1933 Act Registration No. 333-17255
1940 Act File No. 811-07955
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post Effective Amendment No. 5 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 7 [X]
STEIN ROE ADVISOR TRUST
(Exact Name of Registrant as Specified in Charter)
One South Wacker Drive, Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-338-2550
Jilaine Hummel Bauer Cameron S. Avery
Executive Vice-President Bell, Boyd & Lloyd
& Secretary Three First National Plaza
Stein Roe Advisor Trust Suite 3300
One South Wacker Drive 70 W. Madison Street
Chicago, Illinois 60606 Chicago, Illinois 60602
(Name and Address of Agents for Service)
It is proposed that this filing will become effective (check
appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[X] on February 2, 1998 pursuant to paragraph (a)(2) of rule 485
Registrant elects to register under the Securities Act of 1933 an
indefinite number of its shares of beneficial interest, without par
value, of the series of shares designated Stein Roe Advisor High-
Yield Municipals Fund, Stein Roe Advisor Intermediate Bond Fund,
and Stein Roe Advisor Income Fund. Registrant has previously
elected to register under the Securities Act of 1933 an indefinite
number of its shares of beneficial interest, without par value, of
the series of shares designated Stein Roe Advisor Growth & Income
Fund, Stein Roe Advisor International Fund, Stein Roe Advisor Young
Investor Fund, Stein Roe Advisor Special Venture Fund, Stein Roe
Advisor Balanced Fund, Stein Roe Advisor Growth Stock Fund, and
Stein Roe Advisor Special Fund.
This Registration Statement has also been signed by SR&F Base
Trust.
<PAGE>
STEIN ROE ADVISOR TRUST
CROSS REFERENCE SHEET
ITEM
NO. CAPTION
- ----- -------
PART A (PROSPECTUS)
1 Front cover
2 Fee Table; Summary
3 (a) [Advisor High-Yield Municipals Fund, Advisor Intermediate
Bond Fund, Advisor Income Fund, Advisor Growth & Income
Fund, Advisor International Fund, Advisor Special Venture
Fund, Advisor Balanced Fund, and Advisor Special Fund]
Inapplicable; [Advisor Growth Stock Fund and Advisor Young
Investor Fund] Financial Highlights
(b) Inapplicable
(c) Investment Return
(d) Inapplicable
4 Organization and Description of Shares; The Fund;
Investment Policies; Investment Restrictions; Risks
and Investment Considerations; Portfolio Investments and
Strategies; Summary--Investment Risks
5 (a) Management--Trustees and Investment Adviser
(b) Management--Trustees and Investment Adviser, Fees and
Expenses
(c) Management--Portfolio Managers
(d) Inapplicable
(e) Management--Transfer Agent
(f) Management--Fees and Expenses
(g) Inapplicable
5A Inapplicable
6 (a) Organization and Description of Shares; see statement of
additional information: General Information and History
(b) Inapplicable
(c) Organization and Description of Shares
(d) Organization and Description of Shares
(e) For More Information
(f) Distributions and Income Taxes
(g) Distributions and Income Taxes
(h) Master Fund/Feeder Fund: Structure and Risk Factors
7 How to Purchase Shares
(a) Management--Distributor
(b) How to Purchase Shares; Net Asset Value
(c) How to Purchase Shares
(d) How to Purchase Shares
(e) Inapplicable
(f) Management--Fees and Expenses
(g) Inapplicable
8 (a) How to Sell (Redeem) Shares
(b) How to Purchase Shares
(c) How to Sell (Redeem) Shares
(d) How to Sell (Redeem) Shares
9 Inapplicable
PART B (STATEMENT OF ADDITIONAL INFORMATION)
10 Cover page
11 Table of Contents
12 General Information and History
13 Investment Policies; Portfolio Investments and Strategies;
Investment Restrictions
14 Management
15(a) Inapplicable
(b) Principal Shareholders
(c) Principal Shareholders
16(a) Investment Advisory Services; Management; see prospectus:
Management
(b) Investment Advisory Services
(c) Inapplicable
(d) Investment Advisory Services
(e) Inapplicable
(f) Distributor
(g) Inapplicable
(h) Custodian; Independent Auditors
(i) Transfer Agent and Shareholder Servicing
17(a) Portfolio Transactions
(b) Inapplicable
(c) Portfolio Transactions
(d) Portfolio Transactions
(e) Portfolio Transactions
18 General Information and History
19(a) Purchases and Redemptions; see prospectus: How to Purchase
Shares, How to Sell (Redeem) Shares
(b) Purchases and Redemptions; see prospectus: Net Asset Value
(c) Purchases and Redemptions
20 Additional Income Tax Considerations; Portfolio Investments
and Strategies--Taxation of Options and Futures
21(a) Distributor
(b) Inapplicable
(c) Inapplicable
22(a) Inapplicable
(b) Investment Performance
23 Balance Sheet
PART C
24 Financial Statements and Exhibits
25 Persons Controlled By or Under Common Control with
Registrant
26 Number of Holders of Securities
27 Indemnification
28 Business and Other Connections of Investment Adviser
29 Principal Underwriters
30 Location of Accounts and Records
31 Management Services
32 Undertakings
<PAGE>
The prospectuses and statements of additional information relating
to Stein Roe Advisor Growth & Income Fund, Stein Roe Advisor
International Fund, Stein Roe Advisor Special Venture Fund, Stein
Roe Advisor Balanced Fund, Stein Roe Advisor Growth Stock Fund,
Stein Roe Advisor Special Fund and Stein Roe Advisor Young
Investor Fund, series of Stein Roe Advisor Trust, are not affected
by the filing of this post-effective amendment No. 5.
<PAGE>
PRELIMINARY PROSPECTUS DATED _________, 19__
A registration statement relating to these securities has been
filed with the Securities and Exchange Commission but has not yet
become effective. Information contained herein is subject to
completion or amendment. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute
an offer to sell or the solicitation of an offer to buy nor shall
there be any sales of these securities in any state in which such
offer, solicitation, or sale would be unlawful prior to
registration or qualification under the securities laws of any
such state.
____________
Prospectus _______, 1998
Stein Roe Mutual Funds
Stein Roe Advisor Intermediate Bond Fund
Stein Roe Advisor Income Fund
Stein Roe Advisor High-Yield Municipals Fund
Advisor Intermediate Bond Fund seeks high current income by
investing primarily in marketable debt securities. The dollar-
weighted average life of the portfolio is expected to be between
three and ten years.
Advisor Income Fund seeks high current income by investing
principally in medium-quality debt securities and, to a lesser
extent, in lower-quality securities which may involve greater
risk.
Advisor High-Yield Municipals Fund seeks a high current yield
exempt from federal income tax. It invests principally in a
diversified portfolio of long-term medium- or lower-quality
Municipal Securities, which may involve greater risk.
Each Fund invests all of its net investable assets in a
corresponding Portfolio of SR&F Base Trust that has the same
investment objective and substantially the same investment
policies as the Fund. (See Master Fund/Feeder Fund: Structure
and Risk Factors.)
Lower-quality securities, commonly known as "junk bonds," are
subject to a greater risk with regard to payment of interest and
return of principal than higher-rated bonds. Investors should
carefully consider the risks associated with junk bonds before
investing. (See Investment Policies, Risks and Investment
Considerations, Master Fund/Feeder Fund: Structure and Risk
Factors, and Appendix--Ratings.)
Shares of the Funds may be purchased only through Intermediaries,
including retirement plan service providers.
Each Fund is a multi-class series of Stein Roe Advisor Trust and
each Portfolio is a series of SR&F Base Trust. Each Trust is an
open-end management investment company. This prospectus relates
only to Class K shares of each Fund.
This prospectus contains information you should know before
investing in the Funds. Please read it carefully and retain it
for future reference.
A Statement of Additional Information dated ____, 1998, containing
more detailed information, has been filed with the Securities and
Exchange Commission and (together with any supplements thereto) is
incorporated herein by reference. The Statement of Additional
Information may be obtained without charge by writing to Stein Roe
Mutual Funds, Suite 3200, One South Wacker Drive, Chicago,
Illinois 60606, or by calling the Adviser. For additional
information, call Retirement Services at 800-322-1130 or
Advisor/Broker Services at 800-322-0593.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION. SHARES
ARE NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
TABLE OF CONTENTS
Page
Summary....................................3
Fee Table..................................5
The Funds..................................6
Investment Policies........................6
Performance Information...................10
Risks and Investment Considerations ......10
Investment Restrictions ..................12
Portfolio Investments and Strategies......13
Net Asset Value ..........................21
How to Purchase Shares....................22
How to Sell (Redeem) Shares ..............23
Distributions and Income Taxes............24
Management ...............................25
Organization and Description of Shares....28
Master Fund/Feeder Fund: Structure
and Risk Factors.......................28
For More Information .....................30
Appendix--Ratings.........................30
SUMMARY
Stein Roe Advisor Intermediate Bond Fund ("Advisor Intermediate
Bond Fund"), Stein Roe Advisor Income Fund ("Advisor Income
Fund"), and Stein Roe Advisor High-Yield Municipals Fund ("Advisor
High-Yield Municipals Fund") are series of Stein Roe Advisor
Trust, an open-end management investment company organized as a
Massachusetts business trust. (See The Funds and Organization and
Description of Shares.) This prospectus is not a solicitation in
any jurisdiction in which shares of the Funds are not qualified
for sale.
Investment Objectives and Policies. Each Fund seeks to achieve
its objective by investing all of its net investable assets in a
corresponding Portfolio of SR&F Base Trust that has the same
investment objective and substantially the same investment
policies as the Fund.
Advisor Intermediate Bond Fund pursues a high level of current
income, consistent with capital preservation, by investing
primarily in marketable debt securities. At least 60% of assets
will be invested in debt securities rated within the three highest
grades assigned by Moody's or by S&P, or in U.S. Government
Securities, commercial paper, and certain bank obligations. Under
normal market conditions, it invests at least 65% of its assets in
securities with an average life of between three and ten years,
and expects that the dollar-weighted average life of its portfolio
will be between three and ten years.
Advisor Income Fund seeks high current income by investing
principally in medium-quality debt securities (such as securities
rated A or Baa by Moody's or A or BBB by S&P), with at least 60%
of its assets invested in medium- or higher-quality debt
securities. Medium-quality debt securities may have some
speculative characteristics. It may also invest to a lesser
extent in securities of lower quality, which may entail greater
risk. Lower-quality securities are commonly referred to as "junk
bonds."
Advisor High-Yield Municipals Fund seeks a high current yield
exempt from federal income tax by investing principally in long-
term, medium- or lower-quality Municipal Securities. Medium-
quality Municipal Securities are obligations of issuers that the
Adviser believes possess adequate, but not outstanding, capacities
to service the obligations. Lower-quality Municipal Securities
are obligations of issuers that are considered predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy, and are commonly
referred to as "junk bonds." The Adviser attributes to medium-
and lower-quality obligations the same general characteristics as
do rating services. Because many issuers of medium- and lower-
quality Municipal Securities choose not to have their obligations
rated by a rating agency, many of the obligations in the portfolio
may be unrated. The market for unrated securities is usually less
broad than for rated obligations, which could adversely affect
their marketability.
For a more detailed discussion of the investment objective and
policies, please see Investment Policies and Portfolio Investments
and Strategies. There is, of course, no assurance that a Fund and
its corresponding Portfolio will achieve their common investment
objective.
Investment Risks. The risks inherent in each Fund depend
primarily upon the term and quality of the obligations in its
investment portfolio, as well as on market conditions. Interest
rate fluctuations will affect its net asset value, but not the
income received from portfolio securities. However, because
yields on debt securities available for purchase vary over time,
no specific yield on shares of a Fund can be assured. Advisor
Intermediate Bond Fund is appropriate for investors who seek high
income with less net asset value fluctuation from interest rate
changes than that of a longer-term fund and who can accept greater
levels of credit and other risks associated with securities that
are rated below investment grade. Advisor Income Fund is designed
for investors who seek a higher level of income and who can accept
greater levels of credit and other risks associated with
securities of medium or lower quality. Advisor High-Yield
Municipals Fund is designed for investors who seek a high level of
tax-exempt income and who can accept still greater fluctuation in
portfolio value and other risks, such as increased credit risk,
associated with medium- or lower-quality long-term Municipal
Securities. Advisor Intermediate Bond Fund and Advisor Income
Fund may invest in foreign securities, which may entail a greater
degree of risk than investing in securities of domestic issuers.
Please see Investment Restrictions and Risks and Investment
Considerations for further information.
Purchases and Redemptions. Fund shares may be purchased only
through Intermediaries, including certain broker-dealers, bank
trust departments, asset allocation programs sponsored by the
Adviser, wrap fee programs, and retirement plan service providers.
For information on purchasing and redeeming Fund shares, please
see How to Purchase Shares, How to Sell (Redeem) Shares, and
Management--Distributor.
Management and Fees. Stein Roe & Farnham Incorporated (the
"Adviser") is investment adviser to each Portfolio. In addition,
it provides administrative services to the Funds and Portfolios.
For a description of the Adviser and these service arrangements,
see Management.
FEE TABLE
Advisor
Advisor Advisor High-Yield
Intermediate Income Municipals
Bond Fund Fund Fund
------------ ------- ----------
Shareholder Transaction Expenses*
Sales Load Imposed on Purchases None None None
Sales Load Imposed on Reinvested
Dividends None None None
Deferred Sales Load None None None
Redemption Fees* None None None
Exchange Fees None None None
Estimated Annual Fund Operating
Expenses (as a percentage of
average net assets; after
reimbursement)
Management and Administrative Fees 0.50% 0.65% 0.60%
12b-1 Fees 0.25% 0.25% 0.25%
Other Expenses (after reimbursement) 0.25% 0.20% 0.25%
Total Operating Expenses (after ----- ----- -----
reimbursement) 1.00% 1.10% 1.10%
===== ===== =====
______________
*There is a $7.00 charge for wiring redemption proceeds to your
bank.
Example.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return; and (2) redemption at the end of
each time period:
1 year 3 years
------ -------
Advisor Intermediate Bond Fund $10 $32
Advisor Income Fund 11 35
Advisor High-Yield Municipals 11 35
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in Class K shares of a Fund. The Fee
Table reflects the combined expenses of both the Funds and the
Portfolios. Anticipated Total Operating Expenses for Class K
shares of each Fund are annualized projections based upon current
administrative fees and management fees. Other Expenses are
estimated amounts for the current fiscal year. The figures assume
that the percentage amounts listed under Estimated Annual Fund
Operating Expenses remain the same during each of the periods and
that all income dividends and capital gains distributions are
reinvested in additional shares.
Other Expenses and Total Operating Expenses reflect fee
reimbursements by the Adviser or the Distributor, as hereinafter
defined. Absent such reimbursements, Other Expenses and Total
Operating Expenses for Class K shares would have been ___% and
___% for Advisor Intermediate Bond Fund, ___% and ___% for Advisor
Income Fund, and ___% and ___% for Advisor High-Yield Municipals
Fund, respectively. Any such reimbursement will lower the overall
expense ratio for Class K shares and increase its overall return
to investors. (Also see Management--Fees and Expenses.)
Each Fund pays the Adviser an administrative fee based on its
average daily net assets and each Portfolio pays the Adviser a
management fee based on its average daily net assets. The
trustees of Advisor Trust have considered whether the annual
operating expenses of each Fund, including its share of the
expenses of its corresponding Portfolio, would be more or less
than if the Fund invested directly in the securities held by the
Portfolio, and concluded that the Funds' expenses would not be
materially greater in such case.
The figures in the Example are not necessarily indicative of past
or future expenses, and actual expenses may be greater or less
than those shown. Although information such as that shown in the
Example and Fee Table is useful in reviewing expenses and in
providing a basis for comparison with other mutual funds, it
should not be used for comparison with other investments using
different assumptions or time periods.
Because the Funds pay a 12b-1 fee, long-term investors in a Fund
may pay more over long periods of time in distribution expenses
than the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. ("NASD"). For further
information on the 12b-1 fee, see Management--Distributor or call
your financial representative.
THE FUNDS
Stein Roe Advisor Intermediate Bond Fund ("Advisor Intermediate
Bond Fund"), Stein Roe Advisor Income Fund ("Advisor Income
Fund"), and Stein Roe Advisor High-Yield Municipals Fund ("High-
Yield Municipals Fund") (referred to collectively as the "Funds")
are multi-class series of Stein Roe Advisor Trust ("Advisor
Trust"), which is an open-end management investment company
authorized to issue shares of beneficial interest in separate
series.
Rather than invest in securities directly, each Fund seeks to
achieve its investment objective by using the "master fund/feeder
fund structure." Under that structure, a feeder fund and one or
more other feeder funds pool their assets in a master portfolio
that has the same investment objective and substantially the same
investment policies as the feeder funds. (See Master Fund/Feeder
Fund: Structure and Risk Factors.) Each Fund invests all of its
assets in a "master fund" that has an investment objective
identical to that of the Fund. Each master fund is a series of
SR&F Base Trust ("Base Trust") (each master fund is referred to as
a "Portfolio").
Stein Roe & Farnham Incorporated (the "Adviser") provides
portfolio management services to each Portfolio and administrative
services to the Funds and Portfolios.
INVESTMENT POLICIES
Each Fund invests as described below. Further information on
investment techniques that may be employed by the Portfolios and
the risks associated with such techniques may be found under Risks
and Investment Considerations and Portfolio Investments and
Strategies in this prospectus and in the Statement of Additional
Information.
Advisor Intermediate Bond Fund. This Fund's investment objective
is to provide a high level of current income, consistent with the
preservation of capital, by investing primarily in marketable debt
securities. Advisor Intermediate Bond Fund invests all of its net
investable assets in SR&F Intermediate Bond Portfolio
("Intermediate Bond Portfolio"). Under normal market conditions,
Intermediate Bond Portfolio will invest at least 65% of the value
of its total assets (taken at market value at the time of
investment) in convertible and non-convertible bonds and
debentures, and at least 60% of its assets will be invested in the
following:
(1) Marketable straight-debt securities of domestic issuers, and
of foreign issuers payable in U.S. dollars, rated at time of
purchase within the three highest grades assigned by Moody's
Investors Service, Inc. ("Moody's") or by Standard & Poor's
Corporation ("S&P");
(2) U.S. Government Securities;
(3) Commercial paper rated Prime-1 by Moody's or A-1 by S&P at
time of purchase, or, if unrated, issued or guaranteed by a
corporation with any outstanding debt rated Aa or better by
Moody's or AA or better by S&P; and
(4) Bank obligations, including repurchase agreements, of banks
having total assets in excess of $1 billion.
Under normal market conditions, Intermediate Bond Portfolio
invests at least 65% of its assets in securities with an average
life of between three and ten years, and expects that the dollar-
weighted average life of its portfolio will be between three and
ten years. Average life is the weighted average period over which
the Adviser expects the principal to be paid, and differs from
stated maturity in that it estimates the effect of expected
principal prepayments and call provisions. With respect to GNMA
securities and other mortgage-backed securities, average life is
likely to be substantially less than the stated maturity of the
mortgages in the underlying pools. With respect to obligations
with call provisions, average life is typically the next call date
on which the obligation reasonably may be expected to be called.
Securities without prepayment or call provisions generally have an
average life equal to their stated maturity. During periods of
rising interest rates, the average life of mortgage-backed
securities and callable obligations may increase substantially
because they are not likely to be prepaid, which may result in
greater net asset value fluctuation.
Intermediate Bond Portfolio also may invest in other debt
securities (including those convertible into or carrying warrants
to purchase common stocks or other equity interests, and privately
placed debt securities), preferred stocks, and marketable common
stocks that the Adviser considers likely to yield relatively high
income in relation to cost.
Intermediate Bond Portfolio may invest up to 35% of its total
assets in debt securities that are rated below investment grade
(with no minimum permitted rating) and that, on balance, are
considered predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal according to the
terms of the obligation and, therefore, carry greater investment
risk, including the possibility of issuer default and bankruptcy.
(See Portfolio Investments and Strategies and Risks and Investment
Considerations for more information on the risks associated with
investing in debt securities rated below investment grade.)
Advisor Income Fund. The investment objective of Advisor Income
Fund is to provide a high level of current income. Consistent
with that investment objective, capital preservation and capital
appreciation are regarded as secondary objectives. Advisor Income
Fund invests all of its net investable assets in SR&F Income
Portfolio ("Income Portfolio").
Income Portfolio attempts to achieve its objective by investing
principally in medium-quality debt securities, which are
obligations of issuers that the Adviser believes possess adequate,
but not outstanding, capacities to service their debt securities,
such as securities rated A or Baa by Moody's or A or BBB by S&P.
The Adviser generally attributes to medium-quality securities the
same characteristics as rating services.
Although Income Portfolio will invest at least 60% of its assets
in medium- or higher-quality debt securities, it may also invest
to a lesser extent in debt securities of lower quality (in the
case of rated securities, having a rating by Moody's or S&P of not
less than C). Although Income Portfolio can invest up to 40% of
its assets in lower-quality securities, it does not intend to
invest more than 35% in lower-quality securities. Lower-quality
debt securities are obligations of issuers that are considered
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the
obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy, and
are commonly referred to as "junk bonds." Income Portfolio may
invest in lower-quality debt securities; for example, if the
Adviser believes the financial condition of the issuers or the
protection offered to the particular obligations is stronger than
is indicated by low ratings or otherwise. (See Portfolio
Investments and Strategies and Risks and Investment Considerations
for more information on the risks associated with investing in
medium- and lower-quality debt securities.) Income Portfolio may
invest in higher-quality securities; for example, under
extraordinary economic or financial market conditions, or when the
spreads between the yields on medium- and high-quality securities
are relatively narrow.
Some issuers of debt securities choose not to have their
securities rated by a rating service, and Income Portfolio may
invest in unrated securities that the Adviser believes are
suitable for investment.
Under normal market conditions, Income Portfolio will invest at
least 65% of the value of its total assets (taken at market value)
in convertible and non-convertible bonds and debentures. Such
securities may be accompanied by the right to acquire equity
securities evidenced by warrants attached to the security or
acquired as part of a unit with the security. Equity securities
acquired by conversion or exercise of such a right may be retained
by Income Portfolio for a sufficient time to permit orderly
disposition thereof or to establish long-term holding periods for
federal income tax purposes.
Income Portfolio may invest up to 35% of its total assets in other
debt securities, marketable preferred and common stocks, and
foreign and municipal securities that the Adviser considers likely
to yield relatively high income in relation to costs, and rights
to acquire such securities. Any assets not otherwise invested may
be invested in money market instruments.
Advisor High-Yield Municipals Fund. This Fund seeks a high
current yield exempt from federal income tax by investing
primarily in a diversified portfolio of Municipal Securities.
Advisor High-Yield Municipals Fund invests all of its net
investable assets in SR&F High-Yield Municipals Portfolio ("High-
Yield Municipals Portfolio"). High-Yield Municipals Portfolio
invests principally in long-term (generally maturing in more than
ten years) medium- or lower-quality Municipal Securities bearing a
high rate of interest income; possible capital appreciation is of
secondary importance.
It is a fundamental policy that normally assets will be invested
so that at least 80% of its gross income will be derived from
securities the interest on which is exempt from federal income tax
in the opinion of counsel for the issuers of such securities,
except during periods in which the Adviser believes a temporary
defensive position is advisable.
Medium-quality Municipal Securities are obligations of issuers
that the Adviser believes possess adequate, but not outstanding,
capacities to service the obligations. Lower-quality Municipal
Securities are obligations of issuers that are considered
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the
obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy, and
are commonly referred to as "junk bonds." The lowest rating
assigned by Moody's is for bonds that can be regarded as having
extremely poor prospects of ever attaining any real investment
standing. The Adviser attributes to medium- and lower-quality
obligations the same general characteristics as do rating
services. Because many issuers of medium- and lower-quality
Municipal Securities choose not to have their obligations rated by
a rating agency, many of the obligations in the investment
portfolio may be unrated.
Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. An economic downturn could severely
disrupt this market and adversely affect the value of outstanding
bonds and the ability of the issuers to repay principal and
interest. During a period of adverse economic changes, including
a period of rising interest rates, issuers of such bonds may
experience difficulty in servicing their principal and interest
payment obligations.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and High-Yield Municipals Portfolio may have
greater difficulty selling its portfolio securities.
Although High-Yield Municipals Portfolio invests principally in
medium- or lower-quality Municipal Securities, it may invest in
Municipal Securities of higher quality when the Adviser believes
it is appropriate to do so.
PERFORMANCE INFORMATION
The total return from an investment in Class K shares of a Fund is
measured by the distributions received, plus or minus the change
in the net asset value per share for a given period, assuming
reinvestment of all distributions. A total return percentage may
be calculated by dividing the value of a share at the end of the
period (including reinvestment of distributions) by the value of
the share at the beginning of the period and subtracting one. For
a given period, an average annual total return may be calculated
by finding the average annual compounded rate that would equate a
hypothetical $1,000 investment to the ending redeemable value.
Comparison of the total return of Class K shares of a Fund with
alternative investments should consider differences between the
class and the alternative investments, the periods and methods
used in calculation of the return being compared, and the impact
of taxes on alternative investments. The performance of Class K
shares of a Fund may be compared to various indices. Performance
and quotations from various publications may be included in sales
literature and advertisements. Of course, past performance is not
necessarily indicative of future results. Share prices may vary,
and your shares when redeemed may be worth more or less than your
original purchase price.
Each Fund invests all of its net investable assets in the
corresponding Portfolio of Base Trust that has the same investment
objective and substantially the same investment policies as the
Fund. The historical performance of Class K shares of Advisor
Intermediate Bond Fund, Advisor Income Fund and Advisor High-Yield
Municipals Fund is based on the performance of Intermediate Bond
Portfolio, Income Portfolio and High-Yield Municipals Portfolio,
respectively, restated to reflect 12b-1 fees and other expenses
applicable to Class K shares as set forth in the Fee Table,
without giving effect to any fee reimbursements described therein
and assuming reinvestment of dividends and capital gains.
Historical performance as restated should not be interpreted as
indicative of a Fund's future performance. The average annual
total returns for the periods ended Sept. 30, 1997 and Dec. 31,
1997, for 1-year, 5-year, and 10-year investments were:
1 year 5 Years 10 years
9/30 12/31 9/30 12/31 9/30 12/31
------------ ------------ ------------
Advisor High-Yield
Municipals Fund
Advisor Intermediate
Bond Fund
Advisor Income Fund
RISKS AND INVESTMENT CONSIDERATIONS
Although each Fund seeks to reduce risk by investing in a
diversified portfolio, this does not eliminate all risk. The
risks inherent in each Fund depend primarily upon the term and
quality of the obligations in its corresponding Portfolio, as well
as on market conditions. A decline in prevailing levels of
interest rates generally increases the value of securities in the
investment portfolio, while an increase in rates usually reduces
the value of those securities. As a result, interest rate
fluctuations will affect net asset value, but not the income
received from portfolio securities. (Because yields on debt
securities available for purchase vary over time, no specific
yield on shares can be assured.) In addition, if the bonds in an
investment portfolio contain call, prepayment or redemption
provisions, during a period of declining interest rates, these
securities are likely to be redeemed, and the Portfolio will
probably be unable to replace them with securities having as great
a yield.
Advisor Intermediate Bond Fund is appropriate for investors who
seek high income with less net asset value fluctuation from
interest rate changes than that of a longer-term fund, and who can
accept greater levels of credit and other risks associated with
securities that are rated below investment grade. Advisor Income
Fund is designed for investors who seek a higher level of income
and who can accept greater levels of credit and other risks
associated with securities of medium or lower quality. Advisor
High-Yield Municipals Fund is designed for investors who seek a
high level of tax-exempt income and who can accept still greater
fluctuation in portfolio value and other risks, such as increased
credit risk, associated with medium- and lower-quality long-term
Municipal Securities.
Although High-Yield Municipals Portfolio currently limits its
investments in Municipal Securities to those the interest on which
is exempt from the regular federal income tax, it may invest up to
100% of its total assets in Municipal Securities the interest on
which is subject to the federal alternative minimum tax. (See
Distributions and Income Taxes.) High-Yield Municipals Portfolio
may invest 25% or more of its assets in Municipal Securities that
are related in such a way that an economic, business, or political
development affecting one such security could also affect the
other securities. For example, Municipal Securities the interest
upon which is paid from revenues of similar-type projects, such as
hospitals, utilities, or housing, would be so related. High-Yield
Municipals Portfolio may invest 25% or more of its assets in
industrial development bonds (subject to the concentration
restrictions described in this prospectus under Investment
Restrictions and in the Statement of Additional Information).
Assets that are not invested in Municipal Securities may be held
in cash or invested in short-term taxable investments.
High-Yield Municipals Portfolio may purchase high-yield Municipal
Securities, commonly referred to as "junk bonds," which are
Municipal Securities rated lower than investment grade. Although
high-yield Municipal Securities generally offer higher yields than
investment grade Municipal Securities with comparable maturities,
high-yield Municipal Securities involve greater risks and their
total return and yield can be expected to fluctuate more than
those of investment grade Municipal Securities. High-yield
Municipal Securities are regarded as predominantly speculative
with respect to the issuer's continuing ability to meet principal
and interest payments, and are also subject to the risks
associated with substantial market-price volatility resulting from
changes in interest rates and economic conditions, as well as the
possibility of default or bankruptcy. A real or perceived
economic downturn or higher interest rates could cause a decline
in the price of high-yield Municipal Securities. Some additional
risks include the possibility that the interest of High-Yield
Municipals Portfolio in a high-yield Municipal Security could be
subordinated to the prior claims of other creditors, and the tax
or other advantages of high-yield Municipal Securities could be
limited or restricted by Congress. High-yield Municipal
Securities are thinly traded and can be more difficult to sell and
value accurately than high-quality Municipal Securities.
Successful investment in high-yield Municipal Securities involves
greater investment risk and is highly dependent on the Adviser's
credit analysis. Because reliable objective pricing data may not
be readily available, the Adviser's judgment may play a greater
role in the valuation process.
Investments in foreign securities by Intermediate Bond Portfolio
and Income Portfolio, including ADRs, represent both risks and
opportunities not typically associated with investments in
domestic issuers. Risks of foreign investing include currency
risk, less complete financial information on issuers, different
accounting, auditing and financial reporting standards, different
settlement practices, less market liquidity, more market
volatility, less well-developed and regulated markets, and greater
political instability. In addition, various restrictions by
foreign governments on investments by nonresidents may apply,
including imposition of exchange controls and withholding taxes on
dividends, and seizure or nationalization of investments owned by
nonresidents. Foreign investments also tend to involve higher
transaction and custody costs. Intermediate Bond Portfolio and
Income Portfolio may enter into foreign currency forward contracts
and use options and futures contracts, as described elsewhere in
this prospectus, to limit or reduce foreign currency risk.
There can be no assurance that a Fund or Portfolio will achieve
its objective, nor can it assure that payments of interest and
principal on portfolio securities will be made when due. If,
after purchase, the rating of a portfolio security is lost or
reduced, the Portfolio would not be required to sell the security,
but the Adviser would consider such a change in deciding whether
to retain the security in the portfolio.
The investment objective of each Fund and Portfolio is not
fundamental and may be changed by the Board of Trustees without a
vote of shareholders.
Further information on investment techniques that may be employed
by the Portfolios may be found under Portfolio Investments and
Strategies.
INVESTMENT RESTRICTIONS
For purposes of discussion under this section, the term "Fund"
refers to each Fund and each Portfolio, unless otherwise noted.
Each Fund is diversified as that term is defined in the Investment
Company Act of 1940.
A Fund may not invest in a security if, as a result of such
investment: (1) with respect to 75% of its assets, more than 5% of
its total assets would be invested in the securities of any one
issuer, except for U.S. Government Securities or repurchase
agreements /1/ for such securities, and, in the case of Advisor
High-Yield Municipals Fund or High-Yield Municipals Portfolio,
obligations guaranteed by guarantees or letters of credit of a
single guarantor may exceed this limit (see the Statement of
Additional Information); or (2) 25% or more of its total assets
would be invested in the securities of a group of issuers in the
same industry, except that this restriction does not apply to U.S.
Government Securities. Notwithstanding these limitations, a Fund,
but not a Portfolio, may invest all of its assets in another
investment company having the identical investment objective under
a master fund/feeder fund structure.
- -----------
/1/ A repurchase agreement involves a sale of securities to a
Portfolio with the concurrent agreement of the seller (bank or
securities dealer) to repurchase the securities at the same price
plus an amount equal to an agreed-upon interest rate within a
specified time. In the event of a bankruptcy or other default of
a seller of a repurchase agreement, a Portfolio could experience
both delays in liquidating the underlying securities and losses.
A Portfolio may not invest more than 10% of its net assets in
repurchase agreements maturing in more than seven days and other
illiquid securities.
- ------------
A Fund may not make loans except that it may (1) purchase money
market instruments and enter into repurchase agreements; (2)
acquire publicly distributed or privately placed debt securities;
(3) participate in an interfund lending program with other Stein
Roe Funds and Portfolios; and (4), in the case of Advisor
Intermediate Bond Fund, Intermediate Bond Portfolio, Advisor
Income Fund and Income Portfolio, lend portfolio securities under
certain conditions. A Fund may not borrow money, except for
nonleveraging, temporary, or emergency purposes or in connection
with participation in the interfund lending program. Neither a
Fund's aggregate borrowings (including reverse repurchase
agreements) nor its aggregate loans at any one time may exceed 33
1/3% of the value of its total assets. Additional securities may
not be purchased when borrowings, less proceeds receivable from
sales of portfolio securities, exceed 5% of total assets.
The policies set forth in the second and third paragraphs under
Investment Restrictions (but not the footnote) are fundamental
policies of each Fund./2/ The Statement of Additional Information
contains all of the investment restrictions.
- ----------
/2/ A fundamental policy may be changed only with the approval of
a "majority of the outstanding vote securities" of a Fund as
defined in the Investment Company Act.
- ----------
PORTFOLIO INVESTMENTS AND STRATEGIES
U.S. Government Securities. U.S. Government Securities include:
(1) bills, notes, bonds, and other debt securities, differing as
to maturity and rates of interest, that are issued by and are
direct obligations of the U.S. Treasury; and (2) other securities
that are issued or guaranteed as to principal and interest by the
U.S. Government or by its agencies or instrumentalities and that
include, but are not limited to, Government National Mortgage
Association ("GNMA"), Federal Farm Credit Banks, Federal Home Loan
Banks, Farmers Home Administration, Federal Home Loan Mortgage
Corporation ("FHLMC"), and Federal National Mortgage Association
("FNMA"). U.S. Government Securities are generally viewed by the
Adviser as being among the safest of debt securities with respect
to the timely payment of principal and interest (but not with
respect to any premium paid on purchase), but generally bear a
lower rate of interest than corporate debt securities. However,
they are subject to market risk like other debt securities, and
therefore the Funds' shares can be expected to fluctuate in value.
Municipal Securities. Municipal Securities are debt obligations
issued by or on behalf of the governments of states, territories
or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the
interest on which is generally exempt from the regular federal
income tax. Subject to its investment policies described above,
High-Yield Municipals Portfolio may invest in Municipal Securities
rated with any credit rating below investment grade. Medium- and
lower-quality Municipal Securities involve greater investment
risk, as discussed above under Investment Policies.
The two principal classifications of Municipal Securities are
"general obligation" and "revenue" bonds. "General obligation"
bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the payment of principal and interest. "Revenue"
bonds are usually payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from
the proceeds of a special excise tax or other specific revenue
source. Industrial development bonds are usually revenue bonds,
the credit quality of which is normally directly related to the
credit standing of the industrial user involved. Municipal
Securities may bear either fixed or variable rates of interest.
Variable rate securities bear rates of interest that are adjusted
periodically according to formulae intended to minimize
fluctuation in values of the instruments.
Within the principal classifications of Municipal Securities,
there are various types of instruments, including municipal bonds,
municipal notes, municipal leases, custodial receipts, and
participation certificates. Municipal notes include tax, revenue,
and bond anticipation notes of short maturity, generally less than
three years, which are issued to obtain temporary funds for
various public purposes. Municipal lease securities, and
participation certificates therein, evidence certain types of
interests in lease or installment purchase contract obligations of
a municipal authority or other entity. Custodial receipts
represent ownership in future interest or principal payments (or
both) on certain Municipal Securities and are underwritten by
securities dealers or banks. Some Municipal Securities may not be
backed by the faith, credit, and taxing power of the issuer and
may involve "non-appropriation" clauses, which provide that the
municipal authority is not obligated to make lease or other
contractual payments, unless specific annual appropriations are
made by the municipality. High-Yield Municipals Portfolio may
invest more than 5% of its net assets in municipal bonds and
notes, but does not expect to invest more than 5% of its net
assets in the other Municipal Securities described in this
paragraph. The Board is responsible for determining the credit
quality of unrated municipal leases on an ongoing basis, including
an assessment of the likelihood that such leases will not be
cancelled.
High-Yield Municipals Portfolio may also purchase Municipal
Securities that are insured as to the timely payment of interest
and principal. Such insured Municipal Securities may already be
insured when purchased or the Portfolio may purchase insurance in
order to turn an uninsured Municipal Security into an insured
Municipal Security.
Some Municipal Securities are backed by (1) the full faith and
credit of the U.S. Government; (2) agencies or instrumentalities
of the U.S. Government; or (3) U.S. Government Securities.
Medium- and Lower-Quality Debt Securities. Investment in medium-
or lower-quality debt securities involves greater investment risk,
including the possibility of issuer default or bankruptcy. A
Portfolio seeks to reduce investment risk through diversification,
credit analysis, and evaluation of developments in both the
economy and financial markets.
An economic downturn could severely disrupt the high-yield market
and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. In
addition, lower-quality bonds are less sensitive to interest rate
changes than higher-quality instruments (see Risks and Investment
Considerations) and generally are more sensitive to adverse
economic changes or individual corporate developments. During a
period of adverse economic changes, including a period of rising
interest rates, issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.
Lower-quality debt securities are obligations of issuers that are
considered predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal according to the
terms of the obligation and, therefore, carry greater investment
risk, including the possibility of issuer default and bankruptcy,
and are commonly referred to as "junk bonds." The lowest rating
assigned by Moody's is for bonds that can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
Achievement of the investment objective will be more dependent on
the Adviser's credit analysis than would be the case if a
Portfolio were investing in higher-quality debt securities. Since
the ratings of rating services (which evaluate the safety of
principal and interest payments, not market risks) are used only
as preliminary indicators of investment quality, the Adviser
employs its own credit research and analysis, from which it has
developed a proprietary credit rating system based upon
comparative credit analyses of issuers within the same industry.
These analyses may take into consideration such quantitative
factors as an issuer's present and potential liquidity,
profitability, internal capability to generate funds, debt/equity
ratio and debt servicing capabilities, and such qualitative
factors as an assessment of management, industry characteristics,
accounting methodology, and foreign business exposure.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and a Portfolio may have greater difficulty selling
its portfolio securities. (See Net Asset Value.) The market
value of these securities and their liquidity may be affected by
adverse publicity and investor perceptions.
Derivatives. Consistent with its objective, a Portfolio may
invest in a broad array of financial instruments and securities,
including conventional exchange-traded and non-exchange traded
options, futures contracts, futures options, securities
collateralized by underlying pools of mortgages or other
receivables, and other instruments, the value of which is
"derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate, or--in the
case of Intermediate Bond Portfolio and Income Portfolio--a
currency ("Derivatives"). No Portfolio expects to invest more
than 5% of its net assets in any type of Derivative except: for
each Portfolio, options, futures contracts, and futures options;
and for Intermediate Bond Portfolio, mortgage or other asset-
backed securities.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because they are more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives. For additional
information on Derivatives, please refer to the Statement of
Additional Information.
Mortgage and Other Asset-Backed Debt Securities. Intermediate
Bond Portfolio may invest in securities secured by mortgages or
other assets such as automobile or home improvement loans and
credit card receivables. These instruments may be issued or
guaranteed by the U.S. Government or by its agencies or
instrumentalities or by private entities such as commercial,
mortgage and investment banks and financial companies or financial
subsidiaries of industrial companies.
Securities issued by GNMA represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmers Home Administration, or guaranteed by the Veterans
Administration. Securities issued by FNMA and FHLMC, U.S.
Government-sponsored corporations, also represent an interest in a
pool of mortgages.
The timely payment of principal and interest on GNMA securities is
guaranteed by GNMA and backed by the full faith and credit of the
U.S. Treasury. FNMA guarantees full and timely payment of
interest and principal on FNMA securities. FHLMC guarantees
timely payment of interest and ultimate collection of principal on
FHLMC securities. FNMA and FHLMC securities are not backed by the
full faith and credit of the U.S. Treasury.
Mortgage-backed debt securities, such as those issued by GNMA,
FNMA, and FHLMC, are of the "modified pass-through type," which
means the interest and principal payments on mortgages in the pool
are "passed through" to investors. Mortgage-backed securities
provide either a pro rata interest in underlying mortgages or an
interest in collateralized mortgage obligations ("CMOs"), which
represent a right to interest and/or principal payments from an
underlying mortgage pool. CMOs are not guaranteed by either the
U.S. Government or by its agencies or instrumentalities and are
usually issued in multiple classes, each of which has different
payment rights, prepayment risks, and yield characteristics.
Mortgage-backed securities involve the risk of prepayment of the
underlying mortgages at a faster or slower rate than the
established schedule. Prepayments generally increase with falling
interest rates and decrease with rising rates, but they also are
influenced by economic, social, and market factors. If mortgages
are prepaid during periods of declining interest rates, there
would be a resulting loss of the full-term benefit of any premium
paid by the Portfolio on purchase of the securities, and the
proceeds of prepayment would likely be invested at lower interest
rates. Intermediate Bond Portfolio tends to invest in CMOs of
classes known as planned amortization classes ("PACs") which have
prepayment protection features tending to make them less
susceptible to price volatility.
Non-mortgage asset-backed securities usually have less prepayment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
Asset-backed securities tend to experience greater price
volatility than straight debt securities.
REMICs. Intermediate Bond Portfolio and Income Portfolio may
invest in real estate mortgage investment conduits ("REMICs").
REMICs, which were authorized under the Tax Reform Act of 1986,
are private entities formed for the purpose of holding a fixed
pool of mortgages secured by an interest in real property. REMICs
are similar to CMOs in that they issue multiple classes of
securities. A REMIC is a CMO that qualifies for special tax
treatment under the Internal Revenue Code and invests in certain
mortgages principally secured by interests in real property.
Investors may purchase beneficial interests in REMICs, which are
known as "regular" interests, or "residual" interests. Guaranteed
REMIC pass-through certificates ("REMIC Certificates") issued by
FNMA or FHLMC represent beneficial ownership interests in a REMIC
trust consisting principally of mortgage loans or FNMA-, FHLMC- or
GNMA-guaranteed mortgage pass-through certificates. For FHLMC
REMIC Certificates, FHLMC guarantees the timely payment of
interest and also guarantees the payment of principal as payments
are required to be made on the underlying mortgage participation
certificates. FNMA REMIC Certificates are issued and guaranteed as
to timely distribution and principal and interest by FNMA.
Floating Rate Instruments. Intermediate Bond Portfolio and Income
Portfolio may also invest in floating rate instruments which
provide for periodic adjustments in coupon interest rates that are
automatically reset based on changes in amount and direction of
specified market interest rates. In addition, the adjusted
duration of some of these instruments may be materially shorter
than their stated maturities. To the extent such instruments are
subject to lifetime or periodic interest rate caps or floors, such
instruments may experience greater price volatility than debt
instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and
refers to the approximate percentage change in price for a 100
basis point change in yield. For example, if interest rates
decrease by 100 basis points, a market price of a security with an
adjusted duration of 2 would increase by approximately 2%. Income
Portfolio does not intend to invest more than 5% of net assets in
floating rate instruments. Intermediate Bond Portfolio does not
intend to invest more than 10% of net assets in floating rate
instruments.
Futures and Options. Each Portfolio may purchase and write both
call options and put options on securities and on indexes, and
enter into interest rate and index futures contracts and options
on such futures contracts in order to provide additional revenue,
or to hedge against changes in security prices or interest rates.
Each Portfolio may also write options on such futures contracts
and purchase other types of forward or investment contracts linked
to individual securities, indexes or other benchmarks, consistent
with its investment objective, in order to provide additional
revenue, or to hedge against changes in security prices and
interest rates. In addition, Intermediate Bond Portfolio and
Income Portfolio may purchase and write both call options and put
options on foreign currencies, and enter into foreign currency
futures contracts. Each Portfolio may write a call or put option
only if the option is covered. As the writer of a covered call
option, the Portfolio foregoes, during the option's life, the
opportunity to profit from increases in market value of the
security covering the call option above the sum of the premium and
the exercise price of the call. There can be no assurance that a
liquid market will exist when a Portfolio seeks to close out a
position. Because of low margin deposits required, the use of
futures contracts involves a high degree of leverage, and may
result in losses in excess of the amount of the margin deposit.
Private Placements. High-Yield Municipals Portfolio may invest in
securities that are purchased in private placements (including
privately placed securities eligible for purchase and sale under
Rule 144A of the Securities Act of 1933) and, accordingly, are
subject to restrictions on resale as a matter of contract or under
federal securities laws. Because there may be relatively few
potential purchasers for such investments, especially under
adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Portfolio
could find it more difficult to sell such securities when the
Adviser believes it is advisable to do so or may be able to sell
such securities only at prices lower than if such securities were
more widely held. At times, it may also be more difficult to
determine the fair value of such securities for purposes of
computing net asset value.
Participation Interests. High-Yield Municipals Portfolio may also
purchase participation interests or certificates of participation
in all or part of specific holdings of Municipal Securities,
including municipal lease obligations. Some participation
interests, certificates of participation, and municipal lease
obligations are illiquid and, as such, will be subject to the 15%
limit on investments in illiquid securities.
Tender Option Bonds; Trust Receipts. High-Yield Municipals
Portfolio may purchase tender option bonds and trust receipts. 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
Adviser 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. High-Yield Municipals Portfolio may invest up
to 10% of net assets in tender option bonds and trust receipts.
Foreign Securities. Intermediate Bond Portfolio and Income
Portfolio may invest in foreign securities, but will not invest in
a foreign security if, as a result of such investment, more than
25% of its total assets would be invested in foreign securities.
For purposes of this restriction, foreign debt securities do not
include securities represented by American Depositary Receipts
("ADRs"), foreign debt securities denominated in U.S. dollars, or
securities guaranteed by a U.S. person such as a corporation
domiciled in the United States that is a parent or affiliate of
the issuer of the securities being guaranteed. These Portfolios
may invest in sponsored or unsponsored ADRs. In addition to, or
in lieu of, such direct investment, a Portfolio may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars; and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
Because of the availability of a variety of highly liquid U.S.
dollar debt instruments, a synthetic foreign position utilizing
such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. In
connection with the purchase of foreign securities, the Portfolios
may contract to purchase an amount of foreign currency sufficient
to pay the purchase price of the securities at the settlement
date. No Portfolio intends to invest more than 5% of its net
assets in foreign securities. (See Risks and Investment
Considerations.)
Lending of Portfolio Securities. Subject to certain restrictions,
each of Intermediate Bond Portfolio and Income Portfolio may lend
its portfolio securities to broker-dealers and banks. Any such
loan must be continuously secured by collateral in cash or cash
equivalents maintained on a current basis in an amount at least
equal to the market value of the securities loaned by the
Portfolio. The Portfolio would continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities
loaned, and would also receive an additional return that may be in
the form of a fixed fee or a percentage of the collateral. The
Portfolio would have the right to call the loan and obtain the
securities loaned at any time on notice of not more than five
business days. In the event of bankruptcy or other default of the
borrower, the Portfolio could experience both delays in
liquidating the loan collateral or recovering the loaned
securities and losses including (a) possible decline in the value
of the collateral or in the value of the securities loaned during
the period while the Portfolio seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of
access to income during this period; and (c) expenses of enforcing
its rights. The Portfolios may participate in an interfund
lending program, subject to certain restrictions described in the
Statement of Additional Information.
When-Issued and Delayed-Delivery Securities; Forward Commitments;
Standby Commitments. Each Portfolio's assets may include
securities purchased on a when-issued or delayed-delivery basis,
and High-Yield Municipals Portfolio may purchase forward
commitments. Although the payment and interest terms of these
securities are established at the time the purchaser enters into
the commitment, the securities may be delivered and paid for a
month or more after the date of purchase, when their value may
have changed. A Portfolio makes such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if the Adviser deems it
advisable for investment reasons. Securities purchased in this
manner involve a risk of loss if the value of the security
purchased declines before the settlement date.
When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that a Portfolio will
sell securities with a commitment to purchase similar, but not
identical, securities at a future date. Generally, the securities
are repurchased at a price lower than the sales price. Dollar
roll transactions involve the risk of restrictions on the
Portfolio's ability to repurchase the security if the counterparty
becomes insolvent; an adverse change in the price of the security
during the period of the roll or that the value of the security
repurchased will be less than the security sold; and transaction
costs exceeding the return earned by the Portfolio on the sales
proceeds of the dollar roll.
Each Portfolio may also invest in securities purchased on a
standby commitment basis, which is a delayed-delivery agreement in
which the Portfolio binds itself to accept delivery of a security
at the option of the other party to the agreement.
PIK and Zero Coupon Bonds. Intermediate Bond Portfolio and Income
Portfolio may invest in both zero coupon bonds and bonds the
interest on which is payable in kind ("PIK bonds"). A zero coupon
bond is a bond that does not pay interest for its entire life. A
PIK bond pays interest in the form of additional securities. The
market prices of both zero coupon and PIK bonds are affected to a
greater extent by changes in prevailing levels of interest rates
and thereby tend to be more volatile in price than securities that
pay interest periodically and in cash. In addition, because a
Portfolio accrues income with respect to these securities prior to
the receipt of such interest in cash, it may have to dispose of
portfolio securities under disadvantageous circumstances in order
to obtain cash needed to pay income dividends in amounts necessary
to avoid unfavorable tax consequences.
Short Sales Against the Box. Each Portfolio may sell short
securities it owns or has the right to acquire without further
consideration, a technique called selling short "against the box."
Short sales against the box may protect the Portfolio against the
risk of losses in the value of its portfolio securities because
any unrealized losses with respect to such securities should be
wholly or partly offset by a corresponding gain in the short
position. However, any potential gains in such securities should
be wholly or partially offset by a corresponding loss in the short
position. Short sales against the box may be used to lock in a
profit on a security when, for tax reasons or otherwise, the
Adviser does not want to sell the security. For a more complete
explanation, please refer to the Statement of Additional
Information.
Rule 144A Securities. Each Portfolio may purchase securities that
have been privately placed but that are eligible for purchase and
sale under Rule 144A under the 1933 Act. That Rule permits
certain qualified institutional buyers, such as the Portfolios, to
trade in privately placed securities that have not been registered
for sale under the 1933 Act. The Adviser, under the supervision
of the Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the
restriction of investing no more than 10% of net assets in
illiquid securities of Intermediate Bond Portfolio and Income
Portfolio and no more than 15% of net assets of High-Yield
Portfolio. A determination of whether a Rule 144A security is
liquid or not is a question of fact. In making this
determination, the Adviser will consider the trading markets for
the specific security, taking into account the unregistered nature
of a Rule 144A security. In addition, the Adviser 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 would be monitored and if, as a result of
changed conditions, it is determined that a Rule 144A security is
no longer liquid, a Portfolio's holdings of illiquid securities
would be reviewed to determine what, if any, steps are required to
assure that the Portfolio does not invest more than 10% of its
assets in illiquid securities, or 15% of its assets in the case of
High-Yield Portfolio. Investing in Rule 144A securities could
have the effect of increasing the amount of assets invested in
illiquid securities if qualified institutional buyers are
unwilling to purchase such securities. No Portfolio expects to
invest as much as 5% of its total assets in Rule 144A securities
that have not been deemed to be liquid by the Adviser.
Portfolio Turnover. In attempting to attain its objective, each
Portfolio may sell portfolio securities without regard to the
period of time they have been held. Further, the Adviser may
purchase and sell securities for the portfolio of Income Portfolio
with a view to maximizing current return, even if portfolio
changes would cause the realization of capital gains. Although
the average stated maturity of the portfolio of Income Portfolio
generally will exceed ten years, the Adviser may adjust the
average effective maturity of an investment portfolio from time to
time, depending on its assessment of the relative yields available
on securities of different maturities and its expectations of
future changes in interest rates. As a result, the turnover rate
of the Portfolios may vary from year to year. The turnover rate
for a Portfolio may exceed 100%, but is not expected to exceed
200% under normal market conditions. A high rate of portfolio
turnover may result in increased transaction expenses and the
realization of capital gains (which may be taxable) or losses.
(See Financial Highlights and Distributions and Income Taxes.)
NET ASSET VALUE
Each Fund determines the net asset value of its shares as of the
close of trading on the New York Stock Exchange ("NYSE")
(currently 3:00 p.m., central time, or 4:00 p.m., eastern time) by
dividing the difference between the value of its assets and
liabilities allocable to that class by the number of shares of
that class outstanding. Each Portfolio allocates net asset value,
income, and expenses to the corresponding Fund and any other of
its feeder funds in proportion to their respective interests in
the Portfolio.
Net asset value will not be determined on days when the NYSE is
closed unless, in the judgment of the Board of Trustees, the net
asset value of a Fund should be determined on any such day, in
which case the determination will be made at 3:00 p.m., central
time, or 4:00 p.m., eastern time.
Securities held by Intermediate Bond Portfolio and Income
Portfolio for which market quotations are readily available at the
time of valuation are valued on that basis. Long-term straight-
debt securities for which market quotations are not readily
available are valued at a fair value based on valuations provided
by pricing services approved by the Board, which may employ
electronic data processing techniques, including a matrix system,
to determine valuations. Short-term debt securities with
remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains
or losses. The Board believes that the amortized cost represents
a fair value for such securities. Short-term debt securities with
remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix
prepared by the Adviser based on quotations for comparable
securities. Other assets and securities held by a Fund for which
these valuation methods do not produce a fair value are valued by
a method that the Board believes will determine a fair value.
Securities held by High-Yield Municipals Portfolio are valued
based on valuations provided by a pricing service. These
valuations are reviewed by the Adviser. If the Adviser believes
that a valuation received from the service does not represent a
fair value, it values the obligation by a method that the Board
believes will determine a fair value. The Board may approve the
use of another pricing service and any pricing service used may
employ electronic data processing techniques, including a so-
called "matrix" system, to determine valuations. Other assets and
securities are valued by a method that the Board believes will
determine a fair value.
HOW TO PURCHASE SHARES
You may purchase Class K shares of a Fund only through
intermediaries, including certain broker-dealers, bank trust
departments, asset allocation programs sponsored by the Adviser,
wrap fee programs, and retirement plan service providers
("Intermediaries"). The Adviser and Advisor Trust do not
recommend, endorse, or receive payments from any Intermediary.
Class K shares of the Funds are offered continuously. Orders
received in good order prior to the time at which a Fund values
its shares (or placed with an Intermediary before such time and
transmitted by the Intermediary before the Fund processes that
day's share transactions or such other time as agreed to by the
parties) will be processed based on that day's closing net asset
value.
Conditions of Purchase. Each purchase order for Fund shares must
be accepted by an authorized officer of the Distributor or its
authorized agent and is not binding until accepted and entered on
the books of that Fund. Advisor Trust reserves the right not to
accept any purchase order that it determines not to be in the best
interests of Advisor Trust or of a Fund's shareholders.
Purchases Through Intermediaries. You must purchase shares
through Intermediaries. These Intermediaries may charge for their
services or place limitations on the extent to which you may use
the services offered by Advisor Trust. In addition, each
Intermediary will establish its own procedures for the purchase of
Fund shares, including minimum initial and additional investments,
and the acceptable methods of payment for shares. Your
Intermediary may be closed on days when the NYSE is open. As a
result, prices of Fund shares may be significantly affected on
days when you have no access to your Intermediary to buy shares.
If you wish to purchase shares, please contact your Intermediary
for instructions.
HOW TO SELL (REDEEM) SHARES
You may redeem shares only through Intermediaries. Each
Intermediary will establish its own procedures for the sale of
Fund shares. Your Intermediary may be closed on days when the
NYSE is open. As a result, prices for Fund shares may be
significantly affected on days when you have no access to your
Intermediary to sell shares. If you wish to redeem shares through
an Intermediary, please contact the Intermediary for instructions.
Exchange Privilege. Through an account with an Intermediary, you
may redeem all or any portion of your Fund shares and use the
proceeds to purchase shares of any other Fund that is a series of
Advisor Trust offered for sale in the state in which the
Intermediary is located. Each Intermediary will establish its own
exchange policies and procedures. In particular, individual
participants of qualified retirement plans may exchange shares
through the plan sponsor or administrator. Those participants may
exchange shares only for shares of other Advisor Trust Funds that
are included in the plan. An exchange transaction is a sale and
purchase of shares for federal income tax purposes and may result
in capital gain or loss. Before exchanging into another Advisor
Trust Fund, you should obtain the prospectus for the Advisor Trust
Fund in which you wish to invest and read it carefully. The
registration of the account to which you are making an exchange
must be exactly the same as that of the account from which the
exchange is made. Advisor Trust reserves the right to suspend,
limit, modify, or terminate the Exchange Privilege or its use in
any manner by any person or class; Intermediaries would be
notified of such a change.
General Redemption Policies. Advisor Trust will terminate the
exchange privilege as to a particular shareholder if the Adviser
determines, in its sole discretion, that the shareholder's
exchange activity is likely to adversely impact the Adviser's
ability to manage the investment portfolio in accordance with the
investment objectives or otherwise harm a Fund or its remaining
shareholders. Advisor Trust cannot accept a redemption request
that specifies a particular date or price for redemption or any
special conditions.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received by the Intermediary. (See Net Asset
Value.) Because the redemption price you receive depends upon the
net asset value per share at the time of redemption, it may be
more or less than the price you originally paid for the shares and
may result in a realized capital gain or loss.
Advisor Trust will pay redemption proceeds as soon as practicable,
generally within seven days after proper instructions are
received. However, for shares recently purchased by check, a Fund
will delay sending proceeds 15 days in order to protect the Fund
against financial losses and dilution in net asset value caused by
dishonest purchase payment checks. To avoid delay in payment,
investors are advised to purchase shares unconditionally, such as
by certified check or other immediately available funds. (See
Distributions and Income Taxes.)
DISTRIBUTIONS AND INCOME TAXES
Distributions. Income dividends are declared each business day,
paid monthly, and confirmed at least quarterly. Each Fund intends
to distribute by the end of each calendar year at least 98% of any
net capital gains realized from the sale of securities during the
12-month period ended Oct. 31 in that year. The Funds intend to
distribute any undistributed net investment income and net
realized capital gains in the following year.
All income dividends and capital gains distributions on Fund
shares will be reinvested in additional shares of the same class
of that Fund unless you elect to have distributions paid by check.
Reinvestment normally occurs on the payable date. Regardless of
your election, distributions of $10 or less will not be paid by
check to the shareholder, but will be reinvested in additional
shares of the same class of the Fund at net asset value. If you
have 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 your
address of record, your 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 instructions.
Income Taxes. For federal income tax purposes, each Fund is
treated as a separate taxable entity distinct from the other
series of Advisor Trust. This section is not intended to be a
full discussion of income tax laws and their effect on
shareholders. You may wish to consult your own tax advisor.
Advisor Intermediate Bond Fund and Advisor Income Fund. Your
distributions will be taxable to you, under income tax law,
whether received in cash or reinvested in additional shares. For
federal income tax purposes, any distribution that is paid in Jan.
but was declared in the prior calendar year is deemed paid in the
prior calendar year.
You will be subject to federal income tax at ordinary rates on
income dividends and distributions of net short-term capital
gains. Distributions of net long-term capital gains will be
taxable to you as long-term capital gains regardless of the length
of time you have held your shares.
You will be advised annually as to the source of distributions.
If you are not subject to tax on your income, you will not be
required to pay tax on these amounts.
If you realize a loss on the sale or exchange of Fund shares held
for six months or less, your short-term loss is recharacterized as
long-term to the extent of any long-term capital gains
distributions you have received with respect to those shares.
Advisor High-Yield Municipals Fund. High-Yield Municipals
Portfolio currently limits its investments in Municipal Securities
to those the interest on which they believe is exempt from the
regular federal income tax ("exempt-interest dividends"). It may,
however, invest up to 100% of its total assets in Municipal
Securities the interest on which is subject to the alternative
minimum tax. In addition, if it should ever invest in securities
the interest on which is not exempt, dividends paid by it from
such interest would be subject to federal income tax at ordinary
rates. Promptly after the end of each calendar year, shareholders
of Advisor High-Yield Municipals Fund will receive a statement of
the federal income tax status of all dividends and capital gains
distributions paid during the year. The portion of your dividends
and distributions that are taxable will be taxable to you whether
received in cash or reinvested in additional shares. If you are
receiving social security benefits, tax-exempt income, including
exempt-interest dividends received from Advisor High-Yield
Municipals Fund, will be added to your taxable income in
determining whether a portion of your benefits will be subject to
federal income tax. Interest on borrowings you incur to purchase
or carry shares is not deductible for federal income tax purposes.
You may be subject to state and local taxes on distributions from
Advisor High-Yield Municipals Fund, including those distributions
that are exempt from federal income tax.
MANAGEMENT
Trustees and Investment Adviser. The Board of Trustees of Advisor
Trust and the Board of Trustees of Base Trust have overall
management responsibility for each Fund and each Portfolio,
respectively. See Management in the Statement of Additional
Information for the names of and other information about the
trustees and officers. Since Advisor Trust and Base Trust have
the same trustees, the trustees have adopted conflict of interest
procedures to monitor and address potential conflicts between the
interests of the Funds and the Portfolios and other feeder funds
investing in a Portfolio that share a common Board of Trustees
with Advisor Trust and Base Trust.
The Adviser, Stein Roe & Farnham Incorporated, One South Wacker
Drive, Chicago, Illinois 60606, is responsible for managing the
investment portfolio of each Portfolio and the business affairs of
the Funds, the Portfolios, Advisor Trust, and Base Trust, subject
to the direction of the respective Board. The Adviser is
registered as an investment adviser under the Investment Advisers
Act of 1940. The Adviser and its predecessor have advised and
managed mutual funds since 1949. The Adviser is a wholly owned
indirect subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which in turn is a majority owned indirect subsidiary
of Liberty Mutual Insurance Company.
In approving the use of a single combined prospectus, the Board
considered the possibility that one Fund might be liable for
misstatements in the prospectus regarding information concerning
another Fund.
Portfolio Managers. Michael T. Kennedy has been portfolio manager
of Intermediate Bond Portfolio since its inception in 1998 and had
been portfolio manager of its predecessor since 1988. He is a
senior vice president of the Adviser, and has been associated with
the Adviser since 1987. From 1984 to 1987, he was employed by
Homewood Federal Savings and Loan. A chartered financial analyst
and a chartered investment counselor, he received his B.S. degree
from Marquette University in 1984 and his M.M. from Northwestern
University in 1988. Mr. Kennedy is a member of the Adviser's
Taxable Strategy Team and managed $440 million in mutual fund net
assets for the Adviser as of June 30, 1997.
Stephen F. Lockman has been portfolio manager of Income Portfolio
since its inception in 1998 and had been portfolio manager of its
predecessor since Mar. 3, 1997. Mr. Lockman joined the Adviser in
Jan. 1994 and was senior research analyst for the Adviser's fixed
income department from 1994 to 1997. Mr. Lockman previously
served as portfolio manager for the Illinois State Board of
Investment from 1987 to 1994, and as a trust investment officer
for LaSalle National Bank from 1983 to 1987. A chartered
financial analyst, Mr. Lockman earned a bachelor's degree in 1983
from the University of Illinois and a master's degree in 1986 from
DePaul University. As of June 30, 1997, Mr. Lockman managed $415
million in mutual fund net assets.
M. Jane McCart has been portfolio manager of High-Yield Municipals
Portfolio since its inception in 1998 and had been portfolio
manager of its predecessor since Feb. 1995. Ms. McCart is a
senior vice president of the Adviser, and has been associated with
the Adviser since 1983. From 1973 to 1983, she was with the
National Bank of Detroit. She received her B.S.B.A. degree from
Lawrence Technological University in 1973 and, as of June 30,
1997, was responsible for managing $888 million in mutual fund net
assets.
Fees and Expenses. The Adviser is entitled to receive a monthly
administrative fee from each Fund, computed and accrued daily, and
a monthly management fee from each Portfolio. However, as noted
above under Fee Table, the Adviser may voluntarily undertake to
reimburse a Fund for a portion of its operating expenses and its
pro rata share of the operating expenses of its corresponding
Portfolio. Following are the annual rates of fees:
Management Administrative
Portfolio Fee Fund Fee
- --------------- ----------------- -------------- ----------------
Intermediate Intermediate
Bond Portfolio .350% Bond Fund .150%
Income Portfolio .500% up to $100 Income Fund .150% up to
million, .475% $100 million,
thereafter .125% thereafter
High-Yield High-Yield
Municipals .450% up to $100 Municipals Fund .150% up to $100
Portfolio million, .425% million, .125% next
next $100 million, $100 million,
.400% thereafter .100% thereafter
The Adviser provides office space and executive and other
personnel to Advisor Trust and Base Trust. All expenses of the
Funds (other than those paid by the Adviser), including, but not
limited to, printing and postage charges, securities registration
fees, custodian and transfer agency fees, legal and auditing fees,
compensation of trustees not affiliated with the Adviser, and
expenses incidental to its organization, are paid out of the
assets of the Funds.
Under a separate agreement with each Trust, the Adviser provides
certain accounting and bookkeeping services to the Funds and the
Portfolios including computation of net asset value and
calculation of its net income and capital gains and losses on
disposition of assets.
In addition, the Adviser is free to make additional payments out
of its own assets to promote the sale of shares of the Funds.
Portfolio Transactions. The Adviser places the orders for the
purchase and sale of portfolio securities and options and futures
contracts. In doing so, the Adviser seeks to obtain the best
combination of price and execution, which involves a number of
judgmental factors.
Transfer Agent and Shareholder Services. Colonial Investors
Service Center, Inc. ("Transfer Agent"), P. O. Box 1722, Boston,
Massachusetts 02105, an indirect subsidiary of Liberty Financial,
is the agent of Advisor Trust for the transfer of shares,
disbursement of dividends, and maintenance of shareholder
accounting records.
Some Intermediaries that maintain nominee accounts with the Funds
for their clients who are Fund shareholders may be paid by the
Transfer Agent for shareholder servicing and accounting services
they provide with respect to the underlying Fund shares.
Distributor. Class K shares of each Fund are offered for sale
through Liberty Financial Investments, Inc. ("Distributor")
without any sales commissions. The Distributor is an indirect
subsidiary of Liberty Financial. The business address of the
Distributor is One Financial Center, Boston, Massachusetts 02111;
however, all Fund correspondence (including purchase and
redemption orders) should be mailed to Colonial Investors Service
Center, Inc., the Transfer Agent, at P.O. Box 1722, Boston,
Massachusetts 02105.
The trustees of Advisor Trust have adopted a plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Plan"). With
respect to Class K shares, the Plan provides that as compensation
for the promotion and distribution of shares of the Funds
including its expenses related to sale and promotion of Fund
shares and for servicing Fund shareholders, the Distributor
receives from each Fund a fee at an annual rate of 0.25% of the
average net assets attributable to Class K shares. The
Distributor generally pays this amount to institutions that
distribute Fund shares and/or provide services to the Funds and
their shareholders. Those institutions may use the payments for,
among other purposes, compensating employees engaged in sales
and/or shareholder servicing. The amount of fees paid by the
Funds during any year may be more or less than the cost of
distribution or other services provided to the Funds. NASD rules
limit the amount of annual distribution fees that may be paid by a
mutual fund and impose a ceiling on the cumulative sales charges
paid.
Custodian. State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian for
the Funds and the Portfolios. Foreign securities are maintained
in the custody of foreign banks and trust companies that are
members of the Bank's Global Custody Network or foreign
depositories used by such members. (See Custodian in the
Statement of Additional Information.)
ORGANIZATION AND DESCRIPTION OF SHARES
Advisor Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
July 31, 1996, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either Advisor
Trust's shareholders or its trustees. Advisor Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, ten series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as Advisor Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, Advisor Trust or
any particular series shall look only to the assets of Advisor
Trust or of the respective series for payment under such credit,
contract or claim, and that the shareholders, trustees and
officers shall have no personal liability therefor. The
Declaration of Trust requires that notice of such disclaimer of
liability be given in each contract, instrument or undertaking
executed or made on behalf of Advisor Trust. The Declaration of
Trust provides for indemnification of any shareholder against any
loss and expense arising from personal liability solely by reason
of being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and Advisor
Trust was unable to meet its obligations.
The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of Advisor
Trust also is believed to be remote, because it would be limited
to claims to which the disclaimer did not apply and to
circumstances in which the other series was unable to meet its
obligations.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Each Fund, which is a series of an open-end management investment
company, seeks to achieve its objective by investing all of its
assets in another mutual fund having an investment objective
identical to that of the Fund. The initial shareholder of each
Fund approved this policy of permitting it to act as a feeder fund
by investing in its corresponding Portfolio. Please refer to
Investment Policies, Portfolio Investments and Strategies, and
Investment Restrictions for a description of the investment
objectives, policies, and restrictions of the Funds and the
Portfolios. The management and expenses of both the Funds and the
Portfolios are described under Fee Table and Management. Each
Fund bears its proportionate share of Portfolio expenses.
The Adviser has provided investment management services in
connection with other mutual funds employing the master
fund/feeder fund structure since 1991.
Each Portfolio is a separate series of SR&F Base Trust ("Base
Trust"), a Massachusetts common law trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
August 23, 1993. The Declaration of Trust of Base Trust provides
that a Fund and other investors in a Portfolio will each be liable
for all obligations of the Portfolio that are not satisfied by the
Portfolio. However, the risk of a Fund incurring financial loss
on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself were
unable to meet its obligations. Accordingly, the trustees of
Advisor Trust believe that neither a Fund nor its shareholders
will be adversely affected by reason of a Fund's investing in a
Portfolio.
The Declaration of Trust of Base Trust provides that a Portfolio
will terminate 120 days after the withdrawal of a Fund or any
other investor in the Portfolio, unless the remaining investors
vote to agree to continue the business of the Portfolio. The
trustees of Advisor Trust may vote a Fund's interests in a
Portfolio for such continuation without approval of the Fund's
shareholders.
The common investment objective of each Fund and its corresponding
Portfolio is nonfundamental and may be changed without shareholder
approval. The fundamental policies of each Fund and the
fundamental policies of its corresponding Portfolio can be changed
only with shareholder approval.
If a Fund, as a Portfolio investor, is requested to vote on a
proposed change in fundamental policy of its corresponding
Portfolio or any other matter pertaining to the Portfolio (other
than continuation of the business of the Portfolio after
withdrawal of another investor), the Fund will solicit proxies
from its shareholders and vote its interest in the Portfolio for
and against such matters proportionately to the instructions to
vote for and against such matters received from the Fund
shareholders. A Fund will vote shares for which it receives no
voting instructions in the same proportion as the shares for which
it receives voting instructions. There can be no assurance that
any matter receiving a majority of votes cast by Fund shareholders
will receive a majority of votes cast by all Portfolio investors.
If other investors hold a majority interest in a Portfolio, they
could have voting control over the Portfolio.
In the event that a Portfolio's fundamental policies were changed
so as to be inconsistent with those of a Fund, the Board of
Trustees of Advisor Trust would consider what action might be
taken, including changes to the Fund's fundamental policies,
withdrawal of the Fund's assets from its corresponding Portfolio
and investment of such assets in another pooled investment entity,
or the retention of another investment adviser. Any of these
actions would require the approval of the Fund's shareholders. A
Fund's inability to find a substitute master fund or comparable
investment management could have a significant impact upon its
shareholders' investments. Any withdrawal of a Fund's assets
could result in a distribution in kind of portfolio securities (as
opposed to a cash distribution) to the Fund. Should such a
distribution occur, A Fund would incur brokerage fees or other
transaction costs in converting such securities to cash. In
addition, a distribution in kind could result in a less
diversified portfolio of investments for the Fund and could affect
the liquidity of the Fund.
Each investor in a Portfolio, including the corresponding Fund,
may add to or reduce its investment in the Portfolio on each day
the NYSE is open for business. The investor's percentage of the
aggregate interests in the Portfolio will be computed as the
percentage equal to the fraction (1) the numerator of which is the
beginning of the day value of such investor's investment in the
Portfolio on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's
investment in the Portfolio effected on such day; and (2) the
denominator of which is the aggregate beginning of the day net
asset value of the Portfolio on such day plus or minus, as the
case may be, the amount of the net additions to or withdrawals
from the aggregate investments in the Portfolio by all investors
in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the
Portfolio as of the close of business.
Base Trust may permit other investment companies and/or other
institutional investors to invest in the Portfolios, but members
of the general public may not invest directly in a Portfolio.
Other investors in a Portfolio are not required to sell their
shares at the same public offering price as a Fund, might incur
different administrative fees and expenses than the Funds, and
their shares might be sold with a sales commission. Therefore,
Fund shareholders might have different investment returns than
shareholders in another investment company that invests
exclusively in its corresponding Portfolio. Investment by such
other investors in a Portfolio would provide funds for the
purchase of additional portfolio securities and would tend to
reduce the Portfolio's operating expenses as a percentage of its
net assets. Conversely, large-scale redemptions by any such other
investors in a Portfolio could result in untimely liquidations of
the Portfolio's security holdings, loss of investment flexibility,
and increases in the operating expenses of the Portfolio as a
percentage of its net assets. As a result, the Portfolio's
security holdings may become less diverse, resulting in increased
risk.
Intermediate Bond Portfolio, Income Portfolio and High-Yield
Municipals Portfolio commenced operations in ______, 1998 when
Stein Roe Intermediate Bond Fund, Stein Roe Income Fund (which are
series of Stein Roe Income Trust) and Stein Roe High-Yield
Municipals Fund (which is a series of Stein Roe Municipal Trust),
mutual funds that, together with their predecessors, had invested
directly in securities since 1978, 1986 and 1984, respectively,
converted into a feeder fund by investing all of their assets in
their corresponding Portfolios. Currently, Stein Roe Intermediate
Bond Fund, Stein Roe Income Fund and Stein Roe High-Yield
Municipals Fund are the only other investment companies investing
in the Portfolios. Information regarding any investment company
that may invest in the Portfolios in the future may be obtained by
writing to SR&F Base Trust, Suite 3200, One South Wacker Drive,
Chicago, Illinois 60606, or by calling 800-338-2550. The Adviser
may provide administrative or other services to one or more of
such investors.
FOR MORE INFORMATION
For more information about the Funds, call Retirement Services at
800-322-1130 or Advisor/Broker Services at 800-322-0593.
APPENDIX--RATINGS
Ratings in General. A rating of a rating service represents the
service's opinion as to the credit quality of the security being
rated. However, the ratings are general and are not absolute
standards of quality or guarantees as to the creditworthiness of
an issuer. Consequently, the Adviser believes that the quality of
debt securities should be continuously reviewed and that
individual analysts give different weightings to the various
factors involved in credit analysis. A rating is not a
recommendation to purchase, sell or hold a security, because it
does not take into account market value or suitability for a
particular investor. When a security has received a rating from
more than one service, each rating should be evaluated
independently. Ratings are based on current information furnished
by the issuer or obtained by the rating services from other
sources that they consider reliable. Ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability
of such information, or for other reasons. The Adviser, through
independent analysis, attempts to discern variations in credit
ratings of the published services, and to anticipate changes in
credit ratings. The following is a description of the
characteristics of certain ratings used by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"),
and Fitch Investors Service, L.P. ("Fitch").
Ratings by Moody's
Corporate and Municipal Bonds: Aaa. Bonds rated Aaa 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. Although the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group 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
as in Aaa bonds 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 bonds.
A. Bonds rated A 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 which suggest a susceptibility to
impairment sometime in the future.
Baa. Bonds rated Baa are considered 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 which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
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 which are rated B 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 which are rated Caa 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 which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C. Bonds which are rated C 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. Municipal 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 condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or
elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the Aa
through B classifications of its municipal bond rating system and
in the Aa through Caa 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 mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
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.
Ratings by S&P:
Corporate and Municipal Bonds: AAA. Bonds rated AAA have the
highest rating. Capacity to pay interest and repay principal is
extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only
in small degree.
A. Bonds rated A 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 bonds in higher-rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity
to pay principal and interest. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category
than for bonds in higher-rated categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC, or C is
regarded, on balance, as predominantly speculative 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 of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears. The D rating also is issued
upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
NOTE: 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 ratings categories. Foreign debt is rated on the same
basis as domestic debt measuring the creditworthiness of the
issuer; ratings of foreign debt do not take into account currency
exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain
other obligations that S&P believes may experience high volatility
or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or
interest return is indexed to equities, commodities, or
currencies; certain swaps and options; and interest only and
principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.
Provisional Ratings. The letter "p" indicates that the rating of
a municipal bond 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 comment 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+.
Ratings by Fitch
Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors
in determining the credit risk associated with a particular
security. The ratings represent Fitch's assessment of the
issuer's ability to meet the obligations of a specific debt or
preferred issue in a timely manner. The rating takes into
consideration special features of the issue, its relationship to
other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and
any guarantor, as well as the economic and political environment
that might affect the issuer's future financial strength and
credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless
otherwise indicated.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price,
the suitability of any security for a particular investor, or the
tax-exempt nature or taxability of payments made in respect of any
security. Fitch ratings are based on information obtained from
issuers, other obligors, underwriters, their experts, and other
sources Fitch believes to be reliable. Fitch does not audit or
verify the truth or accuracy of such information. Ratings may be
changed, suspended, or withdrawn as a result of changes in, or the
unavailability of, information or for other reasons.
AAA. Bonds and preferred stock 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 and preferred stock considered to be investment grade
and of very high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bond and
preferred 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 and preferred stock considered to be investment grade
and of high quality. The obligor's ability to pay interest and/or
dividends and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and
circumstances than debt or preferred securities with higher
ratings.
BBB. Bonds and preferred stock 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 or preferred will fall
below investment grade is higher than for securities with higher
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 bonds 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 which, 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 bonds 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 bonds, and D represents
the lowest potential for recovery.
Plus (+) or Minus (-). Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit within
the rating category. Plus and minus signs, however, are not used
in the AAA, DDD, DD or D categories.
NR. Indicates that Fitch does not rate the specific issue.
Conditional. A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Suspended. A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating
purposes.
Withdrawn. A rating will be withdrawn when an issue matures or is
called or refinanced, and, at Fitch's discretion, when an issuer
fails to furnish proper and timely information.
FitchAlert. Ratings are placed on FitchAlert to notify investors
of an occurrence that is likely to result in a rating change and
the likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised or
lowered. FitchAlert is relatively short-term and should be
resolved within 12 months.
Ratings Outlook. An outlook is used to describe the most likely
direction of any rating change over the intermediate term. It is
described as "Positive" or "Negative." The absence of a
designation indicates a stable outlook.
Short-Term Ratings
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance
for timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+ and
F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could
cause these securities to be rated below investment grade.
F-S. Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D. Default. Issues assigned this rating are in actual or
imminent payment default.
<PAGE>
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED _________, 19__
A registration statement relating to these securities has been
filed with the Securities and Exchange Commission but has not yet
become effective. Information contained herein is subject to
completion or amendment. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration
statement becomes effective. This STATEMENT OF ADDITIONAL
INFORMATION shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sales of
these securities in any state in which such offer, solicitation,
or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
Statement of Additional Information Dated ____, 1998
STEIN ROE ADVISOR TRUST
Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
Stein Roe Advisor High-Yield Municipals Fund
Stein Roe Advisor Intermediate Bond Fund
Stein Roe Advisor Income Fund
This Statement of Additional Information is not a prospectus,
but provides additional information that should be read in
conjunction with each Fund's prospectus dated Feb. 2, 1998, and
any supplements thereto ("Prospectus"). A Prospectus may be
obtained at no charge by calling the Adviser. For additional
information, call Retirement Services at 800-322-1130 or
Advisor/Broker Services at 800-322-0593.
TABLE OF CONTENTS
Page
General Information and History.....................2
Investment Policies.................................3
Stein Roe Advisor High-Yield Municipals Fund.....3
Stein Roe Advisor Intermediate Bond Fund.........3
Stein Roe Advisor Income Fund....................4
Portfolio Investments and Strategies................5
Investment Restrictions............................26
Additional Investment Considerations...............31
Management.........................................32
Principal Shareholders.............................36
Investment Advisory Services.......................36
Custodian..........................................37
Independent Public Accountants.....................38
Distributor........................................38
Transfer Agent and Shareholder Servicing...........40
Purchases And Redemptions..........................40
Portfolio Transactions.............................41
Additional Income Tax Considerations...............43
Investment Performance.............................45
Appendix--Ratings..................................50
Balance Sheets.....................................57
GENERAL INFORMATION AND HISTORY
The three mutual funds listed on the cover page (referred to
collectively as the "Funds") are separate series of Stein Roe
Advisor Trust ("Advisor Trust"). Stein Roe Advisor Intermediate
Bond Fund and Stein Roe Advisor Income Fund are referred to
collectively as the "Bond Funds." Each Fund offers one class of
shares, Class K. On Sept. 13, 1996, the spelling of the name of
the Trust was changed from Stein Roe Adviser Trust to Stein Roe
Advisor Trust.
Currently 10 series of Advisor Trust are authorized and
outstanding. Each share of a series, without par value, is
entitled to participate pro rata in any dividends and other
distributions declared by the Board on shares of that series, and
all shares of a series have equal rights in the event of
liquidation of that series. Each whole share (or fractional
share) outstanding on the record date established in accordance
with the By-Laws shall be entitled to a number of votes on any
matter on which it is entitled to vote equal to the net asset
value of the share (or fractional share) in United States dollars
determined at the close of business on the record date (for
example, a share having a net asset value of $10.50 would be
entitled to 10.5 votes). As a business trust, Advisor Trust is
not required to hold annual shareholder meetings. However,
special meetings may be called for purposes such as electing or
removing trustees, changing fundamental policies, or approving an
investment advisory contract. If requested to do so by the
holders of at least 10% of its outstanding shares, Advisor Trust
will call a special meeting for the purpose of voting upon the
question of removal of a trustee or trustees and will assist in
the communications with other shareholders as if Advisor Trust
were subject to Section 16(c) of the Investment Company Act of
1940. All shares of all series of Advisor Trust are voted
together in the election of trustees. On any other matter
submitted to a vote of shareholders, shares are voted in the
aggregate and not by individual series, except that shares are
voted by individual series when required by the Investment Company
Act of 1940 or other applicable law, or when the Board of Trustees
determines that the matter affects only the interests of one or
more series, in which case shareholders of the unaffected series
are not entitled to vote on such matters.
Special Considerations Regarding Master Fund/Feeder Fund Structure
Each Fund acts as a "feeder fund" rather than investing in
securities directly; that is, it seeks to achieve its objective by
pooling its assets with those of other investment companies for
investment in a separate "master fund" having the same investment
objective and substantially the same investment policies as the
Fund. The purpose of such an arrangement is to achieve greater
operational efficiencies and reduce costs. Each master fund is a
series of SR&F Base Trust ("Base Trust") (the master funds are
referred to collectively as the "Portfolios"). For more
information, please refer to each Fund's Prospectus under the
caption Master Fund/Feeder Fund: Structure and Risk Factors.
Stein Roe & Farnham Incorporated (the "Adviser") provides
administrative and accounting and recordkeeping services to each
Fund and each Portfolio and provides investment advisory services
to each Portfolio.
INVESTMENT POLICIES
In pursuing its respective objective, each Portfolio will
invest as described below and may employ the investment techniques
described under Portfolio Investments and Strategies. The
investment objective is a non-fundamental policy and may be
changed by the Board of Trustees without the approval of a
"majority of the outstanding voting securities." /1/
- -----------
/1/ A "majority of the outstanding voting securities" means the
approval of the lesser of (i) 67% or more of the shares at a
meeting if the holders of more than 50% of the outstanding shares
are present or represented by proxy or (ii) more than 50% of the
outstanding shares.
- -----------
Stein Roe Advisor High-Yield Municipals Fund
Stein Roe Advisor High-Yield Municipals Fund ("Advisor High-
Yield Municipals Fund") seeks to achieve its objective by
investing in SR&F High-Yield Municipals Portfolio ("High-Yield
Municipals Portfolio"). Their common investment objective is to
seek a high current yield exempt from federal income tax. High-
Yield Municipals Portfolio attempts to achieve this objective by
investing primarily in a diversified portfolio of long-term
medium- or lower-quality Municipal Securities (generally maturing
in more than ten years) bearing a high rate of interest income;
possible capital appreciation is of secondary importance. Of
course, there is no guarantee that the payments of interest and
principal on securities held by High-Yield Municipals Portfolio
will be made when due.
It is a fundamental policy that normally assets will be
invested so that at least 80% of the gross income will be derived
from securities the interest on which is exempt from federal
income tax in the opinion of counsel for the issuers of such
securities, except during periods in which the Adviser believes a
temporary defensive position is advisable.
Although High-Yield Municipals Portfolio invests primarily in
medium- and lower-quality Municipal Securities, it may invest in
Municipal Securities of higher quality when the Adviser believes
it is appropriate to do so.
Stein Roe Advisor Intermediate Bond Fund
Stein Roe Advisor Intermediate Bond Fund ("Advisor
Intermediate Bond Fund") seeks to achieve its objective by
investing in SR&F Intermediate Bond Portfolio ("Intermediate Bond
Portfolio"). Their common investment objective is to provide a
high level of current income, consistent with the preservation of
capital, by investing primarily in marketable debt securities.
Under normal market conditions, Intermediate Bond Portfolio will
invest at least 65% of the value of its total assets (taken at
market value at the time of investment) in convertible and non-
convertible bonds and debentures, and at least 60% of its assets
will be invested in the following:
(1) Marketable straight-debt securities of domestic issuers, and
of foreign issuers payable in U.S. dollars, rated at time of
purchase within the three highest grades assigned by Moody's
Investors Service, Inc. ("Moody's") (Aaa, Aa, or A) or by
Standard & Poor's Corporation ("S&P") (AAA, AA, or A);
(2) U.S. Government Securities;
(3) Commercial paper rated Prime-1 by Moody's or A-1 by S&P at
time of purchase, or, if unrated, issued or guaranteed by a
corporation with any outstanding debt rated Aa or better by
Moody's or AA or better by S&P; and
(4) Bank obligations, including repurchase agreements, of banks
having total assets in excess of $1 billion.
Under normal market conditions, Intermediate Bond Portfolio
invests at least 65% of its assets in securities with an average
life of between three and ten years, and expects that the dollar-
weighted average life of its portfolio will be between three and
ten years. Average life is the weighted average period over which
the Adviser expects the principal to be paid, and differs from
stated maturity in that it estimates the effect of expected
principal prepayments and call provisions. With respect to GNMA
securities and other mortgage-backed securities, average life is
likely to be substantially less than the stated maturity of the
mortgages in the underlying pools. With respect to obligations
with call provisions, average life is typically the next call date
on which the obligation reasonably may be expected to be called.
Securities without prepayment or call provisions generally have an
average life equal to their stated maturity. During periods of
rising interest rates, the average life of mortgage-backed
securities and callable obligations may increase substantially
because they are not likely to be prepaid, which may result in
greater net asset value fluctuation.
Intermediate Bond Portfolio also may invest in other debt
securities (including those convertible into, or carrying warrants
to purchase, common stocks or other equity interests, and
privately placed debt securities); preferred stocks (including
those convertible into, or carrying warrants to purchase, common
stocks or other equity interests); and marketable common stocks
that the Adviser considers likely to yield relatively high income
in relation to cost.
Intermediate Bond Portfolio may invest up to 35% of its total
assets in debt securities that are rated below investment grade
(with no minimum permitted rating) and that, on balance, are
considered predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal according to the
terms of the obligation and, therefore, carry greater investment
risk, including the possibility of issuer default and bankruptcy.
(See Portfolio Investments and Strategies for more information on
the risks associated with investing in debt securities rated below
investment grade.)
Stein Roe Advisor Income Fund
Stein Roe Advisor Income Fund ("Advisor Income Fund") seeks
to achieve its objective by investing in SR&F Income Portfolio
("Income Portfolio"). Income Portfolio attempts to achieve their
common objective by investing principally in medium-quality debt
securities, which are obligations of issuers that the Adviser
believes possess adequate, but not outstanding, capacities to
service their debt securities, such as securities rated A or Baa
by Moody's or A or BBB by S&P. The Adviser generally attributes
to medium-quality securities the same characteristics as do rating
services.
Although Income Portfolio will invest at least 60% of its
assets in medium- or higher-quality debt securities, it may also
invest to a lesser extent in debt securities of lower quality (in
the case of rated securities, having a rating by Moody's or S&P of
not less than C). Although Income Portfolio can invest up to 40%
of its assets in lower-quality securities, it does not intend to
invest more than 35% in lower-quality securities. Lower-quality
debt securities are obligations of issuers that are predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal. Income Portfolio may invest in lower-quality
debt securities; for example, if the Adviser believes the
financial condition of the issuers or the protection offered to
the particular obligations is stronger than is indicated by low
ratings or otherwise. (See Portfolio Investments and Strategies
for more information on the risks associated with investing in
debt securities rated below investment grade.) Income Portfolio
may invest in higher-quality securities; for example, under
extraordinary economic or financial market conditions, or when the
spreads between the yields on medium- and high-quality securities
are relatively narrow.
Some issuers of debt securities choose not to have their
securities rated by a rating service, and Income Portfolio may
invest in unrated securities that the Adviser believes are
suitable for investment.
Under normal market conditions, Income Portfolio will invest
at least 65% of the value of its total assets (taken at market
value) in convertible and non-convertible bonds and debentures.
Such securities may be accompanied by the right to acquire equity
securities evidenced by warrants attached to the security or
acquired as part of a unit with the security. Equity securities
acquired by conversion or exercise of such a right may be retained
by Income Portfolio for a sufficient time to permit orderly
disposition thereof or to establish long-term holding periods for
federal income tax purposes.
Income Portfolio may invest up to 35% of its total assets in
other debt securities, marketable preferred and common stocks, and
foreign and municipal securities that the Adviser considers likely
to yield relatively high income in relation to costs, and rights
to acquire such securities. (Municipal securities are securities
issued by or on behalf of state and local governments, the
interest on which is generally exempt from federal income tax.)
Any assets not otherwise invested may be invested in money market
instruments.
PORTFOLIO INVESTMENTS AND STRATEGIES
For purposes of discussion under Portfolio Investments and
Strategies and Investment Restrictions, the term "Bond Portfolios"
refers to Intermediate Bond Portfolio and Income Portfolio.
AMT Securities
Although High-Yield Municipals Portfolio currently limits its
investments in Municipal Securities to those the interest on which
is exempt from the regular federal income tax, it may invest 100%
of its total assets in Municipal Securities the interest on which
is subject to the federal alternative minimum tax ("AMT").
Debt Securities
In pursuing its investment objective, each Bond Portfolio
and High-Yield Municipals Portfolio invests in debt securities of
corporate and governmental issuers. The risks inherent in debt
securities depend primarily on the term and quality of the
obligations in the investment portfolio as well as on market
conditions. A decline in the prevailing levels of interest rates
generally increases the value of debt securities, while an
increase in rates usually reduces the value of those securities.
Securities in the fourth highest grade may possess
speculative characteristics, and changes in economic conditions
are more likely to affect the issuer's capacity to pay interest
and repay principal. If the rating of a security held by a
Portfolio is lost or reduced below investment grade, the Portfolio
is not required to dispose of the security, but the Adviser will
consider that fact in determining whether that Portfolio should
continue to hold the security.
Securities that are rated below investment grade are
considered predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal according to the
terms of the obligation and therefore carry greater investment
risk, including the possibility of issuer default and bankruptcy.
Medium- and Lower-Quality Debt Securities
Each Portfolio may invest in medium- and lower-quality debt
securities. Medium-quality debt securities, although considered
investment grade, have some speculative characteristics. Lower-
quality securities, commonly referred to as "junk bonds," are
those rated below the fourth highest rating category or bond of
comparable quality.
Investment in medium- or lower-quality debt securities
involves greater investment risk, including the possibility of
issuer default or bankruptcy. A Portfolio seeks to reduce
investment risk through diversification, credit analysis, and
evaluation of developments in both the economy and financial
markets.
An economic downturn could severely disrupt the high-yield
market and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. In
addition, lower-quality bonds are less sensitive to interest rate
changes than higher-quality instruments and generally are more
sensitive to adverse economic changes or individual corporate
developments. During a period of adverse economic changes,
including a period of rising interest rates, issuers of such bonds
may experience difficulty in servicing their principal and
interest payment obligations.
Lower-quality debt securities are obligations of issuers that
are considered predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal according to
the terms of the obligation and, therefore, carry greater
investment risk, including the possibility of issuer default and
bankruptcy, and are commonly referred to as "junk bonds." The
lowest rating assigned by Moody's is for bonds that can be
regarded as having extremely poor prospects of ever attaining any
real investment standing.
Achievement of the investment objective will be more
dependent on the Adviser's credit analysis than would be the case
if a Portfolio were investing in higher-quality debt securities.
Since the ratings of rating services (which evaluate the safety of
principal and interest payments, not market risks) are used only
as preliminary indicators of investment quality, the Adviser
employs its own credit research and analysis, from which it has
developed a proprietary credit rating system based upon
comparative credit analyses of issuers within the same industry.
These analyses may take into consideration such quantitative
factors as an issuer's present and potential liquidity,
profitability, internal capability to generate Portfolios,
debt/equity ratio and debt servicing capabilities, and such
qualitative factors as an assessment of management, industry
characteristics, accounting methodology, and foreign business
exposure.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and a Portfolio may have greater difficulty selling
its portfolio securities. The market value of these securities
and their liquidity may be affected by adverse publicity and
investor perceptions.
Defensive Investments
When the Adviser considers a temporary defensive position
advisable, each Bond Portfolio may invest, without limitation, in
high-quality fixed income securities or hold assets in cash or
cash equivalents.
Derivatives
Consistent with its objective, each Bond Portfolio may
invest in a broad array of financial instruments and securities,
including conventional exchange-traded and non-exchange-traded
options, futures contracts, futures options, securities
collateralized by underlying pools of mortgages or other
receivables, floating rate instruments, and other instruments that
securitize assets of various types ("Derivatives"). In each case,
the value of the instrument or security is "derived" from the
performance of an underlying asset or a "benchmark" such as a
security index, an interest rate, or a currency.
Derivatives are most often used to manage investment risk or
to create an investment position indirectly because it is more
efficient or less costly than direct investment that cannot be
readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an
effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's
ability to correctly predict changes in the levels and directions
of movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives.
No Bond Portfolio intends to invest more than 5% of its
assets in any type of Derivative. (See Options and Futures
below.)
Some mortgage-backed debt securities are of the "modified
pass-through type," which means the interest and principal
payments on mortgages in the pool are "passed through" to
investors. During periods of declining interest rates, there is
increased likelihood that mortgages will be prepaid, with a
resulting loss of the full-term benefit of any premium paid by a
Portfolio on purchase of such securities; in addition, the
proceeds of prepayment would likely be invested at lower interest
rates.
Mortgage-backed securities provide either a pro rata interest
in underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs") that represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities, and are usually issued in multiple classes each
of which has different payment rights, prepayment risks, and yield
characteristics. Mortgage-backed securities involve the risk of
prepayment on the underlying mortgages at a faster or slower rate
than the established schedule. Prepayments generally increase
with falling interest rates and decrease with rising rates but
they also are influenced by economic, social, and market factors.
If mortgages are prepaid during periods of declining interest
rates, there would be a resulting loss of the full-term benefit of
any premium paid by a Portfolio on purchase of the CMO, and the
proceeds of prepayment would likely be invested at lower interest
rates.
Non-mortgage asset-backed securities usually have less
prepayment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans that finance payments on the securities
themselves.
Floating rate instruments provide for periodic adjustments in
coupon interest rates that are automatically reset based on
changes in amount and direction of specified market interest
rates. In addition, the adjusted duration of some of these
instruments may be materially shorter than their stated
maturities. To the extent such instruments are subject to
lifetime or periodic interest rate caps or floors, such
instruments may experience greater price volatility than debt
instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and
refers to the approximate percentage change in price for a 100
basis point change in yield. For example, if interest rates
decrease by 100 basis points, a market price of a security with an
adjusted duration of 2 would increase by approximately 2%.
Interfund Borrowing and Lending Program.
Pursuant to an exemptive order issued by the Securities and
Exchange Commission, each Portfolio has received permission to
lend money to, and borrow money from, other mutual funds advised
by the Adviser. A Portfolio will borrow through the program when
borrowing is necessary and appropriate and the costs are equal to
or lower than the costs of bank loans.
Lending of Portfolio Securities
Subject to the restriction on lending under Investment
Restrictions in this Part B, each Bond Portfolio may lend its
portfolio securities to broker-dealers and banks. Any such loan
must be continuously secured by collateral in cash or cash
equivalents maintained on a current basis in an amount at least
equal to the market value of the securities loaned by a Portfolio.
Cash collateral for securities loaned will be invested in liquid
high-grade debt securities. A Portfolio would continue to receive
the equivalent of the interest or dividends paid by the issuer on
the securities loaned, and would also receive an additional return
that may be in the form of a fixed fee or a percentage of the
collateral. A Portfolio would have the right to call the loan and
obtain the securities loaned at any time on notice of not more
than five business days. A Portfolio would not have the right to
vote the securities during the existence of the loan but would
call the loan to permit voting of the securities if, in the
Adviser's judgment, a material event requiring a shareholder vote
would otherwise occur before the loan was repaid. In the event of
bankruptcy or other default of the borrower, a Portfolio could
experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses, including (a)
possible decline in the value of the collateral or in the value of
the securities loaned during the period while the Portfolio seeks
to enforce its rights thereto, (b) possible subnormal levels of
income and lack of access to income during this period, and (c)
expenses of enforcing its rights.
Line of Credit.
Subject to its restriction on borrowing under Investment
Restrictions, each Portfolio may establish and maintain a line of
credit with a major bank in order to permit borrowing on a
temporary basis to meet share redemption requests in circumstances
in which temporary borrowing may be preferable to liquidation of
portfolio securities.
Participation Interests.
High-Yield Municipals Portfolio may purchase participation
interests in all or part of specific holdings of Municipal
Securities, but does not intend to do so unless the tax-exempt
status of those participation interests or certificates of
participation is confirmed to the satisfaction of the Board of
Trustees, which may include consideration of an opinion of counsel
as to the tax-exempt status. Each participation interest would
meet the prescribed quality standards of the Portfolio or be
backed by an irrevocable letter of credit or guarantee of a bank
that meets the prescribed quality standards of the Portfolio.
Some participation interests are illiquid securities.
High-Yield Municipals Portfolio may also purchase
participations in lease obligations or installment purchase
contract obligations (hereinafter collectively called "lease
obligations") of municipal authorities or entities. Although
lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged,
a lease obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate, and make the payments due
under the 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. In addition to the "non-
appropriation" risk, these securities represent a relatively new
type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are secured by leased
property, disposition of the property in the event of foreclosure
might prove difficult. The Portfolio will seek to minimize these
risks by investing primarily in those "non-appropriation" lease
obligations where (1) the nature of the leased equipment or
property is such that its ownership or use is essential to a
governmental function of the municipality, (2) the lease obligor
has maintained good market acceptability in the past, (3) the
investment is of a size that will be attractive to institutional
investors, and (4) the underlying leased equipment has elements of
portability and/or use that enhance its marketability in the event
foreclosure on the underlying equipment were ever required.
The Board of Trustees has delegated to the Adviser the
responsibility to determine the credit quality of participation
interests. The 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 may 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
transfer.
PIK and Zero Coupon Bonds
Each Bond Portfolio may invest up to 20% of its assets in
zero coupon bonds and bonds the interest on which is payable in
kind ("PIK bonds"). A zero coupon bond is a bond that does not
pay interest for its entire life. A PIK bond pays interest in the
form of additional securities. The market prices of both zero
coupon and PIK bonds are affected to a greater extent by changes
in prevailing levels of interest rates and thereby tend to be more
volatile in price than securities that pay interest periodically
and in cash. In addition, because a Bond Portfolio accrues income
with respect to these securities prior to the receipt of such
interest in cash, it may have to dispose of portfolio securities
under disadvantageous circumstances in order to obtain cash needed
to pay income dividends in amounts necessary to avoid unfavorable
tax consequences.
Rated Securities.
For a description of the ratings applied by rating services
to Municipal Securities and other debt securities, please refer to
the Appendix. The fact that the rating of a debt security held by
High-Yield Municipals Portfolio or a Bond Portfolio may be lost or
reduced below the minimum level applicable to its original
purchase by the Portfolio does not require that obligation to be
sold, but the Adviser will consider such fact in determining
whether the Portfolio should continue to hold the obligation. In
the case of Municipal Securities with a demand feature acquired by
High-Yield Municipals Portfolio, if the quality of such a security
falls below the minimum level applicable at the time of
acquisition, the Portfolio must dispose of the security within a
reasonable period of time either by exercising the demand feature
or by selling the security in the secondary market, unless the
Board of Trustees determines that it is in the best interests of
the Portfolio and its shareholders to retain the security.
To the extent that the ratings accorded by Moody's, S&P, or
Fitch Investors Service for debt securities may change as a result
of changes in such organizations, or changes in their rating
systems, High-Yield Municipals Portfolio or a Bond Portfolio will
attempt to use comparable ratings as standards for its investments
in accordance with its investment policies. The Board of Trustees
is required to review such ratings with respect to High-Yield
Municipals Portfolio.
REMICs
Each Bond Portfolio may invest in real estate mortgage
investment conduits ("REMICs"). REMICs, which were authorized
under the Tax Reform Act of 1986, are private entities formed for
the purpose of holding a fixed pool of mortgages secured by an
interest in real property. REMICs are similar to CMOs in that
they issue multiple classes of securities. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue
Code and invests in certain mortgages principally secured by
interests in real property. Investors may purchase beneficial
interests in REMICs, which are known as "regular" interests, or
"residual" interests. Guaranteed REMIC pass-through certificates
("REMIC Certificates") issued by FNMA or FHLMC represent
beneficial ownership interests in a REMIC trust consisting
principally of mortgage loans or FNMA-, FHLMC- or GNMA-guaranteed
mortgage pass-through certificates. For FHLMC REMIC Certificates,
FHLMC guarantees the timely payment of interest and also
guarantees the payment of principal as payments are required to be
made on the underlying mortgage participation certificates. FNMA
REMIC Certificates are issued and guaranteed as to timely
distribution and principal and interest by FNMA.
Repurchase Agreements.
Each Portfolio may invest in repurchase agreements, provided
that High-Yield Municipals Portfolio may not invest more than 15%
and each Bond Portfolio may not invest more than 10% of net assets
in repurchase agreements maturing in more than seven days and any
other illiquid securities. A repurchase agreement is a sale of
securities to a Portfolio in which the seller agrees to repurchase
the securities at a higher price, which includes an amount
representing interest on the purchase price, within a specified
time. In the event of bankruptcy of the seller, a Portfolio could
experience both losses and delays in liquidating its collateral.
Reverse Repurchase Agreements
Each Portfolio may enter into reverse repurchase agreements
with banks and securities dealers. A reverse repurchase agreement
is a repurchase agreement in which a Portfolio is the seller of,
rather than the investor in, securities and agrees to repurchase
them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later
repurchase of the securities because it avoids certain market
risks and transaction costs.
At the time a Portfolio enters into a reverse repurchase
agreement, liquid assets (cash, U.S. Government securities or
other "high-grade" debt obligations) of the Portfolio having a
value at least as great as the purchase price of the securities to
be purchased will be segregated on the books of the Portfolio and
held by the custodian throughout the period of the obligation.
The use of this investment strategy may increase net asset value
fluctuation.
Private Placements
High-Yield Municipals Portfolio may invest in securities that
are purchased in private placements (including privately placed
securities eligible for purchase and sale under Rule 144A of the
Securities Act of 1933 ["1933 Act"]) and, accordingly, are subject
to restrictions on resale as a matter of contract or under federal
securities laws. Because there may be relatively few potential
purchasers for such investments, especially under adverse market
or economic conditions or in the event of adverse changes in the
financial condition of the issuer, a Fund could find it more
difficult to sell such securities when the Adviser believes it is
advisable to do so or may be able to sell such securities only at
prices lower than if such securities were more widely held. At
times, it may also be more difficult to determine the fair value
of such securities for purposes of computing net asset value.
Rule 144A Securities
Each Portfolio may purchase securities that have been
privately placed but that are eligible for purchase and sale under
Rule 144A under the 1933 Act. That Rule permits certain qualified
institutional buyers, such as the Portfolios, to trade in
privately placed securities that have not been registered for sale
under the 1933 Act. The Adviser, under the supervision of the
Board of Trustees, will consider whether securities purchased
under Rule 144A are illiquid and thus subject to the restriction
of investing no more than 15% (High-Yield Municipals Portfolo) or
10% (each Bond Portfolio) of net assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, the Adviser
will consider the trading markets for the specific security,
taking into account the unregistered nature of a Rule 144A
security. In addition, the Adviser 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 would be monitored and if, as a result of
changed conditions, it is determined that a Rule 144A security is
no longer liquid, the Portfolios' holdings of illiquid securities
would be reviewed to determine what, if any, steps are required to
assure that the Portfolio does not invest more than 5% of its
assets in illiquid securities. Investing in Rule 144A securities
could have the effect of increasing the amount of a Portfolio's
assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities. No Portfolio
expects to invest as much as 5% of its total assets in Rule 144A
securities that have not been deemed to be liquid by the Adviser.
Short Sales "Against the Box"
Each Portfolio may sell securities short against the box;
that is, enter into short sales of securities that it currently
owns or has the right to acquire through the conversion or
exchange of other securities that it owns at no additional cost.
A Portfolio may make short sales of securities only if at all
times when a short position is open the Portfolio owns at least an
equal amount of such securities or securities convertible into or
exchangeable for securities of the same issue as, and equal in
amount to, the securities sold short, at no additional cost.
In a short sale against the box, a Portfolio does not deliver
from its portfolio the securities sold. Instead, the Portfolio
borrows the securities sold short from a broker-dealer through
which the short sale is executed, and the broker-dealer delivers
such securities, on behalf of the Portfolio, to the purchaser of
such securities. The Portfolio is required to pay to the broker-
dealer the amount of any dividends paid on shares sold short.
Finally, to secure its obligation to deliver to such broker-dealer
the securities sold short, the Portfolio must deposit and
continuously maintain in a separate account with the Portfolio's
custodian an equivalent amount of the securities sold short or
securities convertible into or exchangeable for such securities at
no additional cost. A Portfolio is said to have a short position
in the securities sold until it delivers to the broker-dealer the
securities sold. A Portfolio may close out a short position by
purchasing on the open market and delivering to the broker-dealer
an equal amount of the securities sold short, rather than by
delivering portfolio securities.
Short sales may protect a Portfolio against the risk of
losses in the value of its portfolio securities because any
unrealized losses with respect to such portfolio securities should
be wholly or partially offset by a corresponding gain in the short
position. However, any potential gains in such portfolio
securities should be wholly or partially offset by a corresponding
loss in the short position. The extent to which such gains or
losses are offset will depend upon the amount of securities sold
short relative to the amount the Portfolio owns, either directly
or indirectly, and, in the case where the Portfolio owns
convertible securities, changes in the conversion premium.
Short sale transactions involve certain risks. If the price
of the security sold short increases between the time of the short
sale and the time a Portfolio replaces the borrowed security, the
Portfolio will incur a loss and if the price declines during this
period, the Portfolio will realize a short-term capital gain. Any
realized short-term capital gain will be decreased, and any
incurred loss increased, by the amount of transaction costs and
any premium, dividend or interest which the Portfolio may have to
pay in connection with such short sale. Certain provisions of the
Code may limit the degree to which a Portfolio is able to enter
into short sales. There is no limitation on the amount of each
Portfolio's assets that, in the aggregate, may be deposited as
collateral for the obligation to replace securities borrowed to
effect short sales and allocated to segregated accounts in
connection with short sales. No Portfolio will invest more than
5% of its total assets in short sales against the box.
Standby Commitments.
Each Portfolio may obtain standby commitments when purchasing
securities. A standby commitment gives the holder the right to
sell the underlying security to the seller at an agreed-upon price
on certain dates or within a specified period. High-Yield
Municipals Portfolio will acquire standby commitments solely to
facilitate portfolio liquidity and not with a view to exercising
them at a time when the exercise price may exceed the current
value of the underlying securities. If the exercise price of a
standby commitment held by High-Yield Municipals Portfolio should
exceed the current value of the underlying securities, High-Yield
Municipals Portfolio may refrain from exercising the standby
commitment in order to avoid causing the issuer of the standby
commitment to sustain a loss and thereby jeopardizing the
Portfolio's business relationship with the issuer. High-Yield
Municipals Portfolio will enter into standby commitments only with
banks and securities dealers that, in the opinion of the Adviser,
present minimal credit risks. However, if a securities dealer or
bank is unable to meet its obligation to repurchase the security
when High-Yield Municipals Portfolio exercises a standby
commitment, it might be unable to recover all or a portion of any
loss sustained from having to sell the security elsewhere.
Standby commitments will be valued at zero in determining High-
Yield Municipals Portfolio's net asset value.
Standby commitment agreements create an additional risk for
each Bond Portfolio because the other party to the standby
agreement generally will not be obligated to deliver the security,
but a Bond Portfolio will be obligated to accept it if delivered.
Depending on market conditions, a Bond Portfolio may receive a
commitment fee for assuming this obligation. If prevailing market
interest rates increase during the period between the date of the
agreement and the settlement date, the other party can be expected
to deliver the security and, in effect, pass any decline in value
to a Bond Portfolio. If the value of the security increases after
the agreement is made, however, the other party is unlikely to
deliver the security. In other words, a decrease in the value of
the securities to be purchased under the terms of a standby
commitment agreement will likely result in the delivery of the
security, and, therefore, such decrease will be reflected in net
asset value. However, any increase in the value of the securities
to be purchased will likely result in the non-delivery of the
security and, therefore, such increase will not affect the net
asset value unless and until the Portfolio actually obtains the
security.
Taxable Securities
Assets of High-Yield Municipals Portfolio that are not
invested in Municipal Securities may be held in cash or invested
in short-term taxable investments such as: (1) U.S. Government
bills, notes and bonds; (2) obligations of agencies and
instrumentalities of the U.S. Government (including obligations
not backed by the full faith and credit of the U.S. Government);
(3) other money market instruments such as certificates of deposit
and bankers' acceptances of domestic banks having total assets in
excess of $1 billion, and corporate commercial paper rated Prime-1
by Moody's or A-1 by S&P at the time of purchase, or, if unrated,
issued or guaranteed by an issuer with outstanding debt rated Aa
or better by Moody's or AA or better by S&P; and (4) repurchase
agreements with banks and securities dealers. High-Yield
Municipals Portfolio limits repurchase agreements to those that
are short-term, subject to its restriction (g) under Investment
Restrictions (although the underlying securities may not be short-
term).
Tender Option Bonds; Trust Receipts
High-Yield Municipals Portfolio may purchase tender option
bonds and trust receipts. 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 Adviser 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. High-Yield Municipals
Portfolio does not intend to invest more than 10% of net assets in
tender option bonds and trust receipts.
When-Issued and Delayed-Delivery Securities; Forward Commitments
Each Portfolio may purchase securities on a when-issued or
delayed-delivery basis, and High-Yield Municipals Portfolio may
purchase forward commitments.. Although the payment and interest
terms of these securities are established at the time a Portfolio
enters into the commitment, the securities may be delivered and
paid for a month or more after the date of purchase, when their
value may have changed. The Portfolios make such commitments only
with the intention of actually acquiring the securities, but may
sell the securities before settlement date if the Adviser deems it
advisable for investment reasons. No Portfolio currently intends
to make commitments to purchase when-issued securities in excess
of 5% of its net assets.
Securities purchased by a Bond Portfolio on a when-issued or
delayed-delivery basis are sometimes done on a "dollar roll"
basis. Dollar roll transactions consist of the sale by the
Portfolio of securities with a commitment to purchase similar but
not identical securities, generally at a lower price at a future
date. A dollar roll may be renewed after cash settlement and
initially may involve only a firm commitment agreement by the
Portfolio to buy a security. A dollar roll transaction involves
the following risks: if the broker-dealer to whom the Portfolio
sells the security becomes insolvent, the Portfolio's right to
purchase or repurchase the security may be restricted; the value
of the security may change adversely over the term of the dollar
roll; the security which the Portfolio is required to repurchase
may be worth less than a security which the Portfolio originally
held; and the return earned by the Portfolio with the proceeds of
a dollar roll may not exceed transaction costs.
At the time High-Yield Municipals Portfolio or a Bond Portfolio
enters into a binding obligation to purchase securities on a when-
issued basis, liquid assets (cash, U.S. Government or other "high
grade" debt obligations) of the Portfolio having a value of at
least as great as the purchase price of the securities to be
purchased will be segregated on the books of the Portfolio and
held by the custodian throughout the period of the obligation.
Foreign Securities
Each Bond Portfolio may invest up to 25% of its total assets
in foreign securities, which may entail a greater degree of risk
(including risks relating to exchange rate fluctuations, tax
provisions, or expropriation of assets) than does investment in
securities of domestic issuers. For this purpose, foreign
securities do not include American Depositary Receipts (ADRs) or
securities guaranteed by a United States person. ADRs are
receipts typically issued by an American bank or trust company
evidencing ownership of the underlying securities. A Portfolio
may invest in sponsored or unsponsored ADRs. In the case of an
unsponsored ADR, a Portfolio is likely to bear its proportionate
share of the expenses of the depository and it may have greater
difficulty in receiving shareholder communications than it would
have with a sponsored ADR. ADRs are receipts typically issued by
an American bank or trust company evidencing ownership of the
underlying securities. Generally, ADRs, in registered form, are
designed for the U.S. securities markets.
With respect to portfolio securities that are issued by foreign
issuers or denominated in foreign currencies, a Portfolio's
investment performance is affected by the strength or weakness of
the U.S. dollar against these currencies. For example, if the
dollar falls in value relative to the Japanese yen, the dollar
value of a yen-denominated stock held in a Portfolio will rise
even though the price of the stock remains unchanged. Conversely,
if the dollar rises in value relative to the yen, the dollar value
of the yen-denominated stock will fall. (See discussion of
transaction hedging and portfolio hedging under Currency Exchange
Transactions.)
Investors should understand and consider carefully the risks
involved in foreign investing. Investing in foreign securities,
positions in which are generally denominated in foreign
currencies, and utilization of forward foreign currency exchange
contracts involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S.
securities. These considerations include: fluctuations in
exchange rates of foreign currencies; possible imposition of
exchange control regulation or currency restrictions that would
prevent cash from being brought back to the United States; less
public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers,
and issuers of securities; lack of uniform accounting, auditing,
and financial reporting standards; lack of uniform settlement
periods and trading practices; less liquidity and frequently
greater price volatility in foreign markets than in the United
States; possible imposition of foreign taxes; possible investment
in securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational, and
financial protections applicable to foreign sub-custodial
arrangements.
Although a Portfolio will try to invest in companies and
governments of countries having stable political environments,
there is the possibility of expropriation or confiscatory
taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption of
foreign government restrictions, or other adverse political,
social or diplomatic developments that could affect investment in
these nations.
Currency Exchange Transactions. Currency exchange
transactions may be conducted either on a spot (i.e., cash) basis
at the spot rate for purchasing or selling currency prevailing in
the foreign exchange market or through forward currency exchange
contracts ("forward contracts"). Forward contracts are
contractual agreements to purchase or sell a specified currency at
a specified future date (or within a specified time period) and
price set at the time of the contract. Forward contracts are
usually entered into with banks and broker-dealers, are not
exchange traded, and are usually for less than one year, but may
be renewed.
A Portfolio's foreign currency exchange transactions are
limited to transaction and portfolio hedging involving either
specific transactions or portfolio positions. Transaction hedging
is the purchase or sale of forward contracts with respect to
specific receivables or payables of a Portfolio arising in
connection with the purchase and sale of its portfolio securities.
Portfolio hedging is the use of forward contracts with respect to
portfolio security positions denominated or quoted in a particular
foreign currency. Portfolio hedging allows a Portfolio to limit
or reduce its exposure in a foreign currency by entering into a
forward contract to sell such foreign currency (or another foreign
currency that acts as a proxy for that currency) at a future date
for a price payable in U.S. dollars so that the value of the
foreign-denominated portfolio securities can be approximately
matched by a foreign-denominated liability. A Portfolio may not
engage in portfolio hedging with respect to the currency of a
particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in
its portfolio denominated or quoted in that particular currency,
except that a Portfolio may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a
proxy currency where such currencies or currency act as an
effective proxy for other currencies. In such a case, a Portfolio
may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into
separate forward contracts for each currency held in a Portfolio.
A Portfolio may not engage in "speculative" currency exchange
transactions.
At the maturity of a forward contract to deliver a particular
currency, a Portfolio may either sell the security related to such
contract and make delivery of the currency, or it may retain the
security and either acquire the currency on the spot market or
terminate its contractual obligation to deliver the currency by
purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same
amount of the currency.
It is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of a
forward contract. Accordingly, it may be necessary for a
Portfolio to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the
security is less than the amount of currency a Portfolio is
obligated to deliver and if a decision is made to sell the
security and make delivery of the currency. Conversely, it may be
necessary to sell on the spot market some of the currency received
upon the sale of a Portfolio security if its market value exceeds
the amount of currency a Portfolio is obligated to deliver.
If a Portfolio retains the portfolio security and engages in
an offsetting transaction, the Portfolio will incur a gain or a
loss to the extent that there has been movement in forward
contract prices. If a Portfolio engages in an offsetting
transaction, it may subsequently enter into a new forward contract
to sell the currency. Should forward prices decline during the
period between a Portfolio's entering into a forward contract for
the sale of a currency and the date it enters into an offsetting
contract for the purchase of the currency, the Portfolio will
realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, a Portfolio will suffer
a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
A default on the contract would deprive a Portfolio of unrealized
profits or force the Portfolio to cover its commitments for
purchase or sale of currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be
possible for a Portfolio to hedge against a devaluation that is so
generally anticipated that a Portfolio is not able to contract to
sell the currency at a price above the devaluation level it
anticipates. The cost to a Portfolio of engaging in currency
exchange transactions varies with such factors as the currency
involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually
conducted on a principal basis, no fees or commissions are
involved.
Each Bond Portfolio may also construct a synthetic foreign
position by entering into a swap arrangement. A swap is a
contractual agreement between two parties to exchange cash flows--
at the time of the swap agreement and again at maturity, and, with
some swaps, at various intervals through the period of the
agreement. The use of swaps to construct a synthetic foreign
position would generally entail the swap of interest rates and
currencies. A currency swap is a contractual arrangement between
two parties to exchange principal amounts in different currencies
at a predetermined foreign exchange rate. An interest rate swap
is a contractual agreement between two parties to exchange
interest payments on identical principal amounts. An interest
rate swap may be between a floating and a fixed rate instrument, a
domestic and a foreign instrument, or any other type of cash flow
exchange. A currency swap generally has the same risk
characteristics as a forward currency contract, and all types of
swaps have counter-party risk. Depending on the facts and
circumstances, swaps may be considered illiquid. Illiquid
securities usually have greater investment risk and are subject to
greater price volatility. The net amount of the excess, if any,
of the Portfolio's obligations over which it is entitled to
receive with respect to an interest rate or currency swap will be
accrued daily and liquid assets (cash, U.S. Government securities,
or other "high grade" debt obligations) of the Portfolio having a
value at least equal to such accrued excess will be segregated on
the books of the Portfolio and held by the Custodian for the
duration of the swap. A Portfolio may also construct a synthetic
foreign position by purchasing an instrument whose return is tied
to the return of the desired foreign position. An investment in
these "principal exchange rate linked securities" (often called
PERLS) can produce a return similar to a direct investment in a
foreign security.
Options on Securities and Indexes
Each Bond Portfolio may purchase and sell put options and
call options on securities, indexes or foreign currencies in
standardized contracts traded on recognized securities exchanges,
boards of trade, or similar entities, or quoted on Nasdaq. Each
Bond Portfolio may purchase agreements, sometimes called cash
puts, that may accompany the purchase of a new issue of bonds from
a dealer.
An option on a security (or index) is a contract that gives
the purchaser (holder) of the option, in return for a premium, the
right to buy from (call) or sell to (put) the seller (writer) of
the option the security underlying the option (or the cash value
of the index) at a specified exercise price at any time during the
term of the option (normally not exceeding nine months). The
writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver
the underlying security or foreign currency upon payment of the
exercise price or to pay the exercise price upon delivery of the
underlying security or foreign currency. Upon exercise, the
writer of an option on an index is obligated to pay the difference
between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An
index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial
instruments or securities, or certain economic indicators.)
A Portfolio will write call options and put options only if
they are "covered." For example, in the case of a call option on
a security, the option is "covered" if the Portfolio owns the
security underlying the call or has an absolute and immediate
right to acquire that security without additional cash
consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount are held in a segregated
account by its custodian) upon conversion or exchange of other
securities held in its portfolio.
If an option written by a Portfolio expires, the Portfolio
realizes a capital gain equal to the premium received at the time
the option was written. If an option purchased by a Portfolio
expires, the Portfolio realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may
be closed out by an offsetting purchase or sale of an option of
the same series (type, exchange, underlying security or index,
exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be
effected when a Portfolio desires.
A Portfolio will realize a capital gain from a closing
purchase transaction if the cost of the closing option is less
than the premium received from writing the option, or, if it is
more, the Portfolio will realize a capital loss. If the premium
received from a closing sale transaction is more than the premium
paid to purchase the option, the Portfolio will realize a capital
gain or, if it is less, the Portfolio will realize a capital loss.
The principal factors affecting the market value of a put or a
call option include supply and demand, interest rates, the current
market price of the underlying security or index in relation to
the exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration
date.
A put or call option purchased by a Portfolio is an asset of
the Portfolio, valued initially at the premium paid for the
option. The premium received for an option written by a Portfolio
is recorded as a deferred credit. The value of an option
purchased or written is marked-to-market daily and is valued at
the closing price on the exchange on which it is traded or, if not
traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
Risks Associated with Options on Securities and Indexes.
There are several risks associated with transactions in options.
For example, there are significant differences between the
securities markets, the currency markets, and the options markets
that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options
involves the exercise of skill and judgment, and even a well-
conceived transaction may be unsuccessful to some degree because
of market behavior or unexpected events.
There can be no assurance that a liquid market will exist
when a Portfolio seeks to close out an option position. If a
Portfolio were unable to close out an option that it had purchased
on a security, it would have to exercise the option in order to
realize any profit or the option would expire and become
worthless. If a Portfolio were unable to close out a covered call
option that it had written on a security, it would not be able to
sell the underlying security until the option expired. As the
writer of a covered call option on a security, a Portfolio
foregoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call
option above the sum of the premium and the exercise price of the
call.
If trading were suspended in an option purchased or written
by a Portfolio, the Portfolio would not be able to close out the
option. If restrictions on exercise were imposed, the Portfolio
might be unable to exercise an option it has purchased.
Futures Contracts and Options on Futures Contracts
Each Bond Portfoliomay use interest rate futures contracts,
index futures contracts, and foreign currency futures contracts.
An interest rate, index or foreign currency futures contract
provides for the future sale by one party and purchase by another
party of a specified quantity of a financial instrument or the
cash value of an index /2/ at a specified price and time. A
public market exists in futures contracts covering a number of
indexes (including, but not limited to: the Standard & Poor's 500
Index, the Value Line Composite Index, and the New York Stock
Exchange Composite Index) as well as financial instruments
(including, but not limited to: U.S. Treasury bonds, U.S. Treasury
notes, Eurodollar certificates of deposit, and foreign
currencies). Other index and financial instrument futures
contracts are available and it is expected that additional futures
contracts will be developed and traded.
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/2/ A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at
which the index contract was originally written. Although the
value of a securities index is a function of the value of certain
specified securities, no physical delivery of those securities is
made.
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Bond Portfolios may purchase and write call and put futures
options. Futures options possess many of the same characteristics
as options on securities, indexes and foreign currencies
(discussed above). A futures option gives the holder the right,
in return for the premium paid, to assume a long position (call)
or short position (put) in a futures contract at a specified
exercise price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position in
the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true. A
Portfolio might, for example, use futures contracts to hedge
against or gain exposure to fluctuations in the general level of
stock prices, anticipated changes in interest rates or currency
fluctuations that might adversely affect either the value of the
Portfolio's securities or the price of the securities that the
Portfolio intends to purchase. Although other techniques could be
used to reduce or increase that Portfolio's exposure to stock
price, interest rate and currency fluctuations, the Portfolio may
be able to achieve its exposure more effectively and perhaps at a
lower cost by using futures contracts and futures options.
A Portfolio will only enter into futures contracts and
futures options that are standardized and traded on an exchange,
board of trade, or similar entity, or quoted on an automated
quotation system.
The success of any futures transaction depends on the Adviser
correctly predicting changes in the level and direction of stock
prices, interest rates, currency exchange rates and other factors.
Should those predictions be incorrect, a Portfolio's return might
have been better had the transaction not been attempted; however,
in the absence of the ability to use futures contracts, the
Adviser might have taken portfolio actions in anticipation of the
same market movements with similar investment results but,
presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by a
Portfolio, the Portfolio is required to deposit with its custodian
(or broker, if legally permitted) a specified amount of cash or
U.S. Government securities or other securities acceptable to the
broker ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contract is traded
and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith
deposit on the futures contract, which is returned to the
Portfolio upon termination of the contract, assuming all
contractual obligations have been satisfied. A Portfolio expects
to earn interest income on its initial margin deposits. A futures
contract held by a Portfolio is valued daily at the official
settlement price of the exchange on which it is traded. Each day
the Portfolio pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract. This
process is known as "marking-to-market." Variation margin paid or
received by a Portfolio does not represent a borrowing or loan by
the Portfolio but is instead settlement between the Portfolio and
the broker of the amount one would owe the other if the futures
contract had expired at the close of the previous day. In
computing daily net asset value, each Portfolio will mark-to-
market its open futures positions.
A Portfolio is also required to deposit and maintain margin
with respect to put and call options on futures contracts written
by it. Such margin deposits will vary depending on the nature of
the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other
futures positions held by the Portfolio.
Although some futures contracts call for making or taking
delivery of the underlying securities, usually these obligations
are closed out prior to delivery by offsetting purchases or sales
of matching futures contracts (same exchange, underlying security
or index, and delivery month). If an offsetting purchase price is
less than the original sale price, the Portfolio engaging in the
transaction realizes a capital gain, or if it is more, the
Portfolio realizes a capital loss. Conversely, if an offsetting
sale price is more than the original purchase price, the Portfolio
engaging in the transaction realizes a capital gain, or if it is
less, the Portfolio realizes a capital loss. The transaction
costs must also be included in these calculations.
Risks Associated with Futures
There are several risks associated with the use of futures
contracts and futures options. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in
the futures contract. In trying to increase or reduce market
exposure, there can be no guarantee that there will be a
correlation between price movements in the futures contract and in
the portfolio exposure sought. In addition, there are significant
differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a
given transaction not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as:
variations in speculative market demand for futures, futures
options and the related securities, including technical influences
in futures and futures options trading and differences between the
securities market and the securities underlying the standard
contracts available for trading. For example, in the case of
index futures contracts, the composition of the index, including
the issuers and the weighting of each issue, may differ from the
composition of the investment portfolio, and, in the case of
interest rate futures contracts, the interest rate levels,
maturities, and creditworthiness of the issues underlying the
futures contract may differ from the financial instruments held in
the Portfolio's portfolio. A decision as to whether, when and how
to use futures contracts involves the exercise of skill and
judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or
unexpected stock price or interest rate trends.
Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of the current
trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made
on that day at a price beyond that limit. The daily limit governs
only price movements during a particular trading day and therefore
does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses. Stock
index futures contracts are not normally subject to such daily
price change limitations.
There can be no assurance that a liquid market will exist at
a time when a Portfolio seeks to close out a futures or futures
option position. The Portfolio would be exposed to possible loss
on the position during the interval of inability to close, and
would continue to be required to meet margin requirements until
the position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a
significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue
to exist.
Limitations on Options and Futures
If other options, futures contracts, or futures options of
types other than those described herein are traded in the future,
each Bond Portfolio may also use those investment vehicles,
provided the Board of Trustees determines that their use is
consistent with the Portfolio's investment objective.
A Portfolio will not enter into a futures contract or
purchase an option thereon if, immediately thereafter, the initial
margin deposits for futures contracts held by that Portfolio plus
premiums paid by it for open futures option positions, less the
amount by which any such positions are "in-the-money," /3/ would
exceed 5% of the Portfolio's total assets.
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/3/ A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
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When purchasing a futures contract or writing a put option on
a futures contract, a Portfolio must maintain with its custodian
(or broker, if legally permitted) cash or cash equivalents
(including any margin) equal to the market value of such contract.
When writing a call option on a futures contract, the Portfolio
similarly will maintain with its custodian cash or cash
equivalents (including any margin) equal to the amount by which
such option is in-the-money until the option expires or is closed
out by the Portfolio.
A Portfolio may not maintain open short positions in futures
contracts, call options written on futures contracts or call
options written on indexes if, in the aggregate, the market value
of all such open positions exceeds the current value of the
securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative
volatility of the relationship between the portfolio and the
positions. For this purpose, to the extent the Portfolio has
written call options on specific securities in its portfolio, the
value of those securities will be deducted from the current market
value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being deemed a "commodity pool
operator," each Portfolio will use commodity futures or commodity
options contracts solely for bona fide hedging purposes within the
meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts
that do not come within the meaning and intent of 1.3(z), the
aggregate initial margin and premiums required to establish such
positions will not exceed 5% of the fair market value of the
assets of a Portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered
into [in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount (as defined in Section 190.01(x)
of the Commission Regulations) may be excluded in computing such
5%].
Taxation of Options and Futures
If a Bond Portfolio exercises a call or put option that it
holds, the premium paid for the option is added to the cost basis
of the security purchased (call) or deducted from the proceeds of
the security sold (put). For cash settlement options and futures
options exercised by a Portfolio, the difference between the cash
received at exercise and the premium paid is a capital gain or
loss.
If a call or put option written by a Portfolio is exercised,
the premium is included in the proceeds of the sale of the
underlying security (call) or reduces the cost basis of the
security purchased (put). For cash settlement options and futures
options written by a Portfolio, the difference between the cash
paid at exercise and the premium received is a capital gain or
loss.
Entry into a closing purchase transaction will result in
capital gain or loss. If an option written by a Portfolio was in-
the-money at the time it was written and the security covering the
option was held for more than the long-term holding period prior
to the writing of the option, any loss realized as a result of a
closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not
include the period of time the option is outstanding.
If a Portfolio writes an equity call option /4/ other than a
"qualified covered call option," as defined in the Internal
Revenue Code, any loss on such option transaction, to the extent
it does not exceed the unrealized gains on the securities covering
the option, may be subject to deferral until the securities
covering the option have been sold.
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/4/ An equity option is defined to mean any option to buy or sell
stock, and any other option the value of which is determined by
reference to an index of stocks of the type that is ineligible to
be traded on a commodity futures exchange (e.g., an option
contract on a sub-index based on the price of nine hotel-casino
stocks). The definition of equity option excludes options on
broad-based stock indexes (such as the Standard & Poor's 500
index).
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A futures contract held until delivery results in capital
gain or loss equal to the difference between the price at which
the futures contract was entered into and the settlement price on
the earlier of delivery notice date or expiration date. If a
Portfolio delivers securities under a futures contract, the
Portfolio also realizes a capital gain or loss on those
securities.
For federal income tax purposes, a Portfolio generally is
required to recognize as income for each taxable year its net
unrealized gains and losses as of the end of the year on futures,
futures options and non-equity options positions ("year-end mark-
to-market"). Generally, any gain or loss recognized with respect
to such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and
40% short-term, without regard to the holding periods of the
contracts. However, in the case of positions classified as part
of a "mixed straddle," the recognition of losses on certain
positions (including options, futures and futures options
positions, the related securities and certain successor positions
thereto) may be deferred to a later taxable year. Sale of futures
contracts or writing of call options (or futures call options) or
buying put options (or futures put options) that are intended to
hedge against a change in the value of securities held by a
Portfolio: (1) will affect the holding period of the hedged
securities; and (2) may cause unrealized gain or loss on such
securities to be recognized upon entry into the hedge.
If a Portfolio were to enter into a short index future, short
index futures option or short index option position and the
Portfolio's portfolio were deemed to "mimic" the performance of
the index underlying such contract, the option or futures contract
position and the Portfolio's stock positions would be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss
deferral rules.
In order for a Portfolio to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or
foreign currencies, or other income (including but not limited to
gains from options, futures, or forward contracts). Any net gain
realized from futures (or futures options) contracts will be
considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement.
Each Fund distributes to shareholders annually any net
capital gains that have been recognized for federal income tax
purposes (including year-end mark-to-market gains) on options and
futures transactions. Such distributions are combined with
distributions of capital gains realized on the other investments,
and shareholders are advised of the nature of the payments.
The Taxpayer Relief Act of 1997 (the "Act") imposed
constructive sale treatment for federal income tax purposes on
certain hedging strategies with respect to appreciated securities.
Under these rules, taxpayers will recognize gain, but not loss,
with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act)
or futures or "forward contracts" (as defined by the Act) with
respect to the same or substantially identical property, or if
they enter into such transactions and then acquire the same or
substantially identical property. These changes generally apply
to constructive sales after June 8, 1997. Furthermore, the
Secretary of the Treasury is authorized to promulgate regulations
that will treat as constructive sales certain transactions that
have substantially the same effect as short sales, offsetting
notional principal contracts, and futures or forward contracts to
deliver the same or substantially similar property.
INVESTMENT RESTRICTIONS
Fundamental policies may be changed only with the approval of
a "majority of the outstanding voting securities," as defined in
the Investment Company Act of 1940. Nonfundamental investment
restrictions, which may be required by various laws and
administrative positions, may be changed by the Board of Trustees
without a vote of shareholders.
The following investment restrictions (other than material
within brackets) are fundamental policies of Advisor High-Yield
Municipals Fund and High-Yield Municipals Portfolio. They may
not:
(1) invest in a security if, with respect to 75% of the Fund's
assets, as a result of such investment, more than 5% of its total
assets (taken at market value at the time of investment) would be
invested in the securities of any one issuer (for this purpose,
the issuer(s) of a security being deemed to be only the entity or
entities whose assets or revenues are subject to the principal and
interest obligations of the security), other than obligations
issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities or repurchase agreements for such securities,
and [Advisor High-Yield Municipals Fund only] except that all or
substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund [however, in the case of a guarantor of securities (including
an issuer of a letter of credit), the value of the guarantee (or
letter of credit) may be excluded from this computation if the
aggregate value of securities owned by the Fund and guaranteed by
such guarantor (plus any other investments of the Fund in
securities issued by the guarantor) does not exceed 10% of the
Fund's total assets];/5/
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/5/ In the case of a security that is insured as to payment of
principal and interest, the related insurance policy is not deemed
a security, nor is it subject to this investment restriction.
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(2) purchase any securities on margin, except for use of short-
term credit necessary for clearance of purchases and sales of
portfolio securities (this restriction does not apply to
securities purchased on a when-issued or delayed-delivery basis or
to reverse repurchase agreements), but the Fund may make margin
deposits in connection with futures and options transactions;
(3) make loans, although it may (a) participate in an interfund
lending program with other Stein Roe Funds and Portfolios 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;
(b) purchase money market instruments and enter into repurchase
agreements; and (c) acquire publicly distributed or privately
placed debt securities;
(4) borrow except that it may (a) borrow for nonleveraging,
temporary or emergency purposes and (b) engage in reverse
repurchase agreements and make other borrowings, provided that the
combination of (a) and (b) 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; it may borrow from banks, other Stein Roe Funds
and Portfolios, and other persons to the extent permitted by
applicable law;
(5) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the
Fund except (a) as may be necessary in connection with borrowings
mentioned in (iv) above, and (b) it may enter into futures and
options transactions;
(6) invest more than 25% of its total assets (taken at market
value at the time of each investment) in securities of non-
governmental issuers whose principal business activities are in
the same industry, [Advisor High-Yield Municipals Fund only]
except that all or substantially all of the assets of the Fund may
be invested in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund;
(7) purchase portfolio securities from, or sell portfolio
securities to, any of the officers, directors, or trustees of the
Trust or of its investment adviser;
(8) purchase or sell commodities or commodities contracts or oil,
gas, or mineral programs, [Advisor High-Yield Municipals Fund
only] except that the Fund may enter into futures and options
transactions;
(9) issue any senior security except to the extent permitted under
the Investment Company Act of 1940.
The following are the nonfundamental restrictions of Advisor
High-Yield Municipals Fund and High-Yield Municipals Portfolio.
None of the following restrictions shall prevent Advisor High-
Yield Municipals Fund from investing all or substantially all of
its assets in another investment company having the same
investment objective and substantially similar investment policies
as the Fund. They may not:
(a) own more than 10% of the outstanding voting securities of an
issuer;
(b) invest in companies for the purpose of exercising control or
management;
(c) make investments in the securities of other investment
companies, except in connection with a merger, consolidation, or
reorganization;
(d) purchase or sell real estate (other than Municipal Securities
or money market securities secured by real estate or interests
therein or such securities issued by companies which invest in
real estate or interests therein);
(e) act as an underwriter of securities, except that it may
participate as part of a group in bidding, or bid alone, for the
purchase of Municipal Securities directly from an issuer for its
own portfolio;
(f) sell securities short unless (1) it owns or has the right to
obtain securities equivalent in kind and amount to those sold
short at no added cost or (2) the securities sold are "when
issued" or "when distributed" securities which it expects to
receive in a recapitalization, reorganization, or other exchange
for securities it contemporaneously owns or has the right to
obtain and provided that it may purchase standby commitments and
securities subject to a demand feature entitling it to require
sellers of securities to the Fund to repurchase them upon demand
and that transactions in options, futures, and options on futures
are not treated as short sales;
(g) invest more than 15% of its net assets (taken at market value
at the time of a particular investment) in illiquid securities,
including repurchase agreements maturing in more than seven days;
(h) purchase shares of other open-end investment companies, except
in connection with a merger, consolidation, acquisition, or
reorganization
(i) invest more than 5% of its net assets (valued at time of
investment) in warrants, nor more than 2% of its net assets in
warrants that are not listed on the New York or American Stock
Exchange;
(j) write an option on a security unless the option is issued by
the Options Clearing Corporation, an exchange, or similar entity;
or
(k) write a put or call option if the aggregate premiums paid for
all put and call options exceed 20% of its net assets (less the
amount by which any such positions are in-the-money), excluding
put and call options purchased as closing transactions.
Following are the fundamental investment restrictions of each
Bond Fund and each Bond Portfolio. They may not:
(1) invest in a security if, as a result of such investment, more
than 25% of its total assets (taken at market value at the time of
such investment) would be invested in the securities of issuers in
any particular industry, except that this restriction does not
apply to (i) U.S. Government Securities, and (ii) [Bond Funds
only] except that all or substantially all of the assets of the
Fund may be invested in another registered investment company
having the same investment objective and substantially similar
investment policies as the Fund;
(2) invest in a security if, with respect to 75% of its assets, as
a result of such investment, more than 5% of its total assets
(taken at market value at the time of such investment) would be
invested in the securities of any one issuer, except that this
restriction does not apply to U.S. Government Securities or
repurchase agreements for such securities and [Bond Funds only]
except that all or substantially all of the assets of the Fund may
be invested in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund;
(3) invest in a security if, as a result of such investment, it
would hold more than 10% (taken at the time of such investment) of
the outstanding voting securities of any one issuer, [Bond Funds
only] except that all or substantially all of the assets of the
Fund may be invested in another registered investment company
having the same investment objective and substantially similar
investment policies as the Fund;
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate, or
interests therein);
(5) purchase or sell commodities or commodities contracts or oil,
gas or mineral programs, except that it may enter into (i) futures
and options on futures and (ii) forward contracts;
(6) purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities, but it may make margin deposits in connection with
transactions in options, futures, and options on futures;
(7) make loans, although it may (a) lend portfolio securities and
participate in an interfund lending program with other Stein Roe
Funds and Portfolios 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); (b) purchase money market instruments and enter into
repurchase agreements; and (c) acquire publicly distributed or
privately placed debt securities;
(8) borrow except that it may (a) borrow for nonleveraging,
temporary or emergency purposes, (b) engage in reverse repurchase
agreements and make other borrowings, provided that the
combination of (a) and (b) 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, and (c) enter into futures and options
transactions; it may borrow from banks, other Stein Roe Funds and
Portfolios, and other persons to the extent permitted by
applicable law;
(9) act as an underwriter of securities, except insofar as it may
be deemed to be an "underwriter" for purposes of the Securities
Act of 1933 on disposition of securities acquired subject to legal
or contractual restrictions on resale, [Bond funds only] except
that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the same
investment objective and substantially similar investment policies
as the Fund; or
(10) issue any senior security except to the extent permitted
under the Investment Company Act of 1940.
Following are the non-fundamental investment restrictions of
each Bond Fund and each Bond Portfolio. None of the following
restrictions shall prevent Advisor Intermediate Bond Fund and
Advisor Income Fund Fund from investing all or substantially all
of its assets in another investment company having the same
investment objective and substantially similar investment policies
as the Fund. They may not:
(A) invest for the purpose of exercising control or management;
(B) purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal to
more than 5% of its total assets (valued at time of purchase) in
the case of any one other investment company and 10% of such
assets (valued at time of purchase) in the case of all other
investment companies in the aggregate; any such purchases are to
be made in the open market where no profit to a sponsor or dealer
results from the purchase, other than the customary broker's
commission, except for securities acquired as part of a merger,
consolidation or acquisition of assets; /6/
- ---------
/6/ The Funds have been informed that the staff of the Securities
and Exchange Commission takes the position that the issuers of
certain CMOs and certain other collateralized assets are
investment companies and that subsidiaries of foreign banks may be
investment companies for purposes of Section 12(d)(1) of the
Investment Company Act of 1940, which limits the ability of one
investment company to invest in another investment company.
Accordingly, the Funds intend to operate within the applicable
limitations under Section 12(d)(1)(A) of that Act.
- ----------
(C) purchase portfolio securities from, or sell portfolio
securities to, any of the officers and directors or trustees of
the Trust or of its investment adviser;
(D) purchase shares of other open-end investment companies, except
in connection with a merger, consolidation, acquisition, or
reorganization;
(E) invest more than 5% of its net assets (valued at time of
investment) in warrants, nor more than 2% of its net assets in
warrants which are not listed on the New York or American Stock
Exchange;
(F) purchase a put or call option if the aggregate premiums paid
for all put and call options exceed 20% of its net assets (less
the amount by which any such positions are in-the-money),
excluding put and call options purchased as closing transactions;
(G) write an option on a security unless the option is issued by
the Options Clearing Corporation, an exchange, or similar entity;
(H) invest in limited partnerships in real estate unless they are
readily marketable;
(I) sell securities short unless (i) it owns or has the right to
obtain securities equivalent in kind and amount to those sold
short at no added cost or (ii) the securities sold are "when
issued" or "when distributed" securities which it expects to
receive in a recapitalization, reorganization, or other exchange
for securities it contemporaneously owns or has the right to
obtain and provided that transactions in options, futures, and
options on futures are not treated as short sales;
(J) invest more than 15% of its total assets (taken at market
value at the time of a particular investment) in restricted
securities, other than securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933;
(K) invest more than 10% of its net assets (taken at market value
at the time of a particular investment) in illiquid securities,/7/
including repurchase agreements maturing in more than seven days.
- ----------
/7/ In the judgment of the Adviser, Private Placement Notes, which
are issued pursuant to Section 4(2) of the Securities Act of 1933,
generally are readily marketable even though they are subject to
certain legal restrictions on resale. As such, they are not
treated as being subject to the limitation on illiquid securities.
- ----------
ADDITIONAL INVESTMENT CONSIDERATIONS
The Adviser seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. In working to
build wealth for generations, it has been guided by three primary
objectives which it believes are the foundation of a successful
investment program. These objectives are preservation of capital,
limited volatility through managed risk, and consistent above-
average returns, as appropriate for the particular client or
managed account. Because every investor's needs are different,
Stein Roe mutual funds are designed to accommodate different
investment objectives, risk tolerance levels, and time horizons.
In selecting a mutual fund, investors should ask the following
questions:
What are my investment goals?
It is important to a choose a fund that has investment objectives
compatible with your investment goals.
What is my investment time frame?
If you have a short investment time frame (e.g., less than three
years), a mutual fund that seeks to provide a stable share price,
such as a money market fund, or one that seeks capital
preservation as one of its objectives may be appropriate. If you
have a longer investment time frame, you may seek to maximize your
investment returns by investing in a mutual fund that offers
greater yield or appreciation potential in exchange for greater
investment risk.
What is my tolerance for risk?
All investments, including those in mutual funds, have risks which
will vary depending on investment objective and security type.
However, mutual funds seek to reduce risk through professional
investment management and portfolio diversification.
In general, equity mutual funds emphasize long-term capital
appreciation and tend to have more volatile net asset values than
bond or money market mutual funds. Although there is no guarantee
that they will be able to maintain a stable net asset value of
$1.00 per share, money market funds emphasize safety of principal
and liquidity, but tend to offer lower income potential than bond
funds. Bond funds tend to offer higher income potential than
money market funds but tend to have greater risk of principal and
yield volatility.
In addition, the Adviser believes that investment in a high
yield fund provides an opportunity to diversify an investment
portfolio because the economic factors that affect the performance
of high-yield, high-risk debt securities differ from those that
affect the performance of high-quality debt securities or equity
securities.
MANAGEMENT
The following table sets forth certain information with
respect to the trustees and officers of Advisor Trust:
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME AGE WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------- --- ---------------------- ----------------------------------------------------
<S> <C> <C> <C>
William D. Andrews 50 Executive Vice-President Executive vice president of Stein Roe & Farnham
(4) Incorporated (the "Adviser")
Gary A. Anetsberger (4) 42 Senior Vice-President Chief financial officer of the Mutual Funds division of
the Adviser; senior vice president of the Adviser
since Apr. 1996; vice president of the Adviser prior
thereto
Timothy K. Armour 48 President; Trustee President of the Mutual Funds division of the Adviser
(1) (2)(4) and director of the Adviser
Jilaine Hummel Bauer (4) 42 Executive Vice-President; General counsel and secretary (since Nov. 1995) and
Secretary senior vice president of the Adviser
Bruno Bertocci 43 Vice-President Vice president of Colonial Management Associates,
Inc. since Jan. 1996; senior vice president of the
Adviser since May, 1995; global equity portfolio
manager with Rockefeller & Co. prior thereto
William W. Boyd(2)(3)(4) 71 Trustee Chairman and director of Sterling Plumbing Group,
Inc. (manufacturer of plumbing products)
David P. Brady 34 Vice-President Vice president of the Adviser since Nov., 1995;
portfolio manager for the Adviser since 1993; equity
investment analyst, State Farm Mutual Automobile
Insurance Company prior thereto
Thomas W. Butch (4) 41 Executive Vice-President Senior vice president of the Adviser since Sept.
1994; first vice president, corporate communications,
of Mellon Bank Corporation prior thereto
Daniel K. Cantor 38 Vice-President Senior vice president of the Adviser
Lindsay Cook (1)(4) 45 Trustee Executive vice president of Liberty Financial
Companies, Inc. (the indirect parent of the Adviser) since Mar. 1997; senior vice president prior thereto
Philip J. Crosley 51 Vice-President Senior vice president of the Adviser since Feb.,
1996; vice president, institutional sales - advisor
sales, Invesco Funds Group prior thereto
Erik P. Gustafson 34 Vice-President Senior portfolio manager of the Adviser; senior vice
president of the Adviser since Apr. 1996; vice
president of the Adviser from May, 1994 to Apr. 1996;
associate of the Adviser prior thereto
Douglas A. Hacker (3)(4) 42 Trustee Senior vice president and chief financial officer of
United Airlines, since July, 1994; senior vice
president, finance, United Airlines, Feb. 1993 to
July, 1994; vice president, American Airlines prior
thereto
David P. Harris 33 Vice-President Vice president of Colonial Management Associates,
Inc. since Jan. 1996; vice president of the Adviser
since May, 1995; global equity portfolio manager with
Rockefeller & Co. prior thereto
Loren A. Hansen (4) 49 Executive Vice-President Executive vice president of the Adviser since Dec.,
1995; vice president of The Northern Trust (bank)
prior thereto
Harvey B. Hirschhorn 48 Vice-President Executive vice president, senior portfolio manager,
and chief economist and investment strategist of the
Adviser; director of research of the Adviser, 1991 to
1995
Janet Langford Kelly 40 Trustee Senior vice president, secretary and general counsel
(3)(4) of Sara Lee Corporation (branded, packaged, consumer-
products manufacturer) since 1995; partner, Sidley &
Austin (law firm) prior thereto
Michael T. Kennedy 35 Vice-President Senior vice president of the Adviser since Oct. 1994;
vice president of the Adviser prior thereto
Stephen F. Lockman 36 Vice-President Senior vice president, portfolio manager, and credit
analyst of the Adviser; portfolio manager for
Illinois State Board of Investment prior thereto
Eric S. Maddix 34 Vice-President Vice president of the Adviser since Nov. 1995;
portfolio manager or research assistant for the
Adviser since 1987
M. Jane McCart 42 Vice-President Senior vice president of the Adviser
John S. McLandsborough 30 Vice-President Portfolio manager for the Adviser since Apr. 1996;
securities analyst, CS First Boston from June, 1993
to Dec. 1995; securities analyst, National City Bank
of Cleveland from Nov. 1992 to June, 1993
Anne E. Marcel 40 Vice-President Vice president of the Adviser since Apr. 1996;
manager, mutual fund sales & services of the Adviser
since Oct. 1994; supervisor of the Counselor
Department of the Adviser prior thereto
Arthur J. McQueen 39 Vice-President Senior vice president of the Adviser
Lynn C. Maddox 57 Vice-President Senior vice president of the Adviser
Charles R. Nelson (3)(4) 55 Trustee Van Voorhis Professor of Political Economy,
Department of Economics of the University of
Washington
Nicolette D. Parrish (4) 48 Vice-President; Senior compliance administrator and assistant
Assistant Secretary secretary of the Adviser since Nov. 1995; senior
legal assistant for the Adviser prior thereto
Richard B. Peterson 56 Vice-President Senior vice president of the Adviser
Sharon R. Robertson (4) 36 Controller Accounting manager for the Adviser's Mutual Funds
division
Janet B. Rysz (4) 42 Assistant Secretary Senior compliance administrator and assistant
secretary of the Adviser
M. Gerard Sandel 43 Vice-President Senior vice president of the Adviser since July,
1997; vice president of M&I Investment Management
Corporation from Oct. 1993 to June, 1997; vice
president of Acorn Asset Management Corporation prior
thereto
Gloria J. Santella 40 Vice-President Senior vice president of the Adviser since Nov. 1995;
vice president of the Adviser prior thereto
Thomas C. Theobald 60 Trustee Managing director, William Blair Capital Partners
(3)(4) (private equity fund) since 1994; chief executive
officer and chairman of the Board of Directors of
Continental Bank Corporation, 1987-1994
Scott E. Volk (4) 26 Treasurer Financial reporting manager for the Adviser's Mutual
Funds division since Oct. 1997; senior auditor with
Ernst & Young LLP from Sept. 1993 to Apr. 1996 and
from Oct. 1996 to Sept. 1997; financial analyst with
John Nuveen & Company Inc. from May 1996 to Sept.
1996; full-time student prior to Sept. 1993
Heidi J. Walter (4) 30 Vice-President Legal counsel for the Adviser since Mar. 1995;
associate with Beeler Schad & Diamond PC (law firm)
prior thereto
Stacy H. Winick (4) 32 Vice-President Senior legal counsel for the Adviser since Oct. 1996;
associate of Bell, Boyd & Lloyd (law firm) from June,
1993 to Sept. 1996; associate of Debevoise & Plimpton
(law firm) prior thereto
Hans P. Ziegler (4) 56 Executive Vice-President Chief executive officer of the Adviser since May,
1994; president of the Investment Counsel division of
the Adviser from July, 1993 to June, 1994; president
and chief executive officer, Pitcairn Financial
Management Group prior thereto
Margaret O. Zwick (4) 31 Assistant Treasurer Accounting manager for the Adviser's Mutual Funds
division since Apr. 1997; compliance manager from
Aug. 1995 to Apr. 1997; compliance accountant, Jan.
1995 to July 1995; section manager, Jan. 1994 to Jan.
1995; supervisor prior thereto
_________________________
(1) Trustee who is an "interested person" of Advisor Trust and of
the Adviser, as defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope and
results of the audit.
(4) This person holds the corresponding officer or trustee
position with the Base Trust.
Certain of the trustees and officers of Advisor Trust and
Base Trust are trustees or officers of other investment companies
managed by the Adviser. The address of Mr. Boyd is 2900 Golf
Road, Rolling Meadows, Illinois 60008; that of Mr. Cook is 600
Atlantic Avenue, Boston, Massachusetts 02210; that of Mr. Hacker
is P.O. Box 66100, Chicago, IL 60666; that of Ms. Kelly is Three
First National Plaza, Chicago, Illinois 60602; that of Mr. Nelson
is Department of Economics, University of Washington, Seattle,
Washington 98195; that of Mr. Theobald is Suite 3300, 222 West
Adams Street, Chicago, IL 60606; that of Messrs. Bertocci, Cantor,
and Harris is 1330 Avenue of the Americas, New York, New York
10019; and that of the other officers is One South Wacker Drive,
Chicago, Illinois 60606.
Officers and trustees affiliated with the Adviser serve
without any compensation from Advisor Trust. In compensation for
their services to Advisor Trust, trustees who are not "interested
persons" of Advisor Trust or the Adviser are paid an annual
retainer of $8,000 (divided equally among the series of Advisor
Trust) plus an attendance fee from each series for each meeting of
the Board or standing committee thereof attended at which business
for that series is conducted. The attendance fees (other than for
a Nominating Committee or Compensation Committee meeting) are
based on each series' net assets as of the preceding Dec. 31. For
a series with net assets of less than $50 million, the fee is $50
per meeting; with $51 to $250 million, the fee is $200 per
meeting; with $251 million to $500 million, $350; with $501
million to $750 million, $500; with $751 million to $1 billion,
$650; and with over $1 billion in net assets, $800. For any
series participating in the master fund/feeder fund structure, the
trustees' attendance fees are paid solely by the master portfolio.
Each non-interested trustee also receives $500 from Advisor Trust
for attending each meeting of the Nominating Committee and
Compensation Committee. Advisor Trust has no retirement or
pension plan. The following table sets forth compensation paid to
the trustees during the year ended Sept. 30, 1997:
Aggregate Compensation Total Compensation from
Name of Trustee from Advisor Trust the Stein Roe Fund
Complex*
- ------------------ --------------------- -----------------------
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
William W. Boyd $2,000 $77,694
Douglas A. Hacker 2,000 73,860
Janet Langford Kelly 2,000 49,600
Charles R. Nelson 2,000 77,694
Thomas C. Theobald 2,000 73,860
_______________
* At Sept. 30, 1997, the Stein Roe Fund Complex consisted of
seven series of Advisor Trust, six series of Stein Roe Income
Trust, four series of Stein Roe Municipal Trust, ten series of
Stein Roe Investment Trust, one series of Stein Roe Institutional
Trust, one series of Stein Roe Trust, and nine series of Base
Trust.
PRINCIPAL SHAREHOLDERS
As of the date of this Statement of Additional Information,
each Fund had only one shareholder, _____________, which held
10,000 shares of each Fund.
INVESTMENT ADVISORY SERVICES
Stein Roe & Farnham Incorporated provides administrative
services to each Fund and each Portfolio and portfolio management
services to each Portfolio. The Adviser is a wholly owned
subsidiary of SteinRoe Services Inc., which is a wholly owned
subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which is a majority owned subsidiary of LFC Holdings,
Inc., which is a wholly owned subsidiary of Liberty Mutual Equity
Corporation, which is a wholly owned subsidiary of Liberty Mutual
Insurance Company. Liberty Mutual Insurance Company is a mutual
insurance company, principally in the property/casualty insurance
field, organized under the laws of Massachusetts in 1912.
The directors of the Adviser are Kenneth R. Leibler, Harold
W. Cogger, C. Allen Merritt, Jr., Timothy K. Armour, and Hans P.
Ziegler. Mr. Leibler is President and Chief Executive Officer of
Liberty Financial; Mr. Cogger is Executive Vice President of
Liberty Financial; Mr. Merritt is Executive Vice President and
Treasurer of Liberty Financial; Mr. Armour is President of the
Adviser's Mutual Funds division; and Mr. Ziegler is Chief
Executive Officer of the Adviser. The business address of Messrs.
Leibler, Cogger, and Merritt is Federal Reserve Plaza, Boston,
Massachusetts 02210; and that of Messrs. Armour, and Ziegler is
One South Wacker Drive, Chicago, Illinois 60606.
The Adviser and its predecessor have been providing
investment advisory services since 1932. The Adviser acts as
investment adviser to wealthy individuals, trustees, pension and
profit sharing plans, charitable organizations, and other
institutional investors. As of June 30, 1997, the Adviser managed
over $28 billion in assets: over $9 billion in equities and over
$19 billion in fixed income securities (including $1.7 billion in
municipal securities). The $28 billion in managed assets included
over $7.9 billion held by open-end mutual funds managed by the
Adviser (approximately 15% of the mutual fund assets were held by
clients of the Adviser). These mutual funds were owned by over
259,000 shareholders. The $7.9 billion in mutual fund assets
included over $766 million in over 50,000 IRA accounts. In
managing those assets, the Adviser utilizes a proprietary
computer-based information system that maintains and regularly
updates information for approximately 7,000 companies. The
Adviser also monitors over 1,400 issues via a proprietary credit
analysis system. At June 30, 1997, the Adviser employed 16
research analysts and 55 account managers. The average
investment-related experience of these individuals was 24 years.
Please refer to the descriptions of the Adviser, the
management and administrative agreements, fees, expense
limitations, and transfer agency services under Management and Fee
Table in the Prospectuses, which are incorporated herein by
reference.
The Adviser provides office space and executive and other
personnel to the Funds, and bears any sales or promotional
expenses. Each Fund pays all expenses other than those paid by
the Adviser, including but not limited to printing and postage
charges and securities registration and custodian fees and
expenses incidental to its organization.
Each Fund's administrative agreement provides that the
Adviser shall reimburse the Fund to the extent that total annual
expenses of the Fund (including fees paid to the Adviser, but
excluding taxes, interest, commissions and other normal charges
incident to the purchase and sale of portfolio securities, and
expenses of litigation to the extent permitted under applicable
state law) exceed the applicable limits prescribed by any state in
which shares of the Fund are being offered for sale to the public;
provided, however, the Adviser is not required to reimburse a Fund
an amount in excess of fees paid by the Fund under that agreement
for such year. In addition, in the interest of further limiting
expenses of a Fund, the Adviser may voluntarily waive its
management fee and/or absorb certain expenses for a Fund, as
described under Fee Table in its Prospectus. Any such
reimbursement will enhance the yield of such Fund.
Each Portfolio's management agreement provides that neither
the Adviser, nor any of its directors, officers, stockholders (or
partners of stockholders), agents, or employees shall have any
liability to Advisor Trust or any shareholder of Advisor Trust for
any error of judgment, mistake of law or any loss arising out of
any investment, or for any other act or omission in the
performance by the Adviser of its duties under the agreement,
except for liability resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties
or from reckless disregard by it of its obligations and duties
under the agreement.
Any expenses that are attributable solely to the
organization, operation, or business of a Fund shall be paid
solely out of that Fund's assets. Any expenses incurred by
Advisor Trust that are not solely attributable to a particular
Fund are apportioned in such manner as the Adviser determines is
fair and appropriate, unless otherwise specified by the Board of
Trustees.
Bookkeeping and Accounting Agreement
Pursuant to separate agreements with Advisor Trust and Base
Trust, the Adviser receives a fee for performing certain
bookkeeping and accounting services for each Fund and each
Portfolio. For services provided to the Funds, the Adviser
receives an annual fee of $25,000 per Fund plus .0025 of 1% of
average net assets over $50 million. During the fiscal year ended
Sept. 30, 1997, the Adviser received $109,375 from Advisor Trust
for services provided under this agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian for
Advisor Trust and Base Trust. It is responsible for holding all
securities and cash, receiving and paying for securities
purchased, delivering against payment securities sold, receiving
and collecting income from investments, making all payments
covering expenses, and performing other administrative duties, all
as directed by authorized persons. The Bank does not exercise any
supervisory function in such matters as purchase and sale of
portfolio securities, payment of dividends, or payment of
expenses.
Portfolio securities purchased in the U.S. are maintained in
the custody of the Bank or of other domestic banks or
depositories. Portfolio securities purchased outside of the U.S.
are maintained in the custody of foreign banks and trust companies
that are members of the Bank's Global Custody Network and foreign
depositories ("foreign sub-custodians"). Each of the domestic and
foreign custodial institutions holding portfolio securities has
been approved by the Board of Trustees in accordance with
regulations under the Investment Company Act of 1940.
The Board of Trustees of each Trust reviews, at least
annually, whether it is in the best interests of each Portfolio,
each Fund, and its shareholders to maintain assets in each of the
countries in which it invests with particular foreign sub-
custodians in such countries, pursuant to contracts between such
respective foreign sub-custodians and the Bank. The review
includes an assessment of the risks of holding assets in any such
country (including risks of expropriation or imposition of
exchange controls), the operational capability and reliability of
each such foreign sub-custodian, and the impact of local laws on
each such custody arrangement. Each Board of Trustees is aided in
its review by the Bank, which has assembled the network of foreign
sub-custodians utilized, as well as by the Adviser and counsel.
However, with respect to foreign sub-custodians, there can be no
assurance that a Fund, and the value of its shares, will not be
adversely affected by acts of foreign governments, financial or
operational difficulties of the foreign sub-custodians,
difficulties and costs of obtaining jurisdiction over, or
enforcing judgments against, the foreign sub-custodians, or
application of foreign law to foreign sub-custodial arrangements.
Accordingly, an investor should recognize that the non-investment
risks involved in holding assets abroad are greater than those
associated with investing in the United States.
The Portfolios may invest in obligations of the Bank and may
purchase or sell securities from or to the Bank.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants for each Fund and each
Portfolio are Arthur Andersen LLP, 33 West Monroe Street, Chicago,
Illinois 60603. The accountants audit and report on the annual
financial statements, review certain regulatory reports and the
federal income tax returns, and perform other professional
accounting, auditing, tax and advisory services when engaged to do
so by a Trust.
DISTRIBUTOR
Shares of Funds are distributed by Liberty Financial
Investments, Inc. (the "Distributor"), an indirect subsidiary of
Liberty Financial, under a Distribution Agreement as described
under Management in the Prospectuses, which are incorporated
herein by reference. The Distribution Agreement continues in
effect from year to year, provided such continuance is approved
annually (i) by a majority of the trustees or by a majority of the
outstanding voting securities of Advisor Trust, and (ii) by a
majority of the trustees who are not parties to the Agreement or
interested persons of any such party ("independent trustees").
The Distributor has no obligation, as underwriter, to buy Fund
shares, and purchases shares only upon receipt of orders from
authorized Intermediaries. Advisor Trust has agreed to pay all
expenses in connection with registration of its shares with the
Securities and Exchange Commission and auditing and filing fees in
connection with registration of its shares under the various state
blue sky laws and assumes the cost of preparation of prospectuses
and other expenses.
Each Fund offers one class of shares (Class K) and may in the
future offer other classes of shares. Class K shares are offered
at net asset value, subject to a Rule 12b-1 fee.
The trustees of Advisor Trust have adopted a plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Plan").
The Plan provides that, as compensation for personal service
and/or the maintenance of shareholder accounts, the Distributor
receives a service fee at an annual rate not to exceed 0.25% of
net assets attributed to each class of shares other than Class K
shares. The Plan also provides that as compensation for the
promotion and distribution of shares of the Funds including its
expenses related to sale and promotion of Fund shares, the
Distributor receives from each Fund a fee at an annual rate of not
exceeding 0.10% of the average net assets attributed to Class A
shares, and 0.75% of the average net assets attributed to each of
its Class B and Class C shares. The Plan further provides that,
as compensation for services and/or distribution, the Distributor
receives a fee at an annual rate of 0.25% of net assets attributed
to Class A shares. At this time, the Distributor has voluntarily
agreed to limit the Class A distribution fee to 0.05% annually.
The Distributor may terminate this voluntary limitation without
shareholder approval. Class B shares automatically convert to
Class A shares approximately eight years after the Class B shares
are purchased. Class C and Class K shares do not convert. The
Distributor generally pays this amount to institutions that
distribute Fund shares and provide services to the Funds and their
shareholders. Those institutions may use the payments for, among
other purposes, compensating employees engaged in sales and/or
shareholder servicing. The amount of fees paid by the Funds
during any year may be more or less than the cost of distribution
or other services provided to the Fund. NASD rules limit the
amount of annual distribution fees that may be paid by a mutual
fund and impose a ceiling on the cumulative sales charges paid.
Advisor Trust's Plan complies with those rules.
The trustees believe that the 12b-1 plan could be a
significant factor in the growth and retention of Fund assets
resulting in a more advantageous expense ratio and increased
investment flexibility which could benefit each class of
shareholders. The 12b-1 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 independent
trustees. The 12b-1 plan may not be amended to increase the fee
materially without approval by a vote of a majority of the
outstanding voting securities of the relevant class of shares and
all material amendments of the Plans must be approved by the
trustees in the manner provided in the foregoing sentence. The
12b-1 plan may be terminated at any time by a vote of a majority
of the independent trustees or by a vote of a majority of the
outstanding voting securities of the relevant Class of shares.
TRANSFER AGENT AND SHAREHOLDER SERVICING
Colonial Investors Service Center, Inc. (the "Transfer
Agent"), an indirect subsidiary of Liberty Financial, performs
certain transfer agency services for Advisor Trust, as described
under Management in the Prospectuses. For performing these
services, the Transfer Agent receives from each Fund a fee based
on the following annual rates:
Class K Shares
Account maintenance and trade processing 0.05%
Client services 0.25%
Total 0.30%
Advisor Trust believes the charges by the Transfer Agent to the
Funds are comparable to those of other companies performing
similar services.
Some intermediaries that maintain nominee accounts with the
Funds for their clients who are Fund shareholders may be paid a
fee from the Transfer Agent for shareholder servicing and
accounting services they provide with respect to the underlying
Fund shares.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectuses
under the headings How to Purchase Shares, How to Redeem Shares,
and Net Asset Value, and that information is incorporated herein
by reference. It is the responsibility of any broker-dealers,
bank trust departments, asset allocation programs sponsored by the
Adviser, wrap fee programs, and other retirement plan service
providers ("Intermediaries"), through whom you purchase or redeem
shares to establish procedures insuring the prompt transmission to
Advisor Trust of any such purchase order.
Each Fund will accept unconditional orders for shares to
be executed at the public offering price based on the net
asset value per share next determined after the order is
received in good order. The public offering price is the net
asset value plus the applicable sales charge, if any. In the
case of orders for purchase of shares placed through
Intermediaries, the public offering price will be determined
on the day the order is placed in good order, but only if the
Intermediary receives the order prior to the time at which
shares are valued and transmits it to a Fund before that
day's transactions are processed or at such other times as
agreed by the parties. If the Intermediary 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 Intermediary. If the
Intermediary receives the order after the time at which a
Fund values its shares, the price will be based on the net
asset value determined as of the close of the NYSE on the
next day it is open. If funds for the purchase of shares are
sent directly to the Transfer Agent, 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 net asset value per share for each Fund is determined on
days on which the New York Stock Exchange (the "NYSE") is open for
trading. The NYSE is regularly closed on Saturdays and Sundays
and on New Year's Day, the third Monday in Jan., the third Monday
in Feb., Good Friday, the last Monday in May, Independence Day,
Labor Day, Thanksgiving, and Christmas. If one of these holidays
falls on a Saturday or Sunday, the NYSE will be closed on the
preceding Friday or the following Monday, respectively. Net asset
value will not be determined on days when the NYSE is closed
unless, in the judgment of the Board of Trustees, net asset value
of a Fund should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time.
Advisor Trust intends to pay all redemptions in cash and is
obligated to redeem shares solely in cash up to the lesser of
$250,000 or one percent of the net assets of Advisor Trust during
any 90-day period for any one shareholder. However, redemptions
in excess of such limit may be paid wholly or partly by a
distribution in kind of securities. If redemptions were made in
kind, the redeeming shareholders might incur transaction costs in
selling the securities received in the redemptions.
Due to the relatively high cost of maintaining smaller
accounts, Advisor Trust reserves the right to redeem shares in any
account for their then-current value (which will be promptly paid
to the investor) if at any time the shares in the account do not
have a value of at least $1,000. An investor will be notified
that the value of his account is less than that minimum and
allowed at least 30 days to bring the value of the account up to
at least $1,000 before the redemption is processed. The Agreement
and Declaration of Trust also authorizes Advisor Trust to redeem
shares under certain other circumstances as may be specified by
the Board of Trustees.
Advisor Trust reserves the right to suspend or postpone
redemptions of shares of the Funds during any period when: (a)
trading on the NYSE is restricted, as determined by the Securities
and Exchange Commission, or the NYSE is closed for other than
customary weekend and holiday closings; (b) the Securities and
Exchange Commission has by order permitted such suspension; or (c)
an emergency, as determined by the Securities and Exchange
Commission, exists, making disposal of portfolio securities or
valuation of net assets of a Fund not reasonably practicable.
PORTFOLIO TRANSACTIONS
The Adviser places the orders for the purchase and sale of
each Portfolio's portfolio securities and options and futures
contracts.
Purchases and sales of portfolio securities for the Bond
Portfolios are ordinarily transacted with the issuer or with a
primary market maker acting as principal or agent for the
securities on a net basis, with no brokerage commission being paid
by a Portfolio. Transactions placed through dealers reflect the
spread between the bid and asked prices. Occasionally, a
Portfolio may make purchases of underwritten issues at prices that
include underwriting discounts or selling concessions.
Portfolio securities for High-Yield Municipals Portfolio are
purchased both in underwritings and in the over-the-counter
market. Included in the price paid to an underwriter of a
portfolio security is the spread between the price paid by the
underwriter to the issuer and the price paid by the purchaser.
Purchases and sales of portfolio securities in the over-the-
counter market usually are transacted with a broker or dealer on a
net basis, without any brokerage commission being paid, but do
reflect the spread between the bid and asked prices. The Adviser
may also transact purchases of portfolio securities directly with
the issuers.
The Adviser's overriding objective in effecting portfolio
transactions is to seek to obtain the best combination of price
and execution. The best net price, giving effect to brokerage
commissions, if any, and other transaction costs, normally is an
important factor in this decision, but a number of other
judgmental factors may also enter into the decision. These
include: the Adviser's knowledge of negotiated commission rates
currently available and other current transaction costs; the
nature of the security being traded; the size of the transaction;
the desired timing of the trade; the activity existing and
expected in the market for the particular security;
confidentiality; the execution, clearance and settlement
capabilities of the broker or dealer selected and others which are
considered; the Adviser's knowledge of the financial stability of
the broker or dealer selected and such other brokers or dealers;
and the Adviser's knowledge of actual or apparent operational
problems of any broker or dealer. Recognizing the value of these
factors, a Portfolio may pay a brokerage commission in excess of
that which another broker or dealer may have charged for effecting
the same transaction. Evaluations of the reasonableness of
brokerage commissions, based on the foregoing factors, are made on
an ongoing basis by the Adviser's staff while effecting portfolio
transactions. The general level of brokerage commissions paid is
reviewed by the Adviser, and reports are made annually to the
Board of Trustees.
With respect to issues of securities involving brokerage
commissions, when more than one broker or dealer is believed to be
capable of providing the best combination of price and execution
with respect to a particular portfolio transaction for a
Portfolio, the Adviser often selects a broker or dealer that has
furnished it with research products or services such as research
reports, subscriptions to financial publications and research
compilations, compilations of securities prices, earnings,
dividends, and similar data, and computer data bases, quotation
equipment and services, research-oriented computer software and
services, and services of economic and other consultants.
Selection of brokers or dealers is not made pursuant to an
agreement or understanding with any of the brokers or dealers;
however, the Adviser uses an internal allocation procedure to
identify those brokers or dealers who provide it with research
products or services and the amount of research products or
services they provide, and endeavors to direct sufficient
commissions generated by its clients' accounts in the aggregate,
including the Portfolios, to such brokers or dealers to ensure the
continued receipt of research products or services the Adviser
feels are useful. In certain instances, the Adviser receives from
brokers and dealers products or services that are used both as
investment research and for administrative, marketing, or other
non-research purposes. In such instances, the Adviser makes a
good faith effort to determine the relative proportion of such
products or services which may be considered as investment
research. The portion of the costs of such products or services
attributable to research usage may be defrayed by the Adviser
(without prior agreement or understanding, as noted above) through
brokerage commissions generated by transactions by clients
(including the Portfolios), while the portion of the costs
attributable to non-research usage of such products or services is
paid by the Adviser in cash. No person acting on behalf of a
Portfolio is authorized, in recognition of the value of research
products or services, to pay a commission in excess of that which
another broker or dealer might have charged for effecting the same
transaction. The Adviser may also receive research in connection
with selling concessions and designations in fixed price offerings
in which the Portfolios participate. Research products or
services furnished by brokers and dealers may be used in servicing
any or all of the clients of the Adviser and not all such research
products or services are used in connection with the management of
the Portfolios.
With respect to a Portfolio's purchases and sales of
portfolio securities transacted with a broker or dealer on a net
basis, the Adviser may also consider the part, if any, played by
the broker or dealer in bringing the security involved to the
Adviser's attention, including investment research related to the
security and provided to the Portfolio.
Advisor Trust and Base Trust have arranged for the custodian
to act as a soliciting dealer to accept any fees available to the
custodian as a soliciting dealer in connection with any tender
offer for portfolio securities. The custodian will credit any
such fees received against its custodial fees. In addition, the
Board of Trustees has reviewed the legal developments pertaining
to and the practicability of attempting to recapture underwriting
discounts or selling concessions when portfolio securities are
purchased in underwritten offerings. However, the Board has been
advised by counsel that recapture by a mutual fund currently is
not permitted under the Rules of the Association of the National
Association of Securities Dealers.
ADDITIONAL INCOME TAX CONSIDERATIONS
Each Fund and each Portfolio intend to comply with the
special provisions of the Internal Revenue Code that relieve it of
federal income tax to the extent of its net investment income and
capital gains currently distributed to shareholders.
Because dividend and capital gain distributions reduce net
asset value, a shareholder who purchases shares shortly before a
record date will, in effect, receive a return of a portion of his
investment in such distribution. The distribution would
nonetheless be taxable to him, even if the net asset value of
shares were reduced below his cost. However, for federal income
tax purposes the shareholder's original cost would continue as his
tax basis.
Each Fund expects that less than 100% of its dividends will
qualify for the deduction for dividends received by corporate
shareholders.
To the extent a Portfolio invests in foreign securities, it
may be subject to withholding and other taxes imposed by foreign
countries. Tax treaties between certain countries and the United
States may reduce or eliminate such taxes. Investors may be
entitled to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in
the Code. Specifically, if more than 50% its total assets at the
close of any fiscal year consist of stock or securities of foreign
corporations, the Portfolio may file an election with the Internal
Revenue Service pursuant to which shareholders of the Fund will be
required to (i) include in ordinary gross income (in addition to
taxable dividends actually received) their pro rata shares of
foreign income taxes paid even though not actually received, (ii)
treat such respective pro rata shares as foreign income taxes paid
by them, and (iii) deduct such pro rata shares in computing their
taxable incomes, or, alternatively, use them as foreign tax
credits, subject to applicable limitations, against their United
States income taxes. Shareholders who do not itemize deductions
for federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign taxes paid by a Fund,
although such shareholders will be required to include their share
of such taxes in gross income. Shareholders who claim a foreign
tax credit may be required to treat a portion of dividends
received from a Fund as separate category income for purposes of
computing the limitations on the foreign tax credit available to
such shareholders. Tax-exempt shareholders will not ordinarily
benefit from this election relating to foreign taxes. Each year,
the Funds will notify shareholders of the amount of (i) each
shareholder's pro rata share of foreign income taxes paid and (ii)
the portion of dividends which represents income from each foreign
country, if the Fund qualifies to pass along such credit.
Advisor High-Yield Municipals Fund. This Fund intends to
distribute substantially all of its income, tax-exempt and
taxable, including any net realized capital gains, and thereby be
relieved of any federal income tax liability to the extent of such
distributions. The Fund intends to retain for its shareholders
the tax-exempt status with respect to tax-exempt income received.
The distributions will be designated as "exempt-interest
dividends," taxable ordinary income, and capital gains. High-
Yield Municipals Portfolio may also invest in Municipal Securities
the interest on which is subject to the federal alternative
minimum tax. The source of exempt-interest dividends on a state-
by-state basis and the federal income tax status of all
distributions will be reported to shareholders annually. Such
report will allocate income dividends between tax-exempt, taxable
income, and alternative minimum taxable income in approximately
the same proportions as its total income during the year.
Accordingly, income derived from each of these sources may vary
substantially in any particular distribution period from the
allocation reported to shareholders annually. The proportion of
such dividends that constitutes taxable income will depend on the
relative amounts of assets invested in taxable securities, the
yield relationships between taxable and tax-exempt securities, and
the period of time for which such securities are held. High-Yield
Municipals Portfolio may, under certain circumstances, temporarily
invest its assets so that less than 80% of gross income during
such temporary period will be exempt from federal income taxes.
(See Investment Policies.)
Because capital gain distributions reduce net asset value, if
a shareholder purchases shares shortly before a record date he
will, in effect, receive a return of a portion of his investment
in such distribution. The distribution would nonetheless be
taxable to him, even if the net asset value of shares were reduced
below his cost. However, for federal income tax purposes the
shareholder's original cost would continue as his tax basis.
Because the taxable portion investment income of Advisor
High-Yield Municipals Fund consists primarily of interest, none of
its dividends, whether or not treated as "exempt-interest
dividends," will qualify under the Internal Revenue Code for the
dividends received deduction available to corporations.
Interest on indebtedness incurred or continued by
shareholders to purchase or carry shares of Advisor High-Yield
Municipals Fund is not deductible for federal income tax purposes.
Under rules applied by the Internal Revenue Service to determine
whether borrowed funds are used for the purpose of purchasing or
carrying particular assets, the purchase of shares may, depending
upon the circumstances, be considered to have been made with
borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares.
If you redeem at a loss shares of Advisor High-Yield
Municipals Fund held for six months or less, that loss will not be
recognized for federal income tax purposes to the extent of
exempt-interest dividends you have received with respect to those
shares. If any such loss exceeds the amount of the exempt-
interest dividends you received, that excess loss will be treated
as a long-term capital loss to the extent you receive any long-
term capital gain distribution with respect to those shares.
Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds
should consult their own tax advisors before purchasing shares.
Such persons may find investment in Advisor High-Yield Municipals
Fund unsuitable for tax reasons. Corporate investors may also
wish to consult their own tax advisors before purchasing shares.
In addition, certain property and casualty insurance companies,
financial institutions, and United States branches of foreign
corporations may be adversely affected by the tax treatment of the
interest on Municipal Securities.
INVESTMENT PERFORMANCE
A Bond Fund and Advisor High-Yield Municipals Fund may quote
yield figures from time to time. The "Yield" of a Bond Fund is
computed by dividing the net investment income per share earned
during a 30-day period (using the average number of shares
entitled to receive dividends) by the net asset value per share on
the last day of the period. The Yield formula provides for
semiannual compounding which assumes that net investment income is
earned and reinvested at a constant rate and annualized at the end
of a six-month period. For a given period, an "Average Annual
Total Return" may be computed by finding the average annual
compounded rate that would equate a hypothetical initial amount
invested of $1,000 to the ending redeemable value.
6
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1) -1].
Where: a = dividends and interest earned during the period
. (For this purpose, the Fund will recalculate the
yield to maturity based on market value of each
portfolio security on each business day on which
net asset value is calculated.)
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the ending net asset value of Institutional High
Yield Fund for the period.
_____________________
A Fund may quote certain total return figures from time to
time. A "Total Return" on a per share basis is the amount of
dividends distributed per share plus or minus the change in the
net asset value per share for a period. A "Total Return
Percentage" may be calculated by dividing the value of a share at
the end of a period by the value of the share at the beginning of
the period and subtracting one. For a given period, an "Average
Annual Total Return" may be computed by finding the average annual
compounded rate that would equate a hypothetical initial amount
invested of $1,000 to the ending redeemable value.
n
Average Annual Total Return is computed as follows: ERV = P(1+T)
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of the period (or fractional portion thereof).
Each Fund invests all of its net investable assets in a
separate series of Base Trust, which series has the same
investment objective and substantially the same investment
policies as the respective Fund (each such series hereinafter
referred to as a "Portfolio"). The historical performance of each
Fund's shares for all periods are based on the performance of a
Fund's respective Portfolio restated to reflect 12b-1 fees and
other expenses applicable to Class K shares as set forth in the
Prospectus without giving effect to any fee reimbursements
described therein and assuming reinvestment of dividends and
capital gains. Historical performance as restated should not be
interpreted as indicative of a Fund's future performance. The
average annual total returns for Class K shares of each Fund as of
Sept. 30, 1997 and Dec. 31, 1997 were as follows:
1 year 5 Years 10 years
9/30 12/31 9/30 12/31 9/30 12/31
------------ ------------ ------------
Advisor High-Yield
Municipals Fund
Advisor Intermediate
Bond Fund
Advisor Income Fund
Investment performance figures assume reinvestment of all
dividends and distributions and do not take into account any
federal, state, or local income taxes which shareholders must pay
on a current basis. The performance of a Fund is a result of
conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information
is useful in reviewing a Fund's performance and in providing some
basis for comparison with other investment alternatives, it should
not be used for comparison with other investments using different
reinvestment assumptions or time periods.
A Fund may note its mention or recognition in newspapers,
magazines, or other media from time to time. However, the Funds
assume no responsibility for the accuracy of such data.
Newspapers and magazines which might mention the Funds include,
but are not limited to, the following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Associated Press
Barron's
Bloomberg
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Decoder
Gourmet
Individual Investor
Investment Adviser
Investment Dealers' Digest
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsweek
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
Working Women
Worth
Your Money
In advertising and sales literature, a Fund may compare its
performance with that of other mutual funds, indexes or averages
of other mutual funds, indexes of related financial assets or
data, and other competing investment and deposit products
available from or through other financial institutions. The
composition of these indexes or averages differs from that of the
Funds. Comparison of a Fund to an alternative investment should
be made with consideration of differences in features and expected
performance.
All of the indexes and averages noted below will be obtained
from the indicated sources or reporting services, which the Funds
believe to be generally accurate.
All of the Funds may compare their performance to the
Consumer Price Index (All Urban), a widely recognized measure of
inflation.
Each Fund's performance may be compared to the following
indexes or averages:
Dow-Jones Industrial Average New York Stock Exchange Composite Index
Standard & Poor's 500 Stock Index American Stock Exchange Composite Index
Standard & Poor's 400 Industrials Nasdaq Composite
Wilshire 5000 Nasdaq Industrials
(These indexes are widely (These indexes generally reflect the
recognized indicators of general performance of stocks traded in the
U.S. stock market results.) indicated markets.)
In addition, the Funds may compare performance as indicated
below:
Benchmark Fund(s)
- -------------------------------------- -----------------------------
Lehman Aggregate Index Advisor Intermediate Bond Fund
Lehman Brothers Municipal Bond Index Advisor High-Yield Municipals
Fund
Lehman Government/Corporate Index Advisor Intermediate Bond Fund
Lehman Intermediate Corporate Bond Index Advisor Income Fund
Lehman Intermediate Government/Corporate
Index Advisor Intermediate Bond Fund
Lipper All Long-Term Fixed Income Funds
Average Advisor Intermediate Bond Fund,
Advisor Income Fund
Lipper Corporate Bond Funds (A Rated)
Average Advisor Intermediate Bond Fund
Lipper Corporate Bond Funds (BBB Rated)
Average Advisor Income Fund
Lipper High-Yield Municipal Bond Funds
Average Advisor High-Yield Municipals
Fund
Lipper Intermediate-Term (5-10 Year)
Investment Grade Debt Funds Average Advisor Intermediate Bond Fund
Lipper Long-Term Taxable Bond Funds
Average Advisor Intermediate Bond Fund,
Advisor Income Fund
Lipper Municipal Bond Fund Average Advisor High-Yield Municipals
Fund
Merrill Lynch Corporate and Government
Master Index Advisor Intermediate Bond Fund,
Advisor Income Fund
Merrill Lynch High-Yield Master Index Advisor Income Fund
Morningstar All Long-Term Fixed Income
Funds Average Advisor Intermediate Bond Fund,
Advisor Income Fund
Morningstar Corporate Bond (General)
Average Advisor Income Fund
Morningstar Corporate Bond (High
Quality) Average Advisor Intermediate Bond Fund
Morningstar Long-Term Tax-Exempt Fund
Average Advisor High-Yield Municipals
Fund
Morningstar Long-Term Taxable Bond
Funds Average Advisor Intermediate Bond Fund,
Advisor Income Fund
Morningstar Municipal Bond (High-Yield)
Funds Average Advisor High-Yield Municipals
Fund
Salomon Brothers Broad Investment
Grade Bond Index Advisor Intermediate Bond Fund,
Advisor Income Fund
The Lipper and Morningstar averages are unweighted averages
of total return performance of mutual funds as classified,
calculated, and published by these independent services that
monitor the performance of mutual funds. The Funds may also use
comparative performance as computed in a ranking by Lipper or
category averages and rankings provided by another independent
service. Should Lipper or another service reclassify a Fund to a
different category or develop (and place a Fund into) a new
category, that Fund may compare its performance or ranking with
those of other funds in the newly assigned category, as published
by the service.
A Fund may also cite its rating, recognition, or other
mention by Morningstar or any other entity. Morningstar's rating
system is based on risk-adjusted total return performance and is
expressed in a star-rating format. The risk-adjusted number is
computed by subtracting a fund's risk score (which is a function
of the fund's monthly returns less the 3-month T-bill return) from
its load-adjusted total return score. This numerical score is
then translated into rating categories, with the top 10% labeled
five star, the next 22.5% labeled four star, the next 35% labeled
three star, the next 22.5% labeled two star, and the bottom 10%
one star. A high rating reflects either above-average returns or
below-average risk, or both.
Of course, past performance is not indicative of future
results.
________________
To illustrate the historical returns on various types of
financial assets, the Funds may use historical data provided by
Ibbotson Associates, Inc. ("Ibbotson"), a Chicago-based investment
firm. Ibbotson constructs (or obtains) very long-term (since
1926) total return data (including, for example, total return
indexes, total return percentages, average annual total returns
and standard deviations of such returns) for the following asset
types:
Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
_____________________
A Fund may also use hypothetical returns to be used as an
example in a mix of asset allocation strategies. One such example
is reflected in the chart below, which shows the effect of tax
deferral on a hypothetical investment. This chart assumes that an
investor invested $2,000 a year on Jan. 1, for any specified
period, in both a Tax-Deferred Investment and a Taxable
Investment, that both investments earn either 6%, 8% or 10%
compounded annually, and that the investor withdrew the entire
amount at the end of the period. (A tax rate of 39.6% is applied
annually to the Taxable Investment and on the withdrawal of
earnings on the Tax-Deferred Investment.)
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
INTEREST RATE 6% 8% 10% 6% 8% 10%
Compounding
Years Tax-Deferred Investment Taxable Investment
30 $124,992 $171,554 $242,340 $109,197 $135,346 $168,852
25 90,053 115,177 150,484 82,067 97,780 117,014
20 62,943 75,543 91,947 59,362 68,109 78,351
15 41,684 47,304 54,099 40,358 44,675 49,514
10 24,797 26,820 29,098 24,453 26,165 28,006
5 11,178 11,613 12,072 11,141 11,546 11,965
1 2,072 2,096 2,121 2,072 2,096 2,121
Another example of hypothetical returns is reflected in the chart
below, which shows the effect of tax-exempt investing on a
hypothetical investment. Tax-exempt income, however, may be
subject to state and local taxes and the federal alternative
minimum tax. Marginal tax brackets are based on 1993 federal tax
rates and are subject to change. "Joint Return" is based on two
exemptions and "Single return" is based on one exemption. The
results would differ for different numbers of exemptions.
TAX-EQUIVALENT YIELDS
A taxable
investment must yield the following
Taxable Income (thousands) Marginal to equal a tax-exempt yield of:
- ----------------------------- Tax ----------------------------------
Joint Return Single Return Bracket 4% 5% 6% 7% 8%
- -------------- ------------- -------- ---- ---- ---- ----- -----
$0.0 - 36.9 $0.0 - 22.1 15% 4.71 5.88 7.06 8.24 9.41
$36.9 - 89.2 $22.1 - 53.5 28% 5.56 6.94 8.33 9.72 11.11
$89.2 - 140.0 $53.5 - 115.0 31% 5.80 7.25 8.70 10.14 11.59
$140.0 - 250.0 $115.0 - 250.0 36% 6.25 7.81 9.38 10.94 12.50
$250.0+ $250.0+ 39.6% 6.62 8.28 9.93 11.59 13.25
Dollar Cost Averaging. Dollar cost averaging is an
investment strategy that requires investing a fixed amount of
money in Fund shares at set intervals. This allows you to
purchase more shares when prices are low and fewer shares when
prices are high. Over time, this tends to lower your average cost
per share. Like any investment strategy, dollar cost averaging
can't guarantee a profit or protect against losses in a steadily
declining market. Dollar cost averaging involves uninterrupted
investing regardless of share price and therefore may not be
appropriate for every investor.
APPENDIX--RATINGS
Ratings in General. A rating of a rating service represents the
service's opinion as to the credit quality of the security being
rated. However, the ratings are general and are not absolute
standards of quality or guarantees as to the creditworthiness of
an issuer. Consequently, the Adviser believes that the quality of
debt securities should be continuously reviewed and that
individual analysts give different weightings to the various
factors involved in credit analysis. A rating is not a
recommendation to purchase, sell or hold a security, because it
does not take into account market value or suitability for a
particular investor. When a security has received a rating from
more than one service, each rating should be evaluated
independently. Ratings are based on current information furnished
by the issuer or obtained by the rating services from other
sources that they consider reliable. Ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability
of such information, or for other reasons. The Adviser, through
independent analysis, attempts to discern variations in credit
ratings of the published services, and to anticipate changes in
credit ratings. The following is a description of the
characteristics of certain ratings used by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"),
and Fitch Investors Service, L.P. ("Fitch").
Ratings by Moody's
Corporate and Municipal Bonds: Aaa. Bonds rated Aaa 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. Although the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group 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
as in Aaa bonds 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 bonds.
A. Bonds rated A 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 which suggest
a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered 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 which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
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 which are rated B 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 which are rated Caa 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 which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C. Bonds which are rated C 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. Municipal 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 condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or
elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the
Aa through B classifications of its municipal bond rating system
and in the Aa through Caa 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 mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
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.
Ratings by S&P:
Corporate and Municipal Bonds: AAA. Bonds rated AAA have
the highest rating. Capacity to pay interest and repay principal
is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the higher rated
issues only in small degree.
A. Bonds rated A 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 bonds in higher-rated categories.
BBB. Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in this
category than for bonds in higher-rated categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC, or C is
regarded, on balance, as predominantly speculative 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 of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in default, and payment of interest
and/or repayment of principal is in arrears. The D rating also is
issued upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
NOTE: 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 ratings categories. Foreign debt is rated on the
same basis as domestic debt measuring the creditworthiness of the
issuer; ratings of foreign debt do not take into account currency
exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and
certain other obligations that S&P believes may experience high
volatility or high variability in expected returns due to non-
credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities,
or currencies; certain swaps and options; and interest only and
principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.
Provisional Ratings. The letter "p" indicates that the
rating of a municipal bond 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 comment 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+.
Ratings By Fitch
Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to
investors in determining the credit risk associated with a
particular security. The ratings represent Fitch's assessment of
the issuer's ability to meet the obligations of a specific debt or
preferred issue in a timely manner. The rating takes into
consideration special features of the issue, its relationship to
other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and
any guarantor, as well as the economic and political environment
that might affect the issuer's future financial strength and
credit quality.
Fitch ratings do not reflect any credit enhancement that may
be provided by insurance policies or financial guaranties unless
otherwise indicated.
Fitch ratings are not recommendations to buy, sell, or hold
any security. Ratings do not comment on the adequacy of market
price, the suitability of any security for a particular investor,
or the tax-exempt nature or taxability of payments made in respect
of any security. Fitch ratings are based on information obtained
from issuers, other obligors, underwriters, their experts, and
other sources Fitch believes to be reliable. Fitch does not audit
or verify the truth or accuracy of such information. Ratings may
be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA. Bonds and preferred stock 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 and preferred stock considered to be investment
grade and of very high credit quality. The obligor's ability to
pay interest and/or dividends and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bond and
preferred 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 and preferred stock considered to be investment
grade and of high quality. The obligor's ability to pay interest
and/or dividends and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic
conditions and circumstances than debt or preferred securities
with higher ratings.
BBB. Bonds and preferred stock 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 or preferred will fall
below investment grade is higher than for securities with higher
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 bonds 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 which,
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 bonds 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 bonds, and D represents
the lowest potential for recovery.
Plus (+) or Minus (-). Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit within
the rating category. Plus and minus signs, however, are not used
in the AAA, DDD, DD or D categories.
NR. Indicates that Fitch does not rate the specific issue.
Conditional. A conditional rating is premised on the
successful completion of a project or the occurrence of a specific
event.
Suspended. A rating is suspended when Fitch deems the amount
of information available from the issuer to be inadequate for
rating purposes.
Withdrawn. A rating will be withdrawn when an issue matures
or is called or refinanced, and, at Fitch's discretion, when an
issuer fails to furnish proper and timely information.
FitchAlert. Ratings are placed on FitchAlert to notify
investors of an occurrence that is likely to result in a rating
change and the likely direction of such change. These are
designated as "Positive," indicating a potential upgrade,
"Negative," for potential downgrade, or "Evolving," where ratings
may be raised or lowered. FitchAlert is relatively short-term and
should be resolved within 12 months.
Ratings Outlook. An outlook is used to describe the most
likely direction of any rating change over the intermediate term.
It is described as "Positive" or "Negative." The absence of a
designation indicates a stable outlook.
Short-Term Ratings
F-1+. Exceptionally Strong Credit Quality. Issues assigned
this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Very Strong Credit Quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less
in degree than issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have
a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+ and
F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could
cause these securities to be rated below investment grade.
F-S. Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D. Default. Issues assigned this rating are in actual or
imminent payment default.
<PAGE>
Balance Sheets
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) 1. Financial statements included in Part A of this
Registration Statement: Financial Highlights.
2. Financial statements included in Part B of this
Registration Statement:
(a) Balance sheet as of February 6, 1997 and report of
independent public accountants.
(b) Unaudited financial statements (schedule of
investments, balance sheet, statement of operations,
statement of changes in net assets, and notes thereto)
as of June 30, 1997, relating to the series Stein
Roe Advisor Growth Stock Fund.
(c) Unaudited financial statements (schedules of
investments, balance sheets, statements of operations,
statements of changes in net assets, and notes thereto)
as of March 31, 1997, relating to the series Stein
Roe Advisor Growth & Income Fund, Stein Roe Advisor
Balanced Fund, Stein Roe Advisor International Fund,
Stein Roe Advisor Special Venture Fund, Stein Roe
Advisor Growth Stock Fund, and Stein Roe Advisor
Special Fund are incorporated by reference to the
Registrant's March 31, 1997 semiannual reports.
(b) Exhibits: [Note: As used herein, the term "Registration
Statement" refers to the Registration Statement of the
Registrant on Form N-1A under the Securities Act of 1933, No.
333-17255. The terms "Pre-Effective Amendment" and "PEA"
refer, respectively, to a pre-effective amendment and a post-
effective amendment to the Registration Statement.]
1. Agreement and Declaration of Trust as amended through
December 13, 1996. (Exhibit 1 to Pre-Effective Amendment
#1.)*
2. By-Laws of Registrant. (Exhibit 2 to Registration
Statement.)*
3. None.
4. None.
5. None.
6. (a) Underwriting agreement between Registrant and Liberty
Securities Corporation dated April 30, 1997. (Exhibit
6 to PEA No. 1.)*
(b) Form of underwriting agreement between Registrant and
Colonial Investment Services, Inc. (Exhibit 5(b) to PEA
#4.)*
(c) Selling agreement. (Exhibit 6(c) to PEA #2.)*
7. None.
8. Custodian contract between Registrant and State Street
Bank and Trust Company dated February 13, 1997. (Exhibit 8
to PEA #1.)*
9. (a) Shareholder servicing and transfer agency agreement
between Registrant and SteinRoe Services Inc. dated
February 14, 1997. (Exhibit 9(a) to PEA #1.)*
(b) Administrative agreement between Registrant and Stein
Roe & Farnham Incorporated dated February 14, 1997.
(Exhibit 9(b) to PEA #1.)*
(c) Accounting and bookkeeping agreement between Registrant
and Stein Roe & Farnham Incorporated dated February 14,
1997. (Exhibit 9(c) to PEA #1.)*
(d) Sub-transfer agent agreement between SteinRoe Services
Inc. and Colonial Investors Service Center, Inc. as
amended through June 30, 1997. (Exhibit 9(d) to PEA
#1.)*
(e) Form of shareholders servicing and transfer agency
agreement between Registrant and Colonial Investors
Service Center, Inc. (Exhibit 9(e) to PEA #2.)*
10. (a) Opinion and consent of Bell, Boyd & Lloyd relating to
Stein Roe Advisor Growth & Income Fud, Stein Roe
Advisor International Fund, Stein Roe Advisor Young
Investor Fund, Stein Roe Advisor Special Venture Fund,
Stein Roe Advisor Balanced Fund, Stein Roe Advisor
Growth Stock Fund, and Stein Roe Advisor Special Fund.
(Exhibit 10 to Pre-Effective Amendment #1.)*
(b) Opinion and consent of Bell, Boyd & Lloyd with respect
Stein Roe Advisor High-Yield Municipals Fund, Stein Roe
Advisor Intermediate Bond Fund, and Stein Roe Advisor
Income Fund.
11. Consent of Arthur Andersen LLP.
12. None.
13. Subscription agreements. (Exhibit 13 to Pre-Effective
Amendment No. 2.)*
14. None.
15. (a) 12b-1 plan and agreement. (Exhibit 15 to Pre-
Effective Amendment No. 2.)*
(b) Amended 12b-1 plan. (Exhibit 15(b) to PEA #2.)*
16. Schedule of computation of performance data. (Exhibit 16 to
PEA #4.)*
17 (a) Financial data schedule--Stein Roe Advisor Growth &
Income Fund
(b) Financial data schedule--Stein Roe Advisor
International Fund
(c) Financial data schedule--Stein Roe Advisor Young
Investor Fund
(d) Financial data schedule--Stein Roe Advisor Special
Venture Fund
(e) Financial data schedule--Stein Roe Advisor Balanced
Fund
(f) Financial data schedule--Stein Roe Advisor Growth
Stock Fund
(g) Financial data schedule--Stein Roe Advisor Special Fund
18. Rule 18f-3 plan. (Exhibit 18 to PEA #4.)
- -----------
*Incorporated by reference.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
The Registrant does not consider that it is directly or indirectly
controlling, controlled by, or under common control with other
persons within the meaning of this Item. See "Investment Advisory
Services," "Management," and "Transfer Agent" in the Statement of
Additional Information, each of which is incorporated herein by
reference.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Number of Record Holders
Title of Series as of September 30, 1997
--------------- ------------------------
Stein Roe Advisor Growth & Income Fund 1
Stein Roe Advisor International Fund 1
Stein Roe Advisor Young Investor Fund 2
Stein Roe Advisor Special Venture Fund 1
Stein Roe Advisor Balanced Fund 1
Stein Roe Advisor Growth Stock Fund 2
Stein Roe Advisor Special Fund 1
ITEM 27. INDEMNIFICATION.
Article VIII of the Agreement and Declaration of Trust of
Registrant (Exhibit 1), which Article is incorporated herein by
reference, provides that Registrant shall provide indemnification
of its trustees and officers (including persons who serve or
have served at Registrant's request as directors, officers, or
trustees of another organization in which Registrant has any
interest as a shareholder, creditor or otherwise) ("Covered
Persons") under specified circumstances.
Section 17(h) of the Investment Company Act of 1940 ("1940 Act")
provides that neither the Agreement and Declaration of Trust nor
the By-Laws of Registrant, nor any other instrument pursuant to
which Registrant is organized or administered, shall contain any
provision which protects or purports to protect any trustee or
officer of Registrant against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. In
accordance with Section 17(h) of the 1940 Act, Article VIII shall
not protect any person against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Unless otherwise permitted under the 1940 Act,
(i) Article VIII does not protect any person against any
liability to Registrant or to its shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of his office;
(ii) in the absence of a final decision on the merits by a
court or other body before whom a proceeding was brought that a
Covered Person was not liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his office, indemnification is permitted under Article
VIII if (a) approved as in the best interest of the Registrant,
after notice that it involves such indemnification, by at least a
majority of the Trustees who are disinterested persons are not
"interested persons" as defined in Section 2(a)(19) of the 1940
Act ("disinterested trustees"), upon determination, based upon a
review of readily available facts (but not a full trial-type
inquiry) that such Covered Person is not liable to the Registrant
or its shareholders by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of such Covered Person's office or (b) there has been
obtained a opinion in writing of independent legal counsel, based
upon a review of readily available facts (but not a full trial-
type inquiry) to the effect that such indemnification would not
protect such Covered Person against any liability to the Trust to
which such Covered Person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office; and
(iii) Registrant will not advance expenses, including
counsel fees(but excluding amounts paid in satisfaction of
judgments, in compromise or as fines or penalties), incurred by a
Covered Person unless Registrant receives an undertaking by or on
behalf of the Covered Person to repay the advance if it is
ultimately determined that indemnification of such expenses is not
authorized by Article VII and (a) the Covered Person provides
security for his undertaking, or (b) Registrant is insured against
losses arising by reason of such Covered Person's failure to
fulfill his undertaking, or (c) a majority of the disinterested
trustees of Registrant or an independent legal counsel as
expressed in a written opinion, determine, based on a review of
readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Covered Person ultimately
will be found entitled to indemnification.
Any approval of indemnification pursuant to Article VIII does not
prevent the recovery from any Covered Person of any amount paid to
such Covered Person in accordance with Article VIII as
indemnification if such Covered Person is subsequently adjudicated
by a court of competent jurisdiction to have been liable to the
Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties
involved in the conduct of such Covered Person's office.
Article VIII also provides that its indemnification provisions
are not exclusive.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers, and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by Registrant of expenses incurred or paid by a trustee, officer,
or controlling person of Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such trustee,
officer, or controlling person in connection with the securities
being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Registrant, its trustees and officers, its investment adviser, the
other investment companies advised by the adviser, and persons
affiliated with them are insured against certain expenses in
connection with the defense of actions, suits, or proceedings, and
certain liabilities that might be imposed as a result of such
actions, suits, or proceedings. Registrant will not pay any
portion of the premiums for coverage under such insurance that
would (1) protect any trustee or officer against any liability to
Registrant or its shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his office or (2) protect its investment adviser or
principal underwriter, if any, against any liability to Registrant
or its shareholders to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of its duties, or by reason of its
reckless disregard of its duties and obligations under its
contract or agreement with the Registrant; for this purpose the
Registrant will rely on an allocation of premiums determined by
the insurance company.
Registrant, its trustees, officers, employees and representatives
and each person, if any, who controls the Registrant within the
meaning of Section 15 of the Securities Act of 1933 are
indemnified by the distributor of Registrant's shares (the
"distributor"), pursuant to the terms of the distribution
agreement, which governs the distribution of Registrant's shares,
against any and all losses, liabilities, damages, claims and
expenses arising out of the acquisition of any shares of the
Registrant by any person which (i) may be based upon any wrongful
act by the distributor or any of the distributor's directors,
officers, employees or representatives or (ii) may be based upon
any untrue or alleged untrue statement of a material fact
contained in a registration statement, prospectus, statement of
additional information, shareholder report or other information
covering shares of the Registrant filed or made public by the
Registrant or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement
therein not misleading if such statement or omission was made in
reliance upon information furnished to the Registrant by the
distributor in writing. In no case does the distributor's
indemnity indemnify an indemnified party against any liability to
which such indemnified party would otherwise be subject by reason
of willful misfeasance, bad faith, or negligence in the
performance of its or his duties or by reason of its or his
reckless disregard of its or his obligations and duties under the
distribution agreement.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser is a wholly-owned subsidiary of SteinRoe Services Inc.
("SSI"), which in turn is a wholly-owned subsidiary of Liberty
Financial Companies, Inc., which is a majority owned subsidiary of
LFC Holdings, Inc., which in turn is a subsidiary of Liberty
Mutual Equity Corporation, which in turn is a subsidiary of
Liberty Mutual Insurance Company. The Adviser acts as investment
adviser to individuals, trustees, pension and profit-sharing
plans, charitable organizations, and other investors. In addition
to Registrant, it also acts as investment adviser to other
investment companies having different investment policies.
For a two-year business history of officers and directors of the
Adviser, please refer to the Form ADV of Stein Roe & Farnham
Incorporated and to the section of the statement of additional
information (part B) entitled "Investment Advisory Services."
Certain directors and officers of the Adviser also serve and have
during the past two years served in various capacities as
officers, directors, or trustees of SSI and of the Registrant,
SR&F Base Trust, and/or other investment companies managed by the
Adviser. (The listed entities are located at One South Wacker
Drive, Chicago, Illinois 60606, except for SteinRoe Variable
Investment Trust and Keyport Variable Investment Trust, which are
located at Federal Reserve Plaza, Boston, MA 02210 and LFC
Utilities Trust, which is located at One Financial Center, Boston,
MA 02111.) A list of such capacities is given below.
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
STEINROE SERVICES INC.
Gary A. Anetsberger Vice President
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President; Secretary
Kenneth J. Kozanda Vice President; Treasurer
Kenneth R. Leibler Director
C. Allen Merritt, Jr. Director; Vice President
Hans P. Ziegler Director, President, Vice Chairman
Chairman
SR&F BASE TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President; Secy.
Thomas W. Butch Executive Vice-President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Lynn C. Maddox Vice-President
Jane M. Naeseth Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INCOME TRUST; STEIN ROE INSTITUTIONAL TRUST; AND
STEIN ROE TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Thomas W. Butch Executive Vice-President Vice-President
Philip J. Crosley Vice-President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INVESTMENT TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Arthur J. McQueen Vice-President
Richard B. Peterson Vice-President
M. Gerard Sandel Vice-President
Gloria J. Santella Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE ADVISOR TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Arthur J. McQueen Vice-President
Richard B. Peterson Vice-President
M. Gerard Sandel Vice-President
Gloria J. Santella Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE MUNICIPAL TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Thomas W. Butch Executive Vice-President Vice-President
Joanne T. Costopoulos Vice-President
Philip J. Crosley Vice-President
Loren A. Hansen Executive Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Hans P. Ziegler Executive Vice-President
STEINROE VARIABLE INVESTMENT TRUST
Gary A. Anetsberger Treasurer
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President
E. Bruce Dunn Vice President
Erik P. Gustafson Vice President
Harvey B. Hirschhorn Vice President
Michael T. Kennedy Vice President
Jane M. Naeseth Vice President
Richard B. Peterson Vice President
LFC UTILITIES TRUST
Gary A. Anetsberger Vice President
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
KEYPORT VARIABLE INVESTMENT TRUST
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
ITEM 29. PRINCIPAL UNDERWRITERS.
Registrant's principal underwriter, Colonial Investment Services,
Inc., a subsidiary of Colonial Management Associates, Inc., also
acts in the same capacity to Colonial Trust I, Colonial Trust II,
Colonial Trust III, Colonial Trust IV, Colonial Trust V, Colonial
Trust VI and Colonial Trust VII; and sponsor for Colonial Growth
Plans (public offering of which was discontinued on June 14, 197l).
The table below lists each director or officer of Colonial
Investment Services, Inc.
Position and Offices Positions and
Name and Principal with Principal Offices with
Business Address* Underwriter Registrant
- -------------------- --------------------- ---------------
Anderson, Judith Vice President None
Babbitt, Debra VP & Compliance Officer None
Ballou, Rich Regional Vice President None
Balzano, Christine R. Vice President None
Bartlett, John Senior Vice President None
Brown, Beth Vice President None
Burtman, Tracy Vice President None
Carroll, Greg Regional Vice President None
Chrzanowski, Daniel Regional Vice President None
Clapp, Elizabeth A. Vice President None
Crossfield, Andrew Regional Vice President None
Daniszewski, Joseph J. Vice President None
Davey, Cynthia Regional Sr. Vice President None
Desilets, Marian Vice President None
DiMaio, Steve Vice President None
Donovan, John Regional Vice President None
Downey, Christopher Vice President None
Eckelman, Bryan Senior Vice President None
Emerson, Kim P. Regional Vice President None
Erickson, Cynthia G. Senior Vice President None
Evans, C. Frazier Senior Vice President None
Feldman, David Senior Vice President None
Fifield, Robert Regional Vice President None
Gerokoulis, Stephen A. Senior Vice President None
Gibson, Stephen E. Director, Chairman of Board None
Goldberg, Matthew Regional Vice President None
Harasimowicz, Stephen Vice President None
Harrington, Tom Sr. Regional Vice President None
Hodgkins, Joseph Sr. Regional Vice President None
Iudice, Jr., Philip Treasurer and CFO None
Karagiannis, Marilyn Senior Vice President None
Kelley, Terry M. Regional Vice President None
Kelson, David W. Senior Vice President None
Menchen, Catherine Vice President None
Moberly, Ann R. Regional Sr. Vice President None
Morner, Patrick Vice President None
Nerney, Andrew Regional Vice President None
Nolin, Kevin Vice President None
O'Shea, Kevin Senior Vice President None
Predmore, Tracy Regional Vice President None
Reed, Christopher B. Sr. Regional Vice President None
Scarlott, Rebecca Vice President None
Schulman, David Regional Vice President None
Scoon, Davey Director None
Scott, Michael W. Senior Vice President None
Spanos, Gregory J. Senior Vice President None
Stern, Arthur O. Clerk and Counsel, Director None
Studer, Eric Regional Vice President None
Sutton, R. Andrew Regional Vice President None
Van Etten, Keith J. Vice President None
Villanova, Paul Regional Vice President None
Wallace, John Vice President None
Welsh, Stephen Treasurer None
Wess, Valerie Regional Vice President None
Young, Deborah Vice President None
- ---------
*The address for each individual is One Financial Center,
Boston, MA 02111.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Jilaine Hummel Bauer
Executive Vice-President and Secretary
One South Wacker Drive, Suite 3500
Chicago, Illinois 60606
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused
this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City
of Chicago and State of Illinois on the 17th day of November, 1997.
STEIN ROE ADVISOR TRUST
By TIMOTHY K. ARMOUR
Timothy K. Armour
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
Signature* Title Date
- ------------------------ --------------------- --------------
TIMOTHY K. ARMOUR President and Trustee Nov. 17, 1997
Timothy K. Armour
Principal Executive Officer
GARY A. ANETSBERGER Senior Vice-President Nov. 17, 1997
Gary A. Anetsberger
Principal Financial Officer
SHARON R. ROBERTSON Controller Nov. 17, 1997
Sharon R. Robertson
Principal Accounting Officer
KENNETH L. BLOCK Trustee Nov. 17, 1997
Kenneth L. Block
WILLIAM W. BOYD Trustee Nov. 17, 1997
William W. Boyd
LINDSAY COOK Trustee Nov. 17, 1997
Lindsay Cook
DOUGLAS A. HACKER Trustee Nov. 17, 1997
Douglas A. Hacker
JANET LANGFORD KELLY Trustee Nov. 17, 1997
Janet Langford Kelly
FRANCIS W. MORLEY Trustee Nov. 17, 1997
Francis W. Morley
CHARLES R. NELSON Trustee Nov. 17, 1997
Charles R. Nelson
THOMAS C. THEOBALD Trustee Nov. 17, 1997
Thomas C. Theobald
*This Registration Statement has also been signed by the above
persons in their capacities as trustees and officers of SR&F Base
Trust
<PAGE>
STEIN ROE ADVISOR TRUST
INDEX TO EXHIBITS FILED WITH THIS AMENDMENT
Exhibit
Number Description
- ------- -------------
10(b) Opinion and consent of Bell, Boyd & Lloyd
11 Consent of Arthur Andersen LLP
17(a) Financial data schedule--Stein Roe Advisor Growth &
Income Fund
(b) Financial data schedule--Stein Roe Advisor International
Fund
(c) Financial data schedule--Stein Roe Advisor Young
Investor Fund
(d) Financial data schedule--Stein Roe Advisor Special
Venture Fund
(e) Financial data schedule--Stein Roe Advisor Balanced Fund
(f) Financial data schedule--Stein Roe Advisor Growth
Stock Fund
(g) Financial data schedule--Stein Roe Advisor Special Fund
</TABLE>
BELL, BOYD & LLOYD
THREE FIRST NATIONAL PLAZA
70 WEST MADISON STREET, SUITE 3300
CHICAGO, ILLINOIS 60602-4207
312 372-1121
FAX 312 372-2098
November 17, 1997
Stein Roe Advisor Trust
One South Wacker Drive, #3500
Chicago, Illinois 60606-4685
Ladies and Gentlemen:
Stein Roe Advisor Trust
We have acted as counsel for Stein Roe Advisor Trust (the
"Trust") in connection with the registration under the
Securities Act of 1933 (the "Act") of an indefinite number of
shares of beneficial interest (the "Shares") of the
respective series of the Trust designated as follows:
Stein Roe Advisor High-Yield Municipals Fund
Stein Roe Advisor Income Fund
Stein Roe Advisor Intermediate Bond Fund
(each a "Fund") in registration statement no. 333-17255 on
form N-1A as amended by post-effective amendment no. 6
thereto (the "Registration Statement").
In this connection we have examined originals, or copies
certified or otherwise identified to our satisfaction, of
such documents, corporate and other records, certificates and
other papers as we deemed it necessary to examine for the
purpose of this opinion, including the agreement and
declaration of trust (the "Trust Agreement") and by-laws (the
"By-laws") of the Trust, actions of the board of trustees of
the Trust authorizing the issuance of shares of the Funds and
the Registration Statement.
We assume that, upon sale of the Shares, the Trust will
receive the authorized consideration therefor, which will at
least equal the net asset value of the Shares.
Based upon the foregoing, we are of the opinion that the
Trust is authorized to issue an unlimited number of Shares,
and that, when the Shares are issued and sold after the post-
effective amendment to the Registration Statement has been
declared effective and the authorized consideration therefor
is received by the Trust, they will be validly issued, fully
paid and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law,
shareholders could, under certain circumstances, be held
personally liable for the obligations of the Trust or any
series of the Trust (a "Series"). However, the Agreement and
Declaration of Trust disclaims shareholder liability for acts
or obligations of the Trust or any Series and requires that
notice of such disclaimer be given in every note, bond,
contract, instrument, certificate or other undertaking issued
by or on behalf of the Trust. The Agreement and Declaration
of Trust provides for indemnification out of property of a
particular Series for all loss and expense of any shareholder
of that Series held personally liable for obligations of that
Series. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to
circumstances in which the relevant Series would be unable to
meet its obligations.
In rendering the foregoing opinion, we have relied upon the
opinion of Ropes & Gray expressed in their letter to us dated
November 17, 1997.
We consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not
admit that we are in the category of persons whose consent is
required under section 7 of the Act.
Very truly yours,
BELL, BOYD & LLOYD
EXHIBIT 11
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
use of our report dated February 6, 1997, and to all
references to our Firm included in or made a part of this
Registration Statement on Form N-1A of the Stein Roe Advisor
Trust, (comprising the Stein Roe Advisor Balanced Fund, Stein
Roe Advisor Growth & Income Fund, Stein Roe Advisor Growth
Stock Fund, Stein Roe Advisor Special Fund, Stein Roe Advisor
Special Venture Fund, Stein Roe Advisor International Fund
and Stein Roe Advisor Young Investor Fund).
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 14, 1997
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<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> STEIN ROE ADVISOR GROWTH & INCOME FUND
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> STEIN ROE ADVISOR INTERNATIONAL FUND
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<PERIOD-START> FEB-14-1997
<PERIOD-END> MAR-31-1997
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<AVERAGE-NET-ASSETS> 99
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> (.04)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.97
<EXPENSE-RATIO> 65.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> STEIN ROE ADVISOR YOUNG INVESTOR FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> FEB-14-1997
<PERIOD-END> MAR-31-1997
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<PAID-IN-CAPITAL-COMMON> 100
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<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7)
<NET-ASSETS> 90
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> (3)
<APPREC-INCREASE-CURRENT> (7)
<NET-CHANGE-FROM-OPS> (10)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 100
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 90
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 97
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (1.00)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.00
<EXPENSE-RATIO> 109.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> STEIN ROE ADVISOR SPECIAL VENTURE FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> FEB-14-1997
<PERIOD-END> MAR-31-1997
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