<PAGE>
- --------------------------------------------------------------------------------
Colonial
Federal Securities Fund
[Photo]
Annual Report
October 31, 1996
---------------------------
Not FDIC- May lose value
Insured No bank guarantee
---------------------------
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<PAGE>
COLONIAL FEDERAL SECURITIES FUND HIGHLIGHTS
November 1, 1995 - October 31, 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: "Economic and market conditions for fixed income
investments were mixed throughout the fiscal year. In this changing environment,
your Fund benefited from active management, which helped reduce risk and improve
performance." -- Leslie Finnemore
<TABLE>
COLONIAL FEDERAL SECURITIES FUND PERFORMANCE
<CAPTION>
- --------------------------------------------------------------------------------
CLASS A CLASS B
<S> <C> <C>
Inception dates 3/30/84 6/08/92
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Distributions declared per share $0.696 $0.617
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEC yields on October 31, 1996* 5.62% 5.15%
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- --------------------------------------------------------------------------------
12-month total returns, assuming 3.88% 3.11%
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- --------------------------------------------------------------------------------
reinvestment of all distributions and
no sales charge or contingent deferred
sales charge (CDSC)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net asset value per share at 10/31/96 $10.53 $10.53
- --------------------------------------------------------------------------------
<FN>
*The 30-day SEC yields reflect the portfolio's earning power, net of expenses,
expressed as an annualized percentage of the maximum offering price per share.
<CAPTION>
PORTFOLIO STRUCTURE** AVERAGE LIFE BREAKDOWN**
(as of 10/31/96) (as of 10/31/96)
................................................................................
Treasury Securities .........32.82% 1-5 years ...................18.90%
FNMAs .......................32.38% 5-10 years ..................59.85%
FHLMCs ......................19.06% 10-20 years .................21.25%
GNMAs .......................14.24%
Agencies .................... 1.50%
<FN>
** Since the Fund is actively managed, there can be no guarantee the portfolio
holdings and maturities shown will continue in the future. All figures are
percentages of senior securities.
</TABLE>
2
<PAGE>
PRESIDENT'S MESSAGE
To Fund Shareholders
I am pleased to present your Fund's annual report for the
fiscal year ended October 31, 1996. This report gives us the
opportunity to share our analysis of your fund and the
investment environment over the past 12 months. [Photo]
The Federal Reserve Board lowered short-term interest rates
in December 1995 and again in January 1996. Furthermore, in
the bond market, significantly stronger economic indicators
mid-way through the period stirred inflation fears and propelled long-term
interest rates upward. However, we believe that the bond market volatility
should be somewhat reduced in the months ahead.
In the U.S. stock market, generally favorable conditions prevailed throughout
most of the period with both large and small company stocks posting strong
returns until July, when a price-based correction took place. Since then, the
market has rebounded nicely with the Dow Jones Industrial Average setting
several new records.
Internationally, we are still seeing declining interest rates in most markets.
Japan's recovery is modest and interest rates are being held low. China is
reducing rates, now that inflation has declined into single digits. In Europe,
short-term interest rates are much lower than long-term ones, creating a steep
yield curve. We expect this situation to continue until we see an increase in
economic activity.
Our expectations include moderate economic growth continuing into the first half
of 1997. If our current projections hold, we may see the economy picking up
again in the second half of 1997.
In the following pages, you'll find detailed information on your Fund's perfor
mance as well as an in-depth discussion with the portfolio manager. As always,
we appreciate the opportunity to help you meet your investment goals.
Respectfully,
/s/ Harold W. Cogger
Harold W. Cogger
President
December 10, 1996
Because market conditions change frequently, there can be no assurance that the
trends described will continue, come to pass or affect Fund performance.
3
<PAGE>
PORTFOLIO MANAGEMENT REPORT
LESLIE FINNEMORE is portfolio manager of Colonial Federal Securities Fund and is
vice president of Colonial Management Associates, Inc.
Q. HOW DID THE U.S. GOVERNMENT MARKET PERFORM DURING THE PAST TWELVE MONTHS?
A. During the past twelve months, the market psychology shifted from prospects
of lowering short-term interest rates, to expectations of the Fed holding
interest rates steady. The period began with slow economic growth, low inflation
and declining interest rates. These factors contributed to price increases in
the fixed-income markets. During the second half of the period, strong
employment growth, retail sales, housing activity and auto sales led to
increasing interest rates. While the bond market was volatile during the Fund's
fiscal year, conditions were not as severe as they were in 1994. The Fund's
active management helped the Fund's Class A shares achieve a total return of
3.88%.
Q. WHAT WAS THE FUND'S INVESTMENT STRATEGY DURING THE PERIOD?
A. Active management of the mortgage-backed portion of the Fund was the most
important element of the investment strategy. That's because these securities
fluctuate with changes in interest rates. At the end of 1995, we increased the
Fund's mortgage holding to over 87% of total net assets. We did this to take
advantage of market expectations of risk in the mortgage markets. Expectations
of slower economic growth, the Fed's easing, and the lowering of interest rates,
resulted in attractive compensation for refinancing risks that never
materialized. Since that time, we have reduced the Fund's exposure to mortgages
to 78%.
Another important aspect of the Fund's strategy relates to duration management.
Duration measures the Fund's sensitivity to changes in interest rates. As
interest rates increase, mortgage-backed bond duration gets longer because
refinancing expectations decrease. Within the portfolio, we use active
management to prevent the Fund's duration from lengthening, which helped to
control risk in a shifting bond market environment.
Q. HOW DID THE FUND'S PERFORMANCE COMPARE TO THE LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT BOND INDEX?
A. The Fund underperformed the Lehman Brothers Intermediate Government Bond
Index, a broad-based, unmanaged index that tracks the performance of government
bonds with maturities of ten years or less. The total return for the Fund's
Class A shares, based on net asset value, was 3.88% while the return of the
Index was 5.67%. This underperformance may be attributable to the Fund having a
longer duration than the Index. However, the Fund's longer duration has rewarded
its investors over time.
4
<PAGE>
Q. WHAT IS YOUR OUTLOOK FOR THE BOND MARKET?
A. We believe that the volatility that has characterized the market over the
last several months will be somewhat reduced. Further, we anticipate economic
fundamentals like low inflation and moderate growth may prevail, indicating a
positive environment for fixed-income markets. We will continue to actively
manage the Fund with the goal of improving return while moderating risk.
COLONIAL FEDERAL SECURITIES FUND INVESTMENT PERFORMANCE VS.
THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX
Change in Value of $10,000 from 10/31/86 - 10/31/96
Based on NAV and MOP for Class A Shares
<TABLE>
[Area Graph]
<CAPTION>
-----------------------------------------------------------
Label CFSF NAV MOP INDEX
-----------------------------------------------------------
<S> <C> <C> <C> <C>
1 Oct 31, 86 10000 9525 10000
2 Jan 31, 87 10341 9850 10213
3 Apr 30, 87 9978 9505 10060
4 Jul 31, 87 9928 9456 10179
5 Oct 31, 87 9882 9413 10324
6 Jan 31, 88 10621 10117 10747
7 Apr 30, 88 10381 9887 10797
8 Jul 31, 88 10494 9995 10887
9 Oct 31, 88 11086 10559 11243
10 Jan 31, 89 11237 10703 11269
11 Apr 30, 89 11454 10910 11501
12 Jul 31, 89 12233 11652 12266
13 Oct 31, 89 12463 11871 12413
14 Jan 31, 90 12271 11689 12494
15 Apr 30, 90 12052 11479 12513
16 Jul 31, 90 12850 12240 13131
17 Oct 31, 90 12818 12209 13384
18 Jan 31, 91 13570 12926 13916
19 Apr 30, 91 13846 13188 14223
20 Jul 31, 91 13999 13334 14470
21 Oct 31, 91 14783 14081 15167
22 Jan 31, 92 15194 14472 15566
23 Apr 30, 92 15261 14536 15692
24 Jul 31, 92 15994 15234 16466
25 Oct 31, 92 16136 15370 16661
26 Jan 31, 93 16869 16067 17119
27 Apr 30, 93 17515 16683 17571
28 Jul 31, 93 18092 17233 17813
29 Oct 31, 93 18548 17667 18195
30 Jan 31, 94 18676 17789 18359
31 Apr 30, 94 17426 16598 17728
32 Jul 31, 94 17668 16829 17977
33 Oct 31, 94 17330 16507 17884
34 Jan 31, 95 17774 16930 18153
35 Apr 30, 95 18632 17747 18821
36 Jul 31, 95 19498 18572 19484
37 Oct 31, 95 20245 19283 19993
38 Jan 31, 96 21097 20095 20609
39 Apr 30, 96 20005 19055 20239
40 Jul 31, 96 20170 19212 20497
41 Oct 31, 96 21030 20031 21127
</TABLE>
A $10,000 investment in Class B shares made on June 8, 1992 (inception) at net
asset value (NAV) would have been valued at $13,102 on October 31, 1996. The
same investment after deducting the applicable contingent deferred sales charge
(CDSC) would have grown to $12,906 on October 31, 1996.
The Lehman Brothers Intermediate Government Bond Index is an unmanaged index
that tracks the performance of intermediate-term U.S. government securities.
Unlike mutual funds, indexes do not incur fees or charges, and it is not
possible to invest in an index.
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
As of 9/30/96 (Most Recent Quarter End)
- --------------------------------------------------------------------------------
<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 2.84% (2.04)% 2.07% (2.74)%
- --------------------------------------------------------------------------------
5 years 6.92% 5.89% -- --
- --------------------------------------------------------------------------------
10 years 7.61% 7.09% -- --
- --------------------------------------------------------------------------------
Since inception 9.37% 8.95% 5.84% 5.47%
- --------------------------------------------------------------------------------
<FN>
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 returns do not include sales charges
or CDSC. Maximum offering price (MOP) returns include the maximum sales charge
of 4.75%. The CDSC returns reflect the applicable charges of: one year, 5%,
since inception, 2%. Performance for different share classes will vary based on
differences in sales charges and fees associated with each class.
</TABLE>
5
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
OCTOBER 31, 1996 (IN THOUSANDS)
<CAPTION>
U.S GOVERNMENT & AGENCY
OBLIGATIONS - 119.1% PAR VALUE
- -------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 80.0%
MATURITIES
COUPON FROM/TO
- ------------- ----------
<S> <C> <C> <C> <C> <C>
Federal National Mortgage Association:
6.240% 2000 $ 19,600 $ 19,652
----------
Federal National Mortgage Association:
6.000% 2023-2024 40,783 38,246
6.500% 2003-2026 81,961 78,980
7.000% 2010-2025 (a)(b) 148,754 146,882
7.500% 2006-2011 (b) 118,044 119,921
8.000% 2008-2019 3,791 3,939
8.250% 2008-2011 1,596 1,628
8.500% 2008-2017 6,558 6,846
9.000% 2002-2021 23,783 24,987
9.500% 2008-2018 2,049 2,207
10.500% 2004 83 92
----------
423,728
----------
Collateralized Mortgage Obligations:
5.000% 2013 11,099 10,533
6.500% 2014 18,095 17,105
6.750% 2020-2021 26,878 26,180
8.500% 2021 1,777 1,821
8.750% 2020 15,900 16,402
----------
72,041
----------
Federal Home Loan Mortgage Corporation:
6.500% 2024 (b) 125,000 123,086
7.000% 2024 (b) 15,000 15,023
7.500% 2016 1,113 1,126
8.000% 2003-2016 4,628 4,793
8.500% 2007-2010 3,718 3,900
8.750% 2004-2010 1,559 1,640
9.000% 2001-2022 7,502 7,927
9.250% 2008-2016 5,859 6,207
9.500% 2004-2016 2,476 2,679
9.750% 2008-2016 978 1,050
10.000% 2019 2,875 3,139
10.250% 2009-2013 1,447 1,574
10.500% 2017-2020 2,245 2,490
11.250% 2003-2016 2,169 2,432
11.500% 2015 156 177
12.000% 2013 103 117
----------
177,360
----------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio/October 31, 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government National Mortgage Association:
6.500% 2023-2026 $118,127 $113,679
7.500% 2006-2007 1,236 1,257
8.000% 2005-2008 93 96
9.000% 2008-2017 9,100 9,756
9.500% 2009-2019 25,939 28,144
10.000% 2000-2003 455 482
10.500% 2013-2021 17,523 19,599
11.000% 2010 4 5
11.500% 2013-2015 63 73
11.750% 2013-2015 296 345
12.000% 2012-2015 1,017 1,196
12.500% 2010-2014 6,889 8,166
13.000% 2011-2015 2,977 3,562
----------
186,360
----------
TOTAL GOVERNMENT AGENCIES (cost of $854,978) 879,141
----------
GOVERNMENT OBLIGATIONS - 39.1%
U.S. Treasury Bonds:
6.750% 08/15/26 16,848 17,048
12.000% 08/15/13 (a) 91,051 131,085
12.750% 11/15/10 (a) 46,873 66,882
----------
215,015
----------
U.S. Treasury Notes:
5.750% 10/31/00 32,445 32,126
6.250% 10/31/01 9,958 10,023
6.500% 10/15/06 29,318 29,606
6.625% 06/30/01 45,000 45,947
6.875% 05/15/06 11,738 12,152
10.375% 11/15/12 (a) 53,118 68,813
----------
198,667
----------
U.S. Treasury STRIP:
11/15/08 34,600 15,715
----------
TOTAL GOVERNMENT OBLIGATIONS (cost of $436,351) 429,397
----------
TOTAL INVESTMENTS (cost of $1,291,329) 1,308,538
----------
</TABLE>
7
<PAGE>
<TABLE>
Investment Portfolio/October 31, 1996
- -------------------------------------------------------------------------------
<CAPTION>
SHORT-TERM OBLIGATIONS - 7.7% PAR VALUE
===============================================================================
<S> <C> <C>
Repurchase agreement with Lehman Brothers , Inc.
dated 10/31/96, due 11/01/96 at 5.53%, collateralized
by U.S. Treasury bonds and notes with various maturities
to 2023, market value $86,283 (repurchase
proceeds $84,619) $ 84,606 $ 84,606
OTHER ASSETS & LIABILITIES, NET - (26.8%) (293,986)
- -------------------------------------------------------------------------------
NET ASSETS - 100.0% $1,099,158
==========
<FN>
NOTES TO INVESTMENT PORTFOLIO:
- -------------------------------------------------------------------------------
(a) These securities, or a portion thereof, with a total market value of
$336,114 are being used to collateralize the delayed delivery purchases
indicated in note (b) 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 $1,291,433.
Acronym Name
----------- ----------------------------------------------
STRIP Separately Traded Receipt for Interest and Principal
</TABLE>
See notes to financial statements.
8
<PAGE>
<TABLE>
STATEMENT OF ASSETS & LIABILITIES
OCTOBER 31, 1996
(in thousands except for per share amounts and footnotes)
<S> <C> <C>
ASSETS
Investments at value (cost $1,291,329) $1,308,538
Short-term obligations 84,606
----------
1,393,144
Receivable for:
Interest $ 13,387
Investments sold 1,233
Fund shares sold 229
Other 485 15,334
---------- ----------
Total Assets 1,408,478
LIABILITIES
Payable for:
Investments purchased 300,929
Distributions 6,084
Fund shares repurchased 2,185
Payable to custodian bank 7
Accrued:
Deferred Trustees fees 8
Other 107
----------
Total Liabilities 309,320
----------
NET ASSETS $1,099,158
==========
Net asset value & redemption price per share -
Class A (1,025,769/97,444) $ 10.53
==========
Maximum offering price per share - Class A
($10.53/0.9525) $ 11.06(a)
==========
Net asset value & offering price per share -
Class B ($73,389/6,972) $ 10.53(b)
==========
COMPOSITION OF NET ASSETS
Capital paid in $1,339,688
Overdistributed net investment income (6,119)
Accumulated net realized loss (251,620)
Net unrealized appreciation 17,209
----------
$1,099,158
==========
<FN>
(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.
</TABLE>
See notes to financial statements.
9
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1996
<S> <C> <C>
(in thousands)
INVESTMENT INCOME
Interest $ 86,495
Dollar roll fee income 5,858
--------
92,353
EXPENSES
Management fee $ 7,614
Service fee 2,959
Distribution fee - Class B 573
Transfer agent 2,576
Bookkeeping fee 406
Custodian fee 107
Trustees fee 63
Audit fee 52
Registration fee 39
Reports to shareholders 22
Legal fee 5
Other 107 14,523
-------- --------
Net Investment Income 77,830
--------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized loss on:
Investments (17,547)
Closed futures contracts (2,022)
--------
Net Realized Loss (19,569)
Net unrealized appreciation (depreciation) during
the period on:
Investments (19,122)
Open futures contracts 3,258
--------
Net Unrealized Depreciation (15,864)
--------
Net Loss (35,433)
--------
Net Increase in Net Assets From Operations $ 42,397
========
</TABLE>
See notes to financial statements.
10
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
(in thousands) Year ended October 31
==========================
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 77,830 $ 92,442
Net realized gain (loss) (19,569) 22,347
Net unrealized appreciation (depreciation) (15,864) 91,457
---------- ----------
Net Increase from Operations 42,397 206,246
Distributions:
From net investment income - Class A (71,821) (85,675)
From net realized gains - Class A -- (3,434)
From capital paid in - Class A (1,286) --
From net investment income - Class B (4,388) (4,557)
From net realized gains - Class B -- (183)
From capital paid in - Class B (79) --
---------- ----------
(35,177) 112,397
---------- ----------
Fund Share Transactions:
Receipts for shares sold - Class A 80,869 94,460
Value of distributions reinvested - Class A 35,050 41,805
Cost of shares repurchased - Class A (258,356) (319,215)
---------- ----------
(142,437) (182,950)
---------- ----------
Receipts for shares sold - Class B 14,215 18,308
Value of distributions reinvested - Class B 2,316 2,478
Cost of shares repurchased - Class B (19,854) (17,867)
---------- ----------
(3,323) 2,919
---------- ----------
Net Decrease from Fund Share Transactions (145,760) (180,031)
---------- ----------
Total Decrease (180,937) (67,634)
NET ASSETS
Beginning of period 1,280,095 1,347,729
---------- ----------
End of period (net of overdistributed net
investment income of $6,119 and $6,970,
respectively) $1,099,158 $1,280,095
========== ==========
NUMBER OF FUND SHARES
Sold - Class A 7,582 9,160
Issued for distributions reinvested - Class A 3,329 4,058
Repurchased - Class A (24,368) (30,800)
---------- ----------
(13,457) (17,582)
---------- ----------
Sold - Class B 1,342 1,772
Issued for distributions reinvested - Class B 221 240
Repurchased - Class B (1,883) (1,727)
---------- ----------
(320) 285
---------- ----------
</TABLE>
See notes to financial statements
11
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
(in thousands) Year ended October 31, 1996
===========================
<S> <C> <C>
NET CHANGE IN CASH
Cash flows from operating activities:
Interest received $ 89,501
Dollar roll fee income received 6,478
Operating expenses paid (14,493)
-----------
Net cash provided by operating activities $ 81,486
Cash flows from investing activities:
Purchases of securities and
short-term obligations (6,191,464)
Proceeds from sales of securities and
short-term obligations 6,336,986
Futures contracts (2,022)
-----------
Net cash provided by investing activities 143,500
---------
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES 224,986
Cash flows from financing activities:
Proceeds from shares sold 95,628
Cost of shares repurchased (279,565)
Cash dividends paid (41,056)
-----------
Net cash used by financing activities (224,993)
---------
Net change in cash (7)
Cash - beginning of period 0
---------
Payable to custodian bank $ (7)
=========
RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET
CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES:
Net increase in net
assets resulting from operations $ 42,397
Decrease in investments $ 344,579
Decrease in interest and fees receivable 4,860
Increase in receivable from investment
securities sold and futures contracts (520)
Decrease in payable for
investment securities purchased (166,414)
Decrease in other assets 56
Increase in accrued expenses and liabilities 28
---------
Total 182,589
---------
Net cash provided by operating
and investing activities $ 224,986
=========
</TABLE>
See notes to financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
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's investment objective is to seek 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 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 accounting 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
identification method for both financial statement and federal income tax
purposes.
13
<PAGE>
Notes to Financial Statements/October 31, 1996
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES - CONT
- --------------------------------------------------------------------------------
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 the Fund's Statement of Assets and Liabilities and
represents the payable due to the custodian bank as of October 31, 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/October 31, 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 and expired
capital loss carryforwards. 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
- -------------------------------------------------------------------------------
<TABLE>
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:
<CAPTION>
Average Net Assets Annual Fee Rate
------------------ ---------------
<S> <C>
First $1 billion 0.65%
Next $1 billion 0.60%
Next $1 billion 0.50%
Over $3 billion 0.40%
</TABLE>
<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:
<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 reimbursement
for certain out of pocket expenses.
15
<PAGE>
Notes to Financial Statements/October 31, 1996
- --------------------------------------------------------------------------------
NOTE 2. 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 year ended October 31, 1996, the Fund has been
advised that the Distributor retained net underwriting discounts of $45,981 on
sales of the Fund's Class A shares and received contingent deferred sales
charges (CDSC) of $274,363 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 3. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
INVESTMENT ACTIVITY: For the year ended October 31, 1996, purchases and sales of
investments, other than short-term obligations and mortgage dollar roll
transactions, were $1,421,758,576 and $1,690,884,460 respectively. Unrealized
appreciation (depreciation) at October 31, 1996, based on cost of investments
for federal income tax purposes was:
<CAPTION>
<S> <C>
Gross unrealized appreciation $ 32,055,464
Gross unrealized depreciation (14,950,734)
------------
Net unrealized appreciation $ 17,104,730
============
</TABLE>
<TABLE>
Information regarding dollar roll transactions that are other than normal
settlement are as follows:
<CAPTION>
<S> <C>
Maximum amount outstanding during the period $182,690,625
Average amount outstanding during the period $114,416,937
Amount outstanding at October 31, 1996 $ --
</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, 1996.
16
<PAGE>
Notes to Financial Statements/October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
CAPITAL LOSS CARRYFORWARDS: At October 31, 1996, capital loss carryforwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
<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
2004 21,929,000
------------
$249,703,000
============
</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 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>
<TABLE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period are as
follows:
<CAPTION>
Year ended October 31
--------------------------------------
1996 1995
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $10.830 $10.830 $ 9.950 $ 9.950
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.696 0.617 0.710 0.633
Net realized and
unrealized gain (loss) (0.300) (0.300) 0.907 0.907
------- ------- ------- -------
Total from Investment
Operations 0.396 0.317 1.617 1.540
------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net
investment income (0.684) (0.606) (0.709) (0.632)
From net realized gains -- -- (0.028) (0.028)
From capital
paid in (0.012) (0.011) -- --
------- ------- ------- -------
Total Distributions
Declared to
Shareholders (0.696) (0.617) (0.737) (0.660)
------- ------- ------- -------
Net asset value -
End of period $10.530 $10.530 $10.830 $10.830
======= ======= ======= =======
Total return (c) 3.88% 3.11% 16.82% 15.96%
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 1.18%(f) 1.93%(f) 1.17% 1.92%
Net investment income 6.62%(f) 5.87%(f) 7.04% 6.29%
Portfolio turnover 125% 125% 171% 171%
Net assets at end
of period (in millions) $1,026 $ 73 $1,201 $ 79
<FN>
(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
and $0.095 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.
(f) The benefits derived from custody credits and directed brokerage arrangements had
no impact. Prior years' ratios are net of benefits received, if any.
</TABLE>
18
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -continued
<CAPTION>
Year ended October 31
=======================================================
1994 1993 1992
Class A Class B Class A Class B Class A Class B (a)
- ------- ------- ------- ------- ------- -------
<C> <C> <C> <C> <C> <C>
$11.460 $11.460 $10.750 $10.750 $10.800 $10.730
- ------- ------- ------- ------- ------- -------
0.821 0.741 0.819 0.737 0.796 0.286
(1.560) (1.560) 0.739 0.739 0.157 0.095
- ------- ------- ------- ------- ------- -------
(0.739) (0.819) 1.558 1.476 0.953 0.381
- ------- ------- ------- ------- ------- -------
(0.771) (0.691) (0.781) (0.706) (0.796) (0.286)
-- -- (0.067) (0.060) -- --
-- -- -- -- (0.207)(b) (0.075)(b)
- ------- ------- ------- ------- ------- -------
(0.771) (0.691) (0.848) (0.766) (1.003) (0.361)
- ------- ------- ------- ------- ------- -------
$ 9.950 $ 9.950 $11.460 $11.460 $10.750 $10.750
======= ======= ======= ======= ======= =======
(6.57%) (7.28%) 14.94% 14.11% 9.15% 3.47%(d)
======= ======= ======= ======= ======= =======
1.16% 1.91% 1.17% 1.92% 1.24% 1.99%(e)
7.80% 7.05% 7.37% 6.62% 7.36% 6.61%(e)
121% 121% 252% 252% 18% 18%
$ 1,278 $ 70 $1,736 $ 68 $1,809 $ 28
<FN>
- -------------------------------------------------------
State Tax Information (unaudited)
An average of 32% 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 (43% of
gross income) was derived from interest on direct U.S.
Treasury bonds, notes and bills.
</TABLE>
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 the 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, 1996, 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, 1996 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 10, 1996
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 on
most funds; $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. Dividends and capital gains must be
reinvested.
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.
Exchanges are not available on all funds. 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 7:00 pm ET. Transactions received after the close of the New York Stock
Exchange will receive the next business day's closing price.
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 1-800-426-3750 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 objective and operating policies of the Fund.
23
<PAGE>
[LOGO] COLONIAL
MUTUAL FUNDS
Mutual Funds for
Planned Portfolios
- --------------------------------------------------------------------------------
TRUSTEES
ROBERT J. BIRNBAUM
Retired (formerly Special Counsel, Dechert, Price & Rhoads; President and Chief
Operating Officer, New York Stock Exchange, Inc.)
TOM BLEASDALE
Retired (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust Company)
LORA S. COLLINS
Attorney (formerly Attorney, Kramer, Levin, Naftalis, Nessen, Kamin & Frankel)
JAMES E. GRINNELL
Private Investor (formerly Senior Vice President-Operations, The Rockport
Company)
WILLIAM D. IRELAND, JR.
Retired (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, CS 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
COLONIAL INVESTMENT SERVICES, INC., Distributor [Copyright] 1996
One Financial Center, Boston, Massachusetts 02111-2621, 617-426-3750
FS-02/978C-1096 M (12/96)
- --------------------------------------------------------------------------------
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