As filed with the Securities and Exchange Commission on December 22, 2000
1933 Act File No. 333-51742
1940 Act File No. 811-08955
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] Pre-Effective Amendment No. __________
[X] Post-Effective Amendment No. 1
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 6
Liberty-Stein Roe Institutional Floating Rate Income Fund
Exact Name of Registrant as Specified in Declaration of Trust
One Financial Center
Boston, Massachusetts 02111
Address of Principal Executive Offices
(Number, Street, City, State, Zip Code)
(800) 338-0593
Registrant's Telephone Number, including Area Code
Kevin M. Carome Cameron S. Avery
Executive Vice-President Bell, Boyd & Lloyd LLC
Liberty-Stein Roe Institutional Floating Rate 70 W. Madison Street, Suite 3300
Income Fund Chicago, IL 60602
One Financial Center
Boston, MA 02111
Approximate Date of Proposed Public Offering:
If any of the securities being registered on this form are offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box. [X]
It is proposed that this filing will become effective (check appropriate box)
[_] when declared effective pursuant to section 8(c)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 486
[X] on December 28, 2000 pursuant to paragraph (b) of Rule 486
[_] 60 days after filing pursuant to paragraph (a) of Rule 486
[_] on (date) pursuant to paragraph (a) of Rule 486
[_] This post-effective amendment designates a new effective date for a
previously filed registration statement.
[_] The Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act and the Securities Act registration
number of the earlier effective registration statement is _______.
This Registration Statement has also been signed by Stein Roe Floating
Rate Limited Liability Company.
LIBERTY-STEIN ROE INSTITUTIONAL FLOATING RATE
INCOME FUND Cross reference sheet pursuant to rule
495(a) of Regulation C
Item No. Location or caption
References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated
Part A (Prospectus)
1. Outside Front Cover Cover Page
2. Cover Pages; Other Cover Page; Outside Back Cover
Offering Information
3. Fee Table and Synopsis Fund Expenses; Prospectus Summary
4. Financial Highlights Financial Statements
5. Plan of Distribution Cover Page; Use of Proceeds; How
to Purchase Shares
6. Selling Shareholders Not applicable
7. Use of Proceeds Use of Proceeds; Investment
Objective and Policies; How the
Portfolio Invests; Special Risk
Considerations; Other Investment
Practices
8. General Description of
the Registrant Prospectus Summary; The Fund;
Investment Objectives and Policies;
How the Portfolio Invests; Special
Risk Considerations; Other
Investment Practice; How to
Purchase Shares; Organization and
Description of Shares; Master
Fund/Feeder Fund: Structure and
Risk Factors
9. Management Management of the Fund;
Organization and Description of
Shares; Master Fund/Feeder Fund:
Structure and Risk Factors
10. Capital Stock; Long- The Fund; Distributions and Income
Term Debt and Other Taxes; Periodic Repurchase Offers;
Securities Organization and Description of
Shares
11. Defaults and Arrears on
Senior Securities Not applicable
12. Legal Proceedings Not applicable
13. Table of Contents of Table of Contents of Statement
the Statement of of Additional Information
Additional Information
Part B (Statement of Additional Information)
14. Cover Page Cover Page
15. Table of Contents Table of Contents
16. General Information
and History Not applicable
17. Investment Objective
and Policies Investment Policies; Portfolio
Investments and Strategies;
Investment Restrictions
18. Management Management
19. Control Persons and
Principal Holders of
Securities Principal Shareholders
20. Investment Advisory and
Other Services Investment Advisory and Other
Services; Bookkeeping and Accounting;
Distributor; Transfer Agent;
Custodian
21. Brokerage Allocation
and Other Practices Portfolio Transactions
22. Tax Status Additional Income Tax Considerations
23. Financial Statements Financial Statements
Part C (Other Information)
24 Financial Statements and Exhibits
25 Marketing Arrangements
26 Other Expenses of Issuance and Distribution
27 Persons Controlled By or Under Common Control With
Registrant
28 Number of Holders of Securities
29 Indemnification
30 Business and Other Connections of Investment Adviser
31 Location of Accounts and Records
32 Management Services
33 Undertakings
<PAGE>
PROSPECTUS JANUARY 1, 2001
LIBERTY-STEIN ROE INSTITUTIONAL FLOATING RATE INCOME FUND
Liberty-Stein Roe Institutional Floating Rate Income Fund is a non-diversified,
closed-end management investment company. 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.
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide a high level
of current income, consistent with preservation of capital. The Fund seeks to
achieve its objective by investing its net investable assets in Stein Roe
Floating Rate Limited Liability Company (Portfolio), a non-diversified,
closed-end management investment company, which has the same investment
objective and substantially the same investment policies as the Fund, rather
than investing directly in and managing its own investment portfolio.
The Portfolio invests primarily in adjustable rate senior loans (Senior Loans),
the interest rates of which float or vary periodically based upon a benchmark
indicator of prevailing interest rates. Senior Loans are business loans that
have a senior right to payment to most other debts of the borrower. Senior Loans
are often secured by specific assets of the borrower, although the Portfolio may
also invest in Senior Loans that are not secured by any collateral.
Although these securities have been registered with the Securities and Exchange
Commission, the Commission has not approved or disapproved any shares offered in
this prospectus or determined whether this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Price to Public(1) Sales Load Proceeds to Fund(2)
Per Share $9.86 None $9.86
</TABLE>
(1) The shares are offered on a best efforts basis at a price equal to net
asset value. The shares are offered continuously. As of Dec. 19, 2000,
net asset value per share of the Fund was $9.86.
(2) Liberty Funds Distributor, Inc. (Distributor) will pay all distribution
costs from its own assets.
(3) Assumes the sale of all shares registered hereby.
PERIODIC REPURCHASE OFFERS. To provide liquidity to shareholders, the Fund will
make quarterly repurchase offers for 5% to 25% of its outstanding shares. For
each Repurchase Offer, it is anticipated that each Repurchase Request Deadline
will be on the 15th day in each of the months of March, June,
<PAGE>
September and December, or if the 15th day is not a business day, the next
business day. 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 14th day after the Repurchase Request Deadline, or the next
business day if the 14th day is not a business day. The Fund anticipates that
normally it will repay a Repurchase Offer the day following the Repurchase
Pricing Date, but will repay no later than seven days after the Repurchase
Pricing Date. (See "Periodic Repurchase Offers.")
NOT EXCHANGE LISTED. 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. An
investment in the shares should be considered illiquid. (See "Principal Risks.")
Investment in the Fund involves certain risks, including the possible loss of
some or all of the principal investment and risks associated with securities
rated below investment grade. (See "Principal Risks.")
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 January 1, 2001, has been filed with the Securities and Exchange
Commission (SEC) and can be obtained without charge by calling 800-774-2321. A
table of contents to the Statement of Additional Information is located on the
last page 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).
The Fund's investment advisor is Stein Roe & Farnham Incorporated (Stein Roe).
The address of the Fund is One Financial Center, Boston, MA 02111.
This prospectus applies to the offering of shares of beneficial interest of the
Fund, which may be continuously issued and sold from time to time by the Fund
through the Distributor, as distributor and principal underwriter, and through
your financial advisor. (See "How to Buy Shares.")
2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Prospectus Summary.................................................................................
Fund Expenses......................................................................................
Financial Highlights...............................................................................
The Fund...........................................................................................
Use of Proceeds....................................................................................
Investment Objectives and Policies.................................................................
How the Fund or Portfolio Invests..................................................................
Principal Risks....................................................................................
Other Investment Practices.........................................................................
Distributions and Income Taxes ....................................................................
Management of the Fund ............................................................................
How to Buy Shares..................................................................................
Shareholder Services...............................................................................
Periodic Repurchase Offers.........................................................................
Net Asset Value....................................................................................
Performance Information............................................................................
Organization and Description of Shares.............................................................
Master Fund/Feeder Fund: Structure and Risk Factors................................................
Shareholder Reports ...............................................................................
Statement of Additional Information Table of Contents .............................................38
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in this prospectus and in the Statement of Additional Information.
THE FUND. The Fund is a continuously-offered non-diversified, closed-end
management investment company, organized as a Massachusetts business
trust. The Fund invests its net investable assets in Stein Roe Floating
Rate Limited Liability Company (the "Portfolio") under a master/ feeder
structure. The Portfolio is a non-diversified closed-end management
investment company organized as a Delaware limited liability company.
The Fund intends to offer its shares continuously through the
Distributor, as principal underwriter, and through financial advisors
at a price equal to the next determined net asset value per share. The
minimum initial investment is $250,000 and the minimum subsequent
investment is $10,000. The Fund reserves the right to change the
investment minimums and to refuse a purchase order for any reason.
INVESTMENT OBJECTIVE. The investment objective of the Fund and of the Portfolio
is to provide a high level of current income, consistent with
preservation of capital. There can be no assurance that the Portfolio
or the Fund will achieve its investment objective.
The Portfolio seeks to achieve the objective by investing primarily in
a portfolio of Senior Loans to corporations, partnerships and other
entities (Borrowers) that operate in a variety of industries and
geographic regions (including domestic and foreign entities).
INVESTMENT POLICIES. 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.
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.
A maximum of 25% of the Fund's total assets (taken at current value)
may be invested in Senior Loans to Borrowers and securities of other
issuers in any one industry. However, the Fund may invest more than 25%
of its total assets in securities the issuer of which is deemed to be
in the financial services industry, which includes commercial banks,
thrift institutions, insurance companies and finance companies.
Accordingly, the Fund may be more at risk to any single economic,
political, or regulatory occurrence affecting such industries.
HOW THE FUND OR PORTFOLIO INVESTS. 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. The Fund may invest all or substantially all of its
assets in Senior Loans that are rated below investment grade, or in
comparable unrated securities. Senior Loans in which the Portfolio will
purchase interests generally pay interest at rates that are
4
<PAGE>
periodically redetermined by reference to a base lending rate plus a
premium. 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 (Primary Lender).
Stein Roe expects the Portfolio's policy of acquiring interests in
floating or variable rate Senior Loans to minimize the fluctuations in
net asset value as a result of changes in interest rates. However, the
Fund is not a money market fund and its net asset value will fluctuate.
PRINCIPAL RISKS. You should consider the following risk considerations before
investing in the Fund. As described below, the risks could cause you to
lose money as a result of investing in the Fund. See "Principal Risks"
in the Prospectus for more detailed information.
NON-PAYMENT RISK. 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 Fund, a reduction in the value of the Senior Loan experiencing
non-payment, and a potential decrease in the net asset value of the
Fund.
Restrictions on Resale of Senior Loans. Senior Loans, at present,
generally are not readily marketable and may be subject to restrictions
on resale. As a result, the ability of the Fund to dispose of its
investments in a timely fashion and at a fair price may be restricted.
Ongoing Monitoring. On behalf of the several Lenders, the Agent
generally will be required to administer and manage the Senior Loans
and, with respect to collateralized Senior Loans, to service or monitor
the collateral.
Limited Information. The types of Senior Loans in which the Fund 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 Fund 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 Fund is more dependent on the analytical
ability of Stein Roe.
BELOW INVESTMENT GRADE SECURITIES. 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. These securities are commonly referred to as high-yield
debt or "junk debt." The purchase of such Senior Loans exposes the Fund
to financial, market, and interest-rate risks and greater credit risks
than would the purchase of higher-rated Senior Loans. Such investments
are also likely to result in increased fluctuation in the Fund's net
asset value, particularly in response to economic downturns.
Investments in Non-U.S. Issuers. 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.
5
<PAGE>
Investments in Equity Securities. To the extent that the Portfolio
invests in equity securities, the value of its portfolio will be
affected by changes in the stock markets. The stock market can be
volatile and stock prices can fluctuate drastically from day-to-day.
This market risk will affect the Fund's net asset value, which will
fluctuate as the value of the securities held by the Portfolio changes.
Financial Services Industry Concentration. The financial services
industries are subject to extensive government regulation which can
limit both the amounts and types of loans and other financial
commitments they can make, and the interest rates and fees they can
charge. Profitability is largely dependent on the availability and cost
of capital funds, and can fluctuate significantly when interest rates
change. Credit losses resulting from financial difficulties of
borrowers can negatively affect the financial services industries. The
financial services industries are currently undergoing relatively rapid
change as existing distinctions between financial service segments
become less clear.
Prepayment Risk. Borrowers may pay back principal before the scheduled
due date. Borrowers may find it advantageous to prepay principal due to
a decline in interest rates or an excess in cash flow. Such prepayments
may require the Fund to replace a Senior Loan with a lower-yielding
security. This may adversely affect the net asset value of the Fund's
shares.
Legislation; Restrictions. 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 Fund may be adversely
affected.
REPURCHASE OFFER RISKS. The Fund, as a fundamental policy, will make
quarterly repurchases for 5% to 25% of shares outstanding at net asset
value. (See "Periodic Repurchase Offers" below for more information.)
However, shares are less liquid than shares of funds that trade on a
stock exchange. Under limited circumstances, the Fund may suspend or
postpone a quarterly repurchase offer -- the Fund must meet certain
regulatory requirements to do so. There is no guarantee that
shareholders will be able to sell all of their shares that they desire
to sell in a quarterly repurchase offer.
CLOSED-END FUND RISKS. 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 its shares for trading on any
national securities exchange. There is not expected to be any secondary
trading market in the shares and the shares should be considered
illiquid. The shares are, therefore, not readily marketable. 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.
6
<PAGE>
NON-DIVERSIFICATION RISK. The Portfolio is not subject to the general
limitations under the Investment Company Act of 1940 (1940 Act) that,
for 75% of its total assets, it not invest more than 5% of its total
assets in the securities of a single issuer. The Portfolio does not
intend to invest more than 5% of the value of its assets 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 Borrowers, it will be more susceptible than a more widely
diversified investment company to the consequences of any single
corporate, economic, political or regulatory occurrence.
DISTRIBUTIONS. Income dividends are normally declared each business day, paid
monthly, and confirmed at least quarterly. Capital gains, if any, are
distributed at least annually, usually in December. Income dividends
and capital gains distributions may be received in cash or reinvested
in additional full and fractional shares of the Fund.
INVESTMENT ADVISOR. Stein Roe & Farnham Incorporated.
DISTRIBUTOR. Liberty Funds Distributor, Inc.
PERIODIC REPURCHASE 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 at its net asset value. Such
repurchase offers are referred to as a Repurchase Offer. Repurchase
Offers are scheduled to occur on the 15th day (or the next business day
if the 15th is not a business day) in the months of March, June,
September, and December. (See "Periodic Repurchase Offers.")
7
<PAGE>
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.
<TABLE>
<S> <C>
Annual Expenses (as a percentage of average net assets attributable
to common shares)
Management Fees (1)................................................... 0.65%
Distribution (12b-1) Fees............................................. None
Other Expenses (2).................................................... 0.24%
Total Annual Fund Operating Expenses (2) 0.89%
</TABLE>
(1) Management fees includes both the management fee and the administrative
fee charged to the Fund. Stein Roe receives a management fee of 0.45%
from the Portfolio and an administrative fee of 0.20% from the Fund.
(2) Includes expenses of both the Fund and the Portfolio.
(3) Stein Roe has voluntarily agreed to waive advisory fee and reimburse
the Fund for its ordinary operating expenses to the extent that such
expenses exceed 0.75% of its average annual net assets. As a result,,
the Management Fees and Total Annual Expenses would be 0.51 % and
0.75%, respectively. This arrangement may be modified or terminated by
the Advisor at any time. Any such reimbursement will lower the Fund's
overall expense ratio and increase its overall return to investors.
EXAMPLE. This Example helps you compare the cost of investing in the Fund to the
cost of investing in other mutual funds. The Example assumes that (i) you invest
$1,000 in the Fund, (ii) your investment has a 5% return each year, (iii)
operating expenses remain the same, (iv) all income dividends and capital gains
distributions are reinvested in additional shares:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C>
$9 $28 $49 $110
</TABLE>
Your actual costs may be higher or lower, because in reality Fund returns and
other expenses change. This example reflects expenses of both the Fund and the
Portfolio.
8
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table explains the Fund's financial performance. The
Fund's fiscal year runs from September 1 to August 31. The total returns in the
table represent the return that investors earned assuming that they reinvested
all dividends and distributions. Certain information in the table reflects the
financial results for a single Fund share. PricewaterhouseCoopers LLP,
independent accountants, audits this information and issues a report that
appears in the Fund's annual report along with the financial statements. To
request the Fund's annual report, please call 800-422-3737.
<TABLE>
<CAPTION>
PER SHARE DATA For fiscal year For period ending
ended August 31, August 31,
2000 1999(a)
------ -------
<S> <C> <C>
Net asset value, beginning of period ($) 10.07 10.00
Income from investment operations
Net investment income 0.88 0.51
Net realized and unrealized gain (loss) on investments (0.07) 0.07
Total from investment operations 0.81 0.58
Distributions
Net investment income (0.88) (0.51)
In excess of net investment income ---- (b)
From net realized gains (b) ----
Total distributions (0.88) (0.51)
----- -----
Net asset value, end of period ($) 10.00 10.07
----- -----
Total return (d) 8.52 5.94 (f)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ($) 186,661 127,195
Ratio of net expenses to average net assets (%) (c) 0.75 0.87%(e)
Ratio of net investment income to average net assets (%) (d) 8.97 7.68%(e)
Portfolio turnover rate (%)(g) 21 17
</TABLE>
---------------------
(a) From commencement of operations on December 17, 1998.
(b) Rounds to less than $0.01.
(c) If the Fund had paid all of its expenses and there had been no reimbursement
of expenses by the Investment Advisor, this ratio would have been 0.89% for year
ended August 31, 2000 and 1.72%(annualizes) for the period ended August 31,
1999.
(d) Computed giving effect to the Advisor's expense limitation undertaking.
(e) Annualized.
(f) Not annualized.
(g) Represents the portfolio turnover of the Portfolio.
9
<PAGE>
THE FUND
The Fund is a non-diversified, closed-end management investment company
organized as a Massachusetts business trust on August 13, 1998, and managed by
the Board of Trustees. 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's principal office is located at One Financial Center, Boston,
MA 02111 and its telephone number is 800-774-2321.
USE OF PROCEEDS
The net proceeds from the sale of the shares offered hereby will be invested
typically within 30 days after receipt, 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, and the Portfolio may not
achieve its objective during this time. The offering expenses in connection with
the recent registration of 12,000,000 additional shares were $70,639.60.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide a high level
of current income, consistent with preservation of capital. The Fund's
investment objective is a non-fundamental policy, which means that the Board of
Trustees can change it without shareholder approval. 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 various factors, including changes in the credit
quality of Borrowers with respect to Senior Loan interests in which the
Portfolio invests.
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.
POLICIES. Under normal market conditions, the Portfolio will invest at least 80%
of its total assets (either as a Primary 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). 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.
10
<PAGE>
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 Investors Service, Inc. (Moody's) or BBB, A-3 or higher by Standard &
Poor's, (S&P) (or if unrated, determined by Stein Roe 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
Stein Roe 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.
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 a 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.
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. The typical
practice of an Agent in relying exclusively or primarily on reports from the
Borrower may involve a risk of fraud by the Borrower.
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 and certain other obligations of the Borrower. The capital
structure of a Borrower may include Senior Loans, senior and junior subordinated
debt (which may include "junk debt"), 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 from
certain affiliates of the Borrower.
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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. Stein
Roe will consider the terms of 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 or base lending (Prime
Rate) rate offered by one or more major United States banks or other standard
lending rates used by commercial lenders, such as the London Inter-Bank Offered
Rate (LIBOR) or the certificate of deposit (CD) rate. 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 outweigh the
differential between the Prime Rate and the LIBOR
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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 Fund to achieve a net return to
shareholders that consistently approximates the average published Prime Rate of
leading U.S. banks.
PRIMARY LENDER TRANSACTIONS, ASSIGNMENTS, AND PARTICIPATIONS. 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 Primary
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 the
Lender of 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, if
unrated, determined by Stein Roe 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 the purchase, the Portfolio believes that
the party from whom it is purchasing the Participation is retaining an interest
in the underlying Senior Loan. In the event that the Portfolio does not so
believe, it will only purchase 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 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.
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.
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When the Portfolio is a Primary 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 a majority or some greater 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. When the Portfolio is a Primary Lender originating a Senior Loan it
may share in a fee paid by the Borrower to the Primary Lenders. The Portfolio
will never act as the Agent, Originator, or principal negotiator or
administrator of a Senior Loan.
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 Stein Roe to be of comparable quality.
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 interpositioned
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 days to reset 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 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 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 economic 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 Portfolio's investment
portfolio. As a result of expected prepayments from time to time of Senior Loans
in the investment portfolio, based on
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historical performance, Stein Roe believes that the economic 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
Fund's net asset value will vary, Stein Roe 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, Stein Roe 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 Fund's net asset
value. In addition to changes in interest rates, various factors, including
defaults by or changes in the credit quality of Borrowers, will also affect the
Fund's net asset value. A default or serious deterioration in the credit quality
of a Borrower could cause a prolonged or permanent decrease in the Fund's net
asset value.
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. Stein Roe'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,
Stein Roe'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 assets that
normally will be invested in Senior Loans.
BORROWER CREDIT RATINGS. The Portfolio may invest in
the lowest rated loans, but does not intend to invest more than 5% of its assets
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 debt." The
Portfolio will invest only in those Senior Loans with respect to which the
Borrower, in the judgment of Stein Roe, 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, Stein Roe 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.
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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 a Primary 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 Portfolio 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.
In the event that like-yielding loans are not available in the marketplace,
Stein Roe believes that the prepayment of and subsequent reinvestment by the
Portfolio in Senior Loans could have a materially adverse impact on the yield on
the investment portfolio. Prepayments 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
creditworthiness.
OTHER SECURITIES. The Portfolio will acquire warrants, equity securities and
junior debt securities only as are 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 Stein Roe 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
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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. (See "Principal Risks.")
DEFENSIVE INVESTMENT POLICY. If Stein Roe determines that market conditions
temporarily warrant a defensive investment policy, the Portfolio may (but is not
required to) 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, the Fund may invest
more than 25% of its total assets in 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 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.
PRINCIPAL RISKS
You should consider the following Principal Risks before investing in the Fund.
As described below, these risks could cause you to lose money as a result of
investing in the Fund. The Fund and the Portfolio are both closed-end investment
companies. The Fund is designed primarily for long-term investors and not as a
trading vehicle.
NON-PAYMENT. Senior Loans, like other corporate debt obligations, are subject to
the risk of non-payment of scheduled interest or principal. 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 Stein Roe 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 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
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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.
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 Senior Loans 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 shareholders 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 Stein Roe'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 Fund makes a Repurchase Offer for its shares, and may
result in borrowing to meet short-term cash requirements.
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 a Primary
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 a Primary 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
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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. Stein Roe will also monitor these aspects of the Portfolio's
investments and, where the Portfolio is a Primary Lender or owns an Assignment,
will be directly involved with the Agent and the other Lenders regarding the
exercise of credit remedies.
LIMITED INFORMATION. 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 Stein Roe than would be the case for an investment company that
invests 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 its assets in
Senior Loans rated below B- or B3 by S&P or Moody's.
BELOW INVESTMENT GRADE SECURITIES. Securities rated below investment grade are
commonly referred to as high-yield debt or "junk debt." They are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high-yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline in the
prices of high-yield securities.
The secondary market in which high-yield securities are traded is generally less
liquid than the market for higher-grade debt. Less liquidity in the secondary
trading market could adversely affect the price at which the Portfolio could
sell a high-yield Senior Loan, and could adversely affect the net asset value of
the Fund's shares. At times of less liquidity, it may be more difficult to value
high-yield Senior Loans because this valuation may require more research, and
elements of judgment may play a greater role in the valuation since there is
less reliable, objective data available.
Investments in high-yield Senior Loans may result in greater net asset value
fluctuation than if the Portfolio did not make such investments.
There is no limit on the percentage of assets that may be invested in Senior
Loans and other securities that are rated below investment grade or that are
unrated but of comparable quality.
INVESTMENTS IN NON-U.S. ISSUERS. 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.
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INVESTMENTS IN EQUITY SECURITIES. To the extent the Portfolio invests in equity
securities, the value of its portfolio will be affected by changes in the stock
markets, which may be the result of domestic or international political or
economic news, changes in interest rates, or changing investor sentiment. The
stock market can be volatile and stock prices can change substantially. The
equity securities of smaller companies are more sensitive to these changes than
those of larger companies. This market risk will affect the Fund's net asset
value, which will fluctuate as the value of the securities held by the Portfolio
changes. Not all stock prices change uniformly or at the same time and not all
stock markets move in the same direction at the same time. Other factors affect
a particular stock's prices, such as poor earnings reports by an issuer, loss of
major customers, major litigation against an issuer, or changes in governmental
regulations affecting an industry. Adverse news affecting one company can
sometimes depress the stock prices of all companies in the same industry. Not
all factors can be predicted.
FINANCIAL SERVICES INDUSTRY CONCENTRATION. The financial services industries are
subject to extensive government regulation which can limit both the amounts and
types of loans and other financial commitments they can make, and the interest
rates and fees they can charge. Profitability is largely dependent on the
availability and cost of capital funds, and can fluctuate significantly when
interest rates change. Credit losses resulting from financial difficulties of
borrowers can negatively affect the financial services industries. Insurance
companies can be subject to severe price competition. The financial services
industries are currently undergoing relatively rapid change as existing
distinctions between financial service segments become less clear. For instance,
recent business combinations have included insurance, finance, and securities
brokerage under single ownership. Some primarily retail corporations have
expanded into securities and insurance industries. Moreover, the federal laws
generally separating commercial and investment banking have recently been
repealed.
PREPAYMENT RISK. Borrowers may pay back principal before the scheduled due date.
Borrowers may find it advantageous to prepay principal due to a decline in
interest rates or an excess in cash flow. Such prepayments may require the
Portfolio to replace a Senior Loan with a lower-yielding security. This may
adversely affect the net asset value of the Fund's shares.
LEGISLATION; RESTRICTIONS. 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 Senior Loan interests to increased regulatory
scrutiny, such financial institutions may determine to sell Senior Loan
interests in a manner that results in a price that, in the opinion of Stein Roe,
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.
Repurchase Offer Risks. The Fund, as a fundamental policy, will make quarterly
repurchases for 5% to 25% of shares outstanding at net asset value. (See
"Periodic Repurchase Offers" below for more information.) However, shares are
less liquid than shares of funds that trade on a stock exchange, and Class B and
Class C shareholders who offer for repurchase shares held for less than six
years and one year, respectively, will pay an EWC. (See "How to Buy Shares.")
Under limited circumstances, the Fund may suspend or postpone a quarterly
repurchase offer -- the Fund must meet certain regulatory requirements to do so.
There is no guarantee that shareholders will be able to sell all of their shares
that they desire to sell in a quarterly repurchase offer.
Closed-End Fund Risks. 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 its shares for trading on any national securities exchange.
There is not expected to be any secondary trading market in the shares and the
shares should be considered illiquid. The shares are, therefore, not readily
marketable. 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.
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, and the Portfolio intends to limit its investments so as to comply
with the diversification requirements imposed by the Internal Revenue Code for
qualification as a "regulated investment company." 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
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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
Stein Roe may use some or all of the following investment practices when, in its
opinion, their use is appropriate. These investment practices involve certain
special risk considerations. Although Stein Roe believes that these investment
practices may further the 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 swaps" 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 Repurchase Offers for Fund
shares and for temporary, extraordinary or emergency purposes. The Portfolio may
enter into an agreement with a financial institution providing for an unsecured
discretionary credit facility, the proceeds of which may be used to finance, in
part, repurchases. (See "Periodic Repurchase Offers.") 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
shareholders, and the terms of any such borrowings may contain provisions which
limit certain activities of the Portfolio, including the payment of dividends to
shareholders 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 investments, 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
shareholders.
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
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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 Senior Loans 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. 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 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 Senior Loans. 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 Stein Roe 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 Senior Loans depends on Stein Roe's ability to predict correctly
the direction and extent of movements in interest rates. Although Stein Roe
believes that use of the hedging and risk management techniques described above
will benefit the Portfolio, if Stein Roe'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,
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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, Stein Roe 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 its 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 (NYSE) or other entities determined to be
creditworthy by Stein Roe, 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 Stein Roe 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.
"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 Senior Loans in connection with such purchase transactions prior to the
date the Portfolio actually takes delivery of such Senior Loans. 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 Senior Loans
when delivery occurs may be higher or lower than yields on the Senior Loans
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 Senior Loans on such basis only with the intention of actually
acquiring these Senior Loans, but the Portfolio may sell such Senior Loans 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 Senior Loans for its investment
portfolio consistent with its 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.
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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 NYSE. 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 liquid assets at
minimal market risk, although the Portfolio may be subject to various delays and
risks of loss if the counterparty is unable to meet its obligation to
repurchase. Under the 1940 Act, repurchase agreements are deemed to be
collateralized loans of money by the Portfolio to the counterparty. In
evaluating whether to enter into a repurchase agreement, Stein Roe will consider
carefully the creditworthiness of the counterparty. 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 Stein Roe 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.
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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 Repurchase 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.
If you do not indicate on your application your preferences for handling
distributions, the Fund will automatically reinvest all distributions in
additional shares of the Fund. You can choose one of the following options for
distributions when you open your account: (1) reinvest all distributions in
additional shares of the Fund; (2) reinvest all distributions in shares of
another fund; (3) receive dividends in cash and reinvest capital gains; or (4)
receive all distributions in cash. Distributions of $10 or less will
automatically be reinvested in additional shares. If you elect to receive
distributions by check and the check is returned as undeliverable, or if you do
not cash a distribution check within six months of the check date, the
distribution will be reinvested in additional shares.
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 shareholder who, pursuant to a Repurchase Offer, offers all of his or her
shares for repurchase (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 Repurchase Offer or in
connection with a sale or other
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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 Fund 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 shareholders whose shares are
repurchased (other than shareholders who do not offer all of their shares for
repurchase described in the previous paragraph) and to shareholders who do not
offer their shares for repurchase in connection with the Repurchase Offer. For
example, if a shareholder offers for repurchase fewer than all his shares, the
proceeds received could be treated as a taxable dividend, a return of capital,
or capital gain depending on the portion of shares repurchased, the Fund's
earnings and profits, and the shareholder's basis in the repurchased shares.
Moreover, when fewer than all shares owned by a shareholder are repurchased
pursuant to a Repurchase Offer, there is a remote possibility that shareholders
whose shares are not repurchased 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 offering your shares for repurchase.
BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax
("backup withholding") from certain payments to a shareholder -- generally
distribution payments and 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 Advisor. 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.
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The investment advisor, 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. Stein Roe is registered as an investment advisor
under the Investment Advisers Act of 1940. Stein Roe is a wholly owned
subsidiary of Liberty Funds Group, which is a wholly owned subsidiary of Liberty
Financial Services, Inc., which is a wholly owned subsidiary of Liberty
Financial Companies, Inc.(Liberty Financial), which is a majority owned
subsidiary of Liberty Corporate Holdings, Inc., which is a wholly owned
subsidiary of LFC Holdings, Inc., which is a wholly owned subsidiary of Liberty
Mutual Insurance Company. Stein Roe and its predecessor have advised and managed
mutual funds since 1949 and have been providing investment advisory services
since 1932.
Stein Roe's mutual funds and institutional investment advisory businesses are
part of a larger business unit known as Liberty Funds Group (LFG) that includes
several separate legal entities. LFG includes certain affiliates of Stein Roe,
including Colonial Management Associates, Inc. (Colonial). The LFG business unit
is managed by a single management team. Colonial and other LFG entities also
share personnel, facilities, and systems with Stein Roe that may be used in
providing administrative or operational services to the Funds. Colonial is a
registered investment advisor. Stein Roe also has a wealth management business
that is not part of LFG and is managed by a different team. Stein Roe and the
other entities that make up LFG are subsidiaries of Liberty Financial.
FEES AND EXPENSES. Stein Roe provides administrative services to the Fund and
the Portfolio and portfolio management services to the Portfolio. Stein Roe is
entitled to receive a monthly administrative fee from the Fund, computed and
accrued daily, at an annual rate of 0.20% of average net assets and a monthly
management fee from the Portfolio, computed and accrued daily, at an annual rate
of 0.45% of the Portfolio's average net assets. However, Stein Roe may waive a
portion of its fees.
Stein Roe 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 Stein Roe, including but not limited to printing and postage
charges, securities registration and custodian fees, and expenses incidental to
its organization.
PORTFOLIO MANAGERS. Brian W. Good and James R. Fellows, vice presidents of Stein
Roe, have been primarily responsible for the day-to-day management of the
Portfolio since the Fund and the Portfolio commenced operations. Mr. Fellows and
Mr. Good have been employed by Stein Roe 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.
TRANSFER AGENT. Liberty Funds Services, Inc. (Transfer Agent), 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, the
Transfer Agent also provides certain investor accounting services to the
Portfolio.
DISTRIBUTOR. Fund shares are offered for sale through Liberty Funds Distributor,
Inc. (Distributor) without any sales commissions or charges to the Fund. The
Distributor is a wholly owned indirect subsidiary of Liberty Financial. The
business address of the Distributor is One Financial Center, Boston, MA 02111.
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CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street, Boston, MA
02101, is the custodian of the Fund and the Portfolio. The custodian, among
other things, attends to the collection of principal and income and payment for
and collection of proceeds of investments bought and sold by the Portfolio.
HOW TO BUY 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 Stein Roe, 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 Liberty Funds Services, Inc. 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 and credit card convenience checks will not be
accepted for purchases into your account. Each individual check submitted for
purchase must be at least $10,000, and the Fund generally will not accept 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:
Bank Boston
Boston, MA
ABA Routing No. 011000390
Liberty-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 by calling 800-774-2321 or at prescheduled
intervals. 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 Fund shares be cancelled because your electronic
transfer does not clear, you will be responsible for any resulting loss incurred
by the Fund.
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<PAGE>
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. The annual report includes financial statements audited by the
Fund's independent accountants.
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 Repurchase Offer policy in its annual report to
shareholders. The annual report will also disclose the number of Repurchase
Offers conducted each year, the amount of each Repurchase Offer, and the extent
to which the Fund repurchased shares in an oversubscribed Repurchase 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 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 Repurchase Offers, these Repurchase Offers
may not provide shareholders with the degree of liquidity they desire or may
require. Additionally, even during a Repurchase Offer a shareholder may not be
able to have all of the shares it wishes to have repurchased by the Fund. If the
number of shares offered for repurchase 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
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<PAGE>
electing to invest in the Fund through a retirement plan. Your investment
advisor can help you make investment decisions for your plan.
PERIODIC REPURCHASE 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 Repurchase 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 (4 p.m., Eastern time) on the date the Repurchase
Offer ends or within a maximum of 14 days after the Repurchase Offer ends as
described below.
Repurchase Procedure. At the beginning of each Repurchase Offer, shareholders
will be notified in writing about the Repurchase 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 Repurchase 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 Repurchase
Offer, it is anticipated that each Repurchase Request Deadline will be on the
15th day in each of the months of March, June, September and December, or, if
the 15th day is not a business day, the next business day. 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 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 14th day after the Repurchase Request Deadline or the next
business day if the 14th day is not a business day.
The Board may establish other policies for repurchases of shares that are
consistent with the 1940 Act and other pertinent laws. Shares offered for
repurchase 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 offers and the need to fund repurchase obligations may affect the
ability of the Fund to be fully invested, which may reduce returns. Moreover,
diminution in the size of the Fund through repurchases without offsetting new
sales may result in untimely sales of Senior Loans and a higher expense ratio
and may limit the ability of the Fund to participate in new investment
opportunities. The Fund may borrow to meet repurchase obligations, which entails
certain risks and costs (see "Borrowing"). The Fund may also sell Senior Loans
to meet repurchase obligations which, in certain circumstances, may adversely
affect the market for Senior Loans and reduce the Fund's value.
REPURCHASE AMOUNTS. The Board, in its sole discretion, will determine the number
of shares that the Fund will offer to repurchase (the "Repurchase Offer Amount")
for a given Repurchase Request Deadline. However, the Repurchase Offer Amount
will be at least 5% and no more than 25% of the total number of shares
outstanding on the Repurchase Request Deadline.
If shareholders offer for repurchase more than the Repurchase Offer Amount for a
given Repurchase 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 Repurchase Offer Amount, or if
the Fund determines to repurchase the additional 2% of the shares outstanding,
but
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<PAGE>
Fund shareholders offer shares for repurchase in excess of that amount, the Fund
will repurchase the shares on a pro rata basis. The Fund may, however, accept
all shares offered for repurchase by shareholders who own less than 100 shares
and who offer all their shares, before accepting on a pro rata basis shares
offered by other shareholders. In the event there is an oversubscription of a
Repurchase Offer, shareholders may be unable to liquidate all or a given
percentage of their investment in the Fund at net asset value during the
Repurchase Offer.
NOTICES TO SHAREHOLDERS. Notice of each quarterly Repurchase Offer (and any
additional discretionary repurchase offers) will be given to each beneficial
owner of shares between 21 and 42 days before each Repurchase Request Deadline.
The notice will contain information shareholders should consider in deciding
whether or not to offer their shares for repurchase. The notice will also
include detailed instructions on how to offer shares for repurchase. The notice
will state the Repurchase 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 (if the scheduled Repurchase
Pricing Date is not the Repurchase Request Deadline). The notice will describe
(i) the procedures for shareholders to offer their shares for repurchase, (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 Repurchase Offer, and
(iv) the procedures that will enable shareholders to withdraw or modify their
offers of shares for repurchase 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 1-800-422-2321 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
Repurchase Offer.
SUSPENSION OR POSTPONEMENT OF REPURCHASE OFFER. The Fund may suspend or postpone
a repurchase offer only: (a) if making or effecting the repurchase offer would
cause the Fund to lose its status as a regulated investment company under the
Internal Revenue Code; (b) for any period during which the NYSE or any market on
which the securities owned by the Fund are principally traded is closed, other
than customary weekend and holiday closings, or during which trading in such
market is restricted; (c) for any period during which an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable, or during which it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (d) for such other periods
as the SEC may by order permit for the protection of shareholders of the Fund.
LIQUIDITY REQUIREMENTS. The Fund and the Portfolio must maintain liquid assets
equal to their Repurchase 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%
of the Repurchase 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 are sufficiently liquid so that the Fund and the
Portfolio can comply with the Repurchase Offer and the
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<PAGE>
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.
NET ASSET VALUE
The purchase or redemption price of shares is at the 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 NYSE (currently 4 p.m., Eastern time) by dividing the
difference between the values of its assets less its liabilities by the number
of shares outstanding. Net asset value will not be determined on days when the
NYSE is closed unless, in the judgment of the Board of Trustees, the net asset
value should be determined on any such day, in which case the determination will
be made at 4 p.m., Eastern time.
The Senior Loans in which the Fund will invest generally are not listed on any
securities exchange. Certain Senior Loans are traded by institutional investors
in an over-the-counter secondary market for Senior Loan obligations that has
developed over the past several years. This secondary market for those Senior
Loans generally is comparatively illiquid relative to markets for otherfixed
income securities and no active trading market exists for many Senior Loans. In
determining net asset value, the Fund will utilize the valuations of Senior
Loans furnished to Stein Roe by an independent third-party pricing service. The
pricing service provider has no obligation to provide a valuation for a Senior
Loan if it believes that it cannot determine such a valuation. There can be no
assurance that the pricing service provider will continue to provide these
services or will provide a value for each Senior Loan held by the Fund. However,
Stein Roe believes that if the pricing service provider declines to continue to
act as such for the Fund, or does not provide values for a significant portion
of the Senior Loans in the Fund's portfolio, one or more alternative independent
third-party pricing service providers will be available to provide comparable
services on similar terms.
A pricing service provider typically will value Senior Loans at the mean of the
highest bona fide bid and lowest bona fide ask prices when current quotations
are readily available. Senior Loans for which current quotations are not readily
available are valued at a fair value as determined by the pricing service
provider using a wide range of market data and other information and analysis,
including credit considerations considered relevant by the pricing service
provider to determine valuations. The procedures of any pricing service provider
and its valuations will be reviewed by the officers of Stein Roe under the
general supervision of the Board. If Stein Roe believes that a value provided by
a pricing service provider does not represent a fair value as a result of
information, specific to that Senior Loan or Borrower or its affiliates, of
which Stein Roe believes that the pricing agent may not be aware, Stein Roe may
in its discretion value the Senior Loan subject to procedures approved by the
Board and reviewed on a periodic basis, and the Fund will utilize that price
instead of the price as determined by the pricing service provider. In addition
to such information, Stein Roe will consider, among other factors, (i) the
creditworthiness of the Borrower and (ii) the current interest rate, the period
until next interest rate reset and maturity of such Senior Loan interests in
determining a fair value of a Senior Loan. If the pricing service does not
provide a value for a Senior Loan or if no pricing service provider is then
acting, a value will be determined by Stein Roe in the manner described above.
It is expected that the Fund's net asset value will fluctuate as a function of
interest rate and credit factors. Although the Fund's net asset value will vary,
Stein Roe expects the Fund'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, Stein Roe 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.
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. The value of
interest rate swaps, caps, and floors will be determined in accordance with a
formula and then confirmed
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<PAGE>
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
Stein Roe based on quotations for comparable securities. Other assets and
securities held by the Fund for which these valuation methods do not produce a
fair value are valued by a method that the Board believes will determine a fair
value.
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<PAGE>
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 Index(TM) 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, 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.
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include a distribution rate and an average compounded
distribution rate of the Fund for specified periods of time. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper, Inc., Business Week, Forbes or other industry
publications.
The Fund's distribution rate generally is determined on a monthly basis with
respect to the immediately preceding monthly distribution period. The
distribution rate is computed by first annualizing the Fund's distributions per
Share during such a monthly distribution period and dividing the annualized
distribution by the Fund's maximum offering price per Share on the last day of
such period. The Fund calculates the compounded distribution rate by adding one
to the monthly distribution rate, raising the sum to the power of 12 and
subtracting one from the product. In circumstances in which the Fund believes
that, as a result of decreases in market rates of interest, its expected monthly
distributions may be less than the distributions with respect to the immediately
preceding monthly distribution period, the Fund reserves the right to calculate
the distribution rate on the basis of a period of less than one month.
When utilized by the Fund, distribution rate and compounded distribution rate
figures are based on historical performance and are not intended to indicate
34
<PAGE>
future performance. Distribution rate, compounded distribution rate and net
asset value per share can be expected to fluctuate over time.
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.
In calculating the Fund's total return, 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 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 shares are not, and are not expected 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 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.
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<PAGE>
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.
STATUS OF SHARES. The Board of Trustees may classify or reclassify any issued or
unissued shares of the Fund into shares of any class by redesignating such
shares or by setting or changing in any one or more respects, from time to time,
prior to the issuance of such shares, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of repurchase of such shares. Any such
classification or reclassification will comply with the provisions of the 1940
Act.
As of November 30, 2000, the following shares of the Fund were outstanding:
<TABLE>
<CAPTION>
(2) (3) (4)
(1) Amount Amount held by Fund or for Amount Outstanding Exclusive of Amount
Title of Class Authorized its Account Shown Under (3)
<S> <C> <C> <C>
Common Shares Unlimited 0 19,193,124
</TABLE>
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.
Stein Roe 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
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<PAGE>
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
advisor. 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 Senior Loans (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 Senior Loans 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 Senior Loans
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 Senior
Loans, 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
Senior Loans 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, One Financial
Center, Boston, MA 02111, or by calling 800-774-2321. Stein Roe may provide
administrative or other services to one or more such investors.
37
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38
<PAGE>
SHAREHOLDER REPORTS
The Fund issues reports to its shareholders semi-annually that include financial
information.
FINANCIAL STATEMENTS
The Fund will furnish without charge, when available, copies of its Annual
Report and any subsequent Semi-Annual Report to shareholders upon request to the
Fund, One South Wacker Drive, Chicago, Illinois 60606, toll-free 1-800-422-3737.
39
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TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
The Fund................................................................. 2
Investment Policies...................................................... 2
Portfolio Investments and Strategies..................................... 3
Investment Restrictions.................................................. 11
Repurchase Offer Fundamental Policy...................................... 13
Management............................................................... 14
Financial Statements..................................................... 17
Principal Shareholders................................................... 17
Investment Advisory and Other Services................................... 19
Distributor.............................................................. 20
Transfer Agent........................................................... 21
Custodian................................................................ 21
Independent Accountants.................................................. 21
Portfolio Transactions................................................... 22
Additional Income Tax Considerations..................................... 27
Investment Performance................................................... 27
Appendix -- Ratings ..................................................... 28
</TABLE>
Stein Roe & Farnham Incorporated
One South Wacker Drive
Chicago, IL 60606-4685
1-800-322-774-2321
Liberty Funds Distributor, Inc., Distributor
40
<PAGE>
Statement of Additional Information Dated January 1, 2001
LIBERTY-STEIN ROE INSTITUTIONAL FLOATING RATE INCOME FUND
One Financial Center, Boston, MA 02111
800-774-2321
This Statement of Additional Information is not a prospectus but
provides additional information that should be read in conjunction with the
Fund's Prospectus dated January 1, 2001, and any supplements thereto. A
Prospectus may be obtained at no charge by telephoning 800-774-2321.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S>
<C>
The Fund 2
Investment Policies............................................... ...... 2
Portfolio Investments and Strategies..................................... 3
Investment Restrictions.................................................. 11
Repurchase Offer FundamentalPolicy....................................... 14
Management............ .......................................................14
Financial Statements..................................................... 21
Principal Shareholders................................................... 22
Investment Advisory and Other Services................................... 23
Distributor...............................................................25
Transfer Agent........................................................... 25
Custodian.....................................................................25
Independent Accountants.................................................. 26
Portfolio Transactions................................................... 26
Additional Income Tax Considerations............. ....................... 31
Investment Performance................................................... 31
Appendix --Ratings................................ ...................... 33
</TABLE>
<PAGE>
THE FUND
Liberty-Stein Roe Institutional Floating Rate Income Fund (the "Fund")
is a non-diversified, closed-end management investment company. 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 will make Repurchase
Offers on a quarterly basis to repurchase between 5% and 25% of its outstanding
shares at the then current net asset value of the shares. Capitalized terms used
in this Statement of Additional Information and not otherwise defined have the
meanings given them in the Fund's Prospectus. The Fund's name was changed on
November 4, 1998 from "Stein Roe Institutional Floating Rate Income Trust" to
"Stein Roe Institutional Floating Rate Income Fund." The Fund's name was changed
on October 18, 1999 from "Stein Roe Institutional Floating Rate Income Fund" to
"Liberty-Stein Roe Institutional Floating Rate Income Fund."
Stein Roe & Farnham Incorporated ("Stein Roe") provides administrative
and accounting and recordkeeping services to the Fund and the Portfolio
(described below) and provides investment advisory services to the Portfolio.
Special Considerations Regarding Master Fund/Feeder Fund Structure.
Rather than invest in securities directly, the Fund seeks to achieve its
objective by pooling its assets with those of other investment companies for
investment in Stein Roe Floating Rate Limited Liability Company (the
"Portfolio"), which has 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. For more information,
please refer to the Prospectus under the caption "Master Fund/Feeder Fund:
Structure and Risk Factors." The Fund's investment experience will correspond
directly to the investment experience of the Portfolio.
INVESTMENT POLICIES
The following information supplements the discussion of the investment
objectives and policies of the Fund and of the Portfolio described in the
Prospectus. In pursuing its objective, the Fund and the Portfolio will invest as
described below and may employ the investment techniques described in the
Prospectus and elsewhere in this Statement of Additional Information. The
investment objective of the Fund and of the Portfolio is a non-fundamental
policy and may be changed by the Board without the approval of a "majority of
the outstanding voting securities"(1) of the Fund or Portfolio, as applicable.
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
--------------
(1) A "majority of the outstanding voting securities" means the approval of the
lesser of (i) 67% or more of the shares at a meeting if the holders of more than
50% of the outstanding shares are present or represented by proxy or (ii) more
than 50% of the outstanding shares.
2
<PAGE>
Portfolio invests primarily in a portfolio of Senior Loans to Borrowers that
operate in a variety of industries and geographic regions (including domestic
and foreign entities).
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. 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 Stein Roe 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 Stein Roe 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. For more information, please
refer to the Prospectus under the caption "Investment Objectives and Policies."
PORTFOLIO INVESTMENTS AND STRATEGIES
The following sets forth information about the investment policies of
the Fund and the Portfolio and the types of securities the Portfolio may buy.
Please read this information together with information in the Prospectus under
the caption "How the Fund Invests."
Senior Loans. Senior Loans generally are arranged through private
negotiations between a Borrower and the Lenders represented in each case by one
or more Agents of 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 Prime Rate, LIBOR, the CD rate or other base lending
rates used by commercial lenders. 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
3
<PAGE>
maturity of such loans. Stein Roe estimates actual average maturity of Senior
Loans in the portfolio will be approximately 18-24 months.
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 Primary Lenders.
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 S&P or Baa or P-3 or higher by Moody's) or, if unrated,
determined by Stein Roe to be of comparable quality. The rights of the Portfolio
when it acquires a Participation may be different from, and more limited than,
the rights of Primary 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.
Debt Restucturing. 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. Stein Roe's decision to
purchase or retain such an interest will depend on its assessment of the
likelihood that the Portfolio ultimately will receive full repayment of the
principal amount of the 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, Stein Roe'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 total assets that normally will be invested in
Senior Loans.
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
4
<PAGE>
unable to locate permanent financing to replace the bridge loan, which may
impair the Borrower's perceived creditworthiness.
Other Securities. The Portfolio will acquire warrants, equity
securities and junior debt securities only as are 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 Stein Roe 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
entails 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 Stein Roe determines that market
conditions temporarily warrant a defensive investment policy, the Portfolio may
(but is not required to) 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 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. Stein Roe may use some or all of the following investment
practices when, in the opinion of Stein Roe, their use is appropriate. Although
Stein Roe 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 swaps" 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, which is 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.
5
<PAGE>
Borrowing. The Portfolio may borrow money for the purpose of obtaining
short-term liquidity in connection with Repurchase Offers for Fund 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 that 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 Portfolio shares, and the terms of any such borrowings
may contain provisions that 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 the ability of the
Portfolio 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
shareholders. The Portfolio may enter into an agreement with a financial
institution providing for a facility, the proceeds of which may be used to
finance, in part, repurchases.
Derivatives. 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 Portfolio's investment portfolio.
Hedging Transactions. 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. 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
6
<PAGE>
use them only as a means to hedge or manage the risks associated with assets
held in, or anticipated to be purchased for, the 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 the portfolio securities. The Portfolio will incur brokerage and
other costs in connection with its hedging transactions.
Interest Rate Swaps, Caps and Floors. 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 Stein Roe 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
that 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.
7
<PAGE>
The successful use of swaps, caps and floors to preserve the rate of
return on a portfolio of Senior Loans depends on Stein Roe's ability to predict
correctly the direction and extent of movements in interest rates. Although
Stein Roe believes that use of the hedging and risk management techniques
described above will benefit the Portfolio, if Stein Roe's judgment about the
direction or extent of the movement in interest rates is incorrect, the
Portfolio's overall performance could 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, Stein Roe 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 its 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 (NYSE) or other entities
determined to be creditworthy by Stein Roe, 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 Stein Roe 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. New financial products continue to be developed
and the Portfolio may invest in any such products as may be developed to the
extent consistent
8
<PAGE>
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, such loans entail risks of delay in recovery or even loss of rights
in the collateral should the Borrower of the financial instruments fail
financially. However, the loans would be made only to borrowers deemed by Stein
Roe to be of good standing and when, in the judgment of Stein Roe, 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 Stein Roe 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 Senior Loans in connection with such purchase transactions
prior to the date the Portfolio actually takes delivery of such Senior Loans.
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 Senior
Loans when delivery occurs may be higher or lower than yields on the Senior
Loans 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 at least equal
to the amount of such purchase commitments until payment is made. The Portfolio
will make commitments to purchase such Senior Loans on such basis only with the
intention of actually acquiring these Senior Loans, but the Portfolio may sell
such
9
<PAGE>
Senior Loans 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
Senior Loans 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 limitations exist 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 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 NYSE. In entering
into a repurchase agreement, the Portfolio buys securities from the bank or
broker-dealer, 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 liquid assets at minimal market
risk, although the Portfolio may be subject to various delays and risks of loss
if the counterparty is unable to meet its obligation to repurchase. Under the
1940 Act, repurchase agreements are deemed to be collateralized loans of money
by the Portfolio to the counterparty. In evaluating whether to enter into a
repurchase agreement, Stein Roe will consider carefully the creditworthiness of
the counterparty. If the bank or broker-dealer that is the seller 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 and adjusted in
amount so that the value of the collateral is at least equal to the value of the
loan, including the accrued interest thereon, and Stein Roe will monitor the
value of the collateral. No specific limitation exists as to the percentage of
the Portfolio's assets that may be invested 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. Under a reverse repurchase agreement, the Portfolio sells
a debt security and simultaneously obtain the commitment of the purchaser (a
commercial bank or a broker-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.
10
<PAGE>
Reverse repurchase agreements are considered borrowings by the Portfolio and as
such are subject to the restrictions on borrowing described below 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.
Rated Securities. The rated short-term securities described under
Investment Policies above include securities given a rating conditionally by
Moody's or provisionally by S&P. If the rating of a security held by the
Portfolio is withdrawn or reduced, the Portfolio is not required to sell the
security, but Stein Roe will consider such fact in determining whether the
Portfolio should continue to hold the security.
Portfolio Turnover. The frequency and amount of portfolio purchases and
sales (known as the "turnover rate") will vary from year to year. It is
anticipated that the Portfolio's turnover rate will be between 50% and 100%. The
portfolio turnover rate is not expected to exceed 100%, but may vary greatly
from year to year and will not be a limiting factor when Stein Roe deems
portfolio changes appropriate. Although the Portfolio generally does not intend
to trade for short-term profits, the securities held by the Portfolio will be
sold whenever Stein Roe believes it is appropriate to do so, without regard to
the length of time a particular security may have been held. Higher portfolio
turnover involves correspondingly greater brokerage commissions and other
transaction costs that the Portfolio will bear directly.
INVESTMENT RESTRICTIONS
The Fund and the Portfolio operate under the following investment
restrictions. Neither the Fund nor the Portfolio may:
(1) invest in a security if, as a result of such investment, more than
25% of its total assets (taken at market value at the time of such investment)
would be invested in the securities of issuers in any particular industry (the
electric, gas, water and telephone utility industries being treated as separate
industries for the purpose of this restriction) except that this restriction
does not apply to (i) obligations issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities; (ii) 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; [the Fund
only] or (iii) investment by the Fund of all or substantially all of its assets
in another registered investment company having the same investment objective
and substantially similar investment policies as the Fund;
(2) invest in a security if, as a result of such investment, it would
hold more than 10% of the outstanding voting securities (taken at the time of
such investment) of any one issuer [the Fund only] except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund;
11
<PAGE>
(3) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
that invest in real estate, or interests therein), except that it may hold for
prompt sale and sell real estate or interests in real estate to which it may
gain an ownership interest through the forfeiture of collateral securing loans
or debt securities held by it;
(4) purchase or sell commodities or commodities contracts or oil, gas
or mineral programs, except that it may enter into (i) futures and options on
futures and (ii) forward contracts;
(5) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but it
may make margin deposits in connection with transactions in options, futures,
and options on futures (the purchase of Senior Loans, corporate debt securities,
and other investment assets with the proceeds of a permitted borrowing or
securities offering will not be deemed to be the purchase of securities on
margin);
(6) make loans, although it may (a) lend portfolio securities and
participate in an interfund lending program with other investment companies to
which Stein Roe provides investment advisory services provided that no such loan
may be made if, as a result, the aggregate of such loans would exceed 33-1/3% of
the value of its total assets (taken at market value at the time of such loans);
(b) purchase money market instruments and enter into repurchase agreements; and
(c) acquire publicly distributed or privately placed debt securities (including
interests in Assignments and Participation) and other Senior Loans in which it
is authorized to invest in accordance with its respective investment objectives
and policies;
(7) borrow except that it may (a) borrow for nonleveraging, temporary
or emergency purposes, (b) engage in reverse repurchase agreements, hedging
transactions, when-issued and delayed-delivery transactions and similar
investment strategies, and make other borrowings, provided that the combination
of (a) and (b) shall not at any time exceed 33-1/3% of the value of its total
assets (including the amount borrowed) less liabilities (other than for
borrowings) or such other percentage permitted by law, and (c) enter into
futures and options transactions (it may borrow from banks, other investment
companies to which Stein Roe provides investment advisory services, and other
persons to the extent permitted by applicable law);
(8) act as an underwriter of securities, except insofar as it may be
deemed to be an "underwriter" for purposes of the Securities Act of 1933 on
disposition of securities acquired subject to legal or contractual restrictions
on resale, [the Fund only] except that all or substantially all of the assets of
the Fund may be invested in another registered investment company having the
same investment objective and substantially similar investment policies as the
Fund; or
12
<PAGE>
(9) issue any senior security except to the extent permitted under the
Investment Company Act of 1940 (for this purpose Senior Loans shall not be
deemed senior securities).
The above restrictions are fundamental policies and may not be changed
without the approval of a "majority of the outstanding voting securities," as
previously defined herein.
The Fund and the Portfolio are also subject to the following
restrictions and policies that may be changed by the Board of the Fund or of the
Portfolio, as applicable. None of the following restrictions shall prevent the
Fund from investing all or substantially all of its assets in another investment
company having the same investment objective and substantially similar
investment policies as the Fund. Unless otherwise indicated, neither the Fund
nor the Portfolio may:
(A) invest for the purpose of exercising control or management [except
to the extent that exercise by the Portfolio of its rights under Loan Agreements
would be deemed to be constitute such control or management];
(B) purchase more than 3% of the stock of another investment company
(other than the Portfolio) or purchase stock of other investment companies
(other than the Portfolio) equal to more than 5% of its total assets (taken at
market value at the time of purchase) in the case of any one other investment
company (other than the Portfolio) and 10% of such assets (taken at market value
at the time of purchase) in the case of all other investment companies (other
than the Portfolio) in the aggregate; any such purchases are to be made in the
open market where no profit to a sponsor or dealer results from the purchase,
other than the customary broker's commission, except for securities acquired as
part of a merger, consolidation or acquisition of assets(2);
(C) purchase shares of open-end investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization;
(D) purchase a put or call option if the aggregate premiums paid for
all put and call options then held exceed 20% of its net assets (less the amount
by which any such positions are in-the-money), excluding put and call options
purchased as closing transactions;(3)
-----------------------
(2) The Fund has been informed that the staff of the Securities and Exchange
Commission takes the position that the issuers of certain CMOs and certain other
collateralized assets are investment companies and that subsidiaries of foreign
banks may be investment companies for purposes of Section 12(d)(1) of the
Investment Company Act of 1940, which limits the ability of one investment
company to invest in another investment company. Accordingly, the Fund intends
to operate within the applicable limitations under Section 12(d)(1)(A) of that
Act.
(3) The Portfolio does not currently intend to purchase a put or call option if
the aggregate premiums paid for all put and call options then held exceed 5% of
its net assets (less the amount by which any such positions are in-the-money),
excluding put and call options purchased as closing transactions.
13
<PAGE>
(E) write an option on a security unless the option is issued by the
Options Clearing Corporation, an exchange, or similar entity;
(F) invest in limited partnerships in real estate unless they are
readily marketable;
(G) sell securities short unless (i) it owns or has the right to obtain
securities equivalent in kind and amount to those sold short at no added cost or
(ii) the securities sold are "when-issued" or "when distributed" securities that
it expects to receive in a recapitalization, reorganization, or other exchange
for securities it contemporaneously owns or has the right to obtain and provided
that transactions in options, futures, and options on futures are not treated as
short sales;(4)
(H) invest more than 15% of its total net assets (taken at market value
at the time of a particular investment) in restricted securities, other than
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933.
REPURCHASE OFFER FUNDAMENTAL POLICY
The Board has adopted a resolution setting forth the Fund's fundamental
policy that it will conduct quarterly Repurchase Offers (the "Repurchase Offer
Fundamental Policy").
The Repurchase Offer Fundamental Policy sets the interval between each
Repurchase Offer at one quarter and provides that the Fund shall conduct a
Repurchase Offer each quarter (unless suspended or postponed in accordance with
regulatory requirements). The Repurchase Request Deadline will be established by
the Fund and will be based on factors such as market conditions, liquidity of
the Fund's assets and shareholder servicing conditions. The Repurchase Offer
Fundamental Policy also provides that the repurchase pricing shall occur not
later than the 14th day after the Repurchase Request Deadline or the next
business day if the 14th day is not a business day.
The Repurchase Offer Fundamental Policy may only be changed by a
majority vote of the outstanding voting securities. For more information, please
refer to the Prospectus under the caption "Periodic Repurchase Offers."
MANAGEMENT
The following table sets forth certain information with respect to
trustees ("Managers" in the case of the Portfolio) and officers of the Fund and
the Portfolio:
----------------------------
(4) The Portfolio does not currently intend to commit more than 5% of its assets
to short sales.
14
<PAGE>
15
<PAGE>
16
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, AGE; ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
------------------ -------------- ----------------------
<S> <C> <C>
William D. Andrews, 53; Executive Vice-President Executive vice president of Stein Roe
One South Wacker Drive,
Chicago, IL 60606 (4)
John A. Bacon Jr., 73; Trustee Private investor
4N640 Honey Hill Road,
Box 296, Wayne, IL 60184 (3)(4)
Christine Balzano, 35; Vice-President Senior vice president of Liberty Funds Services,
245 Summer Street, Inc.; formerly vice president and assistant vice
Boston, MA 02210 president
William W. Boyd, 73; Trustee Chairman and director of Sterling Plumbing
2900 Golf Road, (manufacturer of plumbing products)
Rolling Meadows, IL 60008 (2)(3)(4)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Kevin M. Carome, 44; Executive Vice-President Executive Vice President of the Stein Roe Funds
One Financial Center, since May 1999 (formerly Vice President andSecretary);
Boston, MA 02111 (4) General Counsel and Secretary of Stein Roe since 1998;
Executive Vice President of Liberty Funds Group and
Liberty All-Star Funds since October, 2000;Executive
Vice President and Assistant Secretary,Liberty Funds
Group - Chicago; Senior Vice President, Legal since
January, 1999 of Liberty Funds Group; Associate
General Counsel and Vice President of Liberty
Financial Companies, Inc. through January,1999.
Denise E. Chasmer, 33; Vice President Employee of Liberty Funds Services, Inc. and
12100 East Iliff Avenue assistant vice president of Stein Roe since
Aurora, CO 80014 (4) November 1999; manager with Scudder Kemper
Investments from October 1995 to November 1999;
assistant manager with Scudder Kemper prior
thereto
J. Kevin Connaughton
One Financial Center
Boston, MA 02111 (4) Controller Controller of the Funds since December 2000
(formerly Controller of the Funds from May 2000 to
October, 2000); Treasurer and Chief Financial
Officer of the Liberty Funds and of the Liberty All-Star Funds
since December, 2000 (formerly Controller and Chief
Accounting Officer of the Liberty Funds from
February, 1998 to October, 2000); Vice President of the
Colonial Management Associates since February, 1998
(formerly Senior Tax Manager, Coopers & Lybrand,
LLP from April, 1996 to January, 1998; Vice President,
440 Financial Group/First Data Investor Services Group
from March, 1994 to April, 1996).
Lindsay Cook, 48; Trustee Executive vice president of Liberty Financial
600 Atlantic Avenue, Companies, Inc. since March 1997; senior vice
Boston, MA 02210 (1)(2)(4) president prior thereto
James R. Fellows, 35; Vice-President Vice president of Stein Roe since April 1998; vice
One South Wacker Drive, president and senior credit analyst,Van Kampen (4)
Chicago, IL 60606 American Capital prior thereto
Stephen E. Gibson, 47; President Director of Stein Roe since September 1, 2000,
One Financial Center, President and Vice Chairman of Stein Roe since
Boston, MA 02111 (4) January, 2000 (formerly Assistant Chairman from
August, 1998 to January,2000); President of the
Stein Roe Funds since November 1999; President of the
Liberty Funds since June, 1998, Chairman of the Board
of the Liberty Funds since July, 1998, Chief Executive
Officer and President since December, 1996
and Director, since July, 1996 of Colonial Management
Associates (formerly Executive Vice Presidentfrom
July, 1996 to December, 1996); Director, Chief
Executive Officer and President of LFG since
December, 1998 (formerly Director, Chief Executive
Officer and President of The Colonial Group,Inc.
(TCG) from December, 1996 to December, 1998);
(formerly Managing Director of Marketing of Putnam
Investments, June, 1992 to July, 1996.)
Brian W. Good, 34; Vice-President Vice president of Stein Roe since April 1998; vice
One South Wacker Drive, president and portfolio manager, Van Kampen
Chicago, IL 60606 (4) American Capital prior thereto
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Douglas A. Hacker, 44; Trustee Senior vice president and chief financial officer
P.O. Box 66100, of UAL, Inc. (airline)
Chicago, IL 60666 (3)(4)
Loren A. Hansen, 53; Executive Vice-President Chief investment officer/equity of CMA since 1997;
One South Wacker Drive, executive vice president of Stein Roe since Dec.
Chicago, IL 60606 (4) 1995; vice president of The Northern Trust(bank)
prior thereto
Janet Langford Kelly, 42; Trustee Executive vice president-corporate development,
One Kellogg Square, general counsel and secretary of Kellogg Company
Battle Creek, MI 49016 (3)(4) since Sept. 1999; senior vice president, secretary
and general counsel of Sara Lee Corporation
(branded, packaged, consumer-products manufacturer)
from 1995 to Aug. 1999; partner of Sidley & Austin
(law firm) prior thereto
Gail D. Knudsen, 38; Vice President Vice president and assistant controller of CMA
45 Summer Street,
Boston, MA 02210 (4)
Mary D. McKenzie, 47; Vice President President of Liberty Funds Services, Inc.
One Financial Center,
Boston, MA 02111 (4)
Charles R. Nelson, 58; Trustee Director/Trustee since 1981. Van Voorhis Professor,
Van Department of Economics, Department of Economics, University of University of
Washington, Washington and consultant on economic and
Seattle, WA 98195 (3)(4) statistical matters.
Nicholas S. Norton, 41; Vice President Senior vice president of Liberty Funds Services,
12100 East Iliff Avenue, Inc. since Aug. 1999; vice president of Scudder
Aurora, CO 80014 (4) Kemper, Inc. from May 1994 to Aug. 1999
Joseph R. Palombo, 48; Trustee; Chairman Trustee and Chairman of the Board of the Stein Roe
One Financial Center, of the Board Funds since October, 2000(formerly Vice President
Boston, MA 02111 (4) of the Funds from April, 1999 to August,2000);
Director of Stein Roe since September , 2000;
Manager of Stein Roe Floating Rate Limited Liability
Company since October, 2000; Chief Operations Officer
of Mutual Funds, Liberty Financial Companies, Inc.
since August, 2000; Executive Vice President and
Director of the Colonial Management Associates since
April, 1999; Executive Vice President and Chief
Administrative Officer of Liberty Funds Group since
April, 1999; and Chief Operating Officer, Putnam
Mutual Funds from 1994 to 1998).
Thomas C. Theobald, 64; Trustee Managing director, William Blair Capital Partners
Suite, 1300, 222 West Adams Street, (private equity fund)
Chicago, IL 60606 (3)(4)
</TABLE>
19
<PAGE>
(1) Trustee who is an "interested person" of the Fund and of Stein Roe, as
defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees, which is
authorized to exercise all powers of the Board with certain statutory
exceptions.
(3) Member of the Audit Committee of the Board, which makes recommendations
to the Board regarding the selection of auditors and confers with the
auditors regarding the scope and results of the audit.
(4) This person holds the corresponding officer or trustee position with
the Stein Roe Floating Rate Limited Liability Company.
Certain of the trustees and officers of the Fund and the Portfolio are
trustees or officers of other investment companies managed by Stein Roe; and
some of the officers are also officers of Liberty Funds Distributor, Inc., the
Fund's distributor.
Officers and trustees affiliated with Stein Roe serve without any
compensation from the Fund. In compensation for their services to the Fund,
trustees who are not "interested persons" of the Fund or Stein Roe are paid an
annual retainer plus an attendance fee for each meeting of the Board or standing
committee attended. The Fund has no retirement or pension plan. The following
table sets forth compensation paid to the trustees during the year ended August
31, 2000 and calendar year ended December 31 1999:
20
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
From the Fund
Aggregate Compensation Complex Paid to the
From the Fund for the Trustees for the
Fiscal Year Ended August Calendar Year Ended
Trustee 31, 2000 December 31, 1999*
------- -------- ------------------
<S> <C> <C>
Lindsay Cook -0- -0-
John A. Bacon Jr. $1,300 $103,450
William W. Boyd 1,400 109,950
Douglas A. Hacker 1,300 93,950
Janet Langford Kelly 1,300 103,450
Charles R. Nelson 1,300 108,050
</TABLE>
*As of August 31, 2000, the Stein Roe Fund Complex consisted of the
Fund, the Portfolio for which the trustees serve on the Board of
Managers, Liberty-Stein Roe Advisor Floating Rate Fund, and the
following open-end mutual funds: four series of Liberty-Stein Roe
Funds Income Trust, four series of Liberty-Stein Roe Funds Municipal
Trust, 12 series of Liberty-Stein Roe Funds Investment Trust, four
series of Liberty-Stein Roe Advisor Trust, one series of Liberty-Stein
Roe Funds Trust, 12 portfolios of SR&F Base Trust, and five series of
SteinRoe Variable Investment Trust.
.
FINANCIAL STATEMENTS
Please refer to August 31, 2000 Financial Statements (statements of
assets and liabilities and schedule of investments as of August 31, 2000 and the
statements of operations, cash flows (of the Portfolio) and changes in net
assets, financial highlights, and notes thereto) and the report of independent
accountants contained in the August 31, 2000 Annual Report of the Fund. The
Financial Statements and the report of independent accountants are incorporated
herein by reference. The Annual Report
may be obtained at no charge by telephoning 800-322-0593.
21
<PAGE>
PRINCIPAL SHAREHOLDERS
As of November 30, 2000, the only persons known by the Fund to own of
record or "beneficially" 5% or more of its outstanding shares within the
definition of that term as contained in Rule 13d-3 under the Securities Exchange
Act of 1934 were as follows:
<TABLE>
<CAPTION>
APPROXIMATE % OF OUTSTANDING
NAME AND ADDRESS SHARES HELD
-------------------------------------- -----------------------------
<S> <C>
Merrill Lynch Pierce Fenner & Smith 7.86%
For the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
</TABLE>
22
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
Stein Roe provides administrative services to the Fund and the Portfolio and
portfolio management services to the Portfolio. Stein Roe is a wholly owned
subsidiary of Liberty Funds Group, LLC which is a wholly owned subsidiary of
Liberty Financial Services, Inc., which is a wholly owned subsidiary of Liberty
Financial Companies, Inc.(Liberty Financial), which is a majority owned
subsidiary of Liberty Corporate Holdings, Inc., which is a wholly owned
subsidiary of LFC Holdings, Inc., which is a wholly owned subsidiary of Liberty
Mutual Insurance Company. Liberty Mutual Insurance Company is a mutual insurance
company, principally in the property/casualty insurance field, organized under
the laws of Massachusetts in 1912. As of September 30, 2000, Stein Roe managed
over $24.2 billion in assets.
On November 1, 2000, Liberty Financial announced that it had retained
CS First Boston to help it explore strategic alternatives, including the
possible sale of Liberty Financial.
The directors of Stein Roe are C. Allen Merritt, Jr., J. Andrew
Hilbert, Stephen E. Gibson and Joseph R. Palombo. Mr. Merritt is Chief Operating
Officer of Liberty Financial. Mr. Hilbert is Senior Vice President and Chief
Financial Officer of Liberty Financial. The positions held by Messrs. Gibson and
Palombo are listed above. The business address of Messrs. Merritt and Hilbert is
Federal Reserve Plaza, Boston, MA 02210. The business address of Messrs. Gibson
and Palombo is One Financial Center, Boston, MA 02111.
Please refer to the descriptions of Stein Roe, the management and
administrative agreements, fees, expense limitation, and transfer agency
services under "Management of the Fund" and "Fund Expenses" in the Prospectus,
which are incorporated herein by reference. The table below shows gross fees
paid (in thousands) and any expense reimbursements by Stein Roe during the past
fiscal year:
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TYPE OF PAYMENT YEAR ENDED PERIOD ENDED 8/31/99
8/31/00
Fund Administrative fee $312 $135
Reimbursement (215) (474)
Portfolio Management fee 1,137 441
</TABLE>
Stein Roe 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 Stein Roe, including but not limited to printing and
postage charges, securities registration and custodian fees, and expenses
incidental to its organization.
The administrative agreement provides that Stein Roe shall reimburse
the Fund to the extent that total annual expenses of the Fund (including fees
paid to Stein Roe, but excluding taxes, interest, brokers' commissions and other
normal charges incident to the purchase and sale of portfolio securities, and
expenses of litigation to the extent permitted under applicable state law)
exceed the applicable limits prescribed by any state in which shares of the Fund
are being offered for sale to the public; however, such reimbursement for any
fiscal year will not exceed the amount of the fees paid by the Fund under that
agreement for such year. In addition, in the interest of further limiting the
Fund's expenses, Stein Roe may waive its fees and/or absorb certain expenses for
the Fund, as described in the Prospectus under "Fund Expenses." Any such
reimbursements will enhance the yield of the Fund.
The management agreement provides that neither Stein Roe nor any of its
directors, officers, stockholders (or partners of stockholders), agents, or
employees shall have any liability to the Portfolio or any shareholder of the
Portfolio for any error of judgment, mistake of law or any loss arising out of
any investment, or for any other act or omission in the performance by Stein Roe
of its duties under the agreement, except for liability resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by Stein Roe of its obligations and duties
under the agreement.
Any expenses that are attributable solely to the organization,
operation, or business of the Fund shall be paid solely out of the Fund's
assets. Any expenses incurred by the Fund that are not solely attributable to
the Fund are apportioned in such manner as Stein Roe determines is fair and
appropriate, unless otherwise specified by the Board.
BOOKKEEPING AND ACCOUNTING
Pursuant to a separate agreement with the Fund, Stein Roe receives a
fee for performing certain bookkeeping and accounting services. For these
services, Stein Roe receives an annual fee of $25,000 plus .0025 of 1% of
average net assets over $50 million. During the fiscal year ended August 31,
2000 and August 31, 1999, the Fund paid (in thousands) Stein Roe $28 and $18,
respectively, for services performed under this agreement.
24
<PAGE>
DISTRIBUTOR
Shares of the Fund are distributed by Liberty Funds Distributor, Inc.
("Distributor"), One Financial Center, Boston, MA 02111, under a Distribution
Agreement (the "Agreement"). The Distributor is a subsidiary of Colonial
Management Associates, Inc., which is an indirect subsidiary of Liberty
Financial. The Agreement continues in effect from year to year, provided such
continuance is approved annually (1) by a majority of the Board or by a majority
of the outstanding voting securities of the Fund, and (2) by a majority of the
trustees who are not parties to the Agreement or interested persons of any such
party. The Fund has agreed to pay all expenses in connection with registration
of its shares with the Securities and Exchange Commission and auditing and
filing fees in connection with registration of its shares under the various
state blue sky laws and assumes the cost of preparation of the prospectus and
other expenses.
As agent, the Distributor offers shares of the Fund to investors in
states where the shares are qualified for sale, at net asset value, without
sales commissions or other sales load to the investor. No sales commission or
"12b-1" payment is paid by the Fund. The Distributor offers the Fund's shares
only on a best-efforts basis.
TRANSFER AGENT
Liberty Funds Services, Inc. ("LFS") performs certain transfer agency
services for the Fund, as described under "Management of the Fund" in the
Prospectus. For performing these services, the Fund pays LFS a fee at the annual
rate of 0.05 of 1% of its average daily net assets. The Board believes the
charges by LFS to the Fund are comparable to those of other companies performing
similar services. (See "Investment Advisory and Other Services.")
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225 Franklin Street,
Boston, MA 02101, is the custodian for the Fund and the Portfolio. It is
responsible for holding all securities and cash, receiving and paying for
securities purchased, delivering against payment securities sold, receiving and
collecting income from investments, making all payments covering expenses, and
performing other administrative duties, all as directed by authorized persons.
The Bank does not exercise any supervisory function in such matters as purchase
and sale of portfolio securities, payment of dividends, or payment of expenses.
The Fund may invest in obligations of the Bank and may purchase or sell
securities from or to the Bank.
25
<PAGE>
INDEPENDENT ACCOUNTANTS
The independent accountants for the Fund and the Portfolio are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, MA 02110. The
independent accountants audit and report on the annual financial statements,
review certain regulatory reports and the federal income tax returns, and
perform other professional accounting, auditing, tax and advisory services when
engaged to do so.
PORTFOLIO TRANSACTIONS
Stein Roe places the orders for the purchase and sale of portfolio
securities and options and futures contracts for its clients, including private
clients and mutual fund clients ("Clients"). Purchases and sales of portfolio
securities are ordinarily transacted with the issuer or with a primary market
maker acting as principal or agent for the securities on a net basis, with no
brokerage commission. Transactions placed through dealers reflect the spread
between the bid and asked prices. Occasionally, the Portfolio may make purchases
of underwritten issues at prices that include underwriting discounts or selling
concessions.
Stein Roe's overriding objective in selecting brokers and dealers to
effect portfolio transactions is to seek the best combination of net price and
execution. The best net price, giving effect to brokerage commissions, if any,
is an important factor in this decision; however, a number of other judgmental
factors may also enter into the decision. These factors include Stein Roe's
knowledge of negotiated commission rates currently available and other current
transaction costs; the nature of the security being purchased or sold; the size
of the transaction; the desired timing of the transaction; the activity existing
and expected in the market for the particular security; confidentiality; the
execution, clearance and settlement capabilities of the broker or dealer
selected and others considered; Stein Roe's knowledge of the financial condition
of the broker or dealer selected and such other brokers and dealers; and Stein
Roe's knowledge of actual or apparent operation problems of any broker or
dealer.
Recognizing the value of these factors, Stein Roe may cause a Client to
pay a brokerage commission in excess of that which another broker may have
charged for effecting the same transaction. Stein Roe has established internal
policies for the guidance of its trading personnel, specifying minimum and
maximum commissions to be paid for various types and sizes of transactions and
effected for Clients in those cases where Stein Roe has discretion to select the
broker or dealer by which the transaction is to be executed. Stein Roe has
discretion for all trades of the Portfolio. Transactions which vary from the
guidelines are subject to periodic supervisory review. These guidelines are
reviewed and periodically adjusted, and the general level of brokerage
commissions paid is periodically reviewed by Stein Roe. Evaluations of the
reasonableness of brokerage commissions, based on the factors described in the
preceding paragraph, are made by Stein Roe's trading personnel while effecting
portfolio transactions. The general level of
26
<PAGE>
brokerage commissions paid is reviewed by Stein Roe, and reports are made
annually to the Board of Trustees.
Stein Roe maintains and periodically updates a list of approved brokers
and dealers which, in Stein Roe's judgment, are generally capable of providing
best price and execution and are financially stable. Stein Roe's traders are
directed to use only brokers and dealers on the approved list, except in the
case of Client designations of brokers or dealers to effect transactions for
such Clients' accounts. Stein Roe generally posts certain Client information on
the "Alert" broker database system as a means of facilitating the trade
affirmation and settlement process.
It is Stein Roe's practice, when feasible, to aggregate for execution
as a single transaction orders for the purchase or sale of a particular security
for the accounts of several Clients, in order to seek a lower commission or more
advantageous net price. The benefit, if any, obtained as a result of such
aggregation generally is allocated pro rata among the accounts of Clients which
participated in the aggregated transaction. In some instances, this may involve
the use of an "average price" execution wherein a broker or dealer to which the
aggregated order has been given will execute the order in several separate
transactions during the course of a day at differing prices and, in such case,
each Client participating in the aggregated order will pay or receive the same
price and commission, which will be an average of the prices and commissions for
the several separate transactions executed by the broker or dealer.
Stein Roe sometimes makes use of an indirect electronic access to the
New York Stock Exchange's "SuperDOT" automated execution system, provided
through a NYSE member floor broker, W&D Securities, Inc., a subsidiary of
Jeffries & Co., Inc., particularly for the efficient execution of smaller orders
in NYSE listed equities. Stein Roe sometimes uses similar arrangements through
Billings & Co., Inc. and Driscoll & Co., Inc., floor broker members of the
Chicago Stock Exchange, for transactions to be executed on that exchange. In
using these arrangements, Stein Roe must instruct the floor broker to refer the
executed transaction to another brokerage firm for clearance and settlement, as
the floor brokers do not deal with the public. Transactions of this type
sometimes are referred to as "step-in" or "step-out" transactions. The brokerage
firm to which the executed transaction is referred may include, in the case of
transactions effected through W&D Securities, brokerage firms which provide
Stein Roe investment research or related services.
Stein Roe places certain trades for the Portfolio through its affiliate
AlphaTrade, Inc. ("ATI"). ATI is a wholly owned subsidiary of Colonial
Management Associates, Inc. ATI is a fully disclosed introducing broker that
limits its activities to electronic execution of transactions in listed equity
securities. The Portfolio pays ATI a commission for these transactions. The Fund
and the Portfolio have adopted procedures consistent with Investment Company Act
Rule 17e-1 governing such transactions. Certain of Stein Roe's officers also
serve as officers, directors and/or employees of ATI.
27
<PAGE>
CONSISTENT WITH THE RULES OF FAIR PRACTICE OF THE NATIONAL SECURITIES
DEALERS, INC. AND SUBJECT TO SEEKING BEST EXECUTION AND SUCH OTHER POLICIES AS
THE TRUSTEES OF THE FUND MAY DETERMINE, STEIN ROE MAY CONSIDER SALES OF SHARES
OF THE FUND AS A FACTOR IN THE SELECTION OF BROKER-DEALERS TO EXECUTE SUCH
MUTUAL FUND SECURITIES TRANSACTIONS.
INVESTMENT RESEARCH PRODUCTS AND SERVICES FURNISHED BY BROKERS AND DEALERS
Stein Roe engages in the long-standing practice in the money management
industry of acquiring research and brokerage products and services ("research
products") from broker-dealer firms in return directing trades for Client
accounts to those firms. In effect, Stein Roe is using the commission dollars
generated from these Client accounts to pay for these research products. The
money management industry uses the term "soft dollars" to refer to this industry
practice. Stein Roe may engage in soft dollar transactions on trades for those
Client accounts for which Stein Roe has the discretion to select the
broker-dealers.
The ability to direct brokerage for a Client account belongs to the
Client and not to Stein Roe. When a Client grants Stein Roe the discretion to
select broker-dealers for Client trades, Stein Roe has a duty to seek the best
combination of net price and execution. Stein Roe faces a potential conflict of
interest with this duty when it uses Client trades to obtain soft dollar
products. This conflict exists because Stein Roe is able to use the soft dollar
products in managing its Client accounts without paying cash ("hard dollars")
for the product. This reduces Stein Roe's expenses.
Moreover, under a provision of the federal securities laws applicable
to soft dollars, Stein Roe is not required to use the soft dollar product in
managing those accounts that generate the trade. Thus, the Client accounts that
generate the brokerage commission used to acquire the soft dollar product may
not benefit directly from that product. In effect, those accounts are cross
subsidizing Stein Roe's management of the other accounts that do benefit
directly from the product. This practice is explicitly sanctioned by a provision
of the Securities Exchange Act of 1934, which creates a "safe harbor" for soft
dollar transactions conducted in a specified manner. Although it is inherently
difficult, if not impossible, to document, Stein Roe believes that over time
most, if not all, Clients benefit from soft dollar products such that cross
subsidizations even out.
Stein Roe attempts to reduce or eliminate this conflict by directing
Client trades for soft dollar products only if Stein Roe concludes that the
broker-dealer supplying the product is capable of providing a combination of the
best net price and execution on the trade. As noted above, the best net price,
while significant, is one of a number of judgmental factors Stein Roe considers
in determining whether a particular broker is capable of providing the best net
price and execution. Stein Roe may cause a Client account to pay a brokerage
commission in a soft dollar trade in excess of that which another broker-dealer
might have charged for the same transaction.
28
<PAGE>
Stein Roe acquires two types of soft dollar research products: (i)
proprietary research created by the broker-dealer firm executing the trade and
(ii) other products created by third parties that are supplied to Stein Roe
through the broker-dealer firm executing the trade.
Proprietary research consists primarily of traditional research
reports, recommendations and similar materials produced by the in house research
staffs of broker-dealer firms. This research includes evaluations and
recommendations of specific companies or industry groups, as well as analyses of
general economic and market conditions and trends, market data, contacts and
other related information and assistance. Stein Roe's research analysts
periodically rate the quality of proprietary research produced by various
broker-dealer firms. Based on these evaluations, Stein Roe develops target
levels of commission dollars on a firm-by-firm basis. Stein Roe attempts to
direct trades to each firm to meet these targets.
Stein Roe also uses soft dollars to acquire products created by third
parties that are supplied to Stein Roe through broker-dealers executing the
trade (or other broker-dealers who "step in" to a transaction and receive a
portion of the brokerage commission for the trade). These products include the
following:
- Database Services -- comprehensive databases containing current and/or
historical information on companies and industries. Examples include
historical securities prices, earnings estimates, and SEC filings.
These services may include software tools that allow the user to search
the database or to prepare value-added analyses related to the
investment process (such as forecasts and models used in the portfolio
management process).
- Quotation/Trading/News Systems -- products that provide real time
market data information, such as pricing of individual securities and
information on current trading, as well as a variety of news services.
- Economic Data/Forecasting Tools -- various macro economic forecasting
tools, such as economic data and economic and political forecasts for
various countries or regions.
- Quantitative/Technical Analysis -- software tools that assist in
quantitative and technical analysis of investment data.
- Fundamental Industry Analysis -- industry-specific fundamental
investment research.
- Fixed Income Security Analysis -- data and analytical tools that
pertain specifically to fixed income securities. These tools assist in
creating financial models, such as cash flow projections and interest
rate sensitivity analyses, that are relevant to fixed income
securities.
- Other Specialized Tools -- other specialized products, such as
specialized economic consulting analyses and attendance at investment
oriented conferences.
Many third-party products include computer software or on-line data
feeds. Certain products also include computer hardware necessary to use the
product.
Certain of these third party services may be available directly from
the vendor on a hard dollar basis. Others are available only through
broker-dealer firms for soft dollars.
29
<PAGE>
Stein Roe evaluates each product to determine a cash ("hard dollars") value of
the product to Stein Roe. Stein Roe then on a product-by-product basis targets
commission dollars in an amount equal to a specified multiple of the hard dollar
value to the broker-dealer that supplies the product to Stein Roe. In general,
these multiples range from 1.25 to 1.85 times the hard dollar value. Stein Roe
attempts to direct trades to each firm to meet these targets. (For example, if
the multiple is 1.5:1.0, assuming a hard dollar value of $10,000, Stein Roe will
target to the broker-dealer providing the product trades generating $15,000 in
total commissions.)
The targets that Stein Roe establishes for both proprietary and for
third party research products typically will reflect discussions that Stein Roe
has with the broker-dealer providing the product regarding the level of
commissions it expects to receive for the product. However, these targets are
not binding commitments, and Stein Roe does not agree to direct a minimum amount
of commissions to any broker-dealer for soft dollar products. In setting these
targets, Stein Roe makes a determination that the value of the product is
reasonably commensurate with the cost of acquiring it. These targets are
established on a calendar year basis. Stein Roe will receive the product whether
or not commissions directed to the applicable broker-dealer are less than, equal
to or in excess of the target. Stein Roe generally will carry over target
shortages and excesses to the next year's target. Stein Roe believes that this
practice reduces the conflicts of interest associated with soft dollar
transactions, since Stein Roe can meet the non-binding expectations of
broker-dealers providing soft dollar products over flexible time periods. In the
case of third party products, the third party is paid by the broker-dealer and
not by Stein Roe. Stein Roe may enter into a contract with the third party
vendor to use the product. (For example, if the product includes software, Stein
Roe will enter into a license to use the software from the vendor.)
In certain cases, Stein Roe uses soft dollars to obtain products that
have both research and non-research purposes. Examples of non-research uses are
administrative and marketing functions. These are referred to as "mixed use"
products. As of the date of this SAI, Stein Roe acquires two mixed use products.
These are (i) a fixed income security data service and (ii) a mutual fund
performance ranking service. In each case, Stein Roe makes a good faith
evaluation of the research and non-research uses of these services. These
evaluations are based upon the time spent by Firm personnel for research and
non-research uses. Stein Roe pays the provider in cash ("hard dollars") for the
non-research portion of its use of these products.
Stein Roe may use research obtained from soft dollar trades in the
management of any of its discretionary accounts. Thus, consistent with industry
practice, Stein Roe does not require that the Client account that generates the
trade receive any benefit from the soft dollar product obtained through the
trade. As noted above, this may result in cross subsidization of soft dollar
products among Client accounts. As noted therein, this practice is explicitly
sanctioned by a provision of the Securities Exchange Act of 1934,
30
<PAGE>
which creates a "safe harbor" for soft dollar transactions conducted in a
specified manner.
In certain cases, Stein Roe will direct a trade to one broker-dealer
with the instruction that it execute the trade and pay over a portion of the
commission from the trade to another broker-dealer who provides Stein Roe with a
soft dollar research product. The broker-dealer executing the trade "steps out"
of a portion of the commission in favor of the other broker-dealer providing the
soft dollar product. Stein Roe may engage in step out transactions in order to
direct soft dollar commissions to a broker-dealer which provides research but
may not be able to provide best execution. Brokers who receive step out
commissions typically are brokers providing a third party soft dollar product
that is not available on a hard dollars basis. Stein Roe has not engaged in step
out transactions as a manner of compensating broker-dealers that sell shares of
investment companies managed by Stein Roe.
ADDITIONAL INCOME TAX CONSIDERATIONS
The Fund and the Portfolio intend to comply with the special provisions
of the Internal Revenue Code that relieve the Fund and the Portfolio, as
applicable, of federal income tax to the extent of their respective net
investment income and capital gains currently distributed to their respective
shareholders.
Because capital gain distributions reduce net asset value, if a
shareholder purchases shares shortly before a record date, he will, in effect,
receive a return of a portion of his investment in such distribution. The
distribution would nonetheless be taxable to him, even if the net asset value of
shares were reduced below his cost. However, for federal income tax purposes the
shareholder's original cost would continue as his tax basis.
The Fund expects that none of its dividends will qualify for the
deduction for dividends received by corporate shareholders.
INVESTMENT PERFORMANCE
The Fund may quote yield figures from time to time. The "Yield" of the
Fund is computed by dividing the net investment income per share earned during a
30-day period (using the average number of shares entitled to receive dividends)
by the net asset value per share on the last day of the period. The Yield
formula provides for semiannual compounding which assumes that net investment
income is earned and reinvested at a constant rate and annualized at the end of
a six-month period.
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1)(6) -1].
31
<PAGE>
Where: a = dividends and interest earned during the period.
(For this purpose, the Fund will recalculate the
yield to maturity based on market value of each
portfolio security on each business day on which net
asset value is calculated.)
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the ending net asset value of the Fund for the
period.
The 30-day yield as of August 31, 2000 was 9.73%.
The Fund may quote total return figures from time to time. A "Total
Return" is your return on an investment which takes into account the change in
value of your investment with distributions reinvested. A "Total Return
Percentage" may be calculated by dividing the value of a share at the end of a
period (including reinvestment of distributions) by the value of the share at
the beginning of the period and subtracting one. For a given period, an "Average
Annual Total Return" may be computed by finding the average annual compounded
rate that would equate a hypothetical initial amount invested of $1,000 to the
ending redeemable value.
Average Annual Total Return is computed as follows: ERV= P(1+T)n
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period at the end of the period (or fractional
portion thereof).
For example, for a $1,000 investment in the Fund, the "Total Return," the
"Total Return Percentage," and the "Average Annual Total Return" at August 31,
2000 were:
32
<PAGE>
<TABLE>
<CAPTION>
ENDING REDEEMABLE TOTAL RETURN AVERAGE ANNUAL TOTAL
VALUE ($) PERCENTAGE (%) RETURN (%)
<S> <C> <C> <C>
1 year 1,085.24 8.52 8.52
Life of Fund* $1,149.73 14.97% 8.55%
</TABLE>
*Since commencement of operations on Dec. 17, 1998.
The Fund may provide information about Stein Roe and its affiliates and
other related funds in sales material or advertisements provided to investors or
prospective investors. Sales materials or advertisements also may provide
information on the use of investment professionals by investors. For further
information, see "Performance Information" in the Prospectus.
APPENDIX -- RATINGS
RATINGS IN GENERAL. A rating of a rating service represents the service's
opinion as to the credit quality of the security being rated. However, the
ratings are general and are not absolute standards of quality or guarantees as
to the creditworthiness of an issuer. Consequently, Stein Roe believes that the
quality of debt securities should be continuously reviewed and that individual
analysts give different weightings to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell or hold a security
because it does not take into account market value or suitability for a
particular investor. When a security has received a rating from more than one
service, each rating should be evaluated independently. Ratings are based on
current information furnished by the issuer or obtained by the rating services
from other sources 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 ("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
33
<PAGE>
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.
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<PAGE>
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:
35
<PAGE>
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.
36
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
(a) Financial statements included in Part A of this
registration statement: Financial Highlights dated August 31, 2000
(b) Financial statements included in Part B of this
registration statement: 8/31/00 annual report.
(2) Exhibits: [Note: As used herein, the term "Registration Statement" refers to
the Registration Statement of the Registrant on Form N-2 under the Securities
Act of 1933, No. 333-61749. The term "Amendment" refers an amendment to the
Registration Statement on Form N-2 under the Investment Company Act of 1940 No.
811-08955.]
a. Agreement and Declaration of Trust of Registrant
as amended through 10/18/99. (Exhibit to Amendment #4)*
b.(1) By-laws of Registrant dated 8/13/98 as amended on
9/25/98. (Exhibit b to Amendment No. #1)*
(2)Amendment to By-laws. (Exhibit to Amendment No. 5)*
(3)Amendment to By-laws (Exhibit to Amendment No. 5)*
c. None.
d. None.
e. None.
f. None.
g. Portfolio Management Agreement between Stein Roe
Floating Rate Limited Liability Company and Stein Roe &
Farnham Incorporated dated 11/20/98 as amended through
8/3/99. (Exhibit to Amendment #1)*
h. Underwriting Agreement between Registrant and
Liberty Funds Distributor, Inc. dated 4/23/99.
(Exhibit to Amendment #1)*
i. None.
j. Custodian Contract between Registrant and State
Street Bank and Trust Company dated 12/17/98.
(Exhibit to Amendment #1)*
k. (1) Transfer Agency Agreement between Registrant
and Liberty Funds Services, Inc. dated 10/19/98
as amended through 8/3/99. (Exhibit to Amendment #1)*
(2) Accounting and Bookkeeping Agreement between
Registrant and Stein Roe & Farnham Incorporated dated
8/3/99. (Exhibit to Amendment #1)*
(3) Administrative Agreement between Registrant
and Stein Roe & Farnham Incorporated dated 11/1/98 as
amended through 8/3/99. (Exhibit to Amendment #1)*
l. (1)Opinion and consent of Bell, Boyd & Lloyd. (Exhibit l to
Registration Statement filed on 5/7/99.)*
(2) Opinion and consent of Bell Boyd & Lloyd. (Exhibit to Amendment #4)*
(3) Opinion and consent of Bell Boyd & Lloyd LLC with respect to
additional shares. (Exhibit to Amendment No. 5)*
(4) Opinion and consent of Bell Boyd & Lloyd LLC.
m. None.
n. Consent of PricewaterhouseCoopers LLP.
o. None.
p. Initial Capital Agreement. (Exhibit p to Amendment No. 2.)*
q None
(1) Revised Code of Ethics-filed as Exhibit 23(p) to Registration
Statement on Form N-1A to Liberty Funds Trust V (file #033-12109 and
811-05030) filed on August 31, 2000 and hereby incorporated by
reference and made a part of this Registration Statement.
Powers of Attorney for John A. Bacon, Jr., William W. Boyd, Lindsay Cook,
Douglas A. Hacker, Janet Langford Kelly, Charles R. Nelson, Thomas C.
Theobald and Joseph R. Palombo filed on Form N-2 (333-51742 and 811-08955)
on December 13, 2000 are hereby incorporated by reference and made a
part of this Registration Statement.
----------
*Incorporated by reference.
Item 25. Marketing Arrangements
None.
Item 26. Other Expenses of Issuance and Distribution
None
Item 27. Persons Controlled By or Under Common Control with Registrant
The Registrant does not consider that it is directly or indirectly
controlling, controlled by, or under common control with other persons within
the meaning of this Item. The information in the Statement of Additional
Information under the captions "Management," "Investment Advisory and Other
Services" and "Transfer Agent" is incorporated by reference.
Item 28. Number of Holders of Securities
There were 43 record holders as of October 31, 2000.
Item 29. Indemnification
Article Eight of the Agreement and Declaration of Trust of Registrant
(Exhibit a), which Article is incorporated herein by reference, provides that
Registrant shall provide indemnification of its trustees and officers (including
each person who serves or has served at Registrant's request as a director,
officer, or trustee of another organization in which Registrant has any interest
as a shareholder, creditor or otherwise) ("Covered Persons") under specified
circumstances.
Section 17(h) of the Investment Company Act of 1940 ("1940 Act") provides
that neither the Agreement and Declaration of Trust nor the By-Laws of
Registrant, nor any other instrument pursuant to which Registrant is organized
or administered, shall contain any provision which protects or purports to
protect any trustee or officer of Registrant against any liability to Registrant
or its shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. In accordance with Section 17(h) of the
1940 Act, Article Eight shall not protect any person against any liability to
Registrant or its shareholders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
Unless otherwise permitted under the 1940 Act,
(i) Article Eight does not protect any person against any liability to
Registrant or to its shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office;
(ii) in the absence of a final decision on the merits by a court or other
body before whom a proceeding was brought that a Covered Person was not liable
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office, no
indemnification is permitted under Article Eight unless a determination that
such person was not so liable is made on behalf of Registrant by (a) the vote of
a majority of the trustees who are not "interested persons" of Registrant, as
defined in Section 2(a)(19) of the 1940 Act ("disinterested trustees"), or (b)
an independent legal counsel as expressed in a written opinion; and
(iii) Registrant will not advance attorneys' fees or other expenses
incurred by a Covered Person in connection with a civil or criminal action, suit
or proceeding unless Registrant receives an undertaking by or on behalf of the
Covered Person to repay the advance (unless it is ultimately determined that he
is entitled to indemnification) and (a) the Covered Person provides security for
his undertaking, or (b) Registrant is insured against losses arising by reason
of any lawful advances, or (c) a majority of the disinterested, non-party
trustees of Registrant or an independent legal counsel as expressed in a written
opinion, determine, based on a review of readily available facts (as opposed to
a full trial-type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
Any approval of indemnification pursuant to Article Eight does not prevent
the recovery from any Covered Person of any amount paid to such Covered Person
in accordance with Article Eight as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction not to have acted
in good faith in the reasonable belief that such Covered Person's action was in,
or not opposed to, the best interests of Registrant or to have been liable to
Registrant or its shareholders by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
such Covered Person's office.
Article Eight also provides that its indemnification provisions are not
exclusive.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted by such trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Registrant, its trustees and officers, its investment adviser, the other
investment companies advised by the adviser, and persons affiliated with them
are insured against certain expenses in connection with the defense of actions,
suits, or proceedings, and certain liabilities that might be imposed as a result
of such actions, suits, or proceedings. Registrant will not pay any portion of
the premium for coverage under such insurance that would (1) protect any trustee
or officer against any liability to Registrant or its shareholders to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office or (2) protect its investment adviser or principal underwriter, if any,
against any liability to Registrant or its shareholders to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, in the performance of its duties, or by reason of its reckless
disregard of its duties and obligations under its contract or agreement with the
Registrant; for this purpose the Registrant will rely on an allocation of
premiums determined by the insurance company.
Pursuant to the indemnification agreement among the Registrant, its
transfer agent and its investment adviser, the Registrant, its trustees,
officers and employees, its transfer agent and the transfer agent's directors,
officers, and employees are indemnified by Registrant's investment adviser
against any and all losses, liabilities, damages, claims and expenses arising
out of any act or omission of the Registrant or its transfer agent performed in
conformity with a request of the investment adviser that the transfer agent and
the Registrant deviate from their normal procedures in connection with the
issue, redemption or transfer of shares for a client of the investment adviser.
Registrant, its trustees, officers, employees and representatives and each
person, if any, who controls the Registrant within the meaning of Section 15 of
the Securities Act of 1933 are indemnified by the distributor of Registrant's
shares (the "distributor"), pursuant to the terms of the distribution agreement,
which governs the distribution of Registrant's shares, against any and all
losses, liabilities, damages, claims and expenses arising out of the acquisition
of any shares of the Registrant by any person which (i) may be based upon any
wrongful act by the distributor or any of the distributor's directors, officers,
employees or representatives or (ii) may be based upon any untrue or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, statement of additional information, shareholder report or other
information covering shares of the Registrant filed or made public by the
Registrant or any amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading if such statement or
omission was made in reliance upon information furnished to the Registrant by
the distributor in writing. In no case does the distributor's indemnity
indemnify an indemnified party against any liability to which such indemnified
party would otherwise be subject by reason of willful misfeasance, bad faith, or
negligence in the performance of its or his duties or by reason of its or his
reckless disregard of its or his obligations and duties under the distribution
agreement.
Item 30. Business and Other Connections of Investment Adviser
Stein Roe & Farnham Incorporated ("Stein Roe"), the investment advisor, is a
wholly owned subsidiary of Liberty Funds Group Inc. ("LFG"), which in turn is a
wholly owned subsidiary of Liberty Financial Companies, Inc., which is a
majority owned subsidiary of Liberty Corporation Holdings, Inc., which is a
wholly owned subsidiary of LFC Holdings, Inc., which in turn is a subsidiary of
Liberty Mutual Equity Corporation, which in turn is a subsidiary of Liberty
Mutual Insurance Company. Stein Roe acts as investment adviser to individuals,
trustees, pension and profit-sharing plans, charitable organizations, and other
investors. In addition to Registrant, it also acts as investment adviser to
other investment companies having different investment policies.
For a two-year business history of officers and directors of Stein Roe, please
refer to the Form ADV of Stein Roe & Farnham Incorporated and to the section of
the statement of additional information (Part B) entitled "Investment Advisory
and Other Services."
Certain directors and officers of Stein Roe also serve and have during the past
two years served in various capacities as officers, directors, or trustees of
Liberty Funds Services, Inc., of Colonial Management Associates, Inc. (which is
a subsidiary of Liberty Financial Companies, Inc.), and of the Registrant and
other investment companies managed by Stein Roe. (The listed entities are
located at One South Wacker Drive, Chicago, Illinois 60606, except for Colonial
Management Associates, Inc., each Trust and Stein Roe Floating Rate Limited
Liability Company, which are located at One Financial Center, Boston, MA 02111,
and SteinRoe Variable Investment Trust and Liberty Variable Investment Trust,
which are located at Federal Reserve Plaza, Boston, MA 02210.) A list of such
capacities is given below.
<PAGE>
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
LIBERTY FUNDS SERVICES
INC.
Stephen E. Gibson Director
Joseph R. Palombo Director
Kevin M. Carome Director
Mary D. McKenzie President
Christine Balzano Senior Vice President
Nicholas S. Norton Senior Vice President
COLONIAL MANAGEMENT ASSOCIATES, INC.
Ophelia L. Barsketis Senior Vice President
Kevin M. Carome Senior Vice President
William M. Garrison Vice President
Stephen E. Gibson Chairman, President and
Chief Executive Officer
Loren A. Hansen Senior Vice President
Clare M. Hounsell Vice President
Deborah A. Jansen Senior Vice President
North T. Jersild Vice President
Joseph R. Palombo Executive Vice President
Yvonne T. Shields Vice President
SR&F BASE TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
David P. Brady Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP VP; Secretary
Denise E. Chasmer Vice President
J. Kevin Connaughton Controller VP;Controller
Stephen E. Gibson President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice-President
Michael T. Kennedy Vice-President
Gail D. Knudsen Vice President
Stephen F. Lockman Vice-President
Mary D. McKenzie Vice President
Jane M. Naeseth Vice-President
Maureen G. Newman Vice-President
Nicholas S. Norton Vice President
Joseph R. Palombo Trustee
Veronica M. Wallace Vice-President
LIBERTY-STEIN ROE FUNDS INCOME TRUST; LIBERTY-STEIN ROE FUNDS
INSTITUTIONAL TRUST; AND LIBERTY-STEIN ROE FUNDS TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
Kevin M. Carome Executive VP VP;Secy.
Denise E. Chasmer Vice President
J. Kevin Connaughton Controller VP;Controller
Stephen E. Gibson President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Gail D. Knudsen Vice President
Stephen F. Lockman Vice-President
Mary D. McKenzie Vice President
Jane M. Naeseth Vice-President
Nicholas S. Norton Vice President
Joseph R. Palombo Trustee
LIBERTY-STEIN ROE FUNDS INVESTMENT TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
David P. Brady Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP VP; Sec; Asst. Secy.
Denise E. Chasmer Vice President
J. Kevin Connaughton Controller VP:Controller
William M. Garrison Vice-President
Stephen E. Gibson President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice-President
Gail D. Knudson Vice President
Mary D. McKenzie Vice President
Nicholas S. Norton Vice President
Joseph R. Palombo Trustee
LIBERTY-STEIN ROE ADVISOR TRUST
William D. Andrews Executive Vice-President
David P. Brady Vice-President
Christine Balzano Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP; VP;Sec; Asst. Secy.
Denise E. Chasmer Vice President
J. Kevin Connaughton Controller VP;Controller
Stephen E. Gibson President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice-President
Gail D. Knudson Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Mary D. McKenzie Vice President
Maureen G. Newman Vice-President
Nicholas S. Norton Vice President
Joseph R. Palombo Trustee
LIBERTY-STEIN ROE FUNDS MUNICIPAL TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
Kevin M. Carome Executive VP VP; Sec; Asst. Secy.
Denise E. Chasmer Vice President
J. Kevin Connaughton Controller VP;Controller
Stephen E. Gibson President
Loren A. Hansen Executive Vice-President
Brian M. Hartford Vice-President
Gail D. Knudsen Vice President
William C. Loring Vice-President
Mary D. McKenzie Vice President
Maureen G. Newman Vice-President
Nicholas S. Norton Vice President
Joseph R. Palombo Trustee
Veronica M. Wallace Vice-President
STEINROE VARIABLE INVESTMENT TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
Kevin M. Carome Executive VP VP; Sec; Asst. Secy.
Denise E. Chasmer Vice President
J. Kevin Connaughton Controller VP;Controller
William M. Garrison Vice President
Stephen E. Gibson President
Erik P. Gustafson Vice President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice President
Michael T. Kennedy Vice President
Gail D. Knudsen Vice President
Mary D. McKenzie Vice President
Jane M. Naeseth Vice President
Nicholas S. Norton Vice President
Joseph R. Palombo Trustee
William M. Wadden IV Vice President
LIBERTY-STEIN ROE ADVISOR FLOATING RATE FUND; LIBERTY-STEIN ROE
INSTITUTIONAL FLOATING RATE INCOME FUND, STEIN ROE FLOATING RATE
LIMITED LIABILITY COMPANY
William D. Andrews Executive Vice-President
Kevin M. Carome Executive VP VP;Sec; Asst. Secy.
Christine Balzano Vice President
Denise E. Chasmer Vice President
J. Kevin Connaughton Controller VP;Controller
Stephen E. Gibson President
Brian W. Good Vice-President
James R. Fellows Vice-President
Loren A. Hansen Executive Vice-President
Gail D. Knudsen Vice President
Mary D. McKenzie Vice President
Nicholas S. Norton Vice President
Joseph R. Palombo Trustee
LIBERTY VARIABLE INVESTMENT TRUST
Kevin M. Carome Vice President
ITEM 27. PRINCIPAL UNDERWRITERS.
Registrant's principal underwriter, Liberty Funds Distributor, Inc., a
subsidiary of Colonial Management Associates, Inc., acts as underwriter to
Liberty Funds Trust I, Liberty Funds Trust II, Liberty Funds Trust III, Liberty
Funds Trust IV, Liberty Funds Trust V, Liberty Funds Trust VI, Liberty Funds
Trust VII, Liberty Funds Trust IX, Liberty-Stein Roe Funds Investment Trust,
Liberty-Stein Roe Funds Income Trust, Liberty-Stein Roe Funds Municipal Trust,
Liberty-Stein Roe Advisor Trust, Liberty-Stein Roe Funds Institutional Trust,
Liberty-Stein Roe Funds Trust, Liberty Floating Rate Fund, Liberty-Stein Roe
Institutional Floating Rate Income Fund, and SteinRoe Variable Investment Trust.
The table below lists the directors and officers of Liberty Funds Distributor,
Inc.
Position and Offices Positions and
Name and Principal with Principal Offices with
Business Address* Underwriter Registrant
-------------------- --------------------- -------------
Anderson, Judith V.P. None
Babbitt, Debra V.P. and None
Comp. Officer
Bartlett, John Managing Director None
Bertrand, Thomas V.P. None
Blakeslee, James Sr. V.P. None
Blumenfeld, Alexander V.P. None
Bozek, James Sr. V.P. None
Brown, Beth V.P. None
Burtman, Tracy V.P. None
Carroll, Sean V.P. None
Campbell, Patrick V.P. None
Chrzanowski, Daniel V.P. None
Clapp, Elizabeth A. Managing Director None
Claiborne, Doug V.P. None
Conley, Brook V.P. None
Cook, Edward V.P. None
Costello, Matthew V.P. None
Couto, Scott V.P. None
Davey, Cynthia Sr. V.P. None
Denny, Jeffrey V.P. None
Desilets, Marian V.P. Asst. Sec
Devaney, James Sr. V.P. None
DiMaio, Stephen V.P. None
Downey, Christopher V.P. None
Dupree, Robert V.P. None
Emerson, Kim P. Sr. V.P. None
Erickson, Cynthia G. Sr. V.P. None
Evans, C. Frazier Managing Director None
Evitts, Stephen V.P. None
Feldman, David Managing Director None
Feloney, Joseph Sr. V.P. None
Ferullo, Jeanne V.P. None
Fifield, Robert V.P. None
Fisher, James V.P. None
Fragasso, Philip Managing Director None
Gentile, Russell V.P. None
Gerokoulis, Sr. V.P. None
Stephen A.
Gibson, Stephen E. Director; Chairman President
of the Board
Goldberg, Matthew Sr. V.P. None
Grace, Anthony V.P. None
Gubala, Jeffrey V.P. None
Guenard, Brian V.P. None
Harrington, Tom Sr. V.P. None
Hartnett, Kelly V.P. None
Hodgkins, Joseph Sr. V.P. None
Huennekens, James V.P. None
Hussey, Robert Managing Director None
Iudice, Jr., Philip Treasurer and CFO None
Ives, Curt V.P. None
Johnston, Kenneth V.P. None
Jones, Cynthia V.P. None
Kelley, Terry M. V.P. None
Kelson, David W. Sr. V.P. None
Kelson, Jr., David V.P. None
Lewis, Blair V.P. None
Lynch, Andrew Managing Director None
Lynn, Jerry V.P. None
Marsh, Curtis Sr. V.P. None
Martin, Peter Sr. V.P. None
McCombs, Gregory Sr. V.P. None
McKenzie, Mary V.P. None
Menchin, Catherine Sr. V.P. None
Miller, Anthony V.P. None
Moberly, Ann R. Sr. V.P. None
Morse, Jonathan V.P. None
Nickodemus, Paul V.P. None
O'Donnell, John V.P. None
O'Shea, Kevin Managing Director None
Palombo, Joseph R. Director Vice President
Perullo, Deborah V.P. None
Piken, Keith Sr. V.P. None
Place, Jeffrey Managing Director None
Powell, Douglas V.P. None
Raftery-Arpino, Linda Sr. V.P. None
Ratto, Gregory V.P. None
Reed, Christopher B. Sr. V.P. None
Riegel, Joyce V.P. None
Ross, Gary Sr. V.P. None
Santosuosso, Louise Sr. V.P. None
Schulman, David Sr. V.P. None
Scully-Power, Adam V.P. None
Shea, Terence V.P. None
Sideropoulos, Lou V.P. None
Sinatra, Peter V.P. None
Smith, Darren V.P. None
Soester, Trisha V.P. None
Studer, Eric V.P. None
Sweeney, Maureen V.P. None
Tambone, James CEO; Co-President None
Tasiopoulos, Lou Co-President None
Torrisi, Susan V.P. None
Vail, Norman V.P. None
VanEtten, Keith H. Sr. V.P. None
Warfield, James V.P. None
Wess, Valerie Sr. V.P. None
White, John V.P. None
Yates, Susan V.P. None
Young, Deborah V.P. None
---------
* The address of Ms. Riegel is One South Wacker Drive, Chicago, IL 60606. The
address of each other director and officer is One Financial Center, Boston, MA
02111.
Item. 31. Location of Accounts and Records
Registrant maintains the records required to be maintained by it under
Rules 31a-1(a), 31a-1(b), and 31a-2(a) under the Investment Company Act of 1940
at its principal executive offices at One South Wacker Drive, Chicago, Illinois
60606. Certain records, including records relating to Registrant's shareholders
and the physical possession of its securities, may be maintained pursuant to
Rule 31a-3 at the main office of Registrant's transfer agent or custodian.
Item 32. Management Services
None.
Item 33. Undertakings
1. The Registrant undertakes to suspend the offering of shares until the
prospectus is amended if: (a) subsequent to the effective date of the
Registration Statement, the net asset value declines more than 10 percent
from its net asset value as of the effective date of the Registration
Statement; or (b) the net asset value increases to an amount greater than
its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. The Registrant undertakes:
a. To file, during any period in which offers or sales are
being made, a post-effective amendment to the
registration statement:
(1) To include any prospectus required by Section
10(a)(3) of the 1933 Act;
(2) To reflect in the prospectus any facts or events after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration
statement; and
(3) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
b. That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of those securities at that time shall be deemed to be the
initial bona fide offering thereof; and
c. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
d. To send by first class mail or other means designed to ensure equally
prompt delivery, within two business days of receipt of a written or
oral request, any Statement of Additional Information.
5. Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 486 (b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Chicago, Illinois on the 22nd day of December, 2000.
LIBERTY-STEIN ROE INSTITUTIONAL FLOATING
RATE INCOME FUND
By: STEPHEN E. GIBSON
Stephen E. Gibson, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
------------------------ --------------------- --------------
STEPHEN E. GIBSON President December 22, 2000
Stephen E. Gibson
Principal Executive Officer
J.KEVIN CONNAUGHTON Controller December 22, 2000
J. Kevin Connaughton
Principal Accounting
and Financial Officer
*JOHN A. BACON JR. Trustee December 22, 2000
John A. Bacon Jr.
*WILLIAM W. BOYD Trustee December 22, 2000
William W. Boyd
*LINDSAY COOK Trustee December 22, 2000
Lindsay Cook
*DOUGLAS A. HACKER Trustee December 22, 2000
Douglas A. Hacker
*JANET LANGFORD KELLY Trustee December 22, 2000
Janet Langford Kelly
*CHARLES R. NELSON Trustee December 22, 2000
Charles R. Nelson
*THOMAS C. THEOBALD Trustee December 22, 2000
Thomas C. Theobald
*JOSEPH R. PALOMBO Trustee December 22, 2000
Joseph R. Palombo
*VINCENT P. PIETROPAOLO
Vincent P. Pietropaolo
Attorney-in-Fact for the Trustees
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
undersigned has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Chicago, Illinois on
the 22nd day of December, 2000.
STEIN ROE FLOATING RATE LIMITED
LIABILITY COMPANY
By: STEPHEN E. GIBSON
Stephen E. Gibson
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
------------------------ --------------------- --------------
STEPHEN E. GIBSON President December 22, 2000
Stephen E. Gibson
Principal Executive
Officer
J.KEVIN CONNAUGHTON Controller December 22, 2000
J. Kevin Connaughton
Principal Accounting
and Financial Officer
*JOHN A. BACON JR. Manager December 22, 2000
John A. Bacon Jr.
*WILLIAM W. BOYD Manager December 22, 2000
William W. Boyd
*LINDSAY COOK Manager December 22, 2000
Lindsay Cook
*DOUGLAS A. HACKER Manager December 22, 2000
Douglas A. Hacker
*JANET LANGFORD KELLY Manager December 22, 2000
Janet Langford Kelly
*CHARLES R. NELSON Manager December 22, 2000
Charles R. Nelson
*THOMAS C. THEOBALD Manager December 22, 2000
Thomas C. Theobald
*JOSEPH R. PALOMBO Manager December 22, 2000
Joseph R. Palombo
*VINCENT P. PIETROPAOLO
Vincent P. Pietropaolo
Attorney-in-Fact for the Managers
<PAGE>
LIBERTY-STEIN ROE INSTITUTIONAL FLOATING RATE FUND
INDEX OF EXHIBITS FILED WITH THIS AMENDMENT
Exhibit
Number Exhibit
-------- --------------------------------------------------
(l)(3) Opinion of Bell, Boyd & Lloyd LLC
(n) Consent of PricewaterhouseCoopers LLP
