Quality government bonds
can add diversification to
your portfolio.
COLONIAL GOVERNMENT FUNDS ANNUAL REPORT, AUGUST 31, 1997
o COLONIAL SHORT DURATION U.S. GOVERNMENT FUND
o COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND
o COLONIAL FEDERAL SECURITIES FUND
<PAGE>
President's Message
What's inside:
o It's been a good market
environment for bonds.
o Management strategies that
helped the Funds beat their
respective peer averages
during the 12-month period.
o Your Fund's holdings
and recent increases in
investment flexibility.
- ---------------------------------
Not FDIC May Lose Value
Insured No Bank Guarantee
- ---------------------------------
DEAR SHAREHOLDERS
[photo -- Cogger] During the last year, the U.S. has been experiencing a very
unusual economic environment: Strong economic growth
with low inflation. This has resulted in a prolonged
"honeymoon" period for U.S. markets.
This stronger-than-expected economic growth caused some concern in fixed-income
markets that the Federal Reserve Board might take action. And, indeed, the Fed
did raise interest rates slightly in March as a preemptive strike against
inflation. Despite the March increase, the general trend for interest rates was
down over the year in response to low inflation.
Your Funds were positioned to take advantage of this declining interest rate
environment. First, the managers actively managed the Funds' sensitivity to
interest rate fluctuations. They also invested heavily in mortgage-backed
securities, which tend to benefit from low volatility. These strategies worked
well; for the year ended August 31, 1997, Class A shares achieved the following
pre-load total returns:
o Colonial Short Duration U.S. Government Fund - 6.79%
o Colonial Intermediate U.S. Government Fund - 8.64%
o Colonial Federal Securities Fund - 10.25%(1)
We thank you for giving us the opportunity to help you meet your financial
goals, and we hope to continue serving you in the years to come. Respectfully,
/s/ Harold W. Cogger
Harold W. Cogger, President
October 13, 1997
(1) Colonial Federal Securities Fund changed its
fiscal year-end from October 31 to August 31 in
1997. The Fund's total return for the 10-month
period was 5.31%.
Because market conditions change frequently,
there can be no assurance that the trends
described in this report will continue.
<PAGE>
Portfolio Managers' Report
A GOOD MARKET ENVIRONMENT FOR BONDS
WHEN YOU LOOK AT BOTH RISK AND RETURN, TREASURY BONDS HAVE BEEN ATTRACTIVE FOR
SEVERAL REASONS.
1. REAL RATES OF RETURN HAVE BEEN HIGH. While current interest rates seem low,
they are high relative to inflation. When compared to other periods in history,
current inflation-adjusted interest rates are attractive, as shown in the chart
below.
2. U.S. RATES ARE ATTRACTIVE TO FOREIGN INVESTORS. Compared to interest rates
in many other parts of the world, U.S. rates have remained high, drawing foreign
investors. In fact, between December of 1996 and July of this year, foreign
ownership of U.S. Treasurys increased by $124 billion.
3. WE EXPECT THE TREND OF FEWER GOVERNMENT BOND ISSUES TO CONTINUE. As the
deficit decreases, the Treasury has issued fewer bonds. If this trend continues,
and the supply of Treasurys drops, demand for these bonds may enable the
government to pay lower interest rates. In a low interest rate environment
accompanied by decreased supply and strong foreign demand, prices could rally,
producing attractive total returns.
INFLATION VS. A 10-YEAR TREASURY NOTE 1987 TO 1997
Today's interest rates may seem low. However, when you compare interest rates
to inflation over the last 10 years, you will see that your post-inflation
return -- or real rate of return -- is higher today than when interest rates
were over 8% in the early '90s.
10 YEAR TREASURY INFLATION
6.34 2.2
6.01 2.2
6.5 2.3
6.66 2.2
6.72 2.5
6.9 2.8
6.55 3
6.49 3
6.42 3.3
6.04 3.3
6.34 3
6.7 3
6.94 2.9
6.79 3
6.71 2.8
6.85 2.9
6.67 2.9
6.33 2.8
6.1 2.7
5.58 2.7
5.57 2.5
5.74 2.6
6.02 2.8
6.18 2.5
6.28 2.6
6.43 2.8
6.2 3
6.28 3.2
7.05 3.1
7.2 2.9
7.2 2.9
7.58 2.8
7.82 2.7
7.91 2.7
7.81 2.6
7.6 3
7.17 2.9
7.11 2.8
7.32 2.5
7.15 2.3
7.04 2.4
6.74 2.5
6.13 2.5
5.64 2.5
5.79 2.7
5.82 2.7
5.43 2.8
5.38 2.7
5.45 2.8
5.81 2.8
5.78 3
6.15 3.2
6.01 3.2
6.02 3.1
6.02 3.2
6.36 3.3
6.69 2.9
6.94 3
6.79 3.2
6.35 3
6.6 3.1
6.71 3.2
7.12 3.1
7.32 3
7.58 3.2
7.53 3.2
7.25 2.8
7.27 2.6
6.7 3.1
7.38 3
7.46 2.9
7.45 3.4
7.82 3.8
8.15 4.4
8.23 4.7
8.06 5
8.01 4.9
8.06 4.9
8.03 5.3
8.01 5.7
8.07 6.1
8.25 6.3
8.62 6.3
8.79 6.2
8.85 5.6
8.34 4.8
8.41 4.7
8.6 4.4
9.02 4.7
8.63 5.2
8.52 5.3
8.42 5.2
7.93 4.6
7.83 4.7
7.91 4.5
8.29 4.3
8.25 4.7
7.8 5
8.08 5.2
8.6 5.4
9.05 5.1
9.27 5
9.3 4.8
8.98 4.7
9.14 4.4
9.05 4.2
8.64 4.2
8.94 4.2
9.24 4
9.1 4.1
8.87 4
9.15 3.9
8.89 3.9
8.54 3.9
8.15 3.9
8.26 4
8.86 4.4
8.97 4.5
8.88 4.5
9.59 4.4
8.97 4.3
Source: Bloomberg -- all rights reserved.
3
<PAGE>
Portfolio managers' report
WHAT IS DURATION?
Duration is a measure of a bond
mutual fund's price sensitivity to
interest rate movements. It is a
mathematical calculation that
assesses such factors as the
maturities of the bonds in a fund's
portfolio, coupon rates and how
often they are paid, and prevailing
market interest rates. In government
bond funds, interest rate risk is the
primary consideration. Therefore,
the specific benefits and risks of
these funds vary by their duration.
DURATION MANAGEMENT HELPS FUNDS BEAT PEERS
AS WE ENTERED 1997, OUR ANALYSIS SUGGESTED THAT INTEREST RATES SHOULD NOT RISE
SIGNIFICANTLY. In fact, in the spring of 1997 we believed they had peaked and
adjusted the portfolios to benefit by increasing their duration. When our
analysis proved correct, the Funds performed well in a rallying bond market.
Each Fund generated price gains consistent with its respective risk profile.
WE INVESTED HEAVILY IN MORTGAGE-BACKED SECURITIES BECAUSE THESE SECURITIES TEND
TO DO WELL IN A STABLE RATE ENVIRONMENT. This stable interest rate environment
combined with active duration management helped mortgage-backed securities
outperform Treasurys during the year.
WE TOOK ADVANTAGE OF INTEREST RATE PEAKS AND VALLEYS. When we felt rates were
bottoming out, we took a conservative stance, lowering interest rate risk to
reduce losses. Then, as rates peaked in April 1997 and were on the verge of
falling, we aggressively increased duration in anticipation of declining rates
and rallying bond prices. In fact, the Federal Reserve Board did not raise rates
again, and the bond market rallied from April through July. Consequently, all of
Colonial's government bond funds beat their respective Lipper peer group average
for the 12 months ended September 30, 1997.
LIPPER RANKINGS AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COLONIAL SHORT DURATION COLONIAL INTERMEDIATE U.S. COLONIAL FEDERAL
U.S. GOVERNMENT FUND GOVERNMENT FUND SECURITIES FUND
Rank out of Rank out of Rank out of
total number of funds total number of funds total number of funds
<S> <C> <C> <C>
1 year 16th 55th 23rd
out of 65 out of 122 out of 180
- -------------------------------------------------------------------------------------------------
3 years 10th 48th 25th
out of 52 out of 89 out of 133
- -------------------------------------------------------------------------------------------------
5 years n/a 24th 11th
out of 45 out of 79
- -------------------------------------------------------------------------------------------------
10 years n/a n/a 6th
out of 49
- -------------------------------------------------------------------------------------------------
</TABLE>
These rankings are as of month-end as
calculated by Lipper Analytical Services, Inc.
Rankings are based on total returns for Class A
shares, and reflect reinvestment of dividends
and capital gains and do not assume deduction
of sales charges.
4
<PAGE>
Portfolio managers' report
- --------------------------------------------------------------------------------
THE ECONOMY HAS BEEN RIDING A WAVE OF STRONG GROWTH COMBINED WITH LOW
INFLATION. In this environment, the bond market rallied as interest rates
declined. This has resulted in strong total returns across bond markets. Stocks
have also produced impressive returns, and investors who took on the additional
risk of the stock market were rewarded during this period.
A CENTRAL TENET OF PORTFOLIO THEORY IS THAT DIVERSIFICATION REDUCES RISK.
HISTORICAL EXPERIENCE SHOWS THAT GOVERNMENT BONDS PROVIDED A HIGHER AVERAGE
TOTAL RETURN THAN LARGE-CAP STOCKS IN BEAR MARKETS SINCE 1929(1). Even in a
strong growth market, such as the last 10 years, having a portion of your
portfolio invested in bonds would have provided returns similar to stocks, with
reduced risk as shown in the chart below.
SIMILAR RETURN WITH REDUCED VOLATILITY
Historically, diversifying a hypothetical stock portfolio with 25% government
bonds has provided 95% of the return of the stock market and has reduced
volatility by almost 20% over the last 10 years.
[graphic omitted -- bar chart]
100% large-cap stocks 75% large-cap stocks, 25% bonds
Total Return 13.87% 13.15%
Risk 14.38% 11.60%
(1) Bear market is defined as a price-only change
of at least 20% over a six-month period. Colonial's
government bond funds invest a portion of their
portfolios in bonds with significantly shorter
durations than long-term government bonds.
Stocks are represented by the Standard & Poor's
500 Index. Long-term bond performance was
provided by Ibbotson Associates. Volatility is
measured by standard deviation. Both returns
and volatility are annualized and cover the
10-year period ended 8/31/97. Unlike mutual
funds, indexes are not investments, do not incur
fees and it is not possible to invest in an index.
These results do not represent past, current or
future performance of any fund. Past
performance cannot guarantee future results.
5
<PAGE>
Portfolio managers' report
YOUR MANAGEMENT TEAM
Leslie W. Finnemore, Ann T. Peterson
and William C. Hill are vice presidents of
Colonial Management Associates, Inc.
Ms. Finnemore has served as manager
or co-manager of Colonial Short
Duration U.S. Government Fund and
Colonial Intermediate U.S. Government
Fund since inception and Colonial
Federal Securities Fund since 1993.
Ms. Peterson has managed or
co-managed Colonial Short Duration
U.S. Government Fund since 1993. Prior
to 1993, she was an associate portfolio
manager and taxable bond analyst
for the firm. Prior to joining Colonial in
1996, Mr. Hill was a mortgage analyst.
Together, they have more than
32 years' experience in professional
money management.
- --------------------------------------------------------------------------------
AS A MUTUAL FUND INVESTOR, YOU CAN TAKE ADVANTAGE OF PROFESSIONAL EXPERTISE,
NOT ONLY IN SELECTING A DIVERSIFIED PORTFOLIO OF BONDS, BUT ALSO IN ACTIVELY
MANAGING THE PORTFOLIO TO REDUCE RISK. Interest rate risk is the chance that
interest rates will rise, causing existing bonds to lose principal value. As
portfolio managers, we work to anticipate and respond to interest rate changes
and adjust each Fund's portfolio within its duration range. We also make
adjustments in sector weightings to manage the overall credit and interest rate
risk/return potential of each Fund.
COLONIAL PROVIDES THREE DIFFERENT GOVERNMENT BOND PORTFOLIOS, EACH FOCUSED ON A
DIFFERENT DURATION RANGE. Colonial Short Duration U.S. Government Fund is the
most conservative of the three Funds and is managed for low price volatility.
Colonial Intermediate U.S. Government Fund has a slightly longer duration and is
designed to offer increased return potential with slightly more risk. Colonial
Federal Securities Fund has the longest duration, greatest long-term return
potential and highest risk to principal. It also has the flexibility to invest
up to 35% of the portfolio in conservative, investment-grade quality, non-
government securities.
/s/Leslie W. Finnemore /s/Ann T. Peterson /s/William C. Hill
Leslie W. Finnemore Ann T. Peterson William C. Hill
COLONIAL'S GOVERNMENT BOND FUNDS
Over time, you can expect a longer duration fund to deliver more return,
but it also carries more risk.
[graphic omitted -- chart]
Total Return Potential Duration Range
Colonial Short Duration
U.S. Government Fund 6.79% Less than 3 years
Colonial Intermediate
U.S. Government Fund 8.64% 2.5 - 5.5 years
Colonial Federal
Securities Fund 10.25% 4.5 - 7.5 years
Source: Colonial Management Associates.
Results shown are Class A share total returns
for one year versus the duration range for each
Fund. Interest rates generally declined during
the period. While you can expect longer
duration funds to produce better returns over
the long term, short-term results may vary
significantly. Past performance cannot predict
future results.
6
<PAGE>
Fund Facts: 8/31/97
DURATION
1.37 years
LAST 12 MONTHS' DISTRIBUTIONS
Class A $0.551
- ----------------------------------
Class B $0.487
- ----------------------------------
Class C $0.532
- ----------------------------------
SEC YIELD (1)
Class A 5.57%
- ----------------------------------
Class B 5.09%
- ----------------------------------
Class C 5.61%
- ----------------------------------
AVERAGE LIFE BREAKDOWN
(As a percentage of net assets)
0 - 2 years 44.36%
- ----------------------------------
2 - 4 years 9.97%
- ----------------------------------
4 - 6 years 30.40%
- ----------------------------------
6 - 8 years 12.66%
- ----------------------------------
8 - 10 years 0.85%
- ----------------------------------
More than 10 years 1.76%
- ----------------------------------
SECTOR BREAKDOWN
(As a percentage of net assets)
[pie chart omitted]
Adjustable Rate
Mortgage Securities - 28.50%
Cash & Other - 26.32%
Treasury Securities - 16.79%
Fixed-rate Mortgage
Securities - 16.40%
Other Agency
Securities - 11.99%
COLONIAL SHORT DURATION U.S. GOVERNMENT FUND
INVESTING EXCLUSIVELY IN U.S. GOVERNMENT SECURITIES, THIS FUND IS DESIGNED FOR
RELATIVELY LOW VOLATILITY. IT IS THE MOST CONSERVATIVE OF COLONIAL'S THREE
GOVERNMENT FUNDS, DESIGNED FOR RISK-AVERSE INVESTORS OR THOSE WITH A SHORT-TERM
TIME HORIZON.
Formerly called Colonial Adjustable Rate U.S. Government Fund, the Fund
expanded its investment flexibility in January to allow greater investment in
fixed-rate securities. This gave us more versatility to seek relative value,
while maintaining the same general risk profile. We concentrated on selecting
securities that we expected to offer greater returns without significantly
increased risk.
Because we believed interest rate fluctuations would remain muted during the
year, we invested a significant portion of your portfolio in mortgage-backed
securities which perform well in that environment. With our expanded investment
flexibility, we decreased the amount of adjustable-rate mortgages while
increasing our investments in fixed-rate mortgages. The rest of the portfolio
was invested in cash, Treasurys, and government agency bonds. These securities
provided the flexibility to adjust the duration of the portfolio to take
advantage of interest rate changes.
The Fund's expanded investment flexibility, mortgage-backed concentration and
duration management all contributed to the portfolio's strong performance
results.
PERFORMANCE OF A $10,000 INVESTMENT IN CLASS A SHARES 10/1/92 - 8/31/97
MOP NAV LEHMAN GOVT
9675 10000 10000 10000
9666.33 9991.04 9943 9936
9666.25 9990.96 9932 9921
9724.78 10051.5 10021 10003
9773.71 10102 10126 10104
9832.21 10162.5 10206 10183
9860.34 10191.6 10238 10210
9908.41 10241.2 10300 10267
9916.86 10250 10275 10255
9973.83 10308.9 10351 10329
9998.89 10334.8 10374 10356
10044.2 10381.6 10460 10431
10059.3 10397.2 10494 10456
10083.2 10421.9 10517 10472
10075.1 10413.5 10519 10463
10107.7 10447.3 10560 10501
10161 10502.3 10626 10568
10163.1 10504.5 10562 10502
10113.8 10453.6 10508 10427
10055.6 10393.4 10468 10389
10069.4 10407.7 10482 10398
10083.5 10422.3 10509 10413
10129.1 10469.3 10603 10489
10164.7 10506.1 10638 10516
10149 10489.9 10614 10496
10149.1 10490 10638 10516
10138.5 10479 10594 10484
10191.7 10534 10615 10506
10310.1 10656.4 10759 10626
10438.9 10789.6 10906 10754
10546.6 10900.9 10967 10810
10632.9 10990.1 11065 10892
10753.5 11114.7 11254 11059
10800.3 11163.1 11315 11110
10814.6 11177.9 11360 11141
10883.8 11249.4 11427 11208
10956.7 11324.7 11483 11260
11028.8 11399.3 11578 11342
11112.5 11485.8 11677 11432
11179.8 11555.3 11765 11514
11247.4 11625.2 11865 11593
11246.2 11624 11819 11551
11231.6 11608.9 11810 11542
11272.8 11651.5 11821 11554
11314.1 11694.2 11848 11568
11390.4 11773 11934 11643
11445.3 11829.7 11980 11685
11490.1 11876.1 12024 11714
11570.1 11958.8 12134 11810
11674.1 12066.3 12270 11925
11765.2 12160.4 1236l 12011
11773.4 12168.9 12363 12008
11839 12236.7 12422 12062
11880.9 12280 12452 12092
11886.9 12286.2 12443 12081
11977.6 12379.9 12544 12171
12056.5 12461.5 12632 12244
12135.7 12543.3 12718 12320
12252.2 12663.8 12857 12447
12271 12683 12871 12455
AVERAGE ANNUAL TOTAL RETURNS AS OF 9/30/97
SHARE CLASS A B C
INCEPTION 10/1/92 2/1/93 1/4/95
NAV MOP NAV w/CDSC NAV w/CDSC
- ---------------------------------------------------------------------
1 year 6.89% 3.42% 6.21% 2.21% 6.69% 5.69%
- ---------------------------------------------------------------------
Since inception 5.03% 4.34% 4.50% 4.50% 7.04% 7.04%
- ---------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) SEC yields reflect the portfolio's earning power net of expenses, expressed
as an annualized percentage of the maximum offering price per share. If the
advisor had not borne certain expenses, the yields would have been 3.97% for
Class A, 3.44% for Class B and 3.95% for Class C and returns would have been
lower.
A $10,000 investment in Class B shares made on 2/1/93 (inception), at net asset
value (NAV) would have grown to $12,188 on 8/31/97 and Class C shares made on
1/4/95 (inception), NAV would have grown to $11,960 on 8/31/97. The Lehman
Brothers ARM Index, used in prior annual reports, was changed as a result of the
Fund's expanded investment flexibility, and a hypothetical $10,000 investment
made on 10/1/92, would have grown to $13,259 on 8/31/97. The Fund's current and
former indexes are unmanaged and track the performance of short-term U.S.
government securities and ARM securities, respectively. The Lipper Short U.S.
Government Fund Average is the average return of funds in the Lipper Short U.S.
Government Fund category. Unlike mutual funds, indexes are not investments, do
not incur fees or charges, and it is not possible to invest in indexes.
Past performance cannot predict future results. Returns 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 the maximum
sales charge of 3.25% for Class A shares. The CDSC returns reflect the maximum
charge of 4% for one year for Class B shares and 1% for one year for Class C
shares.
Performance for different share classes will vary based on differences in sales
charges and fees associated with each class.
7
<PAGE>
Fund Facts: 8/31/97
DURATION
4.31 years
LAST 12 MONTHS' DISTRIBUTIONS
Class A $0.398
- ----------------------------------
Class B $0.349
- ----------------------------------
Class C (1) $0.030
- ----------------------------------
SEC YIELD (2)
Class A 5.77%
- ----------------------------------
Class B 5.29%
- ----------------------------------
Class C 5.46%
- ----------------------------------
AVERAGE LIFE BREAKDOWN
(As a percentage of net assets)
0 - 5 years 55.06%
- ----------------------------------
5 - 10 years 35.58%
- ----------------------------------
10 - 15 years 2.24%
- ----------------------------------
15 - 20 years 0.49%
- ----------------------------------
20 - 25 years 4.25%
- ----------------------------------
25 - 30 years 2.38%
- ----------------------------------
SECTOR BREAKDOWN
(As a percentage of senior securities)
[pie chart omitted]
FNMAs - 41.92%
Treasury Securities - 26.57%
GNMAs - 25.50%
FHLMCs - 3.43%
SBA - 2.58%
COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND
THE FUND MAINTAINS A CONSERVATIVE PORTFOLIO INVESTED EXCLUSIVELY IN GOVERNMENT
SECURITIES, WITH A RISK PROFILE SIMILAR TO A FIVE-YEAR TREASURY. IN APRIL, THE
TRUSTEES APPROVED A CHANGE IN THE FUND'S NAME, ADDING THE WORD "INTERMEDIATE" TO
BETTER REFLECT ITS INTEREST RATE SENSITIVITY AND INVESTMENT HORIZON.
We attribute much of the Funds strong performance this past year to its high
weighting in mortgage-backed securities. We invested from 65% to 90% of the
portfolio in these securities, which typically perform well in times of low
interest rate volatility. Over the year, mortgage-backed securities provided
better returns than Treasurys, helping to buffer Fund performance when interest
rates increased in the first quarter, while still performing well when rates
later declined.
The Treasury securities in the portfolio were used to manage the Fund's
interest rate sensitivity, adjusting the duration of the Fund to take advantage
of interest rate changes when possible. We increased the Fund's sensitivity when
interest rates were peaking, to lock in higher rates before they fell. When
rates were low, we reduced the Fund's sensitivity to interest rates in
anticipation of rising interest rates.
PERFORMANCE OF A $10,000 INVESTMENT IN CLASS A SHARES 10/31/87 - 8/31/97
MOP NAV LEHMAN GOVT
9525 10000 10000 10000
9849.68 10340.9 10060 10087
9947.95 10444 10158 10185
10224.2 10734.1 10410 10489
10351.8 10868.1 10521 10603
10300.8 10814.4 10476 10530
10316.1 10830.5 10458 10486
10289 10802.1 10408 10425
10489.2 11012.3 10578 10634
10456.8 10978.3 10546 10601
10467.2 10989.1 10560 10615
10608.8 11137.8 10743 10813
10766.4 11303.3 10891 10964
10703.9 11237.7 10797 10883
10655.8 11187.1 10808 10878
10757.2 11293.6 10915 11005
10723 11257.8 10869 10960
10734 11269.2 10920 10994
10945.4 11491.2 11140 11190
11142.3 11698 11355 11430
11361 11927.5 11645 11709
11487 12059.9 11881 11919
11423.4 11993 11721 11789
11455.1 12026.4 11777 11834
11616.8 12196.1 12024 12086
11714.6 12298.8 12143 12199
11780.3 12367.8 12178 12229
11730.8 12315.7 12103 12117
11798 12386.4 12147 12165
11831.4 12421.5 12162 12167
11848.4 12439.3 12121 12092
12071.2 12673.2 12381 12391
12192.3 12800.3 12543 12549
12384.3 13001.9 12719 12730
12331.5 12946.5 12673 12639
12402.2 13020.6 12787 12740
12545 13170.6 12965 12900
12761.5 13397.9 13160 13146
12920.9 13565.3 13342 13327
13044.5 13695 13479 13473
13114.4 13768.3 13561 13559
13203.1 13861.5 13636 13625
13311.4 13975.2 13777 13755
13402.1 14070.5 13855 13838
13454.8 14125.8 13866 13825
13604.1 14282.5 14016 13998
13754.9 14440.8 14282 14295
13926.5 14621 14525 14539
14020.5 14719.6 14691 14700
14134.8 14839.7 14864 14855
14354.9 15070.8 15225 15231
14293.4 15006.2 15078 15042
14353.5 15069.3 15125 15120
14331.9 15046.7 15065 15015
14413.7 15132.5 15200 15132
14579.3 15306.4 15427 15396
14698.6 15431.6 15649 15608
14755.6 15491.5 15949 15908
14919.4 15663.4 16112 16071
15020 15769 16334 16268
14971 15717.5 16138 16056
14964.5 15710.7 16070 16009
15078.5 15830.4 16280 16211
15215.3 15974 16582 16511
15330.5 16095 16827 16763
15380 16147 16889 16826
15474.3 16246 17021 16950
15501.8 16274.8 16974 16937
15680.8 16462.8 17220 17239
15724.3 16508.5 17255 17296
15836.5 16626.2 17512 17563
15880.3 16672.3 17583 17614
15901.7 16694.7 17624 17666
15829.6 16619.1 17537 17512
15932.6 16727.1 17610 17605
16083.5 16885.6 17784 17811
15928 16722.3 17540 17504
15629.1 16408.5 17284 17124
15519.5 16293.4 17172 16960
15528.8 16303.2 17184 16895
15514.2 16287.9 17188 16856
15718.2 16502.1 17413 17095
15752.7 16538.2 17464 17105
15664.9 16446.1 17320 16902
15675.1 16456.8 17323 16872
15610.7 16389.1 17246 16800
15649.2 16429.6 17302 16895
15913.6 16707.2 17584 17173
16180.1 16987 17923 17524
16269.9 17081.2 18022 17618
16462.1 17283 18231 17834
16911.6 17754.9 18745 18431
16998.8 17846.5 18864 18551
17009.8 17858.1 18873 18514
17150.5 18005.8 19029 18703
17318.1 18181.7 19156 18857
17512.8 18386.2 19366 19075
17761.6 18647.4 19602 19328
17985.7 18882.6 19796 19558
18130.6 19034.8 19963 19692
17818.8 18707.4 19752 19389
17694.7 18577.1 19662 19264
17598.2 18475.8 19604 19163
17527.3 18401.4 19594 19117
17730.9 18615.1 19793 19326
17768.8 18654.8 19855 19373
17752.7 18638 19877 19356
10842.5 18942.3 20134 19645
18362 19277.7 20464 20016
18655.5 19585.8 20711 20319
18493.3 19415.5 20600 20166
18586.6 19513.5 20679 20231
18594.8 19522.1 20713 20253
18401.5 19319.1 20595 20057
18640.5 19570.1 20827 20323
18793.7 19730.9 20989 20486
19005.5 19953.3 21169 20697
19425.2 20394 21559 21174
19286 20248 21477 21021
AVERAGE ANNUAL TOTAL RETURNS AS OF 9/30/97
SHARE CLASS A B C
INCEPTION 10/13/87 6/8/92 8/1/97(cumulative)
NAV MOP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
1 year 8.25% 3.11% 7.45% 2.45% - -
- --------------------------------------------------------------------------------
5 years 5.39% 4.37% 4.61% 4.29% - -
- --------------------------------------------------------------------------------
Since inception 7.46% 6.94% 4.87% 4.73% 0.45% (0.55)%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Class C shares became available on 8/1/97.
(2) SEC yields reflect the portfolio's earning power net of expenses, expressed
as an annualized percentage of the maximum offering price per share.
A $10,000 investment in Class B shares made on 6/8/92 (inception), at net asset
value (NAV) would have grown to $12,726 on 8/31/97. The same investment after
deducting the applicable contingent deferred sales charge (CDSC) would have
grown to $12,632. The Lehman Brothers Intermediate Government Bond Index is an
unmanaged index that tracks the performance of U.S. government securities. The
Lipper Intermediate U.S. Government Bond Fund Average is the average return of
funds in the Lipper Intermediate U.S. Government Fund category. Unlike mutual
funds, indexes are not investments, do not incur fees or charges, and it is not
possible to invest in indexes.
Past performance cannot predict future results. Returns 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 the maximum
sales charge of 4.75% for Class A shares. The CDSC returns reflect the maximum
charge of 5% for one year, 2% for 5 years and 1% since inception for Class B
shares and 1% since inception for Class C shares.
Performance for different share classes will vary based on differences in sales
charges and fees associated with each class.
8
<PAGE>
Fund Facts: 8/31/97
DURATION
6.04 years
LAST 10 MONTHS' DISTRIBUTIONS (1)
Class A $0.552
- ----------------------------------
Class B $0.487
- ----------------------------------
Class C (2) $0.050
- ----------------------------------
SEC YIELD (3)
Class A 6.23%
- ----------------------------------
Class B 5.77%
- ----------------------------------
Class C 5.98%
- ----------------------------------
AVERAGE LIFE BREAKDOWN
(As a percentage of net assets)
0 - 5 years 23.05%
- ----------------------------------
5 - 10 years 49.54%
- ----------------------------------
10 - 15 years 6.12%
- ----------------------------------
15 - 20 years 16.64%
- ----------------------------------
20 - 25 years 4.65%
- ----------------------------------
SECTOR BREAKDOWN
(As a percentage of senior securities)
Treasury Securities - 30.20%
FNMAs - 30.17%
FHLMCs - 19.03%
WL/ABS - 9.36%
CMO - 5.69%
GNMAs - 5.55%
COLONIAL FEDERAL SECURITIES FUND
THE FUND INVESTS PRIMARILY IN MORTGAGE AND TREASURY SECURITIES AND IS DESIGNED
FOR THE INVESTOR WHO CAN ACCEPT THE RISKS ASSOCIATED WITH THE ADDITIONAL RETURN
POTENTIAL OF LONGER-TERM SECURITIES. THE FUND OFFERS THE HIGHEST RETURN
POTENTIAL OF COLONIAL'S THREE GOVERNMENT FUNDS.
In February, we expanded the Fund's investment flexibility to allow the limited
purchase of non-government securities. The move was made to help improve the
Fund's total return potential and increase diversification to help offset risk.
We maintained a conservative position, with only 9.36% of the portfolio invested
in this asset class as of August 31, 1997. Despite their relatively modest
weighting, these issues have added value and income benefits to shareholders.
We held high weightings in mortgage-backed securities throughout the year.
Mortgage-backed securities tend to perform well in stable rate environments and
outperformed Treasurys by a significant margin for most of the period.
The combination of increased investment flexibility, high weightings in
mortgage-backed securities and active duration management helped the Fund
perform in the top quartile of its Lipper peer group of similar funds for 1, 3,
5 and 10 years.
PERFORMANCE OF A $10,000 INVESTMENT FOR CLASS A SHARES 8/31/87 - 8/31/97
GEN
MOP NAV LEHMAN GOVT
9525 10000 10000 10000
9690.27 10173.5 10230 10145
10410 10929.1 10698 10730
9932.17 10427.5 10584 10503
10234.1 10744.5 10738 10678
10696.2 11229.6 10979 10960
10831.6 11371.8 11052 11020
11353.5 11919.6 11547 11502
11658.4 12239.8 11918 11868
12185.8 12793.5 12348 12278
11904.6 12498.2 12352 12165
12106.9 12710.7 12590 12368
12105.9 12709.6 12887 12523
12802.5 13440.9 13382 13077
13219.7 13878.9 13790 13490
13452.3 14123.2 10488 13736
13909.5 14603.1 14523 14188
14439 15159.1 15114 14691
14825.1 15564.4 15381 15008
15044.3 15794.5 15687 15258
15631.2 16410.8 16384 15919
15670.4 16451.9 16341 15885
16764.8 17600.9 17111 16764
17006.4 17854.5 17261 16933
17841.1 18730.8 17807 17735
17754.3 18639.7 17833 17604
17677.3 18558.8 17836 17532
16925.8 17769.9 17474 16875
17180.4 18037.2 17759 17083
16733.4 17567.9 17537 16760
17714.7 18598.1 18225 17550
18887.8 19829.7 19061 18536
19142.7 20097.3 19350 18789
19979.1 20975.5 19933 19571
19856.6 20846.8 20085 19476
19253.2 20213.4 19925 19088
19486.5 20458.3 20213 19275
20803.8 21841.3 21061 20417
20578.5 21604.7 21062 20221
20808.7 21846.4 21343 20418
21483 22554 21839 21001
AVERAGE ANNUAL TOTAL RETURNS AS OF 9/30/97
SHARE CLASS A B C
INCEPTION 3/30/84 6/8/92 8/1/97(CUMULATIVE)
NAV MOP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
1 year 9.84% 4.62% 9.03% 4.03% - -
- --------------------------------------------------------------------------------
5 years 6.70% 5.66% 5.91% 5.60% - -
- --------------------------------------------------------------------------------
10 years 9.02% 8.49% - - - -
- --------------------------------------------------------------------------------
Since inception 9.41% 9.01% 6.43% 6.29% 0.28% (0.71)%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1)The Fund's fiscal year-end changed from October 31 to August 31 in 1977.
(2)Class C shares became available on 8/1/97.
(3)SEC yields reflect the portfolio's earning power net of expenses, expressed
as an annualized percentage of the maximum offering price per share.
A $10,000 investment in Class B shares made on 6/8/92 (inception), at net asset
value (NAV) would have grown to $13,712 on 8/31/97. The same investment after
deducting the applicable contingent deferred sales charge (CDSC) would have
grown to $13,614. The Lehman Brothers Intermediate Government Bond Index is an
unmanaged index that tracks the performance of U.S. government securities. The
Lipper General U.S. Government Bond Fund Average is the average return of funds
in the Lipper General U.S. Government Fund category. Unlike mutual funds,
indexes are not investments, do not incur fees or charges, and it is not
possible to invest in indexes.
Past performance cannot predict future results. Returns 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 the maximum
sales charge of 4.75% for Class A shares. The CDSC returns reflect the maximum
charge of 5% for one year, 2% for 5 years and 1% since inception for Class B
shares and 1% since inception for Class C shares.
Performance for different share classes will vary based on differences in sales
charges and fees associated with each class.
9
<PAGE>
INVESTMENT PORTFOLIOS
August 31, 1997 (In Thousands)
COLONIAL SHORT DURATION U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS--73.7% PAR VALUE
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES -- 56.9%
MATURITIES
COUPON FROM /TO
- ----------------------
FEDERAL HOME LOAN MORTGAGE CORP.:
Adjustable Rate Mortgage: (a)
6.579% 2018 $ 162 $ 162
6.659% 2018 226 226
7.367% 2019 258 263
--------
651
--------
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
Fixed Rate Note,
6.240% 2000 400 400
--------
Fixed Rate Mortgage:
6.000% 2000 499 487
6.500% 2005 (b) 500 493
7.500% 2027 (b) 500 505
9.500% 2006 164 173
--------
1,658
--------
Adjustable Rate Mortgage: (a)
6.114% 2027 170 168
7.194% 2020 158 163
7.376% 2019 236 244
7.459% 2023 257 262
7.581% 2019 159 166
7.655% 2017 117 120
7.836% 2022 202 207
8.118% 2019 263 278
--------
1,608
--------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
Fixed Rate Mortgage,
9.000% 2009 238 255
--------
Adjustable Rate Mortgage: (a)
7.125% 2022 55 56
7.375% 2022 545 561
7.375% 2023 435 449
--------
1,066
--------
STUDENT LOAN MARKETING ASSOCIATION,
Weekly Floating Rate Note, (a)
5.420% 1999 1,000 999
--------
TOTAL GOVERNMENT
AGENCIES (COST OF $6,614) 6,637
--------
GOVERNMENT OBLIGATIONS--16.8%
U.S. TREASURY BONDS:
8.125% 02/15/19 130 151
8.875% 08/15/19 43 54
--------
205
--------
U.S. TREASURY NOTES:
5.750% 12/31/98 (c) $ 415 $ 414
5.875% 10/31/98 (c) 280 280
5.875% 01/31/99 265 265
6.125% 12/31/01 (c) 63 63
6.250% 06/30/02 130 130
6.500% 05/31/01 (c) 498 503
6.875% 05/15/06 96 99
--------
1,754
--------
TOTAL GOVERNMENT
OBLIGATIONS (COST OF $1,957) 1,959
--------
TOTAL INVESTMENTS (COST OF $8,571) (D) 8,596
--------
SHORT-TERM OBLIGATIONS - 34.1%
- --------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
6.500% (e) 9/02/97 1,662 1,662
Repurchase agreement with Greenwich
Capital Markets dated 08/29/97, due
09/02/97 at 5.530%, collateralized
by U.S. Treasury bonds & notes
with various maturities to 2025,
market value $2,366
(repurchase proceeds $2,317) 2,316 2,316
--------
3,978
--------
OTHER ASSETS & LIABILITIES, NET - (7.8)% (908)
--------
Net Assets - 100.0% $11,666
========
Notes To Investment Portfolio:
(a) Interest rates on variable rate securities change periodically. The rates
listed are as of August 31, 1997.
(b) 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.
(c) These securities, with a total market value of $1,260 are being used to
collateralize the delayed delivery purchases indicated in note (b) above.
(d) Cost for federal income tax purposes is approximately the same.
(e) Rate represents yield at date of purchase.
COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS--105.5% PAR VALUE
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES -- 77.5%
MATURITIES
COUPON FROM /TO
- ----------------------
FEDERAL HOME LOAN MORTGAGE CORP.:
7.500% 2007-2016 $ 1,394 $ 1,424
8.000% 2003-2016 14,595 15,057
8.500% 2007-2017 3,585 3,780
8.750% 2005-2013 1,456 1,535
9.000% 2001-2018 2,957 3,150
9.250% 2008-2019 5,108 5,458
9.500% 2005-2016 2,008 2,160
9.750% 2016 125 134
10.000% 2019 2,392 2,619
10.250% 2009-2016 1,589 1,734
10.500% 2009-2021 2,491 2,756
11.250% 2005-2016 2,912 3,268
12.000% 2014 1 1
---------- ----------
43,076
----------
See notes to financial statements.
10
<PAGE>
INVESTMENT PORTFOLIO CIUSGF CONT.
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
6.000% 2008-2026 (a) $ 121,702 $ 117,446
6.500% 2007-2026 (b) 244,828 239,913
7.000% 2007-2027 (b) 77,457 77,000
7.500% 2006-2027 (a)(b) 42,548 42,998
8.000% 2008-2009 2,689 2,782
8.250% 2008 804 826
8.500% 2003-2021 7,708 8,080
9.000% 2002-2022 21,528 22,780
10.000% 2001-2006 8,949 9,614
10.500% 2010-2016 4,229 4,683
11.000% 2015 930 1,055
---------- ----------
527,177
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
6.500% 2023-2024 7,444 7,231
7.000% 2022-2024 23,916 23,722
7.500% 2007 421 430
8.000% 2004-2025 10,675 10,953
8.500% 2017-2026 4,176 4,301
8.750% 2021-2022 2,254 2,445
8.850% 2018-2020 4,572 4,774
9.000% 2008-2025 24,884 26,338
9.250% 2016-2022 10,075 10,594
9.500% 2004-2025 120,146 130,161
10.000% 1998-2024 4,376 4,699
10.250% 2018 197 215
10.500% 1998-2020 10,535 11,866
10.625% 2010 86 97
11.000% 2009-2021 12,782 14,601
11.250% 2015 161 178
11.500% 2010-2021 18,701 21,651
11.750% 2013-2015 284 321
12.000% 2011-2019 18,573 21,812
12.250% 2013-2015 773 879
12.500% 2010-2015 12,351 14,598
12.750% 2013-2014 140 161
13.000% 2011-2016 3,969 4,733
13.500% 2010-2015 2,965 3,570
14.000% 2011-2014 155 187
14.500% 2012 58 71
15.000% 2011-2012 96 118
---------- ----------
320,706
----------
U.S. SMALL BUSINESS ADMINISTRATION:
7.600% 01/01/12 3,857 3,943
8.200% 10/01/11 3,834 4,040
8.250% 11/01/11 7,285 7,679
8.650% 11/01/14 5,412 5,813
8.850% 08/01/11 1,415 1,521
9.150% 07/01/11 3,329 3,609
9.450% 08/01/10 1,276 1,391
9.500% 04/01/10 2,464 2,701
9.650% 05/01/10 1,720 1,895
---------- ----------
32,592
----------
TOTAL GOVERNMENT
AGENCIES (COST OF $901,770) 923,551
----------
GOVERNMENT OBLIGATIONS--28.0%
U.S. TREASURY BONDS:
6.500% 11/15/26 (a) $ 17,595 $ 17,229
6.750% 08/15/26 11,100 11,216
8.125% 08/15/19 (a) 37,651 43,769
8.875% 02/15/19 5,560 6,928
---------- ----------
79,142
----------
U.S. Treasury Notes:
6.250% 10/31/01 8,942 8,953
6.250% 01/31/02 40,900 40,932
6.250% 06/30/02 42,000 42,000
6.500% 05/31/01 19,155 19,356
6.500% 08/31/01 10,007 10,112
6.625% 03/31/02 (a) 59,820 60,717
6.625% 04/30/02 8,487 8,617
6.875% 05/15/06 (a) 62,377 64,278
---------- ----------
254,965
----------
TOTAL GOVERNMENT
OBLIGATIONS (COST OF $331,687) 334,107
----------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (COST OF $1,233,457) 1,257,658
----------
OPTIONS - 0.0% CONTRACTS
- --------------------------------------------------------------------------------
October 1997 Treasury Bond Call,
Strike price $102.40, Expiration
09/04/97, (cost of $27) 100 2
October 1997 Treasury Bond Call,
Strike price $102.39, Expiration
09/04/97, (cost of $52) 106 2
---------- ----------
TOTAL OPTIONS (COST $79) 4
----------
TOTAL INVESTMENTS
(COST OF $1,233,536) (C) 1,257,662
----------
SHORT-TERM OBLIGATIONS - 3.8% PAR
- --------------------------------------------------------------------------------
Repurchase agreement with Greenwich
Capital Markets dated 08/29/97, due
09/02/97 at 5.530%, collateralized
by U.S. Treasury bonds & notes with
various maturities to 2025, market
value $46,609 (repurchase proceeds
$45,655) $ 45,627 45,627
----------
LIABILITY FOR CALL OPTIONS
OUTSTANDING - 0.0% (6)
----------
OTHER ASSETS & LIABILITIES, NET - (9.3)% (111,554)
----------
Net Assets - 100.0% $1,191,729
==========
NOTES TO INVESTMENT PORTFOLIO:
(a) These securities, or a portion thereof, with a total market value of
$139,285, are being used to collateralize the delayed delivery purchases
indicated in note (b) below and written call options outstanding.
(b) 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.
(c) Cost for federal income tax purposes is $1,235,120.
Written call options outstanding at August 31, 1997 are as follows:
Number Expiration Strike Market
Type of contracts month price Value
- --------------------------------------------------------------------------------
FNMA 7.50% 400 October 101.45 $ 6
See notes to financial statements.
11
<PAGE>
INVESTMENT PORTFOLIOS CONT.
August 31, 1997 (In Thousands)
COLONIAL FEDERAL SECURITIES FUND
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS--112.7% PAR VALUE
- --------------------------------------------------------------------------------
GOVERNMENT AGENCIES -- 75.1%
MATURITIES
COUPON FROM /TO
- ----------------------
FEDERAL HOME LOAN MORTGAGE CORP.:
6.500% 2012-2027 (a) $ 151,450 $ 147,646
7.000% 2012 (a) 15,000 15,070
7.500% 2010-2016 29,991 30,584
8.000% 2003-2016 3,941 4,103
8.500% 2007-2010 3,061 3,228
8.750% 2004-2010 1,137 1,198
9.000% 2001-2022 6,366 6,778
9.250% 2008-2016 5,015 5,358
9.500% 2004-2016 2,156 2,321
9.750% 2008-2016 832 893
10.000% 2019 2,392 2,619
10.250% 2009-2013 1,220 1,332
10.500 2017-2020 1,759 1,946
11.250% 2003-2016 1,910 2,144
11.500% 2015 153 174
12.000% 2013 64 73
----------
225,467
----------
COLLATERALIZED MORTGAGE OBLIGATIONS:
5.000% 2013 11,570 11,186
6.500% 2014 17,686 16,708
6.750% 2020-2021 26,878 26,381
8.500% 2021 1,280 1,310
8.750% 2020 11,422 11,807
----------
67,392
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
6.000% 2008-2024 76,578 73,495
6.500% 2003-2026 (a) 78,694 76,342
7.000% 2010-2027 (a) 142,058 140,904
7.500% 2006-2027 (a) 33,403 33,769
8.000% 2008-2019 3,270 3,383
8.250% 2008-2011 1,328 1,365
8.500% 2008-2017 5,484 5,748
9.000% 2002-2021 19,410 20,522
9.500% 2008-2018 1,716 1,843
10.500% 2004 7 8
----------
357,379
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
6.500% 2023-2025 3,203 3,093
7.500% 2006-2007 1,094 1,115
8.000% 2005-2008 83 86
9.000% 2008-2017 8,180 8,809
9.500% 2009-2019 23,830 25,822
10.000% 2000-2003 321 343
10.500% 2013-2021 13,968 15,757
11.000% 2010 3 4
11.500% 2013-2015 53 61
11.750% 2013-2015 171 193
12.000% 2012-2015 $ 799 $ 938
12.500% 2010-2014 5,697 6,740
13.000% 2011-2015 2,360 2,816
----------
65,777
----------
TOTAL GOVERNMENT
AGENCIES (COST OF $699,650) 716,015
----------
GOVERNMENT OBLIGATIONS--37.6%
U.S. TREASURY BONDS:
8.125% 08/15/19 (b) 22,725 26,418
8.750% 08/15/20 17,000 21,051
8.875% 02/15/19 (b) 6,117 7,622
10.375% 11/15/12 (b) 53,118 67,983
12.000% 08/15/13 (b) 91,051 129,164
12.750% 11/15/10 (b) 46,873 65,322
----------
317,560
----------
U.S. TREASURY NOTES:
6.250% 06/30/02 25,980 25,980
6.875% 05/15/06 13,874 14,297
----------
40,277
----------
TOTAL GOVERNMENT
OBLIGATIONS (COST OF $368,526) 357,837
----------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (COST OF $1,068,176) 1,073,852
----------
NON-AGENCY MORTGAGE-BACKED SECURITIES &
ASSET-BACKED SECURITIES --11.6%
- --------------------------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES -- 4.3%
CS First Boston Mortgage Securities Corp.,
7.500% 06/01/25 (c) 14,058 14,146
Countrywide Mortgage Trust,
7.600% 04/25/23 3,647 3,647
First Boston Mortgage Securities Corp.,
6.150% 09/28/13 2,000 1,952
Green Tree Financial Corp.,
7.320% 07/15/28 4,500 4,562
Indymac Manufactured Housing Contract,
6.970% 02/25/28 5,000 4,923
Norwest Asset Securities Corp.,
7.000% 04/25/12 2,591 2,546
PNC Mortgage Securities Corp.,
7.000% 05/25/27 2,633 2,613
Prudential Home Mortgage Securities,
6.456% 12/28/08 (c) 1,681 1,635
Structured Mortgage Asset Residential Trust,
8.375% 06/25/08 4,326 4,452
Tryon Mortgage Funding, Inc.,
7.500% 02/20/27 1,246 1,233
----------
41,709
----------
See notes to financial statements.
12
<PAGE>
INVESTMENT PORTFOLIO CFSF CONT.
ASSET-BACKED SECURITIES -- 7.3%
Cityscape Home Equity Loan Trust,
7.850% 04/25/18 $ 6,500 $ 6,723
Contimortage Home Equity Loan Trust:
7.310% 08/15/28 7,150 7,213
7.340% 04/15/28 4,000 4,043
7.420% 03/15/28 2,400 2,432
Delta Funding Home Equity Loan Trust,
7.240% 06/25/27 8,650 8,704
Empire Funding Home Loan Owner Trust,
7.510% 03/25/23 4,000 4,090
IMC Home Equity Loan Trust,
7.320% 08/20/28 7,000 7,050
Preferred Mortgage Asset Trust,
7.900% 05/25/12 (c) 4,230 4,344
Residential Asset Securitization Trust,
7.500% 11/25/11 1,171 1,186
Team Fleet Financing Corp.,
7.350% 05/15/03 (c) 2,900 2,959
The Money Store Home Equity Trust:
7.910% 05/15/24 9,225 9,582
8.525% 06/15/25 2,800 2,954
The Money Store Home Improvement Trust,
8.070% 05/15/23 5,875 5,994
UCFC Home Equity Loan Trust,
8.550% 01/10/20 1,800 1,887
----------
69,161
----------
NON-AGENCY MORTGAGE-BACKED SECURITIES
& ASSET-BACKED SECURITIES
(COST OF $109,943) 110,870
----------
OPTIONS - 0.0% CONTRACTS
- --------------------------------------------------------------------------------
October 1997 Treasury Bond Call,
Strike price $102.40, Expiration
09/04/97, (cost of $20) 75 1
October 1997 Treasury Bond Call,
Strike price $102.39, Expiration
09/04/97, (cost of $39) 80 1
----------
Total Options (cost $59) 2
----------
Total Investments
(cost of $1,178,178) (d) 1,184,724
----------
SHORT-TERM OBLIGATIONS - 1.8% PAR
- --------------------------------------------------------------------------------
Repurchase agreement with Greenwich
Capital Markets dated 08/29/97,
due 09/02/97 at 5.530%,
collateralized by U.S. Treasury
bonds & notes with various
maturities to 2025, market value
$17,167 (repurchase proceeds
$16,815) $ 16,805 16,805
LIABILITY FOR CALL OPTIONS OUTSTANDING - (0.0)% (5)
----------
OTHER ASSETS & LIABILITIES, NET - (26.1)% (248,656)
----------
Net Assets - 100.0% $ 952,868
==========
Notes To Investment Portfolio:
(a) These securities have been purchased on a delayed delivery basis whereby
the terms that are fixed are the purchase price, interest rate and the
settlement date. The exact quantity purchased may be slightly more or less
than the amount shown.
(b) These securities, or a portion thereof, with a total market value of
$292,759, are being used to collateralize the delayed delivery purchases
indicated in note (a) above and written call options outstanding.
(c) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At August 31,
1997, the value of these securities amounted to $23,084 or 2.4% of net
assets.
(d) Cost for federal income tax purposes is $1,178,795.
Written call options outstanding at August 31, 1997 are as follows:
Number Expiration Strike Market
Type of contracts month price Value
- --------------------------------------------------------------------------------
FNMA 7.50% 300 October 101.45 $ 5
NOTES TO FINANCIAL STATEMENTS
August 31, 1997
NOTE 1: ACCOUNTING POLICIES
ORGANIZATION: Colonial Short Duration U.S. Government Fund (CSDUSGF) (formerly
Colonial Adjustable Rate U.S. Government Fund), and Colonial Intermediate U.S.
Government Fund (CIUSGF) (formerly Colonial U.S. Government Fund), are each a
series of Colonial Trust II and Colonial Federal Securities Fund (CFSF) is a
series of Colonial Trust III (the series are collectively referred to as the
Funds and are diversified portfolios). Colonial Trust II and Colonial Trust III
are Massachusetts business trusts registered under the Investment Company Act of
1940, as amended, as open-end management investment companies. CSDUSGF's
investment objective is to seek as high a level of current income as is
consistent with very low volatility, by investing primarily in U.S. government
securities and maintaining a weighted average portfolio duration of three years
or less. CIUSGF's investment objective is to seek as high a level of current
income and total return as is consistent with prudent risk by investing
primarily in U.S. government securities. CFSF's investment objective is to seek
as high a level of current income and total return as is consistent with prudent
longer-term investing by investing primarily in U.S. government securities. The
Funds may issue an unlimited number of shares. The Funds each offer 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 contingent deferred sales charge on redemptions made
within one year after purchase and a continuing distribution fee. Effective
August 1, 1997, CIUSGF and CFSF began offering Class C shares.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. CFSF changed its fiscal year
end from October 31 to August 31. Information presented in this report for CFSF
is for the period November 1, 1996 through August 31, 1997.
Continued
13
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1997
<TABLE>
<CAPTION>
(In thousands except for per share amounts and footnotes)
CSDUSGF CIUSGF CFSF
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Investments at cost $ 8,571 $ 1,233,536 $ 1,178,178
Appreciation 25 24,126 6,546
------- ----------- -----------
Investments at value 8,596 1,257,662 1,184,724
Short-term obligations 3,978 45,627 16,805
------- ----------- -----------
12,574 1,303,289 1,201,529
Receivable for:
Investments sold $ 2 $ 45,922 $ 25,670
Interest 80 12,123 15,366
Fund shares sold 51 399 96
Receivable due from Adviser 12 -- --
Deferred organization expenses 1 -- --
Other 1 147 136 58,580 394 41,526
---------- ------- ---------- ----------- ---------- -----------
Total Assets 12,721 1,361,869 1,243,055
LIABILITIES
Options outstanding at value -- 6 5
(premiums received of--,
79 and 59, respectively)
Payable for:
Investments purchased 1,001 161,762 282,910
Distributions 49 5,766 4,969
Fund shares repurchased -- 2,490 2,216
Accrued:
Transfer Agent Out-of-Pocket fees -- 38 35
Deferred Trustees fees 1 17 14
Other 4 61 38
---------- ---------- ----------
Total Liabilities 1,055 170,140 290,187
------- ----------- -----------
Net Assets $ 11,666 $ 1,191,729 $ 952,868
============ =========== ===========
Net asset value & redemption price per share-Class A $ 9.92 $ 6.51 $ 10.52
------------ ----------- -----------
($6,858/691) ($730,791/112,219) ($888,479/84,481)
Maximum offering price per share-Class A $ 10.25(a) $ 6.83(a) $ 11.04(a)
------------ ----------- -----------
($9.92/0.9675) ($6.51/0.9525) ($10.52/0.9525)
Net asset value & offering price per share-Class B $ 9.92(b) $ 6.51(b) $ 10.52(b)
------------ ----------- -----------
($4,233/427) ($460,837/70,765) ($64,291/6,113)
Net asset value & offering price per share-Class C $ 9.92(b) $ 6.51(b) $ 10.52(b)
------------ ----------- -----------
($575/58) ($101/15) ($98/9)
COMPOSITION OF NET ASSETS
Capital paid in $ 11,737 $ 1,301,155 $ 1,116,193
Undistributed (overdistributed)
net investment income 20 (4,947) (2,808)
Accumulated net realized loss (116) (128,678) (167,117)
Net unrealized appreciation on:
Investments 25 24,126 6,546
Written Options -- 73 54
------------ ----------- -----------
$ 11,666 $ 1,191,729 $ 952,868
------------ ----------- -----------
</TABLE>
(a) On sales of $100,000 or more of CSDUSGF or $50,000 or more of CIUSGF or
CFSF 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.
14
<PAGE>
STATEMENT OF OPERATIONS
For the Period Ended August 31, 1997
<TABLE>
<CAPTION>
CSDUSGF CIUSGF CFSF (A)
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
INVESTMENT INCOME
<S> <C> <C> <C>
Interest $ 672 $ 98,580 $ 62,915
Mortgage dollar roll fee income -- 3,270 4,431
============================================================================================
672 101,850 67,346
EXPENSES
Management fee $ 60 $ 7,913 $ 5,535
Service fee 22 3,360 2,135
Distribution fee - Class B 26 3,882 451
Distribution fee - Class C 1 (b) (b)
Transfer agent 24 2,939 1,902
Bookkeeping fee 27 446 304
Trustees fee 10 85 50
Custodian fee 2 213 71
Audit fee 19 70 46
Legal fee 17 12 9
Registration fee 40 46 33
Reports to shareholders 6 23 19
Amortization of deferred
organization expenses 17 -- --
Other 3 109 19,098 87 10,642
274
---------- ---------- ----------- ---------- -----------
Fees and expenses waived or
borne by the Adviser (192) 82
---------- ------------
Net Investment Income 590 82,752 56,704
------------ ----------- -----------
NET REALIZED & UNREALIZED
GAIN (LOSS) ON PORTFOLIO
POSITIONS
Net realized gain (loss) on:
Investments and purchased options 6 (1,696) 5,130
Closed futures contracts -- -- 71
------------ ----------- -----------
Net realized gain (loss) 6 (1,696) 5,201
Change in net unrealized
appreciation (depreciation) during the period on:
Investments 97 28,379 (10,663)
Written Options -- 73 54
------------ ----------- -----------
Net unrealized appreciation (depreciation) 97 28,452 (10,609)
------------ ----------- -----------
Net gain (loss) 103 26,756 (5,408)
------------ ----------- -----------
Increase in Net Assets from Operations $ 693 $ 109,508 $ 51,296
============ =========== ===========
</TABLE>
(a) The Fund changed its fiscal year end from October 31 to August 31.
Information presented is for the period November 1, 1996 through August 31,
1997.
(b) Rounds to less than one.
See notes to financial statements.
15
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Period ended Year ended
(In thousands) Year ended August 31 Year ended August 31 August 31(a) October 31
- ------------------------------------------------------------------------------------------------------------------------------------
CSDUSGF CIUSGF CFSF
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1997 1996 1997(B) 1996 1997(B) 1996
Operations:
<S> <C> <C> <C> <C> <C> <C>
Net investment income $ 590 $ 713 $ 82,752 $ 105,035 $ 56,704 $ 77,830
Net realized gain (loss) 6 (46) (1,696) (23,368) 5,201 (19,569)
Net unrealized appreciation
(depreciation) 97 (10) 28,452 (23,219) (10,609) (15,864)
---------- --------- ------------ ------------ ------------ -----------
Net Increase from Operations 693 657 109,508 58,448 51,296 42,397
Distributions:
From net investment income--Class A (356) (445) (51,004) (63,093) (50,372) (71,821)
In excess of net investment income--Class A ---- ---- ---- (2,852) ---- ----
From paid in capital--Class A ---- ---- ---- ---- ---- (1,286)
From net investment income--Class B (198) (213) (27,936) (34,034) (3,364) (4,388)
In excess of net investment income--Class B ---- ---- ---- (1,539) ---- ----
From paid in capital--Class B ---- ---- ---- ---- ---- (79)
From net investment income--Class C (29) (25) (1) ---- (c) ----
---------- --------- ------------ ------------ ------------ -----------
110 (26) 30,567 (43,070) (2,440) (35,177)
---------- --------- ------------ ------------ ------------ -----------
Fund Share Transactions:
Receipts for shares sold--Class A 5,004 3,597 126,935 112,816 41,502 80,869
Value of distributions reinvested--Class A 321 389 30,856 39,474 25,121 35,050
Cost of shares repurchased--Class A (4,669) (7,769) (366,834) (368,789) (201,762) (258,356)
---------- --------- ------------ ------------ ------------ -----------
656 (3,783) (209,043) (216,499) (135,139) (142,437)
---------- --------- ------------ ------------ ------------ -----------
Receipts for shares sold--Class B 1,788 3,138 43,099 28,322 19,284 14,215
Value of distributions reinvested--Class B 117 122 15,509 19,710 1,767 2,316
Cost of shares repurchased--Class B (1,715) (3,214) (181,019) (161,195) (29,862) (19,854)
---------- --------- ------------ ------------ ------------ -----------
190 46 (122,411) (113,163) (8,811) (3,323)
---------- --------- ------------ ------------ ------------ -----------
Receipts for shares sold--Class C 320 313 102 ---- 100 ----
Value of distributions reinvested--Class C 26 23 ---- ---- ---- ----
Cost of shares repurchased--Class C (237) (259) ---- ---- ---- ----
---------- --------- ------------ ------------ ------------ -----------
Net Increase (Decrease) from Fund 109 77 102 ---- 100 ----
---------- --------- ------------ ------------ ------------ -----------
Share Transactions 955 (3,660) (331,352) (329,662) (143,850) (145,760)
---------- --------- ------------ ------------ ------------ -----------
Total Increase (Decrease) 1,065 (3,686) (300,785) (372,732) (146,290) (180,937)
NET ASSETS
Beginning of period 10,601 14,287 1,492,514 1,865,246 1,099,158 1,280,095
---------- --------- ------------ ------------ ------------ -----------
End of period $ 11,666 $ 10,601 $ 1,191,729 $ 1,492,514 $ 952,868 $1,099,158
---------- --------- ------------ ------------ ------------ -----------
Net of undistributed (overdistributed)
net investment income $ 20 $ 8 ($4,947) ($5,068) ($2,808) ($6,119)
---------- --------- ------------ ------------ ------------ -----------
NUMBER OF FUND SHARES
Sold-- Class A 506 365 19,575 17,280 3,952 7,582
Issued for distributions
reinvested-- Class A 33 40 4,766 6,011 2,402 3,329
Repurchased-- Class A (473) (788) (56,629) (56,357) (19,317) (24,368)
---------- --------- ------------ ------------ ------------ -----------
66 (383) (32,288) (33,066) (12,963) (13,457)
---------- --------- ------------ ------------ ------------ -----------
Sold-- Class B 181 318 6,653 4,313 1,829 1,342
Issued for distributions
reinvested-- Class B 12 13 2,396 3,001 169 221
Repurchased-- Class B (174) (326) (27,955) (24,628) (2,857) (1,883)
---------- --------- ------------ ------------ ------------ -----------
19 5 (18,906) (17,314) (859) (320)
---------- --------- ------------ ------------ ------------ -----------
Sold - Class C 32 32 15 ---- 9 ----
Issued for distributions
reinvested -- Class C 3 2 ---- ---- ---- ----
Repurchased -- Class C (24) (26) ---- ---- ---- ----
---------- --------- ------------ ------------ ------------ -----------
11 8 15 ---- 9 ----
---------- --------- ------------ ------------ ------------ -----------
</TABLE>
(a) The Fund changed its fiscal year end from October 31 to August 31.
Information presented is for the period November 1, 1996 through August 31,
1997.
(b) Class C shares were initially offered on August 1, 1997.
(c) Rounds to less than one.
See notes to financial statements.
16
<PAGE>
STATEMENT OF CASH FLOWS CFSF
For the Period Ended August 31, 1997 (a)
(In thousands)
NET CHANGE IN CASH
Cash flows from operating activities:
Interest received $ 60,355
Mortgage dollar roll fee income received 4,331
Operating expenses paid (10,622)
------------
Net cash provided by
operating activities $ 54,064
-----------
Cash flows from investing activities:
Purchases of securities, options and
short-term obligations (3,594,251)
Proceeds from sales of securities,
options and short-term obligations 3,738,660
Futures contracts 71
------------
Net cash provided by
investing activities 144,480
-----------
NET CASH PROVIDED BY OPERATING 198,544
AND INVESTING ACTIVITIES
Cash flows from financing activities:
Proceeds from Fund shares sold 61,019
Cost of Fund shares repurchased (231,593)
Cash dividends paid (27,963)
------------
Net cash used by financing activities (198,537)
-----------
Net increase in cash 7
Cash - beginning of period (7)
-----------
Cash - end of period $ 0
-----------
RECONCILIATION OF NET INCREASE IN NET ASSETS TO
NET CASH PROVIDED BY OPERATING
AND INVESTING ACTIVITIES
Net increase in net
assets resulting from operations $ 51,296
Decrease in investments $ 191,620
Increase in interest and fees receivable (1,936)
Increase in receivable from investment
securities sold (24,437)
Increase in payable for
investment securities purchased (18,019)
Decrease in other assets 48
Increase in accrued expenses
and liabilities (28)
------------
Total 147,248
-----------
Net cash provided by operating
and investing activities $ 198,544
-----------
(a) The Fund changed its fiscal year end from October 31 to August 31.
Information presented is for the period November 1, 1996 through August 31,
1997.
NOTES TO FINANCIAL STATEMENTS CONT.
August 31, 1997
Note 1 continued
The following is a summary of significant accounting policies that
are consistently followed in the preparation of the Funds' financial statements.
SECURITY VALUATION AND TRANSACTIONS: The Funds' are valued by a pricing service
based upon market transactions for normal, institutional-size trading units of
similar securities. When management deems it appropriate, an over the counter or
exchange bid quotation is used.
Options are valued at the last reported sale price, or in the absence of a sale,
the mean between the last quoted bid and asking price.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
Portfolio positions 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 Funds may enter into mortgage dollar roll transactions. A mortgage dollar
roll transaction involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase substantially similar securities at an
agreed upon price and date. During the period between the sale and repurchase,
the Fund will not be entitled to accrue interest and receive principal payments
on the securities sold. Mortgage dollar roll transactions involve the risk that
the market value of the securities sold by the Fund may decline below the
repurchase price of those securities. In the event the buyer of the securities
under a mortgage dollar roll transaction files for bankruptcy or becomes
insolvent, the Fund's use of proceeds of the transaction may be restricted
pending a determination by or with respect to the other party.
The Funds may trade securities on other than normal settlement terms. This may
increase the risk if the other party to the transaction fails to deliver and
causes the Fund to invest at less advantageous prices.
The Funds maintain U.S. government securities or other liquid high grade debt
obligations as collateral with respect to mortgage dollar roll transactions and
securities traded on other than normal settlement terms.
DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS:
All income, expenses (other than the Class A, Class B and Class C service fees
and Class B and Class C distribution fees) and realized and unrealized gains
(losses), are allocated to each class proportionately on a daily basis for
purposes of determining the net asset value of each class.
Class A, Class B and Class C per share data and ratios are calculated by
adjusting the expense and net investment income ratios for each Fund for the
entire period by the service fees for Class A, Class B and Class C shares and
the distribution fees for Class B and Class C shares only.
FEDERAL INCOME TAXES: Consistent with each Fund's policy to qualify as a
regulated investment company and to distribute all of its taxable income, no
federal income tax has been accrued.
See notes to financial statements.
17
<PAGE>
FINANCIAL HIGHLIGHTS CSDUSGF
<TABLE>
Selected data for a share of each class outstanding throughout each period are as follows:
Year Ended August 31
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996
Class A Class B Class C Class A Class B Class C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- Beginning of period $ 9.820 $ 9.820 $ 9.820 $ 9.850 $ 9.850 $ 9.850
----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.561 0.497 0.542 0.568 0.504 0.549
Net realized and unrealized gain (loss) 0.090 0.090 0.090 (0.032) (0.032) (0.032)
----------- ----------- ----------- ----------- ----------- -----------
Total from Investment Operations 0.651 0.587 0.632 0.536 0.472 0.517
----------- ----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.551) (0.487) (0.532) (0.566) (0.502) (0.547)
In excess of net investment income -- -- -- -- -- --
From net realized gains -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total Distributions Declared to Shareholders (0.551) (0.487) (0.532) (0.566) (0.502) (0.547)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value--End of period $ 9.920 $ 9.920 $ 9.920 $ 9.820 $ 9.820 $ 9.820
----------- ----------- ----------- ----------- ----------- -----------
Total return (e) (f) 6.79% 6.11% 6.59% 5.57% 4.89% 5.36%
=========== =========== =========== =========== =========== ===========
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50%(h) 1.15%(h) 0.70%(h) 0.50%(h) 1.15%(h) 0.70%(h)
----------- ----------- ----------- ----------- ----------- -----------
Net investment income 5.64%(h) 4.99%(h) 5.44%(h) 5.99%(h) 5.34%(h) 5.79%(h)
----------- ----------- ----------- ----------- ----------- -----------
Fees and expenses waived or borne by the
Adviser 1.76%(h) 1.76%(h) 1.76%(h) 1.48%(h) 1.48%(h) 1.48%(h)
----------- ----------- ----------- ----------- ----------- -----------
Portfolio turnover 73% 73% 73% 51% 51% 51%
----------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period (000) $ 6,858 $ 4,233 $ 575 $ 6,136 $ 4,004 $ 461
----------- ----------- ----------- ----------- ----------- -----------
(a) Net of fees and expenses waived or borne by the
Adviser which amounted to: $ 0.169 $ 0.169 $ 0.169 $ 0.136 $ 0.136 $ 0.136
</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) Class C shares were initially offered on January 4, 1995. 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.
(g) Not annualized.
(h) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(i) Annualized.
State Tax Information for the Year Ended August 31, 1997 (unaudited):
An average of 28% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
Approximately 30% of the Fund's distributions (26% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
NOTES TO FINANCIAL STATEMENTS CONT.
August 31, 1997
STATEMENT OF CASH FLOWS: CFSF's information on financial transactions which have
been settled through the receipt or disbursement of cash is presented in CFSF's
Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows is
the amount included in the Fund's Statement of Assets and Liabilities and
represents the cash available at the custodian bank and does not include any
short-term investments as of August 31, 1997.
INTEREST INCOME, FEE INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is
recorded on the accrual basis. Fee income attributable to mortgage dollar roll
transactions is recorded on the accrual basis over the term of the transaction.
Original issue discount is accreted to interest income over the life of a
security with a corresponding increase in the cost basis. For CSDUSGF market
discount is not accreted and premium is amortized against interest income with a
corresponding increase in the cost basis. For CIUSGF and CFSF premium and market
discount are not amortized or accreted.
DISTRIBUTIONS TO SHAREHOLDERS: Each Fund declares and records distributions
daily and pays monthly.
The amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for mortgage backed securities for book and tax purposes and expired
capital loss carryforwards. Permanent book and tax basis differences will result
in reclassifications to capital accounts.
OTHER: The Funds' custodian takes possession through the federal book entry
system of securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying assets
remains sufficient to protect the Fund. The Fund may experience costs and delays
in liquidating the collateral if the issuer defaults or enters bankruptcy.
18
<PAGE>
FINANCIAL HIGHLIGHTS CONT. CSDUSGF
<TABLE>
Selected data for a share of each class outstanding throughout each period are as follows:
Year Ended August 31
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1995 1994 1993(b)
Class A Class B Class C(d) Class A Class B Class A Class B(c)
------- ------- ---------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value -- Beginning of period $ 9.670 $ 9.670 $ 9.550 $ 9.950 $ 9.950 $10.000 $ 9.940
-------- -------- ----------- -------- --------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.514 0.451 0.334 0.473 0.409 0.434 0.237
Net realized and unrealized gain (loss) 0.152 0.152 0.280 (0.356) (0.356) 0.061) (0.003)
-------- -------- ----------- -------- --------- ----------- -----------
Total from Investment Operations 0.666 0.603 0.614 0.117 0.053 0.373 0.234
-------- -------- ----------- -------- --------- ----------- -----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.486) (0.423) (0.314) (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 (0.486) (0.423) (0.314) (0.397) (0.333) (0.423) (0.224)
-------- -------- ----------- -------- --------- ----------- -----------
Net asset value--End of period $ 9.850 $ 9.850 $ 9.850 $ 9.670 $ 9.670 $ 9.950 $ 9.950
-------- -------- ----------- -------- --------- ----------- -----------
Total return (e) (f) 7.08% 6.39% 6.50%(g) 1.20% 0.55% 3.82%(g) 2.38%(g)
======== ======== =========== ======== ========= =========== ===========
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50% 1.15% 0.70%(i) 0.50% 1.15% 0.50%(i) 1.15%(i)
-------- -------- ----------- -------- --------- ----------- -----------
Net investment income 5.50% 4.85% 5.30%(i) 4.84% 4.19% 4.70%(i) 4.05%(i)
-------- -------- ----------- -------- --------- ----------- -----------
Fees and expenses waived or borne by the
Adviser 1.14% 1.14% 1.14% 1.16% 1.16% 1.68%(i) 1.68%(i)
-------- -------- ----------- -------- --------- ----------- -----------
Portfolio turnover 36% 36% 36% 69% 69% 25%(i) 25%(i)
-------- -------- ----------- -------- --------- ----------- -----------
Net assets at end of period (000) $ 9,934 $ 3,968 $ 385 $16,168 $ 4,176 $ 7,866 $ 1,675
-------- -------- ----------- -------- --------- ----------- -----------
(a) Net of fees and expenses waived or
borne by the Adviser which amounted to: $ 0.107 $ 0.107 $ 0.107 $ 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) Class C shares were initially offered on January 4, 1995. 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.
(g) Not annualized.
(h) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(i) Annualized.
State Tax Information for the Year Ended August 31, 1997 (unaudited):
An average of 28% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
Approximately 30% of the Fund's distributions (26% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
NOTES CONT.
NOTE 2: FEES AND COMPENSATION PAID TO AFFILIATES
MANAGEMENT FEE Colonial Management Associates, Inc. (the Adviser) is the
investment Adviser of each Fund and furnishes accounting and other services and
office facilities for a monthly fee based on each Fund's average net assets as
follows:
CSDUSGF
Flat fee rate of 0.55%
CIUSGF
Average Net Assets Annual Fee Rate
- ---------------------------------------------
First $1 billion 0.60%
Next $500 million 0.55%
Over $1.5 billion 0.50%
CFSF
Average Net Assets Annual Fee Rate
- ---------------------------------------------
First $1 billion 0.65%
Next $1 billion 0.60%
Next $1 billion 0.50%
Over $3 billion 0.40%
BOOKKEEPING FEE: For each Fund the Adviser provides bookkeeping
and pricing services for $27,000 per year plus a percentage of the Fund's
average net assets as follows:
Average Net Assets Annual Fee Rate
- ---------------------------------------------
First $50 million No charge
Next $950 million 0.035%
Next $1 billion 0.025%
Next $1 billion 0.015%
TRANSFER AGENT: 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 each Fund's average net assets and receives
reimbursement for certain out of pocket expenses.
19
<PAGE>
FINANCIAL HIGHLIGHTS CIUSGF
<TABLE>
Selected data for a share of each class outstanding throughout each period are as follows:
<CAPTION>
Year Ended August 31
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996
Class A Class B Class C(a) Class A Class B
------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value -- Beginning of period $ 6.370 $ 6.370 $ 6.590 $ 6.550 $ 6.550
------------ ------------ --------------- ------------ ------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.393 0.344 0.032 0.390 0.341
Net realized and unrealized gain (loss) 0.145 0.145 (0.082) (0.161) (0.161)
------------ ------------ --------------- ------------ ------------
Total from Investment Operations 0.538 0.489 (0.050) 0.229 0.180
------------ ------------ --------------- ------------ ------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.398) (0.349) (0.030) (0.391) (0.344)
In excess of net investment income -- -- -- (0.018) (0.016)
From capital paid in -- -- -- -- --
------------ ------------ --------------- ------------ ------------
Total Distributions Declared to Shareholders (0.398) (0.349) (0.030) (0.409) (0.360)
------------ ------------ --------------- ------------ ------------
Net asset value--End of period $ 6.510 $ 6.510 $ 6.510 $ 6.370 $ 6.370
------------ ------------ --------------- ------------ ------------
Total return (b) 8.64% 7.83% (0.77)%(c) 3.51% 2.74%
============ ============ =============== ============ ============
RATIOS TO AVERAGE NET ASSETS
Expenses 1.13%(d) 1.88%(d) 1.78%(d)(e) 1.11%(d) 1.86%(d)
------------ ------------ --------------- ------------ ------------
Net investment income 6.43%(d) 5.68%(d) 5.85%(d)(e) 6.45%(d) 5.70%(d)
------------ ------------ --------------- ------------ ------------
Portfolio turnover 61% 61% 61% 123% 123%
------------ ------------ --------------- ------------ ------------
Net assets at end of period (in millions) $ 731 $ 461 $ (f) $ 921 $ 572
------------ ------------ --------------- ------------ ------------
</TABLE>
(a) Class C shares were initially offered on August 1, 1997. Per share amounts
reflect activity from that date.
(b) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(c) Not annualized.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(e) Annualized.
(f) Rounds to less than one million.
State Tax Information for the Year Ended August 31, 1997 (unaudited):
An average of 20% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
Approximately 24% of the Fund's distributions (18% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
NOTES TO FINANCIAL STATEMENTS CONT.
August 31, 1997
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES:
Liberty Financial Investments, Inc. (formerly Colonial Investment Services,
Inc.) (the Distributor), an affiliate of the Adviser, is each Fund's principal
underwriter. During the period ended August 31, 1997, each Fund has been advised
that the Distributor retained net underwriting discounts on CSDUSGF, CIUSGF, and
CFSF of $2,332, $29,752, and $19,594, respectively, on sales of the Funds' Class
A shares and received contingent deferred sales charges (CDSC) of $12,628,
$1,865,207, and $234,459, respectively, on Class B share redemptions.
Each Fund has adopted a 12b-1 plan which requires the payment of a service fee
to the Distributor. CIUSGF and CFSF pay a service fee equal to 0.25% annually of
their net assets as of the 20th of each month. CSDUSGF pays a service fee equal
to 0.20% annually of Class A and Class B net assets and 0.25% annually of Class
C net assets as of the 20th of each month. The plan also requires the payment of
a distribution fee to the Distributor. CSDUSGF pays a distribution fee equal to
0.65% annually of the average net assets of Class B shares and 0.15% annually of
the average net assets of Class C shares. CIUSGF and CFSF each pay a
distribution fee equal to 0.75% annually of the average net assets for Class B
and 0.60% annually of the average net assets of Class C shares.
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: Until further notice, the Adviser has agreed for CSDUSGF, 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 Funds pay no compensation to their officers, all of whom are
employees of the Adviser.
20
<PAGE>
FINANCIAL HIGHLIGHTS CONT. CIUSGF
<TABLE>
Selected data for a share of each class outstanding throughout each period are as follows:
<CAPTION>
Year Ended August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- Beginning of period $ 6.420 $ 6.420 $ 6.880 $ 6.880 $ 6.980 $ 6.980
--------- --------- ---------- ---------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.447 0.399 0.415 0.365 0.541 0.490
Net realized and unrealized gain (loss) 0.100 0.100 (0.452) (0.452) (0.130) (0.130)
--------- --------- ---------- ---------- --------- ---------
Total from Investment Operations 0.547 0.499 (0.037) (0.087) 0.411 0.360
--------- --------- ---------- ---------- --------- ---------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.417) (0.369) (0.400) (0.352) (0.511) (0.460)
In excess of net investment income -- -- -- -- -- --
From capital paid in -- -- (0.023) (0.021) -- --
--------- --------- ---------- ---------- --------- ---------
Total Distributions Declared to Shareholders (0.417) (0.369) (0.423) (0.373) (0.511) (0.460)
--------- --------- ---------- ---------- --------- ---------
Net asset value--End of period $ 6.550 $ 6.550 $ 6.420 $ 6.420 $ 6.880 $ 6.880
--------- --------- ---------- ---------- --------- ---------
Total return (b) 8.88% 8.07% (0.53)% (1.28)% 6.15% 5.36%
========= ========= ========== ========== ========= =========
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11% 1.86% 1.11% 1.86% 1.10% 1.85%
--------- --------- ---------- ---------- --------- ---------
Net investment income 7.51% 6.76% 8.14% 7.39% 7.85% 7.10%
--------- --------- ---------- ---------- --------- ---------
Portfolio turnover 140% 140% 291% 291% 162% 162%
--------- --------- ---------- ---------- --------- ---------
Net assets at end of period (in millions) $ 1,164 $ 701 $ 758 $ 836 $ 1,202 $ 978
--------- --------- ---------- ---------- --------- ---------
</TABLE>
(a) Class C shares were initially offered on August 1, 1997. Per share amounts
reflect activity from that date.
(b) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(c) Not annualized.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(e) Annualized.
(f) Rounds to less than one million.
State Tax Information for the Year Ended August 31, 1997 (unaudited):
An average of 20% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
Approximately 24% of the Fund's distributions (18% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
NOTES CONT.
NOTE 3: PORTFOLIO INFORMATION
INVESTMENT ACTIVITY: For the period ended August 31, 1997, purchases and sales
of investments, other than short-term obligations and mortgage dollar roll
transactions, were as follows.
Purchases Sales
CSDUSGF $6,090,085 $6,792,319
CIUSGF $794,783,403 $1,021,810,263
CFSF $766,926,817 $853,433,649
Transactions in written call options were as follows:
CIUSGF CFSF
Par Value Par Value
Covered by Premiums Covered by Premiums
Written Options Received Written Options Received
- --------------------------------------------------------------------------------
Outstanding at
beginning of period - - - -
Written 40,000,000 78,906 30,000,000 59,180
Closed - - - -
Expirations - - - -
Exercises - - - -
---------- ------- ---------- -------
Outstanding at end
of period 40,000,000 $78,906 30,000,000 $59,180
---------- ------- ---------- -------
Unrealized appreciation (depreciation) at August 31, 1997 for federal income tax
purposes was as follows:
CSDUSGF CIUSGF CFSF
Gross unrealized
appreciation $ 45,783 $ 26,277,020 $ 22,231,108
Gross unrealized
depreciation (21,261) (3,734,685) (16,302,139)
---------- -------------- --------------
Net unrealized
appreciation $ 24,522 $ 22,542,335 $ 5,928,969
---------- -------------- --------------
Information on mortgage dollar roll transactions that are other than normal
settlement is as follows.
CIUSGF CFSF
Maximum outstanding
during the period $ 265,193,867 $ 433,838,751
Average amount outstanding
during the period $ 39,861,333 $ 84,493,147
Amount outstanding
at August 31, 1997 $ 116,579,531 $ 126,738,281
21
<PAGE>
FINANCIAL HIGHLIGHTS CFSF
<TABLE>
Selected data for a share of each class outstanding throughout each period are as follows:
<CAPTION>
Period Ended August 31(a) Year Ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
Class A Class B Class C(b) Class A Class B
------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value -- Beginning of period $ 10.530 $ 10.530 $ 10.710 $ 10.830 $ 10.830
---------------- --------------- --------------- ------------ ------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.580 0.515 0.058 0.696 0.617
Net realized and unrealized gain (loss) (0.038) (0.038) (0.198) (0.300) (0.300)
---------------- --------------- --------------- ------------ ------------
Total from Investment Operations 0.542 0.477 (0.140) 0.396 0.317
---------------- --------------- --------------- ------------ ------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.552) (0.487) (0.050) (0.684) (0.606)
---------------- --------------- --------------- ------------ ------------
From net realized gain -- -- -- -- --
From capital paid in -- -- -- (0.012) (0.011)
Total Distributions Declared to Shareholders (0.552) (0.487) (0.050) (0.696) (0.617)
---------------- --------------- --------------- ------------ ------------
Net asset value--End of period $ 10.520 $ 10.520 $ 10.520 $ 10.530 $ 10.530
---------------- --------------- --------------- ------------ ------------
Total return (e) 5.31%(f) 4.66%(f) (1.31%)(f) 3.88% 3.11%
================ =============== =============== ============ ============
RATIOS TO AVERAGE NET ASSETS
Expenses 1.19%(g)(h) 1.94%(g)(h) 1.82%(g)(h) 1.18%(h) 1.93%(h)
---------------- --------------- ---------------- ------------ ------------
Net investment income 6.71%(g)(h) 5.96%(g)(h) 6.55%(g)(h) 6.62%(h) 5.87%(h)
---------------- --------------- ---------------- ------------ ------------
Portfolio turnover 79%(f) 79%(f) 79%(f) 125% 125%
---------------- --------------- ---------------- ------------ ------------
Net assets at end of period (in millions) $ 888 $ 64 (i) $ 1,026 $ 73
---------------- --------------- ---------------- ------------ ------------
</TABLE>
(a) The Fund changed its fiscal year end from October 31 to August 31.
Information presented is for the period November 1, 1996 through August 31,
1997.
(b) Class C shares were initially offered on August 1, 1997. Per share amounts
reflect activity from that date.
(c) Class B shares were initially offered on June 8, 1992. Per share amounts
reflect activity from that date.
(d) Because of differences between book and tax basis accounting, approximately
$0.247 and $0.095, respectively, were a return of capital for federal
income tax purposes.
(e) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(f) Not annualized.
(g) Annualized.
(h) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(i) Rounds to less than one million
State Tax Information for the Period Ended August 31, 1997 (unaudited):
An average of 31% of the Fund's period investments as of the end of each quarter
were in direct obligations of the U.S. Treasury.
Approximately 49% of the Fund's distributions (38% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
NOTES TO FINANCIAL STATEMENTS CONT.
August 31, 1997
The average amount outstanding during the period was calculated by summing the
borrowings at the end of each day and dividing the sum by the number of days in
the period ended August 31, 1997.
CAPITAL LOSS CARRYFORWARDS: At August 31, 1997, capital loss carryforwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
Year of Capital loss
expiration carryforward
===============================================================
CSDUSGF 2003 $ 78,000
2004 38,000
----------------
$ 116,000
----------------
Year of Capital loss
expiration carryforward
===============================================================
CIUSGF 1998 $ 706,000
1999 2,970,000
2000 5,878,000
2001 29,729,000
2002 7,249,000
2003 67,291,000
2004 32,580,000
2005 18,973,000
----------------
$165,376,000
----------------
Of the CIUSGF loss carryforwards expiring in 1998, 1999, 2000, 2001, and 2002,
$130,000, $1,184,000, none, none, and none, respectively, were acquired in the
merger with VIP Federal Securities Fund and 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 for use in
offsetting any future realized gains may be limited in a given year.
Year of Capital loss
expiration carryforward
===============================================================
CFSF 1998 $ 22,515,000
1999 36,282,000
2000 595,000
2002 84,302,000
2004 21,929,000
----------------
$165,623,000
----------------
22
<PAGE>
FINANCIAL HIGHLIGHTS CONT. CFSF
<TABLE>
Selected data for a share of each class outstanding throughout each period are as follows:
<CAPTION>
Year Ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
Class A Class B Class A Class B Class A Class B Class A Class B(c)
------- ------- ------- ------- ------- ------- ------- ----------
<S> <C>
Net asset value -- Beginning of period $ 9.950 $ 9.950 $11.460 $11.460 $10.750 $10.750 $10.800 $10.730
-------- -------- ---------- --------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.710 0.633 0.821 0.741 0.819 0.737 0.796 0.286
Net realized and unrealized gain (loss) 0.907 0.907 (1.560) (1.560) 0.739 0.739 0.157 0.095
-------- -------- ---------- --------- -------- -------- -------- --------
Total from Investment Operations 1.617 1.540 (0.739) (0.819) 1.558 1.476 0.953 0.381
-------- -------- ---------- --------- -------- -------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.709) (0.632) (0.771) (0.691) (0.781) 0.706) (0.796) (0.286)
From net realized gain (0.028) (0.028 -- -- (0.067) 0.060) -- --
From capital paid in -- -- -- -- -- -- (0.207)(d) (0.075)d)
-------- -------- ---------- --------- -------- -------- -------- --------
Total Distributions Declared to Shareholders (0.737) (0.660) (0.771) (0.691) (0.848) 0.766) (1.003) (0.361)
-------- -------- ---------- --------- -------- -------- -------- --------
Net asset value--End of period $10.830 $10.830 $ 9.950 $ 9.950 $11.460 $11.460 $10.750 $10.750
-------- -------- ---------- --------- -------- -------- -------- --------
Total return (e) 16.82% 15.96% (6.57%) (7.28%) 14.94% 14.11% 9.15% 3.47%(f)
======== ======== ========== ========= ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 1.92% 1.16% 1.91% 1.17% 1.92% 1.24% 1.99%(g)
-------- -------- ---------- --------- -------- -------- -------- --------
Net investment income 7.04% 6.29% 7.80% 7.05% 7.37% 6.62% 7.36% 6.61%(g)
-------- -------- ---------- --------- -------- -------- -------- --------
Portfolio turnover 171% 171% 121% 121% 252% 252% 18% 18%
-------- -------- ---------- --------- -------- -------- -------- --------
Net assets at end of period (in millions) $ 1,201 $ 79 $ 1,278 $ 70 $ 1,736 $ 68 $ 1,809 $ 28
-------- -------- ---------- --------- -------- -------- -------- --------
</TABLE>
(a) The Fund changed its fiscal year end from October 31 to August 31.
Information presented is for the period November 1, 1996 through August 31,
1997.
(b) Class C shares were initially offered on August 1, 1997. Per share amounts
reflect activity from that date.
(c) Class B shares were initially offered on June 8, 1992. Per share amounts
reflect activity from that date.
(d) Because of differences between book and tax basis accounting, approximately
$0.247 and $0.095, respectively, were a return of capital for federal
income tax purposes.
(e) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(f) Not annualized.
(g) Annualized.
(h) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(i) Rounds to less than one million
State Tax Information for the Period Ended August 31, 1997 (unaudited):
An average of 31% of the Fund's period investments as of the end of each quarter
were in direct obligations of the U.S. Treasury.
Approximately 49% of the Fund's distributions (38% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
NOTES 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.
OTHER: CIUSGF and CFSF may purchase or sell futures contracts and purchase and
write options on futures and securities. The Funds will use these instruments to
hedge against the effects of changes in the value of the portfolio securities
due to anticipated changes in interest rates and/or market conditions and not
for trading purposes. CIUSGF may also invest in these instruments for duration
management. The use of futures contracts and options involves certain risks
which include (1) the imperfect correlation between the price movement of the
instruments and the underlying securities, (2) inability to close out a position
due to different trading hours, or the absence of a liquid market for either the
instrument or the underlying securities or (3) an inaccurate prediction by the
Adviser of the future direction of interest rates. Any of these risks may
involve amounts exceeding the variation margin or option premium recorded in the
Funds' Statement of Assets and Liabilities at any given time.
NOTE 4: LINE OF CREDIT
CSDUSGF may borrow up to 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, 1997.
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF COLONIAL TRUST II AND THE SHAREHOLDERS OF COLONIAL SHORT
DURATION U.S. GOVERNMENT FUND AND COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND AND
THE TRUSTEES OF COLONIAL TRUST III AND THE SHAREHOLDERS OF COLONIAL FEDERAL
SECURITIES FUND
In our opinion, the accompanying statements of assets and liabilities, including
the investment portfolios, and the related statements of operations, of changes
in net assets and of cash flows (for Colonial Federal Securities Fund) and the
financial highlights present fairly, in all material respects, the financial
position of Colonial Short Duration U.S. Government Fund (formerly Colonial
Adjustable Rate U.S. Government Fund), Colonial Intermediate U.S. Government
Fund (formerly Colonial U.S. Government Fund) (each a series of Colonial Trust
II) and Colonial Federal Securities Fund (a series of Colonial Trust III) at
August 31, 1997, the results of their operations, the changes in their net
assets, the cash flows for Colonial Federal Securities Fund and their financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and the financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of portfolio positions at August 31, 1997 by correspondence with
the custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
October 13, 1997
<PAGE>
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25
<PAGE>
This page intentionally left blank
<PAGE>
Trustees & Transfer Agent
- --------------------------------------------------------------------------------
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 (formerly 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
Partner, Development Capital, L.L.C. (formerly Dean, College of Business
and Management, University of Maryland; Dean, Simon Graduate School of
Business, University of Rochester; Chairman and Chief Executive Officer,
CS First Boston Merchant Bank; and President and Chief Executive Officer,
The First Boston Corporation)
JAMES L. MOODY, JR.
Retired (formerly Chairman of the Board and 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
Retired Partner, Peat Marwick Main & Co. (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
- --------------------------------------------------------------------------------
IMPORTANT FUND INFORMATION
The Transfer Agent for Colonial Short Duration U.S. Government Fund,
Colonial Intermediate U.S. Government Fund, and Colonial Federal Securities
Fund is:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
The Funds mail one shareholder report to each shareholder address.
If you would like more than one report, please call 1-800-426-3750 and
additional reports will be sent to you.
This report has been prepared for shareholders of Colonial Short Duration U.S.
Government Fund, Colonial Intermediate U.S. Government Fund, and Colonial
Federal Securities 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 Funds.
<PAGE>
A SELECT GROUP OF INVESTMENT MANAGERS
Colonial Management Associates, Inc. is one of a select group of investment
managers that also includes Newport Fund Management, Inc. and Stein Roe &
Farnham, Inc. Each of these managers offers mutual funds through Liberty
Financial Investments, Inc. that adhere to a consistent investment management
style -- and are dedicated to that style -- helping to complement other
investments in your portfolio. Each is part of the Liberty Financial Companies
(NYSE: L), a diversified asset management company with more than $50 billion in
assets under management for more than 1.5 million investors.
[graphic omitted]
DISCIPLINED MANAGEMENT STYLES
INTERNATIONAL
GROWTH STOCKS
VALUE STOCKS
TAXABLE BONDS
TAX-FREE BONDS
COLONIAL STEIN ROE NEWPORT
FUNDS ADVISOR FUNDS FUNDS
Ask your financial advisor to help you develop an investment strategy that
blends the complementary disciplines of different investment managers into a
well-balanced program tailored to your goals.
COLONIAL GOVERNMENT FUNDS ANNUAL REPORT, AUGUST 31, 1997
[logo] LIBERTY FINANCIAL INVESTMENTS, INC. [Copyright]1997 -----------------
Distributor for Colonial Funds, Stein Roe Advisor BULK RATE
Funds and Newport Funds U.S. POSTAGE
One Financial Center, Boston, MA 02111-2621 PAID
N. READING, MA
PERMIT NO. 105
-----------------
GF-02/050E-0897 (10/97)
