<PAGE>
THE COLONIAL FUND ANNUAL REPORT
October 31, 1998
[graphic omitted]
----------------------------
Not FDIC May Lose Value
Insured No Bank Guarantee
----------------------------
<PAGE>
THE COLONIAL FUND HIGHLIGHTS
NOVEMBER 1, 1997 - OCTOBER 31, 1998
INVESTMENT OBJECTIVE: The Colonial Fund primarily seeks income and capital
growth and, secondarily, capital preservation.
THE FUND IS DESIGNED TO OFFER:
o Long-term investment returns
o Above-average value for your dollars
o Reasonable protection in down markets and broad diversification
o Quarterly dividend income
PORTFOLIO MANAGEMENT COMMENTARY: "During this period in which bonds performed
well, the Fund's balanced investment strategy helped reduce the negative effects
of an extremely volatile stock market. In addition, good stock selection and a
strong showing within the technology sector helped the Fund's equity holdings
turn in a solid performance."
- John Lennon, Gordon Johnson,
Leslie Finnemore and William Hill
THE COLONIAL FUND PERFORMANCE
- --------------------------------------------------------------------------------
CLASS A(1) CLASS B CLASS C CLASS Z
- --------------------------------------------------------------------------------
Inception dates 4/30/82 5/5/92 8/1/97 7/31/95
- --------------------------------------------------------------------------------
12-month distributions declared per share $1.700 $1.618 $1.633 $1.726
- --------------------------------------------------------------------------------
12-month total returns, assuming 9.08% 8.27% 8.21% 9.35%
reinvestment of all distributions
and no sales charge or contingent
deferred sales charge (CDSC)
- --------------------------------------------------------------------------------
Net asset values per share on 10/31/98 $10.38 $10.36 $10.35 $10.39
- --------------------------------------------------------------------------------
TOP FIVE EQUITY HOLDINGS(2) TOP FIVE EQUITY SECTORS(2),(3)
(as of 10/31/98) (as of 10/31/98)
- -------------------------------------------------------------------------------
1. Bristol-Myers Squibb Co........ 2.1% 1. Financial.................. 14.1%
2. Sun Microsystems, Inc.......... 1.9% 2. Technology ................ 9.2%
3. Compaq Computer Corp........... 1.8% 3. Consumer Cyclicals......... 8.1%
4. Merck & Co., Inc............... 1.6% 4. Health Care................ 7.4%
5. General Dynamics Corp.......... 1.6% 5. Capital Goods.............. 7.0%
(1) Date fund adopted current investment objective.
(2) 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.
(3) 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.
<PAGE>
PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
[Photo of Stephen E. Gibson]
In June 1998, Harold Cogger retired as president of The Colonial Fund. I would
like to take this opportunity to thank him for his guidance over the past few
years and wish him well. As the new president of the Fund, I present you with
your Fund's annual report for the 12-month period ended October 31, 1998.
Over the past 12 months, a variety of global events contributed to higher levels
of volatility in stock markets in the U.S. and around the world. Early in the
period, turmoil in Southeast Asia and subsequent concern over a global economic
slowdown created an uncertain investment environment. In a search for stability,
investors worldwide gravitated toward high-quality, U.S. dollar-based
investments, including U.S. Treasurys and blue-chip stocks. This "flight to
quality" helped push stock and bond values higher, while driving bond yields to
historic lows. As the Standard & Poor's 500 Index reached a record high in July
1998, financial and political turmoil in less developed markets, accompanied by
continued concerns about Asia, set the stage for a dramatic correction in U.S.
stock prices. In the final two months of the period, two interest rate cuts by
the Federal Reserve helped U.S. stocks and bonds end the period on a positive
note.
As we've seen over the past 12 months, a global environment of economic and
financial uncertainty tends to increase volatility in equity markets. For
long-term investors, The Colonial Fund's balanced strategy - combining stocks
and bonds - can be a prudent approach to investing, because diversifying across
asset classes can help dampen volatility and reduce overall risk.
The following report will provide you with more detailed information about the
Fund, its performance and the types of investments the Fund made during the
period. Thank you for choosing The Colonial Fund for your investment portfolio
and for the opportunity to serve your investment needs.
Respectfully,
/s/ Stephen E. Gibson
Stephen E. Gibson
President
December 11, 1998
As market and economic conditions change, there can be no assurance that the
trends described above and on the pages that follow will continue.
<PAGE>
PORTFOLIO MANAGEMENT REPORT
JOHN LENNON AND GORDON JOHNSON co-manage the equity portion of The Colonial Fund
and are vice presidents of Colonial Management Associates, Inc. LESLIE FINNEMORE
and WILLIAM HILL co-manage the fixed-income portion of the Fund and are vice
presidents of Colonial Management Associates, Inc. The following is a discussion
of the Fund's performance for the 12-month period ended October 31, 1998.
GLOBAL EVENTS HEAVILY INFLUENCED THE U.S. EQUITY MARKETS
Financial and economic turmoil in the developing regions of Southeast Asia,
Latin America and Russia had a ripple effect in the U.S., leading to uncertainty
about the sustainability of economic growth and creating volatility in our
financial markets. Fearing a global economic slowdown, equity investors
worldwide sought refuge in high-quality U.S. equities, pushing
large-capitalization stocks, and the market in general, to record highs in July
1998. The prolonged rally in the stock market was interrupted by a severe
correction after Russia experienced serious political and financial problems.
U.S. stock prices staged a dramatic recovery in the fall, however, as two
short-term rate cuts by the Federal Reserve helped to reduce concerns about a
U.S. recession.
FALLING RATES CREATED A FAVORABLE ENVIRONMENT FOR BONDS
Declining interest rates during the past 12 months led to a good year for bond
performance. Factors that helped boost bond prices during the period included
continued low inflation, moderating economic growth, the first federal budget
surplus in 29 years, an increase of foreign investment into 30-year U.S.
Treasury bonds, and a decline in bond supply. Also, as the economy showed signs
of slowing, expectations of the aforementioned Federal Reserve interest rate
cuts increased, which further helped bond performance.
EQUITY PERFORMANCE AFFECTED BY MID-CAP HOLDINGS
For the 12 months ended October 31, 1998, The Colonial Fund had a total return
of 9.08% for Class A shares, based on net asset value. The Fund's performance
was held back somewhat by its holdings in mid-capitalization stocks. In the
12-month period, mid-cap stocks, as measured by the S&P 400 Index, increased
6.7%, while large caps, as measured by the S&P 500 Index, increased 22%. We
continue to believe there is value in the mid-cap area, and have recently seen
some evidence that the market may be starting to recognize this value. For
example, in the final two months of the period, the S&P 400 increased 19.1%,
while the S&P 500 increased 15.1%.(1)
During the period, the sectors that made the largest contributions to the Fund's
performance were technology, health care, consumer cyclicals and utilities. With
the exception of health care, these sectors also had the biggest weighting
increases, due to a combination of stock selection and market appreciation. In
the technology sector in particular, the increase in market volatility created
attractive values in some fundamentally strong companies. We took advantage of
these opportunities by replacing some of our current technology holdings with
stocks having stronger growth characteristics and favorable valuations.
THE FUND'S HIGH-QUALITY BOND HOLDINGS REWARDED INVESTORS
Over the past 12 months, the Fund's focus on high-quality bonds rewarded
investors. The flight to quality increased demand for these issues, causing
their prices to surge during the period. U.S. Treasury bonds were the main
beneficiaries of this trend, although higher-rated corporate bonds and
mortgage-backed securities significantly outperformed lower quality issues.
Throughout the period, we made a number of adjustments designed to take
advantage of the strong bond market. First, we increased the portfolio's
duration. Duration is a measure of a bond's price sensitivity to interest rate
movements. The longer the duration of a bond or bond fund, the more sensitive it
will be to changes in interest rate movements. Our duration increase resulted in
above-average price gains when interest rates fell during the period. Secondly,
we shifted some money into corporate bonds and other asset-backed securities, as
the spread - or difference in yield - between these bonds and U.S. Treasury
bonds became very attractive.
A BALANCED FUND CAN HELP REDUCE VOLATILITY
Our portfolio breakdown at the end of the period was 63% in stocks and 36% in
bonds, and the balance in cash equivalents. In a balanced fund such as The
Colonial Fund, the fixed-income component can help to reduce the portfolio's
overall volatility while providing shareholders with an income stream. During
the period from the stock market's peak on July 17, 1998, to its low on October
9, 1998, the Fund performed well in comparison to the S&P 500 Index because of
its bond holdings. While past performance cannot predict future results, a
balanced fund, with its fixed-income component, can help cushion the impact of
an equity market correction.
(1) The Standard & Poor's 500 Index and the Standard & Poor's Midcap 400 Index
are broad-based, unmanaged indexes that track the performance of
large-capitalization and mid-capitalization stocks, respectively. Unlike
mutual funds, an index does not incur fees or charges. It is not possible
to invest directly in an index.
<PAGE>
THE COLONIAL FUND INVESTMENT PERFORMANCE VS.
STANDARD & POOR'S MID-CAP 400 INDEX
Change in Value of $10,000 from 10/31/88 - 10/31/98
CLASS A SHARES BASED ON NAV AND POP
- ------------------------------------------------------------------------------
S&P 400 TCF AT TCF AT
INDEX NAV POP
- -----------------------------------------------------------------------------
10/31/1988 10,000 10,000 10,000
11/30/1988 9,805 9,855 9,288
12/31/1988 10,201 10,037 9,460
01/31/1989 10,896 10,474 9,872
02/28/1989 10,931 10,470 9,868
03/31/1989 11,174 10,678 10,064
04/30/1989 11,779 10,996 10,364
05/31/1989 12,348 11,260 10,613
06/30/1989 12,292 11,273 10,625
07/31/1989 13,023 11,886 11,202
08/31/1989 13,485 12,142 11,444
09/30/1989 13,635 12,114 11,417
10/31/1989 13,061 11,716 11,042
11/30/1989 13,349 11,865 11,182
12/31/1989 13,826 12,045 11,352
01/31/1990 12,657 11,372 10,718
02/28/1990 13,112 11,507 10,845
03/31/1990 13,395 11,820 11,140
04/30/1990 12,875 11,459 10,800
05/31/1990 14,132 12,063 11,369
06/30/1990 14,190 12,024 11,332
07/31/1990 13,865 12,075 11,381
08/31/1990 12,428 11,149 10,508
09/30/1990 11,668 10,583 9,974
10/31/1990 11,311 10,406 9,807
11/30/1990 12,399 10,887 10,261
12/31/1990 13,119 11,141 10,501
01/31/1991 14,155 11,670 10,999
02/28/1991 15,426 12,389 11,677
03/31/1991 16,130 12,588 11,864
04/30/1991 16,126 12,695 11,965
05/31/1991 16,869 13,326 12,560
06/30/1991 16,012 12,802 12,066
07/31/1991 16,975 13,314 12,549
08/31/1991 17,593 13,603 12,821
09/30/1991 17,536 13,552 12,773
10/31/1991 18,489 13,656 12,871
11/30/1991 17,609 12,990 12,243
12/31/1991 19,691 14,052 13,244
01/31/1992 20,039 14,337 13,512
02/29/1992 20,358 14,669 13,825
03/31/1992 19,591 14,456 13,625
04/30/1992 19,357 14,889 14,033
05/31/1992 19,541 14,940 14,081
06/30/1992 18,983 14,737 13,890
07/31/1992 19,925 15,221 14,346
08/31/1992 19,449 14,731 13,884
09/30/1992 19,721 14,920 14,063
10/31/1992 20,193 14,974 14,113
11/30/1992 21,321 15,488 14,597
12/31/1992 22,037 15,873 14,961
01/31/1993 22,312 16,301 15,364
02/28/1993 22,000 16,653 15,695
03/31/1993 22,760 17,076 16,094
04/30/1993 22,164 16,729 15,767
05/31/1993 23,174 17,048 16,067
06/30/1993 23,290 17,154 16,168
07/31/1993 23,245 17,224 16,234
08/31/1993 24,205 18,049 17,012
09/30/1993 24,461 17,907 16,877
10/31/1993 24,541 18,000 16,965
11/30/1993 23,998 17,764 16,743
12/31/1993 25,112 18,169 17,124
01/31/1994 25,696 18,833 17,750
02/28/1994 25,331 18,523 17,458
03/31/1994 24,158 17,728 16,708
04/30/1994 24,338 17,928 16,897
05/31/1994 24,107 17,839 16,813
06/30/1994 23,277 17,475 16,470
07/31/1994 24,065 17,967 16,934
08/31/1994 25,326 18,481 17,419
09/30/1994 24,853 17,976 16,942
10/31/1994 25,125 18,134 17,091
11/30/1994 23,992 17,571 16,561
12/31/1994 24,212 17,787 16,764
01/31/1995 24,464 18,005 16,969
02/28/1995 25,747 18,707 17,632
03/31/1995 26,170 19,173 18,070
04/30/1995 26,720 19,734 18,599
05/31/1995 27,365 20,393 19,220
06/30/1995 28,479 20,907 19,704
07/31/1995 29,958 21,570 20,330
08/31/1995 30,519 21,816 20,561
09/30/1995 31,258 22,319 21,036
10/31/1995 30,454 22,072 20,803
11/30/1995 31,784 22,862 21,548
12/31/1995 31,705 22,874 21,559
01/31/1996 32,165 23,621 22,263
02/29/1996 33,257 23,941 22,564
03/31/1996 33,657 23,894 22,520
04/30/1996 34,685 24,349 22,949
05/31/1996 35,154 24,830 23,403
06/30/1996 34,626 24,577 23,164
07/31/1996 32,282 23,447 22,099
08/31/1996 34,146 24,066 22,682
09/30/1996 35,634 25,088 23,646
10/31/1996 35,738 25,628 24,155
11/30/1996 37,751 26,898 25,351
12/31/1996 37,793 26,709 25,173
01/31/1997 39,210 27,517 25,935
02/28/1997 38,889 27,603 26,016
03/31/1997 37,231 26,562 25,034
04/30/1997 38,197 27,603 26,016
05/31/1997 41,537 29,368 27,679
06/30/1997 42,720 30,706 28,941
07/31/1997 46,931 32,885 30,994
08/31/1997 46,874 32,043 30,200
09/30/1997 49,569 33,699 31,762
10/31/1997 47,412 32,505 30,636
11/30/1997 48,115 33,059 31,158
12/31/1997 49,982 33,666 31,730
01/31/1998 49,031 33,733 31,794
02/28/1998 53,093 35,645 33,595
03/31/1998 55,487 36,467 34,370
04/30/1998 56,500 36,838 34,720
05/31/1998 53,959 36,400 34,307
06/30/1998 54,297 37,011 34,883
07/31/1998 52,193 36,637 34,531
08/31/1998 42,477 33,038 31,138
09/30/1998 46,442 34,228 32,260
10/31/1998 50,593 35,457 33,419
VALUE OF A $10,000 INVESTMENT MADE ON 10/31/88
As of 10/31/98
- -------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
NAV POP NAV W/CDSC NAV W/CDSC NAV
- -------------------------------------------------------------------------------
$35,457 $33,419 $33,770 $33,770 $35,122 $35,122 $35,832
AVERAGE ANNUAL TOTAL RETURNS
As of 10/31/98
- --------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
INCEPTION 4/30/82(1) 5/5/92 8/1/97 7/31/95
NAV POP NAV W/CDSC NAV W/CDSC NAV
- --------------------------------------------------------------------------------
1 YEAR 9.08% 2.81% 8.27% 3.62% 8.21% 7.28% 9.35%
- --------------------------------------------------------------------------------
5 YEARS 14.52 13.17 13.65 13.41 14.30 14.30 14.76
- --------------------------------------------------------------------------------
10 YEARS 13.49 12.82 12.94 12.94 13.39 13.39 13.61
(1) Date fund adopted current investment objective.
Returns and value of an investment will vary, resulting in a gain or loss
on sale. All results shown assume reinvestment of distributions. Net asset
value (NAV) returns do not include sales charges or contingent deferred
sales charges (CDSC). Public offering price (POP) returns include the
maximum sales charge of 5.75% for Class A shares. The CDSC returns reflect
the maximum charges of 5% for one year, 2% for five years 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.
Class B, Class C and Class Z share (newer class shares) performance
information includes returns of the Fund's Class A shares (the oldest
existing fund class) for periods prior to the inception dates of the newer
class shares. These Class A share returns are not restated to reflect any
expense differential (e.g., Rule 12b-1 fees) between class A shares and the
newer class shares. Had the expense differential been reflected, the
returns for periods prior to the inception date of the newer class shares
would have been lower.
The Standard & Poor's Midcap 400 Index is an unmanaged index that tracks
the performance of middle capitalization U.S. stocks. Unlike mutual funds,
an index does not incur fees or charges. It is not possible to invest
directly in an index.
<PAGE>
INVESTMENT PORTFOLIO
OCTOBER 31, 1998 (IN THOUSANDS)
COMMON STOCKS - 63.0% COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------
CONSTRUCTION - 1.0%
Building Construction - 0.7%
Centex Corp. 172 $ 5,769
Koninklijke Volker Stevin CVA Ne 297 5,883
-----------
11,652
-----------
HEAVY CONSTRUCTION - NON BUILDING CONSTRUCTION - 0.3
Grupo Acciona SA Sp 20 5,174
-----------
- ------------------------------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 14.3%
DEPOSITORY INSTITUTIONS - 3.4%
AmSouth Bancorporation 15 601
Banco de Santander SA Sp 110 2,020
Bank of Montreal Ca 398 16,280
Canadian Imperial Bank Ca 547 10,857
First Union Corp. 67 3,879
Greenpoint Financial Corp. 115 3,767
M & T Bank Corporation 4 1,994
National Australia Bank Ltd. Au 1,000 13,228
Toronto Dominion Bank Ca 50 1,487
-----------
54,113
-----------
HOLDING COMPANIES - 1.5%
Fortis Amev NV Ne 247 16,018
Sofina SA Be 177 8,678
-----------
24,696
-----------
INSURANCE CARRIERS - 5.3%
Allstate Corp. 463 19,938
CIGNA Corp. 344 25,120
Citigroup 269 12,643
Old Republic International Corp. 293 5,562
Orion Capital Corp. 29 983
St. Paul Cos., Inc. 190 6,294
Sunamerica, Inc. 176 12,415
United Healthcare Corp. 75 3,267
-----------
86,222
-----------
NONDEPOSITORY CREDIT INSTITUTIONS - 0.4%
Associates First Capital Corp. 48 3,418
Metris Companies, Inc. 96 3,140
-----------
6,558
-----------
SECURITY BROKERS & DEALERS - 3.7%
A.G. Edwards, Inc. 648 22,399
Bear Stearns Cos, Inc. 89 3,193
Merrill Lynch & Co., Inc. 366 21,709
Paine Webber Group, Inc. 366 12,248
-----------
59,549
-----------
- ------------------------------------------------------------------------------
MANUFACTURING - 26.1%
APPAREL - 0.3%
VF Corp. 125 5,227
-----------
CHEMICALS & ALLIED PRODUCTS - 5.6%
Air Products & Chemicals, Inc. 100 3,775
Akzo Nobel NV ADR Ne 127 5,008
Allergan, Inc. 79 4,945
Bristol-Myers Squibb Co. 310 34,274
International Specialty Products, Inc. (a) 210 2,822
Johnson & Johnson 71 5,787
Merck & Co., Inc. 190 25,697
Norsk Hydro ADR No 30 1,286
Pfizer, Inc. 64 6,911
-----------
90,505
-----------
ELECTRONIC COMPONENTS - 0.3%
SCI Systems, Inc. (a) 116 4,582
-----------
FABRICATED METAL - 0.2%
Danaher Corp. 74 2,951
-----------
FOOD & KINDRED PRODUCTS - 0.4%
Interstate Bakeries Corp. 264 6,619
-----------
FURNITURE & FIXTURES - 0.9%
Herman Miller, Inc. 200 4,412
Masco Corp. 340 9,584
-----------
13,996
-----------
HOUSEHOLD APPLIANCES - 0.4%
Maytag Corp. 115 5,685
-----------
MACHINERY & COMPUTER EQUIPMENT - 7.6%
Apple Computer, Inc. 200 7,425
Black & Decker Corp. 127 6,569
Bucher Holding Sz 6 5,822
Caterpillar, Inc. 210 9,450
Compaq Computer Corp. 900 28,463
Lexmark International Group, Inc. (a) 142 9,931
Storage Technology Corp. (a) 115 3,845
Sun Microsystems, Inc. (a) 532 30,989
Timken Co. 179 3,188
Unisys Corp. (a) 390 10,384
Varco International, Inc. (a) 480 5,190
Western Digital Corp. (a) 164 1,722
-----------
122,978
-----------
MEASURING & ANALYZING INSTRUMENTS - 0.3%
Biomet, Inc. 55 1,867
Tektronix, Inc. 179 3,204
-----------
5,071
-----------
PETROLEUM REFINING - 2.0%
British Petroleum Co. PLC, ADR UK 26 2,305
Exxon Corp. 174 12,397
Mobil Corp. 107 8,129
Phillips Petroleum Co. 235 10,168
-----------
32,999
-----------
PRIMARY METAL - 0.1%
Bethlehem Steel Corp. (a) 150 1,350
-----------
PRIMARY SMELTING - 0.7%
Phelps Dodge Corp. 191 10,989
-----------
PRINTING & PUBLISHING - 0.5%
Harte-Hanks Communication 173 4,211
Meredith Corp. 123 4,562
-----------
8,773
-----------
RUBBER & PLASTIC - 1.0%
Goodyear Tire & Rubber Co. 100 5,377
Premark International, Inc. 215 6,813
Wynn's International, Inc. 200 3,762
-----------
15,952
-----------
TOBACCO PRODUCTS - 0.9%
Gallaher Group PLC ADR UK 553 15,075
-----------
TRANSPORTATION EQUIPMENT - 4.9%
Cordant Technologies, Inc. 142 5,778
Ford Motor Co. 185 10,036
General Dynamics Corp. 428 25,356
General Motors Corp. 115 7,252
Paccar, Inc. 39 1,719
Peugeot SA Fr 20 3,343
Textron, Inc. 320 23,800
Toyota Motor Corp. ADR Ja 27 1,309
-----------
78,593
-----------
- ------------------------------------------------------------------------------
MINING & ENERGY- 0.4%
METAL MINING - 0.1%
Cleveland-Cliffs, Inc. 27 1,064
-----------
OIL & GAS EXTRACTION - 0.3%
Helmerich & Payne, Inc. 213 5,067
-----------
- ------------------------------------------------------------------------------
RETAIL TRADE - 5.7%
FOOD STORES - 1.0%
Albertson's, Inc. 135 7,501
Kroger Corp. (a) 163 9,046
-----------
16,547
-----------
GENERAL MERCHANDISE STORES - 2.6%
Family Dollar Stores, Inc. 450 8,156
Kmart Corp. 715 10,100
Sears, Roebuck & Co. 511 22,945
-----------
41,201
-----------
HOME FURNISHINGS & EQUIPMENT - 0.8%
CompUSA, Inc. (a) 166 2,309
Pier 1 Imports, Inc. 381 3,522
Tandy Corp. 150 7,434
-----------
13,265
-----------
MISCELLANEOUS RETAIL - 0.9%
Fingerhut Companies, Inc. 300 2,531
Office Depot, Inc. (a) 500 12,500
-----------
15,031
-----------
RESTAURANTS - 0.4%
Brinker International, Inc. (a) 300 7,256
-----------
- ------------------------------------------------------------------------------
SERVICES - 5.8%
BUSINESS SERVICES - 0.8%
Omnicom Group, Inc. 251 12,399
-----------
COMPUTER RELATED SERVICES - 0.6%
Cadence Design Systems, Inc. (a) 450 9,619
-----------
COMPUTER SOFTWARE - 2.1%
BMC Software, Inc. (a) 470 22,589
Sterling Software, Inc. (a) 250 6,547
Symantec Corp. (a) 345 5,520
-----------
34,656
-----------
ENGINEERING, ACCOUNTING, RESEARCH & MANAGEMENT - 0.8%
Dun & Bradstreet Corp. 163 4,625
EG&G, Inc. 200 5,025
International-Muller NV Ne 146 3,510
-----------
13,160
-----------
HEALTH SERVICES - 1.5%
Healthsouth Rehabilitation Corp. (a) 880 10,670
Lincare Holdings, Inc. (a) 226 9,018
Universal Health Services, Inc., Class B (a) 83 4,259
-----------
23,947
-----------
- ------------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 8.3%
AIR TRANSPORTATION - 1.3%
AMR Corp. (a) 150 10,050
Delta Air Lines, Inc. 105 11,084
-----------
21,134
-----------
ELECTRIC, GAS & SANITARY SERVICES - 0.1%
Sempra Energy 44 1,147
-----------
ELECTRIC SERVICES - 2.3%
DQE, Inc. 79 3,100
Edison International 300 7,912
Energy East Corporation 180 8,797
Nipsco Industries, Inc. 178 5,329
Public Service Enterprise Group, Inc. 240 9,128
Union Electrica Fenosa SA Sp 177 2,875
-----------
37,141
-----------
GAS SERVICES - 1.2%
Gas y Electricidad SA - Series 2 Sp 224 19,104
-----------
SANITARY SERVICES - 1.8%
Severn Trent Water PLC UK 382 6,656
United Utilities PLC UK 1,096 16,039
Yorkshire Water PLC UK 742 6,371
-----------
29,066
-----------
TELECOMMUNICATIONS - 1.6%
AT&T Corp. 190 $ 11,827
Bell Atlantic Corp. 160 8,500
US West, Inc. 101 5,795
-----------
26,122
-----------
- ------------------------------------------------------------------------------
WHOLESALE TRADE - 1.4%
DURABLE GOODS - 0.9%
Beers NV Ne 213 12,870
Pioneer Standard Electronics, Inc. 199 1,777
-----------
14,647
-----------
NONDURABLE GOODS - 0.5%
Bergen Brunswig Corp., Class A 177 8,615
-----------
TOTAL COMMON STOCKS (cost of $663,740) 1,019,497
-----------
MATURITIES
BONDS & NOTES - 36.0% COUPON FROM/TO PAR
- ------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS - 28.5%
GOVERNMENT AGENCIES - 18.7%
Federal Home Loan Mortgage Corp.,
6.000% 2009-2028(b) $ 46,787 46,970
-----------
Federal National Mortgage Association:
6.000% 2008-2009 51,302 51,510
6.500% 2008-2023 103,217 104,415
7.000% 2009 35,048 35,771
-----------
191,696
-----------
Government National Mortgage Association:
6.500% 2024 13,360 13,544
7.000% 2023-2026 48,379 49,543
-----------
63,087
-----------
Government Obligations - 9.8%
U.S. Treasury Bond:
7.875% 2021 24,300 32,015
9.875% 2015(c) 37,260 56,460
-----------
88,475
-----------
U.S. Treasury Note:
5.625% 2008 17,200 18,541
6.125% 2001 22,646 23,796
-----------
42,337
-----------
U.S. Treasury Note/Bond,
5.500% 2003 26,386 27,599
-----------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (cost of $444,584) $ 460,164
-----------
- ------------------------------------------------------------------------------
NON-AGENCY MORTGAGE BACKED & ASSET
BACKED SECURITIES - 3.0%
NON-AGENCY MORTGAGE BACKED - 1.1%
Headlands Mortgage Securities, Inc.,
Series 1997-6 B2,
7.000% 02/25/28 3,350 3,280
PNC Mortgage Securities Corp.,
Series 1998-2 CB2,
7.000% 03/25/28 3,483 3,409
Residential Accredit Loans, Inc.,
Series 1997-QS11:
Class M1,
7.000% 10/25/12 2,959 3,025
Class M2,
7.000% 10/25/12 864 872
Class M3,
7.000% 10/25/12 408 390
Series 1997-QS13, Class M2,
7.250% 12/25/27 4,393 4,476
Residential Funding Mortgage Sec. 1,
Series 1998-S9 1M1,
6.500% 04/25/13 3,043 3,011
-----------
18,463
-----------
ASSET BACKED SECURITIES - 1.9%
Aames Mortgage Trust,
Series 1996-C A1D,
7.870% 09/15/25 2,145 2,232
Delta Funding Home Equity Loan Trust:
Series 1996-2 A5,
8.010% 10/25/27 5,000 5,286
Series 1997-4, Class M1F,
6.970% 01/25/28 5,000 4,947
GT 1995-6 B1,
7.700% 09/15/26 4,155 4,184
Provident Bank Home Equity Trust,
Series 1996-1 A1,
7.600% 10/25/12 3,601 3,717
UCFC Home Equity Loan Corp.,
Series 1996-B1 A6,
7.975% 02/15/22 4,500 4,696
UCFC Home Equity Loan Corp.,
Series 1994-B2, Class A7,
8.025% 08/10/25 5,152 5,350
-----------
30,412
-----------
TOTAL NON-AGENCY MORTGAGE BACKED & ASSET
BACKED SECURITIES (cost of $49,056) 48,875
-----------
CORPORATE FIXED INCOME BONDS & NOTES - 4.5%
- -------------------------------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 1.6%
DEPOSITORY INSTITUTIONS - 0.8%
Bank One Texas,
6.250% 02/15/08 1,000 1,024
Comerica Bank,
7.875% 09/15/26 1,000 1,102
Fleet Financial Group,
6.700% 07/15/28 1,000 977
Key Bank,
7.125% 08/15/06 2,000 2,149
NationsBank Corp.,
6.875% 02/15/05 2,000 2,100
Norwest Corp.,
6.650% 10/15/23 1,000 978
PNC Funding Corp.,
6.875% 07/15/07 1,000 1,064
Signet Bank,
7.800% 09/15/06 2,000 2,227
Wachovia Corp.,
6.250% 08/04/08 1,000 1,039
-----------
12,660
-----------
INSURANCE AGENTS & BROKERS - 0.1%
GE Global Insurance Holdings Corp.,
7.000% 02/15/26 1,000 1,065
-----------
INSURANCE CARRIERS - 0.1%
Metropolitan Life Insurance Co.,
6.300% 11/01/03 2,000 2,064
-----------
NONDEPOSITORY CREDIT INSURANCE - 0.3%
Associates Corp. of North America,
6.875% 11/15/08 1,000 1,049
General Motors Acceptance Corp.,
6.125% 01/22/08 2,000 2,036
Household Finance Corp.:
6.400% 06/17/08 1,000 1,006
7.625% 01/15/03 1,000 1,069
-----------
5,160
-----------
SECURITY BROKERS & DEALERS - 0.3%
Bear Stearns Cos., Inc.,
6.500% 08/01/02 1,000 1,017
Merrill Lynch & Co., Inc.,
6.000% 02/12/03 1,000 1,013
Morgan Stanley, Dean Witter,
Discover and Co.,
8.100% 06/24/02 1,000 1,076
Salomon, Inc.,
7.300% 05/15/02 1,000 1,041
-----------
4,147
-----------
- ------------------------------------------------------------------------------
MANUFACTURING - 0.6%
CHEMICALS & ALLIED PRODUCTS - 0.1%
Dow Chemical,
7.375% 03/01/23 1,000 1,051
-----------
FABRICATED METAL - 0.1%
Masco Corp.,
6.625% 04/15/18 1,000 957
-----------
FOOD & KINDRED PRODUCTS - 0.1%
Archer Daniels Midland,
6.750% 12/15/27 1,000 1,008
Coca-Cola Enterprises,
6.950% 11/15/26 1,000 1,029
-----------
2,037
-----------
MISCELLANEOUS MANUFACTURING - 0.1%
Raytheon Co.,
6.750% 08/15/07 2,000 2,113
-----------
PETROLEUM REFINING - 0.1%
Phillips Petroleum Co.,
6.650% 07/15/18 1,000 996
-----------
TRANSPORTATION EQUIPMENT - 0.1%
Ford Motor Co.,
7.125% 11/15/25 2,000 2,076
-----------
- ------------------------------------------------------------------------------
RETAIL TRADE - 0.2%
GENERAL MERCHANDISE STORES - 0.1%
Dillard Dept Stores, Inc.,
6.625% 01/15/18 1,000 937
Sears Roebuck Acceptance Notes,
6.750% 01/15/28 1,000 977
-----------
1,914
-----------
MISCELLANEOUS RETAIL - 0.1%
Dayton Hudson Corp.,
7.250% 09/01/04 2,000 2,167
-----------
- ------------------------------------------------------------------------------
SERVICES - 0.3%
BUSINESS SERVICES
Federal Express,
7.500% 01/15/18 4,430 4,994
-----------
- ------------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION, ELECTRIC
GAS & SANITARY SERVICES - 1.8%
AIR TRANSPORTATION - 0.1%
Lockheed Martin Corp.,
7.250% 05/15/06 2,000 2,183
-----------
BROADCASTING - 0.1%
News America Holdings,
7.375% 10/17/08 2,000 2,095
-----------
CABLE - 0.3%
Comcast Cable Communications, Inc.,
8.375% 05/01/07 1,000 1,166
Continental Cablevision, Inc.,
8.875% 09/15/05 2,000 2,290
TCI Communications, Inc.,
8.650% 09/15/04 2,000 2,316
-----------
5,772
-----------
COMMUNICATIONS - 0.1%
US West Cap Funding, Inc.,
6.375% 07/15/08 1,000 1,056
-----------
ELECTRIC SERVICES - 0.5%
Arizona Public Service Co.,
6.250% 01/15/05 1,000 1,023
Carolina Power & Light,
6.800% 08/15/07 2,000 2,162
Florida Power & Light,
6.000% 06/01/08 1,000 1,036
Houston Lighting & Power Co.,
6.500% 04/21/03 2,000 2,105
New Century Energies,
7.125% 06/01/06 1,000 1,083
-----------
7,409
-----------
GAS SERVICES - 0.2%
Enron Corp.,
6.750% 07/01/05 1,000 1,035
Panhandle Eastern Corp.,
7.250% 05/15/05 2,000 2,186
Sonat, Inc.,
6.875% 06/01/05 1,000 1,056
-----------
4,277
-----------
RAILROAD - 0.1%
Norfolk Southern Corp.,
7.800% 05/15/27 1,000 1,127
-----------
TELECOMMUNICATIONS - 0.4%
Bellsouth Telecommunication,
6.375% 06/01/28 1,000 1,017
GTE Corp.,
6.840% 04/15/18 2,000 2,067
MCI Worldcom, Inc.,
6.950% 08/15/28 1,000 1,023
Pacific Bell,
6.875% 08/15/06 2,000 2,157
-----------
6,264
-----------
TOTAL CORPORATE FIXED INCOME
BONDS & NOTES (cost of $72,250) 73,584
-----------
TOTAL BONDS & NOTES (cost of $565,890) 582,623
-----------
TOTAL INVESTMENTS - 99.0% (cost of $1,229,630) (d) 1,602,120
-----------
- ------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 3.1% PAR VALUE
- ------------------------------------------------------------------------------
Repurchase agreement with ABN AMRO Chicago
Corp., dated 10/30/98, due 11/02/98 at 5.380%,
collateralized by U.S. Treasury notes
with various maturities to 2021, market value
$50,558, (repurchase proceeds $49,960) $ 49,938 $ 49,938
----------
OTHER ASSETS & LIABILITIES, NET - (2.1)% (34,207)
- -----------------------------------------------------------------------------
NET ASSETS - 100% $1,617,851
----------
NOTES TO INVESTMENT PORTFOLIO:
- ------------------------------------------------------------------------------
(a) Non-income producing.
(b) 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.
(c) These securities, or a portion thereof, with a total market value of $28,033
are being used to collateralize the delayed delivery purchase indicated in
note (b) above.
(d) Cost for federal income tax purposes is $1,235,238.
Summary of Securities
by Country Country Value % of Total
- ------------------------------------------------------------------------------
United States $ 1,420,922 88.7
United Kingdom UK 46,446 2.9
Netherlands Ne 43,289 2.7
Spain Sp 29,173 1.8
Canada Ca 28,624 1.8
Australia Au 13,228 0.8
Belgium Be 8,678 0.5
Switzerland Sz 5,822 0.4
France Fr 3,343 0.2
Japan Ja 1,309 0.1
Norway No 1,286 0.1
----------- ------
$ 1,602,120 100.0%
----------- ------
Certain securities are listed by country of underlying exposure but may
trade predominantly on other exchanges.
Acronym Name
-------------- ----------
ADR American Depositary Receipt
See notes to financial statements.
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
OCTOBER 31, 1998
(in thousands except for per share amounts and footnotes)
ASSETS
Investments at value (cost $1,229,630) $1,602,120
Short-term obligations 49,938
----------
1,652,058
Cash held in foreign banks (cost $315) $ 337
Receivable for:
Investments sold 44,170
Interest 6,418
Fund shares sold 2,182
Dividends 2,108
Foreign tax reclaims 214
Other 30 55,459
------- ----------
Total Assets 1,707,517
LIABILITIES
Payable for:
Investments purchased 87,614
Fund shares repurchased 1,878
Accrued:
Deferred Trustees fees 16
Other 158
-------
Total Liabilities 89,666
----------
NET ASSETS $1,617,851
----------
Net asset value & redemption price per share -
Class A ($936,639/90,239) $ 10.38(a)
----------
Maximum offering price per share - Class A
($10.37/0.9425) $ 11.01(b)
----------
Net asset value & offering price per share -
Class B ($653,476/63,089) $ 10.36(a)
----------
Net asset value & offering price per share -
Class C ($5,501/531) $ 10.35(a)
----------
Net asset value, offering and redemption price
per share - Class Z ($22,235/2,140) $ 10.39
----------
COMPOSITION OF NET ASSETS
Capital paid in $1,170,122
Undistributed net investment income 369
Accumulated net realized gain 74,839
Net unrealized appreciation on:
Investments 372,490
Foreign currency transactions 31
----------
$1,617,851
----------
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $50,000 or more the offering price is reduced.
See notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
(in thousands)
INVESTMENT INCOME
Dividends $ 17,773
Interest 36,087
----------
Total investment income (net of nonrebatable
foreign taxes withheld at source which
amounted to $821) 53,860
EXPENSES
Management fee $ 8,555
Service fee - Class A, B, C 3,871
Distribution fee - Class B 4,720
Distribution fee - Class C 24
Transfer agent 4,521
Bookkeeping fee 512
Custodian fee 90
Registration fee 82
Trustees fee 69
Audit fee 40
Reports to shareholders 42
Legal fee 10
Other 191 22,727
------- ----------
Net Investment Income 31,133
----------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain (loss) on:
Investments 75,074
Foreign currency transactions (37)
-------
Net Realized Gain 75,037
Change in net unrealized appreciation during
the period on:
Investments 23,347
Foreign currency transactions 50
-------
Net Unrealized Appreciation 23,397
----------
Net Gain 98,434
----------
Increase in Net Assets from Operations $ 129,567
----------
See notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
(in thousands) Year ended October 31
----------------------------
INCREASE (DECREASE) IN NET ASSETS 1998 1997 (a)
Operations:
Net investment income $ 31,133 $ 17,677
Net realized gain 75,037 195,193
Net unrealized appreciation 23,397 107,060
---------- ---------
Net Increase from Operations 129,567 319,930
Distributions:
From net investment income - Class A (22,321) (12,073)
From net realized gains - Class A (118,280) (45,097)
From net investment income - Class B (9,895) (3,556)
From net realized gains - Class B (75,040) (27,199)
From net investment income - Class C (55) (1)
From net realized gains - Class C (96) -
From net investment income - Class Z (497) (250)
From net realized gains - Class Z (2,159) (810)
---------- ---------
(98,776) 230,944
---------- ---------
Fund Share Transactions:
Receipts for shares sold - Class A 95,978 164,595
Value of distributions reinvested - Class A 127,684 51,722
Cost of shares repurchased - Class A (142,405) (203,099)
---------- ---------
81,257 13,218
---------- ---------
Receipts for shares sold - Class B 133,497 90,821
Value of distributions reinvested - Class B 80,373 29,053
Cost of shares repurchased - Class B (99,137) (83,019)
---------- ---------
114,733 36,855
---------- ---------
Receipts for shares sold - Class C 5,810 701
Value of distributions reinvested - Class C 148 1
Cost of shares repurchased - Class C (939) (15)
---------- ---------
5,019 687
---------- ---------
Receipts for shares sold - Class Z 5,265 326
Value of distributions reinvested - Class Z 2,656 1,060
Cost of shares repurchased - Class Z (632) (1,193)
---------- ---------
7,289 193
---------- ---------
Net Increase from Fund Share
Transactions 208,298 50,953
---------- ---------
Total Increase 109,522 281,897
NET ASSETS
Beginning of period 1,508,329 1,226,432
---------- ---------
End of period (including undistributed net
investment income of $369 and $3,371,
respectively) $1,617,851 1,508,329
---------- ---------
(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.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS - CONT.
(in thousands) Year ended October 31
---------------------------
NUMBER OF FUND SHARES 1998 1997 (a)
Sold - Class A 8,982 16,206
Issued for distributions reinvested - Class A 12,752 5,631
Repurchased - Class A (13,405) (19,943)
---------- ---------
8,329 1,894
---------- ---------
Sold - Class B 12,597 8,949
Issued for distributions reinvested - Class B 8,054 3,199
Repurchased - Class B (9,418) (8,150)
---------- ---------
11,233 3,998
---------- ---------
Sold - Class C 546 62
Issued for distributions reinvested - Class C 14 (b)
Repurchased - Class C (90) (1)
---------- ---------
470 61
---------- ---------
Sold - Class Z 489 34
Issued for distributions reinvested - Class Z 265 115
Repurchased - Class Z (61) (129)
---------- ---------
693 20
---------- ---------
(a) Class C shares were initially offered on August 1, 1997.
(b) Rounds to less than one.
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
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 and a
1.00% contingent deferred sales charge on redemptions made within eighteen
months on an original purchase of $1 million to $5 million. Class B shares are
subject to an annual distribution fee and a contingent deferred sales charge .
Class B shares will convert to Class A shares when they have been outstanding
approximately eight years. Class C shares are subject to a contingent deferred
sales charge on redemptions made within one year after purchase and an annual
distribution fee. 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 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 service fees and 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, Class A, Class B and Class C net investment income per
share data reflects the service fee per share 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 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.
DISTRIBUTION 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 the fluctuation in exchange rates on
gains (losses) between trade and settlement dates on securities transactions,
gains (losses) arising from the disposition of foreign currency and currency
gains (losses) between the accrual and payment dates on dividends and interest
income and foreign withholding taxes.
The Fund does not distinguish that portion of gains (losses) on investments
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 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%
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: Liberty Funds Services, Inc., formerly Colonial Investors
Service Center, Inc., (the Transfer Agent), an affiliate of the Advisor,
provides shareholder services for a monthly fee equal to 0.236% 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 was 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 Funds
Distributor, Inc., formerly Liberty Financial Investments, Inc., (the
Distributor), a subsidiary of the Adviser, is the Fund's principle underwriter.
For the year ended October 31, 1998, the Fund has been advised that the
Distributor retained net underwriting discounts of $188,546 on sales of the
Fund's Class A shares and received contingent deferred sales charges (CDSC) of
$887, $829,264 and $5,150 on Class A, 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.
NOTE 3. PORTFOLIO INFORMATION
- -----------------------------------------------------------------------------
INVESTMENT ACTIVITY: During the year ended October 31, 1998, purchases and sales
of investments, other than short-term obligations, were $1,153,800,676 and
$1,073,125,567, of which $930,626,842 and $774,644,974, respectively, were U.S.
government securities.
Unrealized appreciation (depreciation) at October 31, 1998, based on cost
of investments for federal income tax purposes was:
Gross unrealized appreciation $407,489,373
Gross unrealized depreciation (40,607,149)
------------
Net unrealized appreciation $366,882,224
------------
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 33 1/3% of its net assets under a line of credit for
temporary or emergency purposes. Any borrowings bear interest at one of the
following options determined at the inception of the loan: (1) federal funds
rate plus 1/2 of 1%, (2) the lending bank's base rate or (3) IBOR offshore loan
rate plus 1/2 of 1%. There were no borrowings under the line of credit during
the year ended October 31, 1998.
NOTE 5. RESULTS OF SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED)
- -----------------------------------------------------------------------------
On October 30, 1998, a Special Meeting of Shareholders of the Fund was held to
elect a Board of Trustees, amend fundamental investment policies regarding
borrowing and lending, reclassify the fundamental investment policy regarding
the purchase of illiquid securities, and to approve policies for a master
fund/feeder fund structure. On August 21, 1998, the record date for the Meeting,
the Fund had outstanding 156,128,372 shares of beneficial interest. The votes
cast at the Meeting were as follows:
Authority
For Withheld
---------- ----------
To Elect a Board of Trustees.
Robert J. Birnbaum 85,931,180 3,820,866
Tom Bleasedale 85,963,534 3,788,532
John Carberry 86,034,718 3,717,348
Lora S. Collins 85,975,478 3,776,588
James E. Grinnell 85,968,161 3,783,905
Richard W. Lowry 86,040,507 3,711,559
Salvatore Macera 85,950,416 3,801,650
William E. Mayer 86,033,453 3,718,613
James L. Moody, Jr. 85,975,478 3,776,588
John J. Neuhauser 86,040,851 3,711,215
Thomas E. Stitzel 86,004,876 3,747,190
Robert L. Sullivan 85,946,483 3,805,583
Anne-Lee Verville 86,003,450 3,748,616
To amend fundamental investment policies regarding borrowing and lending.
For Against Abstain
---------- ------- -------
65,628,453 2,529,193 5,117,642
To reclassify the fundamental investment policy regarding the purchase of
illiquid securities.
For Against Abstain
---------- ------- -------
65,628,453 2,529,193 5,117,642
To approve policies for a master fund/feeder structure.
For Against Abstain
---------- ------- -------
64,971,185 2,698,870 5,605,234
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
Year ended October 31
--------------------------------------------------------
1998
Class A Class B Class C Class Z
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 11.160 $ 11.140 $ 11.150 $ 11.170
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.235 0.156 0.157 0.261
Net realized and
unrealized gain (loss) 0.685 0.682 0.676 0.685
-------- -------- -------- --------
Total from Investment
Operations 0.920 0.838 0.833 0.946
-------- -------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.250) (0.168) (0.183) (0.276)
From net
realized gains (1.450) (1.450) (1.450) (1.450)
-------- -------- -------- --------
Total Distributions
Declared to Shareholders (1.700) (1.618) (1.633) (1.726)
-------- -------- -------- --------
Net asset value -
End of period $ 10.380 $ 10.360 $ 10.350 $ 10.390
-------- -------- -------- --------
Total return (b) 9.08% 8.27% 8.21% 9.35%
-------- -------- -------- --------
RATIOS TO AVERAGE NET ASSETS
Expenses (c) 1.12% 1.87% 1.87% 0.88%
Net investment income (c) 2.22% 1.47% 1.47% 2.46%
Portfolio turnover 69% 69% 69% 69%
Net assets at end
of period (000) $936,639 $653,476 $ 5,501 $ 22,235
(a) Per share data was calculated using average shares outstanding during the period.
(b) Total return at net asset value assuming all distributions reinvested and no initial sales
charge or contingent deferred sales charge.
(c) The benefits derived from custody credits and directed brokerage arrangements had no impact.
</TABLE>
<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
-------------------------------------------------------------
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) 2.225 2.217 (0.345)(d) 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 $ 11.160 $ 11.140 $ 11.150 $ 11.170
-------- -------- -------- --------
Total return (e) 26.83% 25.81% (1.30)%(f) 27.10%
-------- -------- -------- --------
RATIOS TO AVERAGE NET ASSETS
Expenses (g) 1.14% 1.89% 1.86% (h) 0.90%
Net investment
income (g) 1.56% 0.81% 1.01% (h) 1.80%
Portfolio turnover 71% 71% 71% 71%
Net assets at end
of period (000) $913,956 $577,539 $676 $16,158
(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) Class Z shares were initially offered on July 31, 1995. Per share amounts reflect activity
from that date.
(d) 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.
</TABLE>
<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 1995
Class A Class B Class Z Class A Class B Class Z(c)
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
$ 8.940 $ 8.930 $ 8.940 $ 8.060 $ 8.050 $ 8.780
-------- -------- ------- -------- -------- -------
0.165 0.097 0.186 0.200 0.137 0.041
1.183 1.182 1.192 1.393 1.395 0.167
-------- -------- ------- -------- -------- -------
1.348 1.279 1.378 1.593 1.532 0.208
-------- -------- ------- -------- -------- -------
(0.162) (0.093) (0.182) (0.212) (0.151) (0.048)
(0.636) (0.636) (0.636) (0.501) (0.501) -
-------- -------- ------- -------- -------- -------
(0.798) (0.729) (0.818) (0.713) (0.652) (0.048)
-------- -------- ------- -------- -------- -------
$ 9.490 $ 9.480 $ 9.500 $ 8.940 $ 8.930 $ 8.940
-------- -------- ------- -------- -------- -------
16.11% 15.27% 16.50% 21.72% 20.84% 2.02%(f)
-------- -------- ------- -------- -------- -------
1.15% 1.90% 0.91% 1.16% 1.93% 0.93%(h)
1.82% 1.07% 2.06% 2.43% 1.66% 2.66%(h)
38% 38% 38% 66% 66% 66%
$759,409 $453,468 $13,555 $667,611 $353,831 $ 3,659
(e) Total return at net asset value assuming all distributions reinvested and no initial sales
charge or contingent deferred sales charge.
(f) Not annualized.
(g) The benefits derived from custody credits and directed brokerage arrangements had no impact.
Prior years' ratios are net of benefits received, if any.
(h) Annualized.
</TABLE>
- -------------------------------------------------------------------------------
1998 Federal Tax information (unaudited)(continued on following page) An average
of 8% of the Fund's investments as of the end of each quarter were in direct
obligation of the U.S. Treasury.
Approximately 17% of the Fund's distributions (13% of Gross income) was derived
from interest on direct investments in U.S. treasury bonds, notes and bills.
- -------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Year ended October 31
----------------------
1994
Class A Class B
------- -------
Net asset value -
Beginning of period $ 8.410 $ 8.400
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.171 0.109
Net realized and unrealized gain (0.116) (0.111)
------- -------
Total from Investment Operations 0.055 (0.002)
------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.160) (0.103)
From net realized gains (0.245) (0.245)
------- -------
Total Distributions Declared to
Shareholders (0.405) (0.348)
------- -------
Net asset value -
End of period $ 8.060 $ 8.050
------- -------
Total return (b) 0.74% (0.04)%
------- -------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.14% 1.89%
Net investment
income 2.07% 1.32%
Portfolio turnover 54% 54%
Net assets at end
of period (000) $555,275 $264,122
(a) Per share data was calculated using average shares outstanding
during the period.
(b) Total return at net asset value assuming all distributions
reinvested and no initial sales charge or contingent deferred
sales charge.
- ------------------------------------------------------------------------------
1998 Federal Tax information (unaudited)(continued)
28% of the ordinary income distributed by the Fund in the year ended
October 31, 1998 qualifies for the coporate dividends received deduction.
For the fiscal year ended October 31, 1998 the fund earned $66,983,209 of
long term capital gains of which none and $66,983,209 are 28% and 20%
rate gains, repectively.
- ------------------------------------------------------------------------------
<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 (the Fund), a
series of Colonial Trust III, at October 31, 1998, the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements and the financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of portfolio positions
at October 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 11, 1998
<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 FUNDS DISTRIBUTOR 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.)
<PAGE>
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for The Colonial Fund is:
Liberty Funds Services, 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 and with the most recent copy of the Liberty
Funds Distributor, Inc. Performance Update.
* Effective October 1, 1998, Colonial Investors Service Center, Inc. - the
Transfer Agent for Colonial, Crabbe Huson, Newport and Stein Roe Advisor
Funds - changed its name to Liberty Funds Services, Inc.
<PAGE>
TRUSTEES
ROBERT J. BIRNBAUM
Consultant (formerly Special Counsel, Dechert, Price & Rhoads; President and
Chief Operating Officer, New York Stock Exchange, Inc.; President, American
Stock Exchange, Inc.)
TOM BLEASDALE
Retired (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust Company)
JOHN CARBERRY
Senior Vice President of Liberty Financial Companies, Inc. (formerly Managing
Director, Salomon Brothers)
LORA S. COLLINS
Attorney (formerly Attorney, Kramer, Levin, Naftalis & Frankel)
JAMES E. GRINNELL
Private Investor (formerly Senior Vice President-Operations, The Rockport
Company)
RICHARD W. LOWRY
Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood
Corporation)
SALVATORE MACERA
Private Investor (formerly Executive Vice President of Itek Corp. and President
of Itek Optical & Electronic Industries, Inc.)
WILLIAM E. MAYER
Partner, Development Capital, LLC (formerly Dean, College of Business and
Management, University of Maryland; Dean, Simon Graduate School of Business,
University of Rochester; Chairman and Chief Executive Officer, CS First Boston
Merchant Bank; and President and Chief Executive Officer, The First Boston
Corporation)
JAMES L. MOODY, JR.
Retired (formerly Chairman of the Board, Chief Executive Officer and Director,
Hannaford Bros. Co.)
JOHN J. NEUHAUSER
Dean, Boston College School of Management
THOMAS E. STITZEL
Professor of Finance, College of Business, Boise State University; Business
Consultant and Author
ROBERT L. SULLIVAN
Retired Partner, KPMG Peat Marwick LLP (formerly Management Consultant, Saatchi
and Saatchi Consulting Ltd. and Principal and International Practice Director,
Management Consulting, Peat Marwick Main & Co.)
ANNE-LEE VERVILLE
Consultant (formerly General Manager, Global Education Industry, and President,
Applications Solutions Division, IBM Corporation)
[logo] L I B E R T Y
COLONIAL o CRABBE HUSON o NEWPORT o STEIN ROE ADVISOR
Liberty Funds Distributor, Inc. (C)1998
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
Visit us at www.libertyfunds.com
TF-02/176G -1198 (12/98) 98/1336
