STEIN ROE
SMALL CAP TIGER FUND
[PHOTO OF GLOBE WITH SMALL HANDS]
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STEIN ROE SMALL CAP TIGER FUND
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PROSPECTUS
January 1, 2000, Revised May 1, 2000
[Stein Roe Logo]
STEIN ROE MUTUAL FUNDS
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Sensible Risks. Intelligent Investments(SM)
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is truthful or complete. Anyone
who tells you otherwise is committing a crime.
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1 THE FUND
Investment Goal
Principal Investment Strategy
Principal Investment Risks
Fund Performance
Your Expenses
10 FINANCIAL HIGHLIGHTS
12 YOUR ACCOUNT
Purchasing Shares
Opening an Account
Determining Share Price (NAV)
Selling Shares
Exchanging Shares
Reporting to Shareholders
Dividends and Distributions
25 THE FUND'S MANAGEMENT
Investment Advisor
Portfolio Managers
Please keep this prospectus as your reference manual.
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THE FUND
INVESTMENT GOAL The Fund seeks capital appreciation.
PRINCIPAL INVESTMENT STRATEGY Under normal market conditions, the Fund
invests primarily in stocks of companies located in the ten
Tiger countries of Asia. The Tigers of Asia are Hong Kong,
Singapore, South Korea, Taiwan, Malaysia, Thailand, India,
Indonesia, the People's Republic of China and the Philippines.
In selecting investments for the Fund, the Advisor typically
purchases stocks of well-established smaller capitalization
companies with histories of consistent earnings growth in
industries with attractive or improving prospects. Up to 35%
of the Fund's total assets may be invested in stocks of large
capitalization companies.
At times, the Advisor may determine that adverse market
conditions make it desirable to temporarily suspend the Fund's
normal investment activities. During such times, the Fund may,
but is not required to, invest in cash or high quality,
short-term debt securities, without limit. Taking a temporary
defensive position may prevent the Fund from achieving its
investment goal.
In seeking to achieve its goal, the Fund may invest in various
types of securities and engage in various investment
techniques which are not the principal focus of the Fund
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THE FUND
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.
PRINCIPAL INVESTMENT RISKS The primary risks of investing in
the Fund are described below. There are many circumstances
(including additional risks that are not described here) which
could prevent the Fund from achieving its goal. It is possible
to lose money by investing in the Fund.
Market risk is the risk that the price of a security held by
the Fund will fall due to changing market, economic or
political conditions.
Foreign securities are subject to special risks. Foreign stock
markets can be extremely volatile. Fluctuations in currency
exchange rates may impact the value of foreign securities. The
liquidity of foreign securities may be more limited than
domestic securities, which means that the Fund may, at times,
be unable to sell foreign securities at desirable prices.
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THE FUND
Brokerage commissions, custodial fees and other fees are
generally higher for foreign investments. In addition, foreign
governments may impose withholding taxes which would reduce
the amount of income available to distribute to shareholders.
Other risks include the following: possible delays in the
settlement of transactions; less publicly available
information about companies; the impact of political, social
or diplomatic events; and possible seizure, expropriation or
nationalization of the company or its assets.
Emerging markets are subject to additional risk. The risks of
foreign investments are typically increased in less developed
countries, which are sometimes referred to as emerging
markets. For example, political and economic structures in
these countries may be new and developing rapidly, which may
cause instability. These countries are also more likely to
experience high levels of inflation, deflation or currency
devaluations, which could hurt their economies and securities
markets.
Because the Fund's investments are concentrated in the ten
Tiger countries of Asia, the Fund is particularly susceptible
to regional risks. Events in any one Tiger country may impact
the other countries or the Asian region as a whole. As a
result, events in the region will generally have a greater
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THE FUND
effect on the Fund than if the Fund were more geographically
diversified, which may result in greater losses and
volatility. Recently, the markets in each of the Asian
countries have experienced significant volatility. Increased
social or political unrest in some or all of these countries
could cause further economic and market uncertainty.
Smaller companies are more likely than larger companies to
have limited product lines, operating histories, markets or
financial resources. They may depend heavily on a small
management team. Stocks of smaller companies may trade less
frequently, in smaller volumes and fluctuate more sharply in
price than stocks of larger companies. In addition, they may
not be widely followed by the investment community, which can
lower the demand for their stock.
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THE FUND
An investment in the Fund is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. It is not a
complete investment program and you can lose money by
investing in the Fund.
WHO SHOULD INVEST IN THE FUND?
You may want to invest in the Fund if you:
o are interested in investing in companies located in the
Tiger countries and can tolerate the greater share price
volatility that accompanies international investing
o are a long-term investor and can afford to potentially
lose money on your investment
The Fund is not appropriate for investors who:
o can't tolerate volatility or possible losses
o are saving for a short-term investment
o need regular current income
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THE FUND
FUND PERFORMANCE The following charts show the Fund's performance
through Dec. 31, 1999. The returns include the reinvestment of
dividends and distributions. On April 17, 2000, the Fund
redesignated its Class Z shares as Class S shares. As with all
mutual fund, past performance is no guarantee of future
results.
YEAR-BY-YEAR TOTAL RETURNS (CLASS S)
Year-by-year calendar returns show the Fund's volatility over
a period of time. This chart illustrates performance
differences for each calendar year and provides an indication
of the risks of investing in the Fund.
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ANNUAL TOTAL RETURNS
[Bar Chart]
Small Cap Tiger Fund
1997 -28.05%
1998 -14.64%
1999 69.20%
Year to date total return through March 31, 2000 was +1.71%
Best quarter: 2nd quarter 1999, +51.25%
Worst quarter: 2nd quarter 1998, -31.27%
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THE FUND
AVERAGE ANNUAL TOTAL RETURNS
Average annual total returns measure the Fund's performance
over time. We compare the Fund's returns with returns for the
Index. We show returns for calendar years to be consistent
with the way other mutual fund report performance in their
prospectuses. This allows you to accurately compare similar
mutual fund investments and provides an indication of the
risks of investing in the Fund.
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AVERAGE ANNUAL TOTAL RETURNS
Periods ending December 31, 1999
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INCEPTION DATE 1 YR LIFE OF THE FUND
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Class S 6/3/96 69.20% 0.11%
Index N/A 42.58% -0.17%
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Average N/A 73.49% 0.29%
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*The Index is an unmanaged group of stocks that differs from the Fund's
composition; it is not available for direct investment.
*The Average is the Lipper Pacific Ex-Japan Funds category average which is
composed of funds with similar investment objectives to the Fund.
YOUR EXPENSES This table shows fees and expenses you may pay if you
buy and hold shares of the Fund. You do not pay any sales
charge when you purchase or sell your shares.(a)(b) However,
you pay various other indirect expenses because the Fund pays
fees and other expenses that reduce your investment return.
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THE FUND
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ANNUAL FUND OPERATING EXPENSES(A)
(expenses that are deducted from Fund assets)
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Management and administration fees(c) 1.40%
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Distribution (12b-1) fees None
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Other expenses 1.95%
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TOTAL ANNUAL FUND OPERATING EXPENSES 3.35%
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(a) There is a $7.50 charge for wiring redemption proceeds to your bank.
(b) A 2.00% contingent redemption fee is imposed on redemptions and exchanges of
Fund shares purchased and held for five business days or less.
(c) The Fund's Advisor and Administrator have voluntarily agreed to waive
advisory and administration fees and reimburse the Fund for certain
expenses. As a result, the actual management and administration fees for
Class S shares would be 0.06%, other expenses for Class S shares would be
1.94% and total annual fund shares operating expenses for Class S shares
would be 2.00%.
EXPENSE EXAMPLE
This example compares the cost of investing in the Fund to the
cost of investing in other mutual funds. It uses the same
hypothetical assumptions that other funds use in their
prospectuses:
o $10,000 initial investment
o 5% return each year
o the Fund's operating expenses remain constant as a percent
of net assets
o redemption at the end of each time period
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THE FUND
Your actual costs may be higher or lower because in reality
fund returns and operating expenses change. Expense
reimbursements are in effect for the first year in the periods
below. Expenses based on these assumptions are:
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EXPENSE EXAMPLE
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1 YR 3 YRS 5 YRS 10 YRS
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Small Cap Tiger Fund $338 $1,030 $1,745 $3,640
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FINANCIAL HIGHLIGHTS
The financial highlights tables explain the Fund's financial
performance. Consistent with other mutual fund, we show
information for the period of the Fund's operations. The
Fund's fiscal year runs from September 1 to August 31. The
total returns in the tables represent the return that
investors earned assuming that they reinvested all dividends
and distributions. Certain information in the tables reflects
the financial results for a single Fund share.
PricewaterhouseCoopers LLP, an independent accounting firm,
audits this information and issues a report that appears in
the Fund's annual report along with the financial statements.
To request the annual report, please call 800-338-2550.
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FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
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THE FUND
Period ended
Year ended August 31, August 31,
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1999 1998 1997 1996 (C)
CLASS Z CLASS Z CLASS Z CLASS Z
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<S> <C> <C> <C> <C>
NET ASSET VALUE-- BEGINNING OF PERIOD ($) 3.920 9.130 9.320 10.000
INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income (loss) (a)(b) 0.067(d 0.132(e) 0.083(f) 0.021
Net realized and unrealized gain (loss) 4.136 (5.342) (0.273) (0.701)
TOTAL FROM INVESTMENT OPERATIONS 4.203 (5.210) (0.190) (0.680)
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ($):
From net investment income (0.023) -- -- --
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NET ASSET VALUE--END OF PERIOD ($) 8.100 3.920 9.130 9.320
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TOTAL RETURN (%) (G)(H) 107.43 (57.06) (2.04) (6.80)(I)
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RATIOS TO AVERAGE NET ASSETS (%):
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Expenses (j) 2.00 2.00 2.00 2.00(k)
Net investment income (j) 1.09 2.00 0.87 0.87(k)
Fees and expenses waived or borne
by the Advisor/Administrator (j) 1.35 1.02 1.09 5.16(k)
Portfolio turnover (%) 36 56 96 3(i)
Net assets at end ofperiod (000) ($) 39 23 1,203 1,166
(a) Net of fees and expenses waived or borne by
the Advisor/Administrator which amounted to ($): 0.083 0.067 0.105 0.123
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(b) Per share data was calculated using average shares outstanding during the
period.
(c) The fund commenced investment operations on june 3, 1996.
(d) Includes distributions from China Hong Kong Photo Products Holdings Ltd.,
Four Seas Mercantile Holdings Ltd., Hkr International Ltd.,
Li & Fung Ltd., Thai Union Frozen Products Public Co. and Venture
Manufacturing Singapore Ltd., which amounted to $0.022, $0.015, $0.012,
$0.015, $0.022 and $0.017 per share, respectively.
(e) 1998 information includes distributions from China Hong Kong Photo Products,
Dickson Concepts International Ltd., Four Seas Mercantile, Hang Seng Bank
Ltd., Hon Kwok Land Investment, Li & Fung Ltd., Sa Sa International Ltd.,
Sun Hung Kai Properties Ltd. and Varitronix International Ltd., which
amounted to $0.126 per share.
(f) 1997 information includes distributions from Srithai Superware Public Co.,
Ltd. and Varitronix International Ltd., which amounted to $0.039 per share.
(g) Total return at net asset value assuming all distributions reinvested and no
initial sales charge or contingent deferred sales charge.
(h) Had the Advisor/Administrator not waived or reimbursed a portion of
expenses, total return would have been reduced.
(i) Not annualized.
(j) The benefits derived from custody credits and directed brokerage
arrangements had no impact.
(k) Annualized.
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YOUR ACCOUNT
PURCHASING SHARES You may purchase shares of the Fund without a sales
charge. Your purchases are made at the NAV next determined
after the Fund receives your check, wire transfer or
electronic transfer. If the Fund receives your check, wire
transfer or electronic transfer after the close of regular
trading on the New York Stock Exchange (NYSE)--normally 3 p.m.
Central time--your purchase is effective on the next business
day.
PURCHASES THROUGH THIRD PARTIES
If you purchase Fund shares through certain broker-dealers,
banks or other intermediaries (intermediaries), they may
charge a fee for their services. They may also place limits on
your ability to use services the Fund offer. There are no
charges or limitations if you purchase shares directly from
the Fund, except those fees described in this prospectus.
If an intermediary is an agent or designee of the Fund, orders
are processed at the NAV next calculated after the
intermediary receives the order. The intermediary must
segregate any orders it receives after the close of regular
trading on the NYSE and transmit those orders separately for
execution at the NAV next determined.
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YOUR ACCOUNT
CONDITIONS OF PURCHASE
An order to purchase Fund shares is not binding unless and
until an authorized officer, agent or designee of the Fund
accepts it. Once we accept your purchase order, you may not
cancel or revoke it; however, you may redeem your shares. A
Fund may reject any purchase order if it determines that the
order is not in the best interests of the Fund and its
shareholders. The Fund may waive or lower its investment
minimums for any reason. If you participate in the Stein Roe
CounselorSM program or are a client of Stein Roe Private
Capital Management, the minimum initial investment is
determined by those programs.
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ACCOUNT MINIMUMS
MINIMUM TO MINIMUM MINIMUM
TYPE OF ACCOUNT OPEN AN ACCOUNT ADDITION BALANCE
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Regular $2,500 $100 $1,000
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Custodial (UGMA/UTMA) $1,000 $100 $1,000
Automatic Investment Plan $1,000 $50 --
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Roth and Traditional IRA $500 $50 $500
Educational IRA $500 $50* $500
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* Maximum $500 contribution per year per child.
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YOUR ACCOUNT
OPENING AN ACCOUNT
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OPENING OR ADDING TO AN ACCOUNT
BY MAIL BY WIRE
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OPENING Complete the application. Mail your application to the
AN ACCOUNT Make check payable to address listed on the left, then
Stein Roe Mutual Funds. call 800-338-2550 to obtain an
account number. Include your
Mail application and check to: Social Security Number. To
SteinRoe Services Inc. wire funds, use the
P.O. Box 8900 instructions below.
Boston, MA 02205
ADDING TO Make check payable to [Stein Wire funds to:
AN ACCOUNT Roe Mutual Funds]. Be sure to o First National Bank of Boston
write your account number on ABA: 011000390
the check. Attn: SSI, Account No. 560-
99696
Fill out investment slip (stub o Fund No. 040; Stein Roe
from your statement or Small Cap Tiger Fund
confirmation) or include a note o Your name (exactly as in the
indicating the amount of your registration).
purchase, your account number o Fund Account number.
and the name in which your
account is registered.
Mail check with investment slip
or note to the address above.
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YOUR ACCOUNT
<TABLE>
<CAPTION>
BY ELECTRONIC THROUGH AN
FUNDS TRANSFER BY EXCHANGE INTERMEDIARY
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<S> <C> <C> <C>
OPENING You cannot open a new By mail, phone, or automatically Contact your financial
AN ACCOUNT account via electronic (be sure to elect the Automatic professional.
transfer. Exchange Privilege on your
application).
ADDING TO Call 800-338-2550 to make By mail, phone, or automatically Contact your financial
AN ACCOUNT your purchase. To set up (be sure to elect the Automatic professional.
prescheduled purchases, be Exchange Privilege on your
sure to elect the Automatic application).
Investment Plan (Stein Roe
AssetSM Builder) option on
your application.
All checks must be made payable in U.S. dollars and drawn on U.S. banks. Money orders and third-
party checks will not be accepted.
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</TABLE>
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YOUR ACCOUNT
DETERMINING SHARE PRICE (NAV) The Fund's share price is its NAV next
determined. NAV is the difference between the values of the
Fund's assets and liabilities divided by the number of shares
outstanding. We determine NAV at the close of regular trading
on the NYSE--normally 3 p.m. Central time. If you place an
order after that time, you receive the share price determined
on the next business day.
In computing the net asset value, the values of portfolio
securities are generally based upon market quotations.
Depending upon local convention or regulation, these market
quotations may be the last sale price, last bid or asked
price, or the mean between the last bid and asked prices as
of, in each case, the close of the appropriate exchange or
other designated time. Trading in securities on Far Eastern
securities exchanges and over-the-counter markets is normally
completed at various times before the close of business on
each day that the NYSE is open. Trading of these securities
may not take place on every NYSE business-day. Foreign
securities may trade on days when the NYSE is closed. We will
not price shares on days the NYSE is closed for trading. You
will not be able to purchase or redeem shares until the next
NYSE-trading day.
We value a security at fair value when events have occurred
after the last available market price and before the close of
the
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YOUR ACCOUNT
NYSE that materially affect the security's price. In the case
of foreign securities, this could include events occurring
after the close of a foreign market and before the close of
the NYSE.
SELLING SHARES You may sell your shares any day the Fund is open for
business. Please follow the instructions below.
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SELLING SHARES
BY MAIL: Send a letter of instruction, in English, including your
account number and the dollar value or number of shares you
wish to sell. Sign the request exactly as the account is
registered. Be sure to include a signature guarantee. All
supporting legal documents as required from executors,
trustees, administrators, or others acting on accounts not
registered in their names, must accompany the request. We will
mail the check to your registered address.
BY PHONE: This feature is automatically added to your account unless you
decline it on your application. Call 800-338-2550 to redeem an
amount of $1,000 or more. We will mail the check to your
registered address.
BY WIRE: Fill out the appropriate areas of the account
application for this feature. Proceeds of $1,000 or more
($100,000 maximum) may be wired to your predesignated bank
account. Call 800-338-2550 to give instructions to Stein Roe.
There is a $7 charge for wiring redemption proceeds to your
bank.
BY ELECTRONIC Fill out the appropriate areas of the account application
TRANSFER: for this feature. To request an electronic transfer (not
less than $50; not more than $100,000), call 800-338-2550.
We will transfer your sale proceeds electronically to
your bank. The bank must be a member of the
Automated Clearing House.
BY EXCHANGE: Call 800-338-2550 to exchange any portion of your Fund
shares for shares in any other Stein Roe no-load fund.
BY AUTOMATIC Fill out the appropriate areas of the account application
EXCHANGE: for this feature. Redeem a fixed amount on a regular
basis (not less than $50 per month; not more than $100,000)
from the Fund for investment in another Stein Roe
no-load fund.
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YOUR ACCOUNT
WHAT YOU NEED TO KNOW WHEN SELLING SHARES
Once we receive and accept your order to sell shares, you may
not cancel or revoke it. We cannot accept an order to sell
that specifies a particular date or price or any other special
conditions. If you have any questions about the requirements
for selling your shares, please call 800-338-2550 before
submitting your order.
The Fund redeems shares at the NAV next determined after an
order has been accepted. We mail the proceeds within seven
days after the sale. The Fund normally pays wire redemption or
electronic transfer proceeds on the next business day.
We will not pay sale proceeds until your shares are paid for.
If you attempt to sell shares purchased by check or electronic
transfer within 15 days of the purchase date, we will delay
sending the sale proceeds until we can verify that those
shares are paid for. You may avoid this delay by purchasing
shares by a federal fund wire.
We use procedures reasonably designed to confirm that
telephone instructions are genuine. These include recording
the conversation, testing the identity of the caller by asking
for account information, and sending prompt
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YOUR ACCOUNT
written confirmation of the transaction to the shareholder of
record. If these procedures are followed, the Fund and its
service providers will not be liable for any losses due to
unauthorized or fraudulent instructions.
If the amount you redeem is large enough to affect the Fund's
operation, the Fund may pay the redemption "in kind." This is
payment in portfolio securities rather than cash. If this
occurs, you may incur transaction costs when you sell the
securities.
INVOLUNTARY REDEMPTION
If your account value falls below $1,000, the Fund may redeem
your shares and send the proceeds to the registered address.
You will receive notice 30 days before this happens. If your
account falls below $10, the Fund may redeem your shares
without notice to you.
LOW BALANCE FEE
Due to the expense of maintaining accounts with low balances,
if your account balance falls below $2,000 ($800 for custodial
accounts), you will be charged a low balance fee of $5 per
quarter. The low balance fee does not apply to: (1)
shareholders whose accounts in the Stein Roe Funds total
$50,000 or more; (2) Stein Roe IRAs; (3) other Stein
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YOUR ACCOUNT
Roe prototype retirement plans; (4) accounts with automatic
investment plans (unless regular investments have been
discontinued); or (5) omnibus or nominee accounts. The Fund
can waive the fee, at its discretion, in the event of
significant market corrections.
CONTINGENT REDEMPTION FEE
The Fund can experience substantial price fluctuation and is
intended for long-term investors. Short-term "market timers"
who engage in frequent purchases and redemptions can disrupt
the Fund's investment program and create additional
transaction costs that are borne by all shareholders. The Fund
will assess a contingent redemption fee in the amount of 2.00%
on redemptions and exchanges of Fund shares purchased and held
for five business days or less.
The contingent redemption fee will be paid to the Fund to help
offset transaction costs. The Fund will use the "first-in,
first-out" method to determine the five business day holding
period. Under this method, the date of the redemption or
exchange will be compared with the earliest purchase date of
shares held in the account. If this holding period is five
business days or less, the contingent redemption fee will be
assessed.
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YOUR ACCOUNT
The contingent redemption fee does not apply to any shares
purchased through the reinvestment of dividends. The fee may
not apply to omnibus accounts and wrap fee programs.
EXCHANGING SHARES You may exchange Fund shares for shares of other Stein
Roe no-load fund. Call 800-338-2550 to request a prospectus
and application for the fund you wish to exchange into. Please
be sure to read the prospectus carefully before you exchange
your shares.
The account you exchange into must be registered exactly the
same as the account you exchange from. You must meet all
investment minimum requirements for the fund you wish to
exchange into before we can process your exchange transaction.
An exchange is a redemption and purchase of shares for tax
purposes, and you may realize a gain or a loss when you
exchange Fund shares for shares of another fund.
We may change, suspend or eliminate the exchange service after
notification to you.
Generally, we limit you to four telephone exchanges
"roundtrips" per year. A roundtrip is an exchange
out of a
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YOUR ACCOUNT
Fund into another Stein Roe no-load fund and then back to that
Fund.
REPORTING TO SHAREHOLDERS To reduce the volume of mail you receive, only
one copy of certain materials, such as prospectuses and
shareholder reports, will be mailed to your household (same
address). Please call 800-338-2550 if you want to receive
additional copies free of charge. This policy may not apply if
you purchase shares through an intermediary.
DIVIDENDS AND DISTRIBUTIONS The Fund distributes, at least once a year,
virtually all of its net investment income and net realized
capital gains.
A dividend from net investment income represents the income
the Fund earns from dividends and interest paid on its
investments, after payment of the Fund's expenses.
A capital gain is the increase in value of a security that the
Fund holds. The gain is "unrealized" until the security is
sold. Each realized capital gain is either short term or long
term depending on whether the Fund held the security for one
year or less or more than one year, regardless of how long you
have held your Fund shares.
OPTIONS FOR RECEIVING
DISTRIBUTION AND REDEMPTION
PROCEEDS:
o by check
o by electronic transfer into
your bank account
o a purchase of shares of
another Stein Roe fund
o a purchase of shares in
a Stein Roe fund account
of another person
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YOUR ACCOUNT
When the Fund makes a distribution of income or capital gains,
the distribution is automatically invested in additional
shares of the Fund unless you elect on the account application
to have distributions paid by check.
If you elect to receive distributions by check and a
distribution check is returned to the Fund as undeliverable,
or if you do not present a distribution check for payment
within six months, we will change the distribution option on
your account and reinvest the proceeds of the check in
additional shares of that Fund. You will not receive any
interest on amounts represented by uncashed distribution or
redemption checks.
TAX CONSEQUENCES
You are subject to federal income tax on both dividends and
capital gains distributions whether you elect to receive them
in cash or reinvest them in additional Fund shares. If the
Fund declares a distribution in December, but does not pay it
until after December 31, you will be taxed as if the
distribution were paid in December. Stein Roe will process
your distributions and send you a statement for tax purposes
each year showing the source of distributions for the
preceding year.purposes each year showing the source of
distributions for the preceding year.
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YOUR ACCOUNT
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TRANSACTION TAX STATUS
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Income dividend Ordinary income
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Short-term capital gain distribution Ordinary income
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Long-term capital gain distribution Capital gain
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Sale of shares owned one year or less Gain is ordinary income; loss is
subject to special rules
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Sale of shares owned more than one year Capital gain or loss
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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 Fund shares. Such transactions may be
subject to federal income tax.
This tax information provides only a general overview. It does
not apply if you invest in a tax-deferred retirement account
such as an IRA. Please consult your own tax advisor about the
tax consequences of an investment in the Fund.
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THE FUND'S MANAGEMENT
INVESTMENT ADVISER Investment Advisor Newport Fund Management, Inc.
(Newport), 580 California Street, Suite 1960, San Francisco,
California 94104 provides the Fund with investment advisory
services, including portfolio management. Newport is
registered as an investment adviser under the Investment
Advisors Act of 1940 and specializes in investing in the
Pacific region. As of March 31, 2000, Newport managed
approximately $1.4 billion in assets, all of which were
invested in foreign securities. For the fiscal year ended
August 31, 1999, the Fund paid aggregate fees of 0.04% of
average net assets to Newport.
PORTFOLIO MANAGERS Christopher Legallet, chief investment officer of
Newport and its immediate parent, Newport Pacific Management,
Inc. (Newport Pacific), is a co-manager of the Fund and has
co-managed the Fund since December, 1999. Mr. Legallet has
managed various other funds for Newport since 1997. Prior to
his affiliation with Newport, Mr. Legallet was a managing
director of Jupiter Tyndall (Asia) Ltd. in Hong Kong, serving
as lead manager for investment in Asia from 1992 to 1997.
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THE FUND'S MANAGEMENT
Lynda Couch, a managing director of Newport and Newport
Pacific, is a co-manager for the Fund. Ms. Couch has managed
other Newport funds since April, 1995. Ms. Couch has been an
officer of Newport since 1994.
26
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29
<PAGE>
FOR MORE INFORMATION
You can obtain more information about the Fund's investments
in its semiannual and annual report to investors. These
reports discuss the market conditions and investment
strategies that affected the Fund's performance over the past
six months and year.
You may wish to read the Fund's SAI for more information. The
SAI is incorporated into this prospectus by reference, which
means that it is considered to be part of this prospectus and
you are deemed to have been told of its contents.
- --------------------------------------------------------------------------------
STEIN ROE SMALL CAP TIGER FUND
- --------------------------------------------------------------------------------
To obtain free copies of the Fund's semiannual and annual reports, latest
quarterly profile, or the SAI or to request other information about the Fund,
write or call:
Stein Roe Mutual Funds
One South Wacker Drive
Suite 3200
Chicago, IL 60606
800-338-2550
www.steinroe.com
Text-only versions of all Fund documents can be viewed online or downloaded from
the Edgar database on the SEC internet site at www.sec.gov. You can also obtain
copies by visiting the SEC's Public Reference Room in Washington, DC, by calling
800-SEC-0330, or by sending your request and payment of a duplicating fee by
electronic request at the E-mail address [email protected] or by writing the
SEC's public reference section, Washington, DC 20549-6009.
Investment Company Act file number of Liberty Funds Trust II: 811-3009.
LIBERTY FUNDS DISTRIBUTOR, INC.
S40-01/087B-0400
<PAGE>
STEIN ROE SMALL CAP TIGER FUND
A series of Liberty Funds Trust II
Statement of Additional Information
Class S Shares
January 1, 2000, Revised May 1, 2000
This Statement of Additional Information (SAI) contains information which may be
useful to investors but which is not included in the Class S Prospectus of Stein
Roe Small Cap Tiger Fund (the Fund). This SAI is not a prospectus and is
authorized for distribution only when accompanied or preceded by the Prospectus
of the Fund dated January 1, 2000, Revised May 1, 2000. This SAI should be read
together with the Prospectus and the Fund's most recent Annual Report dated
August 31, 1999. Investors may obtain a free copy of the Prospectus and 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 Fund's August 31, 1999 Annual Report 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
Part 1 Page
Definitions b
Organization and History b
Investment Objectives and Policies b
Fundamental Investment Policies b
Other Investment Policies c
Fund Charges and Expenses c
Investment Performance f
Custodian f
Independent Accountants f
Management of the Fund g
Part 2
Miscellaneous Investment Practices 1
Taxes 11
Management of the Funds 14
Determination of Net Asset Value 20
Purchases and Redemptions 21
Distributions 23
How to Exchange Shares 24
Suspension of Redemptions 24
Shareholder Liability 24
Shareholder Meetings 24
Performance Measures 25
Appendix I 27
Appendix II 32
S40-16/237B-0400
Part 1
STEIN ROE SMALL CAP TIGER FUND
Statement of Additional Information
January 1, 2000, Revised May 1, 2000
DEFINITIONS
"Trust" Liberty Funds Trust II
"Fund" Stein Roe Small Cap Tiger Fund
"Advisor" Newport Fund Management, Inc., the Fund's investment advisor
"Administrator" Colonial Management Associates, Inc., the Fund's administrator
"LFD" Liberty Funds Distributor, Inc., the Fund's distributor
"LFS" Liberty Funds Service, Inc., the Fund's shareholder services
and transfer agent
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized in 1980. The Fund, a
diversified series of the Trust, commenced investment operations on June 3,
1996, and 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 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 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. See Part 2 of this SAI for more
information.
Effective June 30, 1998, the Fund changed its name from Colonial Newport Tiger
Cub Fund to Newport Tiger Cub Fund. Effective December 29, 1999, the Fund
changed its name from Newport Tiger Cub Fund to Stein Roe Small Cap Asian Tiger
Fund. Effective May 1, 2000, the Fund changed its name to its current name.
Effective April 1, 1999, the Trust changed its name from Colonial Trust II to
its current name.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the Fund's investment goals and investment
policies. Part 1 of this SAI includes additional information concerning, among
other things, the fundamental investment policies of the Fund. Part 2 contains
additional information about the following securities and investment techniques
that may be utilized by the Fund:
Small Companies
Foreign Securities
Repurchase Agreements
Foreign Currency Transactions
Futures Contracts and Related Options
Except as indicated under "Fundamental Investment Policies," the Funds'
investment policies are not fundamental and the 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 (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.
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.
The Fund may:
1. Borrow from banks, other affiliated funds and other entities to the extent
permitted by applicable law, provided that the Fund's borrowings 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;
2. Only own real estate acquired as the result of owning securities and not more
than 5% of total assets;
3. Purchase and sell futures contracts and related options as long as the total
initial margin and premiums on contracts do not exceed 5% of total assets;
4. Not issue senior securities except as provided in paragraph 1. above and to
the extent permitted by the 1940 Act;
5. Underwrite securities issued by others only when disposing of portfolio
securities;
6. Make loans (a) through lending of securities, (b) through the purchase of
debt instruments or similar evidences of indebtedness typically sold
privately to financial institutions, (c) through an interfund lending program
with other affiliated 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 its
total assets (taken at market value at the time of such loans) and
(d) through repurchase agreements; and
7. Not concentrate more than 25% of its total assets in any one industry
or, with respect to 75% of total assets, purchase any security (other
than obligations of the U.S. government and cash items including
receivables) if as a result more than 5% of its total assets would
then be invested in securities of a single issuer or purchase the
voting securities of an issuer if, as a result of such purchases, the
Fund would own more than 10% of the outstanding voting shares of such
issuer.
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed without a
shareholder vote, the Fund may not:
1. Purchase securities on margin, but it may receive short-term credit to
clear securities transactions and may make initial or maintenance
margin deposits in connection with futures transactions;
2. Have a short securities position, unless the Fund owns, or owns rights
(exercisable without payment) to acquire, an equal amount of such
securities; and
3. Invest up to 15% of its net assets in illiquid assets.
Notwithstanding the investment policies and restrictions of the Fund, the Fund
may invest all or a portion of its investable assets in investment companies
with substantially the same investment objective, policies and restrictions as
the Fund.
FUND CHARGES AND EXPENSES
Under the Fund's management agreement, the Fund pays the Advisor a monthly fee
based on the average daily net assets of the Fund at the annual rate of 1.15%.
Under the Fund's administration agreement, the Fund pays the Administrator a
monthly fee at the annual rate of 0.25% of its average daily net assets and
under a separate pricing and bookkeeping agreement, the Fund pays the
Administrator a monthly fee of $2,250 plus the following percentages of the
Fund's average daily net assets over $50 million:
0.035% annually on the next $950 million
0.025% annually on the next $1 billion
0.015% annually on the next $1 billion
0.001% annually on the excess over $3 billion
Under the Fund's transfer agency and shareholder servicing agreement, the Fund
pays LFS a monthly fee at the annual rate of 0.236% of average daily net assets,
plus certain out-of-pocket expenses.
Recent Fees paid to the Advisor, Administrator, LFD and LFS
(dollars in thousands)
Years ended August 31
---------------------
1999 1998 1997
---- ---- ----
Management fee $125 $163 $184
Administration fee 27 34 40
Bookkeeping fee 27 27 27
Shareholder services and transfer agent fee 42 48 51
Fees or expenses waived or borne by
the Advisor/Administrator (146) (137) (198)
Brokerage Commissions (dollars in thousands)
Years ended August 31
---------------------
1999 1998 1997
---- ---- ----
Total commissions $46 $98 $214
Directed transactions(a) 0 0 0
Commissions on directed transactions 0 0 0
(a) See "Management of the Funds - Portfolio Transactions - Brokerage and
research services" in Part 2 of this SAI.
Trustees and Trustees' Fees
For the fiscal year ended August 31, 1999 and the calendar year ended December
31, 1999, the Trustees received the following compensation for serving as
Trustees (b):
Total Compensation
From the Fund Complex
Aggregate Compensation Paid to the Trustees
From the Fund For the for the Calendar Year
Fiscal Year Ended Ended December 31,
Trustee August 31,1999 1999(c)
- ------- -------------- -------
Robert J. Birnbaum(d)(e) $630 $97,000
Tom Bleasdale(d) 747(f) 103,000(g)
John V. Carberry(h)(i) N/A N/A
Lora S. Collins(d) 624 96,000
James E. Grinnell(d) 650 100,000
Richard W. Lowry(d) 630 97,000
Salvatore Macera(j 538 95,000
William E. Mayer(d) 631 101,000
James L. Moody, Jr.(d) 614(k) 91,000(l)
John J. Neuhauser(d) 661 101,252
Thomas E. Stitzel(j) 538 95,000
Robert L. Sullivan(d) 694 104,100
Anne-Lee Verville(d)(h) 549(m) 96,000(n)
(b) The Funds do not currently provide pension or retirement plan benefits to
the Trustees.
(c) At December 31, 1999, the complex consisted of 51 open-end and 8
closed-end management investment portfolios in the Liberty Funds Group
- Boston (Liberty Funds) and 12 open-end management investment portfolios
in the Liberty Variable Investment Trust (LVIT)(together, the Fund Complex).
(d) Elected by the shareholders of LVIT on October 30, 1998.
(e) Retired as Trustee of the Trust effective December 31, 1999.
(f) Includes $344 payable in later years as deferred compensation.
(g) Includes $52,000payable in later years as deferred compensation.
(h) 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.
(i) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial Companies, Inc. (Liberty Financial).
(j) 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.
(k) Total compensation of $614 for the fiscal year ended August 31, 1999, will
be payable in later years as deferred compensation.
(l) Total compensation of $105,857 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
(m) Total compensation of $549 for the fiscal year ended August 31, 1999, will
be payable in later years as deferred compensation.
(n) Total compensation of $23,445 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
For the fiscal year ended December 31, 1999, 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):
Total Compensation From
Liberty All-Star Funds For The
Trustee Calendar Year Ended December 31, 1998(o)
Robert J. Birnbaum(p) $25,000
John V. Carberry(p)(q)(r) N/A
James E. Grinnell(p) 25,000
Richard W. Lowry(p) 25,000
William E. Mayer(p)(s) 25,000
John J. Neuhauser(p)(t) 25,000
(o) 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).
(p) Elected by the sole Trustee of Liberty Funds Trust IX on December 17, 1998.
(q) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial.
(r) Elected by the trustees of the Liberty All-Star Funds on June 30, 1998.
(s) 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.
(t) Elected by the shareholders of the Liberty All-Star Funds on April 22, 1998.
Ownership of the Fund
As of record on March 31, 2000, the officers and Trustees of the Trust as a
group owned less than 1% of the outstanding shares of the Fund.
As of record on March 31, 2000, the following shareholders of record owned 5% or
more of the Fund's outstanding Class S shares:
Investors Bank & Trust Co Cust 7.87%
Lindsay Cook IRA
48 Arapahoe Road
Newton, Massachusetts 02165
Michelle Proia Cust 7.59%
Janine Proia
Uniform Transfer to Minors Act - MA
82 Undine Avenue
Winthrop, MA 02152
Investors Bank & Trust Co Cust 9.17%
Cynthia A. Clark Rollover IRA
40 Nahanton Avenue
Milton, Massachusetts 02186
Thomas R & Sylvia Tuttle 12.12%
c/o Newport Pacific Management
580 California Street
San Francisco, California 94104
Gretchen C. Keleher 7.55%
3045 Corrales Road
Corrales, New Mexico 87048
Lynda B. Couch 17.72%
1380 Elderberry Drive
Concord, CA 94521
Peter D. Keleher 7.51%
3945 Corrales Road
Corrales, New Mexico 87048
As of record on March 31, 2000, there were 20 number of Class S record holders
of the Fund.
Contingent Redemption Fees
For the fiscal year ended August 31, 1999 there was $1.61 attributable to Class
S shares in Contingent Redemption Fees charged on Fund share redemptions that
were retained by the Fund.
INVESTMENT PERFORMANCE
The Fund's Class S share average annual total returns at August 31, 1999 were:
Class S Shares
Period June 3, 1996
(commencement of investment operations)
1 year(u) through August 31, 1999(u)
107.43% (6.17)%
(u) Performance results reflect any voluntary waiver or reimbursement by
the Advisor, the Administrator and/or their affiliates of class
expenses. Absent this waiver or reimbursement arrangement, performance
results would have been lower. See the Prospectus for details.
See Part 2 of this SAI, "Performance Measures," for how calculations are made.
CUSTODIAN
The Chase Manhattan Bank, located at 270 Park Avenue, New York, New York
10017-2070, is the Funds' custodian. The custodian is responsible for
safeguarding each Fund's cash and securities, receiving and delivering
securities and collecting each Fund's interest and dividends.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, located at 160 Federal Street, Boston, Massachusetts
02110-2624, were the Funds' independent accountants providing audit and tax
return preparation services and assistance and consultation in connection with
the review of various SEC filings through September 30, 1999. 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
Effective September 30, 1999, Ernst & Young LLP, located at 200 Clarendon
Street, Boston, Massachusetts 02116-5072, are the Funds' independent
accountants.
<PAGE>
MANAGEMENT OF THE FUND
The Advisor is the investment advisor to the Fund. The Advisor is a direct
majority-owned subsidiary of Newport Pacific Management, Inc. (Newport Pacific),
580 California Street, San Francisco, CA 94104. Newport Pacific is a direct
wholly-owned subsidiary of Liberty Newport Holdings, Limited (Liberty Newport),
which in turn is a direct wholly-owned subsidiary of Liberty Financial
Companies, Inc. (Liberty Financial), which in turn is a direct majority owned
subsidiary of Liberty Corporate Holdings, Inc., (LCH) which in turn is a direct
wholly-owned subsidiary of LFC Holdings, Inc., 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 U.S. Liberty Financial's address is 600
Atlantic Avenue, Boston, MA 02210. Liberty Mutual's address is 175 Berkeley
Street, Boston, MA 02117.
Investment decisions. The Advisor acts as investment advisor to the Fund and
other funds. The Advisor's affiliate, Newport Pacific, advises other
institutional, corporate, fiduciary and individual clients for which Newport
Pacific performs various services. The fund and clients advised by the Advisor
sometimes invest in securities in which the Funds also invest and sometimes
engage in covered option writing programs and enter into transactions utilizing
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 Funds are
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.
<PAGE>
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.
<PAGE>
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 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.
<PAGE>
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 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 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 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.
<PAGE>
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
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 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 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.
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 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% 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.
<PAGE>
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.
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.
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, LFS 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
, 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, Stein Roe Small Cap Tiger 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.
<TABLE>
<CAPTION>
Trustees and Officers (this section applies to all of the funds)
<S> <C> <C> <C>
Name and Address Age Position with Fund Principal Occupation During Past Five Years
- ---------------- --- ------------------ --------------------------------------------
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
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 Academic Vice President and Dean of Faculties since
84 College Road August, 1999, Boston College (formerly Dean, Boston
Chestnut Hill, MA 02467-3838 College School of Management since September, 1977 to
September, 1999).
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.)
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).
Pamela A. McGrath 46 Treasurer and Treasurer and Chief Financial Officer of the Liberty
Chief Financial Funds and Liberty All-Star Funds since April, 2000;
Officer Treasurer, Chief Financial Officer and Vice President of
LFG since December, 1999; Chief Financial Officer,
Treasurer and Senior Vice President of Colonial since
December, 1999; Director of Offshore Accounting for Putnam
Investments from May, 1998 to October 1999; Managing Director
of Scudder Kemper Investments from October, 1984 to December, 1997.
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 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 $17 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, Stein Roe Small Cap Tiger 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, Stein Roe Small Cap Tiger 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;
(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, Stein Roe Small Cap Tiger 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, Stein Roe Small Cap Tiger 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.
<PAGE>
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, Stein Roe Small Cap Tiger 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, Stein Roe Small Cap
Tiger 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, 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.
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
LFS 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 LFS 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 LFS. The
agreement continues indefinitely but may be terminated by 90 days' notice by the
fund to LFS or generally by 6 months' notice by LFS to the fund. The agreement
limits the liability of LFS to the fund for loss or damage incurred by the fund
to situations involving a failure of LFS 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 LFS against, among other things, loss or damage incurred
by LFS on account of any claim, demand, action or suit made on or against LFS
not resulting from LFS'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, Stein Roe Small Cap 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 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.
PURCHASES AND REDEMPTIONS
Purchases Through Third Parties
You may purchase (or redeem) shares through certain broker-dealers, banks, or
other intermediaries ("Intermediaries"). The state of Texas has asked that
investment companies disclose in their SAIs, as a reminder to any such bank or
institution, that it must be registered as a securities dealer in Texas.
Intermediaries may charge for their services or place limitations on the extent
to which you may use the services offered by the Trust. It is the responsibility
of any such Intermediary to establish procedures insuring the prompt
transmission to the Trust of any such purchase order. An Intermediary, who
accepts orders that are processed at the net asset value next determined after
receipt of the order by the Intermediary, accepts such orders as authorized
agent or designee of the Fund. The Intermediary is required to segregate any
orders received on a business day after the close of regular session trading on
the New York Stock Exchange and transmit those orders separately for execution
at the net asset value next determined after that business day.
Some Intermediaries that maintain nominee accounts with the Funds for their
clients for whom they hold Fund shares charge an annual fee of up to 0.35% of
the average net assets held in such accounts for accounting, servicing, and
distribution services they provide with respect to the underlying Fund shares.
Stein Roe and the Funds' transfer agent share in the expense of these fees, and
Stein Roe pays all sales and promotional expenses.
Net Asset Value
The net asset value of the each Fund is determined on days on which the New York
Stock Exchange (the "NYSE") is open for regular session trading. The NYSE is
regularly closed on Saturdays and Sundays and on New Year's Day, the third
Monday in January, the third Monday in February, Good Friday, the last Monday in
May, Independence Day, Labor Day, Thanksgiving, and Christmas. If one of these
holidays falls on a Saturday or Sunday, the NYSE will be closed on the preceding
Friday or the following Monday, respectively. Net asset value will not be
determined on days when the NYSE is closed unless, in the judgment of the Board
of Trustees, the net asset value should be determined on any such day, in which
case the determination will be made at 3 p.m., Central time. Please refer to
Your Account--Determining Share Price in the Prospectus for additional
information on how the purchase and redemption price of Fund shares is
determined.
General Redemption Policies
The Trust intends to pay all redemptions in cash and is obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
assets during any 90-day period for any one shareholder. However, redemptions in
excess of such limit may be paid wholly or partly by a distribution in kind of
securities. If redemptions were made in kind, the redeeming shareholders might
incur transaction costs in selling the securities received in the redemptions.
The Trust reserves the right to suspend or postpone redemptions of shares during
any period when: (a) trading on the NYSE is restricted, as determined by the
Securities and Exchange Commission, or the NYSE is closed for other than
customary weekend and holiday closings; (b) the Securities and Exchange
Commission has by order permitted such suspension; or (c) an emergency, as
determined by the Securities and Exchange Commission, exists, making disposal of
portfolio securities or valuation of net assets not reasonably practicable.
You may not cancel or revoke your redemption order once instructions have been
received and accepted. The Trust cannot accept a redemption request that
specifies a particular date or price for redemption or any special conditions.
Please call 800-338-2550 if you have any questions about requirements for a
redemption before submitting your request. The Trust reserves the right to
require a properly completed application before making payment for shares
redeemed.
The Trust will generally mail payment for shares redeemed within seven days
after proper instructions are received. However, the Trust normally intends to
pay proceeds of a Telephone Redemption paid by wire on the next business day. If
you attempt to redeem shares within 15 days after they have been purchased by
check or electronic transfer, the Trust will delay payment of the redemption
proceeds to you until it can verify that payment for the purchase of those
shares has been (or will be) collected. To reduce such delays, the Trust
recommends that your purchase be made by federal funds wire through your bank.
Generally, you may not use any Special Redemption Privilege to redeem shares
purchased by check (other than certified or cashiers' checks) or electronic
transfer until 15 days after their date of purchase. The Trust reserves the
right at any time without prior notice to suspend, limit, modify, or terminate
any Privilege or its use in any manner by any person or class.
Neither the Trust, its transfer agent, nor their respective officers, trustees,
directors, employees, or agents will be responsible for the authenticity of
instructions provided under the Privileges, nor for any loss, liability, cost or
expense for acting upon instructions furnished thereunder if they reasonably
believe that such instructions are genuine. The Funds employ procedures
reasonably designed to confirm that instructions communicated by telephone under
any Special Redemption Privilege or the Special Electronic Transfer Redemption
Privilege are genuine. Use of any Special Redemption Privilege or the Special
Electronic Transfer Redemption Privilege authorizes the Funds and their transfer
agent to tape-record all instructions to redeem. In addition, callers are asked
to identify the account number and registration, and may be required to provide
other forms of identification. Written confirmations of transactions are mailed
promptly to the registered address; a legend on the confirmation requests that
the shareholder review the transactions and inform the Fund immediately if there
is a problem. If a Fund does not follow reasonable procedures for protecting
shareholders against loss on telephone transactions, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Shares in any account you maintain with the Funds or any of the other Stein Roe
Funds may be redeemed to the extent necessary to reimburse any Stein Roe Fund
for any loss you cause it to sustain (such as loss from an uncollected check or
electronic transfer for the purchase of shares, or any liability under the
Internal Revenue Code provisions on backup withholding).
The Trust reserves the right to suspend or terminate, at any time and without
prior notice, the use of the Telephone Exchange Privilege by any person or class
of persons. The Trust believes that use of the Telephone Exchange Privilege by
investors utilizing market-timing strategies adversely affects the Funds.
Therefore, regardless of the number of telephone exchange round-trips made by an
investor, the Trust generally will not honor requests for Telephone Exchanges by
shareholders identified by the Trust as "market-timers" if the officers of the
Trust determine the order not to be in the best interests of the Trust or its
shareholders. The Trust generally identifies as a "market-timer" an investor
whose investment decisions appear to be based on actual or anticipated near-term
changes in the securities markets other than for investment considerations.
Moreover, the Trust reserves the right to suspend, limit, modify, or terminate,
at any time and without prior notice, the Telephone Exchange Privilege in its
entirety. Because such a step would be taken only if the Board of Trustees
believes it would be in the best interests of the Fund, the Trust expects that
it would provide shareholders with prior written notice of any such action
unless the resulting delay in the suspension, limitation, modification, or
termination of the Telephone Exchange Privilege would adversely affect the Fund.
If the Trust were to suspend, limit, modify, or terminate the Telephone Exchange
Privilege, a shareholder expecting to make a Telephone Exchange might find that
an exchange could not be processed or that there might be a delay in the
implementation of the exchange. During periods of volatile economic and market
conditions, you may have difficulty placing your exchange by telephone.
The Telephone Exchange Privilege and the Telephone Redemption by Check Privilege
will be established automatically for you when you open your account unless you
decline these Privileges on your application. Other Privileges must be
specifically elected. A signature guarantee may be required to establish a
Privilege after you open your account. If you establish both the Telephone
Redemption by Wire Privilege and the Electronic Transfer Privilege, the bank
account that you designate for both Privileges must be the same. The Telephone
Redemption by Check Privilege, Telephone Redemption by Wire Privilege, and
Special Electronic Transfer Redemptions may not be used to redeem shares held by
a tax-sheltered retirement plan sponsored by Stein Roe.
Redemption Privileges
Exchange Privilege. You may redeem all or any portion of your Fund shares and
use the proceeds to purchase shares of any other no-load Stein Roe Fund offered
for sale in your state if your signed, properly completed application is on
file. An exchange transaction is a sale and purchase of shares for federal
income tax purposes and may result in capital gain or loss. Before exercising
the Exchange Privilege, you should obtain the prospectus for the no-load Stein
Roe Fund in which you wish to invest and read it carefully. The registration of
the account to which you are making an exchange must be exactly the same as that
of the Fund account from which the exchange is made and the amount you exchange
must meet any applicable minimum investment of the no-load Stein Roe Fund being
purchased.
Telephone Exchange Privilege. You may use the Telephone Exchange Privilege to
exchange an amount of $50 or more from your account by calling 800-338-2550 or
by sending a telegram; new accounts opened by exchange are subject to the $2,500
initial purchase minimum. Generally, you will be limited to four Telephone
Exchange round-trips per year and a Fund may refuse requests for Telephone
Exchanges in excess of four round-trips (a round-trip being the exchange out of
a Fund into another no-load Stein Roe Fund, and then back to that Fund). In
addition, the Trust's general redemption policies apply to redemptions of shares
by Telephone Exchange.
Automatic Exchanges. You may use the Automatic Exchange Privilege to
automatically redeem a fixed amount from your Fund account for investment in
another no-load Stein Roe Fund account on a regular basis ($50 minimum; $100,000
maximum).
Telephone Redemption by Wire Privilege. You may use this Privilege to redeem
shares from your account ($1,000 minimum; $100,000 maximum) by calling
800-338-2550. The proceeds will be transmitted by wire to your account at a
commercial bank previously designated by you that is a member of the Federal
Reserve System. The fee for wiring proceeds (currently $7.00 per transaction)
will be deducted from the amount wired.
Telephone Redemption by Check Privilege. You may use the Telephone Redemption by
Check Privilege to redeem an amount of $1,000 or more from your account by
calling 800-338-2550. The proceeds will be sent by check to your registered
address.
Electronic Transfer Privilege. You may redeem shares by calling 800-338-2550 and
requesting an electronic transfer ("Special Redemption") of the proceeds to a
bank account previously designated by you at a bank that is a member of the
Automated Clearing House. You may also request electronic transfers at scheduled
intervals ("Automatic Redemptions"). A Special Redemption request received by
telephone after 3 p.m., central time, is deemed received on the next business
day. You may purchase Fund shares directly from your bank account either at
regular intervals ("Regular Investments") or upon your request ("Special
Investments"). Electronic transfers are subject to a $50 minimum and a $100,000
maximum. You may also have income dividends and capital gains distributions
deposited directly into your bank account ("Automatic Dividend Deposits").
Systematic Withdrawals. You may have a fixed dollar amount, declining balance,
or fixed percentage of your account redeemed and sent at regular intervals by
check to you or another payee.
Dividend Purchase Option. You may have distributions from one Fund account
automatically invested in another no-load Stein Roe Fund account. Before
establishing this option, you should obtain and read the prospectus of the Stein
Roe Fund into which you wish to have your distributions invested. The account
from which distributions are made must be of sufficient size to allow each
distribution to usually be at least $25.
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 LFS before requesting an exchange.
By calling LFS, 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 LFS 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. LFS
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, LFS 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 LFS. 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 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", 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 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 ValueTM 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.
<PAGE>
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.
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.
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.
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.
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.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX II
1999
CATEGORY RETURN (%)
<S> <C> <C>
CREDIT SUISSE FIRST BOSTON:
First Boston High Yield Index- 3.28
Global
LIPPER, INC.:
AMEX Composite Index P 27.28
AMEX Computer Tech IX P 75.02
AMEX Institutional IX P 24.46
AMEX Major Market IX P 17.76
Bse Sensex Index 63.83
CAC 40:FFR IX P 51.12
CD Rate 1 Month Index Tr 5.31
CD Rate 3 Month Index Tr 5.46
CD Rate 6 Month Index Tr 5.59
Consumer Price Index 2.99
Copnhgn SE:Dkr IX P 20.46
DAX:Dm IX Tr 39.10
Domini 400 Social Index 24.50
Dow Jones 65 Comp Av P 11.97
Dow Jones Ind Average P 25.22
Dow Jones Ind Dly Reinv 27.21
Dow Jones Ind Mth Reinv 27.29
Dow Jones Trans Av P -5.47
Dow Jones Trans Av Tr -4.52
Dow Jones Util Av P -9.27
Dow Jones Util Av Tr -6.02
Ft/S&P Act Wld Ex US IX N/A
Ft/S&P Actuaries Wld IX N/A
FT-SE 100:Pd IX P 17.81
FT-SE Gold Mines IX 0.20
Hang Seng:Hng Kng $ IX 68.80
Jakarta Composite Index 70.06
Jasdaq Index:Yen P 244.48
Klse Composite Index 38.59
Kospi Index 82.78
Lear High Growth Rate IX N/A
Lear Low Priced Value IX N/A
Lehman 1-3 Govt/Corp P -2.89
Lehman 1-3 Govt/Corp Tr 3.15
Lehman Aggregate Bd P -7.03
Lehman Aggregate Bd Tr -0.82
Lehman Cp Bd Int P -6.43
Lehman Cp Bd Int Tr 0.16
Lehman Govt Bd Int P -5.36
Lehman Govt Bd Int Tr 0.49
Lehman Govt Bd Long P -14.59
Lehman Govt Bd Long Tr -8.73
Lehman Govt Bd P -8.08
Lehman Govt Bd Tr -2.23
Lehman Govt/Cp Bd P -8.26
Lehman Govt/Cp Bd Tr -2.15
Lehman Govt/Cp Int P -5.70
Lehman Govt/Cp Int Tr 0.39
Lehman High Yield P -6.64
Lehman High Yield Tr 2.39
Lehman Muni 10 Yr IX P -6.08
Lehman Muni 10 Yr IX Tr -1.25
Lehman Muni 3 Yr IX P -3.36
Lehman Muni 3 Yr IX Tr 1.96
Lehman Muni Bond IX P -7.08
Lehman Muni Bond IX Tr -2.06
Lipper 1000 N/A
Lipper Mgmt Co Price IX 12.57
Madrid SE:Pst IX P 16.22
ML 10+ Yr Treasury IX Tr -8.61
ML 1-3 Yr Muni IX P -2.72
ML 1-3 Yr Muni IX Tr 2.51
ML 1-3 Yr Treasury IX P -2.85
ML 1-3 Yr Treasury IX Tr 3.06
ML 1-5 Yr Gv/Cp Bd IX P -3.84
ML 1-5 Yr Gv/Cp Bd IX Tr 2.19
ML 15 Yr Mortgage IX P -4.14
ML 15 Yr Mortgage IX Tr 2.17
ML 1-5 Yr Treasury IX P -3.83
ML 1-5 Yr Treasury IX Tr 2.04
ML 3 MO T-Bill IX Tr 4.85
ML 3-5 Yr Govt IX P -5.45
ML 3-5 Yr Govt IX Tr 0.32
ML 3-7 Yr Muni IX Tr 0.66
ML Corp Master Index P -8.53
ML Corp Master Index Tr -1.89
ML Glbl Govt Bond Inx P -6.83
ML Glbl Govt Bond Inx Tr -1.66
ML Glbl Gv Bond IX II P -9.65
ML Glbl Gv Bond IX II Tr -4.52
ML Global Bond Index P -9.04
ML Global Bond Index Tr -3.50
ML Gov Corp Master IX Tr -2.05
ML Govt Master Index P -8.02
ML Govt Master Index Tr -2.11
ML Govt/Corp Master IX P -8.19
ML High Yld Master IX P -7.86
ML High Yld Master IX Tr 1.57
ML Master Muni IX Tr -6.35
ML Mortgage Master IX P -4.86
ML Mortgage Master IX Tr 1.61
ML Treasury Master IX P -8.31
ML Treasury Master IX Tr -2.38
MSCI AC Americas Free ID 22.71
MSCI AC Asia Fr-Ja IX GD 64.67
MSCI AC Asia Fr-Ja IX ID 61.95
MSCI AC Asia Pac - Ja GD 55.23
MSCI AC Asia Pac - Ja ID 52.30
MSCI AC Asia Pac Fr-J GD 49.83
MSCI AC Asia Pac Fr-J ID 46.80
MSCI AC Asia Pac IX GD 59.66
MSCI AC Asia Pac IX ID 57.86
MSCI AC Europe IX GD 17.35
MSCI AC Europe IX ID 15.22
MSCI AC Fe - Ja IX GD 67.83
MSCI AC Fe - Ja IX ID 65.24
MSCI AC Fe Free IX GD 61.81
MSCI AC Fe Free IX ID 60.29
MSCI AC Fe Fr-Ja IX GD 62.11
MSCI AC Fe Fr-Ja IX ID 59.40
MSCI AC Pac Fr-Jpn IX GD 46.89
MSCI AC Pac Fr-Jpn IX ID 43.84
MSCI AC World Free IX GD 26.82
MSCI AC World Fr-USA GD 30.91
MSCI AC World Fr-USA ID 28.80
MSCI AC World IX GD 27.31
MSCI AC World IX ID 25.49
MSCI AC World-USA IX GD 31.79
MSCI AC Wrld Fr-Ja IX GD 23.07
MSCI AC Wrld Fr-Ja IX ID 21.20
MSCI AC Wrld-Ja IX GD 23.64
MSCI AC Wrld-Ja IX ID 21.77
MSCI Argentina IX GD 34.29
MSCI Argentina IX ID 30.05
MSCI Australia IX GD 18.67
MSCI Australia IX ID 15.19
MSCI Australia IX ND 17.62
MSCI Austria IX GD -8.66
MSCI Austria IX ID -10.47
MSCI Austria IX ND -9.11
MSCI Belgium IX GD -13.75
MSCI Belgium IX ID -15.77
MSCI Belgium IX ND -14.26
MSCI Brazil IX GD 67.23
MSCI Brazil IX ID 61.57
MSCI Canada IX GD 54.40
MSCI Canada IX ID 51.78
MSCI Canada IX ND 53.74
MSCI Chile IX GD 39.01
MSCI Chile IX ID 36.45
MSCI China Dom Fr IX ID 31.10
MSCI China Free IX ID 9.94
MSCI China Non Dom IX ID 5.82
MSCI Colombia IX GD -13.69
MSCI Colombia IX ID -19.14
MSCI Czech Rep IX GD 5.35
MSCI Czech Rep IX ID 3.97
MSCI Denmark IX GD 12.47
MSCI Denmark IX ID 10.85
MSCI Denmark IX ND 12.06
MSCI EAFE - UK IX GD 31.45
MSCI EAFE - UK IX ID 29.63
MSCI EAFE - UK IX ND 31.01
MSCI EAFE + Canada IX GD 28.27
MSCI EAFE + Canada IX ID 26.22
MSCI EAFE + Canada IX ND 27.93
MSCI EAFE + Em IX GD 31.03
MSCI EAFE + EM IX ID 28.93
MSCI EAFE + EMF IX GD 30.33
MSCI EAFE + EMF IX ID 28.24
MSCI EAFE Fr IX ID 25.03
MSCI EAFE GDP Wt IX GD 31.38
MSCI EAFE GDP Wt IX ID 29.49
MSCI EAFE GDP Wt IX ND 31.00
MSCI EAFE IX GD 27.30
MSCI EAFE IX ID 25.27
MSCI EAFE IX ND 26.96
MSCI EASEA IX GD 18.12
MSCI EASEA IX ID 15.90
MSCI EASEA IX ND 17.77
MSCI Em Asia IX GD 69.73
MSCI Em Asia IX ID 67.96
MSCI Em Eur/Mid East GD 79.61
MSCI Em Eur/Mid East ID 76.67
MSCI Em Europe IX GD 83.98
MSCI Em Europe IX ID 81.28
MSCI Em Far East IX GD 67.27
MSCI Em Far East IX ID 65.67
MSCI Em IX GD 68.82
MSCI Em IX ID 66.18
MSCI Em Latin Am IX GD 65.45
MSCI Em Latin Am IX ID 61.81
MSCI EMF Asia IX GD 69.41
MSCI EMF Asia IX ID 67.65
MSCI EMF Far East IX GD 65.50
MSCI EMF Far East IX ID 63.97
MSCI EMF IX GD 66.41
MSCI EMF IX ID 63.70
MSCI EMF Latin Am IX GD 58.89
MSCI EMF Latin Am IX ID 55.48
MSCI Europe - UK IX GD 17.84
MSCI Europe - UK IX ID 16.00
MSCI Europe - UK IX ND 17.35
MSCI Europe GDP Wt IX ID 14.08
MSCI Europe IX GD 16.23
MSCI Europe IX ID 14.12
MSCI Europe IX ND 15.89
MSCI European Union GD 19.22
MSCI European Union ID 16.99
MSCI Far East Free IX ID 59.99
MSCI Far East IX GD 62.63
MSCI Far East IX ID 61.10
MSCI Far East IX ND 62.41
MSCI Finland IX GD 153.33
MSCI Finland IX ID 150.71
MSCI Finland IX ND 152.60
MSCI France IX GD 29.69
MSCI France IX ID 28.00
MSCI France IX ND 29.27
MSCI Germany IX GD 20.53
MSCI Germany IX ID 18.70
MSCI Germany IX ND 20.04
MSCI Greece IX GD 49.64
MSCI Greece IX ID 47.58
MSCI Hongkong IX GD 59.52
MSCI Hongkong IX ID 54.85
MSCI Hongkong IX ND 59.52
MSCI Hungary IX GD 11.66
MSCI Hungary IX ID 10.81
MSCI India IX GD 87.35
MSCI India IX ID 84.67
MSCI Indonesia IX GD 93.46
MSCI Indonesia IX ID 92.04
MSCI Ireland IX ID -14.02
MSCI Israel Dom IX ID 51.10
MSCI Israel IX ID 56.29
MSCI Israel Non Dom Ixid 47.06
MSCI Italy IX GD 0.19
MSCI Italy IX ID -1.48
MSCI Italy IX ND -0.26
MSCI Japan IX GD 61.77
MSCI Japan IX ID 60.56
MSCI Japan IX ND 61.53
MSCI Jordan IX GD 6.26
MSCI Jordan IX ID 2.00
MSCI Kokusai IX GD 21.26
MSCI Kokusai IX ID 19.43
MSCI Kokusai IX ND 20.84
MSCI Korea IX GD 92.42
MSCI Korea IX ID 90.17
MSCI Luxembourg IX ID 50.50
MSCI Malaysia IX GD 109.92
MSCI Malaysia IX ID 107.23
MSCI Mexico Free IX GD 80.07
MSCI Mexico Free IX ID 78.50
MSCI Mexico IX GD 81.76
MSCI Mexico IX ID 80.19
MSCI Netherland IX GD 7.43
MSCI Netherland IX ID 5.25
MSCI Netherland IX ND 6.88
MSCI New Zealand IX GD 14.30
MSCI New Zealand IX ID 9.70
MSCI New Zealand IX ND 12.90
MSCI Nordic IX GD 87.75
MSCI Nordic IX ID 85.11
MSCI Nordic IX ND 87.00
MSCI Norway IX GD 32.43
MSCI Norway IX ID 29.52
MSCI Norway IX ND 31.70
MSCI Nth Amer IX GD 23.47
MSCI Nth Amer IX ID 21.91
MSCI Nth Amer IX ND 23.00
MSCI Pac - Japan IX GD 43.20
MSCI Pac - Japan IX ID 39.35
MSCI Pac - Japan IX ND 42.58
MSCI Pacific Free IX ID 55.19
MSCI Pacific Fr-Jpn ID 34.95
MSCI Pacific IX GD 57.96
MSCI Pacific IX ID 56.17
MSCI Pacific IX ND 57.63
MSCI Pakistan IX GD 49.62
MSCI Pakistan IX ID 42.24
MSCI Peru IX GD 18.86
MSCI Peru IX ID 16.34
MSCI Philippines Fr Ixgd 3.32
MSCI Philippines Fr Ixid 2.33
MSCI Philippines IX GD 8.90
MSCI Philippines IX ID 7.62
MSCI Portugal IX GD -8.45
MSCI Portugal IX ID -10.86
MSCI Russia IX GD 247.06
MSCI Russia IX ID 246.20
MSCI Sing/Mlysia IX GD 99.40
MSCI Sing/Mlysia IX ID 97.08
MSCI Sing/Mlysia IX ND 99.40
MSCI Singapore Fr IX GD 60.17
MSCI Singapore Fr IX ID 58.43
MSCI South Africa IX GD 57.20
MSCI South Africa IX ID 53.43
MSCI Spain IX GD 5.27
MSCI Spain IX ID 3.53
MSCI Spain IX ND 4.83
MSCI Sri Lanka IX GD -6.27
MSCI Sri Lanka IX ID -9.73
MSCI Sweden IX GD 80.60
MSCI Sweden IX ID 77.76
MSCI Sweden IX ND 79.74
MSCI Swtzrlnd IX GD -6.59
MSCI Swtzrlnd IX ID -7.81
MSCI Swtzrlnd IX ND -7.02
MSCI Taiwan IX GD 52.71
MSCI Taiwan IX ID 51.52
MSCI Thailand IX GD 40.92
MSCI Thailand IX ID 40.49
MSCI Turkey IX GD 252.41
MSCI Turkey IX ID 244.36
MSCI UK IX GD 12.45
MSCI UK IX ID 9.74
MSCI UK IX ND 12.45
MSCI USA IX GD 22.38
MSCI USA IX ID 20.86
MSCI USA IX ND 21.92
MSCI Venezuela IX GD 8.71
MSCI Venezuela IX ID 1.68
MSCI World - UK IX GD 26.83
MSCI World - UK IX ID 25.17
MSCI World - UK IX ND 26.38
MSCI World - USA IX GD 28.27
MSCI World - USA IX ID 26.22
MSCI World - USA IX ND 27.93
MSCI World GDP Wt IX ID 27.26
MSCI World IX Free ID 23.45
MSCI World IX GD 25.34
MSCI World IX ID 23.56
MSCI World IX ND 24.93
MSCI Wrld - Austrl IX GD 25.42
MSCI Wrld - Austrl IX ID 23.67
MSCI Wrld - Austrl IX ND 25.03
NASDAQ 100 IX P 101.95
NASDAQ Bank IX P -7.98
NASDAQ Composite IX P 85.59
NASDAQ Industrial IX P 71.67
NASDAQ Insurance IX P 5.54
NASDAQ Natl Mkt Cmp IX 85.87
NASDAQ Natl Mkt Ind IX 72.04
NASDAQ Transport IX P 1.82
Nikkei 225 Avg:Yen P 36.79
NYSE Composite P 9.15
NYSE Finance IX P -0.92
NYSE Industrials IX P 11.37
NYSE Transportation IX -3.25
NYSE Utilities IX P 14.62
Oslo SE Tot:Fmk IX P 45.54
Philippines Composite IX 8.85
PSE Technology IX P 116.40
Russell 1000 Grow IX Tr 33.16
Russell 1000 IX P 19.46
Russell 1000 IX Tr 20.91
Russell 1000 Value IX Tr 7.35
Russell 2000 Grow IX Tr 43.09
Russell 2000 IX P 19.62
Russell 2000 IX Tr 21.26
Russell 2000 Value IX Tr -1.49
Russell 3000 IX P 19.43
Russell 3000 IX Tr 20.90
Russell Midcap Grow IX 51.29
Russell Midcap IX Tr 18.23
Russell Midcap Value IX -0.11
S & P 100 Index P 31.26
S & P 500 Daily Reinv 21.04
S & P 500 Index P 19.53
S & P 500 Mnthly Reinv 21.03
S & P 600 Index P 11.52
S & P 600 Index Tr 12.41
S & P Financial IX P 2.19
S & P Financial IX Tr 3.97
S & P Industrial IX Tr 25.87
S & P Industrials P 24.52
S & P Midcap 400 IX P 13.35
S & P Midcap 400 IX Tr 14.72
S & P Transport Index P -10.69
S & P Transport IX Tr -9.32
S & P Utility Index P -12.48
S & P Utility Index Tr -8.88
S & P/Barra Growth IX Tr 27.98
S & P/Barra Value IX Tr 12.72
SB Cr-Hdg Nn-US Wd IX Tr 2.88
SB Cr-Hdg Wd Gv Bd IX Tr 1.31
SB Non-US Wd Gv Bd IX Tr -5.07
SB Wd Gv Bd:Austrl IX Tr 4.07
SB Wd Gv Bd:Germny IX Tr -16.42
SB Wd Gv Bd:Japan IX Tr 15.53
SB Wd Gv Bd:UK IX Tr -4.30
SB Wd Gv Bd:US IX Tr -2.45
SB World Govt Bond IX Tr -4.27
SB World Money Mkt IX Tr 0.39
Straits Times Index 77.54
Swiss Perf:Sfr IX Tr 11.69
Taiwan SE:T$ IX P 42.86
T-Bill 1 Year Index Tr 4.91
T-Bill 3 Month Index Tr 4.74
T-Bill 6 Month Index Tr 4.85
Thailand Set Index 35.44
Tokyo 2nd Sct:Yen IX P 121.27
Tokyo Se(Topix):Yen IX 58.44
Toronto 300:C$ IX P 29.72
Toronto SE 35:C$ IX P 36.42
Value Line Cmp IX-Arth 10.56
Value Line Cmp IX-Geom -1.40
Value Line Industrl IX -0.05
Value Line Railroad IX -9.93
Value Line Utilties IX -7.10
Lipper CE Pac Ex Jpn IX 73.32
Lipper Pac Ex-Jpn Fd IX 74.88
THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUST::
Real Estate Investment Trust Index -4.62
SALOMON SMITH BARNEY WGBI MARKET SECTORS: LOCAL CURRENCY U.S. DOLLARS
U.S. Government (Sovereign) -2.45 -2.45
United Kingdom (Sovereign) -1.20 -4.3
France (Sovereign) -2.95 -17.16
Germany (Sovereign) -2.08 -16.42
Japan (Sovereign) 4.83 15.53
Canada (Sovereign) -1.46 4.29
</TABLE>
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
