<PAGE>
COLONIAL
FEDERAL SECURITIES FUND
SEMIANNUAL REPORT
APRIL 30, 1996
<PAGE>
COLONIAL FEDERAL SECURITIES FUND HIGHLIGHTS
NOVEMBER 1, 1995 - APRIL 30, 1996
INVESTMENT OBJECTIVE: Colonial Federal Securities Fund seeks as high a level of
current income and total return, as is consistent with prudent longer-term
investing, by investing primarily in U.S. government securities.
THE FUND IS DESIGNED TO OFFER:
- High current monthly income
- Longer-term total return potential
- A quality portfolio
PORTFOLIO MANAGER COMMENTARY: "Market conditions over the past six months
created a challenging environment for investments in U.S. Government Securities.
Rising rates during the second half of the period had the greatest impact on
bonds with longer durations."
COLONIAL FEDERAL SECURITIES FUND PERFORMANCE
<TABLE>
<CAPTION>
CLASS A CLASS B
<S> <C> <C>
Inception date 3/30/84 6/08/92
Distributions declared per share $ 0.348 $ 0.308
SEC Yields on April 30, 1996* 6.26% 5.80%
Total returns, assuming reinvestment
of all distributions and no sales charge or
contingent deferred sales charge (CDSC)--
6 months (1.19)% (1.56)%
Net asset value per share at 4/30/96 $ 10.36 $ 10.36
</TABLE>
*The 30-day SEC yield on April 30, 1996, of 6.26% for Class A shares and 5.80%
for Class B shares reflects the portfolio's earning power, net of expenses,
expressed as an annualized percentage of the maximum offering price per share.
<TABLE>
<CAPTION>
PORTFOLIO STRUCTURE** AVERAGE LIFE BREAKDOWN**
<S> <C> <C> <C>
FNMAs ............................. 48.35% 1-5 years ............... 23.35%
Treasury Securities ............... 31.54% 5-10 years .............. 57.79%
GNMAs ............................. 11.40% 10-20 years ............. 18.87%
CMOs .............................. 4.62%
FHLMCs ............................ 2.83%
Agency ............................ 1.26%
</TABLE>
**There can be no guarantee the portfolio holdings and maturities shown will
continue in the future. All figures are percentages of long-term securities.
2
<PAGE>
TO FUND SHAREHOLDERS
I am pleased to present your Fund's semiannual report for the period ended April
30, 1996. First, however, I would like to extend my thanks to President John A.
McNeice, Jr., who has retired after a career with Colonial that spanned 40
years. We look forward to his continued involvement on the executive committee
of the board of directors at our parent company, Liberty Financial Companies,
Inc.
In my new position, I am directing Colonial's focus on the delivery of superior
investment performance over the long term. To achieve this mission, we will
continue to seek the optimal combination of talented people and effective
investment disciplines.
The receipt of your semiannual report is a good time to reflect on market
conditions and the performance of your Fund during the past 6 months. Falling
interest rates and minimal inflation helped the economy grow at a comfortable
pace throughout 1995 and created a positive environment for fixed income
investments. After a difficult 1994, investors who stayed the course during 1995
were amply rewarded.
While there may be some current market volatility, we expect slow growth and low
inflation to continue and believe that reductions in interest rates may take
place later in the year. In the following pages you'll find detailed information
on your Fund's performance as well as an in-depth discussion with the portfolio
manager.
With over 12 years of service at Colonial and more than 25 years in the
industry, I am enthusiastic about -- and dedicated to achieving -- Colonial's
mission of providing you with competitive investment returns. In my new role, I
look forward to communicating with you regarding your Colonial investment. We
appreciate the opportunity to help you meet your investment goals.
Respectfully,
/s/ Harold W. Cogger
Harold W. Cogger
President
June 14, 1996
Because market conditions change frequently, there can be no assurance that the
trends described here will continue, come to pass, or affect Fund performance.
3
<PAGE>
PORTFOLIO MANAGEMENT REPORT
LESLIE W. FINNEMORE, a vice president of Colonial Management Associates, Inc.
and head of the government/mortgage portfolio management team, is portfolio
manager of Colonial Federal Securities Fund and Colonial U.S. Government Fund,
and co-manager of Colonial Adjustable Rate U.S. Government Fund.
Q. LESLIE, PLEASE COMMENT ON THE ENVIRONMENT FOR U.S. GOVERNMENT BONDS OVER THE
PAST SIX MONTHS.
A. This six-month period was characterized by a change in the investment climate
for U.S. bonds. The early part of the period represented the tail end of one of
the best years in bond market history. These positive conditions carried into
early 1996 and were marked by the Federal Reserve Board's action to lower
short-term rates. But, bonds reversed course when several key economic reports
released in February and March confirmed that growth was stronger than most bond
investors expected. As a result, yields rose across all maturities and bond
prices declined as investors shifted expectations from recession and Fed easing
to a more cautious stance.
Q. HOW DID THE FUND'S RETURN COMPARE TO THE INDEX USED TO EVALUATE ITS
PERFORMANCE?
A. For the six-month period ending April 30, 1996 Class A shares of the Fund
returned negative 1.19% compared to positive 1.22% for the Lehman Brothers
Intermediate Government Index. The primary reason for the Fund's
underperformance was the longer average duration of its portfolio. Consistent
with the principles of fixed income investing, longer-duration securities
experience greater declines in falling markets. Entering 1996, Colonial Federal
Securities Fund's duration was at the midpoint of its 4.5 - 7.5 year duration
range, and as a long-term investment, generated NAV declines. Of course, longer
durations also lead to better performance in rising markets, as the Fund
demonstrated throughout 1995.
Q. WHAT CHANGES DID YOU MAKE TO THE FUND DURING THE PERIOD?
A. Mortgage-backed securities were positive contributors to Fund performance
throughout the period because they performed well in relation to Treasurys. We
added to our mortgage-backed position at the beginning of the period when an
increase in year-end supply caused prices to be very attractive compared to
Treasurys. We have positioned the portfolio neutrally -- with a duration
targeted to the mid-point of its range and remain committed to the mortgage
sector. We will wait for evidence that the rise in rates has slowed the consumer
and overall economic activity before extending the duration.
Q. WHAT CHANGES DID YOU MAKE TO THE FUND DURING THE PERIOD?
A. We believe interest rates are likely to remain volatile throughout the year,
but we also believe we are closer to the peak in rates than to the trough. We
expect low inflation to continue, which is a positive factor and that higher
4
<PAGE>
rates will ultimately slow economic growth. As always, we encourage shareholders
to maintain a long-term perspective. There is a tendency for investors to lose
confidence in volatile markets. Recent history has shown that shareholders who
maintained their investment throughout 1994 were well-positioned to enjoy the
benefits of the 1995 bond market rebound.
COLONIAL FEDERAL SECURITIES FUND INVESTMENT PERFORMANCE VS.
THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT INDEX
Change in Value of $10,000 from 4/86 - 4/96
Based on NAV and MOP for Class A Shares
<TABLE>
<CAPTION>
Label A B C
- ----------------------------------------------------------------------
Label CFSF NAV MOP INDEX
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 4/86 10000 9525 10000
- ----------------------------------------------------------------------
2 6/86 9975.2 9501.38 10109.52
- ----------------------------------------------------------------------
3 9/86 10196.54 9712.21 10360.63
- ----------------------------------------------------------------------
4 12/86 10562.34 10060.63 10618.96
- ----------------------------------------------------------------------
5 10737.05 10227.04 10744.09
- ----------------------------------------------------------------------
6 10380.5 9887.42 10655.09
- ----------------------------------------------------------------------
7 9837.72 9370.43 10517.84
- ----------------------------------------------------------------------
8 12/87 10571.68 10069.52 11001.86
- ----------------------------------------------------------------------
9 10896.57 10378.98 11346.31
- ----------------------------------------------------------------------
10 10979.24 10457.73 11456.4
- ----------------------------------------------------------------------
11 11269.45 10734.15 11635.27
- ----------------------------------------------------------------------
12 12/88 11494.35 10948.37 11705.49
- ----------------------------------------------------------------------
13 11651.15 11097.72 11826.85
- ----------------------------------------------------------------------
14 12439.5 11848.63 12611.98
- ----------------------------------------------------------------------
15 12503.31 11909.4 12755.01
- ----------------------------------------------------------------------
16 12/89 13035.46 12416.28 13190.19
- ----------------------------------------------------------------------
17 12699.55 12096.33 13172.27
- ----------------------------------------------------------------------
18 13148.04 12523.51 13585.49
- ----------------------------------------------------------------------
19 13076.22 12455.1 13849.03
- ----------------------------------------------------------------------
20 12/90 13909.21 13248.52 14450.65
- ----------------------------------------------------------------------
21 14175.5 13502.16 14768.8
- ----------------------------------------------------------------------
22 14318.14 13638.03 15017.89
- ----------------------------------------------------------------------
23 15194.03 14472.32 15731.64
- ----------------------------------------------------------------------
24 12/91 16023.53 15262.41 16489.6
- ----------------------------------------------------------------------
25 15731.48 14984.24 16316.51
- ----------------------------------------------------------------------
26 16247.22 15475.48 16949.35
- ----------------------------------------------------------------------
27 16864.45 16063.39 17691.42
- ----------------------------------------------------------------------
28 12/92 17016.16 16207.89 17632.19
- ----------------------------------------------------------------------
29 17966.77 17113.35 18291.61
- ----------------------------------------------------------------------
30 18661.93 17775.49 18650.51
- ----------------------------------------------------------------------
31 19164.26 18253.96 19043.51
- ----------------------------------------------------------------------
32 12/93 19083.02 18176.58 19072.7
- ----------------------------------------------------------------------
33 18231.95 17365.94 18719.58
- ----------------------------------------------------------------------
34 17942.01 17089.76 18615.55
- ----------------------------------------------------------------------
35 17997.37 17142.93 18758.59
- ----------------------------------------------------------------------
36 12/94 18020.93 17164.93 18739.87
- ----------------------------------------------------------------------
37 18997.03 18094.67 19518.87
- ----------------------------------------------------------------------
38 20295.91 19331.85 20431.14
- ----------------------------------------------------------------------
39 20647.54 19666.79 20747.85
- ----------------------------------------------------------------------
40 12/95 21701.01 20670.21 21440.51
- ----------------------------------------------------------------------
41 3/96 20904.39 19911.43 21295.16
- ----------------------------------------------------------------------
42 4/96 20721.4 19737.13 21233.03
- ----------------------------------------------------------------------
</TABLE>
LEHMAN: $21,233
NAV: $20,721
MOP: $19,737
$20,000
$15,000
$10,000
4/86 4/96
A $10,000 investment in Class B shares made on June 8, 1992 (inception) at net
asset value (NAV) would have been valued at $12,509 on April 30, 1996. The same
investment after deducting the applicable contingent deferred sales charge
(CDSC) would have grown to $12,220 on April 30, 1996.
The Lehman Brothers Intermediate Government Index is an unmanaged index that
tracks the performance of intermediate-term U.S. government securities.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
As of 3/31/96 (Most Recent Quarter End)
- --------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
Inception 3/30/84 Inception 6/8/92
NAV MOP NAV w/CDSC
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1 YEAR 10.03% 4.81% 9.22% 4.22%
- --------------------------------------------------------------------------------
5 YEARS 8.08% 7.03% -- --
- --------------------------------------------------------------------------------
10 YEARS 7.70% 7.17% -- --
- --------------------------------------------------------------------------------
SINCE INCEPTION 9.64% 9.20% 6.30% 5.65%
- --------------------------------------------------------------------------------
</TABLE>
Past performance cannot predict future results. Return and value of an
investment will vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions. NAV return does not include sales charges
or CDSC. Maximum offering price (MOP) return includes the maximum sales charge
of 4.75%. The CDSC returns reflect the applicable charges of: one year, 5%,
since inception, 3%. Performance for different share classes will vary based on
differences in sales charges and fees associated with each class.
5
<PAGE>
INVESTMENT PORTFOLIO
APRIL 30, 1996 (UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - 133.3% PAR VALUE
- -------------------------------------------------------------------------
GOVERNMENT AGENCIES - 91.3%
MATURITIES
COUPON FROM/TO
- ------ ----------
<S> <C> <C> <C> <C>
First National Mortgage Association,
6.240% 2000 (a) $19,600 $ 19,352
--------
Federal Home Loan Mortgage Corp.:
7.500% 2016 1,293 1,308
8.000% 2003-2016 5,202 5,334
8.500% 2007-2010 4,260 4,413
8.750% 2004-2010 1,769 1,829
9.000% 2001-2022 8,335 8,727
9.250% 2008-2016 6,469 6,748
9.500% 2004-2016 2,754 2,952
9.750% 2008-2016 1,071 1,132
10.000% 2019 3,197 3,480
10.250% 2009-2013 1,672 1,812
10.500% 2017-2020 2,544 2,792
11.250% 2003-2016 2,550 2,833
11.500% 2015 158 177
12.000% 2013 112 126
--------
43,663
--------
Collateralized Mortgage Obligation:
5.000% 2013 10,825 10,179
6.500% 2014 18,327 16,964
6.750% 2020-2021 26,878 25,285
8.500% 2021 2,334 2,369
8.750% 2020 (a) 15,900 16,357
--------
71,154
--------
Federal National Mortgage Association:
6.000% 2024 (b) 39,619 36,078
6.500% 2003-2050 (b) 368,791 353,501
7.000% 2010-2050 (a)(b) 221,912 214,641
7.500% 2006-2011 17,160 17,286
8.000% 2008-2019 4,163 4,285
8.250% 2009-2011 1,763 1,780
8.500% 2008-2017 7,350 7,628
9.000% 2002-2024 (b) 101,980 106,671
9.500% 2007-2018 2,370 2,528
10.500% 2004 98 108
--------
744,506
--------
</TABLE>
6
<PAGE>
Investment Portfolio of April 30, 1996
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITIES
COUPON FROM/TO
- ------ ----------
<S> <C> <C> <C> <C>
Government National Mortgage Association:
6.500% 2023-2024 (a) $ 100,774 $ 94,318
7.500% 2006-2007 1,363 1,363
8.000% 2005-2008 105 108
9.000% 2008-2017 10,065 10,715
9.500% 2009-2019 (a) 29,373 31,874
10.000% 2000-2003 603 642
10.500% 2013-2021 (a) 19,768 21,807
11.000% 2010 5 6
11.500% 2013-2015 70 79
11.750% 2013-2015 298 345
12.000% 2010-2015 1,166 1,341
12.500% 2010-2014 7,776 9,075
13.000% 2011-2015 3,242 3,816
----------
175,489
----------
TOTAL GOVERNMENT AGENCIES (cost of $1,051,305) 1,054,164
----------
GOVERNMENT OBLIGATIONS - 42.0%
U.S. Treasury bonds:
6.875% 08/15/25 (a) 1,200 1,185
12.000% 08/15/13 (a) 129,678 183,332
12.750% 11/15/10 (a) 46,873 66,142
----------
250,659
----------
U.S. Treasury notes:
5.750% 10/31/00 (a) 32,445 31,629
6.125% 03/31/98 (a) 63,000 63,098
6.125% 07/31/00 (a) 8,315 8,234
6.500% 05/15/05 (a) 10,450 10,313
10.375% 11/15/12 (a) 71,994 91,466
----------
204,740
----------
U.S. Treasury STRIP:
08/15/05 (a) 29,494 15,746
11/15/08 (a) 34,600 14,506
----------
30,252
----------
TOTAL GOVERNMENT OBLIGATIONS (cost of $506,898) 485,651
----------
TOTAL INVESTMENTS (cost of $1,558,203) 1,539,815
----------
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
SHORT-TERM OBLIGATIONS - 7.2% PAR VALUE
- --------------------------------------------------------------------------------
Repurchase agreement with Bankers Trust Securities
Corp, dated 4/30/96, due 5/01/96 at 5.320%, collateralized
by U.S. Treasury notes with various maturities
to 2001, market value $84,494 (repurchase
proceeds $82,686) $ 82,674 $ 82,674
OTHER ASSETS & LIABILITIES, NET - (40.5%) (467,770)
- ---------------------------------------------------------------------------------
NET ASSETS - 100.0% $1,154,719
-----------
</TABLE>
NOTES TO INVESTMENT PORTFOLIO:
- --------------------------------------------------------------------------------
(a) These securities, or a portion thereof, with a total market value of
$775,771 are being used to collateralize the delayed delivery purchases
indicated in note (b) below and open futures contracts shown below.
(b) These securities, or a portion thereof, have been purchased on a delayed
delivery basis whereby the terms that are fixed are the purchase price,
interest rate and the settlement date. The exact quantity purchased may
be slightly more or less than the amount shown.
(c) Cost for federal income tax purposes is $1,558,366.
<TABLE>
<S> <C>
Acronym Name
- ------- ----------------------------------------------------
STRIP Separately Traded Receipt for Interest and Principal
</TABLE>
Short futures contracts open at April 30, 1996 are as follows:
<TABLE>
<S> <C> <C> <C>
Par value Unrealized
covered by Expiration appreciation
Type contracts Month at 4/30/96
- ---------------------------------------------------------------------------
U.S. Treasury bonds $146,700 June $ 2,829
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
APRIL 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands except for per share amounts and footnotes)
<S> <C> <C>
ASSETS
Investments at value (cost $1,558,203) $ 1,539,815
Short-term obligations 82,674
------------
1,622,489
Receivable for:
Investments sold $ 53,629
Interest 14,223
Variation margin on futures 1,008
Fund shares sold 384
Other 1,238 70,482
---------- -----------
Total Assets 1,692,971
LIABILITIES
Payable for:
Investments purchased 530,443
Distributions 6,451
Fund shares repurchased 1,240
Accrued deferred Trustees fees 9
Other 109
----------
Total Assets 538,252
------------
NET ASSETS $ 1,154,719
------------
Net asset value & redemption price per share -
Class A ($1,079,284/104,193) $ 10.36
------------
Maximum offering price per share - Class A
($10.360/0.9525) $ 10.88(a)
- -----------------------------------------------------------------------------
Net asset value & offering price per share -
Class B ($75,435/7,283) $ 10.36(b)
- -----------------------------------------------------------------------------
COMPOSITION OF NET ASSETS
Capital paid in $ 1,413,683
Overdistributed net investment income (7,175)
Accumulated net realized loss (236,230)
Net unrealized appreciation (depreciation) on:
Investments (18,388)
Open futures contracts 2,829
------------
$ 1,154,719
------------
</TABLE>
(a) On sales of $50,000 or more the offering price is reduced.
(b) Redemption price per share is equal to net asset value less
any applicable contingent deferred sales charge.
See notes of financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1996
(UNAUDITED)
(in thousands)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest $ 45,312
Dollar roll fee income 2,872
--------
48,184
EXPENSES
Management fee $ 4,022
Service fee 1,565
Distribution fee - Class B 296
Transfer agent 1,383
Bookkeeping fee 212
Trustees fee 25
Custodian fee 54
Audit fee 28
Legal fee 6
Registration fee 5
Reports to shareholders 13
Other 106 7,715
-------- --------
Net Investment Income 40,469
--------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized loss on:
Investments (302)
Closed futures contracts (3,569)
--------
Net Realized Loss (3,871)
Net unrealized appreciation (depreciation) during
the period on:
Investments (54,719)
Open futures contracts 6,087
--------
Net Unrealized Depreciation (48,632)
--------
Net Loss (52,503)
Net Decrease in Net Assets from Operations $(12,034)
========
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(Unaudited)
Six months
ended Year ended
(in thousands) April 30 October 31
----------- ----------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
<S> <C> <C>
Operations:
Net investment income $ 40,469 92,442
Net realized gain (loss) (3,871) 22,347
Net unrealized appreciation (depreciation) (48,632) 91,457
---------- ---------
Net Increase (Decrease) from Operations (12,034) 206,246
Distributions:
From net investment income - Class A (37,916) (85,675)
From net realized gains - Class A -- (3,434)
From net investment income - Class B (2,245) (4,557)
From net realized gains - Class B -- (183)
---------- ---------
(52,195) 112,397
---------- ---------
Fund Share Transactions:
Receipts for shares sold - Class A 50,910 94,460
Value of distributions reinvested - Class A 18,095 41,805
Cost of shares repurchased - Class A (142,072) (319,215)
---------- ---------
(73,067) (182,950)
---------- ---------
Receipts for shares sold - Class B 8,985 18,308
Value of distributions reinvested - Class B 1,147 2,478
Cost of shares repurchased - Class B (10,246) (17,867)
---------- ---------
(114) 2,919
---------- ---------
Net Decrease from Fund Share Transactions (73,181) (180,031)
---------- ---------
Total Decrease (125,376) (67,634)
NET ASSETS
Beginning of period 1,280,095 1,347,729
End of period (net of overdistributed net
investment income of $7,175 and $6,970,
respectively) $1,154,719 1,280,095
========== =========
NUMBER OF FUND SHARES
Sold - Class A 4,683 9,160
Issued for distributions reinvested - Class A 1,675 4,058
Repurchased - Class A (13,066) (30,800)
---------- ---------
(6,708) (17,582)
---------- ---------
Sold - Class B 833 1,772
Issued for distributions reinvested - Class B 106 240
Repurchased - Class B (948) (1,727)
---------- ---------
(9) 285
---------- ---------
</TABLE>
See notes to financial statements.
11
<PAGE>
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) Six months ended April 30, 1996
-------------------------------
<S> <C> <C>
NET CHANGE IN CASH
Cash flows from operating activities:
Interest received $ 48,042
Dollar roll fee income received 2,715
Operating expenses paid (7,645)
-----------
Net cash provided by operating activities $ 43,112
Cash flows from investing activities:
Purchases of securities and
short-term obligations (3,551,221)
Proceeds from sales of securities and
short-term obligations 3,622,504
Futures contracts 1,341
-----------
Net cash provided by investing activities 72,624
---------
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES 115,736
Cash flows from financing activities:
Proceeds from shares sold 60,284
Cost of shares repurchased (154,618)
Cash dividends paid (21,402)
-----------
Net cash used by financing activities (115,736)
---------
Net change in cash 0
Cash - beginning of period 0
---------
Cash - end of period $ 0
=========
RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET
CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES:
Net decrease in net
assets resulting from operations $ (12,034)
Decrease in investments $ 115,234
Decrease in interest and fees receivable 3,299
Increase in receivable from investment
securities sold and futures contracts (53,924)
Increase in payable for
investment securities purchased 63,100
Decrease in other assets 29
Increase in accrued expenses and liabilities 32
-----------
Total 127,770
---------
Net cash provided by operating
and investing activities $ 115,736
=========
</TABLE>
See notes to financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996 (UNAUDITED)
NOTE 1. INTERIM FINANCIAL INVESTMENTS
- --------------------------------------------------------------------------------
In the opinion of management of Colonial Federal Securities Fund (the Fund), a
series of Colonial Trust III, the accompanying financial statements contain all
normal and recurring adjustments necessary for the fair presentation of the
financial position of the Fund at April 30, 1996, and the results of its
operations, the changes in its net assets and the financial highlights for the
six months then ended.
NOTE 2. ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION: The Fund is a diversified portfolio of a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund's objective is to seek as high
a level of current income and total return as is consistent with prudent
longer-term investing primarily in U.S. government securities. The Fund may
issue an unlimited number of shares. The Fund offers Class A shares sold with a
front-end sales charge and Class B shares which are subject to an annual
distribution fee and a contingent deferred sales charge. Class B shares will
convert to Class A shares when they have been outstanding approximately eight
years.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following is a summary
of significant acounting policies that are consistently followed by the Fund in
the preparation of its financial statements.
SECURITY VALUATION AND TRANSACTIONS: Debt securities generally are valued by a
pricing service based upon market transactions for normal, institutional-size
trading units of similar securities. When management deems it appropriate, an
over-the-counter or exchange bid quotation is used.
Futures contracts are valued based on the difference between the last sale
price and the opening price of the contract.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
Portfolio positions which cannot be valued as set forth above are valued at
fair value under procedures approved by the Trustees.
Security transactions are accounted for on the date the securities are
purchased, sold or mature.
Cost is determined and gains and losses are based upon the specific
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS/APRIL 30, 1996
- --------------------------------------------------------------------------------
NOTE 2. ACCOUNTING POLICIES - CONT.
- --------------------------------------------------------------------------------
identification method for both financial statement and federal income tax
purposes.
The Fund may enter into dollar roll transactions. A dollar roll transaction
involves a sale by the Fund of securities that it holds with an agreement by
the Fund to repurchase substantially similar securities at an agreed upon price
and date. During the period between the sale and repurchase, the Fund will not
be entitled to accrue interest and receive principal payments on the securities
sold. Dollar roll transactions involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price of those
securities. In the event the buyer of the securities under a dollar roll
transaction files for bankruptcy or becomes insolvent, the Fund's use of
proceeds of the transaction may be restricted pending a determination by or
with respect to the other party.
The Fund may trade securities on other than normal settlement terms. This may
increase the risk if the other party to the transaction fails to deliver and
causes the Fund to subsequently invest at less advantageous prices.
The Fund maintains U.S. government securities or other liquid high grade debt
obligations as collateral with respect to dollar roll transactions and
securities traded on other than normal settlement terms.
DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS:
All income, expenses (other than the Class B distribution fee), realized and
unrealized gains (losses), are allocated to each class proportionately on a
daily basis for purposes of determining the net asset value of each class.
Class B per share data and ratios are calculated by adjusting the expense and
net investment income per share data and ratios for the Fund for the entire
period by the annualized distribution fee applicable to Class B shares only.
FEDERAL INCOME TAXES: Consistent with the Fund's policy to qualify as a
regulated investment company and to distribute all of its taxable income, no
federal income tax has been accrued.
STATEMENT OF CASH FLOWS: Information on financial transactions which have been
settled through the receipt or disbursement of cash is presented in the
Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows
is the amount included in other assets in the Fund's Statement of Assets and
Liabilities and represents cash on hand at its custodian bank account and does
not include any short-term investments as of April 30, 1996.
INTEREST INCOME, FEE INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is
recorded on the accrual basis. Fee income attributable to mortgage dollar roll
transactions is recorded on the accrual basis over the
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS/APRIL 30, 1996
- --------------------------------------------------------------------------------
term of the transaction. Original issue discount is accreted to interest income
over the life of a security with a corresponding increase in the cost basis;
premium and market discount are not amortized or accreted.
DISTRIBUTIONS TO SHAREHOLDERS: The Fund declares and records distributions
daily and pays monthly.
The amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for mortgage backed securities for book and tax purposes.
Permanent book and tax basis differences will result in reclassifications to
capital accounts.
OTHER: The Fund's custodian takes possession through the federal book-entry
system of securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying assets
remains sufficient to protect the Fund. The Fund may experience costs and delays
in liquidating the collateral if the issuer defaults or enters bankruptcy.
NOTE 3: FEES AND COMPENSATIONS PAID TO AFFILIATES
- --------------------------------------------------------------------------------
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Adviser) is the
investment Adviser of the Fund and furnishes accounting and other services and
office facilities for a monthly fee based on the Fund's average net assets as
follows:
<TABLE>
<CAPTION>
Average Net Assets Annual Fee Rate
------------------ ---------------
<S> <C>
First $1 billion 0.65%
Next $1 billion 0.60%
Over $2 billion 0.50%
</TABLE>
BOOKKEEPING FEE: The Adviser provides bookkeeping and pricing services for
$27,000 per year plus a percentage of the Fund's average net assets as follows:
<TABLE>
<CAPTION>
Average Net Assets Annual Fee Rate
------------------ ---------------
<S> <C>
First $50 million No charge
Next $950 million 0.035%
Next $1 billion 0.025%
Next $1 billion 0.015%
</TABLE>
TRANSFER AGENT: Colonial Investors Service Center, Inc. (the Transfer Agent),
an affiliate of the Adviser, provides shareholder services for a monthly fee
equal to 0.18% annually of the Fund's average net assets and receives a
reimbursement for certain out of pocket expenses.
15
<PAGE>
Notes to Financial Statements/April 30, 1996
- --------------------------------------------------------------------------------
NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES - CONT.
- -------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Colonial Investment
Services, Inc. (the Distributor), an affiliate of the Adviser, is the Fund's
principal underwriter. For the six months ended April 30, 1996, the Fund has
been advised that the Distributor retained net underwriting discounts of $29,664
on sales of the Fund's Class A shares and received contingent deferred sales
charges (CDSC) of $140,002 on Class B share redemptions.
The Fund has adopted a 12b-1 plan which requires the payment of a service fee to
the Distributor equal to 0.25% annually of the Fund's net assets as of the 20th
of each month. The plan also requires the payment of a distribution fee to the
Distributor equal to 0.75% annually of the average net assets attributable to
Class B shares only.
The CDSC and the fees received from the 12b-1 plan are used principally as
repayment to the Distributor for amounts paid by the Distributor to dealers who
sold such shares.
OTHER: The Fund pays no compensation to its officers, all of whom are employees
of the Adviser.
The Fund's Trustees may participate in a deferred compensation plan which may
be terminated at any time. Obligations of the plan will be paid solely out of
the Fund's assets.
NOTE 4. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITY: During the six months ended April 30, 1996, purchases and
sales of investments, other than short-term obligations and mortgage dollar roll
transactions, were $1,082,851,484 and $1,695,901,323, respectively.
Unrealized appreciation (depreciation) at April 30, 1996, based on cost of
investments for federal income tax purposes was:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 19,184,020
Gross unrealized depreciation (37,735,030)
------------
Net realized depreciation $(18,551,010)
============
</TABLE>
Information regarding dollar roll transactions that are not in accordance with
standard industry practices for settling purchases of investments are
included in the debt table:
<TABLE>
<S> <C>
Maximum amount outstanding during the period $224,701,563
Average amount outstanding during the period $238,204,262
Amount outstanding at April 30, 1996 $224,701,563
</TABLE>
The average amount outstanding during the period was calculated by summing
borrowings at the end of each day and dividing the sum by the number of days in
the period ended April 30, 1996.
16
<PAGE>
Notes to Financial Statements/April 30, 1996
- --------------------------------------------------------------------------------
CAPITAL LOSS CARRYFORWARDS: At October 31, 1995, capital loss carryforwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
<TABLE>
<CAPTION>
Year of Capital loss
expiration carryforward
---------- ------------
<S> <C>
1997 $ 84,080,000
1998 22,515,000
1999 36,282,000
2000 595,000
2002 84,302,000
------------
$227,774,000
------------
</TABLE>
Expired capital loss carryforwards, if any, are recorded as a reduction of
capital paid in.
To the extent loss carryforwards are used to offset any future realized gains,
it is unlikely that such gains would be distributed since they may be taxable
to shareholders as ordinary income.
OTHER: The Fund may buy or sell Treasury bond futures contracts to manage
overall portfolio interest rate exposure and not for trading purposes. The use
of futures contracts involves certain risks which include (1) imperfect
correlation between the price movement of the contracts and the underlying
securities, (2) inability to close out positions due to different trading
hours, or the temporary absence of a liquid market for either the contract
or the underlying securities, or (3) an inaccurate prediction by the Adviser
of the future direction of interest rates. Any of these risks may involve
amounts exceeding the variation margin recorded in the Fund's Statement of
Assets and Liabilities at any given time.
17
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period
are as follows:
(Unaudited)
Six months ended
April 30 Year ended October 31
---------------------- ---------------------
1996 1995
Class A Class B Class A Class B
--------- --------- --------- ---------
Net asset value-
Beginning of period $10.830 $10.830 $9.950 $9.950
--------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.343 0.303 0.710 0.633
Net realized and
unrealized gain (loss) (0.465) (0.465) 0.907 0.907
--------- --------- --------- ---------
Total from Investment
Operations (0.122) (0.162) 1.617 1.540
--------- --------- --------- ---------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From Net Investment
Income (0.348) (0.308) (0.709) (0.632)
From Net Realized Gain -- -- (0.028) (0.028)
From Capital Paid In -- -- -- --
--------- --------- --------- ---------
Total Distrbiutions
Declared to
Shareholders (0.348) (0.308) (0.737) (0.660)
--------- --------- --------- ---------
Net asset value-
End of Period $10.360 $10.360 $10.830 $10.830
--------- --------- --------- ---------
Total return (a) (1.19)%(b) (1.56)%(b) 16.82% 15.96%
--------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.18%(c) 1.93%(c) 1.17% 1.92%
Net Investment Income 6.49%(c) 5.74%(c) 7.04% 6.29%
Portfolio Turnover 172%(c) 172%(c) 171% 171%
Net assets at end of
period (in millions) $1,079 $75 $1,201 $79
(a) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(b) Not annualized.
(c) Annualized.
18
<PAGE>
FINANCIAL HIGHLIGHTS - continued
Year ended October 31
---------------------------------------------------
1994 1993
Class A Class B Class A Class B
--------- --------- --------- ---------
$11.460 $11.460 $10.750 $10.750
--------- --------- --------- ---------
0.821 0.741 0.819 0.737
(1.560) (1.560) 0.739 0.739
--------- --------- --------- ---------
(0.739) (0.819) 1.558 1.476
--------- --------- --------- ---------
(0.771) (0.691) (0.781) (0.706)
-- -- (0.067) (0.060)
-- -- -- --
--------- --------- --------- ---------
(0.771) (0.691) (0.848) (0.766)
--------- --------- --------- ---------
$9.950 $9.950 $11.460 $11.460
--------- --------- --------- ---------
(6.57)% (7.28)% 14.94% 14.11%
--------- --------- --------- ---------
1.16% 1.91% 1.17% 1.92%
7.80% 7.05% 7.37% 6.62%
121% 121% 252% 252%
$1,278 $70 $1,736 $68
19
<PAGE>
FINANCIAL HIGHLIGHTS - continued
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year ended October 31
-------------------------------------
<S> <C> <C> <C>
1992 1991
Class A Class B (a) Class A
--------- ----------- ---------
Net asset value -
Beginning of period $ 10.800 $ 10.730 $ 10.420
--------- ----------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.796 0.286 0.854
Net realized and
unrealized gain (loss) 0.157 0.095 0.671
--------- ----------- ----------
Total from Investment
Operations 0.953 0.381 1.525
--------- ----------- ----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.796) (0.286) (0.854)
From net realized gains -- -- --
From capital paid in (b) (0.207) (0.075) (0.291)
--------- ----------- ----------
Total Distributions
Declared to Shareholders (1.003) (0.361) (1.145)
--------- ----------- ----------
Net asset value -
End of period $ 10.750 $ 10.750 $ 10.800
--------- ----------- ----------
Total return (c) 9.15% 3.47% 15.33%
--------- ----------- ----------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.24% 1.99%(e) 1.21%
Net investment income 7.36% 6.61%(e) 8.05%
Portfolio turnover 18% 18% 11%
Net assets at end
of period (in millions) $ 1,809 $ 28 $ 2,028
</TABLE>
(a) Class B shares were initially offered on June 8, 1992. Per share
amounts reflect activity from that date.
(b) Because of differences between book and tax basis accounting,
approximately $0.247, $0.095 and $0.315, respectively, were a
return of capital for federal income tax purposes.
(c) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(d) Not annualized.
(e) Annualized.
20
<PAGE>
SHAREHOLDER SERVICES
TO MAKE INVESTING EASIER
Colonial has one of the most extensive selections of shareholder services
available. Your financial adviser can help you arrange for any of these
services, or you can call Colonial directly at 1-800-345-6611.
AFFORDABLE ADDITIONAL INVESTMENTS: Add to your account with as little as
$50; $25 for an IRA account.
FREE EXCHANGES*: Exchange all or part of your account into the same share class
of another Colonial fund, by phone or mail, as your needs change over time.
EASY ACCESS TO YOUR MONEY*: Make withdrawals from your account by phone, by mail
or, for certain funds, by check.
ONE-YEAR REINSTATEMENT PRIVILEGE: If you need access to your money, but then
choose to return it to Colonial within one year, you can reinvest in any
Colonial fund of the same share class without any penalty or sales charge.
FUNDAMATIC: Make periodic investments as low as $50 from your checking
account to your Colonial account.
SYSTEMATIC WITHDRAWAL PLAN (SWP): Receive monthly, quarterly, or semiannual
payments via check or bank transmission. There is a $5,000 account value
required, but no minimum for the payment amount. The maximum annual withdrawal
is 12% of account balance at time SWP is established. SWPs by check are
processed on the 10th of each month.
AUTOMATED DOLLAR COST AVERAGING: Transfer money on a monthly basis from any
Colonial fund with a balance of $5,000 into the same share class of up to four
other Colonial funds. Minimum for each transfer is $100.
LOW COST IRAs: Choose from a broad range of retirement plans,
including IRAs.
* Redemptions and exchanges are made at the next determined net asset value
after the request is received by Colonial. Proceeds may be more or less than
your original cost. The exchange privilege may be terminated at any time.
Investors who purchase Class B or Class D shares (for applicable funds), or $1
million or more of Class A shares, may be subject to a contingent deferred sales
charge.
21
<PAGE>
HOW TO REACH COLONIAL
BY PHONE OR BY MAIL
BY TELEPHONE
For 24-hour account information, call from your touch-tone phone. (Rotary
callers will be automatically connected to a representative during business
hours.) A recorded message will guide you through the menu:
For fund prices, dividends, and capital gains information press 1
For account information ................................. press 2
To speak to a Colonial representative ................... press 3
For yield and total return information .................. press 4
For duplicate statements or new supply of checks ........ press 5
To order duplicate tax forms and year-end statements .... press 6
(February through May)
To review your options at any time during your call ..... press *
To speak with a shareholder services representative about your account, call
Monday to Friday, 8:00 am to 8:00 pm ET, and Saturdays from February through
mid-April, 10:00 am to 2:00 pm ET.
To purchase, exchange, or sell shares by telephone, call Monday to Friday, 9:00
am to 8:00 pm ET. Transactions received after the close of the New York Stock
Exchange will receive the next business day's closing price.
To request literature on any Colonial fund, call Monday to Friday, 8:30 am to
6:30 pm ET.
BY MAIL
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
22
<PAGE>
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Colonial Federal Securities Fund is:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Colonial Federal Securities Fund mails one shareholder report to each
shareholder address. If you would like more than one report, please call our
Literature Department at 1-800-248-2828 and additional reports will be sent to
you.
This report has been prepared for shareholders of Colonial Federal Securities
Fund. This report may also be used as sales literature when preceded or
accompanied by the current prospectus which provides details of sales charges,
investment objectives and operating policies of the Fund.
23
<PAGE>
[Logo]
Mutual Funds for
Planned Portfolios
TRUSTEES
ROBERT J. BIRNBAUM
Trustee (formerly Special Counsel, Dechert, Price & Rhoads; President and Chief
Operating Officer, New York Stock Exchange, Inc.)
TOM BLEASDALE
Trustee (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust company)
LORA S. COLLINS
Attorney, Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
JAMES E. GRINNELL
Private Investor (formerly Senior Vice President-Operations, The Rockport
Company)
WILLIAM D. IRELAND, JR.
Trustee (formerly Chairman of the Board, Bank of New England-Worcester)
RICHARD W. LOWRY
Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood
Corporation)
WILLIAM E. MAYER
Dean, College of business and Management, University of Maryland (formerly
Dean, Simon Graduate School of Business, University of Rochester; Chairman and
Chief Executive Officer, C.S. First Boston Merchant Bank; and President and
Chief Executive Officer, The First Boston Corporation)
JAMES L. MOODY, JR.
Chairman of the Board, Hannaford Bros. Co. (formerly Chief Executive Officer,
Hannaford Bros. Co.)
JOHN J. NEUHAUSER
Dean, Boston College School of Management
GEORGE L. SHINN
Financial Consultant (formerly Chairman, Chief Executive Officer and
Consultant, The First Boston Corporation)
ROBERT L. SULLIVAN
Management Consultant (formerly Management Consultant, Saatchi and Saatchi
Consulting Ltd. and Principal and International Practice Director, Management
Consulting, Peat Marwick Main & Co.)
SINCLAIR WEEKS, JR.
Chairman of the Board, Reed & Barton Corporation
NOT FDIC- MAY LOSE VALUE
INSURED NO BANK GUARANTEED
Colonial Federal Securities, Inc. Distributor(c) 1996
One Financial Center, Boston, Massachusetts 02111-2621, 617-426-3750
FS03/252C-0496 M (6/96)
