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Prospectus Feb. 2, 1998
Stein Roe Advisor Funds
Stein Roe Advisor Balanced Fund
Stein Roe Advisor Growth & Income Fund
Stein Roe Advisor Special Fund
Stein Roe Advisor Special Venture Fund
Stein Roe Advisor International Fund
Advisor Balanced Fund seeks to provide long-term growth of capital
and current income, consistent with reasonable investment risk.
Advisor Growth & Income Fund seeks to provide both growth of
capital and current income.
Advisor Special Fund seeks to provide capital appreciation by
investing in securities that are considered to have limited downside
risk relative to their potential for above-average growth, including
securities of undervalued, underfollowed, or out-of-favor companies.
Advisor Special Venture Fund seeks to provide long-term capital
appreciation by investing primarily in a diversified portfolio of
equity securities of entrepreneurially managed companies. It
emphasizes investments in financially strong small and medium-sized
companies, based principally on management appraisal and stock
valuation.
Advisor International Fund seeks to provide long-term growth of
capital by investing in a diversified portfolio of foreign securities.
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 identical investment objective and substantially the same
investment policies as the Fund. The investment experience of each
Fund will correspond to its respective Portfolio. (See Master
Fund/Feeder Fund: Structure and Risk Factors.)
Fund shares may be purchased only through Intermediaries,
including retirement plan service providers.
The Funds have no sales or redemption charges. Each Fund is a
multi-class series of Stein Roe Advisor Trust (with only one class of
shares, designated Class K) and each Portfolio is a series of SR&F Base
Trust. Each Trust is an open-end management investment company.
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 Feb. 2, 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 and most recent financial statements 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
Financial Highlights.................7
The Funds............................9
Investment Policies..................9
Advisor Balanced Fund.............9
Advisor Growth & Income Fund......9
Advisor Special Fund.............10
Advisor Special Venture Fund.....10
Advisor International Fund.......10
Performance Information.............12
Risks and Investment Considerations.12
Investment Restrictions............ 14
Portfolio Investments and
Strategies.......................15
Net Asset Value.................... 18
How to Purchase Shares..............19
How to Redeem Shares................20
Distributions and Income Taxes......20
Management......................... 22
Organization and Description of
Shares............................25
Master Fund/Feeder Fund: Structure
and Risk Factors..................26
For More Information............... 28
SUMMARY
Stein Roe Advisor Balanced Fund ("Advisor Balanced Fund"), Stein Roe
Advisor Growth & Income Fund ("Advisor Growth & Income Fund"), Stein
Roe Advisor Special Fund ("Advisor Special Fund"), Stein Roe Advisor
Special Venture Fund ("Advisor Special Venture Fund") and Stein Roe
Advisor International Fund ("Advisor International Fund") are series of
Stein Roe Advisor Trust ("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. The investment objective of
Advisor Balanced Fund is to provide long-term growth of capital and
current income, consistent with reasonable investment risk. Advisor
Balanced Fund invests all of its net investable assets in SR&F Balanced
Portfolio ("Balanced Portfolio") which has the same investment
objective and investment policies substantially similar to those of
Advisor Balanced Fund. The assets of Balanced Portfolio are allocated
among equities, debt securities, and cash. The portfolio manager
determines those allocations based on the views of the Adviser's
investment strategists regarding economic, market, and other factors
relative to investment opportunities.
The investment objective of Advisor Growth & Income Fund is to
provide both growth of capital and current income. Advisor Growth &
Income Fund invests all of its net investable assets in SR&F Growth &
Income Portfolio ("Growth & Income Portfolio") which has the same
investment objective and investment policies substantially similar to
those of Advisor Growth & Income Fund. The Fund is designed for
investors seeking a diversified portfolio of securities that offers the
opportunity for long-term growth of capital while also providing a
steady stream of income. In seeking to meet this objective, Growth &
Income Portfolio invests primarily in well-established companies whose
common stocks are believed to have the potential both to appreciate in
value and to pay dividends to shareholders.
The investment objective of Advisor Special Fund is to provide
capital appreciation by investing in securities that are considered to
have limited downside risk relative to their potential for above-
average growth, including securities of undervalued, underfollowed, or
out-of-favor companies. Advisor Special Fund invests all of its net
investable assets in SR&F Special Portfolio ("Special Portfolio") which
has the same investment objective and investment policies substantially
similar to those of Advisor Special Fund. Particular emphasis is
placed on securities that are considered to have limited downside risk
relative to their potential for above-average growth--including
securities of undervalued, underfollowed or out-of-favor companies, and
companies that are low-cost producers of goods or services, financially
strong, or run by well-respected managers. Special Portfolio's
investments may include securities of seasoned, established companies
that appear to have appreciation potential, as well as securities of
relatively small, new companies; securities with limited marketability;
new issues of securities; securities of companies that, in the
Adviser's opinion, will benefit from management change, new technology,
new product or service development, or change in demand; and other
securities that the Adviser believes have capital appreciation
possibilities.
The investment objective of Advisor Special Venture Fund is to
provide long-term capital appreciation by investing primarily in a
diversified portfolio of equity securities of entrepreneurially managed
companies. Advisor Special Venture Fund invests all of its net
investable assets in SR&F Special Venture Portfolio ("Special Venture
Portfolio") which has the same investment objective and investment
policies substantially similar to those of Advisor Special Venture
Fund. Special Venture Portfolio emphasizes investments in financially
strong small and medium-sized companies, based principally on
management appraisal and stock valuation.
The investment objective of Advisor International Fund is to
provide long-term growth of capital by investing in a diversified
portfolio of foreign securities. Advisor International Fund invests
all of its net investable assets in SR&F International Portfolio
("International Portfolio") which has the same investment objective and
investment policies substantially similar to those of Advisor
International Fund. International Portfolio invests primarily in
equity securities. Under normal market conditions, it will invest at
least 65% of its total assets (taken at market value) in foreign
securities of at least three countries outside the United States.
International Portfolio diversifies its investments among several
countries and does not concentrate investments in any particular
industry.
For a more detailed discussion of the investment objectives and
policies, please see Investment Policies and Portfolio Investments and
Strategies. There is, of course, no guarantee that the Funds or the
Portfolios will achieve their investment objectives.
Investment Risks. Advisor Balanced Fund is designed for long-term
investors who can accept the fluctuations in portfolio value and other
risks associated with seeking long-term capital appreciation through
investments in securities. Advisor Growth & Income Fund is designed
for long-term investors who desire to participate in the stock market
with moderate investment risk while seeking to limit market volatility.
Advisor Special Fund is designed for long-term investors who desire to
participate in the stock market with more investment risk and
volatility than the stock market in general, but with less investment
risk and volatility than aggressive capital appreciation funds.
Advisor Special Venture Fund is designed for long-term investors who
want greater return potential than is available from the stock market
in general, and who are willing to tolerate the greater investment risk
and market volatility associated with investments in small and medium-
sized companies. Advisor International Fund is intended for long-term
investors who can accept the risks entailed in investing in foreign
securities.
Since International Portfolio invests primarily in foreign
securities and the other Portfolios may invest in foreign securities,
investors should understand and consider carefully the risks involved
in foreign investing. Investing in foreign securities involves certain
risks and opportunities not typically associated with investing in U.S.
securities. Such risks include fluctuations in exchange rates on
foreign currencies, less public information, less government
supervision, less liquidity, and greater price volatility.
Purchases and Redemptions. Fund shares may be purchased only through
Intermediaries, including retirement plan service providers. For
information on purchasing and redeeming Fund shares, please see How to
Purchase Shares, How to 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 each Fund and each Portfolio. For a
description of the Adviser and these service arrangements, see
Management.
FEE TABLE
Advisor Advisor Advisor
Advisor Growth Advisor Special Inter-
Balanced Stock Special Venture national
Fund Fund Fund Fund Fund
-------- ------ ------- ------- --------
Shareholder Transaction
Expenses /1/
Sales Load Imposed on
Purchases None None None None None
Sales Load Imposed on
Reinvested Dividends None None None None None
Deferred Sales Load None None None None None
Redemption Fees None None None None None
Exchange Fees None None None None None
Annual Fund Operating
Expenses (after reim-
bursement; as a per-
centage of average net
assets)
Management and Adminis-
trative Fees (after
reimbursement ) 0.00% 0.00% 0.00% 0.00% 0.00%
12b-1 Fees 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses (after
reimbursement) 1.10% 1.15% 1.20% 1.25% 1.50%
----- ----- ----- ----- -----
Total Fund Operating
Expenses (after
reimbursement) 1.35% 1.40% 1.45% 1.50% 1.75%
===== ===== ===== ===== =====
__________
1. Redemption proceeds exceeding $500 sent via federal funds wire
will be subject to a $7.50 charge per transaction.
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 5 years 10 years
Advisor Balanced Fund $14 $43 $74 $162
Advisor Growth & Income Fund 14 44 77 168
Advisor Special Fund 15 46 79 174
Advisor Special Venture Fund 15 47 82 179
Advisor International Fund 18 55 95 206
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 a Fund. The Fee Table reflects the combined expenses of
both the Funds and the Portfolios. Total Operating Expenses 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 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.
From time to time, the Adviser may voluntarily undertake to
reimburse a Fund for a portion of its operating expenses and its pro
rata share of the fees and expenses payable by its master Portfolio.
The Adviser has undertaken to reimburse each Fund for its operating
expenses and its pro rata share of the operating expenses of its
corresponding Portfolio to the extent such expenses exceed a specified
percentage of the Fund's annual average net assets. These commitments
expire on Jan. 31, 1999, subject to earlier review and possible
termination by the Adviser on 30 days' notice to the Fund. Any such
reimbursement will lower a Fund's overall expense ratio and increase
its overall return to investors. (Also see Management--Fees and
Expenses.) The following table shows each Fund's expense limit and
what its share of the Management Fee of its master Portfolio, the
Administrative Fee and Total Operating Expenses would be without the
reimbursement:
Management
and
Adminis- Total
trative Other Operating
Expense Fees Expenses Expenses
Limit (without reimbursement)
------- ----------------------------
Advisor Balanced Fund 1.35% 0.70% 86.88% 87.83%
Advisor Growth & Income
Fund 1.40 0.75 87.76 88.76
Advisor Special Fund 1.45 0.87 85.27 86.39
Advisor Special Venture
Fund 1.50 0.90 87.81 88.96
Advisor International
Fund 1.75 1.00 86.90 88.15
Each Fund pays the Adviser an administrative fee based on the
Fund's 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 master Portfolio,
would be more or less than if the Fund invested directly in the
securities held by the Portfolio. The trustees 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 a Fund's 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.
FINANCIAL HIGHLIGHTS
The following tables reflect the results of operations of the Funds on
a per-share basis for the periods shown and have been audited by Arthur
Andersen LLP, independent public accountants. These tables should be
read in conjunction with the respective Fund's financial statements and
notes thereto. The Funds' annual reports, which may be obtained from
Advisor Trust without charge upon request, contain additional
performance information.
Advisor Balanced Fund
Period
Ended
Sept. 30,
1997(a)
---------
Net Asset Value, Beginning of Period $10.00
------
Income from Investment Operations
Net investment income 0.04
Net realized and unrealized gains on
investments 1.13
------
Total from investment operations 1.17
------
Net Asset Value, End of Period $11.17
======
Ratio of net expenses to average net
assets (b) 1.35%*
Ratio of net investment income to
average net assets (c) 0.70%*
Total return 11.70%
Net assets, end of period (000 omitted) $112
Advisor Growth & Income Fund
Period
Ended
Sept. 30,
1997(a)
---------
Net Asset Value, Beginning of Period $10.00
Income from Investment Operations
Net investment income 0.03
Net realized and unrealized gains on
investments 1.33
Total from investment operations 1.36
Net Asset Value, End of Period $11.36
======
Ratio of net expenses to average net
assets (b) 1.40%*
Ratio of net investment income to
average net assets (c) 0.54%*
Total return 13.60%
Net assets, end of period (000 omitted) $114
Advisor Special Fund
Period
Ended
Sept. 30,
1997(a)
---------
Net Asset Value, Beginning of Period $10.00
------
Income from Investment Operations
Net investment loss (0.03)
Net realized and unrealized gains on
investments 2.49
------
Total from investment operations 2.46
------
Net Asset Value, End of Period $12.46
======
Ratio of net expenses to average net
assets (b) 1.44%*
Ratio of net investment income to
average net assets (c) (0.46%)*
Total return 24.60%
Net assets, end of period (000 omitted) $125
Advisor Special Venture Fund
Period
Ended
Sept. 30,
1997(a)
---------
Net Asset Value, Beginning of Period $10.00
------
Income from Investment Operations
Net investment loss (0.03)
Net realized and unrealized gains on
investments 1.87
------
Total from investment operations 1.84
------
Net Asset Value, End of Period $11.84
======
Ratio of net expenses to average net
assets (b) 1.50%*
Ratio of net investment income to
average net assets (c) (0.42%)*
Total return 18.40%
Net assets, end of period (000 omitted) $118
Advisor International Fund
Period
Ended
Sept. 30,
1997(a)
---------
Net Asset Value, Beginning of Period $10.00
------
Income from Investment Operations
Net investment income 0.06
Net realized and unrealized gains on
investments 0.64
------
Total from investment operations 0.70
------
Net Asset Value, End of Period $10.70
======
Ratio of net expenses to average net
assets (b) 1.75%*
Ratio of net investment income to
average net assets (c) 0.87%*
Total return 7.00%
Net assets, end of period (000 omitted) $107
- ----------
*Annualized.
(a) From commencement of operations on Feb. 14, 1997, reflects
information relating to the initial shares of a Fund that were
redesignated Class K shares as of Oct. 15, 1997. As presented in other
parts of this prospectus, the historical performance of Class K shares
prior to Feb. 14, 1997, is based on the performance of each Fund's
respective Portfolio, restated to reflect 12b-1 fees and other expenses
applicable to Class K, without giving effect to any expense
reimbursements described herein and assuming reinvestment of dividends
and capital gains.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the Adviser, this ratio would have been
87.83% for Advisor Balanced Fund, 88.76% for Advisor Growth & Income
Fund, 86.39% for Advisor Special Fund, 88.96% for Advisor Special
Venture Fund, and 88.15% for Advisor International Fund for the period
ended Sept. 30, 1997.
(c) Computed giving effect to the Adviser's expense limitation.
THE FUNDS
The five mutual funds described in this prospectus (referred to
collectively as the "Funds") are series of 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 net investable assets in a
corresponding portfolio (referred to collectively as the "Portfolios")
which is a series of SR&F Base Trust ("Base Trust").
Stein Roe & Farnham Incorporated (the "Adviser") provides
portfolio management services to each Portfolio and administrative
services to each Fund and each Portfolio.
INVESTMENT POLICIES
The Funds invest as described below. Further information on
investment techniques that may be employed 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.
Stein Roe Advisor Balanced Fund ("Advisor Balanced Fund") seeks to
provide long-term growth of capital and current income, consistent with
reasonable investment risk. Advisor Balanced Fund invests all of its
net investable assets in SR&F Balanced Portfolio ("Balanced
Portfolio"), which has the same investment objective and investment
policies substantially similar to Advisor Balanced Fund. The assets of
Balanced Portfolio are allocated among equities, debt securities and
cash. The portfolio manager determines those allocations based on
views of the Adviser's investment strategists regarding economic,
market and other factors relative to investment opportunities.
The equity portion of the portfolio is invested primarily in well-
established companies having market capitalizations in excess of $1
billion. Fixed income senior securities will make up at least 25% of Balanced
Portfolio's total assets. Investments in debt securities are limited
to those that are within the four highest grades (generally referred to
as "investment grade") assigned by a nationally recognized statistical
rating organization or, if unrated, determined by the Adviser to be of
comparable quality.
Stein Roe Advisor Growth & Income Fund ("Advisor Growth & Income Fund")
seeks to provide both growth of capital and current income. Advisor
Growth & Income Fund invests all of its net investable assets in SR&F
Growth & Income Portfolio ("Growth & Income Portfolio"), which has the
same investment objective and investment policies substantially similar
to Advisor Growth & Income Fund. Advisor Growth & Income Fund is
designed for investors seeking a diversified portfolio of securities
that offers the opportunity for long-term growth of capital while also
providing a steady stream of income. In seeking to meet this
objective, Growth & Income Portfolio invests primarily in well-
established companies whose common stocks are believed to have the
potential both to appreciate in value and to pay dividends to shareholders.
Although it may invest in a broad range of securities (including
common stocks, preferred stocks, securities convertible into or
exchangeable for common stocks, and warrants or rights to purchase
common stocks), normally Growth & Income Portfolio emphasizes
investments in equity securities of companies having market
capitalizations in excess of $1 billion. Securities of these well-
established companies are believed to be generally less volatile than
those of companies with smaller capitalizations because companies with
larger capitalizations tend to have experienced management; broad,
highly diversified product lines; deep resources; and easy access to
credit.
Stein Roe Advisor Special Fund ("Advisor Special Fund") seeks to
provide capital appreciation by investing in securities that are
considered to have limited downside risk relative to their potential
for above-average growth, including securities of undervalued,
underfollowed, or out-of-favor companies. Advisor Special Fund invests
all of its net investable assets in SR&F Special Portfolio ("Special
Portfolio"), which has the same investment objective and investment
policies substantially similar to Advisor Special Fund. Special
Portfolio may invest in securities of seasoned, established companies
that appear to have appreciation potential, as well as securities of
relatively small, new companies. In addition, it may invest in
securities with limited marketability; new issues of securities;
securities of companies that, in the Adviser's opinion, will benefit
from management change, new technology, new product or service
development, or change in demand; and other securities that the Adviser
believes have capital appreciation possibilities. Securities of
smaller, newer companies may be subject to greater price volatility
than securities of larger, well-established companies. In addition,
many smaller companies are less well known to the investing public and
may not be as widely followed by the investment community. Although
Special Portfolio invests primarily in common stocks, it may also
invest in other equity-type securities, including preferred stocks and
securities convertible into equity securities.
Stein Roe Advisor Special Venture Fund ("Advisor Special Venture Fund")
seeks to provide long-term capital appreciation by investing primarily
in a diversified portfolio of equity securities of entrepreneurially
managed companies. Advisor Special Venture Fund invests all of its net
investable assets in SR&F Special Venture Portfolio ("Special Venture
Portfolio"), which has the same investment objective
and investment policies substantially similar to Advisor Special
Venture Fund. It emphasizes investments in financially strong
small and medium-sized companies, based principally on management
appraisal and stock valuation. The Adviser considers "small" and
"medium-sized" companies to be those with market capitalizations of
less than $1 billion and $1 to $3 billion, respectively.
In both its initial and ongoing appraisals of a company's
management, the Adviser seeks to know both the principal owners and
senior management and to assess, through personal visits, their business
judgment and strategies through personal visits. The Adviser favors
companies whose management has an owner/operator, risk-averse orientation
and a demonstrated ability to create wealth for investors. Attractive company
characteristics include unit growth, favorable cost structures or
competitive positions, and financial strength that enables management
to execute business strategies under difficult conditions. A company
is attractively valued when its stock can be purchased at a meaningful
discount to the value of the underlying business.
Stein Roe Advisor International Fund ("Advisor International Fund")
seeks to provide long-term growth of capital by investing in a
diversified portfolio of foreign securities. Advisor International
Fund invests all of its net investable assets in SR&F International
Portfolio ("International Portfolio"), which has the same investment
objective and investment policies substantially similar to Advisor
International Fund. Current income is not a primary factor in the
selection of portfolio securities. International Portfolio invests
primarily in common stocks and other equity-type securities (such as
preferred stocks, securities convertible or exchangeable for common
stocks, and warrants or rights to purchase common stocks).
International Portfolio may invest in securities of smaller emerging
companies as well as securities of well-seasoned companies of any size.
Smaller companies, however, involve higher risks in that they typically
have limited product lines, markets, and financial or management
resources. In addition, the securities of smaller companies may trade
less frequently and have greater price fluctuation than larger
companies, particularly those operating in countries with developing
markets.
International Portfolio diversifies its investments among several
countries and does not concentrate investments in any particular
industry. In pursuing its objective, International Portfolio varies
the geographic allocation and types of securities in which it invests
based on the Adviser's continuing evaluation of economic, market, and
political trends throughout the world. While International Portfolio
has not established limits on geographic asset distribution, it
ordinarily invests in the securities markets of at least three
countries outside the United States, including but not limited to
Western European countries (such as Belgium, France, Germany, Ireland,
Italy, The Netherlands, the countries of Scandinavia, Spain,
Switzerland, and the United Kingdom); countries in the Pacific Basin
(such as Australia, Hong Kong, Japan, Malaysia, the Philippines,
Singapore, and Thailand); and countries in the Americas (such as
Argentina, Brazil, Colombia, and Mexico). As of Sept. 30, 1997,
International Portfolio had more than 5% of its total assets in each of
the following countries:
Countries Market Value Percentage of
(in 000s) Total Assets
Japan $27,678 16.44%
United Kingdom 16,881 10.02
Germany 12,204 7.25
France 11,503 6.83
Finland 11,144 6.62
Under normal market conditions, International Portfolio will invest at
least 65% of its total assets (taken at market value) in foreign
securities. If, however, investments in foreign securities appear to
be relatively unattractive in the judgment of the Adviser because of
current or anticipated adverse political or economic conditions,
International Portfolio may hold cash or invest any portion of its
assets in securities of the U.S. Government and equity and debt
securities of U.S. companies, as a temporary defensive strategy. To
meet liquidity needs, International Portfolio may also hold cash in
domestic and foreign currencies and invest in domestic and foreign
money market securities (including repurchase agreements and foreign
money market positions).
In the past, the U.S. Government has from time to time imposed
restrictions, through taxation and otherwise, on foreign investments by
U.S. investors such as International Portfolio. If such restrictions
should be reinstated, it might become necessary for International
Portfolio to invest all or substantially all of its assets in U.S.
securities. In such an event, International Portfolio would review its
investment objective and policies to determine whether changes are
appropriate.
International Portfolio may purchase foreign securities in the
form of American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs), or other securities representing underlying shares of
foreign issuers. International Portfolio may invest in sponsored or
unsponsored ADRs. (For a description of ADRs and EDRs, see the
Statement of Additional Information.)
PERFORMANCE INFORMATION
The total return from an investment in a Fund is measured by the
distributions received (assuming reinvestment), plus or minus the
change in the net asset value per share for a given period. 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 a Fund's total return with alternative investments
should consider differences between the Fund and the alternative
investments, the periods and methods used in calculation of the return
being compared, and the impact of taxes on alternative investments. Of
course, past performance is no guarantee 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 a
corresponding master Portfolio, which has the same investment objective
and substantially the same investment policies as the Fund. Each Fund
commenced operations on Feb. 14, 1997. The historical performance for
the period prior to Feb. 14, 1997, is based on the performance of the
Portfolio, restated to reflect the sales charges, 12b-1 fees and other
applicable expenses 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 were:
Since
Fund 1 Year 3 Years 5 Years 10 Years Inception
- --------------------- ------ --------- ------- --------- ----------
Advisor Balanced Fund 23.24% 17.26% 13.02% 10.76% 9.63%
Advisor Growth &
Income Fund 30.55 24.50 18.71 13.38 13.20
Advisor Special Fund 33.30 21.46 18.30 14.38 13.92
Advisor Special
Venture Fund 21.46 -- -- -- 26.93
Advisor Interna-
tional Fund 9.26 5.16 -- -- 6.00
RISKS AND INVESTMENT CONSIDERATIONS
Advisor Balanced Fund is designed for long-term investors who can
accept the fluctuations in portfolio value and other risks associated
with seeking long-term capital appreciation through investments in
securities. Advisor Growth & Income Fund is designed for long-term
investors who desire to participate in the stock market with moderate
investment risk while seeking to limit market volatility. Advisor
Special Fund is designed for long-term investors who desire to
participate in the stock market with more investment risk and
volatility than the stock market in general, but with less investment
risk and volatility than aggressive capital appreciation funds.
Advisor Special Venture Fund is designed for long-term investors who
want greater return potential than is available from the stock market
in general, and who are willing to tolerate the greater investment risk
and market volatility associated with investments in small and medium-
sized companies. Advisor International Fund is intended for long-term
investors who can accept the risks entailed in investing in foreign
securities.
Each Portfolio usually allocates its investments among a number of
different industries rather than concentrating in a particular industry
or group of industries, but this does not eliminate all risk. No
Portfolio will, however, invest more than 25% of the total value of its
assets (at the time of investment) in the securities of companies in
any one industry. There can be no guarantee that a Fund or Portfolio
will achieve its objective.
Each Portfolio may invest in debt securities. Debt securities
rated in the fourth highest grade may have some speculative
characteristics, and changes in economic conditions or other
circumstances may lead to a weakened capacity of the issuers of such
securities to make principal and interest payments. Securities rated
below investment grade may possess speculative characteristics, and
changes in economic conditions are more likely to affect the issuer's
capacity to pay interest or repay principal.
Foreign Investing. International Portfolio invests primarily in
foreign securities and each other Portfolio may invest up to 25% of its
total assets in foreign securities. For purposes of this limit,
foreign securities exclude American Depositary Receipts (ADRs), foreign
debt securities denominated in U.S. dollars, and securities guaranteed
by a U.S. person.
Non-U.S. investments may be attractive because they increase
diversification, as compared to a portfolio comprised solely of U.S.
investments. In addition, many foreign economies have, from time to
time, grown faster than the U.S. economy, and the returns on
investments in these countries have exceeded those of similar U.S.
investments--there can be no assurance, however, that these conditions
will continue. International diversification also allows a Portfolio
and an investor to take advantage of changes in foreign economies and
market conditions.
Investors should understand and consider carefully the greater
risks involved in foreign investing. Investing in foreign securities--
positions 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 regulations 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 the 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. These risks are greater for emerging market
countries.
Although International 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, and other adverse political, social or diplomatic
developments that could adversely affect investment in these nations.
The price of securities of small, rapidly growing companies is
expected to fluctuate more widely than the general market due to the
difficulty in assessing financial prospects of companies developing new
products or operating in countries with developing markets.
The strategy for selecting investments will be based on various
criteria. A company proposed for investment should have a good market
position in a fast-growing segment of the economy, strong management,
preferably a leading position in its business, prospects of superior
financial returns, ability to self-finance, and securities available
for purchase at a reasonable market valuation. Because of the foreign
domicile of such companies, however, information on some of the above
factors may be difficult, if not impossible, to obtain.
To the extent portfolio securities are issued by foreign issuers
or denominated in foreign currencies, investment performance is
affected by the strength or weakness of the U.S. dollar against these
currencies. If the dollar falls relative to the Japanese yen, for
example, the dollar value of a yen-denominated stock held in the
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 the
discussion of portfolio and transaction hedging under Portfolio
Investments and Strategies.)
Further information on investment techniques that may be employed
by a Portfolio may be found under Portfolio Investments and Strategies.
INVESTMENT RESTRICTIONS
Each Fund and Portfolio is diversified as that term is defined in the
Investment Company of 1940.
No Fund or Portfolio may invest more than 5% of its assets in the
securities of any one issuer. This restriction applies only to 75% of
its investment portfolio, and does not apply to securities of the U.S.
Government or repurchase agreements /1/ for such securities. This
restriction also does not prevent a Fund from investing all of its
assets in shares of another investment company having the identical
investment objective under a master/feeder structure.
- -------
/1/ A repurchase agreement involves 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.
- -------
No Fund or Portfolio will acquire more than 10% of the outstanding
voting securities of any one issuer. A Fund may, however, invest all
of its assets in shares of another investment company having the
identical investment objective under a master/feeder structure.
While no Fund or Portfolio may make loans, each may (1) purchase
money market instruments and enter into repurchase agreements; (2)
acquire publicly distributed or privately placed debt securities; (3)
lend portfolio securities under certain conditions; and (4) participate
in an interfund lending program with other Stein Roe Funds and
Portfolios. A Fund or Portfolio may not borrow money, except for
nonleveraging, temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither the aggregate
borrowings (including reverse repurchase agreements) nor the aggregate
loans at any one time may exceed 33 1/3% of the value of total assets.
Additional securities may not be purchased when borrowings less
proceeds receivable from sales of portfolio securities exceed 5% of
total assets.
Each Portfolio may invest in repurchase agreements, provided that
it will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements maturing in more than seven
days.
The policies summarized in the second, third, and fourth
paragraphs under this section (except for the second and third
paragraphs as they relate to Advisor Special Fund and Special
Portfolio) and the policy with respect to concentration of investments
in any one industry described under Risks and Investment Considerations
are fundamental policies of each Fund and each Portfolio and, as such,
can be changed only with the approval of a "majority of the outstanding
voting securities" as defined in the Investment Company Act of 1940.
The common investment objective of each Fund and its master Portfolio
is nonfundamental and, as such, may be changed by the Board of Trustees
without shareholder approval. All of the investment restrictions are
set forth in the Statement of Additional Information.
Nothing in the investment restrictions outlined here shall be
deemed to prohibit International Portfolio from purchasing the
securities of any issuer pursuant to the exercise of subscription
rights distributed to International Portfolio by the issuer. No such
purchase may be made if, as a result, International Portfolio will no
longer be a diversified investment company as defined in the Investment
Company Act of 1940 or if International Portfolio will fail to meet the
diversification requirements of the Internal Revenue Code.
PORTFOLIO INVESTMENTS AND STRATEGIES
Debt Securities. In pursuing its investment objective, each Portfolio
may invest in debt securities of corporate and governmental issuers.
Investments in debt securities by Growth & Income Portfolio and
Balanced Portfolio are limited to those that are rated within the four
highest grades (generally referred to as "investment grade") assigned
by a nationally recognized statistical rating organization.
Investments in unrated debt securities are limited to those deemed to
be of comparable quality by the Adviser. 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 Fund is lost or reduced below investment grade, the Fund is not
required to dispose of the security--the Adviser will, however,
consider that fact in determining whether that Fund should continue to
hold the security. Special Venture Portfolio, Special Portfolio and
International Portfolio may invest up to 35% of their net assets in
debt securities, but do not expect to invest more than 5% of their net
assets in debt securities that are rated below investment grade.
Foreign Securities. Each Portfolio may invest in sponsored or
unsponsored ADRs. In addition to, or in lieu of, such direct
investment, Each Portfolio may construct a synthetic foreign debt
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 debt position
utilizing such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments.
As of Sept. 30, 1997, holdings of foreign companies, as a
percentage of net assets, were as follows: Balanced Portfolio, 11.4%
(3.9% in foreign securities and 7.5% in ADRs); Growth & Income
Portfolio, 3.1% (0.5% in foreign securities and 2.6% in ADRs); Special
Portfolio, 7.8% (5.3% in foreign securities and 2.5% in ADSs); and
Special Venture Portfolio, 3.2% (1.7% in foreign securities and 1.5% in
ADRs).
Settlement Transactions. When International Portfolio enters into a
contract for the purchase or sale of a foreign portfolio security, it
usually is required to settle the purchase transaction in the relevant
foreign currency or receive the proceeds of the sale in that currency.
In either event, International Portfolio is obliged to acquire or
dispose of an appropriate amount of foreign currency by selling or
buying an equivalent amount of U.S. dollars. At or near the time of
the purchase or sale of the foreign portfolio security, International
Portfolio may wish to lock in the U.S. dollar value of a transaction at
the exchange rate or rates then prevailing between the U.S. dollar and
the currency in which the security is denominated. Known as
"transaction hedging," this may be accomplished by purchasing or
selling such foreign securities on a "spot," or cash, basis.
Transaction hedging also may be accomplished on a forward basis,
whereby International Portfolio purchases or sells a specific amount of
foreign currency, at a price set at the time of the contract, for
receipt or delivery at either a specified date or at any time within a
specified time period. In so doing, International Portfolio will
attempt to insulate itself against possible losses and gains resulting
from a change in the relationship between the U.S. dollar and the
foreign currency during the period between the date the security is
purchased or sold and the date on which payment is made or received.
Similar transactions may be entered into by using other currencies if
International Portfolio seeks to move investments denominated in one
currency to investments denominated in another.
Currency Hedging. Most of International Portfolio's portfolio will be
invested in foreign securities. As a result, in addition to the risk
of change in the market value of portfolio securities, the value of the
portfolio in U.S. dollars is subject to fluctuations in the exchange
rate between the foreign currencies and the U.S. dollar.
When, in the opinion of the Adviser, it is desirable to limit or
reduce exposure in a foreign currency to moderate potential changes in
the U.S. dollar value of the portfolio, a Portfolio may enter into a
forward currency exchange contract to sell or buy such foreign currency
(or another foreign currency that acts as a proxy for that currency)--
through the contract, the U.S. dollar value of certain underlying
foreign portfolio securities can be approximately matched by an
equivalent U.S. dollar liability. This technique is known as "currency
hedging." By locking in a rate of exchange, currency hedging is
intended to moderate or reduce the risk of change in the U.S. dollar
value of a portfolio only during the period of the forward contract.
Forward contracts usually are entered into with banks and broker-
dealers; are not exchange traded; and although they are usually less
than one year, may be renewed. A default on the contract would deprive
a Portfolio of unrealized profits or force it to cover its commitments
for purchase or sale of currency, if any, at the current market price.
Neither type of foreign currency transaction will eliminate
fluctuations in the prices of portfolio securities or prevent loss if
the price of such securities should decline. In addition, such forward
currency exchange contracts will diminish the benefit of the
appreciation in the U.S. dollar value of that foreign currency. (For
further information on forward foreign currency exchange transactions,
see the Statement of Additional Information.)
A Portfolio may utilize spot and forward foreign exchange
transactions to reduce the risk caused by exchange rate fluctuations
between one currency and another when securities are purchased or sold
on a when-issued basis. It may also invest in synthetic money market
instruments.
Convertible Securities. By investing in convertible securities, a
Portfolio obtains the right to benefit from the capital appreciation
potential in the underlying stock upon exercise of the conversion
right, while earning higher current income than would be available if
the stock were purchased directly. In determining whether to purchase
a convertible security, the Adviser will consider substantially the
same criteria that would be considered in purchasing the underlying
stock. Although convertible securities are frequently rated investment
grade, each Portfolio also may purchase unrated securities or
securities rated below investment grade if the securities meet the
Adviser's other investment criteria. Convertible securities rated
below investment grade tend to be more sensitive to interest rate and
economic changes, may be obligations of issuers who are less
creditworthy than issuers of higher-quality convertible securities, and
may be more thinly traded due to the fact that such securities are less
well known to investors than either common stock or conventional debt
securities. As a result, the Adviser's own investment research and
analysis tend to be more important than other factors in the purchase
of convertible securities.
Lending Portfolio Securities; When-Issued and Delayed-Delivery
Securities. Each Portfolio may make loans of its portfolio securities
to broker-dealers and banks subject to certain restrictions described
in the Statement of Additional Information. Each Portfolio may
participate in an interfund lending program, subject to certain
restrictions described in the Statement of Additional Information.
Each Portfolio may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment 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. A Portfolio will make
such commitments only with the intention of actually acquiring the
securities, but may sell the securities before settlement date if it is
deemed advisable for investment reasons.
Short Sales Against the Box. Each Portfolio may sell short securities
it owns or has the right to acquire without further consideration,
using a technique called selling short "against the box." Short sales
against the box may protect 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. No Portfolio expects to
commit more than 5% of its net assets to short sales against the box.
For a more complete explanation, please refer to the Statement of
Additional Information.
Derivatives. Consistent with its objective, each 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.
No Portfolio expects to invest more than 5% of its net assets in any
type of Derivative except for options, futures contracts, and futures
options.
In seeking to achieve its desired investment objective, provide
additional revenue, or hedge against changes in security prices,
interest rates or currency fluctuations, a Portfolio may: (1) purchase
and write both call options and put options on securities, indexes and
foreign currencies; (2) enter into interest rate, index and foreign
currency futures contracts; (3) write options on such futures
contracts; and (4) purchase other types of forward or investment
contracts linked to individual securities, indexes or other benchmarks.
A Portfolio may write a call or put option only if the option is
covered. As the writer of a covered call option, a 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. In addition, because futures positions may
require low margin deposits, 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.
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.
Portfolio Turnover. Although the Portfolios do not purchase securities
with a view to rapid turnover, there are no limitations on the length
of time portfolio securities must be held. Accordingly, the portfolio
turnover rate may vary significantly from year to year, but is not
expected to exceed 100% under normal market conditions. Flexibility of
investment and emphasis on capital appreciation may involve greater
portfolio turnover than that of mutual funds that have the objectives
of income or maintenance of a balanced investment position. A high
rate of portfolio turnover may result in increased transaction expenses
and the realization of capital gains and losses. (See Distributions
and Income Taxes.)
NET ASSET VALUE
The purchase or redemption price of a Fund's shares is its net asset
value per share. Each Fund determines the net asset value of its
shares as of the close of regular session trading on the New York Stock
Exchange ("NYSE") (currently 3:00 p.m., central time) by dividing the
difference between the value of its assets and liabilities by the
number of shares outstanding. Each Portfolio allocates net asset
value, income, and expenses to 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 should be determined on any
such day, in which case the determination will be made at 3:00 p.m.,
central time.
Each security traded on a national stock exchange is valued at its
last sale price on that exchange on the day of valuation or, if there
are no sales that day, at the latest bid quotation. Each over-the-
counter security for which the last sale price on the day of valuation
is available from Nasdaq is valued at that price. All other over-the-
counter securities for which reliable quotations are available are
valued at the latest bid quotation.
Long-term straight-debt obligations and securities convertible
into stocks are valued at a fair value using a procedure determined in
good faith by the Board of Trustees. Pricing services approved by the
Board provide valuations (some of which may be "readily available
market quotations"). 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 using a method
that the Board believes represents fair value. The Board may approve
the use of other pricing services 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 represents fair value.
In computing the net asset value of International Portfolio, the
values of portfolio securities are generally based upon market
quotations. Depending upon local convention or regulation, these market
quotations may be the last sale price, last bid or asked price, or the
mean between the last bid and asked prices as of, in each case, the
close of the appropriate exchange or other designated time. Trading in
securities on European and Far Eastern securities exchanges and over-
the-counter markets is normally completed at various times before the
close of business on each day on which the NYSE is open. Trading of
these securities may not take place on every NYSE business day. In
addition, trading may take place in various foreign markets on
Saturdays or on other days when the NYSE is not open and on which
International Portfolio's net asset value is not calculated.
Therefore, such calculation does not take place contemporaneously with
the determination of the prices of many of the portfolio securities
used in such calculation and the value of International Portfolio's
portfolio may be significantly affected on days when shares of
International Portfolio may not be purchased or redeemed.
HOW TO PURCHASE SHARES
You may purchase 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
the Funds do not recommend, endorse, or receive payments from any
Intermediary.
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 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 the Funds. Once
your purchase order has been accepted, you may not cancel or revoke it;
you may, however, redeem the shares. 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.
To reduce the volume of mail you receive, only one copy of certain
materials, such as prospectuses and shareholder reports, will be mailed
to your household (same address). Please call 800-322-0593 if you wish
to receive additional copies free of charge.
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 REDEEM SHARES
You may redeem shares only through Intermediaries. Each Intermediary
will establish its own procedures for the sale of 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 the same class 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. The Funds reserve 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 Advisor 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,
and in no event later than 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 and paid each calendar
quarter by Advisor Balanced Fund and Advisor Growth & Income Fund and
annually by Advisor Special Fund, Advisor Special Venture Fund, and
Advisor International Fund. 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. Each Fund intends 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 unless your Intermediary
elects 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
gains 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. Advisor Trust reserves the right to reinvest the
proceeds and future distributions in additional shares of a Fund if
checks mailed to you for distributions are returned as undeliverable or
are not presented for payment within six months. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks. To change your election, call the Fund 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. Each Fund intends to qualify for the special tax treatment
afforded regulated investment companies under Subchapter M of the
Internal Revenue Code, so that it will be relieved of federal income
tax on that part of its net investment income and net capital gains
that is distributed to shareholders.
Each Fund will distribute substantially all of its ordinary income
and net capital gains on a current basis. Generally distributions are
taxable as ordinary income, except that any distributions of net long-
term capital gains will be taxed as such. However, distributions by a
Fund to plans that qualify for tax-exempt treatment under federal
income tax laws will not be taxable. Special tax rules apply to
investments through such plans.
The Taxpayer Relief Act of 1997 (the "Act") reduced from 28% to
20% the maximum tax rate on long-term capital gains. This reduced rate
generally applies to securities held for more than 18 months and sold
after July 28, 1997, and securities held for more than one year and
sold between May 6, 1997 and July 29, 1997.
Foreign Income Taxes. Investment income received by International
Portfolio from sources within foreign countries may be subject to
foreign income taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries that entitle
International Portfolio to a reduced rate of tax or exemption from tax
on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of International Portfolio's
assets to be invested within various countries will fluctuate and the
extent to which tax refunds will be recovered is uncertain.
International Portfolio intends to operate so as to qualify for treaty-
reduced tax rates where applicable.
To the extent that International Portfolio is liable for foreign
income taxes withheld at the source, the Portfolio also intends to
operate so as to meet the requirements of the U.S. Internal Revenue
Code to "pass through" to International Advisor Fund's shareholders
foreign income taxes paid, but there can be no assurance that it will
be able to do so.
This discussion of U.S. and foreign taxation 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. The foregoing
information applies to U.S. shareholders. Foreign shareholders should
consult their tax advisors as to the tax consequences of ownership of
Fund shares.
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 or Portfolio might be liable
for misstatements in the prospectus regarding information concerning
another Fund or Portfolio.
Portfolio Managers. Daniel K. Cantor has been portfolio manager of
Growth & Income Portfolio since its inception in 1997 and had managed
its predecessor since 1995. He is a senior vice president of the
Adviser, which he joined in 1985. A chartered financial analyst, he
received a B.A. degree from the University of Rochester (1981) and an
M.B.A. from the Wharton School of the University of Pennsylvania
(1985). As of Sept. 30, 1997, Mr. Cantor was responsible for managing
$338 million in mutual fund net assets. Jeffrey C. Kinzel is associate
portfolio manager. Mr. Kinzel received a B.A. from Northwestern
University (1979), a J.D. from the University of Michigan Law School
(1983), and an M.B.A. from the Wharton School of the University of
Pennsylvania (1991). Mr. Kinzel is a vice president and intermediate
research analyst with the Adviser. Before joining the Adviser in 1991
as an equity research analyst, Mr. Kinzel was employed by the law firm
of Butler and Binion; the law firm of Miller, Canfield, Paddock and
Stone; and 1838 Investment Advisers.
Harvey B. Hirschhorn has been portfolio manager of Balanced
Portfolio since its inception in 1997 and had managed its predecessor
since Apr., 1996. He is executive vice president and chief economist
and investment strategist of the Adviser, which he joined in 1973. He
received an A.B. degree from Rutgers College (1971) and an M.B.A. from
the University of Chicago (1973), and is a chartered financial analyst.
Mr. Hirschhorn was responsible for managing $615 million in mutual fund
net assets at Sept. 30 1997. William Garrison and Sandra Knight are
associate portfolio managers. Mr. Garrison joined the Adviser in 1989.
He received his A.B. from Princeton University (1988) and an M.B.A.
from the University of Chicago (1995). Ms. Knight is a vice president
and quantitative analyst with the Adviser, which she joined in 1991.
She earned a B.S. degree from Lawrence Technological University (1984)
and an M.B.A. from Loyola University of Chicago (1991).
Richard B. Peterson has been co-manager of Special Venture
Portfolio since its inception in 1997 and managed its predecessor since
its inception in 1994; John S. McLandsborough has been co-portfolio
manager since July 1997. Mr. Peterson, who began his investment career
at Stein Roe & Farnham in 1965 after graduating with a B.A. from
Carleton College (1962) and the Woodrow Wilson School at Princeton
University (1964) with a Masters in Public Administration, rejoined the
Adviser in 1991 after 15 years of equity research and portfolio
management experience with State Farm Investment Management Corp.
Prior to joining the Adviser in Apr. 1996, Mr. McLandsborough was an
equity research analyst with CS First Boston from June 1994 until Jan.
1996 and with National City Bank of Cleveland prior thereto. Mr.
McLandsborough, a chartered financial analyst, earned a bachelor's
degree in finance in 1989 from Miami University and a master's degree
in 1992 from Indiana University. As of Sept. 30, 1997, Messrs.
Peterson and McLandsborough were responsible for co-managing $507
million in mutual fund net assets.
M. Gerard Sandel has been manager of Special Portfolio and senior
vice president and principal of the Adviser since July 1997. Prior to
joining the Adviser in July 1997, Mr. Sandel was portfolio manager of
the Marshall Mid-Cap Value Fund and its predecessor fund and vice
president of M&I Investment Management Corporation since Oct. 1993.
Prior thereto, he was vice president of Acorn Asset Management
Corporation. A chartered financial analyst, Mr. Sandel earned a
bachelor's degree in 1977 from the University of Southern Mississippi
and a master's degree in 1984 from the American Graduate School. As of
Sept. 30, 1997, he was responsible for managing $1.3 billion in mutual
fund net assets.
David P. Harris has been co-portfolio manager of International Portfolio since
its inception in 1997 and had been manager to its predecessor since its
inception in 1994 (he served as an associate portfolio manager until May
1995.) He joined the Adviser in 1995 as vice president to create Stein Roe
Global Capital Management, a dedicated global and international equity
management unit. Mr. Harris is also employed by Colonial Management
Associates, Inc., a subsidiary of Liberty Financial and an affiliate of the
Adviser, as vice president. Mr. Harris was a portfolio manager with
Rockefeller & Co. ("Rockefeller") from 1990 to 1995. After earning a
bachelor's degree from the University of Michigan, he was an actuarial
associate for GEICO before returning to school to earn an M.B.A. from
Cornell University. As of Sept. 30, 1997, Mr. Harris was responsible for
managing $207 million in mutual fund net assets.
Fees and Expenses. In return for its services, the Adviser is entitled
to receive a management fee from each Portfolio and an administrative
fee from each Fund. The following table shows the annual rates (dollar
amounts shown in millions) as a percentage of average net assets:
Fund Management Fee Administrative Fee
Advisor Growth & Income Fund N/A .15% up to $500,
.125% next $500,
.10% thereafter
Growth & Income Portfolio .60% up to $500,
.55% next $500,
.50% thereafter N/A
Advisor Balanced Fund N/A .15% up to $500,
.125% next $500,
.10% thereafter
Balanced Portfolio .55% up to $500,
.50% next $500,
.45% thereafter N/A
Advisor Special Fund N/A .15% up to $500,
.125% next $500,
.10% next $500,
.075% thereafter
Special Portfolio .75% up to $500,
.70% next $500,
.65% next $500,
.60% thereafter N/A
Advisor Special Venture
Fund N/A .15%
Special Venture Portfolio .75% N/A
Advisor International Fund N/A .15%
International Portfolio .85% N/A
For the period ended Sept. 30, 1997, the total expenses, after the fee
waivers described under Fee Table, for Advisor Balanced Fund, Advisor
Growth & Income Fund, Advisor Special Fund, Advisor Special Venture
Fund and Advisor International Fund amounted to 1.35%, 1.40%, 1.45%,
1.50% and 1.75%, respectively.
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
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 Fund shares.
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 a Fund 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. Fund shares are offered for sale through Liberty
Financial Investments, Inc. ("Distributor") without any sales
commissions. The Distributor is a subsidiary of Colonial Management
Associates, Inc., which 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 ("Plan"). The Plan
provides that, as compensation for expenses related to the promotion
and distribution of Fund shares including its expenses related to the
sale and promotion of Fund shares and to servicing of the shares, the
Distributor receives from each Fund a servicing and/or distribution fee
at an annual rate not exceeding 0.25% of its average net assets. The
Distributor generally pays this compensation to institutions that
distribute a Fund shares and provide services to the Fund and its
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 a Fund 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 distribution fees paid. Advisor Trust's Plan complies with
those rules.
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, 10 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.
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.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Each Fund (which are series of Advisor Trust, 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 shareholders of each Fund approved
this policy of permitting a Fund to act as a feeder fund by investing
in a 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 fees and expenses of the
Funds and the Portfolios are described under Fee Table and Management.
Each feeder Fund bears its proportionate share of the expenses of its
master Portfolio.
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 Aug. 23, 1993.
The Declaration of Trust of Base Trust provides that a Fund and other
investors in a Portfolio will be liable for all obligations of that
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 liability was inadequately insured
and a Portfolio was unable to meet its obligations. Accordingly, the
trustees of Advisor Trust believe that neither the Funds nor their
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 objectives of the Funds and the Portfolios
are nonfundamental and may be changed without shareholder approval,
subject, however, to at least 30 days' advance written notice to a
Fund's shareholders.
The fundamental policies of each Fund and the corresponding
fundamental policies of its master Portfolio can be changed only with
shareholder approval. If a Fund, as a Portfolio investor, is requested
to vote on a change in a fundamental policy of a 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 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 investors in a Portfolio. If other
investors hold a majority interest in a Portfolio, they could have
voting control over that Portfolio.
In the event that a Portfolio's fundamental policies were changed
so as to be inconsistent with those of the corresponding 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 the Portfolio and investment of such assets
in another pooled investment entity, or the retention of an investment
adviser to invest those assets directly in a portfolio of securities.
Any of these actions would require the approval of a 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,
the 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 a 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 (i)
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 (ii)
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 a Portfolio, but members of the
general public may not invest directly in the 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 Fund, and might charge a
sales commission. Therefore, Fund shareholders might have different
investment returns than shareholders in another investment company that
invests exclusively in a 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 operating expenses as
a percentage of the Portfolio's 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, a
Portfolio's security holdings may become less diverse, resulting in
increased risk.
Each Portfolio commenced operations in Feb. 1997 when each of
Stein Roe Growth & Income Fund, Stein Roe Balanced Fund, Stein Roe
Special Fund, Stein Roe Special Venture Fund and Stein Roe
International Fund, series of Stein Roe Investment Trust, converted
into a feeder fund by investing all of its assets in a corresponding
Portfolio. Information regarding any investment company that may
invest in a Portfolio 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 Advisor Funds, call Retirement Services
at 800-322-1130 or Advisor/Broker Services at 800-322-0593.
______________________
<PAGE>
Stein Roe Advisor Trust
Advisor Growth Stock Fund
Supplement to Prospectus
dated Feb. 2, 1998
During the period Feb. 2, 1998 through April 15, 1998 (Sales
Period), unless extended by Liberty Financial Investments, Inc.
(Distributor), the Distributor will pay to A.G. Edwards & Sons,
Inc. (A.G. Edwards) additional commissions on sales of Class A and
Class B shares of the Fund for investment in accounts in any
Colonial self-directed or prototype IRA, SEP IRA, SARSEP, Roth IRA
and SIMPLE IRA. The Distributor will pay to A.G. Edwards 100% of
the applicable Class A sales charge and an additional commission
equal to 0.50% of the net asset value of Class B shares sold during
the Sales Period for investment in the retirement accounts
referenced above.
This Supplement
is Dated Feb. 2, 1998
SG-43/765E-0198
<PAGE>
The date of this prospectus is Feb. 2, 1998
Stein Roe Advisor Growth Stock Fund
The investment objective of Advisor Growth Stock Fund is to provide
long-term capital appreciation by investing in common stocks and other
equity-type securities. Advisor Growth Stock Fund invests all of its
net investable assets in SR&F Growth Stock Portfolio, which has the
same investment objective and substantially the same investment
policies as Advisor Growth Stock Fund. The investment experience of
Advisor Growth Stock Fund will correspond to Growth Stock Portfolio.
(See Master Fund/Feeder Fund: Structure and Risk Factors.)
Advisor Growth Stock Fund is a multi-class series of Stein Roe Advisor
Trust and SR&F Growth Stock Portfolio is a series of SR&F Base Trust.
Each Trust is an open-end management investment company.
This prospectus contains information you should know before investing
in Advisor Growth Stock Fund. Please read it carefully and retain it
for future reference. Please consult your full-service financial
adviser to determine how investing in this mutual fund may suit your
unique needs, time horizon and risk tolerance.
A Statement of Additional Information dated Feb. 2, 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 and most recent financial statements may be obtained
without charge by calling (800) 426-3750.
This prospectus relates only to the following classes of shares of
Advisor Growth Stock Fund: (i) Class A shares are offered at net asset
value plus a sales charge imposed at the time of purchase and subject
to an annual distribution fee; (ii) Class B shares are offered at net
asset value and are subject to an annual distribution fee and a
declining contingent deferred sales charge on redemptions made within
six years after purchase; and (iii) Class C shares are offered at net
asset value and are subject to an annual distribution fee and a
contingent deferred sales charge on redemptions made within one year
after purchase. Class B shares automatically convert to Class A shares
after approximately eight years. See How to Purchase Shares. For
information on Class K shares of Advisor Growth Stock Fund, call (800)
322-1130.
NOT FDIC INSURED MAY LOSE VALUE
NO BANK GUARANTEE
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....................................2
Fee Table..................................2
The Fund...................................5
Investment Policies........................5
Performance Information....................5
Risks and Investment Considerations....... 6
Investment Restrictions................... 7
Portfolio Investments and Strategies.......8
Net Asset Value...........................10
How to Purchase Shares....................10
How to Sell (Redeem) Shares.............. 13
Distributions and Income Taxes............15
Management............................... 15
Organization and Description of Shares....17
Master Fund/Feeder Fund: Structure
and Risk Factors........................18
For More Information......................20
SUMMARY
Stein Roe Advisor Growth Stock Fund ("Advisor Growth Stock Fund") is a
series of Stein Roe Advisor Trust ("Advisor Trust"), an open-end
management investment company organized as a Massachusetts business
trust. (See The Fund and Organization and Description of Shares.)
This prospectus is not a solicitation in any jurisdiction in which
shares of Advisor Growth Stock Fund are not qualified for sale.
Investment Objective and Policies. The investment objective of Advisor
Growth Stock Fund is to provide long-term capital appreciation by
investing in common stocks and other equity-type securities. Advisor
Growth Stock Fund invests all of its net investable assets in SR&F
Growth Stock Portfolio ("Growth Stock Portfolio") which has the same
investment objective and investment policies substantially similar to
those of Advisor Growth Stock Fund. Growth Stock Portfolio normally
invests at least 65% of its total assets in a diversified portfolio of
common stocks and other equity-type securities that the Adviser
believes to have long-term appreciation possibilities.
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 guarantee that Advisor Growth
Stock Fund or Growth Stock Portfolio will achieve their common
investment objective.
Investment Risks. Advisor Growth Stock Fund is designed for long-term
investors who desire to participate in the stock market with more
investment risk and volatility than the stock market in general, but
with less investment risk and volatility than an aggressive capital
appreciation fund. Growth Stock Portfolio 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. Shares of Advisor Growth Stock Fund are
available through your full-service financial service firm ("FSF").
For information on purchasing and redeeming Advisor Growth Stock 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 Growth Stock Portfolio. In addition, it
provides administrative services to Advisor Growth Stock Fund and
Growth Stock Portfolio. For a description of the Adviser and these
service arrangements, see Management.
FEE TABLE
Expenses are one of several factors to consider when investing in
Advisor Growth Stock Fund. The following tables summarize your maximum
transaction costs and annual expenses for an investment in each class
of shares of Advisor Growth Stock Fund. See Management for more
complete descriptions of the various costs and expenses of Advisor
Growth Stock Fund.
Shareholder Transaction Expenses /1/ /2/
Class A Class B Class C
Maximum Initial Sales Charges
(as a % of offering price)/3/ 5.75% 0.00%/5/ 0.00%/5/
Maximum Contingent Deferred Sales
Charge (as a % of offering
price)/3/ 1.00%/4/ 5.00% 1.00%
_________________
1. For accounts less than $1,000 an annual fee of $10 may be deducted.
See How to Purchase Shares.
2. Redemption proceeds exceeding $500 sent via federal funds wire will
be subject to a $7.50 charge per transaction.
3. Does not apply to reinvested dividends.
4. Applies only to purchases of $1 million to $5 million redeemed
within approximately 18 months after purchase. See How to Purchase
Shares.
5. Because of the 0.75% distribution fee applicable to Class B and
Class C shares, long-term Class B and Class C shareholders may pay more
in aggregate sales charges than the maximum initial sales charge
permitted by the National Association of Securities Dealers, Inc. (the
"NASD"). However, because Class B shares automatically convert to
Class A shares after approximately eight years, this is less likely for
Class B shares than for a class without a conversion feature.
Estimated Annual Operating Expenses
Class A Class B Class C
Management and Administrative Fee 0.65% 0.65% 0.65%
12b-1 Fees 0.30% 1.00% 1.00%
Other Expenses (after reimbursement) 0.45% 0.45% 0.45%
----- ----- -----
Total Operating Expenses (after
reimbursement) 1.40% 2.10% 2.10%
===== ===== =====
Example.
You would pay the following expenses on a $1,000 investment in each
class assuming 5% annual return.
Example 1 (assumes redemption at end of period):
Class A Class B Class C
Period:
1 Year $71 $71 $31
3 Years 99 96 66
Example 2 (assumes no redemption at end of period):
Class A Class B Class C
Period:
1 Year $71 $21 $21
3 Years 99 66 66
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 Advisor Growth Stock Fund. The Fee Table reflects the
combined expenses of both Advisor Growth Stock Fund and Growth Stock
Portfolio. Anticipated Total Operating Expenses for each class of
Advisor Growth Stock 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 A
shares would have been 0.47% and 1.50%, respectively; and for Class B
and C shares, 0.47% and 2.20%, respectively. Any such reimbursement
will lower the overall expense ratio for each respective class and
increase the overall return to investors. (Also see Management--Fees
and Expenses.)
Advisor Growth Stock Fund pays the Adviser an administrative fee based
on its average daily net assets and Growth Stock 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 Advisor Growth Stock Fund, including its share of the
expenses of Growth Stock Portfolio, would be more or less than if
Advisor Growth Stock Fund invested directly in the securities held by
Growth Stock Portfolio. The trustees concluded that Advisor Growth
Stock Fund's 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 Advisor Growth Stock Fund pays a 12b-1 fee, long-term investors
in Advisor Growth Stock Fund may pay more over long periods of time in
distribution expenses than the maximum front-end sales charges
permitted by the NASD. For further information on Advisor Growth Stock
Fund's 12b-1 fee, see Management--Distributor or call your financial
representative.
THE FUND
Stein Roe Advisor Growth Stock Fund ("Advisor Growth Stock Fund") is a
multi-class series of 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, Advisor Growth Stock 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.) Advisor Growth Stock Fund invests all of
its net investable assets in SR&F Growth Stock Portfolio ("Growth Stock
Portfolio"), which is a series of SR&F Base Trust ("Base Trust").
Stein Roe & Farnham Incorporated (the "Adviser") provides portfolio
management services to Growth Stock Portfolio and administrative
services to Advisor Growth Stock Fund and Growth Stock Portfolio.
INVESTMENT POLICIES
The investment objective of Advisor Growth Stock Fund is to provide
long-term capital appreciation by investing in common stocks and other
equity-type securities. Advisor Growth Stock Fund invests all of its
net investable assets in Growth Stock Portfolio, which has the same
investment objective and investment policies substantially similar to
Advisor Growth Stock Fund. Growth Stock Portfolio attempts to achieve
its objective by normally investing at least 65% of its total assets in
common stocks and other equity-type securities (such as preferred
stocks, securities convertible into or exchangeable for common stocks,
and warrants or rights to purchase common stocks) that, in the opinion
of the Adviser, have long-term appreciation possibilities.
Further information on investment techniques that may be employed by
Growth Stock Portfolio 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.
PERFORMANCE INFORMATION
The total return from an investment in a class of shares of Advisor
Growth Stock 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 and payment of the maximum
initial sales charge of 5.75% on Class A shares and the contingent
deferred sales charges applicable to the time period quoted on Class B
and Class C shares. 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. When the Fund compares the
total return of its shares to those of other mutual funds or relevant
indices, its total return may be computed without reflecting any sales
charges so long as the sales charge is stated separately in connection
with the comparison.
Comparison of each class' total return 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 including the inclusion of initial or contingent
deferred sales charges, and the impact of taxes on alternative
investments. Of course, past performance is no guarantee of future
results. Share prices may vary, and your shares when redeemed may be
worth more or less than your original purchase price.
Each class' performance may be compared to various indices.
Performance and quotations from various publications may be included in
sales literature and advertisements.
Advisor Growth Stock Fund invests all of its net investable assets in
Growth Stock Portfolio, which has the same investment objective and
substantially the same investment policies as Advisor Growth Stock
Fund. Advisor Growth Stock Fund commenced operations on Feb. 14, 1997,
but until Oct. 15, 1997, offered only the shares that are now
designated Class K shares. The historical performance of each class of
shares of Advisor Growth Stock Fund for all periods is based on the
performance of Growth Stock Portfolio, restated to reflect the sales
charges, 12b-1 fees and other expenses applicable to the class 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 Advisor Growth Stock Fund's future performance. The
average annual returns for each class of shares as of Sept. 30, 1997
were as follows:
Class A Class B Class C
1 year 25.07% 26.77% 30.77%
3 years 24.48 25.44 26.07
5 years 15.52 15.86 16.08
10 years 11.73 11.76 11.61
Inception 10.73 10.74 10.13
RISKS AND INVESTMENT CONSIDERATIONS
Advisor Growth Stock Fund is designed for long-term investors who
desire to participate in the stock market with more investment risk and
volatility than the stock market in general, but with less investment
risk and volatility than an aggressive capital appreciation fund.
Growth Stock Portfolio usually allocates its investments among a number
of different industries rather than concentrating in a particular
industry or group of industries, but this does not eliminate all risk.
It will not, however, invest more than 25% of the total value of its
assets (at the time of investment) in the securities of companies in
any one industry. There can be no guarantee that Advisor Growth Stock
Fund or Growth Stock Portfolio will achieve its objective.
Growth Stock Portfolio may invest up to 35% of its total assets in debt
securities. Debt securities rated in the fourth highest grade may have
some speculative characteristics, and changes in economic conditions or
other circumstances may lead to a weakened capacity of the issuers of
such securities to make principal and interest payments. Securities
rated below investment grade may possess speculative characteristics,
and changes in economic conditions are more likely to affect the
issuer's capacity to pay interest or repay principal.
Growth Stock Portfolio may invest up to 25% of its total assets in
foreign securities. For purposes of this limit, foreign securities
exclude American Depositary Receipts (ADRs), foreign debt securities
denominated in U.S. dollars, and securities guaranteed by a U.S.
person. Investment in foreign securities may represent a greater
degree of risk (including risk related to exchange rate fluctuations,
tax provisions, exchange and currency controls, and expropriation of
assets) than investment in securities of domestic issuers. Other risks
of foreign investing include less complete financial information on
issuers, different accounting, auditing and financial reporting
standards, different settlement practices, less market liquidity, more
market volatility, less 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.
Further information on investment techniques that may be employed by
Growth Stock Portfolio may be found under Portfolio Investments and
Strategies.
INVESTMENT RESTRICTIONS
Each of Advisor Growth Stock Fund and Growth Stock Portfolio is
diversified as that term is defined in the Investment Company Act of
1940.
Neither Advisor Growth Stock Fund nor Growth Stock Portfolio may invest
more than 5% of its assets in the securities of any one issuer. This
restriction applies only to 75% of the investment portfolio, and does
not apply to securities of the U.S. Government or repurchase agreements
/1/ for such securities. This restriction also does not prevent
Advisor Growth Stock Fund from investing all of its assets in shares of
another investment company (Growth Stock Portfolio) having the
identical investment objective under a master/feeder structure.
- -------
/1/ A repurchase agreement involves a sale of securities to Growth
Stock 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, Growth Stock Portfolio could experience both
losses and delays in liquidating its collateral.
- -------
Neither Advisor Growth Stock Fund nor Growth Stock Portfolio will
acquire more than 10% of the outstanding voting securities of any one
issuer, except that Advisor Growth Stock Fund may invest all of its
assets in shares of another investment company (such as Growth Stock
Portfolio) having the identical investment objective under a
master/feeder structure.
While neither Advisor Growth Stock Fund nor Growth Stock Portfolio may
make loans, each may (1) purchase money market instruments and enter
into repurchase agreements; (2) acquire publicly distributed or
privately placed debt securities; (3) lend portfolio securities under
certain conditions; and (4) participate in an interfund lending program
with other Stein Roe Funds and Portfolios. Advisor Growth Stock Fund
and Growth Stock Portfolio may not borrow money, except for
nonleveraging, temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither the aggregate
borrowings (including reverse repurchase agreements) nor the aggregate
loans at any one time may exceed 33 1/3% of the value of total assets.
Additional securities may not be purchased when borrowings less
proceeds receivable from sales of portfolio securities exceed 5% of
total assets.
Growth Stock Portfolio may invest in repurchase agreements, provided
that it will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements maturing in more than seven
days.
The policies summarized in the second, third, and fourth paragraphs
under this section and the policy with respect to concentration of
investments in any one industry described under Risks and Investment
Considerations are fundamental policies of Advisor Growth Stock Fund
and Growth Stock Portfolio and, as such, can be changed only with the
approval of a "majority of the outstanding voting securities" as
defined in the Investment Company Act of 1940. The common investment
objective of Advisor Growth Stock Fund and Growth Stock Portfolio is
nonfundamental and, as such, may be changed by the Board of Trustees
without shareholder approval. All of the investment restrictions are
set forth in the Statement of Additional Information.
PORTFOLIO INVESTMENTS AND STRATEGIES
Debt Securities. In pursuing its investment objective, Growth Stock
Portfolio may invest up to 35% of its total assets in debt securities
of corporate and governmental issuers. Investment in debt securities
is limited to those that are rated within the four highest grades
(generally referred to as investment grade). If the rating of a
security held by Growth Stock Portfolio is lost or reduced below
investment grade, it is not required to dispose of the security--the
Adviser will, however, consider that fact in determining whether Growth
Stock Portfolio should continue to hold the security. When the Adviser
deems a temporary defensive position advisable, Growth Stock Portfolio
may invest, without limitation, in high-quality fixed income
securities, or hold assets in cash or cash equivalents.
Foreign Securities. Growth Stock Portfolio may invest in sponsored or
unsponsored ADRs. In addition to, or in lieu of, such direct
investment, Growth Stock Portfolio may construct a synthetic foreign
debt 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 debt 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, Growth Stock
Portfolio may enter into foreign currency forward and futures contracts
to hedge the currency risk in settlement of a particular security
transaction or relative to the entire portfolio. A forward contract to
purchase an amount of foreign currency sufficient to pay the purchase
price of securities at settlement date involves the risk that the value
of the foreign currency may decline relative to the value of the dollar
prior to the settlement date. This risk is in addition to the risk
that the value of the foreign security purchased may decline. Growth
Stock Portfolio also may enter into foreign currency contracts as a
hedging technique to limit or reduce exposure of the entire portfolio
to currency fluctuations. In addition, Growth Stock Portfolio may use
options and futures contracts, as described below, to limit or reduce
exposure to currency fluctuations. As of Sept. 30, 1997, Growth Stock
Portfolio's holdings of foreign companies amounted to 4.8% of net
assets (1.6% in foreign securities and 3.2% in ADRs).
Convertible Securities. By investing in convertible securities, Growth
Stock Portfolio obtains the right to benefit from the capital
appreciation potential in the underlying stock upon exercise of the
conversion right, while earning higher current income than would be
available if the stock were purchased directly. In determining whether
to purchase a convertible security, the Adviser will consider
substantially the same criteria that would be considered in purchasing
the underlying stock. Although convertible securities are frequently
rated investment grade, Growth Stock Portfolio also may purchase
unrated securities or securities rated below investment grade if the
securities meet the Adviser's other investment criteria. Convertible
securities rated below investment grade (a) tend to be more sensitive
to interest rate and economic changes, (b) may be obligations of
issuers who are less creditworthy than issuers of higher-quality
convertible securities, and (c) may be more thinly traded due to such
securities being less well known to investors than investment grade
convertible securities, common stock or conventional debt securities.
As a result, the Adviser's own investment research and analysis tend to
be more important than other factors in the purchase of convertible
securities.
Lending Portfolio Securities; When-Issued and Delayed-Delivery
Securities. Growth Stock Portfolio may make loans of its portfolio
securities to broker-dealers and banks subject to certain restrictions
described in the Statement of Additional Information. Growth Stock
Portfolio may participate in an interfund lending program, subject to
certain restrictions described in the Statement of Additional
Information. Growth Stock Portfolio may invest in securities purchased
on a when-issued or delayed-delivery basis. Although the payment terms
of these securities are established at the time Growth Stock 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. Growth Stock Portfolio will make such commitments only
with the intention of actually acquiring the securities, but may sell
the securities before settlement date if it is deemed advisable for
investment reasons.
Short Sales Against the Box. Growth Stock Portfolio may sell short
securities it owns or has the right to acquire without further
consideration, using a technique called selling short "against the
box." Short sales against the box may protect Growth Stock 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. Growth Stock Portfolio does not expect to commit more
than 5% of its net assets to short sales against the box. For a more
complete explanation, please refer to the Statement of Additional
Information.
Derivatives. Consistent with its objective, Growth Stock 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.
Growth Stock Portfolio does not expect to invest more than 5% of its
net assets in any type of Derivative except for options, futures
contracts, and futures options.
In seeking to achieve its desired investment objective, provide
additional revenue, or hedge against changes in security prices,
interest rates or currency fluctuations, Growth Stock Portfolio may:
(1) purchase and write both call options and put options on securities,
indexes and foreign currencies; (2) enter into interest rate, index and
foreign currency futures contracts; (3) write options on such futures
contracts; and (4) purchase other types of forward or investment
contracts linked to individual securities, indexes or other benchmarks.
Growth Stock Portfolio may write a call or put option only if the
option is covered. As the writer of a covered call option, Growth
Stock 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 Growth
Stock Portfolio seeks to close out a position. In addition, because
futures positions may require low margin deposits, 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.
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.
Portfolio Turnover. Although Growth Stock Portfolio does not purchase
securities with a view to rapid turnover, there are no limitations on
the length of time portfolio securities must be held. Accordingly, the
portfolio turnover rate may vary significantly from year to year, but
is not expected to exceed 100% under normal market conditions. A high
rate of portfolio turnover may result in increased transaction expenses
and the realization of capital gains and losses. (See Distributions
and Income Taxes.)
NET ASSET VALUE
Advisor Growth Stock Fund determines the net asset value of its shares
as of the close of regular session 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. Growth Stock Portfolio allocates net asset
value, income, and expenses to Advisor Growth Stock Fund and any other
of its feeder funds in proportion to their respective interests in
Growth Stock 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 Advisor Growth Stock 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.
Each security traded on a national stock exchange is valued at its last
sale price on that exchange on the day of valuation or, if there are no
sales that day, at the latest bid quotation. Each over-the-counter
security for which the last sale price on the day of valuation is
available from Nasdaq is valued at that price. All other over-the-
counter securities for which reliable quotations are available are
valued at the latest bid quotation.
Long-term straight-debt obligations and securities convertible into
stocks are valued at a fair value using a procedure determined in good
faith by the Board of Trustees. Pricing services approved by the Board
provide valuations (some of which may be "readily available market
quotations"). 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 using a method that
the Board believes represents fair value. The Board may approve the
use of other pricing services 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 represents fair value.
HOW TO PURCHASE SHARES
Shares of each class of Advisor Growth Stock Fund are offered
continuously. Orders for a class received in good order prior to the
time at which Advisor Growth Stock Fund values the shares of that class
(or placed with a full-service financial service firm ("FSF") before
such time and transmitted by the FSF before Advisor Growth Stock Fund
processes that day's share transactions) will be processed based on
that day's closing net asset value for the class, plus any applicable
initial sales charge.
The initial purchase minimum per account is $1,000; subsequent
investments may be as small as $50. The minimum initial investment for
the Fundamatic program (as discussed in the Statement of Additional
Information) is $50, and the minimum initial investment for a
retirement account sponsored by Liberty Financial Investments, Inc.
(the "Distributor"), an affiliate of the Adviser and the Distributor, is
$25. Advisor Growth Stock Fund may refuse any purchase order for its
shares. See How to Sell (Redeem) Shares and the Statement of Additional
Information for more information.
Class A Shares. Class A shares are offered at net asset value plus an
initial sales charge as follows and subject to an annual distribution
fee:
Initial Sales Charge
Retained by
Financial
Service Firm
as a % of as a% of
Amount Offering Offering
Amount Purchased Invested Price Price
Less than $50,000 6.10% 5.75% 5.00%
$50,000 to less than $100,000 4.71 4.50 3.75
$100,000 to less than $250,000 3.63 3.50 2.75
$250,000 to less than $500,000 2.56 2.50 2.00
$500,000 to less than $1,000,000 2.04 2.00 1.75
$1,000,000 or more 0.00 0.00 0.00
On purchases of $1 million or more, the Distributor pays the FSF a
cumulative commission as follows:
Amount Purchased Commission
First $3,000,000 1.00%
Next $2,000,000 0.50
Over $5,000,000 0.25/1/
____________________
1. Paid over 12 months but only to the extent the shares remain
outstanding.
In determining the sales charge and commission applicable to a new
purchase under the above schedules, the amount of the current purchase
is added to the current value of shares previously purchased and still
held by an investor. If a purchase results in an account having a
value from $1 million to $5 million, then the shares purchased will be
subject to a 1.00% contingent deferred sales charge payable to the
Distributor, if redeemed within 18 months from the first day of the
month following the purchase. If the purchase results in an account
having a value in excess of $5 million, the contingent deferred sales
charge will not apply to the portion of the purchased shares comprising
such excess amount.
Purchases of $1 million to $5 million are subject to a 1.00% contingent
deferred sales charge payable to the Distributor on redemptions within
18 months from the first day of the month following the purchase. The
contingent deferred sales charge does not apply to the excess of any
purchase over $5 million.
Class B Shares. Class B shares are offered at net asset value, without
an initial sales charge, and are subject to a 0.75% annual distribution
fee for approximately eight years (at which time they automatically
convert to Class A shares not bearing a distribution fee) and a
declining contingent deferred sales charge if redeemed within six years
after purchase. As shown below, the amount of the contingent deferred
sales charge depends on the number of years after purchase that the
redemption occurs:
Years After Purchase Contingent Deferred Sales Charge
0-1 5.00%
1-2 4.00
2-3 3.00
3-4 3.00
4-5 2.00
5-6 1.00
More than 6 0.00
Year one ends one year after the end of the month in which the purchase
was accepted and so on. The Distributor will pay FSFs a commission of
4.00% on Class B share purchases.
Class C Shares. Class C shares are offered at net asset value without
an initial sales charge and are subject to a 0.75% annual distribution
fee and a 1.00% contingent deferred sales charge on redemptions made
within one year after the end of the month after purchase was accepted.
The Distributor pays FSFs an initial commission of 1.00% on purchases
of Class C shares and an ongoing commission of 0.75% annually
commencing after the shares purchased have been outstanding for one
year. Payment of the ongoing commission is conditioned on receipt by
the Distributor of the 0.75% annual distribution fee referred to above.
The commission may be reduced or eliminated if the distribution fee
with respect to Class C shares paid by Advisor Growth Stock Fund is
reduced or eliminated for any reason.
General. All contingent deferred sales charges are deducted from the
amount redeemed, not the amount remaining in the account, and are paid
to the Distributor. Shares issued upon distribution reinvestment and
amounts representing appreciation are not subject to a contingent
deferred sales charge. The contingent deferred sales charge is imposed
on redemptions which result in the account value falling below its Base
Amount (the total dollar value of purchase payments (including initial
sales charges, if any) in the account, reduced by prior redemptions on
which a contingent deferred sales charge was paid and any exempt
redemptions). When a redemption subject to a contingent deferred sales
charge is made, generally older shares will be redeemed first. This may
mean that the shares redeemed will be those closest to being outside the
period in which the contingent deferred sales charge is in effect. See
the Statement of Additional Information for more information.
Which class is more beneficial to an investor depends on the amount and
intended length of the investment. Investments in Class B shares have
100% of the purchase invested immediately. Those investing for a
relatively short period of time might consider Class C shares.
Purchases of $250,000 or more must be for Class A or Class C shares.
Purchases of $1,000,000 or more must be for Class A shares. Consult
your FSF.
FSFs may receive different compensation rates for selling different
classes of shares. The Distributor may pay additional compensation for
FSFs which have made or may make significant sales. See the Statement
of Additional Information for more information.
Special Purchase Programs. Advisor Growth Stock Fund allows certain
investors or groups of investors to purchase shares with reduced or
without initial or contingent deferred sales charges. The programs are
described in the Statement of Additional Information under Purchases
and Redemptions--Programs for Reducing or Eliminating Sales Charges.
Conditions of Purchase. Each purchase order for Advisor Growth Stock
Fund 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 Advisor Growth Stock 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 Advisor Growth Stock Fund's
shareholders.
To reduce the volume of mail you receive, only one copy of certain
materials, such as prospectuses and shareholder reports, will be mailed
to your household (same address). Please call 800-322-0593 if you wish
to receive additional copies free of charge.
Shareholder Services and Account Fees. A variety of shareholder
services are available. For more information about these services or
your account call (800) 345-6611. Some services are described in the
attached account application. A Shareholder's Manual explaining all
available services will be provided upon request.
In June of any year, the Fund may deduct $10 (payable to the Transfer
Agent) from accounts valued at less than $1,000 unless the account
value has dropped below $1,000 solely as a result of share value
depreciation. Shareholders will receive 60 days' written notice to
increase the account value before the fee is deducted. The Fund may
also deduct annual maintenance and processing fees (payable to the
Transfer Agent) in connection with certain retirement plan accounts.
See Purchases and Redemptions--Special Purchase Programs/Investor
Services in the Statement of Additional Information.
HOW TO SELL (REDEEM) SHARES
Selling Shares Directly to Advisor Growth Stock Fund. You may redeem
all or a portion of your shares by submitting a written request in English
in good order. Send a signed letter of instruction to the Transfer Agent.
The sale price is the net asset value (less any contingent deferred sales
charge) next determined after receipt of your redemption request in
good order. Signatures must be guaranteed by a bank, a member firm of
a national stock exchange or another eligible guarantor institution.
Additional documentation is required for sales by corporations, agents,
fiduciaries, surviving joint owners and individual retirement account
holders. For details contact:
Colonial Investors Service Center, Inc.
P.O. Box 1722
Boston, MA 02105-1722
(800) 345-6611
Selling Shares through FSFs. FSFs must receive requests prior to the
time at which Advisor Growth Stock Fund values it shares to receive
that day's price, are responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge for this service.
Your FSF may be closed on days when the NYSE is open. As a result,
prices for shares may be significantly affected on days when you have
no access to your FSF to sell shares. If you wish to sell shares
through your FSF, please contact it for instructions.
Exchange Privilege. Exchanges at net asset value may be made among
shares of the same class of any other fund that is a series of Advisor
Trust or of most funds advised by Colonial Management Associates, Inc.
or distributed by the Distributor, each an affiliate of the Adviser.
A contingent deferred sales charge, if any, continues to apply to the
exchanged shares. For more information on the Colonial Funds, see your
financial adviser or call (800) 426-3750. Not all Advisor Trust Funds
offer Class A, Class B, and Class C shares at this time. 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 fund, you should obtain the prospectus for the 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
Growth Stock Fund reserves the right to suspend, limit, modify, or
terminate the exchange privilege (including the telephone exchange
privilege) or its use in any manner by any person or class. Advisor
Growth Stock Fund will terminate the exchange privilege as to a
particular shareholder if the Adviser determines, in its sole and
absolute 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 objective or otherwise
harm Advisor Growth Stock Fund or its remaining shareholders.
Shares will continue to age without regard to the exchange for purposes
of conversion and determining the contingent deferred sales charge, if
any, upon redemption.
Class A Shares. An exchange from a money market fund into a non-money
market fund will be at the applicable offering price next determined
(including sales charge), except for amounts on which an initial sales
charge was paid. Non-money market fund shares must be held for five
months before qualifying for exchange into a fund with a higher sales
charge, after which an exchange is made at the net asset value next
determined.
Class B Shares. Exchanges of Class B shares are not subject to the
contingent deferred sales charge. However, if shares received in the
exchange are redeemed within six years after the original purchase, a
contingent deferred sales charge will be assessed using the schedule of
the fund into which the original investment was made.
Class C Shares. Exchanges of Class C shares are not subject to the
contingent deferred sales charge. However, if shares received in the
exchange are redeemed within one year after the original purchase, a
1.00% contingent deferred sales charge will be assessed. Only one
"round-trip" exchange of the Class C shares may be made per three-month
period, measured from the date of the initial purchase (a round-trip
being the exchange out of a fund into another fund, and then back to
that fund).
Telephone Transactions. Shareholders and/or their financial advisers
are automatically eligible to exchange shares and redeem shares up to
$50,000 by calling (800) 422-3737 any business day between 10:00 a.m.,
central time (or 9:00 a.m., eastern time) and the time Advisor Growth
Stock Fund values its shares. Telephone redemption privileges for
larger amounts may be elected on the account application.
The Transfer Agent employs procedures reasonably designed to confirm
that instructions communicated by telephone are genuine. If Advisor
Growth Stock Fund and/or the Transfer Agent does not follow reasonable
procedures for protecting shareholders against loss on telephone
transactions, it may be liable for any losses due to unauthorized or
fraudulent instructions. Such procedures include restrictions on where
proceeds of telephone redemptions may be sent, limitations on the
ability to redeem by telephone shortly after an address change,
recording of telephone lines and requirements that the redeeming
shareholder and/or his/her financial adviser provide certain
identifying information. Shareholders and/or their financial advisers
wishing to redeem or exchange shares by telephone may experience
difficulty in reaching Advisor Growth Stock Fund at the toll free
number during periods of drastic economic or market changes. In that
event, shareholders and/or their financial advisers should follow the
procedures for redemption or exchange by mail as described above under
How to Sell (Redeem) Shares. The Transfer Agent and Advisor Growth
Stock Fund reserve the right to change, modify or terminate the
telephone redemption or exchange services at any time upon prior
written notice to shareholders. Shareholders and/or their financial
advisers are not obligated to transact by telephone.
General Redemption Policies. Shares of Advisor Growth Stock Fund may
be sold on any day the NYSE is open, either directly with Advisor
Growth Stock Fund or through your FSF. Advisor Trust will pay
redemption proceeds (less any applicable contingent deferred sales
charge) as soon as practicable, generally within seven days after
proper instructions are received. However, for shares recently
purchased by check, Advisor Growth Stock Fund will send proceeds as
soon as the check has cleared (which may take up to 15 days). 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 receipt of your redemption request in
good order by Advisor Growth Stock Fund. (See Net Asset Value.)
Because the redemption price you receive depends upon Advisor Growth
Stock Fund's 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,
may result in a realized capital gain or loss and may be subject to a
contingent deferred sales charge. The contingent deferred sales charge
may be waived under certain circumstances. See the Statement of
Additional Information for more information.
DISTRIBUTIONS AND INCOME TAXES
Distributions. Income dividends are declared and paid annually.
Advisor Growth Stock 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. Advisor Growth Stock Fund intends to distribute any
undistributed net investment income and net realized capital gains in
the following year.
All income dividends and capital gains distributions on shares of
Advisor Growth Stock Fund will be reinvested in additional shares of
the same class of Advisor Growth Stock 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 Advisor Growth
Stock Fund at net asset value. 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, Advisor Growth Stock
Fund is treated as a separate taxable entity distinct from the other
series of Advisor Trust. Advisor Growth Stock Fund intends to qualify
for the special tax treatment afforded regulated investment companies
under Subchapter M of the Internal Revenue Code, so that it will be
relieved of federal income tax on that part of its net investment
income and net capital gains that is distributed to shareholders.
Generally distributions are taxable as ordinary income, except that any
distributions of net long-term capital gains will be taxed as such.
However, distributions to plans that qualify for tax-exempt treatment
under federal income tax laws will not be taxable. Special tax rules
apply to investments through such plans.
The Taxpayer Relief Act of 1997 (the "Act") reduced from 28% to 20% the
maximum tax rate on long-term capital gains. This reduced rate
generally applies to securities held for more than 18 months and sold
after July 28, 1997, and securities held for more than one year and
sold between May 6, 1997 and July 29, 1997.
If you buy shares shortly before a distribution is declared, the
distribution will be taxable although it is, in effect, a partial
return of the amount invested.
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.
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 Advisor Growth Stock Fund and Growth Stock
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
Advisor Growth Stock Fund and Growth Stock Portfolio and other feeder
funds investing in Growth Stock 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 Growth Stock Portfolio and the business affairs of Advisor
Growth Stock Fund, Growth Stock Portfolio, 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.
Portfolio Managers. Erik P. Gustafson has been portfolio manager of
Growth Stock Portfolio since its inception in 1997 and had managed its
predecessor since 1994. Mr. Gustafson is a senior vice president of
the Adviser, having joined it in 1992. From 1989 to 1992 he was an
attorney with Fowler, White, Burnett, Hurley, Banick & Strickroot. He
holds a B.A. from the University of Virginia (1985) and M.B.A. and J.D.
degrees from Florida State University (1989). As of Sept. 30, 1997,
Mr. Gustafson was responsible for managing $1.3 billion in mutual fund
net assets. David P. Brady is associate portfolio manager. Mr. Brady
is a vice president of the Adviser, which he joined in 1993, and was an
equity investment analyst with State Farm Mutual Automobile Insurance
Company from 1986 to 1993. A chartered financial analyst, Mr. Brady
earned a B.S. in Finance, graduating Magna Cum Laude, from the
University of Arizona (1986), and an M.B.A. from the University of
Chicago (1989).
Fees and Expenses. The Adviser is entitled to receive a monthly
administrative fee from Advisor Growth Stock Fund, computed and accrued
daily, at an annual rate of 0.15% of the first $500 million of Advisor
Growth Stock Fund's average net assets, 0.125% of the next $500
million, and 0.10% thereafter; and a monthly management fee from Growth
Stock Portfolio, computed and accrued daily, at an annual rate of 0.60%
of the first $500 million of Growth Stock Portfolio's average net
assets, 0.55% of the next $500 million, and 0.50% thereafter. However,
as noted above under Fee Table, the Adviser may voluntarily undertake
to reimburse Advisor Growth Stock Fund for a portion of its operating
expenses and its pro rata share of Growth Stock Portfolio's operating
expenses. For the period ended Sept. 30, 1997, total fees, after the
fee waiver described under Fee Table, amounted to 1.35% of average net
assets. At Sept. 30, 1997, Advisor Growth Stock Fund owned 0.04% of
Growth Stock Portfolio.
Under a separate agreement with each Trust, the Adviser provides
certain accounting and bookkeeping services to Advisor Growth Stock
Fund and Growth Stock Portfolio 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 Advisor Growth Stock Fund.
Portfolio Transactions. The Adviser places the orders for the purchase
and sale of portfolio securities and options and futures contracts for
Growth Stock Portfolio. 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, MA 02105-1722,
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 Advisor Growth
Stock Fund for their clients who are Fund shareholders may be paid a
fee by the Transfer Agent for shareholder servicing and accounting
services they provide with respect to the underlying Fund shares.
Distributor. The shares of Advisor Growth Stock Fund are offered for
sale through Liberty Financial Investments, Inc. The Distributor is a
subsidiary of Colonial Management Associates, Inc., which is an
indirect subsidiary of Liberty Financial. The business address of the
Distributor is One Financial Center, Boston, Massachusetts 02111-2621;
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 02105-1722.
The trustees of Advisor Trust have adopted a plan pursuant to Rule 12b-
1 under the Investment Company Act of 1940 ("Plan"). The Plan provides
that, as compensation for personal service and/or the maintenance of
shareholder accounts, the Distributor receives from Advisor Growth
Stock Fund a service fee at an annual rate not to exceed 0.25% of the
Fund's net assets attributed to each class of shares other than Class K
shares. The Plan also provides that, as compensation for expenses
related to the promotion and distribution of shares of Advisor Growth
Stock Fund including its expenses related to the sale and promotion of
Advisor Growth Stock Fund shares, the Distributor receives from Advisor
Growth Stock Fund a distribution fee at an annual rate 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
not to exceed 0.25% of the average net assets attributable to its Class
K 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 were purchased. Class C and Class
K shares do not convert. The Distributor generally pays this
compensation to institutions that distribute Advisor Growth Stock Fund
shares and provide services to Advisor Growth Stock Fund and its
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 Advisor Growth Stock Fund during
any year may be more or less than the cost of distribution or other
services provided to Advisor Growth Stock 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.
Custodian. State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian for
Advisor Growth Stock Fund and Growth Stock Portfolio. 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, 10 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.
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.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Advisor Growth Stock Fund, 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
Advisor Growth Stock Fund. The initial shareholder of Advisor Growth
Stock Fund approved this policy of permitting Advisor Growth Stock Fund
to act as a feeder fund by investing in Growth Stock Portfolio. Please
refer to Investment Policies, Portfolio Investments and Strategies, and
Investment Restrictions for a description of the investment objectives,
policies, and restrictions of Advisor Growth Stock Fund and Growth
Stock Portfolio. The management fees and expenses of both Advisor Growth
Stock Fund and Growth Stock Portfolio are described under Fee Table and
Management. Advisor Growth Stock 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.
Growth Stock 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 Aug. 23, 1993.
The Declaration of Trust of Base Trust provides that Advisor Growth
Stock Fund and other investors in Growth Stock Portfolio will each be
liable for all obligations of Growth Stock Portfolio that are not
satisfied by the Portfolio. However, the risk of Advisor Growth Stock
Fund incurring financial loss on account of such liability is limited
to circumstances in which both inadequate insurance existed and Growth
Stock Portfolio itself was unable to meet its obligations.
Accordingly, the trustees of Advisor Trust believe that neither Advisor
Growth Stock Fund nor its shareholders will be adversely affected by
reason of Advisor Growth Stock Fund's investing in Growth Stock
Portfolio.
The Declaration of Trust of Base Trust provides that Growth Stock
Portfolio will terminate 120 days after the withdrawal of Advisor
Growth Stock Fund or any other investor in Growth Stock Portfolio,
unless the remaining investors vote to agree to continue the business
of Growth Stock Portfolio. The trustees of Advisor Trust may vote
Advisor Growth Stock Fund's interests in Growth Stock Portfolio for
such continuation without approval of Advisor Growth Stock Fund's
shareholders.
The common investment objective of Advisor Growth Stock Fund and Growth
Stock Portfolio is nonfundamental and may be changed without
shareholder approval. The fundamental policies of Advisor Growth Stock
Fund and the corresponding fundamental policies of Growth Stock
Portfolio can be changed only with shareholder approval. Class A
shareholders with accounts of $1,000,000 or more, and holders of Class
B or Class C shares may incur a contingent deferred sales charge if
they redeem shares in response to a change in investment objective.
If Advisor Growth Stock Fund, as a Portfolio investor, is requested to
vote on a proposed change in fundamental policy of Growth Stock
Portfolio or any other matter pertaining to Growth Stock Portfolio
(other than continuation of the business of Growth Stock Portfolio
after withdrawal of another investor), Advisor Growth Stock Fund will
solicit proxies from its shareholders and vote its interest in Growth
Stock Portfolio for and against such matters proportionately to the
instructions to vote for and against such matters received from Advisor
Growth Stock Fund shareholders. Advisor Growth Stock 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
Growth Stock Portfolio investors. If other investors hold a majority
interest in Growth Stock Portfolio, they could have voting control over
Growth Stock Portfolio.
In the event that Growth Stock Portfolio's fundamental policies were
changed so as to be inconsistent with those of Advisor Growth Stock
Fund, the Board of Trustees of Advisor Trust would consider what action
might be taken, including changes to Advisor Growth Stock Fund's
fundamental policies, withdrawal of Advisor Growth Stock Fund's assets
from Growth Stock 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 Advisor
Growth Stock Fund's shareholders. Advisor Growth Stock 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 Advisor Growth Stock Fund's assets
could result in a distribution in kind of portfolio securities (as
opposed to a cash distribution) to Advisor Growth Stock Fund. Should
such a distribution occur, Advisor Growth Stock 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 Advisor Growth Stock Fund and
could affect the liquidity of Advisor Growth Stock Fund.
Each investor in Growth Stock Portfolio, including Advisor Growth Stock
Fund, may add to or reduce its investment in Growth Stock Portfolio on
each day the NYSE is open for business. The investor's percentage of
the aggregate interests in Growth Stock Portfolio will be computed as
the percentage equal to the fraction (i) the numerator of which is the
beginning of the day value of such investor's investment in Growth
Stock 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 Growth Stock Portfolio effected on such day; and (ii) the
denominator of which is the aggregate beginning of the day net asset
value of Growth Stock 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 Growth Stock Portfolio by all investors in
Growth Stock Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in Growth
Stock Portfolio as of the close of business.
Base Trust may permit other investment companies and/or other
institutional investors to invest in Growth Stock Portfolio, but
members of the general public may not invest directly in Growth Stock
Portfolio. Other investors in Growth Stock Portfolio are not required
to sell their shares at the same public offering price as Advisor
Growth Stock Fund and might incur different administrative fees and
expenses than Advisor Growth Stock Fund. Therefore, Advisor Growth
Stock Fund shareholders might have different investment returns than
shareholders in another investment company that invests exclusively in
Growth Stock Portfolio. Investment by such other investors in Growth
Stock 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 Growth Stock Portfolio could
result in untimely liquidations of Growth Stock Portfolio's security
holdings, loss of investment flexibility, and increases in the
operating expenses of Growth Stock Portfolio as a percentage of its net
assets. As a result, Growth Stock Portfolio's security holdings may
become less diverse, resulting in increased risk.
Growth Stock Portfolio commenced operations in Feb. 1997 when Stein Roe
Growth Stock Fund, a mutual fund that, together with its corporate
predecessor, had invested directly in securities since 1958, converted
into a feeder fund by investing all of its assets in the Portfolio.
Currently Stein Roe Growth Stock Fund, which is a series of Stein Roe
Investment Trust, is the only other investment company investing in
Growth Stock Portfolio. Information regarding any investment company
that may invest in Growth Stock Portfolio 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 Advisor Growth Stock Fund, call (800) 345-
6611.
<PAGE>
Prospectus Feb. 2, 1998
Stein Roe Advisor Funds
Stein Roe Advisor Growth Stock Fund
The investment objective of Advisor Growth Stock Fund is to provide
long-term capital appreciation by investing in common stocks and other
equity-type securities. Advisor Growth Stock Fund invests all of its
net investable assets in SR&F Growth Stock Portfolio, which has the
same investment objective and substantially the same investment
policies as Advisor Growth Stock Fund. The investment experience of
Advisor Growth Stock Fund will correspond to Growth Stock Portfolio.
(See Master Fund/Feeder Fund: Structure and Risk Factors.)
Shares of Advisor Growth Stock Fund may be purchased only through
Intermediaries, including retirement plan service providers.
Advisor Growth Stock Fund is a multi-class series of Stein Roe
Advisor Trust and Growth Stock 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 Advisor Growth Stock Fund.
For information on Class A, B, and C shares, please call 800-345-6611.
Class K shares of Advisor Growth Stock Fund have no sales or redemption
charges.
This prospectus contains information you should know before
investing in Advisor Growth Stock Fund. Please read it carefully and
retain it for future reference.
A Statement of Additional Information dated Feb. 2, 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 and most recent financial statements 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..................................2
Fee Table............................... 3
Financial Highlights.....................4
The Fund.................................5
Investment Policies......................5
Performance Information..................6
Risks and Investment Considerations..... 6
Investment Restrictions................. 7
Portfolio Investments and Strategies.....8
Net Asset Value........................ 10
How to Purchase Shares..................11
How to Sell (Redeem) Shares............ 12
Distributions and Income Taxes..........12
Management............................. 13
Organization and Description of Shares..15
Master Fund/Feeder Fund: Structure
and Risk Factors.....................16
For More Information................... 18
SUMMARY
Stein Roe Advisor Growth Stock Fund ("Advisor Growth Stock Fund") is a
series of Stein Roe Advisor Trust ("Advisor Trust"), an open-end
management investment company organized as a Massachusetts business
trust. (See The Fund and Organization and Description of Shares.)
This prospectus is not a solicitation in any jurisdiction in which
shares of Advisor Growth Stock Fund are not qualified for sale.
Investment Objective and Policies. The investment objective of Advisor
Growth Stock Fund is to provide long-term capital appreciation by
investing in common stocks and other equity-type securities. Advisor
Growth Stock Fund invests all of its net investable assets in SR&F
Growth Stock Portfolio ("Growth Stock Portfolio") which has the same
investment objective and investment policies substantially similar to
those of Advisor Growth Stock Fund. Growth Stock Portfolio normally
invests at least 65% of its total assets in a diversified portfolio of
common stocks and other equity-type securities that the Adviser
believes to have long-term appreciation possibilities.
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 guarantee that Advisor Growth
Stock Fund or Growth Stock Portfolio will achieve their common
investment objective.
Investment Risks. Advisor Growth Stock Fund is designed for long-term
investors who desire to participate in the stock market with more
investment risk and volatility than the stock market in general, but
with less investment risk and volatility than an aggressive capital
appreciation fund. Growth Stock Portfolio 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. Shares of Advisor Growth Stock Fund may be
purchased only through Intermediaries, including retirement plan
service providers. For information on purchasing and redeeming Advisor
Growth Stock 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 Growth Stock Portfolio. In addition, it
provides administrative services to Advisor Growth Stock Fund and
Growth Stock Portfolio. For a description of the Adviser and these
service arrangements, see Management.
FEE TABLE
Shareholder Transaction Expenses/1/
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Estimated Annual Fund Operating Expenses (as
a percentage of average net assets;
after reimbursement)
Management and Administrative Fees 0.00%
12b-1 Fees 0.25%
Other Expenses (after reimbursement) 1.10%
-----
Total Operating Expenses (after reimbursement) 1.35%
=====
______________
1. Redemption proceeds exceeding $500 sent via federal funds wire will
be subject to a $7.50 charge per transaction.
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
$14 $43
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 Advisor Growth Stock Fund. The Fee
Table reflects the combined expenses of both Advisor Growth Stock Fund
and Growth Stock Portfolio. Anticipated Total Operating Expenses for
Class K shares of Advisor Growth Stock 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, Management and Administrative
Fees, Other Expenses and Total Operating Expenses for Class K shares
would have been 0.78%, 55.07% and 56.10%, 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.)
Advisor Growth Stock Fund pays the Adviser an administrative fee
based on its average daily net assets and Growth Stock 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 Advisor Growth Stock Fund, including its share of
the expenses of Growth Stock Portfolio, would be more or less than if
Advisor Growth Stock Fund invested directly in the securities held by
Growth Stock Portfolio. The trustees concluded that Advisor Growth
Stock Fund's 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 Advisor Growth Stock Fund pays a 12b-1 fee, long-term
investors in Advisor Growth Stock 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 Advisor Growth Stock Fund's
12b-1 fee, see Management--Distributor or call your financial
representative.
FINANCIAL HIGHLIGHTS
The table below reflects the results of operations of Class K shares of
Advisor Growth Stock Fund on a per-share basis for the period shown and
has been audited by Arthur Andersen LLP, independent public
accountants. The table should be read in conjunction with the
financial statements and notes thereto. The annual report, which may
be obtained from Advisor Trust without charge upon request, contains
additional performance information.
Period Ended
Sept. 30,
1997(a)
------------
Net Asset Value, Beginning of Period $10.00
------
Income from Investment Operations
Net investment loss (0.01)
Net realized and unrealized losses on
investments 1.27
------
Total from investment operations 1.26
------
Net Asset Value, End of Period $11.26
======
Ratio of net expenses to average net assets (b) 1.35%*
Ratio of net investment income to average net
assets (c) (0.22%)*
Total return 12.60%
Net assets, end of period (000 omitted) $251
______________
*Annualized
(a) From commencement of operations on Feb. 14, 1997, reflects
information relating to the initial shares of Advisor Growth Stock Fund
that were redesignated Class K shares as of Oct. 15, 1997. As
presented in other parts of this prospectus, the historical performance
of Class K shares prior to Feb. 14, 1997, is based on the performance
of Growth Stock Portfolio, restated to reflect 12b-1 fees and other
expenses applicable to Class K, without giving effect to any expense
reimbursements described herein and assuming reinvestment of dividends
and capital gains.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses, this ratio would have been 56.10% for the
period ended Sept. 30, 1997.
(c) Computed giving effect to the expense limitation undertaking.
THE FUND
Stein Roe Advisor Growth Stock Fund ("Advisor Growth Stock Fund") is a
multi-class series of 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, Advisor Growth Stock
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.) Advisor Growth Stock Fund invests all of
its net investable assets in SR&F Growth Stock Portfolio ("Growth Stock
Portfolio"), which is a series of SR&F Base Trust ("Base Trust").
Stein Roe & Farnham Incorporated (the "Adviser") provides
portfolio management services to Growth Stock Portfolio and
administrative services to Advisor Growth Stock Fund and Growth Stock
Portfolio.
INVESTMENT POLICIES
The investment objective of Advisor Growth Stock Fund is to provide
long-term capital appreciation by investing in common stocks and other
equity-type securities. Advisor Growth Stock Fund invests all of its
net investable assets in Growth Stock Portfolio, which has the same
investment objective and investment policies substantially similar to
Advisor Growth Stock Fund. Growth Stock Portfolio attempts to achieve
its objective by normally investing at least 65% of its total assets in
common stocks and other equity-type securities (such as preferred
stocks, securities convertible into or exchangeable for common stocks,
and warrants or rights to purchase common stocks) that, in the opinion
of the Adviser, have long-term appreciation possibilities.
Further information on investment techniques that may be employed
by Growth Stock Portfolio 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.
PERFORMANCE INFORMATION
The total return from an investment in Class K shares of Advisor Growth
Stock 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 Class K's total return 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.
Class K's performance 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 no
guarantee of future results. Share prices may vary, and your shares
when redeemed may be worth more or less than your original purchase
price.
Advisor Growth Stock Fund invests all of its net investable assets
in Growth Stock Portfolio, which has the same investment objective and
substantially the same investment policies as Advisor Growth Stock
Fund. Advisor Growth Stock Fund commenced operations on Feb. 14, 1997,
but until Oct. 15, 1997, offered only the shares that are now
designated Class K shares. The historical performance of Class K
shares for the period prior to Feb. 14, 1997, and the historical
performance of each other class of shares of Advisor Growth Stock Fund
for all periods is based on the performance of Growth Stock Portfolio,
restated to reflect the sales charges, 12b-1 fees and other expenses
applicable to the class 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 Advisor Growth
Stock Fund's future performance. The average annual total returns for
the periods ended Sept. 30, 1997, for 1-year, 3-year, 5-year, and 10-
year investments were 32.76%, 27.02%, 16.95%, and 12.45%, respectively.
RISKS AND INVESTMENT CONSIDERATIONS
Advisor Growth Stock Fund is designed for long-term investors who
desire to participate in the stock market with more investment risk and
volatility than the stock market in general, but with less investment
risk and volatility than an aggressive capital appreciation fund.
Growth Stock Portfolio usually allocates its investments among a number
of different industries rather than concentrating in a particular
industry or group of industries, but this does not eliminate all risk.
It will not, however, invest more than 25% of the total value of its
assets (at the time of investment) in the securities of companies in
any one industry. There can be no guarantee that Advisor Growth Stock
Fund or Growth Stock Portfolio will achieve its objective.
Growth Stock Portfolio may invest up to 35% of its total assets in
debt securities. Debt securities rated in the fourth highest grade may
have some speculative characteristics, and changes in economic
conditions or other circumstances may lead to a weakened capacity of
the issuers of such securities to make principal and interest payments.
Securities rated below investment grade may possess speculative
characteristics, and changes in economic conditions are more likely to
affect the issuer's capacity to pay interest or repay principal.
Growth Stock Portfolio may invest up to 25% of its total assets in
foreign securities. For purposes of this limit, foreign securities
exclude American Depositary Receipts (ADRs), foreign debt securities
denominated in U.S. dollars, and securities guaranteed by a U.S.
person. Investment in foreign securities may represent a greater
degree of risk (including risk related to exchange rate fluctuations,
tax provisions, exchange and currency controls, and expropriation of
assets) than investment in securities of domestic issuers. Other risks
of foreign investing include less complete financial information on
issuers, different accounting, auditing and financial reporting
standards, different settlement practices, less market liquidity, more
market volatility, less 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.
Further information on investment techniques that may be employed
by Growth Stock Portfolio may be found under Portfolio Investments and
Strategies.
INVESTMENT RESTRICTIONS
Each of Advisor Growth Stock Fund and Growth Stock Portfolio is
diversified as that term is defined in the Investment Company Act of
1940.
Neither Advisor Growth Stock Fund nor Growth Stock Portfolio may
invest more than 5% of its assets in the securities of any one issuer.
This restriction applies only to 75% of the investment portfolio, and
does not apply to securities of the U.S. Government or repurchase
agreements /1/ for such securities. This restriction also does not
prevent Advisor Growth Stock Fund from investing all of its assets in
shares of another investment company (Growth Stock Portfolio) having
the identical investment objective under a master/feeder structure.
- -------
/1/ A repurchase agreement involves a sale of securities to Growth
Stock 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, Growth Stock Portfolio could experience both
losses and delays in liquidating its collateral.
- -------
Neither Advisor Growth Stock Fund nor Growth Stock Portfolio will
acquire more than 10% of the outstanding voting securities of any one
issuer, except that Advisor Growth Stock Fund may invest all of its
assets in shares of another investment company (such as Growth Stock
Portfolio) having the identical investment objective under a
master/feeder structure.
While neither Advisor Growth Stock Fund nor Growth Stock Portfolio
may make loans, each may (1) purchase money market instruments and
enter into repurchase agreements; (2) acquire publicly distributed or
privately placed debt securities; (3) lend portfolio securities under
certain conditions; and (4) participate in an interfund lending program
with other Stein Roe Funds and Portfolios. Advisor Growth Stock Fund
and Growth Stock Portfolio may not borrow money, except for
nonleveraging, temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither the aggregate
borrowings (including reverse repurchase agreements) nor the aggregate
loans at any one time may exceed 33 1/3% of the value of total assets.
Additional securities may not be purchased when borrowings less
proceeds receivable from sales of portfolio securities exceed 5% of
total assets.
Growth Stock Portfolio may invest in repurchase agreements,
provided that it will not invest more than 15% of its net assets in
illiquid securities, including repurchase agreements maturing in more
than seven days.
The policies summarized in the second, third, and fourth
paragraphs under this section and the policy with respect to
concentration of investments in any one industry described under Risks
and Investment Considerations are fundamental policies of Advisor
Growth Stock Fund and Growth Stock Portfolio and, as such, can be
changed only with the approval of a "majority of the outstanding voting
securities" as defined in the Investment Company Act of 1940. The
common investment objective of Advisor Growth Stock Fund and Growth
Stock Portfolio is nonfundamental and, as such, may be changed by the
Board of Trustees without shareholder approval. All of the investment
restrictions are set forth in the Statement of Additional Information.
PORTFOLIO INVESTMENTS AND STRATEGIES
Debt Securities. In pursuing its investment objective, Growth Stock
Portfolio may invest up to 35% of its total assets in debt securities
of corporate and governmental issuers. Investment in debt securities
is limited to those that are rated within the four highest grades
(generally referred to as investment grade). If the rating of a
security held by Growth Stock Portfolio is lost or reduced below
investment grade, it is not required to dispose of the security--the
Adviser will, however, consider that fact in determining whether Growth
Stock Portfolio should continue to hold the security. When the Adviser
deems a temporary defensive position advisable, Growth Stock Portfolio
may invest, without limitation, in high-quality fixed income
securities, or hold assets in cash or cash equivalents.
Foreign Securities. Growth Stock Portfolio may invest in sponsored or
unsponsored ADRs. In addition to, or in lieu of, such direct
investment, Growth Stock Portfolio may construct a synthetic foreign
debt 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 debt 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, Growth
Stock Portfolio may enter into foreign currency forward and futures
contracts to hedge the currency risk in settlement of a particular
security transaction or relative to the entire portfolio. A forward
contract to purchase an amount of foreign currency sufficient to pay
the purchase price of securities at settlement date involves the risk
that the value of the foreign currency may decline relative to the
value of the dollar prior to the settlement date. This risk is in
addition to the risk that the value of the foreign security purchased
may decline. Growth Stock Portfolio also may enter into foreign
currency contracts as a hedging technique to limit or reduce exposure
of the entire portfolio to currency fluctuations. In addition, Growth
Stock Portfolio may use options and futures contracts, as described
below, to limit or reduce exposure to currency fluctuations. As of
Sept. 30, 1997, Growth Stock Portfolio's holdings of foreign companies
amounted to 4.8% of net assets (1.6% in foreign securities and 3.2% in
ADRs).
Convertible Securities. By investing in convertible securities, Growth
Stock Portfolio obtains the right to benefit from the capital
appreciation potential in the underlying stock upon exercise of the
conversion right, while earning higher current income than would be
available if the stock were purchased directly. In determining whether
to purchase a convertible security, the Adviser will consider
substantially the same criteria that would be considered in purchasing
the underlying stock. Although convertible securities are frequently
rated investment grade, Growth Stock Portfolio also may purchase
unrated securities or securities rated below investment grade if the
securities meet the Adviser's other investment criteria. Convertible
securities rated below investment grade (a) tend to be more sensitive
to interest rate and economic changes, (b) may be obligations of
issuers who are less creditworthy than issuers of higher-quality
convertible securities, and (c) may be more thinly traded due to such
securities being less well known to investors than investment grade
convertible securities, common stock or conventional debt securities.
As a result, the Adviser's own investment research and analysis tend to
be more important than other factors in the purchase of convertible
securities.
Lending Portfolio Securities; When-Issued and Delayed-Delivery
Securities. Growth Stock Portfolio may make loans of its portfolio
securities to broker-dealers and banks subject to certain restrictions
described in the Statement of Additional Information. Growth Stock
Portfolio may participate in an interfund lending program, subject to
certain restrictions described in the Statement of Additional
Information. Growth Stock Portfolio may invest in securities purchased
on a when-issued or delayed-delivery basis. Although the payment terms
of these securities are established at the time Growth Stock 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. Growth Stock Portfolio will make such commitments only
with the intention of actually acquiring the securities, but may sell
the securities before settlement date if it is deemed advisable for
investment reasons.
Short Sales Against the Box. Growth Stock Portfolio may sell short
securities it owns or has the right to acquire without further
consideration, using a technique called selling short "against the
box." Short sales against the box may protect Growth Stock 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. Growth Stock Portfolio does not expect to commit more
than 5% of its net assets to short sales against the box. For a more
complete explanation, please refer to the Statement of Additional
Information.
Derivatives. Consistent with its objective, Growth Stock 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.
Growth Stock Portfolio does not expect to invest more than 5% of its
net assets in any type of Derivative except for options, futures
contracts, and futures options.
In seeking to achieve its desired investment objective, provide
additional revenue, or hedge against changes in security prices,
interest rates or currency fluctuations, Growth Stock Portfolio may:
(1) purchase and write both call options and put options on securities,
indexes and foreign currencies; (2) enter into interest rate, index and
foreign currency futures contracts; (3) write options on such futures
contracts; and (4) purchase other types of forward or investment
contracts linked to individual securities, indexes or other benchmarks.
Growth Stock Portfolio may write a call or put option only if the
option is covered. As the writer of a covered call option, Growth
Stock 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 Growth
Stock Portfolio seeks to close out a position. In addition, because
futures positions may require low margin deposits, 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.
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.
Portfolio Turnover. Although Growth Stock Portfolio does not purchase
securities with a view to rapid turnover, there are no limitations on
the length of time portfolio securities must be held. Accordingly, the
portfolio turnover rate may vary significantly from year to year, but
is not expected to exceed 100% under normal market conditions. A high
rate of portfolio turnover may result in increased transaction expenses
and the realization of capital gains and losses. (See Distributions
and Income Taxes.)
NET ASSET VALUE
Advisor Growth Stock Fund determines the net asset value of its shares
as of the close of regular session 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. Growth Stock Portfolio allocates net asset
value, income, and expenses to Advisor Growth Stock Fund and any other
of its feeder funds in proportion to their respective interests in
Growth Stock 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 Advisor Growth Stock 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.
Each security traded on a national stock exchange is valued at its
last sale price on that exchange on the day of valuation or, if there
are no sales that day, at the latest bid quotation. Each over-the-
counter security for which the last sale price on the day of valuation
is available from Nasdaq is valued at that price. All other over-the-
counter securities for which reliable quotations are available are
valued at the latest bid quotation.
Long-term straight-debt obligations and securities convertible
into stocks are valued at a fair value using a procedure determined in
good faith by the Board of Trustees. Pricing services approved by the
Board provide valuations (some of which may be "readily available
market quotations"). 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 using a method
that the Board believes represents fair value. The Board may approve
the use of other pricing services 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 represents fair value.
HOW TO PURCHASE SHARES
You may purchase Class K shares of Advisor Growth Stock 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 Growth Stock Fund do not
recommend, endorse, or receive payments from any Intermediary.
Class K shares of Advisor Growth Stock Fund are offered
continuously. Orders received in good order prior to the time at which
Advisor Growth Stock Fund values its shares (or placed with an
Intermediary before such time and transmitted by the Intermediary
before Advisor Growth Stock Fund processes that day's share
transactions) will be processed based on that day's closing net asset
value.
Conditions of Purchase. Each purchase order for Advisor Growth Stock
Fund 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 Advisor Growth Stock Fund. Once your purchase order has
been accepted, you may not cancel or revoke it; you may, however,
redeem the shares. 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 Advisor Growth Stock Fund's shareholders.
To reduce the volume of mail you receive, only one copy of certain
materials, such as prospectuses and shareholder reports, will be mailed
to your household (same address). Please call 800-322-0593 if you wish
to receive additional copies free of charge.
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 shares of Advisor
Growth Stock Fund, 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 shares of Advisor
Growth Stock Fund. 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 Advisor Growth Stock 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 the same class 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
Growth Stock Fund 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 Growth Stock Fund 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 Advisor Growth Stock 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,
and in no event later than seven days after proper instructions are
received. However, for shares recently purchased by check, the 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 and paid annually.
Advisor Growth Stock 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. Advisor Growth Stock Fund intends to distribute any
undistributed net investment income and net realized capital gains in
the following year.
All income dividends and capital gains distributions on shares of
Advisor Growth Stock Fund will be reinvested in additional shares of
the same class unless your Intermediary elects 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 Advisor Growth Stock Fund at net asset
value. If a shareholder elected to receive dividends and/or capital
gains distributions in cash and the postal or other delivery service
selected by the transfer agent is unable to deliver checks to the
shareholder's address of record, such shareholder's distribution option
will automatically be converted to having all dividend and other
distributions reinvested in additional shares. The Advisor reserves
the right to reinvest the proceeds and future distributions in
additional shares of the Fund if checks mailed to you for distributions
are returned as undeliverable or are not presented for payment within
six months. No interest will accrue on amounts represented by uncashed
distribution or redemption checks. To change your election, call the
Fund for instructions.
Income Taxes. For federal income tax purposes, Advisor Growth Stock
Fund is treated as a separate taxable entity distinct from the other
series of Advisor Trust. Advisor Growth Stock Fund intends to qualify
for the special tax treatment afforded regulated investment companies
under Subchapter M of the Internal Revenue Code, so that it will be
relieved of federal income tax on that part of its net investment
income and net capital gains that are distributed to shareholders.
Generally distributions are taxable as ordinary income, except
that any distributions of net long-term capital gains will be taxed as
such. However, distributions to plans that qualify for tax-exempt
treatment under federal income tax laws will not be taxable. Special
tax rules apply to investments through such plans.
The Taxpayer Relief Act of 1997 (the "Act") reduced from 28% to
20% the maximum tax rate on long-term capital gains. This reduced rate
generally applies to securities held for more than 18 months and sold
after July 28, 1997, and securities held for more than one year and
sold between May 6, 1997 and July 29, 1997.
If you buy shares shortly before a distribution is declared, the
distribution will be taxable although it is, in effect, a partial
return of the amount invested.
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.
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 Advisor Growth Stock Fund and Growth Stock
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
Advisor Growth Stock Fund and Growth Stock Portfolio and other feeder
funds investing in Growth Stock 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 Growth Stock Portfolio and the business affairs
of Advisor Growth Stock Fund, Growth Stock Portfolio, 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.
Portfolio Managers. Erik P. Gustafson has been portfolio manager of
Growth Stock Portfolio since its inception in 1997 and had managed its
predecessor since 1994. Mr. Gustafson is a senior vice president of
the Adviser, having joined it in 1992. From 1989 to 1992 he was an
attorney with Fowler, White, Burnett, Hurley, Banick & Strickroot. He
holds a B.A. from the University of Virginia (1985) and M.B.A. and J.D.
degrees from Florida State University (1989). As of Sept. 30, 1997,
Mr. Gustafson was responsible for managing $1.3 billion in mutual fund
net assets. David P. Brady is associate portfolio manager. Mr. Brady
is a vice president of the Adviser, which he joined in 1993, and was an
equity investment analyst with State Farm Mutual Automobile Insurance
Company from 1986 to 1993. A chartered financial analyst, Mr. Brady
earned a B.S. in Finance, graduating Magna Cum Laude, from the
University of Arizona (1986), and an M.B.A. from the University of
Chicago (1989).
Fees and Expenses. The Adviser is entitled to receive a monthly
administrative fee from Advisor Growth Stock Fund, computed and accrued
daily, at an annual rate of 0.15% of the first $500 million of average
net assets, 0.125% of the next $500 million, and 0.10% thereafter; and
a monthly management fee from Growth Stock Portfolio, computed and
accrued daily, at an annual rate of 0.60% of the first $500 million of
average net assets, 0.55% of the next $500 million, and 0.50%
thereafter. However, as noted above under Fee Table, the Adviser may
voluntarily undertake to reimburse Advisor Growth Stock Fund for a
portion of its operating expenses and its pro rata share of Growth
Stock Portfolio's operating expenses. For the period ended Sept. 30,
1997, total expenses (annualized and net of reimbursement by the
Adviser) amounted to 1.35%. At Sept. 30, 1997, Advisor Growth Stock
Fund owned 0.04% of Growth Stock Portfolio.
Under a separate agreement with each Trust, the Adviser provides
certain accounting and bookkeeping services to Advisor Growth Stock
Fund and Growth Stock Portfolio 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 Advisor Growth Stock
Fund.
Portfolio Transactions. The Adviser places the orders for the purchase
and sale of portfolio securities and options and futures contracts for
Growth Stock Portfolio. 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 Advisor Growth
Stock Fund 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 Advisor Growth Stock Fund are offered
for sale through Liberty Financial Investments, Inc. ("Distributor")
without any sales commissions. The Distributor is a subsidiary of
Colonial Management Associates, Inc., which 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
expenses related to the promotion and distribution of shares of Advisor
Growth Stock Fund including its expenses related to sale and promotion
of Fund shares and to servicing of the shares, the Distributor receives
from Advisor Growth Stock Fund a servicing and/or distribution fee at
an annual rate not exceeding 0.25% of the average net assets
attributable to Class K shares. The Distributor generally pays this
compensation to institutions that distribute Fund shares and provide
services to Advisor Growth Stock Fund and its 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 Advisor Growth Stock Fund during any year
may be more or less than the cost of distribution or other services
provided to Advisor Growth Stock 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.
Custodian. State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian for
Advisor Growth Stock Fund and Growth Stock Portfolio. 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, 10 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.
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.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Advisor Growth Stock Fund, 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
Advisor Growth Stock Fund. The initial shareholder of Advisor Growth
Stock Fund approved this policy of permitting Advisor Growth Stock Fund
to act as a feeder fund by investing in Growth Stock Portfolio. Please
refer to Investment Policies, Portfolio Investments and Strategies, and
Investment Restrictions for a description of the investment objectives,
policies, and restrictions of Advisor Growth Stock Fund and Growth
Stock Portfolio. The management fees and expenses of both Advisor Growth
Stock Fund and Growth Stock Portfolio are described under Fee Table and
Management. Advisor Growth Stock 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.
SR&F Growth Stock 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
Aug. 23, 1993. The Declaration of Trust of Base Trust provides that
Advisor Growth Stock Fund and other investors in Growth Stock Portfolio
will each be liable for all obligations of Growth Stock Portfolio that
are not satisfied by the Portfolio. However, the risk of Advisor
Growth Stock Fund incurring financial loss on account of such liability
is limited to circumstances in which both inadequate insurance existed
and Growth Stock Portfolio itself were unable to meet its obligations.
Accordingly, the trustees of Advisor Trust believe that neither Advisor
Growth Stock Fund nor its shareholders will be adversely affected by
reason of Advisor Growth Stock Fund's investing in Growth Stock
Portfolio.
The Declaration of Trust of Base Trust provides that Growth Stock
Portfolio will terminate 120 days after the withdrawal of Advisor
Growth Stock Fund or any other investor in Growth Stock Portfolio,
unless the remaining investors vote to agree to continue the business
of Growth Stock Portfolio. The trustees of Advisor Trust may vote
Advisor Growth Stock Fund's interests in Growth Stock Portfolio for
such continuation without approval of Advisor Growth Stock Fund's
shareholders.
The common investment objective of Advisor Growth Stock Fund and
Growth Stock Portfolio is nonfundamental and may be changed without
shareholder approval. The fundamental policies of Advisor Growth Stock
Fund and the corresponding fundamental policies of Growth Stock
Portfolio can be changed only with shareholder approval.
If Advisor Growth Stock Fund, as a Portfolio investor, is
requested to vote on a proposed change in fundamental policy of Growth
Stock Portfolio or any other matter pertaining to Growth Stock
Portfolio (other than continuation of the business of Growth Stock
Portfolio after withdrawal of another investor), Advisor Growth Stock
Fund will solicit proxies from its shareholders and vote its interest
in Growth Stock Portfolio for and against such matters proportionately
to the instructions to vote for and against such matters received from
Advisor Growth Stock Fund shareholders. Advisor Growth Stock 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
Growth Stock Portfolio investors. If other investors hold a majority
interest in Growth Stock Portfolio, they could have voting control over
Growth Stock Portfolio.
In the event that Growth Stock Portfolio's fundamental policies
were changed so as to be inconsistent with those of Advisor Growth
Stock Fund, the Board of Trustees of Advisor Trust would consider what
action might be taken, including changes to Advisor Growth Stock Fund's
fundamental policies, withdrawal of Advisor Growth Stock Fund's assets
from Growth Stock 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 Advisor
Growth Stock Fund's shareholders. Advisor Growth Stock 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 Advisor Growth Stock Fund's assets
could result in a distribution in kind of portfolio securities (as
opposed to a cash distribution) to Advisor Growth Stock Fund. Should
such a distribution occur, Advisor Growth Stock 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 Advisor Growth Stock Fund and
could affect the liquidity of Advisor Growth Stock Fund.
Each investor in Growth Stock Portfolio, including Advisor Growth
Stock Fund, may add to or reduce its investment in Growth Stock
Portfolio on each day the NYSE is open for business. The investor's
percentage of the aggregate interests in Growth Stock Portfolio will be
computed as the percentage equal to the fraction (i) the numerator of
which is the beginning of the day value of such investor's investment
in Growth Stock 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 Growth Stock Portfolio effected on such day; and (ii) the
denominator of which is the aggregate beginning of the day net asset
value of Growth Stock 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 Growth Stock Portfolio by all investors in
Growth Stock Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in Growth
Stock Portfolio as of the close of business.
Base Trust may permit other investment companies and/or other
institutional investors to invest in Growth Stock Portfolio, but
members of the general public may not invest directly in Growth Stock
Portfolio. Other investors in Growth Stock Portfolio are not required
to sell their shares at the same public offering price as Advisor
Growth Stock Fund, might incur different administrative fees and
expenses than Advisor Growth Stock Fund, and their shares might be sold
with a sales commission. Therefore, Advisor Growth Stock Fund
shareholders might have different investment returns than shareholders
in another investment company that invests exclusively in Growth Stock
Portfolio. Investment by such other investors in Growth Stock
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 Growth Stock Portfolio could result in
untimely liquidations of Growth Stock Portfolio's security holdings,
loss of investment flexibility, and increases in the operating expenses
of Growth Stock Portfolio as a percentage of its net assets. As a
result, Growth Stock Portfolio's security holdings may become less
diverse, resulting in increased risk.
Growth Stock Portfolio commenced operations in Feb. 1997 when
Stein Roe Growth Stock Fund, a mutual fund that, together with its
corporate predecessor, had invested directly in securities since 1958,
converted into a feeder fund by investing all of its assets in the
Portfolio. Currently Stein Roe Growth Stock Fund, which is a series of
Stein Roe Investment Trust, is the only other investment company
investing in Growth Stock Portfolio. Information regarding any
investment company that may invest in Growth Stock Portfolio 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 Advisor Growth Stock Fund, call Retirement
Services at 800-322-1130 or Advisor/Broker Services at 800-322-0593.
______________________
<PAGE>
Prospectus Feb. 2, 1998
Stein Roe Advisor 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. The investment experience of each
Fund will correspond to its respective Portfolio. (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 Feb. 2, 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..................................4
The Funds..................................5
Investment Policies........................6
Performance Information....................8
Risks and Investment Considerations .......9
Investment Restrictions ..................11
Portfolio Investments and Strategies......12
Net Asset Value ..........................20
How to Purchase Shares....................20
How to Sell (Redeem) Shares ..............21
Distributions and Income Taxes............22
Management ...............................23
Organization and Description of Shares....25
Master Fund/Feeder Fund: Structure
and Risk Factors.......................26
For More Information .....................28
Appendix--Ratings.........................28
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 ("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 or
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 0.45% 0.53% 0.52%
12b-1 Fees 0.25% 0.25% 0.25%
Other Expenses (after reimbursement) 0.30% 0.32% 0.33%
Total Operating Expenses (after ----- ----- -----
reimbursement) 1.00% 1.10% 1.10%
===== ===== =====
______________
*Redemption proceeds exceeding $500 sent via federal funds wire will be
subject to a $7.50 charge per transaction.
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 Fund 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 0.50% and
1.05% for Advisor Intermediate Bond Fund, 0.63% and 1.20% for Advisor
Income Fund, and 0.57% and 1.15% 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. The trustees 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 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 debt 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 (sometimes referred to as duration) 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,
and are commonly referred to as "junk bonds." (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 no
guarantee 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 June 30, 1997 (fiscal year end)
and Dec. 31, 1997, for 1-year, 5-year, and 10-year investments were:
1 year 5 years 10 years
6/30 12/31 6/30 12/31 6/30 12/31
------------ ------------ ------------
Advisor High-Yield
Municipals Fund 8.64% 9.25% 6.32% 7.15% 7.78% 8.21%
Advisor Intermediate
Bond Fund 9.06% 9.02% 6.71% 6.99% 7.96% 8.30%
Advisor Income Fund 10.06% 9.31% 8.14% 8.17% 8.64% 9.02%
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.
Intermediate Bond Portfolio and Income Portfolio may invest in futures
and options. Risks associated with futures and options include their failure
as hedging techniques in cases where the price movements of securities
underlying the futures and options do not follow the price movements of the
portfolio securities subject to the hedge, that the loss from investing in
futures transactions is potentially unlimited, that gains and losses on
investments in futures and options depend on the portfolio manager's ability to
predict correctly the direction of stock prices, interest rates and economic
factors and that a Fund will likely be unable to control losses by closing its
position where a liquid secondary market does not exist.
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.
- ------------
While a Fund may not make loans, 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 and the lowest rating assigned by S&P is for bonds that
are in default, and payment of interest and/or repayment of principal
is in arrears.
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.
Defensive Investments. While the Adviser considers a temporary
defensive position advisable, Intermediate Bond Portfolio and
Income Portfolio may invest, without limitation, in high quality
fixed income securities or hold assets in cash or cash equivalents.
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, including those backed by
credit card receivables and auto loans, 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.
High-Yield Municipals Portfolio does not currently intend to invest
more than 5% of its assets in tender option bonds. A
tender option bond is a Municipal Security (generally held
pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher
than prevailing short-term tax-exempt rates, that has been coupled
with the agreement of a third party, such as a bank, broker-dealer
or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to
tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the
difference between the Municipal Security's fixed coupon rate and
the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at par on the
date of such determination. Thus, after payment of this fee, the
security holder effectively holds a demand obligation that bears
interest at the prevailing short-term tax-exempt rate. The
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 Distributions and Income Taxes.)
NET ASSET VALUE
Each Fund determines the net asset value of its shares as of the
close of regular session 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. Once your purchase order has been accepted,
you may not cancel or revoke it; you may, however, redeem the shares.
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.
To reduce the volume of mail you receive, only one copy of certain
materials, such as prospectuses and shareholder reports, will be
mailed to your household (same address). Please call 800-322-0593 if
you wish to receive additional copies free to charge.
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 the same class 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. Advisor Trust reserves the right
to reinvest the proceeds and future distributions in additional shares
of a Fund if checks mailed to you for distributions are returned as
undeliverable or are not presented for payment within six months.
No interest will accrue on amounts represented by uncashed distribution
or redemption checks. To change your election, call the Fund for
instructions.
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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 the Adviser believes 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 expenses related to the promotion and distribution of shares of
the Funds including its expenses related to sale and promotion of Fund
shares and to servicing of the shares, the Distributor receives from
each Fund a servicing and/or distribution fee at an annual rate not
exceeding 0.25% of the average net assets attributable to Class K
shares. The Distributor generally pays this compensation 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.
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.
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 fees 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
Aug. 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 Feb. 2, 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 feeder funds 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>
Statement of Additional Information Dated Feb. 2, 1998
STEIN ROE ADVISOR TRUST
Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
Stein Roe Advisor Balanced Fund
Stein Roe Advisor Growth & Income Fund
Stein Roe Advisor Special Fund
Stein Roe Advisor Special Venture Fund
Stein Roe Advisor International 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 Balanced Fund........................3
Stein Roe Advisor Growth & Income Fund.................3
Stein Roe Advisor Special Fund.........................4
Stein Roe Advisor Special Venture Fund.................4
Stein Roe Advisor International Fund...................5
Portfolio Investments and Strategies.....................6
Investment Restrictions.................................24
Additional Investment Considerations....................29
Management..............................................30
Financial Statements....................................33
Principal Shareholders..................................34
Investment Advisory Services............................34
Custodian...............................................36
Independent Public Accountants..........................37
Distributor.............................................37
Transfer Agent and Shareholder Servicing................39
Purchases and Redemptions...............................39
Portfolio Transactions..................................40
Additional Income Tax Considerations....................42
Investment Performance..................................44
Appendix--Ratings.......................................48
GENERAL INFORMATION AND HISTORY
The five mutual funds listed on the cover page (referred to
collectively as the "Funds") are separate series of Stein Roe Advisor
Trust ("Advisor Trust"). 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 Balanced Fund
Stein Roe Advisor Balanced Fund ("Advisor Balanced Fund") seeks to
achieve its objective by investing in SR&F Balanced Portfolio
("Balanced Portfolio"). Their common investment objective is to seek
long-term growth of capital and current income, consistent with
reasonable investment risk. Balanced Portfolio allocates its
investments among equities, debt securities and cash. The portfolio
manager determines those allocations based on the views of the
Adviser's investment strategists regarding economic, market and other
factors relative to investment opportunities.
The equity portion of the investment portfolio is invested
primarily in well-established companies having market capitalizations
in excess of $1 billion. Fixed-income senior securities will make up
at least 25% of Balanced Portfolio's total assets. Investments in debt
securities are limited to those that are within the four highest grades
(generally referred to as "investment grade") assigned by a nationally
recognized statistical rating organization or, if unrated, determined
by the Adviser to be of comparable quality.
Stein Roe Advisor Growth & Income Fund
Stein Roe Advisor Growth & Income Fund ("Advisor Growth & Income
Fund") seeks to achieve its objective by investing in SR&F Growth &
Income Portfolio ("Growth & Income Portfolio"). Their common
investment objective is to provide both growth of capital and current
income. Advisor Growth & Income Fund is designed for investors seeking
a diversified portfolio of securities that offers the opportunity for
long-term growth of capital while also providing a steady stream of
income. Growth & Income Portfolio invests primarily in well-
established companies whose common stocks are believed to have both the
potential to appreciate in value and to pay dividends to shareholders.
Although it may invest in a broad range of securities (including
common stocks, preferred stocks, securities convertible into or
exchangeable for common stocks, and warrants or rights to purchase
common stocks), normally Growth & Income Portfolio emphasizes
investments in equity securities of companies having market
capitalizations in excess of $1 billion. Securities of these well-
established companies are believed to be generally less volatile than
those of companies with smaller capitalizations because companies with
larger capitalizations tend to have experienced management; broad,
highly diversified product lines; deep resources; and easy access to
credit.
Stein Roe Advisor Special Fund
Stein Roe Advisor Special Fund ("Advisor Special Fund") seeks to
achieve its objective by investing in SR&F Special Portfolio ("Special
Portfolio"). Their common investment objective is to invest in
securities selected for possible capital appreciation. Particular
emphasis is placed on securities that are considered to have limited
downside risk relative to their potential for above-average growth,
including securities of undervalued, underfollowed or out-of-favor
companies, and companies that are low-cost producers of goods or
services, financially strong or run by well-respected managers.
Special Portfolio may invest more than 5% of its net assets in
securities of seasoned, established companies that appear to have
appreciation potential, as well as securities of relatively small, new
companies. In addition, it may invest in securities with limited
marketability, new issues of securities, securities of companies that,
in the Adviser's opinion, will benefit from management change, new
technology, new product or service development or change in demand, and
other securities that the Adviser believes have capital appreciation
possibilities; however, Special Portfolio does not currently intend to
invest more than 5% of its net assets in any of these types of
securities. Securities of smaller, newer companies may be subject to
greater price volatility than securities of larger, more well-
established companies. In addition, many smaller companies are less
well known to the investing public and may not be as widely followed by
the investment community. Although Special Portfolio invests primarily
in common stocks, it may also invest in other equity-type securities,
including preferred stocks and securities convertible into equity
securities.
Stein Roe Advisor Special Venture Fund
Stein Roe Advisor Special Venture Fund ("Advisor Special Venture
Fund") seeks to achieve its objective by investing in SR&F Special
Venture Portfolio ("Special Venture Portfolio"). Their common
investment objective is to seek long-term capital appreciation.
Special Venture Portfolio invests primarily in a diversified portfolio
of common stocks and other equity-type securities (such as preferred
stocks, securities convertible or exchangeable for common stocks, and
warrants or rights to purchase common stocks) of entrepreneurially
managed companies that the Adviser believes represent special
opportunities. Special Venture Portfolio emphasizes investments in
financially strong small and medium-sized companies based principally
on appraisal of their management and stock valuations. The Adviser
considers "small" and "medium-sized" companies to be those with market
capitalizations of less than $1 billion and $1 to $3 billion,
respectively.
In both its initial and ongoing appraisals of a company's
management, the Adviser seeks to know both the principal owners and
senior management and to assess their business judgment and strategies
through personal visits. The Adviser favors companies whose management
has an owner/operator, risk-averse orientation and a demonstrated
ability to create wealth for investors. Attractive company
characteristics include unit growth, favorable cost structures or
competitive positions, and financial strength that enables management
to execute business strategies under difficult conditions. A company
is attractively valued when its stock can be purchased at a meaningful
discount to the value of the underlying business.
Stein Roe Advisor International Fund
Stein Roe Advisor International Fund ("Advisor International
Fund") pursues its objective by investing in SR&F International
Portfolio ("International Portfolio"). Their common investment
objective is to seek long-term growth of capital. International
Portfolio seeks to achieve this objective by investing primarily in a
diversified portfolio of foreign securities. Current income is not a
primary factor in the selection of portfolio securities. International
Portfolio invests primarily in common stocks and other equity-type
securities (such as preferred stocks, securities convertible or
exchangeable for common stocks, and warrants or rights to purchase
common stocks). International Portfolio may invest in securities of
smaller emerging companies as well as securities of well-seasoned
companies of any size. Smaller companies, however, involve higher
risks in that they typically have limited product lines, markets, and
financial or management resources. In addition, the securities of
smaller companies may trade less frequently and have greater price
fluctuation than larger companies, particularly those operating in
countries with developing markets.
International Portfolio diversifies its investments among several
countries and does not concentrate investments in any particular
industry. In pursuing its objective, International Portfolio varies
the geographic allocation and types of securities in which it invests
based on the Adviser's continuing evaluation of economic, market, and
political trends throughout the world. While International Portfolio
has not established limits on geographic asset distribution, it
ordinarily invests in the securities markets of at least three
countries outside the United States, including but not limited to
Western European countries (such as Belgium, France, Germany, Ireland,
Italy, The Netherlands, the countries of Scandinavia, Spain,
Switzerland, and the United Kingdom); countries in the Pacific Basin
(such as Australia, Hong Kong, Japan, Malaysia, the Philippines,
Singapore, and Thailand); and countries in the Americas (such as
Argentina, Brazil, Colombia, and Mexico). In addition, it does not
currently intend to invest more than 2% of its total assets in Russian
securities.
Under normal market conditions, International Portfolio will
invest at least 65% of its total assets (taken at market value) in
foreign securities. If, however, investments in foreign securities
appear to be relatively unattractive in the judgment of the Adviser
because of current or anticipated adverse political or economic
conditions, International Portfolio may hold cash or invest any portion
of its assets in securities of the U.S. Government and equity and debt
securities of U.S. companies, as a temporary defensive strategy. To
meet liquidity needs, International Portfolio may also hold cash in
domestic and foreign currencies and invest in domestic and foreign
money market securities (including repurchase agreements and
"synthetic" foreign money market positions).
In the past, the U.S. Government has from time to time imposed
restrictions, through taxation and otherwise, on foreign investments by
U.S. investors such as International Portfolio. If such restrictions
should be reinstated, it might become necessary for International
Portfolio to invest all or substantially all of its assets in U.S.
securities. In such an event, International Portfolio would review its
investment objective and policies to determine whether changes are
appropriate.
PORTFOLIO INVESTMENTS AND STRATEGIES
Debt Securities
In pursuing its investment objective, each Portfolio may invest 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.
Investments in debt securities by Growth & Income Portfolio,
Balanced Portfolio, and International Portfolio are limited to those
that are within the four highest grades (generally referred to as
"investment grade") assigned by a nationally recognized statistical
rating organization or, if unrated, deemed to be of comparable quality
by the Adviser. Each of Special Venture Portfolio and Special
Portfolio may invest up to 35% of its net assets in debt securities,
but none expects to invest more than 5% of its net assets in debt
securities that are rated below investment grade.
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, and are commonly referred to as "junk
bonds."
When the Adviser determines that adverse market or economic
conditions exist and considers a temporary defensive position
advisable, the Portfolios may invest without limitation in high-quality
fixed income securities or hold assets in cash or cash equivalents.
Derivatives
Consistent with its objective, each 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 Portfolio, other than International Portfolio, currently
intends to invest more than 5% of its net assets in any type of
Derivative except for options, futures contracts, and futures options.
International Portfolio currently intends to invest no more than 5% of
its net assets in any type of Derivative other than options, futures
contracts, futures options, and forward contracts. (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
pre-paid 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 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%.
Convertible Securities
By investing in convertible securities, a Portfolio obtains the
right to benefit from the capital appreciation potential in the
underlying stock upon exercise of the conversion right, while earning
higher current income than would be available if the stock were
purchased directly. In determining whether to purchase a convertible,
the Adviser will consider substantially the same criteria that would be
considered in purchasing the underlying stock. While convertible
securities purchased by a Portfolio are frequently rated investment
grade, each Portfolio may purchase unrated securities or securities
rated below investment grade if the securities meet the Adviser's other
investment criteria. Convertible securities rated below investment
grade (a) tend to be more sensitive to interest rate and economic
changes, (b) may be obligations of issuers who are less creditworthy
than issuers of higher quality convertible securities, and (c) may be
more thinly traded due to such securities being less well known to
investors than either common stock or conventional debt securities. As
a result, the Adviser's own investment research and analysis tends to
be more important in the purchase of such securities than other
factors.
Foreign Securities
Each Portfolio other than International Portfolio, which invests
primarily in foreign securities, 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 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. The Portfolios 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 depositary and it may
have greater difficulty in receiving shareholder communications than it
would have with a sponsored ADR. No Portfolio, other than
International Portfolio, intends to invest more than 5% of its net
assets in unsponsored ADRs. International Portfolio may also purchase
foreign securities in the form of European Depositary Receipts (EDRs)
or other securities representing underlying shares of foreign issuers.
Positions in these securities are not necessarily denominated in the
same currency as the common stocks into which they may be converted.
EDRs are European receipts evidencing a similar arrangement.
Generally, ADRs, in registered form, are designed for the U.S.
securities markets and EDRs, in bearer form, are designed for use in
European 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 the 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 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 the Portfolios 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.
The Portfolios' 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 the 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. No Portfolio may engage in "speculative" currency exchange
transactions.
At the maturity of a forward contract to deliver a particular
currency, a Portfolio may either sell the portfolio 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
the 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 the 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 the 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
the 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.
Synthetic Foreign Money Market Positions. International Portfolio
may invest in money market instruments denominated in foreign
currencies. In addition to, or in lieu of, such direct investment,
International Portfolio may construct a synthetic foreign money market
position by (a) purchasing a money market 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. For example, a synthetic money market position in
Japanese yen could be constructed by purchasing a U.S. dollar money
market instrument, and entering concurrently into a forward contract to
deliver a corresponding amount of U.S. dollars in exchange for Japanese
yen on a specified date and at a specified rate of exchange. Because
of the availability of a variety of highly liquid short-term U.S.
dollar money market instruments, a synthetic money market position
utilizing such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency money market instruments. The
result of a direct investment in a foreign currency and a concurrent
construction of a synthetic position in such foreign currency, in terms
of both income yield and gain or loss from changes in currency exchange
rates, in general should be similar, but would not be identical because
the components of the alternative investments would not be identical.
Except to the extent a synthetic foreign money market position consists
of a money market instrument denominated in a foreign currency, the
synthetic foreign money market position shall not be deemed a "foreign
security" for purposes of the policy that, under normal conditions,
International Portfolio will invest at least 65% of its total assets in
foreign securities.
Lending of Portfolio Securities
Subject to restriction (5) under Investment Restrictions in this
Statement of Additional Information, each 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. The 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, 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.
Repurchase Agreements
Each Portfolio may invest in repurchase agreements, provided that
it will not invest more than 15% 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.
When-Issued and Delayed-Delivery Securities; Reverse Repurchase
Agreements
Each Portfolio may purchase securities on a when-issued or
delayed-delivery basis. 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.
International Portfolio may utilize spot and forward foreign currency
exchange transactions to reduce the risk inherent in fluctuations in
the exchange rate between one currency and another when securities are
purchased or sold on a when-issued or delayed-delivery basis.
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 securities because
it avoids certain market risks and transaction costs.
At the time a Portfolio enters into a binding obligation to
purchase securities on a when-issued basis or 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
these investment strategies, as well as borrowing under a line of
credit as described below, may increase net asset value fluctuation.
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 its
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 Internal Revenue 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. Balanced Portfolio
may invest up to 20% of its total assets in short sales against the
box; no other Portfolio will invest more than 5% of its total assets in
short sales against the box.
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 Portfolio, 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 on investing no more than 15% of its 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 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 15% 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.
Swaps, Caps, Floors and Collars
Each Portfolio may enter into swaps and may purchase or sell
related caps, floors and collars. A Portfolio would enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against
any increase in the price of securities it anticipates purchasing at a
later date. The Portfolios intend to use these techniques as hedges
and not as speculative investments and will not sell interest rate
income stream they may be obligated to pay.
A swap agreement is generally individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on its structure, a swap
agreement may increase or decrease a Portfolio's exposure to changes in
the value of an index of securities in which a Portfolio might invest,
the value of a particular security or group of securities, or foreign
currency values. Swap agreements can take many different forms and are
known by a variety of names. Each Portfolio may enter into any form of
swap agreement if the Adviser determines it is consistent with its
investment objective and policies.
A swap agreement tends to shift investment exposure from one type
of investment to another. For example, if a Portfolio agrees to
exchange payments in dollars at a fixed rate for payments in a foreign
currency the amount of which is determined by movements of a foreign
securities index, the swap agreement would tend to increase its
exposure to foreign stock market movements and foreign currencies.
Depending on how it is used, a swap agreement may increase or decrease
the overall volatility of a Portfolio's investments and its net asset
value.
The performance of a swap agreement is determined by the change in
the specific currency, market index, security, or other factors that
determine the amounts of payments due to and from a Portfolio. If a
swap agreement calls for payments by a Portfolio, it must be prepared
to make such payments when due. If the counterparty's creditworthiness
declines, the value of a swap agreement would be likely to decline,
potentially resulting in a loss. No Portfolio will enter into any
swap, cap, floor or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the
counterparty, combined with any credit enhancements, is rated at least
A by Standard & Poor's Corporation or Moody's or has an equivalent
rating from a nationally recognized statistical rating organization or
is determined to be of equivalent credit quality by the Adviser.
The purchase of a cap entitles the purchaser to receive payments
on a notional principal amount from the party selling the cap to the
extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive
payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined
interest rate or amount. A collar is a combination of a cap and floor
that preserves a certain return within a predetermined range of
interest rates or values.
At the time a Portfolio enters into swap arrangements or purchases
or sells caps, floors or collars, liquid assets of the Portfolio having
a value at least as great as the commitment underlying the obligations
will be segregated on its books and held by the custodian throughout
the period of the obligation.
Line of Credit
Subject to restriction (6) under Investment Restrictions in this
Statement of Additional Information, 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.
Interfund Borrowing and Lending Program
Pursuant to an exemptive order issued by the Securities and
Exchange Commission, each Fund has received permission to lend money
to, and borrow money from, other mutual funds advised by the Adviser.
A Fund 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.
Portfolio Turnover
Although the Portfolios do not purchase securities with a view to
rapid turnover, there are no limitations on the length of time that
portfolio securities must be held. At times, Special Portfolio may
invest for short-term capital appreciation. Portfolio turnover can
occur for a number of reasons such as general conditions in the
securities markets, more favorable investment opportunities in other
securities, or other factors relating to the desirability of holding or
changing a portfolio investment. Because of the Portfolios'
flexibility of investment and emphasis on growth of capital, they may
have greater portfolio turnover than that of mutual funds that have
primary objectives of income or maintenance of a balanced investment
position. The future turnover rate may vary greatly from year to year.
A high rate of portfolio turnover in a Portfolio, if it should occur,
would result in increased transaction expenses, which must be borne by
that Portfolio. High portfolio turnover may also result in the
realization of capital gains or losses and, to the extent net short-
term capital gains are realized, any distributions resulting from such
gains will be considered ordinary income for federal income tax
purposes. (See Risks and Investment Considerations and Distributions
and Income Taxes in each Fund's Prospectus, and Additional Income Tax
Considerations in this Statement of Additional Information.)
Options on Securities and Indexes
Each 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 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 Portfolio may 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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The 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.
Each 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.
Each 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
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 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
The Funds and the Portfolios operate under the following
investment restrictions. No Fund or Portfolio may:
(1) with respect to 75% of its total assets, invest more than 5%
of its total assets, taken at market value at the time of a particular
purchase, in the securities of a single issuer, except for securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities or repurchase agreements for such securities, and
[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) acquire more than 10%, taken at the time of a particular
purchase, of the outstanding voting securities of any one issuer,
[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) act as an underwriter of securities, except insofar as it may
be deemed an underwriter for purposes of the Securities Act of 1933 on
disposition of securities acquired subject to legal or contractual
restrictions on resale, [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),
commodities, or commodity contracts, except that it may enter into (a)
futures and options on futures and (b) forward contracts;
(5) 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;
(6) 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;
(7) invest in a security if more than 25% of its total assets
(taken at market value at the time of a particular purchase) would be
invested in the securities of issuers in any particular industry, /5/
except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
and [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
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/5/ For purposes of this investment restriction, International
Portfolio uses industry classifications contained in Morgan Stanley
Capital International Perspective, which is published by Morgan
Stanley, an international investment banking and brokerage firm.
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(8) issue any senior security except to the extent permitted under
the Investment Company Act of 1940.
The above restrictions (other than bracketed portions thereof and,
in the case of Advisor Special Fund and Special Portfolio, other than
restrictions 1 and 2) are fundamental policies and may not be changed
without the approval of a "majority of the outstanding voting
securities" as defined above. The Funds and the Portfolios (and, in
the case of Advisor Special Fund and Special Portfolio, together with
restrictions 1 and 2 above) are also subject to the following non-
fundamental restrictions and policies, which may be changed by the
Board of Trustees. None of the following restrictions shall prevent a
Fund from investing all or substantially all of its assets in another
investment company having the same investment objective and
substantially the same investment policies as the Fund. No Fund or
Portfolio may:
(a) invest in any of the following: (i) interests in oil, gas, or
other mineral leases or exploration or development programs (except
readily marketable securities, including but not limited to master
limited partnership interests, that may represent indirect interests in
oil, gas, or other mineral exploration or development programs); (ii)
puts, calls, straddles, spreads, or any combination thereof (except
that it may enter into transactions in options, futures, and options on
futures); (iii) shares of other open-end investment companies, except
in connection with a merger, consolidation, acquisition, or
reorganization; and (iv) limited partnerships in real estate unless
they are readily marketable;
(b) invest in companies for the purpose of exercising control or
management;
(c) purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal to more
than 5% of the 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;
(d) invest more than 5% of its net assets (valued at time of
purchase) in warrants, nor more than 2% of its net assets in warrants
that are not listed on the New York or American Stock Exchange or
[Advisor International Fund and International Portfolio only] a
recognized foreign exchange;
(e) write an option on a security unless the option is issued by
the Options Clearing Corporation, an exchange, or similar entity;
(f) [all Funds and Portfolios except Advisor International Fund
and International Portfolio] invest more than 25% of its total assets
(valued at time of purchase) in securities of foreign issuers (other
than securities represented by American Depositary Receipts (ADRs) or
securities guaranteed by a U.S. person);
(g) 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;
(h) purchase securities on margin (except for use of short-term
credits as are necessary for the clearance of transactions), or 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 the
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;
(i) [all Funds and Portfolios except Advisor International Fund
and International Portfolio] invest more than 5% 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; [Advisor
International Fund and International Portfolio only] invest more than
10% 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;
(j) 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.
Notwithstanding the foregoing investment restrictions,
International Portfolio may purchase securities pursuant to the
exercise of subscription rights, subject to the condition that such
purchase will not result in International Portfolio's ceasing to be a
diversified investment company. Far Eastern and European corporations
frequently issue additional capital stock by means of subscription
rights offerings to existing shareholders at a price substantially
below the market price of the shares. The failure to exercise such
rights would result in International Portfolio's interest in the
issuing company being diluted. The market for such rights is not well
developed in all cases and, accordingly, International Portfolio may
not always realize full value on the sale of rights. The exception
applies in cases where the limits set forth in the investment
restrictions would otherwise be exceeded by exercising rights or would
have already been exceeded as a result of fluctuations in the market
value of International Portfolio's portfolio securities with the result
that International Portfolio would be forced either to sell securities
at a time when it might not otherwise have done so, to forego
exercising the rights.
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 Principal occupation(s)
Name Age with Advisor Trust during past five years
- ------------------ --- ----------------------- --------------------------
<S> <C> <C> <C>
William D. Andrews (4) 50 Executive Vice-President Executive vice president of
Stein Roe & Farnham
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 49 President; Trustee President of the Mutual Funds division
(1)(2)(4) of the Adviser and director of the
Adviser
William W. Boyd 71 Trustee Chairman and director of Sterling
(2)(3)(4) 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
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
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
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
(3) (4) general counsel 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; 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(3)(4) 60 Trustee Managing director, William Blair
Capital Partners (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
<FN>
_____
(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.
</TABLE>
Certain of the trustees and officers of Advisor Trust and Base
Trust are trustees or officers of other investment companies managed by
the Adviser. Ms. Walter is also a vice president of Liberty Financial
Investments, Inc., the Funds' distributor. 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. 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 fiscal year
ended Sept. 30, 1997:
Name of Trustee Aggregate Compensation Total Compensation from
Advisor Trust the Stein Roe Fund
Complex*
- -------------------- ---------------------- ------------------------
- -
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Kenneth L. Block** $4,000 $84,743
William W. Boyd 4,000 92,643
Douglas A. Hacker 4,000 90,643
Janet Langford Kelly 4,000 77,500
Francis W. Morley** 4,000 90,993
Charles R. Nelson 4,000 92,643
Thomas C. Theobald 4,000 90,643
_______________
* 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.
**Messrs. Block and Morley retired as trustees on Dec. 31, 1997.
FINANCIAL STATEMENTS
Please refer to the Funds' Sept. 30, 1997 Financial Statements
(balance sheets and schedules of investments as of Sept. 30, 1997 and
the statements of operations, changes in net assets, and notes thereto)
and the report of independent public accountants contained in the Sept.
30, 1997 Annual Reports of the Funds. The Financial Statements and the
report of independent public accountants (but no other material from
the Annual Reports ) are incorporated herein by reference. The Annual
Reports may be obtained at no charge by telephoning 800-338-2550.
PRINCIPAL SHAREHOLDERS
As of Dec. 31, 1997, the only persons known by Advisor Trust to
own of record or "beneficially" 5% or more of outstanding shares of any
Fund within the definition of that term as contained in Rule 13d-3 under
the Securities Exchange Act of 1934 was Liberty Financial Companies, Inc.
("Liberty Financial"), 600 Atlantic Avenue, Boston, Massachusetts 02210
(the parent company of the Adviser),which owned 100% of Advisor Balanced
Fund, 99.9% of Advisor Growth & Income Fund, 68.77% of Advisor Special Fund,
100% of Advisor Special Venture Fund, and 99.8% of Advisor International
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
Sept. 30, 1997, the Adviser managed over $29 billion in assets: over $5
billion in equities and over $17 billion in fixed income securities
(including $1.7 billion in municipal securities). The $29 billion in
managed assets included over $7 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 265,000 shareholders. The $7 billion in mutual fund assets
included over $728 million in over 42,000 IRA accounts. In managing
those assets, the Adviser utilizes a proprietary computer-based
information system that maintains and regularly updates information for
approximately 9,000 companies. The Adviser also monitors over 1,400
issues via a proprietary credit analysis system. At Sept. 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 table below shows
gross fees paid for the fiscal year ended Sept. 30, 1997 and any
expense reimbursements by the Adviser:
Year Ended
Fund Type of Payment 9/30/97
Advisor Growth & Income Fund Administrative fee $ 98
Reimbursement 56,890
Growth & Income Portfolio Management fee 1,191,731
Advisor Balanced Fund Administrative fee 97
Reimbursement 55,899
Balanced Portfolio Management fee 971,103
Advisor Special Fund Administrative fee 100
Reimbursement 56,403
Special Portfolio Management fee 5,249,468
Advisor Special Venture Fund Administrative fee 97
Reimbursement 56,443
Special Venture Portfolio Management fee 942,785
Advisor International Fund Administrative fee 98
Reimbursement 56,622
International Portfolio Management fee 838,780
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 not to exceed 0.25% of the average net assets
attributable to Class K 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 having special selling arrangements with the
Distributor, including certain broker-dealers, bank trust departments,
asset allocation programs sponsored by the Adviser, wrap fee programs,
and retirement plan service providers ("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 investment dealers, banks, or other
institutions, including retirement plan service providers, through whom
you purchase or redeem shares to establish procedures insuring the
prompt transmission to Advisor Trust of any such purchase order.
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.
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.
The table below shows information on brokerage commissions paid by
the Portfolios for the period ended Sept. 30, 1997:
Growth & Special Inter-
Income Balanced Special Venture national
Portfolio Portfolio Portfolio Portfolio Portfolio
Total amount of bro-
kerage commissions
paid from inception
to 9/30/97 $76,712 $101,876 $458,431 $240,637 $188,068
Amount of commis-
sions paid to bro-
kers or dealers who
supplied research
services to the
Adviser 68,011 101,526 416,739 214,303 182,656
Total dollar amount
involved in such
transactions
(000 omitted) 50,869 65,427 240,500 90,582 43,434
Amount of commissions
paid to brokers or
dealers that were
allocated to such
brokers or dealers
by the portfolio
manager because of
research services
provided to the
Portfolio 22,206 33,903 125,948 58,243 60,424
Total dollar amount
involved in such
transactions (000
omitted) 16,168 24,728 69,680 58,845 13,543
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.
Passive Foreign Investment Companies. International Portfolio may
purchase the securities of certain foreign investment funds or trusts
called passive foreign investment companies ("PFICs"). In addition to
bearing their proportionate share of International Portfolio's expenses
(management fees and operating expenses), shareholders will also
indirectly bear similar expenses of PFICs. Capital gains on the sale
of PFIC holdings will be deemed to be ordinary income regardless of how
long International Portfolio holds its investment. In addition,
International Portfolio may be subject to corporate income tax and an
interest charge on certain dividends and capital gains earned from
PFICs, regardless of whether such income and gains are distributed to
shareholders.
In accordance with tax regulations, International Portfolio
intends to treat PFICs as sold on the last day of International
Portfolio's fiscal year and recognize any gains for tax purposes at
that time; losses will not be recognized. Such gains will be
considered ordinary income which International Portfolio will be
required to distribute even though it has not sold the security and
received cash to pay such distributions.
INVESTMENT PERFORMANCE
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"). Each Fund
commenced operations on Feb. 14, 1997 and as of Oct. 15, 1997
designated its shares as Class K shares. The historical performance of
each Fund's Class K shares for the period prior to Feb. 14, 1997 is
based on the performance of its respective Portfolio restated to
reflect the 12b-1 fees and other expenses as set forth in a Fund's
prospectus, without giving effect to any fee reimbursement 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 returns
for the Class K shares of each Fund as of Sept. 30, 1997, were as
follows:
AVERAGE
TOTAL ANNUAL
RETURN TOTAL
PERCENTAGE RETURN
Stein Roe Advisor Growth &
Income Fund
1 year 30.55% 30.55%
5 years 135.69 18.71
10 years 268.76 13.14
Stein Roe Advisor Balanced Fund
1 year 23.34 23.34
5 years 84.42 13.02
10 years 177.85 10.76
Stein Roe Advisor Special Fund
1 year 33.30 33.30
5 years 131.66 18.30
10 years 299.45 14.85
Stein Roe Advisor Special Venture
Fund
1 year 21.46 21.46
Life of Fund* 102.27 26.91
Stein Roe Advisor International Fund
1 year 9.24 9.24
Life of Fund* 23.07 5.96
______________________________________
*Life of Fund is as follows: 10/17/94 for Stein Roe Advisor Special
Venture Fund, and 3/1/94 for Stein Roe Advisor International 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
Atlantic Monthly
Associated Press
Barron's
Bloomberg
Boston Globe
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Investment Advisor
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Marketing Alert
Gourmet
Individual Investor
Investment Dealers' Digest
Investment News
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Money on Line
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsday
Newsweek
New York Daily News
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
Reuters
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Street.com
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
recognized indicators of the performance of stocks
general U.S. stock market traded in the indicated
results.) markets.)
In addition, the Funds may compare performance as indicated below:
Benchmark Fund(s)
Lipper Balanced Fund Average Advisor Balanced Fund
Lipper Balanced Fund Index Advisor Balanced Fund
Lipper Equity Fund Average All Funds
Lipper General Equity Fund Average All Funds
Lipper Growth & Income Fund Average Advisor Growth & Income Fund
Lipper Growth & Income Fund Index Advisor Growth & Income Fund
Lipper Growth Fund Average Advisor Special Fund
Lipper Growth Fund Index Advisor Special Fund
Lipper International & Global Funds
Average Advisor International Fund
Lipper International Fund Index Advisor International Fund
Lipper Small Company Growth Fund
Average Advisor Special Venture Fund
Lipper Small Company Growth Fund
Index Advisor Special Venture Fund
Morningstar All Equity Funds Average Advisor International Fund
Morningstar Advisor Balanced Fund
Average Advisor Balanced Fund
Morningstar Domestic Stock Average All Funds except Advisor
International Fund
Morningstar Equity Fund Average Advisor International Fund
Morningstar General Equity Average* Advisor International Fund
Morningstar Growth & Income Fund
Average Advisor Growth & Income Fund
Morningstar Growth Fund Average Advisor Special Fund
Morningstar Hybrid Fund Average Advisor Balanced Fund, Advisor
International Fund
Morningstar International Stock
Average Advisor International Fund
Morningstar Small Company Growth Fund
Average Advisor Special Venture Fund
Morningstar Total Fund Average All Funds
Morningstar U.S. Diversified Average Advisor International Fund
Value Line Index
(Widely recognized indicator of the
performance of small- and medium-
sized company stocks) Advisor Special Fund, Advisor
Special Venture Fund
Lipper Growth Fund index reflects the net asset value weighted
total return of the largest thirty growth funds and thirty growth and
income funds, respectively, as calculated and published by Lipper. 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
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 in which a Fund
invests 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 which
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 following is a description of the characteristics of ratings
of corporate debt securities used by Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P").
RATINGS BY MOODY'S
Aaa. Bonds rated Aaa are judged to be 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 an
exceptionally stable margin and principal is secure. Although the
various protective elements are likely to change, such changes as can
be visualized are more 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 as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba. Bonds 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.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through B in 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.
RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay interest
and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt 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. This rating 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 is also used upon
the filing of a bankruptcy petition if debt service payments are
jeopardized.
NOTES:
The ratings from AA to CCC may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the major rating
categories. 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.
_____________
<PAGE>
Statement of Additional Information Dated Feb. 2, 1998
STEIN ROE ADVISOR TRUST
Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
Stein Roe Advisor Growth Stock Fund
This Statement of Additional Information is not a prospectus, but
provides additional information that should be read in conjunction with
the prospectus dated Feb. 2, 1998, and any supplements thereto
("Prospectus"). A Prospectus may be obtained at no charge by calling
(800) 426-3720.
TABLE OF CONTENTS
Page
General Information and History........................2
Investment Policies....................................3
Portfolio Investments and Strategies...................3
Investment Restrictions...............................21
Additional Investment Considerations..................24
Management............................................25
Financial Statements..................................28
Principal Shareholders................................29
Investment Advisory Services..........................29
Custodian.............................................31
Independent Public Accountants........................32
Distributor...........................................32
Transfer Agent and Shareholder Servicing..............34
Purchases and Redemptions.............................35
Portfolio Transactions................................45
Additional Income Tax Considerations..................47
Investment Performance................................47
Appendix--Ratings.....................................51
GENERAL INFORMATION AND HISTORY
Stein Roe Advisor Growth Stock Fund is a separate multi-class
series of Stein Roe Advisor Trust ("Advisor Trust"). 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
Advisor Growth Stock 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
Advisor Growth Stock 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"). For more
information, please refer to the 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 Advisor
Growth Stock Fund and Growth Stock Portfolio and provides investment
advisory services to Growth Stock Portfolio.
INVESTMENT POLICIES
In pursuing its objective, Growth Stock 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 Growth Stock Fund ("Advisor Growth Stock Fund")
seeks to achieve its objective by investing in SR&F Growth Stock
Portfolio ("Growth Stock Portfolio"). Their common investment
objective is long-term capital appreciation. Growth Stock Portfolio
attempts to achieve this objective by normally investing at least 65%
of its total assets in common stocks and other equity-type securities
(such as preferred stocks, securities convertible into or exchangeable
for common stocks, and warrants or rights to purchase common stocks)
that, in the opinion of the Adviser, have long-term appreciation
possibilities.
PORTFOLIO INVESTMENTS AND STRATEGIES
Debt Securities
In pursuing its investment objective, Growth Stock Portfolio may
invest 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.
Investments in debt securities by Growth Stock Portfolio are
limited to those that are within the four highest grades (generally
referred to as "investment grade") assigned by a nationally recognized
statistical rating organization or, if unrated, deemed to be of
comparable quality by the Adviser.
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 Growth Stock Portfolio is lost or
reduced below investment grade, it is not required to dispose of the
security, but the Adviser will consider that fact in determining
whether to 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 and are commonly referred to as "junk
bonds."
When the Adviser determines that adverse market or economic
conditions exist and considers a temporary defensive position
advisable, Growth Stock Portfolio may invest without limitation in
high-quality fixed income securities or hold assets in cash or cash
equivalents.
Derivatives
Consistent with its objective, Growth Stock 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.
Growth Stock Portfolio does not currently intend to invest more
than 5% of its net assets in any type of Derivative except for options,
futures contracts, and futures options. (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
pre-paid 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 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%.
Convertible Securities
By investing in convertible securities, Growth Stock Portfolio
obtains the right to benefit from the capital appreciation potential in
the underlying stock upon exercise of the conversion right, while
earning higher current income than would be available if the stock were
purchased directly. In determining whether to purchase a convertible,
the Adviser will consider substantially the same criteria that would be
considered in purchasing the underlying stock. While convertible
securities purchased by Growth Stock Portfolio are frequently rated
investment grade, it may purchase unrated securities or securities
rated below investment grade if the securities meet the Adviser's other
investment criteria. Convertible securities rated below investment
grade (a) tend to be more sensitive to interest rate and economic
changes, (b) may be obligations of issuers who are less creditworthy
than issuers of higher quality convertible securities, and (c) may be
more thinly traded due to such securities being less well known to
investors than either common stock or conventional debt securities. As
a result, the Adviser's own investment research and analysis tends to
be more important in the purchase of such securities than other
factors.
Foreign Securities
Growth Stock 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 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. Growth Stock Portfolio may invest in sponsored or
unsponsored ADRs. In the case of an unsponsored ADR, it is likely to
bear its proportionate share of the expenses of the depositary and it
may have greater difficulty in receiving shareholder communications
than it would have with a sponsored ADR. Growth Stock Portfolio does
not currently intend to invest more than 5% of its net assets in
unsponsored ADRs.
With respect to portfolio securities that are issued by foreign
issuers or denominated in foreign currencies, Growth Stock 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 Growth Stock 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 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 Growth Stock 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.
Growth Stock 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 Growth Stock 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 Growth Stock 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. Growth Stock 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 it 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, Growth Stock
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. Growth Stock Portfolio may
not engage in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a particular
currency, Growth Stock Portfolio may either sell the portfolio 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 Growth Stock 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 it 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 the portfolio security if its market value
exceeds the amount of currency it is obligated to deliver.
If Growth Stock Portfolio retains the portfolio security and
engages in an offsetting transaction, it will incur a gain or a loss to
the extent that there has been movement in forward contract prices. If
Growth Stock 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 Growth Stock
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, it 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, Growth Stock
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 Growth Stock
Portfolio of unrealized profits or force it 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 Growth
Stock Portfolio to hedge against a devaluation that is so generally
anticipated that it is not able to contract to sell the currency at a
price above the devaluation level it anticipates. The cost to Growth
Stock 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.
Lending of Portfolio Securities
Subject to restriction (5) under Investment Restrictions in this
Statement of Additional Information, Growth Stock 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 Growth Stock Portfolio. Growth Stock
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. Growth Stock 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. Growth Stock 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, it 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 it 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.
Repurchase Agreements
Growth Stock Portfolio may invest in repurchase agreements,
provided that it will not invest more than 15% 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
Growth Stock 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, Growth Stock Portfolio could experience
both losses and delays in liquidating its collateral.
When-Issued and Delayed-Delivery Securities; Reverse Repurchase
Agreements
Growth Stock Portfolio may purchase securities on a when-issued or
delayed-delivery basis. Although the payment and interest terms of
these securities are established at the time it 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.
Growth Stock 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. Growth Stock Portfolio does not currently intend to make
commitments to purchase when-issued securities in excess of 5% of its
net assets.
Growth Stock Portfolio may enter into reverse repurchase
agreements with banks and securities dealers. A reverse repurchase
agreement is a repurchase agreement in which it 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
securities because it avoids certain market risks and transaction
costs.
At the time Growth Stock Portfolio enters into a binding
obligation to purchase securities on a when-issued basis or enters into
a reverse repurchase agreement, liquid assets (cash, U.S. Government
securities or other "high-grade" debt obligations) having a value at
least as great as the purchase price of the securities to be purchased
will be segregated on its books and held by the custodian throughout
the period of the obligation. The use of these investment strategies,
as well as borrowing under a line of credit as described below, may
increase net asset value fluctuation.
Short Sales "Against the Box"
Growth Stock 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. Growth Stock Portfolio
may make short sales of securities only if at all times when a short
position is open it 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, Growth Stock Portfolio does not
deliver from its portfolio the securities sold. Instead, Growth Stock
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 Growth Stock Portfolio, to the
purchaser of such securities. Growth Stock 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, Growth Stock Portfolio must
deposit and continuously maintain in a separate account with its
custodian an equivalent amount of the securities sold short or
securities convertible into or exchangeable for such securities at no
additional cost. Growth Stock Portfolio is said to have a short
position in the securities sold until it delivers to the broker-dealer
the securities sold. Growth Stock 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 Growth Stock 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
Growth Stock Portfolio owns, either directly or indirectly, and, in the
case where it 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 Growth Stock Portfolio replaces the borrowed security, it
will incur a loss and if the price declines during this period, it 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 Growth
Stock Portfolio may have to pay in connection with such short sale.
Certain provisions of the Internal Revenue Code may limit the degree to
which Growth Stock Portfolio is able to enter into short sales. There
is no limitation on the amount of 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. Growth Stock Portfolio will not invest
more than 5% of its total assets in short sales against the box.
Rule 144A Securities
Growth Stock 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 Growth Stock Portfolio, 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 on investing no more
than 15% of its 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, Growth Stock
Portfolio's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that it does not
invest more than 15% of its assets in illiquid securities. Investing
in Rule 144A securities could have the effect of increasing the amount
of its assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities. Growth
Stock Portfolio does not expect 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.
Swaps, Caps, Floors and Collars
Growth Stock Portfolio may enter into swaps and may purchase or
sell related caps, floors and collars. Growth Stock Portfolio would
enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. Growth Stock Portfolio intends to use
these techniques as hedges and not as speculative investments and will
not sell interest rate income stream they may be obligated to pay.
A swap agreement is generally individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on its structure, a swap
agreement may increase or decrease Growth Stock Portfolio's exposure to
changes in the value of an index of securities in which it might
invest, the value of a particular security or group of securities, or
foreign currency values. Swap agreements can take many different forms
and are known by a variety of names. Growth Stock Portfolio may enter
into any form of swap agreement if the Adviser determines it is
consistent with its investment objective and policies.
A swap agreement tends to shift investment exposure from one type
of investment to another. For example, if Growth Stock Portfolio
agrees to exchange payments in dollars at a fixed rate for payments in
a foreign currency the amount of which is determined by movements of a
foreign securities index, the swap agreement would tend to increase its
exposure to foreign stock market movements and foreign currencies.
Depending on how it is used, a swap agreement may increase or decrease
the overall volatility of Growth Stock Portfolio's investments and its
net asset value.
The performance of a swap agreement is determined by the change in
the specific currency, market index, security, or other factors that
determine the amounts of payments due to and from Growth Stock
Portfolio. If a swap agreement calls for payments by Growth Stock
Portfolio, it must be prepared to make such payments when due. If the
counterparty's creditworthiness declines, the value of a swap agreement
would be likely to decline, potentially resulting in a loss. Growth
Stock Portfolio will not enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the counterparty, combined with any credit
enhancements, is rated at least A by Standard & Poor's Corporation or
Moody's or has an equivalent rating from a nationally recognized
statistical rating organization or is determined to be of equivalent
credit quality by the Adviser.
The purchase of a cap entitles the purchaser to receive payments
on a notional principal amount from the party selling the cap to the
extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive
payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined
interest rate or amount. A collar is a combination of a cap and floor
that preserves a certain return within a predetermined range of
interest rates or values.
At the time Growth Stock Portfolio enters into swap arrangements
or purchases or sells caps, floors or collars, liquid assets of Growth
Stock Portfolio having a value at least as great as the commitment
underlying the obligations will be segregated on its books and held by
the custodian throughout the period of the obligation.
Line of Credit
Subject to restriction (6) under Investment Restrictions in this
Statement of Additional Information, Growth Stock 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.
Interfund Borrowing and Lending Program
Pursuant to an exemptive order issued by the Securities and
Exchange Commission, Advisor Growth Stock Fund has received permission
to lend money to, and borrow money from, other mutual funds advised by
the Adviser. Advisor Growth Stock Fund 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.
Portfolio Turnover
Although Growth Stock Portfolio does not purchase securities with
a view to rapid turnover, there are no limitations on the length of
time that portfolio securities must be held. At times, Special
Portfolio may invest for short-term capital appreciation. Portfolio
turnover can occur for a number of reasons such as general conditions
in the securities markets, more favorable investment opportunities in
other securities, or other factors relating to the desirability of
holding or changing Growth Stock Portfolio investment. Because of
Growth Stock Portfolio's flexibility of investment and emphasis on
growth of capital, they may have greater portfolio turnover than that
of mutual funds that have primary objectives of income or maintenance
of a balanced investment position. The future turnover rate may vary
greatly from year to year. A high rate of portfolio turnover if it
should occur, would result in increased transaction expenses, which
must be borne by Growth Stock Portfolio. High portfolio turnover may
also result in the realization of capital gains or losses and, to the
extent net short-term capital gains are realized, any distributions
resulting from such gains will be considered ordinary income for
federal income tax purposes. (See Risks and Investment Considerations
and Distributions and Income Taxes in the Prospectus, and Additional
Income Tax Considerations in this Statement of Additional Information.)
Options on Securities and Indexes
Growth Stock 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. Growth Stock 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.)
Growth Stock 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 Growth Stock 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 Growth Stock Portfolio expires, it
realizes a capital gain equal to the premium received at the time the
option was written. If an option purchased by Growth Stock Portfolio
expires, it 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 Growth Stock
Portfolio desires.
Growth Stock 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, it will
realize a capital loss. If the premium received from a closing sale
transaction is more than the premium paid to purchase the option,
Growth Stock Portfolio will realize a capital gain or, if it is less,
it 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 Growth Stock Portfolio is an
asset, valued initially at the premium paid for the option. The
premium received for an option written by Growth Stock 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
Growth Stock Portfolio seeks to close out an option position. If
Growth Stock 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 Growth Stock 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, Growth Stock 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
Growth Stock Portfolio, it would not be able to close out the option.
If restrictions on exercise were imposed, It might be unable to
exercise an option it has purchased.
Futures Contracts and Options on Futures Contracts
Growth Stock Portfolio may 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.
- ------
/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.
- ------
Growth Stock Portfolio 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. Growth Stock 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 securities or the price of the securities that
Growth Stock Portfolio intends to purchase. Although other techniques
could be used to reduce or increase portfolio exposure to stock price,
interest rate and currency fluctuations, it may be able to achieve its
exposure more effectively and perhaps at a lower cost by using futures
contracts and futures options.
Growth Stock 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, Growth Stock 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 Growth
Stock Portfolio, it 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 Growth Stock Portfolio upon termination of the
contract, assuming all contractual obligations have been satisfied.
Growth Stock Portfolio expects to earn interest income on its initial
margin deposits. A futures contract held by Growth Stock Portfolio is
valued daily at the official settlement price of the exchange on which
it is traded. Each day Growth Stock 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 Growth Stock Portfolio does not
represent a borrowing or loan by it but is instead settlement between
Growth Stock 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, Growth Stock Portfolio will
mark-to-market its open futures positions.
Growth Stock 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 Growth Stock 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, Growth Stock Portfolio realizes a capital gain, or if it is
more, it realizes a capital loss. Conversely, if an offsetting sale
price is more than the original purchase price, it realizes a capital
gain, or if it is less, it 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 Growth Stock 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 investment 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 Growth Stock Portfolio seeks to close out a futures or
futures option position. Growth Stock 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, Growth
Stock Portfolio may also use those investment vehicles, provided the
Board of Trustees determines that their use is consistent with the
investment objective.
Growth Stock 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 it 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 total assets.
- ------
/3/ 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.
- ------
When purchasing a futures contract or writing a put option on a
futures contract, Growth Stock 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, Growth Stock
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.
Growth Stock 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 Growth Stock Portfolio and the positions. For
this purpose, to the extent Growth Stock 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," Growth Stock 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, 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 Growth Stock 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 it, 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 Growth Stock 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 Growth Stock 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 Growth Stock 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 Growth Stock 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).
- -------
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 Growth Stock Portfolio
delivers securities under a futures contract, it also realizes a
capital gain or loss on those securities.
For federal income tax purposes, Growth Stock 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
Growth Stock 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 Growth Stock Portfolio were to enter into a short index future,
short index futures option or short index option position and its
portfolio were deemed to "mimic" the performance of the index
underlying such contract, the option or futures contract position and
its stock positions would be deemed to be positions in a mixed
straddle, subject to the above-mentioned loss deferral rules.
In order for Growth Stock 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.
Advisor Growth Stock 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
Advisor Growth Stock Fund and Growth Stock Portfolio operate under
the following investment restrictions. They may not:
(1) with respect to 75% of its total assets, invest more than 5%
of its total assets, taken at market value at the time of a particular
purchase, in the securities of a single issuer, except for securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities or repurchase agreements for such securities, and
[Advisor Growth Stock 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;
(2) acquire more than 10%, taken at the time of a particular
purchase, of the outstanding voting securities of any one issuer,
[Advisor Growth Stock 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;
(3) act as an underwriter of securities, except insofar as it may
be deemed an underwriter for purposes of the Securities Act of 1933 on
disposition of securities acquired subject to legal or contractual
restrictions on resale, [Advisor Growth Stock 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;
(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),
commodities, or commodity contracts, except that it may enter into (a)
futures and options on futures and (b) forward contracts;
(5) 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;
(6) 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;
(7) invest in a security if more than 25% of its total assets
(taken at market value at the time of a particular purchase) would be
invested in the securities of issuers in any particular industry,
except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
and [Advisor Growth Stock 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; or
(8) issue any senior security except to the extent permitted under
the Investment Company Act of 1940.
The above restrictions (other than bracketed portions thereof are
fundamental policies and may not be changed without the approval of a
"majority of the outstanding voting securities" as defined above.
Advisor Growth Stock Fund and Growth Stock Portfolio are also subject
to the following non-fundamental restrictions and policies, which may
be changed by the Board of Trustees. None of the following
restrictions shall prevent Advisor Growth Stock Fund from investing all
or substantially all of its assets in another investment company having
the same investment objective and substantially the same investment
policies. Advisor Growth Stock Fund and Growth Stock Portfolio may
not:
(a) invest in any of the following: (i) interests in oil, gas, or
other mineral leases or exploration or development programs (except
readily marketable securities, including but not limited to master
limited partnership interests, that may represent indirect interests in
oil, gas, or other mineral exploration or development programs); (ii)
puts, calls, straddles, spreads, or any combination thereof (except
that it may enter into transactions in options, futures, and options on
futures); (iii) shares of other open-end investment companies, except
in connection with a merger, consolidation, acquisition, or
reorganization; and (iv) limited partnerships in real estate unless
they are readily marketable;
(b) invest in companies for the purpose of exercising control or
management;
(c) purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal to more
than 5% of the 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;
(d) invest more than 5% of its net assets (valued at time of
purchase) in warrants, nor more than 2% of its net assets in warrants
that are not listed on the New York or American Stock Exchange;
(e) write an option on a security unless the option is issued by
the Options Clearing Corporation, an exchange, or similar entity;
(f) invest more than 25% of its total assets (valued at time of
purchase) in securities of foreign issuers (other than securities
represented by American Depositary Receipts (ADRs) or securities
guaranteed by a U.S. person);
(g) 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;
(h) purchase securities on margin (except for use of short-term
credits as are necessary for the clearance of transactions), or 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 the
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;
(i) invest more than 5% 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;
(j) 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.
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. The Adviser's focus on a
long-term investment style can result in lower turnover rates, often
leading to increased tax efficiencies for shareholders subject to
income tax. 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 Principal occupation(s)
Name Age with Advisor Trust during past five years
- ------------------ --- ----------------------- --------------------------
<S> <C> <C> <C>
William D. Andrews (4) 50 Executive Vice-President Executive vice president of
Stein Roe & Farnham
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 49 President; Trustee President of the Mutual Funds division
(1)(2)(4) of the Adviser and director of the
Adviser
William W. Boyd 71 Trustee Chairman and director of Sterling
(2)(3)(4) 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
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
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
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
(3) (4) general counsel 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; 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(3)(4) 60 Trustee Managing director, William Blair
Capital Partners (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
<FN>
____________________
(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.
</TABLE>
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. 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 fiscal year
ended Sept. 30, 1997:
Name of Trustee Aggregate Compensation Total Compensation from
Advisor Trust the Stein Roe Fund
Complex*
- -------------------- ---------------------- ------------------------
- -
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Kenneth L. Block** $4,000 $84,743
William W. Boyd 4,000 92,643
Douglas A. Hacker 4,000 90,643
Janet Langford Kelly 4,000 77,500
Francis W. Morley** 4,000 90,993
Charles R. Nelson 4,000 92,643
Thomas C. Theobald 4,000 90,643
_______________
* 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.
**Messrs. Block and Morley retired as trustees on Dec. 31, 1997.
FINANCIAL STATEMENTS
Please refer to the Sept. 30, 1997 Financial Statements (balance
sheets and schedule of investments as of Sept. 30, 1997 and the
statements of operations, changes in net assets, and notes thereto) and
the report of independent public accountants contained in the Sept. 30,
1997 Annual Report. The Financial Statements and the report of
independent public accountants (but no other material from the Annual
Report) are incorporated herein by reference. The Annual Report may be
obtained at no charge by telephoning 800-322-1130.
PRINCIPAL SHAREHOLDERS
As of Dec. 31, 1997, the only persons known by Advisor Trust to
own of record or "beneficially" 5% or more of outstanding shares of any
class of Advisor Growth Stock Fund within the definition of that term
as contained in Rule 13d-3 under the Securities Exchange Act of 1934
were as follows:
Approximate %
of Outstanding
Name and Address Class Shares Held
- ------------------------------------- ------- --------------
Merrill Lynch Pierce Fenner & Smith* Class A 13.44%
For the Sole Benefit of its Customers Class B 10.17
Attn: Fund Administration Class C 3.51
4800 Deer Lake Dr., E., 3rd floor
Jacksonville, FL 32246
Liberty Financial Companies, Inc. Class K 43.78
600 Atlantic Avenue
Federal Reserve Plaza
Boston, MA 02210
FTC & Co. Class K 36.72
Attn: Datalynx #155
P.O. Box 173726
Denver, CO 80217
_____________
*Shares held of record, but not beneficially.
INVESTMENT ADVISORY SERVICES
Stein Roe & Farnham Incorporated provides administrative services
to Advisor Growth Stock Fund and Growth Stock Portfolio and portfolio
management services to Growth Stock 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
Sept. 30, 1997, the Adviser managed over $29 billion in assets: over $5
billion in equities and over $17 billion in fixed income securities
(including $1.7 billion in municipal securities). The $29 billion in
managed assets included over $7 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 265,000 shareholders. The $7 billion in mutual fund assets
included over $728 million in over 42,000 IRA accounts. In managing
those assets, the Adviser utilizes a proprietary computer-based
information system that maintains and regularly updates information for
approximately 9,000 companies. The Adviser also monitors over 1,400
issues via a proprietary credit analysis system. At Sept. 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 Prospectus, which
is incorporated herein by reference. The table below shows gross fees
paid and any expense reimbursements by the Adviser during the fiscal
year ended Sept. 30, 1997:
Fund Type of Payment Year Ended 9/30/97
- ------------------------- ------------------- ------------------
Advisor Growth Stock Fund Administrative fee $ 166
Reimbursement 60,346
Growth Stock Portfolio Management fee 2,119,803
The Adviser provides office space and executive and other
personnel to Advisor Growth Stock Fund, and bears any sales or
promotional expenses. Advisor Growth Stock 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.
The administrative agreement provides that the Adviser shall
reimburse Advisor Growth Stock Fund to the extent that its total annual
expenses (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 its shares are being offered
for sale to the public; provided, however, the Adviser is not required
to reimburse Advisor Growth Stock Fund an amount in excess of fees paid
under that agreement for such year. In addition, in the interest of
further limiting expenses of Advisor Growth Stock Fund, the Adviser may
voluntarily waive its management fee and/or absorb certain expenses for
Advisor Growth Stock Fund, as described under Fee Table in the
Prospectus. Any such reimbursement will enhance the yield of Advisor
Growth Stock Fund.
Growth Stock 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 series of Advisor Trust shall be paid
solely out of the assets of that series. 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 Advisor Growth Stock Fund and Growth Stock
Portfolio. For services provided to Advisor Growth Stock Fund, 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 Growth Stock Portfolio, Advisor
Growth Stock 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 Advisor
Growth Stock 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.
Growth Stock Portfolio 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 Advisor Growth Stock Fund
and Growth Stock 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 Advisor Growth Stock Fund 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 Prospectus, which is 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 shares of Advisor Growth Stock Fund, and purchases
shares only upon receipt of orders from authorized financial service
firms or investors. 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.
12b-1 Plans, Contingent Deferred Sales Charges, and Conversion of
Shares
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
Advisor Growth Stock Fund including its expenses related to sale and
promotion of Fund shares, the Distributor receives from Advisor Growth
Stock Fund a fee at an annual rate 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 not to
exceed 0.25% of the average net assets attributable to Class K 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 Advisor Growth
Stock Fund and its 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 Advisor
Growth Stock Fund during any year may be more or less than the cost of
distribution or other services provided to Advisor Growth Stock 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.
Advisor Growth Stock Fund offers four classes of shares (Class A,
Class B, Class C, and Class K). Advisor Growth Stock Fund 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; Class A shares are
offered at net asset value plus a front-end sales charge to be imposed
at the time of purchase and are subject to a Rule 12b-1 fee; Class B
shares are offered at net asset value subject to a Rule 12b-1 fee and a
declining contingent deferred sales charge on redemptions made within
six years of purchase; Class C shares are offered at net asset value,
subject to a Rule 12b-1 fee and a contingent deferred sales charge on
redemptions made within one year of purchase. The contingent deferred
sales charges are described in the Prospectus.
No contingent deferred sales charge will be imposed on shares
derived from reinvestment of distributions or amounts representing
capital appreciation. In determining the applicability and rate of any
contingent deferred sales charge, it will be assumed that a redemption
is made first of shares representing capital appreciation, next of
shares representing reinvestment of distributions, and finally of other
shares held by the shareholder for the longest time.
Eight years after the end of the month in which a Class B share is
purchased, such shares and a pro-rated portion of any shares issued on
the reinvestment of distributions will be automatically invested into
Class A shares having an equal value, which are not subject to the
distribution or service fee.
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
Prospectus. For performing these services, the Transfer Agent receives
from Advisor Growth Stock Fund a fee based on the following annual
rates:
Class K Class A Class B Class C
------- ------- -------- -----------
Account maintenance
and trade
processing 0.05% Bundled Fee Bundled Fee Bundled Fee
Client services 0.25%
Total 0.30% 0.236% 0.236% 0.236%
Advisor Trust believes the charges by the Transfer Agent to Advisor
Growth Stock Fund are comparable to those of other companies performing
similar services.
Some financial services firms ("FSF") or other intermediaries
having special selling arrangements with the Distributor, including
certain bank trust departments, wrap fee programs and retirement plan
service providers ("Intermediaries") that maintain nominee accounts
with Advisor Growth Stock Fund 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 Prospectus under
the headings How to Purchase Shares, How to Sell (Redeem) Shares, and
Net Asset Value, and that information is incorporated herein by
reference. It is the responsibility of any investment dealers, banks,
or other institutions, including retirement plan service providers,
through whom you purchase or redeem shares to establish procedures
insuring the prompt transmission to Advisor Trust of any order.
Advisor Growth Stock 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 FSFs or Intermediaries, the public offering price
will be determined on the day the order is placed in good order, but
only if the FSF or Intermediary receives the order prior to the time at
which shares are valued and transmits it to Advisor Growth Stock Fund
before that day's transactions are processed. If the FSF or
Intermediary fails to transmit before Advisor Growth Stock Fund
processes that day's transactions, the customer's entitlement to that
day's closing price must be settled between the customer and the FSF or
Intermediary. If the FSF or Intermediary receives the order after the
time at which Advisor Growth Stock 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.
Advisor Growth Stock Fund receives the entire net asset value of
shares sold. For Class A shares, which are subject to an initial sales
charge, the Distributor's commission is the sales charge shown in the
Prospectus less any applicable FSF or Intermediary discount. The FSF
or Intermediary discount is the same for all FSFs or Intermediaries,
except that the Distributor retains the entire sales charge on any
sales made to a shareholder who does not specify an FSF or Intermediary
on the application, and except that the Distributor may from time to
time reallow additional amounts to all or certain FSFs or
Intermediaries. The Distributor generally retains 100% of any asset-
based sales charge (distribution fee) or contingent deferred sales
charge. Such charges generally reimburse the Distributor for any up-
front and/or ongoing commissions paid to FSFs or Intermediaries.
Checks presented for the purchase of shares of Advisor Growth
Stock Fund which are returned by the purchaser's bank will subject the
purchaser to a $15 service fee for each check returned.
The Transfer Agent acts as the shareholder's agent whenever it
receives instructions to carry out a transaction on the shareholder's
account. Upon receipt of instructions that shares are to be purchased
for a shareholder's account, the designated FSF or Intermediary will
receive the applicable sales commission. Shareholders may change FSFs
or Intermediaries at any time by written notice to the Transfer Agent,
provided the new FSF or Intermediary has a sales agreement with the
Distributor.
Determination of Net Asset Value
The net asset value per share for each Class is determined as of
the close of business (normally 3:00 p.m., central time, or 4:00 p.m.,
eastern time) 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 Advisor Growth Stock Fund
should be determined on any such day, in which case the determination
will be made at 3:00 p.m., Chicago time.
Growth Stock Portfolio may invest in securities that are listed
primarily on foreign exchanges that are open and allow trading on days
on which Advisor Growth Stock Fund does not determine net asset value.
This may significantly affect the net asset value of Advisor Growth
Stock Fund's redeemable securities on days when an investor cannot
redeem such securities. Debt securities generally are valued by a
pricing service which determines valuations based upon market
transactions for normal, institutional-size trading units of similar
securities. However, in circumstances where such prices are not
available or where the Adviser deems it appropriate to do so, an over-
the-counter or exchange bid quotation is used. Securities listed on an
exchange or on Nasdaq are valued at the last sale price. Listed
securities for which there were no sales during the day and unlisted
securities are valued at the last quoted bid price. Options are valued
at the last sale price or in the absence of a sale, the mean between
the last quoted bid and offering prices. Short-term obligations with a
maturity of 60 days or less are valued at amortized cost pursuant to
procedures adopted by the Board of Trustees. The values of foreign
securities quoted in foreign currencies are translated into U.S.
dollars at the exchange rate for that day. Positions for which there
are no such valuations and other assets are valued at fair value as
determined in good faith under the direction of the Board of Trustees.
Generally, trading in certain securities (such as foreign
securities) is substantially completed each day at various times prior
to the close of the NYSE. Trading on certain foreign securities
markets may not take place on all NYSE business days, and trading on
some foreign securities markets takes places on days that are not NYSE
business days and on which net asset value is not calculated. The
values of these securities used in determining net asset value are
computed as of such times. Also, because of the amount of time
required to collect and process trading information as to large numbers
of securities issues, the values of certain securities (such as
convertible bonds, U.S. government securities, and tax-exempt
securities) are determined based on market quotations collected earlier
in the day at the latest practicable time prior to the close of the
NYSE. Occasionally, events affecting the value of such securities may
occur between such time and the close of the NYSE which will not be
reflected in the computation of the net asset value. If events
materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value
following procedures approved by the Board of Trustees.
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 may deduct $10 (payable to the Transfer Agent) from
accounts valued at less than $500 unless the account value has dropped
below $500 solely as a result of share depreciation. An investor will
be notified that the value of his account is less than that minimum and
allowed at least 60 days to bring the value of the account up to at
least $1,000 before the fee is deducted. 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 Advisor Growth Stock Fund 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 Advisor Growth Stock Fund not reasonably practicable.
Special Purchase Programs/Investor Services
The following special purchase programs/investor services may be
changed or eliminated at any time.
Fundamatic Program (Classes A, B and C only). As a convenience to
investors, Class A, B and C shares of Advisor Growth Stock Fund may be
purchased through the Colonial Fundamatic Program. Preauthorized
monthly bank drafts or electronic funds transfer for a fixed amount of
at least $50 are used to purchase Advisor Growth Stock Fund shares at
the public offering price next determined after the Transfer Agent
receives the proceeds from the draft (normally the 5th or the 20th of
each month, or the next business day thereafter). If your Fundamatic
purchase is by electronic funds transfer, you may request the
Fundamatic purchase for any day. Further information and application
forms are available from FSFs or Intermediaries or from the
Distributor.
Tax-Sheltered Retirement Plans (Classes A, B and C only). The
Distributor offers prototype tax-qualified plans, including IRAs and
pension and profit-sharing plans for individuals, corporations,
employees and the self-employed. The minimum initial investment for a
retirement account sponsored by Colonial Management Associates, Inc.,
an affiliate of the Adviser and the Distributor, is $25. The First
National Bank of Boston is the trustee of the Distributor's prototype
plans and charges a $10 annual fee. Detailed information concerning
these retirement plans and copies of the retirement plans are available
from the Distributor.
Participants in other prototype retirement plans (other than IRAs)
also are charged a $10 annual fee unless the plan maintains an omnibus
account with the Transfer Agent. Participants in prototype plans
offered by the Distributor (other than IRAs) who liquidate the total
value of their account will also be charged a $15 close-out processing
fee payable to the Transfer Agent. The fee is in addition to any
applicable contingent deferred sales charge. The fee will not apply if
the participant uses the proceeds to open an IRA Rollover account in
any fund, or if the plan maintains an omnibus account.
Consultation with a competent financial and tax advisor regarding
these plans and consideration of the suitability of Advisor Growth
Stock Fund shares as an investment under the Employee Retirement Income
Security Act of 1974 or otherwise is recommended.
Telephone Address Change Services. By calling the Transfer Agent,
shareholders, beneficiaries or their FSF or Intermediary of record may
change an address on a recorded telephone line. Confirmations of
address change will be sent to both the old and the new addresses.
Telephone redemption privileges are suspended for 30 days after an
address change is effected.
Colonial Cash Connection. Dividends and any other distributions,
including Systematic Withdrawal Plan (SWP) payments, on Class A, Class
B or Class C shares may be automatically deposited to a shareholder's
bank account via electronic funds transfer. Shareholders wishing to
avail themselves of this electronic transfer procedure should complete
the appropriate sections of the Application.
Programs for Reducing or Eliminating Sales Charges
Right of Accumulation and Statement of Intent (Class A shares
only). Reduced sales charges on Class A shares can be effected by
combining a current purchase with prior purchases of Class A, B, C, T,
and Z shares of other funds managed by Colonial Management Associates,
Inc. or distributed by the Distributor (such funds hereinafter referred
to as "Colonial Funds"). The applicable sales charged is based on the
combined total of: (1) the current purchase and (2) the value at the
public offering price at the close of business on the previous day of
all Colonial Funds' Class A shares held by the shareholder (except
shares of any Colonial money market fund, unless such shares were
acquired by exchange from Class A shares of another Colonial Fund other
than a money market fund and Class B, C, T and Z shares).
The Distributor must be promptly notified of each purchase which
entitles a shareholder to a reduced sales charge. Such reduced sales
charge will be applied upon confirmation of the shareholder's holdings
by the Transfer Agent. A Colonial Fund may terminate or amend this
right of Accumulation.
Any person may qualify for reduced sales charges on purchase of
Class A shares made within a 13-month period pursuant to a Statement of
Intent ("Statement"). A shareholder may include, as an accumulation
credit toward the completion of such Statement, the value of all Class
A, B, C, T and Z shares held by the shareholder on the date of the
Statement in Advisor Trust Funds and Colonial Funds (except shares of
any Colonial money market fund, unless such shares were acquired by
exchange from Class A shares of another non-money market Colonial
Fund). The value is determined at the public offering price on the
date of the Statement. Purchases made through reinvestment of
distributions do not count toward satisfaction of the Statement.
During the term of a Statement, the Transfer Agent will hold
shares in escrow to secure payment of the higher sales charge
applicable to Class A shares actually purchased. Dividends and capital
gains will be paid on all escrowed shares and these shares will be
released when the amount indicated has been purchased. A Statement
does not obligate the investor to buy or Advisor Growth Stock Fund to
sell the amount of the Statement.
If a shareholder exceeds the amount of the Statement and reaches
an amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made at the time of expiration of
the Statement. The resulting difference in offering price will
purchase additional shares for the shareholder's account at the then-
current applicable offering price. As a part of this adjustment, the
FSF or Intermediary shall return to the Distributor the excess
commission previously paid during the 13-month period.
If the amount of the Statement is not purchased, the shareholder
shall remit to the Distributor an amount equal to the difference
between the sales charge paid and the sales charge that should have
been paid. If the shareholder fails within 20 days after a written
request to pay such difference in sales charge, the Transfer Agent will
redeem that number of escrowed Class A shares equal to such difference.
The additional amount of FSF or Intermediary discount from the
applicable offering price shall be remitted to the shareholder's FSF or
Intermediary of record.
Additional information about and the terms of Statements of Intent
are available from your FSF or Intermediary or from the Transfer Agent
at 1-800-345-6611.
Reinstatement Privilege. An investor who has redeemed Advisor
Growth Stock Fund shares may, upon request, reinstate within one year a
portion or all of the proceeds of such sale in shares of the same class
of Advisor Growth Stock Fund at the net asset value next determined
after the Transfer Agent receives a written reinstatement request and
payment. Any contingent deferred sales charge paid at the time of the
redemption will be credited to the shareholder upon reinstatement. The
period between the redemption and the reinstatement will not be counted
in aging the reinstated shares for purposes of calculating any
contingent deferred sales charge or conversion date. Investors who
desire to exercise this privilege should contact their FSF or
Intermediary or the Distributor. Shareholders may exercise this
privilege an unlimited number of times. Exercise of this privilege
does not alter the federal income tax treatment of any capital gains
realized on the prior sale of Advisor Growth Stock Fund shares, but to
the extent any such shares were sold at a loss, some or all of the loss
may be disallowed for tax purposes. Consult your tax advisor.
Shareholders may reinvest all or a portion of a recent cash
distribution without a sales charge. A shareholder request must be
received within 30 calendar days of the distribution. A shareholder
may exercise this privilege only once. No charge is currently made for
reinvestment.
Privileges of Adviser Employees, FSFs or Intermediaries. Class A
shares of Advisor Growth Stock Fund may be sold at net asset value to
the following individuals whether currently employed or retired:
Trustees of funds advised or administered by the Adviser or an
affiliate of the Adviser; directors, officers and employees of the
Adviser or an affiliate of the Adviser, including the Transfer Agent
and the Distributor; registered representatives and employees of FSFs
or Intermediaries (including their affiliates) that are parties to
dealer agreements or other sales arrangements with the Distributor; and
such persons' families and their beneficial accounts.
Sponsored Arrangements. Class A shares of Advisor Growth Stock
Fund may be purchased at reduced or no sales charge pursuant to
sponsored arrangements, which include programs under which an
organization makes recommendations to, or permits group solicitation
of, its employees, members or participants in connection with the
purchase of shares of Advisor Growth Stock Fund on an individual basis.
The amount of the sales charge reduction will reflect the anticipated
reduction in sales expense associated with sponsored arrangements. The
reduction in sales expense, and therefore the reduction in sales
charge, will vary depending on factors such as the size and stability
of the organization's group, the term of the organization's existence
and certain characteristics of the members of its group. Advisor
Growth Stock Fund reserves the right to revise the terms of or to
suspend or discontinue sales pursuant to sponsored plans at any time.
Class A shares of Advisor Growth Stock Fund may also be purchased
at reduced or no sales charge by clients of dealers, brokers or
registered investment advisers that have entered into agreements with
the Distributor pursuant to which Advisor Growth Stock Fund is included
as an investment option in programs involving fee-based compensation
arrangements.
Waiver of Contingent Deferred Sales Charges (Classes A with
accounts in excess of $1,000,000, B and C). Contingent deferred sales
charges may be waived on redemptions in the following situations with
the proper documentation:
1. Death. Contingent deferred sales charges may be waived on
redemptions within one year following the death of (i) the sole
shareholder on an individual account, (ii) a joint tenant where the
surviving joint tenant is the deceased's spouse, or (iii) the
beneficiary of a Uniform Gifts to Minors Act ("UGMA"), Uniform
Transfers to Minors Act ("UTMA") or other custodial account. If, upon
the occurrence of one of the foregoing, the account is transferred to
an account registered in the name of the deceased's estate, the
contingent deferred sales charge will be waived on any redemption from
the estate account occurring within one year after the death. If the
shares are not redeemed within one year of the death, they will remain
subject to the applicable contingent deferred sales charge, when
redeemed from the transferee's account. If the account is transferred
to a new registration and then a redemption is requested, the
applicable contingent deferred sales charge will be charged.
2. Systematic Withdrawal Plan (SWP). Contingent deferred sales
charges may be waived on redemptions occurring pursuant to a monthly,
quarterly or semiannual SWP established with the Transfer Agent, to the
extent the redemptions do not exceed, on an annual basis, 12% of the
account's value, so long as at the time of the first SWP redemption the
account had distributions reinvested for a period at least equal to the
period of the SWP (e.g., if it is a quarterly SWP, distributions must
have been reinvested at least for the three month period prior to the
first SWP redemption); otherwise contingent deferred sales charges will
be charged on SWP redemptions until this requirement is met; this
requirement does not apply to Class B or C accounts if the SWP is set
up at the time the account is established, and distributions are being
reinvested. See below under How to Sell Shares--Systematic Withdrawal
Plan.
3. Disability. Contingent deferred sales charges may be waived on
redemptions occurring within one year after the sole shareholder on an
individual account or a joint tenant on a spousal joint tenant account
becomes disabled (as defined in Section 72(m)(7) of the Internal
Revenue Code). To be eligible for such waiver, (i) the disability must
arise after the purchase of shares and (ii) the disabled shareholder
must have been under age 65 at the time of the initial determination of
disability. If the account is transferred to a new registration and
then a redemption is requested, the applicable contingent deferred
sales charge will be charged.
4. Death of a trustee. Contingent deferred sales charges may be
waived on redemptions occurring upon dissolution of a revocable living
or grantor trust following the death of the sole trustee where (i) the
grantor of the trust is the sole trustee and the sole life beneficiary,
(ii) death occurs following the purchase and (iii) the trust document
provides for dissolution of the trust upon the trustee's death. If the
account is transferred to a new registration (including that of a
successor trustee), the applicable contingent deferred sales charge
will be charged upon any subsequent redemption.
5. Returns on excess contributions. Contingent deferred sales
charges may be waived on redemptions required to return excess
contributions made to retirement plans or IRAs, so long as the FSF or
Intermediary agrees to return the applicable portion of any commission
paid by the Distributor.
6. Qualified Retirement Plans. Contingent deferred sales charges
may be waived on redemptions required to make distributions from
qualified retirement plans following (i) normal retirement (as stated
in the plan document) or (ii) separation from service. For shares
purchased in a prototype 401K plan after Sept. 1, 1997, contingent
deferred sales charges will not be waived upon separation from service
except if such plan is held in an omnibus account. Contingent deferred
sales charges also will be waived on SWP redemptions made to make
required minimum distributions from qualified retirement plans that
have invested in Advisor Growth Stock Fund for at least two years.
The contingent deferred sales charge also may be waived where the
FSF or Intermediary agrees to return all or an agreed upon portion of
the commission earned on the sale of the shares being redeemed.
How to Sell ("Redeem") Shares
Shares may also be sold on any day the NYSE is open, either
directly to Advisor Growth Stock Fund or through an FSF or
Intermediary. Sale proceeds generally are sent within seven days
(usually on the next business day after your request is received in
good form). However, for shares recently purchased by check, Advisor
Growth Stock Fund will send proceeds as soon as the check has cleared
(which may take up to 15 days).
To sell shares directly to Advisor Growth Stock Fund, send a
signed letter of instruction to the Transfer Agent. The sale price is
the net asset value next determined (less any applicable contingent
deferred sales charge) after Advisor Growth Stock Fund or an FSF or
Intermediary receives the request in proper form. Signatures must be
guaranteed by a bank, a member firm of a national stock exchange or
another eligible guarantor institution. Additional documentation is
required for sales by corporations, agents, fiduciaries, surviving
joint owners and IRA holders. Call the Transfer Agent for more
information 1-800-345-6611.
FSFs and Intermediaries must receive requests before the time at
which Advisor Growth Stock Fund's shares are valued to receive that
day's price, are responsible for furnishing all necessary documentation
to the Transfer Agent and may charge for this service.
Systematic Withdrawal Plan (Class A, B and C shares). If a
shareholder's account balance is at least $5,000, the shareholder may
establish a SWP. A specified dollar amount or percentage of the then
current net asset value of the shareholder's investment in Advisor
Growth Stock Fund designated by the shareholder will be paid monthly,
quarterly or semiannually to a designated payee. The amount or
percentage the shareholder specifies generally may not, on an
annualized basis, exceed 12% of the value, as of the time the
shareholder makes the election of the shareholder's investment.
Withdrawals from Class B and C shares under a SWP will be treated as
redemptions of shares purchased through the reinvestment of Advisor
Growth Stock Fund distributions, or, to the extent such shares in the
shareholder's account are insufficient to cover plan payments, as
redemptions from the earliest purchased shares of Advisor Growth Stock
Fund in the shareholder's account. No contingent deferred sales
charges apply to a redemption pursuant to a SWP of 12% or less, even
if, after giving effect to the redemption, the shareholder's account
balance is less than the shareholder's base amount. Qualified plan
participants who are required by Internal Revenue Code regulation to
withdraw more than 12%, on an annual basis, of the value of their Class
B or C share account may do so but will be subject to a contingent
deferred sales charge ranging from 1% to 5% of the excess over 12%. If
a shareholder wishes to participate in a SWP, the shareholder must
elect to have all of the shareholder's income dividends and other
distributions payable in shares of Advisor Growth Stock Fund rather
than in cash.
A shareholder or its FSF or Intermediary of record may establish a
SWP account by telephone on a recorded line. However, SWP checks will
be payable only to the shareholder and sent to the address of record.
SWPs from retirement accounts cannot be established by telephone.
Purchasing additional shares (other than through dividend and
distribution reinvestment) while receiving SWP payments is ordinarily
disadvantageous because of duplicative sales charges. For this reason,
a shareholder may not maintain a plan for the accumulation of shares of
Advisor Growth Stock Fund (other than through the reinvestment of
dividends) and a SWP at the same time.
SWP payments are made through share redemptions, which may result
in a gain or loss for tax purposes, may involve the use of principal
and may eventually use up all of the shares in a shareholder's account.
Advisor Growth Stock Fund may terminate a shareholder's SWP if the
shareholder's account balance falls below $5,000 due to any transfer or
liquidation of shares other than pursuant to the SWP. SWP payments
will be terminated on receiving satisfactory evidence of the death or
incapacity of a shareholder. Until this evidence is received, the
Transfer Agent will not be liable for any payment made in accordance
with the provisions of a SWP.
The cost of administering SWPs for the benefit of shareholders who
participate in them is borne by Advisor Growth Stock Fund as an expense
of all shareholders.
Shareholders whose positions are held in "street name" by certain
FSFs or Intermediaries may not be able to participate in a SWP. If a
shareholder's Advisor Growth Stock Fund shares are held in "street
name," the shareholder should consult his or her FSF or Intermediary to
determine whether he or she may participate in a SWP.
Telephone Redemptions. Telephone redemption privileges are
described in the Prospectus.
Non Cash-Redemptions. For redemptions of any single shareholder
within any 90-day period exceeding the lesser of $250,000 or 1% of
Advisor Growth Stock Fund's net asset value, Advisor Growth Stock Fund
may make the payment or a portion of the payment with portfolio
securities held by Advisor Growth Stock Fund instead of cash, in which
case the redeeming shareholder may incur brokerage and other costs in
selling the securities received.
How to Exchange Shares
With respect to Class A, Class B and Class C shares, exchanges at
net asset value may be made among shares of the same class of any other
fund that is a series of Advisor Trust or of most Colonial Funds. For
more information on the Colonial Funds, see your FSF or Intermediary or
call (800) 345-6611. With respect to Class K shares, exchanges at net
asset value may be made among shares of the same class of any other
fund that is a series of Advisor Trust. Shares may be exchanged on the
basis of the net asset value per share at the time of exchange and only
one "round-trip" exchange of Class C shares may be made per three-month
period, measured from the date of the initial purchase. Before
exchanging into another fund, you should obtain the prospectus for the
fund in which you wish to invest and read it carefully. Prospectuses
of Colonial Funds are available by calling (800) 426-3750. Consult the
Transfer Agent before requesting an exchange.
By calling the Transfer Agent, shareholders or their FSF or
Intermediary of record may exchange among accounts with identical
registrations, provided that the shares are held on deposit. During
periods of unusual market changes and/or shareholder activity,
shareholders may experience delays in contacting the Transfer Agent by
telephone to exercise the telephone exchange privilege. Because an
exchange involves a redemption and reinvestment in another fund,
completion of an exchange may be delayed under unusual circumstances,
such as if Advisor Growth Stock Fund suspends repurchases or postpones
payment for Advisor Growth Stock Fund shares being exchanged in
accordance with federal securities law. The Transfer Agent will also
make exchanges upon receipt of a written exchange request. If the
shareholder is a corporation, partnership, agent, or surviving joint
owner, the Transfer Agent will require customary additional
documentation.
A loss to a shareholder may result from an unauthorized
transaction reasonably believed to have been authorized. No
shareholder is obligated to use the telephone to execute transactions.
In all cases, the shares to be exchanged must be registered on the
records of Advisor Growth Stock Fund in the name of the shareholder
desiring to exchange.
An exchange is a capital sale transaction for federal income tax
purposes. The exchange privilege may be revised, suspended or
terminated at any time.
PORTFOLIO TRANSACTIONS
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts. 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, Growth Stock 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 Growth Stock
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 Growth Stock Portfolio, 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 Growth Stock Portfolio), 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 Growth Stock 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 Growth Stock Portfolio participates. 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 Growth Stock Portfolio.
With respect to 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 Growth Stock
Portfolio.
The table below shows information on brokerage commissions paid by
Growth Stock Portfolio for the period ended Sept. 30, 1997:
Total amount of brokerage commissions paid during the period $178,057
Amount of commissions paid to brokers or dealers who
supplied research services to the Adviser 174,017
Total dollar amount involved in such transactions (000
omitted) 163,280
Amount of commissions paid to brokers or dealers that were
allocated to such brokers or dealers by the portfolio
manager because of research services provided to the
Portfolio 17,400
Total dollar amount involved in such transactions
(000 omitted) 10,320
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
Advisor Growth Stock Fund and Growth Stock 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.
Advisor Growth Stock Fund expects that less than 100% of its
dividends will qualify for the deduction for dividends received by
corporate shareholders.
Growth Stock Portfolio may purchase the securities of certain
foreign investment funds or trusts called passive foreign investment
companies ("PFICs"). In addition to bearing their proportionate share
of the Fund's expenses (management fees and operating expenses),
shareholders will also indirectly bear similar expenses of PFICs.
Capital gains on the sale of PFIC holdings will be deemed to be
ordinary income regardless of how long the Portfolio holds its
investment. In addition, the Portfolio may be subject to corporate
income tax and an interest charge on certain dividends and capital
gains earned from PFICs, regardless of whether such income and gains
are distributed to shareholders.
In accordance with tax regulations, Growth Stock Portfolio intends
to treat securities of PFICs as sold on the last day of its fiscal year
and recognize any gains for tax purposes at that time; losses will not
be recognized. Such gains will be considered ordinary income which it
will be required to distribute even though it has not sold the security
and received cash to pay such distributions.
INVESTMENT PERFORMANCE
Advisor Growth Stock Fund may quote certain total return figures
from time to time. A "Total Return" on a per class share basis is the
amount of dividends distributed per class share plus or minus the
change in the net asset value per class share for a period. A "Total
Return Percentage" may be calculated by dividing the value of a share
of a particular class of shares 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).
Advisor Growth Stock Fund invests all of its net investable assets
in SR&F Growth Stock Portfolio, which has the same investment objective
and substantially the same investment policies as Advisor Growth Stock
Fund. Advisor Growth Stock Fund commenced operations on Feb. 14, 1997
and as of Oct. 15, 1997 offered only shares that are now designated
Class K shares. The historical performance of Class K shares for the
period prior to Feb. 14, 1997 and the historical performance of each
other class of shares of Advisor Growth Stock Fund for all periods are
based on the performance SR&F Growth Stock Portfolio restated to
reflect the sales charges, 12b-1 fees and other expenses 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 Advisor Growth Stock Fund's future performance. The
average annual total returns for each class of Advisor Growth Stock
Fund as of Sept. 30, 1997, were as follows:
1 year 5 years 10 years
------ ------- --------
Class A with sales charge of 5.75% 25.07% 15.52% 11.73%
Class A without sales charge 32.70 16.90 12.39
Class B with applicable CDSC 26.77 15.86 11.76
Class B without applicable CDSC 31.77 16.08 11.76
Class C with sales charge of
1.00% and applicable CDSC 30.77 16.08 11.61
Class C without sales charge or CDSC 31.77 16.08 11.61
Class K 32.76 16.95 12.45
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 Advisor Growth Stock Fund is a result of
conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information is
useful in reviewing Advisor Growth Stock 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.
In advertising and sales literature, Advisor Growth Stock 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 Advisor Growth Stock Fund.
Comparison of Advisor Growth Stock 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 Advisor Trust
believes to be generally accurate. Advisor Growth Stock Fund may also
note its mention or recognition in newspapers, magazines, or other
media from time to time. However, Advisor Trust assumes no
responsibility for the accuracy of such data. Newspapers and magazines
which might mention Advisor Growth Stock Fund include, but are not
limited to, the following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Atlantic Monthly
Associated Press
Barron's
Bloomberg
Boston Globe
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Investment Advisor
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Marketing Alert
Gourmet
Individual Investor
Investment Dealers' Digest
Investment News
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Money on Line
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsday
Newsweek
New York Daily News
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
Reuters
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Street.com
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
Working Women
Worth
Your Money
Advisor Growth Stock Fund may compare its performance to the
Consumer Price Index (All Urban), a widely recognized measure of
inflation.
The performance of Advisor Growth Stock Fund 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
recognized indicators of the performance of stocks
general U.S. stock market traded in the indicated
results.) markets.)
In addition, Advisor Growth Stock Fund may compare its performance
to the following benchmarks:
Lipper Equity Fund Average
Lipper General Equity Fund Average
Lipper Growth Fund Average
Lipper Growth Fund Index
Morningstar Domestic Stock Average
Morningstar Growth Fund Average
Morningstar Total Fund Average
Lipper Growth Fund index reflects the net asset value weighted
total return of the largest thirty growth funds and thirty growth and
income funds, respectively, as calculated and published by Lipper. 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. Advisor Growth Stock Fund 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 Advisor Growth Stock Fund to a different category or
develop (and place it into) a new category, the Fund may compare its
performance or ranking with those of other funds in the newly assigned
category, as published by the service.
Advisor Growth Stock 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, Advisor Growth Stock Fund 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
_____________________
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 in which Advisor
Growth Stock Fund invests 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 which 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 following is a description of the characteristics of ratings
of corporate debt securities used by Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P").
RATINGS BY MOODY'S
Aaa. Bonds rated Aaa are judged to be 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 an
exceptionally stable margin and principal is secure. Although the
various protective elements are likely to change, such changes as can
be visualized are more 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 as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba. Bonds 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.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through B in 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.
RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay interest
and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt 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. This rating 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 is also used upon
the filing of a bankruptcy petition if debt service payments are
jeopardized.
NOTES: The ratings from AA to CCC may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within the major
rating categories. 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.
<PAGE>
<PAGE>
Statement of Additional Information Dated Feb. 2, 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................6
Investment Restrictions............................27
Additional Investment Considerations...............32
Management.........................................33
Principal Shareholders.............................37
Investment Advisory Services.......................37
Custodian..........................................39
Independent Public Accountants.....................39
Distributor........................................40
Transfer Agent and Shareholder Servicing...........41
Purchases and Redemptions..........................41
Portfolio Transactions.............................43
Additional Income Tax Considerations...............45
Investment Performance.............................47
Appendix--Ratings..................................52
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.
- ---------
(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
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
<FM>
_________________________
(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.
</TABLE>
Certain of the trustees and officers of Advisor Trust and
Base Trust are trustees or officers of other investment companies
managed by the Adviser. Ms. Walter is also a vice president of Liberty
Financial Investments, Inc. the Funds' distributor. 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. 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, Stein Roe & Farnham Incorporated,
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
June 30, 1997 (fiscal year end) and Dec. 31, 1997 were as follows:
1 year 5 years 10 years
6/30 12/31 6/30 12/31 6/30 12/31
------------ ------------ ------------
Advisor High-Yield
Municipals Fund 8.64% 9.25% 6.32% 7.15% 7.78% 8.21%
Advisor Intermediate
Bond Fund 9.06% 9.02% 6.71% 6.99% 7.96% 8.30%
Advisor Income Fund 10.06% 9.31% 8.14% 8.17% 8.64% 9.02%
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
