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NEWPORT JAPAN OPPORTUNITIES FUND Annual report
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August 31, 1998
[GRAPHIC OMITTED]
------------------------------
Not FDIC May Lose Value
Insured No Bank Guarantee
------------------------------
<PAGE>
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NEWPORT JAPAN OPPORTUNITIES FUND
SEPTEMBER 1, 1997 - AUGUST 31, 1998
Investment Objective: Newport Japan Opportunities Fund seeks capital
appreciation by investing primarily in equity securities of Japanese companies.
The Fund is Designed to Offer:
o A portfolio of quality Japanese stocks
o Long-term growth potential
o Experienced investment management
Portfolio Manager Commentary: "Economic turmoil in Southeast Asia continued to
have a negative impact on stock prices throughout the region. Together, a
weakening Yen and falling stock prices created a challenging environment for
investment managers. We look forward to continued efforts by the Japanese
government to resolve the banking crisis, which is a necessary first step
towards revitalizing the economy and renewing investor confidence."
-- David Smith
Newport Japan Opportunities Fund Performance(1)
Class A Class B Class C Class Z
Inception date -- 6/3/96 for all classes
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Distributions declared per share $0.022 $0.022 $0.022 $0.022
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12-month total returns, assuming (13.62)% (14.16)% (14.18)% (13.30)%
reinvestment of all distributions
and no sales charge or contingent
deferred sales charge (CDSC)
- --------------------------------------------------------------------------------
12-month total returns, assuming (18.59)% (18.44)% (15.03)% (13.30)%
public offering price (POP) and
CDSC(2)
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Net asset value per share at 8/31/98 $8.66 $8.52 $8.51 $8.71
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Top Five Holdings (as of 8/31/98)(3) Top Five Sectors (as of 8/31/98)(3,4)
- --------------------------------------------------------------------------------
1. Murata Manuf. Co. Ltd...4.6% 1. Technologies...........27.5%
2. Ito En Ltd..............4.4% 2. Consumer Cyclicals.....17.2%
3. Shohkoh Fund............4.1% 3. Financials.............16.0%
4. Nidec Corp..............4.1% 4. Services................7.7%
5. Bridgestone Corp........3.6% 5. Capital Goods...........7.3%
1 Performance results reflect any voluntary waivers or reimbursement of Fund
expenses by the Advisor. Absent these waivers or reimbursement arrangements,
performance results would have been lower.
2 Public offering price (POP) returns include the maximum sales charge of 5.75%
for Class A shares. The contingent deferred sales charge (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.
3 Holdings and sector breakdowns are calculated as a percentage of total net
assets. Because the Fund is actively managed, there can be no guarantee the Fund
will continue to hold these securities or invest in these 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 the Advisor's defined criteria.
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2
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PRESIDENT'S MESSAGE
TO FUND SHAREHOLDERS
In June 1998, Harold Cogger retired as president of Newport Japan Opportunities
Fund. I would like to take this opportunity to thank him for his guidance over
the past few years and wish him well. As the new president of the Fund, I
present you with the annual report for Newport Japan Opportunities Fund for the
12-month period ended August 31, 1998.
[PHOTO OMITTED]
The past year represents one of the most difficult investment periods in recent
history for all of Southeast Asia. Stock market volatility that began with the
Asian currency crisis in mid-1997 persisted during the period. In addition,
problems within Japan's banking sector have had a negative impact on the local
economy and stock market. At the same time, many of Japan's smaller neighbors
continue to suffer from financial and political woes, further hindering economic
recovery within the region.
We understand that shareholders who have participated in this declining market
may feel discouraged, as no one likes to see the value of their investment fall.
However, during periods of volatility, it is especially important to remember
the basic investment principle of taking a long-term view. While the investment
managers at Newport Fund Management remain keenly aware of negative events
throughout Southeast Asia, they are encouraged by the resolve recently shown by
Japanese voters and newly elected legislators to turn the economy around. Few
investment managers possess the experience, level of knowledge and strong local
relationships that Newport has developed over the past 25 years. Participating
in numerous economic and market cycles has given them the patience and expertise
necessary to manage effectively during this challenging time.
The following report will provide you with more specific information on your
Fund's performance and the strategies employed during the period. As always, we
thank you for giving us the opportunity to serve your investment needs.
Respectfully,
/s/ Stephen E. Gibson
Stephen E. Gibson
President
October 12, 1998
Because market and economic conditions change, there can be no assurance that
the trends described above or on the following pages will continue.
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3
<PAGE>
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PORTFOLIO MANAGEMENT REPORT
David Smith is portfolio manager of Newport Japan Opportunities Fund and is a
senior vice president of Newport Fund Management, Inc. The following is a
discussion of the Fund's performance for the 12-month period ended August 31,
1998.
[PHOTO OMITTED]
Continued volatility created a challenging investment environment
The Nikkei Average, a widely used measure of the Japanese stock market, reached
its peak of over 22,000 in mid-1996. Since then, a variety of external and
internal factors have caused a general decline in Japanese stock prices that
continued during the past year. Externally, a severe economic and currency
crisis that began in mid-1997 has caused a widespread decline in stock prices
across Southeast Asia. Internally, Japan's economy has struggled with
non-existent growth. Its real estate market became inflated and then crumbled,
bringing 30% of the country's bank loans into default. This, in turn,
contributed to a significant decline in consumer demand.
The Japanese stock market has seen an increase in volatility thus far in 1998.
While prices rose sharply in the first quarter, they declined steadily through
the second quarter due to concerns over the economy. A rally in the third
quarter was short lived, as prices again declined through the month of August.
During the period, the Fund generated a negative total return of 13.62% for
Class A shares, based on net asset value. This represented a significant
outperformance of the MSCI Japan Index, which had a negative total return of
32.70% during the same period.(1)
Japanese government dedicated to resolving the banking crisis and stimulating
the economy
The Japanese government is taking steps to renew consumer confidence and
stimulate economic growth. Resolving the banking crisis is the first priority.
The Japanese legislature, which includes several first-term representatives,
spent most of August trying to come to agreement on a plan to support the
banking sector. Finalizing this plan represents a strong step toward getting the
economy back on track. If the Japanese government enacts a credible bank reform
program, we believe the country's economic health can be restored. With a
mandate for reform from Japanese voters and a significant banking bill submitted
to the legislature in early October 1998, Japan's economy is beginning to
stabilize.
Japan's government has been working to reduce corporate tax rates to a more
competitive level internationally. The corporate tax rate was at 49.98% in early
1998. It is currently at 46% and is expected to reach 40% sometime in
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4
<PAGE>
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1999. The government is also in the process of putting a $120 billion public
works spending package in place. This project would not only help rebuild roads,
bridges and tunnels, but would also create job growth in an environment of high
unemployment.
Japan's foundation for future growth
We believe there are several factors that could create a solid foundation for
future economic growth. Interest rates are at an all-time low, with the Japanese
long-term bond yielding 1.1%. Japanese people, currently holding the U.S.
equivalent of $10.1 trillion in personal liquid assets, have the potential to
create significant consumer demand. Finally, personal income tax rates are
relatively low, with the first $30,000 in earned income going untaxed.
Maintain a long-term investment horizon
In any equity market, including the U.S. market, periods of volatility are
expected. The decline of nearly 20% in large-capitalization U.S. stocks during
July and August is a good example. While the Asian market downturn we've
witnessed over the past year has been sharper than others in years past, we
continue to believe in the long-term investment opportunities that Japan has to
offer. As always, we encourage investors to focus on long-term results when
investing in Asian markets.
1 The Morgan Stanley Capital International Japan Index (MSCI Japan) is an
unmanaged index that tracks the performance of Japanese stocks. Unlike mutual
funds, indexes are not investments and do not incur fees or expenses. It is not
possible to invest in an index.
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5
<PAGE>
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Newport Japan Opportunities Fund Investment Performance
vs. MSCI Japan Index
Change in Value of $10,000 from 6/30/96 - 8/31/98 Class A Shares
based on NAV and POP
[The following information was represented by a line graph in the printed
materials.]
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DATE NAV POP INDEX
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6/30/96 10000 10000 $10,000
7/31/96 9768.116 9206.449 $9,552
8/30/96 9381.643 8842.198 $9,125
9/30/96 9391.304 8851.304 $9,441
10/31/96 8927.536 8414.203 $8,808
11/29/96 9149.758 8623.647 $8,976
12/31/96 9004.831 8487.053 $8,356
1/31/97 8676.329 8177.44 $7,446
2/28/97 8801.932 8295.821 $7,620
3/31/97 8753.623 8250.29 $7,369
4/30/97 9178.744 8650.966 $7,636
5/30/97 10212.56 9625.338 $8,480
6/30/97 10676.33 10062.44 $9,113
7/31/97 11082.13 10444.9 $8,836
8/29/97 9710.145 9151.812 $8,069
9/30/97 9922.705 9352.15 $7,947
10/31/97 9487.923 8942.367 $7,207
11/28/97 9043.478 8523.478 $6,765
12/31/97 8736.062 8233.738 $6,378
1/30/98 9278.434 8744.924 $6,947
2/27/98 9104.1 8580.614 $6,983
3/31/98 8716.692 8215.482 $6,508
4/30/98 8861.97 8352.407 $6,481
5/29/98 8455.191 7969.017 $6,125
6/30/98 8484.246 7996.402 $6,211
7/31/98 8823.229 8315.893 $6,129
8/31/98 8397.08 7914.247 $5,431
Value of a $10,000 investment made on 6/30/96
As of 8/31/98
- --------------------------------------------------------------------------------
Class A Class B Class C Class Z
NAV POP NAV w/CDSC NAV w/CDSC NAV
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$8,387 $7,905 $8,260 $8,013 $8,250 $8,250 $8,436
- --------------------------------------------------------------------------------
Average Annual Total Returns
As of 8/31/98
- --------------------------------------------------------------------------------
Class A Class B Class C Class Z
Inception 6/3/96 6/3/96 6/3/96 6/3/96
NAV POP NAV w/CDSC NAV w/CDSC NAV
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1 year (13.62)% (18.59)% (14.16)% (18.44)% (14.18)% (15.03)% (13.30)%
- --------------------------------------------------------------------------------
Life (6.10) (8.55) (6.78) (8.03) (6.83) (6.83) (5.86)
- --------------------------------------------------------------------------------
Past performance cannot predict future results. Returns and value of an
investment will vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions. Net asset value (NAV) returns do not
include sales charges or contingent deferred sales charges (CDSC). Public
offering price (POP) returns include the maximum sales charge of 5.75% for Class
A shares. The CDSC returns reflect the maximum charges of 5% for one year and 3%
for life for Class B shares, and 1% for one year for Class C shares.
Performance results reflect any voluntary waivers or reimbursement of Fund
expenses by the Advisor. Absent these waivers or reimbursement arrangements,
performance results would have been lower. Performance for different share
classes will vary based on differences in sales charges and fees associated with
each class.
The Morgan Stanley Capital International Japan Index (MSCI Japan) is an
unmanaged index that tracks the performance of Japanese stocks. Unlike mutual
funds, indexes are not investments and do not incur fees or expenses. It is not
possible to invest in an index.
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6
<PAGE>
INVESTMENT PORTFOLIO
AUGUST 31, 1998 (IN THOUSANDS)
COMMON STOCKS - 92.7% SHARES VALUE
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CONSTRUCTION - 1.2%
Building Construction
Sawako Corp. 22 $ 149
-----------
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FINANCE, INSURANCE & REAL ESTATE - 16.0%
Nondepository Credit Institutions
Acom Co., Ltd. 5 249
Aiful Corp. 5 244
Credit Saison Co., Ltd. 18 361
Nichiei Co., Ltd. 6 391
Promise Co., Ltd. 5 208
Shohkoh Fund 2 505
-----------
1,958
-----------
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MANUFACTURING - 55.2%
Chemicals & Allied Products - 4.6%
Fujimi, Inc. 5 174
Takeda Chemical Industries Ltd. 15 394
-----------
568
-----------
Communications Equipment - 7.9%
Matsushita Communication Industrial Co. 10 338
Matsushita-Kotobuki Electronics Industries 14 329
Sony Corp. 4 301
-----------
968
-----------
Electrical Industrial Equipment - 4.1%
Nidec Corp. 7 498
-----------
Electronic Components - 13.2%
Minebea Co., Ltd. 38 387
Murata Manufacturing Co., Ltd. 17 564
Rohm Co., Ltd. 3 307
TDK Corp. 5 348
-----------
1,606
-----------
Food & Kindred Products - 4.4%
Ito En Ltd. 15 532
-----------
Machinery & Computer Equipment - 6.9%
Canon Inc. 17 346
SMC Corp. 1 69
Union Tool 11 430
-----------
845
-----------
7
<PAGE>
Investment Portfolio/August 31, 1998
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COMMON STOCKS - CONT. SHARES VALUE
- -------------------------------------------------------------------------------
MANUFACTURING - CONT.
Measuring & Analyzing Instruments - 10.5%
Fuji Photo Film Co., Ltd. 10 $ 324
Keyence Corp. 2 178
Noritsu Koki Co., Ltd. 7 147
Ricoh Co., Ltd. 30 289
Terumo Corp. 18 341
-----------
1,279
-----------
Rubber & Plastic - 3.6%
Bridgestone Corp. 20 443
-----------
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RETAIL TRADE - 7.8%
Food Stores - 2.8%
Circle K Japan Co., Ltd. 11 346
-----------
General Merchandise Stores - 3.2%
Ryohin Keikaku Co., Ltd. 4 387
-----------
Miscellaneous Retail - 1.8%
Matsumotokiyoshi Co. 7 224
-----------
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SERVICES - 11.6%
Auto Repair, Rental & Parking - 0.8%
Park24 Co., Ltd. 11 94
-----------
Computer Related Services - 5.6%
Bellsystem 24 Inc. 1 209
Diamond Computer Services Co. 10 139
Orix Corp. 5 340
-----------
688
-----------
Computer Software - 2.7%
Fuji Soft ABC Inc. 9 328
-----------
Engineering, Accounting, Research & Management - 2.5%
Meitec Corp. 9 304
-----------
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TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 0.9%
Telecommunications
NTT Data Communications Systems Co. (a) 108
-----------
TOTAL COMMON STOCKS (cost of $11,521)(b) 11,325
-----------
8
<PAGE>
Investment Portfolio/August 31, 1998
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SHORT-TERM OBLIGATIONS - 6.0% PAR VALUE
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Repurchase agreement with ABN AMRO Chicago
Corp., dated 08/31/98, due 09/01/98 at 5.820%,
collateralized by U. S. Treasury notes and bill with
various maturities to 2026, market value
$751 (repurchase proceeds $732) $ 732 $ 732
-----------
OTHER ASSETS & LIABILITIES, NET - 1.3% 164
-----------------------------------------------------------------------------
NET ASSETS - 100.0% $ 12,221
-----------
NOTES TO INVESTMENT PORTFOLIO:
-----------------------------------------------------------------------------
(a) Rounds to less than one.
(b) Cost for federal income tax purposes is $11,579.
See notes to financial statements.
9
<PAGE>
STATEMENT OF ASSETS & LIABILITIES
AUGUST 31, 1998
(in thousands except for per share amounts and footnotes)
ASSETS
Investments at value (cost $11,521) $ 11,325
Short-term obligations 732
-------------
12,057
Cash including foreign currencies (cost $239) $ 246
Receivable for:
Fund shares sold 8
Dividends 5
Deferred organization expenses 1
Other 2 262
------------- -------------
Total Assets 12,319
LIABILITIES
Payable for:
Fund shares repurchased 63
Due to Advisor/Administrator 7
Accrued:
Management fee 10
Administration fee 3
Transfer agent fee 2
Bookkeeping fee 2
Other 11
-------------
Total Liabilities 98
-------------
NET ASSETS $ 12,221
-------------
Net asset value & redemption price per share -
Class A ($2,887/333) $8.66 (a)
-------------
Maximum offering price per share - Class A
($8.66/0.9425) $9.19 (b)
-------------
Net asset value & offering price per share -
Class B ($6,028/708) $8.52 (a)
-------------
Net asset value & offering price per share -
Class C ($1,862/219) $8.51 (a)
-------------
Net asset value, offering & redemption price
per share - Class Z ($1,444/166) $8.71
-------------
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
(b) On sales of $50,000 or more the offering price is reduced.
See notes to financial statements.
10
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1998
(in thousands)
INVESTMENT INCOME
Dividends $ 64
Interest 64
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Total Investment Income (net of nonreclaimable
foreign taxes withheld at source which
amounted to $11) 128
EXPENSES
Management fee $ 138
Administration fee 36
Service fee - Class A, Class B, Class C 32
Distribution fee - Class B 48
Distribution fee - Class C 19
Transfer agent fee 44
Bookkeeping fee 27
Trustees fee 9
Audit fee 25
Legal fee 4
Custodian fee 9
Registration fee 48
Reports to shareholders 12
Other 6
-------------
457
Fees and expenses waived or borne by the
Advisor/Administrator (104) 353
------------- -------------
Net Investment Loss (225)
-------------
NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS Net realized loss
on:
Investments (1,776)
Foreign currency transactions (134)
-------------
Net Realized Loss (1,910)
Net unrealized appreciation (depreciation)
during the period on:
Investments (187)
Foreign currency transactions 20
-------------
Net Unrealized Depreciation (167)
-------------
Net Loss (2,077)
-------------
Decrease in Net Assets from Operations $ (2,302)
-------------
See notes to financial statements.
11
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
(in thousands) Year ended August 31
-----------------------------
INCREASE (DECREASE) IN NET ASSETS 1998 1997 (a)
Operations:
Net investment loss $ (225) $ (113)
Net realized gain (loss) (1,910) 15
Net unrealized appreciation (depreciation) (167) 103
------------- -------------
Net Increase (Decrease) from Operations (2,302) 5
------------- -------------
Distributions:
From net realized gains - Class A (10) --
From net realized gains - Class B (15) --
From net realized gains - Class C (7) --
From net realized gains - Class Z (3) --
------------- -------------
(2,337) --
------------- -------------
Fund Share Transactions:
Receipts for shares sold - Class A 4,953 4,369
Value of distributions reinvested - Class A 9 --
Cost of shares repurchased - Class A (5,430) (1,374)
------------- -------------
(468) 2,995
------------- -------------
Receipts for shares sold - Class B 5,636 7,140
Value of distributions reinvested - Class B 13 --
Cost of shares repurchased - Class B (4,899) (2,125)
------------- -------------
750 5,015
------------- -------------
Receipts for shares sold - Class C 2,608 3,334
Value of distributions reinvested - Class C 6 --
Cost of shares repurchased - Class C (3,346) (709)
------------- -------------
(732) 2,625
------------- -------------
Receipts for shares sold - Class Z 215 250
Value of distributions reinvested - Class Z 3 --
Cost of shares repurchased - Class Z (47) (2)
------------- -------------
171 248
------------- -------------
Net Increase (Decrease) from Fund Share
Transactions (279) 10,883
------------- -------------
Total Increase (Decrease) (2,616) 10,888
NET ASSETS
Beginning of period 14,837 3,949
------------- -------------
End of period (including accumulated
net investment loss of $175 and $61,
respectively) $ 12,221 $ 14,837
------------- -------------
(a) Effective July 1, 1997, Class D shares were redesignated Class C shares.
See notes to financial statements.
12
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS - CONT.
Year ended August 31
-----------------------------
1998 1997 (a)
NUMBER OF FUND SHARES
Sold - Class A 522 432
Issued for distributions reinvested - Class A 1 --
Repurchased - Class A (596) (136)
------------- -------------
(73) 296
------------- -------------
Sold - Class B 607 716
Issued for distributions reinvested - Class B 1 --
Repurchased - Class B (531) (208)
------------- -------------
77 508
------------- -------------
Sold - Class C 284 325
Issued for distributions reinvested - Class C 1 --
Repurchased - Class C (368) (72)
------------- -------------
(83) 253
------------- -------------
Sold - Class Z 23 23
Issued for distributions reinvested - Class Z (b) --
Repurchased - Class Z (5) (b)
------------- -------------
18 23
------------- -------------
(a) Effective July 1, 1997, Class D shares were redesignated Class C shares. (b)
Rounds to less than one.
See notes to financial statements.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998
NOTE 1. ACCOUNTING POLICIES
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Organization: Newport Japan Opportunities 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 a 1.00% contingent deferred sales
charge on redemptions made within eighteen months on an original purchase of $1
million to $5 million. Class B shares are subject to an annual distribution fee
and a contingent deferred sales charge. Class B shares will convert to Class A
shares when they have been outstanding approximately eight years. Class C shares
are subject to 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, 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 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 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. In addition,
if the values of foreign securities have been materially affected by events
occurring after the closing of a foreign market, the foreign securities may be
valued at their fair value.
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 is
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.
14
<PAGE>
Notes to Financial Statements/August 31, 1998
- --------------------------------------------------------------------------------
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 fees and Class B
and Class C distribution fees), and realized and unrealized gains (losses) are
allocated to each class proportionately on a daily basis for purposes of
determining the net asset value of each class.
The per share data was calculated using average shares outstanding during the
period. In addition, 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 include the fluctuations in exchange rates on
gains (losses) 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.
15
<PAGE>
Notes to Financial Statements/August 31, 1998
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES - CONT.
- --------------------------------------------------------------------------------
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,
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 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 Advisor) is the investment
Advisor 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 Advisor, 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.
16
<PAGE>
Notes to Financial Statements/August 31, 1998
- --------------------------------------------------------------------------------
Transfer agent: Liberty Funds Services, Inc., formerly 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.
Effective October 1, 1997 and continuing through September 30, 1998, the
Transfer Agent fee was reduced by 0.0012% in cumulative monthly increments,
resulting in a decrease in the fee from 0.25% to 0.236% annually.
Underwriting discounts, service and distribution fees: Liberty Funds
Distributor, Inc., formerly Liberty Financial Investments, Inc. (the
Distributor), a subsidiary of the Administrator, is the Fund's principal
underwriter. For the year ended August 31, 1998, the Fund has been advised that
the Distributor retained net underwriting discounts of $8,553 on sales of the
Fund's Class A shares and received contingent deferred sales charges (CDSC) of
none, $62,126, and $14,294 on Class A, Class B, and Class C share redemptions,
respectively.
The Fund has adopted a 12b-1 plan which requires it to pay the Distributor a
service fee equal to 0.25% annually 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 Advisor/Administrator have agreed, until further notice, to
waive fees and bear certain Fund expenses to the extent that total expenses
(exclusive of service fees, 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 Advisor 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
Fund's assets.
NOTE 3. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
Investment activity: During the year ended August 31, 1998, purchases and sales
of investments, other than short-term obligations, were $3,077,167 and
$3,275,938, respectively.
Unrealized appreciation (depreciation) at August 31, 1998, based on cost of
investments for federal income tax purposes was:
17
<PAGE>
Notes to Financial Statements/August 31, 1998
- --------------------------------------------------------------------------------
NOTE 3. PORTFOLIO INFORMATION - CONT.
- --------------------------------------------------------------------------------
Gross unrealized appreciation $ 1,156,928
Gross unrealized depreciation (1,410,643)
--------------
Net unrealized depreciation $ (253,715)
--------------
Capital loss carryforwards: At August 31, 1998, capital loss carryforwards
available (to the extent provided in regulations) to offset future realized
gains were approximately as follows:
Year of Capital loss
expiration carryforward
-------------- ------------------
2006 $ 68,000
Expired capital loss carryforwards, if any, are recorded as a reduction of
capital paid in.
To the extent loss carryforwards are used to offset any future realized gains,
it is unlikely that such gains would be distributed since they may be taxable to
shareholders as ordinary income.
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 33 1/3% of its 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 August 31, 1998.
NOTE 5. OTHER RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
At August 31, 1998, 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 $ 14,362
Accumulated net investment loss (175)
Accumulated net realized loss (1,776)
Net unrealized appreciation (depreciation) on:
Investments (196)
Foreign currency transactions 6
--------------
$ 12,221
--------------
18
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of each class outstanding throughout each period are
as follows:
Year ended August 31
-----------------------------------------
1998
Class A Class B Class C Class Z
-------- -------- -------- --------
Net asset value -
Beginning of period $ 10.050 $ 9.950 $ 9.940 $ 10.070
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (a)(b) (0.103) (0.172) (0.172) (0.080)
Net realized and
unrealized loss (1.265) (1.236) (1.236) (1.258)
-------- -------- -------- --------
Total from Investment
Operations (1.368) (1.408) (1.408) (1.338)
-------- -------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net realized gains (0.022) (0.022) (0.022) (0.022)
-------- -------- -------- --------
Net asset value -
End of period $ 8.660 $ 8.520 $ 8.510 $ 8.710
-------- -------- -------- --------
Total return (c)(d) (13.62)% (14.16)% (14.18)% (13.30)%
-------- -------- -------- --------
RATIOS TO AVERAGE NET ASSETS
Expenses (e) 2.00% 2.75% 2.75% 1.75%
Net investment loss (e) (1.12)% (1.87)% (1.87)% (0.87)%
Fees and expenses
waived or borne by the
Advisor/Administrator (e) 0.72% 0.72% 0.72% 0.72%
Portfolio turnover 24% 24% 24% 24%
Net assets at end
of period (000) $ 2,887 $ 6,028 $ 1,862 $ 1,444
(a) Net of fees and expenses waived or borne by the Advisor/Administrator
which amounted to: $ 0.066 $ 0.066 $ 0.066 $ 0.066
(b) Per share data was calculated using average shares outstanding during the
period.
(c) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(d) Had the Advisor/Administrator not waived or reimbursed a portion of
expenses, total return would have been reduced.
(e) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
19
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
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(c) 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) 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
Advisor/Administrator (h) 1.79% 1.79% 1.79% 1.79%
Portfolio turnover 20% 20% 20% 20%
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 Advisor/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) Effective July 1, 1997, Class D shares were redesignated Class C shares. (d)
The Fund commenced investment operations on June 3, 1996. (e) Total return at
net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(f) Had the Advisor/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.
20
<PAGE>
FINANCIAL HIGHLIGHTS - CONT.
Selected data for a share of each class outstanding throughout each period are
as follows:
<TABLE>
<CAPTION>
Period ended August 31
--------------------------------------------------------------
1996 (d)
Class A Class B Class C Class Z
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value -
Beginning of period $ 10.000 $ 10.000 $ 10.000 $ 10.000
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (a)(b) (0.016) (0.034) (0.034) (0.010)
Net realized and
unrealized gain (loss) (0.274) (0.276) (0.276) (0.270)
---------- ---------- ---------- ----------
Total from Investment
Operations (0.290) (0.310) (0.310) (0.280)
---------- ---------- ---------- ----------
Net asset value -
End of period $ 9.710 $ 9.690 $ 9.690 $ 9.720
---------- ---------- ---------- ----------
Total return (e)(f) (2.90)%(g) (3.10)%(g) (3.10)%(g) (2.80)%(g)
---------- ---------- ---------- ----------
RATIOS TO AVERAGE NET ASSETS
Expenses (h) 2.00%(i) 2.75%(i) 2.75%(i) 1.75%(i)
Net investment loss (h) (0.66)%(i) (1.41)%(i) (1.41)%(i) (0.41)%(i)
Fees and expenses
waived or borne by the
Advisor/Administrator (h) 9.13%(i) 9.13%(i) 9.13%(i) 9.13%(i)
Portfolio turnover -- -- -- --
Net assets at end
of period (000) $ 1,066 $ 1,197 $ 472 $ 1,214
(a) Net of fees and expenses waived or borne by the Advisor/Administrator
which amounted to: $ 0.230 $ 0.230 $ 0.230 $ 0.230
</TABLE>
(b) Per share data was calculated using average shares outstanding during the
period.
(c) Effective July 1, 1997, Class D shares were redesignated Class C shares. (d)
The Fund commenced investment operations on June 3, 1996. (e) Total return at
net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(f) Had the Advisor/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.
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
T0 THE TRUSTEES OF COLONIAL TRUST II AND THE SHAREHOLDERS OF
NEWPORT JAPAN OPPORTUNITIES 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 Japan Opportunities Fund
(the "Fund") ( a series of Colonial Trust II) at August 31, 1998, the results of
its operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and the financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and 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, 1998 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 12, 1998
22
<PAGE>
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Newport Japan Opportunities Fund is:
Liberty Funds Services, Inc.*
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Newport Japan Opportunities 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 Newport Japan Opportunities
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.
*Effective October 1, 1998, Colonial Investors Service Center, Inc. -- the
Transfer Agent for Colonial, Stein Roe Advisor and Newport Funds -- changed its
name to Liberty Funds Services, Inc.
23
<PAGE>
- --------------------------------------------------------------------------------
TRUSTEES
ROBERT J. BIRNBAUM
Consultant (formerly Special Counsel, Dechert, Price & Rhoads; President and
Chief Operating Officer, New York Stock Exchange, Inc.; President, American
Stock Exchange, Inc.)
TOM BLEASDALE
Retired (formerly Chairman of the Board and Chief Executive Officer, Shore Bank
& Trust Company)
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)
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, Chief Executive Officer and Director,
Hannaford Bros. Co.)
JOHN J. NEUHAUSER
Dean, Boston College School of Management
ROBERT L. SULLIVAN
Retired Partner, KPMG Peat Marwick LLP (formerly Management Consultant, Saatchi
and Saatchi Consulting Ltd. and Principal and International Practice Director,
Management Consulting, Peat Marwick Main & Co.)
[LOGO] LIBERTY
COLONIAL . CRABBE HUSON . NEWPORT . STEIN ROE ADVISOR
Liberty Funds Distributor, Inc. (c)1998
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
Visit us at www.libertyfunds.com
JO-02/941F-1098 (10/98) 98/1048
