<PAGE>
- ----------------------------------------------
COLONIAL STRATEGIC BALANCED FUND ANNUAL REPORT
- ----------------------------------------------
October 31, 1998
---------------------------
Not FDIC May Lose Value
Insured No Bank Guarantee
---------------------------
<PAGE>
COLONIAL STRATEGIC BALANCED FUND HIGHLIGHTS
NOVEMBER 1, 1997 - OCTOBER 31, 1998
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:
|X| Growth and income potential from a strategic blend of markets
|X| Favorable stock and bond opportunities worldwide
|X| Broad diversification to help reduce risk |X| Expert management by
stock and bond specialists
PORTFOLIO MANAGER COMMENTARY: "The Fund's diversification across six market
sectors gives it the ability to take advantage of new opportunities as they
arise in markets worldwide. Over the long term, this diversification strategy
seeks to provide shareholders with consistent, stable returns." - Gita Rao and
Carl Ericson
COLONIAL STRATEGIC BALANCED FUND PERFORMANCE
CLASS A CLASS B CLASS C
Inception date 9/19/94 9/19/94 9/19/94
- -------------------------------------------------------------------------------
12-month distributions declared per share $0.588 $0.522 $0.521
- -------------------------------------------------------------------------------
12-month total returns, assuming
reinvestment of all distributions and
no sales charge or contingent deferred
sales charge (CDSC) 9.25% 8.71% 8.76%
- -------------------------------------------------------------------------------
Net asset value per share on 10/31/98 $15.17 $15.14 $15.17
- -------------------------------------------------------------------------------
TOP FIVE HOLDINGS - EQUITY TOP FIVE COUNTRIES - GOV'T BONDS
(as of 10/31/98) (as of 10/31/98)
- ------------------------------------- -------------------------------------
1. Nokia Oyj 1.0% 1. United States 11.5%
2. Climentos de Portugal SA 1.0% 2. United Kingdom 2.7%
3. General Electric Co.. 1.0% 3. France 1.2%
4. American Int. Group, Inc. 0.9% 4. Greece 1.1%
5. Comair Holdings, Inc. 0.9% 5. Mexico 1.0%
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.
Peformance results reflect any voluntary waivers or reimbursements of Fund
expenses by the Advisor or its affiliates. Absent these waivers or reimbursement
arrangements performance results would have been lower.
<PAGE>
PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
[Photo of Stephen E. Gibson]
In June 1998, Harold Cogger retired as president of the Colonial Strategic
Balanced 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 am pleased to present the annual report for the 12 months ended October
31, 1998.
The past 12 months were characterized by changing investment conditions.
Initially, investors were concerned with the Asian economic crisis and its
potential impact on financial markets worldwide. During the summer, the
emergence of serious economic problems in Russia and Latin America renewed
concerns of a global economic slowdown. As a result, stock markets around the
world declined as investors sought "safe havens" in strong currencies and
relatively stable investments. This flight to quality increased demand for U.S.
government bonds, and interest rates fell sharply. During the last part of the
period, the Federal Reserve Board announced two successive interest rate cuts,
sending U.S. stock and bond prices higher as investors generally concluded that
lower rates would stimulate the world's economies. Markets were further
encouraged by the Group of Seven industrial nations and the International
Monetary Fund's (IMF) proposal to establish a precautionary line of credit to
stimulate the world's economies and help countries prevent financial panic.
Despite considerable volatility during the year, the Fund's broad
diversification cushioned the negative effects of dramatic market swings.
Because the world's markets are not synchronized, the portfolio's asset
allocation between fixed-income and equity securities and international and U.S.
markets can provide shareholders with a stabilizing effect during periods of
market uncertainty as well as current income and long-term growth potential.
The following report will provide you with more specific information on your
Fund's performance. Thank you for giving us the opportunity to help you meet
your financial goals. We hope to continue serving you in the years to come.
Sincerely,
/s/ Stephen E. Gibson
Stephen E. Gibson
President
December 11, 1998
Because market and economic conditions change frequently, there can be no
assurance that the trends described above or on the following pages will
continue.
<PAGE>
PORTFOLIO MANAGEMENT REPORT
CARL ERICSON AND GITA RAO are portfolio co-managers of Colonial Strategic
Balanced Fund. Mr. Ericson manages the fixed-income portion of the portfolio and
is senior vice president of Colonial Management Associates, Inc. as well as
director of the Taxable Fixed Income Department. Ms. Rao manages the equity
portion and is vice president of Colonial Management Associates, Inc.
MIXED INVESTMENT ENVIRONMENT PRESENTED CHALLENGES
The U.S. and other well-established economies, particularly in Europe, continued
to have well-balanced growth with few signs of inflation. The European markets
also benefited from the impending European Monetary Union (EMU) and the coming
introduction of the Euro on January 1, 1999. The record high levels reached by
U.S. and some European stock markets ended in July when a monetary and political
crisis in Russia emerged. Financial markets worldwide worried that this crisis,
along with continued weakness in Asia, would result in a global economic
slowdown. Investors quickly sold emerging market securities based on fears of
underlying economic problems. Other stock and bond markets around the world
declined as investors sought a safe haven in strong currencies such as the U.S.
dollar, and relatively stable investments such as U.S. Treasury securities. This
"flight to quality" increased demand for U.S. government bonds and interest
rates fell sharply. As worries about the world's economies continued, the
Federal Reserve Board announced two successive interest rate cuts during the
latter part of the period, sending both U.S. stock and bond prices higher.
ALLOCATION WITHIN FIXED-INCOME SECTORS SHIFTED DURING THE PERIOD
The fixed-income portion of the portfolio was diversified among U.S. high-yield
bonds, international government bonds and U.S. Treasury bonds. High-yield bonds
performed well for much of the Fund's fiscal year. The concerns with the
financial markets that began in July led to increased volatility and lower
prices for lower-rated bonds. They continued to represent the largest proportion
of fixed-income assets, although we reduced these holdings late in the period.
This reduction was in response to expectations of slower economic growth. We
focused on sectors such as cable television and satellite communications, where
bond prices are supported by a strong subscriber base and attractive property
and programming values. One investment in this sector is CSC Holdings, Ltd.,
more commonly known as Cablevision Systems (0.2% of net assets), a company that
owns both distribution and programming assets via a strong cable TV franchise on
the East Coast. Cablevision also owns Madison Square Garden and all its
broadcast rights.
We also reduced our investments in international bonds, particularly in emerging
markets, eliminating holdings in Venezuela and Poland. In addition, we sold a
portion of our holdings in European bonds in order to capture gains already
generated by the EMU in countries such as Denmark and Spain. We reinvested those
assets in countries such as Greece and Canada, whose bonds we believe have
greater price appreciation potential.
By reducing the Fund's exposure to high-yield and international bonds, we were
able to increase the proportion of assets invested in U.S. Treasury securities.
These bonds had dramatic price increases in the last few months of the period as
investors around the world sought high credit quality, liquidity and stability.
EQUITY STRATEGY EMPHASIZED OPPORTUNITIES IN WESTERN EUROPE
While the majority of the portfolio's equity investment remained invested in
U.S. stocks, we increased the proportion of international stocks during the
course of the year. A number of investments in core European countries such as
The Netherlands, Germany, France and Italy appeared attractive, offering higher
rates of earnings growth at lower price/earnings multiples than U.S. stocks. One
example, is Mannesman A.G. (0.82% of net assets), a German industrial company
that has restructured into a high-growth telecommunications company. Shares of
this company have increased in value by more than 80% since we purchased it.
ASSET ALLOCATION STRATEGY REFLECTED IN PERFORMANCE
The Fund's objective is to generate stable, consistent returns through
diversification. The benefits of diversification were illustrated during the
past year as the portfolio's asset allocation among six sectors of U.S. and
foreign stocks and bonds worked to reduce the impact of the markets' volatility.
For example, when U.S. stocks, high-yield bonds and emerging market bonds
declined in response to the Russian and emerging market financial crisis, U.S.
Treasury bond prices rose significantly, partially offsetting losses in these
other sectors.
The Fund generated a 12-month total return of 9.25% for Class A shares, based on
net asset value. The Fund's performance is typical for a balanced portfolio
offering both stock and bond exposure.
TRUSTEES APPROVE ADDED FLEXIBILITY FOR EMERGING MARKET INVESTMENTS
At a recent meeting, Fund Trustees approved a proposal to increase the
percentage of the Fund's net assets that can be invested in emerging markets to
35% effective December 31, 1998. Emerging markets have been quite volatile in
recent months. However, we believe that, over the long term, they offer
excellent growth potential. While we do not expect to invest more than 25% of
the Fund's net assets in emerging-market securities at this time, the higher
limit will increase our flexibility to seek future investment opportunities
around the world.
ACTIVE MANAGEMENT FOCUSED ON IDENTIFYING VALUE-PRICED SECTORS
We will continue to actively manage investments in all six market sectors in
order to take advantage of opportunities as they arise. Historically, securities
from all of these sectors have provided attractive returns over different time
periods. Although we expect to see continued volatility in the months ahead, we
believe the Fund's broad diversification should continue to reduce the negative
effect of dramatic market fluctuations. We will continue to manage the asset mix
to emphasize those sectors that we believe offer the best long-term prospects.
The volatile investment climate of the past few months has presented us with a
number of opportunities to acquire value-priced securities that offer
shareholders good appreciation potential.
<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 - 10/31/98
CLASS A SHARES BASED ON NAV AND POP
S & P 500 Lehman Govt/Cp CSBF CSBF
Mnthly Reinv Bd Tr NAV POP
- ------------------------------------------------------------------
Sep 30, 94 10,000 10,000 10,000 9,525
Oct 31, 94 10,224 9,989 10,030 9,554
Nov 30, 94 9,852 9,971 9,717 9,255
Dec 31, 94 9,998 10,037 9,801 9,335
Jan 31, 95 10,257 10,230 9,780 9,316
Feb 28, 95 10,657 10,467 10,127 9,646
Mar 31, 95 10,971 10,537 10,396 9,902
Apr 30, 95 11,294 10,684 10,611 10,107
May 31, 95 11,744 11,132 10,899 10,381
Jun 30, 95 12,017 11,221 11,253 10,718
Jul 31, 95 12,415 11,177 11,822 11,260
Aug 31, 95 12,446 11,320 11,935 11,369
Sep 30, 95 12,971 11,435 12,194 11,615
Oct 31, 95 12,924 11,603 12,184 11,605
Nov 30, 95 13,491 11,794 12,456 11,864
Dec 31, 95 13,751 11,968 12,486 11,893
Jan 31, 96 14,219 12,043 12,707 12,104
Feb 29, 96 14,351 11,787 13,013 12,395
Mar 31, 96 14,489 11,688 13,048 12,429
Apr 30, 96 14,702 11,608 13,378 12,742
May 31, 96 15,081 11,588 13,558 12,914
Jun 30, 96 15,138 11,743 13,276 12,646
Jul 31, 96 14,470 11,770 13,052 12,432
Aug 31, 96 14,776 11,742 13,287 12,656
Sep 30, 96 15,607 11,950 13,811 13,155
Oct 31, 96 16,037 12,229 13,918 13,257
Nov 30, 96 17,248 12,454 14,490 13,801
Dec 31, 96 16,906 12,316 14,443 13,757
Jan 31, 97 17,962 12,330 14,631 13,936
Feb 28, 97 18,103 12,356 14,642 13,947
Mar 31, 97 17,361 12,209 14,220 13,544
Apr 30, 97 18,396 12,388 14,476 13,788
May 31, 97 19,521 12,503 15,100 14,383
Jun 30, 97 20,388 12,654 15,602 14,861
Jul 31, 97 22,010 13,041 16,398 15,619
Aug 31, 97 20,778 12,894 15,983 15,224
Sep 30, 97 21,916 13,097 16,668 15,876
Oct 31, 97 21,184 13,307 16,318 15,543
Nov 30, 97 22,164 13,377 16,488 15,704
Dec 31, 97 22,545 13,517 16,557 15,771
Jan 31, 98 22,794 13,708 16,868 16,067
Feb 28, 98 24,437 13,680 17,605 16,769
Mar 31, 98 25,687 13,722 18,136 17,274
Apr 30, 98 25,950 13,791 18,263 17,395
May 31, 98 25,505 13,939 18,136 17,274
Jun 30, 98 26,540 14,081 18,358 17,486
Jul 31, 98 26,260 14,092 18,393 17,520
Aug 31, 98 22,466 14,368 16,562 15,775
Sep 30, 98 23,906 14,778 17,075 16,264
Oct 31, 98 25,848 14,674 17,828 16,981
VALUE OF A $10,000 INVESTMENT
MADE ON 9/30/94 AS OF 10/31/98
- -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
NAV POP NAV W/CDSC NAV W/CDSC
$17,828 $16,981 $17,519 $17,319 $17,525 $17,525
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
As of 10/31/98
- -------------------------------------------------------------------------------
Class A Class B Class C
INCEPTION 9/19/94 9/19/94 9/19/94
NAV POP NAV w/CDSC NAV w/CDSC
- -------------------------------------------------------------------------------
1 YEAR 9.25% 4.06% 8.71% 3.71% 8.76% 7.76%
LIFE 14.73 13.38 14.21 13.89 14.22 14.22
- -------------------------------------------------------------------------------
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 shares. The CDSC returns reflect charges of 5% for one year and 2% since
inception for Class B shares, and 1% for one year for Class C shares.
Peformance results reflect any voluntary waivers or reimbursements of Fund
expenses by the Advisor or its affilliates. Absent these waivers or
reimbursement arrangements, performance results would have been lower.
Performance for different share classes will vary based on differences in sales
charges and fees associated with each class.
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. It is not possible to invest in an index.
<PAGE>
INVESTMENT PORTFOLIO
OCTOBER 31, 1998 (IN THOUSANDS)
COMMON STOCKS - 57.1% COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 9.5%
DEPOSITORY INSTITUTIONS - 4.2%
Banco Pinto & Sotto Mayor, SA Pt 54 $ 1,031
BankBoston Corp. 29 1,068
Comerica, Inc. 14 890
Corporacion Bancaria de Espana SA Sp 20 436
First Union Corp. 17 987
Firstar Corp. 14 795
Greenpoint Financial Corp. 26 866
HSBC Holdings PLC HK 2 36
Skandinaviska Enskilda Banken Sw 55 557
The Bank of Tokyo Mitsubishi Ja 46 428
----------
7,094
----------
INSURANCE CARRIERS - 4.3%
AGF (Assurances Generales de France) (a) Fr (b) (b)
Allstate Corp. 24 1,023
American Bankers Insurance Group, Inc. 6 268
American International Group, Inc. 18 1,526
Citigroup, Inc. 31 1,450
Conseco, Inc. 16 568
Progressive Corp. 6 913
Toro Assicurazioni It 40 598
Zurich Versicherungs-Gesellschaft (a) Sz 1 911
----------
7,257
----------
INVESTMENT COMPANIES - 1.0%
Standard and Poor's Depository Receipts 15 1,651
----------
- ----------------------------------------------------------------------------
MANUFACTURING - 26.1%
CHEMICALS & ALLIED PRODUCTS - 6.5%
American Home Products Corp. 14 682
BASF AG G 6 255
Bayer AG G 10 407
Bristol-Myers Squibb Co. 10 1,106
E.I. du Pont de Nemours & Co. 14 788
Eli Lilly & Co. 13 1,052
International Specialty Products, Inc. (a) 35 470
Johnson & Johnson 13 1,032
Merck & Co., Inc. 9 1,271
Merck KGAA G 4 166
Norsk Hydro ADR No 2 65
Procter & Gamble Co. 12 1,040
Rhone Poulenc, Class A Fr 15 680
Schering-Plough Corp. 8 854
Warner-Lambert Co. 12 964
----------
10,832
----------
COMMUNICATIONS EQUIPMENT - 1.5%
Motorola, Inc. 12 624
Philips Electronics NV Ne 12 650
Sony Corp. Ja 8 510
Telefonakteibolaget LM Ericsson ADR Sw 35 787
----------
2,571
----------
ELECTRICAL INDUSTRIAL EQUIPMENT - 1.0%
General Electric Co. 18 1,610
----------
ELECTRONIC COMPONENTS - 0.7%
Texas Instruments, Inc. 19 1,240
----------
FOOD & KINDRED PRODUCTS - 2.4%
Group Industrial Maseca Mx 603 492
Nestle AG (Reg) Sz (b) 745
Parmalat Finanziara SPA It 465 732
Philip Morris Co., Inc. 25 1,283
Sara Lee Corp. 14 806
----------
4,058
----------
FURNITURE & FIXTURES - 1.3%
Ethan Allen Interiors, Inc. 27 942
Hillenbrand Industries, Inc. 21 1,249
----------
2,191
----------
MACHINERY & COMPUTER EQUIPMENT - 3.8%
Caterpillar, Inc. 21 922
EMC Corp. (a) 13 850
International Business Machines Corp. 7 1,009
Mannesmann AG G 14 1,380
Oerlikon-Buehrle Holding AG Sz 5 705
Sun Microsystems, Inc. (a) 24 1,398
----------
6,264
----------
MEASURING & ANALYZING INSTRUMENTS - 0.9%
Gambro AB, Class A Sw 47 525
Medtronic, Inc. 15 1,001
----------
1,526
----------
PAPER PRODUCTS - 0.6%
Royal Koninklijke PTT Nederland NV Ne 16 622
TNT Post Group NV Ne 16 429
----------
1,051
----------
PETROLEUM REFINING - 3.5%
Amerada Hess Corp. 8 420
Amoco Corp. 18 1,010
British Petroleum Co., PLC ADR UK 5 460
Chevron Corp. 12 962
ENI SPA It 112 666
Exxon Corp. 14 962
OMV Handels AG Aus 5 453
USX-Marathon Group 29 961
----------
5,894
----------
PRIMARY METAL - 0.2%
Acerinox SA Sp 15 338
----------
PRINTING & PUBLISHING - 0.4%
Gannett Co., Inc. 10 619
----------
RUBBER & PLASTIC - 0.1%
Continental AG G 8 200
----------
STONE, CLAY, GLASS & CONCRETE - 1.0%
Cimentos de Portugal SA Pt 47 1,633
----------
TOBACCO PRODUCTS - 0.4%
Allied Zurich PLC (a) UK 27 312
B.A.T. Industries PLC UK 27 241
Swedish Match AB Sponsored ADR Sw 1 17
----------
570
----------
TRANSPORTATION EQUIPMENT - 1.8%
Alliedsignal, Inc. 20 779
Borg-Warner Automotive, Inc. 10 487
Ford Motor Co. 15 814
Northrop Grumman Corp. 10 832
Volvo AB, ADR Sw 5 104
----------
3,016
----------
- ----------------------------------------------------------------------------
MINING & ENERGY - 0.5%
CRUDE PETROLEUM & NATURAL GAS
Occidental Petroleum Corp. 42 825
----------
- ----------------------------------------------------------------------------
RETAIL TRADE - 7.5%
APPAREL & ACCESSORY STORES - 1.3%
Ross Stores, Inc. 29 936
TJX Companies, Inc. 67 1,273
----------
2,209
----------
FOOD STORES - 3.5%
Albertson's, Inc. 18 $ 978
American Stores Co. 18 570
General Nutrition Companies, Inc. (a) 48 696
Laurus NV Ne 16 398
Safeway, Inc. (a) 27 1,310
Tesco PLC UK 243 686
Vedior NV Ne 28 707
Vendex International NV Ne 23 575
----------
5,920
----------
GENERAL MERCHANDISE STORES - 1.5%
Fred Meyer, Inc. (a) 16 837
Metro AG G 14 851
Sears, Roebuck & Co. 17 741
----------
2,429
----------
MISCELLANEOUS RETAIL - 0.7%
Office Depot, Inc. (a) 48 1,190
----------
RESTAURANTS - 0.5%
McDonald's Corp. 13 856
----------
- ----------------------------------------------------------------------------
SERVICES - 3.8%
COMPUTER RELATED SERVICES - 0.7%
Cadence Design Systems, Inc. (a) 25 530
HBO & Co. 27 714
----------
1,244
----------
COMPUTER SOFTWARE - 2.2%
Computer Associates International, Inc. 21 833
Microsoft Corp. (a) 14 1,450
Network Associates, Inc. (a) 32 1,360
----------
3,643
----------
HEALTH SERVICES - 0.5%
Tenet Healthcare Corp. (a) 28 785
----------
HOTELS, CAMPS & LODGING - 0.4%
Accor SA Fr 3 623
----------
- ----------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES - 9.3%
AIR TRANSPORTATION - 1.4%
Comair Holdings, Inc. 46 1,502
Delta Air Lines, Inc. 7 739
----------
2,241
----------
ELECTRIC, GAS & SANITARY SERVICES - 0.3%
Sempra Energy 22 568
----------
ELECTRIC SERVICES - 1.9%
ABB AB, Class A Sw 16 166
American Electric Power Co., Inc. 14 661
FPL Group, Inc. 13 782
Public Service Enterprise Group, Inc. 16 608
Unicom Corp. 26 995
----------
3,212
----------
RAILROAD - 0.2%
Canadian Pacific, LTD 15 339
----------
TELECOMMUNICATIONS - 5.5%
BellSouth Corp. 17 1,357
Hong Kong Telecommunications, LTD HK 332 670
Nippon Telegraph & Telephone Corp. Ja (b) 612
NTT Mobile Communications (a) Ja (b) 1,015
Oy Nokia AB, Class A Fi 19 1,711
Portugal Telecom SA Pt 15 707
SBC Communications, Inc. 26 1,218
Telecom Italia It 83 604
Telefonica de Espana Sp 18 814
Telefonos de Mexico, Class L, SA ADR Mx 1 58
MCI WorldCom, Inc. (a) 7 387
----------
9,153
----------
- ----------------------------------------------------------------------------
WHOLESALE TRADE - 0.4%
DURABLE GOODS
Patterson Dental Co. (a) 17 705
----------
TOTAL COMMON STOCKS (cost of $73,433) 95,557
----------
PREFERRED STOCKS - 0.2%
- ---------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES
CABLE
CSC Holdings Ltd.,
11.125%, PIK, Series M (cost of $315) 3 343
----------
- ---------------------------------------------------------------------------
BONDS & NOTES - 36.3% PAR VALUE
- ---------------------------------------------------------------------------
CORPORATE FIXED-INCOME BONDS & NOTES - 15.1%
- ---------------------------------------------------------------------------
CONSTRUCTION - 0.4%
BUILDING CONSTRUCTION
Falcon Building Products, Inc.
stepped coupon, (10.500% 06/15/02)
(c) 06/15/07 $ 500 $ 250
Nortek, Inc.,
9.875% 03/01/04 500 495
----------
745
----------
- ----------------------------------------------------------------------------
MANUFACTURING - 5.2%
CHEMICALS & ALLIED PRODUCTS - 0.8%
Agricultural Minerals & Chemicals Co., L.P.,
10.750% 09/30/03 100 100
Laroche Industries, Inc.,
9.500% 09/15/07 500 430
Sterling Chemicals, Inc.,
11.250% 04/01/07 500 380
Trans-Resources,
10.750% 03/15/08 500 488
----------
1,398
----------
FABRICATED METAL - 0.7%
Euramax International, PLC,
11.250% 10/01/06 (d) 250 232
Jorgensen Earle M. Co,
9.500% 04/01/05 500 435
Renco Metals, Inc.,
11.500% 07/01/03 250 250
US Can Corp.,
10.125% 10/15/06 200 202
----------
1,119
----------
MACHINERY & COMPUTER EQUIPMENT - 0.2%
IMO Industries,
11.750% 05/01/06 250 255
----------
MEASURING & ANALYZING INSTRUMENTS - 0.1%
Intertek Finance, PLC,
10.250% 11/01/06 (d) 250 230
----------
MISCELLANEOUS MANUFACTURING - 0.6%
AEI Holding Co.,
10.000% 11/15/07 (e) 500 463
ISP Holdings, Inc.,
9.750% 02/15/02 250 260
Shop Vac Corp.,
10.625% 09/01/03 250 266
----------
989
----------
PAPER PRODUCTS - 0.2%
Stone Container Corp.,
10.750% 10/01/02 250 251
----------
PRIMARY METAL - 1.6%
Algoma Steel, Inc.,
12.375% 07/15/05 250 184
Bayou Steel Corp.,
9.500% 05/15/08 500 430
Kaiser Aluminum & Chemical Corp.,
10.875% 10/15/06 300 285
Keystone Consolidated Industries,
9.625% 08/01/07 500 465
WCI Steel, Inc.,
10.000% 12/01/04 1,000 940
WHX Corp.,
10.500% 04/15/05 500 452
----------
2,756
----------
PRINTING & PUBLISHING - 0.6%
American Lawyer Media, Inc.,
9.750% 12/15/07 500 498
Hollinger International Publishing,
9.250% 03/15/07 500 520
----------
1,018
----------
TRANSPORTATION EQUIPMENT - 0.4%
Collins & Aikman Products Co.,
11.500% 04/15/06 200 200
LDM Technologies, Inc.,
10.750% 01/15/07 500 450
----------
650
----------
- ----------------------------------------------------------------------------
MINING & ENERGY - 0.7%
OIL & GAS EXTRACTION - 0.7%
Belden & Blake Corp.,
9.875% 06/15/07 500 405
Gulf Canada Resources, LTD,
9.625% 07/01/05 100 102
Magnum Hunter Resources, Inc.
10.000% 06/01/07 500 415
Nuevo Energy Co.,
9.500% 04/15/06 200 202
----------
1,124
----------
- ----------------------------------------------------------------------------
RETAIL TRADE - 0.1%
FOOD STORES
Pathmark Stores, Inc.,
9.625% 05/01/03 200 196
----------
SERVICES - 1.4%
Amusement & Recreation - 0.4%
E&S Holdings Corp.,
10.375% 10/01/06 $ 250 $ 107
Regal Cinemas,
9.500% 06/01/08 (e) 500 495
----------
602
----------
BUSINESS SERVICES - 0.2%
Unisys Corp.,
11.750% 10/15/04 250 282
----------
HOTELS, CAMPS & LODGING - 0.5%
Eldorado Resorts,
10.500% 08/15/06 250 260
Horseshoe Gaming LLC,
9.375% 06/15/07 600 589
----------
849
----------
OTHER SERVICES - 0.3%
Borg-Warner Security Corp.,
9.625% 03/15/07 500 535
----------
- ----------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES - 7.2%
AIR TRANSPORTATION - 0.1%
U.S. Air, Inc.,
10.375% 03/01/13 200 216
----------
BROADCASTING - 0.7%
Allbritton Communications Co.,
9.750% 11/30/07 500 515
Fox Family Worldwide, Inc.,
9.250% 11/01/07 500 468
NWCG Holding Corp.,
(f) 06/15/99 175 168
Young Broadcasting Corp.,
11.750% 11/15/04 100 104
----------
1,255
----------
CABLE - 1.1%
Diamond Cable Co.,
stepped coupon, (10.750% 02/15/02)
(c) 02/15/07 500 315
Echostar Communications Corp.,
stepped coupon, (12.875% 06/01/99)
(c) 06/01/04 500 486
Marcus Cable Co., L.P.,
stepped coupon, (14.250% 06/15/00)
(c) 12/15/05 600 554
Telewest Communication, PLC,
stepped coupon, (11.000% 10/01/00)
(c) 10/01/07 (d) 500 394
----------
1,749
----------
COMMUNICATIONS - 0.3%
Classic Cable, Inc.,
9.875% 08/01/08 (e) 500 505
----------
ELECTRIC SERVICES - 0.1%
California Energy Co., Inc.,
9.500% 09/15/06 100 108
----------
GAS SERVICES - 0.1%
HS Resources, Inc.,
9.250% 11/15/06 250 233
----------
MOTOR FREIGHT & WAREHOUSING - 0.1%
Pierce Leahy,
11.125% 07/15/06 162 175
----------
PIPELINES - 0.2%
Falcon Holding Group, L.P.,
stepped coupon, (9.285% 04/15/03)
(c) 04/15/10 500 330
----------
SANITARY SERVICES - 0.3%
Allied Waste Industries, Inc.,
stepped coupon, (11.300% 06/01/02)
(c) 06/01/07 350 263
Allied Waste North America, Inc.,
10.250% 12/01/06 250 273
----------
536
----------
TELECOMMUNICATIONS - 4.2%
Adelphia Communications Corp.,
9.875% 03/01/07 500 537
Clearnet Communications, Inc.,
stepped coupon, (14.750% 12/15/00)
(c) 12/15/05 500 400
Comcast Cellular Corp.,
9.500% 05/01/07 500 518
GST USA, Inc.,
stepped coupon, (13.875% 12/15/00)
(c) 12/15/05 500 366
Hyperion Telecommunications, Inc.,
stepped coupon, (13.000% 04/15/01)
(c) 04/15/03 (e) 500 345
Intermedia Communications, Inc.,
stepped coupon, (11.250% 07/15/02)
(c) 07/15/07 500 333
Level 3 Communications,
9.125% 05/01/08 500 471
Loral Space & Communications, LTD,
11.250% 01/15/07 500 476
McLeodUSA, Inc.,
8.375% 03/15/08 500 483
Metrocall, Inc.,
10.375% 10/01/07 500 455
Nextel Communications, Inc.,
stepped coupon, (9.750% 10/31/02)
(c) 10/31/07 500 280
Nextlink Communications, Inc.,
stepped coupon, (9.450% 04/15/03)
(c) 04/15/08 500 270
NTL, Inc.,
stepped coupon, (9.750% 04/01/03)
(c) 04/01/08 (e) 500 273
Price Communications Wireless,
9.125% 12/15/06 (e) 500 500
RCN Corp.,
stepped coupon, (11.125% 10/15/02)
(c) 10/15/07 500 265
Rogers Cantel, Inc.,
9.750% 06/01/16 460 469
Sprint Spectrum L.P.,
stepped coupon, (12.500% 08/15/01)
(c) 08/15/06 630 548
----------
6,989
----------
- ----------------------------------------------------------------------------
WHOLESALE TRADE - 0.1%
NONDURABLE GOODS
AmeriServ Food Co.
10.125% 07/15/07 200 166
----------
TOTAL CORPORATE FIXED-INCOME
BONDS & NOTES (cost of $27,656) 25,261
----------
- ---------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 11.5% PAR VALUE
- ---------------------------------------------------------------------------
U.S. Treasury Bonds:
8.750% 05/15/17 $ 4,618 $ 6,450
11.625% 11/15/04 (g) 4,062 5,559
12.000% 08/15/13 448 691
U.S. Treasury Note,
11.875% 11/15/03 (g) 4,965 6,594
----------
TOTAL U.S. GOVERNMENT OBLIGATIONS (cost of $17,970) 19,294
----------
FOREIGN GOVERNMENT &
AGENCY OBLIGATIONS - 9.7% CURRENCY
- ---------------------------------------------------------------------------
Argentina Global Bonds,
11.375% 01/30/17 (h) 830 797
Government of Canada,
10.000% 06/01/08 C$ 210 186
Government of France:
8.500% 04/25/03 FF 3,300 710
8.500% 10/25/08 FF 5,230 1,262
Government of Sweden,
10.250% 05/05/03 SK 5,900 941
Hellenic Republic:
8.600% 03/26/08 GD 231,000 853
8.900% 03/21/04 GD 298,800 1,070
Mexican Global Bonds,
11.375% 09/15/16 (i) 1,440 1,423
Province of Ontario,
8.250% 12/01/05 C$ 1,401 1,063
Republic of Argentina,
11.250% 04/10/06 (j) DM 625 384
Republic of Brazil,
10.125% 05/15/27 (k) 1,070 736
Republic of Panama,
8.875% 09/30/27 (l) 350 320
Russian Ministry of Finance,
10.000% 06/26/07 (m) 306 74
Treasury Corp. Victoria,
12.500% 10/15/03 A$ 940 778
United Kingdom Treasury:
9.000% 08/06/12 KB 160 369
10.000% 02/26/01 KB 1,960 3,603
10.000% 09/08/03 KB 307 621
United Mexican States,
10.375% 01/29/03 (n) DM 450 278
Western Australia Treasury Corp.
10.000% 07/15/05 A$ 961 760
----------
TOTAL FOREIGN GOVERNMENT & AGENCY
OBLIGATIONS (cost of $16,350) 16,228
----------
TOTAL BONDS & NOTES (cost of $61,976) 60,783
----------
TOTAL INVESTMENTS - 93.6% (cost of $135,724) (o) 156,683
----------
SHORT-TERM OBLIGATIONS - 5.2%
- ---------------------------------------------------------------------------
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 $8,866 (repurchase proceeds
$8,761) $ 8,757 8,757
----------
FORWARD CURRENCY CONTRACTS - 0.0% (p) (3)
- ---------------------------------------------------------------------------
OTHER ASSETS & LIABILITIES - 1.2% 1,983
- ---------------------------------------------------------------------------
NET ASSETS - 100.0% $ 167,420
----------
NOTES TO INVESTMENT PORTFOLIO:
- ---------------------------------------------------------------------------
(a) Non-income producing.
(b) Rounds to less than one.
(c) Currently zero coupon. Shown parenthetically is the interest rate to be
paid and the date the Fund will begin accruing this rate.
(d) This is a British security. Par amount is stated in U.S. dollars.
(e) 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,
1998, the value of these securities amounted to $2,581 or 1.5% of net
assets.
(f) Zero coupon bond.
(g) These securities, or a portion thereof, with a total market value of $8,935
are being used to collateralize the forward currency exchange contracts
indicated in note (p) below.
(h) This is an Argentinean security. Par amount is stated in U.S. dollars.
(i) This is a Mexican security. Par amount is stated in U.S. dollars.
(j) This is an Argentinean security. Par amount is stated in German
Deutschemarks.
(k) This is a Brazilian security. Par amount is stated in U.S. dollars.
(l) This is a Panamanian security. Par amount is stated in U.S. dollars.
(m) This is a Russian security. Par amount is stated in U.S. dollars.
(n) This is a Mexican security. Par amount is stated in German Deutschemarks.
(o) Cost for federal income tax purposes is $135,745.
(p) As of October 31, 1998, the Fund has entered into the following portfolio
hedges:
Net Unrealized
Appreciation
Contracts In Exchange Settlement (Depreciation)
to Deliver For Date (U.S$)
--------------- ------------- ---------- -------------
A$ 2,314 US$ 1,383 11/06/1998 $ (61)
C$ 1,940 US$ 1,269 11/13/1998 12
SK 7,140 US$ 906 11/16/1998 (12)
KB 2,340 US$ 3,978 11/20/1998 63
FF 3,075 US$ 550 11/30/1998 (5)
-----
$ (3)
-----
<PAGE>
Investment Portfolio/October 31, 1998
- ------------------------------------------------------------------------------
Summary of Securities
by Country/Currency Country/Currency Value % of Total
- ------------------------------------------------------------------------------
United States $111,832 71.4
United Kingdom UK/KB 7,147 4.6
Netherlands Ne 3,381 2.2
Portugal Pt 3,371 2.2
France Fr/FF 3,275 2.1
Germany G/DM 3,259 2.1
Sweden Sw/SK 3,097 2.0
Italy It 2,600 1.7
Japan Ja 2,565 1.6
Switzerland Sz 2,361 1.5
Mexico Mx 2,251 1.4
Greece GD 1,923 1.2
Finland Fi 1,711 1.1
Spain Sp 1,588 1.0
Australia Au/A$ 1,538 1.0
Canada Ca/C$ 1,249 0.8
Argentina Ar 1,181 0.7
Brazil Bz 736 0.5
Hong Kong HK 706 0.4
Austria Aus 453 0.3
Panama Pa 320 0.2
Russia RU 74 0.0
Norway No 65 0.0
-------- -----
$156,683 100.0
-------- -----
Certain securities are listed by country of underlying exposure but may trade
predominantly on other exchanges.
Acronym Name
A$ Australian Dollars
ADR American Depositary Receipt
C$ Canadian Dollars
D German Deutschemarks
FF French Francs
GD Greek Drachmas
KB British Pounds
PIK Payment-In-Kind
SK Swedish Kroner
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 $135,724) $ 156,683
Short-term obligations 8,757
---------
165,440
Cash held in foreign banks (cost $63) $ 67
Unrealized appreciation on forward
currency contracts 75
Receivable for:
Interest 1,716
Fund shares sold 473
Investments sold 294
Dividends 130
Foreign tax reclaims 17
Deferred organization expenses 14
Other 12 2,798
------ ---------
Total Assets 168,238
LIABILITIES
Unrealized depreciation on forward
currency contracts 78
Payable for:
Investments purchased 490
Fund shares repurchased 172
Accrued:
Deferred Trustees fees 1
Other 77
------
Total Liabilities 818
---------
NET ASSETS $ 167,420
---------
Net asset value & redemption price per share -
Class A ($53,639/3,535) $ 15.17 (a)
---------
Maximum offering price per share - Class A
($15.17/0.9525) $ 15.93 (b)
---------
Net asset value & offering price per share -
Class B ($105,513/6,967) $ 15.14 (a)
---------
Net asset value & offering price per share -
Class C ($8,268/545) $ 15.17 (a)
---------
(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
FOR THE YEAR ENDED OCTOBER 31, 1998
(in thousands)
INVESTMENT INCOME
Interest $ 5,440
Dividends 1,335
-------
Total investment income (net of nonreclaimable
foreign taxes withheld at source which
amounted to $56) 6,775
EXPENSES
Management fee $ 1,063
Service fee 381
Distribution fee - Class A 157
Distribution fee - Class B 691
Distribution fee - Class C 56
Transfer agent 455
Bookkeeping fee 63
Registration fee 50
Custodian fee 31
Audit fee 17
Trustees fee 14
Reports to shareholders 18
Legal fee 3
Amortization of deferred
organization expenses 14
Other 18
-------
3,031
Fees waived or borne
by the Advisor (15) 3,016
------- -------
Net Investment Income 3,759
-------
NET REALIZED & UNREALIZED GAIN ON PORTFOLIO POSITIONS
Net realized gain on:
Investments 6,991
Foreign currency transactions 28
-------
Net Realized Gain 7,019
Net change in unrealized appreciation during
the period on:
Investments 664
Foreign currency transactions 127
-------
Net Unrealized Appreciation 791
-------
Net Gain 7,810
-------
Increase in Net Assets from Operations $11,569
-------
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 $ 3,759 $ 2,699
Net realized gain 7,019 1,528
Net unrealized appreciation 791 11,346
----------- ------------
Net Increase from Operations 11,569 15,573
Distributions:
From net investment income - Class A (1,505) (1,033)
From net realized gains - Class A (470) (485)
From net investment income - Class B (2,266) (1,442)
From net realized gains - Class B (802) (783)
From net investment income - Class C (184) (125)
From net realized gains - Class C (67) (71)
----------- ------------
6,275 11,634
----------- ------------
Fund Share Transactions:
Receipts for shares sold - Class A 12,412 19,814
Value of distributions reinvested - Class A 1,852 1,423
Cost of shares repurchased - Class A (8,621) (5,245)
----------- ------------
5,643 15,992
----------- ------------
Receipts for shares sold - Class B 36,356 36,345
Value of distributions reinvested - Class B 2,877 2,074
Cost of shares repurchased - Class B (14,398) (8,391)
----------- ------------
24,835 30,028
----------- ------------
Receipts for shares sold - Class C 2,671 3,286
Value of distributions reinvested - Class C 229 174
Cost of shares repurchased - Class C (1,362) (1,184)
----------- ------------
1,538 2,276
----------- ------------
Net Increase from Fund
Share Transactions 32,016 48,296
----------- ------------
Total Increase 38,291 59,930
NET ASSETS
Beginning of period 129,129 69,199
----------- ------------
End of period (including undistributed
net investment income of $384 and $580,
respectively) $ 167,420 $ 129,129
----------- ------------
(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 1998 1997 (a)
Sold - Class A 820 1,458
Issued for distributions reinvested - Class A 126 106
Repurchased - Class A (575) (381)
------------ -------------
371 1,183
------------ -------------
Sold - Class B 2,388 2,684
Issued for distributions reinvested - Class B 197 154
Repurchased - Class B (955) (608)
------------ -------------
1,630 2,230
------------ -------------
Sold - Class C 177 241
Issued for distributions reinvested - Class C 16 13
Repurchased - Class C (90) (87)
------------ -------------
103 167
------------ -------------
(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, 1998
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, an annual distribution fee 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 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 identifi-
cation 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.
NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES
- --------------------------------------------------------------------------------
MANAGEMENT FEE: Colonial Management Associates, Inc. (the Advisor) is the
investment Advisor of the Fund and furnishes accounting and other services and
office facilities for a monthly fee equal to 0.70% annually of the Fund's
average net assets.
BOOKKEEPING FEE: The Advisor provides bookkeeping and pricing services for
$27,000 per year plus 0.035% of the Fund's average net assets over $50 million.
TRANSFER AGENT: Liberty Funds Services, Inc., formerly Colonial Investors
Service Center, Inc. (the Transfer Agent), an affiliate of the Advisor, provides
shareholder services for a monthly fee equal to 0.236% 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 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 Advisor, is the Fund's principal underwriter.
For the year ended October 31, 1998, the Fund has been advised that the
Distributor retained net underwriting discounts of $38,256 on sales of the
Fund's Class A shares and received contingent deferred sales charges (CDSC) of
$5,000, $182,472 and $2,316, on Class A, Class B and Class C share redemptions,
respectively.
The Fund has adopted a 12b-1 plan which requires it to pay the Distributor a
service fee equal to 0.25% annually of the Fund's net assets as of the 20th of
each month. The plan also requires the payment of a distribution fee to the
Distributor equal to 0.30% 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: Through December 31, 1997, the Advisor waived fees and bore
certain Fund expenses to the extent that total expenses (exclusive of service
and distribution fees, brokerage commissions, interest, taxes and extraordinary
expenses, if any) exceeded 1.10% annually of the Fund's average net assets.
Effective January 1, 1998, the expense limit was eliminated.
OTHER: The Fund pays no compensation to its officers, all of whom are
employees of the Advisor.
The Fund's Trustees may participate in a deferred compensation plan which
may be terminated at any time. Obligations of the plan will be paid solely out
of the Fund's assets.
NOTE 3. PORTFOLIO INFORMATION
- -------------------------------------------------------------------------------
INVESTMENT ACTIVITY: During the year ended October 31, 1998, purchases and sales
of investments, other than short-term obligations, were $103,665,054 and
$72,073,465, respectively, of which $6,877,604 and $1,650,426, 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 $27,288,793
Gross unrealized depreciation (6,351,036)
-----------
Net unrealized appreciation $20,937,757
-----------
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. COMPOSITION OF NET ASSETS
- -------------------------------------------------------------------------------
At October 31, 1998, net assets consisted of:
Capital paid in $ 139,085
Undistributed net investment income 384
Accumulated net realized gain 6,981
Net unrealized appreciation on:
Investments 20,959
Foreign currency transactions 11
---------
$ 167,420
---------
NOTE 6. RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED)
- -------------------------------------------------------------------------------
On October 30, 1998, a Special Meeting of Shareholders of the Fund was held to
elect a Board of Trustees, amend fundamental investment policies regarding
borrowing and lending, and approve policies for a master fund/feeder fund
structure. On August 21, 1998, the record date for the Meeting, the Fund had
outstanding 10,848,919 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 5,340,694 258,475
Tom Bleasdale 5,348,594 250,575
John Carberry 5,354,687 244,482
Lora S. Collins 5,351,490 247,679
James E. Grinnell 5,347,644 251,525
Richard W. Lowry 5,354,687 244,482
Salavatore Macera 5,346,111 253,058
William E. Mayer 5,354,687 244,482
James L. Moody, Jr. 5,349,173 249,996
John J. Neuhauser 5,353,610 245,559
Thomas E. Stitzel 5,354,687 244,482
Robert L. Sullivan 5,341,407 257,762
Anne-Lee Verville 5,349,007 250,162
To amend fundamental investment policies regarding borrowing and lending:
For Against Abstain
--- ------- -------
4,100,316 114,899 327,201
To approve policies for a master fund/feeder fund structure:
For Against Abstain
--- ------- -------
4,071,039 122,065 349,313
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period
are as follows:
Year ended October 31
-----------------------------------
1998
Class A Class B Class C
-------- -------- --------
Net asset value -
Beginning of period $ 14.450 $ 14.430 $ 14.450
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a)(b) 0.418 0.350 0.350
Net realized and
unrealized gain 0.890 0.882 0.891
-------- -------- --------
Total from Investment
Operations 1.308 1.232 1.241
-------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.440) (0.374) (0.373)
From net realized gains (0.148) (0.148) (0.148)
-------- -------- --------
Total Distributions Declared
to Shareholders (0.588) (0.522) (0.521)
-------- -------- --------
Net asset value -
End of period $ 15.170 $ 15.140 $ 15.170
-------- -------- --------
Total return (c)(d) 9.25% 8.71% 8.76%
-------- -------- --------
RATIOS TO AVERAGE NET ASSETS
Expenses (e) 1.69% 2.14% 2.14%
Net investment income (e) 2.76% 2.31% 2.31%
Fees and expenses waived
or borne by the Advisor (e) 0.01% 0.01% 0.01%
Portfolio turnover 51% 51% 51%
Net assets at end
of period (000) $ 53,639 $105,513 $ 8,268
(a) Net of fees and expenses waived or borne by the Advisor which amounted to:
$ 0.001 $ 0.001 $ 0.001
(b) Per share data was calculated using average shares outstanding during the
period.
(c) Total return at net asset value assuming no initial sales charge or
contingent deferred sales charge.
(d) Had the Advisor not waived or reimbursed a portion of expenses, total
return would have been reduced.
(e) 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
------------------------------------
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)(b) 0.404 0.342 0.342
Net realized and
unrealized gain 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%
Net assets at end
of period (000) $ 45,736 $ 77,005 $ 6,388
(a) Net of fees and expenses waived or borne by the Advisor 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.
Year ended October 31
--------------------------------------------
1996
Class A Class B Class C
-------- -------- --------
$ 11.650 $ 11.640 $ 11.650
-------- -------- --------
0.369 0.314 0.314
1.264 1.260 1.258
-------- -------- --------
1.633 1.574 1.572
-------- -------- --------
(0.333) (0.284) (0.272)
(0.040) (0.040) (0.040)
-------- -------- --------
(0.373) (0.324) (0.312)
-------- -------- --------
$ 12.910 $ 12.890 $ 12.910
-------- -------- --------
14.24% 13.71% 13.68%
-------- -------- --------
1.65% 2.10% 2.10%
2.99% 2.54% 2.54%
0.19% 0.19% 0.19%
59% 59% 59%
$ 25,580 $ 40,065 $ 3,554
$ 0.023 $ 0.023 $ 0.023
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Selected data for a share of each class outstanding throughout each period
are as follows:
Year ended October 31
-------------------------------------
1995
Class A Class B Class C
------- ------- -------
Net asset value -
Beginning of period $ 9.910 $ 9.900 $ 9.900
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a)(c) 0.325 0.277 0.277
Net realized and
unrealized gain (loss) 1.764 1.769 1.774
------- ------- -------
Total from Investment
Operations 2.089 2.046 2.051
------- ------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income (0.349) (0.306) (0.301)
------- ------- -------
Net asset value -
End of period $ 11.650 $ 11.640 $ 11.650
------- ------- -------
Total return (d)(e) 21.47% 21.00% 21.04%
------- ------- -------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.65%(g) 2.10%(g) 2.10%(g)
Net investment income 3.05%(g) 2.60%(g) 2.60%(g)
Fees waived or borne
by the Adviser 0.43%(g) 0.43%(g) 0.43%(g)
Portfolio turnover 49% 49% 49%
Net assets at end
of period (000) $ 16,346 $ 18,284 $ 4,164
(a) Net of fees and expenses waived or borne by the Adviser which
amounted to: $ 0.042 $ 0.042 $ 0.042
(b) The Fund commenced investment operations on September 19, 1994.
(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) 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
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Period ended October 31
- ---------------------------------------------
1994 (b)
Class A Class B Class C
- ------------ ------------ ------------
$ 10.000 $ 10.000 $ 10.000
-------- -------- --------
- ------------ ------------ ------------
0.035 0.029 0.029
(0.125) (0.129) (0.129)
- ------------ ------------ ------------
(0.090) (0.100) (0.100)
- ------------ ------------ ------------
- - -
- ------------ ------------ ------------
$ 9.910 $ 9.900 $ 9.900
- ------------ ------------ ------------
(0.90)%(f) (1.00)%(f) (1.00)%(f)
- ------------ ------------ ------------
1.65%(h) 2.10%(h) 2.10%(h)
3.01%(h) 2.56%(h) 2.56%(h)
0.35%(h) 0.35%(h) 0.35%(h)
0% 0% 0%
$ 6,394 $ 6,332 $ 2,231
$ 0.004 $ 0.004 $ 0.004
- -------------------------------------------------------------------------------
1998 Federal Tax information (unaudited)
22% of the ordinary income distributed by the Fund in the year ended October 31,
1998 qualifies for the corporate dividends received deduction.
For the fiscal year ended October 31, 1998 the Fund earned $7,007,492 of long
term capital gains of which none and $7,007,492 are 28% and 20% rate gains,
respectively.
Approximately 32% of the Fund's distributions (17% of gross income) was derived
from interest on direct investments in U.S. Treasury bonds, notes and bills.
An average of 11% of the Fund's investments as of the end of each quarter were
in direct obligations of the U.S. Treasury.
- -------------------------------------------------------------------------------
<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
(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 signifi- cant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirma- tion 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 SERVICES
TO MAKE INVESTING EASIER
Your fund has one of the most extensive selections of shareholder services
available. Your financial advisor can help you arrange for any of these
services, or you can call Liberty Funds Services, Inc. directly at
1-800-345-6611.
AFFORDABLE ADDITIONAL INVESTMENTS: Add to your account with as little as $50 on
most funds; $25 for an IRA account.
FREE EXCHANGES(1): Exchange all or part of your account into the same share
class of another fund distributed by Liberty Funds Distributor, Inc., by phone
or mail.
EASY ACCESS TO YOUR MONEY(1): Make withdrawals from your account by phone, by
mail or, for certain funds, by check.
ONE-YEAR REINSTATEMENT PRIVILEGE: If you need access to your money, but then
choose to return it within one year, you can reinvest in any fund distributed by
Liberty Funds Distributor, Inc. of the same share class without any penalty or
sales charge.
FUNDAMATIC: Make periodic investments as low as $50 from your checking account
to your Fund account.
SYSTEMATIC WITHDRAWAL PLAN (SWP): Receive monthly, quarterly or semiannual
payments via check or bank transmission. There is a $5,000 account value
required, but no minimum for the payment amount. The maximum annual withdrawal
is 12% of account balance at time SWP is established. SWPs by check are
processed on the 10th calendar day of each month unless the 10th falls on a
non-business day or the first business day of the week. If this occurs, the
processing date will be the previous business day. Dividends and capital gains
must be reinvested.
AUTOMATED DOLLAR COST AVERAGING: Transfer money on a monthly basis from any fund
with a balance of $5,000 into the same share class of up to four other funds
distributed by Liberty Funds Distributor, Inc. 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>
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.
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 Colonial Strategic Balanced Fund is:
Liberty Funds Services, 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 and with the most
recent copy of Liberty Funds Distributor's Performance Update.
* Effective October 1, 1998, Colonial Investors Service Center, Inc.- the
Transfer Agent for Colonial, Crabbe Huson, Newport and Stein Roe Adviser
Funds - changed it's 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
Corp.)
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 Distibutor, Inc. (C)1998
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
Visit us at www.libertyfunds.com
SB-02/162G-10/98 (12/98) 98/1308
