Quality government bonds
can add diversification to
your portfolio.
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
COLONIAL GOVERNMENT FUNDS Annual Report, August 31, 1998
- --------------------------------------------------------------------------------
o COLONIAL SHORT DURATION U.S. GOVERNMENT FUND
o COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND
o COLONIAL FEDERAL SECURITIES FUND
<PAGE>
President's Message
What's inside:
o The market environment for bonds has continued to be positive.
o Management strategies that helped the Funds beat their respective Lipper
peer averages during the 12-month period.
o Your Fund's holdings and individual performance.
- -------------------------------------
Not FDIC May Lose Value
Insured No Bank Guarantee
- -------------------------------------
[PHOTO OMITTED]
Dear shareholders
In June 1998, Harold Cogger retired as president of Colonial's government funds.
I would like to take this opportunity to thank him for his guidance over the
past few years and to wish him well. As the new president of the funds, I am
pleased to present the annual report for the 12 months ended August 31, 1998.
The past twelve months have been favorable for investors in government bond
funds. Bond prices rose substantially as interest rates on the 30-year Treasury
bond dropped from 6.61% to 5.27% over the course of the year. This significant
decline in interest rates resulted from a slowdown in the economy's growth rate,
continued low inflation and the Federal Reserve Board's shift to a neutral
monetary policy.
A major contributing factor to this favorable investment environment was Asia's
weakening economies. Near the end of the period, a monetary and political crisis
in Russia emerged. Financial markets worldwide worried that this crisis along
with continued weakness in Asia would result in a global economic slowdown. As a
result, the world's major stock markets declined as investors sought a haven in
strong currencies, such as the U.S. dollar, and relatively stable investments,
such as U.S. Treasury securities. This "flight to quality" increased demand for
U.S. government bonds, and interest rates fell further.
In July, Federal Reserve Board Chairman Alan Greenspan spoke before Congress in
his semiannual testimony. He suggested several reasons to expect a slowdown in
economic growth. His comments signaled that no interest rate increases were
imminent. Subsequent comments by Mr. Greenspan suggested that the effects of
global financial market activity on the U.S. economy might possibly lead to an
interest rate cut which came to pass on September 29, when the Federal Funds
rate was lowered by 0.25%.The government bond market rallied in response to
these comments.
Your portfolio managers' investment strategies positioned the funds to take
advantage of the declining interest rate environment during the period. For the
12 months ended August 31, 1998, Class A shares of each fund achieved the
following net asset value (NAV) pre-load total returns:
Colonial Short Duration U.S. Government Fund: 6.64%
Colonial Intermediate U.S. Government Fund: 9.87%
Colonial Federal Securities Fund: 12.11%
We thank you for giving us the opportunity to help you meet your financial
goals, and we hope to continue serving you in the years to come.
Respectfully,
/s/ Stephen E. Gibson
Stephen E. Gibson, President
October 14, 1998
Important notes: Returns and value of an investment will vary, resulting in a
gain or a loss on sale.
All results shown assume reinvestment of distributions.
Net asset value (NAV) returns do not include sales charges or contingent
deferred sales charges (CDSC).
Public offering price (POP) returns include the maximum initial sales charge:
For Colonial Short Duration U.S. Government Fund: 3.25%. For Colonial
Intermediate U.S. Government Fund and Federal Securities Fund: 4.75%.
The CDSC returns reflect the maximum sales charge on the following schedule:
For Colonial Short Duration U.S. Government Fund: 4% for 1 year on Class B
shares, 1% for 1 year on Class C shares. For Colonial Intermediate U.S.
Government Fund and Federal Securities Fund: 4% for 1 year and 2% for 5 years on
Class B shares, 1% for 1 year on Class C shares.
If the Advisor and/or Distributor had not borne or waived certain Fund expenses,
total returns would have been lower. Performance for different share classes
will vary based on the differences in sales charges and fees associated with
each class. Because the Funds are actively managed, there can be no guarantee
the Funds will continue to maintain the portfolio structure and average life
shown in the future.
Because market conditions change frequently, there can be no assurance that the
trends described in this report will continue.
<PAGE>
Portfolio Managers' Report
- --------------------------------------------------------------------------------
A rewarding market for bond investors
- --------------------------------------------------------------------------------
When you consider both risk and return, Treasury bonds have been attractive for
several reasons:
1. Substantial inflation-adjusted returns. While current interest rates seem
low, they are high relative to inflation, as illustrated on the chart below.
Since many countries are experiencing economic weakness, we expect the products
we import from them to remain inexpensive. This, in turn, limits the ability of
U.S. manufacturers to increase prices on their goods. Together, these trends
suggest that inflation should remain under control.
2. U.S. government securities have provided a haven. The U.S. has provided a
haven for fixed-income investors worldwide. Comparatively high U.S. interest
rates as well as a stable currency are attractive to foreign investors,
particularly in light of recent market volatility around the globe.
3. Declining supply of government bonds. A federal budget surplus -- the first
in 29 years -- has reduced the U.S. Treasury's need to issue bonds. As the
supply of Treasury issues drops, stable or rising demand for these bonds may
drive down the interest rates the government must pay on them. In this
marketplace, the favorable supply and demand environment for U.S. Treasurys may
produce attractive returns.
Inflation vs. a 10-year Treasury note 1988 to 1998
Today's interest rates may seem low. However, when you compare interest rates
(i.e., the interest rate less the inflation rate) over the last 10 years, you
will see that your post-inflation return -- or real rate of return -- is higher
today than when interest rates were over 8% in the early `90s.
[The following table was represented as a mountain graph in the printed
material.]
Date 10-year T-note Inflation
- ---- -------------- ---------
Aug-88 9.236 4
Sep-88 8.935 4.2
Oct-88 8.644 4.2
Nov-88 9.054 4.2
Dec-88 9.137 4.4
Jan-89 8.98 4.7
Feb-89 9.295 4.8
Mar-89 9.275 5
Apr-89 9.053 5.1
May-89 8.6 5.4
Jun-89 8.077 5.2
Jul-89 7.804 5
Aug-89 8.25 4.7
Sep-89 8.286 4.3
Oct-89 7.909 4.5
Nov-89 7.826 4.7
Dec-89 7.935 4.6
Jan-90 8.418 5.2
Feb-90 8.515 5.3
Mar-90 8.628 5.2
Apr-90 9.022 4.7
May-90 8.599 4.4
Jun-90 8.412 4.7
Jul-90 8.341 4.8
Aug-90 8.846 5.6
Sep-90 8.795 6.2
Oct-90 8.617 6.3
Nov-90 8.252 6.3
Dec-90 8.067 6.1
Jan-91 8.007 5.7
Feb-91 8.033 5.3
Mar-91 8.061 4.9
Apr-91 8.013 4.9
May-91 8.059 5
Jun-91 8.227 4.7
Jul-91 8.147 4.4
Aug-91 7.816 3.8
Sep-91 7.445 3.4
Oct-91 7.46 2.9
Nov-91 7.376 3
Dec-91 6.699 3.1
Jan-92 7.274 2.6
Feb-92 7.25 2.8
Mar-92 7.528 3.2
Apr-92 7.583 3.2
May-92 7.318 3
Jun-92 7.121 3.1
Jul-92 6.709 3.2
Aug-92 6.604 3.1
Sep-92 6.354 3
Oct-92 6.789 3.2
Nov-92 6.937 3
Dec-92 6.686 2.9
Jan-93 6.359 3.3
Feb-93 6.02 3.2
Mar-93 6.024 3.1
Apr-93 6.009 3.2
May-93 6.149 3.2
Jun-93 5.776 3
Jul-93 5.807 2.8
Aug-93 5.448 2.8
Sep-93 5.382 2.7
Oct-93 5.426 2.8
Nov-93 5.819 2.7
Dec-93 5.794 2.7
Jan-94 5.642 2.5
Feb-94 6.129 2.5
Mar-94 6.738 2.5
Apr-94 7.042 2.4
May-94 7.147 2.3
Jun-94 7.32 2.5
Jul-94 7.111 2.8
Aug-94 7.173 2.9
Sep-94 7.603 3
Oct-94 7.807 2.6
Nov-94 7.906 2.7
Dec-94 7.822 2.7
Jan-95 7.581 2.8
Feb-95 7.201 2.9
Mar-95 7.196 2.9
Apr-95 7.055 3.1
May-95 6.284 3.2
Jun-95 6.203 3
Jul-95 6.426 2.8
Aug-95 6.284 2.6
Sep-95 6.182 2.5
Oct-95 6.02 2.8
Nov-95 5.741 2.6
Dec-95 5.572 2.5
Jan-96 5.58 2.7
Feb-96 6.098 2.7
Mar-96 6.327 2.8
Apr-96 6.67 2.9
May-96 6.852 2.9
Jun-96 6.711 2.8
Jul-96 6.794 3
Aug-96 6.943 2.9
Sep-96 6.703 3
Oct-96 6.339 3
Nov-96 6.044 3.3
Dec-96 6.148 3.3
Jan-97 6.494 3
Feb-97 6.552 3
Mar-97 6.903 2.8
Apr-97 6.718 2.5
May-97 6.659 2.2
Jun-97 6.5 2.3
Jul-97 6.01 2.2
Aug-97 6.339 2.2
Sep-97 6.102 2.2
Oct-97 5.831 2.1
Nov-97 5.874 1.8
Dec-97 5.741 1.7
Jan-98 5.505 1.6
Feb-98 5.622 1.4
Mar-98 5.654 1.4
Apr-98 5.671 1.4
May-98 5.552 1.7
Jun-98 5.446 1.7
Jul-98 5.494 1.7
Aug-98 4.976 1.6
Source: Bloomberg -- all rights reserved.
3
<PAGE>
Portfolio Managers' Report
What is Duration?
Duration is a measure of a bond mutual fund's price sensitivity to interest rate
movements. It is a mathematical calculation that assesses such factors as the
maturities of the bonds in a fund's portfolio, coupon rates and how often they
are paid, and prevailing market interest rates. In government bond funds,
interest rate risk is the primary consideration. Therefore, the specific
benefits and risks of these funds vary by their duration.
- --------------------------------------------------------------------------------
Strategy produced above-average returns
- --------------------------------------------------------------------------------
Our expectation that interest rates would decline and inflation would remain low
led us to keep duration long. We kept each fund's duration in the upper half of
its allowable range, consistent with its respective risk profile. This strategy
resulted in above-average price gains during a period when long-term interest
rates declined 134 basis points. All three of Colonial's government funds
outperformed their respective Lipper peer group averages for the 12 months ended
August 31, 1998.
Our strategy emphasized securities that would generate larger price gains in
response to falling interest rates. As a rule, when interest rates fall,
longer-term bonds rise in price more than shorter-term securities. For this
reason, we sought to achieve a relatively high duration for each fund, as well
as a significant investment in Treasury securities.
We managed our investments in mortgage-backed securities to reduce refinancing
risk. As interest rates fall, the risk of homeowners refinancing their mortgages
increases. Increased prepayments and supply have a negative effect on
mortgage-backed securities. Therefore, while we continued to have a sizable
investment in mortgage-backed securities, we did reduce the proportion of these
securities in the Funds. We also reduced the average coupon rate of the
securities that we owned. We believe that the Funds are well-positioned for the
time when mortgage-backed securities return to favor.
- --------------------------------------------------------------------------------
Lipper Rankings as of August 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Colonial Short Duration Colonial Intermediate U.S. Colonial Federal
U.S. Government Fund Government Fund Securities Fund
Rank out of total Rank out of total number Rank out of total
number of Short U.S. of Intermediate U.S. number of General U.S.
Government Funds Government Funds Government Funds
---------------- ---------------- ----------------
<S> <C> <C> <C>
1 year 33 44 21
out of 77 out of 117 out of 187
- ---------------------------------------------------------------------------------------------------
3 years 13 35 26
out of 58 out of 96 out of 151
- ---------------------------------------------------------------------------------------------------
5 years 8 17 23
out of 39 out of 59 out of 94
- ---------------------------------------------------------------------------------------------------
10 years n/a 14 7
out of 16 out of 52
- ---------------------------------------------------------------------------------------------------
</TABLE>
These rankings are as of 8/31/98 as calculated by Lipper Analytical Services,
Inc. Rankings are based on total returns for Class A shares, and reflect
reinvestment of dividends and capital gains and do not assume deduction of sales
charges.
4
<PAGE>
Portfolio managers' report
- --------------------------------------------------------------------------------
A central principle of portfolio theory is that diversification reduces risk.
Historical data show that government bonds provided a higher average total
return than large-cap stocks in bear markets since 1929. Recent events hint that
the bull market of the past 10 years may be coming to a close. However, even in
a strong growth market, investing a portion of your portfolio in bonds would
have provided returns similar to stocks, with reduced risk as shown in the chart
below.
As an investor in a mutual fund, you can take advantage of professional
expertise in selecting a diversified portfolio of bonds as well as in actively
managing the portfolio to reduce risk. As portfolio managers, we work to
anticipate changes in interest rates and to respond to them in a way that will
reduce interest rate risk. Interest rate risk is the possibility that interest
rates will rise, causing existing bonds to lose principal value. We manage this
risk by adjusting each fund's duration within its allowable range as well as by
adjusting sector weightings to manage the overall interest rate risk/return
profile of each fund.
Similar return with reduced volatility
Historically, diversifying a hypothetical stock portfolio with 25% government
bonds has provided almost 95% of the return of the stock market and has reduced
volatility by nearly 14% over the last 10 years.
[The following table was represented as a bar graph in the printed material.]
Total return Risk
100% large-cap stocks 17.02% 13.00%
75% large-cap stocks, 25% bonds 15.94% 11.19%
Source: Colonial Managment Associates, Inc. Colonial's government bond funds
invest a portion of their portfolios in bonds with significantly shorter
durations than long-term government bonds.
Stocks are represented by the Standard & Poor's 500 Index. Long-term bond
performance was provided by Ibbotson Associates. Volatility is measured by
standard deviation. Both returns and volatility are annualized and cover the
10-year period ended 8/31/98. Unlike mutual funds, indexes are not investments
and do not incur fees. It is not possible to invest in an index. These results
do not represent past, current or future performance of any fund.
Past performance cannot guarantee future results.
5
<PAGE>
Portfolio managers' report
- --------------------------------------------------------------------------------
Colonial provides three different government bond portfolios, each focused on a
different duration range. Colonial Short Duration U.S. Government Fund is the
most conservative of the three Funds and is managed for low price volatility.
Colonial Intermediate U.S. Government Fund has a slightly longer duration and is
designed to offer increased return potential with slightly more risk. Colonial
Federal Securities Fund has the longest duration, greatest long-term return
potential and highest risk to principal. It also has the flexibility to invest
up to 35% of the portfolio in conservative, investment-grade quality,
non-government securities.
The following pages provide more complete information about how each fund was
managed during the past year.
/s/ Leslie W. Finnemore /s/ Ann T. Peterson /s/ William C. Hill
Leslie W. Finnemore Ann T. Peterson William C. Hill
Your management team
Leslie W. Finnemore, Ann T. Peterson and William C. Hill are vice presidents of
Colonial Management Associates, Inc. Ms. Finnemore has served as manager or
co-manager of Colonial Short Duration U.S. Government Fund and Colonial
Intermediate U.S. Government Fund since inception and Colonial Federal
Securities Fund since 1993. Ms. Peterson has managed or co-managed Colonial
Short Duration U.S. Government Fund since 1993. She has also co-managed Colonial
Intermediate U.S. Government Fund since 1994. Prior to 1993, she was an
associate portfolio manager and taxable bond analyst for the firm. Prior to
joining Colonial in 1996, Mr. Hill was a mortgage analyst. Together, they have
more than 35 years experience in professional money management.
Colonial's government bond funds
Over time, you can expect a longer duration fund to deliver higher returns, but
it also carries more risk.
[The following table was represented as a chart in the printed material.]
Total Returns for 1 year ended 8/31/98
<TABLE>
<CAPTION>
Duration Range
-----------------------------------------------------------------
Less than 3 years 2.5 - 5.5 years 4.5 - 7.5 years
----------------- --------------- ---------------
<S> <C> <C> <C>
Colonial Short Duration U.S. Government Fund 6.64%
Colonial Intermediate U.S. Government Fund 9.87%
Colonial Federal Securities Fund 12.11%
</TABLE>
Source: Colonial Management Associates, Inc. Results shown are Class A share
total returns based on net asset value for one year ended 8/31/98 versus the
duration range for each Fund. Interest rates generally declined during the
period. While you can expect longer duration funds to produce better returns
over the long term, short-term results may vary significantly. Past performance
cannot predict future results.
6
<PAGE>
Fund Facts: 8/31/98
Duration
1.76 years
Last 12 months' distributions
Class A $0.562
- ----------------------------------------
Class B $0.495
- ----------------------------------------
Class C $0.541
- ----------------------------------------
SEC yield(1)
Class A 4.78%
- ----------------------------------------
Class B 4.25%
- ----------------------------------------
Class C 4.74%
- ----------------------------------------
Average life breakdown
(As a percentage of net assets)
0 - 2 years 41.87%
- ----------------------------------------
2 - 4 years 33.72%
- ----------------------------------------
4 - 6 years 14.64%
- ----------------------------------------
6 - 8 years 2.22%
- ----------------------------------------
8 - 10 years 4.82%
- ----------------------------------------
More than 10 years 2.73%
- ----------------------------------------
[The following table was represented as a pie chart in the printed material.]
Sector breakdown
(As a percentage of net assets)
Adjustable Rate Mortgage Securities 14.35%
Cash & Other 25.26%
Treasury Securities 30.11%
Fixed-rate Mortgage Securities 20.20%
Agency Notes 10.08%
- --------------------------------------------------------------------------------
Colonial Short Duration U.S. Government Fund
- --------------------------------------------------------------------------------
Investing primarily in U.S. government securities, this Fund is designed for
relatively low volatility. It is the most conservative of Colonial's three
government funds, designed for investors with a low risk-tolerance or a short
investment time frame.
The Fund invests in Treasury and mortgage-backed securities as well as other
U.S. agency securities such as those of the Federal Home Loan Banks System.
Consistent with its goal of low volatility, it maintains a relatively short
duration of less than three years.
Based on our expectation that interest rates would decline during the year, we
modestly increased the Fund's duration, primarily by increasing the proportion
of Treasury securities in the portfolio. This shift allowed the portfolio to
take advantage of the favorable investment climate and generate larger price
gains.
A significant portion of the Fund remained invested in mortgage-backed
securities. However, because these instruments tend to underperform when
interest rates are declining, we took several protective measures. First, we
lowered the overall representation of these securities in the portfolio. Second,
we reduced the average coupon of the securities we owned as these securities are
less susceptible to refinancing. Third, we maintained our investments in older
adjustable-rate mortgages, which tend to have lower refinancing risk.
The Fund's Class A share performance was in the top 43% of its Lipper peer group
for the year (see page 4 for details). We believe that this solid performance is
a result of appropriate duration management, increased investment in Treasurys,
and strategic management of our mortgage-backed security holdings.
[The following table was represented as a mountain graph in the printed
material.]
Performance of a $10,000 investment in Class A shares 10/1/92 - 8/31/98
<TABLE>
<CAPTION>
Lehman Gov't Bond Lipper Short U.S.
AS OF DATE Fund at NAV Fund at POP (1-3 yr) Index Gov't Fund Average
- ---------- ----------- ----------- -------------- ------------------
<S> <C> <C> <C> <C>
10/1/92 $10,000 $9,675 $10,000 $10,000
10/31/92 $9,991 $9,666 $9,943 $9,938
11/30/92 $9,991 $9,666 $9,932 $9,923
12/31/92 $10,051 $9,725 $10,020 $10,006
1/31/93 $10,102 $9,774 $10,126 $10,105
2/28/93 $10,162 $9,832 $10,207 $10,184
3/31/93 $10,192 $9,860 $10,238 $10,211
4/30/93 $10,241 $9,908 $10,301 $10,267
5/31/93 $10,250 $9,917 $10,276 $10,256
6/30/93 $10,309 $9,974 $10,353 $10,330
7/31/93 $10,335 $9,999 $10,376 $10,358
8/31/93 $10,382 $10,044 $10,462 $10,433
9/30/93 $10,397 $10,059 $10,495 $10,458
10/31/93 $10,422 $10,083 $10,519 $10,474
11/30/93 $10,414 $10,075 $10,521 $10,465
12/31/93 $10,447 $10,108 $10,563 $10,502
1/31/94 $10,502 $10,161 $10,629 $10,569
2/28/94 $10,505 $10,163 $10,564 $10,504
3/31/94 $10,454 $10,114 $10,511 $10,431
4/30/94 $10,393 $10,056 $10,471 $10,392
5/31/94 $10,408 $10,069 $10,484 $10,402
6/30/94 $10,422 $10,084 $10,510 $10,416
7/31/94 $10,469 $10,129 $10,605 $10,494
8/31/94 $10,506 $10,165 $10,640 $10,520
9/30/94 $10,490 $10,149 $10,616 $10,500
10/31/94 $10,490 $10,149 $10,640 $10,520
11/30/94 $10,479 $10,138 $10,595 $10,487
12/31/94 $10,534 $10,192 $10,615 $10,509
1/31/95 $10,656 $10,310 $10,760 $10,629
2/28/95 $10,790 $10,439 $10,906 $10,758
3/31/95 $10,901 $10,547 $10,967 $10,813
4/30/95 $10,990 $10,633 $11,065 $10,896
5/31/95 $11,115 $10,753 $11,254 $11,063
6/30/95 $11,163 $10,800 $11,315 $11,116
7/31/95 $11,178 $10,815 $11,360 $11,146
8/31/95 $11,249 $10,884 $11,428 $11,213
9/30/95 $11,325 $10,957 $11,484 $11,265
10/31/95 $11,399 $11,029 $11,580 $11,348
11/30/95 $11,486 $11,112 $11,678 $11,437
12/31/95 $11,555 $11,180 $11,767 $11,519
1/31/96 $11,625 $11,247 $11,867 $11,598
2/29/96 $11,624 $11,246 $11,820 $11,556
3/31/96 $11,609 $11,232 $11,811 $11,548
4/30/96 $11,651 $11,273 $11,823 $11,559
5/31/96 $11,694 $11,314 $11,849 $11,573
6/30/96 $11,773 $11,390 $11,935 $11,647
7/31/96 $11,830 $11,445 $11,982 $11,690
8/31/96 $11,876 $11,490 $12,026 $11,719
9/30/96 $11,959 $11,570 $12,136 $11,815
10/31/96 $12,066 $11,674 $12,273 $11,930
11/30/96 $12,160 $11,765 $12,364 $12,017
12/31/96 $12,169 $11,773 $12,366 $12,012
1/31/97 $12,237 $11,839 $12,425 $12,067
2/28/97 $12,280 $11,881 $12,455 $12,097
3/31/97 $12,286 $11,887 $12,445 $12,087
4/30/97 $12,380 $11,978 $12,547 $12,177
5/31/97 $12,461 $12,056 $12,635 $12,249
6/30/97 $12,543 $12,136 $12,722 $12,326
7/31/97 $12,664 $12,252 $12,861 $12,452
8/31/97 $12,683 $12,271 $12,874 $12,459
9/30/97 $12,783 $12,368 $12,972 $12,548
10/31/97 $12,871 $12,453 $13,068 $12,629
11/30/97 $12,921 $12,501 $13,100 $12,653
12/31/97 $12,997 $12,574 $13,188 $12,719
1/31/98 $13,082 $12,656 $13,315 $12,826
2/28/98 $13,110 $12,684 $13,327 $12,837
3/31/98 $13,156 $12,729 $13,379 $12,882
4/30/98 $13,214 $12,785 $13,443 $12,933
5/31/98 $13,286 $12,854 $13,514 $12,999
6/30/98 $13,345 $12,911 $13,584 $13,058
7/31/98 $13,377 $12,942 $13,648 $13,109
8/31/98 $13,524 $13,085 $13,712 $13,246
</TABLE>
Growth of a $10,000 investment made on 10/1/92 as of 8/31/98
Class A Class B Class C
NAV POP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
$13,524 $13,085 $13,042 $13,042 $13,428 $13,428
Average annual total returns as of 8/31/98
Share Class A B C
Inception Date 10/1/92 2/1/93 1/4/95
NAV POP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
1 year 6.64% 3.17% 5.93% 1.93% 6.41% 5.41%
- --------------------------------------------------------------------------------
5 years 5.43 4.74 4.75 4.75 5.28 5.28
- --------------------------------------------------------------------------------
Life 5.23 4.65 4.59 4.59 5.10 5.10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) SEC yields reflect the portfolio's earning power net of expenses, expressed
as an annualized percentage of the public offering price per share. If the
Advisor had not borne certain expenses, the yields would have been 3.76% for
Class A, 3.21% for Class B and 3.69% for Class C.
Class B and C share (newer class shares) performance includes returns of the
Fund's Class A shares (oldest existing fund class) for periods prior to the
inception dates of the newer class shares. Class A share returns have not been
restated to reflect any expense differential (e.g., Rule 12b-1 fees) between
Class A shares and the newer class shares. Had the expense differential been
reflected, the returns for periods prior to the inception date of the newer
class shares would have been lower.
The Lehman Brothers Government Bond (1-3 Year) Index is an unmanaged index that
tracks the performance of short-term U.S. government securities. Unlike mutual
funds, indexes are not investments and do not incur fees or charges.It is not
possible to invest in an index. The Lipper Short U.S. Government Fund Average
represents a hypothetical investment in the funds which comprise the Lipper
Short U.S. Government Fund Category.
Past performance cannot predict future results.
7
<PAGE>
Fund Facts: 8/31/98
Duration
4.73 years
Last 12 months' distributions
Class A $0.404
- -----------------------------------------
Class B $0.354
- -----------------------------------------
Class C $0.364
- -----------------------------------------
SEC yield(1)
Class A 4.76%
- -----------------------------------------
Class B 4.25%
- -----------------------------------------
Class C 4.32%
- -----------------------------------------
Average life breakdown
(As a percentage of net assets)
0 - 5 years 43.05%
- -----------------------------------------
5 - 10 years 42.37%
- -----------------------------------------
10 - 15 years 8.99%
- -----------------------------------------
15 - 20 years 0.57%
- -----------------------------------------
20 - 25 years 3.16%
- -----------------------------------------
25 - 30 years 1.86%
- -----------------------------------------
[The following table was represented as a pie chart in the printed material.]
Sector breakdown
(As a percentage of senior securities)
FNMAs 26.57%
Treasury Securities 42.40%
GNMAs 25.90%
FHLMCs 2.54%
SBA 2.59%
- --------------------------------------------------------------------------------
Colonial Intermediate U.S. Government Fund
- --------------------------------------------------------------------------------
The Fund maintains a conservative portfolio invested primarily in U.S.
government securities, with a risk profile similar to a five-year Treasury. The
Fund is managed to maintain an average duration between 2.5 and 5.5 years.
Our economic outlook called for declining interest rates during the year. In
response, we increased the Fund's duration to the upper end of its allowable
range by investing in securities that we believed would generate larger price
increases as interest rates fell. We increased our investment in Treasurys,
particularly those in the intermediate range of the yield curve. Bonds with
maturities of 5 to 10 years experienced the largest rate declines during the
year and provided attractive real rates of return. We also lowered the
portfolio's proportion of mortgage-backed securities from approximately 75% to
55%. We sold mortgages with higher coupons because they have greater inherent
prepayment risk. This move also lowered the average coupon of mortgages owned in
the portfolio. As rates fell throughout the year, these strategies rewarded
shareholders with price gains.
The Fund's Class A share performance was in the top 38% of its Lipper peer group
for the year based on NAV (see page 4 for details). We believe that this solid
performance is a result of active duration management and the strategic shift
into Treasurys from mortgage-backed securities.
As long as global financial markets experience turmoil and volatility, U.S.
Treasury securities should be in high demand, based on their status as a haven
for investors both here and abroad. In addition, the rate of the U.S. economy's
growth has slowed while inflation remains low. In the environment, it is
possible that the Fed may continue to lower rates in the months ahead.
[The following table was represented as a mountain graph in the printed
material.]
Performance of a $10,000 investment in Class A shares 8/31/88 - 8/31/98
<TABLE>
<CAPTION>
Lipper Intermediate Lehman Intermediate
CIUSGF-A U.S. Gov't Gov't Bond
AS OF DATE Fund at NAV Fund at POP Fund Average (1-3 yr) Index
- ---------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
8/31/88 $10,000 $9,525 $10,000 $10,000
11/30/88 $10,226 $9,740 $10,233 $10,224
2/28/89 $10,244 $9,758 $10,300 $10,292
5/31/89 $10,645 $10,139 $10,740 $10,753
8/31/89 $10,914 $10,395 $11,073 $11,099
11/30/89 $11,192 $10,660 $11,461 $11,498
2/28/90 $11,271 $10,736 $11,411 $11,503
5/31/90 $11,532 $10,985 $11,614 $11,724
8/31/90 $11,781 $11,222 $11,839 $12,001
11/30/90 $12,192 $11,613 $12,313 $12,462
2/28/91 $12,529 $11,934 $12,700 $12,842
5/31/91 $12,804 $12,196 $12,959 $13,119
8/31/91 $13,141 $12,517 $13,376 $13,524
11/30/91 $13,504 $12,863 $13,913 $14,075
2/29/92 $13,713 $13,061 $14,158 $14,323
5/31/92 $13,929 $13,267 $14,421 $14,609
8/31/92 $14,254 $13,577 $15,062 $15,258
11/30/92 $14,297 $13,617 $14,990 $15,217
2/28/93 $14,646 $13,951 $15,710 $15,934
5/31/93 $14,810 $14,106 $15,866 $16,074
8/31/93 $15,130 $14,411 $16,454 $16,582
11/30/93 $15,123 $14,405 $16,403 $16,607
2/28/94 $15,217 $14,494 $16,386 $16,609
5/31/94 $14,836 $14,131 $15,851 $16,272
8/31/94 $15,050 $14,335 $16,053 $16,537
11/30/94 $14,914 $14,206 $15,779 $16,331
2/28/95 $15,458 $14,724 $16,440 $16,972
5/31/95 $16,157 $15,389 $17,278 $17,750
8/31/95 $16,385 $15,607 $17,534 $18,019
11/30/95 $16,969 $16,163 $18,128 $18,562
2/29/96 $17,023 $16,215 $18,182 $18,704
5/31/96 $16,745 $15,950 $17,913 $18,555
8/31/96 $16,960 $16,155 $18,136 $18,823
11/30/96 $17,823 $16,976 $19,045 $19,612
2/28/97 $17,765 $16,921 $18,967 $19,614
5/31/97 $17,955 $17,102 $19,182 $19,876
8/31/97 $18,425 $17,550 $19,681 $20,337
11/30/97 $18,960 $18,060 $20,242 $20,844
2/28/98 $19,360 $18,440 $20,666 $21,265
5/31/98 $19,649 $18,715 $20,997 $21,580
8/31/98 $20,243 $19,282 $21,589 $22,222
</TABLE>
Growth of a $10,000 investment made on 8/31/88 as of 8/31/98
Class A Class B Class C
NAV POP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
$20,243 $19,282 $19,333 $19,333 $20,110 $20,110
Average annual total returns as of 8/31/98
Share Class A B C
Inception Date 10/13/87 6/8/92 8/1/97
NAV POP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
1 year 9.87% 4.65% 9.03% 4.03% 9.20% 8.20%
- --------------------------------------------------------------------------------
5 years 6.00 4.97 5.20 4.88 5.86 5.86
- --------------------------------------------------------------------------------
10 years 7.31 6.79 6.81 6.81 7.24 7.24
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) SEC yields reflect the portfolio's earning power net of expenses, expressed
as an annualized percentage of the public offering price per share. If the
Distributor had not waived certain fees, the yield would have been 4.17% for
Class C.
Class B and C share (newer class shares) performance includes returns of the
Fund's Class A shares (oldest existing fund class) for periods prior to the
inception dates of the newer class shares. Class A share returns have not been
restated to reflect any expense differential (e.g., Rule 12b-1 fees) between
Class A shares and the newer class shares. Had the expense differential been
reflected, the returns for periods prior to the inception date of the newer
class shares would have been lower.
The Lehman Brothers Intermediate Government Bond Index is an unmanaged index
that tracks the performance of U.S. government securities.
Unlike mutual funds, indexes are not investments and do not incur fees or
charges. It is not possible to invest in an index. The Lipper Intermediate U.S.
Gov't Average represents a hypothetical investment in the funds which comprise
the Lipper Intermediate U.S. Gov't Fund category.
Past performance cannot predict future results.
8
<PAGE>
Fund Facts: 8/31/98
Duration
5.98 years
Last 12 months' distributions
Class A $0.678
- ---------------------------------------------
Class B $0.595
- ---------------------------------------------
Class C $0.612
- ---------------------------------------------
SEC yield(1)
Class A 5.31%
- ---------------------------------------------
Class B 4.82%
- ---------------------------------------------
Class C 4.97%
- ---------------------------------------------
Average life breakdown
(As a percentage of senior securities)
0 - 5 years 39.50%
- ---------------------------------------------
5 - 10 years 31.71%
- ---------------------------------------------
10 - 15 years 25.09%
- ---------------------------------------------
15 - 20 years 3.70%
- ---------------------------------------------
[The following table was represented as a pie chart in the printed material.]
Sector breakdown
(As a percentage of senior securities)
Treasury Securities 44.25%
FNMAs 11.61%
FHLMCs 13.93%
WL/ABS 10.97%
CMO 2.58%
GNMAs 16.66%
- --------------------------------------------------------------------------------
Colonial Federal Securities Fund
- --------------------------------------------------------------------------------
The Fund invests primarily in U.S. government securities and is designed for the
investor who can accept the risks associated with the additional return
potential of longer-term securities. The Fund offers the highest return
potential of Colonial's three government funds.
Based on our economic outlook, we believed that interest rates would decline
during the course of the year. As a result, we moved the Fund's duration towards
the upper end of its allowable range in order to capture larger price gains as
interest rates fell. We added to our investment in Treasurys while decreasing
the portfolio's proportion of mortgage-backed securities from approximately 80%
to 61% of net assets. For the most part, we sold mortgages with higher coupons
that had greater prepayment risk. This tactic lowered the Fund's overall
exposure to this sector as well as the average coupon rate of the portfolio.
These strategies rewarded shareholders with price gains as interest rates
declined significantly during the year.
The Fund was in the top 12% of its Lipper peer group for the year based on Class
A shares at NAV (see page 4 for details). We attribute this strong performance
to active duration management and reallocating assets from mortgage-backed
securities to Treasurys.
As long as global market turmoil and higher levels of volatility are present,
strong demand for U.S. Treasury securities should continue for two reasons: the
Treasury's status as a haven for foreign and U.S. investors and the prospects
for continued low inflation. In this environment, it is possible that the Fed
may continue to lower rates in the months ahead.
[The following table was represented as a mountain graph in the printed
material.]
Performance of a $10,000 investment for Class A shares 8/31/88 - 8/31/98
<TABLE>
<CAPTION>
CFSF-A Lipper Gen U.S. Lehman Intermediate
AS OF DATE Fund at NAV Fund at POP Gov't Avg Gov't Bond Index
- ---------- ----------- ----------- --------- ----------------
<S> <C> <C> <C> <C>
8/31/88 $10,000 $9,525 $10,000 $10,000
11/30/88 $10,452 $9,955 $10,262 $10,224
2/28/89 $10,584 $10,081 $10,319 $10,292
5/31/89 $11,094 $10,567 $10,762 $10,753
8/31/89 $11,392 $10,851 $11,091 $11,099
11/30/89 $11,907 $11,341 $11,477 $11,498
2/28/90 $11,632 $11,080 $11,382 $11,503
5/31/90 $11,830 $11,268 $11,582 $11,724
8/31/90 $11,829 $11,267 $11,736 $12,001
11/30/90 $12,510 $11,915 $12,262 $12,462
2/28/91 $12,917 $12,304 $12,662 $12,842
5/31/91 $13,145 $12,520 $12,892 $13,119
8/31/91 $13,591 $12,946 $13,317 $13,524
11/30/91 $14,109 $13,439 $13,792 $14,075
2/29/92 $14,486 $13,798 $14,087 $14,323
5/31/92 $14,700 $14,002 $14,323 $14,609
8/31/92 $15,274 $14,548 $14,952 $15,258
11/30/92 $15,312 $14,585 $14,922 $15,217
2/28/93 $16,381 $15,603 $15,732 $15,934
5/31/93 $16,617 $15,828 $15,895 $16,074
8/31/93 $17,433 $16,605 $16,648 $16,582
11/30/93 $17,348 $16,524 $16,538 $16,607
2/28/94 $17,273 $16,452 $16,483 $16,609
5/31/94 $16,539 $15,753 $15,851 $16,272
8/31/94 $16,787 $15,990 $16,050 $16,537
11/30/94 $16,351 $15,574 $15,731 $16,331
2/28/95 $17,309 $16,487 $16,489 $16,972
5/31/95 $18,456 $17,579 $17,427 $17,750
8/31/95 $18,705 $17,816 $17,667 $18,019
11/30/95 $19,522 $18,595 $18,394 $18,562
2/29/96 $19,402 $18,481 $18,323 $18,704
5/31/96 $18,813 $17,919 $17,950 $18,555
8/31/96 $19,041 $18,136 $18,134 $18,823
11/30/96 $20,328 $19,362 $19,216 $19,612
2/28/97 $20,108 $19,153 $19,048 $19,614
5/31/97 $20,333 $19,367 $19,246 $19,876
8/31/97 $20,992 $19,995 $19,809 $20,337
11/30/97 $21,783 $20,748 $20,514 $20,844
2/28/98 $22,301 $21,241 $20,945 $21,265
5/31/98 $22,683 $21,606 $21,280 $21,580
8/31/98 $23,534 $22,416 $21,963 $22,222
</TABLE>
Growth of a $10,000 investment made on 08/31/88 as of 08/31/98
Class A Class B Class C
NAV POP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
$23,544 $22,416 $22,471 $22,471 $23,379 $23,379
Average annual total returns as of 8/31/98
Share Class A B C
Inception Date 3/30/84 6/8/92 8/1/97
NAV POP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
1 year 12.11% 6.79% 11.26% 6.26% 11.43% 10.43%
- --------------------------------------------------------------------------------
5 years 6.19 5.16 5.39 5.08 6.05 6.05
- --------------------------------------------------------------------------------
10 years 8.94 8.41 8.43 8.43 8.86 8.86
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) SEC yields reflect the portfolio's earning power net of expenses, expressed
as an annualized percentage of the public offering price per share. If the
Distributor had not waived certain fees, the yield would have been 4.81% for
Class C.
Class B and C share (newer class shares) performance includes returns of the
Fund's Class A shares (oldest existing fund class) for periods prior to the
inception dates of the newer class shares. Class A share returns have not been
restated to reflect any expense differential (e.g., Rule 12b-1 fees) between
Class A shares and the newer class shares. Had the expense differential been
reflected, the returns for periods prior to the inception date of the newer
class shares would have been lower.
The Lehman Brothers Intermediate Government Bond Index is an unmanaged index
that tracks the performance of U.S. government securities. Unlike mutual funds,
indexes are not investments and do not incur fees or charges. It is not possible
to invest in an index. The Lipper General U.S. Government Average represents a
hypothetical investment in the funds which comprise the Lipper General U.S.
Government Average.
Past performance cannot predict future results.
9
<PAGE>
- --------------------------------------------------------------------------------
Investment Portfolios
- --------------------------------------------------------------------------------
August 31, 1998 (In Thousands)
Colonial Short Duration U.S. Government Fund
- --------------------------------------------------------------------------------
U.S. Government & Agency
Obligations--74.7% Par Value
- --------------------------------------------------------------------------------
Government Agencies -- 44.6%
Maturities
Coupon From /To
- --------------------------
Federal Home Loan Bank,
6.150% 2000 $ 500 $ 509
-----------
Federal Home Loan Mortgage Corp.:
Fixed Rate Note,
9.250% 2009 182 194
-----------
Adjustable Rate Mortgage: (a)
6.096% 2018 127 128
6.577% 2018 183 184
7.391% 2019 237 240
-----------
552
-----------
Federal National Mortgage Association:
Fixed Rate Note:
5.720% 2000 500 504
6.000% 2008-2010 (b) 921 920
6.240% 2000 400 407
6.800% 2003 500 528
9.500% 2006 103 109
-----------
2,468
-----------
Adjustable Rate Mortgage: (a)
6.391% 2027 143 143
7.296% 2019 190 196
7.435% 2019 137 141
7.583% 2023 137 137
7.614% 2020 111 113
7.995% 2022 88 91
8.105% 2017 78 81
8.366% 2019 173 180
-----------
1,082
-----------
Government National Mortgage Association:
Fixed Rate Mortgage:
6.500% 2024 (b) 500 503
9.000% 2009 206 221
-----------
724
-----------
Adjustable Rate Mortgage: (a)
6.875% 2022 43 43
7.000% 2022 398 405
7.375% 2023 318 324
-----------
772
-----------
Student Loan Marketing Association:
Medium Term Note,
5.560% 1999 180 180
Weekly Floating Rate Note, (a)
5.253% 1999 1,000 1,000
-----------
1,180
-----------
Total Government
Agencies (cost of $7,424) $ 7,481
-----------
Government Obligations--30.1%
U.S. Treasury Bonds,
7.875% 02/15/21 130 170
-----------
U.S. Treasury Notes:
5.500% 03/31/03 346 353
5.625% 11/30/99 170 171
5.625% 05/15/08 192 201
5.750% 09/30/99 (c) 794 799
5.750% 10/31/02 160 164
5.875% 11/15/05 242 254
6.125% 12/31/01 (c) 792 818
6.250% 06/30/02 225 234
6.500% 05/31/01 (c) 1,714 1,778
6.875% 05/15/06 96 107
-----------
4,879
-----------
Total Government
Obligations (cost of $4,968) 5,049
-----------
Total Investments (cost of $12,392) (d) 12,530
-----------
Short-Term Obligations - 28.9%
- --------------------------------------------------------------------------------
Repurchase agreement with ABN
AMRO Chicago Corp., dated
08/31/98, due 09/01/98 at 5.820%,
collateralized by U.S. Treasury
notes and bill with various
maturities to 2026 market
value $3,165 (repurchase
proceeds $3,085) 3,084 3,084
Federal Home Loan Mortgage Corp.,
5.700% 09/01/98 1,257 1,257
Federal Home Loan Bank,
5.330% 12/28/98 515 506
-----------
Total Short-Term Obligations 4,847
-----------
Other Assets & Liabilities, Net - (3.6)% (613)
-----------
Net Assets - 100.0% $ 16,764
===========
Notes To Investment Portfolio:
(a) Interest rates on variable rate securities change periodically. The rates
listed are as of August 31, 1998.
(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) These securities, or a portion thereof, with a total market value of
$2,115 are being used to collateralize the delayed delivery purchases
indicated in note (b) above.
(d) Cost for federal income tax purposes is $12,394.
Colonial Intermediate U.S. Government Fund
- --------------------------------------------------------------------------------
U.S. Government & Agency
Obligations--118.7% Par Value
Government Agencies -- 68.4%
Maturities
Coupon From /To
- -------------------------
Federal Home Loan Mortgage Corp.:
7.500% 2007-2016 $ 1,132 $ 1,172
8.000% 2003-2016 11,115 11,530
8.500% 2007-2017 2,660 2,803
8.750% 2005-2013 1,169 1,231
9.000% 2001-2018 2,146 2,280
9.250% 2008-2019 3,883 4,134
See notes to financial statements.
10
<PAGE>
Investment Portfolio CIUSGF Cont.
9.500% 2005-2016 $ 1,417 $ 1,521
9.750% 2016 101 108
10.000% 2019 759 824
10.250% 2009-2016 1,240 1,344
10.500% 2009-2021 1,903 2,111
11.250% 2005-2016 2,270 2,560
12.000% 2014 1 1
-----------
31,619
-----------
Federal National Mortgage Association:
5.750% 2003 53,000 53,894
6.000% 2008-2026 (a) 148,346 148,778
6.500% 2007-2050 (a) 58,544 58,785
7.000% 2007-2023 3,580 3,649
7.500% 2006-2027 (a) 27,921 28,683
8.000% 2008-2009 2,038 2,126
8.250% 2008 622 644
8.500% 2003-2021 5,771 6,041
9.000% 2002-2022 15,760 16,663
10.000% 2001-2006 6,153 6,615
10.500% 2010-2016 3,176 3,524
11.000% 2015 714 812
-----------
330,214
-----------
Government National Mortgage Association:
6.500% 2023-2024 (a) 93,219 93,857
7.000% 2022-2028 25,925 26,655
7.500% 2007 316 326
8.000% 2004-2023 2,872 2,973
8.500% 2017-2022 1,495 1,573
8.750% 2021-2022 1,607 1,747
8.850% 2018-2020 3,301 3,483
9.000% 2008-2025 13,037 13,900
9.250% 2016-2022 6,455 6,816
9.500% 2004-2025 90,613 98,249
10.000% 2000-2024 3,135 3,353
10.250% 2018 194 212
10.500% 1998-2020 7,463 8,301
10.625% 2010 77 86
11.000% 2009-2021 9,337 10,559
11.250% 2015 74 82
11.500% 2010-2021 13,310 15,174
11.750% 2013-2015 250 283
12.000% 2011-2019 14,089 16,295
12.250% 2013-2015 490 558
12.500% 2010-2015 9,555 10,581
12.750% 2013-2014 108 124
13.000% 2011-2016 3,089 3,640
13.500% 2010-2015 2,299 2,744
14.000% 2011-2012 96 115
14.500% 2012 27 32
15.000% 2011-2012 89 108
-----------
321,826
-----------
U.S. Small Business Administration:
7.600% 01/01/12 3,417 3,789
8.200% 10/01/11 3,433 3,923
8.250% 11/01/11 6,979 7,980
8.650% 11/01/14 5,079 5,933
8.850% 08/01/11 1,197 1,393
9.150% 07/01/11 3,061 3,565
9.450% 08/01/10 1,191 1,397
9.500% 04/01/10 2,032 2,400
9.650% 05/01/10 1,529 1,812
-----------
32,192
-----------
Total Government
Agencies (cost of $698,576) 715,851
-----------
Government Obligations--50.3%
U.S. Treasury Bonds,
7.875% 02/15/21 (b) 25,241 33,042
-----------
U.S. Treasury Notes:
5.625% 05/15/08 30,600 31,968
5.625% 02/15/06 14,678 15,164
5.750% 08/15/03 38,000 39,199
5.875% 11/15/05 22,505 23,595
6.250% 06/30/02 (b) 27,420 28,555
6.500% 10/15/06 18,571 20,260
6.500% 11/15/26 (b) 16,930 19,528
6.625% 03/31/02 (b) 59,820 62,876
6.625% 04/30/02 8,487 8,929
6.875% 05/15/06 83,936 93,340
10.375% 11/15/12 (b) 49,603 67,840
-----------
411,254
-----------
U.S. Treasury Notes/Bonds:
5.250% 08/15/03 14,442 14,674
5.375% 02/15/01 11,625 11,732
5.500% 03/31/03 55,003 56,172
-----------
82,578
-----------
Total Government
Obligations (cost of $505,101) 526,874
-----------
Total Investments
(cost of $1,203,677) (c) 1,242,725
===========
Short-Term Obligations - 0.3%
- --------------------------------------------------------------------------------
Repurchase agreement with ABN AMRO
Chicago Corp., dated 08/31/98,
due 09/01/98 at 5.820%,
collateralized by U.S. Treasury
notes and bill with various
maturities to 2026, market value
$3,649 (repurchase proceeds $3,556) 3,555 3,555
-----------
Other Assets & Liabilities, Net - (19.0%) (199,370)
-----------
Net Assets - 100.0% $ 1,046,910
===========
Notes To Investment Portfolio:
(a) 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.
(b) These securities, or a portion thereof, with a total market value of
$232,991 are being used to collateralize the delayed delivery purchases
indicated in note (a) above.
(c) Cost for federal income tax purposes is $1,204,998.
See notes to financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Investment Portfolio continued
- --------------------------------------------------------------------------------
August 31, 1998 (In Thousands)
Colonial Federal Securities Fund
- --------------------------------------------------------------------------------
U.S. Government & Agency
Obligations--121.8% Par Value
- --------------------------------------------------------------------------------
Government Agencies -- 61.3%
Maturities
Coupon From /To
- --------------------------
Federal Home Loan Mortgage Corp.:
6.500% 2012-2027 (a) $ 145,450 $ 146,720
7.500% 2016 692 719
8.000% 2003-2016 2,874 3,013
8.500% 2007-2010 2,220 2,339
8.750% 2004-2010 825 868
9.000% 2001-2022 4,829 5,124
9.250% 2008-2016 3,789 4,034
9.500% 2004-2016 1,659 1,780
9.750% 2009-2010 622 666
10.000% 2019 759 825
10.250% 2009-2013 922 998
10.500% 2017-2020 1,322 1,467
11.250% 2003-2016 1,494 1,686
11.500% 2015 94 107
12.000% 2013 51 58
-----------
170,404
-----------
Collateralized Mortgage Obligations:
5.000% 2013 7,950 7,915
6.500% 2014 17,048 17,128
8.500% 2021 387 389
8.750% 2020 5,993 6,128
-----------
31,560
-----------
Federal National Mortgage Association:
6.000% 2008-2024 (a) 82,406 81,973
6.500% 2003-2050 (a) 6,185 6,224
7.000% 2010-2027 2,390 2,441
7.500% 2006-2027 (a) 26,495 27,220
8.000% 2008-2019 2,591 2,705
8.250% 2008-2011 1,009 1,045
8.500% 2008-2017 4,032 4,221
9.000% 2002-2021 14,066 14,859
9.500% 2008-2018 1,330 1,423
-----------
142,111
-----------
Government National Mortgage Association:
6.500% 2023-2025 (a) 84,895 85,453
7.000% 2024-2027 (a) 70,621 72,078
7.500% 2006-2007 864 899
8.000% 2005-2008 72 75
9.000% 2008-2017 6,325 6,791
9.500% 2009-2019 17,679 19,165
10.000% 2000-2003 187 200
10.500% 2013-2021 10,194 11,373
11.000% 2010 2 3
11.500% 2013-2015 44 51
11.750% 2013-2015 103 116
12.000% 2012-2015 511 591
12.500% 2010-2014 4,224 4,936
13.000% 2013 1,733 2,044
-----------
203,775
-----------
Total Government
Agencies (cost of $537,175) 547,850
-----------
Government Obligations -- 60.5%
U.S. Treasury Bonds:
8.750% 08/15/20 14,333 20,310
12.000% 08/15/13 (b) 91,051 137,914
12.750% 11/15/10 (b) 46,873 67,856
-----------
226,080
-----------
U.S. Treasury Notes:
5.625% 05/15/08 27,100 28,311
6.125% 12/31/01 13,547 13,991
7.250% 08/15/04 12,407 13,805
8.875% 02/15/19 17,585 24,935
10.375% 11/15/12 (b) 53,118 72,647
-----------
153,689
-----------
U.S. Treasury Bonds/Notes:
5.250% 08/15/03 26,133 26,554
5.500% 03/13/03 (b) 110,455 112,802
-----------
139,356
-----------
U.S. Treasury STRIP,
0.000% 08/15/12 47,184 22,266
-----------
Total Government
Obligations (cost of $526,369) 541,391
-----------
Total U.S. Government & Agencies
Obligations (cost of $1,064,544) 1,089,241
-----------
Non-Agency Mortgage-Backed &
Asset-Backed Securities -- 15.0%
- ----------------------------------------------------------
Non-Agency Mortgage-Backed -- 4.2%
Countrywide Mortgage Trust,
7.600% 04/25/23 2,310 2,378
CS First Boston Mortgage Securities Corp.,
7.500% 06/01/20 12,190 12,297
First Boston Mortgage Securities Corp.,
6.150% 09/28/13 2,000 2,006
General Electric Capital Mortgage Services, Inc.,
8.250% 09/25/26 2,663 2,848
Headlands Mortgage Securities, Inc.
7.75% 03/25/27 5,353 5,532
Norwest Asset Securities Corp.,
7.000% 04/25/12 2,477 2,550
PNC Mortgage Securities Corp.,
7.000% 05/25/27 2,507 2,558
Prudential Home Mortgage Securities,
6.456% 12/28/08 1,561 1,568
Residential Asset Securitization Trust,
7.500% 11/25/11 1,120 1,152
Structured Mortgage Asset Residential Trust,
8.375% 06/25/08 2,957 3,033
Tryon Mortgage Funding, Inc.,
7.500% 02/20/27 1,234 1,280
-----------
37,202
-----------
See notes to financial statements.
12
<PAGE>
Investment Portfolio CFSF Cont.
Asset-Backed Securities -- 10.8%
Contimortage Home Equity Loan Trust:
7.310% 08/15/28 $ 7,150 $ 7,291
7.340% 04/15/28 4,000 4,070
7.420% 03/15/28 2,400 2,444
Delta Funding Home Equity Loan Trust,
7.330% 10/25/28 7,588 7,842
Empire Funding Home Loan Owner Trust,
7.510% 03/25/23 4,000 4,135
Green Tree Financial Corp.,
7.200% 01/15/28 10,000 10,450
7.320% 07/15/28 4,500 4,753
7.850% 08/15/25 10,100 10,346
IMC Home Equity Loan Trust,
7.320% 08/20/27 7,000 7,116
Indymac Manufactured Housing Contract,
6.970% 02/25/28 5,000 5,225
Preferred Mortgage Asset Trust,
7.900% 05/25/12 3,081 3,168
Team Fleet Financing Corp.,
7.350% 05/15/03 2,900 3,014
The Money Store Home Equity Trust:
7.910% 05/15/24 9,306 9,857
8.525% 06/15/25 2,800 2,968
The Money Store Home Improvement Trust,
8.070% 05/15/23 5,875 6,253
UCFC Home Equity Loan Trust,
7.975% 02/15/22 5,000 5,298
8.550% 01/10/20 2,650 2,794
-----------
97,024
-----------
Non-Agency Mortgage-Backed
& Asset-Backed Securities
(cost of $131,311) 134,226
-----------
Total Investments -136.8%
(cost of $1,194,855) (c) 1,223,467
-----------
Short-Term Obligations - 0.0%
- --------------------------------------------------------------------------------
Repurchase agreement with ABN AMRO
Chicago Corp., dated 08/31/98, due
09/01/98 at 5.820%, collateralized
by U.S. Treasury notes & bill with
various maturities to 2026, market
value $106 (repurchase proceeds
$103) 103 103
-----------
Other Assets & Liabilities, Net - (36.8)% (329,394)
-----------
Net Assets - 100.0% $ 894,176
===========
Notes To Investment Portfolio:
(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
$386,670, are being used to collateralize the delayed delivery purchases
indicated in note (a) above.
(c) Cost for federal income tax purposes is $1,195,148.
Acronym Name
- --------------------------------------------------------------------------------
STRIP Separately Traded Receipt of Interest and Principal
- --------------------------------------------------------------------------------
Notes To Financial Statements
- --------------------------------------------------------------------------------
August 31, 1998
Note 1: Accounting Policies
Organization: Colonial Short Duration U.S. Government Fund (CSDUSGF), and
Colonial Intermediate U. S. Government Fund (CIUSGF), are each a series of
Colonial Trust II and Colonial Federal Securities Fund (CFSF) is a series of
Colonial Trust III (the series are collectively referred to as the Funds and are
diversified portfolios). Colonial Trust II and Colonial Trust III are
Massachusetts business trusts registered under the Investment Company Act of
1940, as amended, as open end management investment companies. CSDUSGF's
investment objective is to seek as high a level of current income as is
consistent with very low volatility, by investing primarily in U.S. government
securities and maintaining a weighted average portfolio duration of three years
or less. CIUSGF's investment objective is to seek as high a level of current
income and total return as is consistent with prudent risk by investing
primarily in U.S. government securities. CFSF'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
Funds may issue an unlimited number of shares. The Funds each offer three
classes of shares: Class A, Class B and Class C. Class A shares are sold with a
front-end sales charge and a 1.00% contingent deferred sales charge on
redemptions made within eighteen months on an original purchase of $1 million to
$5 million. Class B shares 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. Class C shares are
subject to a contingent deferred sales charge on redemptions made within one
year after purchase and an annual distribution fee.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount 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 in the preparation of the Funds' financial statements.
Security valuation and transactions: The Funds 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.
Options are valued at the last reported sale price, or in the absence of a sale,
the mean between the last quoted bid and asking price.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
Continued
13
<PAGE>
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
August 31, 1998
(In thousands except for per share amounts and footnotes)
<TABLE>
<CAPTION>
CSDUSGF
CIUSGF CFSF
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments at cost $12,392 $1,203,677
$1,194,855
Appreciation 138
39,048 28,612
-------------- ----------------
- ----------------
Investments at value 12,530 1,242,725
1,223,467
Short-term obligations 4,847
3,555 103
-------------- ----------------
- ----------------
17,377 1,246,280
1,223,570
Receivable for:
Interest $149 $13,544 $ 9,623
Investments sold -- 649 1,798
Fund shares sold 621 1,427 4,957
Other 23 793 47 15,667
502 16,880
------ -------------- ------- ---------------- -------
- ----------------
Total Assets 18,170 1,261,947
1,240,450
Liabilities
Payable for:
Investments purchased 1,319 211,057 342,461
Distributions 22 1,596 1,549
Fund shares repurchased 57 2,291 2,163
Accrued:
Transfer Agent Out-of-Pocket fees -- 28 29
Deferred Trustees fees 1 22 8
Other 7 43 64
------ -------
- -------
Total Liabilities 1,406
215,037 346,274
-------------- ----------------
- ----------------
Net Assets $16,764
$1,046,910 $894,176
============== ================
================
Net asset value & redemption price per
share-Class A $10.00 (a) $6.73
(a) $11.08 (a)
-------------- ----------------
- ----------------
($7,284/728) ($650,849/96,650)
($820,733/74,052)
-------------- ----------------
- ----------------
Maximum offering price per share-Class A $10.34 (b) $7.07
(b) $11.63 (b)
-------------- ----------------
- ----------------
($10.00/0.9675) ($6.73/0.9525)
($11.08/0.9525)
Net asset value & offering price per
share-Class B $10.00 (a) $6.73
(a) $11.08 (a)
-------------- ----------------
- ----------------
($7,543/754) ($395,056/58,665)
($72,038/6,500)
Net asset value & offering price per
share-Class C $10.00 (a) $6.73
(a) $11.08 (a)
-------------- ----------------
- ----------------
($1,937/194) ($1,005/149)
($1,405/127)
Composition of Net Assets
Capital paid in $16,728 $1,131,856
$1,009,479
Overdistributed
net investment income (27)
(1,648) (1,597)
Accumulated net realized loss (75)
(122,346) (142,318)
Net unrealized appreciation 138
39,048 28,612
-------------- ----------------
- ----------------
$16,764
$1,046,910 $894,176
-------------- ----------------
- ----------------
</TABLE>
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $100,000 or more of CSDUSGF or $50,000 or more of CIUSGF or
CFSF the offering price is reduced.
See notes to financial statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Statements of Operations
- --------------------------------------------------------------------------------
For the year ended August 31, 1998
<TABLE>
<CAPTION>
CSDUSGF CIUSGF CFSF
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Income
Interest $ 781 $ 78,032 $ 66,460
Dollar roll fee income -- 1,145 3,055
--------------------------------------------------------------------
781 79,177 69,515
Expenses
Management fee $ 71 $ 6,602 $ 5,509
Service fee 26 2,770 2,281
Distribution fee - Class B 28 3,176 482
Distribution fee - Class C 2 4 4
Transfer agent 26 2,277 1,902
Bookkeeping fee 27 387 329
Trustees fee 9 65 51
Custodian fee 2 154 64
Audit fee 18 69 53
Legal fee 20 3 6
Registration fee 30 37 42
Reports to shareholders 1 51 50
Amortization of deferred
organization expenses 1 -- --
Other 3 55 87
------- --------- ---------
264 15,650 10,860
Fees and expenses waived or
borne by the Advisor (142) -- --
Fees waived by the Distributor-Class C -- 122 (1) 15,649 (1) 10,859
------- ------ --------- ---------- --------- ----------
Net Investment Income 659 63,528 58,656
------ ---------- ----------
Net Realized & Unrealized
Gain (Loss) on Portfolio
Positions
Net realized gain on:
Investments and purchased options 26 22,969 24,083
Written options -- 309 --
Closed futures contracts -- 50 61
------- ------ --------- ---------- --------- ----------
Net realized gain 26 23,328 24,144
Net change in net unrealized
appreciation (depreciation)
during the period on:
Investments 113 14,922 22,066
Written Options -- (73) (54)
------ --------- ---------
Net unrealized appreciation 113 14,849 22,012
------ ---------- ----------
Net gain 139 38,177 46,156
------ ---------- ----------
Increase in Net Assets from Operations $ 798 $ 101,705 $ 104,812
--------------------------------------------------------------------
</TABLE>
See notes to financial statements.
15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Period ended
August 31 August 31 August 31
August 31(a)
- ---------------------------------------------------------------------------------------------------------------------------
CSDUSGF CIUSGF CFSF
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
<C>
Increase (Decrease) in Net Assets 1998 1997 1998 1997(b) 1998
1997(b)
Operations:
Net investment income $ 659 $ 590 $ 63,528 $ 82,752 $ 58,656 $
56,704
Net realized gain (loss) 26 6 23,328 (1,696)
24,144 5,201
Net unrealized appreciation
(depreciation) 113 97 14,849 28,452 22,012
(10,609)
---------- ---------- ---------- ---------- ----------
- ----------
Net Increase from Operations 798 693 101,705 109,508 104,812
51,296
Distributions:
From net investment income--Class A (396) (356) (38,886) (51,004) (53,064)
(50,372)
In excess of net investment income--Class A (15) -- (2,922) --
- -- --
From net investment income--Class B (204) (198) (21,012) (27,936) (3,545)
(3,364)
In excess of net investment income--Class B (8) -- (1,579) --
- -- --
From net investment income--Class C (67) (29) (26) (1)
(31) (c)
In excess of net investment income--Class C (3) -- (2) --
- -- --
---------- ---------- ---------- ---------- ----------
- ----------
105 110 37,278 30,567 48,172
(2,440)
---------- ---------- ---------- ---------- ----------
- ----------
Fund Share Transactions:
Receipts for shares sold--Class A 4,793 5,004 64,333 126,935 25,903
41,502
Value of distributions reinvested--Class A 383 321 27,046 30,856 28,232
25,121
Cost of shares repurchased--Class A (4,804) (4,669) (194,333) (366,834) (166,562)
(201,762)
---------- ---------- ---------- ---------- ----------
- ----------
372 656 (102,954) (209,043) (112,427)
(135,139)
---------- ---------- ---------- ---------- ----------
- ----------
Receipts for shares sold--Class B 5,469 1,788 29,371 43,099 19,396
19,284
Value of distributions reinvested--Class B 138 117 13,395 15,509
1,926 1,767
Cost of shares repurchased--Class B (2,338) (1,715) (122,795) (181,019) (17,031)
(29,862)
---------- ---------- ---------- ---------- ----------
- ----------
3,269 190 (80,029) (122,411) 4,291
(8,811)
---------- ---------- ---------- ---------- ----------
- ----------
Receipts for shares sold--Class C 1,604 320 1,310 102
1,317 100
Value of distributions reinvested--Class C 66 26 20 --
27 --
Cost of shares repurchased--Class C (318) (237) (444) --
(72) --
---------- ---------- ---------- ---------- ----------
- ----------
Net Increase (Decrease) from Fund 1,352 109 886 102
1,272 100
---------- ---------- ---------- ---------- ----------
- ----------
Share Transactions 4,993 955 (182,097) (331,352) (106,864)
(143,850)
---------- ---------- ---------- ---------- ----------
- ----------
Total Increase (Decrease) 5,098 1,065 (144,819) (300,785) (58,692)
(146,290)
Net Assets
Beginning of period 11,666 10,601 1,191,729 1,492,514 952,868
1,099,158
---------- ---------- ---------- ---------- ----------
- ----------
End of period $ 16,764 $ 11,666 $1,046,910 $1,191,729 $ 894,176 $
952,868
---------- ---------- ---------- ---------- ----------
- ----------
Net of undistributed (overdistributed)
net investment income (27) 20 (1,648) (4,947) (1,597)
(2,808)
---------- ---------- ---------- ---------- ----------
- ----------
Number of Fund Shares
Sold--Class A 481 506 9,704 19,575
2,381 3,952
Issued for distributions
reinvested--Class A 38 33 4,088 4,766
2,615 2,402
Repurchased--Class A (482) (473) (29,361) (56,629) (15,425)
(19,317)
---------- ---------- ---------- ---------- ----------
- ----------
37 66 (15,569) (32,288) (10,429)
(12,963)
---------- ---------- ---------- ---------- ----------
- ----------
Sold--Class B 548 181 4,426 6,653
1,784 1,829
Issued for distributions
reinvested--Class B 14 12 2,025 2,396
178 169
Repurchased--Class B (235) (174) (18,551) (27,955) (1,575)
(2,857)
---------- ---------- ---------- ---------- ----------
- ----------
327 19 (12,100) (18,906)
387 (859)
---------- ---------- ---------- ---------- ----------
- ----------
Sold--Class C 161 32 198 15
122 9
Issued for distributions
reinvested--Class C 7 3 3 --
3 --
Repurchased--Class C (32) (24) (67) --
(7) --
---------- ---------- ---------- ---------- ----------
- ----------
136 11 134 15
118 9
---------- ---------- ---------- ---------- ----------
- ----------
</TABLE>
(a) The Fund changed its fiscal year end from October 31 to August 31.
Information presented is for the period November 1, 1996 through August
31, 1997.
(b) Class C shares were initially offered on August 1, 1997.
(c) Rounds to less than one.
See notes to financial statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Notes To Financial Statements continued
- --------------------------------------------------------------------------------
August 31, 1998
Portfolio positions for which market quotations are not readily available 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 (losses) are based upon the specific identification
method for both financial statement and federal income tax purposes.
The Funds may enter into mortgage dollar roll transactions. A mortgage 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. Mortgage 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 mortgage 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 Funds 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 invest at less advantageous prices.
The Funds maintain U.S. government securities or other liquid high grade debt
obligations as collateral with respect to mortgage 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 A, Class B and Class C service fees
and Class B and Class C distribution fees) 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 A, Class B and Class C per share data and ratios are calculated by
adjusting the expense and net investment income ratios for each Fund for the
entire period by the service fees for Class A, Class B and Class C shares and
the distribution fees for Class B and Class C shares only.
Federal income taxes: Consistent with each 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.
Interest income, fee income, debt discount and premium:
Interest income is recorded on the accrual basis. Fee income attributable to
mortgage dollar roll transactions is recorded on the accrual basis over the term
of the transaction. Original issue discount is accreted to interest income over
the life of a security with a corresponding increase in the cost basis. For
CSDUSGF market discount is not accreted and premium is amortized against
interest income with a corresponding decrease in the cost basis. For CIUSGF and
CFSF premium and market discount are not amortized or accreted.
Distributions to shareholders: Each 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 Funds' custodian takes possession through the federal book entry
system of securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying assets
remains sufficient to protect the Fund. The Fund may experience costs and delays
in liquidating the collateral if the issuer defaults or enters bankruptcy.
Note 2: Fees and Compensation Paid to Affiliates
Management fee: Colonial Management Associates, Inc. (the Advisor) is the
investment Advisor of each Fund and furnishes accounting and other services and
office facilities for a monthly fee based on each Fund's average net assets as
follows:
CSDUSGF
Flat fee rate of 0.55%
CIUSGF
Average Net Assets Annual Fee Rate
- ---------------------------------------
First $1 billion 0.60%
Next $500 million 0.55%
Over $1.5 billion 0.50%
CFSF
Average Net Assets Annual Fee Rate
- ---------------------------------------
First $1 billion 0.60%
Next $1 billion 0.55%
Next $1 billion 0.50%
Over $3 billion 0.40%
Through September 30, 1997, the management fee for the first $1 billion in
assets was 0.65%.
Bookkeeping fee: For each Fund the Advisor 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%
17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights CSDUSGF
- --------------------------------------------------------------------------------
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year ended August 31
- -------------------------------------------------------------------------------------------
1998
Class A Class B Class C
-------- -------- --------
<S> <C> <C> <C>
Net asset value--Beginning of period $ 9.920 $ 9.920 $ 9.920
-------- -------- --------
Income From Investment Operations:
Net investment income (a) 0.529 0.462 0.508
Net realized and unrealized gain (loss) 0.113 0.113 0.113
-------- -------- --------
Total from Investment Operations 0.642 0.575 0.621
-------- -------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.541) (0.476) (0.521)
In excess of net investment income (0.021) (0.019) (0.020)
-------- -------- --------
Total Distributions Declared to Shareholders (0.562) (0.495) (0.541)
-------- -------- --------
Net asset value--End of period $ 10.000 $ 10.000 $ 10.000
-------- -------- --------
Total return (c) (d) 6.64% 5.93% 6.41%
-------- -------- --------
Ratios to Average Net Assets
Expenses 0.70%(f) 1.35%(f) 0.90%(f)
-------- -------- --------
Net investment income 5.37%(f) 4.72%(f) 5.17%(f)
-------- -------- --------
Fees and expenses waived or borne by
the Advisor 1.10%(f) 1.10%(f) 1.10%(f)
-------- -------- --------
Portfolio turnover 183% 183% 183%
-------- -------- --------
Net assets at end of period (000) $ 7,284 $ 7,543 $ 1,937
-------- -------- --------
(a) Net of fees and expenses waived or borne by the
Advisor which amounted to: $ 0.110 $ 0.110 $ 0.110
<CAPTION>
Year ended August 31
- -------------------------------------------------------------------------------------------
1997
Class A Class B Class C
-------- -------- --------
<S> <C> <C> <C>
Net asset value--Beginning of period $ 9.820 $ 9.820 $ 9.820
-------- -------- --------
Income From Investment Operations:
Net investment income (a) 0.561 0.497 0.542
Net realized and unrealized gain (loss) 0.090 0.090 0.090
-------- -------- --------
Total from Investment Operations 0.651 0.587 0.632
-------- -------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.551) (0.487) (0.532)
In excess of net investment income -- -- --
-------- -------- --------
Total Distributions Declared to Shareholders (0.551) (0.487) (0.532)
-------- -------- --------
Net asset value--End of period $ 9.920 $ 9.920 $ 9.920
-------- -------- --------
Total return (c) (d) 6.79% 6.11% 6.59%
-------- -------- --------
Ratios to Average Net Assets
Expenses 0.50%(f) 1.15%(f) 0.70%(f)
-------- -------- --------
Net investment income 5.64%(f) 4.99%(f) 5.44%(f)
-------- -------- --------
Fees and expenses waived or borne by
the Advisor 1.76%(f) 1.76%(f) 1.76%(f)
-------- -------- --------
Portfolio turnover 73% 73% 73%
-------- -------- --------
Net assets at end of period (000) $ 6,858 $ 4,233 $ 575
-------- -------- --------
(a) Net of fees and expenses waived or borne by the
Advisor which amounted to: $ 0.169 $ 0.169 $ 0.169
</TABLE>
(b) Class C shares were initially offered on January 4, 1995. Per share data
reflects activity from that date.
(c) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(d) Had the Advisor not waived or reimbursed a portion of expenses, total
return would have been reduced.
(e) Not 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.
(g) Annualized.
- --------------------------------------------------------------------------------
Notes To Financial Statements continued
- --------------------------------------------------------------------------------
August 31, 1998
Transfer Agent fee: Liberty Funds Services, Inc., formerly Colonial Investors
Service Center, Inc. (the Transfer Agent), an affiliate of the Advisor, provides
shareholder services for a monthly fee equal to 0.17% annually of each Fund's
average net assets and receives reimbursement for certain out-of-pocket
expenses.
Effective January 1, 1997 and continuing through calendar year 1997, the
Transfer Agent fee was reduced by 0.01% resulting in a decrease in the fee from
0.18% to 0.17% annually.
Underwriting discounts, service and distribution fees:
Liberty Funds Distributor, Inc., formerly Liberty Financial Investments, Inc.
(the Distributor), a subsidiary of the Advisor, is each Fund's principal
underwriter. During the year ended August 31, 1998, each Fund has been advised
that the Distributor retained net underwriting discounts on CSDUSGF, CIUSGF and
CFSF of $548, $25,138 and $20,365, respectively, on sales of the Funds' Class A
shares and received contingent deferred sales charges (CDSC) of $10,841, $284
and none on Class A share redemptions, $15,246, $946,507 and $156,304 on Class B
share redemptions and $74, $1,090 and $1,863 on Class C share redemptions,
respectively.
Each Fund has adopted a 12b-1 plan which requires the payment of a service fee
to the Distributor. CIUSGF and CFSF pay a service fee equal to 0.25% annually of
their net assets as of the 20th of each month. CSDUSGF pays a service fee equal
to 0.20% annually of Class A and Class B net assets and 0.25% annually of Class
C net assets as of the 20th of each month. The plan also requires the payment of
a distribution fee to the Distributor. CSDUSGF pays a distribution fee equal to
0.65% annually of the average net assets of Class B shares and 0.15% annually of
the average net assets of Class C shares. CIUSGF and CFSF each pay a
distribution fee equal to 0.75% annually of the average net assets attributable
to Class B and Class C shares. The Distributor has voluntarily agreed, until
further notice, to waive a portion of the Class C share distribution fee so that
it does not exceed 0.60% annually.
18
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights CSDUSGF continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended August 31
- -------------------------------------------------------------------------------------------
1996
Class A Class B Class C
-------- -------- --------
<S> <C> <C> <C>
Net asset value--Beginning of period $ 9.850 $ 9.850 $ 9.850
-------- -------- --------
Income From Investment Operations:
Net investment income (a) 0.568 0.504 0.549
Net realized and unrealized gain (loss) (0.032) (0.032) (0.032)
-------- -------- --------
Total from Investment Operations 0.536 0.472 0.517
-------- -------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.566) (0.502) (0.547)
In excess of net investment income -- -- --
-------- -------- --------
Total Distributions Declared to Shareholders (0.566) (0.502) (0.547)
-------- -------- --------
Net asset value--End of period $ 9.820 $ 9.820 $ 9.820
-------- -------- --------
Total return (c) (d) 5.57% 4.89% 5.36%
-------- -------- --------
Ratios to Average Net Assets
Expenses 0.50%(f) 1.15%(f) 0.70%(f)
-------- -------- --------
Net investment income 5.99%(f) 5.34%(f) 5.79%(f)
-------- -------- --------
Fees and expenses waived or borne by
the Advisor 1.48%(f) 1.48%(f) 1.48%(f)
-------- -------- --------
Portfolio turnover 51% 51% 51%
-------- -------- --------
Net assets at end of period (000) $ 6,136 $ 4,004 $ 461
-------- -------- --------
(a) Net of fees and expenses waived or borne by the
Advisor which amounted to: $ 0.136 $ 0.136 $ 0.136
<CAPTION>
Year ended August 31
- -------------------------------------------------------------------------------------------
1995
Class A Class B Class C(b)
-------- -------- --------
<S> <C> <C> <C>
Net asset value--Beginning of period $ 9.670 $ 9.670 $ 9.550
-------- -------- --------
Income From Investment Operations:
Net investment income (a) 0.514 0.451 0.334
Net realized and unrealized gain (loss) 0.152 0.152 0.280
-------- -------- --------
Total from Investment Operations 0.666 0.603 0.614
-------- -------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.486) (0.423) (0.314)
In excess of net investment income -- -- --
-------- -------- --------
Total Distributions Declared to Shareholders (0.486) (0.423) (0.314)
-------- -------- --------
Net asset value--End of period $ 9.850 $ 9.850 $ 9.850
-------- -------- --------
Total return (c) (d) 7.08% 6.39% 6.50%(e)
-------- -------- --------
Ratios to Average Net Assets
Expenses 0.50% 1.15% 0.70%(g)
-------- -------- --------
Net investment income 5.50% 4.85% 5.30%(g)
-------- -------- --------
Fees and expenses waived or borne by
the Advisor 1.14% 1.14% 1.14%
-------- -------- --------
Portfolio turnover 36% 36% 36%
-------- -------- --------
Net assets at end of period (000) $ 9,934 $ 3,968 $ 385
-------- -------- --------
(a) Net of fees and expenses waived or borne by the
Advisor which amounted to: $ 0.107 $ 0.107 $ 0.107
<CAPTION>
Year ended August 31
- ----------------------------------------------------------------------------
1994
Class A Class B
-------- --------
<S> <C> <C>
Net asset value--Beginning of period $ 9.950 $ 9.950
-------- --------
Income From Investment Operations:
Net investment income (a) 0.473 0.409
Net realized and unrealized gain (loss) (0.356) (0.356)
-------- --------
Total from Investment Operations 0.117 0.053
-------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.397) (0.333)
In excess of net investment income -- --
-------- --------
Total Distributions Declared to Shareholders (0.397) (0.333)
-------- --------
Net asset value--End of period $ 9.670 $ 9.670
-------- --------
Total return (c) (d) 1.20% 0.55%
-------- --------
Ratios to Average Net Assets
Expenses 0.50% 1.15%
-------- --------
Net investment income 4.84% 4.19%
-------- --------
Fees and expenses waived or borne by
the Advisor 1.16% 1.16%
-------- --------
Portfolio turnover 69% 69%
-------- --------
Net assets at end of period (000) $ 16,168 $ 4,176
-------- --------
(a) Net of fees and expenses waived or borne by the
Advisor which amounted to: $ 0.114 $ 0.114
</TABLE>
State Tax Information for the Period Ended August 31, 1998 (unaudited):
An average of 32% of the Fund's period investments as of the end of each quarter
were in direct obligations of the U.S. Treasury.
Approximately 39% of the Fund's distributions (34% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
- --------------------------------------------------------------------------------
Notes continued
- --------------------------------------------------------------------------------
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.
Expense limits: For CSDUSGF, the Advisor has agreed, until further notice, to
waive fees and bear certain Fund expenses to the extent that total expenses
(exclusive of service and distribution fees, brokerage commissions, interest,
taxes and extraordinary expenses, if any) exceed 0.60% annually of the Fund's
average net assets. Through December 31, 1997, the expense limit was 0.30%
annually of the Fund's average net assets.
Other: The Funds pay no compensation to their officers, all of whom are
employees of the Advisor.
The Funds' 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
Funds' assets.
Note 3: Portfolio Information
Investment activity: For the year ended August 31, 1998, purchases and sales of
investments, other than short-term obligations and mortgage dollar roll
transactions, were as follows:
Purchases Sales
- ----------------------------------------
CSDUSGF $22,247,575 $18,438,659
CIUSGF $1,192,982,070 $1,243,522,757
CFSF $1,087,999,547 $1,088,846,378
Transactions in written call options were as follows:
CIUSGF CFSF
Par Value Par Value
Covered by Premiums Covered by Premiums
Written Options Received Written Options Received
Outstanding at
beginning of period $ 40,000,000 $ 78,906 30,000,000 $ 59,180
Written 86,000,000 229,922 147,000,000 382,265
Closed -- -- -- --
Expirations 126,000,000 308,828 177,000,000 441,445
Exercises -- -- -- --
Outstanding at end
of period -- -- -- --
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights CIUSGF
- --------------------------------------------------------------------------------
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year ended August 31
- ------------------------------------------------------------------------------------
1998
Class A Class B Class C
-------- -------- --------
<S> <C> <C> <C>
Net asset value--Beginning of period $ 6.510 $ 6.510 $ 6.510
-------- -------- --------
Income From Investment Operations:
Net investment income 0.420 0.370 0.380(b)
Net realized and unrealized gain (loss) 0.204 0.204 0.204
-------- -------- --------
Total from Investment Operations 0.624 0.574 0.584
-------- -------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.376) (0.329) (0.339)
In excess of net investment income (0.028) (0.025) (0.025)
From capital paid in -- -- --
-------- -------- --------
Total Distributions Declared to Shareholders (0.404) (0.354) (0.364)
-------- -------- --------
Net asset value--End of period $ 6.730 $ 6.730 $ 6.730
-------- -------- --------
Total return (c) 9.87% 9.03% 9.20%(d)
-------- -------- --------
Ratios to Average Net Assets
Expenses 1.12%(f) 1.87%(f) 1.72%(b)(f)
-------- -------- --------
Net investment income 6.02%(f) 5.27%(f) 5.42%(b)(f)
-------- -------- --------
Portfolio turnover 214% 214% 214%
-------- -------- --------
Net assets at end of period (in millions) $ 651 $ 395 $ 1
-------- -------- --------
<CAPTION>
Year ended August 31
- ------------------------------------------------------------------------------------
1997
Class A Class B Class C
-------- -------- --------
<S> <C> <C> <C>
Net asset value--Beginning of period $ 6.370 $ 6.370 $ 6.590
-------- -------- --------
Income From Investment Operations:
Net investment income 0.393 0.344 0.032
Net realized and unrealized gain (loss) 0.145 0.145 (0.082)
-------- -------- --------
Total from Investment Operations 0.538 0.489 (0.050)
-------- -------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.398) (0.349) (0.030)
In excess of net investment income -- -- --
From capital paid in -- -- --
-------- -------- --------
Total Distributions Declared to Shareholders (0.398) (0.349) (0.030)
-------- -------- --------
Net asset value--End of period $ 6.510 $ 6.510 $ 6.510
-------- -------- --------
Total return (c) 8.64% 7.83% (0.77)%(e)
-------- -------- --------
Ratios to Average Net Assets
Expenses 1.13%(f) 1.88%(f) 1.78%(f)(g)
-------- -------- --------
Net investment income 6.43%(f) 5.68%(f) 5.85%(f)(g)
-------- -------- --------
Portfolio turnover 61% 61% 61%
-------- -------- --------
Net assets at end of period (in millions) $ 731 $ 461 $ (h)
-------- -------- --------
</TABLE>
(a) Class C shares were initially offered on August 1, 1997. Per share data
reflects activity from that date.
(b) Net of fees waived by the Distributor which amounted to $0.010 per share
and 0.15%.
(c) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(d) Had the Distributor not waived a portion of expenses, total return would
have been reduced.
(e) Not 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.
(g) Annualized.
(h) Rounds to less than one million.
- --------------------------------------------------------------------------------
Notes To Financial Statements continued
- --------------------------------------------------------------------------------
August 31, 1998
Unrealized appreciation (depreciation) at August 31, 1998 for federal income tax
purposes was:
CSDUSGF CIUSGF CFSF
- ------------------------------------------------------------------------------
Gross unrealized
appreciation $141,643 $38,404,583 $33,852,933
Gross unrealized
depreciation (5,630) (677,841) (5,533,780)
-------- ----------- -----------
Net unrealized
appreciation $136,013 $37,726,742 $28,319,153
Capital loss carryforwards: At August 31, 1998, capital loss carryforwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
Year of Capital loss
expiration carryforward
- -------------------------------------------------
CSDUSGF 2003 $ 36,000
2004 38,000
------------
$ 74,000
------------
Year of Capital loss
expiration carryforward
- -------------------------------------------------
CIUSGF 2001 $ 12,601,000
2002 7,249,000
2003 67,291,000
2004 32,580,000
2005 18,973,000
------------
$138,694,000
------------
Of the CIUSGF loss carryforwards expiring in 2001 and 2002, $12,601,000 and
$4,423,000, respectively, were acquired in the merger with Liberty Financial
U.S. Government Securities Fund. Their availability for use in offsetting any
future realized gains may be limited in a given year.
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights CIUSGF continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended August 31
- ---------------------------------------------------------------------------------------------------
1996 1995
Class A Class B Class A Class B
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value--Beginning of period $ 6.550 $ 6.550 $ 6.420 $ 6.420
-------- -------- -------- --------
Income From Investment Operations:
Net investment income 0.390 0.341 0.447 0.399
Net realized and unrealized gain (loss) (0.161) (0.161) 0.100 0.100
-------- -------- -------- --------
Total from Investment Operations 0.229 0.180 0.547 0.499
-------- -------- -------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.391) (0.344) (0.417) (0.369)
In excess of net investment income (0.018) (0.016) -- --
From capital paid in -- -- -- --
-------- -------- -------- --------
Total Distributions Declared to Shareholders (0.409) (0.360) (0.417) (0.369)
-------- -------- -------- --------
Net asset value--End of period $ 6.370 $ 6.370 $ 6.550 $ 6.550
-------- -------- -------- --------
Total return (c) 3.51% 2.74% 8.88% 8.07%
-------- -------- -------- --------
Ratios to Average Net Assets
Expenses 1.11%(f) 1.86%(f) 1.11% 1.86%
-------- -------- -------- --------
Net investment income 6.45%(f) 5.70%(f) 7.51% 6.76%
-------- -------- -------- --------
Portfolio turnover 123% 123% 140% 140%
-------- -------- -------- --------
Net assets at end of period (in millions) $ 921 $ 572 $ 1,164 $ 701
-------- -------- -------- --------
<CAPTION>
Year ended August 31
- ---------------------------------------------------------------------
1994
Class A Class B
-------- --------
<S> <C> <C>
Net asset value--Beginning of period $ 6.880 $ 6.880
-------- --------
Income From Investment Operations:
Net investment income 0.415 0.365
Net realized and unrealized gain (loss) (0.452) (0.452)
-------- --------
Total from Investment Operations (0.037) (0.087)
-------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.400) (0.352)
In excess of net investment income -- --
From capital paid in (0.023) (0.021)
-------- --------
Total Distributions Declared to Shareholders (0.423) (0.373)
-------- --------
Net asset value--End of period $ 6.420 $ 6.420
-------- --------
Total return (c) (0.53)% (1.28)%
-------- --------
Ratios to Average Net Assets
Expenses 1.11% 1.86%
-------- --------
Net investment income 8.14% 7.39%
-------- --------
Portfolio turnover 291% 291%
-------- --------
Net assets at end of period (in millions) $ 758 $ 836
-------- --------
</TABLE>
State Tax Information for the Period Ended August 31, 1998 (unaudited):
An average of 33% of the Fund's period investments as of the end of each quarter
were in direct obligations of the U.S. Treasury.
Approximately 36% of the Fund's distributions (28% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
- --------------------------------------------------------------------------------
Notes continued
- --------------------------------------------------------------------------------
Year of Capital loss
expiration carryforward
- ---------------------------------------------
CFSF 1999 $ 34,064,000
2000 595,000
2002 84,302,000
2004 21,929,000
------------
$140,890,000
------------
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: CIUSGF and CFSF may purchase or sell futures contracts and purchase and
write options on futures and securities. The Funds will use these instruments to
hedge against the effects of changes in the value of the portfolio securities
due to anticipated changes in interest rates and/or market conditions and not
for trading purposes. The Funds may also invest in these instruments for
duration management. The use of futures contracts and options involves certain
risks which include (1) the imperfect correlation between the price movement of
the instruments and the underlying securities, (2) inability to close out a
position due to different trading hours, or the absence of a liquid market for
either the instrument 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, or option
premium recorded in the Funds' Statement of Assets and Liabilities at any given
time.
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights CFSF
- --------------------------------------------------------------------------------
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year ended August 31
- ------------------------------------------------------------------------------------
1998
Class A Class B Class C
-------- -------- --------
<S> <C> <C> <C>
Net asset value--Beginning of period $ 10.520 $ 10.520 $ 10.520
-------- -------- --------
Income From Investment Operations:
Net investment income 0.708 0.625 0.642(c)
Net realized and unrealized gain (loss) 0.530 0.530 0.530
-------- -------- --------
Total from Investment Operations 1.238 1.155 1.172
-------- -------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.678) (0.595) (0.612)
From net realized gains -- -- --
From capital paid in -- -- --
-------- -------- --------
Total Distributions Declared to Shareholders (0.678) (0.595) (0.612)
-------- -------- --------
Net asset value--End of period $ 11.080 $ 11.080 $ 11.080
-------- -------- --------
Total return (d) 12.11% 11.26% 11.43%(e)
-------- -------- --------
Ratios to Average Net Assets
-------- -------- --------
Expenses 1.14%(g) 1.89%(g) 1.74%(c)(g)
-------- -------- --------
Net investment income 6.49%(g) 5.74%(g) 5.89%(c)(g)
-------- -------- --------
Portfolio turnover 356% 356% 356%
-------- -------- --------
Net assets at end of period (in millions) $ 821 $ 72 $ 1
-------- -------- --------
<CAPTION>
Period ended August 31(a)
- -----------------------------------------------------------------------------------------
1997
Class A Class B Class C(b)
-------- -------- --------
<S> <C> <C> <C>
Net asset value--Beginning of period $ 10.530 $ 10.530 $ 10.710
-------- -------- --------
Income From Investment Operations:
Net investment income 0.580 0.515 0.058
Net realized and unrealized gain (loss) (0.038) (0.038) (0.198)
-------- -------- --------
Total from Investment Operations 0.542 0.477 (0.140)
-------- -------- --------
Less Distributions Declared to Shareholders:
From net investment income (0.552) (0.487) (0.050)
From net realized gains -- -- --
From capital paid in -- -- --
-------- -------- --------
Total Distributions Declared to Shareholders (0.552) (0.487) (0.050)
-------- -------- --------
Net asset value--End of period $ 10.520 $ 10.520 $ 10.520
-------- -------- --------
Total return (d) 5.31%(f) 4.66%(f) (1.31%)(f)
-------- -------- --------
Ratios to Average Net Assets
-------- -------- --------
Expenses 1.19%(g)(h) 1.94%(g)(h) 1.82%(g)(h)
-------- -------- --------
Net investment income 6.71%(g)(h) 5.96%(g)(h) 6.55%(g)(h)
-------- -------- --------
Portfolio turnover 79%(f) 79%(f) 79%(f)
-------- -------- --------
Net assets at end of period (in millions) $ 888 $ 64 $ (i)
-------- -------- --------
</TABLE>
(a) The Fund changed its fiscal year end from October 31 to August 31.
Information presented is for the period November 1, 1996 through August
31, 1997.
(b) Class C shares were initially offered on August 1, 1997. Per share data
reflects activity from that date.
(c) Net of fees waived by the Distributor which amounted to $0.017 per share
and 0.15%.
(d) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent sales charge.
(e) Had the Distributor not waived a portion of expenses, total return would
have been reduced.
(f) Not annualized.
(g) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(h) Annualized.
(i) Round to less than one million.
- --------------------------------------------------------------------------------
Notes To Financial Statements continued
- --------------------------------------------------------------------------------
August 31, 1998
Note 4: Line of Credit
CSDUSGF may borrow up to 33 1/3% of its net assets under a line of credit for
temporary or emergency purposes. Any borrowings bear interest at one of the
following options determined at the inception of the loan: (1) federal funds
rate plus 1/2 of 1%, (2) the lending bank's base rate or (3) IBOR offshore loan
rate plus 1/2 of 1%. There were no borrowings under the line of credit during
the year ended August 31, 1998.
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights CFSF continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended October 31
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995
1994
Class A Class B Class A Class B Class
A Class B
-------- -------- -------- --------
- -------- --------
<S> <C> <C> <C> <C>
<C> <C>
Net asset value--Beginning of period $ 10.830 $ 10.830 $ 9.950 $ 9.950 $
11.460 $ 11.460
-------- -------- -------- --------
- -------- --------
Income From Investment
Operations:
Net investment income 0.696 0.617 0.710 0.633
0.821 0.741
Net realized and unrealized gain (loss) (0.300) (0.300) 0.907 0.907
(1.560) (1.560)
-------- -------- -------- --------
- -------- --------
Total from Investment Operations 0.396 0.317 1.617 1.540
(0.739) (0.819)
-------- -------- -------- --------
- -------- --------
Less Distributions Declared to
Shareholders:
From net investment income (0.684) (0.606) (0.709) (0.632)
(0.771) (0.691)
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)
(0.771) (0.691)
-------- -------- -------- --------
- -------- --------
Net asset value--End of period $ 10.530 $ 10.530 $ 10.830 $ 10.830 $
9.950 $ 9.950
-------- -------- -------- --------
- -------- --------
Total return (d) 3.88% 3.11% 16.82% 15.96%
(6.57%) (7.28%)
-------- -------- -------- --------
- -------- --------
Ratios to Average Net
Assets
-------- -------- -------- --------
- -------- --------
Expenses 1.18%(g) 1.93%(g) 1.17% 1.92%
1.16% 1.91%
-------- -------- -------- --------
- -------- --------
Net investment income 6.62%(g) 5.87%(g) 7.04% 6.29%
7.80% 7.05%
-------- -------- -------- --------
- -------- --------
Portfolio turnover 125% 125% 171% 171%
121% 121%
-------- -------- -------- --------
- -------- --------
Net assets at end of period (in millions) $ 1,026 $ 73 $ 1,201 $ 79 $
1,278 $ 70
-------- -------- -------- --------
- -------- --------
</TABLE>
State Tax Information for the Period Ended August 31, 1998 (unaudited):
An average of 34% of the Fund's period investments as of the end of each quarter
were in direct obligations of the U.S. Treasury.
Approximately 52% of the Fund's distributions (42% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
23
<PAGE>
Report of Independent Accountants
To the Trustees of Colonial Trust II and the Shareholders of Colonial Short
Duration U.S. Government Fund and Colonial intermediate U.S. Government Fund and
the Trustees of Colonial Trust III and the Shareholders of Colonial Federal
Securities Fund
In our opinion, the accompanying statements of assets and liabilities, including
the investment portfolios, and the related statements of operations, changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Colonial Short Duration U.S. Government
Fund, Colonial Intermediate U.S. Government Fund (each a series of Colonial
Trust II) and Colonial Federal Securities Fund (a series of Colonial Trust III)
at August 31, 1998, the results of their operations, the changes in their net
assets, and their 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 Funds' 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 August 31, 1998 by
correspondence with the custodian and brokers provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
October 14, 1998
24
<PAGE>
This page left intentionally blank.
25
<PAGE>
This page left intentionally blank.
26
<PAGE>
Trustees & Transfer Agent
- --------------------------------------------------------------------------------
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)
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, CS 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
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.)
- --------------------------------------------------------------------------------
Important Information About This Report
The Transfer Agent for Colonial Short Duration U.S. Government Fund, Colonial
Intermediate U.S. Government Fund and Colonial Federal Securities Fund is:
Liberty Funds Services, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
The Funds mail one shareholder report to each shareholder address. If you would
like more than one report, please call 1-800-426-3750 and additional reports
will be sent to you.
This report has been prepared for shareholders of Colonial Short Duration U.S.
Government Fund, Colonial Intermediate U.S. Government Fund and 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 Funds and with the
most recent copy of the Liberty Funds Distributor Performance Update.
27
<PAGE>
- --------------------------------------------------------------------------------
Liberty - Offering a select group of investment managers
- --------------------------------------------------------------------------------
Liberty Funds Distributor offers a diverse group of mutual funds from a select
group of investment managers that includes Colonial Management Associates, Inc.,
Stein Roe & Farnham Incorporated and Newport Fund Management, Inc. Each of these
accomplished managers offers solid long-term performance potential through a
focused, consistent style of management. All are members of the Liberty
Financial Companies (NYSE: L), a diversified organization with more than $54
billion in assets under management for more than 1.7 million investors.
You can choose from a spectrum of conservative income funds to more aggressive
international funds to build a portfolio designed to meet your needs.
[GRAPHIC OMITTED]
Ask your financial advisor to help you develop an investment strategy that
blends the complementary disciplines of different investment managers into a
well-balanced program tailored to your goals.
- --------------------------------------------------------------------------------
COLONIAL GOVERNMENT FUNDS Annual Report, August 31, 1998
- --------------------------------------------------------------------------------
[LOGO] LIBERTY
COLONIAL . CRABBE HUSON . NEWPORT . STEIN ROE ADVISOR
Liberty Funds Distributor, Inc. (C)1998
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
Visit us at www.libertyfunds.com
-------------
BULK RATE
U.S. POSTAGE
PAID
HOLLISTON, MA
PERMIT NO. 20
-------------
GF-02/902F-0898 (10/98) 98/1056
