<PAGE> 1
QUALITY GOVERNMENT BONDS
CAN ADD DIVERSIFICATION TO
YOUR PORTFOLIO.
LIBERTY GOVERNMENT FUNDS ANNUAL REPORT
AUGUST 31, 2000
- LIBERTY SHORT TERM GOVERNMENT FUND
- LIBERTY INTERMEDIATE GOVERNMENT FUND
- LIBERTY FEDERAL SECURITIES FUND
<PAGE> 2
PRESIDENT'S MESSAGE
DEAR SHAREHOLDER:
You may have noticed that the Government Bond Funds we offer have a new name.
Beginning July 14, the names of our funds changed to include Liberty. Rest
assured, the investment objectives and strategies employed by the managers of
these funds are not affected by this name change. We believe the new name better
reflects their affiliation with Liberty Funds, a diverse family of funds
representing a wide selection of investment styles and specialized money
management. The goal of all Liberty funds is to help you reach for financial
freedom -- however you define it.
The fiscal year ended August 31, 2000 saw a wide divergence in the direction of
interest rates. With the U.S. economy continuing to grow at a rapid rate, the
Federal Reserve raised short-term interest rates, which led to higher interest
rates among many shorter-term securities. This trend spread to other types of
bonds, including corporate, agency and mortgage-backed debt securities. At the
same time, interest rates on long-term government bonds dropped rather
dramatically, due to positive revenue developments for the U.S. government that
led to a budget surplus and a reduced need to issue debt. Each of the Fund
portfolios discussed in this report is actively managed to position the Funds
most effectively for developments in the marketplace -- consistent with each
Fund's long-term objective. Although the market's general trend made for a
difficult environment overall, each Fund performed in line with its market.
The following report provides an overview of the bond market and a discussion of
the specific factors that affected the performance of each of these Funds. Thank
you for choosing Liberty Government Funds and for giving us the opportunity to
help meet your investment needs.
Sincerely,
/s/ Stephen E. Gibson
Stephen E. Gibson
President
October 12, 2000
Not FDIC May Lose Value
Insured No Bank Guarantee
Because market conditions change frequently, there can be no assurance that the
trends described in this report will continue or come to pass.
<PAGE> 3
HIGHLIGHTS
- THE FED BOOSTS SHORT-TERM RATES
The U.S. economy continued to grow at a solid pace over the past year,
which raised concerns about the threat of higher inflation and forced the
Federal Reserve to boost short-term interest rates four times. This had an
impact on rates of shorter-term debt securities, which also increased.
- U.S. GOVERNMENT BOND BUYBACK IMPROVES LONG-TERM YIELDS
The strong economy had a positive effect on tax revenues, putting the U.S.
government in the rare position of running a budget surplus. As a result,
the U.S. Treasury began buying back previously issued, long-term government
debt. Decreasing the supply of government debt brought long-term interest
rates down.
- AN INVERTED YIELD CURVE DEVELOPED
With interest rates on short- and intermediate-term bonds increasing and
long-term yields moving in the opposite direction, an inverted yield curve
developed. Historically, this is an unusual situation in which short-term
interest rates are higher than long-term interest rates.
- NON-GOVERNMENT BONDS STRUGGLED IN 2000
Bonds from non-government issuers struggled during the period.
Mortgage-backed securities, government agency bonds and corporate bonds all
saw increased yields, which drove down the value of these bonds.
YIELD CURVE
8/31/99 vs 8/31/2000
[PLOT POINTS]
<TABLE>
<CAPTION>
8/31/99 8/31/00
<S> <C> <C>
3mo 4.97 6.31
5.2 6.37
1yr 5.27 6.27
5.73 6.17
3yr 5.78 6.11
5.82 6.04
5yr 5.87 5.98
5.89 5.93
7yr 5.92 5.88
5.94 5.83
5.96 5.78
10yr 5.98 5.73
5.99 5.73
5.99 5.73
6 5.73
6 5.72
6 5.72
6.01 5.72
6.01 5.71
6.02 5.71
6.02 5.71
20yr 6.03 5.71
6.03 5.7
6.03 5.7
6.04 5.7
6.04 5.69
6.05 5.69
6.05 5.69
6.05 5.69
6.06 5.68
6.06 5.68
30yr 6.07 5.68
</TABLE>
Sources: Solomon Analytics; Colonial Management Associates
WHAT IS AN INVERTED YIELD CURVE?
Usually, holders of long-term debt receive higher yields in compensation for
committing their money for longer periods of time. In other words, yields on
long-term debt instruments are generally higher than those on short-term debt
instruments. As duration lengthens, interest rates increase. This is known as a
positive yield curve, and it has historically represented the bond market under
normal conditions. Currently, a negative or inverted yield curve exists. This
means that in today's bond market, short-term interest rates are higher than
long-term rates.
1
<PAGE> 4
LIBERTY SHORT TERM GOVERNMENT FUND
NET ASSET VALUE PER SHARE
AS OF 8/31/00
<TABLE>
<S> <C>
Class A $9.67
Class B $9.67
Class C $9.67
</TABLE>
DISTRIBUTIONS DECLARED PER SHARE FROM 9/1/99 - 8/31/00
<TABLE>
<S> <C>
Class A $0.564
Class B $0.501
Class C $0.545
</TABLE>
SECTOR BREAKDOWN
[SECTOR BREAKDOWN BAR CHART]
<TABLE>
<CAPTION>
08/31/00 08/31/99
<S> <C> <C>
Fixed-Rate Mortgage Securities 53.7% 69.2%
Floating Rate Notes 17.6% 16.9%
Treasury Securities 17.4% 7.0%
Adjustable Rate Mortgage Securities 11.3% 6.9%
</TABLE>
Sector breakdowns are calculated as a percentage of total investments. Because
the Fund is actively managed, there can be no guarantee that the Fund will
continue to maintain this breakdown in the future.
INVESTING PRIMARILY IN U.S. GOVERNMENT SECURITIES, THE FUND IS MANAGED FOR
REDUCED PRICE VOLATILITY. IT IS THE MOST CONSERVATIVE OF LIBERTY'S THREE
GOVERNMENT FUNDS, DESIGNED FOR INVESTORS WITH A SHORT INVESTMENT HORIZON AND/OR
LOW RISK TOLERANCE.
Increases in mortgage rates during the period negatively influenced the
performance of mortgage-backed securities in general. In response, the Fund
reduced its position in these securities. While this sector of the market at one
time represented two-thirds of the portfolio, by the end of the fiscal year, it
made up slightly more than half of the Fund's holdings. Instead, more of the
Fund's assets were put to work in short- to intermediate-term Treasury
securities, which offered better value and began to enjoy improved performance
in the final months of the year.
The Fund's duration was also shortened a bit to reduce the negative impact of
rising interest rates on the value of the portfolio. Still, with most interest
rates moving higher for much of the period, the environment remained fairly
difficult for the Fund.
Growth in the U.S. economy seems to be moderating a bit. If that trend holds,
which is difficult to predict at this time, the Federal Reserve may not need to
boost interest rates significantly in the near future. That should create a
better environment for the shorter-term debt securities that are the focus of
the Fund.
/s/ Leslie W. Finnemore /s/ Ann T. Peterson /s/ Michael R. Bissonnette
Leslie W. Finnemore Ann T. Peterson Michael R. Bissonnette
Leslie W. Finnemore, Ann T. Peterson and Michael R. Bissonnette are co-portfolio
managers of Liberty Short Term Government Fund. Ms. Finnemore and Mr.
Bissonnette are senior vice presidents of Colonial Management Associates (CMA).
Ms. Peterson is a vice president of CMA.
Government investing offers attractive income and total return opportunities,
but also involves certain risks. The value of an investment in the Fund will
fluctuate with changes in interest rates.
2
<PAGE> 5
PERFORMANCE INFORMATION
PERFORMANCE OF A $10,000 INVESTMENT IN CLASS A SHARES 10/1/92 - 8/31/00
[PLOTPOINTS]
<TABLE>
<CAPTION>
Fund without sales charge Fund with sales charge Lehman Brothers U.S. Gov. Bond Index
<S> <C> <C> <C>
"10/1/92" 10000 9675 10000
"10/31/92" 9990 9665.3 9941.37
"11/30/92" 9990 9665.3 9925.8
"12/31/92 10050.9 9724.28 10019.9
"1/31/93 10101.2 9772.9 10124.9
"2/28/93 10161.8 9831.54 10206.1
"3/31/93 10191.3 9860.05 10236.8
"4/30/93 10241.2 9908.37 10298.9
"5/31/93" 10250.4 9917.29 10272.9
"6/30/93" 10308.8 9973.81 10350.4
"7/31/93" 10334.6 9998.75 10372.5
"8/31/93" 10381.1 10043.7 10459.4
"9/30/93" 10396.7 10058.8 10492.6
"10/31/93" 10421.7 10083 10515.7
"11/30/93" 10413.3 10074.9 10517.3
"12/31/93" 10446.6 10107.1 10559.2
"1/31/94" 10502 10160.7 10625.3
"2/28/94" 10504.1 10162.7 10559.8
"3/31/94" 10452.6 10112.9 10507
"4/30/94" 10392 10054.3 10467.1
"5/31/94" 10406.6 10068.3 10481.5
"6/30/94" 10421.1 10082.4 10507.8
"7/31/94" 10468 10127.8 10602
"8/31/94" 10504.7 10163.3 10636.3
"9/30/94" 10487.8 10147 10612
"10/31/94" 10487.8 10147 10636.4
"11/30/94" 10477.4 10136.8 10592
"12/31/94" 10531.8 10189.6 10613.1
"1/31/95" 10655.1 10308.8 10757.5
"2/28/95" 10788.3 10437.6 10903.8
"3/31/95" 10899.4 10545.2 10965.1
"4/30/95" 10988.8 10631.6 11062.9
"5/31/95" 11112.9 10751.8 11253.2
"6/30/95" 11161.8 10799.1 11314.5
"7/31/95" 11176.3 10813.1 11358.8
"8/31/95" 11247.9 10882.3 11425.9
"9/30/95" 11323.2 10955.2 11481.5
"10/31/95" 11398 11027.5 11577.2
"11/30/95" 11484.6 11111.3 11676.3
"12/31/95" 11553.5 11178 11765.2
"1/31/96" 11622.8 11245.1 11865.7
"2/29/96" 11621.7 11243.9 11819
"3/31/96" 11606.5 11229.3 11808.8
"4/30/96" 11649.5 11270.9 11820
"5/31/96" 11692.6 11312.6 11846.4
"6/30/96" 11770.9 11388.4 11932.2
"7/31/96" 11827.4 11443 11978
"8/31/96" 11873.5 11487.7 12022
"9/30/96" 11956.7 11568.1 12131.1
"10/31/96" 12064.3 11672.2 12267.8
"11/30/96" 12158.4 11763.2 12358.3
"12/31/96" 12166.9 11771.5 12360
"1/31/97" 12235 11837.4 12418.3
"2/28/97" 12277.8 11878.8 12447.8
"3/31/97" 12284 11884.8 12438.1
"4/30/97" 12377.3 11975.1 12539.3
"5/31/97" 12459 12054.1 12626.6
"6/30/97" 12541.3 12133.7 12713.6
"7/31/97" 12661.7 12250.2 12855
"8/31/97" 12680.7 12268.5 12866.4
"9/30/97" 12780.8 12365.5 12964.6
"10/31/97" 12869 12450.8 13061.8
"11/30/97" 12919.2 12499.3 13094.7
"12/31/97" 12995.4 12573.1 13183.5
"1/31/98" 13079.9 12654.8 13311.5
"2/28/98" 13108.7 12682.7 13321.6
"3/31/98" 13154.6 12727 13372.6
"4/30/98" 13212.4 12783 13437.3
"5/31/98" 13283.8 12852.1 13509.5
"6/30/98" 13342.2 12908.6 13578.9
"7/31/98" 13382.3 12947.3 13642.8
"8/31/98" 13522.8 13083.3 13813.1
"9/30/98" 13689.1 13244.2 14004.3
"10/31/98" 13719.2 13273.3 14074.3
"11/30/98" 13717.8 13272 14055.9
"12/31/98" 13768.6 13321.1 14108.9
"1/31/99" 13814 13365.1 14161.5
"2/28/99" 13725.6 13279.5 14091.7
"3/31/99" 13810.7 13361.9 14187.4
"4/30/99" 13863.2 13412.7 14232
"5/31/99" 13807.8 13359 14221
"6/30/99" 13806.4 13357.7 14262.5
"7/31/99" 13795.3 13347 14310.9
"8/31/99" 13799.5 13351 14353.1
"9/30/99" 13907.1 13455.1 14443.9
"10/31/99" 13961.3 13507.6 14479
"11/30/99" 13999 13544.1 14503
"12/31/99" 14015.8 13560.3 14517.4
"1/31/00" 14007.4 13552.2 14511.7
"2/29/00" 14102.7 13644.3 14607.6
"3/31/00" 14188.7 13727.6 14701
"4/30/00" 14212.8 13750.9 14733.1
"5/31/00" 14224.2 13761.9 14796.2
"6/30/00" 14366.4 13899.5 14951.4
"7/31/00" 14438.3 13969 15046.8
"8/31/00" 14550 14077 15169
</TABLE>
The Lehman Brothers U.S. Government Bond (1-3 Year) Index is an unmanaged index
that tracks the performance of short-term U.S. government securities. Unlike
mutual funds, indexes are not investments and do not incur fees or charges. It
is not possible to invest in an index.
AVERAGE ANNUAL TOTAL RETURNS AS OF 8/31/00
<TABLE>
<CAPTION>
Share Class A B C
Inception 10/1/92 2/1/93 1/4/95
------------------------- ------------------------- -------------------------
w/o sales with sales w/o sales with sales w/o sales with sales
charge charge charge charge charge charge
<S> <C> <C> <C> <C> <C> <C>
One year 5.45% 2.02% 4.77% 0.79% 5.24% 4.25%
Five years 5.28 4.59 4.60 4.60 5.07 5.07
Life 4.85 4.42 4.20 4.20 4.70 4.70
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/00
Share Class
<TABLE>
<CAPTION>
A B C
-------------------------- -------------------------- --------------------------
w/o sales with sales w/o sales with sales w/o sales with sales
charge charge charge charge charge charge
<S> <C> <C> <C> <C> <C> <C>
One year 4.04% 0.66% 3.37% (0.56)% 3.84% 2.85%
Five years 5.17 4.48 4.49 4.49 4.96 4.96
Life 4.79 4.34 4.14 4.14 4.64 4.64
</TABLE>
Past performance cannot predict future investment results. Returns and value of
an investment will vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions. The "with sales charge" returns include
the maximum 3.25% sales charge for Class A shares; the appropriate Class B
contingent deferred sales charge for the holding period after purchase as
follows: first year -- 4%, second year -- 3%, third year -- 2%, fourth year --
1%, thereafter -- 0%; and the Class C contingent deferred sales charge of 1% for
the first year only. Performance results reflect any voluntary waivers or
reimbursement of Fund expenses by the Advisor or its affiliates. Absent these
waivers or reimbursement arrangements, performance results would have been
lower.
Performance for different share classes will vary based on differences in sales
charges and fees associated with each class.
Class B and C share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing Fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns are not restated to reflect any expense differential (e.g., Rule 12b-1
fees) between Class A shares and the newer class shares. Had the expense
differential been reflected, the returns for the periods prior to the inception
of Class B and Class C shares would have been lower.
PERFORMANCE OF A $10,000 INVESTMENT IN ALL SHARE CLASSES 10/1/92 - 8/31/00
<TABLE>
<CAPTION>
Without With
sales sales
charge charge
<S> <C> <C>
Class A $14,550 $14,077
Class B $13,852 $13,852
Class C $14,387 $14,387
</TABLE>
PORTFOLIO DURATION (YEARS)
<TABLE>
<S> <C>
8/31/00 1.97
8/31/99 2.45
</TABLE>
AVERAGE LIFE BREAKDOWN
AS OF 8/31/00 (%)
<TABLE>
<S> <C>
0-2 years 36.87
2-4 years 23.99
4-6 years 37.23
6-8 years 0.00
Greater than 8 years 1.91
</TABLE>
Average life is the expected maturity of a bond and is calculated as a
percentage of senior securities. Because the Fund is actively managed, there can
be no guarantee the Fund will continue to maintain the portfolio structure and
average life shown in the future.
30-DAY SEC YIELDS AS OF
8/31/00
<TABLE>
<S> <C>
Class A shares 5.60%
Class B shares 5.12%
Class C shares 5.58%
</TABLE>
The 30-Day SEC yields reflect the portfolio's earning power, net of expenses,
expressed as an annualized percentage of the public offering price at the end of
the period. If the Advisor or its affiliates had not waived certain Fund
expenses, the 30-Day SEC yield would have been 4.97% for Class A shares, 4.48%
for Class B shares and 4.95% for Class C shares.
3
<PAGE> 6
NET ASSET VALUE PER SHARE
AS OF 8/31/00
<TABLE>
<S> <C>
Class A $6.28
Class B $6.28
Class C $6.28
Class Z $6.28
</TABLE>
DISTRIBUTIONS DECLARED PER SHARE 9/1/99 - 8/31/00
<TABLE>
<S> <C>
Class A $0.390
Class B $0.343
Class C $0.353
Class Z $0.406
</TABLE>
AVERAGE LIFE BREAKDOWN AS OF 8/31/00
<TABLE>
<S> <C>
0-2 years 11.71%
2-4 years 15.94%
4-6 years 22.69%
6-8 years 8.11%
8-10 years 30.10%
10-15 years 2.39%
Greater than 15 years 9.06%
</TABLE>
Average life is the expected maturity of a bond and is calculated as a
percentage of senior securities.
PORTFOLIO DURATION (YEARS)
<TABLE>
<S> <C>
8/31/00 5.49
8/31/99 5.40
</TABLE>
LIBERTY INTERMEDIATE GOVERNMENT FUND
THE FUND MAINTAINS A CONSERVATIVE PORTFOLIO INVESTED PRIMARILY IN U.S.
GOVERNMENT SECURITIES, WITH A RISK PROFILE SIMILAR TO A FIVE-YEAR TREASURY
SECURITY. THE FUND IS MANAGED TO MAINTAIN A DURATION BETWEEN 2.5 AND 5.5 YEARS.
In response to rising interest rates, the Fund's duration was reduced in the
first half of the period. With mortgage-backed securities struggling, their
position in the Fund was cut back to less than one-half of the portfolio.
In anticipation of a more favorable interest rate environment for the types of
securities owned in the portfolio, the Fund's duration was increased toward the
end of the period. If rates decline, the Fund should benefit from its more
aggressive duration position.
The near-term direction of the bond market is difficult to predict, but there
are signs that the U.S. economy may be slowing, which would help keep inflation
in check. That could also improve the picture for interest rates, particularly
on many intermediate-term government securities such as mortgage-backed
securities, which have struggled over the past year.
/s/ Leslie W. Finnemore /s/ Michael R. Bissonnette
Leslie W. Finnemore Michael R. Bissonnette
/s/ Ann T. Peterson
Ann T. Peterson
Leslie W. Finnemore, Michael R. Bissonnette and Ann T. Peterson are co-portfolio
managers of Liberty Intermediate Government Fund. Ms. Finnemore and Mr.
Bissonnette are senior vice presidents of Colonial Management Associates (CMA).
Ms. Peterson is a vice president of CMA.
Government investing offers attractive income and total return opportunities,
but also involves certain risks. The value of an investment in the Fund will
fluctuate with changes in interest rates.
4
<PAGE> 7
PERFORMANCE INFORMATION
PERFORMANCE OF A $10,000 INVESTMENT IN CLASS A SHARES 8/31/90 - 8/31/00
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
Lehman Brothers Intermediate
Fund without sales change Fund with with sales charge U.S. Government Bond Index
<S> <C> <C> <C>
08/31/90 10000 9525 10000
11/30/90 10349 9857.42 10384
02/28/91 10634.6 10129.5 10700.7
05/31/91 10867.5 10351.3 10931.9
08/31/91 11153.4 10623.6 11269.6
11/30/91 11461.2 10916.8 11728.3
02/29/92 11638.8 11086 11934.7
05/31/92 11821.6 11260 12173.4
08/31/92 12097 11522.4 12713.9
11/30/92 12133.3 11557 12680.9
02/28/93 12430.6 11840.1 13278.1
05/31/93 12569.8 11972.7 13395
08/31/93 12841.3 12231.3 13819.6
11/30/93 12836.1 12226.4 13840.3
02/28/94 12915.7 12302.2 13841.7
05/31/94 12591.5 11993.5 13560.7
08/31/94 12772.9 12166.2 13781.8
11/30/94 12657.9 12056.7 13609.5
02/28/95 13118.7 12495.5 14143
05/31/95 13711.6 13060.3 14790.8
08/31/95 13905 13244.5 15015.6
11/30/95 14400 13716 15467.5
02/29/96 14446 13759.9 15585.1
05/31/96 14209.1 13534.2 15460.4
08/31/96 14391 13707.4 15683
11/30/96 15122.1 14403.8 16341.7
02/28/97 15072.2 14356.2 16343.4
05/31/97 15233.5 14509.9 16562.4
08/31/97 15632.6 14890 16946.6
11/30/97 16085.9 15321.8 17368.6
02/28/98 16423.7 15643.6 17719.4
05/31/98 16668.4 15876.7 17981.7
08/31/98 17173.5 16357.7 18515.7
11/30/98 17508.4 16676.7 18921.2
02/28/99 17273.8 16453.2 18817.2
05/31/99 17228.8 16410.5 18877.4
08/31/99 17053.1 16243.1 18934
11/30/00 17288.4 16467.2 19148
02/29/00 17226.2 16408 19180.5
05/31/00 17389.8 16563.8 19443.3
08/31/00 18037.2 17180.5 20106.3
</TABLE>
The Lehman Brothers Intermediate U.S. Government Bond Index is an unmanaged
index that tracks the performance of intermediate U.S. government bonds. Unlike
mutual funds, indexes are not investments and do not incur fees or charges. It
is not possible to invest in an index.
AVERAGE ANNUAL TOTAL RETURNS AS OF 8/31/00
<TABLE>
<CAPTION>
Share Class A B C Z
Inception 10/13/87 6/8/92 8/1/97 1/29/99
w/o sales with sales w/o sales with sales w/o sales with sales w/o sales
charge charge charge charge charge charge charge
<S> <C> <C> <C> <C> <C> <C> <C>
One Year 5.77% 0.74% 4.98% 0.01% 5.14% 4.14% 6.03%
Five Years 5.34 4.32 4.56 4.23 4.94 4.94 5.43
Ten Years 6.08 5.56 5.43 5.43 5.87 5.87 6.12
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/00
<TABLE>
<CAPTION>
Share Class A B C Z
w/o sales with sales w/o sales with sales w/o sales with sales w/o sales
charge charge charge charge charge charge charge
<S> <C> <C> <C> <C> <C> <C>
One Year 3.08% (1.82)% 2.31% (2.53)% 2.46% 1.50% 3.33%
Five Years 5.11 4.09 4.32 4.00 4.73 4.73 5.18
Ten Years 5.98 5.47 5.35 5.35 5.79 5.79 6.02
</TABLE>
Past performance cannot predict future investment results. Returns and value of
an investment will vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions. The "with sales charge" returns include
the maximum 4.75% sales charge for Class A shares; the appropriate Class B
contingent deferred sales charge for the holding period after purchase as
follows: first year -- 5%, second year -- 4%, third year -- 3%, fourth year --
3%, fifth year -- 2%, sixth year -- 1%, thereafter -- 0%; and the Class C
contingent deferred sales charge of 1% for the first year only. Performance
results reflect any voluntary waivers or reimbursement of Fund expenses by the
Advisor or its affiliates. Absent these waivers or reimbursement arrangements,
performance results would have been lower.
Performance for different share classes will vary based on differences in sales
charges and fees associated with each class.
Class B, C and Z share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing Fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns are not restated to reflect any expense differential (e.g., Rule 12b-1
fees) between Class A shares and the newer class shares. Had the expense
differential been reflected, the returns for the periods prior to the inception
of Class B and Class C shares would have been lower.
PERFORMANCE OF A $10,000 INVESTMENT IN ALL SHARE CLASSES 8/31/90 - 8/31/00
<TABLE>
<CAPTION>
Without With
sales sales
charge charge
<S> <C> <C>
Class A $18,037 $17,180
Class B $16,967 $16,967
Class C $17,696 $17,696
Class Z $18,109 $18,109
</TABLE>
30-DAY SEC YIELDS AS OF 8/31/00
<TABLE>
<S> <C>
Class A 5.21%
Class B 4.71%
Class C 4.86%
Class Z 5.73%
</TABLE>
The 30-Day SEC yield reflect the portfolio's earning power, net of expenses,
expressed as an annualized percentage of the public offering price at the end of
the period. If the Advisor or its affiliates had not waived certain Fund
expenses, the 30-Day SEC yield would have been 4.69% for Class C shares.
SECTOR BREAKDOWN
[BAR CHART]
<TABLE>
<CAPTION>
As of 8/31/00 As of 8/31/99
<S> <C> <C>
FNMA'S 26.6% 37.8%
GNMA'S 21.6% 28.7%
Tresury Securities 33.4% 29.1%
FHLMC'S 16.0% 2.3%
SBA 2.4% 2.1%
</TABLE>
Sector breakdowns are calculated as a percentage of total investments. Because
the Fund is actively managed, there can be no guarantee that the Fund will
continue to maintain this breakdown in the future.
5
<PAGE> 8
LIBERTY FEDERAL SECURITIES FUND
NET ASSET VALUE PER SHARE
AS OF 8/31/00
<TABLE>
<S> <C>
Class A $10.02
Class B $10.02
Class C $10.02
Class Z $10.02
</TABLE>
DISTRIBUTIONS DECLARED PER SHARE 9/1/99 - 8/31/00
<TABLE>
<S> <C>
Class A $0.722
Class B $0.647
Class C $0.662
Class Z $0.747
</TABLE>
AVERAGE LIFE BREAKDOWN
<TABLE>
<S> <C>
0-2 years 9.10%
2-4 years 8.24%
4-6 years 20.51%
6-8 years 1.97%
8-10 years 35.76%
10-15 years 8.53%
15-20 years 9.19%
Greater than 20 years 6.70%
</TABLE>
Average life is the expected maturity of a bond and is calculated as a
percentage of senior securities.
30-DAY SEC YIELDS
<TABLE>
<S> <C>
Class A shares 5.41%
Class B shares 4.92%
Class C shares 5.07%
Class Z shares 5.94%
</TABLE>
The 30-Day SEC yields reflect the portfolio's earning power, net of expenses,
expressed as an annualized percentage of the public offering price at the end of
the period. If the Advisor or its affiliates had not waived certain Fund
expenses, the 30-Day SEC yield would have been 4.91% for Class C shares.
THE FUND INVESTS PRIMARILY IN U.S. GOVERNMENT SECURITIES AND IS DESIGNED FOR
INVESTORS WHO ARE WILLING TO ACCEPT THE RISKS ASSOCIATED WITH LONGER-TERM
SECURITIES. THE FUND OFFERS THE HIGHEST RETURN POTENTIAL OF LIBERTY'S THREE
GOVERNMENT FUNDS.
During the period, we made a number of changes in the Fund's portfolio. For
example, we reduced the Fund's duration to offset the impact of rising interest
rates. At the same time, the Fund's exposure to mortgage-backed securities was
dramatically reduced, as this sector of the market fell out of favor.
The Fund slightly increased holdings of long-term Treasury bonds in an effort to
take advantage of the government buyback of bonds that created a very favorable
interest rate environment for that particular sector. The Fund also increased
its exposure to government agency bonds that may offer attractive relative
value.
The outlook moving forward is not completely clear, but there are reasons to be
optimistic about the prospects for the government bond market. Yield spreads on
bonds, such as mortgage-backed and agency bonds, have grown wider compared to
those of Treasury bonds, and may offer attractive return potential in the
future. Over the next year, the market may begin putting more emphasis on
segments which are currently out of favor.
/s/ Leslie W. Finnemore /s/ Michael R. Bissonnette
Leslie W. Finnemore Michael R. Bissonnette
/s/ Ann T. Peterson
Ann T. Peterson
Leslie W. Finnemore, Michael R. Bissonnette and Ann T. Peterson are co-portfolio
managers of Liberty Federal Securities Fund. Ms. Finnemore and Mr. Bissonnette
are senior vice presidents of Colonial Management Associates (CMA). Ms. Peterson
is a vice president of CMA.
Government investing offers attractive income and total return opportunities,
but also involves certain risks. The value of an investment in the Fund will
fluctuate with changes in interest rates.
6
<PAGE> 9
PERFORMANCE INFORMATION
PERFORMANCE OF A $10,000 INVESTMENT IN CLASS A SHARES 8/31/90 - 8/31/00
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
Fund without sales charge Fund with sales charge Lehman Brothers Intermediate U.S.
Government Bond Index
<S> <C> <C> <C>
8/31/90 10000 9525 10000
11/30/90 10577 10074.6 10384
2/28/91 10920.8 10402 10700.7
5/31/91 11110.8 10583 10931.9
8/31/91 11488.5 10942.8 11269.6
11/30/91 11926.2 11359.8 11728.3
2/29/92 12244.7 11663.1 11934.7
5/31/92 12425.9 11835.7 12173.4
8/31/92 12911.8 12298.5 12713.9
11/30/92 12945.3 12330.4 12680.9
2/28/93 13850.2 13192.3 13278.1
5/31/93 14049.6 13382.3 13395
8/31/93 14739.5 14039.4 13819.6
11/30/93 14667.3 13970.6 13840.3
2/28/94 14602.7 13909.1 13841.7
5/31/94 13982.1 13318 13560.7
8/31/94 14190.5 13516.4 13781.8
11/30/94 13821.5 13165 13609.5
2/28/95 14631.4 13936.4 14143
5/31/95 15600 14859 14790.8
8/31/95 15810.6 15059.6 15015.6
11/30/95 16501.6 15717.7 15467.5
2/29/96 16397.6 15618.7 15585.1
5/31/96 15899.1 15143.9 15460.4
8/31/96 16091.5 15327.1 15683
11/30/96 17177.7 16361.7 16341.7
2/28/97 16992.2 16185 16343.4
5/31/97 17182.5 16366.3 16562.4
8/31/97 17739.2 16896.6 16946.6
11/30/97 18406.2 17531.9 17368.6
2/28/98 18844.2 17949.1 17719.4
5/31/98 19166.5 18256.1 17981.7
8/31/98 19885.2 18940.7 18515.7
11/30/98 20233.2 19272.1 18921.2
2/28/99 19887.2 18942.6 18817.2
5/31/99 19758 18819.5 18877.4
8/31/99 19372.7 18452.5 18934
11/30/99 19620.6 18688.7 19148
2/29/00 19502.9 18576.5 19180.5
5/31/00 19686.2 18751.2 19443.3
8/31/00 20572.2 19595 20106.3
</TABLE>
The Lehman Brothers Intermediate U.S. Government Bond Index is an unmanaged
index that tracks the performance of intermediate U.S. government bonds. Unlike
mutual funds, indexes are not investments and do not incur fees or expenses. It
is not possible to invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS AS OF 8/31/00
<TABLE>
<CAPTION>
Share Class A B C Z
Inception 3/30/84 6/8/92 8/1/97 1/11/99
w/o sales with sales w/o sales with sales w/o sales with sales w/o sales
charge charge charge charge charge charge charge
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year 6.23% 1.19% 5.44% 0.50% 5.60% 4.61% 6.50%
5 years 5.42 4.40 4.63 4.31 5.01 5.01 5.50
10 years 7.48 6.96 6.81 6.81 7.27 7.27 7.53
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/00
<TABLE>
<CAPTION>
Share Class A B C Z
w/o sales with sales w/o sales with sales w/o sales with sales w/o sales
charge charge charge charge charge charge charge
<S> <C> <C> <C> <C> <C> <C> <C>
1 year 2.37% (2.49)% 1.61% (3.16)% 1.76% 0.81% 2.63%
5 years 5.05 4.04 4.27 3.96 4.68 4.68 5.13
10 years 7.04 6.52 6.38 6.38 6.84 6.84 7.08
</TABLE>
Past performance cannot predict future investment results. Returns and value of
an investment will vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions. The "with sales charge" returns include
the maximum 4.75% sales charge for Class A shares; the appropriate Class B
contingent deferred sales charge for the holding period after purchase as
follows: first year -- 5%, second year -- 4%, third year -- 3%, fourth year --
3%, fifth year -- 2%, sixth year -- 1%, thereafter -- 0%; and the Class C
contingent deferred sales charge of 1% for the first year only. Performance
results reflect any voluntary waivers or reimbursement of Fund expenses by the
Advisor or its affiliates. Absent these waivers or reimbursement arrangements,
performance results would have been lower.
Performance for different share classes will vary based on differences in sales
charges and fees associated with each class.
Class B, C and Z share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing Fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns are not restated to reflect any expense differential (e.g., Rule 12b-1
fees) between Class A shares and the newer class shares. Had the expense
differential been reflected, the returns for the periods prior to the inception
of Class B and Class C shares would have been lower.
PORTFOLIO DURATION (YEARS)
<TABLE>
<S> <C>
8/31/00 6.71
8/31/99 7.32
</TABLE>
PERFORMANCE OF A $10,000 INVESTMENT IN ALL SHARE CLASSES 8/31/90 - 8/31/00
<TABLE>
<CAPTION>
Without With
sales sales
charge charge
<S> <C> <C>
Class A $20,572 $19,595
Class B $19,324 $19,324
Class C $20,181 $20,181
Class Z $20,658 $20,658
</TABLE>
SECTOR BREAKDOWN
[BAR CHART]
<TABLE>
08/31/00 08/31/99
<S> <C> <C>
FNMAs 26.9% 19.0%
GNMAs 8.3% 25.4%
Treasury Securities 34.0% 33.8%
FHLMCs 15.8% 10.5%
Non-Agency MBS/ABS 15.0% 11.3%
</TABLE>
Sector breakdowns are calculated as a percentage of total investments. Because
the Fund is actively managed, there can be no guarantee that the Fund will
continue to maintain this breakdown in the future.
Because the fund is actively managed, there can be no guarantee the Fund will
continue to maintain the portfolio structure and average life shown in the
future.
7
<PAGE> 10
INVESTMENT PORTFOLIO
August 31, 2000 (In thousands)
<TABLE>
<CAPTION>
LIBERTY SHORT TERM GOVERNMENT FUND
U.S. GOVERNMENT &
AGENCY OBLIGATIONS - 113.2% PAR VALUE
-------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 93.5%
MATURITIES
COUPON FROM/TO
----------------------------------------------------------
<S> <C> <C> <C>
FEDERAL FARM CREDIT BANK,
FIXED RATE NOTE,
6.400% 2002 $ 250 $ 249
-------
FEDERAL HOME LOAN BANK:
FIXED RATE NOTE:
5.720% 2003 500 485
6.150% 2000 500 500
7.590% 2005 50 52
-------
1,037
-------
FLOATING RATE NOTE,
6.778% 2000 2,000 2,000
-------
FEDERAL HOME LOAN MORTGAGE CORP.:
FIXED RATE NOTE:
8.000% 2011-2017 841 847
9.250% 2009 77 79
9.750% 2009 138 143
-------
1,069
-------
ADJUSTABLE RATE MORTGAGE: (a)
6.096% 2018 85 83
6.577% 2018 121 119
6.811% 2018 360 364
7.391% 2019 184 183
-------
749
-------
FEDERAL NATIONAL MORTGAGE ASSOCIATION,
FIXED RATE NOTE:
5.310% 2001 500 495
6.080% 2000 120 120
6.240% 2000 400 400
6.986% 2020 182 183
7.000% 2009-2050(b) 2,219 2,194
7.500% 2006-2050(b) 3,954 3,965
9.500% 2006 28 30
10.000% 2006 271 287
-------
7,674
-------
ADJUSTABLE RATE MORTGAGE: (a)
6.391% 2027 101 99
7.121% 2018 647 658
7.296% 2019 125 125
7.435% 2019 88 89
7.583% 2023 77 78
7.614% 2020 71 72
7.995% 2022 85 86
7.998% 2031 329 332
</TABLE>
<TABLE>
<CAPTION>
PAR VALUE
-------------------------------------------------------------------------------------------
MATURITIES
COUPON FROM/TO
----------------------------------------------------------
<S> <C> <C> <C>
8.105% 2017 $ 51 $ 52
8.366% 2019 76 77
-------
1,668
-------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION,
FIXED RATE MORTGAGE:
9.000% 2008-2009 590 615
9.500% 2009(c) 2,715 2,855
10.500% 2012-2018 261 283
-------
3,753
-------
ADJUSTABLE RATE MORTGAGE: (a)
6.875% 2022 26 26
7.000% 2022 248 250
7.375% 2023 194 195
-------
471
-------
STUDENT LOAN MARKETING ASSOCIATION,
FLOATING RATE NOTE, (a)
6.558% 2000 2,500 2,500
-------
TOTAL GOVERNMENT AGENCIES:
(cost of $21,384) 21,170
-------
GOVERNMENT OBLIGATIONS - 19.7%
U.S. TREASURY BOND,
10.750% 08/15/05(c) 685 820
-------
U.S. TREASURY NOTE,
6.500% 02/15/10(c) 473 494
-------
U.S. TREASURY NOTE/BOND,
6.625% 04/30/02(c) 1,560 1,569
6.750% 05/15/05(c) 403 415
7.875% 08/15/01(c) 1,158 1,174
-------
3,158
-------
TOTAL GOVERNMENT OBLIGATIONS
(cost of $4,446) 4,472
-------
TOTAL INVESTMENTS
(cost of $25,830)(c) 25,642
-------
</TABLE>
See notes to investment portfolio.
8
<PAGE> 11
INVESTMENT PORTFOLIO (CONTINUED)
August 31, 2000 (In thousands)
<TABLE>
<CAPTION>
LIBERTY SHORT TERM GOVERNMENT FUND
(CONTINUED)
SHORT-TERM OBLIGATIONS - 7.8% PAR VALUE
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase agreement with
SBC Warburg Ltd., dated 08/31/00, due
09/01/00 at 6.600%, collateralized
by U.S. Treasury notes with various
maturities to 2022, market value $1,602
(repurchase proceeds $1,572) $1,572 $ 1,572
FEDERAL HOME LOAN BANK DISCOUNT NOTE,
8.020%(d) 9/25/00 205 204
--------
TOTAL SHORT-TERM OBLIGATIONS 1,776
--------
OTHER ASSETS & Liabilities, Net - (21.0%) (4,765)
--------------------------------------------------------------------------------------
Net Assets - 100.0% $22,653
========
</TABLE>
Notes To Investment Portfolio:
(a) Interest rates on variable rate securities change periodically. The rates
listed are as of August 31, 2000.
(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 the same.
(d) Rate represents yield at time of purchase.
<TABLE>
<CAPTION>
LIBERTY INTERMEDIATE GOVERNMENT FUND
U.S. GOVERNMENT &
AGENCY OBLIGATIONS - 103.9% PAR VALUE
-------------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 69.1%
MATURITIES
COUPON FROM/TO
-------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORP.:
6.778% 2000 $73,750 $ 73,750
6.875% 2005 19,072 19,143
7.500% 2007-2016 595 594
8.000% 2003-2016 5,746 5,794
8.500% 2007-2017 1,472 1,498
8.750% 2005-2013 641 656
9.000% 2001-2018 1,116 1,144
9.250% 2008-2019 2,371 2,436
9.500% 2005-2016 841 869
9.750% 2016 23 24
10.000% 2019 269 281
10.250% 2009-2016 693 724
10.500% 2009-2021 1,099 1,179
11.250% 2005-2015 1,151 1,249
--------
109,341
--------
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
6.000% 2008-2026 64,163 61,732
6.625% 2009 11,525 11,306
6.500% 2007-2029 4,122 3,952
7.000% 2007-2023(a) 32,399 31,593
7.250% 2010 33,250 34,066
7.500% 2006-2023(a) 21,865 21,731
8.000% 2008-2009 1,107 1,126
8.250% 2008 339 342
8.500% 2003-2021 2,926 2,998
9.000% 2002-2022 7,849 8,086
10.000% 2001-2006 2,337 2,473
10.500% 2010-2016 1,703 1,828
11.000% 2015 417 452
--------
181,685
--------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
6.500% 2023-2029 7,696 7,416
7.000% 2022-2029(a) 88,766 87,200
7.500% 2007 129 130
8.000% 2004-2023 1,358 1,372
8.500% 2017-2022 723 737
8.750% 2021-2022 891 906
8.850% 2018-2020 1,718 1,759
9.000% 2008-2025 6,925 7,154
9.250% 2016-2022 3,374 3,473
9.500% 2004-2025 1,310 758
10.000% 2000-2024 970 1,356
10.250% 2018 188 206
10.500% 2000-2020 3,784 4,094
10.625% 2010 20 22
</TABLE>
See notes to investment portfolio.
9
<PAGE> 12
INVESTMENT PORTFOLIO (CONTINUED)
August 31, 2000 (In thousands)
<TABLE>
<CAPTION>
LIBERTY INTERMEDIATE GOVERNMENT FUND
(CONTINUED) PAR VALUE
---------------------------------------------------------------------------------------
MATURITIES
COUPON FROM/TO
--------------------------------------------------------
<S> <C> <C> <C>
11.000% 2009-2021 $ 4,583 $ 4,978
11.250% 2015 71 74
11.500% 2010-2021 7,260 7,959
11.750% 2013-2015 101 107
12.000% 2011-2016 7,143 8,051
12.250% 2013-2014 359 380
12.500% 2010-2015 4,864 5,466
12.750% 2014 43 46
13.000% 2011-2016 1,859 2,107
13.500% 2010-2015 1,295 1,480
14.000% 2011-2012 74 85
14.500% 2012 16 19
15.000% 2011-2012 80 95
--------
147,430
--------
U.S. Small Business Administration:
7.600% 01/01/12 2,462 2,500
8.200% 10/01/11 2,137 2,185
8.250% 11/01/11 5,192 5,308
8.650% 11/01/14 3,464 3,584
8.850% 08/01/11 629 646
9.150% 07/01/11 2,040 2,101
--------
16,324
--------
TOTAL GOVERNMENT AGENCIES
(cost of $484,655) 454,780
--------
GOVERNMENT OBLIGATIONS - 34.8%
U.S. TREASURY BONDS:
7.125% 02/15/23 22,918 26,305
7.875% 02/15/21 25,241 30,956
--------
57,261
--------
U.S. TREASURY NOTES:
5.875% 11/15/05 18,210 18,105
6.500% 2010-2026(b) 48,266 50,552
6.750% 05/15/05 22,584 23,283
6.875% 05/15/06 26,050 27,120
7.500% 02/15/05 29,857 31,536
7.875% 11/15/04 19,518 20,811
--------
171,407
--------
TOTAL GOVERNMENT OBLIGATIONS
(cost of $196,893) 228,668
--------
TOTAL INVESTMENTS (cost of $681,548)(b) 683,448
--------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM OBLIGATIONS - 10.7% PAR VALUE
---------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase agreement with SBC
Warburg Ltd., dated 08/31/00, due
09/01/00 at 6.600%, collateralized by
U.S. Treasury notes with various
maturities to 2022, market value $71,920
(repurchase proceeds $70,606) $70,593 $ 70,593
----------
Other Assets & Liabilities, Net - (14.6)% (96,210)
----------------------------------------------------------------------------------------
Net Assets - 100.0% $ 657,831
==========
</TABLE>
NOTES TO INVESTMENT PORTFOLIO:
(a) These securities, or a portion thereof, have been purchased on a delayed
delivery basis whereby the terms that are fixed are the purchase price,
interest rate and the settlement date. The exact quantity purchased may be
slightly more or less than the amount shown.
(b) This security, or a portion thereof, with a total market value of $2,325, is
being used to collateralize open futures contracts.
(c) Cost for federal income tax purposes is $682,213.
Long future contracts open at August 31, 2000:
<TABLE>
<CAPTION>
PAR VALUE UNREALIZED
COVERED BY EXPIRATION APPRECIATION
TYPE CONTRACTS MONTH AT 08/31/00
--------------------------------------------------------------
<S> <C> <C> <C>
Treasury Bond $27,400 September $964
Treasury Note 70,000 December 386
------
$1,350
======
</TABLE>
See notes to financial statements.
10
<PAGE> 13
INVESTMENT PORTFOLIO (CONTINUED)
August 31, 2000 (In thousands)
<TABLE>
<CAPTION>
LIBERTY FEDERAL SECURITIES FUND
U.S. GOVERNMENT &
AGENCY OBLIGATIONS - 95.8% PAR VALUE
--------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 57.4%
MATURITIES
COUPON FROM/TO
--------------------------------
<S> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORP:
6.500% 2029 $25,507 $ 24,383
6.780% 2000 45,000 45,000
6.875% 2005 31,846 31,965
7.500% 2016 326 323
8.000% 2003-2016 1,600 1,612
8.500% 2007-2010 1,151 1,171
8.750% 2004-2010 393 402
9.000% 2001-2022 2,508 2,577
9.250% 2008-2010 2,215 2,276
9.500% 2004-2016 975 1,007
9.750% 2008-2016 330 342
10.000% 2019 269 282
10.250% 2009-2013 588 614
10.500% 2017-2020 944 1,013
11.250% 2003-2015 636 691
11.500% 2015 89 97
12.000% 2013 9 10
-------
113,765
-------
FEDERAL NATIONAL MORTGAGE ASSOCIATION:
6.000% 2008-2024 27,696 26,728
6.500% 2003-2029 4,942 4,731
6.625% 2009 19,245 18,879
7.000% 2010-2050(a) 26,403 25,752
7.250% 2001 29,550 30,275
7.500% 2002-2050(a) 75,505 75,001
8.000% 2008-2019 1,281 1,304
8.250% 2008-2011 597 602
8.500% 2008-2017 2,079 2,130
9.000% 2002-2021 7,094 7,303
9.500% 2008-2018 774 806
-------
193,511
-------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION:
6.500% 2023-2029 9,379 9,006
7.000% 2022-2050(a) 36,792 36,103
7.500% 2006-2007 470 472
8.000% 2005-2008 35 36
9.000% 2008-2017 3,801 3,959
10.000% 2001-2003 11 12
10.500% 2013-2021 5,250 5,684
</TABLE>
<TABLE>
<CAPTION>
PAR VALUE
--------------------------------------------------------------------------------
MATURITIES
COUPON FROM/TO
--------------------------------
<S> <C> <C> <C>
11.000% 2010 $ 1 $ 1
11.500% 2013 21 23
11.750% 2013-2015 97 103
12.000% 2012-2015 257 285
12.500% 2010-2014 2,404 2,708
13.000% 2011-2015 1,028 1,169
-------
59,561
-------
TOTAL GOVERNMENT AGENCIES
(cost of $242,407) 366,837
-------
GOVERNMENT OBLIGATIONS - 38.4%
U.S. TREASURY BONDS:
7.125% 2/15/23 21,129 24,252
7.875% 2/15/21 19,617 24,058
8.750% 8/15/20 14,333 18,973
12.000% 8/15/13 37,961 51,763
-------
119,046
-------
U.S. TREASURY NOTES:
6.375% 8/15/02 9,665 9,694
6.500% 2/15/10 26,875 28,059
6.750% 5/15/05 18,000 18,557
7.500% 2/15/05(b) 19,889 21,008
7.875% 11/15/04 2,052 2,188
8.875% 2/15/19 35,758 47,307
-------
126,813
-------
TOTAL GOVERNMENT OBLIGATIONS
(cost of $245,155) 245,859
-------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (cost of $487,562) 612,696
-------
</TABLE>
See notes to investment portfolio.
11
<PAGE> 14
INVESTMENT PORTFOLIO (CONTINUED)
August 31, 2000 (In thousands)
<TABLE>
<CAPTION>
LIBERTY FEDERAL SECURITIES FUND (CONTINUED)
NON-AGENCY MORTGAGE-BACKED &
ASSET-BACKED SECURITIES - 17.0% PAR VALUE
--------------------------------------------------------------------------------
<S> <C> <C> <C>
NON-AGENCY MORTGAGE-BACKED SECURITIES - 7.4%
CHASE MORTGAGE FINANCE CORP.,
7.750% 4/25/30 $ 584 $ 542
COUNTRYWIDE MORTGAGE TRUST:
7.250% 9/25/29 1,788 1,604
7.600% 4/25/23 753 753
7.990% 3/31/31 5,000 5,014
8.600% 3/31/31 5,930 5,949
8.450% 9/25/31 1,500 1,500
9.000% 6/25/31 6,000 6,099
CS FIRST BOSTON MORTGAGE
SECURITIES CORP.,
7.500% 6/1/20(c) 6,185 6,113
FIRST BOSTON MORTGAGE SECURITIES CORP.,
6.150% 9/28/13 462 448
GE CAPITAL MORTGAGE SERVICES, INC.
8.000% 6/25/30 743 708
HEADLANDS MORTGAGE SECURITIES, INC.:
6.500% 11/25/28 490 409
7.750% 3/25/27 5,217 5,319
NORWEST ASSET SECURITIES CORP.:
6.750% 5/25/28 1,680 1,567
7.000% 4/25/12 2,233 2,155
PNC MORTGAGE SECURITIES CORP.,
7.000% 5/25/27 2,226 2,210
RESIDENTIAL ASSET SECURITIZATION TRUST:
7.500% 11/25/11 997 971
7.500% 12/25/29 1,691 1,616
STRUCTURED MORTGAGE ASSET
RESIDENTIAL TRUST,
8.375% 6/25/08 1,275 1,282
WASHINGTON MUTUAL:
6.530% 1/25/40 1,500 1,493
6.930% 1/25/40 1,500 1,493
-------
47,245
-------
ASSET-BACKED SECURITIES - 9.6%
CONSECO FINANCE,
8.390% 2/15/31 300 300
CONTIMORTAGE HOME EQUITY LOAN TRUST,
7.340% 4/15/28 2,531 2,398
DELTA FUNDING HOME EQUITY LOAN TRUST,
7.330% 10/25/28 7,300 6,906
GREEN TREE FINANCIAL CORP.:
7.320% 7/15/28 4,500 4,447
7.850% 8/15/25 8,600 7,336
INDYMAC MANUFACTURED HOUSING CONTRACT,
6.970% 2/25/28 4,562 4,401
THE MONEY STORE HOME EQUITY TRUST,
8.525% 6/15/25 2,800 2,912
</TABLE>
<TABLE>
<CAPTION>
PAR VALUE
--------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED MORTGAGE ASSET TRUST,
7.900% 5/25/12(c) $ 1,438 $ 1,428
PRUDENTIAL HOME MORTGAGED SECURITIES,
6.456% 12/28/08(c) 1,205 1,142
RESIDENTIAL ACCREDITED LOANS, INC.,
6.500% 5/25/29 3,853 3,348
SAXON ASSET SECURITIES TRUST:
8.370% 7/25/30 11,449 11,596
8.664% 7/25/30 12,000 12,154
TRYON MORTGAGE FUNDING, INC.,
7.500% 2/20/27 1,207 1,175
UCFC HOME EQUITY LOAN TRUST,
8.550% 1/10/20 2,052 2,082
---------
61,625
---------
NON-AGENCY MORTGAGE-BACKED
& ASSET-BACKED SECURITIES
(cost $237,077) 108,870
---------
TOTAL INVESTMENTS (cost of $724,639)(d) 721,566
---------
SHORT-TERM OBLIGATIONS - 3.9%
--------------------------------------------------------------------------------
Repurchase agreement with
SBC Warburg Ltd., dated 08/31/00, due
09/01/00 at 6.600%, collateralized
by U.S. Treasury notes with various
maturities to 2022, market value $25,525
(repurchase proceeds $25,059) 25,054 25,054
-------- ---------
OTHER ASSETS & LIABILITIES, NET - (16.7%) (106,800)
--------------------------------------------------------------------------------
Net Assets - 100.0% $ 639,820
=========
</TABLE>
NOTES TO INVESTMENT PORTFOLIO:
(a) These securities, or a portion thereof, have been purchased on a delayed
delivery basis whereby the terms that are fixed are the purchase price,
interest rate and the settlement date. The exact quantity purchased may be
slightly more or less than the amount shown.
(b) These securities, or a portion thereof, with a total market value of $1,690,
are being used to collateralize open futures contracts listed below.
(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,
2000, the value of these securities amounted to $8,683 or 1.4% of net
assets.
(d) Cost for federal income tax purposes is the $724,670.
Long futures contracts open on August 31, 2000:
<TABLE>
<CAPTION>
PAR VALUE UNREALIZED
COVERED BY EXPIRATION APPRECIATION
TYPE CONTRACTS MONTH AT 08/31/00
----------------------------------------------------------------------
<S> <C> <C> <C>
Treasury Bond $31,200 September $1,098
Treasury Note 64,000 December 411
Treasury Note 17,600 December 84
------
$1,593
======
</TABLE>
See notes to investment portfolio.
12
<PAGE> 15
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2000
(In thousands except for per share amounts and footnotes)
<TABLE>
<CAPTION>
LSTGF LIGF
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at cost $ 25,830 $ 681,548
Appreciation/Depreciation (188) 1,900
Investments at value 25,642 683,448
Short-term obligations 1,776 70,593
Investments held as collateral for loaned securities -- 204,371
--------------- -----------------
27,418 958,412
Receivable for:
Investments sold $1,512 $65,929
Interest 252 6,042
Variation margin on futures contracts -- 503
Fund shares sold 8 49
Expense reimbursements due from Advisor 21 --
Other 6 1,799 345 72,868
------ --------------- ------- -----------------
Total Assets 29,217 1,031,280
LIABILITIES
Payable for:
Investments purchased 6,370 164,290
Fund shares repurchased 108 2,709
Distributions 36 1,175
Collateral for securities at value -- 204,371
Accrued:
Management fee 10 332
Transfer Agent fee 9 277
Bookkeeping fee 2 20
Service fee 1 --
Deferred Trustees' fees 3 25
Other 25 250
------ -------
Total Liabilities 6,564 373,449
--------------- -----------------
NET ASSETS $ 22,653 $ 657,831
--------------- -----------------
Net asset value & redemption price per share -- Class A $9.67(a) $6.28(a)
--------------- -----------------
($10,549/1,091) ($465,738/74,138)
Maximum offering price per share -- Class A $9.99(b) $6.59(b)
--------------- -----------------
($9.67/0.9675) ($6.28/0.9525)
Net asset value & offering price per share -- Class B $9.67(a) $6.28(a)
--------------- -----------------
($7,854/812) ($183,760/29,244)
Net asset value & offering price per share -- Class C $9.67(a) $6.28(a)
--------------- -----------------
($4,250/439) ($1,931/307)
Net asset value, offering & redemption price per share -- Class Z -- $6.28
--------------- -----------------
-- ($6,402/1,019)
COMPOSITION OF NET ASSETS
Capital paid in $ 23,319 $ 813,821
Underdistributed (overdistributed) net investment income 68 (1,247)
Accumulated net realized loss (546) (157,993)
Net unrealized appreciation (depreciation) on:
Investments (188) 1,900
Open futures contracts -- 1,350
=============== =================
$ 22,653 $ 657,831
=============== =================
</TABLE>
<TABLE>
<CAPTION>
LFSF
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments at cost 724,639
Appreciation/Depreciation (3,073)
Investments at value 721,566
Short-term obligations 25,054
Investments held as collateral for loaned securities 184,738
-----------------
931,358
Receivable for:
Investments sold $1,205
Interest 4,736
Variation margin on futures contracts 521
Fund shares sold 97
Expense reimbursements due from Advisor --
Other 372 6,931
------- -----------------
Total Assets 938,289
LIABILITIES
Payable for:
Investments purchased 109,458
Fund shares repurchased 2,054
Distributions 1,351
Collateral for securities at value 184,738
Accrued:
Management fee 321
Transfer Agent fee 237
Bookkeeping fee 20
Service fee --
Deferred Trustees' fees 14
Other 276
-------
Total Liabilities 298,469
-----------------
NET ASSETS $ 639,820
-----------------
Net asset value & redemption price per share -- Class A $10.02(a)
-----------------
($582,535/58,125)
Maximum offering price per share -- Class A $10.52(b)
-----------------
($10.02/0.9525)
Net asset value & offering price per share -- Class B $10.02(a)
-----------------
($53,765/5,365)
Net asset value & offering price per share -- Class C $10.02(a)
-----------------
($3,519/351)
Net asset value, offering & redemption price per share -- Class Z $10.02
-----------------
($1/(c))
COMPOSITION OF NET ASSETS
Capital paid in $ 811,500
Underdistributed (overdistributed) net investment income (2,089)
Accumulated net realized loss (168,111)
Net unrealized appreciation (depreciation) on:
Investments (3,073)
Open futures contracts 1,593
=================
$ 639,820
=================
</TABLE>
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $100,000 or more of LSTGF or $50,000 or more of LIGF or LFSF
the offering price is reduced.
(c) Rounds to less than one.
See notes to financial statements.
13
<PAGE> 16
STATEMENT OF OPERATIONS
For the Year Ended August 31, 2000
(In thousands)
<TABLE>
<CAPTION>
LSTGF LIGF LFSF
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest (including income on securities loaned
of none, $211 and $135) $ 1,620 $ 53,369 $ 52,027
Dollar roll fee income 61 2,566 3,371
------- --------- --------
1,681 55,935 55,398
EXPENSES
Management fee $ 130 $ 4,465 $ 4,154
Service fee -- Class A, B and C 50 1,827 1,721
Distribution fee -- Class B 50 1,797 470
Distribution fee -- Class C 7 19 35
Transfer agent fee 63 1,798 1,617
Bookkeeping fee 27 270 252
Trustees' fee 7 37 34
Custodian fee 3 129 54
Audit fee 17 63 49
Legal fee 6 10 8
Registration fee 32 68 62
Reports to shareholders 5 152 117
Other 2 22 19
------ --------- ----------
399 10,657 8,592
Fees and expenses waived or borne by the Advisor (151) -- --
Fees waived by the Distributor -- Class C -- 248 (4) 10,653 (7) 8,585
------ ------- --------- --------- ----------- --------
Net Investment Income 1,433 45,282 46,813
------- --------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
PORTFOLIO POSITIONS
Net realized gain (loss) on:
Investments (277) (21,321) (32,669)
Written options -- 300 292
Closed future contracts -- (2,035) (4,387)
------ --------- ----------
Net Realized Loss (277) (23,056) (36,764)
Net change in unrealized appreciation/depreciation
during the period on:
Investments 28 15,958 28,751
Open future contracts -- 1,022 1,381
Open written options -- (147) (147)
------ --------- ----------
Net change in unrealized appreciation/depreciation 28 16,833 29,985
------- --------- --------
Net Loss (249) (6,223) (6,779)
------- --------- --------
Increase in Net Assets from Operations $ 1,184 $ 39,059 $ 40,034
------- --------- --------
</TABLE>
See notes to financial statements.
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
August 31 August 31 August 31 August 31
----------------------------------------------------------------------------------------------------------------------------------
LSTGF LSTGF LIGF LIGF(a)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS 2000 1999 2000 1999
Operations:
Net investment income $ 1,433 $ 1,101 $ 45,282 $ 55,956
Net realized loss (277) (235) (23,056) (11,415)
Net change in unrealized appreciation/depreciation 28 (203) 16,833 (52,631)
------------ ------------ ----------- -----------
Net Increase (Decrease) from Operations 1,184 663 39,059 (8,090)
Distributions:
From net investment income -- Class A (652) (567) (29,837) (33,518)
In excess of net investment income -- Class A -- (11) (360) --
In excess of net realized gains -- Class A -- (7) -- --
Return of capital -- Class A -- -- (553) --
From net investment income -- Class B (398) (325) (12,784) (16,988)
In excess of net investment income -- Class B -- (6) (154) --
In excess of net realized gains -- Class B -- (4) -- --
Return of capital -- Class B -- -- (237) --
From net investment income -- Class C (262) (169) (139) (116)
In excess of net investment income -- Class C -- (3) (2) --
In excess of net realized gains -- Class C -- (3) -- --
Return of capital -- Class C -- -- (3) --
From net investment income -- Class Z -- -- (437) (138)
In excess of net investment income -- Class Z -- -- (5) --
In excess of net realized gains -- Class Z -- -- -- --
Return of capital -- Class Z -- -- (8) --
------------ ------------ ----------- -----------
(128) (432) (5,460) (58,850)
------------ ------------ ----------- -----------
Fund Share Transactions:
Receipts for shares sold -- Class A 7,853 16,989 103,062 132,798
Receipts for shares issued in the acquisition of
Crabbe Huson U.S. Govt. Income Fund -- 4,254 -- --
Value of distributions reinvested -- Class A 561 467 18,966 20,730
Cost of shares repurchased -- Class A (9,557) (17,154) (190,520) (229,910)
------------ ------------ ----------- -----------
(1,143) 4,556 (68,492) (76,382)
------------ ------------ ----------- -----------
Receipts for shares sold -- Class B 4,089 9,622 11,745 35,046
Value of distributions reinvested -- Class B 286 219 7,377 9,834
Cost of shares repurchased -- Class B (4,680) (8,969) (128,936) (122,781)
------------ ------------ ----------- -----------
(305) 872 (109,814) (77,901)
------------ ------------ ----------- -----------
Receipts for shares sold -- Class C 1,136 4,319 457 3,162
Value of distributions reinvested -- Class C 186 138 109 97
Cost of shares repurchased -- Class C (2,244) (1,066) (1,712) (969)
------------ ------------ ----------- -----------
(922) 3,391 (1,146) 2,290
------------ ------------ ----------- -----------
Receipts for shares sold -- Class Z -- -- 701 7,432
Value of distributions reinvested -- Class Z -- -- 450 125
Cost of shares repurchased -- Class Z -- -- (2,019) (13)
------------ ------------ ----------- -----------
-- -- (868) 7,544
------------ ------------ ----------- -----------
Net Increase (Decrease) from Fund Share Transactions (2,370) 8,819 (180,320) (144,449)
------------ ------------ ----------- -----------
Total Increase (Decrease) (2,498) 8,387 (185,780) (203,299)
------------ ------------ ----------- -----------
NET ASSETS
Beginning of period 25,151 16,764 843,611 1,046,910
------------ ------------ ----------- -----------
End of period $ 22,653 $ 25,151 $ 657,831 $ 843,611
------------ ------------ ----------- -----------
Net of undistributed (overdistributed)
net investment income $ 68 $(49) $ (1,247) $ (716)
------------ ------------ ----------- -----------
NUMBER OF FUND SHARES
Sold -- Class A 812 1,732 16,579 19,974
Issued in acquisition of Crabbe Huson U.S. Govt. Income Fund -- 421 -- --
Issued for distributions reinvested -- Class A 58 47 3,032 3,136
Repurchased -- Class A (988) (1,719) (30,552) (34,681)
------------ ------------ ----------- -----------
(118) 481 (10,941) (11,571)
------------ ------------ ----------- -----------
Sold -- Class B 423 965 1,888 5,259
Issued for distributions reinvested -- Class B 30 22 1,167 1,487
Repurchased -- Class B (484) (898) (20,653) (18,569)
------------ ------------ ----------- -----------
(31) 89 (17,598) (11,823)
------------ ------------ ----------- -----------
Sold -- Class C 117 435 73 476
Issued for distributions reinvested -- Class C 19 14 17 15
Repurchased -- Class C (232) (108) (275) (148)
------------ ------------ ----------- -----------
(96) 341 (185) 343
------------ ------------ ----------- -----------
Sold -- Class Z -- -- 111 1,141
Issued for distributions reinvested -- Class Z -- -- 72 19
Repurchased -- Class Z -- -- (322) (2)
------------ ------------ ----------- -----------
-- -- (139) 1,158
------------ ------------ ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
August 31 August 31
------------------------------------------------------------------------------------------------------
LFSF LFSF(b)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS 2000 1999
Operations:
Net investment income $ 46,813 $ 55, 075
Net realized loss (36,764) (16,079)
Net change in unrealized appreciation/depreciation 29,985 (60,077)
----------- ------------
Net Increase (Decrease) from Operations 40,034 (21,081)
Distributions:
From net investment income -- Class A (42,603) (47,748)
In excess of net investment income -- Class A (1,864) --
In excess of net realized gains -- Class A -- --
Return of capital -- Class A (618) --
From net investment income -- Class B (3,820) (4,106)
In excess of net investment income -- Class B (167) --
In excess of net realized gains -- Class B -- --
Return of capital -- Class B (55) --
From net investment income -- Class C (293) (207)
In excess of net investment income -- Class C (13) --
In excess of net realized gains -- Class C -- --
Return of capital -- Class C (4) --
From net investment income -- Class Z (c) (c)
In excess of net investment income -- Class Z (c) --
In excess of net realized gains -- Class Z -- --
Return of capital -- Class Z (c) --
----------- ------------
(9,403) (73,142)
----------- ------------
Fund Share Transactions:
Receipts for shares sold -- Class A 24,593 45,956
Receipts for shares issued in the acquisition of
Crabbe Huson U.S. Govt. Income Fund -- --
Value of distributions reinvested -- Class A 23,606 24,813
Cost of shares repurchased -- Class A (138,813) (144,033)
----------- ------------
(90,614) (73,264)
----------- ------------
Receipts for shares sold -- Class B 9,936 36,968
Value of distributions reinvested -- Class B 2,452 2,386
Cost of shares repurchased -- Class B (29,987) (32,284)
----------- ------------
(17,599) 7,070
----------- ------------
Receipts for shares sold -- Class C 980 4,548
Value of distributions reinvested -- Class C 258 171
Cost of shares repurchased -- Class C (2,637) (725)
----------- ------------
(1,399) 3,994
----------- ------------
Receipts for shares sold -- Class Z -- 1
Value of distributions reinvested -- Class Z (c) (c)
Cost of shares repurchased -- Class Z -- (c)
----------- ------------
(c) 1
----------- ------------
Net Increase (Decrease) from Fund Share Transactions (109,612) (62,199)
----------- ------------
Total Increase (Decrease) (119,015) (135,341)
----------- ------------
NET ASSETS
Beginning of period 758,835 894,176
----------- ------------
End of period $ 639,820 $ 758,835
----------- ------------
Net of undistributed (overdistributed)
net investment income $ (2,089) $ 641
----------- ------------
NUMBER OF FUND SHARES
Sold -- Class A 2,469 4,205
Issued in acquisition of Crabbe Huson U.S. Govt. Income Fund
Issued for distributions reinvested -- Class A 2,366 2,305
Repurchased -- Class A (13,950) (13,322)
----------- ------------
(9,115) (6,812)
----------- ------------
Sold -- Class B 995 3,383
Issued for distributions reinvested -- Class B 245 222
Repurchased -- Class B (3,008) (2,972)
----------- ------------
(1,768) 663
----------- ------------
Sold -- Class C 98 416
Issued for distributions reinvested -- Class C 26 16
Repurchased -- Class C (265) (67)
----------- ------------
(141) 365
----------- ------------
Sold -- Class Z -- (c)
Issued for distributions reinvested -- Class Z (c) (c)
Repurchased -- Class Z -- (c)
----------- ------------
(c) (c)
----------- ------------
</TABLE>
(a) Class Z Shares were initially offered on January 29, 1999.
(b) Class Z shares were initially offered on January 11, 1999.
(c) Rounds to less than one.
See notes to financial statements.
15
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
ORGANIZATION:
Liberty Short Term Government Fund (formerly Colonial Short Duration U.S.
Government Fund) (LSTGF), and Liberty Intermediate Government Fund (formerly
Colonial Intermediate U.S. Government Fund) (LIGF), are each a series of Liberty
Trust II and Liberty Federal Securities Fund (formerly Colonial Federal
Securities Fund) (LFSF) is a series of Liberty Trust III (the series
collectively referred to as the "Funds" and are diversified portfolios). Liberty
Trust II and Liberty Trust III are Massachusetts business trusts registered
under the Investment Company Act of 1940, as amended, as open end management
investment companies. LSTGF'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. LIGF'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. LFSF'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. LSTGF offers three classes of shares: Class A, Class B, and Class C.
LIGF and LFSF offer four classes of shares: Class A, Class B, Class C, and Class
Z. Class A shares are sold with a front-end sales charge. A 1.00% contingent
deferred sales charge is assessed to Class A shares purchased without an initial
sales charge on redemptions made within eighteen months on an original purchase
of $1 million to $25 million. 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 in three, four, or eight years after purchase
depending on the program under which shares were purchased. Class C shares are
subject to a contingent deferred sales charge on redemptions made within one
year after purchase and an annual distribution fee. Class Z shares are offered
continuously at net asset value. There are certain restrictions on purchasing
Class Z shares, as defined in the Fund's prospectus.
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. 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 for which market quotations are not readily available 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 (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 subsequently 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.
SECURITIES LENDING
LIGF and LFSF may lend its securities to certain qualified brokers who pay the
Fund negotiated lender fees. These fees are included in interest income. The
loans are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As with
other extensions of credit, the Funds may bear risk of delay of the loaned
securities in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. At August 31, 2000, LIGF and LFSF
loaned securities having a market value of $200,749,031 and $181,297,650,
respectively, collateralized by securities issued by the U.S. Government and its
agencies and cash which was invested in a short-term instruments in the amount
of $204,370,751, and $184,738,030, respectively.
DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS:
All income, expenses (other than 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
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
INTEREST INCOME, FEE INCOME, DEBT DISCOUNT AND PREMIUM:
Interest income is recorded on the accrual basis. Fee income attributable to
mortgage dollar roll transactions is recorded on the accrual basis over the term
of the transaction. Original issue discount is accreted to interest income over
the life of a security with a corresponding increase in the cost basis. Premium
and market discount are not amortized or accreted.
DISTRIBUTIONS TO SHAREHOLDERS:
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.
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES
MANAGEMENT FEE:
Colonial Management Associates, Inc. (the Advisor) is the investment Advisor 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:
LSTGF
Flat fee rate of 0.55% annually
<TABLE>
<CAPTION>
LIGF
AVERAGE NET ASSETS ANNUAL FEE RATE
--------------------------------------------------------------------------------
<S> <C>
First $1 billion 0.60%
Next $500 million 0.55%
Over $1.5 billion 0.50%
</TABLE>
<TABLE>
<CAPTION>
LFSF
AVERAGE NET ASSETS ANNUAL FEE RATE
--------------------------------------------------------------------------------
<S> <C>
First $1 billion 0.60%
Next $1 billion 0.55%
Next $1 billion 0.50%
Over $3 billion 0.40%
</TABLE>
BOOKKEEPING FEE:
For each Fund the Advisor provides bookkeeping and pricing services for a
monthly fee equal to $27,000 annually plus a percentage of the Fund's average
net assets as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS ANNUAL FEE RATE
--------------------------------------------------------------------------------
<S> <C>
First $50 million No charge
Next $950 million 0.035%
Next $1 billion 0.025%
Next $1 billion 0.015%
</TABLE>
TRANSFER AGENT FEE:
Liberty Funds Services, Inc. (the Transfer Agent), an affiliate of the Advisor,
provided shareholder services for a monthly fee equal to 0.17% annually of each
Fund's average net assets and received reimbursement for certain out-of-pocket
expenses through December 31, 1999.
Effective January 1, 2000, the Transfer Agent fee was changed to a fee comprised
of 0.07% annually of average net assets plus charges based on the number of
shareholder accounts and transactions. The Transfer Agent continues to receive
reimbursements for certain-out-of-pocket expenses.
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES:
Liberty Funds Distributor, Inc. (the Distributor), a subsidiary of the Advisor,
is each Fund's principal underwriter. During the year ended August 31, 2000,
each Fund has been advised that the Distributor retained net underwriting
discounts on LSTGF, LIGF and LFSF of $1,496, $13,011, and $14,125, respectively,
on sales of the Funds' Class A shares and received contingent deferred sales
charges (CDSC) of $10,468, $8,291, and $8,456 on Class A share redemptions,
$43,648, $307,402, and $213,667 on Class B share redemptions, and $2,382,
$2,632, and $1,182, on Class C share redemptions, respectively.
Each Fund has adopted a 12b-1 plan which requires the payment of a service fee
to the Distributor. LIGF and LFSF pay a service fee equal to 0.25% annually on
Class A, Class B and Class C net assets as of the 20th of each month. LSTGF 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. LSTGF 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. LIGF and
LFSF each pay a distribution fee equal to 0.75% annually of the average net
assets attributable to Class B and Class C shares. The Distributor has
voluntarily agreed, until further notice, to waive a portion of the Class C
share distribution fee so that it does not exceed 0.60% annually for LIGF and
LFSF.
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:
For LSTGF, the Advisor has agreed, until further notice, to waive fees and bear
certain Fund expenses to the extent that total expenses (exclusive of service
and distribution fees, brokerage commissions, interest, taxes and extraordinary
expenses, if any) exceed 0.60% annually of the Fund's average net assets.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OTHER:
The Funds pay no compensation to their officers, all of whom are employees of
the Advisor.
The Funds' Trustees may participate in a deferred compensation plan which may be
terminated at any time. Obligations of the plan will be paid solely out of the
Funds' assets.
NOTE 3. PORTFOLIO INFORMATION
INVESTMENT ACTIVITY:
For the year ended August 31, 2000, purchases and sales of investments, other
than short-term obligations and mortgage dollar roll transactions, were as
follows:
<TABLE>
<CAPTION>
PURCHASES SALES
--------------------------------------------------------------------------------
<S> <C> <C>
LSTGF $ 35,320,297 $ 37,011,948
LIGF $ 425,176,541 $ 489,668,892
LFSF $ 844,510,712 $ 1,008,055,253
</TABLE>
Transactions in written call options were as follows:
<TABLE>
<CAPTION>
LIGF
--------------------------------------------------------------------------------
PAR VALUE
COVERED BY PREMIUMS
WRITTEN OPTIONS RECEIVED
--------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at
Beginning of period $ 30,000,000 $ 147,656
Written 43,710,000 152,028
Closed -- --
Expirations 73,710,000 299,684
Exercises
Outstanding at
End of Period -- --
</TABLE>
<TABLE>
<CAPTION>
LFSF
--------------------------------------------------------------------------------
PAR VALUE
COVERED BY PREMIUMS
WRITTEN OPTIONS RECEIVED
--------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at
Beginning of period $ 30,000,000 $ 147,656
Written 44,500,000 143,853
Closed -- --
Expirations 74,500,000 291,509
Exercises
Outstanding at
End of Period -- --
</TABLE>
Unrealized appreciation (depreciation) at August 31, 2000, for federal income
tax purposes was:
<TABLE>
<CAPTION>
LSTGF LIGF LFSF
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized
appreciation $ 31,238 $ 6,772,013 $ 8,779,659
Gross unrealized
depreciation (219,708) (5,536,772) (11,883,679)
---------- ----------- ------------
Net unrealized appreciation
(depreciation) $ (188,470) $ 1,235,241 $ (3,104,020)
---------- ----------- ------------
</TABLE>
CAPITAL LOSS CARRYFORWARDS:
At August 31, 2000, capital loss carryforwards available (to the extent provided
in regulations) to offset future realized gains were approximately as follows:
<TABLE>
<CAPTION>
YEAR OF CAPITAL LOSS
EXPIRATION CARRYFORWARDS
--------------------------------------------------------------------------------
<S> <C> <C>
LSTGF 2008 $ 287,000
---------
</TABLE>
<TABLE>
<CAPTION>
YEAR OF CAPITAL LOSS
EXPIRATION CARRYFORWARD
--------------------------------------------------------------------------------
<S> <C> <C>
LIGF 2001 $ 4,910,000
2002 7,249,000
2003 67,291,000
2004 32,580,000
2005 18,973,000
2008 11,708,000
------------
$142,711,000
============
</TABLE>
Of the LIGF loss carryforwards expiring in 2001 and 2002, $4,910,000 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.
<TABLE>
<CAPTION>
YEAR OF CAPITAL LOSS
EXPIRATION CARRYFORWARD
--------------------------------------------------------------------------------
<S> <C> <C>
LFSF 2002 $ 84,302,000
2004 21,929,000
2008 24,031,000
============
$130,262,000
============
</TABLE>
Expired capital loss carryforwards, if any, are recorded as a reduction of
capital paid in.
To the extent loss carryforwards are used to offset any future realized gains,
it is unlikely that such gains would be distributed since they may be taxable to
shareholders as ordinary income.
OTHER:
LIGF and LFSF 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. The Funds 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
Advisor 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
LSTGF may borrow up to 33 1/3% 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, 2000.
NOTE 5. PLAN OF REORGANIZATION
A proxy has been filed with the SEC proposing the merger of the Liberty Short
Term Government Fund into the Liberty Intermediate Government Fund which is
subject to Trustee approval.
18
<PAGE> 21
FINANCIAL HIGHLIGHTS LSTGF
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 2000
-----------------------------------------
CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.720 $ 9.720 $ 9.720
-------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a)(b) 0.612 0.549 0.593
Net realized and unrealized loss (0.098) (0.098) (0.098)
-------- ------- -------
Total from Investment Operations 0.514 0.451 0.495
-------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.564) (0.501) (0.545)
-------- ------- -------
Net Asset Value, End of Period $ 9.670 $ 9.670 $ 9.670
======== ======= =======
Total return (c)(d) 5.45% 4.77% 5.24%
======== ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses (e) 0.80% 1.45% 1.00%
Net investment income (e) 6.34% 5.69% 6.14%
Fees and expenses waived or borne by the Advisor (e) 0.64% 0.64% 0.64%
Portfolio turnover 171% 171% 171%
Net assets at end of period (000) $ 10,549 $ 7,854 $ 4,250
(a) Net of fees and expenses waived or borne by the Advisor which amounted to: $ 0.062 $ 0.062 $ 0.062
(b) The per share net investment income amounts do not reflect the period's
reclassification of differences between book and tax basis net investment
income.
(c) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(d) Had the Advisor not waived or reimbursed a portion of expenses, total
return would have been reduced.
(e) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
</TABLE>
--------------------------------------------------------------------------------
State Tax Information for the year ended August 31, 2000 (unaudited)
An average of 27% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury. Approximately 22% of the Fund's
ordinary income distributions (17% of gross income) was derived from interest on
direct investments in U.S. Treasury bonds, notes and bills.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1999
------------------------------------------
CLASS A CLASS B CLASS C
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000 $ 10.000 $ 10.000
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.482 0.417 0.462
Net realized and unrealized loss (0.278) (0.278) (0.278)
-------- -------- --------
Total from Investment Operations 0.204 0.139 0.184
-------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.470) (0.406) (0.451)
In excess of net investment income (0.009) (0.008) (0.008)
In excess of net realized gains (0.005) (0.005) (0.005)
-------- -------- --------
Total Distributions Declared to Shareholders (0.484) (0.419) (0.464)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.720 $ 9.720 $ 9.720
======== ======== ========
Total return (b)(c) 2.05% 1.39% 1.85%
======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses (d) 0.80% 1.45% 1.00%
Net investment income (d) 4.87% 4.22% 4.67%
Fees and expenses waived or borne by the Advisor (d) 0.69% 0.69% 0.69%
Portfolio turnover 112% 112% 112%
Net assets at end of period (000) $ 11,750 $ 8,198 $ 5,203
(a) Net of fees and expenses waived or borne by the Advisor which amounted to: $ 0.069 $ 0.069 $ 0.069
(b) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(c) Had the Advisor not waived or reimbursed a portion of expenses, total
return would have been reduced.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
</TABLE>
19
<PAGE> 22
FINANCIAL HIGHLIGHTS LSTGF (CONTINUED)
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year ended August 31, 1998
------------------------------------------
CLASS A CLASS B CLASS C
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.920 $ 9.920 $ 9.920
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.529 0.462 0.508
Net realized and unrealized gain 0.113 0.113 0.113
-------- -------- --------
Total from Investment Operations 0.642 0.575 0.621
-------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.541) (0.476) (0.521)
In excess of net investment income (0.021) (0.019) (0.020)
-------- -------- --------
Total Distributions Declared to Shareholders (0.562) (0.495) (0.541)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.000 $ 10.000 $ 10.000
======== ======== ========
Total return (b)(c) 6.64% 5.93% 6.41%
======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses (d) 0.70% 1.35% 0.90%
Net investment income (d) 5.37% 4.72% 5.17%
Fees and expenses waived or borne by the Advisor (d) 1.10% 1.10% 1.10%
Portfolio turnover 183% 183% 183%
Net assets at end of period (000) $ 7,284 $ 7,543 $ 1,937
(a) Net of fees and expenses waived or borne by the Advisor which amounted to: $ 0.110 $ 0.110 $ 0.110
(b) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(c) Had the Advisor not waived or reimbursed a portion of expenses, total
return would have been reduced.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
</TABLE>
<TABLE>
<CAPTION>
Year ended August 31, 1997
------------------------------------------
CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.820 $ 9.820 $ 9.820
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.561 0.497 0.542
Net realized and unrealized gain 0.090 0.090 0.090
------- ------- -------
Total from Investment Operations 0.651 0.587 0.632
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.551) (0.487) (0.532)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.920 $ 9.920 $ 9.920
======= ======= =======
Total return (b)(c) 6.79% 6.11% 6.59%
======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses (d) 0.50% 1.15% 0.70%
Net investment income (d) 5.64% 4.99% 5.44%
Fees and expenses waived or borne by the Advisor (d) 1.76% 1.76% 1.76%
Portfolio turnover 73% 73% 73%
Net assets at end of period (000) $ 6,858 $ 4,233 $ 575
(a) Net of fees and expenses waived or borne by the Advisor which amounted to: $ 0.169 $ 0.169 $ 0.169
(b) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(c) Had the Advisor not waived or reimbursed a portion of expenses, total
return would have been reduced.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
</TABLE>
20
<PAGE> 23
FINANCIAL HIGHLIGHTS LSTGF (CONTINUED)
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Years ended August 31
------------------------------------------
1996
------------------------------------------
CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.850 $ 9.850 $ 9.850
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.568 0.504 0.549
Net realized and unrealized loss (0.032) (0.032) (0.032)
------- ------- -------
Total from Investment Operations 0.536 0.472 0.517
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.566) (0.502) (0.547)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.820 $ 9.820 $ 9.820
======= ======= =======
Total return (b)(c) 5.57% 4.89% 5.36%
======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses (d) 0.50% 1.15% 0.70%
Net investment income (d) 5.99% 5.34% 5.79%
Fees and expenses waived or borne by the Advisor (d) 1.48% 1.48% 1.48%
Portfolio turnover 51% 51% 51%
Net assets at end of period (000) $ 6,136 $ 4,004 $ 461
(a) Net of fees and expenses waived or borne by the Advisor which amounted to: $ 0.136 $ 0.136 $ 0.136
(b) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(c) Had the Advisor not waived or reimbursed a portion of expenses, total
return would have been reduced.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
</TABLE>
21
<PAGE> 24
FINANCIAL HIGHLIGHTS LIGF
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 2000
------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.320 $ 6.320 $ 6.320 $ 6.320
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.395 0.348 0.358(b) 0.411
Net realized and unrealized loss (0.045) (0.045) (0.045) (0.045)
------- ------- ------- -------
Total from Investment Operations 0.350 0.303 0.313 0.366
------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.378) (0.333) (0.343) (0.394)
In excess of net investment income (0.005) (0.004) (0.004) (0.005)
Return of capital (0.007) (0.006) (0.006) (0.007)
------- ------- ------- -------
Total Distributions Declared to Shareholders (0.390) (0.343) (0.353) (0.406)
======= ======= ======= =======
NET ASSET VALUE, END OF PERIOD $ 6.280 $ 6.280 $ 6.280 $ 6.280
======= ======= ======= =======
Total return (c) 5.77% 4.98% 5.14%(e) 6.03%
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (d) 1.20% 1.95% 1.80%(b) 0.95%
Net investment income (d) 6.35% 5.60% 5.75%(b) 6.60%
Portfolio turnover 84% 84% 84% 84%
Net assets at end of period (in millions) $ 466 $ 184 $ 2 $ 6
</TABLE>
(a) The per share net investment income amounts do not reflect the period's
reclassification of differences between book and tax basis net
investment income.
(b) Net of fees waived by the Distributor which amounted to $0.009 per
share and 0.15%.
(c) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(e) Had the Distributor not waived a portion of the expenses, total return
would have been reduced.
-------------------------------------------------------------------------------
State Tax Information (unaudited):
An average of 32% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury. Approximately 41% of the Fund's
distributions (34% of gross income) was derived from interest on direct
investments in U.S. Treasury bonds, notes and bills.
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1999
------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z(a)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.730 $ 6.730 $ 6.730 $ 6.760
------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.375 0.325 0.335(b) 0.224
Net realized and unrealized loss (0.416) (0.416) (0.416) (0.435)
------- -------- ------- -------
Total from Investment Operations (0.041) (0.091) (0.081) (0.211)
------- -------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.369) (0.319) (0.329) (0.229)
------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 6.320 $ 6.320 $ 6.320 $ 6.320
======= ======== ======= =======
Total return (c) (0.70)% (1.44)% (1.29)%(d) (3.31)%(e)
======= ======== ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (f) 1.15% 1.90% 1.75%(b) 0.92%(g)
Net investment income (f) 6.10% 5.35% 5.50%(b) 6.35%(g)
Portfolio turnover 62% 62% 62% 62%
Net assets at end of period (in millions) $ 537 $ 296 $ 3 $ 7
</TABLE>
(a) Class Z shares were initially offered on January 29, 1999. Per share
data reflects activity from that date.
(b) Net of fees waived by the Distributor which amounted to $0.007 per
share and 0.15%.
(c) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(d) Had the Distributor not waived a portion of the expenses, total return
would have been reduced.
(e) Not annualized
(f) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(g) Annualized.
22
<PAGE> 25
FINANCIAL HIGHLIGHTS LIGF (continued)
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1998
--------------------------------------------
CLASS A CLASS B CLASS C
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.510 $ 6.510 $ 6.510
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.420 0.370 0.380(a)
Net realized and unrealized gain 0.204 0.204 0.204
------- ------- -------
Total from Investment Operations 0.624 0.574 0.584
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.376) (0.329) (0.339)
In excess of net investment income (0.028) (0.025) (0.025)
------- ------- -------
Total Distributions Declared to Shareholders (0.404) (0.354) (0.364)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 6.730 $ 6.730 $ 6.730
======= ======= =======
Total return (b) 9.87% 9.03% 9.20%(c)
======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (d) 1.12% 1.87% 1.72%(a)
Net investment income (d) 6.02% 5.27% 5.42%(a)
Portfolio turnover 214% 214% 214%
Net assets at end of period (in millions) $ 651 $ 395 $ 1
</TABLE>
(a) Net of fees waived by the Advisor or its affiliates to which amounted
to $0.010 per share and 0.15%.
(b) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(c) Had the Distributor not waived a portion of expenses, total return
would have been reduced.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
------------------------------------------------
CLASS A CLASS B CLASS C(a)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.370 $ 6.370 $ 6.590
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.393 0.344 0.032
Net realized and unrealized gain (loss) 0.145 0.145 (0.082)
------- ------- -------
Total from Investment Operations 0.538 0.489 (0.050)
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.398) (0.349) (0.030)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 6.510 $ 6.510 $ 6.510
======= ======= =======
Total return (b) 8.64% 7.83% (0.77)%(c)
======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (d) 1.13% 1.88% 1.78%(e)
Net investment income (d) 6.43% 5.68% 5.85%(e)
Portfolio turnover 61% 61% 61%
Net assets at end of period (in millions) $ 731 $ 460 $ (f)
</TABLE>
(a) Class C Shares were initially offered on August 1, 1997 per share data
reflects 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
commissions had no impact.
(e) Annualized.
(f) Rounds to less than one million.
23
<PAGE> 26
FINANCIAL HIGHLIGHTS LIGF (continued)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1996
-----------------------------
CLASS A CLASS B
----------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.550 $ 6.550
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.390 0.341
Net realized and unrealized loss (0.161) (0.161)
------- -------
Total from Investment Operations 0.229 0.180
------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.391) (0.344)
In excess of net investment income (0.018) (0.016)
------- -------
Total Distributions Declared to Shareholders (0.409) (0.360)
------- -------
NET ASSET VALUE, END OF PERIOD $ 6.370 $ 6.370
======= =======
Total return (a) 3.51% 2.74%
======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (b) 1.11% 1.86%
Net investment income (b) 6.45% 5.70%
Portfolio turnover 123% 123%
Net assets at end of period (in millions) $ 921 $ 572
</TABLE>
(a) Total return at net asset value assuming all distributions reinvested
and no initial sales charges or contingent deferred sales charge.
(b) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
24
<PAGE> 27
FINANCIAL HIGHLIGHTS LFSF
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 2000
----------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.140 $10.140 $10.140 $ 10.140
------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.744 0.669 0.684(b) 0.769
Net realized and unrealized loss (0.142) (0.142) (0.142) (0.142)
------- ------- ------- --------
Total from Investment Operations 0.602 0.527 0.542 0.627
------- ------- ------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.682) (0.611) (0.626) (0.706)
In excess of net investment income (0.030) (0.027) (0.027) (0.031)
Return of capital (0.010) (0.009) (0.009) (0.010)
------- ------- ------- --------
Total Distributions Declared to Shareholders (0.722) (0.647) (0.662) (0.747)
======= ======= ======= ========
NET ASSET VALUE, END OF PERIOD $10.020 $10.020 $10.020 $ 10.020
======= ======= ======= ========
Total return (c) 6.23% 5.44% 5.60%(d) 6.50%
======= ======= ======= ========
RATIOS TO AVERAGE NET ASSETS
Expenses (e) 1.17% 1.92% 1.77%(b) 0.92%
Net investment income (e) 6.87% 6.12% 6.27%(b) 7.12%
Portfolio turnover 96% 96% 96% 96%
Net assets at end of period (in millions) $ 583 $ 54 $ 4 $ (f)
</TABLE>
(a) The per share net investment income amounts do not reflect the period's
reclassification of differences between book and tax basis net
investment income.
(b) Net of fees waived by the Distributor which amounted to $0.015 per
share and 0.15%.
(c) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(d) Had the Distributor not waived a portion of expenses, total return
would have been reduced.
(e) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(f) Rounds to less than one million.
--------------------------------------------------------------------------------
State Tax Information for the year ended August 31, 2000 (unaudited)
An average of 34% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury. Approximately 52% of the Fund's
ordinary income distributions (46% of gross income) was derived from interest on
direct investments in U.S. Treasury bonds, notes and bills.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1999
----------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z(a)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.080 $11.080 $11.080 $11.010
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.703 0.621 0.637(b) 0.479
Net realized and unrealized loss (0.969) (0.969) (0.969) (0.885)
------- ------- ------- -------
Total from Investment Operations (0.266) (0.348) (0.332) (0.406)
------- ------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.674) (0.592) (0.608) (0.464)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.140 $10.140 $10.140 $10.140
======= ======= ======= =======
Total return (c) (2.56)% (3.30)% (3.15)%(d) (3.77)%(e)
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (f) 1.15% 1.90% 1.79%(b) 0.91%(g)
Net investment income (f) 6.58% 5.83% 5.98%(b) 7.19%(g)
Portfolio turnover 42% 42% 42% 42%
Net assets at end of period (in millions) $ 682 $ 72 $ 5 $ (h)
</TABLE>
(a) Class Z shares were initially offered on January 11, 1999. Per share
data reflects activity from that date.
(b) Net of fees waived by the Distributor which amounted to $0.013 per
share and 0.15%.
(c) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(d) Had the Distributor not waived a portion of expenses, total return
would have been reduced.
(e) Not annualized.
(f) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(g) Annualized.
(h) Rounds to less than one million.
25
<PAGE> 28
FINANCIAL HIGHLIGHTS LFSF (continued)
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1998
---------------------------------------------------------
CLASS A Class B Class C
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD
INCOME FROM INVESTMENT OPERATIONS: $10.520 $10.520 $10.520
------- ------- -------
Net investment income 0.708 0.625 0.642(a)
Net realized and unrealized gain 0.530 0.530 0.530
------- ------- -------
Total from Investment Operations 1.238 1.155 1.172
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.678) (0.595) (0.612)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.080 $11.080 $11.080
======= ======= =======
Total return (b) 12.11% 11.26% 11.43%(c)
======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (d) 1.14% 1.89% 1.74%(a)
Net investment income (d) 6.49% 5.74% 5.89%(a)
Portfolio turnover 356% 356% 356%
Net assets at end of period (in millions) $ 821 $ 72 $ 1
</TABLE>
(a) Net of fees waived by the Distributor which amounted to $0.017 per
share and 0.15%.
(b) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(c) Had the Distributor not waived a portion of expenses, total return
would have been reduced.
(d) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
<TABLE>
<CAPTION>
PERIOD ENDED AUGUST 31, 1997(a)
-------------------------------------------------------
CLASS A CLASS B CLASS C(b)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD
INCOME FROM INVESTMENT OPERATIONS: $10.530 $10.530 $10.710
------- ------- -------
Net investment income 0.580 0.515 0.058
Net realized and unrealized loss (0.038) (0.038) (0.198)
------- ------- -------
Total from Investment Operations 0.542 0.477 0.140
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.552) (0.487) (0.050)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.520 $10.520 $10.520
======= ======= =======
Total return (c) 5.31%(d) 4.66%(d) (1.31)%(d)
======= ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (e) 1.19%(f) 1.94%(f) 1.82%(f)
Net investment income (e) 6.71%(f) 5.96%(f) 6.55%(f)
Portfolio turnover 79%(d) 79%(d) 79%(d)
Net assets at end of period (in millions) $ 888 $ 64 $ (g)
</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 data
reflects activity from that date.
(c) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(d) Not annualized.
(e) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(f) Annualized.
(g) Rounds to less than one million.
See notes to financial statements.
26
<PAGE> 29
FINANCIAL HIGHLIGHTS LFSF (continued)
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------
1996
-----------------------------------
CLASS A CLASS B
-----------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD
INCOME FROM INVESTMENT OPERATIONS: $10.830 $10.830
------- -------
Net investment income 0.696 0.617
Net realized and unrealized loss (0.300) (0.300)
------- -------
Total from Investment Operations 0.396 0.317
------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.684) (0.606)
From net realized gains -- --
From capital paid in (0.012) (0.011)
------- -------
Total Distributions Declared to Shareholders (0.696) (0.617)
------- -------
NET ASSET VALUE, END OF PERIOD $10.530 $10.530
======= =======
Total return (a) 3.88% 3.11%
======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses 1.18%(b) 1.93%(b)
Net investment income 6.62%(b) 5.87%(b)
Portfolio turnover 125% 125%
Net assets at end of period (in millions) $ 1,026 $ 73
</TABLE>
(a) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(b) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
27
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF LIBERTY TRUST II AND THE SHAREHOLDERS OF
LIBERTY SHORT TERM GOVERNMENT FUND AND
LIBERTY INTERMEDIATE GOVERNMENT FUND AND THE
TRUSTEES OF LIBERTY TRUST III AND THE
SHAREHOLDERS OF LIBERTY FEDERAL SECURITIES FUND
In our opinion, the accompanying statements of assets and liabilities, including
the investment portfolios, and the related statements of operations, changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Liberty Short Term Government Fund (formerly
Colonial Short Duration U.S. Government Fund), Liberty Intermediate Government
Fund (formerly Colonial Intermediate U.S. Government Fund) (each a series of
Liberty Trust II) and Liberty Federal Securities Fund (formerly Colonial Federal
Securities Fund) (a series of Liberty Trust III) (collectively, the "Funds") at
August 31, 2000, the results of their operations, the changes in their net
assets, and their financial highlights for the periods indicated, in conformity
with accounting principles generally accepted in the United States of America.
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 accepted auditing standards generally accepted in the United States of
America 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, 2000 by
correspondence with the custodian and brokers provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 12, 2000
28
<PAGE> 31
TRUSTEES & TRANSFER AGENT
ANNUAL REPORT:
LIBERTY GOVERNMENT FUNDS
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 & Frankel)
JAMES E. GRINNELL
Private Investor (formerly Senior Vice President - Operations, The Rockport
Company)
RICHARD W. LOWRY
Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood
Corporation)
SALVATORE MACERA
Private Investor (formerly Executive Vice President of Itek Corp. and President
of Itek Optical & Electronic Industries, Inc.)
WILLIAM E. MAYER
Partner, Park Avenue Equity Partners (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, Chief Executive Officer and Director,
Hannaford Bros. Co.)
JOHN J. NEUHAUSER
Academic Vice President and Dean of Faculties, Boston College (formerly Dean,
Boston College School of Management)
JOSEPH R. PALOMBO
Chief Operations Officer, Mutual Funds, Liberty Financial Companies, Inc.,
Executive Vice President and Director of Colonial Management Associates, Inc.
and Executive Vice President and Chief Administrative Officer of Liberty Funds
Group LLC (formerly Vice President of Liberty Funds Group - Boston and Chief
Operating Officer, Putnam Mutual Funds)
THOMAS E. STITZEL
Business Consultant and Chartered Financial Analyst (formerly Professor of
Finance, College of Business, Boise State University)
ANNE-LEE VERVILLE
Consultant (formerly General Manager, Global Education Industry, and President,
Applications Solutions Division, IBM Corporation)
--------------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Liberty Government Funds is:
Liberty Funds Services, 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 Liberty Government Funds. 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 and with the most recent copy of
the Liberty Funds Distributor, Inc. Performance Update.
Annual Report
Liberty Government Funds
<PAGE> 32
CHOOSE LIBERTY
BECAUSE NO SINGLE INVESTMENT MANAGER CAN BE ALL THINGS TO ALL INVESTORS.(SM)
LIBERTY FUNDS
<TABLE>
<S> <C>
ALL-STAR Institutional money management approach for individual investors.
COLONIAL Fixed income and value style equity investing.
CRABBE A contrarian approach to fixed income and equity investing.
HUSON
NEWPORT A leader in international investing.(SM)
STEIN ROE Innovative solutions for growth and income investing.
ADVISOR
[KEYPORT A leading provider of innovative annuity products.
GRAPHIC
OMITTED]
</TABLE>
Liberty's mutual funds are offered by prospectus through Liberty Funds
Distributor, Inc.
BEFORE YOU INVEST, CONSULT YOUR FINANCIAL ADVISOR.
Your financial advisor can help you develop a long-term plan for reaching your
financial goals.
LIBERTY GOVERNMENT FUNDS ANNUAL REPORT
[LIBERTY LOGO OMITTED]
ALL-STAR - COLONIAL - CRABBE HUSON - NEWPORT - STEIN ROE ADVISOR
Liberty Funds Distributor, Inc. (c) 2000
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
www.libertyfunds.com
BULK RATE
U.S. POSTAGE
PAID
HOLLISTON, MA
PERMIT NO. 20
GOV-02/756C-0800 (10/00) 00/1724
