-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MuyjM/km71U15SaePNqLIFkUDiMZ5QXxeugI4qTq+mUoUlloeE/eNFTrnnqLmrYd TdMS8XxNFox1iZzrrxWz9Q== 0000021847-96-000081.txt : 19961107 0000021847-96-000081.hdr.sgml : 19961107 ACCESSION NUMBER: 0000021847-96-000081 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961106 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLONIAL TRUST II / CENTRAL INDEX KEY: 0000315665 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 046452949 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-03009 FILM NUMBER: 96655057 BUSINESS ADDRESS: STREET 1: ONE FINANCIAL CTR CITY: BOSTON STATE: MA ZIP: 02111 BUSINESS PHONE: 6174263750 FORMER COMPANY: FORMER CONFORMED NAME: COLONIAL MONEY MARKET FUND DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: COLONIAL TRUST II DATE OF NAME CHANGE: 19920505 FORMER COMPANY: FORMER CONFORMED NAME: COLONIAL MONEY MARKET TRUST/MA/ DATE OF NAME CHANGE: 19910917 N-30D 1 COLONIAL U.S. GOVT FUND ANNUAL REPORT COLONIAL U.S. GOVERNMENT FUND [PHOTO] ANNUAL REPORT AUGUST 31, 1996 NOT FDIC-INSURED MAY LOSE VALUE NO BANK GUARANTEE COLONIAL U.S. GOVERNMENT FUND HIGHLIGHTS SEPTEMBER 1, 1995 - AUGUST 31, 1996 INVESTMENT OBJECTIVE: Colonial U.S. Government Fund seeks as high a level of current income and total return as is consistent with prudent risk, by investing exclusively in U.S. government securities. THE FUND IS DESIGNED TO OFFER: - Attractive monthly income and total return - High quality portfolio - Diversification PORTFOLIO MANAGER COMMENTARY: "While economic and market conditions for fixed income investing were mixed during this 12 month period, your Fund benefited from being actively managed throughout the shifting environment to help reduce risk and improve performance." -- Leslie Finnemore
COLONIAL U.S. GOVERNMENT FUND PERFORMANCE CLASS A CLASS B Inception dates 10/13/87 6/8/92 Distributions declared per share $0.409 $0.360 SEC yields on 8/31/96* 5.97% 5.50% Total returns, assuming reinvestment of all distributions and no sales charge or contingent deferred sales charge (CDSC) 12 months 3.51% 2.74% Net asset value per share at 8/31/96 $ 6.37 $ 6.37
* The 30-day SEC yields reflect the portfolio's earning power, net of expenses, expressed as an annualized percentage of the maximum offering price per share at the end of the period.
SECTOR BREAKDOWN ** FNMAs ...................... 45.62% GNMAs ...................... 30.18% Treasury Securities ........ 18.16% FHLMCs ..................... 3.74% Other Agency Securities .... 2.30% AVERAGE LIFE BREAKDOWN ** 0 - 1 year ........ 0.36% 1 - 5 years ....... 37.62% 5 - 10 years ...... 59.98% Over 10 years ..... 2.04%
** Sector and average life breakdowns are based on total senior securities. Because the Fund is actively managed, sector and average life breakdowns will change. 2 PRESIDENT'S MESSAGE TO FUND SHAREHOLDERS [PHOTO] I am pleased to present your Fund's annual report for the period ended August 31, 1996. This report gives us the opportunity to share our analysis of the investment environment over the past 12 months. In the bond market, after the Federal Reserve Board lowered short-term interest rates in December and January, significantly stronger economic indicators mid-way through the period stirred inflation fears and propelled long-term interest rates upward. Bond market volatility will continue, based upon receipt of conflicting economic reports and changing expectations of Federal Reserve Board activity. While market conditions put pressure on municipal bond prices, there was some good news for the tax-exempt sector. Some of the significant reasons that municipal bonds outperformed Treasury bonds were technical factors, such as low supply and strong retail market support. Other reasons include fundamental factors, such as the easing of fears generated by tax-reform proposals, particularly those promoting a flat tax. In the stock market, generally favorable conditions prevailed throughout most of the period, with both large and small company stocks posting strong performance until July, when a price-based correction took place. While stock indices generally posted negative total returns for July, the equity markets rebounded in August. Our expectations for the remainder of 1996 include a moderating economy. We believe that the economy will continue to grow, although at a slower pace than was indicated earlier this year. The lack of any appreciable wage and price pressure should put the bond market's fears of inflation to rest. Therefore, we are optimistic that market psychology will shift and volatility will decline by year-end. As always, we thank you for the opportunity to help you meet your investment goals through Colonial Mutual Funds. Respectfully, /s/ Harold W. Cogger Harold W. Cogger President October 11, 1996 3 PORTFOLIO MANAGER REPORT LESLIE FINNEMORE is lead portfolio manager of Colonial U.S. Government Fund and is a vice president of Colonial Management Associates, Inc. Q: HOW DID THE U.S. GOVERNMENT MARKET PERFORM DURING THE PAST TWELVE MONTHS? A: The market environment shifted midway through the period. The first half of the period had slower economic growth, low inflation and declining interest rates, all of which contributed to price increases in the fixed income markets. The second half of the period had increasing interest rates, based on changing expectations regarding the economy's strength as a result of strong employment growth, retail sales, housing activity and auto sales. Market psychology moved from expectations of Federal Reserve Board easing or lowering short-term interest rates, to expectations of the Fed tightening or raising short-term interest rates, all of which contributed to higher volatility and price declines for fixed income securities. Q: WHAT WAS THE FUND'S INVESTMENT STRATEGY DURING THE PERIOD? A: The most important element of our active strategy is managing the mortgage-backed sector of the portfolio, as these securities exhibit shifting risk characteristics when interest rates fluctuate. At the end of 1995, we increased our holdings of mortgages to over 90% of the Fund's assets to take advantage of the market's expectations of risk in the mortgage market. Expectations of slower economic growth, Fed easing and lower interest rates led to attractive compensation for refinancing risks that never materialized. We have since brought the Fund's exposure to mortgages back to 75%. The Fund's duration, which measures its sensitivity to changes in interest rates, remained relatively stable at about four years for most of the period, which we view as market neutral. Shareholders were rewarded by the Fund's investment in short and intermediate-term securities, mortgage-backed investments and our active management style that maintained a reduced risk profile in a shifting environment. Q: HOW DID THE FUND'S PERFORMANCE COMPARE TO THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX? A: The Fund underperformed the Lehman Brothers Intermediate Government Bond Index, a broad-based, unmanaged index that tracks the performance of government bonds with maturities of ten years or less. The total return for the Fund's Class A shares, based on net asset value, was 3.51% while the return on the Index was 4.46%. This underperformance may be attributable to the Fund having a longer duration than the Index. However, the Fund did outperform the total return of 3.02% posted by the average Intermediate U.S. Government Fund tracked by Lipper Analytical Services, Inc. The Fund was ranked 38 out of 121 of the funds in its investment category. 4 Q: WHAT IS YOUR OUTLOOK FOR THE REMAINDER OF 1996? A: We believe that the economy is still sending enough mixed messages regarding its direction to keep uncertainty, and therefore volatility, relatively high. While we continue to expect short-term price fluctuation, we anticipate that economic fundamentals such as low inflation and moderate growth could prevail, resulting in a natural, mid-cycle correction that may not require Fed intervention. We will continue to actively manage the Fund by keeping the duration neutral to slightly positive and by emphasizing opportunities in mortgage-backed securities. Beginning January 1, 1997, the Fund will no longer be an eligible investment for Federal Credit Unions or National Banks. COLONIAL U.S. GOVERNMENT FUND'S INVESTMENT PERFORMANCE VS. THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX Change in Value of $10,000 from 10/87 - 8/96 Based on Net Asset Value (NAV) and Maximum Offering Price (MOP) for Class A Shares
Label A B C - --------------------------------------------------------------------- Label - --------------------------------------------------------------------- 1 CUSGF-A - --------------------------------------------------------------------- 2 LEHMAN NAV MOP - --------------------------------------------------------------------- 3 10000 10000 9525 - --------------------------------------------------------------------- 4 10060 10198 9714 - --------------------------------------------------------------------- 5 10158 10300 9810 - --------------------------------------------------------------------- 6 10410 10586 10083 - --------------------------------------------------------------------- 7 10521 10718 10209 - --------------------------------------------------------------------- 8 10476 10665 10158 - --------------------------------------------------------------------- 9 10458 10681 10174 - --------------------------------------------------------------------- 10 10408 10653 10147 - --------------------------------------------------------------------- 11 10578 10860 10344 - --------------------------------------------------------------------- 12 10546 10827 10312 - --------------------------------------------------------------------- 13 10560 10837 10322 - --------------------------------------------------------------------- 14 10743 10984 10462 - --------------------------------------------------------------------- 15 10891 11147 10618 - --------------------------------------------------------------------- 16 10797 11082 10556 - --------------------------------------------------------------------- 17 10808 11033 10508 - --------------------------------------------------------------------- 18 10915 11138 10608 - --------------------------------------------------------------------- 19 10869 11102 10575 - --------------------------------------------------------------------- 20 10920 11113 10586 - --------------------------------------------------------------------- 21 11140 11332 10794 - --------------------------------------------------------------------- 22 11355 11536 10988 - --------------------------------------------------------------------- 23 11645 11763 11204 - --------------------------------------------------------------------- 24 11881 11893 11328 - --------------------------------------------------------------------- 25 11721 11827 11265 - --------------------------------------------------------------------- 26 11777 11860 11297 - --------------------------------------------------------------------- 27 12024 12028 11456 - --------------------------------------------------------------------- 28 12143 12129 11553 - --------------------------------------------------------------------- 29 12178 12197 11617 - --------------------------------------------------------------------- 30 12103 12146 11569 - --------------------------------------------------------------------- 31 12147 12215 11635 - --------------------------------------------------------------------- 32 12162 12250 11668 - --------------------------------------------------------------------- 33 12121 12267 11685 - --------------------------------------------------------------------- 34 12381 12498 11904 - --------------------------------------------------------------------- 35 12543 12623 12024 - --------------------------------------------------------------------- 36 12719 12822 12213 - --------------------------------------------------------------------- 37 12673 12768 12161 - --------------------------------------------------------------------- 38 12787 12841 12231 - --------------------------------------------------------------------- 39 12965 12989 12372 - --------------------------------------------------------------------- 40 13160 13213 12585 - --------------------------------------------------------------------- 41 13342 13378 12742 - --------------------------------------------------------------------- 42 13479 13506 12864 - --------------------------------------------------------------------- 43 13561 13578 12933 - --------------------------------------------------------------------- 44 13636 13670 13021 - --------------------------------------------------------------------- 45 13777 13782 13127 - --------------------------------------------------------------------- 46 13855 13876 13217 - --------------------------------------------------------------------- 47 13866 13931 13269 - --------------------------------------------------------------------- 48 14016 14085 13416 - --------------------------------------------------------------------- 49 14282 14241 13565 - --------------------------------------------------------------------- 50 14525 14419 13734 - --------------------------------------------------------------------- 51 14691 14516 13827 - --------------------------------------------------------------------- 52 14864 14635 13939 - --------------------------------------------------------------------- 53 15225 14862 14157 - --------------------------------------------------------------------- 54 15078 14799 14096 - --------------------------------------------------------------------- 55 15125 14861 14155 - --------------------------------------------------------------------- 56 15065 14839 14134 - --------------------------------------------------------------------- 57 15200 14923 14214 - --------------------------------------------------------------------- 58 15427 15095 14378 - --------------------------------------------------------------------- 59 15649 15218 14495 - --------------------------------------------------------------------- 60 15949 15277 14552 - --------------------------------------------------------------------- 61 16112 15447 14713 - --------------------------------------------------------------------- 62 16334 15551 14812 - --------------------------------------------------------------------- 63 16138 15500 14764 - --------------------------------------------------------------------- 64 16070 15494 14758 - --------------------------------------------------------------------- 65 16280 15612 14870 - --------------------------------------------------------------------- 66 16582 15753 15005 - --------------------------------------------------------------------- 67 16827 15873 15119 - --------------------------------------------------------------------- 68 16889 15924 15167 - --------------------------------------------------------------------- 69 17021 16021 15260 - --------------------------------------------------------------------- 70 16974 16050 15288 - --------------------------------------------------------------------- 71 17220 16235 15464 - --------------------------------------------------------------------- 72 17255 16280 15507 - --------------------------------------------------------------------- 73 17512 16396 15618 - --------------------------------------------------------------------- 74 17583 16442 15661 - --------------------------------------------------------------------- 75 17624 16464 15682 - --------------------------------------------------------------------- 76 17537 16389 15611 - --------------------------------------------------------------------- 77 17610 16496 15712 - --------------------------------------------------------------------- 78 17784 16652 15861 - --------------------------------------------------------------------- 79 17540 16491 15708 - --------------------------------------------------------------------- 80 17284 16182 15413 - --------------------------------------------------------------------- 81 17172 16068 15305 - --------------------------------------------------------------------- 82 17184 16078 15314 - --------------------------------------------------------------------- 83 17188 16063 15300 - --------------------------------------------------------------------- 84 17413 16274 15501 - --------------------------------------------------------------------- 85 17464 16310 15535 - --------------------------------------------------------------------- 86 17320 16219 15448 - --------------------------------------------------------------------- 87 17323 16229 15458 - --------------------------------------------------------------------- 88 17246 16163 15395 - --------------------------------------------------------------------- 89 17302 16202 15433 - --------------------------------------------------------------------- 90 17584 16476 15694 - --------------------------------------------------------------------- 91 17923 16752 15956 - --------------------------------------------------------------------- 92 18022 16845 16045 - --------------------------------------------------------------------- 93 18231 17044 16235 - --------------------------------------------------------------------- 94 18745 17510 16678 - --------------------------------------------------------------------- 95 18864 17600 16764 - --------------------------------------------------------------------- 96 18873 17611 16775 - --------------------------------------------------------------------- 97 19029 17757 16913 - --------------------------------------------------------------------- 98 19156 17930 17079 - --------------------------------------------------------------------- 99 19366 18132 17271 - --------------------------------------------------------------------- 100 19602 18390 17516 - --------------------------------------------------------------------- 101 19796 18622 17737 - --------------------------------------------------------------------- 102 19963 18772 17880 - --------------------------------------------------------------------- 103 19752 18449 17572 - --------------------------------------------------------------------- 104 19662 18320 17450 - --------------------------------------------------------------------- 105 19604 18220 17355 - --------------------------------------------------------------------- 106 19594 18147 17285 - --------------------------------------------------------------------- 107 19793 18358 17486 - --------------------------------------------------------------------- 108 19855 18397 17523 - ---------------------------------------------------------------------
- - $19,877 LEHMAN - - $18,380 NAV - - $17,507 MOP 10/87 8/96 A $10,000 investment in Class B shares made on June 8, 1992, (inception) at NAV would have been valued at $11,801 on August 31, 1996. The same investment after deducting the applicable CDSC would have grown to $11,618 on August 31, 1996.
AVERAGE ANNUAL TOTAL RETURNS as of September 30, 1996 (most recent quarter end) - -------------------------------------------------------------------------------- CLASS A SHARES CLASS B SHARES Inception 10/13/87 Inception 6/8/92 NAV MOP NAV w/CDSC - -------------------------------------------------------------------------------- 1 YEAR 4.18% (0.76)% 3.41% (1.48)% - -------------------------------------------------------------------------------- 5 YEARS 5.32% 4.30% -- -- - -------------------------------------------------------------------------------- SINCE INCEPTION 7.38% 6.80% 4.29% 3.91% - --------------------------------------------------------------------------------
The Lehman Brothers Intermediate Government Bond Index is an unmanaged index that tracks the performance of U.S. government securities. The performance of the Index does not reflect fees or expenses associated with an actual investment. Unlike mutual funds, an index does not incur fees or charges and it is not possible to invest in an index. Past performance cannot predict future results. Return and value of an investment will vary, resulting in a gain or loss on sale. All results shown assume reinvestment of distributions. NAV returns do not include sales charges or CDSC. MOP returns include the maximum sales charge of 4.75%. The CDSC returns reflect the maximum charge of 5% for one year and 2% since inception. Performance for different share classes will vary based on differences in sales charges and fees associated with each class. 5 INVESTMENT PORTFOLIO AUGUST 31, 1996 (IN THOUSANDS)
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 99.8% PAR VALUE - -------------------------------------------------------------------------------------------- GOVERNMENT AGENCIES - 81.7% MATURITIES COUPON FROM/TO ---------------- ---------------- Federal Home Loan Mortgage Corp.: 7.500% 2016 $ 1,142 $ 1,142 8.000% 2003-2016 17,799 18,042 8.500% 2007-2017 4,456 4,592 8.750% 2005-2013 1,778 1,837 9.000% 2001-2022 7,433 7,736 9.250% 2008-2016 6,252 6,522 9.500% 2005-2016 2,368 2,536 9.750% 2016 129 137 10.000% 2019 2,951 3,202 10.250% 2009-2016 1,824 1,972 10.500% 2009-2021 3,183 3,471 11.250% 2005-2016 4,000 4,431 12.000% 2014 1 1 ------- 55,621 ------- Federal National Mortgage Association, 6.240% 2000 25,000 24,500 ------- Federal National Mortgage Association: 6.000% 2008-2026 (a) 118,483 109,713 6.500% 2007-2026 (a) 377,859 359,971 7.000% 2007-2025 (a) 103,544 100,753 7.500% 2006-2009 3,273 3,276 8.000% 2008-2009 3,255 3,314 8.250% 2008 1,064 1,064 8.500% 2003-2021 9,478 9,746 9.000% 2002-2022 27,695 28,790 9.500% 2009-2021 2,776 2,963 10.000% 2001-2006 12,601 13,290 10.500% 2010-2016 5,327 5,817 11.000% 2015-2020 14,312 16,023 ------- 654,720 ------- Government National Mortgage Association: 6.500% 2023-2026 (a) 26,151 24,259 7.000% 2022-2024 26,201 25,005 7.500% 2007-2009 16,174 16,235 8.000% 2004-2025 12,450 12,393 8.500% 2017-2026 7,969 8,069
6
Investment Portfolio/August 31, 1996 - ------------------------------------------------------------------------------- MATURITIES COUPON FROM/TO ------------- ------------ 8.750% 2021-2022 $ 3,802 $ 4,004 8.850% 2018-2020 5,643 5,761 9.000% 2008-2025 33,757 35,156 9.250% 2016-2022 13,692 14,475 9.500% 2004-2025 160,970 173,274 10.000% 1998-2024 5,860 6,177 10.250% 2018 315 346 10.500% 2016-2020 13,860 15,359 10.625% 2010 96 107 10.750% 2024 2,426 2,478 11.000% 2009-2021 16,914 19,016 11.250% 2015 164 185 11.500% 2010-2021 24,039 27,344 11.750% 2013-2015 387 448 12.000% 2011-2019 24,048 27,844 12.250% 2013-2015 1,051 1,224 12.500% 2013-2015 15,971 18,632 12.750% 2010-2014 153 180 13.000% 2010-2015 5,389 6,367 13.500% 2010-2015 3,891 4,649 14.000% 2012-2014 165 199 14.500% 2012 60 73 15.000% 2011-2012 126 155 --------- 449,414 --------- U.S. Small Business Administration: 7.600% 01/01/12 4,235 4,187 8.200% 10/01/11 4,013 4,083 8.250% 11/01/11 8,045 8,191 8.650% 11/01/14 5,710 5,896 8.850% 08/01/11 1,603 1,669 9.150% 07/01/11 3,694 3,883 9.450% 08/01/10 1,414 1,490 9.500% 04/01/10 2,695 2,862 9.650% 05/01/10 1,904 2,049 --------- 34,310 --------- TOTAL GOVERNMENT AGENCIES (cost of $1,158,948) 1,218,565 --------- GOVERNMENT OBLIGATIONS (b) - 18.1% U.S. Treasury bonds, 6.750% 08/15/26 13,000 12,411 ---------
7
Investment Portfolio/August 31, 1996 - -------------------------------------------------------------------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS - CONT. PAR VALUE - -------------------------------------------------------------------------- U.S. Treasury notes: 6.500% 05/31/01 $29,000 $ 28,737 6.500% 08/15/05 14,846 14,412 6.625% 06/30/01 36,600 36,440 6.875% 05/15/06 158,082 157,243 7.000% 07/15/06 21,000 21,082 ------------ 257,914 ------------ TOTAL GOVERNMENT OBLIGATIONS (cost of $334,195) 270,325 ------------ TOTAL INVESTMENTS (cost of $1,493,143) 1,488,890 ------------ SHORT-TERM OBLIGATIONS - 9.4% ------------------------------------------------------------------------- Repurchase agreement with Bankers Trust Securities Corp. dated 8/30/96, due 9/03/96 at 5.240%, collateralized by U.S. Treasury notes with various maturities to 2017, market value $146,750. (repurchase proceeds $140,670) 140,588 140,588 ------------ OTHER ASSETS & LIABILITIES, NET - (9.2%) (136,964) ------------------------------------------------------------------------- NET ASSETS - 100.0% $ 1,492,514 ============
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, with a total market value of $270,325 and are being used to collateralize the delayed delivery purchases indicated in note (a) above. (c) Cost for federal income tax purposes is $1,493,954. See notes to financial statements. 8 STATEMENT OF ASSETS & LIABILITIES AUGUST 31, 1996 (in thousands except for per share amounts and footnotes) ASSETS Investments at value (cost $1,493,143) $ 1,488,890 Short-term obligations 140,588 ----------- 1,629,478 Receivable for: Investments sold $ 176,029 Interest 12,838 Fund shares sold 242 Other 337 189,446 ---------- ----------- Total Assets 1,818,924 LIABILITIES Payable for: Investments purchased 315,400 Distributions 7,691 Fund shares repurchased 3,237 Accrued: Transfer Agent Out of Pocket fees 32 Deferred Trustees fees 10 Other 40 ---------- Total Liabilities 326,410 ----------- NET ASSETS $ 1,492,514 =========== Net asset value & redemption price per share - Class A ($920,999/144,507) $ 6.37 =========== Maximum offering price per share - Class A ($6.37/0.9525) $ 6.69 (a) =========== Net asset value & offering price per share - Class B ($571,515/89,671) $ 6.37 (b) =========== COMPOSITION OF NET ASSETS Capital paid in $ 1,633,556 Overdistributed net investment income (5,068) Accumulated net realized loss (131,721) Net unrealized depreciation (4,253) ----------- $ 1,492,514 ===========
(a) On sales of $50,000 or more the offering price is reduced. (b) Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. See notes to financial statements. 9 STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1996 (in thousands) INVESTMENT INCOME $ 124,751 Interest 3,988 --------- Dollar roll fee income 128,739 EXPENSES Management fee $ 9,755 Distribution fee - Class B 4,856 Service fee 4,245 Transfer agent 3,657 Bookkeeping fee 536 Custodian fee 210 Registration fee 107 Trustees fee 93 Audit fee 75 Reports to shareholders 28 Legal fee 19 Other 123 23,704 -------- --------- Net Investment Income 105,035 --------- NET REALIZED & UNREALIZED LOSS ON PORTFOLIO POSITIONS Net realized loss (23,368) Net unrealized depreciation during the period (23,219) -------- Net Loss (46,587) --------- Net Increase in Net Assets From Operations $ 58,448 =========
See notes to financial statements. 10 STATEMENT OF CHANGES IN NET ASSETS
(in thousands) Year ended August 31 --------------------------------- INCREASE (DECREASE) IN NET ASSETS 1996 1995 Operations: Net investment income $ 105,035 $ 119,465 Net realized loss (23,368) (55,099) Net unrealized appreciation (depreciation) (23,219) 74,212 ----------- ----------- Net Increase from Operations 58,448 138,578 Distributions: From net investment income - Class A (63,093) (59,237) In excess of net investment income - Class A (2,852) -- From net investment income - Class B (34,034) (43,146) In excess of net investment income - Class B (1,539) -- ----------- ----------- (43,070) 36,195 ----------- ----------- Fund Share Transactions: Receipts for shares sold - Class A 112,816 23,802 Receipts for shares issued in the merger with Liberty Financial U.S. Government Securities Fund -- 657,855 Value of distributions reinvested - Class A 39,474 32,004 Cost of shares repurchased - Class A (368,789) (331,156) ----------- ----------- (216,499) 382,505 ----------- ----------- Receipts for shares sold - Class B 28,322 24,592 Value of distributions reinvested - Class B 19,710 23,538 Cost of shares repurchased - Class B (161,195) (195,780) ----------- ----------- (113,163) (147,650) ----------- ----------- Net Increase (Decrease) from Fund Share Transactions (329,662) 234,855 ----------- ----------- Total Increase (Decrease) (372,732) 271,050 NET ASSETS Beginning of period 1,865,246 1,594,196 ----------- ----------- End of period (net of overdistributed net investment income of $5,068 and $658, respectively) $ 1,492,514 $ 1,865,246 =========== =========== NUMBER OF FUND SHARES Sold - Class A 17,280 3,736 Issued in the merger with Liberty Financial U.S. Government Securities Fund -- 102,622 Issued for distributions reinvested - Class A 6,011 4,983 Repurchased - Class A (56,357) (51,715) ----------- ----------- (33,066) 59,626 ----------- ----------- Sold - Class B 4,313 3,844 Issued for distributions reinvested - Class B 3,001 3,685 Repurchased - Class B (24,628) (30,739) ----------- ----------- (17,314) (23,210) ----------- -----------
See notes to financial statements. 11 STATEMENT OF CASH FLOWS
(in thousands) Year ended August 31 ------------------------------- NET CHANGE IN CASH Cash flows from operating activities: Interest received $ 121,608 Dollar roll fee income received 4,529 Operating expenses paid (24,073) ----------- Net cash provided by operating activities $ 102,064 Cash flows from investing activities: Purchases of securities and short-term obligations (4,999,189) Proceeds from sales of securities and short-term obligations 5,329,718 ----------- Net cash provided by investing activities 330,529 --------- NET CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES 432,593 Cash flows from financing activities: Proceeds from shares sold 141,323 Cost of shares repurchased (529,904) Cash dividends paid (44,012) ----------- Net cash used by financing activities (432,593) --------- Net change in cash $ 0 Cash - beginning of period 0 --------- Cash - end of period $ 0 ========= RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES: Net increase in net assets resulting from operations $ 58,448 Decrease in investments $ 802,989 Increase in interest and fees receivable (1,566) Increase in receivable from investments securities sold (126,206) Decrease in payable for investment securities purchased (300,703) Decrease in other assets 17 Decrease in accrued expenses and liabilities (386) ----------- Total 374,145 --------- Net cash provided by operating and investing activities $ 432,593 =========
See notes to financial statements. 12 NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996 NOTE 1. ACCOUNTING POLICIES - -------------------------------------------------------------------------------- ORGANIZATION: Colonial U.S. Government Fund (the Fund), a series of Colonial Trust II, is a diversified portfolio of a Massachusetts business trust registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. The Fund's investment objective is to seek as high a level of current income and total return as is consistent with prudent risk. The Fund may issue an unlimited number of shares. The Fund offers Class A shares sold with a front-end sales charge and Class B shares which are subject to an annual distribution fee and a contingent deferred sales charge. Class B shares will convert to Class A shares when they have been outstanding approximately eight years. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS: Debt securities generally are valued by a pricing service based upon market transactions for normal, institutional-size trading units of similar securities. When management deems it appropriate, an over-the-counter or exchange bid quotation is used. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. Portfolio positions which cannot be valued as set forth above are valued at fair value under procedures approved by the Trustees. Security transactions are accounted for on the date the securities are purchased, sold or mature. Cost is determined and gains and losses are based upon the specific identification method for both financial statement and federal income tax purposes. The Fund may enter into dollar roll transactions. A dollar roll transaction involves a sale by the Fund of securities that it holds with an agreement by the Fund to repurchase substantially similar securities at an agreed upon price and date. During the period between the sale and repurchase, the Fund will not be entitled to accrue interest and receive principal payments on the securities sold. Dollar roll transactions involve the risk that the market value of the securities sold by the Fund may decline below the 13 Notes to Financial Statements/August 31, 1996 - -------------------------------------------------------------------------------- NOTE 1. ACCOUNTING POLICIES - CONT. - -------------------------------------------------------------------------------- repurchase price of those securities. In the event the buyer of securities under a dollar roll transaction files for bankruptcy or becomes insolvent, the Fund's use of proceeds of the transaction may be restricted pending a determination by or with respect to the other party. The Fund may trade securities on other than normal settlement terms. This may increase the risk if the other party to the transaction fails to deliver and causes the Fund to subsequently invest at less advantageous prices. The Fund maintains U.S. government securities or other liquid high grade debt obligations as collateral with respect to dollar roll transactions and securities traded on other than normal settlement terms. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS: All income, expenses (other than the Class B distribution fee), realized and unrealized gains (losses), are allocated to each class proportionately on a daily basis for purposes of determining the net asset value of each class. Class B per share data and ratios are calculated by adjusting the expense and net investment income per share data and ratios for the Fund for the entire period by the annualized distribution fee applicable to Class B shares only. FEDERAL INCOME TAXES: Consistent with the Fund's policy to qualify as a regulated investment company and to distribute all of its taxable income, no federal income tax has been accrued. STATEMENT OF CASH FLOWS: Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows is the amount included in other assets in the Fund's Statement of Assets and Liabilities and represents cash on hand at its custodian bank account and does not include any short-term investments as of August 31, 1996. INTEREST INCOME, FEE INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is recorded on the accrual basis. Fee income attributable to mortgage dollar roll transactions is recorded on the accrual basis over the term of the transaction. Original issue discount is accreted to interest income over the life of a security with a corresponding increase in the cost basis; premium and market discount are not amortized or accreted. DISTRIBUTIONS TO SHAREHOLDERS: The Fund declares and records distributions daily and pays monthly. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are 14 Notes to Financial Statements/August 31, 1996 - -------------------------------------------------------------------------------- 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 Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES - -------------------------------------------------------------------------------- MANAGEMENT FEE: Colonial Management Associates, Inc. (the Adviser) is the investment Adviser of the Fund and furnishes accounting and other services and office facilities for a monthly fee based on the Fund's average net assets as follows:
Average Net Assets Annual Fee Rate ------------------ --------------- First $1 billion........ 0.60% Next $500 million....... 0.55% Over $1.5 billion....... 0.50%
BOOKKEEPING FEE: The Adviser provides bookkeeping and pricing services for $27,000 per year plus a percentage of the Fund's average net assets as follows:
Average Net Assets Annual Fee Rate ------------------- --------------- First $50 million....... No charge Next $950 million....... 0.035% Next $1 billion......... 0.025% Next $1 billion......... 0.015%
TRANSFER AGENT: Colonial Investors Service Center, Inc. (the Transfer Agent), an affiliate of the Adviser, provides shareholder services for a monthly fee equal to 0.18% annually of the Fund's average net assets and receives a reimbursement for certain out of pocket expenses. UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Colonial Investment Services, Inc. (the Distributor), an affiliate of the Adviser, is the Fund's principal underwriter. For the year ended August 31, 1996, 15 Notes to Financial Statements/August 31, 1996 - -------------------------------------------------------------------------------- NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES - CONT. - -------------------------------------------------------------------------------- the Fund has been advised that the Distributor retained net underwriting discounts of $45,903 on sales of the Fund's Class A shares and received contingent deferred sales charges (CDSC) of $2,452,811 on Class B share redemptions. The Fund has adopted a 12b-1 plan which requires the payment of a service fee to the Distributor equal to 0.25% annually of the Fund's net assets as of the 20th of each month. The plan also requires the payment of a distribution fee to the Distributor equal to 0.75% annually of the average net assets attributable to Class B shares only. The CDSC and the fees received from the 12b-1 plan are used principally as repayment to the Distributor for amounts paid by the Distributor to dealers who sold such shares. OTHER: The Fund pays no compensation to its officers, all of whom are employees of the Adviser. The Fund's Trustees may participate in a deferred compensation plan which may be terminated at any time. Obligations of the plan will be paid solely out of the Fund's assets. NOTE 3. PORTFOLIO INFORMATION - -------------------------------------------------------------------------------- INVESTMENT ACTIVITY: For the year ended August 31, 1996, purchases and sales of investments, other than short-term obligations and mortgage dollar roll transactions, were $1,748,144,803 and $2,212,383,882, respectively. Unrealized appreciation (depreciation) at August 31, 1996, based on cost of investments for federal income tax purposes was: Gross unrealized appreciation $ 15,818,633 Gross unrealized depreciation (20,882,538) ------------ Net unrealized depreciation $ (5,063,905) ============
Information regarding dollar roll transactions that are other than normal settlement are as follows: Maximum amount outstanding during the period $406,163,125 Average amount outstanding during the period $206,935,073 Amount outstanding at August 31, 1996 $ 16,723,125
The average amount outstanding during the period was calculated by summing borrowings at the end of each day and dividing the sum by the number of days in the period ended August 31, 1996. 16 Notes to Financial Statements/August 31, 1996 - -------------------------------------------------------------------------------- CAPITAL LOSS CARRYFORWARDS: At August 31, 1996, capital loss carry-forwards available (to the extent provided in regulations) to offset future realized gains were approximately as follows:
Year of Capital loss expiration carryforward ------------------- ------------- 1997............... $ 2,528,000 1998............... 706,000 1999............... 2,970,000 2000............... 5,878,000 2001............... 29,729,000 2002............... 7,249,000 2003............... 67,291,000 2004............... 32,546,000 ------------- $ 148,897,000 =============
Of the loss carryforwards expiring in 1997, 1998, 1999, 2000, 2001, and 2002, $25,000, $130,000, and $1,184,000, none, none, and none, respectively, were acquired in the merger with VIP Federal Securities Fund and $2,439,000, none, $938,000, $5,252,000, $25,355,000 and $4,423,000, respectively, were acquired in the merger with Liberty Financial U.S. Government Securities Fund. Their availability may be limited in a given year. Expired capital loss carryforwards, if any, are recorded as a reduction of capital paid in. To the extent loss carryforwards are used to offset any future realized gains, it is unlikely that such gains would be distributed since they may be taxable to shareholders as ordinary income. NOTE 4. MERGER INFORMATION - -------------------------------------------------------------------------------- On March 24, 1995, Liberty Financial U.S. Government Securities Fund (LFUSGSF) was merged into the Fund by a non-taxable exchange of 102,621,829 shares of the Fund (valued at $657,854,682) for the 74,665,826 of LFUSGSF shares then outstanding. The assets of LFUSGSF acquired included unrealized depreciation of $10,937,427. The aggregate net assets of the Fund and LFUSGSF immediately after the merger were $2,014,746,627. 17 FINANCIAL HIGHLIGHTS Selected data for a share of each class outstanding throughout each period are as follows:
Year ended August 31 ----------------------------------------------------- 1996 1995 Class A Class B Class A Class B ------- ------- ------- ------- Net asset value - Beginning of period $ 6.550 $ 6.550 $ 6.420 $ 6.420 ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.390 0.341 0.447 0.399 Net realized and unrealized gain (loss) (0.161) (0.161) 0.100 0.100 ------- ------- ------- ------- Total from Investment Operations 0.229 0.180 0.547 0.499 ------- ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.391) (0.344) (0.417) (0.369) In excess of net investment income (0.018) (0.016) -- -- From capital paid in -- -- -- -- ------- ------- ------- ------- Total Distributions Declared to Shareholders (0.409) (0.360) (0.417) (0.369) ------- ------- ------- ------- Net asset value - End of period $ 6.370 $ 6.370 $ 6.550 $ 6.550 ======= ======= ======= ======= Total return(c) 3.51 % 2.74 % 8.88 % 8.07 % ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS Expenses 1.11 %(e) 1.86 %(e) 1.11 % 1.86 % Net investment income 6.45 %(e) 5.70 %(e) 7.51 % 6.76 % Portfolio turnover 123 % 123 % 140 % 140 % Net assets at end of period (in millions) $ 921 $ 572 $ 1,164 $ 701
(a) Class B shares were initially offered on June 8, 1992. Per share amounts reflect activity from that date. (b) Because of differences between book and tax basis accounting, approximately $0.056 and $0.014, respectively, were a return of capital for federal income tax purposes. (c) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (d) Not annualized. (e) The benefits derived from custody credits and directed brokerage arrangements had no impact. Prior years' ratios are net of benefits received, if any. (f) Annualized. 18 FINANCIAL HIGHLIGHTS - CONTINUED
Year ended August 31 ---------------------------------------------------------------------------------- 1994 1993 1992 Class A Class B Class A Class B Class A Class B (a) ------- ------- ------- -------- ------- ------- Net asset value - Beginning of period $ 6.880 $ 6.880 $ 6.980 $ 6.980 $ 7.020 $ 6.950 ------- ------- ------- -------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.415 0.365 0.541 0.490 0.614 0.122 Net realized and unrealized gain (loss) (0.452) (0.452) (0.130) (0.130) (0.043) 0.029 ------- ------- ------- -------- ------- ------- Total from Investment Operations (0.037) (0.087) 0.411 0.360 0.571 0.151 ------- ------- ------- -------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.400) (0.352) (0.511) (0.460) (0.611) (0.121) In excess of net investment income From capital paid in (0.023) (0.021) -- -- -- -- ------- ------- ------- -------- ------- ------- Total Distributions Declared to Shareholders (0.423) (0.373) (0.511) (0.460) (0.611) (b) (0.121) (b) ------- ------- ------- -------- ------- ------- Net asset value - End of period $ 6.420 $ 6.420 $ 6.880 $ 6.880 $ 6.980 $ 6.980 ======= ======= ======== ======== ======= ======= Total return(c) (0.53)% (1.28)% 6.15 % 5.36 % 8.46 % 2.19 %(d) ======= ======= ======== ======== ======= ======= RATIOS TO AVERAGE NET ASSETS Expenses 1.11 % 1.86 % 1.10 % 1.85 % 1.09 % 1.84 %(f) Net investment income 8.14 % 7.39 % 7.85 % 7.10 % 8.55 % 7.80 %(f) Portfolio turnover 291 % 291 % 162 % 162 % 132 % 132 % Net assets at end of period (in millions) $ 758 $ 836 $ 1,202 $ 978 $ 1,102 $ 343
- -------------------------------------------------------------------------------- State Tax Information for the Year Ended August 31, 1996 (unaudited) An average of 22% of the Fund's investments as of the end of each quarter were in direct obligations of the U.S. Treasury. Approximately 24% of the Fund's distributions (19% of gross income) was derived from interest on direct investments in U.S. Treasury bonds, notes and bills. - -------------------------------------------------------------------------------- 19 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF COLONIAL TRUST II AND THE SHAREHOLDERS OF COLONIAL U.S. GOVERNMENT FUND In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations, of cash flows, and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Colonial U.S. Government Fund (a series of Colonial Trust II) at August 31, 1996, the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and the financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of portfolio positions at August 31, 1996 by correspondence with the custodian and brokers, and the application of alternative auditing procedures when confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Boston, Massachusetts October 11, 1996 20 HOW TO REACH COLONIAL BY PHONE OR BY MAIL BY TELEPHONE COLONIAL CUSTOMER CONNECTION - 1-800-345-6611 For 24-hour account information, call from your touch-tone phone. (Rotary callers will be automatically connected to a representative during business hours.) A recorded message will guide you through the menu: For fund prices, dividends, and capital gains information..... press /1/ For account information....................................... press /2/ To speak to a Colonial representative......................... press /3/ For yield and total return information........................ press /4/ For duplicate statements or new supply of checks.............. press /5/ To order duplicate tax forms and year-end statements.......... press /6/ (February through May) To review your options at any time during your call........... press /*/ To speak with a shareholder services representative about your account, call Monday to Friday, 8:00 am to 8:00 pm ET, and Saturdays from February through mid-April, 10:00 am to 2:00 pm ET. COLONIAL TELEPHONE TRANSACTION DEPARTMENT - 1-800-422-3737 To purchase, exchange, or sell shares by telephone, call Monday to Friday, 9:00 am to 8:00 pm ET. Transactions received after the close of the New York Stock Exchange will receive the next business day's closing price. COLONIAL LITERATURE DEPARTMENT - 1-800-248-2828 To request literature on any Colonial fund, call Monday to Friday, 8:30 am to 6:30 pm ET. BY MAIL COLONIAL INVESTORS SERVICE CENTER, INC. P.O. BOX 1722 BOSTON, MA 02105-1722 21 SHAREHOLDER COMMUNICATIONS TO KEEP YOU INFORMED To make recordkeeping easy and keep you up-to-date on the performance of your investments, you can expect to receive the following information about your Colonial account: TRANSACTION CONFIRMATIONS: Each time you make a purchase, sale, or exchange, you receive a confirmation statement within just a few days. QUARTERLY STATEMENTS: Every three months, if any transactions are made that affect your share balance, this statement reports on your account activity during the quarter (including any reinvestment of dividends). This statement also provides year-to-date information. COLONIAL SHAREHOLDER NEWS: Mailed with your quarterly account statements, this newsletter highlights timely investment strategies, portfolio manager commentary, and shareholder service updates. TAX FORMS AND YEAR-END TAX GUIDE: Easy-to-use forms and timely information are designed to make tax reporting simpler. (Usually mailed in January.) AVERAGE COST BASIS STATEMENTS: If you sold or exchanged shares during the year, this statement may help you calculate your gain/loss for tax purposes. (Usually mailed in February.) 22 IMPORTANT INFORMATION ABOUT THIS REPORT The Transfer Agent for Colonial U.S. Government Fund is: Colonial Investors Service Center, Inc. P.O. Box 1722 Boston, MA 02105-1722 1-800-345-6611 Colonial U.S. Government Fund mails one shareholder report to each shareholder address. If you would like more than one report, please call our Literature Department at 1-800-248-2828 and additional reports will be sent to you. This report has been prepared for shareholders of Colonial U.S. Government Fund. This report may also be used as sales literature when preceded or accompanied by the current prospectus which provides details of sales charges, investment objective, and operating policies of the Fund. 23 [COLONIAL MUTUAL FUNDS LOGO] Mutual Funds for Planned Portfolios TRUSTEES ROBERT J. BIRNBAUM Retired (formerly Special Counsel, Dechert, Price & Rhoads; President and Chief Operating Officer, New York Stock Exchange, Inc.) TOM BLEASDALE Retired (formerly Chairman of the Board and Chief Executive Officer, Shore Bank & Trust Company) LORA S. COLLINS Attorney, Kramer, Levin, Naftalis, Nessen, Kamin & Frankel JAMES E. GRINNELL Private Investor (formerly Senior Vice President-Operations, The Rockport Company) WILLIAM D. IRELAND, JR. Retired (formerly Chairman of the Board, Bank of New England-Worcester) RICHARD W. LOWRY Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood Corporation) WILLIAM E. MAYER Dean, College of Business and Management, University of Maryland (formerly Dean, Simon Graduate School of Business, University of Rochester; Chairman and Chief Executive Officer, CS First Boston Merchant Bank; and President and Chief Executive Officer, The First Boston Corporation) JAMES L. MOODY, JR. Chairman of the Board, Hannaford Bros. Co. (formerly Chief Executive Officer, Hannaford Bros. Co.) JOHN J. NEUHAUSER Dean, Boston College School of Management GEORGE L. SHINN Financial Consultant (formerly Chairman, Chief Executive Officer and Consultant, The First Boston Corporation) ROBERT L. SULLIVAN Management Consultant (formerly Management Consultant, Saatchi and Saatchi Consulting Ltd. and Principal and International Practice Director, Management Consulting, Peat Marwick Main & Co.) SINCLAIR WEEKS, JR. Chairman of the Board, Reed & Barton Corporation COLONIAL INVESTMENT SERVICES, INC. Distributor (C) 1996 One Financial Center, Boston, Massachusetts 02111-2621, 617-426-3750 UG-02/788C-0896 M (10/96) -----END PRIVACY-ENHANCED MESSAGE-----