October 20, 1995
COLONIAL U.S. FUND
FOR GROWTH
PROSPECTUS
BEFORE YOU INVEST
Colonial Management Associates, Inc. (Adviser) and your full-service
financial adviser want you to understand both the risks and benefits
of mutual fund investing.
While mutual funds offer significant opportunities and are
professionally managed, they also carry risks including possible loss
of principal. Unlike savings accounts and certificates of deposit,
mutual funds are not insured or guaranteed by any financial
institution or government agency.
Please consult your full-service financial adviser to determine how
investing in this mutual fund may suit your unique needs, time horizon
and risk tolerance.
Colonial U.S. Fund for Growth (Fund), a diversified portfolio of
Colonial Trust VI (Trust), an open-end management investment company,
seeks growth exceeding the S&P 500 Index (Standard & Poor's Index of
500 common stocks) performance.
The Fund is managed by the Adviser, an investment adviser since 1931.
Portfolio management has been delegated to State Street Global
Advisors, a division of State Street Bank and Trust Company (Sub-
Adviser).
This Prospectus explains concisely what you should know before
investing in the Fund. Read it carefully and retain it for future
reference. More detailed information about the Fund is in the October
20, 1995 Statement of Additional Information which has been filed with
the Securities and Exchange Commission and is obtainable free of
charge by calling the Adviser at 1-800-248-2828. The Statement of
US-01/325B-1095
Additional Information is incorporated by reference in (which means it
is considered to be a part of) this Prospectus.
The Fund offers three classes of shares. Class A shares are offered
at net asset value plus a sales charge imposed at the time of
purchase; Class B shares are offered at net asset value and, in
addition, are subject to an annual distribution fee and a declining
contingent deferred sales charge on redemptions made within six years
after purchase; and Class D shares are offered at net asset value plus
a small initial sales charge, a contingent deferred sales charge on
redemptions made within one year after purchase and a continuing
distribution fee. 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 Fund's financial history.......... 3
The Fund's investment objective....... 4
How the Fund pursues its objective.... 4
How the Fund measures its performance. 5
How the Fund is managed............... 6
How the Fund values its shares........ 7
Distributions and taxes............... 7
How to buy shares..................... 7
How to sell shares.................... 9
How to exchange shares................10
Telephone transactions................10
12b-1 plans...........................11
Organization and history..............11
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR INSURED BY, ANY BANK OR GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in the
Fund. The following tables summarize your maximum transaction costs
and annual expenses for an investment in each Class of the Fund's
shares. See "How the Fund is managed" and "12b-1 plans" for more
complete descriptions of the Fund's various costs and expenses.
Shareholder Transaction Expenses(1)(2)
Class A Class B Class D
Maximum Initial Sales Charge Imposed on a
purchase (as a % of offering price)(3).......... 5.75% 0.00%(5) 1.00%(5)
Maximum Contingent Deferred Sales Charge (as a %
of offering price)(3)........................... 1.00%(4) 5.00% 1.00%
(1) For accounts less than $1,000 an annual fee of $10 may be decucted.
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
and Class D shares, long-term Class B and Class D shareholders may
pay more in aggregate sales charges than the maximum initial sales
charge permitted by the National Association of Securities Dealers,
Inc. However, because the Fund's Class B shares automatically
convert to Class A shares after approximately eight years, this is
less likely for Class B shares than for a class without a
conversion feature.
Annual Operating Expenses (as a % of average net assets)
Class A Class B Class D
Management fee............... 0.80% 0.80% 0.80%
12b-1 fees................... 0.25 1.00 1.00
Other expenses............... 0.41 0.41 0.41
Total operating expenses..... 1.46% 2.21% 2.21%
Total expenses, excluding brokerage, interest, taxes, 12b-1
distribution fees and extraordinary expenses, are, until further
notice, voluntarily limited by the Adviser to 1.50% of average net
assets.
Example
The following Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in each Class of shares of the Fund for
the periods specified, assuming a 5% annual return, and, unless
otherwise noted, redemption at period end. The 5% return and expenses
used in this Example should not be considered indicative of actual or
expected Fund performance or expenses, both of which will vary:
Class A Class B Class D
Period: (6) (7) (6) (7)
1 year................... $ 72 $ 73 $ 23 $ 42 $ 32
3 years.................. 101 100 70 78 78
5 years.................. 133 140 120 127 127
10 years.................. 222 237(8) 237(8) 262 262
(6) Assumes redemption.
(7) Assumes no redemption.
(8) Class B shares convert to Class A shares after
approximately eight years; therefore, years 9 and 10
reflect Class A share expenses.
THE FUND'S FINANCIAL HISTORY (a)
The following schedule of financial highlights for a share
outstanding throughout each year has been audited by Price Waterhouse
LLP, independent accountants. Their unqualified report is included in
the Fund's 1995 Annual Report and is incorporated by reference into
the Statement of Additional Information.
<TABLE>
<CAPTION>
Year ended June 30
---------------------------------------------------------------------
1995 1994 1993(b)
----------------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Class B Class D(c) Class A Class B Class A Class B
Net asset value - Beginning of period $11.460 $11.400 $11.460 $11.820 $11.770 $10.000 $10.000
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.165 0.075 0.074 0.142 0.053 0.103 (d) 0.020 (d)
Net realized and unrealized
gain (loss) 2.530 2.513 2.534 (0.119) (0.122) 1.784 1.763
Total from Investment Operations 2.695 2.588 2.608 0.023 (0.069) 1.887 1.783
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.160) (0.073) (0.093) (0.138) (0.056) (0.067) (0.013)
From net realized gains (0.735) (0.735) (0.735) (0.245) (0.245) --- ---
Total Distributions Declared
to Shareholders (0.895) (0.808) (0.828) (0.383) (0.301) (0.067) (0.013)
Net asset value - End of period $13.260 $13.180 $13.240 $11.460 $11.400 $11.820 $11.770
Total return(e) 24.84% 23.94% 24.01% 0.05% (0.71)% 18.90%(f) 17.84%(f)
RATIOS TO AVERAGE NET ASSETS
Expenses 1.46% 2.21% 2.21% 1.49% 2.24% 1.50% 2.25%
Fees waived by the Adviser --- --- --- --- --- 0.01% 0.01%
Net investment income 1.37% 0.62% 0.62% 1.19% 0.44% 0.93% 0.18%
Portfolio turnover 84% 84% 84% 117% 117% 98% 98%
Net assets at end of period (000) $124,171 $218,201 $3,028 $97,180 $150,121 $44,009 $89,737
_________________________________
</TABLE>
(a) Per share data was calculated using average shares
outstanding during the period.
(b) The Fund commenced investment operations on July 1, 1992.
(c) Class D shares were initially offered on July 1, 1994. Per
share amounts reflect activity from that date.
(d) Net of fees and expenses waived or borne by the Adviser which
amounted to $0.001 and $0.001, respectively.
(e) Total return at net asset value assuming all distributions
reinvested and no initial or contingent deferred sales charges.
(f) Had the Adviser not waived or reimbursed a portion of expenses,
total return would have been reduced.
Further performance information is contained in the Fund's Annual
Report to shareholders, which is obtainable free of charge by calling
1-800-248-2828.
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks growth exceeding the S&P 500 Index performance.
HOW THE FUND PURSUES ITS OBJECTIVE
The Fund normally invests at least 65% of its total assets in U.S.
common stocks (and up to 10% in American Depository Receipts (ADRs))
that the Sub-Adviser believes have superior earnings and value
characteristics selected from a universe which meets certain
guidelines for liquidity and available investment information.
Quantitative standards, designed to identify above average intrinsic
value relative to price and favorable earnings trends, are used to
select securities. The State Street Bank Stock Valuation Universe
consists of about 1,000 securities that the Sub-Adviser believes have
the highest capitalization and liquidity and are followed by the
largest number of analysts in the U.S. The Fund intends to invest in
approximately 100 of the securities in the State Street Bank Stock
Valuation Universe ranked highest by the Sub-Adviser based on the
criteria of "Value" and momentum of Wall Street "Sentiment." "Value"
compares a company's assets, projected income growth and cash flow
growth, while "Sentiment" ranks the stocks by the strength and
consistency of changes in Wall Street analysts' earning estimates.
The S&P 500 Index is a market-value weighted index of 500 common
stocks publicly traded in the open stock market chosen on the basis of
market value and industry diversification. Standard & Poor's
Corporation and the S&P 500 Index are not affiliated with, nor do they
sponsor or recommend, the Fund or the Trust. The Fund will not
concentrate more than 25% of its total assets in any one industry.
The Fund's investments are not limited to securities in the S&P 500
Index and will not precisely match the composition of the S&P 500
Index, but may be managed to correlate with the sectors,
capitalization and volatility of the S&P Index. Portfolio securities
may be sold without regard to time held, causing a portfolio turnover
rate substantially higher than that of most funds, resulting in higher
brokerage commissions and custodian fees, and potential tax
consequences to shareholders from capital gain distributions.
Other Investment Practices. The Fund may engage in the following
investment practices, some of which are described in more detail in
the Statement of Additional Information.
Foreign Investments. The Fund may invest in foreign securities by
purchasing ADRs, which are certificates issued by U.S. banks
representing the right to foreign securities deposited with those
banks or correspondent banks. While most ADRs that the Fund will buy
are "sponsored" by the issuers of the foreign securities, the Fund may
invest in unsponsored ADRs. ADRs have special risks related to
political, economic and legal considerations outside of the U.S. As a
result, the prices of ADRs may fluctuate substantially more than the
prices of securities of issuers based in the U.S. Special risks
associated with ADRs include the possibility of unfavorable currency
exchange rates, the existence of less liquid markets, the
unavailability of reliable information about issuers, the existence
(or potential imposition) of exchange control regulations (including
currency blockage), and political and economic instability, among
others. Some foreign issuers are subject to less comprehensive
auditing, accounting and disclosure requirements than similar U.S.
issuers.
Temporary/Defensive Investments. Temporarily available cash may be
invested in certificates of deposit, bankers' acceptances, high
quality commercial paper, Treasury bills and repurchase agreements.
Some or all of the Fund's assets also may be invested in such
investments during periods of unusual market conditions. Under a
repurchase agreement, the Fund buys a security from a bank or dealer,
which is obligated to buy it back at a fixed price and time. The
security is held in a separate account at the Fund's custodian and
constitutes the Fund's collateral for the bank's or dealer's
repurchase obligation. Additional collateral may 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 right to the collateral in a
bankruptcy proceeding. Not more than 15% of the Fund's net assets
will be invested in repurchase agreements maturing in more than 7 days
and other illiquid assets.
Generally the Fund will maintain less than 5% of total assets in cash
equivalents to meet current cash flow needs. The Fund may also invest
temporarily available cash in money market investment companies,
subject to the limits of the Investment Company Act of 1940. This
will involve the duplicative payment of a portion of the expenses,
including advisory fees, of such investment companies.
The Fund may lend securities to certain institutions (that the Sub-
Adviser considers qualified) to increase income. The loans will not
exceed 30% of total assets. Securities lending involves the risk of
loss to the Fund if the borrower defaults. The Fund will place in a
segregated account with its custodian cash or high quality, liquid
debt securities having a value at least equal to the amount of
collateral received on the loan.
The Statement of Additional Information describes other investment
techniques that the Fund may use, but currently has no intention of
using for the foreseeable future.
Other. The Fund may not always achieve its investment objective. The
Fund's investment objective and non-fundamental policies may be
changed without shareholder approval. The Fund will notify investors
at least 30 days prior to any material change in the Fund's investment
objective. If there is a change in the investment objective,
shareholders should consider whether the Fund remains an appropriate
investment in light of their current financial position and needs.
Shareholders may incur a contingent deferred sales charge if shares
are redeemed in response to a change in objective. The Fund's
fundamental policies listed in the Statement of Additional Information
cannot be changed without the approval of a majority of the Fund's
outstanding voting securities. Additional information concerning
certain of the securities and investment techniques described above is
contained in the Statement of Additional Information.
HOW THE FUND MEASURES ITS PERFORMANCE
Performance may be quoted in sales literature and advertisements.
Each Class's average annual total returns are calculated in accordance
with the Securities and Exchange Commission's formula and assume the
reinvestment of all distributions, the maximum initial sales charge of
5.75% on Class A shares, the maximum initial sales charge of 1.00% on
Class D shares and the contingent deferred sales charge applicable to
the time period quoted on Class B and Class D shares. Other total
returns differ from the average annual total return only in that they
may relate to different time periods, may represent aggregate as
opposed to average annual total returns and may not reflect the
initial or contingent deferred sales charges.
Each Class's yield, which differs from total return because it does
not consider changes in net asset value, is calculated in accordance
with the Securities and Exchange Commission's formula. Each Class's
distribution rate is calculated by dividing the most recent twelve
months' distributions by the maximum offering price of that Class at
the end of the period. Each Class's performance may be compared to
various indices. Quotations from various publications may be included
in sales literature and advertisements. See "Performance Measures" in
the Statement of Additional Information for more information. All
performance information is historical and does not predict future
results.
HOW THE FUND IS MANAGED
The Trustees formulate the Fund's general policies and oversee the
Fund's affairs as conducted by the Adviser.
The Adviser is a subsidiary of The Colonial Group, Inc. Colonial
Investment Services, Inc. (Distributor) is a subsidiary of the Adviser
and serves as the distributor for the Fund's shares. Colonial
Investors Service Center, Inc. (Transfer Agent), an affiliate of the
Adviser, serves as the shareholder services and transfer agent for the
Fund. The Colonial Group, Inc. is a direct subsidiary of Liberty
Financial Companies, Inc. which in turn is an indirect subsidiary of
Liberty Mutual Insurance Company (Liberty Mutual). Liberty Mutual is
considered to be the controlling entity of the Adviser and its
affiliates. Liberty Mutual is an underwriter of worker's compensation
insurance and a property and casualty insurer in the U.S.
The Adviser furnishes the Fund with accounting and administrative
personnel and services, office space and other equipment and services,
and oversees the activities of the Sub-Adviser, for a fee at the
annual rate of 0.80% of the Fund's average daily net assets annually.
The fee is higher than that of most mutual funds. Under a separate
sub-advisory agreement, the Sub-Adviser is entitled to be paid a
monthly fee by the Adviser at the annual rate of 0.50% of average
daily net assets. The Sub-Adviser has voluntarily agreed to waive a
portion of its fee so that its actual annual fee will not exceed 0.50%
of the first $50 million of the Fund's average daily net assets, 0.40%
of the next $150 million and 0.35% of any excess over $200 million.
This waiver does not reduce the amounts payable by the Fund to the
Adviser. See the Statement of Additional Information for more
information.
The Sub-Adviser, subject to the supervision of the Trustees and the
Adviser, directs the investments of the Fund in accordance with the
Fund's investment objective, policies and restrictions. Jeffrey P.
Adams, Assistant Vice President of the Sub-Adviser, is primarily
responsible for the day-to-day management and investment decisions for
the Fund and is supported by a group of other investment professionals
that assist in the management of the Fund. Mr. Adams joined the Sub-
Adviser in 1989.
The Adviser also provides pricing and bookkeeping services to the Fund
for a monthly fee of $2,250 plus a percentage of the Fund's average
net assets over $50 million. The Transfer Agent provides transfer
agency and shareholder services to the Fund for a fee of 0.25%
annually of average net assets plus out-of-pocket expenses.
Each of the foregoing fees is subject to any reimbursement or fee
waiver to which the Adviser may agree.
The Sub-Adviser places all orders for the purchase and sale of
portfolio securities. In selecting broker-dealers, the Adviser and
the Sub-Adviser may consider research and brokerage services furnished
to them and their affiliates. Subject to seeking best execution, the
Adviser and the Sub-Adviser may consider sales of shares of the Fund
(and of certain other Colonial funds) in selecting broker-dealers for
portfolio security transactions.
HOW THE FUND VALUES ITS SHARES
Per share net asset value is calculated by dividing the total value of
each Class's net assets by its number of outstanding shares. Shares
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 their fair value following procedures adopted by
the Trustees.
DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a "regulated investment company" under
the Internal Revenue Code and to distribute to shareholders virtually
all net income and any net realized gain, at least annually. The Fund
generally makes income distributions semiannually. Distributions are
invested in additional shares of the same Class of the Fund at net
asset value unless the shareholder elects to receive cash. Regardless
of the shareholder's election, distributions of $10 or less will not
be paid in cash to shareholders but will be invested in additional
shares of the same Class of the Fund at net asset value. To change
your election, call the Transfer Agent for information.
Whether you receive distributions in cash or in additional Fund
shares, you must report them as taxable income unless you are a tax-
exempt institution. If you buy shares shortly before a distribution
is declared, the distribution will be taxable although it is in effect
a partial return of the amount invested. Each January, information on
the amount and nature of distributions for the prior year is sent to
shareholders.
HOW TO BUY SHARES
Shares are offered continuously. Orders received in good form prior
to 4:00 p.m. Eastern time (or placed with a financial service firm
before such time and transmitted by the financial service firm before
the Fund processes that day's share transactions) will be processed
based on that day's closing net asset value, plus any applicable
initial sales charge.
The minimum initial investment is $1,000; subsequent investments may
be as small as $50. The minimum initial investment for the Colonial
Fundamatic program is $50 and the minimum initial investment for a
Colonial retirement account is $25. Certificates will not be issued
for Class B or Class D shares and there are some limitations on the
issuance of Class A certificates. The Fund may refuse any purchase
order for its shares. See the Statement of Additional Information for
more information.
Class A Shares. Class A shares are offered at net asset value plus an
initial or contingent deferred sales charge as follows:
Initial Sales Charge
Retained
by
Financial
Service
Firm
as % of as % of
Amount Offering Offering
Amount Purchased Invested Price Price
Less than $50,000..... 6.10% 5.75% 5.00%
$50,000 to less than
$100,000.............. 4.71% 4.50% 3.75%
$100,000 to less than
$250,000.............. 3.63% 3.50% 2.75%
$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 A shares are also
subject to a 0.25% annual service fee.
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
convert to Class A shares not bearing a distribution fee), a 0.25%
annual service fee and a contingent deferred sales charge if redeemed
within six years after purchase. As shown below, the amount of the
contingent deferred sales charge depends on the number of years after
purchase that the redemption occurs:
Contingent
Years After Deferred
Purchase Sales Charge
0-1............... 5.00%
1-2............... 4.00%
2-3............... 3.00%
3-4............... 3.00%
4-5............... 2.00%
5-6............... 1.00%
More than 6....... 0.00%
Year one ends one year after the end of the month in which the
purchase was accepted and so on. The Distributor pays financial
service firms a commission of 4.00% on Class B share purchases.
Class D Shares. Class D shares are offered at net asset value plus a
1.00% initial sales charge, subject to a 0.75% annual distribution
fee, a 0.25% annual service fee and a 1.00% contingent deferred sales
charge on redemptions made within one year from the first day of the
month after purchase.
The Distributor pays financial service firms an initial commission of
1.85% on purchases of Class D shares and an ongoing commission of
0.65% annually. Payment of the ongoing commission is conditioned on
receipt by the Distributor of the 0.75% distribution fee referred to
above. The commission may be reduced or eliminated if the
distribution fee paid by the Fund is reduced or eliminated for any
reason.
General. 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, including "How to Buy Shares" and
"Special Purchase Programs/Investor Services."
Which Class is more beneficial to an investor depends on the amount
and intended length of the investment. Large investments, qualifying
for a reduced Class A sales charge, avoid the distribution fee.
Investments in Class B shares have 100% of the purchase invested
immediately. Investors investing for a relatively short period of
time might consider Class D shares. Purchases of $250,000 or more
must be for Class A or Class D shares. Purchases of $500,000 or more
must be for Class A shares. Consult your financial service firm.
Financial service firms may receive different compensation rates for
selling different classes of shares. The Distributor may pay
additional compensation to financial service firms which have made or
may make significant sales. Initial or contingent deferred sales
charges may be reduced or eliminated for certain persons or
organizations purchasing Fund shares alone or in combination with
certain other Colonial funds. See the Statement of Additional
Information for more information.
Shareholder Services. A variety of shareholder services are
available. For more information about these services or your account,
call 1-800-345-6611. Some services are described in the attached
account application. A shareholder's manual explaining all available
services will be provided upon request.
Special Purchase Programs. The Fund allows certain investors or
groups of investors to purchase shares and be subject to reduced or no
initial or contingent deferred sales charge. These programs are
described in the Statement of Additional Information under "Programs
for Reducing or Eliminating Sales Charges" and "How to Sell Shares."
HOW TO SELL SHARES
Shares of the Fund may be sold on any day the Exchange is open, either
directly to the Fund or through your financial service firm. Sale
proceeds generally are sent within seven days (usually on the next
business day after your request is received in good form). However,
for shares recently purchased by check, the Fund will send proceeds
only after the check has cleared (which may take up to 15 days).
Selling Shares Directly To The Fund. Send a signed letter of
instruction or stock power form to the Transfer Agent, along with any
certificates for shares to be sold. The sale price is the net asset
value (less any applicable contingent deferred sales charge) next
calculated after the Fund receives the request in proper form.
Signatures must be guaranteed by a bank, a member firm of a national
stock exchange or another eligible guarantor institution. Stock power
forms are available from financial service firms, the Transfer Agent
and many banks. Additional documentation is required for sales by
corporations, agents, fiduciaries, surviving joint owners and
individual retirement account holders. For details contact:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Selling Shares Through Financial Service Firms. Financial service
firms must receive requests before 4:00 p.m. Eastern time to receive
that day's price, are responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge for this service.
General. The sale of shares is a taxable transaction for income tax
purposes and may be subject to a contingent deferred sales charge. The
contingent deferred sales charge may be waived under certain
circumstances. See the Statement of Additional Information for more
information. Under unusual circumstances, the Fund may suspend
repurchases or postpone payment for up to seven days or longer, as
permitted by federal securities law. In June of any year, the Fund
may deduct $10 (payable to the Transfer Agent) from accounts valued at
less than $1,000 unless the account value has dropped below $1,000
solely as a result of share value depreciation. Shareholders will
receive 60 days' written notice to increase the account value before
the fee is deducted.
HOW TO EXCHANGE SHARES
Exchanges at net asset value may be made among the same class of
shares of most Colonial funds. Not all Colonial funds offer Class D
shares. Shares will continue to age without regard to the exchange
for purposes of conversion and determining the contingent deferred
sales charge, if any, upon redemption. Carefully read the prospectus
of the fund into which the exchange will go before submitting the
request. Call 1-800-248-2828 to receive a prospectus and an exchange
authorization form. Call 1-800-422-3737 to exchange shares by
telephone. An exchange is a taxable capital transaction. The
exchange service may be changed, suspended or eliminated on 60 days'
written notice.
Class A Shares. An exchange from a money market fund into a non-money
market fund will be at the applicable offering price next determined
(including 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.
Class D Shares. Exchanges of Class D shares will not be subject to
the contingent deferred sales charge. However, if shares are redeemed
within one year after the original purchase, a 1.00% contingent
deferred sales charge will be assessed.
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisers are automatically
eligible to exchange Fund shares and redeem up to $50,000 of Fund
shares by calling 1-800-422-3737 toll free any business day between
9:00 a.m. and the close of trading of the Exchange (normally 4:00 p.m.
Eastern time). Telephone redemption privileges for larger amounts may
be elected on the account application. Proceeds and confirmations of
telephone transactions will be mailed or sent to the address of record.
Telephone redemptions are not available on accounts with an address
change in the preceding 30 days. The Adviser, the Transfer Agent and
the Fund will not be liable when following telephone instructions
reasonably believed to be genuine and a shareholder may suffer a loss
from unauthorized transactions. The Transfer Agent will employ
reasonable procedures to confirm that instructions communicated by
telephone are genuine. All telephone transactions are recorded.
Shareholders and/or their financial advisers are required to provide
their name, address and account number. Financial advisers are also
required to provide their broker number. Shareholders and/or their
financial advisers wishing to redeem or exchange shares by telephone
may experience difficulty in reaching the Fund at its toll free
telephone number during periods of drastic economic or market changes.
In that event, shareholders and/or their financial advisers should
follow the procedures for redemption or exchange by mail as described
above under "How to sell shares." The Adviser, the Transfer Agent and
the Fund reserve the right to change, modify, or terminate the
telephone redemption or exchange services at any time upon prior
written notice to shareholders. Shareholders are not obligated to
transact by telephone.
12B-1 PLANS
Under 12b-1 Plans, the Fund pays the Distributor an annual service fee
of 0.25% of the Fund's average net assets attributed to each Class of
shares. The Fund also pays the Distributor an annual distribution fee
of 0.75% of the average net assets attributed to its Class B and
Class D shares. Because the Class B and Class D shares bear the
additional distribution fee, their dividends will be lower than the
dividends of Class A shares. Class B shares automatically convert to
Class A shares, approximately eight years after the Class B shares
were purchased. Class D shares do not convert. The multiple class
structure could be terminated should certain Internal Revenue Service
rulings be rescinded. See the Statement of Additional Information for
more information. The Distributor uses the fees to defray 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 1991. The
Fund represents the entire interest in a separate portfolio of the
Trust.
The Trust is not required to hold annual shareholder meetings, but
special meetings may be called for certain purposes. You receive one
vote for each of your Fund shares. Shares of the Trust vote together
except when required by law to vote separately by fund or by class.
Shareholders owning in the aggregate ten percent of Trust shares may
call meetings to consider removal of Trustees. Under certain
circumstances, the Trust will provide information to assist
shareholders in calling such a meeting. See the Statement of
Additional Information for more information.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the
Fund. However, the Declaration of Trust for the Trust (Declaration)
disclaims shareholder liability for acts or obligations of the Fund
and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the
Fund or the Trust's Trustees. The Declaration provides for
indemnification out of Fund property for all loss and expense of any
shareholder held personally liable for the obligations of the Fund.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund
would be unable to meet its obligations. The likelihood of such
circumstances is remote because it would be limited to circumstances
in which the disclaimer was inoperative and the Trust was unable to
meet its obligations.
The risk of a particular fund incurring financial loss on account of
unsatisfied liability of another fund of the Trust is also believed to
be remote, because it would be limited to claims to which the
disclaimer did not apply and to circumstances in which the other fund
was unable to meet its obligations.
Investment Adviser
Colonial Management Associates, Inc.
One Financial Center
Boston, MA 02111-2621
Sub-Adviser
State Street Bank and Trust Company
Two International Place
Boston, MA 02110
Distributor
Colonial Investment Services, Inc.
One Financial Center
Boston, MA 02111-2621
Custodian
Boston Safe Deposit and Trust Company
One Boston Place
Boston, MA 02108-2624
Shareholder Services and Transfer Agent
Colonial Investors Service Center, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-345-6611
Independent Accountants
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110-2624
Legal Counsel
Ropes & Gray
One International Place
Boston, MA 02110-2624
Your financial service firm is:
Printed in U.S.A.
October 20, 1995
COLONIAL U.S. FUND
FOR GROWTH
PROSPECTUS
Colonial U.S. Fund for Growth seeks growth exceeding the S&P 500 Index
(Standard & Poor's Index of 500 common stocks) performance.
For more detailed information about the Fund, call the Adviser at
1-800-248-2828 for the October 20, 1995 Statement of Additional
Information.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR INSURED BY, ANY BANK OR GOVERNMENT AGENCY.
[COLONIAL FLAG LOGO]
Colonial Mutual Funds
_________________________________________________________________
Please send your completed application to:
Colonial Mutual Funds
P.O. Box 1722
Boston, Massachusetts 02105-1722
New Account Application/Revision to Existing Account
To open a new account, complete sections 1, 2, 3, & 8.
To apply for special services for a new or existing account, complete sections
4, 5, 6, 7, or 9 as appropriate.
___ Please check here if this is a revision.
1-----------Account Ownership--------------
Please choose one of the following.
__Individual: Print your name, Social Security #, U.S. citizen status.
__Joint Tenant: Print all names, the Social Security # for the first person,
and his/her U.S. citizen status.
__Uniform Gift to Minors: Name of custodian and minor, minor's Social Security
#, minor's U.S. citizen status.
__Corporation, Association, Partnership: Include full name, Taxpayer I.D. #.
__Trust: Name of trustee, trust title & date, and trust's Taxpayer I.D. #.
______________________________________
Name of account owner
______________________________________
Name of joint account owner
______________________________________
Street address
______________________________________
Street address
______________________________________
City, State, and Zip
______________________________________
Daytime phone number
______________________________________
Social Security # or Taxpayer I.D. #
Are you a U.S. citizen? Yes___ No___
______________________________________
If no, country of permanent residence
______________________________________
Owner's date of birth
______________________________________
Account number (if existing account)
2 -----Colonial Fund(s) You Are Purchasing--------
Your investment will be made in Class A shares if no class is indicated.
Certificates are not available for Class B or D shares. If no distribution
option is selected, distributions will be reinvested in additional Fund
shares. Please consult your financial adviser to determine which class of
shares best suits your needs.
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
___ D Shares (less than $500,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section 4B, inside
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
___ D Shares (less than $500,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section 4B, inside
Fund Choice(s)
Fund
___ A Shares ___ B Shares (less than $250,000)
___ D Shares (less than $500,000)
$______________________________________________
Amount
Method of Payment
Choose one for each fund
___Check payable to the Fund, enclosed
___Bank wired on (Date) ____/____/____
Wire confirmation #
___Dealer purchased on (Date) ____/____/____
Trade confirmation #
Ways to Receive Your Distributions
Choose one for each fund
___Reinvest dividends and capital gains
___Dividends in cash; reinvest capital gains
___Dividends and capital gains in cash
___Automatic Dividend Diversification See section 5A, inside
___Direct Deposit via Colonial Cash Connection See section 4B, inside
3---Your Signature & Taxpayer I.D. Number Certification----
Each person signing on behalf of an entity represents that his/her actions are
authorized.
I have received and read each appropriate Fund prospectus and understand that
its terms are incorporated by reference into this application. I understand
that this application is subject to acceptance. I understand that certain
redemptions may be subject to a contingent deferred sales charge. I certify,
under penalties of perjury, that:
1. The Social Security # or Taxpayer I.D. # provided is correct.
Cross out 2(a) or 2(b) if either is not true in your case.
2. I am not subject to 31% backup withholding because (a) I have not been
notified that I am subject to backup withholding or (b) the Internal
Revenue Service has notified me that I am no longer subject to backup
withholding.
It is agreed that the Fund, all Colonial companies and their officers,
directors, agents, and employees will not be liable for any loss, liability,
damage, or expense for relying upon this application or any instruction
believed genuine.
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
4--------Ways to Withdraw from Your Fund-------
It may take up to 30 days to activate the following features. Complete only
the section(s) that apply to the features you would like.
A. Systematic Withdrawal Plan (SWP)
You can receive monthly, quarterly, or semiannual checks from your account in
any amount you select, with certain limitations. Your redemption checks can
be sent to you at the address of record for your account, to your bank
account, or to another person you choose. The value of the shares in your
account must be at least $5,000 and you must reinvest all of your
distributions. Checks will be processed on the 10th calendar day of the month
or the following business day. Withdrawals in excess of 12% annually of your
current account value will not be accepted. Redemptions made in addition to
Plan payments may be subject to a contingent deferred sales charge for Class B
or Class D shares. Please consult your financial or tax adviser before
electing this option.
Funds for Withdrawal:
1______________________________________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________ or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _________________ (month).
2______________________________________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________ or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _________________ (month).
3______________________________________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________ or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _________________ (month).
Payment Instructions
Send the payment to (choose one):
__My address of record.
__My bank account via Colonial Cash Connection. Please complete Section 4B
and the Bank Information section below.
__The payee listed at right.
______________________________________________
Name of payee
______________________________________________
Address of payee
______________________________________________
City
______________________________________________
State Zip
______________________________________________
Payee's bank account number, if applicable
X_____________________________________________
Signature of account owner(s)
X_____________________________________________
Signature of account owner(s)
Signatures of all owners must be guaranteed. Provide the name, address,
payment amount, and frequency for other payees (maximum of 5) on a separate
sheet.
B. Direct Deposit via Colonial Cash Connection
You can arrange to have distributions from your Colonial fund account(s) or
Systematic Withdrawal Plan checks automatically deposited directly into your
bank checking account. Distribution deposits will be made 2 days after the
Fund's payable date. Please complete Bank Information below and attach a
blank check marked "VOID."
Please deposit my:
__Dividend distributions only
__Dividend and capital gain distributions
__Systematic Withdrawal Plan payments
I understand that my bank must be a member of the Automated Clearing House
system.
C. Telephone Withdrawal Options
All telephone transaction calls are recorded. These options are not available
for retirement accounts.
1. Fast Cash
You are automatically eligible for this service. You or your financial
adviser can withdraw up to $50,000 from your account and have it sent to your
address on our records. For your protection, this service is only available on
accounts that have not had an address change within 60 days of the redemption
request.
2. Telephone Redemption
__I would like the Telephone Redemption privilege. You may withdraw shares
from your fund account by telephone and send your money to your bank account.
If you are adding this service to an existing account, complete the Bank
Information section below and have all shareholder signatures guaranteed.
Colonial's and the Fund's liability is limited when following telephone
instructions; a shareholder may suffer a loss from an unauthorized transaction
reasonably believed by Colonial to have been authorized. Telephone redemptions
exceeding $5,000 will be sent via Federal Fund Wire, usually on the next
business day ($7.50 will be deducted). Redemptions of $5,000 or less will be
sent by check to your designated bank.
Bank Information (For A, B, or C Above)
I authorize deposits to the following bank account:
____________________________________________________________
Bank name City Bank account number
____________________________________________________________
Bank street address State Zip Bank routing # (your bank
can provide this)
5-----Ways to Make Additional Investments--------
These services involve continuous investments regardless of varying share
prices. Please consider your ability to continue purchases through periods of
price fluctuations. Dollar cost averaging does not assure a profit or protect
against loss in declining markets.
A. Automatic Dividend Diversification
Please diversify my portfolio by investing fund distributions in another
Colonial fund. These investments will be made in the same share class and
without sales charges. I have carefully read the prospectus for the fund(s)
listed below.
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
B. Automated Dollar Cost Averaging
This program allows you to automatically have money from any Colonial fund in
which you have a balance of at least $5,000 transferred into the same share
class of up to four other Colonial funds, on a monthly basis. The minimum
amount for each transfer is $100. Please complete the section below.
____________________________________
Fund from which shares will be sold
$_________________________
Amount to redeem monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
____________________________________
Fund name
$_________________________
Amount to invest monthly
C. Fundamatic
Fundamatic automatically transfers the specified amount from your bank
checking account to your Colonial fund account. Your bank needs to be a
member of the Automated Clearing House system. Please attach a blank check
marked "VOID." Also, complete the section below and Fundamatic
Authorization (Section 6).
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
____________________________________
Fund name
$_____________________ _________________
Amount to transfer Month to start
Frequency
__Monthly or __Quarterly
Date
__5th or __20th of the month
6 -------------Fundamatic Authorization--------------------
Authorization to honor checks drawn by Colonial Investors Service Center,
Inc. Do Not Detach. Make sure all depositors on the bank account sign to
the far right. Please attach a blank check marked "VOID" here. See reverse
for bank instructions.
I authorize Colonial to draw on my bank account, by check or electronic funds
transfer, for an investment in a Colonial fund. Colonial and my bank are not
liable for any loss arising from delays or dishonored draws. If a draw is not
honored, I understand that notice may not be given and Colonial may reverse
the purchase and charge my account $15.
______________________________________
Bank name
______________________________________
Bank street address
______________________________________
Bank street address
______________________________________
City State Zip
______________________________________
Bank account number
______________________________________
Bank routing #
X_____________________________________
Depositor's Signature(s)
Exactly as appears on bank records
X_____________________________________
Depositor's Signature(s)
Exactly as appears on bank records
7--Ways to Reduce Your Sales Charges for Class A Shares--
These services can help you reduce your sales charge while increasing your
share balance over the long term.
A. Right of Accumulation
If you, your spouse or your children own Class A, B, or D shares in other
Colonial funds, you may be eligible for a reduced sales charge. The combined
value of your accounts must be $50,000 or more. Class A shares of money market
funds are not eligible unless purchased by exchange from another Colonial fund.
The sales charge for your purchase will be based on the sum of the purchase
added to the value of all shares in other Colonial funds at the previous
day's public offering price.
__Please link the accounts listed below for Right of Accumulation privileges,
so that this and future purchases will receive any discount for which they
are eligible.
_____________________________________
Name on account
_____________________________________
Account number
_____________________________________
Name on account
_____________________________________
Account number
B. Statement of Intent
If you agree in advance to invest at least $50,000 within 13 months, you'll
pay a lower sales charge on every dollar you invest. If you sign a Statement
of Intent within 90 days after you establish your account, you can receive a
retroactive discount on prior investments. The amount required to receive a
discount varies by fund; see the sales charge table in the "How to Buy Shares"
section of your fund prospectus.
__I want to reduce my sales charge.
I agree to invest $ _______________ over a 13-month period starting
______/______/ 19______ (not more than 90 days prior to this application). I
understand an additional sales charge must be paid if I do not complete this
Statement of Intent.
8-------------Financial Service Firm---------------------
To be completed by a Representative of your financial service firm.
This application is submitted in accordance with our selling agreement with
Colonial Investment Services, Inc. (CISI), the Fund's prospectus, and this
application. We will notify CISI of any purchase made under a Statement of
Intent, Right of Accumulation, or Sponsored Arrangement. We guarantee the
signatures on this application and the legal capacity of the signers.
_____________________________________
Representative's name
_____________________________________
Representative's number
_____________________________________
Representative's phone number
_____________________________________
Account # for client at financial
service firm
_____________________________________
Branch office address
_____________________________________
City
_____________________________________
State Zip
_____________________________________
Branch office number
_____________________________________
Name of financial service firm
_____________________________________
Main office address
_____________________________________
Main office address
_____________________________________
City
_____________________________________
State Zip
X____________________________________
Authorized signature
9--Request for a Combined Quarterly Statement Mailing--
Colonial can mail all of your quarterly statements in one envelope. This
option simplifies your record keeping and helps reduce fund expenses.
__I want to receive a combined quarterly mailing for all my accounts.
Fundamatic (See Reverse Side)
Applications must be received before the start date for processing.
This program's deposit privilege can be revoked by Colonial without prior
notice if any check is not paid upon presentation. Colonial has no obligation
to notify the shareholder of non-payment of any draw. This program may be
discontinued by Colonial by written notice at least 30 business days prior
to the due date of any draw or by the shareholder at any time.
To the Bank Named on the Reverse Side:
Your depositor has authorized Colonial Investors Service Center, Inc. to
collect amounts due under an investment program from his/her personal checking
account. When you pay and charge the draws to the account of your depositor
executing the authorization payable to the order of Colonial Investors
Service Center, Inc., Colonial Management Associates, Inc., hereby indemnifies
and holds you harmless from any loss (including reasonable expenses) you may
suffer from honoring such draw, except any losses due to your payment of any
draw against insufficient funds.
D-461L-594
COLONIAL U.S. FUND FOR GROWTH
Statement of Additional Information
October 20, 1995
This Statement of Additional Information (SAI) contains information
which may be useful to investors but which is not included in the
Prospectus of Colonial U.S. Fund for Growth (Fund). This SAI is not a
prospectus and is authorized for distribution only when accompanied or
preceded by the Prospectus of the Fund dated October 20, 1995. This
SAI should be read together with the Prospectus. Investors may obtain
a free copy of the Prospectus from Colonial Investment Services, Inc.,
One Financial Center, Boston, MA 02111-2621.
Part 1 of this SAI contains specific information about the Fund. Part
2 includes information about the Colonial funds generally and
additional information about certain securities and investment
techniques described in the Fund's Prospectus.
TABLE OF CONTENTS
Part 1 Page
Definitions b
Investment Objective and Policies b
Fundamental Investment Policies b
Other Investment Policies b
Portfolio Turnover c
Fund Charges and Expenses c
Sub-Adviser e
Investment Performance f
Custodian f
Independent Accountants f
Part 2
Miscellaneous Investment Practices 1
Taxes 10
Management of the Colonial Funds 11
Determination of Net Asset Value 16
How to Buy Shares 17
Special Purchase Programs/Investor Services 17
Programs for Reducing or Eliminating Sales
Charges 18
How to Sell Shares 21
Distributions 22
How to Exchange Shares 22
Suspension of Redemptions 23
Shareholder Meetings 23
Performance Measures 23
Appendix I 25
Appendix II 27
US-16/324B-1095
Part 1
COLONIAL U.S. FUND FOR GROWTH
Statement of Additional Information
October 20, 1995
DEFINITIONS
"Trust" Colonial Trust VI
"Fund" Colonial U.S. Fund for Growth
"Adviser" Colonial Management Associates, Inc., the
Fund's investment adviser
"CISI" Colonial Investment Services, Inc., the Fund's
shareholder services and transfer agent
"CISC" Colonial Investors Service Center, Inc., the
Fund's investor services and transfer agent
"State Street or State Street Bank and Trust Company, the Fund's
Sub-Adviser" Sub-Adviser
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the Fund's investment objective and
policies. Part 1 includes additional information concerning, among
other things, the fundamental investment policies of the Fund. Part 2
of this SAI contains additional information about the following
securities and investment techniques:
Repurchase Agreements
Money Market Instruments
Securities Loans
Short-Term Trading
Foreign Securities
Except as described below under "Fundamental Investment Policies," the
Fund's investment policies are not fundamental, and the Trustees may
change the policies without shareholder approval.
FUNDAMENTAL INVESTMENT POLICIES
The Investment Company Act of 1940 (Act) provides that a "vote of a
majority of the outstanding voting securities" means the affirmative
vote of the lesser of (1) more than 50% of the outstanding shares of
the Fund, or (2) 67% or more of the shares present at a meeting if
more than 50% of the outstanding shares are represented at the meeting
in person or by proxy. The following fundamental investment policies
can not be changed without such a vote.
The Fund may:
1. Issue senior securities only through borrowing money from banks for
temporary or emergency purposes up to 10% of its net assets;
however, the Fund will not purchase additional portfolio securities
while borrowings exceed 5% of net assets;
2. Only own real estate acquired as the result of owning securities;
the value of such real estate may not exceed 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 (i) through lending of securities not exceeding 30% of
total assets, (ii) through the purchase of debt instruments or
similar evidences of indebtedness typically sold privately to
financial institutions and (iii) through repurchase agreements; and
6. Not concentrate more than 25% of its total assets in any one
industry or, with respect to 75% of total assets, purchase any
security (other than obligations of the U.S. Government and cash
items including receivables) if as a result more than 5% of its
total assets would then be invested in securities of a single
issuer, or purchase voting securities of an issuer if, as a result
of such purchase, the Fund would own more than 10% of the
outstanding voting shares of such issuer.
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed without a
shareholder vote, the Fund may not:
1. Purchase securities on margin, but the Fund may receive short-term
credit to clear securities transactions and may make initial or
maintenance margin deposits in connection with futures
transactions;
2. Have a short securities position, unless the Fund owns, or owns
rights (exercisable without payment) to acquire, an equal amount of
such securities;
3. Own securities of any company if the 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;
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 then be invested in the securities of
issuers which are restricted as to disposition;
8. Purchase or sell commodity contracts if the total initial margin
and premiums on the contracts exceeds 5% of its total assets;
9. Invest more than 15% of its net assets in illiquid assets (i.e.,
assets which may not be sold in the ordinary course at
approximately the price at which they are valued by the Fund); and
10.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 for this purpose.
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.
PORTFOLIO TURNOVER
The Fund cannot accurately predict portfolio turnover rate, but the
Adviser and State Street anticipate that it will not exceed 250%. A
100% turnover rate would occur if all of the securities in the
portfolio were sold and either repurchased or replaced within one
year. High portfolio turnover involves correspondingly greater
brokerage commission and other transaction costs, which will be borne
directly by the Fund.
Year ended
June 30
1995 1994
84% 117%
FUND CHARGES AND EXPENSES
Under the Fund's management agreement, the Fund pays the Adviser a
monthly fee based on the average net assets of the Fund, determined at
the close of each business day during the month, at the annual rate of
0.80%.
Recent Fees paid to the Adviser, CISI and CISC (dollars in thousands)
Year ended June 30
1995 1994 1993
Management fee $2,266 $1,626 $552
Bookkeeping fee 109 81 37
Shareholder service and 864 598 161
transfer agent fee
12b-1 fees:
Service fee (Classes A , B and D)
and D) 707 511(a) 173(a)
Distribution fee (Class B) 1,319 957 33
Distribution fee (Class D) 11 0 0
(a) Applicable to Class A and Class B shares only. Class D shares
were initially offered on July 1, 1994.
Brokerage Commissions (dollars in thousands)
Year ended June 30
1995 1994 1993
Total commissions $ 576 $ 608 $ 367
Directed transactions (b) 16,594 13,253 1,730
Commissions on directed
transactions 29 16 2
(b) See "Management of the Colonial Funds - Portfolio Transactions -
Brokerage and research services" in Part 2 of this SAI.
Trustees Fees
For the fiscal year ended June 30, 1995, and the calendar year ended
December 31, 1994, the Trustees received the following compensation
for serving as Trustees:
Aggregate Pension Total
Aggregate or Compensation From
Compensation Retirement Trust and Fund
From Fund Benefits Estimated Complex Paid to
For The Accrued Annual the Trustees For
Fiscal As Part Benefits The Calendar Year
Year Ended of Fund Upon Ended December 31
Trustee June 30, 1995 Expense Retirement 1994(d)
Robert J. Birnbaum (h) $868 $0 $0 $ 0
Tom Bleasdale 2,529(c) 0 0 101,000 (e)
Lora S. Collins 2,761 0 0 95,000
James E. Grinnell (h) 870 0 0 0
William D. Ireland, Jr. 2,787 0 0 110,000
Richard W. Lowry(h) 871 0 0 0
William E. Mayer 2,318 0 0 89,752
John A. McNeice, Jr. 0 0 0 0
James L. Moody, Jr. 2,724(f) 0 0 109,000
John J. Neuhauser 2,359 0 0 95,000
George L. Shinn 2,934 0 0 112,000
Robert L. Sullivan 2,589 0 0 104,561
Sinclair Weeks, Jr. 2,871 0 0 116,000
(c) Includes $1,371 payable in later years as deferred
compensation.
(d) At December 31, 1994, the Colonial Funds complex consisted
of 31 open-end and 5 closed-end management investment
company portfolios.
(e) Includes $49,000 payable in later years as deferred
compensation.
(f) Includes $1,477 payable in later years as deferred
compensation.
The following table sets forth the amount of compensation paid to
Messrs. Birnbaum, Grinnell and Lowry in their capacities as Trustees
of the Liberty All-Star Equity Fund, The Charles Allmon Trust, Inc.,
Liberty Financial Trust and LFC Utilities Trust (Liberty Funds) for
service during the calendar year ended December 31, 1994:
Pension or
Retirement
Benefits Estimated Total Compensation
Accrued As Annual From Liberty Funds
Part of Benefits For The Calendar
Fund Upon Year Ended
Trustee Expense Retirement December 31, 1994(g)
Robert J. Birnbaum(h) $ 0 $ 0 $ 0
James E. Grinnell(h) 0 0 31,032
Richard W. Lowry(h) 0 0 31,282
(g) At December 31, 1994, Liberty Financial Trust and LFC
Utilities Trust were advised by Stein Roe & Farnham
Incorporated (Stein Roe) and Liberty All-Star Equity Fund
and The Charles Allmon Trust, Inc. were and are advised by
Liberty Asset Management Company (LAMCO). Stein Roe and
LAMCO are indirect wholly-owned subsidiaries of Liberty
Financial Companies, Inc. (an intermediate parent of the
Adviser). On March 27, 1995, four of the portfolios in the
Liberty Financial Trust (now known as Colonial Trust VII)
were merged into existing Colonial funds and a fifth was
merged into a new portfolio of Colonial Trust III.
(h) Elected as trustee of the Colonial Funds complex on April
21, 1995.
Ownership of the Fund
At September 14, 1995, the Trustees and officers of the Fund as a
group owned approximately 305,852 Class A shares representing 3.16% of
the outstanding Class A shares of the Fund. Messrs. Scoon, Silver and
Stern, who are officers of the Trust, held 271,413 Class A shares,
representing 2.80% of the then outstanding shares. This holding
consisted entirely of shares held by them as Co-Trustees of The
Colonial Group, Inc. Profit Sharing Plan with respect to which they
share voting and investment power.
At September 14, 1995, Merrill Lynch, Pierce, Fenner & Smith, Inc.,
4800 Deer Lake Drive, East, Jacksonville, FL 32216 owned 572,262
Class A shares and 1,821,166 Class B shares representing 5.92% and
10.57%, respectively, of the total outstanding Class A and Class B
shares of the Fund.
At September 14, 1995, there were 10,887 Class A, 21,558 Class B and
311 Class D record holders of the Fund.
Sales Charges (dollars in thousands)
Class A Shares Class D Shares
Year ended June 30 Year ended June 30
1995 1994 1993 1994(i)
Aggregate initial sales charges
on Fund share sales $601 $976 $1,746 $ 0
Initial sales charges retained
by CISI 75 97 85 0
(i) Rounded to less than $1,000.
Class B Shares Class D Shares
Year ended June 30 Year ended June
30
1995 1994 1993 1995
Aggregate contingent deferred
sales charges (CDSC) on Fund $501 $289 $65 $3
redemptions
SUB-ADVISER
Under a Sub-Advisory Agreement (Agreement) among State Street, the
Adviser and the Trust, State Street subject to the Adviser's and the
Trustees' supervision, directs the investment of the Fund in
accordance with the Fund's investment objective, policies and
restrictions. For these services, State Street is entitled to receive
from the Adviser a monthly fee at an annual rate of 0.50% of the first
$50 million of the Fund's average daily net assets, 0.40% of the next
$150 million of average daily net assets and 0.35% of average daily
net assets in excess of $200 million. For the fiscal year ended June
30, 1995, State Street received 0.40% of the Fund's average daily net
assets.
The Agreement provides that State Street shall not be subject to any
liability to the Trust or the Fund, or to any shareholder of the Trust
or the Fund for any act or omission in the course of, or connected
with, rendering services to the Trust or the Fund in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard
of its duties on the part of State Street.
The Agreement may be terminated at any time on 60 days' written notice
to State Street 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 or
on 60 days' written notice to the Adviser and the Trust by State
Street. 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.
Portfolio Transactions
Investment decisions. State Street is the largest provider of
securities processing and recordkeeping services for U.S. mutual funds
and pension funds. State Street is a wholly-owned subsidiary of State
Street Boston Corporation, a publicly held bank holding company.
State Street Global Advisors, the investment management division of
State Street, was established in 1978, and specializes in quantitative
investment products and is the largest U.S. manager of international
pension assets. State Street Global Advisors, with over $156.8
billion (U.S.) under management, provides complete global investment
management services from offices in the United States, London, Sydney,
Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
Clients advised by State Street sometimes invest in securities in
which the Fund also invests. If the Fund and such other clients
desire to buy or sell the same portfolio securities, 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 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 State Street as sub-adviser to the Fund
outweighs the disadvantages, if any, which might result from these
practices.
Selection of broker-dealers. 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, State Street may consider
sales of shares of the Fund as a factor in the selection of broker-
dealers to execute securities transactions for the Fund.
State Street places the transactions of the Fund with broker-dealers
selected by State Street and, if applicable, negotiates commissions.
Broker-dealers may receive brokerage commissions on portfolio
transactions, including the effecting of closing purchase and sale
transactions. The Fund from time to time also executes portfolio
transactions with such broker-dealers acting as principals. The Fund
does not intend to deal exclusively with any particular broker-dealer
or group of broker-dealers.
It is State Street's policy always to seek best execution, which is to
place the Fund's transactions where the Fund 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.
Brokerage and research services. Subject to such practice of always
seeking best execution, securities transactions of the Fund may be
executed by broker-dealers who also provide brokerage and research
services (as defined below) to State Street. State Street may use
all, some or none of such research services in providing investment
advisory services to each of its clients, including the Fund. To the
extent that such services are used by State Street, they tend to
reduce State Street's expenses. In State Street's opinion, it is
impossible to assign an exact dollar value for such services.
Subject to such policies as the Trustees may determine, State Street
may cause the Fund to pay a broker-dealer which provides brokerage and
research services to State Street an amount of commission for
effecting a securities transaction, including a closing purchase or
sale transaction, for the Fund 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). State Street 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 State Street's overall responsibilities to the Fund and all its
other clients.
STATE STREET REPRESENTATIVE CLIENT LIST*
Aluminum Company of America
Amoco Corporation
AT&T
BellSouth Corporation
California Public Employees' Retirement System
Chevron Corporation
Consolidated Rail Corporation (Conrail)
The Dow Chemical Company
Glaxo, Inc.
Hartford Municipal Employees' Retirement Fund
The Interpublic Group of Companies, Inc.
Kellogg Company
Maine State Retirement System
Massachusetts Pensions Reserve Investment
Management Board
Minneapolis Employees' Retirement Fund
Minnesota State Board of Investment
New York City Retirement Systems
North Dakota Public Employees' Retirement System
Northern California UFCW Retail Clerks Specialty Stores
Pension Fund
Northwest Airlines, Inc.
Ohio Edison Company
Pacific Telesis Group
J.C. Penney Company, Inc.
Pennsylvania Municipal Retirement Board
Pension Benefit Guaranty Corporation
Pepsico, Inc.
Perdue Farms, Inc.
Philip Morris Inc.
Pitney Bowes Inc.
Polaroid Corporation
Richmond Retirement System
Seattle City Employees' Retirement System
Southern California UFCW & Food Employer Joint
Trust Fund
State of Connecticut Trust Funds
Tenneco, Inc.
Texaco Inc.
University of Colorado Foundation
Wellesley College Pension Plan
Wisconsin Electric Power Company
The World Bank
Xerox Corporation
Yale New Haven Hospital
* This is a partial representative client list from a client list
published in The Money Market Directory of Pension Funds, 1995. It is
not known whether the foregoing clients approve of State Street or the
advisory services provided. Clients were included based on name
recognition and their willingness to allow the use of their names.
12b-1 Plans, CDSC and Conversion of Shares
The Fund offers three classes of shares - Class A, Class B and Class
D. The Fund may in the future offer other classes of shares. The
Trustees have approved 12b-1 Plans pursuant to Rule 12b-1 under the
Act. Under the Plans, the Fund pays CISI a service fee at an annual
rate of 0.25% of average net assets attributed to each Class of
shares and a distribution fee at an annual rate of 0.75% of average
net assets attributed to Class B and Class D 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 Fund to the Adviser to
the extent that such payments might be construed to be indirect
financing of the distribution of Fund shares.
The Trustees believe the Plans could be a significant factor in the
growth and retention of Fund assets resulting in a more advantageous
expense ratio and increased investment flexibility which could
benefit each class of Fund shareholders. The Plans will continue in
effect from year to year so long as continuance is specifically
approved at least annually by vote of the Trustees, including the
Trustees who are not interested persons of the Trust and have no
direct or indirect financial interest in the operation of the Plans
or in any agreements related to the Plans (Independent Trustees),
cast in person at a meeting called for the purpose of voting on the
Plans. The Plans may not be amended to increase the fee materially
without approval by vote of a majority of the outstanding voting
securities of the relevant class of shares and all material
amendments of the Plans must be approved by the Trustees in the
manner provided in the foregoing sentence. The Plans may be
terminated at any time by vote of a majority of the independent
Trustees or by vote of a majority of the outstanding voting
securities of the relevant class of shares. The continuance of the
Plans will only be effective if the selection and nomination of the
Trustees who are not interested persons is effected by such non-
interested Trustees.
Class A shares are offered at net asset value plus varying sales
charges which may include a CDSC. Class B shares are offered at net
asset value subject to a CDSC if redeemed within six years after
purchase. Class D shares are offered at net asset value plus a 1%
initial sales charge and subject to a 1% CDSC on redemptions within
one year after purchase. The CDSCs are described in the Prospectus.
No CDSC will be imposed on shares derived from reinvestment of
distributions or amounts representing capital appreciation. In
determining the applicability and rate of any CDSC, it will be assumed
that a redemption is made first of shares representing capital
appreciation, next of shares representing reinvestment of
distributions and finally of other shares held by the shareholder for
the longest period of time.
Eight years after the end of the month in which a Class B share is
purchased, such share and a pro rata portion of any shares issued on
the reinvestment of distributions will be automatically converted into
Class A shares having an equal value, which are not subject to the
distribution fee.
Sales-related expenses (for the fiscal year ended June 30, 1995)
(dollars in thousands) of CISI relating to the Fund, were as follows:
Class A Shares Class B Shares Class D Shares
Fees to FSFs $268 $7,878 $25
Cost of sales
material relating to
the Fund (including
printing and mailing 75 176 12
expenses)
Allocated travel,
entertainment and
other promotional
(including advertising) 115 259 18
INVESTMENT PERFORMANCE
The Fund's Class A and Class B yields for the month ended June 30,
1995, were:
Class A Shares Class B Shares Class D Shares
1.13% 0.45% 0.44%
The Fund's average annual total returns at June 30, 1995, were:
Class A Shares
Period July 1,
1992
(commencement of
operations)
through June 30,
1 Year 1995
With sales charge of 5.75% 17.67% 11.86%
Without sales charge 24.84% 14.09%
Class B Shares Class D Shares
Period July 1, 1992 Period July 1, 1994
(commencement of (commencement of
operations) operations)
1 Year through June 30, 1995 through June 30, 1995
With CDSC of 5.00% 18.94% 12.40% 21.77%
Without CDSC 23.94% 13.19% 24.01%
The Fund's Class A, Class B and Class D distribution rates at June 30,
1995, which are based on distributions for the twelve-months then
ended and the maximum offering price (net asset value for Class B and
Class D), were 1.14%, 0.56% and 0.70%, respectively.
See Part 2 of this SAI, "Performance Measures," for how calculations
are made.
CUSTODIAN
Boston Safe Deposit and Trust Company is the Fund's custodian. The
custodian is responsible for safeguarding the Fund's cash and
securities, receiving and delivering securities and collecting the
Fund's interest and dividends.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP are the Trust's independent accountants providing
audit and tax return preparation services and assistance and
consultation in connection with the review of various SEC filings.
The financial statements incorporated by reference in this SAI have
been so incorporated, and the schedule of financial highlights
included in the Prospectus has been so included, in reliance upon the
report of Price Waterhouse LLP given on the authority of said firm as
experts in accounting and auditing.
The financial statements and Report of Independent Accountants
appearing on pages 6 to 21 of the June 30, 1995 Annual Report are
incorporated in this SAI by reference.
STATEMENT OF ADDITIONAL INFORMATION
PART 2
The following information applies generally to most Colonial funds.
"Colonial funds" or "funds" include each series of Colonial Trust I,
Colonial Trust II, Colonial Trust III, Colonial Trust IV, Colonial
Trust V, Colonial Trust VI and Colonial Trust VII. In certain cases, the
discussion applies to some but not all of the Colonial funds, and you
should refer to your Fund's Prospectus and to Part 1 of this SAI to
determine whether the matter is applicable to your Fund. You will also
be referred to Part 1 for certain data applicable to your Fund.
MISCELLANEOUS INVESTMENT PRACTICES
Part 1 of this Statement lists on page b which of the following
investment practices are available to your Fund.
Short-Term Trading
In seeking the fund's investment objective, the Adviser will buy or sell
portfolio securities whenever it believes it is appropriate. The
Adviser's decision will not generally be influenced by how long the fund
may have owned the security. From time to time the fund will buy
securities intending to seek short-term trading profits. A change in
the securities held by the fund is known as "portfolio turnover" and
generally involves some expense to the fund. These expenses may include
brokerage commissions or dealer mark-ups and other transaction costs on
both the sale of securities and the reinvestment of the proceeds in
other securities. If sales of portfolio securities cause the fund to
realize net short-term capital gains, such gains will be taxable as
ordinary income. As a result of the fund's investment policies, under
certain market conditions the fund's portfolio turnover rate may be
higher than that of other mutual funds. A fund's portfolio turnover
rate for a fiscal year is the ratio of the lesser of purchases or sales
of portfolio securities to the monthly average of the value of portfolio
securities, excluding securities whose maturities at acquisition were
one year or less. A fund's portfolio turnover rate is not a limiting
factor when the Adviser considers a change in the fund's portfolio.
Lower Rated Bonds
Lower rated bonds are those rated lower than Baa by Moody's, BBB by S&P,
or comparable unrated securities. Relative to comparable securities of
higher quality:
1. the market price is likely to be more volatile because:
a. an economic downturn or increased interest rates may have a
more significant effect on the yield, price and potential for
default;
b. the secondary market may at times become less liquid or
respond to adverse publicity or investor perceptions,
increasing the difficulty in valuing or disposing of the
bonds;
c. existing or future legislation limits and may further limit
(i) investment by certain institutions or (ii) tax
deductibility of the interest by the issuer, which may
adversely affect value; and
d. certain lower rated bonds do not pay interest in cash on a
current basis. However, the fund will accrue and distribute
this interest on a current basis, and may have to sell
securities to generate cash for distributions.
2. the fund's achievement of its investment objective is more
dependent on the Adviser's credit analysis.
3. lower rated bonds are less sensitive to interest rate changes,
but are more sensitive to adverse economic developments.
Small Companies
Smaller, less well established companies may offer greater opportunities
for capital appreciation than larger, better established companies, but
may also involve certain special risks related to limited product lines,
markets, or financial resources and dependence on a small management
group. Their securities may trade less frequently, in smaller volumes,
and fluctuate more sharply in value than securities of larger companies.
Foreign Securities
A fund may invest in securities traded in markets outside the United
States. Foreign investments can be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations. There
may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards comparable to
those applicable to U.S. companies. Securities of some foreign
companies are less liquid or more volatile than securities of U.S.
companies, and foreign brokerage commissions and custodian fees may be
higher than in the United States. Investments in foreign securities can
involve other risks different from those affecting U.S. investments,
including local political or economic developments, expropriation or
nationalization of assets and imposition of withholding taxes on
dividend or interest payments. Foreign securities, like other assets of
the fund, will be held by the fund's custodian or by a subcustodian or
depository. See also "Foreign Currency Transactions" below.
A fund may invest in certain Passive Foreign Investment Companies
(PFICs) which may be subject to U.S. federal income tax on a portion of
any "excess distribution" or gain (PFIC tax) related to the investment.
The PFIC tax is the highest ordinary income rate and it could be
increased by an interest charge on the deemed tax deferral.
A fund may possibly elect to include in its income its pro rata share of
the ordinary earnings and net capital gain of PFICs. This election
requires certain annual information from the PFICs which in many cases
may be difficult to obtain. An alternative election would permit the
fund to recognize as income any appreciation (but not depreciation) on
its holdings of PFICs as of the end of its fiscal year.
Zero Coupon Securities (Zeros)
A fund may invest in debt securities which do not pay interest, but
instead are issued at a deep discount from par. The value of the
security increases over time to reflect the interest accreted. The
value of these securities may fluctuate more than similar securities
which are issued at par and pay interest periodically. Although these
securities pay no interest to holders prior to maturity, interest on
these securities is reported as income to the fund and distributed to
its shareholders. These distributions must be made from the fund's cash
assets or, if necessary, from the proceeds of sales of portfolio
securities. A fund will not be able to purchase additional income
producing securities with cash used to make such distributions and its
current income ultimately may be reduced as a result.
Step Coupon Bonds (Steps)
A fund may invest in debt securities which do not pay interest for a
stated period of time and then pay interest at a series of different
rates for a series of periods. In addition to the risks associated with
the credit rating of the issuers, these securities are subject to the
volatility risk of zero coupon bonds for the period when no interest is
paid.
Pay-In-Kind (PIK) Securities
A fund may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are
generally high yield securities and in addition to the other risks
associated with investing in high yield securities are subject to the
risks that the interest payments which consist of additional securities
are also subject to the risks of high yield securities.
Money Market Instruments
Government obligations are issued by the U.S. or foreign governments,
their subdivisions, agencies and instrumentalities. Supranational
obligations are issued by supranational entities and are generally
designed to promote economic improvements. Certificates of deposits are
issued against deposits in a commercial bank with a defined return and
maturity. Banker's acceptances are used to finance the import, export
or storage of goods and are "accepted" when guaranteed at maturity by a
bank. Commercial paper are promissory notes issued by businesses to
finance short-term needs (including those with floating or variable
interest rates, or including a frequent interval put feature). Short-
term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-
term needs. Participation Interests include the underlying securities
and any related guaranty, letter of credit, or collateralization
arrangement which the fund would be allowed to invest in directly.
Securities Loans
A fund may make secured loans of its portfolio securities amounting to
not more than the percentage of its total assets specified in Part 1 of
this SAI, thereby realizing additional income. The risks in lending
portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights
in the collateral should the borrower fail financially. As a matter of
policy, securities loans are made to banks and broker-dealers pursuant
to agreements requiring that loans be continuously secured by collateral
in cash or short-term debt obligations at least equal at all times to
the value of the securities on loan. The borrower pays to the fund an
amount equal to any dividends or interest received on securities lent.
A fund retains all or a portion of the interest received on investment
of the cash collateral or receives a fee from the borrower. Although
voting rights, or rights to consent, with respect to the loaned
securities pass to the borrower, the fund retains the right to call the
loans at any time on reasonable notice, and it will do so in order that
the securities may be voted by the fund if the holders of such
securities are asked to vote upon or consent to matters materially
affecting the investment. A fund may also call such loans in order to
sell the securities involved.
Forward Commitments
A fund may enter into contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments"
and "when issued securities") if the fund holds until the settlement
date, in a segregated account, cash or high-grade debt obligations in an
amount sufficient to meet the purchase price, or if the fund enters into
offsetting contracts for the forward sale of other securities it owns.
Forward commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date. Where such purchases are made
through dealers, the fund relies on the dealer to consummate the sale.
The dealer's failure to do so may result in the loss to the fund of an
advantageous yield or price. Although the fund will generally enter
into forward commitments with the intention of acquiring securities for
its portfolio or for delivery pursuant to options contracts it has
entered into, the fund may dispose of a commitment prior to settlement
if the Adviser deems it appropriate to do so. A fund may realize short-
term profits or losses upon the sale of forward commitments.
Repurchase Agreements
A fund may enter into repurchase agreements. A repurchase agreement is
a contract under which the fund acquires a security for a relatively
short period (usually not more than one week) subject to the obligation
of the seller to repurchase and the fund to resell such security at a
fixed time and price (representing the fund's cost plus interest). It
is a fund's present intention to enter into repurchase agreements only
with commercial banks and registered broker-dealers and only with
respect to obligations of the U.S. government or its agencies or
instrumentalities. Repurchase agreements may also be viewed as loans
made by the fund which are collateralized by the securities subject to
repurchase. The Adviser will monitor such transactions to determine
that the value of the underlying securities is at least equal at all
times to the total amount of the repurchase obligation, including the
interest factor. If the seller defaults, the fund could realize a loss
on the sale of the underlying security to the extent that the proceeds
of sale including accrued interest are less than the resale price
provided in the agreement including interest. In addition, if the
seller should be involved in bankruptcy or insolvency proceedings, the
fund may incur delay and costs in selling the underlying security or may
suffer a loss of principal and interest if the fund is treated as an
unsecured creditor and required to return the underlying collateral to
the seller's estate.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the fund sells a security and agrees
to repurchase the same security at a mutually agreed upon date and
price. A reverse repurchase agreement may also be viewed as the
borrowing of money by the fund and, therefore, as a form of leverage. A
fund will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, the fund will enter into a reverse repurchase
agreement only when the interest income expected to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. A fund will not invest the proceeds of a reverse
repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. A fund may not enter into reverse
repurchase agreements exceeding in the aggregate one-third of the market
value of its total assets, less liabilities other than the obligations
created by reverse repurchase agreements. Each fund will establish and
maintain with its custodian a separate account with a segregated
portfolio of securities in an amount at least equal to its purchase
obligations under its reverse repurchase agreements. If interest rates
rise during the term of a reverse repurchase agreement, entering into
the reverse repurchase agreement may have a negative impact on a money
market fund's ability to maintain a net asset value of $1.00 per share.
Options on Securities
Writing covered options. A fund may write covered call options and
covered put options on securities held in its portfolio when, in the
opinion of the Adviser, such transactions are consistent with the fund's
investment objective and policies. Call options written by the fund
give the purchaser the right to buy the underlying securities from the
fund at a stated exercise price; put options give the purchaser the
right to sell the underlying securities to the fund at a stated price.
A fund may write only covered options, which means that, so long as the
fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option (or comparable securities
satisfying the cover requirements of securities exchanges). In the case
of put options, the fund will hold cash and/or high-grade short-term
debt obligations equal to the price to be paid if the option is
exercised. In addition, the fund will be considered to have covered a
put or call option if and to the extent that it holds an option that
offsets some or all of the risk of the option it has written. A fund
may write combinations of covered puts and calls on the same underlying
security.
A fund will receive a premium from writing a put or call option, which
increases the fund's return on the underlying security if the option
expires unexercised or is closed out at a profit. The amount of the
premium reflects, among other things, the relationship between the
exercise price and the current market value of the underlying security,
the volatility of the underlying security, the amount of time remaining
until expiration, current interest rates, and the effect of supply and
demand in the options market and in the market for the underlying
security. By writing a call option, the fund limits its opportunity to
profit from any increase in the market value of the underlying security
above the exercise price of the option but continues to bear the risk of
a decline in the value of the underlying security. By writing a put
option, the fund assumes the risk that it may be required to purchase
the underlying security for an exercise price higher than its then-
current market value, resulting in a potential capital loss unless the
security subsequently appreciates in value.
A fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it
purchases an offsetting option. A fund realizes a profit or loss from a
closing transaction if the cost of the transaction (option premium plus
transaction costs) is less or more than the premium received from
writing the option. Because increases in the market price of a call
option generally reflect increases in the market price of the security
underlying the option, any loss resulting from a closing purchase
transaction may be offset in whole or in part by unrealized appreciation
of the underlying security.
If the fund writes a call option but does not own the underlying
security, and when it writes a put option, the fund may be required to
deposit cash or securities with its broker as "margin" or collateral for
its obligation to buy or sell the underlying security. As the value of
the underlying security varies, the fund may have to deposit additional
margin with the broker. Margin requirements are complex and are fixed
by individual brokers, subject to minimum requirements currently imposed
by the Federal Reserve Board and by stock exchanges and other self-
regulatory organizations.
Purchasing put options. A fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market
value. Such hedge protection is provided during the life of the put
option since the fund, as holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline
in the underlying security's market price. For a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the fund will
reduce any profit it might otherwise have realized from appreciation of
the underlying security by the premium paid for the put option and by
transaction costs.
Purchasing call options. A fund may purchase call options to hedge
against an increase in the price of securities that the fund wants
ultimately to buy. Such hedge protection is provided during the life of
the call option since the fund, as holder of the call option, is able to
buy the underlying security at the exercise price regardless of any
increase in the underlying security's market price. In order for a call
option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. These costs will reduce any profit the fund might
have realized had it bought the underlying security at the time it
purchased the call option.
Over-the-Counter (OTC) options. The Staff of the Division of Investment
Management of the Securities and Exchange Commission has taken the
position that OTC options purchased by the fund and assets held to cover
OTC options written by the fund are illiquid securities. Although the
Staff has indicated that it is continuing to evaluate this issue,
pending further developments, the fund intends to enter into OTC options
transactions only with primary dealers in U.S. Government Securities
and, in the case of OTC options written by the fund, only pursuant to
agreements that will assure that the fund will at all times have the
right to repurchase the option written by it from the dealer at a
specified formula price. A fund will treat the amount by which such
formula price exceeds the amount, if any, by which the option may be
"in-the-money" as an illiquid investment. It is the present policy of the
fund not to enter into any OTC option transaction if, as a result, more
than 15% (10% in some cases, refer to your fund's Prospectus) of the
fund's net assets would be invested in (i) illiquid investments
(determined under the foregoing formula) relating to OTC options written
by the fund, (ii) OTC options purchased by the fund, (iii) securities
which are not readily marketable, and (iv) repurchase agreements
maturing in more than seven days.
Risk factors in options transactions. The successful use of the fund's
options strategies depends on the ability of the Adviser to forecast
interest rate and market movements correctly.
When it purchases an option, the fund runs the risk that it will lose
its entire investment in the option in a relatively short period of
time, unless the fund exercises the option or enters into a closing sale
transaction with respect to the option during the life of the option.
If the price of the underlying security does not rise (in the case of a
call) or fall (in the case of a put) to an extent sufficient to cover
the option premium and transaction costs, the fund will lose part or all
of its investment in the option. This contrasts with an investment by
the fund in the underlying securities, since the fund may continue to
hold its investment in those securities notwithstanding the lack of a
change in price of those securities.
The effective use of options also depends on the fund's ability to
terminate option positions at times when the Adviser deems it desirable
to do so. Although the fund will take an option position only if the
Adviser believes there is a liquid secondary market for the option,
there is no assurance that the fund will be able to effect closing
transactions at any particular time or at an acceptable price.
If a secondary trading market in options were to become unavailable, the
fund could no longer engage in closing transactions. Lack of investor
interest might adversely affect the liquidity of the market for
particular options or series of options. A marketplace may discontinue
trading of a particular option or options generally. In addition, a
market could become temporarily unavailable if unusual events -- such as
volume in excess of trading or clearing capability -- were to interrupt
normal market operations.
A marketplace may at times find it necessary to impose restrictions on
particular types of options transactions, which may limit the fund's
ability to realize its profits or limit its losses.
Disruptions in the markets for the securities underlying options
purchased or sold by the fund could result in losses on the options. If
trading is interrupted in an underlying security, the trading of options
on that security is normally halted as well. As a result, the fund as
purchaser or writer of an option will be unable to close out its
positions until options trading resumes, and it may be faced with losses
if trading in the security reopens at a substantially different price.
In addition, the Options Clearing Corporation (OCC) or other options
markets may impose exercise restrictions. If a prohibition on exercise
is imposed at the time when trading in the option has also been halted,
the fund as purchaser or writer of an option will be locked into its
position until one of the two restrictions has been lifted. If a
prohibition on exercise remains in effect until an option owned by the
fund has expired, the fund could lose the entire value of its option.
Special risks are presented by internationally-traded options. Because
of time differences between the United States and various foreign
countries, and because different holidays are observed in different
countries, foreign options markets may be open for trading during hours
or on days when U.S. markets are closed. As a result, option premiums
may not reflect the current prices of the underlying interest in the
United States.
Futures Contracts and Related Options
A fund will enter into futures contracts only when, in compliance with
the SEC's requirements, cash or cash equivalents, (or, in the case of
the fund investing primarily in foreign equity securities, such equity
securities), equal in value to the commodity value (less any applicable
margin deposits) have been deposited in a segregated account of the
fund's custodian.
A futures contract sale creates an obligation by the seller to deliver
the type of instrument called for in the contract in a specified
delivery month for a stated price. A futures contract purchase creates
an obligation by the purchaser to take delivery of the type of
instrument called for in the contract in a specified delivery month at a
stated price. The specific instruments delivered or taken at settlement
date are not determined until on or near that date. The determination
is made in accordance with the rules of the exchanges on which the
futures contract was made. Futures contracts are traded in the United
States only on commodity exchange or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures
Trading Commission (CFTC), and must be executed through a futures
commission merchant or brokerage firm which is a member of the relevant
contract market.
Although futures contracts by their terms call for actual delivery or
acceptance of commodities or securities, the contracts usually are
closed out before the settlement date without the making or taking of
delivery. Closing out a futures contract sale is effected by purchasing
a futures contract for the same aggregate amount of the specific type of
financial instrument or commodity with the same delivery date. If the
price of the initial sale of the futures contract exceeds the price of
the offsetting purchase, the seller is paid the difference and realizes
a gain. Conversely, if the price of the offsetting purchase exceeds the
price of the initial sale, the seller realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the
purchaser's entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the purchaser realizes a gain,
and if the purchase price exceeds the offsetting sale price, the
purchaser realizes a loss.
Unlike when the fund purchases or sells a security, no price is paid or
received by the fund upon the purchase or sale of a futures contract,
although the fund is required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of cash
and/or U.S. Government Securities. This amount is known as "initial
margin". The nature of initial margin in futures transactions is
different from that of margin in security transactions in that futures
contract margin does not involve the borrowing of funds by the fund to
finance the transactions. Rather, initial margin is in the nature of a
performance bond or good faith deposit on the contract that is returned
to the fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. Futures contracts also
involve brokerage costs.
Subsequent payments, called "variation margin", to and from the broker
(or the custodian) are made on a daily basis as the price of the
underlying security or commodity fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known
as "marking to market."
A fund may elect to close some or all of its futures positions at any
time prior to their expiration. The purpose of making such a move would
be to reduce or eliminate the hedge position then currently held by the
fund. A fund may close its positions by taking opposite positions which
will operate to terminate the fund's position in the futures contracts.
Final determinations of variation margin are then made, additional cash
is required to be paid by or released to the fund, and the fund realizes
a loss or a gain. Such closing transactions involve additional
commission costs.
Options on futures contracts. A fund will enter into written options on
futures contracts only when, in compliance with the SEC's requirements,
cash or equivalents equal in value to the commodity value (less any
applicable margin deposits) have been deposited in a segregated account
of the fund's custodian. A fund may purchase and write call and put
options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing
positions. A fund may use such options on futures contracts in lieu of
writing options directly on the underlying securities or purchasing and
selling the underlying futures contracts. Such options generally
operate in the same manner as options purchased or written directly on
the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option.
There is no guarantee that such closing transactions can be effected.
A fund will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above.
Risks of transactions in futures contracts and related options.
Successful use of futures contracts by the fund is subject to the
Adviser `s ability to predict correctly movements in the direction of
interest rates and other factors affecting securities markets.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to
the fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances
when the purchase of a call or put option on a futures contract would
result in a loss to the fund when the purchase or sale of a futures
contract would not, such as when there is no movement in the prices of
the hedged investments. The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures
contracts.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain market
clearing facilities inadequate, and thereby result in the institution,
by exchanges, of special procedures which may interfere with the timely
execution of customer orders.
To reduce or eliminate a hedge position held by the fund, the fund may
seek to close out a position. The ability to establish and close out
positions will be subject to the development and maintenance of a liquid
secondary market. It is not certain that this market will develop or
continue to exist for a particular futures contract. Reasons for the
absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain
contracts or options; (ii) restrictions may be imposed by an exchange on
opening transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of contracts or options, or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt
normal operations on an exchange; (v) the facilities of an exchange or a
clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue
the trading of contracts or options (or a particular class or series of
contracts or options), in which event the secondary market on that
exchange (or in the class or series of contracts or options) would cease
to exist, although outstanding contracts or options on the exchange that
had been issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their
terms.
Use by tax-exempt funds of U.S. Treasury security futures contracts and
options. A fund investing in tax-exempt securities issued by a
governmental entity may purchase and sell futures contracts and related
options on U.S. Treasury securities when, in the opinion of the Adviser,
price movements in Treasury security futures and related options will
correlate closely with price movements in the tax-exempt securities
which are the subject of the hedge. U.S. Treasury securities futures
contracts require the seller to deliver, or the purchaser to take
delivery of, the type of U.S. Treasury security called for in the
contract at a specified date and price. Options on U.S. Treasury
security futures contracts give the purchaser the right in return for
the premium paid to assume a position in a U.S. Treasury futures
contract at the specified option exercise price at any time during the
period of the option.
In addition to the risks generally involved in using futures contracts,
there is also a risk that price movements in U.S. Treasury security
futures contracts and related options will not correlate closely with
price movements in markets for tax-exempt securities.
Index futures contracts. An index futures contract is a contract to buy
or sell units of an index at a specified future date at a price agreed
upon when the contract is made. Entering into a contract to buy units
of an index is commonly referred to as buying or purchasing a contract
or holding a long position in the index. Entering into a contract to
sell units of an index is commonly referred to as selling a contract or
holding a short position. A unit is the current value of the index. A
fund may enter into stock index futures contracts, debt index futures
contracts, or other index futures contracts appropriate to its
objective(s). The fund may also purchase and sell options on index
futures contracts.
There are several risks in connection with the use by the fund of index
futures as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the index futures and
movements in the prices of securities which are the subject of the
hedge. The Adviser will attempt to reduce this risk by selling, to the
extent possible, futures on indices the movements of which will, in its
judgment, have a significant correlation with movements in the prices of
the fund's portfolio securities sought to be hedged.
Successful use of the index futures by the fund for hedging purposes is
also subject to the Adviser's ability to predict correctly movements in
the direction of the market. It is possible that, where the fund has
sold futures to hedge its portfolio against a decline in the market, the
index on which the futures are written may advance and the value of
securities held in the fund's portfolio may decline. If this occurs,
the fund would lose money on the futures and also experience a decline
in the value in its portfolio securities. However, while this could
occur to a certain degree, the Adviser believes that over time the value
of the fund's portfolio will tend to move in the same direction as the
market indices which are intended to correlate to the price movements of
the portfolio securities sought to be hedged. It is also possible that,
if the fund has hedged against the possibility of a decline in the
market adversely affecting securities held in its portfolio and
securities prices increase instead, the fund will lose part or all of
the benefit of the increased valued of those securities that it has
hedged because it will have offsetting losses in its futures positions.
In addition, in such situations, if the fund has insufficient cash, it
may have to sell securities to meet daily variation margin requirements.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the index
futures and the securities of the portfolio being hedged, the prices of
index futures may not correlate perfectly with movements in the
underlying index due to certain market distortions. First, all
participants in the futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which would distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures
market are less onerous than margin requirements in the securities
market, and as a result the futures market may attract more speculators
than the securities market. Increased participation by speculators in
the futures market may also cause temporary price distortions. Due to
the possibility of price distortions in the futures market and also
because of the imperfect correlation between movements in the index and
movements in the prices of index futures, even a correct forecast of
general market trends by the Adviser may still not result in a
successful hedging transaction.
Options on index futures. Options on index futures are similar to
options on securities except that options on index futures give the
purchaser the right, in return for the premium paid, to assume a
position in an index futures contract (a long position if the option is
a call and a short position if the option is a put), at a specified
exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin
account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or
is less than (in the case of a put) the exercise price of the option on
the index future. If an option is exercised on the last trading day
prior to the expiration date of the option, the settlement will be made
entirely in cash equal to the difference between the exercise price of
the option and the closing level of the index on which the future is
based on the expiration date. Purchasers of options who fail to
exercise their options prior to the exercise date suffer a loss of the
premium paid.
Options on indices. As an alternative to purchasing call and put
options on index futures, the fund may purchase call and put options on
the underlying indices themselves. Such options could be used in a
manner identical to the use of options on index futures.
Foreign Currency Transactions
A fund may engage in currency exchange transactions to protect against
uncertainty in the level of future currency exchange rates.
A fund may engage in both "transaction hedging" and "position hedging".
When it engages in transaction hedging, the fund enters into foreign
currency transactions with respect to specific receivables or payables
of the fund generally arising in connection with the purchase or sale of
its portfolio securities. A fund will engage in transaction hedging
when it desires to "lock in" the U.S. dollar price of a security it has
agreed to purchase or sell, or the U.S. dollar equivalent of a dividend
or interest payment in a foreign currency. By transaction hedging the
fund attempts to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and the
applicable foreign currency during the period between the date on which
the security is purchased or sold, or on which the dividend or interest
payment is declared, and the date on which such payments are made or
received.
A fund may purchase or sell a foreign currency on a spot (or cash) basis
at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign
currency. A fund may also enter into contracts to purchase or sell
foreign currencies at a future date ("forward contracts") and purchase
and sell foreign currency futures contracts.
For transaction hedging purposes the fund may also purchase exchange-
listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. Over-the-counter options
are considered to be illiquid by the SEC staff. A put option on a
futures contract gives the fund the right to assume a short position in
the futures contract until expiration of the option. A put option on
currency gives the fund the right to sell a currency at an exercise
price until the expiration of the option. A call option on a futures
contract gives the fund the right to assume a long position in the
futures contract until the expiration of the option. A call option on
currency gives the fund the right to purchase a currency at the exercise
price until the expiration of the option.
When it engages in position hedging, the fund enters into foreign
currency exchange transactions to protect against a decline in the
values of the foreign currencies in which its portfolio securities are
denominated (or an increase in the value of currency for securities
which the fund expects to purchase, when the fund holds cash or short-term
investments). In connection with position hedging, the fund may
purchase put or call options on foreign currency and foreign currency
futures contracts and buy or sell forward contracts and foreign currency
futures contracts. A fund may also purchase or sell foreign currency on
a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in
foreign currencies will change as a consequence of market movements in
the value of those securities between the dates the currency exchange
transactions are entered into and the dates they mature.
It is impossible to forecast with precision the market value of
portfolio securities at the expiration or maturity of a forward or
futures contract. Accordingly, it may be necessary for the fund to
purchase additional foreign currency on the spot market (and bear the
expense of such purchase) if the market value of the security or
securities being hedged is less than the amount of foreign currency the
fund is obligated to deliver and if a decision is made to sell the
security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security or
securities if the market value of such security or securities exceeds
the amount of foreign currency the fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the fund owns or intends to
purchase or sell. They simply establish a rate of exchange which one
can achieve at some future point in time. Additionally, although these
techniques tend to minimize the risk of loss due to a decline in the
value of the hedged currency, they tend to limit any potential gain
which might result from the increase in value of such currency.
Currency forward and futures contracts. A fund will enter into such
contracts only when, in compliance with the SEC's requirements, cash or
equivalents equal in value to the commodity value (less any applicable
margin deposits) have been deposited in a segregated account of the
fund's custodian. A forward currency contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract as agreed by the
parties, at a price set at the time of the contract. In the case of a
cancelable contract, the holder has the unilateral right to cancel the
contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A
contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. A currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the
contract. Currency futures contracts traded in the United States are
designed and traded on exchanges regulated by the CFTC, such as the New
York Mercantile Exchange.
Forward currency contracts differ from currency futures contracts in
certain respects. For example, the maturity date of a forward contract
may be any fixed number of days from the date of the contract agreed
upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties
rather than predetermined amounts. Also, forward contracts are traded
directly between currency traders so that no intermediary is required.
A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the fund may either
accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the
purchase or sale of an offsetting contract. Closing transactions with
respect to forward contracts are usually effected with the currency
trader who is a party to the original forward contract. Closing
transactions with respect to futures contracts are effected on a
commodities exchange; a clearing corporation associated with the
exchange assumes responsibility for closing out such contracts.
Positions in currency futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market in such
contracts. Although the fund intends to purchase or sell currency
futures contracts only on exchanges or boards of trade where there
appears to be an active secondary market, there is no assurance that a
secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may
not be possible to close a futures position and, in the event of adverse
price movements, the fund would continue to be required to make daily
cash payments of variation margin.
Currency options. In general, options on currencies operate similarly
to options on securities and are subject to many similar risks.
Currency options are traded primarily in the over-the-counter market,
although options on currencies have recently been listed on several
exchanges. Options are traded not only on the currencies of individual
nations, but also on the European Currency Unit ("ECU"). The ECU is
composed of amounts of a number of currencies, and is the official
medium of exchange of the European Economic Community's European
Monetary System.
A fund will only purchase or write currency options when the Adviser
believes that a liquid secondary market exists for such options. There
can be no assurance that a liquid secondary market will exist for a
particular option at any specified time. Currency options are affected
by all of those factors which influence exchange rates and investments
generally. To the extent that these options are traded over the
counter, they are considered to be illiquid by the SEC staff.
The value of any currency, including the U.S. dollars, may be affected
by complex political and economic factors applicable to the issuing
country. In addition, the exchange rates of currencies (and therefore
the values of currency options) may be significantly affected, fixed, or
supported directly or indirectly by government actions. Government
intervention may increase risks involved in purchasing or selling
currency options, since exchange rates may not be free to fluctuate in
respect to other market forces.
The value of a currency option reflects the value of an exchange rate,
which in turn reflects relative values of two currencies, the U.S.
dollar and the foreign currency in question. Because currency
transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the exercise of
currency options, investors may be disadvantaged by having to deal in an
odd lot market for the underlying currencies in connection with options
at prices that are less favorable than for round lots. Foreign
governmental restrictions or taxes could result in adverse changes in
the cost of acquiring or disposing of currencies.
There is no systematic reporting of last sale information for currencies
and there is no regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very
large round-lot transactions in the interbank market and thus may not
reflect exchange rates for smaller odd-lot transactions (less than $1
million) where rates may be less favorable. The interbank market in
currencies is a global, around-the-clock market. To the extent that
options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options
markets.
Settlement procedures. Settlement procedures relating to the fund's
investments in foreign securities and to the fund's foreign currency
exchange transactions may be more complex than settlements with respect
to investments in debt or equity securities of U.S. issuers, and may
involve certain risks not present in the fund's domestic investments,
including foreign currency risks and local custom and usage. Foreign
currency transactions may also involve the risk that an entity involved
in the settlement may not meet its obligations.
Foreign currency conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on
the difference (spread) between prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the fund at one rate, while offering a lesser rate of
exchange should the fund desire to resell that currency to the dealer.
Foreign currency transactions may also involve the risk that an entity
involved in the settlement may not meet its obligation.
Participation Interests
A fund may invest in municipal obligations either by purchasing them
directly or by purchasing certificates of accrual or similar instruments
evidencing direct ownership of interest payments or principal payments,
or both, on municipal obligations, provided that, in the opinion of
counsel to the initial seller of each such certificate or instrument,
any discount accruing on such certificate or instrument that is
purchased at a yield not greater than the coupon rate of interest on the
related municipal obligations will be exempt from federal income tax to
the same extent as interest on such municipal obligations. A fund may
also invest in tax-exempt obligations by purchasing from banks
participation interests in all or part of specific holdings of municipal
obligations. Such participations may be backed in whole or part by an
irrevocable letter of credit or guarantee of the selling bank. The
selling bank may receive a fee from the fund in connection with the
arrangement. A fund will not purchase such participation interests
unless it receives an opinion of counsel or a ruling of the Internal
Revenue Service that interest earned by it on municipal obligations in
which it holds such participation interests is exempt from federal
income tax.
Stand-by Commitments
When the fund purchases municipal obligations it may also acquire stand-by
commitments from banks and broker-dealers with respect to such municipal
obligations. A stand-by commitment is the equivalent of a put option
acquired by the fund with respect to a particular municipal obligation held
in its portfolio. A stand-by commitment is a security independent of the
municipal obligation to which it relates. The amount payable by a bank or
dealer during the time a stand-by commitment is exercisable, absent unusual
circumstances relating to a change in market value, would be substantially
the same as the value of the underlying municipal obligation. A stand-by
commitment might not be transferable by the fund, although it could sell the
underlying municipal obligation to a third party at any time.
A fund expects that stand-by commitments generally will be available
without the payment of direct or indirect consideration. However, if
necessary and advisable, the fund may pay for stand-by commitments
either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to such a commitment (thus
reducing the yield to maturity otherwise available for the same
securities.) The total amount paid in either manner for outstanding
stand-by commitments held in a fund portfolio will not exceed 10% of the
value of the fund's total assets calculated immediately after each stand-by
commitment is acquired. A fund will enter into stand-by commitments
only with banks and broker-dealers that, in the judgment of the Trust's
Board of Trustees, present minimal credit risks.
Inverse Floaters
Inverse floaters are derivative securities whose interest rates vary
inversely to changes in short-term interest rates and whose values
fluctuate inversely to changes in long-term interest rates. The value
of certain inverse floaters will fluctuate substantially more in
response to a given change in long-term rates than would a traditional
debt security. These securities have investment characteristics similar
to leverage, in that interest rate changes have a magnified effect on
the value of inverse floaters.
TAXES
All discussions of taxation at the shareholder level relate to federal
taxes only. Consult your tax adviser for state and local tax
considerations and for information about special tax considerations that
may apply to shareholders that are not natural persons.
Dividends Received Deductions. Distributions will qualify for the
corporate dividends received deduction only to the extent that dividends
earned by the fund qualify. Any such dividends are, however, includable
in adjusted current earnings for purposes of computing corporate AMT.
Return of Capital Distributions. To the extent that a distribution is a
return of capital for federal and state tax purposes, it reduces the
cost basis of the shares on the record date and is similar to a partial
return of the original investment (on which a sales charge may have been
paid). There is no recognition of a gain or loss, however, unless the
return of capital reduces the cost basis in the shares to below zero.
Funds that invest in U.S. Government Securities. Many states grant
tax-free status to dividends paid to shareholders of mutual funds from
interest income earned by the fund from direct obligations of the U.S.
government. Investments in mortgage-backed securities (including GNMA,
FNMA and FHLMC Securities) and repurchase agreements collateralized by
U.S. government securities do not qualify as direct federal obligations
in most states. Shareholders should consult with their own tax advisers
about the applicability of state and local intangible property, income
or other taxes to their fund shares and distributions and redemption
proceeds received from the fund.
Distributions from Tax-Exempt Funds. Each tax-exempt fund will have at
least 50% of its total assets invested in tax-exempt bonds at the end of
each quarter so that dividends from net interest income on tax-exempt
bonds will be exempt from Federal income tax when received by a
shareholder. The tax-exempt portion of dividends paid will be
designated within 60 days after year-end based upon the ratio of net
tax-exempt income to total net investment income earned during the year.
That ratio may be substantially different than the ratio of net tax-exempt
income to total net investment income earned during any particular portion
of the year. Thus, a shareholder who holds shares for only a part of the
year may be allocated more or less tax-exempt dividends than would be the
case if the allocation were based on the ratio of net tax-exempt income to
total net investment income actually earned while a shareholder.
The Tax Reform Act of 1986 makes income from certain "private activity
bonds" issued after August 7, 1986, a tax preference item for the
alternative minimum tax (AMT) at the maximum rate of 28% for individuals
and 20% for corporations. If the fund invests in private activity
bonds, shareholders may be subject to the AMT on that part of the
distributions derived from interest income on such bonds. Other
provisions of the Tax Reform Act affect the tax treatment of
distributions for corporations, casualty insurance companies and
financial institutions; interest on all tax-exempt bonds is included in
corporate adjusted current earnings when computing the AMT applicable to
corporations. Seventy-five percent of the excess of adjusted current
earnings over the amount of income otherwise subject to the AMT is
included in a corporation's alternative minimum taxable income.
Dividends derived from any investments other than tax-exempt bonds and
any distributions of short-term capital gains are taxable to
shareholders as ordinary income. Any distributions of net long-term
gains will in general be taxable to shareholders as long-term capital
gains regardless of the length of time fund shares are held.
Shareholders receiving social security and certain retirement benefits
may be taxed on a portion of those benefits as a result of receiving
tax-exempt income, including tax-exempt dividends from a fund.
Special Tax Rules Applicable to Tax-Exempt Funds. Income distributions
to shareholders who are substantial users or related persons of
substantial users of facilities financed by industrial revenue bonds may
not be excludable from their gross income if such income is derived from
such bonds. Income derived from a fund's investments other than tax-exempt
instruments may give rise to taxable income. A fund's shares must be held
for more than six months in order to avoid the disallowance of a capital
loss on the sale of fund shares to the extent of tax-exempt dividends paid
during that period. A shareholder that borrows money to purchase a fund's
shares will not be able to deduct the interest paid with respect to such
borrowed money.
Sales of Shares. In general, any gain or loss realized upon a taxable
disposition of shares by a shareholder will be treated as long-term
capital gain or loss if the shares have been held for more than twelve
months, and otherwise as short-term capital gain or loss assuming such
shares are held as a capital asset. However, any loss realized upon a
taxable disposition of shares held for six months or less will be
treated as long-term, rather than short-term, capital loss to the extent
of any long-term capital gain distributions received by the shareholder
with respect to those shares. All or a portion of any loss realized
upon a taxable disposition of shares will be disallowed if other shares
are purchased within 30 days before or after the disposition. In such a
case, the basis of the newly purchased shares will be adjusted to
reflect the disallowed loss.
Backup Withholding. Certain distributions and redemptions may be
subject to a 31% backup withholding unless a taxpayer identification
number and certification that the shareholder is not subject to the
withholding is provided to the fund. This number and form may be
provided by either a Form W-9 or the accompanying application. In
certain instances, CISC may be notified by the Internal Revenue Service
that a shareholder is subject to backup withholding.
Excise Tax. To the extent that the fund does not annually distribute
substantially all taxable income and realized gains, it is subject to an
excise tax. The Adviser, intends to avoid this tax except when the cost
of processing the distribution is greater than the tax.
Tax Accounting Principles. To qualify as a "regulated investment
company," the fund must (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains
from the sale or other disposition of securities or foreign currencies
or other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) derive less than 30% of
its gross income from the sale or other disposition of certain assets
held less than three months; (c) diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the value
of its total assets consists of cash, cash items, U.S. Government
securities, and other securities limited generally with respect to any
one issuer to not more than 5% of the total assets of the fund and not
more than 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of its assets is invested in the
securities of any issuer (other than U.S. Government securities).
Futures Contracts. Accounting for futures contracts will be in
accordance with generally accepted accounting principles. The amount of
any realized gain or loss on the closing out of a futures contract will
result in a capital gain or loss for tax purposes. In addition, certain
futures contracts held by the fund (so-called "Section 1256 contracts")
will be required to be "marked-to-market" (deemed sold) for federal
income tax purposes at the end of each fiscal year. Sixty percent of
any net gain or loss recognized on such deemed sales or on actual sales
will be treated as long-term capital gain or loss, and the remainder
will be treated as short-term capital gain or loss.
However, if a futures contract is part of a "mixed straddle" (i.e., a
straddle comprised in part of Section 1256 contracts), a fund may be
able to make an election which will affect the character arising from
such contracts as long-term or short-term and the timing of the
recognition of such gains or losses. In any event, the straddle
provisions described below will be applicable to such mixed straddles.
Special Tax Rules Applicable to "Straddles". The straddle provisions of
the Code may affect the taxation of the fund's options and futures
transactions and transactions in securities to which they relate. A
"straddle" is made up of two or more offsetting positions in "personal
property," including debt securities, related options and futures,
equity securities, related index futures and, in certain circumstances,
options relating to equity securities, and foreign currencies and
related options and futures.
The straddle rules may operate to defer losses realized or deemed
realized on the disposition of a position in a straddle, may suspend or
terminate the fund's holding period in such positions, and may convert
short-term losses to long-term losses in certain circumstances.
Foreign Currency-Denominated Securities and Related Hedging
Transactions. The fund's transactions in foreign currency-denominated
debt securities, certain foreign currency options, futures contracts and
forward contracts may give rise to ordinary income or loss to the extent
such income or loss results from fluctuations in the value of the
foreign currency concerned.
If more than 50% of the fund's total assets at the end of its fiscal
year are invested in securities of foreign corporate issuers, the fund
may make an election permitting its shareholders to take a deduction or
credit for federal tax purposes for their portion of certain foreign
taxes paid by the fund. The Adviser, will consider the value of the
benefit to a typical shareholder, the cost to the fund of compliance
with the election, and incidental costs to shareholders in deciding
whether to make the election. A shareholder's ability to claim such a
foreign tax credit will be subject to certain limitations imposed by the
Code, as a result of which a shareholder may not get a full credit for
the amount of foreign taxes so paid by the fund. Shareholders who do
not itemize on their federal income tax returns may claim a credit (but
no deduction) for such foreign taxes.
Certain securities are considered to be Passive Foreign Investment
Companies (PFICS) under the Code, and the fund is liable for any
PFIC-related taxes.
MANAGEMENT OF THE COLONIAL FUNDS
Colonial Management Associates, Inc. (CMA) is the investment adviser to
each of the Colonial funds (except for Colonial Municipal Money Market
Fund, Colonial Global Utilities Fund and Colonial Newport Tiger Fund).
(See Part I of this SAI for a description of the Adviser to these funds)
CMA is a subsidiary of The Colonial Group, Inc. (TCG), One Financial
Center, Boston, MA 02111. TCG is a subsidiary of Liberty Financial
Companies, Inc. (Liberty Financial), which in turn is a direct
subsidiary of LFC Holdings, Inc., which in turn is a direct subsidiary
Liberty Mutual Equity Corporation, which in turn is a wholly-owned
subsidiary of Liberty Mutual Insurance Company (Liberty Mutual).
Liberty Mutual is an underwriter of worker's compensation insurance and
a property and casualty insurer in the U.S. Liberty Financial's address
is 600 Atlantic Avenue, Boston, MA 02210. Liberty Mutual's address is
175 Berkeley Street, Boston, MA 02117.
Trustees and Officers (this section applies to all of the Colonial funds)
Robert J. Birnbaum(Age 68), Trustee of all Colonial funds since April,
1995 (1), is a Trustee of LFC Utilities Trust in which Colonial Global
Utilities Fund is invested (LFC Portfolio) since November, 1994, is a
Trustee of certain charitable and non-charitable organizations since
December, 1993 (formerly Special Counsel, Dechert Price & Rhoads from
September, 1988 to December, 1993; President and Chief Operating
Officer, New York Stock Exchange, Inc. from May, 1985 to June, 1988),
313 Bedford Road, Ridgewood, NJ 07450
Tom Bleasdale (Age 65), Trustee of all Colonial funds since November,
1987 (2), is a Trustee of certain charitable and non-charitable
organizations since 1993 (formerly Chairman of the Board and Chief
Executive Officer, Shore Bank & Trust Company from 1992-1993), 1508
Ferncroft Tower, Danvers, MA 01923
Lora S. Collins (Age 59), Trustee of all Colonial funds since August,
1980 (2), is an Attorney with Kramer, Levin, Naftalis, Nessen, Kamin &
Frankel since September, 1986, 919 Third Avenue, New York, NY 10022
James E. Grinnell(Age 66), Trustee of all Colonial funds since April,
1995 (1), is a Private Investor since November, 1988, is a Trustee of
the LFC Portfolio since August, 1991 (formerly Senior Vice President-
Operations, The Rockport Company from May, 1986 to November, 1988),
22 Harbor Avenue, Marblehead, MA 01945
William D. Ireland, Jr. (Age 71), Trustee of all Colonial funds since
November, 1969 (2), is a Trustee of certain charitable and non-charitable
organizations since February, 1990 (formerly Chairman of the Board,
Bank of New England, - Worcester from August, 1987 to February, 1990),
103 Springline Drive, Vero Beach, FL 32963
Richard W. Lowry(Age 59), Trustee of all Colonial funds since April,
1995 (1), is a Trustee of the LFC Portfolio since August, 1991, is a
Private Investor since August, 1987 (formerly Chairman and Chief
Executive Officer, U.S. Plywood Corporation from 1985 to August, 1987),
10701 Charleston Drive, Vero Beach, FL 32963
William E. Mayer (Age 55), Trustee of all Colonial funds since February,
1994 (2), is Dean, College of Business and Management, University of
Maryland since October, 1992 (formerly Dean, Simon Graduate School of
Business, University of Rochester from October, 1991 to July, 1992;
formerly Chairman and Chief Executive Officer, C.S. First Boston
Merchant Bank from January, 1990 to January, 1991; and formerly
President and Chief Executive Officer, The First Boston Corporation from
September, 1988 to January, 1990), College Park, MD 20742
John A. McNeice, Jr. (3)(Age 63), Trustee and President of all Colonial
funds since February, 1975 (2), is Chairman of the Board and Director,
TCG since November, 1984 ,and of CMA since November, 1983, Director,
Liberty Financial since March, 1995 (formerly Chief Executive Officer,
CMA and TCG from November, 1983 to March, 1995)
James L. Moody, Jr. (Age 63), Trustee of all Colonial funds since May,
1986 (2), is Chairman of the Board, Hannaford Bros., Co. since May, 1984
(formerly Chief Executive Officer, Hannaford Bros. Co. from May, 1984 to
May, 1992), P.O. Box 1000, Portland, ME 04104
John J. Neuhauser (Age 51), Trustee of all Colonial funds since January,
1984 (2), is Dean, Boston College School of Management since 1978,
140 Commonwealth Avenue, Chestnut Hill, MA 02167
George L. Shinn (Age 72), Trustee of all Colonial funds since May, 1984
(2), is a Financial Consultant since 1989 (formerly Chairman, Chief
Executive Officer and Consultant, The First Boston Corporation from
1983 to July, 1991), The First Boston Corporation, Tower Forty Nine,
12 East 49th Street, New York, NY 10017
Robert L. Sullivan (Age 67), Trustee of all Colonial funds since
September, 1987 (2), is a self-employed Management Consultant since
January, 1989 (formerly Management Consultant, Saatchi and Saatchi
Consulting Ltd. from December, 1987 to January, 1989 and formerly
Principal and International Practice Director, Management Consulting,
Peat Marwick Main & Co. over five years), 7121 Natelli Woods Lane,
Bethesda, MD 20817
Sinclair Weeks, Jr. (Age 72), Trustee of all Colonial funds since
October, 1968 (2), is Chairman of the Board, Reed & Barton Corporation
since 1987, Bay Colony Corporate Center, Suite 4550, 1000 Winter Street,
Waltham, MA 02154
Harold W. Cogger (Age 59), Vice President since July, 1993, is President
since July, 1993, Chief Executive Officer since March, 1995 and Director
since March, 1984, CMA (formerly Executive Vice President, CMA from
October, 1989 to July, 1993); President since October, 1994, Chief
Executive Officer since March, 1995 and Director since October, 1981,
TCG; Executive Vice President and Director, Liberty Financial since
March, 1995
Peter L. Lydecker (Age 41), Controller since June, 1993 (formerly
Assistant Controller from March, 1985 to June, 1993), is Vice President,
CMA since June, 1993 (formerly Assistant Vice President, CMA from
August, 1988 to June, 1993)
Davey S. Scoon (Age 48), Vice President since June, 1993, is Executive
Vice President since July, 1993 and Director since March, 1985, CMA
(formerly Senior Vice President and Treasurer from March, 1985 to July,
1993, CMA); Executive Vice President and Chief Operating Officer, TCG
since March, 1995 (formerly Vice President - Finance and Administration,
TCG from November, 1985 to March, 1995)
Richard A. Silver (Age 48), Treasurer and Chief Financial Officer since
July, 1993 (formerly Controller from July, 1980 to June, 1993), is
Senior Vice President and Director since April, 1988, Treasurer and
Chief Financial Officer since July, 1993, CMA; Treasurer and Chief
Financial Officer, TCG since July, 1993 (formerly Assistant Treasurer,
TCG from January, 1985 to July, 1993)
Arthur O. Stern (Age 56),Secretary since 1985, is Director since 1985,
Executive Vice President since July, 1993, General Counsel, Clerk and
Secretary since March, 1985, CMA; Executive Vice President, Legal and
Compliance since March, 1995 and Clerk since March, 1985, TCG (formerly
Vice President - Legal, TCG from March, 1985 to March, 1995)
(1) On April 3, 1995, and in connection with the merger of The
Colonial Group, Inc. into Liberty Financial which occurred on
March 27, 1995, Liberty Financial Trust (LFT) changed its
name to Colonial Trust VII. Prior to the merger, each of
Messrs. Birnbaum, Grinnell, and Lowry was a Trustee of LFT.
Mr. Birnbaum has been a Trustee of LFT since November, 1994.
Each of Messrs. Grinnell and Lowry has been a Trustee of LFT
since August, 1991. Each of Messrs. Grinnell and Lowry
continue to serve as Trustees under the new name, Colonial
Trust VII, along with each of the other Colonial Trustees
named above. The Colonial Trustees were elected as Trustees
of Colonial Trust VII effective April 3, 1995.
(2) Elected as a Trustee of the LFC Portfolio on March 27, 1995.
(3) Trustees who are "interested persons" (as defined in the 1940
Act) of the fund or CMA.
The address of the officers of each Colonial Fund is One Financial
Center, Boston, MA 02111.
The Trustees serve as trustees of all Colonial funds for which each
Trustee (except Mr. McNeice) will receive an annual retainer of $45,000
and attendance fees of $7,500 for each regular joint meeting and $1,000
for each special joint meeting. Committee chairs receive an annual
retainer of $5,000. Committee members receive an annual retainer of
$1,000 and $1,000 for each special meeting attended. Two-thirds of the
Trustee fees are allocated among the Colonial funds based on the fund's
relative net assets and one-third of the fees are divided equally among
the Colonial funds.
CMA and/or its affiliate, Colonial Advisory Services, Inc. (CASI), has
rendered investment advisory services to investment company,
institutional and other clients since 1931. CMA currently serves as
investment adviser and administrator for 30 open-end and 5 closed-end
management investment company portfolios, and is the administrator for
3 open-end management investment company portfolios (collectively,
Colonial funds). Trustees and officers of the Trust, who are also
officers of CMA or its affiliates will benefit from the advisory fees,
sales commissions and agency fees paid or allowed by the Trust. More
than 30,000 financial advisers have recommended Colonial funds to over
800,000 clients worldwide, representing more than $15.5 billion in
assets.
The Agreement and Declaration of Trust (Declaration) of the Trust
provides that the Trust will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with litigation in which
they may be involved because of their offices with the Trust but that
such indemnification will not relieve any officer or Trustee of any
liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his or
her duties. The Trust, at its expense, provides liability insurance for
the benefit of its Trustees and officers.
The Management Agreement (this section does not apply to the Colonial
Municipal Money Market Fund, Colonial Global Utilities Fund or Colonial
Newport Tiger Fund-See Part I of this SAI))
Under a Management Agreement (Agreement), the Adviser has contracted to
furnish each fund with investment research and recommendations or fund
management, respectively, and accounting, and administrative personnel
and services, and with office space, equipment and other facilities.
For these services and facilities, each Colonial fund pays a monthly fee
based on the average of the daily closing value of the total net assets
of each fund for such month.
The Adviser's compensation under the Agreement is subject to reduction
in any fiscal year to the extent that the total expenses of each fund
for such year (subject to applicable exclusions) exceed the most
restrictive applicable expense limitation prescribed by any state
statute or regulatory authority in which the Trust's shares are
qualified for sale. The most restrictive expense limitation applicable
to a Colonial fund is 2.5% of the first $30 million of the Trust's
average net assets for such year, 2% of the next $70 million and 1.5% of
any excess over $100 million.
Under the Agreement, any liability of the Adviser to the fund and its
shareholders is limited to situations involving the Adviser's own
willful misfeasance, bad faith, gross negligence or reckless disregard
of duties.
The Agreement may be terminated with respect to the fund at any time on
60 days' written notice by the Adviser or by the Trustees of the Trust
or by a vote of a majority of the outstanding voting securities of the
fund. The Agreement will automatically terminate upon any assignment
thereof and shall continue in effect from year to year only so long as
such continuance is approved at least annually (i) by the Trustees of
the Trust or by a vote of a majority of the outstanding voting
securities of the fund and (ii) by vote of a majority of the Trustees
who are not interested persons (as such term is defined in the 1940 Act)
of the Adviser or the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
The Adviser pays all salaries of officers of the Trust. The Trust pays
all expenses not assumed by the Adviser including, but not limited to,
auditing, legal, custodial, investor servicing and shareholder reporting
expenses. The Trust pays the cost of typesetting for its Prospectuses
and the cost of printing and mailing any Prospectuses sent to
shareholders. CISI pays the cost of printing and distributing all other
Prospectuses.
The Agreement provides that the Adviser shall not be subject to any
liability to the Trust or to any shareholder of the Trust for any act or
omission in the course of or connected with rendering services to the
Trust in the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of its duties on the part of the Adviser.
Administration Agreement (this section applies only to the Colonial
Municipal Money Market Fund, Colonial Global Utilities Fund and Colonial
Newport Tiger Fund and their respective Trusts)
Under an Administration Agreement with each Fund, CMA, in its capacity
as the Administrator to each Fund, has contracted to perform the
following administrative services:
(a) providing office space, equipment and clerical personnel;
(b) arranging, if desired by the respective Trust, for its
Directors,
officers and employees to serve as Trustees, officers or
agents of each Fund;
(c) preparing and, if applicable, filing all documents
required for compliance by each Fund with
applicable laws and regulations;
(d) preparation of agendas and supporting documents for and
minutes of meetings of Trustees, committees of Trustees
and shareholders;
(e) monitoring compliance by the Fund (only applicable to
Colonial Municipal Money Market Fund) with Rule 2a-7
under the Investment Company Act of 1940
(the "1940 Act") and reporting to the Trustees from time
to time with respect thereto;
(f) monitoring the investments and operations of the SR&F
Municipal Money Market Portfolio in which Colonial
Municipal Money Market Fund is invested (Municipal Money
Market Portfolio) and the LFC Portfolio and reporting
to the Trustees from time to time with respect
thereto;
(g) coordinating and overseeing the activities of each Fund's
other third-party service providers; and
(h) maintaining certain books and records of each Fund.
The Pricing and Bookkeeping Agreement
CMA provides pricing and bookkeeping services to each Colonial fund
pursuant to a Pricing and Bookkeeping Agreement. The Pricing and
Bookkeeping Agreement has a one-year term. CMA, in its capacity as the
Administrator to each of Colonial Municipal Money Market Fund and
Colonial Global Utilities Fund, is paid an annual fee of $18,000, plus
0.0233% of average daily net assets in excess of $50 million. For each
of the other Colonial funds (except for Colonial Newport Tiger Fund),
CMA is paid monthly a fee of $2,250 by each fund, plus a monthly
percentage fee based on net assets of the fund equal to the following:
1/12 of 0.000% of the first $50 million;
1/12 of 0.035% of the next $950 million;
1/12 of 0.025% of the next $1 billion;
1/12 of 0.015% of the next $1 billion; and
1/12 of 0.001% on the excess over $3 billion
CMA provides pricing and bookkeeping services to Colonial Newport Tiger
Fund for an annual fee of $27,000, plus 0.035% of Colonial Newport Tiger
Fund's average net assets over $50 million.
The Adviser of each of the Municipal Money Market Portfolio and LFC
Portfolio provides pricing and bookkeeping services to each Portfolio
for a fee of $25,000 plus 0.0025% annually of average daily net assets
of each Portfolio over $50 million.
Portfolio Transactions
The following sections entitled "Investment decisions" and Brokerage and
research services" do not apply to Colonial Municipal Money Market Fund,
Colonial U.S. Fund for Growth, Colonial Newport Tiger Fund or Colonial
Global Utilities Fund. For each of Colonial Municipal Money Market
Fund, Colonial U.S. Fund for Growth and Colonial Global Utilities Fund,
see Part 1 of each fund's respective SAI.
Investment decisions. The Adviser acts as investment adviser to each of
the Colonial funds (except for the Colonial Municipal Money Market Fund,
Colonial Global Utilities Fund and Colonial Newport Tiger Fund, each of
which is administered by the Adviser, and Colonial U.S. Fund for Growth
for which investment decisions have been delegated by the Adviser to
State Street Bank and Trust Company, the fund's sub-adviser) (as defined
under Management of the Fund herein) and its affiliate, CASI, advises
other institutional, corporate, fiduciary and individual clients for
which CASI performs various services. Various officers and Trustees of
the Trust also serve as officers or Trustees of other Colonial funds and
the other corporate or fiduciary clients of 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.
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 which it advises as a factor in the
selection of broker-dealers to execute securities transactions for a
Colonial fund.
The Adviser places the transactions of the Colonial funds with
broker-dealers selected by the Adviser and, if applicable, negotiates
commissions. Broker-dealers may receive brokerage commissions on
portfolio transactions, including the purchase and writing of options,
the effecting of closing purchase and sale transactions, and the
purchase and sale of underlying securities upon the exercise of options
and the purchase or sale of other instruments. The Colonial funds from
time to time also execute portfolio transactions with such broker-dealers
acting as principals. The Colonial funds do not intend to deal
exclusively with any particular broker-dealer or group of broker-dealers.
Except as described below in connection with commissions paid to a
clearing agent on sales of securities, it is the Adviser's policy always
to seek best execution, which is to place the Colonial funds'
transactions where the Colonial funds can obtain the most favorable
combination of price and execution services in particular transactions
or provided on a continuing basis by a broker-dealer, and to deal
directly with a principal market maker in connection with over-the-counter
transactions, except when it is believed that best execution is obtainable
elsewhere. In evaluating the execution services of, including the overall
reasonableness of brokerage commissions paid to, a broker-dealer,
consideration is given to, among other things, the firm's general execution
and operational capabilities, and to its reliability, integrity and
financial condition.
Subject to such practice of always seeking best execution, securities
transactions of the Colonial funds may be executed by broker-dealers who
also provide research services (as defined below) to the Adviser and the
Colonial funds. The Adviser may use all, some or none of such research
services in providing investment advisory services to each of its
investment company and other clients, including the fund. To the extent
that such services are used by the Adviser, they tend to reduce the
Adviser's expenses. In the Adviser's opinion, it is impossible to
assign an exact dollar value for such services.
Subject to such policies as the Trustees may determine, the Adviser may
cause the Colonial funds to pay a broker-dealer which provides brokerage
and research services to the Adviser an amount of commission for
effecting a securities transaction, including the sale of an option or a
closing purchase transaction, for the Colonial funds in excess of the
amount of commission which another broker-dealer would have charged for
effecting that transaction. As provided in Section 28(e) of the
Securities Exchange Act of 1934, "brokerage and research services"
include advice as to the value of securities, the advisability of
investing in, purchasing or selling securities and the availability of
securities or purchasers or sellers of securities; furnishing analyses
and reports concerning issues, industries, securities, economic factors
and trends and portfolio strategy and performance of accounts; and
effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement). The Adviser must determine
in good faith that such greater commission is reasonable in relation to
the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of that particular transaction
or the Adviser's overall responsibilities to the Colonial funds and all
its other clients.
The Trustees have authorized the Adviser to utilize the services of a
clearing agent with respect to all call options written by Colonial
funds that write options and to pay such clearing agent commissions of a
fixed amount per share (currently 1.25 cents) on the sale of the
underlying security upon the exercise of an option written by a fund.
The Trustees may further authorize the Adviser to depart from the
present policy of always seeking best execution and to pay higher
brokerage commissions from time to time for other brokerage and research
services as described above in the future if developments in the
securities markets indicate that such would be in the interests of the
shareholders of the Colonial funds.
Principal Underwriter
CISI is the principal underwriter of the Trust's shares. CISI has no
obligation to buy the Colonial funds' shares, and purchases the Colonial
funds shares only upon receipt of orders from authorized FSFs or
investors.
Investor Servicing and Transfer Agent
CISC is the Trust's investor servicing agent (transfer, plan and
dividend disbursing agent), for which it receives fees which are paid
monthly by the Trust. The fee paid to CISC is based on the average
daily net assets of each Colonial fund plus reimbursement for out-of-
pocket expenses. See "Fund Charges and Expenses" in Part 1 of this SAI
for information on fees received by CISC. The agreement continues
indefinitely but may be terminated by 90 days' notice by the Fund or
Colonial funds to CISC or generally by 6 months' notice by CISC to the
Fund or Colonial funds. The agreement limits the liability of CISC to
the Fund or Colonial funds for loss or damage incurred by the Fund or
Colonial funds to situations involving a failure of CISC to use
reasonable care or to act in good faith in performing its duties under
the agreement. It also provides that the Fund or Colonial funds will
indemnify CISC against, among other things, loss or damage incurred by
CISC on account of any claim, demand, action or suit made on or against
CISC not resulting from CISC's bad faith or negligence and arising out
of, or in connection with, its duties under the agreement.
DETERMINATION OF NET ASSET VALUE
Each Colonial fund and each other Colonial fund determines net asset
value (NAV) per share for each Class as of the close of the New York
Stock Exchange (Exchange)(generally 4:00 p.m. Eastern time, 3:00 p.m.
Chicago time) each day the Exchange is open. Currently, the Exchange is
closed Saturdays, Sundays and the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor
Day, Thanksgiving and Christmas. The net asset value of the Municipal
Money Market Portfolio will not be determined on days when the Exchange
is closed unless, in the judgment of the Municipal Money Market
Portfolio's Board of Trustees, the net asset value of the Municipal
Money Market Portfolio should be determined on any such day, in which
case the determination will be made at 3:00 p.m., Chicago time. Debt
securities generally are valued by a pricing service which determines
valuations based upon market transactions for normal, institutional-size
trading units of similar securities. However, in circumstances where
such prices are not available or where the Adviser deems it appropriate
to do so, an over-the-counter or exchange bid quotation is used.
Securities listed on an exchange or on NASDAQ are valued at the last
sale price. Listed securities for which there were no sales during the
day and unlisted securities are valued at the last quoted bid price.
Options are valued at the last sale price or in the absence of a sale,
the mean between the last quoted bid and offering prices. Short-term
obligations with a maturity of 60 days or less are valued at amortized
cost pursuant to procedures adopted by the Trustees. The values of
foreign securities quoted in foreign currencies are translated into U.S.
dollars at the exchange rate for that day. Portfolio positions for
which there are no such valuations and other assets are valued at fair
value as determined in good faith under the direction of the Trust's
Trustees.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of
the Exchange. The values of these securities used in determining the
NAV are computed as of such times. Also, because of the amount of time
required to collect and process trading information as to large numbers
of securities issues, the values of certain securities (such as
convertible bonds, U.S. government securities, and tax-exempt
securities) are determined based on market quotations collected earlier
in the day at the latest practicable time prior to the close of the
Exchange. Occasionally, events affecting the value of such securities
may occur between such times and the close of the Exchange which will
not be reflected in the computation of the Fund's NAV. If events
materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value
following procedures approved by the Trust's Trustees.
Amortized Cost for Money Market Funds (this section currently applies
only to Colonial Government Money Market Fund, a series of Colonial
Trust II- see "Amortized Cost for Money Market Funds" under "Other
Information Concerning the Portfolio" in Part 1 of the SAI of Colonial
Municipal Money Market Fund for information relating to the Municipal
Money Market Portfolio)
Money market funds generally value their portfolio securities at
amortized cost according to Rule 2a-7 under the 1940 Act.
Portfolio instruments are valued under the amortized cost method,
whereby the instrument is recorded at cost and thereafter amortized to
maturity. This method assures a constant NAV but may result in a yield
different than that of the same portfolio under the market value method.
The Trust'sTrustees have adopted procedures intended to stabilize a
money market fund's NAV per share at $1.00. When a money market fund's
market value deviates from the amortized cost of $1.00, and results in a
material dilution to existing shareholders, the Trust's Trustees will
take corrective action to: realize gains or losses; shorten the
portfolio's maturity; withhold distributions; redeem shares in kind; or
convert to the market value method (in which case the NAV per share may
differ from $1.00). All investments will be determined pursuant to
procedures approved by the Trust's Trustees to present minimal credit
risk.
See the Statement of Assets and Liabilities in the Shareholder Report of
the Colonial Government Money Market Fund for a specimen price sheet
showing the computation of maximum offering price per share of Class A
shares.
HOW TO BUY SHARES
The Prospectus contains a general description of how investors may buy
shares of the Fund and tables of charges. This SAI contains additional
information which may be of interest to investors.
The Fund will accept unconditional orders for shares to be executed at
the public offering price based on the NAV per share next determined
after the order is placed in good order. The public offering price is
the NAV plus the applicable sales charge, if any. In the case of orders
for purchase of shares placed through FSFs, the public offering price
will be determined on the day the order is placed in good order, but
only if the FSF receives the order prior to the time shares are valued
and transmits it to the Fund before the Fund processes that day's
transactions. If the FSF fails to transmit before the Fund processes
that day's transactions, the customer's entitlement to that day's
closing price must be settled between the customer and the FSF. If the
FSF receives the order after the time the Fund values its shares, the
price will be based on the NAV determined as of the close of the
Exchange on the next day it is open. If funds for the purchase of
shares are sent directly to CISC, they will be invested at the public
offering price next determined after receipt in good order. Payment for
shares of the Fund must be in U.S. dollars; if made by check, the check
must be drawn on a U.S. bank.
The Fund receives the entire NAV of shares sold. For shares subject to
an initial sales charge, CISI's commission is the sales charge shown in
the Fund's Prospectus less any applicable FSF discount. The FSF
discount is the same for all FSFs, except that CISI retains the entire
sales charge on any sales made to a shareholder who does not specify an
FSF on the Investment Account Application ("Application"). CISI
generally retains 100% of any asset-based sales charge (distribution
fee) or contingent deferred sales charge. Such charges generally
reimburse CISI for an up-front and/or ongoing 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. A shareholder may send any
certificates which have been previously acquired to CISC for deposit to
their account.
SPECIAL PURCHASE PROGRAMS/INVESTOR SERVICES
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 is by
electronic funds transfer, you may request the fundamatic for any day.
Further information and application forms are available from FSFs or
from CISI.
Automated Dollar Cost Averaging (Classes A, B and D). Colonial's
Automated Dollar Cost Averaging program allows you to exchange $100 or
more on a monthly basis from any Colonial fund in which you have a
current balance of at least $5,000 into the same class of shares of up
to four other Colonial funds. Complete the Automated Dollar Cost
Averaging section of the Application. The designated amount will be
exchanged on the third Tuesday of each month. There is no charge for
the exchanges made pursuant to the Automated Dollar Cost Averaging
program. Exchanges will continue so long as your Colonial fund balance
is sufficient to complete the transfers. Your normal rights and
privileges as a shareholder remain in full force and effect. Thus you
can: buy any funds, exchange between the same Class of shares of funds
by written instruction or by telephone exchange if you have so elected
and withdraw amounts from any fund, subject to the imposition of any
applicable CDSC.
Any additional payments or exchanges into your Colonial fund will extend
the time of the Automated Dollar Cost Averaging program.
An exchange is a capital sale transaction for federal income tax
purposes. You may terminate your program, change the amount of the
exchange (subject to the $100 minimum), or change your selection of
funds, by telephone or in writing; if in writing by mailing it to
Colonial Investors Service Center, Inc. P.O. Box 1722, Boston, MA
02105-1722.
You should consult your FSF or investment adviser to determine whether
or not the Automated Dollar Cost Averaging program is appropriate for
you.
CISI offers several plans by which an investor may obtain reduced
initial or contingent deferred sales charges . These plans may be
altered or discontinued at any time.
Tax-Sheltered Retirement Plans. CISI offers prototype tax-qualified
plans, including Individual Retirement Accounts, and Pension and
Profit-Sharing Plans for individuals, corporations, employees and the
self-employed. The minimum initial Retirement Plan investment in these
funds is $25. The First National Bank of Boston is the Trustee and charges
a $10 annual fee. Detailed information concerning these Retirement Plans
and copies of the Retirement Plans are available from CISI.
Consultation with a competent financial and tax adviser regarding these
Plans and consideration of the suitability of fund shares as an
investment under the Employee Retirement Income Security Act of 1974 or
otherwise is recommended.
Telephone Address Change Services. By calling CISC, shareholders or
their FSF of record may change an address on a recorded telephone line.
Confirmations of address change will be sent to both the old and the new
addresses. The $50,000 Fast Cash privilege is 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 the other Colonial funds. An ADD account must be in
the same name as the shareholder's existing Open Account with the
particular fund. Call CISC for more information at 1-800-422-3737.
PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES
Right of Accumulation and Statement of Intent (Class A and Class T
shares only) (Class T shares applies only to the shareholders of
Colonial Newport Tiger Fund who already own Class T shares). Reduced
sales charges on Class A and T shares can be effected by combining a
current purchase with prior purchases of Class A, B, C, D, T and Z
shares of the Colonial funds. The applicable sales charge is based on
the combined total of:
1. the current purchase; and
2. the value at the public offering price at the close of
business on the previous day of all Colonial funds' Class A
shares held by the shareholder (except shares of any Colonial
money market fund, unless such shares were acquired by
exchange from Class A shares of another Colonial fund other
than a money market fund and Class B, C, D, T and Z shares.
CISI must be promptly notified of each purchase which entitles a
shareholder to a reduced sales charge. Such reduced sales charge will
be applied upon confirmation of the shareholder's holdings by CISC. A
Colonial fund may terminate or amend this Right of Accumulation.
Any person may qualify for reduced sales charges on purchases of Class A
and T shares made within a thirteen-month period pursuant to a
Statement of Intent ("Statement"). A shareholder may include, as an
accumulation credit toward the completion of such Statement, the value
of all Class A, B, C D, T and Z shares held by the shareholder on the
date of the Statement in Colonial funds (except shares of any Colonial
money market fund, unless such shares were acquired by exchange from
Class A shares of another non-money market Colonial fund). The value
is determined at the public offering price on the date of the Statement.
Purchases made through reinvestment of distributions do not count toward
satisfaction of the Statement.
During the term of a Statement, CISC will hold shares in escrow to
secure payment of the higher sales charge applicable to Class A or T
shares actually purchased. Dividends and capital gains will be paid on
all escrowed shares and these shares will be released when the amount
indicated has been purchased. A Statement does not obligate the
investor to buy or a fund to sell the amount of the Statement.
If a shareholder exceeds the amount of the Statement and reaches an
amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made at the time of expiration of
the Statement. The resulting difference in offering price will purchase
additional shares for the shareholder's account at the applicable
offering price. As a part of this adjustment, the FSF shall return to
CISI the excess commission previously paid during the thirteen-month
period.
If the amount of the Statement is not purchased, the shareholder shall
remit to CISI an amount equal to the difference between the sales charge
paid and the sales charge that should have been paid. If the
shareholder fails within twenty days after a written request to pay such
difference in sales charge, CISC will redeem that number of escrowed
Class A shares to equal such difference. The additional amount of FSF
discount from the applicable offering price shall be remitted to the
shareholder's FSF of record.
Additional information about and the terms of Statements of Intent are
available from your FSF, or from CISC at 1-800- 345-6611.
Colonial Asset Builder Investment Program (this section currently
applies only to the Class A shares of Colonial Growth Shares Fund and
The Colonial Fund, each a series of Colonial Trust III). A reduced
sales charge applies to a purchase of certain Colonial funds' Class A
shares under a statement of intent for the Colonial Asset Builder
Investment Program. The Program offer may be withdrawn at any time
without notice. A completed Program may serve as the initial investment
for a new Program, subject to the maximum of $4,000 in initial
investments per investor. Shareholders in this program are subject to a
5% sales charge. CISC will escrow shares to secure payment of the
additional sales charge on amounts invested if the Program is not
completed. Escrowed shares are credited with distributions and will be
released when the Program has ended. Shareholders are subject to a 1%
fee on the amount invested if they do not complete the Program. Prior
to completion of the Program, only scheduled Program investments may be
made in a Colonial fund in which an investor has a Program account. The
following services are not available to Program accounts until a Program
has ended:
Systematic Withdrawal Plan Telephone Redemption Statement of Intent
Sponsored Arrangements Colonial Cash Connection Share Certificates
$50,000 Fast Cash Reduced Sales Charges Automatic Dividend
for any "person" Diversification
Right of Accumulation Exchange Privilege
*Exchanges may be made to other Colonial funds offering the Program.
Because of the unavailability of certain services, the Program may not
be suitable for all investors.
The FSF receives 3% of the investor's intended purchases under a Program
at the time of initial investment and 1% after the 24th monthly payment.
CISI may require the FSF to return all applicable commissions paid with
respect to a Program terminated within six months of inception, and
thereafter to return commissions in excess of the FSF discount
applicable to shares actually purchased.
Since the Asset Builder plan involves continuous investment regardless
of the fluctuating prices of funds shares, investors should consult
their FSF to determine whether it is appropriate. The Plan does not
assure a profit nor protect against loss in declining markets.
Reinstatement Privilege. An investor who has redeemed Class A, B, or D
shares may, upon request, reinstate within one year a portion or all of
the proceeds of such sale in shares of the same Class of any Colonial
fund at the NAV next determined after CISC receives a written
reinstatement request and payment. Any CDSC paid at the time of the
redemption will be credited to the shareholder upon reinstatement. The
period between the redemption and the reinstatement will not be counted
in aging the reinstated shares for purposes of calculating any CDSC or
conversion date. Investors who desire to exercise this Privilege should
contact their FSF or CISC. Shareholders may exercise this Privilege an
unlimited number of times. Exercise of this Privilege does not alter
the Federal income tax treatment of any capital gains realized on the
prior sale of fund shares, but to the extent any such shares were sold
at a loss, some or all of the loss may be disallowed for tax purposes.
Consult your tax adviser.
Privileges of Colonial Employees or Financial Service Firms. Class A
shares of certain funds may be sold at NAV to the following current and
retired individuals: Trustees of funds advised or administered by CMA;
directors, officers and employees of CMA, CISI and other companies
affiliated with CMAl; registered representatives and employees of FSFs
(including their affiliates) that are parties to dealer agreements or
other sales arrangements with CISI; and such persons' families and their
beneficial accounts.
Sponsored Arrangements. Class A and Class T shares (Class T shares
applies only to the shareholders of Colonial Newport Tiger Fund who
already own Class T shares) of certain funds may be purchased at reduced
or no sales charge pursuant to sponsored arrangements, which include
programs under which an organization makes recommendations to, or
permits group solicitation of, its employees, members or participants in
connection with the purchase of shares of the fund on an individual
basis. The amount of the sales charge reduction will reflect the
anticipated reduction in sales expense associated with sponsored
arrangements. The reduction in sales expense, and therefore the
reduction in sales charge will vary depending on factors such as the
size and stability of the organizations group, the term of the
organization's existence and certain characteristics of the members of
its group. The Colonial funds reserve the right to revise the terms of
or to suspend or discontinue sales pursuant to sponsored plans at any
time.
Class A and Class T shares (Class T shares applies only to the
shareholders of Colonial Newport Tiger Fund who already own Class T
shares) of certain funds may also be purchased at reduced or no sales
charge by clients of dealers, brokers or registered investment advisers
that have entered into agreements with CISI pursuant to which the
Colonial funds are included as investment options in programs involving
fee-based compensation arrangements.
Net Asset Value Exchange Privilege. Class A shares of certain funds may
also be purchased at reduced or no sales charge by investors moving from
another mutual fund complex or a discretionary account and by
participants in certain retirement plans. In lieu of the commissions
described in the Prospectus, CMAl will pay the FSF a quarterly service
fee which is the service fee established for each applicable Colonial
fund.
Waiver of Contingent Deferred Sales Charges (CDSCs) (Classes A, B, and D).
CDSCs may be waived on redemptions in the following situations with
the proper documentation:
1. Death. CDSCs may be waived on redemptions within one year
following the death of (i) the sole shareholder on an
individual account, (ii) a joint tenant where the surviving
joint tenant is the deceased's spouse, or (iii) the
beneficiary of a Uniform Gifts to Minors Act (UGMA), Uniform
Transfers to Minors Act (UTMA) or other custodial account.
If, upon the occurrence of one of the foregoing, the account
is transferred to an account registered in the name of the
deceased's estate, the CDSC will be waived on any redemption
from the estate account occurring within one year after the
death. If the Class B shares are not redeemed within one year
of the death, they will remain subject to the applicable CDSC,
when redeemed from the transferee's account. If the account
is transferred to a new registration and then a redemption is
requested, the applicable CDSC will be charged.
2. Systematic Withdrawal Plan (SWP). CDSCs may be waived on
redemptions occurring pursuant to a monthly, quarterly or semi-
annual SWP established with CMA , to the extent the
redemptions do not exceed, on an annual basis, 12% of the
account's value, so long as at the time of the first SWP
redemption the account had had distributions reinvested for a
period at least equal to the period of the SWP (e.g., if it is
a quarterly SWP, distributions must have been reinvested at
least for the three month period prior to the first SWP
redemption; otherwise CDSCs will be charged on SWP redemptions
until this requirement is met; this requirement does not apply
if the SWP is set-up at the time the account is established,
and distributions are being reinvested). See below under
"Investors Services" - Systematic Withdrawal Plan.
3. Disability. CDSCs may be waived on redemptions occurring
within one year after the sole shareholder on an individual
account or a joint tenant on a spousal joint tenant account
becomes disabled (as defined in Section 72(m)(7) of the
Internal Revenue Code). To be eligible for such waiver, (i)
the disability must arise after the purchase of shares and
(ii) the disabled shareholder must have been under age 65 at
the time of the initial determination of disability. If the
account is transferred to a new registration and then a
redemption is requested, the applicable CDSC will be charged.
4. Death of a trustee. CDSCs may be waived on redemptions
occurring upon dissolution of a revocable living or grantor
trust following the death of the sole trustee where (i) the
grantor of the trust is the sole trustee and the sole life
beneficiary, (ii) death occurs following the purchase and
(iii) the trust document provides for dissolution of the trust
upon the trustee's death. If the account is transferred to a
new registration (including that of a successor trustee), the
applicable CDSC will be charged upon any subsequent
redemption.
5. Returns of excess contributions. CDSCs may be waived on
redemptions required to return excess contributions made to
retirement plans or individual retirement accounts, so long as
the FSF agrees to return the applicable portion of any
commission paid by Colonial.
6. Qualified Retirement Plans. CDSCs may be waived on
redemptions required to make distributions from qualified
retirement plans following (i) normal retirement (as stated in
the Plan document) or (ii) separation from service. CDSCs
also will be waived on SWP redemptions made to make required
minimum distributions from qualified retirement plans that
have invested in Colonial funds for at least two years.
HOW TO SELL SHARES
Shares may also be sold on any day the Exchange is open, either directly
to the Fund or through your financial service firm. Sale proceeds
generally are sent within seven days (usually on the next business day
after your request is received in good form). However, for shares
recently purchased by check, the Fund will send proceeds only after the
check has cleared (which may take up to 15 days).
To sell shares directly to the Fund, send a signed letter of instruction
or stock power form to CISC, along with any certificates for share to be
sold. The sale price is the net asset value (less any applicable
contingent deferred sales charge) next calculated after the Fund
receives the request in proper form. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange or another eligible
guarantor institution. Stock power forms are available from financial
service firms, CISC and many banks. Additional documentation is
required for sales by corporations, agents, fiduciaries, surviving joint
owners and individual retirement account holders. Call CISC for more
information 1-800-345-6611.
Financial service firms must receive requests before the time at which
the Fund's shares are valued to receive that day's price, are
responsible for furnishing all necessary documentation to CISC and may
charge for this service.
Systematic Withdrawal Plan
If a shareholder's Account Balance is at least $5,000, the shareholder
may establish a SWP. A specified dollar amount or percentage of the
then current net asset value of the shareholder's investment in any
Colonial fund designated by the shareholder will be paid monthly,
quarterly or semi-annually to a designated payee. The amount or
percentage the shareholder specifies generally may not, on an annualized
basis, exceed 12% of the value, as of the time the shareholder makes the
election of the shareholder's investment. Withdrawals from Class B and
Class D shares of the fund under a SWP will be treated as redemptions of
shares purchased through the reinvestment of fund distributions, or, to
the extent such shares in the shareholder's account are insufficient to
cover Plan payments, as redemptions from the earliest purchased shares
of such fund in the shareholder's account. No CDSCs apply to a
redemption pursuant to a SWP of 12% or less, even if, after giving
effect to the redemption, the shareholder's Account Balance is less than
the shareholder's base amount. Qualified plan participants who are
required by Internal Revenue Code regulation to withdraw more than 12%,
on an annual basis, of the value of their Class B and Class D share
account may do so but will be subject to a CDSC ranging from 1% to 5% of
the amount withdrawn. If a shareholder wishes to participate in a SWP,
the shareholder must elect to have all of the shareholder's income
dividends and other fund distributions payable in shares of the fund
rather than in cash.
A shareholder or a shareholder's FSF of record may establish a SWP
account by telephone on a recorded line. However, SWP checks will be
payable only to the shareholder and sent to the address of record. SWPs
from retirement accounts cannot be established by telephone.
A shareholder may not establish a SWP if the shareholder holds shares in
certificate form. Purchasing additional shares (other than through
dividend and distribution reinvestment) while receiving SWP payments is
ordinarily disadvantageous because of duplicative sales charges. For
this reason, a shareholder may not maintain a plan for the accumulation
of shares of the fund (other than through the reinvestment of dividends)
and a SWP at the same time.
SWP payments are made through share redemptions, which may result in a
gain or loss for tax purposes, may involve the use of principal and may
eventually use up all of the shares in a shareholder's open account.
A Colonial fund may terminate a shareholder's SWP if the shareholder's
Account Balance falls below $5,000 due to any transfer or liquidation of
shares other than pursuant to the SWP. SWP payments will be terminated
on receiving satisfactory evidence of the death or incapacity of a
shareholder. Until this evidence is received, CISC will not be liable
for any payment made in accordance with the provisions of a SWP.
The cost of administering SWPs for the benefit of shareholders who
participate in them is borne by the fund as an expense of all
shareholders.
Shareholders whose positions are held in "street name" by certain FSFs
may not be able to participate in a SWP. If a shareholder's Fund shares
are held in "street name", the shareholder should consult his or her FSF
to determine whether he or she may participate in a SWP.
Telephone Redemptions. All shareholders and/or their financial advisers
are automatically eligible to redeem up to $50,000 of the fund's shares
by calling 1-800-422-3737 toll free any business day between 9:00 a.m.
and the close of trading of the Exchange (normally 4:00 p.m. Eastern
time). Telephone redemption privileges for larger amounts may be
elected on the Application. CISC will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine.
Telephone redemptions are not available on accounts with an address
change in the preceding 30 days and proceeds and confirmations will only
be mailed or sent to the address of record. Shareholders and/or their
financial advisers will be required to provide their name, address and
account number. Financial advisers will also be required to provide
their broker number. All telephone transactions are recorded. A loss
to a shareholder may result from an unauthorized transaction reasonably
believed to have been authorized. No shareholder is obligated to
execute the telephone authorization form or to use the telephone to
execute transactions.
Checkwriting (Available only on the Class A and Class C shares of
certain Colonial funds)
Shares may be redeemed by check if a shareholder completed an
Application and Signature Card. The Adviser will provide checks to be
drawn on The First National Bank of Boston (the "Bank"). These checks
may be made payable to the order of any person in the amount of not less
than $500 nor more than $100,000. The shareholder will continue to earn
dividends on shares until a check is presented to the Bank for payment.
At such time a sufficient number of full and fractional shares will be
redeemed at the next determined net asset value to cover the amount of
the check. Certificate shares may not be redeemed in this manner.
Shareholders utilizing checkwriting drafts will be subject to the Bank's
rules governing checking accounts. There is currently no charge to the
shareholder for the use of checks. The shareholder should make sure
that there are sufficient shares in his or her Open Account to cover the
amount of any check drawn since the net asset value of shares will
fluctuate. If insufficient shares are in the shareholder's Open
Account, the check will be returned marked "insufficient funds" and no
shares will be redeemed. It is not possible to determine in advance the
total value of an Open Account because prior redemptions and possible
changes in net asset value may cause the value of an Open Account to
change. Accordingly, a check redemption should not be used to close an
Open Account.
Non cash Redemptions. For redemptions of any single shareholder within
any 90-day period exceeding the lesser of $250,000 or 1% of a Colonial
fund's net asset value, a Colonial fund may make the payment or a
portion of the payment with portfolio securities held by that Colonial
fund instead of cash, in which case the redeeming shareholder may incur
brokerage and other costs in selling the securities received.
DISTRIBUTIONS
Distributions are invested in additional shares of the same Class of the
fund at net asset value unless the shareholder elects to receive cash.
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 my exercise this
privilege only once. No charge is currently made for reinvestment.
Shares of funds that pay daily dividends will normally earn dividends
starting with the date the fund receives payment for the shares and will
continue through the day before the shares are redeemed, transferred or
exchanged.
Undelivered distribution checks returned by the post office will be
invested in your account.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for the same class of shares of the
other continuously offered Colonial funds (with certain exceptions) on
the basis of the NAVs per share at the time of exchange. The prospectus
of each Colonial fund describes its investment objective and policies,
and shareholders should obtain a prospectus and consider these
objectives and policies carefully before requesting an exchange. Shares
of certain Colonial funds are not available to residents of all states.
Consult CISC before requesting an exchange.
By calling CISC, shareholders or their FSF of record may exchange among
accounts with identical registrations, provided that the shares are held
on deposit. During periods of unusual market changes and shareholder
activity, shareholders may experience delays in contacting CISC by
telephone to exercise the telephone exchange privilege. Because an
exchange involves a redemption and reinvestment in another Colonial
fund, completion of an exchange may be delayed under unusual
circumstances, such as if the fund suspends repurchases or postpones
payment for the fund shares being exchanged in accordance with federal
securities law. CISC will also make exchanges upon receipt of a written
exchange request and, share certificates, if any. If the shareholder is
a corporation, partnership, agent, or surviving joint owner, CISC will
require customary additional documentation. Prospectuses of the other
Colonial funds are available from the Colonial Literature Department by
calling 1-800-248-2828.
A loss to a shareholder may result from an unauthorized transaction
reasonably believed to have been authorized. No shareholder is
obligated to use the telephone to execute transactions.
You need to hold your Class A shares for five months before exchanging
to certain funds having a higher maximum sales charge. Consult your FSF
or CISC. In all cases, the shares to be exchanged must be registered on
the records of the fund in the name of the shareholder desiring to
exchange.
Shareholders of the other Colonial open-end funds generally may exchange
their shares at NAV for the same class of shares of the fund.
An exchange is a capital sale transaction for federal income tax
purposes. The exchange privilege may be revised, suspended or
terminated at any time.
SUSPENSION OF REDEMPTIONS
A Colonial fund may not suspend shareholders' right of redemption or
postpone payment for more than seven days unless the Exchange is closed
for other than customary weekends or holidays, or if permitted by the
rules of the SEC during periods when trading on the Exchange is
restricted or during any emergency which makes it impracticable for the
fund to dispose of its securities or to determine fairly the value of
its net assets, or during any other period permitted by order of the SEC
for protection of investors.
SHAREHOLDER MEETINGS
As described under the caption "Organization and history" in the
Prospectus of each Colonial fund, the fund will not hold annual
shareholders' meetings. The Trustees may fill any vacancies in the
Board of Trustees except that the Trustees may not fill a vacancy if,
immediately after filling such vacancy, less than two-thirds of the
Trustees then in office would have been elected to such office by the
shareholders. In addition, at such times as less than a majority of the
Trustees then in office have been elected to such office by the
shareholders, the Trustees must call a meeting of shareholders.
Trustees may be removed from office by a written consent signed by a
majority of the outstanding shares of the Trust or by a vote of the
holders of a majority of the outstanding shares at a meeting duly called
for the purpose, which meeting shall be held upon written request of the
holders of not less than 10% of the outstanding shares of the Trust.
Upon written request by the holders of 1% of the outstanding shares of
the Trust stating that such shareholders of the Trust, for the purpose
of obtaining the signatures necessary to demand a shareholder's meeting
to consider removal of a Trustee, request information regarding the
Trust's shareholders the Trust will provide appropriate materials (at
the expense of the requesting shareholders). Except as otherwise
disclosed in the Prospectus and this SAI, the Trustees shall continue to
hold office and may appoint their successors.
At any shareholders' meetings that may be held, shareholders of all
series would vote together, irrespective of series, on the election of
Trustees or the selection of independent accountants, but each series
would vote separately from the others on other matters, such as changes
in the investment policies of that series or the approval of the
management agreement for that series.
PERFORMANCE MEASURES
Total Return
Standardized average annual total return. Average annual total return
is the actual return on a $1,000 investment in a particular class of
shares of a fund, made at the beginning of a stated period, adjusted for
the maximum sales charge or applicable CDSC for the class of shares of
the fund and assuming that all distributions were reinvested at NAV,
converted to an average annual return assuming annual compounding.
Nonstandardized total return. Nonstandardized total returns differ from
standardized average annual total returns only in that they may relate
to nonstandardized periods, represent aggregate rather than average
annual total returns or in that the sales charge or CDSC is not
deducted.
Yield
Money market. A money market fund's yield and effective yield is
computed in accordance with the SEC's formula for money market fund
yields.
Non money market. The yield for each class of shares is determined by
(i) calculating the income (as defined by the SEC for purposes of
advertising yield) during the base period and subtracting actual
expenses for the period (net of any reimbursements), and (ii) dividing
the result by the product of the average daily number of shares of the a
Colonial fund entitled to dividends for the period and the maximum
offering price of the fund on the last day of the period, (iii) then
annualizing the result assuming semi-annual compounding. Tax-equivalent
yield is calculated by taking that portion of the yield which is exempt
from income tax and determining the equivalent taxable yield which would
produce the same after tax yield for any given federal and state tax
rate, and adding to that the portion of the yield which is fully
taxable. Adjusted yield is calculated in the same manner as yield
except that expenses voluntarily borne or waived by Colonial have been
added back to actual expenses.
Distribution rate. The distribution rate for each class of shares is
calculated by annualizing the most current period's distributions and
dividing by the maximum offering price on the last day of the period.
Generally, the fund's distribution rate reflects total amounts actually
paid to shareholders, while yield reflects the current earning power of
the fund's portfolio securities (net of the fund's expenses). A fund's
yield for any period may be more or less than the amount actually
distributed in respect of such period.
A fund may compare its performance to various unmanaged indices
published by such sources as listed in Appendix II.
A fund may also refer to quotations, graphs and electronically
transmitted data from sources believed by the Adviser to be reputable,
and publications in the press pertaining to a fund's performance or to
the Adviser or its affiliates , including comparisons with competitors
and matters of national and global economic and financial interest.
Examples include Forbes, Business Week, MONEY Magazine, The Wall Street
Journal, The New York Times, The Boston Globe, Barron's National
Business & Financial Weekly, Financial Planning, Changing Times, Reuters
Information Services, Wiesenberger Mutual Funds Investment Report,
Lipper Analytical Services Corporation, Morningstar, Inc., Sylvia
Porter's Personal Finance Magazine, Money Market Directory, SEI Funds
Evaluation Services, FTA World Index and Disclosure Incorporated.
All data is based on past performance and does not predict future
results.
APPENDIX I
DESCRIPTION OF BOND RATINGS
S&P
AAA The highest rating assigned by S&P indicates an extremely strong
capacity to repay principal and interest.
AA bonds also qualify as high quality. Capacity to repay principal and
pay interest is very strong, and in the majority of instances, they
differ from AAA only in small degree.
A bonds have a strong capacity to repay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB bonds are regarded as having an adequate capacity to repay principal
and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to repay principal and interest than for
bonds in the A category.
BB, B, CCC, and CC bonds are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and principal in
accordance with the terms of the obligation. BB indicates the lowest
degree of speculation and CC the highest degree. While likely to have
some quality and protection characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
C ratings are reserved for income bonds on which no interest is being
paid.
D bonds are in default, and payment of interest and/or principal is in
arrears.
Plus(+) or minus (-) are modifiers relative to the standing within the
major rating categories.
Provisional Ratings. The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, although addressing credit quality subsequent to completion of
the project, makes no comments on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise
his own judgment with respect to such likelihood and risk.
Municipal Notes:
SP-1. Notes rated SP-1 have very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming
safety characteristics are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
interest.
Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue will be rated as a note).
Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be rated as a note).
Demand Feature of Variable Rate Demand Securities:
S&P assigns dual ratings to all long-term debt issues that have as part
of their provisions a demand feature. The first rating addresses the
likelihood of repayment of principal and interest as due, and the second
rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols are usually used to denote the put
(demand) option (for example, AAA/A-1+). Normally, demand notes receive
note rating symbols combined with commercial paper symbols (for example,
SP-1+/A-1+).
Commercial Paper:
A. Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree to safety.
A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are designed A-1+.
Corporate Bonds:
The description of the applicable rating symbols and their meanings is
substantially the same as its Municipal Bond ratings set forth above.
MOODY'S
Aaa bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While various protective elements are
likely to change, such changes as can be visualized are most unlikely to
impair a fundamentally strong position of such issues.
Aa bonds are judged to be of high quality by all standards. Together
with Aaa bonds they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger
than in Aaa securities.
Those bonds in the Aa through B groups that Moody's believes possess the
strongest investment attributes are designated by the symbol Aa1, A1 and
Baa1.
A bonds possess many of the favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present that suggest a susceptibility to impairment sometime in
the future.
Baa bonds are considered as medium grade, neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact, have
speculative characteristics as well.
Ba bonds are judged to have speculative elements: their future cannot be
considered as well secured. Often, the protection of interest and
principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes these bonds.
B bonds generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be small.
Caa bonds are of poor standing. They may be in default or there may be
present elements of danger with respect to principal or interest.
Ca bonds are speculative in a high degree, often in default or having
other marked shortcomings.
C bonds are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Conditional Ratings. Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals which being when facilities are completed, or
(d) payments to which some other limiting conditions attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's
believes possess the strongest investment attributes are designated by
the symbols Aa 1, A 1, Baa 1, Ba 1, and B 1.
Municipal Notes:
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength
of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
Demand Feature of Variable Rate Demand Securities:
Moody's may assign a separate rating to the demand feature of a variable
rate demand security. Such a rating may include:
VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
VMIG 2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength
of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
Commercial Paper:
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, Moody's, in
assigning ratings to such issuers, evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments, or other entities, but only as one
factor in the total rating assessment.
Corporate Bonds:
The description of the applicable rating symbols (Aaa, Aa, A) and their
meanings is identical to that of its Municipal Bond ratings as set forth
above, except for the numerical modifiers. Moody's applies numerical
modifiers 1, 2, and 3 in the Aa and A classifications of its corporate
bond rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates
a midrange ranking; and the modifier 3 indicates that the issuer ranks
in the lower end of its generic rating category.
APPENDIX II
1994
SOURCE CATEGORY RETURN
(%)
Donoghue Tax-Free Funds 2.25
Donoghue U.S. Treasury Funds 3.34
Dow Jones Industrials 5.03
Morgan Stanley Capital
International EAFE Index 8.06
Morgan Stanley Capital
International EAFE GDP Index 8.21
Libor Six-month Libor 6.9375
Lipper Adjustable Rate Mortgage -2.20
Lipper California Municipal Bond Funds -7.52
Lipper Connecticut Municipal Bond Funds -7.04
Lipper Closed End Bond Funds -6.86
Lipper Florida Municipal Bond Funds -7.76
Lipper General Bond Fund -5.98
Lipper General Municipal Bonds -6.53
Lipper General Short-Term Tax-Exempt Bonds -0.28
Lipper Global Flexible Portfolio Funds -3.03
Lipper Growth Funds -2.15
Lipper Growth & Income Funds -0.94
Lipper High Current Yield Bond Funds -3.83
Lipper High Yield Municipal Bond Debt -4.99
Lipper Fixed Income Funds -3.62
Lipper Insured Municipal Bond Average -6.47
Lipper Intermediate Muni Bonds -3.53
Lipper Intermediate (5-10) U.S. -3.72
Government Funds
Lipper Massachusetts Municipal Bond Funds -6.35
Lipper Michigan Municipal Bond Funds -5.89
Lipper Mid Cap Funds -2.05
Lipper Minnesota Municipal Bond Funds -5.87
Lipper U.S. Government Money Market Funds 3.58
Lipper Natural Resources -4.20
Lipper New York Municipal Bond Funds -7.54
Lipper North Carolina Municipal Bond Funds -7.48
Lipper Ohio Municipal Bond Funds -6.08
Lipper Small Company Growth Funds -0.73
Lipper Specialty/Miscellaneous Funds -2.29
Lipper U.S. Government Funds -4.63
Shearson Lehman Composite -3.37
Government Index
Shearson Lehman -3.51
Government/Corporate Index
Shearson Lehman Long-term -7.73
Government Index
S&P 500 S&P 1.32
S&P Utility Index S&P -7.94
Bond Buyer Bond Buyer Price Index -18.10
First Boston High Yield Index -0.97
Swiss Bank 10 Year U.S. Government -6.39
(Corporate Bond)
Swiss Bank 10 Year United Kingdom -5.29
(Corporate Bond)
SOURCE CATEGORY RETURN
(%)
Swiss Bank 10 Year France (Corporate Bond) -1.37
Swiss Bank 10 Year Germany (Corporate Bond) 4.09
Swiss Bank 10 Year Japan (Corporate Bond) 7.95
Swiss Bank 10 Year Canada (Corporate Bond) -14.10
Swiss Bank 10 Year Australia (Corporate Bond) 0.52
Morgan Stanley Capital
International 10 Year Hong Kong (Equity) -28.90
Morgan Stanley Capital
International 10 Year Belgium (Equity) 9.43
Morgan Stanley Capital
International 10 Year Spain (Equity) -3.93
Morgan Stanley Capital
International 10 Year Austria (Equity) -6.05
Morgan Stanley Capital
International 10 Year France (Equity) -4.70
Morgan Stanley Capital
International 10 Year Netherlands (Equity) 12.66
Morgan Stanley Capital
International 10 Year Japan (Equity) 21.62
Morgan Stanley Capital
International 10 Year Switzerland (Equity) 4.18
Morgan Stanley Capital
International 10 Year United Kingdom(Equity) -1.63
Morgan Stanley Capital
International 10 Year Germany (Equity) 5.11
Morgan Stanley Capital
International 10 Year Italy (Equity) 12.13
Morgan Stanley Capital
International 10 Year Sweden (Equity) 18.80
Morgan Stanley Capital
International 10 Year United States (Equity) 2.00
Morgan Stanley Capital
International 10 Year Australia (Equity) 6.48
Morgan Stanley Capital
International 10 Year Norway (Equity) 24.07
Inflation Consumer Price Index 2.67
FHLB-San Francisco 11th District Cost-of-Funds
Index 4.367
Federal Reserve Six-Month Treasury Bill 6.49
Federal Reserve One-Year Constant-Maturity
Treasury Rate 7.14
Federal Reserve Five-Year Constant-Maturity
Treasury Rate 7.78
Bloomberg N/A N/A
Credit Lyonnais N/A N/A
Lipper Pacific Region Funds -12.07
Statistical Abstract of
the U.S. N/A N/A
World Economic Outlook N/A N/A
*in U.S. currency
