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Statement of Additional Information Dated Feb. 1, 1999
STEIN ROE ADVISOR TRUST
Suite 3200, One South Wacker Drive, Chicago, IL 60606
Stein Roe Advisor Growth Stock Fund
Stein Roe Advisor Young Investor Fund
This Statement of Additional Information ("SAI") is not a
prospectus, but provides additional information that should be
read in conjunction with each Fund's prospectus dated Feb. 1,
1999, and any supplements thereto ("Prospectus"). Financial
statements, which are contained in the Funds' Annual Reports, are
incorporated by reference into this SAI. A Prospectus and Annual
Report 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....................4
Investment Restrictions................................20
Additional Investment Considerations...................22
Management.............................................23
Financial Statements...................................26
Principal Shareholders.................................27
Investment Advisory and Other Services.................27
Custodian..............................................29
Independent Public Accountants.........................30
Distributor............................................30
Transfer Agent and Shareholder Servicing...............33
Purchases and Redemptions..............................33
Portfolio Transactions.................................42
Additional Income Tax Considerations...................45
Investment Performance.................................45
Master Fund/Feeder Fund: Structure and Risk Factors....49
Appendix-Ratings.......................................51
GENERAL INFORMATION AND HISTORY
The mutual funds described in this SAI are the following
separate series of Stein Roe Advisor Trust (the "Trust"):
Stein Roe Advisor Growth Stock Fund ("Advisor Growth Stock Fund")
Stein Roe Advisor Young Investor Fund ("Advisor Young Investor
Fund")
The above series are referred to collectively as "the Funds."
Advisor Growth Stock Fund offers four classes of shares (Classes
A, B, C and K) and Advisor Young Investor Fund offers two classes
of shares (Classes A and 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.
The 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 the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.
Each series invests in a separate portfolio of securities and
other assets, with its own objectives and policies.
Under Massachusetts law, shareholders of a Massachusetts
business trust such as the 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 the Trust or any
particular series shall look only to the assets of the 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
the 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 the 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 the
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.
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, the 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, the 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 the Trust were subject to Section 16(c) of the
Investment Company Act of 1940. All shares of all series of the
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
Rather than invest in securities directly, the Funds seek to
achieve their objectives by pooling their assets with those of
other investment companies for investment in a master fund having
the identical investment objective and substantially the same
investment policies as its feeder funds. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs. Each Fund invests all of its net investable assets
in a separate master fund that is a series of SR&F Base Trust, as
follows:
Feeder Fund Master Fund
- -------------------------- -------------------------------------
Advisor Growth Stock Fund SR&F Growth Stock Portfolio ("Growth
Stock Portfolio")
Advisor Young Investor Fund SR&F Growth Investor Portfolio
("Growth Investor Portfolio")
The master funds are referred to collectively as the
"Portfolios." For more information, please refer to Master
Fund/Feeder Fund: Structure and Risk Factors.
Stein Roe & Farnham Incorporated ("Stein Roe") provides
administrative and accounting and recordkeeping services to the
Funds and Portfolios and provides investment advisory services to
each Portfolio.
INVESTMENT POLICIES
The Trust and SR&F Base Trust are open-end management
investment companies. The Funds and the Portfolios are
diversified, as that term is defined in the Investment Company Act
of 1940.
In pursuing its 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.
- ------------
Advisor Growth Stock Fund
Advisor Growth Stock Fund seeks to achieve its objective by
investing in Growth Stock Portfolio. Their common investment
objective is long-term capital appreciation. Growth Stock
Portfolio attempts to achieve this objective by investing
primarily 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 Stein Roe, have long-term
appreciation possibilities.
Advisor Young Investor Fund
Advisor Young Investor Fund seeks to achieve its objective by
investing in Growth Investor Portfolio. Their common investment
objective is long-term capital appreciation. Growth Investor
Portfolio invests primarily in common stocks and other equity-type
securities that, in the opinion of Stein Roe, have long-term
appreciation potential.
Under normal circumstances, at least 65% of the total assets
of Growth Investor Portfolio will be invested in securities of
companies that, in the opinion of Stein Roe, directly or through
one or more subsidiaries, affect the lives of young people. Such
companies may include companies that produce products or services
that young people use, are aware of, or could potentially have an
interest in. Although Growth Investor Portfolio invests primarily
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),
it may invest up to 35% of its total assets in debt securities.
PORTFOLIO INVESTMENTS AND STRATEGIES
Debt Securities
In pursuing its investment objective, a 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 investment grade. Growth Investor
Portfolio may invest up to 35% of its net assets in debt
securities, but does not expect to invest more than 5% of its net
assets in debt securities that are rated below investment grade.
"Investment grade" refers to debt securities that are within the
four highest grades assigned by a nationally recognized
statistical rating organization or, if unrated, deemed to be of
comparable quality by Stein Roe.
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, it is not
required to dispose of the security, but Stein Roe 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 Stein Roe determines that adverse market or economic
conditions exist and considers a temporary defensive position
advisable, a 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, 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 using them 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 Stein Roe'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 currently intends 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, 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, Stein Roe will consider substantially the same
criteria that would be considered in purchasing the underlying
stock. While convertible securities purchased by the Portfolios
are frequently rated investment grade, they may purchase unrated
securities or securities rated below investment grade if the
securities meet Stein Roe'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, Stein Roe's own investment research and analysis tend to
be more important in the purchase of such securities than other
factors.
Foreign Securities
A 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. A 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. No Portfolio currently intends to invest more than
5% of its net assets in unsponsored ADRs.
As of Sept. 30, 1998, holdings of foreign companies, as a
percentage of net assets, were 2.0% (none in foreign securities
and 2.0% in ADRs) for Growth Stock Portfolio and 3.9% (none in
foreign securities and 3.9% in ADRs) for Growth Investor
Portfolio.
With respect to portfolio securities that 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. 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 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 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 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, the 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. 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 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 a 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 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
the 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, the 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 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 a 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 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.
Lending of Portfolio Securities
Subject to restriction (5) under Investment Restrictions in
this SAI, a 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 Stein Roe'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
A 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
A 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. A Portfolio makes such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if Stein Roe 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.
A 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 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) 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"
A 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 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, 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. The Portfolio is said to have a short position
in the securities sold until it delivers to the broker-dealer the
securities sold. The 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 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 the 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 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 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.
Rule 144A Securities
A Portfolio may purchase securities that have been privately
placed but that are eligible for purchase and sale under Rule 144A
under the Securities Act of 1933. That Rule permits certain
qualified institutional buyers, such as a Portfolio, to trade in
privately placed securities that have not been registered for sale
under the 1933 Act. Stein Roe, 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, Stein Roe will
consider the trading markets for the specific security, taking
into account the unregistered nature of a Rule 144A security. In
addition, Stein Roe 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 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. 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 Stein Roe.
Swaps, Caps, Floors and Collars
A 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 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. A Portfolio
may enter into any form of swap agreement if Stein Roe 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 Investors Service, Inc. or has an
equivalent rating from a nationally recognized statistical rating
organization or is determined to be of equivalent credit quality
by Stein Roe.
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 SAI, each Fund and 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 and Portfolio may lend money to and
borrow money from other mutual funds advised by Stein Roe. They
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. 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
if it should occur, would result in increased transaction
expenses, which must be borne by the 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.
Options on Securities and Indexes
A 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. A
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 a 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, it realizes a
capital gain equal to the premium received at the time the option
was written. If an option purchased by a 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 the Portfolio desires.
The 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, the 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 a Portfolio is an asset,
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, the 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, 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
A 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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A 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. 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 securities or the price of the securities that the
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.
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 accurate
predictions of changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should
those predictions be incorrect, the return might have been better
had the transaction not been attempted; however, in the absence of
the ability to use futures contracts, Stein Roe 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, 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 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 it 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, a 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 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
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 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 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,
a Portfolio may also use those investment vehicles, provided the
Board of Trustees determines that their use is consistent with the
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 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.
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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, the 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.
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 a 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," a 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 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 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 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 the 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, it 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 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 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
Each Fund and Portfolio operates 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, 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
(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. The Funds and Portfolios 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. A Fund or 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 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
Stein Roe seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. In working to
take sensible risks and make intelligent investments, 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. Stein Roe'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.
MANAGEMENT
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. The following table
sets forth certain information with respect to the trustees and
officers of the Trust:
<TABLE>
<CAPTION>
Position(s) held Principal occupation(s)
Name with the Trust during past five years
- ------------------ ------------------------ -----------------------------------
<S> <C> <C>
William D. Andrews, 51 Executive Vice-President Executive vice president of Stein Roe
Gary A. Anetsberger, 43(4) Senior Vice-President; Chief financial officer and chief administrative
Controller officer of the Mutual Funds division of Stein Roe;
senior vice president of Stein Roe since April 1996;
vice president of Stein Roe prior thereto
John A. Bacon Jr., 70 Trustee Private investor
(3) (4)
William W. Boyd, 72 Trustee Chairman and director of Sterling Plumbing
(2) (3) (4) (manufacturer of plumbing products)
David P. Brady, 34 Vice-President Senior vice president of Stein Roe since March 1998;
vice president of Stein Roe from Nov. 1995 to March
1998; portfolio manager for Stein Roe since 1993
Thomas W. Butch, 42 (4) President President of the Mutual Funds division of Stein Roe
since March 1998; senior vice president of Stein Roe
from Sept. 1994 to March 1998; first vice president,
corporate communications, of Mellon Bank Corporation
prior thereto
Daniel K. Cantor, 39 Vice-President Senior vice president of Stein Roe
Kevin M. Carome, 42 (4) Vice-President; Senior vice president, legal, COGRA LLC (an affiliate
Assistant Secretary of Stein Roe) since Jan. 1999; general counsel and
secretary of Stein Roe since Jan. 1998; associate
general counsel and vice president of Liberty
Financial Companies, Inc. (the indirect parent of
Stein Roe) through Jan. 1999
J. Kevin Connaughton, 34 Vice-President Vice president of Colonial Management Associates,
(4) Inc. ("CMA") , since February, 1998; senior tax
manager, Coopers & Lybrand, LLP from April, 1996 to
January, 1998; vice president, 440 Financial
Group/First Data Investor Services Group from
March,1994 to April, 1996
Lindsay Cook, 46 Trustee Executive vice president of Liberty Financial
(1)(2)(4) Companies, Inc. (the indirect parent of Stein Roe)
since March 1997; senior vice president prior thereto
Erik P. Gustafson, 35 Vice-President Senior portfolio manager of Stein Roe; senior vice
president of Stein Roe since April 1996; vice
president of Stein Roe from May 1994 to April 1996;
associate of Stein Roe prior thereto
Douglas A. Hacker, 43 Trustee Senior vice president and chief financial officer of
(3) (4) UAL, Inc. (airline) since July 1994; senior vice
president, finance of UAL, Inc. prior thereto
Loren A. Hansen, 50 (4) Executive Vice-President Chief investment officer of CMA ("CMA") since 1997;
executive vice president of Stein Roe since Dec. 1995;
vice president of The Northern Trust (bank) prior
thereto
James P. Haynie, 36 Vice-President Vice President of Stein Roe since Oct. 1998; Vice
President of CMA since 1993
Harvey B. Hirschhorn, 49 Vice-President Executive vice president, senior portfolio manager,
and chief economist and investment strategist of Stein
Roe; director of research of Stein Roe, 1991 to 1995
Timothy J. Jacoby, 46 (4) Vice-President Fund treasurer for The Colonial Group since Sept. 1996
and chief financial officer since Aug. 1997; senior
vice president of Fidelity Investments from Sept. 1993
to Sept. 1996
Janet Langford Kelly, 41 Trustee Senior vice president, secretary and general counsel
(3) (4) of Sara Lee Corporation (branded, packaged, consumer-
products manufacturer) since 1995; partner of Sidley &
Austin (law firm) prior thereto
Michael T. Kennedy, 36 Vice-President Senior vice president of Stein Roe since Oct. 1994;
vice president of Stein Roe prior thereto
Gail D. Knudsen, 36 (4) Vice-President Vice president and assistant controller of CMA
Stephen F. Lockman, 37 Vice-President Senior vice president, portfolio manager, and credit
analyst of the Adviser since 1994; portfolio manager
for Illinois State Board of Investment prior thereto
Eric S. Maddix, 35 Vice-President Senior vice president of Stein Roe since March 1998;
vice president of Stein Roe from Nov. 1995 to March
1998; portfolio manager or research assistant for
Stein Roe since 1987
Lynn C. Maddox, 58 Vice-President Senior vice president of Stein Roe
Arthur J. McQueen, 40 Vice-President Senior vice president of Stein Roe
Charles R. Nelson, 56 Trustee Van Voorhis Professor of Political Economy, Department
(3) (4) of Economics of the University of Washington
Maureen G. Newman, 39 Vice-President Vice President of Stein Roe since Nov. 1998; portfolio
manager and vice president of CMA since May 1996;
portfolio manager and bond analyst at Fidelity
Investments from May 1985 to May 1996
Nicolette D. Parrish, 49 Vice-President; Senior legal assistant and assistant secretary of
(4) Assistant Secretary Stein Roe
Gita R. Rao, 39 Vice-President Vice President of Stein Roe since Oct. 1998; vice
president and portfolio manager for CMA since 1995;
global equity research analyst at Fidelity Management
& Research Company prior thereto
Michael E. Rega, 39 Vice-President Vice President of Stein Roe since Oct. 1998; Vice
President of CMA since 1996
Janet B. Rysz, 43 (4) Assistant Secretary Senior legal assistant and assistant secretary of
Stein Roe
M. Gerard Sandel, 44 Vice-President Senior vice president of Stein Roe since July 1997;
vice president of M&I Investment Management
Corporation prior thereto
Gloria J. Santella, 41 Vice-President Senior vice president of Stein Roe since Nov. 1995;
vice president of Stein Roe prior thereto
Thomas C. Theobald, 61 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, 27 (4) Treasurer Financial reporting manager for Stein Roe's Mutual
Funds division since Oct. 1997; senior auditor with
Ernst & Young LLP from Sept. 1993 to April 1996 and
from Oct. 1996 to Sept. 1997; financial analyst with
John Nuveen & Company Inc. from May 1996 to Sept. 1996
Heidi J. Walter, 31 (4) Vice-President; Secretary Vice president of Stein Roe since March 1998; senior
legal counsel for Stein Roe since Feb. 1998; legal
counsel for Stein Roe from March 1995 to Jan. 1998;
associate with Beeler Schad & Diamond, PC (law firm)
prior thereto
Hans P. Ziegler (4), 57 Executive Vice-President Director and Executive Vice-President of Stein Roe
since May 1994; President of the Investment Counsel
division of Stein Roe prior thereto
<FN>
_________________________
(1) Trustee who is an "interested person" of the Trust and of
Stein Roe, 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 SR&F Base Trust.
</TABLE>
Certain of the trustees and officers of the Trust are
trustees or officers of other investment companies managed by
Stein Roe. Mr. Anetsberger, Mr. Butch, and Ms. Walter are also
officers of Liberty Funds Distributor, Inc., the Fund's
distributor. The address of Mr. Bacon is 4N640 Honey Hill Road,
Box 296, Wayne, IL 60184; that of Mr. Boyd is 2900 Golf Road,
Rolling Meadows, IL 60008; that of Mr. Cook is 600 Atlantic
Avenue, Boston, MA 02210; that of Mr. Hacker is P.O. Box 66100,
Chicago, IL 60666; that of Ms. Kelly is Three First National
Plaza, Chicago, IL 60602; that of Mr. Nelson is Department of
Economics, University of Washington, Seattle, WA 98195; that of
Mr. Theobald is Suite 3300, 222 West Adams Street, Chicago, IL
60606; that of Mr. Cantor is 1330 Avenue of the Americas, New
York, NY 10019; that of Ms. Knudsen, Ms. Newman, Ms. Rao, and
Messrs. Connaughton, Haynie, Jacoby, and Rega is One Financial
Center, Boston, MA 02111; and that of the other officers is One
South Wacker Drive, Chicago, IL 60606.
Officers and trustees affiliated with Stein Roe serve without
any compensation from the Trust. In compensation for their
services to the Trust, trustees who are not "interested persons"
of the Trust or Stein Roe are paid an annual retainer plus an
attendance fee for each meeting of the Board or standing committee
thereof attended. The Trust has no retirement or pension plan.
The following table sets forth compensation paid during the fiscal
year ended Sept. 30, 1998 to each of the trustees:
Compensation from the
Stein Roe Fund Complex*
-----------------------
Aggregate Compensation Total Average
Name of Trustee from the Trust Compensation Per Series
- ------------------- -------------------- ------------ ----------
Timothy K. Armour** -0- -0- -0-
Thomas W. Butch** -0- -0- -0-
Lindsay Cook -0- -0- -0-
John A. Bacon Jr.** -0- -0- -0-
Kenneth L. Block** $ 2,000 $ 23,100 $ 525
William W. Boyd 13,400 109,902 2,498
Douglas A. Hacker 13,100 101,148 2,299
Janet Langford Kelly 12,500 97,950 2,226
Francis W. Morley** 2,000 23,100 525
Charles R. Nelson 13,400 109,552 2,490
Thomas C. Theobald 13,100 101,148 2,299
_______________
* At Sept. 30, 1998, the Stein Roe Fund Complex consisted of 10
series of the Trust, 11 series of Stein Roe Investment Trust, four
series of Stein Roe Income Trust, four series of Stein Roe
Municipal Trust, one series of Stein Roe Institutional Trust, one
series of Stein Roe Trust, and 13 series of SR&F Base Trust.
**Messrs. Block and Morley retired as trustees on Dec. 31, 1997.
Mr. Armour resigned as a trustee on April 14, 1998. Mr. Butch
served as a trustee from April 14, 1998 to Nov. 3, 1998. Mr.
Bacon was elected a trustee effective Nov. 3, 1998.
FINANCIAL STATEMENTS
Please refer to the Sept. 30, 1998 Financial Statements
(statements of assets and liabilities and schedules of investments
as of Sept. 30, 1998 and the statements of operations, changes in
net assets, and notes thereto) and the report of independent
public accountants contained in the Sept. 30, 1998 Annual Reports.
The Financial Statements and the report of independent public
accountants (but no other material from the Annual Reports) are
incorporated herein by reference. An Annual Report may be
obtained at no charge by telephoning 800-322-1130.
PRINCIPAL SHAREHOLDERS
As of October 31, 1998, the only persons known by the Trust
to own of record or "beneficially" 5% or more of outstanding
shares of any class of a 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 Fund/Class Shares Held
- --------------------- -------------------------- ----------------
Bob Weik Advisor Growth Stock Fund, 9.01%
P. O. Box 5020 Class K
San Antonio TX 78201
Liberty Financial Advisor Young Investor Fund, 32.63
Companies, Inc. Class K
600 Atlantic Avenue
Federal Reserve Plaza
Boston, MA 02210
A. G. Edwards* Advisor Young Investor Fund, 22.54
For the Sole Benefit Class K
of Its Customers
One N. Jefferson
St. Louis, MO 63103
Merrill Lynch Pierce Advisor Growth Stock Fund:
Fenner & Smith* Class A 19.82
For the Sole Benefit Class B 36.55
of Its Customers Class C 15.77
Attn: Fund Adminis-
tration
4800 Deer Lake Drive
Jacksonville, FL 32246
_____________
*Shares held of record, but not beneficially.
INVESTMENT ADVISORY AND OTHER SERVICES
Stein Roe & Farnham Incorporated provides investment
management services to the Portfolios and administrative services
to the Funds and the Portfolios. Stein Roe is a wholly owned
subsidiary of SteinRoe Services Inc. ("SSI"), the Fund's transfer
agent, which is a wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"), which is a majority owned
subsidiary of Liberty Corporate Holdings, Inc., which is a wholly
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 Stein Roe are Kenneth R. Leibler, C. Allen
Merritt, Jr., Thomas W. Butch, and Hans P. Ziegler. Mr. Leibler
is President and Chief Executive Officer of Liberty Financial; Mr.
Merritt is Chief Operating Officer of Liberty Financial; Mr. Butch
is President of Stein Roe's Mutual Funds division; and Mr. Ziegler
is Chief Executive Officer of Stein Roe. The business address of
Messrs. Leibler and Merritt is 600 Atlantic Avenue, Boston, MA
02210; and that of Messrs. Butch and Ziegler is One South Wacker
Drive, Chicago, IL 60606.
Stein Roe and its predecessor have been providing investment
advisory services since 1932. Stein Roe acts as investment
adviser to wealthy individuals, trustees, pension and profit
sharing plans, charitable organizations, and other institutional
investors. As of Sept. 30, 1998, Stein Roe managed over $28.3
billion in assets: over $9.4 billion in equities and over $18.9
billion in fixed income securities (including $1.1 billion in
municipal securities). The $28.3 billion in managed assets
included over $8.3 billion held by open-end mutual funds managed
by Stein Roe (approximately 14% of the mutual fund assets were
held by clients of Stein Roe). These mutual funds were owned by
over 295,000 shareholders. The $8.3 billion in mutual fund assets
included over $637 million in over 43,000 IRA accounts. In
managing those assets, Stein Roe utilizes a proprietary computer-
based information system that maintains and regularly updates
information for approximately 7,500 companies. Stein Roe also
monitors over 1,400 issues via a proprietary credit analysis
system. At Sept. 30, 1998, Stein Roe employed 18 research
analysts and 55 account managers. The average investment-related
experience of these individuals was 17 years.
In return for its services, Stein Roe is entitled to receive
a monthly administrative fee from each Fund and a monthly
management fee from each Portfolio. The table below shows the
annual rates of such fees as a percentage of average net assets
(shown in millions), gross fees paid since commencement of
operations, and any expense reimbursements by Stein Roe:
<TABLE>
<CAPTION>
Year Ended Year Ended
Fund/Portfolio Type Current Rates 9/30/98 9/30/97
<S> <C> <C> <C> <C>
Advisor Growth
Stock Fund Administrative .15% up to $500,
.125% next $500,
.10% thereafter $ 106,730 $ 166
Class A Reimbursement Expenses exceeding 1.40% 66,480 -
Class B Reimbursement Expenses exceeding 2.10% 74,172 -
Class C Reimbursement Expenses exceeding 2.10% 12,265 -
Class K Reimbursement Expenses exceeding 1.35% 9,039 60,346
Growth Stock
Portfolio Management .60% up to $500,
.55% next $500,
.50% thereafter 4,251,833 2,119,803
Advisor Young
Investor Fund Administrative .20% up to $500,
.150% next $500,
.125% thereafter 26,438 129
Class A Reimbursement Expenses exceeding 1.65% 41,170 -
Class K Reimbursement Expenses exceeding 1.50% 42,387 56,653
Growth Investor
Portfolio Management .60% up to $500,
.55% next $500, .50%
thereafter 3,758,114 1,191,731
</TABLE>
Stein Roe 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
Stein Roe, including but not limited to printing and postage
charges, securities registration and custodian fees, and expenses
incidental to its organization.
The administrative agreement provides that Stein Roe shall
reimburse each Fund to the extent that its total annual expenses
(including fees paid to Stein Roe, 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, Stein Roe is
not required to reimburse a Fund an amount in excess of fees paid
under that agreement for such year. In addition, in the interest
of further limiting expenses of a Fund, Stein Roe may voluntarily
waive its fees and/or absorb certain expenses, as described under
The Fund-Your Expenses in the Prospectus. Any such reimbursement
will enhance the yield of such Fund.
The management agreement provides that neither Stein Roe, nor
any of its directors, officers, stockholders (or partners of
stockholders), agents, or employees shall have any liability to
the Trust or any shareholder of the 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
Stein Roe 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 the Trust are
paid solely out of the assets of that series. Any expenses
incurred by the Trust that are not solely attributable to a
particular series are apportioned in such manner as Stein Roe
determines is fair and appropriate, unless otherwise specified by
the Board of Trustees.
Bookkeeping and Accounting Agreement
Pursuant to a separate agreement with the Trust, Stein Roe
receives a fee for performing certain bookkeeping and accounting
services. For services provided to the Trust, Stein Roe receives
an annual fee of $25,000 per Fund plus .0025 of 1% of average net
assets over $50 million. During the fiscal years ended Sept. 30,
1997 and 1998, Stein Roe received $109,375 and $224,068,
respectively, from the Trust for services provided under this
agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, MA 02101, is the custodian for the Trust
and SR&F 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 the Portfolios,
the Funds, and their 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, as well as by Stein Roe 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 Funds and 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 the Funds and
Portfolios are Arthur Andersen LLP, 33 West Monroe Street,
Chicago, IL 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 the Funds are distributed by Liberty Funds
Distributor, Inc. (the "Distributor"), One Financial Center,
Boston, MA 02111, an indirect subsidiary of Liberty Financial,
under a Distribution Agreement. 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 the 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 financial service firms or investors. The 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 the 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 a Fund including its
expenses related to sale and promotion of Fund shares, the
Distributor receives from the 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 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 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 sales
charges paid. The Trust's Plan complies with those rules.
The trustees believe that the 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
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 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 Plan
must be approved by the trustees in the manner provided in the
foregoing sentence. The 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 Young Investor Fund offers two classes of shares
(Class A and Class K) and Advisor Growth Stock Fund offers four
classes of shares (Class A, Class B, Class C, and Class K). The
Funds 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 of Advisor Young Investor Fund are offered at
net asset value and a subject to a Rule 12b-1 fee and a contingent
deferred sales charge on redemptions made within three years of
purchase. Class A shares of Advisor Growth Stock Fund 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 of that Fund having an
equal value, which are not subject to the distribution or service
fee.
12b-1 fees paid for the fiscal year ended Sept. 30, 1998:
<TABLE>
<CAPTION>
Advisor Growth Stock Fund Advisor Young Investor Fund
- ----------------------------------- -----------------------------------
<S> <C>
Distribution and Service Distribution and Service
Fees-Class A $ 85,338 Fees-Class A $38,986
Distribution and Service Distribution and Service
Fees-Class B 353,004 Fees-Class K 561
Distribution and Service
Fees-Class C 61,520
Distribution and Service
Fees-Class K 3,138
</TABLE?
Sales charges paid for the fiscal year ended Sept. 30, 1998:
</TABLE>
<TABLE>
<CAPTION>
Advisor Growth Advisor Young
Stock Fund Investor Fund
-------------- -------------
<S> <C> <C>
Aggregate initial sales charges on Fund
shares sales $1,695,776 -
Initial sales charges retained by the
Distributor 109,835 -
Aggregate CDSCs on Fund redemptions
retained by the Distributor 32,441 -
</TABLE>
Sales-related expenses (dollars in thousands) of the Distributor
relating to the Funds for the year ended Sept. 30, 1998:
<TABLE>
<CAPTION>
Advisor Young
Advisor Growth Stock Fund Investor Fund
Class A Class B Class C Class A
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Fees to FSFs $ 91 $2,968 $127 $ 29
Cost of sales material relating
to the Fund (including
printing and mailing expenses) 477 524 84 495
Allocated travel, entertainment,
and other promotional expenses
(including advertising) 183 260 45 150
</TABLE>
TRANSFER AGENT AND SHAREHOLDER SERVICING
Liberty Funds Services, Inc. (the "Transfer Agent"), P.O. Box
1722, Boston, MA 02105, an indirect subsidiary of Liberty
Financial, is the agent of the Trust for the transfer of shares,
disbursement of dividends, and maintenance of shareholder
accounting records. For performing these services, the Transfer
Agent receives from each 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%
The Trust believes the charges by the Transfer Agent to the Funds
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 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 Prospectus
under the heading Your Account, 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 the Trust of any order.
The Funds 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 the Fund before that day's transactions are
processed. If the FSF or 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 FSF or Intermediary. If the FSF or
Intermediary receives the order after the time at which the 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.
Each Fund receives the entire net asset value of shares sold.
For Class A shares of Advisor Growth Stock Fund, 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 Fund shares 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 p.m., Central time, or 4
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
January, the third Monday in February, 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 p.m., Central time.
A Portfolio may invest in securities that are listed
primarily on foreign exchanges that are open and allow trading on
days on which the Funds do not determine net asset value. This
may significantly affect the net asset value of a 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 Stein Roe 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 place 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.
The 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 the 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, the Trust 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 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 the Trust
to redeem shares under certain other circumstances as may be
specified by the Board of Trustees.
The Trust reserves the right to suspend or postpone
redemptions of Fund shares 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.
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 the Funds 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 Fund shares at
the public offering price next determined after the Transfer Agent
receives the proceeds from the draft (normally the 5th or 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 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 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 of
Advisor Growth Stock Fund 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 the Trust's 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 the 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 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
that 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 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 of Advisor Growth Stock Fund only). Class A shares may
be sold at net asset value to the following individuals whether
currently employed or retired: Trustees of funds advised or
administered by Stein Roe or an affiliate of Stein Roe; directors,
officers and employees of Stein Roe or an affiliate of Stein Roe,
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 of Advisor Growth Stock Fund
only). Class A shares 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 Fund shares on an individual
basis. The amount of the sales charge reduction will reflect the
anticipated reduction in sales expense associated with sponsored
arrangements. The reduction in sales expense, and therefore the
reduction in sales charge, will vary depending on factors such as
the size and stability of the organization's group, the term of
the organization's existence and certain characteristics of the
members of its group. The 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 the Fund is
included as an investment option in programs involving fee-based
compensation arrangements.
Waiver of Contingent Deferred Sales Charges (Class A of
Advisor Young Investor Fund, Class A of Advisor Growth Stock Fund
with accounts in excess of $1,000,000, and Classes 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 a 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 be sold on any day the NYSE is open, either
directly to a 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, the Fund will
delay sending proceeds for 15 days in order to protect the Fund
against financial losses and dilution in net asset value caused by
dishonored purchase payment checks. To avoid delays in payment,
investors are advised to purchase shares unconditionally, such as
by certified check or other immediately available funds.
To sell shares directly to a 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 the 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 at (800) 345-6611.
FSFs and Intermediaries must receive requests before the time
at which Fund 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 the 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
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 Fund shares 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 income dividends and other
distributions payable in Fund shares 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 a Fund (other than through the
reinvestment of dividends) and a SWP at the same time.
SWP payments are made through share redemptions, which may
result in a gain or loss for tax purposes, may involve the use of
principal and may eventually use up all of the shares in a
shareholder's account.
A Fund may terminate a shareholder's SWP if the shareholder's
account balance falls below $5,000 due to any transfer or
liquidation of shares other than pursuant to the SWP. SWP
payments will be terminated on receiving satisfactory evidence of
the death or incapacity of a shareholder. Until this evidence is
received, 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 the Funds 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 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 a Fund's net asset value, the Fund may make the
payment or a portion of the payment with portfolio securities held
by the 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 of
Advisor Growth Stock Fund, exchanges at net asset value may be
made among shares of the same class of any other fund that is a
series of the Trust or of most Colonial Funds. With respect to
Class A shares of Advisor Young Investor Fund, for a period of 90
days following the purchase of shares, exchanges at net asset
value may be made among Class A shares of Colonial Municipal Money
Market Fund or Colonial Government Money Market Fund (or its
successor). Thereafter, exchanges at net asset value may be made
among Class A shares of any other fund that is a series of the
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 Class K of any other fund that is a
series of the 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 a Fund suspends
repurchases or postpones payment for 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 the 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
Stein Roe places the orders for the purchase and sale of
portfolio securities and options and futures contracts. Stein
Roe's overriding objective in selecting brokers and dealers to
effect portfolio transactions is to seek the best combination of
net price and execution. The best net price, giving effect to
brokerage commissions, if any, is an important factor in this
decision; however, a number of other judgmental factors may also
enter into the decision. These factors include Stein Roe's
knowledge of negotiated commission rates currently available and
other current transaction costs; the nature of the security being
purchased or sold; the size of the transaction; the desired timing
of the transaction; 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 considered; Stein Roe's knowledge of
the financial condition of the broker or dealer selected and such
other brokers and dealers; and Stein Roe's knowledge of actual or
apparent operation problems of any broker or dealer. Recognizing
the value of these factors, Stein Roe may cause a client to pay a
brokerage commission in excess of that which another broker may
have charged for effecting the same transaction.
Stein Roe has established internal policies for the guidance
of its trading personnel, specifying minimum and maximum
commissions to be paid for various types and sizes of transactions
and effected for clients in those cases where Stein Roe has
discretion to select the broker or dealer by which the transaction
is to be executed. Transactions which vary from the guidelines
are subject to periodic supervisory review. These guidelines are
reviewed and periodically adjusted, and the general level of
brokerage commissions paid is periodically reviewed by Stein Roe.
Evaluations of the reasonableness of brokerage commissions, based
on the factors described in the preceding paragraph, are made by
Stein Roe's trading personnel while effecting portfolio
transactions. The general level of brokerage commissions paid is
reviewed by Stein Roe, and reports are made annually to the Board
of Trustees.
Where more than one broker or dealer is believed to be
capable of providing a combination of best net price and execution
with respect to a particular portfolio transaction, Stein Roe
often selects a broker or dealer that has furnished it with
investment research products or services such as: economic,
industry or company research reports or investment
recommendations; subscriptions to financial publications or
research data compilations; compilations of securities prices,
earnings, dividends, and similar data; computerized data bases;
quotation equipment and services; research or analytical computer
software and services; or services of economic and other
consultants. Such selections are not made pursuant to any
agreement or understanding with any of the brokers or dealers.
However, Stein Roe does in some instances request a broker to
provide a specific research or brokerage product or service which
may be proprietary to the broker or produced by a third party and
made available by the broker and, in such instances, the broker in
agreeing to provide the research or brokerage product or service
frequently will indicate to Stein Roe a specific or minimum amount
of commissions which it expects to receive by reason of its
provision of the product or service. Stein Roe does not agree
with any broker to direct such specific or minimum amounts of
commissions; however, Stein Roe does maintain an internal
procedure to identify those brokers who provide it with research
products or services and the value of such products or services,
and Stein Roe endeavors to direct sufficient commissions on client
transactions (including commissions on transactions in fixed
income securities effected on an agency basis and, in the case of
transactions for certain types of clients, dealer selling
concessions on new issues of securities) to ensure the continued
receipt of research products or services Stein Roe believes are
useful.
In a few instances, Stein Roe receives from a broker a
product or service which is used by Stein Roe both for investment
research and for administrative, marketing, or other non-research
or brokerage purposes. In such an instance, Stein Roe makes a
good faith effort to determine the relative proportion of its use
of such product or service which is for investment research or
brokerage, and that portion of the cost of obtaining such product
or service may be defrayed through brokerage commissions generated
by client transactions, while the remaining portion of the costs
of obtaining the product or service is paid by Stein Roe in cash.
Stein Roe may also receive research in connection with selling
concessions and designations in fixed income offerings.
The Funds and the Portfolios do not believe they pay
brokerage commissions higher than those obtainable from other
brokers in return for research or brokerage products or services
provided by brokers. Research or brokerage products or services
provided by brokers may be used by Stein Roe in servicing any or
all of its clients and such research products or services may not
necessarily be used by Stein Roe in connection with client
accounts which paid commissions to the brokers providing such
products or services.
The table below shows information on brokerage commissions
paid by the Portfolios:
Growth Growth
Stock Investor
Portfolio Portfolio
--------- ---------
Total amount of brokerage commissions paid
during the fiscal year ended 9/30/98 $562,354 $807,008
Amount of commissions paid to brokers or
dealers who supplied research services
to Stein Roe 479,454 731,886
Total dollar amount involved in such
transactions (000 omitted) 450,572 476,833
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 19,000 131,103
Total dollar amount involved in such
transactions (000 omitted) 18,693 88,249
Total amount of brokerage commissions paid
from inception to 9/30/97 178,057 298,009
The Trust and SR&F 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.
During the last fiscal year, the Portfolios held securities
issued by one or more of their regular broker-dealers or the
parent of such broker-dealers that derive more than 15% of gross
revenue from securities-related activities. Such holdings were as
follows at Sept. 30, 1998:
Value of
Securities Held
Portfolio Security (in thousands)
- ---------------- ----------------------------- --------------
Growth Stock
Portfolio Associates Corp. of North America $38,635
Travelers Group 18,750
Growth Investor
Portfolio Associates Corp. of North America 35,775
Travelers Group 9,375
ADDITIONAL INCOME TAX CONSIDERATIONS
The Funds and Portfolios intend to qualify under Subchapter M
of the Internal Revenue Code and 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 gains 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.
The Funds expect that less than 100% of their dividends will
qualify for the deduction for dividends received by corporate
shareholders.
A 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, the Portfolios intend 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
The Funds 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).
Each Fund commenced operations on February 14, 1997. Classes
A, B and C of Advisor Growth Stock Fund commenced operations on
Oct. 15, 1997, and Class A of Advisor Young Investor Fund
commenced operations on January 26, 1998. The historical
performance of Class A shares of the Fund prior to commencement of
operations is based on the performance of the Portfolio, restated
to reflect the sales charges, 12b-1 fees and other expenses set
forth in the fee table, without giving effect to any Class A share
fee reimbursements, and assuming reinvestment of dividends and
capital gains. The Fund's performance results since commencement
of operations include any expense reduction arrangements. If
these arrangements were not in place, then the performance results
would have been lower. Any reduction arrangements may be
discontinued at any time. As with all mutual funds, past
performance does not predict the Fund's future performance.
Average annual returns as of Sept. 30, 1998, were as follows:
Advisor Growth Stock Fund 1 year 5 years 10 years
Class A with sales charge of 5.75% -0.40% 15.72% 15.77%
Class A without sales charge 5.67 17.10 16.46
Class B with applicable CDSC -0.07 16.05 15.19
Class B without applicable CDSC 4.93 16.27 15.19
Class C with applicable CDSC 3.75 16.23 15.62
Class C without CDSC 4.75 16.23 15.62
Class K 5.33 17.06 16.47
Advisor Young Investor Fund 1 year Since Inception
Class A with applicable CDSC -2.88% 22.12%
Class A without applicable CDSC -0.88 22.12
Class K -0.62 22.28
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 Trust
assumes 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 Trust believes to be generally accurate. A Fund may compare
its performance to the Consumer Price Index (All Urban), a widely
recognized measure of inflation. The performance of the Funds 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, a Fund may compare its performance to the
indicated benchmarks:
In addition, a Fund may compare its performance to the
indicated benchmarks:
Benchmark Fund(s)
Lipper Equity Fund Average Both Funds
Lipper General Equity Fund Average Both Funds
Lipper Growth Fund Average Both Funds
Lipper Growth Fund Index Both Funds
Morningstar All Equity Funds Average Advisor Young Investor Fund
Morningstar Domestic Stock Average Both Funds
Morningstar Equity Fund Average Advisor Young Investor Fund
Morningstar General Equity Average Advisor Young Investor Fund
Morningstar Growth Fund Average Both Funds
Morningstar Hybrid Fund Average Advisor Young Investor Fund
Morningstar Total Fund Average Both Funds
Morningstar U.S. Diversified Average Advisor Young Investor 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. A 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
a 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.
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, a 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.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Each Fund (each a series of the 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 Investment Advisory and Other Services. Each
feeder Fund bears its proportionate share of the expenses of its
master Portfolio.
Stein Roe 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 the 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 the 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 the 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.
Information regarding other investors in a Portfolio may be
obtained by writing to SR&F Base Trust at Suite 3200, One South
Wacker Drive, Chicago, IL 60606, or by calling 800-338-2550.
Stein Roe may provide administrative or other services to one or
more of such investors.
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, Stein Roe 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 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.
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