<PAGE> 1
[Graphic]
COLONIAL INCOME FUND ANNUAL REPORT
DECEMBER 31, 1998
Not FDIC May Lose Value
Insured --------------
No Bank Guarantee
<PAGE> 2
COLONIAL INCOME FUND HIGHLIGHTS
JANUARY 1, 1998 - DECEMBER 31, 1998
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:
* High monthly income
* Opportunity for growth over time
* A portfolio of quality bonds
PORTFOLIO MANAGER COMMENTARY: "While 1998 was a volatile year for fixed-income
investors, we were able to generate attractive returns for shareholders by
actively managing the Fund's mix of investments. We took advantage of periods of
strength in the U.S. Treasury and high-yield markets, as well as foreign
government markets, to enhance the portfolio's yield and total return."
-- Richard Stevens
<TABLE>
<CAPTION>
COLONIAL INCOME FUND PERFORMANCE
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
Inception dates 12/1/69 5/15/92 8/1/97
12-month distributions declared per share $0.452 $0.402 $0.412
SEC yields on 12/31/98(1) 5.21% 4.71% 4.87%
12-month total returns, assuming 8.13% 7.32% 7.48%(2)
reinvestment of all distributions and
no sales charge or contingent
deferred sales charge (CDSC)
Net asset value per share on 12/31/98 $6.56 $6.56 $6.56
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO STRUCTURE(3)
(as of 12/31/98)
- -------------------------------------------
<S> <C>
Corporate Bonds ..................... 59.9%
U.S. Government Bonds ............... 21.6%
Preferred Stocks .................... 6.7%
Foreign Government Bonds ............ 6.0%
Cash Equivalents .................... 5.2%
Other ............................... 0.6%
</TABLE>
<TABLE>
<CAPTION>
QUALITY BREAKDOWN(3)
(as of 12/31/98)
- -------------------------------------------
<S> <C>
AAA ................................. 32.8%
A ................................... 7.3%
BBB ................................. 39.5%
BB and Below ........................ 13.1%
Equity & Other ...................... 7.3%
</TABLE>
- ----------
(1) The 30-day SEC yields on 12/31/98 reflect the portfolio's earning power,
net of expenses, expressed as an annualized percentage of the public
offering price at the end of the period. If the Advisor or its affiliates
had not waived certain Fund expenses, the SEC yield for Class C shares
would have been 4.72%.
(2) Performance results reflect any voluntary waiver of Fund expenses by the
Advisor or its affiliates. Absent this waiver, performance results would
have been lower.
(3) Portfolio structure and quality breakdown are calculated as a percentage of
total net assets. Because the Fund is actively managed, there can be no
assurance that the Fund will continue to maintain this portfolio structure
and quality breakdown in the future.
2
<PAGE> 3
PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
I am pleased to present the annual report for Colonial [Graphic]
Income Fund for the 12 months ended December 31, 1998.
Conditions for fixed-income investments varied considerably during the period.
While overall the environment for bonds was positive, a variety of domestic and
international factors created a volatile climate for bond fund investors. In the
U.S., fears of inflation that existed early in the period all but vanished
during the second half, as an increasing number of signs pointed toward a
gradually slowing U.S. economy.
"Flight to quality" was a theme that repeated itself at various times during the
period. Abroad, the economic and financial turmoil that began in Asia in the
fall of 1997 gradually spread to other less-developed markets. As a result,
investors worldwide were drawn to the relative safety and stability of U.S.
Treasury bonds. While returns on fixed-income investments were positive,
investor demand for quality and stability made U.S. Treasury bonds the biggest
winners.
During the final months of the period, the Federal Reserve Board lowered
interest rates, a move that helped reduce fears of a global economic slowdown.
U.S. stock and bond markets were further encouraged when the world's largest
industrial nations submitted proposals designed to stimulate the world's
economies and help countries prevent financial panic.
Investment-grade bond funds continue to provide attractive levels of current
income, good long-term growth prospects and an opportunity to diversify your
core portfolio. Thank you for choosing Colonial Income Fund and for giving us
the opportunity to serve your investment needs. Sincerely,
/s/ Stephen E. Gibson
- ---------------------
Stephen E. Gibson
President
February 11, 1999
Because economic and market conditions change frequently, there can be no
assurance that the trends described above or on the following pages will
continue.
3
<PAGE> 4
PORTFOLIO MANAGEMENT REPORT
RICHARD STEVENS is portfolio manager of Colonial Income Fund and is vice
president of Colonial Management Associates, Inc.
FUND'S DIVERSIFICATION STRATEGY GENERATED GOOD PERFORMANCE
In a challenging investment environment, the Fund maintained its core position
in U.S. investment grade corporate bonds of over 50%. The remainder of the
portfolio was invested in U.S. Treasury securities, domestic high-yield bonds,
and foreign government and corporate securities. During the period, our ability
to overweight these sectors when market conditions were favorable enhanced the
Fund's yield, which contributed to total return and highlighted the advantage of
diversification. During the first half of the year, corporate bonds in both the
investment-grade and high-yield categories performed well. Foreign bonds issued
by European countries benefited in anticipation of the European Monetary Union
that took place on January 1, 1999. During the second half of the period,
increased demand for U.S. Treasury bonds pushed up prices and generated
attractive gains in this sector. As the period closed, both investment-grade and
high-yield corporate bonds were showing strong signs of recovery.
The Fund's investment strategy generated a total return of 8.13% for Class A
shares, based on net asset value for the 12-month period. This outperformed the
Fund's Lipper peer group average, which posted a total return of 7.21% for the
same time period.(4)
CORE PORTFOLIO FOCUSED ON FUNDAMENTALLY STRONG COMPANIES WITH
APPRECIATION POTENTIAL
We maintained our core portfolio of high-quality investment-grade corporate
bonds. Using fundamental credit research to seek out undervalued securities, we
identified industries or companies with appealing financial and operating
characteristics that were not captured by their bond prices. For example, we
invested in Hartford Life Inc. (2.76% of net assets) and John Hancock Mutual
Life Insurance Co. (1.44% of net assets) during the height of the market
turmoil. Because financial institutions suffered some of the largest price
declines during this period, the bond prices of both companies fell
significantly. However, both issuers had good operating and financial
performance and neither issuer's business was meaningfully affected by
deteriorating overseas economies. As a result, bond prices recovered and the
Fund enjoyed a gain from these investments.
SELECTIVITY CRITICAL IN THE HIGH-YIELD SECTOR
High-yield corporate bonds represented about 13% of the Fund's net assets. While
these securities performed well early in the year, we were selective in our
investments. We favored higher quality, non-cyclical companies with decreasing
debt levels and strong cash flow generation, which could provide a financial
cushion during periods of slower growth. One example is Adelphia Communications
(1.02% of net assets) a well-managed, seasoned cable TV
4
<PAGE> 5
distributor whose cash flows have been historically stable. This strategy worked
well during the autumn months when prices of lower-quality, more economically
sensitive bonds fell dramatically.
U.S. TREASURY BONDS BENEFITED FROM INCREASED DEMAND
We increased the Fund's investment in U.S. Treasury securities during the late
summer months (20.82% of net assets). These holdings benefited the Fund when the
Treasury market rallied strongly during August and September as investors around
the world demanded both the high credit quality and liquidity of U.S. government
securities. Prices rose dramatically as yields were pushed down to their lowest
levels in almost 30 years.
FOREIGN MARKETS WERE MIXED
Foreign government bonds represented the smallest proportion of the Fund's
assets (6.0% of net assets). Asia and emerging markets may present an
opportunity in the future as those regions make progress towards fiscal and
monetary recovery. We will continue to monitor these securities closely and may
make purchases if conditions appear to be improving. European bond markets
generally performed well during the year. We made a small investment in markets
that we believe may enjoy future benefits from economic unification in Europe.
1999 OFFERS MODERATE ECONOMIC GROWTH
We expect moderate economic growth, continued low inflation and potentially
lower interest rates during the months ahead. U.S. Treasury, investment-grade
and high-yield corporate bonds would all benefit from this environment. Asian
and emerging markets may present some opportunities and we will keep close watch
over economic conditions overseas, as we'll consider investing only when we
believe recovery is underway. We will continue to actively manage the
portfolio's asset mix for the most attractive combination of long-term price
appreciation potential, current income and manageable risk.
- ----------
(4) Source: Lipper, Inc. Lipper rankings are based on the Lipper Intermediate
Investment Grade Debt Fund Universe. As of 12/31/98 the Fund ranked in the
2nd quartile (rated 79 out of 234 funds) on a one-year basis, in the 1st
quartile (rated 20 out of 109 funds) on a five-year basis and in the 2nd
quartile (rated 10 out of 25 funds) on a ten-year basis.
5
<PAGE> 6
COLONIAL INCOME FUND'S INVESTMENT PERFORMANCE VS.
THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX
Change in Value of $10,000 from 12/31/88 - 12/31/98
<TABLE>
<CAPTION>
Colonial Income
AS 0F DATE NAV POP LEHMAN
<S> <C> <C> <C>
Dec 31, 88
Mar 31, 89 10105 9625 10110
Jun 30, 89 10652 10146 10923
Sep 30, 89 10775 10264 11026
Dec 31, 89 10762 10250 11423
Mar 31, 90 10689 10181 11293
Jun 30, 90 10921 10402 11699
Sep 30, 90 10658 10152 11770
Dec 31, 90 11047 10522 12370
Mar 31, 91 11648 11095 12703
Jun 30, 91 11990 11420 12895
Sep 30, 91 12559 11962 13637
Dec 31, 91 13123 12500 14364
Mar 31, 92 13166 12541 14149
Jun 30, 92 13649 13001 14722
Sep 30, 92 14233 13557 15441
Dec 31, 92 14283 13604 15453
Mar 31, 93 15033 14319 16172
Jun 30, 93 15457 14722 16658
Sep 30, 93 15997 15237 17209
Dec 31, 93 16003 15243 17158
Mar 31, 94 15450 14716 16621
Jun 30, 94 15158 14438 16414
Sep 30, 94 15231 14507 16496
Dec 31, 94 15349 14620 16556
Mar 31, 95 16153 15386 17381
Jun 30, 95 17235 16416 18509
Sep 30, 95 17667 16828 18863
Dec 31, 95 18464 17587 19742
Mar 31, 96 18006 17151 19280
Jun 30, 96 18012 17156 19371
Sep 30, 96 18479 17601 19713
Dec 31, 96 19127 18218 20315
Mar 31, 97 18888 17991 20140
Jun 30, 97 19623 18691 20873
Sep 30, 97 20371 19403 21604
Dec 31, 97 20786 19798 22297
Mar 31, 98 21205 20198 22635
Jun 30, 98 21634 20606 23228
Sep 30, 98 22037 20991 24378
Dec 31, 98 22475 21408 24410
</TABLE>
CHANGE IN VALUE OF $10,000 FROM 12/31/88 - 12/31/98
- --------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
NAV POP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
$22,475 $21,408 $21,401 $21,401 $22,286 $22,286
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
As of 12/31/98
- --------------------------------------------------------------------------------
Class A Class B Class C
Inception 12/1/69 5/15/92 8/1/97
NAV POP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1 year 8.13% 2.99% 7.32% 2.32% 7.48% 6.48%
- --------------------------------------------------------------------------------
5 years 7.03 5.99 6.23 5.92 6.85 6.85
- --------------------------------------------------------------------------------
10 years 8.44 7.91 7.91 7.91 8.34 8.34
- --------------------------------------------------------------------------------
</TABLE>
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 contingent deferred sales charges (CDSC). Public
offering price (POP) returns include the maximum sales charge of 4.75% for Class
A shares. The CDSC returns reflect the maximum charges of 5% for one year and 2%
for five years for Class B shares, and 1% for one year for Class C shares.
Performance results reflect any voluntary waivers or reimbursement of Fund
expenses by the Advisor or its affiliates. Absent these waivers or reimbursement
arrangements, performance results would have been lower. Performance for
different share classes will vary based on differences in sales charges and fees
associated with each class.
Class B and Class C share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns are not restated to reflect any expense differential (e.g., Rule 12b-1
fees) between Class A shares and the newer class shares. Had the expense
differential been reflected, the returns for periods prior to inception of the
newer class shares would have been lower.
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, are not professionally managed and
it is not possible to invest in an index.
6
<PAGE> 7
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO
DECEMBER 31, 1998 (IN THOUSANDS)
BONDS & NOTES - 87.5%
- --------------------------------------------------------------------------------
CORPORATE FIXED INCOME BONDS & NOTES - 59.0% PAR VALUE
- --------------------------------------------------------------------------------
CONSTRUCTION - 4.1%
BUILDING CONSTRUCTION
<S> <C> <C> <C> <C>
Centex Corp.,
7.375% 06/01/05 $ 2,100 $ 2,126
Public Service Electric and Gas Co.,
9.125% 07/01/05 1,000 1,197
Pulte Corp.,
8.375% 08/15/04 3,000 3,282
-------
6,605
-------
- --------------------------------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 6.5%
INSURANCE CARRIERS - 4.2%
Hartford Life, Inc.,
7.650% 06/15/27 4,000 4,486
John Hancock Mutual Life Insurance Co.,
7.375% 02/15/24 (a) 2,110 2,340
-------
6,826
-------
REAL ESTATE - 2.3%
CenterPoint Properties Corp.,
6.750% 04/01/05 2,000 1,923
Highwoods Realty, L.P.,
7.000% 12/01/06 2,000 1,889
-------
3,812
- --------------------------------------------------------------------------------
MANUFACTURING - 11.7%
FOOD & KINDRED PRODUCTS - 3.1%
Stop & Shop Cos. Corp.,
9.750% 02/01/02 4,500 4,965
-------
MACHINERY & COMPUTER EQUIPMENT - 0.3%
IMO Industries, Inc.,
11.750% 05/01/06 500 505
-------
MISCELLANEOUS MANUFACTURING - 3.4%
AEI Resources, Inc.,
10.500% 12/15/05 (a) 1,000 980
Tenneco, Inc.,
9.200% 11/15/12 3,000 3,682
Thermadyne Holdings Corp.,
9.875% 06/01/08 1,000 930
-------
5,592
-------
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Investment Portfolio/December 31, 1998
- --------------------------------------------------------------------------------
CORPORATE FIXED INCOME BONDS & NOTES - CONT. PAR VALUE
- --------------------------------------------------------------------------------
MANUFACTURING - CONT.
PAPER PRODUCTS - 0.2%
<S> <C> <C> <C> <C>
Repap New Brunswick, Inc.,
10.625% 04/15/05 $ 500 $ 340
-------
PETROLEUM REFINING - 3.0%
USX Corp.,
9.625% 08/15/03 3,000 3,377
YPF Sociedad Anonima,
7.000% 10/26/02 (b) 1,455 1,448
-------
4,825
-------
PRINTING & PUBLISHING - 0.6%
American Lawyer Media, Inc.,
9.750% 12/15/07 1,000 1,035
-------
RUBBER & PLASTIC - 0.5%
Burke Industries, Inc.,
10.000% 08/15/07 (c) 850 824
-------
TRANSPORTATION EQUIPMENT - 0.6%
LDM Technologies, Inc.,
10.750% 01/15/07 1,000 1,000
-------
- --------------------------------------------------------------------------------
MINING & ENERGY - 7.6%
METAL MINING - 1.9%
Noranda, Inc.,
8.125% 06/15/04 3,000 3,130
-------
OIL & GAS EXTRACTION - 5.7%
Coastal Corp.,
9.750% 08/01/03 1,000 1,150
Global Marine, Inc.,
7.125% 09/01/07 2,000 2,060
HNG Internorth,
9.625% 03/15/06 2,000 2,378
Magnum Hunter Resources, Inc.,
10.000% 06/01/07 400 336
Occidental Petroleum Corp.,
11.125% 08/01/10 2,500 3,259
-------
9,183
-------
- --------------------------------------------------------------------------------
RETAIL TRADE - 5.1%
GENERAL MERCHANDISE STORES - 2.8%
ShopKo Stores, Inc.,
9.000% 11/15/04 4,000 4,482
-------
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Investment Portfolio/December 31, 1998
- --------------------------------------------------------------------------------
MISCELLANEOUS RETAIL - 2.3%
<S> <C> <C> <C> <C>
Discover Credit,
9.070% 03/16/12 $ 3,000 $ 3,796
-------
- --------------------------------------------------------------------------------
SERVICES - 4.0%
AMUSEMENT & RECREATION - 1.9%
Boyd Gaming Corp.,
9.500% 07/15/07 1,000 1,000
Hollywood Casino Corp.,
12.750% 11/01/03 2,000 2,130
-------
3,130
-------
BUSINESS SERVICES - 0.7%
Unisys Corp.,
11.750% 10/15/04 1,000 1,160
-------
OTHER SERVICES - 1.4%
ERAC USA Finance Co.,
9.125% 12/15/04 (a) 2,000 2,209
-------
- --------------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 20.0%
AIR TRANSPORTATION - 3.1%
Delta Air Lines, Inc.,
10.375% 02/01/11 3,000 3,841
U.S. Air, Inc.,
10.375% 03/01/13 1,000 1,105
-------
4,946
-------
BROADCASTING - 0.6%
Fox Family Worldwide, Inc.,
9.250% 11/01/07 1,000 988
-------
CABLE - 8.7%
Adelphia Communications Corp.,
9.875% 03/01/07 1,500 1,661
Comcast Cable Communications, Inc.,
8.375% 05/01/07 4,000 4,625
Continental Cablevision, Inc.,
8.875% 09/15/05 5,000 5,711
EchoStar Satellite Broadcasting Corp.,
stepped coupon, (13.125% 03/15/00)
(d) 03/15/04 1,000 997
EchoStar Communications Corp.,
12.500% 07/01/02 1,000 1,155
-------
14,149
-------
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Investment Portfolio/December 31, 1998
- --------------------------------------------------------------------------------
CORPORATE FIXED INCOME BONDS & NOTES - CONT. PAR VALUE
- --------------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES - CONT.
<S> <C> <C> <C> <C>
ELECTRIC SERVICES - 1.3%
Houston Industries, Inc.,
9.375% 06/01/01 $ 2,000 $ 2,162
-------
GAS SERVICES - 2.4%
Coastal Corp.,
9.625% 05/15/12 3,000 3,856
-------
MOTOR FREIGHT & WAREHOUSING - 0.4%
Pierce Leahy Corp.,
11.125% 07/15/06 650 718
-------
TELECOMMUNICATIONS - 3.5%
Metrocall, Inc.,
11.000% 09/15/08 (a) 1,000 1,005
Nextel Communications, Inc.,
stepped coupon, (9.750% 10/31/02)
(d) 10/31/07 1,500 915
TCI Communications, Inc.,
9.800% 02/01/12 2,000 2,672
Verio, Inc.,
11.250% 12/01/08 (c) 1,000 1,010
-------
5,602
-------
TOTAL CORPORATE FIXED-INCOME
BONDS & NOTES (cost of $94,481) 95,840
-------
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 21.6%
- --------------------------------------------------------------------------------
Federal National Mortgage Association,
9.000% 2019-2020 715 760
-------
Government National Mortgage Association:
10.000% 2017-2019 27 29
10.500% 2016-2020 248 273
11.500% 2013 51 58
12.500% 2010-2013 151 171
13.000% 2011 6 7
14.000% 2011 5 6
-------
544
-------
U.S. Treasury Bonds:
8.750% 05/15/17 4,000 5,564
10.750% 08/15/05 9,000 12,004
11.625% 11/15/02 (e) 3,100 3,840
-------
21,408
-------
U.S. Treasury Notes,
10.375% 11/15/12 (f) 9,000 12,417
-------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Investment Portfolio/December 31, 1998
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
<S> <C>
AGENCY OBLIGATIONS (cost of $35,121) $ 35,129
--------
</TABLE>
<TABLE>
<CAPTION>
FOREIGN GOVERNMENT &
AGENCY OBLIGATIONS - 6.0% CURRENCY
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government of New Zealand,
10.000% 03/15/02 NZ 2,000 1,195
United Kingdom Treasury:
10.000% 02/26/01 KB 2,315 4,223
10.000% 09/08/03 KB 2,130 4,337
--------
TOTAL FOREIGN GOVERNMENT & AGENCY
OBLIGATIONS (cost of $9,447) 9,755
--------
</TABLE>
<TABLE>
<CAPTION>
CORPORATE CONVERTIBLE BONDS - 0.9%
- --------------------------------------------------------------------------------
MINING & ENERGY - 0.9%
OIL & GAS EXTRACTION
<S> <C> <C> <C> <C>
HS Resources, Inc.,
(cost of $1,536) 9.250% 11/15/06 1,500 1,433
--------
TOTAL BONDS & NOTES (cost of $140,585) 142,157
--------
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCKS - 6.7% SHARES
- --------------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES
<S> <C> <C>
CABLE - 0.7%
CSC Holdings Ltd., PIK,
11.125% 10 1,151
--------
ELECTRIC SERVICES - 4.9%
Appalachian Power Co.,
Series 8.250% 80 2,060
ComEd Finance I,
Series 8.480% 78 1,975
HL&P Capital Trust I,
Series 8.125% 70 1,816
TU Electric Capital,
TOPRS, 8.250% 80 2,065
--------
7,916
--------
GAS SERVICES - 1.1%
TransCanada Pipelines Ltd.,
Series 8.250% 70 1,811
--------
TOTAL PREFERRED STOCKS (cost of $10,831) 10,878
--------
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
Investment Portfolio/December 31, 1998
- --------------------------------------------------------------------------------
WARRANTS (g) - 0.0% SHARES VALUE
- --------------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES
<S> <C> <C>
TELECOMMUNICATION
American Telecasting, Inc. (cost of $30)(h) 1 $ (i)
--------
TOTAL INVESTMENTS - 94.2% (cost of $151,446)(j) 153,035
--------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM OBLIGATIONS - 5.2% PAR
- --------------------------------------------------------------------------------
<S> <C> <C>
Repurchase agreement with ABN AMRO Chicago Corp.,
dated 12/31/98, due 01/04/99 at 4.750%,
collateralized by U.S. Treasury notes with
various maturities to 2015, market value
$8,584 (repurchase proceeds $8,440) $ 8,436 8,436
--------
</TABLE>
FORWARD CURRENCY CONTRACTS - 0.1% (k) 104
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES - 0.5% 877
- --------------------------------------------------------------------------------
NET ASSETS - 100.0% $162,452
--------
12
<PAGE> 13
Investment Portfolio/December 31, 1998
- --------------------------------------------------------------------------------
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,
1998, the value of these securities amounted to $6,534 or 4.0% of net
assets.
(b) This is an Argentinean security. Par amount is stated in U.S. dollars.
(c) These securities have been purchased on a delayed delivery basis for
settlement at a future date beyond customary settlement time.
(d) Currently zero coupon. Shown parenthetically is the interest rate to be
paid and the date the Fund will begin accruing this rate.
(e) This security, or a portion thereof, with a total market value of $2,478 is
being used to collateralize the delayed delivery purchases indicated in
note (c) above.
(f) This security, or a portion thereof, with a total market value of $11,038
is being used to collateralize the forward currency exchange contracts
indicated in note (k) below.
(g) Non-income producing.
(h) Represents fair value as determined in good faith under the direction of
the trustees.
(i) Rounds to less than one.
(j) Cost for federal income tax purposes is the same.
(k) As of December 31, 1998, the Fund had entered into the following forward
currency exchange contracts:
Net Unrealized
Appreciation
Contracts In Exchange Settlement (Depreciation)
to Deliver For Date (U.S.$)
- --------------- ------------- ---------- --------------
KB 5,197 US$ 8,717 01/19/99 $ 115
NZ 2,340 US$ 1,221 01/26/99 (11)
--------------
$ 104
==============
<TABLE>
<CAPTION>
Summary of Securities
by Country/Currency Currency Value % of Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $141,832 92.7
United Kingdom KB 8,560 5.6
Argentina 1,448 0.9
New Zealand NZ 1,195 0.8
-------- -----
$153,035 100.0
======== =====
</TABLE>
Certain securities are listed by country of underlying exposure but may trade
predominantly on other exchanges.
See notes to financial statements.
13
<PAGE> 14
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
(in thousands except for per share amounts and footnotes)
ASSETS
<S> <C> <C>
Investments at value (cost $151,446) $ 153,035
Short-term obligations 8,436
---------
161,471
Unrealized appreciation on forward
currency contracts $ 115
Receivable for:
Interest 2,775
Fund shares sold 162
Dividends 96
Other 11 3,159
-------- ---------
Total Assets 164,630
LIABILITIES
Unrealized depreciation on forward
currency contracts 11
Payable for:
Investments purchased 1,883
Fund shares repurchased 264
Accrued:
Deferred Trustees fees 3
Other 17
------
Total Liabilities 2,178
---------
NET ASSETS $ 162,452
=========
Net asset value & redemption price per share -
Class A ($119,002/18,145) $ 6.56 (a)
=========
Maximum offering price per share - Class A
($6.56/0.9525) $ 6.89 (b)
=========
Net asset value & offering price per share -
Class B ($40,828/6,226) $ 6.56 (a)
=========
Net asset value & offering price per share -
Class C ($2,622/400) $ 6.56 (a)
=========
COMPOSITION OF NET ASSETS
Capital paid in $ 171,987
Undistributed net investment income 247
Accumulated net realized loss (11,472)
Net unrealized appreciation on:
Investments 1,589
Foreign currency transactions 101
---------
$ 162,452
=========
</TABLE>
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $50,000 or more the offering price is reduced.
See notes to financial statements.
14
<PAGE> 15
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(in thousands)
INVESTMENT INCOME
<S> <C> <C>
Interest $ 12,539
Dividends 460
---------
Total Investment Income (net of nonreclaimable foreign
taxes withheld at source which amounted to $5)
12,999
EXPENSES
Management fee $ 788
Service fee 394
Distribution fee - Class B 280
Distribution fee - Class C 8
Transfer agent 344
Bookkeeping fee 65
Trustees fee 15
Custodian fee 12
Audit fee 34
Legal fee 4
Registration fee 33
Reports to shareholders 4
Other 30
------
Total expenses 2,011
Fees waived by the
Distributor - Class C (2) 2,009
------ ---------
Net Investment Income 10,990
---------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain (loss) on:
Investments 2,192
Foreign currency transactions (95)
------
Net Realized Gain 2,097
Change in unrealized appreciation (depreciation)
during the period on:
Investments (1,260)
Foreign currency transactions 80
------
Net Change in Unrealized Depreciation (1,180)
---------
Net Gain 917
---------
Increase in Net Assets from Operations $ 11,907
=========
</TABLE>
See notes to financial statements.
15
<PAGE> 16
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
(in thousands) Year ended December 31
-----------------------
INCREASE (DECREASE) IN NET ASSETS 1998 1997 (a)
<S> <C> <C>
Operations:
Net investment income $ 10,990 $ 10,727
Net realized gain 2,097 2,339
Net unrealized depreciation (1,180) (299)
--------- --------
Net Increase from Operations 11,907 12,767
Distributions:
From net investment income - Class A (8,233) (8,496)
From net investment income - Class B (2,303) (2,177)
From net investment income - Class C (65) (3)
--------- --------
1,306 2,091
--------- --------
Fund Share Transactions:
Receipts for shares sold - Class A 13,276 5,109
Value of distributions reinvested - Class A 4,412 4,458
Cost of shares repurchased - Class A (19,999) (20,501)
--------- --------
(2,311) (10,934)
--------- --------
Receipts for shares sold - Class B 12,139 6,652
Value of distributions reinvested - Class B 1,309 1,190
Cost of shares repurchased - Class B (9,069) (7,986)
--------- --------
4,379 (144)
--------- --------
Receipts for shares sold - Class C 4,795 237
Value of distributions reinvested - Class C 53 3
Cost of shares repurchased - Class C (2,474) -
--------- --------
2,374 240
--------- --------
Net Increase (Decrease) from
Fund Share Transactions 4,442 (10,838)
--------- --------
Total Increase (Decrease) 5,748 (8,747)
NET ASSETS
Beginning of period 156,704 165,451
--------- ---------
End of period (including
undistributed net investment
income of $247 and $171, respectively) $ 162,452 $ 156,704
--------- ---------
</TABLE>
(a) Class C shares were initially offered on August 1, 1997.
See notes to financial statements.
16
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS - CONT.
<TABLE>
<CAPTION>
Year ended December 31
----------------------
(in thousands) 1998 1997 (a)
<S> <C> <C>
NUMBER OF FUND SHARES
Sold - Class A 2,033 800
Issued for distributions reinvested - Class A 676 697
Repurchased - Class A (3,063) (3,217)
------ ------
(354) (1,720)
------ ------
Sold - Class B 1,859 1,040
Issued for distributions reinvested - Class B 201 186
Repurchased - Class B (1,388) (1,249)
------ ------
672 (23)
------ ------
Sold - Class C 735 37
Issued for distributions reinvested - Class C 8 (b)
Repurchased - Class C (380) -
------ ------
363 37
------ ------
</TABLE>
(a) Class C shares were initially offered on August 1, 1997.
(b) Rounds to less than one.
See notes to financial statements.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 three classes of shares: Class A,
Class B and Class C. Class A shares are sold with a front-end sales charge and a
1.00% contingent deferred sales charge on redemptions made within eighteen
months on an original purchase of $1 million to $5 million. Class B shares are
subject to an annual distribution fee and a contingent deferred sales charge.
Class B shares will convert to Class A shares when they have been outstanding
approximately eight years. Class C shares 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.
18
<PAGE> 19
Notes to Financial Statements/December 31, 1998
- --------------------------------------------------------------------------------
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 ratios for the Fund for the entire period by
the distribution fee applicable to Class B 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.
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 gains (losses) arising from the
fluctuation in exchange rates 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.
19
<PAGE> 20
Notes to Financial Statements/December 31, 1998
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES - CONT.
- --------------------------------------------------------------------------------
The Fund does not distinguish that portion of gains (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
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 or 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. Interest income is
recorded on the accrual basis.
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 Advisor)
is the investment Advisor 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 Advisor 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: Liberty Funds Services, Inc., formerly Colonial Investors
Service Center, Inc. (the Transfer Agent), an affiliate of the Advisor, provides
shareholder services for a monthly fee equal to 0.17% annually of the Fund's
average net assets and receives reimbursement for certain out of pocket
expenses.
20
<PAGE> 21
Notes to Financial Statements/December 31, 1998
- --------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Liberty Funds
Distributor, Inc., formerly Liberty Financial Investments, Inc., (the
Distributor), a subsidiary of the Advisor, is the Fund's principal underwriter.
For the year ended December 31, 1998, the Fund has been advised that the
Distributor retained net underwriting discounts of $10,666 on sales of the
Fund's Class A shares and received contingent deferred sales charges (CDSC) of
$44, $97,650, and $892 on Class A, Class B and Class C share redemptions,
respectively.
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% of the average net assets attributable to Class B
shares and Class C shares. The Distributor has agreed to waive a portion of the
Class C shares distribution fee so that it does not exceed 0.60% annually.
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 Advisor.
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.
The Fund had an agreement with its custodian bank under which custodian fees
were reduced by balance credits of $162 applied during the year ended December
31, 1998. The Fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing asset if
it had not entered into such an agreement.
NOTE 3. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITY: During the year ended December 31, 1998, purchases and
sales of investments, other than short-term obligations, were $248,382,274, and
$243,124,947, respectively, of which $71,692,846 and $69,218,844, respectively,
were U.S. government securities.
Unrealized appreciation (depreciation) at December 31, 1998, based on cost of
investments for both financial statement and federal income tax purposes was:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 2,921,585
Gross unrealized depreciation (1,333,042)
-----------
Net unrealized appreciation $ 1,588,543
===========
</TABLE>
21
<PAGE> 22
Notes to Financial Statements/December 31, 1998
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO INFORMATION - CONT.
- --------------------------------------------------------------------------------
CAPITAL LOSS CARRYFORWARDS: At December 31, 1998, capital loss carryforwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
Year of Capital loss
expiration carryforward
--------------- -------------------
1999 $ 10,466,000
2002 1,007,000
-------------------
$ 11,473,000
===================
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.
NOTE 5. LINE OF CREDIT
- --------------------------------------------------------------------------------
The Fund may borrow up to 33 1/3% of its net assets under a line of credit for
temporary or emergency purposes. Any borrowings bear interest at one of the
following options determined at the inception of the loan: (1) federal funds
rate plus 1/2 of 1%, (2) the lending bank's base rate or (3) IBOR offshore loan
rate plus 1/2 of 1%. There were no borrowings under the line of credit during
the year ended December 31, 1998.
NOTE 6. RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED)
- --------------------------------------------------------------------------------
On October 30, 1998, a Special Meeting of Shareholders of the Fund was held to
elect a Board of Trustees, amend fundamental investment policies regarding
borrowing and lending, reclassify the fundamental investment policy regarding
the purchase of illiquid securities, and to approve the policies for a master
fund/feeder fund structure. On August 21, 1998, the record date for the Meeting,
the Fund had outstanding 24,414,613 shares of beneficial interest. The votes
cast at the Meeting were as follows:
22
<PAGE> 23
Notes to Financial Statements/December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUTHORITY
FOR WITHHELD
--- --------
To Elect a Board of Trustees:
<S> <C> <C>
Robert J. Birnbaum 13,313,318 449,773
Tom Bleasdale 13,315,517 447,574
John Carberry 13,317,745 445,345
Lora S. Collins 13,321,528 441,563
James E. Grinnell 13,321,528 441,563
Richard W. Lowry 13,321,836 441,255
Salvatore Macera 13,320,528 442,583
William E. Mayer 13,321,554 441,537
James L. Moody, Jr 13,320,714 442,376
John J. Neuhauser 13,319,678 443,413
Thomas E. Stitzel 13,321,810 441,281
Robert L. Sullivan 13,323,069 440,021
Anne-Lee Verville 13,320,714 442,376
</TABLE>
To amend fundamental investment policies regarding borrowing and lending.
FOR AGAINST ABSTAIN
--- ------- -------
10,608,285 351,232 701,898
To reclassify the fundamental investment policy regarding the purchase of
illiquid securities.
FOR AGAINST ABSTAIN
--- ------- -------
10,448,508 498,610 714,296
To approve policies for a master fund/feeder fund structure.
FOR AGAINST ABSTAIN
--- ------- -------
10,490,597 401,507 763,310
23
<PAGE> 24
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
1998
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Net asset value -
Beginning of period $ 6.500 $ 6.500 $ 6.500
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.455 0.405 0.415 (b)
Net realized and
unrealized gain (loss) 0.057 0.057 0.057
------- ------- -------
Total from Investment
Operations 0.512 0.462 0.472
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net
investment income (0.452) (0.402) (0.412)
------- ------- -------
Net asset value -
End of period $ 6.560 $ 6.560 $ 6.560
======== ======= =======
Total return (d) 8.13% 7.32% 7.48% (e)
======== ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (g) 1.09% 1.84% 1.69% (b)
Net investment income (g) 7.16% 6.41% 6.56% (b)
Portfolio turnover 161% 161% 161%
Net assets at end
of period (000) $119,002 $40,828 $ 2,622
</TABLE>
(a) Class C shares were initially offered on August 1, 1997. Per share data
reflects activity from that date.
(b) 1998 information is net of fees waived by the Distributor which amounted to
$0.010 per share and 0.15%. 1997 information is net of fees waived by the
Distributor which amounted to $0.004 per share and 0.15%.
(c) The amount shown for a share outstanding does not correspond with the
aggregate net gain on investments for the period due to the timing of sales
and repurchases of Fund shares in relation to fluctuating market values of
the investments of the Fund.
(d) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(e) Had the Distributor not waived a portion of expenses, total return would
have been reduced.
(f) Not annualized.
(g) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(h) Annualized.
24
<PAGE> 25
FINANCIAL HIGHLIGHTS - CONT.
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)
----------- ---------- ------------
<S> <C> <C> <C>
$ 6.410 $ 6.410 $ 6.530
----------- ---------- ----------
0.439 0.391 0.171 (b)
0.095 0.095 (0.032)(c)
----------- ---------- ----------
0.534 0.486 0.139
----------- ---------- ----------
(0.444) (0.396) (0.169)
----------- ---------- ----------
$ 6.500 $ 6.500 $ 6.500
=========== ========== ==========
8.67% 7.87% 2.17% (e)(f)
=========== ========== ==========
1.11% 1.86% 1.71% (b)(h)
6.98% 6.23% 6.35% (b)(h)
281% 281% 281%
$ 120,336 $ 36,128 $ 240
</TABLE>
25
<PAGE> 26
FINANCIAL HIGHLIGHTS - CONT.
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 $ 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
</TABLE>
(a) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(b) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
26
<PAGE> 27
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1994
Class A Class B
--------- --------
<S> <C> <C>
$ 6.720 $ 6.720
--------- --------
0.487 0.440
(0.761) (0.761)
--------- --------
(0.274) (0.321)
--------- --------
(0.496) (0.449)
--------- --------
$ 5.950 $ 5.950
========= ========
(4.09)% (4.82)%
========= ========
1.11% 1.86%
7.80% 7.05%
16% 16%
$ 129,560 $ 22,805
</TABLE>
27
<PAGE> 28
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, 1998, 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, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 1999
28
<PAGE> 29
SHAREHOLDER SERVICES
TO MAKE INVESTING EASIER
Your Fund has one of the most extensive selections of shareholder services
available. Your financial advisor can help you arrange for any of these
services, or you can call Liberty Funds Services, Inc. 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(1): Exchange all or part of your account into the same share
class of another fund distributed by Liberty Funds Distributor, Inc. by phone or
mail.
EASY ACCESS TO YOUR MONEY(1): 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 within one year, you can reinvest in any fund distributed by
Liberty Funds Distributor 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 Fund 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 calendar day of each month unless the 10th falls on a
non-business day or the first business day of the week. If this occurs, the
processing date will be the previous business day. Dividends and capital gains
must be reinvested.
AUTOMATED DOLLAR COST AVERAGING: Transfer money on a monthly basis from any fund
with a balance of $5,000 into the same share class of up to four other funds
distributed by Liberty Funds Distributor. Minimum for each transfer is $100.
RETIREMENT PLANS: Choose from a broad range of retirement plans, including IRAs.
- ----------
(1) Redemptions and exchanges are made at the next determined net asset value
after the request is received by the Transfer Agent. 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 C shares, or $1 million or more of Class A shares, may
be subject to a contingent deferred sales charge.
29
<PAGE> 30
HOW TO REACH US
BY PHONE OR BY MAIL
BY TELEPHONE
CUSTOMER CONNECTION - 1-800-345-6611
For 24-hour account information, call from your touch-tone phone. (Rotary
callers will be automatically connected to a representative during business
hours.) A recorded message will guide you through the menu:
For fund prices, dividends and capital gains information ............ press 1
For account information ............................................. press 2
To speak to a service representative ................................ press 3
For yield and total return information .............................. press 4
For duplicate statements or new supply of checks .................... press 5
To order duplicate tax forms and year-end statements ................ press 6
(February through May)
To review your options at any time during your call ................. press *
To speak with a shareholder services representative about your account, call
Monday to Friday, 8:00 a.m. to 8:00 p.m. ET, and Saturdays from February through
mid-April, 10:00 a.m. to 2:00 p.m. ET.
TELEPHONE TRANSACTION DEPARTMENT - 1-800-422-3737
To purchase, exchange or sell shares by telephone, call Monday to Friday, 9:00
a.m. to 7:00 p.m. ET. Transactions received after the close of the New York
Stock Exchange will receive the next business day's closing price.
LITERATURE - 1-800-426-3750
To request literature on any fund distributed by Liberty Funds Distributor,
Inc., call Monday to Friday, 8:30 a.m. to 6:30 p.m. ET.
BY MAIL
LIBERTY FUNDS SERVICES, INC.
P.O. BOX 1722
BOSTON, MA 02105-1722
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IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Colonial Income Fund is:
Liberty Funds Services, 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 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
objectives and operating policies of the Fund and the most recent copy of the
Liberty Funds Distributor, Inc. Performance Update.
* Effective October 1, 1998, Colonial Investors Service Center, Inc. - the
Transfer Agent for Colonial, Crabbe Huson, Newport and Stein Roe Advisor
funds - changed its name to Liberty Funds Services, Inc.
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TRUSTEES
ROBERT J. BIRNBAUM
Consultant (formerly Special Counsel, Dechert, Price & Rhoads; President and
Chief Operating Officer, New York Stock Exchange, Inc.; President, American
Stock Exchange Inc.)
TOM BLEASDALE
Retired (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust Company)
JOHN CARBERRY
Senior Vice President of Liberty Financial Companies, Inc. (formerly Managing
Director, Salomon Brothers)
LORA S. COLLINS
Attorney (formerly Attorney, Kramer, Levin, Naftalis & Frankel)
JAMES E. GRINNELL
Private Investor (formerly Senior Vice President-Operations, The Rockport
Company)
RICHARD W. LOWRY
Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood
Corporation)
SALVATORE MACERA
Private Investor (formerly Executive Vice President of Itek Corp. and President
of Itek Optical & Electronic Industries, Inc.)
WILLIAM E. MAYER
Partner, Development Capital, LLC (formerly Dean, College of Business and
Management, University of Maryland; Dean, Simon Graduate School of Business,
University of Rochester; Chairman and Chief Executive Officer, CS First Boston
Merchant Bank; and President and Chief Executive Officer, The First Boston
Corporation)
JAMES L. MOODY, JR.
Retired (formerly Chairman of the Board, Chief Executive Officer and Director
Hannaford Bros. Co.)
JOHN J. NEUHAUSER
Dean, Boston College School of Management
THOMAS E. STITZEL
Professor of Finance, College of Business, Boise State University; Business
Consultant and Author
ROBERT L. SULLIVAN
Retired Partner, KPMG LLP (formerly Management Consultant, Saatchi and Saatchi
Consulting Ltd. and Principal and International Practice Director, Management
Consulting, Peat Marwick Main & Co.)
ANNE-LEE VERVILLE
Consultant (formerly General Manager, Global Education Industry, and President,
Applications Solutions Division, IBM Corporation)
[LIBERTY LOGO] L I B E R T Y
COLONIAL * CRABBE HUSON * NEWPORT * STEIN ROE ADVISOR
Liberty Funds Distributor (C) 1999
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
Visit us at www.libertyfunds.com IF-02/342G-1298 (2/99) 99/126
