1933 Act Registration No. 33-02633
1940 Act File No. 811-4552
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 41 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940[X]
Amendment No. 42 [X]
LIBERTY-STEIN ROE FUNDS INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
One South Wacker Drive, Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-338-2550
Kevin M. Carome Cameron S. Avery
Executive Vice-President Bell, Boyd & Lloyd LLC
Liberty-Stein Roe Three First National Plaza
Income Trust 70 W. Madison Street, Suite 3300
One Financial Center Chicago, Illinois 60602
Boston, Massachusetts 02111
(Name and Address of Agents for Service)
It is proposed that this filing will become effective (check appropriate box):
[X] immediately upon filing pursuant to paragraph (b) [ ] on (date) pursuant to
paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on
(date)pursuant to paragraph (a)(1 [ ] 75 days after filing pursuant to paragraph
(a)(2 [ ] on (date) pursuant to paragraph (a)(2) of rule 485
Registrant has previously elected to register pursuant to Rule 24f-2 an
indefinite number of shares of beneficial interest of the following series:
Stein Roe Income Fund, Stein Roe Cash Reserves Fund, Stein Roe Intermediate Bond
Fund, and Stein Roe High Yield Fund.
This amendment to the Registration Statement has also been signed by SR&F Base
Trust.
The prospectus and statement of additional information relating to the series of
Liberty-Stein Roe Funds Income Trust designated Stein Roe Cash Reserves is not
affected by the filing of this Post-Effective Amendment No. 41.
<PAGE>
<PAGE>
LIBERTY HIGH YIELD BOND FUND CLASS A Prospectus, August 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
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Investment Goals ....................................................... 2
Principal Investment Strategies ........................................ 2
Principal Investment Risks ............................................. 3
Performance History .................................................... 4
Your Expenses .......................................................... 5
YOUR ACCOUNT 6
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How to Buy Shares ...................................................... 6
Sales Charges .......................................................... 7
How to Exchange Shares ................................................. 8
How to Sell Shares ..................................................... 8
Fund Policy on Trading of Fund Shares .................................. 10
Distribution and Service Fees .......................................... 10
Other Information About Your Account ................................... 11
MANAGING THE FUND 13
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Investment Advisor ..................................................... 13
Portfolio Manager ...................................................... 13
OTHER INVESTMENT
STRATEGIES AND RISKS 14
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FINANCIAL HIGHLIGHTS 17
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</TABLE>
<PAGE>
THE FUND
INVESTMENT GOALS
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The Fund seeks its total return by investing for a high level of current income
and capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
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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 shows 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 is 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)
[BAR CHART OMITTED]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C>
15.84% 4.30% 8.21%
</TABLE>
The Fund's year-to-date total return through June 30, 2000 was - 2.86%.
For period shown in bar chart:
Best quarter: 2nd quarter 1997, +6.38%
Worst quarter: 3rd quarter 1998, -6.38%
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 9.77
----------------------------------------------------------------
Merrill Index (%) N/A 1.57 6.52(2)
</TABLE>
(1) Because the Class A shares have not completed a full calendar year the bar
chart and average annual total returns shown are for Class S shares, the
oldest existing Fund class.
(2) Performance information is from October 31, 1996.
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
amount redeemed, if applicable) (5)
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED DIRECTLY FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Management fee(%) 0.65
--------------------------------------------------------------
Distribution and service (12b-1) fees(%) 0.35(6)
--------------------------------------------------------------
Other expenses(%) 0.57(7)
--------------------------------------------------------------
Total annual fund operating expenses(%) 1.57
--------------------------------------------------------------
Expense reimbursement(%) (0.22)(8)
--------------------------------------------------------------
Net expenses(%) 1.35
</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 $622 $942 $1,285 $2,249
</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 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.
(7) Other expenses are based on the Fund's Class S shares.
(8) The Fund's advisor has agreed to reimburse the Fund for certain expenses so
that the total annual fund operating expenses (exclusive of distribution
and service fees, brokerage commissions, interest, taxes and extraordinary
expenses, if any) will not exceed 1.00%. As a result, the actual management
fee would be 0.43% and total annual fund operating expenses for Class A
shares would be 1.35%. This arrangement expires on October 31, 2000. A
reimbursement lowers the expense ratio and increases overall return to
investors.
5
<PAGE>
YOUR ACCOUNT
INVESTMENT MINIMUMS
<TABLE>
<S> <C> Initial Investment ....... $1,000 Subsequent Investments ... $ 50
Automatic Investment Plan* $ 50 Retirement Plans* ........ $ 25 </TABLE> * The
initial investment minimum of $1,000 is waived on this plan.
The Fund reserves the right to change these investment minimums. The Fund also
reserves the right to refuse a purchase order for any reason, including if it
believes that doing so would be in the best interest of the Fund and its
shareholders.
HOW TO BUY SHARES
--------------------------------------------------------------------------------
Your financial advisor can help you establish an appropriate investment
portfolio, buy shares and monitor your investments. When the Fund receives your
purchase request in "good form," your shares will be bought at the next
calculated public offering price. "Good form" means that you placed your order
with your brokerage firm or your payment has been received and your application
is complete, including all necessary signatures. The Fund also offers Class S
shares through a separate prospectus.
OUTLINED BELOW ARE THE VARIOUS OPTIONS FOR BUYING SHARES:
<TABLE>
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 money funds
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>
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
--------------------------------------------------------------------------------
Next $2 million 0.50
--------------------------------------------------------------------------------
Over $5 million 0.25(10)
</TABLE>
(9) Class A shares bought without an initial sales charge in accounts
aggregating $1 million to $5 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 1.00% CDSC if redeemed within 18 months
of their purchase date. Purchases in accounts aggregating over $5 million
are subject to a 1.00% CDSC only to the extent that the sale of shares
within 18 months of purchase causes the value of the accounts to fall below
the $5 million level. The 18-month period begins on the first day of the
month following each purchase.
(10) Paid over 12 months but only to the extent the shares remain outstanding.
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.
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.
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
8
<PAGE>
YOUR ACCOUNT
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.
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 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>
9
<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 drive
Fund expenses higher. In order to promote the best interests of the Fund, the
Fund reserves the right to reject any purchase order or exchange request,
particularly from market timers or investors who, in the advisor's opinion, have
a pattern of short-term or excessive trading or whose trading has been or may be
disruptive to the Fund. The Fund into which you would like to exchange also may
reject your request.
DISTRIBUTION AND SERVICE FEES
--------------------------------------------------------------------------------
The Fund has adopted a plan under Rule 12b-1 that permits it to pay marketing
and other fees to support the sale and distribution of Class A 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.
10
<PAGE>
YOUR ACCOUNT
OTHER INFORMATION ABOUT YOUR ACCOUNT
--------------------------------------------------------------------------------
HOW THE FUND'S SHARE PRICE IS DETERMINED The price of each class of the Fund's
shares is based on its 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.
11
<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.
--------------------------------------------------------------------------------
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(11)
--------------------------------------------------------------------------------
Receive all distributions in cash (with one of the following options) (11):
- send the check to your address of record
- send the check to a third party address
- transfer the money to your bank via electronic funds transfer
TAX CONSEQUENCES 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 personal tax implications.
Please consult your tax advisor on federal, state, local or other applicable tax
laws.
In addition to the dividends and capital gains distributions made by the Fund,
you may realize a capital gain or loss when selling and exchanging shares of the
Fund. Such transactions may be subject to federal, state and local income tax.
(11) 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.
12
<PAGE>
MANAGING THE FUNDS
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 1999 fiscal year, aggregate advisory fees paid to Stein Roe by the Fund
amounted to 0.65% 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.
13
<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.
14
<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.
15
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
PORTFOLIO TURNOVER
--------------------------------------------------------------------------------
There are no limits on turnover. Turnover may vary significantly from year to
year. Stein Roe does not expect 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.
INTERFUND LENDING PROGRAM
--------------------------------------------------------------------------------
The Fund and Portfolio may lend money to borrow money from other funds advised
by Stein Roe. They will do so when Stein Roe believes such lending or borrowing
is necessary and appropriate. Borrowing costs will be the same as or lower than
the costs of a bank loan.
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.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance. Because Class A shares have not commenced operations, the
Fund's Class S shares, the Fund's existing class is shown. 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 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>
<S> <C> <C> <C> <C>
(Unaudited)
Six months ended Period ended
December 31, Years ended June 30, June 30,
1999 1999 1998 1997(c)
Class S Class S Class S Class S
Net asset value--
Beginning of period($) 10.15 11.00 10.54 10.00
--------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS($):
Net investment income 0.77 0.85 0.85 0.52
--------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments allocated from SR&F High Yield
Portfolio (0.54) (0.53) 0.61 0.54
--------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.23 0.32 1.46 1.06
==============================================================================================================
DISTRIBUTIONS($):
Net investment income (0.52) (0.85) (0.85) (0.52)
--------------------------------------------------------------------------------------------------------------
Net realized gains --- (0.32) (0.15) ---
--------------------------------------------------------------------------------------------------------------
Total Distributions (0.52) (1.17) (1.00) (0.52)
--------------------------------------------------------------------------------------------------------------
Net asset value--
End of period($) 9.86 10.15 11.00 10.54
--------------------------------------------------------------------------------------------------------------
Total return(%)(b) 2.35(e) 3.50 14.38 10.88(e)
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA(%):
Ratio of net expenses to average net assets(a) 1.00(d) 1.00 1.00 1.00(d)
--------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets(b) 10.96(d) 8.23 7.79 8.05(d)
--------------------------------------------------------------------------------------------------------------
Portfolio turnover(%)(f) 78 296 426 168
--------------------------------------------------------------------------------------------------------------
Net assets at end of period(000)($) 37,502 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 1.23%
for the six months ended December 31, 1999, 1.22% for the year ended June
30, 1999, 1.32% for the year ended June 30, 1998, and 2.29% for the period
ended June 30, 1997.
(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.
17
<PAGE>
NOTES
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18
<PAGE>
NOTES
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19
<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]
715-01/303C-0700 Liberty Funds Distributor, Inc. (c)2000
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
www.libertyfunds.com
<PAGE>
LIBERTY INCOME BOND FUND CLASS A Prospectus, August 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 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 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.
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.
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 shows 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 is 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)
[BAR GRAPH OMITTED]
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6.08% 17.18% 9.11% 13.38% -3.83% 19.74% 4.82% 9.58% 4.00% 1.23%
</TABLE>
The Fund's year-to-date total return through June 30, 2000 was +3.56%.
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 7.77 7.89
</TABLE>
(1) Because the Class A shares have not completed a full calendar year the bar
chart and average annual total returns shown are for Class S shares, the
oldest existing Fund class.
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
amount redeemed, if applicable) (4)
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED DIRECTLY FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Management fee (%) 0.60
----------------------------------------------------------------------------------
Distribution and service (12b-1) fees (%) 0.35(5)
----------------------------------------------------------------------------------
Other expenses (%) 0.24(6)
----------------------------------------------------------------------------------
Total annual fund operating expenses (%) 1.19
</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 $591 $835 $1,098 $1,850
</TABLE>
(2) A $10 annual fee is deducted from accounts of less than $1,000 and paid to
the transfer agent.
(3) This charge applies only to certain Class A shares bought without an
initial sales charge that are sold within 18 months of purchase.
(4) There is a $7.50 charge for wiring sale proceeds to your bank.
(5) The Fund's distributor has voluntarily agreed to waive a portion of the
12b-1 fee for Class A shares. As a result, the actual 12b-1 fee for Class A
shares would be 0.25% and the total annual fund operating expenses for
Class A shares would be 1.09%. This arrangement may be terminated by the
distributor at any time.
(6) 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 money
funds 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>
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(7) 0.00 0.00 0.00
---------------------------------------------------------------------------------------
</TABLE>
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
---------------------------------------------------------------------------------------
Next $2 million 0.50
---------------------------------------------------------------------------------------
Over $5 million 0.25(8)
</TABLE>
(7) Class A shares bought without an initial sales charge in accounts
aggregating $1 million to $5 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 1.00% CDSC if redeemed within 18 months
of their purchase date. Purchases in accounts aggregating over $5 million
are subject to a 1.00% CDSC only to the extent that the sale of shares
within 18 months of purchase causes the value of the accounts to fall below
the $5 million level. The 18-month period begins on the first day of the
month following each purchase.
(8) Paid over 12 months but only to the extent the shares remain outstanding.
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.
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.
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.
9
<PAGE>
YOUR ACCOUNT
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.
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 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>
10
<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 drive
Fund expenses higher. In order to promote the best interests of the Fund, the
Fund reserves the right to reject any purchase order or exchange request,
particularly from market timers or investors who, in the advisor's opinion, have
a pattern of short-term or excessive trading or whose trading has been or may be
disruptive to the Fund. The Fund into which you would like to exchange also may
reject your request.
DISTRIBUTION AND SERVICE FEES
--------------------------------------------------------------------------------
The Fund has adopted a plan under Rule 12b-1 that permits it to pay marketing
and other fees to support the sale and distribution of Class A 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.
11
<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.
12
<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.
-------------------------------------------------------------------------------
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(9)
--------------------------------------------------------------------------------
Receive all distributions in cash (with one of the following options)(9):
- send the check to your address of record
- send the check to a third party address
- transfer the money to your bank via electronic funds transfer
TAX CONSEQUENCES 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 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.
(9) 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.
13
<PAGE>
MANAGING THE FUNDS
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 1999 fiscal year, aggregate advisory fees paid to Stein Roe by the Fund
amounted to 0.60% 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.
14
<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.
15
<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. Stein Roe does not expect 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 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.
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.
16
<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.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance. Because Class A shares have not commenced operations, the
Fund's Class S shares, the Fund's existing class is shown. Information is shown
for the Fund's last five fiscal years, which run from July 1 to June 30. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that you would have earned (or lost) on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information is included in the Fund's financial statements
which have been audited by Ernst & Young LLP, independent auditors, whose
report, along with the Fund's financial statements, is included in the Fund's
annual report. Information for period ending December 31, 1999 is unaudited. You
can request a free annual report by calling 1-800-426-3750.
THE FUND
<TABLE>
<CAPTION>
(Unaudited)
Six months ended Years ended June 30,
December 31,
-------------------------------------------------
1999 1999 1998 1997
1996 1995
Class S Class S Class S Class S
Class S Class S
Net asset value--
<S> <C> <C> <C> <C>
<C> <C>
Beginning of period ($) 9.41 10.03 9.88 9.63
9.79 9.36
----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income 0.34 0.67 0.69 0.70
0.71 0.71
----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (0.22) (0.62) 0.15 0.25
(0.16) 0.43
----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.12 0.05 0.84 0.95
0.55 1.14
==================================================================================================================================
DISTRIBUTIONS ($):
Net investment income (0.34) (0.67) (0.69) (0.70)
(0.71) (0.71)
----------------------------------------------------------------------------------------------------------------------------------
Net asset value--
End of period ($) 9.19 9.41 10.03 9.88
9.63 9.79
----------------------------------------------------------------------------------------------------------------------------------
Total return (%)(a) 1.32 (e) 0.52 8.72 10.34 (c)
5.70 (c) 12.79 (c)
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of net expenses
to average net assets(a) 0.87 (b) 0.84 0.83 0.84
0.82 0.82
----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets 7.37 (b) 6.91 6.89 7.26 (c) 7.26
(c) 7.55 (c)
----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%)(f) 1.32 (e) 0.52 (f) 59 (d) 138
135 64
----------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period(000) ($) 249,766 294,640 448,403 375,272
309,564 174,327
</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%, 0.88% and
0.85% for the years ended June 30, 1997, 1996 and 1995, respectively.
(b) Annualized.
(c) Computed giving effect to the Advisor's expense limitation undertaking.
(d) Prior to the commencement of operations of the Portfolio.
(e) Not annualized.
(f) For fiscal years from 1995 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, 1999, the portfolio turnover for the Portfolio was 77%. For fiscal year
1999 and the six months ended December 31, 1999, this represents the
portfolio turnover for the Portfolio.
18
<PAGE>
NOTES
19
<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]
Liberty Funds Distributor, Inc. (c)2000
One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
www.libertyfunds.com
751-01/294C-0700
<PAGE>
LIBERTY INTERMEDIATE BOND FUND CLASS A PROSPECTUS, AUGUST 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 total 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 total 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 total assets in lower-rated debt
securities. These securities are sometimes referred to as "junk bonds" and are
rated at the time of purchase:
- below BBB by Standard & Poor's,
- below Baa by Moody's Investors Service, Inc., or
- with a comparable rating by another nationally recognized rating
agency.
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.
To a limited extent, the Portfolio may invest 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 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.
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.
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 shows 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 is 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 OMITTED]
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
7.09% 15.10% 7.69% 9.17% (2.55)% 16.84% 4.52% 9.29% 6.42% 1.27%
</TABLE>
The Fund's year-to-date total return through June 30, 2000 was +3.59%.
For period shown in bar chart:
Best quarter: 2nd quarter 1998, +5.24%
Worst quarter: 1st quarter 1994, -2.19%
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) Because the Class A shares have not completed a full calendar year the bar
chart and average annual total returns shown are for Class S shares, the
oldest existing Fund class.
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
amount redeemed, if applicable) (4)
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED DIRECTLY FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Management fee (%) 0.50
--------------------------------------------------- -----------
Distribution and service (12b-1) fees(%) 0.35(5)
--------------------------------------------------- -----------
Other expenses(%) 0.22(6)
--------------------------------------------------- -----------
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 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.
(6) 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>
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 money
funds 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>
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(7) 0.00 0.00 0.00
</TABLE>
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
-------------------------------------------- ------------------------------------------
Next $2 million 0.50
-------------------------------------------- ------------------------------------------
Over $5 million 0.25(8)
</TABLE>
(7) Class A shares bought without an initial sales charge in accounts
aggregating $1 million to $5 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 1.00% CDSC if redeemed within 18 months
of their purchase date. Purchases in accounts aggregating over $5 million
are subject to a 1.00% CDSC only to the extent that the sale of shares
within 18 months of purchase causes the value of the accounts to fall below
the $5 million level. The 18-month period begins on the first day of the
month following each purchase.
(8) Paid over 12 months but only to the extent the shares remain outstanding.
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.
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.
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.
9
<PAGE>
YOUR ACCOUNT
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.
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 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>
10
<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 drive
Fund expenses higher. In order to promote the best interests of the Fund, the
Fund reserves the right to reject any purchase order or exchange request,
particularly from market timers or investors who, in the advisor's opinion, have
a pattern of short-term or excessive trading or whose trading has been or may be
disruptive to the Fund. The Fund into which you would like to exchange also may
reject your request.
DISTRIBUTION AND SERVICE FEES
-----------------------------
The Fund has adopted a plan under Rule 12b-1 that permits it to pay marketing
and other fees to support the sale and distribution of Class A 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.
11
<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.
12
<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.
-------------------- -----------------------------------------------------------------
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(9)
-------------------------------------------------------------------------------
Receive all distributions in cash (with one of the following options) (9):
- send the check to your address of record
- send the check to a third party address
- transfer the money to your bank via electronic funds transfer
TAX CONSEQUENCES 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 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.
(9) 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.
13
<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 1999 fiscal year, aggregate advisory fees paid to Stein Roe by the Fund
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.
14
<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.
15
<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 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 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. Stein Roe does not expect it to exceed 100% under normal conditions. The
Fund generally intends to purchase securities for long-term investment although,
to a limited extent, it may purchase securities in anticipation of relatively
short-term price gains. Portfolio turnover typically produces capital gains or
losses resulting in tax consequences for Fund investors. It also increases
transaction expenses, which reduce the Fund's return.
16
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
INTERFUND LENDING PROGRAM
-------------------------
The Fund and Portfolio may lend money to and borrow 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.
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.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance. Because Class A shares have not commenced operations, the
Fund's Class S shares, the Fund's existing class is shown. Information is shown
for the Fund's last five fiscal years, which run from July 1 to June 30. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that you would have earned (or lost) on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information is included in the Fund's financial statements
which have been audited by 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.
<TABLE>
<CAPTION>
The Fund
(Unaudited)
Six months
ended
December 31, Years ending June 30,
1999 1999 1998 1997
1996 1995
Class S Class S Class S Class S
Class S Class S
<S> <C> <C> <C> <C>
<C> <C>
Net asset value--
Beginning of period ($) 8.63 8.97 8.74 8.58
8.67 8.44
-------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income 0.30 0.56 0.58 0.60
0.59 0.58
-------------------------------------------------------------------
Net gains realized and unrealized gain
(loss) on investments and futures
transactions (0.21) (0.33) 0.23 0.17
(0.10) 0.23
-------------------------------------------------------------------
Total from Investment Operations 0.09 0.23 0.81 0.77
0.49 0.81
===================================================================
DISTRIBUTIONS ($):
Net investment income (0.30) (0.57) (0.58) (0.61)
(0.58) (0.58)
-------------------------------------------------------------------
Net asset value--
End of period ($) 8.42 8.63 8.97 8.74
8.58 8.67
-------------------------------------------------------------------
Total return (%) 1.00 (e) 2.60 9.51 9.31(c)
5.76(c) 10.11(c)
===================================================================
RATIOS/SUPPLEMENTAL DATA (%):
Ratio of net expenses to
average net assets (a) 0.73 (b) 0.72 0.72 0.73
0.70 0.70
-------------------------------------------------------------------
Ratio of net investment income
to average net assets 6.89 (b) 6.31 6.51 6.97(c)
6.79(c) 6.94 (c)
-------------------------------------------------------------------
Portfolio turnover (%) (f) 188 (e) 253 138 (d) 210
202 162
-------------------------------------------------------------------
Net assets at end of period (000) ($) 401,036 431,123 437,456 328,784
298,112 301,733
</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%, 0.75% and
0.71% for the years ended June 30, 1997, 1996 and 1995, respectively.
(b) Annualized.
(c) Computed giving effect to the Advisor's expense limitation undertaking.
(d) Prior to the commencement of operations of the Portfolio.
(e) Not annualized.
(f) For fiscal years from 1995 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, 1999, the portfolio turnover for the Portfolio was 86%. For fiscal year
1999 and the six months ended December 31, 1999, this represents the
portfolio turnover for the Portfolio.
18
<PAGE>
NOTES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
19
<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]
Liberty Funds Distributor, Inc. (C)2000
713-01/295C-0700 One Financial Center, Boston, MA 02111-2621, 1-800-426-3750
www.libertyfunds.com
Statement of Additional Information Dated August 1, 2000
LIBERTY-STEIN ROE FUNDS INCOME TRUST
One Financial Center, Boston, MA 02111
800-338-2550
Stein Roe Intermediate Bond Fund-
Liberty Intermediate Bond Fund Class A
Stein Roe Income Fund-
Liberty Income Bond Fund Class A
Stein Roe High Yield Fund-
Liberty High Yield Bond Fund Class A
(each a "Fund", collectively, the "Funds")
This Statement of Additional Information ("SAI") is not a prospectus,
but provides additional information that should be read in conjunction with each
Fund's prospectus dated August 1, 2000 and any supplements thereto
("Prospectuses"). Financial statements, which are contained in the Funds' June
30, 1999 Annual Report, and December 31, 1999 Semi-annual Report are
incorporated by reference into this SAI. The Prospectuses and Annual Report and
Semi-annual Report may be obtained at no charge by telephoning 800-338-2550.
TABLE OF CONTENTS
Page
General Information and History.............................................2
Investment Policies.........................................................4
Portfolio Investments and Strategies........................................4
Investment Restrictions....................................................22
Additional Investment Considerations.......................................25
Management.................................................................26
Financial Statements.......................................................30
Principal Shareholders.....................................................31
Investment Advisory and Other Services.....................................31
Distributor................................................................33
Transfer Agent.............................................................35
Purchases and Redemptions..................................................35
Custodian..................................................................46
Independent Auditors.......................................................47
Portfolio Transactions.....................................................47
Additional Income Tax Considerations.......................................52
Investment Performance.....................................................53
Master Fund/Feeder Fund: Structure and Risk Factors........................59
Appendix--Ratings..........................................................62
<PAGE>
GENERAL INFORMATION AND HISTORY
.........Stein Roe Intermediate Bond Fund ("Intermediate Bond Fund"), Stein Roe
Income Fund ("Income Fund") and Stein Roe High Yield Fund ("High Yield Fund")
are separate series of Liberty-Stein Roe Funds Income Trust (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 two classes of shares--Classes A and S. Prior to
August 1, 2000, each Fund had a single class of shares. On July 28, 2000, the
outstanding shares of each Fund were converted into Class S, On August 1, 2000,
each Fund commenced offering Class A shares. This SAI describes Class A shares
of the Funds. A separate SAI relates to Class S.
.........The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated January 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, each with one or more
classes, as the Board may authorize. Currently, 4 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 (or class thereof) is entitled to participate
pro rata in any dividends and other distributions declared by the Board on
shares of that series (or class thereof), and all shares of a series (or class
thereof) have equal rights in the event of liquidation of that series (or class
thereof). 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). 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>
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.
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 of each Fund are described in
the Prospectus under The Fund. In pursuing its objective, a Portfolio may also
employ the investment techniques described under Portfolio Investments and
Strategies in this SAI. The 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 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.
The Portfolios do not currently intend to invest, nor during the past fiscal
year invested, more than 5% of 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.)
Medium- and Lower-Quality Debt Securities
Each 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 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 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 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 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
Each 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 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
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 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% 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 Portfolio on a when-issued or
delayed-delivery basis are sometimes done on a "dollar roll" basis. Dollar roll
transactions consist of 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 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 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.
PIK and Zero Coupon Bonds
The Intermediate Bond Portfolio and the High Yield Portfolio may invest
in zero coupon bonds. The High Yield Portfolio may also invest in 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
Each 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"), 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 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 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, 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 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 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 net 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 Funds' portfolio turnover rates, see Financial
Highlights in their Prospectus. The portfolio turnover rates of the 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 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 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 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.
If an option written by a 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 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 party and purchase by another party of a specified quantity
of a financial instrument or the cash value of an index2 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 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 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 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.
There can be no assurance that a liquid market will exist at a time
when a 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 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 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 other liquid assets
(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%).
Taxation of Options and Futures
If a 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.
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) 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);
(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.
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;
(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;4
(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) 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.
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 the 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.
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 the 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, 52; One South Executive Vice-President Executive vice president of Stein Roe
Wacker Drive, Chicago, IL 60606
(4)
John A. Bacon Jr., 72; 4N640 Trustee Private investor
Honey Hill Road, Box 296, Wayne,
IL 60184 (3)(4)
Christine Balzano, 34; 245 Summer Vice-President Senior vice president of Liberty Funds Services, Inc.;
Street, Boston, MA 02210 formerly vice president and assistant vice president
William W. Boyd, 72; 2900 Golf Trustee Chairman and director of Sterling Plumbing (manufacturer
Road, Rolling Meadows, IL 60008 of plumbing products)
(2)(3)(4)
Kevin M. Carome, 43; One Executive Vice-President Senior vice president, legal, Liberty Funds Group LLC
Financial Center, Boston, MA (an affiliate of Stein Roe) since Jan. 1999; general
02111 (4) counsel and secretary of Stein Roe since Jan. 1998;
associate general counsel and vice president of Liberty
Financial Companies, Inc. (the indirect parent of Stein
Roe) through Jan. 1999
Denise E. Chasmer, 31; Vice President Employee of Liberty Funds Services, Inc. and assistant
12100 East Iliff Avenue vice president of Stein Roe since November 1999; manager
Aurora, CO 80014 (4) with Scudder Kemper Investments from October 1995 to
November 1999; assistant manager with Scudder Kemper
prior thereto
J. Kevin Connaughton, 35; 245 Vice-President; Controller of the Stein Roe Funds since May 2000;
Summer Street, Boston, MA 02210 Controller Controller and Chief Accounting Officer of the Colonial
(4) Funds since February 1998, Vice president of Colonial
Management
Associates, Inc.
("CMA") since
February 1998;
senior tax manager,
Coopers & Lybrand,
LLP from April 1996
to January 1998;
vice president, 440
Financial
Group/First Data
Investor Services
Group prior thereto
Nancy L. Conlin, 46; Senior Vice President Secretary of the Stein Roe Funds since May 2000;
One Financial Center, Boston, MA and Secretary Secretary of the Colonial Funds since April 1998
02111 (4) (formerly Assistant Secretary from July 1994 to April
1998); Director,
Senior Vice
President General
Counsel, Clerk and
Secretary of
Colonial Management
Associates, Inc.
since April 1998
(formerly Vice
President, Counsel,
Assistant Secretary
and Assistant Clerk
from July 1994 to
April 1998); Vice
President, General
Counsel and
Secretary of Liberty
Funds Group since
December 1998
(formerly Vice
President, General
Counsel and Clerk of
The Colonial Group
from April 1998 to
December 1998
(formerly Assistant
Clerk from July 1994
to April 1998)
Lindsay Cook, 47; 600 Atlantic Trustee Executive vice president of Liberty Financial Companies,
Avenue, Boston, MA 02210 (1)(2)(4) Inc. since March 1997; senior vice president prior
thereto
Stephen E. Gibson, 46; One President Vice chairman of Stein Roe since Aug. 1998; chairman,
Financial Center, Boston, MA CEO, president and director of Liberty Funds Group since
02111 (4) Dec. 1998; chairman of the Colonial Group from July 1998
to Dec. 1998; president of the Colonial Group from Dec.
1996 to Dec. 1998; chairman of Colonial Management
Associates, Inc. since Dec. 1998; CEO, president and
director of Colonial Management Associates since July
1996; managing director of Putnam Financial Services
from June 1992 through June 1996
Douglas A. Hacker, 43; P.O. Box Trustee Senior vice president and chief financial officer of
66100, Chicago, IL 60666 (3) (4) UAL, Inc. (airline)
Loren A. Hansen, 51; Executive Vice-President Chief investment
One South Wacker Drive officer/equity of CMA since 1997; executive vice
Chicago, IL 60606 president of Stein Roe since Dec. 1995; (4) vice
president of
The Northern Trust(bank) prior thereto
Janet Langford Kelly, 41; One Trustee Executive vice president-corporate development, general
Kellogg Square, Battle Creek, MI counsel and secretary of Kellogg Company since Sept.
49016 (3)(4) 1999; senior vice president, secretary and general
counsel of Sara Lee Corporation (branded, packaged,
consumer-products manufacturer) from 1995 to Aug. 1999;
partner of Sidley & Austin (law firm) prior thereto
Michael T. Kennedy, 37; One South Vice President Senior vice president of Stein Roe
Wacker Drive, Chicago, IL 60606
(4)
Gail D. Knudsen, 37; 245 Summer Vice President Vice president and assistant controller of CMA
Street, Boston, MA 02210 (4)
Stephen F. Lockman, 38; One South Vice President Senior vice president, portfolio manager and credit
Wacker Drive, Chicago, IL 60606 analyst of Stein Roe
(4)
Pamela A. McGrath, 46: One Senior Vice President Treasurer of the Stein Roe Funds since May 2000;
Financial Center, Boston, MA and Treasurer Treasurer and Chief Financial Officer of the Liberty
02111 (4) Funds and Liberty All-Star Funds since April 2000;
Treasurer, Chief
Financial Officer
and Vice President
of the Liberty Funds
Group since December
1999; Chief
Financial Officer,
Treasurer and Senior
Vice President of
Colonial Management
Associates since
December 1999;
Senior Vice
President and
Director of Offshore
Accounting for
Putnam Investments,
Inc., from May 1998
to October 1999;
Managing Director of
Scudder Kemper
Investments from
October, 1984 to
December 1997.
Mary D. McKenzie, 45; One Vice President President of Liberty Funds Services, Inc.
Financial Center, Boston, MA
02111 (4)
Jane N. Naeseth, 49; One South Vice President Senior Vice President of Stein Roe
Wacker Drive
Chicago, IL 60606 (4)
Charles R. Nelson, 57; Department Trustee Van Voorhis Professor of Political Economy, Department
of Economics, University of of Economics of the University of Washington
Washington, Seattle, WA 98195
(3)(4)
Nicholas S. Norton, 40; 12100 Vice President Senior vice president of Liberty Funds Services, Inc.
East Iliff Avenue, Aurora, CO since Aug. 1999; vice president of Scudder Kemper, Inc.
80014 (4) from May 1994 to Aug. 1999
Joseph R. Palombo, 46; One Executive Vice President Executive Vice President of the Stein Roe Funds since
Financial Center, Boston, MA May 2000; Vice President of the Colonial Funds since
02111 (4) April 1999; Executive Vice President and Director of
Colonial Management
Associates since
April 1999;
Executive Vice
President and Chief
Administrative
Officer of the
Liberty Funds Group
since April 1999;
Chief Operating
Officer, Putnam
Mutual Funds from
1994 to 1998.
Thomas C. Theobald, 62; Suite Trustee Managing director, William Blair Capital Partners
1300, 222 West Adams Street, (private equity fund)
Chicago, IL 60606 (3)(4)
</TABLE>
-------------------------
(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.
Certain of the trustees and officers of the Trust 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. The
following table sets forth compensation paid during the fiscal year ended June
30, 1999 to each of the trustees:
<TABLE>
<CAPTION>
Compensation from the Stein Roe
Fund Complex*
<S> <C> <C> <C>
Aggregate Compensation Total Average Per
Name of Trustee From the Trust Compensation Series
------------------------------ ---------------------------------- ------------------- --------------
Thomas W. Butch** -0- -0- -0-
Lindsay Cook -0- -0- -0-
John A. Bacon Jr.** $6,200 $101,150 $2,199
William W. Boyd 5,600 101,300 2,224
Douglas A. Hacker 5,200 87,700 1,904
Janet Langford Kelly 5,200 97,200 2,113
Charles R. Nelson 5,600 102,100 2,220
Thomas C. Theobald 5,200 97,200 2,113
---------------
</TABLE>
* At June 30, 1999, the Stein Roe Fund Complex consisted of 4 series of
the Trust, one series of Liberty-Stein Roe Funds Trust, four series of
Liberty-Stein Roe Funds Municipal Trust, four series of Liberty-Stein
Roe Funds Income Trust, five series of Liberty-Stein Roe Advisor Trust,
five series of SteinRoe Variable Investment Trust, 12 portfolios of
SR&F Base Trust, Liberty-Stein Roe Advisor Floating Rate Fund,
Liberty-Stein Roe Institutional Floating Rate Income Fund, and Stein
Roe Floating Rate Limited Liability Company.
** Mr. Butch served as a trustee until November 3, 1998; Mr. Bacon was
elected a trustee effective November 3, 1998.
FINANCIAL STATEMENTS
Please refer to the June 30, 1999 Financial Statements for the Funds
referenced in this SAI (management discussion, statements of assets and
liabilities and schedules of investments as of June 30, 1999 and the statements
of operations, changes in net assets, financial highlights, and notes thereto)
and the report of independent accountants contained in the June 30, 1999 Annual
Report and the unaudited December 31, 1999 financial statements contained in the
December 31, 1999 Semi-annual Report. Those Financial Statements and the report
of independent accountants are incorporated herein by reference. The Annual
Report and Semi-Annual Report may be obtained at no charge by telephoning
800-338-2550.
<PAGE>
PRINCIPAL SHAREHOLDERS
As of June 30, 2000, the only persons known by the Trust to own of
record or "beneficially" 5% or more of the outstanding shares of a Fund within
the definition of that term as contained in Rule 13d-3 under the Securities
Exchange Act of 1934 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Approximate Percentage of
Name and Address Fund Outstanding Shares Held
National Financial Services Corp. High Yield Fund 15.48%
For the Exclusive Benefit of Customers
Attn: Mutual Funds
P.O. box 3908
Church Street Station
New York, NY 10008-3908
The Northern Trust Co. TTEE Income Fund 38.80%
U/AL S Hardin
F/B/O Shirley Hardin
P.O. Box 92956
Attn: Mutual Funds
Chicago, Il 60675-2956
Charles Schwab & Co., Inc. Income Fund 16.12%
Special Custody Account for the Exclusive
Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
Stein Roe & Farnham Incorporated provides investment management
services to each Portfolio and administrative services to each Fund and 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 LFC Management Corporation, which is a wholly 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 director of Stein Roe is C. Allen Merritt, Jr. Mr. Merritt is
Chief Operating Officer of Liberty Financial. The business address of Mr.
Merritt is 600 Atlantic Avenue, Boston, MA 02210.
Stein Roe CounselorSM is a professional investment advisory service
offered by Stein Roe to Fund shareholders. Stein Roe CounselorSM is designed to
help 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 CounselorSM 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
non-feeder Fund and each Portfolio. The table below shows the annual rates of
such fees as a percentage of average net assets (shown in millions), gross fees
paid for the three most recent fiscal years, and any expense reimbursements by
Stein Roe:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
Current Rates (as a % 6/30/99 6/30/98 6/30/97
Fund/Portfolio Type of average net assets)
--------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund Management fee N/A -- 777,707 1,090,523
-----------------------------------------------------------------
--------------------------------------------------------------------------------------
Administrative fee .150% 668,778 587,310 465,614
--------------------------------------------------------------------------------------
-----------------------------------------------------------------
Reimbursement N/A -- -- 54,108
------------------------------- -----------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Intermediate Bond Portfolio Management fee .350% 1,577,465 595,616 --
-----------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Income Fund Management fee N/A -- 1,169,260 1,630,122
-----------------------------------------------------------------
--------------------------------------------------------------------------------------
Administrative fee .150% up to $100
million, .125% 488,588 552,272 446,018
thereafter
--------------------------------------------------------------------------------------
-----------------------------------------------------------------
Reimbursement N/A -- -- 40,778
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Income Portfolio Management fee .500% up to $100
million, .475% 1,757,337 862,176 --
thereafter
-----------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
High Yield Fund Administrative fee .150% up to $500
million, 56,913 44,923 9,385
.125% thereafter
--------------------------------------------------------------------------------------
Reimbursement Expenses exceeding 1.00% 80,517 95,498 81,211
---------------------------------------------------------------------------------------------------------------------
High Yield Portfolio Management fee .500% up to $500
million, 419,766 307,472 52,997
.475% thereafter
---------------------------------------------------------------------------------------------------------------------
</TABLE>
Stein Roe provides office space and executive and other personnel to
the Funds, and bears any sales or promotional expenses. The Funds pay 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 that Fund (including fees
paid to Stein Roe, but excluding taxes, interest, 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 a Fund are being
offered for sale to the public; provided, however, Stein Roe is not required to
reimburse, that Fund an amount in excess of fees paid by that Fund under that
agreement for such year. In addition, in the interest of further limiting
expenses of the Funds, Stein Roe may voluntarily waive its fees and/or absorb
certain expenses, as described under The Fund--Your Expenses in the Prospectus.
Any such reimbursement will enhance the yield of such Fund.
Each 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 the Trust or any shareholder of the Trust
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 its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under the
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 such
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, 1997, 1998 and 1999, Stein Roe received aggregate fees of $116,135, $128,363
and $129,024, respectively, from the Trust for services performed under this
Agreement.
DISTRIBUTOR
Shares of the Funds are distributed by Liberty Funds Distributor, Inc.
(the "Distributor"), One Financial Center, Boston, MA 02111, an indirect
subsidiary of Liberty Financial, under a Distribution Agreement. The
Distribution Agreement continues in effect from year to year, provided such
continuance is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of the Trust, and (ii) by a
majority of the trustees who are not parties to the Agreement or interested
persons of any such party ("independent trustees"). The Distributor has no
obligation, as underwriter, to buy Fund shares, and purchases shares only upon
receipt of orders from authorized financial service firms or investors. 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.
12b-1 Plan
The trustees of the Trust have adopted a plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 (the "Plan"). The Plan provides that,
as compensation for personal service and/or the maintenance of shareholder
accounts, the Distributor receives a service fee at an annual rate not to exceed
0.25% of net assets attributed to Class A shares. The Plan also provides that as
compensation for the promotion and distribution of shares of the Fund including
its expenses related to sale and promotion of Fund shares, the Distributor
receives from the Fund a distribution fee at an annual rate not exceeding 0.10%
of the average net assets attributed to Class A shares. At this time, the
Distributor has voluntarily agreed to limit the Class A distribution fee to
0.25% annually. The Distributor may terminate this voluntary limitation without
shareholder approval. The Distributor generally pays this amount to institutions
that distribute Fund shares and provide services to the Funds and their
shareholders. Those institutions may use the payments for, among other purposes,
compensating employees engaged in sales and/or shareholder servicing. The amount
of fees paid by each Fund during any year may be more or less than the cost of
distribution or other services provided to that Fund. NASD rules limit the
amount of annual distribution fees that may be paid by a mutual fund and impose
a ceiling on the cumulative sales charges paid. The Trust's Plan complies with
those rules.
The trustees believe that the Plan could be a significant factor in the
growth and retention of Fund assets resulting in a more advantageous expense
ratio and increased investment flexibility which could benefit each class of
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 independent trustees. The Plan may not be amended to
increase the fee materially without approval by a 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 a vote of a
majority of the independent trustees or by a vote of a majority of the
outstanding voting securities of the relevant class of shares.
Each Fund offers two classes of shares (Class A and Class S). The Funds
may offer other classes of shares in the future. Class S shares are offered at
net asset value and are not subject to a Rule 12b-1 fee. Class A shares are
offered at net asset value plus a front-end sales charge to be imposed at the
time of purchase and are subject to a Rule 12b-1 fee.
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 fees from each Fund based on an annual rate of
0.14% of average net assets of Class S shares and 0.236% of Class A shares. The
Trust believes the charges by SSI to the Fund 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 the Portfolios.
Some financial services firms ("FSF") or other intermediaries having
special selling arrangements with the Distributor, including certain bank trust
departments, wrap fee programs and retirement plan service providers
("Intermediaries") that maintain nominee accounts with the Funds for their
clients who are Fund shareholders, may be paid a fee from SSI for shareholder
servicing and accounting services they provide with respect to the underlying
Fund shares.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus under the
heading Your Account, and that information is incorporated herein by reference.
It is the responsibility of any investment dealers, banks, or other
institutions, including retirement plan service providers, through whom you
purchase or redeem shares to establish procedures insuring the prompt
transmission to the Trust of any order.
The Funds will accept unconditional orders for shares to be executed at
the public offering price based on the net asset value per share next determined
after the order is received in good order. The public offering price is the net
asset value plus the applicable sales charge, if any. In the case of orders for
purchase of shares placed through FSFs or Intermediaries, the public offering
price will be determined on the day the order is placed in good order, but only
if the FSF or Intermediary receives the order prior to the time at which shares
are valued and transmits it to a Fund before that day's transactions are
processed. If the FSF or Intermediary 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 or Intermediary.
If the FSF or Intermediary receives the order after the time at which a Fund
values its shares, the price will be based on the net asset value determined as
of the close of the NYSE on the next day it is open. If funds for the purchase
of shares are sent directly to the Transfer Agent, they will be invested at the
public offering price next determined after receipt in good order. Payment for
shares of a Fund must be in U.S. dollars; if made by check, the check must be
drawn on a U.S. bank.
Each Fund receives the entire net asset value of shares sold. For Class
A shares, which are subject to an initial sales charge, the Distributor's
commission is the sales charge shown in the Prospectus less any applicable FSF
or Intermediary discount. The FSF or Intermediary discount is the same for all
FSFs or Intermediaries, except that the Distributor retains the entire sales
charge on any sales made to a shareholder who does not specify an FSF or
Intermediary on the application, and except that the Distributor may from time
to time reallow additional amounts to all or certain FSFs or Intermediaries. The
Distributor generally retains 100% of any asset-based sales charge (distribution
fee) or contingent deferred sales charge. Such charges generally reimburse the
Distributor for any up-front and/or ongoing commissions paid to FSFs or
Intermediaries.
Checks presented for the purchase of Fund shares which are returned by
the purchaser's bank will subject the purchaser to a $15 service fee for each
check returned.
The Transfer Agent 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 or Intermediary will receive the applicable sales
commission. Shareholders may change FSFs or Intermediaries at any time by
written notice to the Transfer Agent, provided the new FSF or Intermediary has a
sales agreement with the Distributor.
Determination of Net Asset Value
The net asset value per share for each Class is determined as of the
close of business (normally 3:00 p.m., Central time, or 4:00 p.m., Eastern time)
on days on which the New York Stock Exchange (the "NYSE") is open for trading,
except that certain classes of assets, such as index futures for which the
market close occurs shortly after regular trading on the NYSE will be priced at
the closing time of the markets on which they trade but in no event later than
5:00 p.m. 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 the Fund should be
determined on any such day, in which case the determination will be made at 3:00
p.m., Central time.
A Portfolio may invest in securities that are listed primarily on
foreign exchanges that are open and allow trading on days on which a Fund does
not determine net asset value. This may significantly affect the net asset value
of that 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 Stein Roe 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
Board of Trustees. The values of foreign securities quoted in foreign currencies
are translated into U.S. dollars at the exchange rate for that day. Positions
for which market quotations are not readily available and other assets are
valued at fair value as determined in good faith under the direction of the
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
NYSE. Trading on certain foreign securities markets may not take place on all
NYSE business days, and trading on some foreign securities markets takes place
on days that are not NYSE business days and on which net asset value is not
calculated. The values of these securities used in determining net asset value
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 NYSE. Occasionally, events affecting the value of such
securities may occur between such time and the close of the NYSE which will not
be reflected in the computation of the net asset value. 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 Board of Trustees.
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 of the Trust 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.
Due to the relatively high cost of maintaining smaller accounts, the
Trust may deduct $10 (payable to the Transfer Agent) from accounts valued at
less than $1,000 unless the account value has dropped below $1,000 solely as a
result of share depreciation. An investor will be notified that the value of his
account is less than that minimum and allowed at least 60 days to bring the
value of the account up to at least $1,000 before the fee is deducted. The
Agreement and Declaration of Trust also authorizes the Trust to redeem shares
under certain other circumstances as may be specified by the Board of Trustees.
The Trust reserves the right to suspend or postpone redemptions of Fund
shares during any period when: (a) trading on the NYSE is restricted, as
determined by the Securities and Exchange Commission, or the NYSE is closed for
other than customary weekend and holiday closings; (b) the Securities and
Exchange Commission has by order permitted such suspension; or (c) an emergency,
as determined by the Securities and Exchange Commission, exists, making disposal
of portfolio securities or valuation of net assets of a Fund not reasonably
practicable.
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 advised by Colonial, Newport Management, Inc., Crabbe Huson Group,
Inc. and Stein Roe may be purchased through the Automatic Investment Plan.
Preauthorized monthly bank drafts or electronic funds transfers for a fixed
amount at least $50 are used to purchase a fund's shares at the public offering
price next determined after the distributor 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 any day.
Further information and application forms are available from the distributor.
Automated Dollar Cost Averaging. 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 in which you have a current balance of at least $5000 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 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 and 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 to Liberty Funds Services, Inc., P.O. Box 1722, Boston, MA
02105-1722.
You should consult your investment advisor to determine whether or not the
Automated Dollar Cost Averaging program is appropriate for you.
The Distributor 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. The Distributor 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 investment for a retirement account is $25.
Investor's Bank & Trust Company is the Trustee of the prototype plans and
charges an $18 annual fee. The annual fee will be waived if your aggregated IRA
(Traditional IRA, Roth IRA and Education IRA) assets total $25,000 or more. This
waiver will be based on the assets of record when the fees are assessed in
December. If you close your account during the year, the Distributor will not
aggregate the IRAs and you will be subject to that year's annual fee per IRA
regardless of total assets. Further Detailed information concerning these
retirement plans and copies of the retirement plans are available from the
Distributor.
Participants in other prototype retirement plans (other than IRAs) also
are charged a $10 annual fee unless the plan maintains an omnibus account with
the Transfer Agent. Participants in prototype plans offered by the Distributor
(other than IRAs) who liquidate the total value of their account will also be
charged a $15 close-out processing fee payable to the Transfer Agent. The fee is
in addition to any applicable CDSC. The fee will not apply if the participant
uses the proceeds to open an 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 the Transfer Agent,
shareholders, beneficiaries or their FSF or Intermediary 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 in the same name as the shareholder's
existing open account with the particular Fund. Call for more information at
1-800-422-3737.
Programs for Reducing or Eliminating Sales Charges
Right of Accumulation and Statement of Intent. Reduced sales charges on
Class A shares can be effected by combining a current purchase with prior
purchases of Class A, B, C, T, and Z shares of other funds managed Colonial,
Newport Fund Management, Inc., Crabbe Huson Group, Inc., and Stein Roe or
distributed by the Distributor (such funds hereinafter referred to as "Liberty
Funds"). The applicable sales charged 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 Liberty Fund's Class A shares held by the
shareholder (except shares of any Liberty money market fund, unless such shares
were acquired by exchange from Class A shares of another Liberty Fund other than
a money market fund and Class B, C, T and Z shares).
The Distributor 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 the Transfer
Agent. A Liberty Fund may terminate or amend this right of Accumulation.
Any person may qualify for reduced sales charges on purchase of Class A
shares made within a 13-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 the Trust's Funds and
Liberty Funds (except shares of any Liberty money market fund, unless such
shares were acquired by exchange from Class A shares of another non-money market
Liberty 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, the Transfer Agent will hold shares in
escrow to secure payment of the higher sales charge applicable to Class A 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 the 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 then-current applicable offering price. As a part
of this adjustment, the FSF or Intermediary shall return to the Distributor the
excess commission previously paid during the 13-month period.
If the amount of the Statement is not purchased, the shareholder shall
remit to the Distributor 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 20 days after a written request to pay such difference in sales
charge, the Transfer Agent will redeem that number of escrowed Class A shares
equal to such difference. The additional amount of FSF or Intermediary discount
from the applicable offering price shall be remitted to the shareholder's FSF or
Intermediary of record.
Additional information about and the terms of Statements of Intent are
available from your FSF or Intermediary or from the Transfer Agent at
1-800-345-6611.
Reinstatement Privilege. An investor who has redeemed Fund 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 that Fund at the net asset value next
determined after the Transfer Agent receives a written reinstatement request and
payment. Any contingent deferred sales charge 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 contingent deferred sales charge or
conversion date. Investors who desire to exercise this privilege should contact
their FSF or Intermediary or the Distributor. 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.
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.
Privileges of Adviser Employees, FSFs or Intermediaries. Class A shares
may be sold at net asset value to the following individuals whether currently
employed or retired: Trustees of funds advised or administered by Stein Roe or
an affiliate of Stein Roe; directors, officers and employees of Stein Roe or an
affiliate of Stein Roe, including the Transfer Agent and the Distributor;
registered representatives and employees of FSFs or Intermediaries (including
their affiliates) that are parties to dealer agreements or other sales
arrangements with the Distributor; and such persons' families and their
beneficial accounts.
Sponsored Arrangements. Class A shares may be purchased at 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
Fund shares on an individual basis. The amount of the sales charge reduction
will reflect the anticipated reduction in sales expense associated with
sponsored arrangements. The reduction in sales expense, and therefore the
reduction in sales charge, will vary depending on factors such as the size and
stability of the organization's group, the term of the organization's existence
and certain characteristics of the members of its group. The Funds reserve the
right to revise the terms of or to suspend or discontinue sales pursuant to
sponsored plans at any time.
Class A shares may also be purchased at reduced or no sales charge by
clients of dealers, brokers or registered investment advisers that have entered
into agreements with the Distributor pursuant to which a Fund is included as an
investment option in programs involving fee-based compensation arrangements.
Waiver of Contingent Deferred Sales Charges (Class A accounts in excess
of $1,000,000) Contingent deferred sales charges may be waived on redemptions in
the following situations with the proper documentation:
1. Death. Contingent deferred sales charges 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 contingent deferred sales
charge will be waived on any redemption from the estate account occurring within
one year after the death. If the shares are not redeemed within one year of the
death, they will remain subject to the applicable contingent deferred sales
charge, when redeemed from the transferee's account. If the account is
transferred to a new registration and then a redemption is requested, the
applicable contingent deferred sales charge will be charged.
2. Systematic Withdrawal Plan (SWP). Contingent deferred sales charges may be
waived on redemptions occurring pursuant to a monthly, quarterly or semiannual
SWP established with the Transfer Agent, 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 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 contingent deferred sales charges
will be charged on SWP redemptions until this requirement is met. See below
under How to Sell Shares--Systematic Withdrawal Plan.
3. Disability. Contingent deferred sales charges 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 contingent deferred sales charge will be
charged.
4. Death of a trustee. Contingent deferred sales charges 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 contingent deferred
sales charge will be charged upon any subsequent redemption.
5. Returns on excess contributions. Contingent deferred sales charges may be
waived on redemptions required to return excess contributions made to retirement
plans or IRAs, so long as the FSF or Intermediary agrees to return the
applicable portion of any commission paid by the Distributor.
6. Qualified Retirement Plans. Contingent deferred sales charges may be waived
on redemptions required to make distributions from qualified retirement plans
following (i) normal retirement (as stated in the plan document) or (ii)
separation from service. For shares purchased in a prototype 401K plan after
September 1, 1997, contingent deferred sales charges will not be waived upon
separation from service except if such plan is held in an omnibus account.
Contingent deferred sales charges also will be waived on SWP redemptions made to
make required minimum distributions from qualified retirement plans that have
invested in a Fund for at least two years.
The contingent deferred sales charge also may be waived where the FSF
or Intermediary agrees to return all or an agreed upon portion of the commission
earned on the sale of the shares being redeemed.
How to Sell ("Redeem") Shares
Shares may be sold on any day the NYSE is open, either directly to a
Fund or through an FSF or Intermediary. 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, that Fund will
delay sending proceeds for 15 days in order to protect the it against financial
losses and dilution in net asset value caused by dishonored purchase payment
checks. To avoid delays in payment, investors are advised to purchase shares
unconditionally, such as by certified check or other immediately available
funds.
To sell shares directly to a Fund, send a signed letter of instruction
to the Transfer Agent. The sale price is the net asset value next determined
(less any applicable contingent deferred sales charge) after that Fund or an FSF
or Intermediary 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. Additional documentation is required for sales
by corporations, agents, fiduciaries, surviving joint owners and IRA holders.
Call the Transfer Agent for more information at (800) 345-6611.
FSFs and Intermediaries must receive requests before the time at which
Fund shares are valued to receive that day's price, are responsible for
furnishing all necessary documentation to the Transfer Agent 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 a Fund designated by the shareholder will be paid monthly, quarterly or
semiannually 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.
If a shareholder wishes to participate in a SWP, the shareholder must elect to
have all income dividends and other distributions payable in Fund shares rather
than in cash.
A shareholder or its FSF or Intermediary 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.
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 a 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, the Transfer Agent 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 Funds as an expense of all shareholders.
Shareholders whose positions are held in "street name" by certain FSFs
or Intermediaries 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 or Intermediary to determine whether he or she may participate in a SWP.
Telephone Redemptions. Telephone redemption privileges are described
in the Prospectus.
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, that Fund may make the payment or a portion of the payment with portfolio
securities held by it instead of cash, in which case the redeeming shareholder
may incur brokerage and other costs in selling the securities received.
How to Exchange Shares
Class A shares exchanges at net asset value may be made among shares of
the same class of any other fund that is a series of the Trust or of most
Liberty Funds. For a period of 90 days following the purchase of shares,
exchanges at net asset value may be made among Class A shares of Liberty
Tax-Exempt Money Market Fund or Liberty Money Market Fund (or its successor).
Thereafter, exchanges at net asset value may be made among Class A shares of any
other fund that is a series of the Trust or of most Liberty Funds. For more
information on the Liberty Funds, see your FSF or Intermediary or call (800)
345-6611.
By calling the Transfer Agent, shareholders or their FSF or
Intermediary of record may exchange among accounts with identical registrations,
provided that the shares are held on deposit. During periods of unusual market
changes and/or shareholder activity, shareholders may experience delays in
contacting the Transfer Agent 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 a Fund suspends repurchases or postpones payment for fund shares being
exchanged in accordance with federal securities law. The Transfer Agent will
also make exchanges upon receipt of a written exchange request. If the
shareholder is a corporation, partnership, agent, or surviving joint owner, the
Transfer Agent will require customary additional documentation.
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.
In all cases, the shares to be exchanged must be registered on the
records of a Fund in the name of the shareholder desiring to exchange.
An exchange is a capital sale transaction for federal income tax
purposes. The exchange privilege may be revised, suspended or terminated at any
time.
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 of the countries in which the Fund or Portfolio invests with
particular foreign sub-custodians in such countries, pursuant to contracts
between such respective foreign sub-custodians and the Bank. The review includes
an assessment of the risks of holding assets in any such country (including
risks of expropriation or imposition of exchange controls), the operational
capability and reliability of each such foreign sub-custodian, and the impact of
local laws on each such custody arrangement. Each Board of Trustees is aided in
its review by the Bank, which has assembled the network of foreign
sub-custodians, as well as by Stein Roe and counsel. 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 the 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 the Portfolios may invest in obligations of the Bank and
may purchase or sell securities from or to the Bank.
<PAGE>
INDEPENDENT AUDITORS
The independent auditors for the Funds and the Portfolios are Ernst &
Young LLP, 200 Clarendon Street, Boston, MA 02116. The auditors audit and report
on the annual financial statements and provide tax return preparation services
and assistance and consultation in connection with the review of various SEC
filings.
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"). Stein Roe's overriding objective in
selecting brokers and dealers to effect portfolio transactions is to seek the
best combination of net price and execution. The best net price, giving effect
to brokerage commissions, if any, is an important factor in this decision;
however, a number of other judgmental factors may also enter into the decision.
These factors include Stein Roe's knowledge of negotiated commission rates
currently available and other current transaction costs; the nature of the
security being purchased or sold; the size of the transaction; the desired
timing of the transaction; the activity existing and expected in the market for
the particular security; confidentiality; the execution, clearance and
settlement capabilities of the broker or dealer selected and others considered;
Stein Roe's knowledge of the financial condition of the broker or dealer
selected and such other brokers and dealers; and Stein Roe's knowledge of actual
or apparent operation problems of any broker or dealer.
Recognizing the value of these factors, Stein Roe may cause a Client to
pay a brokerage commission in excess of that which another broker may have
charged for effecting the same transaction. Stein Roe has established internal
policies for the guidance of its trading personnel, specifying minimum and
maximum commissions to be paid for various types and sizes of transactions and
effected for Clients in those cases where Stein Roe has discretion to select the
broker or dealer by which the transaction is to be executed. Stein Roe has
discretion for all trades of the Funds. Transactions which vary from the
guidelines are subject to periodic supervisory review. These guidelines are
reviewed and periodically adjusted, and the general level of brokerage
commissions paid is periodically reviewed by Stein Roe. Evaluations of the
reasonableness of brokerage commissions, based on the factors described in the
preceding paragraph, are made by Stein Roe's trading personnel while effecting
portfolio transactions. The general level of brokerage commissions paid is
reviewed by Stein Roe, and reports are made annually to the Board of Trustees.
Stein Roe maintains and periodically updates a list of approved brokers
and dealers which, in Stein Roe's judgment, are generally capable of providing
best price and execution and are financially stable. Stein Roe's traders are
directed to use only brokers and dealers on the approved list, except in the
case of Client designations of brokers or dealers to effect transactions for
such Clients' accounts. Stein Roe generally posts certain Client information on
the "Alert" broker database system as a means of facilitating the trade
affirmation and settlement process.
It is Stein Roe's practice, when feasible, to aggregate for execution
as a single transaction orders for the purchase or sale of a particular security
for the accounts of several Clients, in order to seek a lower commission or more
advantageous net price. The benefit, if any, obtained as a result of such
aggregation generally is allocated pro rata among the accounts of Clients which
participated in the aggregated transaction. In some instances, this may involve
the use of an "average price" execution wherein a broker or dealer to which the
aggregated order has been given will execute the order in several separate
transactions during the course of a day at differing prices and, in such case,
each Client participating in the aggregated order will pay or receive the same
price and commission, which will be an average of the prices and commissions for
the several separate transactions executed by the broker or dealer.
Stein Roe sometimes makes use of an indirect electronic access to the
New York Stock Exchange's "SuperDOT" automated execution system, provided
through a NYSE member floor broker, W&D Securities, Inc., a subsidiary of
Jeffries & Co., Inc., particularly for the efficient execution of smaller orders
in NYSE listed equities. Stein Roe sometimes uses similar arrangements through
Billings & Co., Inc. and Driscoll & Co., Inc., floor broker members of the
Chicago Stock Exchange, for transactions to be executed on that exchange. In
using these arrangements, Stein Roe must instruct the floor broker to refer the
executed transaction to another brokerage firm for clearance and settlement, as
the floor brokers do not deal with the public. Transactions of this type
sometimes are referred to as "step-in" or "step-out" transactions. The brokerage
firm to which the executed transaction is referred may include, in the case of
transactions effected through W&D Securities, brokerage firms which provide
Stein Roe investment research or related services.
Stein Roe places certain trades for each Fund through its affiliate
AlphaTrade, Inc. ("ATI"). ATI is a wholly owned subsidiary of Colonial
Management Associates, Inc. ATI is a fully disclosed introducing broker that
limits its activities to electronic execution of transactions in listed equity
securities. The Funds pay ATI a commission for these transactions. The Funds
have adopted procedures consistent with Investment Company Act Rule 17e-1
governing such transactions. Certain of Stein Roe's officers also serve as
officers, directors and/or employees of ATI.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution 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
broker-dealers.
The ability to direct brokerage for a Client account belongs to the
Client and not to Stein Roe. When a Client grants Stein Roe the discretion to
select broker-dealers for Client trades, Stein Roe has a duty to seek the best
combination of net price and execution. Stein Roe faces a potential conflict of
interest with this duty when it uses Client trades to obtain soft dollar
products. This conflict exists because Stein Roe is able to use the soft dollar
products in managing its Client accounts without paying cash ("hard dollars")
for the product. This reduces Stein Roe's expenses.
Moreover, under a provision of the federal securities laws applicable
to soft dollars, Stein Roe is not required to use the soft dollar product in
managing those accounts that generate the trade. Thus, the Client accounts that
generate the brokerage commission used to acquire the soft dollar product may
not benefit directly from that product. In effect, those accounts are cross
subsidizing Stein Roe's management of the other accounts that do benefit
directly from the product. This practice is explicitly sanctioned by a provision
of the Securities Exchange Act of 1934, which creates a "safe harbor" for soft
dollar transactions conducted in a specified manner. Although it is inherently
difficult, if not impossible, to document, Stein Roe believes that over time
most, if not all, Clients benefit from soft dollar products such that cross
subsidizations even out.
Stein Roe attempts to reduce or eliminate this conflict by directing
Client trades for soft dollar products only if Stein Roe concludes that the
broker-dealer supplying the product is capable of providing a combination of the
best net price and execution on the trade. As noted above, the best net price,
while significant, is one of a number of judgmental factors Stein Roe considers
in determining whether a particular broker is capable of providing the best net
price and execution. Stein Roe may cause a Client account to pay a brokerage
commission in a soft dollar trade in excess of that which another broker-dealer
might have charged for the same transaction.
Stein Roe acquires two types of soft dollar research products: (i)
proprietary research created by the broker-dealer firm executing the trade and
(ii) other products created by third parties that are supplied to Stein Roe
through the broker-dealer firm executing the trade.
Proprietary research consists primarily of traditional research
reports, recommendations and similar materials produced by the in house research
staffs of broker-dealer firms. This research includes evaluations and
recommendations of specific companies or industry groups, as well as analyses of
general economic and market conditions and trends, market data, contacts and
other related information and assistance. Stein Roe's research analysts
periodically rate the quality of proprietary research produced by various
broker-dealer firms. Based on these evaluations, Stein Roe develops target
levels of commission dollars on a firm-by-firm basis. Stein Roe attempts to
direct trades to each firm to meet these targets.
Stein Roe also uses soft dollars to acquire products created by third
parties that are supplied to Stein Roe through broker-dealers executing the
trade (or other broker-dealers who "step in" to a transaction and receive a
portion of the brokerage commission for the trade). These products include the
following:
o Database Services--comprehensive databases containing current and/or
historical information on companies and industries. Examples include
historical securities prices, earnings estimates, and SEC filings. These
services may include software tools that allow the user to search the
database or to prepare value-added analyses related to the investment
process (such as forecasts and models used in the portfolio management
process).
o Quotation/Trading/News Systems--products that provide real time market data
information, such as pricing of individual securities and information on
current trading, as well as a variety of news services.
o Economic Data/Forecasting Tools--various macro economic forecasting tools,
such as economic data and economic and political forecasts for various
countries or regions.
o Quantitative/Technical Analysis--software tools that assist in quantitative
and technical analysis of investment data.
o Fundamental Industry Analysis--industry-specific fundamental investment
research.
o Fixed Income Security Analysis--data and analytical tools that pertain
specifically to fixed income securities. These tools assist in creating
financial models, such as cash flow projections and interest rate
sensitivity analyses, that are relevant to fixed income securities.
o Other Specialized Tools--other specialized products, such as specialized
economic consulting analyses and attendance at investment oriented
conferences.
Many third-party products include computer software or on-line data
feeds. Certain products also include computer hardware necessary to use the
product.
Certain of these third party services may be available directly from
the vendor on a hard dollar basis. Others are available only through
broker-dealer firms for soft dollars. Stein Roe evaluates each product to
determine a cash ("hard dollars") value of the product to Stein Roe. Stein Roe
then on a product-by-product basis targets commission dollars in an amount equal
to a specified multiple of the hard dollar value to the broker-dealer that
supplies the product to Stein Roe. In general, these multiples range from 1.25
to 1.85 times the hard dollar value. Stein Roe attempts to direct trades to each
firm to meet these targets. (For example, if the multiple is 1.5:1.0, assuming a
hard dollar value of $10,000, Stein Roe will target to the broker-dealer
providing the product trades generating $15,000 in total commissions.)
The targets that Stein Roe establishes for both proprietary and for
third party research products typically will reflect discussions that Stein Roe
has with the broker-dealer providing the product regarding the level of
commissions it expects to receive for the product. However, these targets are
not binding commitments, and Stein Roe does not agree to direct a minimum amount
of commissions to any broker-dealer for soft dollar products. In setting these
targets, Stein Roe makes a determination that the value of the product is
reasonably commensurate with the cost of acquiring it. These targets are
established on a calendar year basis. Stein Roe will receive the product whether
or not commissions directed to the applicable broker-dealer are less than, equal
to or in excess of the target. Stein Roe generally will carry over target
shortages and excesses to the next year's target. Stein Roe believes that this
practice reduces the conflicts of interest associated with soft dollar
transactions, since Stein Roe can meet the non-binding expectations of
broker-dealers providing soft dollar products over flexible time periods. In the
case of third party products, the third party is paid by the broker-dealer and
not by Stein Roe. Stein Roe may enter into a contract with the third party
vendor to use the product. (For example, if the product includes software, Stein
Roe will enter into a license to use the software from the vendor.)
In certain cases, Stein Roe uses soft dollars to obtain products that
have both research and non-research purposes. Examples of non-research uses are
administrative and marketing functions. These are referred to as "mixed use"
products. As of the date of this SAI, Stein Roe acquires two mixed use products.
These are (i) a fixed income security data service and (ii) a mutual fund
performance ranking service. In each case, Stein Roe makes a good faith
evaluation of the research and non-research uses of these services. These
evaluations are based upon the time spent by Firm personnel for research and
non-research uses. Stein Roe pays the provider in cash ("hard dollars") for the
non-research portion of its use of these products.
Stein Roe may use research obtained from soft dollar trades in the
management of any of its discretionary accounts. Thus, consistent with industry
practice, Stein Roe does not require that the Client account that generates the
trade receive any benefit from the soft dollar product obtained through the
trade. As noted above, this may result in cross subsidization of soft dollar
products among Client accounts. As noted therein, this practice is explicitly
sanctioned by a provision of the Securities Exchange Act of 1934, which creates
a "safe harbor" for soft dollar transactions conducted in a specified manner.
In certain cases, Stein Roe will direct a trade to one broker-dealer
with the instruction that it execute the trade and pay over a portion of the
commission from the trade to another broker-dealer who provides Stein Roe with a
soft dollar research product. The broker-dealer executing the trade "steps out"
of a portion of the commission in favor of the other broker-dealer providing the
soft dollar product. Stein Roe may engage in step out transactions in order to
direct soft dollar commissions to a broker-dealer which provides research but
may not be able to provide best execution. Brokers who receive step out
commissions typically are brokers providing a third party soft dollar product
that is not available on a hard dollars basis. Stein Roe has not engaged in step
out transactions as a manner of compensating broker-dealers that sell shares of
investment companies managed by Stein Roe.
The table below shows commissions paid on futures transactions during
the past three fiscal years. No Fund or Portfolio paid commissions on any other
transactions.
<TABLE>
<CAPTION>
<S> <C> <C>
Intermediate Intermediate Bond
Bond Fund Portfolio
Total brokerage commissions paid during year ended 6/30/99.............. -- $22,606
Total brokerage commissions paid during year ended 6/30/98.............. $2,160 8,957
Total brokerage commissions paid during year ended 6/30/97.............. -- --
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.
During the last fiscal year, certain Portfolios held securities issued by
one or more of their regular broker-dealers or the parent of such broker-dealers
that derive more than 15% of gross revenue from securities-related activities.
Such holdings were as follows at June. 30, 1999:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Value of Securities Held
Portfolio Broker-Dealer (in thousands)
--------- ------------- --------------
Intermediate Bond Portfolio HSBC Securities, Inc. $6,062
Merrill Lynch, Pierce, Fenner & Smith 5,961
Income Portfolio HSBC Securities, Inc. $4,041
Merrill Lynch, Pierce, Fenner & Smith 3,105
Deutsche Bank 2,904
Associates Corporation of North America 2,613
</TABLE>
ADDITIONAL INCOME TAX CONSIDERATIONS
Each Fund and Portfolio intends to qualify under Subchapter M of the
Internal Revenue 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 dividend and capital gains distributions reduce net asset
value, a shareholder who purchases shares shortly before a record date 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 less than 100% of its dividends will qualify for
the deduction for dividends received by corporate shareholders.
To the extent a Fund invests in foreign securities, it may be subject
to withholding and other taxes imposed by foreign countries. Tax treaties
between certain countries and the United States may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits with respect
to such taxes, subject to certain provisions and limitations contained in the
Code. Specifically, if more than 50% of a Fund's total assets at the close of
any fiscal year consist of stock or securities of foreign corporations, that
Fund may file an election with the Internal Revenue Service pursuant to which
shareholders of that Fund will be required to (i) include in ordinary gross
income (in addition to taxable dividends actually received) their pro rata
shares of foreign income taxes paid by that Fund even though not actually
received, (ii) treat such respective pro rata shares as foreign income taxes
paid by them, and (iii) deduct such pro rata shares in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their United States income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of foreign taxes paid by a Fund,
although such shareholders will be required to include their share of such taxes
in gross income. Shareholders who claim a foreign tax credit may be required to
treat a portion of dividends received from a Fund as separate category income
for purposes of computing the limitations on the foreign tax credit available to
such shareholders. Tax-exempt shareholders will not ordinarily benefit from this
election relating to foreign taxes. Each year, the Funds will notify
shareholders of the amount of (i) each shareholder's pro rata share of foreign
income taxes paid by a Fund and (ii) the portion of fund dividends which
represents income from each foreign country, if that Fund qualifies to pass
along such credit.
INVESTMENT PERFORMANCE
A 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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.
For example, the Yields of the Funds * for the 30-day period ended May 31, 2000, were:
Intermediate Bond Fund = 8.23%
Income Fund = 9.08%
High Yield Fund = 10.72%
---------------------
</TABLE>
*Performance information is based on the
Funds' Class S shares.
Each Fund may quote total return figures from time to time. 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).
<PAGE>
Ending
Redeem-able
Value* Total Return Average Annual
Percentage* Total Return*
Intermediate Bond Fund
1 year $1,026 2.60% 2.60%
5 years 1,431 43.06 7.42
10 years 2,092 109.19 7.66
Income Fund
1 year 1,005 0.52 0.52
5 years 1,438 43.76 7.53
10 years 2,114 111.40 7.77
High Yield Fund
1 year 1,035 3.50 3.50
Life of Fund** 1,313 31.26 10.76
-------
** Performance information is based on the Funds' Class S shares
*Since commencement of operations on November 1, 1996.
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. Fund performance 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, a Fund assumes no responsibility for the accuracy of
such data. Newspapers and magazines that might mention a Fund include, but are
not limited to, the following:
<PAGE>
1
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
<PAGE>
1
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 a Fund believes to be generally accurate.
The Funds may compare their performance to the Consumer Price Index
(All Urban), a widely-recognized measure of inflation.
<PAGE>
A Fund's performance may be compared to the following as indicated
below:
<TABLE>
<CAPTION>
<S> <C>
Benchmark Fund(s)
CS First Boston High Yield Index High Yield Fund
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 High Current Yield Fund Average High Yield 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
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 High Yield Bond Fund Average High Yield Fund
Morningstar Intermediate-Term Bond Fund Average Intermediate Bond Fund, Income 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>
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. A Fund may
also use comparative performance as computed in a ranking by Lipper or category
averages and rankings provided by another independent service. Should Lipper or
another service reclassify a Fund to a different category or develop (and place
The Fund into) a new category, that Fund may compare its performance or ranking
with those of other funds in the newly assigned 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.
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 the Fund's risk score (which
is a function of the fund's 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
U.S. Treasury bills
Consumer Price Index
---------------------
The Funds 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 January 1, for any
specified period, in both a Tax-Deferred Investment and a Taxable Investment,
that both investments earn either 6%, 8% or 10% 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.)
<PAGE>
<TABLE>
<CAPTION>
Tax-Deferred Investment vs. Taxable Investment
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate 3% 5% 7% 9% 3% 5% 7% 9%
---------------------------------------------------------------------------------------------------------------------
Compounding Years
Tax-Deferred Investment Taxable Investment
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 CounselorSM program and asset allocation and other investment
strategies.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Each Fund 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 it 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
Fund and the Portfolios. The management fees and expenses of the Fund 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 investing in a Portfolio.
The Declaration of Trust of Base Trust provides that a Portfolio will
terminate 120 days after the withdrawal of a corresponding 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 that
Fund's interests in a Portfolio for such continuation without approval of that
Funds' 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 the
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), that 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
that Fund's fundamental policies, withdrawal of that 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 that Fund. Should such a distribution occur, that 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 a Fund and could affect the liquidity of that Fund.
Each investor in a Portfolio, including the corresponding 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 the
corresponding Fund, might incur different administrative fees and expenses than
that 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>
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 invests 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 which 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.
The following is a description of the characteristics of ratings of
corporate debt securities 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.
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
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.
------------
G-16/147C-0700
--------
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.
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.
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.
4 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.
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
[Note: As used herein, the term "PEA" refers to a post-
effective amendment to the Registration Statement of the
Registrant on Form N-1A under the Securities Act of 1933,
No. 33-02633.]
(a)(1) Amended and restated Declaration of Trust as amended dated July 28, 2000.
(2) Amendment to Agreement and Declaration of Trust dated
11/1/95. (Exhibit 1(b) to PEA #28.)*
(b)(1) By-Laws of Registrant as amended through 2/3/93.
(Exhibit 2 to PEA #29.)*
(2) Amendment to By-Laws dated 2/4/98. (Exhibit 2(b) to PEA
#38.)*
(c) None.
(d) Management Agreement between SR&F Base Trust and Stein Roe
& Farnham Incorporated ("Stein Roe") dated 8/15/95, as
amended through 6/28/99. (Exhibit (d) to PEA # 39)*
(e) Underwriting agreement between Registrant and Liberty Funds
Distributor, Inc. dated 8/4/99. (Exhibit (e) to PEA #39)*
(f) None.
(g) Custodian contract between Registrant and State Street Bank and Trust
Company dated 2/24/86 as amended through 5/8/95. (Exhibit 8 to PEA #27).*
(h)(1) Administrative Agreement between Registrant and Stein Roe
dated 7/1/96 as amended through 2/2/98. (Exhibit (h)(1) to PEA # 39)*
(2) Accounting and Bookkeeping Agreement between Registrant and
Stein Roe dated 8/3/99. (Exhibit (h)(2) to PEA #39)*
(3) Restated transfer agency agreement between Registrant and
SteinRoe Services Inc. dated 8/1/95 as amended through
3/31/99. (Exhibit (h)(3) to PEA #39)*
(4) Sub-transfer agent agreement between SteinRoe Services
Inc. and Liberty Funds Services, Inc. (formerly named
Colonial Investors Service Center, Inc.) dated 7/3/96 as
amended through 3/31/99. (Exhibit (h)(4) to PEA #39)*
(i)(1) Opinions and consents of Ropes & Gray. (Exhibit 10(a)
to PEA #29.)*
(2) Opinions and consents of Bell, Boyd & Lloyd with
respect to SteinRoe Cash Reserves(now named Stein Roe Cash Reserves
Fund)SteinRoe Intermediate Bond Fund (now named Stein Roe Intermediate
Bond Fund) and SteinRoe Income Fund (now named Stein Roe Income Fund.)
Exhibit (10(b) to PEA #29.*
(3) Opinion and consent of Bell, Boyd & Lloyd with respect
to the series Stein Roe High Yield Fund. (Exhibit
10(c) to PEA #30.)*
(4) Consent of Bell Boyd & Lloyd LLC.
(j)(1) Consent of Ernst & Young LLP,
(2) Consent of Morningstar, Inc. (Exhibit 11(b) to PEA #29.)*
(k) None.
(l) Inapplicable.
(m) Rule 12b-1 Plan. (Exhibit (m) to PEA #39)*
(n) Rule 18f-3 Plan. (Exhibit (n) to PEA #39)*
(o) (Miscellaneous.) Mutual Fund Application. (Exhibit (o) to PEA #39)*
--------
*Incorporated by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
REGISTRANT.
The Registrant does not consider that it is directly or indirectly controlling,
controlled by, or under common control with other persons within the meaning of
this Item. See "Investment Advisory and Other Services," "Management," and
"Transfer Agent" in the Statement of Additional Information, each of which is
incorporated herein by reference.
ITEM 25. INDEMNIFICATION.
Article Tenth of the Agreement and Declaration of Trust of Registrant (Exhibit
a), which Article is incorporated herein by reference, provides that Registrant
shall provide indemnification of its trustees and officers (including each
person who serves or has served at Registrant's request as a director, officer,
or trustee of another organization in which Registrant has any interest as a
shareholder, creditor or otherwise) ("Covered Persons") under specified
circumstances.
Section 17(h) of the Investment Company Act of 1940 ("1940 Act") provides that
neither the Agreement and Declaration of Trust nor the By-Laws of Registrant,
nor any other instrument pursuant to which Registrant is organized or
administered, shall contain any provision which protects or purports to protect
any trustee or officer of Registrant against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. In accordance with Section 17(h) of the
1940 Act, Article Tenth shall not protect any person against any liability to
Registrant or its shareholders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
Unless otherwise permitted under the 1940 Act,
(i) Article Tenth does not protect any person against any liability to
Registrant or to its shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office;
(ii) in the absence of a final decision on the merits by a court or other body
before whom a proceeding was brought that a Covered Person was not liable by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office, no
indemnification is permitted under Article Tenth unless a determination that
such person was not so liable is made on behalf of Registrant by (a) the vote of
a majority of the trustees who are neither "interested persons" of Registrant,
as defined in Section 2(a)(19) of the 1940 Act, nor parties to the proceeding
("disinterested, non-party trustees"), or (b) an independent legal counsel as
expressed in a written opinion; and
(iii) Registrant will not advance attorneys' fees or other expenses incurred by
a Covered Person in connection with a civil or criminal action, suit or
proceeding unless Registrant receives an undertaking by or on behalf of the
Covered Person to repay the advance (unless it is ultimately determined that he
is entitled to indemnification) and (a) the Covered Person provides security for
his undertaking, or (b) Registrant is insured against losses arising by reason
of any lawful advances, or (c) a majority of the disinterested, non-party
trustees of Registrant or an independent legal counsel as expressed in a written
opinion, determine, based on a review of readily available facts (as opposed to
a full trial-type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
Any approval of indemnification pursuant to Article Tenth does not prevent the
recovery from any Covered Person of any amount paid to such Covered Person in
accordance with Article Tenth as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction not to have acted
in good faith in the reasonable belief that such Covered Person's action was in,
or not opposed to, the best interests of Registrant or to have been liable to
Registrant or its shareholders by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
such Covered Person's office.
Article Tenth also provides that its indemnification provisions are not
exclusive.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Registrant, its trustees and officers, its investment adviser, the other
investment companies advised by the adviser, and persons affiliated with them
are insured against certain expenses in connection with the defense of actions,
suits, or proceedings, and certain liabilities that might be imposed as a result
of such actions, suits, or proceedings. Registrant will not pay any portion of
the premiums for coverage under such insurance that would (1) protect any
trustee or officer against any liability to Registrant or its shareholders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office or (2) protect its investment adviser or principal underwriter, if
any, against any liability to Registrant or its shareholders to which such
person would otherwise be subject by reason of willful misfeasance, bad faith,
or gross negligence, in the performance of its duties, or by reason of its
reckless disregard of its duties and obligations under its contract or agreement
with the Registrant; for this purpose the Registrant will rely on an allocation
of premiums determined by the insurance company.
Pursuant to the indemnification agreement among the Registrant, its transfer
agent and its investment adviser, the Registrant, its trustees, officers and
employees, its transfer agent and the transfer agent's directors, officers and
employees are indemnified by Registrant's investment adviser against any and all
losses, liabilities, damages, claims and expenses arising out of any act or
omission of the Registrant or its transfer agent performed in conformity with a
request of the investment adviser that the transfer agent and the Registrant
deviate from their normal procedures in connection with the issue, redemption or
transfer of shares for a client of the investment adviser.
Registrant, its trustees, officers, employees and representatives and each
person, if any, who controls the Registrant within the meaning of Section 15 of
the Securities Act of 1933 are indemnified by the distributor of Registrant's
shares (the "distributor"), pursuant to the terms of the distribution agreement,
which governs the distribution of Registrant's shares, against any and all
losses, liabilities, damages, claims and expenses arising out of the acquisition
of any shares of the Registrant by any person which (i) may be based upon any
wrongful act by the distributor or any of the distributor's directors, officers,
employees or representatives or (ii) may be based upon any untrue or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, statement of additional information, shareholder report or other
information covering shares of the Registrant filed or made public by the
Registrant or any amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading if such statement or
omission was made in reliance upon information furnished to the Registrant by
the distributor in writing. In no case does the distributor's indemnity
indemnify an indemnified party against any liability to which such indemnified
party would otherwise be subject by reason of willful misfeasance, bad faith, or
negligence in the performance of its or his duties or by reason of its or his
reckless disregard of its or his obligations and duties under the distribution
agreement.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Stein Roe & Farnham Incorporated ("Stein Roe"), the investment adviser, is a
wholly owned subsidiary of SteinRoe Services Inc. ("SSI"), which in turn is a
wholly owned subsidiary of Liberty Financial Companies, Inc., which is a
majority owned subsidiary of Liberty Corporation Holdings, Inc., which is a
wholly owned subsidiary of LFC Holdings, Inc., which in turn is a subsidiary of
Liberty Mutual Equity Corporation, which in turn is a subsidiary of Liberty
Mutual Insurance Company. Stein Roe acts as investment adviser to individuals,
trustees, pension and profit-sharing plans, charitable organizations, and other
investors. In addition to Registrant, it also acts as investment adviser to
other investment companies having different investment policies.
For a two-year business history of officers and directors of Stein Roe, please
refer to the Form ADV of Stein Roe & Farnham Incorporated and to the section of
the statement of additional information (Part B) entitled "Investment Advisory
and Other Services."
Certain directors and officers of Stein Roe also serve and have during the past
two years served in various capacities as officers, directors, or trustees of
SSI, of Colonial Management Associates, Inc. (which is a subsidiary of Liberty
Financial Companies, Inc.), and of the Registrant and other investment companies
managed by SteinRoe. (The listed entities are located at One South Wacker Drive,
Chicago, Illinois 60606, except for Colonial Management Associates, Inc., which
is located at One Financial Center, Boston, MA 02111, and SteinRoe Variable
Investment Trust and Liberty Variable Investment Trust, which are located at
Federal Reserve Plaza, Boston, MA 02210.) A list of such capacities is given
below.
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
STEINROE SERVICES INC.
Kevin M. Carome Assistant Clerk
Kenneth J. Kozanda VP; Treasurer
C. Allen Merritt, Jr. Director; Vice President
COLONIAL MANAGEMENT ASSOCIATES, INC.
Ophelia L. Barsketis Senior Vice President
Kevin M. Carome Senior Vice President
William M. Garrison Vice President
Stephen E. Gibson Chairman, President and
Chief Executive Officer
Loren A. Hansen Senior Vice President
Clare M. Hounsell Vice President
Deborah A. Jansen Senior Vice President
North T. Jersild Vice President
Joseph R. Palombo Executive Vice President
Yvonne T. Shields Vice President
SR&F BASE TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
David P. Brady Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP VP; Secretary
Denise Chasmer Vice President
Nancy L. Conlin Senior VP;Secy. VP; Asst. Secy.
J. Kevin Connaughton VP and Controller
Stephen E. Gibson President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice-President
Michael T. Kennedy Vice-President
Gail Knudsen Vice President
Stephen F. Lockman Vice-President
Pamela A. McGrath Senior VP;Treasurer
Mary D. McKenzie Vice President
Jane M. Naeseth Vice-President
Maureen G. Newman Vice-President
Joseph R. Palumbo Executive Vice President
Veronica M. Wallace Vice-President
LIBERTY-STEIN ROE FUNDS INCOME TRUST; LIBERTY-STEIN ROE FUNDS
INSTITUTIONAL TRUST; AND LIBERTY-STEIN ROE FUNDS TRUST
William D. Andrews Executive Vice-President
Christine Balzano Vice President
Kevin M. Carome Executive VP VP;Secy.
Stephen E. Gibson President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Jane M. Naeseth Vice-President
LIBERTY-STEIN ROE FUNDS INVESTMENT TRUST
William D. Andrews Executive Vice-President
David P. Brady Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP VP; Asst. Secy.
William M. Garrison Vice-President
Stephen E. Gibson President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice-President
LIBERTY-STEIN ROE ADVISOR TRUST
William D. Andrews Executive Vice-President
David P. Brady Vice-President
Daniel K. Cantor Vice-President
Kevin M. Carome Executive VP; Secy. VP; Asst. Secy.
Stephen E. Gibson President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Maureen G. Newman Vice-President
LIBERTY-STEIN ROE FUNDS MUNICIPAL TRUST
William D. Andrews Executive Vice-President
Kevin M. Carome Executive VP; Secy. VP; Asst. Secy.
Stephen E. Gibson President
Loren A. Hansen Executive Vice-President
Brian M. Hartford Vice-President
William C. Loring Vice-President
Maureen G. Newman Vice-President
Veronica M. Wallace Vice-President
STEINROE VARIABLE INVESTMENT TRUST
William D. Andrews Executive Vice-President
Kevin M. Carome Executive VP; Secy. VP; Asst. Secy.
William M. Garrison Vice President
Stephen E. Gibson President
Erik P. Gustafson Vice President
Loren A. Hansen Executive Vice-President
Harvey B. Hirschhorn Vice President
Michael T. Kennedy Vice President
Jane M. Naeseth Vice President
William M. Wadden IV Vice President
LIBERTY-STEIN ROE ADVISOR FLOATING RATE FUND; LIBERTY-STEIN ROE
INSTITUTIONAL FLOATING RATE INCOME FUND, STEIN ROE FLOATING RATE
LIMITED LIABILITY COMPANY
William D. Andrews Executive Vice-President
Kevin M. Carome Executive VP; Secy. VP; Asst. Secy.
Stephen E. Gibson President
Brian W. Good Vice-President
James R. Fellows Vice-President
Loren A. Hansen Executive Vice-President
LIBERTY VARIABLE INVESTMENT TRUST
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
Kevin M. Carome Vice President
ITEM 27. PRINCIPAL UNDERWRITERS.
Registrant's principal underwriter, Liberty Funds Distributor, Inc., a
subsidiary of Colonial Management Associates, Inc., acts as underwriter to
Liberty Funds Trust I, Liberty Funds Trust II, Liberty Funds Trust III, Liberty
Funds Trust IV, Liberty Funds Trust V, Liberty Funds Trust VI, Liberty Funds
Trust VII, Liberty Funds Trust IX, Liberty-Stein Roe Funds Investment Trust,
Liberty-Stein Roe Funds Income Trust, Liberty-Stein Roe Funds Municipal Trust,
Liberty-Stein Roe Advisor Trust, Liberty-Stein Roe Funds Institutional Trust,
Liberty-Stein Roe Funds Trust, Liberty-Stein Roe Advisor Floating Rate Fund,
Liberty-Stein Roe Institutional Floating Rate Income Fund, and SteinRoe Variable
Investment Trust. The table below lists the directors and officers of Liberty
Funds Distributor, Inc.
<PAGE>
Position and Offices Positions and
Name and Principal with Principal Offices with
Business Address* Underwriter Registrant
-------------------- --------------------- -------------
Anderson, Judith Vice President None
Babbitt, Debra VP & Compliance Officer None
Bartlett, John Managing Director None
Bertrand, Thomas Vice President None
Blakeslee, James Senior Vice President None
Bozek, James Senior Vice President None
Brown, Beth Vice President None
Burtman, Tracy Vice President None
Campbell, Patrick Vice President None
Carroll, Sean Vice President None
Claiborne, Doug Vice President None
Chrzanowski, Daniel Vice President None
Conley, Brook Vice President None
Clapp, Elizabeth A. Managing Director None
Conlin, Nancy L. Director; Clerk None
Costello, Matthew Vice President None
Couto, Scott Vice President None
Davey, Cynthia Senior Vice President None
Desilets, Marian H. Vice President None
Devaney, James Senior Vice President None
DiMaio, Steve Vice President None
Downey, Christopher Vice President None
Dupree, Robert Vice President None
Emerson, Kim P. Senior Vice President None
Evans, C. Frazier Managing Director None
Evitts, Stephen Vice President None
Feldman, David Managing Director None
Feloney, Joseph Vice President None
Fifield, Robert Vice President None
Fisher, James Vice President None
Fragasso, Philip Managing Director None
Gariepy, Tom Vice President None
Gauger, Richard Vice President None
Gerokoulis, Stephen A. Senior Vice President None
Gibson, Stephen E. Director; Chairman of Board None
Goldberg, Matthew Senior Vice President None
Gupta, Neeti Vice President None
Geunard, Brian Vice President None
Grace, Anthony Vice President None
Gubala, Jeffrey Vice President None
Harrington, Tom Senior Vice President None
Hodgkins, Joseph Senior Vice President None
Huennekens, James Vice President None
Hussey, Robert Senior Vice President None
Iudice, Jr., Philip Treasurer and CFO None
Ives, Curt Vice President None
Jones, Cynthia Vice President None
Jones, Jonathan Vice President None
Kelley, Terry M. Vice President None
Kelson, David W. Senior Vice President None
Lewis, Blair Vice President None
Libutti, Chris Vice President None
Lynch, Andrew Managing Director None
Lynn, Jerry Vice President None
Martin, John Senior Vice President None
Martin, Peter Vice President None
McCombs, Gregory Senior Vice President None
McKenzie, Mary Vice President None
Menchin, Catherine Senior Vice President None
Miller, Anthony Vice President None
Moberly, Ann R. Senior Vice President None
Morse, Jonathan Vice President None
Nickodemus, Paul Vice President None
O'Shea, Kevin Managing Director None
Piken, Keith Vice President None
Place, Jeffrey Managing Director None
Powell, Douglas Vice President None
Predmore, Tracy Vice President None
Quirk, Frank Vice President None
Raftery-Arpino, Linda Senior Vice President None
Ratto, Gregory Vice President None
Reed, Christopher B. Senior Vice President None
Riegel, Joyce B. Vice President None
Robb, Douglas Vice President None
Sandberg, Travis Vice President None
Santosuosso, Louise Senior Vice President None
Schulman, David Senior Vice President None
Scully-Power, Adam Vice President None
Shea, Terence Vice President None
Sideropoulos, Lou Vice President None
Sinatra, Peter Vice President None
Smith, Darren Vice President None
Soester, Trisha Vice President None
Studer, Eric Vice President None
Sweeney, Maureen Vice President None
Tambone, James Chief Executive Officer None
Tasiopoulos, Lou President None
Torrisi, Susan Vice President None
Vail, Norman Vice President None
VanEtten, Keith H. Senior Vice President None
Warfield, James Vice President None
Wess, Valerie Senior Vice President None
Young, Deborah Vice President None
Zarker, Cynthia E. Senior Vice President None
---------
* The address of Ms. Riegel is One South Wacker Drive, Chicago, IL 60606. The
address of each other director and officer is One Financial Center, Boston, MA
02111.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
Registrant maintains the records required to be maintained by it under Rules
31a-1(a), 31a-1(b), and 31a-2(a) under the Investment Company Act of 1940 at its
principal executive offices at One Financial Center, Boston, MA 02111. Certain
records, including records relating to Registrant's shareholders and the
physical possession of its securities, may be maintained pursuant to Rule 31a-3
at the main office of Registrant's transfer agent or custodian.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
Registrant maintains the records required to be maintained by it under Rules
31a-1(a), 31a-1(b), and 31a-2(a) under the Investment Company Act of 1940 at its
principal executive offices at One Financial Center, Boston, MA 02111. Certain
records, including records relating to Registrant's shareholders and the
physical possession of its securities, may be maintained pursuant to Rule 31a-3
at the main office of Registrant's transfer agent or custodian.
ITEM 29. MANAGEMENT SERVICES.
None.
ITEM 30. UNDERTAKINGS.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the undersigned certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago and State of Illinois on the
128th day of July, 2000.
SR&F BASE TRUST
By STEPHEN E. GIBSON
Stephen E. Gibson
President
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
------------------------ ------------------- --------------
STEPHEN E. GIBSON President July 28, 2000
Stephen E. Gibson
Principal Executive Officer
J. KEVIN CONNAUGHTON Controller July 28, 2000
J. Kevin Connaughton
Principal Accounting Officer
JOHN A. BACON JR. Trustee July 28, 2000
John A. Bacon Jr.
WILLIAM W. BOYD Trustee July 28, 2000
William W. Boyd
LINDSAY COOK Trustee July 28, 2000
Lindsay Cook
DOUGLAS A. HACKER Trustee July 28, 2000
Douglas A. Hacker
JANET LANGFORD KELLY Trustee July 28, 2000
Janet Langford Kelly
CHARLES R. NELSON Trustee July 28, 2000
Charles R. Nelson
THOMAS C. THEOBALD Trustee July 28, 2000
Thomas C. Theobald
VINCENT P. Pietropaolo
Vincent P. Pietropaolo
Attorney-in-Fact for the Trustees
<PAGE>
EXHIBIT INDEX
(a)(1) Amended and Restated Agreement and Declaration of Trust dated July 28,
2000.
(i)(4) Consent of Bell, Boyd & Lloyd LLC.
(j)(1) Consent of Ernst & Young LLP, independent auditors.