THE COLONIAL FUND Annual Report
October 31, 1997
-----------------------
Important information
- --------------------------------------- about the Fund's
Not FDIC May Lose Value strategy investment
Insured No Bank Guarantee on page 4.
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THE COLONIAL FUND HIGHLIGHTS
NOVEMBER 1, 1996 - OCTOBER 31, 1997
Investment Objective: The Colonial Fund seeks primarily income and capital
growth and, secondarily, capital preservation.
The Fund is Designed to Offer:
* Long-term investment returns
* Above-average value for your dollars
* Reasonable protection in down markets and broad diversification
* Quarterly dividend income
Portfolio Manager Commentary: "This past year, the Fund has provided
shareholders with some of its strongest returns ever. Our ability to find value
in all sectors enabled us to benefit from market gains, while reducing risk in
down periods."
-- John Lennon and Gordon Johnson
The Colonial Fund Performance(1)
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Class A Class B Class C(2)
12-month distributions declared per share $ 0.715 $ 0.638 $ 0.024
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12-month total returns, assuming 26.83% 25.81% (1.30)%
reinvestment of all distributions
and no sales charge or contingent
deferred sales charge (CDSC)
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Net asset values per share on 10/31/97 $11.16 $11.14 $11.15
Top Five Equity Holdings(3) Top Five Sectors(3), (4)
(as of 10/31/97) (as of 10/31/97)
- ----------------------------------- --------------------------------
1. Bristol-Myers Squibb Co.....2.6% 1. Financial...............15.1%
2. Textron, Inc................2.6% 2. Capital Goods............8.8%
3. Compaq Computer Corp........2.3% 3. Consumer Cyclical........7.3%
4. Merrill Lynch & Co., Inc....1.6% 4. Technology...............7.1%
5. Allstate Corp...............1.4% 5. Health Care..............6.8%
1 For more information about Class Z share performance, please call
1-800-426-3750.
2 Class C share total returns are cumulative since inception on August 1, 1997.
3 Holdings and sector breakdowns 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 hold these securities or invest in these sectors in the future.
4 Industry sectors in the following financial statements are based upon the
standard industrial classifications (SIC) published by the U.S. Office of
Management and Budget. The sector classifications used on this page are based
upon Colonial's defined criteria used in the investment process.
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2
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PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
[PHOTO OMITTED]
I am pleased to present your Fund's annual report for the fiscal year ended
October 31, 1997. This report gives us the opportunity to share our analysis of
your Fund and the investment environment over the past 12 months.
The volatile market: does investing in equities still make sense?
With the recent volatility in world stock markets, many investors are asking
whether the long bull market has come to an end, and if investing in equities
remains a good idea. While the day-to-day swings of the market over the last
several months have generated headlines in the papers, it may be helpful to
remember that the October market losses did not represent the greatest one month
decline for the year as measured by the Dow Jones Industrial Average or the S&P
500 Index. Yet looking over the last 12 months as a whole, these indexes have
posted some of the highest percentage gains in history. Even in a volatile
market, investing in equities offers opportunities for long-term growth not
found anywhere else. Maintaining at least some exposure to stocks still makes
sense for most investors.
What really matters is how you invest
In volatile times like these, it becomes increasingly important that your
investment choices are based on a sound, disciplined strategy. When our
portfolio managers analyze a stock for potential purchase, an attractive price
is just the start. They carefully research all market sectors for undervalued
companies that are well-managed, offer a consistent performance record and have
favorable growth prospects. With a broadly diversified portfolio including value
stocks, defensive stocks, growth-at-a-reasonable-price stocks and bonds, the
Fund is less sensitive to the type of volatility we have seen recently.
The following report will provide you with specific information on your Fund's
performance, as well as an in-depth discussion with your portfolio managers. We
appreciate your continuing confidence, and we thank you for choosing The
Colonial Fund for your mutual fund investment program.
Respectfully,
/s/ Harold W. Cogger
Harold W. Cogger
President
December 10, 1997
Because market conditions change frequently, there can be no assurance that the
trends described will continue.
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3
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PORTFOLIO MANAGEMENT REPORT
John Lennon and Gordon Johnson are portfolio co-managers of The Colonial Fund
and vice presidents of the Advisor, Colonial Management Associates, Inc.
The year's market performance -- different stories in different sectors
The last 12 months have seen strong gains in almost all types of equities,
marked by pockets of volatility in March, August and October. Throughout the
year there were definite changes in which sectors were performing well. During
the first half of the year, large-capitalization stocks, such as those in the
S&P 500 Index, were strong. In the second half mid-capitalization stocks, as
represented by the S&P Mid-Cap 400 Index, outperformed the large caps. Growth
and value stocks also performed differently during the year. Growth stocks
outperformed over the first six months, followed by a second half in which value
stocks led the way. Despite these variations, over the year as a whole, mid-cap
and large-cap stocks offered about the same returns, while growth stocks
slightly outperformed value stocks.
A strong Fund performance for the year
Class A shares of The Colonial Fund had a 26.83% total return for the 12-month
period, based on net asset value. We are especially pleased with the Fund's
performance in the second half, when the mid-cap and value stocks, the kinds of
equities in which the Fund concentrates its holdings, outperformed their market
counterparts. One of the reasons for the year's strong performance is the change
to our investment strategy that allows us to more broadly diversify the Fund by
expanding the definition of value investing. This "new value" perspective
focuses on a stock's value relative to others in its industry rather than on an
absolute measure of value.
Looking inside our equity portfolio -- diversification and good performers
Our equity holdings fall into three categories, or sleeves: stocks that offer
value; defensive stocks, which are more resilient in down markets; and stocks
that offer growth at a reasonable price. In the value sleeve, Caterpillar and
Sun Microsystems were strong performers. Some of our better defensive stocks
were Exxon and Omnicom Group. And in the growth-at-a-reasonable-price sleeve,
CompUSA and Allstate demonstrated impressive gains.
A more defensive strategy
We have increased our investments in fixed-income securities from 7% to 27% of
the portfolio. Looking forward, we expect to maintain this increased exposure to
the fixed-income market. Under normal market conditions, fixed-income securities
will comprise 25% to 35% of the Fund's total assets. We believe this higher bond
component will add balance to the equity portion of the portfolio and help the
Fund remain true to its long-term defensive strategy. On December 18, 1997 the
Trustees approved greater flexibility in the types of fixed-income securities
available for purchase by the Fund. In addition to the government and
mortgage-backed securities the Fund can currently own, the Fund may now purchase
investment grade non-agency mortgage-backed securities, asset-backed securities
and corporate bonds. Going forward, the Fund may also use fixed-income hedging
techniques to help reduce risk. As a part of this new strategy, we are pleased
to announce that Leslie Finnemore and William Hill, members of Colonial's
fixed-income management team, are joining us as portfolio
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4
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co-managers for the fixed-income investments. These changes are described more
fully in a supplement to the Fund's prospectus, available by calling
1-800-426-3750.
Positioned well for the year ahead.
Despite the recent volatility in the stock markets, both here and abroad, the
U.S. economy remains sound, which bodes well for domestic stocks. Moreover,
despite this continued economic strength, inflationary pressures in this country
remain muted, which represents a favorable climate for fixed-income investments.
The Colonial Fund Investment Performance vs.
Standard & Poor's Mid-Cap 400 Index
Change in Value of $10,000 from 10/31/87 - 10/31/97
Based on NAV and POP for Class A Shares
[GRAPH OMITTED]
[The following plot points were represented by a graph in the printed materials]
Label A B C
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Label TCF Class A share
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1
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2 AS OF DATE NAV MOP Midcap 400 Index
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3 Oct-87 9425 9425 10000
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4 10660 10047 10711
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5 11506 10844 11634
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6 11894 11210 11884
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7 12361 11650 12135
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8 12947 12202 13223
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9 13592 12811 14294
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10 14692 13847 15804
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11 14482 13649 15850
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12 14057 13249 15360
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13 14165 13350 15624
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14 14926 14068 16826
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15 12863 12123 13727
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16 14425 13596 17177
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17 15693 14790 19569
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18 16458 15511 20599
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19 16880 15910 22436
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20 17722 16703 24318
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21 18404 17346 23490
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22 18815 17733 24179
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23 18509 17445 24504
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24 20150 18991 27076
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25 20679 19490 26896
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26 21290 20066 28208
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27 22249 20970 29780
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28 23280 21941 31182
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29 22161 20886 29534
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30 22209 20932 29203
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31 22415 21126 30489
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32 22255 20976 29687
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33 24393 22990 32425
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34 26662 25129 36355
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35 27284 25715 36956
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36 29197 27519 39033
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37 30097 28367 42090
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38 28983 27317 39175
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39 31679 29858 43368
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40 34013 32058 47582
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41 34120 32158 46352
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42 40649 38312 56952
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43 0ct-97 40179 37869 57535
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A $10,000 investment in Class B shares made on May 5, 1992 (inception), at net
asset value (NAV) would have grown to $20,847 on October 31, 1997. The same
investment after deducting the applicable contingent deferred sales charge
(CDSC) would have been valued at $20,747 on October 31, 1997. A $10,000
investment in Class C shares made on August 1, 1997 (inception) at NAV would be
valued at $9,870 on October 31, 1997. The same investment after deducting the
applicable CDSC would have been valued at $9,771 on October 31, 1997. The
Standard & Poor's Mid-Cap 400 Index is an unmanaged index that tracks the
performance of the U.S. stock market. Unlike mutual funds, an index does not
incur fees or charges and it is not possible to invest in an index.
Average Annual Total Returns
As of 9/30/97 (most recent quarter end)
- --------------------------------------------------------------------------------
Class A Shares Class B Shares Class C Shares(1)
Inception 4/30/82(2) 5/5/92 8/1/97
NAV POP NAV w/CDSC NAV w/CDSC
- --------------------------------------------------------------------------------
1 year 34.32% 26.60% 33.22% 28.22% -- --
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5 years 17.70 16.31 16.84 16.62 -- --
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10 years 13.07 12.41 -- -- -- --
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Since Inception/
objective change 16.26 15.81 15.33 15.23 2.42% 1.42%
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1 Class C share total returns are cumulative since inception on August 1,
1997.
2 Date the Fund adopted current investment objective.
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. NAV returns do not include
sales charges or CDSC. Public offering price (POP) returns include the
maximum sales charge of 5.75% for Class A shares. The CDSC returns reflect
the maximum charges of 5% for one year; 2% for 5 years and 1% since
inception for Class B shares and 1% since inception for Class C shares.
Performance for different share classes will vary based on differences in
sales charges and fees associated with each class.
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5
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INVESTMENT PORTFOLIO
OCTOBER 31, 1997 (IN THOUSANDS)
COMMON STOCKS - 66.9% COUNTRY SHARES VALUE
---------------------------------------------------------------------------
CONSTRUCTION - 1.3%
Building Construction - 1.1%
Centex Corp. 86 $ 5,037
GTM Entrepose SA Fr 8 498
KoninklijkeVolker Stevin NV Ne 297 9,006
Lennar Corp. 53 2,156
-----------
16,697
-----------
Heavy Construction-Non Building Construction - 0.2%
Grupo Acciona SA Sp 20 3,060
-----------
..........................................................................
FINANCE, INSURANCE & REAL ESTATE - 15.2%
Depository Institutions - 5.1%
Amsouth Bancorporation 100 4,822
Astoria Financial Corp. 85 4,452
Banco De Santander SA Sp 54 1,510
Bank of Montreal Ca 398 17,198
Banque Nationale De Belgique Be 1 1,829
Canadian Imperial Bank of Ca 547 15,988
Commerce
First Empire State Corp. 4 1,636
Greenpoint Financial Corp. 57 3,695
H.F. Ahmanson & Co. 120 7,086
National Australia Bank Ltd. Au 1000 13,638
Nations Bank Corp. 37 2,227
Synovus Financial Corp. 29 633
Toronto Dominion Bank Ca 50 1,833
-----------
76,547
-----------
Holding Companies - 1.0%
Fortis Amev NV Ne 247 9,672
Sofina SA Be 8 5,457
-----------
15,129
-----------
Insurance Carriers - 3.6%
Allstate Corp. 261 21,634
Cigna Corp. 115 17,823
Old Republic International Corp. 195 6,977
Orion Capital Corp. 29 1,294
Sunamerica, Inc. 176 6,328
-----------
54,056
-----------
Nondepository Credit Institutions - 1.0%
Green Tree Financial Corp. 288 12,149
The Money Store, Inc. 114 3,243
-----------
15,392
-----------
6
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Investment Portfolio/October 31, 1997
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Real Estate - 0.2%
New World Development Co., Ltd. HK 500 $ 1,759
Societe Francaise d'Investissements
Immobiliers et de Gestion Fr 4 261
Stewart Enterprises, Inc. 23 959
-----------
2,979
-----------
Security Brokers & Dealers - 4.3%
A.G. Edwards, Inc. 648 21,265
Bear Stearns Cos., Inc. 89 3,550
Merrill Lynch & Co., Inc. 366 24,778
Paine Webber Group, Inc. 244 10,791
Salomon, Inc. 70 5,438
-----------
65,822
-----------
...........................................................................
MANUFACTURING - 33.6%
Chemicals & Allied Products - 7.2%
Air Products & Chemicals, Inc. 50 3,800
Akzo Nobel NV ADR Ne 63 5,547
Biomet, Inc. 55 1,372
Bristol-Myers Squibb Co. 449 39,400
Dexter Corp. 21 805
Dura Pharmaceuticals, Inc. (a) 20 968
Ecolab, Inc. 100 4,756
Ethyl Corp. 280 2,415
Great Lakes Chemical Corp. 100 4,700
International Specialty Products,
Inc. (a) 210 3,136
Johnson & Johnson 192 10,993
Merck & Co., Inc. 240 21,420
Nalco Chemical Co. 60 2,400
Norsk Hydro AS No 30 1,650
Pfizer, Inc. 64 4,556
-----------
107,918
-----------
Electronic Components - 0.3%
Sci Systems, Inc. (a) 116 5,104
-----------
Fabricated Metal - 0.6%
Danaher Corp. 17 904
Harsco Corp. 207 8,599
-----------
9,503
-----------
Food & Kindred Products - 0.9%
Adolph Coors Co., Class B 28 982
Archer Daniels Midland Co. 395 8,794
Bongrain SA Fr (b) 147
Flowers Industries, Inc. 90 1,701
Korn-Og Foderstof Kompagniet AS De 45 1,337
Lancaster Colony Corp. 28 1,361
-----------
14,322
-----------
7
<PAGE>
Investment Portfolio/October 31, 1997
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COMMON STOCKS - CONT. COUNTRY SHARES VALUE
---------------------------------------------------------------------------
MANUFACTURING - CONT.
Furniture & Fixtures - 0.6%
Herman Miller, Inc. 20 $ 958
Masco Corp. 170 7,459
-----------
8,417
-----------
Household Appliances - 0.1%
Helen of Troy Ltd. (a) 66 1,097
-----------
Machinery & Computer
Equipment - 6.2%
Bucher Holding Sz 6 5,924
Caterpillar, Inc. 210 10,763
Compaq Computer Corp. 537 34,202
Cummins Engine Co., Inc. 96 5,826
Diebold, Inc. 39 1,696
Gateway 2000, Inc. (a) 55 1,584
Kaydon Corp. 55 1,670
Pitney Bowes, Inc. 60 4,759
Sun Microsystems, Inc. (a) 532 18,221
Timken Co. 137 4,583
Western Digital Corp. (a) 164 4,909
-----------
94,137
-----------
Measuring & Analyzing
Instruments - 0.5%
Tektronix, Inc. 120 7,065
-----------
Miscellaneous Manufacturing - 1.2%
Callaway Golf Co. 536 17,283
-----------
Paper Products - 0.0%
Avery Dennison Corp. 10 378
-----------
Petroleum Refining - 4.7%
Amerada Hess Corp. 212 13,013
Amoco Corp. 88 8,087
British Petroleum Co., PLC UK 26 2,287
Exxon Corp. 174 10,690
Mobil Corp. 107 7,820
Murphy Oil Corp. 57 3,308
Phillips Petroleum Co. 235 11,358
USX-Marathon Group 410 14,661
-----------
71,224
-----------
Primary Metal - 0.1%
Bethlehem Steel Corp. (a) 150 1,500
-----------
8
<PAGE>
Investment Portfolio/October 31, 1997
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Primary Smelting - 0.9%
Phelps Dodge Corp. 191 $ 14,183
-----------
Printing & Publishing - 0.8%
Harte-Hanks Communications 87 3,010
Meredith Corp. 160 5,450
New York Times Co. 20 1,095
Standard Register Co. 64 2,062
-----------
11,617
-----------
Rubber & Plastic - 1.7%
Cooper Tire & Rubber Co. 200 4,238
Goodyear Tire & Rubber Co. 100 6,250
Illinois Tool Works, Inc. 75 3,689
Premark International Inc. 215 5,832
Wynn's International, Inc. 158 5,345
-----------
25,354
-----------
Tobacco Products - 0.7%
Fortune Brands, Inc. 6 198
Gallaher Group PLC UK 553 10,615
-----------
10,813
-----------
Transportation Equipment - 7.1%
Arvin Industries, Inc. 44 1,658
Eaton Corp. 154 14,880
Ford Motor Co. 185 8,082
General Dynamics Corp. 214 17,390
General Motors Corp. 115 7,382
Harley-Davidson, Inc. 160 4,440
Mascotech, Inc. 165 3,135
Paccar, Inc. 39 1,773
Peugeot SA Fr 20 2,262
Textron, Inc. 670 38,746
Thiokol Corp. 71 6,501
Toyota Motor Corp. ADR Ja 27 1,519
-----------
107,768
-----------
...........................................................................
MINING & ENERGY - 0.7%
Metal Mining - 0.1%
Cleveland-Cliffs, Inc. 27 1,164
-----------
Oil & Gas Extraction - 0.6%
Helmerich & Payne 106 8,585
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9
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Investment Portfolio/October 31, 1997
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COMMON STOCKS - CONT. COUNTRY SHARES VALUE
---------------------------------------------------------------------------
RETAIL TRADE - 3.6%
Food Stores - 0.3%
Kroger Corp. (a) 145 $ 4,731
-----------
General Merchandise Stores - 2.2%
Family Dollar Stores, Inc. 225 5,288
Meyer (Fred), Inc. (a) 201 5,747
Sears, Roebuck & Co. 511 21,380
Shopko Stores, Inc. 45 1,133
-----------
33,548
-----------
Home Furnishings & Equipment - 0.4%
CompUSA, Inc. (a) 166 5,450
-----------
Miscellaneous Retail - 0.7%
Office Depot, Inc. (a) 500 10,313
-----------
...........................................................................
SERVICES - 3.7%
Business Services - 0.6%
Omnicom Group, Inc. 125 8,856
-----------
Computer Related Services - 1.3%
BMC Software, Inc. (a) 274 16,519
Cognos, Inc. (a) 134 3,065
-----------
19,584
-----------
Computer Software - 0.1%
McAfee Associates, Inc. (a) 30 1,493
-----------
Engineering, Accounting,
Research & Management - 0.6%
Corrections Corp. of America (a) 156 4,749
International-Muller NV Ne 146 4,620
-----------
9,369
-----------
Health Services - 0.8%
Lincare Holdings, Inc. (a) 113 6,054
Quorum Health Group, Inc. (a) 75 1,819
Universal Health Services, Inc.,
Class B (a) 83 3,657
-----------
11,530
-----------
Hotels, Camps & Lodging - 0.0%
Harbour Centre Development HK 416 414
-----------
Personal Services - 0.3%
Service Corporation International 147 4,486
-----------
10
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Investment Portfolio/October 31, 1997
---------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 7.5%
Air Transportation - 1.3%
AMR Corp. (a) 75 $ 8,733
British Airways PLC ADR UK 7 657
Delta Air Lines, Inc. 105 10,579
-----------
19,969
-----------
Communications - 0.7%
Bell Atlantic Corp. 80 6,390
US West Communications Group 101 4,021
-----------
10,411
-----------
Electric, Gas & Sanitary
Services - 1.4%
Enova Corp. 224 5,439
Gas Y Electricidad SA Sp 224 15,367
-----------
20,806
-----------
Electric Services - 1.9%
Allegheny Energy, Inc. 64 1,808
DQE, Inc. 79 2,432
Hawaiian Electric Industries, Inc. 75 2,836
Nipsco Industries, Inc. 89 3,910
New England Electric System 126 4,922
New York State Electric & Gas Corp. 180 4,804
Public Service Enterprise
Group, Inc. 240 6,230
Union Electrica Fenosa SA Sp 177 1,688
-----------
28,630
-----------
Gas Services - 0.3%
Pacific Enterprises 145 4,740
-----------
Sanitary Services - 1.7%
Severn Trent Water PLC UK 382 5,530
United Utilities PLC UK 1096 13,357
Yorkshire Water PLC UK 742 5,899
-----------
24,786
-----------
Transportation Services - 0.0%
Cross Harbour Tunnel Co. HK 307 492
-----------
Water Transportation - 0.2%
Tidewater, Inc. 48 3,166
-----------
...........................................................................
WHOLESALE TRADE - 1.3%
Durable Goods - 0.7%
Beers NV Ne 213 7,325
11
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Investment Portfolio/October 31, 1997
---------------------------------------------------------------------------
COMMON STOCKS - CONT. COUNTRY SHARES VALUE
---------------------------------------------------------------------------
WHOLESALE TRADE - CONT.
Durable Goods - Cont.
Pioneer Standard Electronics, Inc. 199 $ 3,331
-----------
10,656
-----------
Nondurable Goods - 0.6%
Bergen Brunswig Corp., Class A 177 7,071
Richfood Holdings, Inc. 66 1,593
Universal Corp. 18 692
-----------
9,356
-----------
TOTAL COMMON STOCKS (cost of $665,896) 1,009,900
-----------
BONDS & MATURITIES
NOTES - 27.3% COUPON FROM/TO PAR
---------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 27.3%
Government Agencies - 24.9%
Federal National Mortgage Association:
6.000% 2008-2009(c) $69,965 69,207
6.500% 2007-2025 127,426 126,868
7.000% 2009-2025(d) 68,913 69,581
-----------
265,656
-----------
Federal Home Loan Mortgage Corp.,
6.000% 2009-2012(d) 39,217 38,679
-----------
Government National Mortgage Association:
6.500% 2023-2024 15,142 15,039
7.000% 2023-2024 55,499 55,967
-----------
71,006
-----------
Government Obligations - 2.4%
U.S. Treasury Bond,
9.875% 2015 (c) 13,093 18,320
U.S. Treasury Note,
6.250% 2007 (c) 18,100 18,547
-----------
36,867
-----------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (cost of $407,320) 412,208
-----------
CORPORATE ADJUSTABLE RATE BONDS & NOTES - 0.1%
---------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION, ELECTRIC
GAS & SANITARY SERVICES - 0.1%
Pipelines SFP Pipeline Holdings (e)
(cost of $720) 11.160% 08/15/10 600 971
-----------
TOTAL BONDS & NOTES (cost of $408,040) 413,179
-----------
12
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Investment Portfolio/October 31, 1997
---------------------------------------------------------------------------
TOTAL INVESTMENTS - 94.3% (cost of $1,073,936)(f) $ 1,423,079
-----------
SHORT-TERM OBLIGATIONS - 8.7%
---------------------------------------------------------------------------
Repurchase agreement with Greenwich Capital
Markets, Inc., dated 10/31/97, due 11/03/97
at 5.625%, collateralized by U.S. Treasury
notes maturing in 2015, market value
$134,210 (repurchase proceeds $130,809) $130,748 130,748
-----------
OTHER ASSETS & LIABILITIES, NET - (3.0)% (45,498)
---------------------------------------------------------------------------
NET ASSETS - 100% $ 1,508,329
===========
NOTES TO INVESTMENT PORTFOLIO:
---------------------------------------------------------------------
(a) Non-income producing.
(b) Rounds to less than one.
(c) These securities, or a portion thereof, with a total market value of
$55,170 are being used to collateralize the delayed delivery purchases
indicated in note (d) below.
(d) These securities, or a portion thereof, have been purchased on a
delayed delivery basis whereby the terms that are fixed are the
purchase price, interest rate and settlement date. The exact quantity
purchased may be slightly more or less than the amount shown.
(e) Interest rates change quarterly. The rate listed is as of October 31,
1997.
(f) Cost for federal income tax purposes is $1,076,061.
Summary of Securities by Country % of Total
---------------------------------------------------------------------------
United States $1,254,733 88.2
United Kingdom UK 38,345 2.7
Netherlands Ne 36,170 2.5
Canada Ca 35,019 2.5
Spain Sp 21,625 1.5
Australia Au 13,638 1.0
Belgium Be 7,286 0.5
Switzerland Sz 5,924 0.4
France Fr 3,168 0.2
Hong Kong HK 2,665 0.2
Norway No 1,650 0.1
Japan Ja 1,519 0.1
Denmark De 1,337 0.1
---------- -------
$1,423,079 100.0
========== =======
Certain securities are listed by country of underlying exposure but may
trade predominantly on other exchanges.
Acronym Name
------------- -----------
ADR American Depository Receipt
See notes to financial statements
13
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
OCTOBER 31, 1997
(in thousands except for per share amounts and footnotes)
ASSETS
Investments at value (cost $1,073,936) $ 1,423,079
Short-term obligations 130,748
-----------
1,553,827
Cash held in foreign banks (cost $135) $ 135
Receivable for:
Interest 2,645
Dividends 1,508
Fund shares sold 1,195
Investments sold 283
Foreign tax reclaims 154
Other 115 6,035
---------- -----------
Total Assets 1,559,862
LIABILITIES
Payable for:
Investments purchased 49,457
Fund shares repurchased 1,952
Accrued:
Deferred Trustees fees 10
Other 114
----------
Total Liabilities 51,533
-----------
NET ASSETS $ 1,508,329
===========
Net asset value & redemption price per share -
Class A ($913,956/81,910) $ 11.16
===========
Maximum offering price per share - Class A
($11.16/0.9425) $ 11.84 (a)
===========
Net asset value & offering price per share -
Class B ($577,539/51,856) $ 11.14 (b)
===========
Net asset value & offering price per share -
Class C ($676/61) $ 11.15 (b)
===========
Net asset value, offering and redemption price
per share - Class Z ($16,158/1,447) $ 11.17
===========
COMPOSITION OF NET ASSETS
Capital paid in $ 960,515
Undistributed net investment income 3,371
Accumulated net realized gain 195,319
Net unrealized appreciation (depreciation) on:
Investments 349,143
Foreign currency transactions (19)
-----------
$ 1,508,329
===========
(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.
14
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
(in thousands)
INVESTMENT INCOME
Dividends $ 24,057
Interest 13,278
-----------
Total investment income (net of nonrebatable
foreign taxes withheld at source which
amounted to $724) 37,335
EXPENSES
Management fee $ 7,578
Distribution fee - Class B 3,909
Distribution fee - Class C 1
Transfer agent 4,022
Service fee - Class A, B, C 3,284
Bookkeeping fee 455
Custodian fee 150
Registration fee 67
Trustees fee 76
Audit fee 37
Reports to shareholders 11
Legal fee 8
Other 60 19,658
--------- -----------
Net Investment Income 17,677
-----------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain (loss) on:
Investments 195,259
Foreign currency transactions (66)
---------
Net Realized Gain 195,193
Change in net unrealized appreciation during
the period on:
Investments 107,059
Foreign currency transactions 1
---------
Net Change in Unrealized Appreciation 107,060
-----------
Net Gain 302,253
-----------
Increase in Net Assets from Operations $ 319,930
===========
See notes to financial statements.
15
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
(in thousands) Year ended October 31
-------------------------------
INCREASE (DECREASE) IN NET ASSETS 1997 (a) 1996
Operations:
Net investment income $ 17,677 $ 17,670
Net realized gain 195,193 72,976
Net unrealized appreciation 107,060 74,411
----------- -----------
Net Increase from Operations 319,930 165,057
Distributions:
From net investment income - Class A (12,073) (12,646)
From net realized gains - Class A (45,097) (47,071)
From net investment income - Class B (3,556) (4,191)
From net realized gains - Class B (27,199) (25,891)
From net investment income - Class C (1) -
From net investment income - Class Z (250) (232)
From net realized gains - Class Z (810) (684)
----------- -----------
230,944 74,342
----------- -----------
Fund Share Transactions:
Receipts for shares sold - Class A 164,595 108,502
Value of distributions reinvested - Class A 51,722 53,915
Cost of shares repurchased - Class A (203,099) (117,196)
----------- -----------
13,218 45,221
----------- -----------
Receipts for shares sold - Class B 90,821 104,995
Value of distributions reinvested - Class B 29,053 28,337
Cost of shares repurchased - Class B (83,019) (60,702)
----------- -----------
36,855 72,630
----------- -----------
Receipts for shares sold - Class C 701 -
Value of distributions reinvested - Class C 1 -
Cost of shares repurchased - Class C (15) -
----------- -----------
687 -
----------- -----------
Receipts for shares sold - Class Z 326 9,783
Value of distributions reinvested - Class Z 1,060 916
Cost of shares repurchased - Class Z (1,193) (1,561)
----------- -----------
193 9,138
----------- -----------
Net Increase from Fund Share
Transactions 50,953 126,989
----------- -----------
Total Increase 281,897 201,331
NET ASSETS
Beginning of period 1,226,432 1,025,101
----------- -----------
End of period (including undistributed net
investment income of $3,371 and $1,641,
respectively) $ 1,508,329 $ 1,226,432
=========== ===========
(a) Class C shares were initially offered on August 1, 1997.
Statement of Changes in Net Assets continued on following page.
See notes to financial statements.
16
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS - CONT.
(in thousands) Year ended October 31
-------------------------------
NUMBER OF FUND SHARES 1997 (a) 1996
Sold - Class A 16,206 12,023
Issued for distributions reinvested - Class A 5,631 6,267
Repurchased - Class A (19,943) (12,967)
----------- -----------
1,894 5,323
----------- -----------
Sold - Class B 8,949 11,645
Issued for distributions reinvested - Class B 3,199 3,308
Repurchased - Class B (8,150) (6,730)
----------- -----------
3,998 8,223
----------- -----------
Sold - Class C 62 -
Issued for distributions reinvested - Class C (b) -
Repurchased - Class C (1) -
----------- -----------
61 -
----------- -----------
Sold - Class Z 34 1,084
Issued for distributions reinvested - Class Z 115 106
Repurchased - Class Z (129) (172)
----------- -----------
20 1,018
----------- -----------
(a) Class C shares were initially offered on August 1, 1997.
(b) Rounds to less than one.
See notes to financial statements.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE 1. ACCOUNTING POLICIES
.............................................................................
Organization: The Colonial Fund (the Fund), a series of Colonial Trust III,
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
primarily income and capital growth and, secondarily, capital preservation.
The Fund may issue an unlimited number of shares. The Fund offers four
classes of shares: Class A, Class B, Class C and Class Z. Class A shares are
sold with a front-end sales charge; 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 August 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 a continuing
distribution fee. Class Z shares are offered continuously at net asset
value. There are certain restrictions on the purchase of Class Z shares,
please refer to a prospectus.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
Security valuation and transactions: 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.
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.
Forward currency contracts are valued based on the weighted value of the
exchange traded contracts with similar durations.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
The value of all assets and liabilities quoted in foreign currencies are
translated into U.S. dollars at that day's exchange rates.
Portfolio positions for which market quotations are not readily available
above are valued at fair value under procedures approved by the Trustees.
Security transactions are accounted for on the date the securities are
purchased, sold or mature.
18
<PAGE>
Notes to Financial Statements/October 31, 1997
-----------------------------------------------------------------------------
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 A, Class B and Class C service fee
and Class B and Class C distribution fee), and realized and unrealized gains
(losses) are allocated to each class proportionately on a daily basis for
purposes of determining the net asset value of each class.
The per share data was calculated using average shares outstanding during
the period. In addition, net investment income per share data reflects the
service fee applicable to Class A, Class B and Class C shares and the
distribution fee applicable to Class B and Class C shares only.
Class A, Class B and Class C ratios are calculated by adjusting the expense
and net investment income ratios for the Fund for the entire period by the
service fee applicable to Class A, Class B and Class C shares and 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: Distributions to shareholders are recorded on
the ex-date.
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 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>
Notes to Financial Statements/October 31, 1997
-----------------------------------------------------------------------------
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 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 Fund may also enter into forward currency contracts to hedge
certain other foreign currency denominated assets. The contracts are used to
minimize the exposure to foreign exchange rate fluctuations during the
period between trade and settlement date of the contracts. All contracts are
marked-to-market daily, resulting in unrealized gains 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 (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. For the period November 1, 1996
through September 30, 1997, the fee was equal to 0.55% annually of the
Fund's average net assets.
Effective October 1, 1997, the monthly fee will be based on the Fund's
average net assets as follows:
Average Net Assets Annual Fee Rate
------------------------ -----------------------------------
First $1 billion 0.55%
Over $1 billion 0.50%
20
<PAGE>
Notes to Financial Statements/October 31, 1997
-----------------------------------------------------------------------------
Bookkeeping fee: The Adviser provides bookkeeping and pricing services for
$27,000 per year plus a percentage of the Fund's average net assets as
follows:
Average Net Assets Annual Fee Rate
------------------------ -----------------------------------
First $50 million No charge
Next $950 million 0.035%
Next $1 billion 0.025%
Next $1 billion 0.015%
Over $3 billion 0.001%
Transfer agent: Colonial Investors Service Center, Inc. (the Transfer
Agent), an affiliate of the Adviser, provides shareholder services for a
monthly fee equal to 0.25% annually of the Fund's average net assets and
receives reimbursement for certain out of pocket expenses.
Effective October 1, 1997 and continuing through September 30, 1998, the
Transfer Agent fee will be reduced by 0.0012% in cumulative monthly
increments, resulting in a decrease in the fee from 0.25% to 0.236%
annually.
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. For the year ended October 31, 1997, the Fund has been advised
that the Distributor retained net underwriting discounts of $175,224 on
sales of the Fund's Class A shares and received contingent deferred sales
charges (CDSC) of $955,633 and none 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. The plan also
requires the payment of a service fee to the Distributor on Class A, Class B
and Class C shares as follows:
Value of shares Annual
outstanding on the 20th of Fee
each month which were issued Rate
---------------------------- --------
Prior to April 1, 1989 0.15%
On or after April 1, 1989 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.
21
<PAGE>
Notes to Financial Statements/October 31, 1997
-----------------------------------------------------------------------------
NOTE 3. PORTFOLIO INFORMATION
.............................................................................
Investment activity: For the year ended October 31, 1997, purchases and
sales of investments, other than short-term obligations, were $933,513,303
and $972,966,964, of which $459,134,751 and $144,540,889, respectively, were
U.S. government securities.
Unrealized appreciation (depreciation) at October 31, 1997, based on cost of
investments for federal income tax purposes was:
Gross unrealized appreciation $353,971,228
Gross unrealized depreciation (6,953,195)
------------
Net unrealized appreciation $347,018,033
============
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 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 October 31, 1997.
NOTE 5. FEDERAL INCOME TAX INFORMATION (UNAUDITED)
.............................................................................
82% of the ordinary income distributed by the Fund in the year ended October
31, 1997, qualifies for the corporate dividends received deduction.
22
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
Year ended October 31
-----------------------------------------------------------------
1997
Class A Class B Class C (b) Class Z
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 9.490 $ 9.480 $ 11.320 $ 9.500
------------ ----------- ------------ ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment
income (a) 0.160 0.081 0.199 0.184
Net realized and
unrealized gain (loss)(a) 2.225 2.217 (0.345)(c) 2.225
------------ ----------- ------------ ----------
Total from Investment
Operations 2.385 2.298 (0.146) 2.409
------------ ----------- ------------ ----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment
income (0.147) (0.070) (0.024) (0.171)
From net
realized gains (0.568) (0.568) - (0.568)
------------ ----------- ------------ ----------
Total Distributions
Declared to
Shareholders (0.715) (0.638) (0.024) (0.739)
------------ ----------- ------------ ----------
Net asset value -
End of period $ 11.16 $ 11.14 $ 11.15 $ 11.17
------------ ----------- ------------ ----------
Total return (d) 26.83% 25.81% (1.30)%(e) 27.10%
------------ ----------- ------------ ----------
RATIOS TO AVERAGE NET ASSETS
Expenses (f) 1.14% 1.89% 1.86%(g) 0.90%
Net investment
income (f) 1.56% 0.81% 1.01%(g) 1.80%
Portfolio turnover 71% 71% 71% 71%
Average commission rate $ 0.0331 $ 0.0331 $ 0.0331 $ 0.0331
Net assets at end
of period (000) $913,956 $577,539 $676 $16,158
</TABLE>
(a) Per share data was calculated using average shares outstanding
during the period.
(b) Class C shares were initially offered on August 1, 1997. Per share
amounts reflect activity from that date.
(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 repurchase 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) Not annualized.
(f) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of
benefits received, if any.
(g) Annualized.
23
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year ended October 31
======================================================
1996
Class A Class B Class Z
============== ============= =============
<S> <C> <C> <C>
Net asset value -
Beginning of period $ 8.940 $ 8.930 $ 8.940
------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment
income (a) 0.165 0.097 0.186
Net realized and
unrealized gain (loss)(a) 1.183 1.182 1.192
------------- ------------- -------------
Total from Investment
Operations 1.348 1.279 1.378
------------- ------------- -------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment
income (0.162) (0.093) (0.182)
From net
realized gains (0.636) (0.636) (0.636)
------------- ------------- -------------
Total Distributions
Declared to
Shareholders (0.798) (0.729) (0.818)
------------- ------------- -------------
Net asset value -
End of period $ 9.490 $ 9.480 $ 9.500
============= ============= =============
Total return (c) 16.11% 15.27% 16.50%
============= ============= =============
RATIOS TO AVERAGE NET ASSETS
Expenses 1.15% (e) 1.90% (e) 0.91% (e)
Net investment
income 1.82% (e) 1.07% (e) 2.06% (e)
Portfolio turnover 38% 38% 38%
Average commission rate (g) $ 0.0347 $ 0.0347 $ 0.0347
Net assets at end
of period (000) $ 759,409 $ 453,468 $ 13,555
</TABLE>
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Class Z shares were initially offered on July 31, 1995. Per share amounts
reflect activity from that date.
(c) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(d) Not annualized.
(e) The benefits derived from custody credits and directed brokerage
arrangements had no impact. Prior years' ratios are net of benefits
received, if any.
(f) Annualized.
(g) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
24
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
<TABLE>
<CAPTION>
Year ended October 31
====================================================================================================================
1995 1994
Class A Class B Class Z (b) Class A Class B
================== ==================== ==================== ==================== ====================
<S> <C> <C> <C> <C>
$8.060 $8.050 $8.780 $8.410 $8.400
------------------ -------------------- -------------------- -------------------- --------------------
0.200 0.137 0.041 0.171 0.109
1.393 1.395 0.167 (0.116) (0.111)
- ------------------ -------------------- -------------------- -------------------- --------------------
1.593 1.532 0.208 0.055 (0.002)
- ------------------ -------------------- -------------------- -------------------- --------------------
(0.212) (0.151) (0.048) (0.160) (0.103)
(0.501) (0.501) -- (0.245) (0.245)
- ------------------ -------------------- -------------------- -------------------- --------------------
(0.713) (0.652) (0.048) (0.405) (0.348)
- ------------------ -------------------- -------------------- -------------------- --------------------
$8.940 $8.930 $8.940 $8.060 $8.050
================== ==================== ==================== ==================== ====================
21.72% 20.84% 2.02% (d) 0.74% (0.04)%
================== ==================== ==================== ==================== ====================
1.16% (e) 1.93% (e) 0.93%(e)(f) 1.14% 1.89%
2.43% (e) 1.66% (e) 2.66%(e)(f) 2.07% 1.32%
66% 66% 66% 54% 54%
-- -- -- -- --
$667,611 $353,831 $3,659 $555,275 $264,122
</TABLE>
25
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Year ended October 31
----------------------------
1993(b)
Class A Class B
------------ ------------
Net asset value -
Beginning of period $ 7.390 $ 7.390
-------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment
income (a) 0.156 0.104
Net realized and
unrealized gain (a) 1.293 1.282
-------- --------
Total from Investment
Operations 1.449 1.386
-------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment
income (0.147) (0.094)
From net
realized gains (0.282) (0.282)
-------- --------
Total Distributions
Declared to
Shareholders (0.429) (0.376)
-------- --------
Net asset value -
End of period $ 8.410 $ 8.400
-------- --------
Total return (c) 20.21% 19.38%
-------- --------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.10% 1.85%
Net investment
income 1.94% 1.19%
Portfolio turnover 14% 14%
Net assets at end
of period (000) $520,706 $124,161
(a) Per share data was calculated using average shares outstanding during the
period.
(b) All per share amounts have been restated to reflect the 3 for 1 stock
split effective December 10, 1993.
(c) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
T0 THE TRUSTEES OF COLONIAL TRUST III AND THE SHAREHOLDERS OF
THE COLONIAL 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 The Colonial Fund (a series of
Colonial Trust III) at October 31, 1997, 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 audit. We conducted our audit 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 October 31, 1997 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
December 10, 1997
27
<PAGE>
HOW TO REACH COLONIAL
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.
Colonial 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 Financial Investments,
call Monday to Friday, 8:30 a.m. to 6:30 p.m. ET.
BY MAIL
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
28
<PAGE>
SHAREHOLDER COMMUNICATIONS
TO KEEP YOU INFORMED
To make recordkeeping easy and keep you up-to-date on the performance of your
investments, you can expect to receive the following information about your
account:
Transaction Confirmations: Each time you make a purchase, sale or exchange, you
receive a confirmation statement within just a few days.
Quarterly Statements: Every three months, if any transactions are made that
affect your share balance, this statement reports on your account activity
during the quarter (including any reinvestment of dividends). This statement
also provides year-to-date information.
Liberty Financial Investments Investor Opportunities: Mailed with your quarterly
account statements, this newsletter highlights timely investment strategies,
portfolio manager commentary and shareholder service updates.
Tax Forms and Year-End Tax Guide: Easy-to-use forms and timely information are
designed to make tax reporting simpler. (Usually mailed in January.)
Average Cost Basis Statements: If you sold or exchanged shares during the year,
this statement may help you calculate your gain/loss for tax purposes. (Usually
mailed in February.)
29
<PAGE>
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 Colonial Investors Service Center 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 Financial Investments, 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 Financial Investments 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 Financial Investments. 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.
30
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IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for The Colonial Fund is:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
The Colonial 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 The Colonial Fund. This report
may also be used as sales literature when preceded or accompanied by the current
prospectus which provides details of sales charges, investment objective and
operating policies of the Fund.
31
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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)1997
Distributor for Colonial Funds, Stein Roe Advisor Funds and Newport Funds
One Financial Center, Boston, MA 02111-2621
TF-02/347E-1097 (12/97)
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