<PAGE>
COLONIAL STRATEGIC INCOME FUND ANNUAL REPORT
December 31, 1997
[picture]
Not FDIC May Lose Value
Insured No Bank Guarantee
<PAGE>
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COLONIAL STRATEGIC INCOME FUND HIGHLIGHTS
January 1, 1997 - December 31, 1997
INVESTMENT OBJECTIVE: Colonial Strategic Income Fund seeks as high a level of
current income and total return as is consistent with prudent risk, by
diversifying investments primarily in U.S. and foreign government and lower
rated corporate debt securities.
THE FUND IS DESIGNED TO OFFER:
* Opportunity for higher income
* Diversification
* Experienced, professional management
PORTFOLIO MANAGER COMMENTARY: "Overall, the Fund performed fairly well for
investors during the past 12 months. The high yield market continued to
outperform, and the Fund benefited from our decision to heavily weight the
portfolio in this sector." -- Carl Ericson
COLONIAL STRATEGIC INCOME FUND PERFORMANCE
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C(1)
<S> <C> <C> <C>
Inception dates 4/21/77 5/15/92 7/1/97
Distributions declared per share $0.593 $0.539 $0.283
SEC Yields on 12/31/97 (2) 6.23% 5.78% 5.93%
12-month total returns, assuming 8.61% 7.81% 5.06%
reinvestment of all distributions and
no sales charge or contingent deferred
sales charge (CDSC)
Net asset value per share on 12/31/97 $7.32 $7.32 $7.32
</TABLE>
(1) The Class C shares total return is cumulative since inception on 7/1/97.
(2) The 30-day SEC yields reflect the portfolio's earning power, net of
expenses, expressed as an annualized percentage of the public offering price
per share at the end of the period.
TOP FIVE ISSUERS3 PORTFOLIO STRUCTURE(3)
(as of 12/31/97) (as of 12/31/97)
..................................... .....................................
U.S. Treasury Obligations . . . 26.3% Corporate Bonds. . . . . . . . .41.3%
United Kingdom Treasury . . . . .5.1% U.S. Gov't & Agency. . . . . . .29.5%
Treasury Corp. Victoria . . . . .4.2% Foreign Gov't Bonds. . . . . . .22.8%
Kingdom of Denmark Bonds . . . . 2.7% Other. . . . . . . . . . . . . . 6.4%
Republic of Poland . . . . . . . 2.3%
(3)Portfolio holdings and structure 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 these portfolio holdings and structure in the future.
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2
<PAGE>
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PRESIDENT'S MESSAGE
To Fund Shareholders
I am pleased to present your Fund's annual report for the 12-month period ended
December 31, 1997. This report reflects on the investment environment for the 12
months ended December 31, 1997 and on the performance of your Fund.
[Photograph - Harold W. Cogger - omitted]
The Fund continues to be an attractive choice for fixed income investors because
it is diversified in a mixture of U.S. Treasury bonds, high yield U.S. corporate
securities and bonds issued by foreign governments. Historically, when one of
the markets experiences difficulty, the other markets often have continued to
work for the investor.
During the past 12 months, the high yield bond market delivered the strongest
performance and successfully weathered a correction in the stock market. In
general, high yield bonds tend to do better in the current climate of economic
expansion and low unemployment.
In the world market, news has focused on the problems of the Asian markets and
their global impact. One of the ripple effects has been a flight to quality,
leading many investors -- both foreign and domestic -- to the U.S. Treasury
market, where creditworthiness is not an issue. This high demand for the quality
of U.S. Treasurys has driven prices up. The value of the U.S. dollar rose
compared to foreign currencies. In turn, investors received less of a return on
investments overseas, which worked to further raise Treasury prices.
As we look ahead, a combination of factors -- rising employment rates, steady
growth in personal income and consumer spending -- continues to provide a firm
foundation for a continuation of the current economic expansion. At the same
time, inflation is likely to drift even lower this year. By investing in a
combination of the three bond markets, we are able to pursue favorable yields
from all three sectors -- in any market environment -- while reducing the risk
of investing in a single bond market.
This report provides you with a closer look at your Fund's performance, as well
as the portfolio manager's investment strategy.
We appreciate your continued confidence in the Fund and thank you for giving us
the opportunity to serve your investment needs.
Respectfully,
/s/ Harold W. Cogger
Harold W. Cogger
President
February 9, 1998
Because market conditions change frequently, there can be no assurance that the
trends described here will continue.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT REPORT
CARL ERICSON is the portfolio manager of Colonial Strategic Income Fund. Mr.
Ericson is Senior Vice President of Colonial Management Associates, Inc. and
Director of the Taxable Fixed Income Department.
The bond market in the '90s can be characterized by volatility and rapid
adjustment to movements in various sectors. By investing in a single market,
investors may end up with declining income and missed market opportunities. The
Fund's diversified portfolio is invested in three sectors of the market,
allowing the investor to seek more income and total return while reducing the
impact of single market investing. For instance, diversification can help reduce
the intensity of events such as the crisis in Asia. Although the Fund had no
direct exposure in the Pacific Rim, the ripple effect resulting from the crisis
affected other markets in which the Fund invests. Our multi-market approach
cushioned the negative impact on the Fund and helped reduce volatility.
HIGH YIELD BONDS CONTINUED TO BENEFIT FROM THE ECONOMY
During the past 12 months, high yield corporate bonds benefited from the stable
economy and performed extremely well. Issuing companies were able to refinance
at relatively low interest rates. The market drew its strength from the
resulting cash flow and liquidity of these companies. Credit quality among high
yield bonds remains solid, with default rates at historic lows of less than 2%.
We expect the economy to continue to grow in the coming year, but the rate of
growth could slow substantially. As a result, our larger holdings tend to be
noncyclical in nature at this point. For instance, the Fund invests in Revlon
and Ralph's Grocery Stores. Telecommunications companies -- such as Nextel,
Time/Warner and EchoStar Communications -- are also high on the Fund's list of
holdings. In addition, the Fund maintained a position in Stone Container Corp.,
which took advantage of the strong economy during the past 12 months to reduce
its leverage and help protect itself from economic cycles.
FOREIGN HOLDINGS REDUCED
In the international arena, the Fund invested primarily in Europe. However, the
return on some of these -- and other -- foreign government bonds fell below the
return of U.S. Treasurys. Because we believed that investors were no longer
being adequately compensated by some overseas investments, we eliminated
positions in South Africa and Italy, and reduced holdings in other foreign
government markets to approximately 23% of the total portfolio. Currently, the
United Kingdom accounts for nearly 5% of the portfolio. Australia accounts for
approximately another 4%. Rounding out the major foreign government holdings are
Argentina, Denmark, Mexico, Poland, Russia, Spain, Sweden and Venezuela. The
Fund has no direct investment in Asia.
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4
<PAGE>
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U.S. TREASURYS BALANCE PORTFOLIO
Uncertainty in the world market, particularly in Asia, has resulted in an
increased demand for the security of the U.S. Treasury market. This trend has
driven Treasury prices up and pushed yields down. The Fund's management has also
turned to U.S. Treasurys in the face of concern about the future pace of
economic activity. Since the beginning of the year, the Fund has increased its
position in U.S. Treasurys from 21% to over 26%.
FUND DELIVERED TOTAL RETURN
For the 12 months ended December 31, 1997, the total return for Class A shares,
based on net asset value, was 8.61%. In comparison, the Lehman Brothers
Government/Corporate Bond Index, an unmanaged index that tracks the performance
of the U.S. bond market, posted a return of 9.76%. At the close of the period,
the 30-day SEC yield for Class A shares was 6.23%.
OUTLOOK IS POSITIVE FOR 1998
Our outlook for the coming year is positive. A modest interest rate decline
coupled with slowing growth in the economy should be favorable. We remain
committed to investing at least 20% but no more than 50% in each of three bond
sectors -- U.S. Treasurys, high yield bonds and international bonds. These
ranges allow us to seek out the best performing bonds while maintaining
diversification. As the markets move, we assess the benefits and risks shifting
assets to the fixed income sector we believe has the most promising combination
of total return, yield and risk.
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5
<PAGE>
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COLONIAL STRATEGIC INCOME FUND INVESTMENT PERFORMANCE VS.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX
Change in Value of $10,000 from 12/31/87 - 12/31/97
Based on NAV and POP for Class A Shares
NAV MOP Lehman Govt/Cp
Dec 31, 87 10000 9525 10000
Mar 31, 88 10967 10446 10358
Jun 30, 88 11439 10895 10460
Sep 30, 88 11287 10751 10655
Dec 31, 88 11666 11111 10758
Mar 31, 89 12001 11431 10877
Jun 30, 89 12365 11777 11751
Sep 30, 89 12772 12166 11861
Dec 31, 89 12825 12216 12289
Mar 31, 90 12437 11846 12149
Jun 30, 90 12874 12262 12586
Sep 30, 90 12040 11468 12662
Dec 31, 90 11922 11355 13307
Mar 31, 91 12970 12354 13666
Jun 30, 91 13577 12932 13873
Sep 30, 91 14451 13765 14670
Dec 31, 91 15309 14582 15453
Mar 31, 92 15662 14918 15221
Jun 30, 92 16361 15584 15838
Sep 30, 92 16955 16150 16612
Dec 31, 92 16805 16007 16625
Mar 31, 93 17695 16854 17398
Jun 30, 93 18285 17416 17920
Sep 30, 93 18683 17796 18513
Dec 31, 93 19317 18399 18459
Mar 31, 94 18813 17919 17881
Jun 30, 94 18567 17685 17659
Sep 30, 94 18614 17730 17746
Dec 31, 94 18607 17723 17811
Mar 31, 95 19633 18700 18699
Jun 30, 95 20700 19716 19912
Sep 30, 95 21400 20383 20293
Dec 31, 95 22360 21298 21239
Mar 31, 96 22464 21397 20742
Jun 30, 96 22797 21714 20839
Sep 30, 96 23719 22592 21207
Dec 31, 96 24651 23480 21855
Mar 31, 97 24357 23200 21667
Jun 30, 97 25407 24200 22455
Sep 30, 97 26480 25222 23242
Dec 31, 97 26773 25501 23988
A hypothetical $10,000 investment in Class B shares made on May 15, 1992, at net
asset value (NAV) would have grown to $16,047 on December 31, 1997. The same
investment after deducting the applicable contingent deferred sales charge
(CDSC) would have been valued at $15,947 on December 31, 1997. A $10,000
investment in Class C shares made on July 1, 1997 at NAV would have been valued
at $10,506 on December 31, 1997. The same investment after deducting the
applicable CDSC would have been valued at $10,406 on December 31, 1997. 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. Unlike mutual funds, indexes are not
investments, do not incur fees or expenses and it is not possible to invest in
an index.
AVERAGE ANNUAL TOTAL RETURNS
As of December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES(1)
INCEPTION 4/21/77 5/15/92 7/1/97
NAV POP NAV W/CDSC NAV W/CDSC
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year 8.61% 3.45% 7.81% 2.81% -- --
- -------------------------------------------------------------------------------
5 years 9.76 8.70 8.95 8.67 -- --
- -------------------------------------------------------------------------------
10 years/Life 10.35 9.81 8.75 8.63 5.06% 4.06%
- -------------------------------------------------------------------------------
</TABLE>
(1)Class C share total returns are cumulative since inception July 1, 1997.
Past performance cannot predict future results.
Returns and value of an investment will vary, resulting in a gain or loss on
sale. All results shown assume reinvestment of distributions. Net asset value
(NAV) returns do not include sales charges or CDSC. Public offering price (POP)
returns include the maximum sales charge of 4.75%. The applicable CDSC for
Class B shares is 5% for one year, 2% for five years and 1% since inception.
The CDSC for Class C shares is 1% since inception.
- --------------------------------------------------------------------------------
6
<PAGE>
INVESTMENT PORTFOLIO
DECEMBER 31, 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
BONDS & NOTES - 93.6%
----------------------------------------------------------------------------
CORPORATE FIXED-INCOME BONDS & NOTES - 41.3% PAR VALUE
----------------------------------------------------------------------------
CONSTRUCTION - 0.2%
<S> <C> <C> <C> <C>
BUILDING CONSTRUCTION
Falcon Building Products Co., Inc.,
stepped coupon,
(10.500% 06/15/02) (a) 06/15/07 $ 3,500 $ 2,319
Kevco, Inc.,
10.375% 12/01/07(b) 1,500 1,530
-----------
3,849
-----------
............................................................................
FINANCE, INSURANCE & REAL ESTATE - 0.3%
FINANCIAL SERVICES - 0.3%
U.S. Timberlands,
9.625% 11/15/07 4,000 4,160
-----------
NONDEPOSITORY CREDIT INSTITUTIONS - 0.0%
Drum Financial Corp.,
12.875% 09/15/99(c)(d) 1,000 10
-----------
............................................................................
MANUFACTURING - 16.0%
CHEMICALS & ALLIED PRODUCTS - 2.7%
Agricultural Minerals Co., L.P.,
10.750% 09/30/03 7,200 7,722
Climachem, Inc.,
10.750% 12/01/07(b) 2,000 2,060
Hydrochem Industrial Services, Inc.,
10.375% 08/01/07 4,420 4,597
LaRoche Industries, Inc.,
9.500% 09/15/07(b) 6,250 6,187
PCI Chemicals Canada, Inc.,
9.250% 10/15/07(b) 1,250 1,256
Revlon Consumer Products Corp.:
9.375% 04/01/01 2,000 2,060
10.500% 02/15/03 8,270 8,725
Revlon Worldwide Corp.:
(e) 03/15/98 4,000 3,950
Sterling Chemicals, Inc.,
11.250% 04/01/07 6,900 6,900
Texas Petrochemical Corp.,
11.125% 07/01/06 1,600 1,720
-----------
45,177
-----------
ELECTRONIC & ELECTRICAL EQUIPMENT - 0.5%
Amphenol Corp.,
9.875% 05/15/07 750 798
</TABLE>
7
<PAGE>
Investment Portfolio/December 31, 1997
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
CORPORATE FIXED-INCOME BONDS & NOTES - CONT. PAR VALUE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANUFACTURING - CONT.
ELECTRONIC & ELECTRICAL EQUIPMENT - CONT.
L-3 Communications Corp.,
10.375% 05/01/07 $ 1,250 $ 1,353
Unisys Corp.,
11.750% 10/15/04 6,000 6,870
-----------
9,021
-----------
FABRICATED METAL - 1.2%
Euramax International, PLC,
11.250% 10/01/06(f) 8,000 8,660
Renco Metals, Inc.,
11.500% 07/01/03 6,000 6,360
U.S. Can Corp.,
10.125% 10/15/06 4,000 4,220
-----------
19,240
-----------
FOOD & KINDRED PRODUCTS - 0.7%
Chiquita Brands International, Inc.,
10.250% 11/01/06 3,750 4,125
Pilgrim's Pride Corp.,
10.875% 08/01/03 1,950 2,057
Sun World International Corp.,
11.250% 04/15/04 3,350 3,601
Windy Hill Pet Food Co.,
9.750% 05/15/07 1,000 1,040
-----------
10,823
-----------
LUMBER & WOOD PRODUCTS - 0.4%
Triangle Pacific Corp.,
10.500% 08/01/03 6,000 6,345
-----------
MACHINERY & COMPUTER EQUIPMENT - 0.5%
IMO Industries, Inc.,
11.750% 05/01/06 6,750 7,458
-----------
MEASURING & ANALYZING INSTRUMENTS - 0.1%
Intertek Finance, PLC,
10.250% 11/01/06(f) 2,000 2,100
-----------
MISCELLANEOUS MANUFACTURING - 2.6%
AEI Holding Co.,
10.000% 11/15/07(b) 3,500 3,605
American Standard Co.,
stepped coupon,
(10.500% 06/01/98) (a) 06/01/05 11,000 11,165
</TABLE>
8
<PAGE>
Investment Portfolio/December 31, 1997
----------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Amscan Holdings, Inc.,
9.875% 12/15/07(b) $ 1,000 $ 1,023
Building Materials Corp. of America,
stepped coupon,
(11.750% 07/01/99) (a) 07/01/04 7,000 6,615
Dade International, Inc.,
11.125% 05/01/06 2,250 2,486
ISP Holdings, Inc.,
9.750% 02/15/02 7,000 7,393
Koppers Industries, Inc.,
9.875% 12/01/07(b) 1,975 2,034
Polymer Group, Inc.,
9.000% 07/01/07 3,500 3,500
Shop Vac Corp.,
10.625% 09/01/03 3,000 3,258
Werner Holding Co.,
10.000% 11/15/07(b) 2,250 2,312
-----------
43,391
-----------
PAPER PRODUCTS - 2.8%
Container Corp. of America,
Series A,
11.250% 05/01/04 7,500 8,212
Cross Timbers Oil Co.,
8.750% 11/01/09 4,000 4,060
Florida Coast Paper, LLC,
12.750% 06/01/03 3,350 3,551
Gaylord Container Corp.,
9.750% 06/15/07 4,500 4,522
Repap New Brunswick, Inc.,
9.875% 07/15/00 5,900 6,018
Riverwood International Corp.,
10.625% 08/01/07 6,000 6,060
Stone Container Corp.:
10.750% 10/01/02 6,750 7,037
11.875% 12/01/98 3,750 3,862
Stone Container Corp. Units,
12.250% 04/01/02(g) 3,000 3,060
-----------
46,382
-----------
PETROLEUM REFINING - 0.2%
Benton Oil & Gas Co.,
9.375% 11/01/07(b) 1,200 1,227
Flores & Rucks, Inc.,
9.750% 10/01/06 1,500 1,650
-----------
2,877
-----------
</TABLE>
9
<PAGE>
Investment Portfolio/December 31, 1997
<TABLE>
----------------------------------------------------------------------------
CORPORATE FIXED-INCOME BONDS & NOTES - CONT. PAR VALUE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANUFACTURING - CONT.
PRIMARY METAL - 2.1%
Algoma Steel, Inc.,
12.375% 07/15/05 $ 8,000 $ 9,320
Insilco Corp.,
10.250% 08/15/07 1,200 1,260
Ivaco, Inc.,
11.500% 09/15/05 1,500 1,620
Kaiser Aluminum & Chemical Corp.,
10.875% 10/15/06 8,000 8,640
Keystone Consolidated Industries, Inc.,
9.625% 08/01/07(b) 6,500 6,532
UCAR Global Enterprises, Inc.,
12.000% 01/15/05 1,870 2,092
WCI Steel, Inc.,
10.000% 12/01/04 4,400 4,510
-----------
33,974
-----------
PRINTING & PUBLISHING - 0.1%
Hollinger International Publishing, Inc.,
9.250% 03/15/07 2,000 2,110
-----------
RUBBER & PLASTIC - 0.4%
Berry Plastics Corp.,
12.250% 04/15/04 3,000 3,270
Burke Industries, Inc.,
10.000% 08/15/07(b) 1,200 1,249
Portola Packaging, Inc.,
10.750% 10/01/05 2,000 2,115
-----------
6,634
-----------
STONE, CLAY, GLASS & CONCRETE - 0.1%
Anchor Glass Container Corp.,
11.250% 04/01/05(b) 2,250 2,452
-----------
TRANSPORTATION EQUIPMENT - 1.6%
Aftermarket Technology Corp.,
Series B,
12.000% 08/01/04 3,011 3,342
Blue Bird Body Co.,
10.750% 11/15/06 1,375 1,478
Collins & Aikman Products Co.,
11.500% 04/15/06 7,000 7,866
Delco Remy International, Inc.,
10.625% 08/01/06(b) 1,600 1,728
</TABLE>
10
<PAGE>
Investment Portfolio/December 31, 1997
----------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Johnstown America Industries, Inc.,
11.750% 08/15/05 $ 4,000 $ 4,380
LDM Technologies, Inc.,
10.750% 01/15/07 6,825 7,439
-----------
26,233
-----------
............................................................................
MINING & ENERGY - 3.6%
CRUDE PETROLEUM & NATURAL GAS - 0.7%
Ferrellgas Finance Corp., L.P.,
10.000% 08/01/01 3,215 3,408
Ferrellgas Partners, L.P.,
9.375% 06/15/06 2,500 2,650
TransAmerica Energy Corp.,
stepped coupon,
(13.000% 06/15/99) (a) 06/15/02(b) 6,250 5,000
-----------
11,058
-----------
OIL & GAS EXTRACTION - 2.0%
Forcenergy, Inc.,
9.500% 11/01/06 2,175 2,311
Gulf Canada Resources, Ltd.:
9.250% 01/15/04(h) 5,875 6,174
Magnum Hunter Resources, Inc.,
10.000% 06/01/07 1,750 1,798
Mariner Energy Corp.,
10.500% 08/01/06 6,000 6,300
Nuevo Energy Co.,
9.500% 04/15/06 5,350 5,691
Petsec Energy, Inc.,
9.500% 06/15/07 4,000 4,105
United Meridian Corp.,
10.375% 10/15/05 7,125 7,873
-----------
34,252
-----------
OIL & GAS FIELD SERVICES - 0.9%
Falcon Drilling Co., Inc.,
Series B,
9.750% 01/15/01 5,300 5,551
Parker Drilling Corp.,
9.750% 11/15/06 8,000 8,600
-----------
14,151
-----------
............................................................................
RETAIL TRADE - 2.6%
APPAREL & ACCESSORY STORES - 0.1%
Specialty Retailers, Inc.,
9.000% 07/15/07 750 765
</TABLE>
11
<PAGE>
Investment Portfolio/December 31, 1997
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
CORPORATE FIXED-INCOME BONDS & NOTES - CONT. PAR VALUE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RETAIL TRADE - CONT.
APPAREL & ACCESSORY STORES - CONT.
William Carter Co.,
10.375% 12/01/06 $ 250 $ 262
-----------
1,027
-----------
FOOD STORES - 1.6%
Friendly Ice Cream Corp.,
10.500% 12/01/07 3,000 3,037
Pathmark Stores, Inc.:
9.625% 05/01/03 2,250 2,070
stepped coupon,
(10.750% 11/01/99)(a) 11/01/03 13,500 7,088
Ralphs Grocery Co.,
10.450% 06/15/04 10,000 11,238
Richmont Marketing,
10.125% 12/15/07(b) 2,000 2,030
Shoppers Food Warehouse Corp.,
9.750% 06/15/04(b) 2,000 2,045
-----------
27,508
-----------
HOME FURNISHINGS & EQUIPMENT - 0.1%
Sealy Mattress Co.,
9.875% 12/15/07(b) 1,000 1,025
-----------
MISCELLANEOUS RETAIL - 0.8%
Brylane Capital Corp.,
Series B,
10.000% 09/01/03 5,000 5,306
Finlay Fine Jewelry Corp.,
10.625% 05/01/03 6,650 6,983
-----------
12,289
-----------
............................................................................
SERVICES - 4.8%
AMUSEMENT & RECREATION - 0.8%
Empress River Casino Finance Corp.,
10.750% 04/01/02 4,000 4,290
E & S Holdings Corp.,
10.375% 10/01/06 4,000 3,680
Hollywood Park, Inc.,
9.500% 08/01/07(b) 1,500 1,609
Prime Hospitality Corp.,
9.250% 01/15/06 3,000 3,158
-----------
12,737
-----------
</TABLE>
12
<PAGE>
Investment Portfolio/December 31, 1997
----------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
BUSINESS SERVICES - 0.7%
Ameriserv Food Co.,
10.125% 07/15/07 $ 2,500 $ 2,625
DecisionOne Corp.,
9.750% 08/01/07 6,000 6,180
Pierce Leahy Corp.
11.125% 07/15/06 1,625 1,844
Williams Scotsman, Inc.,
9.875% 06/01/07 1,500 1,545
-----------
12,194
-----------
HEALTH SERVICES - 0.6%
Graham-Field Health Products, Inc.,
9.750% 08/15/07(b) 1,500 1,583
Maxxim Medical, Inc.,
10.500% 08/01/06 2,500 2,722
Tenet Healthcare Corp.,
10.125% 03/01/05 5,000 5,450
-----------
9,755
-----------
HOTELS, CAMPS & LODGING - 2.3%
Eldorado Resorts Corp.,
10.500% 08/15/06 7,850 8,596
Harvey Casinos Resorts,
10.625% 06/01/06 7,750 8,448
HMC Acquisition Properties,
9.000% 12/15/07 6,500 6,809
HMH Properties, Inc.,
9.500% 05/15/05 5,100 5,438
Horseshoe Gaming LLC,
9.375% 06/15/07 5,800 6,076
Wyndham Hotel Corp.,
10.500% 05/15/06 2,000 2,360
-----------
37,727
-----------
PUBLISHING - 0.1%
American Lawyer Media Holdings,
stepped coupon,
(12.250% 12/15/02) (a) 12/15/08(b) 1,500 848
American Lawyer Media, Inc.,
9.750% 12/15/07(b) 1,500 1,523
-----------
2,371
-----------
MISCELLANEOUS SERVICES - 0.3%
Borg Warner Security Corp.,
9.625% 03/15/07 4,900 5,181
-----------
</TABLE>
13
<PAGE>
Investment Portfolio/December 31, 1997
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
CORPORATE FIXED-INCOME BONDS & NOTES - CONT. PAR VALUE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 13.8%
AIR TRANSPORTATION - 0.9%
Continental Airlines, Inc.,
9.500% 12/15/01 $ 1,500 $ 1,575
ValuJet Airlines, Inc.,
10.500% 04/15/01(b) 4,500 4,433
U.S. Airways Group, Inc., Pass-Through Certificates,
10.375% 03/01/13 8,000 8,980
-----------
14,988
-----------
BROADCASTING - 1.0%
Heritage Media Corp.,
11.000% 06/15/02 1,500 1,566
NWCG Holding Corp.,
(e) 06/15/99 3,000 2,739
Sullivan Broadcasting, Inc.,
10.250% 12/15/05 5,000 5,350
Young Broadcasting Corp.:
10.125% 02/15/05 3,000 3,165
11.750% 11/15/04 4,000 4,430
-----------
17,250
-----------
CABLE - 4.2%
Bell Cablemedia, PLC,
stepped coupon,
(11.950% 07/15/99) (a) 07/15/04(f) 6,000 5,640
Comcast UK Cable Partners Ltd.,
stepped coupon,
(11.200% 11/15/00) (a) 11/15/07 7,425 6,033
Diamond Cable Communications PLC,
stepped coupon,
(10.750% 02/15/02) (a) 02/15/07(f) 3,000 2,040
EchoStar Communications Corp.,
stepped coupon,
(12.875% 06/01/99) (a) 06/01/04 13,500 12,352
International CableTel, Inc.,
stepped coupon,
(12.750% 04/15/00) (a) 04/15/05 5,500 4,579
Le Groupe Videotron,
10.625% 02/15/05(h) 6,000 6,660
Marcus Cable Co.,
stepped coupon,
(13.500% 08/01/99) (a) 08/01/04 3,500 3,229
Marcus Cable Co., L.P.,
stepped coupon,
(14.250% 06/15/00) (a) 12/15/05 6,000 5,175
</TABLE>
14
<PAGE>
Investment Portfolio/December 31, 1997
----------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Northland Cable Television, Inc.,
10.250% 11/15/07(b) $ 4,500 $ 4,748
Rogers Cablesystems, Inc.,
10.000% 03/15/05 3,000 3,315
Telewest Communication, PLC,
stepped coupon,
(11.000% 10/01/00) (a) 10/01/07(f) 6,500 5,054
Videotron Holding, PLC,
stepped coupon:
(11.000% 08/15/00) (a) 08/15/05(f) 4,000 3,535
(11.125% 07/01/99) (a) 07/01/04(f) 6,750 6,362
-----------
68,722
-----------
COMMUNICATIONS - 1.1%
Allbritton Communications Co.,
9.750% 11/30/07 7,650 7,822
GCI Inc.,
9.750% 08/01/07 1,250 1,294
Intermedia Communications Inc.,
stepped coupon:
(11.250% 07/15/02) (a) 07/15/07 5,000 3,588
(12.500% 05/15/01) (a) 05/15/06 6,000 4,710
Metrocall, Inc.,
9.750% 11/01/07(b) 250 249
PTC International Finance BV,
stepped coupon,
(10.750% 07/01/02) (a) 07/01/07 1,700 1,088
-----------
18,751
-----------
ELECTRIC, GAS & SANITARY SERVICES - 0.1%
Allied Waste Industries, Inc.,
stepped coupon,
(11.300% 06/01/02) (a) 06/01/07 2,000 1,405
-----------
ELECTRIC SERVICES - 0.2%
California Energy Co., Inc.,
9.500% 09/15/06 2,000 2,185
System Energy Resources, Inc.,
11.375% 09/01/16 344 367
-----------
2,552
-----------
GAS SERVICES - 1.3%
California Energy Co., Inc.,
9.875% 06/30/03 6,600 7,095
HS Resources, Inc.,
9.250% 11/15/06 13,500 13,871
-----------
20,966
-----------
</TABLE>
15
<PAGE>
Investment Portfolio/December 31, 1997
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
CORPORATE FIXED-INCOME BONDS & NOTES - CONT. PAR VALUE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - CONT.
SANITARY SERVICES - 0.6%
Allied Waste North America, Inc.,
10.250% 12/01/06 $ 9,475 $ 10,399
-----------
TELECOMMUNICATION - 4.3%
Comcast Cellular Corp.,
9.500% 05/01/07 7,250 7,576
Cencall Communications Corp.,
stepped coupon,
(10.125% 01/15/99) (a) 01/15/04 6,000 5,407
Clearnet Communications, Inc.,
stepped coupon,
(14.750% 12/15/00) (a) 12/15/05 7,500 5,972
Esprit Telecom Group PLC,
11.500% 12/15/07(f) 1,500 1,549
ICG Holding, Inc.,
stepped coupon,
(13.500% 09/15/00) (a) 09/15/05 5,000 4,043
IntelCom Group (USA), Inc.,
stepped coupon,
(12.500% 05/01/01) (a) 05/01/06 2,000 1,495
MetroNet Communications Corp.,
12.000% 08/15/07(b) 1,250 1,441
Nextel Communications, Inc.,
stepped coupon:
(9.750% 02/15/99) (a) 08/15/04 10,000 8,875
(9.750% 10/31/02) (a) 10/31/07(b) 6,000 3,690
Pricellular Wireless Corp.:
10.750% 11/01/04 2,500 2,719
14.000% 11/15/01 6,000 6,675
RCN Corp.,
stepped coupon,
(11.125% 10/15/02) (a) 10/15/07(b) 2,750 1,726
Sprint Spectrum, L.P.,
stepped coupon,
(12.500% 08/15/01) (a) 08/15/06 12,900 10,062
Teleport Communications, Inc.,
stepped coupon,
(11.125% 07/01/01) (a) 07/01/07 8,470 6,956
Teligent Inc.,
11.500% 12/01/07 3,000 3,008
</TABLE>
16
<PAGE>
Investment Portfolio/December 31, 1997
----------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
WinStar Communications, Inc.,
stepped coupon,
(14.000% 10/15/00) (a) 10/15/05 $ 250 $ 200
-----------
71,394
-----------
TRANSPORTATION SERVICES - 0.1%
Moog, Inc.,
10.000% 05/01/06 1,125 1,215
-----------
TOTAL CORPORATE FIXED-INCOME
BONDS & NOTES (cost of $653,460) 681,153
------------
CORPORATE CONVERTIBLE BONDS & NOTES - 0.0%
-----------------------------------------------------------------------------
MANUFACTURING - 0.0%
ELECTRONIC & ELECTRICAL EQUIPMENT
Kollmorgen Corp.
(cost of $489) 8.750% 05/01/09 562 591
-----------
</TABLE>
U.S. GOVERNMENT &
AGENCY OBLIGATIONS - 29.5%
-----------------------------------------------------------------------------
GOVERNMENT AGENCIES - 3.2%
<TABLE>
<CAPTION>
Maturities
Coupon From/To
--------- -------------
Federal Home Loan Mortgage Corp.:
<S> <C> <C> <C> <C>
7.500% 2016 218 225
8.000% 2006 1,223 1,282
8.500% 2007-2010 1,181 1,247
8.750% 2005-2008 435 459
9.000% 2004-2022 1,527 1,629
9.250% 2007-2016 987 1,057
9.500% 2008-2016 938 1,008
9.750% 2008-2016 126 136
10.000% 2009-2019 1,412 1,545
10.500% 2020 776 859
10.750% 2010-2013 1,156 1,304
11.250% 2010-2015 591 668
-----------
11,419
-----------
Federal National Mortgage Association:
7.500% 2003 638 662
8.000% 2008 877 916
8.250% 2009 394 407
8.500% 2008-2021 2,385 2,502
9.000% 2003-2021 4,118 4,397
</TABLE>
17
<PAGE>
Investment Portfolio/December 31, 1997
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
U.S. GOVERNMENT &
AGENCY OBLIGATIONS - CONT. PAR VALUE
----------------------------------------------------------------------------
Maturities
Coupon From/To
--------- -------------
<S> <C> <C> <C> <C>
Federal National Mortgage Association - Cont.
9.250% 2016 $ 356 $ 379
10.000% 2013-2016 1,246 1,376
10.500% 2007-2016 1,706 1,889
-----------
12,528
-----------
Government National Mortgage Association:
8.500% 2006 55 59
9.000% 2008-2017 14,051 15,285
9.500% 2009-2017 6,021 6,541
10.000% 2000-2021 2,159 2,400
10.500% 2001-2021 519 587
11.000% 2009-2016 2,976 3,391
11.750% 2013 103 116
12.000% 2014 5 6
-----------
28,385
-----------
GOVERNMENT OBLIGATIONS - 26.3%
U.S. Treasury Bonds:
8.750% 05/15/17 42,254 59,332
11.625% 11/15/04 42,101 55,882
12.000% 08/15/13(i) 32,091 47,284
-----------
162,498
-----------
U.S. Treasury Notes:
8.875% 02/15/19 34,204 45,758
10.375% 11/15/12(i) 72,131 95,844
11.875% 11/15/03(i) 99,610 129,571
-----------
271,173
-----------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS (cost of $479,148) 486,003
-----------
FOREIGN GOVERNMENT &
AGENCY OBLIGATIONS - 22.8% CURRENCY
----------------------------------------------------------------------------
Argentina Global Bonds,
11.375% 01/30/17(j) 7,250 7,934
Government of Sweden,
10.250% 05/05/03SK 230,000 34,918
Kingdom of Denmark,
8.000% 03/15/06DK 264,000 44,599
Mexican Brady Bonds,
6.250% 12/31/19(k) 5,000 4,163
</TABLE>
18
<PAGE>
Investment Portfolio/December 31, 1997
----------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Mexican Global Bonds:
9.750% 02/06/01(k) $ 17,310 $ 18,024
9.875% 01/15/07(k) 7,400 7,705
Ministry of Finance Russia Government Bonds,
9.000% 03/15/04(l) G 27,500 14,641
Poland Non-U.S. Global Registered Bond,
6.688% 10/27/24(m) 19,239 18,674
Republic of Argentina,
11.250% 04/10/06(n) G 15,350 9,431
Republic of Poland (Brady),
Past Due Interest,
stepped coupon,
(5.000% 10/27/98) 4.000% 10/27/14(o) 22,500 19,434
Republic of Venezuela Global Bonds,
9.250% 09/15/27(p) 13,450 12,021
Spanish Government Bonds:
10.000% 02/28/05 SP 3,650 30,318
United Kingdom Treasury:
9.000% 08/06/12 UK 12,455 25,672
10.000% 02/26/01 UK 18,225 32,755
10.000% 09/08/03 UK 13,255 25,408
Victoria Treasury Corp:
10.250% 11/15/06 A$ 50,250 41,479
12.500% 10/15/03 A$ 33,050 28,262
-----------
TOTAL FOREIGN GOVERNMENT &
AGENCY OBLIGATIONS (cost of $382,708) 375,438
------------
TOTAL BONDS & NOTES (cost of $1,515,805) 1,543,185
-----------
COMMON STOCKS - 0.4% (q) SHARES
----------------------------------------------------------------------------
CONSTRUCTION - 0.1%
BUILDING CONSTRUCTION
Calton, Inc. 356 156
U.S. Home Corp. 31 1,225
-----------
1,381
-----------
............................................................................
MANUFACTURING - 0.1%
FOOD & KINDRED PRODUCTS
Darling International, Inc. 80 681
-----------
............................................................................
MINING & ENERGY - 0.0%
OIL & GAS EXTRACTION
Forest Oil Corp. 16 271
-----------
</TABLE>
19
<PAGE>
Investment Portfolio/December 31, 1997
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
COMMON STOCKS (q) - CONT. SHARES VALUE
----------------------------------------------------------------------------
<S> <C> <C>
RETAIL TRADE - 0.0%
MISCELLANEOUS RETAIL
Pharmhouse Corp. 4 $ 25
-----------
............................................................................
SERVICES - 0.1%
HEALTH SERVICES
Total Renal Care Holdings, Inc. 55 1,519
-----------
............................................................................
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 0.0%
GAS SERVICES - 0.0%
United Gas Holdings Corp. (c) 30 416
-----------
LOCAL & SUBURBAN TRANSIT - 0.0%
Greyhound Lines, Inc., 12.50% Escrow
Receipt (c) 1 (r)
-----------
MOTOR FREIGHT & WAREHOUSING - 0.0%
St. Johnsbury Trucking Co. (c) 31 (r)
Sun Carriers, Inc. (c) 130 1
-----------
1
-----------
TELECOMMUNICATIONS - 0.0%
Nextel Communications, Inc. 9 237
-----------
............................................................................
WHOLESALE TRADE - 0.1%
DURABLE GOODS
Continental Health Affiliates, Inc. 530 1,262
-----------
TOTAL COMMON STOCKS (cost of $5,214) 5,793
-----------
PREFERRED STOCKS - 2.0%
----------------------------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 0.1%
DEPOSITORY INSTITUTIONS - 0.1%
California Federal Bancorp, Inc.,
9.125%, Series A 59 1,530
-----------
HOLDING & OTHER INVESTMENT COMPANIES - 0.0%
Riggs National Corp., 10.750% 19 538
-----------
............................................................................
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 1.9%
CABLE - 1.4%
Cablevision Systems Corp.:
11.125%, PIK, Series M 51 5,984
11.750%, PIK, Series H 22 2,607
</TABLE>
20
<PAGE>
Investment Portfolio/December 31, 1997
----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
EchoStar Communications Corp., 12.125% (b) 1 $ 1,312
Time Warner, Inc.,
10.250%, Series M 12 13,547
-----------
23,450
-----------
COMMUNICATIONS - 0.3%
Nextel Communications, Inc.,
13.00%, PIK 4 4,719
-----------
PUBLISHING - 0.2%
Primedia Inc., 9.20% (b) 12 1,200
Primedia Inc., 10.00% 15 1,571
-----------
2,771
-----------
TOTAL PREFERRED STOCKS (cost of $30,994) 33,008
-----------
WARRANTS - 0.0% (q)
----------------------------------------------------------------------------
MANUFACTURING - 0.0%
RUBBER & PLASTIC
BPC Holdings Corp., expires 04/15/04 (c) 3 60
-----------
............................................................................
SERVICES - 0.0%
HOTELS, CAMPS, & LODGING
Capital Gaming International, Inc.,
expires 02/01/99 (c) 6 (r)
-----------
............................................................................
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 0.0%
COMMUNICATIONS
Clearnet Communications, Inc., expires 09/15/05 25 222
Hyperion Telecommunications, Inc.,
expires 04/15/01 (b) 3 195
MetroNet Communications, Inc.,
expires 08/15/07 (b) 1 3
Wireless One, Inc., expires 10/19/01 (c) 14 (r)
-----------
420
-----------
TOTAL WARRANTS (cost of $303) 480
-----------
</TABLE>
21
<PAGE>
Investment Portfolio/December 31, 1997
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
RIGHTS - 0.0% (q) SHARES VALUE
----------------------------------------------------------------------------
<S> <C> <C>
PUBLIC ADMINISTRATION - 0.0%
GENERAL GOVERNMENT
Mexican Government Rights W/ Series A&B (c)
(cost of $0) 5,000 $ (r)
-----------
TOTAL INVESTMENTS (cost of $1,552,316)(s) 1,582,466
-----------
SHORT-TERM OBLIGATIONS - 2.3% PAR
----------------------------------------------------------------------------
Repurchase agreement with ABN Amro Chicago Corp.,
dated 12/31/97, due 01/02/98 at 6.60%
collateralized by U.S. Treasury notes
with various maturities to 2016,
market value $38,512 (repurchase proceeds $37,658) $ 37,644 37,644
-----------
FORWARD CURRENCY CONTRACTS - 0.2% (t) 2,847
----------------------------------------------------------------------------
OTHER ASSETS & LIABILITIES, NET - 1.5% 25,348
----------------------------------------------------------------------------
NET ASSETS - 100.0% $ 1,648,305
-----------
</TABLE>
NOTES TO INVESTMENT PORTFOLIO:
----------------------------------------------------------------------------
(a)Currently zero coupon. Shown parenthetically is the interest rate to be
paid and the date the Fund will begin accruing this rate.
(b)Security is 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,
1997, the value of these securities amounted to $67,855 or of 4.1% of net
assets.
(c)Represents fair value as determined in good faith under the direction of
the Trustees.
(d)This issuer is in default of certain debt covenants. Income is not being
accrued.
(e)Zero coupon bond.
(f)This is a British security. Par amount is stated in U.S. dollars.
(g)Unit consists of a 10.750% bond and a 1.500% supplemental interest
certificate.
(h)This is a Canadian security. Par amount is stated in U.S. dollars.
22
<PAGE>
Investment Portfolio/December 31, 1997
----------------------------------------------------------------------------
(i) These securities, or a portion thereof, with a total market value of
$189,306, are being used to collateralize the forward currency contracts
shown below.
(j) This is an Argentinean security. Par amount is stated in U.S. dollars.
(k) This is a Mexican security. Par amount is stated in U.S. dollars.
(l) This is a Russian security. Par amount is stated in German
Deutschemarks.
(m) This is a Polish security. Par amount is stated in U.S. dollars.
Interest rate shown is a floating rate coupon which changes every six
months.
(n) This is an Argentinean security. Par amount is stated in German
Deutschemarks.
(o) This is a Polish security. Par amount is stated in U.S. dollars. Shown
parenthetically is the interest rate to be paid and the date the Fund
will begin accruing this rate.
(p) This is a Venezuelan security. Par amount is stated in U.S. dollars.
(q) Non-income producing.
(r) Rounds to less than one.
(s) Cost for federal income tax purposes of total investments is $1,552,507.
(t) As of December 31, 1997, the Fund had entered into the following forward
currency exchange contracts:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Contracts In Exchange Settlement (Depreciation)
to Deliver For Date (U.S. $)
---------- --- ---- ---------
<S> <C> <C> <C> <C>
DM 7,253 US$ 4,097 01/15/98 60
UK 39,270 US$ 63,996 01/22/98 (673)
DK 79,544 US$ 11,799 01/14/98 179
FF 48,344 US$ 8,157 01/20/98 122
SK 72,314 US$ 9,302 01/12/98 184
A$ 107,455 US$ 72,893 01/08/98 2,930
A$ 2,545 US$ 1,664 02/09/98 6
DM 4,682 US$ 2,644 01/16/98 39
--------
$ 2,847
--------
</TABLE>
23
<PAGE>
Investment Portfolio/December 31, 1997
----------------------------------------------------------------------------
NOTES TO INVESTMENT PORTFOLIO - CONT.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Summary of Securities
by Country Currency Value % of Total
----------------------------------------------------------------------------
<S> <C> <C>
United States $ 1,165,914 73.7
United Kingdom UK 118,775 7.5
Australia A$ 69,741 4.4
Denmark DK 44,599 2.8
Poland 38,108 2.4
Sweden SK 34,918 2.2
Spain SP 30,318 1.9
Mexico 29,892 1.9
Argentina 17,365 1.1
Russia 14,641 0.9
Venezuela 12,021 0.8
Canada 6,174 0.4
------------ ---------
$ 1,582,466 100.0
------------ ---------
</TABLE>
Certain securities are listed by country of underlying exposure but may
trade predominantly on other exchanges.
ACRONYM NAME
------- ----
PIK Payment-In-Kind
G Germany
See notes to financial statements.
24
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
(in thousands except for per share amounts and footnotes)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value (cost $1,552,316) $ 1,582,466
Short-term obligations 37,644
--------------
1,620,110
Receivable for:
Interest $ 32,993
Fund shares sold 2,110
Investments sold 229
Dividends 6
Unrealized appreciation on forward
currency contracts 2,847
Other 32 38,217
------------ --------------
Total Assets 1,658,327
LIABILITIES
Payable for:
Investments purchased 8,312
Fund shares repurchased 1,485
Accrued:
Deferred Trustees fees 16
Other 209
------------
Total Liabilities 10,022
--------------
NET ASSETS $ 1,648,305
--------------
Net asset value & redemption price per share -
Class A ($808,228/110,479) $ 7.32
--------------
Maximum offering price per share - Class A
($7.32/0.9525) $ 7.69(a)
-------------
Net asset value & offering price per share -
Class B ($833,865/113,988) $ 7.32(b)
-------------
Net asset value & offering price per share -
Class C ($6,212/849) $ 7.32(b)
-------------
</TABLE>
(a) On sales of $50,000 or more the offering price is reduced.
(b) Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
See notes to financial statements.
25
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(in thousands)
INVESTMENT INCOME
<TABLE>
<S> <C> <C>
Interest $ 140,018
Dividends 2,223
--------------
Total investment income 142,241
EXPENSES
Management fee $ 10,020
Service fee 3,655
Distribution fee - Class B 6,059
Distribution fee - Class C 9
Transfer agent 3,865
Bookkeeping fee 506
Trustees fee 70
Custodian fee 266
Audit fee 54
Legal fee 9
Registration fee 117
Reports to shareholders 21
Other 121 24,772
------------ --------------
Net Investment Income 117,469
--------------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain (loss) on:
Investments (9,033)
Foreign currency transactions 26,840
------------
Net Realized Gain 17,807
Net unrealized appreciation (depreciation)
during the period on:
Investments (12,178)
Foreign currency transactions 2,299
------------
Net Unrealized Depreciation (9,879)
-------------
Net Gain 7,928
-------------
Increase in Net Assets From Operations $ 125,397
-------------
</TABLE>
See notes to financial statements.
26
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(in thousands) Year ended December 31
---------------------------------
INCREASE (DECREASE) IN NET ASSETS 1997 (a) 1996
Operations:
<S> <C> <C>
Net investment income $ 117,469 $ 111,153
Net realized gain 17,807 35,512
Net unrealized depreciation (9,879) (9,144)
------------- ------------
Net Increase from Operations 125,397 137,521
Distributions: (b)
From net investment income - Class A (63,388) (61,787)
From net investment income - Class B (59,855) (57,474)
From net investment income - Class C (124) -
-------------- ------------
2,030 18,260
-------------- ------------
Fund Share Transactions:
Receipts for shares sold - Class A 152,305 109,361
Value of distributions reinvested - A 33,842 32,115
Cost of shares repurchased - Class - A (134,241) (109,964)
-------------- ------------
51,906 31,512
-------------- ------------
Receipts for shares sold - Class - B 147,889 156,886
Value of distributions reinvested - Class - B 29,039 27,196
Cost of shares repurchased - Class B (127,760) (123,892)
-------------- ------------
49,168 60,190
-------------- ------------
Receipts for shares sold - Class C 6,263 -
Value of distributions reinvested - Class - C 59 -
Cost of shares repurchased - Class C (93) -
-------------- ------------
6,229 -
-------------- ------------
Net Increase from Fund
Share Transactions 107,303 91,702
-------------- ------------
Total Increase 109,333 109,962
NET ASSETS
Beginning of period 1,538,972 1,429,010
-------------- ------------
End of period (including undistributed net
investment income of $7,673 and $10,314,
respectively) $1,648,305 $1,538,972
-------------- ------------
</TABLE>
(a) Class C shares were initially offered on July 1, 1997.
(b) Distributions from income include currency gains and gains on
securities treated as ordinary income for tax purposes.
See notes to financial statements.
27
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS - CONT.
<TABLE>
<CAPTION>
(in thousands) Year ended December 31
---------------------------------
NUMBER OF FUND SHARES 1997 (a) 1996
<S> <C> <C>
Sold - Class A 20,964 15,235
Issued for distributions reinvested - Class A 4,650 4,471
Repurchased - Class A (18,479) (15,336)
------------ -------------
7,135 4,370
------------ -------------
Sold - Class B 20,354 21,852
Issued for distributions reinvested - Class B 3,991 3,785
Repurchased - Class B (17,572) (17,276)
------------ -------------
6,773 8,361
------------ -------------
Sold - Class C 854 -
Issued for distributions reinvested - Class C 8 -
Repurchased - Class C (13) -
------------ -------------
849 -
------------ -------------
</TABLE>
(a) Class C shares were initially offered on July 1, 1997.
See notes to financial statements.
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. ACCOUNTING POLICIES
.......................................................................
ORGANIZATION: Colonial Strategic 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 diversifying
investments primarily in U.S. and foreign government and lower rated
corporate debt securities. The Fund may issue an unlimited number of
shares. The Fund offers three classes of shares: Class A, Class B, and
Class C. Class A shares are sold with a front-end sales charge and
Class B shares are subject to an annual distribution fee and a
contingent deferred sales charge. Class B shares will convert to Class
A shares when they have been outstanding approximately eight years.
Effective July 1, 1997, the Fund began offering Class C shares which
are subject to a contingent deferred sales charge on redemptions made
within one year after purchase and an annual distribution fee.
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 generally 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.
29
<PAGE>
Notes to Financial Statements/December 31, 1997
-----------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES - CONT.
.......................................................................
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 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.
DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS: All
income, expenses (other than the 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 B and Class C 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 and Class C 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.
The value of additional securities received as an interest payment is
recorded as income and as the cost basis of such securities.
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 (losses) on
investments
30
<PAGE>
Notes to Financial Statements/December 31, 1997
-----------------------------------------------------------
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 and unrealized 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 contracts are used to minimize the exposure to
foreign exchange rate fluctuations during the period between trade and
settlement date of the contracts. The Fund may also enter into forward
currency contracts to hedge certain other foreign currency denominated
assets. 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
(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 based on the Fund's
average net assets as follows:
31
<PAGE>
Notes to Financial Statements/December 31, 1997
-----------------------------------------------------------------------
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES - CONT.
.......................................................................
Average Net Assets Annual Fee Rate
-------------------- --------------------------
First $1 billion 0.65%
Over $1 billion 0.60%
BOOKKEEPING FEE: The Adviser provides bookkeeping and pricing services
for $27,000 per year plus a percentage of the Fund's average net assets
as follows:
Average Net Assets Annual Fee Rate
-------------------- --------------------------
First $50 million No charge
Next $950 million 0.035%
Next $1 billion 0.025%
TRANSFER AGENT: Colonial Investors Service Center, Inc. (the Transfer
Agent), an affiliate of the Adviser, provides shareholder services for
a monthly fee equal to 0.20% annually of the Fund's average net assets
and receives reimbursement for certain out-of-pocket expenses.
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Liberty
Financial Investments, Inc., formerly Colonial Investment Services Inc.
(the Distributor), an affiliate of the Adviser, is the Fund's principal
underwriter. During the year ended December 31, 1997, the Fund has been
advised that the Distributor retained net underwriting discounts of
$225,713 on sales of the Fund's Class A shares and received contingent
deferred sales charges (CDSC) of $2,079,116 and $523 on Class B and
Class C share redemptions, respectively.
The Fund has adopted a 12b-1 plan which requires the payment of a
distribution fee to the Distributor equal to 0.75% annually of the
average net assets attributable to Class B and Class C shares only.
Effective August 1, 1997, the Distributor has voluntarily agreed to
waive a portion of the Class C share distribution fee so that it does
not exceed 0.60% annually. The plan also requires the payment of a
service fee to the Distributor as follows:
Value of shares Annual
outstanding on the 20th of Fee
each month which were issued Rate
--------------------------------- ----------------
Prior to January 1, 1993 0.15%
On or after January 1, 1993 0.25%
The CDSC and the fees received from the 12b-1 plan are used principally
as repayment to the Distributor for amounts paid by the Distributor to
dealers who sold such shares.
OTHER: The Fund pays no compensation to its officers, all of whom are
employees of the Adviser.
The Fund's Trustees may participate in a deferred compensation plan
which may be terminated at any time. Obligations of the plan will be
paid solely out of the Fund's assets.
32
<PAGE>
Notes to Financial Statements/December 31, 1997
-----------------------------------------------------------------------
NOTE 3. PORTFOLIO INFORMATION
.......................................................................
INVESTMENT ACTIVITY: For the year ended December 31, 1997, purchases
and sales of investments, other than short-term obligations, were
$1,761,497,175 and $1,678,361,220, respectively, of which $244,371,825
and $153,646,682, respectively, were U.S. government securities.
Unrealized appreciation (depreciation) at December 31, 1997, based on
cost of investments for federal income tax purposes was:
Gross unrealized appreciation $ 57,727,752
Gross unrealized depreciation (27,768,642)
----------------
Net unrealized appreciation $ 29,959,110
================
CAPITAL LOSS CARRYFORWARDS: At December 31, 1997, capital loss
carry-forwards available (to the extent provided in regulations) to
offset future realized gains were approximately as follows:
Year of Capital loss
expiration carryforward
----------- ----------------
1998 $ 5,118,000
1999 36,511,000
2000 23,761,000
2001 3,442,000
2002 42,652,000
2003 18,825,000
----------------
$ 130,309,000
================
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.
33
<PAGE>
Notes to Financial Statements/December 31, 1997
-----------------------------------------------------------------------
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, 1997.
NOTE 5. COMPOSITION OF NET ASSETS
.......................................................................
At December 31, 1997, net assets consisted of:
Capital paid in $ 1,739,020
Undistributed net investment income 7,673
Accumulated net realized loss (131,104)
Net unrealized appreciation on:
Investments 30,150
Foreign currency transactions 2,566
------------
$ 1,648,305
============
34
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------
1997
Class A Class B Class C (a)
--------- --------- ---------
Net asset value -
<S> <C> <C> <C>
Beginning of period $ 7.310 $ 7.310 $ 7.240
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.578 0.524 0.271
Net realized and
unrealized gain 0.025 0.025 0.092
--------- --------- ---------
Total from Investment
Operations 0.603 0.549 0.363
--------- --------- ---------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.593)(b) (0.539)(b) 0.283 (b)
--------- --------- ---------
Net asset value -
End of period $ 7.320 $ 7.320 7.320
========= ========= =========
Total return (c) 8.61% 7.81% 5.06%(d)
========= ========= =========
RATIOS TO AVERAGE NET ASSETS
Expenses (e) 1.18% 1.93% 1.78%(f)
Net investment income (e) 7.78% 7.03% 7.13%(f)
Portfolio turnover 111% 111% 111%
Net assets at end
of period (000) $808,228 $833,865 $ 6,212
</TABLE>
(a) Class C shares were initially offered on July 1, 1997. Per share amounts
reflect activity from that date.
(b) Distributions from income include currency gains and gains on securities
treated as ordinary income for tax purposes.
(c) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(d) Not annualized.
(e) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(f) Annualized.
35
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------
1996 1995
Class A Class B Class A Class B
---------- --------- --------- ---------
Net asset value -
<S> <C> <C> <C> <C>
Beginning of period $ 7.220 $ 7.220 $ 6.530 $ 6.530
--------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.623 0.569 0.621 0.569
Net realized and
unrealized gain (loss) 0.081 0.081 0.650 0.650
--------- -------- -------- --------
Total from Investment
Operations 0.704 0.650 1.271 1.219
--------- -------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.614)(a) (0.560)(a) (0.581) (0.529)
From capital paid in - - - -
--------- -------- -------- --------
Total Distributions
Declared to Shareholders (0.614) (0.560) (0.581) (0.529)
--------- -------- -------- --------
Net asset value -
End of period $ 7.310 $ 7.310 $ 7.220 $ 7.220
========= ======== ======== ========
Total return (b) 10.24% 9.43% 20.17% 19.29%
========= ======== ======== ========
RATIOS TO AVERAGE NET ASSETS
Expenses 1.18%(c) 1.93%(c) 1.18%(c) 1.97%(c)
Net investment income 8.01%(c) 7.26%(c) 8.42%(c) 7.63%(c)
Portfolio turnover 110% 110% 83% 83%
Net assets at end
of period (000) $755,352 $783,620 $714,961 $714,049
</TABLE>
(a) Distributions from income include currency gains and gains on securities
treated as ordinary income for tax purposes.
(b) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(c) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(d) The data presented for periods prior to November 30, 1994, represent
operations under an earlier objective.
36
<PAGE>
FINANCIAL HIGHLIGHTS - continued
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1994 (d) 1993 (d)
Class A Class B Class A Class B
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$ 7.390 $ 7.390 $ 7.010 $ 7.010
--------- --------- --------- ---------
0.580 0.529 0.565 0.511
(0.848) (0.849) 0.448 0.448
--------- --------- --------- ---------
(0.268) (0.320) 1.013 0.959
--------- --------- --------- ---------
(0.580) (0.529) (0.585) (0.535)
(0.012) (0.011) (0.048) (0.044)
--------- --------- --------- ---------
(0.592) (0.540) (0.633) (0.579)
--------- --------- --------- ---------
$ 6.530 $ 6.530 $ 7.390 $ 7.390
========= ========= ========= =========
(3.67)% (4.40)% 14.95% 14.11%
========= ========= ========= =========
1.21% 1.96% 1.19% 1.94%
8.38% 7.63% 8.42% 7.67%
78% 78% 138% 138%
$ 636,824 $ 608,348 $ 660,654 $ 475,141
</TABLE>
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
T0 THE TRUSTEES OF COLONIAL TRUST I AND THE SHAREHOLDERS OF
COLONIAL STRATEGIC 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 Strategic 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 period
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, 1998
38
<PAGE>
Important Information About this Report
The Transfer Agent for Colonial Strategic Income Fund is:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Colonial Strategic 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 Strategic 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 objectives and operating policies of the Fund.
39
<PAGE>
- --------------------------------------------------------------------------------
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.
Retired (formerly Chairman of the Board and Chief Executive Officer, Hannaford
Bros. Co.)
JOHN J. NEUHAUSER
Dean, Boston College School of Management
GEORGE L. SHINN
Financial Consultant (formerly Chairman, Chief Executive Officer and Consultant,
The First Boston Corporation)
ROBERT L. SULLIVAN
Retired Partner, Peat Marwick Main & Co. (formerly Management Consultant,
Saatchi and Saatchi Consulting Ltd. and Principal and International Practice
Director, Management Consulting, Peat Marwick Main & Co.)
SINCLAIR WEEKS, JR.
Chairman of the Board, Reed & Barton Corporation
[Logo] LIBERTY FINANCIAL INVESTMENTS, INC. [C]1998
Distributor for Colonial Funds, Stein Roe Advisor Funds and Newport Funds
One Financial Center, Boston, MA 02111-2621
SI-02/670E-1297 98/154 (2/98)
- --------------------------------------------------------------------------------
