[Front Cover]
- --------------------------------------------------------
COLONIAL STRATEGIC BALANCED FUND Annual Report
- --------------------------------------------------------
October 31, 1999
<PAGE>
President's Message
[Photo of Stephen E. Gibson]
Dear Shareholder:
The Fund's fiscal year began with domestic economic strength, signs of firming
foreign economies and concerns about inflation. Although inflation remains tame
and fears have calmed, there have been signs of potential inflationary forces.
Commodity prices and raw materials have been strong, manufacturing seems healthy
and consumer spending remains robust. In an attempt to keep the economy and
inflation in check, the Federal Reserve Board (Fed) raised short-term interest
rates by one-quarter point in June, August and again in November -- negating the
three rate cuts last fall.
Toward the end of this 12-month period, the broader stock market took on
strength, particularly in the technology sector. International economies showed
strengthening earnings momentum and little inflation risk. The big question
remained how long the U.S. economy could continue to grow without triggering
increased inflation.
Colonial Strategic Balanced Fund has faced challenges such as recession and
currency devaluation in many emerging world markets since 1997. The manager has
had to switch from defense to offense in many markets, industries and sectors --
tributes to the Fund's active management. However, the Fund's defensive stance
early in this period dampened total return and caused the Fund to underperform
its peers. We believe that the Fund is now better positioned for the current
investment environment and will continue to emphasize broad country and sector
diversification, while pursuing investments in select markets that appear poised
for future growth.
The following report provides you with more specific information about your
Fund's performance and investment strategy during the period. As always, we
thank you for choosing Colonial Strategic Balanced Fund and for giving us the
opportunity to serve your investment needs.
Sincerely,
/s/ Stephen E. Gibson
- ---------------------
Stephen E. Gibson
President
December 13, 1999
Because economic and market conditions change frequently, there can be no
assurance that the trends described in this report will continue or come to
pass.
Table of Contents
<TABLE>
<S> <C>
1 Highlights
2 Portfolio Managers'
Report
4 Performance
Information
5 Portfolio of
Investments
10 Financial
Statements
12 Notes to Financial
Statements
15 Financial Highlights
</TABLE>
- -------------------------------------
Not FDIC May Lose Value
Insured No Bank Guarantee
- -------------------------------------
<PAGE>
Highlights
> Foreign markets showed signs of recovery during the period.
As the period began, lingering concerns about recession in Southeast Asia
and Japan, and possible global repercussions created significant
uncertainty. Early in 1999, however, a stream of favorable economic news,
rising commodity prices and improving overseas markets encouraged
investors. These conditions led to strengthening earnings overseas and
little inflation risk. In addition, Japan's economy began to show signs of
life in the first quarter of 1999, and several other struggling Asian
economies appeared to stabilize and turn upward.
> High-yield and emerging market bonds rebounded.
During the period, economic conditions created a negative backdrop for
U.S. government bonds, but high-yield and emerging market bonds rebounded
from their depressed levels of last fall. High levels of income helped
high-yield corporate bonds offset price declines stemming from rising
interest rates.
> Portfolio repositioned for future growth.
Fund performance was dampened during the early part of 1999 due to its
defensive stance. Based on the strengthening of select markets and
sectors, such as emerging markets and cyclical industries, we made some
significant changes to the portfolio. We reallocated our country and
industry weightings in order to better position the Fund in the current
economic environment.
Colonial Strategic Balanced Fund (Class A shares) vs.
Broad-based indexes
11/1/98 - 10/31/99
[Bar Graph]
Colonial Strategic Balanced Fund 8.47%
S&P 500 Index 25.66%
Lehman Brothers Government/Corporate Bond Index (0.66)%
[End Bar Graph]
The Standard & Poor's 500 Index is an unmanaged index that tracks the
performance of 500 widely held, large-capitalization U.S. stocks. 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 expenses. It is not possible to invest in an
index.
12-month total returns
for the period ended
10/31/99
<TABLE>
<CAPTION>
Without With
Sales Sales
Charge Charge
- ------------------------------
<S> <C> <C>
Class A 8.47% 3.32%
- ------------------------------
Class B 7.87% 2.87%
- ------------------------------
Class C 7.78% 6.78%
- ------------------------------
</TABLE>
Net asset value per share
as of 10/31/99
<TABLE>
<S> <C>
Class A $15.36
- ------------------------------
Class B $15.33
- ------------------------------
Class C $15.35
- ------------------------------
</TABLE>
Distributions declared
per share from 11/1/98
to 10/31/99
<TABLE>
<S> <C>
Class A $1.070
- ------------------------------
Class B $0.982
- ------------------------------
Class C $0.980
- ------------------------------
</TABLE>
1
<PAGE>
Portfolio Managers' Report
Defensive portfolio held back performance
The Fund's Class A shares returned 8.47% for the 12-month period, without a
sales charge. This performance was below the average of the Fund's Lipper peer
group.(1)
In response to turmoil overseas and the threat of recession, we structured the
Fund defensively entering the period. The Fund had a relatively large exposure
to Europe and more defensive sectors, such as telecommunications, financial and
high-quality, large-cap stocks.
Investment shifted to U.S. and Japan
As emerging markets and cyclical industries experienced a strong recovery early
in 1999, the Fund's underweighting in these areas hurt performance. We
repositioned the portfolio to take advantage of the current economic environment
by increasing its weightings in the United States and Japan. Those investments
were shifted from Europe, particularly Portugal, Italy, France and Germany. We
also increased sector weightings in technology, consumer staples and energy, but
reduced our healthcare exposure. These moves helped to strengthen portfolio
returns.
As the period progressed, European economic growth picked up in the summer of
1999. The United States economy continued to grow at a good rate. Signs of
inflation began to appear, however, dampening performance in telecommunications,
financial, and other sectors sensitive to rising interest rates, in which we had
large investments. Investor sentiment turned away from growth toward
value-driven stocks. In the final months of this fiscal year, U.S. technology
stocks, in which the Fund was underinvested, rose dramatically.
High-yield bonds led fixed-income returns
Stronger-than-expected U.S. economic growth and inflationary fears created a
negative backdrop for bonds. As bond yields moved higher in response to rising
interest rates, bond prices generally declined. Some of our emerging market
bonds rebounded nicely as oil prices moved higher and investor sentiment
shifted. However, high-yield bonds proved to be the bond market's biggest
gainers during the period since they are less sensitive to
(1) Lipper, Inc., a widely respected data provider in the industry, calculates
an average total return for mutual funds with similar investment objectives as
the Fund. The total return calculated for the Lipper Balanced Fund Category was
11.30% for the one year ended October 31, 1999. The Fund's Class A shares were
ranked in the third quartile for the one year (293 out of 431 funds) and in the
third quartile for the five years (120 out of 207 funds). Performance for
different share classes will vary with fees associated with each class. Past
performance cannot predict future results.
BOUGHT
- --------------------------------------------------------------------------------
We have added cyclical stocks that benefit from global demand such as steel,
paper, oil and related exporting industries. Examples include: United
Technologies (0.9% of net assets) provides a broad range of high-technology
products and support services to customers in the aerospace, building and
automotive industries worldwide. Schlumberger Ltd. (1.2% of net assets) provides
oil and gas exploration and production services; manufactures energy, water and
communication measurement instruments; and provides communications and
information technology.
SOLD
- -------------------------
To accomplish the asset shift from Europe to other countries such as Japan, we
sold Gambro, Continental AG and Parmalat.
2
<PAGE>
interest rates and more dependent on the health of the company backing the
security. Therefore, the strength of the economy translated into strong returns
for high-yield bonds. Pathmark Stores (0.1% of net assets), a positive for the
Fund, is a supermarket chain serving metropolitan New York and New Jersey.
Pathmark has a valuable franchise in its strategic store locations and has
continued to generate strong cash flow. When Pathmark was purchased by Ahold,
its credit quality and access to capital improved. As a result, it became a
higher quality company and its bonds appreciated.
Due to their sensitivity to interest rates, the performance of U.S. Treasury
bonds and developed foreign government bonds was weak throughout the period. In
addition, we were not currency-hedged to bonds of Greece, and that component
lost value to the strong U.S. dollar. Late in the period, we added Turkish Euro
bonds, which offered attractive yields.
Portfolio anticipates worldwide growth
Moving forward, we anticipate strong GDP growth worldwide. This environment will
create new global demand, benefiting exporting companies and markets.
We believe that Europe should continue its strong economic recovery, aided by
lower interest rates and cheaper exports, merger and acquisition activities,
corporate restructurings, and continued global economic growth. Japan, despite
the risk of a strong yen, should experience higher consumer demand and benefit
from restructuring. Asia should get a boost from this recovery, as well as from
global demand for exports. In Latin America, Mexico and Brazil should benefit
from global growth, low inflation, lower interest rates and successful reforms.
The United States should experience continuing growth with low inflation. There
is the risk of a hard landing, if interest rates rise and cause a market
correction.
/s/ Nicolas /s/ Laura A. Ostrander
- ----------- ----------------------
Nicolas Ghajar and Laura Ostrander are portfolio co-managers of Colonial
Strategic Balanced Fund. Mr. Ghajar, a vice president of the Advisor, manages
the equity portion of the portfolio. Ms. Ostrander manages the fixed-income
portion of the portfolio and is a senior vice president of the Advisor.
The value and returns earned on an investment in the Fund may be affected by
stock market fluctuations. Investing in smaller-cap stocks may include liquidity
risks as well. Changes in interest rates, changes in the financial strength of
issuers of lower-rated bonds, foreign, political and economic developments may
also affect Fund performance.
Top Five Equity Holdings
as of 10/31/99
<TABLE>
<S> <C>
Lucent Technologies 1.94%
- ----------------------------
Wal-Mart Stores 1.91%
- ----------------------------
Kellogg Co. 1.71%
- ----------------------------
Chase Manhattan 1.65%
- ----------------------------
Texaco Co. 1.63%
- ----------------------------
</TABLE>
Top Five Countries
as of 10/31/99
<TABLE>
<S> <C>
United States 74.7%
- ----------------------------
United Kingdom 3.9%
- ----------------------------
Japan 2.0%
- ----------------------------
Germany 1.6%
- ----------------------------
France 1.4%
- ----------------------------
</TABLE>
Portfolio holding breakdowns are calculated as a percentage of net assets.
Country breakdowns are calculated as a percentage of total investments. 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.
HELD
- -------------------------------------------------------------------------------
Lucent Technologies (1.9% of net assets), a U.S. company that designs, builds
and delivers a wide range of public and private networks, communications
systems, business telephone systems and microelectronics components.
Mannesmann A.G. (1.0% of net assets), a German industrial company that has
restructured into a high-growth telecommunications company.
We held corporate bonds with Pathmark Stores (0.1% of net assets), which was
recently acquired by Ahold, N.V. This large food distributor based in the
Netherlands has made numerous acquisitions throughout Europe and the United
States.
3
<PAGE>
Performance Information
Performance of a $10,000 investment in Class A shares 9/30/94 - 10/31/99
[Mountain Chart]
<TABLE>
<CAPTION>
Colonial Strategic Colonial Strategic Lehman Brothers S&P 500 Index
Balanced Fund Balanced Fund Government Corporate
Without Sales Charge With Sales Charge Bond Index
<S> <C> <C> <C> <C>
9/30/94 $10,000 $10,000 $10,000 $10,000
10/31/94 10,030 9,554 9,989 10,224
10/31/95 12,183 11,605 11,604 12,923
10/31/96 13,918 13,257 12,228 16,031
10/31/97 16,317 15,543 13,304 21,174
10/31/98 17,824 16,978 14,671 25,833
10/31/99 19,338 18,419 14,577 32,481
</TABLE>
[End Mountain Chart]
Average Annual Total Returns as of 10/31/99
<TABLE>
<CAPTION>
Share Class A B C
Inception Date 9/19/94 9/19/94 9/19/94
- ---------------------------------------------------------------------------------------------------------
Without With Without With Without With
Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Year 8.47% 3.32% 7.87% 2.87% 7.78% 6.78%
- ---------------------------------------------------------------------------------------------------------
5 Years 14.03 12.93 13.51 13.26 13.49 13.49
- ---------------------------------------------------------------------------------------------------------
Life 13.48 12.40 12.95 12.83 12.94 12.94
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Average Annual Total Returns as of 9/30/99
<TABLE>
<CAPTION>
Share Class A B C
- ---------------------------------------------------------------------------------------------------------
Without With Without With Without With
Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Year 10.45% 5.20% 9.76% 4.76% 9.74% 8.74%
- ---------------------------------------------------------------------------------------------------------
5 Years 13.53 12.43 13.01 12.76 13.00 13.00
- ---------------------------------------------------------------------------------------------------------
Life 13.16 12.07 12.61 12.37 12.61 12.61
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Past performance cannot predict future investment results. Returns and value of
an investment will vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions. The "with sales charge" returns include
the maximum 4.75% charge for Class A shares and the contingent deferred sales
charge (CDSC) maximum charge of 5% for one year, 2% for five years and 1% for
life returns for Class B shares, and 1% for one year for Class C shares.
Performance results reflect any voluntary waivers or reimbursement of Fund
expenses by the Advisor or its affiliates. Absent these waivers or reimbursement
arrangements, performance results would have been lower.
Performance for different share classes will vary based on differences in share
charges and fees associated with each class.
The Standard & Poor's 500 Index is an unmanaged index that tracks the
performance of 500 widely held, large-capitalization U.S. stocks. 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 expenses. It is not possible to invest in an index.
Performance of a
$10,000 investment
in all share classes
from 9/30/94 - 10/31/99
<TABLE>
<CAPTION>
Without With
Sales Sales
Charge Charge
- --------------------------------
<S> <C> <C>
Class A $19,338 $18,419
- --------------------------------
Class B 18,897 18,797
- --------------------------------
Class C 18,888 18,888
- --------------------------------
</TABLE>
4
<PAGE>
Investment Portfolio
October 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Common Stocks - 54.3% Country Shares Value
- ----------------------------------------------------------------------
<S> <C> <C> <C>
FINANCE, INSURANCE & REAL ESTATE - 9.2%
Depository Institutions - 4.9%
AmSouth Bancorporation 86 $ 2,216
Chase Manhattan Corp. 33 2,892
Corporacion Bancaria de Espana SA Sp 42 928
First Union Corp. (a) (a)
Skandinaviska Enskilda Banken Sw 55 566
The Bank of Tokyo Mitsubishi Ja 46 763
Washington Mutual, Inc. 33 1,186
--------
8,551
--------
Holding & Other Investment Offices - 0.5%
Zurich Allied AG Sz 1 837
--------
Insurance Carriers - 2.6%
AGF (Assurances Generales de France) (b) Fr (a) (a)
Allstate Corp. 65 1,866
American International Group, Inc. 22 2,303
Toro Assicurazioni It 40 491
--------
4,660
--------
Nondepository Credit Institutions - 1.2%
Associates First Capital Corp. 58 2,121
--------
- ----------------------------------------------------------------------
MANUFACTURING - 26.8%
Chemicals & Allied Products - 5.5%
Clorox Co. 44 1,817
E.I. du Pont de Nemours & Co. 8 515
Merck & Co., Inc. 19 1,496
Merck KGAA G 4 140
Pharmacia & Upjohn, Inc. 39 2,104
Rhone Poulenc, Class A Fr 15 833
Schering-Plough Corp. 35 1,723
Warner-Lambert Co. 12 981
--------
9,609
--------
Communications Equipment - 4.2%
Lucent Technologies, Inc. 53 3,405
Philips Electronics NV Ne 11 1,154
Sony Corp. Ja 8 1,249
Telefonakteibolaget LM Ericsson ADR 35 1,488
--------
7,296
--------
Electrical Industrial Equipment - 1.4%
General Electric Co. 18 2,494
--------
Food & Kindred Products - 3.4%
Kellogg Co. 75 2,998
Nestle AG (Reg) Sz (a) 677
PepsiCo, Inc. 69 2,386
--------
6,061
--------
Furniture & Fixtures - 0.8%
Furniture Brands International, Inc. (b) 75 1,461
--------
Machinery & Computer Equipment - 3.6%
EMC Corp. (b) 21 1,504
Hewlett-Packard Co. 13 940
International Business Machines Corp. 14 1,338
Mannesmann AG G 11 1,743
Oerlikon-Buehrle Holding AG Sz 5 726
--------
6,251
--------
Petroleum Refining - 4.3%
Amerada Hess Corp. 36 2,037
</TABLE>
<TABLE>
<CAPTION>
Country Shares Value
- ------------------------------------------------------------
<S> <C> <C> <C>
BP Amoco, PLC ADR UK 34 $ 1,976
ENI SPA It 112 658
Texaco, Inc. 47 2,866
--------
7,537
--------
Rubber & Plastic - 0.3%
Premark International, Inc. 11 613
--------
Stone, Clay, Glass & Concrete - 0.4%
Cimentos de Portugal SA Pt 47 785
--------
Transportation Equipment - 2.9%
Dana Corp. 23 674
Ford Motor Co. 15 823
General Dynamics Corp. 18 1,020
Textron, Inc. 11 872
United Technologies Corp. 27 1,634
--------
5,023
--------
- ------------------------------------------------------------
MINING & ENERGY - 1.5%
Crude Petroleum & Natural Gas - 0.3%
Conoco, Inc. Class B 17 456
--------
Oil & Gas Field Services - 1.2%
Schlumberger Ltd. 35 2,120
--------
- ------------------------------------------------------------
RETAIL TRADE - 4.8%
Food Stores - 2.3%
Kroger Corp. (b) 31 654
Safeway, Inc. (b) 41 1,448
Tesco PLC UK 243 733
Vedior NV Ne 28 468
Vendex International NV Ne 23 662
--------
3,965
--------
General Merchandise Stores - 2.3%
Metro AG G 14 744
Wal-Mart Stores, Inc. 59 3,359
--------
4,103
--------
Miscellaneous Retail - 0.2%
Rite Aid Corp. 35 309
--------
- ------------------------------------------------------------
SERVICES - 2.6%
Computer Software - 2.2%
Compuware Corp. (b) 54 1,499
Microsoft Corp. (b) 20 1,851
SunGard Data Systems, Inc. (b) 22 525
--------
3,875
--------
Hotels, Camps & Lodging - 0.4%
Accor SA Fr 3 668
--------
- ------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES - 9.4%
Electric Services - 1.9%
Texas Utilities Co. 60 2,337
Unicom Corp. 26 1,011
--------
3,348
--------
Gas Services - 0.8%
Nicor, Inc. 36 1,376
--------
Motor Freight & Warehousing - 0.8%
CNF Transportation 42 1,392
--------
</TABLE>
5
<PAGE>
Investment Portfolio
October 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Country Shares Value
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunication - 5.9%
Bell Atlantic Corp. 33 $ 2,162
BellSouth Corp. 4 180
Hong Kong Telecommunications Ltd. HK 332 755
MCI WorldCom, Inc. (b) 26 2,188
Nippon Telegraph & Telephone Corp. Ja (a) 1,199
Oyj Nokia AB, Class A Fi 19 2,181
Price Communications Corp. (b) 22 480
Viacom, Inc., Class B (b) 28 1,280
--------
10,425
--------
TOTAL COMMON STOCKS (cost of $81,314) 95,336
--------
Preferred Stocks - 0.2%
- -----------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES - 0.2%
Cable
CSC Holdings Ltd., 11.125% PIK, Series
M (cost of $345) 3 366
--------
Warrants (b) - 0.0%
- -----------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES - 0.0%
Telecommunication
Carrier 1 International (cost of $10) 1 10
--------
Bonds & Notes - 38.7%
- -----------------------------------------------------------------------
CORPORATE FIXED INCOME BONDS & NOTES - 17.7% Par
- -----------------------------------------------------------------------
CONSTRUCTION - 0.2%
Falcon Building Products, Inc.,
stepped coupon (10.500% 06/15/02)
(c) 06/15/07 $500 370
--------
- -----------------------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 0.4%
Financial Services
Dresdner Funding Trust II,
5.790% 06/30/11 (d) 350 337
PDVSA Finance Ltd., Series 1999 I,
9.750% 02/15/10 370 351
--------
688
--------
- -----------------------------------------------------------------------
MANUFACTURING - 6.4%
Chemicals & Allied Products - 0.8%
Agricultural Minerals Co., L.P.,
10.750% 09/30/03 100 54
Allied Waste North America, Inc.,
10.000% 08/01/09 (d) 575 489
LaRoche Industries, Inc.,
9.500% 09/15/07 500 140
Sterling Chemicals, Inc.,
11.125% 04/01/07 500 305
Trans Resources, Inc.,
10.750% 03/15/08 500 453
--------
1,441
--------
Electronic & Electrical Equipment - 0.4%
Gentek, Inc., 11.000% 08/01/09 (d) 250 251
TransDigm, Inc., 10.375% 12/01/08 500 448
--------
699
--------
</TABLE>
<TABLE>
<CAPTION>
Par Value
- -----------------------------------------------------------------------
<S> <C> <C>
Fabricated Metal - 0.5%
Earle M. Jorgensen & Co.,
9.500% 04/01/05 $500 $ 458
Euramax International, PLC,
11.250% 10/01/06 (e) 250 250
US Can Corp., 10.125% 10/15/06 200 203
--------
911
--------
Food & Kindred Products - 0.5%
Chattem, Inc., 8.875% 04/01/08 500 445
Premier International Foods, PLC,
12.000% 09/01/09 (d) 500 503
--------
948
--------
Machinery & Computer Equipment - 0.1%
IMO Industries, Inc., 11.750% 05/01/06 250 250
--------
Miscellaneous Manufacturing - 1.0%
Blount, Inc., 13.000% 08/01/09 100 103
Building Materials Corp. of America,
8.000% 12/01/08 500 454
ISP Holdings, Inc., 9.750% 02/15/02 250 247
Koppers Industries, Inc.,
9.875% 12/01/07 100 87
Owens-Illinois, Inc.,
7.500% 05/15/10 500 452
United Industries,
9.875% 04/01/09 (d) 500 448
--------
1,791
--------
Paper Products - 0.1%
Stone Container Corp.,
10.750% 10/01/02 250 257
--------
Primary Metal - 1.3%
Algoma Steel, Inc., 12.375% 07/15/05 250 215
Bayou Steel Corp., 9.500% 05/15/08 250 233
Kaiser Aluminum & Chemical Corp.,
10.875% 10/15/06 200 201
Keystone Consolidated Industries, Inc.,
9.625% 08/01/07 500 460
Renco Metals, Inc., 11.500% 07/01/03 250 205
WCI Steel, Inc., 10.000% 12/01/04 500 486
WHX Corp., 10.500% 04/15/05 500 470
--------
2,270
--------
Printing & Publishing - 0.5%
American Lawyer Media, Inc.,
9.750% 12/15/07 500 465
Hollinger International Publishing, Inc.,
9.250% 03/15/07 500 490
--------
955
--------
Transportation Equipment - 1.2%
Collins & Aikman Products Co.,
11.500% 04/15/06 200 190
Dura Operating Corp.,
9.000% 05/01/09 500 460
</TABLE>
6
<PAGE>
Investment Portfolio
October 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Par Value
- ------------------------------------------------------------------
<S> <C> <C>
Johnstown America Industries, Inc.
11.750% 08/15/05 $500 $ 509
LDM Technologies, Inc.,
10.750% 01/15/07 500 440
Venture Holdings Trust, Series B,
9.500% 07/01/05 500 463
--------
2,062
--------
- ------------------------------------------------------------------
MINING & ENERGY - 0.9%
Coal Mining - 0.1%
AEI Resources, Inc.,
10.500% 12/15/05 (d) 250 220
--------
Oil & Gas Extraction - 0.8%
Belden & Blake Corp.,
9.875% 06/15/07 500 275
Gulf Canada Resources, Ltd.,
9.625% 07/01/05 100 102
HS Resources, Inc., 9.250% 11/15/06 250 243
Magnum Hunter Resources, Inc.
10.000% 06/01/07 500 475
Mariner Energy, Inc., 10.500% 08/01/06 250 234
--------
1,329
--------
- ------------------------------------------------------------------
RETAIL TRADE - 0.1%
Food Stores
Pathmark Stores, Inc., 9.625% 05/01/03 200 194
--------
- ------------------------------------------------------------------
SERVICES - 1.6%
Amusement & Recreation - 0.8%
Coast Hotels & Casinos, Inc.,
9.500% 04/01/09 500 473
Horseshoe Gaming, L.L.C.,
9.375% 06/15/07 600 594
Regal Cinemas, Inc., 9.500% 06/01/08 500 380
--------
1,447
--------
Business Services - 0.2%
Unisys Corp., 11.750% 10/15/04 250 276
--------
Hotels, Camps & Lodging - 0.3%
CapRock Communications Corp.,
11.500% 05/01/09 350 341
Eldorado Resorts L.L.C.,
10.500% 08/15/06 250 255
--------
596
--------
Other Services - 0.3%
Intertek Finance, PLC.,
10.250% 11/01/06 (e) 500 468
--------
- ------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION,
ELECTRIC, GAS & SANITARY SERVICES - 7.8%
Air Transportation - 0.1%
U.S. Airways, Inc., 10.375% 03/01/13 200 196
--------
Broadcasting - 0.9%
Allbritton Communications Co.,
9.750% 11/30/07 500 503
Fox Family Worldwide, Inc.,
9.250% 11/01/07 500 455
</TABLE>
<TABLE>
<CAPTION>
Par Value
- ------------------------------------------------------------------
<S> <C> <C>
LIN Holding Corp.,
stepped coupon, (10.000% 03/01/03)
(c) 03/01/08 $500 $ 325
Sinclair Broadcast Group, Inc.,
9.000% 07/15/07 250 234
Young Broadcasting Corp.,
11.750% 11/15/04 100 104
--------
1,621
--------
Cable - 1.8%
Adelphia Communications Corp.,
9.875% 03/01/07 500 510
Avalon Cable Holdings,
9.375% 12/01/08 100 100
Charter Communications Holdings L.L.C.,
stepped coupon, (9.920% 04/01/04)
(c) 04/01/11 750 443
Diamond Cable Co.,
stepped coupon, (10.750% 02/15/02)
(c) 02/15/07 500 395
EchoStar DBS Corp.,
9.250% 02/01/06 500 495
NTL, Inc.,
stepped coupon, (9.750% 04/15/04)
(c) 04/15/09 (e) 750 700
Telewest Communication PLC,
stepped coupon, (11.000% 10/01/00)
(c) 10/01/07 500 456
--------
3,099
--------
Communications - 0.7%
Call-Net Enterprises, Inc.,
stepped coupon, (10.800% 05/15/04)
(c) 05/15/09 500 281
Loral Space & Communications Ltd.,
11.250% 01/15/07 230 170
PSINET Inc., 11.000% 08/01/09 (d) 250 256
Spectrasite Holdings, Inc.,
stepped coupon, (11.250% 04/15/04)
(c) 04/15/09 850 442
--------
1,149
--------
Electric Services - 0.3%
Tenet Healthcare Corp.,
8.125% 12/01/08 500 453
--------
Pipelines - 0.2%
Falcon Holding Group L.P.,
stepped coupon, (9.285% 04/15/03)
(c) 04/15/10 500 350
--------
Telecommunications - 3.8%
AirGate PCS, Inc.,
stepped coupon, (13.500% 10/01/04)
(c) 10/01/09 150 92
Carrier 1 International, 13.250% 02/15/09 500 500
Clearnet Communications, Inc.,
stepped coupon, (14.750% 12/15/00)
(c) 12/15/05 500 475
</TABLE>
7
<PAGE>
Investment Portfolio
October 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Currency Par Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Hyperion Telecommunications, Inc.,
stepped coupon, (13.000% 04/15/01)
(c) 04/15/03 $ 150 $ 129
Intermedia Communications, Inc.,
stepped coupon, (11.250% 07/15/02)
(c) 07/15/07 500 345
Level 3 Communications, Inc.,
9.125% 05/01/08 750 699
McLeodUSA, Inc.,
stepped coupon, (10.500% 03/01/02)
(c) 03/01/07 500 394
Metrocall, Inc., 10.375% 10/01/07 500 300
Nextlink Communications, Inc.,
10.750% 06/01/09 500 509
Nextel Communications, Inc.,
stepped coupon, (9.750% 10/31/02)
(c) 10/31/07 500 360
Ono Finance PLC,
13.000% 05/01/09 (d) 250 263
Price Communications Wireless, Inc.,
9.125% 12/15/06 500 505
RCN Corp.,
stepped coupon, (11.125% 10/15/02)
(c) 10/15/07 500 346
Rogers Cantel, Inc., 9.750% 06/01/16 460 520
Sprint Spectrum L.P.,
stepped coupon, (12.500% 08/15/01)
(c) 08/15/06 630 583
Viatel, Inc., 11.500% 03/15/09 250 241
Williams Communications Group, Inc.,
10.875% 10/01/09 250 257
Worldwide Fiber, Inc.,
12.000% 08/01/09 (d) 100 100
--------
6,618
--------
- ----------------------------------------------------------------------------
WHOLESALE TRADE - 0.3%
Durable Goods
Holmes Products Corp.,
9.875% 11/15/07 500 445
--------
TOTAL CORPORATE FIXED INCOME
BONDS & NOTES (cost $35,465) 31,103
--------
- ----------------------------------------------------------------------------
FOREIGN GOVERNMENT &
AGENCY OBLIGATIONS - 10.9%
Government of France,
8.500% 10/25/08 Eu 651 852
Government of Mexico,
11.375% 09/15/16 (p) 1,440 1,532
Government of New Zealand,
8.000% 11/15/06 NZ 2,035 1,088
Government of Norway:
6.750% 01/15/07 NK 2,360 313
9.500% 10/31/02 NK 8,970 1,257
Hellenic Republic:
8.600% 03/26/08 GD 271,000 946
8.900% 03/21/04 GD 390,300 1,316
Kingdom of Sweden, 10.250% 05/05/03 SK 4,900 689
Poland Non-U.S. Global Registered
Bond, 5.000% 10/27/14 (f) 635 560
</TABLE>
<TABLE>
<CAPTION>
Currency Par Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Republic of Argentina:
11.250% 04/10/06 (g) DM $ 625 $ 345
11.375% 01/30/17 (h) 1,025 976
Republic of Brazil:
10.125% 05/15/27 (i) 2,000 1,560
14.500% 10/15/09 (i) 125 130
Republic of Bulgaria,
6.500% 07/28/11 (j) 1,250 942
Republic of Panama,
8.875% 09/30/27 (k) 915 736
Republic of Turkey:
11.875% 11/05/04 (l) 175 176
12.375% 06/15/09 (l) 535 539
Republic of Venezuela,
9.250% 09/15/27 (m) 1,182 793
Russian Federation,
11.000% 07/24/18 (n) 611 285
Treasury Corp. Victoria,
12.000% 09/22/01 A$ 705 496
United Kingdom Treasury:
10.000% 02/26/01 KB 825 1,424
10.000% 09/08/03 KB 487 901
United Mexican States:
10.375% 01/29/03 (o) DM 630 363
11.500% 05/15/26 (p) 100 111
Western Australia Treasury Corp.
10.000% 07/15/05 A$ 1,047 770
--------
TOTAL FOREIGN GOVERNMENT
& AGENCY OBLIGATIONS
(cost $18,570) 19,100
--------
- ----------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 10.1%
Federal Home Loan Mortgage Corp.,
8.000% 07/01/20 489 498
U.S. Treasury Bonds:
8.750% 05/15/2017 2,725 3,360
11.625% 11/15/04 (q) 4,372 5,394
11.875% 11/15/03 (q) 4,965 5,966
12.000% 08/15/13 1,898 2,602
--------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (cost $18,627)
17,820
--------
TOTAL BONDS & NOTES (cost $72,662)
68,023
--------
TOTAL INVESTMENTS (cost $154,331) (r) 163,735
--------
Short-Term Obligations - 5.9%
- ----------------------------------------------------------------------------
Repurchase agreement with Lehman
Brothers Inc., dated 10/29/99,
due 11/01/99 at 5.220%,
collateralized by U.S.
Treasury bonds and/or notes
with various maturities to 2009,
market value $10,589 (repurchase
proceeds $10,335) 10,331 10,331
--------
FORWARD CURRENCY CONTRACTS (s) - 0.0% (32)
--------
Other Assets & Liabilities - 0.9% 1,686
- ----------------------------------------------------------------------------
NET ASSETS - 100%
$175,720
========
</TABLE>
8
<PAGE>
Investment Portfolio
October 31, 1999
(In thousands)
Notes To Investment Portfolio:
- --------------------------------------------------------------------------------
(a) Rounds to less than one.
(b) Non-income producing.
(c) Currently zero coupon. Shown parenthetically is the interest rate to be paid
and the date the Fund will begin accruing this rate.
(d) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At October 31,
1999 the value of these securities amounted to $2,867 or 1.6% of net assets.
(e) This is a British security. Par amount is stated in U.S. dollars.
(f) This is a Polish security. Par amount is stated in U.S. dollars.
(g) This is an Argentinian security. Par amount is stated in German
Deutschemarks.
(h) This is an Argentinian security. Par amount is stated in U.S. dollars.
(i) This is a Brazilian security. Par amount is stated in U.S. dollars.
(j) This is a Bulgarian security. Par amount is stated in U.S. dollars.
(k) This is a Panamanian security. Par amount is stated in U.S. dollars.
(l) This is a Turkish security. Par amount is stated in U.S. dollars.
(m) This is a Venezuelan security. Par amount is stated in U.S. dollars.
(n) This is a Russian security. Par amount is stated in U.S. dollars.
(o) This is a Mexican security. Par amount is stated in German
Deutschemarks.
(p) This is a Mexican security. Par amount is stated in U.S. dollars.
(q) These securities, or a portion thereof, with a total market value of $6,935,
are being used to collateralize the forward currency exchange contracts
indicated in note (r) below.
(r) Cost for federal income tax purposes is $154,461.
(s) As of October 31, 1999, the Fund has entered into the following
portfolio hedges:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Contracts In Exchange (Depreciation)
to Deliver For Settlement Date (US$)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A$ 1,157 US$ 737 11/03/1999 $ 15
KB 595 US$ 978 11/09/1999 (19)
KB 739 US$ 1,215 11/09/1999 (26)
KB 325 US$ 534 11/09/1999 (11)
KB 290 US$ 477 11/09/1999 (10)
NZ 1,167 US$ 592 11/09/1999 24
NZ 993 US$ 504 11/09/1999 20
SK 2,879 US$ 353 11/09/1999 1
-----
$ (6)
=====
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Contracts In Exchange (Depreciation)
to Receive For Settlement Date (US$)
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A$ 1,157 US$ 737 11/03/1999 $ (29)
KB 462 US$ 760 11/09/1999 3
-----
$ (26)
=====
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
Summary of Country/
Securities by Country/Currency Currency Value % of Total
- -------------------------------------------------------------------
<S> <C> <C> <C>
United States $122,281 74.7
United Kingdom UK/KB 6,452 3.9
Japan Ja 3,211 2.0
Germany G/DM 2,627 1.6
France Fr/Eu 2,353 1.4
Greece Gr/GD 2,262 1.4
Netherlands Ne/Eu 2,284 1.4
Switzerland Sz 2,240 1.4
Finland Fi/Eu 2,181 1.3
Mexico Mx 2,006 1.2
Brazil Bz 1,690 1.0
Norway No/NK 1,570 0.9
Argentina Ar 1,321 0.8
Australia Au/A$ 1,266 0.8
Sweden Sw/SK 1,255 0.8
Italy It/Eu 1,149 0.7
New Zealand NZ 1,088 0.7
Bulgaria Bu 942 0.6
Spain Sp/Eu 928 0.6
Venezuela Ve 793 0.5
Portugal Pt/Eu 785 0.5
Hong Kong HK 755 0.5
Panama Pa 736 0.4
Turkey Tu 715 0.4
Poland Po 560 0.3
Russia Ru 285 0.2
-------- -----
$163,735 100.0
======== =====
</TABLE>
Certain securities are listed by country of underlying exposure but may trade
predominantly on other exchanges.
<TABLE>
<CAPTION>
Acronym Name
- ----------- ---------------------------
<S> <C>
A$ Australian Dollars
ADR American Depositary Receipt
Eu Euro
GD Greek Drachmas
KB British Pounds
NK Norwegian Krone
PIK Payment-In-Kind
SK Swedish Krona
</TABLE>
9
<PAGE>
Statement of Assets & Liabilities
October 31, 1999
(In thousands except for per share amounts and footnotes)
<TABLE>
<S> <C> <C>
Assets
Investments at value (cost $154,331) $163,735
Short-term obligations 10,331
--------
174,066
Cash $ 1
Unrealized appreciation on forward
currency contracts 63
Receivable for:
Interest 2,109
Fund shares sold 249
Dividends 141
Investments sold 12
Foreign tax reclaims 34
Other 13 2,622
----- --------
Total Assets $176,688
--------
Liabilities
Unrealized depreciation on forward
currency contracts 95
Payable for:
Fund shares repurchased 414
Investments purchased 173
Accrued:
Management fee 101
Transfer agent fee 34
Bookkeeping fee 6
Deferred Trustees fees 3
Other 142
-----
Total Liabilities 968
--------
Net Assets $175,720
--------
Class A
Net asset value & redemption price per
share ($54,385/3,540) $ 15.36(a)
---------
Maximum offering price per share
($15.36/0.9525) $ 16.13(b)
---------
Class B
Net asset value & offering price per
share ($112,213/7,322) $ 15.33(a)
---------
Class C
Net asset value & offering price per
share ($9,122/594) $ 15.35(a)
---------
Composition of Net Assets:
Capital paid in $147,801
Undistributed net investment income 874
Accumulated net realized gain 17,680
Net unrealized appreciation (depreciation) on:
Investments 9,404
Foreign currency transactions (39)
---------
$175,720
=========
</TABLE>
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $50,000 or more the offering price is reduced.
Statement of Operations
For the Year Ended October 31, 1999
(In thousands)
<TABLE>
<S> <C> <C>
Investment Income
Interest $ 7,251
Dividends 1,427
-------
Total Investment Income (net of
nonreclaimable foreign taxes withheld
at source which amounted to $39) 8,678
Expenses
Management fee $ 1,263
Service fee 452
Distribution fee -- Class A 94
Distribution fee -- Class B 862
Distribution fee -- Class C 68
Transfer agent fee 550
Bookkeeping fee 73
Trustees fee 14
Custodian fee 37
Audit fee 35
Legal fee 7
Registration fee 38
Reports to shareholders 26
Amortization of deferred organization
expenses 14
Other 53
-------
Total expenses 3,586
Fees waived by the Distributor -- Class A (19) 3,567
------- -------
Net Investment Income 5,111
-------
Net Realized and Unrealized Gain (Loss)
on Portfolio Positions
Net realized gain on:
Investments 19,695
Foreign currency transactions 177
-------
Net Realized Gain 19,872
-------
Net change in unrealized appreciation/
depreciation during the period on:
Investments (11,555)
Foreign currency transactions (50)
-------
Net Change in Unrealized
Appreciation/Depreciation (11,605)
-------
Net Gain 8,267
-------
Increase in Net Assets from Operations $13,378
-------
</TABLE>
10 See notes to financial statements.
<PAGE>
Statement of Changes in Net Assets
(In thousands)
<TABLE>
<CAPTION>
Years ended October 31
------------------------
Increase (Decrease) in Net Assets 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income $ 5,111 $ 3,759
Net realized gain 19,872 7,019
Net change in unrealized appreciation/depreciation (11,605) 791
--------- ---------
Net Increase from Operations 13,378 11,569
Distributions:
From net investment income -- Class A (1,696) (1,505)
From net realized gains -- Class A (2,112) (470)
From net investment income -- Class B (2,819) (2,266)
From net realized gains -- Class B (4,213) (802)
From net investment income -- Class C (217) (184)
From net realized gains -- Class C (328) (67)
--------- ---------
1,993 6,275
--------- ---------
Fund Share Transactions:
Receipts for shares sold -- Class A 7,542 12,412
Value of distributions reinvested -- Class A 3,596 1,852
Cost of shares repurchased -- Class A (11,089) (8,621)
--------- ---------
49 5,643
--------- ---------
Receipts for shares sold -- Class B 26,884 36,356
Value of distributions reinvested -- Class B 6,630 2,877
Cost of shares repurchased -- Class B (28,019) (14,398)
--------- ---------
5,495 24,835
--------- ---------
Receipts for shares sold -- Class C 2,530 2,671
Value of distributions reinvested -- Class C 508 229
Cost of shares repurchased -- Class C (2,275) (1,362)
--------- ---------
763 1,538
--------- ---------
Net Increase from Fund Share Transactions 6,307 32,016
--------- ---------
Total Increase 8,300 38,291
Net Assets
Beginning of period 167,420 129,129
--------- ---------
End of period (including undistributed net investment income of $874 and $384,
respectively) $ 175,720 $ 167,420
========= =========
Number of Fund Shares
Sold -- Class A 486 820
Issued for distributions reinvested -- Class A 235 126
Repurchased -- Class A (716) (575)
--------- ---------
5 371
--------- ---------
Sold -- Class B 1,736 2,388
Issued for distributions reinvested -- Class B 433 197
Repurchased -- Class B (1,814) (955)
--------- ---------
355 1,630
--------- ---------
Sold -- Class C 163 177
Issued for distributions reinvested -- Class C 33 16
Repurchased -- Class C (147) (90)
--------- ---------
49 103
--------- ---------
</TABLE>
See notes to financial statements. 11
<PAGE>
Notes to Financial Statements
October 31, 1999
Note 1. Accounting Policies
Organization
Colonial Strategic Balanced Fund (the Fund), a series of Liberty Funds Trust
III, formerly Colonial Trust III, is a diversified portfolio of a Massachusetts
business trust, registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company. The Fund's investment objective is
to seek current income and long-term growth, consistent with prudent risk, by
diversifying investments primarily in U.S. and foreign equity and debt
securities. The Fund may issue an unlimited number of shares. The Fund offers
three classes of shares: Class A, Class B and Class C. Class A shares are sold
with a front-end sales charge and an annual distribution fee. A 1.00% contingent
deferred sales charge is assessed 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 on redemptions made within one year
after purchase and an annual distribution fee.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
Security valuation and transactions
Equity securities generally are valued at the last sale price or, in the case of
unlisted or listed securities for which there were no sales during the day, at
current quoted bid prices.
Debt securities generally are valued by a pricing service based upon market
transactions for normal, institutional-size trading units of similar securities.
When management deems it appropriate, an over-the-counter or exchange bid
quotation is used.
Forward currency contracts are valued based on the weighted value of the
exchange traded contracts with similar durations.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
The value of all assets and liabilities quoted in foreign currencies are
translated into U.S. dollars at that day's exchange rates.
Portfolio positions for which market quotations are not readily available are
valued at fair value under procedures approved by the Trustees.
Security transactions are accounted for on the date the securities are
purchased, sold or mature.
Cost is determined and gains and losses are based upon the specific
identification method for both financial statement and federal income tax
purposes.
The Fund may trade securities on other than normal settlement terms. This may
increase the risk if the other party to the transaction fails to deliver and
causes the Fund to subsequently invest at less advantageous prices.
Determination of class net asset values and financial highlights
All income, expenses (other than the Class A, Class B and Class C distribution
fees), 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 were amortized on a straight-line basis over five years.
12
<PAGE>
Notes to Financial Statements Cont.
October 31, 1999
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., (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.
Underwriting discounts, service and distribution fees
Liberty Funds Distributor, Inc., (the Distributor), a subsidiary of the Advisor,
is the Fund's principal underwriter. For the year ended October 31, 1999, the
Fund has been advised that the Distributor retained net underwriting discounts
of $22,878 on sales of the Fund's Class A shares and received contingent
deferred sales charges (CDSC) of $79, $359,511 and $1,743, 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. Effective March 1, 1999, the plan decreased the payment
of the distribution fee to equal 0.10% annually for Class A. Also, the
Distibutor has voluntarily agreed, until further notice, to waive a portion of
the Class A share distribution fee so that it will not exceed 0.05% annually.
The CDSC and the fees received from the 12b-1 plan are used principally as
repayment to the Distributor for amounts paid by the Distributor to dealers who
sold such shares.
Other
The Fund pays no compensation to its officers, all of whom are employees of the
Advisor.
The Fund's Trustees may participate in a deferred compensation plan which may be
terminated at any time. Obligations of the plan will be paid solely out of the
Fund's assets.
13
<PAGE>
Notes to Financial Statements Cont.
October 31, 1999
Note 3. Portfolio Information
Investment activity
During the year ended October 31, 1999, purchases and sales of investments,
other than short-term obligations, were $101,274,311 and $103,053,489,
respectively, of which $5,623,494 and $4,925,620, respectively, were U.S.
government securities.
Unrealized appreciation (depreciation) at October 31, 1999, based on cost of
investments for federal income tax purposes was:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 21,596,481
Gross unrealized depreciation $(12,322,374)
------------
Net unrealized appreciation $ 9,274,107
============
</TABLE>
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, 1999.
Note 5. Other Related Party Transactions
During the year ended October 31, 1999, the Fund used Alphatrade, a wholly owned
subsidiary of Colonial Management Associates, Inc., as a broker. Total
commissions paid to Alphatrade during the year were $66,270.
14
<PAGE>
Financial Highlights
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Year Ended October 31, 1999
-----------------------------------------
Class A Class B Class C
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of period $ 15.170 $ 15.140 $ 15.170
-------- -------- --------
Income from Investment Operations
Net investment income (a) 0.504(b) 0.409 0.409
Net realized and unrealized gain 0.756 0.763 0.751
-------- -------- --------
Total from Investment Operations 1.260 1.172 1.160
-------- -------- --------
Less Distributions Declared to Shareholders
From net investment income (0.470) (0.382) (0.380)
From net realized gains (0.600) (0.600) (0.600)
-------- -------- --------
Total Distributions Declared to Shareholders (1.070) (0.982) (0.980)
-------- -------- --------
Net Asset Value, End of period $ 15.360 $ 15.330 $ 15.350
-------- -------- --------
Total return (c) 8.47%(d) 7.87% 7.78%
-------- -------- --------
Ratios to Average Net Assets
Expenses (e) 1.55%(b) 2.17% 2.17%
Net investment income (e) 3.26%(b) 2.64% 2.64%
Portfolio turnover 61% 61% 61%
Net assets at end of period (000) $ 54,385 $112,213 $ 9,122
(a) Per share data was calculated using average shares outstanding during the period.
(b) Net of fees waived by the Distributor which amounted to $0.005 per share and 0.05% (annualized).
(c) Total return at net asset value assuming no initial sales charge or contingent deferred sales charge.
(d) Had the Distributor 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.
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31, 1998
-------------------------------------
Class A Class B Class C
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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.
</TABLE>
15
<PAGE>
Financial Highlights Continued
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)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of period $ 12.910 $ 12.890 $12.910
-------- -------- -------
Income from Investment Operations
Net investment income (a)(c) 0.404 0.342 0.342
Net realized and unrealized gain 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 Advisor (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 Advisor 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.
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31, 1996
--------------------------------------
Class A Class B Class C
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of period $ 11.650 $ 11.640 $ 11.650
-------- -------- --------
Income from Investment Operations
Net investment income (a)(b) 0.369 0.314 0.314
Net realized and unrealized gain 1.264 1.260 1.258
-------- -------- --------
Total from Investment Operations 1.633 1.574 1.572
-------- -------- --------
Less Distributions Declared to Shareholders
From net investment income (0.333) (0.284) (0.272)
From net realized gains (0.040) (0.040) (0.040)
-------- -------- --------
Total Distributions Declared to Shareholders (0.373) (0.324) (0.312)
-------- -------- --------
Net Asset Value, End of period $ 12.910 $ 12.890 $ 12.910
-------- -------- --------
Total return (c)(d) 14.24% 13.71% 13.68%
-------- -------- --------
Ratios to Average Net Assets
Expenses (e) 1.65% 2.10% 2.10%
Net investment income (e) 2.99% 2.54% 2.54%
Fees and expenses waived or borne by the Advisor (e) 0.19% 0.19% 0.19%
Portfolio turnover 59% 59% 59%
Net assets at end of period (000) $ 25,580 $ 40,065 $ 3,554
(a) Net of fees and expenses waived or borne by the Advisor which amounted to: $ 0.023 $ 0.023 $ 0.023
(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.
</TABLE>
16
<PAGE>
Financial Highlights Continued
<TABLE>
<CAPTION>
Year Ended October 31, 1995
-------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of period $ 9.910 $ 9.900 $ 9.900
------- ------- -------
Income from Investment Operations
Net investment income(a)(b) 0.325 0.277 0.277
Net realized and unrealized gain 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 (c)(d) 21.47% 21.00% 21.04%
------- ------- -------
Ratios to Average Net Assets
Expenses (e) 1.65% 2.10% 2.10%
Net investment income (e) 3.05% 2.60% 2.60%
Fees and expenses waived or borne by the Advisor (e) 0.43% 0.43% 0.43%
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 Advisor which amounted to: $ 0.042 $ 0.042 $ 0.042
(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.
</TABLE>
- --------------------------------------------------------------------------------
1999 Federal Tax information (unaudited)
22% of the ordinary income distributed by the Fund in the year ended October 31,
1999 qualifies for the corporate dividends received deduction.
For the fiscal year ended October 31, 1999 the Fund earned $16,163,632 of
long-term capital gains.
Approximately 35% of the Fund's distributions (21% of gross income) were 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.
- --------------------------------------------------------------------------------
17
<PAGE>
Report of Independent Accountants
To the Trustees of Liberty Funds 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, 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 Liberty Funds Trust III, formerly Colonial Trust III), at
October 31, 1999, 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, 1999
by correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 13, 1999
18
<PAGE>
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<PAGE>
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<PAGE>
Trustees & Transfer Agent
- --------------------------------------------------------------------------------
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 V. 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
Academic Vice President and Dean of Faculties, Boston College (former Dean,
Boston College School of Management)
Thomas E. Stitzel
Professor of Finance, College of Business, Boise State University; Business
Consultant and Author
Robert L. Sullivan
Retired Partner, KPMG LLP (formerly Management Consultant, Saatchi and Saatchi
Consulting Ltd. and Principal and International Practice Director, Management
Consulting, Peat Marwick Main & Co.)
Anne-Lee Verville
Consultant (formerly General Manager, Global Education Industry, and President,
Applications Solutions Division, IBM Corporation)
- --------------------------------------------------------------------------------
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
The 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 the Liberty Funds Distributor, Inc. Performance Update.
<PAGE>
Liberty offers the independent thinking and collective strength of six financial
specialists. Our distinguished product line helps financial advisors and their
clients build diversified investment portfolios for long-term financial goals.
LIBERTY FUNDS
ALL-STAR Institutional money management approach for individual investors.
COLONIAL Fixed income and value style equity investing.
CRABBE HUSON A contrarian approach to fixed income and equity investing.
NEWPORT A leading in international investing.(SM)
STEIN ROE
ADVISOR Growth style equity investing.
KEYPORT A leading provider of innovative annuity products.
[Logo]
Liberty's mutual funds are offered by prospectus through Liberty Funds
Distributor, Inc.
Before you invest, consult your financial advisor.
Your financial advisor can help you develop a long-term plan for reaching your
financial goals.
COLONIAL STRATEGIC BALANCED FUND Annual Report
[Logo} LIBERTY FUNDS
ALL-STAR [bullet] COLONIAL [bullet] CRABBE HUSON [bullet] NEWPORT [bullet]
STEIN ROE ADVISOR
Liberty Funds Distributor, Inc. [Copyright] 1999
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
www.libertyfunds.com
