QUALITY GOVERNMENT BONDS
CAN ADD DIVERSIFICATION TO
YOUR PORTFOLIO.
COLONIAL GOVERNMENT FUNDS ANNUAL REPORT
AUGUST 31, 1999
[bullet] COLONIAL SHORT DURATION U.S. GOVERNMENT FUND
[bullet] COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND
[bullet] COLONIAL FEDERAL SECURITIES FUND
<PAGE>
TABLE OF CONTENTS
1 PRESIDENT'S MESSAGE
2 PORTFOLIO MANAGERS' REPORT
3 HIGHLIGHTS
4 PERFORMANCE
10 INVESTMENT PORTFOLIO
14 FINANCIAL STATEMENTS
17 NOTES TO FINANCIAL STATEMENTS
21 FINANCIAL HIGHLIGHTS
IMPORTANT NOTES:
Past performance cannot predict future investment results. Returns and value of
an investment will vary, resulting in a gain or loss on sale.
All results shown assume reinvestment of distributions. The "without sales
charge" returns do not include sales charges or contingent deferred sales
charges (CDSC). The "with sales charge" returns include the maximum sales charge
of 3.25% for Colonial Short Duration U.S. Government Fund and 4.75% for Colonial
Intermediate U.S. Government Fund and Colonial Federal Securities Fund, and the
maximum applicable contingent deferred sales charge of 4% for 1 year on Class B
shares and 1% for 1 year on Class C shares for Colonial Short Duration U.S.
Government Fund; 5% for 1 year and 2% for 5 years on Class B shares, and 1% for
1 year on Class C shares for Colonial Intermediate U.S. Government Fund and
Colonial Federal Securities Fund.
Performance results reflect any voluntary waivers or reimbursement of fund
expenses by the Advisor or its affiliates. Absent these waivers or reimbursement
arrangements, performance results would have been lower.
Performance for different share classes will vary based on 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 economic and market conditions change frequently, there can be no
assurance that the trends described in this report will continue or come to
pass.
- ---------------------------------
Not FDIC May Lose Value
Insured No Bank Guarantee
- ---------------------------------
<PAGE>
President's Message
- --------------------------------------------------------------------------------
COLONIAL GOVERNMENT FUNDS
- --------------------------------------------------------------------------------
Dear Shareholder:
[graphic omitted] During the 12 months that ended August 31, 1999, the bond
market experienced considerable volatility. The period's
early months were generally favorable for bond prices as
continued economic weakness in Asia and a financial crisis
in Russia caused a global flight to quality, resulting in
increased demand for U.S. government bonds. In response,
interest rates fell and bond prices rallied. However, by early 1999, changing
economic conditions reversed this trend. Global economies stabilized, and
several months of strong economic growth in the U.S. rekindled investors'
inflation fears. Interest rates rose and bond prices fell across the board,
prompting the Federal Reserve Board to implement two consecutive increases in
short-term rates.
The Funds' managers actively managed each portfolio in response to bond market
conditions during the period. Although this challenging environment was
reflected in the Funds' performance, it is important to remember to maintain a
long-term perspective when making investment decisions.
The following report will provide you with more specific information about the
Funds' performance and the strategies employed during the period. As always, we
thank you for choosing one of Colonial's Government funds and for giving us the
opportunity to serve your investment needs.
Respectfully,
/s/ Stephen E. Gibson
Stephen E. Gibson
President
October 12, 1999
1
<PAGE>
WHAT IS DURATION?
DURATION MEASURES 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 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.
FOR EXAMPLE, IF INTEREST RATES RISE 1%, A FUND WITH A 5-YEAR DURATION IS LIKELY
TO LOSE 5% OF ITS VALUE. IF INTEREST RATES DECLINE 1%, THE VALUE OF THE SAME
FUND MAY INCREASE 5%. THE LONGER THE FUND'S DURATION, THE MORE SENSITIVE ITS
PRICE IS TO INTEREST RATES.
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS' REPORT
- --------------------------------------------------------------------------------
ACTIVE PORTFOLIO MANAGEMENT HELPED IN NEGATIVE MARKET CONDITIONS
As market conditions shifted dramatically during the course of the year, we
sought to reduce the negative effects of volatility by actively managing the
portfolios, particularly their duration characteristics.
During the first part of the year, we reduced the Funds' sensitivity to interest
rate movements in response to rapidly falling interest rates and heightened
concerns that prepayments would increase. We also increased the duration of the
portfolios' other holdings -- including Treasury securities -- to position the
portfolios to take advantage of rising Treasury bond prices.
When interest rates reversed direction early in 1999, we altered our strategy
and reduced the proportion of Treasury securities in the portfolio to offset an
increase in mortgage security duration. When interest rates rise as rapidly as
they did during the period, a large position in mortgage-backed securities can
cause a portfolio's interest rate sensitivity, as measured by its duration, to
increase dramatically. Although funds with a longer duration generally do not
perform as well as funds with a shorter duration when rates rise, we believed
that mortgage-backed securities offered compelling values and attractive
long-term performance potential. Therefore, instead of selling the portfolios'
mortgage holdings as prices fell, we elected to maintain and, in some cases,
modestly increase our investment in mortgage-backed securities.
OUTLOOK SUGGESTS IMPROVED MARKET CONDITIONS AND LOWER VOLATILITY
We are optimistic that conditions should improve. Despite continued economic
growth, we don't anticipate any significant increases in inflation. We believe
any increase in costs should be offset by changes that have taken place in the
economy, including increased global competition that should act to keep prices
of goods and services stable. We also expect volatility to decline as investors
become more risk tolerant as conditions stabilize worldwide, which could
encourage better supply and demand dynamics for mortgage-backed securities. We
are confident that the Funds are well positioned to take advantage of improving
conditions should they occur.
/s/ Leslie W. Finnemore /s/ Michael R. Bissonnette /s/ Ann T. Peterson
LESLIE W. FINNEMORE and MICHAEL R. BISSONNETTE are senior vice presidents of
Colonial Management Associates (CMA). MS. FINNEMORE is co-portfolio manager of
Colonial Federal Securities Fund, Colonial Intermediate U.S. Government Fund and
Colonial Short Duration U.S. Government Fund. MR. BISSONNETTE is co-portfolio
manager of Colonial Federal Securities Fund. ANN T. PETERSON is a vice president
of CMA and co-portfolio manager of Colonial Short Duration U.S. Government Fund
and Colonial Intermediate U.S. Government Fund.
2
<PAGE>
- --------------------------------------------------------------------------------
HIGHLIGHTS
- --------------------------------------------------------------------------------
[arrow] INTEREST RATE VOLATILITY CHALLENGED BOND MARKET INVESTORS.
Long-term interest rates rose more than three-quarters of a percentage
point to 6.07% between the beginning and end of the period. Volatility
was significant, with Treasury rates falling as low as 4.98% and rising
as high as 6.10%.
[arrow] FEDERAL RESERVE BOARD REVERSED ITS POSITION ON INTEREST RATES.
After a series of interest rate cuts in the fall of 1998, the Federal
Reserve Board (the Fed) adopted a neutral stance on the direction of
rates. However, continued economic strength prompted a bias towards
raising rates, and bond prices fell further. Subsequently, the Fed
increased rates twice, in June and in August.
[arrow] TREASURY BOND PERFORMANCE REFLECTED VOLATILE MARKET CONDITIONS.
Treasury bonds outperformed mortgage-backed securities early in the
period. However, as investors became concerned about a potential Fed
increase in interest rates, Treasury bond prices declined sharply,
while mortgage-backed security prices remained stable.
MORTGAGE BOND VS. TREASURY BOND PERFORMANCE
CHANGE IN VALUE OF $10,000 FROM 8/31/98 - 8/31/99
[graphic omitted]
10-Year
Mortgage Bond Treasury Bond
8/31/98 10000 10000
9/98 10121 10508
10/98 10108 10393
11/98 10158 10310
12/98 10202 10414
1/99 10274 10455
2/99 10233 10010
3/99 10302 10085
4/99 10349 10038
5/99 10291 9831
6/99 10255 9737
7/99 10186 9712
8/31/99 10186 9663
Performance of the 10-year Treasury bond is illustrated by the Salomon 10-Year
Treasury Bond Index, a broad-based, unmanaged index that tracks the performance
of the 10-Year on-the-run Treasury market. Performance of mortgage bonds is
illustrated by the Lehman Brothers MBS (Mortgage-Backed Security) Index, a
broad-based, unmanaged index that tracks the performance of mortgage-backed
securities. Unlike mutual funds, indexes are not investments and do not incur
fees or expenses. It is not possible to invest directly in an index.
3
<PAGE>
ANNUAL REPORT: COLONIAL SHORT DURATION U.S. GOVERNMENT FUND
DURATION
8/31/99 2.45 years
- --------------------------
8/31/98 1.76 years
- --------------------------
NET ASSET VALUE PER SHARE
ON 8/31/99
Class A $9.72
- --------------------------
Class B $9.72
- --------------------------
Class C $9.72
- --------------------------
DISTRIBUTIONS DECLARED PER
SHARE FROM 9/1/98 TO 8/31/99
Class A $0.484
- --------------------------
Class B $0.419
- --------------------------
Class C $0.464
- --------------------------
30-DAY SEC YIELDS ON 8/31/99
Class A 5.53%
- --------------------------
Class B 5.05%
- --------------------------
Class C 5.31%
- --------------------------
30-day 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 or its affiliates had not borne certain expenses, the
SEC yield would have been 5.14% for Class A shares, 4.66% for Class B shares and
4.91% for Class C shares.
AVERAGE LIFE BREAKDOWN
AS OF 8/31/99
0-2 years 15.46%
- --------------------------
2-4 years 35.15%
- --------------------------
4-6 years 41.73%
- --------------------------
6-8 years 0.52%
- --------------------------
8-10 years 7.15%
- --------------------------
Average life is the expected maturity of a bond and is calculated as a
percentage of total investments.
- --------------------------------------------------------------------------------
COLONIAL SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
Investing primarily in U.S. government securities, the Fund is managed for low
price volatility. It is the most conservative of Colonial's three government
funds, designed for investors with a short investment horizon and/or low risk
tolerance.
Throughout the period we shifted our asset allocation among investment classes.
We increased the proportion of assets invested in mortgage-backed securities
from 33.4% to 81.1%(1) and decreased our investment in Treasurys and U.S. agency
debt. By reallocating the Fund's assets, we positioned the Fund to take
advantage of slightly higher interest rates, which have typically benefited
mortgage-backed security performance because homeowners are less likely to
prepay their mortgages when rates are rising. As a result, mortgage-oriented
funds are not faced with reinvesting prepayment proceeds back into the mortgage
market when bond yields are lower.
Our strategy of increasing mortgage-backed securities hampered the Fund's
short-term performance because interest rates rose farther and faster than we
anticipated. As prepayments slowed, the duration of mortgage bonds lengthened,
causing investors to sell these securities. Weak prices were further aggravated
by heavy mortgage supply as the period ended. However, we believe that active
management of the portfolio should benefit the Fund over the long term, as we
expect more favorable conditions for mortgage-backed securities.
(1) Calculated as a percentage of senior securities.
AVERAGE ANNUAL TOTAL RETURNS AS OF 8/31/99
SHARE CLASS A B C
Inception 10/1/92 2/1/93 1/4/95
- ------------------------------------------------------------------------------
Without With Without With Without With
Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge
- ------------------------------------------------------------------------------
1 year 2.05% (1.27)% 1.39% (2.50)% 1.85% 0.87%
- ------------------------------------------------------------------------------
5 years 5.61 4.91 4.92 4.92 5.41 5.41
- ------------------------------------------------------------------------------
Life 4.77 4.27 4.12 4.12 4.63 4.63
- ------------------------------------------------------------------------------
Class B and C share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns were not 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 the periods prior to the inception
of the newer class shares would have been lower.
4
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT IN CLASS A SHARES 10/1/92 - 8/31/99
[graphic omitted]
Lehman Brothers Without With
U.S. Govt Bond Sales Charge Sales Charge
9/30/99 10000 10000 9675
10/31/92 9943 9981 9657
11/30/92 9932 10011 9686
12/31/92 10020 10051 9724
1/31/93 10126 10112 9783
2/28/93 10207 10162 9832
3/31/93 10238 10192 9861
4/30/93 10301 10241 9908
5/31/93 10276 10250 9917
6/30/93 10353 10299 9964
7/31/93 10376 10335 9999
8/31/93 10462 10371 10034
9/30/93 10495 10397 10059
10/31/93 10519 10401 10063
11/30/93 10521 10403 10065
12/31/93 10563 10447 10107
1/31/94 10629 10492 10151
2/28/94 10564 10472 10133
3/31/94 10511 10411 10073
4/30/94 10471 10361 10024
5/31/94 10484 10451 10111
6/30/94 10510 10401 10063
7/31/94 10605 10426 10087
8/31/94 10640 10517 10175
9/30/94 10616 10468 10128
10/31/94 10640 10468 10128
11/30/94 10595 10479 10138
12/31/94 10615 10533 10192
1/31/95 10760 10690 10343
2/28/95 10906 10778 10428
3/31/95 10967 10912 10557
4/30/95 11065 11046 10687
5/31/95 11254 11103 10742
6/30/95 11315 11186 10822
7/31/95 11360 11166 10803
8/31/95 11428 11272 10906
9/30/95 11484 11336 10968
10/31/95 11580 11399 11029
11/30/95 11678 11486 11113
12/31/95 11767 11532 11157
1/31/96 11867 11625 11247
2/29/96 11820 11624 11246
3/31/96 11811 11573 11197
4/30/96 11823 11640 11262
5/31/96 11849 11694 11314
6/30/96 11935 11737 11356
7/31/96 11982 11866 11480
8/31/96 12026 11876 11490
9/30/96 12136 11983 11594
10/31/96 12273 12078 11685
11/30/96 12364 12148 11753
12/31/96 12366 12181 11785
1/31/97 12425 12249 11851
2/28/97 12455 12280 11881
3/31/97 12445 12299 11899
4/30/97 12547 12380 11978
5/31/97 12635 12474 12069
6/30/97 12722 12568 12161
7/31/97 12861 12638 12227
8/31/97 12874 12683 12271
9/30/97 12972 12809 12393
10/31/97 13068 12858 12440
11/30/97 13100 12921 12501
12/31/97 13188 12997 12575
1/31/98 13315 13069 12644
2/28/98 13327 13097 12671
3/31/98 13379 13183 12755
4/30/98 13443 13213 12785
5/31/98 13514 13273 12842
6/30/98 13584 13345 12911
7/31/98 13648 13376 12942
8/31/98 13815 13490 13052
9/30/98 14001 13630 13187
10/31/98 14070 13687 13242
11/30/98 14056 13687 13242
12/31/98 14109 13701 13256
1/31/99 14163 13797 13349
2/28/99 14099 13697 13253
3/31/99 14195 13778 13331
4/30/99 14239 13861 13411
5/31/99 14229 13818 13369
6/30/99 14270 13718 13273
7/31/99 14315 13791 13343
8/20/99 14315 13877 13426
8/31/99 14355 13802 13353
The Lehman Brothers U.S. 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.
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/99
SHARE CLASS A B C
Inception 10/1/92 2/1/93 1/4/95
- ------------------------------------------------------------------------------
Without With Without With Without With
Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge
- ------------------------------------------------------------------------------
1 year 3.48% 0.12% 2.79% (1.14)% 3.26% 2.28%
- ------------------------------------------------------------------------------
5 years 5.79 5.09 5.10 5.10 5.60 5.60
- ------------------------------------------------------------------------------
Life 4.90 4.38 4.25 4.25 4.76 4.76
- ------------------------------------------------------------------------------
Class B and C share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns were not 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 the periods prior to the inception
of the newer class shares would have been lower.
PERFORMANCE OF A $10,000
INVESTMENT IN ALL SHARE CLASSES
FROM 10/1/92 - 8/31/99
Without With Sales
Sales Charge Charge
------------ ------
Class A $13,802 $13,353
- ---------------------------------------
Class B $13,224 $13,224
- ---------------------------------------
Class C $13,674 $13,674
- ---------------------------------------
SECTOR BREAKDOWNS
8/31/99 VS. 8/31/98
[graphic omitted]
8/31/99 8/31/98
TREASURY SECURITIES 7.04% 40.29%
ADJUSTABLE OR
MORTGAGE SECURITIES 6.89% 19.20%
FIXED-RATE MORTGAGE
SECURITIES 69.21% 27.02%
FLOATING RATE NOTES 16.86% 13.49%
Sector breakdowns are calculated as a percentage of total investments. Because
the Fund is actively managed, there can be no guarantee the Fund will continue
to maintain this breakdown in the future.
5
<PAGE>
ANNUAL REPORT: COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND
DURATION
8/31/99 5.40 years
- --------------------------------------
8/31/98 4.73 years
- --------------------------------------
NET ASSET VALUE PER SHARE
ON 8/31/99
Class A $6.32
- --------------------------------------
Class B $6.32
- --------------------------------------
Class C $6.32
- --------------------------------------
Class Z $6.32
- --------------------------------------
DISTRIBUTIONS DECLARED PER
SHARE FROM 9/1/98 TO 8/31/99
Class A $0.369
- --------------------------------------
Class B $0.319
- --------------------------------------
Class C $0.329
- --------------------------------------
Class Z (1/29/99-8/31/99) $0.229
- --------------------------------------
30-DAY SEC YIELDS ON 8/31/99
Class A 5.63%
- --------------------------------------
Class B 5.15%
- --------------------------------------
Class C 5.31%
- --------------------------------------
Class Z 6.18%
- --------------------------------------
30-day 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 or its affiliates had not borne certain expenses, the SEC yield
would have been 5.16% for Class C shares.
AVERAGE LIFE BREAKDOWN
AS OF 8/31/99
0-5 years 25.35%
- --------------------------------------
5-10 years 53.73%
- --------------------------------------
10-15 years 15.91%
- --------------------------------------
15-20 years 5.01%
- --------------------------------------
Average life is the expected maturity of a bond and is calculated as a
percentage of total investments.
- --------------------------------------------------------------------------------
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 of between 2.2 and 5.5 years.
Early in the period, investors' low risk tolerance, falling interest rates and
increased fears of mortgage prepayments led us to reduce the portfolio's
investment in mortgage-backed securities. However, early in 1999 interest rates
began to rise and we emphasized attractively valued mortgage securities that we
expected would benefit from lowered prepayment expectations, as homeowners
became less likely to refinance their mortgages. We increased the relative
weight of mortgages in the portfolio from 60.1% to 68.9%(1) and decreased our
investment in Treasurys and U.S. agency debt. In addition to changing the Fund's
asset mix, we positioned the portfolio to take advantage of more stable interest
rates, which have historically been positive for mortgage-backed securities.
Increasing the portfolio's duration and its investment in mortgage securities
held back the Fund's 12-month performance because interest rates rose with a
speed and magnitude that we hadn't anticipated. As a result, despite attractive
mortgage sector investment characteristics, investors favored assets with lower
duration and lower perceived risk than mortgage securities. In response,
mortgage bond prices fell. Conditions were further aggravated by heavy mortgage
issuance as the period ended. However, we believe that our active duration and
asset mix management should benefit the Fund over the longer term.
(1) Calculated as a percentage of senior securities.
AVERAGE ANNUAL TOTAL RETURNS AS OF 8/31/99
SHARE CLASS A B C Z
Inception 10/13/87 6/8/92 8/1/97 1/29/99
- --------------------------------------------------------------------------------
Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge Charge
- --------------------------------------------------------------------------------
1 year (0.70)% (5.42)% (1.44)% (6.14)% (1.29)% (2.23)% (0.55)%
- --------------------------------------------------------------------------------
5 years 5.96 4.93 5.17 4.84 5.69 5.69 5.99
- --------------------------------------------------------------------------------
10 years 6.30 5.78 5.73 5.73 6.16 6.16 6.31
- --------------------------------------------------------------------------------
Class B, C and Z share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns were not restated to reflect any expense differential (e.g., Rule 12b-1
fees) between Class A shares and the newer class shares.
6
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT IN CLASS A SHARES 8/31/89 - 8/31/99
[graphic omitted]
Lehman Brothers
Intermediate U.S. Without Sales With
Govt Bond Charge Sales Charge
8/31/89 10000 10000 9525
11/30/89 10360 10255 9768
2/28/90 10364 10284 9796
5/31/90 10563 10582 10079
8/31/90 10813 10794 10282
11/30/90 11228 11187 10656
2/28/91 11570 11431 10888
5/31/91 11821 11665 11111
8/30/91 12186 12024 11453
11/29/91 12682 12391 11802
2/28/92 12905 12565 11968
5/31/92 13162 12726 12122
8/31/92 13747 13023 12404
11/30/92 13711 13100 12478
2/28/93 14356 13420 12783
5/31/93 14482 13570 12925
8/31/93 14941 13863 13205
11/30/93 14963 13837 13180
2/28/94 14965 13838 13182
5/31/94 14662 13636 12988
8/31/94 14900 13747 13094
11/30/94 14714 13666 13017
2/28/95 15292 14097 13427
5/31/95 15993 14895 14187
8/31/95 16235 15059 14344
11/30/95 16725 15572 14832
2/29/96 16852 15693 14948
5/31/96 16718 15367 14637
8/31/96 16959 15492 14756
11/30/96 17671 16281 15508
2/28/97 17672 16253 15481
5/31/97 17908 16478 15695
8/31/97 18324 16883 16081
11/30/97 18780 17400 16574
2/28/98 19160 17632 16794
5/31/98 19444 17977 17123
8/20/98 20022 18381 17508
11/20/98 20460 18798 17905
2/20/99 20348 18717 17828
5/20/99 20413 18692 17804
8/31/99 20474 18418 17543
The Lehman Brothers Intermediate U.S. 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.
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/99
SHARE CLASS A B C Z
Inception 10/13/87 6/8/92 8/1/97 1/29/99
- --------------------------------------------------------------------------------
Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge Charge
- --------------------------------------------------------------------------------
1 year 2.22% (2.63)% 1.44% (3.39)% 1.59% 0.63% 2.33%
- --------------------------------------------------------------------------------
5 years 6.40 5.37 5.61 5.29 6.16 6.16 6.43
- --------------------------------------------------------------------------------
10 years 6.42 5.90 5.86 5.86 6.29 6.29 6.43
- --------------------------------------------------------------------------------
Class B, C and Z share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns were not restated to reflect any expense differential (e.g., Rule 12b-1
fees) between Class A shares and the newer class shares.
PERFORMANCE OF A $10,000
INVESTMENT IN ALL SHARE CLASSES
FROM 8/31/89 - 8/31/99
Without With Sales
Sales Charge Charge
------------ ------
Class A $18,418 $17,543
- ----------------------------------------
Class B $17,455 $17,455
- ----------------------------------------
Class C $18,187 $18,187
- ----------------------------------------
Class Z $18,448 N/A
- ----------------------------------------
SECTOR BREAKDOWNS
8/31/99 VS. 8/31/98
[graphic omitted]
8/31/99 8/31/98
TREASURY SECURITIES 29.05% 42.40%
FNMAs 37.84% 26.57%
GNMAs 28.70% 25.90%
FHLMCs 2.33% 2.54%
SBA 2.08% 2.59%
Sector breakdowns are calculated as a percentage of total investments. Because
the Fund is actively managed, there can be no guarantee the Fund will continue
to maintain this breakdown in the future.
7
<PAGE>
ANNUAL REPORT: COLONIAL FEDERAL SECURITIES FUND
DURATION
8/31/99 7.32 years
- --------------------------------------
8/31/98 5.98 years
- --------------------------------------
NET ASSET VALUE PER SHARE
ON 8/31/99
Class A $10.14
- --------------------------------------
Class B $10.14
- --------------------------------------
Class C $10.14
- --------------------------------------
Class Z $10.14
- --------------------------------------
DISTRIBUTIONS DECLARED PER
SHARE FROM 9/1/98 TO 8/31/99
Class A $0.674
- --------------------------------------
Class B $0.592
- --------------------------------------
Class C $0.608
- --------------------------------------
Class Z (1/11/99-8/31/99) $0.464
- --------------------------------------
30-DAY SEC YIELDS ON 8/31/99
Class A 6.56%
- --------------------------------------
Class B 6.13%
- --------------------------------------
Class C 6.28%
- --------------------------------------
Class Z 7.16%
- --------------------------------------
30-day 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 or its affiliates had not borne certain expenses, the SEC yield
would have been 6.13% for Class C shares.
AVERAGE LIFE BREAKDOWN
AS OF 8/31/99
0-5 years 15.15%
- --------------------------------------
5-10 years 35.18%
- --------------------------------------
10-15 years 45.02%
- --------------------------------------
15-20 years 4.65%
- --------------------------------------
Average life is the expected maturity of a bond and is calculated as a
percentage of total investments.
- --------------------------------------------------------------------------------
COLONIAL FEDERAL SECURITIES FUND
- --------------------------------------------------------------------------------
The Fund invests primarily in U.S. government securities and is designed for
investors who are willing to accept the risks associated with longer-term
securities. The Fund offers the highest return potential of Colonial's three
government funds.
Over the past 12 months, we shifted the portfolio's asset mix -- we increased
the proportion of assets invested in mortgages and decreased our investment in
Treasurys and asset-backed securities. By reallocating the portfolio's assets,
we positioned the Fund to take advantage of these higher interest rates, which
generally benefit mortgage security performance because of falling prepayment
expectations.
We are confident that active management of the portfolio's duration and asset
allocation should benefit the Fund in the long term. Over the short term, our
strategy of increasing duration and mortgage exposure limited the Fund's returns
because interest rates rose faster and farther than we expected. As a result,
investors avoided mortgage-backed investments in favor of more liquid
investments with shorter durations, and mortgage security prices fell in
response. Conditions were aggravated near the end of the period when heavy
mortgage-backed supply further pressured mortgage prices. We expect more
favorable conditions for mortgage-backed securities going forward and believe we
are well positioned to take advantage of these conditions.
AVERAGE ANNUAL TOTAL RETURNS AS OF 8/31/99
SHARE CLASS A B C Z
Inception 3/30/84 6/8/92 8/1/97 1/11/99
- --------------------------------------------------------------------------------
Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge Charge
- --------------------------------------------------------------------------------
1 year (2.56)% (7.19)% (3.30)% (7.87)% (3.15)% (4.07)% (2.40)%
- --------------------------------------------------------------------------------
5 years 6.43 5.40 5.64 5.32 6.16 6.16 6.47
- --------------------------------------------------------------------------------
10 years 7.25 6.73 6.66 6.66 7.11 7.11 7.26
- --------------------------------------------------------------------------------
Class B, C and Z share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns were not restated to reflect any expense differential (e.g., Rule 12b-1
fees) between Class A shares and the newer class shares.
8
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT IN CLASS A SHARES 8/31/89 - 8/31/99
[graphic omitted]
Lehman Brothers
Intermediate U.S. Without Sales With
Govt Bond Charge Sales Charge
08/31/1989 10000 10000 9525
11/30/1989 10360 10434 9938
02/28/1990 10364 10164 9681
05/31/1990 10563 10472 9976
08/31/1990 10813 10394 9900
11/30/1990 11228 11157 10627
02/28/1991 11570 11297 10760
05/31/1991 11821 11354 10815
08/31/1991 12186 11976 11407
11/30/1991 12682 12511 11917
02/29/1992 12905 12587 11989
05/31/1992 13162 12904 12291
08/31/1992 13747 13555 12911
11/30/1992 13711 13555 12911
02/28/1993 14356 14496 13807
05/31/1993 14482 14640 13945
08/31/1993 14941 15356 14627
11/30/1993 14963 15310 14583
02/28/1994 14965 14942 14232
05/31/1994 14662 14686 13989
08/31/1994 14900 14522 13832
11/30/1994 14714 14382 13699
02/28/1995 15292 15061 14346
05/31/1995 15993 16216 15446
08/31/1995 16235 16435 15654
11/30/1995 16725 17168 16353
02/29/1996 16852 16651 15860
05/31/1996 16718 16401 15622
08/31/1996 16959 16715 15921
11/30/1996 17671 17711 16870
02/28/1997 17672 17634 16796
05/31/1997 17908 17952 17099
08/31/1997 18324 18427 17552
11/30/1997 18780 19050 18145
02/28/1998 19160 19540 18612
05/31/1998 19444 19894 18949
08/31/1998 20022 20586 19608
11/30/1998 20460 20890 19898
02/28/1999 20348 20592 19614
05/31/1999 20413 20507 19533
08/31/1999 20474 20129 19173
The Lehman Brothers Intermediate U.S. Government Bond Index is an unmanaged
index that tracks the performance 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.
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/99
SHARE CLASS A B C Z
Inception 3/30/84 6/8/92 8/1/97 1/11/99
- --------------------------------------------------------------------------------
Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge Charge
- --------------------------------------------------------------------------------
1 year 1.40% (3.42)% 0.62% (4.14)% 0.77% (0.18)% 1.53%
- --------------------------------------------------------------------------------
5 years 7.18 6.14 6.38 6.07 6.93 6.93 7.21
- --------------------------------------------------------------------------------
10 years 7.39 6.87 6.82 6.82 7.26 7.26 7.40
- --------------------------------------------------------------------------------
Class B, C and Z share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns were not restated to reflect any expense differential (e.g., Rule 12b-1
fees) between Class A shares and the newer class shares.
PERFORMANCE OF A $10,000
INVESTMENT IN ALL SHARE CLASSES
FROM 8/31/89 TO 8/31/99
Without With Sales
Sales Charge Charge
------------ ------
Class A $20,129 $19,173
- --------------------------------------
Class B $19,064 $19,064
- --------------------------------------
Class C $19,874 $19,874
- --------------------------------------
Class Z $20,162 N/A
- --------------------------------------
SECTOR BREAKDOWNS
8/31/99 VS. 8/31/98
[graphic omitted]
8/31/99 8/31/98
TREASURY SECURITIES 33.76% 44.25%
FNMAs 19.04% 11.61%
FHLMCs 10.50% 13.93%
NON-AGENCY MBS 11.28% 10.97%
GNMAs 25.42% 16.66%
CMO 0% 2.58%
Sector breakdowns are calculated as a percentage of total investments. Because
the Fund is actively managed, there can be no guarantee the Fund will continue
to maintain this breakdown in the future.
9
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
August 31, 1999 (In thousands)
COLONIAL SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
U.S. GOVERNMENT &
AGENCY OBLIGATIONS -- 106.1% PAR VALUE
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES -- 98.6%
MATURITIES
COUPON FROM/TO
- ------------------------
FEDERAL FARM CREDIT BANK,
FIXED RATE NOTE,
6.400% 2002(a) $ 250 $ 251
-------
FEDERAL HOME LOAN BANK:
FIXED RATE NOTE,
5.720% 2003 500 485
6.150% 2000(a) 500 500
7.590% 2005 50 52
-------
1,037
-------
FLOATING RATE NOTE,
(b) 2000(c) 3,000 3,000
-------
FEDERAL HOME LOAN MORTGAGE CORP:
FIXED RATE NOTE:
6.500% 2012(c) 1,000 972
8.000% 2011-2017(a)(c) 1,054 1,076
9.250% 2009(a) 103 108
9.750% 2009 190 201
-------
2,357
-------
ADJUSTABLE RATE MORTGAGE: (d)
6.096% 2018(a) 103 100
6.577% 2018 149 146
7.391% 2019 205 207
-------
453
-------
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
FIXED RATE NOTE:
6.000% 2008(a) 339 326
6.080% 2000(a) 120 120
6.240% 2000(a) 400 401
6.800% 2003(a) 500 504
7.000% 2009-2024(a)(c) 2,337 2,316
7.500% 2014-2027(c) 4,621 4,651
9.500% 2006 57 61
10.000% 2005-2006(a) 441 471
-------
8,850
-------
ADJUSTABLE RATE MORTGAGE: (d)
6.391% 2027 117 114
7.296% 2019(a) 153 156
7.435% 2019 93 95
7.583% 2023 111 113
7.614% 2020 81 83
7.995% 2022 87 88
8.105% 2017 61 62
8.366% 2019 110 113
-------
824
-------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
FIXED RATE MORTGAGE:
7.000% 2027-2028(a) 1,125 1,090
9.000% 2008-2009 846 893
9.500% 2009(a) 3,453 3,696
10.500% 2012-2018 272 299
-------
5,978
-------
ADJUSTABLE RATE MORTGAGE: (d)
6.875% 2022 $ 28 $ 28
7.000% 2022 299 300
7.375% 2023 231 233
-------
561
-------
STUDENT LOAN MARKETING ASSOCIATION,
FLOATING RATE NOTE, (d)
5.581% 2000(a) 1,500 1,500
-------
Total Government Agencies (cost of $25,002) 24,811
-------
GOVERNMENT OBLIGATIONS - 7.5%
- --------------------------------------------------------------------------------
U.S. TREASURY BOND,
5.625% 02/28/01(a) 1,200 1,199
-------
U.S. TREASURY NOTE,
6.500% 05/31/01(a) 475 481
-------
U.S. TREASURY NOTES/BOND,
4.500% 09/30/00(a) 200 198
-------
Total Government Obligations (cost of $1,903) 1,878
-------
Total Investments (cost of $26,905)(e) 26,689
-------
SHORT-TERM OBLIGATIONS - 24.7%
- --------------------------------------------------------------------------------
Repurchase agreement with ABN AMRO Chicago
Corp., dated 08/31/99, due 09/01/99
at 5.400%, collateralized by U.S. Treasury
notes and/or bonds with various maturities
to 2027, market value $5,307 (repurchase
proceeds $5,211) 5,210 5,210
FEDERAL NATIONAL MORTGAGE ASSOCIATION,
FIXED RATE NOTE,
5.420% 1999 (c) 1,000 1,000
-------
Total Short-Term Obligations 6,210
-------
OTHER ASSETS & LIABILITIES, NET - (30.8%) (7,748)
- --------------------------------------------------------------------------------
Net Assets - 100.0% $25,151
=======
NOTES TO INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
(a) These securities, or a portion thereof, with a total market value of $9,377,
are being used to collateralize the delayed delivery purchases indicated in
note (c) below.
(b) Zero coupon bond. Rate changed to 5.717% on September 1, 1999.
(c) 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.
(d) Interest rates on variable rate securities change periodically. The rates
listed are as of August 31, 1999.
(e) Cost for federal income tax purposes is $26,908.
10
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO CONTINUED
- --------------------------------------------------------------------------------
August 31, 1999 (In thousands)
COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
U.S. GOVERNMENT &
AGENCY OBLIGATIONS - 110.3% PAR VALUE
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 78.3%
MATURITIES
COUPON FROM/TO
- ------------------------
FEDERAL HOME LOAN MORTGAGE CORP.:
7.500% 2007-2016 $771 $ 775
8.000% 2003-2016 7,665 7,785
8.500% 2007-2017 1,864 1,932
8.750% 2005-2013 832 867
9.000% 2001-2018 1,535 1,601
9.250% 2008-2019 2,953 3,104
9.500% 2005-2016 1,006 1,058
9.750% 2016 60 64
10.000% 2019 343 365
10.250% 2009-2016 889 954
10.500% 2009-2021 1,354 1,477
11.250% 2005-2015 1,512 1,664
-------
21,646
-------
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
6.000% 2008-2026(a) 131,484 124,949
6.500% 2007-2029 58,386 55,311
7.000% 2007-2027(a) 71,664 69,618
7.500% 2006-2027(a) 78,359 77,833
8.000% 2008-2009 1,446 1,472
8.250% 2008 468 474
8.500% 2003-2021 3,884 4,022
9.000% 2002-2022 10,641 11,142
10.000% 2001-2006 3,916 4,189
10.500% 2010-2016 2,249 2,454
11.000% 2015 558 617
-------
352,081
-------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
6.500% 2023-2029 44,197 41,749
7.000% 2022-2028(a) 92,982 90,259
7.500% 2007 149 150
8.000% 2004-2023 1,728 1,746
8.500% 2017-2022 895 922
8.750% 2021-2022 930 975
8.850% 2018-2020 2,152 2,232
9.000% 2008-2025 8,535 8,953
9.250% 2016-2022 4,337 4,548
9.500% 2004-2025 61,778 66,080
10.000% 2000-2018 1,881 1,985
10.250% 2018 191 205
10.500% 2000-2020 4,960 5,451
10.625% 2010 21 23
11.000% 2009-2021 6,301 7,006
11.250% 2015 72 79
11.500% 2010-2021 9,528 10,704
11.750% 2013-2015 177 197
12.000% 2011-2016 9,693 10,979
12.250% 2013-2014 400 449
12.500% 2010-2015 6,455 7,369
12.750% 2014 44 50
13.000% 2011-2016 2,343 2,699
13.500% 2010-2015 1,680 1,950
14.000% 2011-2012 89 104
14.500% 2012 17 20
15.000% 2011-2012 86 102
-------
266,986
-------
U.S. SMALL BUSINESS ADMINISTRATION:
7.600% 01/01/12 $ 2,871 $ 2,923
8.200% 10/01/11 2,845 2,950
8.250% 11/01/11 5,599 5,928
8.650% 11/01/14 3,972 4,202
8.850% 08/01/11 831 892
9.150% 07/01/11 2,295 2,428
-------
19,323
-------
Total Government Agencies (cost of $644,945) 660,036
-------
GOVERNMENT OBLIGATIONS - 32.0%
- --------------------------------------------------------------------------------
U.S. TREASURY BONDS:
5.250% 02/15/29 10,020 8,764
7.875% 02/15/21(b) 25,241 29,276
12.000% 08/15/13(b) 13,843 19,051
-------
57,091
-------
U.S. TREASURY NOTES:
5.750% 08/15/03(b) 19,169 19,034
5.875% 11/15/05(b) 18,210 17,994
6.500% 11/15/26(b) 4,294 4,358
6.875% 05/15/06(b) 85,383 88,705
7.875% 11/15/04(b) 19,518 21,064
10.375% 11/15/12(b) 49,603 61,988
-------
213,143
-------
Total Government Obligations (cost of $299,250) 270,234
-------
Total U.S. Government & Agency Obligations
(cost of $944,195) 930,270
OPTIONS - 0.0% CONTRACTS
- --------------------------------------------------------------------------------
September 1999 Treasury Bond Call,
Strike price $97.17, expiration
09/14/99 (cost of $138) 300 5
-------
Total Investments (cost of $944,333) (c) 930,275
-------
LIABILITY FOR CALL OPTIONS OUTSTANDING - 0.0% (1)
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 16.8% PAR
- --------------------------------------------------------------------------------
Repurchase agreement with ABN AMRO
Chicago Corp., dated 08/31/99, due
09/01/99 at 5.400%, collateralized by
U.S. Treasury bonds and/or notes with
various maturities to 2027, market
value $144,628 (repurchase proceeds
$142,013)(b) $141,992 141,992
-------
OTHER ASSETS & LIABILITIES, NET - (27.1)% (228,655)
- --------------------------------------------------------------------------------
Net Assets - 100.0% $ 843,611
=========
11
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO CONTINUED
- --------------------------------------------------------------------------------
August 31, 1999 (In thousands)
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
$299,466, are being used to collateralize the delayed delivery purchases
indicated in note (a) above, open futures contracts and written call
options.
(c) Cost for federal income tax purposes is $945,930.
Long future contracts open at August 31, 1999:
PAR VALUE UNREALIZED
COVERED BY EXPIRATION APPRECIATION
TYPE CONTRACTS MONTH AT 08/31/99
- --------------------------------------------------------------------------------
Treasury Note $332 September $328
Written call options outstanding at August 31, 1999:
NUMBER OF EXPIRATION STRIKE MARKET
TYPE CONTRACTS MONTH PRICE VALUE
- --------------------------------------------------------------------------------
GNMA 7.000% $300 September $99 $1
COLONIAL FEDERAL SECURITIES FUND
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - 116.9% PAR VALUE
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 72.4%
MATURITIES
COUPON FROM/TO
- ------------------------
FEDERAL HOME LOAN MORTGAGE CORP.:
6.500% 2012-2029(a) $91,785 $ 88,524
7.500% 2016 467 469
8.000% 2003-2016 2,069 2,114
8.500% 2007-2010 1,495 1,549
8.750% 2004-2010 547 570
9.000% 2001-2022 3,361 3,508
9.250% 2008-2010 2,769 2,911
9.500% 2004-2016 1,288 1,355
9.750% 2008-2016 473 502
10.000% 2019 343 365
10.250% 2009-2013 753 807
10.500% 2017-2020 1,035 1,129
11.250% 2003-2015 945 1,040
11.500% 2015 91 101
12.000% 2013 38 41
-------
104,985
-------
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
6.000% 2008-2024(a) 71,180 67,334
6.500% 2003-2029(a) 36,035 34,142
7.000% 2010-2027(a) 36,784 35,759
7.500% 2002-2027 36,986 36,744
8.000% 2008-2019 1,657 1,687
8.250% 2008-2011 809 819
8.500% 2008-2017 2,727 2,824
9.000% 2002-2021 9,655 10,103
9.500% 2008-2018 987 1,044
-------
190,456
-------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
6.000% 2028-2029(a) $ 50,005 $ 45,770
6.500% 2023-2029(a) 73,386 69,217
7.000% 2022-2028(a) 110,622 107,201
7.500% 2006-2007(a) 646 645
8.000% 2005-2008 46 47
9.000% 2008-2017 4,681 4,939
9.500% 2009-2019 12,595 13,469
10.000% 2000-2003 80 86
10.500% 2013-2021 6,747 7,439
11.000% 2010 2 2
11.500% 2013-2013 25 28
11.750% 2013-2015 100 112
12.000% 2012-2015 324 368
12.500% 2010-2014 3,007 3,440
13.000% 2011-2015 1,241 1,433
-------
254,196
-------
Total Government Agencies
(cost of $554,444) 549,637
-------
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS - 44.5%
U.S. TREASURY BONDS:
5.250% 2/15/29(b) 8,980 7,855
8.750% 8/15/20(b) 14,333 18,004
12.000% 8/15/13(b) 91,051 125,304
12.750% 11/15/10(b) 46,873 62,041
-------
213,204
-------
U.S. TREASURY NOTES:
7.875% 11/15/04(b) 14,314 15,448
8.875% 2/15/19(b) 17,585 22,149
10.375% 11/15/12(b) 53,118 66,381
-------
103,978
-------
U.S. TREASURY STRIP,
0.000% 8/15/12(b) 47,184 20,487
-------
Total Government Obligations (cost of $360,627) 337,669
-------
Total U.S. Government & Agency Obligations
(cost of $915,071) 887,306
-------
12
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO CONTINUED
- --------------------------------------------------------------------------------
August 31, 1999 (In thousands)
COLONIAL FEDERAL SECURITIES FUND CONTD. PAR VALUE
- --------------------------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES & ASSET-BACKED SECURITIES - 14.9%
NON-AGENCY MORTGAGE-BACKED SECURITIES - 3.5%
Countrywide Mortgage Trust,
7.600% 04/25/23 $ 993 $ 987
CS First Boston Mortgage Securities Corp.,
7.500% 06/1/20(b) 7,986 7,936
First Boston Mortgage Securities Corp.,
6.150% 09/28/13 2,000 1,992
Headlands Mortgage Securities, Inc.:
6.500% 11/25/28 746 616
7.750% 03/25/27 5,291 5,165
Norwest Asset Securities Corp.,
7.000% 04/25/12 2,362 2,244
PNC Mortgage Securities Corp.,
7.000% 05/25/27 2,378 2,317
Prudential Home Mortgage Securities,
6.456% 12/28/08 1,385 1,316
Residential Asset Securitization Trust,
7.500% 11/25/11 1,065 1,047
Structured Mortgage Asset Residential Trust,
8.375% 06/25/08 1,620 1,648
Tryon Mortgage Funding, Inc.,
7.500% 02/20/27 1,221 1,196
-------
26,464
-------
ASSET-BACKED SECURITIES - 11.4%
Contimortgage Home Equity Loan Trust:
7.310% 08/15/28 7,150 6,918
7.340% 04/15/28 4,000 3,901
Country Wide Asset Backed Certificates,
7.530% 05/25/29 1,000 976
Delta Funding Home Equity Loan Trust,
6.800% 03/15/28 400 332
7.330% 10/25/28 7,588 7,407
7.370% 11/15/07 5,000 4,135
Empire Funding Home Loan Owner Trust,
7.510% 03/25/23 4,000 3,935
Green Tree Financial Corp.:
7.200% 01/15/28 10,000 10,045
7.320% 07/15/28 4,500 4,519
7.850% 08/15/25 9,100 7,808
Indymac Manufactured Housing Contract,
6.970% 02/25/28 4,616 4,514
Preferred Mortgage Asset Trust,
7.900% 05/25/12 2,101 2,105
Team Fleet Financing Corp.,
7.350% 05/15/03 3,950 3,966
The Money Store Home Equity Trust:
7.910% 05/15/24 9,306 9,434
8.525% 06/15/25 2,800 2,858
The Money Store Home Improvement Trust,
8.070% 05/15/23 5,875 5,788
UCFC Home Equity Loan Trust:
7.980% 02/15/22 5,000 5,052
8.550% 01/10/20 2,650 2,698
-------
86,391
-------
Non-Agency Mortgage-Backed
& Asset-Backed Securities (cost $116,781) 112,855
-------
CONTRACTS VALUE
- --------------------------------------------------------------------------------
OPTIONS - 0.0%
- --------------------------------------------------------------------------------
September 1999 Treasury Bond Call,
Strike Price $97.17,
expiration 09/14/99 $30,000 $ 5
----------
(cost of $138)
Total Investments (cost of $1,031,990)(c) 1,000,166
----------
LIABILITY FOR CALL OPTIONS OUTSTANDING - 0.0% (1)
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 4.0% PAR
- --------------------------------------------------------------------------------
Repurchase agreement with ABN AMRO
Chicago Corp., dated, 08/31/99, due
09/01/99 at 5.400%, collateralized by
U.S. Treasury notes and/or bonds with
various maturities to 2027, market
value $31,049 (repurchase proceeds
$30,487) 30,483 30,483
---------
OTHER ASSETS & LIABILITIES, NET - (35.8)% (271,813)
- --------------------------------------------------------------------------------
Net Assets - 100.0% $ 758,835
=========
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 $1,032,475.
Futures contracts open at August 31, 1999:
UNREALIZED
PAR VALUE APPRECIATION
COVERED BY EXPIRATION (DEPRECIATION)
TYPE CONTRACTS MONTH AT 08/31/99
- --------------------------------------------------------------
Treasury Bond $8,700 December $(78)
Treasury Note (29,300) September 290
ACRONYM NAME
- -------------------- ---------------------------------------
STRIP Separately Traded Receipt
of Interest and Principal
13
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
August 31, 1999
(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 $ 26,905 $ 944,333 $ 1,031,990
Depreciation (216) (14,058) (31,824)
-------------- ---------------- ----------------
Investments at value 26,689 930,275 1,000,166
Short-term obligations 6,210 141,992 30,483
-------------- ---------------- ----------------
32,899 1,072,267 1,030,649
-------------- ---------------- ----------------
Cash $ -- $ 588 $ --
Receivable for:
Investments sold 1,267 575 18,254
Interest 167 7,602 6,943
Fund shares sold 95 708 221
Variation margin on futures -- 47 19
Expense reimbursement due from Advisor 24 -- --
Other 10 1,563 494 10,014 925 26,362
------ -------------- -------- ---------------- -------- ----------------
Total Assets 34,462 1,082,281 1,057,011
LIABILITIES
Options outstanding
at value (premium received of $148 for each) -- 1 1
Payable for:
Investments purchased 9,190 234,512 294,569
Distributions 40 1,483 1,577
Fund shares repurchased 31 1,952 1,366
Accrued:
Deferred Trustees fees 3 23 19
Management fee 11 425 382
Transfer Agent Out-of-Pocket fees 1 34 32
Transfer Agent fee 4 120 108
Bookkeeping fee 2 26 23
Other 29 94 99
------ -------- --------
Total Liabilities 9,311 238,670 298,176
-------------- ---------------- ----------------
Net Assets $ 25,151 $ 843,611 $ 758,835
-------------- ---------------- ----------------
Net asset value & redemption price per share $9.72(a) $6.32(a) $10.14(a)
-------------- ---------------- ----------------
-- Class A ($11,750/1,209) ($537,353/85,079) ($681,542/67,240)
Maximum offering price per share $10.05(b) $6.64(b) $10.65(b)
-------------- ---------------- ----------------
-- Class A ($9.72/0.9675) ($6.32/0.9525) ($10.14/0.9525)
Net asset value & offering price per share $9.72(a) $6.32(a) $10.14(a)
-------------- ---------------- ----------------
-- Class B ($8,198/843) ($295,832/46,842) ($72,306/7,133)
Net asset value & offering price per share $9.72(a) $6.32(a) $10.14(a)
-------------- ---------------- ----------------
-- Class C ($5,203/535) ($3,109/492) ($4,986/492)
Net asset value, offering & redemption price per share N/A $6.32 $10.14
-------------- ---------------- ----------------
-- Class Z N/A ($7,317/1,158) ($1/(c))
COMPOSITION OF NET ASSETS
Capital paid in $ 25,688 $ 994,942 $ 921,825
Undistributed (overdistributed) net investment income (49) (716) 641
Accumulated net realized loss (272) (137,032) (132,166)
Net unrealized appreciation (depreciation) on:
Investments (216) (14,058) (31,824)
Open futures contracts -- 328 212
Open written options -- 147 147
-------------- ---------------- ----------------
$ 25,151 $ 843,611 $ 758,835
============== ================ ================
</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.
(c) Rounds to less than one.
14 See notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended August 31, 1999
(In thousands)
<TABLE>
<CAPTION>
CSDUSGF CIUSGF CFSF
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $1,320 $65,992 $60,588
Dollar roll fee income 31 3,626 4,765
-------------- ---------------- ----------------
1,351 69,618 65,353
EXPENSES
Management fee $ 132 $ 5,757 $ 5,074
Service fee -- Class A, B and C 50 2,387 2,111
Distribution fee -- Class B 52 2,649 562
Distribution fee -- Class C 6 17 27
Transfer agent 50 2,047 1,810
Bookkeeping fee 27 345 305
Trustees fee 8 43 48
Custodian fee 3 32 23
Audit fee 34 98 83
Legal fee 15 12 10
Registration fee 32 41 62
Reports to shareholders 1 64 45
Other 5 173 124
----- -------- --------
415 13,665 10,284
Fees and expenses waived or borne
by the Advisor (165) -- --
Fees waived by the Distributor -- Class C -- 250 (3) 13,662 (6) 10,278
----- -------------- -------- ---------------- -------- ----------------
Net Investment Income 1,101 55,956 55,075
-------------- ---------------- ----------------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain (loss) on:
Investments (235) (11,791) (16,027)
Written options -- 249 211
Closed futures contracts -- 127 (263)
----- -------- --------
Net Realized Loss (235) (11,415) (16,079)
Net change in unrealized appreciation/depreciation
during the period on:
Investments (See Note 5.) (203) (53,106) (60,436)
Open futures contracts -- 328 212
Open written options -- 147 147
----- -------- --------
Net Change in Unrealized
Appreciation/Depreciation (203) (52,631) (60,077)
-------------- ---------------- ----------------
Net Loss (438) (64,046) (76,156)
-------------- ---------------- ----------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 663 $ (8,090) $(21,081)
============== ================ ================
</TABLE>
See notes to financial statements. 15
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Year ended Year ended Year ended
August 31 August 31 August 31
- ------------------------------------------------------------------------------------------------------------------------------
CSDUSGF CIUSGF CFSF
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS 1999 1998 1999(a) 1998 1999(b) 1998
Operations:
Net investment income $ 1,101 $ 659 $ 55,956 $ 63,528 $ 55,075 $ 58,656
Net realized gain (loss) (235) 26 (11,415) 23,328 (16,079) 24,144
Net unrealized appreciation (depreciation) (203) 113 (52,631) 14,849 (60,077) 22,012
------- ------- -------- ---------- -------- --------
Net Increase (Decrease) from Operations 663 798 (8,090) 101,705 (21,081) 104,812
Distributions:
From net investment income -- Class A (567) (396) (33,518) (38,886) (47,748) (53,064)
In excess of net investment income -- Class A (11) (15) -- (2,922) -- --
In excess of gains -- Class A (7) -- -- -- -- --
From net investment income -- Class B (325) (204) (16,988) (21,012) (4,106) (3,545)
In excess of net investment income -- Class B (6) (8) -- (1,579) -- --
In excess of gains -- Class B (4) -- -- -- -- --
From net investment income -- Class C (169) (67) (116) (26) (207) (31)
In excess of net investment income -- Class C (3) (3) -- (2) -- --
In excess of gains -- Class C (3) -- -- -- -- --
From net investment income -- Class Z -- -- (138) -- (c) --
------- ------- -------- ---------- -------- --------
(432) 105 (58,850) 37,278 (73,142) 48,172
------- ------- -------- ---------- -------- --------
Fund Share Transactions:
Receipts for shares sold -- Class A 16,989 4,793 132,798 64,333 45,956 25,903
Receipts for shares issued in the acquisition
of Crabbe Huson U.S. Govt. Income Fund 4,254 -- -- -- -- --
Value of distributions reinvested -- Class A 467 383 20,730 27,046 24,813 28,232
Cost of shares repurchased -- Class A (17,154) (4,804) (229,910) (194,333) (144,033) (166,562)
------- ------- -------- ---------- -------- --------
4,556 372 (76,382) (102,954) (73,264) (112,427)
------- ------- -------- ---------- -------- --------
Receipts for shares sold -- Class B 9,622 5,469 35,046 29,371 36,968 19,396
Value of distributions reinvested -- Class B 219 138 9,834 13,395 2,386 1,926
Cost of shares repurchased -- Class B (8,969) (2,338) (122,781) (122,795) (32,284) (17,031)
------- ------- -------- ---------- -------- --------
872 3,269 (77,901) (80,029) 7,070 4,291
------- ------- -------- ---------- -------- --------
Receipts for shares sold -- Class C 4,319 1,604 3,162 1,310 4,548 1,317
Value of distributions reinvested -- Class C 138 66 97 20 171 27
Cost of shares repurchased -- Class C (1,066) (318) (969) (444) (725) (72)
------- ------- -------- ---------- -------- --------
3,391 1,352 2,290 886 3,994 1,272
------- ------- -------- ---------- -------- --------
Receipts for shares sold -- Class Z -- -- 7,432 -- 1 --
Value of distributions reinvested -- Class Z -- -- 125 -- (c) --
Cost of shares repurchased -- Class Z -- -- (13) -- (c) --
------- ------- -------- ---------- -------- --------
-- -- 7,544 -- 1 --
------- ------- -------- ---------- -------- --------
Net Increase (Decrease) from Fund Share Transactions 8,819 4,993 (144,449) (182,097) (62,199) (106,864)
------- ------- -------- ---------- -------- --------
Total Increase (Decrease) 8,387 5,098 (203,299) (144,819) (135,341) (58,692)
------- ------- -------- ---------- -------- --------
NET ASSETS
Beginning of period 16,764 11,666 1,046,910 1,191,729 894,176 952,868
------- ------- -------- ---------- -------- --------
End of period $25,151 $16,764 $843,611 $1,046,910 $758,835 $894,176
------- ------- -------- ---------- -------- --------
Net of undistributed (overdistributed)
net investment income (49) 27 (716) (1,648) 641 (1,597)
------- ------- -------- ---------- -------- --------
NUMBER OF FUND SHARES
Sold -- Class A 1,732 481 19,974 9,704 4,205 2,381
Issued in acquisition of Crabbe Huson U.S. Govt. Income Fund 421 -- -- -- -- --
Issued for distributions reinvested -- Class A 47 38 3,136 4,088 2,305 2,615
Repurchased -- Class A (1,719) (482) (34,681) (29,361) (13,322) (15,425)
------- ------- -------- ---------- -------- --------
481 37 (11,571) (15,569) (6,812) (10,429)
------- ------- -------- ---------- -------- --------
Sold -- Class B 965 548 5,259 4,426 3,383 1,784
Issued for distributions reinvested -- Class B 22 14 1,487 2,025 222 178
Repurchased -- Class B (898) (235) (18,569) (18,551) (2,972) (1,575)
------- ------- -------- ---------- -------- --------
89 327 (11,823) (12,100) 633 387
------- ------- -------- ---------- -------- --------
Sold -- Class C 435 161 476 198 416 122
Issued for distributions reinvested -- Class C 14 7 15 3 16 3
Repurchased -- Class C (108) (32) (148) (67) (67) (7)
------- ------- -------- ---------- -------- --------
341 136 343 134 365 118
------- ------- -------- ---------- -------- --------
Sold -- Class Z -- -- 1,141 -- (c) --
Issued for distributions reinvested -- Class Z -- -- 19 -- (c) --
Repurchased -- Class Z -- -- (2) -- -- --
------- ------- -------- ---------- -------- --------
-- -- 1,158 -- (c) --
------- ------- -------- ---------- -------- --------
</TABLE>
(a) Class Z shares were initally offered on January 29, 1999.
(b) Class Z shares were initially offered on January 11, 1999.
(c) Rounds to less than one.
16 See notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 Liberty Funds Trust II,
formerly Colonial Trust II, and Colonial Federal Securities Fund (CFSF) is a
series of Liberty Funds Trust III, formerly Colonial Trust III (individually
referred to as a fund, collectively referred to as the Funds and are diversified
portfolios). Liberty Funds Trust II and Liberty Funds 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. CSDUSGF offers three classes of
shares: Class A, Class B and Class C. CIUSGF and CFSF offer four classes of
shares: Class A, Class B, Class C and Class Z. Class A shares are sold with a
front-end sales charge. A 1.00% contingent deferred sales charge is assessed 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. Effective January 29, 1999
and January 11, 1999, CIUSGF and CFSF, respectively, began offering Class Z
shares. Class Z shares are offered continuously at net asset value. There are
certain restrictions on purchasing Class Z shares, as described in each Fund's
prospectus.
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' portfolio positions 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.
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), 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.
17
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
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% annually.
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%
BOOKKEEPING FEE
For each Fund the Advisor provides bookkeeping and pricing services for a
monthly fee equal to $27,000 annually plus a percentage of the Fund's average
net assets as follows:
AVERAGE NET ASSETS ANNUAL FEE RATE
- -------------------------------------------------------------
First $50 million No charge
Next $950 million 0.035%
Next $1 billion 0.025%
Next $1 billion 0.015%
TRANSFER AGENT FEE
Liberty Funds Services, 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.
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES
Liberty Funds Distributor, Inc. (the Distributor), a subsidiary of the Advisor,
is each Fund's principal underwriter. During the year ended August 31, 1999,
each Fund has been advised that the Distributor retained net underwriting
discounts on CSDUSGF, CIUSGF and CFSF of $4,862, $35,703 and $43,179,
respectively, on sales of the Funds' Class A shares and received contingent
deferred sales charges (CDSC) of $1,284, $4,835 and $1,068 on Class A share
redemptions, $29,678, $441,463 and $208,889 on Class B share redemptions, and
$5,673, $4,915 and $806 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 each 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 for CIUSGF and
CFSF.
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.
18
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
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.
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, 1999, purchases and sales of investments, other
than short-term obligations and mortgage dollar roll transactions, were as
follows:
PURCHASES SALES
- --------------------------------------------------------------
CSDUSGF $ 29,476,544 $ 22,807,565
CIUSGF $747,883,001 $1,166,502,238
CFSF $497,366,539 $ 670,077,994
Transactions in written call options were as follows:
CIUSGF
- --------------------------------------------------------------
PAR VALUE
COVERED BY PREMIUMS
WRITTEN OPTIONS RECEIVED
- --------------------------------------------------------------
Outstanding at
Beginning of period -- --
Written $146,000,000 $434,262
Closed 69,000,000 202,148
Expirations 47,000,000 84,458
Exercises -- --
Outstanding at
End of period $ 30,000,000 $147,656
CFSF
- --------------------------------------------------------------
PAR VALUE
COVERED BY PREMIUMS
WRITTEN OPTIONS RECEIVED
- --------------------------------------------------------------
Outstanding at
Beginning of period
Written $129,000,000 $390,256
Closed 57,000,000 166,992
Expirations 42,000,000 75,608
Exercises -- --
Outstanding at
End of period $ 30,000,000 $147,656
Unrealized appreciation (depreciation) at August 31, 1999 for federal income tax
purposes was approximately:
CSDUSGF CIUSGF CFSF
- --------------------------------------------------------------
Gross unrealized
appreciation $ 26,476 $ 5,338,000 $ 4,107,602
Gross unrealized
depreciation (245,271) (20,993,000) (36,416,826)
Net unrealized
depreciation $(218,795) $(15,655,000) $(32,309,224)
CAPITAL LOSS CARRYFORWARDS
At August 31, 1999, 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
- --------------------------------------------------------------
CIUSGF 2001 $ 4,910,000
2002 7,249,000
2003 67,291,000
2004 32,580,000
2005 18,973,000
------------
$131,003,000
============
Of the CIUSGF loss carryforwards expiring in 2001 and 2002, $4,910,000 and
$4,423,000, respectively, were acquired in a merger of Liberty Financial U.S.
Government Securities Fund. Their availability for use in offsetting any future
realized gains may be limited in a given year.
YEAR OF CAPITAL LOSS
EXPIRATION CARRYFORWARD
- --------------------------------------------------------------
CFSF 2000 $ 595,000
2002 84,302,000
2004 21,929,000
------------
$106,826,000
============
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.
19
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
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
Advisor of the future direction of interest rates. Any of these risks may
involve amounts exceeding the futures variation margin, or written option
premium recorded in the Funds' Statement of Assets and Liabilities at any given
time.
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, 1999.
NOTE 5: MERGER INFORMATION
On October 16, 1998, Crabbe Huson U.S. Government Income Fund (CHUSGIF) was
merged into CSDUSGF by a non-taxable exchange of 421,220 Class A Shares of the
Fund (valued at $4,254,320) for the 382,027 of CHUSGIF shares then outstanding.
The assets of CHUSGIF acquired included unrealized appreciation of $150,545. The
aggregate net assets of the Fund and CHUSGIF immediately after the merger were
$23,875,969.
20
<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, 1999
------------------------------------------
CLASS A CLASS B CLASS C
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.000 $10.000 $10.000
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.482 0.417 0.462
Net realized and unrealized loss (0.278) (0.278) (0.278)
------- ------- -------
Total from Investment Operations 0.204 0.139 0.184
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.470) (0.406) (0.451)
In excess of net investment income (0.009) (0.008) (0.008)
In excess of gains (0.005) (0.005) (0.005)
------- ------- -------
Total Distributions Declared to Shareholders (0.484) (0.419) (0.464)
------ ------ ------
NET ASSET VALUE -- END OF PERIOD $ 9.720 $ 9.720 $ 9.720
======= ======= =======
Total return (b)(c) 2.05% 1.39% 1.85%
======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (d) 0.80% 1.45% 1.00%
Net investment income (d) 4.87% 4.22% 4.67%
Fees and expenses waived or borne by the Advisor (d) 0.69% 0.69% 0.69%
Portfolio turnover 112% 112% 112%
Net assets at end of period (000) $11,750 $ 8,198 $ 5,203
(a) Net of fees and expenses waived or borne by the Advisor
or its affiliates which amounted to: $ 0.069 $ 0.069 $ 0.069
</TABLE>
(b) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(c) Had the Advisor or its affiliates not waived or reimbursed a portion of
expenses, total return would have been reduced.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
- --------------------------------------------------------------------------------
State Tax Information for the year ended August 31, 1999 (unaudited)
An average of 30% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury. Approximately 46% of the Fund's
distributions (38% gross income) was derived from interest on direct investments
in U.S. Treasury bonds, notes and bills.
- --------------------------------------------------------------------------------
<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 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 (b)(c) 6.64% 5.93% 6.41%
======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (d) 0.70% 1.35% 0.90%
Net investment income (d) 5.37% 4.72% 5.17%
Fees and expenses waived or borne by the Advisor (d) 1.10% 1.10% 1.10%
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
or its affiliates which amounted to: $ 0.110 $ 0.110 $ 0.110
</TABLE>
(b) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(c) Had the Advisor or its affiliates not waived or reimbursed a portion of
expenses, total return would have been reduced.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
21
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS CSDUSGF CONTINUED
- --------------------------------------------------------------------------------
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<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 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)
------ ------ ------
NET ASSET VALUE -- END OF PERIOD $9.920 $9.920 $9.920
====== ====== ======
Total return (b)(c) 6.79% 6.11% 6.59%
====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses (d) 0.50% 1.15% 0.70%
Net investment income (d) 5.64% 4.99% 5.44%
Fees and expenses waived or borne by the Advisor (d) 1.76% 1.76% 1.76%
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
or its affiliates which amounted to: $0.169 $0.169 $0.169
</TABLE>
(b) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(c) Had the Advisor or its affiliates not waived or reimbursed a portion of
expenses, total return would have been reduced.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
-------------------------------------------------------------------------
1996 1995
-------------------------------- ------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C(b)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.850 $9.850 $9.850 $9.670 $9.670 $9.550
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.568 0.504 0.549 0.514 0.451 0.334
Net realized and unrealized gain (loss) (0.032) (0.032) (0.032) 0.152 0.152 0.280
------ ------ ------ ----- ----- -----
Total from Investment Operations 0.536 0.472 0.517 0.666 0.603 0.614
------ ------ ------ ----- ----- -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.566) (0.502) (0.547) (0.486) (0.423) (0.314)
------ ------ ------ ----- ----- -----
NET ASSET VALUE -- END OF PERIOD $9.820 $9.820 $9.820 $9.850 $9.850 $9.850
====== ====== ====== ====== ====== ======
Total return (c)(d) 5.57% 4.89% 5.36% 7.08% 6.39% 6.50%(e)
====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50%(f) 1.15%(f) 0.70%(f) 0.50% 1.15% 0.70%(g)
Net investment income 5.99%(f) 5.34%(f) 5.79%(f) 5.50% 4.85% 5.30%(g)
Fees and expenses waived or borne by the Advisor 1.48%(f) 1.48%(f) 1.48%(f) 1.14% 1.14% 1.14%(g)
Portfolio turnover 51% 51% 51% 36% 36% 36%
Net assets at end of period (000) $6,136 $4,004 $ 461 $9,934 $3,968 $ 385
(a) Net of fees and expenses waived or borne by the
Advisor which amounted to: $0.136 $0.136 $0.136 $0.107 $0.107 $0.107
</TABLE>
(b) Class C shares were initially offered on January 4, 1995. Per share
amounts reflect 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 or its affiliates 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.
22
<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, 1999
--------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $6.730 $6.730 $6.730 $6.760
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.375 0.325 0.335(b) 0.224
Net realized and unrealized loss (0.416) (0.416) (0.416) (0.435)
------ ------ ------ ------
Total from Investment Operations (0.041) (0.091) (0.081) (0.211)
------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.369) (0.319) (0.329) (0.229)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $6.320 $6.320 $6.320 $6.320
------ ------ ------ ------
Total return (c) (0.70)% (1.44)% (1.29)%(d) (3.31)%(e)
------ ------ ------ ------
RATIOS TO AVERAGE NET ASSETS
Expenses (f) 1.15% 1.90% 1.75%(b) 0.92%(g)
Net investment income (f) 6.10% 5.35% 5.50%(b) 6.35%(g)
Portfolio turnover 62% 62% 62% 62%
Net assets at end of period (in millions) $ 537 $ 296 $ 3 $ 7
</TABLE>
(a) Class Z shares were initially offered on January 29, 1999. Per share data
reflects activity from that date.
(b) Net of fees waived by the Advisor or its affiliates which amounted to $0.007
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 Advisor or its affiliates not waived a portion of the expenses,
total return would have been reduced.
(e) Not annualized.
(f) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(g) Annualized.
- --------------------------------------------------------------------------------
State Tax Information for the year ended August 31, 1999 (unaudited)
An average of 26% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury. Approximately 53% of the Fund's
distributions (38% of gross income) was derived from interest on direct
investments in U.S. Treasury bonds, notes and bills.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
-----------------------------------------------------------------
1998 1997
--------------------------- --------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $6.510 $6.510 $6.510 $6.370 $6.370 $6.590
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.420 0.370 0.380(b) 0.393 0.344 0.032
Net realized and unrealized gain (loss) 0.204 0.204 0.204 0.145 0.145 (0.082)
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.624 0.574 0.584 0.538 0.489 (0.050)
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.376) (0.329) (0.339) (0.398) (0.349) (0.030)
In excess of net investment income (0.028) (0.025) (0.025) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions Declared to Shareholders (0.404) (0.354) (0.364) (0.398) (0.349) (0.030)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $6.730 $6.730 $6.730 $6.510 $6.510 $6.510
====== ====== ====== ====== ====== ======
Total return (c) 9.87% 9.03% 9.20%(d) 8.64% 7.83% (0.77)%(e)
====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses (f) 1.12% 1.87% 1.72%(b) 1.13% 1.88% 1.78%(g)
Net investment income (f) 6.02% 5.27% 5.42%(b) 6.43% 5.68% 5.85%(g)
Portfolio turnover 214% 214% 214% 61% 61% 61%
Net assets at end of period (in millions) $ 651 $ 395 $ 1 $ 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 Advisor or its affiliates to 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 Advisor or its affiliates 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.
(g) Annualized.
(h) Rounds to less than one million.
23
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS CIUSGF CONTINUED
- --------------------------------------------------------------------------------
Selected data for a share of each class outstanding throughout each period are
as follows:
<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) -- --
------- ------- ------- -------
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 (a) 3.51% 2.74% 8.88% 8.07%
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11%(b) 1.86%(b) 1.11% 1.86%
Net investment income 6.45%(b) 5.70%(b) 7.51% 6.76%
Portfolio turnover 123% 123% 140% 140%
Net assets at end of period (in millions) $ 921 $ 572 $ 1,164 $ 701
</TABLE>
(a) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(b) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior year's ratios are net of benefits
received, if any.
================================================================================
CFSF
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1999
--------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.080 $11.080 $11.080 $11.010
-------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.703 0.621 0.637(b) 0.479
Net realized and unrealized loss (0.969) (0.969) (0.969) (0.885)
-------- ------- ------- -------
Total from Investment Operations (0.266) (0.348) (0.332) (0.406)
-------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.674) (0.592) (0.608) (0.464)
-------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 10.140 $10.140 $10.140 $10.140
======== ======= ======= =======
Total return (c) (2.56)% (3.30)% (3.15)%(d) (3.77)%(e)
======== ======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (f) 1.15% 1.90% 1.75%(b) 0.91%(g)
Net investment income (f) 6.58% 5.83% 5.98%(b) 7.19%(g)
Portfolio turnover 42% 42% 42% 42%
Net assets at end of period (in millions) $681,542 $72,306 $ 4,986 $ 1
</TABLE>
(a) Class Z shares were initially offered on January 11, 1999. Per share data
reflects activity from that date.
(b) Net of fees waived by the Advisor or its affiliates which amounted to $0.013
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 Advisor or its affiliates 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.
(g) Annualized.
- --------------------------------------------------------------------------------
State Tax Information for the year ended August 31, 1999 (unaudited)
An average of 37% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
Approximately 67% of the Fund's distributions (52% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS CFSF CONTINUED
- --------------------------------------------------------------------------------
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
---------------------------------------------------------------------------
1998 1997 (a)
--------------------------------- ---------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C(b)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.520 $10.520 $10.520 $10.530 $10.530 $10.710
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.708 0.625 0.642(c) 0.580 0.515 0.058
Net realized and unrealized gain (loss) 0.530 0.530 0.530 (0.038) (0.038) (0.198)
------- ------- ------- ------- ------- -------
Total from Investment Operations 1.238 1.155 1.172 0.542 0.477 (0.140)
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.678) (0.595) (0.612) (0.552) (0.487) (0.050)
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.080 $11.080 $11.080 $10.520 $10.520 $10.520
------- ------- ------- ------- ------- -------
Total return (d) 12.11% 11.26% 11.43%(e) 5.31%(f) 4.66%(f) (1.31)%(f)
------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS
Expenses (g) 1.14% 1.89% 1.74%(c) 1.19%(h) 1.94%(h) 1.82%(h)
Net investment income (g) 6.49% 5.74% 5.89%(c) 6.71%(h) 5.96%(h) 6.55%(h)
Portfolio turnover 356% 356% 356% 79%(f) 79%(f) 79%(f)
Net assets at end of period (in millions) $ 821 $ 72 $ 1 $ 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 amounts
reflect activity from that date.
(c) Net of fees waived by the Advisor or its affiliates 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 deferred sales charge.
(e) Had the Advisor or its affiliates 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.
(h) Annualized.
(i) Rounds to less than one million.
<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 (a) 3.88% 3.11%(d) 16.82% 15.96% (6.57)% (7.28)%
======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 1.18%(b) 1.93%(b) 1.17% 1.92% 1.16% 1.91%
Net investment income 6.62%(b) 5.87%(b) 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>
(a) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(b) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
25
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE TRUSTEES OF LIBERTY FUNDS TRUST II AND THE SHAREHOLDERS OF
COLONIAL SHORT DURATION U.S. GOVERNMENT FUND AND
COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND
AND THE TRUSTEES OF LIBERTY FUNDS 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 Liberty Funds
Trust II, formerly Colonial Trust II) and Colonial Federal Securities Fund (a
series of Liberty Funds Trust III, formerly Colonial Trust III) at August 31,
1999, 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, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 12, 1999
26
<PAGE>
(Intentionally left blank)
<PAGE>
(Intentionally left blank)
<PAGE>
ANNUAL REPORT: COLONIAL GOVERNMENT FUNDS
TRUSTEE & TRANSFER AGENT
- --------------------------------------------------------------------------------
ROBERT J. BIRNBAUM
Consultant (formerly Special Counsel, Dechert,
Price & Rhoads; President and Chief Operating
Officer, New York Stock Exchange, Inc.;
President, American Stock Exchange Inc.)
TOM BLEASDALE
Retired (formerly Chairman of the Board and
Chief Executive Officer, Shore Bank & Trust
Company)
JOHN V. CARBERRY
Senior Vice President of Liberty Financial
Companies, Inc. (formerly Managing Director,
Salomon Brothers)
LORA S. COLLINS
Attorney (formerly Attorney, Kramer, Levin,
Naftalis & 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)
SALVATORE MACERA
Private Investor (formerly Executive Vice
President of Itek Corp. and President of Itek
Optical & Electronic Industries, Inc.)
WILLIAM E. MAYER
Partner, Development Capital, LLC (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, Chief
Executive Officer and Director Hannaford Bros.
Co.)
JOHN J. NEUHAUSER
Academic Vice President and Dean of Faculties,
Boston College (former Dean, Boston College
School of Management)
THOMAS E. STITZEL
Professor of Finance, College of Business, Boise
State University; Business Consultant and Author
ROBERT L. SULLIVAN
Retired Partner, KPMG LLP (formerly Management
Consultant, Saatchi and Saatchi Consulting Ltd.
and Principal and International Practice
Director, Management Consulting, Peat Marwick
Main & Co.)
ANNE-LEE VERVILLE
Consultant (formerly General Manager, Global
Education Industry, and President, Applications
Solutions Division, IBM Corporation)
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Colonial's Government Funds 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's Government Funds.
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, Inc. Performance Update.
<PAGE>
- --------------------------------------------------------------------------------
CHOOSE LIBERTY
- --------------------------------------------------------------------------------
BECAUSE NO SINGLE INVESTMENT MANAGER CAN BE ALL THINGS TO ALL
INVESTORS.[service mark]
LIBERTY
[graphic omitted] [logo] COLONIAL MANAGEMENT ASSOCIATES, INC.
COLONIAL HAS LONG BEEN A RECOGNIZED LEADER IN FIXED-INCOME INVESTING. IN
ADDITION, COLONIAL HAS DISTINGUISHED ITSELF WITH BOTH A TRADITIONAL VALUE AND A
MORE CONTEMPORARY APPROACH TO EQUITY INVESTING.
- --------------------------------------------------------------------------------
[graphic omitted] [logo] CRABBE HUSON
CRABBE HUSON'S CONTRARIAN INVESTMENT STYLE SEEKS LONG-TERM PERFORMANCE BY
INVESTING IN STOCKS FROM HIGH-QUALITY, OUT-OF-FAVOR COMPANIES. THIS RISK-AVERSE
STRATEGY CAPITALIZES ON THE POTENTIAL OF THESE COMPANIES TO REGAIN MARKET
POPULARITY.
- --------------------------------------------------------------------------------
[graphic omitted] [logo] LIBERTY ASSET MANAGEMENT COMPANY
LAMCO BRINGS INSTITUTIONAL MONEY MANAGEMENT TO INDIVIDUAL INVESTORS THROUGH A
DISCIPLINED MULTI-MANAGER INVESTMENT PROCESS THAT SEEKS TO DELIVER CONSISTENT
LONG-TERM RETURNS.
- --------------------------------------------------------------------------------
[graphic omitted] [logo] NEWPORT FUND MANAGEMENT
LEADERS IN ASIAN INVESTING WITH A GLOBAL REACH.
- --------------------------------------------------------------------------------
[graphic omitted] [logo] STEIN ROE & FARNHAM INVESTMENT MANAGEMENT
STEIN ROE'S GROWTH MANAGEMENT STYLE EMPHASIZES COMPANIES WITH THE ABILITY TO
CREATE, MAINTAIN AND GROW EARNINGS IN DIFFERENT MARKET ENVIRONMENTS.
BOSTON [bullet] CHICAGO [bullet] NEW YORK [bullet] PORTLAND
[bullet] SAN FRANCISCO
That's why each of these affiliated managers has excelled in a particular
investment style. These managers not only specialize in a distinct investment
style, they hold a passion for their style along with a demonstrated track
record.
Each of these managers is a member of the Liberty Financial Companies (NYSE: L),
a diversified asset accumulation and management organization with over $62.7
billion in assets under management for more than 1.7 million investors. Many of
the affiliated managers' products are offered by prospectus through Liberty
Funds Distributor, Inc.
Ask your financial advisor to help you develop an investment strategy that
blends the complementary disciplines of different managers into a well-balanced
program tailored to your goals.
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COLONIAL GOVERNMENT FUNDS ANNUAL REPORT
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[logo] LIBERTY FUNDS
ALL-STAR [bullet] COLONIAL [bullet] CRABBE HUSON [bullet] NEWPORT
[bullet] STEIN ROE ADVISOR
Liberty Funds Distributor, Inc. [copyright]1999
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
www.libertyfunds.com
GF-02/767H-0999 99/1247
