<PAGE>
COLONIAL
ADJUSTABLE RATE
U.S. GOVERNMENT FUND
ANNUAL REPORT
AUGUST 31, 1996
[PHOTO MONTAGE]
NOT FDIC- | MAY LOSE VALUE
INSURED | NO BANK GUARANTEE
<PAGE>
COLONIAL ADJUSTABLE RATE U.S. GOVERNMENT FUND HIGHLIGHTS
SEPTEMBER 1, 1995 - AUGUST 31, 1996
INVESTMENT OBJECTIVE: Colonial Adjustable Rate U.S. Government Fund seeks as
high a level of current income as is consistent with very low volatility, by
investing primarily in adjustable rate securities.
THE FUND IS DESIGNED TO OFFER:
X Attractive monthly income
X Low relative price volatility
X High quality portfolio
PORTFOLIO MANAGER COMMENTARY: "Despite recent economic and market conditions
that were generally negative for bonds, including adjustable rate mortgages, our
active management of the Fund maintained attractive returns and kept volatility
low in a generally rising interest rate environment."
-- Ann Peterson
COLONIAL ADJUSTABLE RATE U.S. GOVERNMENT FUND PERFORMANCE
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Inception dates 10/1/92 2/1/93 1/4/95
Distributions declared per share $0.566 $0.502 $0.547
SEC Yields on 8/31/96* 5.43% 4.93% 5.45%
Total returns, assuming
reinvestment of all distributions
and no sales charge or contingent
deferred sales charge (CDSC)
12 months 5.57% 4.89% 5.36%
Net asset value per share
at 8/31/96 $9.82 $9.82 $9.82
</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. If the Adviser had not waived or borne certain Fund
expenses, SEC yields would have been lower: 4.10% for Class A shares, 3.56% for
Class B shares and 4.08% for Class C shares.
<TABLE>
<CAPTION>
SECTOR BREAKDOWN** ARMs -- MONTHS TO RESET**
<S> <C> <C> <C>
Adjustable Rate Mortgage-backed
Securities................... 76.94% 0 - 3.................. 33.14%
Adjustable Rate Notes........ 10.81% 3 - 6.................. 32.80%
Treasury Securities.......... 7.99% 6 - 9.................. 9.86%
Agency Debt.................. 4.26% 9 - 12................. 24.20%
</TABLE>
** Sector and months to reset breakdowns are based on total senior securities.
Because the Fund is actively managed, sector and months to reset weightings will
change.
2
<PAGE>
PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
I am pleased to present your Fund's annual report for the period ended August
31, 1996. This report gives us the opportunity to share our analysis of the
investment environment over the past 12 months.
[PHOTO]
Harold W. Cogger
President
In the bond market, after the Federal Reserve Board lowered short-term interest
rates in December and January, significantly stronger economic indicators
mid-way through the period stirred inflation fears and propelled long-term
interest rates upward. Bond market volatility will continue, based upon receipt
of conflicting economic reports and changing expectations of Federal Reserve
Board activity.
While market conditions put pressure on municipal bond prices, there was some
good news for the tax-exempt sector. Some of the significant reasons that
municipal bonds outperformed Treasury bonds were technical factors, such as low
supply and strong retail market support. Other reasons include fundamental
factors, such as the easing of fears generated by tax-reform proposals,
particularly those promoting a flat tax.
In the stock market, generally favorable conditions prevailed throughout most of
the period, with both large and small company stocks posting strong performance
until July, when a price-based correction took place. While stock indices
generally posted negative total returns for July, the equity markets rebounded
in August.
Our expectations for the remainder of 1996 include a moderating economy. We
believe that the economy will continue to grow, although at a slower pace than
was indicated earlier this year. The lack of any appreciable wage and price
pressure should put the bond market's fears of inflation to rest. Therefore, we
are optimistic that market psychology will shift and volatility will decline by
year-end.
As always, we thank you for the opportunity to help you meet your investment
goals through Colonial Mutual Funds.
Respectfully,
/s/Harold W. Cogger
- -------------------------
Harold W. Cogger
President
October 11, 1996
3
<PAGE>
PORTFOLIO MANAGER REPORT
ANN PETERSON is lead portfolio manager of Colonial Adjustable Rate U.S.
Government Fund and Colonial Government Money Market Fund. Ms. Peterson is a
vice president of Colonial Management Associates, Inc.
Q: HOW DID THE FIXED INCOME MARKET PERFORM DURING THE PAST TWELVE MONTHS?
A: The market environment shifted midway through the period. The first half had
slower economic growth, low inflation and declining interest rates, all of which
contributed to price increases in the fixed income markets. The second half of
the period had rising interest rates, based on changing expectations regarding
the economy's strength as a result of strong employment growth, retail sales,
housing activity and auto sales. Market psychology moved from expectations of
Federal Reserve Board easing, or lowering short-term interest rates, to
expectations of the Fed tightening, or raising short-term interest rates, all of
which contributed to higher volatility and price declines for fixed income
securities.
Q: WHAT WAS THE FUND'S INVESTMENT STRATEGY DURING THE PERIOD?
A: We actively managed the portfolio to take advantage of various sectors within
the adjustable rate market. Coupons of the various securities in the Fund are
reset based on a number of different indices. As interest rates rise, as they
did during the second half of the period, securities with more frequent resets
respond more quickly to the changing rate environment with smaller price shifts.
Therefore, we decreased our investment in adjustable rate mortgage securities
(ARMs) with one-year resets and increased our investment in adjustable rate
securities with resets based on three-month indices. We also reduced our overall
exposure to ARMs by increasing our holdings of Treasuries, whose duration, which
measures sensitivity to interest rate changes, is more predictable.
Q: HOW DID THE FUND'S PERFORMANCE COMPARE TO THE LEHMAN BROTHERS ADJUSTABLE RATE
MORTGAGE INDEX?
A: The Fund underperformed the Lehman Brothers Adjustable Rate Mortgage Index.
The total return for the Fund's Class A shares, based on net asset value, was
5.57% while the return on the Index was 6.44%. This underperformance may be
attributable to the Index having a higher weighting in longer Government
National Mortgage Association (GNMA) adjustable rate mortgages which performed
very well, in line with the market. The Fund did outperform the total return of
3.92% posted by the average Adjustable Rate Mortgage Fund tracked by Lipper
Analytical Services, Inc. The fund was ranked 27 out of 56 of the funds in its
investment category.
Q: WHAT IS YOUR OUTLOOK FOR THE REMAINDER OF 1996?
A: We believe that the economy is still sending enough mixed messages regarding
its direction to keep uncertainty and volatility relatively high. While we
continue to expect short-term price fluctuation, we anticipate that economic
fundamentals such as low inflation and moderate growth will prevail, resulting
4
<PAGE>
in a natural, mid-cycle correction that may not require Fed intervention.
The Fund will be changing its name and investment objective on December 27,
1996, to Colonial Short U.S. Government Fund, and will seek as high a level of
current income and low volatility by investing primarily in short-duration U.S.
government securities. Our strategy going forward will be to decrease our
adjustable rate mortgage holdings and look for relative value in areas such as
fixed rate mortgages. We view this change as positive for shareholders as the
Fund should benefit from additional investment flexibility without significantly
increased risk.
COLONIAL ADJUSTABLE RATE U.S. GOVERNMENT FUND'S INVESTMENT PERFORMANCE VS.
THE LEHMAN BROTHERS ARM INDEX
Change in Value of $10,000 from 10/92 - 8/96
Based on Net Asset Value (NAV) and Maximum Offering Price (MOP) for Class A
Shares
<TABLE>
<CAPTION>
NAV MOP Lehman
<S> <C> <C>
$10,000 $ 9,675 $10,000
9,991 9,666 9,917
9,991 9,666 9,932
10,051 9,725 10,025
10,102 9,774 10,128
10,162 9,832 10,218
10,192 9,860 10,264
10,241 9,908 10,324
10,250 9,917 10,350
10,309 9,974 10,459
10,335 9,999 10,507
10,382 10,044 10,569
10,397 10,059 10,570
10,422 10,083 10,574
10,414 10,075 10,545
10,447 10,108 10,625
10,502 10,161 10,696
10,505 10,163 10,662
10,454 10,114 10,577
10,393 10,056 10,521
10,408 10,069 10,513
10,422 10,084 10,536
10,469 10,129 10,600
10,506 10,165 10,652
10,490 10,149 10,608
10,490 10,149 10,600
10,479 10,138 10,570
10,534 10,192 10,625
10,656 10,310 10,802
10,790 10,439 11,019
10,901 10,547 11,072
10,990 10,633 11,189
11,115 10,753 11,370
11,163 10,800 11,417
11,178 10,815 11,458
11,249 10,884 11,528
11,325 10,957 11,610
11,399 11,029 11,682
11,486 11,112 11,781
11,555 11,180 11,871
11,625 11,247 11,954
11,624 11,246 11,980
11,609 11,232 12,002
11,651 11,273 12,017
11,694 11,314 12,052
11,773 11,390 12,138
11,830 11,445 12,197
11,876 11,490 12,265
</TABLE>
A $10,000 investment in Class B shares made on February 1, 1993, (inception) at
NAV would have been valued at $11,487 on August 31, 1996. The same investment
after deducting the applicable CDSC would have grown to $11,388 on August 31,
1996. A $10,000 investment in Class C shares made on January 4, 1995,
(inception) would have been valued at $11,221 on August 31, 1996.
AVERAGE ANNUAL TOTAL RETURNS
as of September 30, 1996 (most recent quarter end)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
Inception 10/1/92 Inception 2/1/93 Inception 1/4/95
NAV MOP NAV w/CDSC NAV
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1 YEAR 5.60% 2.17% 4.92% 0.93% 5.39%
- --------------------------------------------------------------------------------
3 YEARS 4.78% 3.63% 4.10% 3.49% --
- --------------------------------------------------------------------------------
SINCE INCEPTION 4.57% 3.71% 4.03% 3.79% 7.25%
- --------------------------------------------------------------------------------
</TABLE>
The Lehman Brothers Adjustable Rate Mortgage Index is an unmanaged index that
tracks the performance of adjustable rate U.S. government securities. The
performance of the Index does not reflect fees or expenses associated with an
actual investment. Unlike mutual funds, an index does not incur fees or charges
and it is not possible to invest in an index.
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 3.25%. The CDSC returns
reflect the maximum charge 4% for one year, 2% for three years and 1% since
inception. If the Adviser had not waived or borne certain Fund expenses, total
returns would have been lower.
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, 1996 (IN THOUSANDS)
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 86.8% PAR VALUE
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT AGENCIES - 79.9%
Maturities
Coupon from/to
------ -------
Federal Home Loan Mortgage Corp.,
Adjustable Rate Mortgage: (a)
<S> <C> <C> <C> <C>
6.839% 2018 $ 231 $ 228
6.861% 2018 185 182
7.164% 2019 288 291
7.292% 2022 122 123
7.301% 2023 180 185
7.602% 2023 650 655
7.629% 2023 559 573
7.875% 2022 131 134
7.897% 2022 84 86
------
2,457
------
Federal National Mortgage Association:
Fixed Rate Note,
6.240% 2000 400 392
Adjustable Rate Mortgage: (a)
6.073% 2027 190 188
6.876% 2017 187 189
7.012% 2020 188 193
7.083% 2023 261 265
7.277% 2022 206 210
7.295% 2017 175 180
7.301% 2019 258 265
7.339% 2019 190 196
7.742% 2019 287 299
7.850% 2021 202 211
------
2,588
------
Government National Mortgage Association,
Adjustable Rate Mortgage: (a)
6.875% 2022 67 68
7.000% 2022 742 753
7.125% 2022-2024 1,590 1,612
------
2,433
------
Student Loan Marketing Association,
Quarterly Floating Note, (a)
5.480% 1999 1,000 996
------
TOTAL GOVERNMENT AGENCIES (cost of $8,509) 8,474
=======
</TABLE>
6
<PAGE>
Investment Portfolio/August 31, 1996
-----------------------------------------------------------------------
GOVERNMENT OBLIGATIONS - 6.9%
U.S. Treasury Notes:
6.125% 09/30/00 $ 318 $ 312
6.250% 08/31/00 300 295
6.875% 05/15/06 130 129
-------
TOTAL GOVERNMENT OBLIGATIONS (cost of $773) 736
-------
TOTAL INVESTMENTS (cost of $9,282) (b) 9,210
-------
SHORT-TERM OBLIGATIONS - 11.1%
-----------------------------------------------------------------------
Repurchase agreement with Bankers Trust Securities
Corp., dated 08/30/96, due 09/03/96 at 5.240%
collaterized by U.S. Treasury bills and notes with
various maturities to 2017, market value $1,225
(repurchase proceeds $1,175) 1,174 1,174
-------
OTHER ASSETS & LIABILITIES, NET - 2.1% 217
-----------------------------------------------------------------------
NET ASSETS - 100.0% $10,601
-------
-----------------------------------------------------------------------
NOTES TO INVESTMENT PORTFOLIO:
(a) Interest rates on variable rate securities change periodically. The
rates listed are as of August 31, 1996.
(b) Cost for federal income tax purposes is the same.
See notes to financial statements.
7
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
AUGUST 31, 1996
<TABLE>
<CAPTION>
(in thousands except for per share amounts and footnotes)
ASSETS
<S> <C> <C>
Investments at value (cost $9,282) $ 9,210
Short-term obligations 1,174
---------
10,384
Receivable for:
Investments sold $ 161
Interest 92
Deferred organization expenses 18
Fund shares sold 9
Other 1 281
------- --------
Total Assets 10,665
LIABILITIES
Payable for:
Distributions 50
Payable to Adviser 11
Accrued:
Deferred Trustees fees 1
Other 2
-------
Total Liabilities 64
---------
NET ASSETS $ 10,601
---------
Net asset value & redemption price per share -
Class A ($6,136/625) $ 9.82
---------
Maximum offering price per share - Class A
($9.82/0.9675) $ 10.15(a)
---------
Net asset value & offering price per share -
Class B ($4,004/408) $ 9.82(b)
---------
Net asset value & offering price per share -
Class C ($461/47) $ 9.82
---------
COMPOSITION OF NET ASSETS
Capital paid in $ 10,797
Undistributed net investment income 8
Accumulated net realized loss (132)
Net unrealized depreciation (72)
---------
$ 10,601
---------
</TABLE>
(a) On sales of $100,000 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.
8
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
INVESTMENT INCOME
Interest $ 803
EXPENSES
Management fee $ 68
Service fee - Class A, Class B, Class C 25
Distribution fee - Class B 27
Distribution fee - Class C 1
Transfer agent 25
Bookkeeping fee 27
Trustees fee 14
Custodian fee 2
Audit fee 23
Legal fee 8
Registration fee 29
Reports to shareholders 4
Amortization of deferred
organization expenses 16
Other 4
-------
273
Fees and expenses waived or
borne by the Adviser (183) 90
------- ------
Net Investment Income 713
------
NET REALIZED & UNREALIZED LOSS ON PORTFOLIO POSITIONS
Net realized loss (46)
Net unrealized depreciation during
the period (10)
-------
Net Loss (56)
------
Net Increase in Net Assets from Operations $ 657
======
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(in thousands) Year ended August 31
------------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995 (a)
<S> <C> <C>
Operations:
Net investment income $ 713 $ 990
Net realized loss (46) (92)
Net unrealized appreciation (depreciation) (10) 327
-------- --------
Net Increase from Operations 657 1,225
Distributions:
From net investment income - Class A (445) (696)
From net investment income - Class B (213) (194)
From net investment income - Class C (25) (12)
-------- --------
(26) 323
-------- --------
Fund Share Transactions:
Receipts for shares sold - Class A 3,597 2,569
Value of distributions reinvested - Class A 389 416
Cost of shares repurchased - Class A (7,769) (9,448)
-------- --------
(3,783) (6,463)
-------- --------
Receipts for shares sold - Class B 3,138 2,509
Value of distributions reinvested - Class B 122 98
Cost of shares repurchased - Class B (3,214) (2,898)
-------- --------
46 (291)
-------- --------
Receipts for shares sold - Class C 313 390
Value of distributions reinvested - Class C 23 6
Cost of shares repurchased - Class C (259) (22)
-------- --------
77 374
-------- --------
Net Decrease from Fund Share Transactions (3,660) (6,380)
-------- --------
Total Decrease (3,686) (6,057)
NET ASSETS
Beginning of period 14,287 20,344
-------- --------
End of period (including undistributed net investment
income of $8 and $8, respectively) $ 10,601 $ 14,287
======== ========
NUMBER OF FUND SHARES
Sold - Class A 365 265
Issued for distributions reinvested - Class A 40 43
Repurchased - Class A (788) (972)
-------- --------
(383) (664)
-------- --------
Sold - Class B 318 260
Issued for distributions reinvested - Class B 13 10
Repurchased - Class B (326) (299)
-------- --------
5 (29)
-------- --------
Sold - Class C 32 40
Issued for distributions reinvested - Class C 2 1
Repurchased - Class C (26) (2)
-------- --------
8 39
-------- --------
</TABLE>
(a) Class C shares were initially offered on January 4, 1995.
See notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 1. ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION: Colonial Adjustable Rate 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's
investment objective is to seek as high a level of current income as is
consistent with very low volatility. The Fund may issue an unlimited
number of shares. The Fund offers three classes of shares: Class A, Class
B, and Class C. Class A shares are sold with a front-end sales charge and
Class B shares are subject to an annual distribution fee and a contingent
deferred sales charge. Class B shares will convert to Class A shares when
they have been outstanding approximately eight years. Class C shares are
subject to a continuing annual distribution fee.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
SECURITY VALUATION AND TRANSACTIONS: Debt securities generally are valued
by a pricing service based upon market transactions for normal,
institutional-size trading units of similar securities. When management
deems it appropriate, an over-the-counter or exchange bid quotation is
used.
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 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.
DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS: All
income, expenses (other than the Class A, Class B and Class C service fees
and Class B and Class C distribution fees), realized and unrealized gains
(losses), are allocated to each class proportionately on a daily basis for
purposes of determining the net asset value of each class.
11
<PAGE>
Notes to Financial Statements/August 31, 1996
-------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES - CONT.
-------------------------------------------------------------------------
Class A, Class B and Class C 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 service fees for Class A, Class
B and Class C shares and the distribution fees for Class B and Class C
shares.
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.
INTEREST INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is recorded on
the accrual basis. Original issue discount is accreted to interest income
over the life of a security with a corresponding increase in the cost
basis; market discount is not accreted. Premium is amortized against
interest income with a corresponding decrease in the cost basis.
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. Permanent book and tax basis differences will result in
reclassifications to capital accounts.
DEFERRED ORGANIZATION EXPENSES: The Fund incurred $80,957 of expenses in
connection with its organization, initial registration with the Securities
and Exchange Commission and various states, and the initial public
offering of its shares. These expenses were deferred and are being
amortized on a straight-line basis over five years.
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 equal to 0.55% annually of the
Fund's average net assets.
BOOKKEEPING FEE: The Adviser provides bookkeeping and pricing services for
$27,000 per year plus 0.035% of the Fund's average net assets over $50
million.
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.
12
<PAGE>
Notes to Financial Statements/August 31, 1996
-------------------------------------------------------------------------
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 year ended August 31, 1996, the Fund
has been advised that the Distributor retained net underwriting discounts
of $4,169 on sales of the Fund's Class A shares and received contingent
deferred sales charges (CDSC) of $19,381 on Class B shares.
The Fund has adopted a 12b-1 plan which requires the payment of a service
fee to the Distributor equal to 0.20% annually of Class A and Class B net
assets and 0.25% annually of Class C net assets as of the 20th of each
month. The plan also requires the payment of a distribution fee to the
Distributor equal to 0.65% and 0.15% annually, of the average net assets
attributable to Class B and Class C shares, respectively.
The CDSC and the fees received from the 12b-1 plan are used principally as
repayment to the Distributor for amounts paid by the Distributor to
dealers who sold such shares.
EXPENSE LIMITS: The Adviser has agreed, until further notice, to waive
fees and bear certain Fund expenses to the extent that total expenses
(exclusive of service and distribution fees, brokerage commissions,
interest, taxes and extraordinary expenses, if any) exceed 0.30% annually
of the Fund's average net assets.
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 the Fund's assets.
NOTE 3. PORTFOLIO INFORMATION
-------------------------------------------------------------------------
INVESTMENT ACTIVITY: For the year ended August 31, 1996, purchases and
sales of investments, other than short-term obligations, were
$5,554,023, and $9,000,179, respectively.
Unrealized appreciation (depreciation) at August 31, 1996, based on cost
of investments for both financial statement and federal income tax
purposes was:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 20,405
Gross unrealized depreciation (92,474)
----------
Net unrealized depreciation $ (72,069)
=========
</TABLE>
CAPITAL LOSS CARRYFORWARDS: At August 31, 1996, 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> <C>
2002 $ 1,000
2003 84,000
2004 38,000
--------
$123,000
========
</TABLE>
13
<PAGE>
Notes to Financial Statements/August 31, 1996
-------------------------------------------------------------------------
NOTE 3. PORTFOLIO INFORMATION - CONT.
-------------------------------------------------------------------------
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. LINE OF CREDIT
--------------------------------------------------------------------------
The Fund may borrow up to 10% of its net assets under a line of credit for
temporary or emergency purposes. Any borrowings bear interest at one of
the following options determined at the inception of the loan: (1) federal
funds rate plus 1/2 of 1%, (2) the lending bank's base rate or (3) IBOR
offshore loan rate plus 1/2 of 1%. There were no borrowings under the line
of credit during the year ended August 31, 1996.
14
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year ended August 31
----------------------------------------------
1996
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Net asset value -
Beginning of period $9.850 $9.850 $9.850
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.568 0.504 0.549
Net realized and
unrealized loss (0.032) (0.032) (0.032)
------ ------ ------
Total from Investment
Operations 0.536 0.472 0.517
------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.566) (0.502) (0.547)
------ ------ ------
Total Distributions
Declared to Shareholders (0.566) (0.502) (0.547)
------ ------ ------
Net asset value - End of period $9.820 $9.820 $9.820
------ ------ ------
Total return (b)(c) 5.57% 4.89% 5.36%
====== ====== ======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50%(d) 1.15%(d) 0.70%(d)
Net investment income 5.99%(d) 5.34%(d) 5.79%(d)
Fees and expenses waived
or borne by the Adviser 1.48% 1.48% 1.48%
Portfolio turnover 51% 51% 51%
Net assets at end of period (000) $6,136 $4,004 $461
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $0.136 $0.136 $0.136
</TABLE>
(b) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(c) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
15
<PAGE>
FINANCIAL HIGHLIGHTS - CONTINUED
<TABLE>
<CAPTION>
Year ended August 31
-------------------------------------------------
1995
Class A Class B Class C (b)
-------- ------- -----------
<S> <C> <C> <C>
Net asset value -
Beginning of period $ 9.670 $ 9.670 $ 9.550
---------- ---------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.514 0.451 0.334
Net realized and
unrealized gain (loss) 0.152 0.152 0.280
---------- ---------- --------
Total from Investment
Operations 0.666 0.603 0.614
---------- ---------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.486) (0.423) (0.314)
In excess of net investment income -- -- --
From net realized gains -- -- --
---------- ---------- --------
Total Distributions
Declared to Shareholders (0.486) (0.423) (0.314)
---------- ---------- --------
Net asset value - End of period $ 9.850 $ 9.850 $ 9.850
---------- ---------- --------
Total return (e)(f) 7.08% 6.39% 6.50%(g)
========== ========== ========
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50% 1.15% 0.70%(h)
Net investment income 5.50% 4.85% 5.30%(h)
Fees and expenses waived
or borne by the Adviser 1.14% 1.14% 1.14%
Portfolio turnover 36% 36% 36%
Net assets at end of period (000) $ 9,934 $ 3,968 $ 385
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $ 0.107 $ 0.107 $ 0.107
</TABLE>
(b) Class C shares were initially offered on January 4, 1995. Per share
amounts reflect activity from that date.
(c) The Fund commenced investment operations on October 1, 1992. Per share
amounts reflect activity from that date.
(d) Class B shares were initially offered on February 1, 1993. Per share
amounts reflect activity from that date.
(e) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(f) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
16
<PAGE>
FINANCIAL HIGHLIGHTS - CONTINUED
<TABLE>
<CAPTION>
Year ended August 31
-----------------------------------------------------------------
1994 1993(c)
Class A Class B Class A Class B (d)
------- ------- ------- ------- ---
<S> <C> <C> <C>
$ 9.950 $ 9.950 $ 10.000 $ 9.940
---------- ---------- ---------- ----------
0.473 0.409 0.434 0.237
(0.356) (0.356) (0.061) (0.003)
---------- ---------- ---------- ----------
0.117 0.053 0.373 0.234
---------- ---------- ---------- ----------
(0.397) (0.333) (0.406) (0.215)
-- -- (0.015) (0.008)
-- -- (0.002) (0.001)
---------- ---------- ---------- ----------
(0.397) (0.333) (0.423) (0.224)
---------- ---------- ---------- ----------
$ 9.670 $ 9.670 $ 9.950 $ 9.950
---------- ---------- ---------- ----------
1.20% 0.55% 3.82%(g) 2.38%(g)
========== ========== ========== ==========
0.50% 1.15% 0.50%(h) 1.15%(h)
4.84% 4.19% 4.70%(h) 4.05%(h)
1.16% 1.16% 1.68%(h) 1.68%(h)
69% 69% 25%(h) 25%(h)
$ 16,168 $ 4,176 $ 7,866 $ 1,675
$ 0.114 $ 0.114 $ 0.155 $ 0.092
</TABLE>
(g) Not annualized.
(h) Annualized.
- --------------------------------------------------------------------------------
State Tax Information for the year ended August 31, 1996 (unaudited)
An average of 9% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
Approximately 8% of the Fund's distributions (7% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
T0 THE TRUSTEES OF COLONIAL TRUST II AND THE SHAREHOLDERS OF
COLONIAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Colonial Adjustable Rate U. S. Government Fund (a series of Colonial
Trust II) at August 31, 1996, 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, 1996 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
October 11, 1996
18
<PAGE>
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Colonial Adjustable Rate U.S. Government Fund is:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Colonial Adjustable Rate 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 Adjustable Rate 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 objective, and operating policies of the Fund.
19
<PAGE>
[COLONIAL MUTUAL FUNDS LOGO]
COLONIAL
MUTUAL FUNDS
Mutual Funds
for Planned Portfolios
TRUSTEES
ROBERT J. BIRNBAUM
Retired (formerly Special Counsel, Dechert, Price & Rhoads; President and Chief
Operating Officer, New York Stock Exchange, Inc.)
TOM BLEASDALE
Retired (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust Company)
LORA S. COLLINS
Attorney, 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, CS 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
COLONIAL INVESTMENT SERVICES, INC., Distributor (C) 1996
One Financial Center, Boston, Massachusetts 02111-2621, 617-426-3750
AF-02/787C-0896 M (10/96)
[Printed on recycled paper LOGO]
