NEWPORT GREATER CHINA FUND Annual report
August 31, 1997
Not FDIC Insured
May Lose Value
No Bank Guarantee
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NEWPORT GREATER CHINA FUND HIGHLIGHTS
MAY 16, 1997 - AUGUST 31, 1997
Investment Objective: Newport Greater China Fund seeks long-term growth of
capital by investing primarily in equity securities of companies located in, or
which derive a substantial portion of their revenue from business activity with
or in, the Greater China Region (i.e., Hong Kong, the People's Republic of China
and Taiwan).
The Fund is Designed to Offer:
[check mark] Access to some of the world's fastest-growing economies
[check mark] Participation in the long-term growth potential in Greater China
[check mark] Experienced investment management
Portfolio Manager Commentary: "Despite positive performance since inception,
market volatility in Asia has left shareholders who participated in the
Fund's subscription offering with disappointing initial performance numbers
during the period. We believe the economies of Greater China remain
fundamentally strong and offer global investors an excellent opportunity for
long-term growth."
--Tim Tuttle, Chris Legallet and Tony Zhang, Co-Managers
Newport Greater China Fund Performance
Class A Load-Modified
Class A
Inception Dates 5/16/97 7/25/97
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Total returns, assuming reinvestment of all 34.22% (10.50)%
distributions and no sales charge or contingent
deferred sales charge (CDSC), since inception
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Total returns, assuming maximum offering price 26.50% (12.29)%
(MOP) and CDSC, since inception(1)
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Net asset value per share at 8/31/97 $17.90 $17.90
(1) Maximum offering price (MOP) returns include the maximum sales charge of
5.75% for Class A shares. The load-modified Class A total return is shown
without a front-end sales charge but with a 2% CDSC. Class B, C and Z shares
were not available during the subscription rights offering period.
Past performance cannot predict future results. Returns and value of an
investment will fluctuate, resulting in a gain or loss on sale. The Fund
commenced investment operations on May 12, 1997. The activity shown is from the
effective date of registration with the Securities and Exchange Commission (May
16, 1997). The Fund's initial public subscription offering closed on July 25,
1997, at which time an additional $120 million was invested in the Fund's Class
A shares.
Top Sectors(2 & 3)
(as of 8/31/97)
1. Financial ........................ 20.3%
2. Consumer Cyclicals ................ 16.5%
3. Cash Equivalents .................. 13.8%
4. Capital Goods .................... 11.6%
5. Utilities ........................ 9.6%
Top Five Holdings(2)
(as of 8/31/97)
1. New World Infrastructure Ltd. .... 8.5%
2. Citic Pacific Ltd. ................ 7.3%
3. Cheung Kong Hldg. Ltd. ............ 6.6%
4. Huaneng Power Intl. Inc. ADR ...... 5.0%
5. China Light & Power Co. Ltd. ...... 4.3%
(2) Sectors and holdings are calculated as a percent of total net assets.
Because the Fund is actively managed, there can be no guarantee the Fund will
continue to hold these securities or invest in these countries in the future.
(3) Industry sectors in the following financial statements are based upon the
standard industrial classifications (SIC) as published by the U.S. Office of
Management and Budget. The sector classifications used on this page are based
upon Colonial's defined criteria.
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PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
[PHOTO OF HAROLD W. COGGER]
I am pleased to present your Fund's first annual report for the period ended
August 31, 1997. This report reflects the investment environment since the
Fund's inception on May 16, 1997 as well as the performance of the Fund since
the initial offering of shares to the public on July 25, 1997.
The smooth handover of Hong Kong to China on July 1 increased investor
confidence in the region, and helped send Greater China stock markets to new
highs by mid-August.
In late summer, however, deteriorating economic fundamentals in Thailand,
Malaysia, Indonesia and the Philippines led to a broad sell-off in all Asian
financial markets. This sell-off erased the gains made in the Greater China
region earlier in the period. Despite declining stock market prices over the
short term, the Chinese economy continues to grow at an average annual rate of
approximately 9.0%. Since inception on May 16, 1997, Newport Greater China Fund
Class A shares had performance of 34.22%. Because much of the sell-off in Asia
occurred after the Fund's subscription rights offering on July 25, 1997,
shareholders who participated in the offering have experienced returns of
negative 10.50%.
Newport believes the long-term prospects for Greater China remain bright and
that the region's high growth rates, low inflation and increasing exports have
differentiated it from other Asian markets. Newport's outlook for the year ahead
includes continued volatility in Asia overall, but improving performance in
Greater China as global investors contrast the region's strong economies with
the weaker economies of Thailand, Malaysia, Indonesia and the Philippines.
The following report offers specific information on your Fund's performance, as
well as an in-depth discussion of Greater China markets with your portfolio
managers. As always, we thank you for the opportunity to help meet your
investment goals.
Respectfully,
/s/ Harold W. Cogger
- --------------------
Harold W. Cogger
President
October 13, 1997
Because market conditions change frequently, there can be no assurance that
the trends described here will continue.
3
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PORTFOLIO MANAGEMENT REPORT
[PHOTO OF TIM TUTTLE]
Tim Tuttle is managing director of Newport Fund Management, Inc., and lead
portfolio manager of Newport Greater China Fund. He has more than 20 years of
experience investing in Asian markets and is a Chartered Financial Analyst.
[PHOTO OF CHRIS LEGALLET]
Chris Legallet is a senior vice president of Newport Fund Management, Inc., and
a co-manager of Newport Greater China Fund. He is a former managing director for
Asian Investment for Jupiter Tyndall (Asia) Ltd. in Hong Kong and prior to that,
was a vice president of Solomon Inc., in New York.
[PHOTO OF XIAODONG (TONY) ZHANG]
Xiaodong (Tony) Zhang is a senior investment officer--Greater China, of Newport
Fund Management, Inc., and a co-manager of Newport Greater China Fund. He is a
former project manager of overseas investments for Hongmei Electronic
Corporation in China.
A volatile economic environment across Asia
Although the Greater China region continues to experience some of the world's
highest rates of economic growth, it has not escaped some of the recent selling
precipitated by currency and economic problems in neighboring Asian countries.
Heavy borrowing and over-investing in real estate in Thailand and Malaysia have
led to steep declines in local stock markets. Similar problems have occurred in
Indonesia and the Philippines. Deteriorating economic fundamentals in these
markets led to a broad-based sell-off in all Asian markets during the late
summer. We believe the Greater China markets of Hong Kong, China and Taiwan are
stronger than markets in Thailand, Malaysia, Indonesia and the Philippines. Our
team considers current valuations in Greater China to represent an attractive
buying opportunity for long-term investors.
Spill-over effect reduces Fund performance
Since the Fund became effective on May 16, 1997 Class A shares had a total
return of 34.22% through August 31, 1997. This compares to a 1.30% increase in
the Hang Seng Index over the same period. The Hang Seng is an unmanaged index of
selected stocks traded in Hong Kong. Unlike mutual funds, indexes are not
investments, do not incur fees or expenses and are not professionally managed.
Some of this outperformance can be attributed to the Fund's position in Beijing
Enterprises, a Hong Kong listed conglomerate that operates McDonald's franchises
in Beijing and operates tourism concessions for the Great Wall of China. Shortly
after the Fund's effective date, Beijing
4
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Enterprises increased more than 300%, boosting the performance of Newport
Greater China Fund.
The Fund's strong performance in the first half of the period did not escape the
indiscriminate selling in Asia, however. Reacting to weakness in Thailand,
Malaysia, Indonesia and the Philippines, institutional fund managers raised the
percentage of cash in their portfolios to meet anticipated investor redemptions
by reducing holdings in the largest, most liquid market of Asia--Hong Kong.
Because many companies operating in Greater China are listed on the Hong Kong
stock exchange, these companies were particularly vulnerable to the reactionary
selling. Although we believe this situation to be temporary, Fund performance
for Load-Modified Class A shares was down 10.50% since the completion of the
subscription rights offering in late July, compared with a 9.40% decline on the
Hang Seng Index.
Positive Outlook for Greater China
This recent sell-off in Asia has not changed our positive long-term outlook for
Greater China. The evolving synergy between the Greater China markets of Hong
Kong, mainland China and Taiwan has created one of the world's largest emerging
markets and is likely to create strong growth potential for long-term global
investors. Mainland China continues to grow at an average annual rate of
approximately 9.0% with its pro-business government, huge labor pool and
competitive export economy. The Chinese government has recently begun a program
to privatize a significant part of its economy--a move that is likely to provide
the foundation for continued economic growth. As China grows, it will rely on
Hong Kong's world-class financial center as well as its management and global
trading expertise. Taiwanese businessmen continue to establish joint ventures
with mainland China to manufacture technology for export to global markets. This
combination of a growing economy, a world-class financial center and a strong
technology center may give Greater China an advantage relative to other emerging
regions of the world.
The investment strategy of the Fund is to find select, well-capitalized
companies in these three markets that offer management expertise, sound balance
sheets, excellent earnings growth and attractive valuations. A good example of
the type of company we look for is China Light & Power Co., Ltd. This electric
utility is well-managed and has a dominant market share in Kowloon Peninsula.
The company is poised for significant expansion to meet rising demand for
electricity in China. Another example is Citic Pacific Ltd., a Chinese holding
company investing in many China and Hong Kong businesses. Its holdings include
airlines, motor services, property, food stores, water treatment plants, toll
roads and bridges.
Although investments in Greater China are likely to continue to experience
volatility along with the rest of Asia, we believe that global investors will
recognize the region's strength relative to other parts of Asia. The investment
case for Greater China is still intact, and we believe that Greater China
continues to offer global investors strong potential for long-term growth.
5
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INVESTMENT PORTFOLIO
AUGUST 31, 1997 (IN THOUSANDS)
COMMON STOCKS - 86.9% COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------
CONSTRUCTION - 3.1%
Special Trade Contractors
Zhejiang Expressway Co. Ltd. (a) HK 11,200 $ 3,613
--------
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FINANCE, INSURANCE & REAL ESTATE - 45.5%
Depository Institutions - 10.5%
Bank of East Asia, Ltd. HK 1,277 4,556
Dah Sing Financial HK 681 2,848
Hang Seng Bank HK 270 3,258
Wing Hang Bank Ltd. HK 356 1,516
--------
12,178
--------
Holding Companies - 14.6%
Citic Pacific Ltd. (a) HK 1,597 8,511
Guangdong Investments HK 3,588 4,329
Hutchison Whampoa Ltd. HK 498 4,145
--------
16,985
--------
Nondepository Credit Institutions - 1.2%
Manhattan Card Co., Ltd. HK 3,844 1,414
--------
Real Estate - 19.1%
Cheung Kong Holdings Ltd. HK 725 7,671
China Overseas Land & Investment HK 168 124
China Resources Enterprises Ltd. HK 996 4,177
Henderson Land Development Co., Ltd. (a) HK 506 4,195
Hysan Development Co., Ltd. HK 548 1,591
New World Development Co., Ltd. HK 715 4,456
--------
22,214
--------
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MANUFACTURING - 6.1%
Chemicals & Allied Products - 0.1%
China Merchants Hai Hong Holding Co. (a) HK 37 117
--------
Fabricated Metal - 1.0%
Shenzen Fangda Co., Ltd. Class B Ch 702 1,178
Sinocan Holdings Ltd. HK 40 17
--------
1,195
--------
Food & Kindred Products - 0.0%
Guangdong Brewery Holdings Ltd. (a) HK 13 4
--------
6
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Investment Portfolio/August 31, 1997
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Household Appliances - 2.5%
Guangdong Kelon Electric Holding HK 2,302 $ 2,867
--------
Leather - 0.5%
Guangdong Tannery Ltd. HK 1,822 605
--------
Primary Metal - 2.0%
Angang New Steel Co., Ltd (a) HK 6,840 2,295
--------
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SERVICES - 1.4%
Computer Software - 0.1%
Founder Hong Kong Ltd. HK 144 127
--------
Other Services - 1.3%
Beijing Enterprises (a) HK 196 1,480
--------
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TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 27.5%
Air Transportation - 5.4%
China Southern Airlines Co. Ltd. (a) HK 3,930 2,523
Swire Pacific Ltd., Series A HK 483 3,693
--------
6,216
--------
Communications - 2.7%
Smartone Telecommunications Holdings Ltd. (a) HK 1,169 3,151
--------
Electric Services - 9.6%
Beijing Datang Power Generation Co., Ltd.,
Class H (a) HK 700 377
China Light & Power Co., Ltd. HK 1,077 4,987
Huaneng Power International, Inc. ADR (a) HK 245 5,793
--------
11,157
--------
Local & Suburban Transit - 1.3%
GZI Transportation Ltd. (a) HK 276 134
Road King Infrastructure Ltd. HK 1,546 1,376
--------
1,510
--------
Transportation Services - 8.5%
New World Infrastructure Ltd. (a) HK 3,533 9,893
--------
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WHOLESALE TRADE - 3.3%
Durable Goods
Glorious Sun Enterprises HK 6,100 2,342
Li & Fung Ltd. HK 1,498 1,527
--------
3,869
--------
TOTAL COMMON STOCKS (cost of $114,125)(b) 100,890
--------
7
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Investment Portfolio/August 31, 1997
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SHORT-TERM OBLIGATIONS - 13.8% PAR VALUE
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Repurchase agreement with Greenwich Capital
Markets, dated 08/29/97 due 09/02/97 at 5.530%,
collateralized by U.S. Treasury bonds & notes with
various maturities to 2025, market value $16,334
(repurchase proceeds $16,000) $ 15,990 $ 15,990
--------
OTHER ASSETS & LIABILITIES, NET - (0.7)% (777)
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NET ASSETS - 100% $116,103
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NOTES TO INVESTMENT PORTFOLIO:
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(a) Non-income producing.
(b) Cost for federal income tax purposes is the same.
Summary of Securities
by Country Country Value % of Total
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Hong Kong HK $ 99,712 98.8
China Ch 1,178 1.2
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$100,890 100.0
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Certain securities are listed by country of underlying exposure but may trade
predominantly on other exchanges.
Acronym Name
- --------------- ---------
ADR American Depository Receipt
See notes to financial statements.
8
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STATEMENT OF ASSETS & LIABILITIES
AUGUST 31, 1997
(in thousands except for per share amounts and footnotes)
ASSETS
Investments at value (cost $114,125) $ 100,890
Short-term obligations 15,990
----------
116,880
Cash including foreign currencies (cost $1,552) $ 1,551
Receivable for:
Dividends 155
Fund shares sold 60
Interest 7
Expense reimbursement due from
Adviser/Administrator 71
Receivable from Distributor 26
Deferred organization expenses 11
Other 1 1,882
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Total Assets 118,762
LIABILITIES
Payable for:
Investments purchased 2,389
Fund shares repurchased 65
Accrued:
Management fee 118
Administration fee 28
Transfer agent fee 28
Bookkeeping fee 7
Other 24
---------
Total Liabilities 2,659
----------
NET ASSETS $ 116,103
----------
Net asset value & redemption price per share -
Class A ($115,699/6,464) $17.90
----------
Maximum offering price per share - Class A
($17.90/0.9425) $18.99(a)
----------
Net asset value & offering price per share -
Class B ($135/8) $17.86(b)
----------
Net asset value & offering price per share -
Class C ($134/8) $17.86(b)
----------
Net asset value, offering & redemption price per share -
Class Z ($135/8) $17.91
----------
(a) On sales of $50,000 or more the offering price is reduced.
(b) Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
See notes to financial statements.
9
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STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED AUGUST 31, 1997 (a)
(in thousands)
INVESTMENT INCOME
Dividends:
China Power & Light Co. Ltd. $ 47
Dah Sing Financial 40
Glorious Sun Enterprises 30
Hang Seng Bank Limited 49
Other 31
Interest 177
---------
Total Investment Income 374
EXPENSES
Management fee $ 154
Administration fee 32
Service fee - Class A, Class B, Class C 26
Distribution fee - Class B, Class C 1
Transfer agent fee 35
Bookkeeping fee 10
Custodian fee 24
Legal fee 6
Registration fee 45
Reports to shareholders 1
Amortization of deferred
organization expenses 1
-------
335
Fees and expenses waived or borne by
the Advisor/Administrator (72) 263
------- ---------
Net Investment Income 111
---------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain (loss) on:
Investments 581
Foreign currency transactions (3)
-------
Net Realized Gain 578
Change in net unrealized depreciation
during the period on:
Investments (13,235)
Foreign currency transactions (1)
-------
Net Unrealized Depreciation (13,236)
---------
Net Loss (12,658)
---------
Decrease in Net Assets from Operations $ (12,547)
---------
(a) The Fund commenced investment operations on May 12, 1997. The
activity shown is from the effective date of registration (May 16,
1997) with the Securities and Exchange Commission.
See notes to financial statements.
10
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STATEMENT OF CHANGES IN NET ASSETS
Period ended
(in thousands) August 31
-------------
INCREASE (DECREASE) IN NET ASSETS 1997 (a)
Operations:
Net investment income $ 111
Net realized gain 578
Net unrealized depreciation (13,236)
----------
Net Decrease from Operations (12,547)
----------
Fund Share Transactions:
Receipts for shares sold - Class A 134,419
Cost of shares repurchased - Class A (7,769)
----------
Net Increase from Fund Share Transactions 126,650
----------
Total Increase 114,103
NET ASSETS
Beginning of period 2,000
----------
End of period (including undistributed net
investment income of $134) $ 116,103
----------
NUMBER OF FUND SHARES
Sold - Class A 6,708
Repurchased - Class A (372)
----------
6,336
----------
(a) The Fund commenced investment operations on May 12, 1997. The
activity shown is from the effective date of registration (May 16,
1997) with the Securities and Exchange Commission.
See notes to financial statements.
11
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NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1997
NOTE 1. ACCOUNTING POLICIES
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Organization: Newport Greater China Fund (the Fund), a series of Colonial
Trust II, 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 long-term growth of capital by investing primarily in equity
securities of companies located in, or which derive a substantial portion of
their revenue from business activity with or in, the Greater China Region
(Hong Kong, the People's Republic of China and Taiwan). The Fund may issue an
unlimited number of shares. The Fund offers four classes of shares: Class A,
Class B, Class C, and Class Z. Class A shares are sold with a front-end sales
charge and 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 a continuing distribution fee. Class Z
shares are offered continuously at net asset value. There are certain
restrictions on the purchase of Class Z shares, please refer to the
prospectus. For information on the Fund's subscription offering period,
please see Note 6.
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 activity reflected in
these financial statements is from the effective date of registration (May
16, 1997) with the Securities and Exchange Commission through the period
ended August 31, 1997. The following is a summary of significant accounting
policies that are consistently followed by the Fund in the preparation of its
financial statements.
Security valuation and transactions: Equity securities 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.
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. In certain
countries, the Fund may hold portfolio positions which cannot be valued as
set forth above. Such securities are valued at fair value under procedures
approved by the Trustees.
12
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Notes to Financial Statements/August 31, 1997
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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.
Determination of class net asset values and financial highlights: All income,
expenses (other than the Class A, Class B and Class C service fee and Class B
and Class C distribution fee) and realized and unrealized gains (losses) are
allocated to each class proportionately on a daily basis for purposes of
determining the net asset value of each class.
The per share data was calculated using average shares outstanding during the
period. In addition, Class A, Class B and Class C net investment income per
share data reflects the service fee per share applicable to Class A, Class B
and Class C shares and the distribution fee applicable to Class B and Class C
shares only.
Class A, Class B and Class C ratios are calculated by adjusting the expense
and net investment income ratios for the Fund for the entire period by the
service fee applicable to Class A, Class B and Class C shares and the
distribution fee applicable to Class B and Class C shares only.
Federal income taxes: Consistent with the Fund's policy to qualify as a
regulated investment company and to distribute all of its taxable income, no
federal income tax has been accrued.
Deferred organization expenses: The Fund incurred $11,352 of expenses in
connection with its organization. These expenses were deferred and are being
amortized on a straight-line basis over five years.
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.
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
13
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Notes to Financial Statements/August 31, 1997
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES - CONT.
- --------------------------------------------------------------------------------
changes in market prices of the investments. Such fluctuations are included
with the net realized and unrealized gains (losses) from 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 is opened, the actual 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: Newport Fund Management, Inc. (the Adviser) is the
investment Adviser of the Fund and receives a monthly fee equal to
1.15% annually of the Fund's average net assets.
Administration fee: Colonial Management Associates, Inc. (the
Administrator), an affiliate of the Adviser, provides accounting and other
services for a monthly fee equal to 0.25% annually of the Fund's average net
assets.
Bookkeeping fee: The Administrator provides bookkeeping and pricing services
for $27,000 per year plus 0.035% of the Fund's average net assets over $50
million.
14
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Notes to Financial Statements/August 31, 1997
- --------------------------------------------------------------------------------
Transfer agent: Colonial Investors Service Center, Inc. (the Transfer
Agent), an affiliate of the Administrator, provides shareholder services
for a monthly fee equal to 0.25% annually of the Fund's average net
assets and receives reimbursement for certain out-of-pocket expenses.
Underwriting discounts, service and distribution fees: Liberty Financial
Investments, Inc., formerly Colonial Investment Services, Inc. (the
Distributor), an affiliate of the Administrator, is the Fund's principal
underwriter. For the period ended August 31, 1997, the Fund has been advised
that the Distributor retained no net underwriting discounts on sales of the
Fund's Class A shares and received contingent deferred sales charges (CDSC)
of $20,569, none and none on Class A, Class B and Class C share redemptions,
respectively. Please refer to Note 6 for further information regarding Class
A front-end sales charges.
The Fund has adopted a 12b-1 plan which requires it to pay the Distributor a
service fee equal to 0.25% annually on Class A, Class B and Class C net
assets as of the 20th of each month. The plan also requires the payment of a
distribution fee to the Distributor equal to 0.75% annually of the average
net assets attributable to Class B and Class C shares only.
The CDSC and the fees received from the 12b-1 plan are used principally as
repayment to the Distributor for amounts paid by the Distributor to dealers
who sold such shares.
Expense limits: The Adviser/Administrator have agreed, until further notice,
to waive fees and bear certain Fund expenses to the extent that total
expenses (exclusive of service and distribution fees, brokerage commissions,
interest, taxes and extraordinary expenses, if any) exceed 1.90% annually of
the Fund's average net assets.
Other: The Fund pays no compensation to its officers, all of whom are
employees of the Adviser or Administrator.
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 the Fund's assets.
NOTE 3. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
Investment activity: During the period ended August 31, 1997, purchases and
sales of investments, other than short-term obligations, were $114,581,874
and $1,036,945, respectively.
Unrealized appreciation (depreciation) at August 31, 1997, based on cost of
investments for both financial statement and federal income tax purposes was:
Gross unrealized appreciation $ 1,702,225
Gross unrealized depreciation (14,937,528)
--------------
Net unrealized depreciation $ (13,235,303)
--------------
15
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Notes to Financial Statements/August 31, 1997
- --------------------------------------------------------------------------------
NOTE 3. PORTFOLIO INFORMATION - CONT.
- --------------------------------------------------------------------------------
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 currency
exchange or 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. STOCK SPLIT
- --------------------------------------------------------------------------------
On July 25, 1997, the Trustees declared and effected a 1.50 for 1 stock split
on shares of beneficial interest outstanding.
NOTE 5. OTHER OPERATIONAL AND CAPITAL ACTIVITY
- --------------------------------------------------------------------------------
For the period May 12, 1997 through May 16, 1997, the Fund had net
investment income of $1,182 and net realized and unrealized losses of $535.
The following is a summary of capital activity from May 12, 1997 through
May 16, 1997, adjusted to reflect the stock split described in Note 4.
Shares
Receipts for shares sold - Class A $ 1,700,000 127,500
Receipts for shares sold - Class B $ 100,000 7,500
Receipts for shares sold - Class C $ 100,000 7,500
Receipts for shares sold - Class Z $ 100,000 7,500
NOTE 6. SUBSCRIPTION OFFERING
- --------------------------------------------------------------------------------
From June 16, 1997 (the record date) through July 25, 1997, the Fund offered
the common shareholders of each of the Participating Funds (Colonial
Investment Grade Municipal Trust, Colonial Municipal Income Fund,
Colonial High Income Municipal Trust, Colonial Intermediate High Income
Fund, Colonial Intermarket Income Trust I, Colonial Newport Tiger Fund,
Colonial Newport Tiger Cub Fund, Colonial Newport Japan Fund, Liberty
All-Star Equity Fund and Liberty All-Star Growth Fund, Inc.) the right to
subscribe for Class A shares of the Fund, without paying an up-front sales
charge, at the rate of one Load-Waived Class A share of the Fund for each
common share of a Participating Fund held on the record date. The
Load-Waived Class A shares issued are subject to a contingent deferred
sales charge (CDSC) of 2.00% if such shares are redeemed prior to July 31,
1999.
NOTE 7. OTHER RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
From May 12, 1997 to July 25, 1997 Colonial Management Associates, Inc., an
affiliate of the Fund, was the sole shareholder. During that period the
Fund's operations produced net realized and unrealized gains of $980,279 and
net investment income of $657. A subscription offering of the shares provided
additional capital of $119,548,718 to the Fund on July 25, 1997.
18
<PAGE>
Notes to Financial Statements/August 31, 1997
- --------------------------------------------------------------------------------
NOTE 8. COMPOSITION OF NET ASSETS
- --------------------------------------------------------------------------------
Capital paid in $ 129,203
Undistributed net investment income 134
Accumulated net realized gain 2
Net unrealized depreciation on:
Investments (13,235)
Foreign currency transactions (1)
---------
$ 116,103
---------
NOTE 9. FINANCIAL HIGHLIGHTS INFORMATION
- --------------------------------------------------------------------------------
The amount shown for a share outstanding does not correspond with the
aggregate net loss on investments for the period due to the timing of sales
and repurchases of Fund shares in relation to fluctuating market values of
the investments of the Fund.
17
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout the period are as
follows:
<TABLE>
<CAPTION>
Period ended August 31
----------------------------------------------------
1997 (d)
Class A Class B Class C Class Z
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 13.340 $ 13.330 $ 13.330 $ 13.340
--------- --------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment
income (loss) (a)(b)(c) 0.052 (0.004) (0.004) 0.065
Net realized and
unrealized gain (b)(j) 4.508 4.534 4.534 4.505
--------- --------- -------- --------
Total from Investment
Operations 4.560 4.530 4.530 4.570
--------- --------- -------- --------
Net asset value -
End of period $ 17.900 $ 17.860 $ 17.860 $ 17.910
--------- --------- -------- --------
Total return (e)(f)(g) 34.22% 33.98% 33.98% 34.29%
--------- --------- -------- --------
RATIOS TO AVERAGE NET ASSETS
Expenses (h)(i) 2.15% 2.90% 2.90% 1.90%
Net investment income (h)(i) 0.89% 0.14% 0.14% 1.14%
Fees and expenses
waived or borne by the
Adviser/Administrator (h)(i) 0.59% 0.59% 0.59% 0.59%
Portfolio turnover (g) 4% 4% 4% 4%
Average commission rate $ 0.0094 $ 0.0094 $ 0.0094 $ 0.0094
Net assets at end
of period (000) $ 115,699 $ 135 $ 134 $ 135
(a) Net of fees and expenses waived or borne by the Adviser/Administrator
which amounted to: $ 0.034 $ 0.034 $ 0.034 $ 0.034
</TABLE>
(b) Per share data was calculated using average shares outstanding during the
period.
(c) Includes distributions from China Light & Power Co. Ltd, Dah Sing Financial,
Glorious Sun Enterprises and Hang Seng Bank Limited which amounted to
$0.078 per share.
(d) The Fund commenced investment operations on May 12, 1997. The activity
shown is from the effective date of registration (May 16, 1997) with the
Securities and Exchange Commission. The per share information reflects the
1.5 for 1 stock split effective July 25, 1997.
(e) Total return at net asset value assuming all distributions reinvested and
no initial sales charge or contingent deferred sales charge.
(f) Had the Adviser/Administrator not waived or reimbursed a portion of
expenses, total return would have been reduced.
(g) Not annualized.
(h) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(i) Annualized.
(j) Please see Note 9 in Notes to the Financial Statements.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
T0 THE TRUSTEES OF COLONIAL TRUST II AND THE SHAREHOLDERS OF
NEWPORT GREATER CHINA FUND
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Newport Greater China Fund (a
series of Colonial Trust II) at August 31, 1997, the results of its operations,
the changes in its net assets and the financial highlights for the period from
May 16, 1997 (effective date of registration) through August 31, 1997 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 audit. We
conducted our audit 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
audit, which included confirmation of portfolio positions at August 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where investments purchased had not settled with the custodian,
provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
October 13, 1997
19
<PAGE>
SHAREHOLDER SERVICES
TO MAKE INVESTING EASIER
Your fund has one of the most extensive selections of shareholder services
available. Your financial advisor can help you arrange for any of these
services, or you can call Colonial Investors Service Center directly at
1-800-345-6611.
Affordable Additional Investments: Add to your account with as little as $50 on
most funds; $25 for an IRA account.
Free Exchanges(1): Exchange all or part of your account into the same share
class of another fund distributed by Liberty Financial Investments, by phone or
mail.
Easy Access to Your Money(1): Make withdrawals from your account by phone, by
mail or, for certain funds, by check.
One-Year Reinstatement Privilege: If you need access to your money, but then
choose to return it within one year, you can reinvest in any fund distributed by
Liberty Financial Investments of the same share class without any penalty or
sales charge.
Fundamatic: Make periodic investments as low as $50 from your checking account
to your Fund account.
Systematic Withdrawal Plan (SWP): Receive monthly, quarterly or semiannual
payments via check or bank transmission. There is a $5,000 account value
required, but no minimum for the payment amount. The maximum annual withdrawal
is 12% of account balance at time SWP is established. SWPs by check are
processed on the 10th calendar day of each month unless the 10th falls on a
non-business day or the first business day of the week. If this occurs, the
processing date will be the previous business day. Dividends and capital gains
must be reinvested.
Automated Dollar Cost Averaging: Transfer money on a monthly basis from any fund
with a balance of $5,000 into the same share class of up to four other funds
distributed by Liberty Financial Investments. Minimum for each transfer is $100.
Retirement Plans: Choose from a broad range of retirement plans, including IRAs.
(1) Redemptions and exchanges are made at the next determined net asset value
after the request is received by the Transfer Agent. Proceeds may be more or
less than your original cost. The exchange privilege may be terminated at any
time. Exchanges are not available on all funds. Investors who purchase Class B
or C shares, or $1 million or more of Class A shares, may be subject to a
contingent deferred sales charge.
20
<PAGE>
HOW TO REACH COLONIAL
BY PHONE OR BY MAIL
BY TELEPHONE
Customer Connection - 1-800-345-6611
For 24-hour account information, call from your touch-tone phone. (Rotary
callers will be automatically connected to a representative during business
hours.) A recorded message will guide you through the menu:
For fund prices, dividends and capital gains information ......... press 1
For account information ........................................... press 2
To speak to a service representative .............................. press 3
For yield and total return information ............................ press 4
For duplicate statements or new supply of checks .................. press 5
To order duplicate tax forms and year-end statements .............. press 6
(February through May)
To review your options at any time during your call ............... press *
To speak with a shareholder services representative about your account, call
Monday to Friday, 8:00 a.m. to 8:00 p.m. ET, and Saturdays from February through
mid-April, 10:00 a.m. to 2:00 p.m. ET.
Colonial Telephone Transaction Department - 1-800-422-3737
To purchase, exchange or sell shares by telephone, call Monday to Friday, 9:00
a.m. to 7:00 p.m. ET. Transactions received after the close of the New York
Stock Exchange will receive the next business day's closing price.
Literature - 1-800-426-3750
To request literature on any fund distributed by Liberty Financial Investments,
call Monday to Friday, 8:30 a.m. to 6:30 p.m. ET.
BY MAIL
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
21
<PAGE>
SHAREHOLDER COMMUNICATIONS
TO KEEP YOU INFORMED
To make recordkeeping easy and keep you up-to-date on the performance of your
investments, you can expect to receive the following information about your
account:
Transaction Confirmations: Each time you make a purchase, sale or exchange, you
receive a confirmation statement within just a few days.
Quarterly Statements: Every three months, if any transactions are made that
affect your share balance, this statement reports on your account activity
during the quarter (including any reinvestment of dividends). This statement
also provides year-to-date information.
Liberty Financial Investments Investor Opportunities: Mailed with your quarterly
account statements, this newsletter highlights timely investment strategies,
portfolio manager commentary and shareholder service updates.
Tax Forms and Year-End Tax Guide: Easy-to-use forms and timely information are
designed to make tax reporting simpler. (Usually mailed in January.)
Average Cost Basis Statements: If you sold or exchanged shares during the year,
this statement may help you calculate your gain/loss for tax purposes. (Usually
mailed in February.)
22
<PAGE>
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Newport Greater China Fund is:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Newport Greater China Fund mails one shareholder report to each shareholder
address. If you would like more than one report, please call 1-800-426-3750 to
order additional reports.
This report has been prepared for shareholders of Newport Greater China 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.
23
<PAGE>
TRUSTEES
ROBERT J. BIRNBAUM
Retired (formerly Special Counsel, Dechert, Price & Rhoads; President and Chief
Operating Officer, New York Stock Exchange, Inc.)
TOM BLEASDALE
Retired (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust Company)
LORA S. COLLINS
Attorney (formerly Attorney, Kramer, Levin, Naftalis, Nessen, Kamin & Frankel)
JAMES E. GRINNELL
Private Investor (formerly Senior Vice President-Operations, The Rockport
Company)
WILLIAM D. IRELAND, JR.
Retired (formerly Chairman of the Board, Bank of New England-Worcester)
RICHARD W. LOWRY
Private Investor (formerly Chairman and Chief Executive Officer, U.S. Plywood
Corporation)
WILLIAM E. MAYER
Partner, Development Capital, L.L.C. (formerly Dean, College of Business and
Management, University of Maryland; Dean, Simon Graduate School of Business,
University of Rochester; Chairman and Chief Executive Officer, CS First Boston
Merchant Bank; and President and Chief Executive Officer, The First Boston
Corporation)
JAMES L. MOODY, JR.
Retired (formerly Chairman of the Board and Chief Executive Officer, Hannaford
Bros. Co.)
JOHN J. NEUHAUSER
Dean, Boston College School of Management
GEORGE L. SHINN
Financial Consultant (formerly Chairman, Chief Executive Officer and Consultant,
The First Boston Corporation)
ROBERT L. SULLIVAN
Retired Partner, Peat Marwick Main & Co. (formerly Management Consultant,
Saatchi and Saatchi Consulting Ltd. and Principal and International Practice
Director, Management Consulting, Peat Marwick Main & Co.)
SINCLAIR WEEKS, JR.
Chairman of the Board, Reed & Barton Corporation
LIBERTY FINANCIAL INVESTMENTS, INC. (C)1997
Distributor for Colonial Funds, Stein Roe Advisor Funds and Newport Funds
One Financial Center, Boston, Massachusetts 02111-2621
GC-02/112E-0897 (10/97)
