<PAGE> 1
LIBERTY MUTUAL FUNDS
STEIN ROE MUTUAL FUNDS
ONE FINANCIAL CENTER, BOSTON, MASSACHUSETTS 02111-2621
Dear Shareholder:
Your Fund will hold a special meeting on December 27, 2000 at 10:00 a.m.
Eastern Time, at the offices of Colonial Management Associates, Inc. You will be
asked to vote on the acquisition of your Fund and on the election of eleven
Trustees. A formal Notice of Special Meeting of Shareholders appears on the next
page, followed by the combined Prospectus/Proxy Statement which explains in more
detail the proposals to be considered. We hope that you can attend the Meeting
in person; however, we urge you in any event to vote your shares at your
earliest convenience.
Your Fund is part of one of several proposed acquisitions and liquidations
of funds in the Liberty and Stein Roe Fund groups proposed by Liberty Financial
Companies, Inc., the indirect parent of each of the investment advisors to the
Liberty and Stein Roe Funds. The overall purposes of these acquisitions and
liquidations include streamlining the product offerings of the Liberty and Stein
Roe Funds, potentially reducing fund expense ratios by creating larger funds and
permitting the Liberty Financial organization to concentrate its portfolio
management resources on a more focused group of portfolios. Please review the
enclosed Prospectus/Proxy Statement for a more detailed description of the
proposed acquisition of your Fund and the specific reasons it is being proposed.
YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. YOU CAN
VOTE EASILY AND QUICKLY BY MAIL, BY FAX (NOT AVAILABLE FOR ALL SHAREHOLDERS;
REFER TO ENCLOSED PROXY INSERT), BY PHONE OR IN PERSON. A SELF-ADDRESSED,
POSTAGE-PAID ENVELOPE HAS BEEN ENCLOSED FOR YOUR CONVENIENCE. PLEASE HELP YOUR
FUND AVOID THE EXPENSE OF A FOLLOW-UP MAILING BY VOTING TODAY!
Your Fund is using Shareholder Communications Corporation ("SCC"), a
professional proxy solicitation firm, to assist shareholders in the voting
process. As the date of the special meeting approaches, if we have not yet
received your vote, you may receive a telephone call from SCC reminding you to
exercise your right to vote.
Please take a few moments to review the details of each proposal. If you
have any questions regarding the combined Prospectus/Proxy Statement, please
feel free to call the contact number listed in the enclosed Prospectus/Proxy
Statement.
We appreciate your participation and prompt response in these matters and
thank you for your continued support.
Sincerely,
/s/Stephen E. Gibson
Stephen E. Gibson, President
November 17, 2000
G-60/604D-1000
<PAGE> 2
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 27, 2000
LIBERTY FUNDS TRUST III
LIBERTY CONTRARIAN SMALL-CAP FUND
NOTICE IS HEREBY GIVEN that a Special Meeting of the shareholders of the
Liberty Contrarian Small-Cap Fund will be held at 10:00 a.m. Eastern Time on
Wednesday, December 27, 2000 at the offices of Colonial Management Associates,
Inc., One Financial Center, Boston, Massachusetts 02111-2621, for these
purposes:
1. To approve an Agreement and Plan of Reorganization providing for the
sale of all of the assets of the Liberty Contrarian Small-Cap Fund to,
and the assumption of all of the liabilities of the Liberty Contrarian
Small-Cap Fund by, the Liberty Special Fund in exchange for shares of
the Liberty Special Fund and the distribution of such shares to the
shareholders of the Liberty Contrarian Small-Cap Fund in complete
liquidation of the Liberty Contrarian Small-Cap Fund.
2. To elect eleven Trustees.
3. To consider and act upon any other matters that properly come before
the meeting and any adjourned session of the meeting.
Shareholders of record at the close of business on September 29, 2000 are
entitled to notice of and to vote at the meeting and any adjourned session.
By order of the Board of Trustees,
William J. Ballou, Secretary
November 17, 2000
NOTICE: YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. YOU
CAN VOTE EASILY AND QUICKLY BY PHONE, BY MAIL, BY FAX (NOT AVAILABLE FOR
ALL SHAREHOLDERS; REFER TO ENCLOSED PROXY INSERT) OR IN PERSON. PLEASE
HELP YOUR FUND AVOID THE EXPENSE OF A FOLLOW-UP MAILING BY VOTING TODAY!
<PAGE> 3
COMBINED PROSPECTUS AND PROXY STATEMENT
NOVEMBER 17, 2000
ACQUISITION OF THE ASSETS AND LIABILITIES OF
LIBERTY CONTRARIAN SMALL-CAP FUND
c/o Liberty Funds Trust III
One Financial Center
Boston, Massachusetts 02111-2621
1-800-426-3750
BY AND IN EXCHANGE FOR SHARES OF
LIBERTY SPECIAL FUND
c/o Liberty Funds Trust III
One Financial Center
Boston, Massachusetts 02111-2621
1-800-426-3750
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS....................................... 3
PROPOSAL 1 -- Acquisition of the Liberty Contrarian
Small-Cap Fund by the Liberty Special Fund.... 7
Principal Investment Risks................................ 7
Information about the Acquisition......................... 8
PROPOSAL 2 -- Election of Trustees.......................... 13
GENERAL..................................................... 17
Voting Information........................................ 17
Appendix A -- Agreement and Plan of Reorganization.......... A-1
Appendix B -- Fund Information.............................. B-1
Appendix C -- Capitalization................................ C-1
Appendix D -- Management's Discussion of Fund Performance
for the Liberty Special Fund.................. D-1
</TABLE>
This combined Prospectus/Proxy Statement contains information you should
know before voting on the proposed acquisition of the Liberty Contrarian
Small-Cap Fund (the "Small Cap Fund") by the Liberty Special Fund (the "Special
Fund") or voting on the other proposals to be considered at a Special Meeting of
Shareholders of the Small Cap Fund (the "Meeting"), which will be held at 10:00
a.m. Eastern Time on December 27, 2000 at the offices of Colonial Management
Associates, Inc. ("Colonial"), One Financial Center, Boston, Massachusetts
02111-2621. Please read this Prospectus/Proxy Statement and keep it for future
reference.
Proposal 1 in this Prospectus/Proxy Statement relates to the proposed
acquisition of the Small Cap Fund by the Special Fund (the "Acquisition"). If
the Acquisition occurs, you will become a shareholder of the Special Fund. The
Special Fund seeks significant long-term capital appreciation. If the Agreement
and Plan of Reorganization is approved by the shareholders of the Small Cap Fund
and the Acquisition occurs, the Small Cap Fund will transfer all of the assets
and liabilities attributable to each class of its shares to the Special Fund in
exchange for shares of the same class of the Special Fund with the same
aggregate net asset value as the assets and liabilities transferred. After that
exchange, shares of each class received by the Small Cap Fund will be
distributed pro rata to its shareholders of the same class. After the
Acquisition, the Special Fund expects to change its name to "Liberty Contrarian
Small Cap Fund."
Proposal 2 in this Prospectus/Proxy Statement relates to the election of
Trustees of Liberty Funds Trust III ("Trust III"), of which the Small Cap Fund
is a series.
Please review the enclosed Prospectus of the Special Fund for your class of
shares. This document is incorporated in this Prospectus/Proxy Statement by
reference. The following documents have also been filed
1
<PAGE> 4
with the Securities and Exchange Commission (the "SEC") and are incorporated in
this Prospectus/Proxy Statement by reference:
- The Prospectuses of the Small Cap Fund dated March 1, 2000, as
supplemented on May 5, 2000, June 23, 2000 and August 1, 2000.
- The Statement of Additional Information of the Small Cap Fund dated March
1, 2000, as supplemented on June 23, 2000 and August 21, 2000.
- The Statement of Additional Information of the Special Fund dated March
1, 2000, as supplemented on June 23, 2000 and August 21, 2000.
- The Report of Independent Accountants and financial statements included
in the Annual Report to Shareholders of the Small Cap Fund dated October
31, 1999.
- The financial statements included in the Small Cap Fund's Semi-Annual
Report to Shareholders dated April 30, 2000.
- The Statement of Additional Information of the Special Fund dated
November 17, 2000 relating to the Acquisition.
The Small Cap Fund has previously sent its Annual and Semi-Annual Reports
to its shareholders. For a free copy of these Reports or any of the documents
listed above, please call 1-800-426-3750 or write to your Fund at One Financial
Center, Boston, Massachusetts 02111-2621. You may also obtain many of these
documents by accessing our web site at www.libertyfunds.com. Our hearing
impaired shareholders may call Liberty Funds Services, Inc. at 1-800-528-6979 if
you have special TTD equipment. Text-only versions of all the Small Cap Fund and
Special Fund documents can be viewed online or downloaded from the Edgar
database on the SEC's internet site at www.sec.gov. You can review and copy
information about the Funds by visiting the following location, and you can
obtain copies, upon payment of a duplicating fee, by electronic request at the
following e-mail address: [email protected], or by writing the Public Reference
Room, U.S. Securities and Exchange Commission, Washington, DC 20549-0102.
Information on the operation of the Public Reference Room may be obtained by
calling 202-942-8090.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS/PROXY STATEMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2
<PAGE> 5
QUESTIONS AND ANSWERS
THE FOLLOWING QUESTIONS AND ANSWERS PROVIDE AN OVERVIEW OF KEY FEATURES OF THE
ACQUISITION AND OF THE OTHER MATTERS TO BE CONSIDERED AT THE MEETING AND OF THE
INFORMATION CONTAINED IN THIS COMBINED PROSPECTUS/ PROXY STATEMENT. PLEASE
REVIEW THE FULL PROSPECTUS/PROXY STATEMENT PRIOR TO CASTING YOUR VOTE.
1. WHAT IS BEING PROPOSED?
First, the Trustees of Trust III are recommending in Proposal 1 that the Special
Fund acquire the Small Cap Fund. This means that the Special Fund would acquire
all of the assets and liabilities of the Small Cap Fund in exchange for shares
of the Special Fund representing the aggregate net asset value of the Small Cap
Fund's assets and liabilities. If Proposal 1 is approved, you will receive
shares of the Special Fund with an aggregate net asset value equal to the
aggregate net asset value of your Small Cap Fund shares as of the business day
before the closing of the Acquisition. The Acquisition is currently scheduled to
take place on or around January 16, 2001.
In addition, the Trustees of Trust III are recommending in Proposal 2 that you
vote in favor of eleven nominees for Trustees.
2. WHY IS THE ACQUISITION BEING PROPOSED?
The Trustees of Trust III recommend approval of the Acquisition. In reviewing
the Acquisition, the Trustees considered:
- that absent the Acquisition, Liberty Financial Companies, Inc. ("Liberty
Financial"), the indirect parent of the investment advisor to the Small
Cap Fund, will recommend to the Trustees that the Fund be liquidated;
- the expected reduction in the fees and expenses payable by the Small Cap
Fund, assuming that the Fund's investment advisor declined to continue
the current voluntary fee waiver or expense reimbursement in effect with
respect to the Fund;
- that the Acquisition offers shareholders of the Small Cap Fund an
investment in a larger fund with similar investment goals and strategies;
- that the Small Cap Fund has not achieved sufficient sales growth and is
not likely to do so in the near future;
- the expected tax-free nature of the Acquisition as opposed to other
alternatives for the Fund and for shareholders and other tax
considerations; and
- that the Acquisition will permit the Funds' investment advisor to
concentrate on a smaller, more focused set of offerings.
Please review "Reasons for the Acquisition" in Proposal 1 of this
Prospectus/Proxy Statement for a full description of the factors considered by
the Trustees.
3. HOW DO THE MANAGEMENT FEES AND EXPENSES OF THE FUNDS COMPARE AND WHAT ARE
THEY ESTIMATED TO BE FOLLOWING THE ACQUISITION?
The following tables allow you to compare the sales charges and management fees
and expenses of the Small Cap Fund and the Special Fund and to analyze the
estimated expenses that Liberty Financial, the indirect parent of each Fund's
investment advisor, expects the combined fund to bear in the first year
following the Acquisition. The shareholder fees presented below for the Special
Fund apply both before and after giving effect to the Acquisition. Sales charges
are paid directly by shareholders to Liberty Funds Distributor, Inc., each
Fund's distributor. Annual Fund Operating Expenses are deducted from the Fund's
assets. They include management and administration fees, 12b-1 fees and
administrative costs, including pricing and custody services. The Annual Fund
Operating Expenses shown in the table below represent expenses incurred by each
Fund for its fiscal year ended October 31, 1999.
3
<PAGE> 6
SHAREHOLDER FEES(1)
(paid directly from your investment)
<TABLE>
<CAPTION>
SMALL CAP FUND SPECIAL FUND
-------------- ------------
CLASS A CLASS B CLASS C CLASS I CLASS A CLASS B CLASS C CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum sales charge
(load) on purchases (%)
(as a percentage of the
offering price) 5.75 0.00 0.00 0.00 5.75 0.00 0.00 0.00
---------------------------------------------------------------------------------------------------------------
Maximum deferred sales
charge (load) on
redemptions (%) (as a
percentage of the lesser
of purchase price or
redemption price) 1.00(2) 5.00 1.00 0.00 1.00(2) 5.00 1.00 0.00
---------------------------------------------------------------------------------------------------------------
Redemption fee (%) (as a
percentage of amount
redeemed, if applicable) (3) (3) (3) (3) (3) (3) (3) (3)
</TABLE>
---------------
(1) A $10 annual fee is deducted from accounts of less than $1,000 and paid to
the transfer agent.
(2) This charge applies only to certain Class A shares bought without an initial
sales charge that are sold within 18 months of purchase.
(3) There is a $7.50 charge for wiring sale proceeds to your bank.
ANNUAL FUND OPERATING EXPENSES
(deducted directly from Fund assets)
<TABLE>
<CAPTION>
SMALL CAP FUND SPECIAL FUND
-------------- ------------
CLASS A CLASS B CLASS C CLASS I CLASS A CLASS B CLASS C CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management and
administration fee(4) (%) 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05
---------------------------------------------------------------------------------------------------------------
Distribution and service
(12b-1) fees (%) 0.25 1.00 1.00 0.00 0.25 1.00 1.00 0.00
---------------------------------------------------------------------------------------------------------------
Other expenses(4) (%) 0.62 0.62 0.62 0.37 0.47 0.47 0.47 0.24
---------------------------------------------------------------------------------------------------------------
Total annual fund
operating expenses(4) (%) 1.92 2.67 2.67 1.42 1.77 2.52 2.52 1.29
</TABLE>
<TABLE>
<CAPTION>
SPECIAL FUND (PRO FORMA COMBINED)
---------------------------------
CLASS A CLASS B CLASS C CLASS I
<S> <C> <C> <C> <C>
Management and administration fee(5) (%) 1.05 1.05 1.05 1.05
------------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees (%) 0.25 1.00 1.00 0.00
------------------------------------------------------------------------------------------------------
Other expenses(5) (%) 0.44 0.44 0.44 0.25
------------------------------------------------------------------------------------------------------
Total annual fund operating expenses(5) (%) 1.74 2.49 2.49 1.30
</TABLE>
---------------
(4) The investment advisor and administrator of each of the Small Cap Fund and
the Special Fund have voluntarily agreed to waive advisory and
administration fees and reimburse the Funds for certain expenses so that the
total annual fund operating expenses (exclusive of distribution and service
fees, brokerage commissions, interest, taxes and extraordinary expenses, if
any) will not exceed 1.25% with respect to Class A, B and C shares, and
1.00% with respect to Class I shares. As a result, with respect to Class A,
B and C shares of the Small Cap Fund, the actual management and
administration fees for each share class would be 0.63%, other expenses for
each share class would be 0.62% and total annual fund operating expenses for
Class A, B and C shares would be 1.50%, 2.25% and 2.25%, respectively. With
respect to Class I shares of the Small Cap Fund, the actual management and
administration fees would be 0.63%, other expenses would be 0.37% and total
annual fund operating expenses would be 1.00%. With respect to Class A, B
and C shares of the Special Fund, the actual management and administration
fees for each share class would be 0.76%, other expenses for each share
class would be 0.47% and total annual fund operating expenses for Class A, B
and C shares would be 1.48%, 2.23% and 2.23%, respectively. With respect to
Class I shares of the Special Fund, the actual management and administration
fees would be 0.76%, other expenses would be 0.24% and total annual fund
operating expenses would be 1.00%. This arrangement may be modified or
terminated by each Fund's investment advisor or administrator at any time.
4
<PAGE> 7
(5) The investment advisor and administrator of the Special Fund have
voluntarily agreed to waive advisory and administration fees and reimburse
the Fund for certain expenses so that the total annual fund operating
expenses (exclusive of distribution and service fees, brokerage commissions,
interest, taxes and extraordinary expenses, if any) will not exceed 1.25%
for Class A, B and C shares, and 1.00% for Class I shares. As a result, with
respect to Class A, B and C shares of the Special Fund, the actual
management and administration fees for each share class would be 0.75%,
other expenses for each share class would be 0.44% and total annual fund
operating expenses for Class A, B and C shares would be 1.44%, 2.19% and
2.19%, respectively. With respect to Class I shares of the Special Fund, the
actual management and administration fees would be 0.75%, other expenses
would be 0.25% and total annual fund operating expenses would be 1.00%. This
arrangement may be modified or terminated by the Fund's investment advisor
or administrator at any time.
EXAMPLE EXPENSES
Example Expenses help you compare the cost of investing in the Small Cap
Fund and the Special Fund currently with the cost of investing in the combined
fund on a pro forma basis and also allows you to compare this with the cost of
investing in other mutual funds. The table does not take into account any
expense reduction arrangements discussed in the footnotes to the Annual Fund
Operating Expenses table. It uses the following hypothetical conditions:
- $10,000 initial investment
- 5% total return for each year
- Each Fund's operating expenses remain the same
- Assumes reinvestment of all dividends and distributions
- Assumes Class B shares convert to Class A shares after eight years
EXAMPLE EXPENSES
(your actual costs may be higher or lower)
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
SMALL CAP FUND
Class A $758 $1,142 $1,550 $2,685
--------------------------------------------------------------------------------------------------
Class B: did not sell your shares $270 $ 828 $1,413 $2,818
sold all your shares at end of period $770 $1,128 $1,613 $2,818
--------------------------------------------------------------------------------------------------
Class C: did not sell your shares $270 $ 828 $1,413 $2,999
sold all your shares at end of period $370 $ 828 $1,413 $2,999
--------------------------------------------------------------------------------------------------
Class I $145 $ 449 $ 776 $1,702
--------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
SPECIAL FUND
Class A $745 $1,100 $1,479 $2,539
--------------------------------------------------------------------------------------------------
Class B: did not sell your shares $255 $ 785 $1,340 $2,672
sold all your shares at end of period $755 $1,085 $1,540 $2,672
--------------------------------------------------------------------------------------------------
Class C: did not sell your shares $255 $ 785 $1,340 $2,856
sold all your shares at end of period $355 $ 785 $1,340 $2,856
--------------------------------------------------------------------------------------------------
Class I $131 $ 408 $ 706 $1,553
SPECIAL FUND
(pro forma combined)
Class A $742 $1,091 $1,464 $2,509
--------------------------------------------------------------------------------------------------
Class B: did not sell your shares $252 $ 776 $1,326 $2,642
sold all your shares at end of period $752 $1,076 $1,526 $2,642
--------------------------------------------------------------------------------------------------
Class C: did not sell your shares $252 $ 776 $1,326 $2,826
sold all your shares at end of period $352 $ 776 $1,326 $2,826
--------------------------------------------------------------------------------------------------
Class I $133 $ 413 $ 714 $1,571
</TABLE>
Significant assumptions underlying the pro forma Annual Fund Operating Expenses
and Example Expenses are as follows: (1) the current contractual agreements will
remain in place; (2) certain duplicate costs involved in operating the Small Cap
Fund are eliminated; and (3) expense ratios are based on pro forma combined
average net assets for the year ended April 30, 2000.
4. HOW DO THE INVESTMENT GOALS, STRATEGIES AND POLICIES OF THE SMALL CAP FUND
AND THE SPECIAL FUND COMPARE?
This table shows the investment goal and primary investment strategies of each
Fund:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
THE SMALL CAP FUND THE SPECIAL FUND
-----------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT GOAL: The Small Cap Fund seeks INVESTMENT GOAL: The Special Fund seeks
to provide long-term capital appreciation. significant long-term capital appreciation.
-----------------------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES: The Small PRIMARY INVESTMENT STRATEGIES: The Special
Cap Fund seeks to achieve its goal as Fund seeks to achieve its goal as follows:
follows: - The Fund invests at least 75% of its total
- The Fund invests at least 65% of its total assets in securities of companies that have
assets in small cap (under $1 billion) small (under $1 billion) to medium ($1-3
companies. billion) market capitalizations.
- The Fund follows a basic value, contrarian - The Fund may engage in short sales.
approach in selecting stocks for its - The Fund follows a basic value, contrarian
portfolio. approach in selecting stocks for its
portfolio.
- The Fund invests primarily in U.S. stocks
that represent more aggressive investments
than the U.S. equity market as a whole.
-----------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 9
The following compares the primary investment strategies that each Fund uses to
achieve its investment goal:
- The Special Fund invests primarily (at least 75% of assets) in securities
of companies that have small to medium market capitalizations, while the
Small Cap Fund invests primarily (at least 65% of assets) in securities
of companies that have small market capitalizations.
- Both Funds follow a basic value, contrarian approach in selecting stocks
for their portfolio; however, the Special Fund purchases primarily stocks
that represent more aggressive investments than the U.S. equity market as
a whole.
- Unlike the Small Cap Fund, the Special Fund may engage in short sales as
part of its primary investment strategy.
The fundamental and non-fundamental investment policies of the Small Cap Fund
and the Special Fund are similar.
5. WHAT CLASS OF SHARES WILL YOU RECEIVE IN THE SPECIAL FUND IF THE ACQUISITION
OCCURS?
You will receive the same class of shares that you currently own in the Small
Cap Fund. The shares will have the same exchange rights and will bear the same
contingent deferred sales charges ("CDSCs"), if applicable, as your current
shares. The shares will also have the same distribution, purchase and redemption
procedures as your current shares.
6. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION?
The Acquisition is expected to be tax free to you for federal income tax
purposes. This means that no gain or loss will be recognized by the Small Cap
Fund or its shareholders as a result of the Acquisition.
The cost basis and holding period of your Small Cap Fund shares are expected to
carry over to your new shares in the Special Fund.
PROPOSAL 1 -- ACQUISITION OF THE LIBERTY CONTRARIAN SMALL-CAP FUND BY
THE LIBERTY SPECIAL FUND
THE PROPOSAL
You are being asked to approve the Agreement and Plan of Reorganization
dated October 26, 2000. A form of Agreement and Plan of Reorganization is
attached as Appendix A to this Prospectus/Proxy Statement. By approving the
Agreement and Plan of Reorganization, you are also approving the Acquisition of
the Small Cap Fund by the Special Fund under the Agreement and Plan of
Reorganization.
PRINCIPAL INVESTMENT RISKS
What are the principal investment risks of the Special Fund, and how do they
compare with the Small Cap Fund?
Because the Funds have similar goals and strategies, the principal risks
associated with each Fund are similar. Both Funds are subject to market risk and
the risks associated with value stocks. Value stocks are securities of companies
that may have experienced adverse business or industry developments or may be
subject to special risks that have caused the stocks to be out of favor. If the
advisor's assessment of the company's prospects is wrong, the price of its stock
may not approach the value the advisor has placed on it. While both Funds may
invest in securities of smaller companies, because the Small Cap Fund invests
primarily in small cap securities, it is particularly exposed to the risks
associated with small capitalization stocks. Smaller companies are more likely
than larger companies to have limited product lines, operating histories,
markets or financial resources and may depend heavily on a small management
team. Stocks of smaller companies may trade less frequently, may trade in
smaller volumes, may fluctuate more sharply in price than stocks of larger
companies and may not be widely followed by the investment community.
7
<PAGE> 10
Because the Special Fund may engage in short sales and generally invest in
U.S. stocks that are more aggressive than the U.S. equity market as a whole, you
may be more exposed to special risks related to short sales and aggressive
investments by becoming a shareholder of the Special Fund. A short sale involves
the sale by the Fund of a security that it does not own with the hope of
purchasing the same shares at a later date at a lower price. In order to deliver
the security to the buyer, the Fund borrows the security from a third party. The
Fund is then obligated to return the security to the third party, so the Fund
must purchase the security at the market price at a later point in time. If the
price of the security has increased during this time, then the Fund will incur a
loss equal to the increase in price of the security from the time that the short
sale was entered into plus any premiums and interest paid to the third party.
Therefore, short sales involve the risk that losses may be exaggerated,
potentially losing more money than the actual cost of the security. Also, there
is the risk that the third party to the short sale may fail to honor its
contract terms, causing a loss to the Fund. The aggressive investments in which
the Special Fund typically invests expose the Fund to a greater degree to the
risks associated with value stocks than many other funds which invest in value
stocks. For more information about the principal investment risks of the Special
Fund, please see the enclosed Prospectus of the Special Fund. The actual risks
of investing in each Fund depend on the securities held in each Fund's portfolio
and on market conditions, both of which change over time.
INFORMATION ABOUT THE ACQUISITION
Terms of the Agreement and Plan of Reorganization
If approved by the shareholders of the Small Cap Fund, the Acquisition is
expected to occur on or around January 16, 2001 under the Agreement and Plan of
Reorganization, a form of which is attached as Appendix A to this combined
Prospectus/Proxy Statement. Please review Appendix A. The following is a brief
summary of the principal terms of the Agreement and Plan of Reorganization:
- The Small Cap Fund will transfer all of the assets and liabilities
attributable to each class of shares of the Small Cap Fund to the Special
Fund in exchange for shares of the same class of the Special Fund with an
aggregate net asset value equal to the net asset value of the transferred
assets and liabilities.
- The Acquisition will occur on the next business day after the time
(currently scheduled to be 4:00 p.m. Eastern Time on January 12, 2001 or
such other date and time as the parties may determine) when the assets of
each Fund are valued for purposes of the Acquisition (the "Valuation
Date").
- The shares of each class of the Special Fund received by the Small Cap
Fund will be distributed to the shareholders of the same class of the
Small Cap Fund pro rata in accordance with their percentage ownership of
each class of the Small Cap Fund in full liquidation of the Small Cap
Fund.
- After the Acquisition, the Small Cap Fund will be terminated, and its
affairs will be wound up in an orderly fashion.
- The Acquisition requires approval by the Small Cap Fund's shareholders
and satisfaction of a number of other conditions; the Acquisition may be
terminated at any time with the approval of the Trustees of Trust III.
A shareholder who objects to the Acquisition will not be entitled under
Massachusetts law or the Declaration of Trust of Trust III (the "Declaration")
to demand payment for, or an appraisal of, his or her shares. However,
shareholders should be aware that the Acquisition as proposed is not expected to
result in recognition of gain or loss to shareholders for federal income tax
purposes and that, if the Acquisition is consummated, shareholders will be free
to redeem the shares which they receive in the transaction at their then-current
net asset value, plus any applicable CDSC. In addition, shares may be redeemed
(at net asset value plus any applicable CDSC) at any time prior to the
consummation of the Acquisition.
8
<PAGE> 11
Shares You Will Receive
If the Acquisition occurs, you will receive shares in the Special Fund of
the same class as the shares that you currently own in the Small Cap Fund. In
comparison to the shares you currently own, the shares you receive will have the
following characteristics:
- They will have an aggregate net asset value equal to the aggregate net
asset value of your current shares as of the Valuation Date.
- If applicable, your Special Fund shares will bear the same sales charges,
redemption fees and CDSCs as your current shares, but for purposes of
determining the CDSC applicable to any redemption, the new shares will
continue to age from the date you purchased your Small Cap Fund shares.
- The procedures for purchasing and redeeming your shares will not change
as a result of the Acquisition.
- You will have the same exchange options as you currently have.
- You will have the same voting rights as you currently have, but as a
shareholder of the Special Fund.
Information concerning the capitalization of each of the Funds is contained
in Appendix C.
Reasons for the Acquisition
The Trustees of Trust III, including all Trustees who are not "interested
persons" of the Trust, have determined that the Acquisition would be in the best
interests of each Fund, on balance in light of all relevant factors, and that
the interests of existing shareholders of each Fund would not be diluted as a
result of the Acquisition. For these reasons, the Trustees have unanimously
approved the Acquisition and recommend that you vote in favor of the Acquisition
by approving the Agreement and Plan of Reorganization, a form of which is
attached as Appendix A to this Prospectus/Proxy Statement. Each shareholder
should carefully consider whether remaining a shareholder of the Special Fund
after the Acquisition is consistent with that shareholder's financial needs and
circumstances.
The Acquisition is one of several proposed acquisitions and liquidations of
funds in the Liberty and Stein Roe Fund groups proposed by Liberty Financial
Companies, Inc. ("Liberty Financial"), the indirect parent of each of the
investment advisors to the Liberty and Stein Roe Funds. The overall purposes of
these acquisitions and liquidations include streamlining the product offerings
of the Liberty and Stein Roe Funds, potentially reducing fund expense ratios by
creating larger funds and permitting the Liberty Financial organization to
concentrate its portfolio management resources on a more focused group of
portfolios.
In proposing the Acquisition, Liberty Financial presented to the Trustees
the following reasons for the Small Cap Fund to enter into the Acquisition:
- Absent the Acquisition, Liberty Financial indicated to the Trustees that
it will discontinue subsidizing the Small Cap Fund's operations (through
fee waivers or expense reductions) and that it will recommend to the
Trustees that the Small Cap Fund be liquidated. Liberty Financial
informed the Trustees that the Small Cap Fund has not achieved sufficient
sales growth and is not likely to do so in the near future, and,
therefore, the Fund may not be able to provide a competitive investment
return in the absence of a subsidy.
- The Acquisition is intended to permit the Small Cap Fund's shareholders
to exchange their investment for an investment in a larger fund with
similar investment goals and strategies to the Small Cap Fund without
recognizing gain or loss for federal income tax purposes. By contrast, if
a Small Cap Fund shareholder redeemed his or her shares to invest in
another fund, like the Special Fund, the transaction would likely be a
taxable event for such shareholder. Similarly, if the Small Cap Fund were
liquidated or reorganized in a taxable transaction, the transaction would
likely be a taxable event for the Fund's shareholders. After the
Acquisition, shareholders may redeem any or all of their Special Fund
shares at net asset value (subject to any applicable CDSC) at any time,
at which point they would recognize a taxable gain or loss.
9
<PAGE> 12
- As a result of Liberty Financial's decision to discontinue its expense
subsidy of the Small Cap Fund, the expense ratio of the Small Cap Fund
will increase significantly if the Acquisition does not occur. If the
Acquisition does occur, then the expense ratio of the combined Special
Fund is expected to be materially lower than the Small Cap Fund's expense
ratio after Liberty Financial discontinues its subsidy. (The Trustees did
note that the Special Fund has a higher expense ratio than the subsidized
expense ratio of the Small Cap Fund). Although, as explained below, it is
not possible to predict future expense ratios with certainty, information
provided to the Trustees by Liberty Financial indicated that, based on
the assets of the Small Cap and Special Funds on July 31, 2000 and the
Funds' current expense structures (assuming the voluntary expense
limitation is discontinued), the Special Fund's annualized expense ratio
(excluding 12b-1 fees) immediately after the Acquisition would be about
0.23% lower than the Small Cap Fund's current expense ratio (for example,
for Class A shares, a 1.57% expense ratio for the Special Fund, as
compared to 1.80% for the Small Cap Fund if the limitation were
discontinued and 1.25% if it continued). Note that the 12b-1 fees on
Class A, B and C shares of each Fund are 0.25%, 1.00% and 1.00%,
respectively. There are no 12b-1 fees on Class I shares.
- The Acquisition will permit the advisor to concentrate on a smaller, more
focused set of fund offerings rather than manage multiple similar
portfolios with somewhat different investment approaches.
The Trustees also considered the possible limitation as a result of the
Acquisition on the future use of losses of the Small Cap Fund to offset future
taxable capital gains required to be distributed to shareholders. This means
that the combined Fund in the future could conceivably distribute to its
shareholders more taxable gains as a result of this limitation than the Small
Cap Fund may have otherwise been required to distribute if the Acquisition had
not occurred. The Trustees determined, despite this consideration, that on
balance the Acquisition is in the best interests of the Small Cap Fund's
shareholders.
The Trustees also considered the differences in the Funds' investment
objectives, policies and strategies and the related risks. In addition, the
Trustees considered the relative performance results which are based on the
factors and assumptions set forth below under "Performance Information." No
assurance can be given that the Special Fund will achieve any particular level
of performance after the Acquisition.
The projected post-Acquisition expense reductions presented above are based
on the Special Fund's current expense structure and the projected
post-Acquisition assets of the combined Fund. The projected reductions are
further based upon numerous material assumptions, including that: (1) the
current contractual agreements will remain in place; (2) any fee reductions
proposed in this Prospectus/Proxy Statement are approved; and (3) certain
duplicate costs involved in operating the Small Cap Fund are eliminated.
Although these projections represent good faith estimates, there can be no
assurance that any particular level of expenses or expense savings will be
achieved, because expenses depend on a variety of factors (including the future
level of Fund assets), many of which factors are beyond the control of the
Special Fund or Liberty Financial.
Performance Information
The charts below show the percentage gain or loss in each calendar year for
the 10-year period ending December 31, 1999 or, if shorter, since inception, for
the Class A shares of the Small Cap Fund and the Class A shares of the Special
Fund. They should give you a general idea of how each Fund's return has varied
from year to year. The charts include the effects of Fund expenses, but not
sales charges. Returns would be lower if applicable sales charges were included.
The calculations of total return assume the reinvestment of all dividends and
capital gain distributions on the reinvestment date. Past performance is not an
indication of future results. Performance results include the effect of expense
reduction arrangements, if any. If these arrangements were not in place, then
the performance results would have been lower. Any expense reduction
arrangements may be discontinued at any time.
Additional discussion of the manner of calculation of total return is
contained in each Fund's respective Prospectus and Statement of Additional
Information, which are incorporated by reference in this Prospectus/ Proxy
Statement.
10
<PAGE> 13
SMALL CAP FUND
[SMALL CAP FUND BAR CHART]
<TABLE>
<CAPTION>
SMALL CAP FUND
--------------
<S> <C>
1997 26.14%
1998 -32.11%
1999 10.09%
</TABLE>
The Fund's year-to-date total return through
September 30, 2000 was 21.91%.
For period shown in bar chart:
Best quarter: Second quarter 1999, +21.94%
Worst quarter: Third quarter 1998, -32.05%
SPECIAL FUND
[SPECIAL FUND BAR CHART]
<TABLE>
<CAPTION>
SPECIAL FUND
------------
<S> <C>
1990 3.82%
1991 17.08%
1992 33.38%
1993 34.54%
1994 11.72%
1995 10.79%
1996 5.92%
1997 11.28%
1998 -42.85%
1999 8.14%
</TABLE>
The Fund's year-to-date total return through
September 30, 2000 was 22.11%.
For period shown in bar chart:
Best quarter: Second quarter 1999, +29.61%
Worst quarter: Third quarter 1998, -33.61%
The following tables list the Small Cap Fund's average annual total return
for Class A and Class I shares for the one-year and life of the Fund periods
ending December 31, 1999, and the Special Fund's average annual total return for
Class A shares for the one-year, five-year and life of the Fund periods ending
December 31, 1999, in each case including the applicable sales charge for Class
A shares. The average annual total returns of Class B and Class C shares of each
Fund are not listed in the tables below because, as of December 31, 1999, no
shares of these classes had been issued. Class I shares of the Special Fund,
which were not in existence as of December 31, 1999, are also not included in
the tables. These tables are intended to provide you with some indication of the
risks of investing in the Funds. At the bottom of each table, you can compare
the Funds' performance with one or more indices or averages.
11
<PAGE> 14
SMALL CAP FUND*
<TABLE>
<CAPTION>
INCEPTION
DATE 1 YEAR LIFE OF FUND
<S> <C> <C> <C>
Class A (%) 2/20/96 3.76 1.49
-----------------------------------------------------------------------------------------------------
Class I (%) 2/20/96 10.59 3.42
-----------------------------------------------------------------------------------------------------
Russell Index (%) N/A 21.26** 13.66**
-----------------------------------------------------------------------------------------------------
Lipper Average (%) N/A 33.49** 17.12**
</TABLE>
SPECIAL FUND*
<TABLE>
<CAPTION>
INCEPTION
DATE 1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A (%) 4/9/87 1.92 5.32 6.37
---------------------------------------------------------------------------------------------------------
Russell Index (%) N/A 21.26** 16.69** 13.40**
---------------------------------------------------------------------------------------------------------
Lipper Average (%) N/A 39.35** 23.31** 16.04**
</TABLE>
---------------
* The Funds' returns are compared to the Russell 2000 Index ("Russell Index"),
an unmanaged index that tracks the performance of small-capitalization stocks
traded on the New York Stock Exchange, the American Stock Exchange and
NASDAQ. Unlike the Funds, indices are not investments, do not incur fees or
expenses and are not professionally managed. It is not possible to invest
directly in indices. The Funds' returns are also compared to the average
return of the funds included in the Lipper Mid Cap Funds category average
("Lipper Average"). This Lipper Average, which is calculated by Lipper, Inc.,
is composed of funds with similar investment objectives to the Funds. Sales
charges are not reflected in the Lipper Average.
** Performance information is from February 29, 1996.
Federal Income Tax Consequences
The Acquisition is intended to be a tax-free reorganization. Ropes & Gray
has delivered to the Small Cap Fund and the Special Fund an opinion, and the
closing of the Acquisition will be conditioned on receipt of a letter from Ropes
& Gray confirming such opinion, to the effect that, on the basis of existing law
under specified sections of the Internal Revenue Code of 1986, as amended (the
"Code"), for federal income tax purposes:
- under Section 361 or Section 354 of the Code, respectively, no gain or
loss will be recognized by the Small Cap Fund or the shareholders of the
Small Cap Fund as a result of the Acquisition;
- under Section 358 of the Code, the tax basis of the Special Fund shares
you receive will be the same, in the aggregate, as the aggregate tax
basis of your Small Cap Fund shares;
- under Section 1223(1) of the Code, your holding period for the Special
Fund shares you receive will include the holding period for your Small
Cap Fund shares if you hold Small Cap Fund shares as a capital asset;
- under Section 1032 of the Code, no gain or loss will be recognized by the
Special Fund as a result of the Acquisition;
- under Section 362(b) of the Code, the Special Fund's tax basis in the
assets that the Special Fund receives from the Small Cap Fund will be the
same as the Small Cap Fund's basis in such assets; and
- under Section 1223(2) of the Code, the Special Fund's holding period in
such assets will include the Small Cap Fund's holding period in such
assets.
The opinion is, and the confirmation letter will be, based on certain
factual certifications made by officers of Trust III. The opinion is not a
guarantee that the tax consequences of the Acquisition will be as described
above.
Prior to the closing of the Acquisition, the Small Cap Fund and the Special
Fund will each distribute to their shareholders all of their respective
investment company taxable income and net realized capital gains
12
<PAGE> 15
that have not previously been distributed to shareholders. Such distributions
will be taxable to the shareholders of the respective Funds.
This description of the federal income tax consequences of the Acquisition
does not take into account your particular facts and circumstances. Consult your
own tax advisor about the effect of state, local, foreign, and other tax laws.
THE TRUSTEES OF TRUST III UNANIMOUSLY RECOMMEND APPROVAL OF THE AGREEMENT AND
PLAN OF REORGANIZATION.
The Declaration establishing Trust III provides that any series of Trust
III (such as the Small Cap Fund) may be terminated by a two-thirds vote of the
series' shares or by notice from the Trustees to the shareholders. The Trust
believes that, under this provision, no shareholder vote is required to approve
the Acquisition, although the provision could also be interpreted to require a
two-thirds vote, if the Acquisition is submitted for shareholder approval. The
Declaration also provides that it may be amended by the Trustees, upon majority
vote of the shareholders of the affected series. To eliminate any uncertainty
about whether any shareholder vote is required to approve the Acquisition, the
Trustees will consider any vote in favor of the Acquisition to be a vote in
favor of amending the Declaration to provide that the Small Cap Fund may be
terminated by majority vote of the Small Cap Fund's shares entitled to vote (or
by Trustee notice to shareholders), and will so amend the Declaration if a
majority of the Small Cap Fund's shareholders entitled to vote on the proposal
vote in favor of such proposal.
Required Vote for Proposal 1
Approval of the Agreement and Plan of Reorganization dated October 26, 2000
among Trust III on behalf of the Small Cap Fund, Trust III on behalf of the
Special Fund, and Liberty Financial will require the affirmative vote of a
majority of the shares of the Small Cap Fund outstanding at the record date for
the Meeting.
PROPOSAL 2 -- ELECTION OF TRUSTEES
THE PROPOSAL
You are being asked to approve the election of four new members as well as
seven of the currently serving members of the Board of Trustees of Trust III.
All of the nominees listed below, except for the proposed four new members (Ms.
Kelly and Messrs. Hacker, Nelson and Theobald), are currently members of the
Board of Trustees of Trust III, as well as nine Liberty closed-end funds and
seven other Liberty open-end trusts (or, in the case of Messrs. Lowry, Mayer and
Neuhauser, eleven Liberty closed-end funds and eight other Liberty open-end
trusts (collectively, the "Liberty Mutual Funds")), and have served in that
capacity continuously since originally elected or appointed. All of the
currently serving members, other than Mr. Palombo, have been previously elected
by the shareholders of Trust III. The proposed four new members currently serve
on the Board of Trustees of two Stein Roe closed-end funds and seven Stein Roe
open-end trusts (collectively, the "Stein Roe Mutual Funds"), and were
recommended for election as Trustees of the Liberty Mutual Funds by the Board of
Trustees at meetings held on October 25 and 26, 2000. Each of the nominees
elected will serve as a Trustee of Trust III until the next meeting of
shareholders of Trust III called for the purpose of electing a Board of
Trustees, and until a successor is elected and qualified or until death,
retirement, resignation or removal.
Currently, two different boards of trustees are responsible for overseeing
substantially all of the Liberty and Stein Roe Mutual Funds. Liberty Financial
and the Trustees of Trust III have agreed that shareholder interests can more
effectively be represented by a single board with responsibility for overseeing
substantially all of the Liberty and Stein Roe Mutual Funds. Creation of a
single, consolidated board should also provide certain administrative
efficiencies for Liberty Financial and potential future cost savings for both
the Liberty and Stein Roe Mutual Funds and Liberty Financial. The nominees
listed below will be the members of the single, consolidated Board of Trustees.
The persons named in the enclosed proxy card intend to vote at the
13
<PAGE> 16
Meeting in favor of the election of the nominees named below as Trustees of
Trust III (if so instructed). If any nominee listed below becomes unavailable
for election, the proxy may be voted for a substitute nominee in the discretion
of the proxy holder(s).
INFORMATION ABOUT THE NOMINEES
Set forth below is information concerning each of the nominees.
<TABLE>
<CAPTION>
NOMINEE NAME & AGE PRINCIPAL OCCUPATION(1) AND DIRECTORSHIPS TRUSTEE SINCE
------------------ ----------------------------------------- -------------
<S> <C> <C>
Douglas A. Hacker Executive Vice President and Chief Financial Officer of New nominee
(43) UAL, Inc. (airline) since July 1999; Senior Vice
President and Chief Financial Officer of UAL, Inc.
prior thereto.
Janet Langford Executive Vice President -- Corporate Development, New nominee
Kelly General Counsel, and Secretary of Kellogg Company
(41) (food, beverage and tobacco producer) since September
1999; Senior Vice President, Secretary and General
Counsel of Sara Lee Corporation (branded, packaged,
consumer-products manufacturer) prior thereto.
Richard W. Lowry Private Investor since 1987. (Formerly Chairman and 1995
(64) Chief Executive Officer of U.S. Plywood Corporation
(building products producer) from August 1985 to August
1987.)
Salvatore Macera Private Investor since 1981. (Formerly Executive Vice 1998
(69) President and Director of Itek Corporation
(electronics) from 1975 to 1981.)
William E. Partner, Park Avenue Equity Partners (venture capital), 1994
Mayer(2) since November 1996; Dean, College of Business and
(60) Management, University of Maryland, prior thereto;
Director, Johns Manville (building products producer),
Lee Enterprises (print and on-line media) and WR
Hambrecht + Co. (financial services provider).
Charles R. Nelson Van Voorhis Professor, Department of Economics, New nominee
(57) University of Washington; Consultant on economic and
statistical matters.
John J. Neuhauser Academic Vice President and Dean of Faculties, Boston 1985
(57) College, since August 1999; Dean, Boston College School
of Management, prior thereto.
Joseph R. Trustee of the Stein Roe Mutual Funds since October 2000
Palombo(3) 2000; Executive Vice President and Director of Colonial
(47) and Stein Roe & Farnham Incorporated since April 1999;
Executive Vice President and Chief Administrative
Officer of Liberty Funds Group LLC since April 1999;
Director of AlphaTrade Inc. (broker-dealer), Colonial
Advisory Services, Inc., Liberty Funds Distributor,
Inc. and Liberty Funds Services, Inc. since April 1999.
(Formerly Vice President of the Stein Roe Mutual Funds
from April 1999 to October 2000, Vice President of the
Liberty Mutual Funds from April 1999 to August 2000,
and Chief Operating Officer of Putnam Mutual Funds
(investments) from 1994 to 1998.)
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
NOMINEE NAME & AGE PRINCIPAL OCCUPATION(1) AND DIRECTORSHIPS TRUSTEE SINCE
------------------ ----------------------------------------- -------------
<S> <C> <C>
Thomas E. Stitzel Business Consultant since 1999; Professor of Finance 1998
(64) and Dean, College of Business, Boise State University,
prior thereto; Chartered Financial Analyst.
Thomas C. Theobald Managing Director, William Blair Capital Partners New nominee
(62) (private equity investing), since 1994; Chief Executive
Officer and Chairman of the Board of Directors of
Continental Bank Corporation (banking services) prior
thereto.
Anne-Lee Verville Consultant since 1997; General Manager, Global 1998
(55) Education Industry (global education applications),
prior thereto. (Formerly President, Applications
Solutions Division, IBM Corporation (global education
and global applications), from 1991 to 1994.)
</TABLE>
---------------
(1) Except as otherwise noted, each individual has held the office indicated or
other offices in the same company for the last five years.
(2) Mr. Mayer is not affiliated with Liberty Financial, but is an "interested
person," as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), because of his affiliation with WR Hambrecht + Co. (a
registered broker-dealer).
(3) Mr. Palombo is an "interested person," as defined in the 1940 Act, because
of his affiliation with Liberty Financial.
The following persons who are currently serving on the Board of Trustees of
Trust III are not standing for reelection:
<TABLE>
<CAPTION>
TRUSTEE NAME & AGE PRINCIPAL OCCUPATION(1) AND DIRECTORSHIPS TRUSTEE SINCE
------------------ ----------------------------------------- -------------
<S> <C> <C>
Tom Bleasdale Retired (formerly Chairman of the Board and Chief 1987
(70) Executive Officer, Shore Bank & Trust Company (banking
services) from 1992 to 1993); Director, Empire Co. (food
distributor).
Lora S. Collins Attorney (formerly Attorney, Kramer Levin Naftalis & 1991
(65) Frankel LLP (law firm) from 1986 to 1996).
James E. Grinnel Private investor since November 1988. 1995
(72)
James L. Moody, Retired (formerly Chairman of the Board, Hannaford Bros. 1986
Jr. Co. (food retailer) from 1984 to 1997 and Chief
(70) Executive Officer prior thereto).
</TABLE>
---------------
(1) Except as otherwise noted, each individual has held the office indicated or
other offices in the same company for the last five years.
TRUSTEES' COMPENSATION
The members of the Board of Trustees will serve as Trustees of the Liberty
and Stein Roe Mutual Funds, for which service each Trustee, except for Mr.
Palombo, will receive 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.
The Board of Trustees is expected to hold six regular joint meetings each year.
Committee chairs will receive an additional annual retainer of $5,000, and
receive $1,000 for each special meeting attended on a day other than a regular
joint meeting day. Committee members will receive an additional annual retainer
of $1,000, and receive $1,000 for each special meeting attended on a day other
than a regular joint meeting day. Two-thirds of the Trustees' fees are allocated
among the Liberty and Stein Roe Mutual Funds based on each Fund's relative net
assets, and one-third of the fees is divided equally among the Liberty and Stein
Roe Mutual Funds.
The Liberty Mutual Funds do not currently provide pension or retirement
plan benefits to the Trustees. However, certain Trustees currently serving on
the Board of Trustees of the Liberty Mutual Funds who are not continuing on the
combined Board of Trustees of the Liberty and Stein Roe Mutual Funds will
receive
15
<PAGE> 18
payments at an annual rate equal to their 1999 Trustee compensation for the
lesser of two years or until the date they would otherwise have retired at age
72. These payments will be made quarterly, beginning in 2001. Liberty Financial
and the Liberty Mutual Funds will each bear one-half of the cost of the
payments; the Liberty Mutual Funds' portion of the payments will be allocated
among the Liberty Mutual Funds based on each fund's share of the Trustee fees
for 2000.
Further information concerning the Trustees' compensation is included in
Appendix B.
MEETINGS AND CERTAIN COMMITTEES
Composition. The current Board of Trustees of the Liberty Mutual Funds
consists of two interested and nine non-interested Trustees. Mr. Mayer is not
affiliated with Liberty Financial or any of its investment advisor affiliates,
but is considered interested as a result of his affiliation with a
broker-dealer. Mr. Palombo is an interested person because of his affiliation
with Liberty Financial.
Audit Committee. The Audit Committee of the Liberty Mutual Funds,
consisting of Ms. Verville (Chairperson) and Messrs. Bleasdale, Grinnell, Lowry,
Macera and Moody, all of whom are non-interested Trustees, recommends to the
Board of Trustees the independent accountants to serve as auditors, reviews with
the independent accountants the results of the auditing engagement and internal
accounting procedures and considers the independence of the independent
accountants, the range of their audit services and their fees.
Compensation Committee. The Compensation Committee of the Liberty Mutual
Funds, consisting of Messrs. Neuhauser (Chairman), Grinnell and Stitzel, and Ms.
Collins, all of whom are non-interested Trustees, reviews compensation of the
Board of Trustees.
Governance Committee. The Governance Committee of the Liberty Mutual
Funds, consisting of Messrs. Bleasdale (Chairman), Lowry, Mayer, Moody, and Ms.
Verville, all of whom are non-interested Trustees, except for Mr. Mayer (Mr.
Mayer is interested as a result of his affiliation with a broker-dealer, but is
not affiliated with Liberty Financial or any of its investment advisor
affiliates), recommends to the Board of Trustees, among other things, nominees
for trustee and for appointments to various committees. The Committee will
consider candidates for trustee recommended by shareholders. Written
recommendations with supporting information should be directed to the Committee
in care of Trust III, Attention: Secretary, One Financial Center, Boston,
Massachusetts 02111-2621.
Record of Board and Committee Meetings. During the fiscal year ended
October 31, 1999, the Board of Trustees of Trust III (excluding the Liberty
Federal Securities Fund, which has a different fiscal year end) held six
meetings, the Audit Committee held four meetings, the Compensation Committee
held two meetings and the Governance Committee held five meetings.
During the most recently completed fiscal year, each of the current
Trustees attended more than 75% of the meetings of the Board of Trustees and the
committees of which such Trustee was a member.
THE BOARD OF TRUSTEES RECOMMENDS THAT THE SHAREHOLDERS OF THE SMALL CAP FUND
VOTE FOR EACH NOMINEE IN PROPOSAL 2.
Required Vote for Proposal 2
A plurality of the votes cast at the Meeting for Trust III, if a quorum is
represented, is required for the election of each Trustee to the Board of
Trustees of Trust III. Since the number of Trustees has been fixed at eleven,
this means that the eleven persons receiving the highest number of votes will be
elected.
16
<PAGE> 19
GENERAL
VOTING INFORMATION
The Trustees of Trust III are soliciting proxies from the shareholders of
the Small Cap Fund in connection with the Meeting, which has been called to be
held at 10:00 a.m. Eastern Time on December 27, 2000 at Colonial's offices, One
Financial Center, Boston, Massachusetts. The meeting notice, this combined
Prospectus/Proxy Statement and proxy cards and inserts are being mailed to
shareholders beginning on or about November 17, 2000.
Information About Proxies and the Conduct of the Meeting
Solicitation of Proxies. Proxies will be solicited primarily by mailing
this combined Prospectus/Proxy Statement and its enclosures, but proxies may
also be solicited through further mailings, telephone calls, personal interviews
or e-mail by officers of the Small Cap Fund or by employees or agents of Crabbe
Huson Group, Inc. ("Crabbe Huson"), each Fund's investment advisor, and its
affiliated companies. In addition, Shareholder Communications Corporation
("SCC") has been engaged to assist in the solicitation of proxies, at an
estimated total cost of $700,000 for all of the proposed acquisitions of funds
in the Liberty and Stein Roe Mutual Fund groups scheduled to take place in
January 2001.
Voting Process
You can vote in any one of the following four ways:
a. By mail, by filling out and returning the enclosed proxy card;
b. By phone, by calling toll-free 1-877-518-9416 between the hours of 9:00
a.m. and 11:00 p.m. Eastern Time and following the instructions;
c. By fax (not available for all shareholders; refer to enclosed proxy
insert); or
d. In person at the Meeting.
Shareholders who owned shares on the record date, September 29, 2000, are
entitled to vote at the Meeting. Shareholders are entitled to cast one vote for
each share owned on the record date. If you choose to vote by mail or by fax,
and you are an individual account owner, please sign exactly as your name
appears on the proxy card. Either owner of a joint account may sign the proxy
card, but the signer's name must exactly match the name that appears on the
card.
Costs. The estimated costs of the Meeting, including the costs of
soliciting proxies, and the costs of the Acquisition to be borne by the Small
Cap Fund and the Special Fund are approximately $19,000 and $21,000,
respectively. Liberty Financial is also bearing a portion of such costs. This
portion to be borne by Liberty Financial is in addition to the amounts to be
borne by the Funds.
Voting and Tabulation of Proxies. Shares represented by duly executed
proxies will be voted as instructed on the proxy card. If no instructions are
given, the proxy will be voted in favor of each Proposal. You can revoke your
proxy by sending a signed, written letter of revocation to the Secretary of the
Small Cap Fund, by properly executing and submitting a later-dated proxy or by
attending the Meeting and voting in person.
Votes cast in person or by proxy at the Meeting will be counted by persons
appointed by the Small Cap Fund as tellers for the Meeting (the "Tellers").
Thirty percent (30%) of the shares of the Small Cap Fund outstanding on the
record date, present in person or represented by proxy, constitutes a quorum for
the transaction of business by the shareholders of the Small Cap Fund at the
Meeting. Shareholders of the Small Cap Fund vote together with the shareholders
of the other series of Trust III for the election of Trustees; thirty percent
(30%) of the outstanding shares of Trust III constitutes a quorum for voting on
the election of Trustees. In determining whether a quorum is present, the
Tellers will count shares represented by proxies that reflect abstentions and
"broker non-votes" as shares that are present and entitled to vote. Since these
shares
17
<PAGE> 20
will be counted as present, but not as voting in favor of any proposal, these
shares will have the same effect as if they cast votes against Proposal 1 and
will have no effect on the outcome of Proposal 2. "Broker non-votes" are shares
held by brokers or nominees as to which (i) the broker or nominee does not have
discretionary voting power and (ii) the broker or nominee has not received
instructions from the beneficial owner or other person who is entitled to
instruct how the shares will be voted.
Advisor's, Underwriter's and Administrator's Addresses. The address of
each Fund's investment advisor, Crabbe Huson Group, Inc., is 121 S. W. Morrison,
Suite 1400, Portland, Oregon 97204. The address of each Fund's principal
underwriter, Liberty Funds Distributor, Inc., is One Financial Center, Boston,
Massachusetts 02111-2621. The address of each Fund's administrator, Colonial
Management Associates, Inc., is One Financial Center, Boston, Massachusetts
02111-2621.
Information About Liberty Financial. On November 1, 2000, Liberty
Financial announced that it had retained CS First Boston to help it explore
strategic alternatives, including the possible sale of Liberty Financial.
Outstanding Shares and Significant Shareholders. Appendix B to this
Prospectus/Proxy Statement lists for the Small Cap Fund and Trust III the total
number of shares outstanding as of September 29, 2000 for each class of the
shares of the Fund and the Trust entitled to vote at the Meeting. It also lists
for the Special Fund the total number of shares outstanding as of September 29,
2000 for each class of the Fund's shares. It also identifies holders of more
than 5% or 25% of any class of shares of each Fund, and contains information
about the executive officers and Trustees of Trust III and their shareholdings
in the Funds and Trust III.
Adjournments; Other Business. If the Small Cap Fund or Trust III, as
applicable, has not received enough votes by the time of the Meeting to approve
any Proposal, the persons named as proxies may propose that the Meeting be
adjourned one or more times to permit further solicitation of proxies. Any
adjournment requires the affirmative vote of a majority of the total number of
shares of the Small Cap Fund or Trust III, as applicable, that are present in
person or by proxy on the question when the adjournment is being voted on. The
persons named as proxies will vote in favor of any such adjournment all proxies
that they are entitled to vote in favor of the relevant Proposal (or in favor of
any nominee, in the case of Proposal 2). They will vote against any such
adjournment any proxy that directs them to vote against the Proposal (or against
all nominees, in the case of Proposal 2). They will not vote any proxy that
directs them to abstain from voting on the Proposal in question.
The Meeting has been called to transact any business that properly comes
before it. The only business that management of the Small Cap Fund intends to
present or knows that others will present is Proposal 1 and Proposal 2, as
described above. If any other matters properly come before the Meeting, and on
all matters incidental to the conduct of the Meeting, the persons named as
proxies intend to vote the proxies in accordance with their judgment, unless the
Secretary of the Small Cap Fund has previously received written contrary
instructions from the shareholder entitled to vote the shares.
Shareholder Proposals at Future Meetings. Trust III, of which the Small
Cap Fund is a series, does not hold annual or other regular meetings of
shareholders. Shareholder proposals to be presented at any future meeting of
shareholders of the Small Cap Fund or Trust III must be received by the Small
Cap Fund or Trust III in writing a reasonable amount of time before the Trust
solicits proxies for that meeting in order to be considered for inclusion in the
proxy materials for that meeting. Shareholder proposals should be sent to the
Small Cap Fund, care of Trust III, Attention: Secretary, One Financial Center,
Boston, Massachusetts 02111-2621.
18
<PAGE> 21
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION dated as of October 26, 2000 is
by and among Liberty Funds Trust III (the "Trust"), a Massachusetts business
trust established under a Declaration of Trust dated May 30, 1986, as amended,
on behalf of Liberty Contrarian Small-Cap Fund (the "Acquired Fund"), a series
of the Trust, Liberty Funds Trust III (the "Acquiring Trust"), a Massachusetts
business trust established under a Declaration of Trust dated May 30, 1986, as
amended, on behalf of Liberty Special Fund (the "Acquiring Fund"), a series of
the Acquiring Trust, and Liberty Financial Companies, Inc.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a) of the United States
Internal Revenue Code of 1986, as amended (the "Code"), and any successor
provision. The reorganization will consist of the transfer of all of the assets
of the Acquired Fund in exchange solely for Class A, B, C and I shares of
beneficial interest of the Acquiring Fund ("Acquiring Shares") and the
assumption by the Acquiring Fund of the liabilities of the Acquired Fund (other
than certain expenses of the reorganization contemplated hereby) and the
distribution of such Acquiring Shares to the shareholders of the Acquired Fund
in liquidation of the Acquired Fund, all upon the terms and conditions set forth
in this Agreement.
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF LIABILITIES
AND ACQUIRING SHARES AND LIQUIDATION OF ACQUIRED FUND.
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein,
(a) The Trust, on behalf of the Acquired Fund, will transfer and deliver
to the Acquiring Fund, and the Acquiring Fund will acquire, all the
assets of the Acquired Fund as set forth in paragraph 1.2;
(b) The Acquiring Fund will assume all of the Acquired Fund's
liabilities and obligations of any kind whatsoever, whether
absolute, accrued, contingent or otherwise in existence on the
Closing Date (as defined in paragraph 1.2 hereof) (the
"Obligations"), except that expenses of reorganization contemplated
hereby to be paid by the Acquired Fund pursuant to paragraphs 1.5
and 9.2 shall not be assumed or paid by the Acquiring Fund; and
(c) The Acquiring Fund will issue and deliver to the Acquired Fund in
exchange for such assets the number of Acquiring Shares (including
fractional shares, if any) determined by dividing the net asset
value of the Acquired Fund, computed in the manner and as of the
time and date set forth in paragraph 2.1, by the net asset value of
one Acquiring Share, computed in the manner and as of the time and
date set forth in paragraph 2.2. Such transactions shall take place
at the closing provided for in paragraph 3.1 (the "Closing").
1.2 The assets of the Acquired Fund to be acquired by the Acquiring Fund
shall consist of all cash, securities, dividends and interest
receivable, receivables for shares sold and all other assets which are
owned by the Acquired Fund on the closing date provided in paragraph
3.1 (the "Closing Date") and any deferred expenses, other than
unamortized organizational expenses, shown as an asset on the books of
the Acquired Fund on the Closing Date.
1.3 As provided in paragraph 3.4, as soon after the Closing Date as is
conveniently practicable (the "Liquidation Date"), the Acquired Fund
will liquidate and distribute pro rata to its shareholders of record
("Acquired Fund Shareholders"), determined as of the close of business
on the Valuation Date (as defined in paragraph 2.1), the Acquiring
Shares received by the Acquired Fund pursuant to paragraph 1.1. Such
liquidation and distribution will be accomplished by the transfer of
the
A-1
<PAGE> 22
Acquiring Shares then credited to the account of the Acquired Fund on
the books of the Acquiring Fund to open accounts on the share records
of the Acquiring Fund in the names of the Acquired Fund Shareholders
and representing the respective pro rata number of Acquiring Shares due
such shareholders. The Acquiring Fund shall not be obligated to issue
certificates representing Acquiring Shares in connection with such
exchange.
1.4 With respect to Acquiring Shares distributable pursuant to paragraph
1.3 to an Acquired Fund Shareholder holding a certificate or
certificates for shares of the Acquired Fund, if any, on the Valuation
Date, the Acquiring Trust will not permit such shareholder to receive
Acquiring Share certificates therefor, exchange such Acquiring Shares
for shares of other investment companies, effect an account transfer of
such Acquiring Shares, or pledge or redeem such Acquiring Shares until
the Acquiring Trust has been notified by the Acquired Fund or its agent
that such Acquired Fund Shareholder has surrendered all his or her
outstanding certificates for Acquired Fund shares or, in the event of
lost certificates, posted adequate bond.
1.5 [RESERVED]
1.6 As promptly as possible after the Closing Date, the Acquired Fund shall
be terminated pursuant to the provisions of the laws of the
Commonwealth of Massachusetts, and, after the Closing Date, the
Acquired Fund shall not conduct any business except in connection with
its liquidation.
2. VALUATION.
2.1 For the purpose of paragraph 1, the value of the Acquired Fund's assets
to be acquired by the Acquiring Fund hereunder shall be the net asset
value computed as of the close of regular trading on the New York Stock
Exchange on the business day next preceding the Closing (such time and
date being herein called the "Valuation Date") using the valuation
procedures set forth in the Declaration of Trust of the Acquiring Trust
and the then current prospectus or statement of additional information
of the Acquiring Fund, after deduction for the expenses of the
reorganization contemplated hereby to be paid by the Acquired Fund
pursuant to paragraphs 1.5, and shall be certified by the Acquired
Fund.
2.2 For the purpose of paragraph 2.1, the net asset value of an Acquiring
Share shall be the net asset value per share computed as of the close
of regular trading on the New York Stock Exchange on the Valuation
Date, using the valuation procedures set forth in the Declaration of
Trust of the Acquiring Trust and the then current prospectus or
prospectuses and the statement or statements of additional information
of the Acquiring Fund (collectively, as from time to time amended and
supplemented, the "Acquiring Fund Prospectus").
3. CLOSING AND CLOSING DATE.
3.1 The Closing Date shall be on January 16, 2001, or on such other date as
the parties may agree in writing. The Closing shall be held at 9:00
a.m. at the offices of Colonial Management Associates, Inc., One
Financial Center, Boston, Massachusetts 02111, or at such other time
and/or place as the parties may agree.
3.2 The portfolio securities of the Acquired Fund shall be made available
by the Acquired Fund to The Chase Manhattan Bank, as custodian for the
Acquiring Fund (the "Custodian"), for examination no later than five
business days preceding the Valuation Date. On the Closing Date, such
portfolio securities and all the Acquired Fund's cash shall be
delivered by the Acquired Fund to the Custodian for the account of the
Acquiring Fund, such portfolio securities to be duly endorsed in proper
form for transfer in such manner and condition as to constitute good
delivery thereof in accordance with the custom of brokers or, in the
case of portfolio securities held in the U.S. Treasury Department's
book-entry system or by the Depository Trust Company, Participants
Trust Company or other third party depositories, by transfer to the
account of the Custodian in accordance with Rule 17f-4 or Rule 17f-5,
as the case may be, under the Investment Company Act of 1940 (the "1940
Act") and
A-2
<PAGE> 23
accompanied by all necessary federal and state stock transfer stamps or
a check for the appropriate purchase price thereof. The cash delivered
shall be in the form of currency or certified or official bank checks,
payable to the order of "The Chase Manhattan Bank, custodian for
Acquiring Fund."
3.3 In the event that on the Valuation Date (a) the New York Stock Exchange
shall be closed to trading or trading thereon shall be restricted, or
(b) trading or the reporting of trading on said Exchange or elsewhere
shall be disrupted so that accurate appraisal of the value of the net
assets of the Acquired Fund or the Acquiring Fund is impracticable, the
Closing Date shall be postponed until the first business day after the
day when trading shall have been fully resumed and reporting shall have
been restored; provided that if trading shall not be fully resumed and
reporting restored within three business days of the Valuation Date,
this Agreement may be terminated by either of the Trust or the
Acquiring Trust upon the giving of written notice to the other party.
3.4 At the Closing, the Acquired Fund or its transfer agent shall deliver
to the Acquiring Fund or its designated agent a list of the names and
addresses of the Acquired Fund Shareholders and the number of
outstanding shares of beneficial interest of the Acquired Fund owned by
each Acquired Fund Shareholder, all as of the close of business on the
Valuation Date, certified by the Secretary or Assistant Secretary of
the Trust. The Acquiring Trust will provide to the Acquired Fund
evidence satisfactory to the Acquired Fund that the Acquiring Shares
issuable pursuant to paragraph 1.1 have been credited to the Acquired
Fund's account on the books of the Acquiring Fund. On the Liquidation
Date, the Acquiring Trust will provide to the Acquired Fund evidence
satisfactory to the Acquired Fund that such Acquiring Shares have been
credited pro rata to open accounts in the names of the Acquired Fund
shareholders as provided in paragraph 1.3.
3.5 At the Closing each party shall deliver to the other such bills of
sale, instruments of assumption of liabilities, checks, assignments,
stock certificates, receipts or other documents as such other party or
its counsel may reasonably request in connection with the transfer of
assets, assumption of liabilities and liquidation contemplated by
paragraph 1.
4. REPRESENTATIONS AND WARRANTIES.
4.1 The Trust, on behalf of the Acquired Fund, represents and warrants the
following to the Acquiring Trust and to the Acquiring Fund as of the
date hereof and agrees to confirm the continuing accuracy and
completeness in all material respects of the following on the Closing
Date:
(a) The Trust is a business trust duly organized, validly existing and
in good standing under the laws of the Commonwealth of
Massachusetts;
(b) The Trust is a duly registered investment company classified as a
management company of the open-end type and its registration with
the Securities and Exchange Commission as an investment company
under the 1940 Act is in full force and effect, and the Acquired
Fund is a separate series thereof duly designated in accordance with
the applicable provisions of the Declaration of Trust of the Trust
and the 1940 Act;
(c) The Trust is not in violation in any material respect of any
provision of its Declaration of Trust or By-laws or of any
agreement, indenture, instrument, contract, lease or other
undertaking to which the Trust is a party or by which the Acquired
Fund is bound, and the execution, delivery and performance of this
Agreement will not result in any such violation;
(d) The Trust has no material contracts or other commitments (other than
this Agreement and such other contracts as may be entered into in
the ordinary course of its business) which if terminated may result
in material liability to the Acquired Fund or under which (whether
or not terminated) any material payments for periods subsequent to
the Closing Date will be due from the Acquired Fund;
(e) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or
threatened against the Acquired Fund, any of its properties or
A-3
<PAGE> 24
assets, or any person whom the Acquired Fund may be obligated to
indemnify in connection with such litigation, proceeding or
investigation. The Acquired Fund knows of no facts which might form
the basis for the institution of such proceedings, and is not a
party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and
adversely affects its business or its ability to consummate the
transactions contemplated hereby;
(f) The statement of assets and liabilities, the statement of
operations, the statement of changes in net assets, and the schedule
of investments of the Acquired Fund as at and for the year ended
October 31, 1998, audited by KPMG, and for the year ended October
31, 1999, audited by Ernst & Young LLP and the statement of assets,
the statement of changes in net assets and the schedule of
investments for the six months ended April 30, 2000, copies of which
have been furnished to the Acquiring Fund, fairly reflect the
financial condition and results of operations of the Acquired Fund
as of such dates and for the periods then ended in accordance with
generally accepted accounting principles consistently applied, and
the Acquired Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on the statements of
assets referred to above or those incurred in the ordinary course of
its business since April 30, 2000;
(g) Since April 30, 2000, there has not been any material adverse change
in the Acquired Fund's financial condition, assets, liabilities or
business (other than changes occurring in the ordinary course of
business), or any incurrence by the Acquired Fund of indebtedness,
except as disclosed in writing to the Acquiring Fund. For the
purposes of this subparagraph (g), distributions of net investment
income and net realized capital gains, changes in portfolio
securities, changes in the market value of portfolio securities or
net redemptions shall be deemed to be in the ordinary course of
business;
(h) By the Closing Date, all federal and other tax returns and reports
of the Acquired Fund required by law to have been filed by such date
(giving effect to extensions) shall have been filed, and all federal
and other taxes shown to be due on said returns and reports shall
have been paid so far as due, or provision shall have been made for
the payment thereof, and to the best of the Acquired Fund's
knowledge no such return is currently under audit and no assessment
has been asserted with respect to such returns;
(i) For all taxable years and all applicable quarters of such years from
the date of its inception, the Acquired Fund has met the
requirements of subchapter M of the Code, for treatment as a
"regulated investment company" within the meaning of Section 851 of
the Code. Neither the Trust nor the Acquired Fund has at any time
since its inception been liable for nor is now liable for any
material excise tax pursuant to Section 852 or 4982 of the Code. The
Acquired Fund has duly filed all federal, state, local and foreign
tax returns which are required to have been filed, and all taxes of
the Acquired Fund which are due and payable have been paid except
for amounts that alone or in the aggregate would not reasonably be
expected to have a material adverse effect. The Acquired Fund is in
compliance in all material respects with applicable regulations of
the Internal Revenue Service pertaining to the reporting of
dividends and other distributions on and redemptions of its capital
stock and to withholding in respect of dividends and other
distributions to shareholders, and is not liable for any material
penalties which could be imposed thereunder;
(j) The authorized capital of the Trust consists of an unlimited number
of shares of beneficial interest with no par value, of multiple
series and classes. All issued and outstanding shares of the
Acquired Fund are, and at the Closing Date will be, duly and validly
issued and outstanding, fully paid and (except as set forth in the
Acquired Fund's then current prospectus or prospectuses and
statement or statements of additional information (collectively, as
amended or supplemented from time to time, the "Acquired Fund
Prospectus")), non-assessable by the Acquired Fund and will have
been issued in compliance with all applicable registration or
A-4
<PAGE> 25
qualification requirements of federal and state securities laws. No
options, warrants or other rights to subscribe for or purchase, or
securities convertible into, any shares of beneficial interest of
the Acquired Fund are outstanding and none will be outstanding on
the Closing Date (except that Class B shares of the Acquired Fund
convert automatically into Class A shares, as set forth in the
Acquired Fund Prospectus);
(k) The Acquired Fund's investment operations from inception to the date
hereof have been in compliance in all material respects with the
investment policies and investment restrictions set forth in its
prospectus and statement of additional information as in effect from
time to time, except as previously disclosed in writing to the
Acquiring Fund;
(l) The execution, delivery and performance of this Agreement has been
duly authorized by the Trustees of the Trust, and, upon approval
thereof by the required majority of the shareholders of the Acquired
Fund, this Agreement will constitute the valid and binding
obligation of the Acquired Fund enforceable in accordance with its
terms except as the same may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of
creditors' rights generally and other equitable principles;
(m) The Acquiring Shares to be issued to the Acquired Fund pursuant to
paragraph 1 will not be acquired for the purpose of making any
distribution thereof other than to the Acquired Fund Shareholders as
provided in paragraph 1.3;
(n) The information provided by the Acquired Fund for use in the
Registration Statement and Proxy Statement referred to in paragraph
5.3 shall be accurate and complete in all material respects and
shall comply with federal securities and other laws and regulations
applicable thereto;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquired Fund of the transactions contemplated by this Agreement,
except such as may be required under the Securities Act of 1933, as
amended (the "1933 Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the 1940 Act and state insurance,
securities or "Blue Sky" laws (which term as used herein shall
include the laws of the District of Columbia and of Puerto Rico);
(p) At the Closing Date, the Trust, on behalf of the Acquired Fund, will
have good and marketable title to its assets to be transferred to
the Acquiring Fund pursuant to paragraph 1.1 and will have full
right, power and authority to sell, assign, transfer and deliver the
Investments (as defined below) and any other assets and liabilities
of the Acquired Fund to be transferred to the Acquiring Fund
pursuant to this Agreement. At the Closing Date, subject only to the
delivery of the Investments and any such other assets and
liabilities and payment therefor as contemplated by this Agreement,
the Acquiring Fund will acquire good and marketable title thereto
and will acquire the Investments and any such other assets and
liabilities subject to no encumbrances, liens or security interests
whatsoever and without any restrictions upon the transfer thereof,
except as previously disclosed to the Acquiring Fund. As used in
this Agreement, the term "Investments" shall mean the Acquired
Fund's investments shown on the schedule of its investments as of
April 30, 2000 referred to in Section 4.1(f) hereof, as supplemented
with such changes in the portfolio as the Acquired Fund shall make,
and changes resulting from stock dividends, stock split-ups, mergers
and similar corporate actions through the Closing Date;
(q) At the Closing Date, the Acquired Fund will have sold such of its
assets, if any, as are necessary to assure that, after giving effect
to the acquisition of the assets of the Acquired Fund pursuant to
this Agreement, the Acquiring Fund will remain a "diversified
company" within the meaning of Section 5(b)(1) of the 1940 Act and
in compliance with such other mandatory investment restrictions as
are set forth in the Acquiring Fund Prospectus, as amended through
the Closing Date; and
A-5
<PAGE> 26
(r) No registration of any of the Investments would be required if they
were, as of the time of such transfer, the subject of a public
distribution by either of the Acquiring Fund or the Acquired Fund,
except as previously disclosed by the Acquired Fund to the Acquiring
Fund.
4.2 The Acquiring Trust, on behalf of the Acquiring Fund, represents and
warrants the following to the Trust and to the Acquired Fund as of the
date hereof and agrees to confirm the continuing accuracy and
completeness in all material respects of the following on the Closing
Date:
(a) The Acquiring Trust is a business trust duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts;
(b) The Acquiring Trust is a duly registered investment company
classified as a management company of the open-end type and its
registration with the Securities and Exchange Commission as an
investment company under the 1940 Act is in full force and effect,
and the Acquiring Fund is a separate series thereof duly designated
in accordance with the applicable provisions of the Declaration of
Trust of the Acquiring Trust and the 1940 Act;
(c) The Acquiring Fund Prospectus conforms in all material respects to
the applicable requirements of the 1933 Act and the rules and
regulations of the Securities and Exchange Commission thereunder and
does not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading, and there are no material
contracts to which the Acquiring Fund is a party that are not
referred to in such Prospectus or in the registration statement of
which it is a part;
(d) At the Closing Date, the Acquiring Fund will have good and
marketable title to its assets;
(e) The Acquiring Trust is not in violation in any material respect of
any provisions of its Declaration of Trust or By-laws or of any
agreement, indenture, instrument, contract, lease or other
undertaking to which the Acquiring Trust is a party or by which the
Acquiring Fund is bound, and the execution, delivery and performance
of this Agreement will not result in any such violation;
(f) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or
threatened against the Acquiring Fund or any of its properties or
assets. The Acquiring Fund knows of no facts which might form the
basis for the institution of such proceedings, and is not a party to
or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects
its business or its ability to consummate the transactions
contemplated hereby;
(g) The statement of assets, the statement of operations, the statement
of changes in assets and the schedule of investments of the Acquired
Fund as at and for the year ended October 31, 1998, audited by KPMG,
and for the year ended October 31, 1999, audited by Ernst & Young
LLP and the statement of assets, the statement of changes in net
assets and the schedule of investments for the six months ended
April 30, 2000 copies of which have been furnished to the Acquired
Fund, fairly reflect the financial condition and results of
operations of the Acquiring Fund as of such dates and the results of
its operations for the periods then ended in accordance with
generally accepted accounting principles consistently applied, and
the Acquiring Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on the statements of
assets referred to above or those incurred in the ordinary course of
its business since April 30, 2000;
(h) Since April 30, 2000, there has not been any material adverse change
in the Acquiring Fund's financial condition, assets, liabilities or
business (other than changes occurring in the ordinary course of
business), or any incurrence by the Acquiring Fund of indebtedness.
For the purposes of this subparagraph (h), changes in portfolio
securities, changes in the market value of portfolio securities or
net redemptions shall be deemed to be in the ordinary course of
business;
A-6
<PAGE> 27
(i) By the Closing Date, all federal and other tax returns and reports
of the Acquiring Fund required by law to have been filed by such
date (giving effect to extensions) shall have been filed, and all
federal and other taxes shown to be due on said returns and reports
shall have been paid so far as due, or provision shall have been
made for the payment thereof, and to the best of the Acquiring
Fund's knowledge no such return is currently under audit and no
assessment has been asserted with respect to such returns;
(j) For each fiscal year of its operation, the Acquiring Fund has met
the requirements of Subchapter M of the Code for qualification as a
regulated investment company;
(k) The authorized capital of the Acquiring Trust consists of an
unlimited number of shares of beneficial interest, no par value, of
such number of different series as the Board of Trustees may
authorize from time to time. The outstanding shares of beneficial
interest in the Acquiring Fund are, and at the Closing Date will be,
divided into Class A shares, Class B shares, Class C shares and
Class I shares each having the characteristics described in the
Acquiring Fund Prospectus. All issued and outstanding shares of the
Acquiring Fund are, and at the Closing Date will be, duly and
validly issued and outstanding, fully paid and non-assessable
(except as set forth in the Acquiring Fund Prospectus) by the
Acquiring Trust, and will have been issued in compliance with all
applicable registration or qualification requirements of federal and
state securities laws. Except for Class B shares which convert to
Class A shares after the expiration of a period of time, no options,
warrants or other rights to subscribe for or purchase, or securities
convertible into, any shares of beneficial interest in the Acquiring
Fund of any class are outstanding and none will be outstanding on
the Closing Date;
(l) The Acquiring Fund's investment operations from inception to the
date hereof have been in compliance in all material respects with
the investment policies and investment restrictions set forth in its
prospectus and statement of additional information as in effect from
time to time;
(m) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of the Acquiring
Trust, and this Agreement constitutes the valid and binding
obligation of the Acquiring Trust and the Acquiring Fund enforceable
in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and other
equitable principles;
(n) The Acquiring Shares to be issued and delivered to the Acquired Fund
pursuant to the terms of this Agreement will at the Closing Date
have been duly authorized and, when so issued and delivered, will be
duly and validly issued Class A shares, Class B shares, Class C
shares and Class I shares of beneficial interest in the Acquiring
Fund, and will be fully paid and non-assessable (except as set forth
in the Acquiring Fund Prospectus) by the Acquiring Trust, and no
shareholder of the Acquiring Trust will have any preemptive right of
subscription or purchase in respect thereof;
(o) The information to be furnished by the Acquiring Fund for use in the
Registration Statement and Proxy Statement referred to in paragraph
5.3 shall be accurate and complete in all material respects and
shall comply with federal securities and other laws and regulations
applicable thereto; and
(p) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquiring Fund of the transactions contemplated by this Agreement,
except such as may be required under 1933 Act, the 1934 Act, the
1940 Act and state insurance, securities or "Blue Sky" laws (which
term as used herein shall include the laws of the District of
Columbia and of Puerto Rico).
A-7
<PAGE> 28
5. COVENANTS OF THE ACQUIRED FUND AND THE ACQUIRING FUND.
The Acquiring Trust, on behalf of the Acquiring Fund, and the Trust, on
behalf of the Acquired Fund, each hereby covenants and agrees with the other as
follows:
5.1 The Acquiring Fund and the Acquired Fund each will operate its business
in the ordinary course between the date hereof and the Closing Date, it
being understood that such ordinary course of business will include
regular and customary periodic dividends and distributions.
5.2 The Acquired Fund will call a meeting of its shareholders to be held
prior to the Closing Date to consider and act upon this Agreement and
take all other reasonable action necessary to obtain the required
shareholder approval of the transactions contemplated hereby.
5.3 In connection with the Acquired Fund shareholders' meeting referred to
in paragraph 5.2, the Acquired Fund will prepare a Proxy Statement for
such meeting, to be included in a Registration Statement on Form N-14
(the "Registration Statement") which the Acquiring Trust will prepare
and file for the registration under the 1933 Act of the Acquiring
Shares to be distributed to the Acquired Fund shareholders pursuant
hereto, all in compliance with the applicable requirements of the 1933
Act, the 1934 Act, and the 1940 Act.
5.4 The information to be furnished by the Acquired Fund for use in the
Registration Statement and the information to be furnished by the
Acquiring Fund for use in the Proxy Statement, each as referred to in
paragraph 5.3, shall be accurate and complete in all material respects
and shall comply with federal securities and other laws and regulations
thereunder applicable thereto.
5.5 The Acquiring Fund will advise the Acquired Fund promptly if at any
time prior to the Closing Date the assets of the Acquired Fund include
any securities which the Acquiring Fund is not permitted to acquire.
5.6 Subject to the provisions of this Agreement, the Acquired Fund and the
Acquiring Fund will each take, or cause to be taken, all action, and do
or cause to be done, all things reasonably necessary, proper or
advisable to cause the conditions to the other party's obligations to
consummate the transactions contemplated hereby to be met or fulfilled
and otherwise to consummate and make effective such transactions.
5.7 The Acquiring Fund will use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and
such of the state securities or "Blue Sky" laws as it may deem
appropriate in order to continue its operations after the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND.
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Trust and the Acquiring Fund of all the obligations to be performed by
them hereunder on or before the Closing Date and, in addition thereto, to the
following further conditions:
6.1 The Acquiring Trust, on behalf of the Acquiring Fund, shall have
delivered to the Trust a certificate executed in its name by its
President or Vice President and its Treasurer or Assistant Treasurer,
in form satisfactory to the Trust and dated as of the Closing Date, to
the effect that the representations and warranties of the Acquiring
Trust on behalf of the Acquiring Fund made in this Agreement are true
and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and that
the Acquiring Trust and the Acquiring Fund have complied with all the
covenants and agreements and satisfied all of the conditions on their
parts to be performed or satisfied under this Agreement at or prior to
the Closing Date.
A-8
<PAGE> 29
6.2 The Trust shall have received a favorable opinion from Ropes & Gray,
counsel to the Acquiring Trust for the transactions contemplated
hereby, dated the Closing Date and, in a form satisfactory to the
Trust, to the following effect:
(a) The Acquiring Trust is a business trust duly organized and validly
existing under the laws of The Commonwealth of Massachusetts and has
power to own all of its properties and assets and to carry on its
business as presently conducted, and the Acquiring Fund is a
separate series thereof duly constituted in accordance with the
applicable provisions of the 1940 Act and the Declaration of Trust
and By-laws of the Acquiring Trust; (b) this Agreement has been duly
authorized, executed and delivered on behalf of the Acquiring Fund
and, assuming the Prospectus and Registration Statement referred to
in paragraph 5.3 complies with applicable federal securities laws
and assuming the due authorization, execution and delivery of this
Agreement by the Trust on behalf of the Acquired Fund, is the valid
and binding obligation of the Acquiring Fund enforceable against the
Acquiring Fund in accordance with its terms, except as the same may
be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights
generally and other equitable principles; (c) the Acquiring Fund has
the power to assume the liabilities to be assumed by it hereunder
and upon consummation of the transactions contemplated hereby the
Acquiring Fund will have duly assumed such liabilities; (d) the
Acquiring Shares to be issued for transfer to the shareholders of
the Acquired Fund as provided by this Agreement are duly authorized
and upon such transfer and delivery will be validly issued and
outstanding and fully paid and nonassessable Class A shares, Class B
shares, Class C shares and Class I shares of beneficial interest in
the Acquiring Fund, and no shareholder of the Acquiring Fund has any
preemptive right of subscription or purchase in respect thereof; (e)
the execution and delivery of this Agreement did not, and the
performance by the Acquiring Trust and the Acquiring Fund of their
respective obligations hereunder will not, violate the Acquiring
Trust's Declaration of Trust or By-laws, or any provision of any
agreement known to such counsel to which the Acquiring Trust or the
Acquiring Fund is a party or by which either of them is bound or, to
the knowledge of such counsel, result in the acceleration of any
obligation or the imposition of any penalty under any agreement,
judgment, or decree to which the Acquiring Trust or the Acquiring
Fund is a party or by which either of them is bound; (f) to the
knowledge of such counsel, no consent, approval, authorization or
order of any court or governmental authority is required for the
consummation by the Acquiring Trust or the Acquiring Fund of the
transactions contemplated by this Agreement except such as may be
required under state securities or "Blue Sky" laws or such as have
been obtained; (g) except as previously disclosed, pursuant to
section 4.2(f) above, such counsel does not know of any legal or
governmental proceedings relating to the Acquiring Trust or the
Acquiring Fund existing on or before the date of mailing of the
Prospectus referred to in paragraph 5.3 or the Closing Date required
to be described in the Registration Statement referred to in
paragraph 5.3 which are not described as required; (h) the Acquiring
Trust is registered with the Securities and Exchange Commission as
an investment company under the 1940 Act; and (i) to the best
knowledge of such counsel, no litigation or administrative
proceeding or investigation of or before any court or governmental
body is presently pending or threatened as to the Acquiring Trust or
the Acquiring Fund or any of their properties or assets and neither
the Acquiring Trust nor the Acquiring Fund is a party to or subject
to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its
business.
A-9
<PAGE> 30
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND.
The obligations of the Acquiring Fund to complete the transactions provided
for herein shall be subject, at its election, to the performance by the Acquired
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, to the following further conditions:
7.1 The Trust, on behalf of the Acquired Fund, shall have delivered to the
Acquiring Trust a certificate executed in its name by its President or
Vice President and its Treasurer or Assistant Treasurer, in form and
substance satisfactory to the Acquiring Trust and dated the Closing
Date, to the effect that the representations and warranties of the
Acquired Fund made in this Agreement are true and correct at and as of
the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and that the Trust and the Acquired
Fund have complied with all the covenants and agreements and satisfied
all of the conditions on its part to be performed or satisfied under
this Agreement at or prior to the Closing Date.
7.2 The Acquiring Trust shall have received a favorable opinion from Ropes
& Gray, counsel to the Trust, dated the Closing Date and in a form
satisfactory to the Acquiring Trust, to the following effect:
(a) The Trust is a business trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts and has
corporate power to own all of its properties and assets and to carry
on its business as presently conducted, and the Acquired Fund is a
separate series thereof duly constituted in accordance with the
applicable provisions of the 1940 Act and the Declaration of Trust
of the Trust; (b) this Agreement has been duly authorized, executed
and delivered on behalf of the Acquired Fund and, assuming the Proxy
Statement referred to in paragraph 5.3 complies with applicable
federal securities laws and assuming the due authorization,
execution and delivery of this Agreement by the Acquiring Trust on
behalf of the Acquiring Fund, is the valid and binding obligation of
the Acquired Fund enforceable against the Acquired Fund in
accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and other
equitable principles; (c) the Acquired Fund has the power to sell,
assign, transfer and deliver the assets to be transferred by it
hereunder, and, upon consummation of the transactions contemplated
hereby, the Acquired Fund will have duly transferred such assets to
the Acquiring Fund; (d) the execution and delivery of this Agreement
did not, and the performance by the Trust and the Acquired Fund of
their respective obligations hereunder will not, violate the Trust's
Declaration of Trust or By-laws, or any provision of any agreement
known to such counsel to which the Trust or the Acquired Fund is a
party or by which either of them is bound or, to the knowledge of
such counsel, result in the acceleration of any obligation or the
imposition of any penalty under any agreement, judgment, or decree
to which the Trust or the Acquired Fund is a party or by which
either of them is bound; (e) to the knowledge of such counsel, no
consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Trust
or the Acquired Fund of the transactions contemplated by this
Agreement, except such as may be required under state securities or
"Blue Sky" laws or such as have been obtained; (f) such counsel does
not know of any legal or governmental proceedings relating to the
Trust or the Acquired Fund existing on or before the date of mailing
of the Prospectus referred to in paragraph 5.3 or the Closing Date
required to be described in the Registration Statement referred to
in paragraph 5.3 which are not described as required; (g) the Trust
is registered with the Securities and Exchange Commission as an
investment company under the 1940 Act; and (h) to the best knowledge
of such counsel, no litigation or administrative proceeding or
investigation of or before any court or governmental body is
presently pending or threatened as to the Trust or the Acquired Fund
or any of its properties or assets and neither the Trust nor the
Acquired Fund is a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body, which
materially and adversely affects its business.
A-10
<PAGE> 31
7.3 [RESERVED]
7.4 Prior to the Closing Date, the Acquired Fund shall have declared a
dividend or dividends which, together with all previous dividends,
shall have the effect of distributing all of the Acquired Fund's
investment company taxable income for its taxable years ending on or
after October 31, 2000 and on or prior to the Closing Date (computed
without regard to any deduction for dividends paid), and all of its net
capital gains realized in each of its taxable years ending on or after
October 31, 2000 and on or prior to the Closing Date.
7.5 The Acquired Fund shall have furnished to the Acquiring Fund a
certificate, signed by the President (or any Vice President) and the
Treasurer of the Trust, as to the adjusted tax basis in the hands of
the Acquired Fund of the securities delivered to the Acquiring Fund
pursuant to this Agreement.
7.6 The custodian of the Acquired Fund shall have delivered to the
Acquiring Fund a certificate identifying all of the assets of the
Acquired Fund held by such custodian as of the Valuation Date.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH OF THE ACQUIRING FUND AND
THE ACQUIRED FUND.
The respective obligations of the Trust and the Acquiring Trust hereunder
are each subject to the further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the vote of the required majority of the holders of the
outstanding shares of the Acquired Fund of record on the record date
for the meeting of its shareholders referred to in paragraph 5.2.
8.2 On the Closing Date no action, suit or other preceding shall be pending
before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection
with, this Agreement or the transactions contemplated hereby.
8.3 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including
those of the Securities and Exchange Commission and of state Blue Sky
and securities authorities) deemed necessary by the Trust or the
Acquiring Trust to permit consummation, in all material respects, of
the transactions contemplated hereby shall have been obtained, except
where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties
of the Acquiring Fund or the Acquired Fund.
8.4 The Registration Statement referred to in paragraph 5.3 shall have
become effective under the 1933 Act and no stop order suspending the
effectiveness thereof shall have been issued and, to the best knowledge
of the parties hereto, no investigation or proceeding for that purpose
shall have been instituted or be pending, threatened or contemplated
under the 1933 Act.
8.5 The Trust shall have received a favorable opinion of Ropes & Gray
satisfactory to the Trust and the Acquiring Trust shall have received a
favorable opinion of Ropes & Gray satisfactory to the Acquiring Trust,
each substantially to the effect that, for federal income tax purposes:
(a) The acquisition by the Acquiring Fund of the assets of the
Acquired Fund in exchange for the Acquiring Fund's assumption of
the Obligations of the Acquired Fund and issuance of the Acquiring
Shares, followed by the distribution by the Acquired Fund of such
the Acquiring Shares to the shareholders of the Acquired Fund in
exchange for their shares of the Acquired Fund, all as provided in
paragraph 1 hereof, will constitute a reorganization within the
meaning of Section 368(a) of the Code, and the Acquired Fund and
the Acquiring Fund will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Acquired Fund (i) upon
the transfer of its assets to the Acquiring Fund in exchange for
the Acquiring Shares or (ii) upon the distribution of the
Acquiring Shares to the shareholders of the Acquired Fund as
contemplated in paragraph 1 hereof;
A-11
<PAGE> 32
(c) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund in exchange for the
assumption of the Obligations and issuance of the Acquiring Shares
as contemplated in paragraph 1 hereof;
(d) The tax basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be the same as the basis of those assets in
the hands of the Acquired Fund immediately prior to the transfer,
and the holding period of the assets of the Acquired Fund in the
hands of the Acquiring Fund will include the period during which
those assets were held by the Acquired Fund;
(e) The shareholders of the Acquired Fund will recognize no gain or
loss upon the exchange of their shares of the Acquired Fund for
the Acquiring Shares;
(f) The tax basis of the Acquiring Shares to be received by each
shareholder of the Acquired Fund will be the same in the aggregate
as the aggregate tax basis of the shares of the Acquired Fund
surrendered in exchange therefor;
(g) The holding period of the Acquiring Shares to be received by each
shareholder of the Acquired Fund will include the period during
which the shares of the Acquired Fund surrendered in exchange
therefor were held by such shareholder, provided such shares of
the Acquired Fund were held as a capital asset on the date of the
exchange; and
(h) The Acquiring Fund will succeed to and take into account the items
of Acquired Fund described in Section 381(c) of the Code, subject
to the conditions and limitations specified in Sections 381, 382,
383 and 384 of the Code and the regulations thereunder.
8.6 At any time prior to the Closing, any of the foregoing conditions of
this Agreement may be waived jointly by the Board of Trustees of the
Trust and the Board of Trustees of the Acquiring Trust if, in their
judgment, such waiver will not have a material adverse effect on the
interests of the shareholders of the Acquired Fund and the Acquiring
Fund.
9. BROKERAGE FEES AND EXPENSES.
9.1 The Trust, on behalf of the Acquired Fund, and the Acquiring Trust, on
behalf of the Acquiring Fund, each represents and warrants to the other
that there are no brokers or finders entitled to receive any payments
in connection with the transactions provided for herein.
9.2 The Acquiring Trust, on behalf of the Acquiring Fund, shall pay all
fees paid to governmental authorities for the registration or
qualification of the Acquiring Shares. All of the other out-of-pocket
expenses (other than tabulation costs which will be borne in their
entirety by Liberty Financial) of the transactions contemplated by this
Agreement shall be borne as follows: (a) as to expenses allocable to
the Trust, on behalf of the Acquired Fund, fifty percent (50%) of such
expenses shall be borne by the Trust, on behalf of the Acquired Fund,
and fifty percent (50%) of such expenses shall be borne by Liberty
Financial; and (b) as to expenses allocable to the Acquiring Trust, on
behalf of the Acquiring Fund, fifty percent (50%) of such expenses
shall be borne by the Acquiring Trust, on behalf of the Acquiring Fund,
and fifty percent (50%) of such expenses shall be borne by Liberty
Financial. The foregoing sentence shall be subject, however, to any
undertaking by Liberty Financial to Liberty Funds Trust I, II, III, IV,
V, VI, VII and IX (or any of their series) (collectively, the "Liberty
Trusts") to limit the aggregate expenses (other than fees paid to
governmental authorities for the registration or qualification of
shares of the Liberty Trusts) of the transactions contemplated by this
Agreement and other transactions involving the Liberty Trusts.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES.
10.1 The Trust on behalf of the Acquired Fund and the Acquiring Trust on
behalf of the Acquiring Fund agree that neither party has made any
representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
A-12
<PAGE> 33
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in
connection herewith shall not survive the consummation of the
transactions contemplated hereunder except paragraphs 1.1, 1.3, 1.5,
1.6, 5.4, 9, 10, 13 and 14.
11. TERMINATION.
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Trust and the Trust. In addition, either the Acquiring Trust
or the Trust may at its option terminate this Agreement at or prior to
the Closing Date because:
(a) Of a material breach by the other of any representation, warranty,
covenant or agreement contained herein to be performed by the
other party at or prior to the Closing Date;
(b) A condition herein expressed to be precedent to the obligations of
the terminating party has not been met and it reasonably appears
that it will not or cannot be met; or
(c) If the transactions contemplated by this Agreement have not been
substantially completed by May 31, 2001 this Agreement shall
automatically terminate on that date unless a later date is agreed
to by both the Trust and the Acquiring Trust.
11.2 If for any reason the transactions contemplated by this Agreement are
not consummated, no party shall be liable to any other party for any
damages resulting therefrom, including without limitation
consequential damages.
12. AMENDMENTS.
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the Trust
on behalf of the Acquired Fund and the Acquiring Trust on behalf of the
Acquiring Fund; provided, however, that following the shareholders' meeting
called by the Acquired Fund pursuant to paragraph 5.2 no such amendment may have
the effect of changing the provisions for determining the number of the
Acquiring Shares to be issued to shareholders of the Acquired Fund under this
Agreement to the detriment of such shareholders without their further approval.
13. NOTICES.
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to: Liberty Funds Trust III, One
Financial Center, Boston, Massachusetts 02111, Attention: Secretary.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT NON-RECOURSE.
14.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the domestic substantive laws of The Commonwealth of Massachusetts,
without giving effect to any choice or conflicts of law rule or
provision that would result in the application of the domestic
substantive laws of any other jurisdiction.
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment
or transfer hereof or of any rights or obligations hereunder shall be
made by any party without the written consent of the other party.
Nothing herein expressed or implied is intended or shall be construed
to confer upon or give any person, firm or corporation, other than the
parties hereto and their respective successors and assigns, any rights
or remedies under or by reason of this Agreement.
A-13
<PAGE> 34
14.5 A copy of the Declaration of Trust of the Trust and Acquiring Trust is
on file with the Secretary of State of the Commonwealth of
Massachusetts, and notice is hereby given that no trustee, officer,
agent or employee of either the Trust or the Acquiring Trust shall
have any personal liability under this Agreement, and that this
Agreement is binding only upon the assets and properties of the
Acquired Fund and the Acquiring Fund.
A-14
<PAGE> 35
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as a sealed instrument by its President or Vice President and its
corporate seal to be affixed thereto and attested by its Secretary or Assistant
Secretary.
LIBERTY FUNDS TRUST III,
on behalf of Liberty Contrarian
Small-Cap Fund
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
ATTEST:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
LIBERTY FUNDS TRUST III,
on behalf of Liberty Special Fund
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
ATTEST:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
A-15
<PAGE> 36
Solely for purposes of Section 9.2 of
the Agreement:
LIBERTY FINANCIAL COMPANIES, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
ATTEST:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
A-16
<PAGE> 37
APPENDIX B
FUND INFORMATION
SHARES OUTSTANDING AND ENTITLED TO VOTE OF THE SMALL CAP FUND AND TRUST III AND
SHARES OUTSTANDING OF THE SPECIAL FUND
For each class of the Small Cap Fund's shares and Trust III's shares
entitled to vote at the Meeting, and for each class of the Special Fund's
shares, the number of shares outstanding as of September 29, 2000 was as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OUTSTANDING AND
FUND OR TRUST CLASS ENTITLED TO VOTE
------------- ----- ----------------
<S> <C> <C>
SMALL CAP FUND............................... A 533,240
B 0
C 0
I 2,194,567
TRUST III.................................... 297,008,531
SPECIAL FUND................................. A 4,884,506
B 0
C 0
I 0
</TABLE>
OWNERSHIP OF SHARES
As of September 29, 2000, Trust III believes that the Trustees and officers
of the Trust, as a group, owned less than one percent of each class of shares of
each Fund and of the Trust as a whole. As of September 29, 2000, the following
shareholders of record owned 5% or more of the outstanding shares of the noted
class of shares of the noted Fund:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
SHARES OF SHARES OF
FUND AND CLASS NAME AND ADDRESS OF SHAREHOLDER CLASS OWNED CLASS OWNED
-------------- ------------------------------- ------------- -------------
<S> <C> <C> <C>
SMALL CAP FUND
CLASS A................ Chemical Bank & Trust Co. Agent 33,666.013 6.31%
Chippewa Nature Center
Endowment Fund
Attn: Trust Department
P.O. Box 231
Midland, MI 48640-0231
Enele Co 31,254.135 5.86%
Dividend Reinvest
c/o Copper Mountain Trust
601 SW 2nd Avenue, Suite 1800
Portland, OR 97204
CLASS I................ AAAA Retirement Fund for Member 974,283.752 44.40%*
Agencies
Wendy E. Jones Trustee
Donald S. Lewis Trustee
201 McCullough Drive, Ste. 100
Charlotte, NC 28262-4345
</TABLE>
B-1
<PAGE> 38
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
SHARES OF SHARES OF
FUND AND CLASS NAME AND ADDRESS OF SHAREHOLDER CLASS OWNED CLASS OWNED
-------------- ------------------------------- ------------- -------------
<S> <C> <C> <C>
M&I Trust Co. Trustee 700,918.677 31.94%*
Neese/Crabbe Huson
1000 N. Water Street, 14th
Floor
Milwaukee, WI 53202-6648
Chicagoland Race Meet Operators 211,321.471 9.63%
Pension Trust Fund
8700 W. Bryn Mawr Avenue
Suite 810N
Chicago, IL 60631
Northwestern Trust Company 115,983.670 5.28%
Custodian
FBO IBEW Local 76
Supplemental Income Fund
1201 3rd Avenue, Ste. 2010
Seattle, WA 98101
Enele Co 144,743.890 6.60%
Dividend Reinvest
c/o Copper Mountain Trust
601 SW 2nd Avenue, Suite 1800
Portland, OR 97204
SPECIAL FUND
CLASS A................ Charles Schwab & Co. Inc 1,109,976.285 22.72%
Special Custody A/C for Benefit
of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
FTC & Co. 577,726.047 11.83%
Attn: Datalynx #203
P.O. Box 173 736
Denver, CO 80217
</TABLE>
---------------
* Entity owned 25% or more of the outstanding shares of beneficial interest of
the Small Cap Fund, and therefore may be presumed to "control" such Fund, as
that term is defined in the 1940 Act.
OWNERSHIP OF SHARES UPON CONSUMMATION
As of September 29, 2000, the shareholders of record that owned 5% or more
of the outstanding shares of the noted class of shares of the noted Fund would
own the following percentage of the Special Fund upon consummation of the
Acquisition.
B-2
<PAGE> 39
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES OF
CLASS OWNED UPON
CONSUMMATION OF
FUND AND CLASS NAME AND ADDRESS OF SHAREHOLDER ACQUISITION
-------------- ------------------------------- ---------------------
<S> <C> <C>
SMALL CAP FUND
CLASS A........................ Chemical Bank & Trust Co. Agent 0.71%
Chippewa Nature Center
Endowment Fund
Attn: Trust Department
P.O. Box 231
Midland, MI 48640-0231
Enele Co.
Dividend Reinvest 0.66%
c/o Copper Mountain Trust
601 SW 2nd Avenue, Suite 1800
Portland, OR 97204
CLASS I........................ AAAA Retirement Fund for Member 44.44%
Agencies
Wendy E. Jones Trustee
Donald S. Lewis Trustee
201 McCullough Drive, Ste. 100
Charlotte, NC 28262-4345
M&I Trust Co. Trustee 31.97%
Neese/Crabbe Huson
1000 N. Water Street, 14th
Floor
Milwaukee, WI 53202-6648
Chicagoland Race Meet Operators 9.64%
Pension Trust Fund
8700 W. Bryn Mawr Avenue
Suite 810N
Chicago, IL 60631
Northwestern Trust Company 5.29%
Custodian
FBO IBEW Local 76
Supplemental Income Fund
1201 3rd Avenue, Ste. 2010
Seattle, WA 98101
Enele Co. 6.60%
Dividend Reinvest
c/o Copper Mountain Trust
601 SW 2nd Avenue, Suite 1800
Portland, OR 97204
SPECIAL FUND
CLASS A........................ Charles Schwab & Co. Inc. 20.18%
Special Custody A/C for Benefit
of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
B-3
<PAGE> 40
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES OF
CLASS OWNED UPON
CONSUMMATION OF
FUND AND CLASS NAME AND ADDRESS OF SHAREHOLDER ACQUISITION
-------------- ------------------------------- ---------------------
<S> <C> <C>
FTC & Co 10.50%
Attn: Datalynx #203
P.O. Box 173 736
Denver, CO 80217
</TABLE>
INFORMATION CONCERNING EXECUTIVE OFFICERS
The following table sets forth certain information about the executive
officers of each Fund:
<TABLE>
<CAPTION>
YEAR OF
ELECTION
AS
EXECUTIVE OFFICER EXECUTIVE
NAME & AGE OFFICE AND PRINCIPAL OCCUPATION ** OFFICER
----------------- ---------------------------------- ------------
<S> <C> <C>
Stephen E. Gibson...................... President of the Stein Roe Mutual Funds 1998
(46) since November 1999; President of the
Liberty Mutual Funds since June 1998;
Chairman of the Board since July 1998,
Chief Executive Officer and President
since December 1996, and Director since
July 1996 of Colonial (formerly
Executive Vice President of Colonial
from July 1996 to December 1996);
Chairman of the Board, Director, Chief
Executive Officer and President of
Liberty Funds Group LLC ("LFG") since
December 1998 (formerly Director, Chief
Executive Officer and President of The
Colonial Group, Inc. from December 1996
to December 1998); Director since
September 2000, President since January
2000, and Vice Chairman since August
1998 of Stein Roe & Farnham
Incorporated ("Stein Roe") (formerly
Assistant Chairman and Executive Vice
President of Stein Roe from August 1998
to January 2000). (Formerly Managing
Director of Marketing of Putnam
Investments (investment advisor) from
June 1992 to July 1996.)
</TABLE>
B-4
<PAGE> 41
<TABLE>
<CAPTION>
YEAR OF
ELECTION
AS
EXECUTIVE OFFICER EXECUTIVE
NAME & AGE OFFICE AND PRINCIPAL OCCUPATION ** OFFICER
----------------- ---------------------------------- ------------
<S> <C> <C>
William J. Ballou...................... Assistant Secretary of the Stein Roe 2000
(35) Mutual Funds since May 2000; Secretary
of the Liberty Mutual Funds since
October 2000 (formerly Assistant
Secretary of the Liberty Mutual Funds
from October 1997 to October 2000);
Vice President, Assistant Secretary and
Counsel of Colonial since October 1997;
Vice President and Counsel since April
2000, and Assistant Secretary since
December 1998 of LFG; Associate
Counsel, Massachusetts Financial
Services Company (financial services
provider) prior thereto.
Kevin M. Carome........................ Executive Vice President of the Liberty 1999
(44) Mutual Funds since October 2000;
Executive Vice President of the Stein
Roe Mutual Funds since May 1999
(formerly Vice President from April
1998 to May 1999, Secretary from
February 2000 to May 2000) and
Assistant Secretary from April 1998 to
February 2000 of the Stein Roe Mutual
Funds; Chief Legal Officer of Liberty
Financial since August, 2000; Senior
Vice President, Legal, of LFG since
January 1999; General Counsel and
Secretary of Stein Roe since January
1998; Associate General Counsel and
Vice President of Liberty Financial
prior thereto.
</TABLE>
---------------
** Except as otherwise noted, each individual has held the office indicated or
other offices in the same company for the last five years.
ADDITIONAL INFORMATION CONCERNING TRUSTEE COMPENSATION
The current Board of Trustees received the following compensation from each
Fund as of each Fund's fiscal year end(1):
<TABLE>
<CAPTION>
SMALL CAP FUND SPECIAL FUND
TRUSTEE 10/31/99 10/31/99
------- -------------- ------------
<S> <C> <C>
Mr. Bleasdale................................. $729(2) $796(3)
Ms. Collins................................... 685 748
Mr. Grinnell.................................. 714 779
Mr. Lowry..................................... 693 756
Mr. Macera.................................... 686 749
Mr. Mayer..................................... 705 768
Mr. Moody..................................... 635(4) 694(5)
Mr. Neuhauser................................. 726 791
Mr. Stitzel................................... 686 749
Ms. Verville.................................. 678(6) 768(7)
</TABLE>
B-5
<PAGE> 42
The following table sets forth the total compensation paid to each Trustee
by the Liberty Mutual Funds for the calendar year ended December 31, 1999.
<TABLE>
<CAPTION>
TRUSTEE TOTAL COMPENSATION
------- ------------------
<S> <C>
Mr. Bleasdale............................................... $103,000(8)
Ms. Collins................................................. 96,000
Mr. Grinnell................................................ 100,000
Mr. Lowry................................................... 97,000
Mr. Macera.................................................. 95,000
Mr. Mayer................................................... 101,000
Mr. Moody................................................... 91,000(9)
Mr. Neuhauser............................................... 101,252
Mr. Stitzel................................................. 95,000
Ms. Verville................................................ 96,000(10)
</TABLE>
For the following calendar year ended December 31, 1999, certain of the
Trustees received the following compensation in their capacities as Trustees or
Directors of the Liberty All-Star Equity Fund, the Liberty All-Star Growth Fund,
Inc. and Liberty Funds Trust IX (together, the "Liberty All-Star Funds"):
<TABLE>
<CAPTION>
TRUSTEE TOTAL COMPENSATION(11)
------- ----------------------
<S> <C>
Mr. Grinnell............................................. $25,000
Mr. Lowry................................................ 25,000
Mr. Mayer................................................ 25,000
Mr. Neuhauser............................................ 25,000
</TABLE>
---------------
(1) The Liberty Mutual Funds do not currently provide pension or retirement
plan benefits to the Trustees.
(2) Includes $375 payable in later years as deferred compensation.
(3) Includes $409 payable in later years as deferred compensation.
(4) Total compensation of $635 for the fiscal year ended October 31, 1999 will
be payable in later years as deferred compensation.
(5) Total compensation of $694 for the fiscal year ended October 31, 1999 will
be payable in later years as deferred compensation.
(6) Total compensation of $678 for the fiscal year ended October 31, 1999 will
be payable in later years as deferred compensation.
(7) Total compensation of $768 for the fiscal year ended October 31, 1999 will
be payable in later years as deferred compensation.
(8) Includes $52,000 payable in later years as deferred compensation.
(9) Total compensation of $91,000 for the calendar year ended December 31, 1999
will be payable in later years as deferred compensation.
(10) Total compensation of $96,000 for the calendar year ended December 31, 1999
will be payable in later years as deferred compensation.
(11) The Liberty All-Star Funds are advised by Liberty Asset Management Company
("LAMCO"). LAMCO is an indirect wholly-owned subsidiary of Liberty
Financial.
B-6
<PAGE> 43
CAPITALIZATION
APPENDIX C
The following table shows on an unaudited basis the capitalization of the
Small Cap Fund and the Special Fund as of April 30, 2000, and on a pro forma
combined basis, giving effect to the acquisition of the assets and liabilities
of the Small Cap Fund by the Special Fund at net asset value as of that date.
Information for Class B and Class C shares of both Funds, and for Class I shares
of the Special Fund, is not included in this table because, as of April 30,
2000, no shares of these classes had been issued.
<TABLE>
<CAPTION>
SPECIAL
SPECIAL FUND
SMALL CAP FUND PRO FORMA PRO FORMA
FUND (ACQUIRING FUND) ADJUSTMENTS(1) COMBINED(2)
----------- ---------------- -------------- -----------
<S> <C> <C> <C> <C>
Class A
Net asset value.................... $ 6,382,596 $44,498,861 $(25,525) $50,855,932
Shares outstanding................. 581,392 4,779,249 101,865 5,462,506
Net asset value per share.......... $ 10.98 $ 9.31 $ 9.31
Class I
Net asset value.................... $23,772,428 $(15,021) $23,757,407
Shares outstanding................. 2,146,233 405,583 2,551,816
Net asset value per share.......... $ 11.08 $ 9.31
</TABLE>
---------------
(1) Adjustments reflect estimated one time proxy, accounting, legal and other
costs of the reorganization of $19,054 and $21,492 to be borne by the Small
Cap Fund and the Special Fund, respectively.
(2) Assumes the Acquisition was consummated on April 30, 2000, and is for
information purposes only. No assurance can be given as to how many shares
of the Special Fund will be received by the shareholders of the Small Cap
Fund on the date the Acquisition takes place, and the foregoing should not
be relied upon to reflect the number of shares of the Special Fund that
actually will be received on or after such date.
C-1
<PAGE> 44
APPENDIX D
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE AS OF OCTOBER 31, 1999
LIBERTY SPECIAL FUND
PORTFOLIO MANAGERS' REPORT
Fund performance affected by market bias toward large-cap growth and impact of
health care stocks
During the fiscal year, the Fund had a total return of negative 13.95%,
based on Class A shares without a sales charge. The Fund has not performed well
in the past few years, in large part because the stock market has been dominated
by large-cap growth stocks, and because investors have favored growth stocks
generally over value stocks. While we do seek -- and have found -- growth stocks
that are reasonably priced, the Fund has had a value bias for the past several
years.
The Fund was also impacted by events in the health care industry.
Non-pharmaceutical health care companies, including HMOs and sub-acute care
companies, have been very harshly treated by the Hospital Financial Control
Authority (HFCA) -- the financial arm of Medicare. Most of the much-publicized
$200 billion in Medicare savings has come from the enormous reductions in
Medicare reimbursements to health care providers. As many people are aware, this
has severely impacted profitability in the health care sector.
"Short selling" techniques not used in 1999
The Fund experienced an especially difficult year in 1998 because of "short
selling" strategies that did not achieve their goals. Short selling is a common
market strategy that allows investors to sell an unowned stock in anticipation
of a price decline with the intent to buy it back at a lower price. It is
typically used to hedge downside risk. We did not employ this strategy in the
Fund in 1999.
An outstanding second quarter
When the market broadened in the second quarter of this year, the Fund
performed very well, posting a return of 29.61% for the quarter ended June 30,
1999. By comparison, the Russell 2000 Index, a broad-based measure of small-cap
stock performance, had a total return of 15.52% during the same period. However,
when the market again narrowed in August to favor large caps and became more
volatile across the board, small-cap stocks declined substantially. The Fund
fared poorly during this time primarily because it had a significant weighting
in value-oriented stocks. These companies were shunned by investors who-in a
volatile and uncertain market-fled to the more familiar large-cap growth issues.
Also, the Fund had exposure to certain sectors that did not perform as well,
including health care and, to a lesser extent, basic materials.
Technology and energy holdings hold promise
The Fund's technology holdings, at roughly 20% of net assets, are an
important part of the portfolio. Most of these companies are component or
circuit manufacturers that are creating entirely new designs for a variety of
electronic and high-tech applications. Another large sector is mining and
energy, at roughly 24% of net assets. In this sector, we are invested primarily
in natural gas companies involved in exploration, production and service. In the
past year, there has been a severe depletion of natural gas reserves and a drop
in Canadian natural gas production, resulting in a significant decline in supply
that created many attractive investment opportunities. We also have stocks in
the basic materials sector, including the aluminum and chemicals industries. We
believe that if global economies continue improving and commodity prices remain
firm, basic materials companies should be profitable.
New additions to the Fund illustrate contrarian style
The concentration of the stock market's preference toward large-cap, blue
chip growth companies has created many opportunities in the small- and mid-cap
areas of the market. One example is Mail-Well (1.2% of net assets), a
fast-growing company in the printing industry. Mail-Well is the leading
conglomerate in this
D-1
<PAGE> 45
fragmented business, having consolidated companies in four areas: commercial
printing, envelopes, labels, and printing for distributors. The firm has had
strong sales and earnings growth, and we were able to acquire it after its stock
dropped sharply from its mid-summer high. As a growing company, Mail-Well nicely
fits our criteria of growth at a reasonable price.
Outlook: anticipation of market broadening
We believe the stock market may broaden to include stocks of small- and
mid-cap companies. One indicator is the continued recovery in several important
global economies-especially Southeast Asia and Japan. The Asian economic crisis
and corresponding global deflation have significantly impacted the profitability
of small- and mid-sized companies, and the earnings of large blue chip companies
have been much stronger on a relative basis. If the global economy continues to
improve, we anticipate that an improvement in the earnings of small- and
mid-sized companies will also occur because many of these firms do a great deal
of business overseas. In addition, the earnings growth rates of large-cap
companies have been slowing, and the earnings growth rates of smaller companies
generally have been improving. Since investors tend to recognize these factors
when valuing stocks, we believe that small- and mid-cap companies that show
strong earnings growth have excellent long-term potential.
/s/ James Crabbe
/s/ John W. Johnson
PERFORMANCE INFORMATION
Special Fund's Investment Performance vs. Russell 2000 Index
CHANGE IN VALUE OF $10,000 FROM 10/31/1989 - 10/31/1999
CLASS A SHARES, WITH AND WITHOUT SALES CHARGE
[LINE GRAPH]
<TABLE>
<CAPTION>
FUND WITH SALES CHARGE FUND WITHOUT SALES CHARGE RUSSELL 2000 INDEX
---------------------- ------------------------- ------------------
<S> <C> <C> <C>
1990 8398 8910 7272
1991 12561 13328 11536
1992 13580 14408 12631
1993 19201 20372 16725
1994 23502 24935 16666
1995 23920 25379 19725
1996 25123 26656 23001
1997 31811 33752 29747
1998 17496 18563 26225
1999 15053 15971 30123
</TABLE>
The Russell 2000 Index is an unmanaged index that tracks the performance of
small-capitalization stocks traded on the New York Stock Exchange, the American
Stock Exchange, and NASDAQ. Unlike mutual funds, indexes are not investments and
do not incur fees or expenses. It is not possible to invest directly in an
index.
D-2
<PAGE> 46
AVERAGE ANNUAL TOTAL RETURNS AS OF 10/31/99
<TABLE>
<CAPTION>
SHARE CLASS A
INCEPTION DATE 4/9/1987
-------------- ----------------------------
WITHOUT WITH
SALES SALES
CHARGE CHARGE
<S> <C> <C>
1 Year...................................... (13.95)% (18.90)%
5 Year...................................... (8.52)% (9.60)%
10 Years.................................... 4.79% 4.17%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS AS OF 9/30/1999
<TABLE>
<CAPTION>
SHARE CLASS A
----------- ----------------------------
WITHOUT WITH
SALES SALES
CHARGE CHARGE
<S> <C> <C>
1 year...................................... 3.13% (2.80)%
5 years..................................... (5.00)% (6.12)%
10 years.................................... 6.18% 5.55%
</TABLE>
Past performance cannot predict future investment results. Returns and value of
an investment will vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions. The "with sales charge" returns include
the maximum 5.75% charge for Class A shares.
Performance results reflect any voluntary waivers or reimbursement of Fund
expenses by the Fund's advisor or its affiliates. Absent these waivers or
reimbursement arrangements, performance results would have been lower.
D-3
<PAGE> 47
LIBERTY FUNDS TRUST III
LIBERTY SPECIAL FUND
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
November 17, 2000
This Statement of Additional Information (the "SAI") relates to the
proposed Acquisition (the "Acquisition") of the Liberty Contrarian Small-Cap
Fund (the "Acquired Fund"), a series of Liberty Funds Trust III, by the Liberty
Special Fund (the "Acquiring Fund"), a series of Liberty Funds Trust III.
This SAI contains information which may be of interest to shareholders
but which is not included in the Prospectus/Proxy Statement dated November 17,
2000 (the "Prospectus/Proxy Statement") of the Acquiring Fund which relates to
the Acquisition. As described in the Prospectus/Proxy Statement, the Acquisition
would involve the transfer of all the assets of the Acquired Fund in exchange
for shares of the Acquiring Fund and the assumption of all the liabilities of
the Acquired Fund. The Acquired Fund would distribute the Acquiring Fund shares
it receives to its shareholders in complete liquidation of the Acquired Fund.
This SAI is not a prospectus and should be read in conjunction with the
Prospectus/Proxy Statement. The Prospectus/Proxy Statement has been filed with
the Securities and Exchange Commission and is available upon request and without
charge by writing to your Fund at One Financial Center, Boston, Massachusetts
02111-2621, or by calling 1-800-426-3750.
Table of Contents
<TABLE>
<S> <C> <C>
I. Additional Information about the Acquiring Fund and the Acquired Fund.. 2
II. Financial Statements................................................... 2
</TABLE>
<PAGE> 48
I. Additional Information about the Acquiring Fund and the Acquired Fund.
Incorporated by reference to Post-Effective Amendment No.114 to the
Registrant's Registration Statement Form N-1A (filed on February 28, 2000)
(Registration Nos. 2-15184 and 811-881).
II. Financial Statements.
This SAI is accompanied by the Semi-Annual Report for the six months
ended April 30, 2000 and the Annual Report for the year ended October 31, 1999
of the Acquiring Fund and the Acquired Fund, which contain historical financial
information regarding such Funds. Such reports have been filed with the
Securities and Exchange Commission and are incorporated herein by reference.
Pro forma financial statements of the Acquiring Fund for the
Acquisition are provided on the following pages.
-2-
<PAGE> 49
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS LIBERTY CONTRARIA LIBERTY PRO-FORMA
APRIL 30, 2000 SMALL CAP FUND SPECIAL FUND COMBINED FUND
-------------- ------------ -------------
SHARES VALUE SHARES VALUE SHARES VALUE
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS - 100.3%
FINANCE, INSURANCE & REAL ESTATE - 9.9%
INSURANCE CARRIERS - 9.9%
Fidelity National Financial, Inc. 33,900 $ 500,025 33,900 $ 500,025
Mid Atlantic Medical Services, Inc.(a) 99,600 927,525 195,300 $ 1,818,731 294,900 2,746,256
Risk Capital Holdings, Inc. 32,000 492,500 144,700 2,227,023 176,700 2,719,523
StanCorp Financial Group, Inc. 28,200 821,325 20,000 582,500 48,200 1,403,825
---------- ----------- ----------
2,741,375 4,628,254 7,369,629
MANUFACTURING - 41.1%
APPAREL - 3.7%
Phillips-Van Heusen 91,400 771,188 186,000 1,569,375 277,400 2,340,563
The Warnaco Group, Inc., Class A 38,600 410,125 38,600 410,125
---------- ----------- ----------
1,181,313 1,569,375 2,750,688
CHEMICALS & ALLIED PRODUCTS - 2.0%
Barr Laboratories, Inc.(a) 9,700 418,918 9,700 418,918
Wellman, Inc. 15,500 331,313 34,600 739,575 50,100 1,070,888
---------- ----------- ----------
750,231 739,575 1,489,806
ELECTRICAL INDUSTRIAL EQUIPMENT - 3.0%
Actel Corp.(a) 24,700 909,269 37,000 1,362,063 61,700 2,271,332
---------- ----------- ----------
909,269 1,362,063 2,271,332
ELECTRONIC & ELECTRICAL EQUIPMENT - 2.6%
Checkpoint Systems, Inc. 77,900 696,231 119,900 1,071,606 197,800 1,767,837
UCAR International, Inc.(a) 14,100 185,944 14,100 185,944
---------- ----------- ----------
882,175 1,071,606 1,953,781
ELECTRONIC COMPONENTS - 2.3%
HMT Technology Corp.(a) 155,900 353,211 331,400 750,828 487,300 1,104,039
Rayovac Corp.(a) 29,700 619,987 29,700 619,987
---------- ----------- ----------
973,198 750,828 1,724,026
MACHINERY & COMPUTER EQUIPMENT - 4.3%
Auspex Systems, Inc.(a) 118,400 902,800 300,000 2,287,500 418,400 3,190,300
---------- ----------- ----------
902,800 2,287,500 3,190,300
MEASURING & ANALYZING INSTRUMENTS - 5.8%
Flanders Corp.(a) 56,600 155,650 56,600 155,650
Input/Output, Inc.(a) 93,100 686,613 93,100 686,613
Oakley, Inc.(a) 111,200 1,278,800 194,300 2,234,450 305,500 3,513,250
---------- ----------- ----------
2,121,063 2,234,450 4,355,513
PAPER PRODUCTS - 5.6%
Longview Fibre Co. 38,400 489,600 287,300 3,663,075 325,700 4,152,675
---------- ----------- ----------
489,600 3,663,075 4,152,675
PRIMARY METAL - 6.8%
Century Aluminum Co. 59,300 830,200 151,900 2,126,600 211,200 2,956,800
Ispat International NV 56,600 661,513 126,000 1,472,625 182,600 2,134,138
---------- ----------- ----------
1,491,713 3,599,225 5,090,938
PRINTING & PUBLISHING - 1.4%
Mail-Well, Inc.(a) 71,900 642,606 43,300 386,994 115,200 1,029,600
---------- ----------- ----------
642,606 386,994 1,029,600
RUBBER & PLASTIC - 0.5%
Cooper Tire & Rubber Co. 27,600 372,600 27,600 372,600
TRANSPORTATION EQUIPMENT - 3.1%
Wabash National Corp. 40,500 589,781 118,000 1,718,375 158,500 2,308,156
---------- ----------- ----------
589,781 1,718,375 2,308,156
MINING & ENERGY - 17.5%
OIL & GAS EXTRACTION - 14.8%
Forest Oil Corp.(a) 63,200 707,050 194,200 2,172,613 257,400 2,879,663
Grey Wolf, Inc.(a) 358,200 1,455,187 924,900 3,757,406 1,283,100 5,212,593
Santa Fe Corp.(a) 79,700 732,244 199,965 1,837,178 279,665 2,569,422
Tom Brown, Inc.(a) 18,600 353,400 18,600 353,400
---------- ----------- ----------
3,247,881 7,767,197 11,015,078
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
LIBERTY CONTRARIAN LIBERTY PRO-FORMA
SMALL CAP FUND SPECIAL FUND COMBINED FUND
----------------------- ---------------------- -------------------------
SHARES VALUE SHARES VALUE SHARES VALUE
<S> <C> <C> <C> <C> <C> <C>
OIL & GAS FIELD SERVICES - 2.7%
Nuevo Energy Co.(a) 35,500 621,250 82,000 1,435,000 117,500 2,056,250
---------- ----------- ----------
621,250 1,435,000 2,056,250
RETAIL TRADE - 0.6%
MISCELLANEOUS RETAIL - 0.6%
Omnicare, Inc. 29,900 454,106 29,900 454,106
SERVICES - 16.1%
AMUSEMENT & RECREATION - 0.4%
Anchor Gaming(a) 6,400 257,600 6,400 257,600
BUSINESS SERVICES - 0.4%
Daleen Technologies, Inc.(a) 20,500 269,063 20,500 269,063
COMPUTER RELATED SERVICES - 7.6%
Mentor Graphics Corp.(a) 64,200 842,625 105,600 1,386,000 169,800 2,228,625
Sensormatic Electronics Corp. 46,700 779,306 87,000 1,451,813 133,700 2,231,119
Sitel Corp.(a) 37,800 259,875 37,800 259,875
Vysis, Inc.(a) 75,100 558,556 61,500 457,406 136,600 1,015,962
---------- ----------- ----------
2,440,362 3,295,219 5,735,581
COMPUTER SOFTWARE - 0.5%
CCC Information Services Group Inc.(a) 10,800 149,850 10,800 149,850
Unova, Inc.(a) 14,600 204,400 14,600 204,400
---------- -----------
354,250 354,250
EDUCATIONAL SERVICES - 0.6%
ITT Educational Services, Inc.(a) 23,800 425,425 23,800 425,425
HEALTH SERVICES - 5.8%
Covance, Inc.(a) 18,300 168,131 18,300 168,131
Coventry Health Care Inc.(a) 86,900 923,313 200,000 2,125,000 286,900 3,048,313
IDEXX Labs, Inc.(a) 21,100 553,875 23,400 614,250 44,500 1,168,125
---------- ----------- ----------
1,645,319 2,739,250 4,384,569
MOTION PICTURES - 0.5%
Hollywood Entertainment Corp.(a) 50,800 355,600 50,800 355,600
PERSONAL SERVICES - 0.3%
Regis Corp. 17,200 201,025 17,200 201,025
TRANSPORTATION, COMMUNICATION,
ELECTRICITY, GAS, & SANITARY SERVICES - 12.0%
AIR TRANSPORTATION - 0.6%
Alaska Air Group 15,800 454,250 15,800 454,250
GAS SERVICES - 0.6%
Western Gas Resources, Inc. 26,788 447,025 26,788 447,025
MOTOR FREIGHT & WAREHOUSING - 6.8%
Budget Group, Inc. Class A(a) 53,900 252,656 53,900 252,656
J.B. Hunt transport Services, Inc. 23,900 394,350 60,400 996,600 84,300 1,390,950
Yellow Corp. 46,800 892,125 132,600 2,527,688 179,400 3,419,813
---------- ----------- ----------
1,539,131 3,524,288 5,063,419
TRANSPORTATION SERVICES - 0.5%
Fritz Companies, Inc.(a) 37,900 364,788 37,900 364,788
TELECOMMUNICATION - 3.5%
E. Spire Communications, Inc.(a) 55,000 278,437 55,000 278,437
Frontier Airlines, Inc.(a) 31,400 478,850 31,400 478,850
PictureTel Corp.(a) 137,700 761,213 137,700 761,213
Weblink Wireless, Inc.(a) 201,600 1,125,413 201,600 1,125,413
---------- ----------- ----------
1,518,500 1,125,413 2,643,913
WHOLESALE TRADE - 3.1%
NONDURABLE GOODS - 3.1%
Fleming Co, Inc. 41,300 678,868 100,700 1,655,256 142,000 2,334,124
---------- ----------- ----------
678,868 1,655,256 2,334,124
TOTAL COMMON STOCKS (COST $33,971,624, 29,322,167 45,552,943 74,875,110
$50,884,324 AND $84,855,948)
SHORT-TERM OBLIGATIONS - 1.9% PAR PAR PAR
Repurchase agreement with SBC Warburg Ltd.,
dated 04/28/00, due at
05/01/00 at 5.71%, collateralized by
U.S. Treasury notes with various
maturities to 2025,
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
LIBERTY CONTRARIAN LIBERTY CONTRARIAN PRO-FORMA
SMALL CAP FUND SPECIAL FUND COMBINED
<S> <C> <C> <C> <C> <C> <C>
market value
$482,882, $1,005,549 and $1,488,431,
respectively, (repurchase proceeds
$472,225, $978,465,
and $1,450,690 respectively) 472,000 472,000 978,000 978,000 1,450,000 1,450,000
---------- ----------- ----------
472,000 978,000 1,450,000
TOTAL INVESTMENTS - 102.2% 29,794,167 46,530,943 76,325,110
OTHER ASSETS & LIABILITIES, NET - (2.2%) 360,857 (2,032,082) (1,711,771)(b)
---------- ----------- ----------
NET ASSETS - 100.0% $ 30,155,024 $ 44,498,861 $74,613,339(b)
============ ============ ============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Adjusted for one time proxy, accounting, legal and other costs of the
reorganization of $19,054 and $21,492 to be borne by the Small Cap Fund and the
Special Fund, respectively.
(c) No adjustments are shown to the unaudited pro forma combined portfolio of
investments due to the fact that upon consummation of the Acquisitions, no
securities would need to be sold in order for the Acquiring Fund to comply with
its Prospectus and SEC and IRS guidelines and restrictions. However, the
foregoing sentence shall not be deemed to restrict in any way the ability of the
investment advisor of any of the funds from buying or selling securities in the
normal course of such Fund's business and operations.
<PAGE> 52
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
PRO FORMA COMBINING CONDENSED STATEMENT OF ASSETS AND LIABILITIES AS OF APRIL
30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
LIBERTY
CONTRARIAN LIBERTY
SMALL CAP SPECIAL PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Investments, at market value $ 29,794,167 $ 46,530,943 76,325,110
Cash - - -
Receivable for investments sold - - -
Payable for investments purchased - - -
Other assets less other liablities 360,857 (2,032,082) (40,546) (a) (1,711,771)
Net assets $ 30,155,024 $ 44,498,861 $ 74,613,339
Net Assets - Class A $6,382,596 $44,498,861 ($25,525) 50,855,932
Shares - Class A 581,392 4,779,249 101,865 5,462,506
Net asset value per share - Class A $10.98 $9.31 $9.31
Net Assets - Class I $23,772,428 ($15,021) 23,757,407
Shares - Class I* 2,146,233 405,583 2,551,816
Net asset value per share - Class I $11.08 $9.31
</TABLE>
* Determined based on Class A share price.
(a) Adjustments reflect one time proxy, accounting, legal and other costs of the
reorganization of $19,054 and $21,492 to be borne by the Small Cap Fund and the
Special Fund respectively. These costs reflect each fund's share of the total
costs of the reorganization that will be shared between Liberty Financial and
the Funds, subject to the terms of each Agreement and Plan of Reorganization, as
follows:
<TABLE>
<CAPTION>
Liberty Financial Fund
----------------- ----
<S> <C> <C>
Liberty Contrarian Small Cap Fund 50% 50%
Liberty Special Fund 50% 50%
</TABLE>
The Funds will bear their full portion of the one time costs of the
reorganization only if the expense reduction experienced as a result of the
Acquisition in the first year after Acquisition Date exceeds the one time costs.
If the one time costs exceed the expense reduction, the Fund will only bear the
share of its portion up to the amount of the expense reduction.
<PAGE> 53
PRO FORMA COMBINING CONDENSED STATEMENT OF OPERATIONS FOR THE TWELVE MONTH
PERIOD ENDED APRIL 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Liberty Liberty
Contrarian Special Pro Forma Pro Forma
Small Cap Fund Adjustments Combined
Fund
INVESTMENT INCOME
<S> <C> <C> <C> <C>
Dividends 177,023 401,562 -- 578,585
Interest 59,149 47,015 -- 106,164
----------- ------------- ----------- -----------
Total investment income 236,172 448,577 -- 684,749
EXPENSES
Management fee 401,819 605,187 (1,050) (a) 1,005,956
----------- ----------- ------------- -----------
Administration fee 20,091 30,259 --(a) 50,350
Service fee - Class A 19,239 151,297 --(a) 170,536
Transfer agent fee - Class A 17,172 136,781 (25,437) (e) 128,516
Transfer agent fee - Class I 812 -- --(a) 812
Bookkeeping fee 27,000 30,682 (12,937) (a) 44,745
Trustees fee 6,845 8,607 (7,740) (b) 7,712
Interest expense 7,094 546,476 (553,570) (c) --
All other expenses 106,532 151,036 (54,568) (d) 203,000
----------- ----------- ------------- -----------
Total operating expenses 606,604 1,660,325 (655,302) 1,611,627
----------- ----------- ------------- -----------
Expense reimbursement (166,306) (752,544) 655,302(a) (263,548)
----------- ----------- ------------- -----------
Net Expenses 440,298 907,781 -- 1,348,079
NET INVESTMENT LOSS (204,126) (459,204) -- (663,330)
NET REALIZED & UNREALIZED GAIN (LOSS)
Net realized loss on investments (21,444,124) (27,836,420) -- (49,280,544)
Change in net unrealized appreciation
during the period on investments 30,897,958 32,355,006 -- 63,252,964
----------- ----------- ------------- -----------
Net Gain 9,453,834 4,518,586 -- 13,972,420
----------- ----------- ------------- -----------
Increase in Net Assets from Operations 9,249,708 4,059,382 -- 13,309,090
</TABLE>
(a) Based on the contract in effect for the surviving fund.
(b) Based on trustee compensation plan for the surviving fund.
(c) The surviving fund is no longer party to a line of credit agreement.
(d) Decrease due to the elimination of duplicative expenses achieved by
merging the funds.
(e) Based on the contract in effect for the surviving Fund. Note that a new
transfer agent fee structure was implemented for Liberty Special Fund
effective January 1, 2000. The pro forma combined transfer agent fee
shown assumes this new agreement was in effect for the entire
twelve-month period ended April 30, 2000.
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
1. These financial statements set forth the unaudited pro forma condensed
statement of assets and liabilities, including the portfolio of investments, as
of April 30, 2000, and the unaudited pro forma condensed statement of operations
for the twelve month period ended April 30, 2000 for Liberty Contrarian
Small-Cap Fund and Liberty Special Fund as adjusted giving effect to the
Acquisition as if it had occurred as of the beginning of the period. These
statements have been derived from the books and records utilized in calculating
daily net asset value for each fund.
<PAGE> 54
[Liberty Logo] LIBERTY
LIBERTY FUNDS SERVICES, INC.
LIBERTY CONTRARIAN SMALL CAP FUND
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN AND, ABSENT DIRECTION, WILL BE VOTED FOR EACH ITEM
BELOW. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE HOLDER'S BEST
JUDGEMENT AS TO ANY OTHER MATTER. THE BOARD OF TRUSTEES RECOMMENDS A
VOTE FOR THE FOLLOWING ITEMS:
1. To approve or disapprove the Agreement and Plan of Reorganization
with respect to the acquisition of Liberty Contrarian Small Cap Fund by
Liberty Special Fund (Item 1 of the Notice).
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
[ ] [ ] [ ]
</TABLE>
2. To elect eleven Trustees (Item 2 of the Notice).
(01) Douglas A. Hacker
(02) Janet Langford Kelly
(03) Richard W. Lowry
(04) Salvatore Macera
(05) William E. Mayer
(06) Charles R. Nelson
(07) John J. Neuhauser
(08) Joseph R. Palombo
(09) Thomas E. Stitzel
(10) Thomas C. Theobald
(11) Anne-Lee Verville
<TABLE>
<CAPTION>
For
All For All
Nominees Withheld Except
<S> <C> <C>
[ ] [ ] [ ]
</TABLE>
Instruction: To withhold authority to vote for any individual
nominee(s), mark the "For All Except" box and strike a line through the
name(s) of the nominee(s). Your shares will be voted for the remaining
nominee(s).
MARK BOX AT RIGHT FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
PLEASE MARK, SIGN DATE AND RETURN THIS PROXY PROMPTLY USING THE
ENCLOSED ENVELOPE. Please sign exactly as name or names appear hereon.
Joint owners should each sign personally. When signing as attorney,
executor, administrator, trustee or guardian, please give full title as
such. If a corporation, please sign in full corporate name by President
or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
Date______________________
_________________________ ______________________
Shareholder sign here Co-owner sign here
Detach Card
<PAGE> 55
PLEASE VOTE PROMPTLY
Your vote is important, no matter how many shares you own. Please vote on the
reverse side of this proxy card and sign in the space(s) provided. Return your
completed proxy card in the enclosed envelope today.
You may receive additional proxies for other accounts. These are not duplicates;
you should sign and return each proxy card in order for your votes to be
counted.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES. The signers of this
proxy hereby appoint William J. Ballou, Suzan M. Barron, Stephen E. Gibson,
Russell L. Kane, Pamela A. McGrath, and Vincent P. Pietropaolo each of them
proxies of the signers, with power of substitution to vote at the Special
Meeting of Shareholders to be held at Boston, Massachusetts, on Wednesday,
December 27, 2000, and at any adjournments, as specified herein, and in
accordance with their best judgement, on any other business that may properly
come before this meeting.
AFTER CAREFUL REVIEW, THE BOARD OF TRUSTEES UNANIMOUSLY HAS RECOMMENDED A VOTE
"FOR" ALL MATTERS.
<PAGE> 56
Two Convenient Ways to Vote Your Proxy
The enclosed proxy statement provides details on important issues affecting
your Liberty Funds. The Board of Trustees recommends that you vote for all
proposals.
We are offering two additional ways to vote: by telephone or fax.
These methods may be faster and more convenient than the traditional method of
mailing back your proxy card.
If you are voting by telephone or fax, you SHOULD NOT mail your proxy card.
Vote by Telephone:
* Read the proxy statement and have your proxy card available.
* When you are ready to vote, call toll free 1-877-518-9416
between 9:00 a.m. and 11:00 p.m. EST.
* Follow the instructions provided to cast your vote. A
representative will be available to answer questions.
Vote by Fax:
* Read the proxy statement.
* Complete the enclosed proxy card.
* Fax your proxy card to 1-800-733-1885.
YOUR PROXY VOTE IS IMPORTANT!
SHM-43/623D-1000 (11/00) 00/2027
