COLONIAL NEWPORT JAPAN FUND ANNUAL REPORT
AUGUST 31, 1997
[graphic omitted]
NOT FDIC | MAY LOSE VALUE
INSURED | NO BANK GUARANTEE
<PAGE>
COLONIAL NEWPORT JAPAN FUND HIGHLIGHTS
September 1, 1996 - August 31, 1997
INVESTMENT OBJECTIVE: Colonial Newport Japan Fund seeks capital appreciation by
investing primarily in equity securities of Japanese companies.
THE FUND IS DESIGNED TO OFFER:
[X] A portfolio of quality Japanese stocks
[X] Long-term growth potential
[X] Experienced investment management
PORTFOLIO MANAGER COMMENTARY: "Despite continuing market weakness, our quality
based, active management approach took advantage of economic growth in an
increasingly segmented market. We strive to provide positive results for
shareholders through identifying attractively priced growth companies with
dominant market share." -- David Smith
COLONIAL NEWPORT JAPAN FUND PERFORMANCE
CLASS A CLASS B CLASS C\1/
Inception Date 6/3/96 6/3/96 6/3/96
- -------------------------------------------------------------------------
12-month total returns, assuming 3.50% 2.68% 2.58%
reinvestment of all distributions and no
sales charge or contingent deferred sales
charge (CDSC)
- -------------------------------------------------------------------------
12-month total returns, assuming (2.45)% (2.32)% 1.58%
maximum offering price (MOP) and CDSC2
- -------------------------------------------------------------------------
Net asset value per share at 8/31/97 $10.05 $9.95 $9.94
\1/ As of July 1, 1997, Class D shares were converted to Class C shares.
\2/ MOP returns include the maximum sales charge of 5.75% for Class A shares.
The CDSC returns reflect the maximum charge of 5% and 1%, respectively, for
Class B and C shares. Past performance cannot predict future results. Returns
and value will fluctuate, resulting in a gain or loss on sale.
TOP FIVE HOLDINGS (as of 8/31/97)\3/ TOP FIVE SECTORS (as of 8/31/97)\3 & 4/
1. Murata Manufacturing..... 4.7% 1. Consumer Cyclicals........... 26.2%
2. Shohkoh Fund, Co. Ltd.... 4.3% 2. Technologies................. 20.6%
3. Nichiei Co. Ltd.......... 3.6% 3. Financials................... 12.9%
4. Canon, Inc............... 3.2% 4. Health Care.................. 9.5%
5. Hoya Corp................ 3.1% 5. Consumer Staples............. 5.0%
\3/ Holdings and sector breakdowns 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 sectors in the future.
\4/ 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.
<PAGE>
PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
[photo Harold W. Cogger]
I am pleased to present the annual report for Colonial Newport Japan Fund. This
report reflects on the investment environment for the 12 months ended August 31,
1997.
Throughout 1996, Japan had the highest economic growth rate of all leading
industrialized nations. Strong consumer demand and export growth continue to
support economic expansion. An 11.1% decline in the yen, relative to the dollar,
has helped make the prices of Japanese goods attractive, particularly in the
technology sector.
More interesting, perhaps, is a significant shift in the corporate culture in
Japan. Companies are beginning to take notice of their shareholders and to
manage their businesses for profitability and higher returns on equity. As a
result, foreign investment in Japan is at an all time high, and Japanese pension
funds are beginning to actively invest in their own market. We believe this
trend should have a positive impact on Japanese stock prices. In the interim,
short-term market weakness presents your Fund manager with an opportunity to
purchase high quality, growth-oriented stocks at attractive prices.
The key to uncovering investment opportunities in this environment is captured
in Newport's active management approach. Effective December 3, 1997, Colonial
Newport Japan Fund will be renamed NEWPORT JAPAN OPPORTUNITIES FUND. While this
new name does not in any way change the Fund's investment approach or management
style, it serves to underscore Newport Fund Management's position as a leader in
Asian investing and to better reflect its active management style.
The long-term benefits of investing in an international fund include an
opportunity to diversify your core portfolio. World stock markets do not tend to
move in step with the domestic stock market, and many international markets have
historically outperformed the U.S. market. Looking ahead, economic growth and
fundamental changes in the Japanese corporate culture point to opportunities for
improving market conditions. Of course, international single-country investing
entails special risks such as currency fluctuations, limited diversification,
political, economic and social developments.
Thank you for giving us the opportunity to serve your investment needs.
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 in this report will continue.
<PAGE>
PORTFOLIO MANAGEMENT REPORT
[photo of David Smith]
DAVID SMITH is the portfolio manager of Colonial Newport Japan Fund and is
senior vice president of Newport Fund Management, Inc.
JAPANESE MARKET POSITIONED FOR TURNAROUND
Export growth, excellent liquidity and increasing accountability to shareholders
have driven improvements in Japan's economy. Japan is a tremendously strong
export economy and is the dominant global supplier of many goods, particularly
in the technology sector. A declining Japanese yen relative to the U.S. dollar
served to further improve the price competitiveness of Japanese goods sold in
the global market. The Japanese stock market continues to be highly liquid with
foreign investment at an all-time high. As a result of the new Japanese pension
law, institutional investments are predicted to double over the next 10 years.
Perhaps most important are recent changes in Japanese corporate culture.
Historically, shareholders and management of Japanese companies have had little
in common. Companies tended to ignore profitability in favor of lifetime
employment and market share. However, recent activities have signaled a shift in
corporate responsibility. One example of this shift in corporate culture is the
improvement of Japanese accounting practices to make them compatible with
international standards. Another is that some companies have begun to tie
executive pay to profitability. In the end, greater attention to shareholders
should force Japanese companies to seek higher returns on equity, encouraging
greater stock market participation by both domestic and international investors.
ACTIVE MANAGEMENT
The cornerstone of our investment approach is our active management style.
Active management works particularly well in Japan, where dominant companies
with strong growth potential can often go unnoticed. In this environment, active
management can uncover strong opportunities for long-term global investors. At
present, some weakness in Japanese stock prices has presented an attractive
buying opportunity.
ACTIVE MANAGEMENT OUTPERFORMS BENCHMARK INDEX
The Fund's Class A shares posted a total return of 3.50% for the 12-month period
ended August 31, 1997. This compares favorably to the Morgan Stanley Capital
International (MSCI) Japan Index and the Nikkei 225 Index that posted negative
total returns down 11.57% and down 8.91%, respectively. We attribute this
performance to our active management style. Unlike mutual funds, indexes are not
investments, do not incur fees or expenses, and are not professionally managed.
FUND CONTINUES TO FOCUS ON TECHNOLOGY-BASED AND CONSUMER ORIENTED COMPANIES
Approximately half of the portfolio is invested in technology and
technology-related companies. For example, we own Noritsu Koki, a company that
manufactures mini-development labs for reading the magnetic strip on APS
(Advanced Photo System) camera film. The company has an estimated worldwide
market share of 55%. This film format represents 30% of the fledgling Japanese
disposable photography market. We believe that there is significant growth
potential for this company as the APS format becomes more widely accepted in
other markets.
In the financial sector, we continue to avoid the Japanese banks. Instead, we
focused on small business and consumer finance companies that target borrowers
who are unable to obtain traditional bank loans. These stocks are attractively
valued and offer tremendous growth potential. One example is Shohkoh Fund, a
consumer lender that has grown at 39% per year for the last nine years and is
expected to have earnings growth well in excess of that this year.
TREND OF IMPROVING ACCOUNTABILITY AND PROFITABILITY OF JAPANESE COMPANIES SHOULD
CONTINUE
Over the short term, market weakness may present an opportunity to buy stocks of
dominant companies at reasonable prices. Over the longer term, we anticipate
several events that could be positive for Japanese stock prices. First, a
reduction in corporate tax rates over the next year or two is likely to result
in increased corporate earnings, and ultimately higher stock prices. As
mentioned earlier, improved accounting practices and greater accountability to
shareholders should result in increased demand for Japanese stocks. We maintain
a strong, long-term outlook for Japanese companies. We believe Colonial Newport
Japan Fund will continue to be an attractive investment opportunity for
long-term global investors.
<PAGE>
COLONIAL NEWPORT JAPAN FUND INVESTMENT PERFORMANCE VS.
MSCI JAPAN INDEX
Change in Value of $10,000 from 6/30/96 - 8/31/97
CLASS A SHARES BASED ON NAV AND MOP
AVERAGE ANNUAL TOTAL RETURNS\1/
Inception 6/3/96 NAV MOP
- --------------------------------
1 YEAR 5.66% (0.42)%
- --------------------------------
SINCE INCEPTION 2.03 (2.42)
MSCI
NAV MOP Japan Index
- ---------------------------------------------------------
Jun 30, 96 10,000 9,425 10,000
Jul 31, 96 9,768.116 9,206.449 9,552
Aug 31, 96 9,381.643 8,842.198 9,125
Sep 30, 96 9,391.305 8,851.305 9,441
Oct 31, 96 8,927.536 8,414.203 8,808
Nov 30, 96 9,149.759 8,623.647 8,976
Dec 31, 96 9,004.831 8,487.054 8,356
Jan 31, 97 8,676.328 8,177.439 7,446
Feb 28, 97 8,801.933 8,295.821 7,620
Mar 31, 97 8,753.623 8,250.29 7,369
Apr 30, 97 9,178.744 8,650.967 7,636
May 31, 97 10,212.56 9,625.338 8,480
Jun 30, 97 10,676.33 10,062.44 9,113
Jul 31, 97 11,082.13 10,444.9 8,836
Aug 31, 97 9,710.145 9,151.812 8,069
CLASS B SHARES BASED ON NAV AND NAV W/CDSC
AVERAGE ANNUAL TOTAL RETURNS\1/
Inception 6/3/96 NAV w/CDSC
- --------------------------------
1 YEAR 4.85% (0.15)%
- --------------------------------
SINCE INCEPTION 1.28 (1.74)
MSCI
NAV MOP Japan Index
- ---------------------------------------------------------
Jun 30, 96 10,000 10,000 10,000
Jul 31, 96 9,767.892 9,767.892 9,552
Aug 31, 96 9,371.373 9,371.373 9,125
Sep 30, 96 9,381.045 9,381.045 9,441
Oct 31, 96 8,907.156 8,907.156 8,808
Nov 30, 96 9,119.923 9,119.923 8,976
Dec 31, 96 8,974.854 8,974.854 8,356
Jan 31, 97 8,646.035 8,646.035 7,446
Feb 28, 97 8,762.089 8,762.089 7,620
Mar 31, 97 8,704.062 8,704.062 7,369
Apr 30, 97 9,119.923 9,119.923 7,636
May 31, 97 10,145.07 10,145.07 8,480
Jun 30, 97 10,599.61 10,599.61 9,113
Jul 31, 97 10,996.13 10,996.13 8,836
Aug 31, 97 9,622.824 9,237.911 8,069
<PAGE>
CLASS C SHARES BASED ON NAV AND NAV W/CDSC2
AVERAGE ANNUAL TOTAL RETURNS\1/
Inception 6/3/96 NAV w/CDSC
- --------------------------------
1 YEAR 4.85% 3.85%
- --------------------------------
SINCE INCEPTION 1.28 1.28
MSCI
NAV Japan Index
- ----------------------------------------
Jun 30, 96 10,000 10,000
Jul 31, 96 9,767.892 9,552
Aug 31, 96 9,371.373 9,125
Sep 30, 96 9,381.045 9,441
Oct 31, 96 8,907.156 8,808
Nov 30, 96 9,110.251 8,976
Dec 31, 96 8,965.184 8,356
Jan 31, 97 8,636.363 7,446
Feb 28, 97 8,762.089 7,620
Mar 31, 97 8,704.062 7,369
Apr 30, 97 9,119.923 7,636
May 31, 97 10,145.07 8,480
Jun 30, 97 10,589.94 9,113
Jul 31, 97 10,986.46 8,836
Aug 31, 97 9,613.152 8,069
\1/ Average annual total returns are as of 9/30/97, the most recent quarter end.
\2/ Effective July 1, 1997, Class D shares were converted to Class C shares.
The Morgan Stanley Capital International Japan Index (MSCI Japan) is an
unmanaged index and tracks the performance of Japanese stocks. Unlike mutual
funds, indexes are not investments, do not incur fees or expenses, and it is not
possible to invest in an index.
Past performance cannot predict future results. Returns and value of an
investment will vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions. Net asset value (NAV) returns do not
include sales charges or contingent deferred sales charges (CDSC). Maximum
offering price (MOP) returns include the maximum initial sales charge of 5.75%
for Class A shares. The CDSC returns reflect the applicable sales charges of: 5%
for one year, and 4% since inception for Class B shares and 1% for one year for
Class C shares.
<PAGE>
INVESTMENT PORTFOLIO
AUGUST 31, 1997 (IN THOUSANDS)
COMMON STOCKS - 90.9% SHARES VALUE
---------------------------------------------------------------------------
CONSTRUCTION - 0.7%
BUILDING CONSTRUCTION
Sawako Corp. 12 $ 109
----------
---------------------------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 14.4%
HOLDING & OTHER INVESTMENT OFFICES - 1.3%
Takefuji Corp. 4 187
----------
NONDEPOSITORY CREDIT INSTITUTIONS - 13.1%
Acom Co., Ltd. 5 236
Credit Saison Co., Ltd. 11 292
Nichiei Co., Ltd. 5 530
Promise Co., Ltd. 5 226
Sanyo Shinpan Finance Co. 1 30
Shohkoh Fund 2 638
----------
1,952
----------
---------------------------------------------------------------------------
MANUFACTURING - 53.1%
CHEMICALS & ALLIED PRODUCTS - 9.2%
Canon Chemicals, Inc. 9 132
Fujimi, Inc. 4 215
Hogy Medical Co. 7 260
Sankyo Co., Ltd. 12 363
Takeda Chemical Industries Ltd. 15 399
----------
1,369
----------
COMMUNICATIONS EQUIPMENT - 7.7%
Matsushita Communication Industrial Co. 10 325
Matsushita-Kotobuki Electronics Industries 14 456
Sony Corp. 4 357
----------
1,138
----------
ELECTRICAL INDUSTRIAL EQUIPMENT - 1.9%
Nidec Corp. 7 288
----------
ELECTRONIC COMPONENTS - 11.0%
Kyocera Corp. 4 252
Murata Manufacturing Co., Ltd. 17 695
Rohm Co., Ltd. 3 306
TDK Corp. 5 383
----------
1,636
----------
FOOD & KINDRED PRODUCTS - 1.2%
Ito En, Ltd. 8 175
----------
MACHINERY & COMPUTER EQUIPMENT - 9.0%
Canon, Inc. 17 469
Hoya Corp. 11 465
SMC Corp. 1 84
Union Tool 11 314
----------
1,332
----------
MEASURING & ANALYZING INSTRUMENTS - 8.9%
Fuji Photo Film Co., Ltd. 10 384
Keyence Corp. 2 257
Noritsu Koki Co., Ltd. 7 277
Ricoh Co., Ltd. 30 405
----------
1,323
----------
MISCELLANEOUS MANUFACTURING - 3.6%
Nintendo Corp., Ltd. 4 336
Yamaha, Corp. 13 200
----------
536
----------
TRANSPORTATION EQUIPMENT - 0.6%
FCC Co., Ltd. 4 86
----------
---------------------------------------------------------------------------
RETAIL TRADE - 10.1%
BUILDING, HARDWARE & GARDEN SUPPLY - 0.1%
Homac Corp. 1 12
----------
FOOD STORES - 1.7%
Circle K Japan Co., Ltd. 5 250
----------
GENERAL MERCHANDISE STORES - 3.8%
Jusco Co. 12 320
Ryohin Keikaku Co., Ltd. 4 237
----------
557
----------
HOME FURNISHINGS & EQUIPMENT - 2.7%
Laox Co. 4 35
Yamada Denki Co. 25 373
----------
408
----------
MISCELLANEOUS RETAIL - 1.8%
Matsumotokiyoshi Co. 7 267
----------
---------------------------------------------------------------------------
SERVICES - 4.9%
AMUSEMENT & RECREATION - 1.4%
Namco 6 209
----------
COMPUTER SOFTWARE - 1.8%
Fuji Soft ABC, Inc. 7 265
----------
ENGINEERING, ACCOUNTING, RESEARCH & MANAGEMENT - 1.7%
Meitec Corp. 9 246
----------
---------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION, ELECTRIC, GAS &
SANITARY SERVICES - 2.3%
COMMUNICATIONS
DDI Corp. (a) 209
NTT Data Communications Systems Co. (a) 133
----------
342
----------
---------------------------------------------------------------------------
WHOLESALE TRADE - 5.4%
DURABLE GOODS - 4.3%
Mitsui & Co. 40 326
Softbank Corp. 8 304
----------
630
----------
NONDURABLE GOODS - 1.1%
Echo Trading Co., Ltd. 12 169
----------
TOTAL INVESTMENTS (cost of $13,495)(b) 13,486
----------
SHORT-TERM OBLIGATIONS - 9.1% PAR
---------------------------------------------------------------------------
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
$1,384 (repurchase proceeds $1,356) 1,355 1,355
----------
OTHER ASSETS & LIABILITIES, NET - (0.0)% (4)
--------------------------------------------------------------------------
NET ASSETS - 100% $ 14,837
==========
NOTES TO INVESTMENT PORTFOLIO:
--------------------------------------------------------------------------
(a) Rounds to less than one.
(b) Cost for federal income tax purposes is $13,540.
See notes to financial statements.
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
AUGUST 31, 1997
(in thousands except for per share amounts and footnotes)
ASSETS
Investments at value (cost $13,495) $13,486
Short-term obligations 1,355
-------
14,841
Cash including foreign currencies (cost $1) 1
Receivable for:
Investment sold 970
Fund shares sold 220
Expense reimbursement due from
Adviser/Administrator 138
Dividends 2
Interest 1
Deferred organization expenses 1
Other 1 1,334
--- -------
Total Assets 16,175
LIABILITIES
Payable for:
Investments purchased 973
Fund shares repurchased 340
Accrued:
Management fee 13
Administration fee 3
Transfer Agent fee 4
Bookkeeping fee 2
Other 3
---
Total Liabilities 1,338
-------
NET ASSETS $14,837
=======
Net asset value & redemption price per share -
Class A ($4,073/406) $10.05
======
Maximum offering price per share - Class A
($10.05/0.9425) $10.66(a)
======
Net asset value & offering price per share -
Class B ($6,275/631) $ 9.95(b)
======
Net asset value & offering price per share -
Class C ($3,001/302) $ 9.94(b)
======
Net asset value, offering & redemption price
per share - Class Z ($1,488/148) $10.07
======
(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.
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1997
(in thousands)
INVESTMENT INCOME
Dividends $ 31
Interest 60
-------
Total Investment Income (net of nonrebatable
foreign taxes withheld at source which
amounted to $5) 91
EXPENSES
Management fee $ 80
Administration fee 21
Service fee - Class A 6
Service fee - Class B 9
Service fee - Class C 3
Distribution fee - Class B 26
Distribution fee - Class C 11
Transfer agent fee 25
Trustees fee 6
Bookkeeping fee 27
Audit fee 17
Legal fee 5
Custodian fee 5
Reports to shareholders 4
Registration fee 102
Other 8
---
355
Fees and expenses waived or borne by the
Adviser/Administrator (151) 204
--- -------
Net Investment Loss (113)
-------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS
Net realized gain (loss) on:
Investments 35
Foreign currency transactions (20)
---
Net Realized Gain 15
Change in net unrealized appreciation (depreciation)
during the period on:
Investments 117
Foreign currency transactions (14)
---
Net Unrealized Appreciation 103
-------
Net Gain 118
-------
Increase in Net Assets from Operations $ 5
=======
See notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Year ended Period ended
(in thousands) August 31 August 31
----------- ------------
INCREASE (DECREASE) IN NET ASSETS 1997 1996(a)
Operations:
Net investment loss $(113) $ (6)
Net realized gain (loss) 15 (6)
Net unrealized appreciation (depreciation) 103 (126)
----- -----
Net Increase (Decrease) from Operations 5 (138)
----- -----
Fund Share Transactions:(b)
Receipts for shares sold - Class A 4,369 1,142
Cost of shares repurchased - Class A (1,374) (33)
----- -----
2,995 1,109
----- -----
Receipts for shares sold - Class B 7,140 1,246
Cost of shares repurchased - Class B (2,125) (1)
----- -----
5,015 1,245
----- -----
Receipts for shares sold - Class C 3,334 483
Cost of shares repurchased - Class C (709) --
----- -----
2,625 483
----- -----
Receipts for shares sold - Class Z 250 1,250
Cost of shares repurchased - Class Z (2) --
----- -----
248 1,250
----- -----
Net Increase from Fund Share Transactions 10,883 4,087
----- -----
Total Increase 10,888 3,949
NET ASSETS
Beginning of period 3,949 --
----- -----
End of period (including accumulated net
investment loss of $61 and $6, respectively) $14,837 $3,949
======= ======
NUMBER OF FUND SHARES (b)
Sold - Class A 432 113
Repurchased - Class A (136) (3)
----- -----
296 110
----- -----
Sold - Class B 716 123
Repurchased - Class B (208) (c)
----- -----
508 123
----- -----
Sold - Class C 325 49
Repurchased - Class C (72) --
----- -----
253 49
----- -----
Sold - Class Z 23 125
Repurchased - Class Z (c) --
----- -----
23 125
----- -----
(a) The Fund commenced investment operations on June 3, 1996.
(b) Effective July 1, 1997, Class D shares were converted to Class C shares.
(c) Rounds to less than one.
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1997
NOTE 1. ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
ORGANIZATION: Colonial Newport Japan 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 capital
appreciation by investing primarily in equity securities of Japanese companies.
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. Effective July 1, 1997, Class D shares were converted to Class C shares.
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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies 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.
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.
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 $1,000 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 gains (losses) arising from the
fluctuation in exchange rates between trade and settlement dates on securities
transactions, gains (losses) arising from the disposition of foreign currency,
and currency gains (losses) between the accrual and payment dates on dividends
and interest income and foreign withholding taxes.
The Fund does not distinguish that portion of gains (losses) on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains (losses) 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 0.95% 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.
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 year ended August 31, 1997, the Fund has been advised that
the Distributor retained net underwriting discounts of $9,993 on sales of the
Fund's Class A shares and received $13,832 and none, contingent deferred sales
charges (CDSC) on Class B and Class C share redemptions, respectively.
The Fund has adopted a 12b-1 plan which requires it to pay the Distributor a
service fee equal to 0.25% annually 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% 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 1.75% 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 year ended August 31, 1997, purchases and sales
of investments, other than short-term obligations, were $11,476,411 and
$1,461,231, respectively.
Unrealized appreciation (depreciation) at August 31, 1997, based on cost of
investments for federal income tax purposes was:
Gross unrealized appreciation $ 1,096,545
Gross unrealized depreciation (1,150,393)
------------
Net unrealized depreciation $ (53,848)
============
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. LINE OF CREDIT
- ------------------------------------------------------------------------------
The Fund may borrow up to 10% 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 for the
year ended August 31, 1997.
NOTE 5. OTHER RELATED PARTY TRANSACTIONS
- ------------------------------------------------------------------------------
At August 31, 1997, the Fund had one shareholder, Liberty Financial Companies,
Inc., who owned greater than 5% of the Fund's shares outstanding.
NOTE 6. COMPOSITION OF NET ASSETS
- -------------------------------------------------------------------------------
Capital paid in $ 14,886
Accumulated net investment loss (61)
Accumulated net realized gain 35
Net unrealized depreciation on:
Investments (9)
Foreign currencies (14)
--------
$ 14,837
========
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period are
as follows:
Year ended August 31
-------------------------------------------------
1997
Class A Class B Class C(d) Class Z
------- ------- ------- -------
Net asset value -
Beginning of period $ 9.710 $9.690 $9.690 $ 9.720
------- ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (a)(b) (0.094) (0.170) (0.170) (0.069)
Net realized and
unrealized gain (loss) (b) 0.434 0.430 0.420 0.419
------- ------ ------ -------
Total from Investment
Operations 0.340 0.260 0.250 0.350
------- ------ ------ -------
Net asset value -
End of period $10.050 $9.950 $9.940 $10.070
======= ====== ====== =======
Total return (e)(f) 3.50% 2.68% 2.58% 3.60%
======= ====== ====== =======
RATIOS TO AVERAGE NET ASSETS
Expenses (h) 2.00% 2.75% 2.75% 1.75%
Net investment loss (h) (0.93)% (1.68)% (1.68)% (0.68)%
Fees and expenses
waived or borne by the
Adviser/Administrator (h) 1.79% 1.79% 1.79% 1.79%
Portfolio turnover 20% 20% 20% 20%
Average commission rate $0.1479 $0.1479 $0.1479 $0.1479
Net assets at end
of period (000) $ 4,073 $ 6,275 $ 3,001 $ 1,488
(a) Net of fees and expenses waived or borne by the Adviser/Administrator
which amounted to: $ 0.180 $ 0.180 $ 0.180 $ 0.180
(b) Per share data was calculated using average shares outstanding during the
period.
(c) The Fund commenced investment operations on June 3, 1996.
(d) Effective July 1, 1997, Class D shares were converted to Class C shares.
(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.
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Selected data for a share of each class outstanding throughout each period are
as follows:
Period ended August 31
----------------------------------------------------
1996 (c)
Class A Class B Class D Class Z
---------- ---------- ---------- ----------
$ 10.000 $ 10.000 $ 10.000 $ 10.000
-------- -------- -------- --------
(0.016) (0.034) (0.034) (0.010)
(0.274) (0.276) (0.276) (0.270)
-------- -------- -------- --------
(0.290) (0.310) (0.310) (0.280)
-------- -------- -------- --------
$ 9.710 $ 9.690 $ 9.690 $ 9.720
======== ======== ======== ========
(2.90)%(g) (3.10)%(g) (3.10)%(g) (2.80)%(g)
======== ======== ======== ========
2.00%(i) 2.75%(i) 2.75%(i) 1.75%(i)
(0.66)%(i) (1.41)%(i) (1.41)%(i) (0.41)%(i)
9.13%(i) 9.13%(i) 9.13%(i) 9.13%(i)
-- -- -- --
$ 0.1794 $ 0.1794 $ 0.1794 $ 0.1794
$ 1,066 $ 1,197 $ 472 $ 1,214
$ 0.230 $ 0.230 $ 0.230 $ 0.230
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF COLONIAL TRUST II AND THE SHAREHOLDERS OF
COLONIAL NEWPORT JAPAN FUND
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Colonial Newport Japan 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 periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and the financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of portfolio positions
at August 31, 1997 by correspondence with the custodian and the application of
alternative auditing procedures where investments purchased had not settled with
the custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
October 13, 1997
<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.)
<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.
<PAGE>
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Colonial Newport Japan Fund is:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Colonial Newport Japan 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 Colonial Newport Japan 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.
<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
[logo] LIBERTY FINANCIAL INVESTMENTS, INC. (C)1997
Distributor for Colonial Funds, Stein Roe Advisor Funds and Newport Funds
One Financial Center, Boston, Massachusetts 02111-2621
JF-02/111E-0897 (10/97)
