<PAGE>
STEIN ROE TAXABLE BOND FUNDS
Intermediate Bond Fund, Class S
Income Fund, Class S
High Yield Fund, Class S
PROSPECTUS
NOV. 1, 2000
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.
<PAGE>
Each fund section contains the following information specific to that fund:
investment goals; principal investment strategies; principal investment risks;
fund performance; and your expenses.
Please keep this prospectus as your reference manual.
3 Intermediate Bond Fund, Class S
8 Income Fund, Class S
13 High Yield Fund, Class S
17 Financial Highlights
20 Your Account
Purchasing Shares
Opening an Account
Determining Share Price
Selling Shares
Exchanging Shares
Fund Policy on Trading of Fund Shares
Reporting to Shareholders
Dividends and Distributions
26 Other Investments and Risks
Initial Public Offerings
Derivative Strategies
Mortgage-Backed Securities
Asset-Backed Securities
When-Issued Securities and Forward Commitments
Zero Coupon Securities
PIK Bonds
Illiquid Investments
Portfolio Turnover
Temporary Defensive Positions
Interfund Lending Program
29 The Funds' Management
Investment Advisor
Portfolio Managers
Master/Feeder Fund Structure
2
<PAGE>
THE FUNDS
INTERMEDIATE BOND FUND, CLASS S
INVESTMENT GOALS Stein Roe Intermediate Bond Fund seeks its total return by
pursuing current income and opportunities for capital appreciation.
PRINCIPALINVESTMENT STRATEGIES Intermediate Bond Fund invests all of its assets
in SR&F Intermediate Bond Portfolio (the "Portfolio") as part of a
master fund/feeder fund structure. The Portfolio invests primarily in:
- debt securities issued by the U.S. government; these include
U.S. Treasury securities and agency securities; agency
securities include certain mortgage-backed securities, which
represent interests in pools of mortgages,
- debt securities of U.S. corporations, and
- mortgage-backed securities and asset-backed securities issued
by private (non-governmental) entities.
The Portfolio will invest at least 60% of its net assets in securities
are higher-quality debt securities rated at the time of purchase:
- at least A by Standard & Poor's,
- at least A by Moody's Investors Service, Inc., or
- with a comparable rating by another nationally recognized
rating agency.
The Portfolio may invest up to 40% of its net assets in securities
rated at the time of purchase:
- BBB and below by Standard & Poor's,
- Baa and below by Moody's Investors Service, Inc., or
- with a comparable rating by another nationally recognized
rating agency.
The Portfolio may invest up to 20% of its net 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.
Normally, the Portfolio expects to maintain a dollar-weighted average
effective maturity of three to 10 years.
The Portfolio seeks to achieve capital appreciation through purchasing
bonds that increase in market value. In addition, to a limited extent,
the Portfolio may seek capital appreciation by using hedging techniques
such as futures and options.
The Portfolio may invest up to 25% of its assets in foreign securities.
The portfolio manager has wide flexibility to vary the allocation among
different types of debt securities based on his judgment of which types
of securities will outperform the others. In determining whether to buy
or sell securities, the portfolio manager evaluates relative values of
the various types of securities in which the Portfolio can invest
(e.g., the relative value of corporate debt securities versus
mortgage-backed securities under prevailing market conditions),
relative values of various rating categories (e.g., relative values of
higher-rated securities versus lower-rated securities under prevailing
market conditions), and individual issuer characteristics. The
portfolio manager may be required to sell portfolio investments to fund
redemptions.
3
<PAGE>
PRINCIPALINVESTMENT 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 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.
Interest rate risk is the risk of a change in the price of a bond when
interest rates increase or decrease. 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.
Because the Portfolio may invest in debt securities issued by private
entities, including corporate bonds and privately issued
mortgage-backed and asset-backed securities, the Fund is subject to
issuer risk. 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.
Structure risk is the risk that an event will occur (such as a security
being prepaid or called) that alters the security's cash flows.
Prepayment risk is a particular type of structure risk that is
associated with investments in mortgage-backed securities. Prepayment
risk is the possibility that, as interest rates fall, homeowners are
more likely to refinance their home mortgages. When mortgages are
refinanced, the principal on mortgage-backed securities is paid earlier
than expected. In an environment of declining interest rates,
mortgage-backed securities may offer less potential for gain than other
debt securities. During periods of rising interest rates,
mortgage-backed securities have a high risk of declining in price
because the declining prepayment rates effectively increase the
maturity of the securities. In addition, the potential impact of
prepayment on the price of a mortgage-backed security may be difficult
to predict and result in greater volatility.
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.
4
<PAGE>
Lower- rated debt securities have the added risk that the issuer of the
security may default and not make payment of interest or principal.
Foreign securities are subject to special risks. Foreign stock markets
can be extremely volatile. Fluctuations in currency exchange rates may
impact the value of foreign securities without a change in the
intrinsic value of those securities. The liquidity of foreign
securities may be more limited than domestic securities, which means
that the Portfolio may, at times, be unable to sell foreign securities
at desirable prices. Brokerage commissions, custodial fees and other
fees are generally higher for foreign investments. In addition, foreign
governments may impose withholding taxes which would reduce the amount
of income and capital gains available to distribute to shareholders.
Other risks include the following: possible delays in the settlement of
transactions or in the notification of income; less publicly available
information about companies; the impact of political, social or
diplomatic events; and possible seizure, expropriation or
nationalization of the company or its assets or imposition of currency
exchange controls
Because the Fund seeks to achieve capital appreciation, you could
receive capital gains distributions. (See "Tax Consequences.")
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.
For more information on the Portfolio's investment techniques, please
refer to "Other Investments and Risks."
WHO SHOULD INVEST IN THE FUND?
You may want to invest in Intermediate Bond Fund if you:
- are looking for a higher level of return potential than
generally offered by short-term money market securities in
exchange for an increased level of risk
- want a mix of government bonds, corporate bonds, and
asset-backed securities that the portfolio manager believes
offers a balance of current income and total return
- are a long-term investor looking to diversify your investment
portfolio by investing in fixed-income securities
Intermediate Bond Fund is not appropriate for investors who:
- want to avoid volatility or possible losses
- are not interested in generating taxable current income
FUND PERFORMANCE The following charts show the Fund's performance for the
past 10 calendar years through Dec. 31, 1999. The returns include the
reinvestment of dividends and distributions. As with all mutual funds,
past performance is no guarantee of future results.
YEAR-BY-YEAR TOTAL RETURNS
Year-by-year calendar total returns show the Fund's volatility over a
period of time. This chart illustrates performance differences for each
calendar year and provides an indication of the risks of investing in
the Fund.
[bar chart]
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20% 16.84%
15% 15.10%
10% 9.17% 9.29%
5% 7.09% 7.69% 4.52% 6.42%
0% 1.27%
-5% -2.55%
--------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
--------------------------------------------------------------------------------
</TABLE>
[/bar chart]
5
<PAGE>
[ ] Intermediate Bond Fund
The Fund's year-to-date total return through Sept. 30, 2000, was 7.35%.
For period shown on the chart above:
Best quarter: 2nd quarter 1995, +5.24%
Worst quarter: 1st quarter 1994, -2.19%
6
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
Average annual total returns measure the Fund's performance over time.
We compare the Fund's returns with returns for the Lehman Brothers
Intermediate Government/Corporate Bond Index. We show returns for
calendar years to be consistent with the way other mutual funds report
performance in their prospectuses. This provides an indication of the
risks of investing in the Fund.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
PERIODS ENDING DEC. 31, 1999
----------------------------
1 YR 5 YR 10 YR
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund 1.27% 7.54% 7.34%
Lehman Brothers Intermediate
Government/Corporate Bond Index* 0.39% 7.09% 7.26%
</TABLE>
*The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged group of securities that differs from the Fund's composition;
it is not available for direct investment.
YOUR EXPENSES This table shows fees and expenses you may pay if you buy and
hold shares of the Fund. You do not pay any sales charge when you
purchase or sell your shares.(a) However, you pay various other
indirect expenses because the Fund or the Portfolio pays fees and other
expenses that reduce your investment return.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(b)
------------------------------------------------------------------------
(expenses that are deducted from Fund assets)
------------------------------------------------------------------------
<S> <C>
Management fees(c) 0.50%
Distribution (12b-1) fees None
Other expenses 0.22%
------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 0.72%
</TABLE>
(a) There is a $7 charge for wiring redemption proceeds to your
bank. A fee of $5 per quarter may be charged to accounts that
fall below the required minimum balance.
(b) Annual fund operating expenses consist of Fund expenses plus
the Fund's share of the expenses of the Portfolio. Fund
expenses include management fees and administrative costs such
as furnishing the Fund with offices and providing tax and
compliance services.
(c) The Portfolio pays a management fee of 0.35% and the Fund pays
an administrative fee of 0.15%.
7
<PAGE>
EXPENSE EXAMPLE
This example compares the cost of investing in the Fund to the cost of
investing in other mutual funds. It uses the same hypothetical
assumptions that other funds use in their prospectuses:
- $10,000 initial investment
- 5% total return each year
- the Fund's operating expenses remain constant as a percent of
net assets
- redemption at the end of each time period
Your actual costs may be higher or lower because in reality fund
returns and other expenses change. This example reflects expenses of
both the Fund and the Portfolio. Expenses based on these assumptions
are:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
EXPENSE EXAMPLE
-------------------------------------------------------------------------------
1 yr 3 yrs 5 yrs 10 yrs
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Intermediate Bond Fund $74 $230 $401 $894
</TABLE>
8
<PAGE>
THE FUNDS
INCOME FUND, CLASS S
INVESTMENT GOALS Stein Roe Income Fund seeks its total return by investing for a
high level of current income and, to a lesser extent, capital
appreciation.
PRINCIPALINVESTMENT STRATEGIES Income Fund invests all of its assets in SR&F
Income Portfolio (the "Portfolio") as part of a master fund/feeder fund
structure. The Portfolio invests primarily in:
- debt securities issued by the U.S. government; these include
U.S. Treasury securities and agency securities; agency
securities include certain mortgage-backed securities, which
represent interests in pools of mortgages,
- debt securities of U.S. corporations,
- mortgage-backed securities and asset-backed securities issued
by private (non-governmental) entities, and
- dollar-denominated debt securities issued by foreign
governments and corporations.
At least 60% of total assets are medium- or higher-quality securities
rated at the time of purchase:
- at least BBB by Standard & Poor's,
- at least Baa by Moody's Investors Service, Inc., or
- with a comparable rating by another nationally recognized
rating agency.
The Portfolio may invest up to 40% of its total assets in lower-rated
or unrated 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.
The Portfolio seeks to achieve capital appreciation through purchasing
bonds that increase in market value. In addition, to a limited extent,
the Portfolio may seek capital appreciation by using hedging techniques
such as futures and options.
The portfolio manager has wide flexibility to vary the allocation among
different types of debt securities based on his judgment of which types
of securities will outperform the others. In determining whether to buy
or sell securities, the portfolio manager evaluates relative values of
the various types of securities in which the Portfolio can invest
(e.g., the relative value of corporate debt securities versus
mortgage-backed securities under prevailing market conditions),
relative values of various rating categories (e.g., relative values of
higher-rated securities versus lower-rated securities under prevailing
market conditions), and individual issuer characteristics. The
portfolio manager may be required to sell portfolio investments to fund
redemptions.
9
<PAGE>
PRINCIPALINVESTMENT 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 goals. You may lose money by investing in the Fund.
Management risk means that the advisor's stock and bond selections and
other investment 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.
Interest rate risk is the risk of changes in the price of a bond when
interest rates increase or decrease. 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.
Because the Portfolio may invest in debt securities issued by private
entities, including corporate bonds and privately issued
mortgage-backed and asset-backed securities, the Fund is subject to
issuer risk. 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 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 and principal.
An economic downturn could severely disrupt the high-yield market and
adversely affect the value of outstanding bonds and the ability of the
issuers to repay principal and interest. In addition, lower-quality
bonds are less sensitive to interest rate changes than higher-quality
instruments and generally are more sensitive to adverse economic
changes or individual corporate developments. During a period of
adverse economic changes, including a period of rising interest rates,
issuers of such bonds may experience difficulty in servicing their
principal and interest payment obligations.
Structure risk is the risk that an event will occur (such as a security
being prepaid or called) that alters the security's cash flows.
Prepayment risk is a particular type of structure risk that is
associated with investments in mortgage-backed securities. Prepayment
risk is the possibility that, as interest rates fall, homeowners are
more likely to refinance their home mortgages. When mortgages are
refinanced, the principal on mortgage-backed securities is paid earlier
than expected. In an environment of declining interest rates,
mortgage-backed securities may offer less potential for gain than other
debt securities. During periods of rising interest rates,
mortgage-backed securities have a high risk of declining in price
because the declining prepayment rates effectively increase the
maturity of the securities. In
10
<PAGE>
addition, the potential impact of prepayment on the price of a
mortgage-backed security may be difficult to predict and result in
greater volatility.
Foreign securities are subject to special risks. Foreign stock markets
can be extremely volatile. Fluctuations in currency exchange rates may
impact the value of foreign securities without a change in the
intrinsic value of those securities. The liquidity of foreign
securities may be more limited than domestic securities, which means
that the Portfolio may, at times, be unable to sell foreign securities
at desirable prices. Brokerage commissions, custodial fees and other
fees are generally higher for foreign investments. In addition, foreign
governments may impose withholding taxes which would reduce the amount
of income and capital gains available to distribute to shareholders.
Other risks include the following: possible delays in the settlement of
transactions or in the notification of income; less publicly available
information about companies; the impact of political, social or
diplomatic events; and possible seizure, expropriation or
nationalization of the company or its assets or imposition of currency
exchange controls.
Because the Fund seeks to achieve capital appreciation, you could
receive capital gains distributions. (See "Tax Consequences.")
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.
For more information on the Portfolio's investment techniques, please
refer to "Other Investments and Risks."
WHO SHOULD INVEST IN THE FUND?
You may want to invest in Income Fund if you:
- want the higher return and income potential offered by
high-yield bonds, but want to balance their greater risk with
a substantial portion of the Fund invested in investment-grade
bonds
- want a balance between return potential and capital
preservation
- are a long-term investor looking to diversify your portfolio
by investing in fixed-income securities
Income Fund is not appropriate for investors who:
- are saving for a short-term investment
- want to avoid volatility or possible losses
- are not interested in generating taxable current income
FUND PERFORMANCE The following charts show the Fund's performance for the
past 10 calendar years through Dec. 31, 1999. The returns include the
reinvestment of dividends and distributions. As with all mutual funds,
past performance is no guarantee of future results.
YEAR-BY-YEAR TOTAL RETURNS
Year-by-year calendar total returns show the Fund's volatility over a
period of time. This chart illustrates performance differences for each
calendar year and provides an indication of the risks of investing in
the Fund.
11
<PAGE>
[bar chart]
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20%
15% 17.18% 19.74%
10% 13.38%
5% 6.08% 9.11% 9.58%
0% 4.82% 4.00%
-5% -3.83% 1.23%
--------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
--------------------------------------------------------------------------------
</TABLE>
[/bar chart]
[ ] Income Fund
The Fund's year-to-date total return through Sept. 30, 2000, was 7.08%.
For period shown on the chart above:
Best quarter: 2nd quarter 1995, +6.52%
Worst quarter: 1st quarter 1994, - 3.18%
AVERAGE ANNUAL TOTAL RETURNS
Average annual total returns measure the Fund's performance over time.
We compare the Fund's returns with returns for the Lehman Brothers
Intermediate Corporate Bond Index. We show returns for calendar years
to be consistent with the way other mutual funds report performance in
their prospectuses. This provides an indication of the risks of
investing in the Fund.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
PERIODS ENDING DEC. 31, 1999
--------------------------------
1 YR 5 YR 10 YR
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Fund 1.23% 7.69% 7.91%
Lehman Brothers Intermediate Corporate Bond
Index* 0.16% 7.79% 7.89%
</TABLE>
*The Lehman Brothers Intermediate Corporate Bond Index is an
unmanaged group of securities that differs from the Fund's
composition; it is not available for direct investment.
12
<PAGE>
YOUR EXPENSES This table shows fees and expenses you may pay if you buy and
hold shares of the Fund.
You do not pay any sales charge when you purchase or sell your
shares.(a) However, you pay various other indirect expenses because the
Fund or the Portfolio pays fees and other expenses that reduce your
investment return.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(b)
-----------------------------------------------------------------------
(expenses that are deducted from Fund assets)
-----------------------------------------------------------------------
<S> <C>
Management fees(c) 0.61%
Distribution (12b-1) fees None
Other expenses 0.25%
-----------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 0.86%
</TABLE>
(a) There is a $7 charge for wiring redemption proceeds to your
bank. A fee of $5 per quarter may be charged to accounts that
fall below the required minimum balance.
(b) Annual fund operating expenses consist of Fund expenses plus
the Fund's share of the expenses of the Portfolio. Fund
expenses include management fees and administrative costs such
as furnishing the Fund with offices and providing tax and
compliance services.
(c) The Portfolio pays a management fee of 0.48% and the Fund pays
an administrative fee of 0.13%.
EXPENSE EXAMPLE
This example compares the cost of investing in the Fund to the cost of
investing in other mutual funds. It uses the same hypothetical
assumptions that other funds use in their prospectuses:
- $10,000 initial investment
- 5% total return each year
- the Fund's operating expenses remain constant as a percent of
net assets
- redemption at the end of each time period
Your actual costs may be higher or lower because in reality fund
returns and other expenses change. This example reflects expenses of
both the Fund and the Portfolio. Expenses based on these assumptions
are:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
EXPENSE EXAMPLE
-------------------------------------------------------------------------------
1 yr 3 yrs 5 yrs 10 yrs
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Fund $88 $274 $477 $1,061
</TABLE>
13
<PAGE>
THE FUNDS
HIGH YIELD FUND, CLASS S
INVESTMENT GOALS Stein Roe High Yield Fund seeks its total return by investing
for a high level of current income and capital appreciation.
PRINCIPALINVESTMENT STRATEGIES High Yield Fund invests all of its assets in SR&F
High Yield Portfolio (the "Portfolio") as part of a master fund/feeder
fund structure. The Portfolio invests at least 65% of total assets in
high-yield, high-risk debt securities. These securities are rated at
the time of purchase:
- below BBB by Standard & Poor's,
- below Baa by Moody's Investors Service, Inc.,
- with a comparable rating by another nationally recognized
rating agency, or
- unrated securities that Stein Roe believes to be of comparable
quality.
The Portfolio may invest in any type of debt securities, including
corporate bonds and mortgage-backed and asset-backed securities.
The Portfolio seeks to achieve capital appreciation through purchasing
bonds that increase in market value. In addition, to a limited extent,
the Portfolio may seek capital appreciation by using hedging techniques
such as futures and options.
Although the Portfolio will invest primarily in debt securities, the
Portfolio may invest in equity securities to seek capital appreciation.
Equity securities include common stocks, preferred stocks, warrants and
debt securities convertible into common stocks.
In determining whether to buy or sell securities, the portfolio manager
evaluates relative values of the various types of securities in which
the Portfolio can invest (e.g., the relative value of corporate debt
securities versus mortgage-backed securities under prevailing market
conditions), relative values of various rating categories (e.g.,
relative values of higher-rated securities versus lower-rated
securities under prevailing market conditions), and individual issuer
characteristics. The portfolio manager may be required to sell
portfolio investments to fund redemptions. The Portfolio may invest in
securities of any maturity.
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 investment 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.
14
<PAGE>
Interest rate risk is the risk of change in the price of a bond when
interest rates change. 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.
Because the Portfolio may invest in debt securities issued by private
entities, including corporate bonds and privately issued
mortgage-backed and asset-backed securities, the Fund is subject to
issuer risk. 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.
An economic downturn could severely disrupt the high-yield market and
adversely affect the value of outstanding bonds and the ability of the
issuers to repay principal and interest. In addition, lower-quality
bonds are less sensitive to interest rate changes than higher-quality
instruments and generally are more sensitive to adverse economic
changes or individual corporate developments. During a period of
adverse economic changes, including a period of rising interest rates,
issuers of such bonds may experience difficulty in servicing their
principal and interest payment obligations.
Because the Fund seeks to achieve capital appreciation, you could
receive capital gains distributions. (See "Tax Consequences.")
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.
For more information on the Portfolio's investment techniques, please
refer to "Other Investments and Risks."
WHO SHOULD INVEST IN THE FUND?
You may want to invest in High Yield Fund if you:
- want the high return potential associated with investing in
lower-rated bonds and can tolerate the high level of risk
associated with such securities
- are a long-term investor looking to diversify your investment
portfolio with high-yield, high-risk fixed-income securities
High Yield Fund is not appropriate for investors who:
- are saving for a short-term investment
- want a relatively low-risk fixed-income investment
- want to avoid volatility or possible losses
- are not interested in generating taxable current income
15
<PAGE>
FUND PERFORMANCE The following charts show the Fund's performance for
calendar years through Dec. 31, 1999. The returns include the
reinvestment of dividends and distributions. As with all mutual funds,
past performance is no guarantee of future results.
YEAR-BY-YEAR TOTAL RETURNS
Year-by-year calendar total returns show the Fund's volatility over a
period of time. This chart illustrates performance differences for each
calendar year and provides an indication of the risks of investing in
the Fund.
[bar chart]
<TABLE>
<CAPTION>
--------------------------------------------
YEAR-BY-YEAR TOTAL
RETURNS
--------------------------------------------
<S> <C> <C> <C>
15% 15.84%
10% 8.21%
5% 4.30%
0%
--------------------------------------------
1997 1998 1999
--------------------------------------------
</TABLE>
[/bar chart]
[ ] High Yield Fund
The Fund's year-to-date total return through Sept. 30, 2000, was
-5.43%.
For period shown on the chart above:
Best quarter: 2nd quarter 1997, +6.38%
Worst quarter: 3rd quarter 1998, -6.38%
AVERAGE ANNUAL TOTAL RETURNS
Average annual total returns measure the Fund's performance over time.
We compare the Fund's returns with returns for the Merrill Lynch High
Yield Master II Index. We show returns for calendar years to be
consistent with the way other mutual funds report performance in their
prospectuses. This provides an indication of the risks of investing in
the Fund.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------------------------------------------------------
PERIODS ENDING DEC. 31, 1999-8
------------------------------
SINCE INCEPTION
1 YR (NOV. 1, 1996)
-------------------------------------------------------------------------------
<S> <C> <C>
High Yield Fund 8.21% 9.78%
Merrill Lynch High Yield Master II Index* 2.51% 6.74%
</TABLE>
*The Merrill Lynch High Yield Master II Index is an unmanaged group
of securities that differs from the Fund's composition; it is not
available for direct investment. Performance information is from Oct.
31, 1996.
16
<PAGE>
YOUR EXPENSES This table shows fees and expenses you may pay if you buy and
hold shares of the Fund.
You do not pay any sales charge when you purchase or sell your
shares.(a) However, you pay various other indirect expenses because the
Fund or the Portfolio pays fees and other expenses that reduce your
investment return.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(b)
-----------------------------------------------------------------------
(expenses that are deducted from Fund assets)
-----------------------------------------------------------------------
<S> <C>
Management fees(c) 0.65%
Distribution (12b-1) fees None
Other expenses 0.54%
-----------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES(d) 1.19%
Expense reimbursement (0.19%)
Net expenses 1.00%
</TABLE>
(a) There is a $7 charge for wiring redemption proceeds to your
bank. A fee of $5 per quarter may be charged to accounts that
fall below the required minimum balance.
(b) Annual fund operating expenses consist of Fund expenses plus
the Fund's share of the expenses of the Portfolio. Fund
expenses include management fees and administrative costs such
as furnishing the Fund with offices and providing tax and
compliance services.
(c) The Portfolio pays a management fee of 0.50% and the Fund pays
an administrative fee of 0.15%.
(d) The Fund's advisor has voluntarily 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 1.00%. As a result, the
actual management fee would be 0.46% and total annual fund
operating expenses 1.00%. This arrangement may be modified or
terminated by the advisor at any time. A reimbursement lowers
the expense ratio and increases overall return to investors.
EXPENSE EXAMPLE
This example compares the cost of investing in the Fund to the cost of
investing in other mutual funds. It uses the same hypothetical
assumptions that other funds use in their prospectuses:
- $10,000 initial investment
- 5% total return each year
- the Fund's operating expenses remain constant as a percent of
net assets
- redemption at the end of each time period
17
<PAGE>
Your actual costs may be higher or lower because in reality fund returns
and other expenses change. This example reflects expenses of both the
Fund and the Portfolio. Expense reimbursements are in effect for the
first year in the periods below. Expenses based on these assumptions are:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
EXPENSE EXAMPLE
--------------------------------------------------------------------------------
1 yr 3 yrs 5 yrs 10 yrs
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High Yield Fund $121 $378 $654 $1,443
</TABLE>
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables explain the Funds' financial
performance. Consistent with other mutual funds, we show information
for the last five fiscal years or for the period of a Fund's operations
(if shorter). Each Fund's fiscal year runs from July 1 to June 30. The
total returns in the tables represent the return that investors earned
assuming that they reinvested all dividends and distributions. Certain
information in the tables reflects the financial results for a single
Fund share. Ernst & Young LLP, independent auditors, audits this
information and issues a report that appears in the Funds' annual
report along with the financial statements. To request the annual
report, please call 800-338-2550.
INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
-----------------------------------------------------------------------------------------------------------------------------------
For years ending June 30,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.63 $ 8.97 $ 8.74 $ 8.58 $ 8.67
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.60 0.56 0.58 0.60 0.59
Net realized and unrealized gain (loss) on investments
and futures transactions (0.22) (0.33) 0.23 0.17 (0.10)
TOTAL INCOME FROM INVESTMENT OPERATIONS 0.38 0.23 0.81 0.77 0.49
DISTRIBUTIONS
Net investment income (0.60) (0.57) (0.58) (0.61) (0.58)
NET ASSET VALUE, END OF PERIOD $ 8.41 $ 8.63 $ 8.97 $ 8.74 $ 8.58
Ratio of net expenses to average net assets (a) 0.72% 0.72% 0.72% 0.73% 0.70%
Ratio of net investment income to average net assets 7.16% 6.31% 6.51% 6.97%(b) 6.79%(b)
Portfolio turnover rate (h) 356%(d) 253%(d) 138%(c) 210% 202%
TOTAL RETURN 4.62% 2.60% 9.51% 9.31%(b) 5.76%(b)
Net assets, end of period (000's) $406,216 $431,123 $437,456 $328,784 $298,112
</TABLE>
19
<PAGE>
INCOME FUND
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
-----------------------------------------------------------------------------------------------------------------------------------
For years ending June 30,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.41 $ 10.03 $ 9.88 $ 9.63 $ 9.79
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.70 0.67 0.69 0.70 0.71
Net realized and unrealized (loss) on investments
(0.26) (0.62) 0.15 0.24 (0.16)
TOTAL INCOME FROM INVESTMENT OPERATIONS 0.44 0.05 0.84 0.95 0.55
DISTRIBUTIONS
Net investment income (0.70) (0.67) (0.69) (0.70) (0.71)
NET ASSET VALUE, END OF PERIOD $ 9.15 $ 9.41 $ 10.03 $ 9.88 $ 9.63
Ratio of net expenses to average net assets (a) 0.86% 0.84% 0.83% 0.84% 0.82%
Ratio of net investment income to average net assets 7.58% 6.91% 6.89% 7.26%(b) 7.26%(b)
Portfolio turnover rate (i) 205%(d) 203%(d) 59%(c) 138%(c) 135%(c)
TOTAL RETURN (b) 4.92% 0.52% 8.72% 10.34%(b) 5.70%(b)
Net assets, end of period (000's) $227,090 $294,640 $448,403 $375,272 $309,564
</TABLE>
20
<PAGE>
HIGH YIELD FUND
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
-----------------------------------------------------------------------------------------------------------------------------------
Period
For years ending ending
June 30, June 30,
-----------------------------------------------------------------------
2000 1999 1998 1997(e)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.15 $ 11.00 $ 10.54 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 1.05 0.85 0.85 0.52
Net realized and unrealized (loss) on investments (1.09) (0.53) 0.61 0.54
TOTAL INCOME FROM INVESTMENT OPERATIONS (0.04) 0.32 1.46 1.06
DISTRIBUTIONS
Net investment income (1.06) (0.85) (0.85) (0.52)
Net realized gains (0.32) (0.15) --
TOTAL DISTRIBUTIONS (1.17) (1.00) (.52)
NET ASSET VALUE, END OF PERIOD $ 9.05 $ 10.15 $ 11.00 $ 10.54
Ratio of net expenses to average net assets (a) 1.00% 1.00% 1.00% 1.00%(f)
Ratio of net investment income to average net assets(b) 10.67% 8.23% 7.79% 8.05%(f)
Portfolio turnover rate 144%(d) 296%(d) 426%(d) 168%(g)
Total return (b) (0.48)% 3.50% 14.38% 10.88%(g)
Net assets, end of period (000 's) $ 35,299 $ 32,766 $ 41,471 $ 13,482
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the Advisor, this ratio would
have been 0.75% for each year ended June 30, 1997 and 1996 for
Intermediate Bond Fund; 0.85% and 0.88% for the years ended
June 30, 1997 and 1996, respectively, for Income Fund; and
1.20%, 1.22% and 1.32% for the years ended June 30, 2000, 1999
and 1998, respectively and 2.29% for the period ended June 30,
1997, for High Yield Fund.
(b) Computed giving effect to the Advisor's expense limitation
undertaking.
(c) Prior to commencement of operations of the Portfolio.
(d) This rate represents the turnover of the Portfolio.
(e) From commencement of operations on Nov. 1, 1996 for High Yield
Fund.
(f) Annualized
(g) Not annualized
(h) For fiscal years from 1996 to 1998, this represents the
portfolio turnover prior to commencement of operations of the
Intermediate Bond Portfolio. For the period from the
commencement of operations of the Portfolio, February 2, 1998
to June 30, 1998, the portfolio turnover for the Portfolio was
86%. For fiscal years 1999 and 2000, this represents the
portfolio turnover for the Portfolio.
21
<PAGE>
(i) For fiscal years from 1996 to 1998, this represents the
portfolio turnover prior to commencement of operations of the
Income Portfolio. For the period from the commencement of
operations of the Portfolio, February 2, 1998 to June 30,
1998, the portfolio turnover for the Portfolio was 77%. For
fiscal years 1999 and 2000, this represents the portfolio
turnover for the Portfolio.
22
<PAGE>
YOUR ACCOUNT
PURCHASING SHARES You will not pay a sales charge when you purchase Fund shares.
Your purchases are made at the net asset value next determined after
the Fund receives your check, wire transfer or electronic transfer. If
a Fund receives your check, wire transfer or electronic transfer after
the close of regular trading on the New York Stock Exchange (NYSE) --
usually 4 p.m. Eastern time -- your purchase is effective on the next
business day.
PURCHASES THROUGH THIRD PARTIES
If you purchase Fund shares through certain broker-dealers, banks or
other intermediaries (intermediaries), they may charge a fee for their
services. They may also place limits on your ability to use services
the Funds offer. There are no charges or limitations if you purchase
shares directly from a Fund, except those fees described in this
prospectus.
If an intermediary is an agent or designee of the Funds, orders are
processed at the net asset value next calculated after the intermediary
receives the order. The intermediary must segregate any orders it
receives after the close of regular trading on the NYSE and transmit
those orders separately for execution at the net asset valuenext
determined.
CONDITIONS OF PURCHASE
An order to purchase Fund shares is not binding unless and until an
authorized officer, agent or designee of the Fund accepts it. Once we
accept your purchase order, you may not cancel or revoke it; however,
you may redeem your shares. A Fund may reject any purchase order if it
determines that the order is not in the best interests of the Fund and
its investors. A Fund may waive or lower its investment minimums for
any reason. If you participate in the Stein Roe Counselor(SM) program
or are a client of Stein Roe Private Capital Management, the minimum
initial investment is determined by those programs.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
ACCOUNT MINIMUMS
--------------------------------------------------------------------------------
MINIMUM TO MINIMUM MINIMUM
TYPE OF ACCOUNT OPEN AN ACCOUNT ADDITION BALANCE
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Regular $2,500 $100 $1,000
Custodial (UGMA/UTMA) $1,000 $100 $1,000
Automatic Investment Plan $1,000 $50 --
Roth and Traditional IRA $500 $50 $500
Educational IRA $500 $50* $500
</TABLE>
*Maximum $500 contribution per calendar year per child.
23
<PAGE>
OPENING AN ACCOUNT
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
OPENING OR ADDING TO AN ACCOUNT
--------------------------------------------------------------------------------------------------------------------
BY MAIL: BY WIRE:
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPENING AN ACCOUNT Complete the application. Mail your application to the address listed
Make check payable to Stein Roe Mutual on the left, then call 800-338-2550 to
Funds. obtain an account number. Include your
Social Security Number. To wire funds, use
Mail application and check to: the instructions below.
SteinRoe Services Inc.
P.O. Box 8900
Boston, MA 02205
ADDING TO AN ACCOUNT Make check payable to Stein Roe Mutual Wire funds to:
Funds. Be sure to write your account
Bank Boston
number on the check. ABA: 011000390
Attn: SSI, Account No. 98227776
Fill out investment slip (stub from your Fund No. __; Stein Roe ____ Fund
statement or confirmation) or include a Your name (exactly as in the
note indicating the amount of your registration).
purchase, your account number, and the name Fund account number.
in which your account is registered. Fund Numbers:
Mail check with investment slip or note to 35 -- Intermediate Bond Fund
the address above. 09 -- Income Fund
15 -- High Yield Fund
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
OPENING OR ADDING TO AN ACCOUNT
-----------------------------------------------------------------------------------------------------------------------
BY ELECTRONIC FUNDS BY EXCHANGE: THROUGH AN
TRANSFER: INTERMEDIARY:
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPENING AN ACCOUNT You cannot open a new account via By mail, phone, or Contact your financial
electronic transfer. automatically (be sure to elect professional.
the Automatic Exchange
Privilege on your application).
ADDING TO AN Call 800-338-2550 to make your By mail, phone, or Contact your financial
ACCOUNT purchase. To set up prescheduled automatically (be sure to elect professional.
purchases, be sure to elect the the Automatic Exchange
Automatic Investment Plan (Stein Roe Privilege on your
application). Asset(SM) Builder) option on your
application.
</TABLE>
All checks must be made payable in U.S. dollars and drawn on U.S.
banks. Money orders and third-party checks will not be accepted.
24
<PAGE>
DETERMINING SHARE PRICE A Fund's share price is its net asset valuenext
determined. Net asset value is the difference between the values of a
Fund's assets and liabilities divided by the number of shares
outstanding. We determine net asset value at the close of regular
trading on the NYSE -- normally 4 p.m. Eastern time. If you place an
order after that time, you receive the share price determined on the
next business day.
Securities for which market quotations are readily available at the
time of valuation are valued on that basis. We value long-term
straight-debt securities for which market quotations are not readily
available at fair value. Pricing services provide the Funds with the
value of the securities. Short-term debt securities with remaining
maturities of 60 days or less are valued at their amortized cost, which
does not take into account unrealized gains or losses. The Board
believes that the amortized cost represents a fair value for such
securities. Short-term debt securities with remaining maturities of
more than 60 days for which market quotations are not readily available
are valued by use of a matrix prepared by Stein Roe based on quotations
for comparable securities. When the price of a security is not
available, including days when we determine that the sale or bid price
of the security does not reflect that security's market value, we value
the security at a fair value determined in good faith under procedures
established by the Board of Trustees.
We value a security at fair value when events have occurred after the
last available market price and before the close of the NYSE that
materially affect the security's price. In the case of foreign
securities, this could include events occurring after the close of the
foreign market and before the close of the NYSE. A Portfolio's foreign
securities may trade on days when the NYSE is closed. We will not price
shares on days that the NYSE is closed for trading. You will not be
able to purchase or redeem shares until the next NYSE-trading day.
25
<PAGE>
SELLING SHARES You may sell your shares any day the Funds are open for business.
Please follow the instructions below.
SELLING SHARES
BY MAIL: Send a letter of instruction, in English,
including your account number and the dollar value
or number of shares you wish to sell. Sign the
request exactly as the account is registered. Be
sure to include a signature guarantee. All
supporting legal documents as required from
executors, trustees, administrators, or others
acting on accounts not registered in their names,
must accompany the request. We will mail the check
to your registered address.
BY PHONE: You may sell your shares by telephone and
request that a check be sent to your address of
record by calling 800-338-2550, unless you have
notified the Fund of an address change within the
previous 30 days. The dollar limit for telephone
redemptions is $100,000 in a 30-day period. This
feature is automatically added to your account
unless you decline it on your application.
BY WIRE: Fill out the appropriate areas of the account
application for this feature. Proceeds of $1,000 or
more ($100,000 maximum) may be wired to your
predesignated bank account. Call 800-338-2550 to
give instructions to Stein Roe. There is a $7
charge for wiring redemption proceeds to your bank.
BY ELECTRONIC TRANSFER: Fill out the appropriate areas
of the account application for this feature. To
request an electronic transfer (not less than $50;
not more than $100,000), call 800-338-2550. We will
transfer your sale proceeds electronically to your
bank. The bank must be a member of the Automated
Clearing House.
BY EXCHANGE: Call 800-338-2550 to exchange any portion of your
Fund shares for shares in any other Stein Roe
no-load fund.
BY AUTOMATIC EXCHANGE: Fill out the appropriate areas
of the account application for this feature. Redeem
a fixed amount on a regular basis (not less than
$50 per month; not more than $100,000) from a Fund
for investment in another Stein Roe no-load fund.
WHAT YOU NEED TO KNOW WHEN SELLING SHARES
Once we receive and accept your order to sell shares, you may not cancel or
revoke it. We cannot accept an order to sell that specifies a particular date or
price or any other special conditions. If you have any questions about the
requirements for selling your shares, please call 800-338-2550 before submitting
your order.
26
<PAGE>
A Fund redeems shares at the net asset value next determined after an
order has been accepted. We mail proceeds within seven days after the
sale. The Funds normally pay wire redemption or electronic transfer
proceeds on the next business day.
We will not pay sale proceeds until your shares are paid for. If you
attempt to sell shares purchased by check or electronic transfer within
15 days of the purchase date, we will delay sending the sale proceeds
until we can verify that those shares are paid for. You may avoid this
delay by purchasing shares by a federal funds wire.
We use procedures reasonably designed to confirm that telephone
instructions are genuine. These include recording the conversation,
testing the identity of the caller by asking for account information,
and sending prompt written confirmation of the transaction to the
shareholder of record. If these procedures are followed, the Fund and
its service providers will not be liable for any losses due to
unauthorized or fraudulent instructions.
If the amount you redeem is in excess of the lesser of (1) $250,000 or
(2) 1% of the Fund's assets, the Fund may pay the redemption "in kind."
This is payment in portfolio securities rather than cash. If this
occurs, you may incur transaction costs when you sell the securities.
INVOLUNTARY REDEMPTION
If your account value falls below $1,000, the Fund may redeem your
shares and send the proceeds to the registered address. You will
receive notice 30 days before this happens. If your account falls below
$10, the Fund may redeem your shares without notice to you.
LOW BALANCE FEE
Due to the expense of maintaining accounts with low balances, if your
account balance falls below $2,000 ($800 for custodial accounts), you
will be charged a low balance fee of $5 per quarter. The low balance
fee does not apply to: (1) shareholders whose accounts in the Stein Roe
Funds total $50,000 or more; (2) Stein Roe IRAs; (3) other Stein Roe
prototype retirement plans; (4) accounts with automatic investment
plans (unless regular investments have been discontinued); or (5)
omnibus or nominee accounts. A Fund can waive the fee, at its
discretion, in the event of significant market corrections.
EXCHANGING SHARES You may exchange Fund shares for shares of other Stein Roe
no-load funds. Call 800-338-2550 to request a prospectus and
application for the fund you wish to exchange into. Please be sure to
read the prospectus carefully before you exchange your shares.
The account you exchange into must be registered exactly the same as
the account you exchange from. You must meet all investment minimum
requirements for the fund you wish to exchange into before we can
process your exchange transaction.
An exchange is a redemption and purchase of shares for tax purposes,
and you may realize a gain or a loss when you exchange Fund shares for
shares of another fund.
We may change, suspend or eliminate the exchange service after
notification to you.
Generally, we limit you to four telephone exchanges "roundtrips" per
year. A roundtrip is an exchange out of a Fund into another Stein Roe
no-load fund and then back to that Fund.
27
<PAGE>
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 increase Fund expenses. 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.
REPORTINGTO SHAREHOLDERS To reduce the volume of mail you receive, only one copy
of certain materials, such as shareholder reports, will be mailed to
your household (same address). Please call 800-338-2550 if you want to
receive additional copies free of charge. This policy may not apply if
you purchase shares through an intermediary.
DIVIDENDSAND DISTRIBUTIONS Each Fund declares dividends daily and pays them
monthly, and any capital gains (including short-term capital gains) at
least annually.
A dividend from net investment income represents the income a Fund
earns from dividends and interest paid on its investments, after
payment of the Fund's expenses.
A capital gain is the increase in value of a security that the
Portfolio holds. The gain is "unrealized" until the security is sold.
Each realized capital gain is either short term or long term depending
on whether the Portfolio held the security for one year or less or more
than one year, regardless of how long you have held your Fund shares.
When a Fund makes a distribution of income or capital gains, the
distribution is automatically invested in additional shares of that
Fund unless you elect on the account application to have distributions
paid by check.
[callout]
OPTIONS FOR RECEIVING DISTRIBUTION AND REDEMPTION PROCEEDS:
- by check
- by electronic transfer into your bank account
- a purchase of shares of another Stein Roe fund
- a purchase of shares in a Stein Roe fund account of another person
[/callout]
If you elect to receive distributions by check and a distribution check
is returned to a Fund as undeliverable, or if you do not present a
distribution check for payment within six months, we will change the
distribution option on your account and reinvest the proceeds of the
check in additional shares of that Fund. You will not receive any
interest on amounts represented by uncashed distribution or redemption
checks.
TAX CONSEQUENCES
You are subject to federal income tax on both dividends and capital
gains distributions whether you elect to receive them in cash or
reinvest them in additional Fund shares. If a Fund declares a
distribution in December, but does not pay it until after December 31,
you will be taxed as if the distribution were paid in December. Stein
Roe will process your distributions and send you a statement for tax
purposes each year showing the source of distributions for the
preceding year.
28
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION TAX STATUS
---------- ----------
<S> <C>
Income dividend Ordinary income
Short-term capital gain distribution Ordinary income
Long-term capital gain distribution Capital gain
Sale of shares owned one year or less Gain is ordinary income;
loss is subject to
special rules
Sale of shares owned more than one year Capital gain or loss
</TABLE>
In addition to the dividends and capital gains distributions made by a
Fund, you may realize a capital gain or loss when selling and
exchanging Fund shares. Such transactions may be subject to federal
income tax.
This tax information provides only a general overview. It does not
apply if you invest in a tax-deferred retirement account such as an
IRA. Please consult your own tax advisor about the tax consequences of
an investment in a Fund.
29
<PAGE>
OTHER INVESTMENTS AND RISKS
A Fund's principal investment strategies and their associated risks are
described above. This section describes other investments a Portfolio
may make and the risks associated with them. In seeking to achieve its
investment goals, a Portfolio may invest in various types of securities
and engage in various investment techniques which are not the principal
focus of the corresponding Fund and therefore are not described in this
prospectus. These types of securities and investment practices are
identified and discussed in the Funds' Statement of Additional
Information, which you may obtain free of charge (see back cover).
Approval by the Funds' shareholders is not required to modify or change
any of the Funds' investment goals or investment strategies.
INITIAL PUBLIC OFFERINGS The High Yield Portfolio may invest a portion of its
assets in certain types of equity securities including securities
offered during a company's initial public offering (IPO). An IPO is
the sale of a company's securities to the public for the first time.
The market price of a security the Portfolio buys in an IPO may change
substantially from the price the Portfolio paid, soon after the IPO
ends. In the short term, the price change may significantly increase
or decrease the Fund's total return, and therefore its performance
history, after an IPO investment. This is especially so when the
Fund's assets are small. However, should the Fund's assets increase,
the results of an IPO investment will not cause the Fund's performance
history to change as much. Although companies can be of any size or
age at the time of their IPO, they are often smaller in size and have
a limited operating history which could create greater market
volatility for the securities. The advisor intends to limit the
Portfolio's IPO investments to issuers whose debt securities the
Portfolio already owns, or issuers which the advisor has specially
researched before the IPO. The Portfolio does not intend to invest
more than 5% of its assets in IPOs and does not intend to buy them for
the purpose of immediately selling (also known as flipping) the
security after its public offering.
DERIVATIVE STRATEGIES Intermediate Bond Portfolio 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 Portfolio may
use these strategies to adjust its 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 Portfolio.
30
<PAGE>
MORTGAGE-BACKED SECURITIES Each Portfolio may invest in mortgage-backed
securities, which are securities that represent ownership interests in
large, diversified pools of mortgage loans. Sponsors pool together
mortgages of similar rates and terms and offer them as a security to
investors.
Most mortgage securities are pooled together and structured as
pass-throughs. Monthly payments of principal and interest from the
underlying mortgage loans backing the pool are collected by a service
and "passed through" regularly to the investor. Pass-throughs can have
a fixed or an adjustable rate. The majority of pass-through securities
are issued by three agencies: Ginnie Mae, Fannie Mae, and Freddie Mac.
Commercial mortgage-backed securities are secured by loans to
commercial properties such as office buildings, multi-family apartment
buildings, and shopping centers. These loans usually contain prepayment
penalties that provide protection from refinancing in a declining
interest rate environment.
Real estate mortgage investment conduits (REMICs) are multiclass
securities that qualify for special tax treatment under the Internal
Revenue Code. REMICs invest in certain mortgages that are secured
principally by interests in real property such as single family homes.
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 Portfolio 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.
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.
ZERO COUPON SECURITIES Intermediate Bond Portfolio and High Yield Portfolio
may invest in zero coupon securities. These securities do not pay
interest in cash on a current basis, but instead accrue 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 a Fund and distributed to its
shareholders.
PIK BONDS High Yield Portfolio may invest in payable-in-kind bonds (PIK
bonds) which are bonds that pay interest in the form of additional
securities. These bonds are subject to greater price volatility than
bonds that pay cash interest on a current basis.
ILLIQUID INVESTMENTS Each Portfolio may invest up to 15% of its net assets in
illiquid investments. An illiquid investment is a security or other
position that cannot be disposed of quickly in the normal course of
business. For example, some securities are not registered under U.S.
securities laws and cannot be sold to the U.S. public because of SEC
regulations (these are known as "restricted securities"). Under
procedures
31
<PAGE>
adopted by the Funds' Trustees, certain restricted securities may be
deemed liquid and will not be counted toward this 15% limit.
PORTFOLIOTURNOVER There are no limits on turnover. Turnover may vary
significantly from year to year. The advisor expects it to exceed 100%
under normal conditions. Each 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 a Fund's return.
TEMPORARYDEFENSIVE POSITIONS At times, the advisor may determine that adverse
market conditions make it desirable to temporarily suspend a Fund's
normal investment activities. During such times, that 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 that Fund from achieving its investment goals.
INTERFUNDLENDING PROGRAM The Funds and Portfolios may lend money to and borrow
money from other funds advised by Stein Roe. They will do so when Stein
Roe believes such lending or borrowing is necessary and appropriate.
Borrowing costs will be the same as or lower than the costs of a bank
loan.
32
<PAGE>
THE FUNDS' MANAGEMENT
INVESTMENT ADVISOR Stein Roe & Farnham Incorporated (Stein Roe), One South
Wacker Drive, Chicago, IL 60606, manages the day-to-day operations of
the Funds and Portfolios. Stein Roe (and its predecessor) has advised
and managed mutual funds since 1949. For the fiscal year ended June 30,
2000, the Funds and Portfolios paid to Stein Roe the following
aggregate fees (as a percent of average net assets of each Fund):
<TABLE>
<CAPTION>
FUND FEE
<S> <C>
Intermediate Bond Fund/Portfolio 0.50%
Income Fund/Portfolio 0.61%
High Yield Fund/Portfolio 0.65%
</TABLE>
Stein Roe's mutual funds and institutional investment advisory
businesses are part of a larger business unit known as Liberty Funds
Group (LFG) that includes several separate legal entities. LFG includes
certain affiliates of Stein Roe, including Colonial Management
Associates, Inc. (Colonial). The LFG business unit is managed by a
single management team. Colonial and other LFG entities also share
personnel, facilities, and systems with Stein Roe that may be used in
providing administrative or operational services to the Funds. Colonial
is a registered investment adviser. Stein Roe also has a wealth
management business that is not part of LFG and is managed by a
different team. Stein Roe and the other entities that make up LFG are
subsidiaries of Liberty Financial Companies, Inc.
PORTFOLIO MANAGERS
INTERMEDIATE BOND FUND
Michael T. Kennedy has been portfolio manager of Intermediate Bond
Portfolio since its inception in 1998 and had been portfolio manager of
Intermediate Bond Fund from 1988 to January 1998. He joined Stein Roe
in 1987 and is a senior vice president. A chartered financial analyst
and a chartered investment counselor, he received his B.S. degree from
Marquette University and his M.M. degree from Northwestern University.
.
INCOME FUND AND HIGH YIELD FUND
Stephen F. Lockman has been manager of High Yield Portfolio since 1997
and of Income Portfolio since its inception in 1998. He was portfolio
manager of Income Fund from 1997 to January 1988, associate manager of
Income Fund from 1995 to 1997, and associate manager of High Yield
Portfolio from November 1996 to February 1997. Mr. Lockman was a senior
research analyst for Stein Roe's fixed income department from 1994,
when he joined Stein Roe, to 1997. He served as portfolio manager for
the Illinois State Board of Investment from 1987 to 1994. A chartered
financial analyst, Mr. Lockman earned a bachelor's degree from the
University of Illinois and a master's degree from DePaul University.
MASTER/FEEDER FUND STRUCTURE Unlike mutual funds that directly acquire and
manage their own portfolios of securities, the Funds are "feeder" funds
in a "master/feeder" structure. This means that the Fund invests its
assets in a larger "master" portfolio of securities (the Portfolio)
which has investment goals and policies substantially identical to
those of the Fund. The investment performance of a Fund depends upon
the investment performance of its Portfolio. If the investment policies
of a Fund and its Portfolio became inconsistent, the Board of Trustees
of the Funds can
33
<PAGE>
decide what actions to take. Actions the Board of Trustees may recommend include
withdrawal of a Fund's assets from the Portfolio. For more information on the
master/feeder fund structure, see the SAI.
34
<PAGE>
FOR MORE INFORMATION
You can obtain more information about the Funds' investments in their semiannual
and annual reports to investors. These reports discuss the market conditions and
investment strategies that affected the Funds' performance over the past six
months and year.
You may wish to read the Funds' SAI for more information. The SAI is
incorporated into this prospectus by reference, which means that it is
considered to be part of this prospectus and you are deemed to have been told of
its contents.
To obtain free copies of the Funds' semiannual and annual reports, latest
quarterly profile, or the SAI or to request other information about the Funds,
write or call:
Stein Roe Mutual Funds
One South Wacker Drive
Suite 3200
Chicago, IL 60606
800-338-2550
www.steinroe.com
Text-only versions of all Fund documents can be viewed online or downloaded from
the SEC at www.sec.gov. You can also obtain copies by visiting the SEC's Public
Reference Room in Washington, DC, by calling 800-SEC-0330, or by sending your
request and the appropriate fee to the SEC's public reference section,
Washington, DC 20549-6009.
Investment Company Act file number:
Liberty-Stein Roe Funds Income Trust: 811-4552
- Stein Roe Intermediate Bond Fund
- Stein Roe Income Fund
- Stein Roe High Yield Fund
LIBERTY FUNDS DISTRIBUTOR, INC.
DIR-01/136D-0900
35
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION DATED NOV. 1, 2000
LIBERTY-STEIN ROE FUNDS INCOME TRUST
MONEY MARKET FUND
STEIN ROE CASH RESERVES FUND
BOND FUNDS
STEIN ROE INTERMEDIATE BOND FUND, CLASS S
STEIN ROE INCOME FUND, CLASS S
STEIN ROE HIGH YIELD FUND, CLASS S
Suite 3300, One South Wacker Drive, Chicago, IL 60606
800-338-2550
This Statement of Additional Information (SAI) is not a prospectus but
provides additional information that should be read in conjunction with the
Funds' Prospectuses dated Nov. 1, 2000 and any supplements thereto. Financial
statements, which are contained in the Funds' June 30, 2000 Annual Reports, are
incorporated by reference into this SAI. A Prospectus and Annual Report may be
obtained at no charge by telephoning 800-338-2550.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
General Information and History..............................................2
Investment Policies..........................................................3
Portfolio Investments and Strategies.........................................4
Investment Restrictions.....................................................20
Additional Investment Considerations........................................23
Purchases and Redemptions...................................................24
Management..................................................................28
Financial Statements........................................................31
Principal Shareholders......................................................31
Investment Advisory and Other Services......................................33
Distributor.................................................................35
Transfer Agent..............................................................36
Custodian...................................................................36
Independent Auditors........................................................36
Portfolio Transactions......................................................37
Additional Income Tax Considerations........................................42
Additional Information on Net Asset Value--Cash Reserves Fund...............42
Investment Performance......................................................43
Master Fund/Feeder Fund: Structure and Risk Factors.........................50
Appendix--Ratings...........................................................52
</TABLE>
<PAGE>
GENERAL INFORMATION AND HISTORY
The following mutual funds are separate series of Liberty-Stein Roe Funds
Income Trust (the "Trust"):
Stein Roe Cash Reserves Fund ("Cash Reserves Fund")
Stein Roe Intermediate Bond Fund ("Intermediate Bond Fund")
Stein Roe Income Fund ("Income Fund")
Stein Roe High Yield Fund ("High Yield Fund")
Each series invests in a separate portfolio of securities and other assets, with
its own objectives and policies. The series of the Trust are referred to
collectively as "the Funds." Intermediate Bond Fund, Income Fund, and High Yield
Fund are referred to collectively as the "Bond Funds." On Nov. 1, 1995, the name
of the Trust and each of its series was changed to separate "SteinRoe" into two
words. The name of the Trust was changed on Oct. 18, 1999, from "Stein Roe
Income Trust" to "Liberty-Stein Roe Funds Income Trust."
Each Fund (with the exeption of Cash Reserves Fund) offers another class of
shares-Class A. This SAI describes the Class S shares of the Funds. A
separate SAI describes the Class A shares of the Funds.
The Trust is a Massachusetts business trust organized under an Agreement
and Declaration of Trust ("Declaration of Trust") dated Jan. 3, 1986, which
provides that each shareholder shall be deemed to have agreed to be bound by the
terms thereof. The Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an unlimited number of
shares, in one or more series as the Board may authorize. Currently, four series
are authorized and outstanding. Each series invests in a separate portfolio of
securities and other assets, with its own objectives and policies.
Under Massachusetts law, shareholders of a Massachusetts business trust
such as the Trust could, in some circumstances, be held personally liable for
unsatisfied obligations of the trust. The Declaration of Trust provides that
persons extending credit to, contracting with, or having any claim against the
Trust or any particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or claim, and that
the shareholders, trustees and officers shall have no personal liability
therefor. The Declaration of Trust requires that notice of such disclaimer of
liability be given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for indemnification of
any shareholder against any loss and expense arising from personal liability
solely by reason of being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to circumstances in which the
disclaimer was inoperative and the Trust was unable to meet its obligations. The
risk of a particular series incurring financial loss on account of unsatisfied
liability of another series of the Trust also is believed to be remote, because
it would be limited to claims to which the disclaimer did not apply and to
circumstances in which the other series was unable to meet its obligations.
Each share of a series, without par value, is entitled to participate pro
rata in any dividends and other distributions declared by the Board on shares of
that series, and all shares of a series have equal rights in the event of
liquidation of that series. Each whole share (or fractional share) outstanding
on the record date established in accordance with the By-Laws shall be entitled
to a number of votes on any matter on which it is entitled to vote equal to the
net asset value of the share (or fractional share) in United States dollars
determined at the close of business on the record date (for example, a share
having a net asset value of $10.50 would be entitled to 10.5 votes).
2
<PAGE>
As a business trust, the Trust is not required to hold annual shareholder
meetings. However, special meetings may be called for purposes such as electing
or removing trustees, changing fundamental policies, or approving an investment
advisory contract. If requested to do so by the holders of at least 10% of its
outstanding shares, the Trust will call a special meeting for the purpose of
voting upon the question of removal of a trustee or trustees and will assist in
the communications with other shareholders as if the Trust were subject to
Section 16(c) of the Investment Company Act of 1940. All shares of all series of
the Trust are voted together in the election of trustees. On any other matter
submitted to a vote of shareholders, shares are voted in the aggregate and not
by individual series, except that shares are voted by individual series when
required by the Investment Company Act of 1940 or other applicable law, or when
the Board of Trustees determines that the matter affects only the interests of
one or more series, in which case shareholders of the unaffected series are not
entitled to vote on such matters.
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND STRUCTURE
Rather than invest in securities directly, each Fund seeks to achieve its
objective by pooling its assets with those of other investment companies for
investment in another mutual fund having the identical investment objective and
substantially the same investment policies as its feeder funds. The purpose of
such an arrangement is to achieve greater operational efficiencies and reduce
costs. Each Fund invests all of its assets in a separate master fund that is a
series of SR&F Base Trust, as follows:
<TABLE>
<CAPTION>
MASTER/FEEDER STATUS
FEEDER FUND MASTER FUND ESTABLISHED
----------- ----------- --------------------
<S> <C> <C>
Cash Reserves Fund SR&F Cash Reserves Portfolio ("Cash Reserves Portfolio") March 2, 1998
Intermediate Bond Fund SR&F Intermediate Bond Portfolio ("Intermediate Bond Portfolio") Feb. 2, 1998
Income Fund SR&F Income Portfolio ("Income Portfolio") Feb. 2, 1998
High Yield Fund SR&F High Yield Portfolio ("High Yield Portfolio") Nov. 1, 1996
</TABLE>
The master funds are referred to collectively as the "Portfolios." Intermediate
Bond Portfolio, Income Portfolio, and High Yield Portfolio are referred to
collectively as the "Bond Portfolios." For more information, please refer to
Master Fund/Feeder Fund: Structure and Risk Factors.
Stein Roe & Farnham Incorporated ("Stein Roe") provides administrative and
accounting and recordkeeping services to the Funds and Portfolios and provides
investment management services to each Portfolio.
INVESTMENT POLICIES
The Trust and SR&F Base Trust are open-end management investment companies.
The Funds and the Portfolios are diversified, as that term is defined in the
Investment Company Act of 1940.
The investment objectives and policies are described in the Prospectus
under The Funds. In pursuing its objective, a Portfolio may also employ the
investment techniques described under Portfolio Investments and Strategies in
this SAI. The
3
<PAGE>
investment objective is a nonfundamental policy and may be changed by the Board
of Trustees without the approval of a "majority of the outstanding voting
securities."(1)
PORTFOLIO INVESTMENTS AND STRATEGIES
DERIVATIVES
Consistent with its objective, each Bond Portfolio 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.
High Yield Portfolio does not currently intend to invest more than 5% of
its net assets in any type of Derivative except options, futures contracts, and
futures options. Income Portfolio does not currently intend to invest, nor has
it during its past fiscal year invested, more than 5% of its net assets in any
type of Derivative EXCEPT options, futures contracts, and futures options.
Intermediate Bond Portfolio does not currently intend to invest, nor has it
during its past fiscal year invested, more than 5% of its net assets in any type
of Derivative EXCEPT options, futures contracts, futures options and obligations
collateralized by either mortgages or other assets. (See Mortgage and Other
Asset-Backed Securities, Variable and Floating Rate Instruments, and Options and
Futures below.)
INTEREST RATE SWAPS, CAPS AND FLOORS
The Intermediate Bond Portfolio may enter into interest rate swaps or purchase
or sell interest rate caps or floors. The Portfolio will not sell interest rate
caps or floors that it does not own. Interest rate swaps involve the exchange by
the Portfolio with another party of their respective obligations to pay or
receive interest; e.g., an exchange of an obligation to make floating rate
payments for an obligation to make fixed rate payments. For example, the
Portfolio may seek to shorten the effective interest rate redetermination period
of a Senior Loan to a Borrower that has selected an interest rate
redetermination period of one year. The Portfolio could exchange the Borrower's
obligation to make fixed rate payments for one year for an obligation to make
payments that readjust monthly. In such event, the Portfolio would consider the
interest rate redetermination period of such Senior Loan to be the shorter
period.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest at the difference between the index and the predetermined rate on a
notional principal amount (the reference amount with respect to which interest
obligations are determined although no actual exchange of principal occurs) from
the party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest at the difference
between the index and the predetermined rate on a notional principal amount from
the party selling such interest rate floor. The Portfolio will not enter into
swaps, caps or floors, if, on a net basis, the aggregate notional principal
amount with respect to such agreements exceeds the net assets of the Portfolio.
In circumstances in which Stein Roe anticipates that interest rates will
decline, the Portfolio might, for example, enter into an interest rate swap as
the floating rate payor or, alternatively, purchase an interest rate floor. In
the case of purchasing an interest rate floor, if interest rates declined below
the floor rate, the Portfolio would receive payments from its counterparty that
would wholly or partially offset the decrease in the payments it would receive
with respect to the portfolio assets being hedged. In the case where the
Portfolio purchases such an interest rate swap, if the floating rate payments
fell below the level of the fixed rate payment set in the swap agreement, the
Portfolio's counterparty would pay the Portfolio amounts equal to interest
computed at the difference between the fixed and floating rates over the
notional principal amount. Such payments would offset or partially offset the
decrease in the payments the Portfolio would receive with respect to floating
rate portfolio assets being hedged.
The successful use of swaps, caps and floors to preserve the rate of return on a
portfolio of Senior Loans depends on Stein Roe's ability to predict correctly
the direction and extent of movements in interest rates. Although Stein Roe
believes that use of the hedging and risk management techniques described above
will benefit the Portfolio, if Stein Roe's judgment about the direction or
extent of the movement in interest rates is incorrect, the Portfolio's overall
performance could be worse than if it had not entered into any such transaction.
For example, if the Portfolio had purchased an interest rate swap or an interest
rate floor to hedge against its expectation that interest rates would decline
but instead interest rates rose, the Portfolio would lose part or all of the
benefit of the increased payments it would receive as a result of the rising
interest rates because it would have to pay amounts to its counterparty under
the swap agreement or would have paid the purchase price of the interest rate
floor.
Inasmuch as these hedging transactions are entered into for good-faith risk
management purposes, Stein Roe and the Portfolio believe such obligations do not
constitute senior securities. The Portfolio will usually enter into interest
rate swaps on a net basis; i.e., where the two parties make net payments with
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap will
be accrued and an amount of cash or liquid securities having an aggregate net
asset value at least equal to the accrued excess will be maintained. If the
Portfolio enters into a swap on other than a net basis, the Portfolio will
maintain the full amount of its obligations under each such swap. Accordingly,
the Portfolio does not treat swaps as senior securities. The Portfolio may enter
into swaps, caps and floors with member banks of the Federal Reserve System,
members of the New York Stock Exchange (NYSE) or other entities determined to be
creditworthy by Stein Roe, pursuant to procedures adopted and reviewed on an
ongoing basis by the Board. If a default occurs by the other party to such
transactions, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction, but such remedies may be subject to
bankruptcy and insolvency laws that could affect the Portfolio's rights as a
creditor. The swap market has grown substantially in recent years with a large
number of banks and financial services firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid. Caps and floors are more recent innovations and
they are less liquid than swaps. There can be no assurance, however, that the
Portfolio will be able to enter into interest rate swaps or to purchase interest
rate caps or floors at prices or on terms Stein Roe believes are advantageous to
the Portfolio. In addition, although the terms of interest rate swaps, caps and
floors may provide for termination, there can be no assurance that the Portfolio
will be able to terminate an interest rate swap or to sell or offset interest
rate caps or floors that it has purchased.
MEDIUM- AND LOWER-QUALITY DEBT SECURITIES
Each Bond Portfolio may invest in medium- and lower-quality debt
securities. Medium-quality debt securities, although considered investment
grade, have some speculative characteristics. Lower-quality securities, commonly
referred to as "junk bonds," are those rated below the fourth highest rating
category or bond of comparable quality.
Investment in medium- or lower-quality debt securities involves greater
investment risk, including the possibility of issuer default or bankruptcy. A
Portfolio
------------------------
(1) A "majority of the outstanding voting securities" means the approval of the
lesser of (i) 67% or more of the shares at a meeting if the holders of more than
50% of the outstanding shares are present or represented by proxy or (ii) more
than 50% of the outstanding shares.
4
<PAGE>
seeks to reduce investment risk through diversification, credit analysis, and
evaluation of developments in both the economy and financial markets.
An economic downturn could severely disrupt the high-yield market and
adversely affect the value of outstanding bonds and the ability of the issuers
to repay principal and interest. In addition, lower-quality bonds are less
sensitive to interest rate changes than higher-quality instruments and generally
are more sensitive to adverse economic changes or individual corporate
developments. During a period of adverse economic changes, including a period of
rising interest rates, issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.
Lower-quality debt securities are obligations of issuers that are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the possibility of issuer
default and bankruptcy, and are commonly referred to as "junk bonds." The lowest
rating assigned by Moody's is for bonds that can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
Achievement of the investment objective will be more dependent on Stein
Roe's credit analysis than would be the case if a Portfolio were investing in
higher-quality debt securities. Since the ratings of rating services (which
evaluate the safety of principal and interest payments, not market risks) are
used only as preliminary indicators of investment quality, Stein Roe employs its
own credit research and analysis, from which it has developed a proprietary
credit rating system based upon comparative credit analyses of issuers within
the same industry. These analyses may take into consideration such quantitative
factors as an issuer's present and potential liquidity, profitability, internal
capability to generate funds, debt/equity ratio and debt servicing capabilities,
and such qualitative factors as an assessment of management, industry
characteristics, accounting methodology, and foreign business exposure.
Medium- and lower-quality debt securities tend to be less marketable than
higher-quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and a Portfolio may have greater difficulty selling its
portfolio securities. The market value of these securities and their liquidity
may be affected by adverse publicity and investor perceptions.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES
Each Bond Portfolio may invest in securities secured by mortgages or other
assets such as automobile or home improvement loans and credit card receivables.
These instruments may be issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities or by private entities such as commercial,
mortgage and investment banks and financial companies or financial subsidiaries
of industrial companies.
Mortgage-backed securities provide either a pro rata interest in underlying
mortgages or an interest in collateralized mortgage obligations ("CMOs") which
represent a right to interest and/or principal payments from an underlying
mortgage pool. CMOs are not guaranteed by either the U.S. Government or by its
agencies or
5
<PAGE>
instrumentalities, and are usually issued in multiple classes each of which has
different payment rights, prepayment risks and yield characteristics.
Mortgage-backed securities involve the risk of prepayment on the underlying
mortgages at a faster or slower rate than the established schedule. Prepayments
generally increase with falling interest rates and decrease with rising rates
but they also are influenced by economic, social and market factors. If
mortgages are prepaid during periods of declining interest rates, there would be
a resulting loss of the full-term benefit of any premium paid by the Portfolio
on purchase of the CMO, and the proceeds of prepayment would likely be invested
at lower interest rates. The Portfolios tend to invest in CMOs of classes known
as planned amortization classes ("PACs") which have prepayment protection
features tending to make them less susceptible to price volatility.
Non-mortgage asset-backed securities usually have less prepayment risk than
mortgage-backed securities, but have the risk that the collateral will not be
available to support payments on the underlying loans which finance payments on
the securities themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
REMICs
Each Bond Portfolio may invest in real estate mortgage investment conduits
("REMICs"). REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. A REMIC is a CMO that qualifies for
special tax treatment under the Internal Revenue Code and invests in certain
mortgages principally secured by interests in real property. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests,
or "residual" interests. Guaranteed REMIC pass-through certificates ("REMIC
Certificates") issued by FNMA or FHLMC represent beneficial ownership interests
in a REMIC trust consisting principally of mortgage loans or FNMA-, FHLMC- or
GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC
Certificates, FHLMC guarantees the timely payment of interest and also
guarantees the payment of principal as payments are required to be made on the
underlying mortgage participation certificates. FNMA REMIC Certificates are
issued and guaranteed as to timely distribution and principal and interest by
FNMA.
VARIABLE AND FLOATING RATE INSTRUMENTS
In accordance with its investment objective and policies, Cash Reserves
Portfolio may invest in variable and floating rate money market instruments
which provide for periodic or automatic adjustments in coupon interest rates
that are reset based on changes in amount and direction of specified short-term
interest rates. Cash Reserves Portfolio will not invest in a variable or
floating rate instrument unless Stein Roe determines that as of any reset date
the market value of the instrument can reasonably be expected to approximate its
par value.
Each Bond Portfolio may invest in floating rate instruments which 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
6
<PAGE>
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%.
Neither Income Portfolio nor High Yield Portfolio intends to invest more than 5%
of its net assets in floating rate instruments. Intermediate Bond Portfolio does
not intend to invest more than 10% of its net assets in floating rate
instruments.
LENDING OF PORTFOLIO SECURITIES
Subject to restriction (7) under Investment Restrictions, each Bond
Portfolio may lend its portfolio securities to broker-dealers and banks. Any
such loan must be continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the market value of
the securities loaned. The Portfolio would continue to receive the equivalent of
the interest or dividends paid by the issuer on the securities loaned, and would
also receive an additional return that may be in the form of a fixed fee or a
percentage of the collateral. The Portfolio would have the right to call the
loan and obtain the securities loaned at any time on notice of not more than
five business days. In the event of bankruptcy or other default of the borrower,
the Portfolio could experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses including (a) possible decline in
the value of the collateral or in the value of the securities loaned during the
period while the Portfolio seeks to enforce its rights thereto, (b) possible
subnormal levels of income and lack of access to income during this period, and
(c) expenses of enforcing its rights.
No Bond Portfolio has loaned portfolio securities during its last fiscal
year, nor does it intend to loan more than 5% of its net assets.
REPURCHASE AGREEMENTS
Each Portfolio may invest in repurchase agreements, provided that it will
not invest more than 15% (10% in the case of Cash Reserves Portfolio) of net
assets in repurchase agreements maturing in more than seven days and any other
illiquid securities. A repurchase agreement is a sale of securities to a
Portfolio in which the seller agrees to repurchase the securities at a higher
price, which includes an amount representing interest on the purchase price,
within a specified time. In the event of bankruptcy of the seller, a Portfolio
could experience both losses and delays in liquidating its collateral.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; REVERSE REPURCHASE AGREEMENTS;
STANDBY COMMITMENTS
Each Portfolio may purchase instruments on a when-issued or
delayed-delivery basis. Although the payment terms are established at the time
it enters into the commitment, the instruments may be delivered and paid for
some time after the date of purchase, when their value may have changed and the
yields available in the market may be greater. They will make such commitments
only with the intention of actually acquiring the instruments, but may sell them
before settlement date if it is deemed advisable for investment reasons.
Securities purchased in this manner involve risk of loss if the value of the
security purchased declines before settlement date.
Securities purchased by a Bond Portfolio on a when-issued or
delayed-delivery basis are sometimes done on a "dollar roll" basis. Dollar roll
transactions consist of
7
<PAGE>
the sale of securities with a commitment to purchase similar but not identical
securities, generally at a lower price at a future date. A dollar roll may be
renewed after cash settlement and initially may involve only a firm commitment
agreement by a Portfolio to buy a security. A dollar roll transaction involves
the following risks: if the broker-dealer to whom a Portfolio sells the security
becomes insolvent, the Portfolio's right to purchase or repurchase the security
may be restricted; the value of the security may change adversely over the term
of the dollar roll; the security which a Portfolio is required to repurchase may
be worth less than a security which the Portfolio originally held; and the
return earned by a Portfolio with the proceeds of a dollar roll may not exceed
transaction costs.
Each Bond Portfolio may enter into reverse repurchase agreements with banks
and securities dealers. A reverse repurchase agreement is a repurchase agreement
in which the Portfolio is the seller of, rather than the investor in, securities
and agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
A standby commitment is a delayed-delivery agreement in which the Portfolio
binds itself to accept delivery of and to pay for an instrument within a
specified period at the option of the other party to the agreement. Standby
commitment agreements create an additional risk because the other party to the
standby agreement generally will not be obligated to deliver the security, but
the Portfolio will be obligated to accept it if delivered. Depending on market
conditions, the Portfolio may receive a commitment fee for assuming this
obligation. If prevailing market interest rates increase during the period
between the date of the agreement and the settlement date, the other party can
be expected to deliver the security and, in effect, pass any decline in value to
the Portfolio. If the value of the security increases after the agreement is
made, however, the other party is unlikely to deliver the security. In other
words, a decrease in the value of the securities to be purchased under the terms
of a standby commitment agreement will likely result in the delivery of the
security, and, therefore, such decrease will be reflected in the net asset
value. However, any increase in the value of the securities to be purchased will
likely result in the non-delivery of the security and, therefore, such increase
will not affect the net asset value unless and until the Portfolio actually
obtains the security.
At the time a Portfolio enters into a binding obligation to purchase
securities on a when-issued basis or enters into a reverse repurchase agreement
or standby commitment, liquid assets (cash, U.S. Government or other "high
grade" debt obligations) of the Portfolio having a value at least as great as
the purchase price of the securities to be purchased is segregated on the books
of the Portfolio and held by the custodian throughout the period of the
obligation. The use of these investment strategies, as well as borrowing under a
line of credit as described below, may increase net asset value fluctuation.
SHORT SALES AGAINST THE BOX
Each Portfolio may sell securities short against the box; that is, enter
into short sales of securities that it currently owns or has the right to
acquire through the conversion or exchange of other securities that it owns at
no additional cost. A Portfolio may make short sales of securities only if at
all times when a short position is open the Portfolio owns at least an equal
amount of such securities or securities
8
<PAGE>
convertible into or exchangeable for securities of the same issue as, and equal
in amount to, the securities sold short, at no additional cost.
In a short sale against the box, a Portfolio does not deliver from its
portfolio the securities sold. Instead, the Portfolio borrows the securities
sold short from a broker-dealer through which the short sale is executed, and
the broker-dealer delivers such securities, on behalf of the Portfolio, to the
purchaser of such securities. The Portfolio is required to pay to the
broker-dealer the amount of any dividends paid on shares sold short. Finally, to
secure its obligation to deliver to such broker-dealer the securities sold
short, the Portfolio must deposit and continuously maintain in a separate
account with its custodian an equivalent amount of the securities sold short or
securities convertible into or exchangeable for such securities at no additional
cost. A Portfolio is said to have a short position in the securities sold until
it delivers to the broker-dealer the securities sold. A Portfolio may close out
a short position by purchasing on the open market and delivering to the
broker-dealer an equal amount of the securities sold short, rather than by
delivering portfolio securities.
Short sales may protect a Portfolio against the risk of losses in the value
of its portfolio securities because any unrealized losses with respect to such
portfolio securities should be wholly or partially offset by a corresponding
gain in the short position. However, any potential gains in such portfolio
securities should be wholly or partially offset by a corresponding loss in the
short position. The extent to which such gains or losses are offset will depend
upon the amount of securities sold short relative to the amount the Portfolio
owns, either directly or indirectly, and, in the case where the Portfolio owns
convertible securities, changes in the conversion premium.
Short sale transactions involve certain risks. If the price of the security
sold short increases between the time of the short sale and the time a Portfolio
replaces the borrowed security, the Portfolio will incur a loss and if the price
declines during this period, it will realize a short-term capital gain. Any
realized short-term capital gain will be decreased, and any incurred loss
increased, by the amount of transaction costs and any premium, dividend or
interest which the Portfolio may have to pay in connection with such short sale.
Certain provisions of the Internal Revenue Code may limit the degree to which a
Portfolio is able to enter into short sales. There is no limitation on the
amount of a Portfolio's assets that, in the aggregate, may be deposited as
collateral for the obligation to replace securities borrowed to effect short
sales and allocated to segregated accounts in connection with short sales. No
Portfolio currently expects that more than 5% of its total assets would be
involved in short sales against the box.
LINE OF CREDIT
Subject to restriction (8) under Investment Restrictions, each Fund and
Portfolio 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 borrowing may be preferable to liquidation of
portfolio securities.
INTERFUND BORROWING AND LENDING PROGRAM
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Portfolios may lend money to and borrow money from other mutual
funds advised by Stein Roe. A Portfolio 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.
9
<PAGE>
PIK AND ZERO COUPON BONDS
Each Bond Portfolio may invest in both zero coupon bonds and bonds the
interest on which is payable in kind ("PIK bonds"). A zero coupon bond is a bond
that does not pay interest for its entire life. A PIK bond pays interest in the
form of additional securities. The market prices of both zero coupon and PIK
bonds are affected to a greater extent by changes in prevailing levels of
interest rates and thereby tend to be more volatile in price than securities
that pay interest periodically and in cash. In addition, because a Portfolio
accrues income with respect to these securities prior to the receipt of such
interest in cash, it may have to dispose of portfolio securities under
disadvantageous circumstances in order to obtain cash needed to pay income
dividends in amounts necessary to avoid unfavorable tax consequences. High Yield
Portfolio may invest up to 20% of its total assets in PIK and zero coupon bonds.
RATED SECURITIES
For a description of the ratings applied by Moody's and S&P (two of the
approved NRSROs) to debt securities, please refer to the Appendix. The rated
debt securities for a Portfolio include securities given a rating conditionally
by Moody's or provisionally by S&P. If the rating of a security held by a
Portfolio is withdrawn or reduced, the Portfolio is not required to sell the
security, but Stein Roe will consider such fact in determining whether that
Portfolio should continue to hold the security. To the extent that the ratings
accorded by a NRSRO for debt securities may change as a result of changes in
such organizations, or changes in their rating systems, each Portfolio will
attempt to use comparable ratings as standards for its investments in debt
securities in accordance with its investment policies.
FOREIGN SECURITIES
Cash Reserves Portfolio may invest in securities of foreign branches of
U.S. banks (Eurodollars), U.S. branches of foreign banks (Yankee dollars), and
foreign banks and their foreign branches, such as negotiable certificates of
deposit; securities of foreign governments; and securities of foreign issuers,
such as commercial paper and corporate notes, bonds and debentures. Each Bond
Portfolio may invest up to 25% of total assets (taken at market value at the
time of investment) in securities of foreign issuers that are not publicly
traded in the United States ("foreign securities"). For purposes of these
limits, foreign securities do not include securities represented by American
Depositary Receipts ("ADRs"), foreign debt securities denominated in U.S.
dollars, or securities guaranteed by U.S. persons. Investment in foreign
securities may involve a greater degree of risk (including risks relating to
exchange fluctuations, tax provisions, or expropriation of assets) than does
investment in securities of domestic issuers.
The Portfolios may invest in both "sponsored" and "unsponsored" ADRs. In a
sponsored ADR, the issuer typically pays some or all of the expenses of the
depositary and agrees to provide its regular shareholder communications to ADR
holders. An unsponsored ADR is created independently of the issuer of the
underlying security. The ADR holders generally pay the expenses of the
depositary and do not have an undertaking from the issuer of the underlying
security to furnish shareholder communications. No Portfolio expects to invest
as much as 5% of its total assets in unsponsored ADRs.
With respect to portfolio securities that are issued by foreign issuers or
denominated in foreign currencies, the investment performance is affected by the
strength or
10
<PAGE>
weakness of the U.S. dollar against these currencies. For example, if the dollar
falls in value relative to the Japanese yen, the dollar value of a
yen-denominated stock held in the portfolio will rise even though the price of
the stock remains unchanged. Conversely, if the dollar rises in value relative
to the yen, the dollar value of the yen-denominated stock will fall. (See
discussion of transaction hedging and portfolio hedging under Currency Exchange
Transactions.)
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, positions which are
generally denominated in foreign currencies, and utilization of forward foreign
currency exchange contracts involve certain considerations comprising both risks
and opportunities not typically associated with investing in U.S. securities.
These considerations include: fluctuations in exchange rates of foreign
currencies; possible imposition of exchange control regulation or currency
restrictions that would prevent cash from being brought back to the United
States; less public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers, and issuers of
securities; lack of uniform accounting, auditing, and financial reporting
standards; lack of uniform settlement periods and trading practices; less
liquidity and frequently greater price volatility in foreign markets than in the
United States; possible imposition of foreign taxes; possible investment in
securities of companies in developing as well as developed countries; and
sometimes less advantageous legal, operational, and financial protections
applicable to foreign sub-custodial arrangements.
Although the Portfolios will try to invest in companies and governments of
countries having stable political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the adoption
of foreign government restrictions, or other adverse political, social or
diplomatic developments that could affect investment in these nations.
Currency Exchange Transactions. Currency exchange transactions may be
conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market or through forward
currency exchange contracts ("forward contracts"). Forward contracts are
contractual agreements to purchase or sell a specified currency at a specified
future date (or within a specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks and
broker-dealers, are not exchange traded, and are usually for less than one year,
but may be renewed.
The Portfolios' foreign currency exchange transactions are limited to
transaction and portfolio hedging involving either specific transactions or
portfolio positions, except to the extent described below under Synthetic
Foreign Positions. Transaction hedging is the purchase or sale of forward
contracts with respect to specific receivables or payables of a Portfolio
arising in connection with the purchase and sale of its portfolio securities.
Portfolio hedging is the use of forward contracts with respect to portfolio
security positions denominated or quoted in a particular foreign currency.
Portfolio hedging allows the Portfolio to limit or reduce its exposure in a
foreign currency by entering into a forward contract to sell such foreign
currency (or another foreign currency that acts as a proxy for that currency) at
a future date for a price payable in U.S. dollars so that the value of the
foreign-denominated portfolio securities can be approximately matched by a
foreign-denominated liability. A Portfolio may not engage in portfolio hedging
with respect to the currency of a particular country to an extent greater than
the aggregate market value (at the time of
11
<PAGE>
making such sale) of the securities held in its portfolio denominated or quoted
in that particular currency, except that a Portfolio may hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currencies or currency act as an effective proxy for
other currencies. In such a case, a Portfolio may enter into a forward contract
where the amount of the foreign currency to be sold exceeds the value of the
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in a Portfolio. No Portfolio may engage
in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a particular currency, a
Portfolio may either sell the portfolio security related to such contract and
make delivery of the currency, or it may retain the security and either acquire
the currency on the spot market or terminate its contractual obligation to
deliver the currency by purchasing an offsetting contract with the same currency
trader obligating it to purchase on the same maturity date the same amount of
the currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for a Portfolio to purchase additional currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of currency it is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Portfolio is obligated to deliver.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss to the extent that there
has been movement in forward contract prices. If a Portfolio engages in an
offsetting transaction, it may subsequently enter into a new forward contract to
sell the currency. Should forward prices decline during the period between a
Portfolio's entering into a forward contract for the sale of a currency and the
date it enters into an offsetting contract for the purchase of the currency, it
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, a Portfolio will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive a Portfolio of
unrealized profits or force the Portfolio to cover its commitments for purchase
or sale of currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for a Portfolio to hedge against a devaluation that is so
generally anticipated that the Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to a
Portfolio of engaging in currency exchange transactions varies with such factors
as the currency involved, the length of the contract period, and prevailing
market conditions. Since currency exchange transactions are usually conducted on
a principal basis, no fees or commissions are involved.
Synthetic Foreign Positions. The Portfolios may invest in debt instruments
denominated in foreign currencies. In addition to, or in lieu of, such direct
investment,
12
<PAGE>
a Portfolio may construct a synthetic foreign position by (a) purchasing a debt
instrument denominated in one currency, generally U.S. dollars, and (b)
concurrently entering into a forward contract to deliver a corresponding amount
of that currency in exchange for a different currency on a future date and at a
specified rate of exchange. Because of the availability of a variety of highly
liquid U.S. dollar debt instruments, a synthetic foreign position utilizing such
U.S. dollar instruments may offer greater liquidity than direct investment in
foreign currency debt instruments. The results of a direct investment in a
foreign currency and a concurrent construction of a synthetic position in such
foreign currency, in terms of both income yield and gain or loss from changes in
currency exchange rates, in general should be similar, but would not be
identical because the components of the alternative investments would not be
identical.
The Portfolios may also construct a synthetic foreign position by entering
into a swap arrangement. A swap is a contractual agreement between two parties
to exchange cash flows--at the time of the swap agreement and again at maturity,
and, with some swaps, at various intervals through the period of the agreement.
The use of swaps to construct a synthetic foreign position would generally
entail the swap of interest rates and currencies. A currency swap is a
contractual arrangement between two parties to exchange principal amounts in
different currencies at a predetermined foreign exchange rate. An interest rate
swap is a contractual agreement between two parties to exchange interest
payments on identical principal amounts. An interest rate swap may be between a
floating and a fixed rate instrument, a domestic and a foreign instrument, or
any other type of cash flow exchange. A currency swap generally has the same
risk characteristics as a forward currency contract, and all types of swaps have
counter-party risk. Depending on the facts and circumstances, swaps may be
considered illiquid. Illiquid securities usually have greater investment risk
and are subject to greater price volatility. The net amount of the excess, if
any, of a Portfolio's obligations over which it is entitled to receive with
respect to an interest rate or currency swap will be accrued daily and liquid
assets (cash, U.S. Government securities, or other "high grade" debt
obligations) of the Portfolio having a value at least equal to such accrued
excess will be segregated on the books of the Portfolio and held by the
Custodian for the duration of the swap.
The Portfolios may also construct a synthetic foreign position by
purchasing an instrument whose return is tied to the return of the desired
foreign position. An investment in these "principal exchange rate linked
securities" (often called PERLS) can produce a similar return to a direct
investment in a foreign security.
RULE 144A SECURITIES
Each Bond Portfolio may purchase securities that have been privately placed
but that are eligible for purchase and sale under Rule 144A under the Securities
Act of 1933. That Rule permits certain qualified institutional buyers, such as
the Portfolios, to trade in privately placed securities that have not been
registered for sale under the 1933 Act. Stein Roe, under the supervision of the
Board of Trustees, will consider whether securities purchased under Rule 144A
are illiquid and thus subject to the restriction of investing no more than 15%
of net assets in illiquid securities. A determination of whether a Rule 144A
security is liquid or not is a question of fact. In making this determination,
Stein Roe will consider the trading markets for the specific security, taking
into account the unregistered nature of a Rule 144A security. In addition, Stein
Roe 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
13
<PAGE>
security, the method of soliciting offers, and the mechanics of transfer). The
liquidity of Rule 144A securities would be monitored and if, as a result of
changed conditions, it is determined that a Rule 144A security is no longer
liquid, a Portfolio's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Portfolio does not
invest more than 15% of its assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of a Portfolio's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities. No Portfolio expects to invest as much as
5% of its total assets in Rule 144A securities that have not been deemed to be
liquid by Stein Roe.
PORTFOLIO TURNOVER
For information on the Bond Funds' portfolio turnover rates, see Financial
Highlights in their Prospectus. The portfolio turnover rates of the Bond Funds
and Portfolios have been greater than 100% in recent fiscal years because of
increased volatility in the financial markets and Stein Roe's techniques for
reacting to changes in the markets to shift exposures to certain sectors and to
capture gains. The turnover rate for a Bond Portfolio in the future may vary
greatly from year to year, and when portfolio changes are deemed appropriate due
to market or other conditions, such turnover rate may be greater than might
otherwise be anticipated. A high rate of portfolio turnover may result in
increased transaction expenses and the realization of capital gains or losses.
Distributions of any net realized gains are subject to federal income tax.
OPTIONS ON SECURITIES AND INDEXES
Each Bond Portfolio may purchase and may sell both put options and call
options on debt or other securities or indexes in standardized contracts traded
on national securities exchanges, boards of trade, or similar entities, or
quoted on Nasdaq, and agreements, sometimes called cash puts, that may accompany
the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the purchaser
(holder) of the option, in return for a premium, the right to buy from (call) or
sell to (put) the seller (writer) of the option the security underlying the
option (or the cash value of the index) at a specified exercise price at any
time during the term of the option. The writer of an option on an individual
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
A Bond Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are held in a segregated account by its custodian) upon conversion
or exchange of other securities held in its portfolio.
14
<PAGE>
If an option written by a Bond Portfolio expires, it realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by a Portfolio expires, it realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
A Portfolio will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Portfolio will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Portfolio will realize a capital gain or, if it is
less, it will realize a capital loss. The principal factors affecting the market
value of a put or a call option include supply and demand, interest rates, the
current market price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying security or
index, and the time remaining until the expiration date.
A put or call option purchased by a Portfolio is an asset of the Portfolio,
valued initially at the premium paid for the option. The premium received for an
option written by a Portfolio is recorded as a deferred credit. The value of an
option purchased or written is marked-to-market daily and is valued at the
closing price on the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between the last bid and
asked prices.
Risks Associated with Options on Securities and Indexes. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities markets and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. If a Portfolio were unable to close out
an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option would expire and become
worthless. If a Portfolio were unable to close out a covered call option that it
had written on a security, it would not be able to sell the underlying security
until the option expired. As the writer of a covered call option, a Portfolio
foregoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased by a Portfolio, it would
not be able to close out the option. If restrictions on exercise were imposed,
the Portfolio might be unable to exercise an option it has purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each Bond Portfolio may use interest rate futures contracts and index
futures contracts. An interest rate or index futures contract provides for the
future sale by one
15
<PAGE>
party and purchase by another party of a specified quantity of a financial
instrument or the cash value of an index(2) at a specified price and time. A
public market exists in futures contracts covering a number of indexes as well
as the following financial instruments: U.S. Treasury bonds; U.S. Treasury
notes; GNMA Certificates; three-month U.S. Treasury bills; 90-day commercial
paper; bank certificates of deposit; Eurodollar certificates of deposit; and
foreign currencies. It is expected that other futures contracts will be
developed and traded.
The Bond Portfolios may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options on
securities and indexes (discussed above). A futures option gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true. A
Portfolio might, for example, use futures contracts to hedge against or gain
exposure to fluctuations in the general level of security prices, anticipated
changes in interest rates or currency fluctuations that might adversely affect
either the value of the Portfolio's securities or the price of the securities
that the Portfolio intends to purchase. Although other techniques could be used
to reduce that Portfolio's exposure to security price, interest rate and
currency fluctuations, the Portfolio may be able to achieve its exposure more
effectively and perhaps at a lower cost by using futures contracts and futures
options.
A Bond Portfolio will only enter into futures contracts and futures options
that are standardized and traded on an exchange, board of trade, or similar
entity, or quoted on an automated quotation system.
The success of any futures transaction depends on accurate predictions of
changes in the level and direction of security prices, interest rates, currency
exchange rates and other factors. Should those predictions be incorrect, the
return might have been better had the transaction not been attempted; however,
in the absence of the ability to use futures contracts, Stein Roe might have
taken portfolio actions in anticipation of the same market movements with
similar investment results but, presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by a Portfolio, it is
required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. Government securities or other securities
acceptable to the broker ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contract is traded and may be
modified during the term of the contract. The initial margin is in the nature of
a performance bond or good faith deposit on the futures contract that is
returned to the Portfolio upon termination of the contract, assuming all
contractual obligations have been satisfied. A Portfolio expects to earn
interest income on its initial margin deposits. A futures contract held by a
Portfolio is valued daily at the official settlement price of the exchange on
which it is traded. Each day the Portfolio pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking-to-market." Variation margin paid or received
by a Portfolio does not
------------------------
(2) A futures contract on an index is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written.
Although the value of a securities index is a function of the value of certain
specified securities, no physical delivery of those securities is made.
16
<PAGE>
represent a borrowing or loan by a Portfolio but is instead settlement between
the Portfolio and the broker of the amount one would owe the other if the
futures contract had expired at the close of the previous trading day. In
computing daily net asset value, each Portfolio will mark-to-market its open
futures positions.
A Portfolio is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of the
underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, it realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Portfolio
realizes a capital gain, or if it is less, it realizes a capital loss. The
transaction costs must also be included in these calculations.
RISKS ASSOCIATED WITH FUTURES
There are several risks associated with the use of futures contracts and
futures options as hedging techniques. A purchase or sale of a futures contract
may result in losses in excess of the amount invested in the futures contract.
In trying to increase or reduce market exposure, there can be no guarantee that
there will be a correlation between price movements in the futures contract and
in the portfolio exposure sought. In addition, there are significant differences
between the securities and futures markets that could result in an imperfect
correlation between the markets, causing a given transaction not to achieve its
objectives. The degree of imperfection of correlation depends on circumstances
such as: variations in speculative market demand for futures, futures options
and debt securities, including technical influences in futures trading and
futures options and differences between the financial instruments and the
instruments underlying the standard contracts available for trading in such
respects as interest rate levels, maturities, and creditworthiness of issuers. A
decision as to whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
17
<PAGE>
There can be no assurance that a liquid market will exist at a time when a
Bond Portfolio seeks to close out a futures or a futures option position. The
Portfolio would be exposed to possible loss on the position during the interval
of inability to close and would continue to be required to meet margin
requirements until the position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active secondary market
will develop or continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES
If other options, futures contracts, or futures options of types other than
those described herein are traded in the future, each Bond Portfolio may also
use those investment vehicles, provided the Board of Trustees determines that
their use is consistent with the Portfolio's investment objective.
A Bond Portfolio will not enter into a futures contract or purchase an
option thereon if, immediately thereafter, the initial margin deposits for
futures contracts held by that Portfolio plus premiums paid by it for open
futures option positions, less the amount by which any such positions are
"in-the-money,"(3) would exceed 5% of the Portfolio's total assets.
When purchasing a futures contract or writing a put on a futures contract,
a Portfolio must maintain with its custodian (or broker, if legally permitted)
cash or cash equivalents (including any margin) equal to the market value of
such contract. When writing a call option on a futures contract, the Portfolio
similarly will maintain with its custodian cash or cash equivalents (including
any margin) equal to the amount by which such option is in-the-money until the
option expires or is closed out by the Portfolio.
A Portfolio may not maintain open short positions in futures contracts,
call options written on futures contracts or call options written on indexes if,
in the aggregate, the market value of all such open positions exceeds the
current value of the securities in its portfolio, plus or minus unrealized gains
and losses on the open positions, adjusted for the historical relative
volatility of the relationship between the portfolio and the positions. For this
purpose, to the extent the Portfolio has written call options on specific
securities in its portfolio, the value of those securities will be deducted from
the current market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation 4.5
and thereby avoid being deemed a "commodity pool operator," each Bond Portfolio
will use commodity futures or commodity options contracts solely for bona fide
hedging purposes within the meaning and intent of Regulation 1.3(z), or, with
respect to positions in commodity futures and commodity options contracts that
do not come within the meaning and intent of 1.3(z), the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
the fair market value of the assets of a Portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into [in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount (as defined in Section 190.01(x) of the Commission
Regulations) may be excluded in computing such 5%].
------------------------
(3) A call option is "in-the-money" if the value of the futures contract that is
the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
18
<PAGE>
TAXATION OF OPTIONS AND FUTURES
If a Bond Portfolio exercises a call or put option that it holds, the
premium paid for the option is added to the cost basis of the security purchased
(call) or deducted from the proceeds of the security sold (put). For cash
settlement options and futures options exercised by a Portfolio, the difference
between the cash received at exercise and the premium paid is a capital gain or
loss.
If a call or put option written by a Portfolio is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by a Portfolio, the difference between the
cash paid at exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by a Portfolio was in-the-money at the time it was
written and the security covering the option was held for more than the
long-term holding period prior to the writing of the option, any loss realized
as a result of a closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not include the
period of time the option is outstanding.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If a Portfolio delivers securities under a futures contract,
the Portfolio also realizes a capital gain or loss on those securities.
For federal income tax purposes, a Portfolio generally is required to
recognize as income for each taxable year its net unrealized gains and losses as
of the end of the year on options, futures and futures options positions
("year-end mark-to-market"). Generally, any gain or loss recognized with respect
to such positions (either by year-end mark-to-market or by actual closing of the
positions) is considered to be 60% long-term and 40% short-term, without regard
to the holding periods of the contracts. However, in the case of positions
classified as part of a "mixed straddle," the recognition of losses on certain
positions (including options, futures and futures options positions, the related
securities and certain successor positions thereto) may be deferred to a later
taxable year. Sale of futures contracts or writing of call options (or futures
call options) or buying put options (or futures put options) that are intended
to hedge against a change in the value of securities held by a Portfolio: (1)
will affect the holding period of the hedged securities; and (2) may cause
unrealized gain or loss on such securities to be recognized upon entry into the
hedge.
In order to continue to qualify for federal income tax treatment as a
regulated investment company, at least 90% of gross income for a taxable year
must be derived from qualifying income; i.e., dividends, interest, income
derived from loans of securities, and gains from the sale of securities or
foreign currencies or other income (including but not limited to gains from
options, futures, and forward contracts). Any net gain realized from futures (or
futures options) contracts will be considered gain from the sale of securities
and therefore be qualifying income for purposes of the 90% requirement.
19
<PAGE>
Each Fund distributes to shareholders annually any net capital gains that
have been recognized for federal income tax purposes (including year-end
mark-to-market gains) on options and futures transactions. Such distributions
are combined with distributions of capital gains realized on the Fund's other
investments and shareholders are advised of the nature of the payments.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules, taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act) or futures or
"forward contracts" (as defined by the Act) with respect to the same or
substantially identical property, or if they enter into such transactions and
then acquire the same or substantially identical property. These changes
generally apply to constructive sales after June 8, 1997. Furthermore, the
Secretary of the Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have substantially the
same effect as short sales, offsetting notional principal contracts, and futures
or forward contracts to deliver the same or substantially similar property.
INVESTMENT RESTRICTIONS
Each Fund and Portfolio operate under the following investment
restrictions. A Fund or Portfolio may not:
(1) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except that
this restriction does not apply to (i) U.S. Government Securities, [Cash
Reserves Fund and Cash Reserves Portfolio only] (ii) repurchase agreements, or
(iii) securities of issuers in the financial services industry, and [Funds only]
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;
(2) 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 such investment) would be invested in the securities of any one
issuer, except that this restriction does not apply to U.S. Government
Securities or repurchase agreements for such securities and [Funds only] 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;(4)
(3) invest in a security if, as a result of such investment, it would hold
more than 10% (taken at the time of such investment) of the outstanding voting
securities of any one issuer, [Funds only] 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;
------------------------
(4) Notwithstanding the foregoing, and in accordance with Rule 2a-7 of the
Investment Company Act of 1940 (the "Rule"), Cash Reserves Portfolio will not,
immediately after the acquisition of any security (other than a Government
Security or certain other securities as permitted under the Rule), invest more
than 5% of its total assets in the securities of any one issuer; provided,
however, that it may invest up to 25% of its total assets in First Tier
Securities (as that term is defined in the Rule) of a single issuer for a period
of up to three business days after the purchase thereof.
20
<PAGE>
(4) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein);
(5) purchase or sell commodities or commodities contracts or oil, gas or
mineral programs, [Bond Funds and Bond Portfolios only] except that it may enter
into (i) futures and options on futures and (ii) forward contracts;
(6) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, [Bond
Funds and Bond Portfolios only] but it may make margin deposits in connection
with transactions in options, futures, and options on futures;
(7) make loans, although it may (a) [Bond Funds and Bond Portfolios only]
lend portfolio securities and [all] participate in an interfund lending program
with other Stein Roe Funds and Portfolios provided that no such loan may be made
if, as a result, the aggregate of such loans would exceed 33 1/3% of the value
of its total assets (taken at market value at the time of such loans); (b)
purchase money market instruments and enter into repurchase agreements; and (c)
acquire publicly distributed or privately placed debt securities;
(8) borrow except that it may (a) borrow for nonleveraging, temporary or
emergency purposes, (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,
and [Bond Funds and Bond Portfolios only] (c) enter into futures and options
transactions; [all] it may borrow from banks, other Stein Roe Funds and
Portfolios, and other persons to the extent permitted by applicable law;
(9) act as an underwriter of securities, except insofar as it may be deemed
to be an "underwriter" for purposes of the Securities Act of 1933 on disposition
of securities acquired subject to legal or contractual restrictions on resale,
[Funds only] 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; or
(10) issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
The above restrictions are fundamental policies and may not be changed
without the approval of a "majority of the outstanding voting securities," as
previously defined herein. The policy on the scope of transactions involving
lending of portfolio securities to broker-dealers and banks (as set forth herein
under Portfolio Investments and Strategies) is also a fundamental policy.
Each Fund and Portfolio is also subject to the following restrictions and
policies that may be changed by the Board of Trustees. None of the following
restrictions shall prevent a Fund from investing all or substantially all of its
assets in another investment company having the same investment objective and
substantially similar investment policies as the Fund. Unless otherwise
indicated, a Fund or Portfolio may not:
(A) invest for the purpose of exercising control or management;
21
<PAGE>
(B) purchase more than 3% of the stock of another investment company or
purchase stock of other investment companies equal to more than 5% of its total
assets (valued at time of purchase) in the case of any one other investment
company and 10% of such assets (valued at time of purchase) in the case of all
other investment companies in the aggregate; any such purchases are to be made
in the open market where no profit to a sponsor or dealer results from the
purchase, other than the customary broker's commission, except for securities
acquired as part of a merger, consolidation or acquisition of assets;(5)
(C) purchase portfolio securities from, or sell portfolio securities to,
any of the officers and directors or trustees of the Trust or of its investment
adviser;
(D) purchase shares of other open-end investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization;
(E) 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 which are not listed on
the New York or American Stock Exchange;
(F) [Bond Funds and Bond Portfolios only] 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;
(G) [Bond Funds and Bond Portfolios only] write an option on a security
unless the option is issued by the Options Clearing Corporation, an exchange, or
similar entity;
(H) [Bond Funds and Bond Portfolios only] invest in limited partnerships in
real estate unless they are readily marketable;
(I) sell securities short unless (i) it owns or has the right to obtain
securities equivalent in kind and amount to those sold short at no added cost or
(ii) 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
[Bond Funds and Bond Portfolios only] and provided that transactions in options,
futures, and options on futures are not treated as short sales;
(J) [Bond Funds and Bond Portfolios only] invest more than 15% of its total
assets (taken at market value at the time of a particular investment) in
restricted securities, other than securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933;
(K) [Cash Reserves Fund and Cash Reserves Portfolio only] invest more than
10% of its net assets (taken at market value at the time of a particular
investment) in illiquid securities(6), including repurchase agreements maturing
in more than seven days;
------------------------
(5) The Funds have been informed that the staff of the Securities and Exchange
Commission takes the position that the issuers of certain CMOs and certain other
collateralized assets are investment companies and that subsidiaries of foreign
banks may be investment companies for purposes of Section 12(d)(1) of the
Investment Company Act of 1940, which limits the ability of one investment
company to invest in another investment company. Accordingly, the Funds intend
to operate within the applicable limitations under Section 12(d)(1)(A) of that
Act.
(6) In the judgment of Stein Roe, Private Placement Notes, which are issued
pursuant to Section 4(2) of the Securities Act of 1933, generally are readily
marketable even though they are subject to certain legal restrictions on resale.
As such, they are not treated as being subject to the limitation on illiquid
securities.
22
<PAGE>
Bond Funds and Bond Portfolios only] invest more than 15% 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.
ADDITIONAL INVESTMENT CONSIDERATIONS
Stein Roe seeks to provide superior long-term investment results through a
disciplined, research-intensive approach to investment selection and prudent
risk management. In working to take sensible risks and make intelligent
investments, it has been guided by three primary objectives which it believes
are the foundation of a successful investment program. These objectives are
preservation of capital, limited volatility through managed risk, and consistent
above-average returns, as appropriate for the particular client or managed
account.
Because every investor's needs are different, Stein Roe mutual funds are
designed to accommodate different investment objectives, risk tolerance levels,
and time horizons. In selecting a mutual fund, investors should ask the
following questions:
What are my investment goals?
It is important to a choose a fund that has investment objectives compatible
with your investment goals.
What is my investment time frame?
If you have a short investment time frame (e.g., less than three years), a
mutual fund that seeks to provide a stable share price, such as a money market
fund, or one that seeks capital preservation as one of its objectives may be
appropriate. If you have a longer investment time frame, you may seek to
maximize your investment returns by investing in a mutual fund that offers
greater yield or appreciation potential in exchange for greater investment risk.
What is my tolerance for risk?
All investments, including those in mutual funds, have risks which will vary
depending on investment objective and security type. However, mutual funds seek
to reduce risk through professional investment management and portfolio
diversification.
In general, equity mutual funds emphasize long-term capital appreciation
and tend to have more volatile net asset values than bond or money market mutual
funds. Although there is no guarantee that they will be able to maintain a
stable net asset value of $1.00 per share, money market funds emphasize safety
of principal and liquidity, but tend to offer lower income potential than bond
funds. Bond funds tend to offer higher income potential than money market funds
but tend to have greater risk of principal and yield volatility.
In addition, Stein Roe believes that investment in a high yield fund
provides an opportunity to diversify an investment portfolio because the
economic factors that affect the performance of high-yield, high-risk debt
securities differ from those that affect the performance of high-quality debt
securities or equity securities.
23
<PAGE>
PURCHASES AND REDEMPTIONS
PURCHASES THROUGH THIRD PARTIES
You may purchase (or redeem) shares through certain broker-dealers, banks,
or other intermediaries ("Intermediaries"). The state of Texas has asked that
investment companies disclose in their SAIs, as a reminder to any such bank or
institution, that it must be registered as a securities dealer in Texas.
Intermediaries may charge for their services or place limitations on the extent
to which you may use the services offered by the Trust. It is the responsibility
of any such Intermediary to establish procedures insuring the prompt
transmission to the Trust of any such purchase order. An Intermediary, who
accepts orders that are processed at the net asset value next determined after
receipt of the order by the Intermediary, accepts such orders as authorized
agent or designee of the Fund. The Intermediary is required to segregate any
orders received on a business day after the close of regular session trading on
the New York Stock Exchange and transmit those orders separately for execution
at the net asset value next determined after that business day.
Some Intermediaries that maintain nominee accounts with the Funds for their
clients for whom they hold Fund shares charge an annual fee of up to 0.35% of
the average net assets held in such accounts for accounting, servicing, and
distribution services they provide with respect to the underlying Fund shares.
Stein Roe and the Funds' transfer agent share in the expense of these fees, and
Stein Roe pays all sales and promotional expenses.
NET ASSET VALUE
The net asset value of each Fund is determined on days on which the New
York Stock Exchange (the "NYSE") is open for regular session trading. The NYSE
is regularly closed on Saturdays and Sundays and on New Year's Day, the third
Monday in January, the third Monday in February, Good Friday, the last Monday in
May, Independence Day, Labor Day, Thanksgiving, and Christmas. If one of these
holidays falls on a Saturday or Sunday, the NYSE will be closed on the preceding
Friday or the following Monday, respectively. Net asset value will not be
determined on days when the NYSE is closed unless, in the judgment of the Board
of Trustees, net asset value of a Fund should be determined on any such day, in
which case the determination will be made at 3 p.m., Central time. Please refer
to Your Account--Determining Share Price in the Prospectuses for additional
information on how the purchase and redemption price of Fund shares is
determined.
GENERAL REDEMPTION POLICIES
The Trust intends to pay all redemptions in cash and is obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
assets during any 90-day period for any one shareholder. However, redemptions in
excess of such limit may be paid wholly or partly by a distribution in kind of
securities. If redemptions were made in kind, the redeeming shareholders might
incur transaction costs in selling the securities received in the redemptions.
The Trust reserves the right to suspend or postpone redemptions of shares
during any period when: (a) trading on the NYSE is restricted, as determined by
the Securities and Exchange Commission, or the NYSE is closed for other than
customary weekend and holiday closings; (b) the Securities and Exchange
Commission has by order permitted such suspension; or (c) an emergency, as
determined by the Securities
24
<PAGE>
and Exchange Commission, exists, making disposal of portfolio securities or
valuation of net assets not reasonably practicable.
You may not cancel or revoke your redemption order once instructions have
been received and accepted. The Trust cannot accept a redemption request that
specifies a particular date or price for redemption or any special conditions.
Please call 800-338-2550 if you have any questions about requirements for a
redemption before submitting your request. The Trust reserves the right to
require a properly completed application before making payment for shares
redeemed.
The Trust will generally mail payment for shares redeemed within seven days
after proper instructions are received. However, the Trust normally intends to
pay proceeds of a Telephone Redemption paid by wire on the next business day. If
you attempt to redeem shares within 15 days after they have been purchased by
check or electronic transfer, the Trust will delay payment of the redemption
proceeds to you until it can verify that payment for the purchase of those
shares has been (or will be) collected. To reduce such delays, the Trust
recommends that your purchase be made by federal funds wire through your bank.
Generally, you may not use any Special Redemption Privilege to redeem
shares purchased by check (other than certified or cashiers' checks) or
electronic transfer until 15 days after their date of purchase. The Trust
reserves the right at any time without prior notice to suspend, limit, modify,
or terminate any Privilege or its use in any manner by any person or class.
Neither the Trust, its transfer agent, nor their respective officers,
trustees, directors, employees, or agents will be responsible for the
authenticity of instructions provided under the Privileges, nor for any loss,
liability, cost or expense for acting upon instructions furnished thereunder if
they reasonably believe that such instructions are genuine. The Funds employ
procedures reasonably designed to confirm that instructions communicated by
telephone under any Special Redemption Privilege or the Special Electronic
Transfer Redemption Privilege are genuine. Use of any Special Redemption
Privilege or the Special Electronic Transfer Redemption Privilege authorizes the
Funds and their transfer agent to tape-record all instructions to redeem. In
addition, callers are asked to identify the account number and registration, and
may be required to provide other forms of identification. Written confirmations
of transactions are mailed promptly to the registered address; a legend on the
confirmation requests that the shareholder review the transactions and inform
the Fund immediately if there is a problem. If the Funds do not follow
reasonable procedures for protecting shareholders against loss on telephone
transactions, it may be liable for any losses due to unauthorized or fraudulent
instructions.
Shares in any account you maintain with a Fund or any of the other Stein
Roe Funds may be redeemed to the extent necessary to reimburse any Stein Roe
Fund for any loss you cause it to sustain (such as loss from an uncollected
check or electronic transfer for the purchase of shares, or any liability under
the Internal Revenue Code provisions on backup withholding).
The Trust reserves the right to suspend or terminate, at any time and
without prior notice, the use of the Telephone Exchange Privilege by any person
or class of persons. The Trust believes that use of the Telephone Exchange
Privilege by investors utilizing market-timing strategies adversely affects the
Funds. THEREFORE, REGARDLESS OF THE NUMBER OF TELEPHONE EXCHANGE ROUND-TRIPS
MADE BY AN INVESTOR, THE TRUST
25
<PAGE>
GENERALLY WILL NOT HONOR REQUESTS FOR TELEPHONE EXCHANGES BY SHAREHOLDERS
IDENTIFIED BY THE TRUST AS "MARKET-TIMERS" IF THE OFFICERS OF THE TRUST
DETERMINE THE ORDER NOT TO BE IN THE BEST INTERESTS OF THE TRUST OR ITS
SHAREHOLDERS. The Trust generally identifies as a "market-timer" an investor
whose investment decisions appear to be based on actual or anticipated near-term
changes in the securities markets other than for investment considerations.
Moreover, the Trust reserves the right to suspend, limit, modify, or terminate,
at any time and without prior notice, the Telephone Exchange Privilege in its
entirety. Because such a step would be taken only if the Board of Trustees
believes it would be in the best interests of the Funds, the Trust expects that
it would provide shareholders with prior written notice of any such action
unless the resulting delay in the suspension, limitation, modification, or
termination of the Telephone Exchange Privilege would adversely affect the
Funds. If the Trust were to suspend, limit, modify, or terminate the Telephone
Exchange Privilege, a shareholder expecting to make a Telephone Exchange might
find that an exchange could not be processed or that there might be a delay in
the implementation of the exchange. During periods of volatile economic and
market conditions, you may have difficulty placing your exchange by telephone.
The Telephone Exchange Privilege and the Telephone Redemption by Check
Privilege will be established automatically for you when you open your account
unless you decline these Privileges on your application. Other Privileges must
be specifically elected. A signature guarantee may be required to establish a
Privilege after you open your account. If you establish both the Telephone
Redemption by Wire Privilege and the Electronic Transfer Privilege, the bank
account that you designate for both Privileges must be the same. The Telephone
Redemption by Check Privilege, Telephone Redemption by Wire Privilege, and
Special Electronic Transfer Redemptions may not be used to redeem shares held by
a tax-sheltered retirement plan sponsored by Stein Roe.
REDEMPTION PRIVILEGES
Exchange Privilege. You may redeem all or any portion of your Fund shares
and use the proceeds to purchase shares of any other no-load Stein Roe Fund
offered for sale in your state if your signed, properly completed application is
on file. An exchange transaction is a sale and purchase of shares for federal
income tax purposes and may result in capital gain or loss. Before exercising
the Exchange Privilege, you should obtain the prospectus for the no-load Stein
Roe Fund in which you wish to invest and read it carefully. The registration of
the account to which you are making an exchange must be exactly the same as that
of the Fund account from which the exchange is made and the amount you exchange
must meet any applicable minimum investment of the no-load Stein Roe Fund being
purchased.
Telephone Exchange Privilege. You may use the Telephone Exchange Privilege
to exchange an amount of $50 or more from your account by calling 800-338-2550
or by sending a telegram; new accounts opened by exchange are subject to the
$2,500 initial purchase minimum. GENERALLY, YOU WILL BE LIMITED TO FOUR
TELEPHONE EXCHANGE ROUND-TRIPS PER YEAR AND THE FUNDS MAY REFUSE REQUESTS FOR
TELEPHONE EXCHANGES IN EXCESS OF FOUR ROUND-TRIPS (A ROUND-TRIP BEING THE
EXCHANGE OUT OF A FUND INTO ANOTHER NO-LOAD STEIN ROE FUND, AND THEN BACK TO
THAT FUND). In addition, the Trust's general redemption policies apply to
redemptions of shares by Telephone Exchange.
Automatic Exchanges. You may use the Automatic Exchange Privilege to
automatically redeem a fixed amount from your Fund account for investment in
26
<PAGE>
another no-load Stein Roe Fund account on a regular basis ($50 minimum; $100,000
maximum).
Telephone Redemption by Wire Privilege. You may use this Privilege to
redeem shares from your account ($1,000 minimum; $100,000 maximum) by calling
800-338-2550. The proceeds will be transmitted by wire to your account at a
commercial bank previously designated by you that is a member of the Federal
Reserve System. The fee for wiring proceeds (currently $7.00 per transaction)
will be deducted from the amount wired.
Telephone Redemption by Check Privilege. You may use the Telephone
Redemption by Check Privilege to redeem shares from your account by calling
800-338-2550. Telephone redemptions are limited to a total of $100,000 in a
30-day period. The proceeds will be sent by check to your registered address.
Electronic Transfer Privilege. You may redeem shares by calling
800-338-2550 and requesting an electronic transfer ("Special Redemption") of the
proceeds to a bank account previously designated by you at a bank that is a
member of the Automated Clearing House. You may also request electronic
transfers at scheduled intervals ("Automatic Redemptions"). A Special Redemption
request received by telephone after 3 p.m., central time, is deemed received on
the next business day. You may purchase Fund shares directly from your bank
account either at regular intervals ("Regular Investments") or upon your request
("Special Investments"). Electronic transfers are subject to a $50 minimum and a
$100,000 maximum. You may also have income dividends and capital gains
distributions deposited directly into your bank account ("Automatic Dividend
Deposits").
Systematic Withdrawals. You may have a fixed dollar amount, declining
balance, or fixed percentage of your account redeemed and sent at regular
intervals by check to you or another payee.
Dividend Purchase Option. You may have distributions from one Fund account
automatically invested in another no-load Stein Roe Fund account. Before
establishing this option, you should obtain and read the prospectus of the Stein
Roe Fund into which you wish to have your distributions invested. The account
from which distributions are made must be of sufficient size to allow each
distribution to usually be at least $25.
Check Writing Privilege. Although Cash Reserves Fund does not currently
charge a fee to its shareholders for the use of the special Check-Writing
Redemption Privilege, Cash Reserves Fund pays for the cost of printing and
mailing checks to its shareholders and pays charges of the bank for payment of
each check. The Trust reserves the right to establish a direct charge to
shareholders for use of the Privilege and both the Trust and the bank reserve
the right to terminate this service.
27
<PAGE>
MANAGEMENT
The Board of Trustees of the Trust has overall management responsibility
for the Trust and the Funds. The following table sets forth certain information
with respect to trustees and officers of the Trust:
<TABLE>
<CAPTION>
<S> <C> <C>
Position(s) held Principal occupation(s)
Name, Age; Address with the Trust during past five years
William D. Andrews, 53; One South Executive Vice-President Executive vice president of Stein Roe
Wacker Drive, Chicago, IL 60606
(4)
John A. Bacon Jr., 73; 4N640 Trustee Private investor
Honey Hill Road, Box 296, Wayne,
IL 60184 (3)(4)
Christine Balzano, 35; Vice-President Senior vice president of Liberty Funds Services, Inc.;
245 Summer Street, Boston, MA formerly vice president and assistant vice president
02210
William W. Boyd, 73; Trustee Chairman and director of Sterling Plumbing (manufacturer
2900 Golf Road, Rolling Meadows, of plumbing products)
IL 60008 (2)(3)(4)
David P. Brady, 36; Vice-President Senior vice president of Stein Roe since March 1998;
One South Wacker Drive, Chicago, vice president of Stein Roe from Nov. 1995 to March
IL 60606 (4) 1998; portfolio manager for Stein Roe since 1993
Daniel K. Cantor, 41; Vice-President Senior vice president of Stein Roe
1330 Avenue of the Americas, New
York, NY 10019 (4)
Kevin M. Carome, 44; Executive Executive Vice President of the Stein Roe Funds since May 1999
One Financial Center Vice President (formerly Vice President and Secretary); General Counsel and
Boston, MA 02111 (4) Secretary of Stein Roe since 1998; Executive Vice President of
Liberty Funds Group
and Liberty All-Star
Funds since October,
2000; Executive Vice
President and
Assistant Secretary,
Liberty Funds Group
Chicago; Senior Vice
President, Legal
since January, 1999
of Liberty Funds
Group; Associate
General Counsel and
Vice President of
Liberty Financial
Companies, Inc.
through January,
1999.
One Financial Center, Boston, MA Vice-President
02111 (4)
Denise E. Chasmer, 33; 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, 48; Trustee Executive vice president of Liberty Financial Companies,
600 Atlantic Avenue, Boston, MA Inc. since March 1997; senior vice president prior
02210 (1)(2)(4) thereto
James R. Fellows, 35; Vice-President Vice president of Stein Roe since April
1998; vice , president and One South Wacker Drive, senior credit analyst,Van
Kampen American Capital prior thereto Chicago IL 60606
William M. Garrison, 34; 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, 47; One President Director of Stein Roe since September 1, 2000, President and
Financial Center, Boston, MA Vice Chairman of Stein Roe since January, 2000 (formerly
02111 (4) Assistant Chairman from August, 1998 to January, 2000);
President of the Stein Roe
Funds since November 1999;
President of the Liberty
Funds since June, 1998,
Chairman of the Board of
the Liberty Funds since
July, 1998, Chief
Executive Officer and
President since December,
1996 and Director, since
July, 1996 of Colonial
Management Associates
(formerly Executive Vice
President from July, 1996
to December, 1996);
Director, Chief Executive
Officer and President of
LFG since December, 1998
(formerly Director, Chief
Executive Officer and
President of The Colonial
Group, Inc. (TCG) from
December, 1996 to
December, 1998); (formerly
Managing Director of
Marketing of Putnam
Investments, June, 1992 to
July, 1996.)
Brian W. Good, 34; Vice-President Vice president of Stein Roe since April 1998; vice
One South Wacker Drive, Chicago, president and portfolio manager, Van Kampen American
IL 60606 Capital prior thereto
Erik P. Gustafson, 36; Vice-President Senior portfolio manager of Stein Roe; Senior vice
One South Wacker Drive,
Chicago, IL 60606 (4) president of Stein Roe since April
1996; vice president
of Stein Roe prior thereto
Douglas A. Hacker, 44; Trustee Senior vice president and chief financial officer of
P.O. Box 66100, Chicago, IL 60666 UAL, Inc. (airline)
(3) (4)
Loren A. Hansen, 53; Executive Vice-President Chief investment officer/equity of CMA since 1997; executive vice
One South Wacker Drive, president of Stein Roe since Dec. 1995;
Chicago, IL 60606 (4) vice president of The Northern Trust (bank) prior thereto
Brian M. Hartford, 41; Vice President Employee of Stein Roe since November 1998; vice
One Financial Center president of CMA since 1993
Boston, MA 02111
Harvey B. Hirschhorn, 50; One Vice-President Executive vice president, senior portfolio manager,
South Wacker Drive, and chief economist and and chief economist and investment strategist
of Stein Roe; director of research of Stein Roe,
Chicago, IL 60606 (4)
1991 to 1995
Janet Langford Kelly, 42; 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, 38; One South Vice President Senior vice president of Stein Roe
Wacker Drive, Chicago, IL 60606
(4)
Gail D. Knudsen, 38; Vice President Vice president and assistant controller of CMA
245 Summer Street, Boston, MA
02210 (4)
Stephen F. Lockman, 39; 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. 50; Vice President Vice president of Stein Roe since November 1998; vice
One Financial Center president of CMA
Boston, MA 02111
Pamela A. McGrath, 47: One Senior Vice Treasurer and Senior Vice President of the Stein Roe Funds
Financial Center, Boston, MA President and since May 2000; Treasurer and Chief Financial Officer of the
02111 (4) Treasurer Liberty Funds since April 2000; Treasurer of the Liberty
All-Star Funds since April
2000; Treasurer and, Chief
Financial Officer of the
Liberty Funds Group since
December 1999; Senior Vice
President of the Liberty
Funds Group since April
2000; 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, 47; Vice President President of Liberty Funds Services, Inc.
One Financial Center, Boston, MA
02111 (4)
Jane N. Naeseth, 50; One South Vice President Senior Vice President of Stein Roe
Wacker Drive
Chicago, IL 60606 (4)
Charles R. Nelson, 58; Trustee Director/Trustee since 1981. Department of Economics Van Voorhis Professor,
of Economics,
University of Department
University of Washington of Economics, University of Washington and consultant
on Seattle, WA 98195 (3)(4) economic and statistical matters.
Maureen G. Newman, 41; 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, 41; 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 One Trustee and Treasurer and Senior Vice President of the Stein Roe Funds
Financial Center, Boston, MA Chairman of the since May 2000; Treasurer and Chief Financial Officer of the
02111 (4) Board Liberty Funds since April 2000; Treasurer of the Liberty
All-Star Funds since April
2000; Treasurer and, Chief
Financial Officer of the
Liberty Funds Group since
December 1999; Senior Vice
President of the Liberty
Funds Group since April
2000; 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.
Thomas C. Theobald, 64; 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, 42; 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, 54; 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
----------------------
(1) Trustee who is an "interested person" of the Trust and of Stein Roe, as
defined in the Investment Company Act of 1940.
(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.
</TABLE>
Certain of the trustees and officers of the Fund and the Portfolio are
trustees or officers of other investment companies managed by Stein Roe; and
some of the officers are also officers of Liberty Funds Distributor, Inc., the
Fund's distributor.
Officers and trustees affiliated with Stein Roe serve without any
compensation from the Trust. In compensation for their services to the Trust,
trustees who are not "interested persons" of the Trust or Stein Roe are paid an
annual retainer plus an attendance fee for each meeting of the Board or standing
committee thereof attended. The Trust has no retirement or pension plan. For
fiscal year ended June 30, 2000 and the calendar year December 31, 1999 , the
Trustees received the following compensation for serving as Trustees:
30
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation Aggregate Aggregate Aggregate From the Fund
From Compensation Compensation Compensation Complex Paid
Trustee Intermediate From Income From High From Cash to the Trustees
Bond Fund for Fund for the Yield Fund for Reserves Fund for the Calendar
the Fiscal Year Fiscal Year the Fiscal Year for the Fiscal Year Ended
Ended June 30, Ended June 30, Ended June 30, Year Ended June December 31,
2000 2000 2000 30, 2000 1999*
<S> <C> <C> <C> <C> <C>
Lindsay Cook 0 0 0 0 0
John A. Bacon Jr $ 1,400 $ 1,400 $ 1,400 $ 1,400 $103,450
William W. Boyd 1,500 1,500 1,500 1,500 109,950
Douglas A. Hacker 1,400 1,400 1,400 1,400 93,950
Janet Langford Kelly 1,400 1,400 1,400 1,400 103,450
Charles R. Nelson 1,500 1,500 1,500 1,500 108,050
Thomas C. Theobald 1,400 1,400 1,400 1,400 103,450
</TABLE>
---------------
* At June 30, 2,000, 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.
**
FINANCIAL STATEMENTS
Please refer to the June 30, 2000 Financial Statements (statements of
assets and liabilities and schedules of investments as of June 30, 2000 and the
statements of operations, changes in net assets, and notes thereto) and the
reports of independent auditors contained in the Funds' June 30, 2000 Annual
Reports. The Financial Statements and the reports of independent auditors (but
no other material from the Annual Reports) are incorporated herein by reference.
The Annual Reports may be obtained at no charge by telephoning 800-338-2550.
PRINCIPAL SHAREHOLDERS
As of September 30, 2000, the Trustees and Officers of the Trust as a group
owned less than 1% of the then outstanding shares of each Fund.
As of September 30, 2000, the only persons known by the Trust to own of record
or "beneficially" 5% or more of outstanding shares of any Fund within the
definition of that term as contained in Rule 13d-3 under the Securities Exchange
Act of 1934 were as follows:
31
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE % OF
OUTSTANDING SHARES
NAME AND ADDRESS FUND HELD
<S> <C> <C>
Liberty Financial Services Cash Reserves Fund 8.19%
600 Atlantic Avenue
Boston, MA 02210
%
Charles Schwab & Co., Inc. High Yield Fund
Special Custody Account for the
Exclusive Benefit of Customers 25.79%
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
-----------------------
(1) Shares held as custodian.
(2) Shares held for accounts of customers.
(3) Northern Trust Company holds shares of record on behalf of the Liberty
Mutual Employees' Thrift-Incentive Plan.
The following table shows shares of the Funds held by the categories of
persons indicated as of September 30, 2000, and in each case the approximate
percentage of outstanding shares represented:
32
<PAGE>
<TABLE>
<CAPTION>
Clients of Stein Roe in their
Client Accounts*
------------------------------
Shares Held Percent
----------- -------
<S> <C> <C>
Cash Reserves Fund 80,964,166 15%
Intermediate Bond Fund 7,687,576% 16%
Income Fund 4,229,226 17%
High Yield Fund 632,901 23%
</TABLE>
--------------
*Stein Roe may have discretionary authority over such shares and,
accordingly, they could be deemed to be owned "beneficially" by Stein Roe
under Rule 13d-3. However, Stein Roe disclaims actual beneficial ownership
of such shares.
INVESTMENT ADVISORY AND OTHER SERVICES
Stein Roe & Farnham Incorporated provides administrative services to each
Fund and Portfolio and portfolio management services to each Portfolio. Stein
Roe is a wholly owned subsidiary of SteinRoe Services Inc. ("SSI"), the Funds'
transfer agent, which is a wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"), which is a majority owned subsidiary of
Liberty Corporate Holdings, Inc., which is a wholly owned subsidiary of LFC
Holdings, Inc., which is a wholly owned subsidiary of Liberty Mutual Equity
Corporation, which is a wholly owned subsidiary of Liberty Mutual Insurance
Company. Liberty Mutual Insurance Company is a mutual insurance company,
principally in the property/casualty insurance field, organized under the laws
of Massachusetts in 1912.
The directors of Stein Roe are C. Allen Merritt, Jr., J. Andrew Hilbert, Stephen
E. Gibson and Joseph R. Palombo. Mr. Merritt is Chief Operating Officer of
Liberty Financial. Mr. Hilbert is Senior Vice President and Chief Financial
Officer of Liberty Financial. The positions held by Messrs. Gibson and Palombo
are listed above. The business address of Messrs. Merritt and Hilbert is Federal
Reserve Plaza, Boston, MA 02210. The business address of Messrs. Gibson and
Palombo is One Financial Center, Boston, MA 02111.
Stein Roe Counselor(SM) is a professional investment advisory service
offered by Stein Roe to Fund shareholders. Stein Roe Counselor(SM) is designed
to help
33
<PAGE>
shareholders construct Fund investment portfolios to suit their individual
needs. Based on information shareholders provide about their financial goals and
objectives in response to a questionnaire, Stein Roe's investment professionals
create customized portfolio recommendations. Shareholders participating in Stein
Roe Counselor(SM) are free to self direct their investments while considering
Stein Roe's recommendations. In addition to reviewing shareholders' goals and
objectives periodically and updating portfolio recommendations to reflect any
changes, Stein Roe provides shareholders participating in these programs with
dedicated representatives. Other distinctive services include specially designed
account statements with portfolio performance and transaction data, asset
allocation planning tools, newsletters, customized website content, and regular
investment, economic and market updates. A $50,000 minimum investment is
required to participate in the program.
In return for its services, Stein Roe is entitled to receive a monthly
administrative fee from each Fund and a monthly management fee from each
Portfolio. The table below shows the annual rates of such fees as a percentage
of average net assets, gross fees paid for the three most recent fiscal years,
and any expense reimbursements by Stein Roe (dollars in thousands):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
YEAR YEAR YEAR
CURRENT RATES (AS A % OF ENDED ENDED ENDED
FUND/PORTFOLIO TYPE AVERAGE NET ASSETS) 6/30/00 6/30/99 6/30/98
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash Reserves Fund Management fee N/A -- -- $ 821
--------------------------------------------------------------------------------------
Administrative .250% $1,325 $1,249 1,216
fee
---------------------------------------------------------------------------------------------------------------------
Cash Reserves Portfolio Management fee .250% up to $500 million, 1,943
.225% thereafter 1,809 542
---------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund Management fee N/A -- -- 777
--------------------------------------------------------------------------------------
Administrative .150% 619 668 587
fee
--------------------------------------------------------------------------------------
Reimbursement N/A -- -- --
---------------------------------------------------------------------------------------------------------------------
Intermediate Bond Portfolio Management fee .350% 1,451 1,577 595
---------------------------------------------------------------------------------------------------------------------
Income Fund Management fee N/A -- -- 1,169
--------------------------------------------------------------------------------------
Administrative .150% up to $100 million,
fee .125% thereafter 340 488 552
--------------------------------------------------------------------------------------
Reimbursement N/A -- -- --
---------------------------------------------------------------------------------------------------------------------
Income Portfolio Management fee .500% up to $100 million,
.475% thereafter 1,225 1,757 862
---------------------------------------------------------------------------------------------------------------------
High Yield Fund Administrative .150% up to $500 million,
fee .125% thereafter 46 56 44
--------------------------------------------------------------------------------------
Reimbursement Expenses exceeding
1.00% 81 80 95
---------------------------------------------------------------------------------------------------------------------
High Yield Portfolio Management fee .500% up to $500 million,
.475% thereafter 424 419 307
---------------------------------------------------------------------------------------------------------------------
</TABLE>
Stein Roe provides office space and executive and other personnel to the
Funds and bears any sales or promotional expenses. Each Fund pays all expenses
other than those paid by Stein Roe, including but not limited to printing and
postage charges, securities registration and custodian fees, and expenses
incidental to its organization.
The administrative agreement provides that Stein Roe shall reimburse each
Fund to the extent that total annual expenses of the Fund (including fees paid
to Stein Roe, but excluding taxes, interest, brokers' commissions and other
normal charges incident to the purchase and sale of portfolio securities, and
expenses of litigation to the extent permitted under applicable state law)
exceed the applicable limits prescribed by any state in which shares of such
Fund are being offered for sale to the public; however, such reimbursement for
any fiscal year will not exceed the amount of the
34
<PAGE>
fees paid by such Fund under that agreement for such year. In addition, in the
interest of further limiting the Funds' expenses, Stein Roe may waive its fees
and/or absorb certain expenses for a Fund. Any such reimbursements will enhance
the yield of such Fund.
The management agreement provides that neither Stein Roe nor any of its
directors, officers, stockholders (or partners of stockholders), agents, or
employees shall have any liability to SR&F Base Trust or any shareholder for any
error of judgment, mistake of law or any loss arising out of any investment, or
for any other act or omission in the performance by Stein Roe of its duties
under the agreement, except for liability resulting from willful misfeasance,
bad faith or gross negligence on Stein Roe's part in the performance of its
duties or from reckless disregard by Stein Roe of Stein Roe's obligations and
duties under that agreement.
Any expenses that are attributable solely to the organization, operation,
or business of a series of the Trust are paid solely out of the assets of that
series. Any expenses incurred by the Trust that are not solely attributable to a
particular series are apportioned in such manner as Stein Roe determines is fair
and appropriate, unless otherwise specified by the Board of Trustees.
BOOKKEEPING AND ACCOUNTING AGREEMENT
Pursuant to a separate agreement with the Trust, Stein Roe receives a fee
for performing certain bookkeeping and accounting services. For these services,
Stein Roe receives an annual fee of $25,000 per series plus .0025 of 1% of
average net assets over $50 million. During the fiscal years ended June 30, ,
1998, 1999 and 2000, Stein Roe received aggregate fees of (dollars in thousands)
$128, $129, and $126, respectively, from the Trust for services performed under
this agreement.
DISTRIBUTOR
Shares of the Funds are distributed by Liberty Funds Distributor, Inc.
("Distributor"), One Financial Center, Boston, MA 02111, under a Distribution
Agreement. The Distributor is a subsidiary of Colonial Management Associates,
Inc., which is an indirect subsidiary of Liberty Financial. The Distribution
Agreement continues in effect from year to year, provided such continuance is
approved annually (1) by a majority of the trustees or by a majority of the
outstanding voting securities of the Trust, and (2) by a majority of the
trustees who are not parties to the Agreement or interested persons of any such
party. The Trust has agreed to pay all expenses in connection with registration
of its shares with the Securities and Exchange Commission and auditing and
filing fees in connection with registration of its shares under the various
state blue sky laws and assumes the cost of preparation of prospectuses and
other expenses.
As agent, the Distributor offers shares of the Funds to investors in states
where the shares are qualified for sale, at net asset value, without sales
commissions or other sales load to the investor. No sales commission or "12b-1"
payment is paid by any Fund. The Distributor offers the Funds' shares only on a
best-efforts basis.
35
<PAGE>
TRANSFER AGENT
SteinRoe Services Inc. ("SSI"), One South Wacker Drive, Chicago, IL 60606,
is the agent of the Trust for the transfer of shares, disbursement of dividends,
and maintenance of shareholder accounting records. For performing these
services, SSI receives a fee based on an annual rate of 0.15 of 1% of average
daily net assets from Cash Reserves Fund and 0.14 of 1% of average daily net
assets from each Bond Fund. The Board of Trustees believes the charges by SSI to
the Funds are comparable to those of other companies performing similar
services. (See Investment Advisory and Other Services.) Under a separate
agreement, SSI also provides certain investor accounting services to each
Portfolio.
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225 Franklin Street,
Boston, MA 02101, is the custodian for the Trust and SR&F Base Trust. It is
responsible for holding all securities and cash, receiving and paying for
securities purchased, delivering against payment securities sold, receiving and
collecting income from investments, making all payments covering expenses, and
performing other administrative duties, all as directed by authorized persons.
The Bank does not exercise any supervisory function in such matters as purchase
and sale of portfolio securities, payment of dividends, or payment of expenses.
Portfolio securities purchased in the U.S. are maintained in the custody of
the Bank or of other domestic banks or depositories. Portfolio securities
purchased outside of the U.S. are maintained in the custody of foreign banks and
trust companies that are members of the Bank's Global Custody Network and
foreign depositories ("foreign sub-custodians"). Each of the domestic and
foreign custodial institutions holding portfolio securities has been approved by
the Board of Trustees in accordance with regulations under the Investment
Company Act of 1940.
Each Board of Trustees reviews, at least annually, whether it is in the
best interests of each Fund, each Portfolio, and their shareholders to maintain
assets in each custodial institution. However, with respect to foreign
sub-custodians, there can be no assurance that a Fund, and the value of its
shares, will not be adversely affected by acts of foreign governments, financial
or operational difficulties of the foreign sub-custodians, difficulties and
costs of obtaining jurisdiction over, or enforcing judgments against, the
foreign sub-custodians, or application of foreign law to a Fund's foreign
sub-custodial arrangements. Accordingly, an investor should recognize that the
non-investment risks involved in holding assets abroad are greater than those
associated with investing in the United States.
The Funds and Portfolios may invest in obligations of the Bank and may
purchase or sell securities from or to the Bank.
INDEPENDENT AUDITORS
The independent auditors for the Funds and the Portfolios are Ernst & Young
LLP, 200 Clarendon Street, Boston, MA 02116. The independent auditors audit and
report on the annual financial statements, review certain regulatory reports and
the federal income tax returns, and perform other professional accounting,
auditing, tax and advisory services when engaged to do so by the Trust.
36
<PAGE>
PORTFOLIO TRANSACTIONS
Stein Roe places the orders for the purchase and sale of portfolio
securities and options and futures contracts for its clients, including private
clients and mutual fund clients ("Clients"). Purchases and sales of portfolio
securities are ordinarily transacted with the issuer or with a primary market
maker acting as principal or agent for the securities on a net basis, with no
brokerage commission being paid by a Portfolio. Transactions placed through
dealers reflect the spread between the bid and asked prices. Occasionally, a
Portfolio may make purchases of underwritten issues at prices that include
underwriting discounts or selling concessions.
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 Portfolios. 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
37
<PAGE>
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 Portfolios 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 Portfolios pay ATI a commission for these transactions. The
Funds and the Portfolios 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 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.
38
<PAGE>
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:
- Database Services--comprehensive databases containing current and/or
historical information on companies and industries. Examples include
historical securities prices, earnings estimates, and SEC filings. These
services may include software tools that allow the user to search the
database or to prepare value-added analyses related to the investment
process (such as forecasts and models used in the portfolio management
process).
- Quotation/Trading/News Systems--products that provide real time market data
information, such as pricing of individual securities and information on
current trading, as well as a variety of news services.
39
<PAGE>
- Economic Data/Forecasting Tools--various macro economic forecasting tools,
such as economic data and economic and political forecasts for various
countries or regions.
- Quantitative/Technical Analysis--software tools that assist in quantitative
and technical analysis of investment data.
- Fundamental Industry Analysis--industry-specific fundamental investment
research.
- Fixed Income Security Analysis--data and analytical tools that pertain
specifically to fixed income securities. These tools assist in creating
financial models, such as cash flow projections and interest rate
sensitivity analyses, that are relevant to fixed income securities.
- Other Specialized Tools--other specialized products, such as specialized
economic consulting analyses and attendance at investment oriented
conferences.
Many third-party products include computer software or on-line data feeds.
Certain products also include computer hardware necessary to use the product.
Certain of these third party services may be available directly from the
vendor on a hard dollar basis. Others are available only through broker-dealer
firms for soft dollars. Stein Roe evaluates each product to determine a cash
("hard dollars") value of the product to Stein Roe. Stein Roe then on a
product-by-product basis targets commission dollars in an amount equal to a
specified multiple of the hard dollar value to the broker-dealer that supplies
the product to Stein Roe. In general, these multiples range from 1.25 to 1.85
times the hard dollar value. Stein Roe attempts to direct trades to each firm to
meet these targets. (For example, if the multiple is 1.5:1.0, assuming a hard
dollar value of $10,000, Stein Roe will target to the broker-dealer providing
the product trades generating $15,000 in total commissions.)
The targets that Stein Roe establishes for both proprietary and for third
party research products typically will reflect discussions that Stein Roe has
with the broker-dealer providing the product regarding the level of commissions
it expects to receive for the product. However, these targets are not binding
commitments, and Stein Roe does not agree to direct a minimum amount of
commissions to any broker-dealer for soft dollar products. In setting these
targets, Stein Roe makes a determination that the value of the product is
reasonably commensurate with the cost of acquiring it. These targets are
established on a calendar year basis. Stein Roe will receive the product whether
or not commissions directed to the applicable broker-dealer are less than, equal
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
40
<PAGE>
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 following table shows commissions paid on futures transactions during
the past three fiscal years. No Fund or Portfolio paid commissions on any other
transactions.
<TABLE>
<CAPTION>
Fund/Portfolio Year Year Year
ended ended ended
6/30/00 6/30/99 6/30/98
<S> <C> <C> <C>
Intermediate Bond Fund $12,506 -- $2,160
Intermediate Bond Portfolio $22,606 8,957
High Yield Fund 2,792 -- --
</TABLE>
The Trust has arranged for its custodian to act as a soliciting dealer to
accept any fees available to the custodian as a soliciting dealer in connection
with any tender offer for portfolio securities. The custodian will credit any
such fees received against its custodial fees.
41
<PAGE>
ADDITIONAL INCOME TAX CONSIDERATIONS
Each Fund intends to qualify under Subchapter M of the Internal Renewal
Code and to comply with the special provisions of the Internal Revenue Code that
relieve it of federal income tax to the extent of its net investment income and
capital gains currently distributed to shareholders.
Because capital gains distributions reduce net asset value, if a
shareholder purchases shares shortly before a record date, he will, in effect,
receive a return of a portion of his investment in such distribution. The
distribution would nonetheless be taxable to him, even if the net asset value of
shares were reduced below his cost. However, for federal income tax purposes the
shareholder's original cost would continue as his tax basis.
Each Fund expects that none of its dividends will qualify for the deduction
for dividends received by corporate shareholders.
ADDITIONAL INFORMATION ON NET ASSET VALUE--CASH RESERVES FUND
Please refer to Net Asset Value in the Prospectus, which is incorporated
herein by reference. Cash Reserves Fund values its portfolio by the "amortized
cost method" by which it attempts to maintain its net asset value at $1.00 per
share. This involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
Although this method provides certainty in valuation, it may result in periods
during which value as determined by amortized cost is higher or lower than the
price Cash Reserves Fund would receive if it sold the instrument. Other assets
are valued at a fair value determined in good faith by the Board of Trustees.
In connection with the use of amortized cost and the maintenance of a per
share net asset value of $1.00, the Trust has agreed, with respect to Cash
Reserves Fund: (i) to seek to maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining relative stability of
principal and not in excess of 90 days; (ii) not to purchase a portfolio
instrument with a remaining maturity of greater than thirteen months; and (iii)
to limit its purchase of portfolio instruments to those instruments that are
denominated in U.S. dollars which the Board of Trustees determines present
minimal credit risks and that are of eligible quality as determined by any major
rating service as defined under SEC Rule 2a-7 or, in the case of any instrument
that is not rated, of comparable quality as determined by the Board.
42
<PAGE>
Cash Reserves Fund has also agreed to establish procedures reasonably
designed to stabilize its price per share as computed for the purpose of sales
and redemptions at $1.00. Such procedures include review of the portfolio
holdings by the Board of Trustees, at such intervals as it deems appropriate, to
determine whether the net asset values calculated by using available market
quotations or market equivalents deviate from $1.00 per share based on amortized
cost. Calculations are made to compare the value of its investments valued at
amortized cost with market value. Market values are obtained by using actual
quotations provided by market makers, estimates of market value, values from
yield data obtained from reputable sources for the instruments, values obtained
from Stein Roe's matrix, or values obtained from an independent pricing service.
Any such service might value investments based on methods which include
consideration of: yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. The service may also employ electronic data processing techniques, a
matrix system or both to determine valuations.
In connection with Cash Reserves Fund's use of the amortized cost method of
portfolio valuation to maintain its net asset value at $1.00 per share, it might
incur or anticipate an unusual expense, loss, depreciation, gain or appreciation
that would affect its net asset value per share or income for a particular
period. The extent of any deviation between net asset value based upon available
market quotations or market equivalents and $1.00 per share based on amortized
cost will be examined by the Board of Trustees as it deems appropriate. If such
deviation exceeds 1/2 of 1%, the Board of Trustees will promptly consider what
action, if any, should be initiated. In the event the Board of Trustees
determines that a deviation exists that may result in material dilution or other
unfair results to investors or existing shareholders, it will take such action
as it considers appropriate to eliminate or reduce to the extent reasonably
practicable such dilution or unfair results. Actions which the Board might take
include: selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; increasing, reducing,
or suspending dividends or distributions from capital or capital gains; or
redeeming shares in kind. The Board might also establish a net asset value per
share by using market values, as a result of which the net asset value might
deviate from $1.00 per share.
The above policies relating to the determination of net asset value also
apply to Cash Reserves Portfolio.
INVESTMENT PERFORMANCE
Cash Reserves Fund may quote a "Current Yield" or "Effective Yield" or both
from time to time. The Current Yield is an annualized yield based on the actual
total return for a seven-day period. The Effective Yield is an annualized yield
based on a daily compounding of the Current Yield. These yields are each
computed by first determining the "Net Change in Account Value" for a
hypothetical account having a share balance of one share at the beginning of a
seven-day period ("Beginning Account Value"), excluding capital changes. The Net
Change in Account Value will always equal the total dividends declared with
respect to the account, assuming a constant net asset value of $1.00.
The yields are then computed as follows:
Net Change in Account Value 365
--------------------------- ---
Current Yield = Beginning Account Value x 7
43
<PAGE>
[1 + Net Change in Account Value ](365/7)
------------------------------------------
Effective Yield = Beginning Account Value - 1
44
<PAGE>
For example, the yields of Cash Reserves Fund for the seven-day period ended
June 30, 2000, were:
$0.000838082 365
----------------------- ---
Current Yield = $1.00 x 7 = 5.62%
[1+$0.000838082](365/7)
-----------------------
Effective Yield = $1.00 - 1 = 5.78%
The average dollar-weighted portfolio maturity of Cash Reserves Fund
for the seven days ended June 30, 2000 was 26 days.
In addition to fluctuations reflecting changes in net income of Cash
Reserves Fund resulting from changes in income earned on its portfolio
securities and in its expenses, yield also would be affected if Cash Reserves
Fund were to restrict or supplement its dividends in order to maintain its net
asset value at $1.00. (See Net Asset Value in the Prospectus and Additional
Information on the Determination of Net Asset Value herein.) Portfolio changes
resulting from net purchases or net redemptions of Fund shares may affect yield.
Accordingly, the yield of Cash Reserves Fund may vary from day to day and the
yield stated for a particular past period is not a representation as to its
future yield. The yield of Cash Reserves Fund is not assured, and its principal
is not insured; however, it will attempt to maintain its net asset value per
share at $1.00.
Comparison of the yield of Cash Reserves Fund with those of alternative
investments (such as savings accounts, various types of bank deposits, and other
money market funds) should be made with consideration of differences between
Cash Reserves Fund and the alternative investments, differences in the periods
and methods used in the calculation of the yields being compared, and the impact
of income taxes on alternative investments.
---------------------
A Bond Fund may quote yield figures from time to time. The "Yield" is
computed by dividing the net investment income per share earned during a 30-day
period (using the average number of shares entitled to receive dividends) by the
net asset value per share on the last day of the period. The Yield formula
provides for semiannual compounding which assumes that net investment income is
earned and reinvested at a constant rate and annualized at the end of a
six-month period.
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1)6 -1].
Where: a = dividends and interest earned during the period. (For this
purpose, the Fund will recalculate the yield to maturity
based on market value of each portfolio security on each
business day on which net asset value is calculated.)
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the ending net asset value of the Fund for the period.
45
<PAGE>
For example, the Yields of the Bond Funds for the 30-day period ended June 30,
2000, were:
Intermediate Bond Fund = 7.92%
Income Fund = 8.77%
High Yield Fund* = 8.85%
Each Fund may quote total return figures from time to time. A "Total
Return" is your return on an investment which takes into account the change in
value of your investment with distributions reinvested. A "Total Return
Percentage" may be calculated by dividing the value of a share at the end of a
period (including reinvestment of distributions) by the value of the share at
the beginning of the period and subtracting one. For a given period, an "Average
Annual Total Return" may be computed by finding the average annual compounded
rate that would equate a hypothetical initial amount invested of $1,000 to the
ending redeemable value.
Average Annual Total Return is computed as follows: ERV = P(1+T)(n)
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the period at the end of the period (or
fractional portion).
For example, for a $1,000 investment in a Fund, the "Ending Redeemable
Value," the "Total Return Percentage," and the "Average Annual Total Return" at
June 30, 2000 were:
<TABLE>
<CAPTION>
ENDING AVERAGE ANNUAL
REDEEMABLE TOTAL RETURN TOTAL
VALUE($) PERCENTAGE (%) RETURN(%)
<S> <C> <C> <C>
Cash Reserves Fund
------------------
1 Year 1,052 5.22 5.22
5 Years 1,276 27.55 4.99
10 Years 1,582 58.17 4.69
Intermediate Bond Fund
----------------------
1 Year 1,046 4.62 4.62
5 Years 1,359 35.93 6.33
10 Years 2,077 107.72 7.58
Income Fund
-----------
1 Year 1,049 4.92 4.92
5 Years 1,337 33.72 5.98
10 Years 2,164 116.38 8.02
High Yield Fund*
---------------
1 year 995 (0.48) (.048)
Life of Fund* 1,306 30.59 7.56
</TABLE>
*Performance results reflect any waiver or reimbursement by the Advisor of
expenses. Absent this waiver or reimbursement arrangement, performance results
would have been lower. See Prospectus for details.
**Since commencement of operations on Nov. 1, 1996.
46
<PAGE>
Investment performance figures assume reinvestment of all dividends and
distributions and do not take into account any federal, state, or local income
taxes which shareholders must pay on a current basis. They are not necessarily
indicative of future results. The performance of a Fund is a result of
conditions in the securities markets, portfolio management, and operating
expenses. Although investment performance information is useful in reviewing a
Fund's performance and in providing some basis for comparison with other
investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods.
A Fund may note its mention in newspapers, magazines, or other media from
time to time. However, the Funds assume no responsibility for the accuracy of
such data. Newspapers and magazines that might mention the Funds include, but
are not limited to, the following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Atlantic Monthly
Associated Press
Barron's
Bloomberg
Boston Globe
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business Consumer Reports Consumer Digest Dow Jones Investment
Advisor Dow Jones Newswire Fee Advisor Financial Planning Financial World Forbes
Fortune Fund Action Fund Marketing Alert Gourmet Individual Investor Investment
Dealers' Digest Investment News Investor's Business Daily Kiplinger's Personal
Finance Magazine Knight-Ridder Lipper Analytical Services Los Angeles Times
Louis Rukeyser's Wall Street Money Money on Line Morningstar Mutual Fund Market
News Mutual Fund News Service Mutual Funds Magazine Newsday Newsweek New York
Daily News The New York Times No-Load Fund Investor Pension World Pensions and
Investment Personal Investor Physicians Financial News Jane Bryant Quinn
(syndicated column) Reuters The San Francisco Chronicle Securities Industry
Daily Smart Money Smithsonian Strategic Insight Street.com Time Travel & Leisure
USA Today U.S. News & World Report Value Line The Wall Street Journal The
Washington Post Working Women Worth Your Money
In advertising and sales literature, a Fund may compare its yield and
performance with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, and other competing
investment and deposit products available from or through other financial
institutions. The composition of these indexes or averages differs from that of
the Funds. Comparison of a Fund to an alternative investment should be made with
consideration of differences in features and expected performance. All of the
indexes and averages noted below will be obtained from the indicated sources or
reporting services, which the Funds believe to be generally accurate.
The Funds may compare their performance to the Consumer Price Index (All
Urban), a widely-recognized measure of inflation.
47
<PAGE>
A Fund's performance may be compared to the following as indicated below:
<TABLE>
<CAPTION>
BENCHMARK FUND(S)
--------- -------
<S> <C>
CS First Boston High Yield Index High Yield Fund
Donoghue's Money Fund Averages(TM)--Aggressive Cash Reserves Fund
Donoghue's Money Fund Averages(TM)--All Taxable Cash Reserves Fund
Donoghue's Money Fund Averages(TM)--Prime Cash Reserves Fund
Donoghue's Money Fund Averages(TM)--Prime and Eurodollar Cash Reserves Fund
Donoghue's Money Fund Averages(TM)--Prime, Eurodollar, and Yankeedollar Cash Reserves Fund
Donoghue's Money Fund Averages(TM)--Taxable Cash Reserves Fund
(Includes the previous four categories)
Lehman Aggregate Index Intermediate Bond Fund
Lehman Government/Corporate Index Intermediate Bond Fund
Lehman High Yield Bond Index High Yield Fund
Lehman High Yield Corporate Bond Index High Yield Fund
Lehman Intermediate Corporate Bond Index Income Fund
Lehman Intermediate Government/Corporate Index Intermediate Bond Fund
Lipper All Long-Term Fixed Income Funds Average Intermediate Bond Fund, Income Fund
Lipper Corporate Bond Funds (A Rated) Average Intermediate Bond Fund
Lipper Corporate Bond Funds (BBB Rated) Average Income Fund
Lipper Intermediate-Term (5-10 Year) Investment Grade Debt Funds Intermediate Bond Fund
Average
Lipper Long-Term Taxable Bond Funds Average Intermediate Bond Fund, Income Fund
Lipper Money Market Instrument Funds Average Cash Reserves Fund
Lipper Short-Term Income Fund Average Cash Reserves Fund
Merrill Lynch Corporate and Government Master Index Intermediate Bond Fund, Income Fund
Merrill Lynch High-Yield Master Index Income Fund, High Yield Fund
Morningstar All Long-Term Fixed Income Funds Average Intermediate Bond Fund, Income Fund
Morningstar Corporate Bond (General) Average Income Fund, High Yield Fund
Morningstar Corporate Bond (High Quality) Average Intermediate Bond Fund
Morningstar Long-Term Taxable Bond Funds Average Intermediate Bond Fund, Income Fund
Salomon Brothers Broad Investment Grade Bond Index Intermediate Bond Fund, Income Fund
Salomon Brothers Extended High Yield Market Index High Yield Fund
Salomon Brothers High Yield Market Index High Yield Fund
</TABLE>
The Lipper and Morningstar averages are unweighted averages of total return
performance of mutual funds as classified, calculated, and published by these
independent services that monitor the performance of mutual funds. The Funds may
also use comparative performance as computed in a ranking by these services or
category averages and rankings provided by another independent service. Should
these services reclassify a Fund to a different category or develop (and place a
Fund into) a new category, that Fund may compare its performance or rank against
other funds in the newly-assigned category (or the average of such category) as
published by the service.
The Merrill Lynch High-Yield Master Index measures the total return
performance of corporate debt issues rated less than investment grade but not in
default. The Merrill Lynch Corporate and Government Master Index measures total
return performance of a broad range of U.S. Treasury, federal agency, and
corporate debt securities, but excluding mortgage-backed securities. The Salomon
Brothers Broad Investment Grade Bond Index measures the market-weighted total
return of a wide range of debt securities, including U.S. Treasury/agency
securities, investment-grade corporate bonds, and mortgage pass-through
securities.
48
<PAGE>
Cash Reserves Fund may compare its after-tax yield (computed by multiplying
the yield by one minus the highest marginal federal individual tax rate) to the
average yield for the tax-free categories of the aforementioned services.
Investors may desire to compare the performance and features of Cash
Reserves Fund to those of various bank products. Cash Reserves Fund may compare
its yield to the average rates of bank and thrift institution money market
deposit accounts, Super N.O.W. accounts, and certificates of deposit. The rates
published weekly by the BANK RATE MONITOR(C), a North Palm Beach (Florida)
financial reporting service, in its BANK RATE MONITOR(C) National Index are
averages of the personal account rates offered on the Wednesday prior to the
date of publication by one hundred leading banks and thrift institutions in the
top ten Consolidated Standard Metropolitan Statistical Areas. Account minimums
range upward from $2,500 in each institution and compounding methods vary. Super
N.O.W. accounts generally offer unlimited checking, while money market deposit
accounts generally restrict the number of checks that may be written. If more
than one rate is offered, the lowest rate is used. Rates are subject to change
at any time specified by the institution. Bank account deposits may be insured.
Shareholder accounts in Cash Reserves Fund are not insured. Bank passbook
savings accounts compete with money market mutual fund products with respect to
certain liquidity features but may not offer all of the features available from
a money market mutual fund, such as check writing. Bank passbook savings
accounts normally offer a fixed rate of interest while the yield of Cash
Reserves Fund fluctuates. Bank checking accounts normally do not pay interest
but compete with money market mutual funds with respect to certain liquidity
features (e.g., the ability to write checks against the account). Bank
certificates of deposit may offer fixed or variable rates for a set term.
(Normally, a variety of terms are available.) Withdrawal of these deposits prior
to maturity will normally be subject to a penalty. In contrast, shares of Cash
Reserves Fund are redeemable at the next determined net asset value (normally,
$1.00 per share) after a request is received, without charge.
In advertising and sales literature, a Fund may also cite its rating,
recognition, or other mention by Morningstar or any other entity. Morningstar's
rating system is based on risk-adjusted total return performance and is
expressed in a star-rating format. The risk-adjusted number is computed by
subtracting a fund's risk score (which is a function of its monthly returns less
the 3-month T-bill return) from its load-adjusted total return score. This
numerical score is then translated into rating categories, with the top 10%
labeled five star, the next 22.5% labeled four star, the next 35% labeled three
star, the next 22.5% labeled two star, and the bottom 10% one star. A high
rating reflects either above-average returns or below-average risk, or both.
Of course, past performance is not indicative of future results.
--------------------
To illustrate the historical returns on various types of financial assets,
the Funds may use historical data provided by Ibbotson Associates, Inc.
("Ibbotson"), a Chicago-based investment firm. Ibbotson constructs (or obtains)
very long-term (since 1926) total return data (including, for example, total
return indexes, total return percentages, average annual total returns and
standard deviations of such returns) for the following asset types:
Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
49
<PAGE>
U.S. Treasury bills
Consumer Price Index
--------------------
A Fund may also use hypothetical returns to be used as an example in a mix
of asset allocation strategies. One such example is reflected in the chart
below, which shows the effect of tax deferral on a hypothetical investment. This
chart assumes that an investor invested $2,000 a year on Jan. 1, for any
specified period, in both a Tax-Deferred Investment and a Taxable Investment,
that both investments earn either 3%, 5%, 7%, or 9% compounded annually, and
that the investor withdrew the entire amount at the end of the period. (A tax
rate of 39.6% is applied annually to the Taxable Investment and on the
withdrawal of earnings on the Tax-Deferred Investment.)
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
<TABLE>
<CAPTION>
INTEREST RATE 3% 5% 7% 9% 3% 5% 7% 9%
---------------------------------------------------------------------------------------------------------------------
Compounding
Years Tax-Deferred Investment Taxable Investment
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 $82,955 $108,031 $145,856 $203,239 $80,217 $98,343 $121,466 $151,057
25 65,164 80,337 101,553 131,327 63,678 75,318 89,528 106,909
20 49,273 57,781 68,829 83,204 48,560 55,476 63,563 73,028
15 35,022 39,250 44,361 50,540 34,739 38,377 42,455 47,025
10 22,184 23,874 25,779 27,925 22,106 23,642 25,294 27,069
5 10,565 10,969 11,393 11,840 10,557 10,943 11,342 11,754
1 2,036 2,060 2,085 2,109 2,036 2,060 2,085 2,109
</TABLE>
Average Life Calculations. From time to time, a Fund may quote an average
life figure for its portfolio. Average life is the weighted average period over
which Stein Roe expects the principal to be paid, and differs from stated
maturity in that it estimates the effect of expected principal prepayments and
call provisions. With respect to GNMA securities and other mortgage-backed
securities, average life is likely to be substantially less than the stated
maturity of the mortgages in the underlying pools. With respect to obligations
with call provisions, average life is typically the next call date on which the
obligation reasonably may be expected to be called. Securities without
prepayment or call provisions generally have an average life equal to their
stated maturity.
Dollar Cost Averaging. Dollar cost averaging is an investment strategy that
requires investing a fixed amount of money in Fund shares at set intervals. This
allows you to purchase more shares when prices are low and fewer shares when
prices are high. Over time, this tends to lower your average cost per share.
Like any investment strategy, dollar cost averaging can't guarantee a profit or
protect against losses in a steadily declining market. Dollar cost averaging
involves uninterrupted investing regardless of share price and therefore may not
be appropriate for every investor.
From time to time, a Fund may offer in its advertising and sales literature
to send an investment strategy guide, a tax guide, or other supplemental
information to investors and shareholders. It may also mention the Stein Roe
Counselor(SM) program and asset allocation and other investment strategies.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Each Fund (which are series of the Trust, an open-end management investment
company) seeks to achieve its objective 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,
50
<PAGE>
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
51
<PAGE>
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.
APPENDIX--RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are general and
are not absolute standards of quality or guarantees as to the creditworthiness
of an issuer. Consequently, Stein Roe believes that the quality of debt
securities should be continuously reviewed and that individual analysts give
different weightings to the various factors involved in credit analysis. A
rating is not a recommendation to purchase, sell or hold a security because it
does not take into account market value or suitability for a particular
investor. When a security has received a rating from more than one service, each
rating should be evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed, suspended or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons.
52
<PAGE>
The following is a description of the characteristics of ratings used by
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P").
CORPORATE BOND RATINGS
RATINGS BY MOODY'S
Aaa. Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or an exceptionally stable margin and
principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are more unlikely to impair the
fundamentally strong position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa bonds or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa bonds.
A. Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade obligations; i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
53
<PAGE>
RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay interest and
repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC, or C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C1. This rating is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
NOTES:
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Foreign debt is rated on the same basis as domestic debt measuring the
creditworthiness of the issuer; ratings of foreign debt do not take into account
currency exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks. Examples of such obligations are:
securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and interest only and
principal only mortgage securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no volatility or
variability in total return.
COMMERCIAL PAPER RATINGS
RATINGS BY MOODY'S
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
54
<PAGE>
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.
RATINGS BY S&P
A brief description of the applicable rating symbols and their meaning
follows:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
-------------
55
<PAGE>
STEIN ROE MONEY MARKET FUND
Cash Reserves Fund
PROSPECTUS
NOV. 1, 2000
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.
<PAGE>
<TABLE>
<S> <C>
3 The Fund
Investment Goals
Principal Investment Strategies
Principal Investment Risks
Fund Performance
Your Expenses
7 Financial Highlights
8 Your Account
Purchasing Shares
Opening an Account
Determining Share Price Selling Shares
Exchanging Shares
Fund Policy on Trading of Fund Shares
Reporting to Shareholders
Dividends and Distributions
14 Other Investments and Risks
14 The Fund's Management
Investment Advisor
Master/Feeder Fund Structure
</TABLE>
Please keep this prospectus as your reference manual.
2
<PAGE>
THE FUND
INVESTMENT GOALS The Fund seeks maximum current income, consistent with capital
preservation and the maintenance of liquidity.
PRINCIPAL INVESTMENT STRATEGIES The Fund invests all of its assets in SR&F Cash
Reserves Portfolio (the "Portfolio") as part of a master fund/feeder fund
structure. The Portfolio invests in high-quality money market securities.
Money market funds are subject to strict rules that require them to buy
individual securities that have remaining maturities of 13 months or less,
maintain an average dollar-weighted portfolio maturity of 90 days or less,
and buy only high-quality, U.S. dollar-denominated obligations. The
Portfolio invests in the following types of money market securities:
- Securities issued or guaranteed by the U.S. government or by its
agencies.
- Securities issued or guaranteed by the government of any foreign
country that have a long-term rating at time of purchase of A or
better (or equivalent rating) by at least one nationally
recognized bond rating agency.
- Certificates of deposit, bankers' acceptances, time deposits and
other short-term securities issued by domestic or foreign banks
or their subsidiaries or branches.
- Commercial paper of domestic or foreign issuers, including
variable-rate demand notes.
- Short-term debt securities having a long-term rating at time of
purchase of A or better (or equivalent rating) by at least one
nationally recognized bond rating agency.
- Repurchase agreements. - Other high-quality short-term obligations.
The Portfolio invests more than 25% of its total assets in securities of
issuers in the financial services industry, including banks and financial
companies such as mortgage companies, investment banks, brokerage
companies, special purpose entities, and personal and business credit
institutions
The Fund seeks to preserve the value of your investment at $1 per share.
The portfolio manager generally makes decisions on buying and selling
portfolio investments based upon her judgment that the decision will
improve the Fund's investment return and further its investment goal. The
portfolio manager may also be required to sell portfolio investments to
fund redemptions.
PRINCIPAL INVESTMENT RISKS The principal risks of investing in the Fund are
described below. There are circumstances (including additional risks that
are not described here) which could prevent the Fund from achieving
investment goals.
An investment in the Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the
Fund seeks to preserve the value of your investment at $1 per share, it is
possible to lose money by investing in the Fund. Additionally, the Fund's
yield will vary as the short-term securities in its portfolio mature and
the proceeds are reinvested in securities with different interest rates.
Market risk means that security prices in a market, sector or industry may
move down. Downward movements will reduce the value of your investment.
Because of market risk, there is no guarantee that the Fund will achieve
its investment goals or perform favorably compared with competing funds.
Interest rate risk is the risk of change in the price of a security when
interest rates increase or decrease. In general, if interest rates rise,
securities prices fall; and if interest rates fall, securities prices rise.
Changes in
3
<PAGE>
the values of securities 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.
Because the Portfolio may invest in debt securities issued by private
entities, including corporate bonds, the Fund is subject to issuer risk.
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 payment of interest or principal.
This could result in decreases in the price of the security and in some
cases a decrease in income..
Foreign securities are subject to special risks. Foreign stock markets can
be extremely volatile. Fluctuations in currency exchange rates may impact
the value of foreign securities without a change in the intrinsic value of
those securities. The liquidity of foreign securities may be more limited
than domestic securities, which means that the Fund may, at times, be
unable to sell foreign securities at desirable prices. Brokerage
commissions, custodial fees and other fees are generally higher for foreign
investments. In addition, foreign governments may impose withholding taxes
which would reduce the amount of income and capital gains available to
distribute to shareholders. Other risks include the following: possible
delays in the settlement of transactions or in the notification of income;
less publicly available information about companies; the impact of
political, social or diplomatic events; and possible seizure, expropriation
or nationalization of the company or its assets or imposition of currency
exchange controls.
Because of the policy of investing more than 25% of assets in securities of
issuers in the financial services industry, the Fund may be affected more
adversely than competing funds by changes affecting that industry.
Financial Services Industry Concentration. The financial services
industries are subject to extensive government regulation which can limit
both the amounts and types of loans and other financial commitments they
can make, and the interest rates and fees they can charge. Profitability is
largely dependent on the availability and cost of capital funds, and can
fluctuate significantly when interest rates change. Credit losses resulting
from financial difficulties of borrowers can negatively affect the
financial services industries. Insurance companies can be subject to severe
price competition. The financial services industries are currently
undergoing relatively rapid change as existing distinctions between
financial service segments become less clear. For instance, recent business
combinations have included insurance, finance, and securities brokerage
under single ownership. Some primarily retail corporations have expanded
into securities and insurance industries. Moreover, the federal laws
generally separating commercial and investment banking are currently being
studied by Congress.
For more information on the Portfolio's investment techniques, please refer
to "Other Investments and Risks."
WHO SHOULD INVEST IN THE FUND?
You may want to invest in Cash Reserves Fund if you:
- want a relatively stable and liquid investment as well the potential
for a competitive yield
- are saving for a short-term investment or creating an emergency fund -
want the ability to write checks on your account - are looking to diversify
your investment portfolio with cash or
similar types of investments
Cash Reserves Fund is not appropriate for investors who:
- want high return potential
- don't want current income
4
<PAGE>
FUND PERFORMANCE The following charts show the Fund's performance for the past
10 calendar years through Dec. 31, 1999. The returns include the
reinvestment of dividends and distributions. As with all mutual funds, past
performance is no guarantee of future results.
YEAR-BY-YEAR TOTAL RETURNS
Year-by-year calendar total returns show the Fund's volatility over a
period of time. This chart illustrates performance differences for each
calendar year and provides an indication of the risks of investing in the
Fund.
<TABLE>
<CAPTION>
[bar chart]
-------------------------------------------------------------------------------------------------------------------
YEAR-BY-YEAR TOTAL RETURNS
--------- ---------- --------- ---------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8%
7% 7.78%
6%
5% 5.71% 5.44% 5.01% 5.01%
4% 4.86% 4.64%
3% 3.42% 3.71%
2% 2.58%
0%
--------- ---------- --------- ---------- ---------- --------- ---------- --------- ---------- --------- ----------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
--------- ---------- --------- ---------- ---------- --------- ---------- --------- ---------- --------- ----------
[/bar chart]
</TABLE>
[ ] Cash Reserves Fund
The Fund's year-to-date total return through Sept. 30, 2000, was 4.22 %. For
period shown on the chart above:
Best quarter: 2nd quarter 1990, +1.91%
Worst quarter: 2nd quarter 1993, +0.63%
AVERAGE ANNUAL TOTAL RETURNS
Average annual total returns measure the Fund's performance over time.
We show returns for calendar years to be consistent with the way other
mutual funds report performance in their prospectuses. This provides
an indication of the risks of investing in the Fund.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDING DEC. 31, 1999
-------------------------------------------
<S> <C> <C> <C>
1 YR 5 YR 10 YR
------------------------------------------------- ------------ ------------- ----------------
Cash Reserves Fund 4.64 4.99 4.81
</TABLE>
For current 7-day yield information on the yield, please call
800-338-2550.
YOUR EXPENSES This table shows fees and expenses you may pay if you buy and hold
shares of the Fund.
You do not pay any sales charge when you purchase or sell your shares.(a)
However, you pay various other indirect expenses because the Fund or the
Portfolio pays fees and other expenses that reduce your investment return.
5
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (b)
(expenses that are deducted from Fund assets)
--------------------------------------------------
<S> <C>
Management fees(c) 0.49%
Distribution (12b-1) fees None
Other expenses 0.19%
--------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 0.68%
</TABLE>
(a) There is a $7 charge for wiring redemption proceeds to your bank. A
fee of $5 per quarter may be charged to accounts that fall below the
required minimum balance.
(b) Annual fund operating expenses consist of Fund expenses plus the
Fund's share of the expenses of the Portfolio. Fund expenses include
management fees and administrative costs such as furnishing the Fund
with offices and providing tax and compliance services.
(c) The Portfolio pays a management fee of 0.24% and the Fund pays an
administrative fee of 0.25%.
EXPENSE EXAMPLE
This example compares the cost of investing in the Fund to the cost of
investing in other mutual funds. It uses the same hypothetical assumptions
that other funds use in their prospectuses:
- $10,000 initial investment
- 5% total return each year
- the Fund's operating expenses remain constant as a percent of net
assets
- redemption at the end of each time period
Your actual costs may be higher or lower because in reality fund returns
and other expenses change. This example reflects expenses of both the Fund
and the Portfolio. Expenses based on these assumptions are:
<TABLE>
<CAPTION>
EXPENSE EXAMPLE
<S> <C> <C> <C> <C>
1 yr 3 yrs 5 yrs 10 yrs
----------------------------- --------- ---------- ----------- ------------
Cash Reserves Fund 69 218 379 847
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table explains the Fund's financial performance.
Consistent with other mutual funds, we show information for the last five
fiscal years. The Fund's fiscal year runs from July 1 to June 30. The total
returns in the table represent the return that investors earned assuming
that they reinvested all dividends and distributions. Certain information
in the table reflects the financial results for a single Fund share. Ernst
& Young LLP, independent auditors, audits this information and issues a
report that appears in the Fund's annual report along with the financial
statements. To request the annual report, please call 800-338-2550.
CASH RESERVES FUND
<TABLE>
<CAPTION>
PER SHARE DATA
For years ending June 30,
---------------------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income 0.051 0.045 0.050 0.048 0.050
Distributions from net investment income (0.045) (0.050) (0.048) (0.050)
(0.051)
NET ASSET VALUE, END OF PERIOD $1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Ratio of net expenses to average net assets 0.68% 0.70% 0.75% 0.77% 0.78%
Ratio of net investment income to average net assets 5.11% 4.58% 4.98% 4.80% 4.98%
TOTAL RETURN 5.22% 4.64% 5.09% 4.92% 5.07%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000,s) $496,850 $503,686 $493,954 $452,358 $476,840
</TABLE>
7
<PAGE>
YOUR ACCOUNT
PURCHASING SHARES You will not pay a sales charge when you purchase Fund shares.
Your purchases are made at the net asset value net asset value) next
determined after the Fund receives your check, wire transfer or electronic
transfer. If the Fund receives your check, wire transfer or electronic
transfer after the close of regular trading on the New York Stock Exchange
(NYSE)--normally 4 p.m. Eastern time--your purchase is effective on the
next business day.
PURCHASES THROUGH THIRD PARTIES
If you purchase Fund shares through certain broker-dealers, banks or other
intermediaries (intermediaries), they may charge a fee for their services.
They may also place limits on your ability to use services the Fund offers.
There are no charges or limitations if you purchase shares directly from
the Fund, except those fees described in this prospectus.
If an intermediary is an agent or designee of the Fund, orders are
processed at the net asset value next calculated after the intermediary
receives the order. The intermediary must segregate any orders it receives
after the close of regular trading on the NYSE and transmit those orders
separately for execution at the net asset value next determined.
CONDITIONS OF PURCHASE
An order to purchase Fund shares is not binding unless and until an
authorized officer, agent or designee of the Fund accepts it. Once we
accept your purchase order, you may not cancel or revoke it; however, you
may redeem your shares. The Fund may reject any purchase order if it
determines that the order is not in the best interests of the Fund and its
investors. The Fund may waive or lower its investment minimums for any
reason. If you participate in the Stein Roe CounselorSM program or are a
client of Stein Roe Private Capital Management, the minimum initial
investment is determined by those programs.
<TABLE>
<CAPTION>
ACCOUNT MINIMUMS
MINIMUM TO OPEN AN MINIMUM MINIMUM
TYPE OF ACCOUNT ACCOUNT ADDITION BALANCE
------------------------------ ---------------------- ----------------- ----------------
<S> <C> <C> <C>
Regular $2,500 $100 $1,000
Custodial (UGMA/UTMA) $1,000 $100 $1,000
Automatic Investment Plan $1,000 $50 --
Roth and Traditional IRA $500 $50 $500
Educational IRA $500 $50* $500
</TABLE>
*Maximum $500 contribution per calendar year per child.
8
<PAGE>
OPENING AN ACCOUNT
<TABLE>
<CAPTION>
OPENING OR ADDING TO AN ACCOUNT
BY MAIL: BY WIRE:
------------------------- --------------------------------------------- ----------------------------------------------
<S> <C> <C>
OPENING AN ACCOUNT Complete the application. Mail your application to the address listed
Make check payable to Stein Roe Mutual on the left, then call 800-338-2550 to
Funds. obtain an account number. Include your
Social Security Number. To wire funds, use
Mail application and check to: the instructions below.
SteinRoe Services Inc.
P.O. Box 8900
Boston, MA 02205
ADDING TO AN ACCOUNT Make check payable to Stein Roe Mutual Wire funds to:
Funds. Be sure to write your account Bank Boston
number on the check.
ABA: 011000390
Attn: SSI, Account No. 98227776
Fill out investment slip (stub from your Fund No. 36; Stein Roe Cash Reserves Fund
statement or confirmation) or include a Your name (exactly as in the
note indicating the amount of your registration).
purchase, your account number, and the name Fund account number.
in which your account is registered.
Mail check with investment slip or note to the address
above.
</TABLE>
<TABLE>
<CAPTION>
OPENING OR ADDING TO AN ACCOUNT
BY ELECTRONIC FUNDS BY EXCHANGE: THROUGH AN
TRANSFER: INTERMEDIARY:
-------------------- -------------------------------------- ----------------------------------- ----------------------
<S> <C> <C> <C>
OPENING AN ACCOUNT You cannot open a new account via By mail, phone, or automatically Contact your
electronic transfer. (be sure to elect the Automatic financial
Exchange Privilege on your professional.
application).
ADDING TO AN Call 800-338-2550 to make your By mail, phone, or automatically Contact your
ACCOUNT purchase. To set up prescheduled (be sure to elect the Automatic financial
purchases, be sure to elect the Exchange Privilege on your professional.
Automatic Investment Plan (Stein Roe application).
Asset(SM) Builder) option on your
application.
</TABLE>
All checks must be made payable in U.S. dollars and drawn on U.S. banks.
Money orders and third-party checks will not be accepted.
DETERMINING SHARE PRICE The Fund's share price is its net asset value next
determined. The Fund attempts to maintain its net asset value at $1 per
share. Net asset value is the
9
<PAGE>
difference between the values of the Fund's assets and liabilities divided
by the number of shares outstanding. We determine net asset value twice
each business day: at 12 p.m. Eastern time and at the close of regular
trading on the NYSE--normally 4 p.m. Eastern time.
To calculate the net asset value, we value portfolio securities based on
their amortized cost, which does not take into account unrealized gains or
losses. The extent of any deviation between the net asset value based upon
market quotations or equivalents and $1 per share based on amortized cost
will be examined by the Board. If such deviation were to exceed 1/2 of 1%,
the Board would consider what action, if any, should be taken, including
selling portfolio securities, increasing, reducing, or suspending
distributions or redeeming shares in kind. Assets and securities for which
this valuation method does not produce a fair value are valued at a fair
value determined in good faith by the Board.
The Portfolio's foreign securities may trade on days when the NYSE is
closed. We will not price shares on days that the NYSE is closed for
trading and you may not purchase or redeem shares.
SELLING SHARES You may sell your shares any day the Fund is open for business.
Please follow the instructions below.
<TABLE>
<CAPTION>
SELLING SHARES
<S> <C>
BY MAIL: Send a letter of instruction, in English, including your account number and the
dollar value or number of shares you wish to sell. Sign the request exactly as the
account is registered. Be sure to include a signature guarantee. All supporting
legal documents as required from executors, trustees, administrators, or others
acting on accounts not registered in their names, must accompany the request. We
will mail the check to your registered address.
BY PHONE: You may sell your shares by telephone and
request that a check be sent to your address of record
by calling 800-338-2550, unless you have notified the
Fund of an address change within the previous 30
days.. The dollar limit for telephone redemptions is
$100,000 in a 30-day period. This feature is
automatically added to your account unless you decline
it on your application..
BY WIRE: Fill out the appropriate areas of the account
application for this feature. Proceeds of $1,000 or
more ($100,000 maximum) may be wired to your
predesignated bank account. Call 800-338-2550 to give
instructions to Stein Roe. There is a $7 charge for
wiring redemption proceeds to your bank.
BY ELECTRONIC Fill out the appropriate areas of
TRANSFER: the account application for this feature. To request
an electronic transfer (not less than $50; not more than
$100,000), call 800-338-2550. We will transfer your sale
proceeds electronically to your bank. The bank must be a
member of the Automated Clearing House.
BY EXCHANGE: Call 800-338-2550 to exchange any portion of your Fund shares for shares in any other
Stein Roe no-load fund.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
BY AUTOMATIC EXCHANGE: Fill out the appropriate areas of the
account application for this feature. Redeem a fixed
amount on a regular basis (not less than $50 per month;
not more than $100,000) from the Fund for investment in
another Stein Roe no-load fund.
BY CHECK WRITING: Complete the appropriate section of the account application for this feature. You
may redeem shares by writing checks (minimum $50) that are drawn against a special
checking account the Fund has with the Boston Safe Deposit & Trust Company
</TABLE>
WHAT YOU NEED TO KNOW WHEN SELLING SHARES
Once we receive and accept your order to sell shares, you may not cancel or
revoke it. We cannot accept an order to sell that specifies a particular
date or price or any other special conditions. If you have any questions
about the requirements for selling your shares, please call 800-338-2550
before submitting your order.
The Fund redeems shares at the net asset value next determined after an
order has been accepted. We mail proceeds within seven days after the sale.
The Fund normally pays wire redemption or electronic transfer proceeds on
the next business day.
We will not pay sale proceeds until your shares are paid for. If you
attempt to sell shares purchased by check or electronic transfer within 15
days of the purchase date, we will delay sending the sale proceeds until we
can verify that those shares are paid for. You may avoid this delay by
purchasing shares by a federal funds wire.
We use procedures reasonably designed to confirm that telephone
instructions are genuine. These include recording the conversation, testing
the identity of the caller by asking for account information, and sending
prompt written confirmation of the transaction to the shareholder of
record. If these procedures are followed, the Fund and its service
providers will not be liable for any losses due to unauthorized or
fraudulent instructions.
If the amount you redeem is in excess of the lesser of (1) $250,000 or (2)
1% of the Fund's assets, the Fund may pay the redemption "in kind." This is
payment in portfolio securities rather than cash. If this occurs, you may
incur transaction costs when you sell the securities.
INVOLUNTARY REDEMPTION
If your account value falls below $1,000, the Fund may redeem your shares
and send the proceeds to the registered address. You will receive notice 30
days before this happens. If your account falls below $10, the Fund may
redeem your shares without notice to you.
LOW BALANCE FEE
Due to the expense of maintaining accounts with low balances, if your
account balance falls below $2,000 ($800 for custodial accounts), you will
be charged a low balance fee of $5 per quarter. The low balance fee does
not apply to: (1) shareholders whose accounts in the Stein Roe Funds total
$50,000 or more; (2) Stein Roe IRAs; (3) other Stein Roe prototype
retirement plans; (4) accounts with automatic investment plans (unless
regular investments have been discontinued); or (5) omnibus or nominee
accounts. The Fund can waive the fee, at its discretion, in the event of
significant market corrections.
EXCHANGING SHARES You may exchange Fund shares for shares of other Stein Roe
no-load funds. Call 800-338-2550 to request a prospectus and application
for the fund you wish to exchange into. Please be sure to read the
prospectus carefully before you exchange your shares.
11
<PAGE>
The account you exchange into must be registered exactly the same as the
account you exchange from. You must meet all investment minimum
requirements for the fund you wish to exchange into before we can process
your exchange transaction.
An exchange is a redemption and purchase of shares for tax purposes, and
you may realize a gain or a loss when you exchange Fund shares for shares
of another fund.
We may change, suspend or eliminate the exchange service after notification
to you.
Generally, we limit you to four telephone exchanges "roundtrips" per year.
A roundtrip is an exchange out of the Fund into another Stein Roe no-load
fund and then back to the Fund.
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 increase Fund expenses. 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.
REPORTING TO SHAREHOLDERS To reduce the volume of mail you receive, only one
copy of certain materials, such as shareholder reports, will be mailed to
your household (same address). Please call 800-338-2550 if you want to
receive additional copies free of charge. This policy may not apply if you
purchase shares through an intermediary.
DIVIDENDS AND DISTRIBUTIONS The Fund declares dividends daily and pays them
monthly, and any capital gains (including short-term capital gains) at
least annually.
A dividend from net investment income represents the income the Fund earns
from dividends and interest paid on its investments, after payment of the
Fund's expenses. If the net asset value per share were to decline below $1,
the Board might temporarily reduce or suspend dividends in an effort to
maintain net asset value at $1 per share.
A capital gain is the increase in value of a security that the Portfolio
holds. The gain is "unrealized" until the security is sold. Each realized
capital gain is either short term or long term depending on whether the
Portfolio held the security for one year or less or more than one year,
regardless of how long you have held your Fund shares.
When the Fund makes a distribution of income or capital gains, the
distribution is automatically invested in additional shares of the Fund
unless you elect on the account application to have distributions paid by
check.
--------------------------------------------------------------------------------
[CALLOUT]
OPTIONS FOR RECEIVING DISTRIBUTION AND REDEMPTION PROCEEDS:
- by check
- by electronic transfer into your bank account
- a purchase of shares of another Stein Roe fund
--------------------------------------------------------------------------------
12
<PAGE>
--------------------------------------------------------------------------------
- a purchase of shares in a Stein Roe fund account of another person
[END OF CALLOUT]
--------------------------------------------------------------------------------
If you elect to receive distributions by check and a distribution check is
returned to the Fund as undeliverable, or if you do not present a
distribution check for payment within six months, we will change the
distribution option on your account and reinvest the proceeds of the check
in additional shares of the Fund. You will not receive any interest on
amounts represented by uncashed distribution or redemption checks.
TAX CONSEQUENCES
You are subject to federal income tax on both dividends and capital gains
distributions whether you elect to receive them in cash or reinvest them in
additional Fund shares. If the Fund declares a distribution in December,
but does not pay it until after December 31, you will be taxed as if the
distribution were paid in December. Stein Roe will process your
distributions and send you a statement for tax purposes each year showing
the source of distributions for the preceding year.
<TABLE>
<CAPTION>
------------------------------------------------ ---------------------------------------------------------
TRANSACTION TAX STATUS
------------------------------------------------ ---------------------------------------------------------
<S> <C>
Income dividend Ordinary income
------------------------------------------------ ---------------------------------------------------------
Short-term capital gain distribution Ordinary income
------------------------------------------------ ---------------------------------------------------------
Long-term capital gain distribution Capital gain
------------------------------------------------ ---------------------------------------------------------
Sale of shares owned one year or less Gain is ordinary income; loss is subject to special rules
------------------------------------------------ ---------------------------------------------------------
Sale of shares owned more than one year Capital gain or loss
------------------------------------------------ ---------------------------------------------------------
</TABLE>
In addition to the dividends and capital gains distributions made by the
Fund, you may realize a capital gain or loss when selling and exchanging
Fund shares. Such transactions may be subject to federal income tax.
This tax information provides only a general overview. It does not apply if
you invest in a tax-deferred retirement account such as an IRA. Please
consult your own tax advisor about the tax consequences of an investment in
the Fund.
13
<PAGE>
OTHER INVESTMENTS AND RISKS
The Fund's principal investment strategies and their associated risks are
described above. This section describes other investments the Portfolio may
make and the risks associated with them. In seeking to achieve its
investment goals, the Portfolio 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.
INTERFUND LENDING PROGRAM The Fund and Portfolio may lend money to and borrow
money from other funds advised by Stein Roe. They will do so when Stein Roe
believes such lending or borrowing is necessary and appropriate. Borrowing
costs will be the same as or lower than the costs of a bank loan.
14
<PAGE>
THE FUND'S MANAGEMENT
INVESTMENT ADVISOR Stein Roe & Farnham Incorporated (Stein Roe), One South
Wacker Drive, Chicago, IL 60606, manages the day-to-day operations of the
Fund and Portfolio. Stein Roe (and its predecessor) has advised and managed
mutual funds since 1949. For the fiscal year ended June 30, 2000, the Fund
and the Portfolio paid to Stein Roe aggregate fees of 0.49% of average net
assets.
Stein Roe's mutual funds and institutional investment advisory businesses
are part of a larger business unit known as Liberty Funds Group (LFG) that
includes several separate legal entities. LFG includes certain affiliates
of Stein Roe, including Colonial Management Associates, Inc. (Colonial).
The LFG business unit is managed by a single management team. Colonial and
other LFG entities also share personnel, facilities, and systems with Stein
Roe that may be used in providing administrative or operational services to
the Fund. Colonial is a registered investment adviser. Stein Roe also has a
wealth management business that is not part of LFG and is managed by a
different team. Stein Roe and the other entities that make up LFG are
subsidiaries of Liberty Financial Companies, Inc.
MASTER/FEEDER FUND STRUCTURE Unlike mutual funds that directly acquire and
manage their own portfolios of securities, the Fund is a "feeder" fund in a
"master/feeder" structure. This means that the Fund invests its assets in a
larger "master" portfolio of securities (the Portfolio) that has investment
goals and policies substantially identical to those of the Fund. The
investment performance of the Fund depends upon the investment performance
of the Portfolio. If the investment policies of the Fund and the Portfolio
became inconsistent, the Board of Trustees of the Fund can decide what
actions to take. Actions the Board of Trustees may recommend include
withdrawal of the Fund's assets from the Portfolio. For more information on
the master/feeder fund structure, see the Statement of Additional
Information.
15
<PAGE>
FOR MORE INFORMATION
You can obtain more information about the Fund's investments in its semiannual
and annual reports to investors. These reports discuss the market conditions and
investment strategies that affected the Fund's performance over the past six
months and year.
You may wish to read the Fund's SAI for more information. The SAI is
incorporated into this prospectus by reference, which means that it is
considered to be part of this prospectus and you are deemed to have been told of
its contents.
To obtain free copies of the Fund's semiannual and annual reports, latest
quarterly profile, or the SAI or to request other information about the Fund,
write or call:
Stein Roe Mutual Funds
One South Wacker Drive
Suite 3200
Chicago, IL 60606
800-338-2550
www.steinroe.com
Text-only versions of all Fund documents can be viewed online or downloaded from
the SEC at www.sec.gov. You can also obtain copies by visiting the SEC's Public
Reference Room in Washington, DC, by calling 800-SEC-0330, or by sending your
request and the appropriate fee to the SEC's public reference section,
Washington, DC 20549-6009.
Investment Company Act file number: 811-4552
Liberty-Stein Roe Funds Income Trust:
- Stein Roe Cash Reserves Fund
---------------------------------
LIBERTY FUNDS DISTRIBUTOR, INC.
16
<PAGE>
--------------------------------------------------------------------------------
LIBERTY HIGH YIELD BOND FUND CLASS A PROSPECTUS, NOVEMBER 1, 2000
--------------------------------------------------------------------------------
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.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND 2
-------------------------------------------
Investment Goals ....................... 2
Principal Investment Strategies ........ 2
Principal Investment Risks ............. 3
Performance History .................... 4
Your Expenses .......................... 5
YOUR ACCOUNT 6
-------------------------------------------
How to Buy Shares ...................... 6
Sales Charges .......................... 7
How to Exchange Shares ................. 8
How to Sell Shares ..................... 8
Fund Policy on Trading of Fund Shares .. 10
Distribution and Service Fees .......... 10
Other Information About Your Account ... 11
MANAGING THE FUND 13
-------------------------------------------
Investment Advisor ..................... 13
Portfolio Manager ...................... 13
OTHER INVESTMENT
STRATEGIES AND RISKS 14
-------------------------------------------
FINANCIAL HIGHLIGHTS 17
-------------------------------------------
</TABLE>
----------------------------
Not FDIC May Lose Value
Insured No Bank Guarantee
----------------------------
<PAGE>
--------------------------------------------------------------------------------
THE FUND
--------------------------------------------------------------------------------
INVESTMENT GOALS
--------------------------------------------------------------------------------
The Fund seeks its total return by investing for a high level of current income
and capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund invests all of its assets in SR&F High Yield Portfolio (the
"Portfolio") as part of a master fund/feeder fund structure. The Portfolio
invests at least 65% of its assets in high-yield, high-risk debt securities.
These securities are rated at the time of purchase:
- below BBB by Standard & Poor's,
- below Baa by Moody's Investors Service, Inc.,
- with a comparable rating by another nationally recognized rating
agency, or
- unrated securities that Stein Roe believes to be of comparable
quality.
The Portfolio may invest in any type of debt securities, including corporate
bonds and mortgage-backed and asset-backed securities.
The Portfolio seeks to achieve capital appreciation through purchasing bonds
that increase in market value. In addition, to a limited extent, the Portfolio
may seek capital appreciation by using hedging techniques such as futures and
options.
Although the Portfolio will invest primarily in debt securities, the Portfolio
may invest in equity securities to seek capital appreciation. Equity securities
include common stocks, preferred stocks, warrants and debt securities
convertible into common stocks.
In determining whether to buy or sell securities, the portfolio manager
evaluates relative values of the various types of securities in which the
Portfolio can invest (e.g., the relative value of corporate debt securities
versus mortgage-backed securities under prevailing market conditions), relative
values of various rating categories (e.g., relative values of higher-rated
securities versus lower-rated securities under prevailing market conditions),
and individual issuer characteristics. The portfolio manager may be required to
sell portfolio investments to fund redemptions. The Portfolio may invest in
securities of any maturity.
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."
---
2
<PAGE>
THE FUND
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
investment 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.
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.
Because the Portfolio may invest in debt securities issued by private entities,
including corporate bonds and privately issued mortgage-backed and asset-backed
securities, the Fund is subject to issuer risk 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 a decrease 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.
An economic downturn could severely disrupt the high-yield market and adversely
affect the value of outstanding bonds and the ability of the issuers to repay
principle and interest. In addition, lower-quality bonds are less sensitive to
interest rate changes than higher-quality instruments and generally are more
sensitive to adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period of rising
interest rates, issuers of such bonds may experience difficulty in servicing
their principle and interest payment obligations.
Because the Fund seeks to achieve capital appreciation, you could receive
capital gains distributions. (See "Tax Consequences.")
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
complete calendar years since it commenced operations. 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 and the life of the Fund periods. It includes
the effects of Fund expenses.
The Fund's return is compared to the Merrill Lynch High Yield Master II Index
(Merrill 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 August 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 and the life of the Fund. 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. As with all mutual funds, past
performance does not predict the Fund's future performance.
--------------------------------------------------------------------------------
Calendar Year Total Returns (Class S)(1)
--------------------------------------------------------------------------------
1997 15.84%
1998 4.30%
1999 8.21%
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
For period shown in bar chart:
The Fund's year-to-date total return through Best quarter: 2nd quarter 1997, +6.38%
September 30, 2000 was -5.43 %. Worst quarter: 3rd quarter 1998, -6.38%
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Returns - (for periods ended December 31, 1999)(1)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCEPTION LIFE OF THE
DATE 1 YEAR FUND
<S> <C> <C> <C>
Class S (%) 11/1/96 8.21 9.78
----------------------------- ------------- -------------- --------------
Merrill Index (%) N/A 2.51 6.74(2)
</TABLE>
(1) Class A shares are a newer class of shares. Its performance information
includes the returns of the Fund's Class S shares (the oldest existing fund
class) for periods prior to the inception of Class A shares. Class S share
returns are not restated to reflect any differences in expenses (such as
sales charges) between Class S shares and Class A shares. Class S shares
were initially offered on November 1, 1996 and Class A shares were
initially offered on August 1, 2000.
---
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. It uses the following hypothetical
conditions:
- $10,000 initial investment
- 5% total return for each year
- Fund operating expenses remain the same
- Assumes reinvestment of all dividends and distributions
--------------------------------------------------------------------------------
YOUR EXPENSES
--------------------------------------------------------------------------------
Expenses are one of several factors to consider before you invest in a mutual
fund. The tables below describe the fees and expenses you may pay when you buy,
hold and sell shares of the Fund.
--------------------------------------------------------------------------------
Shareholder Fees (3) (paid directly from your investment)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Maximum sales charge (load) on purchases (%)
(as a percentage of the offering price) 4.75
--------------------------------------------------- -----------
Maximum deferred sales charge (load) on
redemptions (%) (as a percentage of the
lesser of purchase price or redemption price) 1.00(4)
--------------------------------------------------- -----------
Redemption fee (%) (as a percentage of (5)
amount redeemed, if applicable)
</TABLE>
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (deducted directly from Fund assets)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Management fee (%)(6) 0.65
--------------------------------------------------- -----------
Distribution and service (12b-1) fees (%) 0.35(7)
--------------------------------------------------- -----------
Other expenses (%) 0.54(8)
--------------------------------------------------- -----------
Total annual fund operating expenses (%) 1.54
--------------------------------------------------- -----------
Expense reimbursement (%) (0.19)(9)
--------------------------------------------------- -----------
Net expenses (%) 1.35
</TABLE>
--------------------------------------------------------------------------------
Example Expenses (your actual costs may be higher or lower)
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class A $624 $938 $1,275 $2,222
</TABLE>
(3) A $10 annual fee is deducted from accounts of less than $1,000 and paid to
the transfer agent.
(4) This charge applies only to certain Class A shares bought without an
initial sales charge that are sold within 18 months of purchase.
(5) There is a $7.50 charge for wiring sale proceeds to your bank.
(6) The Portfolio pays a management fee of 0.50% and the Fund pays an
administrative fee of 0.15%.
(7) 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 1.25%. This arrangement may be terminated by the
distributor at any time.
(8) Other expenses are based on the Fund's Class S shares.
(9) The Fund's advisor has voluntarily 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 1.00%. As a result, the
actual management fee would be 0.46% and total annual fund operating
expenses for Class A shares would be 1.35%. 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 account and
financial advisor 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 made
(new account) 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 funds You may purchase shares by electronically transferring money
transfer 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
investment plan from your bank account to your fund account. You can select a
pre-authorized amount to be sent via electronic funds
transfer. Be sure to complete the appropriate section of
the application for this feature.
--------------------- -----------------------------------------------------------------
By dividend You may automatically invest dividends distributed by one fund
diversification 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
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
AS A % OF PRICE
THE PUBLIC AS A % RETAINED BY
OFFERING OF YOUR FINANCIAL
AMOUNT OF PURCHASE PRICE INVESTMENT ADVISOR 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(9) 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 purchases through a fee-based program.
---
7
<PAGE>
YOUR ACCOUNT
UNDERSTANDING CONTINGENT DEFERRED SALES CHARGES
Certain investments in Class A shares are subject to a CDSC, a sales charge
applied at the time you sell your shares. You will pay the CDSC only on shares
you sell within a certain amount of time after purchase. The CDSC generally
declines each year until there is no charge for selling shares. The CDSC is
applied to the net asset value at the time of purchase or sale, whichever is
lower. For purposes of calculating the CDSC, the start of the holding period is
the month-end of the month in which the purchase is made. Shares you purchase
with reinvested dividends or capital gains are not subject to a CDSC. When you
place an order to sell shares, the Fund will automatically sell first those
shares not subject to a CDSC and then those you have held the longest. This
policy helps reduce and possibly eliminate the potential impact of the CDSC.
--------------------------------------------------------------------------------
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 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.
---
8
<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.
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. Shareholders
of Liberty Acorn funds that qualify to purchase Class A shares at net asset
value may exchange their Class A shares for Class Z share of another fund
distributed by Liberty Funds Distributor, Inc. (see the Statement of Additional
Information for a description of these situations). 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,
---
9
<PAGE>
YOUR ACCOUNT
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.
----
10
<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
withdrawal plan percentage of your account on a monthly, quarterly or
semi-annually basis and have the proceeds sent to you if
your account balance is at least $5,000. This feature is
not available if you hold your shares in certificate form.
All dividends and capital gains distributions must be
reinvested. Be sure to complete the appropriate section of
the account application for this feature.
--------------------- -----------------------------------------------------------------
By electronic You may sell shares and request that the proceeds be
funds transfer electronically transferred to your bank. Proceeds may take up
to two business days to be received by your bank. You must
set up this feature prior to your request. Be sure to
complete the appropriate section of the account
application for this feature.
</TABLE>
----
11
<PAGE>
YOUR ACCOUNT
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
increase Fund expenses. 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.
DISTRIBUTION AND SERVICE FEES
--------------------------------------------------------------------------------
The Fund has adopted a plan under Rule 12b-1 that permits it to pay the
distributor marketing and other fees to support the sale and distribution of
Class A shares and the services provided to you by your financial advisor. The
annual service fee may equal up to 0.25% for Class A shares. The annual
distribution fee may equal up to 0.10% for Class A shares. Distribution and
service fees are paid out of the assets of the class. 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.
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
----
12
<PAGE>
YOUR ACCOUNT
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 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.
----
13
<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, net of expenses incurred 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(1)
--------------------------------------------------------------------------------
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 with in six months
of the check date, the distribution will be reinvested in additional shares of
the Fund.
TAX CONSEQUENCES Regardless of whether you receive your distributions in cash or
reinvest them in additional Fund shares, all Fund distributions are subject to
federal income tax. Depending on the state where you live, distributions may
also be subject to state and local income taxes.
In general, any distributions of dividends, interest and short-term capital
gains are taxable as ordinary income. Distributions of long-term capital gains
are generally taxable as such, regardless of how long you have held your Fund
shares. 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
----
14
<PAGE>
YOUR ACCOUNT
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.
----
15
<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 Stein Roe by the Fund
and Portfolio amounted to 0.46% 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 Portfolio, pursuant to
procedures adopted by the Board of Trustees.
PORTFOLIO MANAGER
--------------------------------------------------------------------------------
STEPHEN F. LOCKMAN has been manager of the Portfolio since 1997. He was
portfolio manager of Income Fund from 1997 to January, 1988, associate manager
of Income Fund from 1995 to 1997, and associate manager of High Yield Portfolio
from November, 1996 to February, 1997. Mr. Lockman was a senior research analyst
for Stein Roe's fixed income department from 1994, when he joined SteinRoe, to
1997. He served as portfolio manager for the Illinois State Board of Investment
from 1987 to 1994. A chartered financial analyst, Mr. Lockman earned a
bachelor's degree from the University of Illinois and a master's degree from
DePaul University.
----
16
<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 Portfolio may make
and the risks associated with them. In seeking to achieve its investment goals,
the Portfolio 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.
INITIAL PUBLIC OFFERINGS
--------------------------------------------------------------------------------
The Portfolio may invest a portion of its assets in certain types of equity
securities including securities offered during a company's initial public
offering (IPO). An IPO is the sale of a company's securities to the public for
the first time. The market price of a security the Portfolio buys in an IPO may
change substantially from the price the Portfolio paid, soon after the IPO ends.
In the short term, the price change may significantly increase or decrease the
Fund's total return, and therefore its performance history, after an IPO
investment. This is especially so when the Fund's assets are small. However,
should the Fund's assets increase, the results of an IPO investment will not
cause the Fund's performance history to change as much. Although companies can
be of any size or age at the time of their IPO, they are often smaller in size
and have a limited operating history which could create greater market
volatility for the securities. The advisor intends to limit the Portfolio's IPO
investments to issuers whose debt securities the Portfolio already owns, or
issuers which the advisor has specially researched before the IPO. The Portfolio
does not intend to invest more than 5% of its assets in IPOs and does not intend
to buy them for the purpose of immediately selling (also known as flipping) the
security after its public offering.
MORTGAGE-BACKED SECURITIES
--------------------------------------------------------------------------------
Mortgage-backed securities are securities that represent ownership interests in
large, diversified pools of mortgage loans. Sponsors pool together mortgages of
similar rates and terms and offer them as a security to investors.
Most mortgage securities are pooled together and structured as pass-throughs.
Monthly payments of principal and interest from the underlying mortgage loans
backing the pool are collected by a servicer and "passed through" regularly to
the investor. Pass-throughs can have a fixed or an adjustable rate. The majority
of pass-through securities are issued by three agencies: Ginnie Mae, Fannie Mae,
and Freddie Mac.
Commercial mortgage-backed securities are secured by loans to commercial
properties such as office buildings, multi-family apartment buildings, and
shopping centers. These loans usually contain prepayment penalties that provide
protection from refinancing in a declining interest rate environment.
----
17
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
Real estate mortgage investment conduits (REMICs) are multi-class securities
that qualify for special tax treatment under the Internal Revenue Code. REMICs
invest in certain mortgages that are secured principally by interests in real
property such as single family homes.
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 Portfolio 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.
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.
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.
PIK BONDS
--------------------------------------------------------------------------------
The Portfolio may invest in payable-in-kind bonds (PIK bonds) which are bonds
that pay interest in the form of additional securities. These bonds are subject
to greater price volatility than bonds that pay cash interest on a current
basis.
ILLIQUID INVESTMENTS
--------------------------------------------------------------------------------
The Portfolio may invest up to 15% of its net assets in illiquid investments. An
illiquid investment is a security or other position that cannot be disposed of
quickly in the normal course of business. For example, some securities are not
registered under U.S. securities laws and cannot be sold to the U.S. public
because of SEC regulations (these are known as "restricted securities"). Under
procedures adopted by the Fund's Trustees, certain restricted securities may be
deemed liquid and will not be counted toward this 15% limit.
----
18
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
PORTFOLIO TURNOVER
--------------------------------------------------------------------------------
There are no limits on turnover. Turnover may vary significantly from year to
year. The advisor expects it to exceed 100% under normal conditions. The
Portfolio 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.
INTERFUND LENDING PROGRAM
--------------------------------------------------------------------------------
The Fund and Portfolio may lend money to borrow money from other funds advised
by the advisor. They will do so when the advisor 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.
MASTER/FEEDER STRUCTURE
--------------------------------------------------------------------------------
Unlike mutual funds that directly acquire and manage their own portfolio of
securities, the Fund is a "feeder" fund in a "master/feeder" structure. This
means that the Fund invests its assets in a larger "master" portfolio of
securities, which has investment objectives and policies substantially identical
to those of the Fund. The investment performance of the Fund depends upon the
investment performance of the Portfolio. If the investment policies of the
Portfolio and the Fund became inconsistent, the Board of Trustees of the Fund
can decide what actions to take. Actions the Board of Trustees may recommend
include withdrawal of the Fund's assets from the Portfolio. For more information
on the master/feeder fund structure, see the Statement of Additional
Information.
TEMPORARY DEFENSIVE STRATEGIES
--------------------------------------------------------------------------------
At times, the advisor may determine that adverse market conditions make it
desirable to temporarily suspend the Portfolio's normal investment activities.
During such times, the Portfolio 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.
----
19
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance. Because Class A shares did not commence operations until
August 1, 2000, information is shown for the Fund's Class S shares, the Fund's
existing share class and reflects Class S share expenses. Information is shown
from the Fund's commencement of operations. The Fund's fiscal year runs 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 Class S shares of the Fund (assuming
reinvestment of all dividends and distributions). This information is included
in the Fund's financial statements which have been audited by Ernst & Young LLP,
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>
Period ended
Years ended June 30, June 30,
2000 1999 1998 1997(c)
Class S Class S Class S Class S
<S> <C> <C> <C> <C>
Net asset value -
-----------------------------------------------------------------------------------------------------------------
Beginning of period ($) 10.15 11.00 10.54 10.00
-----------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income 1.05 0.85 0.85 0.52
-----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.09) 0.53 0.61 0.54
-----------------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.04) 0.32 1.46 1.06
-----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS ($):
Net investment income 1.06 (0.85) (0.85) (0.52)
-----------------------------------------------------------------------------------------------------------------
Net realized gains -- (0.32) (0.15) --
-----------------------------------------------------------------------------------------------------------------
Total Distributions (1.06) (1.17) (1.00) (0.52)
-----------------------------------------------------------------------------------------------------------------
Net asset value -
End of period ($) 9.05 10.15 11.00 10.54
-----------------------------------------------------------------------------------------------------------------
Total return (%) (b) (0.48) 3.50 14.38 10.88(e)
-----------------------------------------------------------------------------------------------------------------
Ratio of net expenses to average net assets (a) 1.00 1.00 1.00 1.00(d)
-----------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (b) 10.67 8.23 7.79 8.05(d)
-----------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) (f) 144 296 426 168(e)
-----------------------------------------------------------------------------------------------------------------
Net assets at end of period (000) ($) 35,299 32,766 41,471 13,482
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the advisor, this ratio would have been 1.20%,
1.22%, 1.32%, and 2.29% for the years ended June 30, 2000, 1999, 1998 and
1997, respectively.
(b) Computed giving effect to the advisor's expenses limitation undertaking.
(c) From commencement of operations on November 1, 1996.
(d) Annualized.
(e) Not annualized.
(f) This represents the turnover for the Portfolio.
----
20
<PAGE>
--------------------------------------------------------------------------------
NOTES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
----
21
<PAGE>
NOTES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
----
22
<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 Income Trust: 811-4552
- Stein Roe High Yield Fund
--------------------------------------------------------------------------------
[LIBERTY FUNDS LOGO]
ALL-STAR - COLONIAL - CRABBE HUSON - NEWPORT - STEIN ROE ADVISOR
Liberty Funds Distributor, Inc. (C)2000
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
www.libertyfunds.com
715-01/305D-1000
-----------
0700
<PAGE>
--------------------------------------------------------------------------------
LIBERTY INCOME BOND FUND CLASS A PROSPECTUS, NOVEMBER 1, 2000
--------------------------------------------------------------------------------
Advised by Stein Roe & Farnham Incorporated
--------------------------------------------------------------------------------
TABLE OF CONTENTS
THE FUND 2
------------------------------------------
Investment Goals........................2
Principal Investment Strategies.........2
Principal Investment Risks..............3
Performance History.....................5
Your Expenses...........................6
YOUR ACCOUNT 7
------------------------------------------
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 14
------------------------------------------
Investment Advisor.....................14
Portfolio Manager......................14
OTHER INVESTMENT
STRATEGIES AND RISKS 15
------------------------------------------
FINANCIAL HIGHLIGHTS 18
------------------------------------------
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
--------------------------
<PAGE>
--------------------------------------------------------------------------------
THE FUND
--------------------------------------------------------------------------------
INVESTMENT GOALS
--------------------------------------------------------------------------------
The Fund seeks its total return by investing for a high level of current income
and, to a lesser extent, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund invests all of its assets in SR&F Income Portfolio (the "Portfolio") as
part of a master fund/feeder fund structure. The Portfolio invests primarily in:
* debt securities issued by the U.S. government; these include U.S.
Treasury securities and agency securities; agency securities include
certain mortgage-backed securities, which represent interests in pools
of mortgages,
* debt securities of U.S. corporations,
* mortgage-backed securities and asset-backed securities issued by
private (non-governmental) entities, and
* dollar-denominated debt securities issued by foreign governments and
corporations.
At least 60% of total assets are medium- or higher-quality securities rated at
the time of purchase:
* at least BBB by Standard & Poor's,
* at least Baa by Moody's Investors Service, Inc., or
* with a comparable rating by another nationally recognized rating
agency.
The Portfolio may invest up to 40% of its total assets in lower-rated or unrated
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.
The Portfolio seeks to achieve capital appreciation through purchasing bonds
that increase in market value. In addition, to a limited extent, the Portfolio
may seek capital appreciation by using hedging techniques such as futures and
options.
The portfolio manager has wide flexibility to vary the allocation among
different types of debt securities based on his judgment of which types of
securities will outperform the others. In determining whether to buy or sell
securities, the portfolio manager evaluates relative values of the various types
of securities in which the Portfolio can invest (e.g., the relative value of
corporate debt securities versus mortgage-backed securities under prevailing
market conditions), relative values of various rating categories (e.g., relative
values of higher-rated securities versus lower-rated securities under prevailing
market conditions), and individual issuer characteristics. The portfolio manager
may be required to sell portfolio investments to fund redemptions.
--------
2
<PAGE>
THE FUND
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."
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 bond selections and other investment
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.
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.
Because the Portfolio may invest in debt securities issued by private entities,
including corporate bonds and privately issued mortgage-backed and asset-backed
securities, the Fund is subject to issuer risk. 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 a decrease 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.
An economic downturn could severely disrupt the high-yield market and adversely
affect the value of outstanding bonds and the ability of the issuers to repay
principle and interest. In addition, lower-quality bonds are less sensitive to
interest rate changes than higher-quality instruments and generally are more
sensitive to adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period of rising
interest rates, issuers of such bonds may experience difficulty in servicing
their principle and interest payment obligations.
--------
3
<PAGE>
THE FUND
Structure risk is the risk that an event will occur (such as a security being
prepaid or called) that alters the security's cash flows. Prepayment risk is a
particular type of structure risk that is associated with investments in
mortgage-backed securities. Prepayment risk is the possibility that, as interest
rates fall, homeowners are more likely to refinance their home mortgages. When
mortgages are refinanced, the principal on mortgage-backed securities is paid
earlier than expected. In an environment of declining interest rates,
mortgage-backed securities may offer less potential for gain than other debt
securities. During periods of rising interest rates, mortgage-backed securities
have a high risk of declining in price because the declining prepayment rates
effectively increase the maturity of the security. In addition, the potential
impact of prepayment on the price of a mortgage-backed security may be difficult
to predict and result in greater volatility.
Foreign securities are subject to special risks. Foreign stock markets can be
extremely volatile. Fluctuations in currency exchange rates may impact the value
of foreign securities without a change in the intrinsic value of those
securities. The liquidity of foreign securities may be more limited than
domestic securities, which means that the Portfolio may, at times, be unable to
sell foreign securities at desirable prices. Brokerage commissions, custodial
fees and other fees are generally higher for foreign investments. In addition,
foreign governments may impose withholding taxes which would reduce the amount
of income and capital gains available to distribute to shareholders. Other risks
include the following: possible delays in the settlement of transactions or in
the notification of income; less publicly available information about companies;
the impact of political, social or diplomatic events; and possible seizure,
expropriation or nationalization of the company or its assets or imposition of
currency exchange controls.
Because the Fund seeks to achieve capital appreciation, you could receive
capital gains distributions. (See "Tax Consequences.")
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.
--------
4
<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 Intermediate Corporate 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 August 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)
--------------------------------------------------------------------------------
1990 6.08%
1991 17.18%
1992 9.11%
1993 13.38%
1994 -3.83%
1995 19.74%
1996 4.82%
1997 9.58%
1998 4.00%
1999 1.23%
The Fund's year-to-date total return through September 30, 2000 was +7.08%.
For period shown in bar chart:
Best quarter: 2nd quarter 1995, +6.52%
Worst quarter: 1st quarter 1994, -3.18%
--------------------------------------------------------------------------------
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 (%) 1.23 7.69 7.91
----------------------------------------------------------------------
Lehman Index (%) 0.16 7.79 7.89
</TABLE>
(1) Class A shares are a newer class of shares. Its performance information
includes the returns of the Fund's Class S shares (the oldest existing fund
class) for periods prior to the inception of Class A shares. Class S share
returns are not restated to reflect any differences in expenses (such as
sales charges) between Class S shares and Class A shares. Class S shares
were initially offered on March 5, 1986 and Class A shares were initially
offered on August 1, 2000.
-----
5
<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
--------------------------------------------------------------------------------
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
<S> <C>
Maximum sales charge (load) on purchases (%)
(as a percentage of the offering price) 4.75
--------------------------------------------------------------
Maximum deferred sales charge (load) on
redemptions (%) (as a percentage of the
lesser of purchase price or redemption price) 1.00(3)
--------------------------------------------------------------
Redemption fee (%) (as a percentage of (4)
amount redeemed, if applicable)
</TABLE>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (DEDUCTED DIRECTLY FROM FUND ASSETS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Management fee (%)(5) 0.61
--------------------------------------------------------------
Distribution and service (12b-1) fees (%) 0.35(6)
--------------------------------------------------------------
Other expenses (%) 0.25 (7)
--------------------------------------------------------------
Total annual fund operating expenses (%) 1.21
</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 $592 $841 $1,108 $1,871
</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 Portfolio pays a management fee of 0.48% and the Fund pays an
administrative fee of 0.13%.
(6) 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 1.11%. This arrangement may be terminated by the
distributor at any time.
(7) Other expenses are based on the Fund's Class S shares.
-----
6
<PAGE>
YOUR ACCOUNT
--------------------------------------------------------------------------------
INVESTMENT MINIMUMS
Initial Investment.............$1,000
Subsequent Investments............$50
Automatic Investment Plan*........$50
Retirement Plans*.................$25
* 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:
--------------------------------------------------------------------------------
METHOD INSTRUCTIONS
Through your Your financial advisor can help you establish your account
financial advisor 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 funds You may purchase shares by electronically transferring
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 investment plan
automatically from your bank account to your fund account.
You can select a pre-authorized amount to be sent via
electronic funds transfer. Be sure to complete the
appropriate section of the application for this feature.
--------------------------------------------------------------------------------
By dividend You may automatically invest dividends distributed by 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.
-----
7
<PAGE>
YOUR ACCOUNT
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
AS A % OF PRICE
THE PUBLIC AS A % RETAINED BY
OFFERING OF YOUR FINANCIAL
AMOUNT OF PURCHASE PRICE INVESTMENT ADVISOR 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.
-----
8
<PAGE>
YOUR ACCOUNT
UNDERSTANDING CONTINGENT DEFERRED SALES CHARGES
Certain investments in Class A 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
cumulative 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
--------------------------------------------------------------------------------
Over $5 million 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 shares purchases by participants in certain group retirement plans
offered through a fee- based program, financial advisors receive a 1% 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.
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
-----
9
<PAGE>
YOUR ACCOUNT
that your exchange activity is likely to adversely impact its ability to manage
the Fund. To exchange by telephone, call 1-800-422-3737.
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. Shareholders
of Liberty Acorn funds that qualify to purchase Class A shares at net asset
value may exchange their Class A shares for Class Z share of another fund
distributed by Liberty Funds Distributor, Inc. (see the Statement of Additional
Information for a description of these situations). 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.
-----
10
<PAGE>
YOUR ACCOUNT
--------------------------------------------------------------------------------
OUTLINED BELOW ARE THE VARIOUS OPTIONS FOR SELLING SHARES:
--------------------------------------------------------------------------------
METHOD INSTRUCTIONS
Through your You may call your financial advisor to place your sell
financial advisor order. To receive the current trading day's price, your
financial advisor firm must receive your request prior to
the close of the NYSE, usually 4:00 p.m. Eastern time.
--------------------------------------------------------------------------------
By exchange You or your financial advisor may sell shares by
exchanging from the Fund into the same share class of
another fund 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
withdrawal plan percentage of your account on a monthly, quarterly or
semi-annually basis and have the proceeds sent to you if
your account balance is at least $5,000. This feature is
not available if you hold your shares in certificate form.
All dividends and capital gains distributions must be
reinvested. Be sure to complete the appropriate section of
the account application for this feature.
--------------------------------------------------------------------------------
By electronic You may sell shares and request that the proceeds be
funds transfer electronically transferred to your bank. Proceeds may
take up to two business days to be received by your bank.
You must set up this feature prior to your request. Be
sure to complete the appropriate section of the account
application for this feature.
-----
11
<PAGE>
YOUR ACCOUNT
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
increase Fund expenses. 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.
DISTRIBUTION AND SERVICE FEES
--------------------------------------------------------------------------------
The Fund has adopted a plan under Rule 12b-1 that permits it to pay the Fund's
distributor marketing and other fees to support the sale and distribution of
Class A shares and the services provided to you by your financial advisor. The
annual service fee may equal up to 0.25% for Class A shares. The annual
distribution fee may equal up to 0.10% for Class A shares. Distribution and
service fees are paid out of the assets of the class. 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.
-----
12
<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 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.
-----
13
<PAGE>
YOUR ACCOUNT
DIVIDENDS, DISTRIBUTIONS, AND TAXES The Fund has the potential to make the
following distributions:
--------------------------------------------------------------------------------
TYPES OF DISTRIBUTIONS
--------------------------------------------------------------------------------
Dividend Represents interest and dividends earned from securities
held by the Portfolio, net of expenses incurred 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.
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.
TAX CONSEQUENCES Regardless of whether you receive your distributions in cash or
reinvest them in additional Fund shares, all Fund distributions are subject to
federal income tax. Depending on the state where you live, distributions may
also be subject to state and local income taxes.
In general, any distributions of dividends, interest and short-term capital
gains are taxable as ordinary income. Distributions of long-term capital gains
are generally taxable as such, regardless of how long you have held your Fund
shares. 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
-----
14
<PAGE>
YOUR ACCOUNT
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.
-----
15
<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 Stein Roe by the Fund
and Portfolio amounted to 0.61% 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 Portfolio, pursuant to
procedures adopted by the Board of Trustees.
PORTFOLIO MANAGER
--------------------------------------------------------------------------------
STEPHEN F. LOCKMAN has been manager of the Portfolio since 1997. He was
portfolio manager of Income Fund from 1997 to January, 1988, associate manager
of Income Fund from 1995 to 1997, and associate manager of High Yield Portfolio
from November, 1996 to February, 1997. Mr. Lockman was a senior research analyst
for Stein Roe's fixed income department from 1994, when he joined SteinRoe, to
1997. He served as portfolio manager for the Illinois State Board of Investment
from 1987 to 1994. A chartered financial analyst, Mr. Lockman earned a
bachelor's degree from the University of Illinois and a master's degree from
DePaul University.
-----
16
<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 Portfolio may make
and the risks associated with them. In seeking to achieve its investment goals,
the Portfolio 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.
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 Portfolio 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.
MORTGAGE-BACKED SECURITIES
--------------------------------------------------------------------------------
Mortgage-backed securities are securities that represent ownership interests in
large, diversified pools of mortgage loans. Sponsors pool together mortgages of
similar rates and terms and offer them as a security to investors.
Most mortgage securities are pooled together and structured as pass-throughs.
Monthly payments of principal and interest from the underlying mortgage loans
backing the pool are collected by a servicer and "passed through" regularly to
the investor. Pass-throughs can have a fixed or an adjustable rate. The majority
of pass-through securities are issued by three agencies: Ginnie Mae, Fannie Mae,
and Freddie Mac.
-----
17
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
Commercial mortgage-backed securities are secured by loans to commercial
properties such as office buildings, multi-family apartment buildings, and
shopping centers. These loans usually contain prepayment penalties that provide
protection from refinancing in a declining interest rate environment.
Real estate mortgage investment conduits (REMICs) are multi-class securities
that qualify for special tax treatment under the Internal Revenue Code. REMICs
invest in certain mortgages that are secured principally by interests in real
property such as single family homes.
ILLIQUID INVESTMENTS
--------------------------------------------------------------------------------
The Portfolio may invest up to 15% of its net assets in illiquid investments. An
illiquid investment is a security or other position that cannot be disposed of
quickly in the normal course of business. For example, some securities are not
registered under U.S. securities laws and cannot be sold to the U.S. public
because of SEC regulations (these are known as "restricted securities"). Under
procedures adopted by the Fund's Trustees, certain restricted securities may be
deemed liquid and will not be counted toward this 15% limit.
PORTFOLIO TURNOVER
--------------------------------------------------------------------------------
There are no limits on turnover. Turnover may vary significantly from year to
year. The advisor expects it to exceed 100% under normal conditions. The
Portfolio 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.
INTERFUND LENDING PROGRAM
--------------------------------------------------------------------------------
The Fund and Portfolio may lend money to borrow money from other funds advised
by the advisor. They will do so when the advisor 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.
MASTER/FEEDER STRUCTURE
--------------------------------------------------------------------------------
Unlike mutual funds that directly acquire and manage their own portfolio of
securities, the Fund is a "feeder" fund in a "master/feeder" structure. This
means that the Fund invests its assets in a larger "master" portfolio of
securities, which has investment objectives and policies substantially identical
to those of the Fund. The investment performance of the Fund depends upon the
investment performance of the Portfolio. If the investment policies of the
Portfolio and the Fund became inconsistent, the Board of Trustees of the Fund
can decide what actions to take. Actions the Board of Trustees may recommend
include withdrawal of the Fund's assets from the Portfolio. For more information
on the master/feeder fund structure, see the Statement of Additional
Information.
-----
18
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
TEMPORARY DEFENSIVE STRATEGIES
--------------------------------------------------------------------------------
At times, the advisor may determine that adverse market conditions make it
desirable to temporarily suspend the Portfolio's normal investment activities.
During such times, the Portfolio 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.
-----
19
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance. Because Class A shares did not commence operations until
August 1, 2000, information is shown for the Fund's Class S shares, the Fund's
existing share class and reflects Class S share expenses. 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 Class S shares of the Fund (assuming reinvestment of all
dividends and distributions). This information is included in the Fund's
financial statements which have been audited by Ernst & Young LLP, 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> <C>
Net asset value --
Beginning of period ($) 9.41 10.03 9.88 9.63 9.79
--------------------------------------------------------------------------------------------------------------------------
0.70 0.67 0.69 0.70 0.71
INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income
--------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (0.26) (0.62) 0.15 0.25 (0.16)
(loss) on investments
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.44 0.05 0.84 0.95 0.55
--------------------------------------------------------------------------------------------------------------------------
(0.70) (0.67) (0.69) (0.70) (0.71)
DISTRIBUTIONS ($):
Net investment income
--------------------------------------------------------------------------------------------------------------------------
Net asset value-- 9.15 9.41 10.03 9.88 9.63
End of period ($)
--------------------------------------------------------------------------------------------------------------------------
Ratio of net expenses to average net
assets (a) (%) 0.86(b) 0.84 0.83 0.84 0.82
--------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.58((b) 6.91 6.89 7.26(b) 7.26(b)
--------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) (e) 205(d) 203(d) 59(c) 138 135
--------------------------------------------------------------------------------------------------------------------------
Total return (%) (a) 4.92 0.52 8.72 10.34(b) 5.70(b)
--------------------------------------------------------------------------------------------------------------------------
Net assets at end of period(000) ($) 227,090 294,640 448,403 375,272 309,564
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the advisor this ratio would have been 0.85%, and 0.88%
for the years ended June 30, 1997 and 1996, respectively.
(b) Computed giving effect to the Advisor's expense limitation undertaking.
(c) Prior to the commencement of operations of the Portfolio.
(d) Represents the turnover rate for the Portfolio.
(e) For fiscal years from 1996 to 1998, this represents the
portfolio turnover prior to commencement of operations of the
Portfolio. For the period from the commencement of operations
of the Portfolio, February 2, 1998 to June 30, 1998, the
portfolio turnover for the Portfolio was 77%. For fiscal years
1999 and 2000, this represents the portfolio
(e) turnover for the Portfolio.
-----
20
<PAGE>
--------------------------------------------------------------------------------
NOTES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-----
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 Income Trust: 811-4552
* Stein Roe Income Fund
--------------------------------------------------------------------------------
[LIBERTY FUNDS LOGO]
ALL-STAR - COLONIAL - CRABBE HUSON - NEWPORT - STEIN ROE ADVISOR
Liberty Funds Distributor, Inc. (C)2000 One Financial Center,
Boston, MA 02111-2621, 1-800-426-3750 www.libertyfunds.com
751-01/304D-1000
<PAGE>
LIBERTY INTERMEDIATE BOND FUND CLASS A PROSPECTUS, NOVEMBER 1, 2000
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
-------------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
THE FUND ............................... 2
Investment Goals ....................... 2
Principal Investment Strategies ........ 2
Principal Investment Risks ............. 3
Performance History .................... 5
Your Expenses .......................... 6
YOUR ACCOUNT ........................... 7
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 ...................... 14
Investment Advisor ..................... 14
Portfolio Manager ...................... 14
OTHER INVESTMENT
STRATEGIES AND RISKS ................... 15
FINANCIAL HIGHLIGHTS ................... 18
</TABLE>
<PAGE>
THE FUND
INVESTMENT GOALS
The Fund seeks its total return by pursuing current income and opportunities for
capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests all of its assets in SR&F Intermediate Bond Portfolio (the
"Portfolio") as part of a master fund/feeder fund structure. The Portfolio
invests primarily in:
- debt securities issued by the U.S. government; these include U.S.
Treasury securities and agency securities; agency securities include
certain mortgage-backed securities, which represent interests in pools
of mortgages,
- debt securities of U.S. corporations, and
- mortgage-backed securities and asset-backed securities issued by
private (non-governmental) entities.
The Portfolio will invest at least 60% of its net assets in high-quality debt
securities rated at the time of purchase:
- at least A by Standard & Poor's,
- at least A by Moody's Investors Service, Inc., or
- with a comparable rating by another nationally recognized agency.
The Portfolio may invest up to 40% of its net assets in securities rated at the
time of purchase:
- BBB and below by Standard & Poor's,
- Baa and below by Moody's Investors Service, Inc., or
- With a comparable rating by another nationally recognized rating
agency.
The Portfolio may invest up to 20% of its net 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.
Normally, the Portfolio expects to maintain a dollar-weighted average effective
maturity of three to ten years.
The Portfolio seeks to achieve capital appreciation through purchasing bonds
that increase in market value. In addition, to a limited extent, the Portfolio
may seek capital appreciation by using hedging techniques such as futures and
options.
The Portfolio may invest up to 25% of its net assets in foreign securities.
2
<PAGE>
THE FUND
The portfolio manager has wide flexibility to vary the allocation among
different types of debt securities based on his judgment of which types of
securities will outperform the others. In determining whether to buy or sell
securities, the portfolio manager evaluates relative values of the various types
of securities in which the Portfolio can invest (e.g., the relative value of
corporate debt securities versus mortgage-backed securities under prevailing
market conditions), relative values of various rating categories (e.g., relative
values of higher-rated securities versus lower-rated securities under prevailing
market conditions), and individual issuer characteristics. The portfolio manager
may be required to sell portfolio investments to fund redemptions.
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."
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 bond selections and other investment
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.
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.
Because the Portfolio may invest in debt securities issued by private entities,
including corporate bonds and privately issued mortgage-backed and asset-backed
securities, the Fund is subject to issuer risk. 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 a decrease in the price of the security and
in some cases a decrease in income.
3
<PAGE>
THE FUND
Structure risk is the risk that an event will occur (such as a security being
prepaid or called) that alters the security's cash flows. Prepayment risk is a
particular type of structure risk that is associated with investments in
mortgage-backed securities. Prepayment risk is the possibility that, as interest
rates fall, homeowners are more likely to refinance their home mortgages. When
mortgages are refinanced, the principal on mortgage-backed securities is paid
earlier than expected. In an environment of declining interest rates,
mortgage-backed securities may offer less potential for gain than other debt
securities. During periods of rising interest rates, mortgage-backed securities
have a high risk of declining in price because the declining prepayment rates
effectively increase the maturity of the security. In addition, the potential
impact of prepayment on the price of a mortgage-backed security may be difficult
to predict and result in greater volatility.
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.
Foreign securities are subject to special risks. Foreign stock markets can be
extremely volatile. Fluctuations in currency exchange rates may
impact the value of foreign securities without a change in the
intrinsic value of those securities. The liquidity of foreign
securities may be more limited than domestic securities, which means
that the Portfolio may, at times, be unable to sell foreign securities
at desirable prices. Brokerage commissions, custodial fees and other
fees are generally higher for foreign investments. In addition, foreign
governments may impose withholding taxes which would reduce the amount
of income and capital gains available to distribute to shareholders.
Other risks include the following: possible delays in the settlement of
transactions or in the notification of income; less publicly available
information about companies; the impact of political, social or
diplomatic events; and possible seizure, expropriation or
nationalization of the company or its assets or imposition of currency
exchange controls
Because the Fund seeks to achieve capital appreciation, you could receive
capital gains distributions. (See "Tax Consequences.")
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.
4
<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 Intermediate
Government/Corporate 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 August 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)
[BAR GRAPH]
<TABLE>
<S> <C>
1990 7.09%
1991 15.10%
1992 7.69%
1993 9.17%
1994 -2.55%
1995 16.84%
1996 4.52%
1997 9.29%
1998 6.42%
1999 1.27%
</TABLE>
<TABLE>
<CAPTION>
For period shown in bar chart:
<S> <C>
The Fund's year-to-date total return Best quarter: 2nd quarter 1998, +5.24%
through September 30, 2000 was +7.35%. Worst quarter: 1st quarter 1994, -2.19%
</TABLE>
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 (%) 1.27 7.54 7.34
Lehman Index (%) 0.49 6.93 7.10
</TABLE>
(1) Class A shares are a newer class of shares. Its performance information
includes the returns of the Fund's Class S shares (the oldest existing
fund class) for periods prior to the inception of Class A shares. Class
S share returns are not restated to reflect any differences in expenses
(such as sales charges) between Class S shares and Class A shares.
Class S shares were initially offered on December 5, 1978 and Class A
shares were initially offered on August 1, 2000.
5
<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
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
<S> <C>
Maximum sales charge (load) on purchases (%)
(as a percentage of the offering price) 4.75
----------------------------------------------- -----------
Maximum deferred sales charge (load) on
redemptions (%) (as a percentage of the
lesser of purchase price or redemption price) 1.00(3)
----------------------------------------------- -----------
Redemption fee (%) (as a percentage of (4)
amount redeemed, if applicable)
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED DIRECTLY FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Management fee (%)(5) 0.50
----------------------------------------------- -----------
Distribution and service (12b-1) fees (%) 0.35(6)
----------------------------------------------- -----------
0.22
Other expenses (%) (7)
--------------------------------------------------- -----------
Total annual fund operating expenses (%) 1.07
</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 $579 $799 $1,037 $1,719
</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 Portfolio pays a management fee of 0.35% and the Fund pays an
administrative fee of 0.15%.
(6) 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 0.97%. This arrangement may be terminated by the
distributor at any time.
(7) Other expenses are based on the Fund's Class S shares.
6
<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 account and
financial advisor 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 made
(new account) 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
investment plan from your bank account to your fund account. You can select a
pre-authorized amount to be sent via electronic funds
transfer. Be sure to complete the appropriate section of
the application for this feature.
By dividend You may automatically invest dividends distributed by one fund
diversification 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>
7
<PAGE>
YOUR ACCOUNT
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
AS A % OF PRICE
THE PUBLIC AS A % RETAINED BY
OFFERING OF YOUR FINANCIAL
AMOUNT OF PURCHASE PRICE INVESTMENT ADVISOR 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.
8
<PAGE>
YOUR ACCOUNT
UNDERSTANDING CONTINGENT DEFERRED SALES CHARGES
Certain investments in Class A 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
cumulative 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
Over $5 million 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 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% 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.
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.
9
<PAGE>
YOUR ACCOUNT
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. Shareholders
of Liberty Acorn funds that qualify to purchase Class A shares at net asset
value may exchange their Class A shares for Class Z share of another fund
distributed by Liberty Funds Distributor, Inc. (see the Statement of Additional
Information for a description of these situations). 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.
10
<PAGE>
YOUR ACCOUNT
<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
withdrawal plan percentage of your account on a monthly, quarterly or
semi-annually basis and have the proceeds sent to you if
your account balance is at least $5,000. This feature is
not available if you hold your shares in certificate form.
All dividends and capital gains distributions must be
reinvested. Be sure to complete the appropriate section of
the account application for this feature. You may
automatically sell a specified dollar amount or percentage
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
funds transfer electronically transferred to your bank. Proceeds may take up
to two business days to be received by your bank. You must
set up this feature prior to your request. Be sure to
complete the appropriate section of the account
application for this feature.
</TABLE>
11
<PAGE>
YOUR ACCOUNT
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
increase Fund expenses. 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.
DISTRIBUTION AND SERVICE FEES
The Fund has adopted a plan under Rule 12b-1 that permits it to pay the Fund's
distributor marketing and other fees to support the sale and distribution of
Class A shares and the services provided to you by your financial advisor. The
annual service fee may equal up to 0.25% for Class A shares. The annual
distribution fee may equal up to 0.10% for Class A shares. Distribution and
service fees are paid out of the assets of the class. 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.
12
<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 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.
13
<PAGE>
YOUR ACCOUNT
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, net of expenses incurred 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.
TAX CONSEQUENCES Regardless of whether you receive your distributions in cash or
reinvest them in additional Fund shares, all Fund distributions are subject to
federal income tax. Depending on the state where you live, distributions may
also be subject to state and local income taxes.
In general, any distributions of dividends, interest and short-term capital
gains are taxable as ordinary income. Distributions of long-term capital gains
are generally taxable as such, regardless of how long you have held your Fund
shares. 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
14
<PAGE>
YOUR ACCOUNT
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.
15
<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 Stein Roe by the Fund
and Portfolio amounted to 0.50% 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 Portfolio, pursuant to
procedures adopted by the Board of Trustees.
PORTFOLIO MANAGER
MICHAEL T. KENNEDY has been portfolio manager of the Portfolio since its
inception in 1998 and had been portfolio manager of Intermediate Bond Fund from
1988 to January, 1998. He joined Stein Roe in 1987 and is a senior vice
president. A chartered financial analyst and a chartered investment counselor,
he received his B.S. degree from Marquette University and his M.M. degree from
Northwestern University.
16
<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 Portfolio may make
and the risks associated with them. In seeking to achieve its investment goals,
the Portfolio 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 Portfolio 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 and the
Portfolio 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 or the Portfolio.
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 Portfolio 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.
17
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities that represent ownership interests in
large, diversified pools of mortgage loans. Sponsors pool together mortgages of
similar rates and terms and offer them as a security to investors.
Most mortgage securities are pooled together and structured as pass-throughs.
Monthly payments of principal and interest from the underlying mortgage loans
backing the pool are collected by a servicer and "passed through" regularly to
the investor. Pass-throughs can have a fixed or an adjustable rate. The majority
of pass-through securities are issued by three agencies: Ginnie Mac, Fannie Mac,
and Freddie Mac.
Commercial mortgage-backed securities are secured by loans to commercial
properties such as office buildings, multi-family apartment buildings, and
shopping centers. These loans usually contain prepayment penalties that provide
protection from refinancing in a declining interest rate environment.
Real estate mortgage investment conduits (REMICs) are multi-class securities
that qualify for special tax treatment under the Internal Revenue Code. REMICs
invest in certain mortgages that are secured principally by interests in real
property such as single family homes.
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.
ILLIQUID INVESTMENTS
The Portfolio may invest up to 15% of its net assets in illiquid investments. An
illiquid investment is a security or other position that cannot be disposed of
quickly in the normal course of business. For example, some securities are not
registered under U.S. securities laws and cannot be sold to the U.S. public
because of SEC regulations (these are known as "restricted securities"). Under
procedures adopted by the Fund's Trustees, certain restricted securities may be
deemed liquid and will not be counted toward this 15% limit.
PORTFOLIO TURNOVER
There are no limits on turnover. Turnover may vary significantly from year to
year. The advisor expect its 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.
18
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
INTERFUND LENDING PROGRAM
The Fund and Portfolio may lend money to and borrow from other funds advised by
the advisor. They will do so when the advisor 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.
MASTER/FEEDER STRUCTURE
Unlike mutual funds that directly acquire and manage their own portfolio of
securities, the Fund is a "feeder" fund in a "master/feeder" structure. This
means that the Fund invests its assets in a larger "master" portfolio of
securities, which has investment objectives and policies substantially identical
to those of the Fund. The investment performance of the Fund depends upon the
investment performance of the Portfolio.
If the investment policies of the Portfolio and the Fund became inconsistent,
the Board of Trustees of the Fund can decide what actions to take. Actions the
Board of Trustees may recommend include withdrawal of the Fund's assets from the
Portfolio. For more information on the master/feeder fund structure, see the
Statement of Additional Information.
TEMPORARY DEFENSIVE STRATEGIES
At times, the advisor may determine that adverse market conditions make it
desirable to temporarily suspend the Portfolio's normal investment activities.
During such times, the Portfolio 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.
19
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance. Because Class A shares did not commence operations until
August 1, 2000, information is shown for the Fund's Class S shares, the Fund's
existing share class and reflects Class S share expenses. 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 Class S shares of the Fund (assuming reinvestment of all
dividends and distributions). This information is included in the Fund's
financial statements which have been audited by Ernst & Young LLP, 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 ending 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 ($) 8.63 8.97 8.74 8.58 8.67
------------------------------------------------------------- -------- ------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income 0.60 0.56 0.58 0.60 0.59
------------------------------------------------------------- -------- ------- -------- ------- -------
Net gains realized and unrealized gain
(loss) on investments and futures
transactions (0.22) (0.33) 0.23 0.17 (0.10)
------------------------------------------------------------- -------- ------- -------- ------- -------
Total from Investment Operations 0.38 0.23 0.81 0.77 0.49
------------------------------------------------------------- -------- ------- -------- ------- -------
DISTRIBUTIONS ($):
Net investment income (0.60) (0.57) (0.58) (0.61) (0.58)
------------------------------------------------------------- -------- ------- -------- ------- -------
Net asset value--
End of period ($) 8.41 8.63 8.97 8.74 8.58
------------------------------------------------------------- -------- ------- -------- ------- -------
Ratio of net expenses to average net
assets (a) 0.72 0.72 0.72 0.73 0.70
------------------------------------------------------------- -------- ------- -------- ------- -------
Ratio of net investment income to average net
net assets 7.16 6.31 6.51 6.97(b) 6.79(b)
------------------------------------------------------------- -------- ------- -------- ------- -------
Portfolio turnover (%)(e) 356(d) 253(d) 138(c) 210 202
Total return (%) 4.62 2.60 9.51 9.31(c) 5.76(c)
------------------------------------------------------------- -------- ------- -------- ------- -------
Net assets at end of period (000)($) 406,216 431,123 437,456 328,784 298,112
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the Stein Roe, this ratio would have been 0.75%, for
each year ended June 30, 1997 and 1996.
(b) Computed giving effect to the Advisor's expense limitation undertaking.
(c) Prior to commencement of operations of the Portfolio.
(d) This represents the turnover for the Portfolio.
(e) For fiscal years from 1997 to 1998 this represents the portfolio
turnover prior to commencement of operations of the Portfolio. For the
period from the commencement of operations of the Portfolio, November
1, 1996 to June 30, 1998, the portfolio turnover for the Portfolio was
86%. For fiscal years 1999 and 2000, this represents the portfolio
turnover for the Portfolio.
20
<PAGE>
NOTES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 Income Trust: 811-4552
- Stein Roe Intermediate Bond Fund
[LIBERTY FUNDS LOGO]
713-01/308D-1000
0700
<PAGE>
LIBERTY INCOME BOND FUND, CLASS A
LIBERTY HIGH YIELD BOND FUND, CLASS A
LIBERTY INTERMEDIATE BOND FUND, CLASS A
EACH A SERIES OF LIBERTY-STEIN ROE FUNDS INCOME TRUST
(EACH A FUND; COLLECTIVELY, THE "FUNDS")
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 each Fund's Prospectus. This
SAI is not a prospectus and is authorized for distribution only when accompanied
or preceded by the Prospectuses of the Funds dated November 1, 2000. This SAI
should be read together with each Fund's Prospectus and the Funds' most recent
Annual Report dated June 30, 2000. Investors may obtain a free copy of a
Prospectus and Annual Reports from Liberty Funds Distributor, Inc. (LFD), One
Financial Center, Boston, MA 02111-2621. The Financial Statements and Report of
Independent Auditors appearing in the Funds' June 30, 2000 Annual Report are
incorporated in this SAI by reference.
Part 1 of this SAI contains specific information about the Funds. Part 2
includes information about the funds distributed by LFD generally and additional
information about certain securities and investment techniques described in the
Funds' Prospectus.
TABLE OF CONTENTS
PART 1 PAGE
Definitions b
Organization and History b
Investment Objective and Policies of the Funds b
Fundamental Investment Policies of the Funds c
Other Investment Policies of the Funds c
Fund Charges and Expenses j
Investment Performance w
Custodian aa
Independent Auditors aa
PART 2 PAGE
Miscellaneous Investment Practices 1
Taxes 11
Management of the Funds 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 Factors
Appendix I 29
Appendix II 34
a
<PAGE>
Part 1
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 2000
DEFINITIONS
"Income Bond Fund" Liberty Income Fund, Class A "High Yield Bond
Fund" Liberty High Yield Bond Fund, Class A "Intermediate Bond Fund"
Liberty Intermediate Bond Fund, Class A "Trust" Liberty-Stein Roe
Funds Income Trust "Advisor" Stein Roe & Farnhum, Inc., the Funds'
investment advisor
"LFD" Liberty Funds Distributor, Inc., the
Funds' distributor
"SSI" SteinRoe Services, Inc., the Funds'
shareholder services and transfer agent.
ORGANIZATION AND HISTORY
The Trust is a Massachusetts business trust organized in 1986. Each Fund is a
diversified series of the Trust and represents the entire interest in a separate
series of the Trust. On November 1, 1995, 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 Income Trust" on October
18, 1999.
Each Fund offers 2 classes of shares-Classes A and S. Prior to August 1, 2000,
each Fund had a single class of shares. On that date, the outstanding shares of
each Fund were converted into Class S, and the Funds commenced offering Classes
A shares. The Funds did not have separate classes prior to that date. This SAI
describes Class A shares of the Fund. A separate SAI describes the Class S share
of the Fund.
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 Funds 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.
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND STRUCTURE
Rather than invest in securities directly, each Fund seeks to achieve
its objective by pooling its assets with those of other investment companies for
investment in another mutual fund having the identical investment objective and
substantially the same investment policies as its feeder funds. The purpose of
such an arrangement is to achieve greater operational efficiencies and reduce
costs. Each Fund invests all of its assets in a separate master fund that is a
series of SR&F Base Trust, as follows:
<TABLE>
<CAPTION>
MASTER/FEEDER
STATUS
FEEDER FUND MASTER FUND ESTABLISHED
----------- ----------- -------------
<S> <C> <C>
Intermediate Bond Fund SR&F Intermediate Bond Portfolio ("Intermediate Bond Portfolio") Feb. 2, 1998
Income Fund SR&F Income Portfolio ("Income Portfolio") Feb. 2, 1998
High Yield Fund SR&F High Yield Portfolio ("High Yield Portfolio") Nov. 1, 1996
</TABLE>
The master funds are referred to collectively as the "Portfolios." For more
information, please refer to Master Fund/Feeder Fund: Structure and Risk Factors
in Part 2 of this SAI.
Stein Roe & Farnham Incorporated ("Stein Roe") provides administrative
and accounting and recordkeeping services to the Funds and Portfolios and
provides investment management services to each Portfolio.
b
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
The Prospectus describes each Fund's investment objective and investment
policies. Part 1 of this SAI includes additional information concerning, among
other things, the investment policies of the Funds. Part 2 contains additional
information about the following securities and investment techniques that may be
utilized by the Funds:
Derivatives
Interest Rate Swaps, Caps and Floors
Medium- and Lower-Rated Debt Securities
Mortgage- Backed Securities
Floating Rate Instruments
Inverse Floaters
Short Sales
Interfund Borrowing and Lending
Forward Commitments ("When Issued" and "Delayed Delivery" Securities,
Reverse Repurchase Agreements Securities Loans 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 Foreign
Securities Stand-by Commitments Zero Coupon Securities (Zeros)
Pay-In-Kind (PIK) Securities Rule 144A Securities
Except as indicated below under "Fundamental Investment Policies," the Funds'
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 are
represented at the meeting in person or by proxy. The following fundamental
investment policies can not be changed without such a vote.
(1) invest in a security if, as a result of such investment, more than
25% of its total assets (taken at market value at the time of such investment)
would be invested in the securities of issuers in any particular industry,
except that this restriction does not apply to (i) repurchase agreements, or
(ii) securities of issuers in the financial services industry, 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;
(2) 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 such investment) would be invested in the securities of any
one issuer, except that this restriction does not apply to U.S. Government
Securities 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;
(3) invest in a security if, as a result of such investment, it would
hold more than 10% (taken at the time of such investment) of the outstanding
voting securities of any one issuer, 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;
(4) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein);
c
<PAGE>
(5) purchase or sell commodities or commodities contracts or oil, gas
or mineral programs, except that it may enter into (i) futures and options on
futures and (ii) forward contracts;
(6) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but it
may make margin deposits in connection with transactions in options, futures,
and options on futures;
(7) make loans, although it may (a) lend portfolio securities and
participate in an interfund lending program with other Stein Roe Funds and
Portfolios provided that no such loan may be made if, as a result, the aggregate
of such loans would exceed 33 1/3% of the value of its total assets (taken at
market value at the time of such loans); (b) purchase money market instruments
and enter into repurchase agreements; and (c) acquire publicly distributed or
privately placed debt securities;
(8) borrow except that it may (a) borrow for nonleveraging, temporary
or emergency purposes, (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,
and (c) enter into futures and options transactions; it may borrow from banks,
other Stein Roe Funds and Portfolios, and other persons to the extent permitted
by applicable law;
(9) act as an underwriter of securities, except insofar as it may be
deemed to be an "underwriter" for purposes of the Securities Act of 1933 on
disposition of securities acquired subject to legal or contractual restrictions
on resale, 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; or
(10) issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
OTHER INVESTMENT POLICIES OF THE FUNDS
As non-fundamental investment policies which may be changed without a
shareholder vote, each Fund may not:
(A) invest for the purpose of exercising control or management;
(B) purchase more than 3% of the stock of another investment company or
purchase stock of other investment companies equal to more than 5% of its total
assets (valued at time of purchase) in the case of any one other investment
company and 10% of such assets (valued at time of purchase) in the case of all
other investment companies in the aggregate; any such purchases are to be made
in the open market where no profit to a sponsor or dealer results from the
purchase, other than the customary broker's commission, except for securities
acquired as part of a merger, consolidation or acquisition of assets;(1)
(C) purchase portfolio securities from, or sell portfolio securities
to, any of the officers and directors or trustees of the Trust or of its
investment adviser;
(D) purchase shares of other open-end investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization;
(E) 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 which
are not listed on the New York or American Stock Exchange;
------------------------
(1) The Funds have been informed that the staff of the Securities and Exchange
Commission takes the position that the issuers of certain CMOs and certain other
collateralized assets are investment companies and that subsidiaries of foreign
banks may be investment companies for purposes of Section 12(d)(1) of the
Investment Company Act of 1940, which limits the ability of one investment
company to invest in another investment company. Accordingly, the Funds intend
to operate within the applicable limitations under Section 12(d)(1)(A) of that
Act.
d
<PAGE>
(F) 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;
(G) write an option on a security unless the option is issued by the
Options Clearing Corporation, an exchange, or similar entity;
(H) invest in limited partnerships in real estate unless they are
readily marketable;
(I) sell securities short unless (i) it owns or has the right to obtain
securities equivalent in kind and amount to those sold short at no added cost or
(ii) 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 transactions in options, futures, and options on futures are not
treated as short sales;
(J) invest more than 15% of its total assets (taken at market value at
the time of a particular investment) in restricted securities, other than
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933;
(K) invest more than 15% 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.
e
<PAGE>
FUND CHARGES AND EXPENSES
Under the Funds' Management Agreement, each Portfolio pays the Advisor a monthly
fee based on average net assets, determined at the close of each business day
during the month at the following annual rates: Intermediate Portfolio-.350%;
Income Portfolio-.500% up to $100 million and .475% thereafter; High Yield
Portfolio-.500% up to $500 million and .475% thereafter. Each 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: Intermediate
Bond Fund-.150%; Income Fund-.150% up to $100 million, .125% thereafter; High
Yield Fund-.150% up to $500 million, .125% thereafter. Each Fund pays the
transfer agent 0.14 of 1% of its daily net assets.
RECENT FEES PAID TO THE ADVISOR (dollars in thousands)
<TABLE>
<CAPTION>
INTERMEDIATE FUND/PORTFOLIO
Years ended June 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Management Fees (Intermediate Portfolio) $1,451 $1,577 $595
Administrative Fees 619 668 587
Shareholder Services and Transfer Agency Fees 606 671 548
</TABLE>
<TABLE>
<CAPTION>
INCOME FUND/PORTFOLIO
Years ended June 30
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Management Fee (Income Portfolio) $1,225 $1,757 $862
Administrative Fees 340 56 44
Shareholder Services and Transfer Agency Fees 386 557 591
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD FUND/PORTFOLIO
Years ended June 30
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Management Fees (High Yield Portfolio) $424 $419 $307
Reimbursement by Advisor 81 80 95
Administrative Fees 46 56 44
Shareholder Services and Transfer Agency Fees 54 64 42
</TABLE>
Pursuant to the Bookkeeping and Accounting Agreement with the Trust, during
fiscal years ended June 30, 1998, 1999 and 2000, the Trust paid aggregate fees
(dollars in thousands) to the Advisor of $128, $129 and $126, respectively.
As of June 30, 2000, no Fund paid commissions on Class A shares of the a Fund.
f
<PAGE>
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>
Aggregate Total
Compensation Compensation From
From Aggregate Aggregate the Fund Complex
Trustee Intermediate Compensation From Compensation From Paid to the
Bond Fund for Income Fund for High Yield Fund Trustees for the
the Fiscal Year the Fiscal Year for the Fiscal Calendar Year
Ended June Ended June 30, Year Ended June Ended December
30, 2000 2000 30, 2000 31, 1999*
<S> <C> <C> <C> <C>
Lindsay Cook -0- -0- -0- -0-
John A. Bacon Jr. $1,400 $1,400 $1,400 $103,450
William W. Boyd 1,500 1,500 1,500 109,950
Douglas A. Hacker 1,400 1,400 1,400 93,950
Janet Langford Kelly 1,400 1,400 1,400 103,450
Charles R. Nelson 1,500 1,500 1,500 108,050
Thomas C. Theobald 1,400 1,400 1,400 103,450
</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.
OWNERSHIP OF THE FUNDS
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 Funds.
As of record on September 30, 2000, the following shareholders owned 5% or more
of the following Funds' then outstanding Class A shares:
<TABLE>
<CAPTION>
APPROXIMATE % OF
OUTSTANDING SHARES
NAME AND ADDRESS FUND HELD
<S> <C> <C>
Colonial Management Associates High Yield Bond Fund 100.00
One Financial Center Income Bond Fund 100.00
Boston, MA 02111 Intermediate Bond Fund 100.00
</TABLE>
12b-1 PLAN The Trustees have approved a 12b-1 plan (Plan) for each Fund's Class
A shares pursuant to Rule 12b-1 under the Act. Under the Plan, each Fund pays
LFD monthly a service fee at an annual rate of 0.25% of each Fund's net assets
attributed to Class A shares. The Funds also pay LFD monthly a distribution fee
at an annual rate of not exceed 10%of each Fund's average daily net assets
attributed to Class A shares. LFD has voluntarily agreed to waive a portion of
the distribution fee so that it does not exceed 0.25% annually. 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.
g
<PAGE>
The Plan authorizes any other payments by the Funds 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 each Fund's shares.
The Trustees believe the Plan could be a significant factor in the growth and
retention of each Fund's assets resulting in a more advantageous expense ratio
and increased investment flexibility which could benefit each class of each
Fund's 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 is effected by such
disinterested Trustees.
Class A shares are offered at net asset value plus varying sales charges which
may include a CDSC The CDSC is 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.
h
<PAGE>
INVESTMENT PERFORMANCE*
The Funds' 30-day yields for the month ended June 30, 2000 were:
<TABLE>
<CAPTION>
Yield
<S> <C>
Intermediate Bond Fund 7.92%
Income Fund 8.77
High Yield Fund** 8.85
</TABLE>
The Funds' average annual total returns at June 30, 2000, were:
<TABLE>
<CAPTION>
1 year 5 years 10 years (or Life of the Fund)
------ ------- ------------------------------
<S> <C> <C> <C>
Intermediate Fund 4.62% 6.33% 7.58%
Income Fund 4.92 5.98 8.02
High Yield Fund** -.48 N/A 7.56
</TABLE>
*Performance results are based on each Fund's Class S shares, the oldest
existing Fund class.
**Performance results reflect any waiver or reimbursement by the Advisor of
expenses. Absent this waiver or reimbursement arrangement, performance results
would have been lower. See the Prospectus for details.
See Part 2 of this SAI, "Performance Measures," for how calculations are made.
CUSTODIAN
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
Ernst & Young LLP, located at 200 Clarendon Street, Boston
MA 02116 are the independent auditors for the Funds and Portfolios. The auditors
provide audit and tax return preparation services and assistance and
consultation in connection with the review of various Securities and Exchange
Commission filings. The financial statements incorporated by reference in this
SAI have been so incorporated, and the financial highlights in the Prospectus
have been so included, in reliance upon the reports of Ernst & Young LLP given
on the authority of said firm as experts in accounting and auditing.
3
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
and Liberty-Stein Roe Funds Municipal 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.
Interest Rate Swaps, Caps and Floors
The Fund may enter into interest rate swaps or purchase or sell interest rate
caps or floors. The Fund will not sell interest rate caps or floors that it does
not own. Interest rate swaps involve the exchange by the Fund with another party
of their respective obligations to pay or receive interest; e.g., an exchange of
an obligation to make floating rate payments for an obligation to make fixed
rate payments. For example, the Fund may seek to shorten the effective interest
rate redetermination period of a Senior Loan to a Borrower that has selected an
interest rate redetermination period of one year. The Fund could exchange the
Borrower's obligation to make fixed rate payments for one year for an obligation
to make payments that readjust monthly. In such event, the Portfolio would
consider the interest rate redetermination period of such Senior Loan to be the
shorter period.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest at the difference between the index and the predetermined rate on a
notional principal amount (the reference amount with respect to which interest
obligations are determined although no actual exchange of principal occurs) from
the party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest at the difference
between the index and the predetermined rate on a notional principal amount from
the party selling such interest rate floor. The Fund will not enter into swaps,
caps or floors, if, on a net basis, the aggregate notional principal amount with
respect to such agreements exceeds the net assets of the Fund.
In circumstances in which Stein Roe anticipates that interest rates will
decline, the Fund might, for example, enter into an interest rate swap as the
floating rate payor or, alternatively, purchase an interest rate floor. In the
case of purchasing an interest rate floor, if interest rates declined below the
floor rate, the Fund would receive payments from its counterparty that would
wholly or partially offset the decrease in the payments it would receive with
respect to the portfolio assets being hedged. In the case where the Fund
purchases such an interest rate swap, if the floating rate payments fell below
the level of the fixed rate payment set in the swap agreement, the Fund's
counterparty would pay the Fund amounts equal to interest computed at the
difference between the fixed and floating rates over the notional principal
amount. Such payments would offset or partially offset the decrease in the
payments the Fund would receive with respect to floating rate portfolio assets
being hedged.
The successful use of swaps, caps and floors to preserve the rate of
return on a portfolio of Senior Loans depends on Stein Roe's ability to predict
correctly the direction and extent of movements in interest rates. Although
Stein Roe believes that use of the hedging and risk management techniques
described above will benefit the Fund, if Stein Roe's judgment about the
direction or extent of the movement in interest rates is incorrect, the Fund's
overall performance could be worse than if it had not entered into any such
transaction. For example, if the Fund had purchased an interest rate swap or an
interest rate floor to hedge against its expectation that interest rates would
decline but instead interest rates rose, the Fund would lose part or all of the
benefit of the increased payments it would receive as a result of the rising
interest rates because it would have to pay amounts to its counterparty under
the swap agreement or would have paid the purchase price of the interest rate
floor.
Inasmuch as these hedging transactions are entered into for good-faith
risk management purposes, Stein Roe and the Fund believe such obligations do not
constitute senior securities. The Fund will usually enter into interest rate
swaps on a net basis; i.e., where the two parties make net payments with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained. If the Fund enters into a swap
on other than a net basis, the Fund will maintain the full amount of its
obligations under each such swap. Accordingly, the Fund does not treat swaps as
senior securities. The Fund may enter into swaps, caps and floors with member
banks of the Federal Reserve System, members of the New York Stock Exchange
(NYSE) or other entities determined to be creditworthy by Stein Roe, pursuant to
procedures adopted and reviewed on an ongoing basis by the Board. If a default
occurs by the other party to such transactions, the Fund will have contractual
remedies pursuant to the agreements related to the transaction, but such
remedies may be subject to bankruptcy and insolvency laws that could affect the
Fund's rights as a creditor. The swap market has grown substantially in recent
years with a large number of banks and financial services firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps and floors are more recent
innovations and they are less liquid than swaps. There can be no assurance,
however, that the Fund will be able to enter into interest rate swaps or to
purchase interest rate caps or floors at prices or on terms Stein Roe believes
are advantageous to the Fund. In addition, although the terms of interest rate
swaps, caps and floors may provide for termination, there can be no assurance
that the Fund will be able to terminate an interest rate swap or to sell or
offset interest rate caps or floors that it has purchased.
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 Intermediate Bond Fund, Income Bond Fund and High Yield Bond Fund may invest
up to 25% of total assets (taken at market value at the time of investment) in
securities of foreign issuers that are not publicly traded in the United States
("foreign securities"). For purposes of these limits, foreign securities do not
include securities represented by American Depositary Receipts ("ADRs"), foreign
debt securities denominated in U.S. dollars, or securities guaranteed by U.S.
persons. Investment in foreign securities may involve a greater degree of risk
(including risks relating to exchange fluctuations, tax provisions, or
expropriation of assets) than does investment in securities of domestic issuers.
The Funds may invest in both "sponsored" and "unsponsored" ADRs. In a
sponsored ADR, the issuer typically pays some or all of the expenses of the
depositary and agrees to provide its regular shareholder communications to ADR
holders. An unsponsored ADR is created independently of the issuer of the
underlying security. The ADR holders generally pay the expenses of the
depositary and do not have an undertaking from the issuer of the underlying
security to furnish shareholder communications. No Portfolio expects to invest
as much as 5% of its total assets in unsponsored ADRs.
With respect to portfolio securities that are issued by foreign issuers
or denominated in foreign currencies, the investment performance is affected by
the strength or weakness of the U.S. dollar against these currencies. For
example, if the dollar falls in value relative to the Japanese yen, the dollar
value of a yen-denominated stock held in the portfolio will rise even though the
price of the stock remains unchanged. Conversely, if the dollar rises in value
relative to the yen, the dollar value of the yen-denominated stock will fall.
(See discussion of transaction hedging and portfolio hedging under Currency
Exchange Transactions.)
Investors should understand and consider carefully the risks involved
in foreign investing. Investing in foreign securities, positions which are
generally denominated in foreign currencies, and utilization of forward foreign
currency exchange contracts involve certain considerations comprising both risks
and opportunities not typically associated with investing in U.S. securities.
These considerations include: fluctuations in exchange rates of foreign
currencies; possible imposition of exchange control regulation or currency
restrictions that would prevent cash from being brought back to the United
States; less public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers, and issuers of
securities; lack of uniform accounting, auditing, and financial reporting
standards; lack of uniform settlement periods and trading practices; less
liquidity and frequently greater price volatility in foreign markets than in the
United States; possible imposition of foreign taxes; possible investment in
securities of companies in developing as well as developed countries; and
sometimes less advantageous legal, operational, and financial protections
applicable to foreign sub-custodial arrangements.
Although the Funds will try to invest in companies and governments of
countries having stable political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the adoption
of foreign government restrictions, or other adverse political, social or
diplomatic developments that could affect investment in these nations.
Currency Exchange Transactions. Currency exchange transactions may be
conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market or through forward
currency exchange contracts ("forward contracts"). Forward contracts are
contractual agreements to purchase or sell a specified currency at a specified
future date (or within a specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks and
broker-dealers, are not exchange traded, and are usually for less than one year,
but may be renewed.
The Funds' foreign currency exchange transactions are limited to
transaction and portfolio hedging involving either specific transactions or
portfolio positions, except to the extent described below under Synthetic
Foreign Positions. Transaction hedging is the purchase or sale of forward
contracts with respect to specific receivables or payables of a Portfolio
arising in connection with the purchase and sale of its portfolio securities.
Portfolio hedging is the use of forward contracts with respect to portfolio
security positions denominated or quoted in a particular foreign currency.
Portfolio hedging allows the Fund to limit or reduce its exposure in a foreign
currency by entering into a forward contract to sell such foreign currency (or
another foreign currency that acts as a proxy for that currency) at a future
date for a price payable in U.S. dollars so that the value of the
foreign-denominated portfolio securities can be approximately matched by a
foreign-denominated liability. A Portfolio may not engage in portfolio hedging
with respect to the currency of a particular country to an extent greater than
the aggregate market value (at the time of making such sale) of the securities
held in its portfolio denominated or quoted in that particular currency, except
that a Portfolio may hedge all or part of its foreign currency exposure through
the use of a basket of currencies or a proxy currency where such currencies or
currency act as an effective proxy for other currencies. In such a case, a
Portfolio may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities denominated in such
currency. The use of this basket hedging technique may be more efficient and
economical than entering into separate forward contracts for each currency held
in a Portfolio. No Portfolio may engage in "speculative" currency exchange
transactions.
At the maturity of a forward contract to deliver a particular currency,
a Portfolio may either sell the portfolio security related to such contract and
make delivery of the currency, or it may retain the security and either acquire
the currency on the spot market or terminate its contractual obligation to
deliver the currency by purchasing an offsetting contract with the same currency
trader obligating it to purchase on the same maturity date the same amount of
the currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for a Portfolio to purchase additional currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of currency it is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If a Portfolio retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss to the extent that
there has been movement in forward contract prices. If a Portfolio engages in an
offsetting transaction, it may subsequently enter into a new forward contract to
sell the currency. Should forward prices decline during the period between a
Portfolio's entering into a forward contract for the sale of a currency and the
date it enters into an offsetting contract for the purchase of the currency, it
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, a Portfolio will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive a Portfolio of
unrealized profits or force the Fund to cover its commitments for purchase or
sale of currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for a Portfolio to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to a Portfolio
of engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
Synthetic Foreign Positions. The Funds may invest in debt instruments
denominated in foreign currencies. In addition to, or in lieu of, such direct
investment, a Portfolio may construct a synthetic foreign position by (a)
purchasing a debt instrument denominated in one currency, generally U.S.
dollars, and (b) concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different currency on a
future date and at a specified rate of exchange. Because of the availability of
a variety of highly liquid U.S. dollar debt instruments, a synthetic foreign
position utilizing such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. The results of a direct
investment in a foreign currency and a concurrent construction of a synthetic
position in such foreign currency, in terms of both income yield and gain or
loss from changes in currency exchange rates, in general should be similar, but
would not be identical because the components of the alternative investments
would not be identical.
The Funds may also construct a synthetic foreign position by entering
into a swap arrangement. A swap is a contractual agreement between two parties
to exchange cash flows--at the time of the swap agreement and again at maturity,
and, with some swaps, at various intervals through the period of the agreement.
The use of swaps to construct a synthetic foreign position would generally
entail the swap of interest rates and currencies. A currency swap is a
contractual arrangement between two parties to exchange principal amounts in
different currencies at a predetermined foreign exchange rate. An interest rate
swap is a contractual agreement between two parties to exchange interest
payments on identical principal amounts. An interest rate swap may be between a
floating and a fixed rate instrument, a domestic and a foreign instrument, or
any other type of cash flow exchange. A currency swap generally has the same
risk characteristics as a forward currency contract, and all types of swaps have
counter-party risk. Depending on the facts and circumstances, swaps may be
considered illiquid. Illiquid securities usually have greater investment risk
and are subject to greater price volatility. The net amount of the excess, if
any, of a Portfolio's obligations over which it is entitled to receive with
respect to an interest rate or currency swap will be accrued daily and liquid
assets (cash, U.S. Government securities, or other "high grade" debt
obligations) of the Fund having a value at least equal to such accrued excess
will be segregated on the books of the Fund and held by the Custodian for the
duration of the swap.
The Funds may also construct a synthetic foreign position by purchasing an
instrument whose return is tied to the return of the desired foreign position.
An investment in these "principal exchange rate linked securities" (often called
PERLS) can produce a similar return to a direct investment in a foreign
security.
Other Investment Companies
The fund may invest in other investment companies. Such investments will involve
the payment of duplicative fees through the indirect payment of a portion of the
expenses, including advisory fees, of such other investment companies.
Zero Coupon Securities (Zeros)
The fund may invest in zero coupon securities, which are securities issued at a
significant discount from face value and do not pay interest at intervals during
the life of the security. Zero coupon securities include securities issued in
certificates representing undivided interests in the interest or principal of
mortgage-backed securities (interest only/principal only), which tend to be more
volatile than other types of securities. The fund will accrue and distribute
income from stripped securities and certificates on a current basis and may have
to sell securities to generate cash for distributions.
Step Coupon Bonds (Steps)
The fund may invest in debt securities which pay interest at a series of
different rates (including 0%) in accordance with a stated schedule for a series
of periods. In addition to the risks associated with the credit rating of the
issuers, these securities may be subject to more volatility risk than fixed rate
debt securities.
Tender Option Bonds
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate. The
Advisor will consider on an ongoing basis the creditworthiness of the issuer of
the underlying municipal securities, of any custodian, and of the third-party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying municipal securities and for other
reasons.
Pay-In-Kind (PIK) Securities
The fund may invest in securities which pay interest either in cash or
additional securities. These securities are generally high yield securities and,
in addition to the other risks associated with investing in high yield
securities, are subject to the risks that the interest payments which consist of
additional securities are also subject to the risks of high yield securities.
Money Market Instruments
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposits are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at 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.
The directors of Stein Roe are C. Allen Merritt, Jr., J. Andrew Hilbert, Stephen
E. Gibson and Joseph R. Palombo. Mr. Merritt is Chief Operating Officer of
Liberty Financial. Mr. Hilbert is Senior Vice President and Chief Financial
Officer of Liberty Financial. The positions held by Messrs. Gibson and Palombo
are listed below. The business address of Messrs. Merritt and Hilbert is Federal
Reserve Plaza, Boston, MA 02210. The business address of Messrs. Gibson and
Palombo is One Financial Center, Boston, MA 02111.
Trustees and Officers (this section applies to all of the funds)
<TABLE>
<CAPTION>
Position(s) held Principal occupation(s)
Name, Age; Address with the Trust during past five years
<S> <C> <C>
William D. Andrews, 53; One South Executive Vice-President Executive vice president of Stein Roe
Wacker Drive, Chicago, IL 60606
(4)
John A. Bacon Jr., 73; 4N640 Trustee Private investor
Honey Hill Road, Box 296, Wayne,
IL 60184 (3)(4)
Christine Balzano, 35; Vice-President Senior vice president of Liberty Funds Services, Inc.;
245 Summer Street, Boston, MA formerly vice president and assistant vice president
02210
William W. Boyd, 73; Trustee Chairman and director of Sterling Plumbing (manufacturer
2900 Golf Road, Rolling Meadows, of plumbing products)
IL 60008 (2)(3)(4)
David P. Brady, 36; Vice-President Senior vice president of Stein Roe since March 1998;
One South Wacker Drive, Chicago, vice president of Stein Roe from Nov. 1995 to March
IL 60606 (4) 1998; portfolio manager for Stein Roe since 1993
Daniel K. Cantor, 41; Vice-President Senior vice president of Stein Roe
1330 Avenue of the Americas, New
York, NY 10019 (4)
Kevin M. Carome, 44; Executive Executive Vice President of the Stein Roe Funds since May
One Financial Center, Boston, Vice-President 1999 (formerly Vice President and Secretary); General
MA 02111 (4) Counsel and Secretary of Stein Roe since 1998; Executive Vice
President of Liberty Funds
Group and Liberty All-Star
Funds since October, 2000;
Executive Vice President
and Assistant Secretary,
Liberty Funds Group -
Chicago; Senior Vice
President, Legal since
January, 1999 of Liberty
Funds Group; Associate
General Counsel and Vice
President of Liberty
Financial Companies, Inc.
through January, 1999.
Denise E. Chasmer, 33; 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, 48; Trustee Executive vice president of Liberty Financial Companies,
600 Atlantic Avenue, Boston, MA Inc. since March 1997; senior vice president prior
02210 (1)(2)(4) thereto
James R. Fellows, 35; Vice-President Vice president of Stein Roe since April
1998; vice , president and One South Wacker Drive, senior credit analyst,Van
Kampen American Capital prior thereto Chicago IL 60606
William M. Garrison, 34; 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, 47; One President Director of Stein Roe since September 1, 2000, President and
Financial Center, Boston, MA Vice Chairman of Stein Roe since January, 2000 (formerly
02111 (4) Assistant Chairman from August, 1998 to January, 2000);
President of the Stein Roe
Funds since November 1999;
President of the Liberty
Funds since June, 1998,
Chairman of the Board of
the Liberty Funds since
July, 1998, Chief
Executive Officer and
President since December,
1996 and Director, since
July, 1996 of Colonial
Management Associates
(formerly Executive Vice
President from July, 1996
to December, 1996);
Director, Chief Executive
Officer and President of
LFG since December, 1998
(formerly Director, Chief
Executive Officer and
President of The Colonial
Group, Inc. (TCG) from
December, 1996 to
December, 1998); (formerly
Managing Director of
Marketing of Putnam
Investments, June, 1992 to
July, 1996.)
Brian W. Good, 34; Vice-President Vice president of Stein Roe since April 1998; vice
One South Wacker Drive, Chicago, president and portfolio manager, Van Kampen American
IL 60606 Capital prior thereto
Erik P. Gustafson, 36; Vice-President Senior portfolio manager of Stein Roe; Senior vice
One South Wacker Drive,
Chicago, IL 60606 (4) president of Stein Roe since April
1996; vice president
of Stein Roe prior thereto
Douglas A. Hacker, 44; Trustee Senior vice president and chief financial officer of
P.O. Box 66100, Chicago, IL 60666 UAL, Inc. (airline)
(3) (4)
Loren A. Hansen, 53; Executive Vice-President Chief investment officer/equity of CMA since 1997; executive vice
One South Wacker Drive, president of Stein Roe since Dec. 1995;
Chicago, IL 60606 (4) vice president of The Northern Trust (bank) prior thereto
Brian M. Hartford, 41; Vice President Employee of Stein Roe since November 1998; vice
One Financial Center president of CMA since 1993
Boston, MA 02111
Harvey B. Hirschhorn, 50; One Vice-President Executive vice president, senior portfolio manager,
South Wacker Drive, and chief economist and and chief economist and investment strategist
of Stein Roe; director of research of Stein Roe,
Chicago, IL 60606 (4)
1991 to 1995
Janet Langford Kelly, 42; 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, 38; One South Vice President Senior vice president of Stein Roe
Wacker Drive, Chicago, IL 60606
(4)
Gail D. Knudsen, 38; Vice President Vice president and assistant controller of CMA
245 Summer Street, Boston, MA
02210 (4)
Stephen F. Lockman, 39; 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. 50; Vice President Vice president of Stein Roe since November 1998; vice
One Financial Center president of CMA
Boston, MA 02111
Pamela A. McGrath, 47: One Senior Vice Treasurer and Senior Vice President of the Stein Roe Funds
Financial Center, Boston, MA President and since May 2000; Treasurer and Chief Financial Officer of the
02111 (4) Treasurer Liberty Funds since April 2000; Treasurer of the Liberty
All-Star Funds since April
2000; Treasurer and, Chief
Financial Officer of the
Liberty Funds Group since
December 1999; Senior Vice
President of the Liberty
Funds Group since April
2000; 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, 47; Vice President President of Liberty Funds Services, Inc.
One Financial Center, Boston, MA
02111 (4)
Jane N. Naeseth, 50; One South Vice President Senior Vice President of Stein Roe
Wacker Drive
Chicago, IL 60606 (4)
Charles R. Nelson, 58; Trustee Director/Trustee since 1981. Department of
Economics Van Voorhis Professor, of Economics, University of Department
University of Washington of Economics, University of Washington and consultant
on Seattle, WA 98195 (3)(4) economic and statistical matters.
Maureen G. Newman, 41; 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, 41; 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; One Trustee; Chairman of
Financial Center, Boston, MA the Board Trustee and Chairman of the Board since October 2000;
Director of Stein Roe since September, 2000;Executive Vice
MA 02111 (4) President of the Stein Roe Funds since May 2000; Vice President
of the Colonial Funds since 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, 64; 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, 42; 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, 54; 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
(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.
</TABLE>
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
Investment decisions. The Advisor acts as investment advisor to each of the
funds. Various officers and Trustees of the Trust also serve as officers or
Trustees of other funds and the other corporate or fiduciary clients of the
Advisor. The funds and clients advised by the Advisor or the funds administered
by the Advisor sometimes invest in securities in which the fund also invests and
sometimes engage in covered option writing programs and enter into transactions
utilizing stock index options and stock index and financial futures and related
options ("other instruments"). If the fund, such other funds and such other
clients desire to buy or sell the same portfolio securities, options or other
instruments at about the same time, the purchases and sales are normally made as
nearly as practicable on a pro rata basis in proportion to the amounts desired
to be purchased or sold by each. Although in some cases these practices could
have a detrimental effect on the price or volume of the securities, options or
other instruments as far as the fund is concerned, in most cases it is believed
that these practices should produce better executions. It is the opinion of the
Trustees that the desirability of retaining the Advisor as investment advisor to
the funds outweighs the disadvantages, if any, which might result from these
practices.
Brokerage and research services. Consistent with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., and subject to seeking
"best execution" (as defined below) and such other policies as the Trustees may
determine, the Advisor may consider sales of shares of the funds as a factor in
the selection of broker-dealers to execute securities transactions for a fund.
The Advisor places the transactions of the funds with broker-dealers selected by
the Advisor and, if applicable, negotiates commissions. Broker-dealers may
receive brokerage commissions on portfolio transactions, including the purchase
and writing of options, the effecting of closing purchase and sale transactions,
and the purchase and sale of underlying securities upon the exercise of options
and the purchase or sale of other instruments. The funds from time to time also
execute portfolio transactions with such broker-dealers acting as principals.
The funds do not intend to deal exclusively with any particular broker-dealer or
group of broker-dealers.
It is the Advisor's policy generally to seek best execution, which is to place
the funds' transactions where the funds can obtain the most favorable
combination of price and execution services in particular transactions or
provided on a continuing basis by a broker-dealer, and to deal directly with a
principal market maker in connection with over-the-counter transactions, except
when it is believed that best execution is obtainable elsewhere. In evaluating
the execution services of, including the overall reasonableness of brokerage
commissions paid to, a broker-dealer, consideration is given to, among other
things, the firm's general execution and operational capabilities, and to its
reliability, integrity and financial condition.
Securities transactions of the funds may be executed by broker-dealers who also
provide research services (as defined below) to the Advisor and the funds. The
Advisor may use all, some or none of such research services in providing
investment advisory services to each of its investment company and other
clients, including the fund. To the extent that such services are used by the
Advisor, they tend to reduce the Advisor's expenses. In the Advisor's opinion,
it is impossible to assign an exact dollar value for such services.
The Trustees have authorized the Advisor to cause the Funds to pay a
broker-dealer which provides brokerage and research services to the Advisor an
amount of commission for effecting a securities transaction, including the sale
of an option or a closing purchase transaction, for the funds in excess of the
amount of commission which another broker-dealer would have charged for
effecting that transaction. As provided in Section 28(e) of the Securities
Exchange Act of 1934, "brokerage and research services" include advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities and the availability of securities or purchasers or sellers of
securities; furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends and portfolio strategy and performance
of accounts; and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement). The Advisor must
determine in good faith that such greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of that particular transaction or the Advisor's
overall responsibilities to the funds and all its other clients.
The Trustees have authorized the Advisor to utilize the services of a clearing
agent with respect to all call options written by funds that write options and
to pay such clearing agent commissions of a fixed amount per share (currently
1.25 cents) on the sale of the underlying security upon the exercise of an
option written by a fund.
The Advisor may use the services of AlphaTrade Inc. (ATI), a registered
broker-dealer and subsidiary of the Advisor, when buying or selling equity
securities for a fund's portfolio pursuant to procedures adopted by the Trustees
and 1940 Act Rule 17e-1. Under the Rule, the Advisor must ensure that
commissions a Fund pays ATI on portfolio transactions are reasonable and fair
compared to commissions received by other broker-dealers in connection with
comparable transactions involving similar securities being bought or sold at
about the same time. The Advisor will report quarterly to the Trustees on all
securities transactions placed through ATI so that the Trustees may consider
whether such trades complied with these procedures and the Rule. ATI employs
electronic trading methods by which it seeks to obtain best price and execution
for the fund, and will use a clearing broker to settle trades.
Principal Underwriter
LFD is the principal underwriter of the Trust's shares. LFD has no obligation to
buy the funds' shares, and purchases the funds' shares only upon receipt of
orders from authorized FSFs or investors.
Investor Servicing and Transfer Agent
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>
39
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>
44
APPENDIX II
<TABLE>
<CAPTION>
1999
SOURCE CATEGORY RETURN (%)
<S> <C> <C>
CREDIT SUISSE FIRST BOSTON:
First Boston High Yield Index- 3.28
Global
LIPPER, INC.:
AMEX Composite Index P 27.28
AMEX Computer Tech IX P 75.02
AMEX Institutional IX P 24.46
AMEX Major Market IX P 17.76
Bse Sensex Index 63.83
CAC 40:FFR IX P 51.12
CD Rate 1 Month Index Tr 5.31
CD Rate 3 Month Index Tr 5.46
CD Rate 6 Month Index Tr 5.59
Consumer Price Index 2.99
Copnhgn SE:Dkr IX P 20.46
DAX:Dm IX Tr 39.10
Domini 400 Social Index 24.50
Dow Jones 65 Comp Av P 11.97
Dow Jones Ind Average P 25.22
Dow Jones Ind Dly Reinv 27.21
Dow Jones Ind Mth Reinv 27.29
Dow Jones Trans Av P -5.47
Dow Jones Trans Av Tr -4.52
Dow Jones Util Av P -9.27
Dow Jones Util Av Tr -6.02
Ft/S&P Act Wld Ex US IX N/A
Ft/S&P Actuaries Wld IX N/A
FT-SE 100:Pd IX P 17.81
FT-SE Gold Mines IX 0.20
Hang Seng:Hng Kng $ IX 68.80
Jakarta Composite Index 70.06
Jasdaq Index:Yen P 244.48
Klse Composite Index 38.59
Kospi Index 82.78
Lear High Growth Rate IX N/A
Lear Low Priced Value IX N/A
Lehman 1-3 Govt/Corp P -2.89
Lehman 1-3 Govt/Corp Tr 3.15
Lehman Aggregate Bd P -7.03
Lehman Aggregate Bd Tr -0.82
Lehman Cp Bd Int P -6.43
Lehman Cp Bd Int Tr 0.16
Lehman Govt Bd Int P -5.36
Lehman Govt Bd Int Tr 0.49
Lehman Govt Bd Long P -14.59
Lehman Govt Bd Long Tr -8.73
Lehman Govt Bd P -8.08
Lehman Govt Bd Tr -2.23
Lehman Govt/Cp Bd P -8.26
Lehman Govt/Cp Bd Tr -2.15
Lehman Govt/Cp Int P -5.70
Lehman Govt/Cp Int Tr 0.39
Lehman High Yield P -6.64
Lehman High Yield Tr 2.39
Lehman Muni 10 Yr IX P -6.08
Lehman Muni 10 Yr IX Tr -1.25
Lehman Muni 3 Yr IX P -3.36
Lehman Muni 3 Yr IX Tr 1.96
Lehman Muni Bond IX P -7.08
Lehman Muni Bond IX Tr -2.06
Lipper 1000 N/A
Lipper Mgmt Co Price IX 12.57
Madrid SE:Pst IX P 16.22
ML 10+ Yr Treasury IX Tr -8.61
ML 1-3 Yr Muni IX P -2.72
ML 1-3 Yr Muni IX Tr 2.51
ML 1-3 Yr Treasury IX P -2.85
ML 1-3 Yr Treasury IX Tr 3.06
ML 1-5 Yr Gv/Cp Bd IX P -3.84
ML 1-5 Yr Gv/Cp Bd IX Tr 2.19
ML 15 Yr Mortgage IX P -4.14
ML 15 Yr Mortgage IX Tr 2.17
ML 1-5 Yr Treasury IX P -3.83
ML 1-5 Yr Treasury IX Tr 2.04
ML 3 MO T-Bill IX Tr 4.85
ML 3-5 Yr Govt IX P -5.45
ML 3-5 Yr Govt IX Tr 0.32
ML 3-7 Yr Muni IX Tr 0.66
ML Corp Master Index P -8.53
ML Corp Master Index Tr -1.89
ML Glbl Govt Bond Inx P -6.83
ML Glbl Govt Bond Inx Tr -1.66
ML Glbl Gv Bond IX II P -9.65
ML Glbl Gv Bond IX II Tr -4.52
ML Global Bond Index P -9.04
ML Global Bond Index Tr -3.50
ML Gov Corp Master IX Tr -2.05
ML Govt Master Index P -8.02
ML Govt Master Index Tr -2.11
ML Govt/Corp Master IX P -8.19
ML High Yld Master IX P -7.86
ML High Yld Master IX Tr 1.57
ML Master Muni IX Tr -6.35
ML Mortgage Master IX P -4.86
ML Mortgage Master IX Tr 1.61
ML Treasury Master IX P -8.31
ML Treasury Master IX Tr -2.38
MSCI AC Americas Free ID 22.71
MSCI AC Asia Fr-Ja IX GD 64.67
MSCI AC Asia Fr-Ja IX ID 61.95
MSCI AC Asia Pac - Ja GD 55.23
MSCI AC Asia Pac - Ja ID 52.30
MSCI AC Asia Pac Fr-J GD 49.83
MSCI AC Asia Pac Fr-J ID 46.80
MSCI AC Asia Pac IX GD 59.66
MSCI AC Asia Pac IX ID 57.86
MSCI AC Europe IX GD 17.35
MSCI AC Europe IX ID 15.22
MSCI AC Fe - Ja IX GD 67.83
MSCI AC Fe - Ja IX ID 65.24
MSCI AC Fe Free IX GD 61.81
MSCI AC Fe Free IX ID 60.29
MSCI AC Fe Fr-Ja IX GD 62.11
MSCI AC Fe Fr-Ja IX ID 59.40
MSCI AC Pac Fr-Jpn IX GD 46.89
MSCI AC Pac Fr-Jpn IX ID 43.84
MSCI AC World Free IX GD 26.82
MSCI AC World Fr-USA GD 30.91
MSCI AC World Fr-USA ID 28.80
MSCI AC World IX GD 27.31
MSCI AC World IX ID 25.49
MSCI AC World-USA IX GD 31.79
MSCI AC Wrld Fr-Ja IX GD 23.07
MSCI AC Wrld Fr-Ja IX ID 21.20
MSCI AC Wrld-Ja IX GD 23.64
MSCI AC Wrld-Ja IX ID 21.77
MSCI Argentina IX GD 34.29
MSCI Argentina IX ID 30.05
MSCI Australia IX GD 18.67
MSCI Australia IX ID 15.19
MSCI Australia IX ND 17.62
MSCI Austria IX GD -8.66
MSCI Austria IX ID -10.47
MSCI Austria IX ND -9.11
MSCI Belgium IX GD -13.75
MSCI Belgium IX ID -15.77
MSCI Belgium IX ND -14.26
MSCI Brazil IX GD 67.23
MSCI Brazil IX ID 61.57
MSCI Canada IX GD 54.40
MSCI Canada IX ID 51.78
MSCI Canada IX ND 53.74
MSCI Chile IX GD 39.01
MSCI Chile IX ID 36.45
MSCI China Dom Fr IX ID 31.10
MSCI China Free IX ID 9.94
MSCI China Non Dom IX ID 5.82
MSCI Colombia IX GD -13.69
MSCI Colombia IX ID -19.14
MSCI Czech Rep IX GD 5.35
MSCI Czech Rep IX ID 3.97
MSCI Denmark IX GD 12.47
MSCI Denmark IX ID 10.85
MSCI Denmark IX ND 12.06
MSCI EAFE - UK IX GD 31.45
MSCI EAFE - UK IX ID 29.63
MSCI EAFE - UK IX ND 31.01
MSCI EAFE + Canada IX GD 28.27
MSCI EAFE + Canada IX ID 26.22
MSCI EAFE + Canada IX ND 27.93
MSCI EAFE + Em IX GD 31.03
MSCI EAFE + EM IX ID 28.93
MSCI EAFE + EMF IX GD 30.33
MSCI EAFE + EMF IX ID 28.24
MSCI EAFE Fr IX ID 25.03
MSCI EAFE GDP Wt IX GD 31.38
MSCI EAFE GDP Wt IX ID 29.49
MSCI EAFE GDP Wt IX ND 31.00
MSCI EAFE IX GD 27.30
MSCI EAFE IX ID 25.27
MSCI EAFE IX ND 26.96
MSCI EASEA IX GD 18.12
MSCI EASEA IX ID 15.90
MSCI EASEA IX ND 17.77
MSCI Em Asia IX GD 69.73
MSCI Em Asia IX ID 67.96
MSCI Em Eur/Mid East GD 79.61
MSCI Em Eur/Mid East ID 76.67
MSCI Em Europe IX GD 83.98
MSCI Em Europe IX ID 81.28
MSCI Em Far East IX GD 67.27
MSCI Em Far East IX ID 65.67
MSCI Em IX GD 68.82
MSCI Em IX ID 66.18
MSCI Em Latin Am IX GD 65.45
MSCI Em Latin Am IX ID 61.81
MSCI EMF Asia IX GD 69.41
MSCI EMF Asia IX ID 67.65
MSCI EMF Far East IX GD 65.50
MSCI EMF Far East IX ID 63.97
MSCI EMF IX GD 66.41
MSCI EMF IX ID 63.70
MSCI EMF Latin Am IX GD 58.89
MSCI EMF Latin Am IX ID 55.48
MSCI Europe - UK IX GD 17.84
MSCI Europe - UK IX ID 16.00
MSCI Europe - UK IX ND 17.35
MSCI Europe GDP Wt IX ID 14.08
MSCI Europe IX GD 16.23
MSCI Europe IX ID 14.12
MSCI Europe IX ND 15.89
MSCI European Union GD 19.22
MSCI European Union ID 16.99
MSCI Far East Free IX ID 59.99
MSCI Far East IX GD 62.63
MSCI Far East IX ID 61.10
MSCI Far East IX ND 62.41
MSCI Finland IX GD 153.33
MSCI Finland IX ID 150.71
MSCI Finland IX ND 152.60
MSCI France IX GD 29.69
MSCI France IX ID 28.00
MSCI France IX ND 29.27
MSCI Germany IX GD 20.53
MSCI Germany IX ID 18.70
MSCI Germany IX ND 20.04
MSCI Greece IX GD 49.64
MSCI Greece IX ID 47.58
MSCI Hongkong IX GD 59.52
MSCI Hongkong IX ID 54.85
MSCI Hongkong IX ND 59.52
MSCI Hungary IX GD 11.66
MSCI Hungary IX ID 10.81
MSCI India IX GD 87.35
MSCI India IX ID 84.67
MSCI Indonesia IX GD 93.46
MSCI Indonesia IX ID 92.04
MSCI Ireland IX ID -14.02
MSCI Israel Dom IX ID 51.10
MSCI Israel IX ID 56.29
MSCI Israel Non Dom Ixid 47.06
MSCI Italy IX GD 0.19
MSCI Italy IX ID -1.48
MSCI Italy IX ND -0.26
MSCI Japan IX GD 61.77
MSCI Japan IX ID 60.56
MSCI Japan IX ND 61.53
MSCI Jordan IX GD 6.26
MSCI Jordan IX ID 2.00
MSCI Kokusai IX GD 21.26
MSCI Kokusai IX ID 19.43
MSCI Kokusai IX ND 20.84
MSCI Korea IX GD 92.42
MSCI Korea IX ID 90.17
MSCI Luxembourg IX ID 50.50
MSCI Malaysia IX GD 109.92
MSCI Malaysia IX ID 107.23
MSCI Mexico Free IX GD 80.07
MSCI Mexico Free IX ID 78.50
MSCI Mexico IX GD 81.76
MSCI Mexico IX ID 80.19
MSCI Netherland IX GD 7.43
MSCI Netherland IX ID 5.25
MSCI Netherland IX ND 6.88
MSCI New Zealand IX GD 14.30
MSCI New Zealand IX ID 9.70
MSCI New Zealand IX ND 12.90
MSCI Nordic IX GD 87.75
MSCI Nordic IX ID 85.11
MSCI Nordic IX ND 87.00
MSCI Norway IX GD 32.43
MSCI Norway IX ID 29.52
MSCI Norway IX ND 31.70
MSCI Nth Amer IX GD 23.47
MSCI Nth Amer IX ID 21.91
MSCI Nth Amer IX ND 23.00
MSCI Pac - Japan IX GD 43.20
MSCI Pac - Japan IX ID 39.35
MSCI Pac - Japan IX ND 42.58
MSCI Pacific Free IX ID 55.19
MSCI Pacific Fr-Jpn ID 34.95
MSCI Pacific IX GD 57.96
MSCI Pacific IX ID 56.17
MSCI Pacific IX ND 57.63
MSCI Pakistan IX GD 49.62
MSCI Pakistan IX ID 42.24
MSCI Peru IX GD 18.86
MSCI Peru IX ID 16.34
MSCI Philippines Fr Ixgd 3.32
MSCI Philippines Fr Ixid 2.33
MSCI Philippines IX GD 8.90
MSCI Philippines IX ID 7.62
MSCI Portugal IX GD -8.45
MSCI Portugal IX ID -10.86
MSCI Russia IX GD 247.06
MSCI Russia IX ID 246.20
MSCI Sing/Mlysia IX GD 99.40
MSCI Sing/Mlysia IX ID 97.08
MSCI Sing/Mlysia IX ND 99.40
MSCI Singapore Fr IX GD 60.17
MSCI Singapore Fr IX ID 58.43
MSCI South Africa IX GD 57.20
MSCI South Africa IX ID 53.43
MSCI Spain IX GD 5.27
MSCI Spain IX ID 3.53
MSCI Spain IX ND 4.83
MSCI Sri Lanka IX GD -6.27
MSCI Sri Lanka IX ID -9.73
MSCI Sweden IX GD 80.60
MSCI Sweden IX ID 77.76
MSCI Sweden IX ND 79.74
MSCI Swtzrlnd IX GD -6.59
MSCI Swtzrlnd IX ID -7.81
MSCI Swtzrlnd IX ND -7.02
MSCI Taiwan IX GD 52.71
MSCI Taiwan IX ID 51.52
MSCI Thailand IX GD 40.92
MSCI Thailand IX ID 40.49
MSCI Turkey IX GD 252.41
MSCI Turkey IX ID 244.36
MSCI UK IX GD 12.45
MSCI UK IX ID 9.74
MSCI UK IX ND 12.45
MSCI USA IX GD 22.38
MSCI USA IX ID 20.86
MSCI USA IX ND 21.92
MSCI Venezuela IX GD 8.71
MSCI Venezuela IX ID 1.68
MSCI World - UK IX GD 26.83
MSCI World - UK IX ID 25.17
MSCI World - UK IX ND 26.38
MSCI World - USA IX GD 28.27
MSCI World - USA IX ID 26.22
MSCI World - USA IX ND 27.93
MSCI World GDP Wt IX ID 27.26
MSCI World IX Free ID 23.45
MSCI World IX GD 25.34
MSCI World IX ID 23.56
MSCI World IX ND 24.93
MSCI Wrld - Austrl IX GD 25.42
MSCI Wrld - Austrl IX ID 23.67
MSCI Wrld - Austrl IX ND 25.03
NASDAQ 100 IX P 101.95
NASDAQ Bank IX P -7.98
NASDAQ Composite IX P 85.59
NASDAQ Industrial IX P 71.67
NASDAQ Insurance IX P 5.54
NASDAQ Natl Mkt Cmp IX 85.87
NASDAQ Natl Mkt Ind IX 72.04
NASDAQ Transport IX P 1.82
Nikkei 225 Avg:Yen P 36.79
NYSE Composite P 9.15
NYSE Finance IX P -0.92
NYSE Industrials IX P 11.37
NYSE Transportation IX -3.25
NYSE Utilities IX P 14.62
Oslo SE Tot:Fmk IX P 45.54
Philippines Composite IX 8.85
PSE Technology IX P 116.40
Russell 1000 Grow IX Tr 33.16
Russell 1000 IX P 19.46
Russell 1000 IX Tr 20.91
Russell 1000 Value IX Tr 7.35
Russell 2000 Grow IX Tr 43.09
Russell 2000 IX P 19.62
Russell 2000 IX Tr 21.26
Russell 2000 Value IX Tr -1.49
Russell 3000 IX P 19.43
Russell 3000 IX Tr 20.90
Russell Midcap Grow IX 51.29
Russell Midcap IX Tr 18.23
Russell Midcap Value IX -0.11
S & P 100 Index P 31.26
S & P 500 Daily Reinv 21.04
S & P 500 Index P 19.53
S & P 500 Mnthly Reinv 21.03
S & P 600 Index P 11.52
S & P 600 Index Tr 12.41
S & P Financial IX P 2.19
S & P Financial IX Tr 3.97
S & P Industrial IX Tr 25.87
S & P Industrials P 24.52
S & P Midcap 400 IX P 13.35
S & P Midcap 400 IX Tr 14.72
S & P Transport Index P -10.69
S & P Transport IX Tr -9.32
S & P Utility Index P -12.48
S & P Utility Index Tr -8.88
S & P/Barra Growth IX Tr 27.98
S & P/Barra Value IX Tr 12.72
SB Cr-Hdg Nn-US Wd IX Tr 2.88
SB Cr-Hdg Wd Gv Bd IX Tr 1.31
SB Non-US Wd Gv Bd IX Tr -5.07
SB Wd Gv Bd:Austrl IX Tr 4.07
SB Wd Gv Bd:Germny IX Tr -16.42
SB Wd Gv Bd:Japan IX Tr 15.53
SB Wd Gv Bd:UK IX Tr -4.30
SB Wd Gv Bd:US IX Tr -2.45
SB World Govt Bond IX Tr -4.27
SB World Money Mkt IX Tr 0.39
Straits Times Index 77.54
Swiss Perf:Sfr IX Tr 11.69
Taiwan SE:T$ IX P 42.86
T-Bill 1 Year Index Tr 4.91
T-Bill 3 Month Index Tr 4.74
T-Bill 6 Month Index Tr 4.85
Thailand Set Index 35.44
Tokyo 2nd Sct:Yen IX P 121.27
Tokyo Se(Topix):Yen IX 58.44
Toronto 300:C$ IX P 29.72
Toronto SE 35:C$ IX P 36.42
Value Line Cmp IX-Arth 10.56
Value Line Cmp IX-Geom -1.40
Value Line Industrl IX -0.05
Value Line Railroad IX -9.93
Value Line Utilties IX -7.10
Lipper CE Pac Ex Jpn IX 73.32
Lipper Pac Ex-Jpn Fd IX 74.88
<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>
i
