credit, contract or claim; and neither the Shareholders nor the
Trustees, nor any of the Trust's officers, employees or agents,
whether past, present or future, shall be personally liable
therefor. Nothing in this Declaration of Trust shall protect any
Trustee against any liability to which such Trustee would
otherwise be subject by reason of wilful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or
undertaking made or issued by the Trustees or by any officers or
officer shall give notice that this Declaration of Trust is on
file with the Secretary of State of The Commonwealth of
Massachusetts and shall recite that the same was executed or made
by or on behalf of the Trust or by them as Trustees or Trustee or
as officers or officer and not individually and that the
obligations of such instrument are not binding upon any of them
or the Shareholders individually but are binding only upon the
assets and property of the Trust, and may contain such further
recital as he or she or they may deem appropriate, but the
omission thereof shall not operate to bind any Trustees or
Trustee or officers or officer or Shareholders or Shareholder
individually.
Trustee's Good Faith Action, Expert Advice, No Bond or Surety
Section 2. The exercise by the Trustees of their powers
and discretions hereunder shall be binding upon everyone
interested. A Trustee shall be liable for his or her own wilful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment
or mistakes of fact or law. The Trustees may take advice of
counsel or other experts with respect to the meaning and
operation of this Declaration of Trust, and shall be under no
liability for any act or omission in accordance with such advice
or for failing to follow such advice. The Trustees shall not be
required to give any bond as such, nor any surety if a bond is
required.
Liability of Third Persons Dealing with Trustees
Section 3. No person dealing with the Trustees shall be
bound to make any inquiry concerning the validity of any
transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the
Trust or upon its order.
Duration and Termination of Trust
Section 4. Unless terminated as provided herein, the
Trust shall continue without limitation of time. The Trust may
be terminated at any time by vote of Shareholders holding at
least two-thirds of the Shares of each series entitled to vote or
by the Trustees by written notice to the Shareholders. Any
series of Shares may be terminated at any time by vote of
Shareholders holding at least two-thirds of the Shares of such
series entitled to vote or by the Trustees by written notice to
the Shareholders of such series.
Upon termination of the Trust or of any one or more series
of Shares, after paying or otherwise providing for all charges,
taxes, expenses and liabilities, whether due or accrued or
anticipated as may be determined by the Trustees, the Trust shall
in accordance with such procedures as the Trustees consider
appropriate reduce the remaining assets to distributable form in
cash or shares or other securities, or any combination thereof,
and distribute the proceeds to the Shareholders of the series
involved, ratably according to the number of Shares of such
series held by the several Shareholders of such series on the
date of termination, except to the extent otherwise required or
permitted by the preferences and special or relative rights and
privileges of any classes of Shares of that series, provided that
any distribution to the Shareholders of a particular class of
Shares shall be made to such Shareholders pro rata in proportion
to the number of Shares of such class held by each of them.
Filing of Copies, References, Headings
Section 5. The original or a copy of this instrument and
of each amendment hereto shall be kept at the office of the Trust
where it may be inspected by any Shareholder. A copy of this
instrument and of each amendment hereto shall be filed by the
Trust with the Secretary of State of The Commonwealth of
Massachusetts and with the Clerk of the City of Boston, as well
as any other governmental office where such filing may from time
to time be required. Anyone dealing with the Trust may rely on a
certificate by an officer of the Trust as to whether or not any
such amendments have been made and as to any matters in
connection with the Trust hereunder; and, with the same effect as
if it were the original, may rely on a copy certified by an
officer of the Trust to be a copy of this instrument or of any
such amendments. In this instrument and in any such amendment,
references to this instrument, and all expressions such as
"herein," "hereof" and "hereunder," shall be deemed to refer to
this instrument as amended or affected by any such amendments.
Headings are placed herein for convenience of reference only and
shall not be taken as a part hereof or control or affect the
meaning, construction or effect of this instrument. This
instrument may be executed in any number of counterparts, each of
which shall be deemed an original.
Applicable Law
Section 6. This Declaration of Trust is made in The
Commonwealth of Massachusetts, and it is created under and is to
be governed by and construed and administered according to the
laws of said Commonwealth. The Trust shall be of the type
commonly called a Massachusetts business trust, and without
limiting the provisions hereof, the Trust may exercise all powers
which are ordinarily exercised by such a trust.
Amendments
Section 7. This Declaration of Trust may be amended at
any time by an instrument in writing signed by a majority of the
then Trustees when authorized so to do by a vote of Shareholders
holding a majority of the Shares entitled to vote, except that an
amendment which shall affect the holders of one or more series or
classes of Shares but not the holders of all outstanding series
and classes shall be authorized by vote of the Shareholders
holding a majority of the Shares entitled to vote of each series
and class affected and no vote of Shareholders of a series or
class not affected shall be required. Amendments having the
purpose of changing the name of the Trust or of supplying any
omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision contained
herein shall not require authorization by Shareholder vote.
IN WITNESS WHEREOF, the undersigned have hereunto set their
hands in the City of Boston, Massachusetts for themselves and
their assigns, as of this 15th day of November 1991.
/s/ OLIVER F. AMES
---------------
Oliver F. Ames
/s/ TOM BLEASDALE
-------------
Tom Bleasdale
/s/ LORA S. COLLINS
---------------
Lora S. Collins
/s/ J. CRAIG HUFF, JR.
------------------
J. Craig Huff, Jr.
/s/ WILLIAM D. IRELAND, JR.
-----------------------
William D. Ireland, Jr.
/s/ JOHN A. MCNEICE, JR.
--------------------
John A. MdNeice, Jr.
/s/ JAMES L. MOODY, JR.
-------------------
James L. Moody, Jr.
/s/ JOHN J. NEUHAUSER
-----------------
John J. Neuhauser
/s/ GEORGE L. SHINN
---------------
George L. Shinn
/s/ ROBERT L. SULLIVAN
------------------
Robert L. Sullivan
/s/ SINCLAIR WEEKS, JR.
-------------------
Sinclair Weeks, Jr.
THE COMMONWEALTH OF MASSACHUSETTS
Boston, ss. November 15, 1991
Then personally appeared the above-named Trustees and
acknowledged the foregoing instrument to be their free act and
deed, before me,
/s/ DIANE M. JOYCE
--------------
Diane M. Joyce
Notary Public
My commission expires: 3/2/95
(Notary's Seal)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
and Statements of Additional Information constituting parts of this
Post-Effective Amendment No. 28 to the registration statement on Form N-1A
(the "Registration Statement") of our reports dated October 11, 1996, relating
to the financial statements and financial highlights appearing in the
August 31, 1996 Annual Report to Shareholders of Colonial Government
Money Market Fund and Colonial U.S. Government Fund, each a series of Colonial
Trust II, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings
"The Fund's Financial History" in the Prospectuses and "Independent
Accountants" in the Statements of Additional Information.
PRICE WATERHOUSE LLP
- --------------------
Price Waterhouse LLP
Boston, Massachusetts
December 13, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF COLONIAL GOVERNMENT MONEY MARKET FUND, CLASS A YEAR END
AUG-31-1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS OF COLONIAL GOVERNMENT MONEY MARKET FUND, CLASS A YEAR END
AUG-31-1996
</LEGEND>
<CIK> 0000315665
<NAME> COLONIAL TRUST II
<SERIES>
<NUMBER> 1
<NAME> COLONIAL GOVERNMENT MONEY MARKET FUND, CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 192751
<INVESTMENTS-AT-VALUE> 192751
<RECEIVABLES> 4265
<ASSETS-OTHER> 12
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 197028
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 991
<TOTAL-LIABILITIES> 991
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 196037
<SHARES-COMMON-STOCK> 115031
<SHARES-COMMON-PRIOR> 83052
<ACCUMULATED-NII-CURRENT> 29
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 196037
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8415
<OTHER-INCOME> 0
<EXPENSES-NET> 1742
<NET-INVESTMENT-INCOME> 6673
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 6673
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4162
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 892066
<NUMBER-OF-SHARES-REDEEMED> 863413
<SHARES-REINVESTED> 3327
<NET-CHANGE-IN-ASSETS> 56885
<ACCUMULATED-NII-PRIOR> 36
<ACCUMULATED-GAINS-PRIOR> 13
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 461
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 87210
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.048
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.048
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF COLONIAL GOVERNMENT MONEY MARKET FUND, CLASS B YEAR END
AUG-31-1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS OF COLONIAL GOVERNMENT MONEY MARKET FUND, CLASS B YEAR END
AUG-31-1996
</LEGEND>
<CIK> 0000315665
<NAME> COLONIAL TRUST II
<SERIES>
<NUMBER> 1
<NAME> COLONIAL GOVERNMENT MONEY MARKET FUND, CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 192751
<INVESTMENTS-AT-VALUE> 192751
<RECEIVABLES> 4265
<ASSETS-OTHER> 12
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 197028
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 991
<TOTAL-LIABILITIES> 991
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 76543
<SHARES-COMMON-PRIOR> 55439
<ACCUMULATED-NII-CURRENT> 29
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 196037
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8415
<OTHER-INCOME> 0
<EXPENSES-NET> 1742
<NET-INVESTMENT-INCOME> 6673
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 6673
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2436
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 264792
<NUMBER-OF-SHARES-REDEEMED> 245533
<SHARES-REINVESTED> 1845
<NET-CHANGE-IN-ASSETS> 56885
<ACCUMULATED-NII-PRIOR> 36
<ACCUMULATED-GAINS-PRIOR> 13
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 461
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 64674
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.038
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.038
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF COLONIAL GOVERNMENT MONEY MARKET FUND, CLASS D YEAR END
AUG-31-1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS OF COLONIAL GOVERNMENT MONEY MARKET FUND, CLASS D YEAR END
AUG-31-1996
</LEGEND>
<CIK> 0000315665
<NAME> COLONIAL TRUST II
<SERIES>
<NUMBER> 1
<NAME> COLONIAL GOVERNMENT MONEY MARKET FUND, CLASS D
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 192751
<INVESTMENTS-AT-VALUE> 192751
<RECEIVABLES> 4265
<ASSETS-OTHER> 12
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 197028
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 991
<TOTAL-LIABILITIES> 991
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 196037
<SHARES-COMMON-STOCK> 4433
<SHARES-COMMON-PRIOR> 625
<ACCUMULATED-NII-CURRENT> 29
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 196037
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8415
<OTHER-INCOME> 0
<EXPENSES-NET> 1742
<NET-INVESTMENT-INCOME> 6673
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 6673
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 82
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9081
<NUMBER-OF-SHARES-REDEEMED> 5334
<SHARES-REINVESTED> 61
<NET-CHANGE-IN-ASSETS> 56885
<ACCUMULATED-NII-PRIOR> 36
<ACCUMULATED-GAINS-PRIOR> 13
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 461
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 2258
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.038
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.038
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF COLONIAL US GOVERNMENT FUND, CLASS A YEAR END AUG-31-1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OF COLONIAL
US GOVERNMENT FUND, CLASS A YEAR END AUG-31-1996
</LEGEND>
<CIK> 0000315665
<NAME> COLONIAL TRUST II
<SERIES>
<NUMBER> 2
<NAME> COLONIAL US GOVERNMENT FUND, CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 1633731
<INVESTMENTS-AT-VALUE> 1629478
<RECEIVABLES> 189109
<ASSETS-OTHER> 337
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 189446
<PAYABLE-FOR-SECURITIES> 315400
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11010
<TOTAL-LIABILITIES> 326410
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1633556
<SHARES-COMMON-STOCK> 144507
<SHARES-COMMON-PRIOR> 177573
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (5068)
<ACCUMULATED-NET-GAINS> (131721)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4253)
<NET-ASSETS> 1492514
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 124751
<OTHER-INCOME> 3988
<EXPENSES-NET> 23704
<NET-INVESTMENT-INCOME> 105035
<REALIZED-GAINS-CURRENT> (23368)
<APPREC-INCREASE-CURRENT> (23219)
<NET-CHANGE-FROM-OPS> 58448
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 65945
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 112816
<NUMBER-OF-SHARES-REDEEMED> 368789
<SHARES-REINVESTED> 34474
<NET-CHANGE-IN-ASSETS> (372732)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (658)
<OVERDIST-NET-GAINS-PRIOR> (116303)
<GROSS-ADVISORY-FEES> 9755
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 23704
<AVERAGE-NET-ASSETS> 1702576
<PER-SHARE-NAV-BEGIN> 6.55
<PER-SHARE-NII> 0.390
<PER-SHARE-GAIN-APPREC> (0.161)
<PER-SHARE-DIVIDEND> (0.409)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.37
<EXPENSE-RATIO> 1.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF COLONIAL US GOVERNMENT FUND, CLASS B YEAR END AUG-31-1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OF COLONIAL
US GOVERNMENT FUND, CLASS B YEAR END AUG-31-1996
</LEGEND>
<CIK> 0000315665
<NAME> COLONIAL TRUST II
<SERIES>
<NUMBER> 2
<NAME> COLONIAL US GOVERNMENT FUND, CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 1633731
<INVESTMENTS-AT-VALUE> 1629478
<RECEIVABLES> 189109
<ASSETS-OTHER> 337
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 189446
<PAYABLE-FOR-SECURITIES> 315400
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11010
<TOTAL-LIABILITIES> 326410
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1633556
<SHARES-COMMON-STOCK> 89671
<SHARES-COMMON-PRIOR> 106985
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (5068)
<ACCUMULATED-NET-GAINS> (131721)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4253)
<NET-ASSETS> 1492514
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 124751
<OTHER-INCOME> 3988
<EXPENSES-NET> 23704
<NET-INVESTMENT-INCOME> 105035
<REALIZED-GAINS-CURRENT> (23368)
<APPREC-INCREASE-CURRENT> (23219)
<NET-CHANGE-FROM-OPS> 58448
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 35573
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 28322
<NUMBER-OF-SHARES-REDEEMED> 161195
<SHARES-REINVESTED> 19710
<NET-CHANGE-IN-ASSETS> (372732)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (658)
<OVERDIST-NET-GAINS-PRIOR> (116303)
<GROSS-ADVISORY-FEES> 9755
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 23704
<AVERAGE-NET-ASSETS> 1702576
<PER-SHARE-NAV-BEGIN> 6.55
<PER-SHARE-NII> 0.341
<PER-SHARE-GAIN-APPREC> (0.161)
<PER-SHARE-DIVIDEND> (0.360)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.37
<EXPENSE-RATIO> 1.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
PERFORMANCE CALCULATION
COLONIAL GOVERNMENT MONEY MARKET FUND - CLASS A
Fiscal Year End: 8/31/96
<TABLE>
<CAPTION>
1 YEAR ENDED 8/31/96 5 YEARS ENDED 8/31/96 10 YEARS ENDED 8/31/96
<S> <C> <C> <C>
Initial Investment $1,000.00 $1,000.00 $1,000.00
Maximum Load 0.00% 0.00% 0.00%
Amount Invested $1,000.00 $1,000.00 $1,000.00
Initial NAV $1.00 $1.00 $1.00
Initial Shares 1000.000 1000.000 1000.000
Shares from Distribution 49.262 203.319 675.974
End of Period NAV $1.00 $1.00 $1.00
Total Return 4.93% 20.33% 67.60%
Average Annual
Total Return 4.93% 3.77% 5.30%
</TABLE>
PERFORMANCE CALCULATION
COLONIAL GOVERNMENT MONEY MARKET FUND - CLASS B
Fiscal Year End: 8/31/96
Inception Date: 6/8/92
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR ENDED 8/31/96 6/8/92 TO 8/31/96
Standard Non-Standard Standard Non-Standard
-------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Initial Inv. $1,000.00 $1,000.00 $1,000.00 $1,000.00
Amt. Invested $1,000.00 $1,000.00 $1,000.00 $1,000.00
Initial NAV $1.00 $1.00 $1.00 $1.00
Initial Shares 1000.000 1000.000 1000.000 1000.000
Shares From Dist. 38.629 38.629 119.434 119.434
End of Period NAV $1.00 $1.00 $1.00 $1.00
CDSC 5.00% 2.00%
Total Return -1.14% 3.86% 9.94% 11.94%
Average Annual
Total Return -1.14% 3.86% 2.26% 2.70%
</TABLE>
PERFORMANCE CALCULATION
COLONIAL GOVERNMENT MONEY MARKET FUND - CLASS D
Fiscal Year End: 8/31/96
Inception Date: 7/1/94
<TABLE>
<CAPTION>
FROM INCEPTION
1 YEAR ENDED 8/31/96 7/1/94 TO 8/31/96
Standard Non-Standard Standard Non-Standard
--------- -------------------------- --------------------
<S> <C> <C> <C> <C>
Initial Inv. $1,000.00 $1,000.00 $1,000.00 $1,000.00
Max. Load 1.00% 1.00%
Amt. Invested $990.00 $1,000.00 $990.00 $1,000.00
Initial NAV $1.00 $1.00 $1.00 $1.00
Initial Shares 990.000 1000.000 990.000 1000.000
Shares From Dist. 38.150 38.501 84.832 85.683
End of Period NAV $1.00 $1.00 $1.00 $1.00
CDSC 1.00%
Total Return 1.82% 3.85% 7.48% 8.57%
Average Annual 1.82% 3.85% 3.38% 3.86%
Total Return
</TABLE>
COLONIAL GOVERNMENT MONEY MARKET FUND - CLASS A
YIELD CALCULATION
7-DAY PERIOD ENDED 8/31/96
a = change in value of account during
period, exclusive of capital changes.......... 0.0008861
b = value of account at beginning of period....... 1.00
7 day yield.......................... 4.620%
2) 7 day effective yield = [1 + (a/b
7 day effective yield............... 4.727%
COLONIAL GOVERNMENT MONEY MARKET FUND - CLASS B
YIELD CALCULATION
7-DAY PERIOD ENDED 8/31/96
1) 7 day yield = (a/b)(365/7)
a = change in value of account during
period, exclusive of capital changes... 0.0007092
b = value of account at beginning of period 1.00
7 day yield................ 3.698%
2) 7 day effective yield = [1 + (a/b)^(365/7)] -1
7 day effective yield...... 3.766%
COLONIAL GOVERNMENT MONEY MARKET FUND - CLASS D
YIELD CALCULATION
7-DAY PERIOD ENDED 8/31/96
1) 7 day yield = (a/b)(365/7)
a = change in value of account during
period, exclusive of capital chan 0.0007139
b = value of account at beginning of 1.00
7 day yield............. 3.722%
2) 7 day effective yield = [1 + (a/b)^(365/7)] -1
7 day effective yield... 3.791%
PERFORMANCE CALCULATION
COLONIAL U.S.GOVERNMENT FUND - CLASS A
Fiscal Year End: 8/31/96
Inception Date: 10/13/87
<TABLE>
<CAPTION>
SINCE INCEPTION
1 Year Ended 8/31/96 5 Years Ended 8/31/96 10/13/87 TO 8/31/96
Standard Non-Standard Standard Non-Standard Standard Non-Standard
<S> <C> <C> <C> <C> <C> <C>
Initial Inv. $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00
Max. Load 4.75% 4.75% 4.75%
Amt. Invested $952.50 $1,000.00 $952.50 $1,000.00 $952.50 $1,000.00
Initial NAV $6.55 $6.55 $7.02 $7.02 $7.14 $7.14
Initial Shares 145.420 152.672 135.684 142.450 133.403 140.056
Shares From Dist. 9.359 9.826 57.306 60.163 145.280 152.528
End of Period NAV $6.37 $6.37 $6.37 $6.37 $6.37 $6.37
Total Return -1.41% 3.51% 22.93% 29.06% 77.52% 86.38%
Average Annual
Total Return -1.41% 3.51% 4.22% 5.24% 6.67% 7.25%
</TABLE>
PERFORMANCE CALCULATION
COLONIAL US GOVERNMENT FUND - CLASS B
Fiscal Year End: 8/31/96
Inception Date: 6/8/92
<TABLE>
<CAPTION>
Since Inception
1 Year Ended 8/31/96 6/8/92 TO 8/31/96
Standard Non-Standard Standard Non-Standard
<S> <C> <C> <C> <C>
Initial Inv. $1,000.00 $1,000.00 $1,000.00 $1,000.00
Amt. Invested $1,000.00 $1,000.00 $1,000.00 $1,000.00
Initial NAV $6.55 $6.55 $6.95 $6.95
Initial Shares 152.672 152.672 143.885 143.885
Shares From Dist. 8.619 8.619 41.380 41.380
End of Period NAV $6.37 $6.37 $6.37 $6.37
CDSC * 4.86% 1.83%
Total Return -2.12% 2.74% 16.18% 18.01%
Average Annual
Total Return -2.12% 2.74% 3.60% 3.99%
</TABLE>
* Due to the decrease in NAV from the beginning of the period, the CDSC
has been adjusted according to the prospectus.
COLONIAL U.S. GOVERNMENT FUND
FUND YIELD CALCULATION
(CALENDAR MONTH-END METHOD)
30-DAY BASE PERIOD ENDED 8/31/96
6
FUND YIELD = 2 ----- +1 -1
c-d
a = dividends and interest earned during
the month ........................... $9,113,863
b = expenses (exclusive of distribution fee)
accrued during the month............. 1,340,356
c = average dividend shares outstanding
during the month .....................236,264,591
d = class A maximum offering price per share
on the last day of the month ......... $6.69
CLASS A YIELD ......................... 5.97%
====
CLASS B YIELD ......................... 5.50%
====
