[COVER]
THE COLONIAL FUND Annual Report
October 31, 1999
[Picture of two men rowing]
<PAGE>
President's Message
[Photo of Stephen E. Gibson]
Dear Shareholder:
It has been another strong year for the U.S. economy and a year of economic
rebuilding for both industrialized and developing economies abroad. Consumer
confidence, personal income and employment have remained strong while inflation
has remained in check. Although costs have increased in some segments, notably
energy, businesses have thus far managed to offset them with productivity gains.
It has also been a strong year for the U.S. stock market, although the indexes'
impressive gains masked the volatility of the period and the selectivity that
favored large companies and technology stocks. In the spring it appeared that
the market was broadening to include smaller companies, as well as more
value-oriented stocks. However, that shift was short lived. Once the Federal
Reserve Board raised interest rates late in June, then followed with another
increase in August, investors sought refuge in the stocks of large companies
with familiar names.
What was good for the stock market turned out to be a challenge for the bond
market. Bonds -- the victims of rising interest rates and declining
demand -- lagged for most of the year. That created a challenging environment
for The Colonial Fund, which invests in both stocks and bonds.
The following report will provide you with more specific information about your
Fund's performance and the strategies used during the period. As always, we
thank you for choosing The Colonial Fund. We look forward to continuing to
serve your investment needs.
Respectfully,
/s/ Stephen E. Gibson
- ---------------------
Stephen E. Gibson
President
December 10, 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
9 Financial Statements
11 Notes to Financial Statements
14 Financial Highlights
</TABLE>
- --------------------------------
Not FDIC | May Lose Value
Insured | No Bank Guarantee
- --------------------------------
<PAGE>
Highlights
> Mixed results for stock market investors.
Although many of the major equity indexes delivered another year of 20% plus
performance, the average stock on the New York Stock Exchange fell 20%.
> Bonds hurt by interest rate increases.
The Federal Reserve Board lowered rates at the beginning of the period, but
then came back and raised rates twice in the middle of the year, wiping out
any positive gains for bonds.
> Fund was a competitive performer in its category.
A greater emphasis on stocks and good sector selection helped the Fund's
Class A shares, without a sales charge, perform similarly to its Lipper
category.
The Colonial Fund Performance vs. Lipper Peers
11/1/98 - 10/31/99
[Bar Chart]
The Colonial Fund Class A (without sales charge) 10.94%
Lipper Balanced Funds Category Average 11.30%
[End Bar Chart]
Source: Lipper, Inc. The Fund's Class A share return is compared to the Lipper
Balanced Funds category average.
Lipper, Inc., a widely respected data provider in the industry, calculates an
average total return for mutual funds with similar investment objectives as
those detailed in the Fund's prospectus. The total return calculated for the
Lipper Balanced Funds category was 11.30% for the 12 months ended October 31,
1999. The Fund's Class A shares were ranked in the third quartile for the 1
year (231 out of 431), in the first quartile for the 5 years (40 out of 207)
and in the first quartile for the 10 years (10 out of 60). Lipper rankings and
averages do not include sales charges. Performance for different share classes
will vary with fees associated with each class.
Past performance cannot predict future results. Returns and values of an
investment will vary, resulting in a gain or loss on sale. All results assume
reinvestment of distributions.
Net asset value as of
10/31/99
<TABLE>
<S> <C>
Class A $10.81
- --------------------
Class B $10.79
- --------------------
Class C $10.78
- --------------------
Class Z $11.28
- --------------------
</TABLE>
Distributions declared per
share from 11/1/98 - 10/31/99
<TABLE>
<S> <C>
Class A $0.668
- --------------------
Class B $0.587
- --------------------
Class C $0.589
- --------------------
Class Z $0.693
- --------------------
</TABLE>
1
<PAGE>
Annual Report: The Colonial Fund
Portfolio Managers' Report
Positive returns for the year
An emphasis on stocks and careful selection among industries helped The
Colonial Fund achieve performance that tracked its Lipper category during the
12-month period ended October 31, 1999. The Fund's Class A shares, without a
sales charge, rose 10.94%. That compares similarly to the Lipper Balanced Fund
Average, which was up 11.30% for the period.
A tale of two markets
During the first half of the year, investors began to focus their attention on
areas of the stock market beyond large-company growth stocks.
Value-oriented sectors such as energy, basic materials and consumer cyclicals
did well. However, the shift was short-lived. Two successive interest rate
increases and an economy that looked like it was heating up made investors
nervous. Unfortunately, value stocks gave back their gains. A narrow band of
large technology companies continued to climb, but most of the stock market had
a poor showing in the second half of the year.
Over the period, we continued to implement the strategy we began last year,
raising the Fund's exposure to growth stocks and technology companies, and
increasing the median market capitalization of the Fund. The Fund's stock
position rose from approximately 60% to 67% and bonds declined from 40% to 33%,
primarily as the result of market action.
Fund's technology exposure increased
During the period, we raised the Fund's exposure to the technology sector to
24.2%, which made a positive contribution to the Fund's performance. Applied
Materials, Apple Computer, Texas Instruments and Sun Microsystems (1.1%, 1.0%,
1.4% and 1.0% of net assets, respectively) were among the best technology
performers in the portfolio. The group benefited from a strong economy, which
allowed companies to continue to direct capital spending toward technology, and
increased semiconductor demand, for use in computers and communications
products.
We also experienced disappointments in the technology area. We invested in
Hewlett-Packard, which we sold during the period, and Unisys (0.5% of net
assets) on expectations of rising earnings. However, earnings failed to live up
to our expectations.
Top 10 sector breakdown
as of 10/31/99
<TABLE>
<S> <C>
Technology 24.2%
- ------------------------------------
Financials 18.6%
- ------------------------------------
Health Care 9.5%
- ------------------------------------
Consumer Cyclicals 9.4%
- ------------------------------------
Consumer Staples 9.1%
- ------------------------------------
Capital Goods 9.0%
- ------------------------------------
Communication Services 6.9%
- ------------------------------------
Utilities 5.1%
- ------------------------------------
Energy 4.8%
- ------------------------------------
Transportation 1.9%
- ------------------------------------
</TABLE>
Sector breakdown is calculated as a percentage of total equity investments.
Because the Fund is actively managed, there can be no guarantee the Fund will
maintain this breakdown in the future.
BOUGHT
- -------------------------
Applied Materials, Inc.
Applied Materials (1.1% of net assets) is a leader in the semiconductor capital
equipment industry. We purchased its shares in the fall of 1998 when the
semi-conductor industry was in a downturn. When the industry made a strong
comeback in 1999, the company was a direct beneficiary. We expect it to continue
to benefit from the turn in the industry cycle and from improving Asian
economies.
2
<PAGE>
Mixed results from financial and health care stocks
Financial services and health care are two of the largest sectors in the Fund.
Although financial stocks did well over the 12-month period, rising interest
rates negatively impacted the sector during the second half of the year. In the
health care sector, concern about a reduction in Medicare benefits hurt drug
company stocks. A move to endorse a patient's bill of rights also unsettled the
HMO and hospital segment. As a result, we eliminated our investments in
Universal Health Services, Tenet Health Care and Healthsouth. And, we cut back
on our investment in Merck (1.0% of net assets).
A challenging environment for bonds
The year began on a positive note for bonds as the Fed cut short-term interest
rates and the world began to lower its expectations for growth as a result of
turmoil in the foreign markets. However, the U.S. economy continued its strong
growth. That led the Fed to reverse its course and raise interest rates twice
during the summer. As a result, bond prices declined over fears of rekindled
inflation and continued monetary tightening. Corporate and mortgage bonds were
hurt as investors seemed reluctant to take on any amount of risk. The
portfolio's relatively low weighting to the bond sector helped shield investors
in this challenging environment.
Looking ahead
What's the next move for interest rates? Signs that inflation could have the
potential to pick up are evident in the commodities market as well as the tight
labor market. That suggests that the Fed could raise interest rates again.
However, inflation has remained relatively low, and there are some signs that
the domestic economy is starting to slow -- both positive factors. We continue
to think that growth stocks have potential, but we believe that value stocks
also offer attractive opportunities. As a result, we will keep a mix of both in
the portfolio.
/s/ John Lennon /s/ Peter Wiley /s/ Leslie Finnemore /s/ Ann Peterson
John Lennon and Peter Wiley, a senior vice president and vice president of
Colonial Management Associates (CMA), respectively, manage the equity portion of
the Fund. Leslie Finnemore and Ann Peterson, a senior vice president and vice
president of CMA, respectively, manage the bond portion of the Fund.
Investing in stocks and bonds involves certain risks, including price
fluctuations caused by economic and business developments and changes in
interest rates.
Top 10 equity holdings
as of 10/31/99
<TABLE>
<S> <C>
General Electric Co. 1.9%
- -----------------------------------
Bristol Myers Squibb 1.8%
- -----------------------------------
Cisco Systems 1.7%
- -----------------------------------
Chase Manhattan Corp. 1.5%
- -----------------------------------
Texas Instruments Inc. 1.4%
- -----------------------------------
Microsoft Corp. 1.4%
- -----------------------------------
International Business
Machines Corp. 1.4%
- -----------------------------------
Corning Inc. 1.3%
- -----------------------------------
MCI WorldCom Inc. 1.3%
- -----------------------------------
Omnicom Group 1.2%
- -----------------------------------
</TABLE>
Holdings are calculated as a percentage of net assets. Because the Fund is
actively managed, there can be no guarantee the Fund will maintain these
holdings in the future.
SOLD
- -------------------------
Merck & Co., Inc.
We reduced our investment in Merck (1.0% of net assets). Historically, Merck
has been considered a premier drug company. However, we believe the company's
business prospects have weakened and its outlook for new product development
over the next several years is less than stellar. The company is also exposed
to increasing competition from generic drugs since the patents on some of its
strongest-selling drugs are due to expire over the next several years.
3
<PAGE>
Annual Report: The Colonial Fund
Performance Information
Performance of a $10,000 Investment in Class A Shares 10/31/89 - 10/31/99
[Mountain Chart]
<TABLE>
<CAPTION>
Salomon Brothers
Russell 1000 Broad Investment S&P MidCap Without Sales With Sales
Index Grade Index 400 Index Charge Charge
<S> <C> <C> <C> <C> <C>
10/89 10,000 10,000 10,000 10,000 9,425
10/90 8,741 10,638 8,660 8,878 8,367
10/91 11,551 12,315 14,155 11,653 10,983
10/92 12,427 13,557 15,460 12,771 12,037
10/93 14,007 15,182 18,788 15,352 14,469
10/94 14,044 14,636 19,236 15,465 14,576
10/95 17,378 16,932 23,315 18,825 17,742
10/96 20,895 17,929 27,361 21,858 20,601
10/97 27,006 19,514 36,299 27,723 26,129
10/98 31,849 21,346 38,735 30,240 28,502
10/99 39,470 21,451 46,897 33,574 31,643
</TABLE>
[End Mountain Chart]
Average Annual Total Returns as of 10/31/99
<TABLE>
<CAPTION>
Share Class A B C Z
Inception Date 1904 5/5/92 8/1/97 7/31/95
- --------------------------------------------------------------------------------------------------------------------
Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge Charge
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year 10.94% 4.56% 10.11% 5.11% 10.15% 9.15% 15.92%
- --------------------------------------------------------------------------------------------------------------------
5 Years 16.75 15.38 15.88 15.65 16.36 16.36 18.03
- --------------------------------------------------------------------------------------------------------------------
10 Years 12.88 12.21 12.24 12.24 12.69 12.69 13.49
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Average Annual Total Returns as of 9/30/99
<TABLE>
<CAPTION>
Share Class A B C Z
- ---------------------------------------------------------------------------------------------------------------
Without With Without With Without With Without
Sales Sales Sales Sales Sales Sales Sales
Charge Charge Charge Charge Charge Charge Charge
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year 10.78% 4.41% 10.06% 5.06% 9.99% 8.99% 15.72%
- ---------------------------------------------------------------------------------------------------------------
5 Years 16.10 14.73 15.22 14.99 15.73 15.73 17.36
- ---------------------------------------------------------------------------------------------------------------
10 Years 12.09 11.42 11.47 11.47 11.91 11.91 12.70
- ---------------------------------------------------------------------------------------------------------------
</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 5.75% charge for Class A shares and the contingent deferred sales
charge (CDSC) maximum charge of 5% for one year and 2% for five years for Class
B shares and 1% for one year for Class C shares. Performance for different
share classes will vary based on differences in sales charges and fees
associated with each class.
Class B, C and Z share (newer class shares) performance information includes
returns of the Fund's Class A shares (the oldest existing fund class) for
periods prior to the inception of the newer class shares. These Class A share
returns were not restated to reflect any expense differential (e.g., Rule 12b-1
fees) between Class A shares and the newer class shares. Had the expense
differential been reflected, the returns for the periods prior to the inception
of Class B and Class C shares would have been lower.
The Standard & Poor's MidCap 400 Index is an unmanaged index that tracks the
performance of mid-capitalization U.S. stocks. The Russell 1000 Index is an
unmanaged index that tracks the performance of small-capitalization stocks
traded on the New York Stock Exchange, the American Stock Exchange and the
NASDAQ. The Salomon Brothers Broad Investment Grade Index is an unmanaged index
that tracks the performance of corporate, mortgage, agency and treasury bonds.
Unlike mutual funds, indexes are not investments and do not incur fees or
charges. It is not possible to invest in an index.
Performance of a $10,000
investment in all share
classes 10/31/89 - 10/31/99
<TABLE>
<CAPTION>
Without With
Sales Sales
Charge Charge
- -------------------------------
<S> <C> <C>
Class A $33,574 $31,643
- -------------------------------
Class B $31,739 $31,739
- -------------------------------
Class C $33,021 $33,021
- -------------------------------
Class Z $35,453 N/A
- -------------------------------
</TABLE>
4
<PAGE>
Investment Portfolio
October 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Common Stocks - 66.9% Country Shares Value
- ------------------------------------------------------------------
<S> <C> <C> <C>
FINANCE, INSURANCE & REAL ESTATE - 12.5%
Depository Institutions - 3.6%
Canadian Imperial Bank of Commerce Ca 547 $ 11,776
Chase Manhattan Corp. 280 24,456
Fleet Boston Financial Corp. 302 13,184
Greenpoint Financial Corp. 115 3,272
UnionBanCal Corp. 148 6,407
----------
59,095
----------
Holding Companies - 1.0%
Fortis Amev NV Ne 493 17,020
----------
Insurance Carriers - 4.3%
Allstate Corp. 463 13,311
American International Group, Inc. 188 19,373
CIGNA Corp. 194 14,479
Citigroup, Inc. 334 18,062
Old Republic International Corp. 293 4,007
United Healthcare Corp. 46 2,352
----------
71,584
----------
Nondepository Credit Institutions - 0.5%
Associates First Capital Corp. 97 3,539
Metris Companies, Inc. 150 5,166
----------
8,705
----------
Security Brokers & Dealers - 3.1%
A.G. Edwards, Inc. 447 13,432
Bear Stearns Cos., Inc. 94 4,004
Merrill Lynch & Co., Inc. 155 12,144
Morgan Stanley Dean Witter & Co. 63 6,916
Paine Webber Group, Inc. 366 14,927
----------
51,423
----------
- ------------------------------------------------------------------
MANUFACTURING - 33.8%
Chemicals & Allied Products - 7.5%
Allergan, Inc. 79 8,504
Amgen, Inc. 78 6,229
Biogen, Inc. (a) 51 3,795
Bristol-Myers Squibb Co. 395 30,356
Dow Chemical Co. 73 8,632
Eli Lilly & Co. 151 10,386
Johnson & Johnson 71 7,437
Merck & Co., Inc. 204 16,239
Pfizer, Inc. 193 7,632
Procter & Gamble Co. 166 17,399
Warner-Lambert Co. 84 6,712
----------
123,321
----------
Communications Equipment - 1.7%
Lucent Technologies, Inc. 230 14,778
Motorola, Inc. 88 8,584
Tellabs, Inc. (a) 64 4,067
----------
27,429
----------
Electrical Industrial Equipment - 1.9%
General Electric Co. 231 31,315
----------
Electronic & Electrical Equipment - 0.5%
Micron Technology, Inc. 105 7,488
----------
<CAPTION>
Country Shares Value
- ------------------------------------------------------------------
<S> <C> <C> <C>
Electronic Components - 2.5%
Intel Corp. 235 $ 18,190
Texas Instruments, Inc. 258 23,129
----------
41,319
----------
Food & Kindred Products - 2.8%
Anheuser Busch Cos., Inc. 198 14,226
Coca-Cola Enterprises, Inc. 223 5,698
General Mills, Inc. 66 5,754
PepsiCo, Inc. 226 7,832
Quaker Oats Co. 83 5,775
Sara Lee Corp. 243 6,582
----------
45,867
----------
Furniture & Fixtures - 0.3%
Herman Miller, Inc. 200 4,338
----------
Household Appliances - 0.3%
Whirlpool Corp. 80 5,575
----------
Lumber & Wood Products - 0.2%
Weyerhaeuser Co. 70 4,190
----------
Machinery & Computer Equipment - 8.5%
Apple Computer, Inc. 199 15,945
Applied Materials, Inc. (a) 200 17,962
Cisco Systems, Inc. (a) 372 27,506
EMC Corp. (a) 233 17,009
International Business Machines Corp. 233 22,872
Lexmark International Group, Inc. 71 5,511
Sun Microsystems, Inc. (a) 150 15,872
Tyco International Ltd. 240 9,585
Unisys Corp. (a) 320 7,760
----------
140,022
----------
Measuring & Analyzing Instruments - 0.3%
Baxter International, Inc. 85 5,534
----------
Paper Products - 0.6%
International Paper Co. 87 4,568
Kimberly Clark Corp. 97 6,123
----------
10,691
----------
Petroleum Refining - 2.5%
British Petroleum Co. PLC, ADR UK 100 5,775
Chevron Corp. 60 5,515
Exxon Corp. 174 12,887
Mobil Corp. 107 10,364
Phillips Petroleum Co. 165 7,673
----------
42,214
----------
Rubber & Plastic - 0.2%
Wynn's International, Inc. 196 3,053
----------
Stone, Clay, Glass & Concrete - 1.3%
Corning, Inc. 275 21,622
----------
Transportation Equipment - 2.7%
AlliedSignal, Inc. 250 14,234
Delphi Automotive Systems Corp. 80 1,321
Ford Motor Co. 185 10,152
Textron, Inc. 235 18,139
----------
43,846
----------
</TABLE>
5
<PAGE>
Investment Portfolio (continued)
October 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Country Shares Value
- -----------------------------------------------------------------------
<S> <C> <C> <C>
MINING & ENERGY - 1.7%
Oil & Gas Extraction - 0.5%
Falcon Drilling Co., Inc. (a) 500 $ 6,219
Sonat Offshore Drilling Co. 83 2,248
----------
8,467
----------
Oil & Gas Field Services - 1.2%
Enron Corp. 434 17,333
Petroleum Geo-Services, ADR (a) 141 2,065
----------
19,398
----------
- -----------------------------------------------------------------------
RETAIL TRADE - 4.5%
Apparel & Accessory Stores - 0.2%
Abercrombie & Fitch Co. (a) 134 3,652
----------
Food Stores - 0.4%
Kroger Corp. (a) 326 6,785
----------
General Merchandise Stores - 1.7%
Dayton Hudson Corp. 160 10,340
Kmart Corp. 450 4,529
Wal-Mart Stores, Inc. 232 13,264
----------
28,133
----------
Home Furnishings & Equipment - 1.6%
Best Buy Co., Inc. (a) 176 9,768
Tandy Corp. 275 17,289
----------
27,057
----------
Miscellaneous Retail - 0.2%
CVS Corp. 69 2,975
----------
Restaurants - 0.4%
Brinker International, Inc. (a) 300 6,994
----------
- -----------------------------------------------------------------------
SERVICES - 4.9%
Business Services - 1.2%
Omnicom Group, Inc. 220 19,386
----------
Computer Related Services - 1.0%
America Online, Inc. 25 3,242
Teradyne, Inc. (a) 350 13,475
----------
16,717
----------
Computer Software - 2.7%
BMC Software, Inc. (a) 143 9,166
Compuware Corp. (a) 250 6,953
Microsoft Corp. (a) 248 22,965
Oracle Systems Corp. (a) 100 4,756
----------
43,840
----------
- -----------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 8.9%
Air Transportation - 1.3%
AMR Corp. (a) 150 9,525
Delta Air Lines, Inc. 210 11,432
----------
20,957
----------
Electric Services - 2.4%
Edison International 300 8,887
Entergy Corp. 344 10,289
Texas Utilities Co. 300 11,625
Unicom Corp. 220 8,429
----------
39,230
<CAPTION>
Country Shares Value
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunication - 5.2%
AT&T Corp. 285 $ 13,324
Bell Atlantic Corp. 100 6,494
BellSouth Corp. 119 5,341
Comcast Corp., Special Class A 241 10,135
GTE Corp. 170 12,750
MCI WorldCom, Inc. (a) 240 20,595
SBC Communications, Inc., Class A 345 17,583
----------
86,222
----------
- -----------------------------------------------------------------------
WHOLESALE TRADE - 0.6%
Durable Goods - 0.3%
Beers NV Ne 144 5,233
----------
Nondurable Goods - 0.3%
Sysco Corp. 110 4,220
----------
TOTAL COMMON STOCKS
(cost of $786,139) 1,104,917
----------
</TABLE>
Bonds & Notes - 28.6% Par
- -----------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS - 21.4%
Government Agencies - 16.3%
<TABLE>
<CAPTION>
Maturities
Coupon From/To
- ----------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp.,
6.000% 2009-2026 $18,204 17,406
------
Federal National Mortgage Association:
6.000% 2008-2029 41,271 40,133
6.500% 2008-2023 81,607 79,559
7.000% 2024 (b) 25,000 24,938
7.500% 2018 (b) 30,000 30,065
-------
174,695
-------
Government National Mortgage Association:
6.500% 2024-2029 40,718 39,031
7.000% 2023-2024 39,142 38,626
-------
77,657
-------
Government Obligations - 5.1%
U.S. Treasury Bond:
6.375% 08/15/27 3,770 3,757
8.750% 08/15/20 26,349 33,010
9.250% 02/15/16 16,089 20,486
-------
57,253
-------
U.S. Treasury Note,
6.500% 05/15/08 25,500 25,950
-------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (cost of $353,799) 352,961
-------
</TABLE>
6
<PAGE>
Investment Portfolio (continued)
October 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Maturities
Coupon From/To Par Value
- -----------------------------------------------------------------------
<S> <C> <C> <C>
NON AGENCY MORTGAGE-BACKED & ASSET
BACKED SECURITIES - 3.1%
Non Agency Mortgage-Backed - 2.1%
Aames Mortgage Trust,
7.870% 09/15/25 $2,145 $2,134
Countrywide Home Loans,
6.500% 12/25/28 1,980 1,754
GE Capital Mortgage Services, Inc.,
6.250% 01/25/29 1,397 1,157
Headlands Mortgage Securities, Inc.,
6.500% 11/25/28 719 594
6.500% 11/25/28 1,982 1,755
7.000% 02/25/28 3,311 3,106
Norwest Asset Securities Corp.,
6.250% 01/15/29 3,573 2,948
6.500% 01/25/29 1,785 1,507
PNC Mortgage Securities Corp.,
7.000% 03/25/28 3,439 3,174
Provident Bank Home Equity Loan Trust,
7.600% 10/25/12 2,389 2,398
Residential Accredit Loans, Inc:
6.500% 03/25/29 3,097 2,740
7.000% 10/25/12 4,004 3,845
7.250% 12/25/27 4,342 4,013
Residential Funding Mortgage Securities, Inc.,
6.500% 04/25/13 2,913 2,793
------
33,918
------
Asset Backed Securities - 1.0%
Delta Funding Home Equity Loan Trust,
8.010% 10/25/27 5,000 5,067
Green Tree Financial Corp.,
7.700% 09/15/26 3,950 3,857
Sears Credit Account Master Trust,
6.000% 08/15/05 3,000 2,970
UCFC Home Equity Loan Corp.,
8.025% 08/10/25 5,152 5,180
------
17,074
------
TOTAL NON-AGENCY MORTGAGE-BACKED &
ASSET BACKED SECURITIES (cost of $53,857) 50,992
------
Corporate Fixed Income Bonds & Notes - 4.1%
- -----------------------------------------------------------------------
FINANCE, INSURANCE & REAL
ESTATE - 1.4%
Depository Institutions - 0.7%
Bank One Texas,
6.250% 02/15/08 1,000 936
Comerica Bank,
7.875% 09/15/26 1,000 1,007
Fleet Boston Financial Corp.,
6.700% 07/15/28 1,000 871
KeyBank,
7.125% 08/15/06 2,000 1,988
NationsBank Corp.,
6.875% 02/15/05 2,000 1,980
Norwest Corp.,
6.650% 10/15/23 1,000 880
<CAPTION>
Par Value
- -----------------------------------------------------------------------
<S> <C> <C>
PNC Funding Corp.,
6.875% 07/15/07 $1,000 $ 972
Signet Banking Corp.,
7.800% 09/15/06 2,000 2,046
Wachovia Corp.,
6.250% 08/04/08 1,000 940
------
11,620
------
Insurance Agents & Brokers - 0.1%
General Electric Global Insurance Holding
Corp.,
7.000% 02/15/26 1,000 931
------
Insurance Carriers - 0.1%
Metropolitan Life Insurance Co.,
6.300% 11/01/03 2,000 1,938
------
Nondepository Credit
Insurance - 0.3%
Associates Corp. of North America,
6.875% 11/15/08 1,000 981
General Motors Acceptance Corp.,
6.125% 01/22/08 2,000 1,869
Household Finance Corp.,
6.400% 06/17/08 1,000 939
7.625% 01/15/03 1,000 1,018
------
4,807
------
Security Brokers & Dealers - 0.2%
Bear Stearns Co., Inc.,
6.500% 08/01/02 1,000 987
Merrill Lynch & Co., Inc.,
6.000% 02/12/03 1,000 976
Morgan Stanley, Dean Witter,
Discover and Co.,
8.100% 06/24/02 1,000 1,030
Salomon, Inc.,
7.300% 05/15/02 1,000 1,012
------
4,005
------
- -----------------------------------------------------------------------
MANUFACTURING - 0.5%
Chemicals & Allied Products - 0.2%
Dow Chemical Co.,
7.375% 03/01/23 1,000 966
Equistar Chemicals, L.P.,
8.750% 02/15/09 2,000 1,961
------
2,927
------
Fabricated Metal - 0.0%
Masco Corp.,
6.625% 04/15/18 1,000 905
------
Food & Kindred Products - 0.1%
Archer Daniels Midland Co.,
6.750% 12/15/27 1,000 903
Coca-Cola Enterprises, Inc.,
6.950% 11/15/26 1,000 928
------
1,831
------
Miscellaneous Manufacturing - 0.1%
Raytheon Co.,
6.750% 08/15/07 2,000 1,894
------
Transportation Equipment - 0.1%
Ford Motor Co.,
7.125% 11/15/25 2,000 1,887
------
</TABLE>
7
<PAGE>
Investment Portfolio (continued)
October 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Par Value
- --------------------------------------------------------------------------
<S> <C> <C>
MINING & ENERGY - 0.2%
Crude Petroleum & Natural Gas - 0.1%
Union Oil Co. of California,
7.200% 05/15/05 $1,000 $ 989
-------
Oil & Gas Field Services - 0.1%
Enron Corp.,
6.750% 07/01/05 1,000 957
Phillips Petroleum Co.,
6.650% 07/15/18 1,000 907
-------
1,864
-------
- --------------------------------------------------------------------------
RETAIL TRADE - 0.2%
General Merchandise Stores - 0.1%
Dillard Department Stores, Inc.,
6.625% 01/15/18 1,000 839
Sears, Roebuck & Co. Acceptance Corp.,
6.750% 01/15/28 1,000 842
-------
1,681
-------
Miscellaneous Retail - 0.1%
Dayton Hudson Corp.,
7.250% 09/01/04 2,000 2,014
-------
- --------------------------------------------------------------------------
SERVICES - 0.2%
Business Services
Federal Express Corp.,
7.500% 01/15/18 4,340 4,282
-------
- --------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATIONS, ELECTRIC,
GAS & SANITARY SERVICES - 1.6%
Air Transportation - 0.1%
Lockheed Martin Corp.,
7.250% 05/15/06 2,000 1,948
-------
Broadcasting - 0.1%
News America Holdings, Inc.,
7.375% 10/17/08 2,000 1,960
-------
Cable - 0.3%
Comacast Cable Communications, Inc.,
8.375% 05/01/07 1,000 1,057
Continental Cablevision, Inc.,
8.875% 09/15/05 2,000 2,148
TCI Communications, Inc.,
8.650% 09/15/04 2,000 2,134
-------
5,339
------
Communications - 0.1%
U.S. West Capital Funding, Inc.,
6.375% 07/15/08 1,000 938
-------
Electric Services - 0.5%
Arizona Public Service Co.,
6.250% 01/15/05 1,000 949
Carolina Power & Light Co.,
6.800% 08/15/07 2,000 1,957
Florida Power & Light Co.,
6.000% 06/01/08 1,000 932
Houston Lighting & Power Co.,
6.500% 04/21/03 2,000 1,955
</TABLE>
<TABLE>
<CAPTION>
Par Value
- --------------------------------------------------------------------------
<S> <C> <C>
Public Service Co. of Colorado,
7.125% 06/01/06 $1,000 $ 1,003
Texas Utilities Electric Co.,
8.250% 04/01/04 1,000 1,036
----------
7,832
----------
Gas Services - 0.1%
Sonat, Inc.,
6.875% 06/01/05 1,000 969
----------
Railroad - 0.1%
Norfolk Southern Corp.,
7.800% 05/15/27 1,000 1,002
----------
Telecommunication - 0.3%
BellSouth Telecommunications, Inc.,
6.375% 06/01/28 1,000 871
GTE Corp.,
6.840% 04/15/18 2,000 1,883
Pacific Bell,
6.875% 08/15/06 2,000 1,978
WorldCom, Inc.,
6.950% 08/15/28 1,000 938
----------
5,670
----------
TOTAL CORPORATE FIXED INCOME
BONDS & NOTES (cost of $74,092) 69,233
----------
TOTAL BONDS & NOTES
(cost of $481,748) 473,186
----------
TOTAL INVESTMENTS - 95.5%
(cost of $1,267,887) (c)
1,578,103
----------
Short-Term Obligations - 8.2%
- --------------------------------------------------------------------------
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 2015, market
value $138,519 (repurchase proceeds $135,144) 135,144 135,144
----------
Other Assets & Liabilities, Net - (3.7)% (61,473)
- --------------------------------------------------------------------------
NET ASSETS - 100% 1,651,774
==========
</TABLE>
Notes To Investment Portfolio:
- --------------------------------------------------------------------------
(a) Non-income producing.
(b) This security, or a portion thereof, has been purchased on a delayed
delivery basis whereby the terms that are fixed are the purchase
price, interest rate and settlement date. The exact quantity
purchased may be slightly more or less than the amount shown.
(c) Cost for federal income tax purposes is the same.
<TABLE>
<CAPTION>
Summary of
Securities by Country Country Value % of Total
- --------------------------------------------------------------------------
<S> <C> <C> <C>
United States $1,538,299 97.5
Netherlands Ne 22,253 1.4
Canada Ca 11,776 0.7
United Kingdom UK 5,775 0.4
---------- -----
$1,578,103 100.0%
---------- -----
</TABLE>
Certain securities are listed by country of underlying exposure but may trade
predominantly on other exchanges.
<TABLE>
<CAPTION>
Acronym Name
- ----------- ----------
<S> <C>
ADR American Depositary Receipt
</TABLE>
8
<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 $1,267,887) $1,578,103
Short-term obligations 135,144
----------
1,713,247
Cash including foreign currencies
(cost $261) $ 256
Receivable for:
Interest 3,983
Dividends 1,138
Fund shares sold 951
Investments sold 243
Foreign tax reclaims 234
Other 147 6,952
------ ----------
Total Assets 1,720,199
Liabilities
Cash including foreign currencies
(cost $332) 332
Payable for:
Investments purchased 64,677
Fund shares repurchased 2,071
Accrued:
Management fee 707
Transfer agent fee 314
Bookkeeping fee 42
Deferred Trustees fees 18
Other 264
------
Total Liabilities 68,425
----------
Net Assets $1,651,774
----------
Class A
Net asset value & redemption price per
share ($936,331/86,632) $ 10.81(a)
----------
Maximum offering price per share
($10.81/0.9425) $ 11.47(b)
----------
Class B
Net asset value & offering price per
share ($706,366/65,492) $ 10.79(a)
----------
Class C
Net asset value & offering price per
share ($9,074/842) $ 10.78(a)
----------
Class Z
Net asset value, offering and redemption
price per share ($3/(c)) $ 11.28
----------
Composition of Net Assets
Capital paid in $1,158,945
Undistributed net investment income 2,798
Accumulated net realized gain 179,853
Net unrealized appreciation
(depreciation) on:
Investments 310,216
Foreign currency transactions (38)
----------
$1,651,774
==========
</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.
(c) Rounds to less than one.
Statement of Operations
For the Year Ended October 31, 1999
(In thousands)
<TABLE>
<S> <C> <C>
Investment Income
Dividends $ 15,330
Interest 37,904
--------
Total Investment Income (net of
nonrebatable foreign taxes withheld
at source which amounted to $803) 53,234
Expenses
Management fee $ 8,985
Service fee -- Class A, B, C 4,082
Distribution fee -- Class B 5,311
Distribution fee -- Class C 59
Transfer agent fee 4,728
Bookkeeping fee 534
Trustees fee 79
Custodian fee 81
Audit fee 72
Legal fee 17
Registration fee 124
Reports to shareholders 60
Other 245 24,377
------- --------
Net Investment Income 28,857
--------
Net Realized and Unrealized Gain (Loss)
on Portfolio Positions
Net realized gain (loss) on:
Investments 202,967
Foreign currency transactions (541)
-------
Net Realized Gain 202,426
Net change in net unrealized
appreciation/depreciation during the
period on:
Investments (62,274)
Foreign currency transactions (69)
-------
Net Change in Unrealized
Appreciation/Depreciation (62,343)
--------
Net Gain 140,083
--------
Increase in Net Assets from Operations $168,940
--------
</TABLE>
See notes to financial statements. 9
<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 $ 28,857 $ 31,133
Net realized gain 202,426 75,037
Net Change in Unrealized Appreciation/Depreciation (62,343) 23,397
---------- ----------
Net Increase from Operations 168,940 129,567
---------- ----------
Distributions:
From net investment income -- Class A (20,595) (22,321)
From net realized gains -- Class A (39,280) (118,280)
From net investment income -- Class B (9,809) (9,895)
From net realized gains -- Class B (27,841) (75,040)
From net investment income -- Class C (109) (55)
From net realized gains -- Class C (246) (96)
From net investment income -- Class Z (443) (497)
From net realized gains -- Class Z (930) (2,159)
---------- ----------
69,687 (98,776)
---------- ----------
Fund Share Transactions:
Receipts for shares sold -- Class A 63,422 95,978
Value of distributions reinvested -- Class A 53,836 127,684
Cost of shares repurchased -- Class A (157,644) (142,405)
---------- ----------
(40,386) 81,257
---------- ----------
Receipts for shares sold -- Class B 142,372 133,497
Value of distributions reinvested -- Class B 35,667 80,373
Cost of shares repurchased -- Class B (153,659) (99,137)
---------- ----------
24,380 114,733
---------- ----------
Receipts for shares sold -- Class C 5,044 5,810
Value of distributions reinvested -- Class C 341 148
Cost of shares repurchased -- Class C (2,102) (939)
---------- ----------
3,283 5,019
---------- ----------
Receipts for shares sold -- Class Z 1,700 5,265
Value of distributions reinvested -- Class Z 897 2,656
Cost of shares repurchased -- Class Z (25,638) (632)
---------- ----------
(23,041) 7,289
---------- ----------
Net Increase (Decrease) from Fund Share Transactions (35,764) 208,298
---------- ----------
Total Increase 33,923 109,522
Net Assets
Beginning of period 1,617,851 1,508,329
---------- ----------
End of period (including undistributed net investment
income of $2,798 and $369, respectively.) $1,651,774 $1,617,851
========== ==========
Number of Fund Shares
Sold -- Class A 5,951 8,982
Issued for distributions reinvested -- Class A 5,196 12,752
Repurchased -- Class A (14,754) (13,405)
---------- ----------
(3,607) 8,329
---------- ----------
Sold -- Class B 13,378 12,597
Issued for distributions reinvested -- Class B 3,452 8,054
Repurchased -- Class B (14,427) (9,418)
---------- ----------
2,403 11,233
---------- ----------
Sold -- Class C 475 546
Issued for distributions reinvested -- Class C 33 14
Repurchased -- Class C (197) (90)
---------- ----------
311 470
---------- ----------
Sold -- Class Z 161 489
Issued for distributions reinvested -- Class Z 86 265
Repurchased -- Class Z (2,387) (61)
---------- ----------
(2,140) 693
---------- ----------
</TABLE>
10
<PAGE>
Notes to Financial Statements
October 31, 1999
Note 1. Accounting Policies
Organization
The Colonial 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 primarily income and capital growth and secondarily, capital preservation.
The Fund may issue an unlimited number of shares. The Fund offers four classes
of shares: Class A, Class B, Class C and Class Z. Class A shares are sold with
a front-end sales charge. 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 a contingent deferred sales charge on redemptions made
within one year after purchase and an annual distribution fee. Class Z shares
are offered continuously at net asset value. There are certain restrictions on
the purchase of Class Z shares, as described in the Fund's prospectus.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
Security valuation and transactions
Equity securities generally are valued at the last sale price or, in the case
of unlisted or listed securities for which there were no sales during the day,
at current quoted bid prices.
Debt securities generally are valued by a pricing service based upon market
transactions for normal, institutional-size trading units of similar
securities. When management deems it appropriate, an over-the-counter or
exchange bid quotation is used.
Forward currency contracts are valued based on the weighted value of the
exchange traded contracts with similar durations.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
The value of all assets and liabilities quoted in foreign currencies are
translated into U.S. dollars at that day's exchange rates.
Portfolio positions for which market quotations are not readily available are
valued at fair value under procedures approved by the Trustees.
Security transactions are accounted for on the date the securities are
purchased, sold or mature.
Cost is determined and gains (losses) are based upon the specific
identification method for both financial statement and federal income tax
purposes.
The Fund may trade securities on other than normal settlement terms. This may
increase the risk if the other party to the transaction fails to deliver and
causes the Fund to subsequently invest at less advantageous prices.
Determination of class net asset values and financial highlights
All income, expenses (other than the Class A, Class B and Class C service fees
and Class B and Class C distribution fees), 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 the average shares outstanding during
the period. In addition, Class A, Class B and Class C net investment income per
share data reflects the service fee per share applicable to Class A, Class B
and Class C shares and the distribution fee applicable to Class B and Class C
shares only.
Class A, Class B and Class C ratios are calculated by adjusting the expense and
net investment income ratios for the Fund for the entire period by the service
fee applicable to Class A, Class B and Class C shares and the distribution fee
applicable to Class B and Class C shares only.
Federal income taxes
Consistent with the Fund's policy to qualify as a regulated investment company
and to distribute all of its taxable income, no federal income tax has been
accrued.
Interest income, debt discount and premium
Interest income is recorded on the accrual basis. Original issue discount is
accreted to interest income over the life of a security with a corresponding
increase in the cost basis; premium and market discount are not amortized or
accreted.
Distribution to shareholders
Distributions to shareholders are recorded on the ex-date.
The amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the Fund's
capital accounts to reflect income and gains available for distribution (or
available capital loss carryforwards) under income tax regulations.
Foreign currency transactions
Net realized and unrealized gains (losses) on foreign currency transactions
includes the gains (losses) arising from fluctuations 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.
11
<PAGE>
Notes to Financial Statements (continued)
October 31, 1999
The Fund does not distinguish that portion of gains (losses) on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included
with the net realized and unrealized gains (losses) on investments.
Forward currency contracts
The Fund may enter into forward currency contracts to purchase or sell foreign
currencies at predetermined exchange rates in connection with the settlement of
purchases and sales of securities. The Fund may also enter into forward
currency contracts to hedge certain other foreign currency denominated assets.
The contracts are used to minimize the exposure to foreign exchange rate
fluctuations during the period between trade and settlement date of the
contracts. All contracts are marked-to-market daily, resulting in unrealized
gains or losses which become realized at the time the forward currency
contracts are closed or mature. Realized and unrealized gains (losses) arising
from such transactions are included in net realized and unrealized gains
(losses) on foreign currency transactions. Forward currency contracts do not
eliminate fluctuations in the prices of the Fund's portfolio securities. While
the maximum potential loss from such contracts is the aggregate face value in
U.S. dollars at the time the contract was opened, exposure is typically limited
to the change in value of the contract (in U.S. dollars) over the period it
remains open. Risks may also arise if counterparties fail to perform their
obligations under the contracts.
Other
Corporate actions are recorded on the ex-date (except for certain foreign
securities which are recorded as soon after ex-date as the Fund becomes aware
of such), net of nonrebatable tax withholdings. Where a high level of
uncertainty as to collection exists, income on securities is recorded net of
all tax withholdings with any rebates recorded when received.
The Fund's custodian takes possession through the federal book-entry system of
securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying assets
remains sufficient to protect the Fund. The Fund may experience costs and
delays in liquidating the collateral if the issuer defaults or enters
bankruptcy.
Note 2. Fees and Compensation Paid to Affiliates
Management fee
Colonial Management Associates, Inc. (the Advisor) is the investment Advisor of
the Fund and furnishes accounting and other services and office facilities for
a monthly fee based on the Fund's average net assets as follows:
<TABLE>
<CAPTION>
Average Net Assets Annual Fee Rate
------------------ ---------------
<S> <C>
First $1 billion 0.55%
Over $1 billion 0.50%
</TABLE>
Bookkeeping fee
The Advisor provides bookkeeping and pricing services for $27,000 per year plus
a percentage of the Fund's average net assets as follows:
<TABLE>
<CAPTION>
Average Net Assets Annual Fee Rate
------------------ ---------------
<S> <C>
First $50 million No charge
Next $950 million 0.035%
Next $1 billion 0.025%
Next $1 billion 0.015%
Over $3 billion 0.001%
</TABLE>
Transfer agent fee
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 $133,528 on sales of the Fund's Class A shares and received contingent
deferred sales charges (CDSC) of $4,124, $1,389,656 and $7,860 on Class A,
Class B and Class C share redemptions, respectively.
The Fund has adopted a 12b-1 plan which requires the payment of a distribution
fee to the Distributor equal to 0.75% annually of the average net assets
attributable to Class B and Class C shares only. The plan also requires the
payment of a service fee to the Distributor on Class A, Class B and Class C
shares as follows:
<TABLE>
<CAPTION>
Value of Shares Annual
Outstanding on the 20th of Fee
Each Month Which Were Issued Rate
---------------------------- ----
<S> <C>
Prior to April 1, 1989 0.15%
On or after April 1, 1989 0.25%
</TABLE>
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.
12
<PAGE>
Notes to Financial Statements (continued)
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 $1,234,520,506 and $1,398,852,784, of
which $515,585,998 and $590,248,608, respectively, were U.S. government
securities.
Unrealized appreciation (depreciation) at October 31, 1999, based on cost of
investments for both financial statement and federal income tax purposes was:
<TABLE>
<S> <C>
Gross unrealized appreciation $335,998,125
Gross unrealized depreciation (25,782,085)
------------
Net unrealized appreciation $310,216,040
============
</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 $333,179.
- --------------------------------------------------------------------------------
Change in Independent Auditor (Unaudited)
Based on the recommendation of the Audit Committee of the Fund on June 18,
1999, the Board of Trustees determined not to retain PricewaterhouseCoopers LLP
(PwC) as the Fund's independent auditor and voted to appoint Ernst & Young LLP
for the fiscal year ended October 31, 1999. During the two most recent fiscal
years, PwC's audit reports contained no adverse opinion or disclaimer of
opinion; nor were its reports qualified or modified as to uncertainty, audit
scope, or accounting principle. Further, in connection with its audits for the
two most recent fiscal years and through December 11, 1998, there were no
disagreements between the Fund and PwC on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which if not resolved to the satisfaction of PwC would have caused it to make
reference to the disagreements in its report on the financial statements for
such years.
- --------------------------------------------------------------------------------
13
<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 Class Z
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.380 $ 10.360 $ 10.350 $ 10.390
-------- -------- -------- --------
Income from Investment Operations
Net investment income (a) 0.214 0.134 0.135 0.240
Net realized and unrealized gain 0.884 0.883 0.884 1.343
-------- -------- -------- --------
Total from Investment Operations 1.098 1.017 1.019 1.583
-------- -------- -------- --------
Less Distributions Declared to Shareholders
From net investment income (0.230) (0.149) (0.151) (0.255)
From net realized gains (0.438) (0.438) (0.438) (0.438)
-------- -------- -------- --------
Total Distributions Declared to Shareholders (0.668) (0.587) (0.589) (0.693)
-------- -------- -------- --------
Net Asset Value, End of Period $ 10.810 $ 10.790 $ 10.780 $ 11.280
-------- -------- -------- --------
Total return (b) 10.94% 10.11% 10.15% 15.92%
-------- -------- -------- --------
Ratios to Average Net Assets
Expenses (c) 1.12% 1.88% 1.88% 0.88%
Net investment income (c) 2.02% 1.26% 1.26% 2.26%
Portfolio turnover 74% 74% 74% 74%
Net assets at end of period (000) $936,331 $706,366 $ 9,074 $ 3
(a) Per share data was calculated using average shares outstanding during the period.
(b) Total return at net asset value assuming all distributions reinvested and no initial sales charge or
contingent deferred sales charge.
(c) The benefits derived from custody credits and directed brokerage arrangements had no impact.
</TABLE>
- --------------------------------------------------------------------------------
1999 State Tax information (unaudited)
61% 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 $197,662,935 of
long-term capital gains.
An average of 5% of the Fund's investments as of the end of each quarter were
in direct obligation of the U.S. Treasury.
Approximately 23% of the Funds ordinary income distributions (17% of gross
income) was derived from interest on direct investments in U.S. Treasury bonds,
notes and bills.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31, 1998
-----------------------------------------------------
Class A Class B Class C Class Z
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.160 $ 11.140 $11.150 $11.170
-------- -------- ------- -------
Income from Investment Operations
Net investment income (a) 0.235 0.156 0.157 0.261
Net realized and unrealized gain 0.685 0.682 0.676 0.685
-------- -------- ------- -------
Total from Investment Operations 0.920 0.838 0.833 0.946
-------- -------- ------- -------
Less Distributions Declared to Shareholders
From net investment income (0.250) (0.168) (0.183) (0.276)
From net realized gains (1.450) (1.450) (1.450) (1.450)
-------- -------- ------- -------
Total Distributions Declared to Shareholders (1.700) (1.618) (1.633) (1.726)
-------- -------- ------- -------
Net Asset Value, End of Period $ 10.380 $ 10.360 $10.350 $10.390
-------- -------- ------- -------
Total return (b) 9.08% 8.27% 8.21% 9.35%
-------- -------- ------- -------
Ratios to Average Net Assets
Expenses (c) 1.12% 1.87% 1.87% 0.88%
Net investment income (c) 2.22% 1.47% 1.47% 2.46%
Portfolio turnover 69% 69% 69% 69%
Net assets at end of period (000) $936,639 $653,476 $ 5,501 $22,235
(a) Per share data was calculated using average shares outstanding during the period.
(b) Total return at net asset value assuming all distributions reinvested and no initial sales charge or
contingent deferred sales charge.
(c) The benefits derived from custody credits and directed brokerage arrangements had no impact.
</TABLE>
14
<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) Class Z
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.490 $ 9.480 $11.320 $ 9.500
-------- -------- ------- -------
Income from Investment Operations
Net investment income (a) 0.160 0.081 0.199 0.184
Net realized and unrealized gain (loss) 2.225 2.217 (0.345)(c) 2.225
-------- -------- ------- -------
Total from Investment Operations 2.385 2.298 (0.146) 2.409
-------- -------- ------- -------
Less Distributions Declared to Shareholders
From net investment income (0.147) (0.070) (0.024) (0.171)
From net realized gains (0.568) (0.568) -- (0.568)
-------- -------- ------- -------
Total Distributions Declared to Shareholders (0.715) (0.638) (0.024) (0.739)
-------- -------- ------- -------
Net Asset Value, End of Period $ 11.160 $ 11.140 $11.150 $11.170
-------- -------- ------- -------
Total return (d) 26.83% 25.81% (1.30)%(e) 27.10%
-------- -------- ------- -------
Ratios to Average Net Assets
Expenses (f) 1.14% 1.89% 1.86%(g) 0.90%
Net investment income (f) 1.56% 0.81% 1.01%(g) 1.80%
Portfolio turnover 71% 71% 71% 71%
Net assets at end of period (000) $913,956 $577,539 $ 676 $16,158
(a) Per share data was calculated using average shares outstanding during the period.
(b) Class C shares were initially offered on August 1, 1997. Per share amounts reflect activity from that date.
(c) The amount shown for a share outstanding does not correspond with the aggregate net gain on investments for
the period due to the timing of sales and repurchase of Fund shares in relation to fluctuating market values
of the investments of the Fund.
(d) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent
deferred sales charge.
(e) Not annualized.
(f) The benefits derived from custody credits and directed brokerage arrangements had no impact.
(g) Annualized.
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31
-----------------------------------------------------------------------------
1996 1995
------------------------------------ ---------------------------------------
Class A Class B Class Z Class A Class B Class Z (b)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 8.940 $ 8.930 $ 8.940 $ 8.060 $ 8.050 $ 8.780
-------- -------- ------- -------- -------- -------
Income from Investment Operations
Net investment income (a) 0.165 0.097 0.186 0.200 0.137 0.041
Net realized and unrealized gain 1.183 1.182 1.192 1.393 1.395 0.167
-------- -------- ------- -------- -------- -------
Total from Investment Operations 1.348 1.279 1.378 1.593 1.532 0.208
-------- -------- ------- -------- -------- -------
Less Distributions Declared to Shareholders
From net investment income (0.162) (0.093) (0.182) (0.212) (0.151) (0.048)
From net realized gains (0.636) (0.636) (0.636) (0.501) (0.501) --
-------- -------- ------- -------- -------- -------
Total Distributions Declared to Shareholders (0.798) (0.729) (0.818) (0.713) (0.652) (0.048)
-------- -------- ------- -------- -------- -------
Net Asset Value, End of Period $ 9.490 $ 9.480 $ 9.500 $ 8.940 $ 8.930 $ 8.940
-------- -------- ------- -------- -------- -------
Total return (c) 16.11% 15.27% 16.50% 21.72% 20.84% 2.02%(d)
-------- -------- ------- -------- -------- -------
Ratios to Average Net Assets
Expenses (e) 1.15% 1.90% 0.91% 1.16% 1.93% 0.93%(f)
Net investment income (e) 1.82% 1.07% 2.06% 2.43% 1.66% 2.66%(f)
Portfolio turnover 38% 38% 38% 66% 66% 66%
Net assets at end of period (000) $759,409 $453,468 $13,555 $667,611 $353,831 $ 3,659
(a) Per share data was calculated using average shares outstanding during the period.
(b) Class Z shares were initially offered on July 31, 1995. Per share amounts reflect activity from that date.
(c) Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred
sales charge.
(d) Not annualized.
(e) The benefits derived from custody credits and directed brokerage arrangements had no impact.
(f) Annualized.
</TABLE>
15
<PAGE>
Report of Independent Accountants
Selected data for a share of each class outstanding
throughout each period are as follows:
To the Trustees of Liberty Funds Trust III and the Shareholders of
The Colonial Fund
We have audited the accompanying statement of assets and liabilities of The
Colonial Fund, a series of Liberty Funds Trust III (formerly, Colonial Trust
III), including the investment portfolio as of October 31, 1999, and the
related statement of operations, the statement of changes in net assets and the
financial highlights for the year then ended. These financial statement and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express and opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the year ended October 31, 1998, and the financial highlights for each of
the four years in the period then ended were audited by other auditors whose
report dated December 11, 1998 expressed an unqualified opinion on that
financial statement and those financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the procedures included confirmation of
securities owned as of October 31, 1999 by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlight referred to
above present fairly, in all material respects, the financial position of The
Colonial Fund, a series of Liberty Funds Trust III, at October 31, 1999, the
results of its operations, the changes
in its net assets, and the financial highlights for the year then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 10, 1999
16
<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 The Colonial 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 The Colonial Fund. This report
may also be used as sales literature when preceded or accompanied by the current
prospectus which provides details of sales charges, investment objectives and
operating policies of the Fund and with the most recent copy of the Liberty
Funds Distributor, Inc. Performance Update.
Annual Report:
The Colonial Fund
<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.
THE COLONIAL 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
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