Registration Numbers: 2-66976
811-3009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 39 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 39 [ X ]
COLONIAL TRUST II
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
(617) 426-3750
(Registrant's Telephone Number, Including Area Code)
Name and Address of Agent for Service: Copy to:
Nancy L. Conlin, Esquire John M. Loder, Esquire
Colonial Management Associates, Inc. Ropes & Gray
One Financial Center One International Place
Boston, Massachusetts 02111 Boston, Massachusetts 02110-2624
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ X ] on November 30, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on [date] pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on [date] pursuant to paragraph (a)(2) of Rule 485
If appropriate check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
<PAGE>
COLONIAL TRUST II
Cross Reference Sheet
Newport Tiger Cub Fund (formerly known as Colonial Newport Tiger Cub Fund)
Newport Japan Opportunities Fund
Newport Greater China Fund
Classes A, B and C
Item Number of Form N-1A Prospectus Location or Caption
Part A
1. Cover Page
2. Summary of Expenses
3. The Funds' Financial History
4. Organization and History; The Funds'
Investment Objectives; How the Funds Pursue
their Objectives and Certain Risk Factors
5. Cover Page; How the Funds are Managed;
Organization and History; The Funds'
Investment Objectives; Back Cover
6. Organization and History; Distributions and
Taxes; How to Buy Shares
7. Summary of Expenses; How to Buy Shares; How
the Funds Value their Shares; 12b-1 Plan;
Back Cover
8. How to Sell Shares; How to Exchange Shares;
Telephone Transactions
9. Not Applicable
<PAGE>
November 30, 1998
NEWPORT TIGER CUB FUND
NEWPORT JAPAN OPPORTUNITIES FUND
NEWPORT GREATER CHINA FUND
PROSPECTUS
BEFORE YOU INVEST
Colonial Management Associates, Inc. (Administrator) and your full-service
financial advisor want you to understand both the risks and benefits of mutual
fund investing.
While mutual funds offer significant opportunities and are professionally
managed, they also carry risks including possible loss of principal. Unlike
savings accounts and certificates of deposit, mutual funds are not insured or
guaranteed by any financial institution or government agency.
Please consult your full-service financial advisor to determine how investing in
these mutual funds may suit your unique needs, time horizon and risk tolerance.
Newport Tiger Cub Fund (Cub Fund) and Newport Japan Opportunities Fund (Japan
Fund) are diversified portfolios of Colonial Trust II (Trust), an open-end
management investment company. Newport Greater China Fund (China Fund)
(collectively with the Cub Fund and the Japan Fund, the Funds) is a
non-diversified portfolio of the Trust.
The Cub Fund seeks capital appreciation by investing primarily in equity
securities of small companies (i.e., companies with equity market
capitalizations of U.S. $1 billion or less) located in the nine Tigers of Asia
(Hong Kong, Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, The
People's Republic of China and the Philippines).
The Japan Fund seeks capital appreciation by investing primarily in equity
securities of Japanese companies.
The 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).
Each Fund is managed by Newport Fund Management, Inc. (Advisor), an investment
advisor since 1984 and an affiliate of the Administrator.
This Prospectus explains concisely what you should know before investing in the
Funds. Read it carefully and
JO-01/984F-0998
retain it for future reference. More detailed information about the Funds is
contained in the November 30, 1998 Statement of Additional Information which has
been filed with the Securities and Exchange Commission (SEC) and is obtainable
free of charge by calling the Administrator at 1-800-426-3750. The Statement of
Additional Information is incorporated by reference in (which means it is
considered to be a part of) this Prospectus.
Each Fund offers multiple classes of shares. Class A shares are offered at net
asset value plus a sales charge imposed at the time of purchase; Class B shares
are offered at net asset value and are subject to an annual distribution fee and
a declining contingent deferred sales charge on redemptions made within six
years after purchase; and Class C shares are offered at net asset value and are
subject to an annual distribution fee and a contingent deferred sales charge on
redemptions made within one year after purchase. Each of the Class A, B and C
shares is subject to a contingent redemption fee on redemptions and exchanges
made within five business days of purchase. Class B shares automatically convert
to Class A shares after approximately eight years. See "How to Buy Shares."
Contents Page
Summary of Expenses 2
The Funds' Financial History 4
The Funds' Investment Objectives 7
How the Funds Pursue Their Objectives
and Certain Risk Factors 7
Investment Techniques and Additional
Risk Factors 8
How the Funds Measure Their
Performance 11
How the Funds are Managed 12
Year 2000 13
How the Funds Value Their Shares 13
Distributions and Taxes 13
How to Buy Shares 14
How to Sell Shares 16
How to Exchange Shares 17
Telephone Transactions 17
12b-1 Plans 18
Organization and History 18
This Prospectus is also available on-line at the Web site
http://www.libertyfunds.com. The SEC maintains a Web site (http://www.sec.gov)
that contains the Statement of Additional Information, materials that are
incorporated by reference into this Prospectus and the Statement of Additional
Information, and other information regarding the Funds.
- ----------------------------- --------------------------
NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
- ----------------------------- --------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC NOR HAS THE
SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in a Fund. The
following tables summarize your maximum transaction costs and your annual
expenses, adjusted to reflect current fees, for an investment in each Class of
each Fund's shares. See "How the Funds are Managed" and "12b-1 Plans" for more
complete descriptions of the Funds' various costs and expenses.
Shareholder Transaction Expenses(1)(2)
Cub Fund, Japan Fund and China Fund
----------------------------------------
Class A Class B Class C
Maximum Initial Sales Charge Imposed on
a Purchase (as a % of offering price) 5.75%(3) 0.00%(4) 0.00%(4)
Maximum Contingent Deferred Sales Charge
(as a % of offering price) (3) 1.00%(5) 5.00% 1.00%
Maximum Contingent Redemption Fee (3)(6) 2.00% 2.00% 2.00%
(1) For accounts less than $1,000 an annual fee of $10 may be deducted. See "How
to Buy Shares."
(2) Redemption proceeds exceeding $500 sent via federal funds wire will be
subject to a $7.50 charge per transaction.
(3) Does not apply to reinvested distributions.
(4) Because of the 0.75% distribution fee applicable to Class B and Class C
shares, long-term Class B and Class C shareholders may pay more in
aggregate sales charges than the maximum initial sales charge permitted
by the National Association of Securities Dealers, Inc. However, because
Class B shares automatically convert to Class A shares after
approximately 8 years, this is less likely for Class B shares than for a
class without a conversion feature.
(5) Only with respect to any portion of purchases of $1 million to $5 million
redeemed within approximately 18 months after purchase. See "How to Buy
Shares."
(6) A contingent redemption fee in the amount of 2.00% is imposed on
redemptions and exchanges of Fund shares purchased and held for five
business days or less. See "Contingent Redemption Fee" under the caption
"How to Sell Shares."
Annual Operating Expenses (as a % of average net assets)
Cub Fund
------------------------------------------
Class A Class B Class C
Management and administration fees
(after fee waiver)(7) 0.38% 0.38% 0.38%
12b-1 fees 0.25 1.00 1.00
Other expenses 1.62 1.62 1.62
---- ---- ----
Total operating expenses
(after fee waiver)(7) 2.25% 3.00% 3.00%
===== ===== =====
Japan Fund
------------------------------------------
Class A Class B Class C
Management and administration fees
(after fee waiver)(8) 0.48% 0.48% 0.48%
12b-1 fees 0.25 1.00 1.00
Other expenses 1.27 1.27 1.27
---- ---- ----
Total operating expenses
(after fee waiver)(8) 2.00% 2.75% 2.75%
===== ===== =====
China Fund
------------------------------------------
Class A Class B Class C
Management and administration fees
(after fee waiver)(9) 1.09% 1.09% 1.09%
12b-1 fees 0.25 1.00 1.00
Other expenses 0.81 0.81 0.81
---- ---- ----
Total operating expenses
(after fee waiver)(9) 2.15% 2.90% 2.90%
===== ===== =====
(7) The Advisor and Administrator have voluntarily agreed to waive or bear
certain Fund expenses until further notice to the Fund. Absent such
agreement, the "Management and administration fees" would have been 1.40%
for each class of shares and "Total operating expenses" would have been
3.27% for Class A shares and 4.02% for Class B and Class C shares.
(8) The Advisor and Administrator have voluntarily agreed to waive or bear
certain Fund expenses until further notice to the Fund. Absent such
agreement, the "Management and administration fees" would have been 1.20%
for each class of shares and "Total operating expenses" would have been
2.72% for Class A shares and 3.47% for Class B and Class C shares.
(9) The Advisor and Administrator have voluntarily agreed to waive or bear
certain Fund expenses until further notice to the Fund. Absent such
agreement, the "Management and administration fees" would have been 1.40%
for each class of shares and "Total operating expenses" would have been
2.46% for Class A shares and 3.21% for Class B and Class C shares.
Example
The following Example shows the cumulative transaction and operating expenses
attributable to a hypothetical $1,000 investment in the Class A, Class B and
Class C shares of each Fund for the periods specified, assuming a 5% annual
return and, unless otherwise noted, redemption at period end. This example uses
the fees and expenses in the tables above and gives effect to the fee waivers
and expense reimbursements described above. The 5% return and expenses in this
Example should not be considered indicative of actual or expected Fund
performance or expenses, both of which will vary.
Cub Fund
Class A Class B Class C
Period:
(10) (11) (10) (11)
1 year $ 79 $ 80 $ 30 $ 40 $ 30
3 years $124 $123 $ 93 $ 93(12) $ 93
5 years $171 $178 $158 $158 $158
10 years $301 $314(13) $314(13) $332 $332
Without voluntary fee reductions, the amounts would be $89, $152, $218 and $394
for Class A shares for 1, 3, 5 and 10 years, respectively; $90, $152, $226 and
$406 for Class B shares assuming redemptions for 1, 3, 5 and 10 years,
respectively; $40 $122, $206 and $406 for Class B shares assuming no redemptions
for 1, 3, 5 and 10 years, respectively; $50, $122, $206 and $422 for Class C
shares assuming redemptions for 1, 3, 5, and 10 years, respectively; and $40,
$122, $206 and $422 for Class C shares assuming no redemptions for 1, 3, 5 and
10 years, respectively.
Japan Fund
Class A Class B Class C
Period:
(10) (11) (10) (11)
1 year $ 77 $ 78 $ 28 $ 38 $ 28
3 years $117 $115 $ 85 $ 85(12) $ 85
5 years $159 $165 $145 $145 $145
10 years $277 $290(13) $290(13) $308 $308
Without voluntary fee reductions, the amounts would be $83, $137, $193 and $345
for Class A shares for 1, 3, 5 and 10 years, respectively; $85, $137, $200 and
$358 for Class B shares assuming redemptions for 1, 3, 5 and 10 years,
respectively; $35 $107, $180 and $358 for Class B shares assuming no redemptions
for 1, 3, 5 and 10 years, respectively; $45, $107, $180 and $375 for Class C
shares assuming redemptions for 1, 3, 5, and 10 years, respectively; and $35,
$107, $180 and $375 for Class C shares assuming no redemptions for 1, 3, 5 and
10 years, respectively.
China Fund
Class A Class B Class C
Period:
(10) (11) (10) (11)
1 year $ 78 $ 79 $ 29 $ 39 $ 29
3 years $121 $120 $ 90 $ 90(12) $ 90
5 years $166 $173 $153 $153 $153
10 years $291 $305(13) $305(13) $322 $322
Without voluntary fee reductions, the amounts would be $81, $130, $181 and $321
for Class A shares for 1, 3, 5 and 10 years, respectively; $82, $129, $188 and
$334 for Class B shares assuming redemptions for 1, 3, 5 and 10 years,
respectively; $32, $99, $168 and $334 for Class B shares assuming no redemptions
for 1, 3, 5 and 10 years, respectively; $42, $99, $168 and $351 for Class C
shares assuming redemptions for 1, 3, 5, and 10 years, respectively; and $32,
$99, $168 and $351 for Class C shares assuming no redemptions for 1, 3, 5 and 10
years, respectively.
(10) Assumes redemption at period end.
(11) Assumes no redemption.
(12) Class C shares do not incur a contingent deferred sales charge on
redemptions made after one year.
(13) Class B shares automatically convert to Class A after approximately 8
years; therefore, years 9 and 10 reflect Class A share expenses.
<PAGE>
THE FUNDS' FINANCIAL HISTORY
The following financial highlights for a Class A, Class B or Class C share
outstanding throughout each period have been derived from the Funds' financial
statements, which have been audited by PricewaterhouseCoopers LLP, independent
accountants. Their unqualified report is included in each Fund's 1998 Annual
Report and is incorporated by reference into the Statement of Additional
Information.
<TABLE>
<CAPTION>
Cub Fund
Class A Class B
--------------------------------------- -----------------------------------------
Year ended Period ended Year ended Period ended
August 31 August 31 August 31 August 31
--------------------------------------- -----------------------------------------
--------------------------------------- -----------------------------------------
1998 1997 1996(d) 1998 1997 1996(d)
--------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value-Beginning of period $9.100 $9.320 $10.000 $9.020 $9.300 $10.000
------- ------- -------- ------- ------- --------
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income (loss)(a)(b) 0.115(c) 0.059(f) 0.016 0.067(c) (0.012)(f) (0.002)
Net realized and unrealized loss (5.315) (0.279)(b) (0.696)(b) (5.257) (0.268)(b) (0.698)(b)
Total from Investment Operations (5.200) (0.220) (0.680) (5.190) (0.280) (0.700)
------- ------- ------- ------- ------- -------
Net asset value - End of period $3.900 $9.100 $9.320 $3.830 $9.020 $9.300
======= ======= ======= ======= ======= =======
Total return (g)(h) (57.14)% (2.36)% (6.80)%(i) (57.54)% (3.01)% (7.00)%(i)
======== ======= ====== ======== ======= ======
RATIOS TO AVERAGE NET ASSETS
Expenses(j) 2.25% 2.25% 2.25%(k) 3.00% 3.00% 3.00%(k)
Net investment income (loss)(j) 1.75% 0.62% 0.62%(k) 1.00% (0.13)% (0.13)%(k)
Fees and expenses waived or borne by
the Advisor/Administrator(j) 1.02% 1.09% 5.16%(k) 1.02% 1.09% 5.16%(k)
Portfolio turnover 56% 96% 3%(i) 56% 96% 3%(i)
Net assets at end of period (000) $3,556 $8,653 $3,542 $3,165 $7,664 $2,654
<CAPTION>
(a) Net of fees and expenses
waived or borne by the
Advisor/Administrator
which amounted to: $0.067 $0.105 $0.123 $0.067 $0.105 $0.123
(b) Per share data was calculated using average shares outstanding during the
period.
(c) Includes distributions from China Hong Kong Photo Products, Dickson
Concepts International Ltd., Four Seas Merchantile, Hang Seng Bank Ltd.,
Hon Kwok Land Investment, Li & Fung Ltd., Sa Sa International, Ltd., Sun
Hung Kai Properties Ltd. and Varitronix International Ltd. which
amounted to $0.016, $0.013, $0.013, $0.014, $0.012, $0.014, $0.014,
$0.013, $0.017 per share, respectively.
(d) The Fund commenced investment operations on June 3, 1996.
(e) Effective July 1, 1997, Class D shares were redesignated to Class C shares.
(f) Includes distributions from Srithai Superware Public Co., Ltd. and Varitronix
International Ltd. which amounted to $0.039 per share.
(g) Total return at net asset value assuming all distributions reinvested and no initial
sales charge or contingent deferred sales charge.
(h) Had the Advisor/Administrator not waived or reimbursed a portion of expenses, total return would have been reduced.
(i) Not annualized.
(j) The benefits derived from custody credits and directed brokerage arrangements had no impact.
(k) Annualized.
Class C
--------------------------------------------------
Year ended Period ended
August 31 August 31
--------------------------------------------------
--------------------------------------------------
1998 1997(e) 1996(d)
---------------------------------------
<S> <C> <C> <C>
Net asset value - Beginning of period $9.020 $9.300 $10.000
------- ------- -------
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income (loss)(a)(b) 0.067(c) (0.012)(f) (0.002)
Net realized and unrealized loss (5.257) (0.268)(b) (0.698)(b)
Total from Investment Operations (5.190) (0.280) (0.700)
------- ------- -------
Net asset value - End of period $3.830 $9.020 $9.300
======= ======= ======
Total return (g)(h) (57.54)% (3.01)% (7.00)%(i)
======= ======= ======
RATIOS TO AVERAGE NET ASSETS
Expenses(j) 3.00% 3.00% 3.00%(k)
Net investment income (loss)(j) 1.00% (0.13)% (0.13)%(k)
Fees and expenses waived or borne by
the Advisor/Administrator(j) 1.02% 1.09% 5.16%(k)
Portfolio turnover 56% 96% 3%(i)
Net assets at end of period (000) $732 $1,300 $738
(a) Net of fees and expenses
waived or borne by the
Advisor/Administrator
which amounted to: $0.067 $0.105 $0.123
(b) Per share data was calculated using average shares outstanding during the
period.
(c) Includes distributions from China Hong Kong Photo Products, Dickson
Concepts International Ltd., Four Seas Merchantile, Hang Seng Bank Ltd.,
Hon Kwok Land Investment, Li & Fung Ltd., Sa Sa International, Ltd., Sun
Hung Kai Properties Ltd. and Varitronix International Ltd. which
amounted to $0.016, $0.013, $0.013, $0.014, $0.012, $0.014, $0.014,
$0.013, $0.017 per share, respectively.
(d) The Fund commenced investment operations on June 3, 1996.
(e) Effective July 1, 1997, Class D shares were redesignated to Class C shares.
(f) Includes distributions from Srithai Superware Public Co., Ltd. and Varitronix
International Ltd. which amounted to $0.039 per share.
(g) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(h) Had the Advisor/Administrator not waived or reimbursed a portion of expenses,
total return would have been reduced.
(i) Not annualized.
(j) The benefits derived from custody credits and directed brokerage arrangements had no impact.
(k) Annualized.
</TABLE>
<PAGE>
THE FUNDS' FINANCIAL HISTORY (CONT'D)
<TABLE>
<CAPTION>
Japan Fund
Class A Class B
----------------------------------- -----------------------------------
Year ended Period ended Year ended Period ended
August 31 August 31 August 31 August 31
----------------------------------- -----------------------------------
1998 1997 1996(c) 1998 1997 1996(c)
--------------------- ------------- --------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $10.050 $9.710 $10.000 $9.950 $9.690 $10.000
-------- ------- -------- ------- ------- --------
INCOME FROM
INVESTMENT OPERATIONS:
Net investment loss (a)(b) (0.103) (0.094) (0.016) (0.172) (0.170) (0.034)
Net realized and
unrealized gain (loss) (1.265) 0.434 (0.274) (1.236) 0.430 (0.276)
------- ----- ------- ------- ------ -------
Total from Investment Operations (1.368) 0.340 (0.290) (1.408) 0.260 (0.310)
------- ----- ------- ------- ------ -------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net realized gains (0.022) ---- ---- (0.022) ---- ----
------- ------- ------- ------- ------ -------
Net asset value - End of period $8.660 $10.050 $9.710 $8.520 $9.950 $9.690
======= ======== ======= ======= ======= =======
Total return (e)(f) (13.62)% 3.50% (2.90)%(g) (14.16)% 2.68% (3.10)%(g)
======== ======== ======= ======== ====== =======
RATIOS TO AVERAGE NET ASSETS
Expenses (h) 2.00% 2.00% 2.00%(i) 2.75% 2.75% 2.75%(i)
Net investment loss (h) (1.12)% (0.93)% (0.66)%(i) (1.87)% (1.68)% (1.41)%(i)
Fees and expenses waived or borne
by the Advisor/Administrator (h) 0.72% 1.79% 9.13%(i) 0.72% 1.79% 9.13%(i)
Portfolio turnover 24% 20% 0% 24% 20% 0%
Net assets at end of period (000) $2,887 $4,073 $1,066 $6,028 $6,275 $1,197
<CAPTION>
(a) Net of fees and expenses waived
or borne by the
Advisor/Administrator which
amounted to: $0.066 $0.180 $0.230 $0.066 $0.180 $0.230
(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 redesignated as 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 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.
Class C (d)
------------------------------------------
Year ended Period ended
August 31 August 31
------------------------------------------
<S> <C> <C> <C>
1998 1997 1996(c)
------------------------------------------
Net asset value - Beginning of period $9.940 $9.690 $10.000
------- ------- -------
INCOME FROM
INVESTMENT OPERATIONS:
Net investment loss (a)(b) (0.172) (0.170) (0.034)
Net realized and
unrealized gain (loss) (1.236) 0.420 (0.276)
------- ----- -------
Total from Investment Operations (1.408) 0.250 (0.310)
------- ----- -------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS:
From net realized gains (0.022) ---- ----
------- ------ -------
Net asset value - End of period $8.510 $9.940 $9.690
======= ======= ======
Total return (e)(f) (14.18)% 2.58% (3.10)%(g)
======= ======= ======
RATIOS TO AVERAGE NET ASSETS
Expenses (h) 2.75% 2.75% 2.75%(i)
Net investment loss (h) (1.87)% (1.68)% (1.41)%(i)
Fees and expenses waived or borne
by the Advisor/Administrator (h) 0.72% 1.79% 9.13%(i)
Portfolio turnover 24% 20% 0%
Net assets at end of period (000) $1,862 $3,001 $472
(a) Net of fees and expenses waived
or borne by the
Advisor/Administrator which
amounted to: $0.066 $0.180 $0.230
(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 redesignated as 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 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.
</TABLE>
<PAGE>
THE FUNDS' FINANCIAL HISTORY (CONT'D)
<TABLE>
<CAPTION>
China Fund
Class A Class B Class C
---------------------------------------------------------------------------------------------
Year ended Period ended Year ended Period ended Year ended Period ended
August 31 August 31 August 31 August 31 August 31 August 31
----------------------------- ----------------------------- ----------------------------
1998 1997(e) 1998 1997(e) 1998 1997(e)
----------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - Beginning of period $17.900 $13.340 $17.860 $13.330 $17.860 $13.330
-------- -------- -------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (a)(b) 0.092(c) 0.052(d) 0.012(c) (0.004)(d) 0.013(c) (0.004)(d)
Net realized and unrealized gain (loss) (11.591) 4.508(k) (11.478) 4.534(k) (11.498) 4.534(k)
-------- ------- -------- ------ -------- ------
Total from Investment Operations (11.499) 4.560 (11.466) 4.530 (11.485) 4.530
-------- ------- -------- ------ -------- ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS:
From net investment income (0.061) ---- (0.054) --- (0.055) ---
------- ------- ------- ------ ------- -------
Net asset value - End of period $6.340 $17.900 $6.340 $17.860 $6.320 $17.860
======= ======== ======= ======== ======= =======
Total return (f)(g) (64.42%) 34.22%(h) (64.36%) 33.98%(h) (64.46%) 33.98%(h)
======== ======== ======== ======== ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (i) 2.15% 2.15%(j) 2.90% 2.90%(j) 2.90% 2.90%(j)
Net investment income (loss) (i) 0.74% 0.89%(j) (0.01)% 0.14%(j) (0.01)% 0.14%(j)
Fees and expenses waived or borne by the
Advisor/Administrator (i) 0.31% 0.59%(j) 0.31% 0.59%(j) 0.31% 0.59%(j)
Portfolio turnover 58% 4%(h) 58% 4%(h) 58% 4%(h)
Net assets at end of period (000) $31,214 $115,699 $1,692 $135 $443 $134
<CAPTION>
(a) Net of fees and expenses waived or borne
by the Advisor/Administrator which
amounted to: $0.039 $0.034 $0.039 $0.034 $0.039 $0.034
(b) Per share data was calculated using average shares outstanding during the period.
(c) Includes distributions from Cheung Kong Holdings Ltd., Citic Pacific Ltd., Guangshen Railway Co., Ltd. and Henderson Land
Development Co., Ltd., which amounted to $0.019, $0.036, $0.018 and $0.020 per share, respectively.
(d) Includes distributions from China Light & Power Co. Ltd., Dah Sing Financial, Glorious Sun Enterprises and Hang Seng Bank Ltd.
which amounted to $0.078 per share.
(e) The Fund commenced investment operations on May 12, 1997. The activity
shown is from the effective date of registration (May 16, 1997) with the
SEC. The per share information reflects the 1.5 for 1 stock split
effective July 25, 1997.
(f) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(g) Had the Advisor/Administrator not waived or reimbursed a portion of expenses, total return would have been reduced.
(h) Not annualized.
(i) The benefits derived from custody credits and directed brokerage arrangements had no impact.
(j) Annualized.
(k) 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.
</TABLE>
Further performance information is contained in each Fund's Annual Report to
shareholders, which is obtainable free of charge by calling 1-800-426-3750.
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES
The Cub Fund seeks capital appreciation by investing primarily in equity
securities of small companies (i.e., companies with equity market
capitalizations of U.S. $1 billion or less) located in the nine Tigers of Asia
(Hong Kong, Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, The
People's Republic of China and the Philippines) ("Small Company Tiger
Securities").
The Japan Fund seeks capital appreciation by investing primarily in equity
securities of Japanese companies.
The 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).
HOW THE FUNDS PURSUE THEIR OBJECTIVES AND CERTAIN RISK FACTORS
Cub Fund. The Cub Fund seeks to invest in companies with consistently
above-average earnings growth. Normally, the Cub Fund will invest at least 65%
of its total assets in Small Company Tiger Securities. The Cub Fund may invest
up to 35% of its total assets in equity securities of large companies (i.e.,
companies with equity market capitalizations of more than U.S. $1 billion)
located in the nine Tigers of Asia ("Large Company Tiger Securities"). Small and
Large Company Tiger Securities include common and preferred stock, warrants
(rights) to purchase stock, debt securities convertible into stock, sponsored
and unsponsored American Depositary Receipts (receipts issued in the U.S. by
banks or trust companies evidencing ownership of underlying foreign securities),
Global Depositary Receipts (receipts issued by foreign banks or trust companies
evidencing ownership of underlying foreign securities) and shares of closed-end
investment companies that invest primarily in the foregoing securities. It is
presently anticipated that a large portion of the Cub Fund's assets will be
invested in companies located in Hong Kong and Singapore, which are not
considered by the Advisor to be emerging markets. However, investments in Hong
Kong will involve special risks. See "Investment Techniques and Additional Risk
Factors--Hong Kong" below. The remaining countries in which the Cub Fund invests
are considered to be emerging markets. Investments in foreign securities,
generally, and especially in emerging market securities in a particular region,
involve special risks. See "Regional Concentration and Trends," "Foreign
Investments," and "Emerging Markets" below. Investments in small company
securities also involve special risks. See "Small Companies" below. Dividend
income will not be considered in choosing the investments of the Cub Fund.
Japan Fund. The Japan Fund normally invests substantially all of its assets in
equity securities of well-established Japanese companies (i.e., companies with
equity market capitalizations in excess of U.S. $200 million) (Japanese
Securities). The Japan Fund seeks to invest in companies with histories of
consistent earnings growth in industries with attractive or improving prospects.
Japanese Securities generally include common and preferred stock, warrants
(rights) to purchase such stock, debt securities convertible into such stock,
sponsored and unsponsored American Depositary Receipts (receipts issued in the
U.S. by banks or trust companies evidencing ownership of underlying foreign
securities) and Global Depositary Receipts (receipts issued by foreign banks or
trust companies). Investment in foreign securities involves special risks. See
"Investment Techniques and Additional Risk Factors -- Japanese Securities"
below. Dividend income will not be considered in choosing the investments of the
Japan Fund.
China Fund. The China Fund normally invests at least 80% of its total assets in
equity securities of companies located in, or which derive a substantial portion
(at least 50%) of their revenue from business activity with or in, the Greater
China Region. The remaining 20% may be invested in equity securities of
companies that are otherwise expected to benefit from the Greater China Region's
anticipated economic growth. The Advisor currently anticipates that the China
Fund will invest primarily in companies whose securities are listed and traded
in Hong Kong, but that the Advisor believes will benefit from growth
opportunities in mainland China.
The China Fund generally invests in companies with at least $100 million in
equity market capitalization at the time of purchase, including both seasoned
companies and those with limited operating histories. The equity securities in
which the China Fund invests include common and preferred stock, warrants
(rights) to purchase stock, debt securities convertible into stock, sponsored
and unsponsored American Depositary Receipts (receipts issued in the U.S. by
banks or trust companies evidencing ownership of underlying foreign securities),
Global Depositary Receipts (receipts issued by foreign banks or trust companies)
and shares of closed-end investment companies that invest primarily in the
foregoing securities. Dividend income will not be considered in choosing the
investments of the China Fund.
INVESTMENT TECHNIQUES AND ADDITIONAL RISK FACTORS
The following describes in greater detail different types of securities and
investment techniques used by the Funds, and discusses certain risks related to
such securities and techniques. Additional information about the Funds'
investments and investment practices may be found in the Statement of Additional
Information. The following also describes certain of the risks associated with
the regions and countries in which the Funds may invest.
Regional Concentration and Trends. As the Cub Fund's investments will, under
normal circumstances, be concentrated in equity securities of companies located
in the nine Tigers of Asia, and the China Fund investments will be concentrated
in the Greater China Region, these Funds' investments will be particularly
susceptible to regional trends. The prices of these Funds' securities, and
therefore, the net asset value of the Cub Fund and the China Fund, may be
adversely affected by negative economic or political events in any of the nine
Tigers of Asia and in Southeast Asia as a whole. In addition, events in a number
of the nine Tigers of Asia since the latter half of 1997 have highlighted the
financial interdependence of the region and demonstrated that negative financial
events in one such country may have far-reaching negative effects throughout the
region. In late 1997, a number of the nine Tigers of Asia suffered currency
devaluations, equity market downturns and other detrimental economic events.
There can be no assurance that the recent currency devaluations, equity market
downturns and other detrimental economic events in the region will not continue.
The uncertainty surrounding the effects of the foregoing events may negatively
impact the return of the Cub Fund and the China Fund and the value of the Funds'
shares.
Japanese Securities. Because the Japan Fund's investments are concentrated in
Japan, the value of its shares will be especially affected by political,
economic and market conditions within Japan and by movements in currency
exchange rates between the Japanese and U.S. currencies, and may fluctuate more
widely than the value of shares of a fund investing in companies located in a
number of different countries. In addition, because Japan's economy is
significantly dependent on foreign trade, economic and market conditions within
Japan, and therefore the value of Japan Fund shares, are significantly
influenced by domestic economic and market conditions within its trading partner
countries and by political relations and currency exchange rates between Japan
and such countries. Japan has in the past experienced difficult relations with
its trading partners, particularly the U.S. The imposition of trade sanctions or
other protectionist measures could negatively impact the Japanese economy and
the value of Japan Fund shares. Transactions in Japanese securities may be more
costly due to currency conversion costs and higher brokerage and custodial
costs.
The Greater China Region. Although Hong Kong, The People's Republic of China and
Taiwan are closely tied economically, they have different political and economic
systems and their markets and regulatory structures are at different stages of
development. Following is a summary of the major risks and uncertainties
associated with investing in each country.
Hong Kong. Although Hong Kong has the most developed securities markets of the
three countries in the Greater China Region, a substantial portion of its
economy is dependent on investments in or trade with China and other
less-developed Asian countries. Political, economic and legal developments in
those countries including but not limited to inflation, recession or currency
fluctuations, could adversely impact the China and the Cub Fund's Hong Kong
investments.
As of July 1, 1997, sovereignty over Hong Kong was transferred from Great
Britain to China and Hong Kong became a Special Administrative Region of China.
In connection with this transfer, China has agreed to maintain for 50 years Hong
Kong's existing economic and social systems, as well as most of the personal
freedoms previously enjoyed by Hong Kong residents. Nevertheless, it is
impossible to predict with certainty the ultimate effect Chinese sovereignty
will have on Hong Kong's business environment. Chinese sovereignty could result
in the imposition of significant restrictions on social or economic activity
within Hong Kong. These or other potential actions by China could adversely
affect the China and the Cub Fund's Hong Kong investments. A substantial amount
of the investments of the Cub Fund and the China Fund are expected to be in
companies located in Hong Kong.
China. Since 1978, China's leaders have implemented economic reforms which have
transformed China from a socialist economy to one that is increasingly
market-based. These changes have included the creation of two domestic stock
exchanges and have stimulated strong economic growth. The continued development
of China's industrial and service sectors will depend on, among other things,
the extent to which governmental policies continue to support such development
and the pace at which economic reforms are implemented.
Investments in China also are significantly affected by domestic political
developments. As evidenced by the government's actions during the 1989 crisis in
Tiananmen Square, the Chinese government's reaction to domestic and
international events is unpredictable. Uncertainty exists particularly with
respect to China's relationship with Taiwan and the ultimate impact on Hong Kong
of the assumption of sovereignty by China. Dramatic action by China's leaders
could cause extreme short-run volatility in the value of the China and the Cub
Funds' investments and the China and the Cub Funds' shares, and also could
significantly and adversely affect the China and the Cub Fund's returns in the
long run. Similarly, China's relations with its important trading partners in
the West (including the United States) could be adversely affected if the
Chinese government's human rights policies are perceived to be deteriorating.
Even if trading relations are not actually affected, threats to impose trading
restrictions could cause substantial short-term volatility in the value of the
China and the Cub Funds' China investments and of the China and the Cub Funds'
shares.
Taiwan. The Taiwan Stock Exchange is owned by government-controlled enterprises
and private banks and has only recently begun to allow direct foreign investment
in listed Taiwan securities. Substantial restrictions on such investment remain,
including limitations on the percentage of shares of a company that may be
foreign-owned and prohibitions on foreign ownership of companies in certain
industries.
Taiwan's economy is heavily dependent on exports. Any deterioration in Taiwan's
relationships with its trading partners could adversely impact Taiwan's economy
and the China and the Cub Fund's Taiwan investments. In particular, Taiwan has
become increasingly dependent on direct and indirect trade with China and other
Asian countries. Adverse economic or political developments in those countries
could negatively impact the China and the Cub Fund's Taiwan investments.
Investments in Taiwan could be affected by Taiwan's political relationship with
China. Uncertainty over the prospects for political reunification between the
two countries could make the value of the China and the Cub Funds' Taiwan
investments and of their shares particularly volatile and could negatively
impact returns, especially if China threatens political or military action. Such
reunification, if it were to occur, also could negatively impact the China and
the Cub Fund's Taiwan investments.
General. Countries both within the Greater China Region and in other parts of
Southeast Asia have, at times, experienced rapid economic growth. While these
countries are expected to continue to grow economically over the long term, they
can be expected to do so at varying rates and to experience periods of high
inflation, economic recession and currency fluctuations along the way. Such
periods may be associated with greater, and sometimes extreme, fluctuations in
the value of investments in the Region, compared to investments in more
developed economies. Further, events in one country may impact investments in
other countries. Monetary, fiscal and other governmental policies adopted by the
countries in and around the Region in response to such economic developments
could exacerbate any such fluctuations.
Malaysia. On September 1, 1998, the Malaysian government announced a series of
capital and foreign exchange controls on the Malaysian currency, the ringgit,
and on transactions on the Kuala Lumpur Stock Exchange, that operate to
constrain severely or prohibit foreign investors from repatriating assets. As of
the date of this prospectus, the Funds do not have any of their assets invested
in Malaysian securities.
Foreign Investing Generally. In addition to the specific risks described above,
investing in foreign securities has special risks related to political, economic
and legal conditions outside of the U.S. As a result, the prices of foreign
securities and, therefore, the value of each Fund's shares, may fluctuate
substantially more than the prices of securities of issuers based in the U.S.
Special risks associated with foreign securities include, among others, the
possibility of unfavorable movements in currency exchange rates, difficulties in
enforcing judgments abroad, the existence of less liquid and less regulated
markets, the unavailability of reliable information about issuers, the existence
of different accounting, auditing and legal standards in foreign countries, the
existence (or potential imposition) of exchange control regulations (including
currency blockage or other restrictions on repatriation of capital), and
political and economic instability. In addition, transactions in foreign
securities may be more costly due to currency conversion costs and higher
brokerage and custodial costs and may be subject to delays and disruptions in
securities settlement procedures. See "Foreign Securities" and "Foreign Currency
Transactions" in the Statement of Additional Information for more information
about foreign investing.
Emerging Markets. A portion of the Cub Fund's investments will consist of
securities issued by companies located in countries whose economies, political
systems or securities markets are not yet highly developed. Special risks
associated with these investments (in addition to the considerations regarding
foreign investments generally) may include, among others, greater political
uncertainties, an economy's dependence on revenues from particular commodities
or on international aid or development assistance, highly limited numbers of
potential buyers for such securities, heightened volatility of security prices,
restrictions on repatriation of capital invested abroad and delays and
disruptions in securities settlement procedures. Over the last several years,
political, legal, economic and regulatory systems in the Tiger countries
continue to lag behind those of more developed countries. Accordingly, the risks
that restrictions on repatriation of the Cub Fund investments may be imposed
unexpectedly or other limitations on the Cub Fund's ability to realize on its
investments may be instituted are greater with respect to investments in the
Tiger countries.
Each Fund may engage in the following investment techniques (unless otherwise
indicated).
Small Companies. The Cub and the China Fund may invest in small companies
(companies with equity market capitalizations of U.S. $1 billion or less (Cub
Fund) and companies with equity market capitalizations of U.S. $500 million or
less (China Fund)). The smaller, less well-established companies in which these
Funds may invest may offer greater opportunities for capital appreciation than
larger, better-established companies, but may also involve certain special
risks. Such companies often have limited product lines, markets or financial
resources and depend heavily on a small management group. Their securities may
trade less frequently, in smaller volumes, and fluctuate more sharply in value
than exchange-listed securities of larger companies.
Foreign Currency Transactions. In connection with their investments in equity
securities, the Funds may purchase and sell (i) foreign currencies on a spot or
forward basis, (ii) foreign currency futures contracts, and (iii) options on
foreign currencies and foreign currency futures. Such transactions may be
entered into (i) to lock in a particular foreign exchange rate pending
settlement of a purchase or sale of a foreign security or pending the receipt of
interest, principal or dividend payments on a foreign security held by the
Funds, or (ii) to hedge against a decline in the value, in U.S. dollars or in
another currency, of a foreign currency in which securities held by the Funds
are denominated. The Funds will not attempt, nor would they be able, to
eliminate all foreign currency risk. Further, although hedging may lessen the
risk of loss if the hedged currency's value declines, it limits the potential
gain from currency value increases. See the Statement of Additional Information
for information relating to the Funds' obligations in entering into such
transactions.
Futures Contracts and Options. Each Fund may purchase and sell foreign stock
index futures contracts and options on such contracts. Such transactions may be
entered into to gain exposure to a particular foreign equity market pending
investment in individual securities or to hedge against market declines. A
futures contract creates an obligation by the seller to deliver and the buyer to
take delivery of a type of instrument at the time and in the amount specified in
the contract. A sale of a futures contract can be terminated in advance of the
specified delivery date by subsequently purchasing a similar contract; a
purchase of a futures contract can be terminated by a subsequent sale. Gain or
loss on a contract generally is realized upon such termination. An option on a
futures contract generally gives the option holder the right, but not the
obligation, to purchase or sell the futures contract prior to the option's
specified expiration date. If the option expires unexercised, the holder will
lose any amount it paid to acquire the option. Transactions in futures and
related options may not precisely achieve the goals of hedging or gaining market
exposure to the extent there is an imperfect correlation between the price
movements of the contracts and of the underlying securities. In addition, if the
Advisor's stock market movement expectancies are inaccurate, the Funds may be
worse off than if they had not hedged.
Temporary/Defensive Investments. Each of the Funds may invest temporarily
available cash in U.S. dollar or foreign currency denominated demand deposits,
certificates of deposit, bankers' acceptances, and high-quality, short-term debt
securities, as well as in Treasury bills and repurchase agreements. Some or all
of the Funds' assets may be invested in such investments during periods of
unusual market conditions. Under a repurchase agreement, a Fund buys a security
from a bank or dealer, which is obligated to buy it back at a fixed price and
time. The security is held in a separate account at the Fund's custodian and,
constitutes the Fund's collateral for the bank's or dealer's repurchase
obligation. Additional collateral will be added so that the obligation will at
all times be fully collateralized. However, if the bank or dealer defaults or
enters bankruptcy, the Fund may experience costs and delays in liquidating the
collateral and may experience a loss if it is unable to demonstrate its right to
the collateral in a bankruptcy proceeding. Not more than 15% of a Fund's net
assets will be invested in repurchase agreements maturing in more than seven
days and other illiquid assets.
Borrowing of Money. Each Fund may borrow money from banks, other affiliated
funds and other entities, to the extent permitted by law, for temporary or
emergency purposes up to 33 1/3% of its total assets.
Other. The Funds may not always achieve their investment objectives. The Funds'
investment objectives and non-fundamental investment policies may be changed
without shareholder approval. The Funds' fundamental investment policies listed
in the Statement of Additional Information cannot be changed without the
approval of a majority of the Funds' outstanding voting securities. Additional
information concerning certain of the securities and investment techniques
described above is contained in the Statement of Additional Information.
HOW THE FUNDS MEASURE THEIR PERFORMANCE
Performance may be quoted in sales literature and advertisements. Each Class's
average annual total returns are calculated in accordance with the SEC's formula
and assume the reinvestment of all distributions, the maximum initial sales
charge of 5.75% on Class A shares, and the contingent deferred sales charge
applicable to the time period quoted on Class B and Class C shares. Other total
returns differ from average annual total returns only in that they may relate to
different time periods, may represent aggregate as opposed to average annual
total returns, and may not reflect the initial or contingent deferred sales
charges. Performance results reflect any voluntary waivers or reimbursement of
Fund expenses by the Advisor or its affiliates. Absent these waivers or
reimbursements, performance results would have been lower.
Quotations from various publications may be included in sales literature and
advertisements. Further information about performance is contained in the Funds'
Annual Reports and in the section "Performance Measures" in the Statement of
Additional Information. Both are provided free of charge by calling the
Administrator at 1-800-426-3750. All performance information is historical and
does not predict future results.
HOW THE FUNDS ARE MANAGED
The Trustees formulate the Funds' general policies and oversee the Funds'
affairs as conducted by the Advisor.
Liberty Funds Distributor, Inc. (Distributor), a subsidiary of the
Administrator, serves as the distributor for the Funds' shares. Liberty Funds
Services, Inc. (Transfer Agent), an affiliate of the Administrator, serves as
the shareholder services and transfer agent for the Funds. Each of the Advisor,
the Administrator, the Distributor and the Transfer Agent is an indirect
wholly-owned subsidiary of Liberty Financial Companies, Inc., (Liberty
Financial) which in turn is an indirect majority-owned subsidiary of Liberty
Mutual Insurance Company (Liberty Mutual). Liberty Mutual is considered to be
the controlling entity of the Advisor, the Administrator and their affiliates.
Liberty Mutual is an underwriter of workers' compensation insurance and is a
property and casualty insurer in the U.S.
The Advisor furnishes each Fund with investment management services. For these
services, the Cub Fund and the China Fund pay the Advisor a monthly fee at an
annual rate of 1.15% of their average daily net assets. The Japan Fund pays the
Advisor a monthly fee at an annual rate of 0.95% of its average daily assets.
Pursuant to a voluntary fee waiver in fiscal year 1998, the Cub Fund, Japan Fund
and China Fund each paid the Advisor, respectively, 0.13%, 0.23% and 0.84% of
each Fund's average daily net assets.
Robert B. Cameron, Senior Vice President of the Advisor and its immediate
parent, Newport Pacific Management, Inc. (Newport Pacific), manages the Cub Fund
and co-manages the China Fund. Prior to joining the Advisor in 1996, Mr. Cameron
was a branch manager-equity sales at CS First Boston from 1995 to 1996 and a
branch manager-equity sales at Swiss Bank Corp. since 1993.
David Smith, Senior Vice President of the Advisor, manages the Japan Fund and
has managed other funds or accounts on behalf of Newport Pacific, since 1994.
Prior to this affiliation with Newport Pacific, Mr. Smith was Director of North
Asian Strategies at Newport Pacific, an Executive Vice President at Carnegie
Investor Services, and a Vice President at Global Strategies since 1993.
The China Fund's portfolio management team consists of three co-managers:
Thomas R. Tuttle, as lead portfolio manager, and Robert B. Cameron and
Christopher Legallet.
Mr. Tuttle is Senior Vice President of the Advisor and of Newport Pacific.
Mr. Tuttle has been affiliated with the Advisor since 1987 and with Newport
Pacific since 1983.
Mr. Legallet is Senior Vice President of the Advisor. He has been affiliated
with the Advisor since 1997. Prior to his affiliation with the Advisor, Mr.
Legallet was a Managing Director of Jupiter Tyndall (Asia) Ltd. in Hong Kong
serving as lead manager for investment in Asia from 1992 to 1997.
See "Management of the Funds" in the Statement of Additional Information for
more information.
The Administrator provides certain administrative services to each Fund, for
which the Funds pay the Administrator a monthly fee at the annual rate of 0.25%
of each Fund's average daily net assets. The Administrator also provides pricing
and bookkeeping services to each Fund for a monthly fee of $2,250 plus a
percentage of the Funds' average net assets over $50 million.
The Transfer Agent provides transfer agency and shareholder services to each
Fund for a monthly fee at the annual rate of 0.236% of each Fund's average daily
net assets plus certain out-of-pocket expenses.
Each of the foregoing fees is subject to any reimbursement or fee waiver to
which the Advisor and its affiliates may agree.
The Advisor places all orders for purchases and sales of portfolio securities.
In selecting broker-dealers, the Advisor may consider research and brokerage
services furnished by such broker-dealers to the Advisor and its affiliates. In
recognition of the research and brokerage services provided, the Advisor may
cause the Funds to pay the selected broker-dealer a higher commission than would
have been charged by another broker-dealer not providing such services. The
Advisor may use the services of AlphaTrade Inc., the Administrator's registered
broker-dealer subsidiary, when buying or selling equity securities for the
Funds' portfolios, pursuant to procedures adopted by the Trustees under
Investment Company Act Rule 17e-1. Subject to seeking best execution, the
Advisor may consider sales of shares of the Funds (and of certain other funds
advised by the Advisor, the Administrator and their affiliates) in selecting
broker-dealers for portfolio security transactions.
YEAR 2000
The Funds' Advisor, Administrator, Distributor and Transfer Agent (Liberty
Companies) are actively managing Year 2000 readiness for the Funds. The Liberty
Companies are taking steps that they believe are reasonably designed to address
the Year 2000 problem and are communicating with vendors who provide services,
software and systems to the Funds to provide that date-related information and
data can be properly processed and calculated on and after January 1, 2000. Many
Fund service providers and vendors, including the Liberty Companies, are in the
process of making Year 2000 modifications to their software and systems and
believe that such modifications will be completed on a timely basis prior to
January 1, 2000. The Funds will not pay the cost of these modifications.
However, no assurances can be given that all modifications required to ensure
proper data processing and calculation on and after January 1, 2000 will be
timely made or that services to the Funds will not be adversely affected.
HOW THE FUNDS VALUE THEIR SHARES
Per share net asset value is calculated by dividing the total value of each
Class's net assets by its number of outstanding shares. Shares of the Funds are
generally valued as of the close of regular trading (normally 4:00 p.m. Eastern
time) on the New York Stock Exchange (Exchange) each day the Exchange is open.
Portfolio securities for which market quotations are readily available are
valued at current market value. Short-term investments maturing in 60 days or
less are valued at amortized cost when the Advisor determines, pursuant to
procedures adopted by the Trustees, that such cost approximates current market
value. In certain countries, the Funds may hold foreign designated shares. If
the foreign share prices are not readily available as a result of limited share
activity, the securities are valued at the last sale price of the local shares
in the principal market in which such securities are normally traded. Korean
equity securities that have reached the limit for aggregate foreign ownership
and for which premiums to the local exchange prices may be paid by foreign
investors are valued by applying a broker quoted premium to the local share
price. All other securities and assets are valued at their fair value following
procedures adopted by the Board of Trustees. 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.
DISTRIBUTIONS AND TAXES
The Funds intend to qualify as "regulated investment companies" under the
Internal Revenue Code and to distribute to shareholders net income and any net
realized gain, at least annually.
Each Fund reinvests distributions in additional shares of the same Class of that
Fund at net asset value unless the shareholder elects to receive cash.
Regardless of the shareholder's election, distributions of $10 or less will not
be paid in cash to shareholders but will be invested in additional shares of the
same Class of that Fund at net asset value. If a shareholder has elected to
receive dividends and/or capital gain distributions in cash and the postal or
other delivery service selected by the Transfer Agent is unable to deliver
checks to the shareholder's address of record, such shareholder's distribution
option will automatically be converted to having all dividend and other
distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks. To change
your election, call the Transfer Agent for information.
Whether you receive distributions in cash or in additional Fund shares, you must
report them as taxable income unless you are a tax-exempt institution. If you
buy shares shortly before a distribution is declared, the distribution will be
taxable although it is, in effect, a partial return of the amount invested. Each
January, information on the amount and nature of distributions for the prior
year is sent to shareholders.
HOW TO BUY SHARES
Shares of the Funds are offered continuously. Orders received in good form prior
to the time at which the Funds value their shares (or placed with the financial
service firm before such time and transmitted by the financial service firm
before a Fund processes that day's share transactions) will be processed based
on that day's closing net asset value, plus any applicable initial sales charge.
The minimum initial investment is $1,000; subsequent investments may be as small
as $50. The minimum initial investment for the Fundamatic program is $50; and
the minimum initial investment for retirement accounts sponsored by the
Distributor is $25. Certificates will not be issued for Class B or Class C
shares and there are some limitations on the issuance of Class A share
certificates. The Funds may refuse any purchase order for their shares. See the
Statement of Additional Information for more information.
The Funds also offer Class Z shares which are offered through a separate
Prospectus only to certain institutions. Class Z shares have no initial or
contingent deferred sales charge and no Rule 12b-1 fees. Otherwise, the Class Z
share expenses are the same as those for Classes A, B and C. Class Z shares are
exchangeable for Class A shares of the other funds distributed by the
Distributor.
Class A Shares. Class A shares are offered at net asset value plus an initial
sales charge as follows:
Initial Sales Charge
----------------------------------
Retained
by
Financial
Service
Firm as
as % of % of
---------------------
Amount Offering Offering
Amount Purchased Invested Price Price
Less than $50,000 6.10% 5.75% 5.00%
$50,000 to less than
$100,000 4.71% 4.50% 3.75%
$100,000 to less than
$250,000 3.63% 3.50% 2.75%
$250,000 to less than
$500,000 2.56% 2.50% 2.00%
$500,000 to less than
$1,000,000 2.04% 2.00% 1.75%
$1,000,000 or more 0.00% 0.00% 0.00%
On purchases of $1 million or more of each Fund, the Distributor pays the
financial service firm a cumulative commission as follows:
Amount Purchased Commission
First $3,000,000 1.00%
Next $2,000,000 0.50%
Over $5,000,000 0.25%(1)
(1) Paid over 12 months but only to the extent the shares remain outstanding.
In determining the sales charge and commission applicable to a new purchase
under the above schedules, the amount of the current purchase is added to the
current value of shares previously purchased and still held by an investor. If a
purchase results in an account having a value from $1 million to $5 million,
then the portion of the shares purchased that caused the account's value to
exceed $1 million will be subject to a 1.00% contingent deferred sales charge,
payable to the Distributor, if redeemed within 18 months after the end of the
month in which the purchase was accepted. If the purchase results in an account
having a value in excess of $5 million, the contingent deferred sales charge
will not apply to the portion of the purchased shares comprising such excess
amount.
Class B Shares. Class B shares are offered at net asset value, without an
initial sales charge, subject to a 0.75% annual distribution fee for
approximately eight years (at which time they automatically convert to Class A
shares not bearing a distribution fee) and a declining contingent deferred sales
charge if redeemed within six years after purchase. As shown below, the amount
of the contingent deferred sales charge depends on the number of years after
purchase that the redemption occurs:
Contingent
Years Deferred
After Sales
Purchase Charge
0-1 5.00%
1-2 4.00%
2-3 3.00%
3-4 3.00%
4-5 2.00%
5-6 1.00%
More than 6 0.00%
Year one ends one year after the end of the month in which the purchase was
accepted and so on. The Distributor pays financial service firms a commission
of 5.00% on Class B share purchases.
Class C Shares. Class C shares are offered at net asset value and are subject to
a 0.75% annual distribution fee and a 1.00% contingent deferred sales charge on
redemptions made within one year after the end of the month in which the
purchase was accepted.
The Distributor pays financial service firms an initial commission of 1.00% on
Class C share purchases and an ongoing commission of 0.75% annually, commencing
after the shares purchased have been outstanding for one year. Payment of the
ongoing commission is conditioned on receipt by the Distributor of the 0.75%
annual distribution fee referred to above. The commission may be reduced or
eliminated by the Distributor at any time.
General. All contingent deferred sales charges are deducted from the amount
redeemed, not the amount remaining in the account, and are paid to the
Distributor. Shares issued upon distribution reinvestment and amounts
representing appreciation are not subject to a contingent deferred sales charge.
The contingent deferred sales charge is imposed on redemptions which result in
the account value falling below its Base Amount (the total dollar value of
purchase payments in the account reduced by prior redemptions on which a
contingent deferred sales charge was paid and any exempt redemptions). When a
redemption subject to a contingent deferred sales charge is made, generally,
older shares will be redeemed first unless the shareholder instructs otherwise.
See the Statement of Additional Information for more information.
Which Class is more beneficial to an investor depends on the amount and intended
length of the investment. Large investments, qualifying for a reduced Class A
sales charge, avoid the distribution fee. Investments in Class B shares have
100% of the purchase invested immediately. Investors investing for a relatively
short period of time might consider Class C shares. Purchases of $250,000 or
more must be for Class A or Class C shares. Purchases of $1,000,000 or more must
be for Class A shares. Consult your financial service firm.
Financial service firms may receive different compensation rates for selling
different classes of shares. The Distributor may pay additional compensation to
financial service firms which have made or may make significant sales. See the
Statement of Additional Information for more information.
Special Purchase Programs. The Funds allow certain investors or groups of
investors to purchase shares with reduced or without initial or contingent
deferred sales charges. These programs are described in the Statement of
Additional Information under "Programs for Reducing or Eliminating Sales
Charges."
Class A shares of the Cub Fund and the Japan Fund may also be purchased at net
asset value by (i) investment advisors or financial planners who have entered
into agreements with the Distributor (or who maintain a master account with a
broker or agent that has entered into such an agreement) and who charge a
management, consulting or other fee for their services, and clients of such
investment advisors or financial planners who place trades for their own
accounts, if the accounts are linked to the master account of such investment
advisor or financial planner on the books and records of the broker or agent;
and (ii) retirement and deferred compensation plans and trusts used to fund
those plans, including, but not limited to, those defined in Section 401(a),
403(b), or 457 of the Internal Revenue Code and "rabbi trusts," where the plans
are administered by firms that have entered into agreements with the Distributor
or the Transfer Agent.
Investors may be charged a fee if they effect transactions in Fund shares
through a broker or agent.
Shareholder Services and Account Fees. A variety of shareholder services are
available. For more information about these services or your account, call
1-800-345-6611. Some services are described in the attached account application.
A shareholder's manual explaining all available services will be provided upon
request.
In June of any year, the Funds may deduct $10 (payable to the Transfer Agent)
from accounts valued at less than $1,000 unless the account value has dropped
below $1,000 solely as a result of share value depreciation. Shareholders will
receive 60 days' written notice to increase the account value before the fee is
deducted. The Funds may also deduct annual maintenance and processing fees
(payable to the Transfer Agent) in connection with certain retirement plan
accounts sponsored by the Distributor. See "Special Purchase Programs/Investor
Services" in the Statement of Additional Information for more information.
HOW TO SELL SHARES
Shares of the Funds may be sold on any day the Exchange is open, either directly
to a Fund or through your financial service firm. Sale proceeds generally are
sent within seven days (usually on the next business day after your request is
received in good form). However, for shares recently purchased by check, the
Funds will delay sending proceeds for 15 days in order to protect the Funds
against financial losses and dilution in net asset value caused by dishonored
purchase payment checks. To avoid delay in payment, investors are advised to
purchase shares unconditionally, such as by federal fund wire or other
immediately available funds.
Contingent Redemption Fee. The Funds can experience substantial price
fluctuations and are intended for long-term investors. Short-term "market
timers" who engage in frequent purchases and redemptions can disrupt the Funds'
investment programs and create additional transaction costs that are borne by
all shareholders. For these reasons, the Funds assess a redemption fee in the
amount of 2.00% on redemptions and exchanges of Fund shares purchased and held
for five business days or less.
The contingent redemption fee is paid to the Funds to help offset transaction
costs. The Funds use the "first-in, first-out" (FIFO) method to determine the
five business day holding period. Under this method, the date of the redemption
or exchange is compared with the earliest purchase date of shares held in the
account.
If this holding period is five business days or less, the contingent redemption
fee is assessed.
The contingent redemption fee does not apply to any shares purchased through the
reinvestment of dividends. The fee may not apply to omnibus accounts and wrap
fee programs.
Selling Shares Directly To A Fund. Send a signed letter of instruction or stock
power form to the Transfer Agent, along with any certificates for shares to be
sold. The sale price is the net asset value (less any applicable contingent
deferred sales charge) next calculated after a Fund receives the request in
proper form. Signatures must be guaranteed by a bank, a member firm of a
national stock exchange or another eligible guarantor institution. Stock power
forms are available from financial service firms, the Transfer Agent and many
banks. Additional documentation is required for sales by corporations, agents,
fiduciaries, surviving joint owners and individual retirement account holders.
For details contact:
Liberty Funds Services, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Selling Shares Through Financial Service Firms. Financial service firms must
receive requests prior to the time at which a Fund values its shares to receive
that day's price, are responsible for furnishing all necessary documentation to
the Transfer Agent and may charge for this service.
General. The sale of shares is a taxable transaction for income tax purposes and
may be subject to a contingent deferred sales charge. The contingent deferred
sales charge may be waived under certain circumstances. See the Statement of
Additional Information for more information. Under unusual circumstances, a Fund
may suspend repurchases or postpone payment for up to seven days or longer, as
permitted by federal securities law. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
HOW TO EXCHANGE SHARES
Except as described below with respect to money market funds, Fund shares may be
exchanged at net asset value for shares of other mutual funds distributed by the
Distributor, including mutual funds advised by the Advisor, the Administrator
and their affiliates. Generally, such exchanges must be between the same classes
of shares. Consult your financial service firm or the Transfer Agent for
information regarding what funds are available. Shares will continue to age
without regard to the exchange for purposes of conversion and in determining the
contingent deferred sales charge, if any, upon redemption. Carefully read the
prospectus of the fund into which the exchange will go before submitting the
request. Call 1-800-426-3750 to receive a prospectus. Call 1-800-422-3737 to
exchange shares by telephone. An exchange is a taxable capital transaction. The
exchange service may be changed, suspended or eliminated on 60 days' written
notice. The Funds will terminate the exchange privilege as to a particular
shareholder if the Advisor determines, in its sole and absolute discretion, that
the shareholder's exchange activity is likely to adversely impact the Advisor's
ability to manage the Funds' investments in accordance with their investment
objectives or otherwise harm the Funds or their remaining shareholders. All
exchanges within five business days after a purchase are subject to a 2.00%
contingent redemption fee. See "How to Sell Shares Contingent Redemption Fee."
Class A Shares. An exchange from a money market fund into a non-money market
fund will be at the applicable offering price next determined (including sales
charge), except for amounts on which an initial sales charge was paid. Non-money
market fund shares must be held for five months before qualifying for exchange
to a fund with a higher sales charge, after which exchanges are made at the net
asset value next determined. Exchanges of Class A shares are not subject to a
contingent deferred sales charge. However, in determining whether a contingent
deferred sales charge is applicable to redemptions, the schedule of the fund
into which the original investment was made will be used.
Class B Shares. Exchanges of Class B shares are not subject to the contingent
deferred sales charge. However, if shares are redeemed within six years after
the original purchase, a contingent deferred sales charge will be assessed using
the schedule of the fund in which the original investment was made.
Class C Shares. Exchanges of Class C shares are not subject to the contingent
deferred sales charge. However, if shares are redeemed within one year after the
original purchase, a 1.00% contingent deferred sales charge will be assessed.
Only one "round-trip" exchange of the Fund's Class C shares may be made per
three-month period, measured from the date of the initial purchase. For example,
an exchange from Fund X to Fund Y and back to Fund X would be permitted only
once during each three-month period.
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisors are automatically eligible to
exchange Fund shares and to redeem up to $100,000 of the Funds' shares by
calling 1-800-422-3737 toll-free any business day between 9:00 a.m. Eastern time
and the time at which the Funds value their shares. Telephone redemptions are
limited to a total of $100,000 in a 30-day period. Redemptions that exceed
$100,000 may be done by placing a wire order trade through a broker or
furnishing a signature guaranteed request. Telephone redemption privileges may
be elected on the account application. The Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine
and may be liable for losses related to unauthorized or fraudulent transactions
in the event reasonable procedures are not employed. Such procedures include
restrictions on where proceeds of telephone redemptions may be sent, limitations
on the ability to redeem by telephone shortly after an address change, recording
of telephone lines and requirements that the redeeming shareholder and/or his or
her financial advisor provide certain identifying information. Shareholders
and/or their financial advisors wishing to redeem or exchange shares by
telephone may experience difficulty in reaching the Funds at their toll-free
telephone number during periods of drastic economic or market changes. In that
event, shareholders and/or their financial advisors should follow the procedures
for redemption or exchange by mail as described above under "How to Sell
Shares." The Advisor, the Administrator, the Transfer Agent and the Funds
reserve the right to change, modify or terminate the telephone redemption or
exchange services at any time upon prior written notice to shareholders.
Shareholders and/or their financial advisors are not obligated to transact by
telephone.
12B-1 PLANS
Under their 12b-1 Plans, each Fund pays the Distributor monthly a service fee at
an annual rate of 0.25% of each Fund's net assets attributed to Class A, Class B
and Class C shares. The 12b-1 Plan also requires each Fund to pay the
Distributor monthly a distribution fee at an annual rate of 0.75% of the average
daily net assets attributed to their Class B and Class C shares. Because the
Class B and Class C shares bear additional distribution fees, their dividends
will be lower than the dividends of Class A shares. Class B shares automatically
convert to Class A shares, approximately eight years after the Class B shares
were purchased. Class C shares do not convert. The multiple class structure
could be terminated should certain Internal Revenue Service rulings be
rescinded. See the Statement of Additional Information for more information. The
Distributor uses the fees to defray the cost of commissions and service fees
paid to financial service firms which have sold Fund shares, and to defray other
expenses such as sales literature, prospectus printing and distribution,
shareholder servicing costs and compensation to wholesalers. Should the fees
exceed the Distributor's expenses in any year, the Distributor would realize a
profit. The Plan also authorizes other payments to the Distributor and its
affiliates (including the Advisor and the Administrator) which may be construed
to be indirect financing of sales of Fund shares.
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized in 1980. The Cub Fund and
the Japan Fund each commenced investment operations in 1996 and the China Fund
commenced investment operations in 1997, each as a separate portfolio of the
Trust.
The Trust is not required to hold annual shareholder meetings, but special
meetings may be called for certain purposes. Shareholders receive one vote for
each Fund share. Shares of the Funds and any other series of the Trust that may
be in existence from time to time generally vote together except when required
by law to vote separately. Shareholders owning in the aggregate ten percent of
Trust shares may call meetings to consider removal of Trustees. Under certain
circumstances, the Trust will provide information to assist shareholders in
calling such a meeting. See the Statement of Additional Information for more
information.
<PAGE>
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<PAGE>
Investment Advisor
Newport Fund Management, Inc.
580 California Street, Suite 1960
San Francisco, CA 94104
Administrator
Colonial Management Associates, Inc.
One Financial Center
Boston, MA 02111-2621
Distributor
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111-2621
Custodian
The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017-2070
Shareholder Services and Transfer Agent
Liberty Funds Services, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-345-6611
Independent Accountants
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110-2624
Legal Counsel
Ropes & Gray
One International Place
Boston, MA 02110-2624
Your financial service firm is:
Printed in U.S.A.
November 30, 1998
NEWPORT TIGER
CUB FUND
NEWPORT JAPAN OPPORTUNITIES FUND
NEWPORT GREATER CHINA FUND
PROSPECTUS
Newport Tiger Cub Fund seeks capital appreciation by investing primarily in
equity securities of small companies (i.e., companies with equity market
capitalizations of U.S. $1 billion or less) located in the nine Tigers of Asia
(Hong Kong, Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, The
People's Republic of China and the Philippines).
Newport Japan Opportunities Fund seeks capital appreciation by investing
primarily in equity securities of Japanese companies.
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).
For more detailed information about the Funds, call the Administrator at
1-800-426-3750 for the November 30, 1998 Statement of Additional Information.
- ----------------------------- --------------------------
NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
- ----------------------------- --------------------------
<PAGE>
Liberty
Please send your completed application to:
Liberty Funds Services, Inc. (LFSI)
P.O. Box 1722
Boston, Massachusetts 02105-1722
New A, B & C Shares Account Application/Revision to Existing Account
To open a new account, complete sections 1, 2, 3, & 7.
To apply for special services for a new or existing account, complete sections
4, 5, 6, or 8 as appropriate.
___ Please check here if this is a revision.
1-----------Account ownership--------------
Please choose one of the following.
__Individual: Print your name, Social Security #, U.S. citizen status.
__Joint Tenant w/rights of survivorship: Print all names, the Social
Security # for the first person,
and his/her U.S. citizen status.
__Uniform Gift to Minors: Names of custodian and minor, minor's Social Security
#, minor's U.S. citizen status.
__Corporation, Association, Partnership: Include full name, Taxpayer I.D. #.
__Trust: Name of trustee, trust title & date, and trust's Taxpayer I.D. #.
______________________________________
Name of account owner
______________________________________
Name of joint account owner (JTWROS)
______________________________________
Street address
______________________________________
Street address
______________________________________
City, State, and Zip
______________________________________
Daytime phone number
______________________________________
Social Security # or Taxpayer I.D. #
Are you a U.S. citizen? ___Yes ___No
______________________________________
If no, country of permanent residence
______________________________________
Account Owner's date of birth
______________________________________
Account number (if existing account)
2 -----Fund(s) you are purchasing--------
Your investment will be made in Class A shares if no class is indicated.
Certificates are not available for Class B or C shares. If no distribution
option is selected, distributions will be reinvested in additional fund
shares. Please consult with your financial advisor to determine which class of
shares best suits your needs.
Fund Fund Fund
________________ ___________________ _____________________
Name of Fund Name of Fund Name of Fund
$_______________ $__________________ $____________________
Amount Amount Amount
Class
___ A Shares ___ B Shares (less than $250,000) ___ C Shares (less than
$1,000,000)
Method of Payment Choose one
___Check payable to the Fund ___Bank wired on ____/____/____ (Date)
Wire/Trade confirmation #_____________
Ways to receive your distributions
Choose one (If none chosen, dividends and capital gains will be reinvested).
Distributions of $10.00 or less will automatically be reinvested in additional
fund shares.
___Reinvest dividends and capital gains
___Dividends and capital gains in cash
___Dividends in cash; reinvest capital gains
___Automatic Dividend Diversification See section 5A, inside.
___Direct Deposit Complete Bank information
in section 4B. I understand that my bank must be a member of the
Automated Clearing House System.
3---Your signature & taxpayer I.D. number certification----
Each person signing on behalf of an entity represents that his/her actions are
authorized. I have received and read each appropriate fund prospectus and
understand that its terms are incorporated by reference into this application.
I understand that this application is subject to acceptance. I understand that
certain redemptions may be subject to a contingent deferred sales charge. It
is agreed that the fund, The Colonial Group, Inc. and its affiliates and their
officers, directors, agents, and employees will not be liable for any loss,
liability, damage, or expense for relying upon this application or any
instruction believed genuine.
I certify, under penalties of perjury, that:
1. The Social Security # or Taxpayer I.D. # provided is correct.
You must cross out Item 2a, b or c below only if you have been notified by the
Internal Revenue Service (IRS) that you are currently subject to back-up
withholding because of under-reporting interest or dividends on you tax return.
2. I am not subject to back-up withholding because: (a) I am exempt from back-
up withholding, or (b) I have not been notified by the IRS that I am
subject to back-up withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified me that I am no longer
subject to back-up withholding.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholdings.
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
X______________________________________________
Signature
_______________________________________________
Capacity, if applicable Date
4--------Ways to withdraw from your fund-------
It may take up to 30 days to activate the following features. Complete only
the sections that apply to the features you would like.
A. Systematic Withdrawal Plan (SWP)
Dividends and capital gains must be reinvested.
You can receive monthly, quarterly, or semiannual checks from your account in
any amount you select, with certain limitations. The value of the shares in your
account must be at least $5,000 and you must reinvest all of your
distributions. Checks will be processed on the 10th calendar day of the month
unless the 10th falls on a non-business day or the first day of the week. If
this occurs, the process date will be the previous business day. If you
receive your SWP payment via electronic funds transfer (EFT), you may request
it to be processed any day of the month. Withdrawals in excess of 12% annually
of your current account value will not be accepted. Redemptions made in
addition to SWP payments may be subject to a contingent deferred sales charge
for Class B or C shares. Please consult your financial or tax advisor before
electing this option.
Funds for withdrawal:
___________________
Name of fund
Withdrawal amount
Redeem shares from account as follows:
Dollar amount of payment $___________
or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _____/_____ (month, day).
___________________
Name of fund
Withdrawal Amount
Redeem shares from account as follows:
Dollar amount of payment $___________
or
Total annual %_________
Frequency (choose one)
__Monthly __Quarterly __Semiannually
I would like payments to begin _____/_____ (month, day).
Payment instructions
If you are having this service added to an existing account, please sign below
and have your signature guaranteed.
Send the payment to (choose one):
__My address of record.
__My bank account via EFT. Please complete the Bank Information section below.
All EFT transactions will be made two business days after the processing date.
ACH banks only.
__The payee listed at right.
______________________________________________
Name of payee
______________________________________________
Address of payee
______________________________________________
City
______________________________________________
State Zip
______________________________________________
Payee's bank account number, if applicable
B. Telephone withdrawal options
All telephone transaction calls are recorded. These options are not available
for retirement accounts. Please sign below and have your signature(s)
guaranteed.
1. Fast Cash
You are automatically eligible for this service. You or your financial
advisor can withdraw up to $50,000 from your account and have it sent to your
address of record. For your protection, this service is only available on
accounts that have not had an address change within 30 days of the redemption
request. This option is not available for Stein Roe Advisor Tax-Managed Growth
Fund, Newport Japan Opportunites Fund or Newport Tiger Cub Fund.
2. Telephone Redemption
__I would like the Telephone Redemption privilege either by federal fund wire
or EFT. Telephone redemptions over $500 will be sent via federal fund wire,
usually on the next business day ($7.50 will be deducted). Redemptions of
$500 or less will be sent by check to your designated bank.
3. On-Demand EFT Redemption
__I would like the On-Demand EFT Redemption privilege. Proceeds paid via EFT
will be credited to your bank account two business days after the process
date. You or your financial advisor may withdraw shares from your fund account
by telephone and send your money to your bank account. If you are adding this
service to an existing account, complete the Bank Information section below
and have all shareholder signatures guaranteed.
Liberty Funds Services, Inc. (LFSI) and the fund's liability is
limited when following telephone instructions; a shareholder may suffer a loss
from an unauthorized transaction reasonably believed by LFSI to have been
authorized.
Bank Information (For Sections A and B above)
I authorize deposits to the following bank account:
____________________________________________________________
Bank name City Bank account number
____________________________________________________________
Bank street address State Zip Bank routing # (your bank
can provide this)
X__________________________________
Signature of account owner(s)
X__________________________________
Signature of account owner(s) Place signature guarantee here.
5-----Ways to make additional investments--------
These services involve continuous investments regardless of varying share
prices. Please consider your ability to continue purchases through periods of
price fluctuations. Dollar cost averaging does not assure a profit or protect
against loss in declining markets.
A. Automatic Dividend Diversification
Please diversify my portfolio by investing distributions from one fund into
another Colonial, Stein Roe Advisor or Newport fund. These investments will
be made in the same share class and without sales charges. Accounts must be
identically registered. I have received and carefully read the prospectus for
the fund(s) listed below. This option is not available for Stein Roe Advisor
Tax-Managed Growth Fund.
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
____________________________
From fund
____________________________
Account number (if existing)
____________________________
To fund
____________________________
Account number (if existing)
B. Automated Dollar Cost Averaging
This program allows you to automatically have money from any Colonial, Stein Roe
Advisor or Newport fund in which you have a balance of at least $5,000
exchanged into the same share class of up to four other identically registered
Colonial, Stein Roe Advisor or Newport accounts, on a monthly basis. The minimum
amount for each exchange is $100. Please complete the section below. This
option is not available for Stein Roe Advisor Tax-Managed Growth Fund.
____________________________________
Fund from which shares will be sold
$_________________________
Amount to redeem monthly
____________________________________
Fund to invest shares in
$_________________________
Amount to invest monthly
____________________________________
Fund to invest shares in
$_________________________
Amount to invest monthly
____________________________________
Fund to invest shares in
$_________________________
Amount to invest monthly
C. Automatic Investment Plan/On-Demand EFT Purchase
This option automatically transfers the specified amount from your bank
checking account to your Colonial, Stein Roe Advisor or Newport fund
account on a regular basis. The On-Demand EFT Purchase program moves money
from your bank checking account to your Colonial, Stein Roe Advisor or Newport
fund account by electronic funds transfer based on your telephone request.
You will receive the applicable price two business days after the receipt of
yourrequest. Your bank needs to be a member of the Automated Clearing House
System.Please attach a blank check marked "VOID." (Deposit slips are not a
substitution).Also, complete the section below. Please allow 3 weeks for LFSI
to establish these services with your bank.
____________________________________
Fund name
_________________________________
Account number
$_____________________ _________________
Amount to transfer Month to start
___________________________________
Fund name
________________________________
Account number
$_____________________ _________________
Amount to transfer Month to start
__On-Demand Purchase (will be automatically established if you choose
Automatic Investment Plan)
__Automatic Investment Plan Frequency:
__Monthly or __Quarterly
Check one:
__EFT- Choose any day of the month_____________________
__Paper Draft-Choose either the:
__5th day of the month
__20th day of the month
Authorization to honor checks drawn by Liberty Funds Services, Inc. (LFSI) Do
Not Detach. Make sure all account holders sign to the far right. Please attach
a blank check marked "VOID" here. (Deposit slips are not a substitution).
See reverse for bank instructions.
I authorize LFSI to draw on my bank account, by check or electronic funds
transfer, for an investment in a Colonial, Stein Roe Advisor or Newport fund.
LFSI and my bank are not liable for any loss arising from delays or dishonored
draws. If a draw is not honored, I understand that notice may not be given and
LFSI may reverse the purchase and charge my account $15.
______________________________________
Bank name
______________________________________
Bank street address
______________________________________
Bank street address
______________________________________
City State Zip
______________________________________
Bank account number
______________________________________
Bank routing #
X_____________________________________
Signature(s) of account holder
X_____________________________________
Signature(s) of account holder
6------------Ways to reduce your sales charges------------
These services can help you reduce your sales charge while increasing your
share balance over the long term.
A. Right of Accumulation
If you, your spouse or your children own any other shares in other
Colnial, Stein Roe Advisor or Newport funds, you may be eligible for a reduced
sales charge. The combined value of your accounts must be $50,000 or more.
Class A shares of money market funds are not eligible unless purchased by
exchange from another Colonial, Stein Roe Advisor or Newport fund.
The sales charge for your purchase will be based on the sum of the purchase(s)
added to the value of all shares in other Colonial, Stein Roe
Advisor or Newport funds at the previous day's public offering price.
__Please link the accounts listed below for Right of Accumulation privileges,
so that this and future purchases will receive any discount for which they
are eligible.
_____________________________________
Name on account
_____________________________________
Account number
_____________________________________
Name on account
_____________________________________
Account number
B. Statement of Intent
If you agree in advance to invest at least $50,000 within 13 months, you'll
pay a lower sales charge on every dollar you invest. If you sign a Statement
of Intent within 90 days after you establish your account, you can receive a
retroactive discount on prior investments. The amount required to receive a
discount varies by fund; see the sales charge table in the "How to Buy Shares"
section of your fund prospectus.
__I want to reduce my sales charge.
I agree to invest $ _______________ over a 13-month period starting
______/______/ 19______ (not more than 90 days prior to this application). I
understand an additional sales charge must be paid if I do not complete this
Statement of Intent.
7-------------Financial service firm---------------------
To be completed by a Representative of your financial service firm. If making
changes to the services on an account that has been in existence for more than
30 days, please have your clients signature guaranteed.
This application is submitted in accordance with our selling agreement with
Liberty Funds Distributor, Inc. (LFDI), the Fund's prospectus, and this
application. We will notify LFDI of any purchase made under a Statement
of Intent, Right of Accumulation, or Sponsored Arrangement. We guarantee the
signatures on this application and the legal capacity of the signers.
_____________________________________
Representative's name
_____________________________________
Representative's number
_____________________________________
Representative's phone number
_____________________________________
Account # for client at financial
service firm
_____________________________________
Branch office address
_____________________________________
City
_____________________________________
State Zip
_____________________________________
Branch office number
_____________________________________
Name of financial service firm
_____________________________________
Main office address
_____________________________________
Main office address
_____________________________________
City
_____________________________________
State Zip
X____________________________________
Authorized signature
8----------Request for a combined quarterly statement mailing-----------
LFSI can mail all of your quarterly statements in one envelope. This
option simplifies your record keeping and helps reduce fund expenses.
__I want to receive a combined quarterly mailing for all my accounts. Please
indicate account numbers or tax I.D. numbers of accounts to be linked.
________________________________________________________________________
Automatic Investment Plan (See reverse side)
Applications must be received before the start date for processing.
This program's deposit privilege can be revoked by LFSI without prior
notice if any check is not paid upon presentation. LFSI has no obligation
to notify the shareholder of non-payment of any draw. This program may be
discontinued by LFSI by written notice at least 30 business days prior
to the due date of any draw or by the shareholder at any time.
To the Bank Named on the Reverse Side:
Your depositor has authorized LFSI, to collect amounts due under an
investment program from his/her personal checking account. When
you pay and charge the draws to the account of your depositor
executing the authorization payable to the order of LFSI, Liberty Funds
Distributor, Inc., hereby indemnifies and holds you harmless from any
loss (including reasonable expenses) you may suffer from honoring such
draw, except any losses due to your payment of any draw against insufficient
funds.
Liberty Funds Distributor, Inc. SH-760F-1098(1098)
<PAGE>
COLONIAL TRUST II
Cross Reference Sheet
Newport Tiger Cub Fund (formerly known as Colonial Newport Tiger Cub Fund)
Newport Japan Opportunities Fund
Newport Greater China Fund
Class Z
Item Number of Form N-1A Prospectus Location or Caption
Part A
1. Cover page
2. Summary of Expenses
3. The Funds' Financial History
4. Organization and History; The Funds'
Investment Objectives; How the Funds Pursue
their Objectives and Certain Risk Factors
5. Cover Page; How the Funds are Managed;
Organization and History; The Funds'
Investment Objectives; Back Cover
6. Organization and History; Distributions and
Taxes; How to Buy Shares
7. Summary of Expenses; How to Buy Shares; How
the Funds Value their Shares; Back cover
8. How to Sell Shares; How to Exchange Shares;
Telephone Transactions
9. Not applicable
<PAGE>
November 30, 1998
NEWPORT TIGER CUB FUND
NEWPORT JAPAN OPPORTUNITIES FUND
NEWPORT GREATER CHINA FUND
CLASS Z SHARES
PROSPECTUS
BEFORE YOU INVEST
Colonial Management Associates, Inc. (Administrator) and your full-service
financial advisor want you to understand both the risks and benefits of mutual
fund investing.
While mutual funds offer significant opportunities and are professionally
managed, they also carry risks including possible loss of principal. Unlike
savings accounts and certificates of deposit, mutual funds are not insured or
guaranteed by any financial institution or government agency.
Please consult your full-service financial advisor to determine how investing in
these mutual funds may suit your unique needs, time horizon and risk tolerance.
Newport Tiger Cub Fund (Cub Fund) and Newport Japan Opportunities Fund (Japan
Fund) are a diversified portfolio of Colonial Trust II (Trust), an open-end
management investment company. Newport Greater China Fund (China Fund)
(collectively with the Cub Fund and the Japan Fund, the Funds) is a
non-diversified portfolio of the Trust.
The Cub Fund seeks capital appreciation by investing primarily in equity
securities of small companies (i.e., companies with equity market
capitalizations of U.S. $1 billion or less) located in the nine Tigers of Asia
(Hong Kong, Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, The
People's Republic of China and the Philippines).
The Japan Fund seeks capital appreciation by investing primarily in equity
securities of Japanese companies.
The 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).
JO-01/309G-1198
Each Fund is managed by Newport Fund Management, Inc. (Advisor), an investment
advisor since 1984 and an affiliate of the Administrator.
This Prospectus explains concisely what you should know before investing in the
Class Z shares of the Funds. Read it carefully and retain it for future
reference. More detailed information about the Funds is contained in the
November 30, 1998, Statement of Additional Information which has been filed with
the Securities and Exchange Commission (SEC) and is obtainable free of charge
by calling the Administrator at 1-800-426-3750. The Statement of Additional
Information is incorporated by reference in (which means it is considered to be
a part of) this Prospectus.
The following eligible institutional investors may purchase Class Z shares: (i)
any retirement plan with aggregate assets of at least $5 million at the time of
purchase of Class Z shares and which purchases shares directly through the
Distributor or through a mutual fund "supermarket," third party administrator or
other financial adviser; (ii) any insurance company or bank purchasing shares
for its own account, endowment or foundation, which initially invests, on behalf
of its clients, at least $5 million in Class Z shares of the Fund (the
Distributor may accept smaller initial purchases if it believes, in its sole
discretion, that the investor will make additional investments which will cause
its total investment to exceed $5 million in a reasonable period of time); (iii)
certain retirement plans established for the benefit of employees of the Advisor
and employees of the Advisor's affiliates; and (iv) any fund distributed by the
Distributor, if the fund seeks to achieve its investment objective by investing
primarily in shares of the Fund and other affiliated funds. Class Z shares are
subject to a 2.00% contingent redemption fee on redemptions and exchanges made
within five business days of purchase.
Contents Page
Summary of Expenses
The Funds' Financial History
The Funds' Investment Objectives
How the Funds Pursue Their Objectives
and Certain Risk Factors
Investment Techniques and Additional
Risk Factors
How the Funds Measure Their
Performance
How the Funds are Managed
Year 2000
How the Funds Value Their Shares
Distributions and Taxes
How to Buy Shares
How to Sell Shares
How to Exchange Shares
Telephone Transactions
Organization and History
The SEC maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, materials that are incorporated by reference into this
Prospectus and the Statement of Additional Information, and other information
regarding the Funds.
- ----------------------------- --------------------------
NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
- ----------------------------- --------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC NOR HAS THE
SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in a Fund. The
following tables summarize your maximum transaction costs and your annual
expenses, adjusted to reflect current fees, for an investment in each Class Z
shares of each Fund. See "How the Funds are Managed" for more complete
descriptions of the Funds' various costs and expenses.
Shareholder Transaction Expenses(1)(2)
Cub Fund, Japan Fund and China Fund
--------------------------------------------
Class Z
Maximum Initial Sales Charge Imposed
on a Purchase (as a % of offering price) 0.00%
Maximum Contingent Deferred Sales Charge
(as a % of offering price) 0.00%
Maximum Contingent Redemption Fee (3)(4) 2.00%
(1) For accounts less than $1,000 an annual fee of $10 may be deducted. See "How
to Buy Shares."
(2) Redemption proceeds exceeding $500 sent via federal funds wire will be
subject to a $7.50 charge per transaction.
(3) Does not apply to reinvested distributions.
(4) A contingent redemption fee in the amount of 2.00% is imposed on
redemptions and exchanges of Fund shares purchased and held for five
business days or less. See "Contingent Redemption Fee" under the caption
"How to Sell Shares."
Annual Operating Expenses (as a % of average net assets)
Cub Fund
--------------
Class Z
Management and administration fees (after fee waiver)(5) 0.38%
12b-1 fee 0.00
Other expenses 1.62
----
Total operating expenses (after fee waiver)(5) 2.00%
=====
Japan Fund
--------------
Class Z
Management and administration fees (after fee waiver)(6) 0.48%
12b-1 fees 0.00
Other expenses 1.27
----
Total operating expenses (after fee waiver)(6) 1.75%
=====
China Fund
---------------
Class Z
Management and administration fee (after fee waiver)(7) 1.09%
12b-1 fees 0.00
Other expenses 0.81
Total operating expenses (after fee waiver)(7) 1.90%
=====
(5) The Advisor and Administrator have voluntarily agreed to waive or bear
certain Fund expenses until further notice to the Fund. Absent such
agreement, the "Management and administration fees" would have been
1.40% and "Total operating expenses" would have been 3.02% .
(6) The Advisor and Administrator have voluntarily agreed to waive or bear
certain Fund expenses until further notice to the Fund. Absent such
agreement, the "Management and administration fees" would have been
1.20% and "Total operating expenses" would have been 2.47%.
(7) The Advisor and Administrator have voluntarily agreed to waive or bear
certain Fund expenses until further notice to the Fund. Absent such
agreement, the "Management and administration fees" would have been
1.40% and "Total operating expenses" would have been 2.21%.
Example
The following Example shows the cumulative transaction and operating expenses
attributable to a hypothetical $1,000 investment in Class Z shares of each Fund
for the periods specified, assuming a 5% annual return and, unless otherwise
noted, redemption at period end. This example uses the fees and expenses in the
tables above and gives effect to the fee waivers and expense reimbursements
described above. The 5% return and expenses in this Example should not be
considered indicative of actual or expected Fund performance or expenses, both
of which will vary.
Cub Fund
Class Z
Period:
1 year $20
3 years $63
5 years $108
10 years $233
Without voluntary fee reductions, the amounts would be $30, $93, $159 and $334
for 1, 3, 5 and 10 years, respectively.
Japan Fund
Class Z
Period:
1 year $ 18
3 years $ 55
5 years $ 95
10 years $206
Without voluntary fee reductions, the amounts would be $25, $77, $132 and $281
for 1, 3, 5 and 10 years, respectively.
China Fund
Class Z
Period:
1 year $ 19
3 years $ 60
5 years $103
10 years $222
Without voluntary fee reductions, the amounts would be $22, $69, $118 and $254
for 1, 3, 5 and 10 years, respectively.
<PAGE>
THE FUNDS' FINANCIAL HISTORY
The following financial highlights for a Class Z share outstanding throughout
each period have been derived from the Funds' financial statements, which have
been audited by PricewaterhouseCoopers LLP, independent accountants. Their
unqualified report is included in each Fund's 1998 Annual Report and is
incorporated by reference into the Statement of Additional Information.
Cub Fund
CLASS Z
-----------------------------------------
Year ended Period ended
August 31 August 31
--------------------- ----------------
1998 1997 1996(c)
---- ---- ----
Net asset value - Beginning of period $9.130 $9.320 $10.000
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(a)(b) 0.132(d) 0.083(f) 0.021
Net realized and unrealized loss (5.342) (0.273) (0.701)
------- ------- -------
Total from Investment Operations (5.210) (0.190) (0.680)
------- ------- -------
Net asset value - End of period $3.920 $9.130 $9.320
======= ======= ======
Total return(e)(g) (57.06)% (2.04)% (6.80)%(h)
======== ======= ======
RATIOS TO AVERAGE NET ASSETS
Expenses(i) 2.00% 2.00% 2.00%(j)
Net investment income (loss)(i) 2.00% 0.87% 0.87%(j)
Fees and expenses waived or borne
by the Advisor/Administrator(i) 1.02% 1.09% 5.16%(j)
Portfolio turnover 56% 96% 3%(h)
Net assets at end of period (000) $23 $1,203 $1,166
(a) Net of fees and expenses waived
or borne by the Advisor/
Administrator which amounted to: $0.067 $0.105 $0.123
(b) Per share data was calculated using average shares outstanding during the
period.
(c) The Fund commenced investment operations on June 3, 1996.
(d) Includes distributions from China Hong Kong Photo Products, Dickson
Concepts International Ltd., Four Seas Merchantile, Hang Seng Bank Ltd.,
Hon Kwok Land Investment, Li & Fung Ltd., Sa Sa International, Ltd., Sun
Hung Kai Properties Ltd. and Varitronix International Ltd. which
amounted to $0.016, $0.013, $0.013, $0.014, $0.012, $0.014, $0.014,
$0.013, $0.017 per share, respectively.
(e) Total return at net asset value assuming all distributions reinvested
and no initial sales charge or contingent deferred sales charge.
(f) Includes distributions from Srithai Superware Public Co., Ltd. and
Varitronix International Ltd. which amounted to $0.039 per share.
(g) Had the Advisor/Administrator not waived or reimbursed a portion of
expenses, total return would have been reduced.
(h) Not annualized.
(i) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(j) Annualized.
<PAGE>
THE FUNDS' FINANCIAL HISTORY (CONT'D)
Japan Fund
Class Z
---------------------------------------------
Year ended Period ended
August 31 August 31
-------------------------- -----------------
1998 1997 1996 (c)
---- ---- --------
Net asset value - Beginning of period $10.070 $9.720 $10.000
======== ======= ========
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income (loss) (a)(b) (0.080) (0.069) (0.010)
Net realized and unrealized gain (loss) (1.258) 0.419 (0.270)
------- ------- -------
Total from Investment Operations (1.338) 0.350 (0.280)
------- ------- -------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS:
From net realized gains (0.022) ---- ----
------- -------
Net asset value - End of period $8.710 $10.070 $9.720
====== ======= =======
Total return (d)(e) (13.30)% 3.60% (2.80)%(f)
======== ======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (g) 1.75% 1.75% 1.75%(h)
Net investment loss (g) (0.87)% (0.68)% (0.41)%(h)
Fees and expenses waived or borne by
the Adviser/Administrator (g) 0.72% 1.79% 9.13%(h)
Portfolio turnover 24% 20% 0%
Net assets at end of period (000) $1,444 $1,488 $1,214
(a) Net of fees and expenses waived
or borne by the Advisor/
Administrator which amounted to: $0.066 $0.180 $0.230
(b) Per share data was calculated using average shares outstanding during the
period.
(c) The Fund commenced investment operations on June 3, 1996.
(d) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(e) Had the Advisor/Administrator not waived or reimbursed a portion of
expenses, total return would have been reduced.
(f) Not annualized.
(g) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(h) Annualized.
<PAGE>
THE FUNDS' FINANCIAL HISTORY (CONT'D)
China Fund
---------------------------------
Class Z
---------------------------------
Period ended
August 31
----------------- --------------
1998 1997(e)
---- -------
Net asset value - Beginning of period $17.910 $13.340
-------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a)(b) 0.123(c) 0.065(d)
Net realized and unrealized gain (loss) (11.586) 4.505(k)
Total from Investment Operations (11.463) 4.570
-------- -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net realized gains (0.067) ----
------- ------
Net asset value - End of period $6.380 $17.910
======= =======
Total return (f)(g) (64.19)% 34.29%(h)
======= =======
RATIOS TO AVERAGE NET ASSETS
Expenses (i) 1.90% 1.90%(j)
Net investment income (i) 0.99% 1.14%(j)
Fees and expenses waived or borne by
the Advisor/Administrator (i) 0.31% 0.59%(j)
Portfolio turnover 58% 4%(g)
Net assets at end of period (000) $49 $135
(a) Net of fees and expenses waived or borne
by the Advisor/Administrator
which amounted to: $0.039 $0.034
(b) Per share data was calculated using average shares outstanding during the
period.
(c) Includes distribution from Cheung Kong Holdings Ltd., Citic Pacific Ltd,
Guangshen Railway Co., Ltd. and Henderson Land Development Co., Ltd.,
which amounted to $0.019, $0.036, $0.018 and $0.020 per share,
respectively.
(d) Includes distributions from China Light & Power Co. Ltd., Dah Sing
Financial, Glorious Sun Enterprises and Hang Seng Bank Ltd. which
amounted to $0.078 per share.
(e) The Fund commenced investment operations on May 12, 1997. The activity
shown is from the effective date of registration (May 16, 1997) with the
SEC. The per share information reflects the 1.5 for 1 stock split
effective July 25, 1997.
(f) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(g) Had the Advisor/Administrator not waived or reimbursed a portion of
expenses, total return would have been reduced.
(h) Not annualized.
(i) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(j) Annualized.
(k) 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.
Further performance information is contained in each Fund's Annual Report to
shareholders, which is obtainable free of charge by calling 1-800-426-3750.
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES
The Cub Fund seeks capital appreciation by investing primarily in equity
securities of small companies (i.e., companies with equity market
capitalizations of U.S. $1 billion or less) located in the nine Tigers of Asia
(Hong Kong, Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, The
People's Republic of China and the Philippines) ("Small Company Tiger
Securities").
The Japan Fund seeks capital appreciation by investing primarily in equity
securities of Japanese companies.
The 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).
HOW THE FUNDS PURSUE THEIR OBJECTIVES AND CERTAIN RISK FACTORS
Cub Fund. The Cub Fund seeks to invest in companies with consistently
above-average earnings growth. Normally, the Cub Fund will invest at least 65%
of its total assets in Small Company Tiger Securities. The Cub Fund may invest
up to 35% of its total assets in equity securities of large companies (i.e.,
companies with equity market capitalizations of more than U.S. $1 billion)
located in the nine Tigers of Asia ("Large Company Tiger Securities"). Small and
Large Company Tiger Securities include common and preferred stock, warrants
(rights) to purchase stock, debt securities convertible into stock, sponsored
and unsponsored American Depositary Receipts (receipts issued in the U.S. by
banks or trust companies evidencing ownership of underlying foreign securities),
Global Depositary Receipts (receipts issued by foreign banks or trust companies
evidencing ownership of underlying foreign securities) and shares of closed-end
investment companies that invest primarily in the foregoing securities. It is
presently anticipated that a large portion of the Cub Fund's assets will be
invested in companies located in Hong Kong and Singapore, which are not
considered by the Advisor to be emerging markets. However, investments in Hong
Kong will involve special risks. See "Investment Techniques and Additional Risk
Factors --Hong Kong" below. The remaining countries in which the Cub Fund
invests are considered to be emerging markets. Investments in foreign
securities, generally, and especially in emerging market securities in a
particular region, involve special risks. See "Regional Concentration and
Trends," "Foreign Investments," and "Emerging Markets" below. Investments in
small company securities also involve special risks. See "Small Companies"
below. Dividend income will not be considered in choosing the investments of the
Cub Fund.
Japan Fund. The Japan Fund normally invests substantially all of its assets in
equity securities of well-established Japanese companies (i.e., companies with
equity market capitalizations in excess of U.S. $200 million) (Japanese
Securities). The Japan Fund seeks to invest in companies with histories of
consistent earnings growth in industries with attractive or improving prospects.
Japanese Securities generally include common and preferred stock, warrants
(rights) to purchase such stock, debt securities convertible into such stock,
sponsored and unsponsored American Depositary Receipts (receipts issued in the
U.S. by banks or trust companies evidencing ownership of underlying foreign
securities) and Global Depositary Receipts (receipts issued by foreign banks or
trust companies). Investment in foreign securities involves special risks. See
"Investment Techniques and Additional Risk Factors --Japanese Securities" below.
Dividend income will not be considered in choosing the investments of the Japan
Fund.
China Fund. The China Fund normally invests at least 80% of its total assets in
equity securities of companies located in, or which derive a substantial portion
(at least 50%) of their revenue from business activity with or in, the Greater
China Region. The remaining 20% may be invested in equity securities of
companies that are otherwise expected to benefit from the Greater China Region's
anticipated economic growth. The Advisor currently anticipates that the China
Fund will invest primarily in companies whose securities are listed and traded
in Hong Kong, but that the Advisor believes will benefit from growth
opportunities in mainland China.
The China Fund generally invests in companies with at least $100 million in
equity market capitalization at the time of purchase, including both seasoned
companies and those with limited operating histories. The equity securities in
which the China Fund invests include common and preferred stock, warrants
(rights) to purchase stock, debt securities convertible into stock, sponsored
and unsponsored American Depositary Receipts (receipts issued in the U.S. by
banks or trust companies evidencing ownership of underlying foreign securities),
Global Depositary Receipts (receipts issued by foreign banks or trust companies)
and shares of closed-end investment companies that invest primarily in the
foregoing securities. Dividend income will not be considered in choosing the
investments of the China Fund.
INVESTMENT TECHNIQUES AND ADDITIONAL RISK FACTORS
The following describes in greater detail different types of securities and
investment techniques used by the Funds, and discusses certain risks related to
such securities and techniques. Additional information about the Funds'
investments and investment practices may be found in the Statement of Additional
Information.
Regional Concentration and Trends. As the Cub Fund's investments will, under
normal circumstances, be concentrated in equity securities of companies located
in the nine Tigers of Asia, and the China Fund investments will be concentrated
in the Greater China Region, these Funds' investments will be particularly
susceptible to regional trends. The prices of these Funds' securities, and
therefore, the net asset value of the Cub Fund and the China Fund may be
adversely affected by negative economic or political events in any of the nine
Tigers of Asia and in Southeast Asia as a whole. In addition, events in a number
of the nine Tigers of Asia since the latter half of 1997 have highlighted the
financial interdependence of the region and demonstrated that negative financial
events in one such country may have far-reaching negative effects throughout the
region. In late 1997, a number of the nine Tigers of Asia suffered currency
devaluations, equity market downturns and other detrimental economic events.
There can be no assurance that the recent currency devaluations, equity market
downturns and other detrimental economic events in the region will not continue.
The uncertainty surrounding the effects of the foregoing events may negatively
impact the return of the Cub Fund and the China Fund and the value of the Funds'
shares.
Japanese Securities. Because the Japan Fund's investments are concentrated in
Japan, the value of its shares will be especially affected by political,
economic and market conditions within Japan and by movements in currency
exchange rates between the Japanese and U.S. currencies, and may fluctuate more
widely than the value of shares of a fund investing in companies located in a
number of different countries. In addition, because Japan's economy is
significantly dependent on foreign trade, economic and market conditions within
Japan, and therefore the value of Japan Fund shares, are significantly
influenced by domestic economic and market conditions within its trading partner
countries and by political relations and currency exchange rates between Japan
and such countries. Japan has in the past experienced difficult relations with
its trading partners, particularly the U.S. The imposition of trade sanctions or
other protectionist measures could negatively impact the Japanese economy and
the value of Japan Fund shares. Transactions in Japanese securities may be more
costly due to currency conversion costs and higher brokerage and custodial
costs.
The Greater China Region. Although Hong Kong, The People's Republic of China and
Taiwan are closely tied economically, they have different political and economic
systems and their markets and regulatory structures are at different stages of
development. Following is a summary of the major risks and uncertainties
associated with investing in each country.
Hong Kong. Although Hong Kong has the most developed securities markets of the
three countries in the Greater China Region, a substantial portion of its
economy is dependent on investments in or trade with China and other
less-developed Asian countries. Political, economic and legal developments in
those countries including but not limited to inflation, recession or currency
fluctuations, could adversely impact the China and Cub Fund's Hong Kong
investments.
As of July 1, 1997, sovereignty over Hong Kong was transferred from Great
Britain to China and Hong Kong became a Special Administrative Region of China.
In connection with this transfer, China has agreed to maintain for 50 years Hong
Kong's existing economic and social systems, as well as most of the personal
freedoms previously enjoyed by Hong Kong residents. Nevertheless, it is
impossible to predict with certainty the ultimate effect Chinese sovereignty
will have on Hong Kong's business environment. Chinese sovereignty could result
in the imposition of significant restrictions on social or economic activity
within Hong Kong. These or other potential actions by China could adversely
affect the China and the Cub Fund's Hong Kong investments. A substantial amount
of the investments of the Cub Fund and the China Fund are expected to be in
companies located in Hong Kong.
China. Since 1978, China's leaders have implemented economic reforms which have
transformed China from a socialist economy to one that is increasingly
market-based. These changes have included the creation of two domestic stock
exchanges and have stimulated strong economic growth. The continued development
of China's industrial and service sectors will depend on, among other things,
the extent to which governmental policies continue to support such development
and the pace at which economic reforms are implemented.
Investments in China also are significantly affected by domestic political
developments. As evidenced by the government's actions during the 1989 crisis in
Tiananmen Square, the Chinese government's reaction to domestic and
international events is unpredictable. Uncertainty exists particularly with
respect to China's relationship with Taiwan and the ultimate impact on Hong Kong
of the assumption of sovereignty by China. Dramatic action by China's leaders
could cause extreme short-run volatility in the value of the China and the Cub
Fund's investments and the China and the Cub Fund's shares, and also could
significantly and adversely affect the China and the Cub Fund's returns in the
long run. Similarly, China's relations with its important trading partners in
the West (including the United States) could be adversely affected if the
Chinese government's human rights policies are perceived to be deteriorating.
Even if trading relations are not actually affected, threats to impose trading
restrictions could cause substantial short-term volatility in the value of the
China and the Cub Fund's China investments and of the China and Cub Fund's
shares.
Taiwan. The Taiwan Stock Exchange is owned by government-controlled enterprises
and private banks and has only recently begun to allow direct foreign investment
in listed Taiwan securities. Substantial restrictions on such investment remain,
including limitations on the percentage of shares of a company that may be
foreign-owned and prohibitions on foreign ownership of companies in certain
industries.
Taiwan's economy is heavily dependent on exports. Any deterioration in Taiwan's
relationships with its trading partners could adversely impact Taiwan's economy
and the China and the Cub Fund's Taiwan investments. In particular, Taiwan has
become increasingly dependent on direct and indirect trade with China and other
Asian countries. Adverse economic or political developments in those countries
could negatively impact the China and the Cub Fund's Taiwan investments.
Investments in Taiwan could be affected by Taiwan's political relationship with
China. Uncertainty over the prospects for political reunification between the
two countries could make the value of the China and the Cub Fund's Taiwan
investments and of their shares particularly volatile and could negatively
impact returns, especially if China threatens political or military action. Such
reunification, if it were to occur, also could negatively impact the China and
the Cub Fund's Taiwan investments.
General. Countries both within the Greater China Region and in other parts of
Southeast Asia have, at times, experienced rapid economic growth. While these
countries are expected to continue to grow economically over the long term, they
can be expected to do so at varying rates and to experience periods of high
inflation, economic recession and currency fluctuations along the way. Such
periods may be associated with greater, and sometimes extreme, fluctuations in
the value of investments in the Region, compared to investments in more
developed economies. Further, events in one country may impact investments in
other countries. Monetary, fiscal and other governmental policies adopted by the
countries in and around the Region in response to such economic developments
could exacerbate any such fluctuations.
Malaysia. On September 1, 1998, the Malaysian government announced a series of
capital and foreign exchange controls on the Malaysian currency, the ringgit,
and on transactions on the Kuala Lumpur Stock Exchange, that operate to
constrain severely or prohibit foreign investors from repatriating assets. As of
the date of this prospectus, the Funds do not have any of their assets invested
in Malaysian securities.
Foreign Investing Generally. In addition to the specific risks described above,
investing in foreign securities has special risks related to political, economic
and legal conditions outside of the U.S. As a result, the prices of foreign
securities, and, therefore, the value of each Fund's shares, may fluctuate
substantially more than the prices of securities of issuers based in the U.S.
Special risks associated with foreign securities include, among others, the
possibility of unfavorable movements in currency exchange rates, difficulties in
enforcing judgments abroad, the existence of less liquid and less regulated
markets, the unavailability of reliable information about issuers, the existence
of different accounting, auditing and legal standards in foreign countries, the
existence (or potential imposition) of exchange control regulations (including
currency blockage or other restrictions on repatriation of capital), and
political and economic instability. In addition, transactions in foreign
securities may be more costly due to currency conversion costs and higher
brokerage and custodial costs and may be subject to delays and disruptions in
securities settlement procedures. See "Foreign Securities" and "Foreign Currency
Transactions" in the Statement of Additional Information for more information
about foreign investing.
Emerging Markets. A portion of the Cub Fund's investments will consist of
securities issued by companies located in countries whose economies, political
systems or securities markets are not yet highly developed. Special risks
associated with these investments (in addition to the considerations regarding
foreign investments generally) may include, among others, greater political
uncertainties, an economy's dependence on revenues from particular commodities
or on international aid or development assistance, highly limited numbers of
potential buyers for such securities, heightened volatility of security prices,
restrictions on repatriation of capital invested abroad and delays and
disruptions in securities settlement procedures. Over the last several years,
political, legal, economic and regulatory systems in the Tiger countries
continue to lag behind those of more developed countries. Accordingly, the risks
that restrictions on repatriation of the Cub Fund investments may be imposed
unexpectedly or other limitations on the Cub Fund's ability to realize on its
investments may be instituted are greater with respect to investments in the
Tiger countries.
Each Fund may engage in the following investment techniques (unless otherwise
indicated).
Small Companies. The Cub and the China Fund may invest in small companies
(companies with equity market capitalizations of U.S. $1 billion or less(Cub
Fund) and companies with equity market capitalizations of U.S. $500 million or
less(China Fund)). The smaller, less well-established companies in which these
Funds may invest may offer greater opportunities for capital appreciation than
larger, better-established companies, but may also involve certain special
risks. Such companies often have limited product lines, markets or financial
resources and depend heavily on a small management group. Their securities may
trade less frequently, in smaller volumes, and fluctuate more sharply in value
than exchange-listed securities of larger companies.
Foreign Currency Transactions. In connection with their investments in equity
securities, the Funds may purchase and sell (i) foreign currencies on a spot or
forward basis, (ii) foreign currency futures contracts, and (iii) options on
foreign currencies and foreign currency futures. Such transactions may be
entered into (i) to lock in a particular foreign exchange rate pending
settlement of a purchase or sale of a foreign security or pending the receipt of
interest, principal or dividend payments on a foreign security held by the
Funds, or (ii) to hedge against a decline in the value, in U.S. dollars or in
another currency, of a foreign currency in which securities held by the Funds
are denominated. The Funds will not attempt, nor would they be able, to
eliminate all foreign currency risk. Further, although hedging may lessen the
risk of loss if the hedged currency's value declines, it limits the potential
gain from currency value increases. See the Statement of Additional Information
for information relating to the Funds' obligations in entering into such
transactions.
Futures Contracts and Options. Each Fund may purchase and sell foreign stock
index futures contracts and options on such contracts. Such transactions may be
entered into to gain exposure to a particular foreign equity market pending
investment in individual securities or to hedge against market declines. A
futures contract creates an obligation by the seller to deliver and the buyer to
take delivery of a type of instrument at the time and in the amount specified in
the contract. A sale of a futures contract can be terminated in advance of the
specified delivery date by subsequently purchasing a similar contract; a
purchase of a futures contract can be terminated by a subsequent sale. Gain or
loss on a contract generally is realized upon such termination. An option on a
futures contract generally gives the option holder the right, but not the
obligation, to purchase or sell the futures contract prior to the option's
specified expiration date. If the option expires unexercised, the holder will
lose any amount it paid to acquire the option. Transactions in futures and
related options may not precisely achieve the goals of hedging or gaining market
exposure to the extent there is an imperfect correlation between the price
movements of the contracts and of the underlying securities. In addition, if the
Advisor's stock market movement expectancies are inaccurate, the Funds may be
worse off than if they had not hedged.
Temporary/Defensive Investments. Each of the Funds may invest temporarily
available cash in U.S. dollar or foreign currency denominated demand deposits,
certificates of deposit, bankers' acceptances, and high-quality, short-term debt
securities, as well as in Treasury bills and repurchase agreements. Some or all
of the Funds' assets may be invested in such investments during periods of
unusual market conditions. Under a repurchase agreement, a Fund buys a security
from a bank or dealer, which is obligated to buy it back at a fixed price and
time. The security is held in a separate account at the Fund's custodian and,
constitutes the Fund's collateral for the bank's or dealer's repurchase
obligation. Additional collateral will be added so that the obligation will at
all times be fully collateralized. However, if the bank or dealer defaults or
enters bankruptcy, the Fund may experience costs and delays in liquidating the
collateral and may experience a loss if it is unable to demonstrate its right to
the collateral in a bankruptcy proceeding. Not more than 15% of a Fund's net
assets will be invested in repurchase agreements maturing in more than seven
days and other illiquid assets.
Borrowing of Money. Each Fund may borrow money from banks, other affiliated
funds and other entities, to the extent permitted by law, for temporary or
emergency purposes up to 33 1/3% of its total assets.
Other. The Funds may not always achieve their investment objectives. The Funds'
investment objectives and non-fundamental investment policies may be changed
without shareholder approval. The Funds' fundamental investment policies listed
in the Statement of Additional Information cannot be changed without the
approval of a majority of the Funds' outstanding voting securities. Additional
information concerning certain of the securities and investment techniques
described above is contained in the Statement of Additional Information.
HOW THE FUNDS MEASURE THEIR PERFORMANCE
Performance may be quoted in sales literature and advertisements. Each Class's
average annual total returns are calculated in accordance with the SEC's formula
and assume the reinvestment of all distributions. Other total
returns differ from average annual total returns only in that they may relate to
different time periods, may represent aggregate as opposed to average annual
total returns. Performance results reflect any voluntary waivers or
reimbursement of Fund expenses by the Advisor or its affiliates. Absent these
waivers or reimbursements, performance results would have been lower.
Quotations from various publications may be included in sales literature and
advertisements. Further information about performance is contained in the
Funds' Annual Reports and in the section "Performance Measures" in the Statement
of Additional Information. Both are provided free of charge by calling the
Administrator at 1-800-426-3750. All performance information is historical and
does not predict future results.
HOW THE FUNDS ARE MANAGED
The Trustees formulate the Funds' general policies and oversee the Funds'
affairs as conducted by the Advisor.
Liberty Funds Distributor, Inc. (Distributor), a subsidiary of the
Administrator, serves as the distributor for the Funds' shares. Liberty Funds
Services, Inc. (Transfer Agent), an affiliate of the Administrator, serves as
the shareholder services and transfer agent for the Funds. Each of the Advisor,
the Administrator, the Distributor and the Transfer Agent is an indirect
wholly-owned subsidiary of Liberty Financial Companies, Inc., (Liberty
Financial) which in turn is an indirect majority-owned subsidiary of Liberty
Mutual Insurance Company (Liberty Mutual). Liberty Mutual is considered to be
the controlling entity of the Advisor, the Administrator and their affiliates.
Liberty Mutual is an underwriter of workers' compensation insurance and is a
property and casualty insurer in the U.S.
The Advisor furnishes each Fund with investment management services. For these
services, the Cub Fund and the China Fund pay the Advisor a monthly fee at an
annual rate of 1.15% of their average daily net assets. The Japan Fund pays the
Advisor a monthly fee at an annual rate of 0.95% of its average daily assets.
Pursuant to a voluntary fee waiver in fiscal year 1998, the Cub Fund, Japan Fund
and China Fund each paid the Advisor, respectively, 0.13%, 0.23% and 0.84% of
each Fund's average daily net assets.
Robert B. Cameron, Senior Vice President of the Advisor and its immediate
parent, Newport Pacific Management, Inc. (Newport Pacific), manages the Cub Fund
and co-manages the China Fund. Prior to joining the Advisor in 1996, Mr. Cameron
was a branch manager-equity sales at CS First Boston from 1995 to 1996 and a
branch manager-equity sales at Swiss Bank Corp since 1993.
David Smith, Senior Vice President of the Advisor, manages the Japan Fund and
has managed other funds or accounts on behalf of Newport Pacific, since 1994.
Prior to this affiliation with Newport Pacific, Mr. Smith was Director of North
Asian Strategies at Newport Pacific, an Executive Vice President at Carnegie
Investor Services, and a Vice President at Global Strategies since 1993.
The China Fund's portfolio management team consists of three co-managers:
Thomas R. Tuttle, as lead portfolio manager, and Robert B. Cameron and
Christopher Legallet.
Mr. Tuttle is Senior Vice President of the Advisor and of Newport Pacific.
Mr. Tuttle has been affiliated with the Advisor since 1987 and with Newport
Pacific since 1983.
Mr. Legallet is Senior Vice President of the Advisor. He has been affiliated
with the Advisor since 1997. Prior to his affiliation with the Advisor, Mr.
Legallet was a Managing Director of Jupiter Tyndall (Asia) Ltd. in Hong Kong
serving as lead manager for investment in Asia from 1992 to 1997.
See "Management of the Funds" in the Statement of Additional Information for
more information.
The Administrator provides certain administrative services to each Fund, for
which the Funds pay the Administrator a monthly fee at the annual rate of 0.25%
of each Fund's average daily net assets. The Administrator also provides pricing
and bookkeeping services to each Fund for a monthly fee of $2,250 plus a
percentage of the Funds' average net assets over $50 million.
The Transfer Agent provides transfer agency and shareholder services to each
Fund for a monthly fee at the annual rate of 0.236% of each Funds' average daily
net assets plus certain out-of-pocket expenses.
Each of the foregoing fees is subject to any reimbursement or fee waiver to
which the Advisor and its affiliates may agree.
The Advisor places all orders for purchases and sales of portfolio securities.
In selecting broker-dealers, the Advisor may consider research and brokerage
services furnished by such broker-dealers to the Advisor and its affiliates. In
recognition of the research and brokerage services provided, the Advisor may
cause the Funds to pay the selected broker-dealer a higher commission than would
have been charged by another broker-dealer not providing such services. The
Advisor may use the services of AlphaTrade Inc., the Administrator's registered
broker-dealer subsidiary, when buying or selling equity securities for the
Funds' portfolios, pursuant to procedures adopted by the Trustees under
Investment Company Act Rule 17e-1. Subject to seeking best execution, the
Advisor may consider sales of shares of the Funds (and of certain other funds
advised by the Advisor, the Administrator and their affiliates ) in selecting
broker-dealers for portfolio security transactions.
YEAR 2000
The Funds' Advisor, Administrator, Distributor and Transfer Agent (Liberty
Companies) are actively managing Year 2000 readiness for the Funds. The Liberty
Companies are taking steps that they believe are reasonably designed to address
the year 2000 problem and are communicating with vendors who provide services,
software and systems to the Funds to provide that date-related information and
data can be properly processed and calculated on and after January 1, 2000. Many
Fund service providers and vendors, including the Liberty Companies, are in the
process of making Year 2000 modifications to their , software and systems and
believe that such modifications will be completed on a timely basis prior to
January 1, 2000. The Funds will not pay the cost of these modifications.
However, no assurances can be given that all modifications required to ensure
proper data processing and calculation on and after January 1, 2000 will be
timely made or that services to the Funds will not be adversely affected.
HOW THE FUNDS VALUE THEIR SHARES
Per share net asset value is calculated by dividing the total net asset value
attributable to Class Z shares by the number of Class Z shares outstanding.
Shares of the Funds are generally valued as of the close of regular trading
(normally 4:00 p.m. Eastern time) on the New York Stock Exchange (Exchange) each
day the Exchange is open. Portfolio securities for which market quotations are
readily available are valued at current market value. Short-term investments
maturing in 60 days or less are valued at amortized cost when the Advisor
determines, pursuant to procedures adopted by the Trustees, that such cost
approximates current market value. In certain countries, the Funds may hold
foreign designated shares. If the foreign share prices are not readily available
as a result of limited share activity, the securities are valued at the last
sale price of the local shares in the principal market in which such securities
are normally traded. Korean equity securities that have reached the limit for
aggregate foreign ownership and for which premiums to the local exchange prices
may be paid by foreign investors are valued by applying a broker quoted premium
to the local share price. All other securities and assets are valued at their
fair value following procedures adopted by the Board of Trustees. 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.
DISTRIBUTIONS AND TAXES
The Funds intend to qualify as "regulated investment companies" under the
Internal Revenue Code and to distribute to shareholders net income and any net
realized gain, at least annually.
Each Fund reinvests distributions in additional Class Z shares at net asset
value unless the shareholder elects to receive cash. Regardless of the
shareholder's election, distributions of $10 or less will not be paid in cash to
shareholders but will be invested in additional Class Z shares at net asset
value. If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service selected by the
Transfer Agent is unable to deliver checks to the shareholder's address of
record, such shareholder's distribution option will automatically be converted
to having all dividend and other distributions reinvested in additional shares.
No interest will accrue on amounts represented by uncashed distribution or
redemption checks. To change your election, call the Transfer Agent for
information.
Whether you receive distributions in cash or in additional Fund shares, you must
report them as taxable income unless you are a tax-exempt institution. If you
buy shares shortly before a distribution is declared, the distribution will be
taxable although it is, in effect, a partial return of the amount invested. Each
January, information on the amount and nature of distributions for the prior
year is sent to shareholders.
HOW TO BUY SHARES
Class Z shares are offered continuously at net asset value without a sales
charge. Orders received in good form prior to the time at which the Funds
value their shares (or placed with the financial service firm before such
time and transmitted by the financial service firm before a Fund processes
that day's share transactions) will be processed based on that day's
closing net asset value. Certificates will not be issued for Class Z shares.
The Funds may refuse any purchase order for their shares. See the Statement
of Additional Information for more information.
Shareholder Services and Account Fees. A variety of shareholder services are
available. For more information about these services or your account, call
1-800-345-6611. Some services are described in the attached account application.
A shareholder's manual explaining all available services will be provided upon
request.
In June of any year, the Funds may deduct $10 (payable to the Transfer Agent)
from accounts valued at less than $1,000 unless the account value has dropped
below $1,000 solely as a result of share value depreciation. Shareholders will
receive 60 days' written notice to increase the account value before the fee is
deducted. The Funds may also deduct annual maintenance and processing fees
(payable to the Transfer Agent) in connection with certain retirement plan
accounts sponsored by the Distributor. See "Special Purchase Programs/Investor
Services" in the Statement of Additional Information for more information.
Other Classes of Shares. In addition to Class Z shares, each Fund offers three
other classes of shares, Classes A, B and C through a separate Prospectus.
Which Class is more beneficial to an investor depends on the amount and intended
length of the investment. In general, anyone eligible to purchase Class Z
shares, which do not bear 12b-1 fees or contingent deferred sales charges,
should do so in preference over other classes.
Financial service firms may receive different compensation rates for selling
different classes of shares. The Distributor may pay additional compensation to
financial service firms which have made or may make significant sales. See the
Statement of Additional Information for more information.
HOW TO SELL SHARES
Shares of the Funds may be sold on any day the Exchange is open, either directly
to a Fund or through your financial service firm. Sale proceeds generally are
sent within seven days (usually on the next business day after your request is
received in good form). However, for shares recently purchased by check, the
Funds will delay sending proceeds for 15 days in order to protect the Funds
against financial losses and dilution in net asset value caused by dishonored
purchase payment checks. To avoid delay in payment, investors are advised to
purchase shares unconditionally, such as by federal fund wire or other
immediately available funds.
Contingent Redemption Fee. The Funds can experience substantial price
fluctuations and are intended for long-term investors. Short-term "market
timers" who engage in frequent purchases and redemptions can disrupt the Funds'
investment programs and create additional transaction costs that are borne by
all shareholders. For these reasons, the Funds assess a redemption fee in the
amount of 2.00% on redemptions and exchanges of Fund shares purchased and held
for five business days or less.
The contingent redemption fee is paid to the Funds to help offset transaction
costs. The Funds use the "first-in, first-out" (FIFO) method to determine the
five business day holding period. Under this method, the date of the redemption
or exchange is compared with the earliest purchase date of shares held in the
account.
If this holding period is five business days or less, the contingent redemption
fee is assessed.
The contingent redemption fee does not apply to any shares purchased through the
reinvestment of dividends. The fee may not apply to omnibus accounts and wrap
fee programs.
Selling Shares Directly To A Fund. Send a signed letter of instruction or stock
power form to the Transfer Agent, along with any certificates for shares to be
sold. The sale price is the net asset value (less any applicable contingent
deferred sales charge) next calculated after a Fund receives the request in
proper form. Signatures must be guaranteed by a bank, a member firm of a
national stock exchange or another eligible guarantor institution. Stock power
forms are available from financial service firms, the Transfer Agent and many
banks. Additional documentation is required for sales by corporations, agents,
fiduciaries, surviving joint owners and individual retirement account holders.
For details contact:
Liberty Funds Services, Inc.
P.O. Box 1722
Boston, MA 02105-1722
1-800-345-6611
Selling Shares Through Financial Service Firms. Financial service firms must
receive requests prior to the time at which a Fund values its shares to receive
that day's price, are responsible for furnishing all necessary documentation to
the Transfer Agent and may charge for this service.
General. The sale of shares is a taxable transaction for income tax purposes.
See the Statement of Additional Information for more information. Under
unusual circumstances, a Fund may suspend repurchases or postpone payment
for up to seven days or longer, as permitted by federal securities law.
No interest will accrue on amounts represented by uncashed distribution
or redemption checks.
HOW TO EXCHANGE SHARES
Class Z shares of each Fund may be exchanged at net asset value for the Class A
shares of any other mutual funds advised by the Advisor, the Administrator
or their affiliates. Carefully read the prospectus of the fund
into which the exchange will go before submitting the request. Call
1-800-426-3750 to receive a prospectus. Call 1-800-422-3737 to exchange shares
by telephone. An exchange is a taxable capital transaction. The exchange service
may be changed, suspended or eliminated on 60 days' written notice. The Funds
will terminate the exchange privilege as to a particular shareholder if the
Advisor determines, in its sole and absolute discretion, that the shareholder's
exchange activity is likely to adversely impact the Advisor's ability to manage
the Funds' investments in accordance with their investment objectives or
otherwise harm the Funds or their remaining shareholders.
All exchanges within five business days after a purchase are subject to a 2.00%
contingent redemption fee. See "How to Sell Shares - Contingent Redemption Fee."
TELEPHONE TRANSACTIONS
All shareholders and/or their financial advisors are automatically eligible to
exchange Fund shares and to redeem up to $100,000 of the Funds' shares by
calling 1-800-422-3737 toll-free any business day between 9:00 a.m. Eastern time
and the time at which the Funds value their shares. Telephone redemptions are
limited to a total of $100,000 in a 30-day period. Redemptions that exceed
$100,000 may be done by placing a wire order trade through a broker or
furnishing a signature guaranteed request. Telephone redemption privileges may
be elected on the account application. The Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine
and may be liable for losses related to unauthorized or fraudulent transactions
in the event reasonable procedures are not employed. Such procedures include
restrictions on where proceeds of telephone redemptions may be sent, limitations
on the ability to redeem by telephone shortly after an address change, recording
of telephone lines and requirements that the redeeming shareholder and/or his or
her financial advisor provide certain identifying information. Shareholders
and/or their financial advisors wishing to redeem or exchange shares by
telephone may experience difficulty in reaching the Funds at their toll-free
telephone number during periods of drastic economic or market changes. In that
event, shareholders and/or their financial advisors should follow the procedures
for redemption or exchange by mail as described above under "How to Sell
Shares." The Advisor, the Administrator, the Transfer Agent and the Funds
reserve the right to change, modify or terminate the telephone redemption or
exchange services at any time upon prior written notice to shareholders.
Shareholders and/or their financial advisors are not obligated to transact by
telephone.
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized in 1980. The Cub Fund and
the Japan Fund each commenced investment operations in 1996 and the China Fund
commenced investment operations in 1997, each as a separate portfolio of the
Trust.
The Trust is not required to hold annual shareholder meetings, but special
meetings may be called for certain purposes. Shareholders receive one vote for
each Fund share. Shares of the Funds and any other series of the Trust that may
be in existence from time to time generally vote together except when required
by law to vote separately. Shareholders owning in the aggregate ten percent of
Trust shares may call meetings to consider removal of Trustees. Under certain
circumstances, the Trust will provide information to assist shareholders in
calling such a meeting. See the Statement of Additional Information for more
information.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
Investment Advisor
Newport Fund Management, Inc.
580 California Street, Suite 1960
San Francisco, CA 94104
Administrator
Colonial Management Associates, Inc.
One Financial Center
Boston, MA 02111-2621
Distributor
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111-2621
Custodian
The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017-2070
Shareholder Services and Transfer Agent
Liberty Funds Services, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-345-6611
Independent Accountants
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110-2624
Legal Counsel
Ropes & Gray
One International Place
Boston, MA 02110-2624
Your financial service firm is:
Printed in U.S.A.
November 30, 1998
NEWPORT TIGER
CUB FUND
NEWPORT JAPAN OPPORTUNITIES FUND
NEWPORT GREATER CHINA FUND
CLASS Z SHARES
PROSPECTUS
Newport Tiger Cub Fund seeks capital appreciation by investing primarily in
equity securities of small companies (i.e., companies with equity market
capitalizations of U.S. $1 billion or less) located in the nine Tigers of Asia
(Hong Kong, Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, The
People's Republic of China and the Philippines).
Newport Japan Opportunities Fund seeks capital appreciation by investing
primarily in equity securities of Japanese companies.
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).
For more detailed information about the Funds, call the Administrator at
1-800-426-3750 for the November 30, 1998 Statement of Additional Information.
- ----------------------------- --------------------------
NOT FDIC-INSURED MAY LOSE VALUE
NO BANK GUARANTEE
- ----------------------------- --------------------------
<PAGE>
COLONIAL TRUST II
Cross Reference Sheet
Newport Tiger Cub Fund (formerly known as Colonial Newport Tiger Cub Fund)
Newport Japan Opportunities Fund
Newport Greater China Fund
Item Number of Form N-1A Statement of Additional Information
Location or Caption
Part B
10. Cover Page
11. Table of Contents
12. Not Applicable
13. Investment Objectives and Policies;
Fundamental Investment Policies; Other
Investment Policies; Miscellaneous
Investment Practices
14. Fund Charges and Expenses; Management of
the Funds
15. Fund Charges and Expenses
16. Fund Charges and Expenses; Management of
the Funds
17. Fund Charges and Expenses; Management of
the Funds
18. Shareholder Meetings; Shareholder Liability
19. How to Buy Shares; Determination of Net
Asset Value; Suspension of Redemptions;
Special Purchase Programs/Investor
Services; Programs for Reducing or
Eliminating Sales Charge; How to Sell
Shares; How to Exchange Shares
20. Taxes
Fund Charges and Expenses; Management of
the Funds
22. Fund Charges and Expenses; Investment
Performance; Performance Measures
23. Independent Accountants
<PAGE>
NEWPORT TIGER CUB FUND
NEWPORT JAPAN OPPORTUNITIES FUND
NEWPORT GREATER CHINA FUND
Statement of Additional Information
November 30, 1998
This Statement of Additional Information (SAI) contains information which may be
useful to investors but which is not included in the Prospectus of Newport Tiger
Cub Fund, Newport Japan Opportunities Fund and Newport Greater China Fund (each
a Fund and collectively, the Funds). This SAI is not a prospectus and is
authorized for distribution only when accompanied or preceded by the Prospectus
of the Funds dated November 30, 1998. This SAI should be read together with the
Prospectus and each Fund's most recent Annual Report dated August 31, 1998.
Investors may obtain a free copy of the Prospectus and Annual Reports from
Liberty Funds Distributor, Inc. (LFDI), One Financial Center, Boston, MA
02111-2621.
Part 1 of this SAI contains specific information about the Funds. Part 2
includes information about the funds distributed by LFDI generally and
additional information about certain securities and investment techniques
described in the Funds' Prospectus.
TABLE OF CONTENTS
Part 1 Page
Definitions b
Investment Objectives and Policies b
Fundamental Investment Policies b
Other Investment Policies c
Fund Charges and Expenses c
Investment Performance l
Custodian m
Independent Accountants m
Management of the Funds m
Part 2
Miscellaneous Investment Practices 1
Taxes 11
Management of the Funds 13
Determination of Net Asset Value 19
How to Buy Shares 20
Special Purchase Programs/Investor Services 20
Programs for Reducing or Eliminating Sales Charges 21
How to Sell Shares 24
Distributions 25
How to Exchange Shares 26
Suspension of Redemptions 26
Shareholder Liability 26
Shareholder Meetings 26
Performance Measures 27
Appendix I 29
Appendix II 34
JO-16/305G-1198
<PAGE>
Part 1
NEWPORT TIGER CUB FUND
NEWPORT JAPAN OPPORTUNITIES FUND
NEWPORT GREATER CHINA FUND
Statement of Additional Information
November 30, 1998
DEFINITIONS
"Trust" Colonial Trust II
"Cub Fund" Newport Tiger Cub Fund
"Japan Fund" Newport Japan Opportunities Fund
"China Fund" Newport Greater China Fund
"Advisor" Newport Fund Management, Inc., the Funds' investment
advisor
"Administrator" Colonial Management Associates, Inc., the Funds'
administrator
"LFDI" Liberty Funds Distributor, Inc., the Funds' distributor
"LFSI" Liberty Funds Service, Inc., the Funds' shareholder
services and transfer agent
INVESTMENT OBJECTIVE AND POLICIES
The Funds' Prospectus describes the Funds' investment objectives and investment
policies. Part 1 of this SAI includes additional information concerning, among
other things, the fundamental investment policies of the Funds. Part 2 contains
additional information about the following securities and investment techniques
that are described or referred to in the Prospectus:
Small Companies (Cub Fund and China Fund)
Foreign Securities
Repurchase Agreements
Foreign Currency Transactions
Futures Contracts and Related Options
Except as indicated under "Fundamental Investment Policies," the Funds'
investment policies are not fundamental and the Trustees may change the policies
without shareholder approval. Effective June 30, 1998, the Cub Fund changed its
name from Colonial Newport Tiger Cub Fund to its current name. Effective
December 3, 1997, the Japan Fund changed its name from Colonial Newport Japan
Fund to its current name.
FUNDAMENTAL INVESTMENT POLICIES
The Investment Company Act of 1940 (Act) provides that a "vote of a majority of
the outstanding voting securities" means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of each Fund, or (2) 67% or more of
the shares present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. The following fundamental
investment policies can not be changed without such a vote.
Total assets and net assets are determined at current value for purposes of
compliance with investment restrictions and policies. All percentage limitations
will apply at the time of investment and are not violated unless an excess or
deficiency occurs as a result of such investment. For the purpose of the Act's
diversification requirement, an issuer is the entity whose revenues support the
security.
Each Fund may:
1. Borrow from banks, other affiliated funds and other entities to the
extent permitted by applicable law, provided that the Fund's borrowings
shall not exceed 33 1/3% of the value of its total assets (including the
amount borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law;
2. Only own real estate acquired as the result of owning securities and not
more than 5% of total assets;
3. Purchase and sell futures contracts and related options as long as the
total initial margin and premiums on contracts do not exceed 5% of total
assets;
4. Underwrite securities issued by others only when disposing of
portfolio securities;
5. Make loans (a) through lending of securities, (b) through the
purchase of debt instruments or similar evidences of indebtedness
typically sold privately to financial institutions, (c) through an
interfund lending program with other affiliated funds provided that
no such loan may be made if, as a result, the aggregate of such loans
would exceed 33 1/3% of the value of its total assets (taken at market
value at the time of such loans) and (d) through repurchase agreements;
6. Not concentrate more than 25% of its total assets in any one industry
or, with respect to 75% of total assets, purchase any security (other
than obligations of the U.S. government and cash items including
receivables) if as a result more than 5% of its total assets would then
be invested in securities of a single issuer or purchase the voting
securities of an issuer if, as a result of such purchases, the Fund
would own more than 10% of the outstanding voting shares of such issuer
(Cub Fund and Japan Fund); and
7. Not concentrate more than 25% of its total assets in any one industry
or, with respect to 50% of total assets, purchase any security (other
obligations of the U.S. government and cash items including receivables)
if as a result more than 5% of its total assets would then be invested
in securities of a single issuer or purchase the voting securities of an
issuer if, as a result of such purchases, the Fund would own more than
10% of the outstanding voting shares of such issuer (China Fund).
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed without a
shareholder vote, each Fund may not:
1. Purchase securities on margin, but it may receive short-term credit to clear
securities transactions and may make initial or maintenance margin deposits in
connection with futures transactions;
<PAGE>
2. Have a short securities position, unless the Fund owns, or owns rights
(exercisable without payment) to acquire, an equal amount of such
securities; and
3. Invest up to 15% of its net assets in illiquid assets.
Notwithstanding the investment policies and restrictions of the Funds, the Funds
may invest all or a portion of their investable assets in investment companies
with substantially the same investment objective, policies and restrictions as
the Funds.
FUND CHARGES AND EXPENSES
Under the China Fund's and Cub Fund's management agreements, each Fund pays the
Advisor a monthly fee based on the average daily net assets of each Fund at the
annual rate of 1.15%.
Under the Japan Fund's management agreement, the Fund pays the Advisor a monthly
fee based on the average daily net assets of the Fund at the annual rate of
0.95%
Under each Fund's administration agreement, each Fund pays the Administrator a
monthly fee at the annual rate of 0.25% of its respective average daily net
assets and a monthly pricing and bookkeeping fee of $2,250 plus the following
percentages of each Fund's average daily net assets over $50 million:
0.035% on the next $950 million
0.025% on the next $1 billion
0.015% on the next $1 billion
0.001% on the excess over $3 billion
Under the Funds' transfer agency and shareholder servicing agreement, each Fund
pays LFSI a monthly fee at the annual rate of 0.236% of average daily net
assets, plus certain out-of-pocket expenses.
Recent Fees paid to the Advisor, Administrator, LFDI and LFSI (dollars in
thousands)
<TABLE>
<CAPTION>
Cub Fund
Period June 3, 1996
(commencement of investment
Year ended August 31 operations)
1998 1997 through August 31, 1996
<S> <C> <C> <C>
Management fee $163 $184 $15
Administration fee 34 40 3
Bookkeeping fee 27 27 7
Shareholder services and transfer agent 48 51 3
fee
12b-1 fees:
Service fee (Classes A, B and C) 34 37 2
Distribution fee (Class B) 43 46 3
Distribution fee (Class C) 7 10 1
Fees or expenses waived or borne by
the Advisor/Administrator (137) (198) (67)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Japan Fund
Period June 3, 1996
(commencement of investment
Year ended August 31 operations)
1998 1997 through August 31, 1996
<S> <C> <C> <C>
Management fee $138 $80 $7
Administration fee 36 21 2
Bookkeeping fee 27 27 7
Shareholder services and transfer agent 44 25 2
fee
12b-1 fees:
Service fee (Classes A, B and C) 32 18 (a)
Distribution fee (Class B) 48 26 1
Distribution fee (Class C) 19 11 1
Fees or expenses waived or borne by
the Advisor/Administrator (104) (151) (65)
</TABLE>
<TABLE>
<CAPTION>
China Fund
Period May 16, 1997
Year ended August 31 (effective date of registration)
1998 through August 31, 1997
<S> <C> <C>
Management fee $842 $154
Administration fee 183 32
Bookkeeping fee 36 10
Shareholder services and transfer agent 245 35
fee
12b-1 fees:
Service fee (Classes A, B and C) 183 26
Distribution fee (Class B) 16 1
Distribution fee (Class C) 5
Fees or expenses waived or borne by
the Advisor/Administrator (231) (72)
(a) Rounds to less than one.
</TABLE>
Brokerage Commissions (dollars in thousands)
<TABLE>
<CAPTION>
Cub Fund
Period June 3, 1996
(commencement of investment
Year ended August 31 operations)
1998 1997 through August 31, 1996
<S> <C> <C> <C>
Total commissions $98 $214 $27
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Japan Fund
Period June 3, 1996
(commencement of investment
Year ended August 31 operations)
1998 1997 through August 31, 1996
<S> <C> <C> <C>
Total commissions $22 $57 $18
Directed transactions(b) 0 0 0
Commissions on directed transactions 0 0 0
</TABLE>
<TABLE>
<CAPTION>
China Fund
Period May 16, 1997
Year ended August 31 (effective date of
registration)
1998 Through August 31, 1997
<S> <C> <C>
Total commissions $417 $543
Directed transactions(b) 0 0
Commissions on directed transactions 0 0
(b) See "Management of the Funds - Portfolio Transactions - Brokerage and research services" in Part 2 of this SAI.
</TABLE>
Trustees and Trustees' Fees
For the fiscal year ended August 31, 1998 and the calendar year ended December
31, 1997, the Trustees received the following compensation for serving as
Trustees (c):
<TABLE>
<CAPTION>
Total Compensation
From Trust and Fund
Aggregate Compensation Aggregate Aggregate Complex Paid To The
From Cub Fund For Year Compensation From Japan Compensation From China Trustees For The
Ended August 31,1998 Fund For Year Ended Fund For Year Ended Calendar Year Ended
Trustee August 31, 1998 August 31, 1998 December 31, 1997(d)
- ------- --------------- --------------- --------------------
<S> <C> <C> <C> <C>
Robert J. Birnbaum $819 $817 $673 $93,949
Tom Bleasdale 911(e) 908(f) 733(g) 106,432(h)
John Carberry(p) --- --- --- ---
Lora S. Collins 802 800 651 93,949
James E. Grinnell 821(i) 839(i) 700(j) 94,698(k)
William D. Ireland, 537 533 315 101,445
Jr.(q)
Richard W. Lowry 810 807 660 94,698
Salvatore Macera(p) --- --- --- ---
William E. Mayer 838 837 708 89,949
James L. Moody, Jr. 864(l) 863(m) 727(n) 98,447(o)
John J. Neuhauser 863 862 726 99,945
George L. Shinn(q) 510 505 305 103,443
Thomas E. Stitzel(p) --- --- --- ---
Robert L. Sullivan 890 888 722 99,945
Anne-Lee Verville(p) --- --- --- ---
Sinclair Weeks, Jr.(q) 529 525 282 101,445
(c) The Fund does not currently provide pension or retirement plan benefits to
the Trustees.
(d) At December 31, 1997, the Colonial Funds complex consisted of 39 open-end and 5 closed-end management investment
company portfolios.
(e) Includes $474 payable in later years as deferred compensation.
(f) Includes $472 payable in later years as deferred compensation.
(g) Includes $354 payable in later years as deferred compensation.
(h) Includes $57,454 payable in later years as deferred compensation.
(i) Includes $30 payable in later years as deferred compensation.
(j) Includes $10 payable in later years as deferred compensation.
(k) Includes $4,797 payable in later years as deferred compensation.
(l) Total compensation of $864 payable in later years as deferred compensation.
(m) Includes $796 payable in later years as deferred compensation.
(n) Total compensation of $727 payable in later years as deferred compensation.
(o) Total compensation of $98,447 will be payable in later years as deferred compensation.
(p) Elected by shareholders of the Trust on October 30, 1998.
(q) Retired as Trustee of the Trust effective April 24, 1998.
</TABLE>
The following table sets forth the amount of compensation paid to Messrs.
Birnbaum, Grinnell and Lowry in their capacities as Trustees or Directors of the
Liberty All-Star Equity Fund and of the Liberty All-Star Growth Fund, Inc.
(together, Liberty Funds) for service during the calendar year ended December
31, 1997:
Total Compensation From Liberty
Funds For The Calendar Year
Trustee Ended December 31, 1997 (r)
Robert J. Birnbaum $26,800
James E. Grinnell 26,800
Richard W. Lowry 26,800
(r) The Liberty Funds are advised by Liberty Asset Management Company
(LAMCO). LAMCO is an indirect wholly-owned subsidiary of Liberty
Financial Companies, Inc. (Liberty Financial) (an intermediate parent of
the Advisor and the Administrator).
The following table sets forth the compensation paid to Messrs. Macera and
Stitzel in their capacities as Trustees of Liberty Variable Investment Trust
(LVIT), which offers nine funds: Colonial Growth and Income Fund, Variable
Series; Stein Roe Global Utilities Fund, Variable Series; Colonial International
Fund for Growth, Variable Series; Colonial U.S. Stock Fund, Variable Series;
Colonial Strategic Income Fund, Variable Series; Newport Tiger Fund, Variable
Series; Liberty All-Star Equity Fund, Variable Series; Colonial Small Cap Value
Fund, Variable Series; and Colonial High Yield Securities Fund, Variable Series,
for serving during the fiscal year ended December 31, 1997:
<TABLE>
<CAPTION>
Total Compensation From the LVIT and
Investment Companies which are Series
Trustee Aggregate 1997 Compensation(s) of LVIT in 1997(t)
- ------- ------------------------------ ----------------
<S> <C> <C>
Salvatore Macera $12,500 $33,500
Thomas E. Stitzel 12,500 33,500
(s) Consists of Trustee fees in the amount of (i) a $5,000 annual retainer,
(ii) a $1,500 meeting fee for each meeting attended in person and (iii) a
$500 meeting fee for each telephone meeting.
(t) Includes Trustee fees paid by LVIT and by Stein Roe Variable Investment
Trust.
</TABLE>
Ownership of the Funds
At November 6, 1998 the officers and Trustees of the Trust as a group owned less
than 1% of the shares of the Funds. At November 7, 1998, the following
shareholders of record owned more than 5% of a class of the Funds' outstanding
shares:
Cub Fund
Class A
Merrill Lynch Pierce Fenner & Smith, Inc. 9.38%
for the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive E, 2nd Fl.
Jacksonville, Florida 32246
Class B
Merrill Lynch Pierce Fenner & Smith, Inc. 12.16%
For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive E, 2nd Fl.
Jacksonville, Florida 32246
Class C
Merrill Lynch Pierce Fenner & Smith, Inc. 17.70%
For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive E, 2nd Fl.
Jacksonville, Florida 32246
Class Z
BankBoston NA Cust 6.83%
Lindsay Cook IRA
48 Arapahoe Road
Newton, Massachusetts 02165
BankBoston NA Cust 7.93%
Cynthia A. Clark Rollover IRA
40 Nahanton Avenue
Milton, Massachusetts 02186
Thomas R & Sylvia Tuttle 10.48%
c/o Newport Pacific Management
580 California Street
San Francisco, California 94104
Gretchen C. Keleher 6.53%
3045 Corrales Road
Corrales, New Mexico 87048
BankBoston NA Cust 16.90%
Robert B. Cameron Rollover IRA
6 Robertson Terrace
Mill Valley, California 94941
Peter D. Keleher 6.49%
3945 Corrales Road
Corrales, New Mexico 87048
Japan Fund
Class A
Merrill Lynch Pierce Fenner & Smith for the Sole
Benefit of its Customers 6.87%
Attn.: Fund Administration
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, Florida 32246
Liberty Financial Companies, Inc. 6.42%
Attn.: Michael Santilli
600 Atlantic Avenue
Boston, Massachusetts 02110
Charles Schwab & Co. Inc. 11.29%
Attn.: Mutual Fund Department
101 Montgomery Street
San Francisco, California 94104
Class B
Merrill Lynch Pierce Fenner & Smith for the Sole
Benefit of its Customers 25.73%
Attn.: Fund Administration
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, Florida 32246
Class C
Liberty Financial Companies, Inc. 12.18%
Attn.: Michael Santilli
600 Atlantic Avenue
Boston, Massachusetts 02110
Merrill Lynch Pierce Fenner & Smith for the Sole
Benefit of its Customers 23.85%
Attn.: Fund Administration
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, Florida 32246
Class Z
Liberty Financial Companies, Inc. 79.80%
Attn.: Michael Santilli
600 Atlantic Avenue
Boston, Massachusetts 02110
Harold W. Cogger 5.77%
P.O. Box 418
Hamilton, Massachusetts 01936
Thomas C. Theobald 9.20%
222 West Adams Street, Suite 3300
Chicago, Illinois 60606
China Fund
Class A
Merrill Lynch Pierce Fenner & Smith 22.84%
For the Sole Benefit of its Customers
Attn.: Fund Administration
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, Florida 32246
Class B
Merrill Lynch Pierce Fenner & Smith 31.59%
For the Sole Benefit of its Customers
Attn.: Fund Administration
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, Florida 32246
Class C
Colonial Management Associates, Inc. 10.30%
Attn.: Phil Iudice
One Financial Center, 13th Floor
Boston, Massachusetts 02111-2621
Merrill Lynch Pierce Fenner & Smith 33.69%
For the Sole Benefit of its Customers
Attn.: Fund Administration
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, Florida 32246
Class Z
Colonial Management Associates, Inc. 95.42%
Attn.: Phil Iudice
One Financial Center, 13th Floor
Boston, Massachusetts 02111-2621
<TABLE>
<CAPTION>
At October 31, 1998, there were the following number of record holders of each
Fund:
<C> <C> <C> <C>
Class A Shares Class B Shares Class C Shares Class Z Shares
<S>
Cub Fund 1035 915 131 27
Japan Fund 367 567 124 17
China Fund 7832 221 70 3
</TABLE>
Sales Charges (dollars in thousands)
<TABLE>
<CAPTION>
Cub Fund
Class A Shares
Period June 3, 1996
Year ended August 31, (commencement of investment operations)
1998 1997 through August 31, 1996
---- ---- -----------------------
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share sales $66 $180 $94
Initial sales charges retained by LFDI 11 $ 26 $81
Aggregate contingent deferred sales charge
(CDSC) 1 ----- -----
(Class A)
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Period June 3, 1996
Year ended August 31, (commencement of investment operations)
1998 1997 through August 31, 1996
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions
retained by LFDI $37 $14 $1
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Period June 3, 1996
(commencement of investment operations)
Year ended August 31, through August 31, 1996
--------------------- -----------------------
1998 1997
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions
retained by LFDI $5 $2 $0
</TABLE>
<TABLE>
<CAPTION>
Japan Fund
Class A Shares
Period June 3, 1996
(commencement of investment operations)
Year ended August 31, through August 31, 1996
--------------------- -----------------------
1998 1997
<S> <C> <C> <C>
Aggregate initial sales charges on Fund share $58 $64 $24
sales
Initial sales charges retained by LFDI 9 10 3
Aggregate CDSC (Class A) 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Period June 3, 1996
(commencement of investment operations)
Year ended August 31 through August 31, 1996
-------------------- -----------------------
1998 1997
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions retained by
LFDI $62 $14 (u)
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Period June 3, 1996
(commencement of investment operations)
Year ended August 31 through August 31, 1996
-------------------- -----------------------
1998 1997
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions retained by
LFDI $14 $0 $0
</TABLE>
<TABLE>
<CAPTION>
China Fund
Class A Shares
Period May 16, 1997
Year ended (effective date of registration)
August 31, 1998 through August 31, 1997
<S> <C> <C>
Aggregate initial sales charges on Fund share $228 $0
sales
Initial sales charges retained by LFDI 35 0
Aggregate CDSC on Fund redemptions 207 21
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Period May 16, 1997
Year ended (effective date of registration)
August 31, 1998 through August 31, 1997
<S> <C> <C>
Aggregate CDSC on Fund redemptions $11 $0
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Period May 16, 1997
Year ended (effective date of registration)
August 31, 1998 through August 31, 1997
<S> <C> <C>
Aggregate CDSC on Fund redemptions $7 $0
</TABLE>
(u) Rounds to less than one.
Contingent Redemption Fees
<TABLE>
<CAPTION>
Cub Fund
<S> <C> <C> <C> <C>
Class A Shares Class B Shares Class C Shares Class Z Shares
Contingent Redemption Fees charged on Fund share
redemptions retained by the Fund $17 $12 $2,169 $0
Japan Fund
Class A Shares Class B Shares Class C Shares Class Z Shares
Contingent Redemption Fees charged on Fund share
redemptions retained by the Fund $121 $86 $5,926 $0
China Fund
Class A Shares Class B Shares Class C Shares Class Z Shares
Contingent Redemption Fees charged on Fund share
redemptions retained by the Fund $2,732 $198 $6,869 $0
</TABLE>
12b-1 Plans, CDSC and Conversion of Shares
Each Fund offers four classes of shares - Class A, Class B, Class C and Class Z.
The Funds may in the future offer other classes of shares. The Trustees have
approved a 12b-1 Plan (Plan) for each Fund pursuant to Rule 12b-1 under the Act.
Under each Fund's Plan, each Fund pays LFDI monthly a service fee at an annual
rate of 0.25% of the Fund's net assets attributed to Class A, Class B and Class
C shares. The Fund also pays LFDI monthly a distribution fee at an annual rate
of 0.75% of average daily net assets attributed to Class B and Class C shares.
LFDI may use the entire amount of such fees to defray the cost of commissions
and service fees paid to financial service firms (FSFs) and for certain other
purposes. Since the distribution and service fees are payable regardless of the
amount of LFDI's expenses, LFDI may realize a profit from the fees. The Plan
authorizes any other payments by the Funds to LFDI and its affiliates (including
the Advisor and the Administrator) to the extent that such payments might be
construed to be indirect financing of the distribution of Fund's shares.
The Trustees believe the Plan could be a significant factor in the growth and
retention of each Funds' assets resulting in a more advantageous expense ratio
and increased investment flexibility which could benefit each class of Funds'
shareholders. The Plan will continue in effect from year to year so long as
continuance is specifically approved at least annually by a vote of the
Trustees, including the Trustees who are not interested persons of the Trust and
have no direct or indirect financial interest in the operation of the Plan or in
any agreements related to the Plan (independent Trustees), cast in person at a
meeting called for the purpose of voting on the Plan. The Plan may not be
amended to increase the fee materially without approval by vote of a majority of
the outstanding voting securities of the relevant class of shares and all
material amendments of the Plan must be approved by the Trustees in the manner
provided in the foregoing sentence. The Plan may be terminated at any time by
vote of a majority of the independent Trustees or by vote of a majority of the
outstanding voting securities of the relevant class of shares. The continuance
of the Plan will only be effective if the selection and nomination of the
Trustees of the Trust who are not interested persons of the Trust is effected by
such disinterested Trustees.
Class A shares are offered at net asset value plus varying sales charges which
may include a CDSC. Class B shares are offered at net asset value and are
subject to a CDSC if redeemed within six years after purchase. Class C shares
are offered at net asset value and are subject to a 1.00% CDSC on redemptions
within one year after purchase. Class Z shares are offered at net asset value
and are not subject to a CDSC. The CDSCs are described in the Prospectus. All
classes of shares of the Funds are subject to a 2.00% contingent redemption fee,
as described in the Prospectus.
No CDSC will be imposed on shares derived from reinvestment of distributions or
amounts representing capital appreciation. In determining the applicability and
rate of any CDSC, it will be assumed that a redemption is made first of shares
representing capital appreciation, next of shares representing reinvestment of
distributions and finally of other shares held by the shareholder for the
longest period of time.
Eight years after the end of the month in which a Class B share is purchased,
such share and a pro rata portion of any shares issued on the reinvestment of
distributions will be automatically converted into Class A shares, having an
equal value, which are not subject to the distribution fee.
Sales-related expenses (dollars in thousands) of LFDI relating to the Funds for
the fiscal year ended August 31, 1998, were:
<TABLE>
<CAPTION>
Cub Fund
Class A Shares Class B Shares Class C Shares
<S> <C> <C> <C>
Fees to FSFs $ 8 $79 $12
Cost of sales material relating to the Fund
(including printing and mailing expenses) 17 7 5
Allocated travel, entertainment and other
promotional
expenses (including advertising) 17 6 4
</TABLE>
<TABLE>
<CAPTION>
Japan Fund
Class A Shares Class B Shares Class C Shares
<S> <C> <C> <C>
Fees to FSFs $4 $133 $21
Cost of sales material relating to the Fund
(including printing and mailing expenses) 11 16 7
Allocated travel, entertainment and other
promotional
expenses (including advertising) 11 11 7
</TABLE>
<TABLE>
<CAPTION>
China Fund
Class A Shares Class B Shares Class C Shares
<S> <C> <C> <C>
Fees to FSFs $15 $67 $12
Cost of sales material relating to the Fund
(including printing and mailing expenses) 721 23 10
Allocated travel, entertainment and other
promotional
expenses (including advertising) 27 6 4
</TABLE>
INVESTMENT PERFORMANCE
<TABLE>
<CAPTION>
Each Fund's average annual total returns at August 31, 1998 were:
Cub Fund
Class A Shares
Period June 3, 1996
(commencement of investment operations)
1 year Through August 31, 1998
<S> <C> <C>
With sales charge of 5.75%(v) (59.61)% (35.95)%
Without sales charge(v) (57.14)% (34.24)%
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Period June 3, 1996
(commencement of investment operations)
1 year Through August 31, 1998
<S> <C> <C>
With applicable CDSC(v) (59.66)% (35.64)%
Without CDSC(v) (57.54)% (34.77)%
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Period June 3, 1996
(commencement of investment operations)
1 year Through August 31, 1998
<S> <C> <C>
With applicable CDSC(v) (57.96)% (34.77)%
Without CDSC(v) (57.54)% (34.77)%
</TABLE>
<TABLE>
<CAPTION>
Class Z Shares
Period June 3, 1996
(commencement of investment operations)
1 year through August 31, 1998
<S> <C> <C>
(57.06)% (34.09)%
</TABLE>
<TABLE>
<CAPTION>
Japan Fund
Class A Shares
Period June 3, 1996
(commencement of investment operations)
1 Year through August 31, 1998
<S> <C> <C>
With sales charge of 5.75%(v) (18.59)% (8.55)%
Without sales charge(v) (13.62)% (6.10)%
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Period June 3, 1996
(commencement of investment operations)
1 Year through August 31, 1998
<S> <C> <C>
With applicable CDSC(v) (18.44)% (8.03)%
Without CDSC(v) (14.16)% (6.78)%
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Period June 3, 199
(commencement of investment operations)
1 Year through August 31, 1998
<S> <C> <C>
With applicable CDSC(v) (15.03)% (6.83)%
Without CDSC(v) (14.18)% (6.83)%
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Class Z Shares
Period June 3, 1996
(commencement of investment operations)
1 Year through August 31, 1998
<S> <C> <C>
(13.30)% (5.86)%
</TABLE>
<TABLE>
<CAPTION>
China Fund
Class A Shares
Period May 16, 1997
(commencement of investment operations)
1 Year through August 31, 1998
<S> <C> <C>
With sales charge of 5.75%(v) (66.46)% (45.99)%
Without sales charge(v) (64.42)% (43.46)%
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Period May 16, 1997
(commencement of investment operations)
through August 31, 1998
<S> <C> <C>
With 5.00% CDSC(v) (66.13)% (45.21)%
Without CDSC(v) (64.36)% (43.46)%
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Period May 16, 1997
(commencement of investment operations)
through August 31, 1998
<S> <C> <C>
With 1.00% CDSC(v) (64.82)% (43.60)%
Without CDSC(v) (64.46)% (43.60)%
</TABLE>
<TABLE>
<CAPTION>
Class Z Shares
Period May 16, 1997
(commencement of investment operations)
through August 31, 1998
<S> <C> <C>
(64.19)% (43.17)%
</TABLE>
(v) Performance results reflect any voluntary waiver or reimbursement by
the Advisor, the Administrator and/or their affiliates of class
expenses. Absent this waiver or reimbursement arrangement, performance
results would have been lower. See the Prospectus for details.
See Part 2 of this SAI, "Performance Measures," for how calculations are made.
CUSTODIAN
The Funds' custodian is The Chase Manhattan Bank. The custodian is responsible
for safeguarding each Fund's cash and securities, receiving and delivering
securities and collecting each Fund's interest and dividends.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP are the Funds' independent accountants providing
audit and tax return preparation services and assistance and consultation in
connection with the review of various Securities and Exchange Commission
filings. The financial statements incorporated by reference in this SAI have
been so incorporated and the financial highlights included in the Prospectus
have been so included, in reliance upon the report of PricewaterhouseCoopers LLP
given on the authority of said firm as experts in accounting and auditing
The financial statements and report of Independent Accountants appearing in each
Fund's August 31, 1998 Annual Report are incorporated in this SAI by reference.
MANAGEMENT OF THE FUNDS
The Advisor is the investment advisor to each of the Funds. The Advisor is a
direct majorty-owned subsidiary of Newport Pacific Management, Inc. (Newport
Pacific), 580 California Street, San Francisco, CA 94104. Newport Pacific is a
direct wholly-owned subsidiary of Liberty Newport Holdings, Limited (Liberty
Newport), which in turn is a direct wholly-owned subsidiary of Liberty Financial
Companies, Inc. (Liberty Financial), which in turn is a direct majority owned
subsidiary of Liberty Corporate Holdings, Inc., (LCH) which in turn is a direct
wholly-owned subsidiary of LFC Holdings, Inc., which in turn is a direct
wholly-owned subsidiary of Liberty Mutual Equity Corporation, which in turn is a
direct wholly-owned subsidiary of Liberty Mutual Insurance Company (Liberty
Mutual). Liberty Mutual is an underwriter of workers' compensation insurance and
a property and casualty insurer in the U.S. Liberty Financial's address is 600
Atlantic Avenue, Boston, MA 02210. Liberty Mutual's address is 175 Berkeley
Street, Boston, MA 02117.
<TABLE>
<CAPTION>
Officers of the Funds (in addition to those listed in Part 2 of this SAI).
<S> <C> <C> <C>
Name Age Position with Fund Principal Occupation During Past Five Years
Robert B. Cameron(x) 44 Vice President Senior Vice President of the Advisor and Newport
Pacific since 1996 (formerly branch manager -
equity sales at CS First Boston and Swiss Bank
Corp.)
Lynda Couch(x) 55 Vice President Senior Vice President of the Advisor and Newport
Pacific since 1996 (formerly Vice President of
the Advisor and Newport Pacific and Vice
President - Research at Global Strategies and at
Smith Bellingham International, Inc.)
John M. Mussey(x) 56 Vice President President of the Advisor and President and
Director of Newport Pacific
David Smith(x) 57 Vice President Senior Vice President of the Advisor since 1996
(formerly Director of North Asian Strategies at
Newport Pacific, Executive Vice President at
Carnegie Investor Services and a Vice President
at Global Strategies)
Thomas R. Tuttle(x) 56 Vice President Senior Vice President of the Advisor and Newport
Pacific, respectively
</TABLE>
The other officers and the trustees of the Funds are described under "Management
of the Funds" in Part 2 of this SAI.
(x) The business address of each officer is 580 California Street, Suite 1960,
San Francisco, CA 94104.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART 2
The following information applies generally to most funds advised by the
Advisor. "Funds" include each series of Colonial Trust I, Colonial Trust II,
Colonial Trust III, Colonial Trust IV, Colonial Trust V, Colonial Trust VI and
Colonial Trust VII. In certain cases, the discussion applies to some but not all
of the funds, and you should refer to your Fund's Prospectus and to Part 1 of
this SAI to determine whether the matter is applicable to your Fund. You will
also be referred to Part 1 for certain data applicable to your Fund.
MISCELLANEOUS INVESTMENT PRACTICES
Part 1 of this Statement lists on page b which of the following investment
practices are available to your Fund. If an investment practice is not listed in
Part 1 of this SAI, it is not applicable to your Fund.
Short-Term Trading
In seeking the fund's investment objective, the Advisor will buy or sell
portfolio securities whenever it believes it is appropriate. The Advisor's
decision will not generally be influenced by how long the fund may have owned
the security. From time to time the fund will buy securities intending to seek
short-term trading profits. A change in the securities held by the fund is known
as "portfolio turnover" and generally involves some expense to the fund. These
expenses may include brokerage commissions or dealer mark-ups and other
transaction costs on both the sale of securities and the reinvestment of the
proceeds in other securities. If sales of portfolio securities cause the fund to
realize net short-term capital gains, such gains will be taxable as ordinary
income. As a result of the fund's investment policies, under certain market
conditions the fund's portfolio turnover rate may be higher than that of other
mutual funds. The fund's portfolio turnover rate for a fiscal year is the ratio
of the lesser of purchases or sales of portfolio securities to the monthly
average of the value of portfolio securities, excluding securities whose
maturities at acquisition were one year or less. The fund's portfolio turnover
rate is not a limiting factor when the Advisor considers a change in the fund's
portfolio.
Lower Rated Debt Securities
Lower rated debt securities are those rated lower than Baa by Moody's, BBB by
S&P, or comparable unrated debt securities. Relative to debt securities of
higher quality,
1. an economic downturn or increased interest rates may have a more
significant effect on the yield, price and
potential for default for lower rated debt securities;
2. the secondary market for lower rated debt securities may at times become
less liquid or respond to adverse publicity or investor perceptions,
increasing the difficulty in valuing or disposing of the bonds;
3. the Advisor's credit analysis of lower rated debt securities may have a
greater impact on the fund's achievement of its investment objective; and
4. lower rated debt securities may be less sensitive to interest rate
changes, but are more sensitive to adverse economic developments.
In addition, certain lower rated debt securities may not pay interest in cash on
a current basis.
Small Companies
Smaller, less well established companies may offer greater opportunities for
capital appreciation than larger, better established companies, but may also
involve certain special risks related to limited product lines, markets, or
financial resources and dependence on a small management group. Their securities
may trade less frequently, in smaller volumes, and fluctuate more sharply in
value than securities of larger companies.
Foreign Securities
The fund may invest in securities traded in markets outside the United States.
Foreign investments can be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations. There may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing and financial
reporting standards comparable to those applicable to U.S. companies. Securities
of some foreign companies are less liquid or more volatile than securities of
U.S. companies, and foreign brokerage commissions and custodian fees may be
higher than in the United States. Investments in foreign securities can involve
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets
and imposition of withholding taxes on dividend or interest payments. Foreign
securities, like other assets of the fund, will be held by the fund's custodian
or by a subcustodian or depository. See also "Foreign Currency Transactions"
below.
The fund may invest in certain Passive Foreign Investment Companies (PFICs)
which may be subject to U.S. federal income tax on a portion of any "excess
distribution" or gain (PFIC tax) related to the investment. The PFIC tax is the
highest ordinary income rate, and it could be increased by an interest charge on
the deemed tax deferral.
The fund may possibly elect to include in its income its pro rata share of the
ordinary earnings and net capital gain of PFICs. This election requires certain
annual information from the PFICs which in many cases may be difficult to
obtain. An alternative election would permit the fund to recognize as income any
appreciation (and to a limited extent, depreciation) on its holdings of PFICs as
of the end of its fiscal year. See "Taxation" below.
Zero Coupon Securities (Zeros)
The fund may invest in zero coupon securities which are securities issued at a
significant discount from face value and pay interest only at maturity rather
than at intervals during the life of the security and in certificates
representing undivided interests in the interest or principal of mortgage-backed
securities (interest only/principal only), which tend to be more volatile than
other types of securities. The fund will accrue and distribute income from
stripped securities and certificates on a current basis and may have to sell
securities to generate cash for distributions.
Step Coupon Bonds (Steps)
The fund may invest in debt securities which pay interest at a series of
different rates (including 0%) in accordance with a stated schedule for a series
of periods. In addition to the risks associated with the credit rating of the
issuers, these securities may be subject to additional volatility risk than
fixed rate debt securities.
Tender Option Bonds
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate. The
Advisor will consider on an ongoing basis the creditworthiness of the issuer of
the underlying municipal securities, of any custodian, and of the third-party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying municipal securities and for other
reasons.
Pay-In-Kind (PIK) Securities
The fund may invest in securities which pay interest either in cash or
additional securities. These securities are generally high yield securities and
in addition to the other risks associated with investing in high yield
securities, are subject to the risks that the interest payments which consist of
additional securities are also subject to the risks of high yield securities.
Money Market Instruments
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposits are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-term
needs. Participation Interests include the underlying securities and any related
guaranty, letter of credit, or collateralization arrangement which the fund
would be allowed to invest in directly.
Securities Loans
The fund may make secured loans of its portfolio securities amounting to not
more than the percentage of its total assets specified in Part 1 of this SAI,
thereby realizing additional income. The risks in lending portfolio securities,
as with other extensions of credit, consist of possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. As a matter of policy, securities loans are made to banks and
broker-dealers pursuant to agreements requiring that loans be continuously
secured by collateral in cash or short-term debt obligations at least equal at
all times to the value of the securities on loan. The borrower pays to the fund
an amount equal to any dividends or interest received on securities lent. The
fund retains all or a portion of the interest received on investment of the cash
collateral or receives a fee from the borrower. Although voting rights, or
rights to consent, with respect to the loaned securities pass to the borrower,
the fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The fund may also call such loans in order
to sell the securities involved.
Forward Commitments ("When-Issued" and "Delayed Delivery" Securities)
The fund may enter into contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments" and "when
issued securities") if the fund holds until the settlement date, in a segregated
account, cash or liquid securities in an amount sufficient to meet the purchase
price, or if the fund enters into offsetting contracts for the forward sale of
other securities it owns. Forward commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Where such purchases are made
through dealers, the fund relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the fund of an advantageous
yield or price. Although the fund will generally enter into forward commitments
with the intention of acquiring securities for its portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of a
commitment prior to settlement if the Advisor deems it appropriate to do so. The
fund may realize short-term profits or losses upon the sale of forward
commitments.
Mortgage Dollar Rolls
In a mortgage dollar roll, the fund sells a mortgage-backed security and
simultaneously enters into a commitment to purchase a similar security at a
later date. The fund either will be paid a fee by the counterparty upon entering
into the transaction or will be entitled to purchase the similar security at a
discount. As with any forward commitment, mortgage dollar rolls involve the risk
that the counterparty will fail to deliver the new security on the settlement
date, which may deprive the fund of obtaining a beneficial investment. In
addition, the security to be delivered in the future may turn out to be inferior
to the security sold upon entering into the transaction. Also, the transaction
costs may exceed the return earned by the fund from the transaction.
Mortgage-Backed Securities
Mortgage-backed securities, including "collateralized mortgage obligations"
(CMOs) and "real estate mortgage investment conduits" (REMICs), evidence
ownership in a pool of mortgage loans made by certain financial institutions
that may be insured or guaranteed by the U.S. government or its agencies. CMOs
are obligations issued by special-purpose trusts, secured by mortgages. REMICs
are entities that own mortgages and elect REMIC status under the Internal
Revenue Code. Both CMOs and REMICs issue one or more classes of securities of
which one (the Residual) is in the nature of equity. The funds will not invest
in the Residual class. Principal on mortgage-backed securities, CMOs and REMICs
may be prepaid if the underlying mortages are prepaid. Prepayment rates for
mortgage-backed securities tend to increase as interest rates decline
(effectively shortening the security's life) and decrease as interest rates rise
(effectively lengthening the security's life). Because of the prepayment
feature, these securities may not increase in value as much as other debt
securities when interest rates fall. A fund may be able to invest prepaid
principal only at lower yields. The prepayment of such securities purchased at a
premium may result in losses equal to the premium.
Repurchase Agreements
The fund may enter into repurchase agreements. A repurchase agreement is a
contract under which the fund acquires a security for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the fund to resell such security at a fixed time and price
(representing the fund's cost plus interest). It is the fund's present intention
to enter into repurchase agreements only with commercial banks and registered
broker-dealers and only with respect to obligations of the U.S. government or
its agencies or instrumentalities. Repurchase agreements may also be viewed as
loans made by the fund which are collateralized by the securities subject to
repurchase. The Advisor will monitor such transactions to determine that the
value of the underlying securities is at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, the fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the fund sells a security and agrees to
repurchase the same security at a mutually agreed upon date and price. A reverse
repurchase agreement may also be viewed as the borrowing of money by the fund
and, therefore, as a form of leverage. The fund will invest the proceeds of
borrowings under reverse repurchase agreements. In addition, the fund will enter
into a reverse repurchase agreement only when the interest income expected to be
earned from the investment of the proceeds is greater than the interest expense
of the transaction. The fund will not invest the proceeds of a reverse
repurchase agreement for a period which exceeds the duration of the reverse
repurchase agreement. The fund may not enter into reverse repurchase agreements
exceeding in the aggregate one-third of the market value of its total assets,
less liabilities other than the obligations created by reverse repurchase
agreements. Each fund will establish and maintain with its custodian a separate
account with a segregated portfolio of securities in an amount at least equal to
its purchase obligations under its reverse repurchase agreements. If interest
rates rise during the term of a reverse repurchase agreement, entering into the
reverse repurchase agreement may have a negative impact on a money market fund's
ability to maintain a net asset value of $1.00 per share.
Options on Securities
Writing covered options. The fund may write covered call options and covered put
options on securities held in its portfolio when, in the opinion of the Advisor,
such transactions are consistent with the fund's investment objective and
policies. Call options written by the fund give the purchaser the right to buy
the underlying securities from the fund at a stated exercise price; put options
give the purchaser the right to sell the underlying securities to the fund at a
stated price.
The fund may write only covered options, which means that, so long as the fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The fund may
write combinations of covered puts and calls on the same underlying security.
The fund will receive a premium from writing a put or call option, which
increases the fund's return on the underlying security if the option expires
unexercised or is closed out at a profit. The amount of the premium reflects,
among other things, the relationship between the exercise price and the current
market value of the underlying security, the volatility of the underlying
security, the amount of time remaining until expiration, current interest rates,
and the effect of supply and demand in the options market and in the market for
the underlying security. By writing a call option, the fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option but continues to bear the risk
of a decline in the value of the underlying security. By writing a put option,
the fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an offsetting
option. The fund realizes a profit or loss from a closing transaction if the
cost of the transaction (option premium plus transaction costs) is less or more
than the premium received from writing the option. Because increases in the
market price of a call option generally reflect increases in the market price of
the security underlying the option, any loss resulting from a closing purchase
transaction may be offset in whole or in part by unrealized appreciation of the
underlying security.
If the fund writes a call option but does not own the underlying security, and
when it writes a put option, the fund may be required to deposit cash or
securities with its broker as "margin" or collateral for its obligation to buy
or sell the underlying security. As the value of the underlying security varies,
the fund may have to deposit additional margin with the broker. Margin
requirements are complex and are fixed by individual brokers, subject to minimum
requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
Purchasing put options. The fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such hedge protection is provided during the life of the put option since the
fund, as holder of the put option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. For a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs.
Purchasing call options. The fund may purchase call options to hedge against an
increase in the price of securities that the fund wants ultimately to buy. Such
hedge protection is provided during the life of the call option since the fund,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the fund might
have realized had it bought the underlying security at the time it purchased the
call option.
Over-the-Counter (OTC) options. The Staff of the Division of Investment
Management of the Securities and Exchange Commission (SEC) has taken the
position that OTC options purchased by the fund and assets held to cover OTC
options written by the fund are illiquid securities. Although the Staff has
indicated that it is continuing to evaluate this issue, pending further
developments, the fund intends to enter into OTC options transactions only with
primary dealers in U.S. government securities and, in the case of OTC options
written by the fund, only pursuant to agreements that will assure that the fund
will at all times have the right to repurchase the option written by it from the
dealer at a specified formula price. The fund will treat the amount by which
such formula price exceeds the amount, if any, by which the option may be
"in-the-money" as an illiquid investment. It is the present policy of the fund
not to enter into any OTC option transaction if, as a result, more than 15% (10%
in some cases, refer to your fund's Prospectus) of the fund's net assets would
be invested in (i) illiquid investments (determined under the foregoing formula)
relating to OTC options written by the fund, (ii) OTC options purchased by the
fund, (iii) securities which are not readily marketable, and (iv) repurchase
agreements maturing in more than seven days.
Risk factors in options transactions. The successful use of the fund's options
strategies depends on the ability of the Advisor to forecast interest rate and
market movements correctly.
When it purchases an option, the fund runs the risk that it will lose its entire
investment in the option in a relatively short period of time, unless the fund
exercises the option or enters into a closing sale transaction with respect to
the option during the life of the option. If the price of the underlying
security does not rise (in the case of a call) or fall (in the case of a put) to
an extent sufficient to cover the option premium and transaction costs, the fund
will lose part or all of its investment in the option. This contrasts with an
investment by the fund in the underlying securities, since the fund may continue
to hold its investment in those securities notwithstanding the lack of a change
in price of those securities.
The effective use of options also depends on the fund's ability to terminate
option positions at times when the Advisor deems it desirable to do so. Although
the fund will take an option position only if the Advisor believes there is a
liquid secondary market for the option, there is no assurance that the fund will
be able to effect closing transactions at any particular time or at an
acceptable price.
If a secondary trading market in options were to become unavailable, the fund
could no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A marketplace may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt normal market operations.
A marketplace may at times find it necessary to impose restrictions on
particular types of options transactions, which may limit the fund's ability to
realize its profits or limit its losses.
Disruptions in the markets for the securities underlying options purchased or
sold by the fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with losses if trading in the security reopens at a
substantially different price. In addition, the Options Clearing Corporation
(OCC) or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If a
prohibition on exercise remains in effect until an option owned by the fund has
expired, the fund could lose the entire value of its option.
Special risks are presented by internationally-traded options. Because of time
differences between the United States and various foreign countries, and because
different holidays are observed in different countries, foreign options markets
may be open for trading during hours or on days when U.S. markets are closed. As
a result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Futures Contracts and Related Options
Upon entering into futures contracts, in compliance with the SEC's requirements,
cash or liquid securities, equal in value to the amount of the fund's obligation
under the contract (less any applicable margin deposits and any assets that
constitute "cover" for such obligation), will be segregated with the fund's
custodian.
A futures contract sale creates an obligation by the seller to deliver the type
of instrument called for in the contract in a specified delivery month for a
stated price. A futures contract purchase creates an obligation by the purchaser
to take delivery of the type of instrument called for in the contract in a
specified delivery month at a stated price. The specific instruments delivered
or taken at settlement date are not determined until on or near that date. The
determination is made in accordance with the rules of the exchanges on which the
futures contract was made. Futures contracts are traded in the United States
only on commodity exchange or boards of trade -- known as "contract markets" --
approved for such trading by the Commodity Futures Trading Commission (CFTC),
and must be executed through a futures commission merchant or brokerage firm
which is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or acceptance
of commodities or securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Closing out a futures
contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument or commodity with
the same delivery date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid the difference
and realizes a gain. Conversely, if the price of the offsetting purchase exceeds
the price of the initial sale, the seller realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the purchaser's
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the purchaser realizes a gain, and if the purchase price exceeds
the offsetting sale price, the purchaser realizes a loss.
Unlike when the fund purchases or sells a security, no price is paid or received
by the fund upon the purchase or sale of a futures contract, although the fund
is required to deposit with its custodian in a segregated account in the name of
the futures broker an amount of cash and/or U.S. government securities. This
amount is known as "initial margin." The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds by the fund to
finance the transactions. Rather, initial margin is in the nature of a
performance bond or good faith deposit on the contract that is returned to the
fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin," to and from the broker (or the
custodian) are made on a daily basis as the price of the underlying security or
commodity fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking to market."
The fund may elect to close some or all of its futures positions at any time
prior to their expiration. The purpose of making such a move would be to reduce
or eliminate the hedge position then currently held by the fund. The fund may
close its positions by taking opposite positions which will operate to terminate
the fund's position in the futures contracts. Final determinations of variation
margin are then made, additional cash is required to be paid by or released to
the fund, and the fund realizes a loss or a gain. Such closing transactions
involve additional commission costs.
Options on futures contracts. The fund will enter into written options on
futures contracts only when, in compliance with the SEC's requirements, cash or
liquid securities equal in value to the commodity value (less any applicable
margin deposits) have been deposited in a segregated account of the fund's
custodian. The fund may purchase and write call and put options on futures
contracts it may buy or sell and enter into closing transactions with respect to
such options to terminate existing positions. The fund may use such options on
futures contracts in lieu of writing options directly on the underlying
securities or purchasing and selling the underlying futures contracts. Such
options generally operate in the same manner as options purchased or written
directly on the underlying investments.
As with options on securities, the holder or writer of an option may terminate
his position by selling or purchasing an offsetting option. There is no
guarantee that such closing transactions can be effected.
The fund will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements similar to those described above.
Risks of transactions in futures contracts and related options. Successful use
of futures contracts by the fund is subject to the Advisor`s ability to predict
correctly, movements in the direction of interest rates and other factors
affecting securities markets.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on futures contracts involves less potential risk to the fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the fund when
the purchase or sale of a futures contract would not, such as when there is no
movement in the prices of the hedged investments. The writing of an option on a
futures contract involves risks similar to those risks relating to the sale of
futures contracts.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution, by exchanges, of special
procedures which may interfere with the timely execution of customer orders.
To reduce or eliminate a hedge position held by the fund, the fund may seek to
close out a position. The ability to establish and close out positions will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or continue to exist for a particular
futures contract. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain contracts or options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of contracts or options, or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of contracts or options (or a particular
class or series of contracts or options), in which event the secondary market on
that exchange (or in the class or series of contracts or options) would cease to
exist, although outstanding contracts or options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Use by tax-exempt funds of interest rate and U.S. Treasury security futures
contracts and options. The funds investing in tax-exempt securities issued by a
governmental entity may purchase and sell futures contracts and related options
on interest rate and U.S. Treasury securities when, in the opinion of the
Advisor, price movements in these security futures and related options will
correlate closely with price movements in the tax-exempt securities which are
the subject of the hedge. Interest rate and U.S. Treasury securities futures
contracts require the seller to deliver, or the purchaser to take delivery of,
the type of security called for in the contract at a specified date and price.
Options on interest rate and U.S. Treasury security futures contracts give the
purchaser the right in return for the premium paid to assume a position in a
futures contract at the specified option exercise price at any time during the
period of the option.
In addition to the risks generally involved in using futures contracts, there is
also a risk that price movements in interest rate and U.S. Treasury security
futures contracts and related options will not correlate closely with price
movements in markets for tax-exempt securities.
Index futures contracts. An index futures contract is a contract to buy or sell
units of an index at a specified future date at a price agreed upon when the
contract is made. Entering into a contract to buy units of an index is commonly
referred to as buying or purchasing a contract or holding a long position in the
index. Entering into a contract to sell units of an index is commonly referred
to as selling a contract or holding a short position. A unit is the current
value of the index. The fund may enter into stock index futures contracts, debt
index futures contracts, or other index futures contracts appropriate to its
objective(s). The fund may also purchase and sell options on index futures
contracts.
There are several risks in connection with the use by the fund of index futures
as a hedging device. One risk arises because of the imperfect correlation
between movements in the prices of the index futures and movements in the prices
of securities which are the subject of the hedge. The Advisor will attempt to
reduce this risk by selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the fund's portfolio securities sought to be hedged.
Successful use of index futures by the fund for hedging purposes is also subject
to the Advisor's ability to predict correctly movements in the direction of the
market. It is possible that, where the fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the fund's portfolio may
decline. If this occurs, the fund would lose money on the futures and also
experience a decline in the value in its portfolio securities. However, while
this could occur to a certain degree, the Advisor believes that over time the
value of the fund's portfolio will tend to move in the same direction as the
market indices which are intended to correlate to the price movements of the
portfolio securities sought to be hedged. It is also possible that, if the fund
has hedged against the possibility of a decline in the market adversely
affecting securities held in its portfolio and securities prices increase
instead, the fund will lose part or all of the benefit of the increased values
of those securities that it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the index futures and the securities of
the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures markets are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which would distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Advisor may still not result in a
successful hedging transaction.
Options on index futures. Options on index futures are similar to options on
securities except that options on index futures give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put), at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the index futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the index future. If an option is exercised on
the last trading day prior to the expiration date of the option, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
Options on indices. As an alternative to purchasing call and put options on
index futures, the fund may purchase call and put options on the underlying
indices themselves. Such options could be used in a manner identical to the use
of options on index futures.
Foreign Currency Transactions
The fund may engage in currency exchange transactions to protect against
uncertainty in the level of future currency exchange rates.
The fund may engage in both "transaction hedging" and "position hedging." When
it engages in transaction hedging, the fund enters into foreign currency
transactions with respect to specific receivables or payables of the fund
generally arising in connection with the purchase or sale of its portfolio
securities. The fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the fund attempts to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
The fund may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. The fund may also
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the fund may also purchase exchange-listed and
over-the-counter call and put options on foreign currency futures contracts and
on foreign currencies. Over-the-counter options are considered to be illiquid by
the SEC staff. A put option on a futures contract gives the fund the right to
assume a short position in the futures contract until expiration of the option.
A put option on currency gives the fund the right to sell a currency at an
exercise price until the expiration of the option. A call option on a futures
contract gives the fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
fund the right to purchase a currency at the exercise price until the expiration
of the option.
When it engages in position hedging, the fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or an increase in
the value of currency for securities which the fund expects to purchase, when
the fund holds cash or short-term investments). In connection with position
hedging, the fund may purchase put or call options on foreign currency and
foreign currency futures contracts and buy or sell forward contracts and foreign
currency futures contracts. The fund may also purchase or sell foreign currency
on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the fund is obligated to deliver and if a decision is made
to sell the security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the underlying
prices of the securities which the fund owns or intends to purchase or sell.
They simply establish a rate of exchange which one can achieve at some future
point in time. Additionally, although these techniques tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they tend to limit
any potential gain which might result from the increase in value of such
currency.
Currency forward and futures contracts. Upon entering into such contracts, in
compliance with the SEC's requirements, cash or liquid securities, equal in
value to the amount of the fund's obligation under the contract (less any
applicable margin deposits and any assets that constitute "cover" for such
obligation), will be segregated with the fund's custodian.
A forward currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract as agreed by the parties, at a price set at the time of
the contract. In the case of a cancelable contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades. A currency futures contract is a standardized contract for
the future delivery of a specified amount of a foreign currency at a future date
at a price set at the time of the contract. Currency futures contracts traded in
the United States are designed and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward currency contracts differ from currency futures contracts in certain
respects. For example, the maturity date of a forward contract may be any fixed
number of days from the date of the contract agreed upon by the parties, rather
than a predetermined date in a given month. Forward contracts may be in any
amounts agreed upon by the parties rather than predetermined amounts. Also,
forward contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires no margin or
other deposit.
At the maturity of a forward or futures contract, the fund may either accept or
make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract. Closing transactions with respect to futures contracts are effected on
a commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
Positions in currency futures contracts may be closed out only on an exchange or
board of trade which provides a secondary market in such contracts. Although the
fund intends to purchase or sell currency futures contracts only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a secondary market on an exchange or board of trade will exist
for any particular contract or at any particular time. In such event, it may not
be possible to close a futures position and, in the event of adverse price
movements, the fund would continue to be required to make daily cash payments of
variation margin.
Currency options. In general, options on currencies operate similarly to options
on securities and are subject to many similar risks. Currency options are traded
primarily in the over-the-counter market, although options on currencies have
recently been listed on several exchanges. Options are traded not only on the
currencies of individual nations, but also on the European Currency Unit
("ECU"). The ECU is composed of amounts of a number of currencies, and is the
official medium of exchange of the European Economic Community's European
Monetary System.
The fund will only purchase or write currency options when the Advisor believes
that a liquid secondary market exists for such options. There can be no
assurance that a liquid secondary market will exist for a particular option at
any specified time. Currency options are affected by all of those factors which
influence exchange rates and investments generally. To the extent that these
options are traded over the counter, they are considered to be illiquid by the
SEC staff.
The value of any currency, including the U.S. dollars, may be affected by
complex political and economic factors applicable to the issuing country. In
addition, the exchange rates of currencies (and therefore the values of currency
options) may be significantly affected, fixed, or supported directly or
indirectly by government actions. Government intervention may increase risks
involved in purchasing or selling currency options, since exchange rates may not
be free to fluctuate in respect to other market forces.
The value of a currency option reflects the value of an exchange rate, which in
turn reflects relative values of two currencies, the U.S. dollar and the foreign
currency in question. Because currency transactions occurring in the interbank
market involve substantially larger amounts than those that may be involved in
the exercise of currency options, investors may be disadvantaged by having to
deal in an odd lot market for the underlying currencies in connection with
options at prices that are less favorable than for round lots. Foreign
governmental restrictions or taxes could result in adverse changes in the cost
of acquiring or disposing of currencies.
There is no systematic reporting of last sale information for currencies and
there is no regulatory requirement that quotations available through dealers or
other market sources be firm or revised on a timely basis. Available quotation
information is generally representative of very large round-lot transactions in
the interbank market and thus may not reflect exchange rates for smaller odd-lot
transactions (less than $1 million) where rates may be less favorable. The
interbank market in currencies is a global, around-the-clock market. To the
extent that options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets.
Settlement procedures. Settlement procedures relating to the fund's investments
in foreign securities and to the fund's foreign currency exchange transactions
may be more complex than settlements with respect to investments in debt or
equity securities of U.S. issuers, and may involve certain risks not present in
the fund's domestic investments, including foreign currency risks and local
custom and usage. Foreign currency transactions may also involve the risk that
an entity involved in the settlement may not meet its obligations.
Foreign currency conversion. Although foreign exchange dealers do not charge a
fee for currency conversion, they do realize a profit based on the difference
(spread) between prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the fund at one rate,
while offering a lesser rate of exchange should the fund desire to resell that
currency to the dealer. Foreign currency transactions may also involve the risk
that an entity involved in the settlement may not meet its obligation.
Municipal Lease Obligations
Although a municipal lease obligation does not constitute a general obligation
of the municipality for which the municipality's taxing power is pledged, a
municipal lease obligation is ordinarily backed by the municipality's covenant
to budget for, appropriate and make the payments due under the municipal lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. In addition, the tax treatment of such
obligations in the event of non-appropriation is unclear.
Determinations concerning the liquidity and appropriate valuation of a municipal
lease obligation, as with any other municipal security, are made based on all
relevant factors. These factors include, among others: (1) the frequency of
trades and quotes for the obligation; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; and (4)
the nature of the marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers, and the mechanics of the
transfer.
Participation Interests
The fund may invest in municipal obligations either by purchasing them directly
or by purchasing certificates of accrual or similar instruments evidencing
direct ownership of interest payments or principal payments, or both, on
municipal obligations, provided that, in the opinion of counsel to the initial
seller of each such certificate or instrument, any discount accruing on such
certificate or instrument that is purchased at a yield not greater than the
coupon rate of interest on the related municipal obligations will be exempt from
federal income tax to the same extent as interest on such municipal obligations.
The fund may also invest in tax-exempt obligations by purchasing from banks
participation interests in all or part of specific holdings of municipal
obligations. Such participations may be backed in whole or part by an
irrevocable letter of credit or guarantee of the selling bank. The selling bank
may receive a fee from the fund in connection with the arrangement. The fund
will not purchase such participation interests unless it receives an opinion of
counsel or a ruling of the Internal Revenue Service that interest earned by it
on municipal obligations in which it holds such participation interests is
exempt from federal income tax.
Stand-by Commitments
When the fund purchases municipal obligations it may also acquire stand-by
commitments from banks and broker-dealers with respect to such municipal
obligations. A stand-by commitment is the equivalent of a put option acquired by
the fund with respect to a particular municipal obligation held in its
portfolio. A stand-by commitment is a security independent of the municipal
obligation to which it relates. The amount payable by a bank or dealer during
the time a stand-by commitment is exercisable, absent unusual circumstances
relating to a change in market value, would be substantially the same as the
value of the underlying municipal obligation. A stand-by commitment might not be
transferable by the fund, although it could sell the underlying municipal
obligation to a third party at any time.
The fund expects that stand-by commitments generally will be available without
the payment of direct or indirect consideration. However, if necessary and
advisable, the fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the fund portfolio will not exceed 10% of the value
of the fund's total assets calculated immediately after each stand-by commitment
is acquired. The fund will enter into stand-by commitments only with banks and
broker-dealers that, in the judgment of the Trust's Board of Trustees, present
minimal credit risks.
Inverse Floaters
Inverse floaters are derivative securities whose interest rates vary inversely
to changes in short-term interest rates and whose values fluctuate inversely to
changes in long-term interest rates. The value of certain inverse floaters will
fluctuate substantially more in response to a given change in long-term rates
than would a traditional debt security. These securities have investment
characteristics similar to leverage, in that interest rate changes have a
magnified effect on the value of inverse floaters.
Rule 144A Securities
The fund may purchase securities that have been privately placed but that are
eligible for purchase and sale under Rule 144A of the Securities Act of 1933
("1933 Act"). That Rule permits certain qualified institutional buyers, such as
the fund, to trade in privately placed securities that have not been registered
for sale under the 1933 Act. The Advisor, under the supervision of the Board of
Trustees, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to the fund's investment restriction on illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, the Advisor will consider the
trading markets for the specific security, taking into account the unregistered
nature of a Rule 144A security. In addition, the Advisor could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential purchasers,
(3) dealer undertakings to make a market, and (4) nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer). The liquidity of Rule 144A
securities will be monitored and, if as a result of changed conditions, it is
determined by the Advisor that a Rule 144A security is no longer liquid, the
fund's holdings of illiquid securities would be reviewed to determine what, if
any, steps are required to assure that the fund does not invest more than its
investment restriction on illiquid securities allows. Investing in Rule 144A
securities could have the effect of increasing the amount of the fund's assets
invested in illiquid securities if qualified institutional buyers are unwilling
to purchase such securities. AdvisorTAXES In this section, all discussions of
taxation at the shareholder level relate to federal taxes only. Consult your tax
advisor for state, local and foreign tax considerations and for information
about special tax considerations that may apply to shareholders that are not
natural persons.
Alternative Minimum Tax. Distributions derived from interest which is exempt
from regular federal income tax may subject corporate shareholders to or
increase their liability under the corporate alternative minimum tax (AMT). A
portion of such distributions may constitute a tax preference item for
individual shareholders and may subject them to or increase their liability
under the AMT.
Dividends Received Deductions. Distributions will qualify for the corporate
dividends received deduction only to the extent that dividends earned by the
fund qualify. Any such dividends are, however, includable in adjusted current
earnings for purposes of computing corporate AMT. The dividends received
deduction for eligible dividends is subject to a holding period requirement
modified pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act").
Return of Capital Distributions. To the extent that a distribution is a return
of capital for federal tax purposes, it reduces the cost basis of the shares on
the record date and is similar to a partial return of the original investment
(on which a sales charge may have been paid). There is no recognition of a gain
or loss, however, unless the return of capital reduces the cost basis in the
shares to below zero.
Funds that invest in U.S. Government Securities. Many states grant tax-free
status to dividends paid to shareholders of mutual funds from interest income
earned by the fund from direct obligations of the U.S. government. Investments
in mortgage-backed securities (including GNMA, FNMA and FHLMC Securities) and
repurchase agreements collateralized by U.S. government securities do not
qualify as direct federal obligations in most states. Shareholders should
consult with their own tax advisors about the applicability of state and local
intangible property, income or other taxes to their fund shares and
distributions and redemption proceeds received from the fund.
Fund Distributions. Distributions from the fund (other than exempt-interest
dividends, as discussed below) will be taxable to shareholders as ordinary
income to the extent derived from the fund's investment income and net
short-term gains. Distributions of net capital gains will be treated in the
hands of shareholders as derived from net gains from assets held for more than
one year. Effective January 1, 1998, the IRS Restructuring and Reform Act
eliminated the eighteen-month holding period that was required to take advantage
of the preferable rate for long-term gains. In general, any distributions of net
capital gains from securities sold after December 31, 1997 will be eligible for
the preferred rate (generally 20%).
Distributions of net capital gains will be taxable to shareholders as such,
regardless of how long a shareholder has held the shares in the fund.
Distributions will be taxed as described above whether received in cash or in
fund shares.
Distributions from Tax-Exempt Funds. Each tax-exempt fund will have at least 50%
of its total assets invested in tax-exempt bonds at the end of each quarter so
that dividends from net interest income on tax-exempt bonds will be exempt from
federal income tax when received by a shareholder. The tax-exempt portion of
dividends paid will be designated within 60 days after year-end based upon the
ratio of net tax-exempt income to total net investment income earned during the
year. That ratio may be substantially different from the ratio of net tax-exempt
income to total net investment income earned during any particular portion of
the year. Thus, a shareholder who holds shares for only a part of the year may
be allocated more or less tax-exempt dividends than would be the case if the
allocation were based on the ratio of net tax-exempt income to total net
investment income actually earned while a shareholder.
The Tax Reform Act of 1986 makes income from certain "private activity bonds"
issued after August 7, 1986, a tax preference item for the AMT at the maximum
rate of 28% for individuals and 20% for corporations. If the fund invests in
private activity bonds, shareholders may be subject to the AMT on that part of
the distributions derived from interest income on such bonds. Other provisions
of the Tax Reform Act affect the tax treatment of distributions for
corporations, casualty insurance companies and financial institutions; interest
on all tax-exempt bonds is included in corporate adjusted current earnings when
computing the AMT applicable to corporations. Seventy-five percent of the excess
of adjusted current earnings over the amount of income otherwise subject to the
AMT is included in a corporation's alternative minimum taxable income.
Dividends derived from any investments other than tax-exempt bonds and any
distributions of short-term capital gains are taxable to shareholders as
ordinary income. Any distributions of net long-term capital gains will in
general be taxable to shareholders as long-term capital gains regardless of the
length of time fund shares are held. The 1997 Act subjected long term capital
gains to a maximum tax rate of either 28% or 20% depending on the holding period
in the portfolio assets generating the gain. Effective for any assets disposed
of after December 31, 1997, the IRS Restructuring and Reform Act has eliminated
the 28% tax rate on long term gains. Any gains from assets disposed of after
that date and held for more than one year will be taxed at the maximum rate of
20%. A tax-exempt fund may at times purchase tax-exempt securities at a discount
and some or all of this discount may be included in the fund's ordinary income
which will be taxable when distributed. Any market discount recognized on a
tax-exempt bond purchased after April 30, 1993, with a term at time of issue of
one year or more is taxable as ordinary income. A market discount bond is a bond
acquired in the secondary market at a price below its "stated redemption price"
(in the case of a bond with original issue discount, its "revised issue price").
Shareholders receiving social security and certain retirement benefits may be
taxed on a portion of those benefits as a result of receiving tax-exempt income,
including tax-exempt dividends from the fund.
Special Tax Rules Applicable to Tax-Exempt Funds. Income distributions to
shareholders who are substantial users or related persons of substantial users
of facilities financed by industrial revenue bonds may not be excludable from
their gross income if such income is derived from such bonds. Income derived
from the fund's investments other than tax-exempt instruments may give rise to
taxable income. The fund's shares must be held for more than six months in order
to avoid the disallowance of a capital loss on the sale of fund shares to the
extent of tax-exempt dividends paid during that period. A shareholder who
borrows money to purchase the fund's shares will not be able to deduct the
interest paid with respect to such borrowed money.
Sales of Shares. The sale, exchange or redemption of fund shares may give rise
to a gain or loss. In general, any gain realized upon a taxable disposition of
shares will be treated as long-term capital gain if the shares have been held
for more than 12 months, and if the sale, exchange or redemption occurred on or
after January 1, 1998.. Otherwise the gain on the sale, exchange or redemption
of fund shares will be treated as short-term capital gain. In general, any loss
realized upon a taxable disposition of shares will be treated as long-term loss
if the shares have been held more than 12 months, and otherwise as short-term
loss. However, any loss realized upon a taxable disposition of shares held for
six months or less will be treated as long-term, rather than short-term, capital
loss to the extent of any long-term capital gain distributions received by the
shareholder with respect to those shares. All or a portion of any loss realized
upon a taxable disposition of shares will be disallowed if other shares are
purchased within 30 days before or after the disposition. In such a case, the
basis of the newly purchased shares will be adjusted to reflect the disallowed
loss.
Backup Withholding. Certain distributions and redemptions may be subject to a
31% backup withholding unless a taxpayer identification number and certification
that the shareholder is not subject to the withholding is provided to the fund.
This number and form may be provided by either a Form W-9 or the accompanying
application. In certain instances, LFSI may be notified by the Internal Revenue
Service that a shareholder is subject to backup withholding.
Excise Tax. To the extent that the fund does not annually distribute
substantially all taxable income and realized gains, it is subject to an excise
tax. The Advisor intends to avoid this tax except when the cost of processing
the distribution is greater than the tax.
Tax Accounting Principles. To qualify as a "regulated investment company," the
fund must (a) derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; (b) diversify its holdings so that, at the close of each quarter of
its taxable year, (i) at least 50% of the value of its total assets consists of
cash, cash items, U.S. Government securities, and other securities limited
generally with respect to any one issuer to not more than 5% of the total assets
of the fund and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any issuer (other than U.S. Government securities).
Hedging Transactions. If the fund engages in hedging transactions, including
hedging transactions in options, futures contracts and straddles, or other
similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale and short sale rules),
the effect of which may be to accelerate income to the fund, defer losses to the
fund, cause adjustments in the holding periods of the fund's securities, or
convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The fund will endeavor to make any available elections pertaining
to such transactions in a manner believed to be in the best interests of the
fund.
Securities Issued at a Discount. The fund's investment in securities issued at a
discount and certain other obligations will (and investments in securities
purchased at a discount may) require the fund to accrue and distribute income
not yet received. In such cases, the fund may be required to sell assets
(including when it is not advantageous to do so) to generate the cash necessary
to distribute as dividends to its shareholders all of its income and gains and
therefore to eliminate any tax liability at the fund level.
Foreign Currency-Denominated Securities and Related Hedging Transactions. The
fund's transactions in foreign currencies, foreign currency-denominated debt
securities, certain foreign currency options, futures contracts and forward
contracts (and similar instruments) may give rise to ordinary income or loss to
the extent such income or loss results from fluctuations in the value of the
foreign currency concerned.
If more than 50% of the fund's total assets at the end of its fiscal year are
invested in stock or securities of foreign corporate issuers, the fund may make
an election permitting its shareholders to take a deduction or credit for
federal tax purposes for their portion of certain qualified foreign taxes paid
by the fund. The Advisor will consider the value of the benefit to a typical
shareholder, the cost to the fund of compliance with the election, and
incidental costs to shareholders in deciding whether to make the election. A
shareholder's ability to claim such a foreign tax credit will be subject to
certain limitations imposed by the Code (including a holding period requirement
imposed pursuant to the 1997 Act), as a result of which a shareholder may not
get a full credit for the amount of foreign taxes so paid by the fund.
Shareholders who do not itemize on their federal income tax returns may claim a
credit (but no deduction) for such foreign taxes.
Investment by the fund in certain "passive foreign investment companies" could
subject the fund to a U.S. federal income tax (including interest charges) on
distributions received from the company or on proceeds received from the
disposition of shares in the company, which tax cannot be eliminated by making
distributions to fund shareholders. However, the fund may be able to elect to
treat a passive foreign investment company as a "qualified electing fund," in
which case the fund will be required to include its share of the company's
income and net capital gain annually, regardless of whether it receives any
distribution from the company. Alternatively, the fund may make an election to
mark the gains (and to a limited extent losses) in such holdings "to the market"
as though it had sold and repurchased its holdings in those passive foreign
investment companies on the last day of the fund's taxable year. Such gains and
losses are treated as ordinary income and loss. The qualified electing fund and
mark-to-market elections may have the effect of accelerating the recognition of
income (without the receipt of cash) and increase the amount required to be
distributed for the fund to avoid taxation. Making either of these elections
therefore may require a fund to liquidate other investments (including when it
is not advantageous to do so) to meet its distribution requirement, which also
may accelerate the recognition of gain and affect a fund's total return.
MANAGEMENT OF THE FUNDS (in this section, and the following sections entitled
"Trustees and Officers," "The Management Agreement," "Administration Agreement,"
"The Pricing and Bookkeeping Agreement," "Portfolio Transactions," "Investment
decisions," and "Brokerage and research services," the "Advisor" refers to
Colonial Management Associates, Inc.) The Advisor is the investment advisor to
each of the funds (except for Colonial Money Market Fund, Colonial Municipal
Money Market Fund, Colonial Global Utilities Fund, Newport Tiger Fund, Newport
Tiger Cub Fund, Newport Japan Opportunities Fund, Newport Greater China Fund and
Newport Asia Pacific Fund - see Part I of each Fund's respective SAI for a
description of the investment advisor). The Advisor is a subsidiary of The
Colonial Group, Inc. (TCG), One Financial Center, Boston, MA 02111. TCG is a
direct majority-owned subsidiary of Liberty Financial Companies, Inc. (Liberty
Financial), which in turn is a direct subsidiary of majority-owned LFC Holdings,
Inc., which in turn is a direct subsidiary of Liberty Mutual Equity Corporation,
which in turn is a wholly-owned subsidiary of Liberty Mutual Insurance Company
(Liberty Mutual). Liberty Mutual is an underwriter of workers' compensation
insurance and a property and casualty insurer in the U.S. Liberty Financial's
address is 600 Atlantic Avenue, Boston, MA 02210. Liberty Mutual's address is
175 Berkeley Street, Boston, MA 02117.
Trustees and Officers (this section applies to all of the funds)
<TABLE>
<CAPTION>
Position with
Name and Address Age Fund Principal Occupation During Past Five Years
- ---------------- --- -------------- --------------------------------------------
<S> <C> <C> <C>
Robert J. Birnbaum 70 Trustee Consultant (formerly Special Counsel, Dechert Price &
313 Bedford Road Rhoads from September, 1988 to December, 1993, President,
Ridgewood, NJ 07450 New York Stock Exchange from May, 1985 to June, 1988,
President, American Stock Exchange, Inc. from 1977 to
May, 1985).
Tom Bleasdale 68 Trustee Retired (formerly Chairman of the Board and Chief
11 Carriage Way Executive Officer, Shore Bank & Trust Company from
Danvers, MA 01923 1992-1993), is a Director of The Empire Company since
June, 1995.
John V. Carberry * 51 Trustee Senior Vice President of Liberty Financial Companies,
56 Woodcliff Road Inc. (formerly Managing Director, Salomon Brothers
Wellesley Hills, MA 02481 (investment banking) from January, 1988 to January, 1998).
Lora S. Collins 62 Trustee Attorney (formerly Attorney, Kramer, Levin, Naftalis &
1175 Hill Road Frankel from September, 1986 to November, 1996).
Southold, NY 11971
James E. Grinnell 68 Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
Richard W. Lowry 62 Trustee Private Investor since August, 1987.
10701 Charleston Drive
Vero Beach, FL 32963
Salvatore Macera 67 Trustee Private Investor (formerly Executive Vice President of
26 Little Neck Lane Itek Corp. and President of Itek Optical & Electronic
New Seabury, MA 02649 Industries, Inc. (electronics)).
William E. Mayer* 58 Trustee Partner, Development Capital, LLC (formerly Dean, College
500 Park Avenue, 5th Floor of Business and Management, University of Maryland from
New York, NY 10022 October, 1992 to November, 1996; Dean, Simon Graduate
School of Business, University of Rochester from October,
1991 to July, 1992).
James L. Moody, Jr. 66 Trustee Retired (formerly Chairman of the Board, Hannaford Bros.
16 Running Tide Road Co. from May, 1984 to May, 1997, and Chief Executive
Cape Elizabeth, ME 04107 Officer, Hannaford Bros. Co. from May, 1973 to May, 1992).
John J. Neuhauser 55 Trustee Dean, Boston College School of Management since
140 Commonwealth Avenue September, 1977.
Chestnut Hill, MA 02167
Thomas E. Stitzel 58 Trustee Professor of Finance, College of Business, Boise State
2208 Tawny Woods Place University (higher education); Business consultant and
Boise, ID 83706 author.
Robert L. Sullivan 70 Trustee Retired Partner, KPMG Peat Marwick LLP
45 Sankaty Avenue
Siaconset, MA 02564
Anne-Lee Verville 51 Trustee Consultant (formerly General Manager, Global Education
359 Stickney Hill Road Industry from 1994 to 1997, and President, Applications
Hopkinton, NH 03229 Solutions Division from 1991 to 1994, IBM Corporation
(global education and global applications).
Stephen E. Gibson 45 President President of the Funds since June, 1998 is Chairman of
the Board since July, 1998, Chief Executive Officer and
President since December 1996 and Director, since July
1996 of the Advisor (formerly Executive Vice President
from July, 1996 to December, 1996); Director, Chief
Executive Officer and President of TCG since December,
1996; Assistant Chairman of Stein Roe & Farnham
Incorporated (SR&F) since August, 1998 (formerly
Managing Director of Marketing of Putnam Investments,
June, 1992 to July, 1996.)
J. Kevin Connaughton 34 Controller and Controller and Chief Accounting Officer of Funds since
Chief Accounting February, 1998, Vice President of the Advisor since
Officer February, 1998 (formerly Senior Tax Manager, Coopers &
Lybrand, LLP from April, 1996 to January, 1998; Vice
President, 440 Financial Group/First Data Investor
Services Group from March ,1994 to April, 1996; Vice
President, The Boston Company (subsidiary of Mellon
Bank) from December, 1993 to March, 1994; Assistant
Vice President and Tax Manager, The Boston Company from
March, 1992 to December, 1993).
Timothy J. Jacoby 45 Treasurer and Treasurer and Chief Financial Officer of Funds since
Chief Financial October, 1996 (formerly Controller and Chief Accounting
Officer Officer from October, 1997 to February, 1998), is
Senior Vice President of the Advisor since September, 1996;
Senior Vice President of SR&F since August, 1998
(formerly Senior Vice President, Fidelity Accounting
and Custody Services from September, 1993 to September,
1996 and Assistant Treasurer to the Fidelity Group of
Funds from August, 1990 to September, 1993).
Nancy L. Conlin 45 Secretary Secretary of the Funds since April, 1998 (formerly
Assistant Secretary from July, 1994 to April, 1998), is
Director, Senior Vice President, General Counsel, Clerk
and Secretary of the Advisor since April, 1998
(formerly Vice President, Counsel, Assistant Secretary
and Assistant Clerk from July, 1994 to April, 1998),
Vice President - Legal, General Counsel and Clerk of
TCG since April, 1998 (formerly Assistant Clerk from
July, 1994 to April, 1998)
Davey S. Scoon 51 Vice President Vice President of the Funds since June, 1993, is
Executive Vice President since July, 1993 and Director
since March, 1985 of the Advisor (formerly Senior Vice
President and Treasurer of the Advisor from March, 1985
to July, 1993); Executive Vice President and Chief
Operating Officer, TCG since March, 1995 (formerly Vice
President - Finance and Administration of TCG from
November, 1985 to March, 1995); Executive Vice
President of SR&F since August, 1998.
Advisor
Advisor
</TABLE>
* A Trustee who is an "interested person" (as defined in the Investment
Company Act of 1940 ("1940 Act")) of the fund or the Advisor.
The business address of the officers of each Fund is One Financial Center,
Boston, MA 02111.
The Trustees serve as trustees of all funds for which each Trustee will receive
an annual retainer of $45,000 and attendance fees of $8,000 for each regular
joint meeting and $1,000 for each special joint meeting. Committee chairs and
the lead Trustee receive an annual retainer of $5,000 and Committee chairs
receive $1,000 for each special meeting attended on a day other than a regular
joint meeting day. Committee members receive an annual retainer of $1,000 and
$1,000 for each special meeting attended on a day other than a regular joint
meeting day. Two-thirds of the Trustee fees are allocated among the funds based
on each fund's relative net assets and one-third of the fees are divided equally
among the funds.
The Advisor and/or its affiliate, Colonial Advisory Services, Inc. (CASI), has
rendered investment advisory services to investment company, institutional and
other clients since 1931. The Advisor currently serves as investment advisor or
administrator for 39 open-end and 5 closed-end management investment company
portfolios. Trustees and officers of the Trust, who are also officers of the
Advisor or its affiliates, will benefit from the advisory fees, sales
commissions and agency fees paid or allowed by the Trust. More than 30,000
financial advisors have recommended the funds to over 800,000 clients worldwide,
representing more than $16.3 billion in assets.
The Agreement and Declaration of Trust (Declaration) of the Trust provides that
the Trust will indemnify its Trustees and officers against liabilities and
expenses incurred in connection with litigation in which they may be involved
because of their offices with the Trust but that such indemnification will not
relieve any officer or Trustee of any liability to the Trust or its shareholders
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties. The Trust, at its expense, provides liability
insurance for the benefit of its Trustees and officers.
The Trustees have the authority to convert the Funds into a master fund/feeder
fund structure. Under this structure, a Fund may invest all or a portion of its
investable assets in investment companies with substantially the same investment
objectives, policies and restrictions as the Fund. The primary reason to use the
master fund/feeder fund structure is to provide a mechanism to pool, in a single
master fund, investments of different investor classes, resulting in a larger
portfolio, investment and administrative efficiencies and economies of scale.
The Management Agreement (this section does not apply to Colonial Money Market
Fund, Colonial Municipal Money Market Fund, Colonial Global Utilities Fund,
Newport Tiger Fund, Newport Japan Opportunities Fund, Newport Tiger Cub Fund,
Newport Greater China Fund or Newport Asia Pacific Fund)
Under a Management Agreement (Agreement), the Advisor has contracted to furnish
each fund with investment research and recommendations or fund management,
respectively, and accounting and administrative personnel and services, and with
office space, equipment and other facilities. For these services and facilities,
each fund pays a monthly fee based on the average of the daily closing value of
the total net assets of each fund for such month. Under the Agreement, any
liability of the Advisor to the Trust, a fund and/or its shareholders is limited
to situations involving the Advisor's own willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties. The
Agreement may be terminated with respect to the fund at any time on 60 days'
written notice by the Advisor or by the Trustees of the Trust or by a vote of a
majority of the outstanding voting securities of the fund. The Agreement will
automatically terminate upon any assignment thereof and shall continue in effect
from year to year only so long as such continuance is approved at least annually
(i) by the Trustees of the Trust or by a vote of a majority of the outstanding
voting securities of the fund and (ii) by vote of a majority of the Trustees who
are not interested persons (as such term is defined in the 1940 Act) of the
Advisor or the Trust, cast in person at a meeting called for the purpose of
voting on such approval.
The Advisor pays all salaries of officers of the Trust. The Trust pays all
expenses not assumed by the Advisor including, but not limited to, auditing,
legal, custodial, investor servicing and shareholder reporting expenses. The
Trust pays the cost of printing and mailing any Prospectuses sent to
shareholders. LFDI pays the cost of printing and distributing all other
Prospectuses.
Administration Agreement (this section applies only to Colonial
Money Market Fund, Colonial Municipal Money Market Fund, Colonial Global
Utilities Fund, Newport Tiger Fund, Newport Japan Opportunities Fund, Newport
Tiger Cub Fund, Newport Greater China Fund and Newport Asia Pacific Fund and
their respective Trusts).
Under an Administration Agreement with each fund named above, the Advisor, in
its capacity as the Administrator to each fund, has contracted to perform the
following administrative services:
(a) providing office space, equipment and clerical personnel;
(b) arranging, if desired by the respective Trust, for its
directors, officers and employees to serve as Trustees,
officers or agents of each fund;
(c) preparing and, if applicable, filing all documents
required for compliance by each fund with applicable laws
and regulations;
(d) preparation of agendas and supporting documents for and
minutes of meetings of Trustees, committees of Trustees
and shareholders;
(e) coordinating and overseeing the activities of each fund's
other third-party service providers; and
(f) maintaining certain books and records of each fund.
With respect to Colonial Money Market Fund and Colonial Municipal Money Market
Fund, the Administration Agreement for these funds provides for the following
services in addition to the services referenced above:
(g) Monitoring compliance by the fund with Rule 2a-7 under the
(1940 Act and reporting to the Trustees from time to time
with respect thereto; and
(h) Monitoring the investments and operations of the following
Portfolios: SR&F Municipal Money Market Portfolio
(Municipal Money Market Portfolio) in which Colonial
Municipal Money Market Fund is invested;
SR&F Cash Reserves Portfolio in which Colonial Money
Market Fund is invested; and LFC Utilities Trust (LFC
Portfolio) in which Colonial Global Utilities Fund is
invested and reporting to the Trustees from time to time
with respect thereto.
The Advisor is paid a monthly fee at the annual rate of average daily net assets
set forth in Part 1 of this Statement of Additional Information.
The Pricing and Bookkeeping Agreement
The Advisor provides pricing and bookkeeping services to each fund pursuant to a
Pricing and Bookkeeping Agreement. The Advisor, in its capacity as the
Administrator to each of Colonial Money Market Fund, Colonial Municipal Money
Market Fund and Colonial Global Utilities Fund, is paid an annual fee of
$18,000, plus 0.0233% of average daily net assets in excess of $50 million. For
each of the other funds (except for Newport Tiger Fund, Newport Japan
Opportunities Fund, Newport Tiger Cub Fund, Newport Greater China Fund and
Newport Asia Pacific Fund), the Advisor is paid monthly a fee of $2,250 by each
fund, plus a monthly percentage fee based on net assets of the fund equal to the
following:
1/12 of 0.000% of the first $50 million;
1/12 of 0.035% of the next $950 million;
1/12 of 0.025% of the next $1 billion;
1/12 of 0.015% of the next $1 billion;
and 1/12 of 0.001% on the excess over
$3 billion
The Advisor provides pricing and bookkeeping services to Newport Tiger Fund,
Newport Japan Opportunities Fund, Newport Tiger Cub Fund, Newport Greater China
Fund and Newport Asia Pacific Fund for an annual fee of $27,000, plus 0.035% of
each fund's average daily net assets over $50 million.
Stein Roe & Farnham Incorporated, the investment advisor of each of the
Municipal Money Market Portfolio and LFC Portfolio, provides pricing and
bookkeeping services to each Portfolio for a fee of $25,000 plus 0.0025%
annually of average daily net assets of each Portfolio over $50 million.
Portfolio Transactions
The following sections entitled "Investment decisions" and "Brokerage and
research services" do not apply to Colonial Money Market Fund, Colonial
Municipal Money Market Fund, and Colonial Global Utilities Fund. For each of
these funds, see Part 1 of its respective SAI. The Advisor of Newport Tiger
Fund, Newport Japan Opportunities Fund, Newport Tiger Cub Fund, Newport Greater
China Fund and Newport Asia Pacific Fund follows the same procedures as those
set forth under "Brokerage and research services."
Investment decisions. The Advisor acts as investment advisor to each of the
Funds (except for the Colonial Money Market Fund, Colonial Municipal Money
Market Fund, Colonial Global Utilities Fund, Newport Tiger Fund, Newport Japan
Opportunities Fund, Newport Tiger Cub Fund, Newport Greater China Fund and
Newport Asia Pacific Fund, each of which is administered by the Advisor. The
Advisor's affiliate, CASI, advises other institutional, corporate, fiduciary and
individual clients for which CASI performs various services. Various officers
and Trustees of the Trust also serve as officers or Trustees of other funds and
the other corporate or fiduciary clients of the Advisor. The funds and clients
advised by the Advisor or the funds administered by the Advisor sometimes invest
in securities in which the fund also invests and sometimes engage in covered
option writing programs and enter into transactions utilizing stock index
options and stock index and financial futures and related options ("other
instruments"). If the fund, such other funds and such other clients desire to
buy or sell the same portfolio securities, options or other instruments at about
the same time, the purchases and sales are normally made as nearly as
practicable on a pro rata basis in proportion to the amounts desired to be
purchased or sold by each. Although in some cases these practices could have a
detrimental effect on the price or volume of the securities, options or other
instruments as far as the Fund is concerned, in most cases it is believed that
these practices should produce better executions. It is the opinion of the
Trustees that the desirability of retaining the Advisor as investment advisor to
the funds outweighs the disadvantages, if any, which might result from these
practices.
The portfolio managers of Colonial Utilities Fund, a series of Colonial Trust
IV, will use the trading facilities of Stein Roe & Farnham Incorporated, an
affiliate of the Advisor, to place all orders for the purchase and sale of this
fund's portfolio securities, futures contracts and foreign currencies.
Brokerage and research services. Consistent with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., and subject to seeking
"best execution" (as defined below) and such other policies as the Trustees may
determine, the Advisor may consider sales of shares of the funds as a factor in
the selection of broker-dealers to execute securities transactions for a fund.
The Advisor places the transactions of the funds with broker-dealers selected by
the Advisor and, if applicable, negotiates commissions. Broker-dealers may
receive brokerage commissions on portfolio transactions, including the purchase
and writing of options, the effecting of closing purchase and sale transactions,
and the purchase and sale of underlying securities upon the exercise of options
and the purchase or sale of other instruments. The funds from time to time also
execute portfolio transactions with such broker-dealers acting as principals.
The funds do not intend to deal exclusively with any particular broker-dealer or
group of broker-dealers.
It is the Advisor's policy generally to seek best execution, which is to place
the funds' transactions where the funds can obtain the most favorable
combination of price and execution services in particular transactions or
provided on a continuing basis by a broker-dealer, and to deal directly with a
principal market maker in connection with over-the-counter transactions, except
when it is believed that best execution is obtainable elsewhere. In evaluating
the execution services of, including the overall reasonableness of brokerage
commissions paid to, a broker-dealer, consideration is given to, among other
things, the firm's general execution and operational capabilities, and to its
reliability, integrity and financial condition.
Securities transactions of the fFnds may be executed by broker-dealers who also
provide research services (as defined below) to the Advisor and the funds. The
Advisor may use all, some or none of such research services in providing
investment advisory services to each of its investment company and other
clients, including the fund. To the extent that such services are used by the
Advisor, they tend to reduce the Advisor's expenses. In the Advisor's opinion,
it is impossible to assign an exact dollar value for such services.
The Trustees have authorized the Advisor to cause the Funds to pay a
broker-dealer which provides brokerage and research services to the Advisor an
amount of commission for effecting a securities transaction, including the sale
of an option or a closing purchase transaction, for the funds in excess of the
amount of commission which another broker-dealer would have charged for
effecting that transaction. As provided in Section 28(e) of the Securities
Exchange Act of 1934, "brokerage and research services" include advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities and the availability of securities or purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends and portfolio strategy and performance
of accounts; and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement). The Advisor must
determine in good faith that such greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of that particular transaction or the Advisor's
overall responsibilities to the funds and all its other clients.
The Trustees have authorized the Advisor to utilize the services of a clearing
agent with respect to all call options written by funds that write options and
to pay such clearing agent commissions of a fixed amount per share (currently
1.25 cents) on the sale of the underlying security upon the exercise of an
option written by a fund.
The Advisor may use the services of AlphaTrade Inc. (ATI), its registered
broker-dealer subsidiary, when buying or selling equity securities for a fund's
portfolio pursuant to procedures adopted by the Trustees and 1940 Act Rule
17e-1. Under the Rule, the Advisor must ensure that commissions a Fund pays ATI
on portfolio transactions are reasonable and fair compared to commissions
received by other broker-dealers in connection with comparable transactions
involving similar securities being bought or sold at about the same time. The
Advisor will report quarterly to the Trustees on all securities transactions
placed through ATI so that the Trustees may consider whether such trades
complied with these procedures and the Rule. ATI employs electronic trading
methods by which it seeks to obtain best price and execution for the fund, and
will use a clearing broker to settle trades.
Principal Underwriter
LFDI is the principal underwriter of the Trust's shares. LFDI has no obligation
to buy the funds' shares, and purchases the funds' shares only upon receipt of
orders from authorized FSFs or investors.
Investor Servicing and Transfer Agent
LFSI is the Trust's investor servicing agent (transfer, plan and dividend
disbursing agent), for which it receives fees which are paid monthly by the
Trust. The fee paid to LFSI is based on the average daily net assets of each
fund plus reimbursement for certain out-of-pocket expenses. See "Fund Charges
and Expenses" in Part 1 of this SAI for information on fees received by LFSI.
The agreement continues indefinitely but may be terminated by 90 days' notice by
the fund to LFSI or generally by 6 months' notice by LFSI to the fund. The
agreement limits the liability of LFSI to the fund for loss or damage incurred
by the fund to situations involving a failure of LFSI to use reasonable care or
to act in good faith in performing its duties under the agreement. It also
provides that the fund will indemnify LFSI against, among other things, loss or
damage incurred by LFSI on account of any claim, demand, action or suit made on
or against LFSI not resulting from LFSI's bad faith or negligence and arising
out of, or in connection with, its duties under the agreement.
DETERMINATION OF NET ASSET VALUE
Each fund determines net asset value (NAV) per share for each Class as of the
close of the New York Stock Exchange (Exchange) (generally 4:00 p.m. Eastern
time, 3:00 p.m. Central time) each day the Exchange is open. Currently, the
Exchange is closed Saturdays, Sundays and the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
the Fourth of July, Labor Day, Thanksgiving and Christmas. Funds with portfolio
securities which are primarily listed on foreign exchanges may experience
trading and changes in NAV on days on which such fund does not determine NAV due
to differences in closing policies among exchanges. This may significantly
affect the NAV of the fund's redeemable securities on days when an investor
cannot redeem such securities. The net asset value of the Municipal Money Market
Portfolio will not be determined on days when the Exchange is closed unless, in
the judgment of the Municipal Money Market Portfolio's Board of Trustees, the
net asset value of the Municipal Money Market Portfolio should be determined on
any such day, in which case the determination will be made at 3:00 p.m., Central
time. Debt securities generally are valued by a pricing service which determines
valuations based upon market transactions for normal, institutional-size trading
units of similar securities. However, in circumstances where such prices are not
available or where the Advisor deems it appropriate to do so, an
over-the-counter or exchange bid quotation is used. Securities listed on an
exchange or on NASDAQ are valued at the last sale price. Listed securities for
which there were no sales during the day and unlisted securities are valued at
the last quoted bid price. Options are valued at the last sale price or in the
absence of a sale, the mean between the last quoted bid and offering prices.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost pursuant to procedures adopted by the Trustees. The values of
foreign securities quoted in foreign currencies are translated into U.S. dollars
at the exchange rate for that day. Portfolio positions for which there are no
such valuations and other assets are valued at fair value as determined by the
Advisor in good faith under the direction of the Trust's Board of Trustees.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. Trading on certain foreign securities markets may not take place on
all business days in New York, and trading on some foreign securities markets
takes place on days which are not business days in New York and on which the
fund's NAV is not calculated. The values of these securities used in determining
the NAV are computed as of such times. Also, because of the amount of time
required to collect and process trading information as to large numbers of
securities issues, the values of certain securities (such as convertible bonds,
U.S. government securities, and tax-exempt securities) are determined based on
market quotations collected earlier in the day at the latest practicable time
prior to the close of the Exchange. Occasionally, events affecting the value of
such securities may occur between such times and the close of the Exchange which
will not be reflected in the computation of each fund's NAV. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value following procedures
approved by the Trust's Board of Trustees.
(The following two paragraphs are applicable only to Newport Tiger Fund, Newport
Japan Opportunities Fund, Newport Tiger Cub Fund, Newport Greater China Fund and
Newport Asia Pacific Fund - "Advisor" in these two paragraphs refers to each
fund's Advisor, Newport Fund Management, Inc.)
Trading in securities on stock exchanges and over-the-counter markets in the Far
East is normally completed well before the close of the business day in New
York. Trading on Far Eastern securities markets may not take place on all
business days in New York, and trading on some Far Eastern securities markets
does take place on days which are not business days in New York and on which the
fund's NAV is not calculated.
The calculation of the fund's NAV accordingly may not take place
contemporaneously with the determination of the prices of the fund's portfolio
securities used in such calculations. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the close
of the Exchange (when the fund's NAV is calculated) will not be reflected in the
fund's calculation of NAV unless the Advisor, acting under procedures
established by the Board of Trustees of the Trust, deems that the particular
event would materially affect the fund's NAV, in which case an adjustment will
be made. Assets or liabilities initially expressed in terms of foreign
currencies are translated prior to the next determination of the NAV of the
fund's shares into U.S. dollars at prevailing market rates.
Amortized Cost for Money Market Funds (this section currently does not apply to
Colonial Money Market funds, - see "Amortized Cost for Money Market Funds" under
"Other Information Concerning the Portfolio" in Part 1 of the SAI of and
Colonial Municipal Money Market Fund for information relating to the Municipal
Money Market Portfolio)
Money market funds generally value their portfolio securities at amortized cost
according to Rule 2a-7 under the 1940 Act.
Portfolio instruments are valued under the amortized cost method, whereby the
instrument is recorded at cost and thereafter amortized to maturity. This method
assures a constant NAV but may result in a yield different from that of the same
portfolio under the market value method. The Trust's Trustees have adopted
procedures intended to stabilize a money market fund's NAV per share at $1.00.
When a money market fund's market value deviates from the amortized cost of
$1.00, and results in a material dilution to existing shareholders, the Trust's
Trustees will take corrective action that may include: realizing gains or
losses; shortening the portfolio's maturity; withholding distributions;
redeeming shares in kind; or converting to the market value method (in which
case the NAV per share may differ from $1.00). All investments will be
determined pursuant to procedures approved by the Trust's Trustees to present
minimal credit risk.
See the Statement of Assets and Liabilities in the shareholder report of the
Colonial Money Market Fund for a specimen price sheet showing the computation of
maximum offering price per share of Class A shares.
HOW TO BUY SHARES
The Prospectus contains a general description of how investors may buy shares of
the und and tables of charges. This SAI contains additional information which
may be of interest to investors.
The Fund will accept unconditional orders for shares to be executed at the
public offering price based on the NAV per share next determined after the order
is placed in good order. The public offering price is the NAV plus the
applicable sales charge, if any. In the case of orders for purchase of shares
placed through FSFs, the public offering price will be determined on the day the
order is placed in good order, but only if the FSF receives the order prior to
the time at which shares are valued and transmits it to the fund before the fund
processes that day's transactions. If the FSF fails to transmit before the fund
processes that day's transactions, the customer's entitlement to that day's
closing price must be settled between the customer and the FSF. If the FSF
receives the order after the time at which the fund values its shares, the price
will be based on the NAV determined as of the close of the Exchange on the next
day it is open. If funds for the purchase of shares are sent directly to LFSI,
they will be invested at the public offering price next determined after receipt
in good order. Payment for shares of the Fund must be in U.S. dollars; if made
by check, the check must be drawn on a U.S. bank.
The fund receives the entire NAV of shares sold. For shares subject to an
initial sales charge, LFDI's commission is the sales charge shown in the Fund's
Prospectus less any applicable FSF discount. The FSF discount is the same for
all FSFs, except that LFDI retains the entire sales charge on any sales made to
a shareholder who does not specify a FSF on the Investment Account Application
("Application"). LFDI generally retains 100% of any asset-based sales charge
(distribution fee) or contingent deferred sales charge. Such charges generally
reimburse LFDI for any up-front and/or ongoing commissions paid to FSFs.
Checks presented for the purchase of shares of the fund which are returned by
the purchaser's bank or checkwriting privilege checks for which there are
insufficient funds in a shareholder's account to cover redemption will subject
such purchaser or shareholder to a $15 service fee for each check returned.
Checks must be drawn on a U.S. bank and must be payable in U.S. dollars.
LFSI acts as the shareholder's agent whenever it receives instructions to carry
out a transaction on the shareholder's account. Upon receipt of instructions
that shares are to be purchased for a shareholder's account, the designated FSF
will receive the applicable sales commission. Shareholders may change FSFs at
any time by written notice to LFSI, provided the new FSF has a sales agreement
with LFDI.
Shares credited to an account are transferable upon written instructions in good
order to LFSI and may be redeemed as described under "How to Sell Shares" in the
Prospectus. Certificates will not be issued for Class A shares unless
specifically requested and no certificates will be issued for Class B, C, T or Z
shares. The Colonial money market funds will not issue certificates.
Shareholders may send any certificates which have been previously acquired to
LFSI for deposit to their account.
SPECIAL PURCHASE PROGRAMS/INVESTOR SERVICES
The following special purchase programs/investor services may be changed or
eliminated at any time.
Fundamatic Program. As a convenience to investors, shares of most funds advised
by Colonial, Newport Fund Management, Inc. and Stein Roe & Farnham Incorporated
may be purchased through the Fundamatic Program. Preauthorized monthly bank
drafts or electronic funds transfer for a fixed amount of at least $50 are used
to purchase a fund's shares at the public offering price next determined after
LFDI receives the proceeds from the draft (normally the 5th or the 20th of each
month, or the next business day thereafter). If your Fundamatic purchase is by
electronic funds transfer, you may request the Fundamatic purchase for any day.
Further information and application forms are available from FSFs or from LFDI.
Automated Dollar Cost Averaging (Classes A, B and C). The Automated Dollar Cost
Averaging program allows you to exchange $100 or more on a monthly basis from
any mutual fund advised by Colonial, Newport Fund Management, Inc. and Stein Roe
& Farnham Incorporated in which you have a current balance of at least $5,000
into the same class of shares of up to four other funds. Complete the Automated
Dollar Cost Averaging section of the Application. The designated amount will be
exchanged on the third Tuesday of each month. There is no charge for exchanges
made pursuant to the Automated Dollar Cost Averaging program. Exchanges will
continue so long as your fund balance is sufficient to complete the transfers.
Your normal rights and privileges as a shareholder remain in full force and
effect. Thus you can buy any fund, exchange between the same Class of shares of
funds by written instruction or by telephone exchange if you have so elected and
withdraw amounts from any fund, subject to the imposition of any applicable
CDSC.
Any additional payments or exchanges into your fund will extend the time of the
Automated Dollar Cost Averaging program.
An exchange is a capital sale transaction for federal income tax purposes.
You may terminate your program, change the amount of the exchange (subject to
the $100 minimum), or change your selection of funds, by telephone or in
writing; if in writing by mailing your instructions to Colonial Investors
Service Center, Inc. P.O. Box 1722, Boston, MA 02105-1722.
You should consult your FSF or investment advisor to determine whether or not
the Automated Dollar Cost Averaging program is appropriate for you.
LFDI offers several plans by which an investor may obtain reduced initial or
contingent deferred sales charges. These plans may be altered or discontinued at
any time. See "Programs For Reducing or Eliminating Sales Charges" for more
information.
Tax-Sheltered Retirement Plans. LFDI offers prototype tax-qualified plans,
including Individual Retirement Accounts (IRAs), and Pension and Profit-Sharing
Plans for individuals, corporations, employees and the self-employed. The
minimum initial Retirement Plan investment is $25. BankBoston, N.A. is the
Trustee of LFDI prototype plans and charges a $10 annual fee. Detailed
information concerning these Retirement Plans and copies of the Retirement Plans
are available from LFDI.
Participants in non-LFDI prototype Retirement Plans (other than IRAs) also are
charged a $10 annual fee unless the plan maintains an omnibus account with LFSI.
Participants in LFDI prototype Plans (other than IRAs) who liquidate the total
value of their account will also be charged a $15 close-out processing fee
payable to LFSI. The fee is in addition to any applicable CDSC. The fee will not
apply if the participant uses the proceeds to open a LFDI IRA Rollover account
in any fund, or if the Plan maintains an omnibus account.
Consultation with a competent financial and tax advisor regarding these Plans
and consideration of the suitability of fund shares as an investment under the
Employee Retirement Income Security Act of 1974 or otherwise is recommended.
Telephone Address Change Services. By calling LFSI, shareholders or their FSF of
record may change an address on a recorded telephone line. Confirmations of
address change will be sent to both the old and the new addresses. Telephone
redemption privileges are suspended for 30 days after an address change is
effected.
Cash Connection. Dividends and any other distributions, including Systematic
Withdrawal Plan (SWP) payments, may be automatically deposited to a
shareholder's bank account via electronic funds transfer. Shareholders wishing
to avail themselves of this electronic transfer procedure should complete the
appropriate sections of the Application.
Automatic Dividend Diversification. The automatic dividend diversification
reinvestment program (ADD) generally allows shareholders to have all
distributions from a fund automatically invested in the same class of shares of
another fund. An ADD account must be in the same name as the shareholder's
existing open account with the particular fund. Call LFSI for more information
at 1-800-422-3737.
PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES
Right of Accumulation and Statement of Intent (Class A and Class T shares only)
(Class T shares can only be purchased by the shareholders of Newport Tiger Fund
who already own Class T shares). Reduced sales charges on Class A and T shares
can be effected by combining a current purchase with prior purchases of Class A,
B, C, T and Z shares of the funds distributed by LFDI. The applicable sales
charge is based on the combined total of:
1. the current purchase; and
2. the value at the public offering price at the close of business on
the previous day of all funds' Class A shares held by the
shareholder (except shares of any money market fund, unless such
shares were acquired by exchange from Class A shares of another fund
other than a money market fund and Class B, C, T and Z shares).
LFDI must be promptly notified of each purchase which entitles a shareholder to
a reduced sales charge. Such reduced sales charge will be applied upon
confirmation of the shareholder's holdings by LFSI. A fund may terminate or
amend this Right of Accumulation.
Any person may qualify for reduced sales charges on purchases of Class A and T
shares made within a thirteen-month period pursuant to a Statement of Intent
("Statement"). A shareholder may include, as an accumulation credit toward the
completion of such Statement, the value of all Class A, B, C, T and Z shares
held by the shareholder on the date of the Statement in funds (except shares of
any money market fund, unless such shares were acquired by exchange from Class A
shares of another non-money market fund). The value is determined at the public
offering price on the date of the Statement. Purchases made through reinvestment
of distributions do not count toward satisfaction of the Statement.
During the term of a Statement, LFSI will hold shares in escrow to secure
payment of the higher sales charge applicable to Class A or T shares actually
purchased. Dividends and capital gains will be paid on all escrowed shares and
these shares will be released when the amount indicated has been purchased. A
Statement does not obligate the investor to buy or a fund to sell the amount of
the Statement.
If a shareholder exceeds the amount of the Statement and reaches an amount which
would qualify for a further quantity discount, a retroactive price adjustment
will be made at the time of expiration of the Statement. The resulting
difference in offering price will purchase additional shares for the
shareholder's account at the applicable offering price. As a part of this
adjustment, the FSF shall return to LFDI the excess commission previously paid
during the thirteen-month period.
If the amount of the Statement is not purchased, the shareholder shall remit to
LFDI an amount equal to the difference between the sales charge paid and the
sales charge that should have been paid. If the shareholder fails within twenty
days after a written request to pay such difference in sales charge, LFSI will
redeem that number of escrowed Class A shares to equal such difference. The
additional amount of FSF discount from the applicable offering price shall be
remitted to the shareholder's FSF of record.
Additional information about and the terms of Statements of Intent are available
from your FSF, or from LFSI at 1-800-345-6611.
Colonial Asset Builder Investment Program (this section currently applies only
to the Class A shares of Colonial Select Value Fund and The Colonial Fund, each
a series of Colonial Trust III). A reduced sales charge applies to a purchase of
certain funds' Class A shares under a Statement of Intent for the Colonial Asset
Builder Investment Program. The Program offer may be withdrawn at any time
without notice. A completed Program may serve as the initial investment for a
new Program, subject to the maximum of $4,000 in initial investments per
investor. Shareholders in this program are subject to a 5% sales charge. LFSI
will escrow shares to secure payment of the additional sales charge on amounts
invested if the Program is not completed. Escrowed shares are credited with
distributions and will be released when the Program has ended. Shareholders are
subject to a 1% fee on the amount invested if they do not complete the Program.
Prior to completion of the Program, only scheduled Program investments may be
made in a fund in which an investor has a Program account. The following
services are not available to Program accounts until a Program has ended:
Systematic Withdrawal Plan Share Certificates
Sponsored Arrangements Exchange Privilege
$50,000 Fast Cash Colonial Cash Connection
Right of Accumulation Automatic Dividend Diversification
Telephone Redemption Reduced Sales Charges for any "person"
Statement of Intent
*Exchanges may be made to other funds offering the Program.
Because of the unavailability of certain services, this Program may not be
suitable for all investors.
The FSF receives 3% of the investor's intended purchases under a Program at the
time of initial investment and 1% after the 24th monthly payment. LFDI may
require the FSF to return all applicable commissions paid with respect to a
Program terminated within six months of inception, and thereafter to return
commissions in excess of the FSF discount applicable to shares actually
purchased.
Since the Asset Builder plan involves continuous investment regardless of the
fluctuating prices of funds shares, investors should consult their FSF to
determine whether it is appropriate. The Plan does not assure a profit nor
protect against loss in declining markets.
Reinstatement Privilege. An investor who has redeemed Class A, B, C or T shares
may, upon request, reinstate within one year a portion or all of the proceeds of
such sale in shares of the same Class of any fund at the NAV next determined
after LFSI receives a written reinstatement request and payment. Any CDSC paid
at the time of the redemption will be credited to the shareholder upon
reinstatement. The period between the redemption and the reinstatement will not
be counted in aging the reinstated shares for purposes of calculating any CDSC
or conversion date. Investors who desire to exercise this privilege should
contact their FSF or LFSI. Shareholders may exercise this Privilege an unlimited
number of times. Exercise of this privilege does not alter the Federal income
tax treatment of any capital gains realized on the prior sale of fund shares,
but to the extent any such shares were sold at a loss, some or all of the loss
may be disallowed for tax purposes. Consult your tax advisor.
Privileges of Colonial Employees or Financial Service Firms (in this section,
the "Advisor" refers to Colonial Management Associates, Inc. in its capacity as
the Advisor or Administrator to certain Funds). Class A shares of certain funds
may be sold at NAV to the following individuals whether currently employed or
retired: Trustees of funds advised or administered by the Advisor; directors,
officers and employees of the Advisor, LFDI and other companies affiliated with
the Advisor; registered representatives and employees of FSFs (including their
affiliates) that are parties to dealer agreements or other sales arrangements
with LFDI; and such persons' families and their beneficial accounts.
Sponsored Arrangements. Class A and Class T shares (Class T shares can only be
purchased by the shareholders of Newport Tiger Fund who already own Class T
shares) of certain funds may be purchased at reduced or no sales charge pursuant
to sponsored arrangements, which include programs under which an organization
makes recommendations to, or permits group solicitation of, its employees,
members or participants in connection with the purchase of shares of the fund on
an individual basis. The amount of the sales charge reduction will reflect the
anticipated reduction in sales expense associated with sponsored arrangements.
The reduction in sales expense, and therefore the reduction in sales charge,
will vary depending on factors such as the size and stability of the
organization's group, the term of the organization's existence and certain
characteristics of the members of its group. The funds reserve the right to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
plans at any time.
Class A and Class T shares (Class T shares can only be purchased by the
shareholders of Newport Tiger Fund who already own Class T shares) of certain
funds may also be purchased at reduced or no sales charge by clients of dealers,
brokers or registered investment advisors that have entered into agreements with
LFDI pursuant to which the funds are included as investment options in programs
involving fee-based compensation arrangements, and by participants in certain
retirement plans.
Waiver of Contingent Deferred Sales Charges (CDSCs) (in
this section, the "Advisor" refers to Colonial Management Associates, Inc. in
its capacity as the Advisor or Administrator to certain Funds) (Classes A, B and
C) CDSCs may be waived on redemptions in the following situations with the
proper documentation:
1. Death. CDSCs may be waived on redemptions within one year following the
death of (i) the sole shareholder on an individual account, (ii) a joint
tenant where the surviving joint tenant is the deceased's spouse, or (iii)
the beneficiary of a Uniform Gifts to Minors Act (UGMA), Uniform Transfers
to Minors Act (UTMA) or other custodial account. If, upon the occurrence of
one of the foregoing, the account is transferred to an account registered
in the name of the deceased's estate, the CDSC will be waived on any
redemption from the estate account occurring within one year after the
death. If the Class B shares are not redeemed within one year of the death,
they will remain subject to the applicable CDSC, when redeemed from the
transferee's account. If the account is transferred to a new registration
and then a redemption is requested, the applicable CDSC will be charged.
2. Systematic Withdrawal Plan (SWP). CDSCs may be waived on redemptions
occurring pursuant to a monthly, quarterly or semi-annual SWP established
with LFSI Advisor, to the extent the redemptions do not exceed, on an
annual basis, 12% of the account's value, so long as at the time of the
first SWP redemption the account had had distributions reinvested for a
period at least equal to the period of the SWP (e.g., if it is a quarterly
SWP, distributions must have been reinvested at least for the three month
period prior to the first SWP redemption); otherwise CDSCs will be charged
on SWP redemptions until this requirement is met; this requirement does not
apply if the SWP is set up at the time the account is established, and
distributions are being reinvested. See below under "Investor Services -
Systematic Withdrawal Plan."
3. Disability. CDSCs may be waived on redemptions occurring within one year
after the sole shareholder on an individual account or a joint tenant on a
spousal joint tenant account becomes disabled (as defined in Section
72(m)(7) of the Internal Revenue Code). To be eligible for such waiver, (i)
the disability must arise after the purchase of shares and (ii) the
disabled shareholder must have been under age 65 at the time of the initial
determination of disability. If the account is transferred to a new
registration and then a redemption is requested, the applicable CDSC will
be charged.
4. Death of a trustee. CDSCs may be waived on redemptions occurring upon
dissolution of a revocable living or grantor trust following the death of
the sole trustee where (i) the grantor of the trust is the sole trustee and
the sole life beneficiary, (ii) death occurs following the purchase and
(iii) the trust document provides for dissolution of the trust upon the
trustee's death. If the account is transferred to a new registration
(including that of a successor trustee), the applicable CDSC will be
charged upon any subsequent redemption.
5. Returns of excess contributions. CDSCs may be waived on redemptions
required to return excess contributions made to retirement plans or
individual retirement accounts, so long as the FSF agrees to return the
applicable portion of any commission paid by Colonial.
6. Qualified Retirement Plans. CDSCs may be waived on redemptions required to
make distributions from qualified retirement plans following normal
retirement (as stated in the Plan document). CDSCs also will be waived on
SWP redemptions made to make required minimum distributions from qualified
retirement plans that have invested in funds distributed by LFDI for at
least two years.
The CDSC also may be waived where the FSF agrees to return all or an agreed upon
portion of the commission earned on the sale of the shares being redeemed.
HOW TO SELL SHARES
Shares may also be sold on any day the Exchange is open, either directly to the
Fund or through the shareholder's FSF. Sale proceeds generally are sent within
seven days (usually on the next business day after your request is received in
good form). However, for shares recently purchased by check, the Fund will delay
sending proceeds for up to 15 days in order to protect the Fund against
financial losses and dilution in net asset value caused by dishonored purchase
payment checks.
To sell shares directly to the Fund, send a signed letter of instruction or
stock power form to LFSI, along with any certificates for shares to be sold. The
sale price is the net asset value (less any applicable contingent deferred sales
charge) next calculated after the Fund receives the request in proper form.
Signatures must be guaranteed by a bank, a member firm of a national stock
exchange or another eligible guarantor institution. Stock power forms are
available from FSFs, LFSI and many banks. Additional documentation is required
for sales by corporations, agents, fiduciaries, surviving joint owners and
individual retirement account holders. Call LFSI for more information
1-800-345-6611.
FSFs must receive requests before the time at which the Fund's shares are valued
to receive that day's price, are responsible for furnishing all necessary
documentation to LFSI and may charge for this service.
Systematic Withdrawal Plan. If a shareholder's account balance is at least
$5,000, the shareholder may establish a SWP. A specified dollar amount or
percentage of the then current net asset value of the shareholder's investment
in any fund designated by the shareholder will be paid monthly, quarterly or
semi-annually to a designated payee. The amount or percentage the shareholder
specifies generally may not, on an annualized basis, exceed 12% of the value, as
of the time the shareholder makes the election, of the shareholder's investment.
Withdrawals from Class B and Class C shares of the fund under a SWP will be
treated as redemptions of shares purchased through the reinvestment of fund
distributions, or, to the extent such shares in the shareholder's account are
insufficient to cover Plan payments, as redemptions from the earliest purchased
shares of such fund in the shareholder's account. No CDSCs apply to a redemption
pursuant to a SWP of 12% or less, even if, after giving effect to the
redemption, the shareholder's account balance is less than the shareholder's
base amount. Qualified plan participants who are required by Internal Revenue
Service regulation to withdraw more than 12%, on an annual basis, of the value
of their Class B and Class C share account may do so but will be subject to a
CDSC ranging from 1% to 5% of the amount withdrawn in excess of 12% annually. If
a shareholder wishes to participate in a SWP, the shareholder must elect to have
all of the shareholder's income dividends and other fund distributions payable
in shares of the fund rather than in cash.
A shareholder or a shareholder's FSF of record may establish a SWP account by
telephone on a recorded line. However, SWP checks will be payable only to the
shareholder and sent to the address of record. SWPs from retirement accounts
cannot be established by telephone.
A shareholder may not establish a SWP if the shareholder holds shares in
certificate form. Purchasing additional shares (other than through dividend and
distribution reinvestment) while receiving SWP payments is ordinarily
disadvantageous because of duplicative sales charges. For this reason, a
shareholder may not maintain a plan for the accumulation of shares of the fund
(other than through the reinvestment of dividends) and a SWP at the same time.
SWP payments are made through share redemptions, which may result in a gain or
loss for tax purposes, may involve the use of principal and may eventually use
up all of the shares in a shareholder's account.
A fund may terminate a shareholder's SWP if the shareholder's account balance
falls below $5,000 due to any transfer or liquidation of shares other than
pursuant to the SWP. SWP payments will be terminated on receiving satisfactory
evidence of the death or incapacity of a shareholder. Until this evidence is
received, LFSI will not be liable for any payment made in accordance with the
provisions of a SWP.
The cost of administering SWPs for the benefit of shareholders who participate
in them is borne by the fund as an expense of all shareholders.
Shareholders whose positions are held in "street name" by certain FSFs may not
be able to participate in a SWP. If a shareholder's Fund shares are held in
"street name," the shareholder should consult his or her FSF to determine
whether he or she may participate in a SWP.
Telephone Redemptions. All Fund shareholders and/or their FSFs advisor (except
for Newport Tiger Cub Fund, Newport Japan Opportunities Fund, Newport Asia
Pacific Fund and Newport Greater China Fund) are automatically eligible to
redeem up to $50,000 of the fund's shares by calling 1-800-422-3737 toll-free
any business day between 9:00 a.m. and the close of trading of the Exchange
(normally 4:00 p.m. Eastern time). Transactions received after 4:00 p.m. Eastern
time will receive the next business day's closing price. Telephone redemption
privileges for larger amounts and for Newport Tiger Cub Fund, Newport Japan
Opportunities Fund, Newport Greater China Fund and Newport Asia Pacific Fund may
be elected on the Application. LFSI will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. Telephone redemptions
are not available on accounts with an address change in the preceding 30 days
and proceeds and confirmations will only be mailed or sent to the address of
record unless the redemption proceeds are being sent to a pre-designated bank
account. Shareholders and/or their FSFs advisor will be required to provide
their name, address and account number. FSFs advisor will also be required to
provide their broker number. All telephone transactions are recorded. A loss to
a shareholder may result from an unauthorized transaction reasonably believed to
have been authorized. No shareholder is obligated to execute the telephone
authorization form or to use the telephone to execute transactions.
Checkwriting (in this section, the "Advisor" refers to Colonial Management
Associates, Inc. in its capacity as the Advisor or Administrator of certain
Funds) (Available only on the Class A shares of certain funds) Shares may be
redeemed by check if a shareholder has previously completed an Application and
Signature Card. AdvisorLFSI will provide checks to be drawn on BankBoston (the
"Bank"). These checks may be made payable to the order of any person in the
amount of not less than $500 nor more than $100,000. The shareholder will
continue to earn dividends on shares until a check is presented to the Bank for
payment. At such time a sufficient number of full and fractional shares will be
redeemed at the next determined net asset value to cover the amount of the
check. Certificate shares may not be redeemed in this manner.
Shareholders utilizing checkwriting drafts will be subject to the Bank's rules
governing checking accounts. There is currently no charge to the shareholder for
the use of checks. The shareholder should make sure that there are sufficient
shares in his or her open account to cover the amount of any check drawn since
the net asset value of shares will fluctuate. If insufficient shares are in the
shareholder's open account, the check will be returned marked "insufficient
funds" and no shares will be redeemed; the shareholder will be charged a $15
service fee for each check returned. It is not possible to determine in advance
the total value of an open account because prior redemptions and possible
changes in net asset value may cause the value of an open account to change.
Accordingly, a check redemption should not be used to close an open account. In
addition, a check redemption, like any other redemption, may give rise to
taxable capital gains.
Non Cash Redemptions. For redemptions of any single shareholder within any
90-day period exceeding the lesser of $250,000 or 1% of a fund's net asset
value, a fund may make the payment or a portion of the payment with portfolio
securities held by that fund instead of cash, in which case the redeeming
shareholder may incur brokerage and other costs in selling the securities
received.
DISTRIBUTIONS
Distributions are invested in additional shares of the same Class of the fund at
net asset value unless the shareholder elects to receive cash. Regardless of the
shareholder's election, distributions of $10 or less will not be paid in cash,
but will be invested in additional shares of the same Class of the fund at net
asset value. Undelivered distribution checks returned by the post office will be
reinvested in your account. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service selected by the Transfer Agent is unable to deliver checks to the
shareholder's address of record, such shareholder's distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. No interest will accrue on amounts represented
by uncashed distribution or redemption checks. Shareholders may reinvest all or
a portion of a recent cash distribution without a sales charge. A shareholder
request must be received within 30 calendar days of the distribution. A
shareholder may exercise this privilege only once. No charge is currently made
for reinvestment.
Shares of most funds that pay daily dividends will normally earn dividends
starting with the date the fund receives payment for the shares and will
continue through the day before the shares are redeemed, transferred or
exchanged. The daily dividends for Colonial Money Market Fund and Colonial
Municipal Money Market Fund will be earned starting with the day after that fund
receives payments for the shares.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for the same class of shares of the other
continuously offered Funds (with certain exceptions) on the basis of the NAVs
per share at the time of exchange. Class T and Z shares may be exchanged for
Class A shares of the other Funds. The prospectus of each fund describes its
investment objective and policies, and shareholders should obtain a prospectus
and consider these objectives and policies carefully before requesting an
exchange. Shares of certain funds are not available to residents of all states.
Consult LFSI before requesting an exchange.
By calling LFSI, shareholders or their FSF of record may exchange among accounts
with identical registrations, provided that the shares are held on deposit.
During periods of unusual market changes or shareholder activity, shareholders
may experience delays in contacting LFSI by telephone to exercise the telephone
exchange privilege. Because an exchange involves a redemption and reinvestment
in another fund, completion of an exchange may be delayed under unusual
circumstances, such as if the fund suspends repurchases or postpones payment for
the fund shares being exchanged in accordance with federal securities law. LFSI
will also make exchanges upon receipt of a written exchange request and, share
certificates, if any. If the shareholder is a corporation, partnership, agent,
or surviving joint owner, LFSI will require customary additional documentation.
Prospectuses of the other funds are available from the LFDI Literature
Department by calling 1-800-426-3750.
A loss to a shareholder may result from an unauthorized transaction reasonably
believed to have been authorized. No shareholder is obligated to use the
telephone to execute transactions.
You need to hold your Class A and Class T shares for five months before
exchanging to certain funds having a higher maximum sales charge. Consult your
FSF or LFSI. In all cases, the shares to be exchanged must be registered on the
records of the fund in the name of the shareholder desiring to exchange.
Shareholders of the other open-end funds generally may exchange their shares at
NAV for the same class of shares of the fund.
An exchange is a capital sale transaction for federal income tax purposes. The
exchange privilege may be revised, suspended or terminated at any time.
SUSPENSION OF REDEMPTIONS
A Fund may not suspend shareholders' right of redemption or postpone payment for
more than seven days unless the Exchange is closed for other than customary
weekends or holidays, or if permitted by the rules of the SEC during periods
when trading on the Exchange is restricted or during any emergency which makes
it impracticable for the fund to dispose of its securities or to determine
fairly the value of its net assets, or during any other period permitted by
order of the SEC for the protection of investors.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the fund
and the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the fund or the
Trust's Trustees. The Declaration provides for indemnification out of fund
property for all loss and expense of any shareholder held personally liable for
the obligations of the fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances (which are
considered remote) in which the fund would be unable to meet its obligations and
the disclaimer was inoperative.
The risk of a particular fund incurring financial loss on account of another
fund of the Trust is also believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the other fund was
unable to meet its obligations.
SHAREHOLDER MEETINGS
As described under the caption "Organization and History" in the Prospectus of
each fund, the fund will not hold annual shareholders' meetings. The Trustees
may fill any vacancies in the Board of Trustees except that the Trustees may not
fill a vacancy if, immediately after filling such vacancy, less than two-thirds
of the Trustees then in office would have been elected to such office by the
shareholders. In addition, at such times as less than a majority of the Trustees
then in office have been elected to such office by the shareholders, the
Trustees must call a meeting of shareholders. Trustees may be removed from
office by a written consent signed by a majority of the outstanding shares of
the Trust or by a vote of the holders of a majority of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon written
request of the holders of not less than 10% of the outstanding shares of the
Trust. Upon written request by the holders of 1% of the outstanding shares of
the Trust stating that such shareholders of the Trust, for the purpose of
obtaining the signatures necessary to demand a shareholders' meeting to consider
removal of a Trustee, request information regarding the Trust's shareholders,
the Trust will provide appropriate materials (at the expense of the requesting
shareholders). Except as otherwise disclosed in the Prospectus and this SAI, the
Trustees shall continue to hold office and may appoint their successors.
At any shareholders' meetings that may be held, shareholders of all series would
vote together, irrespective of series, on the election of Trustees or the
selection of independent accountants, but each series would vote separately from
the others on other matters, such as changes in the investment policies of that
series or the approval of the management agreement for that series.
PERFORMANCE MEASURES
Total Return
Standardized average annual total return. Average annual total return is the
actual return on a $1,000 investment in a particular class of shares of the
fund, made at the beginning of a stated period, adjusted for the maximum sales
charge or applicable CDSC for the class of shares of the fund and assuming that
all distributions were reinvested at NAV, converted to an average annual return
assuming annual compounding.
Nonstandardized total return. Nonstandardized total returns may differ from
standardized average annual total returns in that they may relate to
nonstandardized periods, represent aggregate rather than average annual total
returns or may not reflect the sales charge or CDSC.
Total return for a newer class of shares for periods prior to inception includes
(a) the performance of the newer class of shares since inception and (b) the
performance of the oldest existing class of shares from the inception date up to
the date the newer class was offered for sale. In calculating total rate of
return for a newer class of shares in accordance with certain formulas required
by the SEC, the performance will be adjusted to take into account the fact that
the newer class is subject to a different sales charge than the oldest class
(e.g., if the newer class is Class A shares, the total rate of return quoted
will reflect the deduction of the initial sales charge applicable to Class A
shares; if the newer class is Class B or Class C shares, the total rate of
return quoted will reflect the deduction of the CDSC applicable to Class B or
Class C shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Yield
Money market. A money market fund's yield and effective yield is computed in
accordance with the SEC's formula for money market fund yields.
Non-money market. The yield for each class of shares of a fund is determined by
(i) calculating the income (as defined by the SEC for purposes of advertising
yield) during the base period and subtracting actual expenses for the period
(net of any reimbursements), and (ii) dividing the result by the product of the
average daily number of shares of the fund that were entitled to dividends
during the period and the maximum offering price of the fund on the last day of
the period, (iii) then annualizing the result assuming semi-annual compounding.
Tax-equivalent yield is calculated by taking that portion of the yield which is
exempt from income tax and determining the equivalent taxable yield which would
produce the same after-tax yield for any given federal and state tax rate, and
adding to that the portion of the yield which is fully taxable. Adjusted yield
is calculated in the same manner as yield except that expenses voluntarily borne
or waived by Colonial have been added back to actual expenses.
Distribution rate. The distribution rate for each class of shares of a fund is
usually calculated by dividing annual or annualized distributions by the maximum
offering price of that class on the last day of the period. Generally, the
fund's distribution rate reflects total amounts actually paid to shareholders,
while yield reflects the current earning power of the fund's portfolio
securities (net of the fund's expenses). The fund's yield for any period may be
more or less than the amount actually distributed in respect of such period.
The fund may compare its performance to various unmanaged indices published by
such sources as are listed in Appendix II.
The fund may also refer to quotations, graphs and electronically transmitted
data from sources believed by the Advisor to be reputable, and publications in
the press pertaining to a fund's performance or to the Advisor or its
affiliates, including comparisons with competitors and matters of national and
global economic and financial interest. Examples include Forbes, Business Week,
Money Magazine, The Wall Street Journal, The New York Times, The Boston Globe,
Barron's National Business & Financial Weekly, Financial Planning, Changing
Times, Reuters Information Services, Wiesenberger Mutual Funds Investment
Report, Lipper Analytical Services Corporation, Morningstar, Inc., Sylvia
Porter's Personal Finance Magazine, Money Market Directory, SEI Funds Evaluation
Services, FTA World Index and Disclosure Incorporated, Bloomberg and Ibbotson
All data are based on past performance and do not predict future results.
General. From time to time, the fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such person's views on:
the economy; securities markets; portfolio securities and their issuers;
investment philosophies, strategies, techniques and criteria used in the
selection of securities to be purchased or sold for the fund, including the New
ValueTM investment strategy that expands upon the principles of traditional
value investing; the fund's portfolio holdings; the investment research and
analysis process; the formulation and evaluation of investment recommendations;
and the assessment and evaluation of credit, interest rate, market and economic
risks and similar or related matters.
The fund may also quote evaluations mentioned in independent radio or television
broadcasts, and use charts and graphs to illustrate the past performance of
various indices such as those mentioned in Appendix II and illustrations using
hypothetical rates of return to illustrate the effects of compounding and
tax-deferral. The fund may advertise examples of the effects of periodic
investment plans, including the principle of dollar costs averaging. In such a
program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low.
From time to time, the fund may also discuss or quote the views of its
distributor, its investment advisor and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; general investment techniques (e.g.,
asset allocation and disciplined saving and investing); business succession;
issues with respect to insurance (e.g., disability and life insurance and
Medicare supplemental insurance); issues regarding financial and health care
management for elderly family members; and similar or related matters.
37
<PAGE>
APPENDIX I
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S CORPORATION (S&P)
The following descriptions are applicable to municipal bond funds:
AAA bonds have the highest rating assigned by S&P. Capacity to pay interest and
repay principal is extremely strong.
AA bonds have a very strong capacity to pay interest and repay principal, and
they differ from AAA only in small degree.
A bonds have a strong capacity to pay interest and repay principal, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB bonds are regarded as having an adequate capacity to pay interest and repay
principal. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal than for bonds in the A
category.
BB, B, CCC, CC and C bonds are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or large exposures to adverse conditions.
BB bonds have less near-term vulnerability to default than other speculative
issues. However, they face major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B bonds have a greater vulnerability to default but currently have the capacity
to meet interest payments and principal repayments. Adverse business, financial,
or economic conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC bonds have a currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, the bonds are not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC rating typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
C rating typically is applied to debt subordinated to senior debt which assigned
an actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
CI rating is reserved for income bonds on which no interest is being paid.
D bonds are in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus(+) or minus(-) ratings from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Provisional Ratings. The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, although addressing credit
quality subsequent to completion of the project, makes no comments on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
Municipal Notes:
SP-1. Notes rated SP-1 have very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and interest.
Notes due in three years or less normally receive a note rating. Notes maturing
beyond three years normally receive a bond rating, although the following
criteria are used in making that assessment:
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue will be rated as a note).
Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be rated as a note).
Demand Feature of Variable Rate Demand Securities:
S&P assigns dual ratings to all long-term debt issues that have as part of their
provisions a demand feature. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity, and the commercial paper rating symbols are
usually used to denote the put (demand) option (for example, AAA/A-1+).
Normally, demand notes receive note rating symbols combined with commercial
paper symbols (for example, SP-1+/A-1+).
Commercial Paper:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
Corporate Bonds:
The description of the applicable rating symbols and their meanings is
substantially the same as the Municipal Bond ratings set forth above.
The following descriptions are applicable to equity and taxable bond funds:
AAA bonds have the highest rating assigned by S&P. The obligor's capacity to
meet its financial commitment on the obligation is extremely strong.
AA bonds differ from the highest rated obligations only in small degree. The
obligor's capacity to meet its financial commitment on the obligation is very
strong.
A bonds are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB bonds exhibit adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC and CC bonds are regarded, as having significant speculative
characteristics. BB indicates the least degree of speculation and C the highest.
While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB bonds are less vulnerable to non-payment than other speculative issues.
However, they face major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B bonds are more vulnerable to nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC bonds are currently vulnerable to nonpayment, and are dependent upon
favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation.
CC bonds are currently highly vulnerable to nonpayment.
C ratings may be used to cover a situation where a bankruptcy petition has been
filed or similar action has been taken, but payments on the obligation are being
continued.
D bonds are in payment default. The D rating category is used when payments on
an obligation are not made on the date due even if the applicable grace period
has not expired, unless S&P believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or minus(-): The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
r This symbol is attached to the rating of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk, such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa bonds are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edge". Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair a fundamentally
strong position of such issues.
Aa bonds are judged to be of high quality by all standards. Together with Aaa
bonds they comprise what are generally known as high-grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large in
Aaa securities or fluctuation of protective elements may be of greater amplitude
or there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
Those bonds in the Aa through B groups that Moody's believes possess the
strongest investment attributes are designated by the symbol Aa1, A1 and Baa1.
A bonds possess many favorable investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa bonds are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact, have speculative
characteristics as well.
Ba bonds are judged to have speculative elements: their future cannot be
considered as well secured. Often, the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B bonds generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa bonds are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca bonds represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
C bonds are the lowest rated class of bonds and issues so rated can be regarded
as having extremely poor prospects of ever attaining any real investment
standing.
Conditional Ratings. Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
conditions attach. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Municipal Notes:
MIG 1. This designation denotes best quality. There is present strong protection
by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security elements are
accounted for, but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Demand Feature of Variable Rate Demand Securities:
Moody's may assign a separate rating to the demand feature of a variable rate
demand security. Such a rating may include:
VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
VMIG 2. This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
VMIG 3. This designation denotes favorable quality. All security elements are
accounted for, but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Commercial Paper:
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.
Corporate Bonds:
The description of the applicable rating symbols (Aaa, Aa, A) and their meanings
is identical to that of the Municipal Bond ratings as set forth above, except
for the numerical modifiers. Moody's applies numerical modifiers 1, 2, and 3 in
the Aa and A classifications of its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a midrange ranking; and the modifier 3
indicates that the issuer ranks in the lower end of its generic rating category.
FITCH INVESTORS SERVICE
Investment Grade Bond Ratings
AAA bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and/or
dividends and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated `AAA'. Because bonds rated in the
`AAA' and `AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated `F-1+'.
A bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than debt securities with higher ratings.
BBB bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest or dividends and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
securities and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
securities with higher ratings.
Conditional
A conditional rating is premised on the successful completion of a project or
the occurrence of a specific event.
Speculative-Grade Bond Ratings
BB bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified, which could assist the
obligor in satisfying its debt service requirements.
B bonds are considered highly speculative. While securities in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC bonds have certain identifiable characteristics that, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C bonds are in imminent default in payment of interest or principal.
DDD, DD, and D bonds are in default on interest and/or principal payments. Such
securities are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. `DDD'
represents the highest potential for recovery on these securities, and `D'
represents the lowest potential for recovery.
DUFF & PHELPS CREDIT RATING CO.
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA - High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+, A, A - Protection factors are average but adequate. However, risk factors
are more available and greater in periods of economic stress.
BBB+, BBB, BBB - Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB - Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B - Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC - Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD - Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
<PAGE>
39
APPENDIX II
1997
<TABLE>
<CAPTION>
SOURCE CATEGORY RETURN (%)
<S> <C> <C>
Donoghue Tax-Free Funds 4.93
Donoghue U.S. Treasury Funds 4.65
Dow Jones & Company Industrial Index 24.87
Morgan Stanley Capital International EAFE Index 1.78
Morgan Stanley Capital International EAFE GDP Index 5.77
Libor Six-month Libor N/A
Lipper Short U.S. Government Funds 5.82
Lipper California Municipal Bond Funds 9.15
Lipper Connecticut Municipal Bond Funds 8.53
Lipper Closed End Bond Funds 12.01
Lipper Florida Municipal Bond Funds 8.53
Lipper General Municipal Bonds 9.11
Lipper Global Funds 13.04
Lipper Growth Funds 25.30
Lipper Growth & Income Funds 27.14
Lipper High Current Yield Bond Funds 12.96
Lipper High Yield Municipal Bond Debt 10.11
Lipper Fixed Income Funds 8.67
Lipper Insured Municipal Bond Average 8.39
Lipper Intermediate Muni Bonds 7.16
Lipper Intermediate (5-10) U.S. Government Funds 8.08
Lipper Massachusetts Municipal Bond Funds 8.64
Lipper Michigan Municipal Bond Funds 8.50
Lipper Mid Cap Funds 19.76
Lipper Minnesota Municipal Bond Funds 8.15
Lipper U.S. Government Money Market Funds 4.90
Lipper New York Municipal Bond Funds 8.99
Lipper North Carolina Municipal Bond Funds 8.84
Lipper Ohio Municipal Bond Funds 8.16
Lipper Small Cap Funds 20.75
Lipper General U.S. Government Funds 8.84
Lipper Pacific Region Funds-Ex-Japan (35.52)
Lipper International Funds 5.44
Lipper Balanced Funds 19.00
Lipper Tax-Exempt Money Market 3.08
Lipper Multi-Sector 8.77
Lipper Corporate Debt BBB 10.08
Lipper High Yield Municipal - Closed Ends 9.66
Lipper High Current Yield - Closed Ends 14.31
Lipper General Municipal Debt - Closed Ends 10.26
Lipper Intermediate Investment Grade Debt 8.57
Lipper Utilities 26.01
Lipper Japan (14.07)
Lipper China (22.92)
Shearson Lehman Composite Government Index 9.59
Shearson Lehman Government/Corporate Index 9.76
Shearson Lehman Long-term Government Index 9.58
Shearson Lehman Municipal Bond Index 9.19
Shearson Lehman U.S. Government 1-3 6.65
S&P S&P 500 Index 33.35
S&P Utility Index 24.65
S&P Barra Growth 36.38
S&P Barra Value 29.99
S&P Midcap 400 19.00
First Boston High Yield Index 12.63
<PAGE>
SOURCE CATEGORY RETURN (%)
<S> <C> <C>
Swiss Bank 10 Year U.S. Government (Corporate Bond) 11.20
Swiss Bank 10 Year United Kingdom (Corporate Bond) 12.54
Swiss Bank 10 Year France (Corporate Bond) (4.79)
Swiss Bank 10 Year Germany (Corporate Bond) (6.13)
Swiss Bank 10 Year Japan (Corporate Bond) (3.39)
Swiss Bank 10 Year Canada (Corporate Bond) 7.79
Swiss Bank 10 Year Australia (Corporate Bond) (3.93)
Morgan Stanley Capital International 10 Year Hong Kong (Equity) 19.18
Morgan Stanley Capital International 10 Year Belgium (Equity) 14.43
Morgan Stanley Capital International 10 Year Austria (Equity) 7.58
Morgan Stanley Capital International 10 Year France (Equity) 13.27
Morgan Stanley Capital International 10 Year Netherlands (Equity) 18.61
Morgan Stanley Capital International 10 Year Japan (Equity) (2.90)
Morgan Stanley Capital International 10 Year Switzerland (Equity) 18.53
Morgan Stanley Capital International 10 Year United Kingdom (Equity) 13.95
Morgan Stanley Capital International 10 Year Germany (Equity) 13.75
Morgan Stanley Capital International 10 Year Italy (Equity) 6.15
Morgan Stanley Capital International 10 Year Sweden (Equity) 17.62
Morgan Stanley Capital International 10 Year United States (Equity) 17.39
Morgan Stanley Capital International 10 Year Australia (Equity) 9.25
Morgan Stanley Capital International 10 Year Norway (Equity) 13.29
Morgan Stanley Capital International 10 Year Spain (Equity) 10.58
Morgan Stanley Capital International World GDP Index 13.35
Morgan Stanley Capital International Pacific Region Funds Ex-Japan (31.00)
Bureau of Labor Statistics Consumer Price Index (Inflation) 1.70
FHLB-San Francisco 11th District Cost-of-Funds Index N/A
Salomon Six-Month Treasury Bill 5.41
Salomon One-Year Constant-Maturity Treasury Rate N/A
Salomon Five-Year Constant-Maturity Treasury Rate N/A
Frank Russell Company Russell 2000(R)Index 22.36
Frank Russell Company Russell 1000(R)Value Index 35.18
Frank Russell Company Russell 1000(R)Growth Index 30.49
Bloomberg NA NA
Credit Lyonnais NA NA
Statistical Abstract of the U.S. NA NA
World Economic Outlook NA NA
</TABLE>
The Russell 2000(R) Index, the Russell 1000(R) Value Index and the Russell
1000(R) Growth Index are each a trademark/service mark of the Frank Russell
Company. Russell(TM) is a trademark of the Frank Russell Company.
*in U.S. currency
<PAGE>
Part C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A
Summary of Expenses
The Funds' Financial History
Incorporated by reference into Part B are the financial
statements contained in the Annual Reports for the Newport
Tiger Cub Fund, Newport Japan Opportunities Fund and Newport
Greater China Fund, dated August 31, 1998 (which were
previously filed electronically pursuant to Section 30(b)(2)
of the Investment Company Act of 1940):
Fund Accession Number
Newport Tiger Cub Fund 0000021847-98-000151
Newport Japan Opportunities Fund 0000021847-98-000152
Newport Greater China Fund 0000021847-98-000150
The Financial Statements contained in each Fund's Annual
Report are as follows:
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Asset
Notes to Financial Statements
Financial Highlights
Report of Independent Accountants
(b) Exhibits:
1. Amendment No. 5 to the Agreement and Declaration of
Trust (h)
2. By-Laws, as amended (e)
3. Not Applicable
4. Form of Specimen Share Certificate (e)
5.(i) Form of Management Agreement (NJOF, NTCF)(e)
5.(ii) Form of Management Agreement (NGCF)(i)
6.(i) Form of Distributor's Contract(incorporated herein by
reference to Exhibit 6.(a) to Post-Effective Amendment
No. 49 to the Registration Statement of Colonial Trust
I, Registration Nos. 2-41251 and 811-2214 filed with
the Commission on November 20, 1998)
6.(ii) Form of Selling Agreement (incorporated herein by
reference to Exhibit 6.(b) to Post-Effective Amendment
No. 49 to the Registration Statement of Colonial Trust
I, Registration Nos. 2-41251 and 811-2214 filed with
the Commission on November 20, 1998)
6.(iii) Investment Account Application (incorporated by
reference from Prospectus)
6.(iv) Form of Bank and Bank Affiliated Selling Agreement
(incorporated herein by reference to Exhibit 6.(c) to
Post Effective Amendment No. 10 to the Registration
Statement of Colonial Trust VI, Registration Nos.
33-45117 and 811-6529, filed with the Commission on
September 27, 1996)
6.(v) Form of Asset Retention Agreement (incorporated herein
by reference to Exhibit 6.(d) to Post-Effective
Amendment No. 10 to the Registration Statement of
Colonial Trust VI, Registration Nos. 33-45117 and
811-6529, filed with the Commission on September 27,
1996)
6.(vi) Form of Dealer Manager Agreement (NGCF)(j)
7. Not Applicable
8.(i) Global Custody Agreement with The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 8. to
Post-Effective Amendment No. 13 to the Registration
Statement of Colonial Trust VI, Registration Nos.
33-45117 and 811-6529, filed with the
Commission on or about October 24, 1997)
8.(ii) Amendment No. 1 to Appendix A of Global Custody
Agreement with The Chase Manhattan Bank (incorporated
herein by reference to Exhibit 8(a)(2) to
Post-Effective Amendment No. 14 to the Registration
Statement of Colonial Trust VI, Registration Nos.
33-45117 and 811-6529, filed with the Commission on or
about June 11, 1998)
9.(i) Form of Pricing and Bookkeeping Agreement
with Colonial Management Associates, Inc.
(incorporated herein by reference to Exhibit
9.(b) to Post-Effective Amendment No. 10 to
the Registration Statement of Colonial Trust
VI, Registration Nos. 33-45117 and 811-6529,
filed with the Commission on September 27,
1996)
9.(i)(a) Form of Amendment to Appendix I of Pricing and
Bookkeeping Agreement(q)
9.(ii) Amended and Restated Shareholders' Servicing and
Transfer Agent Agreement as amended with Colonial
Management Associates, Inc. and Liberty Funds Services,
Inc. (incorporated herein by reference to Exhibit 9.(a)
to Post-Effective Amendment No. 10 to the Registration
Statement of Colonial Trust VI, Registration Nos.
33-45117 and 811-6529, filed with the Commission
on September 27, 1996)
9.(ii)(a) Form of Amendment No. 12 to Schedule A of Amended and
Restated Shareholders' Servicing and Transfer Agent
Agreement(q)
9.(ii)(b) Form of Amendment No. 17 to Appendix I of Amended and
Restated Shareholders' Servicing and Transfer Agent
Agreement(q)
9.(iii)(a) Form of Administration Agreement (NJOF, NTCF)(e)
9.(iii)(b) Form of Administration Agreement (NGCF)(i)
9.(iv) Credit Agreement (incorporated herein by reference to
Exhibit 9.(f) to Post-Effective Amendment No. 19 to
the Registration Statement of Colonial Trust V,
Registration Nos. 811-5030 and 33-12109, filed with
the Commission on or about May 20, 1996)
9.(iv)(a) Form of Amendment No. 1 to the Credit Agreement
(incorporated herein by reference to Exhibit 9(f)
to Post-Effective Amendment No. 99 to the Registration
Statement of Colonial Trust III, Registration Nos.
811-881 and 2-15184, filed with the Commission on or
about December 19, 1997)
9.(iv)(b) Form of Amendment No. 2 to the Credit Agreement
(incorporated herein by reference to Exhibit 9(g)
to Post-Effective Amendment No. 99 to the Registration
Statement of Colonial Trust III, Registration Nos.
811-881 and 2-15184, filed with the Commission on or
about December 19, 1997)
9.(iv)(c) Form of Amendment No. 3 to the Credit Agreement
(incorporated herein by reference to Exhibit 9(h) to
Post-Effective Amendment No. 99 to the Registration
Statement of Colonial Trust III, Registration Nos.
811-881 and 2-15184, filed with the Commission on or
about December 19, 1997)
9.(iv)(d) Form of Amendment No. 4 to the Credit Agreement
(incorporated herein by reference to Exhibit 9(h) to
Post-Effective Amendment No. 102 to the Registration
Statement of Colonial Trust III, Registration Nos.
811-881 and 2-15184, filed with the Commission on or
about September 17, 1998)
10.(i) Opinion and Consent of Counsel (NGCF)(a)
10 (ii) Opinion and Consent of Counsel (o)
11. Consent of Independent Accountants
12. Not Applicable
13. Not Applicable
14.(i) Form of Colonial Mutual Funds Money Purchase
Pension and Profit Sharing Plan Document and
Employee Communications Kit (incorporated
herein by reference to Exhibit 14(a) to
Post-Effective Amendment No. 99 to the
Registration Statement of Colonial Trust
III, Registration Nos. 2-15184 and 811-881,
filed with the Commission on December 19,
1997)
14.(ii) Form of Colonial Mutual Funds Money Purchase
Pension and Profit Sharing Plan
Establishment Booklet (incorporated herein
by reference to Exhibit 14(b) to
Post-Effective Amendment No. 99 to the
Registration Statement of Colonial Trust
III, Registration Nos. 2-15184 and 811-881,
filed with the Commission on December 19,
1997)
14.(iii) Form of Colonial IRA Application, Forms,
Custodial Agreement and Disclosure Statement
and Distribution Form (incorporated herein
by reference to Exhibit 14(c) to
Post-Effective Amendment No. 99 to the
Registration Statement of Colonial Trust
III, Registration Nos. 2-15184 and 811-881,
filed with the Commission on December 19,
1997)
14.(iv) Form of IRA Application and Fact Kit (incorporated
herein by reference to Exhibit 14(d) to Post-Effective
Amendment No. 99 to the Registration Statement of
Colonial Trust III, Registration Nos. 2-15184 and
811-881, filed with the Commission on December 19,
1997)
14.(v) Form of Colonial Mutual Funds Simplified
Employee Pension Plan and Salary Reduction
Simplified Employee Pension Plan Application
and Fact Kit (incorporated by reference to
Exhibit 14(e) of Post-Effective Amendment
No. 99 to the Registration Statement of
Colonial Trust III, Registration Nos.
2-15184 and 811-881, filed with the
Commission on December 19, 1997)
14.(vi) Form of Colonial Mutual Funds 401(k) Plan
Document, Trust Agreement and IRS Opinion
Letter (incorporated by reference to Exhibit
14(v) of Post-Effective Amendment No. 27 to
the Registration Statement of Colonial Trust
II, Registration Nos. 2-66976 and 811-3009, filed with
the Commission on November 18, 1996)
14.(vii) Form of Colonial Mutual Funds 401(k) Plan Establishment
Booklet and Employee Communications Kit (incorporated
by reference to Exhibit 14.(vi) of Post-Effective
Amendment No. 27 to the Registration Statement of
Colonial Trust II, Registration Nos. 2-66976 and
811-3009, filed with the Commission on November 18,
1996)
14.(viii) Form of Colonial 401(k) Beneficiary Designation and
Participant Enrollment Forms (incorporated by reference
to Exhibit 14(h) of Post-Effective Amendment No. 99 to
the Registration Statement of Colonial Trust III,
Registration Nos. 2-15184 and 811-881, filed with the
Commission on December 19, 1997)
14 (ix) Form of Liberty Simple IRA Plan (incorporated by
reference to Exhibit 14.(i) of Post-Effective
Amendment No. 45 to the Registration Statement of
Colonial Trust I, Registration Nos. 2-41251 and 811-
2214, filed with the Commission on or about February
25, 1998)
14 (x) Form of Liberty Roth IRA (incorporated by
reference to Exhibit 14.(j) of Post-Effective
Amendment No. 45 to the Registration Statement of
Colonial Trust I, Registration Nos. 2-41251 and 811-
2214, filed with the Commission on or about February
25, 1998)
15. Form of proposed Distribution Plan adopted
pursuant to Section 12b-1 of the Investment
Company Act of 1940, incorporated by
reference to the Distributor's Contract
filed as Exhibit 6(i) hereto
16.(i)(a) Calculation of Performance Information
(Classes A,B & Z)(NTCF)(g)
16.(i)(a)(1)Calculation of Performance Information (Class C)
(NTCF) (m)
16.(i)(b) Calculation of Yield Information
(Classes A, B &Z)(NTCF)(g)
16.(i)(b)(1)Calculation of Yield Information (Class C)(NTCF) (m)
16.(ii)(a) Calculation of Performance Information(NJOF)(g)
16.(ii)(b) Calculation of Yield Information(NJOF)(g)
16.(iii)(a) Calculation of Performance Information(NGCF)(k)
16.(iii)(b) Calculation of Yield Information (NGCF)(k)
17.(i)(a) Financial Data Schedule (Class A) (NTCF)
17.(i)(b) Financial Data Schedule (Class B) (NTCF)
17.(i)(c) Financial Data Schedule (Class C) (NTCF)
17.(i)(d) Financial Data Schedule (Class Z) (NTCF)
17.(ii)(a) Financial Data Schedule (Class A) (NJOF)
17.(ii)(b) Financial Data Schedule (Class B) (NJOF)
17.(ii)(c) Financial Data Schedule (Class C) (NJOF)
17.(ii)(d) Financial Data Schedule (Class Z) (NJOF)
17.(iii)(a) Financial Data Schedule (Class A) (NGCF)
17.(iii)(b) Financial Data Schedule (Class B) (NGCF)
17.(iii)(c) Financial Data Schedule (Class C) (NGCF)
17.(iii)(d) Financial Data Schedule (Class Z) (NGCF)
<PAGE>
18.(i) Power of Attorney for: Robert J. Birnbaum,
Tom Bleasdale, John V. Carberry, Lora S.
Collins, James E. Grinnell, Richard W.
Lowry, Salvatore Macera, William E. Mayer,
James L. Moody, Jr., John J. Neuhauser,
Thomas E. Stitzel, Robert L. Sullivan and
Anne-Lee Verville (incorporated herein by
reference to Exhibit 18(a) to Post-Effective
Amendment No. 50 to the Registration
Statement of Colonial Trust VI, Registration
Nos. 2-62492 and 811-2865 filed with the
Commission on or about November 6, 1998)
18.(ii) Plan pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940 (incorporated
herein by reference to Exhibit No. 18(b) to
Post-Effective Amendment No. 47 to the
Registration Statement of Colonial Trust I,
Registration Statement Nos. 2-41251 and 811-2214, filed
with the Commission on September 1, 1998)
Not all footnotes listed below will be applicable to this filing.
(a) Incorporated by reference from Pre-Effective Amendment No. 3 filed on
December 5, 1980.
(b) Incorporated by reference from Post-Effective Amendment No. 14 filed on
December 17, 1991.
(c) Incorporated by reference from Post-Effective Amendment No. 19 filed on
February 19, 1993.
(d) Incorporated by reference from Post-Effective Amendment No. 24 filed on
December 11, 1995.
(e) Incorporated by reference from Post-Effective Amendment No. 25 filed on
March 20, 1996.
(f) Incorporated by reference from Post-Effective Amendment No. 26 filed on
October 28, 1996.
(g) Incorporated by reference from Post-Effective Amendment No. 27 filed on,
November 18, 1996.
(h) Incorporated by reference to Post-Effective Amendment No. 28 filed on
December 13, 1996.
(i) Incorporated by reference to Post-Effective Amendment No. 29 filed on March
11, 1997.
(j) Incorporated by reference to Post-Effective Amendment No. 30 filed on June
23, 1997.
(k) Incorporated by reference to Post-Effective Amendment No. 31 filed on
November 14, 1997.
(l) Incorporated by reference to Post-Effective Amendment No. 32 filed on
November 25, 1997.
(m) Incorporated by reference to Post-Effective Amendment No. 33 filed on
December 22, 1997.
(n) Incorporated by reference to Post-Effective Amendment No. 35 filed on
October 20, 1998.
(o) Incorporated by reference to Post-Effective Amendment No. 36 filed on
October 30, 1998.
(p) Incorporated by reference to Post-Effective Amendment No. 37 filed on
October 30, 1998.
(q) Incorporated by reference to Post-Effective Amendment No. 38 filed on
November 13, 1998.
Item 25.Persons Controlled by or under Common Group Control with Registrant
Not applicable
Item 26. Number of Holders of Securities
(1) (2)
Title of Class Number of Record Holders at 10/31/98
Shares of Beneficial Interest 1,035 Class A recordholders (NTCF)
915 Class B recordholders (NTCF)
131 Class C recordholders (NTCF)
27 Class Z recordholders (NTCF)
367 Class A recordholders (NJOF)
567 Class B recordholders (NJOF)
124 Class C recordholders (NJOF)
17 Class Z recordholders (NJOF)
7,832 Class A recordholders (NGCF)
221 Class B recordholders (NGCF)
70 Class C recordholders (NGCF)
3 Class Z recordholders (NGCF)
Item 27. Indemnification
See Article VIII of Amendment No. 5 to the Agreement and
Declaration of Trust filed as Exhibit 1 hereto.
<PAGE>
Item 28.
Certain information pertaining to business and other connections
of the Registrant's investment adviser, Newport Fund Management,
Inc. (Newport), with respect to Newport Greater China Fund,
Newport Japan Opportunities Fund and Newport Tiger Cub Fund is
incorporated herein by reference to the section of the
Prospectus captioned "How the Funds Pursue Their Objectives and
Certain Risk Factors" and to the section of the Statement of
Additional Information captioned "Management of the Fund." The
information required above is incorporated herein by reference
from Newport's Form ADV, as most recently filed with the
Securities and Exchange Commission.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
The following sets forth business and other connections of each
director and officer of Colonial Management Associates, Inc.:
(see next page)
Registrant's investment adviser/administrator, Colonial Management
Associates, Inc. ("Colonial"), is registered as an investment adviser under
the Investment Advisers Act of 1940 (1940 Act). Colonial Advisory Services,
Inc. (CASI), an affiliate of Colonial, is also registered as an investment
adviser under the 1940 Act. As of the end of its fiscal year, December
31, 1997, CASI had three institutional, corporate or other account under
management or supervision, the market value of which was approximately $82.9
million. As of the end of its fiscal year, December 31, 1997, Colonial
was the investment adviser, sub-adviser and/or administrator to 50 Colonial
mutual funds (including funds sub-advised by Colonial, the market value of
which investment companies was approximately $17,319.00 million. Liberty
Funds Distributor, Inc., a subsidiary of Colonial Management Associates,
Inc., is the principal underwriter and the national distributor of all of
the funds in the Liberty Mutual Funds complex, including the Registrant.
The following sets forth the business and other connections of each
director and officer of Colonial Management Associates, Inc.:
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 11/17/98. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
Allard, Laurie V.P.
Archer, Joseph A. V.P.
Ballou, William J. V.P., Colonial Trusts I through VII Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
LFC Utilities Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
The Colonial Group Asst. Clerk
Barron, Suzan M. V.P., Colonial Trusts I through VII Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
LFC Utilities Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
The Colonial Group Asst. Clerk
Berliant, Allan V.P.
Boatman, Bonny E. Sr.V.P.; Colonial Advisory Services, Inc. Exec. V.P.
IPC Mbr.
Bunten, Walter V.P.
Campbell, Kimberly V.P.
Carnabucci,
Dominick V.P.
Carroll, Sheila A. Sr.V.P.
Citrone, Frank V.P.
Conlin, Nancy L. Sr. V.P.; Colonial Trusts I through VII Secretary
Sec.; Clerk Colonial High Income
IPC Mbr.; Municipal Trust Secretary
Dir; Gen. Colonial InterMarket Income
Counsel Trust I Secretary
Colonial Intermediate High
Income Fund Secretary
Colonial Investment Grade
Municipal Trust Secretary
Colonial Municipal Income
Trust Secretary
LFC Utilities Trust Secretary
Liberty Funds Distributor,
Inc. Dir.; Clerk
Colonial Investors Service
Center, Inc. Clerk; Dir.;
The Colonial Group, Inc. V.P.; Gen.
Counsel and
Clerk
Colonial Advisory Services,
Inc. Dir.; Clerk
AlphaTrade Inc. Dir.; Clerk
Liberty Financial Advisors,
Inc. Dir.; Sec.
Connaughton, V.P.
J. Kevin Colonial Trust I through VII CAO; Controller
LFC Utilities Trust CAO; Controller
Colonial High Income
Municipal Trust CAO; Controller
Colonial Intermarket Income
Trust I CAO; Controller
Colonial Intermediate High
Income Fund CAO; Controller
Colonial Investment Grade
Municipal Trust CAO; Controller
Colonial Municipal Income
Trust CAO; Controller
Daniszewski, V.P.
Joseph J.
Desilets, Marian V.P. Liberty Funds Distributor,
Inc. V.P.
Colonial Trust I through VII Asst. Sec.
LFC Utilities Trust Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial Intermarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
DiSilva-Begley, V.P. Colonial Advisory Services, Compliance
Linda IPC Mbr. Inc. Officer
Ericson, Carl C. Sr.V.P. Colonial Intermediate High
IPC Mbr. Income Fund V.P.
Colonial Advisory Services,
Inc. Pres.; CEO
and CIO
Evans, C. Frazier Sr.V.P. Liberty Funds Distributor,
Inc. Mng. Director
Feingold, Andrea S. V.P. Colonial Intermediate High
Income Fund V.P.
Colonial Advisory Services,
Inc. Sr. V.P.
Feloney, Joseph L. V.P. Colonial Advisory Services,
Asst. Tres. Inc. Asst. Treas.
The Colonial Group, Inc. Asst. Treas.
Finnemore, V.P. Colonial Advisory Services,
Leslie W. Inc. Sr. V.P.
Franklin, Sr. V.P. AlphaTrade Inc. President
Fred J. IPC Mbr.
Gibson, Stephen E. Dir.; Pres.; The Colonial Group, Inc. Dir.;
CEO; Pres.; CEO;
Chairman of Exec. Cmte.
the Board; Mbr.; Chm.
IPC Mbr. Liberty Funds Distributor,
Inc. Dir.; Chm.
Colonial Advisory Services,
Inc. Dir.; Chm.
Colonial Investors Service
Center, Inc. Dir.; Chm.
AlphaTrade Inc. Dir.
Colonial Trusts I through VII President
Colonial High Income
Municipal Trust President
Colonial InterMarket Income
Trust I President
Colonial Intermediate High
Income Fund President
Colonial Investment Grade
Municipal Trust President
Colonial Municipal Income
Trust President
LFC Utilities Trust President
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Asst Chairman
Hanson, Loren Sr. V.P.;
IPC Mbr.
Harasimowicz, V.P.
Stephen
Harris, David V.P. Stein Roe Global Capital Mngmt Principal
Hartford, Brian V.P.
Haynie, James P. V.P. Colonial Advisory Services,
Inc. Sr. V.P.
Hernon, Mary V.P.
Hill, William V.P. Colonial Advisory Services, V.P.
Inc.
Iudice, Jr. V.P.; The Colonial Group, Inc. Controller,
Philip J. Controller CAO, Asst.
Asst. Treas.
Treasurer Liberty Funds Distributor, CFO,
Inc. Treasurer
Colonial Advisory Services,
Inc. Controller;
Asst. Treas.
AlphaTrade Inc. CFO, Treas.
Liberty Financial Advisors,
Inc. Asst. Treas.
Jacoby, Timothy J. Sr. V.P.; The Colonial Group, Inc. V.P., Treasr.,
CFO; CFO
Treasurer Colonial Trusts I through VII Treasr.,CFO
Colonial High Income
Municipal Trust Treasr.,CFO
Colonial InterMarket Income
Trust I Treasr.,CFO
Colonial Intermediate High
Income Fund Treasr.,CFO
Colonial Investment Grade
Municipal Trust Treasr.,CFO
Colonial Municipal Income
Trust Treasr.,CFO
LFC Utilities Trust Treasr.,CFO
Colonial Advisory Services,
Inc. CFO, Treasr.
Liberty Financial Advisors,
Inc. Treasurer
Stein Roe & Farnham
Incorporated Snr. V.P.
Johnson, Gordon V.P.
Knudsen, Gail V.P. Colonial Trusts I through VII Asst. Treas.
Colonial High Income
Municipal Trust Asst. Treas.
Colonial InterMarket Income
Trust I Asst. Treas.
Colonial Intermediate High
Income Fund Asst. Treas.
Colonial Investment Grade
Municipal Trust Asst. Treas.
Colonial Municipal Income
Trust Asst. Treas.
LFC Utilities Trust Asst. Treas.
Lasher, Bennett V.P.
Lennon, John E. V.P. Colonial Advisory Services,
Inc. V.P.
Lenzi, Sharon V.P.
Lessard, Kristen V.P.
Loring, William
C., Jr. V.P.
MacKinnon,
Donald S. Sr.V.P.
Marcus, Harold V.P.
Muldoon, Bob V.P.
Newman, Maureen V.P.
O'Brien, David V.P.
Ostrander, Laura V.P. Colonial Advisory Services,
Inc. V.P.
Peterson, Ann T. V.P. Colonial Advisory Services,
Inc. V.P.
Rao, Gita V.P.
Reading, John V.P.; Colonial Investors Service
Asst. Center, Inc. Asst. Clerk
Sec.; The Colonial Group, Inc. Asst. Clerk
Asst Colonial Advisory Services,
Clerk and Inc. Asst. Clerk
Counsel Liberty Funds Distributor,
Inc. Asst. Clerk
AlphaTrade Inc. Asst. Clerk
Colonial Trusts I through VII Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
LFC Utilities Trust Asst. Sec.
Liberty Financial Advisors,
Inc. Asst. Sec.
Rega, Michael V.P. Colonial Advisory Services,
Inc. V.P.
Schermerhorn, Scott Sr. V.P.
Scoon, Davey S. Dir.; Colonial Advisory Services,
Exe.V.P.; Inc. Dir.
IPC Mbr.; Colonial High Income
Municipal Trust V.P.
Colonial InterMarket Income
Trust I V.P.
Colonial Intermediate High
Income Fund V.P.
Colonial Investment Grade
Municipal Trust V.P.
Colonial Municipal Income
Trust V.P.
Colonial Trusts I through VII V.P.
LFC Utilities Trust V.P.
Colonial Investors Service Director
Center, Inc.
The Colonial Group, Inc. COO; Ex. V.P.
Liberty Funds Distributor,
Inc. Director
AlphaTrade Inc. Director
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Exec. V.P.
Seibel, Sandra L. V.P. Colonial Advisory Services,
Inc. V.P.
Spanos, Gregory J. Sr. V.P. Colonial Advisory Services,
Inc. Exec. V.P.
Stern, Arthur O. Exe.V.P. The Colonial Group, Inc. Exec. V.P.
Stevens, Richard V.P. Colonial Advisory Services,
Inc. V.P.
Stoeckle, Mark V.P. Colonial Advisory Services,
Inc. V.P.
Swayze, Gary V.P.
Wallace, John V.P. Colonial Advisory Services,
Asst.Tres. Inc. Asst. Treas.
The Colonial Group, Inc. Asst. Treas.
Ware, Elizabeth M. V.P.
- ------------------------------------------------
*The Principal address of all of the officers and directors of the investment
adviser is One Financial Center, Boston, MA 02111.
Item 29 Principal Underwriter
- ------- ---------------------
(a) Liberty Funds Distributor, Inc. (LFDI), a subsidiary of Colonial
Management Associates, Inc., is the Registrant's principal
underwriter. LFDI acts in such capacity for each series of Colonial
Trust I, Colonial Trust II, Colonial Trust III, Colonial Trust IV,
Colonial Trust V, Colonial Trust VI and Colonial Trust VII, Stein Roe
Advisor Trust, Stein Roe Income Trust, Stein Roe Municipal Trust,
Stein Roe Investment Trust and Stein Roe Trust.
(b) The table below lists each director or officer of the principal
underwriter named in the answer to Item 21.
(1) (2) (3)
Position and Offices Positions and
Name and Principal with Principal Offices with
Business Address* Underwriter Registrant
- ------------------ ------------------- --------------
Anderson, Judith V.P. None
Anetsberger, Gary Sr. V.P. None
Babbitt, Debra V.P. and None
Comp. Officer
Ballou, Rick Sr. V.P. None
Balzano, Christine R. V.P. None
Bartlett, John Managing Director None
Blakeslee, James Sr. V.P. None
Blumenfeld, Alex V.P. None
Bozek, James Sr. V.P. None
Brown, Beth V.P. None
Burtman, Tracy V.P. None
Butch, Tom Sr. V.P. None
Campbell, Patrick V.P. None
Chrzanowski, V.P. None
Daniel
Claiborne, V.P. None
Douglas
Clapp, Elizabeth A. Managing Director None
Conlin, Nancy L. Dir; Clerk Secretary
Davey, Cynthia Sr. V.P. None
Desilets, Marian V.P. Asst. Sec
Devaney, James Sr. V.P. None
DiMaio, Steve V.P. None
Downey, Christopher V.P. None
Emerson, Kim P. Sr. V.P. None
Erickson, Cynthia G. Sr. V.P. None
Evans, C. Frazier Managing Director None
Feldman, David Managing Director None
Fifield, Robert V.P. None
Gauger, Richard V.P. None
Gerokoulis, Sr. V.P. None
Stephen A.
Gibson, Stephen E. Director; Chairman President
of the Board
Goldberg, Matthew Sr. V.P. None
Guenard, Brian V.P. None
Harrington, Tom Sr. V.P. None
Harris, Carla V.P. None
Hodgkins, Joseph Sr. V.P. None
Hussey, Robert Sr. V.P. None
Iudice, Jr., Philip Treasurer and CFO None
Jones, Cynthia V.P. None
Jones, Jonathan V.P. None
Karagiannis, Managing Director None
Marilyn
Kelley, Terry M. V.P. None
Kelson, David W. Sr. V.P. None
Libutti, Chris V.P. None
Martin, Peter V.P. None
McCombs, Gregory Sr. V.P. None
McKenzie, Mary V.P. None
Menchin, Catherine V.P. None
Miller, Anthony V.P. None
Moberly, Ann R. Sr. V.P. None
Morse, Jonathan V.P. None
O'Shea, Kevin Managing Director None
Piken, Keith V.P. None
Place, Jeffrey Managing Director None
Pollard, Brian V.P. None
Predmore, Tracy V.P. None
Quirk, Frank V.P. None
Raftery-Arpino, Linda V.P. None
Reed, Christopher B. Sr. V.P. None
Riegel, Joyce V.P. None
Robb, Douglas V.P. None
Sandberg, Travis V.P. None
Santosuosso, Louise V.P. None
Scarlott, Rebecca V.P. None
Schulman, David Sr. V.P. None
Scoon, Davey Director V.P.
Scott, Michael W. Sr. V.P. None
Shea, Terence V.P. None
Sideropoulos, Lou V.P. None
Smith, Darren V.P. None
Soester, Trisha V.P. None
Studer, Eric V.P. None
Sweeney, Maureen V.P. None
Tambone, James CEO None
Tasiopoulos, Lou President None
VanEtten, Keith H. Sr. V.P. None
Wallace, John V.P. None
Walter, Heidi V.P. None
Wess, Valerie Sr. V.P. None
Young, Deborah V.P. None
- --------------------------
* The address for each individual is One Financial Center, Boston, MA
02111.
<PAGE>
Item 30. Location of Accounts and Records
Person maintaining physical possession of accounts, books and other
documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder include
Registrant's Secretary; Registrant's investment adviser and/or
administrator, Colonial Management Associates, Inc.; Registrant's
principal underwriter, Liberty Funds Distributor, Inc.;
Registrant's transfer and dividend disbursing agent, Liberty Funds
Services, Inc.; and the Registrant's custodian, The Chase Manhattan
Bank, located at 270 Park Avenue, New York, NY 10017-2070.
Item 31. Management Services
See Item 5, Part A and Item 16, Part B
Item 32. Undertakings
(i) The Registrant undertakes to call a meeting of shareholders
for the purpose of voting upon the question of the removal
of a Trustee or Trustees when requested in writing to do so
by the holders of at least 10% of any series' outstanding
shares and in connection with such meeting to comply with
the provisions of Section 16(c) of the Investment Company
Act of 1940 relating to shareholder communications.
(ii) The Registrant undertakes to furnish free of charge to each
person to whom a prospectus is delivered, a copy of the
applicable series' annual report to shareholders containing
the information required of Item 5A of Form N-1A.
<PAGE>
NOTICE
A copy of the Agreement and Declaration of Trust, as amended, of Colonial
Trust II is on file with the Secretary of The Commonwealth of Massachusetts and
notice is hereby given that the instrument has been executed on behalf of the
Trust by an officer of the Trust as an officer and by the Trust's Trustees as
trustees and not individually and the obligations of or arising out of this
instrument are not binding upon any of the Trustees, officers, or shareholders
individually but are binding only upon the assets and property of the Trust.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all the requirements
for effectiveness of the Registration Statement pursuant to Rule 485(b) and has
duly caused this Post-Effective Amendment No. 39 to its Registration Statement
under the Securities Act of 1933 and the Post-Effective Amendment No. 39 under
the Investment Company Act of 1940, to be signed in this City of Boston, and The
Commonwealth of Massachusetts on this 30th day of November, 1998.
COLONIAL TRUST II
By: STEPHEN E. GIBSON
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment has been signed below by the following persons in their capacities and
on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURES TITLE DATE
STEPHEN E. GIBSON President November 30, 1998
- -------------------------------------
Stephen E. Gibson (chief executive officer)
TIMOTHY J. JACOBY Treasurer and Chief November 30, 1998
- -------------------------------------
Timothy J. Jacoby Financial Officer
J. KEVIN CONNAUGHTON Controller and Chief November 30, 1998
- -------------------------------------
J. Kevin Connaughton Accounting Officer
</TABLE>
<PAGE>
ROBERT J. BIRNBAUM* Trustee
Robert J. Birnbaum
TOM BLEASDALE* Trustee
Tom Bleasdale
JOHN V. CARBERRY* Trustee
John V. Carberry
LORA S. COLLINS* Trustee
Lora S. Collins
JAMES E. GRINNELL* Trustee
James E. Grinnell
RICHARD W. LOWRY* Trustee
Richard W. Lowry
SALVATORE MACERA* Trustee
Salvatore Macera
JAMES L. MOODY, JR.* Trustee WILLIAM J. BALLOU
James L. Moody, Jr. *William J. Ballou
Attorney-in-fact
November 30, 1998
WILLIAM E. MAYER* Trustee
William E. Mayer
JOHN J. NEUHAUSER* Trustee
John J. Neuhauser
THOMAS E. STITZEL Trustee
Thomas E. Stitzel
ROBERT L. SULLIVAN* Trustee
Robert L. Sullivan
ANNE-LEE VERVILLE* Trustee
Anne-Lee Verville
<PAGE>
EXHIBITS
11. Consent of Independent Accountants
17.(i)(a) Financial Data Schedule (Class A) (NTCF)
17.(i)(b) Financial Data Schedule (Class B) (NTCF)
17.(i)(c) Financial Data Schedule (Class C) (NTCF)
17.(i)(d) Financial Data Schedule (Class Z) (NTCF)
17.(ii)(a) Financial Data Schedule (Class A) (NJOF)
17.(ii)(b) Financial Data Schedule (Class B) (NJOF)
17.(ii)(c) Financial Data Schedule (Class C) (NJOF)
17.(ii)(d) Financial Data Schedule (Class Z) (NJOF)
17.(iii)(a) Financial Data Schedule (Class A) (NGCF)
17.(iii)(b) Financial Data Schedule (Class B) (NGCF)
17.(iii)(c) Financial Data Schedule (Class C) (NGCF)
17.(iii)(d) Financial Data Schedule (Class Z) (NGCF)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information constituting part of this Post-Effective Amendment No. 39
to the registration statement on Form N-1A (the "Registration Statement") of our
reports dated October 12, 1998, relating to the financial statements and
financial highlights appearing in the August 31, 1998 Annual Reports to the
Shareholders of Newport Tiger Cub Fund, Newport Japan Opportunities Fund and
Newport Greater China Fund, each a series of Colonial Trust II, which are also
incorporated by reference into the Registration Statement. We also consent to
the reference to us under the heading "The Funds' Financial History" in the
Prospectus and "Independent Accountants" in the Statement of Additional
Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 27, 1998
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> COLONIAL TRUST II
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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