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PROSPECTUS NOV. 20, 1998
STEIN ROE MUTUAL FUNDS
STEIN ROE INSTITUTIONAL FLOATING RATE INCOME FUND
Stein Roe Institutional Floating Rate Income Fund (the
"Fund") is a newly organized non-diversified, closed-end
management investment company. The Fund's investment objective is
to provide a high level of current income, consistent with
preservation of capital. The Fund is engaged in a continuous
public offering of its shares at the next determined net asset
value per share without a sales charge. The Fund currently seeks
to achieve its objective by investing its net investable assets in
Stein Roe Floating Rate Limited Liability Company (the
"Portfolio"), a non-diversified, closed-end management investment
company, which has the same investment objective as the Fund,
rather than investing directly in and managing its own portfolio
of securities.
The Portfolio invests primarily in a portfolio of interests
in floating or variable rate senior loans to corporations,
partnerships and other entities that operate in a variety of
industries and geographic regions. Although the Portfolio's net
asset value per share will vary, the Portfolio's policy of
acquiring interests in floating or variable rate senior loans is
expected to minimize fluctuations in the Portfolio's net asset
value as a result of changes in interest rates. The Portfolio's
net asset value may be affected by defaults by or changes in the
credit quality of borrowers with respect to senior loan interests
in which the Portfolio invests. Fluctuations in the net asset
value per share of the Portfolio will cause fluctuations in the
net asset value per share of the Fund.
The investment adviser to the Fund and to the Portfolio is
Stein Roe & Farnham Incorporated (the "Adviser"). An investment
in the Fund may not be appropriate for all investors and there is
no assurance that the Portfolio or the Fund will achieve its
investment objective. (See "Investment Objective and Policies,"
"Special Risk Considerations," and "Master Fund/Feeder Fund:
Structure and Risk Factors.")
In order to provide liquidity to shareholders, each calendar
quarter the Fund will make an offer ("Tender Offer") to repurchase
between 5% and 25% of its outstanding common shares of beneficial
interest ("Shares") at the then current net asset value of the
Shares. Shares will be repurchased at the net asset value
determined as of the close of business on the day the Tender Offer
ends or within a maximum of fourteen days after the Tender Offer
ends as described in "Periodic Tender Offers." See also "Other
Investment Practices-Borrowing" for a discussion of borrowing in
connection with Tender Offers. Each Tender Offer will last for
between three weeks and six weeks. Shareholders will be notified
in writing at the beginning of each Tender Offer. A Tender Offer
is expected to end near the end of May, 1999, and every three
months thereafter.
The Fund does not intend to list the Shares on any national
securities exchange. Shares of the Fund have no history of public
trading, and there is not expected to be any secondary trading
market in the Shares. Therefore, an investment in the Shares
should be considered illiquid. (See "Special Risk
Considerations.")
Shares of the Fund are not deposits or obligations of, nor
guaranteed or endorsed by, any bank or depository institution;
further, such Shares are not federally insured by the Federal
Deposit Insurance Corporation, The Federal Reserve Board, or any
other government agency. Shares of the Fund involve investment
risks, including the possible loss of principal.
The Prospectus sets forth concisely the information that a
prospective investor should know before investing in Shares of the
Fund. Please read and retain this Prospectus for future
reference. A Statement of Additional Information regarding the
Fund dated the date of this Prospectus has been filed with the
Securities and Exchange Commission ("SEC") and can be obtained
without charge by calling 1-800-774-2321. A table of contents to
the Statement of Additional Information is located at page 45 of
this Prospectus. This Prospectus incorporates by reference the
entire Statement of Additional Information (together with any
supplement to it). The Statement of Additional Information and
other related materials are available at the SEC's internet web
site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Price to Sales Proceeds to
Public (1) Load (2) Fund (3)
--------- -------- ----------
Per Share $ 10.00 None $ 10.00
Total $100,000,000 None $100,000,000
___________________________
(1) The Shares are offered on a best efforts basis at a price
equal to net asset value, which initially is $10.00 per Share.
(2) Liberty Securities Corporation will pay all distribution costs
from its own assets.
(3) Assuming the sale of all Shares registered hereby.
TABLE OF CONTENTS
Page
Fund Expenses..........................................3
Prospectus Summary.....................................4
The Fund...............................................8
Investment Objectives and Policies.....................8
Use of Proceeds........................................9
How the Portfolio Invests..............................9
Special Risk Considerations...........................18
Other Investment Practices............................21
Distributions and Income Taxes........................27
Management of the Fund................................29
Periodic Tender Offers................................30
How to Purchase Shares................................33
Shareholder Services..................................34
Net Asset Value.......................................36
Performance Information...............................37
Organization and Description of Shares................38
Master Fund/Feeder Fund: Structure and Risk Factors...39
Appendix--Ratings.....................................40
Statement of Additional Information Table of Contents.44
FUND EXPENSES
The following tables are intended to assist investors in
understanding the various costs and expenses directly or
indirectly associated with investing in the Fund. Because neither
the Portfolio nor the Fund has an operating history, the
information set forth below is based on estimated amounts for the
fiscal year ending June 30, 1999 after expense reimbursement.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Estimated Annual Fund Operating Expenses
Management and Administrative Fees (after
reimbursement) 0.50%
12b-1 Fees None
Interest Payments on Borrowed Funds None
Other Expenses 0.40%
Total Fund Operating Expenses -----
(after reimbursement) 0.90%
=====
Example
You would pay the following expenses on a $1,000 investment
in the Fund, assuming a 5% annual return:
1 year 3 years 5 years 10 years
$9 $29 $50 $111
The purpose of the Fee Table is to assist you in
understanding the various costs and expenses that you will bear
directly or indirectly as an investor in the Fund. The table is
based upon an estimate of expenses, assuming net assets of $50
million. The figures assume that the percentage amounts listed
under Annual Fund Operating Expenses remain the same during each
of the periods and that all income dividends and capital gains
distributions are reinvested in additional Shares.
From time to time, the Adviser may voluntarily undertake to
reimburse the Fund for a portion of its operating expenses. The
Adviser has undertaken to reimburse the Fund for its operating
expenses to the extent that such expenses exceed 0.90% of its
average annual net assets. This commitment expires on October 31,
1999. Thereafter, the Adviser may terminate the commitment on 30
days' notice to the Fund. Absent such reimbursement, the
Management and Administrative Fees and Total Operating Expenses
would be 1.10% and 1.50%, respectively. Any such reimbursement
will lower the Fund's overall expense ratio and increase its
overall return to investors. (Also, see "Management - Fees and
Expenses").
The figures in the Example are not necessarily indicative of
past or future expenses, and actual expenses may be greater or
less than those shown. Although information such as that shown in
the Example and Fee Table is useful in reviewing the Fund's
expenses and in providing a basis for comparison with other mutual
funds, it should not be used for comparison with other investments
using different assumptions or time periods.
PROSPECTUS SUMMARY
The Fund. Stein Roe Institutional Floating Rate Income Fund
(the "Fund") is a newly organized non-diversified, closed-end
management investment company, organized as a Massachusetts
business trust on August 13, 1998 and managed by the Board of
Trustees. (See "The Fund.") Rather than invest in securities
directly, the Fund seeks to achieve its investment objective by
using the "master fund/feeder fund" structure. Under that
structure, the Fund and other investment companies with the same
investment objective invest their assets in another investment
company having the same investment objective and substantially the
same investment policies as the Fund. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs. The Fund invests all of its net investable assets
in Stein Roe Floating Rate Limited Liability Company (the
"Portfolio"), which is a non-diversified closed-end management
investment company organized as a Delaware limited liability
company and managed by the Board of Managers. The persons who
serve as trustees on the Board of the Fund are the same persons
who serve as Managers on the Board of the Portfolio.
Continuous Offering. The Fund is engaged in a continuous
public offering of its Shares at the next determined net asset
value per share without a sales charge. The minimum initial
investment is $250,000 and the minimum subsequent investment is
$10,000. The Fund does not intend to list the Shares on any
national securities exchange. The Fund will make quarterly Tender
Offers for all or a portion of its Shares, as discussed below in
this Prospectus Summary under "Periodic Tender Offers." An
investment in the Shares should be considered illiquid. (See also
"The Fund," "How to Purchase Shares" and "Periodic Tender
Offers.")
Investment Objective and Policies. The investment objective
of the Fund and of the Portfolio is to provide a high level of
current income, consistent with preservation of capital. To
achieve this objective the Portfolio invests primarily in a
portfolio of interests in floating or variable rate senior loans
("Senior Loans") to corporations, partnerships and other entities
("Borrowers") that operate in a variety of industries and
geographic regions (including domestic and foreign entities). An
investment in the Fund may not be appropriate for all investors
and is not intended to be a complete investment program. No
assurance can be given that the Portfolio or the Fund will achieve
its investment objective.
How the Portfolio Invests
Under normal market conditions, at least 80% of the
Portfolio's total assets will be invested in Senior Loans of
domestic Borrowers or foreign Borrowers (so long as Senior Loans
to such foreign Borrowers are U.S. dollar denominated and payments
of interest and repayments of principal pursuant to such Senior
Loans are required to be made in U.S. dollars). Although most
Senior Loans are secured, the Portfolio may invest up to 20% of
its total assets in interests in Senior Loans that are not secured
by any collateral and in other permitted investments (as described
below).
In addition, during normal market conditions, the Portfolio
may invest up to 20% of its total assets (including assets
maintained by the Portfolio as a reserve against any additional
loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants,
equity securities and, in limited circumstances, junior debt
securities acquired in connection with the Portfolio's investments
in Senior Loans.
Senior Loans. Senior Loans generally are arranged through
private negotiations between a Borrower and several financial
institutions ("Lenders") represented in each case by one or more
such Lenders acting as agent ("Agent") of the several Lenders. On
behalf of the several Lenders, the Agent is primarily responsible
for negotiating the loan agreement ("Loan Agreement") that
establishes the relative terms and conditions of the Senior Loan
and rights of the Borrower and the several Lenders. Senior Loans
in which the Portfolio will purchase interests generally pay
interest at rates that are periodically redetermined by reference
to a base lending rate plus a premium. These base lending rates
are generally the prime rate offered by one or more major United
States banks ("Prime Rate"), the London Inter-Bank Offered Rate
("LIBOR"), the Certificate of Deposit ("CD") rate or other base
lending rates used by commercial lenders.
Participations and Assignments. The Portfolio may invest in
participations ("Participations") in Senior Loans, may purchase
assignments ("Assignments") of portions of Senior Loans from third
parties and may act as one of the group of Lenders originating a
Senior Loan (an "Original Lender"). When the Portfolio purchases
a Participation, the Portfolio will typically enter into a
contractual relationship with the Lender selling the
Participation, but not with the Borrower. As a result, the
Portfolio will assume the credit risk of both the Borrower and the
Lender selling the Participation, and the Portfolio may not
directly benefit from the collateral supporting the Senior Loan in
which it has purchased the Participation. The Portfolio will
purchase a Participation only when the Lender selling the
Participation, and any other institution interpositioned between
such Lender and the Portfolio at the time of investment have
outstanding debt obligations rated investment grade (BBB or A-3 or
higher by Standard & Poor's Corporation ("S&P") or Baa or P-3 or
higher by Moody's Investors Service ("Moody's")) or determined by
the Adviser to be of comparable quality. Further, the Portfolio
will not purchase interests in Senior Loans unless such Agent,
Lender or interpositioned institution has entered into an
agreement that provides for the holding of payments on the Senior
Loan for the benefit of, or the prompt disbursement of payments
to, the Portfolio. With respect to any given Senior Loan, the
rights of the Portfolio when it acquires a Participation may be
different from, and more limited than, the rights of Original
Lenders or of persons who acquire an Assignment. The Portfolio
may pay a fee or forgo a portion of interest payments to the
Lender selling a Participation or Assignment pursuant to the terms
of such Participation or Assignment.
Portfolio Maturity. The Senior Loans in the Portfolio's
investment portfolio will at all times have a dollar-weighted
average time until next interest rate redetermination of 90 days
or less. Because of prepayment provisions, the actual remaining
maturity of Senior Loans may vary substantially from the stated
maturity of such loans. The Portfolio estimates actual average
maturity of Senior Loans in the portfolio will be approximately
18-24 months.
Defensive Investment Policy. If the Adviser determines that
market conditions temporarily warrant a defensive investment
policy, the Portfolio may, subject to its ability to liquidate its
relatively illiquid portfolio of Senior Loans, invest up to 100%
of its assets in cash and high quality, short-term securities.
The Portfolio may also lend its portfolio securities to other
parties and may enter into repurchase and reverse repurchase
agreements for securities, subject to certain restrictions. For
further discussion of the Portfolio's investment objective and
policies and its investment practices and the associated
considerations, see "Investment Objective and Policies," "How the
Fund Invests," "Other Investment Practices," and "Special Risk
Considerations."
Investment Adviser. Stein Roe & Farnham Incorporated (the
"Adviser") is responsible for managing the investment portfolio of
the Portfolio and the business affairs of the Fund. (See
"Management of the Fund.")
Periodic Tender Offers. The Fund has adopted a fundamental
policy to offer each calendar quarter to repurchase a specified
percentage (between 5% and 25%) of the Shares then outstanding.
In response to each Tender Offer, shareholders may choose to
tender their Shares to the Fund for repurchase. Tender Offers
occur at a price per share equal to the net asset value per share
determined as of the close of business (3:00 p.m., Central time)
on the day the Tender Offer ends or within a maximum of fourteen
days after the Tender Offer ends as described in "Periodic Tender
Offers." Each Tender Offer will last for between three and six
weeks, as stated in a written notice to each Shareholder at the
beginning of each Tender Offer. If a Tender Offer is
oversubscribed, the Fund will repurchase Shares pro rata and may
keep purchasing up to an additional 2% of outstanding Shares.
(See "The Fund," "How to Purchase Shares" and "Periodic Tender
Offers.")
Special Risk Considerations
Net Asset Value Fluctuations. The Portfolio's net asset
value per share is expected to be relatively stable during normal
market conditions because the Portfolio's assets will consist
primarily of floating rate Senior Loans and short-term
instruments. Nevertheless, there are circumstances that could
cause a decline in the Portfolio's net asset value per share and a
corresponding decline in the Fund's net asset value. The
Portfolio is not a money market fund and its net asset value will
fluctuate. As a newly organized entity, the Portfolio has no
operating history.
Risks Associated with Senior Loans. Investments in Senior
Loans involve certain risks, including, among other things, risks
of nonpayment of principal and interest; collateral impairment;
non-diversification and Borrower industry concentration; and that
there is not a fully liquid market for Senior Loans, which may
impair the Portfolio's ability to obtain full value for Senior
Loans sold. In addition, shareholders' ability to liquidate their
investments will be subject to the limits on periodic Tender
Offers.
The Portfolio may invest all or substantially all of its
assets in Senior Loans or other securities that are rated below
investment grade, or in comparable unrated securities. Senior
Loans made in connection with recapitalizations, acquisitions,
leveraged buy-outs, and refinancings are subject to greater credit
risks than other Senior Loans in which the Portfolio may invest.
It is expected that the Portfolio's Senior Loans will consist
primarily of such Senior Loans. These credit risks include the
possibility of a default on the Senior Loan or bankruptcy of the
Borrower. The value of these Senior Loans is subject to a greater
degree of volatility in response to interest rate fluctuations and
these Senior Loans may be less liquid than other Senior Loans.
Risks Associated with Closed-End Funds. The Fund is a
closed-end investment company designed primarily for long-term
investors and not as a trading vehicle. The Fund does not intend
to list the Shares for trading on any national securities
exchange. There is not expected to be any secondary trading
market in the Shares and an investment in the Shares should be
considered illiquid. The shares of closed-end investment
companies often trade at a discount from their net asset values
and, in the unlikely event that a secondary market for the Shares
were to develop, the Shares likewise may trade at a discount from
net asset value.
Risks Associated with Tender Offers. Under certain limited
circumstances, the Fund may suspend or postpone a quarterly Tender
Offer for the repurchase of Shares from the Fund's shareholders.
(The Fund must meet certain regulatory requirements and must give
notice to shareholders in order to suspend or postpone a Tender
Offer.) In that event, shareholders will likely be unable to sell
their Shares. The Fund, the Adviser and Liberty Securities
Corporation (the "Distributor") are prohibited from making a
market in Shares as long as the Fund continues to publicly offer
Shares.
THE FUND
The Fund is a newly organized non-diversified, closed-end
management investment company organized as a Massachusetts
business trust and managed by the Board of Trustees. The Fund is
engaged in a continuous public offering of the Shares at the next
determined net asset value per share without a sales charge. The
Fund's principal office is located at One South Wacker Drive,
Chicago, IL 60606-4685 and its telephone number is 1-800-774-
2321.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide a high level of
current income, consistent with preservation of capital. Rather
than invest in securities directly, the Fund seeks to achieve its
investment objective by using the "master fund/feeder fund"
structure. Under that structure, the Fund and other investment
companies with the same investment objective invest their assets
in another investment company having the same investment objective
and substantially the same investment policies as the Fund. The
purpose of such an arrangement is to achieve greater operational
efficiencies and reduce costs. The Fund's investment experience
will correspond directly to the investment experience of the
Portfolio.
The Fund invests all of its net investable assets in the
Portfolio. The Portfolio seeks to achieve its objective through
investment primarily in a professionally managed portfolio of
interests in Senior Loans to Borrowers that operate in a variety
of industries and geographic regions (including domestic and
foreign entities). Although the Portfolio's net asset value per
share will vary, the Portfolio's policy of acquiring interests in
floating or variable rate Senior Loans is expected to minimize the
fluctuations in the Fund's net asset value per share as a result
of changes in interest rates. The Fund's net asset value may be
affected by changes in the credit quality of Borrowers with
respect to Senior Loan interests in which the Portfolio invests.
Under normal market conditions, the Portfolio will invest at
least 80% of its total assets (either as an Original Lender or as
a purchaser of an Assignment or Participation) in Senior Loans of
domestic Borrowers or foreign Borrowers (so long as Senior Loans
to such foreign Borrowers are U.S. dollar denominated and payments
of interest and repayments of principal pursuant to such Senior
Loans are required to be made in U.S. dollars). Investment in
non-U.S. issuers involves special risks, including that non-U.S.
issuers may be subject to less rigorous accounting and reporting
requirements than are U.S. issuers, less rigorous regulatory
requirements, differing legal systems and laws relating to
creditors' rights, the potential inability to enforce legal
judgments and the potential for political, social and economic
adversities. Although most Senior Loans are collateralized, the
Portfolio may invest up to 20% of its total assets (valued at time
of investment) in Senior Loans that are not secured by any
collateral.
During normal market conditions, the Portfolio may invest up
to 20% of its total assets (including assets maintained by the
Portfolio as a reserve against any additional loan commitments) in
(i) high quality, short-term debt securities with remaining
maturities of one year or less and (ii) warrants, equity
securities and junior debt securities acquired in connection with
the Portfolio's investments in Senior Loans. Such high quality,
short-term securities may include commercial paper rated at least
Baa, P-3 or higher by Moody's or BBB, A-3 or higher by S&P (or if
unrated, determined by the Adviser to be of comparable quality),
interests in short-term loans and short-term loan participations
of Borrowers having short-term debt obligations rated or a short-
term credit rating at least in such rating categories (or having
no such rating, determined by the Adviser to be of comparable
quality), certificates of deposit and bankers' acceptances and
securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. Such high quality, short-term
securities may pay interest at rates that are periodically
redetermined or may pay interest at fixed rates.
An investment in the Fund may not be appropriate for all
investors and is not intended to be a complete investment program.
No assurance can be given that the Portfolio or the Fund will
achieve its investment objective.
The Fund is appropriate for investors seeking a high level of
current income consistent with capital preservation. Because the
Fund offers investors higher yield potential with lesser interest
rate risk due to its floating-rate nature, the Fund could be
considered a substitute for lower risk investments, such as short-
term bond funds. However, the Fund is subject to more credit risk
than the typical short-term bond fund since it invests in unrated
and noninvestment grade senior loans.
USE OF PROCEEDS
The net proceeds from the sale of the Shares offered hereby
will be invested in accordance with the Fund's investment
objective and policies. Pending investment by the Portfolio, the
proceeds may be invested in high quality, short-term securities.
It is expected that the proceeds will be fully invested in
accordance with the Fund's investment objectives and policies
within six months after the commencement of this offering.
HOW THE PORTFOLIO INVESTS
Senior Loans. Senior Loans generally are arranged through
private negotiations between a Borrower and Lenders represented in
each case by one or more Agents of the several Lenders. On behalf
of the several Lenders, the Agent, which is frequently the
commercial bank or other entity that originates the Senior Loan
and the person that invites other parties to join the lending
syndicate, will be primarily responsible for negotiating the Loan
Agreement that establishes the relative terms, conditions and
rights of the Borrower and the several Lenders. In larger
transactions it is common to have several Agents; however,
generally only one such Agent has primary responsibility for
documentation and administration of a Senior Loan. The typical
practice of an Agent or a Lender in relying exclusively or
primarily on reports from the Borrower may involve a risk of fraud
by the Borrower.
In a typical Senior Loan, the Agent administers the terms of
the Loan Agreement and is responsible for the collection of
principal and interest and fee payments from the Borrower and the
apportionment of those payments to the credit of all Lenders that
are parties to the Loan Agreement. The Portfolio generally will
rely on the Agent to collect its portion of the payments on a
Senior Loan. Furthermore, the Portfolio will rely on the Agent to
use appropriate creditor remedies against the Borrower.
Typically, under a Loan Agreement, the Agent is given broad
discretion in monitoring the Borrower's performance under the Loan
Agreement and is obligated to use only the same care it would use
in the management of its own property. Upon an event of default,
the Agent typically will act to enforce the Loan Agreement after
instruction from Lenders holding a majority of the Senior Loan.
The Borrower compensates the Agent for the Agent's services. This
compensation may include special fees paid on structuring and
funding the Senior Loan and other fees paid on a continuing basis.
It is anticipated that the proceeds of the Senior Loans in
which the Portfolio will acquire interests primarily will be used
to finance leveraged buyouts, recapitalizations, mergers,
acquisitions, stock repurchases, and, to a lesser extent, to
finance internal growth and for other corporate purposes of
Borrowers. Senior Loans have the most senior position in a
Borrower's capital structure, although some Senior Loans may hold
an equal ranking with other senior securities of the Borrower.
The capital structure of a Borrower may include Senior Loans,
senior and junior subordinated debt (which may include "junk
bonds"), preferred stock and common stock issued by the Borrower,
typically in descending order of seniority with respect to claims
on the Borrower's assets. Senior and junior subordinated debt is
collectively referred to in this Prospectus as "junior debt
securities." Senior Loans generally are secured by specific
collateral, which may include guarantees.
To the extent that the Portfolio invests a portion of its
assets in Senior Loans that are not secured by specific
collateral, the Portfolio will not enjoy the benefits associated
with collateralization with respect to such Senior Loans and such
Senior Loans may pose a greater risk of nonpayment of interest or
loss of principal than do collateralized Senior Loans. As
discussed below, the Portfolio may also acquire warrants, equity
securities and junior debt securities issued by the Borrower or
its affiliates as part of a package of investments in the Borrower
or its affiliates. Warrants, equity securities, and junior debt
securities will not be treated as Senior Loans and thus assets
invested in such securities will not count toward the 80% of the
Portfolio's total assets that normally will be invested in Senior
Loans. The Portfolio may acquire interests in warrants, other
equity securities or junior debt securities through a negotiated
restructuring of a Senior Loan or in a bankruptcy proceeding of
the Borrower.
In order to borrow money pursuant to a collateralized Senior
Loan, a Borrower will typically, for the term of the Senior Loan,
pledge as collateral assets, including but not limited to,
accounts receivable, inventory, buildings, other real estate,
trademarks, franchises and common and preferred stock in its
subsidiaries. In addition, in the case of some Senior Loans,
there may be additional collateral pledged in the form of
guarantees by and/or securities of affiliates of the Borrowers.
In certain instances, a collateralized Senior Loan may be secured
only by stock in the Borrower or its subsidiaries. Collateral may
consist of assets that are not readily liquidated, and there is no
assurance that the liquidation of such assets would satisfy fully
a Borrower's obligations under a Senior Loan. Similarly, in the
event of bankruptcy proceedings involving the Borrower, the
Lenders may be delayed or prevented from liquidating collateral or
may choose not to do so as part of their participation in a plan
of reorganization of the Borrower.
Loan Agreements may also include various restrictive
covenants designed to limit the activities of the Borrower in an
effort to protect the right of the Lenders to receive timely
payments of interest on and repayment of principal of the Senior
Loans. Restrictive covenants may include mandatory prepayment
provisions related to excess cash flows and typically include
restrictions on dividend payments, specific mandatory minimum
financial ratios, limits on total debt and other financial tests.
Breach of such a covenant, if not waived by the Lenders, is
generally an event of default under the applicable Loan Agreement
and may give the Lenders the right to accelerate principal and
interest payments. The Adviser will consider the terms of such
restrictive covenants in deciding whether to invest in Senior
Loans for the Portfolio's investment portfolio. When the
Portfolio holds a Participation in a Senior Loan it may not have
the right to vote to waive enforcement of a restrictive covenant
breached by a Borrower. Lenders voting in connection with a
potential waiver of a restrictive covenant may have interests
different from those of the Portfolio and such Lenders will not
consider the interests of the Portfolio in connection with their
votes.
Senior Loans in which the Portfolio will invest generally pay
interest at rates that are periodically redetermined by reference
to a base lending rate plus a premium. These base lending rates
generally are the prime rate offered by one or more major United
States banks (the "Prime Rate"), the London Inter-Bank Offered
Rate ("LIBOR"), the certificate of deposit ("CD") rate or other
base lending rates used by commercial lenders. LIBOR, as provided
for in Loan Agreements, is an average of the interest rates quoted
by several designated banks as the rates at which such banks would
offer to pay interest to major financial institutional depositors
in the London interbank market on U.S. dollar denominated deposits
for a specified period of time. The CD rate, as generally
provided for in Loan Agreements, is the average rate paid on large
certificates of deposit traded in the secondary market. Senior
Loans traditionally have been structured so that Borrowers pay
higher premiums when they elect LIBOR, in order to permit lenders
to obtain generally consistent yields on Senior Loans, regardless
of whether Borrowers select the LIBOR option, or the Prime Rate
option. In recent years, however, the differential between the
lower LIBOR base rates and the higher Prime Rate base rates
prevailing in the commercial bank markets has widened to the point
where the higher Margins paid by Borrowers for LIBOR pricing
options do not currently compensate for the differential between
the Prime Rate and the LIBOR rate. Consequently, Borrowers have
increasingly selected the LIBOR-based pricing option, resulting in
a yield on Senior Loans that is consistently lower than the yield
available from the Prime Rate-based pricing option. This trend
will significantly limit the ability of the Portfolio to achieve a
net return to shareholders that consistently approximates the
average published Prime Rate of leading U.S. banks.
Participations and Assignments. The Portfolio may invest in
Participations in Senior Loans, may purchase Assignments of
portions of Senior Loans from third parties and may act as one of
the group of Original Lenders.
The Portfolio may invest up to 100% of its assets in
Participations. The selling Lenders and other persons
interpositioned between such Lenders and the Portfolio with
respect to Participations will likely conduct their principal
business activities in the banking, finance and financial services
industries. Although, as discussed below, the Portfolio has taken
measures that it believes significantly reduce its exposure to
risks associated with Participations, the Portfolio may be more
susceptible than an investment company that does not invest in
Participations in Senior Loans to any single economic, political
or regulatory occurrence affecting these industries. Persons
engaged in these industries may be more susceptible than are
persons engaged in some other industries to, among other things,
fluctuations in interest rates, changes in the Federal Open Market
Committee's monetary policy, governmental regulations concerning
such industries and concerning capital raising activities
generally and fluctuations in the financial markets generally.
Participation by the Portfolio in a Lender's portion of a
Senior Loan typically will result in the Portfolio having a
contractual relationship only with such Lender, not with the
Borrower. As a result, the Portfolio may have the right to
receive payments of principal, interest and any fees to which it
is entitled only from the Lender selling the Participation and
only upon receipt by such Lender of such payments from the
Borrower. In connection with purchasing Participations, the
Portfolio generally will have no right to enforce compliance by
the Borrower with the terms of the Loan Agreement, nor any rights
with respect to any funds acquired by other Lenders through set-
off against the Borrower, and the Portfolio may not directly
benefit from the collateral supporting the Senior Loan in which it
has purchased the Participation. As a result, the Portfolio may
assume the credit risk of both the Borrower and the Lender selling
the Participation. In the event of the insolvency of the Lender
selling a Participation, the Portfolio may be treated as a general
creditor of the Lender, and may not benefit from any set-off
between the Lender and the Borrower. In an effort to minimize
such risks, the Portfolio will only acquire Participations if the
Lender selling the Participation, and any other institution
interpositioned between the Portfolio and the Lender, (i) at the
time of investment has outstanding debt or deposit obligations
rated investment grade (BBB or A-3 or higher by S&P or Baa or P-3
or higher by Moody's) or determined by the Adviser to be of
comparable quality and (ii) has entered into an agreement that
provides for the holding of payments on the Senior Loan for the
benefit of, or the prompt disbursement of payments to, the
Portfolio. Long-term debt rated BBB by S&P is regarded by S&P as
having adequate capacity to pay interest and repay principal and
debt rated Baa by Moody's is regarded by Moody's as a medium grade
obligation; i.e., it is neither highly protected nor poorly
secured. The Portfolio ordinarily will purchase a Participation
only if, at the time of such purchase, the Portfolio believes that
the party from whom it is purchasing such Participation is
retaining an interest in the underlying Senior Loan. In the event
that the Portfolio does not so believe, it will only purchase such
a Participation if, in addition to the requirements set forth
above, the party from whom the Portfolio is purchasing such
Participation (i) is a bank, a member of a national securities
exchange or other entity designated in the Investment Company Act
of 1940, as amended (the "1940 Act"), as qualified to serve as a
custodian for a registered investment company and (ii) has been
approved as a custodian by the Board of the Portfolio (a
"Designated Custodian").
The Portfolio may also purchase Assignments from Lenders.
The purchaser of an Assignment typically succeeds to all the
rights and obligations under the Loan Agreement of the assigning
Lender and becomes a Lender under the Loan Agreement with the same
rights and obligations as the assigning Lender.
Original Lender Transactions. When the Portfolio is an
Original Lender originating a Senior Loan it may share in a fee
paid by the Borrower to the Original Lenders. The Portfolio will
never act as the Agent or principal negotiator or administrator of
a Senior Loan. When the Portfolio is a Lender, it will have a
direct contractual relationship with the Borrower, may enforce
compliance by the Borrower with the terms of the Loan Agreement
and may under contractual arrangements among the Lenders have
rights with respect to any funds acquired by other Lenders through
set-off. A Lender also has full voting and consent rights under
the applicable Loan Agreement. Action subject to Lender vote or
consent generally requires the vote or consent of the holders of
some specified percentage of the outstanding principal amount of
the Senior Loan. Certain decisions, such as reducing the amount
or increasing the time for payment of interest on or repayment of
principal of a Senior Loan, or releasing collateral therefor,
frequently require the unanimous vote or consent of all Lenders
affected.
The Portfolio will purchase an Assignment or act as a Lender
with respect to a syndicated Senior Loan only where the Agent with
respect to the Senior Loan at the time of investment has
outstanding debt or deposit obligations rated investment grade
(BBB or A-3 or higher by S&P or Baa or P-3 or higher by Moody's)
or determined by the Adviser to be of comparable quality. In
addition, the Portfolio will purchase a Participation only where
the Lender selling the Participation, and any other institution
interpositioned between the Lender and the Portfolio at the time
of investment, have outstanding debt obligations rated investment
grade or determined by the Adviser to be of comparable quality.
Further, the Portfolio will not purchase Participations in a
Senior Loan unless the Agent, Lender or any other interpositioned
institution has entered into an agreement that provides for the
holding of payments on the Senior Loan for the benefit of, or the
prompt disbursement of payments to, the Portfolio.
Loan Agreements typically provide for the termination of the
Agent's agency status in the event that it fails to act as
required under the relevant Loan Agreement, becomes insolvent,
enters FDIC receivership, or if not FDIC insured, enters into
bankruptcy. Should an Agent, Lender or any other interpositioned
institution with respect to an Assignment interpositioned between
the Portfolio and the Borrower become insolvent or enter FDIC
receivership or bankruptcy, any interest in the Senior Loan of any
such interpositioned institution and any loan payment held by any
such interpositioned institution for the benefit of the Portfolio
should not be included in the estate of such interpositioned
institution. If, however, any such amount were included in such
interpositiond person's estate, the Portfolio would incur certain
costs and delays in realizing payment or could suffer a loss of
principal or interest. In such event, the Portfolio could
experience a decrease in net asset value.
Portfolio Maturity. The Portfolio is not subject to any
restrictions with respect to the maturity of Senior Loans held in
its portfolio. It is currently anticipated that the Portfolio's
assets invested in Senior Loans will consist of Senior Loans with
stated maturities of between three and ten years, inclusive, and
with rates of interest that are redetermined either daily,
monthly, quarterly, semiannually or annually. Investment in
Senior Loans with longer interest rate redetermination periods may
increase fluctuations in the Portfolio's net asset value as a
result of changes in interest rates. The Senior Loans in the
Portfolio's investment portfolio will at all times have a dollar-
weighted average time until the next interest rate redetermination
of 90 days or less. As a result, as short-term interest rates
increase, interest payable to the Portfolio from its investments
in Senior Loans should increase, and as short-term interest rates
decrease, interest payable to the Portfolio from its investments
in Senior Loans should decrease. The amount of time required to
pass before the Portfolio will realize the effects of changing
short-term market interest rates on its portfolio will vary with
the dollar-weighted average time until the next interest rate
redetermination on the Senior Loans in the Portfolio's investment
portfolio. The Portfolio may utilize certain investment practices
to, among other things, shorten the effective interest rate
redetermination period of Senior Loans in its portfolio. In such
event, the Portfolio will consider such shortened period to be the
interest rate redetermination period of the Senior Loan; provided,
however, that the Portfolio will not invest in Senior Loans that
permit the Borrower to select an interest rate redetermination
period in excess of one year. Because most Senior Loans in the
Portfolio's investment portfolio will be subject to mandatory
and/or optional prepayment and there may be significant economic
incentives for a Borrower to prepay its loans, prepayments of
Senior Loans in the Portfolio's investment portfolio may occur.
Accordingly, the actual remaining maturity of the Portfolio's
investment portfolio invested in Senior Loans may vary
substantially from the average stated maturity of the Senior Loans
held in the investment portfolio. As a result of expected
prepayments from time to time of Senior Loans in the Portfolio's
investment portfolio, the Portfolio estimates that the actual
average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.
Net Asset Value Fluctuation. When prevailing interest rates
decline, the value of a portfolio invested in fixed-rate
obligations can be expected to rise. Conversely, when prevailing
interest rates rise, the value of a portfolio invested in fixed-
rate obligations can be expected to decline. Although the
Portfolio's net asset value will vary, the Adviser expects the
Portfolio's policy of acquiring interests in floating or variable
rate Senior Loans to minimize fluctuations in net asset value as a
result of changes in interest rates. Accordingly, the Adviser
expects the value of the investment portfolio to fluctuate
significantly less than a portfolio of fixed-rate, longer term
obligations as a result of interest rate changes. However,
changes in prevailing interest rates can be expected to cause some
fluctuation in the Portfolio's net asset value. In addition to
changes in interest rates, defaults by or changes in the credit
quality of Borrowers will also affect the Portfolio's net asset
value. Further, a default or serious deterioration in the credit
quality of a Borrower could cause a prolonged or permanent
decrease in the Portfolio's net asset value. Fluctuations in the
net asset value of the Portfolio will cause fluctuations in the
net asset value of the Fund. Use of a line of credit referred to
herein may magnify fluctuations in net asset value of the Fund.
Debt Restructuring. The Portfolio may purchase and retain in
its portfolio an interest in a Senior Loan to a Borrower that has
filed for protection under the federal bankruptcy laws or has had
an involuntary bankruptcy petition filed against it by its
creditors. The Adviser's decision to purchase or retain such an
interest will depend on its assessment of the suitability of such
investment for the Portfolio, the Borrower's ability to meet debt
service on Senior Loan interests, the likely duration, if any, of
a lapse in the scheduled repayment of principal and prevailing
interest rates. At times, in connection with the restructuring of
a Senior Loan either outside of bankruptcy court or in the context
of bankruptcy court proceedings, the Portfolio may determine or be
required to accept equity securities or junior debt securities in
exchange for all or a portion of a Senior Loan interest.
Depending upon, among other things, the Adviser's evaluation of
the potential value of such securities in relation to the price
that could be obtained by the Portfolio at any given time upon
sale thereof, the Portfolio may determine to hold such securities
in its portfolio. Any equity security or junior debt security
held by the Portfolio will not be treated as a Senior Loan and
thus will not count toward the 80% of the Portfolio's total assets
that normally will be invested in Senior Loans.
Borrower Credit Ratings. Senior Loans historically have not
been rated by nationally recognized statistical rating
organizations, such as S&P or Moody's. Because of the senior
capital structure position of Senior Loans and the collateralized
or guaranteed nature of most Senior Loans, the Portfolio and the
Adviser believe that ratings of other securities issued by a
Borrower do not necessarily reflect adequately the relative
quality of a Borrower's Senior Loans. Therefore, although the
Adviser may consider such ratings in determining whether to invest
in a particular Senior Loan, the Adviser is not required to
consider such ratings and such ratings will not be the
determinative factor in the Adviser's analysis. To the extent
that Senior Loans are rated, the Portfolio may invest in the
lowest rated loans, but does not intend to invest more than 5% of
the Portfolio in Senior Loans rated below B- or B3 by S&P or
Moody's. The Portfolio may invest a substantial portion of its
assets in Senior Loans to Borrowers having outstanding debt
securities rated below investment grade by a nationally recognized
statistical rating organization (or unrated but of comparable
quality to such securities). Debt securities rated below
investment grade (or unrated but of comparable quality) commonly
are referred to as "junk bonds." The Portfolio will invest only
in those Senior Loans with respect to which the Borrower, in the
judgment of the Adviser, demonstrates one or more of the following
characteristics: sufficient cash flow to service debt; adequate
liquidity; successful operating history; strong competitive
position; experienced management; and, with respect to
collateralized Senior Loans, collateral coverage that equals or
exceeds the outstanding principal amount of the Senior Loan. In
addition, the Adviser will consider, and may rely in part, on the
analyses performed by the Agent and other Lenders, including such
persons' determinations with respect to collateral securing a
Senior Loan.
Fees. The Portfolio may be required to pay or may receive
various fees and commissions in connection with purchasing,
selling and holding interests in Senior Loans. The fees normally
paid by Borrowers may include three types: facility fees,
commitment fees and prepayment penalties. Facility fees are paid
to the Lenders upon origination of a Senior Loan. Commitment fees
are paid to Lenders on an ongoing basis based upon the undrawn
portion committed by the Lenders of the underlying Senior Loan.
Lenders may receive prepayment penalties when a Borrower prepays
all or part of a Senior Loan. The Portfolio will receive these
fees directly from the Borrower if the Portfolio is an Original
Lender, or, in the case of commitment fees and prepayment
penalties, if the Portfolio acquires an interest in a Senior Loan
by way of Assignment. Whether or not the Portfolio receives a
facility fee from the Lender in the case of an Assignment, or any
fees in the case of a Participation, depends upon negotiations
between the Portfolio and the Lender selling such interests. When
the Portfolio is an assignee, it may be required to pay a fee, or
forgo a portion of interest and any fees payable to it, to the
Lender selling the Assignment. Occasionally, the assignor will
pay a fee to the assignee based on the portion of the principal
amount of the Senior Loan that is being assigned. A Lender
selling a Participation to the Portfolio may deduct a portion of
the interest and any fees payable to the Portfolio as an
administrative fee prior to payment thereof to the Portfolio. The
Portfolio may be required to pay over or pass along to a purchaser
of an interest in a Senior Loan from the Portfolio a portion of
any fees that the Portfolio would otherwise be entitled to.
Prepayments. Pursuant to the relevant Loan Agreement, a
Borrower may be required in certain circumstances, and may have
the option at any time, to prepay the principal amount of a Senior
Loan, often without incurring a prepayment penalty. Because the
interest rates on Senior Loans are periodically redetermined at
relatively short intervals, the Portfolio and the Adviser believe
that the prepayment of, and subsequent reinvestment by the
Portfolio in, Senior Loans will not have a materially adverse
impact on the yield on the investment portfolio and may have a
beneficial impact on income due to receipt of prepayment
penalties, if any, and any facility fees earned in connection with
reinvestment.
Commitments to Make Additional Payments. A Lender may have
certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain
circumstances. Such circumstances may include, without
limitation, obligations under revolving credit facilities and
facilities that provide for further loans to Borrowers based upon
compliance with specified financial requirements. The Portfolio
currently intends to reserve against any such contingent
obligation by segregating a sufficient amount of cash, liquid
securities and liquid Senior Loans. The Portfolio will not
purchase interests in Senior Loans that would require the
Portfolio to make any such additional loans if the aggregate of
such additional loan commitments would exceed 20% of the
Portfolio's total assets or would cause the Portfolio to fail to
meet the diversification requirements set forth under the heading
"Investment Restrictions" in the Statement of Additional
Information.
Bridge Financing. The Portfolio may acquire interests in
Senior Loans that are designed to provide temporary or "bridge"
financing to a Borrower pending the sale of identified assets or
the arrangement of longer-term loans or the issuance and sale of
debt obligations. A Borrower's use of a bridge loan involves a
risk that the Borrower may be unable to locate permanent financing
to replace the bridge loan, which may impair the Borrower's
perceived credit worthiness.
Other Securities. The Portfolio will acquire such warrants,
equity securities and junior debt securities only as an incident
to the purchase or intended purchase of interests in
collateralized Senior Loans. The Portfolio generally will acquire
interests in warrants, equity securities and junior debt
securities only when the Adviser believes that the relative value
being given by the Portfolio in exchange for such interests is
substantially outweighed by the potential value of such
instruments. Investment in warrants, equity securities and junior
debt securities entail certain risks in addition to those
associated with investments in Senior Loans. Warrants and equity
securities have a subordinate claim on a Borrower's assets as
compared with debt securities and junior debt securities have a
subordinate claim on such assets as compared with Senior Loans.
As such, the values of warrants and equity securities generally
are more dependent on the financial condition of the Borrower and
less dependent on fluctuations in interest rates than are the
values of many debt securities. The values of warrants, equity
securities and junior debt securities may be more volatile than
those of Senior Loans and thus may have an adverse impact on the
ability of the Portfolio to minimize fluctuations in its net asset
value.
Defensive Investment Policy. If the Adviser determines that
market conditions temporarily warrant a defensive investment
policy, the Portfolio may invest, subject to its ability to
liquidate its relatively illiquid portfolio of Senior Loans, up to
100% of its assets in cash and high quality, short-term debt
securities. The Portfolio may also lend its portfolio securities
to other parties and may enter into repurchase and reverse
repurchase agreements for securities, subject to certain
restrictions. For further discussion of the Portfolio's
investment objective and policies and its investment practices and
the associated considerations, see "Other Investment Practices."
Fundamental Restrictions and Policies. Each of the Portfolio
and the Fund has adopted certain fundamental investment
restrictions and policies which may not be changed unless
authorized by a shareholder vote. These are set forth in the
Statement of Additional Information. Among these fundamental
restrictions, the Portfolio and the Fund may not purchase any
security if, as a result of the purchase, more than 25% of the
Fund's or the Portfolio's total assets (taken at current value)
would be invested in the securities of Borrowers and other issuers
having their principal business activities in the same industry
(the electric, gas, water and telephone utility industries being
treated as separate industries for the purpose of this
restriction). However, there is no limitation on purchasing
securities the issuer of which is deemed to be in the financial
institutions industry, which includes commercial banks, thrift
institutions, insurance companies and finance companies. There is
no limitation with respect to obligations issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities.
Except for the fundamental restrictions and policies set forth as
such in the Fund's Statement of Additional Information, the
Portfolio's and the Fund's investment objective and policies are
not fundamental policies and accordingly may be changed by the
Board without obtaining the approval of shareholders.
SPECIAL RISK CONSIDERATIONS
The Fund and the Portfolio are both closed-end investment
companies with no history of operations. The Fund is designed
primarily for long-term investors and not as a trading vehicle.
Ongoing Monitoring. On behalf of the several Lenders, the
Agent generally will be required to administer and manage the
Senior Loan and, with respect to collateralized Senior Loans, to
service or monitor the collateral. In this connection, the
valuation of assets pledged as collateral will reflect market
value and the Agent may rely on independent appraisals as to the
value of specific collateral. The Agent, however, may not obtain
an independent appraisal as to the value of assets pledged as
collateral in all cases. The Portfolio normally will rely
primarily on the Agent (where the Portfolio is an Original Lender
or owns an Assignment) or the selling Lender (where the Portfolio
owns a Participation) to collect principal of and interest on a
Senior Loan. Furthermore, the Portfolio usually will rely on the
Agent (where the Portfolio is an Original Lender or owns an
Assignment) or the selling Lender (where the Portfolio owns a
Participation) to monitor compliance by the Borrower with the
restrictive covenants in the Loan Agreement and notify the
Portfolio of any adverse change in the Borrower's financial
condition or any declaration of insolvency. Collateralized Senior
Loans will frequently be secured by all assets of the Borrower
that qualify as collateral, which may include common stock of the
Borrower or its subsidiaries. Additionally, the terms of the Loan
Agreement may require the Borrower to pledge additional collateral
to secure the Senior Loan, and enable the Agent, upon proper
authorization of the Lenders, to take possession of and liquidate
the collateral and to distribute the liquidation proceeds pro rata
among the Lenders. If the terms of a Senior Loan do not require
the Borrower to pledge additional collateral in the event of a
decline in the value of the original collateral, the Portfolio
will be exposed to the risk that the value of the collateral will
not at all times equal or exceed the amount of the Borrower's
obligations under the Senior Loan. Lenders that have sold
Participation interests in such Senior Loan will distribute
liquidation proceeds received by the Lenders pro rata among the
holders of such Participations. The Adviser will also monitor
these aspects of the Portfolio's investments and, where the
Portfolio is an Original Lender or owns an Assignment, will be
directly involved with the Agent and the other Lenders regarding
the exercise of credit remedies.
Non-Payment. Senior Loans, like other corporate debt
obligations, are subject to the risk of non-payment of scheduled
interest or principal. Such non-payment would result in a
reduction of income to the Portfolio, a reduction in the value of
the Senior Loan experiencing non-payment and a potential decrease
in the net asset value of the Portfolio. The Portfolio generally
will invest in collateralized Senior Loans only if the Adviser
believes the value of the collateral, which may include
guarantees, exceeds the principal amount of the Senior Loan at the
time of initial investment. However, there can be no assurance
that the liquidation of any such collateral would satisfy the
Borrower's obligation in the event of non-payment of scheduled
interest or principal payments, or that such collateral could be
readily liquidated. Moreover, as a practical matter, most
Borrowers cannot satisfy their debts by selling their assets.
Borrowers pay their debts from the cash flow they generate. This
is particularly the case for Borrowers that are highly leveraged.
Many of the Senior Loans purchased by the Portfolio will be to
highly leveraged Borrowers. If the Borrower's cash flow is
insufficient to pay its debts as they come due, the Borrower is
far more likely to seek to restructure its debts than it is to
sell off assets to pay its Senior Loans. Borrowers may try to
restructure their debts either by seeking protection from
creditors under Chapter 11 of the federal Bankruptcy Code or
negotiating a work out. In the event of bankruptcy of a Borrower,
the Portfolio could experience delays or limitations with respect
to its ability to realize the benefits of the collateral securing
a Senior Loan. To the extent that a Senior Loan is collateralized
by stock in the Borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the event of bankruptcy
of the Borrower. The Agent generally is responsible for
determining that the Lenders have obtained a perfected security
interest in the collateral securing the Senior Loan. If a
Borrower files for protection from creditors under Chapter 11 of
the Bankruptcy Code, the Code will impose an automatic stay that
prohibits the Agent from liquidating collateral. The Agent may
ask the bankruptcy court to lift the stay. As a practical matter,
the court is unlikely to lift the stay if it concludes that the
Borrower has a chance to emerge from the reorganization
proceedings and the collateral is likely to hold most of its
value. If the Lenders have a good security interest, the Senior
Loan will be treated as a separate class in the reorganization
proceedings and will retain a priority interest in the collateral.
Chapter 11 reorganization plans typically are the product of
negotiation among the Borrower and the various creditor classes.
Successful negotiations may require the Lenders to extend the time
for repayment, change the interest rate or accept some
consideration in the form of junior debt or equity securities. A
work out outside of bankruptcy may produce similar concessions by
senior lenders.
Some Senior Loans in which the Portfolio may invest are
subject to the risk that a court, pursuant to fraudulent
conveyance or other similar laws, could subordinate such Senior
Loans to current or future indebtedness of the Borrower or take
other action detrimental to the holders of Senior Loans, such as
the Portfolio, including, under certain circumstances,
invalidating such Senior Loans. Lenders commonly have certain
obligations pursuant to the Loan Agreement, which may include the
obligation to make additional loans or release collateral in
certain circumstances.
Ratings. The types of Senior Loans in which the Portfolio
will invest historically have not been rated by a nationally
recognized statistical rating organization, have not been
registered with the SEC or any state securities commission and
have not been listed on any national securities exchange.
Although the Portfolio will generally have access to financial and
other information made available to the Lenders in connection with
Senior Loans, the amount of public information available with
respect to Senior Loans will generally be less extensive than that
available for rated, registered or exchange listed securities. As
a result, the performance of the Portfolio and its ability to meet
its investment objective is more dependent on the analytical
ability of the Adviser than would be the case for an investment
company that invest primarily in rated, registered or exchange
listed securities.
To the extent that Senior Loans are rated, the Portfolio may
invest in the lowest rated loans, but does not intend to invest
more than 5% of the Portfolio in Senior Loans rated below B- or B3
by S&P or Moody's.
Restrictions on Resale. Senior Loans, at present, generally
are not readily marketable and may be subject to restrictions on
resale. Interests in Senior Loans generally are not listed on any
national securities exchange or automated quotation system and no
active market may exist for many of the Senior Loans in which the
Portfolio may invest. To the extent that a secondary market may
exist for certain of the Senior Loans in which the Portfolio
invests, such market may be subject to irregular trading activity,
wide bid/ask spreads and extended trade settlement periods. The
Portfolio has no limitation on the amount of its assets that may
be invested in securities that are not readily marketable or are
subject to restrictions on resale. Because a substantial portion
of the Portfolio's assets may be invested in Senior Loan
interests, the ability of the Portfolio to dispose of its
investments in a timely fashion and at a fair price may be
restricted, and the Portfolio and holders of Shares may suffer
capital losses as a result. However, many of the Senior Loans in
which the Portfolio expects to purchase interests are of a
relatively large principal amount and are held by a relatively
large number of owners which should, in the Adviser's opinion,
enhance the relative liquidity of such interests. The risks
associated with illiquidity are particularly acute in situations
where the Portfolio's operations require cash, such as when the
Portfolio tenders for its Shares, and may result in the Portfolio
borrowing to meet short-term cash requirements.
Legislation. To the extent that legislation or state or
federal regulators impose additional requirements or restrictions
with respect to the ability of financial institutions to make
loans in connection with highly leveraged transactions, the
availability of Senior Loan interests for investment by the
Portfolio may be adversely affected. In addition, such
requirements or restrictions may reduce or eliminate sources of
financing for certain Borrowers. Further, to the extent that
legislation or federal or state regulators require such
institutions to dispose of Senior Loan interests relating to
highly leveraged transactions or subject such Senior Loan
interests to increased regulatory scrutiny, such financial
institutions may determine to sell such Senior Loan interests in a
manner that results in a price that, in the opinion of the
Adviser, is not indicative of fair value. Were the Portfolio to
attempt to sell a Senior Loan interest at a time when a financial
institution was engaging in such a sale with respect to the Senior
Loan interest, the price at which the Portfolio could consummate
such a sale might be adversely affected.
Non-Diversification. The Portfolio has registered as a "non-
diversified" investment company so that, subject to its investment
restrictions, it will be able to invest more than 5% of the value
of its assets in the obligations of any single issuer, including
Senior Loans of a single Borrower or Participations purchased from
a single Lender. (See "Investment Restrictions" in the Statement
of Additional Information.) The Portfolio does not intend,
however, to invest more than 5% of the value of its assets in
interests in Senior Loans of a single Borrower. To the extent the
Portfolio invests a relatively high percentage of its assets in
obligations of a limited number of issuers, the Portfolio will be
more susceptible than a more widely diversified investment company
to the consequences of any single corporate, economic, political
or regulatory occurrence.
Other Practices. The Portfolio may use various investment
practices that involve special considerations, including engaging
in interest rate and other hedging transactions, lending its
portfolio securities, entering into when-issued and delayed-
delivery transactions and entering into repurchase and reverse
repurchase agreements. For further discussion of these practices
and associated special considerations, see "Other Investment
Practices."
OTHER INVESTMENT PRACTICES
Miscellaneous. In connection with the investment objective
and policies described above, the Portfolio may: engage in
interest rate and other hedging transactions, lend portfolio
holdings, purchase and sell interests in Senior Loans and other
portfolio debt securities on a "when-issued" or "delayed-delivery"
basis, and enter into repurchase and reverse repurchase
agreements. These investment practices involve certain special
risk considerations. The Adviser may use some or all of the
following investment practices when, in the opinion of the
Adviser, their use is appropriate. Although the Adviser believes
that these investment practices may further the Portfolio's
investment objective, no assurance can be given that the
utilization of these investment practices will achieve that
result.
Structured Notes. The Portfolio may invest up to 5% of its
total assets in structured notes, including "total rate of return
swap" with rates of return determined by reference to the total
rate of return on one or more loans referenced in such notes. The
rate of return on the structured note may be determined by
applying a multiplier to the rate of total return on the
referenced loan or loans. Application of a multiplier is
comparable to the use of financial leverage, a speculative
technique. Leverage magnifies the potential for gain and the risk
of loss, because a relatively small decline in the value of a
referenced note could result in a relatively large loss in the
value of a structured note. Structured notes are treated as
Senior Loans for purposes of the Portfolio's policy of normally
investing at least 80% of its assets in Senior Loans.
Borrowing. The Portfolio is authorized to borrow money for
the purpose of obtaining short-term liquidity in connection with
Tender Offers by the Portfolio for its shares and for temporary,
extraordinary or emergency purposes. Under the requirements of
the 1940 Act, the Portfolio, immediately after any such
borrowings, must have an asset coverage of at least 300%. Asset
coverage is the ratio which the value of the total assets of the
Portfolio, less all liabilities and indebtedness not represented
by senior securities (as that term is defined in the 1940 Act),
bears to the aggregate amount of any such borrowings by the
Portfolio. The rights of any lenders to the Portfolio to receive
payments of interest on and repayments of principal of such
borrowings will be senior to those of the holders of Shares, and
the terms of any such borrowings may contain provisions which
limit certain activities of the Portfolio, including the payment
of dividends to holders of Portfolio shares in certain
circumstances. Further, the terms of any such borrowings may, and
the provisions of the 1940 Act do (in certain circumstances),
grant lenders certain voting rights in the event of default in the
payment of interest or repayment of principal. In the event that
such provisions would impair the Portfolio's status as a regulated
investment company, the Portfolio, subject to its ability to
liquidate its relatively illiquid portfolio, intends to repay the
borrowings. Interest payments and fees incurred in connection
with any such borrowings will reduce the amount of net income
available for payment to the holders of Portfolio shares. The
Portfolio may enter into an agreement with a financial institution
providing for an unsecured discretionary credit facility (the
"Facility"), the proceeds of which may be used to finance, in
part, repurchases. (See "Periodic Tender Offers.")
Interest Rate Swaps and Other Hedging Transactions. The
Portfolio may enter into various interest rate hedging and risk
management transactions. Certain of these interest rate hedging
and risk management transactions may be considered to involve
derivative instruments. A derivative is a financial instrument
whose performance is derived at least in part from the performance
of an underlying index, security or asset. The values of certain
derivatives can be affected dramatically by even small market
movements, sometimes in ways that are difficult to predict. There
are many different types of derivatives with many different uses.
The Portfolio expects to enter into these transactions primarily
to seek to preserve a return on a particular investment or portion
of its portfolio, and may also enter into such transactions to
seek to protect against decreases in the anticipated rate of
return on floating or variable rate financial instruments the
Portfolio owns or anticipates purchasing at a later date, or for
other risk management strategies such as managing the effective
dollar-weighted average duration of the investment portfolio. In
addition, the Portfolio may also engage in hedging transactions,
including entering into put and call options, to seek to protect
the value of its portfolio against declines in net asset value
resulting from changes in interest rates or other market changes.
The Portfolio does not intend to engage in such transactions to
enhance the yield on its portfolio. Market conditions will
determine whether and in what circumstances the Portfolio would
employ any hedging and risk management techniques. The Portfolio
will not engage in any of the transactions for speculative
purposes and will use them only as a means to hedge or manage the
risks associated with assets held in, or anticipated to be
purchased for, the Portfolio's investment portfolio or obligations
incurred by the Portfolio. The successful utilization of hedging
and risk management transactions requires skills different from
those needed in the selection of portfolio securities. The
Adviser believes that it possesses the skills necessary for the
successful utilization of hedging and risk management
transactions. The Portfolio will incur brokerage and other costs
in connection with its hedging transactions.
The Portfolio may enter into interest rate swaps or purchase
or sell interest rate caps or floors. The Portfolio will not sell
interest rate caps or floors that it does not own. Interest rate
swaps involve the exchange by the Portfolio with another party of
their respective obligations to pay or receive interest; e.g., an
exchange of an obligation to make floating rate payments for an
obligation to make fixed rate payments. For example, the
Portfolio may seek to shorten the effective interest rate
redetermination period of a Senior Loan to a Borrower that has
selected an interest rate redetermination period of one year. The
Portfolio could exchange the Borrower's obligation to make fixed
rate payments for one year for an obligation to make payments that
readjust monthly. In such event, the Portfolio would consider the
interest rate redetermination period of such Senior Loan to be the
shorter period.
The purchase of an interest rate cap entitles the purchaser,
to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest at the difference
between the index and the predetermined rate on a notional
principal amount (the reference amount with respect to which
interest obligations are determined although no actual exchange of
principal occurs) from the party selling such interest rate cap.
The purchase of an interest rate floor entitles the purchaser, to
the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest at the difference
between the index and the predetermined rate on a notional
principal amount from the party selling such interest rate floor.
The Portfolio will not enter into swaps, caps or floors, if, on a
net basis, the aggregate notional principal amount with respect to
such agreements exceeds the net assets of the Portfolio.
In circumstances in which the Adviser anticipates that
interest rates will decline, the Portfolio might, for example,
enter into an interest rate swap as the floating rate payor or,
alternatively, purchase an interest rate floor. In the case of
purchasing an interest rate floor, if interest rates declined
below the floor rate, the Portfolio would receive payments from
its counterparty which would wholly or partially offset the
decrease in the payments it would receive with respect to the
portfolio assets being hedged. In the case where the Portfolio
purchases such an interest rate swap, if the floating rate
payments fell below the level of the fixed rate payment set in the
swap agreement, the Portfolio's counterparty would pay the
Portfolio amounts equal to interest computed at the difference
between the fixed and floating rates over the notional principal
amount. Such payments would offset or partially offset the
decrease in the payments the Portfolio would receive with respect
to floating rate portfolio assets being hedged.
The successful use of swaps, caps and floors to preserve the
rate of return on a portfolio of financial instruments depends on
the Adviser's ability to predict correctly the direction and
extent of movements in interest rates. Although the Adviser
believes that use of the hedging and risk management techniques
described above will benefit the Portfolio, if the Adviser's
judgment about the direction or extent of the movement in interest
rates is incorrect, the Portfolio's overall performance would be
worse than if it had not entered into any such transaction. For
example, if the Portfolio had purchased an interest rate swap or
an interest rate floor to hedge against its expectation that
interest rates would decline but instead interest rates rose, the
Portfolio would lose part or all of the benefit of the increased
payments it would receive as a result of the rising interest rates
because it would have to pay amounts to its counterparty under the
swap agreement or would have paid the purchase price of the
interest rate floor.
Inasmuch as these hedging transactions are entered into for
good-faith risk management purposes, the Adviser and the Portfolio
believe such obligations do not constitute senior securities. The
Portfolio will usually enter into interest rate swaps on a net
basis; i.e., where the two parties make net payments with the
Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any,
of the Portfolio's obligations over its entitlements with respect
to each interest rate swap will be accrued and an amount of cash
or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained. If the Portfolio
enters into a swap on other than a net basis, the Portfolio will
maintain the full amount of the Portfolio's obligations under each
such swap. Accordingly, the Portfolio does not treat swaps as
senior securities. The Portfolio may enter into swaps, caps and
floors with member banks of the Federal Reserve System, members of
the New York Stock Exchange or other entities determined to be
creditworthy by the Adviser, pursuant to procedures adopted and
reviewed on an ongoing basis by the Board. If a default occurs by
the other party to such transactions, the Portfolio will have
contractual remedies pursuant to the agreements related to the
transaction, but such remedies may be subject to bankruptcy and
insolvency laws that could affect the Portfolio's rights as a
creditor. The swap market has grown substantially in recent years
with a large number of banks and financial services firms acting
both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively
liquid. Caps and floors are more recent innovations and they are
less liquid than swaps. There can be no assurance, however, that
the Portfolio will be able to enter into interest rate swaps or to
purchase interest rate caps or floors at prices or on terms the
Adviser believes are advantageous to the Portfolio. In addition,
although the terms of interest rate swaps, caps and floors may
provide for termination, there can be no assurance that the
Portfolio will be able to terminate an interest rate swap or to
sell or offset interest rate caps or floors that it has purchased.
New financial products continue to be developed and the
Portfolio may invest in any such products as may be developed to
the extent consistent with its investment objective and the
regulatory and federal tax requirements applicable to investment
companies.
Lending of Portfolio Holdings. The Portfolio may seek to
increase its income by lending financial instruments in its
portfolio in accordance with present regulatory policies,
including those of the Board of Governors of the Federal Reserve
System and the SEC. Such loans may be made, without limit, to
brokers, dealers, banks or other recognized institutional
Borrowers of financial instruments and would be required to be
secured continuously by collateral, including cash, cash
equivalents or U.S. Treasury bills maintained on a current basis
at an amount at least equal to the market value of the financial
instruments loaned. The Portfolio would have the right to call a
loan and obtain the financial instruments loaned at any time on
five days' notice. For the duration of a loan, the Portfolio
would continue to receive the equivalent of the interest paid by
the issuer on the financial instruments loaned and also would
receive compensation from the investment of the collateral. The
Portfolio would not have the right to vote any financial
instruments having voting rights during the existence of the loan,
but the Portfolio could call the loan in anticipation of an
important vote to be taken among holders of the financial
instruments or in anticipation of the giving or withholding of
their consent on a material matter affecting the financial
instruments. As with other extensions of credit, risks of delay
in recovery or even loss of rights in the collateral exist should
the Borrower of the financial instruments fail financially.
However, the loans would be made only to firms deemed by the
Adviser to be of good standing and when, in the judgment of the
Adviser, the consideration that can be earned currently from loans
of this type justifies the attendant risk. The creditworthiness
of firms to which the Portfolio lends its portfolio holdings will
be monitored on an ongoing basis by the Adviser pursuant to
procedures adopted and reviewed, on an ongoing basis, by the
Board. No specific limitation exists as to the percentage of the
Portfolio's assets that the Portfolio may lend.
"When-issued" and "Delayed-delivery" Transactions. The
Portfolio may also purchase and sell interests in Senior Loans and
other portfolio securities on a "when-issued" and "delayed-
delivery" basis. No income accrues to the Portfolio on such
interests or securities in connection with such purchase
transactions prior to the date the Portfolio actually takes
delivery of such interests or securities. These transactions are
subject to market fluctuation; the value of the interests in
Senior Loans and other portfolio debt securities at delivery may
be more or less than their purchase price, and yields generally
available on such interests or securities when delivery occurs may
be higher or lower than yields on the interests or securities
obtained pursuant to such transactions. Because the Portfolio
relies on the buyer or seller, as the case may be, to consummate
the transaction, failure by the other party to complete the
transaction may result in the Portfolio missing the opportunity of
obtaining a price or yield considered to be advantageous. When
the Portfolio is the buyer in such a transaction, however, it will
maintain cash or liquid securities having an aggregate value equal
to the amount of such purchase commitments until payment is made.
The Portfolio will make commitments to purchase such interests or
securities on such basis only with the intention of actually
acquiring these interests or securities, but the Portfolio may
sell such interests or securities prior to the settlement date if
such sale is considered to be advisable. To the extent the
Portfolio engages in "when-issued" and "delayed-delivery"
transactions, it will do so for the purpose of acquiring interests
or securities for the Portfolio's investment portfolio consistent
with the Portfolio's investment objective and policies and not for
the purpose of investment leverage. No specific limitation exists
as to the percentage of the Portfolio's assets that may be used to
acquire securities on a "when-issued" or "delayed-delivery" basis.
Repurchase Agreements. The Portfolio may enter into
repurchase agreements (a purchase of, and a simultaneous
commitment to resell, a financial instrument at an agreed-upon
price on an agreed-upon date) only with member banks of the
Federal Reserve System and member firms of the New York Stock
Exchange. When participating in repurchase agreements, the
Portfolio buys securities from a seller (e.g., a bank or brokerage
firm) with the agreement that the seller will repurchase the
securities at a higher price at a later date. Such transactions
afford an opportunity for the Portfolio to earn a return on
available cash at minimal market risk, although the Portfolio may
be subject to various delays and risks of loss if the vendor is
unable to meet its obligation to repurchase. Under the 1940 Act,
repurchase agreement are deemed to be collateralized loans of
money by the Portfolio to the seller. In evaluating whether to
enter into a repurchase agreement, the Adviser will consider
carefully the creditworthiness of the vendor. If the member bank
or member firm that is the party to the repurchase agreement
petitions for bankruptcy or otherwise becomes subject to the U.S.
Bankruptcy Code, the law regarding the rights of the Portfolio is
unsettled. The securities underlying a repurchase agreement will
be marked to market every business day so that the value of the
collateral is at least equal to the value of the loan, including
the accrued interest thereon, and the Adviser will monitor the
value of the collateral. No specific limitation exists as to the
percentage of the Portfolio's assets that may be used to
participate in repurchase agreements.
Reverse Repurchase Agreements. The Portfolio may enter into
reverse repurchase agreements with respect to debt obligations
that could otherwise be sold by the Portfolio. A reverse
repurchase agreement is an instrument under which the Portfolio
may sell an underlying debt security and simultaneously obtain the
commitment of the purchaser (a commercial bank or a broker or
dealer) to sell the security back to the Portfolio at an agreed-
upon price on an agreed-upon date. The Portfolio will maintain
cash or liquid securities in an amount sufficient to cover its
obligations with respect to reverse repurchase agreements. The
Portfolio receives payment for such securities only upon physical
delivery or evidence of book entry transfer by its custodian. SEC
regulations require either that securities sold by the Portfolio
under a reverse repurchase agreement be segregated pending
repurchase or that the proceeds be segregated on the Portfolio's
books and records pending repurchase. Reverse repurchase
agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or
restrictions upon the Portfolio's ability to dispose of the
underlying securities. An additional risk is that the market
value of securities sold by the Portfolio under a reverse
repurchase agreement could decline below the price at which the
Portfolio is obligated to repurchase them. Reverse repurchase
agreements will be considered borrowings by the Portfolio and as
such would be subject to the restrictions on borrowing described
in the Statement of Additional Information under "Investment
Restrictions." The Portfolio will not hold more than 5% of the
value of its total assets in reverse repurchase agreements as of
the time the agreement is entered into.
Year 2000 Compliance. Like other investment companies,
financial and business organizations and individuals around the
world, the Fund could be adversely affected if the computer
systems used by the Adviser and other service providers do not
properly process and calculate date-related information and data
from and after January 1, 2000. This is commonly known as the
"Year 2000 Problem." The Fund's Adviser, administrator,
distributor and transfer agent ("Liberty Companies") are taking
steps that they believe are reasonably designed to address the
Year 2000 problem, including communicating with vendors who
furnish services, software and systems to the Fund, to provide
that date-related information and data can be properly processed
after January 1, 2000. Many Fund service providers and vendors,
including the Liberty Companies, are in the process of making Year
2000 modifications to their software and systems and believe that
such modifications will be completed on a timely basis prior to
January 1, 2000. The Fund will not pay the cost of these
modifications. However, no assurances can be given that all
modifications required to ensure proper data processing and
calculation on and after January 1, 2000 will be timely made or
that services to the Fund will not be adversely affected.
Although the loan documentation typically contains assurances
that Borrowers will be in compliance with Year 2000 issues, those
issues could affect the ability of Borrowers to meet their payment
obligations and may adversely affect their credit ratings.
DISTRIBUTIONS AND INCOME TAXES
Distributions. Income dividends are declared each business
day, paid monthly, and confirmed at least quarterly. Capital
gains, if any, are distributed at least annually, usually in
December. Shares accrue dividends as long as they are issued and
outstanding (i.e., from the date net asset value is determined for
the purchase order to the Redemption Pricing Date of the Tender
Offer in which the Shares are accepted for repurchase by the
Fund).
Dividend payments are not guaranteed and may vary with each
payment. The Fund does not pay "interest" or guarantee any fixed
rate of return.
All of your income dividends and capital gains distributions
will be reinvested in additional Shares unless you elect to have
distributions either (1) paid by check; (2) deposited by
electronic transfer into your bank account; (3) applied to
purchase shares in your account with another Stein Roe Fund; or
(4) applied to purchase shares in a Stein Roe Fund account of
another person. (See "Shareholder Services.") Reinvestment
normally occurs on the payable date. If a shareholder elected to
receive dividends and/or capital gains distributions in cash and
the postal or other delivery service selected by the transfer
agent is unable to deliver checks to the shareholder's address of
record, such shareholder's distribution option will automatically
be converted to having all dividends and other distributions
reinvested in additional Shares. The Fund reserves the right to
reinvest the proceeds and future distributions in additional
Shares if checks mailed to you for distributions are returned as
undeliverable or are not presented for payment within six months.
No interest will accrue on amounts represented by uncashed
distribution or redemption checks. Until such time as the Fund is
fully invested, distributions will be less than they might
otherwise be.
The Fund is authorized to borrow money subject to certain
restrictions. (See "Other Investment Practices.") Under the 1940
Act, the Fund may not declare any dividend or other distribution
on its Shares unless the Fund has, at the time of declaration,
asset coverage of at least 300% of its aggregate indebtedness,
after deducting the amount of the distribution. This limitation
may impair the Fund's ability to maintain its qualification for
taxation as a regulated investment company.
Income Taxes. The Fund intends to satisfy those requirements
relating to the sources of its income, the distribution of its
income, and the diversification of its assets necessary to qualify
for the special tax treatment afforded to regulated investment
companies under the Internal Revenue Code (the "Code") and thereby
be relieved of federal income or excise taxes to the extent that
it distributes its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements
imposed by the Code. For a detailed discussion of tax issues
pertaining to the Fund, see "Additional Income Tax Considerations"
in the Statement of Additional Information.
Your distributions will be taxable to you, under income tax
law, whether received in cash or reinvested in additional Shares.
For federal income tax purposes, any distribution that is paid in
January but was declared in the prior calendar year is deemed paid
in the prior calendar year.
You will be subject to federal income tax at ordinary rates
on income dividends and distributions of net short-term capital
gains. Distributions of net long-term capital gains will be
taxable to you as long-term capital gains regardless of the length
of time you have held your Shares.
You will be advised annually as to the source of
distributions for tax purposes. If you are not subject to tax on
your income, you will not be required to pay tax on these amounts.
A holder of Shares who, pursuant to a Tender Offer, tenders
all of his or her Shares (and is not considered to own any other
Shares pursuant to attribution rules contained in the Code) may
realize a taxable gain or loss depending upon the shareholder's
basis in the Shares. Such gain or loss realized on the
disposition of Shares (whether pursuant to a Tender Offer or in
connection with a sale or other taxable disposition of Shares in a
secondary market) generally will be treated as long-term capital
gain or loss if the Shares have been held as a capital asset for
more than one year and as short-term capital gain or loss if held
as a capital asset for one year or less. Starting in 2001, net
long-term capital gains realized upon the disposition of Shares
held longer than five years will be subject to a lower maximum
capital gains tax rate than is currently available. If Shares are
sold at a loss after being held for six months or less, the loss
will be treated as long-term-instead of short-term-capital loss to
the extent of any capital gain distributions received on those
Shares. All or a portion of any loss realized on a sale or
exchange of Shares of the Fund will be disallowed if the
shareholder acquires other Shares within 30 days before or after
the disposition. In such a case, the basis of the Shares acquired
will be adjusted to reflect the disallowed loss.
Different tax consequences may apply to tendering
shareholders other than fully-tendering shareholders described in
the previous paragraph and to non-tendering shareholders in
connection with the Tender Offer. For example, if a shareholder
tenders fewer than all Shares owned by or attributed to him or
her, the proceeds received could be treated as a taxable dividend,
a return of capital, or capital gain depending on the portion of
Shares tendered, the Fund's earnings and profits, and the
shareholder's basis in the tendered Shares. Moreover, when a
shareholder tenders fewer than all Shares owned pursuant to a
Tender Offer, there is a remote possibility that non-tendering
shareholders may be considered to have received a deemed
distribution that is taxable to them in whole or in part. You may
wish to consult your tax advisor prior to tendering.
Backup Withholding. The Fund may be required to withhold
federal income tax ("backup withholding") from certain payments to
a shareholder-generally redemption proceeds. Backup withholding
may be required if:
* the shareholder fails to furnish its properly certified Social
Security or other tax identification number;
* the shareholder fails to certify that its tax identification
number is correct or that it is not subject to backup withholding
due to the underreporting of certain income;
* the Internal Revenue Service ("IRS") informs the Fund that the
shareholder's tax identification number is incorrect.
These certifications are contained in the application that
you should complete and return when you open an account. The Fund
must promptly pay to the IRS all amounts withheld. Therefore, it
is usually not possible for the Fund to reimburse you for amounts
withheld. You may, however, claim the amount withheld as a credit
on your federal income tax return.
The federal income tax discussion set forth above is for
general information only. Prospective investors should consult
their advisors regarding the specific federal and state tax
consequences of purchasing, holding and disposing of Shares, as
well as the effects of other state, local and foreign tax laws and
any proposed tax law changes.
MANAGEMENT OF THE FUND
Board of Trustees and Adviser. The Board of Trustees of the
Fund has overall management responsibility for the Fund; the Board
of Managers of the Portfolio has overall management responsibility
for the Portfolio. See "Management" in the Statement of
Additional Information for the names of and other information
about the trustees, managers and officers. Since the Fund and the
Portfolio have the same Board members, they have adopted conflict
of interest procedures to monitor and address potential conflicts
between the interests of the Fund and the Portfolio.
The Adviser, Stein Roe & Farnham Incorporated, One South
Wacker Drive, Chicago, IL 60606, is responsible for managing the
investment portfolio of the Portfolio and the business affairs of
the Fund, subject to the direction of their respective Boards.
The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940. The Adviser and its predecessor
have advised and managed mutual funds since 1949. The Adviser is
a wholly owned indirect subsidiary of Liberty Financial Companies,
Inc. ("Liberty Financial"), which in turn is a majority owned
indirect subsidiary of Liberty Mutual Insurance Company. The
Adviser and its predecessor have been providing investment
advisory services since 1932. The Adviser acts as investment
adviser to wealthy individuals, trustees, pensions and profit
sharing plans, charitable organizations and other institutional
investors. As of June 30, 1998 the Adviser managed over $29
billion in assets.
The Adviser's mutual funds and institutional asset management
businesses are managed together with its affiliate, Colonial
Management Associates, Inc. ("CMA"). A single management team
includes employees of each company. CMA is a registered
investment adviser serving mutual funds and institutions. Certain
officers of CMA also are officers of the Adviser in their roles as
managers of the combined business. CMA shares personnel,
facilities and systems with the Adviser that the Adviser uses in
providing services to the Fund.
Portfolio Management. Brian W. Good is a vice president of
the Adviser, and James R. Fellows is vice president of the
Adviser. Mr. Good and Mr. Fellows have been primarily responsible
for the day to day management of the Fund's and the Portfolio's
investment portfolio since the Fund's and the Portfolio's
commencement of investment operation. Mr. Fellows and Mr. Good
have both been employed by the Adviser since April 1998. Prior
thereto, Mr. Good was vice president and portfolio manager at Van
Kampen American Capital since 1989 and Mr. Fellows was vice
president and senior credit analyst at Van Kampen American Capital
since 1988.
Fees and Expenses. The Adviser provides administrative
services to the Fund and the Portfolio and portfolio management
services to the Portfolio. The Adviser is entitled to receive a
monthly administrative fee from the Fund, computed and accrued
daily, at an annual rate of 0.25% of average net assets and a
monthly management fee from the Portfolio, computed and accrued
daily, at an annual rate of 0.85% of the Portfolio's average net
assets. However, the Adviser may voluntarily waive a portion of
its fees.
The Adviser provides office space and executive and other
personnel to the Fund and bears any sales or promotional expenses.
The Fund pays all expenses other than those paid by the Adviser,
including but not limited to printing and postage charges and
securities registration and custodian fees and expenses incidental
to its organization.
Transfer Agent. Liberty Funds Services, Inc. ("LFS"), P.O.
Box 1722, Boston, MA 02105, a wholly owned subsidiary of Liberty
Financial, is the agent of the Fund for the transfer of Shares,
disbursement of dividends, and maintenance of shareholder
accounting records. Under a separate agreement, LFS also provides
certain investor accounting services to the Portfolio.
Distributor. The Shares of the Fund are offered for sale
through Liberty Securities Corporation ("Distributor") without any
sales commissions or charges to the Fund or to its subsidiaries.
The Distributor is a wholly owned indirect subsidiary of Liberty
Financial. The business address of the Distributor is 100
Manhattanville Road, Purchase, NY 10577; however, all Fund
correspondence should be mailed to Stein Roe & Farnham
Incorporated, One South Wacker Drive, Chicago, IL 60606. All
distribution and promotional expenses are paid by the Adviser,
including payments to the Distributor for sales of Fund Shares.
Custodian. State Street Bank and Trust Company, 225 Franklin
Street, Boston, MA 02101, is the custodian of the Fund and has
custody of the securities and cash of the Fund. The custodian,
among other things, attends to the collection of principal and
income and payment for and collection of proceeds of securities
bought and sold by the Fund.
PERIODIC TENDER OFFERS
The Board has adopted Share repurchase policies as
fundamental policies. Those policies, which may not be changed
without the vote of the holders of a majority of the Fund's
outstanding voting securities, provide that each calendar quarter,
the Fund intends to make a Tender Offer to repurchase a portion of
the outstanding Shares from shareholders who request repurchases.
The price of the repurchases of Shares normally will be the net
asset value per share determined as of the close of business (3:00
p.m., Central time) on the date the Tender Offer ends or within a
maximum of fourteen days after the Tender Offer ends as described
below.
Repurchase Procedure. At the beginning of each Tender Offer,
the Fund's shareholders will be notified in writing about the
Tender Offer, how they may request that the Fund repurchase their
Shares and the deadline for shareholders to provide their
repurchase requests to the Distributor (the "Repurchase Request
Deadline"), which is the date the Tender Offer ends. The time
between the notification of the shareholders and the Repurchase
Request Deadline may vary from no more than six weeks to no less
than three weeks. For each Tender Offer the Fund will establish
the Repurchase Request Deadline based on factors, such as market
conditions, liquidity of the Fund's assets and shareholder
servicing considerations. The repurchase price of the Shares will
be the net asset value as of the close of the NYSE on the date on
which the repurchase price of the Shares will be determined (the
"Repurchase Pricing Date"). It is anticipated that normally the
Repurchase Pricing Date will be the same date as the Repurchase
Request Deadline, and if so, the Repurchase Request Deadline will
be set for a time no later than the close of the NYSE on such
date. The Fund has determined that the Repurchase Pricing Date
may occur no later than the fourteenth day after the Repurchase
Request Deadline or the next business day if the fourteenth day is
not a business day. Within such fourteen day period, the Fund may
use an earlier Repurchase Pricing Date under certain
circumstances.
The Board may establish other policies for repurchases of
Shares that are consistent with the 1940 Act and other pertinent
laws. Shares tendered by shareholders by any Repurchase Request
Deadline will be repurchased subject to the aggregate repurchase
amounts established for that Repurchase Request Deadline.
Repurchase proceeds will be paid to shareholders in cash within
seven days after each Repurchase Pricing Date. The end of the
seven days is referred to as the "Repurchase Payment Deadline."
Repurchase Amounts. The Board, in its sole discretion, will
determine the number of Shares that the Fund will offer to
repurchase (the "Tender Offer Amount") for a given Repurchase
Request Deadline. However, the Tender Offer Amount will be at
least 5% and no more than 25% of the total number of Shares
outstanding on the Repurchase Request Deadline. The first Tender
Offer is expected to end near the end of May, 1999 and every three
months thereafter. Prior to the notification of the Repurchase
Request Deadline, the Board will determine in its sole discretion
the percentage at which the Tender Offer Amount will be set.
If shareholders tender more than the Tender Offer Amount for
a given Tender Offer, the Fund may repurchase an additional amount
of Shares of up to 2% of the Shares outstanding on the Repurchase
Request Deadline. If the Fund determines not to repurchase more
than the Tender Offer Amount, or if the Fund determines to
repurchase the additional 2% of the Shares outstanding, but Fund
shareholders tender Shares in an amount exceeding the Repurchase
Offer Amount plus 2% of the Shares outstanding on the Repurchase
Request Deadline, the Fund will repurchase the Shares on a pro
rata basis. The Fund may, however, accept all Shares tendered by
shareholders who own less than one hundred Shares and who tender
all their Shares, before accepting on a pro rata basis Shares
tendered by other shareholders.
Notices to Shareholders. Notice of each quarterly Tender
Offer (and any additional discretionary repurchase offers) will be
given to each beneficial owner of Shares between twenty-one (21)
and forty-two (42) days before each Repurchase Request Deadline.
The notice will contain information shareholders should consider
in deciding whether or not to tender their Shares. The notice
will also include detailed instructions on how to tender Shares.
The notice will state the Tender Offer Amount. The notice will
also identify the dates of the Repurchase Request Deadline,
scheduled Repurchase Pricing Date, and scheduled Repurchase
Payment Deadline. The notice will describe the risk of
fluctuation in the net asset value between the Repurchase Request
Deadline and the Repurchase Pricing Date, if such dates do not
coincide, and the possibility that the Fund may use an earlier
Repurchase Pricing Date than the scheduled Repurchase Pricing Date
under certain circumstances. The notice will describe (i) the
procedures for shareholders to tender their Shares, (ii) the
procedures for the Fund to repurchase Shares on a pro rata basis,
(iii) the circumstances in which the Fund may suspend or postpone
a Tender Offer, and (iv) the procedures that will enable
shareholders to withdraw or modify their tenders of Shares until
the Repurchase Request Deadline. The notice will set forth the
net asset value of the Shares to be repurchased no more than seven
days before the date of notification, and how shareholders may
ascertain the net asset value after the notification date.
Repurchase Price. The current net asset value of the Shares
is computed daily. The Board has determined that the time at
which the net asset value will be computed will be as of the close
of regular session trading on the NYSE. You may call 1-800-774-
2321 to learn the net asset value per share. The notice of the
repurchase offer will also provide information concerning the net
asset value per share, such as the net asset value as of a recent
date or a sampling of recent net asset values, and a toll-free
number for information regarding the Tender Offer.
Suspension or Postponement of Repurchase Offer. The Fund
will not suspend or postpone a Tender Offer unless a majority of
the Board, including a majority of the Board who are not
"interested persons" of the Fund, as defined in the 1940 Act,
votes to do so. In addition, the Fund will not delay a Tender
Offer unless so required by certain regulatory requirements
described in the notice of the Tender Offer are met. Shareholders
will receive notice of any suspension or postponement and a notice
of any renewed repurchase offer after a suspension or
postponement.
Although the Board believes that Tender Offers for the Shares
generally would increase the liquidity of the Shares, the
acquisition of Shares by the Fund will decrease the total assets
of the Fund and, therefore, have the effect of increasing the
Fund's expense ratio. Because of the nature of the Fund's
investment objective and polices and the Fund's portfolio, the
Adviser anticipates potential difficulty in disposing of portfolio
securities in order to consummate Tender Offers for the Shares.
Liquidity Requirements. The Fund and the Portfolio must
maintain liquid assets equal to their repurchase Tender Offer
Amount from the time that the notice is sent to shareholders until
the Repurchase Pricing Date. The Fund and the Portfolio will
ensure that a percentage of their respective net assets equal to
at least 100 percent of the Tender Offer Amount consists of assets
(a) that can be sold or disposed of in the ordinary course of
business at approximately the price at which the Fund or the
Portfolio, as applicable, has valued the investment within the
time period between the Repurchase Request Deadline and the
Repurchase Payment Deadline; or (b) that mature by the Repurchase
Payment Deadline.
The Board of the Portfolio has adopted procedures that are
reasonably designed to ensure that the assets of the Fund and the
Portfolio are sufficiently liquid so that the Fund and the
Portfolio can comply with the Repurchase Policy and the liquidity
requirements described in the previous paragraph. If, at any
time, the Fund or the Portfolio falls out of compliance with these
liquidity requirements, their respective Boards will take whatever
action they deem appropriate to ensure compliance.
The Fund intends to satisfy the liquidity requirements with
cash on hand, cash raised through borrowings, and Senior Loans.
There is some risk that the need to sell Senior Loans to fund
Tender Offers may affect the market for those Senior Loans. In
turn, this could diminish the Fund's net asset value.
HOW TO PURCHASE SHARES
The Fund is engaged in a continuous public offering of its
Shares at the next determined net asset value per share without a
sales charge. Shares may be purchased through the Distributor.
The Fund does not intend to list the Shares on any national
securities exchange.
You may purchase Shares by check, by wire or electronic
transfer. The initial purchase minimum per Fund account is
$250,000. Subsequent purchases must be at least $10,000. If you
wish to purchase Shares to be held by a tax-sheltered retirement
plan sponsored by the Adviser, you must obtain special forms for
those plans. (See "Shareholder Services.")
By Check. To make an initial purchase of Shares by check,
please complete and sign the application and mail it, together
with a check made payable to Stein Roe Mutual Funds, to LFS at
P.O. Box 1722, Boston, MA 02105.
You may make subsequent investments by submitting a check
along with either the stub from your Fund account confirmation
statement or a note indicating the amount of the purchase, your
account number, and the name in which your account is registered.
Money orders will not be accepted for initial purchases into new
accounts. Credit card convenience checks will not be accepted for
initial and subsequent purchases into your account. Each
individual check submitted for purchase must be at least $10,000,
and the Fund generally will not cash, drafts, third or fourth
party checks, or checks drawn on banks outside the United States.
Should an order to purchase Shares of the Fund be cancelled
because your check does not clear, you will be responsible for any
resulting loss incurred by the Fund.
By Wire. You may also pay for Shares by instructing your
bank to wire federal funds (monies of member banks within the
Federal Reserve System) to the Fund at the First National Bank of
Boston. Your bank may charge you a fee for sending the wire. If
you are opening a new account by wire transfer, you must first
call 800-774-2321 to request an account number and furnish your
Social Security or other tax identification number. The Fund will
not be responsible for the consequences of delays, including
delays in the banking or Federal Reserve wire systems. Your bank
must include the full name(s) in which your account is registered
and your Fund account number, and should address its wire as
follows:
First National Bank of Boston
Boston, MA
ABA Routing No. 011000390
Stein Roe Institutional Floating Rate Income Fund; Fund No. 24
Account of (exact name(s) in registration)
Shareholder Account No. ______________
By Electronic Transfer. You may also make subsequent
investments by an electronic transfer of funds from your bank
account. Electronic transfer allows you to make purchases at your
request ("Special Investments") by calling 800-774-2321 or at
prescheduled intervals ("Regular Investments"). (See "Shareholder
Services.") Electronic transfer purchases are subject to a $500
minimum and a $100,000 maximum. You may not open a new account
through electronic transfer. Should an order to purchase Shares
of the Fund be cancelled because your electronic transfer does not
clear, you will be responsible for any resulting loss incurred by
the Fund.
Conditions of Purchase. Each purchase order for the Fund
must be accepted by an authorized officer of the Fund or its
authorized agent or designee and is not binding until accepted and
entered on the books of the Fund. Once your purchase order has
been accepted, you may not cancel or revoke it. The Fund reserves
the right not to accept any purchase order that it determines not
to be in the best interests of the Fund. The Fund also reserves
the right to waive or lower its investment minimums for any
reason. The Fund does not issue certificates for Shares.
SHAREHOLDER SERVICES
Reporting to Shareholders. The Fund will send semiannual and
annual reports to shareholders. These reports will include
financial statements audited by the Fund's independent auditors.
The Fund will provide shareholders with information necessary
to prepare federal and state tax returns shortly after the end of
the calendar year.
The Fund will describe the Tender Offer policy in its annual
report to shareholders. The annual report will also disclose the
number of Tender Offers conducted each year, the amount of each
Tender Offer, and the extent to which the Fund repurchased Shares
in an oversubscribed Tender Offer.
Tax-Sheltered Retirement Plans. Booklets describing the
following programs and special forms necessary for establishing
them are available on request:
Prototype Money Purchase Pension and Profit Sharing Plans for
self-employed individuals, partnerships and corporations.
Simplified Employee Pension Plans permitting employers to
provide retirement benefits to their employees by utilizing IRAs
while minimizing administration and reporting requirements.
The purchase of Shares of the Fund may be limited by the
plans' provisions and does not itself establish such plans. The
minimum initial investment in connection with a tax-sheltered
retirement plan is $250,000.
Shareholders considering establishing a retirement plan or
purchasing any Fund Shares in connection with a retirement plan
should consult with their attorney or tax advisor with respect to
plan requirements and tax aspects pertaining to the shareholder.
Retirement plan investors should be aware of the following
features of the Fund that may impact their decision as to whether
the Fund is an appropriate investment for the retirement plan.
Fund Shares are not liquid. Unlike open-end fund shares, they are
not redeemable on each day that the Fund is open for business, and
unlike traditional closed-end fund shares, Fund Shares are not
traded on any exchange and thus cannot readily be sold. Although
the Fund has adopted policies to provide periodic Tender Offers,
these Tender Offers may not provide shareholders with the degree
of liquidity they desire or may require for tax purposes.
Additionally, even during a Tender Offer a shareholder may not be
able to have all of the shares it wishes to tender be repurchased
by the Fund. If the number of shares tendered by all shareholders
exceeds the repurchase amount authorized by the Board, the Fund
may not be able to repurchase all shares submitted and thus may
repurchase shares on a pro rata basis. These features could
result in a retirement plan not being able to comply with
mandatory distribution requirements. Accordingly, retirement plan
investors may wish to limit the percentage of plan assets (for
example, to 10%) that are invested in the Fund. The Fund does not
monitor retirement plan requirements for an investor. Please
consult your legal, tax or retirement plan specialist before
choosing a retirement plan or electing to invest in the Fund
through a retirement plan. Your investment advisor can help you
make investment decisions for your plan.
NET ASSET VALUE
The purchase or redemption price of the Fund's Shares is its
net asset value per share. The Fund determines the net asset value
of its Shares as of the close of regular session trading on the
New York Stock Exchange ("NYSE") (currently 3:00 p.m., Central
time) by dividing the difference between the values of its assets
and liabilities by the number of Shares outstanding. The Portfolio
allocates net asset value, income, and expenses to its feeder
funds in proportion to their respective interests in the
Portfolio. Net asset value will not be determined on days when
the NYSE is closed unless, in the judgment of the Board of
Trustees, the net asset value of a Fund should be determined on
any such day, in which case the determination will be made at 3:00
p.m., Central time. The value of the Portfolio will be determined
by the Adviser, following guidelines established and periodically
reviewed by the Board. Interests in Senior Loans will be valued
by the Adviser on behalf of the Portfolio at fair value, which
approximates market value. In determining fair value, the Adviser
will consider on an ongoing basis, among other factors, (i) the
creditworthiness of the Borrower; (ii) the current interest rate,
period until next interest rate reset, and maturity of such Senior
Loan interests; and (iii) recent prices in the market for
instruments of similar quality, rate, and period until next
interest rate reset and maturity. It is expected that the Fund's
net asset value will fluctuate as a function of interest rate and
credit factors. Because of the short-term nature of such
instruments, however, the Fund's net asset value is expected to
fluctuate less in response to changes in interest rates than the
net asset values of investment companies with portfolios
consisting primarily of fixed-income or longer-term securities.
The Adviser believes that Lenders selling Senior Loan interests or
otherwise involved in a Senior Loan transaction may tend, in
valuing Senior Loan interests for their own account, to be less
sensitive to interest rate and credit quality changes and,
accordingly, the Adviser does not intend to rely solely on such
valuations in valuing the Senior Loan interests for the
Portfolio's account. In addition, because a secondary trading
market in Senior Loans has not yet fully developed, in valuing
Senior Loans, the Adviser may not rely solely on, but may
consider, to the extent the Adviser believes such information to
be reliable, prices or quotations provided by banks, dealers or
pricing services with respect to secondary market transactions in
Senior Loans. To the extent that an active secondary market in
Senior Loan interests develops to a reliable degree, the Adviser
may rely to an increasing extent on such market prices and
quotations in valuing the Senior Loan interests in the Portfolio.
Other long-term debt securities for which market quotations are
not readily available are valued at fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. In certain circumstances,
portfolio securities will be valued at the last sale price on the
exchange that is the primary market for such securities, or the
last quoted bid price for those securities for which the over-the-
counter market is the primary market or for listed securities in
which there were no sales during the day. The value of interest
rate swaps, caps, and floors will be determined in accordance with
a formula and then confirmed periodically by obtaining a
quotation. Short-term debt securities with remaining maturities
of 60 days or less are valued at their amortized cost, which does
not take into account unrealized gains or losses. The Board
believes that the amortized cost represents a fair value for such
securities. Short-term debt securities with remaining maturities
of more than 60 days for which market quotations are not readily
available are valued by use of a matrix prepared by the Adviser
based on quotations for comparable securities. Other assets and
securities held by the Portfolio for which these valuation methods
do not produce a fair value are valued by a method that the Board
believes will determine a fair value.
PERFORMANCE INFORMATION
The Fund seeks to provide an effective yield that is higher
than other short-term instrument alternatives. From time to time,
the Fund may include its current and/or effective yield based on
various specific time periods. Yields will fluctuate from time to
time and are not necessarily representative of future results.
The current yield is calculated by annualizing the most
recent monthly distribution (i.e., multiplying the distribution
amount by 365/31 for a 31 day month) and dividing the product by
the current maximum offering price. The effective yield is
calculated by dividing the current yield by 365/31 and adding 1.
The resulting quotient is then taken to the 365/31st power and
reduced by 1. The result is the effective yield.
On occasion, the Fund may compare its yield to: (a) LIBOR,
quoted daily in the Wall Street Journal; (b) the CD Rate as quoted
daily in the Wall Street Journal as the average of top rates paid
by major New York banks on primary new issues of negotiable CDs,
usually on amounts of $1 million or more; (c) the Prime Rate,
quoted daily in The Wall Street Journal as the base rate on
corporate loans at large U.S. money center commercial banks; (d)
one or more averages compiled by Donoghue's Money Fund Report, a
widely recognized independent publication that monitors the
performance of money market mutual funds; (e) the average yield
reported by the Bank Rate Monitor National IndexTM for money
market deposit accounts offered by the 100 leading banks and
thrift institutions in the ten largest standard metropolitan
statistical areas; (f) yield data published by Lipper Analytical
Services, Inc.; (g) the yield on an investment in 90-day Treasury
bills on a rolling basis, assuming quarterly compounding; or (h)
the yield on an index of loan funds comprised of all continually
offered closed-end bank loan funds, as categorized by Lipper (the
"loan fund index"). In addition, the Fund may compare the Prime
Rate, the Donoghue's averages and the other yield data described
above to each other. Yield comparisons should not be considered
indicative of the Fund's yield or relative performance for any
future period.
Advertisements and communications to present or prospective
shareholders also may cite a total return for any period. Total
return is calculated by subtracting the net asset value of a
single purchase of Shares at a given date from the net asset value
of those Shares (assuming reinvestment of distributions) or a
later date. The difference divided by the original net asset
value is the total return. The Fund may include information about
the total return on the loan fund index, and compare that to the
total return of the Fund and other indices.
All dividends and distributions are assumed to be reinvested
in additional Shares of the Fund at net asset value. Therefore,
the calculation of the Fund's total return and effective yield
reflects the effect of compounding. The calculation of total
return, current yield and effective yield does not reflect the
amount of any shareholder income tax liability, which would reduce
the performance quoted. If the Fund's fees or expenses are waived
or reimbursed, the Fund's performance will be higher.
Finally, the Fund may include information on the history of
its net asset value per share and the net asset value per share of
the loan fund index, including comparisons between them, in
advertisements and other material furnished to present and
prospective shareholders. Information about the performance of
the Fund or other investments is not necessarily indicative of
future performance and should not be considered a representative
of what an investor's yield or total return may be in the future.
ORGANIZATION AND DESCRIPTION OF SHARES
The Fund is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
August 13, 1998, 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 Fund's
shareholders or its trustees.
Under Massachusetts law, shareholders of a Massachusetts
business trust such as the Fund could, in some circumstances, be
held personally liable for unsatisfied obligations of the trust.
However, the Declaration of Trust provides that persons extending
credit to, contracting with, or having any claim against, the Fund
shall look only to its assets for payment under such credit,
contract or claim, and that the shareholders, trustees and
officers of the Fund 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 Fund. Further, 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 Fund
was unable to meet its obligations.
The Fund's Shares are not, and are not expect to be, listed
for trading on any national securities exchange nor, to the Fund's
knowledge, is there, or is there expected to be, any secondary
trading market in the Shares.
Anti-Takeover Provisions in the Declaration of Trust. The
Fund's Declaration of Trust includes provisions that could have
the effect of limiting the ability of other entities or persons to
acquire control of the Fund. In addition, in the event a
secondary market were to develop in the Shares, such provisions
could have the effect of depriving shareholders of an opportunity
to sell their Shares at a premium over prevailing market prices.
The Declaration of Trust requires the favorable vote of the
holders of not less than three-fourths of the outstanding Shares
then entitled to vote to authorize certain transactions, unless at
least three-fourths of the members of the Board then in office and
at least three-fourths of the non-interested trustees who have
acted in such capacities for at least 12 months (or since
commencement of operation if that period is less than 12 months)
authorize such transaction and then only a vote of the majority of
the holders of the outstanding Shares then entitled to vote is
required.
The Board has determined that the voting requirements
described above, which are greater than the minimum requirements
under Massachusetts law or the 1940 Act, are in the best interests
of shareholders generally. Reference should be made to the
Declaration of Trust on file with the SEC for the full text of
these provisions.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
The Fund seeks to achieve its objective by investing all of
its assets in another closed-end fund having an investment
objective identical to that of the Fund. The initial shareholder
of the Fund approved this policy of permitting the Fund to act as
a feeder fund by investing in the Portfolio. Please refer to
"Investment Objective and Policies" for a description of the
investment objectives, policies, and restrictions of the
Portfolio. The management and expenses of both the Fund and the
Portfolio are described under "Fund Expenses" and "Management of
the Fund-Fees and Expenses." The Fund bears its proportionate
share of Portfolio expenses.
The Adviser has provided investment management services in
connection with other mutual funds employing the master
fund/feeder fund structure since 1991.
The common investment objective of the Fund and the Portfolio
is non-fundamental and may be changed without shareholder
approval, subject, however, to at least 30 days' advance written
notice to the Fund's shareholders.
The fundamental policies of the Fund, and the corresponding
fundamental policies of the Portfolio, can be changed only with
shareholder approval.
If the Fund, as a Portfolio investor, is requested to vote on
a proposed change in a fundamental policy of the Portfolio or any
other matter pertaining to the Portfolio (other than continuation
of the business of the Portfolio after withdrawal of another
investor), the Fund will solicit proxies from its shareholders and
vote its interest in the Portfolio for and against such matters
proportionately to the instructions to vote for and against such
matters received from the Fund's shareholders. The 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 the Fund's shareholders will receive a
majority of votes cast by all Portfolio investors. If other
investors hold a majority interest in the Portfolio, they could
have voting control over the Portfolio.
In the event that the Portfolio's fundamental policies were
changed so as to be inconsistent with those of the Fund, the Board
of the Fund 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 another
investment adviser. Any of these actions would require the
approval of the Fund's shareholders. The 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 the 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 the Fund and could
affect the liquidity of the Fund.
The Portfolio may permit other investment companies and/or
other institutional investors to invest, but members of the
general public may not invest directly in the Portfolio. Other
investors in the Portfolio are not required to sell their shares
at the same public offering price as the Fund, could incur
different administrative fees and expenses than the Fund, and
their shares might be sold with a sales commission. Therefore,
Fund shareholders might have different investment returns than
shareholders in another investment company that invests
exclusively in the Portfolio. Investment by such other investors
in the Portfolio would provide funds for the purchase of
additional portfolio securities and would tend to reduce the
Portfolio's operating expenses as a percentage of its net assets.
Conversely, large-scale redemptions by any such other investors in
the Portfolio could result in untimely liquidations of the
Portfolio's security holdings, loss of investment flexibility, and
increases in the operating expenses of the Portfolio as a
percentage of its net assets. As a result, the Portfolio's
security holdings may become less diverse, resulting in increased
risk.
Information regarding any other investors in the Portfolio
may be obtained by writing to Stein Roe Floating Rate Limited
Liability Company, Suite 3200, One South Wacker Drive, Chicago, IL
60606 or by calling 800-774-2321. The Adviser may provide
administrative or other services to one or more 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, the Adviser believes
that the quality of debt securities should be continuously
reviewed and that individual analysts give different weightings to
the various factors involved in credit analysis. A rating is not
a recommendation to purchase, sell or hold a security because it
does not take into account market value or suitability for a
particular investor. When a security has received a rating from
more than one service, each rating should be evaluated
independently. Ratings are based on current information furnished
by the issuer or obtained by the rating services from other
sources that they consider reliable. Ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability
of such information, or for other reasons. The following is a
description of the characteristics of ratings used by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P").
Corporate Bond Ratings
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.
C. Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
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 ratings categories. Foreign debt is rated on the
same basis as domestic debt measuring the creditworthiness of the
issuer; ratings of foreign debt do not take into account currency
exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and
certain other obligations that S&P believes may experience high
volatility or high variability in expected returns due to non-
credit risks. Examples of such obligations are: securities whose
principal or interest return is indexed to equities, commodities,
or currencies; certain swaps and options; and interest only and
principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.
Commercial Paper Ratings
Ratings by Moody's. Moody's employs the following three
designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or
entities, Moody's, in assigning ratings to such issuers, evaluates
the financial strength of the indicated affiliated corporations,
commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating
assessment.
Ratings By S&P. A brief description of the applicable rating
symbols and their meaning follows:
A. Issues assigned this highest rating are regarded as
having the greatest capacity for timely payment. Issues in this
category are further refined with the designations 1, 2, and 3 to
indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is very strong. Those issues determined
to possess overwhelming safety characteristics will be denoted
with a plus (+) sign designation.
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
Page
The Fund.................................................2
Investment Policies......................................2
Portfolio Investments and Strategies.....................3
Investment Restrictions.................................11
Tender Offers Fundamental Policy........................14
Management..............................................14
Principal Shareholders..................................17
Investment Advisory Services............................17
Distributor.............................................19
Transfer Agent..........................................19
Custodian...............................................19
Independent Auditors....................................20
Portfolio Transactions..................................20
Additional Income Tax Considerations....................22
Investment Performance..................................22
Financial Statements....................................23