COLONIAL MUNICIPAL MONEY MARKET FUND PROSPECTUS, NOVEMBER 1, 1999
CLASS A, B AND C SHARES
Advised by Stein Roe & Farnham Incorporated
INVESTMENTS IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT.THERE CAN BE NO ASSURANCE THAT THE FUND'S $1.00 NET ASSET VALUE
PER SHARE WILL BE MAINTAINED.
Although these securities have been registered with the Securities and Exchange
Commission, the Commission has not approved or disapproved any shares offered in
this prospectus or determined whether this prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
NOT FDIC INSURED MAY LOSE VALUE
NO BANK GUARANTEE
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND 2
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Investment Goal........................ 2
Primary Investment Strategies.......... 2
Primary Investment Risks............... 2
Performance History.................... 4
Your Expenses.......................... 5
YOUR ACCOUNT 6
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How to Buy Shares...................... 6
Sales Charges.......................... 7
How to Exchange Shares................. 8
How to Sell Shares..................... 9
Distribution and Service Fees.......... 10
Other Information About Your Account... 11
MANAGING THE FUND 13
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Investment Advisor..................... 13
Master/Feeder Structure................ 13
OTHER INVESTMENT
STRATEGIES AND RISKS 14
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When-Issued Securities and
Forward Commitments.................... 14
Interfund Lending Program.............. 14
Year 2000 Compliance................... 14
FINANCIAL HIGHLIGHTS 15
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</TABLE>
<PAGE>
THE FUND
UNDERSTANDING TAX-EXEMPT SECURITIES
TAX-EXEMPT SECURITIES are issued by state and local governments for various
public purposes. The interest on tax-exempt securities typically is not subject
to federal income tax. As a result, the yields on tax-exempt securities are
generally lower than the yields on taxable bonds with similar maturities.
Tax-exempt bond funds may be appropriate for investors in high tax brackets who
seek current income that is free from federal income tax.
INVESTMENT GOAL
The Fund seeks maximum current income exempt from federal income tax consistent
with capital preservation and the maintenance of liquidity.
PRIMARY INVESTMENT STRATEGIES
The Fund invests all of its assets in SR&F Municipal Money Market Portfolio
(Portfolio) as part of a master fund/feeder fund structure. The Portfolio
invests principally in high-quality, tax-exempt money market securities. Money
market funds are subject to strict rules that require them to buy individual
securities that have remaining maturities of 13 months or less, maintain an
average dollar-weighted portfolio maturity of 90 days or less, and buy only
high-quality, dollar-denominated obligations. Under normal conditions, at least
80% of the Portfolio's investments will produce income that is exempt from
federal income tax.
At times, the advisor may determine that adverse market conditions make it
desirable to temporarily suspend the Portfolio's normal investment activities.
Taking a temporary defensive position may prevent the Portfolio from achieving
its investment goal.
Additional strategies that are not primary investment strategies and the risks
associated with them are described below under "Other Investment Strategies and
Risks."
PRIMARY INVESTMENT RISKS
The primary risks of investing in the Fund are described below.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund. Additionally, the Fund's yield will vary as the
short-term securities in its portfolio mature and the proceeds are reinvested in
securities with different interest rates.
Market risk is the risk that the price of a security held by the Portfolio will
fall due to changing market, economic or political conditions. Market risk
includes interest rate risk.
Interest rate risk is the risk of a change in the price of a security when
interest rates increase or decline. In general, if interest rates rise,
securities prices fall; and if interest rates fall, securities prices rise.
Changes in the values of bonds usually will not affect the amount of income the
Fund receives from them but will affect the value of the Fund's shares. Interest
rate risk is generally greater for bonds with longer maturities.
Issuer risk is the possibility that changes in the financial condition of the
issuer of a security, changes in general economic conditions, or changes in
economic conditions that affect the issuer may impact its ability to make timely
payments of interest or principal. This could result in a decrease in the price
of the security.
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2
<PAGE>
THE FUND
Tax-exempt bonds are subject to special risks. Changes in tax laws or adverse
determinations by the Internal Revenue Service may make the income from some of
these bonds taxable. Bonds that are backed by the issuer's taxing authority,
known as general obligation bonds, may partially depend for payment on
legislative appropriation and/or aid from other governments. These bonds may be
vulnerable to legal limits on a government's power to raise revenue or increase
taxes. Other tax-exempt bonds, known as special revenue obligations, are payable
from revenues earned by a particular project or other revenue source. These
bonds are subject to greater risk of default than general obligations because
investors can look only to the revenue generated by the project or private
company, rather than to the credit of the state or local government issuer of
the bonds.
As a non-diversified mutual fund, the Fund is allowed to invest a greater
percentage of its total assets in the securities of a single issuer. This may
concentrate issuer risk and, therefore, the Fund may have an increased risk of
loss compared to a similar diversified mutual fund.
The interest income distributed by the Portfolio from certain tax-exempt bonds
may be subject to the federal Alternative Minimum Tax (AMT) for individuals and
corporations. The Portfolio is permitted to invest all of its assets in bonds
subject to the AMT.
Consult your tax advisor for more information.
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3
<PAGE>
THE FUND
UNDERSTANDING PERFORMANCE
CALENDAR-YEAR TOTAL RETURN shows the Fund's Class A share performance for each
of the last ten complete calendar years. It includes the effects of Fund
expenses. There are no sales charges on Class A shares.
AVERAGE ANNUAL TOTAL RETURN is a measure of the Fund's performance over the past
one-year, five-year and ten-year periods. It includes the effects of Fund
expenses. The table shows returns with sales charges on Classes B and C.
PERFORMANCE HISTORY
The bar chart below shows changes in the Fund's performance from year to year by
illustrating the Fund's calendar year total returns for its Class A shares. The
performance table following the bar chart shows the Fund's average annual
returns for Class A, B and C shares for 1 year, 5 years and 10 years. The chart
and table are intended to illustrate some of the risks of investing in the Fund
by showing the changes in the Fund's performance. All returns include the
reinvestment of dividends and distributions. 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. As with all mutual
funds, past performance does not predict the Fund's future performance.
Calendar-Year Total Returns (Class A)
[BAR GRAPH]
<TABLE>
<S> <C>
1989 5.92%
1990 5.44%
1991 3.93%
1992 2.38%
1993 1.86%
1994 2.20%
1995 3.35%
1996 2.94%
1997 3.07%
1998 2.88%
</TABLE>
The Fund's year-to-date total return through September 30, 1999 was +1.94%.
For period shown in bar chart:
Best quarter: 2nd quarter 1989, +1.57%
Worst quarter: 1st quarter 1994, +0.44%
Average Annual Total Returns -- for periods ended December 31, 1998
<TABLE>
<CAPTION>
INCEPTION DATE 1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
CLASS A (%) 3/14/83 2.88 2.90 3.40
- ------------------------------------------------------------------
CLASS B (%) 3/14/83 (3.13) 1.96 3.11(1)
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CLASS C (%) 8/1/97 1.48 2.45(1) 3.17(1)
- ------------------------------------------------------------------
</TABLE>
(1) With shareholder approval, on September 28, 1995, the Fund converted to
a master fund/feeder fund structure, which invests all of its assets in
the Portfolio, a municipal money market master fund that has the same
investment objective as the Fund. Investment performance for periods
prior to that date is for the Portfolio. Although the performance does
take current sales charges into account, it has not been adjusted to
take into account the fact that the classes offered subsequent to
September 28, 1995 bear different class specific expenses than the
Portfolio (e.g. Rule 12b-1 fees).
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4
<PAGE>
THE FUND
UNDERSTANDING EXPENSES
SALES CHARGES are paid directly by shareholders to Liberty Funds Distributor,
Inc., the Fund's distributor.
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund. They include
management fees, 12b-1 fees, brokerage costs, and administrative costs including
pricing and custody services.
EXAMPLE EXPENSES help you compare the cost of investing in the Fund to 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
- - Fund operating expenses remain the same
- - Assumes reinvestment of all dividends and distributions
YOUR EXPENSES
Expenses are one of several factors to consider before you invest in a mutual
fund. The tables below describe the fees and expenses you may pay when you buy,
hold and sell shares of the Fund.
SHAREHOLDER FEES (2) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum sales charge (load) on purchases (%)
(as a percentage of the offering price) 0.00 0.00 0.00
- ------------------------------------------------------------------------------------
Maximum deferred sales charge (load) on
redemptions (%) (as a percentage of the
offering price) 1.00(3) 5.00 1.00
- ------------------------------------------------------------------------------------
Redemption fee (%)(4) (as a percentage of
amount redeemed, if applicable) None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED DIRECTLY FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Administration fee(5) (%) 0.25 0.25 0.25
- ------------------------------------------------------------------------------------
Distribution and service (12b-1) fees (%) 0.00 1.00 1.00(7)
- ------------------------------------------------------------------------------------
Other expenses(5) (%) 1.25 1.25 1.25
- ------------------------------------------------------------------------------------
Total annual fund operating expenses(5)(6) (%) 1.50 2.50 2.50(7)
</TABLE>
EXAMPLE EXPENSES (YOUR ACTUAL COSTS MAY BE HIGHER OR LOWER)
<TABLE>
<CAPTION>
CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A $ 153 $ 476 $ 821 $ 1,796
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Class B: did not sell your shares $ 754 $ 1,080 $ 1,533 $ 2,590
sold all your shares at
the end of the period $ 254 $ 780 $ 1,333 $ 2,656
--------------------------------------------------------------------------------------
Class C: did not sell your shares $ 354 $ 780 $ 1,333 $ 2,841
sold all your shares at
the end of the period $ 254 $ 780 $ 1,333 $ 2,841
</TABLE>
(2) A $10.00 annual fee is deducted from accounts of less than $1,000.00
and paid to the transfer agent.
(3) This charge applies only to certain Class A shares bought without an
initial sales charge that are sold within 18 months of purchase.
(4) There is a $7.50 charge for wiring sale proceeds to your bank.
(5) The Fund's administrator has voluntarily agreed to waive certain Fund
expenses. As a result, the actual administration fees for each share
class would have been 0.00%, other expenses for each share class would
have been 0.75% and total annual operating expenses for Class A, B and
C would have been 0.75%, 1.75% and 1.75%, respectively.
(6) Annual fund operating expenses consist of Fund expenses plus the
Fund's share of the expenses of the Portfolio.
(7) The Fund's distributor has voluntarily agreed to waive a portion of the
12b-1 fee for Class C shares. As a result, the actual 12b-1 fee for
Class C shares would have been 0.40% and the total annual fund
operating expenses would have been 1.15%. The 1.15% total annual fund
operating expenses reflects the administrator's waiver discussed in
footnote (4).
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5
<PAGE>
YOUR ACCOUNT
INVESTMENT MINIMUMS(8)
<TABLE>
<S> <C>
Initial Investment............. $ 1,000
Subsequent Investments......... $ 50
Automatic Investment Plans..... $ 50
Retirement Plans............... $ 25
</TABLE>
HOW TO BUY SHARES
Your financial advisor can help you establish an appropriate investment
portfolio, buy shares and monitor your investments. When the Fund receives your
purchase request in "good form," your shares will be bought at the next
calculated price. "Good form" means that you placed your order with your
brokerage firm or your payment has been received and your application is
complete, including all necessary signatures.
OUTLINED BELOW ARE THE VARIOUS OPTIONS FOR BUYING SHARES:
METHOD INSTRUCTIONS
Through your Your financial advisor can help you establish your
financial advisor account and buy Fund shares on your behalf.
By check For new accounts, send a completed application and
(new account) check made payable to the Fund to the transfer agent,
Liberty Funds Services, Inc., P.O. Box 1722, Boston,
MA 02105-1722.
By check For existing accounts, fill out and return the
(existing account) additional investment stub included in your quarterly
statement, or send a letter of instruction including
your Fund name and account number with a check made
payable to the Fund to Liberty Funds Services, Inc.,
P.O. Box 1722, Boston, MA 02105-1722.
By exchange You or your financial advisor may acquire shares by
exchanging shares you own in one fund for shares of
the same class of the Fund at no additional cost.
There may be an additional charge if exchanging from
a money market fund. To exchange by telephone, call
1-800-422-3737.
By wire You may purchase shares by wiring money from your
bank account to your fund account. To wire funds to
your fund account, call 1-800-422-3737 to obtain a
control number and the wiring instructions.
By electronic You may purchase shares by electronically
funds transfer transferring money from your bank account to your
fund account by calling 1-800-422-3737. Your money
may take up to two business days to be invested. You
must set up this feature prior to your telephone
request. Be sure to complete the appropriate section
of the application.
Automatic You can make monthly or quarterly investments
investment plan automatically from your bank account to your fund
account. You can select a pre-authorized amount to be
sent via electronic funds transfer. Be sure to
complete the appropriate section of the application
for this feature.
By dividend You may automatically invest dividends distributed by
diversification one fund into the same class of shares of the Fund at
no additional sales charge. To invest your dividends
in another fund, call 1-800-345-6611.
(8) The Fund reserves the right to change the investment minimums. The Fund
also reserves the right to refuse a purchase order for any reason,
including if it believes that doing so would be in the best interest of
the Fund and its shareholders.
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6
<PAGE>
YOUR ACCOUNT
CHOOSING A SHARE CLASS
The Fund offers three classes of shares in this prospectus -- CLASS A, B and C.
Each share class has its own sales charge and expense structure. Determining
which share class is best for you depends on the dollar amount you are investing
and the number of years for which you are willing to invest. Purchases of
$250,000 or more but less than $1 million can be made only in Class A or Class C
shares. Purchases of $1 million or more are automatically invested in Class A
shares. Based on your personal situation, your investment advisor can help you
decide which class of shares makes the most sense for you.
SALES CHARGES
You may be subject to a contingent deferred sales charge (CDSC) when you sell
shares of the Fund. These sales charges are described below. In certain
circumstances, these sales charges are waived, as described below and in the
Statement of Additional Information.
CLASS A SHARES Your purchases of Class A shares generally are at net asset value
(NAV), which is the value of a Fund share excluding any sales charge, and are
not subject to an initial sales charge when you purchase shares of the Fund.(9)
(9) Class A shares aggregating $1 million to $5 million at the time of
purchase are subject to a 1% CDSC if the shares are sold within 18
months of the time of purchase. Subsequent Class A share purchases that
bring your account value above $1 million are subject to a 1% CDSC if
redeemed within 18 months of their purchase date. The 18-month period
begins on the first day of the month following each purchase.
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7
<PAGE>
YOUR ACCOUNT
UNDERSTANDING CONTINGENT DEFERRED SALES CHARGES (CDSC)
Certain investments in Class A, B and C shares are subject to a CDSC, a sales
charge applied at the time you sell your shares. You will pay the CDSC only on
shares you sell within a certain amount of time after purchase. The CDSC
generally declines each year until there is no charge for selling shares. The
CDSC is applied to the net asset value at the time of purchase or sale,
whichever is lower. For purposes of calculating the CDSC, the start of the
holding period is the month-end of the month in which the purchase is made.
Shares you purchase with reinvested dividends or capital gains are not subject
to a CDSC. When you place an order to sell shares, the Fund will automatically
sell first those shares not subject to a CDSC and then those you have held the
longest. This policy helps reduce and possibly eliminate the potential impact of
the CDSC.
CLASS B SHARES Your purchases of Class B shares are at the Fund's NAV. Class B
shares carry a CDSC that is imposed only on shares sold prior to the completion
of the periods shown in the chart below. The CDSC generally declines each year
and eventually disappears over time. Class B shares automatically convert to
Class A shares after eight years. The distributor pays the financial advisor
firm an up-front commission of 4.00% on sales of Class B shares.
CLASS B SALES CHARGES
<TABLE>
<CAPTION>
HOLDING PERIOD AFTER PURCHASE % DEDUCTED WHEN
SHARES ARE SOLD
<S> <C>
Through first year 5.00
- ------------------------------------------------------------------------
Through second year 4.00
- ------------------------------------------------------------------------
Through third year 3.00
- ------------------------------------------------------------------------
Through fourth year 3.00
- ------------------------------------------------------------------------
Through fifth year 2.00
- ------------------------------------------------------------------------
Through sixth year 1.00
- ------------------------------------------------------------------------
Longer than six years 0.00
</TABLE>
CLASS C SHARES Similar to Class B shares, your purchases of Class C shares are
at the Fund's NAV. Class C shares carry a CDSC of 1% that is applied to shares
sold within the first year after they are purchased. After holding shares for
one year, you may sell them at any time without paying a CDSC. The distributor
pays the financial advisor firm an up-front commission of 1.00% on sales of
Class C shares.
CLASS C SALES CHARGES
<TABLE>
<CAPTION>
YEARS AFTER PURCHASE % DEDUCTED WHEN SHARES ARE SOLD
<S> <C>
Through first year 1.00
- ---------------------------------------------------------------------------------
Longer than one year 0.00
</TABLE>
HOW TO EXCHANGE SHARES
You may exchange your shares for shares of the same share class of another fund
distributed by Liberty Funds Distributor, Inc. at net asset value. If your
shares are subject to a CDSC, you will not be charged a CDSC upon the exchange.
However, when you sell the shares acquired through the exchange, the shares sold
may be subject to a CDSC, depending upon when you originally purchased the
shares you exchanged. For purposes of computing the CDSC, the length of time you
have owned your shares will be computed from the date of your original purchase
and the applicable CDSC will be the CDSC of the original fund. Unless your
account is part of a tax-deferred retirement plan, an exchange is a taxable
event. Therefore, you may realize a gain or a loss for tax purposes. The Fund
may terminate your exchange privilege if the advisor determines that your
exchange activity is likely to adversely impact its ability to manage the Fund.
To exchange by telephone, call 1-800-422-3737.
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<PAGE>
YOUR ACCOUNT
HOW TO SELL SHARES
Your financial advisor can help you determine if and when you should sell your
shares. You may sell shares of the Fund on any regular business day that the New
York Stock Exchange (NYSE) is open.
When the Fund receives your sales request in "good form," shares will be sold at
the next calculated price. In "good form" means that money used to purchase your
shares is fully collected. When selling shares by letter of instruction, "good
form" also means (i) your letter has complete instructions, the proper
signatures and signature guarantees, and (ii) any other required documents are
attached. For additional documents required for sales by corporations, agents,
fiduciaries and surviving joint owners, please call 1-800-345-6611. Retirement
plan accounts have special requirements; please call 1-800-799-7526 for more
information.
The Fund will generally send proceeds from the sale to you within seven days
(usually on the next business day after your request is received in "good
form"). However, if you purchased your shares by check, the Fund may delay
sending the proceeds from the sale of your shares for up to 15 days after your
purchase to protect against checks that are returned. No interest will be paid
on uncashed redemption checks.
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9
<PAGE>
YOUR ACCOUNT
OUTLINED BELOW ARE THE VARIOUS OPTIONS FOR SELLING SHARES:
METHOD INSTRUCTIONS
Through your You may call your financial advisor to place your
financial advisor sell order. To receive the current trading day's
price, your financial advisor firm must receive your
request prior to the close of the NYSE, usually 4:00
p.m. Eastern time.
By exchange You or your financial advisor may sell shares by
exchanging from the Fund into the same share class of
another fund. To exchange by telephone, call
1-800-422-3737.
By telephone You or your financial advisor may sell shares by
telephone and request that a check be sent to your
address of record by calling 1-800-422-3737, unless
you have notified the Fund of an address change
within the previous 30 days. The dollar limit for
telephone sales is $100,000 in a 30-day period. You
do not need to set up this feature in advance of your
call. Certain restrictions apply to retirement
accounts. For details, call 1-800-345-6611.
By mail You may send a signed letter of instruction or stock
power form to the address below. In your letter of
instruction, note the Fund's name, share class,
account number, and the dollar value or number of
shares you wish to sell. All account owners must sign
the letter, and signatures must be guaranteed by
either a bank, a member firm of a national stock
exchange or another eligible guarantor institution.
Additional documentation is required for sales by
corporations, agents, fiduciaries, surviving joint
owners and individual retirement account owners. For
details, call 1-800-345-6611.
Mail your letter of instruction to Liberty Funds
Services, Inc., P.O. Box 1722, Boston, MA 02105-1722.
By wire You may sell shares and request that the proceeds be
wired to your bank. You must set up this feature
prior to your telephone request. Be sure to complete
the appropriate section of the account application
for this feature.
By electronic You may sell shares and request that the proceeds be
funds transfer electronically transferred to your bank. Proceeds may
take up to two business days to be received by your
bank. You must set up this feature prior to your
request. Be sure to complete the appropriate section
of the account application for this feature.
DISTRIBUTION AND SERVICE FEES
The Fund has adopted a plan under Rule 12b-1 that permits it to pay marketing
and other fees to support the sale and distribution of Class B and C shares and
the services provided to you by your financial advisor. The annual distribution
fee and service fee may equal up to 0.75% and 0.25%, respectively, for each of
Class B and Class C shares and are paid out of the assets of these classes. The
distributor has voluntarily agreed to waive a portion of the Class C share
distribution fee so that it does not exceed 0.15% annually. Over time, these
fees will increase the cost of your shares and may cost you more than paying
other types of sales charges.(10)
(10) Class B shares automatically convert to Class A shares after eight
years, eliminating the distribution fee upon conversion.
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10
<PAGE>
YOUR ACCOUNT
OTHER INFORMATION ABOUT YOUR ACCOUNT
HOW THE FUND'S SHARE PRICE IS DETERMINED The price of each class of the Fund's
shares is based on its NAV. The NAV is determined at the close of the NYSE,
usually 4:00 p.m. Eastern time, on each business day that the NYSE is open
(typically Monday through Friday).
When you request a transaction, it will be processed at the NAV next determined
after your request is received in "good form" by the distributor. In most cases,
in order to receive that day's price, the distributor must receive your order
before that day's transactions are processed. If you request a transaction
through your financial advisor's firm, the firm must receive your order by the
close of trading on the NYSE to receive that day's price.
The Fund determines its NAV for each share class by dividing each class' total
net assets by the number of that class' shares outstanding. Portfolio securities
are valued based on their amortized cost, which does not take into account
unrealized gains or losses. Securities for which market quotations are available
are valued each day at the current market value. However, where market
quotations are unavailable, or when the advisor believes that subsequent events
have made them unreliable, the Fund may use other data to determine the fair
value of the securities.
You can find the daily prices of some share classes for the Fund in most major
daily newspapers under the caption "Liberty." You can find daily prices for all
share classes by visiting the Fund's web site at www.libertyfunds.com.
ACCOUNT FEES If your account value falls below $1,000 (other than as a result of
depreciation in share value), you may be subject to an annual account fee of
$10. This fee is deducted from the account in June each year. Approximately 60
days prior to the fee date, the Fund's transfer agent will send you written
notification of the upcoming fee. If you add money to your account and bring the
value above $1,000 prior to the fee date, the fee will not be deducted.
SHARE CERTIFICATES Share certificates are not available.
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11
<PAGE>
YOUR ACCOUNT
UNDERSTANDING FUND DISTRIBUTIONS
The Fund earns income from the securities the Portfolio holds. The Fund also may
realize capital gains and losses on sales of securities. The Fund distributes
substantially all of its net investment income and capital gains to
shareholders. As a shareholder, you are entitled to a portion of the Fund's
income and capital gains based on the number of shares you own at the time these
distributions are declared.
DIVIDENDS, DISTRIBUTIONS, AND TAXES The Fund has the potential to make the
following distributions:
TYPES OF DISTRIBUTIONS
Dividend Represents interest and dividends earned from
securities held by the Fund.
Capital gains Represents long-term capital gains on sales of
securities held for more than 12 months and
short-term capital gains, which are gains on sales of
securities held for a 12-month period or less.
DISTRIBUTION OPTIONS The Fund declares dividends daily and pays them monthly,
and any capital gains (including short-term capital gains) at least annually.
Dividends begin to accrue on the day that we receive payment and stop accruing
on the day prior to the shares leaving the account. You can choose one of the
options listed in the table below for these distributions when you open your
account.(11) To change your distribution option call 1-800-345-6611.
DISTRIBUTION OPTIONS
Reinvest all distributions in additional shares of your current fund
Reinvest all distributions in shares of another fund
Receive dividends in cash (see options below) and reinvest capital gains(12)
Receive all distributions in cash (with one of the following options) (12):
- - send the check to your address of record
- - send the check to a third party address
- - transfer the money to your bank via electronic funds transfer
TAX CONSEQUENCES For federal income tax purposes, distributions of investment
income by the Fund, whether in cash or additional securities, will ordinarily
constitute tax-exempt income. Generally, gains realized by the Fund on the sale
or exchange of investments, the income from which is tax-exempt, will be taxable
to shareholders. In addition, an investment in the Fund may result in liability
for federal alternative minimum tax for both individuals and corporate
shareholders.
You will be provided with information each year regarding the amount of ordinary
income and capital gains distributed to you for the previous year and any
portion of your distribution which is exempt from state and local taxes. Your
investment in the Fund may have additional personal tax implications. Please
consult your tax advisor on federal, state, local or other applicable tax laws.
In addition to the dividends and capital gains distributions made by the Fund,
you may realize a capital gain or loss when selling and exchanging shares of the
Fund. Such transactions may be subject to federal, state and local income tax.
(11) If you do not indicate on your application your preference for handling
distributions, the Fund will automatically reinvest all distributions
in additional shares of the Fund.
(12) Distributions of $10 or less will automatically be reinvested in
additional Fund shares. If you elect to receive distributions by check
and the check is returned as undeliverable, or if you do not cash a
distribution check within six months of the check date, the
distribution will be reinvested in additional shares of the Fund.
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12
<PAGE>
MANAGING THE FUND
INVESTMENT ADVISOR
Stein Roe & Farnham Incorporated (Stein Roe), located at One South Wacker Drive,
Chicago, Illinois 60606, is the Fund's investment advisor. In its duties as
investment advisor, Stein Roe runs the Portfolio's day-to-day business,
including placing all orders for the purchase and sale of the portfolio
securities. Stein Roe has been an investment advisor since 1949. As of September
30, 1999, Stein Roe managed over $29.7 billion in assets.
Stein Roe's mutual funds and institutional investment advisory businesses are
part of a larger business unit that includes several separate legal entities
known as Liberty Funds Group LLC (LFG). LFG includes certain affiliates of Stein
Roe, principally Colonial Management Associates, Inc. (Colonial). Stein Roe and
the LFG business unit are managed by a single management team. Stein Roe,
Colonial and the other LFG entities also share personnel, facilities and systems
that may be used in providing administrative or operational services to the
Fund. Colonial is a registered investment advisor. Stein Roe, Colonial and the
other entities that make up LFG are subsidiaries of Liberty Financial Companies,
Inc.
For the 1999 fiscal year, aggregate advisory fees paid to Stein Roe by the Fund
amounted to 0.00% of average daily net assets of the Fund.
MASTER/FEEDER STRUCTURE
Unlike mutual funds that directly acquire and manage their own portfolios of
securities, the Fund is a "feeder" fund in a "master/feeder" structure. This
means that the Fund invests its assets in a larger "master" portfolio of
securities (the Fund's corresponding Portfolio) that has an investment objective
and policies substantially identical to those of the Fund. The investment
performance of the Fund depends upon the investment performance of its
Portfolio. If the investment policies of the Fund and its Portfolio became
inconsistent, the Board of Trustees of the Fund can decide what actions to take.
Actions the Board of Trustees may recommend include withdrawal of the Fund's
assets
---
13
<PAGE>
MANAGING THE FUND
from the Portfolio. For more information on the master/feeder fund structure,
see the Statement of Additional Information.
---
14
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
UNDERSTANDING THE FUND'S
OTHER INVESTMENTS AND RISKS
The Fund's primary investments and risks are described under "The Fund - Primary
Investment Strategies" and "The Fund - Primary Investment Risks." In seeking to
meet its investment goal, the Portfolio may also invest in other securities and
use certain investment techniques. These securities and investment techniques
offer opportunities and carry various risks.
The Portfolio may elect not to buy any of these securities or use any of these
techniques unless it believes that doing so will help the Fund achieve its
investment goal. The Fund may not always achieve its investment goal.
Additional information about the Portfolio's securities and investment
techniques, as well as the Fund's fundamental and non-fundamental investment
policies, is contained in the Statement of Additional Information.
The Fund's primary investment strategies and their associated risks are
described below. This section describes other investments the Portfolio may make
and the risks associated with them. In seeking to achieve its goal, the
Portfolio may invest in various types of securities and engage in various
investment techniques which are not the principal focus of the Portfolio and
therefore are not described in this prospectus. These types of securities and
investment practices are identified and discussed in the Fund's Statement of
Additional Information, which you may obtain free of charge (see back cover).
Approval by the Fund's shareholders is not required to modify or change the
Fund's investment goal or investment strategies except the fundamental policy
that at least 80% of the Portfolio's investment will produce income that is
exempt from federal income tax, except during periods that the advisor believes
require a temporary defensive position for the protection of shareholders.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
When-issued securities and forward commitments are securities that are purchased
prior to the date they are actually issued or delivered. These securities
involve the risk that they may fall in value by the time they are actually
issued or that the other party may fail to honor the contract terms.
---
15
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
INTERFUND LENDING PROGRAM
The Fund and Portfolio may lend money to and borrow money from other funds
advised by Stein Roe. They will do so when Stein Roe believes such lending or
borrowing is necessary and appropriate. Borrowing costs will be the same as or
lower than the costs of a bank loan.
YEAR 2000 COMPLIANCE
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the advisor, other service providers and the companies
in which the Fund invests do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known as
the "Year 2000 Problem." The Fund's service providers are taking steps that they
believe are reasonably designed to address the Year 2000 Problem, including
communicating with vendors who furnish services, software and systems to the
Fund, to provide that date-related information and data can be properly
processed after January 1, 2000. Many mutual fund service providers and vendors,
including the Fund's service providers, are in the process of making Year 2000
modifications to their software and systems and believe that such modifications
will be completed on a timely basis prior to January 1, 2000. In addition, Year
2000 readiness is one of the factors considered by the advisor in its assessment
of companies in which the Fund invests to the extent that information is readily
available. However, no assurances can be given that the Fund will not be
adversely affected by these matters.
---
16
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance. Information is shown for the Fund's last five fiscal
years, which run from July 1 to June 30. Certain information reflects financial
results for a single Fund share. The total returns in the table represent the
rate that you would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information is included
in the Fund's financial statements which have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report, along with
the Fund's financial statements, is included in the annual report. You can
request a free annual report by calling 1-800-426-3750.
THE FUND
<TABLE>
<CAPTION>
Year ended June 30,
1999 1998 1997
Class A Class B Class C Class A Class B Class C(c) Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value--
Beginning of period ($) 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income (a)(b) 0.026 0.016 0.022(d) 0.030 0.023 0.024(e) 0.029 0.021
- ------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS ($):
From net investment income (0.026) (0.016) (0.022) (0.030) (0.023) (0.024) (0.029) (0.021)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value--
End of period ($) 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
- ------------------------------------------------------------------------------------------------------------------------------
Total return (%) (f)(g) 2.68 1.65 2.27(h) 3.03 2.31 2.40(h)(i) 2.98 2.12
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses (b) 0.75 1.75 1.15(d) 0.75 1.48 1.15(e)(j) 0.75 1.66
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income (b) 2.66 1.66 2.26(d) 3.02 2.29 2.62(e)(j) 2.94 2.03
- ------------------------------------------------------------------------------------------------------------------------------
Fees and expenses waived or borne by the
Advisor/Administrator (b) 0.75 0.75 0.75 0.70 0.70 0.70(j) 0.46 0.46
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000) ($) 12,604 1,099 178 16,389 1,270 176 18,450 1,203
- ------------------------------------------------------------------------------------------------------------------------------
(a) Net of fees and expenses waived or
borne by the Administrator which
amounted to ($): 0.008 0.008 0.008 0.007 0.007 0.007 0.005 0.005
</TABLE>
(b) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses
of SR&F Municipal Money Market Portfolio.
(c) Class C shares were initially offered on August 1, 1997. Per share
amounts reflect activity from that date.
(d) Net of fees waived by the Distributor which amounted to $0.006 per
share and 0.60%.
(e) Net of fees waived by the Distributor which amounted to $0.005 per
share and 0.60% (annualized).
(f) Total return at net asset value assuming all distributions reinvested
and no contingent deferred sales charge.
(g) Had the Advisor/Administrator not waived or reimbursed a portion of
expenses, total return would have been reduced.
(h) Had the distributor not waived or reimbursed a portion of expenses,
total return would have been reduced.
(i) Not annualized.
(j) Annualized.
---
17
<PAGE>
FINANCIAL HIGHLIGHTS
THE FUND
<TABLE>
<CAPTION>
Year ended June 30, Year ended November 30,
1996(b) 1995(c) 1994
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Net asset value--
Beginning of period ($) 1.000 1.000 1.000 1.000 1.000 1.000
- --------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income (a) 0.030(d) 0.020(d) 0.018 0.012 0.020 0.010
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS ($):
From net investment income (0.030) (0.020) (0.018) (0.012) (0.020) (0.010)
- --------------------------------------------------------------------------------------------------------------
Net asset value--
End of period ($) 1.000 1.000 1.000 1.000 1.000 1.000
- --------------------------------------------------------------------------------------------------------------
Total return (%) (e)(f) 3.04 2.02 1.80(g) 1.20(g) 2.00 1.01
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (%):
Expenses 0.75(d) 1.75(d) 0.75(h) 1.75(h) 0.60 1.60
- --------------------------------------------------------------------------------------------------------------
Net investment income 3.00(d) 2.00(d) 3.05(h) 2.05(h) 2.05 1.05
- --------------------------------------------------------------------------------------------------------------
Fees and expenses waived or borne
by the Advisor/Administrator 0.84(d) 0.84(d) 0.36(h) 0.36(h) 0.59 0.59
- --------------------------------------------------------------------------------------------------------------
Net assets at end of period (000) ($) 19,676 1,235 24,675 3,111 28,808 3,867
- --------------------------------------------------------------------------------------------------------------
(a) Net of fees and expenses waived or
borne by the Advisor/Administrator
which amounted to ($): 0.008 0.008 0.002 0.002 0.006 0.006
</TABLE>
(b) Effective September 28, 1995, Stein Roe became the advisor of the Fund.
(c) The Fund changed its fiscal year end from November 30 to June 30 in
1995.
(d) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses
of SR&F Incorporated Municipal Money Market Portfolio.
(e) Total return at net asset value assuming all distributions reinvested
and no contingent deferred sales charge.
(f) Had the Advisor/Administrator not waived or reimbursed a portion of
expenses, total return would have been reduced.
(g) Not annualized.
(h) Annualized.
---
18
<PAGE>
NOTES
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19
<PAGE>
NOTES
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---
20
<PAGE>
FOR MORE INFORMATION
You can get more information about the Fund's investments in the Fund's
semi-annual and annual reports to shareholders. The annual report contains a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance over its last fiscal year.
You may wish to read the Statement of Additional Information for more
information on the Fund and the securities in which it invests. The Statement of
Additional Information is incorporated into this prospectus by reference, which
means that it is considered to be part of this prospectus.
You can get free copies of reports and the Statement of Additional Information,
request other information and discuss your questions about the Fund by writing
or calling the Fund's distributor at:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-426-3750
www.libertyfunds.com
Text-only versions of all Fund documents can be viewed online or downloaded from
the Securities and Exchange Commission at www.sec.gov.
You can review and copy information about the Fund by visiting the following
location, and you can obtain copies, upon payment of a duplicating fee, by
writing the:
Public Reference Room
Securities and Exchange Commission
Washington, DC 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330.
INVESTMENT COMPANY ACT FILE NUMBER:
Liberty Funds Trust IV (formerly Colonial Trust IV): 811-2865
- - Colonial Municipal Money Market Fund
[LIBERTY LETTERHEAD]
TM-01/795 H-0999
<PAGE>
COLONIAL MUNICIPAL MONEY MARKET FUND
A SERIES OF LIBERTY FUNDS TRUST IV
Statement of Additional Information
November 1, 1999
This Statement of Additional Information (SAI) contains information which may be
useful to investors but which is not included in the Prospectus of Colonial
Municipal Money Market Fund (Fund). This SAI is not a prospectus and is
authorized for distribution only when accompanied or preceded by the Prospectus
of the Fund dated October 28, 1999. This SAI should be read together with the
Prospectus and the Fund's most recent annual report dated June 30, 1999.
Investors may obtain a free copy of the Prospectus and the annual report from
Liberty Funds Distributor, Inc. (LFD), One Financial Center, Boston, MA
02111-2621. The financial statements and Report of Independent Accountants
appearing in the June 30, 1999 Annual Report of the Fund are incorporated in
this SAI by reference.
Part 1 of this SAI contains specific information about the Fund. Part 2 includes
information about the funds distributed by LFD generally and additional
information about certain securities and investment techniques described in the
Fund's Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART 1
Definitions b
Organization and History b
Investment Objective and Policies b
Fundamental Investment Policies b
Other Investment Policies c
Fund Charges and Expenses d
Investment Performance f
Custodian of the Fund h
Independent Accountants of the Fund h
Management of the Base Trust h
Information Concerning the Portfolio i
PART 2
Miscellaneous Investment Practices 1
Taxes 11
Management of the Funds 14
Determination of Net Asset Value 20
How to Buy Shares 21
Special Purchase Programs/Investor Services 22
Programs for Reducing or Eliminating Sales Charges 23
How to Sell Shares 26
Distributions 27
How to Exchange Shares 27
Suspension of Redemptions 28
Shareholder Liability 28
Shareholder Meetings 28
Performance Measures 29
Appendix I 31
Appendix II 36
</TABLE>
TM-16/810H-0999
a
PART 1
COLONIAL MUNICIPAL MONEY MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1999
DEFINITIONS
<TABLE>
<S> <C>
"Trust" Liberty Funds Trust IV
"Fund" Colonial Municipal Money Market Fund
"Administrator" Colonial Management Associates, Inc., the Fund's administrator
"LFD" Liberty Funds Distributor, Inc., the Fund's distributor
"LFS" Liberty Funds Services, Inc., the Fund's shareholder services and transfer agent
"Base Trust" SR&F Base Trust, a Massachusetts business trust
"Portfolio" SR&F Municipal Money Market Portfolio, a series of the Base Trust
"Advisor" Stein Roe & Farnham Incorporated, the Portfolio's investment advisor
</TABLE>
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized in 1978. The Fund is the
successor to Colonial Tax-Exempt Money Market Trust, which was organized in 1987
as a Massachusetts business trust. The Fund, a non-diversified series of the
Trust, represents the entire interest in a separate portfolio of the Trust.
The Trust is not required to hold annual shareholder meetings, but special
meetings may be called for certain purposes. Shareholders receive one vote for
each Fund share. Shares of the Fund and of any other series of the Trust that
may be in existence from time to time generally vote together except when
required by law to vote separately by fund or by class. Shareholders owning in
the aggregate ten percent of Trust shares may call meetings to consider removal
of Trustees. Under certain circumstances, the Trust will provide information to
assist shareholders in calling such a meeting.
The Fund changed its name from "Colonial Tax-Exempt Money Market" to its current
name on September 28, 1995, and the Trust changed its name from "Colonial Trust
II" to its current name on April 1, 1999.
INVESTMENT OBJECTIVE AND POLICIES
As described in the Fund's Prospectus, the Fund currently seeks to achieve its
investment objective by investing all its assets in the Portfolio. Part 1 of
this SAI includes additional information concerning the Fund and the Portfolio
including, among other things, a description of the Fund's and the Portfolio's
fundamental investment policies. Except where otherwise indicated, references to
the Fund in connection with descriptions of investment policies and practices
shall include the Portfolio. Part 2 contains additional information about the
following securities and investment techniques that are described and referred
to in the Prospectus and that may be utilized by the Portfolio:
Short-term Trading
Tender Option Bonds
Repurchase Agreements
Reverse Repurchase Agreements
Money Market Instruments
Forward Commitments
Participation Interests
Stand-by Commitments
Except as indicated below under "Fundamental Investment Policies," the Fund's
and the Portfolio's investment policies are not fundamental, and the Fund's or
the Portfolio's Trustees may change the policies without shareholder approval.
FUNDAMENTAL INVESTMENT POLICIES
The Investment Company Act of 1940 (Act) provides that a "vote of a majority of
the outstanding voting securities" means the affirmative vote of the lesser of
(1) more than 50% of the outstanding shares of the Fund or the Portfolio, or (2)
67% or more of the shares present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. The
following fundamental investment policies can not be changed without such a
vote.
b
Total assets and net assets are determined at current value for purposes of
compliance with investment restrictions and policies. All percentage limitations
will apply at the time of investment and are not violated unless an excess or
deficiency occurs as a result of such investment. For the purpose of the Act's
diversification requirement, an issuer is the entity whose revenues support the
security.
As fundamental policies, neither the Fund nor the Portfolio may:
1. Invest in a security if, with respect to 75% of the Portfolio's assets,
as a result of such investment, more than 5% of its total assets (taken
at market value at the time of such investment) would be invested in
the securities of any one issuer (for this purpose, the issuer(s) of a
security being deemed to be only the entity or entities whose assets or
revenues are subject to the principal and interest obligations of the
security), except (1) in the case of a guarantor of securities
(including an issuer of a letter of credit), the value of the guarantee
(or letter of credit) may be excluded from this computation if the
aggregate value of securities owned by the Fund or the Portfolio and
guaranteed by such guarantor (plus any other investments of the Fund or
the Portfolio in securities issued by the guarantor) does not exceed
10% of the Fund's or the Portfolio's total assets, (2) this restriction
does not apply to U.S. government securities or repurchase agreements
for such securities and (3) the Fund may invest all or substantially
all of its assets in another registered investment company having the
same investment objective and substantially similar investment
policies(1);
2. Purchase any securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities
(this restriction does not apply to securities purchased on a
when-issued or delayed-delivery basis or to reverse repurchase
agreements);
3. Make loans, although the Portfolio may (a) participate in an interfund
lending program with other Stein Roe Funds provided that no such loan
may be made if, as a result, the aggregate of such loans would exceed
33 1/3% of the value of the Portfolio's total assets; (b) purchase
money market instruments and enter into repurchase agreements; and (c)
acquire publicly-distributed or privately placed debt securities;
4. Borrow, except that it may (a) borrow for non-leveraging, temporary or
emergency purposes, and (b) engage in reverse repurchase agreements and
make other borrowings, provided that the combination of (a) and (b)
shall not exceed 33 1/3% of the value of its total assets (including
the amount borrowed) less liabilities (other than borrowings) or such
other percentage permitted by law; the Portfolio and the Fund may
borrow from banks, other Stein Roe Funds, and other persons to the
extent permitted by applicable law;
5. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund or the
Portfolio, except as may be necessary in connection with borrowings
permitted in (4) above;
6. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in securities of non-governmental issuers
whose principal business activities are in the same industry;
7. Purchase portfolio securities for the Fund or the Portfolio from, or
sell portfolio securities to, any of the officers, directors or
trustees of the Trust, the Base Trust or the Portfolio's investment
advisor;
8. Purchase or sell commodities or commodities contracts or oil, gas or
mineral programs;
9. Purchase any securities other than those described in the Prospectus;
10. Issue any senior securities except to the extent permitted under the
Investment Company Act of 1940;
11. Purchase or sell real estate (other than Municipal Securities or money
market securities secured by real estate or interests therein or such
securities issued by companies which invest in real estate or interests
therein); and
12. Act as an underwriter of securities, except that the Fund or the
Portfolio may participate as part of a group in bidding, or bid alone,
for the purchase of Municipal Securities directly from an issuer for
the Fund's or the Portfolio's own portfolio.
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed without a
shareholder vote, neither the Fund nor the Portfolio may:
1. Own more than 10% of the outstanding voting securities of an issuer,
except that the Fund may invest all or substantially all of its assets
in another registered investment company having the same investment
objective and substantially similar investment policies;
2. Invest in companies for the purpose of exercising control or
management, except that all or substantially all of the assets of the
Fund may be invested in another registered investment company having
the same investment objective and substantially similar investment
policies;
(1) Notwithstanding the foregoing, and in accordance with Rule 2a-7 under the
Investment Company Act of 1940 (Rule), the Fund or the Portfolio will not,
immediately after the acquisition of any security (other than a government
security or certain other securities as permitted under the Rule) invest more
than 5% of its assets in the securities of any one issuer; provided, however,
that the Fund or the Portfolio may invest up to 25% of its total assets in First
Tier Securities (as that term is defined in the Rule) of a single issuer for a
period of up to three business days after the purchase thereof.
c
3. Make investments in the securities of other investment companies,
except in connection with a merger, consolidation, or reorganization,
except that the Fund may invest all or substantially all of its assets
in another registered investment company having the same investment
objective and substantially similar investment policies;
4. Invest more than 10% of its net assets (taken at market value at the
time of each purchase) in illiquid securities, including repurchase
agreements maturing in more than seven days;
5. Sell securities short unless (1) the Fund or the Portfolio owns or has
the right to obtain securities equivalent in kind and amount to those
sold short at no added cost or (2) the securities sold are
"when-issued" or "when-distributed" securities which the Fund or the
Portfolio expects to receive in a recapitalization, reorganization or
other exchange for securities the Fund or the Portfolio
contemporaneously owns or has the right to obtain, and provided that
the Fund or the Portfolio may purchase stand-by commitments and
securities subject to a demand feature entitling the Portfolio to
require sellers of securities to the Fund or the Portfolio to
repurchase them upon demand by the Fund or the Portfolio; and
6. Purchase shares of other open-end investment companies, except in
connection with a merger, consolidation, acquisition, or
reorganization.
FUND CHARGES AND EXPENSES
Aggregate Fund expenses include the Fund's proportionate share of the expenses
of the Portfolio, which are borne indirectly by the Fund, and the Fund's direct
expenses. The Portfolio's expenses include (i) a management fee paid to the
Advisor at the annual rate of 0.25% of the Portfolio's average daily net assets,
(ii) a pricing and bookkeeping fee of $25,000 plus 0.0025% annually of average
daily net assets over $50 million, (iii) a monthly transfer agent fee of $500,
and (iv) custody, legal and audit fees and other miscellaneous expenses. The
Fund's direct expenses include (i) an administrative fee paid to the
Administrator at the annual rate of 0.25% of average daily net assets, (ii) a
transfer agency and shareholder services fee paid to LFS at the annual rate of
0.20% of average daily net assets plus LFS's out-of-pocket expenses, (iii) the
Rule 12b-1 fees paid to LFD described below, (iv) a pricing and bookkeeping fee
paid to the Administrator in the amount of $18,000 per year plus 0.0233% of
average daily net assets in excess of $50 million, and (v) custody, legal and
audit fees and other miscellaneous expenses.
RECENT FEES PAID BY THE FUND TO THE ADVISOR, ADMINISTRATOR, LFD AND LFS (in
thousands)
<TABLE>
<CAPTION>
Year ended June 30
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Administration fee $ 37 $ 50 $ 50
Management fee 339 359 352
Bookkeeping fee 18 18 18
Shareholder service and transfer agent fee 35 46 46
Fees and expenses waived or borne by the
Administrator (111) (139) (94)
12b-1 fees:
Service fee (Class B) 2 3 4
Service fee (Class C) 1 (a) N/A
Distribution fee (Class B) 8 5 11
Distribution fee (Class C) 1 (a) N/A
Fees waived by LFD (Class C) (1) (a) N/A
</TABLE>
(a) Rounds to less than one.
BROKERAGE COMMISSIONS
The Fund did not pay brokerage commissions during the fiscal years ended June
30, 1999, 1998 and 1997.
d
TRUSTEES AND TRUSTEES FEES
For the fiscal year ended June 30, 1999 and the calendar year ended December 31,
1998, the Trustees received the following compensation for serving as
Trustees(b):
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation From Trust And
From Fund For The Fund Complex Paid To The Trustees For
Trustee Fiscal Year Ended June 30, 1999 The Calendar Year Ended December 31, 1998(c)
- ------- ------------------------------- --------------------------------------------
<S> <C> <C>
Robert J. Birnbaum(d) $705 $ 99,429
Tom Bleasdale(d) 810(e) 115,000(f)
John Carberry(g)(h) N/A N/A
Lora S. Collins(d) 699 97,429
James E. Grinnell(d) 746 103,071
Richard W. Lowry(d) 693 98,214
Salvatore Macera(i) 433 25,250
William E. Mayer(d) 732 99,286
James L. Moody, Jr.(d) 697(j) 105,857(k)
John J. Neuhauser(d) 757 105,323
Thomas E. Stitzel(i) 433 25,250
Robert L. Sullivan(d) 757 104,100
Anne-Lee Verville(d)(g) 444(l) 23,445(m)
</TABLE>
(b) The Fund does not currently provide pension or retirement plan benefits
to the Trustees.
(c) At December 31, 1998, the complex consisted of 47 open-end and 5
closed-end management investment company portfolios in the Liberty
Funds Group - Boston (Liberty Funds) and 9 open-end management
investment portfolios in the Liberty Variable Investment Trust (LVIT)
(together, the Fund Complex).
(d) Elected by shareholders of LVIT on October 30, 1998.
(e) Includes $383 payable in later years as deferred compensation.
(f) Includes $52,000 payable in later years as deferred compensation.
(g) Elected by the Trustees of the closed-end Liberty Funds on June 18,
1998, and by the shareholders of the open-end Liberty Funds on October
30, 1998.
(h) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial Companies, Inc. (Liberty Financial).
(i) Elected by the shareholders of the open-end Liberty Funds on October
30, 1998, and by the trustees of the closed-end Liberty Funds on
December 17, 1998.
(j) Total compensation of $697 for the fiscal year ended June 30, 1999,
will be payable in later years as deferred compensation.
(k) Total compensation of $105,857 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
(l) Total compensation of $444 for the fiscal year ended June 30, 1999,
will be payable in later years as deferred compensation.
(m) Total compensation of $23,445 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
e
For the fiscal year ended December 31, 1998, some 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, Liberty All-Star Funds):
<TABLE>
<CAPTION>
Total Compensation From
Liberty All-Star Funds For The Calendar
Trustee Year Ended December 31, 1998(n)
- ------- ---------------------------------------
<S> <C>
Robert J. Birnbaum(o) $25,000
John V. Carberry(o)(p)(q) N/A
James E. Grinnell(o) 25,000
Richard W. Lowry(o) 25,000
William E. Mayer(o)(r) 14,000
John J. Neuhauser(o)(s) 25,000
</TABLE>
(n) The Liberty All-Star Funds are advised by Liberty Asset Management
Company (LAMCO). LAMCO is an indirect wholly-owned subsidiary of
Liberty Financial (an intermediate parent of the Advisor).
(o) Elected by the sole Trustee of Liberty Funds Trust IX on December 17,
1998.
(p) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial.
(q) Elected by the trustees of the Liberty All-Star Funds on June 30, 1998.
(r) Elected by the shareholders of the Liberty All-Star Equity Fund on
April 22, 1998 and by the trustees of the Liberty All-Star Growth Fund,
Inc. on December 17, 1998.
(s) Elected by the shareholders of the Liberty All-Star Funds on April 22,
1998.
OWNERSHIP OF THE FUND
As of record on September 30, 1999, the Trustees and officers of the Trust as a
group owned less than 1% of the then outstanding shares of the Fund.
As of October 1, 1999, the following shareholders owned 5% or more of a class of
the Fund's outstanding shares:
<TABLE>
<S> <C>
Class B Shares
Alan Baker Co. 12.89%
160 Sylvester Road
South San Francisco, CA 94080-6014
Charles R. Matties & Laura B. Matties JT TEN 9.27%
84 Overbrook Road
West Hartford, CT 06107
RSBCo Cust 24.45%
Emma Jean Williams
107 N. Trenton Street
Ruston, LA 71270
Class C Shares
Colonial Management Associates, Inc. 58.78%
f
Attn: Phil Iudice
One Financial Center, 11th Floor
Boston, MA 02111-2621
</TABLE>
As of record on September 30, 1999, there were 534 Class A, 50 Class B and 5
Class C shareholders of record of the Fund.
SALES CHARGES (in thousands)
<TABLE>
<CAPTION>
Class A Shares
----------------------------------------
Year ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Aggregate contingent deferred sales
charges (CDSC) on Fund redemptions
retained by LFD $ 0 $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
----------------------------------------
Year ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions
retained by LFD
$ 8 $ 9 $ 16
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
----------------------------------------
Year ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Aggregate CDSC on Fund redemptions
retained by LFD $ 0 $ 0 $ 0
</TABLE>
12b-1 PLAN, CDSCS AND CONVERSION OF SHARES
The Fund offers three classes of shares - Class A, Class B and Class C. The Fund
may in the future offer other classes of shares. The Trustees have approved a
12b-1 Plan (Plan) pursuant to Rule 12b-1 under the Act. Under the Plan, the Fund
pays LFD monthly a service fee at the annual rate of 0.25% of the Fund's net
assets attributed to its Class B and Class C shares and a distribution fee at an
annual rate of 0.75% of the average daily net assets attributed to its Class B
and Class C shares. The Distributor has voluntarily agreed to waive a portion of
the Class C share distribution fee so that it does not exceed 0.15% annually.
LFD may use the entire amount of such fees to defray the cost of commissions and
service fees paid to financial service firms (FSFs) and for certain other
purposes. Since the distribution and service fees are payable regardless of the
amount of LFD's expenses, LFD may realize a profit from the fees. The Class A
Plan has no fee but like the Class B and Class C Plan authorizes any other
payments by the Fund to LFD and its affiliates (including the Administrator and
the Advisor) to the extent that such payments might be construed to be indirect
financing of the distribution of Fund shares.
The Trustees of the Trust believe the Plan could be a significant factor in the
growth and retention of Fund assets resulting in a more advantageous expense
ratio and increased investment flexibility which could benefit each class of
Fund shareholders. The Plan will continue in effect from year to year so long as
continuance is specifically approved at least annually by a vote of the Trustees
of the Trust, including a majority of the Trustees who are not interested
persons of the Trust and have no direct or indirect financial interest in the
operation of the Plan or in any agreements related to the Plan (independent
Trustees), cast in person at a meeting called for the purpose of voting on the
Plan. The Plan may not be amended to increase the fee materially without
approval by vote of a majority of the outstanding voting securities of the
relevant class of shares and all material amendments of the Plan must be
approved by the Trustees in the manner provided in the foregoing sentence. The
Plan may be terminated at any time by vote of a majority of the independent
Trustees or by vote of a majority of the outstanding voting securities of the
relevant class of shares. The continuance of the Plan will only be effective if
the selection and nomination of the Trustees of the Trust who are not interested
persons of the Trust is effected by such disinterested Trustees.
Class A shares are offered at net asset value and will be subject to a CDSC if a
purchase of such shares having a value from $1 million to $5 million is redeemed
within 18 months of the purchase. Class B shares are offered at net asset value
subject to a
g
CDSC if redeemed within six years after purchase. Class C shares are offered at
net asset value and are subject to a 1.00% CDSC on redemptions within one year
after purchase. The CDSCs are described in the Prospectus.
No CDSC will be imposed on shares derived from reinvestment of distributions or
amounts representing capital appreciation. In determining the applicability and
rate of any CDSC, it will be assumed that a redemption is made first of shares
representing capital appreciation, next of shares representing reinvestment of
distributions and finally of other shares held by the shareholder for the
longest period of time.
Eight years after the end of the month in which a Class B share is purchased,
such share and a pro rata portion of any shares issued on the reinvestment of
distributions will be automatically converted into Class A shares having an
equal value, which are not subject to the distribution or service fee.
SALES-RELATED EXPENSES (in thousands) of LFD relating to the Fund were:
<TABLE>
<CAPTION>
Year ended June 30, 1999
-------------------------------------------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Fees to FSF $ 0 $12 (t)
Cost of sales material relating to the Fund
(including printing and mailing expenses) $11 (t) $ 0
Allocated travel, entertainment and other
promotional expenses (including advertising) $ 0 $ 0 $ 0
</TABLE>
(t) Rounds to less than one.
INVESTMENT PERFORMANCE
The Fund's yields for the seven days ended June 30, 1999, were:
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Current Yield 2.704% 1.700% 2.299%
Effective Yield 2.740% 1.710% 2.330%
Tax-Equivalent Current Yield 4.477% 2.815% 3.806%
Tax-Equivalent Effective Yield 4.540% 2.830% 3.860%
</TABLE>
The Fund's average annual total returns at June 30, 1999, were:
Class A Shares
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C>
2.68% 2.96% 3.21%
</TABLE>
Class B Shares
(Class B Shares initially offered
on May 5, 1992)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
With applicable CDSC (3.35)%(5.00% CDSC) 1.92%(2.00% CDSC) 2.87% (u)
Without CDSC 1.65% 2.29% 2.87% (u)
</TABLE>
Class C Shares
(Class C Shares initially offered
on August 1, 1997)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
With applicable CDSC 1.27%(1.00% CDSC) 2.47%(u) 2.97%(u)
Without CDSC 2.27% 2.47%(u) 2.97%(u)
</TABLE>
(u) Classes B and C are newer classes of shares. Their performance includes
returns of the Fund's Class A shares (the oldest existing fund class) for
periods prior to the inception of the newer class of shares. The Class A share
returns are not restated to reflect any differences in expenses (i.e., Rule
12b-1 fees) between Class A shares and the newer classes of shares.
h
With shareholder approval, on September 28, 1995 the Fund converted to a
master fund/feeder structure, which invests all of its assets in the Portfolio,
a municipal money market master fund that has the same investment objective as
the Fund. Investment performance for periods prior to that date is for the
Portfolio. Although the performance does take current sales charges into
account, it has not been adjusted to take into account the fact that the classes
offered subsequent to September 28, 1995 bear different class specific expenses
than the Portfolio (e.g. Rule 12b-1 fees).
Performance results reflect any voluntary waivers or reimbursements of Fund
expenses by the Advisor or its affiliates. Absent these waivers or reimbursement
arrangements, performance results would have been lower.
See Part 2 of this SAI, "Performance Measures," for how calculations are made.
CUSTODIAN OF THE FUND
The Chase Manhattan Bank, located at 270 Park Avenue, New York, New York
10017-2070, is the Fund's custodian. The custodian is responsible for
maintaining the Fund's open account.
INDEPENDENT ACCOUNTANTS OF THE FUND
Ernst & Young, located at 200 Clarendon Street, Boston, Massachusetts
02116-5072, is Fund's independent accountants, providing audit and tax return
preparation services and assistance and consultation in connection with the
review of various Securities and Exchange Commission filings. Prior to September
30, 1999, PricewaterhouseCoopers LLP, located at 160 Federal Street, Boston,
Massachusetts 02110-2624, was the Fund's independent accountants. The financial
statements incorporated by reference in this SAI have been so incorporated, and
the financial highlights included in the Prospectus have been so included, in
reliance upon the report of PricewaterhouseCoopers LLP given on the authority of
said firm as experts in accounting and auditing.
MANAGEMENT OF THE BASE TRUST(v)
TRUSTEES AND OFFICERS OF THE BASE TRUST
WILLIAM D. ANDREWS (Age 52), Executive Vice President, is Executive Vice
President of the Advisor.
GARY A. ANETSBERGER (Age 43), Senior Vice President and Treasurer, is Chief
Financial Officer and Chief Administrative Officer of the Mutual Funds division
of the Advisor, Senior Vice President of the Advisor since April, 1996; Vice
President of the Advisor prior thereto.
JOHN A. BACON, JR. (Age 72), Trustee, is a Private Investor; 4N640 Honey Hill
Road, Box 296, Wayne, Illinois 60184.
WILLIAM W. BOYD (Age 72), Trustee, is Chairman and Director of Sterling Plumbing
(manufacturer of plumbing products); 2900 Golf Road, Rolling Meadows, Illinois
60008.
DAVID P. BRADY (Age 35), Vice President, is Senior Vice President of the Advisor
since March, 1998; Vice President of the Advisor from November, 1995 to March,
1998; Portfolio Manager for the Advisor since 1993.
DANIEL K. CANTOR (Age 39), Vice President, is Senior Vice President of the
Advisor; 1330 Avenue of the Americas, New York, New York 10019.
KEVIN M. CAROME (Age 43), Executive Vice President and Assistant Secretary, is
Senior Vice President, Senior Vice President and General Counsel of Liberty
Funds Group LLC (an affiliate of the Advisor); General Counsel and Secretary of
the Advisor since January, 1998; Senior Vice President of the Administrator
since January, 1999; Associate General Counsel and Vice President of Liberty
Financial through January, 1999.
J. KEVIN CONNAUGHTON (Age 35), Vice President, is Vice President of the
Administrator since February, 1998; Senior Tax Manager, Coopers & Lybrand, LLP
from April, 1996 to January, 1998; Vice President, 440 Financial Group/First
Data Investor Services Group prior thereto; One Financial Center, Boston,
Massachusetts 02111.
LINDSAY COOK(w) (Age 47), Trustee, is Executive Vice President of Liberty
Financial since March, 1997; Senior Vice President of Liberty Financial prior
thereto; 600 Atlantic Avenue, Boston, Massachusetts 02210.
i
STEPHEN E. GIBSON (Age 45), is President of the Advisor as of November, 1999.
Chairman of the Board since July, 1998, Chief Executive Officer and President
since December, 1996 and Director since July, 1996 of the Administrator
(formerly Executive Vice President from July, 1996 to December, 1996); Director,
Chief Executive Officer and President of Liberty Funds Group LLC since December,
1998 (formerly Director, Chief Executive Officer and President of The Colonial
Group, Inc. from December, 1996 to December, 1998); Assistant Chairman of the
Advisor since August, 1998; former Managing Director of Marketing of Putnam
Investments from June, 1992 to July, 1996; One Financial Center, Boston,
Massachusetts 02111.
DOUGLAS A. HACKER (Age 44), Trustee, is Senior Vice President and Chief
Financial Officer, UAL, Inc. (airline), P.O. Box 66100, Chicago, Illinois 60666.
LOREN A. HANSEN (Age 51), Executive Vice President, is Senior Vice President of
the Administrator since October, 1997; Executive Vice President of the Advisor
since December, 1995; Vice President of The Northern Trust (bank) prior thereto.
JAMES P. HAYNIE (Age 36), Vice President; is Vice President of the Advisor since
October, 1998; Vice President of the Administrator; One Financial Center,
Boston, Massachusetts 02111.
HARVEY B. HIRSCHHORN (Age 49), Vice President; is Executive Vice President,
Senior Portfolio Manager, and Chief Economist and Investment Strategist of the
Advisor; Director of Research of the Advisor from 1991 to 1995.
TIMOTHY J. JACOBY (Age 47), Vice President; is Vice President, Chief Financial
Officer and Treasurer for Liberty Funds Group LLC since December, 1998; Senior
Vice President of the Administrator since September, 1996; Senior Vice President
of Fidelity Investments prior thereto; One Financial Center, Boston,
Massachusetts 02111.
JANET LANGFORD KELLY (Age 41), Trustee, Executive Vice President - Corporate
Development, Legal Counsel and Secretary, Kellogg Company since September 1999;
Senior Vice President, Secretary and General Counsel of Sara Lee Corporation
(branded, packaged, consumer-products manufacturer) from 1995 to August 1999;
partner of Sidley & Austin (law firm) prior thereto; Three First National Plaza,
Chicago, Illinois 60602.
MICHAEL T. KENNEDY (Age 37); Vice President; is Senior Vice President of the
Advisor.
GAIL D. KNUDSEN (Age 37), Vice President; is Vice President of the Administrator
since July, 1997; Assistant Vice President prior thereto; One Financial Center,
Boston, Massachusetts 02111.
STEPHEN F. LOCKMAN (Age 37), Vice President; is Senior Vice President, Portfolio
Manager and Credit Analyst of the Advisor.
JANE NAESETH (Age 49), Vice President; is Senior Vice President of the Advisor.
CHARLES R. NELSON (Age 57), Trustee, is Van Voorhis Professor of Political
Economy of the University of Washington, Seattle, Washington 98195.
MAUREEN G. NEWMAN (Age 40), Vice President; is Vice President of the Advisor
since November, 1998; Senior Vice President of the Administrator since March,
1999; Vice President of the Administrator from May, 1996 to March, 1999;
Portfolio Manager and Bond Analyst at Fidelity Investment prior thereto; One
Financial Center, Boston, Massachusetts 02111.
NICOLETTE D. PARRISH (Age 49), Vice President and Assistant Secretary, is Senior
Legal Assistant of the Advisor.
MICHAEL E. REGA (Age 39), Vice President; is Vice President of the Advisor since
October, 1998; Vice President of the Administrator since 1996; Analyst of the
Administrator from 1993 to 1996; One Financial Center, Boston, Massachusetts
02111.
JANET B. RYSZ (Age 44), Assistant Secretary, is Senior Legal Assistant and
Assistant Secretary of the Advisor.
THOMAS C. THEOBALD (Age 62), Trustee, is Managing Director of William Blair
Capital Partners (private equity fund) since 1994; Chief Executive Officer and
Chairman of the Board of Directors of Continental Bank Corporation from 1987 to
1994; Suite 1300, 222 West Adams Street, Chicago, Illinois 60606.
j
VERONICA M. WALLACE (Age 53), Vice President; is Vice President of the
Advisor since March, 1998; Portfolio Manager for the Advisor since September,
1995; Trader in taxable short-term instruments for the Advisor prior thereto.
HEIDI J. WALTER (Age 32), Vice President and Secretary, is Vice President
of the Advisor since March, 1998 and Senior Legal Counsel for the Advisor since
March, 1995; associate with Beeler Schad & Diamond PC (law firm) prior thereto.
(v) The address of each Trustee and Officer is One South Wacker Drive, Chicago,
IL 60606, unless otherwise noted.
(w) Trustee who is an "interested person" of the Portfolio and of the Advisor,
as defined in the Investment Company Act of 1940.
THE MANAGEMENT AGREEMENT
Under the Management Agreement, the Advisor has agreed to make day-to-day
investment decisions for the Portfolio, arrange for the execution of portfolio
transactions and generally manage the Portfolio's investments. The Advisor has
also agreed to perform administrative services for the Portfolio, including
without limitation, providing all executive and other facilities required to
render investment management and administrative services. For these services and
facilities, the Portfolio pays a monthly fee based on the average daily net
assets of the Portfolio for such month.
INFORMATION CONCERNING THE PORTFOLIO
PORTFOLIO'S INVESTMENT ADVISOR
Under its Management Agreement with the Portfolio, the Advisor provides the
Portfolio with discretionary investment services. Specifically, the Advisor is
responsible for supervising and directing the investments of the Portfolio in
accordance with the Portfolio's investment objective, policies and restrictions
as provided in the Fund's Prospectus and this Statement of Additional
Information. The Management Agreement provides for the payment by the Portfolio
to the Advisor of the management fee described above under "Fund Charges and
Expenses."
The Advisor is a wholly-owned subsidiary of Liberty Financial, which in turn is
an indirect majority-owned subsidiary of Liberty Mutual Insurance Company
(Liberty Mutual). Liberty Mutual is an underwriter of worker's compensation
insurance and a property and casualty insurer in the U.S. Liberty Mutual's
address is 175 Berkeley Street, Boston, Massachusetts 02117.
The Advisor is the successor to an investment advisory business that was founded
in 1932. The Advisor acts as investment advisor to wealthy individuals,
trustees, pension and profit sharing plans, charitable organizations and other
institutional investors. As of June 30, 1999, the Advisor managed over $22.2
billion in net assets, including over $6.3 billion in equities and over $15.9
billion in fixed-income securities (including $1 billion in municipal
securities). The $22.2 billion in managed assets included over $9.2 billion held
by open-end mutual funds managed by the Advisor (approximately 15% of the mutual
fund assets were held by clients of the Advisor). These mutual funds were owned
by over 282,000 shareholders. The $9.2 billion in mutual fund assets included
over $679 million in over 420,000 IRA accounts. In managing those assets, the
Advisor utilizes a proprietary computer-based information system that maintains
and regularly updates information for approximately 7,500 companies. The Advisor
also monitors over 1,400 issues via a proprietary credit analysis system. At
June 30, 1999, the Advisor employed approximately 18 research analysts and 54
account managers. The average investment-related experience of these individuals
is 17 years.
The directors of the Advisor are Kenneth R. Leibler and C. Allen Merritt, Jr.
Mr. Leibler is President and Chief Executive Officer of Liberty Financial; and
Mr. Merritt is Chief Operating Officer of Liberty Financial. The business
address of Messrs. Leibler and Merritt is Federal Reserve Plaza, 600 Atlantic
Avenue, Boston, Massachusetts 02210;
Under the Management Agreement, the Advisor is not liable for any error of
judgment or mistake of law or for any loss suffered by the Portfolio or the Fund
in connection with the matters to which such Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties or from reckless disregard of its obligations and
duties under the Agreement.
PORTFOLIO TRANSACTIONS
k
The Advisor places the orders for the purchase and sale of portfolio securities
and options and futures contracts for its clients, including private clients and
mutual fund clients (Clients). Purchases and sales of portfolio securities are
ordinarily transacted with the issuer or with a primary market maker acting as
principal or agent for the securities on a net basis, with no brokerage
commission being paid by the Portfolio. Transactions placed through dealers
reflect the spread between the bid and asked prices. Occasionally, the Portfolio
may make purchases of underwritten issues at prices that include underwriting
discounts or selling concessions.
The Advisor's overriding objective in selecting brokers and dealers to effect
portfolio transactions is to seek the best combination of net price and
execution. The best net price, giving effect to brokerage commissions, if any,
is an important factor in this decision; however, a number of other judgmental
factors may also enter into the decision. These factors include the Advisor's
knowledge of negotiated commission rates currently available and other current
transaction costs; the nature of the security being purchased or sold; the size
of the transaction; the desired timing of the transaction; the activity existing
and expected in the market for the particular security; confidentiality; the
execution, clearance and settlement capabilities of the broker or dealer
selected and others considered; the Advisor's knowledge of the financial
condition of the broker or dealer selected and such other brokers and dealers;
and the Advisor's knowledge of actual or apparent operation problems of any
broker or dealer.
Recognizing the value of these factors, the Advisor may cause a Client to pay a
brokerage commission in excess of that which another broker may have charged for
effecting the same transaction. The Advisor has established internal policies
for the guidance of its trading personnel, specifying minimum and maximum
commissions to be paid for various types and sizes of transactions and effected
for Clients in those cases where the Advisor has discretion to select the broker
or dealer by which the transaction is to be executed. The Advisor has discretion
for all trades of the Portfolio. Transactions which vary from the guidelines are
subject to periodic supervisory review. These guidelines are reviewed and
periodically adjusted, and the general level of brokerage commissions paid is
periodically reviewed by the Advisor. Evaluations of the reasonableness of
brokerage commissions, based on the factors described in the preceding
paragraph, are made by the Advisor's trading personnel while effecting portfolio
transactions. The general level of brokerage commissions paid is reviewed by the
Advisor, and reports are made annually to the Board of Trustees.
The Advisor maintains and periodically updates a list of approved brokers and
dealers which, in the Advisor's judgment, are generally capable of providing
best price and execution and are financially stable. The Advisor's traders are
directed to use only brokers and dealers on the approved list, except in the
case of Client designations of brokers or dealers to effect transactions for
such Clients' accounts. The Advisor generally posts certain Client information
on the "Alert" broker database system as a means of facilitating the trade
affirmation and settlement process.
It is the Advisor's practice, when feasible, to aggregate for execution as a
single transaction orders for the purchase or sale of a particular security for
the accounts of several Clients, in order to seek a lower commission or more
advantageous net price. The benefit, if any, obtained as a result of such
aggregation generally is allocated pro rata among the accounts of Clients which
participated in the aggregated transaction. In some instances, this may involve
the use of an "average price" execution wherein a broker or dealer to which the
aggregated order has been given will execute the order in several separate
transactions during the course of a day at differing prices and, in such case,
each Client participating in the aggregated order will pay or receive the same
price and commission, which will be an average of the prices and commissions for
the several separate transactions executed by the broker or dealer.
The Advisor sometimes makes use of an indirect electronic access to the New York
Stock Exchange's "SuperDOT" automated execution system, provided through a NYSE
member floor broker, W&D Securities, Inc., a subsidiary of Jeffries & Co., Inc.,
particularly for the efficient execution of smaller orders in NYSE listed
equities. The Advisor sometimes uses similar arrangements through Billings &
Co., Inc. and Driscoll & Co., Inc., floor broker members of the Chicago Stock
Exchange, for transactions to be executed on that exchange. In using these
arrangements, the Advisor must instruct the floor broker to refer the executed
transaction to another brokerage firm for clearance and settlement, as the floor
brokers do not deal with the public. Transactions of this type sometimes are
referred to as "step-in" or "step-out" transactions. The brokerage firm to which
the executed transaction is referred may include, in the case of transactions
effected through W&D Securities, brokerage firms which provide the Advisor
investment research or related services.
The Advisor places certain trades for the Portfolio through its affiliate
AlphaTrade, Inc. (ATI). ATI is a wholly-owned subsidiary of the Administrator.
ATI is a fully disclosed introducing broker that limits its activities to
electronic execution of transactions in listed equity securities. The Portfolio
pays ATI a commission for these transactions. The Fund and the Portfolio have
adopted procedures consistent with Investment Company Act Rule 17e-1 governing
such transactions. Certain of the Advisor's officers also serve as officers,
directors and/or employees of ATI.
l
CONSISTENT WITH THE RULES OF FAIR PRACTICE OF NATIONAL SECURITIES DEALERS, INC.
AND SUBJECT TO SEEKING BEST EXECUTING AND SUCH OTHER POLICIES AS THE TRUSTEES OF
THE FUND MAY DETERMINE, THE ADVISOR MAY CONSIDER SALES OF SHARES OF EACH OF THE
FUND AS A FACTOR IN THE SELECTION OF BROKER-DEALERS TO EXECUTE SUCH MUTUAL FUND
SECURITIES TRANSACTIONS.
INVESTMENT RESEARCH PRODUCTS AND SERVICES FURNISHED BY BROKERS AND DEALERS
The Advisor engages in the long-standing practice in the money management
industry of acquiring research and brokerage products and services (research
products) from broker-dealer firms in return directing trades for Client
accounts to those firms. In effect, the Advisor is using the commission dollars
generated from these Client accounts to pay for these research products. The
money management industry uses the term "soft dollars" to refer to this industry
practice. The Advisor may engage in soft dollar transactions on trades for those
Client accounts for which the Advisor has the discretion to select the
brokers-dealer.
The ability to direct brokerage for a Client account belongs to the Client and
not to the Advisor. When a Client grants the Advisor the discretion to select
broker-dealers for Client trades, the Advisor has a duty to seek the best
combination of net price and execution. The Advisor faces a potential conflict
of interest with this duty when it uses Client trades to obtain soft dollar
products. This conflict exists because the Advisor is able to use the soft
dollar products in managing its Client accounts without paying cash (hard
dollars) for the product. This reduces the Advisor's expenses.
Moreover, under a provision of the federal securities laws applicable to soft
dollars, the Advisor is not required to use the soft dollar product in managing
those accounts that generate the trade. Thus, the Client accounts that generate
the brokerage commission used to acquire the soft dollar product may not benefit
directly from that product. In effect, those accounts are cross subsidizing the
Advisor's management of the other accounts that do benefit directly from the
product. This practice is explicitly sanctioned by a provision of the Securities
Exchange Act of 1934, which creates a "safe harbor" for soft dollar transactions
conducted in a specified manner. Although it is inherently difficult, if not
impossible, to document, the Advisor believes that over time most, if not all,
Clients benefit from soft dollar products such that cross subsidizations even
out.
The Advisor attempts to reduce or eliminate this conflict by directing Client
trades for soft dollar products only if the Advisor concludes that the
broker-dealer supplying the product is capable of providing a combination of the
best net price and execution on the trade. As noted above, the best net price,
while significant, is one of a number of judgmental factors the Advisor
considers in determining whether a particular broker is capable of providing the
best net price and execution. The Advisor may cause a Client account to pay a
brokerage commission in a soft dollar trade in excess of that which another
broker-dealer might have charged for the same transaction.
The Advisor acquires two types of soft dollar research products: (i) proprietary
research created by the broker-dealer firm executing the trade and (ii) other
products created by third parties that are supplied to the Advisor through the
broker-dealer firm executing the trade.
Proprietary research consists primarily of traditional research reports,
recommendations and similar materials produced by the in house research staffs
of broker-dealer firms. This research includes evaluations and recommendations
of specific companies or industry groups, as well as analyses of general
economic and market conditions and trends, market data, contacts and other
related information and assistance. The Advisor's research analysts periodically
rate the quality of proprietary research produced by various broker-dealer
firms. Based on these evaluations, the Advisor develops target levels of
commission dollars on a firm-by-firm basis. The Advisor attempts to direct
trades to each firm to meet these targets.
The Advisor also uses soft dollars to acquire products created by third parties
that are supplied to the Advisor through broker-dealers executing the trade (or
other broker-dealers who "step in" to a transaction and receive a portion of the
brokerage commission for the trade). These products include the following:
- - Database Services--comprehensive databases containing current and/or
historical information on companies and industries. Examples include
historical securities prices, earnings estimates, and SEC filings.
These services may include software tools that allow the user to search
the database or to prepare value-added analyses related to the
investment process (such as forecasts and models used in the portfolio
management process).
- - Quotation/Trading/News Systems--products that provide real time market
data information, such as pricing of individual securities and
information on current trading, as well as a variety of news services.
- - Economic Data/Forecasting Tools--various macro economic forecasting
tools, such as economic data and economic and political forecasts for
various countries or regions.
- - Quantitative/Technical Analysis--software tools that assist in
quantitative and technical analysis of investment data.
- - Fundamental Industry Analysis--industry-specific fundamental investment
research.
m
- - Fixed Income Security Analysis--data and analytical tools that pertain
specifically to fixed income securities. These tools assist in creating
financial models, such as cash flow projections and interest rate
sensitivity analyses, that are relevant to fixed income securities.
- - Other Specialized Tools--other specialized products, such as
specialized economic consulting analyses and attendance at investment
oriented conferences.
Many third-party products include computer software or on-line data feeds.
Certain products also include computer hardware necessary to use the product.
Certain of these third party services may be available directly from the vendor
on a hard dollar basis. Others are available only through broker-dealer firms
for soft dollars. The Advisor evaluates each product to determine a cash (hard
dollars) value of the product to the Advisor. The Advisor then on a
product-by-product basis targets commission dollars in an amount equal to a
specified multiple of the hard dollar value to the broker-dealer that supplies
the product to the Advisor. In general, these multiples range from 1.25 to 1.85
times the hard dollar value. The Advisor attempts to direct trades to each firm
to meet these targets. (For example, if the multiple is 1.5:1.0, assuming a hard
dollar value of $10,000, the Advisor will target to the broker-dealer providing
the product trades generating $15,000 in total commissions.)
The targets that the Advisor establishes for both proprietary and for third
party research products typically will reflect discussions that the Advisor has
with the broker-dealer providing the product regarding the level of commissions
it expects to receive for the product. However, these targets are not binding
commitments, and the Advisor does not agree to direct a minimum amount of
commissions to any broker-dealer for soft dollar products. In setting these
targets, the Advisor makes a determination that the value of the product is
reasonably commensurate with the cost of acquiring it. These targets are
established on a calendar year basis. The Advisor will receive the product
whether or not commissions directed to the applicable broker-dealer are less
than, equal to or in excess of the target. The Advisor generally will carry over
target shortages and excesses to the next year's target. The Advisor believes
that this practice reduces the conflicts of interest associated with soft dollar
transactions, since the Advisor can meet the non-binding expectations of
broker-dealers providing soft dollar products over flexible time periods. In the
case of third party products, the third party is paid by the broker-dealer and
not by the Advisor. The Advisor may enter into a contract with the third party
vendor to use the product. (For example, if the product includes software, the
Advisor will enter into a license to use the software from the vendor.)
In certain cases, the Advisor uses soft dollars to obtain products that have
both research and non-research purposes. Examples of non-research uses are
administrative and marketing functions. These are referred to as "mixed use"
products. As of the date of this SAI, the Advisor acquires two mixed use
products. These are (i) a fixed income security data service and (ii) a mutual
fund performance ranking service. In each case, the Advisor makes a good faith
evaluation of the research and non-research uses of these services. These
evaluations are based upon the time spent by Firm personnel for research and
non-research uses. The Advisor pays the provider in cash (hard dollars) for the
non-research portion of its use of these products.
The Advisor may use research obtained from soft dollar trades in the management
of any of its discretionary accounts. Thus, consistent with industry practice,
the Advisor does not require that the Client account that generates the trade
receive any benefit from the soft dollar product obtained through the trade. As
noted above, this may result in cross subsidization of soft dollar products
among Client accounts. As noted therein, this practice is explicitly sanctioned
by a provision of the Securities Exchange Act of 1934, which creates a "safe
harbor" for soft dollar transactions conducted in a specified manner.
In certain cases, the Advisor will direct a trade to one broker-dealer with the
instruction that it execute the trade and pay over a portion of the commission
from the trade to another broker-dealer who provides the Advisor with a soft
dollar research product. The broker-dealer executing the trade "steps out" of a
portion of the commission in favor of the other broker-dealer providing the soft
dollar product. The Advisor may engage in step out transactions in order to
direct soft dollar commissions to a broker-dealer which provides research but
may not be able to provide best execution. Brokers who receive step out
commissions typically are brokers providing a third party soft dollar product
that is not available on a hard dollars basis. The Advisor has not engaged in
step out transactions as a manner of compensating broker-dealers that sell
shares of investment companies managed by the Advisor.
The Base Trust has arranged for its custodian to act as a soliciting dealer to
accept any fees available to the custodian as a soliciting dealer in connection
with any tender offer for portfolio securities. The custodian will credit any
such fees received against its custodial fees.
n
AMORTIZED COSTS FOR MONEY MARKET FUNDS
o
In connection with the Portfolio's use of amortized cost and the maintenance of
its per share net asset value of $1.00, the Base Trust has agreed, with respect
to the Portfolio: (i) to seek to maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining relative stability of
principal and not in excess of 90 days; (ii) not to purchase a portfolio
instrument with a remaining maturity of greater than thirteen months (for this
purpose, the Portfolio considers that an instrument has a maturity of thirteen
months or less if it is a "short-term" obligation); and (iii) to limit its
purchase of portfolio instruments to those instruments that are denominated in
U.S. dollars which the Portfolio's Board of Trustees determines present minimal
credit risks and that are of eligible quality as determined by any major rating
service as defined under Securities and Exchange Commission Rule 2a-7 or, in the
case of any instrument that is not rated, of comparable quality as determined by
the Portfolio's Board of Trustees.
The Portfolio has also agreed to establish procedures reasonably designed to
stabilize its price per share, as computed for the purpose of sales and
redemptions, at $1.00. Such procedures include review of its portfolio holdings
by the Portfolio's Board of Trustees, at such intervals as the Portfolio deems
appropriate, to determine whether its net asset value calculated by using
available market quotations or market equivalents deviates from $1.00 per share
based on amortized cost. Calculations are made to compare the value of its
investments valued at amortized cost with market value. Market values are
obtained by using actual quotations provided by market makers, estimates of
market value, values from yield data obtained from reputable sources for the
instruments, values obtained from the Advisor's matrix, or values obtained from
an independent pricing service. Any such service might value the Portfolio's
investments based on methods which include consideration of yields or prices of
Municipal Securities of comparable quality, coupon, maturity and type;
indications as to values from dealers and general market conditions. The service
may also employ electronic data processing techniques, a matrix system, or both
to determine valuations.
In connection with the Portfolio's use of the amortized cost method of portfolio
valuation to maintain its net asset value at $1.00 per share, the Portfolio
might incur or anticipate an unusual expense, loss, depreciation, gain or
appreciation that would affect its net asset value per share or income for a
particular period. The extent of any deviation between the net asset value based
upon available market quotations or market equivalents and $1.00 per share based
on amortized cost will be examined by the Portfolio's Board of Trustees as it
deems appropriate. If such deviation exceeds 1/2 of 1%, the Portfolio's Board of
Trustees will promptly consider what action, if any, should be initiated. In the
event the Portfolio's Board of Trustees determines that a deviation exists that
may result in material dilution or other unfair results to investors or existing
shareholders, it will take such action as it considers appropriate to eliminate
or reduce to the extent reasonably practicable such dilution or unfair results.
Actions which the Portfolio's Board of Trustees might take include: selling
portfolio instruments prior to maturity to realize capital gains or losses or to
shorten average portfolio maturity; increasing, reducing, or suspending
dividends or distributions from capital or capital gains; or redeeming shares in
kind. The Portfolio's Board of Trustees might also establish a net asset value
per share by using market values, as a result of which the net asset value might
deviate from $1.00 per share.
CUSTODIAN OF THE PORTFOLIO
State Street Bank and Trust Company (Bank), located at 225 Franklin Street,
Boston, Massachusetts 02110, is the custodian for the securities and cash of the
Portfolio, but it does not participate in the investment decisions of the
Portfolio. The Portfolio has authorized the Bank to deposit certain portfolio
securities in central depository systems as allowed by federal law.
INDEPENDENT AUDITORS OF THE PORTFOLIO
The independent auditors for the Portfolio are Ernst & Young LLP, located at 200
Clarendon Street, Boston, Massachusetts 02116. Ernst & Young LLP audits and
reports on the annual financial statements of the Portfolio, reviews certain
regulatory reports and the Portfolio's Federal income tax returns, and performs
such other professional accounting, auditing, tax and advisory services as the
Portfolio may engage them to do.
The Portfolio's financial statements and Report of Independent Auditors included
in the Fund's June 30,1999 Annual Report are incorporated into this SAI by
reference.
CROSS-INDEMNIFICATION AGREEMENT
The Trust, on behalf of the Fund, and the Base Trust, on behalf of the
Portfolio, have entered into a cross-indemnification agreement relating to
liability in connection with the information relating to the Base Trust and the
Portfolio contained in the Trust's Registration Statement of which this SAI is a
part.
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STATEMENT OF ADDITIONAL INFORMATION
PART 2
The following information applies generally to most funds advised by the
Advisor. "Funds" include each series of Liberty Funds Trust I (formerly Colonial
Trust I), Liberty Funds Trust II (formerly Colonial Trust II), Liberty Funds
Trust III (formerly Colonial Trust III), Liberty Funds Trust IV (formerly
Colonial Trust IV), Liberty Funds Trust V (formerly Colonial Trust V), Liberty
Funds Trust VI (formerly Colonial Trust VI), Liberty Funds Trust VII (formerly
Colonial Trust VII), Liberty Funds Trust VIII (formerly LFC Utilities Trust) and
Liberty Funds Trust IX (formerly LAMCO Trust I) . In certain cases, the
discussion applies to some, but not all of the funds, and you should refer to
your Fund's Prospectus and to Part 1 of this SAI to determine whether the matter
is applicable to your Fund. You will also be referred to Part 1 for certain data
applicable to your Fund.
MISCELLANEOUS INVESTMENT PRACTICES
PART 1 OF THIS SAI LISTS ON PAGE b WHICH OF THE FOLLOWING INVESTMENT PRACTICES
ARE AVAILABLE TO YOUR FUND. IF AN INVESTMENT PRACTICE IS NOT LISTED IN PART 1 OF
THIS SAI, IT IS NOT APPLICABLE TO YOUR FUND.
SHORT-TERM TRADING
In seeking the fund's investment objective, the Advisor will buy or sell
portfolio securities whenever it believes it is appropriate. The Advisor's
decision will not generally be influenced by how long the fund may have owned
the security. From time to time, the fund will buy securities intending to seek
short-term trading profits. A change in the securities held by the fund is known
as "portfolio turnover" and generally involves some expense to the fund. These
expenses may include brokerage commissions or dealer mark-ups and other
transaction costs on both the sale of securities and the reinvestment of the
proceeds in other securities. If sales of portfolio securities cause the fund to
realize net short-term capital gains, such gains will be taxable as ordinary
income. As a result of the fund's investment policies, under certain market
conditions the fund's portfolio turnover rate may be higher than that of other
mutual funds. The fund's portfolio turnover rate for a fiscal year is the ratio
of the lesser of purchases or sales of portfolio securities to the monthly
average of the value of portfolio securities, excluding securities whose
maturities at acquisition were one year or less. The fund's portfolio turnover
rate is not a limiting factor when the Advisor considers a change in the fund's
portfolio.
LOWER RATED DEBT SECURITIES
Lower rated debt securities are those rated lower than Baa by Moody's or BBB by
S&P, or comparable unrated debt securities. Relative to debt securities of
higher quality,
1. an economic downturn or increased interest rates may have a more
significant effect on the yield, price and potential for default for
lower rated debt securities;
2. the secondary market for lower rated debt securities may at times become
less liquid or respond to adverse publicity or investor perceptions,
increasing the difficulty in valuing or disposing of the bonds;
3. the Advisor's credit analysis of lower rated debt securities may have a
greater impact on the fund's achievement of its investment objective;
and
4. lower rated debt securities may be less sensitive to interest rate
changes, but are more sensitive to adverse economic developments.
In addition, certain lower rated debt securities may not pay interest in cash on
a current basis.
SMALL COMPANIES
Smaller, less well established companies may offer greater opportunities for
capital appreciation than larger, better established companies, but may also
involve certain special risks related to limited product lines, markets, or
financial resources and dependence on a small management group. Their securities
may trade less frequently, in smaller volumes, and fluctuate more sharply in
value than securities of larger companies.
FOREIGN SECURITIES
The fund may invest in securities traded in markets outside the United States.
Foreign investments can be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations. There may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing and financial
reporting
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standards comparable to those applicable to U.S. companies. Securities
of some foreign companies are less liquid or more volatile than securities of
U.S. companies, and foreign brokerage commissions and custodian fees may be
higher than in the United States. Investments in foreign securities can involve
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets
and imposition of withholding taxes on dividend or interest payments. Foreign
securities, like other assets of the fund, will be held by the fund's custodian
or by a subcustodian or depository. See also "Foreign Currency Transactions"
below.
The fund may invest in certain Passive Foreign Investment Companies (PFICs)
which may be subject to U.S. federal income tax on a portion of any "excess
distribution" or gain (PFIC tax) related to the investment. This "excess
distribution" will be allocated over the fund's holding period for such
investment. The PFIC tax is the highest ordinary income rate in effect for any
period multiplied by the portion of the "excess distribution" allocated to such
period, and it could be increased by an interest charge on the deemed tax
deferral.
The fund may possibly elect to include in its income its pro rata share of the
ordinary earnings and net capital gain of PFICs. This election requires certain
annual information from the PFICs which in many cases may be difficult to
obtain. An alternative election would permit the fund to recognize as income any
appreciation (and to a limited extent, depreciation) on its holdings of PFICs as
of the end of its fiscal year. See "Taxation" below.
OTHER INVESTMENT COMPANIES
The fund may invest in other investment companies. Such investments will involve
the payment of duplicative fees through the indirect payment of a portion of the
expenses, including advisory fees, of such other investment companies.
ZERO COUPON SECURITIES (ZEROS)
The fund may invest in zero coupon securities, which are securities issued at a
significant discount from face value and do not pay interest at intervals during
the life of the security. Zero coupon securities include securities issued in
certificates representing undivided interests in the interest or principal of
mortgage-backed securities (interest only/principal only), which tend to be more
volatile than other types of securities. The fund will accrue and distribute
income from stripped securities and certificates on a current basis and may have
to sell securities to generate cash for distributions.
STEP COUPON BONDS (STEPS)
The fund may invest in debt securities which pay interest at a series of
different rates (including 0%) in accordance with a stated schedule for a series
of periods. In addition to the risks associated with the credit rating of the
issuers, these securities may be subject to more volatility risk than fixed rate
debt securities.
TENDER OPTION BONDS
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate. The
Advisor will consider on an ongoing basis the creditworthiness of the issuer of
the underlying municipal securities, of any custodian, and of the third-party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying municipal securities and for other
reasons.
PAY-IN-KIND (PIK) SECURITIES
The fund may invest in securities which pay interest either in cash or
additional securities. These securities are generally high yield securities and,
in addition to the other risks associated with investing in high yield
securities, are subject to the risks that the interest payments which consist of
additional securities are also subject to the risks of high yield securities.
MONEY MARKET INSTRUMENTS
GOVERNMENT OBLIGATIONS are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. SUPRANATIONAL OBLIGATIONS are
issued by supranational entities and are generally designed to promote economic
improvements. CERTIFICATES OF DEPOSITS are issued against deposits in a
commercial bank with a defined return and maturity. BANKER'S ACCEPTANCES are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. COMMERCIAL PAPER is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
SHORT-TERM CORPORATE OBLIGATIONS are bonds and notes (with one year or less to
maturity at
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the time of purchase) issued by businesses to finance long-term needs.
PARTICIPATION INTERESTS include the underlying securities and any related
guaranty, letter of credit, or collateralization arrangement which the fund
would be allowed to invest in directly.
SECURITIES LOANS
The fund may make secured loans of its portfolio securities amounting to not
more than the percentage of its total assets specified in Part 1 of this SAI,
thereby realizing additional income. The risks in lending portfolio securities,
as with other extensions of credit, consist of possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. As a matter of policy, securities loans are made to banks and
broker-dealers pursuant to agreements requiring that loans be continuously
secured by collateral in cash or short-term debt obligations at least equal at
all times to the value of the securities on loan. The borrower pays to the fund
an amount equal to any dividends or interest received on securities lent. The
fund retains all or a portion of the interest received on investment of the cash
collateral or receives a fee from the borrower. Although voting rights, or
rights to consent, with respect to the loaned securities pass to the borrower,
the fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The fund may also call such loans in order
to sell the securities involved.
FORWARD COMMITMENTS ("WHEN-ISSUED" AND "DELAYED DELIVERY" SECURITIES)
The fund may enter into contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments" and "when
issued securities") if the fund holds until the settlement date, in a segregated
account, cash or liquid securities in an amount sufficient to meet the purchase
price, or if the fund enters into offsetting contracts for the forward sale of
other securities it owns. Forward commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date. Where such purchases are made
through dealers, the fund relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the fund of an advantageous
yield or price. Although the fund will generally enter into forward commitments
with the intention of acquiring securities for its portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of a
commitment prior to settlement if the Advisor deems it appropriate to do so. The
fund may realize short-term profits or losses (generally taxed at ordinary
income tax rates in the hands of the shareholders) upon the sale of forward
commitments.
MORTGAGE DOLLAR ROLLS
In a mortgage dollar roll, the fund sells a mortgage-backed security and
simultaneously enters into a commitment to purchase a similar security at a
later date. The fund either will be paid a fee by the counterparty upon entering
into the transaction or will be entitled to purchase the similar security at a
discount. As with any forward commitment, mortgage dollar rolls involve the risk
that the counterparty will fail to deliver the new security on the settlement
date, which may deprive the fund of obtaining a beneficial investment. In
addition, the security to be delivered in the future may turn out to be inferior
to the security sold upon entering into the transaction. In addition, the
transaction costs may exceed the return earned by the fund from the transaction.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities, including "collateralized mortgage obligations"
(CMOs) and "real estate mortgage investment conduits" (REMICs), evidence
ownership in a pool of mortgage loans made by certain financial institutions
that may be insured or guaranteed by the U.S. government or its agencies. CMOs
are obligations issued by special-purpose trusts, secured by mortgages. REMICs
are entities that own mortgages and elect REMIC status under the Internal
Revenue Code. Both CMOs and REMICs issue one or more classes of securities of
which one (the Residual) is in the nature of equity. The funds will not invest
in the Residual class. Principal on mortgage-backed securities, CMOs and REMICs
may be prepaid if the underlying mortgages are prepaid. Prepayment rates for
mortgage-backed securities tend to increase as interest rates decline
(effectively shortening the security's life) and decrease as interest rates rise
(effectively lengthening the security's life). Because of the prepayment
feature, these securities may not increase in value as much as other debt
securities when interest rates fall. A fund may be able to invest prepaid
principal only at lower yields. The prepayment of such securities purchased at a
premium may result in losses equal to the premium.
NON-AGENCY MORTGAGE-BACKED SECURITIES
The fund may invest in non-investment grade mortgage-backed securities that are
not guaranteed by the U.S. Government or an Agency. Such securities are subject
to the risks described under "Lower Rated Debt Securities" and "Mortgage-Backed
Securities." In addition, although the underlying mortgages provide collateral
for the security, the fund may experience losses, costs and delays in enforcing
its rights if the issuer defaults or enters bankruptcy, and the fund may incur a
loss.
REPURCHASE AGREEMENTS
The fund may enter into repurchase agreements. A repurchase agreement is a
contract under which the fund acquires a security for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the fund to resell such security at a fixed time and price
(representing the fund's cost plus interest). It is the fund's present intention
to enter into repurchase agreements only with commercial banks and registered
broker-dealers and only with respect to obligations of the U.S. government or
its agencies or instrumentalities. Repurchase agreements may also be viewed as
loans made by the fund which are collateralized by the
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securities subject to repurchase. The Advisor will monitor such transactions to
determine that the value of the underlying securities is at least equal at all
times to the total amount of the repurchase obligation, including the interest
factor. If the seller defaults, the fund could realize a loss on the sale of the
underlying security to the extent that the proceeds of sale including accrued
interest are less than the resale price provided in the agreement including
interest. In addition, if the seller should be involved in bankruptcy or
insolvency proceedings, the fund may incur delay and costs in selling the
underlying security or may suffer a loss of principal and interest if the fund
is treated as an unsecured creditor and required to return the underlying
collateral to the seller's estate.
REVERSE REPURCHASE AGREEMENTS
In a reverse repurchase agreement, the fund sells a security and agrees to
repurchase the same security at a mutually agreed upon date and price. A reverse
repurchase agreement may also be viewed as the borrowing of money by the fund
and, therefore, as a form of leverage. The fund will invest the proceeds of
borrowings under reverse repurchase agreements. In addition, the fund will enter
into a reverse repurchase agreement only when the interest income expected to be
earned from the investment of the proceeds is greater than the interest expense
of the transaction. The fund will not invest the proceeds of a reverse
repurchase agreement for a period which exceeds the duration of the reverse
repurchase agreement. The fund may not enter into reverse repurchase agreements
exceeding in the aggregate one-third of the market value of its total assets,
less liabilities other than the obligations created by reverse repurchase
agreements. Each fund will establish and maintain with its custodian a separate
account with a segregated portfolio of securities in an amount at least equal to
its purchase obligations under its reverse repurchase agreements. If interest
rates rise during the term of a reverse repurchase agreement, entering into the
reverse repurchase agreement may have a negative impact on a money market fund's
ability to maintain a net asset value of $1.00 per share.
OPTIONS ON SECURITIES
WRITING COVERED OPTIONS. The fund may write covered call options and covered put
options on securities held in its portfolio when, in the opinion of the Advisor,
such transactions are consistent with the fund's investment objective and
policies. Call options written by the fund give the purchaser the right to buy
the underlying securities from the fund at a stated exercise price; put options
give the purchaser the right to sell the underlying securities to the fund at a
stated price.
The fund may write only covered options, which means that, so long as the fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The fund may
write combinations of covered puts and calls on the same underlying security.
The fund will receive a premium from writing a put or call option, which
increases the fund's return on the underlying security if the option expires
unexercised or is closed out at a profit. The amount of the premium reflects,
among other things, the relationship between the exercise price and the current
market value of the underlying security, the volatility of the underlying
security, the amount of time remaining until expiration, current interest rates,
and the effect of supply and demand in the options market and in the market for
the underlying security. By writing a call option, the fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option but continues to bear the risk
of a decline in the value of the underlying security. By writing a put option,
the fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
The fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an offsetting
option. The fund realizes a profit or loss from a closing transaction if the
cost of the transaction (option premium plus transaction costs) is less or more
than the premium received from writing the option. Because increases in the
market price of a call option generally reflect increases in the market price of
the security underlying the option, any loss resulting from a closing purchase
transaction may be offset in whole or in part by unrealized appreciation of the
underlying security.
If the fund writes a call option but does not own the underlying security, and
when it writes a put option, the fund may be required to deposit cash or
securities with its broker as "margin" or collateral for its obligation to buy
or sell the underlying security. As the value of the underlying security varies,
the fund may have to deposit additional margin with the broker. Margin
requirements are complex and are fixed by individual brokers, subject to minimum
requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
PURCHASING PUT OPTIONS. The fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such hedge protection is provided during the life of the put option since the
fund, as holder of the put option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. For a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and
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transaction costs. By using put options in this manner, the fund will reduce any
profit it might otherwise have realized from appreciation of the underlying
security by the premium paid for the put option and by transaction costs.
PURCHASING CALL OPTIONS. The fund may purchase call options to hedge against an
increase in the price of securities that the fund wants ultimately to buy. Such
hedge protection is provided during the life of the call option since the fund,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the fund might
have realized had it bought the underlying security at the time it purchased the
call option.
OVER-THE-COUNTER (OTC) OPTIONS. The Staff of the Division of Investment
Management of the Securities and Exchange Commission (SEC) has taken the
position that OTC options purchased by the fund and assets held to cover OTC
options written by the fund are illiquid securities. Although the Staff has
indicated that it is continuing to evaluate this issue, pending further
developments, the fund intends to enter into OTC options transactions only with
primary dealers in U.S. government securities and, in the case of OTC options
written by the fund, only pursuant to agreements that will assure that the fund
will at all times have the right to repurchase the option written by it from the
dealer at a specified formula price. The fund will treat the amount by which
such formula price exceeds the amount, if any, by which the option may be
"in-the-money" as an illiquid investment. It is the present policy of the fund
not to enter into any OTC option transaction if, as a result, more than 15% (10%
in some cases, refer to your fund's Prospectus) of the fund's net assets would
be invested in (i) illiquid investments (determined under the foregoing formula)
relating to OTC options written by the fund, (ii) OTC options purchased by the
fund, (iii) securities which are not readily marketable, and (iv) repurchase
agreements maturing in more than seven days.
RISK FACTORS IN OPTIONS TRANSACTIONS. The successful use of the fund's options
strategies depends on the ability of the Advisor to forecast interest rate and
market movements correctly.
When it purchases an option, the fund runs the risk that it will lose its entire
investment in the option in a relatively short period of time, unless the fund
exercises the option or enters into a closing sale transaction with respect to
the option during the life of the option. If the price of the underlying
security does not rise (in the case of a call) or fall (in the case of a put) to
an extent sufficient to cover the option premium and transaction costs, the fund
will lose part or all of its investment in the option. This contrasts with an
investment by the fund in the underlying securities, since the fund may continue
to hold its investment in those securities notwithstanding the lack of a change
in price of those securities.
The effective use of options also depends on the fund's ability to terminate
option positions at times when the Advisor deems it desirable to do so. Although
the fund will take an option position only if the Advisor believes there is a
liquid secondary market for the option, there is no assurance that the fund will
be able to effect closing transactions at any particular time or at an
acceptable price.
If a secondary trading market in options were to become unavailable, the fund
could no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A marketplace may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt normal market operations.
A marketplace may at times find it necessary to impose restrictions on
particular types of option transactions, which may limit the fund's ability to
realize its profits or limit its losses.
Disruptions in the markets for the securities underlying options purchased or
sold by the fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with losses if trading in the security reopens at a
substantially different price. In addition, the Options Clearing Corporation
(OCC) or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If a
prohibition on exercise remains in effect until an option owned by the fund has
expired, the fund could lose the entire value of its option.
Special risks are presented by internationally traded options. Because of time
differences between the United States and various foreign countries, and because
different holidays are observed in different countries, foreign options markets
may be open for trading during hours or on days when U.S. markets are closed. As
a result, option premiums may not reflect the current prices of the underlying
interest in the United States.
FUTURES CONTRACTS AND RELATED OPTIONS
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Upon entering into futures contracts, in compliance with the SEC's requirements,
cash or liquid securities, equal in value to the amount of the fund's obligation
under the contract (less any applicable margin deposits and any assets that
constitute "cover" for such obligation), will be segregated with the fund's
custodian.
A futures contract sale creates an obligation by the seller to deliver the type
of instrument called for in the contract in a specified delivery month for a
stated price. A futures contract purchase creates an obligation by the purchaser
to take delivery of the type of instrument called for in the contract in a
specified delivery month at a stated price. The specific instruments delivered
or taken at settlement date are not determined until on or near that date. The
determination is made in accordance with the rules of the exchanges on which the
futures contract was made. Futures contracts are traded in the United States
only on commodity exchanges or boards of trade -- known as "contract markets" --
approved for such trading by the Commodity Futures Trading Commission (CFTC),
and must be executed through a futures commission merchant or brokerage firm
which is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or acceptance
of commodities or securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Closing out a futures
contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument or commodity with
the same delivery date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid the difference
and realizes a gain. Conversely, if the price of the offsetting purchase exceeds
the price of the initial sale, the seller realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the purchaser's
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the purchaser realizes a gain, and if the purchase price exceeds
the offsetting sale price, the purchaser realizes a loss.
Unlike when the fund purchases or sells a security, no price is paid or received
by the fund upon the purchase or sale of a futures contract, although the fund
is required to deposit with its custodian in a segregated account in the name of
the futures broker an amount of cash and/or U.S. government securities. This
amount is known as "initial margin." The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds by the fund to
finance the transactions. Rather, initial margin is in the nature of a
performance bond or good faith deposit on the contract that is returned to the
fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin," to and from the broker (or the
custodian) are made on a daily basis as the price of the underlying security or
commodity fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking to market."
The fund may elect to close some or all of its futures positions at any time
prior to their expiration. The purpose of making such a move would be to reduce
or eliminate the hedge position then currently held by the fund. The fund may
close its positions by taking opposite positions which will operate to terminate
the fund's position in the futures contracts. Final determinations of variation
margin are then made, additional cash is required to be paid by or released to
the fund, and the fund realizes a loss or a gain.
Such closing transactions involve additional commission costs.
OPTIONS ON FUTURES CONTRACTS. The fund will enter into written options on
futures contracts only when, in compliance with the SEC's requirements, cash or
liquid securities equal in value to the commodity value (less any applicable
margin deposits) have been deposited in a segregated account of the fund's
custodian. The fund may purchase and write call and put options on futures
contracts it may buy or sell and enter into closing transactions with respect to
such options to terminate existing positions. The fund may use such options on
futures contracts in lieu of writing options directly on the underlying
securities or purchasing and selling the underlying futures contracts. Such
options generally operate in the same manner as options purchased or written
directly on the underlying investments.
As with options on securities, the holder or writer of an option may terminate
his position by selling or purchasing an offsetting option. There is no
guarantee that such closing transactions can be effected.
The fund will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements similar to those described above.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful use
of futures contracts by the fund is subject to the Advisor's ability to predict
correctly, movements in the direction of interest rates and other factors
affecting securities markets.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on futures contracts involves less potential risk to the fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the fund when
the purchase or
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sale of a futures contract would not, such as when there is no movement in the
prices of the hedged investments. The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures contracts.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution, by exchanges, of special
procedures which may interfere with the timely execution of customer orders.
To reduce or eliminate a hedge position held by the fund, the fund may seek to
close out a position. The ability to establish and close out positions will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or continue to exist for a particular
futures contract. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain contracts or options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of contracts or options, or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of contracts or options (or a particular
class or series of contracts or options), in which event the secondary market on
that exchange (or in the class or series of contracts or options) would cease to
exist, although outstanding contracts or options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
USE BY TAX-EXEMPT FUNDS OF INTEREST RATE AND U.S. TREASURY SECURITY FUTURES
CONTRACTS AND OPTIONS. The funds investing in tax-exempt securities issued by a
governmental entity may purchase and sell futures contracts and related options
on interest rate and U.S. Treasury securities when, in the opinion of the
Advisor, price movements in these security futures and related options will
correlate closely with price movements in the tax-exempt securities which are
the subject of the hedge. Interest rate and U.S. Treasury securities futures
contracts require the seller to deliver, or the purchaser to take delivery of,
the type of security called for in the contract at a specified date and price.
Options on interest rate and U.S. Treasury security futures contracts give the
purchaser the right in return for the premium paid to assume a position in a
futures contract at the specified option exercise price at any time during the
period of the option.
In addition to the risks generally involved in using futures contracts, there is
also a risk that price movements in interest rate and U.S. Treasury security
futures contracts and related options will not correlate closely with price
movements in markets for tax-exempt securities.
INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or sell
units of an index at a specified future date at a price agreed upon when the
contract is made. Entering into a contract to buy units of an index is commonly
referred to as buying or purchasing a contract or holding a long position in the
index. Entering into a contract to sell units of an index is commonly referred
to as selling a contract or holding a short position. A unit is the current
value of the index. The fund may enter into stock index futures contracts, debt
index futures contracts, or other index futures contracts appropriate to its
objective(s). The fund may also purchase and sell options on index futures
contracts.
There are several risks in connection with the use by the fund of index futures
as a hedging device. One risk arises because of the imperfect correlation
between movements in the prices of the index futures and movements in the prices
of securities which are the subject of the hedge. The Advisor will attempt to
reduce this risk by selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the fund's portfolio securities sought to be hedged.
Successful use of index futures by the fund for hedging purposes is also subject
to the Advisor's ability to predict correctly movements in the direction of the
market. It is possible that, where the fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the fund's portfolio may
decline. If this occurs, the fund would lose money on the futures and also
experience a decline in the value of its portfolio securities. However, while
this could occur to a certain degree, the Advisor believes that over time the
value of the fund's portfolio will tend to move in the same direction as the
market indices which are intended to correlate to the price movements of the
portfolio securities sought to be hedged. It is also possible that, if the fund
has hedged against the possibility of a decline in the market adversely
affecting securities held in its portfolio and securities prices increase
instead, the fund will lose part or all of the benefit of the increased values
of those securities that it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the index futures and the securities of
the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying
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index due to certain market distortions. First, all participants in the futures
markets are subject to margin deposit and maintenance requirements. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions which would distort the normal
relationship between the index and futures markets. Second, margin requirements
in the futures market are less onerous than margin requirements in the
securities market, and as a result, the futures market may attract more
speculators than the securities market. Increased participation by speculators
in the futures market may also cause temporary price distortions. Due to the
possibility of price distortions in the futures market and also because of the
imperfect correlation between movements in the index and movements in the prices
of index futures, even a correct forecast of general market trends by the
Advisor may still not result in a successful hedging transaction.
OPTIONS ON INDEX FUTURES. Options on index futures are similar to options on
securities except that options on index futures give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put), at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the index futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the index future. If an option is exercised on
the last trading day prior to the expiration date of the option, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
OPTIONS ON INDICES. As an alternative to purchasing call and put options on
index futures, the fund may purchase call and put options on the underlying
indices themselves. Such options could be used in a manner identical to the use
of options on index futures.
FOREIGN CURRENCY TRANSACTIONS
The fund may engage in currency exchange transactions to protect against
uncertainty in the level of future currency exchange rates.
The fund may engage in both "transaction hedging" and "position hedging." When
it engages in transaction hedging, the fund enters into foreign currency
transactions with respect to specific receivables or payables of the fund
generally arising in connection with the purchase or sale of its portfolio
securities. The fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the fund attempts to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
The fund may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. The fund may also
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the fund may also purchase exchange-listed and
over-the-counter call and put options on foreign currency futures contracts and
on foreign currencies. Over-the-counter options are considered to be illiquid by
the SEC staff. A put option on a futures contract gives the fund the right to
assume a short position in the futures contract until expiration of the option.
A put option on currency gives the fund the right to sell a currency at an
exercise price until the expiration of the option. A call option on a futures
contract gives the fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
fund the right to purchase a currency at the exercise price until the expiration
of the option.
When it engages in position hedging, the fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or an increase in
the value of currency for securities which the fund expects to purchase, when
the fund holds cash or short-term investments). In connection with position
hedging, the fund may purchase put or call options on foreign currency and
foreign currency futures contracts and buy or sell forward contracts and foreign
currency futures contracts. The fund may also purchase or sell foreign currency
on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the fund is obligated to deliver and if a decision is made
to sell the security or securities and make delivery of the foreign currency.
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Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the underlying
prices of the securities which the fund owns or intends to purchase or sell.
They simply establish a rate of exchange which one can achieve at some future
point in time. Additionally, although these techniques tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they tend to limit
any potential gain which might result from the increase in value of such
currency.
CURRENCY FORWARD AND FUTURES CONTRACTS. Upon entering into such contracts, in
compliance with the SEC's requirements, cash or liquid securities, equal in
value to the amount of the fund's obligation under the contract (less any
applicable margin deposits and any assets that constitute "cover" for such
obligation), will be segregated with the fund's custodian.
A forward currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract as agreed by the parties, at a price set at the time of
the contract. In the case of a cancelable contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades. A currency futures contract is a standardized contract for
the future delivery of a specified amount of a foreign currency at a future date
at a price set at the time of the contract. Currency futures contracts traded in
the United States are designed and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward currency contracts differ from currency futures contracts in certain
respects. For example, the maturity date of a forward contract may be any fixed
number of days from the date of the contract agreed upon by the parties, rather
than a predetermined date in a given month. Forward contracts may be in any
amounts agreed upon by the parties rather than predetermined amounts. Also,
forward contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires no margin or
other deposit.
At the maturity of a forward or futures contract, the fund may either accept or
make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract. Closing transactions with respect to futures contracts are effected on
a commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
Positions in currency futures contracts may be closed out only on an exchange or
board of trade which provides a secondary market in such contracts. Although the
fund intends to purchase or sell currency futures contracts only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a secondary market on an exchange or board of trade will exist
for any particular contract or at any particular time. In such event, it may not
be possible to close a futures position and, in the event of adverse price
movements, the fund would continue to be required to make daily cash payments of
variation margin.
CURRENCY OPTIONS. In general, options on currencies operate similarly to options
on securities and are subject to many similar risks. Currency options are traded
primarily in the over-the-counter market, although options on currencies have
recently been listed on several exchanges. Options are traded not only on the
currencies of individual nations, but also on the European Currency Unit
("ECU"). The ECU is composed of amounts of a number of currencies, and is the
official medium of exchange of the European Economic Community's European
Monetary System.
The fund will only purchase or write currency options when the Advisor believes
that a liquid secondary market exists for such options. There can be no
assurance that a liquid secondary market will exist for a particular option at
any specified time. Currency options are affected by all of those factors which
influence exchange rates and investments generally. To the extent that these
options are traded over the counter, they are considered to be illiquid by the
SEC staff.
The value of any currency, including the U.S. dollar, may be affected by complex
political and economic factors applicable to the issuing country. In addition,
the exchange rates of currencies (and therefore the values of currency options)
may be significantly affected, fixed, or supported directly or indirectly by
government actions. Government intervention may increase risks involved in
purchasing or selling currency options, since exchange rates may not be free to
fluctuate in respect to other market forces.
The value of a currency option reflects the value of an exchange rate, which in
turn reflects relative values of two currencies, the U.S. dollar and the foreign
currency in question. Because currency transactions occurring in the interbank
market involve substantially larger amounts than those that may be involved in
the exercise of currency options, investors may be disadvantaged by having to
deal in an
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odd lot market for the underlying currencies in connection with options at
prices that are less favorable than for round lots. Foreign governmental
restrictions or taxes could result in adverse changes in the cost of acquiring
or disposing of currencies.
There is no systematic reporting of last sale information for currencies and
there is no regulatory requirement that quotations available through dealers or
other market sources be firm or revised on a timely basis. Available quotation
information is generally representative of very large round-lot transactions in
the interbank market and thus may not reflect exchange rates for smaller odd-lot
transactions (less than $1 million) where rates may be less favorable. The
interbank market in currencies is a global, around-the-clock market. To the
extent that options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets.
SETTLEMENT PROCEDURES. Settlement procedures relating to the fund's investments
in foreign securities and to the fund's foreign currency exchange transactions
may be more complex than settlements with respect to investments in debt or
equity securities of U.S. issuers, and may involve certain risks not present in
the fund's domestic investments, including foreign currency risks and local
custom and usage. Foreign currency transactions may also involve the risk that
an entity involved in the settlement may not meet its obligations.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not charge a
fee for currency conversion, they do realize a profit based on the difference
(spread) between prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the fund at one rate,
while offering a lesser rate of exchange should the fund desire to resell that
currency to the dealer. Foreign currency transactions may also involve the risk
that an entity involved in the settlement may not meet its obligation.
MUNICIPAL LEASE OBLIGATIONS
Although a municipal lease obligation does not constitute a general obligation
of the municipality for which the municipality's taxing power is pledged, a
municipal lease obligation is ordinarily backed by the municipality's covenant
to budget for, appropriate and make the payments due under the municipal lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. In addition, the tax treatment of such
obligations in the event of non-appropriation is unclear.
Determinations concerning the liquidity and appropriate valuation of a municipal
lease obligation, as with any other municipal security, are made based on all
relevant factors. These factors include, among others: (1) the frequency of
trades and quotes for the obligation; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; and (4)
the nature of the marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers, and the mechanics of the
transfer.
PARTICIPATION INTERESTS
The fund may invest in municipal obligations either by purchasing them directly
or by purchasing certificates of accrual or similar instruments evidencing
direct ownership of interest payments or principal payments, or both, on
municipal obligations, provided that, in the opinion of counsel to the initial
seller of each such certificate or instrument, any discount accruing on such
certificate or instrument that is purchased at a yield not greater than the
coupon rate of interest on the related municipal obligations will be exempt from
federal income tax to the same extent as interest on such municipal obligations.
The fund may also invest in tax-exempt obligations by purchasing from banks
participation interests in all or part of specific holdings of municipal
obligations. Such participations may be backed in whole or part by an
irrevocable letter of credit or guarantee of the selling bank. The selling bank
may receive a fee from the fund in connection with the arrangement. The fund
will not purchase such participation interests unless it receives an opinion of
counsel or a ruling of the Internal Revenue Service that interest earned by it
on municipal obligations in which it holds such participation interests is
exempt from federal income tax.
STAND-BY COMMITMENTS
When the fund purchases municipal obligations, it may also acquire stand-by
commitments from banks and broker-dealers with respect to such municipal
obligations. A stand-by commitment is the equivalent of a put option acquired by
the fund with respect to a particular municipal obligation held in its
portfolio. A stand-by commitment is a security independent of the municipal
obligation to which it relates. The amount payable by a bank or dealer during
the time a stand-by commitment is exercisable, absent unusual circumstances
relating to a change in market value, would be substantially the same as the
value of the underlying municipal obligation. A stand-by commitment might not be
transferable by the fund, although it could sell the underlying municipal
obligation to a third party at any time.
The fund expects that stand-by commitments generally will be available without
the payment of direct or indirect consideration. However, if necessary and
advisable, the fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the fund portfolio will not exceed 10%
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of the value of the fund's total assets calculated immediately after each
stand-by commitment is acquired. The fund will enter into stand-by commitments
only with banks and broker-dealers that, in the judgment of the Trust's Board of
Trustees, present minimal credit risks.
INVERSE FLOATERS
Inverse floaters are derivative securities whose interest rates vary inversely
to changes in short-term interest rates and whose values fluctuate inversely to
changes in long-term interest rates. The value of certain inverse floaters will
fluctuate substantially more in response to a given change in long-term rates
than would a traditional debt security. These securities have investment
characteristics similar to leverage, in that interest rate changes have a
magnified effect on the value of inverse floaters.
RULE 144A SECURITIES
The fund may purchase securities that have been privately placed but that are
eligible for purchase and sale under Rule 144A of the Securities Act of 1933
("1933 Act"). That Rule permits certain qualified institutional buyers, such as
the fund, to trade in privately placed securities that have not been registered
for sale under the 1933 Act. The Advisor, under the supervision of the Board of
Trustees, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to the fund's investment restriction on illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, the Advisor will consider the
trading markets for the specific security, taking into account the unregistered
nature of a Rule 144A security. In addition, the Advisor could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential purchasers,
(3) dealer undertakings to make a market, and (4) nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer). The liquidity of Rule 144A
securities will be monitored and, if as a result of changed conditions, it is
determined by the Advisor that a Rule 144A security is no longer liquid, the
fund's holdings of illiquid securities would be reviewed to determine what, if
any, steps are required to assure that the fund does not invest more than its
investment restriction on illiquid securities allows. Investing in Rule 144A
securities could have the effect of increasing the amount of the fund's assets
invested in illiquid securities if qualified institutional buyers are unwilling
to purchase such securities.
TAXES
In this section, all discussions of taxation at the shareholder level relate to
federal taxes only. Consult your tax advisor for state, local and foreign tax
considerations and for information about special tax considerations that may
apply to shareholders that are not natural persons or not U.S. citizens or
resident aliens.
FEDERAL TAXES. The Fund (even if it is a fund in a Trust with multiple series)
is treated as a separate entity for federal income tax purposes under the
Internal Revenue Code of 1986, as amended (the "Code"). The Fund has elected (or
in the case of a new Fund, intends to elect) to be, and intends to qualify to be
treated each year as, a "regulated investment company" under Subchapter M of the
Code by meeting all applicable requirements of Subchapter M, including
requirements as to the nature of the Fund's gross income, the amount of its
distributions (as a percentage of both its overall income and any tax-exempt
income), and the composition of its portfolio assets. As a regulated investment
company, the Fund will not be subject to any federal income or excise taxes on
its net investment income and net realized capital gains that it distributes to
shareholders in accordance with the timing requirements imposed by the Code. The
Fund's foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company" in any
year, it would incur a regular federal corporate income tax on all of its
taxable income, whether or not distributed, and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
ALTERNATIVE MINIMUM TAX. Distributions derived from interest that is exempt from
regular federal income tax may subject corporate shareholders to or increase
their liability under the corporate alternative minimum tax (AMT). A portion of
such distributions may constitute a tax preference item for individual
shareholders and may subject them to or increase their liability under the AMT.
DIVIDENDS RECEIVED DEDUCTIONS. Distributions will qualify for the corporate
dividends received deduction only to the extent that dividends earned by the
fund qualify. Any such dividends are, however, includable in adjusted current
earnings for purposes of computing corporate AMT. The dividends received
deduction for eligible dividends is subject to a holding period requirement.
RETURN OF CAPITAL DISTRIBUTIONS. To the extent that a distribution is a return
of capital for federal tax purposes, it reduces the cost basis of the shares on
the record date and is similar to a partial return of the original investment
(on which a sales charge may have been paid). There is no recognition of a gain
or loss, however, unless the return of capital exceeds the cost basis in the
shares.
FUNDS THAT INVEST IN U.S. GOVERNMENT SECURITIES. Many states grant tax-free
status to dividends paid to shareholders of mutual funds from interest income
earned by the fund from direct obligations of the U.S. government. Investments
in mortgage-backed securities (including GNMA, FNMA and FHLMC Securities) and
repurchase agreements collateralized by U.S. government securities do not
qualify as direct federal obligations in most states. Shareholders should
consult with their own tax advisors about the applicability of state and local
intangible property, income or other taxes to their fund shares and
distributions and redemption proceeds received from the fund.
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FUND DISTRIBUTIONS. Distributions from the fund (other than exempt-interest
dividends, as discussed below) will be taxable to shareholders as ordinary
income to the extent derived from the fund's investment income and net
short-term gains. Distributions of long-term capital gains (that is, the excess
of net gains from capital assets held for more than one year over net losses
from capital assets held for not more than one year) will be taxable to
shareholders as such, regardless of how long a shareholder has held the shares
in the fund. In general, any distributions of net capital gains will be taxed to
shareholders who are individuals at a maximum rate of 20%.
Distributions will be taxed as described above whether received in cash or in
fund shares. Dividends and distributions on a fund's shares are generally
subject to federal income tax as described herein to the extent they do not
exceed the fund's realized income and gains, even though such dividends and
distributions may economically represent a return of a particular shareholder's
investment. Such distributions are likely to occur in respect of shares
purchased at a time when a fund's net asset value reflects gains that are either
unrealized, or realized but not distributed. Such realized gains may be required
to be distributed even when a fund's net asset value also reflects unrealized
losses.
DISTRIBUTIONS FROM TAX-EXEMPT FUNDS. Each tax-exempt fund will have at least 50%
of its total assets invested in tax-exempt bonds at the end of each quarter so
that dividends from net interest income on tax-exempt bonds will be exempt from
federal income tax when received by a shareholder. The tax-exempt portion of
dividends paid will be designated within 60 days after year-end based upon the
ratio of net tax-exempt income to total net investment income earned during the
year. That ratio may be substantially different from the ratio of net tax-exempt
income to total net investment income earned during any particular portion of
the year. Thus, a shareholder who holds shares for only a part of the year may
be allocated more or less tax-exempt dividends than would be the case if the
allocation were based on the ratio of net tax-exempt income to total net
investment income actually earned while a shareholder.
The Tax Reform Act of 1986 makes income from certain "private activity bonds"
issued after August 7, 1986, a tax preference item for the AMT at the maximum
rate of 28% for individuals and 20% for corporations. If the fund invests in
private activity bonds, shareholders may be subject to the AMT on that part of
the distributions derived from interest income on such bonds. Other provisions
of the Tax Reform Act affect the tax treatment of distributions for
corporations, casualty insurance companies and financial institutions; interest
on all tax-exempt bonds is included in corporate adjusted current earnings when
computing the AMT applicable to corporations. Seventy-five percent of the excess
of adjusted current earnings over the amount of income otherwise subject to the
AMT is included in a corporation's alternative minimum taxable income.
Dividends derived from any investments other than tax-exempt bonds and any
distributions of short-term capital gains are taxable to shareholders as
ordinary income. Any distributions of long-term capital gains will in general be
taxable to shareholders as long-term capital gains (generally subject to a
maximum 20% tax rate for shareholders who are individuals) regardless of the
length of time fund shares are held.
A tax-exempt fund may at times purchase tax-exempt securities at a discount and
some or all of this discount may be included in the fund's ordinary income which
will be taxable when distributed. Any market discount recognized on a tax-exempt
bond purchased after April 30, 1993, with a term at time of issue of one year or
more is taxable as ordinary income. A market discount bond is a bond acquired in
the secondary market at a price below its "stated redemption price" (in the case
of a bond with original issue discount, its "revised issue price").
Shareholders receiving social security and certain retirement benefits may be
taxed on a portion of those benefits as a result of receiving tax-exempt income,
including tax-exempt dividends from the fund.
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SPECIAL TAX RULES APPLICABLE TO TAX-EXEMPT FUNDS. Income distributions to
shareholders who are substantial users or related persons of substantial users
of facilities financed by industrial revenue bonds may not be excludable from
their gross income if such income is derived from such bonds. Income derived
from the fund's investments other than tax-exempt instruments may give rise to
taxable income. The fund's shares must be held for more than six months in order
to avoid the disallowance of a capital loss on the sale of fund shares to the
extent of tax-exempt dividends paid during that period. A shareholder who
borrows money to purchase the fund's shares will not be able to deduct the
interest paid with respect to such borrowed money.
SALES OF SHARES. The sale, exchange or redemption of fund shares may give rise
to a gain or loss. In general, any gain realized upon a taxable disposition of
shares generally will be treated as long-term capital gain if the shares have
been held for more than 12 months. Otherwise the gain on the sale, exchange or
redemption of fund shares will be treated as short-term capital gain. In
general, any loss realized upon a taxable disposition of shares will be treated
as long-term loss if the shares have been held more than 12 months, and
otherwise as short-term loss. However, any loss realized upon a taxable
disposition of shares held for six months or less will be treated as long-term,
rather than short-term, capital loss to the extent of any long-term capital gain
distributions received by the shareholder with respect to those shares. All or a
portion of any loss realized upon a taxable disposition of shares will be
disallowed if other shares are purchased within 30 days before or after the
disposition. In such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss.
BACKUP WITHHOLDING. Certain distributions and redemptions may be subject to a
31% backup withholding unless a taxpayer identification number and certification
that the shareholder is not subject to the withholding is provided to the fund.
This number and form may be provided by either a Form W-9 or the accompanying
application. In certain instances, LFSI may be notified by the Internal Revenue
Service that a shareholder is subject to backup withholding.
EXCISE TAX. To the extent that the fund does not annually distribute
substantially all taxable income and realized gains, it is subject to an excise
tax. The Advisor intends to avoid this tax except when the cost of processing
the distribution is greater than the tax.
TAX ACCOUNTING PRINCIPLES. To qualify as a "regulated investment company," the
fund must (a) derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; and (b) diversify its holdings so that, at the close of each quarter
of its taxable year, (i) at least 50% of the value of its total assets consists
of cash, cash items, U.S. government securities, and other securities limited
generally with respect to any one issuer to not more than 5% of the total assets
of the fund and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any issuer (other than U.S. government securities).
HEDGING TRANSACTIONS. If the fund engages in hedging transactions, including
hedging transactions in options, futures contracts and straddles, or other
similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale and short sale rules),
the effect of which may be to accelerate income to the fund, defer losses to the
fund, cause adjustments in the holding periods of the fund's securities, convert
long-term capital gains into short-term capital gains or convert short-term
capital losses into long-term capital losses. These rules could therefore affect
the amount, timing and character of distributions to shareholders. The fund will
endeavor to make any available elections pertaining to such transactions in a
manner believed to be in the best interests of the fund.
SECURITIES ISSUED AT A DISCOUNT. The fund's investment in securities issued at a
discount and certain other obligations will (and investments in securities
purchased at a discount may) require the fund to accrue and distribute income
not yet received. In such cases, the fund may be required to sell assets
(possibly at a time when it is not advantageous to do so) to generate the cash
necessary to distribute as dividends to its shareholders all of its income and
gains and therefore to eliminate any tax liability at the fund level.
FOREIGN CURRENCY-DENOMINATED SECURITIES AND RELATED HEDGING TRANSACTIONS. The
fund's transactions in foreign currencies, foreign currency-denominated debt
securities, certain foreign currency options, futures contracts and forward
contracts (and similar instruments) may give rise to ordinary income or loss to
the extent such income or loss results from fluctuations in the value of the
foreign currency concerned.
If more than 50% of the fund's total assets at the end of its fiscal year are
invested in stock or securities of foreign corporate issuers, the fund may make
an election permitting its shareholders to take a deduction or credit for
federal tax purposes for their portion of certain qualified foreign taxes paid
by the fund. The Advisor will consider the value of the benefit to a typical
shareholder, the cost to the fund of compliance with the election, and
incidental costs to shareholders in deciding whether to make the election. A
shareholder's ability to claim such a foreign tax credit will be subject to
certain limitations imposed by the Code, including a holding period requirement,
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as a result of which a shareholder may not get a full credit for the amount of
foreign taxes so paid by the fund. Shareholders who do not itemize on their
federal income tax returns may claim a credit (but not a deduction) for such
foreign taxes.
Investment by the fund in certain "passive foreign investment companies" could
subject the fund to a U.S. federal income tax (including interest charges) on
distributions received from the company or on proceeds received from the
disposition of shares in the company, which tax cannot be eliminated by making
distributions to fund shareholders. However, the fund may be able to elect to
treat a passive foreign investment company as a "qualified electing fund," in
which case the fund will be required to include its share of the company's
income and net capital gain annually, regardless of whether it receives any
distribution from the company. Alternatively, the fund may make an election to
mark the gains (and, to a limited extent, losses) in such holdings "to the
market" as though it had sold and repurchased its holdings in those passive
foreign investment companies on the last day of the fund's taxable year. Such
gains and losses are treated as ordinary income and loss. The qualified electing
fund and mark-to-market elections may have the effect of accelerating the
recognition of income (without the receipt of cash) and increase the amount
required to be distributed for the fund to avoid taxation. Making either of
these elections therefore may require a fund to liquidate other investments
(including when it is not advantageous to do so) in order to meet its
distribution requirement, which also may accelerate the recognition of gain and
affect a fund's total return.
MANAGEMENT OF THE FUNDS (IN THIS SECTION, AND THE FOLLOWING SECTIONS ENTITLED
"TRUSTEES AND OFFICERS," "THE MANAGEMENT AGREEMENT," "ADMINISTRATION AGREEMENT,"
"THE PRICING AND BOOKKEEPING AGREEMENT," "PORTFOLIO TRANSACTIONS," "INVESTMENT
DECISIONS," AND "BROKERAGE AND RESEARCH SERVICES," THE "ADVISOR" REFERS TO
COLONIAL MANAGEMENT ASSOCIATES, INC.)
The Advisor is the investment advisor to each of the funds (except for Colonial
Money Market Fund, Colonial Municipal Money Market Fund, Colonial Global
Utilities Fund, Stein Roe Advisor Tax-Managed Value Fund, Newport Tiger Fund,
Newport Tiger Cub Fund, Newport Japan Opportunities Fund, Newport Greater China
Fund, Newport Europe Fund and Newport Asia Pacific Fund - see Part I of each
Fund's respective SAI for a description of the investment advisor). The Advisor
is a subsidiary of Liberty Funds Group LLC (LFG), One Financial Center, Boston,
MA 02111. LFG is an indirect wholly-owned subsidiary of Liberty Financial
Companies, Inc. (Liberty Financial), which in turn is a direct majority-owned
subsidiary of Liberty Corporate Holdings, Inc., which in turn is a direct
wholly-owned subsidiary of LFC Management Corporation, which in turn is a direct
wholly-owned subsidiary of Liberty Mutual Equity Corporation, which in turn is a
direct wholly-owned subsidiary of Liberty Mutual Insurance Company (Liberty
Mutual). Liberty Mutual is an underwriter of workers' compensation insurance and
a property and casualty insurer in the United States. Liberty Financial's
address is 600 Atlantic Avenue, Boston, MA 02210. Liberty Mutual's address is
175 Berkeley Street, Boston, MA 02117.
TRUSTEES AND OFFICERS (THIS SECTION APPLIES TO ALL OF THE FUNDS)
<TABLE>
<CAPTION>
Position with
Name and Address Age Fund Principal Occupation During Past Five Years
- ---------------- --- ---- --------------------------------------------
<S> <C> <C> <C>
Robert J. Birnbaum 71 Trustee Consultant (formerly Special Counsel, Dechert Price &
313 Bedford Road Rhoads from September, 1988 to December, 1993, President,
Ridgewood, NJ 07450 New York Stock Exchange from May, 1985 to June, 1988,
President, American Stock Exchange, Inc. from 1977 to
May, 1985).
Tom Bleasdale 68 Trustee Retired (formerly Chairman of the Board and Chief
102 Clubhouse Drive #275 Executive Officer, Shore Bank & Trust Company from 1992
Naples, Florida 34105 to 1993); Director of The Empire Company since June,
1995.
John V. Carberry * 51 Trustee Senior Vice President of Liberty Financial (formerly
56 Woodcliff Road Managing Director, Salomon Brothers (investment banking)
Wellesley Hills, MA 02481 from January, 1988 to January, 1998).
Lora S. Collins 63 Trustee Attorney (formerly Attorney, Kramer, Levin, Naftalis &
1175 Hill Road Frankel from September, 1986 to November, 1996).
Southold, NY 11971
James E. Grinnell 69 Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Richard W. Lowry 62 Trustee Private Investor since August, 1987.
10701 Charleston Drive
Vero Beach, FL 32963
Salvatore Macera 67 Trustee Private Investor (formerly Executive Vice President and
26 Little Neck Lane Director of Itek Corporation (electronics) from 1975 to
New Seabury, MA 02649 1981).
William E. Mayer* 58 Trustee Partner, Development Capital, LLC (venture capital)
500 Park Avenue, 5th Floor (formerly Dean, College of Business and Management,
New York, NY 10022 University of Maryland from October, 1992 to November,
1996; Dean, Simon Graduate School of Business,
University of Rochester from October, 1991 to July, 1992).
James L. Moody, Jr. 67 Trustee Retired (formerly Chairman of the Board, Hannaford Bros.
16 Running Tide Road Co. (food retailer) from May, 1984 to May, 1997, and
Cape Elizabeth, ME 04107 Chief Executive Officer, Hannaford Bros. Co. from May,
1973 to May, 1992).
John J. Neuhauser 55 Trustee Dean, Boston College School of Management since
84 College Road September, 1977.
Chestnut Hill, MA 02467-3838
Thomas E. Stitzel 63 Trustee Professor of Finance, College of Business, Boise State
2208 Tawny Woods Place University (higher education); Business consultant and
Boise, ID 83706 author.
Robert L. Sullivan 71 Trustee Retired (formerly Partner, KPMG Peat Marwick LLP, from
45 Sankaty Avenue July, 1966 to June, 1985).
Siasconset, MA 02564
Anne-Lee Verville 53 Trustee Consultant (formerly General Manager, Global Education
359 Stickney Hill Road Industry from 1994 to 1997, and President, Applications
Hopkinton, NH 03229 Solutions Division from 1991 to 1994, IBM Corporation
(global education and global applications)).
Stephen E. Gibson 45 President President of the 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 the Advisor (formerly Executive Vice President
from July, 1996 to December, 1996); Director, Chief
Executive Officer and President of LFG since December,
1998 (formerly Director, Chief Executive Officer and
President of The Colonial Group, Inc. (TCG) from
December, 1996 to December, 1998); Assistant Chairman of
Stein Roe & Farnham Incorporated (SR&F) since August,
1998 (formerly Managing Director of Marketing of Putnam
Investments, June, 1992 to July, 1996.)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
J. Kevin Connaughton 34 Controller and Controller and Chief Accounting Officer of the Funds
Chief Accounting since February, 1998; Vice President of the Advisor since
Officer February, 1998 (formerly Senior Tax Manager, Coopers &
Lybrand, LLP from April, 1996 to January, 1998; Vice
President, 440 Financial Group/First Data Investor Services
Group from March, 1994 to April, 1996).
Timothy J. Jacoby 46 Treasurer and Treasurer and Chief Financial Officer of the Funds since
Chief Financial October, 1996 (formerly Controller and Chief Accounting
Officer Officer from October, 1997 to February, 1998); Senior
Vice President of the Advisor since September, 1996;
Vice President, Chief Financial Officer and Treasurer since
December, 1998 of LFG (formerly Vice President, Chief
Financial Officer and Treasurer from July, 1997 to
December, 1998 of TCG); Senior Vice President of SR&F
since August, 1998 (formerly Senior Vice President,
Fidelity Accounting and Custody Services from
September, 1993 to September, 1996).
Nancy L. Conlin 45 Secretary Secretary of the Funds since April, 1998 (formerly
Assistant Secretary from July, 1994 to April, 1998);
Director, Senior Vice President, General Counsel, Clerk
and Secretary of the Advisor since April, 1998 (formerly
Vice President, Counsel, Assistant Secretary and
Assistant Clerk from July, 1994 to April, 1998); Vice
President, General Counsel and Secretary of LFG since
December, 1998 (formerly Vice President-, General
Counsel and Clerk of TCG from April, 1998 to December,
1998; (formerly Assistant Clerk from July, 1994 to April,
1998).
Joseph R. Palombo 46 Vice President Vice President of the Funds since April, 1999; Executive
Vice President and Director of the Advisor since April,
1999; Executive Vice President and Chief Administrative
Officer of LFG since April, 1999; (formerly Chief
Operating Officer, Putnam Mutual Funds from 1994 to 1998).
</TABLE>
* A Trustee who is an "interested person" (as defined in the Investment
Company Act of 1940 ("1940 Act")) of the fund or the Advisor.
The business address of the officers of each fund is One Financial Center,
Boston, MA 02111.
The Trustees serve as trustees of all funds for which each Trustee (except Mr.
Carberry) 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.
Committee chairs receive an annual retainer of $5,000 and Committee chairs
receive $1,000 for each special meeting attended on a day other
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<PAGE>
than a regular joint meeting day. Committee members receive an annual retainer
of $1,000 and $1,000 for each special meeting attended on a day other than a
regular joint meeting day. Two-thirds of the Trustee fees are allocated among
the funds based on each fund's relative net assets and one-third of the fees are
divided equally among the funds.
The Advisor and/or its affiliate, Colonial Advisory Services, Inc. (CASI), has
rendered investment advisory services to investment company, institutional and
other clients since 1931. The Advisor currently serves as investment advisor or
administrator for 39 open-end and 5 closed-end management investment company
portfolios. Trustees and officers of the Trust, who are also officers of the
Advisor or its affiliates, will benefit from the advisory fees, sales
commissions and agency fees paid or allowed by the Trust. More than 30,000
financial advisors have recommended the funds to over 800,000 clients worldwide,
representing more than $16.3 billion in assets.
The Agreement and Declaration of Trust (Declaration) of the Trust provides that
the Trust will indemnify its Trustees and officers against liabilities and
expenses incurred in connection with litigation in which they may be involved
because of their offices with the Trust but that such indemnification will not
relieve any officer or Trustee of any liability to the Trust or its shareholders
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties. The Trust, at its expense, provides liability
insurance for the benefit of its Trustees and officers.
The Trustees have the authority to convert the funds into a master fund/feeder
fund structure. Under this structure, a fund may invest all or a portion of its
investable assets in investment companies with substantially the same investment
objectives, policies and restrictions as the fund. The primary reason to use the
master fund/feeder fund structure is to provide a mechanism to pool, in a single
master fund, investments of different investor classes, resulting in a larger
portfolio, investment and administrative efficiencies and economies of scale.
THE MANAGEMENT AGREEMENT (THIS SECTION DOES NOT APPLY TO COLONIAL MONEY MARKET
FUND, COLONIAL MUNICIPAL MONEY MARKET FUND, COLONIAL GLOBAL UTILITIES FUND,
STEIN ROE ADVISOR TAX-MANAGED VALUE FUND, NEWPORT TIGER FUND, NEWPORT JAPAN
OPPORTUNITIES FUND, NEWPORT TIGER CUB FUND, NEWPORT GREATER CHINA FUND, NEWPORT
EUROPE FUND OR NEWPORT ASIA PACIFIC FUND)
Under a Management Agreement (Agreement), the Advisor has contracted to furnish
each fund with investment research and recommendations or fund management,
respectively, and accounting and administrative personnel and services, and with
office space, equipment and other facilities. For these services and facilities,
each fund pays a monthly fee based on the average of the daily closing value of
the total net assets of each fund for such month. Under the Agreement, any
liability of the Advisor to the Trust, a fund and/or its shareholders is limited
to situations involving the Advisor's own willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties.
The Agreement may be terminated with respect to the fund at any time on 60 days'
written notice by the Advisor or by the Trustees of the Trust or by a vote of a
majority of the outstanding voting securities of the fund. The Agreement will
automatically terminate upon any assignment thereof and shall continue in effect
from year to year only so long as such continuance is approved at least annually
(i) by the Trustees of the Trust or by a vote of a majority of the outstanding
voting securities of the fund and (ii) by vote of a majority of the Trustees who
are not interested persons (as such term is defined in the 1940 Act) of the
Advisor or the Trust, cast in person at a meeting called for the purpose of
voting on such approval.
The Advisor pays all salaries of officers of the Trust. The Trust pays all
expenses not assumed by the Advisor including, but not limited to, auditing,
legal, custodial, investor servicing and shareholder reporting expenses. The
Trust pays the cost of printing and mailing any Prospectuses sent to
shareholders. LFD pays the cost of printing and distributing all other
Prospectuses.
ADMINISTRATION AGREEMENT (THIS SECTION APPLIES ONLY TO COLONIAL MONEY MARKET
FUND, COLONIAL MUNICIPAL MONEY MARKET FUND, COLONIAL GLOBAL UTILITIES FUND,
STEIN ROE ADVISOR TAX-MANAGED VALUE FUND, NEWPORT TIGER FUND, NEWPORT JAPAN
OPPORTUNITIES FUND, NEWPORT TIGER CUB FUND, NEWPORT GREATER CHINA FUND, NEWPORT
EUROPE FUND AND NEWPORT ASIA PACIFIC FUND AND THEIR RESPECTIVE TRUSTS).
Under an Administration Agreement with each fund named above, the Advisor, in
its capacity as the Administrator to each fund, has contracted to perform the
following administrative services:
(a) providing office space, equipment and clerical personnel;
(b) arranging, if desired by the respective Trust, for its directors,
officers and employees to serve as Trustees, officers or agents of
each fund;
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<PAGE>
(c) preparing and, if applicable, filing all documents required for
compliance by each fund with applicable laws and regulations;
(d) preparation of agendas and supporting documents for and minutes of
meetings of Trustees, committees of Trustees and shareholders;
(e) coordinating and overseeing the activities of each fund's other
third-party service providers; and
(f) maintaining certain books and records of each fund.
With respect to Colonial Money Market Fund and Colonial Municipal Money Market
Fund, the Administration Agreement for these funds provides for the following
services in addition to the services referenced above:
(g) Monitoring compliance by the fund with Rule 2a-7 under the (1940 Act
and reporting to the Trustees from time to time with respect
thereto; and
(h) Monitoring the investments and operations of the following
Portfolios: SR&F Municipal Money Market Portfolio (Municipal Money
Market Portfolio) in which Colonial Municipal Money Market Fund is
invested;
SR&F Cash Reserves Portfolio in which Colonial Money Market Fund is
invested.
The Advisor is paid a monthly fee at the annual rate of average daily net assets
set forth in Part 1 of this SAI.
THE PRICING AND BOOKKEEPING AGREEMENT
The Advisor provides pricing and bookkeeping services to each fund pursuant to a
Pricing and Bookkeeping Agreement. The Advisor, in its capacity as the
Administrator to each of Colonial Money Market Fund, Colonial Municipal Money
Market Fund and Colonial Global Utilities Fund, is paid an annual fee of
$18,000, plus 0.0233% of average daily net assets in excess of $50 million. For
each of the other funds (except for Newport Tiger Fund, Newport Japan
Opportunities Fund, Newport Tiger Cub Fund, Newport Greater China Fund, Newport
Europe Fund and Newport Asia Pacific Fund), the Advisor is paid monthly a fee of
$2,250 by each fund, plus a monthly percentage fee based on net assets of the
fund equal to the following:
1/12 of 0.000% of the first $50 million;
1/12 of 0.035% of the next $950 million;
1/12 of 0.025% of the next $1 billion;
1/12 of 0.015% of the next $1 billion; and
1/12 of 0.001% on the excess over $3 billion
The Advisor provides pricing and bookkeeping services to Newport Tiger Fund,
Newport Japan Opportunities Fund, Newport Tiger Cub Fund, Newport Greater China
Fund, Newport Europe Fund and Newport Asia Pacific Fund for an annual fee of
$27,000, plus 0.035% of each fund's average daily net assets over $50 million.
Stein Roe & Farnham Incorporated, the investment advisor of the Municipal Money
Market Portfolio, provides pricing and bookkeeping services to the Portfolio for
a fee of $25,000 plus 0.0025% annually of average daily net assets of the
Portfolio over $50 million.
PORTFOLIO TRANSACTIONS
THE FOLLOWING SECTIONS ENTITLED "INVESTMENT DECISIONS" AND "BROKERAGE AND
RESEARCH SERVICES" DO NOT APPLY TO COLONIAL MONEY MARKET FUND, COLONIAL
MUNICIPAL MONEY MARKET FUND, STEIN ROE ADVISOR TAX-MANAGED VALUE FUND AND
COLONIAL GLOBAL UTILITIES FUND. FOR EACH OF THESE FUNDS, SEE PART 1 OF ITS
RESPECTIVE SAI. THE ADVISOR OF NEWPORT TIGER FUND, NEWPORT JAPAN OPPORTUNITIES
FUND, NEWPORT TIGER CUB FUND, NEWPORT GREATER CHINA FUND, NEWPORT EUROPE FUND
AND NEWPORT ASIA PACIFIC FUND FOLLOWS THE SAME PROCEDURES AS THOSE SET FORTH
UNDER "BROKERAGE AND RESEARCH SERVICES."
INVESTMENT DECISIONS. The Advisor acts as investment advisor to each of the
funds (except for the Colonial Money Market Fund, Colonial Municipal Money
Market Fund, Colonial Global Utilities Fund, Stein Roe Advisor Tax-Managed Value
Fund, Newport Tiger Fund, Newport Japan Opportunities Fund, Newport Tiger Cub
Fund, Newport Greater China Fund, Newport Europe Fund and Newport Asia Pacific
Fund, each of which is administered by the Advisor. The Advisor's affiliate,
CASI, advises other institutional, corporate,
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<PAGE>
fiduciary and individual clients for which CASI performs various services.
Various officers and Trustees of the Trust also serve as officers or Trustees of
other funds and the other corporate or fiduciary clients of the Advisor. The
funds and clients advised by the Advisor or the funds administered by the
Advisor sometimes invest in securities in which the fund also invests and
sometimes engage in covered option writing programs and enter into transactions
utilizing stock index options and stock index and financial futures and related
options ("other instruments"). If the fund, such other funds and such other
clients desire to buy or sell the same portfolio securities, options or other
instruments at about the same time, the purchases and sales are normally made as
nearly as practicable on a pro rata basis in proportion to the amounts desired
to be purchased or sold by each. Although in some cases these practices could
have a detrimental effect on the price or volume of the securities, options or
other instruments as far as the fund is concerned, in most cases it is believed
that these practices should produce better executions. It is the opinion of the
Trustees that the desirability of retaining the Advisor as investment advisor to
the funds outweighs the disadvantages, if any, which might result from these
practices.
The portfolio managers of Colonial Utilities Fund, a series of Liberty Funds
Trust IV (formerly Colonial Trust IV), will use the trading facilities of Stein
Roe & Farnham Incorporated, an affiliate of the Advisor, to place all orders for
the purchase and sale of this fund's portfolio securities, futures contracts and
foreign currencies.
BROKERAGE AND RESEARCH SERVICES. Consistent with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., and subject to seeking
"best execution" (as defined below) and such other policies as the Trustees may
determine, the Advisor may consider sales of shares of the funds as a factor in
the selection of broker-dealers to execute securities transactions for a fund.
The Advisor places the transactions of the funds with broker-dealers selected by
the Advisor and, if applicable, negotiates commissions. Broker-dealers may
receive brokerage commissions on portfolio transactions, including the purchase
and writing of options, the effecting of closing purchase and sale transactions,
and the purchase and sale of underlying securities upon the exercise of options
and the purchase or sale of other instruments. The funds from time to time also
execute portfolio transactions with such broker-dealers acting as principals.
The funds do not intend to deal exclusively with any particular broker-dealer or
group of broker-dealers.
It is the Advisor's policy generally to seek best execution, which is to place
the funds' transactions where the funds can obtain the most favorable
combination of price and execution services in particular transactions or
provided on a continuing basis by a broker-dealer, and to deal directly with a
principal market maker in connection with over-the-counter transactions, except
when it is believed that best execution is obtainable elsewhere. In evaluating
the execution services of, including the overall reasonableness of brokerage
commissions paid to, a broker-dealer, consideration is given to, among other
things, the firm's general execution and operational capabilities, and to its
reliability, integrity and financial condition.
Securities transactions of the funds may be executed by broker-dealers who also
provide research services (as defined below) to the Advisor and the funds. The
Advisor may use all, some or none of such research services in providing
investment advisory services to each of its investment company and other
clients, including the fund. To the extent that such services are used by the
Advisor, they tend to reduce the Advisor's expenses. In the Advisor's opinion,
it is impossible to assign an exact dollar value for such services.
The Trustees have authorized the Advisor to cause the Funds to pay a
broker-dealer which provides brokerage and research services to the Advisor an
amount of commission for effecting a securities transaction, including the sale
of an option or a closing purchase transaction, for the funds in excess of the
amount of commission which another broker-dealer would have charged for
effecting that transaction. As provided in Section 28(e) of the Securities
Exchange Act of 1934, "brokerage and research services" include advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities and the availability of securities or purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends and portfolio strategy and performance
of accounts; and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement). The Advisor must
determine in good faith that such greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of that particular transaction or the Advisor's
overall responsibilities to the funds and all its other clients.
The Trustees have authorized the Advisor to utilize the services of a clearing
agent with respect to all call options written by funds that write options and
to pay such clearing agent commissions of a fixed amount per share (currently
1.25 cents) on the sale of the underlying security upon the exercise of an
option written by a fund.
The Advisor may use the services of AlphaTrade Inc. (ATI), a registered
broker-dealer and subsidiary of the Advisor, when buying or selling equity
securities for a fund's portfolio pursuant to procedures adopted by the Trustees
and 1940 Act Rule 17e-1. Under the Rule, the Advisor must ensure that
commissions a Fund pays ATI on portfolio transactions are reasonable and fair
compared to commissions received by other broker-dealers in connection with
comparable transactions involving similar securities being bought or sold at
about the same time. The Advisor will report quarterly to the Trustees on all
securities transactions placed through ATI so that the Trustees may consider
whether such trades complied with these procedures and the Rule. ATI employs
electronic trading methods by which it seeks to obtain best price and execution
for the fund, and will use a clearing broker to settle trades.
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<PAGE>
PRINCIPAL UNDERWRITER
LFD is the principal underwriter of the Trust's shares. LFD has no obligation to
buy the funds' shares, and purchases the funds' shares only upon receipt of
orders from authorized FSFs or investors.
INVESTOR SERVICING AND TRANSFER AGENT
LFSI is the Trust's investor servicing agent (transfer, plan and dividend
disbursing agent), for which it receives fees which are paid monthly by the
Trust. The fee paid to LFSI is based on the average daily net assets of each
fund plus reimbursement for certain out-of-pocket expenses. SEE "FUND CHARGES
AND EXPENSES" IN PART 1 OF THIS SAI FOR INFORMATION ON FEES RECEIVED BY LFSI.
The agreement continues indefinitely but may be terminated by 90 days' notice by
the fund to LFSI or generally by 6 months' notice by LFSI to the fund. The
agreement limits the liability of LFSI to the fund for loss or damage incurred
by the fund to situations involving a failure of LFSI to use reasonable care or
to act in good faith in performing its duties under the agreement. It also
provides that the fund will indemnify LFSI against, among other things, loss or
damage incurred by LFSI on account of any claim, demand, action or suit made on
or against LFSI not resulting from LFSI's bad faith or negligence and arising
out of, or in connection with, its duties under the agreement.
DETERMINATION OF NET ASSET VALUE
Each fund determines net asset value (NAV) per share for each class as of the
close of the New York Stock Exchange (Exchange) (generally 4:00 p.m. Eastern
time, 3:00 p.m. Central time) each day the Exchange is open. Currently, the
Exchange is closed Saturdays, Sundays and the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. Funds with portfolio
securities which are primarily listed on foreign exchanges may experience
trading and changes in NAV on days on which such fund does not determine NAV due
to differences in closing policies among exchanges. This may significantly
affect the NAV of the fund's redeemable securities on days when an investor
cannot redeem such securities. The net asset value of the Municipal Money Market
Portfolio will not be determined on days when the Exchange is closed unless, in
the judgment of the Municipal Money Market Portfolio's Board of Trustees, the
net asset value of the Municipal Money Market Portfolio should be determined on
any such day, in which case the determination will be made at 3:00 p.m., Central
time. Debt securities generally are valued by a pricing service which determines
valuations based upon market transactions for normal, institutional-size trading
units of similar securities. However, in circumstances where such prices are not
available or where the Advisor deems it appropriate to do so, an
over-the-counter or exchange bid quotation is used. Securities listed on an
exchange or on NASDAQ are valued at the last sale price. Listed securities for
which there were no sales during the day and unlisted securities are valued at
the last quoted bid price. Options are valued at the last sale price or in the
absence of a sale, the mean between the last quoted bid and offering prices.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost pursuant to procedures adopted by the Trustees. The values of
foreign securities quoted in foreign currencies are translated into U.S. dollars
at the exchange rate for that day. Portfolio positions for which there are no
such valuations and other assets are valued at fair value as determined by the
Advisor in good faith under the direction of the Trust's Board of Trustees.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. Trading on certain foreign securities markets may not take place on
all business days in New York, and trading on some foreign securities markets
takes place on days which are not business days in New York and on which the
fund's NAV is not calculated. The values of these securities used in determining
the NAV are computed as of such times. Also, because of the amount of time
required to collect and process trading information as to large numbers of
securities issues, the values of certain securities (such as convertible bonds,
U.S. government securities, and tax-exempt securities) are determined based on
market quotations collected earlier in the day at the latest practicable time
prior to the close of the Exchange. Occasionally, events affecting the value of
such securities may occur between such times and the close of the Exchange which
will not be reflected in the computation of each fund's NAV. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value following procedures
approved by the Trust's Board of Trustees.
(The following two paragraphs are applicable only to Newport Tiger Fund, Newport
Japan Opportunities Fund, Newport Tiger Cub Fund, Newport Greater China Fund,
Newport Europe Fund and Newport Asia Pacific Fund. " Advisor" in these two
paragraphs refers to each fund's investment advisor, Newport Fund Management,
Inc.)
Trading in securities on stock exchanges and over-the-counter markets in the Far
East is normally completed well before the close of the business day in New
York. Trading on Far Eastern securities markets may not take place on all
business days in New York, and trading on some Far Eastern securities markets
does take place on days which are not business days in New York and on which the
fund's NAV is not calculated.
The calculation of the fund's NAV accordingly may not take place
contemporaneously with the determination of the prices of the fund's portfolio
securities used in such calculations. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the close
of the Exchange (when the fund's NAV is calculated) will not be reflected in the
fund's calculation of NAV unless the Advisor, acting under procedures
established by the Board of Trustees of the Trust, deems that the particular
event would
20
<PAGE>
materially affect the fund's NAV, in which case an adjustment will be made.
Assets or liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the NAV of the fund's shares into
U.S. dollars at prevailing market rates.
AMORTIZED COST FOR MONEY MARKET FUNDS (THIS SECTION CURRENTLY DOES NOT APPLY TO
COLONIAL MONEY MARKET FUNDS, - SEE "AMORTIZED COST FOR MONEY MARKET FUNDS" UNDER
"OTHER INFORMATION CONCERNING THE PORTFOLIO" IN PART 1 OF THE SAI OF COLONIAL
MUNICIPAL MONEY MARKET FUND FOR INFORMATION RELATING TO THE MUNICIPAL MONEY
MARKET PORTFOLIO)
Money market funds generally value their portfolio securities at amortized cost
according to Rule 2a-7 under the 1940 Act.
Portfolio instruments are valued under the amortized cost method, whereby the
instrument is recorded at cost and thereafter amortized to maturity. This method
assures a constant NAV but may result in a yield different from that of the same
portfolio under the market value method. The Trust's Trustees have adopted
procedures intended to stabilize a money market fund's NAV per share at $1.00.
When a money market fund's market value deviates from the amortized cost of
$1.00, and results in a material dilution to existing shareholders, the Trust's
Trustees will take corrective action that may include: realizing gains or
losses; shortening the portfolio's maturity; withholding distributions;
redeeming shares in kind; or converting to the market value method (in which
case the NAV per share may differ from $1.00). All investments will be
determined pursuant to procedures approved by the Trust's Trustees to present
minimal credit risk.
See the Statement of Assets and Liabilities in the shareholder report of the
Colonial Money Market Fund for a specimen price sheet showing the computation of
maximum offering price per share of Class A shares.
HOW TO BUY SHARES
The Prospectus contains a general description of how investors may buy shares of
the fund and tables of charges. This SAI contains additional information which
may be of interest to investors.
The Fund will accept unconditional orders for shares to be executed at the
public offering price based on the NAV per share next determined after the order
is placed in good order. The public offering price is the NAV plus the
applicable sales charge, if any. In the case of orders for purchase of shares
placed through FSFs, the public offering price will be determined on the day the
order is placed in good order, but only if the FSF receives the order prior to
the time at which shares are valued and transmits it to the fund before the fund
processes that day's transactions. If the FSF fails to transmit before the fund
processes that day's transactions, the customer's entitlement to that day's
closing price must be settled between the customer and the FSF. If the FSF
receives the order after the time at which the fund values its shares, the price
will be based on the NAV determined as of the close of the Exchange on the next
day it is open. If funds for the purchase of shares are sent directly to LFSI,
they will be invested at the public offering price next determined after receipt
in good order. Payment for shares of the fund must be in U.S. dollars; if made
by check, the check must be drawn on a U.S. bank.
The fund receives the entire NAV of shares sold. For shares subject to an
initial sales charge, LFD's commission is the sales charge shown in the fund's
Prospectus less any applicable FSF discount. The FSF discount is the same for
all FSFs, except that LFD retains the entire sales charge on any sales made to a
shareholder who does not specify a FSF on the Investment Account Application
("Application"). LFD generally retains 100% of any asset-based sales charge
(distribution fee) or contingent deferred sales charge. Such charges generally
reimburse LFD for any up-front and/or ongoing commissions paid to FSFs.
Checks presented for the purchase of shares of the fund which are returned by
the purchaser's bank or checkwriting privilege checks for which there are
insufficient funds in a shareholder's account to cover redemption will subject
such purchaser or shareholder to a $15 service fee for each check returned.
Checks must be drawn on a U.S. bank and must be payable in U.S. dollars.
LFSI acts as the shareholder's agent whenever it receives instructions to carry
out a transaction on the shareholder's account. Upon receipt of instructions
that shares are to be purchased for a shareholder's account, the designated FSF
will receive the applicable sales commission. Shareholders may change FSFs at
any time by written notice to LFSI, provided the new FSF has a sales agreement
with LFD.
Shares credited to an account are transferable upon written instructions in good
order to LFSI and may be redeemed as described under "How to Sell Shares" in the
Prospectus. Certificates will not be issued for Class A shares unless
specifically requested and no certificates will be issued for Class B, C, T or Z
shares. The Colonial money market funds will not issue certificates.
Shareholders may send any certificates which have been previously acquired to
LFSI for deposit to their account.
LFD may, at its expense, provide special sales incentives (such as cash payments
in addition to the commissions specified in the Fund's SAI) to FSF's that agree
to promote the sale of shares of the Fund or other funds that LFD distributes.
At its discretion, the Distributor
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<PAGE>
may offer special sales incentives only to selected FSFs or to FSFs who have
previously sold or expect to sell significant amounts of the Fund's shares.
SPECIAL PURCHASE PROGRAMS/INVESTOR SERVICES
The following special purchase programs/investor services may be changed or
eliminated at any time.
FUNDAMATIC PROGRAM. As a convenience to investors, shares of most funds advised
by Colonial, Newport Fund Management, Inc., Crabbe Huson Group, Inc. and Stein
Roe & Farnham Incorporated may be purchased through the Fundamatic Program.
Preauthorized monthly bank drafts or electronic funds transfers for a fixed
amount of at least $50 are used to purchase a fund's shares at the public
offering price next determined after LFD receives the proceeds from the draft
(normally the 5th or the 20th of each month, or the next business day
thereafter). If your Fundamatic purchase is by electronic funds transfer, you
may request the Fundamatic purchase for any day. Further information and
application forms are available from FSFs or from LFD.
AUTOMATED DOLLAR COST AVERAGING (Classes A, B and C). The Automated Dollar Cost
Averaging program allows you to exchange $100 or more on a monthly basis from
any mutual fund advised by Colonial, Newport Fund Management, Inc., Crabbe Huson
Group, Inc. and Stein Roe & Farnham Incorporated in which you have a current
balance of at least $5,000 into the same class of shares of up to four other
funds. Complete the Automated Dollar Cost Averaging section of the Application.
The designated amount will be exchanged on the third Tuesday of each month.
There is no charge for exchanges made pursuant to the Automated Dollar Cost
Averaging program. Exchanges will continue so long as your fund balance is
sufficient to complete the transfers. Your normal rights and privileges as a
shareholder remain in full force and effect. Thus you can buy any fund, exchange
between the same Class of shares of funds by written instruction or by telephone
exchange if you have so elected and withdraw amounts from any fund, subject to
the imposition of any applicable CDSC.
Any additional payments or exchanges into your fund will extend the time of the
Automated Dollar Cost Averaging program.
An exchange is generally a capital sale transaction for federal income tax
purposes.
You may terminate your program, change the amount of the exchange (subject to
the $100 minimum), or change your selection of funds, by telephone or in
writing; if in writing by mailing your instructions to Liberty Funds Services,
Inc. P.O. Box 1722, Boston, MA 02105-1722.
You should consult your FSF or investment advisor to determine whether or not
the Automated Dollar Cost Averaging program is appropriate for you.
LFD offers several plans by which an investor may obtain reduced initial or
contingent deferred sales charges. These plans may be altered or discontinued at
any time. See "Programs For Reducing or Eliminating Sales Charges" for more
information.
TAX-SHELTERED RETIREMENT PLANS. LFD offers prototype tax-qualified plans,
including Individual Retirement Accounts (IRAs), and Pension and Profit-Sharing
Plans for individuals, corporations, employees and the self-employed. The
minimum initial Retirement Plan investment is $25. Investors Bank & Trust
Company is the Trustee of LFD prototype plans and charges a $15 annual fee.
Detailed information concerning these Retirement Plans and copies of the
Retirement Plans are available from LFD.
Participants in non-LFD prototype Retirement Plans (other than IRAs) also are
charged a $10 annual fee unless the plan maintains an omnibus account with LFSI.
Participants in LFD prototype Plans (other than IRAs) who liquidate the total
value of their account will also be charged a $15 close-out processing fee
payable to LFSI. The fee is in addition to any applicable CDSC. The fee will not
apply if the participant uses the proceeds to open a LFD IRA Rollover account in
any fund, or if the Plan maintains an omnibus account.
Consultation with a competent financial and tax advisor regarding these Plans
and consideration of the suitability of fund shares as an investment under the
Employee Retirement Income Security Act of 1974 or otherwise is recommended.
TELEPHONE ADDRESS CHANGE SERVICES. By calling LFSI, shareholders or their FSF of
record may change an address on a recorded telephone line. Confirmations of
address change will be sent to both the old and the new addresses. Telephone
redemption privileges are suspended for 30 days after an address change is
effected.
CASH CONNECTION. Dividends and any other distributions, including Systematic
Withdrawal Plan (SWP) payments, may be automatically deposited to a
shareholder's bank account via electronic funds transfer. Shareholders wishing
to avail themselves of this electronic transfer procedure should complete the
appropriate sections of the Application.
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<PAGE>
AUTOMATIC DIVIDEND DIVERSIFICATION. The automatic dividend diversification
reinvestment program (ADD) generally allows shareholders to have all
distributions from a fund automatically invested in the same class of shares of
another fund. An ADD account must be in the same name as the shareholder's
existing open account with the particular fund. Call LFSI for more information
at 1-800-422-3737.
PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES
RIGHT OF ACCUMULATION AND STATEMENT OF INTENT (Class A and Class T shares only)
(Class T shares can only be purchased by the shareholders of Newport Tiger Fund
who already own Class T shares). Reduced sales charges on Class A and T shares
can be effected by combining a current purchase with prior purchases of Class A,
B, C, T and Z shares of the funds distributed by LFD. The applicable sales
charge is based on the combined total of:
1. the current purchase; and
2. the value at the public offering price at the close of business on
the previous day of all funds' Class A shares held by the
shareholder (except shares of any money market fund, unless such
shares were acquired by exchange from Class A shares of another
fund other than a money market fund and Class B, C, T and Z
shares).
LFD must be promptly notified of each purchase which entitles a shareholder to a
reduced sales charge. Such reduced sales charge will be applied upon
confirmation of the shareholder's holdings by LFSI. A fund may terminate or
amend this Right of Accumulation.
Any person may qualify for reduced sales charges on purchases of Class A and T
shares made within a thirteen-month period pursuant to a Statement of Intent
("Statement"). A shareholder may include, as an accumulation credit toward the
completion of such Statement, the value of all Class A, B, C, T and Z shares
held by the shareholder on the date of the Statement in funds (except shares of
any money market fund, unless such shares were acquired by exchange from Class A
shares of another non-money market fund). The value is determined at the public
offering price on the date of the Statement. Purchases made through reinvestment
of distributions do not count toward satisfaction of the Statement.
During the term of a Statement, LFSI will hold shares in escrow to secure
payment of the higher sales charge applicable to Class A or T shares actually
purchased. Dividends and capital gains will be paid on all escrowed shares and
these shares will be released when the amount indicated has been purchased. A
Statement does not obligate the investor to buy or a fund to sell the amount of
the Statement.
If a shareholder exceeds the amount of the Statement and reaches an amount which
would qualify for a further quantity discount, a retroactive price adjustment
will be made at the time of expiration of the Statement. The resulting
difference in offering price will purchase additional shares for the
shareholder's account at the applicable offering price. As a part of this
adjustment, the FSF shall return to LFD the excess commission previously paid
during the thirteen-month period.
If the amount of the Statement is not purchased, the shareholder shall remit to
LFD an amount equal to the difference between the sales charge paid and the
sales charge that should have been paid. If the shareholder fails within twenty
days after a written request to pay such difference in sales charge, LFSI will
redeem that number of escrowed Class A shares to equal such difference. The
additional amount of FSF discount from the applicable offering price shall be
remitted to the shareholder's FSF of record.
Additional information about and the terms of Statements of Intent are available
from your FSF, or from LFSI at 1-800-345-6611.
COLONIAL ASSET BUILDER INVESTMENT PROGRAM (THIS SECTION CURRENTLY APPLIES ONLY
TO THE CLASS A SHARES OF COLONIAL SELECT VALUE FUND AND THE COLONIAL FUND, EACH
A SERIES OF LIBERTY FUNDS TRUST III (FORMERLY COLONIAL TRUST III)). A reduced
sales charge applies to a purchase of certain funds' Class A shares under a
Statement of Intent for the Colonial Asset Builder Investment Program (Program).
The Program offer may be withdrawn at any time without notice. A completed
Program may serve as the initial investment for a new Program, subject to the
maximum of $4,000 in initial investments per investor. Shareholders in this
program are subject to a 5% sales charge. LFSI will escrow shares to secure
payment of the additional sales charge on amounts invested if the Program is not
completed. Escrowed shares are credited with distributions and will be released
when the Program has ended. Shareholders are subject to a 1% fee on the amount
invested if they do not complete the Program. Prior to completion of the
Program, only scheduled Program investments may be made in a fund in which an
investor has a Program account. The following services are not available to
Program accounts until a Program has ended:
<TABLE>
<S> <C>
Systematic Withdrawal Plan Share Certificates
Sponsored Arrangements Exchange Privilege
$50,000 Fast Cash Colonial Cash Connection
</TABLE>
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<TABLE>
<S> <C>
Right of Accumulation Automatic Dividend Diversification
Telephone Redemption Reduced Sales Charges for any "person"
Statement of Intent
</TABLE>
*Exchanges may be made to other funds offering the Program.
Because of the unavailability of certain services, this Program may not be
suitable for all investors.
The FSF receives 3% of the investor's intended purchases under a Program at the
time of initial investment and 1% after the 24th monthly payment. LFD may
require the FSF to return all applicable commissions paid with respect to a
Program terminated within six months of inception, and thereafter to return
commissions in excess of the FSF discount applicable to shares actually
purchased.
Since the Asset Builder plan involves continuous investment regardless of the
fluctuating prices of funds shares, investors should consult their FSF to
determine whether it is appropriate. The Plan does not assure a profit nor
protect against loss in declining markets.
REINSTATEMENT PRIVILEGE. An investor who has redeemed Class A, B, C or T shares
may, upon request, reinstate within one year a portion or all of the proceeds of
such sale in shares of the same Class of any fund at the NAV next determined
after LFSI receives a written reinstatement request and payment. Any CDSC paid
at the time of the redemption will be credited to the shareholder upon
reinstatement. The period between the redemption and the reinstatement will not
be counted in aging the reinstated shares for purposes of calculating any CDSC
or conversion date. Investors who desire to exercise this privilege should
contact their FSF or LFSI. Shareholders may exercise this Privilege an unlimited
number of times. Exercise of this privilege does not alter the Federal income
tax treatment of any capital gains realized on the prior sale of fund shares,
but to the extent any such shares were sold at a loss, some or all of the loss
may be disallowed for tax purposes. Consult your tax advisor.
PRIVILEGES OF COLONIAL EMPLOYEES OR FINANCIAL SERVICE FIRMS (IN THIS SECTION,
THE "ADVISOR" REFERS TO COLONIAL MANAGEMENT ASSOCIATES, INC. IN ITS CAPACITY AS
THE ADVISOR OR ADMINISTRATOR TO CERTAIN FUNDS). Class A shares of certain funds
may be sold at NAV to the following individuals whether currently employed or
retired: Trustees of funds advised or administered by the Advisor; directors,
officers and employees of the Advisor, LFD and other companies affiliated with
the Advisor; registered representatives and employees of FSFs (including their
affiliates) that are parties to dealer agreements or other sales arrangements
with LFD; and such persons' families and their beneficial accounts.
SPONSORED ARRANGEMENTS. Class A and Class T shares (Class T shares can only be
purchased by the shareholders of Newport Tiger Fund who already own Class T
shares) of certain funds may be purchased at a reduced or no sales charge
pursuant to sponsored arrangements, which include programs under which an
organization makes recommendations to, or permits group solicitation of, its
employees, members or participants in connection with the purchase of shares of
the fund on an individual basis. The amount of the sales charge reduction will
reflect the anticipated reduction in sales expense associated with sponsored
arrangements. The reduction in sales expense, and therefore the reduction in
sales charge, will vary depending on factors such as the size and stability of
the organization's group, the term of the organization's existence and certain
characteristics of the members of its group. The funds reserve the right to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
plans at any time.
Class A and Class T shares (Class T shares can only be purchased by the
shareholders of Newport Tiger Fund who already own Class T shares) of certain
funds may also be purchased at reduced or no sales charge by clients of dealers,
brokers or registered investment advisors that have entered into agreements with
LFD pursuant to which the funds are included as investment options in programs
involving fee-based compensation arrangements, and by participants in certain
retirement plans.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES (CDSCS) (IN THIS SECTION, THE
"ADVISOR" REFERS TO COLONIAL MANAGEMENT ASSOCIATES, INC. IN ITS CAPACITY AS THE
ADVISOR OR ADMINISTRATOR TO CERTAIN FUNDS) (Classes A, B and C) CDSCs may be
waived on redemptions in the following situations with the proper documentation:
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<PAGE>
1. Death. CDSCs may be waived on redemptions within one year following
the death of (i) the sole shareholder on an individual account, (ii)
a joint tenant where the surviving joint tenant is the deceased's
spouse, or (iii) the beneficiary of a Uniform Gifts to Minors Act
(UGMA), Uniform Transfers to Minors Act (UTMA) or other custodial
account. If, upon the occurrence of one of the foregoing, the
account is transferred to an account registered in the name of the
deceased's estate, the CDSC will be waived on any redemption from
the estate account occurring within one year after the death. If the
Class B shares are not redeemed within one year of the death, they
will remain subject to the applicable CDSC, when redeemed from the
transferee's account. If the account is transferred to a new
registration and then a redemption is requested, the applicable CDSC
will be charged.
2. Systematic Withdrawal Plan (SWP). CDSCs may be waived on redemptions
occurring pursuant to a monthly, quarterly or semi-annual SWP
established with LFSI, to the extent the redemptions do not exceed,
on an annual basis, 12% of the account's value, so long as at the
time of the first SWP redemption the account had had distributions
reinvested for a period at least equal to the period of the SWP
(e.g., if it is a quarterly SWP, distributions must have been
reinvested at least for the three-month period prior to the first
SWP redemption). Otherwise CDSCs will be charged on SWP redemptions
until this requirement is met; this requirement does not apply if
the SWP is set up at the time the account is established, and
distributions are being reinvested. See below under "Investor
Services - Systematic Withdrawal Plan."
3. Disability. CDSCs may be waived on redemptions occurring within one
year after the sole shareholder on an individual account or a joint
tenant on a spousal joint tenant account becomes disabled (as
defined in Section 72(m)(7) of the Internal Revenue Code). To be
eligible for such waiver, (i) the disability must arise AFTER the
purchase of shares AND (ii) the disabled shareholder must have been
under age 65 at the time of the initial determination of disability.
If the account is transferred to a new registration and then a
redemption is requested, the applicable CDSC will be charged.
4. Death of a trustee. CDSCs may be waived on redemptions occurring
upon dissolution of a revocable living or grantor trust following
the death of the sole trustee where (i) the grantor of the trust is
the sole trustee and the sole life beneficiary, (ii) death occurs
following the purchase AND (iii) the trust document provides for
dissolution of the trust upon the trustee's death. If the account is
transferred to a new registration (including that of a successor
trustee), the applicable CDSC will be charged upon any subsequent
redemption.
5. Returns of excess contributions. CDSCs may be waived on redemptions
required to return excess contributions made to retirement plans or
individual retirement accounts, so long as the FSF agrees to return
the applicable portion of any commission paid by Colonial.
6. Qualified Retirement Plans. CDSCs may be waived on redemptions
required to make distributions from qualified retirement plans
following normal retirement (as stated in the Plan document). CDSCs
also will be waived on SWP redemptions made to make required minimum
distributions from qualified retirement plans that have invested in
funds distributed by LFD for at least two years.
The CDSC also may be waived where the FSF agrees to return all or an agreed upon
portion of the commission earned on the sale of the shares being redeemed.
HOW TO SELL SHARES
Shares may also be sold on any day the Exchange is open, either directly to the
Fund or through the shareholder's FSF. Sale proceeds generally are sent within
seven days (usually on the next business day after your request is received in
good form). However, for shares recently purchased by check, the Fund may delay
selling your shares for up to 15 days in order to protect the Fund against
financial losses and dilution in net asset value caused by dishonored purchase
payment checks.
To sell shares directly to the Fund, send a signed letter of instruction or
stock power form to LFSI, along with any certificates for shares to be sold. The
sale price is the net asset value (less any applicable contingent deferred sales
charge) next calculated after the Fund receives the request in proper form.
Signatures must be guaranteed by a bank, a member firm of a national stock
exchange or another eligible guarantor institution. Stock power forms are
available from FSFs, LFSI and many banks. Additional documentation is required
for sales by corporations, agents, fiduciaries, surviving joint owners and
individual retirement account holders. Call LFSI for more information
1-800-345-6611.
FSFs must receive requests before the time at which the Fund's shares are valued
to receive that day's price, are responsible for furnishing all necessary
documentation to LFSI and may charge for this service.
SYSTEMATIC WITHDRAWAL PLAN If a shareholder's account balance is at least
$5,000, the shareholder may establish a SWP. A specified dollar amount or
percentage of the then current net asset value of the shareholder's investment
in any fund designated by the
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shareholder will be paid monthly, quarterly or semi-annually to a designated
payee. The amount or percentage the shareholder specifies generally may not, on
an annualized basis, exceed 12% of the value, as of the time the shareholder
makes the election, of the shareholder's investment. Withdrawals from Class B
and Class C shares of the fund under a SWP will be treated as redemptions of
shares purchased through the reinvestment of fund distributions, or, to the
extent such shares in the shareholder's account are insufficient to cover Plan
payments, as redemptions from the earliest purchased shares of such fund in the
shareholder's account. No CDSCs apply to a redemption pursuant to a SWP of 12%
or less, even if, after giving effect to the redemption, the shareholder's
account balance is less than the shareholder's base amount. Qualified plan
participants who are required by Internal Revenue Service regulation to withdraw
more than 12%, on an annual basis, of the value of their Class B and Class C
share account may do so but will be subject to a CDSC ranging from 1% to 5% of
the amount withdrawn in excess of 12% annually. If a shareholder wishes to
participate in a SWP, the shareholder must elect to have all of the
shareholder's income dividends and other fund distributions payable in shares of
the fund rather than in cash.
A shareholder or a shareholder's FSF of record may establish a SWP account by
telephone on a recorded line. However, SWP checks will be payable only to the
shareholder and sent to the address of record. SWPs from retirement accounts
cannot be established by telephone.
A shareholder may not establish a SWP if the shareholder holds shares in
certificate form. Purchasing additional shares (other than through dividend and
distribution reinvestment) while receiving SWP payments is ordinarily
disadvantageous because of duplicative sales charges. For this reason, a
shareholder may not maintain a plan for the accumulation of shares of the fund
(other than through the reinvestment of dividends) and a SWP at the same time.
SWP payments are made through share redemptions, which may result in a gain or
loss for tax purposes, may involve the use of principal and may eventually use
up all of the shares in a shareholder's account.
A fund may terminate a shareholder's SWP if the shareholder's account balance
falls below $5,000 due to any transfer or liquidation of shares other than
pursuant to the SWP. SWP payments will be terminated on receiving satisfactory
evidence of the death or incapacity of a shareholder. Until this evidence is
received, LFSI will not be liable for any payment made in accordance with the
provisions of a SWP.
The cost of administering SWPs for the benefit of shareholders who participate
in them is borne by the fund as an expense of all shareholders.
Shareholders whose positions are held in "street name" by certain FSFs may not
be able to participate in a SWP. If a shareholder's Fund shares are held in
"street name," the shareholder should consult his or her FSF to determine
whether he or she may participate in a SWP.
TELEPHONE REDEMPTIONS. All Fund shareholders and/or their FSFs are automatically
eligible to redeem up to $100,000 of the fund's shares by calling 1-800-422-3737
toll-free any business day between 9:00 a.m. and the close of trading of the
Exchange (normally 4:00 p.m. Eastern time). Transactions received after 4:00
p.m. Eastern time will receive the next business day's closing price. Telephone
redemptions are limited to a total of $100,000 in a 30-day period. Redemptions
that exceed $100,000 may be accomplished by placing a wire order trade through a
broker or furnishing a signature guarantee request. Telephone redemption
privileges for larger amounts may be elected on the Application. LFSI will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Telephone redemptions are not available on accounts with
an address change in the preceding 30 days and proceeds and confirmations will
only be mailed or sent to the address of record unless the redemption proceeds
are being sent to a pre-designated bank account. Shareholders and/or their FSFs
will be required to provide their name, address and account number. FSFs will
also be required to provide their broker number. All telephone transactions are
recorded. A loss to a shareholder may result from an unauthorized transaction
reasonably believed to have been authorized. No shareholder is obligated to
execute the telephone authorization form or to use the telephone to execute
transactions.
CHECKWRITING (IN THIS SECTION, THE "ADVISOR" REFERS TO COLONIAL MANAGEMENT
ASSOCIATES, INC. IN ITS CAPACITY AS THE ADVISOR OR ADMINISTRATOR OF CERTAIN
FUNDS) (Available only on the Class A shares of certain funds) Shares may be
redeemed by check if a shareholder has previously completed an Application and
Signature Card. LFSI will provide checks to be drawn on BankBoston (the "Bank").
These checks may be made payable to the order of any person in the amount of not
less than $500 nor more than $100,000. The shareholder will continue to earn
dividends on shares until a check is presented to the Bank for payment. At such
time a sufficient number of full and fractional shares will be redeemed at the
next determined net asset value to cover the amount of the check. Certificate
shares may not be redeemed in this manner.
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Shareholders utilizing checkwriting drafts will be subject to the Bank's rules
governing checking accounts. There is currently no charge to the shareholder for
the use of checks. The shareholder should make sure that there are sufficient
shares in his or her open account to cover the amount of any check drawn since
the net asset value of shares will fluctuate. If insufficient shares are in the
shareholder's open account, the check will be returned marked "insufficient
funds" and no shares will be redeemed; the shareholder will be charged a $15
service fee for each check returned. It is not possible to determine in advance
the total value of an open account because prior redemptions and possible
changes in net asset value may cause the value of an open account to change.
Accordingly, a check redemption should not be used to close an open account. In
addition, a check redemption, like any other redemption, may give rise to
taxable capital gains.
NON CASH REDEMPTIONS. For redemptions of any single shareholder within any
90-day period exceeding the lesser of $250,000 or 1% of a fund's net asset
value, a fund may make the payment or a portion of the payment with portfolio
securities held by that fund instead of cash, in which case the redeeming
shareholder may incur brokerage and other costs in selling the securities
received.
DISTRIBUTIONS
Distributions are invested in additional shares of the same Class of the fund at
net asset value unless the shareholder elects to receive cash. Regardless of the
shareholder's election, distributions of $10 or less will not be paid in cash,
but will be invested in additional shares of the same class of the fund at net
asset value. Undelivered distribution checks returned by the post office will be
reinvested in your account. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service selected by the Transfer Agent is unable to deliver checks to the
shareholder's address of record, such shareholder's distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. No interest will accrue on amounts represented
by uncashed distribution or redemption checks. Shareholders may reinvest all or
a portion of a recent cash distribution without a sales charge. A shareholder
request must be received within 30 calendar days of the distribution. A
shareholder may exercise this privilege only once. No charge is currently made
for reinvestment.
Shares of most funds that pay daily dividends will normally earn dividends
starting with the date the fund receives payment for the shares and will
continue through the day before the shares are redeemed, transferred or
exchanged. The daily dividends for Colonial Municipal Money Market Fund will be
earned starting with the day after that fund receives payments for the shares.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for the same class of shares of the other
continuously offered funds (with certain exceptions) on the basis of the NAVs
per share at the time of exchange. Class T and Z shares may be exchanged for
Class A shares of the other funds. The prospectus of each fund describes its
investment objective and policies, and shareholders should obtain a prospectus
and consider these objectives and policies carefully before requesting an
exchange. Shares of certain funds are not available to residents of all states.
Consult LFSI before requesting an exchange.
By calling LFSI, shareholders or their FSF of record may exchange among accounts
with identical registrations, provided that the shares are held on deposit.
During periods of unusual market changes or shareholder activity, shareholders
may experience delays in contacting LFSI by telephone to exercise the telephone
exchange privilege. Because an exchange involves a redemption and reinvestment
in another fund, completion of an exchange may be delayed under unusual
circumstances, such as if the fund suspends repurchases or postpones payment for
the fund shares being exchanged in accordance with federal securities law. LFSI
will also make exchanges upon receipt of a written exchange request and share
certificates, if any. If the shareholder is a corporation, partnership, agent,
or surviving joint owner, LFSI will require customary additional documentation.
Prospectuses of the other funds are available from the LFD Literature Department
by calling 1-800-426-3750.
A loss to a shareholder may result from an unauthorized transaction reasonably
believed to have been authorized. No shareholder is obligated to use the
telephone to execute transactions.
You need to hold your Class A and Class T shares for five months before
exchanging to certain funds having a higher maximum sales charge. Consult your
FSF or LFSI. In all cases, the shares to be exchanged must be registered on the
records of the fund in the name of the shareholder desiring to exchange.
Shareholders of the other open-end funds generally may exchange their shares at
NAV for the same class of shares of the fund.
An exchange is generally a capital sale transaction for federal income tax
purposes. The exchange privilege may be revised, suspended or terminated at any
time.
SUSPENSION OF REDEMPTIONS
A fund may not suspend shareholders' right of redemption or postpone payment for
more than seven days unless the Exchange is closed for other than customary
weekends or holidays, or if permitted by the rules of the SEC during periods
when trading on the Exchange is
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restricted or during any emergency which makes it impracticable for the fund to
dispose of its securities or to determine fairly the value of its net assets, or
during any other period permitted by order of the SEC for the protection of
investors.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the fund
and the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the fund or the
Trust's Trustees. The Declaration provides for indemnification out of fund
property for all loss and expense of any shareholder held personally liable for
the obligations of the fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances (which are
considered remote) in which the fund would be unable to meet its obligations and
the disclaimer was inoperative.
The risk of a particular fund incurring financial loss on account of another
fund of the Trust is also believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the other fund was
unable to meet its obligations.
SHAREHOLDER MEETINGS
As described under the caption "Organization and History" in the Prospectus of
each fund, the fund will not hold annual shareholders' meetings. The Trustees
may fill any vacancies in the Board of Trustees except that the Trustees may not
fill a vacancy if, immediately after filling such vacancy, less than two-thirds
of the Trustees then in office would have been elected to such office by the
shareholders. In addition, at such times as less than a majority of the Trustees
then in office have been elected to such office by the shareholders, the
Trustees must call a meeting of shareholders. Trustees may be removed from
office by a written consent signed by a majority of the outstanding shares of
the Trust or by a vote of the holders of a majority of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon written
request of the holders of not less than 10% of the outstanding shares of the
Trust. Upon written request by the holders of 1% of the outstanding shares of
the Trust stating that such shareholders of the Trust, for the purpose of
obtaining the signatures necessary to demand a shareholders' meeting to consider
removal of a Trustee, request information regarding the Trust's shareholders,
the Trust will provide appropriate materials (at the expense of the requesting
shareholders). Except as otherwise disclosed in the Prospectus and this SAI, the
Trustees shall continue to hold office and may appoint their successors.
At any shareholders' meetings that may be held, shareholders of all series would
vote together, irrespective of series, on the election of Trustees or the
selection of independent accountants, but each series would vote separately from
the others on other matters, such as changes in the investment policies of that
series or the approval of the management agreement for that series.
PERFORMANCE MEASURES
TOTAL RETURN
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN. Average annual total return is the
actual return on a $1,000 investment in a particular class of shares of the
fund, made at the beginning of a stated period, adjusted for the maximum sales
charge or applicable CDSC for the class of shares of the fund and assuming that
all distributions were reinvested at NAV, converted to an average annual return
assuming annual compounding.
NONSTANDARDIZED TOTAL RETURN. Nonstandardized total returns may differ from
standardized average annual total returns in that they may relate to
nonstandardized periods, represent aggregate (i.e. cumulative) rather than
average annual total returns or may not reflect the sales charge or CDSC.
Total return for a newer class of shares for periods prior to inception includes
(a) the performance of the newer class of shares since inception and (b) the
performance of the oldest existing class of shares from the inception date up to
the date the newer class was offered for sale. In calculating total rate of
return for a newer class of shares in accordance with certain formulas required
by the SEC, the performance will be adjusted to take into account the fact that
the newer class is subject to a different sales charge than the oldest class
(e.g., if the newer class is Class A shares, the total rate of return quoted
will reflect the deduction of the initial sales charge applicable to Class A
shares (except Colonial Money Market Fund); if the newer class is Class B or
Class C shares, the total rate of return quoted will reflect the deduction of
the CDSC applicable to Class B or Class C shares). However, the performance will
not be adjusted to take into account the fact that the newer class of shares
bears different class specific expenses than the oldest class of shares (e.g.,
Rule 12b-1 fees). Therefore, the total rate of return quoted for a newer class
of shares will differ from the return that would be quoted had the newer class
of shares been outstanding for the entire period over which the calculation is
based (i.e., the total rate of return quoted for the newer class will be higher
than the return that would have been quoted had the newer class of shares been
outstanding for the entire period over which the calculation is based if the
class specific expenses for the newer class are higher than the class specific
expenses of the oldest class, and the total rate of return quoted for the newer
class will be lower than the return that would be quoted had the newer class of
shares been outstanding for this entire period if the class specific expenses
for the newer class are lower than the class specific expenses of the oldest
class). Performance results reflect any voluntary waivers or reimbursements of
fund
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expenses by the Advisor, Administrator or its affiliates. Absent these waivers
or reimbursements, performance results would have been lower.
YIELD
MONEY MARKET. A money market fund's yield and effective yield is computed in
accordance with the SEC's formula for money market fund yields.
NON-MONEY MARKET. The yield for each class of shares of a fund is determined by
(i) calculating the income (as defined by the SEC for purposes of advertising
yield) during the base period and subtracting actual expenses for the period
(net of any reimbursements), and (ii) dividing the result by the product of the
average daily number of shares of the fund that were entitled to dividends
during the period and the maximum offering price of the fund on the last day of
the period, (iii) then annualizing the result assuming semi-annual compounding.
Tax-equivalent yield is calculated by taking that portion of the yield which is
exempt from income tax and determining the equivalent taxable yield which would
produce the same after-tax yield for any given federal and, in some cases, state
tax rate, and adding to that the portion of the yield which is fully taxable.
Adjusted yield is calculated in the same manner as yield except that expenses
voluntarily borne or waived by the Advisor or its affiliates have been added
back to actual expenses.
DISTRIBUTION RATE. The distribution rate for each class of shares of a fund is
usually calculated by dividing annual or annualized distributions by the maximum
offering price of that class on the last day of the period. Generally, the
fund's distribution rate reflects total amounts actually paid to shareholders,
while yield reflects the current earning power of the fund's portfolio
securities (net of the fund's expenses). The fund's yield for any period may be
more or less than the amount actually distributed in respect of such period.
The fund may compare its performance to various unmanaged indices published by
such sources as are listed in Appendix II.
The fund may also refer to quotations, graphs and electronically transmitted
data from sources believed by the Advisor to be reputable, and publications in
the press pertaining to a fund's performance or to the Advisor or its
affiliates, including comparisons with competitors and matters of national and
global economic and financial interest. Examples include Forbes, Business Week,
Money Magazine, The Wall Street Journal, The New York Times, The Boston Globe,
Barron's National Business & Financial Weekly, Financial Planning, Changing
Times, Reuters Information Services, Wiesenberger Mutual Funds Investment
Report, Lipper, Inc., Morningstar, Inc., Sylvia Porter's Personal Finance
Magazine, Money Market Directory, SEI Funds Evaluation Services, FTA World Index
and Disclosure Incorporated, Bloomberg and Ibbotson.
All data are based on past performance and do not predict future results.
TAX-RELATED ILLUSTRATIONS. The Fund also may present hypothetical illustrations
(i) comparing the Fund's and other mutual fund's pre-tax and after-tax total
returns, and (ii) showing the effects of income, capital gain and estate taxes
on performance.
GENERAL. From time to time, the fund may discuss or quote its current portfolio
manager as well as other investment personnel and members of the tax management
oversight team, including such person's views on: the economy; securities
markets; portfolio securities and their issuers; investment philosophies,
strategies, techniques and criteria used in the selection of securities to be
purchased or sold for the fund, including the New Value(TM) investment strategy
that expands upon the principles of traditional value investing; the fund's
portfolio holdings; the investment research and analysis process; the
formulation and evaluation of investment recommendations; and the assessment and
evaluation of credit, interest rate, market and economic risks and similar or
related matters.
The fund may also quote evaluations mentioned in independent radio or television
broadcasts, and use charts and graphs to illustrate the past performance of
various indices such as those mentioned in Appendix II and illustrations using
hypothetical rates of return to illustrate the effects of compounding and
tax-deferral. The fund may advertise examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low.
From time to time, the fund may also discuss or quote the views of its
distributor, its investment advisor and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; general investment techniques (e.g.,
asset allocation and disciplined saving and investing); business succession;
issues with respect to insurance (e.g., disability and life insurance and
Medicare supplemental insurance); issues regarding financial and health care
management for elderly family members; and similar or related matters.
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APPENDIX I
DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S CORPORATION (S&P)
The following descriptions are applicable to municipal bond funds:
AAA bonds have the highest rating assigned by S&P. Capacity to pay interest and
repay principal is extremely strong.
AA bonds have a very strong capacity to pay interest and repay principal, and
they differ from AAA only in small degree.
A bonds have a strong capacity to pay interest and repay principal, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB bonds are regarded as having an adequate capacity to pay interest and repay
principal. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal than for bonds in the A
category.
BB, B, CCC, CC and C bonds are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or large exposures to adverse conditions.
BB bonds have less near-term vulnerability to default than other speculative
issues. However, they face major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B bonds have a greater vulnerability to default but currently have the capacity
to meet interest payments and principal repayments. Adverse business, financial,
or economic conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC bonds have a currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, the bonds are not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC rating typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
C rating typically is applied to debt subordinated to senior debt which assigned
an actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
CI rating is reserved for income bonds on which no interest is being paid.
D bonds are in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus(+) or minus(-) ratings from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
PROVISIONAL RATINGS. The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, although addressing credit
quality subsequent to completion of the project, makes no comments on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
MUNICIPAL NOTES:
SP-1. Notes rated SP-1 have very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and interest.
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Notes due in three years or less normally receive a note rating. Notes maturing
beyond three years normally receive a bond rating, although the following
criteria are used in making that assessment:
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue will be rated as a note).
Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be rated as a note).
DEMAND FEATURE OF VARIABLE RATE DEMAND SECURITIES:
S&P assigns dual ratings to all long-term debt issues that have as part of their
provisions a demand feature. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity, and the commercial paper rating symbols are
usually used to denote the put (demand) option (for example, AAA/A-1+).
Normally, demand notes receive note rating symbols combined with commercial
paper symbols (for example, SP-1+/A-1+).
COMMERCIAL PAPER:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree to safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.
CORPORATE BONDS:
The description of the applicable rating symbols and their meanings is
substantially the same as the Municipal Bond ratings set forth above.
The following descriptions are applicable to equity and taxable bond funds:
AAA bonds have the highest rating assigned by S&P. The obligor's capacity to
meet its financial commitment on the obligation is extremely strong.
AA bonds differ from the highest rated obligations only in small degree. The
obligor's capacity to meet its financial commitment on the obligation is very
strong.
A bonds are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB bonds exhibit adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC and CC bonds are regarded, as having significant speculative
characteristics. BB indicates the least degree of speculation and C the highest.
While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB bonds are less vulnerable to non-payment than other speculative issues.
However, they face major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B bonds are more vulnerable to nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC bonds are currently vulnerable to nonpayment, and are dependent upon
favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation.
CC bonds are currently highly vulnerable to nonpayment.
C ratings may be used to cover a situation where a bankruptcy petition has been
filed or similar action has been taken, but payments on the obligation are being
continued.
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D bonds are in payment default. The D rating category is used when payments on
an obligation are not made on the date due even if the applicable grace period
has not expired, unless S&P believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or minus(-): The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
r This symbol is attached to the rating of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk, such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa bonds are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edge". Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair a fundamentally
strong position of such issues.
Aa bonds are judged to be of high quality by all standards. Together with Aaa
bonds they comprise what are generally known as high-grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large in
Aaa securities or fluctuation of protective elements may be of greater amplitude
or there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
Those bonds in the Aa through B groups that Moody's believes possess the
strongest investment attributes are designated by the symbol Aa1, A1 and Baa1.
A bonds possess many favorable investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa bonds are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact, have speculative
characteristics as well.
Ba bonds are judged to have speculative elements: their future cannot be
considered as well secured. Often, the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B bonds generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa bonds are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca bonds represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
C bonds are the lowest rated class of bonds and issues so rated can be regarded
as having extremely poor prospects of ever attaining any real investment
standing.
CONDITIONAL RATINGS. Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
conditions attach. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
MUNICIPAL NOTES:
MIG 1. This designation denotes best quality. There is present strong protection
by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security elements are
accounted for, but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
32
<PAGE>
DEMAND FEATURE OF VARIABLE RATE DEMAND SECURITIES:
Moody's may assign a separate rating to the demand feature of a variable rate
demand security. Such a rating may include:
VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
VMIG 2. This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
VMIG 3. This designation denotes favorable quality. All security elements are
accounted for, but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
COMMERCIAL PAPER:
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.
CORPORATE BONDS:
The description of the applicable rating symbols (Aaa, Aa, A) and their meanings
is identical to that of the Municipal Bond ratings as set forth above, except
for the numerical modifiers. Moody's applies numerical modifiers 1, 2, and 3 in
the Aa and A classifications of its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a midrange ranking; and the modifier 3
indicates that the issuer ranks in the lower end of its generic rating category.
FITCH INVESTORS SERVICE
INVESTMENT GRADE BOND RATINGS
AAA bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and/or
dividends and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than debt securities with higher ratings.
BBB bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest or dividends and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
securities and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
securities with higher ratings.
CONDITIONAL
A conditional rating is premised on the successful completion of a project or
the occurrence of a specific event.
SPECULATIVE-GRADE BOND RATINGS
BB bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified, which could assist the
obligor in satisfying its debt service requirements.
B bonds are considered highly speculative. While securities in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
33
<PAGE>
CCC bonds have certain identifiable characteristics that, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D bonds are in default on interest and/or principal payments. Such
securities are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. 'DDD'
represents the highest potential for recovery on these securities, and 'D'
represents the lowest potential for recovery.
DUFF & PHELPS CREDIT RATING CO.
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA - High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+, A, A - Protection factors are average but adequate. However, risk factors
are more available and greater in periods of economic stress.
BBB+, BBB, BBB - Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB - Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes.
Overall quality may move up or down frequently within this category.
B+, B, B - Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC - Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD - Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
34
<PAGE>
APPENDIX II
1998
<TABLE>
<CAPTION>
SOURCE CATEGORY RETURN (%)
- ------ -------- ----------
<S> <C> <C>
CREDIT SUISSE
FIRST BOSTON:
First Boston High Yield 0.58
LIPPER, INC.:
AMEX Composite Index P 0.64
AMEX Computer Tech IX P 81.46
AMEX Institutional IX P 37.59
AMEX Major Market IX P 18.32
Aust Crdtstlt:Osh IX P N/A
Bse Sensex Index -16.50
CAC 40:FFR IX P 31.47
CD Rate 1 Month Index Tr 5.61
CD Rate 3 Month Index Tr 5.59
CD Rate 6 Month Index Tr 5.58
Consumer Price Index 1.61
Copnhgn SE:Dkr IX P N/A
DAX:Dm IX Tr 17.71
Dow Jones 65 Comp Av P 10.10
Dow Jones Ind Average P 16.10
Dow Jones Ind Dly Reinv 18.13
Dow Jones Ind Mth Reinv 18.15
Dow Jones Trans Av P -3.29
Dow Jones Trans Av Tr 0.02
Dow Jones Util Av P 14.37
Dow Jones Util Av Tr 18.88
FT-SE 100:Pd IX P 14.55
Hang Seng:Hng Kng $ IX -6.29
Jakarta Composite Index N/A
Jasdaq Index:Yen P N/A
Klse Composite Index -1.40
Kospi Index N/A
Lear High Growth Rate IX 1.53
Lear Low Priced Value IX -1.52
Lehman 1-3 Govt/Corp Tr 6.96
Lehman Aggregate Bd P 2.03
Lehman Aggregate Bd Tr 8.69
Lehman Cp Bd Int Tr 8.29
Lehman Govt Bd Int P 1.99
Lehman Govt Bd Int Tr 8.49
Lehman Govt Bd Long P 6.59
Lehman Govt Bd Long Tr 13.41
Lehman Govt Bd P 3.27
Lehman Govt Bd Tr 9.85
Lehman Govt/Cp Bd P 2.70
Lehman Govt/Cp Bd Tr 9.47
Lehman Govt/Cp Int P 1.78
Lehman Govt/Cp Int Tr 8.44
Lehman High Yield P -6.46
Lehman High Yield Tr 1.60
Lehman Muni 10 Yr IX Tr 6.76
Lehman Muni 3 Yr IX Tr 5.21
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Lehman Muni Bond IX Tr 6.48
Lehman 7-Year Muni Bond 6.23
ML 0-3 Yr Muni IX P 0.02
ML 0-3 Yr Muni IX Tr 5.01
ML 1-3 Yr Treasury IX P 0.60
ML 1-3 Yr Treasury IX Tr 7.00
ML 1-5 Yr Gv/Cp Bd IX P 1.12
ML 1-5 Yr Gv/Cp Bd IX Tr 7.68
ML 1-5 Yr Treasury IX P 1.32
ML 1-5 Yr Treasury IX Tr 7.74
ML 10+ Yr Treasury IX Tr 13.55
ML 15 Yr Mortgage IX P 0.85
ML 15 Yr Mortgage IX Tr 7.30
ML 3-5 Yr Govt IX P 2.40
ML 3-5 Yr Govt IX Tr 8.87
ML Corp Master Index P 1.47
ML Corp Master Index Tr 8.72
ML Glbl Govt Bond Inx P 7.71
ML Glbl Govt Bond Inx Tr 14.12
ML Glbl Gv Bond IX II P 8.32
ML Glbl Gv Bond IX II Tr 14.97
ML Global Bond Index P 6.07
ML Global Bond Index Tr 12.78
ML Gov Corp Master IX P 2.69
ML Gov Corp Master IX Tr 9.53
ML Govt Master Index P 3.17
ML Govt Master Index Tr 9.85
ML High Yld Master IX P -5.59
ML High Yld Master IX Tr 3.66
ML Mortgage Master IX P 0.68
ML Mortgage Master IX Tr 7.19
ML Treasury Master IX P 3.35
ML Treasury Master IX Tr 10.03
MSCI AC Americas Free GD 25.77
MSCI AC Americas Free ID 23.77
MSCI AC Asia Fr-Ja IX GD -7.79
MSCI AC Asia Fr-Ja IX ID -10.27
MSCI AC Asia Pac - Ja GD -4.77
MSCI AC Asia Pac - Ja ID -7.30
MSCI AC Asia Pac Fr-J GD -4.42
MSCI AC Asia Pac Fr-J ID -7.12
MSCI AC Asia Pac IX GD 2.03
MSCI AC Asia Pac IX ID 0.53
MSCI AC Europe IX GD 27.18
MSCI AC Europe IX ID 24.84
MSCI AC Fe - Ja IX GD -4.83
MSCI AC Fe - Ja IX ID -7.16
MSCI AC Fe Fr-Ja IX GD -4.82
MSCI AC Fe Fr-Ja IX ID -7.39
MSCI AC Fe Free IX GD 3.38
MSCI AC Fe Free IX ID 2.07
MSCI AC Pac Fr-Jpn IX GD -2.07
MSCI AC Pac Fr-Jpn IX ID -4.86
MSCI AC World Fr-USA GD 14.46
MSCI AC World Fr-USA ID 12.36
MSCI AC World Free IX GD 21.97
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
MSCI AC World IX GD 21.72
MSCI AC World IX ID 19.69
MSCI AC World-USA IX GD 14.09
MSCI AC Wrld Fr-Ja IX GD 24.09
MSCI AC Wrld Fr-Ja IX ID 21.93
MSCI AC Wrld-Ja IX GD 23.80
MSCI AC Wrld-Ja IX ID 21.64
MSCI Argentina IX GD -24.30
MSCI Argentina IX ID -27.30
MSCI Australia IX GD 7.06
MSCI Australia IX ID 3.80
MSCI Australia IX ND 6.07
MSCI Austria IX GD 0.77
MSCI Austria IX ID -0.91
MSCI Austria IX ND 0.35
MSCI Belgium IX GD 68.73
MSCI Belgium IX ID 64.84
MSCI Belgium IX ND 67.75
MSCI Brazil IX GD -39.62
MSCI Brazil IX ID -44.07
MSCI Canada IX GD -5.70
MSCI Canada IX ID -7.44
MSCI Canada IX ND -6.14
MSCI Chile IX GD -28.50
MSCI Chile IX ID -30.65
MSCI China Dom Fr IX ID -51.52
MSCI China Free IX ID -43.83
MSCI China Non Dom IX ID -42.06
MSCI Colombia IX GD -42.17
MSCI Colombia IX ID -45.32
MSCI Czech Rep IX GD 0.54
MSCI Czech Rep IX ID -0.66
MSCI Denmark IX GD 9.38
MSCI Denmark IX ID 7.82
MSCI Denmark IX ND 8.99
MSCI EAFE + Canada IX GD 19.11
MSCI EAFE + Canada IX ID 17.02
MSCI EAFE + Canada IX ND 18.76
MSCI EAFE + EMF IX GD 15.25
MSCI EAFE + EMF IX ID 13.13
MSCI EAFE + Em IX GD 14.94
MSCI EAFE + Em IX ID 12.84
MSCI EAFE - UK IX GD 21.02
MSCI EAFE - UK IX ID 19.17
MSCI EAFE - UK IX ND 20.59
MSCI EAFE Fr IX ID 18.32
MSCI EAFE GDP Wt IX GD 27.12
MSCI EAFE GDP Wt IX ID 25.12
MSCI EAFE GDP Wt IX ND 26.71
MSCI EAFE IX GD 20.33
MSCI EAFE IX ID 18.23
MSCI EAFE IX ND 20.00
MSCI EASEA IX GD 25.42
MSCI EASEA IX ID 22.94
MSCI EASEA IX ND 25.03
MSCI EMF Asia IX GD -11.00
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
MSCI EMF Asia IX ID -12.36
MSCI EMF Far East IX GD -6.23
MSCI EMF Far East IX ID -7.33
MSCI EMF IX GD -25.34
MSCI EMF IX ID -27.52
MSCI EMF Latin Am IX GD -35.11
MSCI EMF Latin Am IX ID -38.04
MSCI Em Asia IX GD -8.57
MSCI Em Asia IX ID -9.90
MSCI Em Eur/Mid East GD -26.01
MSCI Em Eur/Mid East ID -27.37
MSCI Em Europe IX GD -30.11
MSCI Em Europe IX ID -31.17
MSCI Em Far East IX GD -4.12
MSCI Em Far East IX ID -5.28
MSCI Em IX GD -23.21
MSCI Em IX ID -25.30
MSCI Em Latin Am IX GD -35.29
MSCI Em Latin Am IX ID -38.19
MSCI Europe - UK IX GD 33.95
MSCI Europe - UK IX ID 31.86
MSCI Europe - UK IX ND 33.38
MSCI Europe GDP Wt IX ID 31.74
MSCI Europe IX GD 28.91
MSCI Europe IX ID 26.53
MSCI Europe IX ND 28.53
MSCI European Union GD 30.44
MSCI European Union ID 27.93
MSCI Far East Free IX ID 1.52
MSCI Far East IX GD 2.56
MSCI Far East IX ID 1.22
MSCI Far East IX ND 2.39
MSCI Finland IX GD 122.63
MSCI Finland IX ID 119.10
MSCI Finland IX ND 121.64
MSCI France IX GD 42.06
MSCI France IX ID 40.00
MSCI France IX ND 41.54
MSCI Germany IX GD 29.88
MSCI Germany IX ID 28.17
MSCI Germany IX ND 29.43
MSCI Greece IX GD 78.11
MSCI Greece IX ID 75.01
MSCI Hongkong IX GD -2.92
MSCI Hongkong IX ID -7.60
MSCI Hongkong IX ND -2.92
MSCI Hungary IX GD -8.16
MSCI Hungary IX ID -8.70
MSCI India IX GD -21.24
MSCI India IX ID -22.89
MSCI Indonesia IX GD -31.53
MSCI Indonesia IX ID -32.40
MSCI Ireland IX ID 32.99
MSCI Israel Dom IX ID -16.20
MSCI Israel IX ID -7.91
MSCI Israel Non Dom Ixid 42.21
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
MSCI Italy IX GD 53.20
MSCI Italy IX ID 50.99
MSCI Italy IX ND 52.52
MSCI Japan IX GD 5.25
MSCI Japan IX ID 4.27
MSCI Japan IX ND 5.05
MSCI Jordan IX GD -11.01
MSCI Jordan IX ID -14.26
MSCI Kokusai IX GD 27.46
MSCI Kokusai IX ID 25.30
MSCI Kokusai IX ND 26.96
MSCI Korea IX GD 141.15
MSCI Korea IX ID 137.54
MSCI Luxembourg IX ID 8.63
MSCI Malaysia IX GD -29.49
MSCI Malaysia IX ID -31.04
MSCI Mexico Free IX GD -33.53
MSCI Mexico Free IX ID -34.50
MSCI Mexico IX GD -34.18
MSCI Mexico IX ID -35.12
MSCI Netherland IX GD 23.93
MSCI Netherland IX ID 21.13
MSCI Netherland IX ND 23.23
MSCI New Zealand IX GD -21.48
MSCI New Zealand IX ID -25.23
MSCI New Zealand IX ND -22.62
MSCI Nordic IX GD 23.83
MSCI Nordic IX ID 21.78
MSCI Nordic IX ND 23.25
MSCI Norway IX GD -29.67
MSCI Norway IX ID -31.21
MSCI Norway IX ND -30.06
MSCI Nth Amer IX GD 29.04
MSCI Nth Amer IX ID 27.11
MSCI Nth Amer IX ND 28.46
MSCI Pac - Japan IX GD -6.22
MSCI Pac - Japan IX ID -9.55
MSCI Pac - Japan IX ND -6.64
MSCI Pacific Fr-Jpn ID -8.40
MSCI Pacific Free IX ID 1.43
MSCI Pacific IX GD 2.69
MSCI Pacific IX ID 1.16
MSCI Pacific IX ND 2.44
MSCI Pakistan IX GD -56.61
MSCI Pakistan IX ID -60.56
MSCI Peru IX GD -40.22
MSCI Peru IX ID -42.11
MSCI Philippines Fr Ixgd 13.45
MSCI Philippines Fr Ixid 12.60
MSCI Philippines IX GD 16.10
MSCI Philippines IX ID 14.89
MSCI Portugal IX GD 27.90
MSCI Portugal IX ID 25.42
MSCI Russia IX GD -82.99
MSCI Russia IX ID -83.16
MSCI Sing/Mlysia IX GD -12.88
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
MSCI Sing/Mlysia IX ID -14.62
MSCI Sing/Mlysia IX ND -12.88
MSCI Singapore Fr IX GD -3.59
MSCI Singapore Fr IX ID -5.31
MSCI South Africa IX GD -27.56
MSCI South Africa IX ID -29.84
MSCI Spain IX GD 50.58
MSCI Spain IX ID 47.87
MSCI Spain IX ND 49.90
MSCI Sri Lanka IX GD -25.57
MSCI Sri Lanka IX ID -27.30
MSCI Sweden IX GD 14.54
MSCI Sweden IX ID 12.62
MSCI Sweden IX ND 13.96
MSCI Swtzrlnd IX GD 24.05
MSCI Swtzrlnd IX ID 22.57
MSCI Swtzrlnd IX ND 23.53
MSCI Taiwan IX GD -20.64
MSCI Taiwan IX ID -21.45
MSCI Thailand IX GD 19.09
MSCI Thailand IX ID 18.74
MSCI Turkey IX GD -52.51
MSCI Turkey IX ID -53.53
MSCI UK IX GD 17.80
MSCI UK IX ID 14.84
MSCI UK IX ND 17.80
MSCI USA IX GD 30.72
MSCI USA IX ID 28.79
MSCI USA IX ND 30.14
MSCI Venezuela IX GD -49.16
MSCI Venezuela IX ID -52.69
MSCI World - UK IX GD 25.63
MSCI World - UK IX ID 23.73
MSCI World - UK IX ND 25.11
MSCI World - USA IX GD 19.11
MSCI World - USA IX ID 17.02
MSCI World - USA IX ND 18.76
MSCI World GDP Wt IX ID 25.61
MSCI World IX Free ID 22.82
MSCI World IX GD 24.80
MSCI World IX ID 22.78
MSCI World IX ND 24.34
MSCI Wrld - Austrl IX GD 25.03
MSCI Wrld - Austrl IX ID 23.03
MSCI Wrld - Austrl IX ND 24.58
Madrid SE:Pst IX P 37.19
NASDAQ 100 IX P 85.31
NASDAQ Bank IX P -11.77
NASDAQ Composite IX P 39.63
NASDAQ Industrial IX P 6.82
NASDAQ Insurance IX P -0.06
NASDAQ Natl Mkt Cmp IX 40.23
NASDAQ Natl Mkt Ind IX 6.27
NASDAQ Transport IX P -7.85
NYSE Composite P 16.55
NYSE Finance IX P 5.13
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
NYSE Industrials IX P 17.97
NYSE Transportation IX 3.46
NYSE Utilities IX P 33.04
Nikkei 225 Avg:Yen P -9.28
Oslo SE Tot:Fmk IX P N/A
PSE Technology IX P 54.60
Philippines Composite IX N/A
Russell 1000(R) Grow IX Tr 38.71
Russell 1000(R) IX P 25.12
Russell 1000(R) IX Tr 27.02
Russell 1000(R) Value IX Tr 15.63
Russell 2000(R) Grow IX Tr 1.23
Russell 2000(R) IX P -3.45
Russell 2000(R) IX Tr -2.55
Russell 2000(R) Value IX Tr -6.45
Russell 3000(R) IX P 22.32
Russell 3000(R) IX Tr 24.14
Russell Midcap(TM) Grow IX 17.86
Russell Midcap(TM) Inx Tr 10.09
Russell Midcap(TM)Value IX 5.09
S & P 100 Index P 31.33
S & P 500 Daily Reinv 28.58
S & P 500 Index P 26.67
S & P 500 Mnthly Reinv 28.60
S & P 600 Index P -2.10
S & P 600 Index Tr -1.31
S & P Financial IX Tr 11.43
S & P Financial Idx P 9.58
S & P Industrial IX Tr 33.71
S & P Industrials P 31.91
S & P Midcap 400 IX P 17.68
S & P Midcap 400 IX Tr 19.11
S & P Transport IX Tr -1.94
S & P Transport Index P -3.03
S & P Utility Index P 10.10
S & P Utility Index Tr 14.77
S & P/Barra Growth IX Tr 42.15
S & P/Barra Value IX Tr 14.68
S Afr All Mng:Rnd IX P 3.72
SB Cr-Hdg Nn-US Wd IX Tr 11.53
SB Cr-Hdg Wd Gv Bd IX Tr 11.03
SB Non-US Wd Gv Bd IX Tr 17.79
SB USD 3month Dom CD IX 5.74
SB USD 3month Euro CD IX 6.19
SB USD 3month Eurodep IX 5.74
SB USD 3month Tbill IX 5.11
SB Wd Gv Bd:Austrl IX Tr 3.88
SB Wd Gv Bd:Germny IX Tr 19.76
SB Wd Gv Bd:Japan IX Tr 15.85
SB Wd Gv Bd:UK IX Tr 20.88
SB Wd Gv Bd:US IX Tr 10.00
SB World Govt Bond IX Tr 15.31
SB World Money Mkt IX Tr 9.11
Straits Times Index -7.62
Swiss Perf:Sfr IX Tr 15.37
T-Bill 1 Year Index Tr 4.93
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
T-Bill 3 Month Index Tr 4.88
T-Bill 6 Month Index Tr 4.94
Taiwan SE:T$ IX P -15.56
Thailand Set Index -4.53
Tokyo 2nd Sct:Yen IX P N/A
Tokyo Se(Topix):Yen IX N/A
Toronto 300:C$ IX P -3.19
Toronto SE 35:C$ IX P -2.05
Value Line Cmp IX-Arth 5.82
Value Line Cmp IX-Geom -3.79
Value Line Industrl IX -7.27
Value Line Railroad IX -9.93
Value Line Utilties IX 7.61
Wilshire 4500 Index Tr 8.63
Wilshire 5000 (Cap Wt)Tr 23.43
Wilshire 5000 Index P 21.71
Wilshire Lg Cp Gro IX Tr N/A
Wilshire Lg Cp Val IX Tr N/A
Wilshire MD Cp Gro IX Tr N/A
Wilshire MD Cp Val IX Tr N/A
Wilshire Sm Cp Gro IX Tr -2.46
Wilshire Sm Cp Val IX Tr -4.87
THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUST:
Real Estate Investment Trust Index -17.50
</TABLE>
<TABLE>
<S> <C>
SALOMON SMITH BARNEY:
10 Year U.S. Government (Sovereign) 10.00
10 Year United Kingdom (Sovereign) 19.55
10 Year France (Sovereign) 12.59
10 Year Germany (Sovereign) 10.94
10 Year Japan (Sovereign) 0.50
10 Year Canada (Sovereign) 9.41
</TABLE>
42
<PAGE>
43
<PAGE>
Each Russell Index listed above is a trademark/service mark of the Frank Russell
Company. Russell(TM) is a trademark of the Frank Russell Company.
*in U.S. currency
