AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 2000
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. _____2______ [X]
Post-Effective Amendment No. ___________ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. ____2_____ [X]
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. [X]
It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c)
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
PROPOSED TITLE OF PROPOSED AMOUNT OF MAXIMUM AGGREGATE
SECURITIES BEING SHARES BEING MAXIMUM OFFERING OFFERING PRICE(1) AMOUNT OF
REGISTERED REGISTERED(1) PRICE PER UNIT(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
</TABLE>
(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.
<PAGE>
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
Cross Reference Sheet Items Required by Form N-2
Class A, B and C shares
PART A.
<TABLE>
<CAPTION>
Item Number and Item Caption Caption in Prospectus
<S> <C> <C>
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
</TABLE>
<PAGE>
STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND PROSPECTUS, JANUARY __, 2000
CLASS A, B AND C SHARES
Advised by: Stein Roe & Farnham Incorporated
TABLE OF CONTENTS
Prospectus Summary ........................................................ 4
Fund Expenses ............................................................. 7
The Fund .................................................................. 8
Use of Proceeds ........................................................... 8
Investment Objectives and Policies ........................................ 8
How the Fund Invests ...................................................... 9
Principal Risks ........................................................... 16
Other Investment Practices ................................................ 21
Distributions and Income Taxes ............................................ 25
Management of the Fund .................................................... 27
How to Buy Shares ......................................................... 29
Multiple Share Classes .................................................... 30
Periodic Repurchase Offers ................................................ 33
Net Asset Value ........................................................... 35
Performance Information ................................................... 36
Organization and Description of Shares .................................... 37
Shareholder Reports ....................................................... 40
Financial Statements ...................................................... 40
Statement of Additional Information Table of Contents ..................... 40
<PAGE>
PROSPECTUS JANUARY __, 2000
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
CLASS A, B AND C 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 (at least 80% of its total assets)
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. All or substantially all of the
Fund's Senior Loans may be rated below investment grade. The Fund may
periodically borrow money for the purpose of financing long-term investments,
obtaining short-term liquidity and for temporary, emergency or extraordinary
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.
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.
<TABLE>
<CAPTION>
Price to Maximum Sales Proceeds to
Public (1) Load(2) Fund (3)
---------- ------------- -----------
<S> <C> <C> <C>
Per Class A Share $ 12.00 $0.42 $ 11.58
Per Class B Share $ 12.00 None $ 12.00
Per Class C Share $ 12.00 None $ 12.00
</TABLE>
(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 $2,500. No arrangements have been made to place the funds
in an escrow, trust, or similar arrangement.
(2) The maximum initial sales load on Class A shares is 3.5% of the public
offering price. Class B and C shares are not subject to an initial
sales load but are subject to an early withdrawal charge. Class A, B
and C shares are subject to a distribution fee and a service fee.
(3) Assumes the sale of all shares registered hereby and the exclusion of
approximately $243,693 of organizational and initial operating
expenses. All organizational expenses will be paid by Colonial
Management Associates, Inc., the Fund's Administrator.
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
2
<PAGE>
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 for
Classes A, B, and C will be May 15, 2000. (See "Periodic Repurchase Offers.")
Not Exchange Listed. The Fund does not intend to list the shares on any national
securities exchange. SHARES OF THE FUND HAVE NO HISTORY OF PUBLIC TRADING AND
THERE IS NOT EXPECTED TO BE ANY SECONDARY TRADING MARKET IN THE SHARES. An
investment in the shares should be considered illiquid. (See "Principal Risks.")
INVESTMENT IN THE FUND INVOLVES 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 BONDS"). (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 800-345-6611. 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 Financial Center, Boston, Massachusetts 02111.
This prospectus applies to the offering of shares of beneficial interest of the
Fund, which may be continuously issued and sold from time to time by the Fund
through Liberty Funds Distributor, Inc., as distributor and principal
underwriter, and through your financial advisor. (See "How to Buy Shares.") The
Fund is authorized as a business trust to issue an unlimited number of common
shares and has registered 12,498,000 common shares.
The Fund's Class A shares are subject to a front-end sales charge and to a
distribution fee and other expenses. The Fund's Class B shares will not be
subject to a front-end sales charge, but will be subject to a declining early
withdrawal charge (EWC) over a five-year period and a distribution fee, as well
as other expenses. Class B shares will convert automatically to Class A shares
eight years from the date of purchase. The Fund's Class C shares will not be
subject to a front-end sales charge, but will be subject to an EWC of 1% during
the first year a shareholder owns Class C shares and a distribution fee, as well
as other expenses. The Fund may add additional classes of shares in the future.
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 REGULATIONS THAT WOULD NOT
OTHERWISE BE APPLICABLE TO THE FUND.
3
<PAGE>
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.
4
<PAGE>
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in this prospectus and in the Statement of Additional Information.
THE FUND. The Fund is a continuously-offered non-diversified, closed-end
management investment company, organized as a Massachusetts business
trust.
The Fund 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 $2,500 ($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.
CLASSES OF SHARES. The Fund offers three classes of shares in this prospectus,
with each class having its own sales charge and expense structure. Each
class has distinct advantages and disadvantages for different investors.
(See "Multiple Share Classes.")
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 (at least
80% of its total assets) 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 engaged in the
financial services industry, which includes commercial banks, thrift
institutions, insurance companies and finance companies. The Fund may
invest at these levels because it regards the issuers of Senior Loans in
which the Fund may invest to include the Borrower as well as any Agent
that administers the
5
<PAGE>
Senior Loans. Accordingly, the Fund may be more at risk to any single
economic, political or regulatory occurrence affecting such industries.
6
<PAGE>
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.
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
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
7
<PAGE>
of the Fund to dispose of its investments in a timely fashion and at a
fair price may be restricted.
8
<PAGE>
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
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. 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 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.
9
<PAGE>
Financial Services Industry Concentration. The financial services
industries are subject to extensive government regulation which can limit
both the amounts and types of loans and other financial commitments they
can make, and the interest rates and fees they can charge. Profitability
is largely dependent on the availability and cost of capital funds, and
can fluctuate significantly when interest rates change. Credit losses
resulting from financial difficulties of borrowers can negatively affect
the financial services industries. The financial services industries are
currently undergoing relatively rapid change as existing distinctions
between financial service segments become less clear.
Prepayment Risk. Borrowers may pay back principal before the scheduled
due date. Borrowers may find it advantageous to prepay principal due to a
decline in interest rates or an excess in cash flow. Such prepayments may
require the Fund to replace a Senior Loan with a lower-yielding security.
This may adversely affect the net asset value of the Fund's shares.
Limited Information. The types of Senior Loans in which the Fund will
invest historically have not been rated by a nationally recognized
statistical rating organization, have not been registered with the SEC or
any state securities commission, and have not been listed on any national
securities exchange. Although the Fund will generally have access to
financial and other information made available to the Lenders in
connection with Senior Loans, the amount of public information available
with respect to Senior Loans will generally be less extensive than that
available for rated, registered or exchange listed securities. As a
result, the Fund is more dependent on the analytical ability of Stein
Roe.
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. 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
10
<PAGE>
next business day if the 15th is not a business day) in the months of
February, May, August, and November. (See "Periodic Repurchase Offers.")
11
<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing in
the Fund. 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 August 31, 2000.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES (1) Class A Class B (2) Class C
------- ----------- -------
<S> <C> <C> <C>
Sales Load Imposed (as a percentage of offering price)............. 3.50% None None
Sales Load Imposed on Reinvested Dividends......................... None None None
Early Withdrawal Charge (3)........................................ None 3.25% 1.00%
Exchange Fee....................................................... None None None
ANNUAL EXPENSES (as a percentage of average net assets
attributable to common shares) (4)
Management Fees (5)................................................ 0.97% 0.97% 0.97%
Distribution and Service Fees ..................................... 0.35% 0.70% 0.85%
Interest Payments on Borrowed Funds................................ 2.70% 2.70% 2.70%
----- ----- -----
Other Expenses..................................................... 0.40% 0.40% 0.40%
----- ----- -----
Total Annual Expenses -- Gross..................................... 4.42% 4.77% 4.92%
----- ----- -----
Expense Reimbursement (6)....................................... (0.25%) (0.25%) (0.25%)
----- ----- -----
Total Annual Expenses -- Net....................................... 4.17% 4.52% 4.67%
----- ----- -----
</TABLE>
(1) Financial advisors may independently charge additional fees for
shareholder transactions or for advisory services. Please see their
materials for details.
(2) Class B shares will automatically covert to Class A shares eight years
after purchase.
(3) The maximum EWC on Class B shares applies for repurchases during the
first year. The charge is 3.25% for shares submitted and accepted for
repurchase during the first year after each purchase, 3.00% during the
second year, 2.00% during the third year, 1.50% during the fourth year,
and 1.00% during the fifth year. There is no EWC on Class B shares
thereafter. The EWC on Class C shares is 1% within the first year from
each purchase. There is no EWC on Class C shares thereafter.
(4) Figures assume the Fund borrows 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:
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Management Fees 0.65% 0.65% 0.65%
Distribution and Service Fees 0.35% 0.70% 0.85%
Interest Payments on Borrowed Funds 0.00% 0.00% 0.00%
----- ----- -----
Other Expenses 0.40% 0.40% 0.40%
----- ----- -----
Total Annual Expenses -- Gross 1.40% 1.75% 1.90%
----- ----- -----
Expense Reimbursement (0.25%) (0.25%) (0.25%)
----- ----- -----
Total Annual Expenses -- Net 1.15% 1.50% 1.65%
</TABLE>
(5) 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%.
12
<PAGE>
(6) Stein Roe has undertaken to reimburse the Fund for its operating expenses
to the extent that such expenses exceed 0.15% (exclusive of management
fees, administrative fees, distribution and service fees and interest
expenses). This commitment expires on December 31, 2000.
Service and distribution fees include an asset-based sales charge -- as a
result, if you hold your shares for a long period of time, then you may pay more
than the economic equivalent of the maximum front-end sales charges permitted by
the National Association of Securities Dealers, Inc. (See "Multiple Share
Classes.")
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. The Example should not be
considered a representation of future expenses. Your actual costs may be higher
or lower.
<TABLE>
<CAPTION>
Class* 1 year 3 years 5 years 10 years
- ----- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A $ 78 $164 $252 $476
---- ---- ---- ----
Class B**
did not sell your shares $ 48 $144 $240 $476
---- ---- ---- ----
sold all your shares at the end of the period $ 80 $164 $250 $476
---- ---- ---- ----
Class C
did not sell your shares $ 49 $148 $247 $495
---- ---- ---- ----
sold all your shares at the end of the period $ 59 $148 $247 $495
---- ---- ---- ----
</TABLE>
- ----------
*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:
<TABLE>
<CAPTION>
Class 1 year 3 years 5 years 10 years
- ----- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A $ 49 $ 78 $109 $197
---- ---- ---- ----
Class B**
did not sell your shares $ 18 $ 55 $ 95 $197
---- ---- ---- ----
sold all your shares at the end of the period $ 50 $ 75 $105 $197
---- ---- ---- ----
Class C
did not sell your shares $ 19 $ 60 $103 $222
---- ---- ---- ----
sold all your shares at the end of the period $ 29 $ 60 $103 $222
---- ---- ---- ----
</TABLE>
**Class B shares convert to Class A shares after eight years. The 10-year
expense example for Class B shares reflects Class B share expenses for eight
years and Class A expenses for two years.
THE FUND
The Fund is a non-diversified, closed-end management investment company
organized as a Massachusetts business trust on June 8, 1999. The Fund is engaged
in a continuous public offering of shares at the next determined net asset value
per share. The Fund's
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principal office is located at One Financial Center, Boston, Massachusetts 02111
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 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 (at least
80% of its total assets) 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
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loans and short-term loan participations of Borrowers having short-term debt
obligations rated or a short-term credit rating at least in such rating
categories (or having no such rating, determined by Stein Roe to be of
comparable quality), certificates of deposit and bankers' acceptances and
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Such high quality, short-term securities may pay interest at
rates that are periodically redetermined or may pay interest at fixed rates.
HOW THE 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 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
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
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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 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 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
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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 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
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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 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 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 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.
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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 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 the investment practices described in this prospectus 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 economic
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, based on historical
experience, Stein Roe believes that the economic maturity of the Senior Loans
held in its portfolio will be approximately 18-24 months.
NET ASSET VALUE FLUCTUATION. When prevailing interest rates decline, the value
of a portfolio invested in fixed-rate obligations can be expected to rise.
Conversely, when prevailing interest rates rise, the value of a portfolio
invested in fixed-rate obligations can be expected to decline. Although the
Fund's net asset value will vary, Stein Roe expects the 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,
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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
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
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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, 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 obligations pursuant
to a Loan Agreement 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 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
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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. 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 a number of
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 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
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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.
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 obligations pursuant to the Loan Agreement, which may
include the obligation to make additional loans or release collateral.
BELOW INVESTMENT GRADE SECURITIES. Securities rated below investment grade are
commonly referred to as high-yield debt or "junk debt." They are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high-yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline in the
prices of high-yield securities.
The secondary market in which high-yield securities are traded is generally less
liquid than the market for higher-grade debt. Less liquidity in the secondary
trading market could adversely affect the price at which the Fund could sell a
high-yield Senior Loan, and could adversely
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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.
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
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.
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 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. 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.
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
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interests for investment by the Fund may be adversely affected. In addition,
such requirements or restrictions may reduce or eliminate sources of financing
for affected 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.
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.
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.
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 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
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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.
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 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.
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
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sometimes depress the stock prices of all companies in the same industry. Not
all factors can be predicted.
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.
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."
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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 special
risk considerations that are discussed below. 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.
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STRUCTURED NOTES. The Fund may invest up to 10% 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 total assets in
Senior Loans.
INTEREST RATE SWAPS AND OTHER HEDGING TRANSACTIONS. The Fund may enter into
various interest rate hedging and risk management transactions. 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 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
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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 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.
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
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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 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.
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
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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.
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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 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.
DISTRIBUTIONS AND INCOME TAXES
DISTRIBUTIONS. Income dividends are declared each business day, paid monthly,
and confirmed at least quarterly. Initial distributions to shareholders are
expected to be paid approximately 60 days after the commencement of this
offering. 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
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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 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.
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
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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;
- - the shareholder fails to certify that its tax identification number is
correct or that it is not subject to backup withholding due to the
underreporting of certain income;
- - the Internal Revenue Service (IRS) informs the Fund that the
shareholder's tax identification number is incorrect.
These certifications are contained in the application that you should complete
and return when you open an account. The Fund must promptly pay to the IRS all
amounts withheld. Therefore, it is usually not possible for the Fund to
reimburse you for amounts withheld. You may, however, claim the amount withheld
as a credit on your federal income tax return.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their advisors regarding the specific
federal and state tax consequences of purchasing, holding and disposing of
shares, as well as the effects of other state, local and foreign tax laws and
any proposed tax law changes.
37
<PAGE>
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 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, computed 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.
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.
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<PAGE>
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. 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:
<TABLE>
<CAPTION>
METHOD INSTRUCTIONS
<S> <C>
Through your financial Your financial advisor can help you establish your account and buy Fund shares on your behalf.
advisor
By check For new accounts, send a completed application and check made payable to the Fund to the
(new account) transfer agent, Liberty Funds Services, Inc., P.O. Box 1722, Boston, MA 02105-1722.
By check For existing accounts, fill out and return the additional investment stub included in your
(existing account) 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
1-800-345-6611. 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 1-800-345-6611 to obtain a control number and the wiring
instructions.
By electronic funds You may purchase shares by electronically transferring money from your bank account to your
transfer Fund account by calling 1-800-345-6611. 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 plan You can make monthly or quarterly investments 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.
By dividend You may automatically invest dividends distributed by the Fund into the same class of shares
diversification of another fund at no additional sales charge. To invest your dividends in another fund, call
1-800-345-6611.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT MINIMUMS
<S> <C>
Initial Investment $2,500
Subsequent Investments $ 50
Automatic Investment Plan $ 50
Retirement Plans $ 25
</TABLE>
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 three classes of shares in this
prospectus -- Class A, B and C. Each share class has its own sales charge and
expense structure. Determining which share class is best for you depends on the
dollar amount you are investing and the number of years for which you are
willing to invest. Purchases of $1 million or more are automatically invested in
Class A shares. Based on your personal situation, your financial advisor can
help you decide which class of shares makes the most sense for you. The Fund
also offers Class Z shares, which are available only to institutional and other
investors through a separate prospectus.
SALES CHARGES. You may be subject to an initial sales charge when you purchase
or an early withdrawal charge (EWC) when you offer your shares for repurchase.
These sales charges are described below. In certain circumstances, these sales
charges are waived, as described below and in the Statement of Additional
Information.
CLASS A SHARES. Your purchases of Class A shares generally are at the public
offering price. This price includes a sales charge that is based on the amount
of your investment. The sales charge you pay on additional investments is based
on the amount of your additional purchase, plus the current value of your
account. The amount of the sales charge differs depending on the amount you
invest as shown in the table below. The table below also shows the commission
paid to the financial advisor firm on sales of Class A shares.
<TABLE>
<CAPTION>
AS A % OF AS A % OF % OF OFFERING
THE PUBLIC YOUR PRICE PAID TO
AMOUNT OF PURCHASE OFFERING INVESTMENT FINANCIAL ADVISOR
PRICE FIRM
<S> <C> <C> <C>
Less than $100,000 3.50 3.63 3.25
$100,000 to less than $500,000 2.25 2.30 2.00
$500,000 to less than $1,000,000 1.25 1.27 1.00
$1,000,000 or more* 0.00 0.00 0.50
</TABLE>
*Class A shares bought without an initial sales charge in accounts aggregating
between $1 million to $5 million at the time of purchase may be subject to a
1.00% EWC if the shares are sold within 18 months of the time of each purchase.
Class A share purchases that bring your account value above $1 million but less
than $5 million are subject to a 1.00% EWC if redeemed within 18 months of each
purchase date. The 18-month period begins on the first day of the month
following each purchase.
CLASS A SHARES. For Class A share purchases of $1 million or more, financial
advisors receive a commission from the Distributor as follows:
40
<PAGE>
<TABLE>
<CAPTION>
AMOUNT PURCHASED COMMISSION %
- ---------------------------------------------------------
<S> <C>
First $3 million 1.00
- ---------------------------------------------------------
Next $2 million 0.50
- ---------------------------------------------------------
Over $5 million 0.25*
</TABLE>
*Paid over 12 months but only to the extent the shares remain outstanding.
REDUCED SALES CHARGES FOR LARGER INVESTMENTS. There are two ways for you to pay
a lower sales charge when purchasing Class A shares. The first is through Rights
of Accumulation. If the combined value of the Fund accounts maintained by you,
your spouse or your minor children reaches a discount level (according to the
above chart), your next purchase will receive the lower sales charge. The second
is by signing a Statement of Intent within 90 days of your purchase. By doing
so, you would be able to pay the lower sales charge on all purchases by agreeing
to invest a total of at least $100,000 within 13 months. If your Statement of
Intent purchases are not completed within 13 months, you will be charged the
applicable sales charge. In addition, certain investors may purchase Class A
shares at a reduced sales charge or net asset value, which is the value of a
Fund share excluding any sales charges. See the Statement of Additional
Information for a description of these situations.
CLASS B SHARES. Your purchases of Class B shares are at the Fund's net asset
value. Class B shares have no front-end sales charge, but carry an EWC that is
imposed only on shares sold prior to the completion of the periods shown in the
chart below. The EWC generally declines each year and eventually disappears over
time. Class B shares automatically convert to Class A shares after eight years.
The Distributor pays, from its own assets, the financial advisor firm an
up-front commission of 3.25% on sales of Class B shares.
<TABLE>
<CAPTION>
HOLDING PERIOD AFTER PURCHASE % DEDUCTED WHEN SHARES ARE SOLD
- ----------------------------------------------------------------------------
<S> <C>
Through first year 3.25
- ----------------------------------------------------------------------------
Through second year 3.00
- ----------------------------------------------------------------------------
Through third year 2.00
- ----------------------------------------------------------------------------
Through fourth year 1.50
- ----------------------------------------------------------------------------
Through fifth year 1.00
- ----------------------------------------------------------------------------
Longer than five years 0.00
</TABLE>
CLASS C SHARES. Like Class B shares, your purchases of Class C shares are at the
Fund's net asset value. Although Class C shares have no front-end sales charge,
they carry an EWC of 1% that is applied to shares sold within the first year
after they are purchased. After holding shares for one year, you may sell them
at any time without paying an EWC. Class C shares do not convert into Class A
shares. The Distributor pays, from its own assets, the financial advisor firm an
up-front commission of 1.00% on sales of Class C shares.
DISTRIBUTION AND SERVICE FEES. In addition to an EWC, each class of shares is
authorized under a distribution plan (Plan) to use the assets attributable to a
class to finance 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
41
<PAGE>
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 an exemptive order under the 1940 Act to permit it to have a multi-class
structure, EWCs 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). As described above, certain investments in
Class A, B and C shares are subject to an EWC. You will pay the EWC only on
shares you offer for repurchase within the prescribed amount of time after
purchase. The EWC generally declines each year until there is no charge for
shares repurchased. 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 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, converted 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
42
<PAGE>
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.
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
43
<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
risks and costs (see "Borrowing"). The Fund may also sell Senior Loans to meet
repurchase obligations which 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 (if the scheduled
44
<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 as certain the net asset value after the notification date.
REPURCHASE PRICE. The current net asset value of the shares is computed daily.
The Board has determined that the time at which the net asset value will be
computed will be as of the close of regular session trading on the NYSE. You may
call 1-800-345-6611 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 generally the net asset value per
share except for Class A share purchases at the public offering price. 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
45
<PAGE>
of shares outstanding. Net asset value will not be determined on days when the
NYSE is closed unless, in the judgment of the Board of Trustees, the net asset
value should be determined on any such day, in which case the determination will
be made at 4 p.m., Eastern time.
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 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. 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.
46
<PAGE>
PERFORMANCE INFORMATION
The Fund seeks to provide an effective yield that is higher than other
short-term instrument alternatives. From time to time, the Fund may include its
current and/or effective yield based on various specific time periods. Yields
will fluctuate from time to time and are not necessarily representative of
future results.
The current yield is calculated by annualizing the most recent monthly
distribution (i.e., multiplying the distribution amount by 365/31 for a 31 day
month) and dividing the product by the current maximum offering price. The
effective yield is calculated by dividing the current yield by 365/31 and adding
1. The resulting quotient is then taken to the 365/31st power and reduced by 1.
The result is the effective yield.
On occasion, the Fund may compare its yield to: (a) LIBOR, quoted daily in the
Wall Street Journal; (b) the CD Rate as quoted daily in the Wall Street Journal
as the average of top rates paid by major New York banks on primary new issues
of negotiable CDs, usually on amounts of $1 million or more; (c) the Prime Rate,
quoted daily in The Wall Street Journal as the base rate on corporate loans at
large U.S. money center commercial banks; (d) one or more averages compiled by
Donoghue's Money Fund Report, a widely recognized independent publication that
monitors the performance of money market mutual funds; (e) the average yield
reported by the Bank Rate Monitor National Index(TM) for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas; (f) yield data published by
Lipper, Inc.; (g) the yield on an investment in 90-day Treasury bills on a
rolling basis, assuming quarterly compounding; or (h) the yield on an index of
loan funds comprised of all continually offered closed-end bank loan funds, as
categorized by Lipper (the "loan fund index"). In addition, the Fund may compare
the Prime Rate, the Donoghue's averages and the other yield data described above
to each other. Yield comparisons should not be considered indicative of the
Fund's yield or relative performance for any future period.
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.
47
<PAGE>
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. 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.
DIVIDENDS, VOTING AND LIQUIDATION RIGHTS. Each common share of beneficial
interest of the Fund has one vote and shares equally with other shares of its
class in dividends and distributions when and if declared by the Fund and in the
Fund's net assets upon liquidation. All shares, when issued, are fully paid and
are non-assessable by the Fund. There are no preemptive or conversion rights
applicable to any of the common shares except for such conversion rights that
may be established by the Trustees in connection with the designation of a class
of shares including the conversion of Class B shares to Class A shares eight
years after purchase. Fund shares do not have cumulative voting rights and, as
such, holders of more than 50% of the shares voting for trustees can elect all
trustees and the remaining shareholders
48
<PAGE>
would not be able to elect any Trustees. The Fund does not intend to hold annual
meetings of shareholders.
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.
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 Financial Center, Boston, Massachusetts 02111, toll-free
1-800-345-6611.
49
<PAGE>
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
The Fund.............................................................. 2
Investment Policies................................................... 2
Portfolio Investments and Strategies.................................. 3
Investment Restrictions............................................... 11
Repurchase Offer Fundamental Policy................................... 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
Programs for Reducing or Eliminating Sales Charges....................
Portfolio Transactions................................................ 24
Additional Income Tax Considerations.................................. 29
Investment Performance................................................ 29
Financial Statements..................................................
Appendix -- Ratings................................................... 30
</TABLE>
[LIBERTY FUNDS LOGO]
Liberty Funds Distributor, Inc. (c)2000
One Financial Center, Boston, MA 02111-2621. 1-800-426-3750
www.libertyfunds.com.....................................FR-01/697H-0899 (11/99)
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus in connection with the offer made by this prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Fund or the Advisor. This prospectus does not constitute an
offer to sell or the solicitation of any offer to buy any security other than
the shares offered by this prospectus, nor does it constitute an offer to sell
or a solicitation of any offer to buy the shares by anyone in any jurisdiction
in which such offer of solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so, or to any such
person to whom it is unlawful to make such offer or solicitation. Neither the
delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that information contained herein is
correct as of any time subsequent to the date hereof. However, if any material
change occurs while this prospectus is required by law to be delivered, this
prospectus will be amended or supplemented accordingly.
50
<PAGE>
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
Cross Reference Sheet Items Required by Form N-2
Class Z shares
PART A.
<TABLE>
<CAPTION>
Item Number and Item Caption Caption in Prospectus
<S> <C> <C>
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
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND PROSPECTUS, JANUARY __, 2000
- --------------------------------------------------------------------------------
CLASS Z SHARES
Advised by: Stein Roe & Farnham Incorporated
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary ...................................................... 4
Fund Expenses ........................................................... 7
The Fund ................................................................ 8
Use of Proceeds ......................................................... 8
Investment Objectives and Policies ...................................... 8
How the Fund Invests .................................................... 9
Principal Risks ......................................................... 16
Other Investment Practices .............................................. 21
Distributions and Income Taxes .......................................... 25
Management of the Fund .................................................. 27
How to Buy Shares ....................................................... 29
Multiple Share Classes .................................................. 30
Periodic Repurchase Offers .............................................. 33
Net Asset Value ......................................................... 35
Performance Information ................................................. 36
Organization and Description of Shares .................................. 37
Shareholder Reports ..................................................... 40
Financial Statements .................................................... 40
Statement of Additional Information Table of Contents ................... 40
</TABLE>
<PAGE>
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 (at least 80% of its total assets)
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. All or substantially all of the
Fund's Senior Loans may be rated below investment grade. The Fund may
periodically borrow money for the purpose of financing long-term investments,
obtaining short-term liquidity and for temporary, emergency or extraordinary
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.
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.
<TABLE>
<CAPTION>
Price to Maximum Proceeds to
Public (1) Sales Load Fund (2)
-------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class Z Share $12.00 None $12.00
</TABLE>
(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 $1,000,000. 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 and the exclusion
of approximately $243,693 of organizational and initial operating
expenses. All organizational expenses will be
paid by Colonial Management Associates, Inc., the Fund's
Administrator.
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
May 15, 2000. (See "Periodic Repurchase Offers.")
2
<PAGE>
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 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 BONDS"). (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 800-345-6611. 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 Financial Center, Boston, Massachusetts 02111.
This prospectus applies to the offering of shares of beneficial interest of the
Fund, which may be continuously issued and sold from time to time by the Fund
through Liberty Funds Distributor, Inc., as distributor and principal
underwriter, and through your financial advisor. (See "How to Buy Shares.") The
Fund is authorized as a business trust to issue an unlimited number of common
shares and has registered 12,498,000 common 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 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, 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.
3
<PAGE>
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in this prospectus and in the Statement of Additional Information.
THE FUND. The Fund is a continuously-offered non-diversified, closed-end
management investment company, organized as a Massachusetts business
trust.
The Fund 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 $1,000,000 ($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 (at
least 80% of its total assets) 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 engaged in the
financial services industry, which includes commercial banks, thrift
institutions, insurance companies and finance companies. The Fund may
invest at these levels because it regards the issuers of Senior Loans
in which the Fund may invest to include the Borrower as well as any
Agent that administers the Senior Loans. Accordingly, the Fund may be
more at risk to any single economic, political or regulatory occurrence
affecting such industries.
4
<PAGE>
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.
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 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
5
<PAGE>
of the Fund to dispose of its investments in a timely fashion and at a
fair price may be restricted.
6
<PAGE>
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
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. 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 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.
7
<PAGE>
Financial Services Industry Concentration. The financial services
industries are subject to extensive government regulation which can
limit both the amounts and types of loans and other financial
commitments they can make, and the interest rates and fees they can
charge. Profitability is largely dependent on the availability and cost
of capital funds, and can fluctuate significantly when interest rates
change. Credit losses resulting from financial difficulties of
borrowers can negatively affect the financial services industries. The
financial services industries are currently undergoing relatively rapid
change as existing distinctions between financial service segments
become less clear.
Prepayment Risk. Borrowers may pay back principal before the scheduled
due date. Borrowers may find it advantageous to prepay principal due to
a decline in interest rates or an excess in cash flow. Such prepayments
may require the Fund to replace a Senior Loan with a lower-yielding
security. This may adversely affect the net asset value of the Fund's
shares.
Limited Information. The types of Senior Loans in which the Fund will
invest historically have not been rated by a nationally recognized
statistical rating organization, have not been registered with the SEC
or any state securities commission, and have not been listed on any
national securities exchange. Although the Fund will generally have
access to financial and other information made available to the Lenders
in connection with Senior Loans, the amount of public information
available with respect to Senior Loans will generally be less extensive
than that available for rated, registered or exchange listed
securities. As a result, the Fund is more dependent on the analytical
ability of Stein Roe.
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. 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
8
<PAGE>
next business day if the 15th is not a business day) in the months of
February, May, August, and November. (See "Periodic Repurchase
Offers.")
9
<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing in
the Fund. 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 August 31, 2000.
SHAREHOLDER TRANSACTION EXPENSES (1)
<TABLE>
<S> <C>
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 attributable to
common shares) (2)
Management Fees (3)................................................ 0.97%
Distribution and Service Fees ..................................... 0.00%
Interest Payments on Borrowed Funds................................ 2.70%
Other Expenses..................................................... 0.40%
Total Annual Expenses -- Gross..................................... 4.07%
Expense Reimbursement (4)....................................... (0.25%)
Total Annual Expenses -- Net....................................... 3.82%
</TABLE>
(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 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:
<TABLE>
<S> <C>
Management Fees 0.65%
Distribution and Service Fees 0.00%
Interest Payments on Borrowed Funds 0.00%
-----
Other Expenses 0.40%
-----
Total Annual Expenses -- Gross 1.05%
Expense Reimbursement (0.25%)
-----
Total Annual Expenses -- Net 0.80%
</TABLE>
(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%.
10
<PAGE>
(4) Stein Roe has undertaken to reimburse the Fund for its operating expenses
to the extent that such expenses exceed 0.15% (exclusive of
management fees, administrative fees, distribution
and service fees and interest expenses). 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. The Example should not be
considered a representation of future expenses. Your actual costs may be higher
or lower.
<TABLE>
<CAPTION>
Class* 1 year 3 years 5 years 10 years
- ----- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class Z $78 $164 $252 $476
</TABLE>
---------
*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:
<TABLE>
<CAPTION>
Class 1 year 3 years 5 years 10 years
- ----- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class Z $49 $78 $109 $197
</TABLE>
THE FUND
The Fund is a non-diversified, closed-end management investment company
organized as a Massachusetts business trust on June 8, 1999. The Fund is engaged
in a continuous public offering of shares at the next determined net asset value
per share. The Fund's principal office is located at One Financial Center,
Boston, Massachusetts 02111 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 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 (at least
80% of its total assets) 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
11
<PAGE>
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.
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
12
<PAGE>
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 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
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 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 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
13
<PAGE>
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 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
14
<PAGE>
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 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
15
<PAGE>
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 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 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 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 the investment practices described in this prospectus 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
16
<PAGE>
prepay its loans, prepayments of Senior Loans in the Fund's investment portfolio
may occur. Accordingly, the economic 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, based on historical experience, Stein Roe believes that the economic
maturity of the Senior Loans held in its portfolio will be approximately 18-24
months.
NET ASSET VALUE FLUCTUATION. When prevailing interest rates decline, the value
of a portfolio invested in fixed-rate obligations can be expected to rise.
Conversely, when prevailing interest rates rise, the value of a portfolio
invested in fixed-rate obligations can be expected to decline. Although the
Fund's net asset value will vary, Stein Roe expects the 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
17
<PAGE>
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 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, 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 obligations pursuant
to a Loan Agreement 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
18
<PAGE>
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 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 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. 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 a number of
fundamental investment restrictions and policies which may not be changed unless
authorized
19
<PAGE>
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 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
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Senior Loan will be treated as a separate class in the reorganization
proceedings and will retain a priority interest in the collateral. Chapter 11
reorganization plans typically are the product of negotiation among the Borrower
and the various creditor classes. Successful negotiations may require the
Lenders to extend the time for repayment, change the interest rate or accept
some consideration in the form of junior debt or equity securities. A work out
outside of bankruptcy may produce similar concessions by senior lenders.
Some Senior Loans in which the 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 obligations pursuant to the Loan Agreement, which may
include the obligation to make additional loans or release collateral.
BELOW INVESTMENT GRADE SECURITIES. Securities rated below investment grade are
commonly referred to as high-yield debt or "junk debt." They are regarded as
predominantly speculative with respect to the issuing company's continuing
ability to meet principal and interest payments. The prices of high-yield
securities have been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline in the
prices of high-yield securities.
The secondary market in which high-yield securities are traded is generally less
liquid than the market for higher-grade debt. Less liquidity in the secondary
trading market could adversely affect the price at which the 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.
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
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,
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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.
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 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. 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.
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 affected
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.
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
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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.
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.
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 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.
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
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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
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.
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.
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.
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."
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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 special
risk considerations that are discussed below. 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.
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STRUCTURED NOTES. The Fund may invest up to 10% 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 total assets in
Senior Loans.
INTEREST RATE SWAPS AND OTHER HEDGING TRANSACTIONS. The Fund may enter into
various interest rate hedging and risk management transactions. 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 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
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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 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.
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
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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 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.
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
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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.
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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 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.
DISTRIBUTIONS AND INCOME TAXES
DISTRIBUTIONS. Income dividends are declared each business day, paid monthly,
and confirmed at least quarterly. Initial distributions to shareholders are
expected to be paid approximately 60 days after the commencement of this
offering. 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
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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 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.
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
33
<PAGE>
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;
- - the shareholder fails to certify that its tax identification number is
correct or that it is not subject to backup withholding due to the
underreporting of certain income;
- - the Internal Revenue Service (IRS) informs the Fund that the shareholder's
tax identification number is incorrect.
These certifications are contained in the application that you should complete
and return when you open an account. The Fund must promptly pay to the IRS all
amounts withheld. Therefore, it is usually not possible for the Fund to
reimburse you for amounts withheld. You may, however, claim the amount withheld
as a credit on your federal income tax return.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their advisors regarding the specific
federal and state tax consequences of purchasing, holding and disposing of
shares, as well as the effects of other state, local and foreign tax laws and
any proposed tax law changes.
34
<PAGE>
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 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, computed 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.
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.
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<PAGE>
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. 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:
<TABLE>
<CAPTION>
METHOD INSTRUCTIONS
<S> <C>
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 1-800-345-6611. 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 1-800-345-6611 to obtain a control
number and the wiring instructions.
By electronic funds You may purchase shares by electronically transferring
transfer money from your bank account to your Fund account by
calling 1-800-345-6611. 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 You can make monthly or quarterly investments
investment 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.
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 1-800-345-6611.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT MINIMUMS
<S> <C>
Initial Investment $1,000,000
Subsequent Investments $ 50
Automatic Investment Plan $ 50
Retirement Plans $ 25
</TABLE>
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.
37
<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 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
38
<PAGE>
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
risks and costs (see "Borrowing"). The Fund may also sell Senior Loans to meet
repurchase obligations which 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 (if the scheduled Repurchase Pricing Date is not the
Repurchase Request Deadline). The notice will describe (i) the procedures for
shareholders to offer their shares for repurchase, (ii) the procedures for the
Fund to repurchase shares on a pro rata basis, (iii) the circumstances in which
the Fund may suspend or postpone a Repurchase Offer, and (iv) the procedures
that will enable shareholders to withdraw or modify their offers of shares for
repurchase until the Repurchase Request
39
<PAGE>
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 as certain the net asset value after the notification date.
REPURCHASE PRICE. The current net asset value of the shares is computed daily.
The Board has determined that the time at which the net asset value will be
computed will be as of the close of regular session trading on the NYSE. You may
call 1-800-345-6611 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 generally 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. 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.
40
<PAGE>
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 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. 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.
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<PAGE>
The current yield is calculated by annualizing the most recent monthly
distribution (i.e., multiplying the distribution amount by 365/31 for a 31 day
month) and dividing the product by the current maximum offering price. The
effective yield is calculated by dividing the current yield by 365/31 and adding
1. The resulting quotient is then taken to the 365/31st power and reduced by 1.
The result is the effective yield.
On occasion, the Fund may compare its yield to: (a) LIBOR, quoted daily in the
Wall Street Journal; (b) the CD Rate as quoted daily in the Wall Street Journal
as the average of top rates paid by major New York banks on primary new issues
of negotiable CDs, usually on amounts of $1 million or more; (c) the Prime Rate,
quoted daily in The Wall Street Journal as the base rate on corporate loans at
large U.S. money center commercial banks; (d) one or more averages compiled by
Donoghue's Money Fund Report, a widely recognized independent publication that
monitors the performance of money market mutual funds; (e) the average yield
reported by the Bank Rate Monitor National Index(TM) for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas; (f) yield data published by
Lipper, Inc.; (g) the yield on an investment in 90-day Treasury bills on a
rolling basis, assuming quarterly compounding; or (h) the yield on an index of
loan funds comprised of all continually offered closed-end bank loan funds, as
categorized by Lipper (the "loan fund index"). In addition, the Fund may compare
the Prime Rate, the Donoghue's averages and the other yield data described above
to each other. Yield comparisons should not be considered indicative of the
Fund's yield or relative performance for any future period.
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.
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<PAGE>
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. 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.
DIVIDENDS, VOTING AND LIQUIDATION RIGHTS. Each common share of beneficial
interest of the Fund has one vote and shares equally with other shares of its
class in dividends and distributions when and if declared by the Fund and in the
Fund's net assets upon liquidation. All shares, when issued, are fully paid and
are non-assessable by the Fund. There are no preemptive or conversion rights
applicable to any of the common shares except for such conversion rights that
may be established by the Trustees in connection with the designation of a class
of shares including the conversion of Class B shares to Class A shares eight
years after purchase. Fund shares do not have cumulative voting rights and, as
such, holders of more than 50% of the shares voting for trustees can elect all
trustees and the remaining shareholders would not be able to elect any Trustees.
The Fund does not intend to hold annual meetings of shareholders.
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
43
<PAGE>
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.
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 Financial Center, Boston, Massachusetts 02111, toll-free
1-800-345-6611.
44
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TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
The Fund................................................................................................ 2
Investment Policies..................................................................................... 2
Portfolio Investments and Strategies.................................................................... 3
Investment Restrictions................................................................................. 11
Repurchase Offer Fundamental Policy..................................................................... 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
Programs for Reducing or Eliminating Sales Charges...................................................... ..
Portfolio Transactions.................................................................................. 24
Additional Income Tax Considerations.................................................................... 29
Investment Performance.................................................................................. 29
Financial Statements....................................................................................
Appendix -- Ratings..................................................................................... 30
</TABLE>
[LIBERTY FUNDS LOGO]
Liberty Funds Distributor, Inc. (c)2000
One Financial Center, Boston, MA 02111-2621. 1-800-426-3750
www.libertyfunds.com.....................................FR-01/697H-0899 (11/99)
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus in connection with the offer made by this prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Fund or the Advisor. This prospectus does not constitute an
offer to sell or the solicitation of any offer to buy any security other than
the shares offered by this prospectus, nor does it constitute an offer to sell
or a solicitation of any offer to buy the shares by anyone in any jurisdiction
in which such offer of solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so, or to any such
person to whom it is unlawful to make such offer or solicitation. Neither the
delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that information contained herein is
correct as of any time subsequent to the date hereof. However, if any material
change occurs while this prospectus is required by law to be delivered, this
prospectus will be amended or supplemented accordingly.
45
<PAGE>
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
Cross Reference Sheet Items Required by Form N-2
<TABLE>
<CAPTION>
PART B.
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
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 Financial Statements
</TABLE>
<PAGE>
Statement of Additional Information Dated January __, 2000
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
One Financial Center, Boston, MA 02111
800-345-6611
This Statement of Additional Information is not a prospectus but
provides additional information that should be read in conjunction with the
Fund's Prospectus dated January __, 2000 and any supplements thereto. A
Prospectus may be obtained at no charge by telephoning 800-345-6611.
TABLE OF CONTENTS
-----------------------
<TABLE>
<CAPTION>
Page
<S> <C>
The Fund.............................................................. 2
Investment Policies................................................... 2
Portfolio Investments and Strategies.................................. 3
Investment Restrictions............................................... 13
Other Investment Policies............................................. 14
Repurchase Offer Fundamental Policy................................... 15
Management of the Fund................................................ 16
Principal Shareholders................................................ 24
Investment Advisory and Other Services................................ 25
Distributor........................................................... 27
Transfer Agent........................................................ 28
Custodian............................................................. 29
Independent Accountants............................................... 29
Programs for Reducing or Eliminating Sales Charges.................... 29
Portfolio Transactions................................................ 32
Additional Income Tax Considerations.................................. 38
Investment Performance................................................ 38
Financial Statements..................................................
Appendix -- Ratings................................................... 40
</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 (at least 80% of its total assets) 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
- --------
(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>
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 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 economic maturity of Senior Loans may vary substantially from
the stated maturity of such loans. As a result of anticipated prepayments from
time to time of Senior Loans in the investment portfolio, based on historical
experience, Stein Roe believes that the economic 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
3
<PAGE>
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. 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
4
<PAGE>
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.
5
<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 10% 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.
6
<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
7
<PAGE>
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 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
8
<PAGE>
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. 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. Interest payments and fees incurred in
connection with such borrowings will reduce the amount of net income available
for distribution to the holders of Shares.
9
<PAGE>
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 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
10
<PAGE>
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.
11
<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
12
<PAGE>
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.
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 fundamental 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; provided that this limitation shall not apply with respect
to obligations issued or guaranteed by the U.S. government or by its
agencies or instrumentalities; and provided further that the fund
will invest more than 25% and may invest up to 100% of its assets in
securities of issuers in the industry group consisting of financial
institutions and their holding companies, including commercial banks,
thrift institutions, insurance companies and finance companies. For
purposes of this restriction, the term "issuer" includes the Borrower
and the Agent (as defined under
13
<PAGE>
"Prospectus Summary" in the Prospectus); 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.
The above restrictions are fundamental policies and may not be changed
without the approval of a "majority of the outstanding voting securities," as
defined under "Investment Policies" above. 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.
14
<PAGE>
REPURCHASE OFFER FUNDAMENTAL POLICY
-----------------------------------
The Board has adopted a resolution setting forth the Fund's fundamental
policy that it will conduct quarterly Repurchase Offers (the "Repurchase Offer
Fundamental Policy").
The Repurchase Offer Fundamental Policy sets the interval between each
Repurchase Offer at one quarter and provides that the Fund shall conduct a
Repurchase Offer each quarter (unless suspended or postponed in accordance with
regulatory requirements). The Repurchase Request Deadline will be established by
the Fund and will be based on factors such as market conditions, liquidity of
the Fund's assets and shareholder servicing conditions. The Repurchase Offer
Fundamental Policy also provides that the repurchase pricing shall occur not
later than the 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."
15
<PAGE>
MANAGEMENT OF THE FUND
----------------------
<TABLE>
<CAPTION>
Trustees and Officers
- ---------------------
Positions and Offices
----------------------
Name (Age) and Address with Fund Principal Occupation During Past Five Years
---------------------- --------- -------------------------------------------
<S> <C> <C>
Tom Bleasdale (69) Trustee Retired (formerly Chairman of the Board and
102 Clubhouse Drive #275 Chief Executive Officer, Shore Bank & Trust
Naples, FL 34105 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 Director,
Wellesley Hills, MA 02481 Salomon Brothers (investment 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 September,
Southold, NY 11971 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).
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Trustees and Officers
- ---------------------
Positions and Offices
----------------------
Name (Age) and Address with Fund Principal Occupation During Past Five Years
---------------------- --------- -------------------------------------------
<S> <C> <C>
William E. Mayer (59) Trustee Partner, Development Capital, LLC (venture
500 Park Avenue, 5th Floor capital) (formerly Dean, College of Business and
New York, NY 10022 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>
17
<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 May,
Cape Elizabeth, ME 04107 1984 to May, 1997, and Chief Executive Officer,
Hannaford Bros. Co. from May, 1973 to May, 1992).
John J. Neuhauser (56) Trustee Academic Vice President and Dean of Faculties
84 College Road since August, 1999, Boston College (formerly
Chestnut Hill, MA 02467-3838 Dean, Boston College School of Management since
September, 1977 to September, 1999).
Thomas E. Stitzel (63) Trustee Professor of Finance, College of Business, Boise
2208 Tawny Woods Place State University (higher education); Business
Boise, ID 83706 consultant and author.
Robert L. Sullivan (71) Trustee Retired (formerly Partner, KPMG Peat Marwick
45 Sankaty Avenue LLP, from July, 1966 to June, 1985).
Siasconset, MA 02564
Anne-Lee Verville (53) Trustee Consultant (formerly General Manager, Global
359 Stickney Hill Road Education Industry from 1994 to 1997, and
Hopkinton, NH 03229 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>
18
<PAGE>
19
<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 the
Accounting Officer 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 (46) 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).
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
-------------------------
Name (Age) and Address with Fund Principal Occupation During Past Five Years
---------------------- --------- -------------------------------------------
<S> <C> <C>
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).
Joseph R. Palombo (46) Vice President Vice President of the Funds since April, 1999;
Executive Vice President and Director of the
Advisor since April, 1999; Executive Vice
President and Chief Administrative Officer of
LFG since April, 1999 (formerly Chief Operating
Officer, Putnam Mutual Funds from 1994 to 1998).
</TABLE>
21
<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. 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 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
From the Fund for the Complex Paid to the Trustees for
Trustee Fiscal Year Ended the Calendar Year Ended
August 31, 2000(b) December 31, 1999(c)
------------------ --------------------
<S> <C> <C>
Tom Bleasdale $590(d) $103,000(e)
John V. Carberry (f) N/A N/A
Lora S. Collins 567 96,000
James E. Grinnell 590 100,000
Richard W. Lowry 567 97,000
Salvatore Macera 567 95,000
William E. Mayer 590 101,000
James L. Moody, Jr. 590(g) 91,000(h)
John J. Neuhauser 594 101,252
Thomas E. Stitzel 567 95,000
Robert L. Sullivan 621 104,100
Anne-Lee Verville 567(i) 96,000(j)
</TABLE>
(a) Neither the Fund nor the Fund Complex currently provides pension or
retirement plan benefits to the Trustees.
(b) Since the Fund has not completed its first full fiscal year, compensation
is estimated based upon future payments to be made and upon estimated
relative Fund net assets.
22
<PAGE>
(c) At December 31, 1999, the complex consisted of 63 open-end and 10
closed-end management investment portfolios in the Liberty Funds
(together, the "Fund Complex").
(d) Include $301 payable in later years as deferred compensation.
(e) Includes $52,000 payable in later years as deferred compensation.
(f) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial Companies, Inc. ("Liberty Financial").
(g) Total compensation of $590 for the fiscal year ended August 31, 2000, will
be payable in later years as deferred compensation.
(h) Total compensation of $91,000 for the calendar year ended December 31,
1999, will be payable in later years as deferred compensation.
(i) Total compensation of $567 for the fiscal year ended August 31, 2000, will
be payable in later years as deferred compensation.
(j) Total compensation of $96,000 for the calendar year ended December 31,
1999, will be payable in later years as deferred compensation.
For the fiscal year ended December 31, 1999, some 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 (together, the "Liberty All-Star Funds").
<TABLE>
<CAPTION>
Total Compensation From
Liberty All-Star Funds For
Trustee The Calendar Year Ended
- ------- December 31, 1999(k)
--------------------
<S> <C>
John V. Carberry(l) N/A
James E. Grinnell $25,000
Richard W. Lowry 25,000
William E. Mayer 25,000
John J. Neuhauser 25,000
</TABLE>
(k) 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).
(l) Does not receive compensation because he is an affiliated trustee and
employee of Liberty Financial.
23
<PAGE>
PRINCIPAL SHAREHOLDERS
----------------------
Until the Fund completes the public offering of the shares, Colonial
Management Associates, Inc. or an affiliate will be deemed to control the Fund
under the 1940 Act.
24
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
- --------------------------------------
Stein Roe provides portfolio management services to the Fund. Stein Roe is
a wholly owned subsidiary of Stein Roe 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 December 31, 1999, Stein
Roe managed over $30 billion in assets.
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.
25
<PAGE>
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, including assets
representing leverage.
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.
26
<PAGE>
DISTRIBUTOR
-----------
Shares of the Fund are distributed by Liberty Funds Distributor, Inc.
("Distributor" or "LFD"), 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.
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 an 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
27
<PAGE>
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 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 converted 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 0.170 of 1% of its average daily net assets, plus out-of-pocket
expenses. The Board believes the charges by LFS to the Fund are comparable to
those of other companies performing
28
<PAGE>
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.
PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES
RIGHT OF ACCUMULATION AND STATEMENT OF INTENT (CLASS A SHARES ONLY).
Reduced sales charges on Class A shares can be effected by combining a current
purchase with prior purchases of Class A, B, C and Z shares of the funds
distributed by LFD. The applicable sales charge is based on the combined total
of:
1. the current purchase; and
2. the value at the public offering price at the close of business on
the previous day of all funds' Class A shares held by the
shareholder (except shares of any money market fund, unless such
shares were acquired by exchange from Class A shares of another fund
other than a money market fund and Class B, C and Z shares).
LFD must be promptly notified of each purchase which entitles a
shareholder to a reduced sales charge. Such reduced sales charge will be applied
upon confirmation of the shareholder's holdings by LFS. A fund may terminate or
amend this Right of Accumulation.
29
<PAGE>
Any person may qualify for reduced sales charges on purchases of Class A
shares made within a thirteen-month period pursuant to a Statement of Intent
("Statement"). A shareholder may include, as an accumulation credit toward the
completion of such Statement, the value of all Class A, B, C and Z shares held
by the shareholder on the date of the Statement in funds (except shares of any
money market fund, unless such shares were acquired by exchange from Class A
shares of another non-money market fund). The value is determined at the public
offering price on the date of the Statement. Purchases made through reinvestment
of distributions do not count toward satisfaction of the Statement.
During the term of a Statement, LFS will hold shares in escrow to secure
payment of the higher sales charge applicable to Class A shares actually
purchased. Dividends and capital gains will be paid on all escrowed shares and
these shares will be released when the amount indicated has been purchased. A
Statement does not obligate the investor to buy or a fund to sell the amount of
the Statement.
If a shareholder exceeds the amount of the Statement and reaches an amount
which would qualify for a further quantity discount, a retroactive price
adjustment will be made at the time of expiration of the Statement. The
resulting difference in offering price will purchase additional shares for the
shareholder's account at the applicable offering price. As a part of this
adjustment, the financial service firm ("FSF") shall return to LFD the excess
commission previously paid during the thirteen-month period.
If the amount of the Statement is not purchased, the shareholder shall
remit to LFD an amount equal to the difference between the sales charge paid and
the sales charge that should have been paid. If the shareholder fails within
twenty days after a written request to pay such difference in sales charge, LFS
will redeem that number of escrowed Class A shares to equal such difference. The
additional amount of FSF discount from the applicable offering price shall be
remitted to the shareholder's FSF of record.
Additional information about and the terms of Statements of Intent are
available from your FSF, or from LFS at 1-800-345-6611.
REINSTATEMENT PRIVILEGE. An investor who has redeemed Class A, B or C
shares may, upon request, reinstate within one year a portion or all of the
proceeds of such sale in shares of the same Class of any fund at the NAV next
determined after LFSI receives a written reinstatement request and payment. Any
EWC paid at the time of the redemption will be credited to the shareholder upon
reinstatement. The period between the redemption and the reinstatement will not
be counted in aging the reinstated shares for purposes of calculating any EWC or
conversion date. Investors who desire to exercise this privilege should contact
their FSF or LFS. Shareholders may exercise this Privilege an unlimited number
of times. Exercise of this privilege
30
<PAGE>
does not alter the Federal income tax treatment of any capital gains realized on
the prior sale of fund shares, but to the extent any such shares were sold at a
loss, some or all of the loss may be disallowed for tax purposes. Consult your
tax advisor.
PRIVILEGES OF STEIN ROE EMPLOYEES OR FINANCIAL SERVICE. Class A shares of
certain funds may be sold at NAV to the following individuals whether currently
employed or retired: Trustees of funds advised or administered by the Advisor;
directors, officers and employees of the Advisor, LFD and other companies
affiliated with the Advisor; registered representatives and employees of FSFs
(including their affiliates) that are parties to dealer agreements or other
sales arrangements with LFD; and such persons' families and their beneficial
accounts.
SPONSORED ARRANGEMENTS. Class A shares may be purchased at reduced or no
sales charge pursuant to sponsored arrangements, which include programs under
which an organization makes recommendations to, or permits group solicitation
of, its employees, members or participants in connection with the purchase of
shares of the Fund on an individual basis. The amount of the sales charge
reduction will reflect the anticipated reduction in sales expense associated
with sponsored arrangements. The reduction in sales expense, and therefore the
reduction in sales charge, will vary depending on factors such as the size and
stability of the organization's group, the term of the organization's existence
and certain characteristics of the members of its group. The Fund reserves the
right to revise the terms of or to suspend or discontinue sales pursuant to
sponsored plans at any time.
Class A shares may also be purchased at reduced or no sales charge by
clients of dealers, brokers or registered investment advisors that have entered
into agreements with LFD pursuant to which the Fund is included as investment
options in programs involving fee-based compensation arrangements, and by
participants in certain retirement plans.
WAIVER OF EARLY WITHDRAWAL CHARGES (EWCS). EWCs may be waived on
redemptions in the following situations with the proper documentation:
1. Death. EWCs may be waived on redemptions within one year following the
death of (i) the sole shareholder on an individual account, (ii) a joint
tenant where the surviving joint tenant is the deceased's spouse, or (iii)
the beneficiary of a Uniform Gifts to Minors Act (UGMA), Uniform Transfers
to Minors Act (UTMA) or other custodial account. If, upon the occurrence
of one of the foregoing, the account is transferred to an account
registered in the name of the deceased's estate, the EWC will be waived on
any redemption from the estate account occurring within one year after the
death. If the Class B shares are not redeemed within one year of the
death, they will remain subject to the applicable EWC, when redeemed from
the transferee's account. If the account is transferred to a new
registration and then a redemption is requested, the applicable EWC will
be charged.
31
<PAGE>
2. Disability. EWCs may be waived on redemptions occurring within one year
after the sole shareholder on an individual account or a joint tenant on a
spousal joint tenant account becomes disabled (as defined in Section
72(m)(7) of the Internal Revenue Code). To be eligible for such waiver,
(i) the disability must arise after the purchase of shares and (ii) the
disabled shareholder must have been under age 65 at the time of the
initial determination of disability. If the account is transferred to a
new registration and then a redemption is requested, the applicable EWC
will be charged.
3. Death of a trustee. EWCs may be waived on redemptions occurring upon
dissolution of a revocable living or grantor trust following the death of
the sole trustee where (i) the grantor of the trust is the sole trustee
and the sole life beneficiary, (ii) death occurs following the purchase
and (iii) the trust document provides for dissolution of the trust upon
the trustee's death. If the account is transferred to a new registration
(including that of a successor trustee), the applicable EWC will be
charged upon any subsequent redemption.
4. Returns of excess contributions. EWCs may be waived on redemptions
required to return excess contributions made to retirement plans or
individual retirement accounts, so long as the FSF agrees to return the
applicable portion of any commission paid by Colonial.
5. Qualified Retirement Plans. EWCs may be waived on redemptions required to
make distributions from qualified retirement plans following normal
retirement (as stated in the Plan document). EWCs also will be waived on
SWP redemptions made to make required minimum distributions from qualified
retirement plans that have invested in funds distributed by LFDI for at
least two years.
The EWC also may be waived where the FSF agrees to return all or an agreed
upon portion of the commission earned on the sale of the shares being redeemed.
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.
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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.
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
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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 ASSOCIATION OF
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 for directing trades for Client
accounts to those firms. In effect, Stein Roe is using the commission dollars
generated from these Client accounts to pay for these research products. The
money management industry uses the term "soft dollars" to refer to this industry
practice. Stein Roe may engage in soft dollar transactions on trades for those
Client accounts for which Stein Roe has the discretion to select the
broker-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
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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.
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-
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dealers who "step in" to a transaction and receive a portion of the brokerage
commission for the trade). These products include the following:
- - Database Services -- comprehensive databases containing current and/or
historical information on companies and industries. Examples include
historical securities prices, earnings estimates, and SEC filings. These
services may include software tools that allow the user to search the
database or to prepare value-added analyses related to the investment process
(such as forecasts and models used in the portfolio management process).
- - Quotation/Trading/News Systems -- products that provide real time market data
information, such as pricing of individual securities and information on
current trading, as well as a variety of news services.
- - Economic Data/Forecasting Tools -- various macro economic forecasting tools,
such as economic data and economic and political forecasts for various
countries or regions.
- - Quantitative/Technical Analysis -- software tools that assist in quantitative
and technical analysis of investment data.
- - Fundamental Industry Analysis -- industry-specific fundamental
investment research.
- - Fixed Income Security Analysis -- data and analytical tools that pertain
specifically to fixed income securities. These tools assist in creating
financial models, such as cash flow projections and interest rate sensitivity
analyses, that are relevant to fixed income securities.
- - Other Specialized Tools -- other specialized products, such as specialized
economic consulting analyses and attendance at investment oriented
conferences.
Many third-party products include computer software or on-line data feeds.
Certain products also include computer hardware necessary to use the product.
Certain of these third party services may be available directly from the
vendor on a hard dollar basis. Others are available only through broker-dealer
firms for soft dollars. 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
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to or in excess of the target. Stein Roe generally will carry over target
shortages and excesses to the next year's target. Stein Roe believes that this
practice reduces the conflicts of interest associated with soft dollar
transactions, since Stein Roe can meet the non-binding expectations of
broker-dealers providing soft dollar products over flexible time periods. In the
case of third party products, the third party is paid by the broker-dealer and
not by Stein Roe. Stein Roe may enter into a contract with the third party
vendor to use the product. (For example, if the product includes software, Stein
Roe will enter into a license to use the software from the vendor.)
In certain cases, Stein Roe uses soft dollars to obtain products that have
both research and non-research purposes. Examples of non-research uses are
administrative and marketing functions. These are referred to as "mixed use"
products. As of the date of this 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.
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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 if the net asset value of
shares were reduced below his cost. However, for federal income tax purposes the
shareholder's original cost would continue as his tax basis.
The Fund expects that none of its dividends will qualify for the deduction
for dividends received by corporate shareholders.
INVESTMENT PERFORMANCE
The Fund may quote yield figures from time to time. The "Yield" of the
Fund is computed by dividing the net investment income per share earned during a
30-day period (using the average number of shares entitled to receive dividends)
by the net asset value per share on the last day of the period. The Yield
formula provides for semiannual compounding which assumes that net investment
income is earned and reinvested at a constant rate and annualized at the end of
a six-month period.
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1)(6) -1].
Where: a = dividends and interest earned during the period.
(For this purpose, the Fund will recalculate the
yield to maturity based on market value of each
portfolio security on each business day on which
net asset value is calculated.)
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the ending net asset value of the Fund for the period.
The 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.
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Average Annual Total Return is computed as follows: ERV = P(1+T)(n)
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the end
of the period (or fractional portion).
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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.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Following are the audited financial statements for the initial capitalization of
the Fund and the report of PricewaterhouseCoopers LLP dated January 14, 2000.
Liberty-Stein Roe Advisor Floating Rate Advantage Fund
Statement of Assets and Liabilities
January 13, 2000
Assets:
Cash $100,000
================================================================================
Deferred offering costs 211,193
Total assets 311,193
================================================================================
Liabilities:
Payable for offering costs 211,193
Capital:
Paid in Capital (net assets) $100,000
================================================================================
================================================================================
Net assets, shares and net asset value per share:
Class A ($25,000/2,083) $12.00
Class B ($25,000/2,083) $12.00
Class C ($25,000/2,083) $12.00
Class Z ($25,000/2,083) $12.00
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
Note 1. Organization: Liberty-Stein Roe Advisor Floating Rate Advantage Fund
(the "Fund") is a newly organized non-diversified, closed-end management
investment company. The Fund is engaged in a continuous public offering of its
shares and will offer on a quarterly basis to repurchase between 5% and 25% of
its outstanding shares at the then current net asset value of the shares. The
Fund may issue an unlimited number of shares. The Fund offers four classes of
shares - Classes A, B, C and Z.
The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve this
objective by investing primarily (at least 80% of its total assets) 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. All or substantially all of the Fund's Senior
Loans may be rated below investment grade. The Fund may periodically borrow
money for the purpose of financing long-term investments, obtaining short-term
liquidity and for temporary, emergency or extraordinary 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.
At January 13, 2000, the Fund is inactive except for matters relating to its
organization and registration as a closed-end investment company under the
Investment Company Act of 1940, and the sale of 2,083 shares for $25,000 for
each of Class A, Class B, Class C and Class Z to Colonial
Management Associates, Inc., ("CMA") a wholly-owned subsidiary of Liberty Funds
Group LLC, which is an indirect majority-owned subsidiary of Liberty Mutual
Insurance Company ("Liberty Mutual"). Organizational costs will be borne by CMA,
offering costs will be borne by the Fund.
Note 2. Transactions with Affiliates: Upon commencement of investment
operations, Stein Roe & Farnham Incorporated (the "Advisor), a wholly owned
indirect subsidiary of Liberty Financial Companies, Inc. ("Liberty Financial"),
which is a majority owned indirect subsidiary of Liberty Mutual, will receive a
monthly management fee from the Fund, computed and accrued daily and paid
monthly, in an amount equal to 0.45% annually of the Fund's average net assets.
CMA provides the Fund with administrative (accounting, bookkeeping, pricing and
other) services for a monthly fee, computed and accrued daily, based on an
annual rate of 0.20% of the Fund's average net assets.
Liberty Funds Services, Inc., a wholly owned subsidiary of Liberty Financial,
performs certain transfer agency services for the Fund for an annual fee of
0.17% of the Fund's average net assets, plus out-of-pocket expenses.
Fund shares are offered for sale through Liberty Funds Distributor, Inc., a
wholly owned indirect subsidiary of Liberty Financial. The Fund has adopted a
distribution plan for each class of shares as stated in the "Multiple Share
Classes" section in the Prospectus.
For the period from the Fund's inception through December 31, 2000, the Advisor
has agreed to reimburse the Fund for its operating expenses to the extent that
such expenses (exclusive of management, distribution and service fees and
interest expenses, if any) exceed 0.15%.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of
Liberty-Stein Roe Advisor Floating Rate Advantage Fund
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Liberty-Stein Roe
Advisor Floating Rate Advantage Fund (the "Fund") at January 13, 2000, in
conformity with accounting principles generally accepted in the United States.
The statement of assets and liabilities is the responsibility of the Fund's
management; our responsibility is to express an opinion on the statement of
assets and liabilities based on our audit. We conducted our audit of the
statement of assets and liabilities in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the statement of assets
and liabilities is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
statement of assets and liabilities, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 14, 2000
<PAGE>
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
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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.
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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.
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A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC and C. Debt rated BB, B, CCC, CC, or C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C1. This rating is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
NOTES: The ratings from AA to CCC may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within the major ratings
categories. Foreign debt is rated on the same basis as domestic debt measuring
the creditworthiness of the issuer; ratings of foreign debt do not take into
account currency exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks. Examples of such obligations are:
securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and interest only and
principal only mortgage securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no volatility or
variability in total return.
COMMERCIAL PAPER RATINGS
Ratings by Moody's. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
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If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment.
Ratings By S&P. A brief description of the applicable rating symbols
and their meaning follows:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
[LIBERTY FUNDS LOGO]
Liberty Funds Distributor, Inc. (c)2000
One Financial Center, Boston, MA 02111-2621. 1-800-426-3750
www.libertyfunds.com.....................................FR-16/1131-1199(11/99)
44
<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
Statement of Assets and Liabilities
(2) Exhibits
(a)(1) Agreement and Declaration of Trust(1)
(a)(2) Amendment No. 1 to Agreement and Declaration of
Trust
(b) By-Laws(1)
(c) Not Applicable
(d) Form of Specimen of Share Certificate - filed as
Exhibit 4 in Part C, Item 24(b) of Post-Effective
Amendment No. 45 to the Registration Statement on
Form N-1A of Liberty Funds Trust IV (formerly
Colonial Trust IV) (File Nos. 2-62492 and
811-2865), filed with the Commission on or about
March 21, 1997, and is hereby incorporated by
reference and made a part of this Registration
Statement
(e) Not Applicable
(f) Not Applicable
(g)(1) Management Agreement between Liberty-Stein Roe
Advisor Floating Rate Advantage Fund
and Stein Roe & Farnham Incorporated
(g)(2) Expense Reimbursement Agreement between Liberty-
Stein Roe Advisor Floating Rate
Advantage Fund and Stein Roe & Farnham Incorporated
(h) Form of Underwriting Agreement
(i) Not Applicable
(j)(1) Custodian Contract between the Registrant and State
Street Bank and Trust Company
(j)(2) Addendum to Custodian Contract between the
Registrant and State Street Bank and Trust
Company
(j)(3) Loan Services Addendum to Custodian Contract
between the Registrant and State Street
Bank and Trust Company
(k)(1) Amended and Restated Shareholders' Servicing and
Transfer Agent Agreement as amended filed as
Exhibit No. 9.(b) in Part C, Item 24(b) of
Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A of Liberty Funds Trust VI
(formerly Colonial Trust VI)(File Nos. 33-45117 &
811-6529), filed with the Commission on or about
September 27, 1996, and is hereby incorporated by
reference and made a part of this Registration
Statement
(k)(2) Amendment No. 16 to Schedule A of Amended and
Restated Shareholders' Servicing and
Transfer Agent Agreement as amended
(k)(3) Amendment No. 21 to Appendix I of Amended and
Restated Shareholders' Servicing and
Transfer Agent Agreement as amended
(k)(4) Administration Agreement between Registrant and
Colonial Management Associates, Inc.
(k)(5) Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940
(k)(6) Rule 12b-1 Distribution Plan
(l) Opinion and Consent of Counsel
(m) Not Applicable
(n) Consent of Independent Accountants
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
(r) Not Applicable
- --------------------------------
Power of Attorney for: Tom Bleasdale, John V. Carberry, Lora S. Collins,
James E. Grinnell, Richard W. Lowry, Salvatore Macera, William E. Mayer,
James L. Moody, Jr., John J. Neuhauser, Thomas E. Stitzel, Robert
L. Sullivan and Anne-Lee Verville - filed as Exhibit 18(a) in Part C, Item
24(b) of Post-Effective Amendment No. 54 to the Registration Statement on
Form N-1A of Liberty Funds Trust IV (formerly Colonial Trust
IV)(File Nos. 2-62492 and 811-2865), filed with the Commission on or
about May 26, 1999 and is hereby incorporated by reference and made a part of
this Registration Statement
(1) Incorporated by reference to the Registration Statement filed
with the Commission via EDGAR on or about November 24, 1999.
Item 25. Marketing Arrangements
Not applicable.
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 $ 41,700
National Association of Securities Dealers, Inc. Fees $ 15,350
Printing Fees $149,143
Accounting Fees and Expenses $ 2,500
Legal Fees and Expenses $ 30,000
Miscellaneous $ 5,000
Total $243,693
</TABLE>
Item 27. Persons Controlled by or under Common Control with Registrant
None
Item 28. Number of Holders of Securities
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
<S> <C>
Liberty-Stein Roe Advisor Floating Rate Advantage Fund -
Class A 1
Liberty-Stein Roe Advisor Floating Rate Advantage Fund -
Class B 1
Liberty-Stein Roe Advisor Floating Rate Advantage Fund -
Class C 1
Liberty-Stein Roe Advisor Floating Rate Advantage Fund -
Class Z 1
</TABLE>
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
Advisor, 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 advisor to individuals, trustees, pension and
profit sharing plans, charitable organizations, and other
investors. In addition to Registrant, it also acts as
investment advisor 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 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 and of Colonial
Management Associates, Inc. (which is a subsidiary of Liberty
Financial Companies, Inc.), and of the Registrant and other
investment companies managed by Stein Roe. (The listed entities
are located at One South Wacker Drive, Chicago, Illinois 60606,
except for Colonial Management Associates, Inc., which is
located at One Financial Center, Boston, MA 02111 and SteinRoe
Variable Investment Trust, which is 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
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 14th day of January, 2000.
LIBERTY-STEIN ROE ADVISOR
FLOATING RATE ADVANTAGE FUND
By: STEPHEN E. GIBSON
Stephen E. Gibson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in their capacities and
on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
STEPHEN E. GIBSON President (chief January 14, 2000
- -------------------- executive officer)
Stephen E. Gibson
TIMOTHY J. JACOBY Treasurer and Chief January 14, 2000
- -------------------- Financial Officer
Timothy J. Jacoby (principal accounting
officer)
J. KEVIN CONNAUGHTON Controller and Chief January 14, 2000
- --------------------- Accounting Officer
J. Kevin Connaughton (principal accounting
officer)
</TABLE>
<PAGE>
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 January 14, 2000
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
<PAGE>
EXHIBIT INDEX
(a)(2) Amendment No. 1 to Agreement and Declaration of Trust
(g)(1) Management Agreement between Liberty-Stein Roe Advisor
Floating Rate Advantage Fund and Stein Roe
& Farnham Incorporated
(g)(2) Expense Reimbursement Agreement between Liberty-Stein Roe
Advisor Floating Rate Advantage Fund
and Stein Roe & Farnham Incorporated
(h) Form of Underwriting Agreement
(j)(1) Custodian Contract between the Registrant and State Street
Bank and Trust Company
(j)(2) Addendum to Custodian Contract between the Registrant and
State Street Bank and Trust Company
(j)(3) Loan Services Addendum to Custodian Contract between the
Registrant and State Street Bank and Trust Company
(k)(2) Amendment No. 16 to Schedule A of Amended and Restated
Shareholders' Servicing and Transfer Agent Agreement as
amended
(k)(3) Amendment No. 21 to Appendix I of Amended and Restated
Shareholders' Servicing and Transfer Agent
Agreement as amended
(k)(4) Administration Agreement between Registrant and Colonial
Management Associates, Inc.
(k)(5) Plan pursuant to Rule 18f-3(d) under the Investment Company
Act of 1940
(k)(6) Rule 12b-1 Distribution Plan
(l) Opinion and Consent of Counsel
(n) Consent of Independent Accountants
AMENDMENT NO. 1
TO THE
AGREEMENT AND DECLARATION OF TRUST
OF
STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
WHEREAS, Section 1 of Article I of the Agreement and Declaration of
Trust (Declaration of Trust) dated June 8, 1999 of the Stein Roe Advisor
Floating Rate Advantage Fund (Trust), a copy of which is on file in the Office
of the Secretary of The Commonwealth of Massachusetts authorizes the Trustees of
the Trust to amend the Declaration of Trust to change the name of the Trust
without authorization by vote of Shareholders of the Trust.
WE, THE UNDERSIGNED, being a majority of the Trustees of Stein Roe
Advisor Floating Rate Advantage Fund, do hereby certify that the undersigned
have determined to conduct the business of the Trust under the name
"Liberty-Stein Roe Advisor Floating Rate Advantage Fund" and have authorized the
following amendment to said Declaration of Trust:
Section 1 of Article I is hereby amended to read in its entirety as
follows:
Section 1. This Trust shall be known as "Liberty-Stein Roe
Advisor Floating Rate Advantage Fund" and the Trustees shall conduct
the business of the Trust under that name or any other name as they may
from time to time determine.
The foregoing Amendment shall become effective as of December 15, 1999.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands in
the City of Boston, Massachusetts, for themselves and their assigns, as of this
December 15, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/Robert J. Birnbaum /s/William E. Mayer
- ---------------------------------------------------------- -------------------------------------------------------
/s/Tom Bleasdale /s/James L. Moody, Jr.
- ---------------------------------------------------------- -------------------------------------------------------
/s/John V. Carberry /s/John J. Neuhauser
- ---------------------------------------------------------- -------------------------------------------------------
/s/Lora S. Collins /s/Thomas E. Stitzel
- ---------------------------------------------------------- -------------------------------------------------------
/s/James E. Grinnell /s/Robert L. Sullivan
- ---------------------------------------------------------- -------------------------------------------------------
/s/Richard W. Lowry /s/Anne-Lee Verville
- ----------------------------------------------------------
/s/Salvatore Macera
</TABLE>
Commonwealth of Massachusetts )
)ss.
County of Suffolk )
Then personally appeared the above-named Trustees and executed
Amendment No. 1 to the Agreement and Declaration of Trust of Stein Roe Advisor
Floating Rate Advanatage Fund as their free act and deed, before me, this
December 15, 1999.
/s/Mary P. Mahoney
Notary Public/My Commission
Expires: 2/22/02
MANAGEMENT AGREEMENT
AGREEMENT dated as of January 14, 2000, between LIBERTY-STEIN ROE ADVISOR
FLOATING RATE ADVANTAGE FUND, a Massachusetts business trust (Fund), and STEIN
ROE & FARNHAM INCORPORATED, a Delaware corporation (Advisor).
In consideration of the promises and covenants herein, the parties agree as
follows:
1. The Advisor will manage the investment of the assets of the Fund in
accordance with its investment policies and will perform the other
services herein set forth, subject to the supervision of the Board of
Trustees of the Fund.
2. In carrying out its investment management obligations, the Advisor
shall:
(a) evaluate such economic, statistical and financial information and
undertake such investment research as it shall believe advisable; (b)
purchase and sell securities and other investments for the Fund in
accordance with the procedures approved by the Board of Trustees; and
(c) report results to the Board of Trustees.
3. The Advisor shall furnish at its expense the following:
(a) office space, supplies, facilities and equipment; (b) executive and
other personnel for managing the affairs of the Fund (including
preparing financial information of the Fund and reports and tax returns
required to be filed with public authorities, but exclusive of those
related to custodial, transfer, dividend and plan agency services,
determination of net asset value and maintenance of records required by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
rules thereunder (1940 Act)); and (c) compensation of Trustees who are
directors, officers, partners or employees of the Advisor or its
affiliated persons (other than a registered investment company).
4. The Advisor shall be free to render similar services to others so long
as its services hereunder are not impaired thereby.
5. The Fund shall pay the Advisor monthly a fee at the annual rate of 0.45%
of the Average Daily Managed Assets of the Fund.
"Average Daily Managed Assets" of the Fund shall mean the average
daily value of the total assets of the Fund less all accrued
liabilities of the Fund (other than the aggregate amount of any
outstanding borrowings constituting financial leverage).
6. If the operating expenses of the Fund for any fiscal year exceed the
most restrictive applicable expense limitation for any state in which
shares are sold, the Advisor's fee shall be reduced by the excess but
not to less than zero. Operating expenses shall not include brokerage,
interest, taxes, deferred organization expenses and extraordinary
expenses, if any. The Advisor may waive its compensation (and, bear
expenses of the Fund) to the extent that expenses of the Fund exceed any
expense limitation the Advisor declares to be effective.
7. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, shall continue until two years from its
date of execution and from year to year thereafter so long as approved
annually in accordance with the 1940 Act; (b) may be terminated without
penalty on sixty days written notice to the Advisor either by vote of
the Board of Trustees of the Fund or by vote of a majority of the
outstanding voting securities of the Fund; (c) shall automatically
terminate in the eventof its assignment; and (d) may be terminated
without penalty by the Advisor on sixty days written notice to the Fund.
8. This Agreement may be amended in accordance with the 1940 Act.
9. For the purpose of the Agreement, the terms "vote of a majority of the
outstanding voting securities", "affiliated person" and "assignment"
shall have their respective meanings defined in the 1940 Act and
exemptions and interpretations issued by the Securities and Exchange
Commission under the 1940 Act.
10. In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Advisor, or reckless disregard of its obligations and
duties hereunder, the Advisor shall not be subject to any liability to
the Fund, to any shareholder of the Fund or to any other person, firm or
organization, for any act or omission in the course of, or connected
with, rendering services hereunder.
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
By: /s/J. Kevin Connaughton
Title: Controller
STEIN ROE & FARNHAM INCORPORATED
By: /s/Joseph R. Palombo
Title: Executive Vice President
A copy of the document establishing the Fund is filed with the Secretary of The
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Fund individually but only upon the assets of the Fund.
EXPENSE REIMBURSEMENT AGREEMENT
-------------------------------
AGREEMENT made this 14th day of January, 2000, by and between LIBERTY-STEIN ROE
ADVISOR FLOATING RATE ADVANTAGE FUND, a Massachusetts business trust (the
"Fund"), and STEIN ROE & FARNHAM INCORPORATED, a Delaware corporation (the
"Advisor").
WHEREAS, the Fund and the Advisor have separately entered into a
Management Agreement of even date herewith (the "Management Agreement");
In consideration of the mutual covenants hereinafter contained, and in
connection with the establishment and commencement of operations of the Fund, it
is hereby agreed by and between the parties hereto as follows:
1. For the period from the commencement of the Fund's operations through
December 31, 2000, the Advisor agrees to reimburse the Fund for expenses (other
than Management Fees payable pursuant to the terms of the Management Agreement,
administrative fees payable pursuant to the terms of the Administration
Agreement, distribution or service fees, and interest and fees on borrowings)
incurred by the Fund in excess of an annual rate of 0.15% of the average daily
net assets of the Fund.
2. This Agreement, and the Advisor's obligation to so waive expenses hereunder,
shall terminate on the earlier of (a) December 31, 2000 or (b) termination of
the Management Agreement.
3. Except as provided in paragraph 2 above, this Agreement may be terminated
only by the vote of (a) the Board of Trustees of the Fund, including the vote of
the members of the Board who are not "interested persons" within the meaning of
the Investment Company Act of 1940, and (b) a majority of the outstanding voting
securities of the Fund.
4. If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule, or otherwise, the remainder shall not be thereby
affected.
5. The Fund's Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund
by the Fund's officers as officers and not individually and the obligations
imposed upon the Fund by this Agreement are not binding upon any of the Fund's
Trustees, officers or shareholders individually but are binding only upon the
assets and property of the Fund.
<PAGE>
IN WITNESS WHEREOF, the Fund and the Advisor have caused this Agreement to be
executed on the day and year above written.
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
By: J. Kevin Connaughton, Controller
STEIN ROE & FARNHAM INCORPORATED
By: Joseph R. Palombo, Executive Vice President
UNDERWRITING AGREEMENT BETWEEN
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
AND LIBERTY FUNDS DISTRIBUTOR, INC.
THIS UNDERWRITING AGREEMENT ("Agreement"), made as of the 14th day of
January, 2000 by and between Liberty-Stein Roe Advisor Floating Rate Advantage
Fund, a business trust organized and existing under the laws of the Commonwealth
of Massachusetts (hereinafter called the "Fund"), and Liberty Funds Distributor,
Inc., a corporation organized and existing under the laws of the Commonwealth of
Massachusetts (hereinafter called the "Distributor").
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end management
investment company registered under the Investment Company Act of 1940, as
amended ("ICA-40"); and
WHEREAS, the Distributor is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended ("SEA-34") and the laws of each
state (including the District of Columbia and Puerto Rico) in which it engages
in business to the extent such law requires, and is a member of the National
Association of Securities Dealers ("NASD") (such registrations and membership
are referred to collectively as the "Registrations"); and
WHEREAS, the Fund desires the Distributor to act as the distributor in
the public offering of its Shares of beneficial interest (hereinafter called
"Shares");
WHEREAS, the Fund shall pay all charges of its transfer, shareholder
recordkeeping, dividend disbursing and redemption agents, if any; all expenses
of notices, proxy solicitation material and reports to shareholders; all
expenses of preparation of annual or more frequent revisions of the Fund's
Prospectus and Statement of Additional Information ("SAI") and of supplying
copies thereof to shareholders; all expenses of registering and maintaining the
registration of the Fund under ICA-40 and of the Fund's Shares under the
Securities Act of 1933, as amended ("SA-33"); all expenses of qualifying and
maintaining qualification of such Fund and of the Fund's Shares for sale under
securities laws of various states or other jurisdictions and of registration and
qualification of the Fund under all laws applicable to the Fund or its business
activities; and
WHEREAS, Stein Roe and Farnham Incorporated, investment advisor to the
Fund, or its affiliates, may pay expenses incurred in the sale and promotion of
the Fund except as provided in the Fund's 12b-1 plan;
NOW, THEREFORE, in consideration of the premises and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. Appointment. The Fund appoints Distributor to act as principal
underwriter (as such term is defined in Sections 2(a)(29) of ICA-40) of its
Shares for each series or class of the Fund set forth on Schedule A hereto.
2. Delivery of Fund Documents. The Fund has furnished Distributor with
properly certified or authenticated copies of each of the following in effect on
the date hereof and shall furnish Distributor from time to time properly
certified or authenticated copies of all amendments or supplements thereto:
(a) Agreement and Declaration of Trust;
(b) By-Laws;
(c) Resolutions of the Board of Trustees of the Fund (hereinafter
referred to as the "Board") selecting Distributor as
distributor and approving this form of agreement and
authorizing its execution.
The Fund shall furnish Distributor promptly with copies of any
registration statements filed by it with the Securities and Exchange Commission
("SEC") under SA-33 or ICA-40, together with any financial statements and
exhibits included therein, and all amendments or supplements thereto hereafter
filed.
The Fund also shall furnish Distributor such other certificates or
documents which Distributor may from time to time, in its discretion, reasonably
deem necessary or appropriate in the proper performance of its duties.
3. Distribution of Shares.
(a) Subject to the provisions of Paragraphs 6, 7, 10, 11, 12, 13
and 14 hereof, and to such minimum purchase and other
requirements as may from time to time be indicated in the
Fund's Prospectus, Distributor, acting as principal for its
own account and not as agent for the Fund, shall have the
right to purchase Shares from the Fund. Distributor shall sell
Shares only in accordance with the Fund's Prospectus, on a
"best efforts" basis. Distributor shall purchase Shares from
the Fund at a price equal to the net asset value, shall sell
Shares at the public offering price as defined in Paragraph 8,
and shall retain all sales charges.
(b) The Fund shall pay all expenses associated with notices, proxy
solicitation material, the preparation of annual or more
frequent revisions to the Fund's Prospectus and SAI and of
printing and supplying the currently effective Prospectus and
SAI to shareholders, other than those necessitated by
Distributor's activities or rules and regulations related to
Distributor's activities where such amendments or supplements
result in expenses which the Fund would not otherwise have
incurred.
(c) The Distributor (or its affiliates) shall pay the costs of
printing and supplying all copies of the Prospectus and SAI
that it may reasonably request for use in connection with the
distribution of Shares. The Distributor will also pay the
expenses of the preparation, excluding legal fees, and
printing of all amendments and supplements to the Fund's
Prospectus and SAI if the amendment or supplement arises from
Distributor's activities or rules and regulations related to
Distributor's activities and those expenses would not
otherwise have been incurred by the Fund. Distributor will pay
all expenses incurred by Distributor in advertising, promoting
and selling Fund Shares.
(d) Prior to the continuous offering of any Fund Shares,
commencing on a date agreed upon by the Fund and the
Distributor, it is contemplated that the Distributor may
solicit subscriptions for such Shares during a subscription
period which shall last for such period as may be agreed upon
by the parties hereto. The subscriptions will be payable
within three business days after the termination of the
subscription period, at which time the Fund will commence
operations.
4. Selling Agreements. Distributor is authorized to enter into
agreements with other broker-dealers providing for the solicitation of
unconditional orders for purchases of the Fund's Shares authorized for issuance
and registered under SA-33 and fix therein the portion of the sales charge which
may be reallowed to the selected dealers, as permitted under that Fund's
prospectus. All such agreements shall be either in the form of agreement
attached hereto or in such other form as may be approved by the officers of the
Fund ("Selling Agreement"). Within the United States, the Distributor shall
offer and sell Shares to such selected dealers as are members in good standing
of the NASD; "banks" as such term is defined in Section 3(a)(6) of the Exchange
Act or a "bank holding company" as such term is defined in the Bank Holding
Company Act of 1956, as amended, duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it was organized; and such
other entities or purchasers as otherwise mutually agreed in writing.
5. Conduct of Business. Other than as set forth in the Fund's currently
effective prospectus, Distributor will not distribute any sales material or
statements except literature or advertising which conforms to the requirements
of federal and state securities laws and regulations which have been filed,
where necessary, with the appropriate regulatory authorities. Upon the Fund's
request, Distributor will furnish the Fund with copies of all such materials
prior to their use. Any sales material or statements the substance of which is
not included in the Prospectus or SAI shall be submitted for advance approval by
the Fund.
6. Solicitation of Orders to Purchase Shares by Fund. The rights
granted to the Distributor shall be non-exclusive in that the Fund reserves the
right to solicit purchases from, and sell its Shares to, investors. Further, the
Fund reserves the right to issue Shares in connection with the merger or
consolidation of any other investment company, trust or personal holding company
with the Fund, or the Fund's acquisition, by the purchase or otherwise, of all
or substantially all of the assets of an investment company, trust or personal
holding company, or substantially all of the outstanding Shares or interests of
any such entity. Any right granted to Distributor to solicit purchases of Shares
will not apply to Shares that may be offered by the Fund to shareholders by
virtue of their being shareholders of the Fund.
7. Shares Covered by this Agreement. This Agreement relates to the
solicitation of orders to purchase Shares that are duly authorized and
registered and available for sale by the Fund, including redeemed or repurchased
Shares if and to the extent that they may be legally sold and if, but only if,
the Fund authorizes the Distributor to sell them.
8. Public Offering Price. The public offering price for the Fund's
Shares will be the net asset value per Share next determined by the Fund after
the Distributor or its appointed agent receives the order plus any sales charge
as set forth in the Fund's Prospectus. The net asset value per Share shall be
determined in the manner provided in the Fund's Agreement and Declaration of
Trust as now in effect or as they may be amended, and as reflected in the Fund's
then current Prospectus and SAI.
9. Compensation.
(a) Sales Charge. Distributor shall be entitled to charge a sales
charge on the sale or redemption, as appropriate, of
each series and class of each Fund's Shares as set forth
in the Fund's then current Prospectus. Distributor may
allow any dealers with which it has signed selling agreements
such commissions or discounts from and not exceeding
the total sales charge as Distributor shall deem advisable,
so long as any such commissions or discounts are set
forth in the Fund's current Prospectus to the extent required
by the applicable federal and state securities laws.
Distributor may also make payments to dealers from
Distributor's own resources, subject to the following
conditions: (a) any such payments shall not create any
obligation for or recourse against the Fund or any series
or class, and (b) the terms and conditions of any such
payments are consistent with the Fund's Prospectus and
applicable federal and state securities laws and are
disclosed in the Prospectus or SAI to the extent such laws may
require.
(b) Distribution Plans. Distributor shall also be entitled to
compensation for its services as provided in any Distribution
Plan adopted as to any series and class of any Fund's Shares
pursuant to Rule 12b-1 under the ICA-40.
10. Suspension of Sales. If and whenever the determination of the
Fund's net asset value is suspended and until such suspension is terminated, the
Distributor shall not accept orders for Shares except for unconditional orders
placed before the suspension. In addition, the Fund reserves the right to
suspend sales of Shares if, in the judgment of the Board of the Fund, it is in
the best interest of the Fund to do so, such suspension to continue for such
period as may be determined by the Board of the Fund; and in that event, (i) at
the direction of the Fund, Distributor shall suspend receipt and acceptance of
orders to purchase Shares of the Fund until otherwise instructed by the Fund and
(ii) the Distributor shall not accept orders to purchase Shares while such
suspension remains in effect unless otherwise directed by the Board.
11. Orders and Payment for Shares.
(a) Distributor shall direct orders for the purchase of Shares of
any series to the Fund's transfer agent. At or prior to the
time of delivery of any Shares the Distributor will pay or
cause to be paid to the custodian of the Fund's assets, for
the account of such series, an amount in cash equal to the
purchase price of such Shares. The Fund's custodian and
transfer agent shall be identified in its Prospectus.
(b) The Fund, or any agent of the Fund designated in writing by
the Fund, shall be promptly advised of all purchase orders for
Fund Shares received by the Distributor. Any order may be
rejected by the Fund; provided, however, that the Fund will
not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Fund Shares from
eligible investors.
12. Repurchase or Redemption of Shares by the Fund.
(a) Any of the outstanding Fund Shares may be tendered to the
transfer agent for redemption at any time, other than when
the Fund suspends redemptions as permitted by the Prospectus
or applicable law, and the Fund agrees to repurchase or
redeem the Shares so tendered in accordance with its
obligations as set forth in its Agreement and Declaration of
Trust, as amended from time to time, and in accordance with
the applicable provisions set forth in the Prospectus
and SAI. The price to be paid to redeem or repurchase the
Shares shall be equal to the net asset value calculated
in accordance with the provisions of the Fund's Prospectus
and SAI, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set
forth in the Prospectus or SAI of the Fund. All payments
by the Fund hereunder shall be made in the manner set forth
below.
(b) If Shares are tendered to the transfer agent for redemption or
repurchase by the Fund within seven business days after
Distributor's acceptance of the original purchase order for
such Shares, Distributor will immediately refund to the Fund
the full sales commission (net of allowances to dealers or
brokers) allowed to Distributor on the original sale, and will
promptly, upon receipt thereof, pay to the Fund any refunds
from dealers or brokers of the balance of sales commissions
reallowed by Distributor. The transfer agent shall notify
Distributor of such tender for redemption within ten days of
the day on which notice of such tender for redemption is
received by the transfer agent.
(c) The transfer agent shall pay the total amount of the
redemption price as defined in the above paragraph 12(a),
pursuant to the instructions of the Distributor in Federal
Funds on or before the seventh business day subsequent to its
having received the notice of redemption in proper form except
as otherwise provided in the Prospectus or SAI of the Fund.
The proceeds of any redemption of Shares shall be paid by the
transfer agent as follows: (i) any applicable CDSC shall be
paid to the Distributor, and (ii) the balance shall be paid to
or for the account of the shareholder, in each case in
accordance with the applicable provision of the Prospectus and
SAI.
13. Purchases for your own Account. Distributor may purchase Shares for
its own investment account upon Distributor's written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by the Fund.
14. Stein Roe & Farnham Incorporated Investment Programs. In connection
with any program under which Stein Roe & Farnham Incorporated or one of its
affiliates offers investment advice to shareholders, the Distributor is
authorized to offer and sell Shares of the Fund, as principal, to participants
in such program. The terms of this Agreement shall apply to such sales,
including terms as to the offering price of Shares, the proceeds to be paid to
the Fund, the duties of the Distributor, the payment of expenses and
indemnification obligations of the Fund and the Distributor.
15. Authorized Representations. No Fund is authorized by the
Distributor to give on behalf of the Distributor any information or to make any
representations other than the information and representations contained in the
Fund's registration statement filed with the SEC under SA-33 and/or ICA-40 as it
may be amended from time to time.
16. Registration of Additional Shares. The Fund hereby agrees to
register an indefinite number of Shares pursuant to Rule 24f-2 under ICA-40, as
amended. The Fund will, in cooperation with the Distributor, take such action as
may be necessary from time to time to qualify the Shares (so registered or
otherwise qualified for sale under SA-33), in any state mutually agreeable to
the Distributor and the Fund, and to maintain such qualification; provided,
however, that nothing herein shall be deemed to prevent the Fund from
registering its Shares without approval of the Distributor in any state it deems
appropriate.
17. Conformity With Law. Distributor agrees that in soliciting orders
to purchase Shares it shall duly conform in all respects with applicable federal
and state laws and the rules and regulations of the NASD. Distributor will use
its best efforts to maintain its registrations in good standing during the term
of this Agreement and will promptly notify the Fund and Stein Roe & Farnham
Incorporated in the event of the suspension or termination of any of the
registrations.
18. Independent Contractor. Distributor shall be an independent
contractor and neither the Distributor, nor any of its officers, directors,
employees, or representatives is or shall be an employee of the Fund in the
performance of Distributor's duties hereunder. Distributor shall be responsible
for its own conduct and the employment, control, and conduct of its agents and
employees and for injury to such agents or employees or to others through its
agents and employees and agrees to pay all employee taxes thereunder.
Distributor may appoint sub-agents or distribute through dealers or otherwise as
Distributor may determine from time to time, but this Agreement shall not be
construed as authorizing any dealer or other person to accept orders for sale or
repurchase on the Fund's behalf or otherwise act as the Fund's agent for any
purpose.
19. Indemnification. Distributor agrees to indemnify and hold harmless
the Fund and each of the members of its Board and its officers, employees and
representatives and each person, if any, who controls the Fund within the
meaning of Section 15 of SA-33 against any and all losses, liabilities, damages,
claims and expenses (including the reasonable costs of investigating or
defending any alleged loss, liability, damage, claim or expense and reasonable
legal counsel fees incurred in connection therewith) to which the Fund or such
of the members of its Board and of its officers, employees, representatives, or
controlling person or persons may become subject under SA-33, under any other
statute, at common law, or otherwise, arising out of or based upon (i) any
violation of an applicable law, rule or regulation or wrongful act by
Distributor or any of Distributor's directors, officers, employees or
representatives, or (ii) any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, Prospectus, SAI,
shareholder report or other information covering Shares of the Fund filed or
made public by the Fund or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading if
such statement or omission was made in reliance upon information furnished to
the Fund by Distributor in writing. In no case (i) is Distributor's indemnity in
favor of the Fund, or any person indemnified, to be deemed to protect the Fund
or such indemnified person against any liability to which the Fund or such
person would otherwise be subject by reason of willful misfeasance, bad faith,
or negligence in the performance of its or his duties or by reason of its or his
reckless disregard of its or his obligations and duties under this Agreement or
(ii) is Distributor to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Fund or any person
indemnified unless the Fund or such person, as the case may be, shall have
notified Distributor in writing of the claim within a reasonable time after the
summons, or other first written notification, giving information of the nature
of the claim served upon the Fund or upon such person (or after the Fund or such
person shall have received notice of such service on any designated agent).
However, failure to notify Distributor of any such claim shall not relieve
Distributor from any liability which Distributor may have to the Fund or any
person against whom such action is brought otherwise than on account of
Distributor's indemnity agreement contained in this Paragraph.
Distributor shall be entitled to participate, at its own expense, in
the defense, or, if Distributor so elects, to assume the defense of any suit
brought to enforce any such claim but, if Distributor elects to assume the
defense, such defense shall be conducted by legal counsel chosen by Distributor
and satisfactory to the persons indemnified who are defendants in the suit. In
the event that Distributor elects to assume the defense of any such suit and
retain such legal counsel, persons indemnified who are defendants in the suit
shall bear the fees and expenses of any additional legal counsel retained by
them. If Distributor does not elect to assume the defense of any such suit,
Distributor will reimburse persons indemnified who are defendants in such suit
for the reasonable fees of any legal counsel retained by them in such
litigation.
The Fund agrees to indemnify and hold harmless Distributor and each of
its directors, officers, employees, and representatives and each person, if any,
who controls Distributor within the meaning of Section 15 of SA-33 against any
and all losses, liabilities, damages, claims or expenses (including the damage,
claim or expense and reasonable legal counsel fees incurred in connection
therewith) to which Distributor or such of its directors, officers, employees,
representatives or controlling person or persons may become subject under SA-33,
under any other statute, at common law, or otherwise arising out of or based
upon (i) any violation of applicable law, rule or regulation or wrongful act by
the Fund or any of the members of the Fund's Board, or the Fund's officers,
employees or representatives other than Distributor, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in a
registration statement, Prospectus, SAI, shareholder report or other information
covering Shares filed or made public by the Fund or any amendment thereof or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading unless such statement or omission was made in reliance
upon information furnished by Distributor to the Fund. In no case (i) is the
Fund's indemnity in favor of the Distributor or any person indemnified to be
deemed to protect the Distributor or such indemnified person against any
liability to which Distributor or such indemnified person would otherwise be
subject by reason of willful misfeasance, bad faith, or negligence in the
performance of its or his duties or by reason of its or his reckless disregard
of its or his obligations and duties under this Agreement, or (ii) is the Fund
to be liable under its indemnity agreement contained in this Paragraph with
respect to any claim made against Distributor or any person indemnified unless
Distributor, or such person, as the case may be, shall have notified the Fund in
writing of the claim within a reasonable time after the summons, or other first
written notification, giving information of the nature of the claim served upon
Distributor or upon such person (or after Distributor or such person shall have
received notice of such service on any designated agent). However, failure to
notify a Fund of any such claim shall not relieve the Fund from any liability
which the Fund may have to Distributor or any person against whom such action is
brought otherwise than on account of the Fund's indemnity agreement contained in
this Paragraph.
The Fund shall be entitled to participate, at its own expense, in the
defense or, if the Fund so elects, to assume the defense of any suit brought to
enforce such claim but, if the Fund elects to assume the defense, such defense
shall be conducted by legal counsel chosen by the Fund and satisfactory to the
persons indemnified who are defendants in the suit. In the event that the Fund
elects to assume the defense of any such suit and retain such legal counsel, the
persons indemnified who are defendants in the suit shall bear the fees and
expenses of any additional legal counsel retained by them. If the Fund does not
elect to assume the defense of any such suit, the Fund will reimburse the
persons indemnified who are defendants in such suit for the reasonable fees and
expenses of any legal counsel retained by them in such litigation.
20. Duration and Termination of this Agreement. With respect to the
Fund and the Distributor, this Agreement shall become effective upon its
execution ("Effective Date") and unless terminated as provided herein, shall
remain in effect through June 30, 2001, and from year to year thereafter, but
only so long as such continuance is specifically approved at least annually (a)
by a vote of majority of the members of the Board of the Fund who are not
interested persons of the Distributor or of the Fund, voting in person at a
meeting called for the purpose of voting on such approval, and (b) by the vote
of either the Board of the Fund or a majority of the outstanding Shares of the
Fund. This Agreement may be terminated by and between an individual Fund and
Distributor at any time, without the payment of any penalty (a) on 60 days'
written notice, by the Board of the Fund or by a vote of a majority of the
outstanding Shares of the Fund, or by Distributor, or (b) immediately, on
written notice by the Board of the Fund, in the event of termination or
suspension of any of the Registrations. This Agreement will automatically
terminate in the event of its assignment. In interpreting the provisions of this
Paragraph 20 the definitions contained in Section 2(a) of ICA-40 (particularly
the definitions of "interested person", "assignment", and "majority of the
outstanding Shares") shall be applied.
21. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged, or terminated orally, but only by an instrument in
writing signed by each party against which enforcement of the change, waiver,
discharge, or termination is sought. If the Fund should at any time deem it
necessary or advisable in the best interests of the Fund that any amendment of
this Agreement be made in order to comply with the recommendations or
requirements of the SEC or any other governmental authority or to obtain any
advantage under state or Federal tax laws and notifies Distributor of the form
of such amendment, and the reasons therefor, and if Distributor should decline
to assent to such amendment, the Fund may terminate this Agreement forthwith. If
Distributor should at any time request that a change be made in the Fund's
Agreement and Declaration of Trust or By-Laws or in its methods of doing
business, in order to comply with any requirements of Federal law or regulations
of the SEC, or of a national securities association of which Distributor is or
may be a member, relating to the sale of Shares, and the Fund should not make
such necessary changes within a reasonable time, Distributor may terminate this
Agreement forthwith.
22. Liability. It is understood and expressly stipulated that neither
the shareholders of the Fund nor the members of the Board of the Fund shall be
personally liable hereunder. The obligations of the Fund are not personally
binding upon, nor shall resort to the private property of, any of the members of
the Board of the Fund, nor of the shareholders, officers, employees or agents of
the Fund, but only the Fund's property shall be bound. A copy of the Declaration
of Trust and of each amendment thereto has been filed by the Trust with the
Secretary of State of The Commonwealth of Massachusetts and with the Clerk of
the City of Boston, as well as any other governmental office where such filing
may from time to time be required.
23. Miscellaneous. The captions in this Agreement are included for
convenience or reference only, and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
24. Notice. Any notice required or permitted to be given by a party to
this Agreement or to any other party hereunder shall be deemed sufficient if
delivered in person or sent by registered or certified mail, postage prepaid,
addressed by the party giving notice to each such other party at the address
provided below or to the last address furnished by each such other party to the
party giving notice.
If to the Fund: One Financial Center
Boston, Massachusetts 02111
Attn: Secretary
If to Distributor: One Financial Center
Boston, Massachusetts 02111
Attn: Secretary
LIBERTY FUNDS DISTRIBUTOR, INC.
By:_____________________________
ATTEST:
- --------------------------
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
By:______________________________
Stephen E. Gibson
President
ATTEST:
- --------------------------
Assistant Secretary
<PAGE>
Schedule A to Underwriting Agreement
Between Liberty-Stein Roe Advisor Floating Rate Advantage Fund
and Liberty Funds Distributor, Inc.
The classes of the Fund covered by this agreement are:
<TABLE>
<CAPTION>
Name of Class Effective Date
<S> <C>
Liberty-Stein Roe Advisor Floating Rate Advantage Fund
Class A January ___, 2000
Class B January ___, 2000
Class C January ___, 2000
Class Z January ___, 2000
</TABLE>
Dated: January ___, 2000
CUSTODIAN CONTRACT
This Contract between Liberty-Stein Roe Advisor Floating Rate Advantage
Fund, a business trust organized and existing under the laws of the Commonwealth
of Massachusetts, hereinafter called the "Company", and State Street Bank and
Trust Company, a Massachusetts trust company, hereinafter called the
"Custodian",
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Company hereby employs the Custodian as the custodian of its
assets, including loans and participation and other interests in loans ("Loans")
and securities (as used herein, the term "securities" shall include Loans) which
it desires to be held in places within the United States ("domestic securities")
and securities it desires to be held outside the United States ("foreign
securities"). The Company agrees to deliver to the Custodian all securities and
cash owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Company
from time to time, and the cash consideration received by it for such new or
treasury shares of capital stock ("Shares") of the Company as may be issued or
sold from time to time. The Custodian shall not be responsible for any property
of the Company held or received by the Company and not delivered to the
Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote by
the board of trustees of the Company (the "Board"), and provided that the
Custodian shall have no more or less responsibility or liability to the Company
on account of any actions or omissions of any sub-custodian so employed than any
such sub-custodian has to the Custodian. The Custodian may employ as
sub-custodians for the Company's securities and other assets the foreign banking
institutions and foreign securities depositories designated in Schedule "A"
hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Company
Held By the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Company all non-cash property, to be held by it
in the United States, including all domestic investments owned by the
Company, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository
or in a book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies (each, a "U.S. Securities
System") and (b) commercial paper of an issuer for which the Custodian
acts as issuing and paying agent ("Direct Paper") which is deposited
and/or maintained in the Direct Paper System of the Custodian (the
"Direct Paper System") pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Company held by the Custodian or in a
U.S. Securities System account of the Custodian or in the Custodian's
Direct Paper book-entry system account ("Direct Paper System Account")
only upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, and only in the
following cases:
1) Upon sale of such securities for the account of the Company
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Company;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Company;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Company or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of
any agent appointed pursuant to Section 2.9 or into the name
or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Company, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Company, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian
and the Company, which may be in the form of cash or
obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with
any loans for which collateral is to be credited to the
Custodian's account in the book-entry system authorized by the
U.S. Department of the Treasury, the Custodian will not be
held liable or responsible for the delivery of securities
owned by the Company prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Company requiring a pledge of assets by the Company, but
only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Company, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Company;
13) For delivery in accordance with the provisions of any
agreement among the Company, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any contract market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Company;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Company, for delivery to such
Transfer Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Company's currently effective prospectus and statement
of additional information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
15) For any other proper corporate purpose, but only upon receipt
of Proper Instructions specifying the securities to be
delivered setting forth the purpose for which such delivery is
to be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of
such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Company or in the name of any nominee of the Company or of any nominee
of the Custodian which nominee shall be assigned exclusively to the
Company, unless the Company has authorized in writing the appointment
of a nominee to be used in common with other registered investment
companies having the same investment adviser as the Company, or in the
name or nominee name of any agent appointed pursuant to Section 2.9 or
in the name or nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian on behalf of the
Company under the terms of this Contract shall be in "street name" or
other good delivery form. If, however, the Company directs the
Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Company
on such securities and to notify the Company on a best efforts basis
only of relevant corporate actions including, without limitation,
pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Company,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Company, other than cash maintained by the Company
in a bank account established and used in accordance with Rule 17f-3
under the Investment Company Act of 1940. Funds held by the Custodian
for the Company may be deposited by it to its credit as Custodian in
the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of
1940 and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall be approved by
vote of a majority of the Board. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the
Company and the Custodian, the Custodian shall, upon the receipt of
Proper Instructions, make federal funds available to the Company as of
specified times agreed upon from time to time by the Company and the
Custodian in the amount of checks received in payment for Shares of the
Company which are deposited into the Company's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to United States registered securities held hereunder to
which the Company shall be entitled either by law or pursuant to custom
in the securities business, and shall collect on a timely basis all
income and other payments with respect to United States bearer
securities if, on the date of payment by the issuer, such securities
are held by the Custodian or its agent thereof and shall credit such
income, as collected, to the Company's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach
and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest
when due on securities held hereunder. Income due the Company on United
States securities loaned pursuant to the provisions of Section 2.2 (10)
shall be the responsibility of the Company. The Custodian will have no
duty or responsibility in connection therewith, other than to provide
the Company with such information or data as may be necessary to assist
the Company in arranging for the timely delivery to the Custodian of
the income to which the Company is properly entitled.
2.7 Payment of Company Monies. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties,
the Custodian shall pay out monies of the Company in the following
cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Company but only (a) against the delivery of such
securities, or evidence of title to such options, futures
contracts or options on futures contracts, to the Custodian
(or any bank, banking firm or trust company doing business in
the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Company
or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the
case of a purchase effected through a U.S. Securities System,
in accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in
Section 2.11; (d) in the case of repurchase agreements entered
into between the Company and the Custodian, or another bank,
or a broker-dealer which is a member of NASD, (i) against
delivery of the securities either in certificate form or
through an entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Company of
securities owned by the Custodian along with written evidence
of the agreement by the Custodian to repurchase such
securities from the Company or (e) for transfer to a time
deposit account of the Company in any bank, whether domestic
or foreign; such transfer may be effected prior to receipt of
a confirmation from a broker and/or the applicable bank
pursuant to Proper Instructions from the Company as defined in
Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Company as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the
Company as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Company, including but not limited to the following payments
for the account of the Company: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Company whether or not such expenses are to be
in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the governing
documents of the Company;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of Proper
Instructions specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contact, in any and
every case where payment for purchase of domestic securities for the
account of the Company is made by the Custodian in advance of receipt
of the securities purchased in the absence of specific written
instructions from the Company to so pay in advance, the Custodian shall
be absolutely liable to the Company for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder.
2.10 Deposit of Securities in U.S. Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Company in a
clearing agency registered with the Securities and Exchange Commission
under Section 17A of the Securities Exchange Act of 1934, which acts as
a securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "U.S. Securities System" in
accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep domestic securities of the Company in a
U.S. Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
U.S. Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary, custodian
or otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Company which are maintained in a U.S.
Securities System shall identify by book-entry those
securities belonging to the Company;
3) The Custodian shall pay for domestic securities purchased for
the account of the Company upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Company. The Custodian shall
transfer domestic securities sold for the account of the
Company upon (i) receipt of advice from the U.S. Securities
System that payment for such securities has been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such transfer and payment for the
account of the Company. Copies of all advices from the U.S.
Securities System of transfers of domestic securities for the
account of the Company shall identify the Company, be
maintained for the Company by the Custodian and be provided to
the Company at its request. Upon request, the Custodian shall
furnish the Company confirmation of each transfer to or from
the account of the Company in the form of a written advice or
notice and shall furnish to the Company copies of daily
transaction sheets reflecting each day's transactions in the
U.S.
Securities System for the account of the Company.
4) The Custodian shall provide the Company with any report
obtained by the Custodian on the U.S. Securities System's
accounting system, internal accounting control and procedures
for safeguarding domestic securities deposited in the U.S.
Securities System;
5) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Company for any loss or
damage to the Company resulting from use of the U.S.
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of
its or their employees or from failure of the Custodian or any
such agent to enforce effectively such rights as it may have
against the U.S. Securities System; at the election of the
Company, it shall be entitled to be subrogated to the rights
of the Custodian with respect to any claim against the U.S.
Securities System or any other person which the Custodian may
have as a consequence of any such loss or damage if and to the
extent that the Company has not been made whole for any such
loss or damage.
2.11 Company Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by the Company
in the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Company in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of the
Company which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the
Company;
4) The Custodian shall pay for securities purchased for the
account of the Company upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Company. The Custodian
shall transfer securities sold for the account of the Company
upon the making of an entry on the records of the Custodian to
reflect such transfer and receipt of payment for the account
of the Company;
5) The Custodian shall furnish the Company confirmation of each
transfer to or from the account of the Company, in the form of
a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the
Company copies of daily transaction sheets reflecting each
day's transaction in the U.S. Securities System for the
account of the Company;
6) The Custodian shall provide the Company with any report on its
system of internal accounting control as the Company may
reasonably request from time to time;
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for and on behalf of the Company, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Company, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of
The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection
with transactions by the Company, (ii) for purposes of segregating cash
or government securities in connection with options purchased, sold or
written by the Company or commodity futures contracts or options
thereon purchased or sold by the Company, (iii) for the purposes of
compliance by the Company with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of
the Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of clause (iv),
upon receipt of Proper Instructions setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of the Company held by it
and in connection with transfers of such securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Company or a nominee of the Company, all proxies,
without indication of the manner in which such proxies are to be voted,
and shall
<PAGE>
promptly deliver to the Company such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 Communications Relating to Company Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Company all written information (including, without limitation,
pendency of calls and maturities of domestic securities and expirations
of rights in connection therewith and notices of exercise of call and
put options written by the Company and the maturity of futures
contracts purchased or sold by the Company) received by the Custodian
from issuers of the domestic securities being held for the Company.
With respect to tender or exchange offers, the Custodian shall transmit
promptly to the Company all written information received by the
Custodian from issuers of the domestic securities whose tender or
exchange is sought and from the party (or his agents) making the tender
or exchange offer. If the Company desires to take action with respect
to any tender offer, exchange offer or any other similar transaction,
the Company shall notify the Custodian at least three business days
prior to the date on which the Custodian is to take such action.
2.16 Reports to Company by Independent Public Accountants. The Custodian
shall provide the Company, at such times as the Company may reasonably
require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including domestic securities deposited and/or maintained in
a U.S. Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of sufficient
scope and in sufficient detail, as may reasonably be required by the
Company to provide reasonable assurance that any material inadequacies
would be disclosed by such examination, and, if there are no such
inadequacies, the reports shall so state.
2.17 Services Relating to Loans. The Custodian shall perform certain
additional services with respect to the Company's Loans as described on
the Loan Services Addendum hereto.
3. Duties of the Custodian with Respect to Property of the Company Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Company hereby authorizes
and instructs the Custodian to employ as sub-custodians for the
Company's securities and other assets maintained outside the United
States the foreign banking institutions and foreign securities
depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as defined in
Section 5 of this Contract, together with an approval by the Company
signed by an authorized officer of the Company, the Custodian and the
Company may agree to amend Schedule A hereto from time to time to
designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodian. Upon receipt of Proper
Instructions, the Company may instruct the Custodian to cease the
employment of any one or more such sub-custodians for maintaining
custody of the Company's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Company may
determine to be reasonably necessary to effect the Company's foreign
securities transactions. The Custodian shall identify on its books as
belonging to the Company, the foreign securities of the Company held by
each foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Company, assets of the Company shall
be maintained in a clearing agency which acts as a securities
depository or in a book-entry system for the central handling of
securities located outside the United States (each, a "Foreign
Securities System") only through arrangements implemented by the
foreign banking institutions serving as sub-custodians pursuant to the
terms hereof (Foreign Securities Systems and U.S. Securities Systems
are collectively referred to herein as the "Securities System"). Where
possible, such arrangements shall include entry into agreements
containing the provisions set forth in Section 3.5 hereof.
3.4 Holding Securities. The Custodian may hold securities and other
non-cash property for all of its customers, including the Company, with
a foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers, provided
however, that (i) the records of the Custodian with respect to
securities and other non-cash property of the Company which are
maintained in such account shall identify by book-entry those
securities and other non-cash property belonging to the Company and
(ii) the Custodian shall require that securities and other non-cash
property so held by the foreign sub-custodian be held separately from
any assets of the foreign sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that: (a) the Company's
assets will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution
or its creditors or agent, except a claim of payment for their safe
custody or administration; (b) beneficial ownership of the Company's
assets will be freely transferable without the payment of money or
value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to the Company;
(d) officers of or auditors employed by, or other representatives of
the Custodian, including to the extent permitted under applicable law
the independent public accountants for the Company, will be given
access to the books and records of the foreign banking institution
relating to its actions under its agreement with the Custodian; and (e)
assets of the Company held by the foreign sub-custodian will be subject
only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Company. Upon request of the
Company, the Custodian will use its best efforts to arrange for the
independent accountants of the Company to be afforded access to the
books and records of any foreign banking institution employed as a
foreign sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Company from
time to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Company held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Company's securities and other assets
and advices or notifications of any transfers of securities to or from
each custodial account maintained by a foreign banking institution for
the Custodian on behalf of the Company indicating, as to securities
acquired for the Company, the identity of the entity having physical
possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Company held outside the United States by
foreign sub-custodians. (b) Notwithstanding any provision of this
Contract to the contrary, settlement and payment for securities
received for the account of the Company and delivery of securities
maintained for the account of the Company may be effected in accordance
with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer. (c) Securities maintained in the custody of a
foreign sub-custodian may be maintained in the name of such entity's
nominee to the same extent as set forth in Section 2.3 of this
Contract, and the Company agrees to hold any such nominee harmless from
any liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless,
the Custodian and each Company from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the
Company, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Company has not been
made whole for any such loss, damage, cost, expense, liability or
claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by paragraph 3.13 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism or any loss where the sub-custodian has
otherwise exercised reasonable care. Notwithstanding the foregoing
provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Company for any loss due to such delegation,
except such loss as may result from (a) political risk (including, but
not limited to, exchange control restrictions, confiscation,
expropriation, nationalization, insurrection, civil strife or armed
hostilities) or (b) other losses (excluding a bankruptcy or insolvency
of State Street London Ltd. not caused by political risk) due to Acts
of God, nuclear incident or other losses under circumstances where the
Custodian and State Street London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Company requires the Custodian to
advance cash or securities for any purpose including the purchase or
sale of foreign exchange or of contracts for foreign exchange, or in
the event that the Custodian or its nominee shall incur or be assessed
any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may
arise from its or its nominee's own negligent action, negligent failure
to act or willful misconduct, any property at any time held for the
account of the Company shall be security therefor and should the
Company fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Company assets
to the extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Company, during the month of June, information concerning the
foreign sub-custodians employed by the Custodian. Such information
shall be similar in kind and scope to that furnished to the Company in
connection with the initial approval of this Contract. In addition, the
Custodian will promptly inform the Company in the event that the
Custodian learns of a material adverse change in the financial
condition of a foreign sub-custodian or any material loss of the assets
of the Company or in the case of any foreign sub-custodian not the
subject of an exemptive order from the Securities and Exchange
Commission is notified by such foreign sub-custodian that there appears
to be a substantial likelihood that its shareholders' equity will
decline below $200 million (U.S. dollars or the equivalent thereof) or
that its shareholders' equity has declined below $200 million (in each
case computed in accordance with generally accepted U.S. accounting
principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Company assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract. (b)
Cash held for the Company in the United Kingdom shall be maintained in
an interest bearing account established for the Company with the
Custodian's London branch, which account shall be subject to the
direction of the Custodian.
3.14 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Company or the
Custodian as custodian of the Company by the tax law of the United
States of America or any state or political subdivision thereof. It
shall be the responsibility of the Company to notify the Custodian of
the obligations imposed on the Company or the Custodian as custodian of
the Company by the tax law of jurisdictions other than those mentioned
in the above sentence, including responsibility for withholding and
other taxes, assessments or other governmental charges, certifications
and governmental reporting. The sole responsibility of the Custodian
with regard to such tax law shall be to use reasonable efforts to
assist the Company with respect to any claim for exemption or refund
under the tax law of jurisdictions for which the Company has provided
such information.
4. Payments for Repurchases or Redemptions and Sales of Shares of the
Company
From such funds as may be available for the purpose, but subject to any
applicable votes of the Board pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available each
quarter for payment to holders of Shares who have delivered to the Transfer
Agent a request for redemption or repurchase of their Shares. In connection with
the redemption or repurchase of Shares of the Company, the Custodian is
authorized upon receipt of instructions from the Transfer Agent to wire funds to
or through a commercial bank designated by the redeeming shareholders. In
connection with the redemption or repurchase of Shares of the Company, the
Custodian shall honor checks drawn on the Custodian by a holder of Shares, which
checks have been furnished by the Company to the holder of Shares, when
presented to the Custodian in accordance with such procedures and controls as
are mutually agreed upon from time to time between the Company and the
Custodian.
The Custodian shall receive from the distributor for the Company's
Shares or from the Transfer Agent of the Company and deposit into the Company's
account such payments as are received for Shares of the Company issued or sold
from time to time by the Company. The Custodian will provide timely notification
to the Company and the Transfer Agent of any receipt by it of payments for
Shares of the Company.
5. Proper Instructions
Proper Instructions as used herein means a writing signed or initialed
by one or more person or persons as the Board shall have from time to time
authorized. Each such writing shall set forth the specific transaction or type
of transaction involved, including a specific statement of the purpose for which
such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Company shall cause all oral instructions to be confirmed in
writing. Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the instructions
are consistent with the security procedures agreed to by the Company and the
Custodian including, but not limited to, the security procedures selected by the
Company on the Funds Transfer Addendum to this Contract. For purposes of this
Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Company:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Company;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Company,
checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Company except as otherwise directed by the Board.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the
Company. The Custodian may receive and accept a certified copy of a vote of the
Board as conclusive evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination or of any action by the
Board as described in such vote, and such vote may be considered as in full
force and effect until receipt by the Custodian of written notice to the
contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board to keep the books of account of
the Company and/or compute the net asset value per share of the outstanding
shares of the Company or, if directed in writing to do so by the Company, shall
itself keep such books of account and/or compute such net asset value per share.
If so directed, the Custodian shall also calculate daily the net income of the
Company as described in the Company's currently effective prospectus and shall
advise the Company and the Transfer Agent daily of the total amounts of such net
income and, if instructed in writing by an officer of the Company to do so,
shall advise the Transfer Agent periodically of the division of such net income
among its various components. The calculations of the net asset value per share
and the daily income of the Company shall be made at the time or times described
from time to time in the Company's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Company under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Company and shall at all times
during the regular business hours of the Custodian be open for inspection by
duly authorized officers, employees or agents of the Company and employees and
agents of the Securities and Exchange Commission. The Custodian shall, at the
Company's request, supply the Company with a tabulation of securities owned by
the Company and held by the Custodian and shall, when requested to do so by the
Company and for such compensation as shall be agreed upon between the Company
and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Company's Independent Accountant
The Custodian shall take all reasonable action, as the Company may from
time to time request, to obtain from year to year favorable opinions from the
Company's independent accountants with respect to its activities hereunder in
connection with the preparation of the Company's Form N-1A, and Form N-SAR or
other annual reports to the Securities and Exchange Commission and with respect
to any other requirements of such Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Company and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Company for
any action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Company) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Company for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls or
restrictions, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications disruptions, acts
of war or terrorism, riots, revolutions, work stoppages, natural disasters or
other similar events or acts; (ii) errors by the Company or the Investment
Advisor in their instructions to the Custodian provided such instructions have
been in accordance with this Contract; (iii) the insolvency of or acts or
omissions by a Securities System; (iv) any delay or failure of any broker, agent
or intermediary, central bank or other commercially prevalent payment or
clearing system to deliver to the Custodian's sub-custodian or agent securities
purchased or in the remittance or payment made in connection with securities
sold; (v) any delay or failure of any company, corporation, or other body in
charge of registering or transferring securities in the name of the Custodian,
the Company, the Custodian's sub-custodians, nominees or agents or any
consequential losses arising out of such delay or failure to transfer such
securities including non-receipt of bonus, dividends and rights and other
accretions or benefits; (vi) delays or inability to perform its duties due to
any disorder in market infrastructure with respect to any particular security or
Securities System; and (vii) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of competent
jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract.
If the Company requires the Custodian to take any action with respect
to securities, which action involves the payment of money or which action may,
in the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Company being liable for the payment of money or incurring liability of
some other form, the Company, as a prerequisite to requiring the Custodian to
take such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Company requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement) or
in the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Company shall be security
therefor and should the Company fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the
Company assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however, that the Company shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Company's constitutive documents, and further provided, that the Company
may at any time by action of its Board (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the Custodian,
or (ii) immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Company shall pay to the
Custodian such compensation as may be due as of the date of such termination and
shall likewise reimburse the Custodian for its costs, expenses and
disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board, the Custodian
shall, upon termination, deliver to such successor custodian at the office of
the Custodian, duly endorsed and in the form for transfer, all securities then
held by it hereunder and shall transfer to an account of the successor custodian
all of the Company's securities held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board, deliver
at the office of the Custodian and transfer such securities, funds and other
properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board shall have been delivered to the Custodian
on or before the date when such termination shall become effective, then the
Custodian shall have the right to deliver to a bank or trust company, which is a
"bank" as defined in the Investment Company Act of 1940, doing business in
Boston, Massachusetts, of its own selection, having an aggregate capital,
surplus, and undivided profits, as shown by its last published report, of not
less than $25,000,000, all securities, funds and other properties held by the
Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract and to transfer to an account of
such successor custodian all of the Company's securities held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Company to procure the certified copy of the vote referred to or
of the Board to appoint a successor custodian, the Custodian shall be entitled
to fair compensation for its services during such period as the Custodian
retains possession of such securities, funds and other properties and the
provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Company may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Company's constitutive documents. No interpretive or additional provisions
made as provided in the preceding sentence shall be deemed to be an amendment of
this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Company and the Custodian relating to the custody of
the Company's assets.
18. Reproduction of Documents
This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties hereto
all/each agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
19. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Company to indicate whether it authorizes the
Custodian to provide the Company's name, address, and share position to
requesting companies whose securities the Company owns. If the Company tells the
Custodian "no", the Custodian will not provide this information to requesting
companies. If the Company tells the Custodian "yes" or does not check either
"yes" or "no" below, the Custodian is required by the rule to treat the Company
as consenting to disclosure of this information for all securities owned by the
Company or any funds or accounts established by the Company. For the Company's
protection, the Rule prohibits the requesting company from using the Company's
name and address for any purpose other than corporate communications. Please
indicate below whether the Company consents or objects by checking one of the
alternatives below.
YES [ ] The Custodian is authorized to release the Company's name,
address, and share positions.
NO [X] The Custodian is not authorized to release the Company's name,
address, and share positions.
20. Data Access Services Addendum
The Custodian and the Company agree to be bound by the terms of the
Remote Access Services Addendum attached hereto.
[The remainder of this page is intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of _______________.
*date
LIBERTY-STEIN ROE ADVISOR FLOATING RATE
Attested to by: ADVANTAGE FUND
____________________ By: _________________________
*[title]
Name: _________________________
Title: _________________________
STATE STREET BANK and TRUST COMPANY
Attested to by::
____________________ By: _________________________
VP & Assoc. Counsel
Name: Ronald E. Logue
Title: Vice Chairman
ADDENDUM TO CUSTODIAN AGREEMENT
*[date]
To: Liberty-Stein Roe Advisor Floating Rate Advantage Fund
Re: Remote Access Services
Dear Customer:
State Street Bank and Trust Company ("State Street") has developed and
utilizes proprietary accounting and other systems in conjunction with the
custodian services which we provide to you. In this regard, we maintain certain
information in databases under our control and ownership which we make available
to our customers (the "Remote Access Services").
The Services
State Street agrees to provide you, the Customer, and your designated
investment advisors, consultants or other third parties authorized by State
Street who agree to abide by the terms of this Agreement ("Authorized
Designees") with access to In~SightSM as described in Exhibit A (the "System")
on a remote basis for the purpose of obtaining and analyzing reports and
information.
Security Procedures
You agree to comply, and to cause your Authorized Designees to comply,
with remote access operating standards and procedures and with user
identification or other password control requirements and other security
procedures as may be issued from time to time by State Street for use of the
System and access to the Remote Access Services. You agree to advise State
Street immediately in the event that you learn or have reason to believe that
any person to whom you have given access to the System or the Remote Access
Services has violated or intends to violate the terms of this Agreement and you
will cooperate with State Street in seeking injunctive or other equitable
relief. You agree to discontinue use of the System and Remote Access Services,
if requested, for any security reasons cited by State Street.
Fees
Fees and charges for the use of the System and the Data Access
Services and related payment terms shall be as set forth in the Custody Fee
Schedule in effect from time to time between the parties (the "Fee Schedule").
You shall be responsible for any tariffs, duties or taxes imposed or levied by
any government or governmental agency by reason of the transactions contemplated
by this Agreement, including, without limitation, federal, state and local
taxes, use, value added and personal property taxes (other than income,
franchise or similar taxes which may be imposed or assessed against State
Street). Any claimed exemption from such tariffs, duties or taxes shall be
supported by proper documentary evidence delivered to State Street.
Proprietary Information/Injunctive Relief
The System and Remote Access Services described herein and the
databases, computer programs, screen formats, report formats, interactive design
techniques, formulae, processes, systems, software, knowhow, algorithms,
programs, training aids, printed materials, methods, books, records, files,
documentation and other information made available to you by State Street as
part of the Remote Access Services and through the use of the System and all
copyrights, patents, trade secrets and other proprietary rights of State Street
related thereto (the "Proprietary Information") are the exclusive, valuable and
confidential property of State Street and its relevant licensors. You agree on
behalf of yourself and your Authorized Designees to keep the Proprietary
Information confidential and to limit access to your employees and Authorized
Designees (under a similar duty of confidentiality) who require access to the
System for the purposes intended. The foregoing shall not apply to Proprietary
Information in the public domain or required by law to be made public.
You agree to use the Remote Access Services only in connection with the
proper purposes of this Agreement. You will not, and will cause your employees
and Authorized Designees not to, (i) permit any third party to use the System or
the Remote Access Services, (ii) sell, rent, license or otherwise use the System
or the Remote Access Services in the operation of a service bureau or for any
purpose other than as expressly authorized under this Agreement, (iii) use the
System or the Remote Access Services for any fund, trust or other investment
vehicle without the prior written consent of State Street, or (iv) allow or
cause any information transmitted from State Street's databases, including data
from third party sources, available through use of the System or the Remote
Access Services, to be redistributed or retransmitted for other than use for or
on behalf of yourself, as our Customer.
You agree that neither you nor your Authorized Designees will modify
the System in any way, enhance or otherwise create derivative works based upon
the System, nor will you or your Authorized Designees reverse engineer,
decompile or otherwise attempt to secure the source code for all or any part of
the System.
You acknowledge that the disclosure of any Proprietary Information, or
of any information which at law or equity ought to remain confidential, will
immediately give rise to continuing irreparable injury to State Street
inadequately compensable in damages at law and that State Street shall be
entitled to obtain immediate injunctive relief against the breach or threatened
breach of any of the foregoing undertakings, in addition to any other legal
remedies which may be available.
Limited Warranties
State Street represents and warrants that it is the owner of and has
the right to grant access to the System and to provide the Remote Access
Services contemplated herein. Because of the nature of computer information
technology and the necessity of relying upon third party sources, and data and
pricing information obtained from third parties, the System and Remote Access
Services are provided "AS IS", and you and your Authorized Designees shall be
solely responsible for the investment decisions, regulatory reports and
statements produced using the Remote Access Services. State Street will not be
liable to you or your Authorized Designees for any direct or indirect, special,
incidental, punitive or consequential damages arising out of or in any way
connected with the System or the Remote Access Services, nor shall either party
be responsible for delays or nonperformance under this Agreement arising out of
any cause or event beyond such party's control.
State Street will take reasonable steps to ensure that its products
(and those of its third-party suppliers) reflect the available state of the art
technology to offer products that are Year 2000 compliant, including, but not
limited to, century recognition of dates, calculations that correctly compute
same century and multi century formulas and date values, and interface values
that reflect the date issues arising between now and the next one-hundred years,
and if any changes are required, State Street will make the changes to its
products at no cost to you and in a commercially reasonable time frame and will
require third-party suppliers to do likewise. You will do likewise for your
systems.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, STATE STREET EXPRESSLY
DISCLAIMS ANY AND ALL WARRANTIES CONCERNING THE SYSTEM AND THE SERVICES TO BE
RENDERED HEREUNDER, WHETHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY
WARRANTY OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE.
Infringement
State Street will defend or, at our option, settle any claim or action
brought against you to the extent that it is based upon an assertion that access
to the System or use of the Remote Access Services by you under this Agreement
constitutes direct infringement of any United States patent or copyright or
misappropriation of a trade secret, provided that you notify State Street
promptly in writing of any such claim or proceeding and cooperate with State
Street in the defense of such claim or proceeding. Should the System or the
Remote Access Services or any part thereof become, or in State Street's opinion
be likely to become, the subject of a claim of infringement or the like under
the patent or copyright or trade secret laws of the United States, State Street
shall have the right, at State Street's sole option, to (i) procure for you the
right to continue using the System or the Remote Access Services, (ii) replace
or modify the System or the Remote Access Services so that the System or the
Remote Access Services becomes noninfringing, or (iii) terminate this Agreement
without further obligation.
Termination
Either party may terminate this Agreement (i) for any reason by giving the other
party at least one-hundred and eighty (180) days' prior written notice in the
case of notice of termination by State Street to you or thirty (30) days' notice
in the case of notice from you to State Street of termination, or (ii)
immediately for failure of the other party to comply with any material term and
condition of the Agreement by giving the other party written notice of
termination. This Agreement shall in any event terminate within ninety (90) days
after the termination of any custodian agreement applicable to you. In the event
of termination, you will return to State Street all copies of documentation and
other confidential information in your possession or in the possession of your
Authorized Designees. The foregoing provisions with respect to confidentiality
and infringement will survive termination for a period of three (3) years.
Miscellaneous
This Agreement and the exhibits hereto constitute our entire
understanding with respect to access to the System and the Remote Access
Services. This Agreement cannot be modified or altered except in a writing duly
executed by both of us and shall be governed by and construed in accordance with
the laws of the State of New York.
Should you wish to avail yourself of the System and the Remote Access
Services, please sign and return one copy of this letter. If you do not sign and
return one copy of this letter we will deem your and your Authorized Designees'
continued use of the System and the Remote Access Services to be your acceptance
of these terms.
Very truly yours,
STATE STREET BANK AND TRUST COMPANY
By: ____________________________________
Name: ____________________________________
Title: _____________________________________
CONFIRMED AND AGREED BY LIBERTY-STEIN ROE
ADVISOR FLOATING RATE ADVANTAGE FUND:
By: ______________________________
Name: ______________________________
Title: ______________________________
Date: ______________________________
<PAGE>
EXHIBIT A
IN~SIGHTSM
System Product Description
In~SightSM provides information delivery and on-line access to State Street.
In~SightSM allows users a single point of entry into the many views of data
created by the diverse systems and applications. Reports and data from systems
such as Investment Policy MonitorSM, Multicurrency HorizonSM, Securities
Lending, Performance & Analytics can be accessed through In~SightSM. This
Internet-enabled application is designed to run from a Web browser and perform
across low-speed data line or corporate high-speed backbones. In~SightSM also
offers users a flexible toolset, including an ad-hoc query function, a custom
graphics package, a report designer, and a scheduling capability. Data and
reports offered through In~SightSM will continue to increase in direct
proportion with the client roll out, as it is viewed as the information delivery
system that will grow with our clients.
Loan Services Addendum
to the Custodian Contract,
dated as of December 17, 1998, between
Liberty-Stein Roe Advisor Floating Rate Advantage Fund
State Street Bank and Trust Company
In consideration of the mutual agreements contained herein and in the Custodian
Contract, dated as of *[date], between Liberty-Stein Roe Advisor Floating Rate
Advantage Fund (the "Company") and State Street Bank and Trust Company (the
"Custodian") (the "Custodian Contract"), the receipt and sufficiency of which
are hereby acknowledged, the Company and the Custodian hereby agree as follows
with respect to Loans. Capitalized terms used herein and not defined herein are
used as defined in the Custodian Contract.
1. Safekeeping. All financing documents evidencing the Company's Loans
("Financing Documents") shall be held by the Custodian at its offices in Boston,
Massachusetts.
2. Duties of the Custodian.
a) The Custodian shall accept such Financing Documents as may be
delivered to it from time to time by the Company.
b) If payments with respect to a Loan ("Loan Payment") are not received
by the Custodian on the date on which they are due ("Payment Date") as reflected
in the Payment Schedule (as such term is defined in Section 4(c) below) of the
Loan, or in the case of interest payments, not received either on the interest
payable date (the "Interest Payable Date") of the Loan or in the amount of their
accrued interest payable, the Custodian shall promptly, but in no event later
than two business days after the Payment Date or the Interest Payable Date, give
telephonic notice to the party obligated under the Financing Documents to make
such Loan Payment (the "Obligor") of its failure to make timely payment, and (2)
if such payment is not received within three business days of its due date,
shall notify the Company of such Obligor's failure to make the Loan Payment. The
Custodian shall have no responsibility with respect to the collection of Loan
Payments which are past due, other than the duty to notify the Obligor and the
Company as provided herein.
c) The Custodian shall have no responsibilities or duties whatsoever
under this Addendum or in the Custodian Contract, with respect to Loans or the
Financing Documents, except for such responsibilities as are expressly set forth
herein and in the Custodian Contract. Without limiting the generality of the
foregoing, The Custodian shall have no obligation to preserve any rights against
prior parties or to exercise any right or perform any obligation in connection
with the Loans. In case any question arises as to its duties hereunder, the
Custodian may request instructions from the Company and shall be entitled at all
times to refrain from taking any action unless it has received Proper
Instructions from the Company and the Custodian shall in all events have no
liability, risk or cost for any action taken, with respect to a Loan, pursuant
to and in compliance with the Proper Instructions of such parties.
d) The Custodian shall be only responsible and accountable for Loan
Payments actually received by it and identified as for the account of the
Company; any and all credits and payments credited to the Company, with respect
to Loans, shall be conditional upon clearance and actual receipt by the
Custodian of final payment thereon.
e) The Custodian shall promptly, upon the Company's request, release to
the Company's investment adviser or to any party as the Company may specify, any
Financing Documents being held on behalf of the Company.
3. Responsibilities of the Company. With respect to each Loan held by
the Custodian hereunder in accordance with the provisions hereof, the Company
(a) cause the Financing Documents evidencing such Loan to be delivered to the
Custodian; (b) include with such Financing Documents an amortization schedule of
payments (the "Payment Schedule") identifying the amount and due dates of
scheduled principal payments; (c) cause the Custodian to be named as its nominee
for payment purposes under the Financing Documents or otherwise provide for the
direct payment of the Payments to the Custodian.
4. Instructions; Authority to Act. The certificate of the Secretary or
an Assistant Secretary of the Company, identifying certain individuals to be
officers of the Company or employees of the investment adviser of the Company
authorized to sign any such instructions, may be received and accepted as
conclusive evidence of the incumbency and authority of such to act and may be
considered by the Custodian to be in full force and effect until it receives
written notice to the contrary from the Secretary or Assistant Secretary of the
Company. Notwithstanding any other provision of this Addendum or the Custodian
Contract, the Custodian shall have no responsibility to ensure that any
investment by the Company with respect to Loans has been authorized.
5. Amendment and Termination. This Addendum may be amended by the
Company and the Custodian at any time, but only in writing by an instrument
signed by both parties. This Addendum shall terminate upon the terms provided
for in the Custodian Contract with respect to its termination, or upon the
termination of the Custodian Contract, provided that the Company has the express
right to terminate this Addendum upon 30 days written notification.
6. Attachment. In case any portion of the Loans or the Financing
Documents shall be attached or levied upon pursuant to an order of court, or the
delivery or disbursement thereof shall be stayed or enjoined by an order of
court, or any other order, judgment or decrees shall be made or entered by any
court affecting the property of the Company or any act of the Custodian relating
thereto, the Custodian is hereby expressly authorized in its sole discretion to
obey and comply with all orders, judgments or decrees so entered or issued,
without the necessity of inquire whether such court had jurisdiction, and, in
case the Custodian obeys or complies with any such order, judgment or decree, it
shall not be liable to anyone by reason of such compliance.
7. Parties in Interest; No Third Party Benefit. This Addendum shall be
binding upon and inure to the benefit of the respective successors and assigns
of the parties hereto. This Addendum is not intended for, and shall not be
construed to be intended for, the benefit of any third parties and may not be
relied upon or enforced by any third parties.
8. Notices, etc. All notices, applications and other communications
hereunder shall be in writing and shall be deemed to have been given or made
when delivered by recognized overnight delivery service or sent by telecopy
transmission:
(i) if to the Company c/o Stein Roe & Farnham Incorporated, One South
Wacker Drive, Chicago, Illinois 60606, or such other address as may have been
furnished to the Custodian in writing by the Company; and
(ii) if to the Custodian, at State Street Bank and Trust Company, 225
Franklin Street, Corporate Trust Department, Boston, MA 02110, Telecopy Number
(617) 662-1434, or at such other address as may have been furnished to the
Company by the Custodian in writing, with a copy to State Street Bank and Trust
Company, 1 Heritage Drive, JPB2N, North Quincy, Massachusetts 02171, Attention:
Charles R. Whittemore, Jr., Telephone Number (617) 985-7809, Telecopy Number
(617) 537-5152.
9. Examination of Securities and Related Documents. Upon reasonable
prior notice to the Custodian, the Board of Managers, the Company's accountants,
attorneys and auditors will be permitted to examine the Financing Documents then
in the physical possession of the Custodian and any records pertaining thereto
during normal business hours.
10. Headings. The headings set forth in this Addendum appear for
convenience only and shall not affect the interpretation of this Addendum.
11. Governing Law. This Addendum shall be construed and enforced in
accordance with, and rights of the parties shall be governed by, the internal
laws of The Commonwealth of Massachusetts.
12. Severability. If any term hereof is determined to be invalid or
unenforceable, such determination shall not affect the remaining terms.
13. Non-Assignability. The rights and obligations of the parties to
this Addendum are non-assignable.
AMENDMENT NO. 16 TO SCHEDULE A
Terms used in the Schedule and not defined herein shall have the
meaning specified in the AMENDED AND RESTATED SHAREHOLDERS' SERVICING AND
TRANSFER AGENT AGREEMENT dated July 1, 1991, and as amended from time to time
(the "Agreement"). Payments under the Agreement to CSC shall be made in the
first two weeks of the month following the month in which a service is rendered
or an expense incurred. This Amendment No. 16 to Schedule A shall be effective
as of January 14, 2000, and supersedes the original Schedule A and Amendment
Nos. 1, 2, 3, 4, 5, 6, 7,8, 9, 10, 11, 12, 13, 14 and 15 to Schedule A.
0. Each Fund that is a series of the Trust shall pay CSC for the
services to be provided by CSC under the Agreement an amount
equal to the sum of the following:
0. The Fund's Share of CSC Compensation
PLUS
0. The Fund's Allocated Share of CSC Reimbursable Out-of-Pocket Expenses.
In addition, CSC shall be entitled to retain as additional compensation for its
services all CSC revenues for Distributor Fees, fees for wire, telephone,
redemption and exchange orders, IRA trustee agent fees and account transcripts
due CSC from shareholders of any Fund and interest (net of bank charges) earned
with respect to balances in the accounts referred to in paragraph 2 of the
Agreement.
0. All determinations hereunder shall be in accordance with
generally accepted accounting principles and subject to audit
by the Fund's independent accountants.
0. Definitions
"Allocated Share" for any month means that percentage of CSC
Reimbursable Out-of-Pocket Expenses which would be allocated
to the Fund for such month in accordance with the methodology
described in Exhibit 1 hereto.
"CSC Reimbursable Out-of-Pocket Expenses" means (i)
out-of-pocket expenses incurred on behalf of the Fund by CSC
for stationery, forms, postage and similar items, (ii)
networking account fees paid to dealer firms by CSC on
shareholder accounts established or maintained pursuant to the
National Securities Clearing Corporation's networking system,
which fees are approved by the Trustees from time to time and
(iii) fees paid by CSC or its affiliates to third-party dealer
firms or transfer agents that maintain omnibus accounts with a
Fund in respect of expenses similar to those referred to in
clause (i) above, to the extent the Trustees have approved the
reimbursement by the Fund of such fees.
"Distributor Fees" means the amount due CSC pursuant to any
agreement with the Fund's principal underwriter for
processing, accounting and reporting services in connection
with the sale of shares of the Fund.
"Fund" means each of the open-end investment companies advised
or administered by CMA that are series of the Trusts which are
parties to the Agreement.
"Fund's Share of CSC Compensation" for any month means 1/12 of
the following applicable percentage of the average daily
closing value of the total net assets of such Fund for such
month:
<TABLE>
<CAPTION>
Fund Percent
<S> <C>
Equity Funds: 0.236(1)
The Colonial Fund
Colonial Select Value Fund
Colonial U.S. Growth & Income Fund
Colonial Global Equity Fund
Colonial International Horizons Fund
Colonial Small Cap Value Fund
Colonial Value Fund
Stein Roe Advisor Tax-Managed Growth Fund
Crabbe Huson Small Cap Fund
Crabbe Huson Equity Fund
Crabbe Huson Real Estate Investment Fund
Crabbe Huson Managed Income & Equity Fund
Crabbe Huson Contrarian Fund
Newport Tiger Fund
Newport Tiger Cub Fund
Newport Japan Opportunities Fund
Newport Greater China Fund
Newport Asia Pacific Fund
Colonial Strategic Balanced Fund
Colonial Global Utilities Fund
Stein Roe Advisor Tax-Managed Value Fund
Newport Europe Fund
Taxable Bond Funds: 0.17(2)
Colonial Intermediate U.S. Government Fund
Colonial Short Duration U.S. Government Fund
Colonial Federal Securities Fund
Colonial Income Fund
Crabbe Huson Contrarian Income Fund
Liberty-Stein Roe Advisor Floating Rate Advantage Fund
Colonial Investment Grade Bond Fund
Tax-Exempt Funds 0.13
Colonial Tax-Exempt Insured Fund
Colonial Tax-Exempt Fund
Colonial High Yield Municipal Fund
Colonial California Tax-Exempt Fund
Colonial Connecticut Tax-Exempt Fund
Colonial Florida Tax-Exempt Fund
Colonial Intermediate Tax-Exempt Fund
Colonial Massachusetts Tax-Exempt Fund
Colonial Michigan Tax-Exempt Fund
Colonial Minnesota Tax-Exempt Fund
Colonial New York Tax-Exempt Fund
Colonial North Carolina Tax-Exempt Fund
Colonial Ohio Tax-Exempt Fund
Crabbe Huson Oregon Tax-Free Fund
(1) 0.0025% with respect to the Class I shares of Crabbe Huson Small Cap
Fund, Crabbe Huson Equity Fund, and Crabbe Huson Managed Income & Equity
Fund.
(2) 0.0025% with respect to the Class I shares of Crabbe Huson Contrarian
Income Fund.
<PAGE>
Fund Percent
Money Market Funds: 0.20
Colonial Money Market Fund
Colonial Municipal Money Market Fund
Others:
Colonial High Yield Securities Fund 0.25
Colonial Strategic Income Fund 0.20
Colonial Utilities Fund 0.20
Colonial Counselor Select Income Portfolio 0.0025
Colonial Counselor Select Balanced Portfolio 0.0025
Colonial Counselor Select Growth Portfolio 0.0025
</TABLE>
Agreed:
EACH TRUST ON BEHALF OF EACH FUND DESIGNATED
IN APPENDIX I FROM TIME TO TIME
By: Nancy L. Conlin, Secretary
LIBERTY FUNDS SERVICES, INC.
By: Mary D. McKenzie, President
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: Nancy L. Conlin, Senior Vice President
<PAGE>
EXHIBIT 1
METHODOLOGY OF ALLOCATING CSC
REIMBURSABLE OUT-OF-POCKET EXPENSES
1. CSC Reimbursable Out-of-Pocket Expenses are allocated to the Funds as
follows:
A. Identifiable Based on actual services
performed and invoiced to a Fund.
B. Unidentifiable Allocation will be based on
three evenly weighted
factors.
- number of shareholder
accounts
- number of transactions
- average assets
AMENDMENT NO. 21 TO APPENDIX I
<TABLE>
<CAPTION>
Funds Custodian
<S> <C> <C>
Liberty Funds Trust I Colonial High Yield Securities Fund Chase Manhattan Bank
Colonial Income Fund Chase Manhattan Bank
Colonial Strategic Income Fund Chase Manhattan Bank
Stein Roe Advisor Tax-Managed Growth Fund Chase Manhattan Bank
Stein Roe Advisor Tax-Managed Value Fund Chase Manhattan Bank
Liberty Funds Trust II Colonial Money Market Fund Chase Manhattan Bank
Colonial Intermediate U.S. Government Fund Chase Manhattan Bank
Colonial Short Duration U.S. Government Fund Chase Manhattan Bank
Newport Tiger Cub Fund Chase Manhattan Bank
Newport Japan Opportunities Fund Chase Manhattan Bank
Newport Greater China Fund Chase Manhattan Bank
Liberty Funds Trust III Colonial Select Value Fund Chase Manhattan Bank
The Colonial Fund Chase Manhattan Bank
Colonial Federal Securities Fund Chase Manhattan Bank
Colonial Global Equity Fund Chase Manhattan Bank
Colonial International Horizons Fund Chase Manhattan Bank
Colonial Strategic Balanced Fund Chase Manhattan Bank
Crabbe Huson Small Cap Fund Chase Manhattan Bank
Crabbe Huson Equity Fund Chase Manhattan Bank
Crabbe Huson Managed Income & Equity Fund Chase Manhattan Bank
Crabbe Huson Oregon Tax-Free Fund Chase Manhattan Bank
Crabbe Huson Real Estate Investment Fund Chase Manhattan Bank
Crabbe Huson Contrarian Income Fund Chase Manhattan Bank
The Crabbe Huson Special Fund Chase Manhattan Bank
Crabbe Huson Contrarian Fund Chase Manhattan Bank
Colonial Global Utilities Fund Chase Manhattan Bank
Liberty Funds Trust IV Colonial Tax-Exempt Fund Chase Manhattan Bank
Colonial Tax-Exempt Insured Fund Chase Manhattan Bank
Colonial Municipal Money Market Fund Chase Manhattan Bank
Colonial High Yield Municipal Fund Chase Manhattan Bank
Colonial Utilities Fund Chase Manhattan Bank
Colonial Intermediate Tax-Exempt Fund Chase Manhattan Bank
Colonial Counselor Select Income Portfolio Chase Manhattan Bank
Colonial Counselor Select Balanced Portfolio Chase Manhattan Bank
Colonial Counselor Select Growth Portfolio Chase Manhattan Bank
Liberty Funds Trust V Colonial Massachusetts Tax-Exempt Fund Chase Manhattan Bank
Colonial Minnesota Tax-Exempt Fund Chase Manhattan Bank
Colonial Michigan Tax-Exempt Fund Chase Manhattan Bank
Colonial New York Tax-Exempt Fund Chase Manhattan Bank
Colonial Ohio Tax-Exempt Fund Chase Manhattan Bank
Colonial California Tax-Exempt Fund Chase Manhattan Bank
Colonial Connecticut Tax-Exempt Fund Chase Manhattan Bank
Colonial Florida Tax-Exempt Fund Chase Manhattan Bank
Colonial North Carolina Tax-Exempt Fund Chase Manhattan Bank
Liberty Funds Trust VI Colonial U.S. Growth and Income Fund Chase Manhattan Bank
Colonial Small Cap Value Fund Chase Manhattan Bank
Colonial Value Fund Chase Manhattan Bank
Newport Asia Pacific Fund Chase Manhattan Bank
Liberty Funds Trust VII Newport Tiger Fund Chase Manhattan Bank
Newport Europe Fund Chase Manhattan Bank
Liberty-Stein Roe Advisor Floating Rate Advantage Fund Chase Manhattan Bank
Colonial Investment Grade Bond Fund Chase Manhattan Bank
</TABLE>
Effective Date: January 14, 2000
By: J. Kevin Connaughton, Controller for Each Fund
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: Nancy L. Conlin, Senior Vice President
LIBERTY FUNDS SERVICES, INC.
By: Mary D. McKenzie, President
S:\FUNDS\GENERAL\CONTRACT\AAMEND2.DOC
Page 2 of 2
ADMINISTRATION AGREEMENT
AGREEMENT dated as of January 14, 2000, between LIBERTY-STEIN ROE ADVISOR
FLOATING RATE ADVANTAGE FUND, a Massachusetts business trust (the "Trust") and
COLONIAL MANAGEMENT ASSOCIATES,INC., a Massachusetts corporation (the
"Administrator").
In consideration of the promises and covenants herein, the parties agree as
follows:
1. Subject to the general direction and control of the Board of Trustees
of the Trust, the Administrator shall perform such administrative
services as may from time to time be reasonably requested by the Trust,
which shall include without limitation:(a) providing office space,
equipment and clerical personnel necessary for maintaining the organization
of the Trust and for performing the administrative functions herein set
forth;(b) arranging, if desired by the Trust, for Directors, officers and
employees of the Administrator to serve as Trustees, officers or agents
of the Trust if duly elected or appointed to such positions and subject to
their individual consent and to any limitations imposed by law; (c)
preparing and, if applicable, filing all documents required for compliance
by the Trust with applicable laws and regulations, including registration
statements, registration fee filings, semi-annual and annual reports to
shareholders, proxy statements and tax returns;(d) preparation of agendas
and supporting documents for and minutes of meetings of Trustees,
committees of Trustees and shareholders; (e) coordinating and overseeing
the activities of the Trust's other third-party service providers; and (f)
maintaining books and records of the Trust (exclusive of records required
by Section 31(a)of the 1940 Act). Notwithstanding the foregoing, the
Administrator shall not be deemed to have assumed or have any
responsibility with respect to functions specifically assumed by any
transfer agent or custodian of the Trust.
2. The Administrator shall be free to render similar services to others so
long as its services hereunder are not impaired thereby.
3. The Trust shall pay the Administrator monthly a fee at the annual rate of
0.20% of the Average Daily Managed Assets of the Trust.
"Average Daily Managed Assets of the Trust" shall mean the average daily
value of the total assets of the Trust less all accrued liabilities of the
Trust (other than the aggregate amount of any outstanding borrowings
constituting financial leverage).
4. This Agreement shall become effective as of the date of its execution,
and may be terminated without penalty by the Board of Trustees of the Trust
or by the Administrator, in each case on sixty days written notice to the
other party.
<PAGE>
5. This Agreement may be amended only by a writing signed by both parties.
6. In the absence of willful misfeasance, bad faith or gross negligence on the
part of the Administrator, or reckless disregard of its obligations and
duties hereunder, the Administrator shall not be subject to any liability
to the Trust, to any shareholder of the Trust or to any other person, firm
or organization, for any act or omission in the course of, or connected
with, rendering services hereunder.
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
By: J. Kevin Connaughton
Controller
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: Nancy L. Conlin
Senior Vice President
A copy of the document establishing the Trust is filed with the Secretary of The
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Trust individually but only upon the assets of the Trust.
S:\FUNDS\GENERAL\CONTRACT\ADMNNEF.DOC
LIBERTY FUNDS TRUST I-IX
LIBERTY-STEIN ROE ADVISOR FLOATING RATE ADVANTAGE FUND
COLONIAL INVESTMENT GRADE BOND FUND
Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940
Effective April 22, 1996(1)
Amended November 1, 1999
Each series ("Fund") of Liberty Funds Trusts I-IX (the "Trusts") may from time
to time issue one or more of the following classes of shares: Class A shares,
Class B shares, Class C shares, Class E shares, Class F shares, Class G shares,
Class H shares, Class I shares, Class J shares, Class T shares, Class S shares
and Class Z shares. Each class is subject to such investment minimums and other
conditions of eligibility as set forth in the Funds' prospectuses as from time
to time in effect. The differences in expenses among these classes of shares,
and the conversion and exchange features of each class of shares, are set forth
below in this Plan, which is subject to change, to the extent permitted by law
and by the Declaration of Trust and By-laws of each Trust, by action of the
Board of Trustees of each Trust.
Class A shares
Class A shares are offered at net asset value ("NAV") plus the initial sales
charges described in the Funds' prospectuses as from time to time in effect.
Initial sales charges may not exceed 6.50%, and may be reduced or waived as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act") and as described in the Funds' prospectuses from time to time in effect.
Purchases of $1 million to $5 million of Class A shares that are redeemed within
18 months from purchase are subject to a contingent deferred sales charge
("CDSC") of 1% of either the purchase price or the NAV of the shares redeemed,
whichever is less. Class A shares are not otherwise subject to a CDSC. The CDSC
may be reduced or waived as permitted by Rule 6c-10 under the 1940 Act and as
described in the Funds' prospectuses as from time to time in effect.
Class A shares pay service fees pursuant to plans adopted pursuant to Rule 12b-1
under the 1940 Act ("12b-1 Plans") as described in the Funds' prospectuses in
effect from time to time. Such fees may not exceed 0.25% per annum of the
average daily net assets attributable to such class. Class A shares generally do
not pay distribution fees, except that Colonial Strategic Balanced Fund pays a
distribution fee of 0.30% per annum of average daily net assets attributable to
its Class A shares.
Class A shares of any Fund may be exchanged, at the holder's option, for Class A
shares of another Fund without the payment of a sales charge, except that if
shares of any other non-money market fund are exchanged within five months after
purchase for shares of a Fund with a higher sales charge, then the difference in
sales charges must be paid on the exchange.
Class B shares
Class B shares are offered at NAV, without an initial sales charge. Class B
shares that are redeemed within the period of time after purchase (not more than
6 years) specified in each Fund's prospectus as from time to time in effect are
subject to a CDSC of up to 5% of either the purchase price or the NAV of the
shares redeemed, whichever is less; such percentage may be lower for certain
Funds and declines the longer the shares are held, all as described in the
Funds' prospectuses as from time to time in effect. Class B shares purchased
with reinvested distributions are not subject to a CDSC. The CDSC is subject to
reduction or waiver in certain circumstances, as permitted by Rule 6c-10 under
the 1940 Act and as described in the Funds' prospectuses as from time to time in
effect.
Class B shares pay distribution and service fees pursuant to 12b-1 Plans as
described in the Funds' prospectuses in effect from time to time. Such fees may
be in amounts up to but may not exceed, respectively, 0.75% and 0.25% per annum
of the average daily net assets attributable to such class.
Class B shares automatically convert to Class A shares of the same Fund eight
years after purchase, except that Class B shares purchased through the
reinvestment of dividends and other distributions on Class B shares convert
proportionally to the amount of Class B shares otherwise being converted.
Class B shares of any Fund may be exchanged, at the holder's option, for Class B
shares of another Fund, without the payment of a CDSC. The holding period for
determining the CDSC and the conversion to Class A shares will include the
holding period of the shares exchanged. If the Class B shares received in the
exchange are subsequently redeemed, the amount of the CDSC, if any, will be
determined by the schedule of the Fund in which the original investment was
made.
Class C shares
Class C shares are offered at NAV without an initial sales charge. Class C
shares that are redeemed within one year from purchase may be subject to a CDSC
of 1% of either the purchase price or the NAV of the shares redeemed, whichever
is less. Class C shares purchased with reinvested dividends or capital gain
distributions are not subject to a CDSC. The CDSC may be reduced or waived in
certain circumstances as permitted by Rule 6c-10 under the 1940 Act and as
described in the Funds' prospectuses as from time to time in effect.
<PAGE>
Class C shares pay distribution and service fees pursuant to 12b-1 Plans, as
described in the Funds' prospectuses in effect from time to time. Such fees may
be in amounts up to but may not exceed, respectively, 0.75% and 0.25% per annum
of the average daily net assets attributable to such class.
Class C shares of any Fund may be exchanged for Class C shares of any other Fund
that offers Class C shares. The holding period for determining whether a CDSC
will be charged will include the holding period of the shares exchanged. Only
one exchange of any Fund's Class C shares may be made in any three month period.
For this purpose, an exchange into any Fund and a prior or subsequent exchange
out of the Fund constitutes "one exchange."
Class E shares
Class E shares are offered at NAV plus the initial sales charges described in
the Fund's prospectus as from time to time in effect. Initial sales charges may
not exceed 5.00%, and may be reduced or waived as permitted by Rule 22d-1 under
the 1940 Act and as described in the Fund's prospectus from time to time in
effect.
Purchases of $1 million to $5 million of Class E shares that are redeemed within
18 months from purchase are subject to the same CDSC on the same basis as Class
A shares. Class E shares are not otherwise subject to a CDSC. The CDSC may be
reduced or waived as permitted by Rule 6c-10 under the 1940 Act and as described
in the Fund's prospectus as from time to time in effect.
Class E shares pay distribution and service fees pursuant to 12b-1 Plans, as
described in the Fund's prospectus in effect from time to time. Such fees may be
in amounts up to but may not exceed, respectively, 0.10% and 0.25% per annum of
the average daily net assets attributable to such class.
Class E shares may not be exchanged for shares of any other Fund.
Class F shares
Class F shares are offered at NAV without an initial sales charge and subject to
the same declining CDSC, distribution and service fees as Class B shares. Class
F shares automatically convert to Class E shares eight years after purchase,
except that Class F shares purchased through the reinvestment of dividends and
other distributions on Class F shares convert proportionally to the amount of
Class E shares being converted.
Class F shares may not be exchanged for shares of any other Fund.
<PAGE>
Class G shares
Class G shares are offered at NAV plus the initial sales charges described in
the Fund's prospectus as from time to time in effect. Initial sales charges may
not exceed 4.50%, and may be reduced or waived as permitted by Rule 22d-1 under
the 1940 Act and as described in the Fund's prospectus from time to time in
effect.
Purchases of $1 million to $5 million of Class G shares that are redeemed within
18 months from purchase are subject to the same CDSC on the same basis as Class
A shares. Class G shares are not otherwise subject to a CDSC. The CDSC may be
reduced or waived as permitted by Rule 6c-10 under the 1940 Act and as described
in the Fund's prospectus as from time to time in effect.
Class G shares may not be exchanged for shares of any other Fund.
Class H shares
Class H shares are offered at NAV without an initial sales charge and subject to
the same declining CDSC, distribution and service fees as Class B shares. Class
H shares automatically convert to Class G shares eight years after purchase,
except that Class H shares purchased through the reinvestment of dividends and
other distributions on Class H shares convert proportionally to the amount of
Class G shares being converted.
Class H shares pay distribution and service fees pursuant to 12b-1 Plans, as
described in the Fund's prospectus in effect from time to time. Such fees may be
in amounts up to but may not exceed, respectively, 0.25% and 0.25% per annum of
the average daily net assets attributable to such class.
Class H shares may not be exchanged for shares of any other Fund.
Class I shares
Class I shares are offered at NAV, without an initial sales charge or CDSC.
Class I shares do not pay fees under a Rule 12b-1 Plan. Class I shares of a Fund
may only be exchanged for Class I shares of another Fund.
<PAGE>
Class J shares
Class J shares are offered at NAV, plus the initial sales charges described in
the Funds' prospectuses as from time to time in effect. Initial sales charges
may not exceed 3.00%, and may be reduced or waived as permitted by Rule 22d-1
under the 1940 Act and as described in the Funds' prospectuses from time to time
in effect.
Class J shares pay distribution and service fees pursuant to 12b-1 Plans as
described in the Funds' prospectuses in effect from time to time. Such fees may
be in amounts up to but may not exceed, respectively, 0.35% and 0.25% per annum
of the average daily net assets attributable to such class.
Class J shares also bear certain expenses of offering and distribution in Japan,
such as registration and prospectus translation expenses.
Class J shares may not be exchanged for shares of any other Fund.
Class S shares
Class S shares are offered at NAV, without an initial sales charge or CDSC.
Class S shares do not pay fees under a 12b-1 Plan. Class S shares of a Fund may
be exchanged for the Class S shares of another Fund.
Class T shares
Class T shares are offered at NAV plus the initial sales charges described in
the Funds' prospectuses as from time to time in effect. The sales charge may not
exceed 6.50%, and may be reduced or waived as permitted by Rule 22d-1 under the
1940 Act and as described in the Funds' prospectuses from time to time in
effect.
Purchases of $1 million or more of Class T shares that are redeemed within 18
months from purchase are subject to a CDSC of 1% of either the purchase price or
the NAV of the shares redeemed, whichever is less. Class T shares are not
otherwise subject to a CDSC. The CDSC may be reduced or waived as permitted by
Rule 6c-10 under the 1940 Act and as described in the Funds' prospectuses as
from time to time in effect.
Class T shares do not pay fees pursuant to a 12b-1 Plan. Class T shares of a
Fund may only be exchanged for Class A shares of another Fund.
Class Z shares
Class Z shares are offered at NAV, without an initial sales charge or CDSC.
Class Z shares do not pay fees under a 12b-1 Plan. Class Z shares of a Fund may
be exchanged for the Class A or Class Z shares of another Fund.
- --------
1 Liberty Funds Trusts I-VII (the "Trusts") have been offering multiple classes
of shares, prior to the effectiveness of this Plan, pursuant to an exemptive
order of the Securities and Exchange Commission. This Plan is intended to permit
the Trusts to offer multiple classes of shares pursuant to Rule 18f-3 under the
Investment Company Act of 1940, without any change in the arrangements and
expense allocations that have been approved by the Board of Trustees of each
Trust under such order of exemption.
The Colonial Funds
The Newport Funds
The Crabbe Huson Funds
Stein Roe Advisor Tax-Managed Growth Fund
Stein Roe Advisor Tax-Managed Value Fund
Liberty-Stein Roe Advisor Floating Rate Advantage Fund
Colonial Investment Grade Bond Fund
Rule 12b-1 Distribution Plan
January 14, 2000
Each Massachusetts Business Trust (Trust) designated in Appendix 1 as
revised from time to time, acting severally, adopts the following distribution
plan (the Plan) pursuant to Rule 12b-1 (the Rule) under the Investment Company
Act of 1940 (Act) on behalf of each Fund in that Trust.
I. A. PLANS APPLYING TO CLASS A, B AND C SHARES
Except as indicated below, each Fund having Class A, B or C Shares
shall pay a service fee at the annual rate of 0.25% of the net assets of its
Class A, B and C Shares, and a distribution fee at the annual rate of 0.75% of
the average daily net assets of its Class B and C Shares.
Colonial Money Market Fund and Colonial Municipal Money Market Fund do
not pay a service fee on Class A shares.
Colonial California Tax-Exempt Fund, Colonial Connecticut Tax-Exempt
Fund, Colonial Florida Tax-Exempt Fund, Colonial Massachusetts Tax-Exempt Fund,
Colonial Michigan Tax-Exempt Fund, Colonial Minnesota Tax-Exempt Fund, Colonial
New York Tax-Exempt Fund, Colonial North Carolina Tax-Exempt Fund and Colonial
Ohio Tax-Exempt Fund each pays a service fee at the annual rates of:
(A) 0.10% of the net assets attributable to its outstanding Class A and
Class B Shares issued prior to December 1, 1994, and
(B) 0.25% of the net assets attributable to its outstanding Class A, B
and C Shares issued thereafter.
The Colonial Fund and Colonial Select Value Fund each pays a service
fee at the annual rates of: (A) 0.15% of the net assets attributable to
its outstanding Class A and B Shares issued prior to
April 1, 1989, and
(B) 0.25% of the net assets attributable to its outstanding Class A, B
and C Shares issued thereafter.
Colonial Strategic Income Fund pays a service fee at the annual rates
of:
(A) 0.15% of its net assets attributable to its outstanding Class A and
B Shares issued prior to January 1, 1993, and
(B) 0.25% of the net assets attributable to its outstanding Class A, B
and C Shares issued thereafter.
<PAGE>
Colonial Short Duration U.S. Government Fund and Colonial Intermediate
Tax-Exempt Fund each pays a service fee at the annual rate of 0.20% of the net
assets of its Class A, B and C Shares and a distribution fee at an annual rate
of 0.65% of the average daily net assets of its Class B and C Shares.
Colonial Strategic Balanced Fund, Newport Europe Fund and Liberty-Stein
Roe Advisor Floating Rate Advantage Fund each pays an annual distribution fee
not exceeding 0.10% of the average net assets of its Class A Shares.
Liberty-Stein Roe Advisor Floating Rate Advantage Fund and Colonial
Investment Grade Bond Fund each pays an annual distribution fee not exceeding
0.45% of the average net assets of its Class B Shares and 0.55% of the average
net assets of its Class C Shares.
B. PLANS APPLYING TO OTHER CLASSES OF SHARES
Stein Roe Advisor Tax-Managed Growth Fund:
Class E Shares. Class E shares pay a service fee at the annual rate of
0.25% of the net assets of the Class and a distribution fee at the annual rate
of 0.10% of the average daily net assets of the Class.
Class F Shares. Class F Shares pay a service fee at the annual rate of
0.25% of the net assets of the Class and a distribution fee at the annual rate
of 0.75% of the average daily net assets of the Class.
Class G Shares. Class G Shares pay LFDI a service fee at the annual
rate of 0.25% of the net assets of the Class and a distribution fee at the
annual rate of 0.10% of the aggregate net asset value of Class G Shares
outstanding less than five years from the date of purchase and 0.25% of the
average daily net assets of Class G Shares outstanding for five years or more.
Class H Shares. Class H Shares pay a service fee at the annual rate of
0.25% of the net assets of the Class and a distribution fee at the annual rate
of 0.75% of the average daily net assets of the Class.
Colonial Strategic Income Fund:
Class J Shares Class J Shares pay a service fee at the annual rate of
0.25% of the net assets of the Class and a distribution fee at the annual rate
of 0.35% of the average daily net assets of the Class.
Stein Roe Advisor Tax-Managed Value Fund also pays an annual
distribution fee not exceeding 0.05% of the average net assets of its Class A
Shares.
The following Funds do not have 12b-1 Plans for the specified classes of shares:
Crabbe Huson Small Cap Fund, Crabbe Huson Equity Fund, Crabbe Huson
Managed Income & Equity Fund, Crabbe Huson Contrarian Income Fund:
Class I Shares.
Newport Tiger Fund: Class T and Class Z Shares.
Colonial Strategic Income Fund, Colonial Income Fund, Colonial
Intermediate U.S. Government Fund, Colonial Federal Securities Fund, Newport
Greater China Fund, Colonial International Horizons Fund, Crabbe Huson Real
Estate Investment Fund, Colonial Counselor Select Income Portfolio, Colonial
Counselor Select Balanced Portfolio, Colonial Counselor Select Growth Portfolio,
Newport Asia Pacific Fund, Colonial Small Cap Value Fund, Colonial U.S. Growth &
Income Fund, The Colonial Fund, Colonial High Yield Securities Fund, Colonial
Utilities Fund, Colonial Value Fund, Colonial Select Value Fund, Stein Roe
Advisor Tax-Managed Growth Fund, Newport Tiger Cub Fund, Newport Japan
Opportunities Fund, Stein Roe Advisor Tax-Managed Value Fund, Newport Europe
Fund, Liberty-Stein Roe Advisor Floating Rate Advantage Fund and Colonial
Investment Grade Bond Fund: Class Z Shares.
II. Payments of Fees Under the Plan
Each Fund shall make all payments of service and distribution fees
under this Plan to Liberty Funds Distributor, Inc. (LFDI) monthly, on the 20th
day of each month or, if such day is not a business day, on the next business
day thereafter. No Fund shall pay, nor shall LFDI be entitled to receive, any
amount under this Plan if such payment would result in LFDI receiving amounts in
excess of those permitted by applicable law or by rules of the National
Association of Securities is Dealers, Inc.
III. Use of Fees.
LFDI may pay part or all of the service and distribution fees it
receives from a Fund as commissions to financial service firms that sell Fund
Shares or as reimbursements to financial service firms or other entities that
provide shareholder services to record or beneficial owners of shares (including
third party administrators of qualified plans). This provision does not obligate
LFDI to make any such payments nor limit the use that LFDI may make of the fees
it receives.
IV. Reporting
LFDI shall provide to the Trust's Trustees, and the Trustees shall
review, at least quarterly, reports setting forth all Plan expenditures, and the
purposes for those expenditures. Amounts payable under this paragraph are
subject to any limitations on such amounts prescribed by applicable laws or
rules.
V. Other Payments Authorized
Payments by the Trust to LFDI and its affiliates (including Colonial
Management Associates, Inc.) other than as set forth in Section I which may be
indirect financing of distribution costs are authorized by this Plan.
VI. Continuation; Amendment; Termination
This Plan shall continue in effect with respect to a Class of Shares
only so long as specifically approved for that Class at least annually as
provided in the Rule. The Plan may not be amended to increase materially the
service fee or distribution fee with respect to a Class of Shares without such
shareholder approval as is required by the Rule and any applicable orders of the
Securities and Exchange Commission, and all material amendments of the Plan must
be approved in the manner described in the Rule. The Plan may be terminated with
respect to any Class of Shares at any time as provided in the Rule without
payment of any penalty. The continuance of the Plan shall be effective only if
the selection and nomination of the Trust's Trustees who are not interested
persons (as defined under the Act) of the Trust is effected by such
non-interested Trustees as required by the Rule.
Approved by the Trustees as of the date set
forth above:
By: Nancy L. Conlin, Secretary For Each Trust
<PAGE>
APPENDIX 1
Trust Series
Liberty Funds Trust I
Colonial High Yield Securities Fund
Colonial Income Fund
Colonial Strategic Income Fund
Stein Roe Advisor Tax-Managed Growth Fund
Stein Roe Advisor Tax-Managed Value Fund
Liberty Funds Trust II
Colonial Money Market Fund
Colonial Intermediate U.S. Government Fund
Colonial Short Duration U.S. Government Fund
Newport Tiger Cub Fund
Newport Japan Opportunities Fund
Newport Greater China Fund
Liberty Funds Trust III
Colonial Select Value Fund
The Colonial Fund
Colonial Federal Securities Fund
Colonial Global Equity Fund
Colonial International Horizons Fund
Colonial Strategic Balanced Fund
Colonial Global Utilities Fund
Crabbe Huson Small Cap Fund
The Crabbe Huson Special Fund
Crabbe Huson Equity Fund
Crabbe Huson Real Estate Investment Fund
Crabbe Huson Managed Income & Equity Fund
Crabbe Huson Oregon Tax-Free Fund
Crabbe Huson Contrarian Income Fund
Crabbe Huson Contrarian Fund
Liberty Funds Trust IV
Colonial High Yield Municipal Fund
Colonial Intermediate Tax-Exempt Fund
Colonial Tax-Exempt Fund
Colonial Tax-Exempt Insured Fund
Colonial Municipal Money Market Fund
Colonial Utilities Fund
Colonial Counselor Select Income Portfolio
Colonial Counselor Select Balanced Portfolio
Colonial Counselor Select Growth Portfolio
<PAGE>
Liberty Funds Trust V
Colonial Massachusetts Tax-Exempt Fund
Colonial Connecticut Tax-Exempt Fund
Colonial California Tax-Exempt Fund
Colonial Michigan Tax-Exempt Fund
Colonial Minnesota Tax-Exempt Fund
Colonial New York Tax-Exempt Fund
Colonial North Carolina Tax-Exempt Fund
Colonial Ohio Tax-Exempt Fund
Colonial Florida Tax-Exempt Fund
Liberty Funds Trust VI
Colonial U.S. Growth & Income Fund
Colonial Small Cap Value Fund
Colonial Value Fund
Newport Asia Pacific Fund
Liberty Funds Trust VII
Newport Tiger Fund
Newport Europe Fund
Liberty-Stein Roe Advisor Floating Rate Advantage Fund
Colonial Investment Grade Bond Fund
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2624
(617) 951-7000
FAX: (617) 951-7050
30 Kennedy Plaza One Franklin Square
Providence, RI 02903-2358 1301 K Street, N.W.
(401) 455-4400 Suite 800 East
FAX: (401) 455-4401 Washington, D.C. 20005-3333
(202) 626-3900
FAX: (202) 626-3961
January 14, 2000
Liberty-Stein Roe Advisor Floating
Rate Advantage Fund
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
You have informed us that you propose to register under the Securities
Act of 1933, as amended (the "Act"), and offer and sell from time to time shares
of beneficial interest (the "Shares") of Liberty-Stein Roe Advisor Floating Rate
Advantage Fund (the "Trust").
We act as counsel for the Trust and are familiar with the actions taken
by its Board of Trustees to authorize the issuance of the Shares. We have
examined the Trust's Agreement and Declaration of Trust and Amendment No. 1
thereto on file at the office of the Secretary of the Commonwealth of
Massachusetts (collectively, the "Agreement and Declaration of Trust") and the
Trust's By-Laws. We have also examined such other documents as we deem necessary
for the purpose of this opinion.
We assume that appropriate action has been taken to register or qualify
the sale of the Shares under any applicable state and federal laws regulating
offerings and sales of securities.
Based on the foregoing, we are of the opinion that the issue and sale
by the Trust of an unlimited number of Shares has been duly authorized under
Massachusetts law. Upon the original issue and sale of any such authorized but
unissued Shares and upon receipt by the Trust of the authorized consideration
therefor in an amount not less than the applicable net asset value, the Shares
so issued will be validly issued, fully paid and nonassessable by the Trust.
<PAGE>
Liberty-Stein Roe Advisor Floating
Rate Advantage Fund -2- January 14, 2000
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or its Trustees. The Agreement and Declaration of Trust provides for
indemnification out of the Trust property of the particular series of shares for
all loss and expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder's incurring financial
loss on account of shareholder liability is limited to circumstances in which
the particular series would be unable to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of an indefinite number of Shares for offering and sale pursuant to
the Act. We consent to the filing of this opinion with and as part of your
Registration Statement on Form N-2 relating to such offering and sale.
Very truly yours,
/s/ Ropes & Gray
Ropes & Gray
MHODMA.Active;8169757;2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 2 to the registration
statement on Form N-2 (the "Registration Statement") of our report dated
January 14, 2000 relating to the statement of assets and liabilities of
Liberty-Stein Roe Advisor Floating Rate Advantage Fund, which also appears in
such Statement of Additional Information. We also consent to the references
to us under the headings "Independent Accountants" and "Financial Statements" in
such Statement of Additional Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 14, 2000
