<PAGE>
[COLONIAL LOGO]
COLONIAL
FEDERAL SECURITIES FUND
ANNUAL REPORT
OCTOBER 31, 1995
<PAGE>
COLONIAL FEDERAL SECURITIES FUND HIGHLIGHTS
NOVEMBER 1, 1994 - OCTOBER 31, 1995
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: "Economic and market conditions over the past year
have favored U.S. government securities. Low inflation, declining interest
rates, balanced budget expectations, and renewed interest in U.S. government
securities by foreign investors have all been positive factors in this market."
COLONIAL FEDERAL SECURITIES FUND PERFORMANCE
<TABLE>
<CAPTION>
CLASS A CLASS B
<S> <C> <C>
Inception date 3/30/84 6/8/92
Distributions declared per share $ 0.737 $ 0.660
SEC Yields on October 31, 1995* 5.84% 5.38%
Total returns, assuming reinvestment of all distributions and no sales
charge or contingent deferred sales charge (CDSC) --
12 months 16.82% 15.96%
Net asset value per share at 10/31/95 $10.83 $10.83
</TABLE>
*The 30-day SEC yield on October 31, 1995, of 5.84% for Class A shares and 5.38%
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**
- --------------------------------------------------------------------------------
<S> <C>
FNMAs................................................................. 45.06%
Treasury Securities................................................... 36.86%
GNMAs................................................................. 11.07%
CMOs.................................................................. 4.26%
FHLMCs................................................................ 2.75%
<CAPTION>
AVERAGE LIFE BREAKDOWN**
- --------------------------------------------------------------------------------
<S> <C>
1-5 years............................................................. 22.55%
5-10 years............................................................ 51.75%
10-20 years........................................................... 25.70%
</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>
PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
[PHOTO]
John A. McNeice, Jr.
President
In sharp contrast to 1994, this year's successful "soft landing" of the U.S.
economy created a very favorable environment for investors in fixed-income
securities. The combination of declining interest rates, low inflation, and
slower economic growth contributed to an extended rally that included corporate
bonds, municipal bonds, and U.S. government securities. In fact, longer-term
bonds (the bonds that are the primary investment focus of your Fund) were one of
the best performing sectors of the bond market during the fiscal year.
The market events of the past two years provide a textbook example of the value
of maintaining a long-term outlook on investing. Fund shareholders who were able
to stay the course in the face of difficult market conditions in 1994 reaped
their rewards this year when the bond market rebounded. Consistent with the
Fund's objective, investors enjoyed both attractive current income and a
competitive total return.
Helen Frame Peters, Lead Portfolio Manager of Colonial Federal Securities Fund,
believes that interest rates will continue to decline in the months ahead, a
scenario that would have a favorable impact on the bond market. In the following
report, Helen comments on the Fund's management strategy and reviews key issues
affecting the U.S. government bond market.
Respectfully,
/s/ John A. McNeice, Jr.
John A. McNeice, Jr.
President
December 11, 1995
3
<PAGE>
PORTFOLIO MANAGEMENT REPORT
HELEN FRAME PETERS, Ph.D., Senior Vice President of Colonial Management
Associates, Inc., directs Colonial's taxable fixed income group. Dr. Peters is
Lead Portfolio Manager of Colonial Federal Securities Fund. Dr. Peters holds a
B.A. in economics from the University of Pennsylvania and an M.A. in Statistics
and a Ph.D. in Finance from the Wharton School. Dr. Peters is also a board
member of The Bond Analysts Society of Boston.
STRONG BOND MARKET BENEFITS FUND: The improvement in the U.S. government bond
market during the Fund's fiscal year was the result of a favorable combination
of economic events. The U.S. economy experienced a "soft landing" as economic
growth slowed enough to reduce the market's inflation fears. An increase in
demand for U.S. government bonds from foreign investors, coupled with lower
interest rates, had a favorable impact on the performance of U.S. government
securities.
INVESTORS REWARDED FOR LONG-TERM PERSPECTIVE: Shareholders who were able to keep
their eyes on the "big picture" over the past two years were well-rewarded for
their patience. Colonial Federal Securities Fund is managed within a duration
range of 4.5 - 7.5 years, which is considered long-term. A longer duration fund
should offer investors higher returns, although investors may experience greater
volatility over the short run. Colonial Federal Securities Fund's long duration
and exposure to price gains rewarded investors with attractive returns over this
year's market rally. As a longer-duration fund, Colonial Federal Securities Fund
is designed for investors with an investment horizon of 5 to 10 years. In fact,
some financial advisers try to match a fund's duration and risk profile to their
client's investment time horizon -- the farther out the investor's time frame,
the longer the fund's duration should be.
POSITIONED FOR A BULL MARKET: The Fund was well-positioned to benefit from the
market rally that lasted throughout the period. In addition to maintaining a
long duration, we also moved into deeply discounted mortgage-backed securities
early in the fiscal year to take advantage of the potential for rising prices in
a declining rate environment. We expected that rates would fall eventually, and
when they did, deeply discounted, longer-term securities benefited most, as
demonstrated by your Fund's performance.
LOOKING AHEAD: Our longer duration, and exposure to mortgage backed securities,
enabled Colonial Federal Securities Fund to outperform the Lehman Brothers
Intermediate Government Index. We remain optimistic about the prospects for the
U.S. government bond market. We believe rates may be volatile in the short run,
but will continue to decline. Inflation is low, eco-
4
<PAGE>
nomic growth remains sluggish, and investor confidence has improved as a result
of Congress's dedication to balancing the federal budget. Lower rates should
continue to have a favorable impact on the government securities market.
COLONIAL FEDERAL SECURITIES FUND INVESTMENT PERFORMANCE VS.
THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT INDEX
Change in Value of $10,000 from 3/84 - 10/95
Based on NAV and MOP for Class A Shares
<TABLE>
<CAPTION>
DATE MOP NAV INDEX
<S> <C> <C> <C>
3/84 9525 10000 10000
10029 10530 10416
10936 11481 11018
10956 11502 11212
11199 11757 11491
11601 12179 11778
11793 12381 11917
11401 11970 11818
10805 11344 11666
11611 12190 12203
11968 12565 12585
12059 12660 12707
12377 12995 12905
12624 13254 12983
12797 13435 13118
13662 14344 13989
13732 14417 14148
14137 15031 14630
13948 14644 14611
14441 15161 15071
14362 15078 15362
15277 16038 16029
15569 16345 16383
15726 16510 16657
16688 17520 17449
17599 18476 18288
17278 18140 18096
17844 18734 18798
18522 19446 19621
18689 19621 19555
19733 20717 20287
20497 21519 20685
21048 22098 21122
20959 22004 21155
20024 21023 20764
19706 20689 20648
19767 20752 20805
19793 20780 20786
20865 21905 21651
22291 23403 22663
22677 23808 23014
10/95 23033 24181 23267
</TABLE>
A $10,000 investment in Class B shares made on June 8, 1992 (inception) at net
asset value would have been valued at $12,581 on October 31, 1995. The same
investment after deducting the applicable CDSC would have grown to $12,281 on
October 31, 1995.
The Lehman Brothers Intermediate Government Index is an unmanaged index that
tracks the performance of intermediate-term U.S. government securities.
AVERAGE ANNUAL TOTAL RETURNS
As of 9/30/95 (Most Recent Quarter End)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
Inception 3/30/84 Inception 6/8/92
NAV MOP NAV w/CDSC
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR 14.73% 9.28% 13.88% 8.88%
- --------------------------------------------------------------------------------
5 YEARS 9.57% 8.51% -- --
- --------------------------------------------------------------------------------
10 YEARS 9.29% 8.76% -- --
- --------------------------------------------------------------------------------
SINCE INCEPTION 9.96% 9.50% 7.01% 6.23%
- --------------------------------------------------------------------------------
</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. Net asset value (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, 5.00%, since inception, 3.00%.
Performance for different share classes will vary based on differences in sales
charges and fees associated with each class.
5
<PAGE>
INVESTMENT PORTFOLIO
OCTOBER 31, 1995 (IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - 134.6% PAR VALUE
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 85.0%
MATURITIES
COUPON FROM/TO
------ ----------
<S> <C> <C>
Federal Home Loan Mortgage Corp.:
7.500% 2016 $ 1,450 $ 1,462
8.000% 2003-2016 5,748 5,918
8.500% 2007-2010 4,812 5,009
8.750% 2004-2010 2,022 2,089
9.000% 2001-2022(a) 9,248 9,695
9.250% 2008-2016 7,175 7,480
9.500% 2004-2016 3,008 3,196
9.750% 2008-2016 1,188 1,244
10.000% 2019 3,526 3,833
10.250% 2009-2010 793 858
10.500% 2017-2020 2,875 3,165
11.250% 2003-2016 2,830 3,145
11.500% 2015 159 178
12.000% 2013 128 143
--------
47,415
--------
Collateralized Mortgage Obligation:
5.000% 2013 10,558 9,839
6.500% 2014 18,550 17,819
6.750% 2020-2021 26,878 26,303
8.500% 2021 2,775 2,833
8.750% 2020(a) 15,900 16,606
--------
73,400
--------
Federal National Mortgage Association:
6.000% 2024-2025(b) 39,631 37,612
6.240% 2000 19,600 19,806
6.500% 2003-2024(b) 379,362 373,601
7.000% 2010-2025(a)(b) 277,529 275,740
7.500% 2006-2011 19,266 19,664
8.000% 2008-2009 4,239 4,384
8.250% 2008-2011(a) 1,987 2,036
8.500% 2008-2017 8,130 8,504
9.000% 2002-2021(a) 30,528 32,061
9.500% 2008-2018 2,669 2,823
10.500% 2004 126 139
--------
776,370
--------
</TABLE>
6
<PAGE>
Investment Portfolio/October 31, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITIES
COUPON FROM/TO
------ ----------
<S> <C> <C>
Government National Mortgage Association:
6.500% 2023-2024(a) $103,148 $ 100,312
7.500% 2006-2007(a) 1,481 1,522
8.000% 2005-2008 115 120
9.000% 2008-2017(a) 11,076 11,758
9.500% 2009-2019(a) 32,934 35,513
10.000% 2000-2003(a) 681 715
10.500% 2013-2021 22,339 24,747
11.000% 2010 6 7
11.500% 2013-2015(a) 75 85
11.750% 2013-2015 395 443
12.000% 2012-2015(a) 1,242 1,432
12.500% 2010-2015(a) 8,487 9,924
13.000% 2011-2015(a) 3,505 4,129
----------
190,707
----------
TOTAL GOVERNMENT AGENCIES (cost of $1,043,137) 1,087,892
----------
GOVERNMENT OBLIGATIONS - 49.6%
U.S. Treasury bonds:
7.125% 02/15/23(a) 64,058 69,743
7.625% 02/15/25(a) 1,864 2,164
12.000% 08/15/13(a) 129,678 194,538
12.750% 11/15/10(a) 46,873 69,811
----------
336,256
----------
U.S. Treasury notes:
6.125% 07/31/00 57,000 57,695
6.125% 09/30/00 47,103 47,684
6.500% 08/15/05 56,859 58,884
7.500% 11/15/24(a) 8,436 9,638
7.875% 11/15/04(a) 24,860 28,018
10.375% 11/15/12(a) 71,994 96,820
----------
298,739
----------
TOTAL GOVERNMENT OBLIGATIONS (cost of $643,419) 634,995
----------
TOTAL INVESTMENTS (cost of $1,686,556)(c) 1,722,887
----------
SHORT-TERM OBLIGATIONS - 1.1%
- --------------------------------------------------------------------------------
Repurchase agreement with Bankers Trust Securities
Corp. dated 10/31/95, due 11/01/95 at 5.875%,
collateralized by U.S. Treasury notes with various
maturities to 1997, market value $15,150
(repurchase proceeds $14,838) 14,836 14,836
----------
</TABLE>
7
<PAGE>
Investment Portfolio/October 31, 1995
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
OTHER ASSETS & LIABILITIES, NET - (35.7%) $ (457,628)
- -------------------------------------------------------------------------------
NET ASSETS - 100.0% $1,280,095
----------
</TABLE>
NOTES TO INVESTMENT PORTFOLIO:
- -------------------------------------------------------------------------------
(a) These securities, or a portion thereof, with a total market value of
$697,656, 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 $1,686,703.
Short futures contracts open at October 31, 1995 are as follows:
<TABLE>
<CAPTION>
Par value Unrealized
covered by Expiration depreciation
Type contracts month at 10/31/95
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury bonds $ 59,600 December $3,258
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
OCTOBER 31, 1995
<TABLE>
<CAPTION>
(in thousands except for per share amounts and footnotes)
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments at value (cost $1,686,556) $1,722,887
Short-term obligations 14,836
----------
1,737,723
Receivable for:
Interest $ 17,871
Investments sold 881
Fund shares sold 773
Other 917 20,442
-------- ----------
Total Assets 1,758,165
LIABILITIES
Payable for:
Investments purchased 467,343
Distributions 6,932
Fund shares repurchased 3,540
Variation margin on futures 168
Accrued:
Deferred Trustees fees 18
Other 69
--------
Total Liabilities 478,070
----------
NET ASSETS $1,280,095
==========
Net asset value & redemption price per share -
Class A ($1,201,126/110,901) $ 10.83
==========
Maximum offering price per share - Class A
($10.830/0.9525) $ 11.37(a)
==========
Net asset value & offering price per share -
Class B ($78,969/7,292) $ 10.83(b)
==========
COMPOSITION OF NET ASSETS
Capital paid in $1,486,883
Overdistributed net investment income (6,970)
Accumulated net realized loss (232,891)
Net unrealized appreciation (depreciation) on:
Investments 36,331
Open futures contracts (3,258)
----------
$1,280,095
==========
</TABLE>
(a) On sales of $50,000 or more the offering price is reduced.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1995
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest $101,503
Dollar roll fee income 6,974
--------
108,477
EXPENSES
Management fee $ 8,424
Service fee 3,298
Distribution fee - Class B 558
Transfer agent 2,881
Bookkeeping fee 440
Trustees fee 65
Custodian fee 101
Audit fee 56
Legal fee 12
Registration fee 23
Reports to shareholders 22
Other 155 16,035
-------- --------
Net Investment Income 92,442
--------
NET REALIZED & UNREALIZED GAIN (LOSS)
ON PORTFOLIO POSITIONS
Net realized gain (loss) on:
Investments 31,009
Closed futures contracts (8,662)
--------
Net Realized Gain 22,347
Net unrealized appreciation (depreciation)
during the period on:
Investments 101,733
Open futures contracts (10,276)
--------
Net Unrealized Appreciation 91,457
--------
Net Gain 113,804
--------
Net Increase in Net Assets From Operations $206,246
========
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
Year ended
October 31
---------------------
1995 1994
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 92,442 120,333
Net realized gain (loss) 22,347 (44,423)
Net unrealized appreciation (depreciation) 91,457 (186,929)
---------- ----------
Net Increase (Decrease) from Operations 206,246 (111,019)
Distributions:
From net investment income - Class A (85,675) (107,338)
From net realized gains - Class A (3,434) --
From net investment income - Class B (4,557) (4,701)
From net realized gains - Class B (183) --
---------- ----------
112,397 (223,058)
---------- ----------
Fund Share Transactions:
Receipts for shares sold - Class A 94,460 59,031
Value of distributions reinvested - Class A 41,805 48,833
Cost of shares repurchased - Class A (319,215) (352,589)
---------- ----------
(182,950) (244,725)
---------- ----------
Receipts for shares sold - Class B 18,308 28,089
Value of distributions reinvested - Class B 2,478 2,451
Cost of shares repurchased - Class B (17,867) (18,610)
---------- ----------
2,919 11,930
---------- ----------
Net Decrease from Fund Share Transactions (180,031) (232,795)
---------- ----------
Total Decrease (67,634) (455,853)
NET ASSETS
Beginning of period 1,347,729 1,803,582
---------- ----------
End of period (net of overdistributed net
investment income of $6,970 and $8,191,
respectively) $1,280,095 $1,347,729
========== ==========
NUMBER OF FUND SHARES
Sold - Class A 9,160 5,589
Issued for distributions reinvested - Class A 4,058 4,598
Repurchased - Class A (30,800) (33,079)
---------- ----------
(17,582) (22,892)
---------- ----------
Sold - Class B 1,772 2,600
Issued for distributions reinvested - Class B 240 232
Repurchased - Class B (1,727) (1,768)
---------- ----------
285 1,064
---------- ----------
</TABLE>
See notes to financial statements.
11
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Year ended October 31, 1995
---------------------------
<S> <C> <C>
NET CHANGE IN CASH
Cash flows from operating activities:
Interest received $ 107,603
Operating expenses paid 8,121
Dollar roll fee income received (16,028)
-----------
Net cash provided by operating act $ 99,696
Cash flows from investing activities:
Purchases of securities and short-term obligations (6,028,562)
Proceeds from sales of securities and short-term
obligations 6,225,441
Futures contracts (18,770)
-----------
Net cash provided by investing activities 178,109
---------
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES 277,805
Cash flows from financing activities:
Proceeds from shares sold 112,555
Cost of shares repurchased (339,020)
Cash dividends paid (51,340)
-----------
Net cash used by financing activities (277,805)
---------
Net change in cash 0
Cash - beginning of period 0
---------
Cash - end of period $ 0
=========
RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET
CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES:
Net increase in net
assets resulting from operations $ 206,246
Decrease in investments $ 119,004
Decrease in interest and fees receivable 6,714
Decrease in receivable from investment
securities sold and futures contracts 180,287
Decrease in payable for
investment securities purchased (234,453)
Decrease in other assets 50
Decrease in accrued expenses and liabilities (43)
-----------
Total 71,559
---------
Net cash provided by operating
and investing activities $ 277,805
=========
</TABLE>
See notes to financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
NOTE 1. ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION: Colonial Federal Securities Fund (the Fund), a series of
Colonial Trust III, 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 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 following significant accounting policies are consistently followed by
the Fund in the preparation of its financial statements and conform to
generally accepted accounting principles.
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
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 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.
13
<PAGE>
Notes to Financial Statements/October 31, 1995
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES - CONT.
- --------------------------------------------------------------------------------
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 October 31,
1995.
INTEREST INCOME, FEE INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is
recorded on the accrual basis. Fee income attributable to mortgage dollar
roll transactions is recorded on the accrual basis over the term of the
transaction. Original issue discount is accreted to interest income over
the life of a security with a corresponding increase in the cost basis;
premium and market discount are not amortized or accreted.
DISTRIBUTIONS TO SHAREHOLDERS: The Fund declares and records distributions
daily and pays monthly.
The amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are 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 2. FEES AND COMPENSATION PAID TO AFFILIATES
- --------------------------------------------------------------------------------
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Adviser) is the
investment Adviser of the Fund and furnishes accounting and other services
and office facilities for a monthly fee based on the Fund's average net
assets as follows:
14
<PAGE>
Notes to Financial Statements/October 31, 1995
- -------------------------------------------------------------------------------
<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.
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Colonial Investment
Services, Inc. (the Distributor), an affiliate of the Adviser, is the Fund's
principal underwriter. During the year ended October 31, 1995, the Fund has
been advised that the Distributor retained net underwriting discounts of
$48,872 on sales of the Fund's Class A shares and received contingent
deferred sales charges (CDSC) of $315,596 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.
15
<PAGE>
Notes to Financial Statements/October 31, 1995
- --------------------------------------------------------------------------------
NOTE 3. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITY: During the year ended October 31, 1995, purchases and
sales of investments, other than short-term obligations and mortgage dollar
roll transactions, were $1,990,117,930 and $2,070,205,578, respectively.
Unrealized appreciation (depreciation) at October 31, 1995, based on cost of
investments for federal income tax purposes was:
<TABLE>
<S> <C>
Gross unrealized appreciation $46,267,118
Gross unrealized depreciation (10,083,383)
-----------
Net unrealized appreciation $36,183,735
===========
</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 $ 472,837,031
Average amount outstanding during the period $ 274,217,477
Amount outstanding at October 31, 1995 $ 232,096,875
</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 October 31, 1995.
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.
Loss carryforwards are available to offset any future realized gains. If
the Fund realizes and distributes to shareholders capital gains that are so
offset, those distributions will be taxable to shareholders as ordinary
income. If the Fund were to retain rather than distribute the gains, the
gains would not be taxable to the Fund or shareholder.
16
<PAGE>
Notes to Financial Statements/October 31, 1995
- -------------------------------------------------------------------------------
OTHER: The Fund sells 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:
<TABLE>
<CAPTION>
Year ended October 31
------------------------------------------------------------
1995 1994
Class A Class B Class A Class B
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 9.950 $ 9.950 $11.460 $11.460
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.710 0.633 0.821 0.741
Net realized and
unrealized gain (loss) 0.907 0.907 (1.560) (1.560)
------- ------- ------- -------
Total from Investment
Operations 1.617 1.540 (0.739) (0.819)
------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.709) (0.632) (0.771) (0.691)
From net realized gains (0.028) (0.028) --- ---
From capital paid in (b) --- --- --- ---
------- ------- ------- -------
Total Distributions
Declared to Shareholders (0.737) (0.660) (0.771) (0.691)
------- ------- ------- -------
Net asset value -
End of period $10.830 $10.830 $ 9.950 $ 9.950
======= ======= ======= =======
Total return (c) 16.82% 15.96% (6.57)% (7.28)%
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 1.92% 1.16% 1.91%
Net investment income 7.04% 6.29% 7.80% 7.05%
Portfolio turnover 171% 171% 121% 121%
Net assets at end
of period (in millions) $ 1,201 $ 79 $ 1,278 $ 70
</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.
18
<PAGE>
FINANCIAL HIGHLIGHTS - CONTINUED
<TABLE>
<CAPTION>
Year ended October 31
----------------------------------------------------------------------------
1993 1992 1991
Class A Class B Class A Class B (a) Class A
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$10.750 $10.750 $10.800 $10.730 $10.420
------- ------- ------- ------- -------
0.819 0.737 0.796 0.286 0.854
0.739 0.739 0.157 0.095 0.671
------- ------- ------- ------- -------
1.558 1.476 0.953 0.381 1.525
------- ------- ------- ------- -------
(0.781) (0.706) (0.796) (0.286) (0.854)
(0.067) (0.060) --- --- ---
--- --- (0.207) (0.075) (0.291)
------- ------- ------- ------- -------
(0.848) (0.766) (1.003) (0.361) (1.145)
------- ------- ------- ------- -------
$11.460 $11.460 $10.750 $10.750 $10.800
======= ======= ======= ======= =======
14.94% 14.11% 9.15% 3.47% (d) 15.33%
======= ======= ======= ======= =======
1.17% 1.92% 1.24% 1.99% (e) 1.21%
7.37% 6.62% 7.36% 6.61% (e) 8.05%
252% 252% 18% 18% 11%
$ 1,736 $ 68 $ 1,809 $ 28 $ 2,028
</TABLE>
- -------------------------------------------------------------------------------
State Tax Information (unaudited)
An average of 35% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
Approximately 50% of the Fund's distributions (44% of
gross income) was derived from interest on direct
investments in U.S. Treasury bonds, notes, and bills.
- -------------------------------------------------------------------------------
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF COLONIAL TRUST III AND THE SHAREHOLDERS OF COLONIAL FEDERAL
SECURITIES FUND
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations, of
cash flows, and of changes in net assets and financial highlights present
fairly, in all material respects, the financial position of Colonial Federal
Securities Fund (a series of Colonial Trust III) at October 31, 1995, the
results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and the financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of portfolio positions at October 31, 1995 by correspondence with
the custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
December 11, 1995
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
COLONIAL CUSTOMER CONNECTION - 1-800-345-6611
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.
COLONIAL TELEPHONE TRANSACTION DEPARTMENT - 1-800-422-3737
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.
COLONIAL LITERATURE DEPARTMENT - 1-800-248-2828
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 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>
[COLONIAL LOGO]
COLONIAL
MUTUAL FUNDS
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)
JOHN A. MCNEICE, JR.
Chairman of the Board and Director, The Colonial Group, Inc. and Colonial
Management Associates, Inc. (formerly Chief Executive Officer, The Colonial
Group, Inc. and Colonial Management Associates, Inc.)
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
COLONIAL INVESTMENT SERVICES, INC. (C)1995
One Financial Center, Boston, Massachusetts 02111-2621, 617-426-3750
FS-02/416B-1095 (12/95)
