<PAGE>
[graphic omitted]
- ----------------------------------------------
COLONIAL STRATEGIC BALANCED FUND ANNUAL REPORT
- ----------------------------------------------
October 31, 1997
----------------------------
Not FDIC | May Lose Value
Insured | No Bank Guarantee
----------------------------
<PAGE>
COLONIAL STRATEGIC BALANCED FUND HIGHLIGHTS
November 1, 1996 - October 31, 1997
INVESTMENT OBJECTIVE: Colonial Strategic Balanced Fund seeks current income and
long-term growth, consistent with prudent risk, by diversifying investments
primarily in U.S. and foreign equity and debt securities.
THE FUND IS DESIGNED TO OFFER:
* Growth and income potential from a strategic blend of markets
* Favorable stock and bond opportunities worldwide
* Broad diversification to help reduce risk
* Expert management by stock and bond specialists
PORTFOLIO MANAGER COMMENTARY: "As an investment carefully balanced between
stocks and bonds, the performance of the Fund was on target, producing a
positive total return that placed the Fund between the S&P 500 Index and the
Lehman Brothers Government/Corporate Bond Index. Our strongest performers on the
equity side were large-cap stocks. On the bond side, high-yield corporate bonds
continued to provide positive results."
--Carl Ericson and James Haynie
COLONIAL STRATEGIC BALANCED FUND PERFORMANCE
CLASS A CLASS B CLASS C(1)
Inception date 9/19/94 9/19/94 9/19/94
- -------------------------------------------------------------------------------
12-month distributions declared $0.626 $0.568 $0.568
per share
- -------------------------------------------------------------------------------
12-month total returns, assuming 17.24% 16.77% 16.75%
reinvestment of all distributions and
no sales charge or contingent deferred
sales charge (CDSC)
- -------------------------------------------------------------------------------
Net asset value per share on 10/31/97 $14.45 $14.43 $14.45
- -------------------------------------------------------------------------------
TOP FIVE HOLDINGS - EQUITY(2) TOP FIVE COUNTRIES - GOV'T BONDS(2)
(as of 10/31/97) (as of 10/31/97)
1. Office Depot, Inc..........1.0% 1. United States ...........10.2%
2. TJX Companies, Inc.........1.0% 2. United Kingdom........... 2.7%
3. Merck & Co., Inc...........0.9% 3. Australia................ 1.6%
4. Warner-Lambert Co..........0.8% 4. Denmark.................. 1.1%
5. Philip Morris Co., Inc.....0.8% 5. Russia................... 0.9%
(1) On July 1, 1997, Class D shares were redesignated Class C shares.
(2) Holding and country 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 countries in
the future.
<PAGE>
PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
[Photo of Harold W. Cogger]
I am pleased to present your Fund's annual report for the 12-month period ended
October 31, 1997. This report reflects on the investment environment for the
period and on the performance of the Fund.
During the period, the economy exhibited continuous well-balanced growth with
only modest levels of inflation. In this positive economic environment, the two
largest areas of focus in the portfolio -- large-cap stocks and high-yield
corporate bonds -- produced attractive returns for investors. The strength of
the economy enabled companies to generate strong cash flow and produce higher
earnings. In turn, the high-yield bonds issued by these companies became more
attractive to investors.
At the end of the period, the stock market experienced a correction. As a
result, we anticipate some degree of volatility in the markets during the coming
months. However, we believe that the broad diversification inherent in our
approach to managing this Fund should reduce the negative impact of drastic
market fluctuations.
In addition, the Fund's managers constantly examine the effectiveness of the
current asset allocation mix and make adjustments as necessary to provide
current income and long-term growth potential consistent with prudent risk. The
Fund's diversification allows us to be well positioned for economic and market
conditions.
As always, we thank you for the opportunity to help meet your investment goals.
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 herein will continue.
<PAGE>
PORTFOLIO MANAGEMENT REPORT
CARL ERICSON AND JAMES HAYNIE are portfolio co-managers of Colonial Strategic
Balanced Fund. Mr. Ericson, who manages the fixed-income portion of the
portfolio, is a Senior Vice President of Colonial Management Associates, Inc.
and Director of the Taxable Fixed Income Department. Mr. Haynie, who manages the
equity portion, is a Vice President of Colonial Management Associates, Inc.
ECONOMY CONTINUES LONG CYCLE OF GROWTH
The U.S. economy continued its long cycle of well-balanced growth and appears
poised to continue at this pace in the near term. Inflation remains subdued, and
the breadth of corporate earnings remains respectable. In addition, leading
indicators suggest a solid fourth quarter and money supply growth continues to
accelerate, an indication that above-average growth could extend into the first
part of 1998.
While the stock market experienced a correction at the close of the period, the
Fund's diversification strategy reduced the impact of the market's fluctuations.
PERFORMANCE ON TRACK FOR BALANCED FUND
The Fund generally attempts to maintain a 60/40 split between stocks and bonds.
At the end of the period, the Fund's position was 57.3% stocks, 33.2% bonds and
9.5% in cash. As expected of a balanced fund with this mix, our total return of
17.24% for the year placed Class A shares between the S&P 500 Index and the
Lehman Brothers Government/Corporate Bond Index (recognized benchmarks of stock
and bond performance, respectively).
CAPITALIZING ON LARGE-CAP STOCKS
The Fund's equity position consists mainly of large-cap stocks, small-cap stocks
and foreign stocks. The largest percentage -- approximately 60% at the end of
the period -- remained invested in large-cap stocks, such as Intel and other
blue-chip companies. For the majority of the 12-month period, this sector of the
equity market outperformed other equity sectors. The remainder of the equity
holdings was fairly evenly split between small-cap companies and foreign stocks.
Toward the end of the period, small-cap companies performed well, while non-U.S.
holdings, primarily in Japan, the United Kingdom and Germany, lagged.
HIGH-YIELD BONDS CONTINUE TO OUTPERFORM PEERS
On the bond side, the Fund's mix consisted mainly of government, corporate and
foreign securities. During this period, the Fund invested most heavily in
high-yield corporate bonds, which benefited from the economy and relatively low
interest rates. The high-yield market drew its strength from strong cash flow
and liquidity of the issuing companies.
During the past six months, we have de-emphasized our holdings in foreign bonds
by eliminating our position in Venezuela and trimming our holdings in other
emerging market bonds. These actions positively impacted the Fund's performance.
At the end of the period, our foreign holdings accounted for less than 25% of
our total bond position.
In turn, we increased our government bond position to approximately 25% of the
Fund's total bond holdings. We maintain a relatively positive outlook for the
government market in the near term.
FOCUSED ON THE FUTURE
As always, we continue to seek solid, steady returns by maintaining significant
exposure to all six sectors in which the Fund invests, without subjecting
shareholders to high levels of fluctuations in share price. As a result, we
believe that we are well positioned for potentially volatile economic and market
conditions. In pursuit of the Fund's objective, we actively manage the
portfolio's investments in each sector to pursue value and capitalize on
opportunities.
<PAGE>
COLONIAL STRATEGIC BALANCED FUND'S INVESTMENT PERFORMANCE VS.
STANDARD & POOR'S 500 INDEX AND
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX
Change in Value of $10,000 from 9/30/94 - 10/31/97
CLASS A SHARES BASED ON NAV AND POP
AVERAGE ANNUAL TOTAL RETURNS*
Inception 9/19/94 NAV POP
- -------------------------------------------
1 YEAR 20.69% 14.96%
- -------------------------------------------
SINCE INCEPTION 17.86 15.99
NAV POP LEHMAN BROTHERS S&P 500 INDEX
- ---------------------------------------------------------------------
Sep 94 10,000 9,525 10,000 10,000
Oct 94 10,030 9,554 9,989 10,224
Nov 94 9,717 9,255 9,971 9,852
Dec 94 9,801 9,335 10,037 9,998
Jan 95 9,780 9,316 10,230 10,257
Feb 95 10,127 9,646 10,467 10,657
Mar 95 10,396 9,902 10,537 10,971
Apr 95 10,611 10,107 10,684 11,294
May 95 10,899 10,381 11,132 11,744
Jun 95 11,253 10,718 11,221 12,017
Jul 95 11,822 11,260 11,177 12,415
Aug 95 11,935 11,369 11,320 12,446
Sep 95 12,194 11,615 11,435 12,971
Oct 95 12,184 11,605 11,603 12,924
Nov 95 12,456 11,864 11,794 13,491
Dec 95 12,486 11,893 11,968 13,751
Jan 96 12,707 12,104 12,043 14,219
Feb 96 13,013 12,395 11,787 14,351
Mar 96 13,048 12,429 11,688 14,489
Apr 96 13,378 12,742 11,608 14,702
May 96 13,558 12,914 11,588 15,081
Jun 96 13,276 12,646 11,743 15,138
Jul 96 13,052 12,432 11,770 14,470
Aug 96 13,287 12,656 11,742 14,776
Sep 96 13,811 13,155 11,950 15,607
Oct 96 13,918 13,257 12,229 16,037
Nov 96 14,490 13,801 12,454 17,248
Dec 96 14,443 13,757 12,316 16,906
Jan 97 14,631 13,936 12,330 17,962
Feb 97 14,642 13,947 12,356 18,103
Mar 97 14,220 13,544 12,209 17,361
Apr 97 14,476 13,788 12,388 18,396
May 97 15,100 14,383 12,503 19,521
Jun 97 15,602 14,861 12,654 20,388
Jul 97 16,398 15,619 13,041 22,010
Aug 97 15,983 15,224 12,894 20,778
Sep 97 16,668 15,876 13,097 21,916
Oct 97 16,318 15,543 13,307 21,184
CLASS B SHARES BASED ON NAV AND MAXIMUM CDSC
AVERAGE ANNUAL TOTAL RETURNS*
Inception 9/19/94 NAV W/CDSC
- -------------------------------------------
1 YEAR 20.12% 15.12%
- -------------------------------------------
SINCE INCEPTION 17.34 16.62
NAV POP LEHMAN BROTHERS S&P 500 INDEX
- ---------------------------------------------------------------------
Sep 94 10,000 10,000 10,000 10,000
Oct 94 10,030 10,030 9,989 10,224
Nov 94 9,716 9,716 9,971 9,852
Dec 94 9,792 9,792 10,037 9,998
Jan 95 9,772 9,772 10,230 10,257
Feb 95 10,118 10,118 10,467 10,657
Mar 95 10,376 10,376 10,537 10,971
Apr 95 10,602 10,602 10,684 11,294
May 95 10,878 10,878 11,132 11,744
Jun 95 11,221 11,221 11,221 12,017
Jul 95 11,799 11,799 11,177 12,415
Aug 95 11,902 11,902 11,320 12,446
Sep 95 12 147 12,147 11,435 12,971
Oct 95 12,137 12,137 11,603 12,924
Nov 95 12,408 12,408 11,794 13,491
Dec 95 12,425 12,425 11,968 13,751
Jan 96 12,646 12,646 12,043 14,219
Feb 96 12,940 12,940 11,787 14,351
Mar 96 12,974 12,974 11,688 14,489
Apr 96 13,292 13,292 11,608 14,702
May 96 13,471 13,471 11,588 15,081
Jun 96 13,187 13,187 11,743 15,138
Jul 96 12,953 12,953 11,770 14,470
Aug 96 13,187 13,187 11,742 14,776
Sep 96 13,704 13,704 11,950 15,607
Oct 96 13,800 13,800 12,229 16,037
Nov 96 14,368 14,368 12,454 17,248
Dec 96 14,306 14,306 12,316 16,906
Jan 97 14,493 14,493 12,330 17,962
Feb 97 14,504 14,504 12,356 18,103
Mar 97 14,080 14,080 12,209 17,361
Apr 97 14,323 14,323 12,388 18,396
May 97 14,931 14,931 12,503 19,521
Jun 97 15,423 15,423 12,654 20,388
Jul 97 16,211 16,211 13,041 22,010
Aug 97 15,789 15,789 12,894 20,778
Sep 97 16,461 16,461 13,097 21,916
Oct 97 16,115 15,815 13,307 21,184
CLASS C SHARES BASED ON NAV AND W/CDSC
AVERAGE ANNUAL TOTAL RETURNS*
Inception 9/19/94 NAV W/CDSC
- -------------------------------------------
1 YEAR 20.09% 19.09%
- -------------------------------------------
SINCE INCEPTION 17.33 17.33
NAV POP LEHMAN BROTHERS S&P 500 INDEX
- ---------------------------------------------------------------------
Sep 94 10,000 10,000 10,000 10,000
Oct 94 10,030 10,030 9,989 10,224
Nov 94 9,716 9,716 9,971 9,852
Dec 94 9,799 9,799 10,037 9,998
Jan 95 9,768 9,768 10,230 10,257
Feb 95 10,115 10,115 10,467 10,657
Mar 95 10,372 10,372 10,537 10,971
Apr 95 10,598 10,598 10,684 11,294
May 95 10,875 10,875 11,132 11,744
Jun 95 11,226 11,226 11,221 12,017
Jul 95 11,794 11,794 11,177 12,415
Aug 95 11,897 11,897 11,320 12,446
Sep 95 12,152 12,152 11,435 12,971
Oct 95 12,141 12,141 11,603 12,924
Nov 95 12,402 12,402 11,794 13,491
Dec 95 12,429 12,429 11,968 13,751
Jan 96 12,649 12,649 12,043 14,219
Feb 96 12,943 12,943 11,787 14,351
Mar 96 12,965 12,965 11,688 14,489
Apr 96 13,293 13,293 11,608 14,702
May 96 13,462 13,462 11,588 15,081
Jun 96 13,179 13,179 11,743 15,138
Jul 96 12,956 12,956 11,770 14,470
Aug 96 13,179 13,179 11,742 14,776
Sep 96 13,706 13,706 11,950 15,607
Oct 96 13,802 13,802 12,229 16,037
Nov 96 14,358 14,358 12,454 17,248
Dec 96 14,307 14,307 12,316 16,906
Jan 97 14,494 14,494 12,330 17,962
Feb 97 14,494 14,494 12,356 18,103
Mar 97 14,071 14,071 12,209 17,361
Apr 97 14,325 14,325 12,388 18,396
May 97 14,931 14,931 12,503 19,521
Jun 97 15,422 15,422 12,654 20,388
Jul 97 16,210 16,210 13,041 22,010
Aug 97 15,788 15,788 12,894 20,778
Sep 97 16,459 16,459 13,097 21,916
Oct 97 16,113 16,113 13,307 21,184
*Average annual total returns are as of 9/30/97, the most recent quarter end.
The Standard & Poor's 500 Index is an unmanaged index that tracks the
performance of U.S. stock market securities. The Lehman Brothers
Government/Corporate Bond Index is an unmanaged index that tracks the
performance of U.S. Government and U.S. Corporate bonds. Unlike mutual funds,
indexes do not incur fees or charges, and it is not possible to invest in an
index.
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 charges of 4.75% for
Class A. The CDSC returns reflect charges of 5% for one year and 3% since
inception for Class B shares and 1% for one year for Class C shares. Performance
for different share classes will vary based on differences in sales charges and
fees associated with each class.
<PAGE>
INVESTMENT PORTFOLIO
OCTOBER 31, 1997 (IN THOUSANDS)
COMMON STOCKS - 56.3% COUNTRY SHARES VALUE
------------------------------------------------------------------------------
CONSTRUCTION - 0.5%
BUILDING CONSTRUCTION - 0.5%
Continental Homes Holding Corp. 7 $ 211
Pulte Corp. 11 407
---------
618
---------
HEAVY CONSTRUCTION - NON BUILDING CONSTRUCTION - 0.0%
Yondenko Corp. Ja 9 44
---------
------------------------------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 8.3%
DEPOSITORY INSTITUTIONS - 4.6%
BankAmerica Corp. 12 858
BankBoston Corp. 3 276
Bank of Montreal Ca 4 173
Bank of New York Co., Inc. 7 349
Banker's Trust New York Co. 3 338
Citicorp 5 600
Comerica, Inc. 1 95
Corporacion Bancaria de Espana SA Sp 5 277
Firstar Corp. 14 506
Greenpoint Financial Corp. 9 560
HSBC Holdings PLC HK 6 127
J.P. Morgan & Co., Inc. 4 439
Kredietbank NV Be (a) 84
Lloyds Bank PLC UK 19 235
National Westminster Bank PLC UK 9 123
Norwest Corp. 7 236
ONBANCorp., Inc. 10 649
---------
5,925
---------
HOLDING & OTHER INVESTMENT COMPANIES - 0.1%
Worms et Cie Fr 1 103
---------
INSURANCE CARRIERS - 2.6%
Allstate Corp. 3 231
American Bankers Insurance Group, Inc. 6 224
American International Group, Inc. 9 918
Centris Group, Inc. 8 163
Fremont General Corp. 4 200
Life Re Corp. 3 171
Loews Corp. 5 514
Maxicare Health Plans, Inc. (b) 4 56
Pacificare Health Systems, Inc. (b) 1 86
Progressive Corp. 6 646
Protective Life Corp. (b) 3 169
---------
3,378
---------
INVESTMENT COMPANIES - 0.0%
First Australia Fund, Inc. Au 3 18
First Phillipine Fund, Inc. Ph 2 17
---------
35
---------
NONDEPOSITORY CREDIT INSTITUTIONS - 0.7%
Aplus Co., Ltd. Ja 42 49
Green Tree Financial Corp. 10 421
The Money Store, Inc. 13 379
---------
849
---------
SECURITY BROKERS & DEALERS - 0.3%
Paine Webber Group, Inc. 10 442
---------
------------------------------------------------------------------------------
MANUFACTURING - 27.3%
APPAREL - 0.2%
Nautica Enterprises, Inc. (b) 8 224
---------
CHEMICALS & ALLIED PRODUCTS - 6.1%
American Home Products Corp. 7 519
BASF AG G 6 203
Bayer AG G 10 351
Bristol-Myers Squibb Co. 10 878
DSM NV Ne 1 63
E.I. DuPont de Nemours & Co. 3 159
Eli Lilly & Co. 13 869
Haw Par Brothers International Ltd. Si 20 32
International Specialty Products, Inc. (b) 35 523
Johnson & Johnson 7 411
Merck & Co., Inc. 13 1,151
Merck KGAA G 4 150
NCH Corp. 3 201
Norsk Hydro A.S. No 2 84
Schering-Plough Corp. 15 841
Union Carbide Corp. 8 347
Warner-Lambert Co. 8 1,074
---------
7,856
---------
COMMUNICATIONS EQUIPMENT - 1.7%
Aspect Telecommunications Corp. (b) 8 192
Comverse Technology, Inc. (b) 4 173
Harman International Industries, Inc. 2 119
Motorola, Inc. 12 741
Philips Electronics NV Ne 12 954
---------
2,179
---------
ELECTRONIC COMPONENTS - 0.7%
HADCO Corp. (b) 7 390
International Rectifier Corp. (b) 8 107
Park Electrochemical Corp. 4 102
Sanmina Corp. (b) Fr 5 359
---------
958
---------
ELECTRONIC MACHINERY, COMPUTERS & SUPPLIES - 0.3%
Hitachi Maxwell Ja 10 223
Komag, Inc. (b) 6 104
---------
327
---------
FABRICATED METAL - 0.5%
Buderus AG G (a) 97
Bunka Shutter Co. Ltd. Ja 20 74
GFI Industries SA Fr 1 202
Oriental Holdings Bhd Ma 11 23
SCHMALBACH LUBECA AG G 2 278
---------
674
---------
FOOD & KINDRED PRODUCTS - 2.4%
Archer Daniels Midland Co. 14 322
Hudson Foods, Inc. 9 160
Nestle Ag (Reg) Sz (a) 494
PepsiCo, Inc. 4 147
Philip Morris Co., Inc. 25 995
Sara Lee Corp. 14 690
Smithfield Foods, Inc. (b) 5 143
Superfos AS De 5 120
---------
3,071
---------
FURNITURE & FIXTURES - 0.2%
Hillenbrand Industries, Inc. 7 299
---------
LEATHER - 0.2%
Wolverine World Wide, Inc. 12 260
---------
LUMBER & WOOD PRODUCTS - 0.1%
Oakwood Homes Corp. 5 137
---------
MACHINERY & COMPUTER EQUIPMENT - 3.2%
Amatsuji Steel Ball Manufacturing Ja 14 134
Applied Materials, Inc. (b) 10 334
Brunswick Corp. 4 118
Caterpillar, Inc. 5 256
Deere & Co. 3 142
EMC Corp. (b) 7 370
Fujitsu Ltd. Ja 4 44
Gateway 2000, Inc. (b) 10 287
Hewlett-Packard Co. 8 469
Hitachi Ltd. Ja 14 108
International Business Machines Corp. 7 667
Lam Research Corp. (b) 3 90
Seagate Technology, Inc. (b) 14 369
Sun Microsystems, Inc. (b) 16 562
Swedish Match AB, ADR Sw 1 16
Toro Co. 3 128
---------
4,094
---------
MEASURING & ANALYZING INSTRUMENTS - 1.2%
Bio-Rad Laboratories, Inc.,
Class A (b) 6 156
Credence Systems Corp. (b) 12 354
Esterline Technologies Corp. (b) 6 200
Fuji Photo Film Co., Ltd. Ja 5 181
Medtronic, Inc. 15 670
---------
1,561
---------
MISCELLANEOUS MANUFACTURING - 0.3%
Callaway Golf Co. 12 400
---------
Paper Products - 1.0%
ACX Technologies, Inc. (b) 8 210
Longview Fibre Co. 10 159
Paragon Trade Brands, Inc. (b) 12 225
Potlatch Corp. 10 484
SCA Laakirchen AG Au (a) 223
---------
1,301
---------
PETROLEUM REFINING - 3.9%
Amerada Hess Corp. 8 467
Amoco Corp. 9 825
British Petroleum Co., PLC UK 5 456
Chevron Corp. 10 829
Exxon Corp. 6 369
Kerr-Mcgee Corp. 7 439
Lyondell Petrochemical Co. 9 228
Murphy Oil Corp. 7 406
Phillips Petroleum Co. 3 121
USX-Marathon Group 25 894
---------
5,034
---------
PRIMARY METAL - 0.7%
Acerinox SA Sp 3 447
Alcan Aluminum Ltd. 5 129
British Steel PLC UK 29 75
Texas Industries, Inc. 4 199
---------
850
---------
PRIMARY SMELTING - 0.3%
Phelps Dodge Corp. 5 387
---------
PRINTING & PUBLISHING - 0.8%
Data Dimensions, Inc. (b) 20 540
Gannett Co., Inc. 10 526
---------
1,066
---------
RUBBER & PLASTIC - 0.4%
Continental AG G 8 179
Nike, Inc., Class B 6 282
---------
461
---------
STONE, CLAY, GLASS & CONCRETE - 0.2%
Global Industrial Technologies, Inc. (b) 8 137
Owens Corning Fiberglass Corp. (b) 3 103
Vitro S.A. Mx 12 47
---------
287
---------
TOBACCO PRODUCTS - 0.4%
B.A.T. Industries PLC UK 54 471
---------
TRANSPORTATION EQUIPMENT - 2.5%
Alliedsignal, Inc. 20 720
Alvis PLC UK 30 73
Arvin Industries, Inc. 17 618
Borg-Warner Automotive, Inc. 10 523
Coachmen Industries, Inc. 11 211
Ford Motor Co. 6 262
Honda Motor Co. Ltd. Ja 2 67
Northrop Grumman Corp. 5 538
Varlen Corp. 4 137
Volvo AB ADR Sw 5 124
---------
3,273
---------
------------------------------------------------------------------------------
MINING & ENERGY - 0.8%
CRUDE PETROLEUM & NATURAL GAS - 0.5%
Burlington Resources, Inc. 8 406
Occidental Petroleum Corp. 9 237
---------
643
---------
METAL MINING - 0.2%
Cleveland-Cliffs, Inc. 6 274
---------
NONMETALLIC, EXCEPT FUELS - 0.1%
Potash Corp. of Saskatchewan, Inc. Ca 1 98
---------
------------------------------------------------------------------------------
RETAIL TRADE - 7.0%
APPAREL & ACCESSORY STORES - 1.7%
Dress Barn, Inc. (b) 23 581
Ross Stores, Inc. 10 374
TJX Companies, Inc. 44 1,289
---------
2,244
---------
AUTO DEALERS & GAS STATIONS - 0.0%
Aichi Toyota Motor Ja 4 43
---------
FOOD STORES - 1.8%
American Stores Co. 25 642
General Nutrition Companies, Inc. (b) 14 441
Giant Food, Inc. 12 358
Safeway, Inc. (b) 16 907
---------
2,348
---------
GENERAL MERCHANDISE STORES - 1.7%
BJ'S Wholesale Club, Inc. (b) 6 167
Daiwa Co. Ja 47 160
Dollar General Corp. 16 523
Federated Department Stores, Inc. (b) 6 260
Homebase, Inc. (b) 6 53
Jardine Strategic Holdings Ltd. Si 22 70
Fred Meyer, Inc. (b) 22 628
Sears, Roebuck & Co. 7 293
---------
2,154
---------
HOME FURNISHINGS & EQUIPMENT - 0.3%
Circuit City Stores, Inc. 4 163
CompUSA, Inc. (b) 8 262
---------
425
---------
MISCELLANEOUS RETAIL - 1.2%
Imasco Ltd. Ca 7 223
Office Depot, Inc. (b) 63 1,299
---------
1,522
---------
RESTAURANTS - 0.3%
Foodmaker, Inc. (b) 25 411
Tricon Global Restaurants, Inc. (b) (a) 12
---------
423
---------
------------------------------------------------------------------------------
SERVICES - 4.5%
BUSINESS SERVICES - 0.8%
Advo, Inc. 37 830
Norrell Corp. 8 245
---------
1,075
---------
COMPUTER RELATED SERVICES - 1.4%
Cadence Design Systems, Inc. (b) 18 953
Computer Associates International, Inc. 3 252
HBO & Co. 14 592
---------
1,797
---------
COMPUTER SOFTWARE - 0.9%
McAfee Associates, Inc. (b) 5 249
Microsoft Corp. (b) 5 649
Oracle Systems Corp. (b) 6 215
---------
1,113
---------
ENGINEERING, ACCOUNTING, RESEARCH & MANAGEMENT - 0.1%
International-Muller NV Ne 3 108
---------
Health Services - 1.0%
Integrated Health Services, Inc. 7 221
Lincare Holdings, Inc. (b) 9 483
Tenet Healthcare Corp. (b) 18 553
---------
1,257
---------
Hotels, Camps & Lodging - 0.3%
Hospitality Franchise Systems, Inc. (b) 6 423
---------
------------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES - 6.5%
AIR TRANSPORTATION - 0.9%
British Airways PLC UK 1 98
Comair Holdings, Inc. 9 331
Delta Air Lines, Inc. 7 705
Lufthansa AG G 5 87
---------
1,221
---------
COMMUNICATIONS - 1.7%
BellSouth Corp. 17 804
SBC Communications, Inc. 2 146
Telecom Italia SPA It 83 521
Telefonica de Espana Sp 18 490
Telefonos de Mexico SA Mx 1 48
WorldCom, Inc. 7 235
---------
2,244
---------
ELECTRIC SERVICES - 1.9%
Allegheny Energy, Inc. 4 99
American Electric Power Co., Inc. 14 638
Central Hudson Gas & Electric Corp. 10 354
FPL Group, Inc. 13 646
Public Service Enterprise Group, Inc. 16 415
Unicom Corp. 10 280
---------
2,432
---------
GAS SERVICES - 0.8%
Consolidated Natural Gas Co. 4 216
MCN Corp., 8.750%, PRIDES 10 346
NICOR, Inc. 3 108
Pacific Enterprises 11 360
---------
1,030
---------
RAILROAD - 0.3%
Canadian Pacific Ltd. 15 447
---------
SANITARY SERVICES - 0.4%
USA Waste Services, Inc. (b) 10 370
Yorkshire Water PLC UK 14 114
---------
484
---------
WATER TRANSPORTATION - 0.5%
DFDS AS De (a) 90
Koninklijke Nedlloyd Groep NV Ne 17 490
---------
580
---------
------------------------------------------------------------------------------
WHOLESALE TRADE - 1.4%
DURABLE GOODS - 1.4%
Arrow Electronics, Inc. (b) 4 114
Beers NV Ne 3 86
Commercial Metals Co. 12 400
Ethan Allen Interiors, Inc. 15 521
Hughes Supply, Inc. 6 209
Patterson Dental Co. (b) 11 456
Shelter Components Corp. 2 27
---------
1,813
---------
NONDURABLE GOODS - 0.0%
Dalgety PLC UK 11 43
---------
TOTAL COMMON STOCKS (cost of $53,524) 72,805
---------
PREFERRED STOCKS - 1.0%
------------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES - 1.0%
CABLE
Cablevision Systems Corp.,
11.125%, PIK, Series M 3 311
Time Warner, 10.250%, Series M 1 953
---------
TOTAL PREFERRED STOCKS (cost of $1,213) 1,264
---------
RIGHTS - 0.0%
------------------------------------------------------------------------------
MANUFACTURING - 0.0%
TRANSPORTATION EQUIPMENT - 0.0%
Alvis Funding UK 8 3
---------
PUBLIC ADMINISTRATION - 0.0%
GENERAL GOVERNMENT - 0.0%
Mexican Government Rights W/ Series A&B (c) 300 (a)
---------
TOTAL RIGHTS (cost of $0) 3
---------
BONDS & NOTES - 33.2% PAR
------------------------------------------------------------------------------
CORPORATE FIXED-INCOME BONDS & NOTES - 14.1%
------------------------------------------------------------------------------
------------------------------------------------------------------------------
MANUFACTURING - 5.8%
Chemicals & Allied Products - 1.4%
Agricultural Minerals
Co., L.P., 10.750% 09/30/03 $ 100 107
Laroche Industries, Inc.,
9.500% 09/15/07(d) 500 496
Revlon Consumer Products Corp.,
10.500% 02/15/03 250 264
Revlon Worldwide Corp.:
(e) 03/15/98 250 244
(e) 03/15/01 300 206
Sterling Chemicals, Inc.,
11.250% 04/01/07 500 548
---------
1,865
---------
ELECTRONIC & ELECTRICAL EQUIPMENT - 0.6%
LDM Technologies, Inc.,
10.750% 01/15/07 500 546
Unisys Corp., Senior Notes,
11.750% 10/15/04 250 283
---------
829
---------
FABRICATED METAL - 0.4%
Euramax International, PLC,
11.250% 10/01/06(f) 250 270
Renco Metals, Inc.,
11.500% 07/01/03 250 265
---------
535
---------
LUMBER & WOOD PRODUCTS - 0.1%
Triangle Pacific Corp.,
10.500% 08/01/03 100 105
---------
MACHINERY & COMPUTER EQUIPMENT - 0.2%
IMO Industries,
11.750% 05/01/06 250 275
---------
MEASURING & ANALYZING INSTRUMENTS - 0.2%
Intertek Finance, PLC,
10.250% 11/01/06(f) 250 260
---------
MISCELLANEOUS MANUFACTURING - 1.4%
American Standard Co.,
stepped coupon, (10.500% 06/01/98)
(g) 06/01/05 250 250
Borg-Warner Security Corp.,
9.625% 03/15/07 500 516
ISP Holdings, Inc.,
9.750% 02/15/02 250 264
Polymer Group, Inc.,
9.000% 07/01/07 500 500
Shop Vac Corp.,
10.625% 09/01/03 250 267
---------
1,797
---------
PAPER PRODUCTS - 0.2%
Stone Container Corp.,
10.750% 10/01/02 250 267
---------
PRIMARY METAL - 0.7%
Algoma Steel, Inc.,
12.375% 07/15/05 250 289
Kaiser Aluminum & Chemical Corp.,
10.875% 10/15/06 300 331
US Can Corp.,
10.125% 10/15/06 200 209
---------
829
---------
PRINTING & PUBLISHING - 0.4%
Hollinger International Publishing,
9.250% 03/15/07 $ 500 $ 515
---------
TRANSPORTATION EQUIPMENT - 0.2%
Aftermarket Technology Corp.,
12.000% 08/01/04 86 95
Collins & Aikman Products Co.,
11.500% 04/15/06 200 226
---------
321
---------
------------------------------------------------------------------------------
MINING & ENERGY - 1.1%
CRUDE PETROLEUM & NATURAL GAS - 0.2%
Ferrellgas Finance Corp., LP,
10.000% 08/01/01 200 211
---------
OIL & GAS EXTRACTION - 0.3%
Gulf Canada Resources Ltd.:
9.250% 01/15/04 100 106
9.625% 07/01/05 100 111
Nuevo Energy Co.,
9.500% 04/15/06 200 214
---------
431
---------
OIL & GAS FIELD SERVICES - 0.6%
Falcon Drilling Co., Inc.,
9.750% 01/15/01 200 209
Magnum Hunter Resources, Inc.,
10.000% 06/(d)07 500 513
---------
722
---------
------------------------------------------------------------------------------
RETAIL TRADE - 0.5%
FOOD STORES - 0.4%
Pathmark Stores, Inc.,
9.625% 05/01/03 200 189
Ralphs Grocery Co.,
10.450% 06/15/04 250 275
---------
464
---------
MISCELLANEOUS RETAIL - 0.1%
Finlay Fine Jewelry Corp.,
10.625% 05/01/03 100 105
---------
---------
------------------------------------------------------------------------------
SERVICES - 1.7%
AMUSEMENT & RECREATION - 0.2%
E & S Holdings,
10.375% 10/01/06 250 213
---------
BUSINESS SERVICES - 0.5%
Ameriserv Food Co.,
10.125% 07/(d)07 500 520
Pierce Leahy Corp.,
11.125% 07/15/06 162 183
---------
703
---------
HOTELS, CAMPS & LODGING - 1.0%
Eldorado Resorts,
10.500% 08/15/06 250 272
HMH Properties, Inc.
9.500% 05/15/05 150 158
Horseshoe Gaming,
9.375% 06/15/07 600 614
Wyndham Hotel Corp.,
10.500% 05/15/06 200 229
---------
1,273
---------
------------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES - 5.0%
AIR TRANSPORTATION - 0.2%
U.S. Air, Inc.,
10.375% 03/01/13 200 224
---------
BROADCASTING - 0.3%
Allbritton Communications Co.,
11.500% 08/15/04 100 105
NWCG Holding Corp.,
(e) 06/15/99 175 158
Young Broadcasting Corp.,
11.750% 11/15/04 100 110
---------
373
---------
CABLE - 0.8%
Bell Cablemedia, PLC,
stepped coupon, (11.950% 07/15/99)
(g) 07/(f)04 150 135
Diamond Cable Co.,
stepped coupon, (10.750% 02/15/02)
(g) 02/15/07 350 227
Marcus Cable Co., L.P.:
11.875% 10/01/05 250 271
stepped coupon, (14.250% 06/15/00)
(g) 12/15/05 400 336
Videotron Holding, PLC,
stepped coupon, (11.000% 08/15/00)
(g) 08/(f)05 100 85
---------
1,054
---------
COMMUNICATIONS - 1.3%
Intermedia Communications, Inc.,
stepped coupon, (11.250% 07/15/02)
(g) 07/15/07 500 328
Sprint Spectrum, LP,
stepped coupon, (12.500% 08/15/01)
(g) 08/15/06 850 654
Teleport Communications Group, Inc.,
stepped coupon, (11.125% 07/01/01)
(g) 07/01/07 850 667
---------
1,649
---------
ELECTRIC, GAS & SANITARY SERVICES - 0.6%
Allied Waste Industries, Inc.,
stepped coupon, (11.300% 06/01/02)
(g) 06/01/07 350 238
Mesa Operating Co.:
10.625% 07/01/06 200 230
stepped coupon, (11.625% 07/01/01)
(g) 07/01/06 400 321
---------
789
---------
ELECTRIC SERVICES - 0.1%
California Energy Co., Inc.,
9.500% 09/15/06 100 108
---------
GAS SERVICES - 0.4%
California Energy Co., Inc.,
9.875% 06/30/03 250 272
HS Resources, Inc.,
9.250% 11/15/06 250 257
---------
529
---------
SANITARY SERVICES - 0.2%
Allied Waste North America, Inc.,
10.250% 12/01/06 250 271
---------
TELECOMMUNICATION - 1.1%
Brooks Fiber Properties, Inc.,
stepped coupon, (10.875% 03/01/01)
(g) 03/01/06 100 81
Comcast Cellular Corp.,
9.500% 05/01/07 500 518
Echostar Communications Corp.,
stepped coupon, (12.875% 06/01/99)
(g) 06/01/04 500 448
PanAmSat Corp.,
stepped coupon, (11.375% 08/01/98)
(g) 08/01/03 200 198
WorldCom, Inc.,
9.375% 01/15/04 $ 174 $ 184
---------
1,429
---------
TOTAL CORPORATE FIXED-INCOME
BONDS & NOTES (cost of $17,589) 18,146
---------
U.S. GOVERNMENT OBLIGATIONS - 10.2%
------------------------------------------------------------------------------
U.S. Treasury Bonds:
8.750% 05/(h)17 5,463 7,027
11.625% 11/15/04 2,350 3,117
---------
10,144
---------
U.S. Treasury Note,
11.875% 11/(h)03 2,300 2,996
---------
TOTAL U.S. GOVERNMENT OBLIGATIONS (cost of $12,665) 13,140
---------
FOREIGN GOVERNMENT &
AGENCY OBLIGATIONS - 8.9% CURRENCY
------------------------------------------------------------------------------
Australian Government Bonds,
10.000% 02/15/06 A$ 1,571 1,390
Government of Sweden,
10.250% 05/05/03 SK 5,500 875
Kingdom of Denmark,
8.000% 03/15/06 DK 8,450 1,450
Mexican Brady Bonds,
6.250% 12/31/19(i) 300 235
Mexican Global Bonds,
9.750% 02/06/01(i) 610 628
Poland Non-U.S. Global Registered Bond,
6.688% 10/27/24(j) 213 199
Republic of Argentina,
11.250% 04/10/06(k) G 425 261
Republic of Poland (Brady),
Past Due Interest, stepped coupon,
(5.000% 10/27/98) 4.000% 10/27/14(l) 250 205
Republic of South Africa,
8.500% 06/23/17(m) 300 289
Russian Ministry of Finance:
9.000% 03/25/04(n) G 950 518
10.000% 06/26/07(o) 696 630
Spanish Government Bonds,
10.000% 02/28/05 SP 100 854
United Kingdom:
9.000% 08/06/12 KB 540 $ 1,106
9.750% 08/27/02 KB 590 1,108
10.000% 09/08/03 KB 570 1,107
Western Australia Treasury Corp.,
10.000% 07/15/05 A$ 750 651
---------
TOTAL FOREIGN GOVERNMENT & AGENCY
OBLIGATIONS (cost of $11,578) 11,506
---------
TOTAL BONDS & NOTES (cost of $41,832) 42,792
---------
TOTAL INVESTMENTS - 90.5% (cost of $96,569) (p) 116,864
---------
SHORT-TERM OBLIGATIONS - 8.2%
------------------------------------------------------------------------------
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 $10,802 (repurchase proceeds $10,528) 10,523 10,523
---------
FORWARD CURRENCY CONTRACTS - (0.1)% (q) (120)
-----------------------------------------------------------------------------
OTHER ASSETS & LIABILITIES, NET - 1.4% 1,862
-----------------------------------------------------------------------------
NET ASSETS - 100.0% $ 129,129
=========
NOTES TO INVESTMENT PORTFOLIO:
------------------------------------------------------------------------------
(a) Rounds to less than one.
(b) Non-income producing.
(c) Represents fair value as determined in good faith under the direction of
the Trustees.
(d) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At October 31,
1997, the value of these securities amounted to $1,529 or 1.2% of net
assets.
(e) Zero coupon bond.
(f) This is a British security. Par amount is stated in U.S. dollars.
(g) Currently zero coupon. Shown parenthetically is the interest rate to be
paid and the date the Fund will begin accruing this rate.
(h) These securities, or a portion thereof, with a total market value of
$10,023 are being used to collateralize the forward currency exchange
contracts shown below.
(i) This is a Mexican security. Par amount is stated in U.S. dollars.
(j) This is a Polish security. Par amount is stated in U.S. dollars. Interest
rate shown is a floating rate coupon which changes every six months.
(k) This is an Argentinean security. Par amount is stated in German
Deutschemarks.
(l) This is a Polish security. Par amount is stated in U.S. dollars. Shown
parenthetically is the interest rate to be paid and the date the Fund will
begin accruing this rate.
(m) This is a South African security. Par amount is stated in U.S. dollars.
(n) This is a Russian security. Par amount is stated in German Deutschemarks.
(o) This is a Russian security. Par amount is stated in U.S. dollars.
(p) Cost for federal income tax purposes is $96,655.
(q) As of October 31, 1997, 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. $)
-----------------------------------------------------------------------------
G 690 US$ 390 11/06/1997 $ (10)
US$ 398 G 690 11/06/1997 2
G 1,750 US$ 991 11/07/1997 (24)
US$ 1,012 G 1,750 11/07/1997 2
KB 1,500 US$ 2,434 11/17/1997 (74)
Fr 2,603 US$ 440 11/24/1997 (11)
SK 3,390 US$ 447 12/03/1997 (6)
A$ 2,970 US$ 2085 12/04/1997 1
---------
$ (120)
=========
<PAGE>
SUMMARY OF SECURITIES
BY COUNTRY/CURRENCY COUNTRY/CURRENCY VALUE % OF TOTAL
- ------------------------------------------------------------------------------
United States $ 94,984 81.3
United Kingdom UK/KB 5,012 4.3
Australia Au/A$ 2,282 2.0
Germany G 2,124 1.8
Spain Sp/SP 2,068 1.8
Netherlands Ne 1,701 1.5
Denmark De/DK 1,660 1.4
Japan Ja 1,127 1.0
Sweden Sw/SK 1,015 0.9
Mexico Mx 958 0.8
France Fr 664 0.6
Russia RU 630 0.5
Italy It 521 0.4
Canada Ca 494 0.4
Switzerland Sz 494 0.4
Poland PL 404 0.3
South Africa SA 289 0.2
Hong Kong HK 127 0.1
Singapore Si 102 0.1
Belgium Be 84 0.1
Norway No 84 0.1
Malaysia Ma 23 0.0
Philippines Ph 17 0.0
--------- -----
$ 116,864 100.0
========= =====
Certain securities are listed by country of underlying exposure but may trade
predominantly on other exchanges.
Acronym Name
------- ------
ADR American Depositary Receipt
PIK Payment-In-Kind
PRIDES Preferred Redeemable Increased Dividend Equity Securities
See notes to financial statements.
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
OCTOBER 31, 1997
(in thousands except for per share amounts and footnotes)
ASSETS
Investments at value (cost $96,569) $ 116,864
Short-term obligations 10,523
---------
127,387
Cash held in foreign banks (cost $2) $ 2
Receivable for:
Interest 1,157
Investments sold 542
Fund shares sold 239
Dividends 75
Foreign tax reclaims 10
Deferred organization expenses 28
Other 1 2,054
-------- ---------
Total Assets 129,441
LIABILITIES
Unrealized depreciation on forward
currency contracts 120
Payable for:
Fund shares repurchased 158
Payable to Adviser 12
Accrued:
Deferred Trustees fees 1
Other 21
--------
Total Liabilities 312
---------
NET ASSETS $ 129,129
=========
Net asset value & redemption price per share -
Class A ($45,736/3,164) $ 14.45
=========
Maximum offering price per share - Class A
($14.45/0.9525) $ 15.17(a)
=========
Net asset value & offering price per share -
Class B ($77,005/5,337) $ 14.43(b)
=========
Net asset value & offering price per share -
Class C ($6,388/442) $ 14.45(b)
=========
(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.
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
(in thousands)
INVESTMENT INCOME
Interest $ 3,778
Dividends 900
---------
Total investment income (net of nonrebatable
foreign taxes withheld at source which
amounted to $33) 4,678
EXPENSES
Management fee $ 712
Service fee 256
Distribution fee - Class A 110
Distribution fee - Class B 450
Distribution fee - Class C 39
Transfer agent 318
Bookkeeping fee 45
Registration fee 40
Custodian fee 29
Audit fee 17
Trustees fee 14
Reports to shareholders 18
Legal fee 6
Amortization of deferred
organization expenses 14
Other 5
--------
2,073
Fees waived by the Adviser (94) 1,979
-------- ---------
Net Investment Income 2,699
---------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain on:
Investments 821
Foreign currency transactions 707
--------
Net Realized Gain 1,528
Change in unrealized appreciation (depreciation) during
the period on:
Investments 11,452
Foreign currency transactions (106)
--------
Net Change in Unrealized Appreciation 11,346
---------
Net Gain 12,874
---------
Increase in Net Assets from Operations $ 15,573
=========
See notes to financial statements.
<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 $ 2,699 $ 1,374
Net realized gain 1,528 1,399
Net unrealized appreciation 11,346 3,841
-------- --------
Net Increase from Operations 15,573 6,614
Distributions:
From net investment income - Class A (1,033) (508)
From net realized gains - Class A (485) (59)
From net investment income - Class B (1,442) (650)
From net realized gains - Class B (783) (69)
From net investment income - Class C (125) (85)
From net realized gains - Class C (71) (14)
-------- --------
11,634 5,229
-------- --------
Fund Share Transactions:
Receipts for shares sold - Class A 19,814 13,772
Value of distributions reinvested - Class A 1,423 523
Cost of shares repurchased - Class A (5,245) (7,076)
-------- --------
15,992 7,219
-------- --------
Receipts for shares sold - Class B 36,345 25,817
Value of distributions reinvested - Class B 2,074 659
Cost of shares repurchased - Class B (8,391) (7,446)
-------- --------
30,028 19,030
-------- --------
Receipts for shares sold - Class C 3,286 1,940
Value of distributions reinvested - Class C 174 94
Cost of shares repurchased - Class C (1,184) (3,107)
-------- --------
2,276 (1,073)
-------- --------
Net Increase from Fund
Share Transactions 48,296 25,176
-------- --------
Total Increase 59,930 30,405
NET ASSETS
Beginning of period 69,199 38,794
-------- --------
End of period (including undistributed
net investment income of $580 and $242,
respectively) $129,129 $ 69,199
======== ========
(a) Class D shares were redesignated Class C shares on July 1, 1997. Statement
of Changes in Net Assets continued on following page.
See notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS - CONT.
(in thousands) Year ended October 31
-----------------------
NUMBER OF FUND SHARES 1997(a) 1996
Sold - Class A 1,458 1,111
Issued for distributions reinvested - Class A 106 42
Repurchased - Class A (381) (575)
-------- --------
1,183 578
-------- --------
Sold - Class B 2,684 2,088
Issued for distributions reinvested - Class B 154 54
Repurchased - Class B (608) (605)
-------- --------
2,230 1,537
-------- --------
Sold - Class C 241 157
Issued for distributions reinvested - Class C (a) 13 8
Repurchased - Class C (87) (248)
-------- --------
167 (83)
-------- --------
(a) Class D shares were redesignated Class C shares on July 1, 1997.
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE 1. ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
ORGANIZATION: Colonial Strategic Balanced 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
current income and long term growth, consistent with prudent risk, by
diversifying investments primarily in U.S. and foreign equity and 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 continuing distribution fee; Class B shares
are subject to an annual distribution fee and a contingent deferred sales
charge. Class B shares will convert to Class A shares when they have been
outstanding approximately eight years. Effective July 1, 1997, Class D shares
were redesignated to Class C shares which are subject to an annual distribution
fee and a contingent deferred sales charge.
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: 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 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 A, 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.
The per share data was calculated using average shares outstanding during the
period. In addition, net investment income per share data reflects the
distribution fee applicable to each class.
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
distribution fee applicable to Class A, Class B and Class C shares.
FEDERAL INCOME TAXES: Consistent with the Fund's policy to qualify as a
regulated investment company and to distribute all of its taxable income, no
federal income tax has been accrued.
Interest income, debt discount and premium: Interest income is recorded on the
accrual basis. Original issue discount is accreted to interest income over the
life of a security with a corresponding increase in the cost basis; premium and
market discount are not amortized or accreted.
The value of additional securities received as an interest payment is recorded
as income and as the cost basis of such securities.
DISTRIBUTIONS TO SHAREHOLDERS: 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.
DEFERRED ORGANIZATION EXPENSES: The Fund incurred expenses of $69,500 in
connection with its organization, initial registration with the Securities and
Exchange Commission and with various states, and the initial public offering of
its shares. These expenses were deferred and are being amortized on a
straight-line basis over five years.
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.
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 (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.
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Adviser) is the
investment Adviser of the Fund and furnishes accounting and other services and
office facilities for a monthly fee equal to 0.70% annually of the Fund's
average net assets.
BOOKKEEPING FEE: The Adviser provides bookkeeping and pricing services for
$27,000 per year plus 0.035% of the Fund's average net assets over $50 million.
TRANSFER AGENT: Colonial Investors Service Center, Inc. (the Transfer
Agent), an affiliate of the Adviser, provides shareholder services for
a monthly fee equal to 0.25% 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 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 $40,427 on sales of the
Fund's Class A shares and received contingent deferred sales charges (CDSC) of
$123,845 and $4,091, on 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 0.30% for Class A and 0.75% for Class B and Class C,
annually, of the average net assets attributable to Class A, Class B, and Class
C shares, respectively.
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.
EXPENSE LIMITS: The Adviser has agreed, until further notice, to waive fees and
bear certain Fund expenses to the extent that total expenses (exclusive of
service and distribution fees, brokerage commissions, interest, taxes and
extraordinary expenses, if any) exceed 1.10% annually of the Fund's average net
assets.
OTHER: The Fund pays no compensation to its officers, all of whom are
employees of the Adviser.
The Fund's Trustees may participate in a deferred compensation plan which may be
terminated at any time. Obligations of the plan will be paid solely out of the
Fund's assets.
NOTE 3. PORTFOLIO INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT ACTIVITY: For the year ended October 31, 1997, purchases and sales of
investments, other than short-term obligations, were $88,274,695 and
$40,455,054, respectively, of which $8,155,306 and $1,958,814, 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 $22,385,042
Gross unrealized depreciation (2,176,408)
-----------
Net unrealized appreciation $20,208,634
===========
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. COMPOSITION OF NET ASSETS
- -------------------------------------------------------------------------------
At October 31, 1997, net assets consisted of:
Capital paid in $ 107,058
Undistributed net investment income 580
Accumulated net realized gain 1,312
Net unrealized appreciation (depreciation) on:
Investments 20,295
Foreign currency transactions (116)
----------
$ 129,129
=========
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each
period are as follows:
Year ended October 31
----------------------------------
1997
Class A Class B Class C (b)
-------- -------- --------
Net asset value -
Beginning of period $ 12.910 $ 12.890 $ 12.910
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a)(c) 0.404 0.342 0.342
Net realized and unrealized gain (c) 1.762 1.766 1.766
-------- -------- --------
Total from Investment
Operations 2.166 2.108 2.108
-------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.393) (0.335) (0.335)
From net realized gains (0.233) (0.233) (0.233)
-------- -------- --------
Total Distributions Declared
to Shareholders (0.626) (0.568) (0.568)
-------- -------- --------
Net asset value -
End of period $ 14.450 $ 14.430 $ 14.450
======== ======== ========
Total return (d)(e) 17.24% 16.77% 16.75%
======== ======== ========
RATIOS TO AVERAGE NET ASSETS
Expenses (f) 1.65% 2.10% 2.10%
Net investment income (f) 2.93% 2.48% 2.48%
Fees and expenses waived
or borne by the Adviser (f) 0.09% 0.09% 0.09%
Portfolio turnover 45% 45% 45%
Average commission rate $ 0.0260 $ 0.0260 $ 0.0260
Net assets at end
of period (000) $ 45,736 $ 77,005 $ 6,388
(a) Net of fees and expenses waived or
borne by the Adviser which amounted
to: $ 0.013 $ 0.013 $ 0.013
(b) Class D shares were redesignated Class C shares on July 1, 1997.
(c) Per share data was calculated using average shares outstanding
during the period.
(d) Total return at net asset value assuming no initial sales charge
or contingent deferred sales charge.
(e) Had the Adviser not waived or reimbursed a portion of expenses,
total return would have been reduced.
(f) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Selected data for a share of each class outstanding throughout each
period are as follows:
Year ended October 31
----------------------------------
1996
Class A Class B Class C(b)
-------- -------- --------
Net asset value -
Beginning of period $ 11.650 $ 11.640 $ 11.650
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a)(c) 0.369 0.314 0.314
Net realized and unrealized gain (c) 1.264 1.260 1.258
-------- -------- --------
Total from Investment
Operations 1.633 1.574 1.572
-------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.333) (0.284) (0.272)
From net realized gains (0.040) (0.040) (0.040)
-------- -------- --------
Total Distributions Declared
to Shareholders (0.373) (0.324) (0.312)
-------- -------- --------
Net asset value -
End of period $ 12.910 $ 12.890 $ 12.910
======== ======== ========
Total return (d)(e) 14.24% 13.71% 13.68%
======== ======== ========
RATIOS TO AVERAGE NET ASSETS
Expenses (f) 1.65% 2.10% 2.10%
Net investment income (f) 2.99% 2.54% 2.54%
Fees and expenses waived
or borne by the Adviser (f) 0.19% 0.19% 0.19%
Portfolio turnover 59% 59% 59%
Average commission rate(g) $ 0.0299 $ 0.0299 $ 0.0299
Net assets at end
of period (000) $ 25,580 $ 40,065 $ 3,554
(a) Net of fees and expenses waived or
borne by the Adviser which amounted
to: $ 0.023 $ 0.023 $ 0.023
(b) Class D shares were redesignated Class C shares on July 1, 1997.
(c) Per share data was calculated using average shares outstanding
during the period.
(d) Total return at net asset value assuming no initial sales charge or
contingent deferred sales charge.
(e) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(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) 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.
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Year ended October 31
-------------------------------------
1995
Class A Class B Class C(b)
-------- -------- --------
$ 9.910 $ 9.900 $ 9.900
-------- -------- --------
0.325 0.277 0.277
1.764 1.769 1.774
-------- -------- --------
2.089 2.046 2.051
-------- -------- --------
(0.349) (0.306) (0.301)
- - -
-------- -------- --------
(0.349) (0.306) (0.301)
-------- -------- --------
$ 11.650 $ 11.640 $ 11.650
======== ======== ========
21.47% 21.00% 21.04%
======== ======== ========
1.65% 2.10% 2.10%
3.05% 2.60% 2.60%
0.43% 0.43% 0.43%
49% 49% 49%
- - -
$ 16,346 $ 18,284 $ 4,164
$ 0.042 $ 0.042 $ 0.042
- -------------------------------------------------------------------------------
1997 State tax information (unaudited)
An average of 10% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
Approximately 28% of the Fund's distributions (14% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
- -------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Selected data for a share of each class outstanding throughout each period are
as follows:
Period ended October 31
----------------------------------
1994 (b)
Class A Class B Class C(c)
-------- -------- --------
Net asset value -
Beginning of period $ 10.000 $ 10.000 $ 10.000
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment
income (a)(d) 0.035 0.029 0.029
Net realized and
unrealized gain (loss) (d) (0.125) (0.129) (0.129)
-------- -------- --------
Total from Investment
Operations (0.090) (0.100) (0.100)
-------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment
income -- -- --
-------- -------- --------
Net asset value -
End of period $ 9.910 $ 9.900 $ 9.900
======== ======== ========
Total return (e)(f) (0.90)(g) (1.00)(g) (1.00)%(g)
======== ======== ========
RATIOS TO AVERAGE NET ASSETS
Expenses 1.65(h) 2.10(h) 2.10%(h)
Net investment income 3.01(h) 2.56(h) 2.56%(h)
Fees waived or borne
by the Adviser 0.35(h) 0.35(h) 0.35%(h)
Portfolio turnover 0% 0% 0%
Net assets at end
of period (000) $ 6,394 $ 6,332 $ 2,231
(a) Net of fees and expenses waived or borne by the Adviser which
amounted to: $ 0.004 $ 0.004 $ 0.004
(b) The Fund commenced investment operations on September 19, 1994.
(c) Class D shares were redesignated Class C shares on July 1, 1997.
(d) Per share data was calculated using average shares outstanding during the
period.
(e) Total return at net asset value assuming no initial sales charge or
contingent deferred sales charge.
(f) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(g) Not annualized.
(h) Annualized.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
T0 THE TRUSTEES OF COLONIAL TRUST III AND THE SHAREHOLDERS OF
COLONIAL STRATEGIC BALANCED FUND
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Colonial Strategic Balanced 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 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 October 31, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
December 10, 1997
<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.
<PAGE>
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Colonial Strategic Balanced Fund is:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Colonial Strategic Balanced 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 Strategic Balanced
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.
<PAGE>
TRUSTEES
ROBERT J. BIRNBAUM
Retired (formerly Special Counsel, Dechert, Price & Rhoads; President and Chief
Operating Officer, New York Stock Exchange, Inc.)
TOM BLEASDALE
Retired (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust Company)
LORA S. COLLINS
Attorney (formerly Attorney, Kramer, Levin, Naftalis, Nessen, Kamin & Frankel)
JAMES E. GRINNELL
Private Investor (formerly Senior Vice President-Operations, The Rockport
Company)
WILLIAM D. IRELAND, JR.
Retired (formerly Chairman of the Board, Bank of New England-Worcester)
RICHARD W. LOWRY
Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood
Corporation)
WILLIAM E. MAYER
Partner, Development Capital, L.L.C. (formerly Dean, College of Business and
Management, University of Maryland; Dean, Simon Graduate School of Business,
University of Rochester; Chairman and Chief Executive Officer, CS First Boston
Merchant Bank; and President and Chief Executive Officer, The First Boston
Corporation)
JAMES L. MOODY, JR.
Retired (formerly Chairman of the Board and Chief Executive Officer, Hannaford
Bros. Co.)
JOHN J. NEUHAUSER
Dean, Boston College School of Management
GEORGE L. SHINN
Financial Consultant (formerly Chairman, Chief Executive Officer and Consultant,
The First Boston Corporation)
ROBERT L. SULLIVAN
Retired Partner, Peat Marwick Main & Co. (formerly Management Consultant,
Saatchi and Saatchi Consulting Ltd. and Principal and International Practice
Director, Management Consulting, Peat Marwick Main & Co.)
SINCLAIR WEEKS, JR.
Chairman of the Board, Reed & Barton Corporation
[graphic omitted] LIBERT FINANCIAL INVESTMENTS, INC. (C)1997
Distributor for Colonial Funds, Stein Roe Advisor Funds and
Newport Funds
One Financial Center, Boston, MA 02111-2621
SB-02/382E-1097 M (12/97)
