[LOGO]
COLONIAL
FEDERAL SECURITIES FUND
[PHOTO]
SEMIANNUAL REPORT
APRIL 30, 1997
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NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
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COLONIAL FEDERAL SECURITIES FUND HIGHLIGHTS
NOVEMBER 1, 1996 - APRIL 30, 1997
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:
o High current monthly income
o Longer-term total return potential
o A quality portfolio
Portfolio Manager Commentary: "The Fund's recently increased investment
flexibility has already benefited shareholders. Adding small amounts of
non-government securities has helped to increase income, add value and expand
diversification." -- Leslie Finnemore
Colonial Federal Securities Fund Performance
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Class A Class B
Inception dates 3/30/84 6/8/92
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Six-month distributions declared per share $0.333 $0.293
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SEC Yields on 4/30/97* 5.96% 5.52%
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Six-month total returns, assuming 1.08% 0.70%
reinvestment of all distributions and
no sales charge or contingent deferred
sales charge (CDSC)
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Net asset value per share on 4/30/97 $10.31 $10.31
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*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.
Portfolio Structure**
(as of 4/30/97)
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FNMAs...................31.34%
Treasury Securities.....31.22%
FHLMCs..................20.31%
GNMAs....................6.08%
Collateral Mortgage
Obligations.............5.87%
Whole Loans/Asset Backed
Securities..............5.18%
Average Life Breakdown**
(as of 4/30/97)
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0-5 years...............22.06%
5-10 years..............52.20%
10-20 years.............22.97%
20+ years................2.77%
** 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.
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2
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PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
I am pleased to present your Fund's semiannual report for the six months ended
April 30, 1997.
[PHOTO]
During this period, your Fund was managed against a backdrop of fluctuating
interest rates. This included the Federal Reserve Board raising short-term
interest rates in late March as a preemptive strike against inflation.
Although this interest rate fluctuation occurred within a somewhat limited
range, it did cause some volatility in the bond market. There were some market
rallies during periods of falling rates. However, long-term government bond
rates ultimately moved upward from 6.4% to 7.2%, hindering the performance of
mutual funds such as yours holding interest-rate-sensitive, fixed-income
securities. Looking forward, shareholders may yet be rewarded by this recent
rise in interest rates, since we believe the long-term trend is for declining
rates.
Despite the volatile interest rate environment over the past six months, the
Fund managed a solid positive performance. This report will provide you with a
closer look at that performance and the portfolio manager's investment strategy,
which included taking advantage of the Fund's recently increased flexibility to
invest in non-government issues.
We thank you for the opportunity to help you meet your investment goals.
Respectfully,
/s/ Harold W. Cogger
Harold W. Cogger
President
June 13, 1997
Because market conditions change frequently, there can be no assurance that the
trends described in this report will continue, come to pass or affect the Fund
performance.
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3
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PORTFOLIO MANAGEMENT REPORT
Leslie Finnemore is portfolio manager of Colonial Federal Securities Fund and
vice president of Colonial Management Associates, Inc.
A Tough Interest Rate Environment
Over the past six months, the performance of Colonial Federal Securities Fund
was affected by one of the most basic principles of investing: When interest
rates rise, bond values decline.
While rates fluctuated up and down over the period, ultimately they shifted
higher, mostly due to a strong, growing economy. As expected, the Federal
Reserve Board raised short-term interest rates by 0.25% in late March. Because
the move was anticipated as a preemptive strike against inflation, the market's
response to it has been subdued and the resulting rise in long-term rates has
been softer than in previous cycles.
Despite this somewhat detrimental market for long-term bonds, active management
of the Fund enabled it to perform in line with the Lehman Brothers Intermediate
Government Bond Index. This unmanaged index tracks the performance of government
bonds with maturities of ten years or less. The Fund's total return also
outpaced five-year Treasurys. There are several reasons for this satisfactory
performance:
1. Added Exposure to Mortgage-backed Securities
We found value in the mortgage-backed market toward year-end, so we increased
our weighting in that sector. At times we had over 87% of the portfolio invested
in mortgage-backed securities, and this strategy paid off. Over the six-month
period these securities outperformed Treasurys with comparable maturities.
2. Managed Interest Rate Sensitivity
Because interest rates fluctuated within a relatively defined range compared to
the past, we believed it did not reflect a broader bearish trend. We made modest
changes to the Fund's interest rate sensitivity in this environment. We bought
more conservative investments when interest rates fell to 6.35% in February,
investing more aggressively as interest rates peaked at 7.20% in April.
3. Increased Investment Flexibility
In February, the Board of Trustees approved a plan to increase the Fund's
investment flexibility. The Fund can now invest in investment-grade quality
non-government debt securities. One purpose for recommending this was to improve
the Fund's total return potential. These issues also provide added
diversification -- which may lower the portfolio's overall risk. While we are
allowed to invest up to 35% in non-government issues, we are moving very
conservatively into this sector with only five to six percent at end of the
period.
Even in this small amount, these issues have already added value and income
benefits to shareholders.
Shareholders Could Be Rewarded in the Future
Long-term bonds are a long-term asset. While higher interest rates hurt the Fund
in the short-term, the fact that long-term rates went above 7% may actually
represent value for the long-term investor. That's because we believe the next
trend in the economic cycle is for slower growth and declining interest rates.
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4
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While we believe the Federal Reserve Board may raise rates slightly once or
twice more in coming months, this effect may be muted and ultimately rates will
decline. When they do, the Fund and its shareholders should benefit from another
basic principle of investing: falling interest rates customarily bring rising
bond values. In the meantime, we'll continue to actively manage the Fund to seek
consistent returns while managing risk.
Colonial Federal Securities Fund Investment Performance vs.
The Lehman Brothers Intermediate Government Bond Index
Change in Value of $10,000 from 4/30/87 - 4/30/97
Based on NAV and MOP for Class A Shares
[The following table was represented as a mountain chart
in the printed material]
AS OF DATE NAV MOP LEHMAN
4/30/87 10,000 9,525 $10,000
7/31/87 9,949.255 9,476.665 10,118
10/31/87 9,903.706 9,433.28 10,262
1/31/88 10,643.91 10,138.32 10,683
4/30/88 10,402.95 9,908.812 10,732
7/31/88 10,516.45 10,016.92 10,822
10/31/88 11,109.69 10,581.98 11,176
1/31/89 11,261.27 10,726.36 11,201
4/30/89 11,479.12 10,933.86 11,432
7/31/89 12,259.67 11,677.33 12,193
10/31/89 12,489.62 11,896.36 12,339
1/31/90 12,297.94 11,713.79 12,420
4/30/90 12,077.53 11,503.85 12,439
7/31/90 12,877.96 12,266.26 13,053
10/31/90 12,845.84 12,235.66 13,304
1/31/91 13,599.62 12,953.64 13,833
4/30/91 13,875.9 13,216.79 14,138
7/31/91 14,029.45 13,363.05 14,383
10/31/91 14,815.18 14,111.46 15,076
1/31/92 15,226.67 14,503.4 15,473
4/30/92 15,294.11 14,567.64 15,599
7/31/92 16,028.43 15,267.08 16,367
10/31/92 16,171.15 15,403.02 16,561
1/31/93 16,905.06 16,102.07 17,017
4/30/93 17,553.03 16,719.26 17,467
7/31/93 18,131.45 17,270.21 17,707
10/31/93 18,588.04 17,705.1 18,086
1/31/94 18,716.28 17,827.26 18,250
4/30/94 17,463.74 16,634.21 17,622
7/31/94 17,706.31 16,865.26 17,870
10/31/94 17,367.79 16,542.82 17,777
1/31/95 17,812.38 16,966.29 18,045
4/30/95 18,671.86 17,784.94 18,708
7/31/95 19,540.21 18,612.05 19,368
10/31/95 20,288.2 19,324.51 19,874
1/31/96 21,142.88 20,138.6 20,486
4/30/96 20,048.18 19,095.89 20,118
7/31/96 20,213.9 19,253.74 20,375
10/31/96 21,074.99 20,073.93 21,000
1/31/97 21,249.28 20,239.94 21,221
4/30/97 21,301.75 20,289.91 $21,373
A $10,000 investment in Class B shares made on June 8, 1992 (inception) at net
asset value (NAV) would have been valued at $13,193 on April 30, 1997. The same
investment after deducting the applicable contingent deferred sales charge
(CDSC) would have grown to $13,001 on April 30, 1997.
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.
Average Annual Total Returns
As of 3/31/97 (Most Recent Quarter End)
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Class A Shares Class B Shares
Inception 3/30/84 Inception 6/8/92
NAV MOP NAV w/CDSC
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1 year 3.35% (1.56)% 2.58% (2.26)%
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5 years 6.55 5.52 -- --
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10 years 7.24 6.72 -- --
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Since inception 9.14 8.74 5.52 5.20
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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) returns do not
include sales charges or contingent deferred sales charge (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.
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5
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INVESTMENT PORTFOLIO
APRIL 30, 1997 (UNAUDITED, IN THOUSANDS)
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - 112.1% PAR VALUE
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GOVERNMENT AGENCIES - 75.2%
MATURITIES
COUPON FROM/TO
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Federal Home Loan Mortgage Corp.:
6.000% 2012 (a) $ 12,000 $ 11,430
6.500% 2012-2027 (a) 151,450 144,841
7.000% 2012 (a) 15,000 14,864
7.500% 2010-2016 30,974 31,241
8.000% 2003-2016 4,212 4,323
8.500% 2007-2010 3,291 3,431
8.750% 2004-2010 1,337 1,393
9.000% 2001-2022 6,856 7,216
9.250% 2008-2016 5,248 5,537
9.500% 2004-2016 2,333 2,519
9.750% 2008-2016 898 967
10.000% 2019 2,590 2,842
10.250% 2009-2013 1,315 1,438
10.500% 2017-2020 1,869 2,052
11.250% 2003-2016 2,028 2,253
11.500% 2015 154 173
12.000% 2013 81 91
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236,611
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Collateralized Mortgage Obligations:
5.000% 2013 11,332 10,808
6.500% 2014 17,853 16,559
6.750% 2020-2021 26,878 25,752
8.500% 2021 1,458 1,478
8.750% 2020 13,490 13,798
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68,395
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Federal National Mortgage Association:
6.000% 2008-2024 79,321 74,678
6.500% 2003-2026 61,936 58,459
6.500% 2024 (a) 18,000 17,471
7.000% 2010-2025 97,871 95,789
7.000% 2050 (a) 47,000 45,531
7.500% 2006-2050 3,688 3,740
7.500% 2050 (a) 34,000 34,255
8.000% 2008-2019 3,450 3,546
8.250% 2008-2011 1,408 1,426
6
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Investment Portfolio/April 30, 1997
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8.500% 2008-2017 $ 5,957 $ 6,200
9.000% 2002-2021 20,957 21,938
9.500% 2008-2018 1,838 1,979
10.500% 2004 22 24
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365,036
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Government National Mortgage Association:
6.500% 2023-2025 3,301 3,109
7.500% 2006-2007 1,155 1,158
8.000% 2005-2008 87 89
9.000% 2008-2017 8,958 9,524
9.500% 2009-2019 25,682 27,658
10.000% 2000-2003 366 388
10.500% 2013-2021 15,319 16,975
11.000% 2010 4 5
11.500% 2013-2015 57 65
11.750% 2013-2015 245 282
12.000% 2012-2015 883 1,019
12.500% 2010-2014 6,314 7,352
13.000% 2011-2015 2,729 3,206
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70,830
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TOTAL GOVERNMENT AGENCIES (cost of $728,274) 740,872
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GOVERNMENT OBLIGATIONS - 36.9%
U.S. Treasury Bonds:
8.125% 08/15/19 10,725 12,000
8.750% 08/15/00 (b) 17,000 20,265
12.000% 08/15/13 (b) 91,051 126,874
12.750% 11/15/10 (b) 46,873 64,597
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223,736
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U.S. Treasury Notes:
5.750% 10/31/00 15,071 14,729
5.875% 02/15/00 (b) 30,000 29,597
6.250% 04/30/02 (b) 8,946 8,967
6.625% 06/30/01 17,500 17,547
10.375% 11/15/12 (b) 53,118 66,754
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137,594
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U.S. Treasury STRIP:
11/15/08 5,000 2,269
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TOTAL GOVERNMENT OBLIGATIONS (cost of $379,933) 363,599
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TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (cost of $1,108,207) 1,104,471
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7
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Investment Portfolio/April 30, 1997
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ASSET BACKED SECURITIES & NON AGENCY
MORTGAGE-BACKED SECURITIES - 6.1% PAR VALUE
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ASSET- BACKED SECURITIES - 3.9%
Cityscape Home Equity Loan Trust,
7.850% 04/25/08 $6,500 $ 6,634
Empire Funding Home Loan Owner Trust,
7.510% 03/25/23 4,000 4,021
Preferred Mortgage Asset Trust,
7.900% 05/25/12 4,660 4,722
Team Fleet Financing Corp.,
7.350% 10/15/02 2,900 2,906
The Money Store Home Equity Trust:
7.910% 05/15/24 9,225 9,430
8.525% 06/15/25 2,800 2,868
The Money Store Home Improvement Trust,
8.070% 05/15/23 5,875 5,864
UCFC Home Equity Loan Trust,
8.550% 01/10/20 1,800 1,877
38,322
NON AGENCY MORTGAGE- BACKED SECURITIES- 2.2%
CS First Boston Mortgage Securities Corp.,
7.500% 06/01/20 (c) 14,488 14,384
Prudential Home Mortgage Securities,
6.456% 12/28/08 1,664 1,632
Structured Mortgage Asset Residential Trust,
8.375% 06/25/08 4,602 4,697
Tryon Mortgage Funding, Inc.,
7.500% 05/15/23 1,249 1,219
21,932
TOTAL ASSET BACKED & NON-AGENCY
MORTGAGE BACKED SECURITIES (cost $60,524) 60,254
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TOTAL INVESTMENTS -118.2% (cost of $1,168,731) (d) 1,164,725
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SHORT-TERM OBLIGATIONS - 7.4%
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Repurchase agreement with Chase Securities, Inc.,
dated 04/30/97, due 05/01/97 at 5.340%, collateralized
by U.S. Treasury notes with various maturities
to 2016, market value $75,264 (repurchase proceeds
$73,173) 73,162 73,162
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OTHER ASSETS & LIABILITIES, NET - (25.6)% (252,084)
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NET ASSETS - 100.0% $ 985,803
=========
8
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Investment Portfolio/April 30, 1997
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NOTES TO INVESTMENT PORTFOLIO:
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(a) These securities 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.
(b) These securities, or a portion thereof, with a total market value of
$290,862 are being used to collateralize the delayed delivery purchases
indicated in note (a) above.
(c) Securities exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At April 30,
1997, the value of these securities amounted to $14,384 or 1.5% of net
assets.
(d) Cost for federal income tax purposes is $1,169,165.
Acronym Name
------------------ ------------------------------------------------------
STRIP Separately Traded Receipt for Interest and Principal
See notes to financial statements.
9
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STATEMENT OF ASSETS & LIABILITIES
APRIL 30, 1997 (UNAUDITED)
(in thousands except for per share amounts and footnotes)
ASSETS
Investments at value (cost $1,168,731) $ 1,164,725
Short-term obligations 73,162
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1,237,887
Receivable for:
Investments sold $ 66,207
Interest 13,358
Fund shares sold 50
Other 532 80,147
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Total Assets 1,318,034
LIABILITIES
Payable for:
Investments purchased 325,001
Distributions 5,253
Fund shares repurchased 1,855
Accrued:
Deferred Trustees fees 8
Other 114
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Total Liabilities 332,231
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NET ASSETS $ 985,803
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Net asset value & redemption price per share -
Class A ($919,985/89,219) $ 10.31
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Maximum offering price per share - Class A
($10.310/0.9525) $ 10.82(a)
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Net asset value & offering price per share -
Class B ($65,818/6,383) $ 10.31(b)
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COMPOSITION OF NET ASSETS
Capital paid in $ 1,248,183
Overdistributed net investment income (4,939)
Accumulated net realized loss (253,435)
Net unrealized depreciation (4,006)
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$ 985,803
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(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.
10
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STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
(in thousands)
INVESTMENT INCOME
Interest $ 38,576
Dollar roll fee income 2,972
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41,548
EXPENSES
Management fee $ 3,420
Service fee 1,321
Distribution fee - Class B 288
Transfer agent 1,186
Bookkeeping fee 187
Trustees fee 42
Custodian fee 54
Audit fee 27
Legal fee 9
Registration fee 20
Reports to shareholders 11
Other 68 6,633
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Net Investment Income 34,915
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NET REALIZED & UNREALIZED LOSS ON PORTFOLIO POSITIONS
Net realized loss (2,147)
Net unrealized depreciation during
the period (21,215)
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Net Loss (23,362)
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Net Increase in Net Assets from Operations $ 11,553
=========
See notes to financial statements.
11
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STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
Six months
ended Year ended
(in thousands) April 30 October 31
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INCREASE (DECREASE) IN NET ASSETS 1997 1996
Operations:
Net investment income $ 34,915 77,830
Net realized loss (2,147) (19,569)
Net unrealized depreciation (21,215) (15,864)
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Net Increase from Operations 11,553 42,397
Distributions:
From net investment income - Class A (31,271) (71,821)
From paid in capital - Class A - (1,286)
From net investment income - Class B (2,161) (4,388)
From paid in capital - Class B - (79)
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(21,879) (35,177)
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Fund Share Transactions:
Receipts for shares sold - Class A 37,476 80,869
Value of distributions reinvested - Class A 15,570 35,050
Cost of shares repurchased - Class A (138,521) (258,356)
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(85,475) (142,437)
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Receipts for shares sold - Class B 16,625 14,215
Value of distributions reinvested - Class B 1,161 2,316
Cost of shares repurchased - Class B (23,787) (19,854)
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(6,001) (3,323)
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Net Decrease from Fund Share Transactions (91,476) (145,760)
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Total Decrease (113,355) (180,937)
NET ASSETS
Beginning of period 1,099,158 1,280,095
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End of period (net of overdistributed net
investment income of $4,939 and $6,119,
respectively) $ 985,803 1,099,158
=========== ============
NUMBER OF FUND SHARES
Sold - Class A 3,568 7,582
Issued for distributions reinvested - Class A 1,487 3,329
Repurchased - Class A (13,280) (24,368)
----------- ------------
(8,225) (13,457)
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Sold - Class B 1,575 1,342
Issued for distributions reinvested - Class B 111 221
Repurchased - Class B (2,275) (1,883)
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(589) (320)
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See notes to financial statements.
12
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STATEMENT OF CASH FLOWS
(in thousands) Six months ended April 30, 1997
---------------------------------
NET CHANGE IN CASH
Cash flows from operating activities:
Interest received $ 38,044
Dollar roll fee income received 2,916
Operating expenses paid (6,584)
------------
Net cash provided by operating activities $ 34,376
Cash flows from investing activities:
Purchases of securities and
short-term obligations (2,317,866)
Proceeds from sales of securities and
short-term obligations 2,409,389
------------
Net cash provided by investing activities 91,523
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NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES 125,899
Cash flows from financing activities:
Proceeds from shares sold 54,280
Cost of shares repurchased (162,638)
Cash dividends paid (17,533)
------------
Net cash used by financing activities (125,891)
----------
Net change in cash 8
Cash - beginning of period (7)
----------
Cash - end of period $ 1
==========
RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET
CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES:
Net increase in net
assets resulting from operations $ 11,553
Decrease in investments $ 155,257
Increase in interest and fees receivable (46)
Increase in receivable from investment
securities sold (64,974)
Increase in payable for
investment securities purchased 24,072
Decrease in other assets 28
Increase in accrued expenses and liabilities 9
------------
Total 114,346
----------
Net cash provided by operating
and investing activities $ 125,899
==========
See notes to financial statements.
13
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NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997 (UNAUDITED)
NOTE 1. INTERIM FINANCIAL STATEMENTS
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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, 1997, 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
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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 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 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 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.
14
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Notes to Financial Statements/April 30, 1997
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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 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), and 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 and does not
include any short-term investments as of April 30, 1997.
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
15
<PAGE>
Notes to Financial Statements/April 30, 1997
- --------------------------------------------------------------------------------
NOTE 2. ACCOUNTING POLICIES - CONT.
- --------------------------------------------------------------------------------
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 3. 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:
Average Net Assets Annual Fee Rate
-------------------- -----------------
First $1 billion 0.65%
Next $1 billion 0.60%
Next $1 billion 0.50%
Over $3 billion 0.40%
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:
Average Net Assets Annual Fee Rate
-------------------- -----------------
First $50 million No charge
Next $950 million 0.035%
Next $1 billion 0.025%
Next $1 billion 0.015%
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.
16
<PAGE>
Notes to Financial Statements/April 30, 1997
- --------------------------------------------------------------------------------
NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES - CONT.
- --------------------------------------------------------------------------------
Effective January 1, 1997 and continuing through calendar year 1997, the
Transfer Agent fee will be reduced by 0.01% in cumulative monthly increments,
resulting in a decrease in the fee from 0.18% to 0.17% annually.
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 six months ended April 30, 1997, the Fund has
been advised that the Distributor retained net underwriting discounts of $12,768
on sales of the Fund's Class A shares and received contingent deferred sales
charges (CDSC) of $159,256 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, 1997, purchases and
sales of investments, other than short-term obligations and mortgage dollar roll
transactions, were $293,576,252 and $683,085,402, respectively.
Unrealized appreciation (depreciation) at April 30, 1997, based on cost of
investments for federal income tax purposes was:
Gross unrealized appreciation $ 16,564,405
Gross unrealized depreciation (21,004,003)
--------------
Net unrealized depreciation (4,439,598)
--------------
17
<PAGE>
Notes to Financial Statements/April 30, 1997
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO INFORMATION - CONT.
- --------------------------------------------------------------------------------
Information regarding dollar roll transactions that are other than normal
settlement are as follows:
Maximum amount outstanding during the period $ 385,098,750
Average amount outstanding during the period $ 150,344,952
Amount outstanding at April 30, 1997 $ 324,925,688
The average amount outstanding during the period was calculated by totaling
borrowings at the end of each day and dividing the sum by the number of days in
the period ended April 30, 1997.
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: follows:
Year of Capital loss
expiration carryforward
----------- -------------
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
-------------
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.
18
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each
period are as follows:
<TABLE>
<CAPTION>
(Unaudited)
Six months ended
April 30 Year ended October 31
------------------------------ ---------------------------
1997 1996
Class A Class B Class A Class B
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 10.530 $ 10.530 $ 10.830 $ 10.830
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.340 0.300 0.696 0.617
Net realized and
unrealized loss (0.227) (0.227) (0.300) (0.300)
---------- ---------- ---------- ----------
Total from Investment
Operations 0.113 0.073 0.396 0.317
---------- ---------- ---------- ----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net
investment income (0.333) (0.293) (0.684) (0.606)
From capital
paid in -- -- (0.012) (0.011)
---------- ---------- ---------- ----------
Total Distributions
Declared to
Shareholders (0.333) (0.293) (0.696) (0.617)
---------- ---------- ---------- ----------
Net asset value -
End of period $ 10.310 $ 10.310 $ 10.530 $ 10.530
========== ========== ========== ==========
Total return (a) 1.08%(b) 0.7%(b) 3.88% 3.11%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS
Expenses (d) 1.2%(c) 1.95%(c) 1.18% 1.93%
Net investment income(d) 6.66%(c) 5.91%(c) 6.62% 5.87%
Portfolio turnover 30%(b) 30%(b) 125% 125%
Net assets at end
of period (in millions) $ 920 $ 66 $ 1,026 $ 73
</TABLE>
(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.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
19
<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 -- -- -- --
---------- ---------- ---------- ----------
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
<CAPTION>
Year ended October 31
----------------------------------------------------------
1993 1992
Class A Class B Class A Class B
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 10.750 $ 10.750 $ 10.800 $ 10.730
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.819 0.737 0.796 0.286
Net realized and
unrealized gain (loss) 0.739 0.739 0.157 0.095
---------- ---------- ---------- ----------
Total from Investment
Operations 1.558 1.476 0.953 0.381
---------- ---------- ---------- ----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net
investment income (0.781) (0.706) (0.796) (0.286)
From net realized gains (0.067) (0.060) -- --
From capital
paid in -- -- (0.207)(b) (0.075)(b)
---------- ---------- ---------- ----------
Total Distributions
Declared to
Shareholders (0.848) (0.766) (1.003) (0.361)
---------- ---------- ---------- ----------
Net asset value -
End of period $ 11.460 $ 11.460 $ 10.750 $ 10.750
========== ========== ========== ==========
Total return (c) 14.94% 14.11% 9.15% 3.47%(d)
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 1.92% 1.24% 1.99(e)
Net investment income 7.37% 6.62% 7.36% 6.61(e)
Portfolio turnover 252% 252% 18% 18%
Net assets at end
of period (in millions) $ 1,736 $ 68 $ 1,809 $ 28
</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 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.
20 & 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.
Literature - 1-800-426-3750
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
Colonial 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 objectives 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
Partner, Development Capital, L.L.C. (formerly Dean, College of Business and
Management, University of Maryland; 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.
Retired (formerly Chairman of the Board and 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
Retired Partner, Peat Marwick Main & Co. (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 (C) 1997
A Liberty Financial Company (NYSE:L)
One Financial Center, Boston, Massachusetts 02111-2621, 617-426-3750
FS-03/667D-0497 M (6/97)
- --------------------------------------------------------------------------------
