<PAGE>
[COLONIAL LOGO]
COLONIAL
ADJUSTABLE RATE
U.S. GOVERNMENT FUND
[PHOTO]
SEMIANNUAL REPORT
FEBRUARY 29, 1996
<PAGE>
COLONIAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
HIGHLIGHTS
SEPTEMBER 1, 1995 - FEBRUARY 29, 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:
- Attractive monthly income
- Low relative price volatility
- High quality portfolio
PORTFOLIO MANAGER COMMENTARY: "Economic and market conditions were generally
positive for adjustable rate securities during the period. Interest rates
continued their trend downward, but the Fund's monthly distribution rose due to
the lagging influence of higher interest rates in the previous fiscal year."
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 $ 0.285 $ 0.253 $ 0.275
SEC Yields on 2/29/96* 5.63% 5.15% 5.45%
Total returns, assuming
reinvestment of all distributions
and no sales charge or contingent
deferred sales charge (CDSC)
- - 6 months 3.33% 3.00% 3.23%
- - 12 months 7.73% 7.04% 7.52%
Net asset value per share
at 2/29/96 $ 9.89 $ 9.89 $ 9.89
</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: 4.07% for Class A shares, 3.54% for
Class B shares, and 3.90% for Class C shares.
SECTOR BREAKDOWN**
<TABLE>
<S> <C>
Adjustable Rate Mortgage-backed
Securities .......................................................... 76.64%
Cash & Equivalents .................................................. 10.13%
Treasury Securities ................................................. 10.03%
Agency Debt ......................................................... 3.20%
</TABLE>
ARMS -- MONTHS TO RESET**
<TABLE>
<S> <C>
0 - 3 ............................................................... 7.20%
3 - 6 ............................................................... 46.50%
6 - 9 ............................................................... 30.25%
9 - 12 .............................................................. 16.05%
</TABLE>
** Sector and months to reset breakdowns are based on total net assets. 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 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 MANAGEMENT REPORT
ANN T. PETERSON has been with Colonial Management Associates, Inc. since 1986.
She is lead Portfolio Manager for Colonial Adjustable Rate U.S. Government Fund
and Colonial Government Money Market Fund.
Q: HOW DID BONDS PERFORM OVER THE SIX-MONTH PERIOD?
A: Bonds generally had strong performance during the period. Slower economic
growth, low inflation and, most importantly, declining interest rates,
contributed to price increases in the fixed income markets. The Federal Reserve
Board lowered interest rates twice during the period, in December and then again
in January. Longer-term fixed-rate securities derived the greatest advantages
from these conditions, but adjustable-rate bonds also benefited. In February,
bond prices declined, but ARMs held their value better than longer bonds.
Q: WHAT EFFECT DID DECLINING INTEREST RATES HAVE ON THE FUND?
A: The declining interest rate environment during the second half of 1995 had a
positive impact on the prices of adjustable rate securities. The Fund invests in
a portfolio of adjustable rate U.S. government securities which fluctuate with
interest rates. Although rates declined during the six-month period, the coupons
of the individual securities in the Fund's portfolio are based on a variety of
indexes with a range of reset dates. Many of the Fund's holdings were not yet
affected by lower rates, and in fact, the Fund's monthly distribution increased
during the period.
Q: WHAT WAS YOUR INVESTMENT STRATEGY DURING THE PERIOD?
A: We continued to manage the Fund for total return in a declining rate
environment. We lengthened the average "months to reset" of the portfolio to
lock in higher coupon rates for longer time periods. We increased the average
from 9.6 months on August 31, 1995 to 13.2 months on February 29, 1996. We also
reduced our exposure to the possibility of pre-payments by maintaining our large
position in "seasoned" mortgages. These older securities have already passed the
test of a declining market without refinancing and are a stabilizing force in
the portfolio.
Q: HOW DID THE FUND PERFORM COMPARED TO THE LEHMAN BROTHERS ARM INDEX AND WHY?
A: The Fund did not perform as well as the Lehman Brothers ARM Index, which
outperformed all ARM funds during the period. The Fund earned a total return of
3.33% for the period for Class A shares; the Index posted a return of 3.92%. The
difference is attributable to the Index's greater weighting in longer GNMA
adjustable rate mortgages and its higher percentage of bonds that reset based on
the Cost of Funds Index (COFI). However, the Fund did outperform the total
returns of 1.20% of the average Adjustable Rate Mortgage funds tracked by Lipper
Analytical Services, Inc.*
*Lipper Analytical Services, Inc. is an independent research organization;
rankings vary over time and do not reflect the effects of sales charges.
4
<PAGE>
Q: WHAT IS YOUR MARKET OUTLOOK?
A: Based on market conditions at the end of the period, we expect short-term
volatility, but we believe the economic fundamentals -- low inflation and
moderate growth -- will prevail. We have already seen election year
uncertainties priced into the market and we view it as a potential buying
opportunity for conservative investors with a short-term investment horizon.
Going forward, we believe the Fund will continue to provide returns consistent
with its investment objective.
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 - 2/96
Based on Net Asset Value (NAV) and Maximum Offering Price (MOP)
for Class A Shares
<TABLE>
<CAPTION>
LABEL A B C
Label CARUSGF Annual MOP NAV
<S> <C> <C> <C> <C>
1 11/92 9675 10000 10000
2 9666 9991 9917
3 9666 9991 9932
4 9725 10051 10025
5 1/93 9774 10102 10128
6 9832 10162 10218
7 9860 10192 10264
8 9908 10241 10324
9 9917 10250 10350
10 9974 10309 10459
11 9999 10335 10507
12 10044 10382 10569
13 10059 10397 10570
14 10083 10422 10574
15 10075 10414 10545
16 10108 10447 10625
17 1/94 10161 10502 10696
18 10163 10505 10662
19 10114 10454 10577
20 10056 10393 10521
21 10069 10408 10513
22 10084 10422 10536
23 10129 10469 10600
24 10165 10506 10652
25 10149 10490 10608
26 10149 10490 10600
27 10138 10479 10570
28 10192 10534 10625
29 1/95 10310 10656 10802
30 10439 10790 11019
31 10547 10901 11072
32 10633 10990 11189
33 10753 11115 11370
34 10800 11163 11417
35 10815 11178 11458
36 8/95 10884 11250 11528
37 10957 11325 11610
38 11029 11399 11682
39 11112 11486 11781
40 11180 11555 11871
41 11247 11625 11954
42 11246 11624 11980
</TABLE>
A $10,000 investment in Class B shares made on 2/93 (inception) at net asset
value would have been valued at $11,279 on February 29, 1996. The same
investment after deducting the applicable CDSC would have grown to $11,080 on
February 29, 1996. A $10,000 investment in Class C shares made on 1/95
(inception) would have been valued at $10,994 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 CLASS C SHARES
Inception 10/1/92 2/1/93 1/4/95
NAV MOP NAV W/CDSC NAV
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 6.49% 3.03% 5.81% 1.81% 6.28%
- --------------------------------------------------------------------------------
3 YEARS 4.44% 3.29% 3.76% 3.15% --
- --------------------------------------------------------------------------------
SINCE INCEPTION 4.35% 3.37% 3.82% 3.53% 7.80%
- --------------------------------------------------------------------------------
</TABLE>
The Lehman Brothers ARM 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.
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 return does not include sales charges
or CDSC. MOP return includes the maximum sales charge of 3.25%. The CDSC return
reflects the maximum charge 4.00% for one year and 1.00% 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
FEBRUARY 29, 1996 (UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 89.9% PAR VALUE
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 79.8%
Maturities
Coupon from/to
------ -------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp.,
Adjustable Rate Mortgage: (a)
6.062% 2023 $ 572 $ 584
6.096% 2018 205 206
6.577% 2018 319 320
7.391% 2019 298 300
7.630% 2023 885 905
7.679% 2022 93 94
7.901% 2022 141 141
7.925% 2023 223 229
8.250% 2022 172 176
-------------
2,955
-------------
Federal National Mortgage Association,
Adjustable Rate Mortgage: (a)
6.240% 2000 400 405
6.383% 2023 263 264
6.391% 2027 201 203
7.296% 2019 267 271
7.329% 2017 224 226
7.435% 2019 193 198
7.614% 2020 206 210
7.625% 2021 126 126
7.995% 2022 207 209
8.105% 2017 177 183
8.366% 2019 331 343
8.475% 2021 228 236
-------------
2,874
-------------
Government National Mortgage Association,
Adjustable Rate Mortgage: (a)
6.125% 2022 826 844
6.875% 2022 730 744
7.000% 2022 - 2024 2,031 2,075
7.375% 2023 582 592
-------------
4,255
-------------
TOTAL GOVERNMENT AGENCIES (cost of $10,081) 10,084
-------------
</TABLE>
6
<PAGE>
Investment Portfolio/February 29, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
GOVERNMENT OBLIGATIONS - 10.0%
U.S. Treasury Notes:
6.125% 09/30/00 $ 568 $ 577
6.250% 08/31/00 300 306
6.500% 05/15/05 376 385
-------------
TOTAL GOVERNMENT OBLIGATIONS (cost of $1,290) 1,268
-------------
TOTAL INVESTMENTS (cost of $11,371) (b) 11,352
-------------
SHORT-TERM OBLIGATIONS - 8.9%
-------------------------------------------------------------------------------
Repurchase agreement with Bankers Trust
Securities Corp., dated 02/29/96, due 03/01/96
at 5.400% collaterized by U.S. Treasury notes
with various maturities to 1999, market value
$1,155 (repurchase proceeds $1,130) 1,130 1,130
-------------
OTHER ASSETS & LIABILITIES, NET - 1.2% 152
- --------------------------------------------------------------------------------
NET ASSETS - 100.0% $ 12,634
=============
- --------------------------------------------------------------------------------
</TABLE>
NOTES TO INVESTMENT PORTFOLIO:
(a) Interest rates on variable rate securities change periodically. The rates
listed are as of February 29, 1996.
(b) Cost for federal income tax purposes is the same.
See notes to financial statements.
7
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
FEBRUARY 29, 1996 (UNAUDITED)
(in thousands except for per share amounts and footnotes)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (cost $11,371) $11,352
Short-term obligations 1,130
-------
12,482
Receivable for:
Interest $111
Investments sold 72
Deferred organization expenses 26
Fund shares sold 2
Other 8
----
219
-------
Total Assets 12,701
LIABILITIES
Payable for:
Distributions 61
Payable to Adviser 5
Accrued:
Deferred Trustees fees 1
----
Total Liabilities 67
-------
NET ASSETS $12,634
-------
Net asset value & redemption price per share -
Class A ($7,952/804) $ 9.89
-------
Maximum offering price per share - Class A
($9.89/0.9675) $ 10.22 (a)
-------
Net asset value & offering price per share -
Class B ($4,181/423) $ 9.89 (b)
-------
Net asset value & offering price per share -
Class C ($501/51) $ 9.89
-------
COMPOSITION OF NET ASSETS
Capital paid in $12,754
Undistributed net investment income 12
Accumulated net realized loss (113)
Net unrealized depreciation (19)
-------
$12,634
=======
</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 SIX MONTHS ENDED FEBRUARY 29, 1996
(UNAUDITED)
(in thousands)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest $447
EXPENSES
Management fee $ 38
Service fee - Class A, Class B, Class C 14
Distribution fee - Class B 13
Distribution fee - Class C (a)
Transfer agent 14
Bookkeeping fee 13
Trustees fee 6
Custodian fee 1
Audit fee 10
Legal fee 6
Registration fee 15
Reports to shareholders 2
Amortization of deferred
organization expenses 8
Other 3
---
143
Fees and expenses waived or
borne by the Adviser (95) 48
--- ---
Net Investment Income 399
---
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized loss (5)
Net unrealized appreciation during
the period 43
---
Net Gain 38
----
Net Increase in Net Assets from Operations $437
====
</TABLE>
(a) Rounds to less than one.
See notes to financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(Unaudited)
Six months
Ended Year ended
February 29 August 31
----------- ---------
(in thousands)
INCREASE (DECREASE) IN NET ASSETS 1996 1995 (a)
<S> <C> <C>
Operations:
Net investment income $ 399 $ 990
Net realized loss (5) (92)
Net unrealized appreciation 43 327
------- -------
Net Increase from Operations 437 1,225
Distributions:
From net investment income - Class A (264) (696)
From net investment income - Class B (103) (194)
From net investment income - Class C (12) (12)
------- -------
58 323
------- -------
Fund Share Transactions:
Receipts for shares sold - Class A 1,021 2,569
Value of distributions reinvested - Class A 218 416
Cost of shares repurchased - Class A (3,264) (9,448)
------- -------
(2,025) (6,463)
------- -------
Receipts for shares sold - Class B 1,220 2,509
Value of distributions reinvested - Class B 56 98
Cost of shares repurchased - Class B (1,077) (2,898)
------- -------
199 (291)
------- -------
Receipts for shares sold - Class C 225 390
Value of distributions reinvested - Class C 11 6
Cost of shares repurchased - Class C (121) (22)
------- -------
115 374
------- -------
Net Decrease from Fund Share Transactions (1,711) (6,380)
------- -------
Total Decrease (1,653) (6,057)
NET ASSETS
Beginning of period 14,287 20,344
------- -------
End of period (including undistributed net investment
income of $12 and $8, respectively) $12,634 $14,287
======= =======
NUMBER OF FUND SHARES
Sold - Class A 103 265
Issued for distributions reinvested - Class A 22 43
Repurchased - Class A (329) (972)
------- -------
(204) (664)
------- -------
Sold - Class B 123 260
Issued for distributions reinvested - Class B 6 10
Repurchased - Class B (109) (299)
------- -------
20 (29)
------- -------
Sold - Class C 23 40
Issued for distributions reinvested - Class C 1 1
Repurchased - Class C (12) (2)
------- -------
12 39
------- -------
</TABLE>
(a) Class C shares were initially offered on January 4, 1995.
See notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996 (UNAUDITED)
NOTE 1. INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In the opinion of management of Colonial Adjustable Rate 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 financial highlights 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 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 that are consistently followed by the Fund in
the preparation of its financial statements.
SECURITY VALUATION AND TRANSACTIONS: Debt securities 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.
11
<PAGE>
Notes to Financial Statements/February 29, 1996
- --------------------------------------------------------------------------------
NOTE 2. ACCOUNTING POLICIES - CONT.
- --------------------------------------------------------------------------------
DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS: All income,
expenses (other than the Class A, Class B and Class C service fees and Class B
and Class C distribution fees), realized and unrealized gains (losses), are
allocated to each class proportionately on a daily basis for purposes of
determining the net asset value of each class.
Class A, Class B and Class C per share data and ratios are calculated by
adjusting the expense and net investment income per share data and ratios for
the Fund for the entire period by the annualized service fees for Class A, Class
B and Class C shares and the annualized 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 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 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.
12
<PAGE>
Notes to Financial Statements/February 29, 1996
- --------------------------------------------------------------------------------
TRANSFER AGENT: Colonial Investors Service Center, Inc. (the Transfer Agent), an
affiliate of the Adviser, provides shareholder services and receives 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 $403 on
sales of the Fund's Class A shares and received contingent deferred sales
charges (CDSC) of $9,053 on Class B shares.
The Fund has adopted a 12b-1 plan which requires it to pay the Distributor a
service fee equal to 0.20% annually of Class A and Class B net assets and 0.25%
annually of Class C net assets as of the 20th of each month. The plan also
requires the payment of a distribution fee to the Distributor 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 4. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITY: During the six months ended February 29, 1996, purchases
and sales of investments, other than short-term obligations, were $4,424,611,
and $5,836,642, respectively.
Unrealized appreciation (depreciation) at February 29, 1996, based on cost of
investments for both financial statement and federal income tax purposes was:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 62,692
Gross unrealized depreciation (81,248)
--------
Net unrealized depreciation $(18,556)
========
</TABLE>
13
<PAGE>
Notes to Financial Statements/February 29, 1996
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO INFORMATION - CONT.
- --------------------------------------------------------------------------------
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>
2003 $84,000
-------
</TABLE>
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.
14
<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
-----------------------------------------
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) 0.289 0.257 0.279
Net realized and
unrealized gain (loss) 0.036 0.036 0.036
------- ------- -------
Total from Investment
Operations 0.325 0.293 0.315
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.285) (0.253) (0.275)
In excess of net investment income -- -- --
From net realized gains -- -- --
------- ------- -------
Total Distributions
Declared to Shareholders (0.285) (0.253) (0.275)
------- ------- -------
Net asset value -
End of period $ 9.890 $ 9.890 $ 9.890
======= ======= =======
Total return (b)(c) 3.33%(d) 3.00%(d) 3.23%(d)
======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50%(e)(f) 1.15%(e)(f) 0.70%(e)(f)
Net investment income 6.03%(e)(f) 5.38%(e)(f) 5.83%(e)(f)
Fees and expenses waived
or borne by the Adviser 1.39%(e) 1.39%(e) 1.39%(e)
Portfolio turnover 65% 65% 65%
Net assets at end
of period (000) $ 7,952 $ 4,182 $ 501
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $0.064 $0.064 $0.064
</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) 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.
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 (c)(d) 7.08% 6.39% 6.50%(e)
======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50% 1.15% 0.70%(f)
Net investment income 5.50% 4.85% 5.30%(f)
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
</TABLE>
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $ 0.107 $ 0.107 $ 0.107
(b) Class C shares were initially offered on January 4, 1995. Per share amounts
reflect activity from that date.
(c) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(d) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(e) Not annualized.
(f) Annualized.
16
<PAGE>
FINANCIAL HIGHLIGHTS - CONTINUED
<TABLE>
<CAPTION>
Year ended August 31
----------------------------------------------------
1994 1993(b)
Class A Class B Class A Class B (c)
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 9.950 $ 9.950 $10.000 $ 9.940
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.473 0.409 0.434 0.237
Net realized and
unrealized gain (loss) (0.356) (0.356) (0.061) (0.003)
------- ------- ------- -------
Total from Investment
Operations 0.117 0.053 0.373 0.234
------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.397) (0.333) (0.406) (0.215)
In excess of net investment income -- -- (0.015) (0.008)
From net realized gains -- -- (0.002) (0.001)
------- ------- ------- -------
Total Distributions
Declared to Shareholders (0.397) (0.333) (0.423) (0.224)
------- ------- ------- -------
Net asset value -
End of period $ 9.670 $ 9.670 $ 9.950 $ 9.950
======= ======= ======= =======
Total return (d)(e) 1.20% 0.55% 3.82%(f) 2.38%(f)
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50% 1.15% 0.50%(g) 1.15%(g)
Net investment income 4.84% 4.19% 4.70%(g) 4.05%(g)
Fees and expenses waived
or borne by the Adviser 1.16% 1.16% 1.68%(g) 1.68%(g)
Portfolio turnover 69% 69% 25%(g) 25%(g)
Net assets at end
of period (000) $16,168 $ 4,176 $ 7,866 $ 1,675
(a) Net of fees and expenses
waived or borne by the
Adviser which amounted to $ 0.114 $ 0.114 $ 0.155 $ 0.092
</TABLE>
(b) The Fund commenced investment operations on October 1, 1992. Per share
amounts reflect activity from that date.
(c) Class B shares were initially offered on February 1, 1993. Per share
amounts reflect activity from that date.
(d) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(e) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been advised.
(f) Not annualized.
(g) Annualized.
17
<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.
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 objectives, and operating policies of the Fund.
19
<PAGE>
[COLONIAL 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, 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- MAY LOSE VALUE
INSURED NO BANK GUARANTEE
------------------------------
COLONIAL INVESTMENT SERVICES, INC., Distributor (C)1996
One Financial Center, Boston, Massachusetts 02111-2621, 617-426-3750
AF-03/910B-0296 M (4/96)
[RECYCLE LOGO] PRINTED ON RECYCLED PAPER
