<PAGE>
[COLONIAL LOGO]
COLONIAL
U.S. GOVERNMENT FUND
[GRAPHIC]
SEMIANNUAL REPORT
FEBRUARY 29, 1996
<PAGE>
COLONIAL U.S. GOVERNMENT FUND HIGHLIGHTS
SEPTEMBER 1, 1995 - FEBRUARY 29, 1996
INVESTMENT OBJECTIVE: Colonial U.S. Government 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.
THE FUND IS DESIGNED TO OFFER:
- Attractive monthly income and total return
- High quality portfolio
- Diversification
PORTFOLIO MANAGER COMMENTARY: "Economic and market conditions were generally
favorable for government securities during the period. Interest rates continued
to trend downward, inflation stayed low, and foreign investors remained active
in the market."
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 $0.205 $0.180
SEC yields on 2/29/96* 5.49% 4.99%
Total returns, assuming
reinvestment of all distributions
and no sales charge or contingent
deferred sales charge (CDSC)
- - 6 months 3.90% 3.51%
- - 12 months 10.13% 9.32%
Net asset value per share at 2/29/96 $6.60 $6.60
</TABLE>
* The 30-day SEC yields reflect the portfolio's earning power, net of expenses,
expressed as an annualized percentage of the maximum offering price per share at
the end of the period.
<TABLE>
<CAPTION>
SECTOR BREAKDOWN **
<S> <C>
FNMAs ................... 38.43%
GNMAs ................... 31.00%
Treasury Securities ..... 24.06%
Agency Securities ....... 3.30%
FHLMCs .................. 3.21%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE LIFE BREAKDOWN **
<S> <C>
0 - 1 year ............ 0.34%
1 - 5 years ........... 48.36%
5 - 10 years .......... 47.81%
Over 10 years ......... 3.49%
</TABLE>
** Sector and average life breakdowns are based on total senior securities.
Because the Fund is actively managed, sector and average life breakdowns will
change.
2
<PAGE>
PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
I am pleased to present your Fund's semiannual report for the period ended
February 29, 1996. First, however, I would like to extend my thanks to President
John A. McNeice, Jr., who has retired after a career with Colonial that spanned
40 years. We look forward to his continued involvement on the executive
committee of the board of directors at our parent company, Liberty Financial
Companies, Inc.
[PHOTO OF PRESIDENT HAROLD W. COGGER]
In my new position, I will direct Colonial's focus on the delivery of superior
investment performance over the long term. To achieve this mission, we will
continue to seek the optimal combination of talented people and effective
investment disciplines.
The receipt of your semiannual report is a good time to reflect on market
conditions and the performance of your Fund during the past 6 to 12 months.
Falling interest rates and minimal inflation helped the economy grow at a
comfortable pace throughout 1995 and created a positive environment for fixed
income investments. After a difficult 1994, investors who stayed the course
during 1995 were amply rewarded.
While there may be some current market volatility, we expect slow growth and low
inflation to continue and believe that further reductions in interest rates may
take place later in the year. In the following pages you'll find detailed
information on your Fund's performance as well as an in-depth discussion with
the portfolio manager.
With over 12 years of service at Colonial and more than 25 years in the
industry, I am enthusiastic about -- and dedicated to achieving -- Colonial's
mission of providing you with competitive investment returns. In my new role, I
look forward to communicating with you regarding your Colonial investment. We
appreciate the opportunity to help you meet your investment goals.
Respectfully,
/s/ Harold W. Cogger
Harold W. Cogger
President
April 15, 1996
Because market conditions change frequently, there can be no assurance that the
trends described here will continue, come to pass, or affect Fund performance.
3
<PAGE>
PORTFOLIO MANAGER REPORT
LESLIE FINNEMORE is a Vice President of Colonial Management Associates, Inc.,
and Lead Portfolio Manager of the Colonial U.S. Government Fund. MICHAEL
BISSONNETTE is a Vice President of Colonial Management Associates, Inc., and
Co-Portfolio Manager of the Fund.
Q: HOW DID THE GOVERNMENT MARKET PERFORM DURING THE SIX-MONTH PERIOD?
A: Bond performance was generally strong. Slower economic growth, low inflation
and, most importantly, declining interest rates, contributed to price increases
in the fixed income markets. The government market began to weaken in February
on speculation that the economy was growing faster than originally anticipated
and, therefore, the Federal Reserve Board would not lower rates in its March
meeting.
Q: WHAT EFFECT DID MARKET CONDITIONS HAVE ON THE FUND?
A: It was a good period for the Fund because mortgage-backed securities
performed well. They comprised approximately 75% of Fund holdings. Given the
Fund's intermediate nature, it generally outperformed shorter-term securities.
The Fund's NAV increased from $6.56 on 9/1/95 to $6.60 on 2/29/96.
Q: WHAT WAS YOUR INVESTMENT STRATEGY DURING THE PERIOD?
A: We continued to manage the Fund for total return in a declining interest rate
environment and stayed fully invested throughout the bond market rally. We
reduced our exposure to the possibility of refinancings by favoring low-coupon,
or discounted, mortgages. We also favored "seasoned" mortgages. These older
securities have already experienced a declining interest rate environment and
now have less refinancing risk. As a result, they are a stabilizing force in the
portfolio.
While rates declined, we managed the Fund on the higher range of its duration.
As sentiment changes, we will shorten the average duration of Fund holdings to
become slightly more defensive. Duration is a measure that helps determine a
portfolio's exposure to changes in interest rates. The higher the duration, the
greater the potential gains and losses when interest rates change.
Q: HOW DID THE FUND PERFORM COMPARED TO THE LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT INDEX?
A: The Fund's performance was approximately the same as that of the Lehman
Brothers Intermediate Government Index for both the six- and twelve-month
periods. The Fund's Class A shares returned 3.90% for the six-month period and
10.13% for twelve months while the Index returned 3.80% and 10.21%,
respectively. Although the Fund's duration was similar to that of the Index, we
had a greater exposure to mortgage-backed securities, which accounts for the
primary difference in performance.
4
<PAGE>
Q: WHAT IS YOUR MARKET OUTLOOK?
A: Market conditions at the end of the period demonstrated that there is more
uncertainty in the fixed-income markets, particularly in an election year. While
there may be some price fluctuations in the short term, we expect the economic
fundamentals -- low inflation and moderate growth -- to prevail over the long
term. Going forward, we will continue to manage the Fund to provide returns
consistent with its investment objective. We encourage shareholders to maintain
a long-term perspective on their investments.
COLONIAL U.S. GOVERNMENT FUND'S INVESTMENT PERFORMANCE VS.
THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT INDEX
Change in Value of $10,000 from 10/87 - 2/96
Based on Net Asset Value (NAV) and Maximum Offering Price (MOP) for Class A
Shares
<TABLE>
<CAPTION>
Label CUSGF NAV GOV MOP
- ----- ----- --- --- ---
<S> <C> <C> <C>
1 10/87 10000 10000 9525
2 10198 10060 9714
3 10300 10158 9810
4 1/88 10586 10409 10083
5 10718 10520 10209
6 10665 10476 10158
7 4/88 10681 10458 10174
8 10653 10408 10147
9 10860 10577 10344
10 7/88 10827 10546 10312
11 10837 10559 10322
12 10984 10742 10462
13 10/88 11147 10890 10618
14 11082 10797 10556
15 11033 10807 10508
16 1/89 11138 10915 10608
17 11102 10868 10575
18 11113 10920 10586
19 4/89 11332 11140 10794
20 11536 11355 10988
21 11763 11645 11204
22 7/89 11893 11881 11328
23 11827 11721 11265
24 11860 11777 11297
25 10/89 12028 12024 11456
26 12129 12143 11553
27 12197 12178 11617
28 1/90 12146 12103 11569
29 12215 12148 11635
30 12250 12162 11668
31 4/90 12267 12122 11685
32 12498 12382 11904
33 12623 12545 12024
34 7/90 12822 12721 12213
35 12768 12675 12161
36 12841 12788 12231
37 10/90 12989 12965 12372
38 13213 13161 12585
39 13378 13343 12742
40 1/91 13506 13480 12864
41 13578 13563 12933
42 13670 13637 13021
43 4/91 13782 13778 13127
44 13876 13855 13217
45 13931 13866 13269
46 7/91 14085 14016 13416
47 14241 14282 13565
48 14419 14525 13734
49 10/91 14516 14691 13827
50 14635 14864 13939
51 14862 15224 14157
52 1/92 14799 15078 14096
53 14861 15125 14155
54 14839 15064 14134
55 4/92 14923 15200 14214
56 15095 15427 14378
57 15218 15649 14495
58 7/92 15277 15949 14552
59 15447 16112 14713
60 15551 16334 14812
61 10/92 15500 16138 14764
62 15494 16069 14758
63 15612 16279 14870
64 1/93 15753 16582 15005
65 15873 16826 15119
66 15924 16888 15167
67 4/93 16021 17020 15260
68 16050 16974 15288
69 16235 17219 15464
70 7/93 16280 17254 15507
71 16396 17511 15618
72 16442 17582 15661
73 10/93 16464 17824 15682
74 16389 17537 15611
75 16496 17609 15712
76 1/94 16652 17783 15861
77 16491 17539 15708
78 16182 17283 15413
79 4/94 16068 17171 15305
80 16078 17184 15314
81 16063 17187 15300
82 7/94 16274 17413 15501
83 16310 17464 15535
84 16219 17319 15448
85 10/94 16229 17323 15458
86 16163 17246 15395
87 16202 17302 15433
88 1/95 16476 17683 15694
89 16752 17922 15956
90 16845 18022 16045
91 4/95 17044 18231 16235
92 17510 18744 16678
93 17600 18863 16764
94 7/95 17611 18873 16775
95 17757 19028 16913
96 17930 19156 17079
97 18132 19366 17271
98 18390 19602 17516
99 18622 19795 17737
100 18772 19962 17800
101 2/96 18449 19752 17573
</TABLE>
A $10,000 investment in Class B shares made on 6/92 (inception) at NAV would
have been valued at $11,890 on February 29, 1996. The same investment after
deducting the applicable CDSC would have grown to $11,605 on February 29, 1996.
AVERAGE ANNUAL TOTAL RETURNS AS OF MARCH 31, 1996 (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 8.76% 3.59% 7.95% 2.95%
- --------------------------------------------------------------------------------
5 YEARS 6.03% 5.00% -- --
- --------------------------------------------------------------------------------
SINCE INCEPTION 7.58% 6.97% 4.43% 3.77%
- --------------------------------------------------------------------------------
</TABLE>
The Lehman Brothers Intermediate Government Index is an unmanaged index that
tracks the performance of U.S. government securities. The performance of the
Index does not reflect fees or expenses associated with an actual investment.
Past performance cannot predict future results. Return and value of an
investment will vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions. NAV returns do not include sales charges
or CDSC. MOP returns include the maximum sales charge of 4.75%. The CDSC returns
reflect the maximum charge of 5.00% for one year and 3.00% since inception.
Performance for different share classes will vary based on differences in sales
charges and fees associated with each class.
5
<PAGE>
INVESTMENT PORTFOLIO
FEBRUARY 29, 1996 (UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - 110.9% PAR VALUE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT AGENCIES - 84.2%
MATURITIES
COUPON FROM/TO
--------- ----------
Federal National Mortgage Association,
6.240% 2000 $ 25,000 $ 25,297
--------
Federal Home Loan Mortgage Corp.:
7.500% 2016 1,357 1,399
8.000% 2003-2016 19,965 20,601
8.500% 2007-2017 5,077 5,307
8.750% 2005-2013 2,070 2,158
9.000% 2001-2022 8,415 8,865
9.250% 2008-2019 6,969 7,309
9.500% 2005-2016 2,662 2,877
9.750% 2016 131 139
10.000% 2019 3,351 3,698
10.250% 2009-2016 659 724
10.500% 2009-2021 3,736 4,121
11.250% 2005-2016 3,605 4,011
12.000% 2014 1 1
--------
61,210
--------
Federal National Mortgage Association:
6.000% 2023-2025 (a) 45,712 42,954
6.500% 2007-2050 (a) 492,358 483,246
7.000% 2007-2025 (a) 108,618 108,598
7.500% 2006-2009 3,821 3,916
8.000% 2008-2009 3,696 3,835
8.250% 2008 1,206 1,237
8.500% 2003-2021 10,688 11,242
9.000% 2002-2022 31,841 33,657
9.500% 2009-2021 3,098 3,328
10.000% 2001-2006 14,814 15,679
10.500% 2010-2016 6,357 6,963
11.000% 2015-2020 16,790 18,961
--------
733,616
--------
Government National Mortgage Association:
6.500% 2023-2024 8,085 7,794
7.000% 2023-2024 (a) 71,195 70,371
7.500% 2007-2024 68,931 69,956
8.000% 2004-2025 13,693 14,002
8.500% 2017-2026 9,052 9,373
8.750% 2021-2022 5,179 5,446
8.850% 2018-2020 6,879 7,173
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio/February 29, 1996
- -------------------------------------------------------------------------------
MATURITIES
COUPON FROM/TO
--------- ----------
<S> <C> <C> <C> <C>
9.000% 2008-2025 $ 38,631 $ 40,648
9.250% 2016-2022 16,801 17,709
9.500% 2004-2025 181,630 198,101
10.000% 1998-2024 6,905 7,349
10.250% 2018 316 349
10.500% 1998-2020 16,667 18,433
10.625% 2010 101 112
10.750% 2024 2,433 2,503
11.000% 2009-2021 19,148 21,590
11.250% 2015 165 185
11.500% 2010-2021 27,822 31,750
11.750% 2013-2015 420 483
12.000% 2011-2019 27,292 31,602
12.250% 2013-2015 1,189 1,373
12.500% 2010-2015 18,621 21,853
12.750% 2013-2014 154 180
13.000% 2011-2016 6,189 7,317
13.500% 2010-2015 4,384 5,250
14.000% 2011-2014 181 220
14.500% 2012 77 94
15.000% 2011-2012 138 169
---------
591,385
---------
U.S. Small Business Administration:
7.600% 01/01/12 4,325 4,506
8.200% 10/01/11 4,314 4,629
8.250% 11/01/11 8,264 8,868
8.650% 11/01/14 5,814 6,335
8.850% 08/01/11 1,629 1,783
9.150% 07/01/11 3,876 4,286
9.450% 08/01/10 1,438 1,599
9.500% 04/01/10 2,969 3,309
9.650% 05/01/10 2,037 2,289
---------
37,604
---------
TOTAL GOVERNMENT AGENCIES (cost of $1,407,985) 1,449,112
---------
GOVERNMENT OBLIGATIONS - 26.7%
U.S. Treasury bonds:
6.000% 02/15/26 (b) 9,445 8,849
6.875% 08/15/25 (b) 25,500 26,572
7.125% 02/15/23 (b) 6,142 6,513
---------
41,934
---------
U.S. Treasury notes:
6.125% 07/31/00 (b) 143,837 145,882
6.500% 05/15/05 (b) 82,474 84,407
6.500% 08/15/05 (b) 5,858 5,993
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio/February 29, 1996
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS - CONT. PAR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7.500% 02/15/05 (b) $37,590 $ 41,026
5.750% 10/31/00 (b) 52,765 52,732
10.375% 11/15/12 (b) 16,995 22,476
----------
352,516
----------
U.S. Treasury STRIP,
08/15/05 116,850 64,778
----------
TOTAL GOVERNMENT OBLIGATIONS (cost of $485,805) 459,228
----------
TOTAL INVESTMENTS (cost of $1,893,790) 1,908,340
----------
SHORT-TERM OBLIGATIONS (b) - 8.4%
- --------------------------------------------------------------------------------
Repurchase agreement with Bankers Trust Securities
Corp. dated 2/29/96, due 3/01/96 at 5.400%, collateralized
by U.S. Treasury notes maturing in 1999, market
value $147,595 (repurchase proceeds $144,468) 144,446 144,446
----------
OTHER ASSETS & LIABILITIES, NET - (19.3%) (332,561)
- --------------------------------------------------------------------------------
NET ASSETS - 100.0% $1,720,225
==========
</TABLE>
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
$380,606 and are being used to collateralize the delayed delivery purchases
indicated in note (a) above.
(c) Cost for federal income tax purposes is $1,894,167.
Acronym Name
- --------------- --------------------------------------------------------
STRIP Separately Traded Receipt for Interest and Principal
See notes to financial statements
8
<PAGE>
STATEMENT OF ASSETS & LIABILITIES (UNAUDITED)
FEBRUARY 29, 1996
<TABLE>
<CAPTION>
(in thousands except for per share amounts and footnotes)
<S> <C> <C>
ASSETS
Investments at value (cost $1,893,790) $ 1,908,340
Short-term obligations 144,446
-----------
2,052,786
Receivable for:
Investments sold $ 32,807
Interest 12,980
Fund shares sold 670
Other 513 46,970
----------- -----------
Total Assets 2,099,756
LIABILITIES
Payable for:
Investments purchased 366,155
Distributions 8,540
Fund shares repurchased 4,706
Accrued:
Deferred Trustees fees 11
Other 119
----------
Total Liabilities 379,531
----------
NET ASSETS $ 1,720,225
===========
Net asset value & redemption price per share -
Class A ($1,065,551/161,484) $ 6.60
===========
Maximum offering price per share - Class A
($6.60/0.9525) $ 6.93 (a)
===========
Net asset value & offering price per share -
Class B ($654,674/99,218) $ 6.60 (b)
===========
COMPOSITION OF NET ASSETS
Capital paid in $ 1,804,423
Overdistributed net investment income (2,437)
Accumulated net realized loss (96,311)
Net unrealized appreciation 14,550
-----------
$ 1,720,225
===========
</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 (UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
INVESTMENT INCOME
Interest $ 65,933
Dollar roll fee income 1,940
--------
67,873
EXPENSES
Management fee $ 5,148
Service fee 2,260
Distribution fee - Class B 2,573
Transfer agent 1,907
Bookkeeping fee 282
Trustees fee 61
Custodian fee 150
Audit fee 47
Legal fee 15
Registration fee 40
Reports to shareholders 16
Other 160 12,659
-------- --------
Net Investment Income 55,214
--------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain 16,237
Net unrealized depreciation during
the period (4,416)
--------
Net Gain 11,821
--------
Net Increase in Net Assets From Operations $ 67,035
--------
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(unaudited)
Six months
ended Year ended
(in thousands) February 29 August 31
----------- -----------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
Operations:
<S> <C> <C>
Net investment income $ 55,214 $ 119,465
Net realized gain (loss) 16,237 (55,099)
Net unrealized appreciation (depreciation) (4,416) 74,212
----------- -----------
Net Increase from Operations 67,035 138,578
Distributions:
From net investment income - Class A (34,722) (59,237)
From net investment income - Class B (18,528) (43,146)
----------- -----------
13,785 36,195
----------- -----------
Fund Share Transactions:
Receipts for shares sold - Class A 41,109 23,802
Receipts for shares issued in the merger with
Liberty Financial U.S. Government Securities Fund -- 657,855
Value of distributions reinvested - Class A 20,870 32,004
Cost of shares repurchased - Class A (169,092) (331,156)
----------- -----------
(107,113) 382,505
----------- -----------
Receipts for shares sold - Class B 14,989 24,592
Value of distributions reinvested - Class B 10,384 23,538
Cost of shares repurchased - Class B (77,066) (195,780)
----------- -----------
(51,693) (147,650)
----------- -----------
Net Increase (Decrease) from Fund Share Transactions (158,806) 234,855
----------- -----------
Total Increase (Decrease) (145,021) 271,050
NET ASSETS
Beginning of period 1,865,246 1,594,196
----------- -----------
End of period (net of overdistributed
net investment income of $2,437 and
$658, respectively) $ 1,720,225 $ 1,865,246
=========== ===========
NUMBER OF FUND SHARES
Sold - Class A 6,153 3,736
Issued in the merger with Liberty Financial
U.S. Government Securities Fund -- 102,622
Issued for distributions reinvested - Class A 3,137 4,983
Repurchased - Class A (25,379) (51,715)
----------- -----------
(16,089) 59,626
----------- -----------
Sold - Class B 2,247 3,844
Issued for distributions reinvested - Class B 1,561 3,685
Repurchased - Class B (11,575) (30,739)
----------- -----------
(7,767) (23,210)
----------- -----------
</TABLE>
See notes to financial statements.
11
<PAGE>
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) Six months ended February 29
----------------------------
<S> <C> <C>
NET CHANGE IN CASH
Cash flows from operating activities:
Interest received $ 63,187
Dollar roll fee income received 2,382
Operating expenses paid (12,993)
----------
Net cash provided by operating activities $ 52,576
Cash flows from investing activities:
Purchases of securities and short-term obligations (3,133,542)
Proceeds from sales of securities and short-term 3,292,544
obligations ---------
Net cash provided by investing activities 159,002
---------
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES 211,578
Cash flows from financing activities:
Proceeds from shares sold 55,855
Cost of shares repurchased (244,609)
Cash dividends paid (22,823)
-----------
Net cash used by financing activities (211,577)
---------
Net change in cash 1
Cash - beginning of period 0
---------
Cash - end of period $ 1
=========
RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET
CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES:
Net increase in net
assets resulting from operations $ 67,035
Decrease in investments $ 379,612
Increase in interest and fees receivable (1,807)
Decrease in receivable
from investments securities sold 17,016
Decrease in payable for
investment securities purchased (249,948)
Decrease in other assets (11)
Decrease in accrued expenses and liabilities (319)
-----------
Total 144,543
---------
Net cash provided by operating
and investing activities $ 211,578
=========
</TABLE>
See notes to financial statements
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
FEBRUARY 29, 1996
NOTE 1. INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In the opinion of management of Colonial U.S. Government Fund (the Fund), a
series of Colonial Trust II, the accompanying financial statements contain
all normal and recurring adjustments necessary for the fair presentation of
the financial position of the Fund at February 29, 1996, and the results of
its operations, the changes in its net assets, and the selected per share
data and ratios for the six months then ended.
NOTE 2. ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION: The Fund is a diversified portfolio of a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund's objective is to seek as
high a level of current income as is consistent with prudent risk. The Fund
may issue an unlimited number of shares. The Fund offers Class A shares sold
with a front-end sales charge and Class B shares which are subject to an
annual distribution fee and a contingent deferred sales charge. Class B
shares will convert to Class A shares when they have been outstanding
approximately eight years.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates. The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
SECURITY VALUATION AND TRANSACTIONS: Debt securities generally are valued by
a pricing service based upon market transactions for normal,
institutional-size trading units of similar securities. When management deems
it appropriate, an over-the-counter or exchange bid quotation is used.
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
13
<PAGE>
Notes to Financial Statements/February 29, 1996
- -------------------------------------------------------------------------------
NOTE 2. ACCOUNTING POLICIES - CONT.
- -------------------------------------------------------------------------------
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.
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 February 29, 1996.
INTEREST INCOME, FEE INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is
recorded on the accrual basis. Fee income attributable to mortgage dollar
roll transactions is recorded on the accrual basis over the 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.
14
<PAGE>
Notes to Financial Statements/February 29, 1996
- --------------------------------------------------------------------------------
OTHER: The Fund's custodian takes possession through the federal book-entry
system of securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying
assets remains sufficient to protect the Fund. The Fund may experience costs
and delays in liquidating the collateral if the issuer defaults or enters
bankruptcy.
NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES
- -------------------------------------------------------------------------------
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Adviser) is the
investment Adviser of the Fund and furnishes accounting and other services
and office facilities for a monthly fee based on the Fund's average net
assets as follows:
<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>
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. For the six months ended February 29, 1996, the Fund
has been advised that the Distributor retained net underwriting discounts of
$27,795 on sales of theFund's Class A shares and received contingent deferred
sales charges (CDSC) of $1,248,195 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.
15
<PAGE>
Notes to Financial Statements/February 29, 1996
- --------------------------------------------------------------------------------
NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES - CONT.
- --------------------------------------------------------------------------------
OTHER: The Fund pays no compensation to its officers, all of whom are
employees of the Adviser.
The Fund's Trustees may participate in a deferred compensation plan which may
be terminated at any time. Obligations of the plan will be paid solely out of
the Fund's assets.
NOTE 4. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITY: For the six months ended February 29, 1996, purchases
and sales of investments, other than short-term obligations and mortgage
dollar roll transactions, were $1,727,741,424 and $1,255,178,696,
respectively.
Unrealized appreciation (depreciation) at February 29, 1996, based on cost of
investments for federal income tax purposes was:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 31,946,102
Gross unrealized depreciation (17,773,293)
------------
Net unrealized appreciation $ 14,172,809
============
</TABLE>
Information regarding dollar roll transactions that are other than normal
settlement are as follows:
<TABLE>
<S> <C>
Maximum amount outstanding during the period $ 502,753,750
Average amount outstanding during the period $ 258,549,263
Amount outstanding at February 29, 1996 $ 10,268,750
</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 February 29, 1996.
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
----------------- -----------------
<C> <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>
16
<PAGE>
Notes to Financial Statements/February 29, 1996
- -------------------------------------------------------------------------------
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.
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 5. 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.
17
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
(unaudited)
Six
months ended
February 29 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 0.198 0.173 0.447 0.399
Net realized and
unrealized gain (loss) 0.057 0.057 0.100 0.100
---------- ---------- ---------- ----------
Total from Investment
Operations 0.255 0.230 0.547 0.499
---------- ---------- ---------- ----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.205) (0.180) (0.417) (0.369)
From capital paid in -- -- -- --
---------- ---------- ---------- ----------
Total Distributions
Declared to Shareholders (0.205) (0.180) (0.417) (0.369)
---------- ---------- ---------- ----------
Net asset value -
End of period $ 6.600 $ 6.600 $ 6.550 $ 6.550
========== ========== ========== ==========
Total return (c) 3.90%(d) 3.51%(d) 8.88% 8.07%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11%(e)(f) 1.86%(e)(f) 1.11% 1.86%
Net investment income 6.37%(e)(f) 5.62%(e)(f) 7.51% 6.76%
Portfolio turnover 153%(e) 153%(e) 140% 140%
Net assets at end
of period (in millions) $ 1,065 $ 655 $ 1,164 $ 701
</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.
(f) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
18
<PAGE>
FINANCIAL HIGHLIGHTS - CONTINUED
<TABLE>
<CAPTION>
Year ended August 31
---------------------------------------------------------------------------------------
1994 1993 1992
Class A Class B Class A Class B Class A Class B (a)
----------- ---------- ---------- ---------- ---------- ----------
Net asset value - <C> <C> <C> <C> <C> <C>
Beginning of period $ 6.880 $ 6.880 $ 6.980 $ 6.980 $ 7.020 $ 6.950
---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.415 0.365 0.541 0.490 0.614 0.122
Net realized and
unrealized gain (loss) (0.452) (0.452) (0.130) (0.130) (0.043) 0.029
--------- ---------- ---------- ---------- ---------- ----------
Total from Investment
Operations (0.037) (0.087) 0.411 0.360 0.571 0.151
---------- ---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.400) (0.352) (0.511) (0.460) (0.611) (0.121)
From capital paid in (0.023) (0.021) -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total Distributions
Declared to Shareholders (0.423) (0.373) (0.511) (0.460) (0.611)(b) (0.121)(b)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value -
End of period $ 6.420 $ 6.420 $ 6.880 $ 6.880 $ 6.980 $ 6.980
========== ========== ========== ========== ========== ==========
Total return (c) (0.53%) (1.28%) 6.15% 5.36% 8.46% 2.19% (d)
========== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11% 1.86% 1.10% 1.85% 1.09% 1.84% (e)
Net investment income 8.14% 7.39% 7.85% 7.10% 8.55% 7.80% (e)
Portfolio turnover 291% 291% 162% 162% 132% 132%
Net assets at end
of period (in millions) $ 758 $ 836 $ 1,202 $ 978 $ 1,102 $ 343
<CAPTION>
1991
Class A
----------
<S> <C>
Net asset value -
Beginning of period $ 6.950
----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.699
Net realized and
unrealized gain (loss) 0.069
----------
Total from Investment
Operations 0.768
----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.698)
From capital paid in --
----------
Total Distributions
Declared to Shareholders (0.698)
----------
Net asset value -
End of period $ 7.020
==========
Total return (c) 11.54
==========
RATIOS TO AVERAGE NET ASSETS
Expenses 1.16%
Net investment income 9.68%
Portfolio turnover 129%
Net assets at end
of period (in millions) $ 444
</TABLE>
19
<PAGE>
SHAREHOLDER SERVICES
TO MAKE INVESTING EASIER
Colonial has one of the most extensive selections of shareholder services
available. Your financial adviser can help you arrange for any of these
services, or you can call Colonial directly at 1-800-345-6611.
AFFORDABLE ADDITIONAL INVESTMENTS: Add to your account with as little as $50;
$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.
20
<PAGE>
HOW TO REACH COLONIAL
BY PHONE OR BY MAIL
BY TELEPHONE
COLONIAL CUSTOMER CONNECTION - 1-800-345-6611
For 24-hour account information, call from your touch-tone phone. (Rotary
callers will be automatically connected to a representative during business
hours.) A recorded message will guide you through the menu:
For fund prices, dividends, and capital gains information press 1
For account information press 2
To speak to a Colonial representative press 3
For yield and total return information press 4
For duplicate statements or new supply of checks press 5
To order duplicate tax forms and year-end statements press 6
(February through May)
To review your options at any time during your call press *
To speak with a shareholder services representative about your account, call
Monday to Friday, 8:00 am to 8:00 pm ET, and Saturdays from February through
mid-April, 10:00 am to 2:00 pm ET.
COLONIAL TELEPHONE TRANSACTION DEPARTMENT - 1-800-422-3737
To purchase, exchange, or sell shares by telephone, call Monday to Friday, 9:00
am to 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
21
<PAGE>
SHAREHOLDER COMMUNICATIONS
TO KEEP YOU INFORMED
To make recordkeeping easy and keep you up-to-date on the performance of your
investments, you can expect to receive the following information about your
Colonial account:
TRANSACTION CONFIRMATIONS: Each time you make a purchase, sale, or exchange, you
receive a confirmation statement within just a few days.
QUARTERLY STATEMENTS: Every three months, if any transactions are made that
affect your share balance, this statement reports on your account activity
during the quarter (including any reinvestment of dividends). This statement
also provides year-to-date information.
COLONIAL SHAREHOLDER NEWS: Mailed with your quarterly account statements, this
newsletter highlights timely investment strategies, portfolio manager
commentary, and shareholder service updates.
TAX FORMS AND YEAR-END TAX GUIDE: Easy-to-use forms and timely information are
designed to make tax reporting simpler. (Usually mailed in January.)
AVERAGE COST BASIS STATEMENTS: If you sold or exchanged shares during the year,
this statement may help you calculate your gain/loss for tax purposes. (Usually
mailed in February.)
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]
Mutual Funds for
Planned Portfolios
TRUSTEES
ROBERT J. BIRNBAUM
Retired (formerly Special Counsel, Dechert, Price & Rhoads; President and Chief
Operating Officer, New York Stock Exchange, Inc.)
TOM BLEASDALE
Retired (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust Company)
LORA S. COLLINS
Attorney, Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
JAMES E. GRINNELL
Private Investor (formerly Senior Vice President - Operations, The Rockport
Company)
WILLIAM D. IRELAND, JR.
Retired (formerly Chairman of the Board, Bank of New England - Worcester)
RICHARD W. LOWRY
Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood
Corporation)
WILLIAM E. MAYER
Dean, College of Business and Management, University of Maryland (formerly Dean,
Simon Graduate School of Business, University of Rochester; Chairman and Chief
Executive Officer, C.S. First Boston Merchant Bank; and President and Chief
Executive Officer, The First Boston Corporation)
JAMES L. MOODY, JR.
Chairman of the Board, Hannaford Bros. Co. (formerly Chief Executive Officer,
Hannaford Bros. Co.)
JOHN J. NEUHAUSER
Dean, Boston College School of Management
GEORGE L. SHINN
Financial Consultant (formerly Chairman, Chief Executive Officer and Consultant,
The First Boston Corporation)
ROBERT L. SULLIVAN
Management Consultant (formerly Management Consultant, Saatchi and Saatchi
Consulting Ltd. and Principal and International Practice Director, Management
Consulting, Peat Marwick Main & Co.)
SINCLAIR WEEKS, JR.
Chairman of the Board, Reed & Barton Corporation
NOT FDIC- INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
COLONIAL INVESTMENT SERVICES, INC. Distributor (C)1996
One Financial Center, Boston, Massachusetts 02111-2621, 617-426-3750
UG-03/911B-0296 M (4/96)
