1933 Act Registration No. 2-99356
1940 Act File No. 811-4367
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 31 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 32 [X]
LIBERTY-STEIN ROE FUNDS MUNICIPAL TRUST
(Exact Name of Registrant as Specified in Charter)
One South Wacker Drive, Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-338-2550
Kevin M. Carome Cameron S. Avery
Executive Vice President Bell, Boyd & Lloyd LLC
Liberty-Stein Roe Three First National Plaza
Funds Municipal Trust 70 W. Madison Street,, Suite 3300
One Financial Center Chicago, Illinois 60602
Boston, Massachusetts 02111
(Name and Address of Agents for Service)
<PAGE>
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph b)
[X] on October 31, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph
(a)(1) [ ] 75 days after filing pursuant to
paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
Registrant has elected to register pursuant to Rule 24f-2 an indefinite number
of shares of beneficial interest of the following series: Stein Roe Intermediate
Municipals Fund, Stein Roe Municipal Money Market Fund, Stein Roe Managed
Municipals Fund, and Stein Roe High-Yield Municipals Fund.
The prospectus and statement of additional information relating to the series of
Liberty-Stein Roe Funds Municipal Trust designated Stein Roe Municipal Money
Market Fund, Stein Roe High Yield Municipals Fund and Stein Roe Managed
Municipals Fund are not affected by the filing of this Post-Effective Amendment
No. 31.
<PAGE>
<PAGE>
STEIN ROE INTERMEDIATE MUNICIPALS FUND PROSPECTUS, NOVEMBER 1, 2000
CLASS A, B AND C SHARES
Advised by Stein Roe & Farnham Incorporated
Although these securities have been registered with the Securities and Exchange
Commission, the Commission has not approved or disapproved any shares offered in
this prospectus or determined whether this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
---------------------------
NOT FDIC MAY LOSE VALUE
-----------------
INSURED NO BANK GUARANTEE
---------------------------
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TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND 2
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Investment Goal ........................................................... 2
Principal Investment Strategies ........................................... 2
Principal Investment Risks ................................................ 3
Performance History ....................................................... 5
Your Expenses ............................................................. 6
YOUR ACCOUNT 7
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How to Buy Shares ......................................................... 7
Sales Charges ............................................................. 8
How to Exchange Shares .................................................... 9
How to Sell Shares ........................................................ 9
Fund Policy on Trading of Fund Shares ..................................... 11
Distribution and Service Fees ............................................. 11
Other Information About Your Account ...................................... 12
MANAGING THE FUND 15
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Investment Advisor ........................................................ 15
Portfolio Manager ......................................................... 15
OTHER INVESTMENT STRATEGIES AND RISKS 16
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FINANCIAL HIGHLIGHTS 19
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</TABLE>
<PAGE>
THE FUND
INVESTMENT GOALS
--------------------------------------------------------------------------------
The Fund seeks a high level of total return, consisting of current income exempt
from federal income tax, consistent with the preservation of capital
PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund invests primarily in "intermediate-term" tax-exempt bonds.
"Intermediate term" means the bonds generally have a dollar-weighted-average
maturity of three to 10 years. At least 75% of the Fund's total assets are
invested in tax-exempt securities that are at the time of purchase:
- rated at least BBB by Standard & Poor's,
- rated at least Baa by Moody's Investors Service, Inc.,
- given a comparable rating by another nationally recognized rating
agency,
- unrated securities that Stein Roe believes to be of comparable quality,
or backed by the full faith and credit or guarantee of the U.S.
government.
The Fund may also invest up to 25% of its total assets in lower-rated debt
securities. These securities are sometimes referred to as "junk bonds" and are
rated at the time of purchase:
- below BBB by Standard & Poor's,
- below Baa by Moody's Investors Service, Inc., or
- with a comparable rating by another nationally recognized rating agency.
It is a fundamental policy that, during periods of normal market conditions, at
least 80% of the Fund's net assets will be invested in securities that produce
income that is exempt from federal income tax.
The Portfolio is permitted to invest all of its assets in bonds subject to the
Alternative Minimum Tax.
PRINCIPAL INVESTMENT RISKS
--------------------------------------------------------------------------------
The principal 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 investment goals. You may lose money
by investing in the Fund.
Management risk means that the advisor's stock and bond selections and other
management decisions might produce losses or cause the Fund to underperform when
compared to other funds with similar investment goals. Market risk means that
security prices in a market, sector or industry may move down. Downward
movements will reduce the value of your investment. Because of management and
market risk, there is no guarantee that the Fund will achieve its investment
goals or perform favorably compared with competing funds.
2
<PAGE>
THE FUND
Interest rate risk is the risk of a change in the price of a bond when interest
rates increase or decline. In general, if interest rates rise, bond prices fall;
and if interest rates fall, bond prices rise. Changes in the values of bonds
usually will not affect the amount of income the Fund receives from them but
will affect the value of the Fund's shares. Interest rate risk is generally
greater for bonds with longer maturities.
Issuer risk is the possibility that changes in the financial condition of the
issuer of a security, changes in general economic conditions, or changes in
economic conditions that affect the issuer may impact its willingness or ability
to make timely payments of interest or principal. This could result in decreases
in the price of the security and in some cases a decrease in income.
Lower-rated debt securities, commonly referred to as "junk bonds", involve
greater risk of loss due to credit deterioration and are less liquid, especially
during periods of economic uncertainty or change, than higher-quality debt
securities. Lower-rated debt securities have the added risk that the issuer of
the security may default and not make payment of interest or principal.
Call risk is the chance that during periods of falling interest rates, a bond
issuer will "call"--or repay--its high-yielding bond before the bond's maturity
date. The Fund could experience a decline in income if it has to reinvest the
unanticipated proceeds at a lower interest rate.
Tax-exempt bonds are subject to special risk. Changes in tax laws or adverse
determinations by the Internal Revenue Service may make the income from some of
these bonds taxable. Bonds that are backed by the issuer's taxing authority,
known as general obligations, may depend partially on legislative appropriation
and/or aid from other governments. These bonds may be vulnerable to legal limits
on a government's power to raise revenue or increase taxes. Other tax-exempt
bonds, known as special revenue obligations, are payable from revenues earned by
a particular project or other revenue source. These bonds are subject to greater
risk of default than general obligations because investors can look only to the
revenue generated by the project or private company, rather than to the credit
of the state or local government issuer of the bonds.
The interest income distributed by the Fund from certain tax-exempt bonds may be
subject to the federal Alternative Minimum Tax for individuals and corporations.
Consult your tax advisor for more information.
Additional strategies that are not principal investment strategies and the risks
associated with them are described later in this prospectus under "Other
Investment Strategies and Risks."
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
3
<PAGE>
THE FUND
UNDERSTANDING PERFORMANCE
CALENDAR YEAR TOTAL RETURNS show the Fund's Class S share performance for each
of the last ten complete calendar years. It includes the effects of Fund
expenses.
AVERAGE ANNUAL TOTAL RETURNS are a measure of the Fund's Class S share
performance over the past one-year, five-year and ten-year periods. It includes
the effects of Fund expenses.
The Fund's return is compared to the Lehman Brothers 10-year Municipal Bond
Index (Lehman Index), an unmanaged broad-based measure of market performance.
Unlike the Fund, indices are not investments, do not incur fees or expenses and
are not professionally managed. It is not possible to invest directly in
indices.
PERFORMANCE HISTORY
--------------------------------------------------------------------------------
The bar chart below shows changes in the Fund's performance from year to year by
illustrating the Fund's calendar year total returns for its Class S shares. The
Fund did not have separate classes of shares prior to November 1, 2000; on that
date, the Fund's outstanding shares were reclassified as Class S shares. The
performance table following the bar chart shows how the Fund's average annual
returns for Class S shares compare with those of a broad measure of market
performance for 1 year, 5 years and 10 years. The chart and table are intended
to illustrate some of the risks of investing in the Fund by showing the changes
in the Fund's performance. All returns include the reinvestment of dividends and
distributions. Performance results include the effect of expense reduction
arrangements, if any. If these arrangements were not in place, then the
performance results would have been lower. Any expense reduction arrangements
may be discontinued at any time. As with all mutual funds, past performance does
not predict the Fund's future performance.
CALENDAR YEAR TOTAL RETURNS (CLASS S)(1)
<TABLE>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
7.48% 10.67% 7.63% 11.06% -3.36% 12.93% 4.16% 7.50% 5.46% -1.41%
</TABLE>
The Fund's year-to-date total return through September 30, 2000 was + %.
For period shown in bar chart:
Best quarter: 1st quarter 1995, +4.73%
Worst quarter: 1st quarter 1994, -4.24%
AVERAGE ANNUAL TOTAL RETURNS -- FOR PERIODS ENDED DECEMBER 31, 1999(1)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
Class S (%) -1.41 5.62 6.09
------------------------------------------------------
Lehman Index (%) -1.25 7.12 7.10
</TABLE>
(1) Because the Class A ,B and C shares have not completed a full calendar year
the bar chart and average annual total returns shown are for Class S shares,
the oldest existing Fund class.
4
<PAGE>
THE FUND
UNDERSTANDING EXPENSES
SALES CHARGES are paid directly by shareholders to Liberty Funds Distributor,
Inc., the Fund's distributor.
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund. They include
management fees, 12b-1 fees and administrative costs including pricing and
custody services.
EXAMPLE EXPENSES help you compare the cost of investing in the Fund to the cost
of investing in other mutual funds. The table does not take into account any
expense reduction arrangements discussed in the footnotes to the Annual Fund
Operating Expenses table. It uses the following hypothetical conditions:
- $10,000 initial investment
- 5% total return for each year
- Fund operating expenses remain the same
- Assumes reinvestment of all dividends and distributions
- Assumes Class B shares convert to
Class A shares after eight years
YOUR EXPENSES
--------------------------------------------------------------------------------
Expenses are one of several factors to consider before you invest in a mutual
fund. The tables below describe the fees and expenses you may pay when you buy,
hold and sell shares of the Fund.
SHAREHOLDER FEES (2) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum sales charge (load) on
purchases (%) (as a percentage
of the offering price) 4.75 0.00 0.00
-------------------------------------------------------------------------------
Maximum deferred sales charge
(load) on redemptions (%) (as a
percentage of the lesser of
purchase price or redemption
price) 1.00(3) 5.00 1.00
-------------------------------------------------------------------------------
Redemption fee (%) (as a
percentage of amount
redeemed, if applicable) (4) (4) (4)
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED DIRECTLY FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Management fee (%) 0.58 0.58 0.58
-------------------------------------------------------------------------------
Distribution and service (12b-1)
fees (%) 0.35(5) 1.00 1.00
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Other expenses (6) (%) 0.23 0.23 0.23
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Total annual fund operating
expenses (%) 1.16 1.81 1.81
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Expense reimbursement (7) (%) (0.11) (0.11) (0.11)
-------------------------------------------------------------------------------
Net expenses (%) 1.05 1.70 1.70
</TABLE>
EXAMPLE EXPENSES (YOUR ACTUAL COSTS MAY BE HIGHER OR LOWER)
<TABLE>
<CAPTION>
CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A $588 $827 $1,085 $1,825
-------------------------------------------------------------------------------
Class B: did not sell
your shares $184 $569 $980 $1,954
sold all your
shares at
the end of
the period $684 $869 $1,180 $1,954
-------------------------------------------------------------------------------
Class C: did not sell
your shares $184 $569 $980 2,127
sold all your
shares at
the end of
the period $284 $569 $980 $2,127
</TABLE>
(2) A $10 annual fee is deducted from accounts of less than $1,000 and paid to
the transfer agent.
(3) This charge applies only to certain Class A shares bought without an initial
sales charge that are sold within 18 months of purchase.
(4) There is a $7.50 charge for wiring sale proceeds to your bank.
(5) The Fund's distributor has voluntarily agreed to waive a portion of the
12b-1 fee for Class A shares. As a result, the actual 12b-1 fee for Class A
shares would be 0.25% and the total annual fund operating expenses for Class
A shares would be 1.06%. This arrangement may be terminated by the
distributor at any time.
(6) Other expenses are based on the Fund's Class S shares.
(7) The Fund's advisor has agreed to reimburse the Fund for certain expenses so
that the total annual fund operating expenses (exclusive of distribution and
service fees, brokerage commissions, interest, taxes and extraordinary
expenses, if any) will not exceed 0.70%. As a result, the actual management
fee for each share class would be 0.33% and total annual fund operating
expenses for Class A, B and C shares would be 0.95%, 1.70% and 1.70%,
respectively. This arrangement expires on October 31, 2000. A reimbursement
lowers the expense ratio and increases overall return to investors.
5
<PAGE>
YOUR ACCOUNT
INVESTMENT MINIMUMS
<TABLE>
<S> <C>
Initial Investment ................................................... $1,000
Subsequent Investments ............................................... $50
Automatic Investment Plan* ........................................... $50
Retirement Plans* .................................................... $25
</TABLE>
* The initial investment minimum of $1,000 is waived on this plan.
The Fund reserves the right to change these investment minimums. The Fund also
reserves the right to refuse a purchase order for any reason, including if it
believes that doing so would be in the best interest of the Fund and its
shareholders.
HOW TO BUY SHARES
--------------------------------------------------------------------------------
Your financial advisor can help you establish an appropriate investment
portfolio, buy shares and monitor your investments. When the Fund receives your
purchase request in "good form," your shares will be bought at the next
calculated public offering price. "Good form" means that you placed your order
with your brokerage firm or your payment has been received and your application
is complete, including all necessary signatures. The Fund also offers Class S
shares through a separate prospectus.
OUTLINED BELOW ARE THE VARIOUS OPTIONS FOR BUYING SHARES:
<TABLE>
<CAPTION>
METHOD INSTRUCTIONS
<S> <C>
Through your Your financial advisor can help you establish your
financial advisor account and buy Fund shares on your behalf. Your financial
advisor may charge you fees for executing the purchase for you.
--------------------------------------------------------------------------------
By check For new accounts, send a completed application and check
(new account) made payable to the Fund to the transfer agent, SteinRoe
Services, Inc., c/o Liberty Funds Services, Inc., P.O. Box 1722,
Boston, MA 02105-1722.
--------------------------------------------------------------------------------
By check For existing accounts, fill out and return the additional
(existing account) investment stub included in your quarterly statement, or send a
letter of instruction including your Fund name and account
number with a check made payable to the Fund to SteinRoe
Services, Inc., c/o Liberty Funds Services, Inc., P.O. Box 1722,
Boston, MA 02105-1722.
--------------------------------------------------------------------------------
By exchange You or your financial advisor may acquire
shares by exchanging shares you own in one fund for
shares of the same class of the Fund at no additional
cost. There may be an additional charge if exchanging
from a money market fund. To exchange by telephone,
call 1-800-422-3737.
--------------------------------------------------------------------------------
By wire You may purchase shares by wiring money from your
bank account to your fund account. To wire funds to
your fund account, call 1-800-422-3737 to obtain a
control number and the wiring instructions.
--------------------------------------------------------------------------------
By electronic You may purchase shares by electronically transferring funds
transfer money from your bank account to your fund account by calling
1-800-422-3737. Electronic funds transfers may take up
to two business days to settle and be considered in
"good form." You must set up this feature prior to your
telephone request. Be sure to complete the appropriate
section of the application.
--------------------------------------------------------------------------------
Automatic You can make monthly or quarterly investments automatically from
investment plan your bank account to your fund account. You can select a
pre-authorized amount to be sent via electronic funds
transfer. Be sure to complete the appropriate section
of the application for this feature.
--------------------------------------------------------------------------------
By dividend You may automatically invest dividends distributed by one
diversification fund into the same class of shares of the Fund at no additional
sales charge. To invest your dividends in another fund, call
1-800-345-6611.
</TABLE>
6
<PAGE>
YOUR ACCOUNT
CHOOSING A SHARE CLASS
The Fund offers three classes of shares in this prospectus -- CLASS A, B and C.
Each share class has its own sales charge and expense structure. Determining
which share class is best for you depends on the dollar amount you are investing
and the number of years for which you are willing to invest. If your financial
advisor firm does not participate in the Class B discount program, purchases in
excess of $250,000 must be for Class A or Class C shares only. Purchases of over
$1 million can be made only in Class A shares. Based on your personal situation,
your investment advisor can help you decide which class of shares makes the most
sense for you.
The Fund also offers an additional class of shares, Class S shares made
available through a separate prospectus.
SALES CHARGES
--------------------------------------------------------------------------------
You may be subject to an initial sales charge when you purchase, or a contingent
deferred sales charge (CDSC) when you sell, shares of the Fund. These sales
charges are described below. In certain circumstances, these sales charges are
waived, as described below and in the Statement of Additional Information.
CLASS A SHARES Your purchases of Class A shares generally are at the public
offering price. This price includes a sales charge that is based on the amount
of your initial investment when you open your account. A portion of the sales
charge is the commission paid to the financial advisor firm on the sale of Class
A shares. The sales charge you pay on additional investments is based on the
total amount of your purchase and the current value of your account. The amount
of the sales charge differs depending on the amount you invest as shown in the
table below.
CLASS A SALES CHARGES
<TABLE>
<CAPTION>
% OF
OFFERING
PRICE
AS A % RETAINED
OF THE BY
PUBLIC AS A % FINANCIAL
OFFERING OF YOUR ADVISOR
AMOUNT OF PURCHASE PRICE INVESTMENT FIRM
<S> <C> <C> <C>
Less than $50,000 4.75 4.99 4.25
-------------------------------------------------------------------------------
$50,000 to less than $100,000 4.50 4.71 4.00
-------------------------------------------------------------------------------
$100,000 to less than $250,000 3.50 3.63 3.00
-------------------------------------------------------------------------------
$250,000 to less than $500,000 2.50 2.56 2.00
-------------------------------------------------------------------------------
500,000 to less than $1,000,000 2.00 2.04 1.75
-------------------------------------------------------------------------------
$1,000,000 or more 0.00 0.00 0.00
</TABLE>
Class A shares bought without an initial sales charge in accounts aggregating $1
million to $25 million at the time of purchase are subject to a 1.00% CDSC if
the shares are sold within 18 months of the time of purchase. Subsequent Class A
share purchases that bring your account value above $1 million are subject to a
CDSC if redeemed within 18 months of the date of purchase. The 18-month period
begins on the first day of the month following each purchase. The CDSC does not
apply to retirement plans purchased through a fee-based program.
7
<PAGE>
YOUR ACCOUNT
UNDERSTANDING CONTINGENT DEFERRED SALES CHARGES
Certain investments in Class A, B and C shares are subject to a CDSC, a sales
charge applied at the time you sell your shares. You will pay the CDSC only on
shares you sell within a certain amount of time after purchase. The CDSC
generally declines each year until there is no charge for selling shares. The
CDSC is applied to the net asset value at the time of purchase or sale,
whichever is lower. For purposes of calculating the CDSC, the start of the
holding period is the month-end of the month in which the purchase is made.
Shares you purchase with reinvested dividends or capital gains are not subject
to a CDSC. When you place an order to sell shares, the Fund will automatically
sell first those shares not subject to a CDSC and then those shares you have
held the longest. This policy helps reduce and possibly eliminate the potential
impact of the CDSC.
For Class A share purchases of $1 million or more, financial advisors receive a
commission from the distributor as follows:
PURCHASES OVER $1 MILLION
<TABLE>
<CAPTION>
AMOUNT PURCHASED COMMISSION %
<S> <C>
First $3 million 1.00
------------------------------------------------------------------------------
$3 million to less than $5 million 0.80
------------------------------------------------------------------------------
$5 million to less than $25 million 0.50
------------------------------------------------------------------------------
$25 million or more 0.25
</TABLE>
The commission to financial advisors for Class A share purchases of $25 million
or more is paid over 12 months but only to the extent the shares remain
outstanding.
For Class A share purchases by participants in certain group retirement plans
offered through a fee-based program, financial advisors receive a 1.00%
commission from the distributor on all purchases of less than $3 million.
REDUCED SALES CHARGES FOR LARGER INVESTMENTS There are two ways for you to pay a
lower sales charge when purchasing Class A shares. The first is through Rights
of Accumulation. If the combined value of the Fund accounts maintained by you,
your spouse or your minor children reaches a discount level (according to the
chart on the previous page), your next purchase will receive the lower sales
charge. The second is by signing a Statement of Intent within 90 days of your
purchase. By doing so, you would be able to pay the lower sales charge on all
purchases by agreeing to invest a total of at least $50,000 within 13 months. If
your Statement of Intent purchases are not completed within 13 months, you will
be charged the applicable sales charge on the amount you had invested to that
date. In addition, certain investors may purchase shares at a reduced sales
charge or net asset value, which is the value of a fund share excluding any
sales charges. See the Statement of Additional Information for a description of
these situations.
CLASS B SHARES Your purchases of Class B shares are at Class B's net asset
value. Class B shares have no front-end sales charge, but they do carry a CDSC
that is imposed only on shares sold prior to the completion of the periods shown
in the charts below. The CDSC generally declines each year and eventually
disappears over time. The distributor pays the financial advisor firm an
up-front commission on sales of Class B shares as depicted in the charts below.
8
<PAGE>
YOUR ACCOUNT
PURCHASES OF LESS THAN $250,000:
CLASS B SALES CHARGES
<TABLE>
<CAPTION>
% DEDUCTED WHEN
HOLDING PERIOD AFTER PURCHASE SHARES ARE SOLD
<S> <C>
Through first year 5.00
------------------------------------------------------------------------------
Through second year 4.00
------------------------------------------------------------------------------
Through third year 3.00
------------------------------------------------------------------------------
Through fourth year 3.00
------------------------------------------------------------------------------
Through fifth year 2.00
------------------------------------------------------------------------------
Through sixth year 1.00
------------------------------------------------------------------------------
Longer than six years 0.00
</TABLE>
Commission to financial advisors is 4%.
Automatic conversion to Class A shares is eight years after purchase.
You can pay a lower CDSC and reduce the holding period when making purchases of
Class B shares through a financial advisor firm which participates in the Class
B share discount program for larger purchases as described in the charts below.
Some financial advisor firms are not able to participate because their record
keeping or transaction processing systems are not designed to accommodate these
reductions. For non-participating firms, purchases of Class B shares must be
less than $250,000. Consult your financial advisor to see whether it
participates in the discount program for larger purchases. For participating
firms, Rights of Accumulation apply, so that if the combined value of the Fund
accounts maintained by you, your spouse or your minor children is at or above a
discount level, your next purchase will receive the lower CDSC and the
applicable reduced holding period.
PURCHASES OF $250,000 TO LESS THAN $500,000:
CLASS B SALES CHARGES
<TABLE>
<CAPTION>
% DEDUCTED WHEN
HOLDING PERIOD AFTER PURCHASE SHARES ARE SOLD
<S> <C>
Through first year 3.00
------------------------------------------------------------------------------
Through second year 2.00
------------------------------------------------------------------------------
Through third year 1.00
------------------------------------------------------------------------------
Longer than three years 0.00
</TABLE>
Commission to financial advisors is 2.50%.
Automatic conversion to Class A shares is four years after purchase.
9
<PAGE>
YOUR ACCOUNT
PURCHASES OF $500,000 TO LESS THAN $1 MILLION:
CLASS B SALES CHARGES
<TABLE>
<CAPTION>
% DEDUCTED WHEN
HOLDING PERIOD AFTER PURCHASE SHARES ARE SOLD
<S> <C>
Through first year 3.00
------------------------------------------------------------------------------
Through second year 2.00
------------------------------------------------------------------------------
Through third year 1.00
------------------------------------------------------------------------------
Longer than four years 0.00
</TABLE>
Commission to financial advisors is 1.75%.
Automatic conversion to Class A shares is three years after purchase.
If you exchange into a fund participating in the Class B share discount program
or transfer your fund account from a financial advisor which does not
participate in the program to one who does, the exchanged or transferred shares
will retain the pre-existing CDSC but any additional purchases of Class B shares
which cause the exchanged or transferred account to exceed the applicable
discount level will receive the lower CDSC and the reduced holding period for
amounts in excess of the discount level. Your financial advisor will receive the
lower commission for purchases in excess of the applicable discount level. If
you exchange from a participating fund or transfer your account from a financial
advisor that does participate in the program into a fund or financial advisor
which does not, the exchanged or transferred shares will retain the pre-existing
CDSC but all additional purchases of Class B shares will be in accordance with
the higher CDSC and longer holding period of the non-participating fund or
financial advisor.
CLASS C SHARES Similar to Class B shares, your purchases of Class C shares are
at Class C's net asset value. Although Class C shares have no front-end sales
charge, they carry a CDSC of 1.00% that is applied to shares sold within the
first year after they are purchased. After holding shares for one year, you may
sell them at any time without paying a CDSC. The distributor pays the financial
advisor firm an up-front commission of 1.00% on sales of Class C shares.
CLASS C SALES CHARGES
<TABLE>
<CAPTION>
YEARS AFTER PURCHASE % DEDUCTED WHEN SHARES ARE SOLD
Through first year 1.00
-------------------------------------------------------------------------------
<S> <C>
Longer than one year 0.00
</TABLE>
10
<PAGE>
YOUR ACCOUNT
HOW TO EXCHANGE SHARES
-------------------------------------------------------------------------------
You may exchange your shares for shares of the same share class of another fund
distributed by Liberty Funds Distributor, Inc. at net asset value. If your
shares are subject to a CDSC, you will not be charged a CDSC upon the exchange.
However, when you sell the shares acquired through the exchange, the shares sold
may be subject to a CDSC, depending upon when you originally purchased the
shares you exchanged. For purposes of computing the CDSC, the length of time you
have owned your shares will be computed from the date of your original purchase
and the applicable CDSC will be the CDSC of the original fund. Unless your
account is part of a tax-deferred retirement plan, an exchange is a taxable
event. Therefore, you may realize a gain or a loss for tax purposes. The Fund
may terminate your exchange privilege if the advisor determines that your
exchange activity is likely to adversely impact its ability to manage the Fund.
To exchange by telephone, call 1-800-422-3737.
HOW TO SELL SHARES
-------------------------------------------------------------------------------
Your financial advisor can help you determine if and when you should sell your
shares. You may sell shares of the Fund on any regular business day that the New
York Stock Exchange (NYSE) is open.
When the Fund receives your sales request in "good form," shares will be sold at
the next calculated price. In "good form" means that money used to purchase your
shares is fully collected. When selling shares by letter of instruction, "good
form" also means (i) your letter has complete instructions, the proper
signatures and signature guarantees, (ii) you have included any certificates for
shares to be sold, and (iii) any other required documents are attached. For
additional documents required for sales by corporations, agents, fiduciaries and
surviving joint owners, please call 1-800-345-6611. Retirement plan accounts
have special requirements; please call 1-800-799-7526 for more information.
The Fund will generally send proceeds from the sale to you within seven days
(usually on the next business day after your request is received in "good
form"). However, if you purchased your shares by check, the Fund may delay
sending the proceeds from the sale of your shares for up to 15 days after your
purchase to protect against checks that are returned. No interest will be paid
on uncashed redemption checks. Redemption proceeds may be paid in securities,
rather than in cash, if the advisor determines that it is in the best interest
of the Fund.
11
<PAGE>
YOUR ACCOUNT
OUTLINED BELOW ARE THE VARIOUS OPTIONS FOR SELLING SHARES:
<TABLE>
<CAPTION>
METHOD INSTRUCTIONS
<S> <C>
Through your You may call your financial advisor to place your sell order.
financial advisor To receive the current trading day's price, your financial
advisor firm must receive your request prior to the close
of the NYSE, usually 4:00 p.m. Eastern time.
--------------------------------------------------------------------------------------
By exchange You or your financial advisor may sell shares by
exchanging from the Fund into the same share class of
another fund at no additional cost. To exchange by
telephone, call 1-800-422-3737.
--------------------------------------------------------------------------------------
By telephone You or your financial advisor may sell shares by telephone and
request that a check be sent to your address of record by
calling 1-800-422-3737, unless you have notified the Fund of an
address change within the previous 30 days. The dollar limit for
telephone sales is $100,000 in a 30-day period. You do not need
to set up this feature in advance of your call. Certain
restrictions apply to retirement accounts. For details, call
1-800-345-6611.
--------------------------------------------------------------------------------------
By mail You may send a signed letter of instruction or stock power form
along with any certificates to be sold to the address below. In
your letter of instruction, note the Fund's name, share class,
account number, and the dollar value or number of shares you
wish to sell. All account owners must sign the letter, and
signatures must be guaranteed by either a bank, a member firm of
a national stock exchange or another eligible guarantor
institution. Additional documentation is required for sales by
corporations, agents, fiduciaries, surviving joint owners and
individual retirement account owners. For details, call
1-800-345-6611. Mail your letter of instruction to SteinRoe
Services, Inc., c/o Liberty Funds Services, Inc., P.O. Box 1722,
Boston, MA 02105-1722.
--------------------------------------------------------------------------------------
By wire You may sell shares and request that the proceeds be
wired to your bank. You must set up this feature prior to
your telephone request. Be sure to complete the
appropriate section of the account application for this
feature.
--------------------------------------------------------------------------------------
By systematic You may automatically sell a specified dollar amount or percentage
withdrawal plan on a monthly, quarterly or semi-annually basis if your account
balance is at least $5,000 and have the proceeds sent to
you. This feature is not available if you hold your shares
in certificate form. Be sure to complete the appropriate
section of the account application for this feature.
--------------------------------------------------------------------------------------
By electronic You may sell shares and request that the proceeds be electronically
funds transfer transferred to your bank. Proceeds may take up to two business days
to be received by your bank. You must set up this feature
prior to your request. Be sure to complete the appropriate
section of the account application for this feature.
</TABLE>
FUND POLICY ON TRADING OF FUND SHARES
-------------------------------------------------------------------------------
The Fund does not permit short-term or excessive trading. Excessive purchases,
redemptions or exchanges of Fund shares disrupt portfolio management and drive
Fund expenses higher. In order to promote the best interests of the Fund, the
Fund reserves the right to reject any purchase order or exchange request,
particularly from market timers or investors who, in the advisor's opinion, have
a pattern of short-term or excessive trading or whose trading has been or may be
disruptive to the Fund. The Fund into which you would like to exchange also may
reject your request.
12
<PAGE>
YOUR ACCOUNT
DISTRIBUTION AND SERVICE FEES
-------------------------------------------------------------------------------
The Fund has adopted a plan under Rule 12b-1 that permits it to pay marketing
and other fees to support the sale and distribution of Class A, B and C shares
and the services provided to you by your financial advisor. The annual service
fee may equal up to 0.25% for each of Class A, Class B and Class C shares. The
annual distribution fee may equal up to 0.10% for Class A shares and 0.75% for
each of Class B and Class C shares. Distribution and service fees are paid out
of the assets of these classes. The distributor has voluntarily agreed to waive
the Class A share distribution fee. Over time, these fees will increase the cost
of your shares and may cost you more than paying other types of sales charges.
Class B shares automatically convert to Class A shares after a certain number of
years, depending on the program you purchased your shares under, eliminating a
portion of the distribution fee upon conversion.
13
<PAGE>
YOUR ACCOUNT
OTHER INFORMATION ABOUT YOUR ACCOUNT
-------------------------------------------------------------------------------
HOW THE FUND'S SHARE PRICE IS DETERMINED The price of each class of the Fund's
shares is based on its net asset value. The net asset value is determined at the
close of regular trading on the NYSE, usually 4:00 p.m. Eastern time, on each
business day that the NYSE is open (typically Monday through Friday).
When you request a transaction, it will be processed at the net asset value
(plus any applicable sales charges) next determined after your request is
received in "good form" by the distributor. In most cases, in order to receive
that day's price, the distributor must receive your order before that day's
transactions are processed. If you request a transaction through your financial
advisor firm, the firm must receive your order by the close of trading on the
NYSE to receive that day's price.
The Fund determines its net asset value for each share class by dividing each
class's total net assets by the number of that class's outstanding shares. In
determining the net asset value, the Fund must determine the price of each
security in its portfolio at the close of each trading day. Securities for which
market quotations are available are valued each day at the current market value.
However, where market quotations are unavailable, or when the advisor believes
that subsequent events have made them unreliable, the Fund may use other data to
determine the fair value of the securities.
You can find the daily prices of some share classes for the Fund in most major
daily newspapers under the caption "Liberty." You can find daily prices for all
share classes by visiting the Fund's web site at www.libertyfunds.com.
ACCOUNT FEES If your account value falls below $1,000 (other than as a result of
depreciation in share value) you may be subject to an annual account fee of $10.
This fee is deducted from the account in June each year. Approximately 60 days
prior to the fee date, the Fund's transfer agent will send you written
notification of the upcoming fee. If you add money to your account and bring the
value above $1,000 prior to the fee date, the fee will not be deducted.
SHARE CERTIFICATES Share certificates are not available for Class B and C
shares. Certificates will be issued for Class A shares only if requested. If you
decide to hold share certificates, you will not be able to sell your shares
until you have endorsed your certificates and returned them to the distributor.
14
<PAGE>
YOUR ACCOUNT
UNDERSTANDING FUND DISTRIBUTIONS
The Fund earns income from the securities it holds. The Fund also may realize
capital gains and losses on sales of its securities. The Fund distributes
substantially all of its net investment income and capital gains to
shareholders. As a shareholder, you are entitled to a portion of the Fund's
income and capital gains based on the number of shares you own at the time these
distributions are declared.
DIVIDENDS, DISTRIBUTIONS, AND TAXES The Fund has the potential to make the
following distributions:
TYPES OF DISTRIBUTIONS
<TABLE>
<S> <C>
Dividend Represents interest and dividends earned from securities held
by the Portfolio.
--------------------------------------------------------------------------------
Capital gains Represents net long-term capital gains on sales of
securities held for more than 12 months and net short-term
capital gains, which are gains on sales of securities held for
a 12-month period or less.
</TABLE>
DISTRIBUTION OPTIONS The Fund declares dividends daily and pays them monthly,
and any capital gains (including short-term capital gains) at least annually.
Dividends begin to accrue on the day that the Fund receives payment and stop
accruing on the day prior to the shares leaving the account. You can choose one
of the options listed in the table below for these distributions when you open
your account. To change your distribution option call 1-800-345-6611.
If you do not indicate on your application your preference for handling
distributions, the Fund will automatically reinvest all distributions in
additional shares of the Fund.
DISTRIBUTION OPTIONS
Reinvest all distributions in additional shares of your current fund
--------------------------------------------------------------------------------
Reinvest all distributions in shares of another fund
--------------------------------------------------------------------------------
Receive dividends in cash (see options below) and reinvest capital gains
--------------------------------------------------------------------------------
Receive all distributions in cash (with one of the following options) :
- send the check to your address of record
- send the check to a third party address
- transfer the money to your bank via electronic funds transfer
Distributions of $10 or less will automatically be reinvested in additional Fund
shares. If you elect to receive distributions by check and the check is returned
as undeliverable, or if you do not cash a distribution check within six months
of the check date, the distribution will be reinvested in additional shares of
the Fund.
15
<PAGE>
YOUR ACCOUNT
TAX CONSEQUENCES For federal income tax purposes, distributions of investment
income by the Fund, whether in cash or additional securities, will ordinarily
constitute tax-exempt income. Generally, gains realized by the Fund on the sale
or exchange of investments, the income from which is tax-exempt, will be taxable
to shareholders. In addition, an investment in the Fund may result in liability
for federal alternative minimum tax for both individuals and corporate
shareholders. The Fund intends to distribute federally tax-exempt income. The
Fund may invest a portion of its assets in securities that generate taxable
income for federal or state income taxes. Income exempt from federal tax may be
subject to state and local taxes. Any capital gains distributed by the Fund may
be taxable.
You will be provided with information each year regarding the amount of ordinary
income and capital gains distributed to you for the previous year and any
portion of your distribution which is exempt from state and local taxes. Your
investment in the Fund may have additional personal tax implications. Please
consult your tax advisor on federal, state, local or other applicable tax laws.
In addition to the dividends and capital gains distributions made by the Fund,
you may realize a capital gain or loss when selling and exchanging shares of the
Fund. Such transactions may be subject to federal, state and local income tax.
16
<PAGE>
MANAGING THE FUND
INVESTMENT ADVISOR
--------------------------------------------------------------------------------
Stein Roe & Farnham Incorporated (Stein Roe), located at One South Wacker Drive,
Suite 3500, Chicago, Illinois 60606, is the Fund's investment advisor. In its
duties as investment advisor, Stein Roe runs the Fund's day-to-day business,
including placing all orders for the purchase and sale of portfolio securities
for the Portfolio. Stein Roe has been an investment advisor since 1932.
Stein Roe's mutual funds and institutional investment advisory businesses are
part of a larger business unit that includes several separate legal entities
known as Liberty Funds Group LLC (LFG). LFG includes certain affiliates of Stein
Roe, principally Colonial Management Associates, Inc. (Colonial). Stein Roe and
the LFG business unit are managed by a single management team. Stein Roe,
Colonial and the other LFG entities also share personnel, facilities and systems
that may be used in providing administrative or operational services to the
Fund. Colonial is a registered investment advisor. Stein Roe, Colonial and the
other entities that make up LFG are subsidiaries of Liberty Financial Companies,
Inc.
For the 2000 fiscal year, aggregate advisory fees paid to the Advisor by the
Fund amounted to 0.58% of average daily net assets of the Fund.
Stein Roe can use the services of AlphaTrade Inc., an affiliated broker-dealer,
when buying or selling equity securities for the Fund, pursuant to procedures
adopted by the Board of Trustees.
PORTFOLIO MANAGER
--------------------------------------------------------------------------------
William C Loring joined Stein Roe in November 1998 as co-portfolio manager of
Stein Roe Managed Municipals Fund. Since 1986, he has managed various Liberty
tax-exempt funds, including Liberty Tax Exempt Fund since May 1997, Liberty
Intermediate Tax Exempt Fund since 1993 and Intermediate Municipals Fund since
May, 2000. Mr. Loring is jointly employed as a senior vice president by both
Colonial and Stein Roe and has a bachelor's degree from Bowdoin College.
17
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
UNDERSTANDING THE FUND'S OTHER INVESTMENT STRATEGIES AND RISKS
The Fund's principal investment strategies and risks are described under "The
Fund - Principal Investment Strategies" and "The Fund - Principal Investment
Risks." In seeking to meet its investment goals, the Fund may also invest in
other securities and use certain other investment techniques. These securities
and investment techniques offer opportunities and carry various risks.
The advisor may elect not to buy any of these securities or use any of these
techniques unless it believes that doing so will help the Fund achieve its
investment goals. The Fund may not always achieve its investment goals.
Additional information about the Fund's securities and investment techniques, as
well as the Fund's fundamental and non-fundamental investment policies, is
contained in the Statement of Additional Information.
The Fund's principal investment strategies and their associated risks are
described above. This section describes other investments the Fund may make and
the risks associated with them. In seeking to achieve its investment goals, the
Fund may invest in various types of securities and engage in various investment
techniques which are not the principal focus of 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 any of the Fund's investment
goals or investment strategies.
DERIVATIVE STRATEGIES
--------------------------------------------------------------------------------
The Fund may enter into a number of hedging strategies, including those that
employ futures and options, to gain or reduce exposure to particular securities
or markets. These strategies, commonly referred to as derivatives, involve the
use of financial instruments whose values depend on, or are derived from, the
value of an underlying security, index or currency. The Fund may use these
strategies to adjust their sensitivity to changes in interest rates or for other
hedging purposes (i.e., attempting to offset a potential loss in one position by
establishing an interest in an opposite position). Derivative strategies involve
the risk that they may exaggerate a loss, potentially losing more money than the
actual cost of the underlying security, or limit a potential gain. Also, with
some derivative strategies there is the risk that the other party to the
transaction may fail to honor its contract terms, causing a loss to the Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
--------------------------------------------------------------------------------
When-issued securities and forward commitments are securities that are purchased
prior to the date they are actually issued or delivered. These securities
involve the risk that they may fall in value by the time they are actually
issued or that the other party may fail to honor the contract terms.
ASSET-BACKED SECURITIES
--------------------------------------------------------------------------------
Asset-backed securities are interests in pools of debt securities backed by
various types of loans such as credit card, auto and home equity loans. These
securities involve prepayment risk, which is the possibility that the underlying
debt may be refinanced or prepaid prior to maturity during periods of declining
interest rates. During periods of rising interest rates, asset-backed securities
have a high risk of declining in price because the declining prepayment rates
effectively increase the maturity of the securities. A decline in interest rates
may lead to a faster rate of repayment on asset-backed securities and,
therefore, cause the Fund to earn a lower interest rate on reinvestment. In
addition, the potential impact of prepayment on the price of an asset-backed
security may be difficult to predict and result in greater volatility.
18
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
ZERO COUPON BONDS
--------------------------------------------------------------------------------
Zero coupon bonds do not pay interest in cash on a current basis, but instead
accrue interest over the life of the bond. As a result, these securities are
issued at a deep discount. The value of these securities may fluctuate more than
similar securities that pay interest periodically. Although these securities pay
no interest to holders prior to maturity, interest on these securities is
reported as income to the Fund and distributed to its shareholders.
MUNICIPAL LEASE OBLIGATIONS
--------------------------------------------------------------------------------
Municipal lease obligations are revenue bonds backed by leases or installment
purchase contracts. Municipal leases are issued by a state or local government
and authorities to acquire property or equipment. They frequently involve
special risks not normally associated with general obligation or revenue bonds.
Municipal lease obligations may not be backed by the issuing municipality and
many have a "non-appropriation" clause. A non-appropriation clause relieves the
issuer of any lease obligation from making future payments under the lease
unless money is appropriated for such purpose on a periodic basis. In addition,
such lease obligation payments to the Fund may be suspended if the issuing
municipality is prevented from maintaining occupancy of the leased premises or
utilizing the leased equipment. The disposition of the property in the event of
non-appropriation or foreclosure may be difficult, time consuming and costly and
result in a delay in recovery or the failure to fully recover the Fund's
original investment.
INVERSE FLOATING RATE OBLIGATIONS
--------------------------------------------------------------------------------
Inverse floating rate obligations represent interests in tax-exempt bonds. They
carry interest rates that will vary inversely to changes in short-term market
interest rates. As short-term interest rates rise, inverse floaters produce less
income, and their market value can become volatile. Therefore, their market
values are subject to greater risks of fluctuation than securities bearing a
fixed rate of interest which may lead to greater fluctuation in the price of the
security.
PORTFOLIO TURNOVER
--------------------------------------------------------------------------------
There are no limits on turnover. Turnover may vary significantly from year to
year. The Advisor does not expect it to exceed 100% under normal conditions. The
Fund generally intends to purchase securities for long-term investment although,
to a limited extent, it may purchase securities in anticipation of relatively
short-term price gains. Portfolio turnover typically produces capital gains or
losses resulting in tax consequences for Fund investors. It also increases
transaction expenses, which reduce the Fund's return.
19
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
INTERFUND LENDING PROGRAM
--------------------------------------------------------------------------------
The Fund may lend money to borrow money from other funds advised by Stein Roe.
They will do so when Stein Roe believes such lending or borrowing is necessary
and appropriate. Borrowing costs will be the same as or lower than the costs of
a bank loan.
TEMPORARY DEFENSIVE STRATEGIES
--------------------------------------------------------------------------------
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 goals.
20
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance. Because Class A shares have not commenced operations, the
Fund's Class S shares, the Fund's oldest existing fund class is shown.
Information is shown for the Fund's last five fiscal years, which run from July
1 to June 30. Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that you would have
earned (or lost) on an investment in the Fund (assuming reinvestment of all
dividends and distributions). This information is included in the Fund's
financial statements which have been audited by [ ] independent auditors, whose
report, along with the Fund's financial statements, is included in the Fund's
annual report. You can request a free annual report by calling 1-800-426-3750.
THE FUND
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998 1997 1996
CLASS S CLASS S CLASS S CLASS S CLASS S
<S> <C> <C> <C> <C> <C>
Net asset value--
Beginning of period ($) 11.23 11.57 11.38 11.22 11.16
---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income 0.28 0.54 0.54 0.55 0.55
---------------------------------------------------------------------------------------------------------
Net realized and unrealized
gains (loss) on investments (0.27) 0.22 0.22 0.06
---------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.01) 0.24 0.76 0.77 0.61
---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS ($):
Net investment income (0.26) (0.54) (0.54) (0.55)
---------------------------------------------------------------------------------------------------------
Net realized capital gains (0.02) (0.04) (0.03) (0.06) --
TOTAL DISTRIBUTIONS (0.28) (0.58) (0.57) (0.61) (0.55)
Net asset value--
End of period ($) 10.96 11.23 11.57 11.38 11.22
---------------------------------------------------------------------------------------------------------
Total return (b) (%) 3.10 2.08 6.84 7.07 5.47
---------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of net expenses to
average net assets (a) 0.70 0.70 0.70 0.70 0.70
---------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (b) 4.93 4.85 4.70 4.84 4.82
---------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 26 48 29 44 66
---------------------------------------------------------------------------------------------------------
</TABLE>
(a) If the Fund had paid all its expenses and there had been no reimbursement of
expenses by the Advisor, this ratio would have been 0.81%, 0.79%, 0.81%,
0.82% and 0.81 % for the years ended June 30, 2000, 1999, 1998, 1997 and
1996, respectively.
(b) Computed with the effect of Stein Roe's expense reimbursement.
21
<PAGE>
FOR MORE INFORMATION
--------------------------------------------------------------------------------
You can get more information about the Fund's investments in the Fund's
semi-annual and annual reports to shareholders. The annual report contains a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance over its last fiscal year.
You may wish to read the Statement of Additional Information for more
information on the Fund and the securities in which it invests. The Statement of
Additional Information is incorporated into this prospectus by reference, which
means that it is considered to be part of this prospectus.
You can get free copies of reports and the Statement of Additional Information,
request other information and discuss your questions about the Fund by writing
or calling the Fund's distributor at:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111-2621
1-800-426-3750
www.libertyfunds.com
Text-only versions of all Fund documents can be viewed online or downloaded from
the Edgar database on the Securities and Exchange Commission internet site at
www.sec.gov.
You can review and copy information about the Fund by visiting the following
location, and you can obtain copies, upon payment of a duplicating fee by
electronic request at the E-mail address [email protected] or by writing the:
Public Reference Room
Securities and Exchange Commission
Washington, DC 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling 1-202-942-8090.
INVESTMENT COMPANY ACT FILE NUMBER:
Liberty-Stein Roe Funds Municipal Trust: 811-4367
- Stein Roe Intermediate Municipals Fund
[LIBERTY FUNDS LETTERHEAD AND LOGO]
<PAGE>
<PAGE>
STEIN ROE INTERMEDIATE MUNICIPALS FUND
CLASS A, B, C
A SERIES OF LIBERTY-STEIN ROE FUNDS MUNICIPAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 2000
This Statement of Additional Information (SAI) contains information which may be
useful to investors but which is not included in the Prospectus of
Stein Roe Intermediate Municipals Fund Class A, B, C. This SAI is not
a prospectus and isauthorized for distribution only when accompanied or preceded
by the Prospectus of the Fund dated November 1, 2000. This SAI should be read
together with the Fund's Prospectus and most recent Annual Report dated June 30,
2000. 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 Auditors
appearing in the Fund's June 30, 2000 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
<TABLE>
<CAPTION>
PART 1 PAGE
<S> <C>
Definitions b
Organization and History b
Investment Objective and Policies of the Fund b
Fundamental Investment Policies of the Fund c
Other Investment Policies of the Fund c
Fund Charges and Expenses j
Investment Performance w
Custodian aa
Independent Auditors aa
</TABLE>
<TABLE>
<CAPTION>
PART 2 PAGE
<S> <C>
Miscellaneous Investment Practices 1
Taxes 11
Management of the Fund 13
Determination of Net Asset Value 19
How to Buy Shares 20
Special Purchase Programs/Investor Services 21
Programs for Reducing or Eliminating Sale Charges 22
How to Sell Shares 24
Distributions 26
How to Exchange Shares 26
Suspension of Redemptions 26
Shareholder Liability 26
Shareholder Meetings 27
Performance Measures 27
Master Fund/Feeder Fund: Structure and Risk
Appendix I 29
Appendix II 34
</TABLE>
a
<PAGE>
Part 1
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 2000
<TABLE>
<CAPTION>
DEFINITIONS
<S> <C>
"The Fund" Stein Roe Intermediate Municipals Fund
"The Trust" Liberty-Stein Roe Funds Municipal Trust
"Advisor" Stein Roe & Farnhum, Inc., the Fund's investment advisor
"LFD" Liberty Funds Distributor, Inc., the Fund's distributor
"SSI" SteinRoe Services, Inc., the Fund's shareholder services and
transfer agent.
</TABLE>
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized in 1987. The Fund is a
diversified series of the Trust and represents the entire interest in a separate
series of the Trust. On February 1, 1996, the name of the Trust was changed to
separate "SteinRoe" into two words. The name of the Trust was changed from
"Stein Roe Municipal Trust" to Liberty-Stein Roe Funds Municipal Trust" on
October 18, 1999.
The Fund offers 4 classes of shares-Classes A,B,C and S. Prior to November 1,
2000, the Fund had a single class of shares. On that date, the outstanding
shares of the Fund were converted into Class S, and the Fund commenced offering
Classes A,B and C shares. The Fund did not have separate classes prior to that
date. This SAI describes the Class A, B and C shares of the Fund. A separate SAI
relates to Class S.
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 by class. Shareholders owning in the
aggregate ten percent of Trust shares may call meetings to consider removal of
Trustees. Under certain circumstances, the Trust will provide information to
assist shareholders in calling such a meeting. See Part 2 of this SAI for more
information.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Prospectus describes the Fund's investment objective and investment
policies. Part 1 of this SAI includes additional information concerning, among
other things, the investment policies of the Fund. Part 2 contains additional
information about the following securities and investment techniques that may be
utilized by the Fund:
Derivatives
Medium- and Lower Rated Debt Securities
Short Sales
Interfund Lending and Borrowing
Forward Commitments ("When Issued" and "Delayed Delivery" Securities,
Reverse Repurchase Agreements Repurchase Agreements Line of Credit Futures
Contracts and Related Options (Limited to interest rate futures, tax-exempt
bond index futures, options on such futures and options on such indices)
Options on Securities Participation Interests Stand-by Commitments Zero
Coupon Securities (Zeros) Tender Option Bonds Pay-In-Kind (PIK) Securities
Rule 144A Securities
Except as indicated below under "Fundamental Investment Policies," the Fund's
investment policies are not fundamental and the Trustees may change the
investment policies without shareholder approval.
FUNDAMENTAL INVESTMENT POLICIES OF THE FUNDS
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
b
<PAGE>
are represented at the meeting in person or by proxy. The following fundamental
investment policies can not be changed without such a vote. The Fund will not:
(i) invest in a security if, with respect to 75% of its assets, as a
result of such investment, more than 5% of its total assets (taken at market
value at the time of investment) would be invested in the securities of any one
issuer (for this purpose, the issuer(s) of a security being deemed to be only
the entity or entities whose assets or revenues are subject to the principal and
interest obligations of the security), other than obligations issued or
guaranteed by the U.S. Government or by its agencies or instrumentalities or
repurchase agreements for such securities, and except that all or substantially
all of the assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially similar
investment policies as the Fund [however, in the case of a guarantor of
securities (including an issuer of a letter of credit), the value of the
guarantee (or letter of credit) may be excluded from this computation if the
aggregate value of securities owned by it and guaranteed by such guarantor (plus
any other investments in securities issued by the guarantor) does not exceed 10%
of its total assets];
(ii) purchase any securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of portfolio securities
(this restriction does not apply to securities purchased on a when-issued or
delayed-delivery basis or to reverse repurchase agreements), but it may make
margin deposits in connection with futures and options transactions;
(iii) make loans, although it may (a) participate in an interfund
lending program with other Stein Roe Funds and the Fund 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; (b) purchase money market instruments and
enter into repurchase agreements; and (c) acquire publicly distributed or
privately placed debt securities;
(iv) borrow except that it may (a) borrow for nonleveraging, temporary
or emergency purposes and (b) engage in reverse repurchase agreements and make
other borrowings, provided that the combination of (a) and (b) shall not exceed
33 1/3% of the value of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage permitted by law;
it may borrow from banks, other Stein Roe Funds, and other persons to the extent
permitted by applicable law;
(v) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by it except (a) as may
be necessary in connection with borrowings mentioned in (iv) above, and (b) it
may enter into futures and options transactions;
(vi) invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of non-governmental issuers whose
principal business activities are in the same industry, except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund;
(vii) purchase portfolio securities for the Fund from, or sell
portfolio securities to, any of the officers, directors, or trustees of the
Trust or of its investment adviser;
(viii) purchase or sell commodities or commodities contracts or oil,
gas, or mineral programs, except that it may enter into futures and options
transactions;
(ix) issue any senior security except to the extent permitted under the
Investment Company Act of 1940;
(x) purchase or sell real estate (other than Municipal Securities or
money market securities secured by real estate or interests therein or such
securities issued by companies which invest in real estate or interests
therein); or
(xi) act as an underwriter of securities, except that it may
participate as part of a group in bidding, or bid alone, for the purchase of
Municipal Securities directly from an issuer for its own portfolio.
c
<PAGE>
OTHER INVESTMENT POLICIES OF THE FUND
As non-fundamental investment policies which may be changed without a
shareholder vote, the Fund may not:
(a) own more than 10% of the outstanding voting securities of an
issuer;
(b) invest in companies for the purpose of exercising control or
management;
(c) make investments in the securities of other investment companies,
except in connection with a merger, consolidation, or reorganization;
(d) sell securities short unless (1) it owns or has the right to obtain
securities equivalent in kind and amount to those sold short at no added cost or
(2) the securities sold are "when issued" or "when distributed" securities which
it expects to receive in a recapitalization, reorganization, or other exchange
for securities it contemporaneously owns or has the right to obtain and provided
that it may purchase standby commitments and securities subject to a demand
feature entitling it to require sellers of securities to the Fund to repurchase
them upon demand by the Fund and that transactions in options, futures, and
options on futures are not treated as short sales;
(e) invest more than 10% of its net assets (taken at market value at
the time of a particular investment) in illiquid securities, including
repurchase agreements maturing in more than seven days;
(f) purchase shares of other open-end investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization;
(g) invest more than 5% of its net assets (valued at time of
investment) in warrants, nor more than 2% of its net assets in warrants that are
not listed on the New York or American Stock Exchange;
(h) write an option on a security unless the option is issued by the
Options Clearing Corporation, an exchange, or similar entity;
(i) purchase a put or call option if the aggregate premiums paid for
all put and call options exceed 20% of its net assets (less the amount by which
any such positions are in-the-money), excluding put and call options purchased
as closing transactions.
d
<PAGE>
FUND CHARGES AND EXPENSES
Under the Fund's Management Agreement, the Fund pays the Advisor a monthly fee
based on the Fund's combined average daily net assets, determined at the close
of each business day during the month at the following annual rates: .450% up to
$100 million, .425% next $100 million and .400% thereafter. The Fund pays the
Advisor a monthly Administrative Fee based on average daily net assets at the
close of each business day during the month at the following rates:.150% up to
$100 million, .125 next $100 million and .100% thereafter.
RECENT FEES PAID TO THE ADVISOR (dollars in thousands)
<TABLE>
<CAPTION>
Years ended June 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Management Fees $644 $850 $872
Administrative fees 208 267 274
Shareholder Services and Transfer
Agency Fees 215 272 279
</TABLE>
Pursuant to the Bookkeeping and Accounting Agreement with the Trust, during the
fiscal years ended June 30, 1998, 1999 and 2000, the Trust paid aggregate fees
(dollars in thousands) to the Advisor of $126 for each year.
TRUSTEES AND TRUSTEES' FEES
For the fiscal year ended June 30, 2000 and the calendar year ended December 31,
1999, the Trustees received the following compensation for serving as Trustees:
<TABLE>
<CAPTION>
Compensation from the Stein Roe
Stein Roe Fund Complex*
-----------------------
Aggregate Compensation Total Average
Name of Trustee from the Trust Compensation Per Series
------------------- -------------------- ------------ ----------
<S> <C> <C> <C> <C>
Thomas W. Butch** -0- -0- -0-
Lindsay Cook -0- -0- -0-
John A. Bacon Jr.** $8,300 $101,150 $2,199
William W. Boyd 8,400 102,300 2,224
Douglas A. Hacker 7,300 87,700 1,907
Janet Langford Kelly 8,000 97,200 2,113
Charles R. Nelson 8,400 102,100 2,220
Thomas C. Theobald 8,000 97,200 2,113
</TABLE>
* At June 30, 2000 the Stein Roe Fund Complex consisted of four series of the
Trust, one series of Liberty-Stein Roe Funds Trust, four series of
Liberty-Stein Roe Funds Municipal Trust, 12 series of Liberty-Stein Roe Funds
Investment Trust, five series of Liberty-Stein Roe Advisor Trust, five series
of SteinRoe Variable Investment Trust, 12 portfolios of SR&F Base Trust,
Liberty-Stein Roe Advisor Floating Rate Fund, Liberty-Stein Roe Institutional
Floating Rate Income Fund, and Stein Roe Floating Rate Limited Liability
Company.
** Mr. Butch served as a trustee until Nov. 3, 1998; Mr. Bacon was elected a
trustee effective Nov. 3, 1998.
OWNERSHIP OF THE FUND
At September 30, 2000, the officers and Trustees of the Trust as a group owned
less than 1% of the then outstanding shares of the Fund.
As of record on September 30, 2000, the following shareholders owned 5% or more
of the following Fund's then outstanding Class shares:
<PAGE>
12b-1 PLAN, CDSCS AND CONVERSION OF SHARES The Fund offers four classes of
shares - Class A, Class B, Class C and Class S. Class S shares are offered
through a separate prospectus. The Fund may in the future offer other classes of
shares. The Trustees have approved a 12b-1 plan (Plan) pursuant to Rule 12b-1
under the Act for each Class except Class S. Under the Plan, the Fund pays LFD
monthly a service fee at an annual rate of 0.25% of net assets attributed to
each Class of shares. At this time, the Distributor has voluntarily agreed to
limit the Class A distribution fee to 0.25% annually. The Distributor may
terminate this voluntary limitation without shareholder approval. The Fund also
pays LFD monthly a distribution fee at an annual rate of 0.75% of average daily
net assets attributed to Class B and Class C shares. LFD may use the entire
amount of such fees to defray the costs of commissions and service fees paid to
financial service firms (FSFs) and for certain other purposes. Since the
distribution and service fees are payable regardless of the amount of LFD's
expenses, LFD may realize a profit from the fees.
The Plan authorizes any other payments by the Fund to LFD and its affiliates
(including the Advisor) to the extent that such payments might be construed to
be indirect financing of the distribution of Fund shares.
The Trustees believe the Plan could be a significant factor in the growth and
retention of Fund assets resulting in a more advantageous expense ratio and
increased investment flexibility which could benefit each class of Fund
shareholders. The Plan will continue in effect from year to year so long as
continuance is specifically approved at least annually by a vote of the
Trustees, including the Trustees who are not interested persons of the Trust and
have no direct or indirect financial interest in the operation of the Plan or in
any agreements related to the Plan (Independent Trustees), cast in person at a
meeting called for the purpose of voting on the Plan. The Plan may not be
amended to increase the fee materially without approval by vote of a majority of
the outstanding voting securities of the relevant class of shares and all
material amendments of the Plan must be approved by the Trustees in the manner
provided in the foregoing sentence. The Plan may be terminated at any time by
vote of a majority of the Independent Trustees or by vote of a majority of the
outstanding voting securities of the relevant class of shares. The continuance
of the Plan will only be effective if the selection and nomination of the
Trustees who are not interested persons of the Trust are effected by such
disinterested Trustees.
Class A shares are offered at net asset value plus varying sales charges which
may include a CDSC. Class B shares are offered at net asset value and are
subject to a CDSC if redeemed for periods up to six years after purchase. Class
C shares are offered at net asset value and are subject to a 1.00% CDSC if
redeemed within one year after purchase.
f
<PAGE>
The CDSCs are described in the Prospectus.
No CDSC will be imposed on shares derived from reinvestment of distributions or
amounts representing capital appreciation. In determining the applicability and
rate of any CDSC, it will be assumed that a redemption is made first of shares
representing capital appreciation, next of shares representing reinvestment of
distributions and finally of other shares held by the shareholder for the
longest period of time.
A certain number of years, depending on the program you purchased your shares
under, after the end of the month in which a Class B share is purchased, such
share and a pro rata portion of any shares issued on the reinvestment of
distributions will be automatically converted into Class A shares having an
equal value, which are not subject to the distribution fee.
INVESTMENT PERFORMANCE
The following 30-day yields for the month ended June 30, 2000 were:
<TABLE>
<CAPTION>
Yield Tax-Equivalent Yield
----- --------------------
<S> <C>
4.65% 7.70%
----- -----
</TABLE>
The Fund's average annual total returns at June 30, 2000 were:
<TABLE>
<CAPTION>
1 year 5 years 10 years
------ ------- --------
<S> <C> <C>
3.10% 4.89% 6.12%
----- ----- -----
</TABLE>
Performance results are based on the Fund's Class S shares, the oldest existing
Fund class.
See Part 2 of this SAI, "Performance Measures," for how calculations are made.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02101 is
the custodian for the Trust and SR&F Base Trust. The custodian is responsible
for safeguarding each Fund's cash and securities, receiving and delivering
securities and collecting the Fund's interest and dividends.
INDEPENDENT AUDITORS
27
STATEMENT OF ADDITIONAL INFORMATION
PART 2
The following information applies generally to most funds advised by the
Advisor. "Funds" include certain series of Liberty-Stein Roe Funds Income Trust,
Liberty-Stein Roe Funds Municipal Trust, Liberty-Stein Roe Funds Investment
Trust and Liberty-Stein Roe Funds Trust. 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. Unless otherwise noted, the term
"fund" refers to each Fund and each Portfolio.
Derivatives
Consistent with its objective, the fund may invest in a broad array of financial
instruments and securities, including conventional exchange-traded and
non-exchange-traded options, futures contracts, futures options, securities
collateralized by underlying pools of mortgages or other receivables, and other
instruments the value of which is "derived" from the performance of an
underlying asset or a "benchmark" such as a security index, an interest rate, or
a currency ("Derivatives").
Derivatives are most often used to manage investment risk or to create an
investment position indirectly because using them is more efficient or less
costly than direct investment that cannot be readily established directly due to
portfolio size, cash availability, or other factors. They also may be used in an
effort to enhance portfolio returns.
The successful use of Derivatives depends on Stein Roe's ability to correctly
predict changes in the levels and directions of movements in security prices,
interest rates and other market factors affecting the Derivative itself or the
value of the underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well established.
Finally, privately negotiated and over-the-counter Derivatives may not be as
well regulated and may be less marketable than exchange-traded Derivatives.
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.
Medium- and Lower-Rated Debt Securities
Medium-rated debt securities are those rated A or below by Moodys and S&P.
Lower-rated debt securities are those rated lower than Baa by Moody's or BBB by
S&P, or comparable unrated debt securities. Relative to debt securities of
higher quality,
1. an economic downturn or increased interest rates may have a more significant
effect on the yield, price and potential for default for lower rated debt
securities;
2. the secondary market for lower rated debt securities may at times become less
liquid or respond to adverse publicity or investor perceptions, increasing the
difficulty in valuing or disposing of the bonds;
3. the Advisor's credit analysis of lower rated debt securities may have a
greater impact on the fund's
achievement of its investment objective; and
4. lower rated debt securities may be less sensitive to interest rate changes,
but are more sensitive to adverse
economic developments.
In addition, certain lower-rated debt securities may not pay interest in cash on
a current basis.
Small Companies
Smaller, less well established companies may offer greater opportunities for
capital appreciation than larger, better established companies, but may also
involve certain special risks related to limited product lines, markets, or
financial resources and dependence on a small management group. Their securities
may trade less frequently, in smaller volumes, and fluctuate more sharply in
value than securities of larger companies.
Foreign Securities
The fund may invest in securities traded in markets outside the United States.
Foreign investments can be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations. There may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing and financial
reporting 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.
<PAGE>
Tender Option Bonds
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate. The
Advisor will consider on an ongoing basis the creditworthiness of the issuer of
the underlying municipal securities, of any custodian, and of the third-party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying municipal securities and for other
reasons.
Pay-In-Kind (PIK) Securities
The fund may invest in securities which pay interest either in cash or
additional securities. These securities are generally high yield securities and,
in addition to the other risks associated with investing in high yield
securities, are subject to the risks that the interest payments which consist of
additional securities are also subject to the risks of high yield securities.
Money Market Instruments
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposits are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at 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.
Interfund Borrowing and Lending
The fund may lend money to and borrow money from other mutual funds advised by
the Advisor. The fund will borrow through the program when borrowing is
necessary and appropriate and the costs are equal to or lower than the costs of
bank loans.
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.
Line of Credit
The fund may establish and maintain a line of credit with a major bank in order
to permit borrowing on a temporary basis to meet share redemption requests in
circumstances in which temporary borrowings may be preferrable to liquidation of
portfolio securities.
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.
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 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.
Floating Rate Instruments
Floating rate instruments provide for periodic adjustments in coupon interest
rates that are automatically reset based on changes in amount and direction of
specified market interest rates. In addition, the adjusted duration of some of
these instruments may be materially shorter than their stated maturities. To the
extent such instruments are subject to lifetime or periodic interest rate caps
or floors, such instruments may experience greater price volatility than debt
instruments without such features. Adjusted duration is an inverse relationship
between market price and interest rates and refers to the approximate percentage
change in price for a 100 basis point change in yield. For example, if interest
rates decrease by 100 basis points, a market price of a security with an
adjusted duration of 2 would increase by approximately 2%.
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 exceed its investment
limit on illiquid securities. 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 and Fund levels
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 were to fail to qualify as a "regulated investment company"
in any year, it would incur a regular federal corporate income tax on all of its
taxable income, whether or not distributed, and fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Alternative Minimum Tax. Distributions derived from interest that is exempt from
regular federal income tax may subject corporate shareholders to or increase
their liability under the corporate alternative minimum tax (AMT). A portion of
such distributions may constitute a tax preference item for individual
shareholders and may subject them to or increase their liability under the AMT.
Dividends Received Deductions. Distributions will qualify for the corporate
dividends received deduction only to the extent that dividends earned by the
fund qualify. Any such dividends are, however, includable in adjusted current
earnings for purposes of computing corporate AMT. The dividends received
deduction for eligible dividends is subject to a holding period requirement.
Return of Capital Distributions. To the extent that a distribution is a return
of capital for federal tax purposes, it reduces the cost basis of the shares on
the record date and is similar to a partial return of the original investment
(on which a sales charge may have been paid). There is no recognition of a gain
or loss, however, unless the return of capital exceeds the cost basis in the
shares.
Funds that invest in U.S. Government Securities. Many states grant tax-free
status to dividends paid to shareholders of mutual funds from interest income
earned by the fund from direct obligations of the U.S. government. Investments
in mortgage-backed securities (including GNMA, FNMA and FHLMC Securities) and
repurchase agreements collateralized by U.S. government securities do not
qualify as direct federal obligations in most states. Shareholders should
consult with their own tax advisors about the applicability of state and local
intangible property, income or other taxes to their fund shares and
distributions and redemption proceeds received from the fund.
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 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; (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) and (c)
distribute at least 90% of both its ordinary income (inclusive of net short-term
capital gains) and its tax-exempt interest income earned each year.
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 and its shareholders.
Securities Issued at a Discount. The fund's investment in debt 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 The Advisor is the investment advisor to each of the
funds. The Advisor is a wholly owned subsidiary of SteinRoe Services
Inc.,("SSI"), the fund's transfer agent, which is a 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.
<PAGE>
<TABLE>
<CAPTION>
Trustees and Officers (this section applies to all of the funds)
Position(s) held Principal occupation(s)
Name, Age; Address with the Trust during past five years
------------------ -------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
William D. Andrews, 52; One South Executive Vice-President Executive vice president of Stein Roe
Wacker Drive, Chicago, IL 60606
(4)
John A. Bacon Jr., 72; 4N640 Trustee Private investor
Honey Hill Road, Box 296, Wayne,
IL 60184 (3)(4)
Christine Balzano, 34; 245 Summer Vice-President Senior vice president of Liberty Funds Services, Inc.;
Street, Boston, MA 02210 formerly vice president and assistant vice president
William W. Boyd, 72; 2900 Golf Trustee Chairman and director of Sterling Plumbing (manufacturer
Road, Rolling Meadows, IL 60008 of plumbing products)
(2)(3)(4)
David P. Brady, 35; One South Vice-President Senior vice president of Stein Roe
since March 1998; Wacker Drive, Chicago, IL 60606 vice president of Stein Roe
from Nov. 1995 to March (4) 1998; portfolio manager for Stein Roe since 1993
Daniel K. Cantor, 40; 1330 Avenue Vice-President Senior vice president of Stein Roe
of the Americas, New York, NY
10019 (4)
Kevin M. Carome, 43; One Executive Senior vice president, legal, Liberty Funds Group LLC
Financial Center, Boston, MA Vice-President; (an affiliate of Stein Roe) since Jan. 1999; general
02111 (4) Assistant Secretary counsel and secretary of Stein Roe since Jan. 1998;
associate general counsel and vice president of Liberty
Financial Companies, Inc. (the indirect parent of Stein
Roe) through Jan. 1999
Denise E. Chasmer, 31; Vice President Employee of Liberty Funds Services, Inc. and assistant
12100 East Iliff Avenue vice president of Stein Roe since November 1999; manager
Aurora, CO 80014 (4) with Scudder Kemper Investments from October 1995 to
November 1999; assistant manager with Scudder Kemper
prior thereto
Lindsay Cook, 47; 600 Atlantic Trustee Executive vice president of Liberty Financial Companies,
Avenue, Boston, MA 02210 (1)(2)(4) Inc. since March 1997; senior vice president prior
thereto
James R. Fellows, 34; One South Vice-President Vice president of Stein Roe since
April 1998; vice Wacker Drive, Chicago, IL 60606 president and senior credit
analyst, Van Kampen American
Capital prior thereto
William M. Garrison, 33; One Vice-President Vice president of Stein Roe since Feb. 1998; associate
South Wacker Drive, Chicago, IL portfolio manager for Stein Roe since August 1994
60606 (4)
Stephen E. Gibson, 46; One President Vice chairman of Stein Roe since Aug. 1998; chairman,
Financial Center, Boston, MA CEO, president and director of Liberty Funds Group since
02111 (4) Dec. 1998; chairman of the Colonial Group from July 1998
to Dec. 1998; president of the Colonial Group from Dec.
1996 to Dec. 1998; chairman of Colonial Management
Associates, Inc. since Dec. 1998; CEO, president and
director of Colonial Management Associates since July
1996; managing director of Putnam Financial Services
from June 1992 through June 1996
Brian W. Good, 33; One South Vice-President Vice president of Stein Roe since
April 1998; vice Wacker Drive, Chicago, IL 60606 president and portfolio
manager, Van Kampen American
Capital prior thereto
Erik P. Gustafson, 35; One South Vice-President Senior portfolio manager of
Stein Roe; senior vice Wacker Drive, Chicago, IL 60606 president of Stein Roe
since April 1996; vice president (4) of Stein Roe prior thereto
Douglas A. Hacker, 43; P.O. Box Trustee Senior vice president and chief financial officer of
66100, Chicago, IL 60666 (3) (4) UAL, Inc. (airline)
Loren A. Hansen, 51; One South Executive Vice-President Chief investment
officer/equity of CMA since 1997; Wacker Drive, Chicago, IL 60606 executive vice
president of Stein Roe since Dec. 1995; (4) vice president of The Northern Trust
(bank) prior thereto
Brian M. Hartford, 40; Vice President Employee of Stein Roe since November 1998; vice
One Financial Center president of CMA since 1993
Boston, MA 02111
Harvey B. Hirschhorn, 49; One Vice-President Executive vice president, senior
portfolio manager, and South Wacker Drive, Chicago, IL chief economist and
investment strategist of Stein Roe; 60606 (4) director of research of Stein Roe,
1991 to 1995
Janet Langford Kelly, 41; One Trustee Executive vice president-corporate development, general
Kellogg Square, Battle Creek, MI counsel and secretary of Kellogg Company since Sept.
49016 (3)(4) 1999; senior vice president, secretary and general
counsel of Sara Lee Corporation (branded, packaged,
consumer-products manufacturer) from 1995 to Aug. 1999;
partner of Sidley & Austin (law firm) prior thereto
Michael T. Kennedy, 37; One South Vice President Senior vice president of Stein Roe
Wacker Drive, Chicago, IL 60606
(4)
Gail D. Knudsen, 37; 245 Summer Vice President Vice president and assistant controller of CMA
Street, Boston, MA 02210 (4)
Stephen F. Lockman, 38; One South Vice President Senior vice president, portfolio manager and credit
Wacker Drive, Chicago, IL 60606 analyst of Stein Roe
(4)
William C. Loring, Jr. 49; Vice President Vice president of Stein Roe since November 1998; vice
One Financial Center president of CMA
Boston, MA 02111
Pamela A. McGrath, 46: One Senior Vice President Treasurer of the Stein Roe Funds since May 2000;
Financial Center, Boston, MA and Treasurer Treasurer and Chief Financial Officer of the Liberty
02111 (4) Funds and Liberty All-Star Funds since April 2000;
Treasurer, Chief
Financial Officer
and Vice President
of the Liberty Funds
Group since December
1999; Chief
Financial Officer,
Treasurer and Senior
Vice President of
Colonial Management
Associates since
December 1999;
Senior Vice
President and
Director of Offshore
Accounting for
Putnam Investments,
Inc., from May 1998
to October 1999;
Managing Director of
Scudder Kemper
Investments from
October, 1984 to
December 1997.
Mary D. McKenzie, 45; One Vice President President of Liberty Funds Services, Inc.
Financial Center, Boston, MA
02111 (4)
Jane N. Naeseth, 49; One South Vice President Senior Vice President of Stein Roe
Wacker Drive
Chicago, IL 60606 (4)
Charles R. Nelson, 57; Department Trustee Van Voorhis Professor of Political Economy, Department
of Economics, University of of Economics of the University of Washington
Washington, Seattle, WA 98195
(3)(4)
Maureen G. Newman, 40; Vice President Vice President of Stein Roe since November
1998; One Financial Center portfolio manager and vice president of CMA since May
Boston, MA 02111 (4) 1996; portfolio manager and bond analyst at Fidelity
Investments prior thereto
Nicholas S. Norton, 40; 12100 Vice President Senior vice president of Liberty Funds Services, Inc.
East Iliff Avenue, Aurora, CO since Aug. 1999; vice president of Scudder Kemper, Inc.
80014 (4) from May 1994 to Aug. 1999
Joseph R. Palombo, 47; Executive Vice President Executive Vice President of the Stein Roe Funds since
One Financial Center, Boston, MA May 2000; Vice President of the Liberty Funds since
02111 (4) April 1999; Executive Vice President and Director of
Colonial Management
Associates since
April 1999;
Executive Vice
President and Chief
Administrative
Officer of the
Liberty Funds Group
since April 1999;
Chief Operating
Officer, Putnam
Mutual Funds from
1994 to 1998.
Thomas C. Theobald, 62; Suite Trustee Managing director, William Blair Capital Partners
1300, 222 West Adams Street, (private equity fund)
Chicago, IL 60606 (3)(4)
William M. Wadden IV, 41; Vice President Vice president of Stein Roe since June 1995; executive
One South Wacker Drive vice president of CSI Asset Management, Inc. prior
Chicago, IL 60606 thereto
Veronica M. Wallace, 53; Vice President Vice President of Stein Roe since March
1998; portfolio One South Wacker Drive manager for Stein Roe since September
1995; trader in Chicago, IL 60606 (4) taxable short-term instruments for Stein
Roe prior
thereto
</TABLE>
(1) A Trustee who is an "interested person" (as defined in the Investment
Company Act of 1940 ("1940 Act")) of the fund or the Advisor.
(2) Member of the
Executive Committee of the Board of Trustees, which is authorized to exercise
all powers of the Board with certain statutory exceptions.
(3) Member of the
Audit Committee of the Board, which makes recommendations to the Board regarding
the selection of auditors and confers with the auditors regarding the scope and
results of the audit.
(4) This person holds the corresponding officer or trustee
position with SR&F Base Trust.
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
Under a Management Agreement between the Advisor and SR&F Base Trust
(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 compensation of the Trustees 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
Under an Administration Agreement with each fund, 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. (g) Monitoring the
investments and operations of the SR&F Base Trust
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 Accounting and Bookkeeping Agreement
The Advisor provides certain accounting and bookkeeping services to the fund
pursuant to an Accounting and Bookkeeping Agreement. For these services, the
Advisor receives an annual fee of $25,000 per fund, plus 0.25% of 1% of average
net assets over $50 million.
Portfolio Transactions
Stein Roe places the orders for the purchase and sale of portfolio securities
and options and futures contracts for its clients, including private clients and
mutual fund clients ("Clients"). Portfolio securities are purchased both in
underwritings and in the over-the-counter market. The Funds paid no commissions
on futures transactions or any other transactions during the past three fiscal
years. Included in the price paid to an underwriter of a portfolio security is
the spread between the price paid by the underwriter to the issuer and the price
paid by the purchaser. Purchases and sales of portfolio securities in the
over-the-counter market usually are transacted with a broker or dealer on a net
basis, without any brokerage commission being paid by a Fund, but do reflect the
spread between the bid and asked prices. Stein Roe may also transact purchases
of portfolio securities directly with the issuers.
Stein Roe's overriding objective in selecting brokers and dealers to effect
portfolio transactions is to seek the best combination of net price and
execution. The best net price, giving effect to brokerage commissions, if any,
is an important factor in this decision; however, a number of other judgmental
factors may also enter into the decision. These factors include Stein Roe's
knowledge of negotiated commission rates currently available and other current
transaction costs; the nature of the security being purchased or sold; the size
of the transaction; the desired timing of the transaction; the activity existing
and expected in the market for the particular security; confidentiality; the
execution, clearance and settlement capabilities of the broker or dealer
selected and others considered; Stein Roe's knowledge of the financial condition
of the broker or dealer selected and such other brokers and dealers; and Stein
Roe's knowledge of actual or apparent operation problems of any broker or
dealer.
Recognizing the value of these factors, Stein Roe may cause a Client to pay a
brokerage commission in excess of that which another broker may have charged for
effecting the same transaction. Stein Roe has established internal policies for
the guidance of its trading personnel, specifying minimum and maximum
commissions to be paid for various types and sizes of transactions and effected
for Clients in those cases where Stein Roe has discretion to select the broker
or dealer by which the transaction is to be executed. Stein Roe has discretion
for all trades of the Funds. Transactions which vary from the guidelines are
subject to periodic supervisory review. These guidelines are reviewed and
periodically adjusted, and the general level of brokerage commissions paid is
periodically reviewed by Stein Roe. Evaluations of the reasonableness of
brokerage commissions, based on the factors described in the preceding
paragraph, are made by Stein Roe's trading personnel while effecting portfolio
transactions. The general level of brokerage commissions paid is reviewed by
Stein Roe, and reports are made annually to the Board of Trustees.
Stein Roe maintains and periodically updates a list of approved brokers and
dealers which, in Stein Roe's judgment, are generally capable of providing best
price and execution and are financially stable. Stein Roe's traders are directed
to use only brokers and dealers on the approved list, except in the case of
Client designations of brokers or dealers to effect transactions for such
Clients' accounts. Stein Roe generally posts certain Client information on the
"Alert" broker database system as a means of facilitating the trade affirmation
and settlement process.
It is Stein Roe's practice, when feasible, to aggregate for execution as a
single transaction orders for the purchase or sale of a particular security for
the accounts of several Clients, in order to seek a lower commission or more
advantageous net price. The benefit, if any, obtained as a result of such
aggregation generally is allocated pro rata among the accounts of Clients which
participated in the aggregated transaction. In some instances, this may involve
the use of an "average price" execution wherein a broker or dealer to which the
aggregated order has been given will execute the order in several separate
transactions during the course of a day at differing prices and, in such case,
each Client participating in the aggregated order will pay or receive the same
price and commission, which will be an average of the prices and commissions for
the several separate transactions executed by the broker or dealer.
Stein Roe sometimes makes use of an indirect electronic access to the New York
Stock Exchange's "SuperDOT" automated execution system, provided through a NYSE
member floor broker, W&D Securities, Inc., a subsidiary of Jeffries & Co., Inc.,
particularly for the efficient execution of smaller orders in NYSE listed
equities. Stein Roe sometimes uses similar arrangements through Billings & Co.,
Inc. and Driscoll & Co., Inc., floor broker members of the Chicago Stock
Exchange, for transactions to be executed on that exchange. In using these
arrangements, Stein Roe must instruct the floor broker to refer the executed
transaction to another brokerage firm for clearance and settlement, as the floor
brokers do not deal with the public. Transactions of this type sometimes are
referred to as "step-in" or "step-out" transactions. The brokerage firm to which
the executed transaction is referred may include, in the case of transactions
effected through W&D Securities, brokerage firms which provide Stein Roe
investment research or related services.
Stein Roe places certain trades for the Funds through its affiliate AlphaTrade,
Inc. ("ATI"). ATI is a wholly owned subsidiary of Colonial Management
Associates, Inc. ATI is a fully disclosed introducing broker that limits its
activities to electronic execution of transactions in listed equity securities.
The Funds pay ATI a commission for these transactions. The Funds have adopted
procedures consistent with Investment Company Act Rule 17e-1 governing such
transactions. Certain of Stein Roe's officers also serve as officers, directors
and/or employees of ATI.
Consistent with the Rules of Fair Practice of National Association of
Securities Dealers, Inc. and subject to seeking best executing and such other
policies as the trustees of the Funds may determine, Stein Roe may consider
sales of shares of each of the Funds as a factor in the selection of
broker-dealers to execute such mutual fund securities transactions.
Investment Research Products and Services Furnished by Brokers and Dealers
Stein Roe engages in the long-standing practice in the money management industry
of acquiring research and brokerage products and services ("research products")
from broker-dealer firms in return directing trades for Client accounts to those
firms. In effect, Stein Roe is using the commission dollars generated from these
Client accounts to pay for these research products. The money management
industry uses the term "soft dollars" to refer to this industry practice. Stein
Roe may engage in soft dollar transactions on trades for those Client accounts
for which Stein Roe has the discretion to select the brokers-dealer.
The ability to direct brokerage for a Client account belongs to the Client and
not to Stein Roe. When a Client grants Stein Roe the discretion to select
broker-dealers for Client trades, Stein Roe has a duty to seek the best
combination of net price and execution. Stein Roe faces a potential conflict of
interest with this duty when it uses Client trades to obtain soft dollar
products. This conflict exists because Stein Roe is able to use the soft dollar
products in managing its Client accounts without paying cash ("hard dollars")
for the product. This reduces Stein Roe's expenses.
Moreover, under a provision of the federal securities laws applicable to soft
dollars, Stein Roe is not required to use the soft dollar product in managing
those accounts that generate the trade. Thus, the Client accounts that generate
the brokerage commission used to acquire the soft dollar product may not benefit
directly from that product. In effect, those accounts are cross subsidizing
Stein Roe's management of the other accounts that do benefit directly from the
product. This practice is explicitly sanctioned by a provision of the Securities
Exchange Act of 1934, which creates a "safe harbor" for soft dollar transactions
conducted in a specified manner. Although it is inherently difficult, if not
impossible, to document, Stein Roe believes that over time most, if not all,
Clients benefit from soft dollar products such that cross subsidizations even
out.
Stein Roe attempts to reduce or eliminate this conflict by directing Client
trades for soft dollar products only if Stein Roe concludes that the
broker-dealer supplying the product is capable of providing a combination of the
best net price and execution on the trade. As noted above, the best net price,
while significant, is one of a number of judgmental factors Stein Roe considers
in determining whether a particular broker is capable of providing the best net
price and execution. Stein Roe may cause a Client account to pay a brokerage
commission in a soft dollar trade in excess of that which another broker-dealer
might have charged for the same transaction.
Stein Roe acquires two types of soft dollar research products: (i) proprietary
research created by the broker-dealer firm executing the trade and (ii) other
products created by third parties that are supplied to Stein Roe through the
broker-dealer firm executing the trade.
Proprietary research consists primarily of traditional research reports,
recommendations and similar materials produced by the in house research staffs
of broker-dealer firms. This research includes evaluations and recommendations
of specific companies or industry groups, as well as analyses of general
economic and market conditions and trends, market data, contacts and other
related information and assistance. Stein Roe's research analysts periodically
rate the quality of proprietary research produced by various broker-dealer
firms. Based on these evaluations, Stein Roe develops target levels of
commission dollars on a firm-by-firm basis. Stein Roe attempts to direct trades
to each firm to meet these targets.
Stein Roe also uses soft dollars to acquire products created by third parties
that are supplied to Stein Roe through broker-dealers executing the trade (or
other broker-dealers who "step in" to a transaction and receive a portion of the
brokerage commission for the trade). These products include the following:
o Database Services--comprehensive databases containing current and/or
historical information on companies and industries. Examples include
historical securities prices, earnings estimates, and SEC filings. These
services may include software tools that allow the user to search the
database or to prepare value-added analyses related to the investment
process (such as forecasts and models used in the portfolio management
process).
o Quotation/Trading/News Systems--products that provide real time market data
information, such as pricing of individual securities and information on
current trading, as well as a variety of news services.
o Economic Data/Forecasting Tools--various macro economic forecasting tools,
such as economic data and economic and political forecasts for various
countries or regions.
o Quantitative/Technical Analysis--software tools that assist in quantitative
and technical analysis of investment data.
o Fundamental Industry Analysis--industry-specific fundamental investment
research.
o Fixed Income Security Analysis--data and analytical tools that pertain
specifically to fixed income securities. These tools assist in creating
financial models, such as cash flow projections and interest rate
sensitivity analyses, that are relevant to fixed income securities.
o Other Specialized Tools--other specialized products, such as specialized
economic consulting analyses and attendance at investment oriented
conferences.
Many third-party products include computer software or on-line data feeds.
Certain products also include computer hardware necessary to use the product.
Certain of these third party services may be available directly from the vendor
on a hard dollar basis. Others are available only through broker-dealer firms
for soft dollars. Stein Roe evaluates each product to determine a cash ("hard
dollars") value of the product to Stein Roe. Stein Roe then on a
product-by-product basis targets commission dollars in an amount equal to a
specified multiple of the hard dollar value to the broker-dealer that supplies
the product to Stein Roe. In general, these multiples range from 1.25 to 1.85
times the hard dollar value. Stein Roe attempts to direct trades to each firm to
meet these targets. (For example, if the multiple is 1.5:1.0, assuming a hard
dollar value of $10,000, Stein Roe will target to the broker-dealer providing
the product trades generating $15,000 in total commissions.)
The targets that Stein Roe establishes for both proprietary and for third party
research products typically will reflect discussions that Stein Roe has with the
broker-dealer providing the product regarding the level of commissions it
expects to receive for the product. However, these targets are not binding
commitments, and Stein Roe does not agree to direct a minimum amount of
commissions to any broker-dealer for soft dollar products. In setting these
targets, Stein Roe makes a determination that the value of the product is
reasonably commensurate with the cost of acquiring it. These targets are
established on a calendar year basis. Stein Roe will receive the product whether
or not commissions directed to the applicable broker-dealer are less than, equal
to or in excess of the target. Stein Roe generally will carry over target
shortages and excesses to the next year's target. Stein Roe believes that this
practice reduces the conflicts of interest associated with soft dollar
transactions, since Stein Roe can meet the non-binding expectations of
broker-dealers providing soft dollar products over flexible time periods. In the
case of third party products, the third party is paid by the broker-dealer and
not by Stein Roe. Stein Roe may enter into a contract with the third party
vendor to use the product. (For example, if the product includes software, Stein
Roe will enter into a license to use the software from the vendor.)
In certain cases, Stein Roe uses soft dollars to obtain products that have both
research and non-research purposes. Examples of non-research uses are
administrative and marketing functions. These are referred to as "mixed use"
products. As of the date of this SAI, Stein Roe acquires two mixed use products.
These are (i) a fixed income security data service and (ii) a mutual fund
performance ranking service. In each case, Stein Roe makes a good faith
evaluation of the research and non-research uses of these services. These
evaluations are based upon the time spent by Firm personnel for research and
non-research uses. Stein Roe pays the provider in cash ("hard dollars") for the
non-research portion of its use of these products.
Stein Roe may use research obtained from soft dollar trades in the management of
any of its discretionary accounts. Thus, consistent with industry practice,
Stein Roe does not require that the Client account that generates the trade
receive any benefit from the soft dollar product obtained through the trade. As
noted above, this may result in cross subsidization of soft dollar products
among Client accounts. As noted therein, this practice is explicitly sanctioned
by a provision of the Securities Exchange Act of 1934, which creates a "safe
harbor" for soft dollar transactions conducted in a specified manner.
In certain cases, Stein Roe will direct a trade to one broker-dealer with the
instruction that it execute the trade and pay over a portion of the commission
from the trade to another broker-dealer who provides Stein Roe with a soft
dollar research product. The broker-dealer executing the trade "steps out" of a
portion of the commission in favor of the other broker-dealer providing the soft
dollar product. Stein Roe may engage in step out transactions in order to direct
soft dollar commissions to a broker-dealer which provides research but may not
be able to provide best execution. Brokers who receive step out commissions
typically are brokers providing a third party soft dollar product that is not
available on a hard dollars basis. Stein Roe has not engaged in step out
transactions as a manner of compensating broker-dealers that sell shares of
investment companies managed by Stein Roe.
The Board of Trustees of each Trust has reviewed the legal aspects and the
practicability of attempting to recapture underwriting discounts or selling
concessions included in prices paid by the Funds for purchases of Municipal
Securities in underwritten offerings. Each Fund attempts to recapture selling
concessions on purchases during underwritten offerings; however, the Adviser
will not be able to negotiate discounts from the fixed offering price for those
issues for which there is a strong demand, and will not allow the failure to
obtain a discount to prejudice its ability to purchase an issue. Each Board
periodically reviews efforts to recapture concessions and whether it is in the
best interests of the Funds to continue to attempt to recapture underwriting
discounts or selling concessions
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
SSI 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 SSI 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 SSI. The
agreement continues indefinitely but may be terminated by 180 days' notice by
the fund to SSI or by SSI to the fund. The agreement limits the liability of SSI
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 SSI
against, among other things, loss or damage incurred by SSI on account of any
claim, demand, action or suit made on or against SSI not resulting from SSI's
bad faith or negligence and arising out of, or in connection with, its duties
under the agreement.
Code of Ethics
The fund, the Advisor, and LFD have adopted Codes of Ethics pursuant to the
requirements of the Act. These Codes of Ethics permit personnel subject to the
Codes to invest in securities, including securities that may be purchased or
held by the funds.
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) each day the Exchange is open, except that certain classes of assets, such
as index futures, for which the market close occurs shortly after the close of
regular trading on the Exchange will be priced at the closing time of the market
on which they trade, but in no event later than 5:00 p.m. Eastern time.
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. 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 generally 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 market quotations are not readily available 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.
HOW TO BUY SHARES
The Prospectus contains a general description of how investors may buy shares of
the fund and tables of charges. This SAI contains additional information which
may be of interest to investors.
The Fund will accept unconditional orders for shares to be executed at the
public offering price based on the NAV per share next determined after the order
is placed in good order. The public offering price is the NAV plus the
applicable sales charge, if any. In the case of orders for purchase of shares
placed through FSFs, the public offering price will be determined on the day the
order is placed in good order, but only if the FSF receives the order prior to
the time at which shares are valued and transmits it to the fund before the fund
processes that day's transactions. If the FSF fails to transmit before the fund
processes that day's transactions, the customer's entitlement to that day's
closing price must be settled between the customer and the FSF. If the FSF
receives the order after the time at which the fund values its shares, the price
will be based on the NAV determined as of the close of the Exchange on the next
day it is open. If funds for the purchase of shares are sent directly to LFS,
they will be invested at the public offering price next determined after receipt
in good order. Payment for shares of the fund must be in U.S. dollars; if made
by check, the check must be drawn on a U.S. bank.
The fund receives the entire NAV of shares sold. For shares subject to an
initial sales charge, LFD's commission is the sales charge shown in the fund's
Prospectus less any applicable FSF discount. The FSF discount is the same for
all FSFs, except that LFD retains the entire sales charge on any sales made to a
shareholder who does not specify a FSF on the Investment Account Application
("Application"), and except that LFD may from time to time reallow additional
amounts to all or certain FSFs. LFD generally retains some or all of any
asset-based sales charge (distribution fee) or contingent deferred sales charge.
Such charges generally reimburse LFD for any up-front and/or ongoing commissions
paid to FSFs.
Checks presented for the purchase of shares of the fund which are returned by
the purchaser's bank or checkwriting privilege checks for which there are
insufficient funds in a shareholder's account to cover redemption will subject
such purchaser or shareholder to a $15 service fee for each check returned.
Checks must be drawn on a U.S. bank and must be payable in U.S. dollars.
SSI acts as the shareholder's agent whenever it receives instructions to carry
out a transaction on the shareholder's account. Upon receipt of instructions
that shares are to be purchased for a shareholder's account, the designated FSF
will receive the applicable sales commission. Shareholders may change FSFs at
any time by written notice to SSI, provided the new FSF has a sales agreement
with LFD.
Shares credited to an account are transferable upon written instructions in good
order to LFS and may be redeemed as described under "How to Sell Shares" in the
Prospectus. Certificates will not be issued for Class A shares unless
specifically requested. Shareholders may send any certificates which have been
previously acquired to LFS for deposit to their account.
LFD may, at its expense, provide special sales incentives (such as cash payments
in addition to the commissions specified in the Fund's SAI) to FSFs that agree
to promote the sale of shares of the Fund or other funds that LFD distributes.
At its discretion, the Distributor may offer special sales incentives only to
selected FSFs or to FSFs who have previously sold or expect to sell significant
amounts of the Fund's shares.
Special Purchase Programs/INVESTOR SERVICES
The following special purchase programs/investor services may be changed or
eliminated at any time.
Automatic Investment Plan. As a convenience to investors, shares of most funds
may be purchased through the Automatic Investment Plan. Preauthorized monthly
bank drafts or electronic funds transfers for a fixed amount of at least $50 are
used to purchase a fund's shares at the public offering price next determined
after LFD receives the proceeds from the draft (normally the 5th or the 20th of
each month, or the next business day thereafter). If your Automatic Investment
Plan purchase is by electronic funds transfer, you may request the Automatic
Investment Plan purchase for any day. Further information and application forms
are available from FSFs or from LFD.
Automated Dollar Cost Averaging (Classes A, B and C). The Automated Dollar Cost
Averaging program allows you to exchange $100 or more on a monthly basis from
any mutual fund advised by Colonial, Newport Fund Management, Inc., Crabbe Huson
Group, Inc. and Stein Roe & Farnham Incorporated in which you have a current
balance of at least $5,000 into the same class of shares of up to four other
funds. Complete the Automated Dollar Cost Averaging section of the Application.
The designated amount will be exchanged on the third Tuesday of each month.
There is no charge for exchanges made pursuant to the Automated Dollar Cost
Averaging program. Exchanges will continue so long as your fund balance is
sufficient to complete the transfers. Your normal rights and privileges as a
shareholder remain in full force and effect. Thus you can buy any fund, exchange
between the same Class of shares of funds by written instruction or by telephone
exchange if you have so elected and withdraw amounts from any fund, subject to
the imposition of any applicable CDSC.
Any additional payments or exchanges into your fund will extend the time of the
Automated Dollar Cost Averaging program.
An exchange is generally a capital sale transaction for federal income tax
purposes.
You may terminate your program, change the amount of the exchange (subject to
the $100 minimum), or change your selection of funds, by telephone or in
writing; if in writing by mailing your instructions to Liberty Funds Services,
Inc. P.O. Box 1722, Boston, MA 02105-1722.
You should consult your FSF or investment advisor to determine whether or not
the Automated Dollar Cost Averaging program is appropriate for you.
LFD offers several plans by which an investor may obtain reduced initial or
contingent deferred sales charges. These plans may be altered or discontinued at
any time. See "Programs For Reducing or Eliminating Sales Charges" for more
information.
Tax-Sheltered Retirement Plans. LFD offers prototype tax-qualified plans,
including Individual Retirement Accounts (IRAs), and Pension and Profit-Sharing
Plans for individuals, corporations, employees and the self-employed. The
minimum initial Retirement Plan investment is $25. Investors Bank & Trust
Company is the Trustee of LFD prototype plans and charges an $18 annual fee.
Detailed information concerning these Retirement Plans and copies of the
Retirement Plans are available from LFD.
Participants in non-LFD prototype Retirement Plans (other than IRAs) also are
charged a $10 annual fee unless the plan maintains an omnibus account with LFS.
Participants in LFD prototype Plans (other than IRAs) who liquidate the total
value of their account will also be charged a $15 close-out processing fee
payable to LFS. The fee is in addition to any applicable CDSC. The fee will not
apply if the participant uses the proceeds to open a LFD IRA Rollover account in
any fund, or if the Plan maintains an omnibus account.
Consultation with a competent financial and tax advisor regarding these Plans
and consideration of the suitability of fund shares as an investment under the
Employee Retirement Income Security Act of 1974 or otherwise is recommended.
Telephone Address Change Services. By calling LFS, shareholders or their FSF of
record may change an address on a recorded telephone line. Confirmations of
address change will be sent to both the old and the new addresses. Telephone
redemption privileges are suspended for 30 days after an address change is
effected.
Cash Connection. Dividends and any other distributions, including Systematic
Withdrawal Plan (SWP) payments, may be automatically deposited to a
shareholder's bank account via electronic funds transfer. Shareholders wishing
to avail themselves of this electronic transfer procedure should complete the
appropriate sections of the Application.
Automatic Dividend Diversification. The automatic dividend diversification
reinvestment program (ADD) generally allows shareholders to have all
distributions from a fund automatically invested in the same class of shares of
another fund. An ADD account must be in the same name as the shareholder's
existing open account with the particular fund. Call LFS for more information at
1-800-422-3737.
PROGRAMS FOR REDUCING OR ELIMINATING SALES CHARGES
Right of Accumulation (Class A and B only). Reduced sales charges on Class A and
B shares can be effected by combining a current purchase with prior purchases of
Class A, B, C, T and Z shares of the funds distributed by LFD. The applicable
sales charge is based on the combined total of:
1. The current purchase; and
2. The value at the public offering price at the close of business on
the previous day of all funds' Class A shares held by the
shareholder (except shares of any money market fund, unless such
shares were acquired by exchange from Class A shares of another
fund other than a money market fund and Class B, C, T and Z
shares).
LFD must be promptly notified of each purchase which entitles a shareholder to a
reduced sales charge. Such reduced sales charge will be applied upon
confirmation of the shareholder's holdings by LFS. A fund may terminate or amend
this Right of Accumulation.
Statement of Intent (Class A shares only). Any person may qualify for reduced
sales charges on purchases of Class A shares made within a thirteen-month period
pursuant to a Statement of Intent ("Statement"). A shareholder may include, as
an accumulation credit toward the completion of such Statement, the value of all
Class A, B, C, T and Z shares held by the shareholder on the date of the
Statement in funds (except shares of any money market fund, unless such shares
were acquired by exchange from Class A shares of another non-money market fund).
The value is determined at the public offering price on the date of the
Statement. Purchases made through reinvestment of distributions do not count
toward satisfaction of the Statement.
During the term of a Statement, LFS will hold shares in escrow to secure payment
of the higher sales charge applicable to Class A or T shares actually purchased.
Dividends and capital gains will be paid on all escrowed shares and these shares
will be released when the amount indicated has been purchased. A Statement does
not obligate the investor to buy or a fund to sell the amount of the Statement.
If a shareholder exceeds the amount of the Statement and reaches an amount which
would qualify for a further quantity discount, a retroactive price adjustment
will be made at the time of expiration of the Statement. The resulting
difference in offering price will purchase additional shares for the
shareholder's account at the applicable offering price. As a part of this
adjustment, the FSF shall return to LFD the excess commission previously paid
during the thirteen-month period.
If the amount of the Statement is not purchased, the shareholder shall remit to
LFD an amount equal to the difference between the sales charge paid and the
sales charge that should have been paid. If the shareholder fails within twenty
days after a written request to pay such difference in sales charge, LFS will
redeem that number of escrowed Class A shares to equal such difference. The
additional amount of FSF discount from the applicable offering price shall be
remitted to the shareholder's FSF of record.
Additional information about and the terms of Statements of Intent are available
from your FSF, or from LFS at 1-800-345-6611.
Reinstatement Privilege. An investor who has redeemed Class A, B or C shares
may, upon request, reinstate within one year a portion or all of the proceeds of
such sale in shares of the same Class of any fund at the NAV next determined
after LFS receives a written reinstatement request and payment. Any CDSC paid at
the time of the redemption will be credited to the shareholder upon
reinstatement. The period between the redemption and the reinstatement will not
be counted in aging the reinstated shares for purposes of calculating any CDSC
or conversion date. Investors who desire to exercise this privilege should
contact their FSF or LFS. Shareholders may exercise this Privilege an unlimited
number of times. Exercise of this privilege does not alter the Federal income
tax treatment of any capital gains realized on the prior sale of fund shares,
but to the extent any such shares were sold at a loss, some or all of the loss
may be disallowed for tax purposes. Consult your tax advisor.
Privileges of Stein Roe Employees or Financial Service Firms (in this section,
the "Advisor" refers to Stein Roe in its capacity as the Advisor or
Administrator to the funds). Class A shares of certain funds may be sold at NAV
to the following individuals whether currently employed or retired: Trustees of
funds advised or administered by the Advisor; directors, officers and employees
of the Advisor, LFD and other companies affiliated with the Advisor; registered
representatives and employees of FSFs (including their affiliates) that are
parties to dealer agreements or other sales arrangements with LFD; and such
persons' families and their beneficial accounts.
Sponsored Arrangements. Class A shares of certain funds may be purchased at a
reduced or no sales charge pursuant to sponsored arrangements, which include
programs under which an organization makes recommendations to, or permits group
solicitation of, its employees, members or participants in connection with the
purchase of shares of the fund on an individual basis. The amount of the sales
charge reduction will reflect the anticipated reduction in sales expense
associated with sponsored arrangements. The reduction in sales expense, and
therefore the reduction in sales charge, will vary depending on factors such as
the size and stability of the organization's group, the term of the
organization's existence and certain characteristics of the members of its
group. The funds reserve the right to revise the terms of or to suspend or
discontinue sales pursuant to sponsored plans at any time.
Waiver of Contingent Deferred Sales Charges (CDSCs) (Classes A, B and C) CDSCs
may be waived on redemptions in the following situations with the proper
documentation:
1. Death. CDSCs may be waived on redemptions within one year following the death
of (i) the sole shareholder ----- on an individual account, (ii) a joint tenant
where the surviving joint tenant is the deceased's spouse, or (iii) the
beneficiary of a Uniform Gifts to Minors Act (UGMA), Uniform Transfers to Minors
Act (UTMA) or other custodial account. If, upon the occurrence of one of the
foregoing, the account is transferred to an account registered in the name of
the deceased's estate, the CDSC will be waived on any redemption from the estate
account occurring within one year after the death. If the Class B shares are not
redeemed within one year of the death, they will remain subject to the
applicable CDSC, when redeemed from the transferee's account. If the account is
transferred to a new registration and then a redemption is requested, the
applicable CDSC will be charged.
2. Systematic Withdrawal Plan (SWP). CDSCs may be waived on redemptions
occurring pursuant to a monthly, -------------------------------- quarterly or
semi-annual SWP established with LFS, to the extent the redemptions do not
exceed, on an annual basis, 12% of the account's value, so long as at the time
of the first SWP redemption the account had had distributions reinvested for a
period at least equal to the period of the SWP (e.g., if it is a quarterly SWP,
distributions must have been reinvested at least for the three-month period
prior to the first SWP redemption). Otherwise, CDSCs will be charged on SWP
redemptions until this requirement is met; this requirement does not apply if
the SWP is set up at the time the account is established, and distributions are
being reinvested. See below under "Investor Services - Systematic Withdrawal
Plan."
3. Disability. CDSCs may be waived on redemptions occurring within
one year after the sole shareholder on an individual account or a
joint tenant on a spousal joint tenant account becomes disabled
(as defined in Section 72(m)(7) of the Internal Revenue Code). To
be eligible for such waiver, (i) the disability must arise after
the purchase of shares and (ii) the disabled shareholder must
have been under age 65 at the time of the initial determination
of disability. If the account is transferred to a new
registration and then a redemption is requested, the applicable
CDSC will be charged.
4. Death of a trustee. CDSCs may be waived on redemptions occurring
upon dissolution of a revocable living or grantor trust following
the death of the sole trustee where (i) the grantor of the trust
is the sole trustee and the sole life beneficiary, (ii) death
occurs following the purchase and (iii) the trust document
provides for dissolution of the trust upon the trustee's death.
If the account is transferred to a new registration (including
that of a successor trustee), the applicable CDSC will be charged
upon any subsequent redemption.
5. Returns of excess contributions. CDSCs may be waived on
redemptions required to return excess contributions made to
retirement plans or individual retirement accounts, so long as
the FSF agrees to return the applicable portion of any commission
paid by Colonial.
6. Qualified Retirement Plans. CDSCs may be waived on redemptions
required to make distributions from qualified retirement plans
following normal retirement (as stated in the Plan document).
CDSCs also will be waived on SWP redemptions made to make
required minimum distributions from qualified retirement plans
that have invested in funds distributed by LFD for at least two
years.
The CDSC also may be waived where the FSF agrees to return all or an agreed upon
portion of the commission earned on the sale of the shares being redeemed.
HOW TO SELL SHARES
Shares may also be sold on any day the Exchange is open, either directly to the
Fund or through the shareholder's FSF. Sale proceeds generally are sent within
seven days (usually on the next business day after your request is received in
good form). However, for shares recently purchased by check, the Fund may delay
selling your shares for up to 15 days in order to protect the Fund against
financial losses and dilution in net asset value caused by dishonored purchase
payment checks.
To sell shares directly to the Fund, send a signed letter of instruction or
stock power form to LFS, along with any certificates for shares to be sold. The
sale price is the net asset value (less any applicable contingent deferred sales
charge) next calculated after the Fund receives the request in proper form.
Signatures must be guaranteed by a bank, a member firm of a national stock
exchange or another eligible guarantor institution. Stock power forms are
available from FSFs, LFS and many banks. Additional documentation is required
for sales by corporations, agents, fiduciaries, surviving joint owners and
individual retirement account holders. Call LFS for more information
1-800-345-6611.
FSFs must receive requests before the time at which the Fund's shares are valued
to receive that day's price, are responsible for furnishing all necessary
documentation to LFS and may charge for this service.
Systematic Withdrawal Plan If a shareholder's account balance is at least
$5,000, the shareholder may establish a SWP. A specified dollar amount or
percentage of the then current net asset value of the shareholder's investment
in any fund designated by the shareholder will be paid monthly, quarterly or
semi-annually to a designated payee. The amount or percentage the shareholder
specifies generally may not, on an annualized basis, exceed 12% of the value, as
of the time the shareholder makes the election, of the shareholder's investment.
Withdrawals from Class B and Class C shares of the fund under a SWP will be
treated as redemptions of shares purchased through the reinvestment of fund
distributions, or, to the extent such shares in the shareholder's account are
insufficient to cover Plan payments, as redemptions from the earliest purchased
shares of such fund in the shareholder's account. No CDSCs apply to a redemption
pursuant to a SWP of 12% or less, even if, after giving effect to the
redemption, the shareholder's account balance is less than the shareholder's
base amount. Qualified plan participants who are required by Internal Revenue
Service regulation to withdraw more than 12%, on an annual basis, of the value
of their Class B and Class C share account may do so but will be subject to a
CDSC ranging from 1% to 5% of the amount withdrawn in excess of 12% annually. If
a shareholder wishes to participate in a SWP, the shareholder must elect to have
all of the shareholder's income dividends and other fund distributions payable
in shares of the fund rather than in cash.
A shareholder or a shareholder's FSF of record may establish a SWP account by
telephone on a recorded line. However, SWP checks will be payable only to the
shareholder and sent to the address of record. SWPs from retirement accounts
cannot be established by telephone.
A shareholder may not establish a SWP if the shareholder holds shares in
certificate form. Purchasing additional shares (other than through dividend and
distribution reinvestment) while receiving SWP payments is ordinarily
disadvantageous because of duplicative sales charges. For this reason, a
shareholder may not maintain a plan for the accumulation of shares of the fund
(other than through the reinvestment of dividends) and a SWP at the same time.
SWP payments are made through share redemptions, which may result in a gain or
loss for tax purposes, may involve the use of principal and may eventually use
up all of the shares in a shareholder's account.
A fund may terminate a shareholder's SWP if the shareholder's account balance
falls below $5,000 due to any transfer or liquidation of shares other than
pursuant to the SWP. SWP payments will be terminated on receiving satisfactory
evidence of the death or incapacity of a shareholder. Until this evidence is
received, LFS will not be liable for any payment made in accordance with the
provisions of a SWP.
The cost of administering SWPs for the benefit of shareholders who participate
in them is borne by the fund as an expense of all shareholders.
Shareholders whose positions are held in "street name" by certain FSFs may not
be able to participate in a SWP. If a shareholder's Fund shares are held in
"street name," the shareholder should consult his or her FSF to determine
whether he or she may participate in a SWP.
Telephone Redemptions. All Fund shareholders and/or their FSFs are automatically
eligible to redeem up to $100,000 of the fund's shares by calling 1-800-422-3737
toll-free any business day between 9:00 a.m. and the close of trading of the
Exchange (normally 4:00 p.m. Eastern time). Transactions received after 4:00
p.m. Eastern time will receive the next business day's closing price. Telephone
redemptions are limited to a total of $100,000 in a 30-day period. Redemptions
that exceed $100,000 may be accomplished by placing a wire order trade through a
broker or furnishing a signature guarantee request. Telephone redemption
privileges for larger amounts may be elected on the Application. LFS will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. Telephone redemptions are not available on accounts with an address
change in the preceding 30 days and proceeds and confirmations will only be
mailed or sent to the address of record unless the redemption proceeds are being
sent to a pre-designated bank account. Shareholders and/or their FSFs will be
required to provide their name, address and account number. FSFs will also be
required to provide their broker number. All telephone transactions are
recorded. A loss to a shareholder may result from an unauthorized transaction
reasonably believed to have been authorized. No shareholder is obligated to
execute the telephone authorization form or to use the telephone to execute
transactions.
Checkwriting Shares may be redeemed by check if a shareholder has previously
completed an Application and Signature Card. LFS will provide checks to be drawn
on Boston Safe Deposit and Trust Company (the "Bank"). These checks may be made
payable to the order of any person in the amount of not less than $500 nor more
than $100,000. The shareholder will continue to earn dividends on shares until a
check is presented to the Bank for payment. At such time a sufficient number of
full and fractional shares will be redeemed at the next determined net asset
value to cover the amount of the check. Certificate shares may not be redeemed
in this manner.
Shareholders utilizing checkwriting drafts will be subject to the Bank's rules
governing checking accounts. There is currently no charge to the shareholder for
the use of checks. The Bank may charge customary fees for services such as a
stop payment request or a request for copies of a check. The shareholder should
make sure that there are sufficient shares in his or her open account to cover
the amount of any check drawn since the net asset value of shares will
fluctuate. If insufficient shares are in the shareholder's open account, the
check will be returned marked "insufficient funds" and no shares will be
redeemed; the shareholder will be charged a $15 service fee for each check
returned. It is not possible to determine in advance the total value of an open
account because prior redemptions and possible changes in net asset value may
cause the value of an open account to change. Accordingly, a check redemption
should not be used to close an open account. In addition, a check redemption,
like any other redemption, may give rise to taxable capital gains.
Non Cash Redemptions. For redemptions of any single shareholder within any
90-day period exceeding the lesser of $250,000 or 1% of a fund's net asset
value, a fund may make the payment or a portion of the payment with portfolio
securities held by that fund instead of cash, in which case the redeeming
shareholder may incur brokerage and other costs in selling the securities
received.
DISTRIBUTIONS
Distributions are invested in additional shares of the same Class of the fund at
net asset value unless the shareholder elects to receive cash. Regardless of the
shareholder's election, distributions of $10 or less will not be paid in cash,
but will be invested in additional shares of the same class of the fund at net
asset value. Undelivered distribution checks returned by the post office will be
reinvested in your account. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service selected by the Transfer Agent is unable to deliver checks to the
shareholder's address of record, such shareholder's distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. No interest will accrue on amounts represented
by uncashed distribution or redemption checks. Shareholders may reinvest all or
a portion of a recent cash distribution without a sales charge. A shareholder
request must be received within 30 calendar days of the distribution. A
shareholder may exercise this privilege only once. No charge is currently made
for reinvestment.
Shares of most funds that pay daily dividends will normally earn dividends
starting with the date the fund receives payment for the shares and will
continue through the day before the shares are redeemed, transferred or
exchanged.
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. 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 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.
<PAGE>
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 Liberty 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 funds' 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.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Certain Funds are part of a Master Fund/Feeder Fund Structure which seeks to
achieve their objectives by investing all of its assets in another mutual fund
having an investment objective identical to that of the Fund. The shareholders
of each Fund approved this policy of permitting a Fund to act as a feeder fund
by investing in a Portfolio. Please refer to Investment Policies, Portfolio
Investments and Strategies, and Investment Restrictions for a description of the
investment objectives, policies, and restrictions of the Funds and the
Portfolios. The management fees and expenses of the Funds and the Portfolios are
described under Investment Advisory and Other Services. Each feeder Fund bears
its proportionate share of the expenses of its master Portfolio.
Stein Roe has provided investment management services in connection with other
mutual funds employing the master fund/feeder fund structure since 1991.
Each Portfolio is a separate series of SR&F Base Trust ("Base Trust"), a
Massachusetts common law trust organized under an Agreement and Declaration of
Trust ("Declaration of Trust") dated Aug. 23, 1993. The Declaration of Trust of
Base Trust provides that a Fund and other investors in a Portfolio will be
liable for all obligations of that Portfolio that are not satisfied by the
Portfolio. However, the risk of a Fund incurring financial loss on account of
such liability is limited to circumstances in which liability was inadequately
insured and a Portfolio was unable to meet its obligations. Accordingly, the
trustees of the Trust believe that neither the Funds nor their shareholders will
be adversely affected by reason of a Fund's investing in a Portfolio.
The Declaration of Trust of Base Trust provides that a Portfolio will terminate
120 days after the withdrawal of a Fund or any other investor in the Portfolio,
unless the remaining investors vote to agree to continue the business of the
Portfolio. The trustees of the Trust may vote a Fund's interests in a Portfolio
for such continuation without approval of the Fund's shareholders.
The common investment objectives of the Funds and the Portfolios are
nonfundamental and may be changed without shareholder approval, subject,
however, to at least 30 days' advance written notice to a Fund's shareholders.
The fundamental policies of each Fund and the corresponding fundamental policies
of its master Portfolio can be changed only with shareholder approval. If a
Fund, as a Portfolio investor, is requested to vote on a change in a fundamental
policy of a Portfolio or any other matter pertaining to the Portfolio (other
than continuation of the business of the Portfolio after withdrawal of another
investor), the Fund will solicit proxies from its shareholders and vote its
interest in the Portfolio for and against such matters proportionately to the
instructions to vote for and against such matters received from Fund
shareholders. A Fund will vote shares for which it receives no voting
instructions in the same proportion as the shares for which it receives voting
instructions. There can be no assurance that any matter receiving a majority of
votes cast by Fund shareholders will receive a majority of votes cast by all
investors in a Portfolio. If other investors hold a majority interest in a
Portfolio, they could have voting control over that Portfolio.
In the event that a Portfolio's fundamental policies were changed so as to be
inconsistent with those of the corresponding Fund, the Board of Trustees of the
Trust would consider what action might be taken, including changes to the Fund's
fundamental policies, withdrawal of the Fund's assets from the Portfolio and
investment of such assets in another pooled investment entity, or the retention
of an investment adviser to invest those assets directly in a portfolio of
securities. A Fund's inability to find a substitute master fund or comparable
investment management could have a significant impact upon its shareholders'
investments. Any withdrawal of a Fund's assets could result in a distribution in
kind of portfolio securities (as opposed to a cash distribution) to the Fund.
Should such a distribution occur, the Fund would incur brokerage fees or other
transaction costs in converting such securities to cash. In addition, a
distribution in kind could result in a less diversified portfolio of investments
for the Fund and could affect the liquidity of the Fund.
Each investor in a Portfolio, including a Fund, may add to or reduce its
investment in the Portfolio on each day the NYSE is open for business. The
investor's percentage of the aggregate interests in the Portfolio will be
computed as the percentage equal to the fraction (i) the numerator of which is
the beginning of the day value of such investor's investment in the Portfolio on
such day plus or minus, as the case may be, the amount of any additions to or
withdrawals from the investor's investment in the Portfolio effected on such
day; and (ii) the denominator of which is the aggregate beginning of the day net
asset value of the Portfolio on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined
will then be applied to determine the value of the investor's interest in the
Portfolio as of the close of business.
Base Trust may permit other investment companies and/or other institutional
investors to invest in a Portfolio, but members of the general public may not
invest directly in the Portfolio. Other investors in a Portfolio are not
required to sell their shares at the same public offering price as a Fund, might
incur different administrative fees and expenses than the Fund, and might charge
a sales commission. Therefore, Fund shareholders might have different investment
returns than shareholders in another investment company that invests exclusively
in a Portfolio. Investment by such other investors in a Portfolio would provide
funds for the purchase of additional portfolio securities and would tend to
reduce the operating expenses as a percentage of the Portfolio's net assets.
Conversely, large-scale redemptions by any such other investors in a Portfolio
could result in untimely liquidations of the Portfolio's security holdings, loss
of investment flexibility, and increases in the operating expenses of the
Portfolio as a percentage of its net assets. As a result, a Portfolio's security
holdings may become less diverse, resulting in increased risk.
Information regarding other investors in a Portfolio may be obtained by writing
to SR&F Base Trust at Suite 3200, One South Wacker Drive, Chicago, IL 60606, or
by calling 800-338-2550. Stein Roe may provide administrative or other services
to one or more of such investors.
<PAGE>
40
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>
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48
APPENDIX II
1999
SOURCE CATEGORY RETURN (%)
<S> <C> <C> <C> <C> <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
<PAGE>
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
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
</TABLE>
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
[Note: As used herein, the term "PEA" refers to a post- effective
amendment to the Registration Statement of the Registrant under the
Securities Act of 1933, No. 2-99356.]
(a)(1) Agreement and Declaration of Trust as amended and restated
dated July 28,2000. (Exhibit to PEA #29*)
(b)(1) By-Laws of Registrant as amended through 2/3/93.
(Exhibit 2 to PEA #21.)*
(2) Amendment to By-Laws dated 2/4/98. (Exhibit 2(b) to
PEA #26.)*
(3)Amendment to By-Laws dated 3/15/00.(Exhibit to PEA# 30)
(4) Amendment to By-Laws dated 9/28/00.(Exhibit to PEA# 30)
(c) None.
(d)(1) Management agreement between Registrant and Stein Roe & Farnham
Incorporated ("Stein Roe") relating to the series designated Stein Roe
Intermediate Municipals Fund and Stein Roe Managed Municipals Fund dated
7/1/96 as amended through 2/2/98. (Exhibit 5 to PEA #26.)*
(2) Management Agreement between SR&F Base Trust and Stein Roe dated 8/15/95,
as amended through 6/28/99.(Exhibit to PEA# 28)*
(e) Underwriting agreement between Registrant and Liberty Funds
Distributor, Inc. dated 8/4/99. (Exhibit to PEA#28)*
(f) None.
(g) Custodian contract between Registrant and State Street Bank and Trust
Company ("Bank") dated 12/31/87 as amended through 5/8/95. (Exhibit 8 to
PEA #18.)*
(h)(1) Administrative agreement between Registrant and Stein Roe as amended
through 7/1/96. (Exhibit 9(c) to PEA #21.)*
(2) Accounting and Bookkeeping Agreement between the Registrant
and Stein Roe dated 8/3/99. (Exhibit to PEA #27)*
(3) Restated transfer agency agreement between Registrant and
SteinRoe Services Inc. dated 8/1/95 as amended through
3/31/99. (Exhibit to PEA #27)*
(4) Sub-transfer agent agreement between SteinRoe Services
Inc. and Liberty Funds Services, Inc. (formerly named
Colonial Investors Service Center, Inc.) dated 7/3/96 as
amended through 3/31/99. (Exhibit to PEA #27)*
(i)(1) Opinions and consents of Bell, Boyd & Lloyd and Ropes & Gray with respect
to the series of Registrant designated SteinRoe Tax-Exempt Money Fund now
named Stein Roe Municipal Money Market Fund), SteinRoe Intermediate
Municipals(now named Stein Roe Intermediate Municipals Fund, SteinRoe
Managed Municipals (now named Stein Roe Managed Municipals Fund) And
SteinRoe High-Yield Municipals (now named Stein Roe High-Yield Municipals
Fund. (Exhibit 10 to PEA 21.)*
(2) Consent of Bell Boyd & Lloyd LLC. (Exhibit to PEA #29)
(j)(1) Opinion and consent of Bell, Boyd & Lloyd to SteinRoe Intermediate
Municipals (now named Stein Roe Intermediate Municipals Fund)
regarding tax-exempt status of standby commitments. (Exhibit 11(b)
to PEA #21)*
(2) Consent of Morningstar, Inc. (Exhibit 11(b) to PEA #21.)*
(3) Consent of Ernst & Young LLP. (Exhibit to PEA #29)
(k) None.
(l) Inapplicable.
(m) Rule 12b-1 Plan. (Exhibit (m) to PEA #27)*
(n) Rule 18f-3 Plan. (Exhibit (n) to PEA #27)*
(o) Mutual Funds Application. (Exhibit (o) to PEA #27)*
(p) Revised Code of Ethics-filed as Exhibit 23(p) to Registration
Statement on Form N-1A to Liberty Funds Trust V (file#s 033-12109 and
811-05030) filed on August 31, 2000 and hereby incorporated by
reference and made a part of this Registration Statement.
Powers of Attorney for: John A. Bacon, Jr., William W. Boyd, Lindsay Cook,
Douglas A. Hacker, Janet Langford Kelly, Charles R. Nelson and
Thomas C. Theobald-filed in Part C, Item 23 of Post-Effective Amendment
No. 28 to the Registration Statement of Liberty-Stein Roe Funds Municipal
Trust filed with the Commission on July 14, 2000, is hereby
incorporated by reference and made part of this Registration Statement.
-------------------------------
*Incorporated by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
REGISTRANT.
The Registrant does not consider that it is directly or indirectly controlled
by, or under common control with, other persons within the meaning of this Item.
See "Investment Advisory and Other Services," "Management," "Distributor," and
"Transfer Agent" in the statement of additional information, each of which is
incorporated herein by reference.
ITEM 25. INDEMNIFICATION.
Article Tenth of the Agreement and Declaration of Trust of Registrant (Exhibit
a), which Article is incorporated herein by reference, provides that Registrant
shall provide indemnification of its trustees and officers (including each
person who serves or has served at Registrant's request as a director, officer,
or trustee of another organization in which Registrant has any interest as a
shareholder, creditor or otherwise) ("Covered Persons") under specified
circumstances.
Section 17(h) of the Investment Company Act of 1940 ("1940 Act") provides that
neither the Agreement and Declaration of Trust nor the By-Laws of Registrant,
nor any other instrument pursuant to which Registrant is organized or
administered, shall contain any provision which protects or purports to protect
any trustee or officer of Registrant against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. In accordance with Section 17(h) of the
1940 Act, Article Tenth shall not protect any person against any liability to
Registrant or its shareholders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
To the extent required under the 1940 Act,
(i) Article Tenth does not protect any person against any liability to
Registrant or to its shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office;
(ii) in the absence of a final decision on the merits by a court or other
body before whom a proceeding was brought that a Covered Person was not liable
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office, no
indemnification is permitted under Article Tenth unless a determination that
such person was not so liable is made on behalf of Registrant by (a) the vote of
a majority of the trustees who are neither "interested persons" of Registrant,
as defined in Section 2(a)(19) of the 1940 Act, nor parties to the proceeding
("disinterested, non-party trustees"), or (b) an independent legal counsel as
expressed in a written opinion; and
(iii) Registrant will not advance attorneys' fees or other expenses incurred
by a Covered Person in connection with a civil or criminal action, suit or
proceeding unless Registrant receives an undertaking by or on behalf of the
Covered Person to repay the advance (unless it is ultimately determined that he
is entitled to indemnification) and (a) the Covered Person provides security for
his undertaking, or (b) Registrant is insured against losses arising by reason
of any lawful advances, or (c) a majority of the disinterested, non-party
trustees of Registrant or an independent legal counsel as expressed in a written
opinion, determine, based on a review of readily-available facts (as opposed to
a full trial-type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
Any approval of indemnification pursuant to Article Tenth does not prevent the
recovery from any Covered Person of any amount paid to such Covered Person in
accordance with Article Tenth as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction not to have acted
in good faith in the reasonable belief that such Covered Person's action was in,
or not opposed to, the best interests of Registrant or to have been liable to
Registrant or its shareholders by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
such Covered Person's office.
Article Tenth also provides that its indemnification provisions are not
exclusive.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Registrant, its trustees and officers, Stein Roe & Farnham Incorporated ("Stein
Roe"), the other investment companies advised by Stein Roe, and persons
affiliated with them are insured against certain expenses in connection with the
defense of actions, suits, or proceedings, and certain liabilities that might be
imposed as a result of such actions, suits, or proceedings. Registrant will not
pay any portion of the premiums for coverage under such insurance that would (1)
protect any trustee or officer against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office or (2) protect Stein Roe or principal
underwriter, if any, against any liability to Registrant or its shareholders to
which such person would otherwise be subject by reason of willful misfeasance,
bad faith, or gross negligence, in the performance of its duties, or by reason
of its reckless disregard of its duties and obligations under its contract or
agreement with the Registrant; for this purpose the Registrant will rely on an
allocation of premiums determined by the insurance company.
Pursuant to the indemnification agreement dated July 1, 1995, among the
Registrant, its transfer agent and Stein Roe, Registrant, its trustees, officers
and employees, its transfer agent and the transfer agent's directors, officers
and employees are indemnified by Stein Roe against any and all losses,
liabilities, damages, claims and expenses arising out of any act or omission of
the Registrant or its transfer agent performed in conformity with a request of
Stein Roe that the transfer agent and the Registrant deviate from their normal
procedures in connection with the issue, redemption or transfer of shares for a
client of Stein Roe.
Registrant, its trustees, officers, employees and representatives and each
person, if any, who controls the Registrant within the meaning of Section 15 of
the Securities Act of 1933 are indemnified by the distributor of Registrant's
shares (the "distributor"), pursuant to the terms of the distribution agreement,
which governs the distribution of Registrant's shares, against any and all
losses, liabilities, damages, claims and expenses arising out of the acquisition
of any shares of the Registrant by any person which (i) may be based upon any
wrongful act by the distributor or any of the distributor's directors, officers,
employees or representatives or (ii) may be based upon any untrue or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, statement of additional information, shareholder report or other
information covering shares of the Registrant filed or made public by the
Registrant or any amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading if such statement or
omission was made in reliance upon information furnished to the Registrant by
the distributor in writing. In no case does the distributor's indemnity
indemnify an indemnified party against any liability to which such indemnified
party would otherwise be subject by reason of willful misfeasance, bad faith, or
negligence in the performance of its or his duties or by reason of its or his
reckless disregard of its or his obligations and duties under the distribution
agreement.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Stein Roe & Farnham Incorporated ("Stein Roe"), the investment
adviser, is a wholly owned subsidiary of SteinRoe Services Inc.
("SSI"), which in turn is a wholly owned subsidiary of Liberty
Financial Companies, Inc., which is a majority owned subsidiary
of Liberty Corporation Holdings, Inc., which is a wholly owned
subsidiary of LFC Holdings, Inc., which in turn is a subsidiary
of Liberty Mutual Equity Corporation, which in turn is a
subsidiary of Liberty Mutual Insurance Company. Stein Roe acts
as investment adviser to individuals, trustees, pension and
profit-sharing plans, charitable organizations, and other
investors. In addition to Registrant, it also acts as
investment adviser to other investment companies having
different investment policies.
For a two-year business history of officers and directors
of Stein Roe, please refer to the Form ADV of Stein Roe &
Farnham Incorporated and to the section of the statement of
additional information (Part B) entitled "Investment Advisory
and Other Services."
Certain directors and officers of Stein Roe also serve and have
during the past two years served in various capacities as
officers, directors, or trustees of SSI, of Colonial Management
Associates, Inc. (which is a subsidiary of Liberty Financial
Companies, Inc.), and of the Registrant and other investment
companies managed by SteinRoe. (The listed entities are located
at One South Wacker Drive, Chicago, Illinois 60606, except for
Colonial Management Associates, Inc., which is located at One
Financial Center, Boston, MA 02111, and SteinRoe Variable
Investment Trust and Liberty Variable Investment Trust, which
are located at Federal Reserve Plaza, Boston, MA 02210.) A
list of such capacities is given below.
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
STEINROE SERVICES INC.
Kevin M. Carome Assistant Clerk
Kenneth J. Kozanda VP; Treasurer
C. Allen Merritt, Jr. Director; Vice President
COLONIAL MANAGEMENT ASSOCIATES, INC.
Ophelia L. Barsketis Senior Vice President
Kevin M. Carome Senior Vice President
William M. Garrison Vice President
Stephen E. Gibson Chairman, President and
Chief Executive Officer
Loren A. Hansen Senior Vice President
Clare M. Hounsell Vice President
Deborah A. Jansen Senior Vice President
North T. Jersild Vice President
Joseph R. Palombo Executive Vice President
Yvonne T. Shields Vice President
SR&F BASE TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
David P. Brady Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP VP; Secretary
Denise E. Chasmer Vice President
Stephen E. Gibson President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice-President
Michael T. Kennedy Vice-President
Gail D. Knudsen Vice President
Stephen F. Lockman Vice-President
Pamela A. McGrath Senior VP;Treasurer
Mary D. McKenzie Vice President
Jane M. Naeseth Vice-President
Maureen G. Newman Vice-President
Nicholas S. Norton Vice President
Joseph R. Palombo Executive Vice President
Veronica M. Wallace Vice-President
LIBERTY-STEIN ROE FUNDS INCOME TRUST; LIBERTY-STEIN ROE FUNDS
INSTITUTIONAL TRUST; AND LIBERTY-STEIN ROE FUNDS TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
Kevin M. Carome Executive VP VP;Secy.
Denise E. Chasmer Vice President
Stephen E. Gibson President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Gail D. Knudsen Vice President
Stephen F. Lockman Vice-President
Pamela A. McGrath Senior VP;Treasurer
Mary D. McKenzie Vice President
Jane M. Naeseth Vice-President
Nicholas S. Norton Vice President
Joseph R. Palombo Executive Vice President
LIBERTY-STEIN ROE FUNDS INVESTMENT TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
David P. Brady Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP VP; Asst. Secy.
Denise E. Chasmer Vice President
William M. Garrison Vice-President
Stephen E. Gibson President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice-President
Gail D. Knudsen Vice President
Pamela A. McGrath Senior VP;Treasurer
Mary D. McKenzie Vice President
Nicholas S. Norton Vice President
Joseph R. Palombo Executive Vice President
LIBERTY-STEIN ROE ADVISOR TRUST
William D. Andrews Executive Vice-President
David P. Brady Vice-President
Christine Balzano Vice President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP; Secy. VP; Asst. Secy.
Denise E. Chasmer Vice President
Stephen E. Gibson President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice-President
Gail D. Knudsen Vice President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Pamela A. McGrath Senior VP;Treasurer
Mary D. McKenzie Vice President
Maureen G. Newman Vice-President
Nicholas S. Norton Vice President
Joseph R. Palombo Executive Vice President
LIBERTY-STEIN ROE FUNDS MUNICIPAL TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
Kevin M. Carome Executive VP; Secy. VP; Asst. Secy.
Denise E. Chasmer Vice President
Stephen E. Gibson President
Loren A. Hansen Executive Vice-President
Brian M. Hartford Vice-President
Gail D. Knudsen Vice President
William C. Loring Vice-President
Pamela A. McGrath Senior VP;Treasurer
Mary D. McKenzie Vice President
Maureen G. Newman Vice-President
Nicholas S. Norton Vice President
Joseph R. Palombo Executive Vice President
Veronica M. Wallace Vice-President
STEINROE VARIABLE INVESTMENT TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
Kevin M. Carome Executive VP; Secy. VP; Asst. Secy.
Denise E. Chasmer Vice President
William M. Garrison Vice President
Stephen E. Gibson President
Erik P. Gustafson Vice President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice President
Michael T. Kennedy Vice President
Gail D. Knudsen Vice President
Pamela A. McGrath Senior VP;Treasurer
Mary D. McKenzie Vice President
Jane M. Naeseth Vice President
Nicholas S. Norton Vice President
Joseph R. Palombo Executive Vice President
William M. Wadden IV Vice President
LIBERTY-STEIN ROE ADVISOR FLOATING RATE FUND; LIBERTY-STEIN ROE
INSTITUTIONAL FLOATING RATE INCOME FUND, STEIN ROE FLOATING RATE
LIMITED LIABILITY COMPANY
William D. Andrews Executive Vice-President
Kevin M. Carome Executive VP; Secy. VP; Asst. Secy.
Christine Balzano Vice President
Denise E. Chasmer Vice President
Stephen E. Gibson President
Brian W. Good Vice-President
James R. Fellows Vice-President
Loren A. Hansen Executive Vice-President
Gail D. Knudsen Vice President
Pamela A. McGrath Senior VP;Treasurer
Mary D. McKenzie Vice President
Nicholas S. Norton Vice President
Joseph R. Palombo Executive Vice President
LIBERTY VARIABLE INVESTMENT TRUST
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
Kevin M. Carome Vice President
ITEM 27. PRINCIPAL UNDERWRITERS.
Registrant's principal underwriter, Liberty Funds Distributor,
Inc., a subsidiary of Colonial Management Associates, Inc.,
acts as underwriter to Liberty Funds Trust I, Liberty Funds Trust
II, Liberty Funds Trust III, Liberty Funds Trust IV, Liberty
Funds Trust V, Liberty Funds Trust VI, Liberty Funds Trust VII,
Liberty Funds Trust IX, Liberty-Stein Roe Funds Investment Trust,
Liberty-Stein Roe Funds Income Trust, Liberty-Stein Roe Funds
Municipal Trust, Liberty-Stein Roe Advisor Trust, Liberty-Stein
Roe Funds Institutional Trust, Liberty-Stein Roe Funds Trust,
Liberty-Stein Roe Advisor Floating Rate Fund, Liberty-Stein Roe
Institutional Floating Rate Income Fund, and SteinRoe Variable
Investment Trust. The table below lists the directors and
officers of Liberty Funds Distributor, Inc.
Position and Offices Positions and
Name and Principal with Principal Offices with
Business Address* Underwriter Registrant
-------------------- --------------------- -------------
Anderson, Judith Vice President None
Babbitt, Debra VP & Compliance Officer None
Bartlett, John Managing Director None
Bertrand, Thomas Vice President None
Blakeslee, James Senior Vice President None
Bozek, James Senior Vice President None
Brown, Beth Vice President None
Burtman, Tracy Vice President None
Campbell, Patrick Vice President None
Carroll, Sean Vice President None
Claiborne, Doug Vice President None
Chrzanowski, Daniel Vice President None
Conley, Brook Vice President None
Clapp, Elizabeth A. Managing Director None
Costello, Matthew Vice President None
Couto, Scott Vice President None
Davey, Cynthia Senior Vice President None
Desilets, Marian H. Vice President None
Devaney, James Senior Vice President None
DiMaio, Steve Vice President None
Downey, Christopher Vice President None
Dupree, Robert Vice President None
Emerson, Kim P. Senior Vice President None
Evans, C. Frazier Managing Director None
Evitts, Stephen Vice President None
Feldman, David Managing Director None
Feloney, Joseph Vice President None
Fifield, Robert Vice President None
Fisher, James Vice President None
Fragasso, Philip Managing Director None
Gariepy, Tom Vice President None
Gauger, Richard Vice President None
Gerokoulis, Stephen A. Senior Vice President None
Gibson, Stephen E. Director; Chairman of Board None
Goldberg, Matthew Senior Vice President None
Gupta, Neeti Vice President None
Geunard, Brian Vice President None
Grace, Anthony Vice President None
Gubala, Jeffrey Vice President None
Harrington, Tom Senior Vice President None
Hodgkins, Joseph Senior Vice President None
Huennekens, James Vice President None
Hussey, Robert Senior Vice President None
Iudice, Jr., Philip Treasurer and CFO None
Ives, Curt Vice President None
Jones, Cynthia Vice President None
Jones, Jonathan Vice President None
Kelley, Terry M. Vice President None
Kelson, David W. Senior Vice President None
Lewis, Blair Vice President None
Libutti, Chris Vice President None
Lynch, Andrew Managing Director None
Lynn, Jerry Vice President None
Martin, John Senior Vice President None
Martin, Peter Vice President None
McCombs, Gregory Senior Vice President None
McKenzie, Mary Vice President None
Menchin, Catherine Senior Vice President None
Miller, Anthony Vice President None
Moberly, Ann R. Senior Vice President None
Morse, Jonathan Vice President None
Nickodemus, Paul Vice President None
O'Shea, Kevin Managing Director None
Palombo, Joseph R. Director None
Piken, Keith Vice President None
Place, Jeffrey Managing Director None
Powell, Douglas Vice President None
Predmore, Tracy Vice President None
Quirk, Frank Vice President None
Raftery-Arpino, Linda Senior Vice President None
Ratto, Gregory Vice President None
Reed, Christopher B. Senior Vice President None
Riegel, Joyce B. Vice President None
Robb, Douglas Vice President None
Sandberg, Travis Vice President None
Santosuosso, Louise Senior Vice President None
Schulman, David Senior Vice President None
Scully-Power, Adam Vice President None
Shea, Terence Vice President None
Sideropoulos, Lou Vice President None
Sinatra, Peter Vice President None
Smith, Darren Vice President None
Soester, Trisha Vice President None
Studer, Eric Vice President None
Sweeney, Maureen Vice President None
Tambone, James Chief Executive Officer None
Tasiopoulos, Lou President None
Torrisi, Susan Vice President None
Vail, Norman Vice President None
VanEtten, Keith H. Senior Vice President None
Warfield, James Vice President None
Wess, Valerie Senior Vice President None
Young, Deborah Vice President None
Zarker, Cynthia E. Senior Vice President None
---------
* The address of Ms. Riegel is One South Wacker Drive, Chicago,
IL 60606. The address of each other director and officer is One
Financial Center, Boston, MA 02111.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
Registrant maintains the records required to be maintained by
it under Rules 31a-1(a), 31a-1(b), and 31a-2(a) under the
Investment Company Act of 1940 at its principal executive
offices at One Financial Center, Boston, MA 02111.
Certain records, including records relating to Registrant's
shareholders and the physical possession of its securities,
may be maintained pursuant to Rule 31a-3 at the main office of
Registrant's transfer agent or custodian.
ITEM 29. MANAGEMENT SERVICES.
None.
ITEM 30. UNDERTAKINGS.
None.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago and State of Illinois on the
2nd day of October, 2000.
LIBERTY-STEIN ROE FUNDS
MUNICIPAL TRUST
By STEPHEN E. GIBSON
Stephen E. Gibson
President
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
------------------------ ------------------- --------------
STEPHEN E. GIBSON President October 2, 2000
Stephen E. Gibson
Principal Executive Officer
JOHN A. BACON JR. Trustee October 2, 2000
John A. Bacon Jr.
WILLIAM W. BOYD Trustee October 2, 2000
William W. Boyd
LINDSAY COOK Trustee October 2, 2000
Lindsay Cook
DOUGLAS A. HACKER Trustee October 2, 2000
Douglas A. Hacker
JANET LANGFORD KELLY Trustee October 2, 2000
Janet Langford Kelly
CHARLES R. NELSON Trustee October 2, 2000
Charles R. Nelson
THOMAS C. THEOBALD Trustee October 2, 2000
Thomas C. Theobald
