<PAGE>
COLONIAL
INCOME FUND
ANNUAL REPORT
DECEMBER 31, 1996
[PHOTO MONTAGE]
NOT FDIC- | MAY LOSE VALUE
INSURED | NO BANK GUARANTEE
<PAGE>
COLONIAL INCOME FUND HIGHLIGHTS
JANUARY 1, 1996 - DECEMBER 31, 1996
INVESTMENT OBJECTIVE: Colonial Income Fund seeks as high a level of current
income and total return, as is consistent with prudent risk, by investing
primarily in corporate debt securities.
THE FUND IS DESIGNED TO OFFER:
X High monthly income
X Opportunity for growth over time
X A portfolio of quality bonds
PORTFOLIO MANAGER COMMENTARY: "1996 was a volatile year for the fixed-income
markets. We focused on corporate bonds with capital appreciation potential and
we increased our investments in markets with strong technical and fundamental
characteristics."
-- Richard Stevens
COLONIAL INCOME FUND PERFORMANCE
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C>
Inception dates 12/1/69 5/15/92
Distributions declared per share $ 0.450 $ 0.402
SEC yields on 12/31/96* 6.14% 5.69%
12-month total returns, assuming 3.59% 2.82%
reinvestment of all distributions and
no sales charge or contingent
deferred sales charge (CDSC)
Net asset value per share on 12/31/96 $ 6.41 $ 6.41
</TABLE>
*The 30-day SEC yields on December 31, 1996, reflect the portfolio's earning
power, net of expenses, expressed as an annualized percentage of the maximum
offering price per share at the end of the period.
PORTFOLIO STRUCTURE QUALITY BREAKDOWN
(as of 12/31/96) (as of 12/31/96)
1.Corporate Bonds ............ 63.5% AAA ...................... 27.9%
2.U.S. Government Bonds ..... 21.3% AA ....................... 5.4%
3.Foreign Government Bonds ... 11.3% A ........................ 12.0%
4.Preferred Stocks ........... 1.3% BBB ...................... 32.6%
5.Other ...................... 2.6% BB and Below ............. 18.8%
Portfolio structure and quality breakdown are calculated as a percentage of
total net assets. Because the Fund is actively managed, there can be no
guarantee the Fund will continue to maintain this portfolio structure and
quality breakdown in the future.
2
<PAGE>
PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
I am pleased to present your Fund's annual report for the fiscal year ended
December 31, 1996. This report reflects on the investment environment of the
past 12 months and on the performance of your Fund.
[PHOTO]
Harold W, Cogger
President
While the Federal Reserve Board lowered short-term interest rates early in the
period, stronger than expected economic reports in February 1996 brought the
Fed's easing trend to a halt. As a result, long-term interest rates were rising
during most of the period, having a negative effect on fixed income investments.
However, with recent statistics suggesting an easing pace of economic activity
and a continued benign inflation outlook, we are hopeful that bond market
volatility will be somewhat reduced in the months ahead.
There was some good news for the tax-exempt sector. Low supply and strong retail
market support enabled municipal bonds to outperform Treasury bonds for much of
the year. The post-election conditions should promote a period of stability for
the tax-exempt market as the flat tax initiative is now a receding memory.
In the domestic stock market, generally favorable conditions prevailed until
July, when a price-based correction took place. Since then, the market has
rebounded nicely with the Dow Jones Industrial Average setting several new
records. Internationally, the Tiger countries of the Pacific Rim continue to
offer a good combination of growth and value. In the European markets,
short-term interest rates continue to be much lower than long-term rates. We
expect these conditions to prevail until we see an increase in economic
activity.
Our economic expectations include growth continuing at a slower, but more
sustainable rate, and our outlook for 1997 is relatively bright.
The following report will provide you with specific information on your Fund's
performance as well as an in-depth discussion with your portfolio manager. As
always, we thank you for the opportunity to help you meet your investment goals
through the Colonial family of funds.
Respectfully,
/s/Harold W. Cogger
- ------------------------
Harold W. Cogger
President
February 10, 1997
Because market conditions change frequently, there can be no assurance that the
trends described here will continue, come to pass or affect Fund performance.
3
<PAGE>
PORTFOLIO MANAGEMENT REPORT
RICHARD STEVENS has been portfolio manager of Colonial Income Fund since
November 1996. Mr. Stevens co-managed the fund from September 1995 through
October 1996. He has been with Colonial since 1994 and is Vice President of
Colonial Management Associates, Inc.
Q. WHAT WAS THE FUND'S INVESTMENT STRATEGY DURING THE PAST YEAR?
A. During the interest rate cycle, the Fund maintained a large core portfolio of
high quality investment grade corporate bonds. We used fundamental credit
research to identify undervalued securities, searching for industries and
companies that possessed appealing operating and financial characteristics that
we believe have not been recognized by the market. Securities of such companies
may offer price appreciation potential regardless of the interest rate
environment. Sector rotation also enhanced shareholder returns. For example, in
1995 the Fund was overweighted in U.S. Treasury securities and high grade
corporate issues. But when the market experienced unexpectedly strong economic
activity early in 1996, interest rates reversed direction and moved sharply
upwards, a negative for bond prices. In order to reduce the effect of this
volatility on the portfolio, we diversified approximately 30% of the Fund's
assets, cut back our positions in the volatile U.S. Government sector and
increased our positions in the high yield and international bond markets.
Q. WHAT INVESTMENTS ENHANCED THE FUND'S PERFORMANCE?
A. The Fund benefited from investments in the financial services and energy
industries. In the financial services sector, investments in Met Life, one of
the nation's major insurers, did well as a result of improved credit. When
compared to many corporate and government securities, these investments offer
incremental yield as well as an opportunity for greater price gains when
interest rates decline. In the energy sector, investments in Occidental
Petroleum, a large chemical, oil and gas producer, and Parker & Parsley, an oil
and gas exploration company, profited from both short- and long-term trends. In
the short-term, higher oil prices during 1996 provided these companies with a
financial windfall. Longer term, they are expected to benefit from increased
global energy demand, resulting in part from the industrialization of China, the
Pacific Rim and eastern Europe.
Q. WHAT IS YOUR OUTLOOK FOR 1997?
A. Employment levels and strong consumer confidence lead us to anticipate
reasonably healthy economic growth over the next six months. This growth should
be at a more modest pace than we saw during the first half of 1996 -- a positive
for bond prices. While we do not see any meaningful signs of increasing
inflation, we will be watching wage levels and energy prices closely.
4
<PAGE>
Investors' expectations for a strong economy should favor corporate bonds,
positioning them for continued strong performance relative to Treasury
securities. Technical factors, such as strong foreign and domestic demand for a
limited supply of corporate bonds, provide good price support regardless of the
direction of interest rates. Fundamental factors such as strong earnings growth
are also positive because corporate bond prices reflect industry and company
performance as well as the level of interest rates.
COLONIAL INCOME FUND INVESTMENT PERFORMANCE VS.
THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX
Change in Value of $10,000 from 12/31/86 - 12/31/96
Based on NAV and MOP for Class A Shares
<TABLE>
<CAPTION>
Label A B C
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Label cifa nav mop
1 Dec 31, 86 10000 9525 10000
2 Mar 31, 87 10276.63 9788.485 10148
3 Jun 30, 87 10176.99 9693.583 9956
4 Sep 30, 87 9944.669 9472.297 9665
5 Dec 31, 87 10048.38 9571.079 10229
6 Mar 31, 88 10543.59 10042.77 10595
7 Jun 30, 88 10799.56 10286.58 10700
8 Sep 30, 88 11079.27 10553.01 10900
9 Dec 31, 88 11300.15 10763.39 11005
10 Mar 31, 89 11418.51 10876.13 11126
11 Jun 30, 89 12036.82 11465.07 12021
12 Sep 30, 89 12176.36 11597.98 12133
13 Dec 31, 89 12160.85 11583.21 21571
14 Mar 31, 90 12078.32 11504.6 21427
15 Jun 30, 90 12340.43 11754.26 12875
16 Sep 30, 90 12043.55 11471.48 12953
17 Dec 31, 90 12482.96 11890.02 13613
18 Mar 31, 91 13162.8 12537.57 13980
19 Jun 30, 91 13548.58 12905.02 14191
20 Sep 30, 91 14191.73 13517.63 15007
21 Dec 31, 91 14829.6 14125.19 15808
22 Mar 31, 92 14878.32 14171.6 15571
23 Jun 30, 92 15424.1 14691.46 16201
24 Sep 30, 92 16083 15319.06 16993
25 Dec 31, 92 16139.72 15373.09 17006
26 Mar 31, 93 16987.28 16180.38 17797
27 Jun 30, 93 17466.09 16636.45 18331
28 Sep 30, 93 18076.52 17217.88 18938
29 Dec 31, 93 18084.16 17225.16 18882
30 Mar 31, 94 17459.03 16629.72 18291
31 Jun 30, 94 17129.07 16315.44 18064
32 Sep 30, 94 17211.11 16393.58 18153
33 Dec 31, 94 17344.37 16520.52 18220
34 Mar 31, 95 18253.05 17386.03 19128
35 Jun 30, 95 19475.75 18550.65 20369
36 Sep 30, 95 19963.99 19015.7 20759
37 Dec 31, 95 20864.67 19873.6 21726
38 Mar 31, 96 20347.01 19380.53 21217
39 Jun 30, 96 20353.66 19386.87 21317
40 Sep 30, 96 20881.11 19889.26 21693
41 Dec 31, 96 21613.63 20586.98 22356
</TABLE>
A hypothetical $10,000 investment in Class B shares made on May 15, 1992
(inception), at NAV would have been valued at $13,779 on December 31, 1996. The
same investment after deducting the applicable contingent deferred sales charge
(CDSC) would have grown to $13,579 on December 31, 1996.
AVERAGE ANNUAL TOTAL RETURNS
As of 12/31/96 (Most Recent Quarter End)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
INCEPTION 12/1/69 5/15/92
- --------------------------------------------------------------------------------
NAV MOP NAV w/CDSC
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3.59% (1.33)% 2.82% (2.01)%
- --------------------------------------------------------------------------------
5 years 7.83% 6.78% -- --
- --------------------------------------------------------------------------------
10 years 8.01% 7.49% -- --
- --------------------------------------------------------------------------------
Since inception -- -- 7.16% 6.82%
- --------------------------------------------------------------------------------
</TABLE>
The Lehman Brothers Government/Corporate Bond Index is an unmanaged index that
tracks the performance of a selection of U.S. government agency, Treasury and
investment-grade corporate bonds. The Lehman Mutual Fund General Bond Index
(used previously to track performance) ceased to exist in May 1995. The Lehman
Brothers Government/Corporate Bond Index most closely parallels that Index's
performance. Unlike mutual funds, indexes are not investments, do not incur fees
or expenses, and it is not possible to invest in an index.
Return and value of an investment will vary, resulting in a gain or loss on
sale. All results shown assume reinvestment of distributions. Net asset value
(NAV) returns do not include sales charges or CDSC. Maximum offering price (MOP)
returns include the maximum sales charge of 4.75%. The CDSC returns reflect the
maximum charge of 5% for one year and 2% since inception.
5
<PAGE>
SHAREHOLDER SERVICES
TO MAKE INVESTING EASIER
Colonial has one of the most extensive selections of shareholder services
available. Your financial adviser can help you arrange for any of these
services, or you can call Colonial directly at 1-800-345-6611.
AFFORDABLE ADDITIONAL INVESTMENTS: Add to your account with as little as $50 on
most funds; $25 for an IRA account.
FREE EXCHANGES*: Exchange all or part of your account into the same share class
of another Colonial fund, by phone or mail.
EASY ACCESS TO YOUR MONEY*: Make withdrawals from your account by phone, by mail
or, for certain funds, by check.
ONE-YEAR REINSTATEMENT PRIVILEGE: If you need access to your money, but then
choose to return it to Colonial within one year, you can reinvest in any
Colonial fund of the same share class without any penalty or sales charge.
FUNDAMATIC: Make periodic investments as low as $50 from your checking account
to your Colonial account.
SYSTEMATIC WITHDRAWAL PLAN (SWP): Receive monthly, quarterly or semiannual
payments via check or bank transmission. There is a $5,000 account value
required, but no minimum for the payment amount. The maximum annual withdrawal
is 12% of account balance at time SWP is established. SWPs by check are
processed on the 10th of each month. Dividends and capital must be reinvested.
AUTOMATED DOLLAR COST AVERAGING: Transfer money on a monthly basis from any
Colonial fund with a balance of $5,000 into the same share class of up to four
other Colonial funds. Minimum for each transfer is $100.
LOW COST IRAS: Choose from a broad range of retirement plans, including IRAs.
* Redemptions and exchanges are made at the next determined net asset value
after the request is received by Colonial. Proceeds may be more or less than
your original cost. The exchange privilege may be terminated at any time.
Exchanges are not available on all funds. Investors who purchase Class B or D
shares (for applicable funds), or $1 million or more of Class A shares, may be
subject to a contingent deferred sales charge. 6
26
<PAGE>
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Colonial Income Fund is:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Colonial Income Fund mails one shareholder report to each shareholder address.
If you would like more than one report, please call Colonial at 1-800-426-3750
and additional reports will be sent to you.
This report has been prepared for shareholders of Colonial Income Fund. This
report may also be used as sales literature when preceded or accompanied by the
current prospectus which provides details of sales charges, investment objective
and operating policies of the Fund.
27
<PAGE>
[COLONIAL MUTUAL FUNDS LOGO]
Mutual Funds for
Planned Portfolios
TRUSTEES
ROBERT J. BIRNBAUM
Retired (formerly Special Counsel, Dechert, Price & Rhoads; President and Chief
Operating Officer, New York Stock Exchange, Inc.)
TOM BLEASDALE
Retired (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust Company)
LORA S. COLLINS
Attorney (formerly Attorney, Kramer, Levin, Naftalis, Nessen, Kamin & Frankel)
JAMES E. GRINNELL
Private Investor (formerly Senior Vice President - Operations, The Rockport
Company)
WILLIAM D. IRELAND, JR.
Retired (formerly Chairman of the Board, Bank of New England - Worcester)
RICHARD W. LOWRY
Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood
Corporation)
WILLIAM E. MAYER
Partner, Development Capital, L.L.C. (formerly Dean, College of Business and
Management, University of Maryland; Dean, Simon Graduate School of Business,
University of Rochester; Chairman and Chief Executive Officer, CS First Boston
Merchant Bank; and President and Chief Executive Officer, The First Boston
Corporation)
JAMES L. MOODY, JR.
Chairman of the Board, Hannaford Bros. Co. (formerly Chief Executive Officer,
Hannaford Bros. Co.)
JOHN J. NEUHAUSER
Dean, Boston College School of Management
GEORGE L. SHINN
Financial Consultant (formerly Chairman, Chief Executive Officer and Consultant,
The First Boston Corporation)
ROBERT L. SULLIVAN
Management Consultant (formerly Management Consultant, Saatchi and Saatchi
Consulting Ltd. and Principal and International Practice Director, Management
Consulting, Peat Marwick Main & Co.)
SINCLAIR WEEKS, JR.
Chairman of the Board, Reed & Barton Corporation
COLONIAL INVESTMENT SERVICES, INC., Distributor (C) 1997
A Liberty Financial Company (NYSE: L)
One Financial Center, Boston, Massachusetts 02111-2621, 617-426-3750
IF-02/237D-1296 M (2/97)
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
DECEMBER 31, 1996 (IN THOUSANDS)
<CAPTION>
BONDS & NOTES - 96.1%
================================================================================
CORPORATE FIXED-INCOME BONDS & NOTES - 63.5% PAR VALUE
================================================================================
<S> <C> <C>
CONSTRUCTION- 1.2%
HEAVY CONSTRUCTION - NON BUILDING CONSTRUCTION
Foster Wheeler Corp.,
6.750% 11/15/05 $2,000 $1,945
------
- --------------------------------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 15.2%
DEPOSITORY INSTITUTIONS - 4.5%
First Bank System, Inc.,
7.625% 05/01/05 2,000 2,073
Great Western Financial Corp.,
8.600% 02/01/02 3,000 3,228
NCNB Corp.,
9.125% 10/15/01 2,000 2,200
------
7,501
-----
HOLDING & OTHER INVESTMENT COMPANIES - 1.2%
Keycorp,
6.750% 03/15/06 2,000 1,950
------
INSURANCE AGENTS & BROKERS - 1.8%
Metropolitan Life Insurance Co.,
7.700% 11/01/15 (a) 3,000 3,009
------
INSURANCE CARRIERS - 2.4%
John Hancock Mutual Life Insurance Co.,
7.375% 02/15/24 (a) 4,000 3,910
------
NONDEPOSITORY CREDIT INSTITUTIONS - 4.0%
Green Tree Financial Corp.,
10.250% 06/01/02 3,000 3,456
Household Finance Co.,
8.450% 12/10/02 3,000 3,227
------
6,683
------
SECURITY BROKERS & DEALERS - 1.3%
Lehman Brothers Holdings, Inc.,
8.500% 05/01/07 2,000 2,149
------
- --------------------------------------------------------------------------------
MANUFACTURING - 13.5%
CHEMICALS & ALLIED PRODUCTS - 1.0%
Agricultural Minerals Co., L.P.,
10.750% 09/30/03 1,500 1,599
------
</TABLE>
6
<PAGE>
<TABLE>
Investment Portfolio/December 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONIC & ELECTRICAL EQUIPMENT - 1.2%
Northrop-Grumman Corp.,
7.000% 03/01/06 $2,000 $1,958
------
FABRICATED METAL - 1.3%
Masco Corp.,
9.000% 10/01/01 2,000 2,184
------
FOOD & KINDRED PRODUCTS - 2.9%
ConAgra, Inc.,
9.750% 03/01/21 2,000 2,475
Ralston Purina Co.,
9.300% 05/01/21 2,000 2,352
------
4,827
------
MACHINERY & COMPUTER EQUIPMENT - 0.3%
IMO Industries, Inc.,
11.750% 05/01/06 500 468
------
PETROLEUM REFINING - 1.5%
Pennzoil Co.,
10.125% 11/15/09 2,025 2,502
------
PRIMARY METAL - 1.3%
Algoma Steel, Inc.,
12.375% 07/15/05 1,000 1,083
US Can Corp,
10.125% 10/15/06 (a) 1,000 1,050
------
2,133
------
RUBBER & PLASTIC - 2.2%
Armstrong World Industries, Inc.,
9.750% 04/15/08 2,050 2,472
Premark International, Inc.,
10.500% 09/15/00 1,000 1,120
------
3,592
------
TRANSPORTATION EQUIPMENT - 1.8%
Ford Motor Co.,
7.250% 10/01/08 3,000 3,030
------
- --------------------------------------------------------------------------------
MINING & ENERGY - 11.9%
CRUDE PETROLEUM &, NATURAL GAS - 5.0%
CSW Energy,
6.875% 10/01/01 (a) 3,000 3,020
</TABLE>
7
<PAGE>
<TABLE>
Investment Portfolio/December 31, 1996
- --------------------------------------------------------------------------------
CORPORATE FIXED-INCOME BONDS & NOTES - CONT. PAR VALUE
================================================================================
<S> <C> <C>
MINING & ENERGY- CONT.
CRUDE PETROLEUM & NATURAL GAS - CONT.
Ferrellgas Partners, LP.,
9.375% 06/15/06 $2,000 $ 2,033
Parker & Parsley Co.,
8.250% 08/15/07 3,000 3,230
-------
8,283
Oil & GAS EXTRACTION - 6.2%
Forcenergy, Inc.,
9.500% 11/01/06 1,000 1,042
Gulf Canada Resources, Ltd.,
9.625% 07/01/05 (b) 1,000 1,079
Mariner Energy Corp.,
10.500% 08/01/06 (a) 1,000 1,060
Nuevo Energy Co.,
9.500% 04/15/06 2,000 2,120
Occidental Petroleum Corp.,
11.125% 08/01/10 2,500 3,309
Santa Fe Energy Resources, Inc.,
11.000% 05/15/04 1,500 1,658
-------
10,268
Oil & GAS FIELD SERVICES - 0.7%
United Meridian Corp.,
10.375% 10/15/05 1,000 1,097
-------
- --------------------------------------------------------------------------------
RETAIL TRADE - 2.8%
FOOD STORES - 0.7%
Dominick's Finer Foods, Inc.,
10.875% 05/01/05 1,000 1,105
-------
GENERAL MERCHANDISE STORES - 2.1%
Dayton Hudson Co.,
9.625% 02/01/08 3,000 3,541
-------
- --------------------------------------------------------------------------------
SERVICES - 5.9%
BUSINESS SERVICES - 0.7%
Pierce Leahy Corp.,
11.125% 07/15/06 1,000 1,095
-------
HEALTH SERVICES - 2.7%
Manor Care, Inc.,
7.500% 06/15/06 3,000 3,088
</TABLE>
8
<PAGE>
<TABLE>
Investment Portfolio/December 31, ! 996
- --------------------------------------------------------------------------------
<S> <C> <C>
Tenet Healthcare Corp.,
10.125% 03/01/05 $1,250 $1,381
------
4,469
------
HOTELS, CAMPS & LODGING - 1.9%
Station Casinos, Inc.,
10.125% 03/15/06 1,000 1,003
Harvey Casinos Resorts,
10.625% 06/01/06 1,000 1,067
Showboat, Inc.,
13.000% 08/01/09 1,000 1,106
------
3,176
------
PRIVATE HOUSEHOLDS - 0.6%
Allied Waste Industries, Inc.,
10.250% 12/01/06 (a) 1,000 1,050
------
================================================================================
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 13.0%
AIR TRANSPORTATION - 0.6%
U.S. Air, Inc.,
10.375% 03/01/13 1,000 1,043
------
BROADCASTING - 1.8%
News America Holding Corp.,
8.625% 02/01/03 2,000 2,166
NWCG Holding Corp.,
(c) 06/15/99 1,000 832
------
2,998
------
CABLE - 2.6%
Continental Cablevision, Inc.,
8.875% 09/15/05 2,000 2,224
Tele-Communications, Inc.,
9.250% 04/15/02 2,000 2,112
------
4,336
------
COMMUNICATIONS - 0.7%
UNC, Inc.,
11.000% 06/01/06 1,000 1,070
------
ELECTRIC, GAS & SANITARY SERVICES - 2.0%
Mesa Operating Co.,
10.625% 07/01/06 1,250 1,359
Southern Investments,
6.800% 12/01/06 (d) 2,000 1,958
------
3,317
------
</TABLE>
9
<PAGE>
<TABLE>
Investment Portfolio/December 31, 1996
- --------------------------------------------------------------------------------
CORPORATE FIXED-INCOME BONDS & NOTES - CONT. PAR VALUE
================================================================================
<S> <C> <C>
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - CONT.
ELECTRIC SERVICES - 1.2%
Pacificorp Holdings,
7.200% 04/01/06 $2,000 $ 1,997
--------
MOTOR FREIGHT & WAREHOUSING - 1.3%
Consolidated Freightways, Inc.,
9.125% 08/15/99 2,000 2,110
--------
RAILROADS- 1.2%
Union Pacific Corp.,
7.250% 11/01/08 2,000 2,009
--------
TELECOMMUNICATIONS- 1.6%
Echostar Communications Corp.,
stepped coupon,
(12.875% 06/01/99) (e) 06/01/04 1,000 830
MFS Communications Company, Inc.,
stepped coupon,
(9.375% 01/15/99) (e) 01/15/04 1,000 870
PanAmSat Corp.,
stepped coupon,
(11.375% 08/01/98) (e) 08/01/03 1,000 928
--------
2,628
--------
TOTAL CORPORATE FIXED-INCOME
BONDS & NOTES (cost of $101,664) 105,032
--------
U.S. GOVERNMENT
& AGENCY OBLIGATIONS - 21.3%
================================================================================
Maturities
Coupon From/to
------ -------
Federal National Mortgage Association,
11.000% 01/01/16 1,708 1,935
--------
Government National Mortgage Association:
10.000% 2017-2019 51 56
10.500% 2016-2020 352 395
11.500% 2013 82 94
12.500% 2010-2014 306 361
13.000% 2011 28 33
14.000% 2011 5 6
--------
945
--------
</TABLE>
10
<PAGE>
<TABLE>
Investment Portfolio/December 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bonds:
8.750% 05/15/17 $ 13,217 $ 16,127
11.625% 11/15/02 4,000 5,044
--------
21,171
--------
U.S. Treasury Notes:
9.125% 05/15/99 2,000 2,137
10.375% 11/15/12 7,000 9,015
11,152
--------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS (cost of $35,283) 35,203
--------
FOREIGN GOVERNMENT &
AGENCY OBLIGATIONS - 11.3% CURRENCY
================================================================================
Canada Government Bonds,
7.000% 12/01/06 CS 3,900 2,975
Government of Finland Bond,
7.250% 04/18/06 FM 16,000 3,722
Kingdom of Denmark,
8.000% 05/15/03 DK 16,500 3,102
Spanish Government Bonds,
11.300% 01/15/02 SP 484,030 4,541
Treasury Corp Victoria,
10.250% 11/15/06 AS 4,729 4,440
--------
TOTAL FOREIGN GOVERNMENT &
AGENCY OBLIGATIONS (cost of $18,782) 18,780
--------
TOTAL BONDS & NOTES (cost of $155,729) 159,015
--------
PREFERRED STOCKS - 1.3% SHARES
================================================================================
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES
COMMUNICATIONS - 0.5%
Cablevision Systems Corp., 11.750% PIK 9 834
--------
GAS SERVICES - 0.8%
Enron Corp., 8.000% 50 1,256
--------
TOTAL PREFERRED STOCKS (cost of $2,211) 2,090
--------
WARRANTS - 0.0%
================================================================================
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES
COMMUNICATIONS
American Telecasting, Inc. (cost of $30) 1 9
--------
TOTAL INVESTMENTS - 97.4% (cost of $157,970)(f) 161,114
--------
</TABLE>
11
<PAGE>
<TABLE>
Investment Portfolio/December 31, 1996
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 0.7% PAR VALUE
================================================================================
<S> <C> <C>
Repurchase agreement with Lehman Brothers, lnc.,
dated 12/31/96, due 01/02/97 at 6.900%, collateralized
by U.S. Treasury notes with various maturities to
2022, market value $1,200 (repurchase proceeds $1,184) $1,184 $ 1,184
--------
FORWARD CURRENCY CONTRACTS - 0.0% (g) 36
================================================================================
OTHER ASSETS & LIABILITIES NET - 1.9% 3,117
================================================================================
NET ASSETS - 100.0% $165,451
<FN>
NOTES TO INVESTMENT PORTFOLIO:
================================================================================
(a) 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 December 31,
1996, the value of these securities amounted to $13,099 or 7.9% of net
assets.
(b) This is a Canadian security. Par amount is stated in U.S. dollars.
(c) Zero coupon bond.
(d) This is a British security. Par amount is stated in U.S. dollars.
(e) Currently zero coupon. Shown parenthetically is the interest rate to be
paid and the date the Fund will begin accruing this rate.
(f) Cost for federal income tax purposes is $158,015.
(g) As of December 31, 1996, the Fund had entered into the following forward
currency exchange contracts:
Net Unrealized
Appreciation
Contracts In Exchange Settlement (Depreciation)
to Deliver For Date (U.S. $)
---------- --- ---- --------
FM 8,739,471 US $1,936,639 01/07/1997 $ 38
DK 8,763,526 US $1,495,508 01/08/1997 8
FM 70,917 US $ 15,429 01/08/1997 (h)
FF 12,724,370 US $2,438,553 01/16/1997 (15)
A$ 1,394,796 US $1,108,863 01/23/1997 1
C$ 2,025,438 US $1,484,882 01/27/1997 4
----
$ 36
====
(h) Rounds to less than one.
</TABLE>
12
<PAGE>
<TABLE>
Investment Portfolio/December 31, 1996
<CAPTION>
- --------------------------------------------------------------------------------
Summary of Securities
by Country Currency Value % of Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 139,297 86.5
Spain SP 4,541 2.8
Australia A$ 4,440 2.8
Canada C$ 4,054 2.5
Finland FM 3,722 2.3
Denmark DK 3,102 1.9
United Kingdom 1,958 1.2
-------- -----
$161,114 100.0
======== =====
</TABLE>
Certain securities are listed by country of underlying exposure but may trade
predominantly on other exchanges.
Acronym Name
------- ----
PIK Payment-in-Kind
FF French Franc
See notes to financial statements.
13
<PAGE>
<TABLE>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
(in thousands except for per share amounts and footnotes)
<S> <C> <C>
ASSETS
Investments at value (cost $157,970) $161,114
Short-term obligations 1,184
-----
162,298
Receivable for:
Interest $3,273
Fund shares sold 10
Unrealized appreciation on forward
currency contracts 36
Other 19 3,338
------ --------
Total Assets 165,636
LIABILITIES
Payable for:
Fund shares repurchased 141
Accrued:
Transfer Agent fees 11
Deferred Trustees fees 3
Other 30
------
Total Liabilities 185
--------
NET ASSETS $165,451
========
Net asset value & redemption price per share -
Class A ($129,681/20,219) $ 6.41
========
Maximum offering price per share - Class A
($6.41/0.9525) $ 6.73 (a)
========
Net asset value & offering price per share -
Class B ($35,770/5,577) $ 6.41 (b)
========
COMPOSITION OF NET ASSETS
Capital paid in $180,671
Undistributed net investment income 322
Accumulated net realized loss (18,711)
Net unrealized appreciation on:
Investments 3,144
Foreign currency transactions 25
--------
$165,451
========
<FN>
(a) On sales of $50,000 or more the offering price is reduced.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
See notes to financial statements.
14
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<CAPTION>
(in thousands)
<S> <C> <C>
INVESTMENT INCOME
Interest $13,732
Dividends 261
-------
13,993
EXPENSES
Management fee $ 852
Service fee 425
Distribution fee - Class B 271
Transfer agent 385
Bookkeeping fee 69
Trustees fee 21
Custodian fee 13
Audit fee 37
Legal fee 7
Registration fee 28
Reports to shareholders 16
Other 18 2,142
------- -------
Net Investment Income 11,851
-------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain on:
Investments 635
Foreign currency transactions 82
Net Realized Gain 717
-------
Net unrealized appreciation (depreciation) during the period on:
Investments (7,139)
Foreign currency transactions 25
Net Unrealized Depreciation ------- (7,114)
-------
Net Loss (6,397)
-------
Net Increase in Net Assets from Operations $ 5,454
=======
</TABLE>
See notes to financial statements.
15
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
(in thousands) Year ended December 31
----------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
<S> <C> <C>
Operations:
Net investment income $ 11,851 $ 12,430
Net realized gain 717 847
Net unrealized appreciation (depreciation) (7,114) 17,487
-------- --------
Net lncrease from Operations 5,454 30,764
Distributions:
From net investment income - Class A (9,496) (10,607)
From net investment income - Class B (2,285) (2,027)
-------- --------
(6,327) 18,130
-------- --------
Fund Share Transactions:
Receipts for shares sold - Class A 9,095 25,742
Value of distributions reinvested - Class A 4,879 5,505
Cost of shares repurchased - Class A (23,147) (31,959)
-------- --------
(9,173) (712)
-------- --------
Receipts for shares sold - Class B 12,249 20,614
Value of distributions reinvested - Class B 1,243 1,165
Cost of shares repurchased - Class B (14,578) (9,525)
-------- --------
(1,086) 12,254
-------- --------
Net Increase (Decrease) from
Fund Share Transactions (10,259) 11,542
-------- --------
Total Increase (Decrease) (16,586) 29,672
NET ASSETS
Beginning of period 182,037 152,365
-------- --------
End of period (including undistributed
net investment income of $322 and
$56, respectively) $165,451 $182,037
======== ========
NUMBER OF FUND SHARES
Sold - Class A 1,428 4,064
Issued for distributions reinvested - Class A 767 864
Repurchased - Class A (3,647) (5,033)
-------- --------
(1,452) (105)
-------- --------
Sold - Class B 1,907 3,230
Issued for distributions reinvested - Class B 195 182
Repurchased - Class B (2,281) (1,489)
-------- --------
(179) 1,923
-------- --------
See notes to financial statements.
</TABLE>
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1. ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION: Colonial Income Fund (the Fund), a series of Colonial Trust I, is
a diversified portfolio of a Massachusetts business trust registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company. The Fund's investment objective is to seek as high a level
of current income and total return, as is consistent with prudent risk, by
investing primarily in corporate debt securities. The Fund may issue an
unlimited number of shares. The Fund offers Class A shares sold with a front-end
sales charge and Class B shares which are subject to an annual distribution fee
and a contingent deferred sales charge. Class B shares will convert to Class A
shares when they have been outstanding approximately eight years.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
SECURITY VALUATION AND TRANSACTIONS: Debt securities generally are valued by a
pricing service based upon market transactions for normal, institutional-size
trading units of similar securities. When management deems it appropriate, an
over-the-counter or exchange bid quotation is used.
Equity securities are valued at the last sale price or, in the case of unlisted
or listed securities for which there were no sales during the day, at current
quoted bid prices.
Forward currency contracts are valued based on the weighted value of the
exchange traded contracts with similar durations.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
The value of all assets and liabilities quoted in foreign currencies are
translated into U.S. dollars at that day's exchange rates.
Portfolio positions which cannot be valued as set forth above are valued at fair
value under procedures approved by the Trustees.
Security transactions are accounted for on the date the securities are
purchased, sold or mature.
Cost is determined and gains and losses are based upon the specific
identification method for both financial statement and federal income tax
purposes.
The Fund may trade securities on other than normal settlement terms. This may
increase the risk if the other party to the transaction fails to deliver and
causes the Fund to subsequently invest at less advantageous prices.
17
<PAGE>
Notes to Financial Statements/December 31, 1996
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES - CONT.
================================================================================
DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS: All income,
expenses (other than the Class B distribution fee), 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 B per share data and ratios are calculated by adjusting the expense and
net investment income per share data and ratios for the Fund for the entire
period by the distribution fee applicable to Class B shares only.
FEDERAL INCOME TAXES: Consistent with the Fund's policy to qualify as a
regulated investment company and to distribute all of its taxable income, no
federal income tax has been accrued.
INTEREST INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is recorded on the
accrual basis. Original issue discount is accreted to interest income over the
life of a security with a corresponding increase in the cost basis; premium and
market discount are not amortized or accreted.
DISTRIBUTIONS TO SHAREHOLDERS: The Fund declares and records distributions daily
and pays monthly.
The amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Reclassifications are made to the Fund's capital accounts
to reflect income and gains available for distribution (or available capital
loss carryforwards) under income tax regulations.
FOREIGN CURRENCY TRANSACTIONS: Net realized and unrealized gains (losses) on
foreign currency transactions includes the fluctuation in exchange rates on
gains (losses) between trade and settlement dates on securities transactions,
gains (losses) arising from the disposition of foreign currency and currency
gains (losses) between the accrual and payment dates on dividends and interest
income and foreign withholding taxes.
The Fund does not distinguish that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized gains (losses) on investments.
FORWARD CURRENCY CONTRACTS: The Fund may enter into forward currency contracts
to purchase or sell foreign currencies at predetermined exchange rates in
connection with the settlement of purchases and sales of securities. The Fund
may also enter into forward currency contracts to hedge certain other foreign
currency denominated assets. The contracts are used to minimize the exposure to
foreign exchange rate fluctuations during the period between trade and
settlement date of the contracts. All contracts are marked-to-market daily,
resulting in unrealized gains (losses) which become realized at the time the
forward currency contracts are closed or mature. Realized and unrealized gains
18
<PAGE>
Notes to Financial Statements/December 31, 1996
- --------------------------------------------------------------------------------
(losses) arising from such transactions are included in net realized and
unrealized gains (losses) on foreign currency transactions. Forward currency
contracts do not eliminate fluctuations in the prices of the Fund's portfolio
securities. While the maximum potential loss from such contracts is the
aggregate face value in U.S. dollars at the time the contract was opened,
exposure is typically limited to the change in value of the contract (in U.S.
dollars) over the period it remains open. Risks may also arise if counterparties
fail to perform their obligations under the contracts.
OTHER: Corporate actions are recorded on the ex-date (except for certain foreign
securities which are recorded as soon after ex-date as the Fund becomes aware of
such), net of nonrebatable tax withholdings. Where a high level of uncertainty
as to collection exists, income on securities is recorded net of all tax
withholdings with any rebates recorded when received.
The Fund's custodian takes possession through the federal book-entry system of
securities collateralizing repurchase agreements. Collateral is marked-to-
market daily to ensure that the market value of the underlying assets remains
sufficient to protect the Fund. The Fund may experience costs and delays in
liquidating the collateral if the issuer defaults or enters bankruptcy.
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES
================================================================================
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Adviser) is the
investment Adviser of the Fund and furnishes accounting and other services and
office facilities for a monthly fee equal to 0.50% annually of the Fund's
average net assets.
BOOKKEEPING FEE: The Adviser provides bookkeeping and pricing services for
$27,000 per year plus 0.035% of the Fund's average net assets over $50 million.
TRANSFER AGENT: Colonial Investors Service Center, Inc. (the Transfer Agent), an
affiliate of the Adviser, provides shareholder services for a monthly fee equal
to 0.18% annually of the Fund's average net assets and receives reimbursement
for certain out of pocket expenses.
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Colonial Investment
Services, Inc. (the Distributor), an affiliate of the Adviser, is the Fund's
principal underwriter. During the year ended December 31, 1996, the Fund has
been advised that the Distributor retained net underwriting discounts of $19,095
on sales of the Fund's Class A shares and received contingent deferred sales
charges (CDSC) of $141,618 on Class B share redemptions.
The Fund has adopted a 12b-1 plan which requires it to pay the Distributor a
service fee equal to 0.25% annually of the Fund's net assets as of the 20th of
each month. The plan also requires the payment of a distribution fee to the
Distributor equal to 0.75% annually of the average net assets attributable to
Class B shares.
The CDSC and the fees received from the 12b-1 plan are used principally as
19
<PAGE>
Notes to Financial Statements/December 31, 1996
- --------------------------------------------------------------------------------
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES - CONT.
================================================================================
repayment to the Distributor for amounts paid by the Distributor to dealers who
sold such shares.
OTHER: The Fund pays no compensation to its officers, all of whom are employees
of the Adviser.
The Fund's Trustees may participate in a deferred compensation plan which may be
terminated at any time. Obligations of the plan will be paid solely out of the
Fund's assets.
NOTE 3. PORTFOLIO INFORMATION
================================================================================
INVESTMENT ACTIVITY: During the year ended December 31, 1996, purchases and
sales of investments, other than short-term obligations, were $414,113,839, and
$421,301,303, respectively, of which $214,741,239 and $216,969,832,
respectively, were U.S. government securities.
<TABLE>
Unrealized appreciation (depreciation) at December 31, 1996, based on cost of
investments for federal income tax purposes was:
<S> <C>
Gross unrealized appreciation $ 4,455,117
Gross unrealized depreciation (1,356,239)
-----------
Net unrealized appreciation $ 3,098,878
===========
</TABLE>
<TABLE>
CAPITAL LOSS CARRYFORWARDS: At December 31, 1996, capital loss carryforwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
<CAPTION>
Year of Capital loss
expiration carryforward
------------ ------------
<S> <C>
1997 $ 2,536,000
1998 4,686,000
1999 10,466,000
2002 1,007,000
-----------
$18,695,000
===========
</TABLE>
Expired capital loss carryforwards, if any, are recorded as a reduction of
capital paid in.
To the extent loss carryforwards are used to offset any future realized gains,
it is unlikely that such gains would be distributed since they may be taxable to
shareholders as ordinary income.
OTHER: There are certain additional risks involved when investing in foreign
securities that are not inherent with investments in domestic securities. These
risks may involve foreign currency exchange rate fluctuations, adverse political
and economic developments and the possible prevention of foreign currency
exchange or the imposition of other foreign governmental laws or restrictions.
The Fund may focus its investments in certain industries, subjecting it to
greater risk than a fund that is more diversified.
20
<PAGE>
Notes to Financial Statements/December 31, 1996
- --------------------------------------------------------------------------------
NOTE 4. LINE OF CREDIT
================================================================================
The Fund may borrow up to 10% of its net assets under a line of credit for
temporary or emergency purposes. Any borrowings bear interest at one of the
following options determined at the inception of the loan: (1) federal funds
rate plus 1/2 of 1%, (2) the lending bank's base rate or (3) IBOR offshore loan
rate plus 1/2 of 1%. There were no borrowings under the line of credit during
the year ended December 31, 1996.
21
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
Selected data for a share of each class outstanding throughout each period are
as follows:
<CAPTION>
Year ended December 31
==================================================
1996 1995
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 6.640 $ 6.640 $ 5.950 $ 5.950
-------- ------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.460 0.412 0.472 0.425
Net realized and
unrealized gain (loss) (0.240) (0.240) 0.698 0.698
-------- ------- -------- -------
Total from Investment
Operations 0.220 0.172 1.170 1.123
-------- ------- -------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net
investment income (0.450) (0.402) (0.480) (0.433)
-------- ------- -------- -------
Net asset value -
End of period $ 6.410 $ 6.410 $ 6.640 $ 6.640
-------- ------- -------- -------
Total return (a) 3.59% 2.82% 20.30% 19.42%
-------- ------- -------- -------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.10% (b) 1.85% (b) 1.09% (b) 1.84% (b)
Net investment income 7.12% (b) 6.37% (b) 7.45% (b) 6.70% (b)
Portfolio turnover 253% 253% 85% 85%
Net assets at end
of period (000) $129,681 $35,770 $143,834 $38,203
<FN>
(a) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(b) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years'ratios are net of benefits
received, if any.
</TABLE>
22
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS - CONTINUED
Year ended December 31
==================================================
1994 1993
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C>
$ 6.720 $ 6.720 $ 6.460 $ 6.460
-------- ------- -------- -------
0.487 0.440 0.501 0.451
(0.761) (0.761) 0.261 0.261
-------- ------- -------- -------
(0.274) (0.321) 0.762 0.712
-------- ------- -------- -------
(0.496) (0.449) (0.502) (0.452)
-------- ------- -------- -------
$ 5.950 $ 5.950 $ 6.720 $ 6.720
======== ======= ======== =======
(4.09%) (4.82%) 12.05% 11.23%
======== ======= ======== =======
1.11% 1.86% 1.10% 1.85%
7.80% 7.05% 7.45% 6.70%
16% 16% 46% 46%
$129,560 $22,805 $155,543 $19,787
</TABLE>
23
<PAGE>
FINANCIAL HIGHLIGHTS - continued
<TABLE>
Selected data for a share of each class outstanding throughout each period
are as follows:
<CAPTION>
Year ended December 31
======================
1992
Class A Class B (a)
------- -------
<S> <C> <C>
Net asset value -
Beginning of period $ 6.460 $ 6.390
-------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.546 0.290
Net realized and
unrealized gain 0.001 0.088
-------- -------
Total from Investment
Operations 0.547 0.378
-------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.547) (0.308)
-------- -------
Net asset value -
End of period $ 6.460 $ 6.460
========
Total return (b) 8.83% 6.00% (c)
========
RATIOS TO AVERAGE NET ASSETS
Expenses 1.24% 1.99% (d)
Net investment income 8.49% 7.74% (d)
Portfolio turnover 68% 68%
Net assets at end of period (000) $149,309 $ 6,092
<FN>
(a) Class B shares were initially offered on May 5, 1992. Per share amounts
reflect activity from that date.
(b) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(c) NOT ANNUALIZED.
(d) ANNUALIZED.
</TABLE>
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF COLONIAL TRUST I AND THE SHAREHOLDERS OF
COLONIAL INCOME FUND
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Colonial Income Fund, (the "Fund")
(a series of Colonial Trust I) at December 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements and the financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of portfolio positions
at December 31, 1996 by correspondence with the custodian and brokers, and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
25
