-----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, TP6dS00BLyVMym6g3B4LNvMcSvAQGyRFFZwxJ7Ur5vv0MgcRNS+OhqzdjH4g+MI4 pEiB4b2lht7ZuorKClOsuw== 0000950135-01-503695.txt : 20020412 0000950135-01-503695.hdr.sgml : 20020412 ACCESSION NUMBER: 0000950135-01-503695 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBERTY FUNDS 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: 1800146 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 TRUST II / DATE OF NAME CHANGE: 19950926 N-30D 1 b40660xxn-30d.txt LIBERTY GOVERNMENT FUNDS Liberty Government Funds Annual Report August 31, 2001 SEE WHAT THE TOP OF YOUR DESK REALLY LOOKS LIKE. INTRODUCING LIBERTY eDELIVERY. For more information about receiving your shareholder reports electronically, call us at 800-345-6611. To sign up for eDelivery, visit us online at www.libertyfunds.com. - -------------------------------------------------------------------------------- PRESIDENT'S LETTER - -------------------------------------------------------------------------------- [STEVE GIBSON PHOTO] Dear Shareholder, A noteworthy investment story for bond investors during the past year began with the stock market's decline and its impact on the economy. As fallout from the tech crash in 2000 began to drag down other market sectors, equity investors saw a relatively abrupt about-face in the dramatic gains from the long-lived bull market of the 1990s. In the wake of the market slump, the economy softened significantly, and investors turned expectantly to the Federal Reserve Board for relief. While the tech sector's woes proved disastrous for many equity securities, higher-quality sectors of the bond market fared well. It is times like these when the case for a diversified portfolio is strongest; while many stocks have suffered, high quality bonds have rallied. Recently, tragic events in New York, Washington, DC and Pennsylvania have created a great deal of market uncertainty and wariness. In order to provide our perspective during these trying economic times, we have included an economic commentary from Liberty Senior Economist C. Frazier Evans as a special feature in this report. Though the long-term effects of these incidents are uncertain, please visit www.libertyfunds.com for regularly updated editions of Viewpoint, Frazier's quarterly economic commentary. In the following report from the portfolio managers of Liberty's government funds, you'll read more about how these significant market events impacted the bond market and the funds' portfolios. We thank you for choosing Liberty Government Funds, and for giving us the opportunity to serve your investment needs. Respectfully, /S/ Stephen E. Gibson Stephen E. Gibson President - --------------------------------------------------- HIGHLIGHTS
LIBERTY INTERMEDIATE GOVERNMENT FUND NET ASSET VALUE PER SHARE AS OF 8/31/01 ($) CLASS A 6.61 CLASS B 6.61 CLASS C 6.61 CLASS Z 6.61
LIBERTY FEDERAL SECURITIES FUND NET ASSET VALUE PER SHARE AS OF 8/31/01 ($) CLASS A 10.61 CLASS B 10.61 CLASS C 10.61 CLASS Z 10.61 - ---------------------------------------------------
Because economic and market conditions change frequently, there can be no assurance that the trends described in this report will continue or come to pass. - ----------------------------------- May Lose Value Not FDIC ----------------- Insured No Bank Guarantee - -----------------------------------
- -------------------------------------------------------------------------------- SPECIAL ECONOMIC COMMENTARY - -------------------------------------------------------------------------------- [C.FRAZIER EVANS PHOTO] C. Frazier Evans has more than 30 years of investment experience at Liberty Funds Group, where he has held positions as director of investment research and portfolio manager of several equity funds. He has held the title of senior economist for the past 15 years. "Everything's changed." That statement, echoed again and again after the horrific events of September 11, captures the bewilderment following the tragic attacks on the World Trade Center and the Pentagon and the airplane crash in Pennsylvania. It is true that air travel will probably never be the same again. Certainly travel-related industries have been dealt a heavy blow. And the plunge in consumer confidence after the event suggests that a slump in consumer spending may trigger a recession, perhaps extending into the first part of next year. The effect of a possible recession, coupled with the extra costs of supply disruptions and falling demand, means that earnings forecasts for the equity markets are being revised down sharply. - -------------------------------------------------------------------------------- "DESPITE THE SHOCK AND SORROW WE ALL FEEL IN THE AFTERMATH OF THIS CALAMITY, IT IS WORTH EXAMINING WHAT HAS NOT CHANGED ABOUT THE US ECONOMY." - -------------------------------------------------------------------------------- HISTORIC STRENGTHS OF US ECONOMY REMAIN IN PLACE Despite the shock and sorrow we all feel in the aftermath of this calamity, it is worth examining what has not changed about the US economy. As a people, we still have enormous resiliency, as the reopening of the New York Stock Exchange and other markets illustrated. Our banking system is liquid and in far better shape than at the inception of the Gulf War in 1991. Inflation is low and easing, which gives the Federal Reserve considerable latitude to deal with the situation. Our federal budget surplus provides ample funds for the new claims on federal spending arising from the enormous task of reconstruction, the shoring up of the airline industry, and the identification and punishment of the perpetrators. INCREASED ACTIVITY POSSIBLE IN 2002 In short, we believe the economy, although shaken, is likely to recover. Indeed, the seeds of recovery have already been sown. The Federal Reserve has created substantial liquidity over the past 12 months. These funds are parked on the sidelines of the economic system but could eventually find their way first into the equity markets and ultimately into the real economy. Spending initiatives, particularly military spending, could also accelerate economic activity. Inventory liquidation may give way to inventory accumulation, as manufacturers seek to reduce the impact of transportation disruptions on just-in-time inventory management. Although near-term activity is likely to suffer, we believe the economy could commence a recovery at some point next year. BOND RATES MAY HOLD The reaction of the bond market to recent events has been a swift steepening of the yield curve. Short rates have dropped. This reflects not only the September 17 rate cut by the Federal Reserve, but also a growing conviction by market participants that more rate cuts are coming. Bond market participants are concerned that the opening of the Social Security "lock box" could lead to lower retirement of outstanding Treasury debt. This is certainly possible. While reduced retirement of Treasury debt is a probability, this does not necessarily mean that long-term interest rates must rise. Other factors, such as sluggish economic activity, and a projected decline in the rate of inflation, could be more important. While the market has been buffeted by unfolding events, we believe rates should be able to hold at current levels. 1 - -------------------------------------------------------------------------------- SPECIAL ECONOMIC COMMENTARY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- "IT IS INTERESTING TO NOTE THAT SOME OF THE BEST BUYING OPPORTUNITIES IN THE STOCK MARKET HAVE OCCURRED DURING PAST RECESSIONS." - -------------------------------------------------------------------------------- WHAT HISTORY INDICATES Past crises such as the attack on Pearl Harbor, the Cuban missile standoff, the assassination of John F. Kennedy and Iraq's invasion of Kuwait saw the stock market initially sell off and then recover to pre-crisis levels in a matter of sometimes days, sometimes weeks and, in one case, six months. Although historic trends cannot predict future market action, if we look at 10 financial crises over the past 30 years, we see that although the initial market response was negative, the decline was typically toward the end, not the beginning, of a selloff, and was followed in due course by a significant market recovery. STAY THE COURSE For those who are concerned that we may be in the midst of a recession that possibly began with the second quarter of this year, it is interesting to note that some of the best buying opportunities in the stock market have occurred during past recessions. The equity markets, being anticipatory by nature, have tended at some point to look through current troubles to eventual recovery on the other side. Whether that point was reached in the early days of trading when the New York Stock Exchange reopened, or at some point later on, cannot be anticipated. What we can say with more confidence is that even a tragedy of this scope, with its incalculable human consequences, is unlikely to permanently cripple a $10 trillion economy. The opinions expressed are those of the contributor and are subject to change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will come to pass. International investing may pose special risks due to currency exchange rate fluctuations, as well as political, economic and social developments. Investing in smaller stocks may include liquidity risks as well. Bond investing may pose special risks associated with changes in interest rates and changes in the financial strength of issuers of lower-rated bonds. - -------------------------------------------------------------------------------- FOR C. FRAZIER EVANS' MONTHLY MARKET COMMENTARY VISIT WWW.LIBERTYFUNDS.COM - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- PERFORMANCE INFORMATION--LIBERTY INTERMEDIATE GOVERNMENT FUND - -------------------------------------------------------------------------------- Value of a $10,000 investment 8/31/91-8/31/01 PERFORMANCE OF A $10,000 INVESTMENT IN ALL SHARE CLASSES, 8/31/91-8/31/01 ($)
without with sales sales charge charge ---------------------------------------------------------- Class A 17,968 17,114 ---------------------------------------------------------- Class B 16,781 16,781 ---------------------------------------------------------- Class C 17,536 17,536 ---------------------------------------------------------- Class Z 18,083 18,083
[Performance Graph]
LEHMAN BROS. INTERMEDIATE CLASS A SHARES WITHOUT CLASS A SHARES WITH SALES U.S. GOVERNMENT BOND SALES CHARGE CHARGE INDEX ---------------------- ------------------------- ------------------------- 8/31/91 10000.00 9525.00 10000.00 10125.00 9644.06 10170.00 10192.80 9708.68 10285.90 10276.40 9788.29 10406.30 10436.70 9940.99 10659.20 10397.10 9903.21 10556.80 10437.60 9941.83 10589.50 10419.90 9924.93 10547.20 10479.30 9981.50 10642.10 10599.80 10096.30 10800.70 10686.70 10179.10 10956.20 10728.40 10218.80 11166.60 10847.50 10332.20 11280.50 10920.10 10401.40 11436.10 10884.10 10367.10 11298.90 10879.80 10363.00 11251.50 10962.40 10441.70 11398.90 11062.20 10536.70 11610.90 11146.30 10616.80 11781.50 11181.90 10650.80 11825.10 11250.10 10715.80 11917.40 11270.40 10735.00 11885.20 11400.00 10858.50 12057.50 11431.90 10888.90 12081.60 11513.10 10966.20 12261.70 11545.30 10996.90 12311.90 11560.30 11011.20 12341.50 11508.30 10961.70 12279.80 11583.10 11032.90 12330.10 11693.20 11137.70 12452.20 11579.70 11029.70 12281.60 11362.00 10822.30 12102.30 11282.50 10746.60 12023.60 11289.30 10753.00 12032.00 11279.10 10743.40 12034.50 11426.90 10884.10 12192.10 11452.00 10908.00 12227.50 11387.90 10847.00 12126.00 11394.70 10853.50 12128.40 11348.00 10809.00 12073.80 11376.40 10836.00 12113.70 11568.60 11019.10 12311.10 11761.80 11203.10 12548.70 11827.70 11265.90 12617.70 11967.20 11398.80 12764.10 12294.00 11710.00 13124.00 12357.90 11770.90 13208.00 12365.30 11778.00 13214.60 12467.90 11875.70 13324.30 12590.10 11992.10 13413.60 12732.40 12127.60 13561.10 12913.20 12299.80 13726.60 13075.90 12454.80 13862.50 13180.50 12554.40 13978.90 12953.80 12338.50 13830.80 12863.10 12252.10 13767.10 12792.40 12184.70 13727.20 12741.20 12136.00 13720.40 12889.00 12276.80 13860.30 12917.40 12303.80 13903.30 12905.70 12292.70 13918.60 13116.10 12493.10 14098.10 13348.20 12714.20 14329.30 13561.80 12917.60 14502.70 13443.80 12805.20 14424.40 13511.00 12869.30 14479.20 13516.50 12874.40 14502.40 13375.90 12740.50 14419.70 13549.80 12906.20 14582.60 13660.90 13012.00 14696.40 13815.20 13159.00 14822.80 14119.20 13448.50 15095.50 14017.50 13351.70 15038.10 14195.50 13521.30 15202.10 14395.70 13711.90 15379.90 14423.00 13738.00 15413.80 14560.10 13868.50 15538.60 14742.10 14041.80 15740.60 14725.90 14026.40 15723.30 14753.80 14053.00 15772.00 14804.00 14100.80 15847.80 14944.60 14234.80 15957.10 15040.30 14325.90 16064.00 15073.40 14357.40 16125.10 15397.50 14666.10 16429.80 15810.10 15059.10 16812.60 15721.60 14974.80 16841.20 15698.00 14952.30 16789.00 15745.10 14997.20 16854.50 15817.50 15066.20 16930.30 15485.30 14749.80 16698.40 15586.00 14845.70 16808.60 15656.10 14912.50 16854.00 15444.80 14711.10 16751.20 15373.70 14643.50 16774.60 15283.00 14557.10 16776.30 15289.10 14562.90 16799.80 15463.40 14728.90 16944.30 15495.90 14759.90 16978.20 15500.50 14764.30 16990.00 15406.00 14674.20 16937.40 15292.00 14565.60 16879.80 15443.40 14709.80 17019.90 15628.70 14886.30 17213.90 15608.40 14867.00 17207.00 15591.20 14850.60 17253.50 15850.00 15097.20 17527.80 15935.60 15178.70 17643.50 16173.10 15404.80 17841.10 16252.30 15480.30 17996.30 16384.00 15605.70 18120.50 16695.20 15902.20 18386.90 17034.20 16225.00 18710.50 17219.80 16401.90 18959.30 17347.30 16523.30 19133.80 17432.30 16604.20 19271.50 17317.20 16494.60 19209.80 17403.80 16577.10 19288.60 17457.80 16628.50 19350.30 17808.70 16962.70 19712.20 8/31/01 17968.00 17114.00 19887.60
The Lehman Brothers Intermediate U.S. Government Bond Index is an unmanaged index that tracks the performance of 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 return as of 8/31/01 (%)
Share class A B C Z Inception 10/13/87 6/8/92 8/1/97 1/29/99 - --------------------------------------------------------------------------------------------------------------------- without with without with without with without sales sales sales sales sales sales sales charge charge charge charge charge charge charge - --------------------------------------------------------------------------------------------------------------------- 1-year 11.10 5.83 10.31 5.31 10.46 9.46 11.37 - --------------------------------------------------------------------------------------------------------------------- 5-year 6.85 5.81 6.05 5.74 6.33 6.33 6.98 - --------------------------------------------------------------------------------------------------------------------- 10-year 6.03 5.52 5.31 5.31 5.78 5.78 6.10
Average annual total return as of 6/30/01 (%)
Share class A B C Z - --------------------------------------------------------------------------------------------------------------------- without with without with without with without sales sales sales sales sales sales sales charge charge charge charge charge charge charge - --------------------------------------------------------------------------------------------------------------------- 1-year 10.12 4.89 9.33 4.33 9.49 8.49 10.39 - --------------------------------------------------------------------------------------------------------------------- 5-year 6.26 5.23 5.47 5.14 5.76 5.76 6.38 - --------------------------------------------------------------------------------------------------------------------- 10-year 5.96 5.45 5.25 5.25 5.71 5.71 6.02
MUTUAL FUND PERFORMANCE CHANGES OVER TIME. PLEASE VISIT LIBERTYFUNDS.COM FOR DAILY PERFORMANCE UPDATES. 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 maximum 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. 3 - -------------------------------------------------------------------------------- 30-DAY SEC YIELD (%) (UNAUDITED) Class A shares 4.70 Class B shares 4.19 Class C shares 4.36 Class Z shares 5.17 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 4.21% FOR CLASS C SHARES.
DISTRIBUTIONS DECLARED PER SHARE 9/1/00-8/31/01 ($) CLASS A 0.351 CLASS B 0.304 CLASS C 0.313 CLASS Z 0.367 EFFECTIVE NOVEMBER 1, 2001, WE MADE A CHANGE TO LIBERTY INTERMEDIATE GOVERNMENT FUND'S INVESTMENT STRATEGY. THE PARAMETERS OF THIS NEWLY-EXPANDED INVESTMENT STRATEGY ALLOW THE FUND TO INVEST UP TO 20% OF ITS ASSETS IN NON-GOVERNMENT, INVESTMENT GRADE BONDS AND INCREASE ITS HEDGING FLEXIBILITY. THIS CHANGE DOES NOT AFFECT THE FUND'S DURATION, OR INTEREST RATE SENSITIVITY. - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- PORTFOLIO MANAGERS' REPORT--LIBERTY INTERMEDIATE GOVERNMENT FUND - -------------------------------------------------------------------------------- Liberty Intermediate Government Fund turned out strong performance for the period, posting a total return of 11.10% for class A shares (without sales charge). The fund's performance was consistent with both its benchmark, the Lehman Brothers Intermediate U.S. Government Bond Index, which posted a total return of 11.48%, and its peers, the Lipper Intermediate U.S. Government Funds, which averaged 11.03%.(1) Falling interest rates and low inflation in the midst of a dramatically softening economy contributed to the fund's solid performance. INTEREST RATES DECLINED During the first half of the period, many investors began to anticipate a lowering interest rate environment. However, the Fed behaved cautiously during this time, fearful that low unemployment and a tightening labor market might lead to wage inflation. The market's continued downturn led to a severe decline in capital spending and further economic weakness. When the Fed began lowering the federal funds rate in January, long-term rates rose briefly due to fears that a rapid economic turnaround would trigger inflation. The picture shifted dramatically during the second half of the period. The Fed's easing caused a substantial and fairly consistent decline in short-term rates. However, while capital spending slowed and layoffs were announced, the impact on the unemployment rate was negligible. Concerns that wage pressure might lead to inflation prevented long-term rates from falling as they had been, and the yield curve steepened once more. As the extent of the weakness in the economy became clear, however, inflation concerns began to diminish. Toward the end of the period, the market seemed to expect further easing and economic weakness, along with inflation levels that would be beneficial for bonds. (1) Lipper Inc., a widely respected data provider in the industry, calculates an average total return for mutual funds with similar investment objectives as the fund. 4 FUND FOCUSED ON DURATION IN THE MIDST OF DECLINING RATES As declining rates exert a positive influence on bond prices, we focused on duration, or interest rate sensitivity, during the period. As rates began to decline in anticipation of Fed action, we focused on lengthening the average duration of the portfolio. Our strategy paid off during the second half of the period as the Fed began cutting rates between its regularly scheduled meetings. This was telling for the bond market, as it confirmed the extent of the economy's weakness. As the Fed lowered the federal funds rate throughout 2001, our greater interest rate sensitivity continued to boost fund performance. We began to lessen our interest rate exposure toward the end of the period. Although the economy continued to show significant weakness, we felt the position of the yield curve dictated that the dramatic pace at which rates had been falling was unlikely to be sustained. CONTINUED ECONOMIC WEAKNESS LIKELY As we move toward 2002, we anticipate continued weakness in the economy. In the wake of the recent terrorist attacks, aggressive action from the Fed may create sufficient liquidity to see the US through this crisis. This stance, coupled with massive layoffs in transportation and related industries, creates the potential for further interest rate reductions. Although a prolonged, steep yield curve is generally good for fixed-income securities, the fact remains that we have entered uncharted territory, which creates a great deal of uncertainty in the bond market and in the economy in general. /s/ LESLIE W. FINNEMORE/s/ ANN T. PETERSON LESLIE W. FINNEMORE ANN T. PETERSON /S/ MICHAEL R. BISSONNETTE MICHAEL R. BISSONNETTE Leslie W. Finnemore, Ann T. Peterson and Michael R. Bissonnette are co-portfolio managers of Liberty Intermediate Government Fund. Ms. Finnemore and Mr. Bissonnette are senior vice presidents and Ms. Peterson is a vice president of Colonial Management Associates, Inc. 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. - -------------------------------------------------------------------------------- MATURITY BREAKDOWN (%) - -------------------------------------------------------------------------------- [PERFORMANCE PIE CHART] Less than one year 1.90 1-5 years 69.10 5-10 years 17.00 10-20 years 6.20 Greater than 20 years 5.80
Maturity breakdowns are calculated as a percentage of total net assets. Net other assets, cash, cash equivalents and any bonds with an average life of one year or less are included into the 0-1 year average life class. Because the fund is actively managed, there can be no guarantee the fund will continue to maintain these breakdowns in the future. - -------------------------------------------------------------------------------- SECTOR BREAKDOWN (%) - -------------------------------------------------------------------------------- [SECTOR BREAKDOWN BAR CHART]
AS OF 8/31/01 AS OF 8/31/00 ------------- ------------- FNMAs MBS 39.10 26.60 GNMAs MBS 11.70 21.60 Treasury Securities 36.60 33.40 FHLMCs 4.80 16.00 SBA 2.10 2.40 Other Agency 5.70 0.00
Sector breakdowns are calculated as a percentage of total investments, excluding short-term obligations. Because the fund is actively managed, there can be no guarantee that the fund will continue to maintain this breakdown in the future. 5 - -------------------------------------------------------------------------------- PERFORMANCE INFORMATION--LIBERTY FEDERAL SECURITIES FUND - -------------------------------------------------------------------------------- Value of a $10,000 investment 8/31/91-8/31/01 PERFORMANCE OF A $10,000 INVESTMENT IN ALL SHARE CLASSES, 8/31/91-8/31/01 ($)
without with sales sales charge charge ---------------------------------------------------------- Class A 20,077 19,123 ---------------------------------------------------------- Class B 18,725 18,725 ---------------------------------------------------------- Class C 19,594 19,594 ---------------------------------------------------------- Class Z 20,209 20,209
[Performance Graph]
LEHMAN BROS. INTERMEDIATE CLASS A SHARES WITHOUT CLASS A SHARES WITH SALES U.S. GOVERNMENT BOND SALES CHARGE CHARGE INDEX ---------------------- ------------------------- ------------------------- 8/31/1991 10000.00 9525.00 10000.00 10230.00 9744.08 10170.00 10310.80 9821.05 10285.90 10382.00 9888.82 10406.30 10788.90 10276.50 10659.20 10596.90 10093.50 10556.80 10658.40 10152.10 10589.50 10592.30 10089.10 10547.20 10644.20 10138.60 10642.10 10816.60 10302.80 10800.70 10939.90 10420.30 10956.20 11155.40 10625.50 11166.60 11240.20 10706.30 11280.50 11356.00 10816.60 11436.10 11254.90 10720.30 11298.90 11268.40 10733.20 11251.50 11458.90 10914.60 11398.90 11767.10 11208.20 11610.90 12056.60 11483.90 11781.50 12100.00 11525.20 11825.10 12219.80 11639.30 11917.40 12230.80 11649.80 11885.20 12568.30 11971.30 12057.50 12622.40 12022.80 12081.60 12831.90 12222.40 12261.70 12908.90 12295.70 12311.90 12941.20 12326.50 12341.50 12770.40 12163.80 12279.80 12854.60 12244.00 12330.10 13030.80 12411.80 12452.20 12714.10 12110.20 12281.60 12279.30 11696.00 12102.30 12156.50 11579.00 12023.60 12172.30 11594.10 12032.00 12082.20 11508.30 12034.50 12323.90 11738.50 12192.10 12352.20 11765.50 12227.50 12117.50 11541.90 12126.00 12086.00 11511.90 12128.40 12030.40 11459.00 12073.80 12132.70 11556.40 12113.70 12396.00 11807.10 12311.10 12735.60 12130.70 12548.70 12790.40 12182.80 12617.70 12996.30 12379.00 12764.10 13581.10 12936.00 13124.00 13668.00 13018.80 13208.00 13601.10 12955.00 13214.60 13765.60 13111.80 13324.30 13904.70 13244.20 13413.60 14123.00 13452.10 13561.10 14368.70 13686.20 13726.60 14615.90 13921.60 13862.50 14718.20 14019.00 13978.90 14278.10 13599.90 13830.80 14075.30 13406.80 13767.10 13951.50 13288.80 13727.20 13841.30 13183.80 13720.40 14042.00 13375.00 13860.30 14065.80 13397.70 13903.30 14008.20 13342.80 13918.60 14295.30 13616.30 14098.10 14667.00 13970.30 14329.30 14957.40 14246.90 14502.70 14754.00 14053.20 14424.40 14789.40 14086.90 14479.20 14796.80 14094.00 14502.40 14548.20 13857.20 14419.70 14827.50 14123.20 14582.60 14964.00 14253.20 14696.40 15173.50 14452.70 14822.80 15645.30 14902.20 15095.50 15448.20 14714.40 15038.10 15704.60 14958.70 15202.10 15992.00 15232.40 15379.90 16028.80 15267.50 15413.80 16214.80 15444.60 15538.60 16461.20 15679.30 15740.60 16408.50 15629.10 15723.30 16446.30 15665.10 15772.00 16515.40 15730.90 15847.80 16690.40 15897.60 15957.10 16852.30 16051.80 16064.00 16874.20 16072.70 16125.10 17318.00 16495.40 16429.80 17839.30 16991.90 16812.60 17644.80 16806.70 16841.20 17620.20 16783.20 16789.00 17694.20 16853.70 16854.50 17812.70 16966.60 16930.30 17317.50 16494.90 16698.40 17443.90 16615.30 16808.60 17499.80 16668.50 16854.00 17205.80 16388.50 16751.20 17085.30 16273.80 16774.60 16919.60 16115.90 16776.30 16868.80 16067.60 16799.80 17099.90 16287.70 16944.30 17120.50 16307.20 16978.20 17084.50 16273.00 16990.00 16932.40 16128.10 16937.40 16815.60 16016.90 16879.80 16982.10 16175.40 17019.90 17245.30 16426.20 17213.90 17191.80 16375.20 17207.00 17142.00 16327.70 17253.50 17491.70 16660.80 17527.80 17619.40 16782.50 17643.50 17924.20 17072.80 17841.10 18006.60 17151.30 17996.30 18172.30 17309.10 18120.50 18570.30 17688.20 18386.90 19014.10 18110.90 18710.50 19213.80 18301.10 18959.30 19392.40 18471.30 19133.80 19456.40 18532.30 19271.50 19261.90 18346.90 19209.80 19333.10 18414.80 19288.60 19406.60 18484.80 19350.30 19874.30 18930.30 19712.20 8/31/2001 20077.50 19123.00 19887.60
The Lehman Brothers Intermediate U.S. Government Bond Index is an unmanaged index that tracks the performance of 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 return as of 8/31/01 (%)
Share class A B C Z Inception 3/30/84 6/8/92 8/1/97 1/11/99 - ----------------------------------------------------------------------------------------------------------------- without with without with without with without sales sales sales sales sales sales sales charge charge charge charge charge charge charge - ----------------------------------------------------------------------------------------------------------------- 1-year 12.12 6.79 11.32 6.32 11.47 10.47 12.39 - ----------------------------------------------------------------------------------------------------------------- 5-year 7.47 6.43 6.68 6.37 6.95 6.95 7.62 - ----------------------------------------------------------------------------------------------------------------- 10-year 7.22 6.70 6.47 6.47 6.96 6.96 7.29
Average annual total return as of 6/30/01 (%)
Share class A B C Z - ----------------------------------------------------------------------------------------------------------------- without with without with without with without sales sales sales sales sales sales sales charge charge charge charge charge charge charge - ----------------------------------------------------------------------------------------------------------------- 1-year 10.93 5.66 10.13 5.13 10.29 9.29 11.20 - ----------------------------------------------------------------------------------------------------------------- 5-year 6.67 5.64 5.88 5.56 6.18 6.18 6.80 - ----------------------------------------------------------------------------------------------------------------- 10-year 7.24 6.72 6.50 6.50 6.99 6.99 7.30
MUTUAL FUND PERFORMANCE CHANGES OVER TIME. PLEASE VISIT LIBERTYFUNDS.COM FOR DAILY PERFORMANCE UPDATES. 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 maximum 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. 6 - -------------------------------------------------------------------------------- 30-DAY SEC YIELD (%) (UNAUDITED) Class A shares 4.98 Class B shares 4.44 Class C shares 4.59 Class Z shares 5.48 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 4.44% FOR CLASS C SHARES.
DISTRIBUTIONS DECLARED PER SHARE 9/1/00-8/31/01 ($) CLASS A 0.594 CLASS B 0.519 CLASS C 0.534 CLASS Z 0.619 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- PORTFOLIO MANAGERS' REPORT-- LIBERTY FEDERAL SECURITIES FUND - -------------------------------------------------------------------------------- Liberty Federal Securities Fund turned out strong performance for the year ended August 31, 2001, posting a total return of 12.12% for class A shares (without sales charge). The fund outperformed both its benchmark, the Lehman Brothers Intermediate U.S. Government Bond Index, which posted a total return of 11.48%, and its peers, the Lipper General U.S. Government Funds, which averaged 10.81%.(1) Falling interest rates and low inflation in the midst of a dramatically softening economy contributed to the fund's strong performance. INTEREST RATES DECLINED During the first half of the period, many investors began to anticipate a lowering interest rate environment. However, the Fed behaved cautiously during this time, fearful that low unemployment and a tightening labor market might lead to wage inflation. The market's continued downturn led to a severe decline in capital spending and further economic weakness. When the Fed began lowering the federal funds rate in January, long-term rates rose briefly due to fears that a rapid economic turnaround would trigger inflation. The picture shifted dramatically during the second half of the period. The Fed's easing caused a substantial and fairly consistent decline in short-term rates. However, while capital spending slowed and layoffs were announced, the impact on the unemployment rate was negligible. Concerns that wage pressure might lead to inflation prevented long-term rates from falling as they had been, and the yield curve steepened once more. As the extent of the weakness in the economy became clear, however, inflation concerns began to diminish. Toward the end of the period, the market seemed to expect further easing and economic weakness, along with inflation levels that would be beneficial for bonds. (1) Lipper Inc., a widely respected data provider in the industry, calculates an average total return for mutual funds with similar investment objectives as the fund. 7 INCREASED RATE SENSITIVITY BENEFITED FUND Our strategy during the period focused on duration, or interest rate sensitivity, in order to capture declining rates. As interest rates continued to fall, we lengthened duration throughout the period in order to increase the fund's exposure to interest rates. As this fund is the more aggressive of our government funds and therefore maintains a longer average duration, we had ample opportunity to benefit from the strong gains posted by government bonds over the past year. CONTINUED ECONOMIC WEAKNESS LIKELY As we move toward 2002, we anticipate continued weakness in the economy. In the wake of the recent terrorist attacks, aggressive action from the Fed may create sufficient liquidity to see the US through this crisis. This stance, coupled with massive layoffs in the transportation and related industries, creates the potential for further interest rate reductions. Although a prolonged, steep yield curve is generally good for fixed-income securities, the fact remains that we have entered uncharted territory, which creates a great deal of uncertainty in the bond market and in the economy in general. /s/ LESLIE W. FINNEMORE/s/ ANN T. PETERSON LESLIE W. FINNEMORE ANN T. PETERSON /S/ MICHAEL R. BISSONNETTE MICHAEL R. BISSONNETTE Leslie W. Finnemore, Ann T. Peterson and Michael R. Bissonnette are co-portfolio managers of Liberty Federal Securities Fund. Ms. Finnemore and Mr. Bissonnette are senior vice presidents and Ms. Peterson is a vice president of Colonial Management Associates, Inc. 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. - -------------------------------------------------------------------------------- MATURITY BREAKDOWN (%) - -------------------------------------------------------------------------------- [MATURITY BREAKDOWN PIE CHART] Less than one year 2.10 1-5 years 59.20 5-10 years 18.00 10-20 years 9.90 Greater than 20 years 10.80
Maturity breakdowns are calculated as a percentage of total net assets. Net other assets, cash, cash equivalents and any bonds with an average life of one year or less are included into the 0-1 year average life class. Because the fund is actively managed, there can be no guarantee that the fund will continue to maintain these breakdowns in the future. - -------------------------------------------------------------------------------- SECTOR BREAKDOWN (%) - -------------------------------------------------------------------------------- [SECTOR BREAKDOWN BAR CHART]
AS OF 8/31/01 AS OF 8/31/00 ------------- ------------- FNMAs 30.50 26.90 GNMAs 5.70 8.30 Treasury Securities 37.10 34.00 FHLMCs 9.40 15.80 Non-Agency MBS/ABS 17.30 15.00
Sector breakdowns are calculated as a percentage of total investments, excluding short-term obligations. Because the fund is actively managed, there can be no guarantee that the fund will continue to maintain this breakdown in the future. 8 - -------------------------------------------------------------------------------- INVESTMENT PORTFOLIO -- LIBERTY INTERMEDIATE GOVERNMENT FUND - -------------------------------------------------------------------------------- August 31, 2001
U.S. Government Agencies & Obligations - 111.1% Par Value - -------------------------------------------------------------------------- U.S. GOVERNMENT AGENCIES - 70.4% FEDERAL FARM CREDIT BANK, 6.400% 01/16/02 $ 250,000 $ 252,695 ------------- FEDERAL HOME LOAN BANK: 4.500% 04/25/03(a) 40,113,000 40,526,565 5.720% 08/25/03 500,000 513,360 7.590% 03/10/05 50,000 54,672 ------------- 41,094,597 ------------- FEDERAL HOME LOAN MORTGAGE CORP.: 6.096% 02/01/18(b) 68,495 68,995 6.577% 11/01/18(b) 79,710 79,945 6.811% 05/01/18(b) 268,931 272,249 6.875% 01/15/05 19,072,000 20,403,988 7.391% 07/01/19(b) 145,172 144,764 7.500% 04/01/07-03/01/16 474,748 490,291 8.000% 06/01/03-04/01/17 4,783,048 4,958,588 8.500% 12/01/07-09/01/17 1,092,582 1,162,485 8.750% 12/01/05-05/01/09 455,424 478,906 9.000% 11/01/01-12/01/18 847,830 905,551 9.250% 11/01/08-10/01/19 1,897,677 1,997,305 9.500% 02/01/05-09/01/16 627,553 672,836 9.750% 04/01/09-09/01/16 129,624 135,943 10.000% 11/01/19 231,920 258,247 10.250% 01/01/09-07/01/16 470,267 517,732 10.500% 11/01/09-04/01/21 891,671 994,018 11.250% 09/01/05-12/01/15 910,779 1,032,199 ------------- 34,574,042 ------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION: 6.000% 05/01/08-05/01/26 53,176,218 53,484,599 6.250% 05/15/29(a) 8,602,000 8,686,644 6.375% 10/15/02(a) 12,612,000 13,002,215 6.391% 07/01/27(b) 84,483 85,327 6.500% 10/01/07-01/01/29 3,219,422 3,241,752 6.625% 09/15/09 11,525,000 12,356,759 6.750% 08/15/02 24,444,000 25,188,809 6.986% 06/01/20(b) 136,512 137,323 7.000% 11/01/07-11/01/23 2,679,947 2,752,495 7.121% 03/01/18(b) 483,379 489,726 7.250% 01/15/10 33,250,000 37,042,495 7.296% 08/01/19(b) 97,917 98,427 7.435% 11/01/19(b) 58,941 59,273 7.500% 12/01/06-10/01/23 2,513,485 2,603,181 7.583% 11/01/23(b) 57,162 57,006 7.614% 07/01/20(b) 50,036 50,310 7.998% 12/01/31(b) 224,833 228,838 8.000% 07/01/08-08/01/09 819,139 860,113 8.105% 12/01/17(b) 39,347 39,537
Par Value - -------------------------------------------------------------------------- 8.250% 02/01/08-06/01/08 $ 253,554 $ 263,709 8.366% 06/01/19(b) 52,206 52,774 8.500% 11/01/03-09/01/21 2,191,697 2,333,456 9.000% 06/01/07-08/01/21 5,504,796 5,894,113 9.500% 12/01/06 9,028 9,654 10.000% 08/01/02-10/01/06 1,523,893 1,648,182 10.500% 07/01/10-02/01/16 1,283,829 1,446,311 11.000% 08/01/15-12/01/15 303,523 343,834 To Be Announced: 7.000% 05/01/30(c) 31,500,000 32,210,700 7.500% 05/01/30(c) 74,400,000 76,703,284 ------------- 281,370,846 ------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION: 6.500% 06/01/23-01/15/29 6,567,623 6,631,197 6.875% 08/20/22(b) 19,764 20,218 7.000% 05/20/22(b) 192,529 196,530 7.000% 11/15/22-10/15/29 30,600,385 31,384,367 7.375% 06/20/23(b) 154,618 157,928 7.500% 02/15/07 77,151 80,550 8.000% 03/15/04-07/15/23 895,663 932,348 8.500% 06/15/17-11/20/22 535,230 560,993 8.750% 06/15/21-12/15/21 627,073 659,794 8.850% 09/15/18-09/15/20 1,317,237 1,420,514 9.000% 08/15/08-02/15/25 5,994,832 6,333,437 9.250% 06/15/16-12/15/21 2,557,168 2,722,566 9.500% 10/15/04-01/20/25 2,516,775 2,660,517 10.000% 01/15/02-07/20/18 1,003,805 1,076,698 10.250% 10/15/18 120,761 132,761 10.500% 12/15/02-11/15/16 3,114,175 3,512,702 10.625% 05/15/10 18,630 21,023 11.000% 12/15/09-03/15/21 3,572,699 4,062,020 11.250% 07/15/15-12/15/15 68,202 76,727 11.500% 03/15/10-01/15/21 5,668,556 6,519,480 11.750% 07/15/13-07/15/15 85,602 97,693 12.000% 07/15/11-02/20/16 5,747,801 6,660,766 12.250% 08/15/13-05/15/14 317,089 363,464 12.500% 01/15/10-10/15/15 3,971,293 4,631,847 12.750% 05/15/14 41,749 48,377 13.000% 01/15/11-01/15/16 1,603,909 1,892,771 13.500% 05/15/10-06/15/15 1,032,580 1,231,714 14.000% 06/15/11-03/15/12 57,404 69,064 14.500% 10/15/12 15,499 18,841 15.000% 09/15/11-09/15/12 77,328 94,243 ------------- 84,271,150 ------------- U.S. SMALL BUSINESS ADMINISTRATION: 7.600% 01/01/12 2,171,000 2,279,550 8.200% 10/01/11 1,946,589 2,048,177 8.250% 11/01/11 4,252,351 4,557,989
See notes to financial statements. 9 - -------------------------------------------------------------------------------- INVESTMENT PORTFOLIO -- LIBERTY INTERMEDIATE GOVERNMENT FUND (CONTINUED) - -------------------------------------------------------------------------------- August 31, 2001
U.S. Government Agencies & Obligations (continued) Par Value - -------------------------------------------------------------------------- U.S. GOVERNMENT AGENCIES (CONTINUED) U.S. SMALL BUSINESS ADMINISTRATION: (CONTINUED) 8.650% 11/01/14 $ 3,290,512 $ 3,572,262 8.850% 08/01/11 534,550 568,965 9.150% 07/01/11 1,650,102 1,782,110 ------------- 14,809,053 ------------- TOTAL U.S. GOVERNMENT AGENCIES (cost of $440,951,486) 456,372,383 ------------- U.S. GOVERNMENT OBLIGATIONS - 40.7% - -------------------------------------------------------------------------- U.S. TREASURY BONDS: 6.500% 02/15/10-11/15/26(a)(d) 48,739,000 54,233,897 6.750% 08/15/26 4,348,000 5,086,464 6.875% 08/15/25(a) 3,843,000 4,544,962 7.125% 02/15/23(a) 15,523,000 18,700,403 7.875% 02/15/21(a) 25,241,000 32,497,788 10.750% 08/15/05(a) 685,000 843,194 ------------- 115,906,708 ------------- U.S. TREASURY NOTES: 5.250% 08/15/03(a) 1,822,000 1,876,095 5.500% 01/31/03(a) 1,600,000 1,643,744 5.625% 11/30/02(a) 52,106,000 53,473,783 5.875% 11/15/05(a) 9,105,000 9,642,741 6.625% 04/30/02(a) 1,560,000 1,592,666 6.750% 05/15/05(a) 22,987,000 24,922,965 7.500% 02/15/05(a) 29,857,000 33,024,529 7.875% 11/15/04 19,518,000 21,683,327 ------------- 147,859,850 ------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (cost of $252,430,613) 263,766,558 ------------- TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS (cost of $693,382,099) 720,138,941 ------------- Short-Term Obligation - 4.9% Par Value - -------------------------------------------------------------------------- Repurchase Agreement with SBC Warburg Ltd., dated 08/31/01, due 09/04/01 at 3.650%, collateralized by U.S. Treasury Bonds with various maturities to 02/15/27, market value $33,026,895 (repurchase proceeds $31,977,964) (cost of $31,965,000) $31,965,000 $ 31,965,000 ------------- TOTAL INVESTMENTS (cost of $725,347,099)(e) 752,103,941 ------------- Other Assets & Liabilities, Net - (16.0%) (104,096,831) - -------------------------------------------------------------------------- NET ASSETS - 100.0% $ 648,007,110 -------------
NOTES TO INVESTMENT PORTFOLIO: (a) All or a portion of these securities are out on loan. (b) Interest rates on variable rate securities change periodically. The rates listed are as of August 31, 2001. (c) 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. (d) This security, or a portion thereof, with a total market value of $10,412,063, is being used to collateralize open futures contracts. (e) Cost for federal income tax purposes is $725,514,317. Long futures contracts open at August 31, 2001:
PAR VALUE UNREALIZED COVERED BY EXPIRATION APPRECIATION TYPE CONTRACTS MONTH AT 08/31/01 ---- ---------- ---------- ------------ 10-YR U.S. T-Note $7,700,000 December $51,260 20-YR U.S. T-Bond 2,100,000 December 22,103 ------- $73,363 =======
See notes to financial statements. 10 - -------------------------------------------------------------------------------- INVESTMENT PORTFOLIO -- LIBERTY FEDERAL SECURITIES FUND - -------------------------------------------------------------------------------- August 31, 2001
U.S. Government Agencies & Obligations - 92.7% Par Value - -------------------------------------------------------------------------- U.S. GOVERNMENT AGENCIES - 51.1% FEDERAL HOME LOAN MORTGAGE CORP: 6.500% 04/01/29-06/01/29 $23,304,071 $ 23,420,592 6.875% 01/15/05 31,846,000 34,070,125 7.500% 03/01/16 228,474 234,398 8.000% 04/01/07-05/01/16 1,217,979 1,269,938 8.500% 12/01/07-07/01/10 846,049 900,179 8.750% 03/01/04-02/01/10 261,220 274,688 9.000% 09/01/01-12/01/18 1,882,979 2,001,629 9.250% 10/01/08-11/01/10 1,715,145 1,805,191 9.500% 10/01/08-10/01/16 745,077 798,804 9.750% 11/01/08-09/01/16 259,437 272,084 10.000% 11/01/19 231,920 258,247 10.250% 09/01/09-11/01/13 426,482 469,527 10.500% 06/01/17-01/01/20 713,302 794,883 11.250% 10/01/03-07/01/15 464,778 527,812 11.500% 02/01/15 48,849 55,775 12.000% 09/01/13 3,546 4,032 ------------- 67,157,904 ------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION: 6.000% 12/01/08-03/01/24 22,670,869 22,867,319 6.375% 10/15/02 3,506,000 3,614,476 6.500% 07/01/03-06/01/29 4,045,468 4,067,912 6.625% 09/15/09 19,245,000 20,633,912 6.750% 08/15/02 8,658,000 8,921,809 7.000% 07/01/10-02/01/27 1,062,155 1,093,212 7.250% 01/15/10 29,550,000 32,920,473 7.500% 08/01/02-12/01/23 1,092,426 1,132,076 8.000% 03/01/08-01/01/19 969,071 1,017,835 8.250% 05/01/08-09/01/11 413,955 430,534 8.500% 11/01/08-07/01/17 1,603,991 1,707,737 9.000% 06/01/07-08/01/21 5,103,798 5,455,728 9.500% 06/01/08-02/01/18 605,570 641,962 To Be Announced: 7.000% 05/01/30(a) 25,000,000 25,554,750 7.500% 05/01/30(a) 86,000,000 88,634,180 ------------- 218,693,915 ------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION: 6.500% 06/15/23-02/15/29 8,354,040 8,434,907 7.000% 04/15/22-09/15/29 20,191,315 20,708,665 7.500% 04/15/06-03/15/07 367,927 380,918 8.000% 06/15/05-04/15/08 24,137 25,193 9.000% 08/15/08-09/15/17 2,971,972 3,142,861 10.000% 02/15/03 1,177 1,274 10.500% 02/15/13-08/15/21 4,270,793 4,819,290 11.000% 01/15/10-02/15/10 1,171 1,332 11.500% 04/15/13-08/15/13 13,873 15,967
Par Value - -------------------------------------------------------------------------- 11.750% 07/15/13-09/15/15 $ 85,354 $ 97,410 12.000% 12/15/12-06/15/15 220,040 255,039 12.500% 04/15/10-11/15/14 2,011,869 2,348,213 13.000% 01/15/11-05/15/15 793,658 937,255 ------------- 41,168,324 ------------- TOTAL U.S. GOVERNMENT AGENCIES (cost of $314,239,233) 327,020,143 ------------- U.S. GOVERNMENT OBLIGATIONS - 41.6% - -------------------------------------------------------------------------- U.S. TREASURY BONDS: 5.500% 08/15/28(b) 11,254,000 11,275,045 6.750% 08/15/26 8,540,000 9,990,434 6.875% 08/15/25(b) 15,406,000 18,220,060 7.125% 02/15/23(b) 21,129,000 25,453,895 7.250% 08/15/22 10,346,000 12,612,395 7.875% 02/15/21(b) 19,617,000 25,256,888 8.750% 08/15/20(b) 14,333,000 19,902,660 8.875% 02/15/19(c) 18,758,000 26,035,541 ------------- 148,746,918 ------------- U.S. TREASURY NOTES: 5.625% 11/30/02(b) 44,000,000 45,155,000 6.375% 08/15/02(b) 9,665,000 9,938,326 6.500% 02/15/10(b) 28,356,000 31,488,487 7.500% 02/15/05(b) 19,889,000 21,999,024 7.875% 11/15/04(c) 7,647,000 8,495,358 ------------- 117,076,195 ------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (cost of $252,945,352) 265,823,113 ------------- TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS (cost of $567,184,585) 592,843,256 ------------- Non-Agency Mortgage-Backed & Asset-Backed Securities - 19.5% - -------------------------------------------------------------------------- NON-AGENCY MORTGAGE-BACKED SECURITIES - 6.1% Chase Mortgage Finance Corp., 7.750% 04/25/30 578,974 596,917 Countrywide Home Loan: 7.250% 09/25/29 1,763,130 1,726,607 8.000% 07/25/30 10,099,622 10,697,578 Countrywide Mortgage Trust, 7.600% 04/25/23 630,475 630,475 CS First Boston Mortgage Securities Corp., 7.500% 06/01/20(d) 4,627,343 4,750,893
See notes to financial statements. 11 - -------------------------------------------------------------------------------- INVESTMENT PORTFOLIO -- LIBERTY FEDERAL SECURITIES FUND (CONTINUED) - -------------------------------------------------------------------------------- August 31, 2001
Non-Agency Mortgage-Backed & Asset-Backed Securities (continued) Par Value - -------------------------------------------------------------------------- NON-AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED) First Boston Mortgage Securities Corp., 6.150% 09/28/13 $ 286,640 $ 286,640 GE Capital Mortgage Services Inc., 8.000% 06/25/30 736,427 746,093 Headlands Mortgage Securities, Inc., 7.750% 03/25/27 5,136,208 5,473,271 Norwest Asset Securities Corp.: 6.750% 05/25/28 1,927,306 1,942,069 7.000% 04/25/12 2,095,075 2,153,840 PNC Mortgage Securities Corp., 7.000% 05/25/27 2,083,709 2,092,106 Residential Asset Securitization Trust, 7.500% 11/25/11 929,400 949,264 Residential Funding Mortgage Securities Inc., 7.500% 12/25/29 1,936,022 2,006,203 Structured Mortgage Asset Residential Trust, 8.375% 06/25/08 870,728 907,290 Washington Mutual: 6.530% 01/25/40 1,500,000 1,500,000 6.930% 01/25/40 2,500,000 2,500,000 ------------- TOTAL NON-AGENCY MORTGAGE-BACKED SECURITIES (cost of $37,057,095) 38,959,246 ------------- ASSET-BACKED SECURITIES - 13.4% - -------------------------------------------------------------------------- Conseco Finance, 8.383% 02/15/31 300,000 301,097 Countrywide Asset-Backed Certificates: 7.240% 04/25/28 1,685,946 1,717,294 8.450% 09/25/31 1,500,000 1,503,984 8.600% 03/31/31 5,930,000 6,272,583 9.000% 06/25/31 6,000,000 6,339,375 9.770% 03/25/31 5,000,000 5,033,550 GMAC Mortgage Loan Trust, 7.500% 11/25/30 3,587,036 3,720,429 Green Tree Financial Corp.: 7.320% 07/15/28 4,487,507 4,728,711 7.850% 08/15/25 9,100,000 8,387,641
Par Value - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- Indymac Manufactured Housing Contract, 6.970% 02/25/28 $ 3,873,682 $ 4,012,553 The Money Store Home Equity Trust, 8.525% 06/15/25 2,800,000 2,885,750 Preferred Mortgage Asset Trust, 7.900% 05/25/12(d) 955,259 987,200 Prudential Home Mortgage Securities, 6.456% 12/28/08(d) 1,016,714 1,027,406 Residential Accredited Loans, Inc. 6.500% 05/25/29 4,119,823 3,909,135 Saxon Asset Securities Trust: 6.870% 01/25/30 8,750,000 8,883,984 8.370% 07/25/30 11,449,000 11,964,205 8.664% 07/25/30 12,000,000 12,528,750 Tyron Mortgage Funding, Inc., 7.500% 02/20/27 1,191,219 1,240,728 ------------- TOTAL ASSET-BACKED SECURITIES (cost of $83,013,630) 85,444,375 ------------- TOTAL NON-AGENCY MORTGAGE-BACKED & ASSET-BACKED SECURITIES (cost of $120,070,725) 124,403,621 ------------- Short-Term Obligation - 5.1% - -------------------------------------------------------------------------- Repurchase Agreement with SBC Warburg Ltd., dated 08/31/01, due 09/04/01 at 3.650%, collateralized by U.S. Treasury Bonds with various maturities to 02/15/27, market value $33,595,848 (repurchase proceeds $32,528,187) (cost of $32,515,000) 32,515,000 32,515,000 ------------- TOTAL INVESTMENTS (cost of $719,770,310)(e) 749,761,877 ------------- Other Assets & Liabilities, Net - (17.3)% (110,227,586) - -------------------------------------------------------------------------- NET ASSETS - 100.0% $ 639,534,291 ------------
See notes to financial statements. 12 - -------------------------------------------------------------------------------- INVESTMENT PORTFOLIO -- LIBERTY FEDERAL SECURITIES FUND (CONTINUED) - -------------------------------------------------------------------------------- August 31, 2001 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 settlement date. The exact quantity purchased may be slightly more or less than the amount shown. (b) All or a portion of these securities are out on loan. (c) These securities, or a portion thereof, with a total market value of $34,530,899, are being used to collateralize open futures contracts. (d) 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, 2001, the value of these securities amounted to $6,765,499 or 1.1% of net assets. (e) Cost for federal tax purposes is $719,792,404. Long futures contracts open on August 31, 2001:
PAR VALUE UNREALIZED COVERED BY EXPIRATION APPRECIATION TYPE CONTRACTS MONTH AT 08/31/01 ---- ----------- ---------- ------------ 5-YR U.S. T-Note $17,600,000 December $47,113 20-YR U.S. T-Bond 2,100,000 December 22,033 ------- $69,146 -------
Short futures contract open on August 31, 2001:
PAR VALUE UNREALIZED COVERED BY EXPIRATION DEPRECIATION TYPE CONTRACTS MONTH AT 08/31/01 ---- ----------- ---------- ------------ 10-YR U.S. T-Note $13,000,000 December $(88,028) --------
See notes to financial statements. 13 - -------------------------------------------------------------------------------- STATEMENTS OF ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- August 31, 2001
LIGF LFSF - ------------------------------------------------------------------------------------------------------------------ ASSETS: Investments, at cost $ 725,347,099 $ 719,770,310 ======================== ======================== Investments, at value $ 752,103,941 $ 749,761,877 Cash 567 25,511 Investments held as collateral for loaned securities 202,448,687 113,709,326 Receivable for: Investments sold 303,097 696,045 Fund shares sold 1,602,235 962,016 Interest 6,402,470 4,330,539 Variation margin on futures contracts -- 11,936 Deferred Trustees' compensation plan 4,645 697 Other assets 57,810 121,325 ------------------------ ------------------------ Total Assets 962,923,452 869,619,272 ======================== ======================== LIABILITIES: Payable for: Collateral for loaned securities, at value 202,448,687 113,709,326 Investments purchased on a delayed delivery basis 108,381,718 113,723,711 Fund shares repurchased 2,354,115 720,130 Distributions 1,087,568 1,345,655 Management fee 326,715 319,140 Transfer agent fee 144,056 130,640 Bookkeeping fee 19,535 19,177 Trustees' fee -- 18,547 Service fee -- Class A 24,000 -- Variation margin on futures contracts 16,844 -- Deferred Trustees' fees 4,645 697 Other liabilities 108,459 97,958 ------------------------ ------------------------ Total Liabilities 314,916,342 230,084,981 ------------------------ ------------------------ NET ASSETS $ 648,007,110 $ 639,534,291 ======================== ======================== COMPOSITION OF NET ASSETS: Paid-in capital $ 776,087,379 $ 774,080,894 Overdistributed net investment income (679,901) (1,186,705) Accumulated net realized loss (154,230,573) (163,332,583) Net unrealized appreciation (depreciation) on: Investments 26,756,842 29,991,567 Futures contracts 73,363 (18,882) ------------------------ ------------------------ NET ASSETS $ 648,007,110 $ 639,534,291 ======================== ======================== Net asset value and redemption price per share -- Class A $ 6.61(a) $ 10.61(a) ======================== ======================== ($557,943,757/84,419,811) ($577,808,600/54,439,847) Maximum offering price per share -- Class A $ 6.94(b) $ 11.14(b) ======================== ======================== ($6.61/0.9525) ($10.61/0.9525) Net asset value and offering price per share -- Class B $ 6.61(a) $ 10.61(a) ======================== ======================== ($83,900,919/12,693,107) ($55,365,237/5,216,513) Net asset value and offering price per share -- Class C $ 6.61(a) $ 10.61(a) ======================== ======================== ($5,906,413/893,682) ($6,347,346/598,053) Net asset value, offering price and redemption price per share -- Class Z $ 6.61 $ 10.61 ======================== ======================== ($256,021/38,728) ($13,108/1,235)
(a) Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. (b) On sales of $50,000 or more the offering price is reduced. See notes to financial statements. 14 - -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- For the Year Ended August 31, 2001
LIGF LFSF - ---------------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including income on securities loaned of $367,136 and $309,263, respectively) $43,170,794 $42,889,020 Dollar roll fee income 1,313,161 1,618,006 ----------- ----------- Total Investment Income 44,483,955 44,507,026 EXPENSES: Management fee 3,925,854 3,833,320 Service fee -- Class A 1,308,315 1,453,341 Service fee -- Class B 311,587 132,234 Service fee -- Class C 10,441 11,681 Distribution fee -- Class B 934,638 396,701 Distribution fee -- Class C 31,339 35,043 Transfer agent fee 1,617,104 1,444,599 Bookkeeping fee 236,398 231,060 Trustees' fee 29,265 21,833 Custody fee 120,288 34,391 Legal fee 10,732 9,779 Registration fee 49,005 62,055 Audit fee 37,254 37,372 Other expenses 85,852 83,750 ----------- ----------- Total Expenses 8,708,072 7,787,159 Fees waived by Distributor -- Class C (6,268) (7,009) ----------- ----------- Net Expenses 8,701,804 7,780,150 ----------- ----------- Net Investment Income 35,782,151 36,726,876 ----------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS: Net realized gain on: Investments 5,041,343 966,185 Futures contracts 2,906,013 3,618,235 ----------- ----------- Net realized gain 7,947,356 4,584,420 Net change in unrealized appreciation/depreciation on: Investments 24,783,675 33,064,357 Futures contracts (1,277,510) (1,611,394) ----------- ----------- Net change in unrealized appreciation/depreciation 23,506,165 31,452,963 ----------- ----------- Net Gain 31,453,521 36,037,383 ----------- ----------- Increase in Net Assets from Operations $67,235,672 $72,764,259 =========== ===========
See notes to financial statements. 15 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
LIGF LFSF ------------------------------ ------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, INCREASE (DECREASE) IN NET ASSETS 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 35,782,151 $ 45,282,300 $ 36,726,876 $ 46,813,492 Net realized gain (loss) on investments and futures contracts 7,947,356 (23,056,212) 4,584,420 (36,764,489) Net change in unrealized appreciation/depreciation on investments and futures contracts 23,506,165 16,832,915 31,452,963 29,985,000 ------------- ------------- ------------- ------------- Net Increase from Operations 67,235,672 39,059,003 72,764,259 40,034,003 ------------- ------------- ------------- ------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income -- Class A (28,321,104) (29,837,423) (33,416,321) (42,602,709) In excess of net investment income -- Class A -- (360,236) -- (1,863,579) Return of capital -- Class A -- (552,967) -- (617,929) From net investment income -- Class B (5,923,009) (12,783,822) (2,652,375) (3,819,778) In excess of net investment income -- Class B -- (154,343) -- (167,089) Return of capital -- Class B -- (236,918) -- (55,404) From net investment income -- Class C (198,131) (139,016) (238,158) (293,493) In excess of net investment income -- Class C -- (1,678) -- (12,838) Return of capital -- Class C -- (2,576) -- (4,257) From net investment income -- Class Z (116,077) (437,046) (354) (69) In excess of net investment income -- Class Z -- (5,277) -- (3) Return of capital -- Class Z -- (8,100) -- (1) ------------- ------------- ------------- ------------- Total Distributions Declared to Shareholders (34,558,321) (44,519,402) (36,307,208) (49,437,149) ------------- ------------- ------------- ------------- SHARE TRANSACTIONS: Subscriptions -- Class A 301,227,404 103,062,812 49,220,341 24,592,608 Proceeds issued in connection with merger -- Class A 13,490,658 -- -- -- Distributions reinvested -- Class A 17,734,677 18,965,484 18,014,892 23,606,038 Redemptions -- Class A (266,374,294) (190,519,868) (105,240,352) (138,812,636) ------------- ------------- ------------- ------------- Net Increase (Decrease) -- Class A 66,078,445 (68,491,572) (38,005,119) (90,613,990) ------------- ------------- ------------- ------------- Subscriptions -- Class B 26,691,929 11,745,504 28,101,813 9,935,588 Proceeds issued in connection with merger -- Class B 7,830,746 -- -- -- Distributions reinvested -- Class B 3,531,945 7,376,876 1,665,693 2,451,779 Redemptions -- Class B (144,102,350) (128,936,251) (31,075,214) (29,986,362) ------------- ------------- ------------- ------------- Net Decrease -- Class B (106,047,730) (109,813,871) (1,307,708) (17,598,995) ------------- ------------- ------------- ------------- Subscriptions -- Class C 8,631,527 457,174 4,795,998 979,556 Distributions reinvested -- Class C 163,874 108,945 168,607 258,270 Redemptions -- Class C (4,971,365) (1,712,322) (2,406,545) (2,636,911) ------------- ------------- ------------- ------------- Net Increase (Decrease) -- Class C 3,824,036 (1,146,203) 2,558,060 (1,399,085) ------------- ------------- ------------- ------------- Subscriptions -- Class Z 1,303,406 700,749 11,639 -- Distributions reinvested -- Class Z 116,077 450,423 354 73 Redemptions -- Class Z (7,776,387) (2,018,757) -- -- ------------- ------------- ------------- ------------- Net Increase (Decrease) -- Class Z (6,356,904) (867,585) 11,993 73 ------------- ------------- ------------- ------------- Net Decrease from Share Transactions (42,502,153) (180,319,231) (36,742,774) (109,611,997) ------------- ------------- ------------- ------------- Total Decrease in Net Assets (9,824,802) (185,779,630) (285,723) (119,015,143) ------------- ------------- ------------- ------------- NET ASSETS: Beginning of period 657,831,912 843,611,542 639,820,014 758,835,157 ------------- ------------- ------------- ------------- End of period $ 648,007,110 $ 657,831,912 $ 639,534,291 $ 639,820,014 ============= ============= ============= ============= Overdistributed net investment income $ (679,901) $ (1,247,131) $ (1,186,705) $ (2,088,231) ============= ============= ============= =============
See notes to financial statements. 16 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) - --------------------------------------------------------------------------------
LIGF LFSF ------------------------------ ------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- CHANGES IN SHARES: Subscriptions -- Class A 46,598,412 16,578,781 4,730,239 2,469,026 Issued in connection with merger -- Class A 2,065,951 -- -- -- Issued for distributions reinvested -- Class A 2,740,519 3,032,696 1,742,578 2,365,889 Redemptions -- Class A (41,123,530) (30,552,302) (10,158,140) (13,950,238) ------------- ------------- ------------- ------------- Net Increase (Decrease) -- Class A 10,281,352 (10,940,825) (3,685,323) (9,115,323) ------------- ------------- ------------- ------------- Subscriptions -- Class B 4,107,574 1,887,508 2,697,587 995,261 Issued in connection with merger -- Class B 1,199,195 -- -- -- Issued for distributions reinvested -- Class B 547,662 1,167,034 161,119 244,542 Redemptions -- Class B (22,405,586) (20,652,542) (3,006,935) (3,008,414) ------------- ------------- ------------- ------------- Net Decrease -- Class B (16,551,155) (17,598,000) (148,229) (1,768,611) ------------- ------------- ------------- ------------- Subscriptions -- Class C 1,323,398 73,399 462,424 98,175 Issued for distributions reinvested -- Class C 25,221 17,810 16,282 25,852 Redemptions -- Class C (762,313) (276,255) (231,723) (264,711) ------------- ------------- ------------- ------------- Net Increase (Decrease) -- Class C 586,306 (185,046) 246,983 (140,684) ------------- ------------- ------------- ------------- Subscriptions -- Class Z 196,864 110,449 1,099 -- Issued for distributions reinvested -- Class Z 20,091 72,462 34 7 Redemptions -- Class Z (1,197,117) (322,470) -- -- ------------- ------------- ------------- ------------- Net Increase (Decrease) -- Class Z (980,162) (139,559) 1,133 7 ------------- ------------- ------------- -------------
See notes to financial statements. 17 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- August 31, 2001 NOTE 1. ACCOUNTING POLICIES ORGANIZATION: Liberty Intermediate Government Fund ("LIGF") is a series of Liberty Trust II and Liberty 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. 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. The Funds 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 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. On February 9, 2001, the Liberty Short Term Government Fund merged into LIGF as follows:
Mutual Fund Shares Net Assets Unrealized Issued Received Appreciation(1) - ------ ----------- --------------- 3,265,146 $21,321,404 $72,856
Net Assets Net Assets of the Fund of the Fund prior to the immediately after combination combination - ------------ ----------------- $645,595,755 $666,917,159
- --------------- (1) Unrealized appreciation is included in the Mutual Fund Net Assets Received amount shown above. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies that are consistently followed 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 and losses are based upon the specific identification method for both financial statement and federal income tax purposes. The Funds may enter into mortgage dollar roll transactions. A mortgage dollar roll transaction involves a sale by the Fund of securities that it holds with an agreement by the Fund to repurchase substantially similar securities at an agreed upon price and date. During the period between the sale and repurchase, the Fund will not be entitled to accrue interest and receive principal payments on the securities sold. Mortgage dollar roll transactions involve the risk that the market value of the securities sold by the Fund may decline below the repurchase price of those securities. In the event the buyer of the securities under a mortgage dollar roll transaction files for bankruptcy or becomes insolvent, the Fund's use of proceeds of the transaction may be restricted pending a determination by or with respect to the other party. The Funds may trade securities on other than normal settlement terms. This may increase the risk if the other 18 - ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------- 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. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: 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. Effective September 1, 2001, the Funds will adopt the provisions of the AICPA Audit and Accounting Guide for Investment Companies and will be required to amortize premium and discount on all debt securities. Upon the effective date, this accounting principle change will not have an impact on total net assets, but will result in a reclassification between cost of securities held and net unrealized appreciation/depreciation. Management of the Funds believes that the impact of adopting this principle will not be material to the financial statements. SECURITIES LENDING: The Funds may lend their 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, 2001, LIGF and LFSF loaned securities having a market value of $198,474,003 and $111,698,327, respectively, collateralized by securities issued by the U.S. Government and its agencies and cash which was invested in short-term instruments in the amount of $202,448,687 and $113,709,326, 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 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. The Funds intend to utilize provisions of the federal income tax law that allow them to carry a realized capital loss forward for up to eight years following the year of the loss and offset such losses against any future realized gains. At August 31, 2001, the Funds had capital loss carryforwards as follows:
Year of Capital Loss Expiration Carryforward* ---------- ------------- LIGF 2002 $ 7,248,466 2003 67,291,258 2004 32,580,328 2005 18,973,274 2007 287,185 2008 11,858,635 2009 15,616,545 ------------ $153,855,691 ------------
Year of Capital Loss Expiration Carryforward* ---------- ------------- LFSF 2002 $ 84,302,080 2004 21,929,352 2008 24,031,026 2009 29,849,094 ------------ $160,111,552 ------------
- --------------- * May be subject to limitations. Of the LIGF loss carryforwards expiring in 2002 and 2008, $4,423,000 and $287,000, respectively, were acquired in mergers with Liberty Financial U.S. Government Securities Fund and Liberty Short Term Government Fund. Their availability for use in offsetting any future realized gains may be limited in a given year. Expired capital loss carryforwards, if any, are recorded as a reduction of paid in capital. 19 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- The following reclassifications have been made to the financial statements:
Increase (Decrease) - ------------------------------------------------------------------------ Overdistributed Accumulated Net Investment Net Realized Fund Paid in Capital Income Gain (Loss) - ---- --------------- ---------------- ------------ LIGF $4,840,983 $(656,600) $(4,184,383) LFSF (677,591) 482,856 194,735
These differences are primarily due to paydowns and expiring capital loss carryforwards. Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. Additionally, the following net capital losses attributable to security transactions incurred after October 31, 2000, are treated as arising on September 1, 2001, the first day of the Funds' next taxable year:
Fund Capital Loss - ---- ------------ LFSF $1,976,408
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"), an affiliate of Liberty Financial Companies, Inc. ("Liberty Financial"), 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:
LIGF Annual Average Net Assets Fee Rate - ------------------ -------- First $1 billion 0.60% Next $500 million 0.55% Over $1.5 billion 0.50%
LFSF Annual Average Net Assets Fee Rate - ------------------ -------- First $1 billion 0.60% Next $1 billion 0.55% Next $1 billion 0.50% Over $3 billion 0.40%
Liberty Financial, an intermediate parent of the Funds' investment advisor, has entered into an agreement with Fleet National Bank for the sale of Liberty Financial's asset management business, including each of the Liberty Financial affiliates. This proposed transaction may result in a change of control of the Funds' investment advisor and, therefore, an assignment of its existing investment advisory contract with the Funds. Liberty Financial has obtained approval of a new investment advisory contract by each Fund's Board of Trustees and shareholders. This contract is identical to the current contract in all material respects except for its effective and termination dates. The transaction is expected to be completed prior to the end of 2001. BOOKKEEPING FEE: The Advisor is responsible for providing pricing and bookkeeping services to the Funds under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), the Advisor has delegated those functions to State Street Bank and Trust Company ("State Street"). Effective February 1, 2001, the Advisor pays fees to State Street under the Outsourcing Agreement. During the period September 1, 2000 to June 30, 2001, the Advisor provided bookkeeping and pricing services to the Funds for a monthly fee equal to $27,000 annually plus 0.035% annually of the Funds' average net assets over $50 million. Effective July 1, 2001, under its pricing and bookkeeping agreement with the Funds, the Advisor receives from each Fund an annual flat fee of $10,000, paid monthly, and in any month that each Fund's average net assets are more than $50 million, a monthly fee equal to the average net assets of each Fund for that month multiplied by a fee rate that is calculated by taking into account the fees 20 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- payable to State Street under the Outsourcing Agreement. TRANSFER AGENT FEE: Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Advisor, provides shareholder services for a monthly fee comprised of 0.06% annually of each Fund's average net assets plus charges based on the number of shareholder accounts and transactions. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. Prior to July 1, 2001, the Transfer Agent received a monthly fee of 0.07% annually of each Fund's average net assets plus charges based on the number of shareholder accounts and transactions. The Transfer Agent also received reimbursement for certain out-of-pocket expenses. UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Liberty Funds Distributor, Inc. (the "Distributor"), an affiliate of the Advisor, is each Fund's principal underwriter. During the year ended August 31, 2001, each Fund has been advised that the Distributor retained net underwriting discounts on LIGF and LFSF of $586,658 and $417,174, respectively, on sales of the Funds' Class A shares and received contingent deferred sales charges (CDSC) of $21,243 and $94 on Class A share redemptions, $212,636 and $146,799 on Class B share redemptions, and $2,621 and $4,244, on Class C share redemptions, respectively. Each Fund has adopted a 12b-1 plan (the "Plan") which requires the payment of a service fee to the Distributor. The Funds each 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. The Plan also requires the payment of a distribution fee to the Distributor. The Funds 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 Plan are used principally as repayment to the Distributor for amounts paid by the Distributor to dealers who sold such shares. 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, 2001, purchases and sales of investments, other than short-term obligations and mortgage dollar roll transactions, were as follows:
Purchases Sales -------------- -------------- LIGF $1,399,192,925 $1,343,206,563 LFSF $1,517,560,630 $1,515,179,823
Unrealized appreciation (depreciation) at August 31, 2001, for federal income tax purposes was:
LIGF LFSF ----------- ----------- Gross unrealized appreciation $27,733,956 $31,154,373 Gross unrealized depreciation (1,144,332) (1,184,900) ----------- ----------- Net unrealized appreciation $26,589,624 $29,969,473 =========== ===========
OTHER: The Funds 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. 21 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- LIBERTY INTERMEDIATE GOVERNMENT FUND - -------------------------------------------------------------------------------- Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED AUGUST 31, -------------------------------------------------------- CLASS A SHARES 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.28 $ 6.32 $ 6.73 $ 6.51 $ 6.37 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.36(a) 0.40(b) 0.38 0.42 0.39 Net realized and unrealized gain (loss) on investments and futures contracts 0.32 (0.05) (0.42) 0.20 0.15 -------- -------- -------- -------- -------- Total from Investment Operations 0.68 0.35 (0.04) 0.62 0.54 -------- -------- -------- -------- -------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.35) (0.38) (0.37) (0.38) (0.40) In excess of net investment income -- (0.00)(c) -- (0.02) -- Return of capital -- (0.01) -- -- -- -------- -------- -------- -------- -------- Total Distributions Declared to Shareholders (0.35) (0.39) (0.37) (0.40) (0.40) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 6.61 $ 6.28 $ 6.32 $ 6.73 $ 6.51 ======== ======== ======== ======== ======== Total return(d) 11.10% 5.77% (0.70)% 9.87% 8.64% ======== ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses(e) 1.18% 1.20% 1.15% 1.12% 1.13% Net investment income(e) 5.62% 6.35% 6.10% 6.02% 6.43% Portfolio turnover rate 218% 84% 62% 214% 61% Net assets, end of period (000's) $557,944 $466,000(f) $537,000(f) $651,000(f) $731,000(f)
(a) Per share data was calculated using average shares outstanding during the period. (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) Represents less than $0.01 per share. (d) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (e) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had no impact. (f) Rounded to the nearest thousand. 22 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- LIBERTY INTERMEDIATE GOVERNMENT FUND (CONTINUED) - -------------------------------------------------------------------------------- Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED AUGUST 31, ------------------------------------------------------- CLASS B SHARES 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 6.28 $ 6.32 $ 6.73 $ 6.51 $ 6.37 ------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.31(a) 0.35(b) 0.33 0.37 0.34 Net realized and unrealized gain (loss) on investments and futures contracts 0.32 (0.05) (0.42) 0.20 0.15 ------- -------- -------- -------- -------- Total from Investment Operations 0.63 0.30 (0.09) 0.57 0.49 ------- -------- -------- -------- -------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.30) (0.33) (0.32) (0.33) (0.35) In excess of net investment income -- (0.00)(c) -- (0.02) -- Return of capital -- (0.01) -- -- -- ------- -------- -------- -------- -------- Total Distributions Declared to Shareholders (0.30) (0.34) (0.32) (0.35) (0.35) ------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 6.61 $ 6.28 $ 6.32 $ 6.73 $ 6.51 ======= ======== ======== ======== ======== Total return(d) 10.31% 4.98% (1.44)% 9.03% 7.83% ======= ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses(e) 1.93% 1.95% 1.90% 1.87% 1.88% Net investment income(e) 4.87% 5.60% 5.35% 5.27% 5.68% Portfolio turnover rate 218% 84% 62% 214% 61% Net assets, end of period (000's) $83,901 $184,000(f) $296,000(f) $395,000(f) $461,000(f)
(a) Per share data was calculated using average shares outstanding during the period. (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) Represents less than $0.01 per share. (d) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (e) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had no impact. (f) Rounded to the nearest thousand. 23 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- LIBERTY INTERMEDIATE GOVERNMENT FUND (CONTINUED) - -------------------------------------------------------------------------------- Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED AUGUST 31, ------------------------------------------------ CLASS C SHARES 2001 2000 1999 1998 1997(c) - ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.28 $ 6.32 $ 6.73 $ 6.51 $ 6.59 ------ ------ ------- ------ ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.33(a) 0.36(b) 0.34 0.38 0.03 Net realized and unrealized gain (loss) on investments and futures contracts 0.31 (0.05) (0.42) 0.20 (0.08) ------ ------ ------- ------ ------- Total from Investment Operations 0.64 0.31 (0.08) 0.58 (0.05) ------ ------ ------- ------ ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.31) (0.34) (0.33) (0.34) (0.03) In excess of net investment income -- (0.00)(d) -- (0.02) -- Return of capital -- (0.01) -- -- -- ------ ------ ------- ------ ------- Total Distributions Declared to Shareholders (0.31) (0.35) (0.33) (0.36) (0.03) ------ ------ ------- ------ ------- NET ASSET VALUE, END OF PERIOD $ 6.61 $ 6.28 $ 6.32 $ 6.73 $ 6.51 ====== ====== ======= ====== ======= Total return(e) 10.46%(f) 5.14%(f) (1.29)%(f) 9.20%(f) (0.77)%(g) ====== ====== ======= ====== ======= RATIOS TO AVERAGE NET ASSETS: Expenses(h) 1.78% 1.80% 1.75% 1.72% 1.78%(i) Net investment income(h) 5.02% 5.75% 5.50% 5.42% 5.85%(i) Waiver/reimbursement 0.15% 0.15% 0.15% 0.15% -- Portfolio turnover rate 218% 84% 62% 214% 61%(g) Net assets, end of period (000's) $5,906 $2,000(j) $ 3,000(j) $1,000(j) $ --(k)
(a) Per share data was calculated using average shares outstanding during the period. (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) Class C Shares were initially offered on August 1, 1997. Per share data reflects activity from that date. (d) Represents less than $0.01 per share. (e) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (f) Had the Distributor not waived a portion of the expenses, total return would have been reduced. (g) Not annualized. (h) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had no impact. (i) Annualized. (j) Rounded to the nearest thousand. (k) Rounds to less than one million. 24 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- LIBERTY INTERMEDIATE GOVERNMENT FUND (CONTINUED) - -------------------------------------------------------------------------------- Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED AUGUST 31, ----------------------------- CLASS Z SHARES 2001 2000 1999(c) - ------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 6.28 $ 6.32 $ 6.76 ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.37(a) 0.41(b) 0.22 Net realized and unrealized gain (loss) on investments and futures contracts 0.33 (0.05) (0.43) ------- ------- ------- Total from Investment Operations 0.70 0.36 (0.21) ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.37) (0.39) (0.23) In excess of net investment income -- (0.00)(d) -- Return of capital -- (0.01) -- ------- ------- ------- Total Distributions Declared to Shareholders (0.37) (0.40) (0.23) ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 6.61 $ 6.28 $ 6.32 ======= ======= ======= Total return(e) 11.37% 6.03% (3.31)%(f) ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses(g) 0.93% 0.95% 0.92%(h) Net investment income(g) 5.87% 6.60% 6.35%(h) Portfolio turnover rate 218% 84% 62%(f) Net assets, end of period (000's) $ 256 $ 6,000(i) $ 7,000(i)
(a) Per share data was calculated using average shares outstanding during the period. (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) Class Z shares were initially offered on January 29, 1999. Per share data reflects activity from that date. (d) Represents less than $0.01 per share. (e) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (f) Not annualized. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had no impact. (h) Annualized. (i) Rounded to the nearest thousand. 25 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- LIBERTY FEDERAL SECURITIES FUND - -------------------------------------------------------------------------------- Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED AUGUST 31, YEAR ENDED -------------------------------------------------------- OCTOBER 31, CLASS A SHARES 2001 2000 1999 1998 1997(c) 1996 - ---------------------------------------------------------------------------------------------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.02 $ 10.14 $ 11.08 $ 10.52 $ 10.53 $ 10.83 -------- -------- -------- -------- -------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.60(a) 0.74(b) 0.70 0.71 0.58 0.70 Net realized and unrealized gain (loss) on investments and futures contracts 0.58 (0.14) (0.97) 0.53 (0.04) (0.30) -------- -------- -------- -------- -------- ---------- Total from Investment Operations 1.18 0.60 (0.27) 1.24 0.54 0.40 -------- -------- -------- -------- -------- ---------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.59) (0.68) (0.67) (0.68) (0.55) (0.69) In excess of net investment income -- (0.03) -- -- -- -- Return of capital -- (0.01) -- -- -- (0.01) -------- -------- -------- -------- -------- ---------- Total Distributions Declared to Shareholders (0.59) (0.72) (0.67) (0.68) (0.55) (0.70) -------- -------- -------- -------- -------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.61 $ 10.02 $ 10.14 $ 11.08 $ 10.52 $ 10.53 ======== ======== ======== ======== ======== ========== Total return(d) 12.12% 6.23% (2.56)% 12.11% 5.31%(f) 3.88% ======== ======== ======== ======== ======== ========== RATIOS TO AVERAGE NET ASSETS: Expenses(e) 1.15% 1.17% 1.15% 1.14% 1.19%(g) 1.18% Net investment income(e) 5.82% 6.87% 6.58% 6.49% 6.71%(g) 6.62% Portfolio turnover rate 229% 96% 42% 356% 79%(f) 125% Net assets, end of period (000's) $577,809 $583,000(h) $682,000(h) $821,000(h) $888,000(h) $1,026,000(h)
(a) Per share data was calculated using average shares outstanding during the period. (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) 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. (d) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (e) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had no impact. (f) Not annualized. (g) Annualized. (h) Rounded to the nearest thousand. 26 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- LIBERTY FEDERAL SECURITIES FUND (CONTINUED) - -------------------------------------------------------------------------------- Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED AUGUST 31, YEAR ENDED --------------------------------------------------- OCTOBER 31, CLASS B SHARES 2001 2000 1999 1998 1997(c) 1996 - --------------------------------------------------------------------------------------------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.02 $ 10.14 $ 11.08 $ 10.52 $10.53 $ 10.83 ------- ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.52(a) 0.67(b) 0.62 0.63 0.52 0.62 Net realized and unrealized gain (loss) on investments and futures contracts 0.59 (0.14) (0.97) 0.53 (0.04) (0.30) ------- ------- ------- ------- ------- ------- Total from Investment Operations 1.11 0.53 (0.35) 1.16 0.48 0.32 ------- ------- ------- ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.52) (0.61) (0.59) (0.60) (0.49) (0.61) In excess of net investment income -- (0.03) -- -- -- -- Return of capital -- (0.01) -- -- -- (0.01) ------- ------- ------- ------- ------- ------- Total Distributions Declared to Shareholders (0.52) (0.65) (0.59) (0.60) (0.49) (0.62) ------- ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 10.61 $ 10.02 $ 10.14 $ 11.08 $10.52 $ 10.53 ======= ======= ======= ======= ======= ======= Total return(d) 11.32% 5.44% (3.30)% 11.26% 4.66%(f) 3.11% ======= ======= ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses(e) 1.90% 1.92% 1.90% 1.89% 1.94%(g) 1.93% Net investment income(e) 5.07% 6.12% 5.83% 5.74% 5.96%(g) 5.87% Portfolio turnover rate 229% 96% 42% 356% 79%(f) 125% Net assets, end of period (000's) $55,365 $54,000(h) $72,000(h) $72,000(h) $64,000(h) $73,000(h)
(a) Per share data was calculated using average shares outstanding during the period. (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) 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. (d) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (e) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had no impact. (f) Not annualized. (g) Annualized. (h) Rounded to the nearest thousand. 27 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- LIBERTY FEDERAL SECURITIES FUND (CONTINUED) - -------------------------------------------------------------------------------- Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED AUGUST 31, -------------------------------------------------------- CLASS C SHARES 2001 2000 1999 1998 1997(c) - -------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.02 $ 10.14 $ 11.08 $ 10.52 $ 10.71 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.54(a) 0.68(b) 0.64 0.64 0.06 Net realized and unrealized gain (loss) on investments and futures contracts 0.58 (0.14) (0.97) 0.53 (0.20) -------- -------- -------- -------- -------- Total from Investment Operations 1.12 0.54 (0.33) 1.17 (0.14) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.53) (0.62) (0.61) (0.61) (0.05) In excess of net investment income -- (0.03) -- -- -- Return of capital -- (0.01) -- -- -- -------- -------- -------- -------- -------- Total Distributions Declared to Shareholders (0.53) (0.66) (0.61) (0.61) (0.05) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.61 $ 10.02 $ 10.14 $ 11.08 $ 10.52 ======== ======== ======== ======== ======== Total return(d) 11.47%(e) 5.60%(e) (3.15)%(e) 11.43%(e) (1.31)%(g) ======== ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses(f) 1.75% 1.77% 1.79% 1.74% 1.82%(h) Net investment income(f) 5.22% 6.27% 5.98% 5.89% 6.55%(h) Waiver/reimbursement 0.15% 0.15% 0.15% 0.15% -- Portfolio turnover rate 229% 96% 42% 356% 79%(g) Net assets, end of period (000's) $ 6,347 $ 4,000(i) $ 5,000(i) $ 1,000(i) $ --(j)
(a) Per share data was calculated using average shares outstanding during the period. (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) Class C shares were initially offered on August 1, 1997. Per share data reflects activity from that date. (d) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (e) Had the Distributor not waived a portion of expenses, total return would have been reduced. (f) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had no impact. (g) Not annualized. (h) Annualized. (i) Rounded to the nearest thousand. (j) Rounds to less than one million. 28 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- LIBERTY FEDERAL SECURITIES FUND (CONTINUED) - -------------------------------------------------------------------------------- Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED AUGUST 31, --------------------------------- CLASS Z SHARES 2001 2000 1999(c) - ----------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.02 $ 10.14 $ 11.01 ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.63(a) 0.77(b) 0.48 Net realized and unrealized gain (loss) on investments and futures contracts 0.58 (0.14) (0.89) ------- ------- ------- Total from Investment Operations 1.21 0.63 (0.41) ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.62) (0.71) (0.46) In excess of net investment income -- (0.03) -- Return of capital -- (0.01) -- ------- ------- ------- Total Distributions Declared to Shareholders (0.62) (0.75) (0.46) ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 10.61 $ 10.02 $ 10.14 ======= ======= ======= Total return(d) 12.39% 6.50% (3.77)%(f) ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses(e) 0.90% 0.92% 0.91%(h) Net investment income(e) 6.07% 7.12% 7.19%(h) Portfolio turnover rate 229% 96% 42%(f) Net assets, end of period (000's) $ 13 $ 1 $ --(g)
(a) Per share data was calculated using average shares outstanding during the period. (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) Class Z shares were initially offered on January 11, 1999. Per share data reflects activity from that date. (d) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (e) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had no impact. (f) Not annualized. (g) Rounds to less than one million. (h) Annualized. 29 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- TO THE TRUSTEES OF LIBERTY TRUST II AND THE SHAREHOLDERS OF 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 Intermediate Government Fund (a series of Liberty Trust II) and Liberty Federal Securities Fund (a series of Liberty Trust III) (collectively, the "Funds") at August 31, 2001, 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 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 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, 2001 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts October 15, 2001 30 - -------------------------------------------------------------------------------- UNAUDITED INFORMATION - -------------------------------------------------------------------------------- RESULTS OF SPECIAL MEETING OF SHAREHOLDERS On December 17, 2000, a Special Meeting of Shareholders of LIGF and LFSF was held to elect eleven Trustees. On September 29, 2000, the record date for the Meeting, LIGF and LFSF had shares outstanding of 104,521,268 and 63,440,308, respectively. The votes cast were as follows:
AUTHORITY LIGF FOR WITHHELD - ---- ---------- --------- TO ELECT A BOARD OF TRUSTEES: Douglas Hacker 52,579,489 488,869 Janet Langford Kelly 52,565,304 503,054 Richard W. Lowry 52,582,804 485,554 Salvatore Macera 52,563,561 504,797 William E. Mayer 52,570,832 497,526 Charles R. Nelson 52,586,593 481,765 John J. Neuhauser 52,583,304 485,054 Joseph R. Palombo 52,559,841 508,517 Thomas E. Stitzel 52,575,137 493,221 Thomas C. Theobald 52,581,496 486,862 Anne-Lee Verville 52,567,810 500,548
AUTHORITY LFSF FOR WITHHELD - ---- ---------- --------- TO ELECT A BOARD OF TRUSTEES: Douglas Hacker 37,192,693 564,625 Janet Langford Kelly 37,181,334 575,984 Richard W. Lowry 37,196,707 560,611 Salvatore Macera 37,178,266 579,052 William E. Mayer 37,196,863 560,455 Charles R. Nelson 37,191,449 565,869 John J. Neuhauser 37,187,965 569,353 Joseph R. Palombo 37,191,680 565,638 Thomas E. Stitzel 37,198,251 559,067 Thomas C. Theobald 37,203,940 553,378 Anne-Lee Verville 37,193,042 564,276
FEDERAL INCOME TAX INFORMATION The following average of each Fund's investments, as of each quarter, were in direct obligations of the U.S. Treasury: LIGF 42% LFSF 37%
The following approximations of each Fund's distributions (35% of gross income) were derived from interest on direct investments in U.S. Treasury bonds, notes and bills: LIGF 45% LFSF 43%
31 (THIS PAGE INTENTIONALLY LEFT BLANK) - -------------------------------------------------------------------------------- Trustees & Transfer Agent - -------------------------------------------------------------------------------- Douglas A. Hacker Executive Vice President and Chief Financial Officer of UAL, Inc. (formerly Senior Vice President and Chief Financial Officer of UAL, Inc.) Janet Langford Kelly Executive Vice President-Corporate Development and Administration, General Counsel and Secretary, Kellogg Company (formerly Senior Vice President, Secretary and General Counsel, Sara Lee Corporation) Richard W. Lowry Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood Corporation) Salvatore Macera Private Investor (formerly Executive Vice President and Director of Itek Corp.) William E. Mayer Managing Partner, Park Avenue Equity Partners (formerly Founding Partner, Development Capital LLC; Dean and Professor, College of Business and Management, University of Maryland) Charles R. Nelson Van Voorhis Professor, Department of Economics, University of Washington; consultant on econometric and statistical matters (formerly Department Chairman and Director of the Institute for Economic Research) 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 Stein Roe & Farnham Incorporated; Executive Vice President and Chief Administrative Officer of Liberty Funds Group LLC (formerly Vice President of Liberty Mutual Funds, Stein Roe Mutual Funds and All-Star Funds, 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) Thomas C. Theobald Managing Director, William Blair Capital Partners (formerly Chief Executive Officer and Chairman of the Board of Directors, Continental Bank Corporation) Anne-Lee Verville Chairman of the Board of Directors, Enesco Group, Inc. and author and speaker on educational systems needs (formerly General Manager, Global Education Industry, and President, Applications Solutions Division, IBM Corporation) Important Information About This Report The Transfer Agent for each of the Liberty Government Funds is: Liberty Funds Services, Inc. P.O. Box 1722 Boston, MA 02105-1722 800-345-6611 The Funds mail one shareholder report to each shareholder address. If you would like more than one report, please call 800-426-3750 and additional reports will be sent to you. This report has been prepared for shareholders of each of the 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 fund and with the most recent copy of the Liberty Funds Performance Update. Annual Report: Liberty Government Funds - -------------------------------------------------------------------------------- GIVE ME LIBERTY.(R) Liberty Funds believes in financial choice At Liberty, it's our job to help you achieve your financial goals. So whether it's savings for your kid's education, building your retirement nest egg, or managing your income... we can help. We offer a diverse familty of mutual funds representing a wide selection of investment styles and specialized money management. It's all designed to help you reach for financial freedom -- however your define it. Liberty believes in professional advice Today's ever-changing financial markets can challenge even the most seasoned investors. That's why we recommend working with a financial advisor. With an advisor you have an experienced, knowledgeable professional looking out for your best interests. Your advisor can help you establish a plan for reaching your personal financial goals and help you stay on track over the long term. It's a relationship that's focused on you and your needs. - -------------------------------------------------------------------------------- Liberty Government Funds Annual Report, August 31, 2001 [LOGO] LIBERTY ----------------- FUNDS ALL-STAR - COLONIAL - CRABBE HUSON - NEWPORT - STEIN ROE ADVISOR Liberty Funds Distributor, Inc. (c)2001 One Financial Center, Boston, MA 02111-2621, 800-426-3750 www.libertyfunds.com PRSRT STD U.S. POSTAGE PAID HOLLISTON, MA PERMIT NO. 20 -----END PRIVACY-ENHANCED MESSAGE-----