May 31, 1996
COLONIAL CALIFORNIA
TAX-EXEMPT FUND
COLONIAL CONNECTICUT
TAX-EXEMPT FUND
COLONIAL FLORIDA
TAX-EXEMPT FUND
COLONIAL MASSACHUSETTS
TAX-EXEMPT FUND
COLONIAL MICHIGAN
TAX-EXEMPT FUND
COLONIAL MINNESOTA
TAX-EXEMPT FUND
COLONIAL NEW YORK
TAX-EXEMPT FUND
COLONIAL NORTH CAROLINA
TAX-EXEMPT FUND
COLONIAL OHIO
TAX-EXEMPT 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
one of these mutual funds may suit your unique needs, time horizon and risk
tolerance.
Each of Colonial California Tax-Exempt Fund, Colonial Connecticut Tax-Exempt
Fund, Colonial Florida Tax-Exempt Fund, Colonial Massachusetts Tax-Exempt Fund,
Colonial Michigan Tax-Exempt Fund, Colonial Minnesota Tax-Exempt Fund, Colonial
New York Tax-Exempt Fund, Colonial North Carolina Tax-Exempt Fund and Colonial
Ohio Tax-Exempt Fund is a portfolio of Colonial Trust V (Trust), an open-end
management investment company. Each Fund seeks as high a level of after-tax
total return as is consistent with prudent risk, by pursuing current income
exempt from federal and its state's personal income tax (if any) and
opportunities for long-term appreciation from a portfolio primarily
invested in investment grade municipal bonds. The Florida and Michigan Funds'
shares are intended to be exempt from their respective states' intangibles tax.
Each Fund (except the California Fund) is non-diversified. The Funds are 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 each Fund is in the May 31, 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 1-800-248-2828. 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 two 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 a distribution fee
and a declining contingent deferred sales charge on redemptions made within six
years after purchase. Class B shares automatically convert to Class A shares
after approximately eight years. See "How to Buy Shares."
Contents Page
Summary of Expenses 2
The Funds' Financial History 5
The Funds' Investment Objective 15
How the Funds Pursue Their Objective
and Certain Risk Factors 15
How the Funds Measure Their Performance 19
How the Funds are Managed 19
How the Funds Value Their Shares 20
Distributions and Taxes 20
How to Buy Shares 20
How to Sell Shares 21
How to Exchange Shares 22
Telephone Transactions 22
12b-1 Plans 22
Organization and History 22
Appendix 23
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.
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in a 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.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses(1)(2)
Class A Class B
<S> <C> <C>
Maximum Initial Sales Charge Imposed on a Purchase (as a % of offering price)(3) 4.75% 0.00%(5)
Maximum Contingent Deferred Sales Charge (as a % of offering price)(3) 1.00%(4) 5.00%
</TABLE>
(1) For accounts less than $1,000 an annual fee of $10 may be deducted. See
"How to Sell Shares."
(2) Redemption proceeds exceeding $5,000 sent via federal funds wire will be
subject to a $7.50 charge per transaction.
(3) Does not apply to reinvested distributions.
(4) Only with respect to any portion of purchases of $1 million to $5
million redeemed within approximately 18 months after purchase. See "How
to Buy Shares."
(5) Because of the 0.75% distribution fee applicable to Class B shares,
long-term Class B 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 Funds'
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)(6)
<TABLE>
<CAPTION>
California Connecticut Florida Massachusetts Michigan
Class A Class B 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> <C> <C>
Management fee
(after waiver) 0.52% 0.52% 0.19% 0.19% 0.08% 0.08% 0.51% 0.51% 0.37% 0.37%
12b-1 fees(7) 0.13 0.88 0.14 0.89 0.16 0.91 0.14 0.89 0.13 0.88
Other expenses
(after waiver) 0.24 0.24 0.26 0.26 0.32 0.32 0.24 0.24 0.38 0.38
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total operating
expenses (8) 0.89% 1.64% 0.59% 1.34% 0.56% 1.31% 0.89% 1.64% 0.88% 1.63%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Minnesota New York North Carolina Ohio
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>
Management fee
(after waiver) 0.33% 0.33% 0.21% 0.21% 0.00% 0.00% 0.45% 0.45%
12b-1 fees(7) 0.15 0.90 0.15 0.90 0.14 0.89 0.13 0.88
Other expenses
(after waiver) 0.42 0.42 0.29 0.29 0.30 0.30 0.30 0.30
---- ---- ---- ---- ---- ---- ---- ----
Total operating
expenses(8) 0.90% 1.65% 0.65% 1.40% 0.44% 1.19% 0.88% 1.63%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Without voluntary fee waivers/expense limits that the Adviser may discontinue at
anytime, Annual Operating Expenses would be:
<TABLE>
<CAPTION>
Connecticut Florida Massachusetts Michigan
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>
Management fee 0.52% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52%
12b-1 fees(7) 0.14 0.89 0.16 0.91 0.14 0.89 0.13 0.88
Other expenses 0.26 0.26 0.32 0.32 0.24 0.24 0.38 0.38
---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses 0.92% 1.67% 1.00% 1.75% 0.90% 1.65% 1.03% 1.78%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Minnesota New York North Carolina Ohio
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>
Management fee 0.52% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52%
12b-1 fees(7) 0.15 0.90 0.15 0.90 0.14 0.89 0.13 0.88
Other expenses 0.42 0.42 0.29 0.29 0.42 0.42 0.30 0.30
---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses 1.09% 1.84% 0.96% 1.71% 1.08% 1.83% 0.95% 1.70%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<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 the Example should
not be considered indicative of actual or expected Fund performance or expenses,
both of which will vary.
<TABLE>
<CAPTION>
California Connecticut Florida
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period: (9) (9) (9)
1 year $ 56 $ 67 $ 17 $53 $ 64 $ 14 $53 $ 63 $ 13
3 years 75 82 52 66 72 42 65 72 42
5 years 94 109 89 79 93 73 77 92 72
10 years 152 174(10) 174(10) 118 141(10) 141(10) 114 137(10) 137(10)
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Michigan Minnesota
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period: (9) (9) (9)
1 year $ 56 $ 67 $ 17 $ 56 $ 67 $ 17 $ 56 $ 67 $ 17
3 years 75 82 52 74 81 51 75 82 52
5 years 94 109 89 94 109 89 95 110 90
10 years 152 174(10) 174(10) 151 173(10) 173(10) 153 175(10) 175(10)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
New York North Carolina Ohio
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period: (9) (9) (9)
1 year $ 54 $ 64 $ 14 $ 52 $62 $12 $ 56 $ 67 $ 17
3 years 67 74 44 61 68 38 74 81 51
5 years 82 97 77 71 85 65 94 109 89
10 years 125 147(10) 147(10) 100 123(10) 123(10) 151 173(10) 173(10)
</TABLE>
Without voluntary fee waivers/expense limits that the Adviser may discontinue at
any time, the amounts in the Example would be:
<TABLE>
<CAPTION>
Connecticut Florida Massachusetts
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period: (9) (9) (9)
1 year $ 56 $ 67 $ 17 $ 57 $ 68 $ 18 $ 56 $ 67 $ 17
3 years 75 83 53 78 85 55 75 82 52
5 years 96 111 91 100 115 95 95 110 90
10 years 155 178(10) 178(10) 164 186(10) 186(10) 153 176(10) 176(10)
</TABLE>
<TABLE>
<CAPTION>
Michigan Minnesota New York
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period: (9) (9) (9)
1 year $ 58 $ 68 $ 18 $ 58 $ 69 $ 19 $ 57 $ 67 $ 17
3 years 79 86 56 81 88 58 77 84 54
5 years 102 117 97 105 120 100 98 113 93
10 years 168 190(10) 190(10) 174 196(10) 196(10) 159 182(10) 182(10)
</TABLE>
<TABLE>
<CAPTION>
North Carolina Ohio
Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Period: (9) (9)
1 year $ 58 $ 69 $ 19 $ 57 $ 67 $ 17
3 years. 80 87 57 76 83 53
5 years 104 119 99 97 112 92
10 years 173 195(10) 195(10) 158 181(10) 181(10)
</TABLE>
<PAGE>
(6) Amounts shown (before voluntary fee waivers/expense limits by the
Adviser) are based on expenses during the fiscal year ended January 31,
1996, except that Management fees (before waiver) reflect a fee
reduction that took effect January 1, 1996.
(7) The 12b-1 fee rate will fluctuate but will not exceed 0.25%.
(8) Effective August 1, 1995, the Adviser agreed to waive its fees and bear
expenses (exclusive of 12b-1 fees, brokerage commissions, interest,
taxes and extraordinary expenses, if any) to the extent such expenses
would otherwise exceed the following annual percentages of average net
assets:
<TABLE>
<CAPTION>
Massachusetts
Michigan
Minnesota
California Connecticut Florida Ohio New York North Carolina
<S> <C> <C> <C> <C> <C> <C>
0.80% 0.45% 0.40% 0.75% 0.50% 0.30%
(9) Assumes no redemption at period end.
(10) Class B shares automatically convert to Class A shares after
approximately 8 years; therefore years 9 and 10 reflect Class A share
expenses.
</TABLE>
<PAGE>
THE FUNDS' FINANCIAL HISTORY
The following schedules of financial highlights for a share outstanding
throughout each period have been audited by Price Waterhouse LLP, independent
accountants. Their unqualified reports are included in the Funds' 1996 Annual
Reports, and are incorporated by reference into the Statement of Additional
Information.
<TABLE>
<CAPTION>
CALIFORNIA
----------------------------------------------------------------------------
Year ended January 31
---------------------------------------------------------------------------
1996 1995
---- ----
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value - Beginning of period $6.870 $6.870 $7.660 $7.660
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.388 0.334 0.413 0.360
Net realized and unrealized gain (loss) 0.671 0.671 (0.791) (0.791)
------ ------ ------- -------
Total from Investment Operations 1.059 1.005 (0.378) (0.431)
------ ------ ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.389) (0.335) (0.412) (0.359)
------- ------- ------- -------
Net asset value - End of period $7.540 $7.540 $6.870 $6.870
======= ======= ======= =======
Total return(c)(d) 15.78% 14.94% (4.83)% (5.55)%
====== ====== ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.89%(f) 1.64%(f) 0.77% 1.52%
Net investment income 5.33%(f) 4.58%(f) 5.91% 5.16%
Fees and expenses waived or borne
by the Adviser 0.01% 0.01% 0.06% 0.06%
Portfolio turnover 47% 47% 47% 47%
Net assets at end of period (000) $304,581 $106,925 $301,912 $98,975
- -----------------------------------------------
(a) Net of fees and expenses waived or
borne by the Adviser which amounted to $0.001 $0.001 $0.004 $0.004
(b) The Fund changed its fiscal year end from November 30 to January 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>
<TABLE>
<CAPTION>
CALIFORNIA (continued)
-------------------------------------------------------------------------------------
Two months ended
January 31
------------------------------------------------------------------------------------
1994 1993(b)
---- -------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value - Beginning of period $7.350 $7.350 $7.270 $7.270
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.434 0.378 0.076 0.067
Net realized and unrealized gain (loss) 0.315 0.315 0.081 0.081
------ ------ ------ -----
Total from Investment Operations 0.749 0.693 0.157 0.148
------ ------ ------ -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.439) (0.383) (0.077) (0.068)
------- ------- ------- -------
Net asset value - End of period $7.660 $7.660 $7.350 $7.350
======= ======= ======= ======
Total return(c)(d) 10.44% 9.63% 8.70%(e) 1.01%(e)
====== ===== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.75% 1.50% 0.65%(g) 1.40%(g)
Net investment income 5.73% 4.98% 6.29%(g) 5.54%(g)
Fees and expenses waived or borne
by the Adviser 0.08% 0.08% 0.21%(g) 0.21%(g)
Portfolio turnover 17% 17% 19%(g) 19%(g)
Net assets at end of period (000) $379,987 $104,578 $337,409 $33,819
- ------- ----------------------------------------
(a) Net of fees and expenses waived or
borne by the Adviser which amounted to $0.006 $0.006 $0.002 $0.002
(b) The Fund changed its fiscal year end from November 30 to January 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>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA (CONTINUED)
-----------------------------------------------------------------------------------
Year November 30
-------------------------------------------------------------------------------
1992 1991 1990 1989 1988
---- ---- ---- ---- ----
Class A Class B(c) Class A Class A Class A Class A
-------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $7.150 $7.410 $6.940 $7.010 $6.850 $6.530
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.467 0.143 0.473 0.490 0.480 0.497
Net realized and unrealized gain (loss) 0.109 (0.151) 0.211 (0.065) 0.160 0.316
------ ------- ------ ------- ------ ------
Total from Investment Operations 0.576 (0.008) 0.684 0.425 0.640 0.813
------ ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.456) (0.132) (0.474) (0.492) (0.480) (0.493)
From net realized gains --- --- --- --- ---
From capital paid in (d) --- ---- --- (0.003) --- ---
--- ---- --- ------- --- ---
Total Distributions Declared to Shareholders (0.456) (0.132) (0.474) (0.495) (0.480) (0.493)
------- ------- ------- ------- ------- -------
Net asset value - End of period $7.270 $7.270 $7.150 $6.940 $7.010 $6.850
======= ======= ======= ======= ======= =======
Total return (e) (f) 8.27% 1.94%(g) 10.18% 6.30% 9.61% 12.74%
===== ===== ====== ===== ===== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.71% 1.46%(h) 0.80% 0.70% 0.95% 0.66%
Net investment income 6.44% 5.69%(h) 6.69% 7.02% 6.87% 7.28%
Fees and expenses waived or borne
by the Adviser 0.13% 0.13%(h) 0.05% 0.15% 0.15% 0.49%
Portfolio turnover 12% 12% 11% 22% 40% 106%
Net assets at end of period (000) $324,012 $22,797 $295,459 $221,519 $155,514 $133,317
- ------- ------------------------------------------
(a) Net of fees and expenses waived or borne
by the Adviser which amounted to $0.010 $0.010 $0.003 $0.010 $0.011 $0.033
(b) The Fund commenced investment operations on June 16, 1986.
(c) Class B shares were initially offered on August 4, 1992. Per share
amounts reflect activity from that date.
(d) Because of differences between book and tax basis accounting there was
no return of capital for federal income tax purposes.
(e) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(f) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(g) Not annualized.
(h) Annualized.
</TABLE>
--------------------------------
--------------------------------
CALIFORNIA (CONTINUED)
-------------------------------
Period ended
November 30
-------------------------------
1987 1986(b)
---- -------
Class A Class A
-------- -------
Net asset value - Beginning of period $7.490 $7.140
------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.515 0.237
Net realized and unrealized gain (loss) (0.950) 0.351
------- -----
Total from Investment Operations (0.435) 0.588
------- -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.514) (0.238)
From net realized gains (0.002) ---
From capital paid in (d) (0.009) ---
------- -------
Total Distributions Declared to Shareholders (0.525) (0.238)
------- -------
Net asset value - End of period $6.530 $7.490
======= ======
Total return (e) (f) (6.02)% 8.35%(g)
======= ======
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.52% ---(h)
Net investment income 7.33% 6.99%(h)
Fees and expenses waived or borne
by the Adviser 0.63% 1.08%(h)
Portfolio turnover 94% 31%(h)
Net assets at end of period (000) $113,774 $57,777
- ------- ------------------------------------------
(a) Net of fees and expenses waived or borne
by the Adviser which amounted to $0.044 $0.014
(b) The Fund commenced investment operations on June 16, 1986.
(c) Class B shares were initially offered on August 4, 1992. Per share
amounts reflect activity from that date.
(d) Because of differences between book and tax basis accounting there was
no return of capital for federal income tax purposes.
(e) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(f) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(g) Not annualized.
(h) Annualized.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
CONNECTICUT
--------------------------------------------------------------------------------
Year ended January 31
--------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $7.080 $7.080 $7.890 $7.890 $7.420 $7.420
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.400 0.345 0.418 0.363 0.429 0.372
------
Net realized and unrealized gain (loss) 0.552 0.552 (0.809) (0.809) 0.465 0.465
------ ------ ------- ------- ------ ------
Total from Investment Operations 0.952 0.897 (0.391) (0.446) 0.894 0.837
------ ------ ------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.402) (0.347) (0.418) (0.363) (0.424) (0.367)
In excess of net investment income --- --- --- --- --- ---
From net realized gains --- --- (0.001) (0.001) --- ---
In excess of net realized gains --- --- --- --- --- ---
--- --- --- --- --- ---
Total from Distributions Declared to Shareholders (0.402) (0.347) (0.419) (0.364) (0.424) (0.367)
------- ------- ------- ------- ------- -------
Net asset value - End of period $7.630 $7.630 $7.080 $7.080 $7.890 $7.890
======= ======= ======= ======= ======= =======
Total return(d)(e) 13.77% 12.93% (4.85)% (5.57)% 12.30% 11.49%
====== ====== ======= ======= ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.51%(g) 1.25%(g) 0.32% 1.07% 0.22% 0.97%
Net investment income 5.42%(g) 4.68%(g) 5.81% 5.06% 5.48% 4.73%
Fees and expenses waived or borne by the Adviser 0.42% 0.42% 0.55% 0.55% 0.65% 0.65%
Portfolio turnover 13% 13% 22% 22% 5% 5%
Net assets at end of period (000) $80,039 $82,785 $74,616 $73,580 $91,436 $71,791
- ------- -------------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $0.031 $0.031 $0.039 $0.039 $0.051 $0.051
(b) Class B shares were initially offered on June 8, 1992. Per share
amounts reflect activity from that date.
(c) The Fund commenced investment operations on November 1, 1991.
(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) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(h) Annualized.
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONNECTICUT(continued)
--------------------------------------------------------------
Period ended
Year ended January 31 January 31
--------------------------------------------------------------
1993 1992
---- ----
Class A Class B(b) Class A (c)
------- ---------- -----------
<S> <C> <C> <C>
Net asset value - Beginning of period $7.190 $7.200 $7.140
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.449 0.256 0.118
Net realized and unrealized gain (loss) 0.270 0.257 0.046
------ ------ -----
Total from Investment Operations 0.719 0.513 0.164
------ ------ -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.452) (0.256) (0.114)
In excess of net investment income (0.021) (0.021) ---
From net realized gains (0.002) (0.002) ---
In excess of net realized gains (0.014) (0.014) ---
------- ------- ---
Total from Distributions Declared to Shareholders (0.489) (0.293) (0.114)
------- ------- -------
Net asset value - End of period $7.420 $7.420 $7.190
======= ======= ======
Total return(d)(e) 10.34% 7.23(f) 2.31%(f)
====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses --- 0.75%(h) --- (h)
Net investment income 6.00% 5.25%(h) 4.68%(h)
Fees and expenses waived or borne by the Adviser 0.90% 0.90% 1.32%(h)
Portfolio turnover 4% 4% 53%(h)
Net assets at end of period (000) $ $63,126 $27,839 $12,349
- ------- -------------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to
$0.067 $0.042 $0.033
(b) Class B shares were initially offered on June 8, 1992. Per share
amounts reflect activity from that date.
(c) The Fund commenced investment operations on November 1, 1991.
(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) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(h) Annualized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
FLORIDA
----------------------------------------------------------------------
Year ended January 31
----------------------------------------------------------------------
1996 1995
---- ----
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value - Beginning of period $7.100 $7.100 $7.930 $7.930
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.404 0.351 0.423 0.369
Net realized and unrealized gain (loss) 0.535 0.533 (0.839) (0.839)
------ ------ ------- -------
Total from Investment Operations 0.939 0.884 (0.416) (0.470)
------ ------ ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.419) (0.364) (0.414) (0.360)
------- ------- ------- -------
Net asset value - End of period $7.620 $7.620 $7.100 $7.100
======= ======= ======= =======
Total return(c)(d) 13.55% 12.72% (5.11)% (5.83)%
====== ====== ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.45%(e) 1.18%(e) 0.22% 0.97%
Net investment income 5.45%(e) 4.72%(e) 5.92% 5.17%
Fees and expenses waived or borne by the Adviser 0.55% 0.55% 0.73% 0.73%
Portfolio turnover 83% 83% 45% 45%
Net assets at end of period (000) $32,599 $35,741 $27,498 $31,116
- ------- ---------------------------------------------
(a) Net of fees and expenses waived or borne by
the Adviser which amounted to $0.040 $0.040 $0.052 $0.052
(b) The Fund commenced investment operations on February 1, 1993.
(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) The benefits derived from custodian credits and brokerage arrangements
had no impact. Prior years' ratios are net of benefits received, if
any.
</TABLE>
FLORIDA(continued)
---------------------------------
Year ended January 31
--------------------------------
1994(b)
-------
Class A Class B
------- -------
Net asset value - Beginning of period $7.500 $7.500
------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.434 0.378
Net realized and unrealized gain (loss) 0.420 0.420
------ -----
Total from Investment Operations 0.854 0.798
------ -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.424) (0.368)
------- -------
Net asset value - End of period $7.930 $7.930
======= ======
Total return(c)(d) 11.66% 10.85%
====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.05% 0.80%
Net investment income 5.40% 4.65%
Fees and expenses waived or borne by the Adviser 0.88% 0.88%
Portfolio turnover 19% 19%
Net assets at end of period (000) $23,802 $31,513
- ------- ---------------------------------------------
(a) Net of fees and expenses waived or borne by
the Adviser which amounted to $0.071 $0.071
(b) The Fund commenced investment operations on February 1, 1993.
(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) The benefits derived from custodian credits and brokerage arrangements
had no impact. Prior years' ratios are net of benefits received, if
any.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS
-------------------------------------------------------------------------------------------------
Year ended January 31
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Class A Class B Class A Class B Class A Class B Class A Class B (b)
------- ------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $7.390 $7.390 $8.130 $8.130 $7.700 $7.700 $7.420 $7.450
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.424 0.367 0.444 0.388 0.453 0.395 0.481 0.272
Net realized and unrealized gain (loss) 0.650 0.650 (0.738) (0.738) 0.439 0.439 0.301 0.275
------ ------ ------- ------- ------ ------ ------ ------
Total from Investment Operations 1.074 1.017 (0.294) (0.350) 0.892 0.834 0.782 0.547
------ ------ ------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.424) (0.367) (0.446) (0.390) (0.462) (0.404) (0.479) (0.274)
From net realized gains --- --- ---- --- --- --- (0.002) (0.002)
In excess of net realized gains --- --- ---- --- --- --- (0.021) (0.021)
--- --- ---- --- --- --- ------- -------
Total Distributions Declared to Shareholders (0.424) (0.367) (0.446) (0.390) (0.462) (0.404) (0.502) (0.297)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value - End of period $8.040 $8.040 $7.390 $7.390 $8.130 $8.130 $7.700 $7.700
======= ======= ======= ======= ======= ======= ======= =======
Total return(c)(d) 14.90% 14.05% (3.49)% (4.21)% 11.86% 11.05% 10.87% 1.11%(e)
====== ====== ======= ======= ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.85%(f) 1.60%(f) 0.72% 1.47% 0.64% 1.39% 0.54% 1.29%(g)
Net investment income 5.49%(f) 4.74%(f) 5.93% 5.18% 5.68% 4.93% 6.38% 5.63%(g)
Fees and expense waived
or borne by the Adviser 0.06% 0.06% 0.12% 0.12% 0.21% 0.21% 0.33% 0.33%
Portfolio turnover 21% 21% 58% 58% 7% 7% 7% 7%
Net assets at end of period (000) $207,759 $60,651 $193,303 $53,973 $225,636 $51,819 $186,526 $17,282
- -----------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $0.005 $0.005 $0.009 $0.009 $0.016 $0.016 $0.025 $0.016
(b) Class B shares were initially offered on June 8, 1992. 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 total 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.
(h) The Fund commenced investment operations on April 10, 1987.
</TABLE>
<TABLE>
<CAPTION>
MASSACHUSETTS(continued)
-------------------------------------------------------------------------------------------------
Year ended January 31 Period ended
January 31
-------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988(h)
---- ---- ---- ---- -------
Class A Class A Class A Class A Class A
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $7.120 $7.080 $7.190 $7.060 $7.140
------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.505 0.523 0.515 0.517 0.407
Net realized and unrealized gain (loss) 0.295 0.041 (0.107) 0.129 (0.085)
------ ------ ------- ------ -------
Total from Investment Operations 0.800 0.564 0.408 0.646 0.322
------ ------ ------ ------ -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.500) (0.524) (0.518) (0.516) (0.402)
From net realized gains --- --- --- --- ---
In excess of net realized gains --- --- --- --- ---
--- --- --- --- ---
Total Distributions Declared to Shareholders (0.500) (0.524) (0.518) (0.516) (0.402)
------- ------- ------- ------- -------
Net asset value - End of period $7.420 $7.120 $7.080 $7.190 $7.060
======= ======= ======= ======= ======
Total return(c)(d) 11.61% 8.31% 5.86% 9.55% 4.80%(e)
====== ===== ===== ===== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.46% 0.30% 0.45% 0.22% --- (g)
Net investment income 6.89% 7.34% 7.17% 7.30% 7.47%(g)
Fees and expense waived
or borne by the Adviser 0.43% 0.65% 0.89% 1.94% 2.90%(g)
Portfolio turnover 14% 30% 25% 44% 104%(g)
Net assets at end of period (000) $145,957 $85,301 $42,167 $21,987 $7,563
- -----------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to
$0.032 $0.046 $0.064 $0.137 $0.157
(b) Class B shares were initially offered on June 8, 1992. 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 total 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.
(h) The Fund commenced investment operations on April 10, 1987.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MICHIGAN
--------------------------------------------------------------------------------------------------
Year ended January 31
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Class A Class B Class A Class B Class A Class B Class A Class B(b)
------- ------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.660 $6.660 $7.340 $7.340 $6.970 $6.970 $6.730 $6.950
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.368 0.317 0.410 0.359 0.404 0.351 0.405 0.167
Net realized and unrealized gain (loss) 0.484 0.484 (0.689) (0.689) 0.356 0.356 0.250 0.029
------ ------ ------- ------- ------ ------ ------ ------
Total from Investment Operations 0.852 0.801 (0.279) (0.330) 0.760 0.707 0.655 0.196
------ ------ ------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.382) (0.331) (0.401) (0.350) (0.390) (0.337) (0.407) (0.168)
From capital paid in -- -- --- --- --- --- (0.008) (0.008)
-- -- --- --- --- --- ------- -------
Total Distributions Declared to Shareholders (0.382) (0.331) (0.401) (0.350) (0.390) (0.337) (0.415) (0.176)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value - End of period $7.130 $7.130 $6.660 $6.660 $7.340 $7.340 $6.970 $6.970
======= ======= ======= ======= ======= ======= ======= =======
Total return (c)(d) 13.13% 12.30% (3.66)% (4.39)% 11.16% 10.36% 10.04% 0.98%(e)
====== ====== ======= ======= ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80%(f) 1.55%(f) 0.62% 1.37% 0.66% 1.41% 0.88% 1.63%(g)
Net investment income 5.34%(f) 4.59%(f) 6.08% 5.33% 5.61% 4.86% 5.86% 5.11%(g)
Fees and expense waived
or borne by the Adviser 0.25% 0.25% 0.32% 0.32% 0.33% 0.33% 0.32% 0.32%
Portfolio turnover 48% 48% 40% 40% 7% 7% 14% 14%
Net assets at end of period (000) $43,308 $15,236 $41,844 $14,144 $45,570 $15,030 $36,024 $6,670
- -----------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $0.017 $0.017 $0.022 $0.022 $0.024 $0.024 $0.022 $0.009
(b) Class B shares were initially offered on August 4, 1992. 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.
(h) The Fund commenced investment operations on September 26, 1986.
(i) Because of differences between book and tax basis accounting, there was
no return of capital for federal income tax purposes.
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN(continued)
--------------------------------------------------------------------------------------------------
Period ended
Year ended January 31 January 31
--------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987(h)
---- ---- ---- ---- ---- -------
Class A Class A Class A Class A Class A Class A
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.520 $6.520 $6.690 $6.550 $7.260 $7.140
------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.432 0.441 0.422 0.438 0.495 0.170
Net realized and unrealized gain (loss) 0.208 (0.001) (0.168) 0.133 (0.709) 0.125
------ ------- ------- ------ ------- -----
Total from Investment Operations 0.640 0.440 0.254 0.571 (0.214) 0.295
------ ------ ------ ------ ------- -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.430) (0.440) (0.424) (0.431) (0.496)(i) (0.175)(i)
From capital paid in --- --- --- --- --- ---
--- --- --- --- --- ---
Total Distributions Declared to Shareholders (0.430) (0.440) (0.424) (0.431) (0.496) (0.175)
------- ------- ------- ------- ------- -------
Net asset value - End of period $6.730 $6.520 $6.520 $6.690 $6.550 $7.260
======= ======= ======= ======= ======= ======
Total return (c)(d) 10.12% 7.01% 3.90% 9.08% (2.68)% 4.18%(e)
====== ===== ===== ===== ======= ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.95% 1.00% 1.42% 1.29% 0.38% ---(g)
Net investment income 6.50% 6.79% 6.37% 6.73% 7.38% 6.19%(g)
Fees and expense waived
or borne by the Adviser 0.35% 0.40% 0.30% 0.51% 1.36% 1.93(g)
Portfolio turnover 5% 18% 16% 57% 58% 31%(g)
Net assets at end of period (000) $28,608 $24,273 $18,870 $20,112 $21,426 $9,679
- -----------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $0.023 $0.026 $0.020 $0.033 $0.089 $0.052
(b) Class B shares were initially offered on August 4, 1992. 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.
(h) The Fund commenced investment operations on September 26, 1986.
(i) Because of differences between book and tax basis accounting, there was no
return of capital for federal income tax purposes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MINNESOTA
---------------------------------------------------------------------------------------------------
Year ended January 31
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Class A Class B Class A Class B Class A Class B Class A Class B(b)
------- ------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.840 $6.840 $7.480 $7.480 $7.160 $7.160 $7.030 $7.210
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.384 0.332 0.415 0.363 0.419 0.364 0.449 0.191
Net realized and unrealized gain (loss) 0.516 0.516 (0.642) (0.642) 0.323 0.323 0.125 (0.049)
------ ------ ------- ------- ------ ------ ------ -------
Total from Investment Operations 0.900 0.848 (0.227) (0.279) 0.742 0.687 0.574 0.142
------ ------ ------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.390) (0.338) (0.413) (0.361) (0.422) (0.367) (0.444) (0.19)
------- -------
From net realized gains --- --- --- --- --- --- --- ---
From capital paid in (c) --- --- --- --- --- --- --- ---
--- --- --- --- --- --- --- ---
Total Distributions Declared to Shareholders (0.390) (0.338) (0.413) (0.361) (0.422) (0.367) (0.444) (0.192)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value - End of period $7.350 $7.350 $6.840 $6.840 $7.480 $7.480 $7.160 $7.160
======= ======= ======= ======= ======= ======= ======= ======
Total return (d)(e) 13.50% 12.66% (2.92)% (3.65)% 10.62% 9.81% 8.41% 2.01%(f)
====== ====== ======= ======= ====== ===== ===== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.85%(g) 1.60%(g) 0.72% 1.47% 0.82% 1.57% 0.85% 1.60%(h)
Net investment income 5.41%(g) 4.66%(g) 5.98% 5.23% 5.69% 4.94% 6.33% 5.58%(h)
Fees and expense waived
or borne by the Adviser 0.24% 0.24% 0.26% 0.26% 0.20% 0.20% 0.35% 0.35%
Portfolio turnover 42% 42% 26% 26% 9% 9% 5% 5%
Net assets at end of period (000) $36,586 $19,083 $35,846 $14,731 $41,326 $10,317 $35,017 $2,173
- -----------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $0.016 $0.016 $0.018 $0.018 $0.015 $0.015 $0.025 $0.009
(b) Class B shares were initially offered on August 4, 1992. Per share
amounts reflect activity from that date.
(c) Because of differences between book and tax basis accounting, there was
no 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) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(f) Not annualized.
(g) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(h) Annualized.
(i) The Fund commenced investment operations on September 26, 1986.
</TABLE>
<TABLE>
<CAPTION>
MINNESOTA
--------------------------------------------------------------------------------
Year ended January 31 Period ended
January 31
-------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987(i)
---- ---- ---- ---- ---- -------
Class A Class A Class A Class A Class A Class A
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.930 $6.820 $6.850 $6.820 $7.310 $7.140
------- ------- ------- ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.461 0.467 0.440 0.434 0.499 0.170
Net realized and unrealized gain (loss) 0.098 0.108 (0.032) 0.034 (0.490) 0.175
------ ------- ------ ----- ------- ------
Total from Investment Operations 0.559 0.575 0.408 0.468 0.009 0.345
------ ------ ------ ----- ------ -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.458)(0.465) (0.438) (0.438) (0.497) (0.175)
From net realized gains --- --- --- --- (0.002) ---
From capital paid in (c) (0.001) --- --- --- --- ---
------- --- --- --- --- ---
Total Distributions Declared to Shareholders (0.459) (0.465) (0.438) (0.438) (0.499) (0.175)
------- ------- ------- ------ ------- ------
Net asset value - End of period $7.030 $6.930 $6.820 $6.850 $6.820 $7.310
======= ======= ======= ===== ====== ======
Total return (d)(e) 8.33% 8.70% 6.11% 7.15% 0.47% 4.87%(f)
===== ===== ===== ===== ===== =====
RATIOS TO AVERAGE NET ASSETS
Expenses 0.88% 1.00% 1.41% 1.47% 0.55% --- (h)
Net investment income 6.58% 6.77% 6.40% 6.41% 7.22% 6.16%(h)
Fees and expense waived
or borne by the Adviser 0.42% 0.37% 0.28% 0.39% 1.36% 4.83%(h)
Portfolio turnover 1% 7% 13% 20% 43% 43%(h)
Net assets at end of period (000) $30,676 $24,188 $19,100 $19,721 $17,533 $5,765
- -----------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $0.029 $0.026 $0.019 $0.027 $0.094 $0.131
(b) Class B shares were initially offered on August 4, 1992. Per share
amounts reflect activity from that date.
(c) Because of differences between book and tax basis accounting, there was
no 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) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(f) Not annualized.
(g) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(h) Annualized.
(i) The Fund commenced investment operations on September 26, 1986.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NEW YORK
------------------------------------------------------------------------------------------------
Year ended January 31
------------------------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Class A Class B Class A Class B Class A Class B Class A Class B(b)
------- ------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.680 $6.680 $7.500 $7.500 $7.090 $7.090 $6.840 $7.130
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.401 0.349 0.427 0.376 0.421 0.368 0.438 0.182
Net realized and unrealized gain (loss) 0.576 0.576 (0.834) (0.834) 0.407 0.407 0.260 (0.029)
------ ------ ------- ------- ------ ------ ------ -------
Total from Investment Operations 0.977 0.925 (0.407) (0.458) 0.828 0.775 0.698 0.153
------ ------ ------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.407) (0.355) (0.413) (0.362) (0.418) (0.365) (0.445) (0.190)
In excess of net investment income --- --- --- --- --- --- (0.003) (0.003)
---- ---- ------ ------ ------ ------ ------- -------
Total Distributions Declared to Shareholders (0.407) (0.355) (0.413) (0.362) (0.418) (0.365) (0.448) (0.193)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value - End of period $7.250 $7.250 $6.680 $6.680 $7.500 $7.500 $7.090 $7.090
======= ======= ======= ======= ======= ======= ======= =======
Total return (c)(d) 14.99% 14.15% (5.32)% (6.04)% 11.95% 11.14% 10.50% 1.16%(e)
====== ====== ======= ======= ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.58%(f) 1.33(f) 0.42% 1.17% 0.62% 1.37% 0.96% 1.71%(g)
Net investment income 5.72%(f) 4.97%(f) 6.25% 5.50% 5.68% 4.93% 6.25% 5.50%(g)
Fees and expense waived
or borne by the Adviser 0.38% 0.38% 0.46% 0.46% 0.29% 0.29% 0.06% 0.06%
Portfolio turnover 39% 39% 65% 65% 25% 25% 7% 7%
Net assets at end of period (000) $56,795 $53,505 $53,322 $43,166 $63,527 $45,061 $53,779 $14,743
- -----------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $0.026 $0.026 $0.032 $0.032 $0.021 $0.021 $0.004 $0.001
(b) Class B shares were initially offered on August 4, 1992. 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.
(h) The Fund commenced investment operations on September 26, 1986.
</TABLE>
<TABLE>
<CAPTION>
NEW YORK(continued)
-------------------------------------------------------------------------------
Year ended January 31 Period ended January 31
-------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987(h)
---- ---- ---- ---- ---- -------
Class A Class A Class A Class A Class A Class A
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.600 $6.590 $6.690 $6.620 $7.310 $7.140
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.453 0.459 0.441 0.427 0.488 0.175
Net realized and unrealized gain (loss) 0.242 0.013 (0.116) 0.073 (0.687) 0.168
------ ------ ------- ------ ------- -----
Total from Investment Operations 0.695 0.472 0.325 0.500 (0.199) 0.343
------ ------ ------ ------ ------- -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDER
From net investment income (0.455) (0.462) (0.425) (0.430) (0.491) (0.173)
In excess of net investment income --- --- --- --- --- ---
---- ------ ------ ------ ---- -----
Total Distributions Declared to Shareholders (0.455) (0.462) (0.425) (0.430) (0.491) (0.173)
------- ------- ------- ------- ------- -------
Net asset value - End of period $6.840 $6.600 $6.590 $6.690 $6.620 $7.310
======= ======= ======= ======= ======= ======
Total return (c)(d) 10.86% 7.42% 4.98% 7.89% (2.44)% 4.83%(e)
====== ===== ===== ===== ======= =====
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.00% 1.04% 1.46% 1.46% 0.49% ---(g)
Net investment income 6.71% 6.99% 6.62% 6.52% 7.35% 6.27%(g)
Fees and expense waived
or borne by the Adviser 0.14% 0.24% 0.05% 0.10% 1.04% 1.70%(g)
Portfolio turnover 17% 6% 41% 53% 112% 30%(g)
Net assets at end of period (000) $40,233 $31,691 $23,124 $25,360 $26,588 $15,738
- -----------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $0.009 $0.016 $0.003 $0.007 $0.070 $0.047
reflect activity from that date.
(b) Class B shares were initially offered on August 4, 1992. 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.
(h) The Fund commenced investment operations on September 26, 1986.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA
--------------------------------------------------------------------------
Year ended January 31
--------------------------------------------------------------------------
1996 1995 1994(b)
---- ---- -------
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.680 $6.680 $7.500 $7.500 $7.500 $7.500
------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.386 0.334 0.396 0.345 0.164 0.141
Net realized and unrealized gain (loss) 0.588 0.588 (0.822) (0.822) --- ---
------ ------ ------- ------- --- ---
Total from Investment Operations 0.974 0.922 (0.426) (0.477) 0.164 0.141
------ ------ ------- ------- ------ -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.384) (0.332) (0.394) (0.343) (0.164) (0.141)
------- ------- ------- ------- ------- -------
Net asset value - End of period $7.270 $7.270 $6.680 $6.680 $7.500 $7.500
======= ======= ======= ======= ======= ======
Total return(c)(d) 14.91% 14.07% (5.55)% (6.27)% 2.22%(e) 1.90%(e)
====== ====== ====== ======= ======= ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.33%(f) 1.08%(f) 0.12% 0.87% 0.10%(g) 0.85%(g)
Net investment income 5.47%(f) 4.72%(f) 5.83% 5.08% 4.91%(g) 4.16%(g)
Fees and expenses waived or borne by the Adviser 0.76% 0.76% 0.93% 0.93% 1.20%(g) 1.20%(g)
Portfolio turnover 34% 34% 37% 37% 1%(g) 1%(g)
Net assets at end of period (000) $15,813 $18,593 $14,189 $17,169 $13,710 $9,934
- ------- --------------------------------------------------
(a) Net of fees and expenses waived or borne
by the Adviser which amounted to $0.053 $0.053 $0.063 $0.063 $0.040 $0.040
(b) The Fund commenced investment operations on September 1, 1993.
(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>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OHIO
------------------------------------------------------------------------------------------------
Year ended January 31
------------------------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Class A Class B Class A Class B Class A Class B Class A Class B(b)
------- ------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.930 $6.930 $7.670 $7.670 $7.290 $7.290 $7.090 $7.330
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.375 0.321 0.401 0.348 0.406 0.351 0.444 0.185
Net realized and unrealized gain (loss) 0.585 0.585 (0.745) (0.745) 0.389 0.389 0.204 (0.033)
------ ------ ------- ------- ------ ------ ------ -------
Total from Investment Operations 0.960 0.906 (0.344) (0.397) 0.795 0.740 0.648 0.152
------ ------ ------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.380) (0.326) (0.396) (0.343) (0.411) (0.356) (0.448) (0.192)
From capital paid in --- --- --- --- (0.004) (0.004) --- ---
From net realized gains --- --- --- --- --- --- --- ---
------ ------ ---- ---- ------ ------ ------ ------
Total Distributions Declared to Shareholders(0.380) (0.326) (0.396) (0.343) (0.415) (0.360) (0.448) (0.192)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value - End of period $7.510 $7.510 $6.930 $6.930 $7.670 $7.670 $7.290 $7.290
======= ======= ======= ======= ======= ======= ======= =======
Total return (c)(d) 14.18% 13.34% (4.38)% (5.10)% 11.17% 10.36% 9.41% 0.85(e)
====== ====== ======= ======= ====== ====== ===== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.85(f) 1.60%(f) 0.72% 1.47% 0.82% 1.57% 1.00% 1.75(g)
Net investment income 5.19(f) 4.44(f) 5.71% 4.96% 5.34% 4.59% 6.18% 5.43(g)
Fees and expense waived
or borne by the Adviser 0.11% 0.11% 0.16% 0.16% 0.09% 0.09% 0.03% 0.03%
Portfolio turnover 31% 31% 33% 33% 3% 3% 13% 13%
Net assets at end of period (000) $74,383 $56,160 $72,123 $53,547 $79,394 $51,212 $62,439 $7,293
- -----------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to
$0.008 $0.008 $0.011 $0.011 $0.007 $0.007 $0.002 ---
(b) Class B shares were initially offered on August 4, 1992. 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.
(h) The Fund commenced investment operations on September 26, 1986.
(i) Approximately $0.004 per share represents a return of capital for book
purposes only.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
OHIO(continued)
----------------------------------------------------------------------
Year ended January 31
----------------------------------------------------------------------
1992 1991 1990 1989 1988 1987(h)
---- ---- ---- ---- ---- -------
Class A Class A Class A Class A Class A Class A
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $6.880 $6.750 $6.850 $6.640 $7.260 $7.140
------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a) 0.457 0.462 0.463 0.448 0.499 0.175
Net realized and unrealized gain (loss) 0.208 0.138 (0.114) 0.204 (0.615) 0.120
------ ------ ------- ------ ------- -----
Total from Investment Operations 0.665 0.600 0.349 0.652 (0.116) 0.295
------ ------ ------ ------ ------- -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.455) (0.470) (0.449) (0.442) (0.503)(i) (0.175)
From capital paid in --- --- --- --- --- ---
From net realized gains --- --- --- --- (0.001) ---
------ ------ ------ ------ ------- -----
Total Distributions Declared to Shareholders( (0.455) (0.470) (0.449) (0.442) (0.504) (0.175)
------- ------- ------- ------- ------- -------
Net asset value - End of period $7.090 $6.880 $6.750 $6.850 $6.640 $7.260
======= ======= ======= ======= ======= ======
Total return (c)(d) 10.00% 9.21% 5.21% 10.22% (1.25)% 4.18%(e)
====== ===== ===== ====== ======= =====
RATIOS TO AVERAGE NET ASSETS
Expenses 1.00% 1.00% 1.27% 1.28% 0.41% ---(g)
Net investment income 6.57% 6.83% 6.77% 6.74% 7.49% 6.59%(g)
Fees and expense waived
or borne by the Adviser 0.09% 0.15% 0.06% 0.34% 1.12% 1.72(g)
Portfolio turnover 13% 11% 45% 89% 69% 158%(g)
Net assets at end of period (000) $50,281 $41,158 $27,433 $27,676 $27,320 $13,041
- -----------------------------
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to
$0.006 $0.010 $0.004 $0.022 $0.074 $0.045
(b) Class B shares were initially offered on August 4, 1992. 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.
(h) The Fund commenced investment operations on September 26, 1986.
(i) Approximately $0.004 per share represents a return of capital for book
purposes only.
</TABLE>
Further performance information is contained in each Fund's Annual Report to
shareholders, which is obtainable free of charge by calling 1-800-248-2828.
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVE
Each Fund seeks as high a level of after-tax total return as is consistent with
prudent risk, by pursuing current income exempt from federal and its state's
personal income tax (if any) and opportunities for long-term appreciation from a
portfolio primarily invested in investment grade municipal bonds. The Florida
and Michigan Funds' shares are intended to be exempt from their respective
states' intangibles tax.
HOW THE FUNDS PURSUE THEIR OBJECTIVE AND CERTAIN RISK FACTORS
Each Fund normally invests substantially all of its assets in investment grade
debt securities of any maturity, the interest on which is exempt from federal
income tax and that state's personal income tax (if any), other than any
alternative minimum tax (State Bonds); in the case of the Florida and Michigan
Funds, the State Bonds are exempt from the state intangibles tax. The value of
debt securities (and thus of Fund shares) usually fluctuates inversely to
changes in interest rates. Mutual funds investing in taxable securities may have
higher yields than the Funds. Each Fund under normal circumstances will invest
at least 80% of its assets in its State's Bonds. The Minnesota Fund intends to
invest its assets so that at least 95% of its exempt-interest dividends each
year are derived from certain Minnesota sources, as specified by Minnesota law.
In periods of unusual market conditions, when the Adviser considers it
appropriate, each Fund may temporarily invest up to 50% of its total assets in
assets that are not State Bonds, subject to applicable state requirements. The
Adviser relies on the opinion of bond counsel to each issuer as to the
tax-exempt status of the issue. Each Fund limits investments in State Bonds
subject to individual alternative minimum tax to a maximum of 20% of total
assets. Each Fund normally limits investments in securities that are not State
Bonds to a maximum of 20% of the Fund's total assets, subject to applicable
state requirements. Investment grade securities are those rated at least Baa by
Moody's, BBB by S&P, comparably rated by another national rating service or
unrated but considered similar in quality by the Adviser. Bonds rated BBB or Baa
are considered to have some speculative characteristics and could be more
adversely affected by unfavorable economic developments than higher rated bonds.
Each Fund may invest up to 25% of its net assets in securities-rated below
investment grade (or comparable unrated securities), but not below the
equivalent of CCC by S&P. Each Fund may invest up to 25% of its assets in
unrated State Bonds and other unrated securities, subject to applicable state
requirements. Certain bonds do not pay interest in cash on a current basis.
However, the Funds will accrue and distribute this interest on a current basis,
and may have to sell securities to generate cash for distributions. Certain
variable rate debt securities (known as "inverse floaters") pay interest rates
that move inversely to changes in short-term market interest rates. These
securities' values move inversely to changes in long-term rates. The values of
certain inverse floaters will change substantially more, given a change in
long-term rates, than would a traditional debt security of similar maturity.
There may not always be a sufficient supply of State Bonds to enable the Funds
to achieve their objective. Many bonds have call features and if called, the
Funds may only be able to invest the proceeds at lower yields.
Each Fund may invest, under normal conditions, up to 20% of its total assets in
high quality, short-term obligations of banks or corporations (rated at least
Prime-2 by Moody's, A-2 by S&P, comparably rated by another national rating
service or unrated but considered comparable by the Adviser), the U.S.
government, and repurchase agreements. These investments are subject to federal
and/or state income tax. In addition, gains realized upon the sale of portfolio
securities may be taxable when distributed by the Fund.
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 at the Fund's custodian, and constitutes that 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 15% of each Fund's net assets will be
invested in repurchase agreements maturing in more than 7 days and other
illiquid assets.
To participate in the new issues market, each Fund may without limit acquire
securities on a "when-issued" basis by contracting to purchase securities for a
fixed price on a date beyond the customary settlement time with no interest
accruing until settlement. High quality securities in an amount equal to the
when-issued securities are maintained in a segregated account at the custodian.
If made through a dealer, the contract is dependent on the dealer's consummation
of the sale. The dealer's failure could deprive a Fund of an advantageous yield
or price. These contracts may be considered securities and involve risk to the
extent that the value of the underlying security changes prior to settlement. A
Fund may realize short-term profits or losses if the contracts are sold.
Lower Rated Debt Securities. Lower rated debt securities (commonly referred to
as junk bonds) are debt securities which, because of the greater possibility
that the issuers will default, are not investment grade (i.e., are rated below
BBB by Standard & Poor's Corporation (S&P) or below Baa by Moody's Investors
Service (Moody's), or unrated but considered by the Adviser to be of comparable
credit quality). Because of the increased risk of default, these securities
generally have higher nominal interest rates than higher quality securities.
The Funds may purchase bonds in the lowest rating categories (C for Moody's and
D for S&P) and comparable unrated securities. However, the Funds will only
purchase securities rated Ca or lower by Moody's or CC or lower by S&P if the
Adviser believes the quality of such securities is higher than indicated by the
rating.
The values of lower rated securities are more likely to fluctuate directly,
rather than inversely, with changes in interest rates. This is because increases
in interest rates often are associated with an improving economy, which may
translate into an improved ability of the issuers to pay off their bonds
(lowering the risk of default). Lower rated bonds also are generally considered
significantly more speculative and likely to default than higher quality bonds.
Relative to other debt securities, their values tend to be more volatile
because: (i) an economic downturn may more significantly impact their potential
for default, and (ii) the secondary market for such securities may at times be
less liquid or respond more adversely to negative publicity or investor
perceptions, making it more difficult to value or dispose of the securities. The
likelihood that these securities will help the Funds achieve their investment
objective is more dependent on the Adviser's own credit analysis.
Options And Futures. Each Fund may write covered call and put options and
purchase call and put options on debt securities. A call option gives the
purchaser the right to buy a security from, and a put option the right to sell a
security to, the option writer at a specified price, on or before a specified
date. Each Fund will pay a premium when purchasing an option, which reduces the
Fund's return on the underlying security if the option is exercised and results
in a loss if the option expires unexercised. Each Fund will receive a premium
from writing an option, which may increase its return if the option expires or
is closed out at a profit. If the Fund is unable to close out an unexpired
option, the Fund must continue to hold the underlying security until the option
expires. Trading hours for options may differ from the trading hours for the
underlying securities. Thus, significant price movements may occur in the
securities markets that are not reflected in the options market. This may limit
the effectiveness of options as hedging devices.
Each Fund may buy or write options that are not traded on national securities
exchanges and not protected by the Options Clearing Corporation. These
transactions are effected directly with a broker-dealer, and each Fund bears the
risk that the broker-dealer will fail to meet its obligations. The market value
of such options and other illiquid assets will not exceed 15% of each Fund's
total assets.
Index and Interest Rate Futures. For hedging purposes each Fund may purchase or
sell (1) interest rate and tax-exempt bond index futures contracts and (2) put
and call options on such contracts and on such indices. A futures contract
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 a futures contract calls for delivery (or acceptance) of the specified
instrument, a futures contract is usually closed out before the settlement date
through the purchase (sale) of a comparable contract. If the initial sale price
of the future exceeds (or is less than) the price of the offsetting purchase,
the Fund realizes a gain (or loss). Options on futures contracts operate in a
similar manner to options on securities, except that the position assumed is in
the futures contracts rather than in the security. A 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. Transactions in futures and related options involve the
risk of (1) imperfect correlation between the price movement of the contracts
and the underlying securities, (2) significant price movement in one but not the
other market because of different trading hours, (3) the possible absence of a
liquid secondary market at any point in time, and (4) if the Adviser's
prediction on interest rates is inaccurate, the Fund may be worse off than if it
had not hedged.
Borrowing of Money. Each Fund may borrow 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.
Special Considerations. State Bonds include general obligation bonds (GOs),
revenue bonds (RBs) and industrial revenue bonds (IRBs). GOs are payable from
the issuer's unrestricted revenues and may depend on appropriation by the
applicable legislative body. RBs are payable only from a specified revenue
source, not the unrestricted revenues of the issuer. An IRB generally is payable
only from the revenues of the corporate user of a facility and consequently its
credit rating relates to that of the corporate user. Each Fund may invest more
than 25% of its total assets in IRBs, but intends to limit investments in IRBs
which are based on the credit of private entities in any one industry to 25% or
less.
State Fiscal Conditions. The value of each Fund's shares may be affected by
factors pertaining to its state's economy (which may affect issuer tax revenues)
and the ability of issuers of State Bonds to meet their obligations and may
fluctuate more widely than the value of shares of a portfolio investing in a
number of different states. The availability of federal, state and local aid to
issuers of State Bonds may also affect their ability to meet their obligations.
Payments of principal and interest on RBs and IRBs will depend on the economic
condition of the specific revenue source, which could be affected by economic,
political and demographic conditions in the relevant state. There is no
assurance that any issuer of a State Bond will make full and timely payments of
principal and interest or remain solvent. For example, in December 1994, Orange
County, California filed for protection under the federal bankruptcy laws. A
reduction in the actual or perceived ability of an issuer of State Bonds to meet
its obligations (including a reduction in the rating of its outstanding
securities) could also affect adversely the value and marketability of State
Bonds.
California. From mid-1990 to late 1993, the State of California suffered a
recession with the worst economic, fiscal and budget conditions since the
1930's. Construction, manufacturing (especially aerospace), and financial
services, among others, were severely affected. Job losses were the worst of any
post-war recession. The recession seriously affected State tax revenues and
caused an increase in expenditures for health and welfare programs.
Consequently, the State has experienced recurring budget deficits, and the
ratings of the State's general obligation bonds were lowered, most recently in
July 1994. The California economy has shown signs of recovery since 1994, with
significant job gains in 1994 and 1995.
It is impossible to predict the time, location or magnitude of a major
earthquake or its effect on the California economy. In January 1994, a major
earthquake struck Los Angeles, causing significant property damage in a
four-county area. The possibility exists that another earthquake could create a
major dislocation of the California economy.
Certain California State Bonds rely on real property taxes as a source of
revenue. In 1978, California voters approved Proposition 13, which limits ad
valorem taxes on real property and restricts the ability of taxing entities to
increase property taxes. California voters subsequently approved measures that
limit spending by the State and local governments. Decreased State revenues may
result in reductions of funds provided to local governments. The effect of these
changes on the ability of issuers of California State Bonds to pay interest and
principal on their obligations remains unclear, and may depend upon whether a
particular bond is a general obligation or limited obligation bond.
Connecticut. The State of Connecticut has a mature economy with primary
dependence on durable goods manufacturing, particularly in defense-related
industries. Significant job losses in this sector coupled with restructurings in
the insurance and other service industries have resulted in the State losing 8%
of its job base between 1989 and 1994. While no signs of a strong economic
recovery are present, unemployment levels have stabilized. Partially offsetting
job losses is the State's exceptional personal wealth level which, despite the
poverty of certain of its largest cities, continues to rank among the highest in
the nation in terms of per capita income. However, the State's rate of growth of
personal income has lagged behind the nation's rate for several years. In 1992,
the State implemented a personal income tax while cutting certain business and
consumption based taxes with the intent of reducing economic vulnerability and
diversifying the revenue base. These actions have been coupled with a
constitutional cap on the rate of spending growth and have served to stabilize
the State's finances and restore budgetary balance. The outlook for future
economic growth is modest and a return to the growth rates of the 1980s is
unlikely.
Florida. The State of Florida continues to experience strong population growth
and good economic performance. The State's economy is becoming more diversified
with foreign trade surpassing tourism as the State's leading industry. Export
industries have benefited from the State's strategic geographic location for
international trade, particularly with Latin America. While the State's growth
has been impressive, continuing strong fiscal and economic performance will be
based on the State's ability to maintain a balance that adequately funds the
additional service and infrastructure needs driven by rapid population growth
while continuing to promote further economic development. Without a personal
income tax, the State's operations are largely dependent on consumption based
taxes which are more vulnerable to general economic conditions.
Massachusetts. The Commonwealth of Massachusetts has a highly developed economy
with a large service sector, particularly in health care and education. Strong
economic growth in the 1980s was halted late in the decade by weakening in the
high technology, real estate and finance sectors, resulting in steady job
losses. While the Commonwealth's economy has turned around over the past five
years, it is unlikely that the growth rates of the 1980's will be matched. This
is due, in part, to large exposure to downsizing defense-related and computer
manufacturing industries. Additionally, the economy is dependent on the health
care sector which could be hurt by continuing consolidation, proposed cuts in
medicare/medicaid funding and other proposed reforms. The Commonwealth has made
progress in stabilizing its fiscal position since 1990. More realistic revenue
expectations and increased efforts to impose spending discipline have resulted
in the elimination of deficit financing, reduced reliance on short-term
financing and four consecutive years of positive fund balances.
Michigan. The State of Michigan is highly industrialized with a strong economic
concentration in motor vehicle production and other durable goods manufacturing.
A significant degree of industrial restructuring took place in the early 1980s,
mitigating the economic impact of the recession in the early 1990s. Positive
economic factors for the State include a stabilizing market share and improving
profitability for the domestic auto manufacturers, increased manufacturing
productivity and minimal exposure to the downsizing defense industry. In
addition, the State has demonstrated its commitment to addressing budget
imbalances and promoting public service efficiencies, resulting in balanced
general fund operations throughout a difficult economic period and enabling the
State to transfer approximately $84.5 million to the State's budget
stabilization fund as of September 30, 1995, the end of the State's 1994-95
fiscal year, bringing the balance in that fund to over $1 billion.
Minnesota. The State of Minnesota's overall economic structure closely parallels
that of the nation as a whole, although manufacturing is modestly more
significant than construction, finance and real estate. The State's natural
resource base is evidenced in its strong positions in food and forestry
products, and the State serves as a major regional commercial center. While the
recession of the early 1990s was less severe in the State than in the nation
overall, the State was not immune to its impact as evidenced by slowdowns in
income and sales tax revenue growth. Because the State relies on a progressive
personal income tax and retail sales tax for general fund revenue, its fiscal
system is sensitive to economic conditions as evidenced by budget deficits 1991
and 1992. The State demonstrated its financial discipline by curing the deficits
through a variety of measures, including a sales tax rate increase and spending
cuts. An improved economy in 1993, 1994 and 1995 has led to stronger revenues
and a more favorable expectation for balanced budget operations.
Under legislation enacted in 1995, if a court determines that Minnesota's
taxation of interest on other state's obligations, while not taxing interest on
its own obligations, discriminates against interstate commerce, the interest on
Minnesota obligations may become taxable. Should an adverse decision be
rendered, the value of the securities purchased by the Minnesota Fund might be
adversely affected, and the value of the shares of the Minnesota Fund might also
be adversely affected. See "Minnesota Tax Considerations" in the Statement of
Additional Information for a further discussion of the 1995 Minnesota
legislation.
New York. The State of New York enjoys a generally diverse and substantial
economic base and a strong socioeconomic profile with personal income levels
among the highest in the nation. The employment levels in the State have been
adversely affected by the most recent recession as a result of an overweighting
in the service sector, especially in finance, real estate and insurance. The
State's economy has continued to underperform the nation through the current
business cycle. While unemployment appears to have peaked, the State's
unemployment rate continues to be in excess of the national average. Significant
improvement in the labor market is not expected due to current weakness in the
manufacturing, defense sectors and health care. Income levels have suffered as
well, despite the State's strong position relative to the rest of the nation, as
growth rates have been stagnant and have lagged the nation as a whole.
Improvement in this indicator of economic health will be tied to improvement in
the employment level. New York's financial operations have been historically
weak, with chronic budget deficits, untimely budget passage and overly
optimistic revenue assumptions in the face of a protracted economic recession.
Both the State and New York City must overcome substantial budget gaps in fiscal
years 1996 and 1997, which will be difficult given the local politics and
economic health of the State and New York City. Recently enacted multi-year tax
reductions, as well as a November 1995 voter rejection of a constitutional
amendment to reform debt issuance practices, will exacerbate these problems.
North Carolina. Although the State of North Carolina is the tenth largest state
in population, it is primarily a rural state, having only five municipalities
with populations in excess of 100,000. The labor force has undergone significant
change during recent years, transitioning from an agricultural to a service and
goods producing economy. Persons displaced by farm mechanization and farm
consolidations have, in large measure, sought and found employment in other
pursuits. During the period 1985 to 1995, the State labor force grew about 17%.
Per capita income during the period 1980 to 1993 increased by 133.8%. The
current economic profile of the State consists of a combination of industry,
agriculture and tourism. As of June 1995, the State was reported to rank tenth
among the states in non-agricultural employment and eighth in manufacturing
employment. Employment indicators have varied somewhat in the annual periods
since June, 1989, but have remained consistently below the national average. As
of the date of this Prospectus, Moody's rated the State's general obligation
bonds as Aaa and Standard & Poor's rated such bonds AAA. Standard & Poor's also
reaffirmed its stable outlook for the State in January 1994. The State's highest
quality general obligation bond ratings reflect strong economic characteristics,
sound financial performance, and low debt levels.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the State's economy continues to rely to a significant extent on durable
goods manufacturing, largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. However, in
recent years the State has benefited from strength in its traditional
manufacturing industries. For the last five years, the State's unemployment
levels have been well below the national rate, reversing the trend of the
1980's. This economic expansion has resulted in strong financial performance in
the 1993-1995 biennium, enhancing revenues and positioning the State well for
managing cyclical fluctuations during the next weak economic period.
Non-Diversification. Because of the relatively small number of issuers of
investment grade State Bonds, each Fund (except the California Fund) may
concentrate in the securities of a few issuers which the Adviser considers to be
attractive. This may increase the risk of loss to those Funds. It is also
possible that there will not be a sufficient supply of State Bonds available to
enable each Fund to achieve its objective.
Other. The Funds may not always achieve their investment objective. The Funds'
investment objective and non-fundamental policies may be changed without
shareholder approval. Each Fund will notify investors at least 30 days prior to
any material change in its investment objective. If there is a change in a
Fund's 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 objective. Each Fund's fundamental policies
listed in the Statement of Additional Information cannot be changed without the
approval of a majority of that 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 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% on Class A shares and
the contingent deferred sales charge applicable to the time period quoted on
Class B 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 and tax-equivalent yield, which differ from total return
because they do not consider the change in net asset value, are 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 the Funds' general policies and oversee the Funds'
affairs as conducted by the Adviser.
The Adviser is a subsidiary of The Colonial Group, Inc. Colonial Investment
Services, Inc. (Distributor) is a subsidiary of the Adviser and serves as the
distributor for the Funds' shares. Colonial Investors Service Center, Inc.
(Transfer Agent), an affiliate of the Adviser, serves as the shareholder
services and transfer agent for the Funds. The Colonial Group, Inc. is a direct
subsidiary of Liberty Financial Companies, Inc. which in turn is an indirect
subsidiary of Liberty Mutual Insurance Company (Liberty Mutual).Liberty Mutual
is considered to be the controlling entity of the Adviser and its affiliates.
Liberty Mutual is an underwriter of 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 Funds pay the Adviser
at the following annual percentages of the Funds' combined average daily net
assets: on the first $1 billion of combined average daily net assets, the annual
rate shall be 0.5375% for January through March 1996, 0.525% for April through
June 1996, 0.5125% for July through September 1996, and 0.5% thereafter: on the
next $1 billion of combined average daily net assets, the annual rate shall be
0.5%; and on the combined average daily net assets in excess of $2 billion, the
annual rate shall be 0.45%.
Robert S. Waas, Vice President of the Adviser, has managed the Florida Fund, the
New York Fund and the North Carolina Fund since 1996. Prior to joining the
Adviser in July, 1995, Mr. Waas was a portfolio manager at Van Kampen/American
Capital and at the Colonial Penn Group.
Brian M. Hartford, Vice President of the Adviser, has managed the Michigan Fund,
the Minnesota Fund and the Ohio Fund since 1993. Mr. Hartford was a Senior
Municipal Trader of the Adviser from 1991 until 1993, and Manager of the
Analytic Department at Harvard Management Company until 1991.
William C. Loring, Vice President of the Adviser, has managed the California
Fund since its inception and has managed various other Colonial tax-exempt funds
since 1986.
Maureen G. Newman, Vice President of the Adviser, has managed the Connecticut
Fund and the Massachusetts Fund since May 1996. Prior to joining the Adviser,
Ms. Newman was a portfolio manager and head of the High Yield Municipal Bond
Research area at Fidelity Investments from July 1994 until May 1996, and a bond
analyst from May 1985 until July 1994.
The Adviser also provides pricing and bookkeeping services to each Fund for a
monthly fee of $2,250 per Fund 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 0.14% annually of average net
assets plus certain out-of-pocket expenses.
Each of the foregoing fees is subject to any reimbursement or fee waiver or
expense 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 to it and its affiliates. Subject to seeking best execution,
the Adviser may consider sales of shares of the Funds (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 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 market. Short-term investments maturing in 60 days or
less are valued at amortized cost, when it is determined, pursuant to procedures
adopted by the Trustees, that such cost approximates market value. All other
securities and assets are valued at 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 virtually all net income
and any net realized gain at least annually.
The Funds generally declare distributions daily and pay 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. The Funds' distributions of net income generally will be exempt
from Federal and the relevant State's personal income taxes. However, as
described above under "How the Funds Pursue Their Objective and Certain Risk
Factors," certain investments may produce taxable income, and portfolio
transactions may produce gains a portion of which may be taxable at ordinary
Federal income tax rates. If the Funds make taxable distributions, those
distributions will generally be taxable whether you receive them in cash or in
additional Fund shares, unless you are a tax-exempt institution. Each January,
information on the amount and nature of distributions for the prior year,
including the alternative minimum tax portion, is sent to shareholders.
While each Fund's distributions from income on its State's Bonds are generally
not taxable at the federal level or subject to that Fund's state's personal
income tax, if any, a portion may be included in computing a shareholder's
alternative minimum tax liability. Social security benefits may be taxed as a
result of receiving tax-exempt income. If you receive social security or
railroad retirement benefits, you should consult your tax adviser to determine
what effect, if any, an investment in the Funds may have on the taxation of your
benefits.
The foregoing is a summary of certain income tax consequences of investing in
the Funds. You should consult your tax adviser to determine the effect of an
investment in a Fund on your particular tax situation (including possible
liability for federal alternative minimum tax and for state and local taxes).
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. Certificates will not be issued for Class B 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 are offered at net asset value plus an initial or
a contingent deferred sales charge as follows:
Initial Sales Charge
Retained
by
Financial
Service
as % of Firm as %
--------------------- 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 3.63% 3.50% 3.00%
$250,000 to less than
$500,000 2.56% 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%
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 contingent deferred sales charge if
redeemed within six years that declines over time. 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.
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. Purchases of $250,000 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 Funds allow certain investors or groups of
investors to purchase shares at a reduced, or without an, initial or contingent
deferred sales charge. These programs are described in the Statement of
Additional Information under "Programs for Reducing or Eliminating Sales
Charges" and "How to Sell Shares."
Shareholder Services. A variety of shareholder services are available. For more
information about these services or your account, call 1-800-345-6611. Some
services are described in the attached account application. A shareholder's
manual explaining all available services will be provided upon request.
HOW TO SELL SHARES
Shares of the 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, the
Fund will send proceeds after 15 days from the date of the purchase.
Selling Shares Directly To A 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 particular 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 Funds value their 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. 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 before the fee is deducted.
HOW TO EXCHANGE SHARES
Exchanges at net asset value may be made among the same class of shares of most
Colonial funds. Shares will continue to age without regard to the exchange for
purposes of conversion and determining the contingent deferred sales charge, if
any, upon redemption. Carefully read the prospectus of the fund into which the
exchange will go before submitting the request. Call 1-800-248-2828 to receive a
prospectus and an exchange authorization form. Call 1-800-422-3737 to exchange
shares by telephone. An exchange is a taxable capital transaction. The exchange
service may be changed, suspended or eliminated on 60 days' written notice.
Class A Shares. An exchange from a money market fund into a non-money market
fund will be at the applicable offering price next determined (including sales
charge), except for amounts on which an initial sales charge was paid. Non-money
market fund shares must be held for five months before qualifying for exchange
to a fund with a higher sales charge, after which exchanges are made at the net
asset value next determined.
Class B Shares. Exchanges of Class B shares are not subject to the contingent
deferred sales charge. However, if shares are redeemed within six years after
the original purchase, a contingent deferred sales charge will be assessed using
the schedule of the fund into which the original investment was made.
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisers are automatically eligible to
exchange Fund shares and redeem up to $50,000 of Fund shares by calling
1-800-422-3737 toll-free any business day between 9:00 a.m. and the time at
which the Fund values its shares. Telephone redemption privileges for larger
amounts may be elected on the account application. Proceeds and confirmations of
telephone transactions will be mailed or sent to the address of record.
Telephone redemptions are not available on accounts with an address change in
the preceding 30 days. The Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine and, if it does
not, may be liable for any losses due to unauthorized or fraudulent telephone
transactions. 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, each Fund pays the Distributor an annual service fee of 0.10%
of each Fund's average net assets for shares outstanding on November 30, 1994,
and 0.25% of average net assets for shares issued thereafter. Each Fund also
pays the Distributor an annual distribution fee of 0.75% of the average net
assets attributed to its Class B shares. Because the Class B shares bear the
additional fee, their dividends will be lower than the dividends of Class A
shares. Class B shares automatically convert to Class A shares, approximately
eight years after the Class B shares were purchased. The multiple class
structure could be terminated should certain Internal Revenue Service rulings be
rescinded. See the Statement of Additional Information for more information. The
Distributor uses the fees to defray the cost of commissions and service fees
paid to financial service firms which have sold Fund shares and to defray other
expenses such as sales literature, prospectus printing and distribution,
shareholder servicing costs, and compensation to wholesalers. Should the fees
exceed the Distributor's expenses in any year, the Distributor would realize a
profit. The 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 1987. 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.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the Trust's
Declaration of Trust (Declaration) disclaims shareholder liability for acts or
obligations of each Fund and the Trust and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by each 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 each 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.
APPENDIX
DESCRIPTION OF BOND RATINGS
S&P
AAA The highest rating assigned by S&P indicates an extremely strong capacity to
repay principal and interest.
AA bonds also qualify as high quality. Capacity to repay principal and pay
interest is very strong, and in the majority of instances, they differ from AAA
only in a small degree.
A bonds have a strong capacity to repay principal and interest, although they
are somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions.
BBB bonds are regarded as having an adequate capacity to repay principal and
interest. Whereas they normally exhibit protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to repay principal and interest than for bonds in the A category.
BB, B, CCC and CC bonds are regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and CC
the highest degree. While likely to have some quality and protection
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C ratings are reserved for income bonds on which no interest is being paid.
D bonds are in default, and payment of interest and/or principal is in arrears.
Plus(+) or minus (-) are modifiers relative to the standing within the major
rating categories.
MOODY'S
Aaa bonds are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edge". Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa bonds are judged to be of high quality by all standards. Together with Aaa
bonds they comprise what are generally known as high-grade bonds. They are rated
lower than the best bonds because margins of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than in Aaa securities.
Those bonds in the Aa through B groups which Moody's believes possess the
strongest investment attributes are designated by the symbol Aa1, A1 and Baa1.
A bonds possess many of the favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa bonds are considered as medium grade, neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba bonds are judged to have speculative elements: their future cannot be
considered as well secured. Often, the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes these
bonds.
B bonds generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa bonds are of poor standing. They may be in default or there may be present
elements of danger with respect to principal or interest.
Ca bonds are speculative in a high degree, often in default or having other
marked shortcomings.
C bonds are the lowest rated class of bonds and can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
<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
UMB, n.a.
928 Grand Avenue
Kansas City, MO 64106
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.
May 31,1996
COLONIAL CALIFORNIA
TAX-EXEMPT FUND
COLONIAL CONNECTICUT
TAX-EXEMPT FUND
COLONIAL FLORIDA
TAX-EXEMPT FUND
COLONIAL MASSACHUSETTS
TAX-EXEMPT FUND
COLONIAL MICHIGAN
TAX-EXEMPT FUND
COLONIAL MINNESOTA
TAX-EXEMPT FUND
COLONIAL NEW YORK
TAX-EXEMPT FUND
COLONIAL NORTH CAROLINA
TAX-EXEMPT FUND
COLONIAL OHIO
TAX-EXEMPT FUND
PROSPECTUS
Each of Colonial California Tax-Exempt Fund, Colonial Connecticut Tax-Exempt
Fund, Colonial Florida Tax-Exempt Fund, Colonial Massachusetts Tax-Exempt Fund,
Colonial Michigan Tax-Exempt Fund, Colonial Minnesota Tax-Exempt Fund, Colonial
New York Tax-Exempt Fund, Colonial North Carolina Tax-Exempt Fund and Colonial
Ohio Tax-Exempt Fund seeks as high a level of after-tax total return as is
consistent with prudent risk, by pursuing current income exempt from federal and
its state's personal income tax (if any) and opportunities for long-term
appreciation from a portfolio primarily invested in investment grade municipal
bonds.
For more detailed information about the Funds, call the Adviser at
1-800-248-2828 for the May 31, 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
Checkwriting Signature Card
(Class A & Class C Shares Only)
Colonial Mutual Funds
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-138A-0795
COLONIAL CALIFORNIA TAX-EXEMPT FUND
COLONIAL CONNECTICUT TAX-EXEMPT FUND
COLONIAL FLORIDA TAX-EXEMPT FUND
COLONIAL MASSACHUSETTS TAX-EXEMPT FUND
COLONIAL MICHIGAN TAX-EXEMPT FUND
COLONIAL MINNESOTA TAX-EXEMPT FUND
COLONIAL NEW YORK TAX-EXEMPT FUND
COLONIAL NORTH CAROLINA TAX-EXEMPT FUND
COLONIAL OHIO TAX-EXEMPT FUND
Statement of Additional Information
May 31, 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
California Tax-Exempt Fund, Colonial Connecticut Tax-Exempt Fund, Colonial
Florida Tax-Exempt Fund, Colonial Massachusetts Tax-Exempt Fund, Colonial
Michigan Tax-Exempt Fund, Colonial Minnesota Tax-Exempt Fund, Colonial New York
Tax-Exempt Fund, Colonial North Carolina Tax-Exempt Fund and Colonial Ohio
Tax-Exempt Fund (Funds). This SAI is not a prospectus and is authorized for
distribution only when accompanied or preceded by the Prospectus of the Funds
dated May 31, 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 Funds. Part 2
includes information about the Colonial funds generally and additional
information about certain securities and investment techniques described in the
Fund's Prospectus.
TABLE OF CONTENTS
Part 1 Page
Definitions b
Investment Objectives and Policies of the Funds b
Fundamental Investment Policies of the Funds b
Other Investment Policies of the Funds c
California Tax Considerations c
Connecticut Tax Considerations d
Florida Tax Considerations d
Massachusetts Tax Considerations e
Michigan Tax Considerations e
Minnesota Tax Considerations e
New York Tax Considerations f
North Carolina Tax Considerations f
Ohio Tax Considerations g
Portfolio Turnover g
Fund Charges and Expenses g
Investment Performance s
Custodian u
Independent Accountants u
Part 2 Page
Miscellaneous Investment Practices 1
Taxes 10
Management of the Colonial Funds 12
Determination of Net Asset Value 17
How to Buy Shares 18
Special Purchase Programs/Investor Services 19
Programs for Reducing or Eliminating Sale Charges 20
How to Sell Shares 22
Distributions 24
How to Exchange Shares 24
Suspension of Redemptions 24
ShareholderMeetings 25
Performance Measures 25
Appendix I 27
Appendix II 30
SP-16/139C-0596
<PAGE>
Part 1
COLONIAL CALIFORNIA TAX-EXEMPT FUND
COLONIAL CONNECTICUT TAX-EXEMPT FUND
COLONIAL FLORIDA TAX-EXEMPT FUND
COLONIAL MASSACHUSETTS TAX-EXEMPT FUND
COLONIAL MICHIGAN TAX-EXEMPT FUND
COLONIAL MINNESOTA TAX-EXEMPT FUND
COLONIAL NORTH CAROLINA TAX-EXEMPT FUND
COLONIAL NEW YORK TAX-EXEMPT FUND
COLONIAL OHIO TAX-EXEMPT FUND
Statement of Additional Information
May 31, 1996
DEFINITIONS
"California Fund" or "Fund" Colonial California Tax-Exempt Fund
"Connecticut Fund" or "Fund" Colonial Connecticut Tax-Exempt Fund
"Florida Fund" or "Fund" Colonial Florida Tax-Exempt Fund
"Massachusetts Fund" or "Fund" Colonial Massachusetts Tax-Exempt Fund
"Michigan Fund" or "Fund" Colonial Michigan Tax-Exempt Fund
"Minnesota Fund" or "Fund" Colonial Minnesota Tax-Exempt Fund
"New York Fund" or "Fund" Colonial New York Tax-Exempt Fund
"North Carolina" or "Fund" Colonial North Carolina Tax-Exempt Fund
"Ohio Fund" or "Fund" Colonial Ohio Tax-Exempt Fund
"Trust" Colonial Trust V
"Adviser Colonial Management Associates, Inc.,
the Funds' investment adviser
"CISI" Colonial Investment Services, Inc.,the
Funds' distributor
"CISC" Colonial Investors Service Center,
Inc., the Funds' shareholder services
and transfer agent
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The Prospectus describes each Fund's investment objectives and policies. Part 1
of this SAI includes additional information concerning, among other things, the
investment policies of the Funds. Part 2 contains additional information about
the following securities and investment techniques that are described or
referred to in the prospectus:
Short-Term Trading
Lower Rated Bonds
Inverse Floaters
Short Sales
Forward Commitments
Repurchase Agreements
Futures Contracts and Related Options (Limited to interest rate
futures, tax-exempt bond index futures, options on such futures and
options on such indices)
Options on Securities-purchasing put options
Participation Interests
Stand-by Commitments
Zero Coupon Securities (Zeros)
Except as described below under "Fundamental Investment Policies," the Funds'
investment policies are not fundamental and the Trustees may change the policies
without shareholder approval.
FUNDAMENTAL INVESTMENT POLICIES OF THE FUNDS
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.
Each Fund may:
1. Issue senior securities only through borrowing money from banks for
temporary or emergency purposes up to 10% of its net assets (entering
into repurchase agreements and other similar instruments is not
considered the issuance of a senior security); however, the Fund will
not purchase additional portfolio securities while borrowings exceed
5% of net assets;
2. Only own real estate acquired as a result of owning securities and not
more than 5% of total assets;
3. 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;
4. Underwrite securities issued by others only when disposing of
portfolio securities;
5. 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;
6. Not concentrate more than 25% of its total assets in any one industry
or, [California Fund only] 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 purchases the Fund would own more than 10% of the outstanding
voting shares of such issuer;
7. And will, under normal circumstances, invest at least 80% of its total
assets in State Bonds subject to applicable State requirements.
OTHER INVESTMENT POLICIES OF THE FUNDS
As non-fundamental investment policies which may be changed without a
shareholder vote, each 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 Fund 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, or in industrial development
revenue bonds (IRBs) where the private entity on whose credit the
security is based, directly or indirectly, has a record of less
than three years continuous business operations or relevant business
experience (including predecessors, controlling persons, general
partners and guarantors), unless the security purchased by the
Fund is rated by a nationally recognized rating service;
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;
8. Invest more than 15% of its net assets in illiquid assets; and
9. 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.
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, the issuer is the entity whose revenues support the
security.
CALIFORNIA TAX CONSIDERATIONS
It is the policy of the Fund to meet all applicable requirements of the Internal
Revenue Code (Code) and the California Revenue and Taxation Code for
shareholders to be relieved of the obligation to pay regular federal income
taxes and California personal income tax on amounts distributed to them which
are derived from tax-exempt interest income. That is, the Fund will have at
least 50% of its total assets invested in tax-exempt bonds (and at least 50% of
its total assets invested in California Bonds and U. S. Government obligations
(including obligations of the Commonwealth of Puerto Rico, the United States
Virgin Islands and Guam) whose interest is excluded from income for California
personal income tax purposes) at the end of each quarter.
California law provides that, to the extent distributions by the Fund are
derived from interest on California Bonds (as defined in the Prospectus) and
notes (or on obligations of the United States which pay interest excludable from
income under the Constitution or laws of the United States) and are designated
as such, such distributions shall be exempt from California personal income
taxes. For California personal income tax purposes, distributions derived from
other investments and distributions from any net realized capital gains will be
taxable, whether paid in cash or reinvested in additional shares.
Interest derived from California Bonds is not subject to the California
alternative minimum tax and California personal income tax does not apply to any
portion of Social Security or railroad retirement benefits. Under the Code, a
portion of interest on any indebtedness (including insurance policy loans)
incurred or continued to purchase or carry shares of the Fund which is deemed to
relate to tax-exempt dividends will not be deductible. For California personal
income tax purposes none of such interest will be deductible. Depending on the
circumstances, the Internal Revenue Service or California Franchise Tax Board
may consider shares to have been purchased or carried with borrowed funds even
though the shares are not directly traceable to the borrowed funds. Shareholders
who are, within the meaning of Section 147 of the Code, "substantial users" (or
"related persons" of substantial users) of facilities financed by industrial
development bonds should consult their tax advisers as to whether the Fund is a
desirable investment.
Distributions from investment income and capital gains, including dividends
derived from interest paid on California Bonds, will be subject to California
franchise tax and California corporate income tax.
Special Factors Affecting California Bonds
Certain California State Bonds rely on real property taxes as a source of
revenue. In 1978, an amendment to the California Constitution, Article XIII A,
limited taxes on real property and restricted the ability to increase property
taxes. In 1979, Article XIII B was added to the California Constitution,
significantly limiting spending by state and local government. In June 1982,
voters approved initiative measures which would result in substantial annual
reductions in state revenues. California also revised its system of taxing
corporations which could also result in decreased state revenues. Decreased
state revenues may result in reductions to local governments. The State's
ability to raise revenues and to reduce expenditures to the extent necessary to
balance the budget for any year depends upon, among other things, the State's
economic health and the accuracy of the State's revenue predictions, as well as
the impact of budgetary restrictions.
It is not presently possible to determine the impact of Articles XIII A or XIII
B or any implementing or related legislation on the securities in the Fund's
portfolio or the ability of State or local governments to pay the interest or
principal on the securities.
CONNECTICUT TAX CONSIDERATIONS
Distributions received by shareholders from the Fund that are treated as
exempt-interest dividends for federal income tax purposes are exempt from the
Connecticut personal income tax to the extent that they are derived from
interest on Connecticut Bonds or on the obligations of certain other
governmental entities the interest on which the states are prohibited from
taxing by federal law (including obligations of Guam, the United States Virgin
Islands and the Commonwealth of Puerto Rico), and are designated as such. Other
distributions are subject to the Connecticut personal income tax, except that
those treated as capital gain dividends for federal income tax purposes are not
subject to the tax to the extent derived from the sale or exchange of
Connecticut Bonds. Distributions that are subject to the federal alternative
minimum tax are subject to the net Connecticut minimum tax, with the exception
of those derived from interest on Connecticut Bonds.
Distributions from investment income and capital gains, including dividends
derived from interest paid on Connecticut Bonds, are included in gross income
for purposes of the Connecticut corporation business tax. However, seventy
percent of such distributions, provided that they are treated as dividends for
federal income tax purposes but not as exempt-interest dividends or capital gain
dividends, are deductible for purposes of this tax, but no deduction is allowed
for expenses related thereto.
FLORIDA TAX CONSIDERATIONS
Florida currently has no income tax on individuals. Thus individual shareholders
of the Fund will not be subject to any Florida state income tax on distributions
received from the Fund. However, certain distributions will be taxable to
corporate shareholders which are subject to Florida corporate income tax.
Florida currently imposes an "intangibles tax" at the annual rate of 0.20% on
certain securities and other intangible assets owned by Florida residents.
Certain types of tax-exempt securities of Florida issuers, U.S. Government
Securities and tax-exempt securities issued by certain U.S. territories and
possessions (including the Commonwealth of Puerto Rico, the United States Virgin
Islands and Guam) are exempt from this intangibles tax. The Fund has received a
ruling from Florida authorities that, if on December 31 of any year the Fund's
portfolio consists solely of such exempt assets, the Fund's shares will be
exempt from the Florida intangibles tax payable for the following year. To take
advantage of this exemption in any year, the Fund must sell any non-exempt
assets held in its portfolio prior to December 31. Such sales could result in
capital losses or in the realization of taxable capital gains, as well as
transaction costs that would likely reduce the Fund's investment return and
might exceed any investment return the Fund achieved by investing in non-exempt
assets during the year.
You should consult your tax adviser to determine the precise application of
Florida or other state law to your particular situation.
<PAGE>
MASSACHUSETTS TAX CONSIDERATIONS
Distributions received by shareholders from the Fund are exempt from
Massachusetts personal income tax to the extent that they are derived from
interest on Massachusetts Bonds or certain U.S. territories and possessions
(including the Commonwealth of Puerto Rico, the United States Virgin Islands or
Guam) and are designated as such. The Fund believes that gains it realizes on
the sale of certain Massachusetts Bonds are exempt from Massachusetts personal
income taxation and will designate them as such when those gains are distributed
to shareholders.
Distributions from investment income and capital gains, including dividends
derived from interest paid on Massachusetts Bonds, may be subject to
Massachusetts corporate excise tax.
The foregoing is a general summary of the Massachusetts tax consequences of
investing in the Fund. You should consult your tax advisor regarding specific
questions as to federal, state or local taxes.
MICHIGAN TAX CONSIDERATIONS
To the extent that dividends from the Fund are derived from interest on debt
obligations issued by the State of Michigan or its political subdivisions or
certain U.S. territories and possessions (including the Commonwealth of Puerto
Rico, United States Virgin Islands or Guam), the interest on which is excludable
from gross income for purposes of both federal income taxation and Michigan
personal income tax ("Michigan Bonds"), such dividends will be exempt from
Michigan personal income tax and excluded from the taxable income base of the
intangibles tax. For Michigan personal income and intangibles tax purposes,
exempt-interest dividends attributable to any investment in other than Michigan
Bonds or certain obligations of the U.S. will be fully taxable. Distributions
representing capital gains, if any, will be fully taxable for both Michigan
personal income and intangible tax purposes (except that distributions
reinvested in shares of the Fund are excluded from the taxable income base of
the Michigan intangibles tax).
Certain Michigan cities have adopted Michigan's Uniform City Income Tax
Ordinance, which under the Michigan City Income Tax Act is the only income tax
ordinance that may be adopted by cities in Michigan. To the extent that
distributions from the Fund are not subject to Michigan income tax, they are not
subject to any Michigan city's income tax.
You should consult your tax adviser if you are subject to the Michigan Single
Business Tax.
MINNESOTA TAX CONSIDERATIONS
Provided that the Fund qualifies as a separate "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"), and subject to
the discussion in the paragraph below, shareholders of the Fund who are
individuals, estates or trusts and who are subject to the regular Minnesota
personal income tax, will not be subject to such tax on Fund dividends under
existing law to the extent that such distributions qualify as exempt-interest
dividends under section 852(b)(5) of the Code which are derived from interest
income on tax-exempt obligations of the State of Minnesota or its political or
governmental subdivisions, municipalities, governmental agencies or
instrumentalities (Minnesota Sources). The foregoing will apply, however, only
if the portion of the exempt-interest dividends from Minnesota Sources that is
paid to all shareholders represents 95% or more of the exempt-interest dividends
that are paid by the Fund. If the 95% test is not met, all exempt-interest
dividends that are paid by the Fund will be subject to the regular Minnesota
personal income tax. Even if the 95% test is met, to the extent that
exempt-interest dividends that are paid by the Fund are not derived from
Minnesota Sources, such dividends will be subject to the regular Minnesota
personal income tax. Other distributions of the Fund, including distributions
from net short-term and long-term capital gains, are generally not exempt from
the regular Minnesota personal income tax.
Legislation enacted in 1995 provides that it is the intent of the Minnesota
legislature that interest income on obligations of Minnesota governmental units,
including obligations of the Minnesota Sources described above, and
exempt-interest dividends that are derived from interest income on such
obligations, be included in the net income of individuals, estates, and trusts
for Minnesota income tax purposes if it is judicially determined that the
exemption by Minnesota of such interest or such exempt-interest dividends
unlawfully discriminates against interstate commerce because interest income on
obligations of governmental issuers located in other states, or exempt-interest
dividends derived from such obligations, is so included. This provision applies
to taxable years that begin during or after the calendar year in which such
judicial decision becomes final, regardless of the date on which the obligations
were issued, and other remedies apply for previous taxable years. The United
States Supreme Court recently denied certiorari in an Ohio case which upheld an
exemption for interest income on obligations of Ohio governmental issuers, even
though interest income on obligations of non-Ohio governmental issuers was
subject to tax. However, it cannot be predicted whether a similar case will be
brought in Minnesota or elsewhere, or what the outcome of such case would be.
Shareholders of the Fund who are individuals, estates or trusts may be subject
to the Minnesota alternative minimum tax as a result of the receipt of
exempt-interest dividends that are attributable to certain private activity bond
interest even though derived from Minnesota Sources. In addition, the entire
portion of exempt-interest dividends that is received by such shareholders and
that is derived from sources other than Minnesota sources is subject to the
Minnesota alternative minimum tax. Further, should the 95% test fail to be met,
all of the exempt-interest dividends that are paid by the Fund, including those
derived from Minnesota Sources, will be subject to the Minnesota alternative
minimum tax in the case of shareholders of the Fund who are individuals, estates
or trusts.
Subject to certain limitations that are set forth in the Minnesota rules, Fund
dividends, if any, that are derived from interest on certain United States
obligations are not subject to the regular Minnesota personal income tax or the
Minnesota alternative minimum tax in the case of shareholders of the Fund who
are individuals, estates, or trusts.
Fund distributions, including exempt-interest dividends, are not excluded in
determining the Minnesota franchise tax on corporations, which is measured by
taxable income and alternative minimum taxable income. Fund distributions may
also be taken into account in certain cases in determining the minimum fee that
is imposed on corporations, S corporations and partnerships.
NEW YORK TAX CONSIDERATIONS
New York law provides that, to the extent distributions by a regulated
investment company are derived from interest on debt obligations issued by the
State of New York or its political subdivisions or certain other governmental
entities (for example, the Commonwealth of Puerto Rico, the United States Virgin
Islands or Guam), the interest on which was excludable from gross income for
purposes of both federal income taxation and New York State or City personal
income taxation (New York Bonds) and designated as such, such distributions
shall be exempt from New York State and City personal income taxes. For federal
income tax purposes, all Fund distributions other than exempt-interest dividends
will be taxable as ordinary income, except that any distributions of net
long-term capital gains will be taxable to shareholders as such, whether
received in cash or shares and regardless of how long shareholders have held
their shares. For New York State and City personal income tax purposes,
distributions derived from investments other than New York Bonds and
distributions from any net short-term capital gains will be taxable as ordinary
income, whether paid in cash or reinvested in additional shares. For New York
State and City personal income tax purposes, distributions of net long-term
capital gains will be taxable at the same rate as ordinary income, whether
received in cash or shares through the reinvestment of distributions.
Distributions by the Fund from investment income and capital gains, including
exempt-interest dividends, are included in a corporation's net investment income
for purposes of calculating such corporation's New York State franchise taxes
and the New York City General Corporation Tax if received by a corporation
subject to those taxes, and will be subject to such taxes to the extent that a
corporation's net investment income is allocated to New York State and/or New
York City. Distributions by the Fund may be subject to state taxes in states
other than New York and to local taxes in cities other than New York City, both
for individual and corporate shareholders. Also, if the Fund purchases New York
tax-exempt securities at a discount from the price at which they were originally
issued, for federal income tax purposes some or all of this market discount will
be included in the Fund's ordinary income and will be taxable to shareholders as
such when it is distributed to them.
The foregoing is a summary of certain New York State and New York City income
tax consequences of investing in the Fund. Shareholders should consult their tax
adviser to determine the precise effect of an investment in the Fund on their
particular tax situation (including possible liability for federal alternative
minimum tax and state and local taxes).
NORTH CAROLINA TAX CONSIDERATIONS
The State of North Carolina recently repealed its Intangible Personal Property
tax formerly applicable to shares of stock, including shares of certain mutual
funds. The repeal is effective for taxable years beginning after 1994.
Under existing North Carolina law, as long as the Fund qualifies as a separate
"regulated investment company" under the Internal Revenue Code of 1986, as
amended, and 50% or more of the value of the total assets of the Fund at the
close of each quarter of its taxable year consists of obligations whose interest
is exempt from federal income tax, dividends received from the Fund that
represent either (i) interest exempt from federal income tax and received by the
Fund on obligations of North Carolina or its political subdivisions; nonprofit
educational institutions organized or chartered under the laws of North
Carolina; or Guam, Commonwealth of Puerto Rico, or the United States Virgin
Islands, including the governments thereof and their agencies, instrumentalities
and authorities, or (ii) interest received by the Fund on direct obligations of
the United States will be exempt from North Carolina individual, trust and
estate income taxation.
Any capital gains distributed by the Fund (except for capital gains attributable
to the sale by the Fund of an obligation, the profit from which is exempt by a
North Carolina statute) or gains realized by the shareholder from a redemption
or sale of shares of the Fund will be subject to North Carolina individual,
trust or estate income taxation.
Section 23-48 of the North Carolina General Statutes appears to permit any city,
town, school district, county or other taxing district to avail itself of the
provisions of Chapter 9 of the United States Bankruptcy Code, but only with the
consent of the Local Government Commission of the State and of the holders of
such percentage or percentages of the indebtedness of the issuer as may be
required by the Bankruptcy Code (if any such consent is required). Thus,
although limitations apply, in certain circumstances political subdivisions
might be able to seek the protection of the Bankruptcy Code.
Fund shareholders that are corporations are advised to consult their own tax
advisors regarding the North Carolina tax consequences to them of investing in
the Fund.
OHIO TAX CONSIDERATIONS
Provided that the Fund continues to qualify as a regulated investment company
under the Internal Revenue Code of 1986, as amended (Code), and that at all
times at least 50% of the value of the total assets of the Fund consists of
obligations issued by or on behalf of Ohio, political subdivisions thereof or
agencies or instrumentalities of Ohio or its political subdivisions (Ohio
Obligations), or similar obligations of other states or their subdivisions, (i)
distributions with respect to shares of the Fund ("Distributions") will be
exempt from Ohio personal income tax and municipal and school district income
taxes in Ohio, and will be excluded from the net income base of the Ohio
corporation franchise tax to the extent such Distributions are properly
attributable to interest payments on Ohio Obligations or on obligations issued
by the Governments of the Commonwealth of Puerto Rico, the United States Virgin
Islands or Guam (Territorial Obligations), and (ii) Distributions of profit made
on the sale, exchange, or other disposition of Ohio Obligations, including
Distributions of "capital gain dividends," as defined in the Code, properly
attributable to the sale, exchange, or other disposition of Ohio Obligations,
will be exempt from Ohio personal income tax, and municipal and school district
income taxes in Ohio, and will be excluded from the net income base of the Ohio
corporation franchise tax.
Distributions that are properly attributable to interest on obligations of the
United States or its territories or possessions or of any authority, commission,
or instrumentality of the United States that is exempt from state income taxes
under the laws of the United States (including Territorial Obligations) will be
exempt from Ohio personal income tax and municipal and school district income
taxes in Ohio, and will be excluded from the net income base of the Ohio
corporation franchise tax.
However, other Distributions will generally not be exempt from Ohio personal
income tax and municipal and school district income taxes in Ohio, and shares of
the Fund will not be excluded from the net worth base of the Ohio corporation
franchise tax.
PORTFOLIO TURNOVER
Years ended January 31
1996 1995
---- ----
California Fund 47% 47%
Connecticut Fund 13% 22%
Florida Fund 83% 45%
Massachusetts Fund 21% 58%
Michigan Fund 48% 40%
Minnesota Fund 42% 26%
New York Fund 39% 65%
North Carolina 34% 37%
Ohio Fund 31% 33%
FUND CHARGES AND EXPENSES
Under the Funds' management agreement, the Funds pay the Adviser a monthly fee
at the annual rates of the Funds' combined average daily net assets: on the
first $1 billion of combined average daily net assets, the annual rate shall be
0.5375% for January through March, 1996, 0.525% for April through June 1996,
0.5125% for July through September 1996, and 0.5% thereafter: on the next $1
billion of combined average daily net assets, the annual rate shall be 0.51%;
and on the combined average daily net assets in excess of $2 billion, the annual
rate shall be 0.45%.
Recent Fees paid to the Adviser, CISI and CISC (dollars in thousands)
<TABLE>
<CAPTION>
California Fund
Years ended January 31
1996 1995 1994
---- ---- - ----
<S> <C> <C> <C>
Management fee (before reduction) $2,207 $2,457 $2,622
Bookkeeping fee 153 161 162
Shareholder service and transfer agent fee 650 671 679
12b-1 fees:
Service fee (a) 496 71 ---
Distribution fee (Class B) 778 762 552
Fees waived or borne by the Adviser (51) (241) (347)
</TABLE>
<TABLE>
<CAPTION>
Connecticut Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Management fee (before reduction) $854 $870 $808
Bookkeeping fee 65 63 56
Shareholder service and transfer agent fee 256 240 210
12b-1 fees:
Service fee (a) 200 27 ---
Distribution fee (Class B) 596 540 393
Fees waived or borne by the Adviser (672) (841) (877)
</TABLE>
<TABLE>
<CAPTION>
Florida Fund
Years ended January 31
1996 1995
---- ----
<S> <C> <C>
Management fee (before reduction) $346 $316
Bookkeeping fee 32 29
Shareholder service and transfer agent fee 103 89
12b-1 fees:
Service fee (a) 89 9
Distribution fee (Class B) 253 236
Fees waived or borne by the Adviser (353) (411)
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Management fee (before reduction) $1,414 $1,446 $1,474
Bookkeeping fee 101 99 95
Shareholder service and transfer agent fee 419 400 384
12b-1 fees:
Service fee (a) 332 45 ---
Distribution fee (Class B) 440 396 265
Fees waived or borne by the Adviser (153) (298) (507)
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Management fee (before reduction) $309 $326 $314
Bookkeeping fee 30 30 28
Shareholder service and transfer agent fee 96 96 82
12b-1 fees:
Service fee (a) 69 10 ---
Distribution fee (Class B) 109 112 84
Fees waived or borne by the Adviser (143) (185) (174)
</TABLE>
<TABLE>
<CAPTION>
Minnesota Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Management fee (before reduction) $288 $295 $274
Bookkeeping fee 14 28 27
Shareholder service and transfer agent fee 28 88 76
12b-1 fees:
Service fee (a) 68 9 ---
Distribution fee (Class B) 126 99 50
Fees waived or borne by the Adviser (125) (137) (93)
</TABLE>
<TABLE>
<CAPTION>
New York Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Management fee (before reduction) $566 $574 $556
Bookkeeping fee 46 45 42
Shareholder service and transfer agent fee 169 159 146
12b-1 fee:
Service fee (a) 136 17 ---
Distribution fee (Class B) 370 330 241
Fees waived or borne by the Adviser (395) (471) (268)
</TABLE>
<TABLE>
<CAPTION>
North Carolina Fund
Years ended January 31
Period September 1, 1993
(commencement of
operations)
through January 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Management fee (before reduction) $186 $165 $32
Bookkeeping fee 27 27 11
Shareholder service and transfer agent fee 59 49 8
12b-1 fees:
Service fee (a) 44 5 ---
Distribution fee (Class B) 142 105 20
Fees waived or borne by the Adviser (261) (271) (65)
</TABLE>
<TABLE>
<CAPTION>
Ohio Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Management fee (before reduction) $696 $720 $630
Bookkeeping fee 55 54 46
Shareholder service and transfer agent fee 222 213 170
12b-1 fees:
Service fee (a) 156 23 ---
Distribution fee (Class B) 418 399 241
Fees waived or borne by the Adviser (145) (202) (94)
</TABLE>
(a) Effective December 31, 1994, each Fund pays CISI monthly a service fee at
the rate of 0.10% of average net assets attributed to shares outstanding on
November 30, 1994 and 0.25% of average net assets attributed to shares issued
thereafter.
Brokerage Commissions (dollars in thousands)
<TABLE>
<CAPTION>
California Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total commissions $12 $10 $0
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Connecticut Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total commissions $5 $2 $11
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Florida Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total commissions $4 $4 $3
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total commissions $7 $5 $3
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total commissions $3 $2 $1
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Minnesota Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total commissions $2 $0 $0
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
<TABLE>
<CAPTION>
New York Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total commissions $5 $3 $1
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
<TABLE>
<CAPTION>
North Carolina Fund
Period September 1, 1993
(commencement of
Years ended January 31 operations)
through January 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total commissions $2 $2 $1
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Ohio Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
1Total commissions $6 $4 $0
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
(b) See "Management of the Colonial Funds - Portfolio Transactions - Brokerage
and research services" in Part 2 of this SAI.
<PAGE>
Trustees Fees
For the fiscal year ended January 31, 1996 and the calendar year ended December
31, 1995, the Trustees received the following compensation for serving as
Trustees:
<TABLE>
<CAPTION>
California Fund
Aggregate Compensation Total Compensation From Trust and
From Fund For Fund Complex Paid to the Trustees
The Fiscal Year Ended For The Calendar Year Ended
Trustee 1/31/96 12/31/95 (c)
- ------- ------- ------------
<S> <C> <C>
Robert J. Birnbaum (d) $2,294 $71,250
Tom Bleasdale 2,720 (e) 98,000 (f)
Lora S. Collins 2,296 91,000
James E. Grinnell (d) 2,284 71,250
William D. Ireland, Jr. 3,144 113,000
Richard W. Lowry (d) 2,289 71,250
William E. Mayer 2,527 91,000
James L. Moody, Jr. 2,637 (g) 94,500 (h)
John J. Neuhauser 2,530 91,000
George L. Shinn 2,864 120,500
Robert L. Sullivan 2,792 101,000
Sinclair Weeks, Jr. 3,111 112,000
</TABLE>
(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 a Trustee of the Colonial Funds complex on April 21, 1995.
(e) Includes $1,466 payable in later years as deferred compensation.
(f) Includes $49,000 payable in later years as deferred compensation.
(g) Total compensation of $2,637 for the fiscal year ended January 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.
Connecticut Fund
Aggregate Compensation
From Fund For
Trustee The Fiscal Year Ended 1/31/96
- ------- -----------------------------
Robert J. Birnbaum $1,338
Tom Bleasdale 1,592 (i)
Lora S. Collins 1,341
James E. Grinnell 1,344
William D. Ireland, Jr. 1,837
Richard W. Lowry 1,339
William E. Mayer 1,481
James L. Moody, Jr. 1,534 (j)
John J. Neuhauser 1,479
George L. Shinn 1,669
Robert L. Sullivan 1,633
Sinclair Weeks, Jr. 1,817
(i) Includes $917 payable as deferred compensation.
(j) Total compensation of $1,534 for the fiscal year ended January
31, 1996 will be payable in later years as deferred compensation.
<PAGE>
Florida Fund
Aggregate Compensation
From Fund For
Trustee The Fiscal Year Ended 1/31/96
- ------- -----------------------------
Robert J. Birnbaum $989
Tom Bleasdale 1,176(k)
Lora S. Collins 997
James E. Grinnell 990
William D. Ireland, Jr. 1,359
Richard W. Lowry 990
William E. Mayer 1,095
James L. Moody, Jr. 1,136 (l)
John J. Neuhauser 1,093
George L. Shinn 1,236
Robert L. Sullivan 1,205
Sinclair Weeks, Jr. 1,345
(k) Includes $677 payable as deferred compensation.
(l) Total compensation of $1,136 for the fiscal year ended January
31, 1996 will be payable in later years as deferred compensation.
Massachusetts Fund
Aggregate Compensation
From Fund For
Trustee The Fiscal Year Ended 1/31/96
- ------- -----------------------------
Robert J. Birnbaum $1,729
Tom Bleasdale 2,046 (m)
Lora S. Collins 1,730
James E. Grinnell 1,728
William D. Ireland, Jr. 2,358
Richard W. Lowry 1,730
William E. Mayer 1,901
James L. Moody, Jr. 1,979 (n)
John J. Neuhauser 1,903
George L. Shinn 2,148
Robert L. Sullivan 2,102
Sinclair Weeks, Jr. 2,339
(m) Includes $1,178 payable as deferred compensation.
(n) Total compensation of $1,979 for the fiscal year ended January
31, 1996 will be payable in later years as deferred compensation.
Michigan Fund
Aggregate Compensation
From Fund For
Trustee The Fiscal Year Ended 1/31/96
- ------- -----------------------------
Robert J. Birnbaum $973
Tom Bleasdale 1,151 (o)
Lora S. Collins 971
James E. Grinnell 973
William D. Ireland, Jr. 1,325
Richard W. Lowry 972
William E. Mayer 1,070
James L. Moody, Jr. 1,114 (p)
John J. Neuhauser 1,069
George L. Shinn 1,206
Robert L. Sullivan 1,184
Sinclair Weeks, Jr. 1,314
(o) Includes $662 payable as deferred compensation.
(p) Total compensation of $1,114 for the fiscal year ended January
31, 1996 will be payable in later years as deferred compensation.
<PAGE>
Minnesota Fund
Aggregate Compensation
From Fund For
Trustee The Fiscal Year Ended 1/31/96
- ------- -----------------------------
Robert J. Birnbaum $956
Tom Bleasdale 1,135 (q)
Lora S. Collins 955
James E. Grinnell 958
William D. Ireland, Jr. 1,304
Richard W. Lowry 956
William E. Mayer 1,053
James L. Moody, Jr. 1,092 (r)
John J. Neuhauser 1,053
George L. Shinn 1,187
Robert L. Sullivan 1,165
Sinclair Weeks, Jr. 1,294
(q) Includes $653 payable as deferred compensation.
(r) Total compensation of $1,092 for the fiscal year ended January
31, 1996 will be payable in later years as deferred compensation.
New York Fund
Aggregate Compensation
From Fund For
Trustee The Fiscal Year Ended 1/31/96
- ------- -----------------------------
Robert J. Birnbaum $1,145
Tom Bleasdale 1,356 (s)
Lora S. Collins 1,148
James E. Grinnell 1,139
William D. Ireland, Jr. 1,568
Richard W. Lowry 1,141
William E. Mayer 1,256
James L. Moody, Jr. 1,313 (t)
John J. Neuhauser 1,258
George L. Shinn 1,424
Robert L. Sullivan 1,390
Sinclair Weeks, Jr. 1,550
(s) Includes $781 payable as deferred compensation.
(t) Total compensation of $1,313 for the fiscal year ended January
31, 1996 will be payable in later years as deferred
compensation.
North Carolina Fund
Aggregate Compensation
From Fund For
Trustee The Fiscal Year Ended 1/31/96
- ------- -----------------------------
Robert J. Birnbaum $882
Tom Bleasdale 1,051 (u)
Lora S. Collins 891
James E. Grinnell 884
William D. Ireland, Jr. 1,213
Richard W. Lowry 885
William E. Mayer 977
James L. Moody, Jr. 1,016 (v)
John J. Neuhauser 975
George L. Shinn 1,103
Robert L. Sullivan 1,073
Sinclair Weeks, Jr. 1,202
(u) Includes $604 payable as deferred compensation.
(v) Total compensation of $1,016 for the fiscal year ended January
31, 1996 will be payable in later years as deferred compensation.
Ohio Fund
Aggregate Compensation
From Fund For
Trustee The Fiscal Year Ended 1/31/965
- ------- ------------------------------
James J. Birnbaum $1,241
Tom Bleasdale 1,474 (w)
Lora S. Collins 1,242
James E. Grinnell 1,243
William D. Ireland, Jr. 1,697
Richard D. Lowry 1,241
William E. Mayer 1,368
James L. Moody, Jr. 1,419 (x)
John J. Neuhauser 1,369
George L. Shinn 1,544
Robert L. Sullivan 1,509
Sinclair Weeks, Jr. 1,683
(w) Includes $848 payable as deferred compensation.
(x) Total compensation of $1,419 for the fiscal year ended January
31, 1996 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 (y):
Total Compensation Total Compensation
From Liberty Funds II For From Liberty Funds I For
The Period January 1, 1995 The Calendar Year Ended
Trustee through March 26, 1995 December 31, 1995 (z)
- ------- ---------------------- ---------------------
Robert J. Birnbaum $2,900 $16,675
James E. Grinnell 2,900 22,900
Richard W. Lowry 2,900 26,250 (aa)
(y) 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.
(z) 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).
(aa) 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 Funds
At April 30, 1996, the officers and Trustees of the Trust as a group owned less
than 1% of the outstanding shares of each of the California, Connecticut,
Florida, Massachusetts, Michigan, Minnesota, New York, North Carolina and Ohio
Funds.
At April 30, 1996, the following shareholders owned 5% or more of the following
Funds' outstanding Class A and Class B shares:
California Fund: Merrill Lynch, Pierce, Fenner & Smith, Inc., Mutual Fund
Operations, 4800 Deer Lake Drive E, 3rd Floor, Jacksonville, FL 32216 (Class A:
9.12%) (Class B: 8.27%)
Connecticut Fund: Merrill Lynch, Pierce, Fenner & Smith, Inc., Mutual Fund
Operations, 4800 Deer Lake Drive E, 3rd Floor, Jacksonville, FL 32216 (Class A:
14.43%) (Class B: 20.40%)
Florida Fund: Merrill Lynch, Pierce, Fenner & Smith, Inc., Mutual Fund
Operations, 4800 Deer Lake Drive E, 3rd Floor, Jacksonville, FL, 32216(Class A
14.87%) (Class B: 15.39%)
Massachusetts Fund: Merrill Lynch, Pierce, Fenner & Smith, Inc., Mutual Fund
Operations, 4800 Deer Lake Drive E, 3rd Floor, Jacksonville, FL 32216 (Class A:
5.42%)
Michigan Fund: Merrill Lynch, Pierce, Fenner & Smith, Inc., Mutual Fund
Operations, 4800 Deer Lake Drive E, 3rd Floor, Jacksonville, FL 32216-0561
(Class A: 10.45%) (Class B: 24.85%)
Minnesota Fund: Merrill Lynch, Pierce, Fenner & Smith, Inc., Mutual Fund
Operations, 4800 Deer Lake Drive E, 3rd Floor, Jacksonville, FL 32216 (Class B:
9.04%)
New York Fund: Merrill Lynch, Pierce, Fenner & Smith, Inc., Mutual Fund
Operations, 4800 Deer Lake Drive E, 3rd Floor, Jacksonville, FL 32216 (Class A:
16.58%) (Class B: 20.40%)
North Carolina Fund: Frank M. Drendel, 330 17th Avenue NW, Hickory, NC
28601-1817 (Class A: 7.24); Merrill Lynch, Pierce, Fenner & Smith, Inc.,
Mutual Fund Operations, 4800 Deer Lake Drive E, 3rd Floor, Jacksonville, FL
32216 (Class B: 7.46%)
Ohio Fund: Merrill Lynch, Pierce, Fenner & Smith, Inc., Mutual Fund
Operations, 4800 Deer Lake Drive E, 3rd Floor, Jacksonville, FL 32216 (Class A:
7.51%)
At April 30, 1996, there were the following number of shareholders of each Fund:
Class A Class B
California Fund 5,061 2,277
Connecticut Fund 1,772 1,817
Florida Fund 671 707
Massachusetts Fund 4,253 1,761
Michigan Fund 1,304 408
Minnesota Fund 1,339 644
New York Fund 1,309 1,168
North Carolina Fund 552 524
Ohio Fund 2,484 2,014
Sales Charges (dollars in thousands)
<TABLE>
<CAPTION>
_____________________________________________Class A Shares_____________________________________________________
California Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share $270 $483 $1,527
sales
Initial sales charges retained by CISI 34 47 201
</TABLE>
<TABLE>
<CAPTION>
Connecticut Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share $279 $370 $1,057
sales
Initial sales charges retained by CISI 30 34 117
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Florida Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share $264 $153 $716
sales
Initial sales charges retained by CISI 35 12 33
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share $396 $634 $1,463
sales
Initial sales charges retained by CISI 51 55 167
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share $88 $143 $315
sales
Initial sales charges retained by CISI 10 12 34
</TABLE>
<TABLE>
<CAPTION>
Minnesota Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share $75 $143 $308
sales
Initial sales charges retained by CISI 9 12 31
</TABLE>
<TABLE>
<CAPTION>
New York Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share $199 218 $488
sales
Initial sales charges retained by CISI 23 19 52
</TABLE>
<TABLE>
<CAPTION>
North Carolina Fund
Period September 1, 1993
(commencement of
operations)
Years ended January 31 throughout January 31,
---------------------- ----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share $71 $235 $309
sales
Initial sales charges retained by CISI 8 18 4
</TABLE>
<TABLE>
<CAPTION>
Ohio Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share $126 $247 $696
sales
Initial sales charges retained by CISI 15 21 73
</TABLE>
<TABLE>
<CAPTION>
_____________________________________________Class B Shares_____________________________________________________
California Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate contingent deferred sales charges (CDSC)
on Fund redemptions retained by CISI $362 $489 $173
</TABLE>
<TABLE>
<CAPTION>
Connecticut Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions retained by CISI $171 $198 $51
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Florida Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions retained by CISI $121 $139 $11
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions retained by CISI $242 $169 $61
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions retained by CISI $44 $68 $5
</TABLE>
<TABLE>
<CAPTION>
Minnesota Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions retained by CISI $30 $31 $3
</TABLE>
<TABLE>
<CAPTION>
New York Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions retained by CISI $156 $155 $34
</TABLE>
<TABLE>
<CAPTION>
North Carolina Fund
Period September 1, 1993
(commencement of operations)
Year ended January 31 through January 31
----------- ------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions retained by CISI $78 $35 $0
</TABLE>
<TABLE>
<CAPTION>
Ohio Fund
Years ended January 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions retained by CISI $221 $181 $29
</TABLE>
Distribution Plan, CDSCs and Conversion of Shares
The Funds each offer two classes of shares - Class A and Class B. Each Fund may
in the future offer other classes of shares. The Trustees have approved 12b-1
plans (Plans) for each Fund pursuant to Rule 12b-1 under the Act. Under the
Plans, each Fund pays CISI monthly a service fee at the rate of 0.10% of average
net assets attributed to shares outstanding on November 30, 1994, and 0.25% of
average net assets attributed to shares issued thereafter. The Funds also pay
CISI a distribution fee not to exceed 0.75% of average net assets attributed to
each Fund's Class B shares. CISI may use the entire amount of such fees to
defray the costs of commissions and service fees paid to financial service firms
(FSFs) and for certain other purposes. Since the distribution and service fees
are payable regardless of the amount of CISI's expenses, CISI may realize a
profit from the fees.
The Plans authorize any other payments by the Funds to CISI (and its affiliates
including Colonial) to the extent that such payments might be construed to be
indirectly financing the distribution of each Fund's shares.
The Trustees believe the Plans could be a significant factor in the growth and
retention of each Fund's assets resulting in a more advantageous expense ratio
and increased investment flexibility which could benefit each Fund's
shareholders. The Plans will continue in effect from year to year so long as
continuance is specifically approved at least annually by a vote of the
Trustees, including the Trustees who are not interested persons of the Trust and
have no direct or indirect financial interest in the operation of the Plans or
in any agreements related to the Plans (Independent Trustees), cast in person at
a meeting called for the purpose of voting on the Plans. The Plans may not be
amended to increase the fee materially without approval by vote of a majority of
the outstanding voting securities of the relevant class of shares and all
material amendments of the Plans must be approved by the Trustees in the manner
provided in the foregoing sentence. The Plans may be terminated at any time by
vote of a majority of the Independent Trustees or by vote of a majority of the
outstanding voting securities of the relevant class of shares. The continuance
of the Plans will only be effective if the selection and nomination of the
Trustees who are non-interested Trustees is effected by such non-interested
Trustees.
Class A shares are offered at net asset value plus varying sales charges which
may include a CDSC. Class B shares are offered at net asset value and are
subject to a CDSC if redeemed within six years after the purchase.
The CDSCs are described in the Prospectus.
No CDSC will be imposed on distributions or on amounts which represent an
increase in the value of the shareholders account resulting from 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.
Approximately eight years after the end of the month in which a Class B share is
purchased, such share and a pro rata portion of any shares issued on the
reinvestment of distributions will be automatically converted into Class A
shares having an equal value, which are not subject to the distribution fee.
Sales-related expenses (dollars in thousands) of CISI relating to the Funds for
the fiscal year ended January 31, 1996 were:
<TABLE>
<CAPTION>
California Fund Connecticut Fund
Class A Class B Class A Class B
<S> <C> <C> <C> <C>
Fees to FSFs $363 $509 $106 $484
Cost of sales material (including printing and mailing 24 23 17 20
expenses)
Allocated travel, entertainment and other promotional
expenses (including advertising) 56 48 45 51
</TABLE>
<TABLE>
<CAPTION>
Florida Fund Massachusetts Fund
Class A Class B Class A Class B
<S> <C> <C> <C> <C>
Fees to FSFs $53 $273 $288 $407
Cost of sales material (including printing and mailing 20 16 52 22
expenses)
Allocated travel, entertainment and other promotional
expenses (including advertising) 41 32 102 47
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund Minnesota Fund
Class A Class B Class A Class B
<S> <C> <C> <C> <C>
Fees to FSFs $52 $75 $56 $179
Cost of sales material (including printing and mailing 10 7 8 11
expenses)
Allocated travel, entertainment and other promotional
expenses (including advertising) 10 7 17 21
</TABLE>
<TABLE>
<CAPTION>
New York Fund North Carolina Fund
Class A Class B Class A Class B
<S> <C> <C> <C> <C>
Fees to FSFs $82 $431 $23 $131
Cost of sales material (including printing and mailing 15 25 8 11
expenses)
Allocated travel, entertainment and other promotional
expenses (including advertising) 33 52 19 14
</TABLE>
<TABLE>
<CAPTION>
Ohio Fund
Class A Class B
<S> <C> <C>
Fees to FSFs $89 $250
Cost of sales material including (printing and mailing 6 10
expenses)
Allocated travel, entertainment and other promotional expenses
(including advertising) 17 25
</TABLE>
<PAGE>
INVESTMENT PERFORMANCE
The following Funds' Class A and Class B yields for the month ended January 31,
1996, were:
<TABLE>
<CAPTION>
Class A Shares
Yield Tax-Equivalent Yield(bb) Adjusted Yield(cc)
<S> <C> <C> <C>
California Fund 4.37% 8.13% --%
Connecticut Fund 4.62% 8.01% 4.32%
Florida Fund 4.59% 7.60% 4.16%
Massachusetts Fund 4.50% 8.47% 4.46%
Michigan Fund 4.50% 7.81% 4.25%
Minnesota Fund 4.49% 8.12% 4.28%
New York Fund 4.74% 8.93% 4.44%
North Carolina Fund 4.83% 8.67% 4.25%
Ohio Fund 4.34% 7.77% 4.23%
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Yield Tax-Equivalent Yield(bb) Adjusted Yield(cc)
<S> <C> <C> <C>
California Fund 3.83% 7.12% --%
Connecticut Fund 4.09% 7.09% 3.78%
Florida Fund 4.06% 6.72% 3.61%
Massachusetts Fund 3.97% 7.47% 3.93%
Michigan Fund 3.96% 6.87% 3.71%
Minnesota Fund 3.96% 7.17% 3.74%
New York Fund 4.22% 7.93% 3.91%
North Carolina Fund 4.31% 7.74% 3.71%
Ohio Fund 3.80% 6.80% 3.69%
</TABLE>
(bb)Calculated using the effective maximum combined federal and state tax rates.
(cc) Without voluntary expense limit.
The following Funds' average annual total returns at January 31, 1996, were:
<TABLE>
<CAPTION>
Class A Shares
California Fund
Since inception
1 year 5 years 6/16/86 to 1/31/96
------ ------- ------------------
<S> <C> <C> <C>
With sales charge of 4.75% 10.29% 6.79% 6.83%
Without sales charge 15.78% 7.83% 7.37%
</TABLE>
<TABLE>
<CAPTION>
Connecticut Fund
Since inception
1 year 11/1/91 to 1/31/96
------ ------------------
<S> <C> <C>
With sales charge of 4.75% 8.36% 6.50%
Without sales charge 13.77% 7.72%
</TABLE>
<TABLE>
<CAPTION>
Florida Fund
Since inception
1 year 2/1/93 to 1/31/96
------ -----------------
<S> <C> <C>
With sales charge of 4.75% 8.16% 4.64%
Without sales charge 13.55% 6.36%
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund
Since inception
1 year 5 years 4/10/87 to 1/31/96
------ ------- ------------------
<S> <C> <C> <C>
With sales charge of 4.75% 9.44% 7.89% 7.70%
Without sales charge 14.90% 8.95% 8.30%
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund
Since inception
1 year 5 years 9/26/86 to 1/31/96
------ ------- ------------------
<S> <C> <C> <C>
With sales charge of 4.75% 7.76% 6.94% 5.96%
Without sales charge 13.13% 7.98% 6.52%
</TABLE>
<TABLE>
<CAPTION>
Minnesota Fund
Since inception
1 year 5 years 9/26/86 to 1/31/96
------ ------- ------------------
<S> <C> <C> <C>
With sales charge of 4.75% 8.11% 6.40% 6.33%
Without sales charge 13.50% 7.44% 6.88%
</TABLE>
<TABLE>
<CAPTION>
New York Fund
Since inception
1 year 5 years 9/26/86 to 1/31/96
------ ------- ------------------
<S> <C> <C> <C>
With sales charge of 4.75% 9.53% 7.30% 6.29%
Without sales charge 14.99% 8.35% 6.84%
</TABLE>
<TABLE>
<CAPTION>
North Carolina Fund
Since inception
1 year 9/1/93 to 1/31/96
------ -----------------
<S> <C> <C>
With sales charge of 4.75% 9.45% 2.30%
Without sales charge 14.91% 4.38%
</TABLE>
<TABLE>
<CAPTION>
Ohio Fund
Since inception
1 year 5 years 9/26/86 to 1/31/96
------ ------- ------------------
<S> <C> <C> <C>
With sales charge of 4.75% 8.75% 6.83% 6.56%
Without sales charge 14.18% 7.87% 7.12%
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
California Fund
Since inception
1 year 8/4/92 to 1/31/96
<S> <C> <C>
With applicable CDSC 9.94%(5.00%CDSC) 4.93%(3.00%CDSC)
Without CDSC 14.94% 5.68%
</TABLE>
<TABLE>
<CAPTION>
Connecticut Fund
Since inception
1 year 6/8/92 to 1/31/96
<S> <C> <C>
With applicable CDSC 7.93%(5.00%CDSC) 6.18%(3.00%CDSC)
Without CDSC 12.93% 6.88%
</TABLE>
<TABLE>
<CAPTION>
Florida Fund
Since inception
1 year 2/1/93 to 1/31/96
<S> <C> <C>
With applicable CDSC 7.72% (5.00%CDSC) 4.67%(3.00%CDSC)
Without CDSC 12.72% 5.57%
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund
Since inception
1 year 6/8/92 to 1/31/96
<S> <C> <C>
With applicable CDSC 9.05%(5.00%CDSC) 6.84% (3.00%CDSC)
Without CDSC 14.05% 7.52%
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund
Since inception
1 year 8/4/92 to 1/31/96
<S> <C> <C>
With applicable CDSC 7.30%(5.00%CDSC) 5.08%(3.00%CDSC)
Without CDSC 12.30% 5.83%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Minnesota Fund
Since inception
1 year 8/4/92 to 1/31/96
<S> <C> <C>
With applicable CDSC 7.66% (5.00%CDSC) 5.00% (3.00% CDSC)
Without CDSC 12.66% 5.75%
</TABLE>
<TABLE>
<CAPTION>
New York Fund
Since inception
1 year 8/4/92 to 1/31/96
<S> <C> <C>
With applicable CDSC 9.15%(5.00% CDSC) 5.06%(3.00%CDSC)
Without CDSC 14.15% 5.81%
</TABLE>
<TABLE>
<CAPTION>
North Carolina Fund
Since inception
1 year 9/1/93 to 1/31/96
<S> <C> <C>
With applicable CDSC 9.07(5.00%CDSC) 2.45%(3.00%CDSC)
Without CDSC 14.07% 3.61%
</TABLE>
<TABLE>
<CAPTION>
Ohio Fund
Since inception
1 year 8/4/92 to 1/31/96
<S> <C> <C>
With applicable CDSC 8.34%(5.00%CDSC) 4.91% (3.00%CDSC)
Without CDSC 13.34% 5.66%
</TABLE>
The following Funds' Class A and Class B share distribution rates at January 31,
1996, based on the most recent month's distribution, annualized, and the maximum
offering price at the end of the month, were:
Fund Class A Class B
California Fund 4.78% 4.27%
Connecticut Fund 4.88% 4.39%
Florida Fund 5.03% 4.54%
Massachusetts Fund 4.82% 4.31%
Michigan Fund 4.87% 4.38%
Minnesota Fund 4.82% 4.31%
New York Fund 5.20% 4.72%
North Carolina Fund 4.91% 4.41%
Ohio Fund 4.63% 4.11%
See Part 2 of this SAI, "Performance Measures," for how calculations are made.
CUSTODIAN
UMB, n.a. is the Funds' custodian. The Funds' custodian is responsible for
safeguarding each Fund's cash and securities, receiving and delivering
securities and collecting the Fund's interest and dividends.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP are the Funds' independent accountants providing audit and
tax return preparation services and assistance and consultation in connection
with the review of various SEC filings. The financial statements incorporated by
reference in this SAI have been so incorporated, and the schedules of financial
highlights in the Prospectus have been so included, in reliance upon the report
of Price Waterhouse LLP given on the authority of said firm as experts in
accounting and auditing.
The following Funds' financial statements and Reports of Independent Accountants
appearing on the referenced pages in each of the Fund's January 31, 1996 Annual
Reports are incorporated in this SAI by reference:
Fund Pages
- ---- -----
California Fund 6-28
Connecticut Fund 6-24
Florida Fund 6-19
Massachusetts Fund 6-26
Michigan Fund 6-21
Minnesota Fund 6-23
New York Fund 6-22
North Carolina Fund 6-19
Ohio Fund 6-24
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 accreted. The value of these securities may
fluctuate more than similar securities which are issued at par and pay interest
periodically. Although these securities pay no interest to holders prior to
maturity, interest on these securities is reported as income to the fund and
distributed to its shareholders. These distributions must be made from the
fund's cash assets or, if necessary, from the proceeds of sales of portfolio
securities. The fund will not be able to purchase additional income producing
securities with cash used to make such distributions and its current income
ultimately may be reduced as a result.
Step Coupon Bonds (Steps)
The fund may invest in debt securities which do not pay interest for a stated
period of time and then pay interest at a series of different rates for a series
of periods. In addition to the risks associated with the credit rating of the
issuers, these securities are subject to the volatility risk of zero coupon
bonds for the period when no interest is paid.
Pay-In-Kind (PIK) Securities
The fund may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are generally
high yield securities and in addition to the other risks associated with
investing in high yield securities are subject to the risks that the interest
payments which consist of additional securities are also subject to the risks of
high yield securities.
Money Market Instruments
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposits are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper are promissory notes issued
by businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-term
needs. Participation Interests include the underlying securities and any related
guaranty, letter of credit, or collateralization arrangement which the fund
would be allowed to invest in directly.
Securities Loans
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 a fund's present intention
to enter into repurchase agreements only with commercial banks and registered
broker-dealers and only with respect to obligations of the U.S. government or
its agencies or instrumentalities. Repurchase agreements may also be viewed as
loans made by the fund which are collateralized by the securities subject to
repurchase. The Adviser will monitor such transactions to determine that the
value of the underlying securities is at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, the fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the fund sells a security and agrees to
repurchase the same security at a mutually agreed upon date and price. A reverse
repurchase agreement may also be viewed as the borrowing of money by the fund
and, therefore, as a form of leverage. 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 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 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 fund investing in tax-exempt securities issued by a governmental entity may
purchase and sell futures contracts and related options on U.S. Treasury
securities when, in the opinion of the Adviser, price movements in Treasury
security futures and related options will correlate closely with price movements
in the tax-exempt securities which are the subject of the hedge. U.S. Treasury
securities futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right in return for the premium paid to assume
a position in a U.S. Treasury futures contract at the specified option exercise
price at any time during the period of the option.
In addition to the risks generally involved in using futures contracts, there is
also a risk that price movements in U.S. Treasury security futures contracts and
related options will not correlate closely with price movements in markets for
tax-exempt securities.
Index futures contracts. An index futures contract is a contract to buy or sell
units of an index at a specified future date at a price agreed upon when the
contract is made. Entering into a contract to buy units of an index is commonly
referred to as buying or purchasing a contract or holding a long position in the
index. Entering into a contract to sell units of an index is commonly referred
to as selling a contract or holding a short position. A unit is the current
value of the index. The fund may enter into stock index futures contracts, debt
index futures contracts, or other index futures contracts appropriate to its
objective(s). The fund may also purchase and sell options on index futures
contracts.
There are several risks in connection with the use by the fund of index futures
as a hedging device. One risk arises because of the imperfect correlation
between movements in the prices of the index futures and movements in the prices
of securities which are the subject of the hedge. The Adviser will attempt to
reduce this risk by selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the fund's portfolio securities sought to be hedged.
Successful use of the index futures by the fund for hedging purposes is also
subject to the Adviser's ability to predict correctly movements in the direction
of the market. It is possible that, where the fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the fund's portfolio may
decline. If this occurs, the fund would lose money on the futures and also
experience a decline in the value in its portfolio securities. However, while
this could occur to a certain degree, the Adviser believes that over time the
value of the fund's portfolio will tend to move in the same direction as the
market indices which are intended to correlate to the price movements of the
portfolio securities sought to be hedged. It is also possible that, if the fund
has hedged against the possibility of a decline in the market adversely
affecting securities held in its portfolio and securities prices increase
instead, the fund will lose part or all of the benefit of the increased valued
of those securities that it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the index futures and the securities of
the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures markets are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which would distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction.
Options on index futures. Options on index futures are similar to options on
securities except that options on index futures give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put), at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the index futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the index future. If an option is exercised on
the last trading day prior to the expiration date of the option, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
Options on indices. As an alternative to purchasing call and put options on
index futures, the fund may purchase call and put options on the underlying
indices themselves. Such options could be used in a manner identical to the use
of options on index futures.
Foreign Currency Transactions
The fund may engage in currency exchange transactions to protect against
uncertainty in the level of future currency exchange rates.
The fund may engage in both "transaction hedging" and "position hedging". When
it engages in transaction hedging, the fund enters into foreign currency
transactions with respect to specific receivables or payables of the fund
generally arising in connection with the purchase or sale of its portfolio
securities. The fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the fund attempts to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
The fund may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. The fund may also
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the fund may also purchase exchange-listed and
over-the-counter call and put options on foreign currency futures contracts and
on foreign currencies. Over-the-counter options are considered to be illiquid by
the SEC staff. A put option on a futures contract gives the fund the right to
assume a short position in the futures contract until expiration of the option.
A put option on currency gives the fund the right to sell a currency at an
exercise price until the expiration of the option. A call option on a futures
contract gives the fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
fund the right to purchase a currency at the exercise price until the expiration
of the option.
When it engages in position hedging, the fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or an increase in
the value of currency for securities which the fund expects to purchase, when
the fund holds cash or short-term investments). In connection with position
hedging, the fund may purchase put or call options on foreign currency and
foreign currency futures contracts and buy or sell forward contracts and foreign
currency futures contracts. The fund may also purchase or sell foreign currency
on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the fund is obligated to deliver and if a decision is made
to sell the security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the underlying
prices of the securities which the fund owns or intends to purchase or sell.
They simply establish a rate of exchange which one can achieve at some future
point in time. Additionally, although these techniques tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they tend to limit
any potential gain which might result from the increase in value of such
currency.
Currency forward and futures contracts. 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.
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.
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 than the ratio of net tax-exempt
income to total net investment income earned during any particular portion of
the year. Thus, a shareholder who holds shares for only a part of the year may
be allocated more or less tax-exempt dividends than would be the case if the
allocation were based on the ratio of net tax-exempt income to total net
investment income actually earned while a shareholder.
The Tax Reform Act of 1986 makes income from certain "private activity bonds"
issued after August 7, 1986, a tax preference item for the 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 shareholderwho 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 and Colonial Newport Tiger 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 Fund Principal Occupation During Past Five Years
- ---------------- --- ------------------ -------------------------------------------
<S> <C> <C> <C>
Robert J. Birnbaum(1) (2) 68 Trustee Retired since 1994 (formerly Special Counsel, Dechert
313 Bedford Road Price & Rhoads from September, 1988 to December, 1993)
Ridgewood, NJ 07450
Tom Bleasdale 65 Trustee Retired since 1993 (formerly Chairman of the Board and
1508 Ferncroft Tower Chief Executive Officer, Shore Bank & Trust Company from
Danvers, MA 01923 1992-1993), is a Director of The Empire Company since
June, 1995 (3)
Lora S. Collins 60 Trustee Attorney with Kramer, Levin, Naftalis, Nessen, Kamin &
919 Third Avenue Frankel since September, 1986 (3)
New York, NY 10022
James E. Grinnell (1) (2) 66 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) 59 Trustee Private Investor since August, 1987
10701 Charleston Drive
Vero Beach, FL 32963
William E. Mayer* 55 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. 64 Trustee Chairman of the Board, Hannaford Bros., Co. since May,
1984 (formerly Chief Executive Officer, Hannaford Bros.
Co. from May, 1973 to May, 1992) (3)
John J. Neuhauser 52 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. 72 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 (former 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)
Peter L. Lydecker 41 Controller Controller of Colonial funds since June, 1993 (formerly
(formerly Assistant Controller from March, 1985 to June, 1993);
Assistant Vice President of the Adviser since June, 1993
Controller) (formerly Assistant Vice President of the Adviser from
August, 1988 to June, 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)
Richard A. Silver 49 Treasurer and Treasurer and Chief Financial Officer of Colonial funds
Chief Financial since July, 1993 (formerly Controller from July, 1980
Officer to July, 1993), is Senior Vice President and Director
(formerly since April, 1988 and Treasurer and Chief Financial
Controller) Officer since July, 1993 of the Adviser (formerly
Assistant Treasurer from January, 1978 to July,1993);
Treasurer and Chief Financial Officer of TCG since July,
1993(formerly Assistant Treasurer of TCG from January,
1985 to July, 1993) (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 into Liberty Financial which occurred on March 27, 1995,
Liberty Financial Trust (LFT) changed its name to Colonial Trust VII.
Prior to the merger, each of Messrs. Birnbaum, Grinnell, and Lowry was
a Trustee of LFT. Mr. Birnbaum has been a Trustee of LFT since
November, 1994. Each of Messrs. Grinnell and Lowry has been a Trustee
of LFT since August, 1991. Each of Messrs. Grinnell and Lowry continue
to serve as Trustees under the new name, Colonial Trust VII, along with
each of the other Colonial Trustees named above. The Colonial Trustees
were elected as Trustees of Colonial Trust VII effective April 3, 1995.
(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 the 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 30 open-end and 5 closed-end management investment company
portfolios, and is the administrator for 3 open-end management investment
company portfolios (collectively, Colonial funds). Trustees and officers of the
Trust, who are also officers of 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 $15.5 billion in assets.
The Agreement and Declaration of Trust (Declaration) of the Trust provides that
the Trust will indemnify its Trustees and officers against liabilities and
expenses incurred in connection with litigation in which they may be involved
because of their offices with the Trust but that such indemnification will not
relieve any officer or Trustee of any liability to the Trust or its shareholders
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties. The Trust, at its expense, provides liability
insurance for the benefit of its Trustees and officers.
The Management Agreement (this section does not apply to the Colonial Municipal
Money Market Fund, Colonial Global Utilities Fund or Colonial Newport Tiger
Fund) Under a Management Agreement (Agreement), the Adviser has contracted to
furnish each fund with investment research and recommendations or fund
management, respectively, and accounting and administrative personnel and
services, and with office space, equipment and other facilities. For these
services and facilities, each Colonial fund pays a monthly fee based on the
average of the daily closing value of the total net assets of each fund for such
month.
The Adviser's compensation under the Agreement is subject to reduction in any
fiscal year to the extent that the total expenses of each fund for such year
(subject to applicable exclusions) exceed the most restrictive applicable
expense limitation prescribed by any state statute or regulatory authority in
which the Trust's shares are qualified for sale. The most restrictive expense
limitation applicable to a Colonial fund is 2.5% of the first $30 million of the
Trust's average net assets for such year, 2% of the next $70 million and 1.5% of
any excess over $100 million.
Under the Agreement, any liability of the Adviser to the fund and its
shareholders is limited to situations involving the Adviser's own willful
misfeasance, bad faith, gross negligence or reckless disregard of duties.
The Agreement may be terminated with respect to the fund at any time on 60 days'
written notice by the Adviser or by the Trustees of the Trust or by a vote of a
majority of the outstanding voting securities of the fund. The Agreement will
automatically terminate upon any assignment thereof and shall continue in effect
from year to year only so long as such continuance is approved at least annually
(i) by the Trustees of the Trust or by a vote of a majority of the outstanding
voting securities of the fund and (ii) by vote of a majority of the Trustees who
are not interested persons (as such term is defined in the 1940 Act) of the
Adviser or the Trust, cast in person at a meeting called for the purpose of
voting on such approval.
The Adviser pays all salaries of officers of the Trust. The Trust pays all
expenses not assumed by the Adviser including, but not limited to, auditing,
legal, custodial, investor servicing and shareholder reporting expenses. The
Trust pays the cost of typesetting for its Prospectuses and the cost of printing
and mailing any Prospectuses sent to shareholders. CISI pays the cost of
printing and distributing all other Prospectuses.
The Agreement provides that the Adviser shall not be subject to any liability to
the Trust or to any shareholder of the Trust for any act or omission in the
course of or connected with rendering services to the Trust in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties on the part of the Adviser.
Administration Agreement (this section applies only to the Colonial Municipal
Money Market Fund, Colonial Global Utilities
Fund and Colonial Newport Tiger Fund and their respective Trusts)
Under an Administration Agreement with each Fund, 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), 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 for an annual fee of $27,000, plus 0.035% of Colonial Newport Tiger Fund's
average 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,
Colonial U.S. Fund for Growth and Colonial Global Utilities Fund. For each of
these funds, see Part 1 of its respective SAI. The Adviser of Colonial Newport
Tiger 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 and Colonial Newport Tiger Fund, each of which is
administered by the Adviser, and Colonial U.S. Fund for Growth for which
investment decisions have been delegated by the Adviser to State Street Bank and
Trust Company, the fund's sub-adviser) (as defined under Management of the Fund
herein). The Adviser's affiliate, CASI, advises other institutional, corporate,
fiduciary and individual clients for which CASI performs various services.
Various officers and Trustees of the Trust also serve as officers or Trustees of
other Colonial funds and the other corporate or fiduciary clients of the
Adviser. The Colonial funds and clients advised by the Adviser or the funds
administered by the Adviser sometimes invest in securities in which the Fund
also invests and sometimes engage in covered option writing programs and enter
into transactions utilizing stock index options and stock index and financial
futures and related options ("other instruments"). If the Fund, such other
Colonial funds and such other clients desire to buy or sell the same portfolio
securities, options or other instruments at about the same time, the purchases
and sales are normally made as nearly as practicable on a pro rata basis in
proportion to the amounts desired to be purchased or sold by each. Although in
some cases these practices could have a detrimental effect on the price or
volume of the securities, options or other instruments as far as the Fund is
concerned, in most cases it is believed that these practices should produce
better executions. It is the opinion of the Trustees that the desirability of
retaining the Adviser as investment adviser to the Colonial funds outweighs the
disadvantages, if any, which might result from these practices.
The portfolio managers of Colonial International Fund for Growth, 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
- - "Adviser" in these two paragraphs refers to the 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 than 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, and Pension and Profit-Sharing Plans
for individuals, corporations, employees and the self-employed. The minimum
initial Retirement Plan investment in these funds is $25. The First National
Bank of Boston is the Trustee and charges a $10 annual fee. Detailed information
concerning these Retirement Plans and copies of the Retirement Plans are
available from CISI.
Consultation with a competent financial and tax adviser regarding these Plans
and consideration of the suitability of fund shares as an investment under the
Employee Retirement Income Security Act of 1974 or otherwise is recommended.
Telephone Address Change Services. By calling CISC, shareholders or their FSF of
record may change an address on a recorded telephone line. Confirmations of
address change will be sent to both the old and the new addresses. 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.). 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 the Adviser , CISI and other companies
affiliated with the Adviser l; 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.
Net Asset Value Exchange Privilege (in this section, the "Adviser" refers to
Colonial Management Associates, Inc.). Class A shares of certain funds may also
be purchased at reduced or no sales charge by investors moving from another
mutual fund complex or a discretionary account and by participants in certain
retirement plans. In lieu of the commissions described in the Prospectus, the
Adviser will pay the FSF a quarterly service fee which is the service fee
established for each applicable Colonial fund.
Waiver of Contingent Deferred Sales Charges (CDSCs) (in this section, the
"Adviser" refers to Colonial Management Associates, Inc.) (Classes A, B, and D)
CDSCs may be waived on redemptions in the following situations with the proper
documentation:
1. Death.
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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 shareholders and/or their financial advisers are
automatically eligible to redeem up to $50,000 of the fund's shares by calling
1-800-422-3737 toll free any business day between 9:00 a.m. and the close of
trading of the Exchange (normally 4:00 p.m. Eastern time). Telephone redemption
privileges for larger amounts may be elected on the Application. CISC will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Telephone redemptions are not available on accounts with
an address change in the preceding 30 days and proceeds and confirmations will
only be mailed or sent to the address of record. Shareholders and/or their
financial advisers will be required to provide their name, address and account
number. Financial advisers will also be required to provide their broker number.
All telephone transactions are recorded. A loss to a shareholder may result from
an unauthorized transaction reasonably believed to have been authorized. No
shareholder is obligated to execute the telephone authorization form or to use
the telephone to execute transactions.
Checkwriting (in this section, the "Adviser" refers to Colonial Management
Associates, Inc.) (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 MEETINGS
As described under the caption "Organization and History" in the Prospectus of
each Colonial fund, the fund will not hold annual shareholders' meetings. The
Trustees may fill any vacancies in the Board of Trustees except that the
Trustees may not fill a vacancy if, immediately after filling such vacancy, less
than two-thirds of the Trustees then in office would have been elected to such
office by the shareholders. In addition, at such times as less than a majority
of the Trustees then in office have been elected to such office by the
shareholders, the Trustees must call a meeting of shareholders. Trustees may be
removed from office by a written consent signed by a majority of the outstanding
shares of the Trust or by a vote of the holders of a majority of the outstanding
shares at a meeting duly called for the purpose, which meeting shall be held
upon written request of the holders of not less than 10% of the outstanding
shares of the Trust. Upon written request by the holders of 1% of the
outstanding shares of the Trust stating that such shareholders of the Trust, for
the purpose of obtaining the signatures necessary to demand a shareholder's
meeting to consider removal of a Trustee, request information regarding the
Trust's shareholders, the Trust will provide appropriate materials (at the
expense of the requesting shareholders). Except as otherwise disclosed in the
Prospectus and this SAI, the Trustees shall continue to hold office and may
appoint their successors.
At any shareholders' meetings that may be held, shareholders of all series would
vote together, irrespective of series, on the election of Trustees or the
selection of independent accountants, but each series would vote separately from
the others on other matters, such as changes in the investment policies of that
series or the approval of the management agreement for that series.
PERFORMANCE MEASURES
Total Return
Standardized average annual total return. Average annual total return is the
actual return on a $1,000 investment in a particular class of shares of 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 is based on past performance and does not predict future results.
<PAGE>
3431
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>
363333
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
</TABLE>
<TABLE>
<CAPTION>
SOURCE CATEGORY RETURN (%)
<S> <C> <C>
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>
