<PAGE>
COLONIAL
U.S. GOVERNMENT FUND
[GRAPHIC]
ANNUAL REPORT
AUGUST 31, 1995
<PAGE>
COLONIAL U.S. GOVERNMENT FUND HIGHLIGHTS
SEPTEMBER 1, 1994 - AUGUST 31, 1995
INVESTMENT OBJECTIVE: Colonial U.S. Government Fund seeks as high a level of
current income as is consistent with prudent risk by investing exclusively in
U.S. government securities.*
THE FUND IS DESIGNED TO OFFER:
- Attractive monthly income
- High quality portfolio
- Diversification
PORTFOLIO MANAGER COMMENTARY: "In recent months, economic conditions have
favored U.S. government securities. This reflects a favorable environment,
including low inflation, balanced budget expectations, and renewed interest in
U.S. government securities from foreign investors."
COLONIAL U.S. GOVERNMENT FUND PERFORMANCE
<TABLE>
<CAPTION>
CLASS A CLASS B
<S> <C> <C>
Inception dates 10/13/87 6/8/92
Distributions declared per share $0.417 $0.369
SEC Yields on 8/31/95 5.86% 5.40%
Total returns, assuming
reinvestment of all distributions
and no sales charge or contingent
deferred sales charge (CDSC)
- 12 months 8.88% 8.07%
Net asset values per share at 8/31/95 $6.55 $6.55
</TABLE>
SECTOR BREAKDOWN **
<TABLE>
<S> <C>
Treasury Securities..................................................... 12.30%
Agency Securities....................................................... 2.10%
GNMAs................................................................... 32.20%
FNMAs................................................................... 49.90%
FHLMCs.................................................................. 3.50%
</TABLE>
AVERAGE MATURITY BREAKDOWN **
<TABLE>
<S> <C>
0 - 1 year.............................................................. 0.00%
1 - 5 years............................................................. 38.13%
5 - 10 years............................................................ 60.68%
Over 10 years........................................................... 1.19%
</TABLE>
*As of September 1, 1995, the Fund's objective was modified as follows: "the
Fund seeks as high a level of current income and total return as is consistent
with prudent risk by investing exclusively in U.S. government securities."
** Percent of total investments
2
<PAGE>
PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
During the 12 months ended August 31, 1995, fixed-income markets in the United
States showed marked improvement. This reflected a general decline in interest
rates as the economy gradually slowed.
The overall environment for fixed-income securities was positive throughout the
fiscal year. Almost all sectors of the bond market performed well during the
period, including corporate bonds, municipal bonds, and intermediate-term U.S.
government securities. In fact, the favorable interest rate environment helped
make U.S. government bonds one of the best performing sectors of the bond
market during the fiscal year.
Leslie Finnemore, Lead Portfolio Manager of Colonial U.S. Government Fund,
believes that interest rates will continue to decline in the months ahead, a
development that would have a favorable impact on the bond market. In the
following report, Leslie comments on the Fund's management strategy and on key
issues affecting the U.S. government bond market.
Respectfully,
/s/ John A. McNeice, Jr.
John A. McNeice, Jr.
President
October 11, 1995
3
<PAGE>
PORTFOLIO MANAGER REPORT
LESLIE FINNEMORE is the Lead Portfolio Manager of Colonial U.S. Government
Fund. She also manages three other Colonial Funds.
SLOWING ECONOMY, LOWER INTEREST RATES BENEFIT FUND: It appears that the U.S.
economy is coming in for the "soft landing" that has been the Federal Reserve
Board's goal for the last two years. Real gross domestic product (GDP) for the
first two quarters of 1995 grew at an annualized rate of 2.7% and 1.3%,
respectively, down significantly from the annualized GDP growth rate of 5.1%
for the final quarter of 1994. This weakness in the U.S. economy, which
translated into lower interest rates, had a favorable impact on the performance
of U.S. government securities.
BOND MARKET PERFORMANCE POSITIVE: The improvement in the U.S. government bond
market during the Fund's fiscal year was the result of a favorable confluence
of economic events. As we have already mentioned, economic growth in the
United States slowed considerably. This significantly reduced the market's
inflation fears. However, growth has remained strong enough to keep the
economy from lapsing into recession. Additionally, there has been an increase
in demand for U.S. government bonds from foreign investors. This reflects the
improving outlook for the U.S. dollar. Investor confidence has also improved
as a result of Congress's dedication to balancing the federal budget. Although
longer-term securities benefited most from the recent rally, intermediate-term
bonds also did well, as demonstrated by your Fund's performance.
MORTGAGE-BACKED SECURITIES ARE EMPHASIZED: Because mortgage-backed securities
may provide returns superior to comparable Treasury securities, the Fund
maintained its emphasis on mortgage-backeds throughout the fiscal year.
Investments in this sector were increased from 69.35% of the portfolio on
September 1, 1994, to 85.60% of the portfolio on August 31, 1995. However,
there was a change in the types of mortgage-backed securities the Fund invested
in. Investments in higher-coupon securities were reduced, and these were
replaced with discount mortgages, which tend to perform well during bond market
rallies.
LOOKING AHEAD: We remain optimistic about the near-term prospects for the U.S.
government bond market. Although it is not clear whether the Federal Reserve
Board will reduce interest rates, we believe rates will continue to decline.
Lower rates should have a favorable impact on the performance of the securities
in which your Fund invests.
4
<PAGE>
COLONIAL U.S. GOVERNMENT FUND'S INVESTMENT PERFORMANCE VS.
THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT INDEX
Change in Value of $10,000 from 10/87 - 8/95
Based on Net Asset Value and Maximum Offering Price for Class A Shares
<TABLE>
<CAPTION>
DATE NAV GOV MOP
- ---- --- --- ---
<S> <C> <C> <C>
10/87 10000 10000 9525
10198 10060 9714
10300 10158 9810
1/88 10586 10409 10083
10718 10520 10209
10665 10476 10158
4/88 10681 10458 10174
10653 10408 10147
10860 10577 10344
7/88 10827 10546 10312
10837 10559 10322
10984 10742 10462
10/88 11147 10890 10618
11082 10797 10556
11033 10807 10508
1/89 11138 10915 10608
11102 10868 10575
11113 10920 10586
4/89 11332 11140 10794
11536 11355 10988
11763 11645 11204
7/89 11893 11881 11328
11827 11721 11265
11860 11777 11297
10/89 12028 12024 11456
12129 12143 11553
12197 12178 11617
1/90 12146 12103 11569
12215 12148 11635
12250 12162 11668
4/90 12267 12122 11685
12498 12382 11904
12623 12545 12024
7/90 12822 12721 12213
12768 12675 12161
12841 12788 12231
10/90 12989 12965 12372
13213 13161 12585
13378 13343 12742
1/91 13506 13480 12864
13578 13563 12933
13670 13637 13021
4/91 13782 13778 13127
13876 13855 13217
13931 13866 13269
7/91 14085 14016 13416
14241 14282 13565
14419 14525 13734
10/91 14516 14690 13827
14635 14862 13939
14862 15223 14157
1/92 14799 15077 14096
14861 15124 14155
14839 15063 14134
4/92 14923 15199 14214
15095 15425 14378
15218 15648 14495
7/92 15277 15948 14552
15447 16111 14713
15551 16333 14812
10/92 15500 16137 14764
15494 16071 14758
15612 16278 14870
1/93 15753 16581 15005
15873 16825 15119
15924 16887 15167
4/93 16021 17019 15260
16050 16973 15288
16235 17219 15464
7/93 16280 17253 15507
16396 17510 15618
16442 17582 15661
10/93 16464 17624 15682
16389 17538 15611
16496 17610 15712
1/94 16652 17784 15861
16491 17540 15708
16182 17284 15413
4/94 16068 17172 15305
16078 17184 15314
16063 17187 15300
7/94 16274 17413 15501
16310 17463 15535
16219 17318 15448
10/94 16229 17322 15458
16163 17245 15395
16202 17302 15433
1/95 16476 17584 15694
16752 17924 15956
16845 18022 16045
4/95 17044 18231 16235
17510 18746 16678
17600 18866 16764
7/95 17611 18875 16775
17784 19030 16939
</TABLE>
A $10,000 investment in Class B shares made on June 8, 1992, (inception) at net
asset value would have been valued at $11,396 on August 31, 1995. The same
investment after deducting the applicable CDSC would have grown to $11,113 on
August 31, 1995.
AVERAGE ANNUAL TOTAL RETURNS AS OF SEPTEMBER 30, 1995 (MOST RECENT QUARTER END)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
Inception 10/13/87 Inception 6/8/92
NAV MOP NAV W/CDSC
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR 10.56% 5.30% 9.74% 4.74%
- --------------------------------------------------------------------------------
5 YEARS 6.91% 5.87% -- --
- --------------------------------------------------------------------------------
SINCE INCEPTION 7.79% 7.13% 4.56% 3.78%
- --------------------------------------------------------------------------------
</TABLE>
The Lehman Brothers Intermediate Government Index is an unmanaged index that
tracks the performance of U.S. government securities.
The 30-day SEC yield on August 31, 1995, of 5.86% for Class A shares and 5.40%
for Class B shares reflects the portfolio's earning power, net of expenses, and
does not include changes in Fund price.
Past performance cannot predict future results. Return and value of an
investment will vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions. Net asset value (NAV) return does not
include sales charges or CDSC. Maximum offering price (MOP) return includes
the maximum sales charge of 4.75%. The CDSC returns reflect charges of: one
year, 5.00%; since inception, 3.00%.
Performance for different share classes will vary based on differences in sales
charges and fees associated with each class.
5
<PAGE>
INVESTMENT PORTFOLIO
AUGUST 31, 1995 (IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - 106.3% PAR VALUE
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 93.3%
MATURITIES
COUPON FROM/TO
- ------------ ---------
<S> <C> <C> <C>
Federal Home Loan Bank:
8.300% 01/26/98 $ 3,000 $ 3,031
--------
Federal Home Loan Mortgage Corp.:
7.500% 2016 1,494 1,492
8.000% 2003-2011 22,250 22,761
8.260% 1998 3,000 3,026
8.500% 2007-2017 5,687 5,884
8.750% 2005-2013 2,290 2,352
9.000% 2001-2018 9,395 9,812
9.250% 2008-2016 7,490 7,773
9.500% 2005-2016 2,957 3,123
9.750% 2016 132 138
10.000% 2019 3,638 3,933
10.250% 2009-2016 690 742
10.500% 2009-2021 4,286 4,686
11.250% 2005-2016 4,148 4,548
12.000% 2014 2 2
--------
70,272
--------
Federal National Mortgage Association:
6.000% 2023-2025 (a) 46,288 43,423
6.500% 2007-2025 (a) 502,165 490,590
7.000% 2007-2025 (a) 112,898 112,339
7.500% 2006-2025 (a) 236,304 237,111
8.000% 2008-2009 4,093 4,213
8.250% 2008 1,299 1,325
8.500% 2008-2017 11,845 12,341
9.000% 2002-2021 35,896 37,562
9.500% 2009-2021 3,432 3,613
10.000% 2001-2006 17,198 18,031
10.500% 2010-2016 7,239 7,947
11.000% 2015-2020 18,638 20,676
--------
989,171
--------
Government National Mortgage Association:
6.500% 2023-2024 8,638 8,279
7.000% 2023-2025 (a) 72,202 70,961
7.500% 2007-2024 72,871 73,532
8.000% 2017-2025 14,731 14,994
8.500% 2017-2026 9,955 10,270
8.750% 2021-2022 5,794 6,023
</TABLE>
6
<PAGE>
Investment Portfolio/August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITIES
COUPON FROM/TO
- ------------ ----------
<S> <C> <C> <C>
8.850% 2018-2020 $ 7,728 $ 8,025
9.000% 2008-2022 43,303 45,310
9.250% 2016-2022 20,746 21,615
9.500% 2009-2025 200,207 215,101
10.000% 1998-2024 7,823 8,232
10.250% 2018 318 346
10.500% 1998-2020 18,954 20,810
10.625% 2010 106 116
10.750% 2024 2,438 2,524
11.000% 2009-2021 21,391 23,812
11.250% 2015 166 183
11.500% 2010-2021 31,176 35,126
11.750% 2013-2015 430 475
12.000% 2011-2019 30,724 34,573
12.250% 2013-2015 1,309 1,459
12.500% 2010-2015 20,861 23,541
12.750% 2013-2014 155 171
13.000% 2011-2016 6,828 7,649
13.500% 2010-2015 4,826 5,393
14.000% 2011-2014 216 241
14.500% 2012 78 88
15.000% 2011-2012 140 159
----------
639,008
----------
U.S. Small Business Administration:
7.600% 01/01/12 4,474 4,588
8.200% 10/01/11 4,378 4,637
8.250% 11/01/11 8,422 8,922
8.650% 11/01/14 5,921 6,380
8.850% 08/01/11 1,693 1,830
9.150% 07/01/11 4,070 4,440
9.450% 08/01/10 1,501 1,647
9.500% 04/01/10 3,087 3,396
9.650% 05/01/10 2,103 2,333
----------
38,173
----------
TOTAL GOVERNMENT AGENCIES (cost of $1,723,756) 1,739,655
----------
GOVERNMENT OBLIGATIONS - 13.0%
U.S. Treasury bonds,
6.875% 08/15/25(b) 6,615 6,798
----------
U.S. Treasury notes:
5.750% 08/15/03(b) 99,092 95,732
6.500% 08/15/05(b) 52,000 52,796
6.875% 03/31/00(b) 34,902 35,971
7.500% 02/15/05(b) 47,600 51,453
----------
235,952
----------
</TABLE>
7
<PAGE>
Investment Portfolio/August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - CONT. PAR VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL GOVERNMENT OBLIGATIONS (cost of $239,683) $ 242,750
----------
TOTAL INVESTMENTS (cost of $1,963,439) 1,982,405
----------
SHORT-TERM OBLIGATIONS (b) - 24.1%
- --------------------------------------------------------------------------------
Repurchase agreement with Bankers Trust Securities
Corp. dated 8/31/95, due 9/01/95 at 5.800%, collateralized
by U.S. Treasury notes maturing in 1998, market
value $45,989 (repurchase proceeds $45,007) 45,000 45,000
Repurchase agreement with Chase Securities, Inc.,
dated 8/31/95, due 9/01/95 at 5.820% collateralized by
U.S. Treasury bills and notes with various maturities to
1997, market value $413,878 (repurchase proceeds
$405,199) 405,134 405,134
----------
TOTAL SHORT-TERM OBLIGATIONS 450,134
==========
OTHER ASSETS & LIABILITIES, NET - (30.4%) (567,293)
- -------------------------------------------------------------------------------------
NET ASSETS - 100.0% $1,865,246
==========
</TABLE>
NOTES TO INVESTMENT PORTFOLIO:
- --------------------------------------------------------------------------------
(a) This security, or a portion thereof, has 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, which are held in a segregated account, along with the
repurchase agreements, have a total market value of $692,884 and are
being used to collateralize the delayed delivery purchases indicated in
note (a) above.
(c) Cost for federal income tax purposes is $1,963,551.
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
AUGUST 31, 1995
(in thousands except for per share amounts and footnote)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (cost $1,963,439) $1,982,405
Short-term obligations 450,134
----------
2,432,539
Receivable for:
Investments sold $ 49,823
Interest 10,733
Fund shares sold 427
Other 821 61,804
-------- ----------
Total Assets 2,494,343
LIABILITIES
Payable for:
Investments purchased 616,103
Distributions 9,369
Fund shares repurchased 3,157
Accrued:
Deferred Trustees fees 8
460
--------
Total Liabilities 629,097
----------
NET ASSETS $1,865,246
----------
Net asset value & redemption price per share -
Class A ($1,163,975/177,573) $6.55
==========
Maximum offering price per share - Class A
($6.55/0.9525) $6.88 (a)
----------
Net asset value & offering price per share -
Class B ($701,271/106,985) $6.55 (b)
----------
COMPOSITION OF NET ASSETS
Capital paid in $1,963,241
Overdistributed net investment income (658)
Accumulated net realized loss (116,303)
Net unrealized appreciation 18,966
----------
$1,865,246
==========
</TABLE>
(a) On sales of $50,000 or more the offering price is reduced.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1995
(in thousands)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest $137,263
Dollar roll fee income 6,256
--------
143,519
EXPENSES
Management fee $ 9,630
Service fee 4,117
Distribution fee - Class B 5,595
Transfer agent 3,588
Bookkeeping fee 525
Trustees fee 84
Custodian fee 226
Custodian credits earned (8)
Audit fee 78
Legal fee 17
Registration fee 50
Reports to shareholders 24
Other 128 24,054
-------- --------
Net Investment Income 119,465
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized loss (55,099)
Net unrealized appreciation during
the period 74,212
--------
Net Gain 19,113
========
Net Increase in Net Assets From Operations $138,578
========
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended
(in thousands) August 31
------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
<S> <C> <C>
Operations:
Net investment income $ 119,465 $ 150,500
Net realized loss (55,099) (96,561)
Net unrealized appreciation (depreciation) 74,212 (73,750)
---------- ----------
Net Increase (Decrease) from Operations 138,578 (19,811)
Distributions:
From net investment income - Class A (59,237) (59,838)
From capital paid in - Class A -- (3,498)
From net investment income - Class B (43,146) (50,284)
From capital paid in - Class B -- (2,940)
---------- ----------
36,195 (136,371)
---------- ----------
Fund Share Transactions:
Receipts for shares sold - Class A 23,802 156,635
Receipts for shares issued in the merger with
Liberty Financial U.S. Government Securities Fund 657,855
Value of distributions reinvested - Class A 32,004 35,774
Cost of shares repurchased - Class A (331,156) (566,219)
---------- ----------
382,505 (373,810)
---------- ----------
Receipts for shares sold - Class B 24,592 160,818
Value of distributions reinvested - Class B 23,538 29,049
Cost of shares repurchased - Class B (195,780) (264,656)
---------- ----------
(147,650) (74,789)
---------- ----------
Net Increase (Decrease) from Fund Share Transactions 234,855 (448,599)
---------- ----------
Total Increase (Decrease) 271,050 (584,970)
NET ASSETS
Beginning of period 1,594,196 2,179,166
---------- ----------
End of period (net of overdistributed
net investment income of $658 and
$7,986, respectively) $1,865,246 $1,594,196
========== ==========
NUMBER OF FUND SHARES
Sold - Class A 3,736 23,127
Issued in the merger with Liberty Financial
U.S. Government Securities Fund 102,622
Issued for distributions reinvested - Class A 4,983 5,368
Repurchased - Class A (51,715) (85,108)
---------- ----------
59,626 (56,613)
---------- ----------
Sold - Class B 3,844 23,779
Issued for distributions reinvested - Class B 3,685 4,369
Repurchased - Class B (30,739) (39,973)
---------- ----------
(23,210) (11,825)
---------- ----------
</TABLE>
See notes to financial statements.
11
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Year ended August 31
----------------------------
<S> <C> <C>
NET CHANGE IN CASH
Cash flows from operating activities:
Interest received $ 140,960
Dollar roll fee income received 7,574
Operating expenses paid (24,382)
------------
Net cash provided by operating activities $ 124,152
Cash flows from investing activities:
Purchases of securities and short-term obligations (5,735,314)
Proceeds from sales of securities and short-term 6,136,739
obligations ------------
Net cash provided by investing activities 401,425
---------
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES 525,577
Cash flows from financing activities:
Proceeds from shares sold 48,511
Cost of shares repurchased (528,595)
Cash dividends paid (45,493)
------------
Net cash used by financing activities (525,577)
---------
Net change in cash 0
Cash - beginning of period 0
---------
Cash - end of period $ 0
=========
RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET
CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES:
Net increase in net
assets resulting from operations $ 138,578
Decrease in investments $ 352,184
Decrease in interest and fees receivable 8,595
Increase in receivable
from investments securities sold (48,466)
Increase in payable for
investment securities purchased 76,135
Decrease in other assets (1,106)
Decrease in accrued expenses and liabilities (343)
------------
Total 386,999
=========
Net cash provided by operating
and investing activities $ 525,577
=========
</TABLE>
See notes to financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995
NOTE 1. ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION: Colonial U.S. Government Fund (the Fund), a series of Colonial
Trust II, is a diversified portfolio of a Massachusetts business trust
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund may issue an unlimited number of
shares. The Fund offers Class A shares sold with a front-end sales charge and
Class B shares which are subject to an annual distribution fee and a contingent
deferred sales charge. Class B shares will convert to Class A shares when they
have been outstanding approximately eight years. The following significant
accounting policies are consistently followed by the Fund in the preparation of
its financial statements and conform to generally accepted accounting
principles.
SECURITY VALUATION AND TRANSACTIONS: Debt securities generally are valued by a
pricing service based upon market transactions for normal, institutional-size
trading units of similar securities. When management deems it appropriate, an
over-the-counter or exchange bid quotation is used.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
Portfolio positions which cannot be valued as set forth above are valued at fair
value under procedures approved by the Trustees.
Security transactions are accounted for on the date the securities are
purchased, sold, or mature.
Cost is determined and gains and losses are based upon the specific
identification method for both financial statement and federal income tax
purposes.
The Fund may enter into dollar roll transactions. A dollar roll transaction
involves a sale by the Fund of securities that it holds with an agreement by the
Fund to repurchase substantially similar securities at an agreed upon price and
date. During the period between the sale and repurchase, the Fund will not be
entitled to accrue interest and receive principal payments on the securities
sold. Dollar roll transactions involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price of those
securities. In the event the buyer of securities under a dollar roll
transaction files for bankruptcy or becomes insolvent, the Fund's use of
proceeds of the transaction may be restricted pending a determination by or with
respect to the other party.
The Fund may trade securities on other than normal settlement terms. This may
increase the risk if the other party to the transaction fails to deliver and
causes the Fund to subsequently invest at less advantageous prices.
The Fund maintains U.S. government securities or other liquid high grade debt
obligations as collateral with respect to dollar roll transactions and
securities traded on other than normal settlement terms.
13
<PAGE>
Notes to Financial Statements/August 31, 1995
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES - CONT.
- --------------------------------------------------------------------------------
DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS: All income,
expenses (other than the Class B distribution fee), realized and unrealized
gains (losses), are allocated to each class proportionately on a daily basis
for purposes of determining the net asset value of each class.
Class B per share data and ratios are calculated by adjusting the expense and
net investment income per share data and ratios for the Fund for the entire
period by the annualized distribution fee applicable to Class B shares only.
FEDERAL INCOME TAXES: Consistent with the Fund's policy to qualify as a
regulated investment company and to distribute all of its taxable income, no
federal income tax has been accrued.
STATEMENT OF CASH FLOWS: Information on financial transactions which have been
settled through the receipt or disbursement of cash is presented in the
Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows
is the amount included in other assets in the Fund's Statement of Assets and
Liabilities and represents cash on hand at its custodian bank account and does
not include any short-term investments as of August 31, 1995.
The merger with Liberty Financial U.S. Government Securities Fund was a non-cash
financing activity.
INTEREST INCOME, FEE INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is
recorded on the accrual basis. Fee income attributable to mortgage dollar roll
transactions is recorded on the accrual basis over the term of the transaction.
Original issue discount is accreted to interest income over the life of a
security with a corresponding increase in the cost basis; premium and market
discount are not amortized or accreted.
DISTRIBUTIONS TO SHAREHOLDERS: The Fund declares and records distributions
daily and pays monthly.
The amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for mortgage backed securities for book and tax purposes and expired
capital loss carryovers. Permanent book and tax basis differences will result
in reclassifications to capital accounts.
OTHER: The Fund's custodian takes possession through the federal book-entry
system of securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying assets
remains sufficient to protect the Fund. The Fund may experience costs and
delays in liquidating the collateral if the issuer defaults or enters
bankruptcy.
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES
- --------------------------------------------------------------------------------
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Adviser) is the
investment adviser of the Fund and furnishes accounting and other services and
office facilities for a monthly fee based on the Fund's average net assets as
follows:
14
<PAGE>
Notes to Financial Statements/August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Net Assets Annual Fee Rate
------------------ ---------------
<S> <C>
First $1 billion........................... 0.60%
Next $500 million.......................... 0.55%
Over $1.5 billion.......................... 0.50%
</TABLE>
Prior to July 1, 1995, average net assets over $1 billion and under $2 billion
had an annual fee rate of 0.55%.
BOOKKEEPING FEE: The Adviser provides bookkeeping and pricing services for
$27,000 per year plus a percentage of the Fund's average net assets as follows:
<TABLE>
<CAPTION>
Average Net Assets Annual Fee Rate
------------------ ---------------
<S> <C>
First $50 million.......................... No charge
Next $950 million.......................... 0.035%
Next $1 billion............................ 0.025%
Next $1 billion............................ 0.015%
</TABLE>
TRANSFER AGENT: Colonial Investors Service Center, Inc. (the Transfer Agent),
an affiliate of the Adviser, provides shareholder services for a monthly fee
equal to 0.18% annually of the Fund's average net assets and receives a
reimbursement for certain out of pocket expenses.
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Colonial Investment
Services, Inc. (the Distributor), an affiliate of the Adviser, is the Fund's
principal underwriter. During the year ended August 31, 1995, the Distributor
retained net underwriting discounts of $54,789 on sales of the Fund's Class A
shares and received contingent deferred sales charges (CDSC) of $4,043,657 on
Class B share redemptions.
The Fund has adopted a 12b-1 plan which requires the payment of a service fee to
the Distributor equal to 0.25% annually of the Fund's net assets as of the 20th
of each month. The plan also requires the payment of a distribution fee to the
Distributor equal to 0.75% annually of the average net assets attributable to
Class B shares only.
The CDSC and the fees received from the 12b-1 plan are used principally as
repayment to the Distributor for amounts paid by the Distributor to dealers who
sold such shares.
OTHER: The Fund pays no compensation to its officers, all of whom are employees
of the Adviser.
The Fund's Trustees may participate in a deferred compensation plan which may be
terminated at any time. Obligations of the plan will be paid solely out of the
Fund's assets.
15
<PAGE>
Notes to Financial Statements/August 31, 1995
- --------------------------------------------------------------------------------
NOTE 3. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITY: During the year ended August 31, 1995, purchases and sales
of investments, other than short-term obligations and mortgage dollar roll
transactions, were $2,017,952,911 and $2,594,029,145, respectively.
Unrealized appreciation (depreciation) at August 31, 1995, based on cost of
investments for federal income tax purposes was:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 29,712,143
Gross unrealized depreciation (10,858,055)
------------
Net unrealized appreciation $ 18,854,088
============
</TABLE>
Information regarding dollar roll transactions that are other than normal
settlement are as follows:
<TABLE>
<S> <C>
Maximum amount outstanding during the period $281,250,215
Average amount outstanding during the period $249,017,072
Amount outstanding at August 31, 1995 $235,024,063
</TABLE>
The average amount outstanding during the period was calculated by summing
borrowings at the end of each day and dividing the sum by the number of days in
the period ended August 31, 1995.
CAPITAL LOSS CARRYFORWARDS: At August 31, 1995, capital loss carryforwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
<TABLE>
<CAPTION>
Year of Capital loss
expiration carryforward
------------------- ------------
<S> <C>
1996............... $ 6,713,000
1997............... 2,528,000
1998............... 706,000
1999............... 2,970,000
2000............... 5,878,000
2001............... 29,729,000
2002............... 7,249,000
2003............... 67,291,000
------------
$123,064,000
============
</TABLE>
Of the loss carryforward expiring in 1996, $722,000 was acquired in the merger
with Colonial Government Mortgage Trust. Of the loss carryforwards expiring in
1996, 1997, 1998, 1999, 2000, 2001, and 2002, $67,000, $25,000, $130,000, and
$1,184,000, none, none, and none, respectively, were acquired in the merger with
VIP Federal Securities Fund and $5,925,000, $2,439,000, none, $938,000,
$5,252,000, $25,355,000 and $4,423,000, respectively, were acquired in the
merger with Liberty Financial U.S. Government Securities Fund. Their
availability may be limited in a given year.
16
<PAGE>
Notes to Financial Statements/August 31, 1995
- --------------------------------------------------------------------------------
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.
NOTE 4. MERGER INFORMATION
- --------------------------------------------------------------------------------
On March 24, 1995, Liberty Financial U.S. Government Securities Fund (LFUSGSF)
was merged into the Fund by a non-taxable exchange of 102,621,829 shares of the
Fund (valued at $657,854,682) for the 74,665,826 of LFUSGSF shares then
outstanding. The assets of LFUSGSF acquired included unrealized depreciation of
$10,937,427. The aggregate net assets of the Fund and LFUSGSF immediately after
the merger were $2,014,746,627.
NOTE 5. RESULTS OF SPECIAL SHAREHOLDERS MEETING (unaudited)
- --------------------------------------------------------------------------------
On February 15, 1995, a special meeting of shareholders was held and a new
Management Agreement between the Trust, with respect to the Fund, and Colonial
Management Associates, Inc. was approved and became effective upon the merger of
The Colonial Group, Inc. with Apple Merger Corporation, a subsidiary of Liberty
Financial Companies, Inc. The merger occured on March 24, 1995. Of the shares
of beneficial interest outstanding on December 9, 1994, 147,129,945 voted for
the new Management Agreement, 1,721,803 voted against, 7,488,077 abstained, and
596,027 were broker non-votes.
17
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year ended August 31
-------------------------------------------------
1995 1994
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 6.420 $ 6.420 $ 6.880 $ 6.880
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.447 0.399 0.415 0.365
Net realized and
unrealized gain (loss) 0.100 0.100 (0.452) (0.452)
------- ------- ------- -------
Total from Investment
Operations 0.547 0.499 (0.037) (0.087)
------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.417) (0.369) (0.400) (0.352)
From capital paid in -- -- (0.023) (0.021)
------- ------- ------- -------
Total Distributions
Declared to Shareholders (0.417) (0.369) (0.423) (0.373)
Net asset value -
End of period $ 6.550 $ 6.550 $ 6.420 $ 6.420
------- ------- ------- -------
Total return (c) 8.88% 8.07% (0.53%) (1.28%)
------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11% 1.86% 1.11% 1.86%
Net investment income 7.51% 6.76% 8.14% 7.39%
Portfolio turnover 140% 140% 291% 291%
Net assets at end
of period (in millions) $ 1,164 $ 701 $ 758 $ 836
</TABLE>
(a) Class B shares were initially offered on June 8, 1992. Per share amounts
reflect activity from that date.
(b) Because of differences between book and tax basis accounting, approximately
$0.056 and $0.014, respectively, were a return of capital for federal
income tax purposes.
(c) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(d) Not annualized.
(e) Annualized.
18
<PAGE>
FINANCIAL HIGHLIGHTS - CONTINUED
<TABLE>
<CAPTION>
Year ended August 31
----------------------------------------------------------------------
1993 1992 1991
Class A Class B Class A Class B (a) Class A
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 6.980 $ 6.980 $ 7.020 $ 6.950 $ 6.950
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.541 0.490 0.614 0.122 0.699
Net realized and
unrealized gain (loss) (0.130) (0.130) (0.043) 0.029 0.069
------- ------- ------- ------- -------
Total from Investment
Operations 0.411 0.360 0.571 0.151 0.768
------- ------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.511) (0.460) (0.611) (0.121) (0.698)
From capital paid in -- -- -- -- --
------- ------- ------- ------- -------
Total Distributions
Declared to Shareholders (0.511) (0.460) (0.611) (b) (0.121) (b) (0.698)
------- ------- ------- ------- -------
Net asset value -
End of period $ 6.880 $ 6.880 $ 6.980 $ 6.980 $ 7.020
------- ------- ------- ------- -------
Total return (c) 6.15% 5.36% 8.46% 2.19% (d) 11.54%
------- ------- ------- ------- -------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.10% 1.85% 1.09% 1.84% (e) 1.16%
Net investment income 7.85% 7.10% 8.55% 7.80% (e) 9.68%
Portfolio turnover 162% 162% 132% 132% 129%
Net assets at end
of period (in millions) $ 1,202 $ 978 $ 1,102 $ 343 $ 444
</TABLE>
- --------------------------------------------------------------------------------
State Tax Information (unaudited)
An average of 23% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
Approximately 41% of the Fund's distributions (32% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes, and bills.
- --------------------------------------------------------------------------------
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
T0 THE TRUSTEES OF COLONIAL TRUST II AND THE SHAREHOLDERS OF
COLONIAL U.S. GOVERNMENT FUND
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations, of
cash flows, and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Colonial U.S.
Government Fund (a series of Colonial Trust II) at August 31, 1995, the results
of its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and the financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of portfolio positions at August 31, 1995 by correspondence with
the custodian, and brokers, and the application of alternative auditing
procedures when confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
October 11, 1995
20
<PAGE>
SHAREHOLDER SERVICES
TO MAKE INVESTING EASIER
Colonial has one of the most extensive selections of shareholder services
available. Your financial adviser can help you activate any of these services,
or call Colonial directly at 1-800-345-6611.
AFFORDABLE ADDITIONAL INVESTMENTS: Add to your account with as little as $50;
$25 for an IRA account.
FREE EXCHANGES*: Exchange all or part of your account into the same share class
of another Colonial fund, by phone or mail, as your needs change over time.
EASY ACCESS TO YOUR MONEY*: Make withdrawals from your account by phone, by mail
or, for certain funds, by check.
ONE-YEAR REINSTATEMENT PRIVILEGE: If you need access to your money, but then
choose to return it to Colonial within one year, you can reinvest in any
Colonial fund of the same share class without any penalty or sales charge.
FUNDAMATIC: Make periodic investments as low as $50 from your checking account
to your Colonial account.
SYSTEMATIC WITHDRAWAL PLAN (SWP): Receive monthly, quarterly, or semiannual
payments via check or bank transmission. There is a $5,000 account value
required, but no minimum for the payment amount. The maximum annual withdrawal
is 12% of account balance at time SWP is established. SWPs by check are
processed on the 10th of each month.
AUTOMATED DOLLAR COST AVERAGING: Transfer money on a monthly basis from any
Colonial fund with a balance of $5,000 into the same share class of up to four
other Colonial funds. Minimum for each transfer is $100.
LOW COST IRAS: Choose from a broad range of retirement plans, including IRAs.
* Redemptions and exchanges are made at the next determined net asset value
after the request is received by Colonial. Proceeds may be more or less than
your original cost. The exchange privilege may be terminated at any time.
Investors who purchase Class B or Class D shares (for applicable funds), or $1
million or more of Class A shares, may be subject to a contingent deferred
sales charge.
21
<PAGE>
HOW TO REACH COLONIAL
BY PHONE OR BY MAIL
BY TELEPHONE
COLONIAL CUSTOMER CONNECTION - 1-800-345-6611
For 24-hour account information, call from your touch-tone phone. (Rotary
callers will be automatically connected to a representative during business
hours.) A recorded message will guide you through the menu:
<TABLE>
<S> <C>
For fund prices, dividends, and capital gains information.............. press 1
For account information................................................ press 2
To speak to a Colonial representative.................................. press 3
For yield and total return information................................. press 4
For duplicate statements or new supply of checks....................... press 5
To order duplicate tax forms and year-end statements................... press 6
(February through May)
To review your options at any time during your call.................... press *
</TABLE>
To speak with a shareholder services representative about your account, call
Monday to Friday, 8:00 am to 8:00 pm ET, and Saturdays from February through
mid-April, 10:00 am to 2:00 pm ET.
COLONIAL TELEPHONE TRANSACTION DEPARTMENT - 1-800-422-3737
To purchase, exchange, or sell shares by telephone, call Monday to Friday, 9:00
am to 8:00 pm ET. Transactions received after the close of the New York Stock
Exchange will receive the next business day's closing price.
COLONIAL LITERATURE DEPARTMENT - 1-800-248-2828
To request literature on any Colonial fund, call Monday to Friday, 8:30 am to
6:30 pm ET.
BY MAIL
COLONIAL INVESTORS SERVICE CENTER, INC.
P.O. BOX 1722
BOSTON, MA 02105-1722
22
<PAGE>
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Colonial U.S. Government Fund is:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Colonial U.S. Government Fund mails one shareholder report to each shareholder
address. If you would like more than one report, please call our Literature
Department at 1-800-248-2828 and additional reports will be sent to you.
This report has been prepared for shareholders of Colonial U.S. Government
Fund. This report may also be used as sales literature when preceded or
accompanied by the current prospectus which provides details of sales charges,
investment objectives and operating policies of the Fund.
23
<PAGE>
[COLONIAL MUTUAL FUNDS LOGO]
Earning Your Trust for
More Than 60 Years
TRUSTEES
ROBERT J. BIRNBAUM
Trustee (formerly Special Counsel, Dechert, Price & Rhoads; President and Chief
Operating Officer, New York Stock Exchange, Inc.)
TOM BLEASDALE
Trustee (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust Company)
LORA S. COLLINS
Attorney, Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
JAMES E. GRINNELL
Private Investor (formerly Senior Vice President - Operations, The Rockport
Company)
WILLIAM D. IRELAND, JR.
Trustee (formerly Chairman of the Board, Bank of New England - Worcester)
RICHARD W. LOWRY
Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood
Corporation)
WILLIAM E. MAYER
Dean, College of Business and Management, University of Maryland (formerly
Dean, Simon Graduate School of Business, University of Rochester; Chairman and
Chief Executive Officer, C.S. First Boston Merchant Bank; and President and
Chief Executive Officer, The First Boston Corporation)
JOHN A. MCNEICE, JR.
Chairman of the Board and Director, The Colonial Group, Inc. and Colonial
Management Associates, Inc. (formerly Chief Executive Officer, The Colonial
Group, Inc. and Colonial Management Associates, Inc.)
JAMES L. MOODY, JR.
Chairman of the Board, Hannaford Bros. Co. (formerly Chief Executive Officer,
Hannaford Bros. Co.)
JOHN J. NEUHAUSER
Dean, Boston College School of Management
GEORGE L. SHINN
Financial Consultant (formerly Chairman, Chief Executive Officer and
Consultant, The First Boston Corporation)
ROBERT L. SULLIVAN
Management Consultant (formerly Management Consultant, Saatchi and Saatchi
Consulting Ltd. and Principal and International Practice Director, Management
Consulting, Peat Marwick Main & Co.)
SINCLAIR WEEKS, JR.
Chairman of the Board, Reed & Barton Corporation
COLONIAL INVESTMENT SERVICES, INC. (C)1995
One Financial Center, Boston, Massachusetts 02111-2621, 617-426-3750
UG-02/320B-0895
[RECYCLE LOGO] Printed on recycled paper
