<PAGE>
December 27, 1996, Revised August 1, 1997 GF-D-0797
COLONIAL INTERMEDIATE U.S.
GOVERNMENT FUND
COLONIAL SHORT DURATION
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, including the
FDIC.
Please consult your full-service financial adviser to determine how investing in
these mutual funds may suit your unique needs, time horizon, and risk tolerance.
Each of the Colonial Intermediate U.S. Government Fund (Intermediate Fund) and
Colonial Short Duration U.S. Government Fund (Short Duration Fund) (each a Fund
and collectively, the Funds) is a diversified portfolio of Colonial Trust II
(Trust), an open-end management investment company. The Intermediate 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.
The Short Duration Fund seeks as high a level of current income as is consistent
with very low volatility by investing primarily in U.S. government securities
and maintaining a weighted average portfolio duration of 3 years or less. Each
Fund is managed by the Adviser, an investment adviser since 1931.
This Prospectus explains concisely what you should know before investing in the
Funds. Read it carefully and retain it for future reference. More detailed
information about the Funds is in the December 27, 1996 Statement of Additional
Information as revised April 30, 1997, 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.
Each 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 are subject to an annual distribution fee and
a declining contingent deferred sales charge on redemptions made within four
years after purchase for the Short Duration Fund and six years after purchase
for the Intermediate Fund; and Class C shares are offered at net asset value 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 2
The Funds' Financial History 4
The Funds' Investment Objectives 7
How the Funds Pursue Their Objectives
and Certain Risk Factors 7
How the Funds Measure Their Performance 9
How the Funds are Managed 9
How the Funds Value Their Shares 10
Distributions and Taxes 10
How to Buy Shares 11
How to Sell Shares 13
How to Exchange Shares 13
Telephone Transactions 14
12b-1 Plans 14
Organization and History 14
- --------------------------------------------------------------------------------
NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in each Fund. The
following tables summarize your maximum transaction costs and your annual
expenses for an investment in each Class of each Fund's shares. See "How the
Funds are Managed" and "12b-1 Plans" for more complete descriptions of the
Funds' various costs and expenses.
Shareholder Transaction Expenses (1)(2)
Intermediate Fund
Class A Class B Class C
Maximum Initial Sales Charge Imposed on
a Purchase (as a % of offering price)(3) 4.75% 0.00%(5) 0.00%(5)
Maximum Contingent Deferred Sales Charge
(as a % of offering price)(3) 1.00%(4) 5.00% 1.00%
Short Duration Fund
Class A Class B Class C
Maximum Initial Sales Charge Imposed on
a Purchase (as a % of offering price)(3) 3.25% 0.00%(5) 0.00%(5)
Maximum Contingent Deferred Sales Charge
(as a % of offering price)(3) 1.00%(4) 4.00% 1.00%
(1) For accounts less than $1,000 an annual fee of $10 may be deducted. See "How
to Buy Shares."
(2) Redemption proceeds exceeding $1,000 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 shares of the
Intermediate Fund, the 0.65% distribution fee applicable to Class B shares
of the Short Duration Fund, the 0.60% distribution fee applicable to the
Class C shares of the Intermediate Fund and the 0.15% distribution fee
applicable to Class C shares of the Short Duration Fund, long-term Class B
and Class C 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 each 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)
Intermediate Fund
Class A Class B Class C
Management fee 0.57% 0.57% 0.57%
12b-1 fees 0.25 1.00 0.85(7)
Other expenses 0.29 0.29 0.29
---- ---- ----
Total operating expenses(6) 1.11% 1.86% 1.71%
==== ==== =====
Short Duration Fund
Class A Class B Class C
Management fee (after fee waiver
or reimbursement) 0.00% 0.00% 0.00%
12b-1 fees 0.20 0.85 0.40
Other expenses (after fee waiver
or reimbursement) 0.30 0.30 0.30
---- ---- ----
Total operating expenses (after
fee waiver or reimbursement)(8) 0.50% 1.15% 0.70%
==== ==== ====
(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.
(7) The Distributor has voluntarily agreed to waive a portion of the Class C
share Rule 12b-1 distribution fee so that it will not exceed 0.60% annually.
The Distributor may terminate the fee waiver at any time without shareholder
approval. See "12b-1 Plans."
(8) The Adviser has voluntarily agreed to waive or bear certain Fund expenses
until further notice. Absent such agreement, the "Management fee" would
have been 0.55% for each Class, "Other expenses" would have been 1.23% for
each Class and "Total
2
<PAGE>
operating expenses" would have been 1.98% for Class A, 2.63% for Class B and
2.18% for Class C. See "How the Funds are Managed" for other fees paid to the
Adviser.
3
<PAGE>
Example
The following Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in each Class of shares of each 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:
Intermediate Fund
Period Class A Class B Class C
(8) (9) (8) (9)
1 year $ 58 $ 69 $ 19 27 17
3 years 81 88 58 54 54(13)
5 years 106 121 101 93 93
10 years 176 198(10) 198(10) 202 202
Short Duration Fund (11)
Class A Class B Class C
Period: (8) (9) (8) (9)
1 year $ 37 $ 12 $ 52 $ 7 17
3 years 48 37 57 22 22(12)
5 years 60 63 63 39 39
10 years 93 122(10) 122(10) 87 87
(8) Assumes no redemption.
(9) Assumes redemption at period end.
(10) Class B shares convert to Class A shares after approximately 8 years;
therefore, years 9 and 10 reflect Class A share expenses.
(11) Without voluntary fee reduction, the amounts in the Example would be $52,
$93, $136 and $256 for Class A shares for 1, 3, 5 and 10 years,
respectively; $27, $82, $140 and $281 for Class B shares assuming no
redemption for 1, 3, 5 and 10 years, respectively; $67, $102, $140 and $281
for Class B shares assuming redemptions at 1, 3, 5 and 10 years,
respectively; $22, $68, $117 and $251 for Class C shares assuming no
redemption for 1, 3, 5 and 10 years, and $32, $68, $117 and $251 for Class
C shares assuming redemptions at 1, 3 5 and 10 years, respectively. Class
B shares convert to Class A shares after approximately 8 years; therefore,
years 9 and 10 reflect Class A share expenses.
(12) Class C shares do not incur a contingent deferred sales charge on
redemptions made after one year.
4
<PAGE>
THE FUNDS' FINANCIAL HISTORY
The following financial highlights for a share outstanding throughout each
period have been audited by Price Waterhouse LLP, independent accountants. Their
unqualified report is included in each Fund's 1996 Annual Report and is
incorporated by reference into the Statement of Additional Information. The data
presented for the Short Duration Fund represent operations under objectives and
policies which changed effective December 27, 1996. No Class C shares were
outstanding for the Intermediate Fund during the periods shown.
<TABLE>
<CAPTION>
Intermediate Fund
----------------------------------------------------------------------------
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(a) 3.51% 2.74% 8.88% 8.07%
====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11%(b) 1.86%(b) 1.11% 1.86%
Net investment income 6.45%(b) 5.70%(b) 7.51% 6.76%
Portfolio turnover 123% 123% 140% 140%
Net assets at end of period (in millions) $921 $572 $1,164 $701
</TABLE>
<TABLE>
<CAPTION>
Intermediate Fund
----------------------------------------------------------------------------
Year ended August 31
----------------------------------------------------------------------------
1994 1993
Class A Class B Class A Class B
<S> <C> <C> <C> <C>
Net asset value - Beginning of period $6.880 $6.880 $6.980 $6.980
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.415 0.365 0.541 0.490
Net realized and unrealized gain (loss) (0.452) (0.452) (0.130) (0.130)
------ ------ ------ ------
Total from Investment Operations (0.037) (0.087) 0.411 0.360
------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.400) (0.352) (0.511) (0.460)
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)
------ ------ ------ ------
Net asset value - End of period $6.420 $ 6.420 $6.880 $6.880
====== ====== ====== ======
Total return(a) (0.53)% (1.28)% 6.15% 5.36%
====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11% 1.86% 1.10% 1.85%
Net investment income 8.14% 7.39% 7.85% 7.10%
Portfolio turnover 291% 291% 162% 162%
Net assets at end of period (in millions) $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.
<PAGE>
THE FUNDS' FINANCIAL HISTORY (CONT'D)
<TABLE>
<CAPTION>
Intermediate Fund
----------------------------------------------------------------------------------
Period ended
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 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)
In excess of net investment income
From capital paid in -- -- -- -- -- --
------ ------ ------ ------ ------ ------
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(a) 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)
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.
<PAGE>
THE FUNDS' FINANCIAL HISTORY (CONT'D)
<TABLE>
<CAPTION>
Short Duration Fund
-----------------------------------------------------------------------------------
Year ended
August 31
-----------------------------------------------------------------------------------
1996 1995
Class A Class B Class C Class A Class B Class C(d)
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $9.850 $9.850 $9.850 $9.670 $9.670 $9.550
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.568 0.504 0.549 0.514 0.451 0.334
Net realized and unrealized gain (loss) (0.032) (0.032) (0.032) 0.152 0.152 0.280
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.536 0.472 0.517 0.666 0.603 0.614
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.566) (0.502) (0.547) (0.486) (0.423) (0.314)
In excess of net investment income -- -- -- -- -- --
From net realized gains -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total Distributions Declared to Shareholders (0.566) (0.502) (0.547) (0.486) (0.423) (0.314)
------ ------ ------ ------ ------ ------
Net asset value - End of period $9.820 $9.820 $9.820 $9.850 $9.850 $9.850
====== ====== ====== ====== ====== ======
Total return(e)(f) 5.57% 4.89% 5.36% 7.08% 6.39% 6.50%(g)
====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50(h) 1.15%(h) 0.70%(h) 0.50% 1.15% 0.70%(i)
Net investment income 5.99(h) 5.34%(h) 5.79%(h) 5.50% 4.85% 5.30%(i)
Fees and expenses waived or borne by
the Adviser 1.48% 1.48% 1.48% 1.14% 1.14% 1.14%
Portfolio turnover 51% 51% 51% 36% 36% 36%
Net assets at end of period (000) $6,136 $4,004 $461 $9,934 $3,968 $385
- ------------------------------------------
(a) Net of fees and expenses waived or
borne by the Adviser which amounted to $0.136 $0.136 $0.136 $0.107 $0.107 $0.107
</TABLE>
<TABLE>
<CAPTION>
Short Duration Fund
------------------------------------------------------------------
Year ended Period ended
August 31 August 31
------------------------------------------------------------------
1994 1993
Class A Class B Class A(b) Class B(c)
<S> <C> <C> <C> <C>
Net asset value - Beginning of period $9.950 $9.950 $10.00 $9.940
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.473 0.409 0.434 0.237
Net realized and unrealized gain (loss) (0.356) (0.356) (0.061) (0.003)
------ ------ ------ ------
Total from Investment Operations 0.117 0.053 0.373 0.234
------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.397) (0.333) (0.406) (0.215)
In excess of net investment income -- -- (0.015) (0.008)
From net realized gains -- -- (0.002) (0.001)
------ ------ ------ ------
Total Distributions Declared to Shareholders (0.397) (0.333) (0.423) (0.224)
------ ------ ------ ------
Net asset value - End of period $9.670 $ 9.670 $9.950 $9.950
====== ====== ====== ======
Total return(e)(f) 1.20% 0.55% 3.82%(g) 2.38%(g)
====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50% 1.15% 0.50%(i) 1.15%(i)
Net investment income 4.84% 4.19% 4.70%(i) 4.05%(i)
Fees and expenses waived or borne by
the Adviser 1.16% 1.16% 1.68%(i) 1.68%(i)
Portfolio turnover 69% 69% 25%(i) 25%(i)
Net assets at end of period (000) $16,168 $4,176 $7,866 $1,675
- ------------------------------------------
(a) Net of fees and expenses waived or
borne by the Adviser which amounted to $0.114 $0.114 $0.155 $0.092
</TABLE>
(b) The Fund commenced investment operations on October 1, 1992. Class A per
share amounts reflect activity from that date.
(c) Class B shares were initially offered on February 1, 1993. Class B per
share amounts reflect activity from that date.
(d) Class C shares were initially offered on January 4, 1995. Class C per share
amounts reflect activity from that date.
(e) Total return at net asset value assuming all distributions reinvested and
no front-end sales charge or contingent deferred sales charge.
(f) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(g) Not annualized.
(h) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(i) Annualized.
Further performance information is contained in each Fund's Annual Report to
shareholders, which may be obtained without charge by calling 1-800-426-3750.
7
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES
The Intermediate 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.
The Short Duration Fund seeks as high a level of current income as is consistent
with very low volatility by investing primarily in U.S. government securities
and maintaining a weighted average portfolio duration of 3 years or less.
HOW THE FUNDS PURSUE THEIR OBJECTIVES AND CERTAIN RISK FACTORS
Each Fund invests primarily in U.S. government securities. U.S. government
securities in which a Fund may invest consist of (1) U.S. treasury obligations;
(2) obligations issued or guaranteed by the 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 issuing agency to borrow
under a line of credit with the U.S. treasury, (c) the discretionary power of
the U.S. government to purchase obligations of the agency or (d) the credit of
the agency. Agency securities include securities commonly referred to as
mortgage-backed securities, the principal and interest on which are paid from
principal and interest payments made on pools of mortgage loans. These include
securities commonly referred to as "pass-throughs," "collateralized mortgage
obligations" (CMOs), and "real estate mortgage investment conduits" (REMICs).
Each Fund may purchase U.S. government securities that pay fixed, floating or
adjustable interest rates, as well as zero coupon securities.
The Intermediate Fund invests primarily and the Short Duration Fund invests
exclusively in debt securities. Therefore, the value of an investment in each
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 each Fund's duration. Duration measures how
quickly the principal and interest of a bond is expected to be paid. Investment
managers use duration to predict how much a bond's value will fluctuate given a
change in interest rates. Generally, when interest rates change, the shorter the
duration, the less a bond's market value would be expected to change. The
Intermediate Fund generally maintains a duration of less than 7 1/2 years. The
Short Duration Fund generally maintains a duration of 3 years or less. Declines
in interest rates may mean that a Fund will pay lower income distributions.
Mortgage-Backed Securities. Mortgage-backed securities, including CMOs and
REMICs, evidence ownership in a pool of mortgage loans made by certain financial
institutions that may be insured or guaranteed by the U.S. government or its
agencies. CMOs are obligations issued by special-purpose trusts, secured by
mortgages. REMICs are entities that own mortgages and elect REMIC status under
the Internal Revenue Code. Both CMOs and REMICs issue one or more classes of
securities of which one (the Residual) is in the nature of equity. The Fund will
not invest in the Residual class. Principal on mortgage-backed securities, CMOs
or REMICs, may be prepaid if the underlying mortgages are prepaid. Prepayment
rates for mortgage-backed securities tend to increase as interest rates decline
(effectively shortening the security's maturity) and decrease as interest rates
rise (effectively lengthening the security's maturity). Because of the
prepayment feature, these securities may not increase in value as much as other
debt securities when interest rates fall. A 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
8
<PAGE>
change more dramatically because of changes in interest rates than similar
securities paying interest currently. Because zero coupon securities may not pay
interest, but the Fund nevertheless must accrue and distribute to investors the
income deemed to be earned on a current basis, the Fund may have to sell other
investments to raise the cash needed to make income 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. A dealer's failure
could deprive a Fund of advantageous yields. These contracts also involve the
risk that the value of the underlying security may change prior to settlement.
Each Fund currently will not purchase "when issued" securities more than 120
days prior to settlement. Each Fund will segregate with its custodian cash or
liquid securities equal in value to its obligations under the contract.
Mortgage Dollar Rolls. Each Fund may also engage in so-called "mortgage dollar
roll" transactions. In a mortgage dollar roll, a 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 a Fund of 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 a Fund from the transaction.
Financial Futures; Options. The Intermediate Fund may (1) buy or sell financial
futures contracts (futures) and (2) purchase and write call and put options on
futures and securities. The Fund will enter into such transactions for hedging
purposes or to adjust the Fund's duration. A futures contract obliges the seller
to deliver and the buyer to accept a financial 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. The
Intermediate Fund may not purchase or sell futures contracts or purchase related
options if immediately thereafter the sum of the amount of deposits for initial
margin or premiums on the existing futures and related options positions would
exceed 5% of the market value of the Fund's total assets.
Temporary/Defensive Investments. Temporarily available cash may be invested in
repurchase agreements. Some or all of each Fund's assets also may be invested in
such investments during periods of unusual market conditions.
Under a repurchase agreement, a 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 by each Fund's custodian and constitutes each 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, a
Fund may experience costs and delays in liquidating the 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 Intermediate Fund's net assets
or 15% of the Short Duration Fund's net assets will be invested in repurchase
agreements maturing in more than 7 days and other illiquid assets.
The Short Duration Fund may enter into reverse repurchase agreements, which are
contracts under which the Fund sells a security and agrees to buy it back at a
fixed price and
9
<PAGE>
time. The Fund will segregate with its custodian U.S. government securities
equal in value to the Fund's obligations under the reverse repurchase
agreements.
Borrowing of Money. Each Fund may borrow money from banks for temporary or
emergency purposes up to 10% of its net assets. However, a Fund will not
purchase additional portfolio securities while borrowings exceed 5% of net
assets.
Other. The Short Duration Fund intends to qualify as an eligible investment for
federal credit unions and national banks. The Fund will strictly limit its
investments and investment transactions to those that are legal for federal
credit unions under regulations adopted by the National Credit Union
Administration.
Each Fund may trade portfolio securities for short-term profits to take
advantage of price differentials. These trades involve transaction costs and are
limited by certain Internal Revenue Code requirements. High portfolio turnover
may result in higher transaction costs and higher levels of realized capital
gains.
Each Fund may not always achieve its investment objective. Each Fund's
investment objective and non-fundamental investment policies may be changed
without shareholder approval. Each Fund's fundamental investment policies listed
in the Statement of Additional Information cannot be changed without the
approval of a majority of such Fund's outstanding voting securities. Each Fund
will notify investors in connection with any material change in its investment
objective. If there is a change in a Fund's investment objective or investment
policies, shareholders should consider whether that 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 an investment objective or investment policies. Additional information
concerning certain of the securities and investment techniques described above
is contained in the Statement of Additional Information.
HOW THE FUNDS MEASURE THEIR 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% for the Intermediate
Fund or 3.25% for the Short Duration Fund on Class A shares and the contingent
deferred sales charge applicable to the time period quoted on Class B and Class
C shares. Other total returns differ from average annual total return only in
that they may relate to different time periods, may represent aggregate as
opposed to average annual total returns and may not reflect the initial or
contingent deferred sales charges.
Each Class's yield, which differs from total return because it does not consider
changes in net asset value, is calculated in accordance with the Securities and
Exchange Commission's formula. Each Class's distribution rate is calculated by
dividing the most recent month's distribution, annualized, 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 FUNDS ARE MANAGED
The Trustees formulate each Fund's general policies and oversee each Fund's
affairs as conducted by the Adviser.
Colonial Investment Services, Inc. (Distributor), a subsidiary of the Adviser,
serves as the distributor for each Fund's shares. Colonial Investors Service
Center, Inc. (Transfer Agent), an affiliate of the Adviser, serves as the
shareholder services and transfer agent for each 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
10
<PAGE>
is an underwriter of workers' compensation insurance and a property and casualty
insurer in the U.S.
The Adviser furnishes each 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 Short Duration Fund
did not pay the Adviser a management fee in fiscal year 1996 due to the fee
waiver in effect. The Intermediate Fund paid the Adviser 0.57% of its average
net assets in fiscal year 1996.
Leslie W. Finnemore, Vice President of the Adviser, has managed the Intermediate
Fund since its inception and various other Colonial taxable income funds since
1987.
Ann T. Peterson, Vice President of the Adviser, has managed or co-managed the
Short Duration Fund since 1993. Prior to 1993, she was a taxable bond analyst
with the Adviser. Ms. Finnemore has managed or co-managed the Fund since its
inception.
The Adviser also provides pricing and bookkeeping services to each Fund for a
monthly fee of $2,250 plus a percentage of each Fund's average net assets over
$50 million. The Transfer Agent provides transfer agency and shareholder
services to each 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 fee waiver or reimbursement 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 by such broker-dealers to the Adviser and its affiliates. In
recognition of the research and brokerage services provided, the Adviser may
cause a Fund to pay the selected broker-dealer a higher commission than would
have been charged by another broker-dealer not providing such services. Subject
to seeking best execution, the Adviser may consider sales of shares of a Fund
(and of certain other Colonial funds) in selecting broker-dealers for portfolio
security transactions.
HOW THE FUNDS VALUE THEIR 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 Funds are
valued as of the close (normally 4:00 p.m. Eastern time) of the New York Stock
Exchange (Exchange) each day the Exchange is open. Portfolio securities for
which market quotations are readily available are valued at current market
value. Short-term investments maturing in 60 days or less are valued at
amortized cost when the Adviser determines, pursuant to procedures adopted by
the Trustees, that such cost approximates current market value. All other
securities and assets are valued at their fair value following procedures
adopted by the Trustees.
DISTRIBUTIONS AND TAXES
Each Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code and to distribute to shareholders net income monthly and
any net realized gain at least annually. Each Fund generally declares
distributions daily and makes distributions monthly.
At times each Fund's distributions may exceed its actual investment returns for
the year, causing a portion of the distributions to be deemed a "return of
capital." A return of capital reduces the cost basis of an investor's share and
is similar to a partial redemption of the investment (on which a sales charge
may have been paid).
Each Fund reinvests distributions in additional shares of the same Class of that
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 that 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.
11
<PAGE>
Each 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 Funds are offered continuously. Orders received in good form prior
to the time at which the Funds value their shares (or placed with a financial
service firm before such time and transmitted by the financial service firm
before a 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 C shares and there are
some limitations on the issuance of Class A share certificates. The Funds may
refuse any purchase order for their shares. See the Statement of Additional
Information for more information.
Class A Shares. Class A shares of the Intermediate Fund 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 3.90% 3.50% 3.00%
$250,000 to less than $500,000 3.09% 2.50% 2.00%
$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%
Class A Shares. Class A shares of the Short Duration Fund 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 $100,000 3.36% 3.25% 3.00%
$100,000 to less than $250,000 2.56% 2.50% 2.25%
$250,000 to less than $500,000 2.04% 2.00% 1.75%
$500,000 to less than $1,000,000 1.52% 1.50% 1.25%
$1,000,000 or more 0.00% 0.00% 0.00%
On purchases of $1 million or more of each Fund, 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.
In determining the sales charge and commission applicable to a new purchase
under the above schedules, the amount of the current purchase is added to the
current value of shares previously purchased and still held by the investor. If
a purchase results in an account having a value from $1 million to $5 million,
then the shares purchased will be subject to a 1.00% contingent deferred sales
charge, payable to the Distributor, if redeemed within 18 months from the first
day of the month following the purchase. If the purchase results in an account
having a value in excess of $5 million, the contingent deferred sales charge
will not apply to the portion of the purchased shares comprising such excess
amount.
Class B Shares. Class B shares are offered at net asset value, without an
initial sales charge and, are subject to an annual distribution fee of 0.75% for
the Intermediate Fund or 0.65% for the Short Duration Fund for approximately
eight years (at which time they automatically convert to Class A shares not
bearing a distribution fee) and a declining contingent
12
<PAGE>
deferred sales charge if redeemed within six years after purchase for the
Intermediate Fund or within four years after purchase for the Short Duration
Fund. As shown below, the amount of the contingent deferred sales charge depends
on the number of years after purchase that the redemption occurs:
Intermediate Fund
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%
Short Duration Fund
Years Contingent Deferred
After Purchase Sales Charge
0-1 4.00%
1-2 3.00%
2-3 2.00%
3-4 1.00%
More than 4 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% for the Intermediate Fund or 3.00% for the Short Duration Fund on Class B
share purchases.
Class C Shares. Class C shares are offered at net asset value and are subject to
a 0.75% annual distribution fee for the Intermediate Fund and a 0.15% annual
distribution fee for the Short Duration Fund, and a 1.00% contingent deferred
sales charge on redemptions made within one year after the end of the month in
which the purchase was accepted. The Distributor has voluntarily agreed to waive
a portion of the Intermediate Fund's distribution fee so that it will not exceed
0.60% annually. This waiver may be terminated by the Distributor at any time
without shareholder approval. The Distributor pays financial service firms an
initial commission of 1.00% on Class C share purchases and an ongoing commission
of 0.55% for the Intermediate Fund and 0.10% for the Short Duration Fund
annually commencing after the shares have been outstanding for one year. Payment
of the ongoing commission is conditioned on receipt by the Distributor of the
distribution fees referred to above. The commission may be reduced or eliminated
if the distribution fee paid by the Fund is reduced or eliminated for any
reason.
General. All contingent deferred sales charges are deducted from the 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 charge, if any) in the account
reduced by prior redemptions on which a contingent deferred sales charge was
paid and any exempt redemptions). When a redemption subject to a contingent
deferred sales charge is made, generally, older shares will be redeemed first
unless the shareholder instructs otherwise. 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 C shares. Purchases of $250,000 or
more must be for Class A or Class C shares. Purchases of $1,000,000 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
13
<PAGE>
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 Funds allow certain investors or groups of
investors to purchase shares with reduced or without initial or contingent
deferred sales charges. The programs are described in the Statement of
Additional Information under "Programs for Reducing or Eliminating Sales
Charges."
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.
A shareholder's manual explaining all available services will be provided upon
request.
In June of any year, a 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. A 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 Funds may be sold on any day the Exchange is open, either directly
to a 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, a 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 a 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 a 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, a Fund
may suspend repurchases or postpone payment for up to seven days or longer, as
permitted by federal securities law.
HOW TO EXCHANGE SHARES
Except as described below with respect to money market funds, a Fund's shares
may be exchanged at net asset value among shares of the same class of most
Colonial funds. Shares will continue to age without regard to the exchange for
purposes of conversion and in determining the contingent deferred sales charge,
if any, upon redemption. Carefully read the prospectus of the fund into which
the exchange will go before submitting the request. Call 1-800-426-3750 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
14
<PAGE>
changed, suspended or eliminated on 60 days' written notice. Each Fund will
terminate the exchange privilege as to a particular shareholder if the Adviser
determines, in its sole and absolute discretion, that the shareholder's exchange
activity is likely to adversely impact the Adviser's ability to manage a Fund's
investments in accordance with its investment objective or otherwise harm a Fund
or its remaining shareholders.
Class A Shares. An exchange from a money market fund into a non-money market
fund will be at the applicable offering price next determined (including sales
charge), except for amounts on which an initial sales charge was paid. Non-money
market fund shares must be held for five months before qualifying for exchange
to a fund with a higher sales charge, after which exchanges are made at the net
asset value next determined.
Class B Shares. Exchanges of Class B shares are not subject to the contingent
deferred sales charge. However, if shares are redeemed within six years after
the original purchase for the Intermediate Fund or four years after the original
purchase for the Short Duration Fund, a contingent deferred sales charge will be
assessed using the schedule of the fund into which the original investment was
made.
Class C Shares. Exchanges of Class C shares are not 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.
Only one "roundtrip" exchange of the Fund's Class C shares may be made per
three-month period, measured from the date of the initial purchase. For example,
an exchange from Fund A to Fund B and back to Fund A would be permitted only
once during each three-month period.
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisers are automatically eligible to
exchange each Fund's shares and redeem up to $50,000 of a Fund's shares by
calling 1-800-422-3737 toll-free any business day between 9:00 a.m. and the 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 or
fraudulent 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.
Shareholders and/or their financial advisers wishing to redeem or exchange
shares by telephone may experience difficulty in reaching a 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 each 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 their 12b-1 Plans, the Intermediate Fund pays the Distributor monthly a
service fee at an annual rate of 0.25% of net assets attributed to Class A,
Class B and Class C shares. The Short Duration Fund pays the Distributor monthly
a service fee at an annual rate of 0.20% of net assets attributed to Class A and
Class B shares and 0.25% of net assets attributed to Class C shares. Pursuant to
its respective Plan, each Fund also pays the Distributor monthly a distribution
fee at an annual rate of 0.75% applicable to the Intermediate Fund or 0.65%
applicable to the Short Duration Fund of average daily net assets attributed to
Class B shares. The Intermediate Fund pays the Distributor monthly a
distribution fee at an annual rate of 0.75% of average daily net assets
attributed to Class C shares and the Short Duration Fund pays the Distributor
monthly a distribution fee at an annual rate of 0.15% of average daily net
assets attributed to Class C shares. The Distributor has voluntarily agreed to
waive a portion of the Intermediate Fund's Class C distribution fee so that it
does
15
<PAGE>
not exceed 0.60% annually. The Distributor may terminate this waiver at any time
without shareholder approval. Because Class B and Class C 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. Class C shares do not
convert. The multiple class structure could be terminated should certain
Internal Revenue Service rulings be rescinded. See the Statement of Additional
Information for more information. The Distributor uses the fees to defray the
cost of commissions and service fees paid to financial service firms which have
sold a Fund's 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 each Fund's shares.
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized in 1980. Each 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.
16
<PAGE>
17
<PAGE>
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, Revised August 1, 1997
COLONIAL INTERMEDIATE U.S.
GOVERNMENT FUND
COLONIAL SHORT DURATION
U.S. GOVERNMENT FUND
PROSPECTUS
Colonial Intermediate U.S. Government 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.
Colonial Short Duration U.S. Government Fund seeks as high a level of current
income as is consistent with very low volatility by investing primarily in U.S.
government securities and maintaining a weighted average portfolio duration of 3
years or less.
For more information about each Fund, call the Adviser at 1-800-426-3750 for the
December 27, 1996 Statement of Additional Information as revised April 30, 1997.
- --------------------------------------------------------------------------------
NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
- --------------------------------------------------------------------------------
18
Colonial Mutual Funds
Please send your completed application to:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, Massachusetts 02105-1722
New A, B & C Shares 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
______________________________________
Account 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 C 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
________________ ___________________ _____________________
Name of Fund Name of Fund Name of Fund
$_______________ $__________________ $____________________
Amount Amount Amount
Class
___ A Shares ___ B Shares (less than $250,000) ___ C Shares (less than
$1,000,000, available on certain funds after July 1,
1997; see prospectus)
___ 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 (If none chosen, dividends and capital gains will be reinvested)
Distributions of $10.00 or less will automatically be reinvested in additional
fund shares.
___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 System.
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 sections 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 preceding business day if the 10th falls on a non-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 C 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 pptions
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 $500 will be sent via federal fund wire,
usually on the next business day ($7.50 will be deducted). Redemptions of
$500 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
____________________________________
Fund to invest shares in
$_________________________
Amount to invest monthly
____________________________________
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 on a regular basis. The On-
Demand EFT Purchase program moves money from your bank checking account to
your Colonial fund account by electronic funds transfer based on your
telephone request. 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." (Deposit slips are not a substitution). Also, complete the
section below. Please allow 3 weeks for Colonial to establish these services
with your bank.
____________________________________
Fund name
_________________________________
Account number
$_____________________ _________________
Amount to transfer Month to start
___________________________________
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. (Deposit slips
are not a substitution). 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 account numbers or tax I.D. numbers of 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-823D-0697 (6/97)
[Colonial Flag Logo]
Colonial
Mutual Funds
Checkwriting Signature Card
(Class A Shares Only)
Signature Card for the Bank of Boston ("Bank").
- -----------------------------------------------
Name of Fund
- -----------------------------------------------
Fund account number
Indicate the number of signatures required
- -----------------------------------------------
Account Name:
You must sign below exactly as your account is registered.
X
- -----------------------------------------------
Signature
X
- -----------------------------------------------
Signature
By signing this card, you are subject to the conditions printed on the reverse
side. If adding this privilege to an existing account, your signatures must be
guaranteed.
Checkwriting Privilege
By electing the checkwriting privilege and signing the signature card, I
acknowledge that I am subject to the rules and regulations of the Bank of
Boston ("Bank") as currently existing and as they may be amended from time
to time. I designate the Bank as my representative to present checks drawn
on my Fund account to the Fund or its Agent and deposit the proceeds in this
checking account. I understand that the shares for which share certificates
have been issued or requested cannot be redeemed in this manner.
If the account is registered in joint tenancy, all persons must sign this card,
and each person guarantees the genuineness of all other parties' signatures. I
understand that if only one person signs a check, that all other tenants have
authorized that signature.
Minimum and Maximum
I understand that checks may not be in amounts less than $500 nor more than
$100,000, and that the Fund reserves the right to change these limits in its
sole discretion. I agree that neither the Fund nor its Agent is responsible
for any loss, expense, or cost arising from these redemptions. Also, if I have
recently made additional investments, I understand that redemption proceeds
will not be available until the check used to purchase the investment
(including a certified or cashier's check) has been cleared by the bank on
which it is drawn, which could take up to 15 days or more.
D-999D-0797
<PAGE>
COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND
COLONIAL SHORT DURATION U.S. GOVERNMENT FUND
Supplement to Statement of Additional Information
dated December 27, 1996, Revised April 30, 1997
The first and fourth paragraphs under the sub-caption 12b-1 Plans, CDSC and
Conversion of Shares are revised in their entirety, as follows:
Each Fund offers three classes of shares - Classes A, B and C. The Funds may in
the future offer other classes of shares. The Trustees have approved a 12b-1
plan (Plan) for each Fund pursuant to Rule 12b-1 under the Act. Under the
respective Plans, the Intermediate Fund pays CISI monthly a service fee at an
annual rate of 0.25% of the net assets of its Class A, Class B and Class C
shares and a distribution fee at the annual rate of 0.75% of average daily net
assets of its Class B and Class C shares. The Distributor has voluntarily agreed
to waive a portion of the Class C share distribution fee so that it does not
exceed 0.60% annually. The Distributor may terminate this waiver at any time
without shareholder approval. The Short Duration Fund pays CISI monthly a
service fee at the annual rate of 0.20%, 0.20%, and 0.25% of the net assets of
its Class A, Class B and Class C shares, respectively. The Short Duration Fund
also pays CISI monthly a distribution fee at the annual rate of 0.65% and 0.15%
of the average daily net assets of its Class B and Class C shares, respectively.
CISI may use the entire amount of such fees to defray the costs 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.
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 four years after purchase for the Short Duration Fund or
six years after purchase for the Intermediate Fund. Class C shares are offered
at net asset value and are subject to a 1.00% CDSC on redemptions made within
one year after purchase. The CDSCs are described in the Prospectus.
GF-16/972D-0897 August 1, 1997
<PAGE>
