SECURITIES ACT FILE NO. 333-91637
INVESTMENT COMPANY ACT FILE NO. 811-09709
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _____1_____ [ ]
Post-Effective Amendment No.___________ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. ____1_____ [ ]
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
(Exact name of Registrant as specified in charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
(617) 426-3750
(Registrant's Telephone Number, including Area Code)
Name and Address of Agents for Service
Nancy L. Conlin Stacy Winick
Liberty-Stein Roe Advisor Floating Bell Boyd & Lloyd
Rate Advantage Fund 70 West Madison St. Suite 3300
One Financial Center Chicago, IL 60602-4207
Boston, MA 02111
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c)
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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TITLE OF AMOUNT OF PROPOSED PROPOSED
SECURITIES BEING SHARES BEING MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest
Class A 5,625,000 $12.00 $67,500,000 $18,765.00
Class B 5,625,000 $12.00 $67,500,000 $18,765.00
Class C 1,125,000 $12.00 $13,500,000 $ 3,753.00
Class Z 123,000 $12.00 $ 1,500,000 $ 417.00
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
Cross Reference Sheet Items Required by Form N-2
Class Z
PART A.
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Item Number and Item Caption Caption in Prospectus
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1. Outside Front Cover Front Cover Page
2. Inside Front and Outside Back Cover Page Front Cover Page; Outside Back Cover
3. Fee Table and Synopsis Fund Expenses; Prospectus Summary
4. Financial Highlights Not applicable
5. Plan of Distribution Cover Page; Use of Proceeds; How to Buy Shares
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds; Investment Objectives and Policies; How the
Fund Invests; Principal Risks; Other Investment
Practices
8. General Description of the Registrant Prospectus Summary; The Fund; Investment Objectives and
Policies; How the Fund Invests; Principal Risks;
Other Investment Practices; How to Buy Shares; Organization
and Description of Shares
9. Management Management of the Fund; Organization and Description of Shares
10. Capital Stock; Long-Term Debt and Other The Fund; Distributions and Income Taxes; Periodic Repurchase
Securities Offers; Organization and Description of Shares
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of Statement of Additional Information Table of Contents
Additional Information
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STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND PROSPECTUS, JANUARY __, 2000
- -------------------------------------------------------------------------------
CLASS Z SHARES
Advised by: Stein Roe & Farnham Incorporated
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TABLE OF CONTENTS
<S> <C> <C> <C>
Prospectus Summary.........................4 How to Buy Shares.........................29
Fund Expenses..............................7 Multiple Share Classes....................30
The Fund...................................8 Periodic Repurchase Offers................33
Use of Proceeds............................8 Net Asset Value...........................35
Investment Objectives and Policies.........8 Performance Information...................36
How the Fund Invests.......................9 Organization and Description of Shares....37
Principal Risks...........................16 Shareholder Reports.......................40
Other Investment Practices................21 Financial Statements......................40
Distributions and Income Taxes............25 Statement of Additional Information Table
Management of the Fund....................27 of Contents...............................40
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PROSPECTUS JANUARY __, 2000
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
CLASS Z SHARES
Liberty-Stein Roe Advisor Floating Rate Advantage Fund is a non-diversified,
closed-end management investment company that is continuously offered.
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 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 Fund may also invest in Senior Loans that are not secured by any
collateral. The Fund may periodically borrow money and will invest the proceeds
in Senior Loans. The Fund may borrow money as a cash management tool or for the
purpose of creating financial leverage.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Maximum Proceeds to
Public (1) Sales Load Fund (2)
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$ $ $
Per Class Z Share $ None $12.00
$ $
(1) The shares are offered on a best efforts basis at a price equal to
net asset value. The shares are offered continuously. The minimum
initial purchase is $1,000. No arrangements have been made to place
the funds in an escrow, trust, or similar arrangement.
(2) 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 February, May, August and
November, 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 will repay a Repurchase Offer no later than
seven days after the Repurchase Pricing Date. The first Repurchase Offer will be
August 15, 2000. (See "Periodic Repurchase Offers.")
2
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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, RISKS ASSOCIATED WITH LEVERAGE AND
RISKS ASSOCIATED WITH SECURITIES RATED BELOW INVESTMENT GRADE (OFTEN REFERRED TO
AS "JUNK"). (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 __, 2000, has been filed with the Securities and Exchange
Commission ("SEC") and can be obtained without charge by calling 800-426-3750. 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 adviser is Stein Roe & Farnham Incorporated (Stein Roe).
The address of the Fund is One South Wacker Drive, Chicago, IL 60606.
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.")
THE FUND HAS RECEIVED EXEMPTIVE RELIEF FROM THE SEC WITH RESPECT TO THE FUND'S
DISTRIBUTION FEE ARRANGEMENTS, EWCS AND MULTI-CLASS STRUCTURE. AS A CONDITION OF
SUCH RELIEF, THE FUND WILL BE REQUIRED TO COMPLY WITH CERTAIN REGULATIONS THAT
WOULD NOT OTHERWISE BE APPLICABLE TO THE FUND.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY.
The following eligible institutional investors may purchase Class Z shares: (i)
any retirement plan with aggregate assets of at least $5 million at the time of
purchase of Class Z shares and which purchases shares directly from Liberty
Funds Distributor, Inc., the Fund's distributor,
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or through a third-party broker-dealer; (ii) any registered investment adviser
purchasing shares for its clients; (iii) any insurance company, trust company or
bank purchasing shares for its own account; (iv) any endowment, investment
company or foundation; and (v) any trustee of the Fund, any employee of Stein
Roe & Farnham Incorporated, or any of its affiliates, or any member of the
immediate family of any trustee or employee.
4
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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 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 $1,000 ($25 for individual retirement
accounts) and the minimum subsequent investment is $50. 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 is to provide a high
level of current income, consistent with preservation of capital. There
can be no assurance that the Fund will achieve its investment
objective.
The Fund seeks to achieve its 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 Fund'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 Fund 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 Fund
may invest up to 20% of its total assets (including assets maintained
by the Fund 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 Fund'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.
5
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The Fund may borrow money in an amount up to 33 1/3% of the Fund's
total assets (after giving effect to the amount borrowed). The Fund may
borrow for the purpose of financing long-term investments, obtaining
short-term liquidity and for temporary, extraordinary or emergency
purposes. To the extent the Fund borrows more money than it has cash or
short-term cash equivalents and invests the proceeds in Senior Loans,
the Fund will create financial leverage. It will do so only when it
expects to be able to invest the process at a higher rate of return
than its cost of borrowing.
HOW THE FUND 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 or other securities that are rated below
investment grade, or in comparable unrated securities. Senior Loans in
which the Fund will purchase interests generally pay interest at rates
that are periodically redetermined by reference to a base lending rate
plus a premium. The Fund 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 Fund'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.
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.
Below Investment Grade Securities. The Fund 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.
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
6
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of the Fund to dispose of its investments in a timely fashion and at a
fair price may be restricted.
7
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Borrowing. The Fund is authorized to borrow money in an amount up to 33
1/3% of the Fund's total assets (after giving effect to the amount
borrowed). The use of leverage for investment purposes creates
opportunities for greater total returns but at the same time involves
certain risks. Any investment income or gains earned with respect to
the amounts borrowed, which is in excess of the interest which is due
on the borrowing, will augment the Fund's income. Conversely, if the
investment performance with respect to the amounts borrowed fails to
cover the interest on such borrowings, the value of the Fund's shares
may decrease more quickly than would otherwise be the case and
dividends on the shares would be reduced or eliminated.
The rights of any lenders to the Fund to receive payments of interest
on and repayments of principal of such borrowings will be senior to
those of the holders of Shares, and the terms of any borrowings may
contain provisions which limit certain activities of the Fund,
including the payment of dividends to holders of Shares in certain
circumstances. The terms of such borrowings also may, and the terms of
the Investment Company Act of 1940, as amended (1940 Act), do (in
certain circumstances), grant lenders certain voting rights in the
event of default in the payment of interest or the repayment of
principal. Interest payments and fees incurred in connection with such
borrowings will reduce the amount of net income available for payment
to the holders of Shares.
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 five 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.
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.
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Non-Diversification Risk. The Fund 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 Fund 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 Fund 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 ADVISER. 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 February, May,
August, and November. (See "Periodic Repurchase Offers.")
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FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing in
the Fund. Because the Fund does not yet have an operating history, this
information is based on estimated fees, expenses and net assets for the fiscal
year ending November 30, 2000.
SHAREHOLDER TRANSACTION EXPENSES (1)
Sales Load Imposed (as a percentage of offering price)................. None
Sales Load Imposed on Reinvested Dividends............................. None
Early Withdrawal Charge................................................ None
Exchange Fee........................................................... None
ANNUAL EXPENSES (as a percentage of average net assets
excluding leverage) (2)
Management Fees (3).................................................... 0.97%
Distribution and Service Fees ......................................... 0.00%
Other Expenses......................................................... __%
Total Annual Expenses -- Gross......................................... __%
Expense Reimbursement (4)........................................... (__%)
Total Annual Expenses -- Net........................................... __%
(1) Financial advisors may independently charge additional fees for
shareholder transactions or for advisory services. Please see their
materials for details.
(2) Figures assume the Fund borrows in an amount representing 33 1/3% of the
Fund's total assets (including the proceeds of such borrowing). If the
Fund does not utilize any leverage, the Fund estimates that annual
operating expenses would be approximately as follows:
Management Fees 0.65%
Distribution and Service Fees 0.00%
Other Expenses __%
----
Total Annual Expenses -- Gross __%
Expense Reimbursement __%
----
Total Annual Expenses -- Net 0.80%
----
(3) Management fees includes both the management fee and the administrative
fee charged to the Fund. Expressed as a percentage of average total net
assets excluding leverage, Stein Roe receives an annual management fee of
0.45% from the Fund and Colonial Management Associates, Inc. (Colonial)
receives an administrative fee of 0.20% from the Fund. Expressed as a
percentage of average total net assets including leverage, Stein Roe
receives a management fee of 0.68% and Colonial receives an
administration fee of 0.29%.
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(4) Stein Roe has undertaken to reimburse the Fund for its operating expenses
to the extent that such expenses exceed ___%. This commitment expires on
December 31, 2000. Absent such reimbursement, the Management Fees would
be ___% and Total Annual Expenses would be ___%. Any such reimbursement
will lower the overall expense ratio and increase the 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, and (v) expense reductions
are in effect for the first year in the periods below:
Class* 1 year 3 years 5 years 10 years
- ----- ------ ------- ------- --------
Class Z $ $ $ $
---------
*The table assumes leverage representing 33 1/3% of total assets. In the
event that the Fund does not utilize any leverage an investor would pay
the following expenses based on the assumptions in the example:
Class 1 year 3 years 5 years 10 years
- ----- ------ ------- ------- --------
Class Z $ $ $ $
THE FUND
The Fund is a non-diversified, closed-end management investment company
organized as a Massachusetts business trust organized on June 8, 1999. The Fund
is engaged in a continuous public offering of the shares at the next determined
net asset value per share. The Fund's principal office is located at One South
Wacker Drive, Chicago, IL 60606 and its telephone number is 1-800-345-6611.
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. The Fund's actual investment timetable will depend on
the availability of Senior Loans and other
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market conditions. Pending investment by the Fund, the proceeds may be invested
in high quality, short-term securities, and the Fund may not achieve its
objective during this time.
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.
The Fund 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 Fund's net asset value per share will vary,
the Fund'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 Fund 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
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 Fund 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 Fund may invest up to 20% of its total assets (valued at
time of investment) in Senior Loans that are not secured by any collateral.
During normal market conditions, the Fund may invest up to 20% of its total
assets (including assets maintained by the Fund 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 Fund'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, a division
of The McGraw-Hill Companies, Inc. (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.
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HOW THE FUND 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 Fund generally will rely on
the Agent to collect its portion of the payments on a Senior Loan. Furthermore,
the Fund 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 Fund 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 bonds"), preferred stock and common stock issued
by the Borrower, typically in descending order of seniority with respect to
claims on the Borrower's assets. Senior and junior subordinated debt is
collectively referred to in this Prospectus as "junior debt securities." Senior
Loans generally are secured by specific collateral, which may include guarantees
from certain affiliates of the Borrower.
To the extent that the Fund invests a portion of its assets in Senior Loans that
are not secured by specific collateral, the Fund 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 Fund 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 Fund's total assets that
normally will be invested in Senior Loans. The Fund may acquire interests in
warrants, other
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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 Fund's investment portfolio. When the Fund 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 Fund and such Lenders will not consider the
interests of the Fund in connection with their votes.
Senior Loans in which the Fund 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 rate. Consequently, Borrowers
have
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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 Fund 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 Fund may invest up to 100% of its assets in Participations. The selling
Lenders and other persons interpositioned between such Lenders and the Fund with
respect to Participations will likely conduct their principal business
activities in the banking, finance and financial services industries. Although,
as discussed below, the Fund has taken measures that it believes significantly
reduce its exposure to risks associated with Participations, the Fund 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 Fund in a Lender's portion of a Senior Loan typically will
result in the Fund having a contractual relationship only with such Lender, not
with the Borrower. As a result, the Fund 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 Fund 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 Fund may not directly
benefit from the collateral supporting the Senior Loan in which it has purchased
the Participation. As a result, the Fund 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 Fund 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 Fund will only
acquire Participations if the Lender selling the Participation, and any other
institution interpositioned between the Fund 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 Fund. 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 Fund ordinarily will purchase a Participation only if, at the time
of the purchase, the Fund 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 Fund does not so believe, it will only purchase a Participation
if, in addition to the requirements set forth above, the party from whom the
Fund is purchasing such Participation (i) is a bank, a
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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 Fund.
The Fund 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.
When the Fund 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 Fund is a Primary Lender originating a Senior Loan it may
share in a fee paid by the Borrower to the Primary Lenders. The Fund will never
act as the Agent, Originator, or principal negotiator or administrator of a
Senior Loan.
The Fund 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 Fund 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 Fund
should not be included in the estate of such interpositioned institution. If,
however, any such amount were included in such interpositioned institution's
estate, the Fund would incur certain costs and delays in realizing payment or
could suffer a loss of principal or interest. In such event, the Fund could
experience a decrease in net asset value.
PORTFOLIO MATURITY. The Fund is not subject to any restrictions with respect to
the maturity of Senior Loans held in its portfolio. It is currently anticipated
that the Fund'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 Fund's net asset value
as a result of changes in interest rates. The Senior Loans in the Fund's
investment portfolio will at all times have a dollar-weighted average days to
reset until the next interest rate redetermination of 90
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days or less. As a result, as short-term interest rates increase, interest
payable to the Fund from its investments in Senior Loans should increase, and as
short-term interest rates decrease, interest payable to the Fund from its
investments in Senior Loans should decrease. The amount of time required to pass
before the Fund 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 Fund 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 Fund will consider such shortened
period to be the interest rate redetermination period of the Senior Loan;
provided, however, that the Fund 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 Fund's investment portfolio may occur. Accordingly, the actual remaining
maturity of the Fund's investment portfolio invested in Senior Loans may vary
substantially from the average stated maturity of the Senior Loans held in the
Fund's investment portfolio. As a result of anticipated prepayments from time to
time of Senior Loans in the investment portfolio, the Fund estimates that the
actual average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.
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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 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. 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 Fund 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 Fund, 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 Fund 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 Fund at any given time upon sale thereof, the Fund may determine
to hold such securities in its portfolio. Any equity security or junior debt
security held by the Fund 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. Senior Loans historically have not been rated by
nationally recognized statistical rating organizations, such as S&P or Moody's.
Because of the senior capital structure position of Senior Loans and the
collateralized or guaranteed nature of most Senior Loans, the Fund and Stein Roe
believe that ratings of other securities issued by a Borrower do not necessarily
reflect adequately the relative quality of a Borrower's Senior Loans. Therefore,
although Stein Roe may consider such ratings in determining whether to invest in
a particular Senior Loan, Stein Roe is not required to consider ratings and
ratings will not be the determinative factor in Stein Roe's analysis. To the
extent that Senior Loans are rated, the Fund 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 Fund may invest a substantial
portion of its assets in Senior Loans to Borrowers having outstanding debt
securities rated below investment grade by a nationally recognized statistical
rating organization (or unrated but of comparable quality to such securities).
Debt securities rated below investment grade (or unrated but of comparable
quality) commonly are referred to as "junk bonds." The Fund 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
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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.
FEES. The Fund 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 Fund will receive
these fees directly from the Borrower if the Fund is a Primary Lender, or, in
the case of commitment fees and prepayment penalties, if the Fund acquires an
interest in a Senior Loan by way of Assignment. Whether or not the Fund 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 Fund and the
Lender selling such interests. When the Fund 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
Fund based on the portion of the principal amount of the Senior Loan that is
being assigned. A Lender selling a Participation to the Fund may deduct a
portion of the interest and any fees payable to the Fund as an administrative
fee prior to payment thereof to the Fund. The Fund may be required to pay over
or pass along to a purchaser of an interest in a Senior Loan from the Fund a
portion of any fees that the Fund 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
Fund in Senior Loans could have a materially adverse impact on the yield on the
Fund's 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 Fund currently intends to reserve against any such
contingent obligation by segregating a sufficient amount of cash, liquid
securities and liquid Senior Loans. The Fund will not purchase interests in
Senior Loans that would require the Fund to make any such additional loans if
the aggregate of such additional loan commitments would exceed 20% of the Fund's
total assets or would cause the Fund to fail to meet the diversification
requirements set forth under the heading "Investment Restrictions" in the
Statement of Additional Information.
BRIDGE FINANCING. The Fund 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
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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.
BORROWING. The Fund may borrow money in an amount up to 33 1/3% of the Fund's
total assets (after giving effect to the amount borrowed). The Fund may borrow
for the purpose of financing long-term investments, obtaining short-term
liquidity and for temporary, extraordinary or emergency purposes. To the extent
the Fund borrows more money than it has cash or short-term cash equivalents and
invests the proceeds in Senior Loans, the Fund will create financial leverage.
It will do so only when it expects to be able to invest the proceeds at a higher
rate of return than its cost of borrowing.
OTHER SECURITIES. The Fund 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 Fund 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 Fund in exchange
for such interests is substantially outweighed by the potential value of such
instruments. Investment in warrants, equity securities and junior debt
securities entail certain risks in addition to those associated with investments
in Senior Loans. Warrants and equity securities have a subordinate claim on a
Borrower's assets as compared with debt securities, and junior debt securities
have a subordinate claim on such assets as compared with Senior Loans. As such,
the values of warrants and equity securities generally are more dependent on the
financial condition of the Borrower and less dependent on fluctuations in
interest rates than are the values of many debt securities. The values of
warrants, equity securities and junior debt securities may be more volatile than
those of Senior Loans and thus may have an adverse impact on the ability of the
Fund 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 Fund 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 Fund 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
Fund's investment objective and policies and its investment practices and the
associated considerations, see "Other Investment Practices."
FUNDAMENTAL RESTRICTIONS AND POLICIES. 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 Fund may not purchase any
security if, as a result of the purchase, more than 25% of the Fund'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
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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 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 is a closed-end investment company. 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 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. The Fund 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 Fund 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 Fund 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.
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Some Senior Loans in which the Fund 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
Fund, 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 Fund may invest. To the extent that a secondary market may exist for
certain of the Senior Loans in which the Fund invests, such market may be
subject to irregular trading activity, wide bid/ask spreads and extended trade
settlement periods. The Fund 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 Fund's assets
may be invested in Senior Loan interests, the ability of the Fund to dispose of
its investments in a timely fashion and at a fair price may be restricted, and
the Fund and shareholders may suffer capital losses as a result. However, many
of the Senior Loans in which the Fund 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 Fund'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 Loans 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 Fund normally
will rely primarily on the Agent (where the Fund is a Primary Lender or owns an
Assignment) or the selling Lender (where the Fund owns a Participation) to
collect principal of and interest on a Senior Loan. Furthermore, the Fund
usually will rely on the Agent (where the Fund is a Primary Lender or owns an
Assignment) or the selling Lender (where the Fund owns a Participation) to
monitor compliance by the Borrower with the restrictive covenants in the Loan
Agreement and notify the Fund of any adverse change in the Borrower's financial
condition or any declaration of insolvency. Collateralized Senior Loans will
frequently be secured by all assets of the Borrower that qualify as collateral,
which may include common stock of the Borrower or its subsidiaries.
Additionally, the terms of the Loan Agreement may require the Borrower to pledge
additional collateral to secure the Senior Loan, and enable the Agent, upon
proper authorization of the Lenders, to take possession of and liquidate the
collateral and to distribute the liquidation proceeds pro rata among the
Lenders. If the terms of a Senior Loan do not require the Borrower to pledge
additional collateral in the event of a decline in the value of the original
collateral, the Fund 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
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proceeds received by the Lenders pro rata among the holders of such
Participations. Stein Roe will also monitor these aspects of the Fund's
investments and, where the Fund 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 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 performance of the Fund 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 Fund 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.
BORROWING. The Fund is authorized to borrow money in an amount up to 33 1/3% of
the Fund's total assets (after giving effect to the amount borrowed). The Fund
is authorized to borrow money for the purpose of financing long-term
investments, obtaining short-term liquidity in connection with quarterly
repurchase offers and for temporary, extraordinary or emergency purposes. The
use of leverage for investment purposes creates opportunities for greater total
returns but at the same time involves certain risks. Any investment income or
gains earned with respect to the amounts borrowed, which is in excess of the
interest which is due on the borrowing, will augment the Fund's income.
Conversely, if the investment performance with respect to the amounts borrowed
fails to cover the interest on such borrowings, the value of the Fund's shares
may decrease more quickly than would otherwise be the case and dividends on the
shares would be reduced or eliminated.
The rights of any lenders to the Fund to receive payments of interest on and
repayments of principal of such borrowings will be senior to those of the
holders of Shares, and the terms of any borrowings may contain provisions which
limit certain activities of the Fund, including the payment of dividends to
holders of Shares in certain circumstances. The terms of such borrowings also
may, and the terms of the 1940 Act do (in certain circumstances), grant lenders
certain voting rights in the event of default in the payment of interest or the
repayment of principal. Interest payments and fees incurred in connection with
such borrowings will reduce the amount of net income available for payment to
the holders of Shares.
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
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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 Fund 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 Fund 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 Fund 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 Fund
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 are currently being
studied by Congress.
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. In addition, such requirements or
restrictions may reduce or eliminate sources of financing for certain Borrowers.
Further, to the extent that legislation or federal or state regulators require
such institutions to dispose of Senior Loan interests relating to highly
leveraged transactions or subject such Senior Loan interests to increased
regulatory scrutiny, such financial institutions may determine to sell 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 Fund 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 Fund could
consummate such a sale might be adversely affected.
NON-DIVERSIFICATION. The Fund 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
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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 Fund
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 Fund 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 Fund invests a relatively high percentage of its assets in
obligations of a limited number of issuers, the Fund will be more susceptible
than a more widely diversified investment company to the consequences of any
single corporate, economic, political or regulatory occurrence.
OTHER PRACTICES. The Fund 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 Fund 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 loan 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 Fund's policy of normally
investing at least 80% of its assets in Senior Loans.
INTEREST RATE SWAPS AND OTHER HEDGING TRANSACTIONS. The Fund 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 Fund 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 Senior
Loans the Fund 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
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portfolio. In addition, the Fund 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 Fund would employ any hedging and risk management
techniques. The Fund will not engage in any of these 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 Fund. The successful
utilization of hedging and risk management transactions requires skills
different from those needed in the selection of Senior Loans. The Fund will
incur brokerage and other costs in connection with its hedging transactions.
The Fund may enter into interest rate swaps or purchase or sell interest rate
caps or floors. The Fund will not sell interest rate caps or floors that it does
not own. Interest rate swaps involve the exchange by the Fund 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 Fund 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 Fund 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 Fund 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 Fund 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 Fund.
In circumstances in which Stein Roe anticipates that interest rates will
decline, the Fund 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 Fund 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 Fund
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 Fund's
counterparty would pay the Fund 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 Fund 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
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movements in interest rates. Although Stein Roe believes that use of the hedging
and risk management techniques described above will benefit the Fund, if Stein
Roe's judgment about the direction or extent of the movement in interest rates
is incorrect, the Fund's overall performance would be worse than if it had not
entered into any such transaction. For example, if the Fund 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 Fund
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.
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Inasmuch as these hedging transactions are entered into for good-faith risk
management purposes, Stein Roe and the Fund believe such obligations do not
constitute senior securities. The Fund will usually enter into interest rate
swaps on a net basis; i.e., where the two parties make net payments with the
Fund 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 Fund'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 Fund enters into a swap
on other than a net basis, the Fund will maintain the full amount of its
obligations under each such swap. Accordingly, the Fund does not treat swaps as
senior securities. The Fund 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 Fund 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
Fund'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 Fund 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 Fund. In addition, although the terms of interest rate
swaps, caps and floors may provide for termination, there can be no assurance
that the Fund 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 Fund 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 Fund 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 Fund on
such Senior Loans in connection with such purchase transactions prior to the
date the Fund 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 Fund 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 Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund 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 Fund will make commitments to purchase such Senior Loans on
such basis only with the intention of actually acquiring these Senior Loans, but
the Fund may sell such Senior Loans prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund 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
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and not for the purpose of investment leverage. No specific limitation exists as
to the percentage of the Fund's assets that may be used to acquire securities on
a "when-issued" or "delayed-delivery" basis.
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REPURCHASE AGREEMENTS. The Fund 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 Fund 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
Fund to earn a return on available liquid assets at minimal market risk,
although the Fund 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 Fund
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 Bankruptcy Code,
the law regarding the rights of the Fund 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 Fund's
assets that may be used to participate in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with respect to debt obligations that could otherwise be sold by the
Fund. A reverse repurchase agreement is an instrument under which the Fund 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 Fund at an agreed-upon price on an agreed-upon date. The Fund will maintain
cash or liquid securities in an amount sufficient to cover its obligations with
respect to reverse repurchase agreements. The Fund 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 Fund under
a reverse repurchase agreement be segregated pending repurchase or that the
proceeds be segregated on the Fund'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 Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them. Reverse repurchase agreements will be considered
borrowings by the Fund and as such would be subject to the restrictions on
borrowing described in the Statement of Additional Information under "Investment
Restrictions." The Fund will not hold more than 5% of the value of its total
assets in reverse repurchase agreements as of the time the agreement is entered
into.
YEAR 2000 COMPLIANCE. Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by Stein Roe, other service providers and
the issuers in which the Fund invests do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 problem." The Fund's service providers are
taking steps that they believe are reasonably designed to address the Year 2000
problem, including communicating with vendors who furnish services, software and
systems to the Fund, to provide that date-related information and data can be
properly processed after January 1, 2000. Many Fund service providers and
vendors, including the Fund's service
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providers, are in the process of making Year 2000 modifications to their
software and systems and believe that such modifications will be completed on a
timely basis prior to January 1, 2000. In addition, Year 2000 readiness is one
of the factors considered by Stein Roe in its ongoing selection of issuers in
which the Fund invests, to the extent that information is readily available.
However, no assurances can be given that the Fund will not be adversely affected
by these matters.
Although the loan documentation typically contains assurances that Borrowers
will be in compliance with Year 2000 issues, those issues could affect the
ability of Borrowers to meet their payment obligations.
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
"How the Fund Invests.") 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.
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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 taxable disposition of shares in a secondary
market) generally will be treated as long-term capital gain or loss if the
shares have been held as a capital asset for more than one year and as
short-term capital gain or loss if held as a capital asset for one year or less.
Starting in 2001, net long-term capital gains realized upon the disposition of
shares held longer than five years will be subject to a lower maximum capital
gains tax rate than is currently available. If shares are sold at a loss after
being held for six months or less, the loss will be treated as
long-term--instead of short-term--capital loss to the extent of any capital gain
distributions received on those shares. All or a portion of any loss realized on
a sale or exchange of shares of the Fund will be disallowed if the shareholder
acquires other shares within 30 days before or after the disposition. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Different tax consequences may apply to 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;
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- - 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.
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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 INVESTMENT ADVISER. The Board of Trustees of the Fund has
overall management responsibility for the Fund. See "Management" in the
Statement of Additional Information for the names of and other information about
the trustees, and officers.
The investment adviser, Stein Roe & Farnham Incorporated, One South Wacker
Drive, Chicago, IL 60606, is responsible for managing the investment portfolio
and the business affairs of the Fund, subject to the direction of the Board.
Stein Roe is registered as an investment adviser under the Investment Advisers
Act of 1940. Stein Roe is a wholly owned indirect subsidiary of Liberty
Financial Companies, Inc. (Liberty Financial), which is a majority owned
indirect 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 adviser. 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 portfolio management services to the Fund
for a monthly management fee, computed and accrued daily, based on an annual
rate of 0.45% of average net assets of the Fund, including assets representing
leverage. Colonial Management Associates, Inc. provides administrative services
to the Fund for a monthly fee, compiled and accrued daily, based on an annual
rate of 0.20% of average net assets of the Fund, including assets representing
leverage.
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, are primarily responsible for the day-to-day management of the Fund. 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.
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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.
DISTRIBUTOR. Fund shares are offered for sale through Liberty Funds Distributor,
Inc. (Distributor). The Distributor is a wholly owned indirect subsidiary of
Liberty Financial. The business address of the Distributor is One Financial
Center, Boston, MA 02111.
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street, Boston, MA
02101, is the custodian of the Fund and has custody of the securities and cash.
The custodian, among other things, attends to the collection of principal and
income and payment for and collection of proceeds of securities bought and sold.
HOW TO BUY SHARES
Your financial advisor can help you establish an appropriate investment
portfolio, buy shares, and monitor your investments. When the Fund receives your
purchase request in "good form," your shares will be bought at the next
calculated net asset value. In "good form" means that you placed your order with
your brokerage firm or your payment has been received and your application is
complete, including all necessary signatures.
Outlined below are various ways you can purchase shares:
METHOD INSTRUCTIONS
Through your Your financial advisor can help you establish your
financial advisor account and buy Fund shares on your behalf.
- --------------------------------------------------------------------------------
By check For new accounts, send a completed application and
(new account) check made payable to the Fund to the transfer agent,
Liberty Funds Services, Inc., P.O. Box 1722, Boston,
MA 02105-1722.
- --------------------------------------------------------------------------------
By check For existing accounts, fill out and return the
(existing account) additional investment stub included in your quarterly
statement, or send a letter of instruction, including
your Fund name and account number with a check made
payable to the Fund to Liberty Funds Services, Inc.,
P.O. Box 1722, Boston, MA 02105-1722.
- --------------------------------------------------------------------------------
By exchange You or your financial advisor may acquire shares by
exchanging shares you own in one Fund for shares of
the same class of the Fund at no additional cost. To
exchange by telephone, call 1-800-422-3737. There may
be an additional charge when exchanging from a money
market fund.
- --------------------------------------------------------------------------------
By wire You may purchase shares by wiring money from your
bank account to your Fund account. To wire funds to
your Fund account, call 1-800-422-3737 to obtain a
control number and the wiring instructions.
- --------------------------------------------------------------------------------
By electronic funds You may purchase shares by electronically
transfer transferring money from your bank account to your
Fund account by calling 1-800-422-3737. Your money
may take up to two business days to be invested. You
must set up this feature prior to your telephone
request. Be sure to complete the appropriate section
of the application.
- --------------------------------------------------------------------------------
Automatic investment You can make monthly or quarterly investments
plan automatically from your bank account to your Fund
account. You can select a pre-authorized amount to be
sent via electronic funds transfer. Be sure to
complete the appropriate section of the application
for this feature.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
By dividend You may automatically invest dividends distributed by
diversification the Fund into the same class of shares of another
fund at no additional sales charge. To invest your
dividends in another fund, call 1-800-422-3737.
37
<PAGE>
INVESTMENT MINIMUMS
Initial Investment $1,000
Subsequent Investments $ 50
Automatic Investment Plan $ 50
Retirement Plans $ 25
The Fund reserves the right to change the investment minimums. The Fund also
reserves the right to refuse a purchase order for any reason, including if it
believes that doing so would be in the best interest of the Fund and its
shareholders.
MULTIPLE SHARE CLASSES
CHOOSING A SHARE CLASS. The Fund offers one class of shares in this
prospectus--Class Z shares. Class Z shares are available to institutional and
other investors at net asset value without a sales charge or early withdrawal
charge. The Fund also offers Class A, B and C shares through a separate
prospectus.
38
<PAGE>
HOW TO EXCHANGE SHARES. Shareholders of the Fund whose shares are repurchased
during a Repurchase Offer may exchange those shares for shares of the same class
of a fund distributed by Liberty Funds Distributor, Inc. at net asset value.
Fund shareholders will not be able to participate in this exchange privilege at
any time other than in connection with a Repurchase Offer. If your shares are
subject to an EWC, you will not be charged an EWC upon the exchange. However,
when you sell the shares acquired through the exchange, the shares sold may be
subject to a CDSC (a CDSC is the deferred sales charge applicable to the
open-end Liberty Funds) or EWC, depending upon when you originally purchased the
shares you exchanged. For purposes of computing the CDSC or EWC, the length of
time you have owned your shares will be computed from the date of your original
purchase and the applicable CDSC or EWC will be the EWC of the original Fund.
Unless your account is part of a tax-deferred retirement plan, an exchange is a
taxable event. Therefore, you may realize a gain or a loss for tax purposes. The
Fund may terminate your exchange privilege if Stein Roe determines that your
exchange activity is likely to adversely impact its ability to manage the Fund.
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 February, May, August and November, 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
39
<PAGE>
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 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
40
<PAGE>
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.
41
<PAGE>
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 1-800-345-6611 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 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 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 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 Fund has adopted procedures that are reasonably designed to
ensure that the assets are sufficiently liquid so that the Fund can comply with
the Repurchase Offer and the liquidity requirements described in the previous
paragraph. If, at any time, the Fund 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 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 and liabilities by the number of
shares outstanding. The Fund allocates net asset value, income, and expenses to
its feeder funds in proportion to their respective interests in the Fund. 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 value of the Fund will be determined by Stein Roe, following
guidelines established and periodically reviewed by the Board. Interests in
Senior Loans will be valued at fair value, which approximates market value. In
determining fair value, Stein Roe will consider on an ongoing basis, among other
factors, (i) the creditworthiness of the Borrower; (ii) the current interest
rate, period until next interest rate reset, and maturity of such Senior Loan
interests; and (iii) recent prices in the
42
<PAGE>
market for instruments of similar quality, rate, and period until next interest
rate reset and maturity. It is expected that the Fund's net asset value will
fluctuate as a function of interest rate and credit factors. 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. Stein Roe believes that Lenders selling Senior Loan interests or
otherwise involved in a Senior Loan transaction may tend, in valuing Senior Loan
interests for their own account, to be less sensitive to interest rate and
credit quality changes and, accordingly, Stein Roe does not intend to rely
solely on such valuations in valuing the Senior Loan interests for the Fund's
account. In addition, because a secondary trading market in Senior Loans has not
yet fully developed, in valuing Senior Loans, Stein Roe may not rely solely on,
but may consider, to the extent Stein Roe believes such information to be
reliable, prices or quotations provided by banks, dealers or pricing services
with respect to secondary market transactions in Senior Loans. To the extent
that an active secondary market in Senior Loan interests develops to a reliable
degree, Stein Roe may rely to an increasing extent on such market prices and
quotations in valuing the Senior Loan interests in the Fund. Other long-term
debt securities for which market quotations are not readily available are valued
at fair value based on valuations provided by pricing services approved by the
Board, which may employ electronic data processing techniques, including a
matrix system, to determine valuations. In certain circumstances, portfolio
securities will be valued at the last sale price on the exchange that is the
primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The value of
interest rate swaps, caps, and floors will be determined in accordance with a
formula and then confirmed periodically by obtaining a quotation. Short-term
debt securities with remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains or losses. The
Board believes that the amortized cost represents a fair value for such
securities. Short-term debt securities with remaining maturities of more than 60
days for which market quotations are not readily available are valued by use of
a matrix prepared by 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.
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.
43
<PAGE>
On occasion, the Fund may compare its yield to: (a) LIBOR, quoted daily in the
Wall Street Journal; (b) the CD Rate as quoted daily in the Wall Street Journal
as the average of top rates paid by major New York banks on primary new issues
of negotiable CDs, usually on amounts of $1 million or more; (c) the Prime Rate,
quoted daily in The Wall Street Journal as the base rate on corporate loans at
large U.S. money center commercial banks; (d) one or more averages compiled by
Donoghue's Money Fund Report, a widely recognized independent publication that
monitors the performance of money market mutual funds; (e) the average yield
reported by the Bank Rate Monitor National IndexTM for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas; (f) yield data published by
Lipper, Inc.; (g) the yield on an investment in 90-day Treasury bills on a
rolling basis, assuming quarterly compounding; or (h) the yield on an index of
loan funds comprised of all continually offered closed-end bank loan funds, as
categorized by Lipper (the "loan fund index"). In addition, the Fund may compare
the Prime Rate, the Donoghue's averages and the other yield data described above
to each other. Yield comparisons should not be considered indicative of the
Fund's yield or relative performance for any future period.
Advertisements and communications to present or prospective shareholders also
may cite a total return for any period. Total return is calculated by
subtracting the net asset value of a single purchase of shares at a given date
from the net asset value of those shares (assuming reinvestment of
distributions) or a later date. The difference divided by the original net asset
value is the total return. The Fund may include information about the total
return on the Loan Fund Index, and compare that to the total return of the Fund
and other indices.
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 calculations of total return, current
yield and effective yield do not reflect the amount of any shareholder income
tax liability, which would reduce the performance quoted. If the Fund's fees or
expenses are waived or reimbursed, the Fund's performance will be higher.
Finally, the Fund may include information on the history of its net asset value
per share and the net asset value per share of the Loan Fund Index, including
comparisons between them, in advertisements and other material furnished to
present and prospective shareholders. Information about the performance of the
Fund or other investments is not necessarily indicative of future performance
and should not be considered a representative of what an investor's yield or
total return may be in the future.
ORGANIZATION AND DESCRIPTION OF SHARES
The Fund is a Massachusetts business trust organized under an Agreement and
Declaration of Trust (Declaration of Trust) dated June 8, 1999, 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. The Fund offers four classes of shares--Class A,
Class B, Class C, and Class Z.
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.
44
<PAGE>
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 holders of shares of an opportunity to sell their shares at
a premium over prevailing market prices.
The Declaration of Trust requires the favorable vote of the holders of not less
than three-fourths of the outstanding shares then entitled to vote to authorize
certain transactions, unless at least three-fourths of the members of the Board
then in office and at least three-fourths of the non-interested trustees who
have acted in such capacities for at least 12 months (or since commencement of
operation if that period is less than 12 months) authorize such transaction and
then only a vote of the majority of the holders of the outstanding shares then
entitled to vote is required.
The Board has determined that the voting requirements described above, which are
greater than the minimum requirements under Massachusetts law or the 1940 Act,
are in the best interests of shareholders generally. Reference should be made to
the Declaration of Trust on file with the SEC for the full text of these
provisions.
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.
SHAREHOLDER REPORTS
The Fund issues reports to its shareholders semi-annually that include financial
information.
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<PAGE>
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.
46
<PAGE>
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
Page
The Fund .................................................................. 2
Investment Policies ....................................................... 2
Portfolio Investments and Strategies ...................................... 3
Investment Restrictions ................................................... 11
Repurchase Offer Fundamental Policy ....................................... 14
Management ................................................................ 15
Financial Statements ...................................................... 18
Principal Shareholders .................................................... 18
Investment Advisory and Other Services .................................... 19
Distributor ............................................................... 21
Transfer Agent ............................................................ 23
Custodian ................................................................. 23
Independent Accountants ................................................... 24
Portfolio Transactions .................................................... 24
Additional Income Tax Considerations ...................................... 29
Investment Performance .................................................... 29
Appendix--Ratings ......................................................... 30
[LIBERTY FUNDS LOGO] ..................................FR-01/697H-0899 (11/99)
47
<PAGE>
PART B.
<TABLE>
<CAPTION>
Item Number and Item Caption Caption in Statement of Additional Information
<S> <C> <C>
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 of the Fund
19. Control Persons and Principal Holders of Principal Shareholders
Securities
20. Investment Advisory and Other Services Investment Advisory and Other Services;
Distributor; Transfer Agent; Custodian
21. Brokerage Allocation and Other Practices Portfolio Transactions
22. Tax Status Additional Income Tax Considerations
23. Financial Statements Not Applicable
</TABLE>
<PAGE>
Statement of Additional Information Dated ____________ __, 2000
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
Suite 3300, One South Wacker Drive, Chicago, IL 60606
800-322-0593
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 ____________ __, 2000 and any supplements thereto. A
Prospectus may be obtained at no charge by telephoning 800-322-0593.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
The Fund......................................................................2
Investment Policies...........................................................2
Portfolio Investments and Strategies..........................................3
Investment Restrictions......................................................11
Other Investment Policies....................................................11
Repurchase Offer Fundamental Policy..........................................12
Management of the Fund.......................................................13
Principal Shareholders.......................................................17
Investment Advisory and Other Services.......................................18
Distributor..................................................................19
Transfer Agent...............................................................21
Custodian....................................................................21
Independent Accountants......................................................21
Portfolio Transactions.......................................................22
Additional Income Tax Considerations.........................................26
Investment Performance.......................................................27
Appendix--Ratings............................................................28
</TABLE>
<PAGE>
THE FUND
--------
Liberty-Stein Roe Advisor Floating Rate Advantage Fund ("Fund") is a
non-diversified, closed-end management investment company. The Fund is engaged
in a continuous public offering of its shares. The Fund makes 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 offers four classes of
shares--Classes A, B, C, and Z.
Stein Roe & Farnham Incorporated ("Stein Roe") provides investment
advisory services to the Fund Colonial Management Associates, Inc. ("Colonial")
provides administrative, accounting and recordkeeping services to the Fund.
INVESTMENT POLICIES
-------------------
The following information supplements the discussion of the investment
objectives and policies of the Fund described in the Prospectus. In pursuing its
objective, the Fund 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 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.
The investment objective of the Fund is to provide a high level of
current income, consistent with preservation of capital. To achieve this
objective the Fund 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 Fund'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 Fund 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 Fund may invest up to
20% of its total assets (including assets maintained by the Fund 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 Fund's investments in Senior Loans. Such high
- -----------
(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>
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 types of securities the Fund 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 Fund 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 Fund's investment
portfolio will at all times have a dollar-weighted average time until next
interest rate redetermination of 90 days or less. Because of prepayment
provisions, the actual remaining maturity of Senior Loans may vary substantially
from the stated maturity of such loans. Stein Roe estimates actual average
maturity of Senior Loans in the portfolio will be approximately 18-24 months.
Participations and Assignments. The Fund 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 Fund purchases a Participation, the Fund will typically enter
into a contractual relationship with the Lender selling the Participation, but
not with the Borrower. As a result, the Fund will assume the credit risk of both
the Borrower and the Lender selling the Participation, and the Fund may not
directly benefit from the collateral supporting the Senior Loan in which it has
purchased the Participation. The Fund will purchase a Participation only when
the Lender selling the Participation, and any other institution interpositioned
between such Lender and the Fund 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 Fund 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.
3
<PAGE>
The Fund 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 Restructuring. The Fund 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 Fund
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 Fund 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 Fund at any given time upon sale
thereof, the Fund may determine to hold such securities in its portfolio. Any
equity security or junior debt security held by the Fund 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 Fund 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 Fund 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 Fund 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 Fund 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
Fund to minimize fluctuations in its net asset value.
4
<PAGE>
Defensive Investment Policy. If Stein Roe determines that market
conditions temporarily warrant a defensive investment policy, the Fund 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 Fund 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 Fund's
investment objective, no assurance can be given that the utilization of these
investment practices will achieve that result.
Structured Notes. The Fund 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 Fund's policy of normally investing at least 80% of its assets
in Senior Loans.
Borrowing. The Fund 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 Fund, 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 Fund, 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 Fund.
The rights of any lenders to the Fund to receive payments of interest
on and repayments of principal of such borrowings will be senior to those of the
holders of Fund shares, and the terms of any such borrowings may contain
provisions that limit certain activities of the Fund, including the payment of
dividends to holders of Fund 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 Fund's status as a regulated investment company, the
Fund, subject to the ability of the Fund 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 Fund 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.
5
<PAGE>
Derivatives. The Fund 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 Fund 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 Fund 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 Fund's
investment portfolio.
Hedging Transactions. In addition, the Fund 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 Fund would employ any hedging
and risk management techniques. The Fund 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 Fund. The
successful utilization of hedging and risk management transactions requires
skills different from those needed in the selection of portfolio securities. The
Fund will incur brokerage and other costs in connection with its hedging
transactions.
Interest Rate Swaps, Caps and Floors. The Fund may enter into interest
rate swaps or purchase or sell interest rate caps or floors. The Fund will not
sell interest rate caps or floors that it does not own. Interest rate swaps
involve the exchange by the Fund 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 Fund 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 Fund 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 Fund 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
6
<PAGE>
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 Fund 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
Fund.
In circumstances in which Stein Roe anticipates that interest rates
will decline, the Fund 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 Fund 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 Fund
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 Fund's
counterparty would pay the Fund 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 Fund 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 Fund, if Stein Roe's judgment about the
direction or extent of the movement in interest rates is incorrect, the Fund's
overall performance could be worse than if it had not entered into any such
transaction. For example, if the Fund 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 Fund 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 Fund believe such obligations do not
constitute senior securities. The Fund will usually enter into interest rate
swaps on a net basis; i.e., where the two parties make net payments with the
Fund 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 Fund'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 Fund enters into a swap
on other than a net basis, the Fund will maintain the full amount of its
obligations under each such swap. Accordingly, the Fund does not treat swaps as
senior securities. The Fund 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
7
<PAGE>
default occurs by the other party to such transactions, the Fund 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 Fund'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 Fund 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 Fund. In addition, although the terms of
interest rate swaps, caps and floors may provide for termination, there can be
no assurance that the Fund 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 Fund 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.
Borrowing. The Fund is authorized to borrow money in an amount up to 33
1/3% of the Fund's total assets (after giving effect to the amount borrowed).
The Fund is authorized to borrow money for the purpose of financing long-term
investments, obtaining short-term liquidity in connection with quarterly
repurchase offers and for temporary, extraordinary or emergency purposes. The
use of leverage for investment purposes creates opportunities for greater total
returns but at the same time involves certain risks. Any investment income or
gains earned with respect to the amounts borrowed, which is in excess of the
interest which is due on the borrowing, will augment the Fund's income.
Conversely, if the investment performance with respect to the amounts borrowed
fails to cover the interest on such borrowings, the value of the Fund's shares
may decrease more quickly than would otherwise be the case and dividends on the
shares would be reduced or eliminated.
The rights of any lenders to the Fund to receive payments of interest
on and repayments of principal of such borrowings will be senior to those of the
holders of Shares, and the terms of any borrowings may contain provisions which
limit certain activities of the Fund, including the payment of dividends to
holders of Shares in certain circumstances. The terms of such borrowings also
may, and the terms of the 1940 Act do (in certain circumstances), grant lenders
certain voting rights in the event of default in the payment of interest or the
repayment of principal. Interest payments and fees incurred in connection with
such borrowings will reduce the amount of net income available for payment to
the holders of Shares.
Lending of Portfolio Holdings. The Fund 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
8
<PAGE>
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 Fund 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 Fund 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 Fund would not
have the right to vote any financial instruments having voting rights during the
existence of the loan, but the Fund 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 Fund 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 Fund's assets that the Fund may lend.
"When-Issued" and "Delayed-Delivery" Transactions. The Fund 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 Fund on
such Senior Loans in connection with such purchase transactions prior to the
date the Fund 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 Fund 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 Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund 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 Fund will make commitments to purchase
such Senior Loans on such basis only with the intention of actually acquiring
these Senior Loans, but the Fund may sell such Senior Loans prior to the
settlement date if such sale is considered to be advisable. To the extent the
Fund 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 limitations exist as to the percentage of the
Fund's assets that may be used to acquire securities on a "when-issued" or
"delayed-delivery" basis.
9
<PAGE>
Repurchase Agreements. The Fund 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 Fund 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 Fund to earn a
return on available liquid assets at minimal market risk, although the Fund 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 Fund 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 Fund 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 Fund's assets that may be invested in
repurchase agreements.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements with respect to debt obligations that could otherwise be
sold by the Fund. Under a reverse repurchase agreement, the Fund 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 Fund at an agreed upon
price on an agreed upon date. The Fund will maintain cash or liquid securities
in an amount sufficient to cover its obligations with respect to reverse
repurchase agreements. The Fund 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 Fund under a reverse
repurchase agreement be segregated pending repurchase or that the proceeds be
segregated on the Fund'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 Fund's ability to dispose of the underlying securities. An additional risk
is that the market value of securities sold by the Fund under a reverse
repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them. Reverse repurchase agreements are considered
borrowings by the Fund and as such are subject to the restrictions on borrowing
described below under "Investment Restrictions." The Fund 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. For a description of the ratings applied by Moody's
and S&P to short-term securities, please refer to the Appendix. 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 Fund is withdrawn or reduced, the Fund is
not required to sell the security, but Stein Roe will consider such fact in
determining whether the Fund should continue to hold the security.
10
<PAGE>
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 Fund'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 Fund generally does not intend to
trade for short-term profits, the securities held by the Fund 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 Fund will bear directly.
INVESTMENT RESTRICTIONS
-----------------------
The Fund operates under the following investment restrictions. The
Fund may:
(1) issue senior securities or borrow money to the extent permitted by
the 1940 Act;
(2) only own real estate acquired as a result of owning securities;
(3) purchase and sell futures contracts and related options;
(4) underwrite securities issued by others only when disposing of
portfolio securities;
(5) make loans through lending of securities, through the purchase of
debt instruments or similar evidence of indebtedness typically sold
to financial institutions and through repurchase agreements;
(6) not concentrate more than 25% of its total assets in any one
industry, or with respect to 75% of total assets purchase any
security (other than obligations of the U.S. Government and cash
items including receivables) if as a result more than 5% of its
total assets would then be invested in securities of a single
issuer or purchase the voting securities of an issuer if, as a
result of such purchase, the Fund would own more than 10% of the
outstanding voting shares of such issuer (The Fund will treat each
state and each separate political subdivision, agency, authority or
instrumentality of such state, each multi state agency or
authority, and each guarantor, if any, as separate issuers. In the
utilities category, gas, electric, water and telephone companies
will be considered as separate industries.); and
(7) not purchase or sell commodities or commodities contracts, except
that, consistent with its investment policies, the Fund may
purchase and sell financial futures contracts and options and may
enter into swap agreements, foreign exchange contracts and other
financial transactions not requiring the delivery of physical
commodities.
11
<PAGE>
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities. Notwithstanding the investment policies and
restrictions of the Fund, the Fund may invest all or a portion of its investable
assets in investment companies with substantially the same investment objective,
policies and restrictions as the Fund.
OTHER INVESTMENT POLICIES
-------------------------
As non-fundamental investment policies which may be changed by the
Trust without a shareholder vote, the Fund may not:
1. purchase securities on margin, but it may receive short-term
credit to clear securities transactions and may make initial or
maintenance margin deposits in connection with futures
transactions; and
2. invest in interests in oil, gas or other mineral exploration or
development programs, including leases.
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 fourteenth day after the Repurchase Request Deadline or the next
business day if the fourteenth day is not a business day.
The Repurchase Offer Fundamental Policy may be changed only by a
majority vote of the outstanding voting securities. For more information, please
refer to the Prospectus under the caption "Periodic Repurchase Offers."
12
<PAGE>
MANAGEMENT OF THE FUND
----------------------
Trustees and Officers
- ---------------------
<TABLE>
<CAPTION>
Positions and Offices
Name (Age) and Address with Fund Principal Occupation During Past Five Years
- ---------------------- --------------------- -------------------------------------------
<S> <C> <C>
Robert J. Birnbaum (71) Trustee Consultant (formerly Special Counsel,
313 Bedford Road Dechert Price & Rhoads (law firm) from
Ridgewood, NJ 07450 September, 1988 to December, 1993;
President, New York Stock Exchange from
May, 1985 to June, 1988; President,
American Stock Exchange, Inc. from 1977 to
May, 1985).
Tom Bleasdale (69) Trustee Retired (formerly Chairman of the Board and
502 Woodlands Drive Chief Executive Officer, Shore Bank & Trust
Linville, NC 28646 Company from 1992 to 1993); Director of
The Empire Company since June, 1995.
John V. Carberry * (52) Trustee Senior Vice President of Liberty Financial
56 Woodcliff Road Companies, Inc. (formerly Managing
Wellesley Hills, MA Director, Salomon Brothers (investment
02481 banking) from January, 1988 to January,
1998).
Lora S. Collins (63) Trustee Attorney (formerly Attorney, Kramer, Levin,
1175 Hill Road Naftalis & Frankel (law firm) from
Southold, NY 11971 September, 1986 to November, 1996).
James E. Grinnell (69) Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
Richard W. Lowry (63) Trustee Private Investor since August, 1987.
10701 Charleston Drive
Vero Beach, FL 32963
Salvatore Macera (67) Trustee Private Investor (formerly Executive Vice
26 Little Neck Lane President and Director of Itek Corporation
New Seabury, MA 02649 (electronics) from 1975 to 1981).
William E. Mayer* (59) Trustee Partner, Development Capital, LLC (venture
500 Park Avenue, 5th Floor capital) (formerly Dean, College of Business
New York, NY 10022 and Management, University of Maryland
from October, 1992 to November, 1996;
Dean, Simon Graduate School of Business,
University of Rochester from October, 1991
to July, 1992).
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name (Age) and Address with Fund Principal Occupation During Past Five Years
- ---------------------- --------------------- -------------------------------------------
<S> <C> <C>
James L. Moody, Jr. (67) Trustee Retired (formerly Chairman of the Board,
16 Running Tide Road Hannaford Bros. Co. (food retailer) from
Cape Elizabeth, ME 04107 May, 1984 to May, 1997, and Chief
Executive Officer, Hannaford Bros. Co. from
May, 1973 to May, 1992).
John J. Neuhauser (56) Trustee Dean, Boston College School of Management
84 College Road since September, 1977 to September, 1999).
Chestnut Hill, MA 02467-3838
Thomas E. Stitzel (63) Trustee Professor of Finance, College of Business,
2208 Tawny Woods Place Boise State University (higher education);
Boise, ID 83706 Business consultant and author.
Robert L. Sullivan (71) Trustee Retired (formerly Partner, KPMG Peat
45 Sankaty Avenue Marwick LLP, from July, 1966 to June,
Siasconset, MA 02564 1985).
Anne-Lee Verville (53) Trustee Consultant (formerly General Manager,
359 Stickney Hill Road Global Education Industry from 1994 to
Hopkinton, NH 03229 1997, and President, Applications Solutions
Division from 1991 to 1994, IBM
Corporation (global education and global
applications)).
Stephen E. Gibson (45) President President of the Fund and Liberty Funds
since June, 1998, Chairman of the Board
since July, 1998, and Chief Executive Officer
and President since December, 1996, and
Director, since 1996 of the Advisor (formerly
Executive Vice President from July, 1996 to
December, 1996); Director, Chief Executive
Officer and President of Liberty Funds Group
LLC (formerly known as COGRA, LLC)
("LFG") since December, 1998 (formerly
Director, Chief Executive Officer and
President of The Colonial Group, Inc.
("TCG") from December, 1996 to
December, 1998); Assistant Chairman of
Stein Roe & Farnham Incorporated
("SR&F") since August, 1998 (formerly
Managing Director of Marketing of Putnam
Investments, June, 1992 to July, 1996.)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name (Age) and Address with Fund Principal Occupation During Past Five Years
- ---------------------- --------------------- -------------------------------------------
<S> <C> <C>
J. Kevin Connaughton (34) Controller and Chief Controller and Chief Accounting Officer of
Accounting Officer the Fund and the Liberty Funds, except
Liberty Funds Trust IX, since February,
1998; Controller, Liberty Funds Trust IX,
since December, 1998; Vice President of the
Advisor 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).
Timothy J. Jacoby (45) Treasurer and Chief Treasurer and Chief Financial Officer of the
Financial Officer Fund and the Liberty Funds, except Liberty
Funds Trust IX, since October, 1996
(formerly Controller and Chief Accounting
Officer from October, 1997 to February,
1998); Treasurer of Liberty Funds Trust IX
since December, 1998; Senior Vice President
of the Advisor since September, 1996; Vice
President, Chief Financial Officer and
Treasurer since December, 1998 of LFG
(formerly Vice President, Chief Financial
Officer and Treasurer from July, 1997 to
December, 1998 of TCG); Senior Vice
President of SR&F since August, 1998
(formerly Senior Vice President, Fidelity
Accounting and Custody Services from
September, 1993 to September, 1996).
Nancy L. Conlin (45) Secretary Secretary of the Fund and the Liberty Funds,
except Liberty Funds Trust IX, since April,
1998 (formerly Assistant Secretary from July,
1994 to April, 1998); Director, Senior Vice
President, General Counsel, Clerk and
Secretary of the Advisor since April, 1998
(formerly Vice President, Counsel, Assistant
Secretary and Assistant Clerk from July, 1994
to April, 1998); Vice President, General
Counsel and Secretary of LFG since
December, 1998 (formerly Vice President,
Counsel, General Counsel and Clerk of TCG
from April, 1998 to December, 1998;
(formerly Assistant Clerk from July, 1994 to
April, 1998).
</TABLE>
15
<PAGE>
- ------------------
*Denotes those Trustees who are "interested persons" (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of the Fund or
Stein Roe. Mr. Carberry is an "interested person" as defined in the 1940 Act
because of his affiliation with Liberty Financial Companies, Inc., an indirect
parent company of the Advisor, and also because he has a direct or indirect
beneficial interest in one of the Underwriters. Mr. Mayer is an "interested
person" as defined in the 1940 Act because he is a director of Hambrecht & Quist
Incorporated, a registered broker-dealer.
The Trustees of the Fund are also directors or trustees, as the case may be, of
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 VIII (formerly known as LFC Utilities Trust),
Liberty Variable Investment Trust ("LVIT"), Colonial Municipal Income Trust,
Colonial High Income Municipal Trust, Colonial Investment Grade Municipal Trust,
Colonial California Insured Municipal Fund, Colonial Massachusetts Insured
Municipal Fund, Colonial New York Insured Municipal Fund, Colonial Intermediate
High Income Fund, and Colonial Intermarket Income Trust I (collectively, each
trust or any series thereof termed the "Liberty Funds").
The Trustees serve as trustees of all Liberty Funds for which each Trustee
(except Mr. Carberry) receives an annual retainer of $45,000 and attendance fees
of $8,000 for each regular joint meeting and $1,000 for each special joint
meeting. Committee chairs and the lead Trustee receive an annual retainer of
$1,000 and Committee chairs receive $1,000 for each special meeting attended on
a day other than a regular joint meeting day. Committee members receive an
annual retainer of $1,000 and $1,000 for each special meeting attended on a day
other than a regular joint meeting day. Two-thirds of the Trustee fees are
allocated among the Liberty Funds based on each Liberty Fund's relative net
assets, and one-third of the fees are divided equally among the Liberty Funds.
Trustees and Trustees' Fees
It is estimated that the Trustees will receive the amounts set forth below for
the fiscal year ending August 31, 2000. For the calendar year ended December 31,
1998, the Trustees received the compensation set forth below for serving as
trustees of the Liberty Funds. (a)
<TABLE>
<CAPTION>
Estimated Compensation Total Compensation From The Fund Complex
From The Fund For The Fiscal Paid To The Trustees For The Calendar Year
Trustee Year Ended August 31, 2000 Ended December 31, 1998(b)
------- ---------------------------- ------------------------------------------
<S> <C> <C>
Robert J. Birnbaum(c)
Tom Bleasdale(c)
John V. Carberry (f)(g)
Lora S. Collins(c)
James E. Grinnell(c)
Richard W. Lowry(c)
Salvatore Macera (h)
William E. Mayer(c)
James L. Moody, Jr.(c)
John J. Neuhauser(c)
Thomas E. Stitzel (h)
Robert L. Sullivan(c)
Anne-Lee Verville (c)(f)
</TABLE>
(a) Neither the Fund nor the Fund Complex currently provides pension or
retirement plan benefits to the Trustees.
(b) At December 31, 1998, the complex consisted of 56 open-end and 5 closed-end
management investment portfolios in the Liberty Funds (together, the
"Fund Complex").
(c) Elected by the shareholders of LVIT on October 30, 1998.
(d) Is expected to include $431 payable in later years as deferred compensation.
16
<PAGE>
(e) Includes $52,000 payable in later years as deferred compensation.
(f) Elected by the Trustees of the closed-end Liberty Funds on June 18, 1998,
and by the shareholders of the open-end Liberty Funds on October 30, 1998.
(g) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial Companies, Inc. ("Liberty Financial").
(h) Elected by the shareholders of the open-end Liberty Funds on October 30,
1998, and by the trustees of the closed-end Liberty Funds on December 17,
1998.
(i) Total estimated compensation of $___ for the fiscal year ended August 31,
2000, is expected to be payable in later years as deferred compensation.
(j) Total compensation of $_______ for the calendar year ended December 31,
1999, will be payable in later years as deferred compensation.
(k) Total estimated compensation of $803 for the fiscal year ended November 30,
1999, is expected to be payable in later years as deferred compensation.
(l) Total compensation of $23,445 for the calendar year ended December 31, 1998,
will be payable in later years as deferred compensation.
For the fiscal year ended December 31, 1998, certain of the Trustees received
the following compensation in their capacities as trustees or directors of
Liberty All-Star Equity Fund, Liberty All-Star Growth Fund, Inc. and Liberty
Funds Trust IX (formerly known as LAMCO Trust I) (together, the "Liberty
All-Star Funds") (m).
<TABLE>
<CAPTION>
Total Compensation From
Liberty All-Star Funds For The Calendar
Year Ended December 31, 19998(n)
---------------------------------------
<S> <C>
Robert J. Birnbaum
John V. Carberry(o)
James E. Grinnell
Richard W. Lowry
William E. Mayer(p)
John J. Neuhauser(q)
</TABLE>
(m) The Liberty All-Star Funds do not currently provide pension or retirement
plan benefits to the trustees/directors.
(n) The Liberty All-Star Funds are advised by Liberty Asset Management Company
("LAMCO"). LAMCO is an indirect wholly owned subsidiary of Liberty Financial
(an intermediate parent of the Advisor).
(o) Elected by the trustees/directors of the Liberty All-Star Funds on June 30,
1998. Does not receive compensation because he is an affiliated trustee and
employee of Liberty Financial.
(p) Elected by the shareholders of the Liberty All-Star Equity Fund on April 22,
1998, and by the directors of the Liberty All-Star Growth Fund, Inc. on
December 17, 1998.
(q) Elected by the shareholders of the Liberty All-Star Funds on April 22, 1998.
PRINCIPAL SHAREHOLDERS
----------------------
Until the Fund completes the public offering of the shares, Stein Roe
will be deemed to control the Fund under the 1940 Act.
17
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
- --------------------------------------
Stein Roe provides portfolio management services to the Fund. Stein Roe
is a wholly owned subsidiary of SteinRoe Services Inc., which is a wholly owned
subsidiary of Liberty Financial Companies, Inc. ("Liberty Financial"), which is
a majority owned subsidiary of Liberty Corporate Holdings, Inc., which is a
wholly owned subsidiary of LFC Holdings, Inc., which is a wholly owned
subsidiary of Liberty Mutual Equity Corporation, which is a wholly owned
subsidiary of Liberty Mutual Insurance Company. Liberty Mutual Insurance Company
is a mutual insurance company, principally in the property/casualty insurance
field, organized under the laws of Massachusetts in 1912.
The directors of Stein Roe are Kenneth R. Leibler and C. Allen Merritt,
Jr. Mr. Leibler is President and Chief Executive Officer of Liberty Financial;
and Mr. Merritt is Chief Operating Officer of Liberty Financial. The business
address of Messrs. Leibler and Merritt is Federal Reserve Plaza, 600 Atlantic
Avenue, Boston, MA 02210.
Stein Roe and its predecessor have been providing investment advisory
services since 1932. Stein Roe acts as investment adviser to wealthy
individuals, trustees, pension and profit sharing plans, charitable
organizations, and other institutional investors. As of______ __, 1999, Stein
Roe managed over $___ billion in assets: over $___ billion in equities and over
$___ billion in fixed income securities (including $__ billion in municipal
securities). The $___ billion in managed assets included over $___ billion held
by mutual funds managed by Stein Roe (approximately 15% of the mutual fund
assets were held by clients of Stein Roe). These mutual funds were owned by over
_______ shareholders. The $___ billion in mutual fund assets included over $___
million in over ______ IRA accounts. In managing those assets, Stein Roe
utilizes a proprietary computer-based information system that maintains and
regularly updates information for approximately _____ companies. Stein Roe also
monitors over _____ issues via a proprietary credit analysis system. At______
__, 1999, Stein Roe employed ___ research analysts and ___ account managers. The
average investment-related experience of these individuals was ___ years.
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.
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
18
<PAGE>
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 Fund or any shareholder of the Fund
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.
Administrative Services
- -----------------------
Pursuant to a separate agreement with the Fund, Colonial provides
administrative and accounting services to the Fund. For these services, Colonial
receives an annual fee of 0.20% of average net assets.
Bookkeeping and Accounting
- --------------------------
Pursuant to a separate agreement with the Fund, Colonial receives a fee
for performing certain bookkeeping and accounting services. For these services,
Colonial receives an annual fee of $25,000 plus .0025 of 1% of average net
assets over $50 million.
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, 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.
19
<PAGE>
Distribution and Service Fees
- -----------------------------
In addition to an early withdrawal charge, each of Class A, B, and C of
shares is authorized under a distribution plan (Plan) to use the assets
attributable to a class to finance certain activities relating to the
distribution of shares to investors. These include marketing and other
activities to support the distribution of the Class A, B, and C shares and the
services provided to you by your financial advisor. The Plan was approved and
reviewed in a manner consistent with Rule 12b-1 under the 1940 Act, which
regulates the manner in which an open-end investment company may directly or
indirectly bear the expenses of distributing its shares. Although the Fund is
not an open-end investment company, it has undertaken to comply with the terms
of Rule 12b-1 as a condition of a pending exemptive order under the 1940 Act to
permit it to have a multi-class structure, early withdrawal charges, and
distribution fees.
Under the Plan, distribution and service fees paid by the Fund to the
Distributor may equal up to an annual rate of 0.35% of average daily net assets
attributable to Class A shares, 0.70% of average daily net assets attributable
to Class B shares, and 0.85% of average daily net assets attributable to Class C
shares, respectively. Since the distribution and service fees are payable
regardless of the Distributor's expenses, the Distributor may realize a profit
from the fees. The Plan authorizes any other payments by the Fund to the
Distributor and its affiliates to the extent that such payments might be
construed to be indirect financing of the distribution of Fund shares.
The trustees believe that the Plan could be a significant factor in the
growth and retention of Fund assets resulting in a more advantageous expense
ratio and increased investment flexibility which could benefit each class of
Fund shareholders. The Plan will continue in effect from year to year so long as
continuance is specifically approved at least annually by a vote of the
trustees, including the trustees who are not interested persons of the Fund and
who have no direct or indirect financial interest in the operation of the Plan
or in any agreements related to the Plan (Independent Trustees), cast in person
at a meeting called for the purpose of voting on the Plan. The Plan may not be
amended to increase the fee materially without approval by a vote of a majority
of the outstanding voting securities of the relevant class of shares and all
material amendments of the Plan must be approved by the trustees in the manner
provided in the foregoing sentence. The Plan may be terminated at any time by a
vote of a majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the relevant class of shares. The continuance
of the Plan will only be effective if the selection and nomination of the
Independent Trustees is effected by such Independent Trustees.
Early Withdrawal Charges (EWCs). Certain investments in Class A, B and
C shares are subject to an EWC. You will pay the EWC only on shares you submit
for repurchase within a certain amount of time after purchase. The EWC generally
declines each year until there is no charge for repurchased shares. The EWC is
applied to the net asset value at the time of purchase or repurchase, whichever
is lower. For purposes of calculating the EWC, the start of the holding period
is the first day of the month following each purchase. shares you purchase with
reinvested dividends or capital gains are not subject to an EWC. When
20
<PAGE>
shares are repurchased, the Fund will automatically repurchase those shares not
subject to an EWC and then those you have held the longest. This policy helps
reduce and possibly eliminate the potential impact of the EWC. In certain
circumstances, EWCs may be waived, as described in the Statement of Additional
Information.
Conversion Feature. Class B shares will automatically convert to Class
A shares after eight years and after that date, Class B shares will no longer be
subject to the distribution fees applicable to Class B shares. Conversion will
be on the basis of the relative net asset values per share, without the
imposition of any sales charge, fee or other charge. The purpose of the
conversion feature is to relieve the holders of Class B shares from asset-based
distribution expenses applicable to such shares at such time as the Class B
shares have been outstanding for a duration sufficient for the Distributor to
have been substantially compensated for distribution-related expenses incurred
in connection with those shares. Class C shares do not convert to Class A
shares. Therefore, holders of Class C shares will continue to bear the
asset-based distribution fees on the Class C shares for as long as they hold
such shares.
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 0.140 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 Services.") Under a separate
agreement, SSI also provides certain investor accounting services to the Fund.
CUSTODIAN
---------
State Street Bank and Trust Company (the "Bank"), 225 Franklin Street,
Boston, MA 02101, is the custodian for the Fund. 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.
INDEPENDENT ACCOUNTANTS
-----------------------
The independent accountants for the Fund are PricewaterhouseCoopers
LLP, 160 Federal Street, Boston, MA 02110. The accountants audit and report on
the annual financial statements, review certain regulatory reports and the
federal income tax returns, and perform other professional accounting, auditing,
tax and advisory services when engaged to do so.
21
<PAGE>
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 Fund 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 Fund. Transactions which vary from the
guidelines are subject to periodic supervisory review. These guidelines are
reviewed and periodically adjusted, and the general level of brokerage
commissions paid is periodically reviewed by Stein Roe. Evaluations of the
reasonableness of brokerage commissions, based on the factors described in the
preceding paragraph, are made by Stein Roe's trading personnel while effecting
portfolio transactions. The general level of brokerage commissions paid is
reviewed by Stein Roe, and reports are made annually to the Board of Trustees.
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.
22
<PAGE>
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 Fund 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 Fund pays ATI a commission for these transactions. The Fund and
the Fund 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.
Consistent with the Rules of Fair Practice of National Securities
Dealers, Inc. and subject to seeking best executing 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
23
<PAGE>
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 brokers-dealer.
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.
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.
24
<PAGE>
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:
o 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).
o 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.
o Economic Data/Forecasting Tools--various macro economic forecasting tools,
such as economic data and economic and political forecasts for various
countries or regions.
o Quantitative/Technical Analysis--software tools that assist in quantitative
and technical analysis of investment data.
o Fundamental Industry Analysis--industry-specific fundamental investment
research.
o 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.
o 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. 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
25
<PAGE>
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 Statement of Additional Information, 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, 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 intends to comply with the special provisions of the Internal
Revenue Code that relieve the Fund 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
26
<PAGE>
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.
6
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1) -1].
<TABLE>
<S> <C>
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 were entitled to receive dividends.
d = the ending net asset value of the Fund for the period.
</TABLE>
The Fund may quote total return figures from time to time. A "Total
Return" on a per share basis is the amount of dividends received per share plus
or minus the change in the net asset value per share for a period. A "Total
Return Percentage" may be calculated by dividing the value of a share at the end
of a period (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.
n
Average Annual Total Return is computed as follows: ERV = P(1+T)
<TABLE>
<S> <C>
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).
</TABLE>
27
<PAGE>
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,
1999 were:
<TABLE>
<CAPTION>
Total Total Return Average Annual
Return Percentage Total Return
------ ------------ --------------
<S> <C> <C> <C>
Life of Fund* $1,054 5.43% 5.43%
</TABLE>
- --------------
*Since commencement of operations on Dec. 17, 1998.
The Fund may provide information about the Advisor 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, the Adviser believes that
the quality of debt securities should be continuously reviewed and that
individual analysts give different weightings to the various factors involved in
credit analysis. A rating is not a recommendation to purchase, sell or hold a
security because it does not take into account market value or suitability for a
particular investor. When a security has received a rating from more than one
service, each rating should be evaluated independently. Ratings are based on
current information furnished by the issuer or obtained by the rating services
from other sources that they consider reliable. Ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability of such
information, or for other reasons. The following is a description of the
characteristics of ratings used by Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's Corporation ("S&P").
Corporate Bond Ratings
Ratings By Moody's. Aaa. Bonds rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or an
exceptionally stable margin and principal is secure. Although the various
protective elements are likely to change, such changes as can be visualized are
more unlikely to impair the fundamentally strong position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa bonds or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa bonds.
28
<PAGE>
A. Bonds rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Ratings by S&P. AAA. Debt rated AAA has the highest rating. Capacity to
pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
29
<PAGE>
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:
<TABLE>
<S> <C>
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
</TABLE>
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.
30
<PAGE>
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.
[LIBERTY LOGO]
L I B E R T Y
- -------------
F U N D S
ALL STAR COLONIAL o CRABBE HUSON o NEWPORT o STEIN ROE ADVISOR
Liberty Funds Distributor, Inc. (C) 1999
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
www.libertyfunds.com FR-16/113I-1199 (11/99)
<PAGE>
PART C.
Other Information.
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A:
None
Included in Part B:
Report of Independent Accountants(1)
Statement of Assets and Liabilities(1)
(2) Exhibits
(a) Agreement and Declaration of Trust(2)
(b) By-Laws(2)
(c) Not Applicable
(d)(1) To be filed under amendment
(d)(2) Form of specimen of share certificate(1)
(e) Dividend Reinvestment Plan(1)
(f) Not Applicable
(g) Management Agreement between Liberty-Stein Roe
Advisor Floating Rate Advantage Fund
and Stein Roe & Farnham Incorporated(1)
(h) Form of Underwriting Agreement(1)
(i) Not Applicable
(j) To be filed under amendment
(k)(1) Form of Transfer Agency Agreement(1)
(k)(2) Administration Agreement between Registrant and
Colonial Management Associates, Inc.(1)
(l) Opinion and Consent of Counsel(1)
(m) Not Applicable
(n) Consent of Independent Accountants(1)
(o) Not Applicable
(p) Form of Subscription Agreement(1)
(q) Not Applicable
(r) Not Applicable
- --------------------------------
(1) To be filed by amendment.
(2) Incorporated by reference to the Registration Statement
filed with the Commission via EDGAR on or about November
24, 1999.
<PAGE>
Item 25. Marketing Arrangements
See sections _____ of Exhibit (h) of Item 24(2) of this
Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be incurred in
connection with the Offer described in this Registration
Statement:
<TABLE>
<CAPTION>
<S> <C>
Registration Fees(2) $_______
National Association of Securities Dealers, Inc. Fees(2) $_______
State Taxes and Fees(2) $_______
Printing Fees(2) $_______
Accounting Fees and Expenses(2) $_______
Rating Agency Fees(2) $_______
Legal Fees and Expenses(2) $_______
Miscellaneous(2) $_______
Total(2) $_______
</TABLE>
(2) To be filed by amendment.
Item 27. Persons Controlled by or under Common Control with Registrant
None
Item 28. Number of Holders of Securities
Title of Class Number of Record Holders
Liberty-Stein Roe Advisor Floating Rate
Advantage Fund - Class A 0
Liberty-Stein Roe Advisor Floating Rate
Advantage Fund - Class B 0
Liberty-Stein Roe Advisor Floating Rate
Advantage Fund - Class C 0
Liberty-Stein Roe Advisor Floating Rate
Advantage Fund - Class Z 0
Item 29. Indemnification
The Agreement and Declaration of Trust filed as Exhibit (a) to
this Registration Statement provides for indemnification to
each of the Registrant's Trustees and officers against all
liabilities and expenses incurred in acting as Trustee or
officer, except in the case of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved
in the conduct of such Trustees and officers.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, 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 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 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 Act and will be governed by the final adjudication of such
issue.
The Registrant, its advisor, Stein Roe & Farnham Incorporated,
and its Administrator, Colonial Management Associates, Inc.
(Colonial) and their respective trustees, directors and
officers are insured by a Directors and Officers/Errors and
Omissions Liability insurance policy through ICI Mutual
Insurance Company.
Item 30. Business and Other Connections of Investment Advisor
Stein Roe & Farnham Incorporated ("Stein Roe"), the investment
adviser, is a wholly owned subsidiary of SteinRoe Services Inc.
("SSI"), which in turn is a wholly owned subsidiary of Liberty
Financial Companies, Inc., which is a majority owned subsidiary
of 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 SSI, 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 Financial Center, Boston, MA 02111, except for SteinRoe
Services Inc. which is located at One South Wacker Drive,
Chicago, IL 60606, 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.
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
STEINROE SERVICES INC.
Kevin M. Carome Assistant Clerk
Kenneth J. Kozanda Vice President; Treasurer
Kenneth R. Leibler Director
Karl J. Maurer Comptroller
C. Allen Merritt, Jr. Director; 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 President
Loren A. Hansen Senior Vice President
Clare M. Hounsell Vice President
Timothy J. Jacoby Senior Vice President
Deborah A. Jansen Senior Vice President
North T. Jersild Vice President
Yvonne T. Shields Vice President
SR&F BASE TRUST
William D. Andrews Executive Vice-President
David P. Brady Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP; Asst. Secy. VP
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
Stephen F. Lockman Vice-President
Jane M. Naeseth Vice-President
Maureen G. Newman Vice-President
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
Kevin M. Carome Executive VP; Asst. Secy. VP
Stephen E. Gibson President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Lynn C. Maddox Vice-President
Jane M. Naeseth Vice-President
LIBERTY-STEIN ROE FUNDS INVESTMENT TRUST
William D. Andrews Executive Vice-President
David P. Brady Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP; Asst. Secy. VP
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
Lynn C. Maddox Vice-President
Arthur J. McQueen Vice-President
LIBERTY-STEIN ROE ADVISOR TRUST
William D. Andrews Executive Vice-President
David P. Brady Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP; Asst. Secy. VP
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
Stephen F. Lockman Vice-President
Lynn C. Maddox Vice-President
Arthur J. McQueen Vice-President
Maureen G. Newman Vice-President
LIBERTY-STEIN ROE FUNDS MUNICIPAL TRUST
William D. Andrews Executive Vice-President
Kevin M. Carome Executive VP; Asst. Secy. VP
Joanne T. Costopoulos Vice-President
Stephen E. Gibson President
Loren A. Hansen Executive Vice-President
Brian M. Hartford Vice-President
William C. Loring Vice-President
Lynn C. Maddox Vice-President
Maureen G. Newman Vice-President
Veronica M. Wallace Vice-President
STEINROE VARIABLE INVESTMENT TRUST
William D. Andrews Executive Vice-President
Kevin M. Carome Executive VP; Asst. Secy. VP
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
Jane M. Naeseth Vice President
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; Asst. Secy. VP
Stephen E. Gibson President
Brian W. Good Vice-President
James R. Fellows Vice-President
Loren A. Hansen Executive Vice-President
LIBERTY VARIABLE INVESTMENT TRUST
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
Kevin M. Carome Vice President
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
Financial Center, Boston, MA 02111. 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 this Registration Statement, the net asset
value declines more than 10 percent from its net asset value as
of the effective date of this 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;
(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; and
(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)(a) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form
of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant under Rule 497(h) under the Securities
Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of the securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) The Registrant undertakes 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Amendment to its Registration Statement on Form N-2 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Boston and the Commonwealth of Massachusetts on the 30th day of December,
1999.
LIBERTY-STEIN ROE ADVISOR
FLOATING RATE ADVANTAGE FUND
By:/s/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 their capacities and
on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/STEPHEN E. GIBSON President (chief December 30, 1999
- -------------------- executive officer)
Stephen E. Gibson
/s/TIMOTHY J. JACOBY Treasurer and Chief December 30, 1999
- -------------------- Financial Officer
Timothy J. Jacoby (principal accounting
officer)
/s/J. KEVIN CONNAUGHTON Controller and Chief December 30, 1999
- --------------------- Accounting Officer
J. Kevin Connaughton (principal accounting
officer)
</TABLE>
<PAGE>
ROBERT J. BIRNBAUM* Trustee
Robert J. Birnbaum
TOM BLEASDALE* Trustee
Tom Bleasdale
JOHN V. CARBERRY* Trustee
John V. Carberry
LORA S. COLLINS* Trustee
Lora S. Collins
JAMES E. GRINNELL* Trustee
James E. Grinnell
RICHARD W. LOWRY* Trustee */s/ WILLIAM J. BALLOU
Richard W. Lowry William J. Ballou
Attorney-in-fact
For each Trustee
SALVATORE MACERA* Trustee December 30, 1999
Salvatore Macera
WILLIAM E. MAYER* Trustee
William E. Mayer
JAMES L. MOODY, JR. * Trustee
James L. Moody, Jr.
JOHN J. NEUHAUSER* Trustee
John J. Neuhauser
THOMAS E. STITZEL* Trustee
Thomas E. Stitzel
ROBERT L. SULLIVAN* Trustee
Robert L. Sullivan
ANNE-LEE VERVILLE* Trustee
Anne-Lee Verville
